[Congressional Record Volume 143, Number 65 (Friday, May 16, 1997)]
[House]
[Pages H2869-H2871]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




      REPORT ON ECONOMY FROM CHAIRMAN OF JOINT ECONOMIC COMMITTEE

  The SPEAKER pro tempore (Mr. Hastings of Washington). Under the 
Speaker's announced policy of January 7, 1997, the gentleman from New 
Jersey [Mr. Saxton] is recognized for 60 minutes.
  Mr. SAXTON. Mr. Speaker, I take this time to talk a little bit about 
this Nation's economy. I have had the privilege during this 2 years of 
serving in the House as the chairman of the Joint Economic Committee. 
The Joint Economic Committee, as all the Members know, is made up of 
both Members of this House as well as Members of the other house, and 
it is essentially our job to try and determine what it is that is 
happening right with the economy, and how the activities that take 
place from time to time in this House and in the other house and in the 
administration and in the Federal Reserve, what

[[Page H2870]]

kind of influence, both positive and negative, those agencies have on 
our economy, on job growth, on wage levels and all of the other aspects 
of economic life in the United States.
  I might say that some of these issues are from time to time very 
difficult to deal with because they have to do with taxes, they have to 
do with spending, they have to do with interest rates, they have to do 
with regulations that the Federal Government through our bureaucratic 
departments promulgates from time to time, and we have learned through 
studies in the Joint Economic Committee and other places that these 
issues that we deal with in the U.S. Government have a very direct and 
sometimes dramatic effect, sometimes positively and sometimes 
negatively, on our economy and jobs and wage scales and other issues 
that have to do with job stability and price stability and all of those 
kinds of things.
  What I wanted to talk about today is one little aspect of what we do, 
not taxes today so much or not spending today so much or not regulation 
today so much, but something called monetary policy, which really has a 
very direct effect on every American family because it has to do with 
how much we pay for money, how high interest rates are and how those 
interest rates affect our ability to get along, to make a living, to 
keep a job, to provide for our families, and the Federal Reserve has a 
very direct role to play with regard to these issues.
  The point here that I want to get to today is that the Federal 
Reserve over the past couple of months has entered upon some new 
policies which may or may not have a direct, dramatic effect on our 
economy. But I wanted to share these thoughts with the Members today 
because, as I said, they may or may not, and I think it is important 
for us to recognize that in all likelihood they may and probably will.
  First let me say that I am not here to criticize the Fed for their 
past policies. The economy of our country has done very well. As a 
matter of fact, over the past number of years, as a matter of fact, 
since the second quarter of 1991, our economy has been getting better. 
Our economy has been growing through each quarter. We had a recession 
in 1990, in the first quarter of 1991, and then it started to grow.
  Some of us found that a little bit strange because, as those of my 
colleagues who know me know, I do not think that tax increases help the 
economy very much. As a matter of fact, I believe quite the opposite, 
that tax increases like the one that we had in 1990 and like the one 
that we had in 1993, work to dampen job growth and work to dampen wage 
increases. Those tax increases take money out of the private sector and 
give it to us here in Washington, and we spend it much less efficiently 
than it gets spent and used and invested and saved in the private 
sector.
  So I was a little bit surprised when I began to see economic growth 
take place in the early 1990's, because in 1990 we had a big tax 
increase and the biggest one ever in 1993, and I thought that would 
serve to dampen the economy and to slow growth. But very much to my 
surprise, something else happened, and that was that a good friend of 
ours by the name of Alan Greenspan, who is Chairman of the Federal 
Reserve, entered upon a program which provided for stable prices.
  We call that price stability. Inflation is another word that we 
sometimes use to describe price stability. Over the past several years, 
in the decade of the 1990's, price stability has come to mean a great 
deal to us. It is my job today partly to compliment and thank the 
Federal Reserve for the policies that they have carried out during the 
decade of the 1990's, which have in large part offset the negative 
aspects of the tax increases that we had early in the decade.
  So since the second quarter of 1991 the economy has been growing, 
there have been more jobs, the unemployment rate has been coming down, 
wages have been stable, one of our weaker points, wages have not gone 
up like we had hoped, but unemployment has gone down, the gross 
domestic product has gone up, and the economy has been good, until and 
including the first quarter of this year when the economy grew by over 
4 percent, and that is really good. But aside from the fact that we had 
economic growth during this period of time, we have also had inflation 
which has been going down, and this was also something that I think was 
very desirable.
  This chart that I have which is labeled ``Inflation'' measures 
inflation, and we have charted it out through the use of a measure 
called the Consumer Price Index. This is actually the Consumer Price 
Index, it is called the core CPI, which means it is all of the prices 
of goods and services that we buy in this country except food and 
energy, and we took out food and energy because they provide for big 
shots up and big shots down, and so we took those items out.
  But this chart serves very well to show the fine job that Fed policy 
has done during this decade. We can see very clearly that beginning in 
1990 when inflation was relatively high, almost 6 percent a year during 
some quarters, that it has come down dramatically. It is our belief on 
the majority side at least of the Joint Economic Committee, that this 
has been a direct result of Federal Reserve policy in terms of their 
ability to squeeze inflation out of our economy.
  This is very important, because this sets the background for perhaps 
a change in policy away from this very successful policy that we have 
had. Because, as my colleagues all know, during the last couple of 
months there has been more and more talk about the Fed increasing 
interest rates. We have had a growing economy because of low interest 
rates. We have had good price stability because the Fed has squeezed 
inflation out of the economy through their policies, and many of us 
would like to see this policy continue. But on March 25, for the first 
time in a long time, Chairman Greenspan and the other Governors of the 
Fed chose to enter upon the policy of increasing interest rates, and on 
March 25 we had a 25 basis point increase in interest rates.
  I have another chart here which also demonstrates inflation. It is a 
very parallel track. This is called the Gross Domestic Product 
deflator. It shows, again, that inflation is well under control and 
that we do not have to worry about inflation at least in the short 
term, and many of us think in the long term as well.
  So what the Fed has set out to do, they have been very successful in 
doing, and that is keeping a good level of lowering and lowering and 
lowering inflation until we have gotten to a very low level.
  And so we began to wonder what the reasons were that the Fed decided 
to increase interest rates, because the economy is good, inflation is 
low. Why would anyone want to change that mix? Obviously the Fed's 
primary objective is and should be to control inflation, as we all 
know, and so it became a big question that we began to search for the 
answer to.

                              {time}  1430

  We also looked at inflation of commodities. These commodities are 
those materials that we use in production basically. That may be a 
slight oversimplification, but once again we can see that during the 
decade of the 1990's, while commodity prices rose in the middle of the 
decade, they have sharply dropped here at the end of the decade. And so 
once again we see no signs of inflation, nothing for us to be all that 
concerned about.
  Here again is another picture of commodity prices since 1990, early 
1995, 1995, 1996, and 1997. Once again we can see that prices are 
dropping, and so while the economy is good, prices continue to go down.
  Mr. Speaker, it is interesting to point out here that obviously, if 
we are going to have increases in interest rates, it is going to be 
more difficult for the economy to continue to do well, and so we 
searched and searched to try to find out why the Fed might be 
contemplating on next Tuesday yet another interest rate.
  Here are some measures that we look at over the long term to try and 
determine where inflation is going to go. When people buy bonds, for 
example, this is the long-term bond interest rate on 30-year Treasury 
bonds, people who decide to buy bonds and hold them for a long time are 
obviously very concerned about what interest rates will be in the 
future, and the long-term bond interest rate, therefore, tends to go up 
and down depending on the demand for long-term bonds. These interest 
rates have been consistently low,

[[Page H2871]]

and we see no sign here of increase in interest rates over the long 
term, and so we still have found no evidence of inflation anywhere in 
the economy.
  This is a chart that looks quite different, but it is also an 
indicator that there is no threat of increases in inflation over the 
long term. This shows the relative value of the United States dollar, 
the American dollar, against the German mark, and it is high, meaning 
that we can buy lots of goods from Germany with fewer dollars than we 
could otherwise. And so this again is an indicator that we do not see 
inflation any time in the near future.
  And finally, a very similar chart which compares the value of our 
dollar. I am sorry, I guess I have lost a chart, but in any event we 
have a chart that looks very similar with regard to the value of the 
United States dollar against the Japanese yen.
  So in all of these instances we saw no evidence that inflation is 
coming, and so through conversations with people who are familiar with 
the Federal Reserve we began to ask why is it that we would have 
increases in the interest rates? Why is it that the Fed is again 
contemplating on next Tuesday the possibility of yet another interest 
rate rise?
  And one of the answers that we got has to do with our industrial 
production, and means that as we have the capacity to produce goods in 
our country our industrial complex could some day get to 100-percent 
capacity. We do not usually operate; in fact, we never really get to 
100-percent capacity, but sometimes we could operate at 60-percent 
capacity or 70-percent capacity, and obviously when the economy is 
good, as it is right now, we would operate at a higher capacity.
  And what the Fed suggested is that we are operating at a very high 
capacity relative to our ability to produce goods and services and that 
this could be inflationary because, as we reach toward full capacity, 
things get so good that inflation could take place. In other words, we 
cannot produce enough goods to meet the demand that we have and because 
of the law of supply and demand inflation takes place because there is 
too much demand for the few goods that we can produce.
  And so we put these lines on charts to see if there is a correlation 
between this capacity, which is called capacity utilization; that is a 
big word that economists use that frankly I had to learn a while back. 
But this blue line represents capacity, and we can see here that back 
in the late 1980's our capacity was at a very high level, somewhere 
around 85 or 86, a full percent of full capacity, and we are about back 
at that level again currently.
  Now what happened when we were at full capacity back in the late 
1980's was that we saw that we had moderate inflation. But today, being 
at about 85- or 86-percent capacity, the red line, which represents 
inflation, has gone down, and so the demand for goods and the ability 
to produce goods has not had a direct influence on inflation, and so 
when we looked at this and found that the Fed was worried about us 
producing at a very high capacity and that that might be causing 
inflation, we said we do not think this is the answer either.
  And so it leaves one to conclude that the members of the Fed who are 
concerned about inflation are concerned that because the economy is 
doing good, that that somehow translates into a coming period of 
inflation, and frankly we just do not see the evidence to support that 
notion. We believe that all of the indicators that I showed my 
colleagues; we believe that the ability to look at long-term bond 
rates, for example, and see that they are headed even lower, the 
ability to look at commodity prices and see that they continue to, as 
of today, go lower.
  The ability to look at the rate of inflation itself, which today 
continues at a very, very low level, does not indicate that we should 
have any worries about this economy overheating and, therefore, no 
thoughts or no thoughts which turn into action about raising interest 
rates which in turn will have the effect of slowing down the economy.
  Mr. Speaker, it is almost like saying we cannot have an economy that 
grows at 4 percent because, if we do, we will have inflation, and 
therefore we have to increase interest rates to slow down the economy 
so we will not have inflation, so we will increase interest rates, 
increase the level of unemployment, et cetera.
  We believe that what we should do is to enter upon a continuation of 
the policies that we have had since the early 1990's which have 
provided for a price stability, which has translated into lower 
interest rates, which lower interest rates have provided an incentive 
for the economy to grow and continue along the path toward prosperity 
after the turn of the century.
  I guess the other thing that is interesting to note here is that 
throughout the economic history of our country we have very seldom 
stayed on a growth line for a prolonged period of time. During the 
1980's we had a very long period of growth that lasted from about 1983 
to about 1990. When we got into a recession there was a 6 or 7-year 
period of growth, but then we had a major correction in our economy. We 
have now been in a period of sustained economic growth since the second 
quarter of 1991, and our fear is that if the Fed raises interest rates 
yet again on next Tuesday, that a new trend will have set in. After 
all, they raised interest rates on March 25, it is now May 20 on 
Tuesday, and if they raise interest rates again, a trend will have been 
set toward higher interest rates which cannot be good for a continued 
economic growth and the continuation of our economic expansion.
  Obviously, we think economic expansion is good for American families. 
Obviously, we think that is because wages have just recently begun to 
increase after this entire decade of stagnant wages. We think that 
ought to continue. We also think that families should have the 
opportunity to avail themselves to low interest rates so that they can 
buy homes and cars, and you know in a sense if the Fed increases 
interest rates, it is almost like us increasing taxes because it means 
families have less disposable income. And of course all of that acts to 
dampen the American economy.

  So, as you listen over this weekend to economic reports in 
anticipation of next Tuesday when the FOMC meets again, as you listen 
to different opinions, keep in mind that the charts and the data that I 
have shown you here this afternoon indicates that inflation is well in 
check, that the economy continues to grow at something above 4 percent, 
GDP continues to go up by something above 4 percent, that interest 
rates are relatively low at the moment and, we believe, ought to 
continue there, but most importantly the Federal Reserve's primary goal 
in my opinion and in the opinion, I believe, of most economists in this 
country should be to control inflation, and it is abundantly clear, at 
least to me, that we are in a period of controlled inflation, of price 
stability quite unlike most long periods of economic growth that we 
have seen in the past, and it is my hope and I think the hope of most 
Americans that we can continue to enjoy this period of economic 
prosperity and relatively low interest rates.

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