[Congressional Record Volume 146, Number 31 (Monday, March 20, 2000)]
[Extensions of Remarks]
[Page E349]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

[[Page E349]]



                        ``THE FED IS MISTAKEN''

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                           HON. BARNEY FRANK

                            of massachusetts

                    in the house of representatives

                         Monday, March 20, 2000

  Mr. FRANK of Massachusetts. Mr. Speaker, I continue to be very 
concerned that the Federal Reserve will unduly restrict economic growth 
by overreacting to the possibility of inflation, in the absence of any 
sign of it. Last week I introduced into the Record a very thoughtful 
analysis by Jeff Faux of the Economic Policy Institute, a liberal 
organization, refuting the Fed's analysis. Today, I introduce an 
article from a conservative thinker, Lawrence Kudlow, who disagrees 
with Mr. Faux on many points, but who agrees on the central issue that 
the Federal Reserve is threatening our prosperity unnecessarily by 
inaccurately portraying an inflationary danger in current economic 
trends. Unfortunately, the well deserved respect that people have for 
Mr. Greenspan and his record in office serves to diminish the healthy 
debate a democracy ought to have on the important questions with which 
the Fed deals. In fairness to Mr. Greenspan, it should be noted that he 
has not himself sought to discourage discussion, and indeed I believe 
he welcomes an open debate on these questions. I believe that the 
central thesis that Mr. Kudlow discusses here is absolutely accurate, 
namely that the growth we have been enjoying results from improved 
productivity, among other things, and does not carry with it the 
inflationary threats that some in the Fed see. In the interest of the 
sort of debate that we should be having on this central subject, I ask 
that Mr. Kudlow's analysis be printed here.

                          (By Lawrence Kudlow)

       Alan Greenspan's harsh warnings that only substantially 
     higher interest rates can slow down the economy are like an 
     out-of-range cellular telephone call. They are disconnected 
     from the reality of the new Internet economy.
       Mr. Greenspan, the chairman of the Federal Reserve, has 
     repeatedly warned that we are at risk of inflation and that 
     ``excess demand'' must be curbed by a tighter credit policy. 
     Trouble is, the superb performance of the economy disproves 
     these fears. Over the past fives years, rapid technological 
     advances have generated 4 percent yearly growth while 
     inflation has been at a minuscule 1\1/2\ percent. A virtually 
     perfect scenario.
       Yet Mr. Greenspan persists in conjuring up arguments that 
     fly in the face of both actual evidence and established 
     economic theory. Lately he has been seeing harm in the 
     productivity gains that policymakers have sought for three 
     decades. Overall productivity has grown an average of 3 
     percent annually in the United States; the industrial sector 
     has increased productivity by more than 5 percent per year. 
     All schools of economic thought--Keynesian, supply-side, even 
     socialist--agree that productivity increases are always 
     desirable.
       The Fed chairman, however, now asserts that rising 
     productivity is doing bad things, fueling corporate profits 
     and higher stock market prices. This, he warns, poses the 
     threat of inflation caused by increased consumer spending.
       So, in this tortured Alice-in-Wonderland logic, all that 
     appears to be good is really bad. Real world statistical 
     evidence, however, runs counter to this view. Despite the
       Also, a recent study by the Federal Reserve itself suggests 
     that many investors in the bull market are actually saving 
     more and spending less in order to reap greater retirement 
     benefits. Indeed, it was during the 1970's, when inflation 
     was high, that consumption went up faster than wealth. During 
     the 1980's and 1990's, when inflation was low, wealth rose 
     faster than consumption. And this wealth led to a spectacular 
     surge in investment, providing more factories, equipment and 
     services that can keep up with demand.
       Indeed, the very success of Mr. Greenspan's own anti-
     inflation policies has fostered the productivity-driven 
     prosperity that he is now in danger of curbing. Declining 
     inflation puts more money in the pockets of workers, 
     investors and entrepreneurs. As a result, the efficiency of 
     employers and employees has improved markedly. The entire 
     economy has been retooled for global competitiveness.
       Most vexing, however, is Mr. Greenspan's apparent refusal 
     to acknowledge that inflation really is caused by too much 
     money chasing too few goods. In speech after speech--warning 
     of potential inflation threats--the central banker never, 
     ever mentions the word money.
       If the money supply were excessive, the dollar's exchange 
     rate would decline, gold prices would increase and long-term 
     interest rates would rise--all market signals of future 
     inflation. But today, the dollar is strong, gold is weak and 
     long-term Treasury rates are falling, telling us that the 
     Internet is more important than the Fed.
       Technology has fought inflation much more successfully than 
     the Fed ever could. Let's look at recent technological 
     breakthroughs: computer chips that break the gigahertz speed 
     barrier of one billion cycles per second, new molecular 
     electronic chip-making systems, new open access to broadband 
     cable transmission systems, and new business-to-business 
     auction websites for low-cost manufacturing supplies and 
     parts.
       They all promote faster economic growth at lower prices 
     without any help from the Fed.
       But Alan Greenspan doesn't seem to appreciate these 
     developments. And in this sense, the Fed is stuck in the old 
     era--it thinks we still have a smokestack economy as opposed 
     to the new Internet economy.
       The Fed keeps trying to pour old wine into new bottles. 
     This won't work, and it might do considerable harm. If it 
     goes too far, and raises interest rates too high, that will 
     surely undermine this prosperity.
       Here's a better idea for Greenspan and Company: If it ain't 
     broke, don't fix it.

     

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