Hearing of the Senate Banking, Housing and Urban Affairs Committee - Federal Reserve Monetary Policy Report

Federal News Service

HEADLINE: HEARING OF THE SENATE BANKING, HOUSING AND URBAN AFFAIRS COMMITTEE

SUBJECT: FEDERAL RESERVE MONETARY POLICY REPORT

CHAIRED BY: SENATOR RICHARD SHELBY (R-AL)

LOCATION: 538 DIRKSEN SENATE OFFICE BUILDING, WASHINGTON, D.C.

WITNESSES: FEDERAL RESERVE BOARD CHAIRMAN ALAN GREENSPAN

BODY:
SEN. CHARLES SCHUMER (D-NY): Thank you, Mr. Chairman. And I'd like my whole statement to be put in the record.

SEN. SHELBY: Without objection, so ordered.

SEN. SCHUMER: I would just like to make a brief point here, because-and I'd like the chairman to comment on it when he gets a chance. And it is the issue of outsourcing. Many of us on this side of the aisle have basically supported free trade, not exclusively, but basically. And I am troubled by the new trends. I don't think they're the same as the old trends.

You have three factors which we haven't had before. One, the flow of capital goes to all corners of the earth. Ten years ago our major companies wouldn't have invested in China and India; now they feel confident to do it. That's the least important of the three. The second is broadband. You can have people working almost anywhere around the globe and have instantaneous and full communication with them for no cost. But third and most important-for the first time in our history, you will have 50 to 100 million over the next decade well educated, well motivated Chinese and Indians who are Ph.D.s, who are college graduates, who can compete for high-end jobs.

The theory of free trade since World War II, at least as it's played out, is, you know, the lower-end jobs-the lower paying jobs, the lower value-added jobs-would go overseas. But the high-end jobs would stay here. But if you have instantaneous ability-if an American company, an international company has an instantaneous ability to hire someone in India who is asking for $20,000 and does the job that an American gets $100,000 for, we've got new trouble.

The head of a major securities firm told me that there are 800 people in New York who do the high-end computer programming. These are the ones who do the programs as the derivatives, you know, with billions of dollars sloshing around-things you understand, Mr. Chairman; I don't. They get paid $150,000 a year. He told me in three years none of them will be working for us. We will instead hire 800 Indian computer programmers, just as good, he said, who ask for $20,000 a year.

The former head of the American Radiological Society told me that we will need half the radiologists we have now 10 years from now, because when you break a leg or need a chest X-ray, you'll go back to the technician and the picture will be beamed overseas to a Chinese doctor who will be able to read it just as well. But instead of charging $500 to read the picture, they'll charge $50 to read the picture. You'll still need radiologists, because the more complicated things will be read by Americans. But the typical workmanlike broken arm, chest X-ray will go there.

So I think we may have something new here.

Free trade works on comparative advantage. But if, for the first time, at the low-end, the middle-end, the high-end, other countries have an advantage over our labor force, where are we headed? That's the question I would like. I don't think the classic theory of free trade works when the means of production can shift in the blink of an eye. I don't know what the answer is. I don't think the old protectionist nostrums are the answer, but I don't-I think we're ignoring the question.

And just one other point and I'll conclude.

I just feel strongly about this, and it relates a little to what my colleague from Michigan asked. Somehow this is related to the productivity numbers, I think, although again, you know much more about this than me. This is the first time we've had such high productivity and no job growth.

Productivity grew at 3.3 percent between 1948 and 1973, I think it is, maybe '77 -- '73. And there was huge job growth.

In the last two years, productivity has grown a little higher, 4 percent, and there is no job growth, virtually no job growth-job loss.

Could it be that the shifting of jobs overseas is causing this, that when IBM or Intel hires workers to do the same job at one-fifth the cost-somehow, the way we measure productivity, Intel or IBM is still very productive, but it's not happening here. Nine percent productivity-I mean, I know there are bumps in this, but overall something is different when productivity-now it's two years; maybe you'll say-and I hope you're right-that if there's 4 percent productivity growth over five years, we'll see job growth.

But I think we're in a different world, and I think we need to look at this differently, and I would ask the chairman to comment in general on that specific issue, which I think plagues all of us. No one has good solutions, but I don't think, by just sticking to the old nostrums, everything will be all right. At least I'd like to know a trajectory, a scenario, as to how we deal if our high-end jobs can go to India and China, as well as our low- and middle-end jobs, whether they be blue-collar or white-collar.

Thank you, Mr. Chairman. I'm sorry to take the --

BREAK IN TRANSCRIPT

SEN. SCHUMER: Thank you, Mr. Chairman.

And thank you, Mr. Chairman. I'd like to focus on the area I mentioned at the beginning, which I am very concerned about. And, you know, when people question whether free trade is still the way to go, usually economists and editorial boards say, You're being protectionist. But given the new changes, there are lots of very-not lots-there are a few very respected economists who are saying we ought to reexamine because the world is changed. Mr. Roach of Morgan Stanley has been-he calls it global labor arbitrage. I'd like to read you a quote from two very respected economists, Ralph Gomory and William Baumol, and get your comments on that. They say-first they're saying what the free trade theory is.

"However"-this is a quote from their book, "Global Trade and Conflicting National Interests". "However, it is also true that in the time since these basic models of international trade were formulated there have been major changes in the world economy. David Ricardo's world of agriculture, slow-moving technology and tiny businesses has been replaced by a world dominated by manufactured goods, rapidly evolving technology and huge firms.

This calls for reexamination of those classical models."

There's another paragraph, and then they say: "However, as modified by us, the theory shows that there are, in fact, inherent conflicts in international trade. This means that it is often true that improvement in one country's productive capability is attainable only at the expense of another country's general welfare. An improvement in the productive capability of a trading partner that allows it to compete effectively with a home-country industry, instead of benefiting the public as a whole, may come at the expense of the home country overall. And this harm is not the localized damage previously mentioned-loss of jobs in the immediately affected industry-but an adverse effect that is felt throughout the home country."

As I mentioned to you earlier, it seems to me that the Ricardo Theory relied on factors of production that were staying in a country, not in a world with broadband, with an international labor market that is rapidly changing.

And I think I mentioned, you know, just two examples-I've heard many. The head of a major insurance company said, except for sales people who have to deal face to face, if he's doing his job, 80 percent of his workers should be overseas within 10 years.

Can you comment on both my opening statement and particularly the comments of Mr. Gomory-professors Gomory and Baumol?

MR. GREENSPAN: Certainly.

SEN. SCHUMER: And I'm not-I don't know a solution here, to be honest with you. But I think-do you disagree with the view that the basic changes in the last five years perhaps should cause us to reexamine the classical theory of free trade, which is when each country specializes, everyone does better?

MR. GREENSPAN: I see no reason to do so, and let me say one-let me tell you why. Instead of thinking in terms of trade per se, I think it's important to start in a different direction and then come back to trade.

The real question is the question which Adam Smith originally raised: What causes the wealth of nations? We have two statistics in this country which we have to explain. One is that employment has moved in parallel with the adult population for generations; there are aberrations, but in general, it's happened. More importantly, real wages have gone up at all times. And I might say that both of those trends have occurred irrespective if we've had a trade deficit or a trade surplus, whether we've had high outsourcing or low outsourcing.

And if indeed the wealth of the nation, meaning the United States, is independent of the degree or nature of trade, then the question is, what causes the wealth of nations? And here, even though we do not have any recent evaluations for developed countries, there's been an extraordinary amount of research on less developed countries, which looks to me wholly applicable to developed countries as well. And you start off with, what are the factors which seem to make the difference? One is the skill and education level of the indigenous population. Two is the extent to which there is a rule of law which facilitates the way that population trades internally, of which property rights-it turns out to be a very critical issue. And the two of those are sometimes augmented by the degree of natural resources that are there, but that's a very minor question.

This then, therefore, raises the issue of why is it that the United States has been able to increase our per capita income period after-not every year, but over a period of time?

And it largely comes down to the fact that our skills, our degree of intelligence is what determines what our real income is, wholly independent of which particular job we had and what proportion of our total consumption was imported.

And I submit to you that if indeed that is the case, then the issue of trade is constructed in a different context; then the question is how do people exchange goods and services, how do you create specialization of labor within an economy, within a city, within a company, to create maximum wealth. And in a context of fully free trade, then national boundaries are utterly irrelevant to where people move or not move.

Yesterday I raised the very important issue in this regard of education. I think our real concern should not be the question of whether or not trade is increasing internally or externally, I think we have to be very concerned about the fact that there are very substantial people who are obviously losing jobs not only because of trade, but because of internal productivity. That's something which is a public policy question we have to be very much concerned about. But it should not change our view of what the economic forces are which are moving world events in that regard.

And what I am saying here is that if we have, as I mentioned before, an economy which is increasingly conceptual, that is the quality of the goods are more and more, it means that for us to function, we need a level of skills of our working population which is continuously becoming more conceptual to match the type of goods and services that consumers want, or put it another way, that workers acting as consumers request.

And what we are observing at this stage --

SEN. SCHUMER: Could you comment on 100 million well-educated people --

MR. GREENSPAN: I will. Yes, I will exactly do that, because that's where the critical issue is.

Any event, what is happening in the United States is we are finding that the lesser skills are turning out to be in surplus supply and, therefore, the real wages of our lower incomes are going nowhere. But the premiums for skills in the upper areas of our skill area has been rising for the last two decades, which is another way of saying that we are not moving our younger people through our school system, from the fourth grade through 12, sufficiently quickly to put them into college and into areas where their capabilities get to a point where the supply of skills meets the burgeoning demand, which incidentally, will bring down the wage rate and will reduce the inequality of income which is involved here.

And there have been very disturbing international studies that American students in math and science in the fourth grade are average, maybe even slightly better than average internationally.

By the time they get to the twelfth grade, they are way down below the average. We do something wrong, which obviously people in Singapore, Hong Kong, Korea and Japan do far better than we. It's nothing wrong with our students. Obviously, they're just as good if not better in the fourth grade. They're doing-teaching in these strange, exotic places seems for some reason to be far better than we can do it. And because we are not doing, then the issue you raise, Senator, disturbs me because what will ultimately determine the standard of living of this country is the skill of the people.

I think we are fortunate in that we have a Constitution and a rule of law here which people find sufficiently attractive to invest in, and that's helped; in other words, it's helped us a very considerable-to a considerable degree. But unless we somehow resolve the education problem, then I think the issue you raise about the hundred million Indians, Chinese and the like is an issue.

I should, however, say parenthetically that, remember, that was our concern about Japan in the 1950s and 1960s, and when the demand for those so-called low-wage workers-highly educated-began to move, the Japanese wage rates just took off. So it's not as though Chinese and Indian software engineers, for example, are always going to be at a very significant differential. Because of the very large numbers of them it will be for a while, but eventually the gap will close. But whether it closes or not should not be relevant to us if we cannot solve our education issues.

SEN. SCHUMER: Thank you.

Thank you, Mr. --