[Extensions of Remarks]
[Page E349]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

[[Page E349]]

``THE FED IS MISTAKEN''

______

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.

____________________