Federal News Service Transcript - Monetary Report of the Federal Reserve

Federal News Service

July 16, 2003 Wednesday

HEADLINE: HEARING OF THE SENATE BANKING, HOUSING AND URBAN AFFAIRS COMMITTEE
 
SUBJECT: MONETARY REPORT OF THE FEDERAL RESERVE
 
CHAIRED BY: SENATOR RICHARD SHELBY (R-AL)
 
LOCATION: 538 DIRKSEN SENATE OFFICE BUILDING, WASHINGTON, D.C.
SEN. CHARLES SCHUMER (D-NY): Thank you, Mr. Chairman. I want to thank you again for the job you do.

I have a few questions. One is a little bit related to Chris Dodd's, but somewhat different. One of the reasons we lose manufacturing jobs is trade with China, and there are the classic free trade arguments about why businesses would go to China. But there's something else that's been happening, and I'd like your comment on that. And that is that the Chinese have tightly-pegged their currency. It's a fixed rate. The yuan has been, since 1994, at 8.3 yuan per dollar. Now, if you let that currency float, almost every economist says it would be valued higher. Goldman Sachs says 15 percent, some say 25 to 40 percent. And the natural reason that we all went to floating currencies among the major currencies is if somebody develops—it's sort of a self-correcting mechanism that you and Chris Dodd were talking about.

Why wouldn't it be—would it be a good idea for our president to sort of jawbone the Chinese or our Treasury secretary to let their currency float? You know, the Chinese seem, in a lot of ways, to want to be part of the family of nations when it benefits them, but not—you know, the bigger, more productive nations—but not when it doesn't. Why wouldn't it help everybody to let the U.N. float? And why wouldn't it be a good idea for our government to sort of urge the Chinese to make it happen?

MR. GREENSPAN: Well, the secretary of the Treasury has indicated that.

SEN. SCHUMER: I haven't heard any public pronouncements about that.

MR. GREENSPAN: Oh, I—yes, no, indeed, there has been a public statement.

SEN. SCHUMER: Why do the Chinese resist? Well, we know why, but --

MR. GREENSPAN: Let me just say

SEN. SCHUMER: Okay. If you could comment in general on --

MR. GREENSPAN: Yeah, there is an issue here. But remember that it is very much to the advantage of the United States to have China involved in world trade, interrelated to all of the various institutions with which we are involved. They had, and indeed, still have, the centrally-planned economy, which has considerable rigidities in it. And they've been endeavoring, and with some success, in opening up, indeed, creating property rights, creating markets, which seems to be contradictory to their political system, but so far, it is working and they are increasingly engaging on trade throughout the world. I happen to think that's very good. Most economists would say that it's good.

In the process of doing that, because of the structure of the rigidities of their system, they tend to—for purposes of stability, to fix the yuan to the dollar. And to date --

SEN. SCHUMER: But they never change it. They haven't changed it in 10 years.

MR. GREENSPAN: No, they have not. Exactly. And that, obviously, from their point of view, has created a degree of stability. But it has required them to, in order to hold that rate, to be very heavy purchasers of U.S. dollar-denominated assets. And they've accumulated very large store of assets, as has been indicated in various different fora.

At some point, they will no longer be able to do that, because it will create an inability of their monetary system to function well. How one approaches the issue of getting the exchange rates better balanced, I'm—it's partially an economic issue, partially a political issue.

SEN. SCHUMER: Well, you're good at both. (Chuckles.)

MR. GREENSPAN: My tools are limited. (Laughter.)

SEN. SCHUMER: But would it be, all things being equal, better to have either a revaluation of the yuan or, at least, to let it—aren't they a big enough economy now? It's not 1994.

MR. GREENSPAN: Well --

SEN. SCHUMER: They should be letting it float?

MR. GREENSPAN: I think that from an economic point of view, it's going to become increasingly evident that that is what is going to have to happen if the existing cost structures around the world remain as they are.

And I think the Chinese economist is sufficiently sophisticated to understand that.

SEN. SCHUMER: When you hear, and we'll all hearing what Senator Dodd talked about, that manufacturing is just shrinking and shrinking—and you're right. You said once before something I've repeated often: high value is added more by thinking things than by making things these days. That's correct. But you still have a large manufacturing base. I don't know if the same is happening in agriculture as in manufacturing: in other words, there's more production with fewer workers, or is it less production?

MR. GREENSPAN: No. It's—in fact, if anything, it may be more impressive.

SEN. SCHUMER: More than agriculture.

MR. GREENSPAN: Remember crop yields are incredible, and --

SEN. SCHUMER: Yep. So I understand that. Let me ask you one other question if I might, Mr. Chairman.

We're in this period now where the economy moves along at not a terribly rapid pace, but a decent pace: 1 percent, 2 percent, maybe 3 percent growth. Because productivity outstrips that growth, the number of jobs declines. And I'm sure my colleagues have talked about that. This is the first administration since Herbert Hoover's where the absolute number of jobs has declined, even though growth has occurred. How long can this continue?

Now, I understand that incomes are going up. But if incomes continue to go up and jobs continue to decline, it means that wealth almost by definition is being more concentrated. Does this—is this bad for the economy? Can we just continue to go along at this pace? And doesn't the job loss, if it does matter, sort of help drag the economy, and instead of creating an upward cycle, which we had in the '90s where productivity and job growth went hand in hand, really provide a drag on the economy where productivity goes up and jobs go down?

MR. GREENSPAN: It's certainly been our experience, Senator, that you cannot have a situation with productivity growth growing faster than the economy is: in other words, essentially rising output, falling employment. And the reason, basically, is that one must presume that the consequence of that is an opening up of profit margins as one characteristic, and historically increased capital investment. Over time, that situation is unstable, and eventually adjusts to a higher level of economic growth, and hence increasing employment or productivity growth slowing down. I mean, obviously, if you continue GDP growing and employment declining, at the end of the day everything is being produced by nobody.

SEN. SCHUMER: Right.

MR. GREENSPAN: Now, that --

SEN. SCHUMER: Or, by another country. You see, that's what may change this is the interrelatedness of the world economy.

MR. GREENSPAN: Well, but then the question is, where do we get the purchasing power, meaning the goods and services we produce, to be able to buy it from others? So it is an internally long-term, inconsistent framework. And our expectations that what will occur as a consequence is that the GDP will move above --

SEN. SCHUMER: Productivity.

MR. GREENSPAN: -- the productivity rate, and employment will start to turn up accordingly.

SEN. SCHUMER: Thank you, Mr. Chairman.