[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
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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,
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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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