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Hearing of the House Financial Service Committee-Semiannual Monetary Policy Report to the Congress

Location: Washington, DC

Federal News Service February 11, 2004 Wednesday
Copyright 2004 Federal News Service, Inc.
Federal News Service

February 11, 2004 Wednesday







REP. OXLEY: (Gavel.) This hearing of the Committee on Financial Services will come to order. We are meeting today to receive the semi-annual testimony of the chairman of the Federal Reserve Board of Governors. Pursuant to the chair's prior announcement and Rule 3F(2) of the rules of the committee, the chair will recognize the chairs and ranking members of the full committee and the subcommittee on domestic and international monetary policy, technology and trade, or their respective designees, for opening statements. The statements of all other members may be placed in the record.

The chair now recognizes himself for five minutes.

Good morning, Mr. Chairman, and welcome back to the committee. All of us on the Financial Service Committee look forward to our discussions with you on U.S. economic performance, which so directly affects the lives and livelihoods of all Americans.

At this unique economic moment of war and renewal, there are many who deserve credit for the recovering economy. First and foremost are the American people-the American investor, who didn't panic and never lost faith, and the American consumer who believes that the economy will continue to improve.

Our American companies have retooled in accordance with the Sarbanes-Oxley Act, thus improving financial reporting and bolstering confidence. Our markets continue to be the most productive capital- creation organizations in the world. Despite predictions that companies would delist, they have not done so. In fact, companies continue to seek new listings in our deep and vibrant U.S. markets.

Mr. Chairman, the economy is recovering nicely from the mild recession of 2001. The market is back to pre-recession levels. Fixed investment is up. Unemployment is down from its peak. Exports are up. The balance of payments is down. And none of the Blue Chip 50 forecaster predict growth rates of less than 3 -- than mid-3 percent rate over inflation higher than the mid-2 percent ranges for this year or next. Most of the Blue Chip forecasts are much more optimistic.

Two items that have everyone's attention are the employment figures and the deficit numbers. There is understandable concern about both. I'm sure we would all prefer budget surpluses and would like every American who seeks a job to have one right now. However, I believe these are temporary problems attributable to temporary conditions.

Despite some alarmist commentary, the deficit numbers for this year are understandable given the terror attack, a recession, corporate governance problems and war. While they are higher than we would like, even after all of these events, the deficit is till at about 3.5 percent of GDP. According to the president's budget, the deficit will be half that level in five years. The alternative would be to stop investing in economic stimulus or to fight against terror on the cheap, and I don't think the American people would want either of these options.

Mr. Chairman, I know you favor pay-as-you-go budgeting.

However, the president's tax cuts have helped to sustain the U.S. economy, especially in the face of recent shocks. In addition to the headline grabbers of terrorism, war and corporate scandal, we faced a European currency unit that sank in value by a third, which damaged the value of our exports.

Regarding employment levels, Mr. Chairman, I hope that you will be able to add some perspective to the national debate. When I studied economics and until just a few years ago, the accepted theory was that roughly 6 percent was considered full employment. This is about where we are now. During the bubble economy of the late 1990s, that rate went down in the 4 percent range and briefly hovered near 3.9 percent. To many of us, it seemed as if one of the laws of economics had been repealed. Then, with the recession, unemployment increased again over 6 percent, though I should quickly add that we have been seeing steady job creation since last July.

Mr. Chairman, I think most of us on both sides of the aisle believe the American economy will create additional jobs and their quality will improve as the economy continues to adapt to changing times. We would welcome your thoughts on job creation and what we in Congress might do to help.

With that, Mr. Chairman, I will look forward to your appearance here again, which is always a great occasion for this committee. We thank you for your stewardship of the economy.


REP. BRAD SHERMAN (D-CA): Thank you, Mr. Chairman. This has been a surprising week. I opened my L.A. Times yesterday with the headline "Bush supports shift of jobs overseas." And then I come to this committee, and just to comment about your opening statement, Mr. Chairman, where you put forth the idea that 6 percent might have once been defined as full employment, that --

MR. GREENSPAN: I don't remember my saying that.

REP. SHERMAN: No, no, no. You didn't, the other chairman. We got two chairmen in the room.

MR. GREENSPAN: I beg your pardon.

REP. SHERMAN: And I would say that I think we're about the same age. When I was studying economics they told me 3 percent was full employment; a decade or two later maybe 4 percent. And if 6 percent was full employment, then today we would have an unemployment rate that was too low, which is at least not what I'm hearing from my constituents.

The other, Mr. Chairman. Back in '97 you testified to us-I was a green member of this House-before the Budget Committee that the CPI as calculated overstated the rate of inflation and that hence the inflationary increases to Social Security checks are a point, a point and a half higher than they need to be to maintain purchasing power. Is that still your position, or have they made such enormous improvements over at the Bureau of Labor Statistics that we now can-that that CPI index is something you would support?

MR. GREENSPAN: The Bureau of Labor Statistics has, indeed, made significant changes and very materially improved the existing published index. However, they also have an index called the CPI Chained Index, which is far more realistic with respect to measuring the cost of living that's not officially employed in either indexing of the tax system or of outlays or benefits. If it were, or, say, had been employed instead of the current published CPI, we would have had a fairly significant reduction cumulatively in the budget deficit. About 60 percent, as I recall, would have come out of increased revenues, because the indexing was-would have been slower, and about 40 percent out of entitlements. So in that --

REP. SHERMAN: So if this superior index had been used, today's Social Security check would be 4 or 5 percent lower than the checks we just made out.

MR. GREENSPAN: I think that's a-no, that's a larger number than I think --

REP. SHERMAN: But it would-it would be, what, about a point a year over the last five years, or less than that?

MR. GREENSPAN: No, no, no. It would be-it would be in the-a few tenths per year. And tax revenues would have been higher by a somewhat higher proportion.

REP. SHERMAN: We've got the largest trade deficit in history. We're perhaps the only government in history that thinks exporting jobs is good, imports are good. You've got two large Asian governments that are pushing their currencies down vis-a-vis ours, both by buying U.S. Treasuries on the one hand, and in the case of China, adding to that a fixing of its rate of exchange with us. If the Japanese and Chinese governments simply abandon all efforts to influence currency values, what effect would that have on the yen and yuan dollar exchange rate, and what effect would that have on the trade deficit? (Pause.) This is no small question, I realize.

MR. GREENSPAN: The general view in the marketplace is that there is a so-called home bias in Japan with respect to holding yen as distinct from foreign currencies. The consequence of that is basically to raise the long-term value of the exchange rate in international markets, because obviously, if households are not buying any foreign asset, nor, in fact, are financial institutions in any significant measure, you're having an abnormal reduction in the demand for external currencies, which means you have upward pressure on the yen.

The Ministry of Finance has been, as you well know, endeavoring to hold the rate down by significant purchases of dollars. And one must presume that were that procedure abandoned for a short time at least, one would have to conclude that the yen exchange rate would go up. My own impression is that it would only go up for a while but not stay there.

The issue of China is a little more complex in the fact that they have capital controls in place. But again, what that does is to create a lesser demand for foreign currencies because Chinese residents are inhibited in what they can buy with respect to-what they can invest in foreign currency. So one also presumes that were the purchases reduced or ceased, that exchange rates would rise accordingly.

REP. SHERMAN: So we could be talking hundreds of --

REP. OXLEY: The gentleman's time has expired.


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