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MONETARY POLICY AND THE

STATE OF THE ECONOMY, PART I

HEARING

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

JULY 17, 2007

Printed for the use of the Committee on Financial Services

Serial No. 110–51

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

ALBIO SIRES, New Jersey 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

SPENCER BACHUS, Alabama 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III)

C O N T E N T S 

Page 

Hearing held on: 

July 17, 2007 ..................................................................................................... 1

Appendix: 

July 17, 2007 ..................................................................................................... 39

WITNESSES 

TUESDAY, JULY 17, 2007

Friedman, Dr. Benjamin M., William Joseph Maier Professor of Economics, 

Department of Economics, Harvard University ................................................ 6

Galbraith, Dr. James K., Lloyd M. Bentsen, Jurisdiction Chair in Government/Business Relations, Lyndon B. Johnson School of Public Affairs, The 

University of Texas at Austin ............................................................................. 9

Meltzer, Dr. Allan H.., The Allan H. Meltzer University Professor of Political 

Economy, Tepper School of Business, Carnegie Mellon University ................. 13

APPENDIX 

Prepared statements: 

Paul, Hon. Ron .................................................................................................. 40

Friedman, Dr. Benjamin M. ............................................................................ 41

Galbraith, Dr. James K. ................................................................................... 52

Meltzer, Dr. Allan H. ....................................................................................... 60

(1)

MONETARY POLICY AND THE 

STATE OF THE ECONOMY, PART I 

Tuesday, July 17, 2007

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The committee met, pursuant to notice, at 10 a.m., in room 2128, 

Rayburn House Office Building, Hon. Barney Frank [chairman of 

the committee] presiding. 

Present: Representatives Frank, Waters, Maloney, Watt, Scott, 

Green, Cleaver, Ellison, Klein, Wilson, Perlmutter; Castle, Paul, 

Manzullo, Garrett, Neugebauer, Bachmann, and Marchant. 

The CHAIRMAN. The hearing will come to order. As we made 

clear, we have a statutory requirement under the Humphrey-Hawkins Act for the Chairman of the Federal Reserve to come twice a 

year to each of the relevant committees in the House and the Senate to make a report. That has previously been considered to be a 

unique, if not sacred occasion, in which the Chairman is invited to 

pronounce with due deference on the part of the listeners. We intend to continue to be polite and receptive to what the Chairman 

has to say, but we have decided in the current Congress that we 

are going to make clear that there are other views that are relevant, and that the responsibility the Federal Reserve has under 

the Humphrey-Hawkins Act is one that is important enough to get 

a range of comments on the issue, so that is what we are going to 

be doing today. 

The ranking member of the subcommittee—although this is a full 

committee hearing—has also been one of those who over the years 

has argued that it is legitimate to have full and vigorous debate 

over whether what the Federal Reserve does is right or wrong. And 

so we look forward to today, leading to a very serious discussion 

tomorrow. 

We are seeing a change to some extent in the economics profession that the New York Times talks about. I’m glad we have three 

very distinguished economists here today, none of whom have ever 

felt constrained by academic convention. And I think that affects 

one of the key issues that the Federal Reserve is dealing with. 

There has been a lot of conversation about inflation targeting, 

about the theory that the Federal Reserve, in pursuit of its obligations under the Humphrey-Hawkins Act, should focus on a maximum inflation amount and very explicitly conduct its policy with 

the goal of keeping inflation under that number. 

The Federal Reserve, of course, under the Humphrey-Hawkins 

Act has a dual mandate—to restrain inflation, but also to promote 

2

full employment. Many of us are concerned about that approach because we believe it would lead to an undervaluing of the employment issue. The Chairman believes, and he will talk more about 

this, that he can in fact serve both goals by the way in which he 

is approaching the inflation issue, and we will hear a lot about the 

anchoring of inflation expectations as the philosophy that the Federal Reserve is increasingly adopting, both the Chairman and Governor Mishkin in particular have spoken about this. 

What I want to talk about, though, is the real economic situation 

we find ourselves in today, which I think has an impact on this inflation unemployment incipient rivalry, which is what’s there, 

whether people acknowledge it or not, at least in the emphasis, and 

here’s the issue that I’m really sort of trying out in my own head, 

and I will talk some today and a little bit more tomorrow, and the 

issue is this: 

What we have in the Federal Reserve is the argument that, from 

the standpoint of overall economic progress, it is important implicitly to focus on inflation and that if you can keep inflation low and 

keep inflation expectations anchored at a fairly low level, that will 

allow them to conduct monetary policy in a way that will promote 

the fullest possible employment in any given set of circumstances. 

And it’s an emphasis that says from the overall economic standpoint, inflation is really the key driver. Some deference is paid to 

employment, but it does seem to me that the emphasis goes the 

other way. 

But we have, I think, a new recognition. We had a hearing on 

it last week. The New York Times has written about it a couple 

of times, and it’s this: We’re at a situation in America today where 

the distribution of wealth that is generated has become a very significant economic issue. And implicitly, the view that I’ve been discussing downgrades that. It asserts essentially that the focus has 

to be on the overall rate of growth in the country. And the assumption is that if you keep inflation down, you can promote an appropriate rate of growth and therefore all will benefit. 

Increasingly, it is clear as we look at the events of the past couple of decades, especially the past 6 years, the increasing concentration of wealth in the country has now become a significant 

issue. A couple of weeks ago, the immigration bill blew up very 

noisily in the Senate. Of somewhat equal significance from this 

perspective, trade promotion expansion died without either a bang 

or even a whimper. It just died. People didn’t even notice. 

I say that because there are many who argue for increased integration of the United States into the global economy, taking full 

advantage of technology and trade as wealth generators, who were 

very regretful of that, and they have been talking about, ‘‘How do 

we resuscitate the immigration bill? How do we get back trade promotion authority?’’ 

I think it’s very clear. The problems that led to the demise of 

both of those are extrinsic to both issues. You are not going to solve 

either the immigration issue for those who want, as I do, an immigration bill along the general lines that went down, or get back into 

the trade business simply by changing the terms of those two policies. There is a deep unhappiness within the American electorate 

over the maldistribution of income. 

3

The recent report put out by the Financial Services Forum—

which is headed by Don Evans, a close friend of the President, and 

the first Secretary of Commerce in this Administration—a threemember panel which consists of: Matthew Slaughter, an immediate 

past member of the Council of Economic Advisors, whom Mr. 

Bernanke says he selected for that job; Grant Aldonis, who is a 

high-ranking Commerce Department official with trade responsibilities in this Administration; and Robert Lawrence of Harvard. 

What they put out is a report which documents the extraordinary 

maldistribution of income recently. 

The fact under their—the most striking chart was the one that 

shows, since 2000 I believe was the period they picked, if you look 

at segments of the economy, real income rose for 3.8 percent of the 

economy, of the people, and was either stagnant or eroded for 96.2 

percent. The political effects of that are serious. Professor Friedman has written about inequality and the impact of it. 

And we are now seeing, in very vigorous form, that the connection between the two is this: If we do not address this problem of 

the excessive inequality—obviously, inequality is essential to a capitalist system. No one’s trying to get rid of it, at least no one rational. But it can reach a point where it becomes clearly politically distorting, and it may also become economically distorting in terms of 

consumption, in terms of the savings rate. 

But if we are not able to alleviate the understandable anger that 

Americans feel at the real maldistribution of income and the fact 

that as wealth has increased, they get little of it, then people 

should understand that we will not be making progress in some of 

these other areas. It makes no sense to tell people that trade and 

other economic policies will help promote national wealth if the 

overwhelming majority of citizens don’t think that they benefit 

when the national wealth increases. 

And that is why—and that seems to become a constraint on the 

Federal Reserve. That gets to the tradeoff of inflation and unemployment to the extent that there is one. It does mean that the social and eventually the economic cost of increased unemployment 

is even greater than it may have been in people’s minds. The anger 

that will be generated if the Federal Reserve were to decide that 

because of excessive inflation, and that it’s slowed down the economy with the resulting increase in unemployment and the obvious 

further retardation of real wage growth, then the economic consequences and political consequences become worse. 

So I think we are in a somewhat new era in this regard in which 

this—it is no longer sufficient to look at the overall economic performance. Distribution questions have become prime questions for 

the future of the economy, and they’ve become more than just distribution questions because they control whether or not the economy can in fact continue to grow in ways that people would find 

satisfactory. 

I now recognize the gentleman from Texas. 

Dr. PAUL. Thank you, Mr. Chairman. I appreciate very much you 

holding these hearings because, like you, I’ve had an intense interest in monetary policy and think it’s very significant. 

It’s interesting to note that over the years since we’ve been holding these Humphrey-Hawkins hearings, money supply had been in 

4

the past emphasized to a large degree, and yet recently, it’s been 

deemphasized to the point where in these reports they’ve barely 

even referred to money supply. Likewise, a year ago, they even 

stopped reporting M3, as if it were totally unimportant. But the 

definition of certain words, I think, is very important. Most people 

talk about inflation, but almost everybody wants others to think 

that inflation is measured by prices as recorded in the CPI or the 

PPI. And yet for others, inflation is merely the increase in the supply of money and credit, it’s the excess of credit that is inflated, 

which leads to higher prices in certain categories. 

So often what is neglected today with current understanding of 

monetary policy is that as long as we can bring about a government statistic that claims that the prices are relatively stable or 

rising at a lower level than that which would cause worry, then everything is okay. What is ignored is the fact that even if prices are 

stable as measured by the CPI, you still have other conditions to 

be concerned about such as malinvestment, excessive debt, and 

bubble formations. 

And indeed, this is the case in recent years where inflation of 

prices seem to be relatively stable, and yet we still had NASDAQ 

bubbles developing, housing bubbles develop, and various areas of 

the economy where prices go up excessively. The one thing characteristic about monetary inflation is that price inflation is not 

even. It’s never even, and it’s never fair, and I think this should 

help explain the concerns that the chairman has regarding the 

maldistribution of wealth. I’m deeply concerned about that, too, but 

I see it so often as a monetary phenomenon because the characteristics of a fiat currency, the characteristics of a devaluation of 

money, mean that the middle class and the poor hurt the most, and 

there are certain categories that benefit the most, the people who 

get to use the money first; the politicians, the government, and the 

military-industrial complex. These individuals benefit. When that 

money circulates, somebody else gets hit with a high inflation rate. 

Quite frankly, if we were measuring the CPI today the way we 

used to measure the CPI, it’s rising at over 10 percent, so it becomes convenient for governments to change their calculation and 

make it sound like we are controlling prices and everybody is supposed to be satisfied with this. 

But what has happened, I believe, over these many years, especially since 1971, is that we have deferred to the central bank to 

be the central economic planners, that they are in charge of the 

economy and they can achieve this merely by manipulating interest 

rates. So there’s a large consensus of people and groups that like 

low interest rates. The stock market likes low interest rates. The 

banks like low interest rates. Everybody seems to like low interest 

rates, and people call for low interest rates. Consumers, when 

they’re borrowing money, like low interest rates. But it just happens to injure a lot of other people. Some individuals still believe 

that saving is worthwhile, and yet the interest that they earn is 

below market rate, and it hurts them. People on fixed incomes suffer from this. 

But this whole notion that a central bank somehow has the wisdom to know what interest rates should be is to me rather bizarre, 

and also the source of so much mischief that has gone on. If our 

5

goal is to have stable prices to a degree, if you look at monetary 

history, you will find out that if you have an asset-backed currency, 

prices will remain pretty stable for 100 or 200 years as long as you 

have an asset-backed currency. 

It’s only when there’s nothing behind that currency, and banks, 

the central banks that inflate the currency that you have this radical increase in prices, and all you have to do is study the price increases since 1971, and it’s a disastrous record for that. 

I believe also the idea that ought to be challenged is the notion 

that somehow or another if we just increase the money supply, 

which is the inflation, that we will increase employment, and yet 

this was virtually disproven and to a degree rejected in the 1970’s, 

because it did eventually lead to stagflation. And today, I believe 

we are facing the very same conditions. This is the first time in 

over 30 years that every currency is going down in value in terms 

of traditional money, which is gold. And in the 1970’s, it led to very 

bad times for us, and I think we should beware of this. 

But ultimately, monetary policy is key. Most economists will accept the notion that inflation, when they think of inflation, of 

course, prices, is a monetary phenomenon. At the same time, they 

falsely assume that if we can hide the inflation, change the way we 

record it, don’t look at inflation for one group versus another, that 

we have nothing to worry about. That was virtually the major error 

they made in the 1920’s, believing there was no inflation, no 

malinvestment; but there was, and there had to be a correction. 

So the malinvestment and the misdirected economy and the excessive debt comes from the excessive credit created by the Federal 

Reserve Bank. Unless we address that and really hold their feet to 

the fire so that we have more transparency, the fact now that we 

get less transparency, although they talk about more transparency, 

means to me that they’re trying to hide the ill effects of what’s happening with the monetary system. 

So once again, I want to thank the chairman for these particular 

hearings that we’re having, the extra effort to try to emphasize the 

importance of the Federal Reserve. But I will argue strongly that 

we need more transparency. The Congress needs to assume more 

responsibility for the very important issue of maintaining the value 

of the currency. And I yield back. 

The CHAIRMAN. The gentlewoman from New York is recognized 

for 5 minutes. 

Mrs. MALONEY. Thank you, Chairman Frank, and I want to welcome our distinguished panel of experts and thank them for testifying today. 

These next 2 days of hearings come at an important time, because monetary policy remains at a critical juncture. Risks in the 

housing market have not yet subsided, and rising mortgage delinquencies on subprime home loans could level a serious blow to the 

overall economy. Personal bankruptcies will undoubtedly rise as 

the many families who have fallen prey to these risky mortgages 

run out of options, and the ability of American consumers to keep 

spending may be flagging with the cooling housing market. 

Last month retail sales experienced the sharpest decline in nearly 2 years, with housing-related sales contributing to the fall. 

Meanwhile, core inflation has tended to be higher than the Fed is 

6

comfortable with over the long term, which seems to have contributed to the Fed maintaining an anti-inflation tilt. 

Dr. Galbraith’s testimony challenges the Fed’s view that the relatively low unemployment we currently have poses an inflation 

risk. Even more compelling is the evidence he presents that earnings inequality is, ‘‘A direct product of monetary policy choices.’’ 

How American families are faring should be an important part of 

the Fed’s policymaking decisions, because most workers have not 

shared in the gains from the economic growth we have seen so far. 

Setting the right course for monetary policy is further complicated by our huge budget deficits, our record debt, and international trade imbalances. Our challenge is to return to the legacy 

of fiscal discipline that President Bush inherited but squandered 

over the past 6 years. Democrats in Congress have a realistic budget plan that adheres to the PAYGO principles for controlling the 

deficit and bringing revenues into line with what we need to spend 

to defend our country and take care of our citizens. 

I thank the chairman for holding these hearings, and I look forward to the discussion and the testimony from our distinguished 

panel. 

Thank you. I yield back my time. 

The CHAIRMAN. The gentleman from Texas had a unanimous 

consent request. 

Dr. PAUL. Thank you, Mr. Chairman. I’d ask unanimous consent 

to insert a printed statement into the record. 

The CHAIRMAN. Is there any objection? 

There being none, it will be put in the record. 

And we will now proceed to the witnesses. We appreciate your 

coming. This is a procedural innovation which we think people will 

be building on, so we thank you for participating. Professor Friedman, let’s begin with you. 

STATEMENT OF DR. BENJAMIN M. FRIEDMAN, WILLIAM JOSEPH MAIER PROFESSOR OF ECONOMICS, DEPARTMENT OF 

ECONOMICS, HARVARD UNIVERSITY 

Mr. FRIEDMAN. Thank you, Mr. Chairman. I’m delighted to be 

here this morning to address this distinguished committee. As you 

mentioned, I do indeed have views on the role of inequality in our 

economy today, and I also have views on the issues that Congressman Paul raised in his earlier remarks. The remarks in my prepared statement focus on two issues. The first is the dual mandate 

and the second is inflation targeting. What I’ll do, with your permission, and in the interest of time, is to only present parts of my 

prepared remarks. 

The CHAIRMAN. Without objection, all of the written material 

that any of the witnesses wish to present will be made part of the 

record. 

Mr. FRIEDMAN. Thank you. I appreciate that. Our country’s central bank is unusual today in two respects. First, under the prevailing legislation, Congress has instructed the Federal Reserve to 

conduct monetary policy so as to promote both maximum employment and stable prices. This dual mandate, as it’s often called, 

stands in contrast to the charge given to many other countries’ cenVerDate 0ct 09 2002 13:24 Nov 13, 2007 Jkt 038390 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\38390.TXT HFIN PsN: TERRIE
7

tral banks to focus primarily or even exclusively on maintaining 

stable prices. 

Second, the Federal Reserve System has stood apart from the 

movement among many other central banks to organize monetary 

policy around the pursuit of a specific publicly announced rate of 

inflation, what’s commonly called inflation targeting. 

I believe our country is well served by both of these differences. 

The Congress is right to assign the Federal Reserve a dual mandate, and given that dual mandate, it would be harmful for the 

Federal Reserve to organize its monetary policy within an inflationtargeting rubric. I will address both of these issues. 

First, the dual mandate: The purpose of any nation’s economic 

policy is clearly to advance its economic wellbeing, meaning the 

prosperity of its citizens and the vitality of the institutions through 

which they participate in economic activity. 

Whether working men and women are able to make a living, 

whether the businesses that they own and at which they work and 

earn a profit and invest for future growth, and whether the banks 

and other financial institutions on which they rely can survive, are 

all fundamental aspects of that wellbeing. Individual citizens are, 

and they have a right to be, concerned with many facets of the economic environment in which they live; their incomes, their employment prospects, their ability to start a business, or to borrow to 

purchase a new home, just to name a few. 

Experience shows that rising prices, or for that matter, falling 

prices, can and sometimes do undermine the efficient functioning 

of economic activity, so that price stability is a key desideratum in 

all of these regards. But price stability is instrumental. We value 

it not for itself but for how it enhances the economy’s capacity to 

achieve those goals that, even if they are not genuinely primary 

from the perspective of basic human concerns, at least instrumental on a higher level. 

The idea that economic policy should pursue price stability as a 

means of promoting more fundamental economic wellbeing, either 

currently or in the future, is not grounds for pursuing price stability at the expense, much less to the exclusion, of that more fundamental wellbeing. 

I go on, in my prepared remarks, to contemplate an imaginary 

situation in which the economy is in deep depression, banks are 

failing, corporations are in bankruptcy, home mortgage foreclosures 

are accelerating, and then to imagine that the Chairman of the 

Board of Governors of the Federal Reserve System were to appear 

at the equivalent of tomorrow morning’s hearing and greet you, ladies and gentlemen, by saying, ‘‘I’m pleased to report that during 

the past year, U.S. monetary policy has been outstandingly successful. Overall inflation has again been just 1 percent, and prices 

other than for food and energy have risen by .9 percent. My colleagues are here to accept your congratulations.’’ 

Now, such a situation is of course unthinkable. But the relevant 

question for this committee is what makes it unthinkable. The Federal Reserve System is a part of our Federal Government, to which 

the Congress has—importantly, under instruction and with oversight—delegated its constitutional power to make monetary policy. 

8

The substantive content of that instruction is essential, and the existing dual mandate is a crucial component of it. 

I turn now to inflation targeting. 

The CHAIRMAN. I’m going to—we’ll do 7 minutes for each of the 

witnesses, so, please keep going. 

Mr. FRIEDMAN. Thank you, Mr. Chairman. Advocates of inflation 

targeting, both within central banks and elsewhere, frequently 

ground the argument in favor of this way of conducting monetary 

policy on considerations of transparency, which Mr. Paul mentioned in his remarks, though in a very different way, and accountability. Telling the public which single variable to associate with 

monetary policy and also the numerical target at which the central 

bank is aiming, makes clear what policymakers are trying to 

achieve. When the objective is low and stable inflation, transparency also helps to anchor the public’s expectations. Furthermore, accountability of policymakers for the efficacy of their actions 

is plainly part of what constitutes effective democracy. 

I believe, however, that under circumstances like those under 

which our Federal Reserve System operates, the argument for the 

transparency of inflation targeting fails, and with it the argument 

for the resulting greater accountability. Describing the intended 

trajectory of monetary policy in terms of inflation alone need not 

imply that policymakers have no objectives apart from inflation, 

but nor does it preclude their having such a single goal for monetary policy. The essential question is whether policymakers have 

objectives for output and employment or not. If they do, then inflation targeting is more likely to undermine the transparency of their 

policy than to promote it. The chief reason is that under inflation 

targeting, policymakers reveal to the public only one aspect of their 

multiple objectives. They have a numerically specific and publicly 

announced target for inflation, but not for the real component. 

Indeed, many inflation targeting central banks—and I give some 

examples in my prepared remarks—appear to go to some effort not 

to reveal targets that they have, or even objectives that they have, 

for the real aspects of the economy. In light of the favorable effect 

on short-run output—inflation tradeoffs that some people argue ensues from keeping expectations of future inflation anchored at a 

low level, the incentive for policymakers to downplay or even conceal their objectives for real outcomes is of course clear enough. But 

their doing so hardly contributes to the transparency of their policy, nor does it contribute to making their policy accountable. 

Indeed, one interpretation of the movement toward inflation targeting among so many of the world’s central banks, is that this is 

precisely the state of policymaking that inflation targeting is intended to bring about over time. A plausible consequence of constraining the discussion of monetary policy to be carried out entirely in terms of a specified numerical inflation trajectory is that, 

in time, objectives for output and employment will atrophy or even 

disappear from policymakers’ purview altogether. 

This eventuality would ensue in part simply because the language and analytical framework within which discussion takes 

place inevitably shapes what is discussed. The 18th century Scottish philosopher and economist David Hume, writing about the central political issue in the Britain of his day, which was monarchy 

9

versus republic, observed that, and here I quote Dr. Hume, ‘‘The 

Tories’’—that is, the pro-monarchy party—‘‘The Tories have been 

obliged for so long to talk in the republican style that they have 

at length embraced the sentiments as well as the language of their 

adversaries.’’ We are all familiar with instances of the same phenomenon in our own day. 

In addition, exactly as the argument for accountability implies, 

policymakers inevitably take more seriously those aspects of their 

responsibilities for which they expect to be held accountable. Disclosing a numerical target for only the inflation objective, when in 

fact policymakers are charged by the Congress to have objectives 

for inflation as well as for output and employment, biases the relative importance that policymakers will attach to these respective 

objectives by fostering their accountability for inflation and not for 

real outcomes. In time, the objectives for output and employment 

specified in the Congress’s instruction to the Federal Reserve, 

would simply devolve into a rhetorical fiction. 

The United States is today well-served by the dual mandate that 

the Congress has assigned to our Nation’s central bank. It is worth 

preserving. Inflation targeting would instead undermine it. Thank 

you, Mr. Chairman. 

[The prepared statement of Dr. Friedman can be found on page 

41 of the appendix.] 

The CHAIRMAN. Thank you, Mr. Friedman. 

Mr. Galbraith. 

STATEMENT OF DR. JAMES K. GALBRAITH, LLOYD M. BENTSEN, JURISDICTION CHAIR IN GOVERNMENT/BUSINESS RELATIONS, LYNDON B. JOHNSON SCHOOL OF PUBLIC AFFAIRS, THE UNIVERSITY OF TEXAS AT AUSTIN 

Mr. GALBRAITH. Thank you, Mr. Chairman, Congressman Paul, 

and members of the committee. It is a particular honor for me to 

be here today, as someone who worked for this committee from 

1976 until the early 1980’s, and who helped—with Congressman 

Hawkins, and under the leadership of Chairman Reuss—to draft 

what became the Full Employment and Balanced Growth Act, 

under which these hearings are being held, and who worked on 

these hearings for the first 5 or 6 years of their existence. So I am 

delighted and honored and very privileged to be back. 

As this title suggests, the Full Employment and Balanced 

Growth Act set into law goals for the economic policy of the United 

States, including for the Federal Reserve. Those goals included full 

employment and reasonable price stability, a precise statement of 

what is now often called the dual mandate. 

Like Professor Friedman, I strongly subscribe to the wisdom that 

Congress showed in specifying multiple goals for our Nation’s Central Bank. The question I would like to address today is, has the 

Federal Reserve particularly over the last several decades, observed that mandate? 

I would like to make a number of closely related points, some of 

them about the condition of the economy and some of them about 

the actual conduct of monetary policy. 

It is widely believed in the economics profession that the dual 

mandate is inconsistent: that low unemployment and particularly 

10

full employment is, per se, an inflation risk. If you read, for example, ‘‘The Wall Street Journal’’ of just this past June 21st, you find 

the headline, ‘‘Fed policy makers are likely to continue to highlight 

risks that low unemployment could push inflation higher when 

they meet next week.’’ 

The study that I and my co-authors have done, and that we 

present to this committee, contradicts the connection between inflation and unemployment for the period after 1983. And especially 

the natural rate or NAIRU hypothesis that was first formulated 

back in 1968, and which has been accepted as a matter of faith by 

a great many economists ever since. 

This alleged connection has been proffered to justify persistently 

high unemployment rates and to rationalize raising interest rates 

when unemployment falls too low. But since 1983, let me repeat, 

there is simply no evidence that violating this supposed threshold 

produces rising inflation. 

A perfect example of that came in the late 1990’s when those 

thresholds were violated persistently for a period of 3 years or 

more with sustained full employment. Contrary to the fears of 

many, inflation simply did not rise. It was a very good time and 

a lesson in the wisdom of the Congress in having specified that 

both full employment and reasonable price stability could and 

should be policy goals. 

A second point that is often made is that inequality lies outside 

the scope of monetary policy. In testimony before this committee in 

1997, Chairman Greenspan said he was uncomfortable with inequality but, ‘‘There is nothing monetary policy can do to address 

that. And it is outside the scope so far as I am concerned of the 

issues with which we deal.’’ 

Chairman Bernanke holds a similar view. He gave a speech recently in Omaha where he discussed inequality with concern, but 

didn’t mention the role of monetary policy. 

This belief is incorrect. We find that inequality—specifically in 

pay or earnings, that is to say the inequality in the labor market, 

experienced by working people—does react to the rate-setting decisions of the Federal Reserve. Inequality has always been the recipient of shocks, among them the effects of unemployment and inflation. What we show is that it is also in part a direct product of 

monetary policy choices. 

I should say, having said that in the good period that I just referred to in the late 1990’s, inequality of this type declined. And 

so I believe the Federal Reserve’s relatively permissive monetary 

policy in that period should get some of the credit. 

Let me turn to the conduct of monetary policy. It is, of course, 

widely believed and often stated that monetary policy in recent 

years has been aimed at fighting inflation. And for an earlier period, 1969 to 1983, there is some evidence of that. But that evidence has as a statistical matter largely disappeared in the period 

since. 

Part of the reason may be that since 1983, the economy has 

transmitted very few clear signals of high or even rising inflation 

to the Federal Reserve. And with no inflation, logically there can 

be no reaction to inflation. But this raises two questions. Why did 

inflation so largely disappear? And why did the Federal Reserve 

11

undertake numerous periods of tighter policy in spite of the absence of rising inflation? 

Now there is an argument that the Federal Reserve was engaged 

in the management of inflation expectations, but I would suggest 

that there is very little direct evidence of what those expectations 

are. And it is a very nebulous kind of argument. 

Our belief on the contrary is that the economy really did change 

in the early 1980’s as a result of the high dollar de-industrialization and, frankly, globalization. And that inflation was permanently or for the long term reduced as a result of the changed position of the United States in the world economy. Since then, fighting 

inflation has been a relatively easy task because there has been 

virtually no inflation and certainly no wage inflation to combat. 

The second claim is that the Federal Reserve does respect the 

dual mandate. But we find that over the period from 1984 through 

2006, the Federal Reserve has not in practice generally accepted 

the strictures of the Full Employment Act. Instead, it has behaved 

as if it believed that unemployment rates below a range between 

5 and 6 percent are dangerous in and of themselves. It has behaved 

as if it believed that low unemployment poses high risks of inflation, although the evidence that I have just mentioned refutes that 

view. It is perhaps not surprising since, as I said before, a large 

number of economists hold this belief, but it is contrary to the evidence. It is contrary to what one should expect in an open economy—which the United States has become—where prices are largely set globally and not in the home labor market. And in addition 

to that, it is contrary to the mandate of the Congress. 

A final point about monetary policy—and here I tread on somewhat delicate territory—has to do with the question of whether the 

Federal Reserve has stood entirely apart from politics over this period. 

The Federal Reserve has a reputation of being an apolitical agency. Still scholars have raised the question: Does there exist a presidential election cycle in monetary policy? And we thought it reasonable to examine that possibility. We find, and in the paper which 

the committee was presented, rather strong evidence that such a 

cycle has existed. 

We find that in the year before presidential elections, the term 

structure of interest rates, a measure of monetary stance, deviates 

sharply from what was otherwise normal. Moreover, the direction 

of variation depends on who is on power. The Federal Reserve has 

had a tendency to ease in election cycles when Republican Administrations are in office, and a tendency to tighten in election cycles 

when Democratic Administrations are in office. 

These are historical findings that do not necessarily predict the 

conduct of policy under Chairman Bernanke, but they raise an 

issue in our view that this committee would be well-advised to take 

into consideration as we approach future elections. 

I would like very briefly to second what Professor Friedman just 

said about an inflation target. An inflation target alone would indicate that the Federal Reserve gives priority to price stability over 

full employment. 

Congress should not accept that. 

12

Further, the more one examines the making of an inflation target, the more technical difficulties appear. Should one target core 

or headline inflation? If the former, you run the risk that non-core 

inflation will become ingrained before any reaction occurs. And if 

the latter, you run the risk of compounding supply shocks with demand shocks adding interest rate insult to oil price injury. 

These are technical issues with no easy answers. And that suggests that in some situations, constructive ambiguity may be preferable to complete clarity. This is something that, of course, Chairman Greenspan was famous for knowing. 

And, if I am right, finally, that inflation was in fact killed by the 

opening of the economy in the early 1980’s, then setting an inflation target is a little bit like putting up a cross over the grave. It 

is perhaps not a bad thing. It may make us feel better. But one 

would not be justified in crediting the cross for keeping the ghost 

in the ground. 

The fact that the inflation of the 1970’s died out in the 1980’s 

does not mean that we face no inflation risks. Inflation accompanies war. The Iraq War had some inflationary impact mainly 

through its affect on the price of oil. Inflation may also recur if the 

international monetary system enters a crisis causing a further fall 

in the value of the dollar. That is the risk of any unipolar currency 

system. It’s a great privilege to issue the world’s reserve currency 

but only so long as it lasts. These are issues for the future. They 

are issues, however, that the Federal Reserve will not be able to 

handle on its own. They require a broader perspective than one 

that would simply be served by an inflation target. 

Mr. Chairman, in conclusion, my research has pointed to several 

somewhat disturbing patterns in the actual conduct of monetary 

policy over the past quarter century. We have, in particular, the 

evidence that the Federal Reserve has a habit of reacting adversely 

to low unemployment even though full employment does not by 

itself pose an inflation risk. 

On these and other matters, I believe Chairman Bernanke 

should be asked to provide assurances that these patterns will not 

be repeated. He should be asked, I think, to reexamine any models 

which tie predicted inflation to the unemployment rate and to report in detail on that review and to examine in particular the evidence that the world did change as much as 25 years ago, breaking 

previous linkages between inflation and unemployment. 

He should be asked to reexamine the view that the Federal Reserve does not have any effect on inequality and he should be 

asked, of course, to assure Congress that interest rates will not be 

cut or raised solely in anticipation of an election. 

Mr. Chairman, thank you for your time, and again for this opportunity, and I look forward to answering any questions you may 

have. 

[The prepared statement of Dr. Galbraith can be found on page 

52 of the appendix.] 

The CHAIRMAN. And now, Professor Meltzer. 

13

STATEMENT OF DR. ALLAN H. MELTZER, THE ALLAN H. 

MELTZER UNIVERSITY PROFESSOR OF POLITICAL ECONOMY, TEPPER SCHOOL OF BUSINESS, CARNEGIE MELLON 

UNIVERSITY 

Mr. MELTZER. Thank you, Mr. Chairman. 

I am going to start by responding to the comments that you, Congressman Paul and Congresswoman Maloney, made at the beginning. It is a pleasure to be here again, yet again, before this committee. 

I would like to say on the issue of distribution, one may think 

that the issue of distribution is very important or think that the 

poverty problem is very important and the distribution of income 

is something that should be left. But if the public thinks the distribution of income is important then for the Congress it becomes 

important. But what is the problem? 

First, we should note that the problem arises not just in the 

United States and Canada; it arises pretty much generally around 

the world. That is, it is happening in China, perhaps even more extreme than here. It is happening in the U.K. It is really a reflection 

of something which is very basic and going on all over the world, 

and that is productivity change. 

As the great Frederick Hayek pointed out, the first effects of productivity change are going to be felt by those who are able to master it, and their incomes go up relative to other people. 

Our failure, to the extent that we have a failure on the problem, 

lies in the poverty of the educational system that we have for those 

people who are most victims of the distribution of income that you 

are concerned with. Congress, along with various Administrations 

have been discussing that problem since the 1960’s without making 

significant progress. It is really seriously time to look at why that 

is, and to ask the question, why is it that we cannot train a large 

fraction of the population to do the jobs and have the skills that 

are necessary? 

In my experience as a corporate director, if you go to a factory, 

it is hard to see a job of any major importance to a company, including line jobs, where the worker does not have to be literate and 

numerate. He has to be able to read the computer and take his instructions from the computer and transfer that into an action on 

his line. And if we do not train people do that, we cannot expect 

them to get jobs that require that. 

Second, to Mr. Paul, I think one of the great advantages of Humphrey Hawkins has been that it eventually led to greater transparency for the Federal Reserve. And this committee by scheduling 

regular hearings, even though they are not always successful, they 

at least require the Chairman to answer your questions and to be 

responsive. It is a long distance from the 1930’s when the Federal 

Reserve said, ‘‘We do what we want and it is none of your business.’’ That just does not fly in the present system. 

On the inflation target, I think the discussion so far has been incorrect. We have an inflation target. It is a loose inflation target. 

We go to the marketplace and ask anybody, what is the Fed’s objective, and they will tell you to get the inflation rate, the core inflation rate, down to 1 to 2 percent. They say it all the time. It is published in the newspapers. It is a generally agreed upon thing. 

14

Now, does that violate the dual mandate? Of course not. If the 

unemployment rate were 8 percent now, instead of somewhere 

around 4.5 percent, the Fed would be behaving differently. It would 

be responding as it is required to do under the dual mandate. 

So the issue about the inflation target is, how specific are we 

going to be, how transparent is the Fed going to be, how clear is 

the announcement going to be? Are we going to leave it at the sort 

of vague 1 to 2 percent or are we going to tighten it? 

I think if we tighten it, we have to go in the direction of making 

sure that we are clear about exactly what the Federal Reserve is 

going to do. I am going to talk about that a little bit more. 

To Congresswoman Maloney, I have to say that I agree broadly 

with what the Fed has been doing. The unemployment rate is relatively low and they are concentrating on inflation. If the unemployment rate was higher, as I said before, they would be doing 

things a little bit differently. 

Now is a good opportunity. They have had the benefit of going 

through a period where they were able to lower the measured inflation rate without having unemployment rise, and I think that certainly has influenced them in their decisions. 

So I agree broadly with the aims that they have been generating 

and the direction in which they have been going. I think the problems remain, and many of the problems that you have talked about 

do remain, but they are not primarily monetary problems. Monetary policy is a powerful instrument but it is not all that powerful: 

it cannot do much about the saving rate; it cannot do much about 

the distribution of income; and it cannot do much about the budget 

deficit. Those are problems which, for better or worse, Congress has 

to work on, and the Administration has to work on, but not the 

Fed. 

Let me turn to my written remarks. They are brief. In the past 

25 years, central banking has been transformed in all developed 

countries. Several announce inflation targets and make serious and 

generally successful efforts to achieve the targets. 

The European Central Bank uses judgment about current or recent data supplemented by concern about money growth, the socalled second pillar of the strategy. The Federal Reserve continues 

its discretionary policy, but as I have said, a discretionary policy 

aiming at a loose inflation target. 

All of these techniques have been much more successful than 

previous policies or methods of operation. Although they differ in 

their approach, current operations have two common features. 

First, central banks are more independent of politics and government than in the past. This is obvious in Britain and New Zealand 

where the meaning of central bank independence and its limits are 

set out explicitly in an agreement between the government and the 

central bank. Second, central banks now give much more weight to 

avoiding inflation than in the past. 

In the 1960’s and the 1970’s, the mantra preached by central 

banks all over the world and certainly here told the public that inflation would start to rise before the economy reached full employment. Price and wage guidelines were a necessary policy tool to 

achieve full employment with price stability and low inflation. That 

15

is the essence of the argument of James Tobin in the landmark 

1962 Report of the Council of Economic Advisors. 

Instead of getting low unemployment and low inflation, major 

countries, Britain and the United States especially, had higher inflation and rising unemployment. Even the politicians noticed the 

failure because the public noticed the failure. More importantly the 

voters noticed that countries like Germany and Switzerland put 

more effort into controlling inflation and did not suffer higher average unemployment at the time. 

Governments and central banks discarded the old mantra. 

Guideposts and wage controls went into the dust bin where they 

belonged. In their place was a new mantra preaching a very different point of view. The new claim was that sustained low inflation or price stability is a necessary condition for sustained full employment. Free markets work better than controls. The approximately 25 recent years of low inflation have strengthened this belief. With floating exchange rates and low inflation, Britain and the 

United States have had long expansions and relatively mild recessions. The United States is now in a third long expansion. The 

three longest peacetime, if I may use that word, peacetime expansions in the United States are the three most recent expansions. 

That is a very good record. 

If we do not worry so much about what has happened in the last 

few months, but we go back and look what has happened over the 

20 years since we have changed to a less inflationary policy, we can 

see quite a remarkable increase in living standards in the United 

States. 

Maintaining low inflation has worked extremely well in Britain 

and the United States but less well in European countries that 

joined the European Central Bank. Within the European Central 

Bank, the experience of countries like Ireland with pro-growth policies differs markedly from countries like Germany and Italy that 

tax and regulate excessively. The voters have noticed that and 

there seems to be some change happening. 

Virtually everyone recognizes that for Germany, France, and 

Italy, the required solutions to current problems are real, not monetary, and more generally political, not economic. 

Central banks in Britain and the United States should not rest 

on the achievements of past reforms, as important as they are. 

Both now claim to value transparency and clear communication, a 

break from the past secrecy that central bankers once prized. It 

took many decades for central bankers to recognize that just as financial markets depend on them, they depend on financial markets. In principle, interdependence has become accepted. 

Central banks have not explained an ever present part of the uncertainty that accompanies all economic changes. The duration of 

any change is often in doubt. A change may be temporary or persistent. Changes may alter the level or the growth rate. It usually 

takes time to decide the type of change that has occurred and how 

long it will persist. 

Inflation occurs when the central bank lets money grow persistently above the growth rate of real output on a sustained basis. 

The price level rises and continues to rise as long as the central 

bank remains on this course. 

16

Contrast this inflation with the rise in the price level that continues for a few months or a year, something like the shock that 

we have had recently. Money growth is not expansive. The rise in 

the price level can be the result of an oil shock, an increase in excise taxes, devaluation of the currency, and many other one-time 

changes. As the change spreads through the economy, the price 

level rises. The rise is typically spread over time so the rate of 

price increase will at first look very similar to a monetary inflation 

just discussed. But it is important to keep them apart. 

The Fed is in the money business. It can do something about the 

monetary inflation without any harm to the economy. It cannot do 

much about most of those other price rises without harming the 

economy. If it tries to roll back the domestic prices to offset the oil 

price we will have more unemployment. 

The difference is that the one-time increase does not persist. Oil 

prices do not rise from $35 to $70 a barrel this year into $140 a 

barrel next year and $280 the following year. Central banks must 

learn to distinguish these one-time increases from the sustained inflation that they and only they can cause. 

A great part of the dispute, I believe, in the economics profession 

about what to do about inflation has to do with the fact that some 

of us define inflation the way I do, sustained increases in the price 

level continuing over time, and others define it as any increase in 

the price level. Those are two different things and it is useful whatever names are applied to them, it is useful to keep them separate. 

Some make the distinction, or appear to, when they describe 

their role as preventing a surge in oil prices from increasing the 

expected rate of inflation. Many market watchers do not make the 

distinction and some official statements are misleading. Central 

banks should clarify their role and their view. 

Separating one-time changes and persistent changes is a major 

problem. Decades ago, in 1948, the late distinguished economist, 

Jacob Viner, wrote to the President of the New York Federal Reserve to caution him about over-responding to temporary transitory 

changes. 

Viner wrote, ‘‘You certainly have the advantage over me of being 

closer to the market.’’ But it may not be an unmixed advantage. 

The ticker may loom too large in your perspective and what from 

the point of view of the national economy are molehills may appear 

to you as mighty mountains. Mistaking one-time price changes for 

inflation can be costly. An oil price increase is a tax on consumers 

and producers whether it comes as a restriction of supply as in the 

1970’s or mainly an increase in demand as currently, it is not a 

monetary event. Reducing money growth to roll back the effect of 

the oil price increase is costly. The first effect is to reduce output 

over its growth rate. Further, letting the price level rise but holding the maintained rate of inflation unchanged is a low-cost way 

of reducing real income. A reduction that must be made to pay the 

oil producers for the real increase in the cost of their product. 

Central bankers and markets must be much more, must become 

more familiar to the duration of changes, whether the change is 

permanent or temporary. They cannot do that if they adjustment 

policy fully to new information at each meeting. 

17

I am writing the history of the Federal Reserve. I have read 

more Federal Reserve minutes than any living person would ever 

want to do and I can tell you that most of the discussion, most of 

the discussion at the meetings has to do with very near-term 

events. Trying to interpret whether the inventory increase is going 

to persist, whether the unemployment increase reported this month 

is going to persist, whether the big surge in prices this month is 

going to persist. The answer is they do not know. They cannot 

know. So they should direct their policy at a longer-term target. 

They must hold to medium term strategies. One reason the economy’s performance has been better in recent years is that to a large 

extent they have done that. Central banks should announce and 

follow a policy rule that seeks stability over the medium term. 

Thank you. 

[The prepared statement of Dr. Meltzer can be found on page 60 

of the appendix.] 

The CHAIRMAN. Thank you, Mr. Meltzer. 

Professor Galbraith, the point about inflation—we have that 

paper that you mentioned on that, and I—many people in America 

have felt, in addition to the overall growth pattern, some of the 

negative impacts of globalization, it does seem to be—you’re telling 

us that there are some benefits for them they haven’t been able to 

reap either, namely that—well, we are told reduction in prices, advantages for consumers, that that’s one of the results of 

globalization and trade. You’re kind of generalizing that and saying 

that there is a basis for taking that into account in policy. 

So let’s—what is the policy implication of your view that inflation 

has been substantially—the possibility of inflation is substantially 

diminished by economic trends for the context specifically of monetary policy. What should that mean to the Fed? 

Mr. GALBRAITH. Well, globalization came very abruptly and 

roughly to the United States in the early 1980’s. A great many industries were downsized and offshored, and a great many workers 

lost their jobs. The system of wage setting that we had up to that 

time greatly diminished in importance, largely disappeared. 

We also got afterwards a rising tide of imported goods, low-cost 

imported goods from oversees. Those two things had a sustained, 

permanent effect on the previously inflationary structure of the 

economy. That’s the basic point. 

What that meant was when we got to the 1990’s, we, in fact, 

were able to pursue a full employment monetary policy, and inflation didn’t return. What we got instead when we got to full employment was sustained increases in productivity. Productivity turned 

out to be dependent on, endogenous to, the state of the economy. 

It improved when labor became scarce. 

So the implication I would draw from this for the present is that 

we can have a full employment policy in this country. It does not 

by itself pose a risk of higher inflation, and that is the key point 

which I don’t think—the evidence does not suggest that the Federal 

Reserve has taken that point on board. The evidence suggests that 

they are still very wary of low rates of unemployment and that 

they tend to regard those low rates of unemployment as intrinsically risky. But I would suggest that they aren’t. 

18

Inflation could return, but if it does return, it will return as a 

result of the deterioration of our international position rather than 

as a result of an eruption of wage pressures in the domestic economy. And it seems to me that’s a different set of problems and one 

that can’t be easily addressed simply by manipulations of the interest rate. 

So the Federal Reserve ought to be supportive of a full employment policy. 

The CHAIRMAN. When you say the danger of inflation is deteriorating internationally, is this a dumping of American debt that people hold? 

Mr. GALBRAITH. Precisely. We do supply the reserve currency to 

the world. We greatly benefit from the willingness of foreign central banks and institutions to hold American dollar assets. If they 

decided that they would prefer euro in large quantities we would 

have a very serious problem and that would include inflationary 

consequences. 

That’s an issue which we may have to deal with in the future, 

but it’s not a question that can be dealt with by short-term monetary policy decisions. 

The CHAIRMAN. Professor Meltzer, you’re eager to say something. 

Mr. MELTZER. Yes. I don’t think that’s factually correct. 

The CHAIRMAN. Which part? 

Mr. MELTZER. The part of what he just said about the reason inflation has come down. Productivity growth did not begin, did not 

rise until 1990. Inflation was cut, more than cut in half in the 

1980’s. It was 1982 when Paul Volcker and the Fed gave up the 

attempt—gave up the anti-inflation, the strict anti-inflation—under 

pressure both from the Congress and from events abroad, gave it 

up. But growth rate of productivity does not increase for at least 

another decade, so it’s hard to put it. 

Second, how much can the growth rate of productivity, which is 

where globalization is going to mainly affect the economy, how 

much can it affect the inflation rate? I mean the growth rate of productivity is 1 percent, 11⁄2 percent during part of this period higher. 

The inflation rate is substantially lower by much more than 11⁄2

percent. 

So it has to do with something else. That something else is the 

much better monetary policy that we’ve had. 

Mr. GALBRAITH. Just to clarify, I think we don’t have a disagreement of facts. What I was saying was that the rise in productivity 

which occurred in the late 1990’s—in the timeframe that Allan is 

referring to—was what happened instead of a rise of inflation that 

many predicted when unemployment fell very low. 

It turned out that we got a great deal of productivity growth at 

precisely that period. 

The CHAIRMAN. Let me ask—Professor Friedman, I think by the 

way, is very clear on it. Alan Greenspan is seen by many as a great 

conservative. In fact, during the 1990’s, he was arguing that we 

could sustain a lower unemployment rate without a risk of inflation. He was in fact acting on that premise, contrary to what—a 

lot of conventional liberals. 

I mean the New York Times—I remember one great event—reporting a story in the New York Times financial page which said 

19

that if unemployment had remained below the level that would 

cause inflation for 11 quarters without causing inflation and therefore we should just wait for the inflation rather than thinking that 

maybe that equation they had was not accurate. I think that was 

a very important time. 

Let me just close my time with Professor Friedman. You’ve been, 

to my mind, very persuasively critical of the notion of inflation targeting. How should the Fed balance the dual mandate? Is there a 

big conflict, and if there is, how do they balance it? 

Mr. FRIEDMAN. Mr. Chairman, on the balancing of the two parts 

of the dual mandate, I think the word is, precisely, balanced. What 

is wrong with inflation targeting is not that the Federal Reserve 

would suddenly have some objective for inflation that they do not 

already have. 

Allan Meltzer is exactly right in this regard. Everybody in the 

market has a reasonably good understanding today, and many people in the general public too, that what the Federal Reserve would 

like to see is somewhere between 1 and 2 percent for some appropriately defined inflation rate. 

The issue is that if the Federal Reserve were to announce publicly a specified numerical inflation rate without simultaneously 

having some kind of a numerical description of what unemployment rate or rate of economic growth it were pursuing then we 

would be back in a situation like, for example, when the Federal 

Reserve was pursuing monetary targets. 

Many of us remember well what it was like on Thursday afternoons when the Federal Reserve had a monetary target. If you 

happened to have been standing on the trading floor of any brokerage firm or any bank at approximately 3:15 in the afternoon, every 

trade would stop. The room would fall into a hush as everyone 

would wait to see what number the Federal Reserve announced at 

3:30 for the previous week’s money supply, as if there were any information of any serious economic content in one week’s money 

supply movement. 

Now why is this the case? The reason is clearly that once a central bank or for that matter any other economic policymaker states 

a clear numerical objective, then the public wants to hold the policymaker accountable for that objective. 

If the Federal Reserve felt in a position to be evenhanded, and 

have a numerical target for inflation and a numerical target for the 

growth rate or the unemployment rate, then the problems of 

undoing the dual mandate that I was describing would go away. 

But the Federal Reserve has been very articulate, I think, about 

why they do not want or are not able to announce a clear numerical target for growth or for unemployment. And in that context, I 

think it would be a mistake for all of the reasons that I described 

to have one for inflation. 

Now what should they do? At a hearing like this, I suppose it’s 

always somewhat awkward to say that current practice is pretty 

good, but I think if one reads carefully the statements that the 

Federal Reserve Chairman makes when appearing before this committee and its Senate counterpart, I think one sees the thought 

process of trying to steer one’s way between the tensions that inevitably arise in the short and medium run between wanting to have 

20

unemployment as low as possible, and growth as rapid as possible, 

and yet not wanting to ignite either inflation or inflationary expectations. 

Now no doubt these reports can be made better, and I agree with 

what both Allan Meltzer and Jamie Galbraith said about the role 

of this committee and its Senate counterpart in causing these reports to be written and questioning the Federal Reserve Chairman 

when he appears, but I think the process of talking through and 

thinking through and questioning through what the conflicts and 

tensions are is exactly right. 

Let me finally offer if I may— 

The CHAIRMAN. Quickly. 

Mr. FRIEDMAN.—just one comment on the exchange that you and 

Jamie and Allan were just having. 

A key way to understand how international influences have affected our economy in the last 20 years is to ask whether, 20 years 

ago, any of us would have believed that the United States, in the 

context of a falling dollar and huge increase in oil prices, would be 

able to have 2 percent inflation and an unemployment rate in 

which the digit in front of the decimal point is a four? 

That was exactly the achievement that Alan Greenspan delivered 

when he was the Chairman of the Federal Reserve. In September 

of 1994, the unemployment rate first dropped below 6 percent. A 

widespread view announced in the Wall Street Journal, the New 

York Times, and elsewhere, and widely shared among economists, 

was that this would be inflationary, and therefore, the Federal Reserve had better tighten monetary policy. 

But Alan Greenspan was explicit that he saw a combination of 

increasing productivity and, importantly, international pressures 

that would prevent firms from having pricing power and therefore 

avoid the need to tighten policy, and therefore, he didn’t. 

Three years later, in September of 1997, the unemployment rate 

for the first time in a very long time— 

The CHAIRMAN. We have to move quickly. 

Mr. FRIEDMAN. —dropped below 5 percent, and once again everybody expected this to be inflationary and Greenspan again didn’t 

tighten. I think this was a tremendous achievement, but it was 

based on recognizing both the role of productivity and the importance of international competition. 

The CHAIRMAN. I would say that there was reference to the role 

of this committee and greater transparency, and I have to, I think, 

give deference to Henry Gonzalez whose picture is up there. During 

my time in this committee, he was a consistent advocate of greater 

openness. He was told by people at the Fed that what he was pushing for would be destructive. 

When I got here, they didn’t announce what they did. The FOMC 

didn’t announce for 6 weeks what it had done. They denied that 

there were minutes. Meltzer would have had to find another topic 

because they used to deny they even had the minutes until we 

found them. 

And Henry Gonzalez was a very effective advocate for that. The 

other thing I would notice, and it just has occurred to me, is we 

talked about this at—particularly what Professor Friedman said. 

There was this substantial absence of expected inflation and it 

21

doesn’t seem to me that an anchoring of inflation expectations was 

a major factor in that in the 1990’s. 

Mr. Paul. 

Dr. PAUL. Thank you, Mr. Chairman. Adding to the case for 

transparency, I would like to see the day that the Fed returns to 

at least reporting M3 unless they’ve decided money supply has no 

value, but I want to deal a little bit with inflationary expectations 

and the future of the dollar on international exchange markets. 

We talk about inflationary expectations, and I think we have to 

recognize that expectations are very subjectively motivated, and I 

think it’s very important. But in reality, it has to be in relationship 

to the money supply. But inflationary expectations are really the 

reverse side of the value of the dollar, and we can’t ignore that. 

Today the dollar is having a bit of a problem on the international 

exchange market, and I’m just wondering what the future will 

bring. My question, as I conclude this short statement, is what will 

the future of the dollar be in the short run in the next 1 or 2 years? 

Already we have some evidence that there has been an attack on 

the dollar. As far as the euro goes, it has lost more than 9 percent 

in the past year. It has lost more than 10 percent against the 

pound. And lo and behold the Indian rupee, if you had been in Indian rupees, you would have made 13 percent, so that doesn’t say 

a whole lot for a sound currency. 

As a matter of fact, if you had just gone north and invested in 

Canadian dollars, in 6 months, you could have made 11 percent. So 

it seems to me that if you want sound money and stable prices you 

have to deal with that, you can’t ignore it and resort to saying, 

well, the CPI is going up at 2 percent. The CPI, if you use the old 

CPI calculation, which I see no problem with, it’s going up over 10 

percent. 

And besides, poor people and the middle class have a higher inflation rate than other people. If you have to pay for medical care 

and food and fuel, you might have an inflation rate of 15 percent, 

for all we know. So it ultimately is the value of the dollar. 

Dr. Galbraith mentioned that the dollar, you know, is—inflation 

and the dollar can be weakened in times of war. And certainly the 

1970’s rushed it in after we had the guns-and-butter attitude of the 

1960’s, and it is true, it isn’t the war that causes the inflation, it’s 

the spending, and it’s the monetizing of the debt that causes inflation. And we can well expect to see a lot more inflation coming because of this tremendously excessive spending today as well as no 

attempt to cut back on entitlements. 

But the dollar, up until recently, may well have been much 

stronger than it really deserved. There was a false trust. It’s a reserve currency, and there’s a fair amount of trust. And I think I 

sense from Dr. Galbraith that there is a concern; maybe attitudes 

will change. 

And the characteristics of so many currencies over history is that 

the confidence in currencies can gradually decrease and then they 

can collapse because there’s a subjective element to it. And this is 

my great concern, what will the future bring for the dollar because 

if the dollar goes down, you have inflation. 

Already we have Kuwait asking for euros, and we have the Iranians not taking dollars. This to me seems to be a very, very seriVerDate 0ct 09 2002 13:24 Nov 13, 2007 Jkt 038390 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\38390.TXT HFIN PsN: TERRIE
22

ous problem if the dollar is to be rejected. Of course, the Chinese 

aren’t going to attack the dollar, but they themselves indicated that 

they might buy a few more currencies other than just dollars. 

And we had a serious attack on the dollar in 1979 and 1980. It 

was rescued with 21 percent interest rates. So my question is, are 

we moving into a new era? Will the IMF be able to bail us out? 

How serious is this? Or should we forget about it and just say, 

well, CPI is not going up, and unemployment is high, and nobody 

seems to be suffering? Or should we really be concerned about 

some of these indicators now that show that our dollar is under attack? 

I’d like to see if I can get comments from you about what you 

expect in the next 1 to 2 years, with regard to the dollar. 

Mr. FRIEDMAN. Well, Congressman, I’m happy to address the dollar, although I have to say that if what you’re really interested in 

is the outlook for currencies over something like a 1-year horizon, 

the last group of people in the world whom you should ask is professional economists. Certainly that would include all three of us 

sitting before you today. 

But if you’re interested also in the longer run perspective, say a 

half-a-decade or a decade, I think the fears that you express are 

quite well-founded, but in a slightly different way than you express 

them. The way I would put it is that today the United States is 

paying for what we buy from abroad, over and above what we receive from what we sell to people abroad, an amount equal to approximately 61⁄2 percent of our national income. 

If any country other than the United States were to do this, this 

would be unanimously recognized as irresponsible. Now as Jamie 

Galbraith mentioned, we have the privilege at the moment of 

issuing the world’s reserve currency, and therefore people don’t 

normally use the word irresponsible to refer to us in this way. But 

it is irresponsible, nonetheless. And the further question is whether 

it is sustainable. The answer there is clearly no, and so what will 

happen as a result? 

One thing that could happen is that we would find a variety of 

ways of increasing our country’s competitiveness, increasing what 

we save, and reducing what the government borrows. And putting 

all of those together, we would be able to reduce the size of our 

international imbalance in such a way that we would avoid a major 

decline in the dollar. 

Failing those steps then, I think it’s clear that the dollar will 

have to move toward a lower exchange value compared to the currencies of the other countries with whom we trade. And then the 

crucial question from the perspective of your inquiry is whether 

that would happen abruptly and in a disorderly way—you point entirely correctly to the events of 1979 and 1980—or whether it 

would happen over a longer period and in a much more orderly 

way. 

The United States currency has declined enormously over the 

past 40 years compared to, for example, the Japanese yen and the 

Swiss franc. But nobody looks at this as a disaster. This is just the 

ordinary working of differential competitiveness and differential inflation rates, and there’s no reason to think that would be harmful 

to the economy now. 

23

The key issue is whether we move in a timely fashion on a whole 

variety of fronts—saving, government borrowing, competitiveness, 

and education—in a way that makes our workforce more productive. All of these ways that would allow us to narrow our trade deficit by at least, let us say, half, or whether we continue to borrow 

from abroad in a way that really is irresponsible, in which case 

then we certainly will risk the kind of eventuality that you’re concerned with. 

Mr. GALBRAITH. I would take—well, agreeing with many things 

that Professor Friedman just said, I would take a somewhat more 

sanguine view of the stability of the system, at least in the short 

term. 

We issue the world’s reserve currency. Other countries hold it because we provide a very liquid and very safe financial asset, more 

liquid even now than the euro is. And they have their reasons. The 

Chinese have their reasons in particular for accumulating the reserves that they accumulate. They are engaged in managing a massive project of urbanization, massive growth of exports, and the accumulation of dollars is an artifact of that. 

So they’re not inclined to destabilize the system, and there are 

only a few players who are large enough that their actions would 

be decisive. I think it’s possible that this system could go on for a 

while. As long as the world economy is growing, the corresponding 

demand for reserves will be there, and the corresponding current 

account deficit will be there for the United States. 

The problem, as I see it, is that the system, like all monetary 

systems, is inherently precarious. It is subject to a shock, a crisis, 

a panic, a collapse down the road. The form of that, I think, is very 

difficult to predict. It could be incident to a political crisis of some 

kind. 

We should be thinking strategically about how to deal with that 

should it occur. And that’s the issue, it seems to me, that we ought 

to be focusing on. 

Mr. MELTZER. I think you’ve raised an appropriate long run 

question. As Professor Friedman said, not just economists, no one 

knows what’s going to happen with the dollar over any short period. 

The great economist Keynes is alleged to have said that if you 

owe your banker $100 and can’t pay, then you have a problem, but 

if you owe your banker $1 million and can’t pay, then he has a 

problem. So with the Chinese, they have $1.2, $1.3 trillion dollars. 

There’s not much that they can do to get out of that position without hurting themselves along with us and many other people, and 

they show every evidence of collecting more no matter what they 

say as they follow the Golden Rule of Paul Samuelson, never give 

the forecast and the date in the same sentence. So they say, we are 

going to revalue our currency, but they never quite say when. 

But the long-term problem is a serious problem. That is, if you 

said over the long term what will happen with the dollar you have 

to believe that over the long term the dollar is going to decline in 

value. Why is that? Basically because we invest more than we save; 

we save too little. 

Look at the political campaigns that are now well underway. 

What are we hearing? We hear a lot about the need for more more 

24

money spent on health care. That may be a very desirable thing 

to do and say, but very little is said about how we’re going to pay 

for the additional health care or even for the present heath care 

programs. 

The unfunded liability in health care is something in the order of $60 trillion. Nobody has a good idea. Nobody even wants to discuss how we’re going to get $60 trillion to pay for that. So if you 

add that to the Social Security program, which is small compared 

to the health care program, and the health care programs are getting bigger, it’s hard not to believe that we’re going to continue to 

spend at a faster rate than we save. That cannot be resolved with 

a strong dollar. 

So finally I’d like to say we always have to make a choice between whether we want domestic price stability or foreign exchange stability. We can’t do both with the same instruments. 

We’ve chosen to have domestic price stability, so the Federal Reserve’s policy, the government’s policy, and the Congress’s policy is 

to live in hope, as Jamie Galbraith said, that the dollar will decline 

gradually. 

They have no policy to make sure that’s going to happen. They 

just hope that’s what’s going to happen. 

The CHAIRMAN. The gentlewoman from California. 

Ms. WATERS. Thank you very much, Mr. Chairman and members. 

I’d like to thank our guests for being here today. And I would 

like to go back to some of the discussion that was afforded us by 

Dr. James Galbraith about income equality and monetary policy. 

Mr. Bernanke was here, I don’t know, several months ago, and 

I complimented him on several speeches that he had made on income equality. However, I was basically jeered by one of my colleagues who said something to the effect of, well how could you 

possibly be that passionate about a speech by Mr. Bernanke on income equality. But I was, because I had not heard that issue coming from a Chairman since I’d been here. 

I had been here since Mr. Greenspan was here, and I interacted 

with him a lot; but, I don’t believe that he saw the relationship between the conduct of monetary policy and income equality. I think 

Chairman Bernanke does. And I would like you—even though you 

did so, I think, in your presentation, and there may have been 

some additional discussion—to explain why there is such a debate 

about the role of monetary policy and the problem of income equality? What can you tell us about the divergent perspectives on this 

issue? 

Are you suggesting, or have you said to us, that there certainly 

is a relationship, some correlation between the conduct of monetary 

policy and income equality? If there is such a correlation, what 

might the Fed do to address inequality and income over the long 

term which appears to have grown in the past several years? 

Mr. GALBRAITH. A great deal of this discussion—and Professor 

Meltzer alluded to it in his remarks—is couched in terms of the 

functioning of the labor market, the capacity of workers to meet the 

demands of employers to have the appropriate sets of skills. 

We found in looking very carefully at the way in which the inequality in structures of pay actually received by workers behaves 

25

over time—and we’ve measured it very precisely going back as far 

as 1947, that a large part of the movement of inequality is very 

closely related to the overall performance of the economy. 

That is to say, when times are bad, it is low wage workers—who 

work variable hours, who work at hourly rates, who have overtime 

or don’t have overtime—who suffer the most. And they suffer more 

than higher paid workers, workers in more stable industries, workers with regular salaries. 

When times are good on the other hand, as they were in the late 

1990’s, it’s the low paid workers—whether they’re skilled or unskilled—the workers at the bottom of the scale who gained the 

most rapidly. 

Ms. WATERS. May I interrupt you for just a moment because I 

want you to include in your discussion some of my concerns about 

the exportation of jobs to third world countries for cheap labor? 

When I first got elected to office, the Goodyear plant closed down 

in my district, and those were well-paid workers who had been 

there for years. They sent their children to college, they bought 

homes. What I have not seen in that community is the kind of jobs 

and incomes tied to Goodyear since that time. 

Mr. GALBRAITH. Certainly that has happened, and certainly a 

great many high quality blue collar jobs have been lost over the 

past couple of decades. But what happened in the late 1990’s, in 

particular, was that we had, as Ben Friedman referred to, a sustained period of very low unemployment. It was correspondingly a 

good period for relatively low wage workers. They gained ground. 

They worked a lot of hours. They had overtime. They had continuous employment. And that then enabled poverty rates, particularly for minority populations, to fall to levels they had not seen 

before. 

So it’s possible for a well-functioning economy in other words 

that pursues and reaches the objective of full employment to greatly reduce the inequality which is experienced in the labor market. 

That is to say, inequality between the wages paid to low wage 

workers and those paid to higher paid salaried and managerial employees. 

There are other aspects to inequality. Inequality that emerges 

from stock market incomes is an entirely different phenomenon. I 

don’t want to address that. But just focusing on what happens in 

the labor market because that is where one hears all the talk about 

the need for education and skill development, it turns out that one 

can have a very material effect in the short run by pursuing a high 

employment strategy. 

These two things are in fact not distinct. They are connected, and 

that’s something that makes it relevant to monetary policy. 

Ms. WATERS. Thank you very much. I yield back. 

The CHAIRMAN. The gentleman from Delaware. 

Mr. CASTLE. Thank you very much, Mr. Chairman. Dr. Galbraith, I’m struck by your comment, which has been repeated in 

the questions too, in your written testimony, and in your oral testimony, about inflation being permanently defeated in the early 

1980’s. 

I guess it’s in the eyes of the beholder to a degree because certain 

things come to mind, particularly higher education, in which a lot 

26

of you are involved, which has had tremendous inflationary aspects 

to it, medical insurance and the health assurance that’s attended 

to it, as you can imagine, the cost of housing, which has had tremendous inflation as well. 

And I would agree with you that in the case of many goods, the 

quality has improved and the cost has stayed roughly the same. 

But in those instances, the quality arguably is roughly the same 

as it was, and the cost has gone up tremendously. 

One key element in all of these is that there has been government involvement, as we know, with health care obviously, Medicare, Medicaid and other programs, lending on higher education 

and the same thing with housing, mostly through this committee. 

What does this suggest about the wisdom of expanding government’s role in the economy, or is that unrelated to the three areas 

which happen to have had real inflationary growth? 

Mr. GALBRAITH. Well, I think, Congressman, that you’re entirely 

right, that these are areas in which economic activity and to some 

degree pricing power has been sustained in part because these are 

areas where you have a public-private system in which the backstopping influence of the government is there. And as a result we 

have had, in part—that’s part of the reason why we’ve had a rising 

share of GDP devoted to health care, a very high share by comparative standards devoted to higher education and a very high 

proportion of the population who owns their own homes compared 

to other advanced countries. 

I tend to regard these things as strengths of the American economy, actually, areas in which we perform quite well in terms of delivering high quality services to at least part of the population. Obviously health care has at least major problems with the part of the 

population that isn’t insured, with the costs of certain services and 

with the costs of the insurance system that many who are privately 

insured have to bear. But it is a dynamic and technologically advanced sector that delivers a lot of services to the population. 

So one has to balance these things. And I think that the question—if your question is, could one have done better by leaving 

these sectors entirely to the private market, my answer would be, 

I don’t think so. I think that one would have run the risk of not 

having the services and not being able to sustain the quality that 

we’ve seen. And so I would see the problem of controlling costs as 

something that has to be addressed in each of these sectors. It essentially can’t be evaded. It’s part of the public policy issue that the 

system that we have presents. 

Mr. CASTLE. Dr. Meltzer. 

Mr. MELTZER. Can I just add a little bit? If you look at the research, and there’s tons of it, on education and what makes a big 

difference, the answer that pops out at you everywhere is family 

structure. If you’re a middle class family, you’re helping the kids 

do their homework. That’s not true of the whole population, and 

that’s the biggest single problem that we have to solve, and it’s not 

an easy one to solve. 

We can substitute in the public sector for that by having things 

like early childhood education. There seems to be some evidence 

that early childhood education, if it’s maintained, not if you start 

27

it in the first grade, if you start it well before the first grade, that 

in fact it has some effect that doesn’t wear out. 

A lot of these programs, they have an initial effect, they raise the 

standards for the children, but then by the time they get to the 

fifth grade or the eighth grade, it’s gone. There seems to be some 

evidence now that if we start it early and maintain it that maybe 

we get somewhere. In effect we replace the family with doing the 

discipline and the training. 

Mr. CASTLE. Let me ask you this question, or maybe to anybody 

who would like to answer, and that is the relationship of education 

to employment and to wages. I mean this is something that’s a 

given. We’ve all talked about it. We’ve all seen the statistics that 

if you graduate from college you earn this much more, and college 

that much more, or whatever. 

From an economics point of view, is all of that rhetoric that generally we talk about, and others talk about, a given or is there any 

inaccuracy to it in terms of employment for this country? Should 

we be looking to education to advance employment as far as the future is concerned? 

Mr. FRIEDMAN. I’ll speak to that, Congressman. 

Mr. MELTZER. Let me just say it not only is true what you said, 

that you get a big jump because of college education, but you get 

a bigger jump now than you did earlier. 

Mr. FRIEDMAN. Yes, Congressman what you say is absolutely 

true. And importantly, the origin of much of the wage inequality 

that we’ve been talking about this morning has been the widening 

of these wage differentials. The amount by which a college educated person in the United States earns more than a high school 

educated person has doubled over the past generation, and so the 

incentive both for an individual to go to college and also for the 

public policy process to provide opportunities for people to go to college is much greater than it was before. 

The same thing is true also for the kind of early education policy 

that Allan Meltzer was just describing. Many years ago, Project 

Head Start, for example, got a very bad rap because all we had to 

go on in evaluating it was questions like, does it increase students’ 

test scores. If you think about how you would evaluate a program 

after 2 or 3 years, of course, that’s all you can measure. 

But now we’ve been at Head Start for 30 years and we can address questions like, does it affect who graduates from high school 

12 years later, does it affect who goes on to college, and does it affect who has a stable job by age 23? We can even address pathology 

questions like, does it affect who gets in trouble with the law while 

in high school, or does it affect which of the girls get pregnant 

while in high school? 

In every case, the answer to that question is ‘‘yes.’’ Yes, the incentive both for individuals to get educated is much greater today, 

but we shouldn’t just stop there. There is also an important incentive and signal for what the education process, which is mostly a 

public institution in the United States as you point out ought to 

be doing. 

Ms. WATERS. [presiding] Thank you very much. 

The gentlelady from New York, Mrs. Maloney. 

28

Mrs. MALONEY. Thank you. Dr. Galbraith, in your testimony you 

raise the charge that there is a presidential election cycle for monetary policy. Monetary policy is more restrictive when a Democratic 

Administration is in office but more permissive when a Republican 

Administration is in office. Does that mean that you expect monetary policy to be less restrictive heading into 2008? 

Mr. GALBRAITH. It is a statistical finding and it relates to the 

year before a presidential election, compared to other periods, after 

controlling for the position of inflation and unemployment. And it’s 

a remarkably stable finding. So it does suggest that there has been, 

going back to 1969, a pattern in which this variance in monetary 

policy has occurred in the year before presidential election. 

I would make no prediction about what Chairman Bernanke and 

his colleagues may do in the next year as we approach the presidential election. I would hope that this pattern would not persist—

that if I ran the study 2 years from now, I would find that this 

cycle was an exception. 

I think it’s worthwhile, though, for this committee to be aware 

that this pattern does exist in the data. The committee should be 

wary of interest movements in future presidential election cycles 

that are otherwise difficult to explain. You should be prepared to 

ask questions so that a more stable policy can, in fact, emerge 

going forward. 

Mrs. MALONEY. Professors Meltzer and Friedman, would you 

care to comment on the theory that there is a presidential election 

cycle to monetary policy? 

Mr. MELTZER. Yes, as I said earlier, I have been writing the history of the Federal Reserve, and I would be glad to share with you 

1,100 pages of manuscript covering just the period from 1951 to 

1986. It is certainly true that in 1968, President Johnson decided 

that he had to raise the tax rate and tighten policy in December 

of 1968, after the election; he didn’t do anything before the election. 

The CHAIRMAN. We should note that he wasn’t a candidate, so 

that made it a little easier for him. 

Mr. MELTZER. No, but his vice president was a candidate. It may 

have had some effect, it may not. 

In 1971, 1972, what happened? Well, President Nixon put on 

price controls, all right, following out what was then the belief that 

you couldn’t stop the inflation by other means without having serious loss of unemployment. 

In 1975, 1976, Republican Administration, President Ford was in 

office. President Ford was an anti-inflationist and the Federal Reserve tightened in 1975 in preparation for the 1976 election. And 

many people believe that’s one of the reasons that President Ford 

lost the election. 

The next case is Jimmy Carter. This is one I’m very familiar 

with. I had a meeting with Bert Lance right after the Carter Administration came in. I told him that they were doing an expansive 

policy at that time. They were going to pay for it later very likely 

by having high inflation when they wanted to run for reelection 

and not to do that. 

And he said to me, ‘‘Well, Walter Heller was just in here and he 

said the opposite of what you just said. What would you say to 

Walter Heller?’’ 

29

And I said, my answer to Walter Heller would be that if you follow my proposal, you can always expand before the election, but if 

you follow his, you are going to have to contract. And of course, we 

did get a big inflation, partly because of the oil shock, partly because of poor Federal Reserve policy. 

So I won’t go through all the others—1984 we now have the 

Volcker disinflation, right? It was more expansive in 1983 and 1984 

because the disinflation was over. 

So we can go through those. I just don’t think—the Fed is in 

Washington. It is, of course, aware of politics. How can you not be? 

How can you live in Washington and not be aware of politics, but 

it mostly does a reasonable job of trying not to play politics because 

it knows that if it plays that game, it is going to lose. You’re not 

going to let them play that game and you’re certainly not going to 

let them play the game that Jamie Galbraith is talking about. 

So there may be statistical evidence that comes true. I just don’t 

believe if you look at them one by one, that you see a pattern there 

which says that they’re systematically trying to do things. And I 

can tell you that very rarely at a Federal Reserve meeting does 

anyone ever mention political facts. The only person I can remember doing it regularly was Preston Martin, and he didn’t stay very 

long. 

Mrs. MALONEY. My time has expired. Dr. Friedman. 

Mr. FRIEDMAN. There have been a few episodes that clearly meet 

this test. The most obvious one involved Arthur Burns in 1972, and 

it has been widely reported in the press because of various leaks 

by people who were present. 

But the key thing to remember is that it’s not necessarily the 

case that the majority of the people who are serving as members 

of the open market committee are appointed by, or even sympathetic to, any particular person who is running for President at the 

moment. The Federal Reserve Bank Presidents tend to stay in office for a very long time. Members of the Federal Reserve Board 

don’t necessarily stay for their full 14-year terms, but typically it 

has been the case that a person who is running for President, even 

if it’s an incumbent running for reelection, can look at only a small 

number of members of the open market committee as people to 

whom he would have some connection. I would, therefore, find it 

surprising as well if this were a very strong regularity. 

The CHAIRMAN. The gentleman from Missouri. 

Mr. CLEAVER. Thank you, Mr. Chairman. It is an honor to have 

the opportunity to have some dialogue with the three of the best 

brains in our country and I’m going to ask two questions in one 

just to reduce the time, since you probably are interested in having 

lunch. 

I’m very much concerned over the fact that we have probably less 

than another $800 billion to spend before we reach the debt ceiling. 

And with us borrowing a considerable amount each month for the 

war in Iraq, we’re borrowing probably close to $14 billion, certainly 

more than $10 billion each month, so I think it is like $600,000 a 

minute. 

Pretty soon we’re going—this is the question. Do you believe that 

in a short period of time, certainly within the next 2 years, the support of the war is going to require a vote of Congress to raise the 

30

debt ceiling beyond $9 trillion. And if so, how does that speak to 

the world, considering that China and Japan are buying a lot of 

our debt? 

The second part of it, which has some impact on it, I believe, and 

that is—since the Great Depression, we have not had a minus savings rate in this country. I think in the Depression it was like –0.5 

percent. The second part of the question is do you think—we hear 

the words that the economy is going fine, everything is good, everybody should be happy, and if that is so what is happening with the 

savings rate considering that the Asians are close to 20 percent? 

And because we have no savings rate in this country, the domestic 

borrowing by the government is almost nonexistent; is this dangerous for our capacity to defend this Nation as well? 

Dr. FRIEDMAN. Congressman, I’ll address primarily your first 

question but also the second because the two are clearly related. 

The answer to your first question is very simply, ‘‘yes.’’ If we continue with the current levels of government spending and government taxing, then within some quite finite period, Congress will be 

called upon once again to raise the debt ceiling. 

Now some people think that this ritual of having to raise the 

debt ceiling is pointless. I disagree. I think that it serves a useful 

function of focusing people’s attention on the extent to which the 

government is borrowing as a result of spending more than it takes 

in. 

At the moment, a large part of that excess spending is going for 

Iraq, but the same would be true if it were spending for something 

else. The real issue is the balance of the spending and the taxing. 

But, the government’s debt today, while large in absolute dollars, 

is actually smaller than it was some time ago. At the end of World 

War II, the government owed more than a dollar of debt for every 

dollar of our national income. Over a period of years, by running 

only small deficits, the government got the debt ratio down to only 

26 cents on the dollar of GDP. It then went up dramatically between 1980 and 1993. Then it came down again during the Clinton 

Administration, and now under the Bush Administration, it’s going 

back up again, but not as dramatically as it had been rising earlier. 

In a world in which the Baby Boom generation is going to retire 

very soon, we have this liability that Allan Meltzer associated with 

keeping the Medicare system going. Nobody knows how we’re going 

to manage to do that. We also have borrowing from abroad that’s 

equal to 61⁄2 percent of our national income. We should be running 

a surplus now, not running a deficit. The useful purpose of the debt 

ceiling ritual, I think, is to focus people’s attention on exactly that 

problem. 

Mr. CLEAVER. Dr. Friedman. Before you move on to Dr. Galbraith, when you were saying that the debt today is probably 

smaller than it was in World War II, I’m not sure what the loan 

guarantees were then, but the loan guarantees that we have today 

are not even included in this $8.3, $8.4 trillion debt that we have. 

Mr. FRIEDMAN. That’s exactly right, Congressman. My reason for 

focusing on the actual secured indebtedness, the part that you were 

describing, was that’s what is involved in the debt ceiling. When 

Congress votes to raise the debt ceiling, it isn’t about all of the unfunded liabilities, nor the credit guarantees. What that’s about is 

31

the debt securities that the U.S. Treasury issues. To the extent 

that we also have $60 trillion of unfunded Medicare liabilities, they 

are completely separate from the amount included in the debt ceiling that you will inevitably be asked to raise within the next short 

period of time. 

Mr. GALBRAITH. Here Ben Friedman and I do have something of 

a difference of view. 

I would be very wary of measures that tried to move directly 

back toward a budget surplus in the present environment because 

those measures would tend to slow economic activity, and they 

would tend to put people out of work. It would either be by raising 

taxes or by cutting expenditures on public programs. They would 

tend to cause direct harm. 

And the benefit is at least somewhat uncertain, perhaps even 

very uncertain. So given the choice between a strong economy and 

public deficits which, while large in dollar terms are not historically very large in relation to GDP, and as Ben said, a debt burden 

which is not historically out of line—it’s lower than it was in the 

1940’s and through much of the 1950’s—I would be careful about 

making radical changes in fiscal policy just because the deficit is 

high, and the debt is going up. 

I would say, since you mentioned the war, and since talking earlier about the degree to which our position depends upon the confidence that the world has in our economic dynamism of viability 

and prosperity, that the war is very troubling in this respect. It 

raises questions about the extent to which the United States really 

can anchor the global security system on its own. 

And to the extent that those uncertainties and anxieties exist in 

the world, you’re going to see other governments and foreign players, financial players, diversifying, hedging their bets. I would like 

to see us consider the global security situation as part and parcel 

of our global financial stability. 

These issues tend to be considered entirely apart, but they are 

not entirely unrelated. And we could find that if we make serious 

errors in one area, that it comes back to be very costly in the other. 

The CHAIRMAN. Oh, I’m sorry. Go ahead, Professor Meltzer, did 

you want to— 

Mr. MELTZER. I just want to add briefly, I agree with most of 

what Ben Friedman said. I would only disagree that when you 

raise the debt ceiling, nothing happens. I mean people have forecast pretty well that you’re going to have to do that, you forecast 

that you’re going to have to do it. It’s not going to be a secret when 

it comes, so it will be a hassle in the Congress. Because Congress 

doesn’t like to increase the debt ceiling, the public misinterprets it, 

but the fact is that it won’t have any economic effect. 

The CHAIRMAN. Let me restate that, as there is an important 

principle here. The Minority is always strictly opposed to raising 

the debt ceiling, whomever is in the Minority. The gentleman from 

Minnesota. 

Mr. ELLISON. Mr. Chairman, thank you very much for holding 

this hearing. It is a shame sometimes but there are so many things 

going on because I really wanted to hear the bulk of the testimony. 

I apologize for not being here. 

32

And, Mr. Chairman, I wonder if I could ask some questions about 

debt, personal debt that Americans are facing. I know that is not 

exactly on the subject, but I would be very grateful for your view 

on the subject. 

You know, Americans on average have a negative savings rate. 

Could you talk about what that means for the overall functioning 

of our economy, what it means in terms of what the implications 

are for individuals, and for our consumer sector? Could you talk 

about that a little bit? 

Mr. FRIEDMAN. I am guessing that is probably closer to my interests than either Jamie Galbraith’s or Allan Meltzer’s. 

I think we have to be very careful to distinguish different parts 

of the population, Congressman. There are some families who have 

very large debts but also have very large amounts of assets behind 

those debts. Some of those assets are stable in value but others 

aren’t. People who keep taking out larger and larger mortgages because their houses keep rising in value, for example, are exposed 

in a particular way, namely, what happens if the value of their 

house drops significantly? 

Then a much larger part of the population is borrowing not 

against assets, but in an unsecured way on credit cards, borrowing 

to buy washing machines, refrigerators, or to take vacations. These 

are typically smaller amounts of debt and they are exposed less to 

that kind of asset risk than to the risk that a person is going to 

lose his or her job. Hence, there is a part of the population that 

is exposed to asset value risk, and there is another part of the population that is exposed to employment risk. 

For many years, at least the last 10 years that I can recall, 

economists have been concerned that the rising consumer debt burden would cause consumer spending to drop back to be more in 

step with the increase in personal incomes, and this has not really 

happened yet. 

Clearly borrowing more than one earns cannot go on forever unless one is the government. But the question then is, when does 

something stop that we know is unsustainable? Economists have 

been predicting for a long time that rising debt levels would cause 

consumers to pull back. This might cause the economy to slow, perhaps even go into recession. But it just has not happened yet. Perhaps this means that the American consumer is becoming used to 

higher debt levels. Perhaps it means that our lending institutions 

are more capable of finding efficient ways to lend to consumers, although the collapse of the subprime mortgage market certainly 

suggests that these institutions do not work as well as the lenders 

would like to believe. 

Mr. ELLISON. Excuse me, Doctor. I was going to say that example 

you just mentioned on the prime, you know, we do have a lot of 

people whose housing prices were increasing, they were refinancing 

their houses, and then the housing market flattened out. And now 

some of them are what they call upside down, and then they are 

in foreclosure, and they lose their houses, which has implications 

throughout the economy. 

Is that an example of sort of this, the end of the consumer debt 

gravy train? Sort of the chickens coming home to roost situation? 

33

Mr. FRIEDMAN. It may be, Congressman. But even apart from the 

subprime market, it could be simply that the cessation of increase 

in house prices would mean that all sorts of middle class families 

who were not in the subprime market at all will have to stop borrowing more simply because their house—against which they have 

been borrowing—is no longer going up in value. 

Mr. ELLISON. Right. 

Mr. FRIEDMAN. So there are many, many reasons to believe that 

at some stage, the ability of the American consumer to keep increasing spending more rapidly than family incomes are going up 

is going to come to a halt. But it has not happened yet and, therefore, expecting it to happen this year or next year or the year after 

is simply a speculation. 

Mr. ELLISON. Okay. Let me ask you this, Doctor. What about the 

fact that people are living on credit cards nowadays? I mean, if we 

have a 1 percent negative savings rate, does that mean that, you 

know, you have an average number of working families who run 

out of money by Wednesday, but don’t get paid until Friday? Is 

that a way to understand the negative savings rate situation in 

which we find ourselves? 

Mr. FRIEDMAN. I think it is both that and the borrowing against 

houses, Congressman. Both pieces are quantitatively very important. 

Mr. ELLISON. What do you think about individual development 

accounts to help poor people save money? 

Mr. FRIEDMAN. I think it is a terrific idea. Indeed, there are all 

sorts of such devices. If we had been having this conversation 20 

years ago, I think every one of us at this table would have bemoaned the country’s low savings rate and then gone on to say that 

we know very little about how to use public policy to encourage 

saving. It turns out that all of these tax-favored saving plans were 

very disappointing in their effect. 

But today all sorts of new research has suggested new ideas like 

the ones that you suggest. One of my own colleagues at Harvard, 

for example, has come up with a terrific idea that the Congress, I 

think, has been moving forward with, to change the default option 

on 401(k) plans. It turns out that merely such a small thing as 

changing the default option—which is not forcing anybody to do 

anything, it is just what happens if you do not check any of the 

boxes on the form—even that device turns out to have a significant 

impact on what people save. So I think the state of play in terms 

of what public policy can contribute to the low saving problem is 

very different than it was 2 decades ago, and I am pleased to see 

Congress moving forward in some of these respects and I think 

there are plenty of others, too. 

Mr. MELTZER. May I just say— 

The CHAIRMAN. We are running out of time, I am afraid. If you 

are real quick— 

Mr. MELTZER. Very quick. 

That is a very poor number, the saving rate, the personal saving 

rate, for the reasons that he just outlined. I mean mortgages, capital gains, things like that are just not in there. So a better number 

of what the society is doing is to look at the overall saving rate 

34

which includes businesses and so on. We do not save enough but 

that number is misleading. 

The CHAIRMAN. Is the second number better or worse? Better? 

Mr. MELTZER. Better. 

The CHAIRMAN. The gentleman from Colorado. 

Mr. PERLMUTTER. Thanks, Mr. Chairman. Just a couple of questions on the auto industry. We have this CAFE standards bill coming up and I have been getting besieged by both sides as to the 

need to really increase mileage beyond 35 miles per gallon in the 

next 10 or 15 years. And the other side is saying, ‘‘Gee, let the 

SUVs and the pick-ups kind of go their own direction and we can 

do this with cars, otherwise the entire industry is going to be 

gone.’’ 

I guess my question to you, gentlemen, is where do you see the 

auto industry going? 

The CHAIRMAN. In fairness to the witnesses, they can answer if 

they want to, but we did have a hearing on this specific set of subjects, and they were not asked to come with any particular reference to either the auto industry or energy efficiency or any others. If they wish to answer it, okay, but in fairness, we do like to 

have some kind of notice of what people are going to be asking. 

Mr. PERLMUTTER. So now that I have been slightly chastised, I 

still am going to ask my question. If you cannot answer it, it is 

okay. It is what is on my mind and, if not, then I do not have any 

questions, Mr. Chairman. 

Mr. MELTZER. Let me give you an answer which is not a direct 

answer to your question, which is highly relevant. We are unwilling to do things to raise the price of gasoline and cut down on the 

amount of oil. So we are giving money, sending money to our adversaries. To the Iranians, to the Saudi Arabians, even to minor 

adversaries like the Venezuelans. We are going to pay in defense 

because of our unwillingness to pay for the energy. 

If we would cut down on our importation of energy and the price 

were lower, they would have less money. That is a really important 

in my opinion national security issue which affects our economy. 

I do not know much about the automobile industry, but I do 

think that is an area where we are going to spend for defense because we are unwilling to tell the consumers they have to pay more 

for oil and we have to do things to get rid of oil imports. 

Mr. GALBRAITH. I have to say I agree with Allan on that. I would 

add that if we do now what is necessary to move to the front of 

the technological curves in these areas then we may have a competitive industry which we may lose if we do not. It is inevitable 

that we are going to have to transform the way we do transportation in this country in order to meet, among other things, the 

challenge of climate change, the challenge of energy security. We 

should be taking on that assignment with real intensity at this 

point or it will quite soon too late. 

Mr. FRIEDMAN. I agree with what both Allan Meltzer and Jamie 

Galbraith said, but I would add one more point that I think is pertinent to your question, Congressman. 

The history of American business in the post-World War II period is full of examples of things that public policy has asked business to do and that business has resisted on the ground that it 

35

would be destructive of the industry. But many have turned out 

not only not to be destructive of the industry, but to be stimulative 

in ways that nobody imagined. 

The most obvious example is putting stack scrubbers in utility 

plants. I am old enough to remember that debate after the Clean 

Air Act was passed and the question was whether it was conceivable that the American public utility industry could afford to put 

stack scrubbers in the utility plants or whether this was going to 

lead to the collapse of industry or the price of electricity becoming 

too expensive for middle class families to pay. 

Not only did neither of those outcomes take place, but after a 

very short interval, it dawned on people that there was going to be 

a business in which somebody had to make the stack scrubbers, 

somebody had to install the stack scrubbers, and somebody had to 

maintain the stack scrubbers. This was all about profits and jobs 

that nobody had ever imagined. 

I am very optimistic about the capacity of American industry to 

meet the requirements that are placed on it. Today the story is 

that it would be impossibly expensive and either the automakers 

would go out of business or consumers would never buy the cars 

if they had to meet some higher CAFE standards. My guess is that 

the technology will not only be doable for the industry, but turn out 

to be a further source of jobs and profits for whoever is smart 

enough to be able to make it and install it and maintain it. 

Mr. PERLMUTTER. Thank you very much. Thanks, Mr. Chairman. 

The CHAIRMAN. I am going to ask one final question. We have 

a vote. 

On the role of the bank, there was a quote, I think from Professor Galbraith, from the current and previous Chairman of the 

Federal Reserve about how monetary policy is irrelevant to the 

issue of inequality and they accept that it is a factor. 

It does seem to me that—I disagree with that and the monetary 

policy in fact has had an effect on inequality. Let me put it this 

way. First, Professor Meltzer, you did note correctly that there is 

a worldwide phenomenon now of the erosion of real wages, but it 

is not uniform. It does appear that there are institutional mechanisms that can have an impact, particularly on strong labor market 

mechanisms. 

And they do not have to be bad ones. The Scandinavians do better than the Chinese or us and so—and that is all in the sense—

here is the problem we now have. It was still the view on the part 

of, I think, the establishment, all three of you in various ways dissent to that and that is why we were glad to have you here, that 

it is important for the central bank occasionally to crack down on 

overall growth to keep inflation from getting out of hand. And that 

despite the previous experience with the NAIRU and it seemed to 

me that during the 1990’s the NAIRU was a lagging indicator of 

unemployment. As unemployment went down, the NAIRU to economists. It was always about a half-a-point more than the reality. 

But it clearly got discredited. 

There are still people who see that trade-off, that Phillips Curve. 

The problem with that is that it does affect inequality. The one recent period when we have had a halt in the excessive trend—the 

trend towards excessive inequality was the late 1990’s when a very 

36

tight labor market and it seems to me we had a very good situation 

there. We had a very tight labor market which helped wages go up 

but not to the point where they caused inflationary pressures. To 

his credit, Bernanke has acknowledged as long as wages significantly are lagging productivity increases the fact that they are 

going up should not be—is not inflationary. 

So here is the situation that we run into. The erosion of labor 

market institutional factors in the United States has been a problem. And we now have the point where there is still this tendency 

on the part of some, it would seem to be the Federal Reserve and 

Governor Mishkin talks about this and says, ‘‘Well, we have reduced the pain that will come in the employment area if we raise 

interest rates and slow down the economy, but it is still going to 

be there.’’ 

What is the response to those who say that it is still going to be 

necessary from time to time to combat inflation by reducing overall 

growth, by raising interest rates in the most blunt way to raise unemployment, and that to some extent, it is still important for the 

Fed to be willing to see unemployment rise as a way of checking 

inflation. 

Let me ask each of you, because that still clearly is, I think, a 

received opinion. Let me start with Professor Galbraith. 

Mr. GALBRAITH. Well, I would say as the gentleman from Missouri might say, ‘‘Show me.’’ Wait until the evidence is in and as 

the gentleman from Massachusetts might say, ‘‘Don’t shoot until 

you see the whites of their eyes.’’ 

The CHAIRMAN. But, of course, they will tell us that once that 

happens, then inflation will be out of control and it will be too late. 

Mr. GALBRAITH. Well, what they still need to have is evidence for 

their point of view. And that evidence has been singularly lacking. 

If the evidence is clear, it is presented that their case, that there 

is a run-away wage inflation such as we have not seen in this country in a generation, then one would have to consider the evidence. 

But as Allan Meltzer said earlier, you would not want to mistake 

a one-time increase in the oil price for a sustained rise in the inflation rate, and you will not know the difference until substantial 

time has elapsed. 

And as Ben Friedman just said, if you impose standards on the 

auto companies, they will adapt and innovate. The same insight 

underlay the Scandinavian model that you just referred to in the 

labor market. What the Scandinavians did was to say, we are going 

to have a relatively egalitarian structure of wages with strong 

union representation. Firms will have to adjust and become more 

productive. And that underlay the rise of Scandinavian productivity from the middle of Europe to the top at the present time. So 

it is a strategy for a stronger and more competitive America. 

The CHAIRMAN. I cannot be more inclined to—you cited the Massachusetts response from Bunker Hill, but I did go up into the New 

York area, and I think my response would be more likely to be 

‘‘Forget about it.’’ 

Professor Meltzer? 

Mr. MELTZER. Unfortunately, if we get a big inflation, there is no 

way we are going to end it without more unemployment. I mean 

that is just a fact. 

37

The CHAIRMAN. Right. But is it—I guess I phrased it unartfully. 

Do we have to anticipate the problem by being very tough on the 

interest rate if the unemployment rate starts trickling down? 

Mr. MELTZER. Look at the record of the last three expansions. 

Now, we did not end up with a high inflation. We did not end up 

with big unemployment. We pursued a moderate policy through 

that period and in 2001, 2002, we had a slight rise in unemployment, but, boy, I have never seen a recession in which consumer 

spending went up and up dramatically. Home buying. Home building. Businesses were the ones that took the heat in the 2001 and 

2002 recession. They pursued, I would say, a really strong countercyclical policy. 

Talk about the dual mandate in operation. The dual mandate 

was certainly uppermost in Greenspan’s mind in 2001 and 2002. 

The CHAIRMAN. Oh, yes, that is very important. You say that 

clearly in 2001 and 2002, they took very seriously both aspects of 

the mandate and the results were benign. 

Mr. MELTZER. They were good. 

The CHAIRMAN. Good. 

Mr. MELTZER. Good. Hard on corporate profits, hard on investment, you know, but we took the burden off the consumers. We had 

a housing boom and an automobile boom. We sold 17 million cars 

in a recession year. 

The CHAIRMAN. Professor Friedman, let’s finish up. 

Mr. FRIEDMAN. Two points, Mr. Chairman. First, the fact that inequality tends to be abated during a strong economy is yet another 

reason why the Federal Reserve should take seriously the real part 

of its dual mandate, but the underlying point is that they should 

be doing that anyway. 

It is not as if they need the connection to inequality to think that 

low unemployment, all else being equal, is better, and more rapid 

growth, all else being equal, is better. It is very useful to have the 

connection to inequality, to the extent that it is there, and I look 

forward to reading Jamie Galbraith’s paper. But it should not be 

the case that the Federal Reserve needs that argument to think 

that a low unemployment is better than a high unemployment rate. 

They should be doing that anyway. 

Second, is it going to be necessary from time to time to arrest 

the growth of the economy in order to keep inflation in check? Well, 

yes, of course it is. But the real issue is the extent to which the 

Federal Reserve is willing to press forward on both sides of the 

dual mandate. In the same way that when inflation is beginning 

to get out of hand then what they are supposed to do, by Congress’ 

instruction, is to take steps to arrest it, similarly when inflation is 

not getting out of hand, what they are supposed to do also by Congress’ instruction is to press forward to achieve maximum employment. That is what the Act says: maximum employment. It is terrific if maximum employment means impeding the widening increase in wage inequalities, but they should be doing that anyway. 

The CHAIRMAN. Thank you. I appreciate that. We are going to 

have to break. We are going to go vote. I thank the panel for showing up. 

38

I will just say, Professor Meltzer, we will be awaiting the book. 

And if the book becomes a movie, some of us will be thinking about 

who should play us in the history of the Federal Reserve. 

This has been very useful to us and we really appreciate the 

thoughtfulness of today. 

The hearing is adjourned. 

[Whereupon, at 12:20 p.m., the hearing was adjourned.] 

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A P P E N D I X

July 17, 2007

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