CONGRESSMAN FRANK DISCUSSES ECONOMIC POLICY AND QUESTIONS FEDERAL RESERVE CHAIRMAN GREENSPAN AT HEARING OF FINANCIAL SERVICES COMMITTEE

11 February 2004
 

[Congressman Frank's opening statement]

FRANK: Thank you, Mr. Chairman.

Chairman Greenspan, in your appearance today, I think you come at a time when one of the subjects that is often debated here, namely the appropriate level for the interest rates that you set, is really not very controversial. There is, I think, a general consensus that the current rate is appropriate. Indeed, we are -- I noticed, as I mentioned to you -- we are at apparently, sort of, historic lows, at least in recent times, both for your weight and interest rates. And I congratulate you on both.

But there is a broader set of questions that is really deeply troubling. We may be at an inflection point in the American economy. And I think we're at the point where the old phrase of "political economy" has become very relevant because we are, as has been noted, in a period of growth, significant growth. We are coming out of a recession. Unfortunately, we are coming out of this recession with less job growth than we have seen, I think, ever, and certainly in any recent history.

FRANK: To the extent that there is something somewhat prolonged about this -- I won't say permanent because nothing is permanent, but if it is prolonged -- and today, we have this problem -- it does appear, clearly, that the amount of job growth we are getting, given the level of GDP, has dropped significantly.
What we have, however, is not simply that fact. There is a growing perception in the country that the benefits of growth and of increased productivity are being very unequally shared -- excessively unequally shared.

Let's be very clear: We're capitalists, as we should be. Inequality is not a bad thing. It's necessary to our system. A market system with its incentives and its allocation mechanisms doesn't work without inequality.
On the other hand, I think it is clear that inequality left entirely unchecked might get out of the bounds where it is reasonable. And too much inequality can have serious negative consequences.

I think our job is, in part, to try to contain excessive inequality because we can't have inequality that is more than we need for efficiency -- obviously need some -- and can have damaging social consequences. I think we are on the verge of that.

Three levels. First of all, there were the real effects of inequality: people without jobs, people without health care, people inadequately educated. I and many of my colleagues are moved primarily by that.

But I recognize dwelling simply on the moral aspects and the social costs of inequality may not be enough.

As Adlai Stevenson once said, when he was told he had all the thinking people on his side, "Yes, but I need a majority." Of course, it was cracks like that helped him not get a majority.

But I don't, unfortunately, believe the moral argument is enough.

So let me give you two other arguments -- some of which you have, yourself, I think, taken note of -- as to why we have got to tackle this inequality thing, which is being exacerbated by the reality today in which jobs are lagging what they should be by normal rules in the economy.

And essentially what we have, I think, is a situation in which a combination of factors -- and you've talked about this in the recent speech about flexibility.

FRANK: The rewards of capital have, I think, gone beyond what they should be relative to labor. That is, I think there is both a reality and certainly a perception -- I believe the reality -- that the owners of capital are getting a disproportionately unequal share, damagingly so, of the gains.

Now, that's partly by technology. It's partly by a number of real economy factors. But it's been exacerbated by public policy; not by the facts of tax cuts, but by the composition of the tax cuts; by policies that have eroded the ability of organized labor to represent people; by a failure to keep the minimum wage updated; by a number of policies -- by the way in which globalization has been pursued.

And in consequence, you have the following. Not simply as I said, the negative consequences. You have a resistance in this country, increasingly, to policies that you and many others think are in our best interest. Trade treaties will have a very hard time. The objection to outsourcing: No matter the chairman of the Council on Economic Advisers says about it, you're going to see increasing legislation restricting outsourcing.

You are seeing difficulty in other public policies that people think are in our overall interest. And the reason is in part -- and I was in Davos and I heard someone make a very interesting formulation. Namely, that any quality has two aspects: between countries and within countries.

Now, globalization has as its advantage reducing inequality between countries. But if it's carried out in a way that exacerbates inequality within countries, resistance will grow. And we are at that point.

So we are at that point -- I'll finish in 30 seconds, Mr. Chairman -- we're at the point where I believe that resentment at the excessive inequality is now an obstacle to many of the policies you would like to see and you warned against them.

Finally, and this one isn't certain yet, but we may be reaching a point if we cannot change this situation or if the situation doesn't change, if job growth does not accelerate, it could have macro- economic effects. To the extent that job gains are not what we would ordinarily see, both in real spending power and in perception and consumer confidence, you may begin to see the consumer spending sector lag and not do what it ought to do in our economy.

So, as I said, it's not just the morality of it. Clearly we are at the point where political resistance to much of what you think is wise, in terms of increased efficiency and increased flexibility, is a significant factor, and we may be at the point where macro- economically this also is a problem.

 

[Congressman Frank questions Chairman Greenspan]

FRANK: Mr. Chairman, just to begin on that question, one of the reasons we were able, I think, to get to that quite healthy level, both socially and economically, was your willingness to challenge a lot of people who believed that somehow automatically if we got that low in the unemployment rate, it was going to be inflationary.

FRANK: And I continue to think that was one of the great services you performed by challenging what was then received wisdom in a lot of places, that we simply couldn't get below -- remember, they had this concept of the NAIRU, and it seemed to me be a lagging indicator: Whenever unemployment dropped, it dropped. But fortunately you were not blocked by that, and your willingness to accommodate that drop was very helpful.

I have one very specific question, because I was struck again by your comments on the negative consequences of the deficit -- the inescapable negative consequences of the deficit. Have you ever discussed deficits with Vice President Cheney?

GREENSPAN: The reason I hesitate to answer that is I...

FRANK: I know the reason you hesitate, you don't want to answer it. I mean, we know that, Mr. Chairman.
(LAUGHTER)

GREENSPAN: Well, no.

FRANK: That's stipulated when you testify.

GREENSPAN: I just wanted to say that the reason for my hesitation is what comes to mind is that I don't discuss private conversations.

FRANK: OK. Fortunately, Paul O'Neill does, so we will go elsewhere to get that information.

On the question of unemployment, we share your hope that we will be able to get it down, but clearly we haven't yet, and here's the problem. And I read your December speech, and, yes, the flexibility helps in the macro-economic sense.
You acknowledge that the process of adjustment causes some pain to some people: that overall the country benefits, but it does mean people get thrown out of work. What troubles me is I think you are not sufficiently attendant to the importance, both I think socially but even economically, of alleviating some of that distress.

In that December speech about flexibility, you did cite one -- only really one amelioration and that was to retrain people through the community colleges. I appreciate that, but, you know, the outsourcing now is taking place in many of the jobs that we used to retrain people for. I mean, if you'll go back to what we were retraining people for 10 years ago, some of those jobs are being outsourced.

I don't think we can stop the economy, but it's going to stop if we don't a better job of alleviating this. As you know, the people who are losing the jobs may not be the ones who get the new jobs.

There's a particular problem, and that is that many of the jobs being lost carried with them some reasonable degree of health benefits. And one of the terrible social problems in this country -- and again all of these social problems have been economic kickback.

The percentage of full-time employed people who get health benefits through their employment, as you know, is dropping, and new jobs do not have the health benefits, partly because different structures; partly because of the weakness of labor unions, which has been a conscious policy as well as an economic factor; partly because when people start from scratch they figure they don't have to do it.

What -- and I have to say also, Mr. Chairman, I think you exacerbate it in one other way. Your comments on the deficit and its dangers are very strong. Not here, but elsewhere, you have advocated that the great bulk of deficit reduction comes through spending reductions, not through any increasing in tax rates at any level.

FRANK: And we're not now talking, obviously, about tax reduction that was short-term stimulative. We're talking about longer questions in the economy.

I have to tell you that if we were to follow the prescription that I think you have made, that almost all of the adjustment -- fairly substantial adjustment -- to get rid of these huge deficits, if it all comes on the spending side, our ability to ameliorate the social distress that you acknowledge is the inevitable consequence of economic adjustment will dwindle. And if that happens, you are going to continue to see resistance.

Now, you do tell people in your speeches, "Don't be protectionist." But as I've told you before, preaching Schumpeter's Theory of Creative Destruction buys you less, in terms of a tolerance on the part of the people who are the short-term victims, than you might ask. And I would really urge you -- and I hope you will have something to say about it now -- join us in trying to do a better job.

I don't think we can, as a country, stop transitions. But if we don't do a better job of managing the social costs of these transitions to real people in large numbers, they are going to slow down the transitions, and in some cases stop them. And we can't do that if we adjust all of this deficit by spending reductions and none of it by looking at the revenue side.

GREENSPAN: What I said, Congressman, and I will say again, is that the longer-term problem is on the expenditure side. And that's a fact in a sense that you cannot, without looking at the data, see that we have very considerable difficulty in meeting the long-term projections for the commitments we have made without a significant increase in tax rates.

FRANK: Is it a fact that we have to reduce -- abolish the estate tax altogether? That's not a fact. That's a value judgment.

GREENSPAN: Well, no, no. No, I'm saying what the fact is -- I'm referring to the numbers. If you look at the numbers, what the numbers tell you -- and this is CBO, OMB, and in fact virtually every major private analyst who looks at it -- we have a very serious problem in the future.

The point that I think we have to recognize is the fact that we don't know the extent to which tax increases curtail economic activity and therefore the revenue base.

GREENSPAN: We do know that it is a risk. And therefore, in my judgment, we ought to be looking at getting as much as we can in the longer run in the way of expenditure restraint before we look at the issue of filling the gap on the tax side in order to get a viable fiscal policy. I'm talking about process.

 

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