Congressional Record, Volume 143 Issue 146 (Monday, October 27, 1997)

[Congressional Record Volume 143, Number 146 (Monday, October 27, 1997)]
[Senate]
[Pages S11222-S11229]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

THE FEDERAL RESERVE

Mr. HARKIN. Mr. President, 16 months ago we had a debate on the
nomination of Alan Greenspan as Chairman of the Federal Reserve System.
I argued at that time that he was far too concerned about a possible
increase in the rate of inflation and had far too little concern about
the employment and incomes of working people.
At that time, we had a number of Senators who came to the floor and
said, with unemployment at 5.5 percent, a further decline in
unemployment would likely lead to higher inflation. They seemed to
believe that raising interest rates was the best course of action.
In the last year, unemployment has dropped three-tenths of 1 percent.
But that represents only a part of the increase in the work force. The
pool of workers that can get jobs not only comes from the 4.9 percent
who are unemployed now but also from those who are not considered part
of the labor force, such as younger retirees, women at home, and people
who have been discouraged from looking for work in the past, and, of
course, persons on welfare. Our economy has brought an additional
400,000 of these persons into the work force over the year beyond those
considered as unemployed.
In the past year, the economy has grown at a rate of about 3.3
percent, roughly about 1 percent over what the Federal Reserve's target
was to be.
In terms of economic growth, a little means a lot. A 1 percent higher
rate of economic growth in an $8 trillion economy means at extra $80
billion a year, year after year. That comes out to be $300 for every
man, woman, and child in America.
Now, unfortunately, the Fed seems intent on restraining the economy
and keeping from building on its success. Many at the Fed, including
the two nominees, Mr. Gramlich and Mr. Ferguson that will soon be
before the Senate, believe in a concept called NAIRU--the non-
accelerating inflationary rate of unemployment. If it sounds arcane,
that is because it is.
But it is still important nonetheless. It is important because so
many people adhere to it and believe in it. NAIRU basically says, if
the unemployment goes below a certain level, inflation will accelerate,
not just increase, but will accelerate at such a rate that only
unnecessarily high interest rates can slow it down.
Just 3 years ago, it was widely accepted among the economic elites
that the economy would shift toward higher inflation if unemployment
fell below 6 percent. That was the NAIRU cutoff. But it fell below 6
percent, and actually some measures showed inflation dropping after
unemployment went below that.
Then the common wisdom was then if unemployment went below 5.5
percent for long, then inflation will accelerate. Greenspan and others
insisted on this. Well, it fell below 5.5 percent. Then the magic point
became 5 percent, below which inflation was sure to accelerate at
dizzying speeds if we went below 5 percent.
Unemployment has been under 6 percent for more than 3 years now and
less than 5 percent since early this year, and no one, including the
Fed Chairman, can point to any signs of accelerating inflation.
Unfortunately, economic reality and the new world has yet to
penetrate the thinking of those at the Fed.
I was deeply disappointed with Mr. Greenspan's statement before the
House Budget Committee on October 8 when he said, ``the performance of
the labor markets this year suggests that the economy has been on an
unsustainable track.''

In other words, a 3.3 percent rate of growth, he says, is
unsustainable. Let me respectfully disagree.
I disagree with the basic premise that Alan Greenspan and the
nominees before us are promoting. Their focus seems to be on when we
should raise interest rates--not ``if'' but ``when.''
I believe the debate should be broadened. Let us broaden it to
consider lowering interest rates.
A number of economic experts believe that unemployment could possibly
go as low as 4.5 percent, maybe

[[Page S11223]]

even lower, and economic growth increased beyond current levels without
triggering any inflationary threat.
Defenders of Fed policy constantly point to the inflation we
experienced in the 1970's as the No. 1 reason why it is better to
sacrifice higher unemployment for lower inflation.
Let us take a look at the causes behind the inflation of the 1970's.
We had massive Government spending, both on the Vietnam war and the
war on poverty; there was a serious energy crisis; and American
companies and their workers were no longer as productive as their
foreign counterparts.
Today, all that has changed. Congress and the President recently
reached an agreement to balance the Government's budget by 2002. I
might also point out that it was the 103d Congress--and I am very proud
to say I was one of those who helped to cast the deciding vote in the
Senate on the budget of 1993--that enacted President Clinton's budget
package that helped put our Government's finances on the road to
balance. However, we heard from the other side of the aisle saying,
``If this budget passes, disaster is going to happen. We're going to
have recessions and people will be out of work.'' And on and on.
Well, we passed that budget. What happened? The size of the budget
deficit began to shrink dramatically. That, coupled with the Clinton
administration's goal of downsizing Government and reorganizing
Government, with the Clinton program of reorganizing welfare and
restructuring welfare and making welfare-to-work, with the other
constraints put on the Government side of the ledger, that budget, plus
that, has led us through about 4 straight years of reducing the deficit
to the point now where it is at the lowest point, I think, since the
early 1970's, in fact, it might even be balanced as early as next year
rather than the year 2002.
So the Government's finances are getting in good order, thanks again
to that budget we passed in 1993 and further actions taken by the
Clinton administration.
Also, oil and gas prices have been stable for quite some time. There
seems to be no danger of any acceleration there. Our workers now are
the most productive in the world. I will have more to say about that.
In other words, our economy is much more able to ward off inflation and
control its harmful effects than it was in the 1970's.
Perhaps before I go any further, I want to explain how the Federal
Reserve experts have tremendous influence on the economy. Some people
say it is not the Federal Reserve; there are really a lot of other
things going on. Simply put, the Fed sets the interest rates charged to
banks for the banks' loans. In turn, that rate determines how much the
bank charges to their consumers for auto loans, credit cards, home
mortgages, and everything else --business expansion, new plants, and
new equipment.
By increasing the costs of borrowing money, the Federal Reserve is
able to limit the number of new loans that are used to expand or start
a business, buy a new car, finance the purchase of a home. If consumers
cannot afford to purchase these items, demand will decline and the
economy will slow down. So the Fed must realize that the gains from
encouraging economic growth far outweigh the gains from needlessly
increasing interest rates in order to fight the ghost of inflation.
That is exactly what they are fighting--a ghost. They cannot point to
any inflation. They cannot point to any accelerating inflation. Again,
I will have more to say about that.
Unnecessarily high interest rates that ensure a stagnant economy or
an economy that is growing at less than its full capacity virtually
assures that hard-working Americans will not get ahead. You cannot give
everyone a pay raise simply by redistributing dollars within a stagnant
economy. To increase incomes for everyone, you need a strong, growing
economy.
Last year, we enacted a very ambitious welfare-to-work program. If
that is to succeed, we must have an economy that is creating new jobs
that pay real well and provide benefits such as health insurance and
retirement savings--most important, health insurance.
The unemployment rate measures the number of people who are looking
for work compared to the number of people who have jobs. That is the
basic formula. Many of the persons counted as unemployed are actually
underemployed and would jump at the chance for a better paying job.
Again, I will later read from many articles around the country where
job openings have shown up and, even in areas where we have low rates
of unemployment, hundreds, thousands of people have shown up for these
jobs because they are better paying jobs.
Many unemployed are discouraged--the recently retired or those who
are not now thinking of working but will start to do so should the
opportunity arise. A growing economy and tight job market are the
surest way to bring these people into the work force.
We also have a reservoir of women that I will be talking about very
shortly in terms of their coming into the market and what that might
mean.
In fact, referring to an article that appeared in the September 8
issue of Forbes magazine, I thought it was very good. It was written by
Peter Huber. The title is ``Wage inflation? Where?'' I will read some
parts of this. I do not know if I need to read the whole thing. I think
it was very crucial and right on point in terms of what we are talking
about here. There are reservoirs and things happening in our economy in
the employment and work sector that were not there in the 1970's.
The PRESIDING OFFICER (Mr. Thomas). The Chair informs the Senator
that the time allocated to the Senator has expired.
Mr. HARKIN. Mr. President, I ask unanimous consent that I be allowed
to speak in morning business for at least another 30 minutes.
The PRESIDING OFFICER. Is there objection?
Without objection, the Senator from Iowa is recognized to speak for
up to 30 minutes in morning business.
The Senator from Iowa.
Mr. HARKIN. I thank the Chair.
Mr. Huber, in his article in Forbes said:

Again, I am reading from the article that was in Forbes written by
Mr. Peter Huber.

Labor markets have stretched into the home; they have also
spilled out of the country. A U.S. multinational doesn't
raise wages in Maine if it can shift production to a more
elastic labor market in Mexico.* * * Labor statistics, in
short, don't mean much unless they track where goods are
produced and consumed. The more transnational economies
become, the worse the tracking gets.
Then there's silicon. It takes a mix of capital and labor
to manufacture a mousetrap, and economists have always
allowed that the mix can change. In the past, however, the
substitution effects were slow. You could hire and fire
workers a lot faster than you could acquire or retire
machines and buildings. So ready supplies of capital didn't
discipline the price of labor in the short run.
Is that still true? Computers are getting easier to deploy,
smarter and--because of rapid innovation and falling costs--
shorter-lived. Many a manager can now expand production as
easily by investing an extra dollar in chips or software as
he can by hiring new workers. Technology can have a powerful
wage moderating effect long before silicon becomes a complete
substitute for sapiens. All it takes is enough substitution
at the margin.
The substitution is happening. Productivity, it now
appears, has been rising a good bit faster in recent years
than government statisticians recognized. Three new working
moms with computers produce as much as four old working dads
without. And newly minted Pentiums to the ranks of those in
search of useful work, and unemployment statistics look very
different.

* * * * *

This much we do know for sure. If the officially audited
supply of labor keeps falling--

[[Page S11224]]

Which is what I have just said has been happening--

and the price does not rise--

Which has been happening--

then we must either give up on economics completely or
conclude that there's more to the supply side of labor
markets then meets the official eye. Perhaps it's simply that
American women, Mexican men and Intel's progeny have all
become good substitutes for what the official statisticians
call U.S. labor. Maybe welfare reform is effectively
expanding labor pools, too. * * *
According to official statistics and economic models, a
supply-side crisis in labor markets should have reignited
inflation some time ago.

Almost 3 years ago.

Investors may indeed be crazy to ignore this indubitable,
though theoretical, truth. But if so, wage earners are
crazier still--so crazy they don't raise the price of their
labor when they can. Then again, maybe they can't.

I ask unanimous consent this article be printed in the Record.
There being no objection, the article was ordered to be printed in
the Record, as follows:

Wage Inflation? Where? (Labor Statistics Lose Predictive Value)

(By Peter Huber)

Here's why stock prices are really supposed to fall.
Employment rates rise above some critical flash point. So
wages rise sharply. So prices of goods rise--just as rising
wages are boosting demand. Inflation soars. So interest rates
go up. Stock prices crash.
This is a perfectly sound theory, but it requires some
facts. Where's the critical flash point? Do the employment
statistics mean what they used to mean? Do they mean anything
at all?
Officially speaking, America hasn't yet discovered
microwave ovens or women's lib. Bone-weary though she may be,
the stay-at-home mother doesn't labor at all in the eyes of
employment statisticians. But she could, easily enough. With
one new mom working at a day care center, three other moms
can enter the official work force when they choose. So long
as many women remain ambivalent about where to work, in the
home or out, the supply of labor will remain far more elastic
then the statistics suggest. Memo to Alan Greenspan: Wire
roses to Gloria Steinem.
Labor markets have stretched into the home; they have also
spilled out of the country. A U.S. multinational doesn't
raise wages in Maine if it can shift production to a more
elastic labor market in Mexico. Even the all-American
producer in Kansas can't raise wages or prices much if it
competes against imports from a wage-stable Korea. Labor
statistics, in short, don't mean much unless they track where
goods are produced and consumed. The more transnational
economies become, the worse the tracking gets.
Then there's silicon. It takes a mix of capital and labor
to manufacture a mousetrap, and economists have always
allowed that the mix can change. In the past, however, the
substitution effects were slow. You could hire and fire
workers a lot faster than you could acquire or retire
machines and buildings. So ready supplies of capital didn't
discipline the price of labor in the short run.
Is that still true? Computers are getting easier to deploy,
smarter and--because of rapid innovation and falling costs--
shorter-lived. Many a manager can now expand production as
easily by investing an extra dollar in chips or software as
he can by hiring new workers. Technology can have a powerful
wage moderating effect long before silicon becomes a complete
substitute for sapiens. All it takes is enough substitution
at the margin.
The substitution is happening. Productivity, it now
appears, has been rising a good bit faster in recent years
than government statisticians recognized. Three new working
moms with computers produce as much as four old working dads
without. Add newly minted Pentiums to the ranks of those in
search of useful work, and unemployment statistics look very
different.
None of this will tell you whether to go long or short on
General Motors next week. It's just that the next release of
official labor statistics probably won't, either. Like a
drunk searching for his keys under the lamppost rather than
in the shadows where he lost them, the government
statistician counts where the counting is easy. But the three
great economic stories of our times--women in the work force,
global trade and information technology--offer no easy
counting at all. The counters are good with things that sit
still. Women, foreigners and chips keep moving.
This much we do know for sure. If the officially audited
supply of labor keeps falling and the price doesn't rise,
then we must either give up on economics completely or
conclude that there's more to the supply side of labor
markets than meets the official eye. Perhaps it's simply that
American women, Mexican men and Intel's progeny have all
become good substitutes for what the official statisticians
call U.S. labor. Maybe welfare reform is effectively
expanding labor pools, too. In any event, running out of old
bread creates neither famine nor inflation when there's a
glut of new cake.
According to official statistics and economic models, a
supply-side crisis in labor markets should have reignited
inflation some time ago. Investors may indeed be crazy to
ignore this indubitable, though theoretical, truth. But if
so, wage earners are crazier still--so crazy they don't raise
the price of their labor when they can. Then again, maybe
they can't.

Mr. HARKIN. Again, Mr. President, because of the new labor pool that
is there and because of the international marketplace, because of
increasing technology and productivity, I believe the economy can
continue to expand for some period of time, at least at its current
pace, without causing a significant rise in inflation.
Second, we need to do more to increase the wages and incomes of
average Americans. This should be one of our Nation's very top
priorities. So we have an economy growing 3.3 percent. That is good,
but who is taking part in it?
The Federal Government should complete a very good year from a
budgetary perspective, as I said. In February, the White House said
there would be a $125 billion deficit. CBO, our budget estimator for
Congress, said it would be $115 billion in March of this year. In fact,
it looks like it will only be a $23 billion deficit this year.
So why do we have the good news? Because the economy grew faster than
the traditional economists perceived likely. I am pleased with the
growth. I am pleased with that growth and the lower deficit level and
the fact that prices are not rising. But I am disappointed that a
fairly small share of the gain went to average Americans.
Look at this chart which says it all. Look what has been happening in
the last several years in the recent economic boom in this country. If
you look at the corporate profit rates, they are really going up.
Especially since 1992 and 1993 they have gone up tremendously. Look at
the median weekly earnings during the same period of time. They keep
going down. Corporate profits are going up and median weekly earnings
are going down.
The reality is that the incomes of average Americans are not rising
very much. Median household income remains lower than in 1989, before
the last recession. The poverty rate is still higher than in 1989, and
the number of persons considered very poor, earning less than half the
poverty threshold, actually increased. The poverty rate is still higher
than in 1989, and the number of persons considered very poor--that is,
earning less than half of the threshold poverty rate, actually
increased. At the same time, corporate profits are soaring.
If the Fed clamps down and the economy ceases to grow at a reasonable
rate, there will be no real chance that wages will grow at anything
more than a minimal rate. This line will continue to go down even more.
If we allow the economy to move forward, then, workers may achieve some
real income growth. That means a higher standard of living for all
Americans. That really should be our bottom economic line, a higher
standard of living for all Americans, including those at the bottom who
are falling further and further behind.
If someone asked me what I would want, I would say I just want
average Americans to be able to buy a home with decent mortgage rates,
low monthly payments, to go on a nice vacation every year with the
family, treat their kids to a ball game, go out and have a nice dinner
at a restaurant with their spouse on their anniversaries or birthdays,
be able to save some money for a rainy day or for their kids'
education. In other words, to improve their quality of life. This
should be our fundamental goal.
To not allow a chance of an improved standard of living because of an
innate fear of a possible rising inflation is not only unfair to
Americans, it flies in the face of economic reality and it fails to
recognize basic changes that have taken place in the global economy.
A little history. Back in 1933 the Congress set the Federal Reserve
policy goals as ``the maintenance of sound credit conditions, and
accommodation of commerce, industry and agriculture.'' In 1946, the
Congress passed the Employment Act of 1946 which set out a shared
Federal Reserve responsibility, the goal being ``responsibility of the
Federal Government to use all practical means * * * to promote maximum
employment, production and purchasing power.'' It was only in 1978

[[Page S11225]]

that the law was modified to add the goal of containing inflation,
interestingly. Not until 1978--we had some pretty good years before
1978, but it was in 1978 that the law was modified to add the goal to
the Federal Reserve's policy of containing inflation. That goal did not
replace maximizing employment and production. It didn't say in lieu of
maximizing employment and production, but in addition to maximizing
employment and production.

In the last Congress, Senator Mack, my good friend from Florida,
introduced a bill to make fighting inflation the sole principal goal of
Federal Reserve policy, to undo everything it has been doing since
1933, to take what was done and added in 1978 as another goal, and make
that the only goal of Fed policy.
Alan Greenspan supports this proposal and said in open testimony that
he supported taking out of the Federal Reserve's consideration
``promoting maximum employment, production and purchasing power, the
maintenance of sound credit conditions to accommodate commerce,
industrial and agriculture,'' all of which has been in there at least
since 1933 and 1946--do away with all that and have only one goal for
the Federal Reserve--to fight inflation. Mr. Greenspan supports
formally shifting the focus of the Fed to controlling inflation and
achieving price stability.
Well, I do not think this policy is a wise course of action. Alan
Greenspan may want to change the Fed's mandate, but that does not
relieve the Federal Reserve of its responsibility to carry out the law
and its mandate which is not just inflation but ``to promote maximum
employment, production and purchasing power.''
Unfortunately, under the leadership of Mr. Greenspan, the focus has
become only oriented toward a fear of fighting the ghost of inflation.
I say ``a fear of fighting the ghost of inflation'' because there is no
inflation. But out there sometime around Halloween the ghost of
inflation that might actually appear, and we need to be worried about
that, according to Mr. Greenspan.
I recently met with the two nominees for the Federal Reserve board
that will shortly be before the Senate, Mr. Gramlich and Mr. Ferguson.
We had two very productive and informative meetings. I found them both
very learned individuals and fine individuals. They also have good
career backgrounds. But what American families need at the Federal
Reserve are Board members who will not simply follow the prevailing
wind at the Fed but follow what is set out in law, and that is
balancing the goals of sustaining rates of growth from employment,
production and purchasing power as well as minimizing inflation.
Unfortunately, our two nominees before us still adhere to that
outdated consent of NAIRU, nonaccelerating rate of unemployment, and I
am afraid that they will fail to aggressively challenge many of the
current assumptions at the Fed.
We need a good healthy debate at the Fed and we need a good healthy
debate outside of the Fed about economic policies. I also believe that
the nominees are just not likely to push for this kind of debate prior
to risking the upward movement of the economy with an interest rate
increase. That, in my view, is unfortunate.
The Federal Reserve seems to look at the economy solely through the
eyes of lenders. They need to look at the needs of manufacturers and
builders, entrepreneurs and hard-working families, as the law requires.
These are the people that move the economy, the people that make
things, that take the risks, that sell things for whom the Federal
Reserve policy should aim to benefit. The nominees before us,
unfortunately, I believe share that view of just simply looking at the
economy through the eyes of the lenders and the bankers.
Lastly, and while this is not being talked about very much, I believe
we are facing an increasing risk of deflation--deflation. While the Fed
focuses on getting inflation down to zero, I think and fear they may
overshoot it and send the economy into a deflationary spiral.
Inflation as measured by the CPI for the past year has been 2.2
percent. Unemployment is below 5 percent, and the economy is moving at
a GDP rate of around 3.3 percent. Most of the members of the Federal
Reserve seem to feel the CPI overestimates inflation by a percentage
point or more. If that is the case, then inflation is somewhere down
around 1 percent, maybe less. Maybe inflation is really somewhere
between zero and 1 percent.

These people at the Fed fear inflation might rise because the
unemployment rate is so low, 4.9 percent. If it does, we can react, but
there is nothing in our history that points to our inability to slow
down and reverse inflation due to an overheated economy. But the
preemptive strikes launched by the Fed do not restrain inflation.
Instead, this reaction to the remote possibility of accelerating
inflation has tremendous costs to our nation.
A preemptive strike blocks the chance of people to be more employed;
it blocks the chance of people, on average, to see their incomes truly
rise; and it increases the risk of recession. A recession in the
current economic environment creates a real possibility of deflation. I
believe that right now we are very close to zero inflation, but if we
go into recession, that could slip down below zero, and indeed we would
have inflation. That would deepen the recession and make it even harder
to come out.
Because of this excessive fear of inflation at the Fed, we now live
in a world where good economic news for working families is bad news on
Wall Street and at the Fed. I don't know how many times I have seen
that if there is some good news out there for working families, they
say stocks will fall, the Fed is going to have to raise interest rates.
I will read from an article written by Mr. Robert Reno earlier this
year, entitled ``Economic Prosperity Not Fully Shared,'' to underscore
this point. Mr. Reno said in his article of March 14, 1997, talking
about the unemployment rate falling to 5.3 percent and below.

Wall Street held its breath recently, fearful that one of
the greatest bull markets in history was about to be handed
the excuse it was looking for to crash.

He said that was because early in March the U.S. Bureau of Labor
Statistics was ready to release the report on unemployment.

It could have been another Black Friday. But closer
inspection of the employment report showed things weren't all
that dreadful. Average earnings rose just 3 cents an hour.
No sign there that wage inflation was any threat except in
the minds of those who use a Hubble telescope to see
inflationary signs invisible to everyone else. Moreover,
there were ``healthy'' signs that American workers are still
scared witless.
The percentage of workers holding down two jobs, seen as a
barometer of job insecurity, was 6.2 percent, about the same
as it was a year ago. And the percentage of job quitters--
those who felt confident enough to strike out in search of
new employment--fell significantly. . . .
It says something weird about the economic culture of the
1990s that the docility of the American labor force has come
to be regarded as the chief barometer of the Nation's
economic health, the indicator that causes the largest
holders of wealth to prosper even as wage-earner incomes
stagnate.

Again we see it here, wage earners going down, corporate profits
going up.

Still, the alarmists continue to talk about a ``tight''
labor market. This is not the same labor market viewed by
most American wage earners.
They see an economic landscape littered with the victims of
downsizing, a corporate strategy that has institutionalized
the process of maximizing short-term share values by
minimizing worker security. They also see a system in which
health-care coverage, especially the fear of losing it, is
increasingly a factor in workers' decisions to change jobs or
to hang on for dear life to the one that they have.
These and other factors, including the weakening of the
labor movement, combine to make workers less likely to demand
higher wages even as they see their CEO's taking home grossly
swollen compensation packages that are an embarrassment to
capitalism.

I think that paragraph needs repeating.

These and other factors, including the weakening of the
labor movement, combine to make workers less likely to demand
higher wages, even as they see their CEO's taking home
grossly swollen compensation packages that are an
embarrassment to capitalism.

I ask unanimous consent that the full text of Mr. Reno's article be
printed in the Record.
There being no objection, the article was ordered to be printed in
the Record, as follows:

[[Page S11226]]

[From the Salt Lake Tribune, Mar. 14, 1997]

Economic Prosperity Not Fully Shared

(By Robert Reno)

New York.--Wall Street held its breath recently, fearful
that one of the greatest bull markets in history was about to
be handed the excuse it was looking for to crash.
This was because early March 7, the U.S. Bureau of Labor
Statistics was scheduled to release its monthly report on
employment, an event that could provide the Federal Reserve
with a reason to raise interest rates, to punish the economy
for growing too fast and the stock market for its
``irrational exuberance.''
At first, the news looked terrible. Not only did the
unemployment rate fall during February to 5.3 percent, we
below the 6 percent level that some inflation hawks view as
dangerously inflationary, but non-farm payrolls expanded by a
brisk 339,000 jobs, a much higher figure than most economists
had expected. Yes, things looked bleak.
It could have been another Black Friday. But closer
inspection of the employment report showed things weren't all
that dreadful. Average earnings rose just 3 cents an hour.
No sign there that wage inflation was any threat except in
the minds of those who use a Hubble telescope to see
inflationary signs invisible to everybody else. Moreover,
there were ``healthy'' signs that American workers are still
scared witless.
The percentage of workers holding down two jobs, seen as a
barometer of job insecurity, was 6.2 percent, about the same
as it was a year ago. And the percentage of job quitters--
those who felt confident enough to strike out in search of
new employment--fell significantly.
So the market heaved with relief, shook itself, and the Dow
Jones industrial average proceeded to rise 50.19 points.
Monday, it hit a new all-time high in a day of exuberant
trading, then peaked again Tuesday.
It says something weird about the economic culture of the
1990's that the docility of the American labor force has come
to be regarded as the chief barometer of the nation's
economic health, the indicator that causes the largest
holders of wealth to prosper even as wage-earner income
stagnates.
Still, the alarmists continue to talk about a ``tight''
labor market. This is not the same labor market viewed by
most American wage earners.
They see an economic landscape littered with the victims of
downsizing, a corporate strategy that has institutionalized
the process of maximizing short-term share values by
minimizing worker security. They also see a system in which
health-care coverage, especially, the fear of losing it, is
increasingly a factor in worker's decisions to change jobs or
to hang on for dear life to the one they have.
These and other factors, including the weakening of the
labor movement, combine to make workers less likely to demand
higher wages even as they see their CEOs taking home grossly
swollen compensation packages that are an embarrassment to
capitalism.
The current economic expansion, in its length, durability
and non-inflationary nature, is an achievement not to be
despised. February's figures are further evidence that it
will continue. But until the policy-makers and the economists
discover a way to more fairly distribute its good fortune, it
is an unfinished job.

Mr. HARKIN. Mr. President, I want to point out that just 2 weeks
after this article appeared, the Fed launched one of its preemptive
strikes, despite admitting the fact that there was no accelerated
inflation, and raised interest rates again.
The issues that are before us are much more important than just two
nominees to the Federal Reserve system. It is about strengthening our
Nation's economy and ensuring that all Americans have a better standard
of living than their parents and their grandparents. It is about
everyday Americans making everyday decisions, families trying to make a
payment on their House, pay for their kids' college education, Main
Street merchants paying for a loan for inventory to run their small
business, and farmers making decisions on borrowing to put in next
year's crop.
The Federal Reserve policies affect families budgets and national
budgets. The Federal Reserve policies shape the course of America's
future. If we hope to reach and maintain a balanced budget and move
people from welfare to work and ensure the solvency of Medicare and
Social Security, we must have a vigorous, growing economy.
Unfortunately, the Federal Reserve is standing in the way. As I have
said many times, the Fed has kept its key interest rates, such as the
Federal Funds rate, unnecessarily high and, as a result, sacrificed job
growth and the living standard of hard-working Americans in the blind
pursuit of fighting the ghost of inflation.
The reason the Fed is willing to pay any price and bear any burden to
fight the ghost of inflation is that the Fed's prime constituency is
the Nation's largest banks. Bill Wolman, an economist for Business Week
magazine and CNBC News, wrote in the Judas Economy:

The Federal Reserve's anti-inflation hysteria is, pure and
simple, special interest politics, practiced by an
institution almost totally free of effective oversight.

I will continue the quote by Mr. Wolman:

As a class, Bankers are creditors who have a strong
interest in making sure that the money they lend out--ranging
from revolving credit, such as Visa or MasterCard, to thirty-
year mortgages--is paid back in money that does not lose
value through time. The central bank is most concerned to
limit inflation because inflation depreciates the value of
the assets held by commercial banks. When prices are rising
(inflation), debtors can repay their loans to creditors in
cheaper currency; for this reason creditors hate inflation.
But when prices are falling, debtors are forced to repay
their debts with expensive (harder to earn) currency. Thus,
creditors benefit at the expense of workers. . . .

As I previously noted, this mindset that we are confronting is
largely based on this outdated and faulty concept called NAIRU, the
Nonaccelerating Inflation Rate of Unemployment.
As Robert Eisner wrote in his book, ``The Misunderstood Economy,''
which I recommend to all, the NAIRU concept is the purest example of
the old saying, ``Statistics are the straightest line from an
unreasonable assumption to a foregone conclusion.''
Again, NAIRU basically says that if unemployment goes below a certain
level--once and for many years thought to be 6 percent--inflation will
accelerate at such a pace that it will take excessively high interest
rates and subsequent levels of unemployment in order to bring inflation
under control. Describing NAIRU, Robert Eisner wrote:

It tells us that if we persist in trying to get and keep
unemployment (below its natural level) [whatever that is], we
will have, not merely inflation, but accelerating inflation.
Literally that might mean a very slowly accelerating
inflation like one-tenth of one percent per year. But somehow
the term is used to imply that inflation will accelerate
rapidly, conjuring up visions of the Germans in the 1920's
carrying marks in wheelbarrows and using money as wallpaper.
The strongest and most unabashed supporter of NAIRU at the Federal
Reserve is Fed Governor Meyer, an appointee of the Clinton
administration. He said:

I am a strong and unapologetic proponent of the Phillips
Curve and the NAIRU concept. Fundamentally, the NAIRU
framework involves two principles. First, the proximate
source of an increase in inflation is excess demand in labor
and/or product markets. In the labor market, this excess
demand gap is often expressed in this model as the difference
between the prevailing unemployment rate and NAIRU, the
nonaccelerating inflation rate of unemployment.

Mr. Mire goes on to say:

Second, once excess demand gap opens up, inflation
increases indefinitely and progressively until the excess
demand gap is closed, and then stabilizes at the higher level
until cumulative excess supply gaps reverse the process.

Visions of Germany in the 1920's. Why, my goodness, if the
unemployment rate goes a little lower, you will be taking your dollars
to the banks in wheelbarrows. They will be worthless. We will have this
huge inflation. That is the kind of fear-mongering done by those who
adhere to this concept of NAIRU.
Now, Mr. Greenspan has recently made some public statements kind of
distancing the Fed from NAIRU. I guess, after 3 years, it has finally
kind of come home to him that maybe a 5-percent rate of unemployment is
not going to accelerate unemployment, maybe not 4.9 percent, and maybe
not even 4.5 percent. In his July 22 Humphrey-Hawkins testimony, Mr.
Greenspan said:

The rise in the average workweek since early 1996 suggests
employers are having a greater difficulty fitting the
millions who want a job into available job slots. If the pace
of job creation continues, the pressures on wages and other
costs of hiring increasing numbers of such individuals could
escalate more rapidly.

Furthermore, the prospect of adding more employees to the workforce
is equally unappealing to Mr. Greenspan who believes this will ignite
inflation. He said this in July:

Presumably, some of these early retiree, students, or
homemakers might be attracted to the job market if it became
sufficiently rewarding. However, making it attractive enough
could also involve upward pressures in real wages that would
trigger renewed price pressures, undermining expansion.

[[Page S11227]]

To that, I say: Not true. Turn again to this chart. Median weekly
earnings are going down and corporate profits are going up. All I am
saying, and others are saying, is that more of the growth in our
economy needs to go to those who are working and making weekly wages.
More should be going to the bottom part of our economy who are falling
further and further behind and who rely more than anyone else on
interest rates.
Well, again, Mr. Greenspan linked wage pressures, no matter how
little to the specter of accelerating inflation in his October 8
testimony earlier this month before the House Budget Committee. He
admitted, ``There is still little evidence of wage acceleration.'' But
he said, ``If labor demand continues to outpace sustainable increases
in supply, the question is surely when, not whether, labor costs will
escalate more rapidly.''
I know Mr. Greenspan is a skilled economist, but I would like to
point out a few things to him. First, you have increasing technology
with the silicon chip; second, you have a lot of women who are in the
pool that can come into the work force because they are homemakers, and
as we develop more and more safe, affordable daycare in America, more
of those women can come into the work force. Third, we have a global
economy, Mr. Greenspan.
Now, some may say it's odd for me, for this Senator, to be talking
about this global economy as part of an element that contributes to
economic growth in our country and the keeping down of wage demands.
But it is true and it's a fact. All I am saying is that as long as it
is a fact, then don't further penalize the workers in our economy by
keeping unnecessarily high interest rates, which penalizes them in
buying a home, or buying a car, or taking a vacation, or saving some
money for a rainy day, or for their kids' college education. We can use
the global economy as it is with increasing technology, with a vast
pool of women, early retirees, and the underemployed, to move into that
work pool and hope at least to get some increase in the wages of those
that are on the bottom, and at least give them a better ability to be
able to increase their standard of living by not paying so much in
interest rates.

Mr. Greenspan, as recently as October 8, is warning us that if the
labor demand--once again, that old NAIRU concept--out there continues a
little bit further, then inflation is going to accelerate and take off.
Another simple component of the NAIRU concept is, of course, the
preemptive strike. It's when the Federal Reserve raises interest rates
to fight inflation, despite seeing no signs of accelerating inflation.
The justification behind a preemptive strike is the possibility of
inflation increasing at some point in the future. Again, Mr. Greenspan
said, in his Humphrey-Hawkins testimony this year:

Given the lags in which monetary policy affects the
economy, however, we cannot rule out a situation in which a
preemptive policy tightening may become appropriate before
any sign of actual inflation becomes evidence.

That leads me to another change in Fed policy that I think we ought
to enact and enact rapidly.
There is no reason why the minutes of the Federal Reserve Board
meetings need to be kept secret for 5 years. That's right. When the
Federal Reserve meets and sets their policy, it's sealed for 5 years.
We don't do that in Congress. We don't do that in the Supreme Court.
There is no reason why the Fed has to have that capability to withhold
important information. I grant that there may be some economic
reasons--in terms of market stability--why their minutes may be kept
sealed for a short period of time, but certainly no longer than a year.
We ought to know from year to year why the Fed is making the
decisions it is making. People ought to go back and read the minutes of
the Fed meetings back in 1990 and 1991 when it was making some of its
decisions. Then you will begin to see that their crystal ball is pretty
cloudy indeed.
Mr. Greenspan, as I have pointed out on many occasions, raised
interest rates seven consecutive times in 1994 and 1995. Think about
that--seven consecutive times. I say he doubled interest rates. The Fed
fund rates went from 3 percent to 6 percent in less than 2 years--about
18 months. He did this despite seeing no signs of accelerating
inflation. There never were any signs of accelerating inflation.
For example, in his February 22, 1994, testimony given shortly after
the first of the rate hikes, Mr. Greenspan said the current economic
statistics ``do not suggest that the financial tender needed to support
the ongoing inflation process is in place.''
Yet, they kept raising interest rates. So during a period of time
when we had great economic growth in this country, the raising of those
interest rates pushed a lot of our people on the bottom further down on
the bottom and let the people at the top get more of the growth that we
have had.
Since the last of the seven rate hikes, Mr. Greenspan lowered the
rate slightly and then put them back up again a quarter of a point--at
about 5.5 percent right now.
In July, Business Week published a cover story entitled ``Alan
Greenspan's Brave New World.'' He said Greenspan has moved the Fed into
``uncharted territory * * * by allowing faster growth and lower
unemployment than the Fed would have permitted in the past.''
I think we should continue on that track. But I am concerned about
the recent testimony given by Mr. Greenspan just earlier this month.
The pervasive fear of inflation still holds true to that. This is best
shown as the preemptive strike launched by the Fed in March of this
year, despite minimal signs of inflation and Greenspan's February
Humphrey-Hawkins testimony, in which he said, ``This year overall
inflation is anticipated to stay restrained.'' Mind you, in February,
Mr. Greenspan said: ``This year overall inflation is anticipated to
stay restrained.'' One month later the Fed increased its Fed funds
rates by a quarter of a point. On April 24, Governor Meyer--again, the
biggest proponent of NAIRU--gave a speech in which he said, ``The
recent Federal Reserve policy action was clearly a preemptive one. This
means that it was undertaken not in response to where the economy and
inflation were at the time of the policy change, but in response to
where the economy and inflation were projected to be in the future
absent a policy change.''
Again, I would like to know exactly what the Fed is looking at when
it makes these decisions. What is that future? What is the long run?
One economist once said, ``In the long run we are all dead.'' What are
we talking about in the future? One month the head of the Fed says
inflation is going to stay restrained, and the next month they raise
the Federal funds rate. The next month Mr. Meyer says it was preemptive
because we projected that in the future sometime we would have
inflation. Obviously, not this year, because just a month before, they
said it was going to be restrained. And, yet, over the last several
months, our consumers, our small businesses, our farmers, our
homeowners, our manufacturers have had to pay a quarter point more
interest rate. That hits everyone. It is just like a hidden tax; just
like a nice little hidden tax on everyone.
A lot of people believe that preemptive rate hike in March was
totally unnecessary. In the April 14, 1997, edition of Barron's, David
Ranson wrote an article entitled ``The Federal Reserve's Pointless
Quarter Point: A Preemptive Strike Against a Non-Threat.''
Mr. Ranson said first:

There isn't any inflation around to curb. Everyone,
including Alan Greenspan, concedes that inflation is absent.
Thus, the traditional pretext for Fed action is nowhere to be
found. I am reminded of the two buzzards sitting on a tree
limb. One turns to the other and announces: ``Patience, my
foot. I'm going to kill someone.''

We have all seen that cartoon before. So it is like the old Fed
sitting there. ``Well, patience my foot. We are going to raise interest
rates. Inflation isn't there. By gosh, we are going to raise it
anyway.''
According to the official story by Mr. Ranson, the Fed's action was a
necessary preemptive strike against inflation before it becomes
evident.
If it is not evident, how do they know it? If it is not evident to a
lot of preeminent economists in this country, how is it evident to the
Fed? What is their basis for it? Again, we will not know for 5 years.
We ought to know a lot sooner than that.

[[Page S11228]]

Mr. Ranson said,

The real enemy for now is not inflation itself but
unwarranted angst about inflation brought on by stubborn
adherence to basic misconceptions. Inflation is certainly
detrimental to growth, but it is not true that growth must
lead to inflation. This principle is observable worldwide.
Low-inflation countries have tended to be economically
successful while high-inflation countries have tended to
stagnate.
Fourth, increased interest rates do little to curb
inflation; mostly they just ratify it. There is powerful
evidence that an increase in interest rates slows the
economy, but we find surprisingly little evidence that it
curbs inflation. Inflation does not decline perceptively
following a rate rise. Nor does inflation increase noticeably
following a rate cut.

Mr. Ranson concludes the article by saying:

The notion that inflation is generated by economic success
belies history and perpetuates the ``good news is bad news''
syndrome that bedevils government policy and the financial
markets.
The assumption that we need the Fed to tinker endlessly
with interest rates needs to be challenged. Policymakers are
prone to assume that the Nation needs them to take vigorous
action . . . even when the pretext for action is elusive.
It is unclear whether those clamoring for higher interest
rates will be mollified by the Fed's token action. It is only
more likely they will be encouraged to demand more. One
policy mistaken facilitates another.

Mr. President, I ask unanimous consent that Mr. Ranson's article be
printed in the Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:

[From Barron's, Apr. 14, 1997]

The Federal Reserve's Pointless Quarter-Point: A Preemptive Strike
Against a Non-Threat

(By David Ranson)

The recent quarter-point increase in the federal-funds rate
was unwarranted and potentially harmful. Government
policymakers, impatient with the absence of a pretext for
action, have once again chosen to act anyway. There are a
number of reasons why the Federal Reserve's recent action was
pointless at best.
First, there isn't any inflation around to curb. Everyone,
including Alan Greenspan, concedes that inflation is absent.
Thus the traditional pretext for Fed action is nowhere to be
found! I am reminded of the two buzzards sitting on a tree
limb. One turns to the other and announces: ``Patience, my
foot. I'm going to kill something.''
Second, there is no valid indication of inflation around
the corner for the Fed to pre-empt. The current acceleration
in the economy is cited as the primary indication that
inflation might lie ahead. According to the official story,
the Fed's action was a necessary ``pre-emptive strike''
against inflation before it becomes evident.
The good news is that low unemployment and healthy economic
growth have been achieved in an environment of very low
inflation. Tragically, the most prevalent response to this
positive scenario is to worry even more loudly and to suggest
that this excellent state of affairs can't last. Supply-
siders correctly point out that such conventional wisdom is
contradicted by historical fact. While many observers express
surprise at the economy's success, it is exactly as real-life
experience suggests: Low inflation goes hand-in-hand with low
unemployment--and high inflation with high unemployment.
The real enemy for now is not inflation itself, but
unwarranted angst about inflation brought on by stubborn
adherence to basic misconceptions. Inflation is certainly
detrimental to growth, but it is not true that growth must
lead to inflation. This principle is observable worldwide.
Low-inflation countries have tended to be economically
successful while high-inflation countries have tended to
stagnate.
H.C. Wainwright Economics tracks in detail
interrelationships among U.S. interest rates, economic growth
and inflation. Statistical analysis confirms that inflation
precedes periods of weak economic growth rather than follows
periods of strong growth.
Fourth, increased interest rates do little to curb
inflation; mostly, they just ratify it. There is powerful
evidence that an increase in interest rates slows the
economy, but we find surprisingly little evidence that it
curbs inflation. Inflation does not decline perceptively
following a rate rise. Nor does inflation increase noticeably
following a rate cut.
Consider, for example, the half-dozen occasions when there
has been a year-to-year increase of more than two percentage
points in the federal-fund rate. These Fed moves were
followed after a year by an average decline of nearly 5
points in the rate of industrial production growth, a
dramatic impact.
But whatever the counter-inflationary result, it was highly
unimpressive. In terms of producer prices (which are a more
sensitive indicator than consumer prices), the reduction in
inflation one year following these large rate hikes averaged
an insignificant one-tenth of a percentage point. Inflation
as measured by the consumer price index actually continued to
accelerate.
A skillful newspaper editor, faced with a peaceful day of
no news, makes a bigger fuss over what little he has to work
with. He knows how easy it is to fuel public anxiety. Wall
Street strategists have been playing this game for at least
the past year. Faced with a benign economy and virtually no
inflation, they have pursued a vociferous debate about the
mere possibility of increased inflation and the Fed's
potential reactions.
The Fed has succumbed to this pessimism. Far from pre-
emptively curbing inflation, its latest action tends to
endorse inflation that does not exist. Surely this is an
absurdity. It makes no sense for the government to respond to
fears of inflation by heightening them. Why would anyone want
to hamper a strengthening economy just to obviate the harm
than a purely speculative bout of inflation might cause?
While a quarter of a percentage point will not cause material
damage to the economy, additional moves in the same direction
will.
The notion that inflation is generated by economic success
belies history and perpetuates the ``good news is bad news''
syndrome that bedevils government policy and the financial
markets. Granted, inflation has harmful effects, but the
damage done by unsubstantiated fears of inflation is worse
precisely because it is so unnecessary. The recent sag in the
bond market is just one of the symptoms of the less-visible
damage we are inflicting upon ourselves.
The assumption that we need the Fed to tinker endlessly
with interest rates needs to be challenged. Policymakers are
prone to assume that the nation needs them to take vigorous
action--even when the pretext for action is elusive.
It is unclear whether those clamoring for higher interest
rates will be mollified by the Fed's token action. It is more
likely that they will be encouraged only to demand more,
especially as the economy continues to accelerate. One policy
mistake facilitates another.
But it is also possible that Alan Greenspan understands
what his critics do not: that the Fed's true role is to keep
both interest rates and the dollar's purchasing power as
stable as possible. Perhaps in a histrionic Washington where
inaction is death he dare not say this too loudly.
In a recent commentary on National Public Radio, economist
Robert Kuttner suggests that Greenspan succumbed to pressure
from inflation hawks out of fear of being on the losing side
of the Open Market Committee vote. Whether that's true or
not, the Fed's decision to raise interest rates was more a
political act than an economic one.
But I remain optimistic that the longer inflation remains
absent, the less influence the inflation hawks will wield. In
such a environment the Fed will be able to justify smaller
and less frequent changes in interest rates.

Mr. HARKIN. Mr. President, again, I am also concerned that the
nominees that will be shortly before us to the Board of Governors seem
equally frightened by this ghost of inflation. For example, nominee
Roger Ferguson said in his testimony before the Senate Banking
Committee, ``Therefore, I agree with the Fed's historic approach''--I
would challenge that word ``historic approach''--``to reduce monetary
stimulus before the emergence of obvious and strong inflationary
pressure. Unfortunately, the timing and appropriate amount of change in
monetary policy involves some guesswork and some risk taking.''
He agrees with the Fed's historic approach. It seems to me the
historic approach of the Fed back in 1933 was to facilitate commerce
and keep employment high. Only in 1978 was it added to keep inflation
in check.
Mr. Ferguson's view is not a comforting thought given that we have a
chairman of the Federal Reserve System who has echoed that comment when
he said, ``economic understanding is imperfect and measurement is
imprecise.''
That is interesting. Mr. President, if measurements are not perfect,
can we assume the Fed knows what it is doing when it launches one of
its preemptive strikes? Maybe all it is doing again is simply raising
the corporate profit rate and cutting down median weekly earnings.
This is what is happening. Change in the share of income received by
each quintile from--look what is happening. The lowest quintile, the
lowest 20 percent of our population, their share of income received is
going down. All of it is going down. But in the top 20 percent it is
going up--their share of the income.
So I suggest that what the Federal Reserve is doing is not stopping
inflation at all. What they are doing is shifting who gets the money;
who gets the biggest share of this great growth that our country is now
engaged in.
Furthermore, I submit that their policy inhibits that rate of growth
and keeps it from being even greater than it is.
So we have a Fed that has used a method to fight inflation when we
may not even be sure if inflation actually exists in the economy.

[[Page S11229]]

Well, Mr. President, I believe I have used up my 30 minutes. I see
others who are on the floor who want to speak. But I will have more to
say about this as the week progresses if the nominations are put before
the Senate for consideration. I have a number of other charts that I am
going to use to illustrate how the Federal Reserve policies, I believe,
are hurting the working families in America, how their policies are
mistaken in bending this country toward higher interest rates when
those higher interest rates are not needed, when they are not
legitimate, and when those higher interest rates benefit the top 20
percent of the people of this country and hurt everyone else.
The Fed's policies, in short, are keeping growth restrained more than
should be.
Second, the Fed's policies, I believe, are keeping wages from keeping
up with productivity in this country.
Third, the Fed's policies are skewing who gets whatever the growth is
in our economic pie. In other words, we know and all of the figures
show--and I will release those later on this week--that in our country
the richer are getting richer and the poor are getting poorer. We know
that. All we have to do is look at this chart.
So the Fed's policies are destroying the broad middle class in
America, that middle class that has always been the ladder of
opportunity for those who ascend. I fear that if we do not stop the
policies of the Fed, that rather than accelerating inflation, what we
will have is an accelerating spread between the rich and the poor in
our country, an acceleration of depressing wages, an acceleration of
pushing people in the middle class down further on the economic scale,
and that I submit will be harder to turn around and more dangerous for
our country, more fraught with the possibilities of deflation and
severe recession than any fear of a small increase in inflation that
might come about if the Fed were to actually reduce interest rates.

Mr. President, I yield the floor.
The PRESIDING OFFICER. The Senator from Minnesota.
Mr. GRAMS. Mr. President, are we in morning business?
The PRESIDING OFFICER. We are in morning business.
Mr. GRAMS. I thank the Chair. I ask unanimous consent to speak for up
to 10 minutes.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. GRAMS. I thank the Chair.

____________________