View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.






· ON


AUGUST 5, 1986
Printed for the use of the Committee on Banking, Housing, and Urban Affairs

63-040 0

For sale by the Superintendent of Documents, Congreeaional Salee Office
U.S. Government Printing Office, Washington, DC 20402

Digitized by


JAKE GARN, Utah, Chairman
JOHN HEINZ, Pennsylvania •
SLADE GORTON, Washington
ALAN J. DIXON, Illinois
JIM SASSER, Tennessee
M. DANNY WALL, Staff Director
KENNETH A. McLEAN, Minority Staff Director
w. LAMAR SMITH, Economist


Opening statement of Chairman Garn ........................................................................
Opening statements of:
Senator D'Amato......................................................................................................
Senator Mattingly ....................................................................................................
Senator Hecht...........................................................................................................
Senator Wilson..........................................................................................................
Senator Dixon ....... ....................................................................................................


H. Robert Heller, nominated to be a member of the Board of Governors,
Federal Reserve System..............................................................................................
Growing interdependence of world economy......................................................
Biographical sketch of the nominee .....................................................................
Witness discussion:
LDC's debt problems................................................................................................
Essential to provide additional financial resources...........................................
Ml growth rate.........................................................................................................
Coordinated policies with key trading partners.................................................
Expansive monetary policy....................................................................................
Effects of tax reform bill.........................................................................................
Proposals to change the independence of the Fed .............................. ...............
Further reduction in interest rates ......................................................................
Tax bill may cut interest rates..............................................................................
Review of Fed decisions in last 10 years..............................................................
Bank of America's $640 million loss.....................................................................
Risk of defaults on the banking system...............................................................
Response to written questions of Senator Gorton..............................................
Michael L. Mussa, nominated to be a member of the Council of Economic
Responsibility and qualifications for the Council ..............................................
Biographical sketch of the nominee .....................................................................
Witness discussion:
Reporting of performance of U.S. economy.........................................................
Uncertainties of the tax bill...................................................................................
Effects of deficit reduction......................................................................................
Floating exchange rates..........................................................................................
$200-plus billion deficit ...........................................................................................
Statistical results of oil price drop........................................................................
Prediction of 4 percent growth rate......................................................................
Need to eliminate the stagger in the tax bill.....................................................
Response to written questions of Senator Gorton..............................................

Digitized by



Digitized by



Washington, DC.
The committee met at 10:30 a.m., in room SD-538, Dirksen
Senate Office Building, Senator Jake Garn (chairman of the committee) presiding.
Present: Senators Garn, Heinz, D' Amato, Mattingly, Hecht, Proxmire, Dixon, and Sasser.

The CHAIRMAN. The Banking Committee will come to order.
This morning we welcome Dr. H. Robert Heller to the Banking
Dr. Heller has been nominated to serve on the Board of Governors of the Federal Reserve System for a term running until January 31, 1996.
Dr. Heller brings impressive credentials to this assignment. He
currently is a senior vice president and director of international research at the Bank of America. Dr. Heller previously served as
Chief of the Financial Studies Division of the International Monetary Fund and has been a professor of economics at both the University of California in Los Angeles and at the University of
Dr. Heller has also published widely in economic journals.
International economic considerations are becoming increasingly
important to the implementation of monetary policy just as they
are becoming increasingly important to all other areas of the economic decisionmaking.
For this reason, Dr. Heller's background and expertise in international economics will be particularly valuable to the Board of
Again, I'd like to welcome you here this morning, Dr. Heller, and
look forward to learning more about your viewpoints on monetary
policy and its relationship to international economics.
Senator D' Amato.

Digitized by




Senator D'AMAro. Mr. Chairman, I just think we're very fortunate to have someone of Dr. Heller's stature and I'm pleased that
he's been nominated for this position. We certainly need him. He
will add to the strength of the Reserve Board and its decisions
which are so important and I'm delighted to see my good friend,
Senator Wilson, who will be presenting Dr. Heller to the committee.
I want to welcome Dr. Mussa to the committee this morning to
discuss certain issues that will confront him as a member of the
Council of Economic Advisors. Due to the unique role that the
Council plays in analyzing the economy and advising the President,
Dr. Mussa will have a direct impact on national economic policy
and initiatives.
Dr. Mussa will be required to address a wide array of issues not
the least of which is the worsening U.S. trade posture. Unless the
trade figures are reduced in the second half of this year, the
United States will post an unprecedented $170 billion trade deficit
by yearend. We cannot afford to allow this trend to continue. Coherent policies must be initiated that will increase U.S. competitiveness in the world marketplace as we work toward balancing
our trade account.
Mr. Chairman, Dr. Mussa's academic and professional accomplishments recommend him for the position to which he has been
nominated. His expertise in the area of international trade will
make him a valuable adviser. I look forward to working with him
in the future.
Thank you, Mr. Chairman.
Chairman GARN. Senator Mattingly.

Senator MA'ITINGLY. Mr. Chairman. I, too, would like to welcome
before the committee both Dr. Heller and Dr. Mussa. The positions
they will fill are certainly important ones, and will have considerable impact on the performance of our economy and therefore the
public policy response by the Congress. I look forward to their
The CHAIRMAN. Senator Hecht.

Senator HECHT. Thank you, Mr. Chairman. I just wanted to hear
him personally. It's a very, very important job and you come well
recommended and there are very few positions in our Government
pertaining to financial institutions and finances all over the world
that are as important. So I will be anxious to hear from you.
The CHAIRMAN. Senator Wilson.

Senator WILSON. Thank you very much, Mr. Chairman.
I am delighted to have the opportunity to be here today to introduce to you Dr. H. Robert Heller, who has been nominated by

Digitized by



President Reagan to be a member of the Board of Governors of the
Federal Reserve System.
Mr. Chairman, as your statement indicates, the significance of
this position cannot be exaggerated in these times when strong economic leadership provides the basis for continued economic growth
upon which we will depend for prosperity and for strength of all
kinds in this Nation.
And as we in the Congress struggle to deal with the fiscal deficit
through balanced spending cuts, our efforts are very much dependent on the policies of the Federal Reserve Board.
AB responsible growth-enhancing increases in our money supply
joined with increased fiscal restraint, not only can our economy
grow at a brisker pace but our trade deficit should also shrink
Mr. Chairman, for those reasons and because of the importance
of this responsibility, we are singularly fortunate that Dr. Heller
has the experience, the skill, and the training necessary to further
these interrelated economic goals.
He has, as you indicated in your capsule statement, both the
background and the temperament to deal with the massive economic problems which the Fed must address. For example, not only
must the Fed grapple with domestic economic issues, but clearly
global ones as well.
In this regard, Dr. Heller brings to the Fed special knowledge
and skills that will help us coordinate policies with the central
banks of our major trading partners as well as with those of the
LDC's, particularly those in this hemisphere.
While Dr. Heller's complete resume is before the committee, let
me highlight just a few of his many accomplishments.
Having gained his doctorate in economics, Dr. Heller also offers
to the Fed the benefit of years of academic strength, having taught
for 6 years at the University of California at Los Angeles and for 3
years at the University of Hawaii in the fields of money and banking, macroeconomic policy, international trade, and international
monetary economics.
In addition, he has taught graduate classes at the Virginia Polytechnic Institute and the University of California at Berkeley and
has lectured at universities in Germany and Japan.
Dr. Heller left academia in 1974 to serve as the Chief of the Financial Studies Division of the International Monetary Fund.
There he was responsible for the IMF's Research Program in monetary policy and financial markets. The results of this research were
published both in academic journals and in IMF publications.
Most recently Dr. Heller has worked in San Francisco as the
senior vice president and director of international economic research at the Bank of America. In this position, he directed the institution's international economic research activities involving economic analyses and forecasting of the economies of more than 100
In addition to Dr. Heller's extensive professional experience, as
an expert in the field of economics he's produced varied research
reports and books, including "International Monetary Economics,"
"International Trade and the Economic System."

Digitized by



Certainly Dr. Heller is no stranger to the Congress having appeared before committees on both sides of the Capitol, including
this distinguished committee.
And last but not least, I take special pride, Mr. Chairman, as you
might imagine, in being able to advise the committee that Dr.
Heller, having lived in other parts of the world, is by choice an
adoptive Californian. We are very pleased that he and his wife preside in a lovely area of that State called Mill Valley with their two
children. I have met his wife. She is here with him. I don't know
whether your children are, Dr. Heller, but if so I'm sure the chairman will be pleased to allow you the opportunity to introduce them
to the committee.
Mr. Chairman, I obviously share the expressed enthusiasm of
Senators D' Amato and Hecht as well as your own for the nominee
and would urge the committee to move as quickly as you deliberately can to bring his nomination to the Senate floor so they may
confirm him and he may begin on his service as a member of the
Federal Reserve Board of Governors.
The CHAIRMAN. Thank you very much, Senator Wilson. We certainly appreciate your willingness to be here in support of Dr. Heller's nomination this morning.
Dr. Heller, before you begin, could I have you stand and be
[The witness was duly sworn.]
The CHAIRMAN. Do you have an opening statement you wish to
Dr. HELLER. Yes, Mr. Chairman. I'd like to make a brief oral

It's a great honor and privilege to appear before this distinguished committee as a nominee to the Board of Governors of the
Federal Reserve System. I am particularly grateful to Senator
Wilson for introducing me to this committee and I would also like
to thank Senators Hecht and D' Amato for their introductory remarks.
The tasks facing the Board of Governors in the discharge of its
monetary policy and regulatory and supervisory functions are most
challenging these days. Framing appropriate policies is no easy
task in the best of times, but in the current period of vast structural changes in the financial sector and the economy at large that
task is even more demanding and complicated.

The ever-growing interdependence between the American economy and the rest of the world adds further complexity to the issues.
If confirmed, I will do my best to support monetary policies that
will encourage economic growth and employment within a framework of price stability.

Digitized by



I also look forward to participating in the design and implementation of market-oriented regulatory and supervisory policies that
will be supportive of a strong and vigorous financial system.
Thank you very much, Mr. Chairman. I would be happy to
answer any questions that you and the other members of the committee might have.
The CHAIRMAN. Thank you, Dr. Heller.
Senator Wilson, I'm sure you have other commitments. We
would be happy to excuse you.
Senator WILSON. Thank you very much, Mr. Chairman.
The CHAIRMAN. Dr. Heller, have you and your wife sold all of
your bank or bank holding company stock?
Dr. HELLER. Yes, we did, sir.
The CHAIRMAN. Do you hold any options to purchase additional
bank or bank holding stock?
Dr. HELLER. Yes, I do hold some options, but these will expire immediately upon my leaving Bank of America.
The CHAIRMAN. So you would not plan to exercise any of those
Dr. HELLER. No, sir.
The CHAIRMAN. Would you please explain to the committee your
holdings of restricted stock in Bank of America Corp.?
Dr. HELLER. In years past, Bank of America has awarded me a
certain amount of restricted stock. These restricted stocks become
vested only after a 5-year period. That 5-year period has not passed
yet. As a result, the board of directors has exercised its right to repurchase this stock and I will not benefit in any way from these
The CHAIRMAN. Your SF-278 financial disclosure report shows
that you will receive a $25,000 bonus from Bank of America for
your services at the corporation up to July 1, 1986, and you will
also receive a cashout payment of your vested retirement in 401-K
plan funds.
Would this bonus and this cashout payment be payable to you if
you left Bank of America at this time for any reason other than
service on the Federal Reserve Board?
Dr. HELLER. Yes.
The CHAIRMAN. Will you receive any other payments or funds
from Bank of America?
Dr. HELLER. No, none other than the normal benefits of the
health-life insurance which will cease shortly after I join the Federal Reserve.
The CHAIRMAN. Aside from your continued participation for a
brief period in Bank of America's group life, health, and disability
insurance plans to continue these protections for yourself and your
family, have you any other continuing arrangement or agreement
with Bank of America?
Dr. HELLER. No, sir.
The CHAIRMAN. Is it correct that in order to avoid even an appearance of a conflict of interest you have agreed to recuse yourself
for 1 year from participating in any particular matter involving
Bank of America or its subsidiary banks that come before the
Board of Governors?
Dr. HELLER. Yes, sir.

Digitized by



The CHAIRMAN. While a member of the Board of Governors do
you agree to appear before this committee and any other duly constituted committee of the Congress when requested to do so?
Dr. HELLER. Yes, I'd be happy to do so.
The CHAIRMAN. You currently are senior vice president and director of international economic research at Bank of America. Previously, as I stated, you served at the International Monetary Fund
as Chief of Financial Studies Division. You obviously have a very
strong background in international economics.

Of course, this committee has been vitally concerned for several
years with the heavily indebted developing countries, the LDC debt
problem, and their ability to continue to service their external
debt. It's a subject of conversation that we simply can't go more
than a few days without discussing.
How do you view the outlook for the LDC's and the implications
that the debts have for our banking system? Certainly it has a
great effect on Bank of America with the stories that have just appeared in the last few days.
Dr. HELLER. That's right, Senator. I think it's very important to
differentiate between the various countries that got into debt service difficulties in the early 1980's. Some of them have made extraordinary progress in resolving their debt service problems that
they encountered when interest rates soared to unprecedented
highs in the early 1980's, when the industrial countries went into a
recession, and when commodity prices started to fall very sharply.
Countries like Brazil have largely overcome their initial difficulties and they are now again enjoying very high and vigorous economic growth.
Other countries have not been so fortunate. Mexico is a good example of that latter group, and Mexico has been very hard hit
during the last few months by the continued fall in oil prices.
As a result, I think we are further away from a satisfactory resolution of the debt service problems of countries like Mexico, but
I'm confident that with continued strong growth in the industrialized countries, the absence of protectionism against the exports of
the developing countries, and with continued help from the international financial institutions like the World Bank, the IMF, as
well as the private commercial banks, these countries will eventually be able to overcome their own problems.
But the key to the solution to their problems will necessarily be
the implementation of appropriate adjustment policies on their
behalf and that is a political decision that these countries have to
take themselves.
The CHAIRMAN. What's your view of the willingness of commercial banks to increase their exposure to these already heavily indebted countries, speaking specifically of the Baker plan?
Dr. HELLER. I think most banks recognize that it's a necessity to
participate in further increases of loans at the present time. If that
necessity wouldn't exist, I think banks would be probably more
cautious and in many cases they would be quite happy to reduce
their total exposures. But at the present time, there really are no

Digitized by



alternatives but to help these countries to overcome the difficulties
that still persist. And what I said about Mexico also applies to several other countries in that category.
The Chairman. It's difficult for me to explain, particularly in
Utah, that you continue to loan them more money and that is the
answer to their problems. Where does it end? You say it's a necessity right now, but they can't pay their existing debt; we're stretching out loans; we're reducing interest payments; and so it's a little
hard for' some to understand this necessity that you loan them
more money because they can't pay you back what they already
owe you.

Dr. HELLER. Well, Senator, I think the problems faced by the developing countries are really very similar to the problems faced by
many farmers in your own State and in the eritire Midwest and in
other areas of our country, like Texas and Oklahoma, which are
suffering now from the falling oil prices in exactly the same way as
countries like Mexico and Indonesia are suffering.
I think it is essential to provide these additional financial resources and just like we have to help our farmers to overcome the
difficulties that they're facing now, it is important to help these developing countries to overcome their problems.
The CHAIRMAN. Chairman Volcker appeared before this committee a couple of weeks ago and he emphasized the need for some of
our major trading partners to increase the stimulus to their own
domestic economies, partly to correct the imbalances we're talking
about in international trade and partly to help the developing
countries expand their exports.
How important do you think it is that the major industrial countries do increase their domestic growth rates? And, of course, this
gets back into the argument we've had over who goes first in reducing their discount rates and we have tried to coordinate with
them. We have just made a recent discount rate cut which they
have not responded to.
Dr. HELLER. I think in all countries it is desired to have high
growth rates, but where countries sometime differ is in their judgment as to what is, first of all, the likelihood of achieving that high
growth, and second, what are the other associated costs that would
be accompanying such higher economic growth rates.
I think some countries feel that there are different tradeoffs between growth and inflation and similar factors.
But I would agree with Chairman Volcker that countries like
Japan and Germany are certainly in the position to open up their
markets more and to absorb greater exports from the developing
countries in particular and also increase their purchases from the
United States. I think it would benefit the consumers in these
countries and it would benefit the world economy at large if they
would do so.
The CHAIRMAN. Last February the Fed set a 3- to 8-percent
target range for growth in the Ml money aggregate for this year.
Since the end of last year, Ml has actually been growing at an

Digitized by



annual rate of about 14 percent. Ml velocity has declined at a rate
even faster than the postwar record decline in 1985.
How do you explain the rapid growth in Ml which dates from
late 1984?

Dr. HELLER. Well, obviously, Mr. Chairman, that's a very complex and broad issue that you're raising here. I think, first of all,
there are probably some measurement problems as to what we are
really focusing on in the Ml aggregates. I saw a recent survey by
the Federal Reserve that could not account for a very large proportion of the currency in circulation. At least it could not be found
anywhere in this country. And if you travel around the world, you
will see clearly cash drawers full of U.S. dollar bills not only in
Europe and Asia but also in Latin America. So much of that money
supply, much of that monetary growth that has been taking place
in years past, I think has just leaked out of the country into cash
drawers around the world because the dollar was considered a very
highly desirable currency to hold, not only in this country but also
in foreign countries. During the last couple of years I think that
has been part of the problem.
There are other measurement problems as far as the movement
into NOW accounts and Super NOW accounts is concerned. As interest rates have come down, the interest rates paid on these NOW
accounts are now very attractive compared to long-term interest
rates or funds that could be invested in instruments that would
count only in the broader monetary aggregates, such as time plan
accounts, savings accounts, and the like. As a consequence, we have
that measurement problem.
You mentioned the money velocity. You were talking about the
velocity of circulation of money compared to GNP, but money isn't
only used in transactions for GNP. Money is also used in transactions for buying assets in stock markets, bond markets, buying
used items, and all these transactions don't count in the current
As the stock market has boomed, as bond markets have boomed,
it is reasonable to expect that some of that transaction money has
been used for these purposes, for asset-related transactions.
As a result, the relationship between GNP and money itself is no
longer the same as it used to be in years past.
I think all these are factors that account for that change of velocity that we are observing at the present time and that can explain
the very high growth rate of Ml while the broader monetary aggregates have grown very nicely within the Federal Reserve specified
target ranges.
The CHAIRMAN. Senator Proxmire.
Senator PROXMIRE. Thank you, Mr. Chairman.
Dr. Heller, you have a very interesting background and a very
diversified background not only in this country but internationally.
You obviously have been an experienced international economist
and you've had a chance to study the monetary system in Germany
and elsewhere. You were born in Germany, right?
Dr. HELLER. That's right.

Digitized by



Senator PROXMIRE. You have something in common with a great
portion of the people who live in my State of Wisconsin. I think we
have more people of German ancestry living in our State than any
State in the Union.
Earlier this spring the Federal Reserve was concerned that a
unilateral reduction in the discount rate by the United States
could trigger a run on the dollar unless accompanied by similar reductions by the central banks of our major trading partners.
However, the most recent reduction of the discount rate seems to
have been made without reference to what the other central banks
were doing. This move has prompted some Fed watchers to conclude that the Fed is now following a go-it-alone policy.
What's your conclusion about whether the Fed is indeed following a go-it-alone policy and do you think such a policy would be appropriate under the present circumstances?

Dr. HELLER. I would certainly prefer that our policies would be
coordinated with our key trading partners, especially Germany and
Japan, the countries that you have mentioned, Senator.
However, if those countries are not willing to go along with Federal Reserve policy, I don't feel that our policies should be dictated
by the action or inaction of central banks around the world. In
other words, the Federal Reserve should decid~ what is the right
monetary policy to be pursued for our own national purposes.
Senator PROXMIRE. Chairman Volcker made it very clear when
he testified only a few days ago before this committee that we now
live in an international community in which international economics is of the greatest importance. We have to find some way of coordinating international economic policy, particularly among our
friends in Europe and Japan-Germany and Japan. It's difficult to
do that. I would think maybe with your background you could contribute something to that.
Dr. HELLER. I'd be very happy to do so.
Senator PROXMIRE. Years ago I proposed the Fed set targets for
monetary policy and this procedure was adopted. It was objected to
by Chairman Burns when I proposed it, but he finally agreed but
he established ranges. In other words, instead of saying that we
would hit a specific number for Ml, M2, M3, he indicated he would
only accept it if there could be ranges.
The ranges have gotten so broad they don't have much meaning,
in my view. In Germany, as I understand it, they have for each of
their monetary aggregates specific numbers.
Why shouldn't we do something of that kind so that we can
know whether or not the Federal Reserve is following their guidelines or not?
Dr. HELLER. To hit a precise number is obviously something that
is impossible.
Senator PROXMIRE. I wouldn't expect them to hit it on the nose,
but when they say it's from 3 to 8 percent it doesn't mean anything. The targets are so broad that it's like hitting the broadside
of a barn door by falling against it. You can't miss it.

Digitized by



Dr. HELLER. Well, whether we can't miss it-I think in the past
we have managed to miss it.
Senator PROXMIRE. They've missed that too. You would think
they couldn't but they have accomplished that.
Dr. HELLER. As Senator Garn pointed out, there sometimes may
also be a good reason to miss it because we've done something else
also and that is to specify several different targets-Ml, M2, and
M3-and sometimes these targets are not totalll consistent because
of the shifts that are taking place in the public s preferences as far
as its own currency and funds holdings are concerned.
So as long as we have a variety of targets I think it is probably
reasonable to talk about target ranges and one may well debate on
how wide these tolerance ranges should be set.

Senator PROXMIRE. Are you concerned with the rapid increase in
the money supply by any measure that we've had over the last 18
months or so. Ml as we all know has even exceeded its enormous
range of targets. M2 and M3 are within the targets but the targets
are very broad considering the increase in the nominal GNP. And
the result is that it seems to me we have an extraordinarily expansive monetary policy. I can't think of a time in our history when
our monetary policy as well as our fiscal policy-but especially our
monetary policy has been so expansive as it is now.
Dr. HELLER. Well, if you judge it by the monetary target of Ml
alone, I think there's reason to-Senator PROXMIRE. That's not what I'm doing. I'm saying forget
about whether it's within the targets or not. The targets themselves permit an increase that's far above a nominal GNP increase
that's been fairly modest, 1.1 percent annual rate in the last quarter, very low inflation. So that the amount of credit and money you
need in order to finance our gross national product is very moderate but the increase has been great. That's one of the reasons interest rates have been coming down, right?
Dr. HELLER. Well, I would be very careful in arguing that the interest rates have come down because the monetary growth rates
have been so high. If you have very high monetary growth rates,
sustained over a long period of time, that would undoubtedly rekindle inflationary forces and-Senator PROXMIRE. I agree with that, but we're talking about
over a limited period of time.
Dr. HELLER. That's not a situation that we're in right now, and
measured on other indicators as, for instance, commodity prices,
real interest rates, inflation-adjusted interest rates, and exchange
rates, I wouldn't judge that our monetary policy has been excessively easy overall.
At the same time, you also have a fiscal policy that is becoming
more tight and you may well argue that there's reason to countersteer a bit on the monetary policy side as our fiscal deficits are
being brought down.
Senator PROXMIRE. I want to ask you a question I'm going to ask
Dr. Mussa a little later, Herbert Stein, as you know, is a former
Chairman of the Council of Economic Advisers, a highly respected,

Digitized by



topflight economist. He had an article the other day in the Washington Post in which he said that we should not-I almost fell over
when I read it from Herb Stein because he's so conservative-that
we should not try to cut spending under present circumstances because if we cut spending under present circumstances it could precipitate a recession. It would be a mistake. It was shocking coming
from him. I would have accepted it coming from your namesake,
Walter Heller or John Kenneth Galbraith or somebody of that
But how can we stimulate the economy if we continue to have a
slow rate of growth or move into a recession when we have this
very expansive fiscal policy, colossal deficits, and what we agree
now, at least for the time being, is an expansive monetary policy?
What's left? What do we do?
Dr. liELLER. Well, I think first of all, I would disagree with Professor Stein, with all due respect. I think we have to look beyond
the immediate impact in the very short run of cutting Government
expenditure. AB we are restructuring our whole tax system, as we
are making it not only more equitable but also providing a more
level playing field, as we are reducing our individual income tax
rates, I think you will see that economic growth in the American
economy will pick up again, that resources will allocated more efficiently, and that greater economic growth will result.
I think the measures that are being taken right now are necessary measures to set us on a sustained course of economic recovery.
To do otherwise, to add to our fiscal deficits, will be a road that
will lead to eventually much larger problems than we are facing
already right now.

Senator PROXMIRE. Well, I would agree with you and Stein says
the same thing. He just says we're in a dilemma. He doesn't offer
any solution, but he says we're in a very, very painful dilemma
here and, of course, I can't see any stimulus coming from a neutral
change in the tax system. I think it's good. I'm for it. I'm going to
vote for it. It's an improvement. AB you say, it's more equitable.
But I think you could get all kinds of arguments from people who
would say that this kind of a revenue neutral tax bill is going to
give us much economic stimulus.
It will tend to discourage some savings. It will tend to discourage
some business investment. I think it should because there are loopholes involved there and inequities, but to foresee that that tax
proposal is going to do much for stimulating our economy I think is
really reaching.
Dr. HELLER. I think it won't be a stimulus in the traditional
Keynesian sense of providing further Government expenditures
and thereby stimulating the economy by increasing aggregate
Senator PROXMIRE. How do you increase aggregate demand if you
don't have any change in the overall tax take one way or the
other? It's neutral.
Dr. HELLER. I'm saying it will not do that.
Senator PROXMIRE. All right.

Digitized by


Dr. HELLER. It will not do that. I fully agree with you there. But
what it will-and I think we agree on this-make the entire playing field more level. By bringing down individual income tax rates,
it will reward work efforts more because people will be able to keep
a larger share of their marginal dollars that they're earning.
Senator PROXMIRE. Corporations will keep less because corporation taxes are going to increase. Overall, it's a wash.
Dr. HELLER. Well, I agree with you, it's an unfortunate element
that the corporate taxes have to go up under current circumstances, and I would guess that you would rather lower the individual income tax rates without having to engage in the necessity of
increasing the corporate rates at the present time. That, viewed in
isolation, is something that will not enhance growth at the present
But if you look at the broader picture of providing a fairer tax
system, getting rid of the loopholes, broadening the tax base in that
sense, while maintaining low marginal rates, that is the recipe for
higher economic growth in years to come.
Senator PROXMIRE. My time is up, Mr. Chairman.
The CHAIRMAN. Senator Dixon.
Senator D1xoN. I have no questions for Dr. Heller, but I would
like the honor of introducing Dr. Mussa if I may, Mr. Chairman.
Dr. Heller, several proposals have been made in recent years for
changing the function and structure of the Fed and they are really
all directed, in my opinion, at eroding the independence of the Fed
which I have always defended, even when I disagreed with the Fed
in the directions they're going, I still feel very strongly that the
last thing we want is political interference down there. I would
hate to think what the condition of the economy would have been
over the years if those in Congress who have been fouling up the
fiscal policy of this country had also been determining the monetary policy.
But one of the things that I have been looking at and encouraging the Fed to consider is much quicker release of the minutes of
the meeting of the Federal Open Market Committee [FOMC].
What are your views on that proposal?
Dr. HELLER. Well, I understand the debate on that particular
issue. As a basic proposition, I am in favor of having more information available rather than less information available.
On the other hand, I understand the arguments to be said in
favor of the current practice. The current open market policy directives are frequently phrased in an if-then type of fashion-if economic conditions should change in such and such a manner, then
the open market desk should react. In other words, what you're
giving the open market desk is a road map of how to navigate in
the months to come and you have a lot of conditional statements.
If the minutes would be released right away, I think the open
market directives would probably take a different form and it
might be necessary to have more frequent meetings of the FOMC
so as to guide the open market desk as economic events unfold.
If it should be found advantageous to make those kinds of
changes, I think one might well support such an argument. But as

Digitized by


I indicated earlier, I have not heard all the issues and that's clearly something that the Federal Reserve Board has to decide.

The CHAIRMAN. Getting back to proposals for changing the independence of the Fed, one of the most prominent ones is to make
the Chairman of the Fed's term coterminus with that of the President. What do you think of that proposal?
Dr. HELLER. I like it as a basic proposition because it would allow
the President to pick his own spokesman for the Board of Governors as a whole. I believe that also Chairman Volcker supports
that particular change.
The CHAIRMAN. Well, I don't.
I talk about the Congress interfering and I don't necessarily
think we ought to have a spokesman for the President down there.
As I look at administrations-and not just this one, which I happen
to favor-but others, I think the independence of the Fed has been
valuable to us.
What's your view of the proposal to reduce the Fed member's
term to something less than 14 years in order to give the President
an opportunity to make more appointments to the Board?
Dr. HELLER. I think the longer terms really are one of the safeguards that you're talking about-the independence of the Federal
Reserve. If you look at the Supreme Court with lifelong appointments, they have the ultimate arrangement that guarantees the independence of the judges sitting on the Court.
The CHAIRMAN. The independence and the arrogance.
Dr. HELLER. But as you shorten the terms, if you would shorten
them to very short periods, 2 or 4 years, I think then you would get
not only a lack of experience that has served the Federal Reserve I
think well in years past, but you would get also the political process much more closely involved.
And if I may come back for one second to your earlier question
about the Chairman's term, by making it coterminus you don't give
an extra vote to the President who appoints the Chairman. He is
the spokesman. He is just the leader of equals. It's still seven votes
on the Board at large.
The CHAIRMAN. Well, I agree with you. I don't favor shortening
the terms. Your allusion to the Court, I think when you said "ultimate independence," you described it correctly. I think it's too
much, far too much there, and I wasn't lightly saying arrogance
when I look at how some of our judges with that lifetime security
make decisions. But that isn't for our discussion here today to try
and resolve the entire court system.
What is your view of the proposals to put a member of the administration, perhaps the Secretary of the Treasury, as he used to
be, on the Board?
Dr. HELLER. Well, the Secretary of the Treasury used to be on
the Board, as you point out. If you look around the world, I think
you will find central banks that have a high degree of independence from the current government. Basically these are the countries where you have low inflation and where monetary policy is
conducted in what I would consider a more rational fashion than in

63-040 0 - 86 - 2

Digitized by


those countries where the central bank is a mere instrument of the
finance ministry or the treasury of that particular country. In the
extreme, the central bank then turns into just a financing agency
of the treasury. That would be clearly detrimental.
The CHAIRMAN. We have also been constantly faced at one time
or another with those who believe we should establish seats on the
Board-we ought to have a farmer's seat, we ought to have a small
businessman's seat, and so on.
Do you favor that kind of proposal?
Dr. HELLER. Well, at the present time we already have a requirement for a certain regional diversification of the Board members. I
think if you would overlay another grid on a functional basis you
would come down to a quota system where only a small businessman with a farm background from Texas would be able to fill a
certain vacancy. Maybe we are overdoing it a bit with further requirements of that sort.
If you look at the Board at the present time, yes, there is an exfarmer-I think Dr. Angell still is a farmer-on the Board. We
have small businessmen. We have a wide variety of backgrounds
represented. So I think that in the current selection process these
diverse interests are already being represented.
The CHAIRMAN. Governor Angel filled all the quotas-farmer,
economist, professor-he took care of several categories.
Senator Heinz.
Senator HEINZ. Mr. Chairman, thank you very much.
Dr. Heller, I gather that Senator Garn discussed with you the
issues involving LDC's. Senator Proxmire discussed with you a bit
the effects of the tax bill and I apologize for being late. I was down
at a leadership meeting at the White House dealing with everything except high interest rates, high real interest rates.
Has the discussion, Mr. Chairman, evolved beyond the discussion
of Ml and into the Fed discount rate at this point?
Senator HEINZ. Well, good. I didn't want to go over plowed
As you know, there's been a great deal of debate, a lot of speeches on the Senate floor and comments in this committee room about
whether or not it's appropriate for the Federal Reserve to lower
further the discount rate, one of the most sensitive subjects that
can ever be discussed. In a sense, you're freer now to discuss it
than you will be, assuming you're confirmed. You will not only
take a constitutional oath, you in effect will also be taking almost
an oath of secrecy unless you are able to prevail on the earlier release of the FOMC minutes, which I understand you did discuss.
As you view the economy today and you take into account the
relatively soft economic performance of the Japanese, the West
Germans, and the other developed nations, do you think that a further cut in the discount rate would be inflationary?

Dr. HELLER. At the present time, I think the conditions are set
for a further reduction in interest rates at large. If you look at the
Gramm-Rudman legislation which will be reducing our Federal

Digitized by


deficits in the years to come, the pressures on real interest rates
certainly should come down.
I think in the world economy we also see very few signs that
there will be a renewal of inflationary forces in the near future, so
I would also expect that nominal interest rates overall would decline.
And in that framework of a declining structure of interest rates
overall, I think that there may well be room for further discount
rate cuts in the future as well.
Senator HEINZ. Typically, the argument about lower interest
rates and the reason they increased inflation is that it was too
much money chasing too few goods. What's been remarkable about
the last 1½ years of this economic cycle is that whenever you want
new goods they're available, not in the United States necessarily,
but they are widely available from overseas and at the same prices,
in the case of the less developed countries, for the most part than
they were 1½ years ago before the Baker plan was announced.
I don't know what I said but I think they concluded that you just
made news. It wasn't me. I have never seen that before. You may
want a transcript. Let the record show that about 30 seconds ago
there was a mass exodus of what I assume were fmancial reporters
of some kind or another. It must have been the other because some
are still sitting here.
Do you believe that as long as the United States pursues a free
trade policy, as long as LDC's continue to peg their currencies to
the dollar as most of them seem determined to do, that it's highly
unlikely that inflationary pressures will develop?
Dr. HELLER. I think you mentioned most of the relevant issues
there. There's a lot of excess capacity not only in this country as
far as our industrial capacity is concerned. Our agricultural output
certainly could increase much more without rekindling inflationary
pressures. The same holds true for most of the industrialized countries and certainly for the developing world. So we have quite a bit
of leeway as far as expansions of output without inflation resurgence is concerned.
Senator HEINZ. During the first 6 months of this year we had virtually zero inflation or less, yet 30-day and 90-day T-bills still commanded an interest rate in the range of somewhere between 6 and
7 percent. That is about as secure an obligation as anyone knows
of. That implies very high real interest rates.
What is it going to take to get real interest rates-the difference
between the nominal rate and the inflation rate-at least in my
terminology-down? Do you consider these a sign of some kind of
stress or distress or are we going through some other kind of cycle
or period where the returns to capital are for other reasons unusually high and the returns to labor at least in this country relatively
low in terms of growth?
Dr. HELLER. Well, in addition, I would stress very much the role
of the Federal deficit not only in this country but in countries
around the world. That large Federal deficit and the demand for
funds in capital markets that is associated with that large Federal
deficit, I believe, is responsible to an extent for these high real interest rates.

Digitized by


AB we bring down our Federal deficits, these real interest rates
should fall.
Senator HEINZ. Well, Dr. Heller, I understand that that's what
the book says and yet our deficit as a percentage of GNP has been
falling. It's been high. It's been about the same, but as a percentage of GNP it's been falling and maybe you have better statistics
than I do, but my impression is there's no shortage of lendable
money. There's plenty of availability of credit and there doesn't
seem to be a surplus of demand for credit that would create the
kind of demand and supply conditions unless-and it would seem
to me that in theory you've got to be right-in practice something
has happened to the supply and demand equation that has bumped
up the real interest rate in a way that puzzles a lot of us.
Dr. HELLER. It is still true that we are pulling in very large
amounts of foreign funds on a net basis, into our country, and I
think that's another indication of the great financing needs that
we have at the present time.
I agree that there are also other factors, like uncertainty in financial markets and nobody knows exactly what's happening with
tax legislation. These factors may contribute to a higher level of
real interest rates because people are asking for an uncertainty
premium in addition.
Senator HEINZ. Is there anything we can do about that uncertainty premium besides ratchet down the budget dificit? Is our
trade deficit an element there? Is world debt an element there as
Dr. HELLER. I would say the trade deficit is to a large extent also
reflective of the large budget deficit that we have in our country
because the aggregate demand for goods and services, including the
Federal demand for goods and services, just spills over into the foreign sector and thereby pulls in these imports.
So the solution to the trade imbalance will also lie to quite an
extent in the elimination of the Federal deficit.
Senator HEINZ. If we can't do a better job of reducing spending,
should we increase taxes?
Dr. HELLER. I would do that only as a very, very last resort.
Senator HEINZ. You mentioned the tax bill. My last question has
to do with the tax bill and one of the predictions regarding at least,
the Senate tax bill. We don't know what's going to happen in the
House-Senate conference-probably nothing good. We'll have to
compromise with the House on some things we shouldn't. The
Senate tax bill, because of the lower tax rates, both average and
marginal, and because of the elimination of certain deductions
such as the consumer interest deduction, is estimated to reduce interest rates by some economists.
Do you agree with that?
Dr. HELLER. Yes.
Senator HEINZ. By the same token, because of the shift of tax
burden in the case of the Senate bill-roughly $100 billion over 5
years to business to corporate America-it is also believed that the

Digitized by


bill will result in more consumer spending. There will be less tax
burdens on consumers and more on business.
Would you agree with that?
Dr. HELLER. Well, clearly there's a greater tax burden on business as a result of the bill. I think nobody would differ with that.
You mentioned the figure of $100 billion which is the current estimate.
Senator HEINZ. Will that $100 billion in funds that are made
available to consumers-they will have more to spend-will that go
principally into consumption or into savings?
Dr. HELLER. Well, it will be split. Principally, it will go into consumption. Over a longer period of time, one has as a rule of thumb
that approximately three-fourths of it will go into consumption.
Senator HEINZ. If the tax bill not only lowers the cost of capital,
which presumably a reduction in interest rates is an important element to bring about, but at the same time it also makes the kind of
changes in tilting more toward consumption and away from investment, do we come out ahead or behind or can't we tell?
Dr. HELLER. Well, overall, I think we will come out ahead because, first of all, the consumption effect that you talked about earlier will bring forth more production of goods and services.
Senator HEINZ. It might bring in more imports. A few minutes
ago you said the fiscal stimulus stimulates imports. If the tax bill
results in consumer stimulus, why won't that mean more imports?
Dr. HELLER. I think it will be associated with more imports too.
All the more important it is to eliminate the Federal deficit because then you get the macroeconomic equation right again so that
you don't have that excess of spending. But I agree with you that
some of these additional consumption goods will be bought abroad.
There's every reason to expect that.
Senator HEINZ. Dr. Heller, thank you very much for your answers.
Dr. HELLER. Thank you, sir.
The CHAIRMAN. Dr. Heller, if we could go out of order just for a
moment, Senator Dixon has to leave and would like the opportunity to introduce Dr. Mussa and so we'll do that. You don't need to
leave and he doesn't need to come up. We'll just make sure that
the recorder places Senator Dixon's introduction in the proper
place when we start the next hearing. Senator Dixon.

Senator DIXON. Thank you, Mr. Chairman. I thank you and the
ranking member for letting me impose for a moment to introduce
Dr. Michael Mussa, who is a distinguished Illinoisian. He's a product of one of the truly premiere educational institutions in our
country, the University of Chicago. He was educated there and he
now teaches at the university, and while I do not know Professor
Mussa personally, I am told that he is an economist of real distinction.
He currently holds the Abbott professorship at the University of
Chicago and he received the Prix Mondial Nessim Habif from the
University of Geneva for his research in international economics,

Digitized by


and I recommend him highly to the committee, Mr. Chairman. I
thank you for the time.
The CHAIRMAN. I thank the Senator from Illinois.
Senator Proxmire.
Senator PROXMIRE. Thank you, Mr. Chairman.
I was seeing if I can think of a question that will empty the press
table on the left. The people on this side are a little more stable I
guess. [Laughter.]
I just have a couple of questions because I know Dr. Mussa has
been waiting very patiently.
Isn't the answer to Senator Heinz on why interest rates are high
comparatively, is that they're high because lenders are smart
enough to see that our fiscal and monetary policy-and there's a
lag involved certainly in monetary policy-Mr. Friedman has demonstrated that very well-will lead to future inflation, perhaps
very great inflation, so lenders demand an inflation premium to
compensate for the expected inflation in the future?
Dr. HELLER. I believe your statement is entirely correct for
medium- and long-term interest rates. However, it would not explain the high-interest rates on short-term instruments.
Senator PROXMIRE. Well, isn't the answer there that these interest rates are interdependent to a considerable extent and the
higher rates on long- and medium-term have an influence on shortterm interest rates?
Dr. HELLER. Yes, as far as the inflation premium is concerned,
you may well have lower short-term interest rates. In other words,
you would get a steeper yield curve if you would expect that inflation would pick up very rapidly.
At the present time, we have a yield curve that is rather flat as
far as the overall profile is concerned. To me, that would indicate
no great change in the inflation rate expectation over the time
period covered.
Senator PROXMIRE. Now as you look back over the conduct of
monetary policy during the last 10 years, there must have been occasions when you disagreed strongly with actions taken by the Fed.
Can you outline for the committee the two or three major mistakes made by the Fed where you would have argued for a different course had you been a Federal Reserve Board Governor?
Dr. HELLER. Well, I think that's a very, very difficult question for
me to answer because whatever I say or don't say may lead to some
major mistakes on my behalf. In other words, when I walk out of
here I may say, well, that's really an instance where I would have
disagreed with the Federal Reserve or not.
Senator HEINZ. Senator Proxmire, are you trying to get the rest
of the people of the press to leave? [Laughter.]
Senator PROXMIRE. Well, I'm trying.
Dr. HELLER. I don't know. I honestly don't know how to answer
that question in such a broad framework.
Senator PROXMIRE. Well, I don't ask you to criticize any particular member of the Federal Reserve Board or anything like that,
but I would just like to get a sharper delineation of your philosoREVIEW

Digitized by


phy and your view. I think all of us may support or criticize the
Fed for one thing or another. It's not a question designed to get you
in any difficulty and I know you're smart enough you won't get
into any difficulty.
Dr. HELLER. Well, there were times where maybe the policy
could have been a bit more steady, if you want to call it that way.
In the early 1980's, interest rates had enormous volatility, in 198081, in that period in particular. If the Federal Reserve maybe had
been a bit more steady-and the Federal Reserve is not the only
agency influencing the level of interest rates-I think it would
have served the country better.
Senator PROXMIRE. Was the depth and duration of the 1982 recession caused in part by the Federal Reserve policy that was too tight
under the circumstances?
Dr. HELLER. Well, too tight or not too tight-I think that's a very
tough question to answer again. Clearly, the Federal Reserve had
to stop the inflationary climate that we had gotten into in the
1970's. It is, I think, fairly easy to be a Monday-morning quarterback and to say, well, if the monetary growth process would have
been slowed down over a period of 5 years instead of over a period
of 3 years, then the recession would not have been as severe as it
actually turned out to be.
I think at the time that the decisions were made the Federal Reserve probably did the best that could have been done.
Senator PROXMIRE. Now you're taking the place of Preston
Martin I understand and your California background is very
strong. You got your doctorate at the University of California at
Berkeley in 1965. You were associate professor of economics at
UCLA in Los Angeles from 1965 to 1971. From 1978 until the
present you've been a senior vice president and director of international economics at the Bank of America in San Francisco. Is that
Dr. HELLER. Yes, sir.
Senator PROXMIRE. Now, on July 17, the New York Times carried
an article about Bank of America's $640 million loss in the second
quarter of this year. That loss is the second largest ever for an
American bank, following the $1.16 billion loss by Continental Illinois in the second quarter of 1984. It comes on top of other major
losses by Bank of America in recent years.
My understanding is that one reason that Bank of America has
been able to deal with these problems is because it was forced by
regulators in recent years to better its capital position.
In May 1983, in testimony before the House, you mentioned your
own reservations about forcing banks to increase their capital.
In retrospect, do you now favor that emphasis even if foreign
bank regulators permit their banks to operate with less capital?
Dr. HELLER. Higher capital provides a certain cushion, a margin
of safety, for the depositors of the institution. In that sense, banks
that are highly capitalized clearly provide a greater margin of
safety and, as a result, these banks also benefit from having more
favorable ratings from the rating agencies and therefore are able

Digitized by


to raise funds at lesser costs than banks that are not so highly capitalized.
I think it's very difficult for a bank in a time of higher loan
losses to raise capital at that particular time as well. If you have a
higher capital cushion to start out with, clearly you are in a better
position to weather difficult economic conditions in the future. But
if you are forced to increase capital at a time when you are already
in difficulty, I think you are putting a lot of stress on that particular institution.
Senator PROXMIRE. Well, of course, you are, but isn't that one of
the disciplines that the regulators are in business to do? You will
be a bank regulator as well as a monetary policy expert and you
will determine monetary policy along with the other Governors,
but you're also a regulator. Don't the regulators-under these circumstances-have a duty to force banks to do some things that are
unpleasant that they won't do themselves? It's hard for them to do
it, but if they don't do it the banks will be in trouble.
Your bank, Bank of America, is in trouble.
Dr. HELLER. Well, we may differ on that, but we would certainly
be happier if profits were higher.
As far as the regulatory question is concerned, what I'm saying
is that the regulators should not change course at a time when
there are already great stresses on these financial institutions. If
the regulators had had the foresight to ask for these higher capital
requirements in the first instance, the banks would have been
clearly better placed to live through these difficult times that they
were encountering.
I think there's a second question. I think that's what I really
stressed in that earlier testimony, that many banks in other countries have much lower capital ratios. Overall, the Japanese banks,
for instance, have roughly half the capital ratios that we have in
this country.
Now, with these lower capital ratios, they have credit ratings
that are, on average, better than the credit ratings of American institutions. The Japanese banks are also operating branches and
subsidiaries in this country, and what I'm calling for is a bit more
of a level playing field not only domestically but also internationally.
Senator PROXMIRE. Well, that may be, but I don't see any conflict
between a more conservative banking operation plus a capital ratio
of the kind that Arthur Burns, who we all respect greatly, recommended of about 7 percent. It's a lot less than that now. Many of
these banks have capital ratios around 3 or 4 percent, as you know,
especially the big banks, and, as you say, the foreign banks have
even lower capital ratios, but they have apparently more conservative policies judged by their results.
Dr. HELLER. Well, Bank of America, I'm happy to say, has a capital ratio of approximately 6 percent, so it's close to the Burns
standard that you are advocating.
Senator PROXMIRE. Well, it's close to it but it's below it.
Dr. HELLER. Yes.
Senator PROXMIRE. That was a minimum of 7 percent.

Digitized by





In May 1981 you testified before the Foreign Relations Committee on the debt servicing capacities of developing countries. You
said then:
The international portfolio of commercial banks is rather well diversified and the
risk that default by any one country would materially affect the health of the international banking system is therefore rather remote.

Do you still believe that? If Mexico defaulted, what would be the
impact on the Bank of America and on the banking system as a
Dr. HELLER. Well, an outright default of Mexico would clearly
not be a pleasant experience for any major bank around the world.
Given the exposure of the large American banks, including Bank of
America, it would be a very difficult pill to swallow at the present
I think we have portfolio diversification, for instance, between
loans to Brazil and to Mexico. I think overall it has been true that
this diversification has clearly helped the banks to weather the
very severe international difficulties that we encountered.
As you recall, in the early days of the debt crisis, Mexico was improving its conditions rather rapidly. I'm talking about the period
in 1983, early 1984, when oil prices were still very high; while
Brazil was struggling. Since then we have seen a reversal of the
fortunes of these two countries, that was not entirely unrelated to
the oil prices. So the diversification that I was talking about really
has helped us to live with the difficulties in the international financial world.
Senator PROXMIRE. But apparently you would modify, then, your
statement of May 1981 where you said the international portfolio
of commercial banks is rather well diversified and the risk that default by any one country would materially affect the health of the
international banking system is rather remote.
You would agree that if Mexico, for example, defaulted, there
would be considerable problems?
Dr. HELLER. Yes; there would be considerable problems. I think I
was talking about the average country rather than the biggest ones
as far as total international debt is concerned, Mexico and Brazil
being them.
Senator PROXMIRE. Thank you very much.
The CHAIRMAN. Thanks very much, Dr. Heller. We have no additional questions for you at this time. There may be some from
members who were not able to be here this morning who would
like you to respond in writing, but we will move forward with your
confirmation process as rapidly as we can. Thank you very much.
Dr. HELLER. Thank you, Mr. Chairman.
[Response to written questions of Senator Gorton and biographical sketch of nominee follow:]

Digitized by


Question 1.

Given the current economic conditions of

slowing growth, contractionary fiscal policy, falling interest
rates, and a trade deficit that reaches new records regularly,
what tools are available to the U.S. government to stimulate
growth? Or are we heavily dependent upon other economies at
this point?

High economic growth in the key industrial

countries would undoubtedly help to increase our exports and
thereby our economic growth, with particularly beneficial
effects on those of our industries that have been affected by a
loss of export markets.

However, exports account for only 9

percent of U.S. GNP and even a high percentage rate of growth in
that sector would contribute only

a relatively

small boost to

overall U.S. GNP.
The U.S. Government can help to sustain economic growth
in this country by reducing the Federal deficit through- spending
cuts and by implementing swiftly the proposed tax reforms.


short-term contractionary effects of the fiscal policy may well
be limited as private spending is stimulated by the lower
interest rates and greater availability of credit that would
result from the lower deficit, and, if necessary, could be
counterbalanced by a more accommodative monetary policy.


tually the tax cuts and the tax reform will result in a more
acceptable sharing of the tax burden and a reduction of distortions in resource allocation patterns.

As loopholes and special

tax incentives are reduced or eliminated, investors will respond
by allocating investment funds on the basis of economic incentives and not just tax incentives.

This improvement in resource

allocation, in conjunction with the lower marginal tax rates,
should improve the climate for sustained economic growth in this

Digitized by




Question 2. Given that the Germans and the Japanese
are reluctant to stimulate their domestic economies, what course
should the U.S. follow to stimulate domestic economic growth?

I have answered this question largely in the

context of Question No. 1.

To repeat, the key to achieving

sustained economic growth in the United States is the swift
implementation of tax reform and the deficit reduction program.
During that period monetary policy should be accommodative if
needed to sustain U.S. expansion.
Question 3. Would you say that it has heen possible to
lower the discount rate for the third time this year because of
Congressional efforts to curb federal budget deficits or because
of slowing economic growth?

Both the Federal deficit reduction program and

the slowing economic growth have helped to reduce interest rates
since late last year.

In addition, the decline in inflation and

in inflation expectations also have contributed in a major way
to bringing about lower rates.

It is difficult to disentangle

the effects of these various influences, although the proposed
Federal budget cuts probably had their impact mainly on expectations and therefore on medium and long-term interest rates.
Within that framework of falling interest rates and subdued
economic expansion, it was possible to lower the discount rate
as wel 1.
Question 4. Some private and many government
forecasters are predicting a rise in the rate of growth to as
high as 4% in 1987. What factors will contribute to this rise?

The fall in interest rates and the ample

monetary growth that has taken place should be key factors in
stimulating the domestic economy.
in the exchange rate.

A further factor is the fall

I would expect that the fall in the ex-

ternal value of the U.S. dollar will have a reasonably strong

Digitized by



etfect on the import competing sector in this country.

By pro-

viding a more level playing field for domestic and foreign
producers, it should be possible for domestic corporations to
compete more effectively against their foreign counterparts.
I do not anticipate a rapid increase in U.S. exports
because foreign growth rates are rather modest and the demand
for U.S. products should therefore increase only slowly.


will be difficult for U.S. producers to compete in the markets
of Japan and Western Europe as domestic producers in these
countries offer stiff competition to American exporters.


should also be borne in mind that Third World markets in Latin
America, the Middle East and Africa are largely depressed and
that export prospects for these traditional markets of American
producers are therefore not very bright.
Question 5. What factors should be taken into account
in setting monetary policy?

I believe that a broad range of factors should

be taken into account in determining monetary policy.

In addi-

tion to the traditional monetary aggregates, one should consider
economic conditions in the country at large, as evidenced by
capacity utilization rates, employment and unem~loyment rates,
and the like.

A second group of factors relates to the price

performance in commodity and asset markets as well as the
markets for goods and services.

Third, interest rates, and in

particular real interest rates, have to be paid much attention.
A fourth group of factors that should be increasingly taken into
account relates to the external sector.

Exchange rates and our

trade performance are among the important indicators in this

Digitized by



Question 6. Can we •xpect to see upward pressure on
inflation as a result of the fall in the value of the dollar?
If so, when? If not, why not?

I would not expect that major upward pressure

on inflation would result as a consequence of the fall in the
price of the dollar experienced so far.

World market prices

have been rather stable in terms of U.S. dollars, and consequently little or no inflationary stimulus has emanated from
that source.

I would view the current change in the exchange

rate of the dollar versus the key currencies of Japan and
Western Europe mainly as an appreciation of their currencies
rather than a depreciation of the U.S. dollar.

The difference

lies in the stable price performance of the American currency at
the present time.
So far foreign producers have been able to absorb much
of the appreciation of their own currencies through a reduction
in the rather ample profit margins that they enjoyed in the
recent past.

Consequently, they did not have to increase U.S.

dollar prices or have done so only by modest amounts.

This has

contributed to the stable price performance of the American

A further marked drop in the dollar, however, would

probably put much greater pressures on those producers to increase prices, and might, therefore, tend to have a more
pronounced impact on domestic U.S. prices.
Question 7. Are there any factors on the horizon that
may reignite inflation?

There are no indications that inflation will

increase rapidly in the immediate future.

We should expect a

modest pickup in the measured inflation rate once the beneficial
effects of the oil price increases have been fully passed
through, but I would expect overall price pressures to remain
quite moderate.

Digitized by



Question 8. Suppose that inflation does rise again
sometime during the Gramm-Rudman-Hollings deficit reduction
period. What type of policy should the Fed pursue as Congress
continues to reduce deficits?
Should Congress pursue a less contractionary course if
the Fed was to restrict money growth under such circumstances?

If there should be an increase in inflation in

the coming years, the Federal Reserve should take that into
account, along with the other factors mentioned in the answers
to Question 5, in determining future monetary policy.
I do not believe that Congress should waver in its
deficit reduction program to offset a temporary restriction in
the growth of the monetary aggregates under such circumstances.
It would be very difficult to fine tune fiscal policy to respond
to temporary changes in monetary growth, and such an action
should not deflect Congress from the overriding goal of
restoring fiscal discipline.
Question 9. Do you believe that proposals to permit
bank holding companies to underwrite municipal revenue bonds,
commercial paper, or mortgage-backed securities threaten the
safety and soundness of our banking system? Do they enhance it?

I believe that it is perfectly reasonable for

commercial banks to underwrite municipal revenue bonds, commercial paper or mortgage-backed securities.

These are activities

clearly related to banking activities now performed by commercial banks and would help to enhance the earnings and competitiveness of the banking system.

I would judge that the risks

associated with these activities are no different from the risks
incurred by banks in their other activities.

By offering

aiother source of banking earnings, the product differentiation
will help to enhance the stability of the earnings base of the
banking system.

Digitized by


JI~ L. t-€Ye
II f!,.,,;,..J
Rober r




Marital status:




1(0 f'IKeolblrth:






N-::i::: ~1,.,


,z,;r.,., ~ '">'J"l'.Date~natlon:

7- 21- Fb

G e-rtr,4-K/


t::U.. e(E"N"


il~'-'1, II
[? - - - - - - - -




pn,u~.r ~'-'-E"""..

~ l'flNNaorA

,-,,,_,,-,.,....,,.p1L1.r, "'"'f
VNt-'. 6/: Clk1F<J<c,1A
[l ..-.ZI( f,Le-Y,




Dates of







fl,. i).


F/1-tR. F-, ".... i> /0-./A




Honors and -n11: Ult below all schalarshlpe. feHowlhlpa, honorary_,_, mllltary medals, honorary society
memberships, and any other apeclal ........,111on1 for outstandln1 service or achllV9ment.

t?J-f<~ D€7.:r~


s n,~ tT, u C. L. H'

/4SJOC- ,n.Pi'>frJ",



f:'--(Jfll1a /11Jw#

,:, .. ,]'fltw,

I ,.,,

,«.,,. ry
fe1'J-(I( ,,,,


o-..,.r'ilhf/},ffli Se«nCf- 4-1/,M.j)

Digitized by



List below all memberships and offices held in professional, fraternal, business, scholarly,

civic, charitable and other organizations.
Offiee held
(if any)

O'1(■ nization


€~.,..,c 1/'



R-o'lm.. ~-,c



t-,,,.ec, 4r"1M,1'11c7i'

/C/6 7- ~ p , r

!'i6J- PJl-,;r,,.,,


1%.r -IJZ.-rt'HT


r - 71
/976' -/1/l#;ow,-


M-1-11~,>'1~ '(A<H• C1.,'1 I]

S'A--tf ,FM,,C.]"C(, '140i,CulJ
/$mf~ C t.."'!Jlfhf Fa,..c..n.j

/q 7'1 - /JtZri ..°T'p,-

Ti/$,; {U,( PPttriS<L.+ cu,8

1-it 2. -1'£€Jt?N,


Employment record: List below all positions held since college, Including the tttle or description of Job, name of
employment. location of work, and dates of inclusive employment.

l16r-11 /ltff. /tu«..'Ptt.,Fgh,~~1a UCt..,fo 1..,.01,f,,.,c,~e.c+.

f,7/ -?If


ttnv-7! Cltt~


~~-f t,:;;:;~2


s 71,,.i),t,,,-:I


~l-{.,f,,r,t-1~ ./1,twoc.,,u, If,

]), Vt.J',


/H~IV4--,,,,.,.,,t,... /'}1""1-(,:f,rtr.1 F-,,,-;_j


sei,~ v,cr p.z.e,,.,-,

/Mr''- -(;cnt.

73 ftr/K


A,-(i) j),,'<,E'(:~


~ 111-1,:.VCfi [Jrl( H1,,t,-1c,"J'l,.J 1 (Id.


Digitized by



List any experiance in or di1'9Ct association with Federal, State, or local ..,..mmlnb, in-

cludin1 any advisory, consultati.., honorary or other part-time Mlvice or positions.



Ult the titles, publishers and datae of books, articles, rwports or other published matarlal1
you haw wrtttan.

A- TT,+Cl-(Ei)

and activities:



List all memberships and offices held in and services rendered to all politlcal parties or
elaction comm~ duri111 the last 10 years.


K-r1' .. iJt.1

C,,'ty,f ~



63-040 0 - 86 - 3
Digitized by



Itemize all political contributions of $500 or more to any individual, campai&n orpniza•
tlon, political party, political action committee or similar entity during the last eilht
years and identify the specific amounts, dates, and names of the recipilt)ts.



State fully your quallflcatlons to MM in the position to which you have been named.

A- TT,,K~'J)
Future employment
1. Indicate whether you will sever 111 connections with your p,...nt employer, bull.firm, association or O'lanization if you are confirmed by the Senate.

2. As far II can be foreseen, state whethllr you h... any plans after compilting IDYWII•
ment service to resume employment, affiliation or practice with your previous em•
ploy9r, busi.- firm, association or orpnlzation.

3. Has anybody made you a commitment to I job aflar you ._.. ..,.,.mment?

4. Do you expect to MM the full term for which you h... been appointed?



Digitized by


Potential conflicts
of Interest:

1. Describe any financial arranaements or daferr9d compensation a1l'Hlllents or contlnulnc dealinp with business associates. clients or customers who will be af•
fected by policiu which you will influence in the position to which you h.,,. been

tfl'oAl'e-. Al. L


"''"'c,,,.._ ~-, ,..,~ r,-,,,r

2. Ust any lffllU!ments, obligations. liabilitiu, or other relationships which mllht invoift
potential conflicts of interest with the position to which you haft been nominated.


3. Describe any business relationship, d•ll111 or financial transaction (other than tax•
payinll) which you hawt had durln1 the last 10 years with the Flderal Government,
~ e r for yourself, on behalf of a client, or actin1 as an qent, that mi1ht in any
way constitute or result in a possibla conflict of interest with the position to which you
haft been nominated.



Digitized by


4. Ust any lobbyin1 activity durin1 the put 10 yurs In which you have w,ppcl for the
purpose of directly or indirectly influenc:in1 the palSql, dlleat or modification Ill
any loaislation at the national level of .-,nment or llfloct1111 the administration and
execution of national law or public policy.


11,/c: CJ-H6',t,.erhhfA-L

OTH~ 7114-,,,

5. Explain how you will resolve any pol9ntlal conflict of i - that may be discloslld by
your respon-to tho above items.


~Hl!'"CT"1h<.I { p~-..,J', -

e--,P,n.,yt v,
Civil, criminal and


l'<,'h,) V1 TH ~ T P - f •

C..,-W "F-1,t ~ T , - ,



qo ,.,,,,-.u·

1. Give tho lull ootails of any civil or criminal proceedinr In which yoii were a defendant
or any inquiry or invostlptlon by a Fllde,al, S-, or local apncy in which you were
tho subject of tho inquiry or lnvostlptlon.

I lv'M /V/t"1'1e> /I:,



~DA-r,, //'( /f ~,.,

W/t,:f 1>1.1""1/..S.I~



ar.+n. ?,1-tt-11:Jw,P.

,+ R-€1h.

,.T /!..lriRv.:r, ~ PLh1H1'1FF.

'P.1Htr,,V~.rH11' /.I iJE: ,,., ~

~II.Ioc.. vej) A-c~i),H(f;

2. Give tho full details of any proceodln1, Inquiry or investlption by any professional
association includin1 any bor association in which you were the subject of tho pn,ceedin1, inquiry or investiptlon.



Digitized by


H. Robert Heller
Statement of Qualifications to Serve as Member of the
Board of Governors of the Federal Reserve System
I believe that I am qualified to serve as a member of the
Board of Governors of the Federal Reserve System because of
my academic experience, service with an international
governmental institution, work experience as bank executive,
extensive publishing activity, and previous relations with
Congress. A complete biography is attached.

Academic oualifications
After receiving my Ph.D. degree in economics from the
University of California at Berkeley in 1965, I taught for 6
years at the University of California in Los Angeles and for
3 years at the University of Hawaii. My teaching activities
focused on money and banking, macro-economic policy, international trade, and international monetary economics. At both
institutions I was granted tenure through a faculty peer
review process.
After leaving full-time academic employment in 1974, I
continued to teach graduate economics and business courses at
Virginia Polytechnic Institute (Reston Graduate Program) and
the Graduate School of Business of the University of
California at Berkeley.
I have lectured at a large number of universities in the
United States, Germany, and Japan and participated in
numerous national and international academic, business, and
governmental conferences.

International organizations
I served with the International Monetary Fund for 4 years,
b~ginning in 1974. As Chief of the Financial Studies
Division, I was responsible for conducting and supervising
the IMF's ·research program in monetary policy and financial
markets. The results of that research were published in
academic journals, IMF publications, and internal documents.
As a staff member of the IMF, I participated in a wide
variety of intergovernmental consultations and negotiations
at the htghest levels. I assisted in the drafting of
speeches, policy statements, and the Annual Report. I also
helped to organize international conferences and meetings.

Page 1

Digitized by


commercial Banking
As Senior Vice President and Director of International
Economic Research at Bank of America, I have supervised the
international economic research activities of the bank since
1978. This has involved economic and financial analysis and
forecasting for more than 100 countries.
I also participated extensively in senior management
committees. In addition, I gave numerous speeches to bank
customers and the public about economic and financial issues
and had frequent contacts with the media.

Publishing Activity
I have published extensively throughout my professional
career. I have written 5 books, including International
Monetary Economics. International~. and l1le Economic
~ . My books have been translated into 5 foreign
languages. I have also edited books for the International
Monetary Fund.
I have written numerous articles for publications ranging
from the American Economic Review to the liAJ.J. street Journal.
In addition, I have served on the editorial boards of several
scholarly journals.

congressional Testimony
I have testified on 14 occasions before Congressional
Committees, including the Joint Economic Committee; the
Senate Subcommittees on International Finance and Monetary
Policy; International Economic Policy; and East Asian and
Pacific Affairs; as well as the House Subcommittees on
Domestic Monetary Policy; International Trade, Investment,
and Monetary Policy; and Financial Institutions, Supervision,
Regulation, and Insurance.

July 21, 1986

Page 2

Digitized by



Senior Vice President and Director
International Economic Research
Bank of America NT&SA
San Francisco, California 94137
(415) 622-2076





Senior Vice


President and Director of




internationally renowned expert on monetary and trade issues, he
serves as the bank's chief international economic spokesman.
Prior to

joining Bank of America,

he was Chief of the

Financial Studies Division of the International Monetary Fund, where
he was in charge of the 114F's financial research program.

He also teaches financial management in the Graduate School
of Business Amninistration, University of CalHornia at Berkeley,
the same institution where he received his doctorate.

A former

professor at UCLA and the University of Hawaii. he has lectured at
universities and business conferences all over the world.
Ile has testified n1.111erous times before committees of the U.S.
Congress and has served as a consultant to NATO.

In addition, he

has~ pub11shed ffve books and numerous articles on international
trade and finance.

Digitized by


Economics-Policy Research Department (J01Sl
Bank of /wrica
San Francisco, California 94137
(41!1) 622-2070
Birthdate: January 8, 1940
U.S. Citizen
Social Security Numer: 485-52-9879
Married to Ell11y Mitchell (1970)
Children: Kinilerly (19741, Christopher (1977)




Ph.D., University of California, Berkeley
M.A., University of Minnesota, Minneapolis



Senior Vice President and Director,
Internatfonal Econonric Research
Bank of lalrica, San Francisco


Chief, Financial Studies Division,
International Monetary Fund, Washington, D.C.


Professor of Econolllcs, University of Hawaii,


Assistant and Associate Professor of Econolllcs,
University of California, Los lngeles


Instructor, University of California, Berkeley


Lecturer, Graduate School of Business
Admfnfst,ation, University of California,


Co-Director, International Banking Sellfnar,
Al pbach. Austria


Adjunct Professor, Vi rgi ni a Tech and State
University, Graduate Center Reston, Virginia


Cnair111n, Departant of Economics, University
of Hawaii


Graduate Chairwan, Departnant o.f Econolllcs,
University of Hawaii


Director, National Science Foundation,
Institute for Econollfcs Instructors, University
of California, Los lngeles


Gastprofessor, Universitat Gottingen, Gerwany


Gastprofessor, Universitat des Saarlandes,
Saarbrucken, Gerwan1


Visiting Associate Professor, University of

Digitized by




Editorial Soard, International Tride Joumal


Advisory Conifttee, lntemational Affairs
Program, Golden Gate University, San Francisco


International Advisory Board,
Bank Administration Institute


Economic Advisory Co-1 ttee, Institute of
International Finance, wasnington, u.c.


Advisory Board, Institute on International
Finance, Southern Methodist University, Dallas,


Trustee, Institute for internatioMl Trade,
Berkeley, California


Member, Wi semen Group on Korean E.cono111r


Coaittee on Intemational Monetary Affairs,

U.S. Council on International Business, New

York, N. Y.


Executive Comi ttee, Westem E.conolll1 c


Associate Editor, wournal of Money. Creait 1
and Banking


NATO Fellow


Exchange Visitor, t.enmn Research Foundation


Exchange Visitor, Nagoya City University,

Nagoya, Japan


Distinguished Service l'Ward, Associated
Students, UCLA


Distinguished Ttacning l'Ward, Associated
Students, UCLA


Ford Foundation Grants

Major Sank of ,_ri ca Co-1 ttees


Trust and Fiduciary Policy Coaittee


Country Evaluation Advisory Co-1ttee

1978-Present _ Foreign Currency Outlook Conrlttee
(Chliraan since 1983)

Digitized by




International Money Policy Coillllittee


Country Risk Rating ~~11111ittee (Chail'l!lln)


Policy Research Council


rent ce a ,
g ewoo
s, •• ,
rst e ition
1968, Second edition 197J; Japanese edition 1970 and 1984,
Portuguese edition 1970, Taiwan edition 1974, Geran
edition 1975, Malaysian edition 1983, Spanish edition 198J.
International Monetary Econollics, Prentice Hall,
tiiglewood Clfffs, N.J. 1974; Tatwan edition 1978,
Spantsn edition 1~78, Japanese edition 1979,
Malaysian edition 1983.
The Economic S.yste•, TIit. Macllillan Co., New Yortt,
N.Y., 1972; Portuguese edition 1977.
Jap1111ese Investment in the United States (with Emily Heller),
Praeger Publfshen, New York 1§14.
Tne Economic and Soci11l I~act of foreign Invtstant in
H11waif (w1th Eiil1y Re er), Econoiifc Res11rcri
Center, Honolulu, Hawaii 1973. Japanese edition
publ lshed in Econ0111c Society Polic~,
/ipr11 and May, 1974 • . X1so publlshe by Hawatt
International Services Agency, State of Hdwaii, 1974.
Books produced for tllt Internetion1l Monet1ry Fund
TIit Monetary #pproach to tile Balance of Payrants 1 1977.
TIit New International Monetary SistH, R. A. Jillndell and J .J.
Polak, eds. co1uii1a Un1vers ty Press, 1977.

Ess!is in Econolllc ?o11c) by J. Marcus Fleming
oluiiibf1 Unfvenf~ ress, 1978.


Testi ■o'!Y

"J1panese Investrant in Hawaii," Inpact of Foreign
Investant in tile United States, Hearings before the
Subcoat ttee on Foref gn co-rce and Touris• of the
Co..tttet on Co-rce, U.S. Senate, Dectmtr 27, 1973.
"TIit Eurocurrency Market Control kt of 1979, •
Stau1111nt before the Subconrlttees on Domestic Monetary
Policy ana on International Tr1de, Investant, and Monetary
Po 11 cy of tnt Conai ttee on Banking, Fi nanct, 1nd Urban
Affairs of the U.S. House of Representatives, June 27, 19711.

Digitized by




Proposed Redeffnftfon of the U.S. Monetary Aggregates,•
Measuring the Moneta~ :,sresates, Subcoarfttee
on 0omstfc Monetary o cy of the Co..tttee on Banking,
Finance, and Urban Affafrs, February, 19d0.

"Intern&tfonal Co-rcial Bank Lendfng and Desfrabflfty of
an ll'F Quota Increase,• State•nt Defore tne Sul>coaittee
on Internatfonal Trade, Investment and Monetary Policy
of the Comittee on Bankfng, Finance, and Urban Affafrs,
House of Representatives, -'llrfl 21, 1980.
•The Export Tradfng Co111Pany kt of 1980, •
State•nt before the U.S. Houu of Representatfves
Subco..-lttee on Ffnancfal lnstftutfons, Supervision,
Regulation and Insurance of the Co..tttee on Bankfng,
Ffnance and Urban Aff1irs, Wasnington, D.C., Septe111Der
JO, 1980.
"The Debt-Servicing Cap1city of Developing Countries,•
State•nt at the He1rfngs on "The U.S. Stake fn .the Globil
£cono111r. • U.S. Sen1te Subcoafttee on lntern&tfon1l
Econollfc Polfcy, Coafttff on Foreign Rel1tfons,
WdShington, D.C., February 25, 1981.
"TIie ll'F Quota Increase and the lntern1tfon1l Debt
Situation,• State•nt 01fore the U.S. House of
Representatives, Subco111111ttee on lntern1tional Trade,
Invest•nt and Monetlry Policy, i4-Y j, 19a3.


Energy Trade Policy in the Pacific Rf ■,•
Stateant before the U.S. Sen1te, Subcoafttee on Eut
Asian and P1cific Affafrs, Coafttee on Foreign Rel1tions,
July 19, 1983.

"TIie Need for an Il'F Quotl lncre11e, •
Stlte•nt before the U.S. House of Representltfves,
Subcoalittff on Foref9n Operations of the -'llproprfations
Co..tttff, September 20, 1983.

"The U.S. Tr1de Deficit: C1uses and Cures,"
State•nt before the U.S. House of Representatives, Ways
1nd Means Subcoanttee on Tr1de, -'llril 10, 1984.
"Foreign Trade and the B1lance of P~mnts,•
Stateraent before the Jofnt Econoartc Comittee, Hay 1, 19~.
"The Coll!Pet1tiveness of the Ooll1r,•
Statement before the U.S. Senate, Subco•i ttee on
International Fin1nce and Monetary Policy, June 6, 1984.


Economic Growt.1 1nd the Third World Debt: Monet1ry,
Fiscal, and Exchange Rate Policies of the lndustri111zed
Countrfes,• State•nt 1>efore the U.S. Senate, Subcoanfttee
on Intern~tfonal Econollfc Policy, October 9, 1985.

Digitized by




Econolllc Growth and Third World Oebt: Credit Flows of the
Private Banking System,• State•nt before the U.S. Senate,
Subcoalttff on International Econolllc Policy, October 10,


Neasure of International Liquidity,•
National Banking Review, DecelDer, 1964.


"TIit Oe•nd for Money: TIit Evidence fro ■
Short-Run Date,• ~arttrly Journal of
Economics, May, 1 5.


"Opti•l International Reserves,•
Econolllc Journal, June, 1filb6.
"Borrowers fn lnternationel Capital Markets,•
National Bankfn9 Revi1W, September, 1966.
"TIit De•nd for Money f n Sou th Afrf ca, •
Sowth African .iournal of Economics, Decemer,
"New Forefgn Bond Issues fn Europe,•
Lloyds Bank Review, October, 1967.

"So• Evidence on the Burden of Balance of Pay•nts
Adjust11ent," Western Econo■fc Journal, Dece11>er, 1967.
"The Transactions DeNnd for International Means of
Pay•nts,• Journal of. Political Ccono!r:, February, 1968.
"Opti•l Internetional Reserves: A Reply,•
Econollic Journe 1 , Dec ear, 1968.
"Sources of lnstabilit;y in the International Accounts,"
Weltwirtschlftliclles An:hiv, Vol. 1, 1970.
"Wealth and International Reserves,"
Review of Econoaics and Statistics, May, U70.
"The United States Balance of Pay•nts in 1968,"

Journel of 14oney 1 Credit. and Banking, llllgust, 1~70.

"Internationel Capital Move•nts and Monetary Equilfbriu ■:
Co-nt,• -rlcan Econolllc Review, Decear, 1970.
"The Effectiveness of the Principles of Econo■tc Course,"
Business Education Foru ■, "4y, 1971.
"More on Projecting, Forecasting , and Hinde.sting,•
~ournal of Noney 1 Credit. and ~ankini, May, 1971.

"The International Monetary Base and the Euro-Dollar Market:
co-nt," Kredlt und Kapltal, aetheft 1, 1972.

Digitized by



"International Adjustant and Optio•l Rtsenes,• (witn
Ro111ld 6rftto), International Econollfc ~evfew, Febru•ry,
•The Costs and Benefits of tile Doll•r •s a Reserve Currency:
Discussion,• Allrican Econollfc Review, May, 1973.
"illjustnant Costs, OptiNl Currency Areas, and International
Resents,• (wit/IM. Kreininl, Essos fn Honor of Jan
Tfnbergen, Iii. Sellekaerts ed., Niw91ork:
international Arts and Sciences Press, 1974.
"Foreign lnvestaent: TIit Hawaii•n Experience,•
Colulllbie Journal of World Business, Fall, 1974.
"International Reserves, Money and Global Inflation,•
Finance and Develu£'nt, i◄arch, 1970, reprinted fn
8. 8i1assa, td., C fffll!I Patterns fn Foreign Trade
and Pg•nts, :Srd ed ion, Norton 1911; also in Mirc•do,
Buenos Afres, 18 March 1976.
-. - "The Choice of an Exchange Rate System:

Theory and
Practice,• International Monetary Fund, Decelbtr, 1976.

International Reserves •nd World-Wide Inflation,•
IMF Staff Papers, March, 1976; reprinted in USIA,
Portfolio, Vo1. 4, No. 5, 1977.
"Tne Choice of an Exchange R•te Syste■ for a Developing
Country,• Cuadernos de Econo11ia, Jugust, 1977.
"The World Money Supply: ·Concept and i'leasure•nt," (with w.
Day), Weltwirtschaftliches Ar"chfv, Dece■ber, 1977.
"TIii Monetary 1')proach to the Balance of Payants:
Introductory Survey," (with R. Rho■berg) in IMF, The
Monetary ,eroach to the S.lance of Payments,
llishington, b.c., 1911.

Step at a Tf•, Tne ll4F Moves Toward Its Goal,•
Mlna9e•nt, June/July, 1978.

"Detenri nan ts of Exchange Rate Practices,•
Journal of Mon•J• Credit, and Banking, Jugust, 1978;
reprinted inc •• X: Digest.
"The Cllangin~ Role of the International ~netary Fund,"
(witll A. Crockett), Kredit und Kapital, Jugust, 1978.
"Reserves Currency ~references of Central Banks,• (with
H,Knight), Princeton Essays in International Finance,
No. 131, Decelli>er, 1978.
The De•nd for ' International Reserves Under Fixed and
Floating Exchanye Rates," (with M. Kllanl, IMF Staff
Papers, Decelllber, 1978.

Digitized by



"The Chang;ng International Monetary System,•
in: Tariffs, Quotas and Trade: The Politics of
Protectionis■, lnstftute for ~onteqiorary Stuaies,
San Francisco, 1978.
"The De111nd for Money and the Ter■ Structure of Interest
Rates,• (with M. Khan), Journal of Political £cono!IY,
February, 1979.
"The wrocurrency Market - A ue1111nd .-pp roach,•
wro ■oney, February 1979.
"The European Monetary System,•
Manage.. nt, May/June 1979.
"Choosing an Exchange Rate System,• Finance and
Oevelop•nt, June, 1977, reprinted in J • .lldam,
the Conte,:orary International £cono!IY, St.
Mirttn's ress, l979.
"Exchange Rate Flexibility ana Currency Areas,•
Zeitschrift fuer Wirtschafts und
Sozfalwissenschaften, l979,
"The International Monetary Syste■ and World-Wide
Inflation,• Colu ■oia Journal of Worla Business,
Fall, 1976, reprinted in J. Adams, the tonte;orary
International £cono"!)', St. Martin's Press, 1 9.
"Further Evidence on the Relationship Between International
Reserves and World Inflation," r1. Boskin, ed.,
£conollfcs and Huaan Welfare: Essais in Honor of
ttbor Scftovsij, Ai:adeitc Press, 1 79.
"Country Risk Analysis,•
.-rican Binker, J~ly 25, 1980.
"Recycling OPEC Surplus Funds: Refining the Process
tne Second Ti• Around,"
Mlna9ement, July/Algust, 1980.
"The Long-Run Role of the Dollar,"
£conumic Review, Fourth Conferenca, Federal Reserve
Bank of San Francisco, California, Fall, 1980.
"International Stabilization Policy Under Flexible Exchange
Rates," Stabilization Policies,
Federal Reserve Bank of St. Louis, 198u.
"Economic Theory and IMF Policy--Con■-nt,•
Carnegie-Rochester Conference Series, Vol. 13,
North-Rolland Publishers, 1911b.
"International'~eserves and WorlG-Wide Inflation: Further
Analysis,• IMF Staff Papers, March, 1981.

Digitized by


"Why Do We Lend to Developing Countries?"
Mana91•nt, May/June, 1~1.
"The North•South Dfllogu1: 1ft ,_rican Perspective,"
Conf1renc1 volu• U.S./&lropean Dialogue Congress,
Al pbac:11, ~stria; Ju111 , 1981.
"International 1:1tnking in a Multi-Currency World,"
The International Fraaeworit for "°"!t/nd S.nking
fn tfie Ullb's, Guy Auf6au1r, ed., c; pter 9,
Georgetown Univ1rsit,y Law Center, Washington, D.C.,
"TIii Role of Private Banks in Stabilization Progra•:
Coa.nt, • £.conolllc: Stabilfzatfon in Develo~~
Countries, by Willia ■ R. Clint and Sidney7itraub,
Ids., the Brookings Institution, 1981.

~set in international Markets,• (witn D. Lamnd)
Manage•nt, January, 1982.


"Developing Country Problem Afftc:t International Profiles,•
Allleric:an Banker, pp. 42-50, 26 Marci! 19B2.
"Con ind1sac:ion, no hay inflac:ion qu1 st d1tenga,•
( in Spanish) Revfsta IDE~
Buenos Aires, pp. 16-21, Maren, 1982.
"Deterlll nants of LDC Indebtedness, "
(with Eanuel A. Frenkel l, ColunC>h Journal of World
Business, Spring, 1982.
"Indexing and Inflation, ~
The Banker' s Magazine, July/lugust, 1982.
"Internal Gov1rn•nt Defic:its and tlll Rise in International
Liquidit,y,• Thi Nation Review, 16 Dec:ear 1982.
"Thi International Monetary Fund,"
Enc;yc:151tdia of £.conolllcs, D. Greenwald, ed.,
IEliraw 11, U82.
"Thi European £.conollfc: Co-..nity I EEC), •
Enc;yc:loRfdia of £.conollics, D. Greenwald, ed.,
IEGraw 11, U82.
"The Organization for £.collOlliC: Cooperation and Development
(OECO), • Enc;yc:lor.dia of f.c:onollfcs, D. Greenwald,
td., i,tcGraw H1l , 1982.
"Special Drawing Rights (SOR),"
Enc;yc:loR,dia of Econollics, o. Greenwald, ed.,
McGraw 1l, 1982.
"The Oollar in_ the International Monetary Syste■, •
TIie Polftical Econox of tlla United States,
North-Holland Publls Ing Co., 1982.

Digitized by


"Coiant on International Liquidity,•
The International Monetary System, J, Dreyer,
G. Raber1er, and T. Willett, eds., Alllerican Enterprise
Institute, 1982.
"Money and Credit in the E.lromarkets," (in Spanish)
Cuadernos Econollicos de ICE, No. 19, 1982.
"International Lending and the Debt of the Developing
Countries,• Portfolio, USIA, Vol. 91 No. 51 1982.
"Country Risk and International Bank Lending,•
P. Wdchtel, Crises in the Econollic and
Financial Structure, Lexington Books, 1982.
"Managing International Indebtedness," D. Fair and
R. Bertrdnd eds., International Lendin¥ in a
Fragile World, M. Aijhotf Pu61ishers,he Rigue, 1982.
"Why Should Congress Lend Foreign Banks a Hand?"
Wall Street Journal, 19 July 1983.
"Regulatory .Aspects of the World Debt Proble■: co. .nt,•
CATO Journal, Spring/Sunier, 1984.
"International Risk Manage•nt,• (with Kaj Areskougl,
Center for International Business Studies,
Pace University, Paper No. 6, ;~ay, 1984.
"Haben sich die flexiblen Wechselkurse bewanrt?"
in: Hans Seidel, editor, Geldwertstabilitat und
Wirtschaftswachstum, Vandenhoeck I Ruprecht, Gottingen.
"TIie Debt Crisis," Managing International Develop•nt,
July, 1984.


"Economic Outlook,• Contenporary Pol
(Western Econolllic Association). Yo • III, No. 1,
Fal 1, 1984-85.

"How the Il4f Could Revive Trade," Euromoney, Septeri>er,

"External Debt in Foreign Currency," (in Portugesel fn:
/INAIS, XV Congresso Nacional de Bancos, Salvador,
Brazil, Novelllber, 1984.
"World Trade and Honetary Order,• fortncoming Journal
of International Monetary Economics, (Gol<Miir
Conference, Arizona State University, March 16, 1985).
"Foreigners Target the Vast US Market," San Francisco
Chronicle, May 14, 198~.

Digitized by



The CHAIRMAN. Next, if Dr. Mussa would come to the table. This
morning we are also happy to welcome Dr. Michael Mussa before
the Banking Committee. He's been nominated to serve as a
member of the Council of Economic Advisers.
Since 1977, Dr. Mussa has been a professor of economics at the
graduate school of business at the University of Chicago. At the
same time, he has served as a research associate at the National
Bureau of Economic Research and published widely in economic
At CEA, Dr. Mussa will be the so-called macromember, dealing
with such issues as GNP growth, inflation, employment, and the
balance of payments.
Dr. Mussa, before we begin, could I have you stand and be sworn.
[Whereupon, the witness was duly sworn.]
The CHAIRMAN. Senator Proxmire, do you have any opening
Senator PROXMIRE. No opening statement. I have some questions.
The CHAIRMAN. Please proceed, Dr. Mussa.

Dr. MussA. I have a brief opening statement, Mr. Chairman.
Mr. Chairman and members of this distinguished committee, it is
an honor to appear before you today as the President's nominee to
become a member of the Council of Economic Advisers. I would
like to thank the President for the confidence he has expressed in
me in making this nomination. I would also like to thank Senator
Dixon for his kind remarks in introducing me to the committee.

If confirmed by the Senate, upon the recommendation of this
committee, my responsibilities would be those of the macromember
of the Council. Under the direction of the Chairman, I would be responsible for advising the President and senior officials of the administration concerning the aggregate performance of the U.S.
economy, especially the behavior of national output, employment,
and the price level, and concerning broad macroeconomic policies,
especially fiscal and monetary policies. I would also represent the
Council at the member level in determining the administration's
economic forecast. Given the current importance of international
economic issues, in particular the problems associated with large
and persistent payments imbalances, and given my background
and interests as an international economist, I would anticipate that
advising on these issues would also be a significant part of my responsibilities.
My qualifications for membership on the Council of Economic
Advisers derive primarily from my graduate training in economics
and from 15 years of experience as an academic economist. My
graduate studies in the Department of Economics at the University
of Chicago focused largely on macroeconomics, international economics, and econometrics. From 1971-76, I served on the economics
faculty at the University of Rochester, with the last 18 months on
leave at the London School of Economics and at the Graduate Insti-

Digitized by


tute of International Studies in Geneva. I joined the faculty of the
graduate school of business of the University of Chicago in January
1977, and was promoted to the William H. Abbott Professorship of
International Business in 1980. I might also note 3 years of service
on the business forecast panel of the University of Chicago, during
which I prepared and presented forecasts of the aggregate performance of the U.S. economy.
In addition to my academic work, I have served as a consultant
to the World Bank, as a visiting professor at the International
Monetary Fund, and as a consultant to private businesses and associations. This experience has been valuable in my academic work
and, I believe, will contribute to my effectiveness at the Council.
However, my extensive past involvement with the Securities Industry Association in controversial issues dealing with commercial
bank participation in securities market activities might give rise to
the appearance of conflicts of interest if I were to become involved
with these issues while at the Council. Accordingly, I have taken
steps to recuse myself from any such involvement. I shall also
avoid involvement with other issues that might give rise to conflicts of interest or the appearance of conflicts of interest.
Thank you, Mr. Chairman. I would now be pleased to answer any
questions from the committee.
The CHAIRMAN. Dr. Mussa, it's my understanding that as a
member of the Council of Economic Advisers you will not participate in matters that might affect certain companies in which you
own stock until and unless you receive waivers to participate. Is
that correct?
Dr. MussA. That is correct, yes.
The CHAIRMAN. It is my understanding that you will be on leave
of absence from both the University of Chicago and the National
Bureau of Economic Research while you serve at the CEA. Is that
Dr. MussA. That is correct.
The CHAIRMAN. While a member of the CEA, do you agree to
appear before this committee and any other duly constituted committee of the Congress when requested to do so?
Dr. MussA. I do.
The CHAIRMAN. In your opening statement you note that your responsibilities at the Council will be those of the macromember
dealing with such subjects as GNP, inflation, employment, balance
of payments, and other issues of broad monetary and fiscal policy.
Over the last few months, we've seen a great deal of change in
the perception of the economy. What I'd like is just a general
answer to my question on how you see this developing and including in that not only your outlook for the economy, whether the economic expansion will continue or not, but our reporting-it seems
to me that where perceptions are so important in the economy and
you get all of the stories and the psychology going-well, the
growth rate is really slowing dramatically, and then several
months later you find out, no, that was not correct; it was much
better than we said.
Is there something wrong with the reporting as well and can we
do a better job so we're not having, in addition to the real problems
out there, adding perception problems?

Digitized by



Dr. MussA. Well, I think the Government's statistical agencies do
the best job they can to report honestly the performance of the
U.S. economy.
I think one of the difficulties we've been having recently is that
some sectors of the economy have continued to perform quite
strongly, while others have been performing more weakly. In particular, the goods-producing sector of the economy, in that sector,
employment grew strongly in the early stages of the expansion but
has leveled off over the last 2½ years or so, whereas employment
has continued to grow strongly in the service sector of the economy.
The upward revisions in real GNP growth in 1985 were largely a
consequence of an upward revision in the estimate of real services
output sold to consumers.
I think that's an area where we have considerable difficulty in
measuring what's actually going on in terms of economic performance on a current basis.
I might note that in the first half of this year we have seen a
pattern which was similar to that in 1985, particularly in the
second quarter. We saw the continuation of reasonably strong employment growth, particularly as measured by the household
survey, combined with sluggish growth of real GNP. Now it may
be-and we don't know the final answer yet-that the sluggish reported growth in GNP is a little bit overly sensitive to performance
in the goods sector of the economy and when we have more complete information in the service sector will add a little bit of
I wish there was something that could be done to improve the
accuracy of the initial indicators that are released of economic performance. I believe there's a committee working actively on that
issue at present within the administration and consulting with outside experts on that subject.
The CHAIRMAN. Beyond the actual use of the statistics, what is
your analysis then of the current situation and what do you anticipate over the next few months?
Dr. MussA. In terms of the current situation, over the first half
of this year, real GNP I think has grown a little bit more sluggishly than I would have anticipated. I said I served on the business
forecast panel. It didn't release the formal forecast last December,
but my estimate would have been something like 4 percent real
GNP growth for 1986, about in line with the administration's forecast. And we've clearly fallen below that, particularly in the second
In my view, the decline in oil prices and the effect that that's
had on the energy industry both in terms of employment and investment is part of the explanation for why we have fallen a little
below the forecast of real growth performance. That's an event
which has pain for the economy in the short term but which I
think will produce higher real growth as we move to the second
half of this year and particularly into 1987.
We did a little dynamic simulation of what the effects of an oil
price decline would be based on what the effects of an oil price in-

Digitized by


crease were in 1973 and 1979, and we found the pattern there was,
first, there was some gain for the economy and then subsequently
decline when oil prices went up. And if you reverse that, you would
expect first some negative effects and then some positive effects.
So I think that the real growth performance being somewhat
below what was anticipated in the first half is partly the consequence of what's been happening in the oil sector and I would
expect that we're going to get more of the beneficial effects of the
oil price decline in terms of real GNP growth later this year, particularly in 1987.
There was also substantial further deterioration of the real trade
balance in the first half of this year, particularly in the second
quarter, and that's kind of a quirk of the way in which we put together the real GNP numbers. The number of barrels of oil imported each day increased from a little over 5 million barrels to a little
over 7 million barrels. So if we value each barrel of oil in calculating real GNP at 1982 prices, we're costing that oil at over $30 a
barrel and we said real imports expanded because we increased 2
million more barrels at a price of $30 a barrel and, therefore, the
real trade balance-real net exports and the GNP actually deteriorated between the end of last year and the second quarter of this
If you look at nominal net exports, rather than seeing a $12 billion decline, you actually see a $9 billion improvement. So I think
there's been a little bit of distortion in that contribution.
But we have been anticipating a flattening of the trade balance
and ultimately some improvement in the trade balance figures.
We've not quite seen that yet but I would expect to see at least a
flattening and probably some improvement as we move into the
second half of this year and 1987.
The general decline in the level of real business investment from
a very high level in 1985 I would also anticipate will end soon and
it will be a little while before we see significant strength there, but
by 1987 I would expect that the impact of lower interest rates,
nominal and real interest rates, will begin to have some positive
effect on the level of general business investment.

The CHAIRMAN. What impact do you think the uncertainties of
the tax bill and what it's going to look like have had? And I don't
mean just in the conference, I mean all year long. I happen to feel
that that's part of the problem of the sluggishness of the economy
that investment decisions are being delayed, that it's affecting the
growth in the economy. I happen to think that businesses can deal
with bad tax law more easily than they can with not knowing what
the tax law is.
What's your feeling about the uncertainties of what the Tax
Code is going to look like and its impact on the economy?
Dr. MussA. I think the uncertainty about how the new Tax Code
will treat business investment has been an important negative
factor. I think also the general perception that business taxes will
rise has not been encouraging to business investment.

Digitized by


There was also the quirk of the House bill and now the Senate
bill eliminating investment tax credit effective January 1, 1986,
and that may have boosted investment a bit toward the end of
1985. So we had particularly strong business investment in the
fourth quarter of last year and some of that may have been shifting investment that otherwise would have taken place in 1986 to
an earlier date in order to take advantage of the credit before it
expired. So there may have been some time shift for that reason as
The CHAIRMAN. Senator Proxmire.
Senator PROXMIRE. Dr. Mussa, the Council of Economic Advisers
has the function of being our expert economists advising the President and the Congress, the Federal Reserve Board and others on
economic policy, on what policies we should follow.
As I indicated to the previous witness, I intended to ask you
about what we can do to stimulate the economy when we're in a
situation where we've had 5 years of back-to-back megadeficits,
now over $200 billion-this year it will probably be the biggest in
history, although it's the first year of Gramm-Rudman. And we
have the prospect that we're going to have a drastic reduction in
the deficit this year. We're supposed to, whether we go down to
$154 or $144 billion, it will be an enormous reduction and it will
have some effect. Most people would say it would have a considerable effect on slowing the economy down.
We have followed a very, very expansive monetary policy. So
what do we do to stimulate the economy if it continues to move
along-mosey along at a 1.1-percent annual rate of growth or if it
slips into a recession? After all, this recovery is pretty long in the
tooth now compared to others. It's been going on since 1982. This is
the fifth year.
So what policies would you recommend that the Congress and
the other branches of Government follow?
Dr. MussA. Well, first, I'm not certain that at this stage that additional stimulus is actually required in order to improve the
growth rate from what it was experiencing before.
Senator PROXMIRE. Let me just interrupt to say you may be correct, but we're mandated by law to reduce the stimulus sharply in
fiscal policy, are we not?
Dr. MussA. With respect to fiscal policy, reduction of Federal
fiscal deficit to the order of $150 billion from it looks like a figure a
little over $200 billion in the current year, is going to have some
negative impact on the level of real aggregate demand in the U.S.
There is some controversy as to what is the best estimate of the
magnitude of that negative impact. I'm not amongst-some extremists would say there's no negative impact, but I think the best estimates indicate that the multiplier is something between a half and
unity if we talked about an across the board spending cut.
Now it does make a difference how it is one goes about cutting
the Federal fiscal deficit. My understanding is a substantial part of
the reduction is going to come not from cutting real spending or

Digitized by


from raising tax rates, but instead from the natural increase in tax
revenue that results from the growth of nominal and real GNP.
Over and above that, to reduce the deficit, there's going to need
to be some meaningful cut between fiscal 1986 and fiscal 1987 in
overall real spending levels or some increase in tax rates in order
to make the deficit target. Given where we are now, that is probably about half or perhaps a little bit more than half of the total
job that needs to be done.
The question which would then need to be asked is, if we cut
Federal spending in real terms by say three-quarters of 1 percent
of GNP and we have multiplier associated with that of something
between a half and unity, then the estimated effect next year
would be to push the GNP for 1 year down half a percen~e point
or thereabouts below what it would otherwise be if we didn t make
that reduction in Federal spending.
Now the question is: How strong is underlying growth in the
economy? I guess my judgment continues to be that we're going to
see the positive effects of the decline in oil prices, the positive effects of lower interest rates, and so forth, and so the danger in
terms of aggregate economic performance from making the expenditure reduction between fiscal 1986 and fiscal 1987 is less than
would otherwise be the case for many years in the economy.
Senator PROXMIRE. Now I noticed from your background statement you once authored a study sponsored by the Securities Industry Association refuting the claim that allowing commercial banks
to underwrite municipal revenue bonds would reduce the cost of
State and local fmancing.
Dr. MussA. Yes, that's correct.
Senator PROXMIRE. Now when I studied economics, I was taught
that removing barriers to entering a market will increase competition and lower prices. That would certainly have been the conclusion of the economists for State and local government associations
that have looked closely at the issue.
How were you able to come up with just the opposite conclusion?
Dr. MussA. Let me say before I answer your question that this is,
of course, an issue from which I would recuse myself as a member
of the Council. This would not be an issue that I would involve
myself with while at the Council.
Do you want me to respond to the substance of the question?
This goes back to what that study was.
Senator PROXMIRE. Well, you will recuse yourself, but you're a
member of the Council and you're a very intelligent, able man and
you obviously aren't bashful about expressing your views and, after
all, this is a group of people-there are only three Council members now, is that right?
Dr. MussA. There are two now and there would be three.
Senator PROXMIRE. There will be three. You will have considerable influence. So maybe you can give me a 1-minute response.
Dr. MussA. I was responding to a specific study which had not
only the claim that there would be interest savings to the issuers of
revenue bonds but also by implication all municipal bond issuers,
and there was an estimated magnitude of those savings based upon
the bonds issued in 1977 I think was the base year, and the estimated savings and the present discounted value sense of interest

Digitized by


payments was, I believe, $412 million. Out of those estimated savings of $412 million, $7 million of those estimated savings came
from reduced underwriting spreads and the other $405 million
came from the assertion that as a result of bank participation in
underwriting the yields at which purchasers of these bonds would
buy them would diminish. The attractiveness of the bonds to the
holders would be sufficiently enhanced by having banks underwrite
that additional savings of $405 million over and above the $7 million of reduced underwriting spread would be available.
The $7 million of reduced underwriting spread is really the issue
of the competitive effect of having banks enter the underwriting
I think if I go back and review that study I ultimately don't dispute the possibility of savings, not only on order of $7 million but
perhaps on the order of $20 million in that regard.
But I found the evidentiary basis for the claim of an additional
$400 million not to be very credible.

Senator PROXMIRE. AB you know, the case for flexible exchange
rates was pioneered by your former colleague at the University of
Chicago, Dr. Friedman. We have now had freely floating exchange
rates since the early 1970's. Some would argue the experiment has
been a dismal failure. Excessive exchange rate volatility has burdened international trade and has cost the manufacturing sector
millions of jobs.
Have floating exchange rates been a failure and, if so, what can
we do to restore stability in our international monetary system?
Dr. MussA. I don't think the floating exchange rate system in
and of itself has been a failure. What has been I think the source
of dissatisfaction has been the wide fluctuations we've observed in
both nominal and real exchange rates and one needs to look in assessing the behavior of a market-determined price about the economic forces that have underlaid movements in that price. And I
would assign principal responsibility in this regard to wide fluctuations in economic policies among the major industrial countries
and wide divergences in the policies that they have been pursuing.
I think the dollar was pushed down in nominal and also in real
terms in the late 1970's because of concern that the United States
was embarked on an excessively and essentially uncontrolled inflationary binge. And as the Federal Reserve provided more persuasive evidence that that was not the case, in 1981 and 1982 the
dollar strengthened over that period.
I think the relatively strong performance of the U.S. economy in
the current expansion and the weak economic performance of
many other industrial countries, particularly in 1983 and 1984, contributed to somewhat greater strengthening of the U.S. dollar.
Senator PROXMIRE. By that line of reasoning, wouldn't the fiscal
policy and the monetary policy of this country, which has been
highly inflationary, contribute once again to an adverse situation?
Dr. MussA. If we adjudged the monetary policy at this stage to be
highly inflationary in terms of its implications, then I think that it

Digitized by


would precipitate further declines in the foreign exchange value of
the dollar.
Senator PROXMIRE. How do you judge present monetary policy?
Dr. MussA. I don't judge present monetary policy at this time as
being highly inflationary. If we were to persist in the rates of monetary expansion that we have experienced over the last 1½ years
for another couple years, then I think the broad range of historical
evidence would suggest that-Senator PROXMIRE. There's a lag involved, isn't there? Dr. Friedman found in his remarkable study over the years that there's a
lag of 24 months or so. So if we pursue a policy for 1 ½ years, this
very expansionary monetary policy, and we still have moderate inflation, we can't say, well, that shows that monetary policy doesn't
really do it. The proof of the pudding is going to come in the next
year or two if we continue an expansive monetary policy.
Dr. MussA. That's correct. I think in judging whether monetary
policy is expansive or not, though, we need to look at indicators
other than the rate of growth of monetary aggregates. If at this
stage I saw a real economic growth accelerating rapidly, if I saw
commodity prices rising rapidly, if I saw the other signs of an early
return to more rapid inflation, then I would argue that monetary
policy was now and had been over the last 6 months or so too easy.
I don't see those indications at present.
Senator PROXMIRE. You don't see them now, but your guru, Dr.
Friedman, indicated that there's a lag involved and you wouldn't
see it. You wouldn't expect to see it until some time next year.
Dr. MussA. There's usually a lag between the acceleration of
monetary growth and the acceleration of broadly based measures
of consumer prices or the deflator. The effect of inflation in other
variables, however, is usually apparent somewhat earlier than
Senator PROXMIRE. Thank you.
The CHAIRMAN. Senator Heinz.
Senator HEINZ. Thank you, Mr. Chairman.
In your discussion with Senator Garn you were talking about
economic forecasts for this year and next year and, as I understand
it, we had about a $202 billion deficit for the first 10 months of this
What does that suggest we're going to have for the entire year of
fiscal 1986?
Dr. MussA. Well, pretty clearly we're going to be over $200 billion.
Senator HEINZ. It's already over $200 billion and we have 2 more
months to go. Does that mean we're going to have $230 billion?
Dr. MussA. I would think probably a little bit lower than that. I
think there's probably one quarterly tax payment that's due in so
that there may be some net revenue gain from that.
Senator HEINZ. Well, $225 or something in that range?
Dr. MussA. Something in that neighborhood.
Senator HEINZ. Now under Gramm-Rudman and assuming that
the House goes along with what's on the debt ceiling bill, that part

Digitized by


of the debt ceiling bill, we'll come in-if we're going to avoid a sequester-somewhere between $144 and $154. Whether or not we
avoid having a sequester-if we don't avoid a sequester, we're
going to come in at $144, and that is a cut in spending-or in the
deficit, excuse me, of roughly $75 billion, $75 to $80 billion. That's
2 percent or more of GNP, isn't it?
Dr. MussA. It's a little bit less than 2 percent of GNP at this
time. One of the things which I've not had an opportunity to assess
yet is how the deficit has been running more recently because
there was the $20 billion cut due to the Gramm-Rudman action
earlier this year for the last 7 months of the fiscal year.
I think the right question to ask is, at what annual rate is the
deficit currently running? And that may well be below the $220 or
$230 billion figure, even though that will be the cumulative deficit
for the fiscal year as a whole.
Senator HEINZ. We all hope so. I'm a little discouraged about the
$202 billion today.
Dr. MUSSA. So am I.
Senator HEINZ. And whatever it is, it's probably going to be too
high and I suppose we can hypothesize whether the deficit is going
to be 1.5 percent reduced under the formula under 1.5 or 2 percent
of GNP-it's probably going to be in that range.
Now that classically is a fairly substantial reduction in fiscal
stimulus, is it not?
Dr. MUSSA. Yes.
Senator HEINZ. Isn't that a big reduction?
Dr. MussA. Not unprecedented, but not trivial either.
Senator HEINZ. What are the consequences of that? You mentioned some good consequences. You mentioned that you thought
interest rates would come down, both nominal and real.
Dr. MussA. I believe there would be such effects. I think Dr.
Heller really discussed that issue more than I did. I think there
will be some favorable effects on interest rates from reducing the
fiscal deficit, though I'm not amongst those who assign to the fiscal
deficit the primary role in explaining why nominal and real interest rates have been high in the 1980's. I think there would be some
favorable effects in that regard.
I think I answered earlier that I think there are some negative
effects from a general cut in Government spending and on the aggregate level of economic activity it was a multiplier of something
between a half and unity.
Senator HEINZ. There will be a reduction of some kind in aggregate demand as a result of the policies we adopt.
Dr. MussA. Yes.
Senator HEINZ. And with industrial capacity being fairly low,
with imports remaining fairly high, and apparently quite available
since countries like Brazil feel compelled to export to service their
debts as do other countries like Mexico and so forth, why isn't that
a scenario, whether we like it not, for a pretty soft economy this
year and next year?
Dr. MussA. As I say, I think it depends upon the assessment of
what other economic forces are operating in the economy.
To give you an example not exactly relevant to current circumstances, between 1945 and 1946 we cut Federal spending from 25

Digitized by


percent of GNP to 11 percent of GNP and that was an enormous
reduction in Federal spending and the result of that was not an
economic catastrophe, despite predictions to the contrary. Now an
important part of the reason for that was there was a lot of pentup consumer demand that had been built up during the wartime
period. So as we demobilized and reduced our military spending, civilian spending picked most of that up without dropping too much
out in terms of aggregate output.
Now that's not the situation we're in at present, but I think we
need to ask, are there other factors in the economy which are
likely to be promoting acceleration of growth next year absent the
cut in the fiscal deficit; and I believe that there are such forces at
Senator HEINZ. You mentioned the reduction in oil prices as a
Dr. MUSSA. Yes.
Senator HEINZ. Obviously, all of the economists said a year ago,
oh, this is going to be great. They overestimated the goodness and
they underestimated the badness. The oil and gas industry in
Texas and Oklahoma is a very substantial part of the investment
sector, the capital equipment sector, and I gather by all economic
accounts most economists feel that they were unnecessarily optimistic in their forecast as to how that was going to play out.
Why are we finally right today?
Dr. MussA. There's a sharp division of opinion amongst economists in terms of that assessment. We ran, as I said earlier, a simulation-what we call formally vector-auto regression, which is
model-free analysis of the statistical inter-relationships amongst
real GNP, the GNP deflator, oil prices, interest rates, monetary
policy, and so forth. And we asked, what has been statistically the
effect of increases in oil prices. There you get in the United States
a couple of quarters where the effect is positive, followed by a quarter or 2 where the effect is neutral, followed by 2 years where the
effect is big and negative.
And if you reverse that, then what you expect from a substantial
decline in oil prices is a couple of quarters where the effect is negative, a quarter or two where the effect is neutral, and then a couple
ofyearsSenator HEINZ. Is that the basis on which we predicted it; that
when oil prices went up things happen one way; if they go down
they're going to happen upsidedown like that?

Dr. MussA. Well, I wouldn't place unitary weight on that simulation. If I did, I would be forecasting on the basis of those statistical
results real GNP of-Senator HEINZ. But I gather that is a substantial element in the
forecast. We've looked at what happened when oil prices went up.
We haven't had a situation where oil prices and energy prices have
dropped dramatically, have we? We don't have any historical experience there, do we?
Dr. MussA. I think there actually was an experience earlier in
the 1950's. Commodity prices got really pushed up in the Korean

Digitized by



war and then there was a substantial falloff a little bit later on. So
there is some experience of that kind.
I was going to say that if I bought those statistical results as an
accurate description of what we should anticipate next year, then
we would be projecting 10 percent real GNP growth, which is too
Senator HEINZ. All I'm trying to figure out is where the effects of
those reduced oil prices are going to be felt. Logically, you would
expect them to free up more income for people and that there
would be therefore some consumer demand.
Of course, what's actually happened is that imports appear to
have taken care of any additional consumer demand, at least as it
impacts our domestic economy. And one of the things that concerns
me is that the decline in oil prices has also been accompanied by a
decline of the dollar and, of course, oil prices are denominated in
dollars. So while you would normally think that the declining
dollar would be to our advantage in terms of strengthening our
trading position, in fact there is an offset to that, the declining
dollar makes energy inputs which are based on the dollar denomination of crude oil prices-energy inputs to our trading competitors
a good deal cheaper.
Could that be a factor in why things aren't quite as rosy as we'd
like them to be?
Dr. MussA. It may be a factor for the Japanese. For us the oil
price is down to less than half its level, whereas for Japan it's
down to about a third of the level prevailing at the end of last
year. That's the effect of the strengthening of the yen vis-a-vis the
dollar and that's reduced their imported materials costs more than
it's reduced our imported materials costs.
Senator HEINZ. If you add it all up together, what would be your
best estimate of economic growth for fiscal 1987?
Dr. MussA. For fiscal 1987?

Senator HEINZ. The budget year beginning October 1?
Dr. MussA. Well, I think at the beginning of last year I probably
would have said a little over 4 percent for 1986 as a whole. I think
that's been displaced in time and I think that that's probably what
we're going to get over the next fiscal year. That is to say, I expect
stronger growth starting probably with the third quarter of this
Those timing things, though, are very difficult to get. My first
forecasting exercise was in June 1982 and I said the expansion is
going to start July 1, and it started, instead, December 1. So I overshot for my initial forecast and then undershot for the next one.
And there's always some danger that that will happen.
But I think evidence and logic suggest that lower oil prices are
good for the American economy, not bad for the American economy.
Senator HEINZ. They should be, all other things being more or
less equal, but for some reason that good stuff still seems to be
around the comer. We're all disappointed by the economic performance at least of the flash numbers for the second quarter. And

Digitized by



whether those are reestimated up or not, I remain concerned about
the level of production and unused capacity numbers. What are we
at currently in terms of capacity utilization?
Dr. MussA. I think the Federal Reserve Board's index is something like 78 percent. I don't keep that figure at the top of my
mind, but it would indicate a fair degree of excess capacity. We
rarely exceed 90 percent, so there's a question as to what 100 percent means in that index. But there's certainly in the industrial
sector of the economy substantial capacity that could be utilized if
demand for the products of those industries was somewhat stronger.
Senator HEINZ. I guess the sum and substance of my questions-I
could believe 4 percent as a forecast-and Lord knows, I want to
believe it-if there was some sign that capital investment was
going to pick up in this country. Capital investment isn't going to
pick up until capacity utilization picks up and I don't see any signs
of that happening.
Dr. MussA. That's an issue about which we need to be again
careful. The capacity utilization figures are heavily weighted
toward the industrial sector of the economy as opposed to the service sector of the economy.
Now it's true there's more industrial sector than in the service
sector of the economy, but you can get reasonably strong overall
business investment demand even from the service sector of the
I certainly don't think we're going to get it from the oil industry.
Senator HEINZ. Dr. Chairman, thank you very much.
Dr. Mussa, thank you.
The CHAIRMAN. Dr. Mussa, you've talked about the benefits of
lower oil prices. From what OPEC said yesterday, apparently
they're going to start going back up. So how does that fit in your
equation forecast? If we haven't yet received the goodness that Senator Heinz has talked about and we've only had the badness, does
the goodness come before the badness comes again?
Dr. MussA. Well, I think that OPEC is trying to push them up to
the range of $15 a barrel or so.
The CHAIRMAN. The report I heard this morning is $18 to $22.
Dr. MussA. Even if they hit $18 to $22, oil prices would still be 50
percent down from where they were toward the end of last year.
Also, the success of OPEC in achieving that objective I think has
yet to be demonstrated.
If oil prices were to rise back to that range, then I would think
that that would be first of all, negative news on the inflation front.
Part of the deflation that we've observed in the first half has been
the consequence of lower oil and energy prices and if we were to
kick them back up to the range of $20 a barrel, then I think we
would see the Consumer Price Index in particular react to that
fairly rapidly. Probably the last monthly increase we saw in the
CPI was due to the blip up in oil prices in June. Probably next
month the CPI increase will be much less because oil prices fell in
July and if they were pushed up in August it will translate
through in September. And then I would think high oil prices over
the intermediate to longer term would be a negative factor for the
U.S. economy.

Digitized by


The CHAIRMAN. In the short run I would think the positive
factor, the spot you talked about in the economy, in Texas and
Oklahoma you would be helping.
Dr. MussA. Yes. Now I think probably the oil industry has adjusted to lower oil prices but not completely adjusted to a price of
$10 a barrel or even $15 a barrel. If we went up to $20 a barrel,
maybe now they have taken all the adjustments they would really
want to in terms of employment and investment. Indeed, there
might be some substantial resumption of drilling activity which is
evidence they're going to stick around $20. I think they would wait
and see evidence that that $20 a barrel was really here to stay on
some more permanent basis than a couple of days before we get
that type of reaction.
The CHAIRMAN. Just one more question on the tax bill. There's
been a great deal of discussion about the so-called straddle of the
deductions going away January 1 and the new tax rates not effective until July 1. I hear more and more about the negative impacts
on the economy not just in anticipation for next year but on this
year because of that so-called straddle.
Do you agree that that's a very negative factor as far as the
economy is concerned to not have the rate reductions go along at
the same time as the removal of the so-called loopholes or preferences or whatever you want to call them?

Dr. MussA. We refer to it as the stagger and we think it is important to eliminate or, if not eliminate, reduce the extent of that
stagger. I think that it has both demand side effects on the economy and supply side effects on the economy in terms of the intertemporal structure of incentives for economic activity.
So I think it would be an important change to make in that bill
and a positive change to make the rate cuts effective on the same
date as the changes in deductions and other changes that are a revenue-raising effect.
The CHAIRMAN. But in order to do that you're going to probably
get it out of business and increase taxes, so what do you gain? In
other words, in these tradeoff games that we're constantly playing
with that tax bill, you take it away with one hand and give it back
someplace else, and so I would agree with you that it's important
to remove the stagger, but in order to pay for the stagger it comes
out of business. Are r,ou going to just compensate or-Dr. MussA. I don t know that I would necessarily recommend
taking it out in the form of hi~her business taxes.
The CHAIRMAN. Oh, I don t recommend that. I'm just saying
every time you hear anything from that conference, that's the
game we're playing. It's politically popular to say, "Stick it to business." Let's face it. Don't worry about the economy or stimulation
of the economy or incentive for investment and jobs or anything
like that. It's just popular as hell to say, "Take it away from business and give it to the lower and middle classes." What else is new
in our populist society?
So don't misunderstand me. I'm not recommending taking it
away from business. I happen to think that whatever the tax bill

Digitized by



that finally passes is going to have a negative impact on the economy. But what do we politicians care about that as long we look
good by November?
Dr. MussA. I think there's legitimate concern that the short-term
macroeffect of the bill may be negative over the next year. I think
the long-term economic effect is a very different matter. There I
would expect significant positives from improving incentives by reducing marginal rates.
Also, I think this issue of leveling the playing field is an important question. To encourage investment in those lines of activity
where true returns are not very large but tax breaks are big and to
discourage it in lines of activity where true economic returns are
high but tax breaks are not available, that's not a good policy. And
I would expect some positive impact on economic performance from
reversing that policy and I think the Senate bill-The CHAIRMAN. I don't disagree with you. It's just whether we
survive the transition or not. That's what I'm concerned about.
Dr. MussA. It's an important question.
The CHAIRMAN. Dr. Mussa, thank you very much.
The committee is adjourned.
[Whereupon, at 12:25 p.m., the hearing was adjourned.]
[Response to written questions of Senator Gorton and biographical sketch of nominee follow:]

Digitized by








Dear Senator Gorton:
In response to your questions of August 5, I offer the
following responses.
I am also forwarding a copy to Edward
Malan, along with the transcript of my testimony, for the
Question l: Do you believe that the economy will resume a
higher growth pattern in the second half of this year? If so,
what factors will contribute to higher growth? If not, what do
you believe is slowing the economy down?
I believe that the u.s. economy is likely to move to
higher growth in the second half of this year, especially
higher growth than indicated by the preliminary results for the
second quarter. The relatively strong performance of the
leading economic indictors over the past six months is
conaiatent with this forecast.
An important reason to expect higher real growth in
the second half is that forces that held down first half growth
seem likely to abate.
Inventory investment fell between the
first and second quarters, but further substantial declines do
not appear likely. The ratio of inventories to final sales
remains low. As final sales grow, inventories will need to
grow at or above the rate experienced in the second quarter.
Real net exports, as measured in the national income and
product accounts, deteriorated sharply in the second quarter.
But, again, further worsening of our real trade position does
not seem likely.
The lagged effects of the depreciation of the
dollar which began in February 1985 probably should begin to
improve the trade balance later this year and in 1987. In
addition, stronger growth abroad, after the disappointing
performance of West Germany and Japan in the first quarter,
should contribute to some improvement in our exports.
Declining employment and investment in the oil industries was
also a factor holding down growth in the first half, but much
of the adjustment of the oil industry to lower oil prices has
probably been achieved. Continued growth of real consumer
spending, strength in residential construction, and the
beginning phase of a more positive response to lower oil prices
should strengthen real growth in the second half.

Digitized by




Question 2: Do you be1ieve that we must reduce the deficit in
order to reduce our trade deficit? Or do you believe that the
lower value of the dollar will ultimately help us control the
trade deficit?
I believe that the reductions we have already seen in
the value of the dollar will help to reduce our trade deficit
and that we should begin to see some of this effect later this
year and in 1987, The effect has probably been somewhat
delayed because prices of many goods imported into the United
States have only recently begun to reflect the higher values of
foreign currencies. There is clearly a limit, however, to the
extent to which foreign exporters will be willing to absorb the
effects of higher currency values in their profit margins.
I also believe that reducing the federal deficit can make an
important contribution to improving our trade balances. To
correct our substantial trade imbalances, we need a combination
of appropriate policies both here and abroad.
Question 3: There is a very good chance that the Congress will
be faced with a sequester order this August. If there is a
sequester order, Congress can opt to structure a deficit
reduction package that will bring the deficit projection into
conformance with the Gramm-Rudman-Hollings targets.
In your
view, would it be better to achieve conformance with the
deficit target through budget cuts or a combination of cuts and
new revenues?
I believe that Congress needs to address the problem
of the federal deficit primarily through restraint of the
growth of real government spending. To meet the Gramm-RudmanHollings targets for fiscal 1987, some reduction in the level
of real government spending will probably be necessary.
Achieving such spending reductions is not easy. However, I
believe that the results of the 1984 Presidential election
indicated clearly the preference of the electorate to reduce
the budget deficit through spending restraint rather than
through tax increases.
I should note that increases in tax
revenues due to increases in national income will make an
important contribution to reducing the deficit, without any
increase in tax rates.
Is it preferable to reduce the budget deficit
through spending cuts, or a combination of spending cuts and
modest tax increases?

Digitized by




Answer: As my previous answer indicates, I believe that it is
preferable to reduce the budget deficit primarily through
restraint in the growth of spending, with some real spending
cuts required between fiscal 1986 and fiscal 1987. Increased
tax revenues generated by rising national income will also play
a major role in deficit reduction, given restraint on the
growth of spending.
Increased revenues from fees charged to
users of Federal Government services will play a more minor
Question 5: Do you think that the financial markets reflect
the likelihood that Congress will achieve the
Gramm-Rudman-Hollings targets? Or do you think that they
reflect a sense that somehow, Congress will be able to avoid
the targets?
I believe that financial markets responded quite
positively to the enactment of Gramm-Rudman-Hollings and to
earlier evidence of the likelihood of its enactment. I believe
that there probably has been and remains some skepticism about
whether the deficit targets of Gramm-Rudman-Hollings will
actually be achieved, and that an increase in such skepticism
has adverse effects on the financial markets.

Michael L. Mussa
The Honorable Slade Gorton
United States Senate
Washington, o.c. 20510

Mr. Edward M. Malan, Senate Committee on Banking,
Housing, and Urban Affairs

Digitized by


_ _ _ __




l'lllltlon1Dwlllcll Member, Council of
Economic Advisers


.J. wJi

Marltal mtuc unmarried

nomination: _ _ _ _ _ _ __

Pl-ofblrlll:.....;;;L.c.o.c.s...;An~g'-"e_l_e_s:....,_c;_a_l_i_fo_r_n_i_a_ _ _ __

Full , - o f spaus __N_/_A_ _ _ _ _ _ _ _ _ __

of chlld_,
_ _ _ _ _ __


Jc:tm Marahall

High Schlol




2/59 - 2/62





univ. of CSlif.
at Loa Angel•

2/62 - 2/66


Univ. of Otlcago

9/66 - 6/71



univ. of Otlcago

9/66 - 6/71




Honon and awards: Ult below all scholarships, fellawshlps. honorary dqrNs, military medals, honorary saci.ty
membenhlps, and any other special recoanitlon1 for outstandln1 service or achl-ment.

Phi Beta Kappa
Lilly Honor Fellow, tltlv. ol! Chicago

William Rainey Harper Fellow, tltlv, of Chicago
Prix Mcn:lial Nessim Habif, tltlf, of Geneva

Digitized by


Ult below all rnembanhips and offices held In professional, fratwnal, buslnaa, ICholarly,
cMc. charitable and Olhar orpniutlona.


-- (lfany)


!cCnallic: AM' n.




1966 top:.-nt


l.968 to 1974



1966 to prNmt

C0uncil at. the tJniV • Senate
univ. of R:x:hat.C


1973 to 1975
1.biv. of R:ldlNter


1973 to 1975

Sl!Z .IIMMlml llll!Zl' l!OR .NX>rrICIIIU. M!M!ERSHIPS

below Ill pasitlons hald llnce calllp. 1nc1uc11,. Iha t111e or deacrlpllan ol Jab, name al
- ~ location ol _.., and data ol lneluliw " " ~

E,nplclymn ~ Ult

llatM !'.npl.oym



1/1/77 -pr--,t

Grad. SCh. of l!Uaimu,
1.biwraity of OUcago


Grad. Imtituta of Int'l.



Job TiUe

1101 !. 58th St.
Qucago, IL


132 Rmdat.--ine
01N Postal 53



6/2/75 - 9/30/76

L0n5on Sdlcol of Bccnaaioa

Baqltcn St.,
Al&,ydl, L0n5on

9/l/74 - 5/15/75

Grad. Center, City 1.biv.


9/l/7l - 6/30/76

Dllpt. of Ealnallica
1.biv. of ibdlNter


421,d St.



Rivu caap,a
lbdlNter, NY 14620


7/l/70 - 8/20/70

I.biV • at. Weatern

I.ord:n, ontario


Digitized by


in Econar

List any experience In or dl1'9Ct association with Federal, 5tata. or local p,emments. lnciudi"I any admory, conaultatlw, honorary or other pert-tlme ...,;ce or politionL

O:nlultant, <bn:il of l!:conclllic: Adviaen
- fran OCt:01:ar 1985 to the pr.-it


List the titles, publlshwl and dal8I of boob. articles, raports or other publlshld matarlal1

you , _ wrttt.n.

Boole■ and Monograph■

A Study in



Macroeconomic ■•


North Bolland,

in the Munici al Revenue
e Evidence.
ecur1t ••
97 •

Can eti

Taxation of Municipal Bond ■ (with Roger ~ormendi).
American !nterpri ■ e In■ titute, 1979.
• r

affl Ilatlona
and activities:


and M cha•

Bou ■ e Publi ■hing


a:intima1 on attad>ed 112-..

List all memberships and offices held in and services rendered to all political parties or
election commit!Ms durin1 the last 10 yurs.


Digitized by



Itemize all political contributions ol $500 or _,. to any lndlvldual, -,,pell" orpnlzatlon, political party, political action cornmlttee or llmilar 9lltlty durl,. the lut ailf,t
years and Identify the spacilic amounts, datas, and name, ol the ,-clplanta.


State fully your qualifications to san,e In the position to which yoli haw bNn named.


Future employment
1. Indicate whether you will all connactianl with your ~ employer, businesl
firm, nsociation or orpnizlltion if you are confirmed by the Senate.

All mat.iawhipa have been .....rm acapt a the uniwraity c1. OUcago
ant the Natia>al auremi of Eccrallic RaNard\ • dNcri1-! in the
att.lldlm a,rnapondence to Ir, Baryl W, S1rinkaJ. ant David Martin.
2. /u far u can ba fllrflMn, state whether YIIU haw any plans llftw complatln1 .,_,..
nwrt service to resume a m p ~ . affiliation or practice with Y11Ur prevtous am•
ployer, businass firm, auociation or orpnization.

I plan to ntum to the Univeraity of
3. Hu anybody made you

a commitment to a job after YIIU lee¥a ..,...-nrnent?

See t2 aboll9.

4. Do you expect to ..,... the full term for which you have been appointed?



Digitized by


l"Dlentlal conflicts
al lnlaNst:

l, DHcrlbe 1ny llnlnclll 1rranpm■nts or clel1rract comp■nUtlon IINMllllla or alls
cantlnul,. dullnp with busln■sa .-Illes, clients or ~ who wlll be 11·
f9cted by pollcles which you will lnfhi■nc■ In the position to which you hive b■en

I will be en a law of ~ fEQII th■ Quverai.1;¥ of Olimgo aaS tJia
aticnal. aa--i of llc0ncJaic RIINllrdl. Aa a raul.t, I -1l. law an 18
UOB(a) f1rwmial 1ntenat in both czganisatiaa.
I will ma.
apell fl:QII puticdpating in IID,Y particular •ttara ~ t:1-. 1:1110


2. LIit IIIJ llwtrwlll, abllptlons. lllbllltlel, or other Nlltlonllllp■ which rn1cM lnvolvl
pat9111111 conlllcts al lnt■r.t with Ill■ position to-which you hive b■en nomln■ted.

I haw atcdt holdiDJa in Boeing, TUM !lect.ric, au.en Electric, DII,
Stmdud Oil (of Quo), Tennaco, SUgull l!ncgy 0:rlplny, and 1b.18ta1 Oil
TrUat and bcrld holdiDJa at TUM Electric and th■ llorl.d Bulk. I plan to
..ic -1,,_. under 18 o.s.c. ID('b)(l) 10 that I can ~ t e fully
in •ttera attacting ~ NCtara of th■ eocncmy, ~ I dD Clbtain a
wiwr, er if a wiwr ia not available liar any particular inl:arwt, I
will - - - myaeU fl:QII participating in partial1ar aattem attacting
t:)-. CD!p1D1M,

3, Dacrlbe any busln■sa rwlatlonshlp, dull.. or lln■nclal tranlKtlon (other thin tup■ylnc) which you i - had durlnc Ill■ IISt 10 rurs with the Federal Government.
WMthlr for youl'lllf, on behllf al • client, or ■ctln1 u an ■pnt. th■t mllht In any
way constltul9 or ra■ult In • pos&lble conflict of lnter■st with Ill■ position to which you
hive b■en nomlnltld.


Digitized by


4. Ust arr; lobbyin1 activity durin1 the put 10 ,-rs In which you have .,ppd for the
purpose of dir9Clly or indi..ctly influencin1 the passap, defat or modification of
any lelislatlon II the national level of IC)Vemment or afleclin1 the administration and
ucution of national law or public policy.

a ammltant lltr the Securiti. . Induauy (SIA), I 11iU
act.i'Vlll.y involwd in the 1 - of a:marcial bmk i m l c l - in
- 1 t i a act.ivitia fraa 1978 through 1982. I tNtifiad a, their
babal1 mfare the a.ate Bulking ec-itM, thentbr9, in a:der to IM>id
thP . - - of a ocnflic% of intanat, I will ~ myaeU frail
~ in that 1 - 'llllilll auvinJ a, the CD.

5. Explain ' - you will raolw any potential conflict of intenst 1h11 may be dilcloNd by
your rapon- lo the above Items.

S.. att.adwd lettar to Mr.

Civil. crtminal and

1. Give the full details of any civil or criminal proceeding in which you wera a defendant
or any Inquiry or 1....tlption by a Federal, State, or local apncy In which you the subject of the inquiry or lnvesti1atlon.


2. Give the full details of any proceeding, inquiry or investigation by any professional
association Including any bar association in which you were the subject ol the proceeding, inquiry or investigation.


Digitized by


~ s (continued fran p!lge 2),

ante. a, Minori t::J Student
Concerns, UniV. Otlcag::,


1980 to 1984

ante. a, Int' 1. llalaticna
Univ. of Otlcago


1980 to p.-eaent


1980 to 1984


1982 to 1984

Bus. FOrecaat P-1, Grad.
SdlooJ. of Illa. , u,iV. 0u.cag:,


1982 to present

Cculcil of the Univ. senate
Univ. of Otlalgo


1982 to 1985

ante. of the QJunciJ. of the
Uni V. Sana.ta, UU.V • 0u.cago


1984 to 1985

Policy Ollte., Grad.


of Illa., tkli.v. of Ou.cago

Student/Fllcult::J ante., Grad.
SdlooJ. of Bus • , UniV • Ou.cage

Digitized by


Article• -

publiahed and forthcoming:

"A Monetary Approach to Balance of Payments Analysis,
Journal of Money, Credit and Banking, August 1974:
translated and reprinted in M. BleJer and A. Prozecanski
(eds.) Economia Monetaria. Mexico, D.F., Centro De
Estudios Moneterios Latinoamericanos, 1977.
•Tariffs and the Distribution of Income, The Importance
of Factor Intensity, Specificity and Substitutability,"
Journal of Political Economy, November 1974.
•consumption, Real Balances and the Hoarding Function,"
with Rudiger Dornbusch, International Economic Review,
June 1975.
•Adaptive and Regressive Expectations in a Rational Model
of the Inflationary Process,• Journal of Monetary
Economics, October 1975.
"Equities, Interest and the Stability of the Inflationary
Process,• Journal of Money, Credit and Banking, November
"Cyclical Adjustments of Wages, Prices and Employment: A
Connnent on Parkin, Sumner and Ward," in Karl Brunner and
Allan Meltzer (eds.), The Economics of Price and Wage
Controls, carnegie-Rochester Conference Series, Vol. 2,
Amsterdam, North Holland, 1976 (a supplement to the
Journal of Monetary Economics).
•The Exchange Rate, the Balance of Payments, and Monetary
and Fiscal Policy Under a Regime of Controlled Floating,•
Scandinavian Journal of Economics, June 1976, reprinted in
Jacob Frenkel and Harry G. Johnson (eds.), The Economics
of Exchange Rates. Reading, Massachusetts,
Addison-Wesley, 1978.
"Tariffs and the Balance of Payments: A Monetary
Approach," in Jacob Frenkel and Harry G. Johnson (eds.),
The Monetary Approach to the Balance of Payments: Chicago
Essays. London, Allen and Unwin, 1976.
"Our Recent Experience with Fixed and Floating Exchange
Rates: A Comment on Kindelberger and McKinnon," in Karl
Brunner and Allan Meltzer (eds.), Institutional
Arrangements and the Inflation Problem, Carnegie-Rochester
Conference Series, Vol. 3, Amsterdam, North Holland, 1976
(a supplement to the Journal of Monetary Economics).

Digitized by



Articles -

published and forthcomings

"External and Internal Adjustment Costs and the Theory of
Aggregate and Firm Investment," Economica, May 1977.
"The Welfare Cost of Inflation and the Role of Money aa a
Unit of Account,• Journal of Money, Credit and Banking,
May 1977.
"A Dynamic Theory of Foreign Exchange,• in Michael Artis
and A.R. Wobay (eds.), Studies in Modern-Econanic
Analysis, proceedings of the 1976 Conference of the
Association of University Teachers of Economics. Oxford,
Basil Blackwell, 1977.
"Monopoly and Product Quality," with Sherwin Rosen,
~ournal of Econanic Theory, August 1978.
"Dynamic Adjustment in the Heckacher-Ohlin-Samuelson
Model," Journal of Political Economy, September 1978.
•on the Inherent Stability of Rationally Adaptive
Expectations," Journal of Monetary Econanics, October

"Macroeconomic Interdependence and the Exchange Rate
Regime," in Rudiger Dornbusch and Jacob Frenkel (eds.),
International Economic Policy1 Theory and Evidence.
Baltimore, Johns Hopkins University Presa, 1979.
"The Two-Sector Model in Terma of Its Dual: A Geometric
Exposition,• Journal of International Economics, November
1979, reprinted in Jagdish Bhagwati {ed.), International
Trade: Selected Readings. Cambridge, Massachusetts: MIT
Preas, 1980.
"Empirical Regularities in the Behavior of Exchange ·Rates
and Theories of the Foreign Exchange Market," in Karl
Brunner and Allan Meltzer (eds.), Policies for Employment,
Prices and Exchange Rates, carnegie-Rocheater Conference
Series, Vol. 11, a supplement to the Journal of Monetary
Economics, Autumn 1979. Reprinted (in Italian) in Remy
Cohen e Francesco Gravazzi (eds.), La Fluttuazione dei
Cambi. Italy: Etas Libri, 1982.
"The Efficiency of the Foreign Exchange Market and
Measures of Turbulence," (with Jacob Frenkel), American
Economic Review Papers and Proceedings, May 1980.

Digitized by


Published Writings by Michael L, Mussa (continued from previous
Articles -

published and forthcaaing1

"Public Policy Issues in International Finance," in
onomic Polic Reaearch1 Proceedings of a
c., October 3-4, 1980,
"The Role of Official Intervention,• Occasional Paper,
No. 6, Group of Thirty, New York, 1981.

•sticky Individual Prices and the Dynamics of the General
Price Level," in Karl Brunner and Allan Meltzer (eds.),
The Costa and Consequences of Inflation,
Carnegi-Rocheater Conference Serles, Vol. 15, a
supplement to the Journal of Monetary Econanica, Autumn

•sticky Prices and Disequilibrium Adjustment in a Rational
Model of the Inflationary Process,• American Econanic
Review, December 1981.

"Government Policy Toward the Adjustment Process,• in
Jagdiah Bhagwati (ed.}, Im ort Canpetition and Response.
Chicago1 University of Ch cago Press, 1982.


Comment on "Trade in Differentiated Products and the
Political Economy of Trade Liberalization,• by Paul
Krugman, in Jagdiah Bhagwati (ad.}, Import Competition and
Response. Chicago1 University of Chicago Press, l982.
Comments on Papers by Hans Genberg and Donald Coea and
Panel Discussion in John Williamson (ed.), Exchange Rate
Rulea1 The Theo , Performance and Proa ects of the
Crawling Peg. London: Macm llan, 1981.
"A Model of Exchange Rate Dynamics,• Journal of Political
Economy, February 1982.
"Imperfect Factor Mobility and the Distribution of
Income," Journal of International Economics, February

"Exchange Rate and Price Level Dynamics in a Simple
Monetary Model," in J agdeep Bhandari (ed.}, Exchange Rate
Determination and Adjustment. New York: Praeger, 1982,
"Optimal Economic Integration," in Pedro Aspe Armella,
Rudiger Dornbusch and Maurice Obstfeld (eds,), Financial
Policies and the World Capital.Market: The Problem of
Latin American Countries. Chicago: University of Chicago
Press, 1983.

Digitized by


Article ■


published and forthcoming:

"U.S. Macroeconomic Policy and Third World Debt," The Cato
Journal, v. 4, no. 1, Spring/Summer 1984, pp. 81-95.
"The Theory of Exchange Rate Determination," in John F.
o. Bilson and Richard Marston (eds.), Exchange Rate Theory
and Practice. Chicago, University of Chicago Press,
"Asset Markets, Exchange Rates and the Balance of
Payments," (with Jacob A. Frenkel) in Ronald w. Jones and
Peter B. Kenen (eds.), The Handbook of International
Economics, vol. II. Amsterdam: North Holland, 1985, pp.
"Official Intervention and Exchange Rate Dynamics, " in
Jagdeep s. Bhandari (ed.), Exchange Rate Management and
Uncertainty. cambridge, Massachusetts: MIT Press, 1985,
PP• 1-30.
"Safety and Soundness as an Objective of Regulation of
Depository Institutions: Comment on Kareken," Journal of
Business, v. 59, no. 1, January 1986, pp. 97-117.
"Commentary on Is the Strong Dollar Sustainable?",
proceedings of ·the Conference on the u.s. Dollar -- Recent
Developments, Outlook and Policy Options, Federal Reserve
Bank of Kansas City.
"competition, Efficiency and Fairness in the Financial
Services Industry," proceedings of Mid-America Institute
Conference on Financial Services, Ballinger Publishing
Company, forthcoming.
"Nominal Exchange Rate Regimes and the Behavior of Real
Exchange Rates: Evidence and Implications," Carnegie
Rochester Conference Series on Public Policy, forthcoming.
"Average Protection and Economic Policy."

Digitized by



Current Working Papers:
"Rational Expectations Models with a Continuum of
Convergent Solutions," NBER Technical Working Paper, No.
41, June 1984.
"Economically Sensible Solutions for Linear Rational
Expectations Models with Forward and Backward Looking
Dynamic Processes, NBER Working Paper Series, No. 1398,
July 1984.
"The New Protectionist Threat to World Welfare," edited by
Dominick Salvatore, Fordham University and The United
Nations. North-Holland Publishing Co., Inc.
"The Economics of Content Protection," NBER Working Paper
Series, No. 1457, September 1984.
"The Adjustment Process and the Timing of Trade
Liberalization," NBER Working Paper Series, No. 1458,
September 1984.
"The Real Exchange Rate as a Tool of Commercial Policy,"
NBER Working Paper Series, No. 1577, March 1985.
"Macroeconomic Policy and Trade Liberalization," paper
prepared for the Country Policy Department of the World
Bank, May 1985.
"A Limited Stochastic Rational Expectations Model of the
Current Account and the Real Exchange Rate."

Digitized by


Congressiona.l Testia:>ny and Miscellaneous1

Statement and background paper entitled, "The Taxable Bond
Option: An Appraisal of Its Economic Effects,• Hearings
on the President's 1978 Tax Reduction and Reform
Proposals, COIIDllittee on Ways and Means, u.s. House of
Representatives, March 16, 1978.
A Critical Appraisal of the Taxable Bond Option, pamphlet,
with Roger Kormendi, April 1978.
•The Taxable Bond Option: Boondoggle or Bonanza,• speech
before the Local Government Law Section of the American
Bar Association convention, New York, August 1978.
"Bank Underwriting and Borrowing Costa for Revenue Bond
Issues," The American Banker, February l, 1979.
"Response to the Dealer Ban1t Association Claims Concerning
Interest Savings from Bank Underwriting of Municipal ·
Revenues Bonda," paper presented to the Securities and
Exchange Commission, the Federal Reserve Board, the United
States Treasury, and the Subcommittee on Financial
Institutions of the u.s. House of Representatives, May 14,
"What Increasing a Bank's Underwriting Power would Not
Do," letter to the editor of the New York Times, June 13,

"competition, combination and Commercial Bank Involvement
in the Municipal Revenue Bond Market, " paper presented to
the Securities and Exchange Commission, the Federal
Reserve Board, the United States Treasury, and the
Subcommittee on Financial Institutions of the u.s. House
of Representatives, June 27, 1979.
Testimony before the Subcommittee on Financial
Institutions of the u.s. House of Representatives, June
27, 1979.
Statement to the Senate Banking Committee, October 22,
Statement and Testimony before the Subcommittee on
International Trade, Investment and Monetary Policy of the
House Committee on Banking, Finance and Urban Affairs,
November 1, 1983.
Testimony before the Treasury and Civil Service Committee
on International Monetary Arrangements of the House of
Commons (U.K.), in Washington, D.C., June 4, 1985.

Digitized by


Qualifications (from page


Michael L. Mussa is the William H. Abbott Professor of
International Business at the Graduate School of Business of
the University of Chicago. After completing his
undergraduate studies in economics and mathematics at the
University of California at Los Angeles, Professor Mussa did
his graduate work in economics at the University of Chicago
where he received his M.A. and Ph.D. in economics. From
1971 to 1976 he was on the faculty of the Department of
Economics at the University of Rochester. During this
period, he was also a visiting faculty member at the
Graduate Center of the City University of New York, the
London School of Economics, and the Graduate Institute of
International Studies in Geneva, SWitzerland. In 1976
Professor Mussa joined the faculty of the Graduate School of
Business of the University of Chicago as Associate Professor
of Business Economics. In 1980, he was promoted to full
professor and then to the Abbott Chair. In 1981, he
received the Prix Mondial Nessim Habif from the University
of Geneva for his research in international economics.
Professor Mussa's main areas of research have been in
international trade, finance, macroeconomics, monetary
economics, and municipal finance. In addition to research
and teaching, Professor Mussa has served as one of the
editors of the Journal of Business, as a member of the
Business Forecast Panel for the Graduate School of Business,
and as a consultant to the World Bank. He is a member of
the American Economic Association and former member of the
Econometric Society, the Council of the University Senate at
the University of Rochester, the Council on Research at the
University of Rochester, and a member of Phi Beta Kappa.
His publications include A Study in Macroeconomics,
Taxation of Municipal Bonds (with Roger Kormendi), as well
as numerous articles in the Journal of Political Economy,
the Journal of Monetary Economics, the Journal of Money,
Credit, and Banking, the Journal of International Economics
and other scholarly journals.


63-040 (78)