Hearing of the Senate Banking, Housing and Urban Affairs Committee - Alan Greenspan Renomination as Federal Reserve Chair

Federal News Service

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

SUBJECT: THE RENOMINATION OF ALAN GREENSPAN AS CHAIRMAN OF THE FEDERAL RESERVE BOARD OF GOVERNORS

CHAIRED BY: SENATOR RICHARD SHELBY (R-AL)

WITNESS: ALAN GREENSPAN, CHAIRMAN OF THE FEDERAL RESERVE

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

BODY:
SEN. REED: Thank you very much, Mr. Chairman. And Chairman Greenspan, welcome. You spoke earlier with great insights about productivity growth and its impact on the economy. But one of the things that is interesting, indeed troubling, is that even with this rapid growth in productivity, we haven't seen a rapid growth in labor compensation to the extent we've seen in other periods of expanding productivity. Which leads me to the, sort of the conclusion that the expansion is now driven more by debt than by income, people buying things not from increased wages in their paycheck but credit cards, which is not sustainable over a longer period of time. And I suspect there are some structural reasons for this-or let me just pose the question-why is labor compensation not keeping up? Why is this expansion as a result of debt and credit cards rather than wages being devoted to consumption?

MR. GREENSPAN: Well, first of all, I think that, as I indicated to Senator Dole, very substantial part of the increase over the last year in productivity has ended up in increasing profit margins, but that seems to have come to an end as margins have gone from a very low level to a very high level and historically they've stabilized at this point, and there is evidence that that's occurring. This will mean that productivity growth will feed into a fairly pronounced up-trend in real wages, and indeed, there is evidence that that is already in the process of occurring.

The amount of income that is now moving into consumer markets is becoming an ever-important factor in consumption. And even though it is the case that credit card debt has moved up significantly, it's not large enough to be a serious concern, and indeed, the delinquencies and the defaults are not particularly large relative to what one ordinarily expects in that type of business. And indeed, delinquencies generally have been exceptionally low across-the-board in the consumer area, especially, for example, in mortgage and in home equity loans.

So, I'm not actually concerned at this point that we're looking at a really serious consumer debt problem, especially when one of the major factors in the growth of mortgage debt, in fact 10 percent of the level of mortgage debt, occurs as a consequence of the fairly significant increase in the ratio of households who are homeowners, because if we had the 64 percent home ownership ratio that we had 10 years ago, rather than the current 68, 69 percent, we would not have had a very significant number of renters buying homes, which has two effects. One, it obviously increases the asset side of their balance sheet by the value of the home, but it increases almost to the same extent the liability side, which is mortgage debt.

And as a consequence of that, what you have is a very significant part of the population which have gone from renter to homeowner, and in the process have statistically increased the amount of household debt, mortgage debt in this case, very substantially. But I would never argue that the renters, by moving, by becoming homeowners had their financial situation significantly deteriorated.

So, part of this ratio of debt to income is not evidence of deterioration in household finances. It is the case, however, that if we continue to get very significant increases in the ratio of household debt to income, that the debt service charges, obviously, will be going up, and there is a conceivable point out there, which I would consider worrisome. I just don't think that we are anywhere near there yet, and I doubt if we will.

SEN. REED: Mr. Chairman, you suggest that wages are improving a bit, yet, in May, according to the Labor Department, real wages fell by about 0.4 percent and, according to the Economic Policy Institute, over the past year, all real wages are up about 2.2 percent, just about the rate of inflation. And part of my question was the notion that there might be structural reasons here-the outsourcing of jobs, the threat of outsourcing, putting pressure on the ability of employers to ask for money, decline of labor union participation, fewer and fewer -- (inaudible) -- workers are organized, therefore, less ability to negotiate. Are any of these factors, structural factors that will mitigate increases in wages, going forward?

MR. GREENSPAN: I don't think that they are relative to the average increase in wages. They are a problem on the distribution of wages. As I pointed out many times in recent months, we are seeing and probably are continuing to see even to this day, a continuing opening up of the wage spread between highly skilled and lesser skilled workers, and that this is, in my judgment, largely an educational problem that's confronting us, which, I think, has to be addressed.

But the consequence is that the real wage of the below median-the real wage below the median has been flat-to-declining, whereas, in the upper quartile it's been rising, and that is largely reflected in skill differentials. But, on average, what we're observing is now a fairly across-the-board increase industry-by-industry, as I indicated to Sen. Dole, but I suspect that within industries, we are getting this skill-lesser skilled spread continuing.

So, in that sense, if you want to say that the educational aspect of this problem-that is, it's a problem caused basically by our skill mix not keeping up with the technology that our capital stock requires, I guess that is a structural problem, but it is one that can be and must be addressed, because I think that it's creating an increasing concentration of incomes in this country and, for a democratic society, that is not a very desirable thing to allow to happen.

SEN. REED: Thank you, Mr. Chairman.