[Congressional Record Volume 143, Number 44 (Tuesday, April 15, 1997)]
[Extensions of Remarks]
[Pages E660-E661]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                      THE FEDERAL RESERVE IS WRONG

                                 ______
                                 

                           HON. BARNEY FRANK

                            of massachusetts

                    in the house of representatives

                        Tuesday, April 15, 1997

  Mr. FRANK of Massachusetts. Mr. Speaker, I have voiced my strong 
disagreement with the recent decision by the Federal Reserve to raise 
interest rates on the floor of the House. Recently I saw an article in 
the April 21 issue of The New Republic which makes the case in a cogent 
way that Mr. Greenspan was mistaken, and that his mistake will be 
damaging to our economy. Similarly, the Economic Scene column by Peter 
Passell in the April 10 issue of the New York Times does a good job 
describing the downside of the Fed's decision to clamp down on economic 
growth. I am inserting both articles here:

                 [From the New Republic, Apr. 21, 1997]

                              Fed Accompli

       Last week the Federal Reserve ended a five-year experiment: 
     How many people can the nation put to work without triggering 
     inflation? The results are fiercely contested, their 
     ramifications enormous. Everybody wants unemployment to be as 
     low as possible, but nobody knows for sure how low that is. 
     Growth optimists believe unemployment can fall much lower 
     than the current 5.3 percent without fueling inflation. 
     Inflation hawks, led by Fed Chairman Alan Greenspan, don't.
       But the debate is academic, because monetary policy isn't 
     set by public debates and majority votes, it's set by Alan 
     Greenspan. And Greenspan is sure that the current high levels 
     of economic growth and employment will soon cause a spiral of 
     higher prices. So he raised interest rates last week and 
     appears likely to do so again, effectively ensuring that 
     unemployment will not drop any lower than it is today. Given 
     the data of the last two years, data that, despite endless 
     scrutiny, shows not the slightest hint of creeping inflation, 
     we wish the chairman were a little less certain.
       Both Greenspan and his critics agree that prices hinge upon 
     a balance of power between employers and employees. When 
     joblessness drops, the value of labor rises. Employers raise 
     salaries and pass the cost on to consumers. These higher 
     prices cause other workers to demand raises. Such an 
     inflationary spiral can only be stopped if the Federal 
     Reserve slows the economy, making everybody worse off. The 
     big question is how low unemployment can drop before an 
     inflationary spiral begins. Conventional economists have long 
     held that inflation would start to mount if unemployment fell 
     below 6 percent. But the current economic expansion, which 
     began in 1992, has brought unemployment down to 5.3 percent 
     without a trace of rising inflation. For inflation hawks like 
     Greenspan, this state of affairs can't go on.
       The growth optimists, with varying levels of plausibility, 
     suggest another story. They believe the economy has entered a 
     new era, capable of sustaining lower unemployment than 
     before. Why have the rules changed? There are several 
     reasons:
       Globalization. International competition makes it harder 
     for American companies to raise the cost of their goods, lest 
     foreign firms undercut them. It has also made workers less 
     secure about their future and hence more timid in demanding 
     raises. (Polls of employee confidence support this 
     notion.)
       Computers have increased productivity. This is the pivotal 
     point. Productivity ultimately determines wages. If wages are 
     rising just because employees have more leverage, then the 
     boss has to raise prices. But if workers are producing more, 
     then employers can pay for a wage increase out of profits 
     instead of passing the cost on to consumers. The latter 
     scenario seems to be the case. Productivity rose 1.5 percent 
     last year, while real wages rose by just 0.6 percent. The 
     share of the economy going to corporate profits is up a full 
     percentage point from the peak of the last business cycle. 
     This suggests that firms can pay their employees more without 
     hiking prices.
       Bad statistics. Most (though not all) economists believe 
     the government has been overestimating inflation for years. 
     That means we have less to worry about than Greenspan thinks. 
     (Greenspan, interestingly, adheres to this theory himself, 
     although he has of yet failed to reconcile it with his 
     inflationary paranoia.)
       Hard data to support the new era hypotheses remains 
     sketchy. So far, however, the story checks out. And, even if 
     it's wrong, failure entails nothing more than slightly higher 
     prices and a future interest rate hike. At its current level, 
     inflation appears unlikely to spiral out of control. A little 
     inflation hurts, of course, but it doesn't really start to 
     bite until it hits the mid-to-upper single digits. As MIT 
     economist Paul Krugman wrote recently in The Economist, ``3 
     percent inflation does much less than one-third as much harm 
     as 9 percent.
       One other recent even has strengthened the case for 
     experimentation: welfare reform. If the government demands 
     that all citizens who can work do work, it cannot 
     simultaneously enforce Greenspan's explicitly anti-employment 
     program. Or, at least, it should not do so without first 
     attempting an alternative. The alternative--an effort to see 
     whether we can successfully push unemployment below 5 
     percent, and perhaps improve the lives of millions in the 
     American underclass in the process--may prove a pipe dream. 
     But the benefits of success outweigh the costs of failure. 
     And we'll never know unless the Federal Reserve chairman 
     opens himself to the possibility that he is wrong.

                [From the New York Times, Apr. 10, 1997]

                           (By Peter Passell)

       The latest labor market numbers have been widely greeted as 
     fresh evidence that the Federal Reserve chairman, Alan 
     Greenspan, has a direct line to the Oracle of Delphi. With 
     data suggesting that the demand for workers is growing more 
     rapidly than the working-age population, the Fed's pre-
     emptive strike against inflation last month seems to be one 
     more sign that the Fed remains ahead of the game.
       But not quite everyone is convinced that Mr. Greenspan's 
     latest prognostication--or for that matter, the unbroken 
     economic expansion since 1991--proves that he has all the 
     answers. For while a recession-free six years may have 
     marginalized his critics, it has not really established that 
     the Fed has found a golden mean between stable prices and 
     economic growth.
       For that exquisite balance, if it exists at all, depends as 
     much on value judgments as technocratic insight. ``Where was 
     it written,'' asks Robert M. Solow of M.I.T., a Nobel 
     laureate in economics, ``that absolute security against 
     inflation is worth sacrificing unknown quantities of national 
     income?''
       Moreover, this seems a particularly unfortunate moment to 
     choose to err on the side of fighting inflation at the 
     expense of higher unemployment--and without even a whimper of 
     debate. To make welfare reform work, there have to be jobs 
     for those pushed off the rolls. Yet without tight labor 
     markets, business will have little incentive to invest in the 
     training needed to bring marginally competent workers into 
     the mainstream.
       No one disputes that Admiral Greenspan has kept the economy 
     on an even keel since the recession of 1990-91. His 
     performance seems all the more impressive when compared with 
     that of German, French and Japanese policy makers, who have 
     not been able to spring their economies from the doldrums. 
     Today, unemployment is at 5.2 percent and the economy is 
     growing at an annual rate well above 3 percent.
       Indeed, even his critics are quick to praise Mr. Greenspan 
     for flexibility in recent years, keeping interest rates 
     steady as unemployment dipped below the level experience 
     suggested would fuel wage-led inflation. ``He deserves a lot 
     of credit'' for holding the line long after traditional 
     conservatives were calling for a tougher stance, argues James 
     Tobin of Yale, another Nobel laureate.
       By the same token, most economists see the quarter-point 
     interest rate increase last month as a sign of Mr. 
     Greenspan's enlightened pragmatism and the best way to avoid 
     a future recession brought on by painfully high interest 
     rates. ``By tightening a little now,'' suggests William 
     Dudley of Goldman, Sachs, ``he makes it less likely he'll 
     have to tighten a lot later.''
       So what's left to argue about? Plenty. Mr. Tobin says that 
     inflation is simply not a clear and present danger. A close 
     reading of other bellwether statistics--notably the 
     proportion of the newly unemployed who were dismissed and the 
     index of labor demand based on help-wanted ads--is 
     surprisingly benign. ``The risks of inflation seem no greater 
     today,'' he concludes, ``than when unemployment was up at 6 
     percent.''
       For his part, Mr. Solow is unconvinced by the conventional 
     wisdom that gradualism works best. Small increases in 
     interest rates early on--the pre-emptive strike--may seem 
     less traumatic. But by Mr. Solow's reading of the evidence, 
     larger increases once signs

[[Page E661]]

     of inflation are unambiguous are no more likely to generate 
     overcorrections.
       Economists are comfortable staying within the confines of 
     this purely technical debate. A Greenspan-worshiping majority 
     believes that unemployment is already below the rate that can 
     be sustained without bringing on inflation, or that the 
     economy's momentum will soon bring the rate into the 
     inflationary range. An embattled minority suspects that 
     fundamental changes in the economy--globalization, de-
     unionization, downsizing--have sharply lowered the level of 
     unemployment that is compatible with stable prices.
       But the debate can be confined only to the technical by 
     ignoring its social dimension. No one really knows whether 
     the magic ``nonaccelerating inflation rate of unemployment'' 
     is 5.5 percent or 4.5 percent. So decisions about the target 
     implicitly have as much to do with how one weighs the 
     consequences of erring on the side of slow growth against the 
     costs of inflation.
       Fear of inflation has been an easy sell since the trauma of 
     the oil shocks in the 1970's. Uncertainty about prices leads 
     to economic inefficiency--and, horror of horrors, lower stock 
     prices. Besides, inflation breeds recessions because it 
     eventually brings down the wrath of the monetary gods. But 
     not to belabor the obvious, living with 5.2 percent 
     unemployment if the economy is able to sustain 4.5 percent 
     also has costs: every tenth of a percentage point represents 
     at least 130,000 jobs.
       It may be tidier to leave monetary policy in the hands of a 
     benign despot. But it's also a little sad: if the 5 percent 
     unemployment barrier cannot be tested when inflation is 
     beyond the horizon and a Democrat is in the White House, when 
     can it?

                          ____________________