[Congressional Record Volume 143, Number 50 (Thursday, April 24, 1997)]
[Extensions of Remarks]
[Page E740]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




     CONGRESS MUST DEBATE THE FED'S DECISION TO CUT BACK ON GROWTH

                                 ______
                                 

                           HON. BARNEY FRANK

                            of massachusetts

                    in the house of representatives

                        Thursday, April 24, 1997

  Mr. FRANK of Massachusetts. Mr. Speaker, I believe Congress is 
delinquent in paying too little attention to the most significant set 
of public policy decisions now being made in this country: namely the 
decision by Chairman Alan Greenspan and the rest of the Federal Open 
Market Committee to increase interest rates because they believe that 
this country has been growing too fast economically, and that we must 
therefore cut back on growth and job creation so as to avoid any 
possible increase in inflation. I should note that they maintain this 
even though by their own admission there is no sign of inflation 
currently, and even though many of them, including Chairman Greenspan, 
have been unduly pessimistic in the past about the impact of reduced 
unemployment on inflation.
  Twenty-five of the twenty-six Democratic and Independent members of 
the Banking Committee have urged the chairman of the committee to 
convene a full committee hearing on the important issues raised by the 
Fed's decision. He has declined. I have now turned to my Republican 
colleagues to ask them to join in this request for a hearing. Under 
committee rules, if 4 of the 30 Republicans were to join us, we would 
have the requisite number to require that a hearing be held.
  It seems to many of us essential that we convene public hearings in 
the Congress in which Mr. Greenspan and his colleagues can defend their 
decision, and in which representatives of business, organized labor, 
citizens groups, and others can voice their agreement or disagreement. 
The scope of the issues involved here was recently made very clear in a 
cogent article Lester Thurow, former dean of the MIT Sloan School of 
Management, and currently a professor of economics at the school. 
Because this is the single most important set of decisions now being 
made about the American economy, and therefore about such related 
issues as how we can reduce the budget deficit to zero in a socially 
responsible way, how we can absorb hundreds of thousands of welfare 
recipients into the economy, and how we can accommodate growing 
internationalization of our economy without increased inequity. I am 
inserting Professor Thurow's article here:

       Alan Greenspan's move to higher interest rates in March was 
     in and of itself unimportant--after all what can a one-
     quarter of 1 percent increase in interest rates do to an 
     economy as big as that of the United States. The real issue 
     isn't the increase but Greenspan's history. He believes in 
     salami tactics. In 1994 and 1995 he raised interest rates 7 
     times in 12 months. Each increase was small, but in the end 
     those 7 increases doubled interest rates.
       Based upon his history, financial markets know Greenspan 
     does not like big jumps in interest rates and a small rate 
     increase is apt to signal that a sequence of small increases 
     has begun and that in the end those small increases will end 
     up being a big jump in rates. Given this belief, it is not 
     surprising the stock market started to fall in the aftermath 
     of Greenspan's announcement.
       But the issues are far more important than the ups and 
     downs of Wall Street. Greenspan has indirectly signaled he 
     believes that the bottom two-thirds of the American work 
     force should continue to get the small annual real wage 
     reductions that they have gotten over the past quarter of a 
     century--reductions that now amount to a 20 percent fall in 
     real wages over the past 23 years. In the most recent year 
     for which we have complete data, 1995, real wages once again 
     fell for both fully employed male and female workers. Median 
     family income rose slightly, but only because both men and 
     women worked more hours per year.
       In a market economy, wages rise for only one reason--demand 
     has to be rising faster than supply. In the past 16 years, a 
     2.6 percent growth rate has led to falling wages. If the 
     economy continues on that pace, no one should expect anything 
     different to occur in the future. Nothing has happened to 
     change demand; nothing has happened to change supply. Yet 
     this is precisely what Greenspan is suggesting should happen 
     with this recent hike in interest rates.
       In his view the American economy must be limited to a 2 to 
     2\1/2\ percent rate of growth on the grounds that this is all 
     the economy can achieve without rekindling inflation. In this 
     environment, the pattern of falling wages for the bottom two 
     thirds of the American work force has to continue. Americans 
     cannot break out of this pattern without a different growth 
     path.
       The bottom part of the American work force also needs to be 
     reskilled and re-educated, but these programs cannot work 
     without faster growth. With today's growth rate, real wages 
     are falling for males at all edu- cational levels and for 
     women at all educational levels except those with 
     university degrees. With today's growth rates, there is no 
     shortage of skilled workers. To increase the supply of 
     skilled workers and do nothing about demand would simply 
     reduce wages faster.
       If inflation were visible, perhaps one could justify 
     drafting the bottom two thirds of the American work force to 
     be ``Inflation fighters for the U.S. of A.'' It would not be 
     fair (why should they suffer all of the costs of stopping 
     inflation), but perhaps it might be necessary. But there is 
     no sign of inflation in any of the indexes. Greenspan and the 
     Fed can point to none--and they do not even try to do so. 
     Greenspan has also testified to Congress that he believes the 
     Boskin Commission is right and that today's price indexes 
     include at least 1.1 percentage points of exaggeration. With 
     this correction, the lack of inflation becomes even stronger.
       Nor is there any data showing that higher wages are about 
     to lead to higher prices. The preliminary data for 1996 show 
     a small gain in average real wages--0.2 percent--but 1996's 
     productivity gain was five times as big. There is no economic 
     theory under which such small wage gains far below the rate 
     of growth of productivity can be labeled inflationary. Yet 
     Greenspan is saying with his interest rate hike that those 
     1996 wage increases are too large.
       Only the modern Delphic Oracle, Greenspan and the Federal 
     Reserve Board Open Market Committee, can see the inflation in 
     our future. Only they can see why most Americans must prepare 
     for a future of falling wages and diminishing expectations. 
     Ordinary mortals who must rely on real world data cannot see 
     what they see, but then we are only mortals--not gods.
       To put it bluntly and simply, such decisions ought to be 
     unacceptable in a democracy. Decisions to lower the real 
     wages for a majority of American voters must be decided in a 
     democratic context. It is popular to talk about maintaining 
     the independence of central bankers from the influence of 
     politics, but that only makes sense if the central bankers 
     are making sensible decisions that can be supported with hard 
     real world data. When they ask us to believe them simply 
     because they are wiser than we are and can see things that we 
     cannot see, they are going beyond the appropriate bounds of 
     any government agency in a democracy.

                          ____________________