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For Immediate Release: February 15, 2006

Contact:	Steve Adamske, 202-225-7141

Statement of Congressman Barney Frank and

Questions and Answers with Chairman Bernanke

Committee on Financial Services

Wednesday, February 15, 2006
10:00 AM
2128 RHOB

Hearing to receive the testimony of the Chairman of the Federal Reserve Board of Governors on monetary policy and the state of the economy.

Note:  The following is the transcript of Mr. Frank's statement and his questions and answers at today's hearing.

Mr. Frank's Statement:

FRANK: Thank you, Mr. Chairman.

And, Mr. Chairman, thank you. And thank you for the courtesies you have extended to us.

You have made yourself very available for the kind of conversations that will be helpful in our having to work together, including being able to articulate those legitimate policy disagreements that are part of a democracy.

FRANK: I just want to apologize in advance, because the flood insurance bill has been scheduled to come up. And I'm going to go over and, after I do my questioning, I'm sorry to say to you -- but I will be on the floor and come back again. So I apologize for that.

But I welcome the chance to talk to the chairman, because I think we are facing a kind of crisis in our economy.

I am glad to see that economic growth is steady and solid. I agree with the projections that it will be good going forward.

But we face a problem we haven't faced for a long time in America. I'm not enough of an economic historian to know when, if ever, that was.

There is a decoupling between growth in the gross domestic product and the economic situation of the average American.

The report documents that -- the monetary report to Congress. On page nine of the report -- page eight: "With profits posting further solid gains in 2005," et cetera; and on page nine: "Corporate profits continue to grow strongly in 2005. The ratio of before-tax profits of domestic non-financial corporations to that sector's gross value and it rose to more than 12 percent; near its 1997 peak. Operating earnings per share for S&P 500 firms appear to have been nearly 14 percent above that level four quarters earlier."

That's explained in part by the growth in productivity. It was not as high last year as it's been, but it was still considerably above trend.

And if you look at productivity over the last five years, as has been noted, it has been very high.

And then we get to page 17: "Increases in hourly labor compensation were moderate in 2005." In fact, real wages, wages paid to people who work for other people, taking into account inflation, have not gone up for years. They have been flat.

What we have is an economy in which, thanks to increased productivity, gross domestic product goes up and a very, very large share -- an excessive share of the increased wealth has gone to a very small number of people who own the capital.

Now, obviously, for the system to work, there has to be compensation for people who own capital. No one is, I hope, arguing that that shouldn't happen at all. But in recent years, that has become disproportionate. Your predecessor had acknowledged that on several occasions.

You have wages flat; you have insecurity caused by pensions being under funded, being abandoned, defined benefits going over to 401(k)s; you have medical care costs increasing, the extent to which workers have to pay them.

And the consequence of this -- and it's something that people complain, but I will tell you that I was in Davos, listening to a leader of one of our financial institutions lament the fact that the American people seem so unimpressed with globalization, so resistant to the effort to adapt that very productivity which many believe is so important for the economy. And I share that.

And he said, "Recent studies show that the globalization adds a trillion dollars a year to the American economy. That's $9,000 per family. Why are Americans so resistant to something that adds $9,000 per family?"

And my answer was, "Because they don't have the $9,000. Not only do they not get the $9,000," I said to this individual, "They think you have that $9,000. In fact, you have the $9,000 for about 2,000 of them or more."

And this disparity, this problem is why you now encounter increasing resistance to trade, to deregulation, to the very flexibility that many think are important for the economy.

So these numbers are right here: productivity goes up, the economy is going very well; but average Americans correctly assert that they are getting little if any of the benefit.

And I know people say, "Well, you know, globalization -- after all, T-shirts are a lot cheaper now than they used to be a Wal-Mart and elsewhere." Remember, I'm talking about real wages. That factors in the cost of living.

So when you talk about real wages being flat, you can't double- count the low prices. Real wages is, obviously, nominal wages discounted by inflation.

And so if we do not do a better job in this country of not getting rid of inequality, which is essential for our society's markets to function, but diminish it, you will continue to have the resistance to many of the policies that people advocate. And that, I think, is a major task before us.

We have to end this decoupling of growth of the GDP and the economic well-being of the average American.

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Questions and Answers with Mr. Bernanke:

FRANK: Thank you, Mr. Chairman.

Let me start on a moment of bipartisanship and give credit where credit is due.  As this colloquy about the 30-year bond made clear, when President Bush came to office, there was some concern -- and Mr. Greenspan had it -- about how the federal government would deal with this problem of surpluses and a disappearing debt. And the Bush administration has certainly solved that problem: No one has to worry anymore, thanks to our recent fiscal policy, about the possibility of surplus and not enough debt.

So I did want to acknowledge that accomplishment.

On the question that I began with, Mr. Bernanke, I wondered, Mr. Greenspan did on several occasions lament the increasing inequality that was happening in America.

And again, I want to stress, inequality is a good thing in a capitalist economy. The economy doesn't work without it. But it can become excessive in ways that I think are not necessary for efficiency and can cause other kinds of problems.

Do you share his concern about inequality, both in the abstract and in terms of how we've been in the last few years?

BERNANKE: I agree with you, Congressman, that rising inequality is a concern in the American economy.

It's important for our society that everyone feels that they have an opportunity to participate in the opportunities that the economy is creating. And in a situation where incomes are becoming less equal, there will be less support, for example, for free trade, for keeping labor markets flexible.

BERNANKE: And so the strength of the economy itself, again, requires a certain amount of belief on the part of the broad public that they are participants and beneficiaries of the strength of the economy.

Now, there's a question as to why there have been some indications of rising inequality. There are a number of factors; I don't want to take all your time.

I guess I would submit that the most important factor is a long- term trend which has been going on for a quarter of a century or more, which is the rising skill premium, the increased return to education.

We've seen since about 1980 that people with a high school education or lower have seen essentially no increases in their real wages, whereas people with a college education or greater have seen a significant increase.

FRANK: And I think that's very clear. One point actually -- let me just give you a chance to respond -- attributed to the institution which you now head, not even in indirect quotes, but frequently in the financial pages, the sentiment is attributed to your institution that one of the things that troubles you is the possibility that wages might rise.

And we see that the Fed is worried that wages will rise and this will, of course, have terrible things. We are, of course, delirious when profits rise. But the potential that wages might rise causes problems.

Are you worried that wages might rise, Mr. Chairman?

BERNANKE: Congressman, there's a bit of a misunderstanding there.

What would not be desirable would be for nominal wages to rise and for nominal prices to rise even more, leaving workers worse off than when they started.

What is desirable is for real wages, wages measured in terms of purchasing power, to rise. I believe that will happen as the market strengthens. And I have certainly no objection to...

FRANK: But I appreciate you saying that, because it is the latter. I am quoting now some of the financial pages, and that difference you mentioned isn't there.

And in fact, as we've noted, productivity has been outstripping wage increases. Real wages have, in fact, been stagnant. And if you throw in what's happening in health and elsewhere, there are other problems.

Now, one of the things I just would note, and I know there's a debate about the cause of this, but it is clear: Unemployment has dropped, but a significant factor in the drop of unemployment has not been growth in jobs above trend -- at least that's a part of it -- but a drop in the participation rate.

FRANK: You've noted this. The Council of Economic Advisers have noted this. To quote your report: "The participation rate of people in the workforce in January 2006 was 66 percent, well below the high of 67.25 percent reached in early 2000."

Now, there's a debate about what extent it's demographic. The Council of Economic Advisers does say, on page 171, it's a least partly cyclical.

But in any case, you ought to be clear that the drop in unemployment has been greatly helped not by job growth above trend, but by demographics.

And here's a question. I agree with you that the skill premium has been increasing. Natural trends in the economy -- globalization, technological change, productivity -- those I agree are exacerbating inequality. The problem is that I believe public policy has made it worse, rather than better.

In my view, the role of public policy in part ought to be to mitigate the inequality, not to the point where you destroy incentives, but at least mitigate it. And, frankly, I think that is the difference between the approach in the previous administration and the current one through tax policy.

You know, we read today there's a new assault being launched by very conservative elements on labor unions. And we see a major funded effort to try and undercut labor unions. We see, in my judgment, a budget which cuts back on virtually all of the federal programs that would go to diminishing the inequality.

So the question is -- I know I'm out of time, but I'd be glad to take this in writing later -- given that we agree that inequality is a problem -- and I agree that it is trends in the economy that cause it, but my problem is that public policy has gone from trying to mitigate that, it seems to me, to exacerbating it, maybe out of the motive that this will promote incentives that lead to growth, so the question is: What do we do about it? What federal policies would it make sense -- if we all agree that inequality is increasing beyond what is healthy, what should we do about it?

OXLEY: The gentleman's time has expired.

The chairman may respond.

BERNANKE: Well, the discussion we were having a moment ago about returns to skills suggested one very positive thing would be to continue to strengthen education and to continue to strengthen job training and skills acquisition, life-long learning.

BERNANKE: I think that's a very important dimension of public policy.

 

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The Committee oversees all components of the nation's housing and financial services sectors including banking, insurance, real estate, public and assisted housing, and securities. The Committee continually reviews the laws and programs relating to the U.S. Department of Housing and Urban Development, the Federal Reserve Bank, the Federal Deposit Insurance Corporation, Fannie Mae and Freddie Mac, and international development and finance agencies such as the World Bank and the International Monetary Fund. The Committee also ensures enforcement of housing and consumer protection laws such as the U.S. Housing Act, the Truth In Lending Act, the Housing and Community Development Act, the Fair Credit Reporting Act, the Real Estate Settlement Procedures Act, the Community Reinvestment Act, and financial privacy laws.