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CONTENTS
MONDAY
, APRIL 22, 1991
Openingstatement
ofChairmanRiegle
.
OpeningstatementofSenatorDixon.........
Page
1
4
WITNESSES
2
Ed Derwinski
, Secretary
, Department
ofVeterans
Affairs
, Washington
, DC
RaoulLordCarroll
,oftheDistrict
ofColumbia
,tobe President
,Government 3
National
Mortgage
Association
,Washington
,DC ....
9
Response
towritten
questions
ofSenator
Riegle
.
210
Response
towritten
questions
ofSenator
Sasser
hicalsketchofnominee
Biograp
B12
16
TUESDAY , MAY
7, 1991
Opening
statement
ofChairman
Riegle
......
s of:
g statement
Openin
Senator
Moynihan..
25
28
31
37
39
51
Senator Warn er .
Senator Dixon
Senator Sanford..
Senator Sasser..
..
WITNESSES
LawrenceLindsey
,ofVirginia
,tobe a member oftheBoardofGovernors
of
theFedera
l Reserv
e ..
33
76
Biographical
sketch
ofnominee
National
Association
ofFederal
Credit
Unions
,letter
ofsupport
ofnomi
n ee
Response
towritten
questions
ofSenator
Riegle
(III)
87
88
NOMINATION
THE
OF
RAOUL
LORD
DISTRICT OF COLUMBIA
DENT , GOVERNMENT
CARROLL
,
, OF
, TO BE PRESI
NATIONAL MORTGAGE
ASSOCIATION
MONDAY , APRIL 22, 1991
U.S. SENAT E ,
COMMITTEE ON BANKING ,HOUSING,AND URBAN AFFAIRS,
n,DC.
ingto
Wash
The committee met at 10:10a.m.,in room SD -538 ofthe Dirksen
man of
gle
e Offic
e Buil
ding
, Jr. (chair
Senat
,SenatorDonald W. Rie
iding
thecommittee) pres
.
OPENING
STATEMENT
OF CHAIRMAN
RIEGLE
The CHAIRMAN .The committeewillcome toorder.
Letme welcomeallinattendance
thismorning
.We arepleased
nomineepresent
to havea Presidential
whom I willshortly
com
ment on .
He isaccompanied
bytheSecretary
ofVeterans
Affairs
,Edward
Derwinski
.We arealsopleased
tohavehim heretoday- and I will
sayjusta bitmoreaboutthatina moment.
We are herethis
morningtoconsider
thenomination
of Raoul
Carroll
tobe thePresident
of theGovernmentNational
Mortgage
Association
, morecommonlyknown asGNMA .
Mr. Carroll
, I want to welcomeyou before
the committee
and
publicly
congratulate
you on yournomination
.
GNMA isperhaps
best
knownforits
mortgage
-backed
securities
,
theMBS Program
, whichincreases
theavailability
ofmortgage
creditforfederally
insuredmortgagesby attracting
new sourcesof
capital
tothemortgage
market
.
Throughthisprocess
, GNMA's mortgage
-backedsecurities
serve
toincrease
theavailability
ofcredit
forhousing
inallareasofthe
country
, and to assurethatsuchcredit
isavailable
at reasonable
interestrates.
The neteffect
isgreater
home ownership
opportunities
fora
broadrangeofAmericanfamilies
.
Giventhealarming
declines
we haveseeninourNation's
home
ownership
rates
during
thelast
fewyears
,therole
ofGNMA infos
tering
home ownership
ismore critical
thanever
. Yet,we must
also
beverymindful
ofGNMA's fiscal
stability
asitseeks
tofulfill
its
mission
infostering
theAmerican
dreamofhomeownership
.
Soclearly
there
areimportant
tasks
aheadand,Mr.Carroll
, you
bring
a diversified
array
of legal
expertise
tothis
challenge
andI
(1)
2
lookforward
tohearing
yourpersonal
statement
this
morning
,and
alsodiscussing
withyousomeof theissues
thatfaceGNMA .
At thispoint
, letme acknowledge
thepresence
ofa member of
President
Bush's
Cabinet
,anda former
Housecolleague
anda good
friend
,Ed Derwinski
,who isherewithyoutoday
.
We areverypleased
tohaveyou,Mr.Secretary
,tocomeandbe
present
atthis
hearing
.I thinkitshowsimportantly
yourfeeling
aboutthisnominee.
Why don't
youpullthatmicrophone
overand we wouldbede
lighted
tohearyourstatement
atthis
time.
STATEMENT OF ED DERWINSKI ,SECRETARY ,DEPARTMENT
VETERANS
AFFAIRS ,WASHINGTON
OF
,DC
Secretary
DERWINSKI
.Thank you,Mr. Chairman
,I willbe brief
.
I am herewithmixedemotions
,sinceGNMA's gainistheVA's
loss
.Mr. Carroll
has beena veryeffective
GeneralCounsel
forus
and hasserved
withspecial
distinction
inthetimewe were formu
lating
policies
inthenewlycreated
Department
.
He hasbeena very
,verystrong
supporter
ofreforms
thatwe
haveembarkedupon, and he has beena towerofstrength
and a
strongrightarm to me .
At the same time, I realize
thatthisassignment
forwhichyou
areconsidering
him isa verychallenging
assignment
. Hislegal
background
isespecially
suited
forit
,andtherefore
itiswiththis
sort
ofmixedfeeling
oflosing
a verykeyally
,butyetatthesame
timewiththe satisfaction
of knowinghe is goingon togreater
heights
thatI am verypleased
tocommend him toyou inhispro
fessional
capacity
asan outstanding
gentleman
,dedicated
public
servant
,and a very
,veryeffective
public
official
.
Mr.Chairman
,I am pleased
inthatspirit
torecommend
Mr.
Carroll
toyouandthemembersofyourcommittee
.
The CHAIRMAN. I appreciate
yourstatement
, as thecommittee
does
. I have known you now for25 years
, and I know when you
comeandmake a personal
statement
ofthatkinditsignifies
how
strongly
you feelaboutthisnominee
.That has important
weight
withme ,and itdoeswiththis
committee
.
I appreciate
those
comments
,andI appreciate
thetimethatyou
have takentocome and presentthem .
DERWINSKI
Secretary
.Thankyou.
.
The CHAIRMAN.Iam goingtogo toMr.Carroll
tasks
.
andgeton toother
yourself
Iwanttoallow
youtoexcuse
Mr.Carroll
,letme now askyoutostand
andletme administer
the oath.
[RaoulCarrol
l dulysworn.]
TheCHAIRMAN
.Letme again
welcome
you.Ihavehadtheoppor
tunityto meet your lovelywifeand your sister
who are herewith
youtoday
,somaybeyouwouldlike
tojust
introduce
themtothe
room sowe willhaveitas partoftherecord
thattheywere
present
,and anybodyelse
who may be accompanying
you who you
wouldlike
tointroduce
this
morning
.
3
TESTIMONY
OF RAOUL
LORD
CARROLL
OF THE DISTRICT OF CO
LUMBIA , TO BE PRESIDENT , GOVERNMENT
NATIONAL MORT
GAGE ASSOCIATION
Mr.CARROLL
.Thank you,Mr.Chairman
.
I wouldliketointroduce
my wife
, Elizabeth
Carroll
who iswith
me today
,and my sister
,V'nell
Carroll
,who isalsowithme today
.
Otherpeople
intheroominclude
many ofmy staff
fromtheOffice
ofGeneral
Counsel
oftheDepartment
of Veterans
Affairs
, and
many oftheofficials
withwhom I will
be working
,hopefully
,in
theverynear futureat GNMA .
Thank you.
The CHAIRMAN .Thank you.
We are very pleased to have your family and the other guests
who accompany you today.Let me now invite you,Mr. Carroll, to
make whatever opening personal comments that you would like to
ma ke .
Then,when you conclude
that
,we will
getintoa discussion
.
Mr. CARROLL
.Again,goodmorning
.Mr. Chairman
,first
ofallI
wouldliketo thankSecretary
Derwinski
, a truly
distinguished
American,forintroducing
me .
During
thepastyear
,I havelearned
many things
fromtheSec
retary
,butmostimportant
I believe
- and you well
know thisabout
him- isthathe can manage ina trulydynamicenvironment
with
bothtoughness
anda sense
ofhumor.Thesearetwoskills
Ihope
tobring
,ifconfirmed
,totheOffice
ofthePresidency
ofGNMA .
Iwill
also
greatly
missthepeople
attheDepartment
ofVeterans
Affairs
. I havehad a veryenjoyable
and rewarding
experience
with
them .
Mr.Chairman
,itisa privilege
forme toappear
before
youtoday
as President Bush's nominee to be the President of the Govern
ment NationalMortgageAssociation
,alsoknown as "GNMA
."
I am honored
bythe confidence
President
Bushand Secretary
Kemp haveshowninme byselecting
me forthis
position
.
ina mannerthatup
thatresponsibility
I willstrive
tofulfill
.
service
ofpublic
standards
the veryhighest
holds
To be confirmed
tothisposition
wouldresult
intherealization
of
one ofmy highest
professional
goals
.For almosta decade
, asyou
know, Mr. Chairman
, my professional
life
has beensubstantially
devotedto helpinglow-and moderate
-incomeAmericansrealize
theirdream of havinga comfortable
and safehome in whichto
raisea family
.
As President
ofGNMA ,Ibelieve
Iwouldbeserving
inoneofthe
ve
programs
arecrucial
andVA guarantee
The FHA insurance
mostimportant
agencies
responsible
forfacilitating
thatdream.
to buy
toenablefamilies
neededassistance
hicles
whichprovide
issuers
as
ofprivate
its
network
,through
homes.GNMA ,inturn
fam
fordeserving
be available
money will
suresthatthemortgage
when theyarereadytobuy.
ilies
capital
tomortgage
GNMA's facilitation
ofthe flowofprivate
of
therealization
linkinthechaintoward
isthecrucial
lenders
.
theAmericandream ofhome ownership
I am excited
abouttheopportunity
tojoinSecretary
Kemp and
hisverydistinguished
staff
atHUD in working
toachieve
thead
4
ministration's
goalofexpanding
affordable
housing
andhome own
ershipopportunities
forallAmericans.
I am particularly
pleased
aboutassuming
the leadership
of
GNMA becauseof itsfinereputation
as one of thetrueGovern
ment success
stories
.The professional
staff
atGNMA isextremely
well
regarded
byvirtually
everyone
whohasworked
withthem.
Already
, several
pastPresidents
ofGNMA havecontacted
me to
offer
their
congratulations
, and eachhascommentedon thequality
of the staff
.
Ilookforward
to working
withsuchdedicated
men andwomen
in theverynearfuture
.
Under former PresidentArthur Hill'sdirection
, GNMA
was
made stronger
through
theimplementation
ofnumerous
reforms
that
helped
lead
toincreased
profitability
from$54million
infiscal
year1989toover$385million
infiscal
year1990
.
Iintend
tobuild
on these
successes
byexploring
new waystoim
proveGNMA's internal
controls
and enhancingitsprofitability
;
and,by continuing
tomake theagencymoreefficient
, effective
,
and responsive
inmeetingtheconcerns
oftheindustry
and the
needsofAmerica's
mortgage
borrowers
.
In particular
,I am interested
in continuing
thedevelopment
of
GNMA's riskanalysis
systems
, and in the establishment
of effi
disposition
cient
asset
policies
.
I also
look
forward
tobuilding
on andimproving
theworking
re
lationships
betweenGNMA and itssister
Federal
agencies
, includ
ingtheFHA ,theVA , and theRTC ,as wellasGovernment
-spon
soredenterprises
FannieMae and Freddie
Mac.
Overthepasttwo decades
, GNMA hasserved
a vital
rolein
makinghomeownership
an affordable
reality
fornearly
13million
Americanfamilies
. In successfully
carrying
out thisrole
,GNMA
hashelpedeliminate
regional
differences
in theavailability
of
credit
andreduced
mortgage
interest
rates
formillions
oflowand
moderate
-income
families
who mightnototherwise
havebeenable
to afforda home .
I lookforward
againtoworkingwithSecretary
Kemp and with
themembersofthis
committee
inexploring
new waystoenhance
GNMA's ability
tocarryoutitsvital
mission
.
Mr. Chairman,at thi
s time,I willbe happy toanswer any ques
tions
you may have.
Thank you verymuch.
The CHAIRMAN .Thank youvery much.
Iappreciate
thatstatement
,andyournomination
aswell
.Before
we begin
,I havea statement
fromSenatorDixontobe inserted
in
the record.
STATEMENT
BY SENATOR
ALAN
J. DIXON
Senator
Dixon.Mr.Chairman
,before
ustodayisthenomination
of Raoul Lord Carroll
to be President
of the Government National
Mortgage
[GNMA ]Association
atHUD .
The purpose
ofGNMA mortgage
-backed
securities
istoattract
nontraditional
investors
into
theresidential
mortgage
market
.This
isan extraordinary
important
programgiventhecurrent
needfor
theproduction
oflowandmoderate
-incomehousing
today
.
5
As my colleagues
know,I am also
particularly
concerned
about
mortgagediscrimination
.I suggested
toMr. Carroll
thatI willbe
calling
on hisgoodoffice
toassist
theSubcommittee
on Consumer
and Regulatory
Affairs
, whichI chair
, initsefforts
tofight
and
eradicate
thishousingdiscrimination
problem.
I lookforwardtoMr. Carroll's
confirmation
and workingwith
him as President
ofGNMA
in thenear future
.
Thank you,Mr. Chairman
.
The CHAIRMAN.Itcrosses
my mind thatifI wantedtoreally
get
a thorough
understanding
ofyourbackground
and history
, I ought
to probably
call
yoursister
up tothewitness
table
,because
I am
sureshecouldtell
me allthethings
I really
needtoknow thatoth
erwise
I may notlearn
-although
,I sense
thatifyoursister
islike
mine,shewouldonlytell
allthegoodthings
.
Mr. CARROLL
. She is very good about that
, Mr. Chairman
.
[Laughter
.]
The CHAIRMAN.I thoughtshemightbe.So we willnotcallher
today
,forthatveryreason
.
Butinlooking
atyourpersonal
background
,Iam struck
indoing
sobythinking
that
, witha lotofhardwork,youhavecomea long
way since
driving
thattaxicab
backinNew York Cityintheearly
1970's
.
Mr. CARROLL.That istrue.I have not had to work as hard since
.
The CHAIRMAN
.Butitisinteresting
toseethedifferent
things
youhavedoneovera period
oftimetoprepare
yourself
,andtode
velop
yourself
professionally
tocomeforward
todaytobe ableto
stand
on thethreshold
ofassuming
these
veryimportant
national
responsibilities
.
Of course
youhave beendoingthatasGeneral
Counsel
atthe
Department
ofVeterans
Affairs
,but thisI thinkisa new assign
ment ofgreatimportance
tothecountry
,and I thinkonethatwill
testyou innew ways.
So I want tosay
, as we start
down throughsome ofthepoints
I
wanttodiscuss
withyou,that
assuming
yourconfirmation
,whichI
do,I lookforward
toyou doinga fine
pieceofworkhere
and us
having
a goodworking
relationship
backandforth
personally
,and
withrespect
tothis
committee
.
Letme now cover
someitems
thatI wanttodevelop
withyou.I
want you to describe
forme , ifyou would, yourfamiliarity
with
GNM 's portfolio
portfolio
manage
,andelaborate
onanyrelevant
ment
experience
that
youhavehadduring
your
career
.
Mr. CARROLL.Thank
you,Mr. Chairman .
I am familiar
thatGNMA presently
haswithin
itsportfolio
ap
proximately
$16billion
worthofservicing
rights
.Mostofthatisre
latedto single
familyhousing
. Some of itisalsomultifamily
, as
wellasmanufactured
housing
.
Inmy pastbackground
,I havenotbeeninvolved
inthemanage
mentofmortgage
servicing
rights
, but Ihavebeeninvolved
for
manyyears
inthedevelopment
oflowandmoderate
-income
single
family
andmultifamily
housing
,usually
inmy role
asbondcoun
sel
,or underwriter's
counsel
representing
housing
authorities
or
underwriters
intheproduction
oflow-and moderate
-incomehous
ing
6
The CHAIRMAN .So on theissuethough of portfo
liomanageme nt,
assuch,thatisgoingtobe more orless
a new area foryou?
Mr. CARROLL
.Thatwouldbe a new areaforme ,Mr. Chairman.
That is correct.
The CHAIRMAN
. In yourqualifications
statement
, you indicate
thatyouregularly
review
theactivities
ofGNMA ,Fannie
Mae,and
Freddie
, and GNMA programmatic
guidesforissuers
and default
experiences
.
Again,I want tohaveiton therecord
.In what professional
ca
pacity
didyouhavetheoccasion
tofocus
on theseissues
?
Mr.CARROLL
.On twooccasions
,Mr.Chairman
,again
beginning
withmy private
sector
experience
as a bond counseland under
writers
'counsel
;and more recently
as theGeneralCounsel
ofthe
Department
ofVeterans
Affairs
.
As youknow,Mr.Chairman
,within
theDepartment
ofVeterans
Affairs
, we do have a relatively
small
, in comparison
to GNMA ,
mortgagesecuritization
program
. It relates
to what we callour
vendee loans.
The DepartmentofVeterans
Affairs
issues
approximately
$800
million
worthof mortgagesecurities
a year. That programhas
beenverysuccessful
overthelast
yearand a halfsinceI and my
staff
have beenworkingthere
.
We came intotheDepartment
withtheintent
,hopefully
,ofjoin
ingwiththeprofessional
staff
thereto develop
thatprogram
,
whichatthetimewas initsinfancy
, and notasefficient
as we be
lieveditcould be.
Inthatcontext
,ithasbeennecessary
tofollow
bothwhatFannie
Mae hasbeendoing
,and what GNMA and Freddie
Mac havebeen
doing
,and we havedonethaton a routine
and regular
basis
.
The CHAIRMAN
. You havealsoindicated
inyourqualification
statement
thatyou have keptabreast
of recentdevelopments
in
credit
reformasitrelates
toGovernment
-sponsored
enterprises
.
Do you feelthatGNMA , and Freddie
Mac, and FannieMae
shouldhave thesame regulator
?
Ifso,why ?
Mr. CARROLL
.Mr. Chairman
,I understand
thatcertainly
itisthe
viewofOMB thattheyshould
all
betreated
alike
.Prior
tobecom
inga Government
official
, I wouldhavefelt
thatthere
wouldbe
some different
treatment for GNMA
which does not have the same
standing
,statutory
or otherwise
,as theGovernment
-sponsored
en
terprises
.
I certainly
wouldliketoconfer
withthiscommittee
and confer
further
withOMB toseeiftheir
viewshavenotchangedon that
.
Quite
candidly
,however
,my viewisthatGNMA should
probably
be treated
differently
and notregulated
thesameway as Fannie
Mae and FreddieMac .
GNMA isa Government
agency
.Theother
twoareGovernment
sponsoredenterprises
.
The CHAIRMAN.I thinkitisimportant
tonotethat
,ifconfirmed
,
you do notwork forOMB !You work independent
ofOMB .Thatis
notto saythatyou do nottalk
, and thatyou do not reason
and
think
about
problems
together
,butyourresponsibilities
arediffer
entand morebroadthanthat
,asI am sureyou know.
7
So I thinkitisveryimportant
thatwhatever
yourprofessional
view,whateverprofessional
view you developas time goeson,that
youexhibit
andholdtheindependence
thatyourposition
requires
.
Mr.CARROLL
.I guarantee
it
,Mr.Chairman
.
The CHAIRMAN. Otherwise
, thesejobsare not much worth
having
,ifthey
do nothavethat
,asIam sureyouknow.SoIthink
in thespirit
of workingwithothers
throughout
theGovernment
,
youhavean obligation
tospeak
yourown mindandsetforward
positions
thatyou thinkare right
. And sometimespeoplesome
place
oranother
may notagree
withit
,butI viewthatasthees
sential
obligation
ofyourwork.
I wantyoutoknowthat
we will
stand
behind
yourability
and
latitude
tospeakyourmind.I want tobe surethatyou feelcom
fortable
--infact
,thatyou willdo so.
Mr.CARROLL
.Again
,onlybyexample
,Mr.Chairman
,Icanpoint
outthatwhileI was attheDepartment
ofVeterans
Affairs
we had
many discussions
withOMB regarding
theDepartment
ofVeterans
Affairs
Program.
'MortgageSecuritization
I think
itisfair
tosaythatwe movedthemsubstantially
inthe
direction
ofwhat we wantedtodo withinthe Department
, and I
position
wouldexpect
tohavethesame success
inmy subsequent
.
The CHAIRMAN.Some individuals
withinthehousing
finance
in
dustry
haveasserted
thatthereisno significant
secondary
market
mortgages
forlow-and moderate
-incomemultifamily
.
Such individuals
pointto Freddie
Mac'sdifficulty
in itsmulti
family
program
,and theDepartment's
own problems
insubsequent
termination
ofthecoinsurance
programasindications
of this
fact
.
I am wondering
, whatisyourviewofthis
assertion
? And what
do you thinkthe roleof GNMA
shouldbe in the multifamily
arena?
Mr. CARROLL
. Mr. Chairman
, I believe
that
, to theextentthat
GNMA's overall
mission
istosupport
and facilitate
development
of
low-and moderate
-incomehousing
, including
multifamily
housing
,
GNMA oughttohavea role
. I am certainly
not an expert
intheir
present
programs
, but itwouldbe my intention
to explore
that
from thetimeofmy arrival
toseeifthereisnota way toincrease
our rolein that area.
, as you know, in the
The CHAIRMAN. We have a realproblem
fora
more and more difficult
isbecoming
wherehousing
country
.
issue
. I viewitasanurgentnational
numberofpeople
large
When we seeontelevision
scenes
oftheKurdish
people
,dispos
sessed
and scrambling
justtostayalive
,itisjusta heartbreaking
scene
. But we do nothave to go thereto findproblems
thatare
similar
to thatrightherein our own communities
, as you well
know .
todaythatarestrug
country
we havegotfamilies
Allacross
this
andsomewithone,but
,somewithtwoparents
economically
gling
over
tojustputa roof
trying
withsmallchildren
inmany cases
shelters
areoverflow
.And allofourhomeless
headatnight
their
.
thecountry
ingthroughout
It seems to me thatwithinthe bounds of what isfeasible
and
mostpractical
,we havegottofinda way tobroadenoutthehous
ingopportunities
here
. Itisnota one-dimensional
problem
,obvi
ously
,itisa multidimensional
problem
.
8
A substantial
partofitI thinkdoesrelate
tothequestion
of
whetherornotwe canfinda way tofacilitate
an expansion
oflow
andmoderate
-income
multifamily
opportunities
,andobviously
the
financing
thatgoeswith that.
So Iwouldaskyou,just
personally
,toreally
zeroinon thatbe
causeI thinkthat,butforthegraceofGod ,we couldbe inanybody
else's
shoes
.We happentobe inourown shoes
, and we arein
stronger
situations
todaythana lotofotherpeople
inoursociety
who have not been as fortunateas we have .
.
really
seeanimpact
So Iwouldhopethatinthatareawe could
,butiftheviewoftheman or woman who isinthe
Itisnoteasy
isthatwe aregoingtofinda
position
atthetopoftheorganization
progress
in thatarea,usuallyithappens.
way to make a little
Letme ask you. How willHUD's new dele
gatedproce
ssingpro
gram affe
ctGNMA' s business?
Mr. CARROLL. Mr. Chairman, that is not a subjectarea with
whichI am veryfamiliar
. So what I wouldliketodo isrespond
to
you inwriting
tothatquestion
,ifI may .
The CHAIRMAN .Very good.
Letme askyouifyouhaveanyplans
now astohow youwould
allocate
resources
tomonitorandrvewGNMA's portfolio
.I guess
thatisanotherway of saying
, and askingwhetherthe present
systems
andpersonnel
aresufficient
toaccomplish
thattask
.
Mr. CARROLL. Mr. Chairman, I believethatthe presentsystems
to
hascontinued
.I know thatmy predecessor
areverygoodindeed
.
do likewise
lookatwaystoimprovethem.I will
As farasstaffing
isconcerned
, I believe
we havean excellent
staff
andthey
havethecapability
todothe job
.Again
, itissome
thing
thatIwill
look
atwhenIassumetheposition
.Butright
now,
I believe
inbothofthosetwo areasGNMA
jobtoa verygoodjob
.
isdoinga pretty
good
The CHAIRMAN
.I am wondering
ifyouhaveanythoughts
asto
what criteria
we shouldusefromboth a programmatic
perspective
andfroma safety
andsoundness
perspective
toaccurately
measure
theperformance
ofGNMA overtime
?
Mr. CARROLL
. Mr. Chairman
, I thinkone ofthethings
thatwe
mightlookat, and certainly
something
thatI willwantto lookat,
isthe level
ofdefault
among our issuers
.
GNMA
doesapprovetheissuers
ofitsMBS's,and ifwe havea
program
whichminimizes
thedefault
rateovera period
oftime
,I
think
it isa verygoodway of measuring
theeffectiveness
of
GNMA
.
Whether
or notwe canissue
moreMBS'sinanygiven
yearcer
tainly
involves
circumstances
beyondjustwhat goeson inside
of
GNMA .Butifwe canminimize
theprogram's
exposure
toissuer
default
and maximizetheflowofcapital
back tomortgage
lenders
sotheycanlendtolow-and moderate
-income
Americans
, thenI
thinkthatisa verygoodway ofmeasuring
performance
.
The CHAIRMAN.I have askedeveryotherHUD nomineebefore
thiscommittee
fortheir
personal
commitmentthatifat any time
theyseeorsense
any evidence
offraud
,orabuse
,orpolitical
favor
itism
of anykind
,thattheywouldtakeappropriate
steps
todeal
withitand stopit.
9
I mean by that
,notonlyjust
comingdownastoughasnails
on
anysituation
like
thatthat
youcatch
windof
,butifthere
isa per
sistent
problem
I wouldexpect
tohaveitreported
tothis
commit
teedirectly
.
You willneverbe more than2 minutesaway froma phone,and
I am veryeasytoreachifany problemlikethatarises
.So I would
like
yourpersonal
assurance
thatifyou seeorsenseanything
like
that
,youwill
moveon itimmediately
.And ifitisa situation
of
sufficient
gravity
,that
youwill
inform
thecommittee
ofit
.
Mr.CARROLL
.You certainly
havemy assurances
,Mr.Chairman
.
The CHAIRMAN. I thinkthatisveryimportant
.As I said
, I put
thatquestion
toeverybody
.Sothatquestion
isnotdesigned
foryou
personally
, but we have had enough problemsgoingback over
time,and some still
up intheairasyou know insome ofthehous
ingareasthatare still
unresolved
.
So we wanttoleave
thatchapter
behind
us.So ifanybody
ever
tries
anything
thatraises
a flaginyourmind,Iwant youtobejust
aboutasbluntasI am sureyoucanbe when you needtobe.
Mr. CARROLL.I will
,Mr. Chairman.
TheCHAIRMAN.Verygood.
We may haveother
questions
tosubmittoyou fortherecord
from othercolleagues
.
Senator
Garnwantedtobe herethis
morning
andwasnotable
to do so.
He wantedme toexpress
hisregret
forthat
.Butother
members
ofthecommittee
,totheextent
thattheyhavequestions
,willfor
ward thosetoyou.
yournomi
withyouandsupport
toworking
ButI lookforward
nation
,and I lookforwardtoworkingwithyou.
Mr.CARROLL
.Thankyouverymuch,Mr.Chairman
.
The CHAIRMAN .With that,thecommitteestandsin recess
.
[Whereupon
,at10:30
a.m.
,thecommittee
was adjourned
, subject
tothe call
oftheChair
.]
10
RESPONSE TO WRITTEN QUESTIONS OF SENATOR PIEGLE FROM
Raoul Lord Carroll
U.S.DepartmentofHousing and UrbanDevelopment
Washington
,D.C.20410-1000
.
MAY
7 isü
OFFICE OF THE ASSISTANT SECRETARY FOR
LEGISLATION AND CONGRESSIONAL RELATIONS
Honorable Donald W. Riegle , Jr.
Chairm an
Committee on Banking , Housing
and Urban Affairs
United States Senate
Washington , DC 20510-6075
Dear Mr.
Chairman :
This responds to your April 23, 1991 letter in which you
requestedresponsesto questionsposed by CommitteeMembers as
follow-up to the April 22 hearingon Raoul L. Carroll's
nomination
to be the President
of the Government
a
National
Mortgage Association .
Mr. Carroll's
responses
to thequestions
are enclosedalong
with his correctedcopy of the hearingtranscript
.
If further informationis needed, please contact Paul
Ruppert of my staff at (202) 708-0005
.
Very sincerelyyours,
Lhaa Ba
IvanA. Ránoop
her
Ass istan t Secre tary
(Acting)
Enclosures
11
Chairman Riegle
Ques tions
for the Rec ord
Q.1. How will the Department's
delegatedprocessingprogramimpact
GNMA'S operations
A.1. GNMA does not anticipateany materialor adverse impact on
its operations as a result of the implementation of FHA'S
delegated processing program . GNMA currently provides , and
has provided in the past , a means to securitize FHA -insured
multifamily loans thereby returning capital to multifamily
lendersand assistinginproviding adequatehousingfor low
and moderate - income families . GNMA will be able to provide
for the
securitization
of this fully-insuredprogramas the
loans are originatedand availablefor securitization
.
GNMA, unlike many other federal loan programs, does not, and
estimatesshow that GNMA will not, requireany subsidyin order to
meet
its loan guaranty obligatior.s
. Moreover , G NM A is at the
forefront of federal programs in estimating and managing credit
GNMA has developed extensive computer systems which will
risk .
al low
to
it
be tt er
un de rst and
th e
cr edi t
ri sk
in her en t
in
its
In addition, as part of the annual audit of its financial
program .
statements by an independent accounting firm , GNMA reviews the
Through these steps , GNMA already
estimates of future loss .
quantifies its credit risk on an annual basis, accomplishing one
of the main goals of credit reform . GNMA's implementation of the
rigid reporting requirements of credit reform would , therefore ,
generate little additional information to assist in the assessment
of the credit cost of Federal programs .
Implementationof credit reform as currentlycontemplated
,
would, however, have a significantimpact on the operations
of
GNMA
.
A completely duplicative and complicated general
ledger system would have to be established
, major computer
systems would be revised and up to
ten
addi ti on al
s ta ff
persons (over the 69 currently employed) would be needed to
meet credit reform reporting obligations . In addition , credit
reform may result in the application of additional burdensome
requirements on private sector issuers of GNMA securities and
additionally encumber the efficiency of operations of federal
progr
loan
G NM A
ams .
has
begun
planning
to
implement
cre dit
reform .
Nonetheless, as a program which traditionally has required no
federal subsidy and which has traditionally earned revenue in
excess of its expenses on an accounting basis, would seem to
fall outside the scope of programs and costs intended to be
addressed by credit reform .
12
RESPON SE TO WRITT EN QUESTI ONS
OF SENA TOR SASSER
FROM
Raoul Lord Carroll
Q.1 .
W ith
the
opportunity
decl ine
to
in
inter est
refinance
rate s ,
the mortgages
th ere
on
may b e
an
many
of the
defaulted properties serviced by GNMA and/or assigned to FHA
a result of the defaultsof severalcoinsuringlenders.
as
Some have advocated that HUD could save significant sums of
money if GNMA would participatein a processto reinstatethe
defaultedmortgages. Are budgetarysavingsachievable
? Would
GNMA facilitate in such a program ?
A.1 . The
Government
National
Mortgage
Association
("GNMA ")
currentlyholds a number of mortgagesfor whichrefinancing
is a viable alternative . GNMA is activelyparticipating
with
the Federal Housing Administration ("FHA ") in an effort to
reinstatedefaulted
, formerlycoinsuredmultifamilyloans. To
date , these efforts have involved a form of refinancing which
allows for the reduction of a project's debt service payments
by substituting
low floating-rate, tax-exemptbonds for fixed
rate tax exempt bonds . To date , GNMA has been able to utilize
these procedures to refinance
successfullyapproximately
$110,000,000 of defaulted loans . These refinancingshave
reducedthe expenseof carryingthe loans.
However, there are many mortgagesin the GNMA portfolioof
assets acquired as a result of issuer defaults which are
incapable
of being successfully
refinanced
. Many of these
loans are delinquentor were over-mortgagedby the initial
coinsuring lenders to the point where there is virtually no
chance of the loan ever becoming current , even if refinanced
at
a
lower
interest
utilizing the most
rate
creative
refinancingtechniquesavailable
.
Once a mortgage has been converted to full insurance (under
the coinsuranceprogramregulations
) and assignedto the FHA,
the mortgageis no longerunderGNMA'scontrol. We understand
that the FHA intendsto deal appropriatelywith refinancing
requests
for those
GNMA
committed
is
loans .
to working with the FHA
to
reduce
the
overall Departmentalloss caused by the coinsuranceprogram
through refinancing when appropriate.
13
2.2 . The Omnibus Budget and Reconciliation Act of 1990 created a
new systemof budgetaccountingfor FederalCreditprograms.
How will "credit reform " change the operations of Ginnie Mae ?
What problems are anticipated in the implementation of credit
reform ?
A.2 . GNMA has begun planning to implement credit reform . Early
analysis indicates that , at a minimum , implementation of
credit reform will require :
-- Creationand maintenanceof a separategeneralledger
and treasurysystemto track pre- and post-creditreform
activity, allocatingrevenueand expensesfirst between
pre- and post-credit reform activities . The system will
then require allocation of post-credit reform revenues
and expensesbetween each of up to 30 separate-annual
components (matching the life of a GNMA security);
Revision of all pool submission documents , related
processingproceduresand computersystemsto allow for
tracking of loan pools by year of issuance;
Creationand revisionof multiple internalcomputer
systems to allow for tracking of information on a year
by-year basis ; and
Revision
accounting
of
all
systems
master
to
subservicer
provide
for
and
contractor
by
reporting
contractorsand master subservicersin the appropriate
pre- and post-creditreformcomponents
.
GNMA estimates that the above changes could result in the
expenditure of up to $ 10 million in systems revision costs
and the dedicationof additionalstaff resourcesto develop
and implement the accounting systems described above . GNMA
estimates that credit reform implementation would result in
the addition of up to ten additional staff persons (over the
69 currentlyemployed
) to handlethe increasedadministrative
burdens
of credit
reform .
Q.3. Coopers and Lybrandis performinga comprehensivereview of
GNM A'S
pr og ram s .
What are the parameters of this study and
what are some of the initial findings? When will this study
be available to the Congress ?
A.3. The question
refers
mostlikelyto a CoopersandLybrandstudy
the scope of which is limitedto analyzingthe adequacy of
GNMA'S
current single-family program guaranty fee .
The
guarantyfee, which is determinedby statute, is paid to GNMA
by the issuer on a monthly basis and is calculated upon the
amount of the remaining principal balance of the mortgages
14
underlyingthe GNMA-guaranteedsecurity. GNMA feels this
study is extremelyimportantto GNMA'seffortsto ensurethat
adequate funds are reserved to properly account for any
potentiallosses that might occur as GNMA performsits vital
function of providing liquidity in the secondarymortgage
market for government guaranteed or insured mortgages .
The current schedule calls for the delivery of the final
versionof the guarantyfee study by July 1, 1991.
Q.4. What have been the total unrecoveredlosses and increased
administrative costs to GNMA from: A ) VA No-bid loans; B )
CoinsuredLenders; and c ) mobile home defaults
?
A.4 . GNMA has incurred direct losses as set forth below :
A ) VA No -bid loans :
1) Losses from VA No-bid loans erode the capital of
GNMA
issuers
and thereby increase the risk of
default of GNMA issuers .
VA No -bids have been a
primaryfactorcontributingto issuerdefaultsthat
otherwisewould not have occurredand are directly
relatedto GNMA'srecording(since the beginningof
FiscalYear 1987) of $354 millionin liabilitiesfor
estimatedfuture losses in creatinga reserve for
losses in the single-family program.
GNMA
has
alreadyrealized$110 millionof theseestimated
losses
to date .
2)
GNMA'S subservicersestimate that GNMA has
incurred direct , out -of-pocket VA No-bid losses of
approximately $6,000,000 between October 1990 (when
GNMA begantracking
No-bid lossesseparately
) and
on
February
1991
loans currently held by GNMA .
These losses are based upon an average VA No -bid
lossof approximately
$20,000
perNo-bidloan, which
is consistent with the industry average.
B ) Coinsured lenders :
GNMA began experiencingsignificantdefaults by
coinsuring
lenders
in
February
1989.
Direct
expenses from the default of coinsuringlenders
between
February 1989
to
February 1991 w ere
approximately $10.5 million .
C ) Mobile home defaults:
Direct expenses from the default of mobile home
issuersbetweenFebruary1986 to February1991were
approximately $423 million .
15
The only administrativeexpense directly linked to issuer
defaults
is
the
expense
of
subservicing
the
acquired
portfolios
. Becausethis expenseis paid on a per-loan basis,
subservicingexpense increasesas the size of the portfolio
serviced by GNMA increases as a result of issuer defaults .
The increasebetween FY 1989 and FY 1990 was approximately
$600,000 and would have been higher if significantcost
savingshad not been achievedthroughthe implementation
of
master subservicingcontracts
.
Other administrativeexpenses
, such as additionalstaff and
computer
resources
are more difficult to quantify but also
increase
directly
withthe sizeof the acquired
portfolio
.
17
Membershi
ps:
List
below
all
memberships
andoffices
held
inprofessional
,fraternal
,business
,scholarly
,
civic
,charitable
andothe
rorganizat
ions
.
Office
held
(if any)
Organization
Americançenterfor Int'l
Leadershi
p , Baltimore, MD
Chairman ( 1988-89 ).
Nat'l Association of
SecuritiesProfessionals
D.C. Bar Association
New York State Bar
D.C. Black Assistant U.S.
198 6-88
N /A
1985-89
N /A
1979 -Present
N /A
1976 -Present
President
Attorney Association
Omega Psi Phi Fraternity
1985 -Present
N /A
Nat'l Associa tion of
Bond Lawyers
Datos
Chapter
Basileus 1970-71
1 981- 83
1970-Presen
t. (Inactive)
ofjob
,nameof
titl
the
eordescrip
tion
luding
below
all
positi
ldsinc
ecolleg
e,inc
: List
onshe
Emp
record
loyment
nt.
lusive
ofinc
employme
ent,location
ofwork,anddates
employm
General Counsel; U.S. Dept. of Veterans Affairs, Wash. D.C.
Present
October 1989 --
Partner, Bishop, Cook,Purcell & Reynolds, Wash. D.C.
October 1986-Sept. 1989
s, Wash . D.C.
Partner, Hart, Carroll & Chaver
October 1981-Sept. 1986
AssociateMember, Board of Veterans Appeals, Wash. D.C.
October 1980-Sept. 1981
AssistantU.S. Attorney, Dept. of Justice, Wash. D.C.
t. 1979
-Oct. 1980
Sep
Officer, U.S. Army, Dept.of the Army,
May, 1972
-Sept. 1979
.
tingCorp.
, N.Y
, New York
TaxiDriver, Chad Opera
1
April 1973-April 1974
2
19
Political
contributions
:
Itemize
all
political
contributions
of$500ormoretoanyindividual
,campaign
organiza
.
tion
,political
party
, political
action
committee
orsimilar
entity
during
thelast
eight
years
andidentity
thespecific
amounts
,dates
,andnames
oftherecipients
.
$5,000; April 1989; RepublicanNation
al Committee, Washe. Daca
Qualifications
:
State
fully
your
qualifications
toserve
intheposition
towhich
youhave
been
named
.
(attachsheet)
(See Attachment "A").
Future
employm
ent
relationships
:
1.Indicate
whether
youwill
sever
all
connections
with
your
present
employer
,business
firm
,association
ororganization
if
youare
confirmed
bythe
Senate
.
Y es
By Resig
nationEffe
ctiveon Confirmat
ionDate
2.Asfar
ascanbeforeseen
,state
whether
youhave
anyplans
after
completing
govern
mentservice
toresume
employment
,affiliation
orpractice
with
your
previous
em
player
,business
firm
,association
ororganization
.
NO
3.Hasanybody
madeyoua commitment
toajob
after
youleave
government
?
4. Do youexpect
toserve
thefull
termforwhich
youhavebeenappointed
?
Yes
20
conflicts
Potential
ofinterest
:
1.Describe
anyfinancial
arrangements
ordeferred
compensation
agreements
orother
continuing
dealings
with
business
associates
,clients
orcustomers
whowill
beat.
fected
by policies
whichyouwill
influence
intheposition
towhichyouhavebeen
nominated
.
N one
2. List
anyinvestments
,obligations
,liabilities
,orother
relationships
whichmight
involve
potential
conflicts
ofinterest
with
theposition
towhich
youhave
been
nominated
.
N on e
3.Describe
anybusiness
relationship
,dealing
orfinancial
transaction
(other
than
tax
.
paying
) whichyouhavehadduring
thelast
10 years
withtheFoderal
Government
,
whether
for
yourselt
,onbehalf
ofa client
,oracting
asanagent
,that
might
inany
wayconstitute
orresult
ina possible
conflict
ofinterest
with
the
position
towhich
you
havebeennominated
.
No ne
5
21
4.List
anylobbying
activity
during
the
past
10years
inwhich
youhave
engaged
for
the
purpose
ofdirectly
orindirectly
influencing
thepassage
,defeat
ormodification
of
anylegislation
atthenational
level
ofgovernment
oraftecting
the
administration
and
execution
ofnational
laworpublic
policy
.
No n e
5.Explain
howyouwill
resolve
anypotential
conflict
ofinterest
that
maybedisclosed
by
estotheaboveitems
.
yourrespons
N /A
Civil
, rminal
and
Investigat
ory
actions
:
1.Give
thefull
details
ofanycivil
orcriminal
proceeding
inwhich
youwere
a detendant
oranyinquiry
orinvestigation
bya Federal
,State
,orlocal
agency
inwhich
youwere
thesubject
oftheinquiry
orInvestigation
.
LimitedPartnershipvs.
Thereis a pendingcivil suit, VermontInvestment
Ct. of
, Superior
Christopher
A. Hart, et al., CivilActionNo. 90-2126
The claim is for breach of lease terms . All
the District of Columbia.
claims have been denied. Plaintiff's claims , if valid , arose after I
withdrew from the firm .
I am a named defendant because I was an officer
intheprofessional
corporation
atthetimethelease
wassigned
.
2.Give
thefull
details
ofanyproceeding
, inquiry
orinvestigation
byanyprofessional
association
including
anybarassociation
inwhichyouwerethesubject
ofthepro
ceeding
,inquiry
orinvestigation
.
No ne
6
23
Attachment A
Page Two
later, we have a programwhich routinely
raises over
ninety-five cents ($ .95) per one dollar ($1.00) of assets
sold . Expenseshave been trimmedsubstantially
during the same
period . The VA now sells approximately Eight Hundred Million
Dollars ($800,000,000
) of mortgagebackedREMIC securitiesa
year to a very receptivemarketwith a full VA guarantyon the
underlying loans . We are still workingon furtherrefiningthe
product. It should be noted that these changeshave taken
place without increasingthe government'srisk and, therefore
,
the programhas retainedthe supportof Congressand relevant
executivedepartmentofficials
.
As a resultof my substantialexperiencewith housing
production
, mortgage finance, mortgagesecuritization
and the
capitalmarkets, I believe I am exceptionally
well suited to
assume the presidencyof GINNIEMAE. In closing, I should
further note that my experiences with the agency have caused me
to have a very high regard for the staff, and I know that it is
well regardedby all the constituentgroups that work with the
people there on a regular basis .
I , too , look forward
to
workingwith the many fine professionals
at GINNIEMAE.
NOMINATION
GINIA , TO
GOVERNORS
OF LAWRENCE
BE
LINDSEY , OF VIR
A MEMBER
OF THE BOARD
OF THE FEDERAL
RESERVE
TUESDAY , MAY
OF
7, 1991
U.S. SE NAT E ,
COMMITTEE ON BANKING,HOUSING,AND URBAN AFFAIRS,
gton, DC .
Washin
e met at2:40p.m.,inroom SD -538 ofthe Dirkse
n
The committe
ing,Senato
r DonaldW. Rie
Senate Office
Build
gle,Jr.(chairmanof
tee)pres
iding
the commit
.
OPENING
STATEMENT
OF CHAIRMAN
RIEGLE
The CHAIRMAN.The committee
willcome to order
. Letme wel
come allthosein attendancethisafternoon
. We're a little
latein
starting
duetothefactthatwe wereanticipating
a voteon the
Senate
flooratexactly
2:30and,as isoften
thecase
, thattimegot
moved.And,aswell
,downstairs
in theFinance
Committee
,whereI
serveasamember ,we arehavinga hearing
thisafternoon
on the
proposedUnited States
Mexican Free Trade Agreement
. Carla
Hills
andtheLaborSecretary
andtheDirector
oftheEnvironmen
talProtection
Agencyare alldownstairs
testifying
, and thathas
alsorequired
my attendance
.
I'mtoldthatSenatorWarneriscomingforthepurpose
ofintro
duction
.And ,we'llcallon SenatorWarner when he arrives
.
Thisafternoon's
hearing
ison thenomination
ofLawrence
Lind
sey to the FederalReserveBoard forthe remainderof a term
endingintheyear2000.
Mr. Lindsey
isan economist
on leave
from
HarvardUniversity
who has servedas SeniorStaff
Economist
at
theCouncil
ofEconomicAdvisers
,and mostrecently
asSpecial
As
sistant
to thePresident
forPolicyDevelopment
.
Thefact
thatthis
isan extremely
important
position
inourGov
ernmentisverymuch apparent
atthepresent
timebecause
ofthe
economicrecession
thatwe'redealing
withand thehardship
that
we'reseeing
throughout
theeconomy
. We just
saw a reduction
in
thediscount
raterecently
asan effort
totrytobringinterest
rates
downgenerally
andputsomeadditional
strength
into
theeconomy
,
and we'll
seetheeffect
thathasastheweeksgo by.
A new appointee
to theFed willimmediately
havean opportuni
tyand a responsibility
totrytoreverse
thedifficulties
thatwe see
today
in theeconomy
. The taskisin large
measurethatof at
tempting
totrytobring
aboutan economic
expansion
, while
atthe
same timerestraining
inflation
. We'll
be interested
in learning
today
moreabout
Mr.Lindsey's
views
on monetary
policy
general
(25)
26
lyandalso
insomemoredetailed
respect
tohisviews
on thestate
oftheeconomy:wherewe areand wherewe mightbe going
.
In addition
,the FederalReservehas substantial
bank and finan
cial
marketregulatory
responsibilities
. Thereareseveral
recent
proposals
,including
theadministration's
,thatwouldmake major
changesin theFed'sregulatory
role
. In hiscurrent
position
, Mr.
Lindsey
was theWhiteHousechief's
participant
inthedevelop
mentoftheadministration's
banking
reform
proposal
.The Fedand
others
haveproposed
some ofthekey provisions
in thatproposal
,
including
thosedealing
withthemechanismforproviding
funding
totheFDICwiththebankregulatory
design
,andwiththemerging
ofbanking
incommerce
.So,we will
wanttohearMr.Lindsey's
views
todayonthose
issues
andother
issues
thatareraised
by the
administration's
proposal
.
Also
, Mr. Lindsey's
professional
work isfocused
on analysis
of
theeffects
oftaxchanges
. He'swritten
a provocative
bookinwhich
heclaims
,forexample
,andI'mquoting
:
The Reagantax cutscontributed
onlytrivially
to theboomingdeficits
of the
1980's.
And inanother quote:
TheReagan boomwas disti
rapidgrow
ngu
eci
ish
ally
thinbus
ine
edby anesp
ss in
vestment .
And ,anotherquote:
deroftheworldeconomy.
isonceagainthe lea
The Unit
edStates
Itakesomestrong
exception
tothese
last
comments
,andthey're
a matter
ofconcern
tome,quite
frankly
, ifthose
continue
tobe
your views.
Let me ask forthesakeofsetting
thestageforour discussion
todayifsomeonewouldgo overand put the two charts
up. The
first
chartshowsnetbusiness
investment
as a percent
ofnetna
tional
product
. Thischartshowsas a percentage
of netnational
product
theamountofbusiness
investment
invarious
timeperiods
,
thefirst
one being1952–61
.And thenitgoesin10-yeartimeperi
ods: 1962-71
, 1972–81and 1982–90
. What one can clearly
seein
looking
atthis
chart
isthatwe wereintherangeof3 percent
to4
percent
in eachof thosefirst
threedecades
. But, in the 1982-90
period
, we seea verymeasurable
dropin termsofthathistorical
performance
, dropping
downtosomething
just
slightly
over2 per
cent .
Thatwouldstrike
me as a measureofthefactthatnetbusiness
investment
,rather
thanbooming
,was,infact
,retreating
relative
towhatwe had seeninearlier
periods
.
Letme askthattheother
chart
be putup now.Thisonealso
reflects
a veryserious
erosion
intheU.S.financial
position
,inmy
view. And this is a chart that shows America's slideout of the
creditor
nation
status
inthemid-1980's
,whichismeasuredby that
bluezoneabovea zeroline
, to theredarea
, whichisthedebtor
nationindication
, withthe UnitedStates
plunging
down intoan
international
debtor
position
in $100billion
increments
, down
through
theendof1990
,wherewe wereup intherangeofnearly
$700billion
, in termsof ournetdebtor
position
, and certainly
27
continues
at a veryhigh
.Our tradedeficit
headed for$1 trillion
totakeusdown overtime.
continue
,evennow,whichwill
level
At thesametime
,measures
ofcomparison
withhow we're
doing
,
say,vis
-a-vistheJapanese
,intermsofinvestments
arealsoalarm
ing.The latest
datathatI haveindicates
thattheyhavebeenput
tingabout5 timestheamount ofinvestment
in equity
capital
in
theirbusinesses
as we wereintheUnitedStates
.Theircapital
in
vestmentrates
areway aboveoursand othereconomies
aswell
.
I don'twant us to kidourselves
aboutthe natureofwhere Amer
performing
icaistodayandwhetherornotitisreally
inan excep
tionally
positive
fashion
comparedwiththe restof theworld
, or
whether
we'vegotsomeveryserious
problems
.
IfIthought
thatyouwereconvinced
that
things
werejust
terrif
ic and thatwe'rejustriding
a gigantic
boom, I thinkI'dbe con
vinced
thatyouwerethewrongperson
forthejob
.Now,I'm1 vote
and thereare99 others
.But,I havethedeepest
and themostseri
ous interest
inwhat kindofeconomic
trendlines
we'reriding
into
thefuture
.And yourviewson thatareveryimportant
tome.
So,when we getintothattoday
,it's
more thanan academicex
ercise
. I thinkit'sthe most important
question
to be askedin
terms of the kindsof policy
decisions
and orientation
thatyou
wouldbringtothistask
.
With that
,letme call
on Senator
Garn.And then,ina moment,
I'll
call
on youtointroduce
membersofyourfamily
and others
thatareheretoday
.
SenatorGARN .Thank you,Mr. Chairman.
Due tothelateness
ofthehour,I willnottakethetimeofDr.
Lindsey
tomake an opening
statement
atthis
time.
The CHAIRMAN .Very good.
I alsohavea statement
fromSenator
Moynihanon behalf
ofthe
nomineethathe wouldlikemade a partoftherecord
.And so I
wouldaskthat
,without
objection
,itbe made a partoftherecord
.
[The complete
prepared
statement
ofSenator
Moynihanfollows
:)
29
2
a Governor of the Federal Reserve System, an arm of
governmentwhich was created to be independentof partisan
politics in order to safeguardthe stabilityof our monetary
system .
Dr. Lindsey is a man of fine intellect , as I am sure
many of you have already discovered. He is an economist ,
policy analyst and public administratorwith considerableand
proven skill .
d istinc tion .
He has served in two Administrations with
In e ac h ca se ,
he has moved up quickly into
positions
of greaterimportance
, influence
and
responsibility
.
President Bush has made a fine choice in nominatingDr.
Lindsey .
I am sure that the committeewill enjoy questioning
him and learningmore on his views as they consider his
confirmation .
46-442 0 - 91 - 2
30
I will
also
attempt
tointerrupt
theproceeding
atsuchtimethat
Senator
Warnercomesbecause
we wanttohavehiscomments
.
Letme now askyoutostandand taketheoath
.
Do youswearthatthetestimony
you areabouttogiveisthe
truth
,thewholetruth
andnothing
butthetruth
,sohelpyou,God?
Mr. LINDSEY. I do,Senator.
The CHAIRMAN. Do you agreeto appearand testify
before
any
dulyconstituted
committeeoftheSenate?
Mr. LINDSEY.Yes,sir
.
The CHAIRMAN.Verygood.
Senator
Warnerhasnow comeinto
theroom.Letme invite
you,
Senator
,tocomeon up tothetable
,andI knowyouhavesomein
troductory
commentsyouwishtomake.
SenatorWARNER. I wouldjustapologize
. We had a votesched
uledfor2:30
.I was thereon thefloor
.
But,Ithink
whatI'll
doisjust
submit
this
fortherecord
andnot
delaythe hearing
. This is such an outstanding
man , he doesn't
need senatorial
introduction
.
You're
on yourown.(Laughter
.]
[The complete
prepared
statement
ofSenator
Warnerfollows
:]
31
JOHN
JohnDames
WARNER
225 AUSSELL SENATE OFFICEBUILDING
WASHINGT
ON,DC20$10-4601
(202)224-2023
A
VIAGINI
CONSTITUENT SERVICEOFFICES
COMMITTEES
ARMED SERVICES
SELECT
COMMITTEE
UnitedStatesSenat
e
ON INTELLIGENCE
ENVIRONMENTAND PUBLICWORKS
490WORLDTRADECENTER
NORFOLK VA 23510 1624
(804) 441-3079
PARCEL POST BUILDING
1100 EAST MAIN STREET
RICHMOND VA 23219-3538
(804 ) 771-2579
235 FEDERAL BUILDING
180 WEST MAIN STREET
ABINGDON VA 24210 0887
(703)628 8158
DOMINION BANK BUIL
213 S JEFFERSON ST SUITE 1003
ROANOKE VA 240 11-1714
(703)982-4676
SPECIAL COMMITT EE ON AGING
STATEMENT
BEFORE
OF
THE
ON
SENATOR
SENATE
THE
THE
B.
FEDERAL
WARNER
COMMITTEE
NOMINATION
LAWRENCE
TO
JOHN
BANKING
OF
LINDSEY
RESERVE
BOARD
MAY 7 , 1991
Mr. Chairman and members of the Committee, I am pleased to
introduce Mr. Lawrence B. Lindsey, who has been nominated to be a
governo r of the Fed eral
Res erve Board .
It is my privilege to
recommend Mr. Lindsey to the President.
Mr. Lindsey, a longtime resident of Virginia, has enjoyed a
varied and extensi ve car eer .
He is currently an Associate
Director for Domestic Economic Policy in the Office of Policy
Developm ent at the White
Hous e .
He has been there since
1989 .
Mr. Lindsey's past experience is equally impressive.
served
as an Executive
Competitiveness.
Director
He served
for the President's
as a senior
He
Council
staff economist
for
on
t ax
policyfor the Councilof EconomicAdvisors
, and he taught
economi cs as
an AssociateProfessorat HarvardUniversity
.
Mr. Lindsey's
educational
background
, as well as his honors
and awards
, speakwell for his dedicationto his profession
.
He
receivedhis undergraduate
degreefrom BowdoinCollegewherehe
was Phi Beta Kappaand graduatedMagnaCum Laude. He received
his graduate degree and Ph.d in economics from Harvard
32
-2
University.
He was awardedthe OutstandingDoctoralDissertation
Award , was a Citicorp/Wriston Fellow for Economic Research, and
was elected
to the National
and Finance
Committee .
Tax Association's
Federal
Taxation
Mr. Lindsey has also enjoyed extensive international
consultingexperience
. He has served in the Republic of Ireland ,
West Germany , Sweden and the United Kingdom . While abroad , he
was involved in consortiums on tax reform, tax rate reduction and
the role of personal tax rates and tax revenues.
Lastly, the nominee boasts an extremely impressive list of
publicationswhich is too extensiveto presentin its entirety.
The list includesbooks, magazine
, newspaperand journalarticles
as well as testimonypresentedbefore the House Ways and Means
Committee .
Lawrence Lindsey will make a great contribution as
to the Federal
Reserve
Board , and I endorse
a
g overn or
his nomination .
Thank you Mr. Chairman and members of the Committee for your
attention
to this matter .
33
Mr. LINDSEY.Thank you , Senator.
Warnerwas Secretary
The CHAIRMAN.Youknow, when Senator
what he usedtodo,you know. He'dbringthese
oftheNavy,that's
, now you
up tothedeckand he'dsay, “Allright
youngofficers
.” And thensteer
thisship
.]
[Laughter
The CHAIRMAN
.Now, we dohavea votethat's
starting
.We'll
go
fora short
period
oftimeherebefore
we'll
havetorecess
long
enough togo and vote.
I knowyourwifeis
present
.We'dlikeyoutointroduce
herand
any othermembersofyour family
thatmightbe here
,or anyone
accompanying
elsethat's
you.
Mr.LINDSEY
.Yes,Senator
. My wife
,Susan
.I'mlucky
enoughto
haveherjoinme today
.
Thank you verymuch .
you go aheadand beginany opening
The CHAIRMAN. Why don't
seehow farwe get
commentsyou wishto make. And thenwe'll
.
forthevote
briefly
we havetorecess
before
Mr. LINDSEY.Thank you.
TES TI MO N Y OF LA W RE NC E LI ND SE Y ,OF VIRGIN IA ,TO BE A M EM
BE R O F T HE BO AR D OF GO V ER NO RS OF TH E F ED ER AL R E SE RV E
Mr.LINDSEY
.Chairman
Riegle
,membersofthecommittee
,itisa
privilege
toappear
before
youthis
afternoon
asa nominee
toserve
on theBoardofGovernors
of theFederal
Reserve
System
.
honoredme by askingme to servein
President
Bush has greatly
devoteallof my
, I'll
by the Senate
. If confirmed
thiscapacity
thatyouandthePresident
thetrust
tofulfill
and ability
energy
inme.
willhaveplaced
I'mmostdeeply
grateful
forthekindwordsofSenator
Warner
,
who isfrommy home State
ofVirginia
,forhisconfidence
,and also
for
the generous
support
ofSenator
Moynihan
,whom I've
known
and worked withformany years.
Fora numberofreasons
,this
isa particularly
exciting
and chal
lenging
timeto be considered
forthe position
of Federal
Reserve
Governor.
First
, theeconomyisata crucial
point
inthebusiness
cycle
.
Policy
makers
,particularly
those
withresponsibility
formonetary
policy
, facea challenging
task
. Concernaboutthe healthof the
economyandespecially
forthose
individuals
who areunemployed
promptsonetofavorpolicies
thatwillaccelerate
economic
growth
.
At the same time,history
has taughtthatexcessive
monetary
easeleads
tohigherinflation
as theeconomyrecovers
.Greatcare
mustbetakentostrike
balance
theproper
.
Careful
thoughtand balanced
action
willalsobe neededas the
Nation
reforms
andstrengthens
itsfinancial
services
industry
. The
Federal
Reserve
willplay
roleinthatprocess
a crucial
intheyears
aheadasoneoftheprincipal
regulatory
organs
ofGovernment
.
America needsfinanci
almarket rules
appropri
atetooureconom
iclea
dersh
ippos
ition
intheemergin
g glob
almarke
t ofthe 21st
centur
y. We alsoneed consi
stentand equi
tableappli
catio
n ofour
regul
ation
s.
35
In my case
,theidealistic
tendencies
oftheacademic
ivory
tower
have been temperedby practical
political
experience
.
Conversely
,theharsher
demandsofpolitical
life
havebeensoft
enedby timeforacademic
reflection
.
Ibelieve
that
this
background
will
behelpful
inthecollegial
,yet
,
policy
and decision
oriented
environment
of theFederal
Reserve
.
agenda
and challenging
Reserve
faces
an ambitious
The Federal
thatI
me ,I believe
intheyearsahead.ShouldtheSenateconfirm
.
those
challenges
tomeeting
contribution
can make a useful
I cannot
promise
this
committee
thatmy confirmation
will
solve
our Nation's
bankingproblems
, and therecession
, or usherin a
new age ofpricestability
.
But, I can and do pledgethat
, ifI'm confirmed
, the Nationand
the Federal
Reservewillhavemy unflinching
commitment
, time
andenergy
devoted
toaddressing
those
tasks
.
Thank you verymuch,Mr.Chairman
.
The CHAIRMAN .Very good.
We'llshortly
begoing
,I think
,tothesecond
bells
on thisvote
,so
we'll
justgetstarted
here
. I'vebeengoingthroughyour résumé
here,which I looked
at previously
,and I seetheexperiences
that
you'vecited
,thetimeat Harvard
,thetimeas a faculty
research
fellow
,yourtimeontheCouncil
ofEconomic
Advisers
.
Itappearstome that
, essentially
,thebulkofyourbackground
training
wouldbe inacademic
areas
,aswellasadvisory
positions
inGovernment.
Would thatbe a fair
statement
? Or,whatelse
?
Mr. LINDSEY
.Yes,Senator
,I believe
that's
accurate
.
The CHAIRMAN. Now ,I takeitthatyou don'tthinkthelackof
any direct
business
experience
isa handicap
intermsofyourabili
tyto beable
tobring
thatkindofperspective
tobearhere
?
Mr. LINDSEY
.Senator
, I don't
thinkso.I thinkI have,inmy uni
versity
time,had managerial
experience
.I'musedtoworkingwith
staffs
.I had40teachers
and 1,000
kidsI wasresponsible
for
.So,I
understand
thechallenges
ofa manager
,butyou're
right
,I have
notbeen inthe private
sector
.
The CHAIRMAN
.When youwanttotrytogeta private
sector
as
sessment
,and I'msureyou talktoany number ofpeople
and I'm
sureyouwouldhavebeentalking
withpeople
fromthesedifferent
policy
positions
you've
beenin,who doyoutalktoon themanufac
turing
side
? Who aresomeofthepeople
thatyou relyon foradvice
and insight
who would be some ofthe kindsofpeoplethaton some
kindofa regular
orperiodic
basis
youwouldtalk
tojust
totakea
reading
onwhat's
happening
intheeconomy
?
Mr. LINDSEY.Well,Senato
r,inmy curren
t positio
n,Imeet regu
larl
y withany numberofreprese
ntati
vesof busine
ssandindust
ry
who come through.
The CHAIRMAN.But,who do you seek out? Who do you pick up
thephone andca
llwhen you wanttogeta readin
g as to what'
s
goin
g on out ther
e with peopl
ewho run busi
nessand, youknow,
aretry
ingtomake a go ofitinthepriva
tesector
?
Mr. LINDSEY
.Well,I thinkthatI wouldcall
academic
economist
friends
of mine who have worked forbusinessorganizations
. The
conference
board,forexample.
36
Ialso
havefrien
dswho arerespo
nsible
,have beenent
repre
neurs
,
partic
ularl
y in high
-techareas
,inbiote
chnol
ogy.
And I findthatI haveno shortage
ofindividuals
who wantto
giveme their
advice
.And I've
learned
thathavinga goodearisa
veryimportant
part
ofmy responsibilities
.
So I do feel
thatI'mopentoanyonewho wouldexpress
their
views .
TheCHAIRMAN
. Letme putus intoa recess
herebriefly
. The
second
bells
haverungandSenator
GarnandIhavetogoover
and
vote
.We'll
be backjustassoonaswe cangethere
.
The committeestands in reces
s.[Recess.)
The committee
willresume
. I don'tknow exactly
what our out
lookisforadditional
votes
,butwe're
going
tostayherethis
after
noonuntil
we'vegonethrough
theseissues
.
We are pleased
to have beenjoinedby SenatorSarbanes
, and
alsoSenator
Dixoncame by and left
hisstatement
, whichwe'll
makea partoftherecord
,without
objection
.
ts ofSena
torsDixon and San
ed statemen
eteprepar
[The compl
ow:]
fordfoll
37
MAY 7,1991
>
STATEMENT
OF SENATOR
SENATE
NOMINATION
BANKING
HEARING
ALAN J. DIXON
COMMITTEE
ON LAWRENCE
LINDSEY
MR .CHAIRMAN , I AM PLEASED TO BE HERE THIS AFTERNOON AS
THE SENATE
BANKING
LAWRENCE
COMMITTEE
CONSIDERS
LINDSEY TO BE A GOVERNOR
THE NOMINATION
ON THE FEDERAL
OF
RESERVE
BOARD .
I UNDERSTAND
THE GROWTH
THAT MR .LINDSEY HAS WRITTEN
A BOOK
CALLED
EXPERIMENT . AND ,I UNDERSTAND THAT THE BOOK
ARGUES ,IN EFFECT ,THAT THE REAGAN SUPPLY -SIDE POLICIESWERE A
BIG SUCCESS ,A POSITION WITH WHICH MOST MAINSTREAM
ECONOMISTS WOULD DISAGREE ,I BELIEVE. THIS AFTERNOON ,I HOPE
WE WILL EXPLORE WHETHER
OR NOT "GOVERNOR
LINDSEY" WOULD
TAKE A RIGIDLY IDEOLOGICAL AND EXCLUSIVELY SUPPLY -SIDE
APPROACH
TO ISSUES PUT BEFORE
HIM AT THE FEDERAL
RESERVE .
WOULD "GOVERNOR LINDSEY "ARGUE ,FOR EXAMPLE ,THAT THE
MARKET -PLACE CREATES SUFFICIENT DISINCENTIVES AGAINST
DISCRIMINATION AND OTHER CONSUMER
CONCERNS THAT THE FED
38
NEED NOT WORRY ABOUT MORTGAGE DISCRIMINATION OR OTHER
"CONSUMER
ISSUES"? WOULD "GOVERNOR
LINDSEY "BE CONCERNED
ABOUT THE UNITED STATES MOVING IN 1981FROM BEING THE WORLD'S
LARGEST CREDITOR TO THE WORLD'S LARGEST DEBTOR IN 1989--A
SHIFT OF $0.8TRILLION IN NET FOREIGN
INVESTMENT
"GOVERNOR
CONCERN
WORKING
LINDSEY " SHOW
AMERICANS
SUFFICIENT
IN FORMING
MONETARY
? WOULD
FOR AVERAGE
POLICY?
THESE ARE CONCERNS OF MINE AND PROPER CONCERNS ,I
BELIEVE,OF THE FEDERAL RESERVE BOARD AND ITSGOVERNORS . I
HOPE
THAT THIS AFTERNOON'S
RELATED
BANKING
HEARING
POLICY MATTERS .
WILL EXPLORE
THESE AND
39
Tempenfora
OPENING
HEARING
STATEMENT
OF
SENATOR
ON THE NOMINATION
TO BE A MEMBER
TERRY
OF LAWRENCE
SANFORD
LINDSEY
OF THE BOARD OF GOVERNORS
FREDERAL
OF THE
RESERVE
MAY 7 , 1991
Thank you , Mr. Chairman .
I appreciate your calling for
this hearing and look forward to hearing the views of Mr.
Lindsey .
I must say at the outset , however , than I am quite
troubled by a number of the things Mr. Lindsey has written ,
particularly
in his recently
published
book, TheGrowth
Experiment :
Economy
How the New Tax Policy Is Transforming the U.S.
From what I have read , this book clearly takes
the view that the 1981 tax cuts were only a minimal cause of
our tremendousbudgetdeficitand that more of the same is
what we need to build a better, strongernation.
I don't
know of anything that could be further from the truth .
I am extremely concerned about placing someone on the
Federal Reserve Board who takes the Reagan Administration's
"don't worry, be happy" mentalityto heart, while we have
watched the rich get much richer, the poor get much poorer ;
our cities and states fall into fiscal crisis from being
asked to shoulderan ever increasingarray of problemsthat
42
The CHAIRMAN.In theinterest
oftimenow,I want tojustraise
oneitem
.And thenI'mgoing
togotoSenator
Garnandgoto Sen
ator Sarbanes.
You should
infer
frommy commentsaboutsomeofthequotes
thatItook
fromyourbookandmy own sense
as towhathappened
in the 1980'sand where we are now ,thatI thinkthateconomic as
sessment
justdoesn't
makemuch sense
.
Now,Iknow youprobably
havejust
asstrongly
a held
viewon
theother
side
.But,I guessI wouldlike
tohearan explanation
fromyouastowhy,with
the statistics
thatI've
cited
,hugestruc
tural
deficits
now intheFederal
budget
, a very
substantial
trade
deficit
- someimprovement
,butstill
verylarge
, hugeoverhang
of
debtthroughout
theeconomy
,serious
recession
on ourhands
, cap
investment
looking
pretty
anemicwhenyoureally
compareit
ital
withothercountries
,how doI make a silk
purseoutofallofthat
rather
perverse
economic
dataand thosetrendlines
,whichI think
arereally
quite
adverse
toourfuture
?
Mr.LINDSEY
. Senator
,letme saythatI shareyourconcern
about
thelevel
ofsavings
and level
ofinvestment
inAmerica
.
We canallagreethatAmericawouldbe better
offifwe had
more.And I thinkthatthetasksaheadattheFed inthemonetary
sphere
touchtosomedegree
on that
.
In looking
atthe1980's
,I thinkit's
important
toputthem into
thecontext
ofthechallenge
that
weentered
the1980's
with
.
I suppose
it's
truewithgenerations
as well
. Eachgeneration
makesforward
steps
,butthenextgeneration
inherits
new prob
lemsthat
,although
theprevious
generation
hadsolved
someprob
lems,new problemsemerge.
I thinkthat
, when onelooks
attheunderlying
inflation
,unem
ployment
tradeoff
thatwe beganthe1980's
with
,Ithink
there
was
substantial
improvement
.I thinkwe had a substantially
improved
functioning
ofourmarketeconomyas thedecadewenton.
In thelongrun,I thinkthatisthe greatstrength
oftheAmeri
can economyand theonethatwillbemost helpful
inthedecades
marketplace
ahead,aswe entera global
.
But,I share
yourconcern
about
getting
thesavings
rate
up.Ab
solutely
The CHAIRMAN. Well, I remember when RonaldReagan took
overthePresidency
and,ifmy memory isright
and I thinkitis
,he
budget
saidthatwe'dhavea balanced
by 1984
.
Well,1984came and went.And 1988wentby.And 1990wentby.
And we're
in1991.
And no onereally
yetsees
outon thehorizon
a
balanced
budget
.
Do youseeone?Imean,areyouwilling
tohangyourprofession
alhaton a dateby whichyouthink
iswe're
going
tohavea bal
ancedFederalbudget?
Mr. LINDSEY
.Well
, itverymuch dependson ourpolicy
decisions
.
In thebookthatyou cited
,what I laidoutwas a scenario
where,if
we hadaverage
economic
growth
and4-percent
inflation
,Icarted
thepathofrevenues
,compared
ittothechart
ofspending
with
an
assumption
aboutspending
. And thatwaswhatwe wouldbeable
to have with zerorealspendinggrowth
. In otherwords, has
spending
keep pacewithinflation
. And thenriseat 2 percent
a
year.
43
And,underthat
scenario
,we wereabletoobtain
budget
surplus
es by later
inthedecade
,actually
,by mid-decade
.
Now ,when thebookwas written
,again
, that's
basedon the as
sumptions
.We havenotrestrained
thegrowth
ofspending
,aswas
suggested
in thebook.Nor havewe attained
therateofeconomic
growth
growth
,theaverage
rate
ofeconomic
,inrecent
years
.
But,I do thinkthat
,overthelonghaul,giventhatrevenues
will
rise
faster
thantheeconomy
,ifwecan simply
restrain
therate
of
spending
growth
totherateofinflation
or,at most,totherate
of
economic
growth
,thetaxline
will
overtake
thespending
line
.
The CHAIRMAN
.As I understand
it
,whatyouhad projected
and
thought
mighthappen
was less
spending
and greater
growth
, we
didn't
gettheless
spending
. We gotmore thanyou anticipated
.
AndI wouldthinkthatthatoughttohavedriven
thegrowth
line
up evenhigher
onthetheory
that
,ifyouaddadditional
stimu
lus,yougetmoregrowth
.
Now, maybeyouwouldarguetothecontrary
, butwhathap
penedtothegrowth
?Why did
itfall
short
?[Pause
.)
Mr.LIND
SEY
. The reaso
n I pauseisyou'reaski
nga verygood
ques
tion,onewithmany answers.
Inpart
,I thinkwe'veseena slowdownbecause
we areattheend
ofa period
ofextended
economic
growth
,what hasturnedouttobe
thelongest
peacetime
expansion
we've
hadinAmerican
history
.
Thereweresome signslate
lastyear,duringtheyear
,thatthe
economywas slowing
down.I thinkthattheIraq
-Kuwaitcrisis
sent
whatwas a slowgrowing
economy
into
a negative
growth
situation
.
I think that the lossin consumer confidence
had a tremendous
amount todo withthat.
So, again
, thereare many, many reasons
explaining
why the
economyhasslowed
down.Theyinclude
thenormal
business
cycle
typeofreasons
— theIranIraqwar,monetarypolicy
.
Itisimportant
when you examinethedeficits
aswelltoconsider
the natureof the deficit
and how much fiscal
stimulusone would
getfromeachparticular
kindofspending
.
A numberofcommentators
havenoted
,forexample
,that
,inour
effort
to make surethatdepositors
in financial
institutions
get
their
money,itcosts
theGovernmentmoney.But, it's
notnecessar
ily
clear
that
you'll
geta substantial
fiscal
stimulus
fromthat
.The
individuals
who aregetting
their
moneyguaranteed
thinkthey
havethemoneyalready
,andsotheydon't
feel
anywealthier
from
thatspending
:
edpict
urewithregardtothe
licat
n,it's
a very,very comp
So,agai
tion
l.
, aswel
luspartofyourques
l stimu
fisca
The CHAIRMAN. Let me goto SenatorGarn.
Senator
GARN .IfI may follow
up on thatspecifically
. Would you
amplify
youranswer
onhow muchimpact
youthink
thatmonetary
policy
had on the recession
and theway the Fed has conducted
monetarypolicy
?
Mr.LINDSEY
.Well
,it's
always
difficult
,Senator
,toputa precise
quantification
on thingsuntil
we geta lotmore data
. And, even
then
, it's
somewhatdoubtful
.
I don'tmean touse thatas an evasion
,however.
I thinktha
t inthelatter
part oflastyear,inretrosp
ect,mone
tarypolicywas below what would be desi
rable
.
45
Thatmadeitvery
,verydifficult
forthese
individuals
toattract
investors
becauseit's
so highrisk
.
And so I thinkthatoneofthekey reasons
forsmallbusiness
is
thatwe needtosortofright
thebalance
.
Ratherthanhavea playing
field
that's
uphill
against
smallbusi
nessraising
capital
,we need
tohaveonethat's
morebalanced
.
SenatorGARN. Do you believe
thattheFederal
Reserves
needto
be involved
in banksupervision
and regulation
in orderto have
inputformonetarypolicy
?
Mr. LINDSEY
. Well
,you're
asking
a goodquestion
.I'll
tell
you,it
wouldbe oneI couldanswerbetter
and withmore detailed
knowl
edgeina yearorso,I hope.
Sena
torGarn.How aboutasimpl
e yesor no?
Mr.LINDSEY
.A simple
yes.I'll
start
withthat
.And thereason
I
do, Senator
,isthatIthink
that
,ifyou're
concerned
about
liquidity
crises
,about
thestate
ofbusiness
loandemandandwhat-have
-you,
havingyour finger
on the microdata
, havingfeedback
come up
throughthechannelsisvery,veryimportant
.
Senator
Garn.Well,let
me sayrespectfully
thatMr. LINDSEY.That would be my answer.
SenatorGARN . My answerwouldbe no. Mr. Greenspandoesn't
agreewithme. PaulVolcker
didn't
agreewithme.I veryrarely
.
findanybodyon theFed who does
.
But,wesimply
have
,inmy opinion
,a proliferation
ofregulation
and examinations
. I haveneverunderstood
thatanswerfromany
ofyouon theFed, orproposed
membersoftheFed,thatyouhave
todo ityourself
inordertoplaywiththeM's.
We'vegotFDIC.We'vegotallkindsofagencies
outthere
.I can't
believe
thatwe havetohavethatoverlap
and duplication
ofrules
and regulations
. And that
, in workingforthesame Government
,
thattheinformation
thatIagreewithyouthatyou do need
there's
no doubtaboutthat- butyou havetohaveyour own exam
ining
force
andregulatory
force
inorder
togainthatinformation
.
You can'ttrustone of the otherregulatory
bodies
; becauseI do
thinkwe needsomestreamlining
,somereduction
oftheoverlap
andduplication
.
I belie
ve the first
pla
ce to star
t istheFed,and giv
e you more
time to play withyour M's, unfette
red with that regu
lator
y
burden .
Thank you,Mr. Chairman.
The CHAIRMAN .Thank you.
SenatorSarbanes
.
Sena
torSARBANES.Mr.Lindse
y, areyou on leavefrom yourposi
tionat Harvard ?
Mr. LINDSEY.Yes,I am ,Senator
.
Senator
SARBANES
.Well,how longhaveyoubeenon leave
?
Mr. LINDSEY.I'vebeen on leavenow sinceJanuary31,1989.
Senator
SARBANES
. So, yourpresence
down hereat least
was
temporary
in nature
? Isthatcorrect
? I mean,you wereassuming
a
return toHarvard ?
Mr.LINDSEY
.Ididn't
knowwhatIwasgoing
todo,Senator
.And
I thought
itbesttohavean option
.
SenatorSARBANES
. So, you'vemaintained
thisHarvardconnec
tionduringthetimeyou've
beendown here.
46
Isthatcorrect
?
leavefromHarvardUniversity
. I havemaintained
Mr. LINDSEY
.
.Yes,Senator
I've
beendown here
since
Senator
SARBANES
. Allright
. Now, forwhatgeographic
region
areyou beingappointed
totheBoardtorepresent
?
Mr. LINDSEY
.I'm representing
theRichmondFederal
Reserve
District
?
SenatorSARBANES
. What'syourconnection
withthe Richmond
Federal
Reserve
District
?
Mr. LINDSEY
. I own a houseinVirginia
.It's
theonlyhousethat
my wifeand I own. I pay incometaxesthere
,personal
property
taxesthere
,votethere
.We'veactually
spenthalfourmarriedlife
there
,in two stints
.
Senator
SARBANES
.How much ofyourlife
haveyouspent
there
?
Mr. LINDSEY.Fiveyears
.
Senator
SARBANES
.Out ofhow many?
Mr.LINDSEY
. Thirty
-six
.
Senator
SARBANES
.Well
,halfofyourmarried
life
isnothighly
relevant
to thenexuswith the Richmond ReserveDistrict
,isit
?
or,myMr.LINDSE
Y.Well,Senat
Senator
SARBANES
. Why do youthink
thatrequirement
isinthe
Reservelaw?Why was itputthere
law,intheFederal
? Why do we
requirement
havea geographical
?
Mr. LINDSEY
.I would- I'dhavetogo backand checkthe1913act
tobe sure
.My suspicion
istogetpeople
witha variety
ofback
grounds
and geographic
distribution
.
SenatorSARBANES. Wasn'tone intentat leastto getpeoplefrom
intheeconomic
who participated
ofthecountry
regions
different
Reserve
Boardmakingna
regiontositon theFederal
life
oftheir
monetarypolicy
tionwide
?
Mr.LINDSEY
. Verywellcouldhavebeen,Senator
.
SenatorSARBANES. I don'tunderstandhow you underany stretch
forthe Richmond
would meet thatcriteria
of the imagination
.
Reserve District
Have you everengaged
in economic
activity
in thatDistrict
other
thansimply
living
there
for5 years
while
you've
beenwork
inginWashington?
Mr. LINDSEY
r,no.
.Asid
e frombeinga taxpaye
And ,I voted.
Senator
SARBANES
. Do youthink
there's
a credit
crunchunder
way rightnow ?
Mr.LINDSEY
.Yes, Senator
.And I do in thiscontext
. I thinkof
theterm "credit
crunch," thebestdefinition
thatI'veseenis:a sig
nificant
increase
inthestandards
forcredit
availability
.
regionsof
industries
, particular
And I thinkthatin particular
toexperi
. Ithink
,ifonelooks
true
,thatisespecially
thecountry
Riegle
made earlier
Senator
- anda point
encesinthelate1980's
inthose
was appropriate
standards
incredit
some increase
perhaps
industries.
Howev
er,I sharewhat I thin
k isyourconcernthat
,inmany
cases,tha
t incre
asein stand
ardshas gonetoofar.
Senator
SARBANES
.What do you thinktheFed can do aboutit
?
Mr.LINDSEY
.Well
,there
area numberofthings
thattheFederal
Reserve
hasalready
done.I thinkonepositive
stepwas theFederal
47
a setof
together
toclarify
getting
Reserveandtheotherregulators
assets
on
and valuing
of valuingassets
forpurposes
regulations
bank balancesheets.
I thinktha
t tha
t willhave more impa
ct astimegoes on,asregu
latorsand bankers become familiarwith it.
I thinkthatthe reduction
in interest
rates
, whilenota direct
way of solving
the credit
crunch
, isan indirect
way when you
lower the costof funds
, make more funds available
. I thinkthat
you're
makingaccess
tothose
funds
tomoreandmoreborrowers
.
So I think
those
aretwoimportant
steps
thathavealready
been
taken.And I thinkthatmore willfollow
.
Senator
SARBANES
.Do you thinkthatan increase
in thedeficit
wouldimpactnegatively
on thelevel
ofinterest
rates
?
Mr. LINDSEY
. I thinkthatitwoulddependon what the funds
were expendedfor
.
SenatorSARBANES.Let'sassume it's
tocuttaxes
.
Mr.LINDSEY
.Ithink
that
— again
,itwoulddepend
onwhattaxes
were cut .
If
,forexample
,taxes
on thesupply
ofloanable
fundswerere
duced
,I think
you may notseeanincrease
ininterest
rates
.We're
experiencing
that
, for
example
, inthecaseofwhattypes
oflevels
ofinsurance
tochargebanks.
There'sa limitto the amount. I don'tknow what thatlimitis.
But,certainly
increasing
theBIFpremium
,whichisa formoftax
,
would— there's
an exampleofwhereitwouldreducetheavailabil
ityofloanable
fundsand drive
up interest
rates
.
So , again
, itwoulddependverymuch on thenatureofthe ex
penditure
orthenatureofthetaxinvolved
.
Senator
SARBANES
.How didthis
nomination
come about
?
Mr.LINDSEY
.Well
,all
I knowandcananswer
isfrommy experi
ence. And, latelastsummer, RogerPorter
, who'sthe personI
report
to,and MichaelBoskinspoketome and askedme ifI would
consider
havingmy name included
, amongothernames. And I
thought
aboutit
. I talked
tosomefriends
.And,saidyes.
Senator
SARBANES
.Had youindicated
an interest
intheposition
,
yourself
?
.
theyspoketome ,Senator
Mr.LINDSEY
.Notbefore
theredoingyourjob,
SARBANES
Senator
.You weresortofsitting
, and theycame
so tospeak
,down attheWhiteHouseon thestaff
Re
on theFederal
inserving
,“Areyouinterested
toyouand said
serve
?"
Mr. LINDSEY.Yes,Senator
.
The CHAIRMAN.Thank you,Senator
Sarbanes
.
Senator D'Amato .
Senator
D'AMATO.Thank you,Mr.Chairman
.
Mr.Lindsey
,let
me askyou,haveyoubeenfollowing
theFederal
Reserve's
policy
as itrelates
tointerest
rates
,and thedebate
that
haspursued
within
thecouncils
oftheFederal
Reserve
?
Mr.LINDSEY
.Senator
,Ihavenotbeenprivy
tothedebate
within
the councils
.
Senator
D’AMATO
.You mean youhaven't
heardanything
about
it?
48
Mr. LINDS
EY. All I can tell
you is what I read inthepaper
. In
thatsense
,I haveno private
knowledg
e ofthedebate
s.Thatisone
ofthe restri
ction
sona desi
gnee
,a Govern
ordesi
gnee
.
SenatorD'AMATO . Beforeyou became a designee
.This has been
going
onfor
a period
oftime
,hasn't
it
? Thequestion
asitrelates
to
whatthepolicy
shouldbe withrespect
tointerest
rates
? What are
thepolicies
asitrelates
totheregulators
,andtheReserves
andthe
requirements
forReserves
?
Has thatnotbeenan ongoing
matter
ofconcern
fora period
of
timenow,prior
toyourbecoming
a designee
?
Mr. LINDSEY
.Senator
,letme saythatI am verymuch awareof
discussion
ofthoseissues
.I may havemistook
yourquestion
.I do
nothaveany knowledge
oftheprivate
deliberations
within
the
Federal
Reserve
, butI am awareofthegeneral
debate
aboutthose
issues
.
Senator
D'AMATO
.Wouldyoucaretosharewiththis
committee
what yourthoughts
havebeenwithrespect
tothat
? Do you think
thattheFederal
Reserve
hasmoved expeditiously
enoughas itre
lates
to
,let's
say,thediscount
rate
,andlowering
thediscount
rate
?
Or,has itmoved precip
itousl
y?
Or,hasitmoved jus
?
t abouton target
And whatrelevance
doyouthinkthatallplays
intheeconomic
situation
thatwe now face?
Mr.LINDSEY
. Senator
, inmy view
,therate
of moneycreation
,
>
the
growth
ofthemoneyaggregates
,particularly
during
thelatter
halfoflast
year
,was probably
tooslow
.
I think
,tosomeextent
, thathasbeenrectified
inrecent
months.
Senator
D'AMATO
.Do youthinkit's
beenpossibly
tooslowand
rectified
in recentmonths ?
Mr. LINDSEY
. I thinkthatitwas certainly
tooslowin the last
yearand haslargely
beenrectified
inrecent
months.
SenatorD'AMATO.Letme askyou,ifyouweretolookin thelast
10-yearperiod
oftime,do you know what thelowpoint
forthedis
count rate has been ?
Mr.LINDSEY
. In thelast10years
,we areprobably
atthelow
point
rateright
inthediscount
now.
Senator
D'AMATO.Do youknow ifthediscount
ratewas everthis
lowprior
?
Mr.LINDSEY
.Oh ,yes,itwouldbe in theSenator
D'AMATO.Well,inthelast
decade
.
Mr. LINDSEY.In thelastdecade.
Senator
D'AMATO
.Thelast
5 years
.Let's
putitthat
way.
Would itsurprise
--letme be fairto you. I'm not trying
to
woulditsurprise
youtoknow thatthediscount
ratewas5.5per
cent-that's
the same ratethatitisnow- intheperiod
ofAugust
1986through
August1987
?
Wouldthatsurpris
e you ?
Mr. LINDSEY. No ,itwould not surpri
seme .
Senator D'AMATO.Itwouldn't?
Well, as an economist
, woulditseem toyou thatthediscount
rateof 5.5percent
backin 1986
— and youremember. You were
workingintheWhiteHousein1986
,weren't
you?
Mr. LINDSEY. No.
Sena
torD'AMATO.No? Where wereyou then
?
49
Mr. LINDSEY
.I was atHarvard
.
Senator
D'AMATO.That's
why you lost
trackofit
,huh?
Mr.LINDSEY
.Ivorytower
,Iguess
. That's
right
. [Laughter
.]
SenatorD’AMATO .Well,letme ask you.Let'slookat the econom
indicators
, andallofthose
,etcetera
icperiod
in termsofgrowth
thatwe know aboutthe healthof theeconomy. Ifyou can look
- don'task me to name a specific
back toAugust1986and reflect
. On July4, we had the
. Yes, I could
thingbackthen. I couldn't
of Liberty
, and itwas thehundredth
forthe Statute
dedication
fiftieth
had their
about
- my motherand father
.That's
dedication
, but-be
recall
couldn't
, I probably
. Anythingelse
anniversary
,wouldyousaythatthe
ofAugust1986
, and1987
tweentheperiod
,strong
?
prosperous
economywas rather
Mr. LINDSEY. Yes,Senator, itwas.
Senato
r D'AMATO.Very strong
? [Pause.]
Do you thinkthatthediscount
ratethentoday
,was the econo
my - how wouldyou ratetheeconomy today?
,ina reces
,certainly
,orhasbeen
Mr. LINDSEY
.Theeconomyis
sion .
?
,inyouropinion
Senator
D'AMATO.Arewe ina recession
Mr. LINDSEY
. Well, I thinkwe certainly
were throughthefirst
quarter
year
this
.
Senator
D'AMATO
.You weredoing
verywell
.Now you're
begin
ningtogetlike
a politician
.
Are we ina recession
today
?
Mr.LINDSEY
.Um -probably
:
Senator
D'AMATO.Didthathurtyou tosaythat
?
Mr. LINDSEY.Well,I ofcoursewish we were not.
Senator
D'AMATO
.Well
,IhadGreenspan
here
- listen
,don't
hesi
tate
. Itonlytookhim a yearand a halfof me askingthesame
question
every
timehe cameastowhenhe wasgoing
tolower
the
discountrate.
Imean,youknow that
.Theyprepped
youforme,didn't
they
?
Mr.LINDSEY
. I'msorry
,Senator
?WhatSenatorD'AMATO. Let's
getto the point
. Do you thinkthedis
count
rate
iswhereitshould
beatthepresent
time
? Areyousatis
fiedthatit's
lowenoug
Do youthink
theeconomy
needs
anyadditional
stimulation
?
Mr.LINDSEY
.Ifthequestion
is
:IfIwereconfirmed
,wouldIraise
orlower
thediscount
rate
,I wouldhavetosayitwoulddepend
on
thedatathatwas available
tome thenand Ido commend,I think
theFed made theright
move last
week in cutting
therateto51/2
percent .
I would want to- I know SenatorGarn doesn't
thinkwe should
wait formore data either.
Senator D'AMATO .We should what ?
Mr. LINDSEY
.Waitformoredata
.But,I thinkI wouldbeSenator
D'AMATO.Well,you havetobeblind
,deaf
,and dumb not
toknow thatwe'reina recession
.I don't
know what thehecktook
Greenspan
solong
andtheBoardoverthere
tofind
out.It's
given
a
man who isdeadartificial
respiration
so,fine
, you'll
savetherest
helpofthem,butyou didn't
Senator
GARN .I already
gavehim thesame speech
.Not quite
as
colorfully
,but-
50
[Laughter
.]
Senator
D'AMATO.Well,Ijustwant toknow what we'regoingto
be in for,Jake.
Are we going
tohavesomebody
who saysallthese
nicethings
and thenwhen we come up-
Senator
Garn .I agree
.I saidtheywaitedtoolong
,theyweretoo
slowand theyoughttotrust
their
gut and quitwaiting
formore
reports
.
SenatorD'AMATO. And the reports
don'tsay a darnedthing
anyway
. Do you really
thinkemployment's
up? I wonderwhere
theygotthosefigures
,and whattheydiscounted
.
But
, thatlittle
light
wenton, soI'll
passtoanother
roundof
questions
tosomebodyelse
.
The CHAIRMAN . Senator Sasser.
Senator
SASSER
.Thank you verymuch,Mr.Chairman
.
I havea statement
,Mr.Chairman
,whichI wouldaskappear
in
the record.
The CHAIRMAN.Withoutobjection
,soordered
.
Senator
SASSER
.Intoto
,asifread
.
[Thecomplete
prepared
statement
ofSenator
Sasser
follows
:)
51
STATEMENT
OF
SENATOR
JIM
SASSER
ON
THE
NOMINATION
OF
LAWRENCE
LINDS EY , MA Y 7 , 1991
THANK YOU MR . CHAIRMAN, FOR CALLING THIS HEARING ON THIS
IMPORTANT
DEEP
NOMINATION
THE
RECESSION .
CRISIS
SINCE
.
THE
THE
ECONOMY
BANKING
DEPRESSION
SYSTEM
IS
AS
IS
WE
ALL
KNOW
MIRED
EXPERIENCING
ITS
IN
A
GREATEST
.
INDEED, THERE HAS BEEN CONSIDERABLE COMMENT OVER THE PAST
YEAR AND A HALF OR SO ABOUT THE ROLE OF THE FEDERAL RESERVE IN
RESPONDING TO THE ECONOMIC DISASTER THAT WE SEE ALL ACROSS THE
COUNTRY
.
THE FEDERAL
CURRENT
SIZE
OF
RESERVE
THE
IS IN A CRITICAL
FEDERAL
BUDGET
GIVEN
POSITION .
DEFICIT
THERE
AREN'T
THE
MANY
OPTIONS FOR A FISCAL STIMULUS TO GET THE ECONOMY MOVING AGAIN .
MONETARY
POLICY
RECESSION
.
AND
BANKING
CALLED
COULD
THERE
ARE
SYSTEM
UPON
FOCUSSED
.
TO
ON
DICTATE
VERY
THE
SERIOUS
LENGTH
CONCERNS
AND
DEPTH
ABOUT
OUR
OF
THIS
NATION'S
THERE IS SOME QUESTION THAT THE TAXPAYERS MAY BE
BAILOUT
BOTH
THESE
THE
FDIC .
ISSUES
I THINK
THE
FED
NEEDS
TO
BE
.
SO THEREFORE
, I LOOK FORWARDTO HEARINGDR. LINDSEY'SVIEWS
ON
THESE
THAT
ARE
MATTERS
THE
MONETARY
CRUX
OF
THE
POLICY
FED'S
AND
MISSION
.
BANKING
WE
ARE
REGULATION
FAMILIAR
TO
SOME
DEGREE WITH DR . LINDSEY'S SUPPLY SIDE TAX IDEAS , BUT KNOW VERY
LITTLE ABOUT HIS EXPERTISE IN THE MATTERS THAT HE WOULD PRESIDE
OVER AT THE FED .
THANK
YOU
MR . CHAIRMAN
.
52
Senator
SASSER
.Dr.Lindsey
,looking
backoverthecourse
oflast
year
,evenlate
1989
,itappears
tome that
theeconomy
hasshown
rather
significant
signs
ofweakness
.The lastquarter
of 1989
, for
example
, in thelastquarter
, theeconomygrew at lessthana 1
percent
realrateofgrowth
.
Throughthefirst
6 monthsof1990
,theindicators
wereuniform
lybad, according
totheeconomists
thatI talked
to.And probably
themostalarming
thing
wasthatthebanking
system
wasshowing
serious
signs
ofweakness
. Unemploymentwas goingup.And hous
inginthefirst
6 monthsof1990was inthemostdramatic
decline
since1982.
Now , the Fed didnotmove until
the middleof 1990to reduce
interest
rates
.And thatwas a veryminoradjustment
. And Dr.
Greenspan
made itclear
atthattimethattheyweren't
doingthis
inan effort
tospurtheeconomy
,butrather
this
wasbeing
doneto
counteractthework of overzealous
bank examiners who had
causeda creditcrunchbecauseof the pressurethey were putting
on thebanks and thebanks didn't
want to lend.
And itwasn'tuntilverylatelastfall
, actually
, December
, if
memoryserves
me correctly
,thattheFedactually
begantolower
rates.
Now,this
happened
,ofcourse
,after
nearly
every
forecaster
told
us we wereinarecession
. We now learnthat
,officially
, thereces
sionstarted
in July. Ittookthe Fed from Julyto Decemberto
begin
lowering
rates
.
And this
raises
a lotofquestions
inmy mindabout
whattheFed
shouldhave been doing.
Letme just
putyoubacktoJanuary
1990andlet's
saythatDr.
Lawrence
Lindsey
wassitting
ontheBoardoftheFedatthattime
.
Wouldyouhavebeenurging
further
and moreaggressive
rate
reductions
during
calendar
1990
?
Mr. LINDSEY.Senator
, I do notknow what data would have been
available
tome as a GovernoroftheFederal
Reserve
Boardback
then
.Today
,we havetheadvantage
ofhindsight
.
From hindsight
, I believe
thatmonetary
growthwas tooslow
,
particularly
during
thelast
three
-quarters
of1990
.
I thinkthat
, to someextent
, thatslowmoney growthhas been
rectified
since
January
ofthis
year
.Therate
hasbeenrectified
.
But, I can't
- I don'tknow what I wouldhaveknown ifI were
there
.I really
can't
answerwhat I wouldhavebeenarguing
. But,I
do know fromhindsight
thatI believe
money growthwas tooslow
last year .
SenatorSASSER
. Well, what would you be advising
now with
regardto interest
rates
?
Mr. LINDSEY
. I thinkthat
,knowingwhat I know now,thatthe
>
votelast
weekwasan appropriate
one.I think
itwasoneI would
have cast.
And I wouldwanttostudythedatathatwas before
me, data
from thebankingsystem
, whichI'm not privyto now, and take
thatintoconsideration
beforemaking a definitive
judgmenton
that matter .
Senator
SASSER
. Well
, now, Dr.Lindsey
, I'mnotan economist
,
butitbecameobvious
tome atleast
by themiddleoflast
yearthat
we had serious
problems
.And I, alongwithothers
,began admon
53
ishing
Dr.Greenspanwhen he appeared
before
the BudgetCom
mitteeand alsobeforethe Banking Committee that, in my view,
the Fed was overly
concerned
aboutinflation
, thatinflation
was
notthedanger
tothis
economy
,thatthedanger
really
wasinim
minentandimpending
economic
slowdown
.
We wereunabletogettheFed's
earatthattime.But,justtothe
layman,and I'dcharacterize
myselfas a laymanineconomic
mat
ters
- perhaps
knowledge
a little
superior
totheaverage
layman
.
I'd
give
myself
that
credit
without
hoping
toappear
immodest
-but
itwas apparent
to usatthattimethattheeconomywasslowing
down anditneededthestimulus
oflowerrates
.
Now,this
comesaroundtoyourphilosophy
withregard
tothe
Fed and how you wouldviewyourjobthere
,viewyourrole
.
Do youthink
thattheFedshould
bejust
solely
reactive
asithas
been overthe pastfew years
? Or, isit your viewthattheFed
oughttobe proactive
? ThattheFed,through
itsmonetary
policy
,
oughttobe attempting
toleadthiseconomy
,toleaditon togreat
ergrowthina noninflationary
way?
Mr.LINDSEY
. Senator
, I think
itimportant
thatwhenwe- when
any policymaker
makes a decision
, thattheyhave theireyeson
thefutureand tryto takeactions
todayto achieve
thefuture
result
thattheyviewdesirable
.
And,inthatsense
,ifit's
proactive
,I thinkthattheyshould
be
proactive
.
Senator
SASSER
.But,inother
words
,ifyouhadyourchoice
be
tweenjustsitting
backand reacting
towhat hasoccurred
,perhaps
evenreacting
6 monthstoolate
,youwouldchoose
tohavetheFed
takea moreactive
roleand tryto leadthiseconomythrough
mon
etarypolicy
?
Mr.LINDSEY
.IfI might
,asan example
,Senator
,we havea rela
tionship
between
thelevel
ofmoney- I'mgoing
to pickM -2 asan
example- and the levelof futureeconomicactivities
6 or 9 months
hence.
When youhavea target
level
ofactivity
6 or9 monthshence
,if
youmakean assumption
about
the
- thetechnical
termisvelocity
.
Itmeanshow fast
themoneyturns
over
. Youhavean idea
ofwhat
yourtarget
level
ofmoney stock
should
be today
.
So,inthatsense
,yes
,theFedshould
belooking
downtheroad
6
or 9 monthstothedesired
level
ofeconomic
activity
at thattime
andsetting
its
monetary
aggregates
,itspolicy
toattain
monetary
aggregates
todaytoeffect
thatdesired
result
down the road.
SenatorSASSER
.And thatdesired
result
wouldbe enhancing
eco
nomic growth?
Mr. LINDSEY
.That desired
result
wouldbe maximum economic
growthwithout
accelerating
inflation
,yes.
Senator
SASSER
.Well
,Dr.Lindsey
,we havean areaofagreement
there
.Now ,letme move on toanother
areawhereI thinkwe may
havea disagreement
.
You're
a prolific
writer
andyouwrote
inoneofyourbooks
,andI
quote it,that:
Despite
claims
tothecontrary
Mr. Chairman
, I thinkI may be overrunning
my timethere
.
That redlight's
goneon.
54
The CHAIRMAN
.Well
,thatmay be.Did youhavemorethanone
additional
question
right
now? Or did youwant toraise
one more
and thenwe'll
go?
We'vebeenkindofflexible
duringthediscussion
.
Senator
SASSER
.There's
somebodybeenwaiting
here.I'mreally
hesitant
togo forward
.It's
Senator
The CHAIRMAN.Fine.Let's
go toSenator
Mack.
Senator
Mack.I'dbehappytoyield
on my time.
I was not herewhen you first
came, so letme welcomeyou
beforethe committee
. And I am alsovery interested
in your re
sponses .
Let's
justgo backto the lastpointthatSenatorSasser
raised
.
And Iwouldmake thecommentinthebeginning
thatIdon't
think
thattheFedcan servetwo masters
.I mean, we'reallverycomfort
ableusingthat
phrase
, “maximum growthwithprice
stability
,"
you know.But,thebottomlineisthattheFed hastomake choices
fromtimetotimebetweenthosetwoverylaudable
goals
.
And therealquestion
is
, ifyouhad topickbetween
those
two,
whatdoyou think
theFed's
role
is
?Isitprice
stability
? Or,isit
,in
fact
,trying
toproduce
economic
activity
?
you'reaskingthekey ques
Mack,I think
. Senator
Mr.LINDSEY
thatI have learnedistheneed
tion
.I thinkthatone ofthe lessons
objectives
.
tobalanceoftenconflicting
I thinkthat,intheimmediate
term
, there
may be thequestion
ofthetradeoff
betweeninflation
and economic
growth
.
I think
thattheFedisuniquely
abletopursue
long
-termobjec
tives
,given
its
independence
,thelength
oftenure
ofthemembers
.
And I thinkthat
, in thelongterm,therereally
isno conflict
be
tweenprice
stability
andeconomic
growth
.
In fact
,were we ableto reduce-
SenatorMACK . Let me justhop in there
. That'sunderthe as
sumption
that
really
theprimary
objective
isprice
stability
.Ithink
implying
that's
whatyou're
there
.
consistently
overa longenough
thepolicy
IftheFed maintains
, thatwe will
the valueof the dollar
periodof timeto maintain
.
underthosecircumstances
growthopportunity
have our greatest
Mr.LINDSEY
.We will
haveourgreatest
growth
opportunity
,I be
lieve
,ina period
of- yes
.Ithink
yousaid
itbetter
thanIcould
say
it,Senator
Senator
Mack.Thenyouagree
withthat
?
ofmonetary
-term objective
Mr. LINDSEY
. I thinkthatthelong
there
. Ithink
thatthepathofgetting
stability
policy
mustbeprice
at minimum
price
stability
one.We want toattain
isa challenging
run.
costtotheeconomy,intheshort
In thelongrun,we agreethatitistheobjective
thatisbestfor
theeconomy
.And I thinkthata prudent
,sustained
effort
atgradu
ally
reducing
therate
ofinflation
isthebest
way.Itmustbe credi
bletoconvincemarketsthattheFed means business
.
But,I believe
italsomust be steady
and gradual
togivemarkets
a chancetoadjust
tothedeclining
rateofinflation
.
But,yes,thatiscertainly
--that's
thetaskahead.That'sthetask
ahead forthe Fed forthe decade.
SenatorMack . Let me refocus
thisin sayingI thinkwhat I
wouldbe mostinterested
inat thispoint
,and Ithinkitwouldbe
55
veryhelpful
to thecommittee
,too, isto,giventhecomment that
youwouldsupport
orthatyouthink
thattheFedmadetheright
decision
,forexample,in loweringthe discountrateto 5.5percent
,
what kindofdatawillyoube most inclined
totakea lookat?
Willyoube looking
at theactivities
within
oureconomyinthe
senseofproduction
and thosekindsof- or willyou be looking
to
themonetaryaggregates
,asthey're
sometimes
referred
to?
Which ofthosetwo areasareyou mostinclined
to lookfor
, for
information
?
Mr. LINDSEY
.Senator
,thebigproblem
withdataissomedata's
goodforsome things
and some's
goodforotherthings
.And letme
pick-
Senator
MACK.You soundjust
like
oneoftheeconomics
profes
sorsthatI had attheUniversity
ofFlorida
.
goodorbad.
know ifthat's
Mr.LINDSEY
.Idon't
SenatorMack .Well,it's
an indication
thatyou allhavea tend
encytousethesame kindoflanguage
.
Mr. LINDSEY. Iguesswe do.
The level
of nominalGNP isprobably
the one single
variable
that the Federal Reserve can affectthe most .
Senator
Mack .Didyou say“canaffect
themost?”
Mr. LINDSEY
.Can affect
themost.
The problemiswe getit12timesa year.And 8 ofthetimesare
revisions
oftheother4 times
. So it's
not thatgreata continuing
pieceofdata.
The monetary
aggregates
whichyoumentioned
,M -2,we getona
weeklybasis
.They're
a pretty
goodforecaster
ofwheretheecono
my isgoingdowntheroad
.They're
notperfect
though
.That's
the
problem.
So I thinkthatyou haveto lookat nominalGNP as your ulti
matetarget
,themonetary
aggregates
asa confirming
numberthat
you getmore frequently
. And thenI thinkyou should
alsobe sensi
tive
to conditions
in markets
,commodityprices
, theyield
curve
,
thewholearray
ofdatathatthemarkets
aretelling
youwhether
you're
doinga goodjobornot.
So Iwould say thatallofwhat you mention
, nominalGNP is
yourultimate
objective
, moneyasan intermediate
termobjective
,
withtheseothermarketsignals
telling
you thumbsup or thumbs
down alongtheway.
Senator
Mack .In thedebate
thattookplaceintheFed,I think
,
inNovember-December1989
,therewas an attemptby theFed to
bringshort
-term interest
ratesdown.And,again
,therewas some
dissension
. I thinkWayne Angelwas theone thatvoiced
hiscon
cernaboutthedirection
theFed was taking
, by arguing
thatthe
markets
wouldreact
to youraction
as being
inflationary
. Long
term interest
rateswillgo up.
And that'
s exactlywhat happened.
What makesyoulookatthesituation
now,forexample
,withthe
mostrecent
decline
inthediscount
rateand saying
fromwhatyou
can see
— notnecessarily
what theFed islooking
at,butwhat you
canseethatthat's
notinflationary
?
Mr. LINDSEY
.Long-terminterest
rates
didnotrespondthistime
theway theydidthen
.Therewas also
— we wereata position
in
thecommoditymarketsand intheforeign
exchangemarketsthat
56
indicated
a lotmore confidence
inan anti
-inflationary
stance
.That
was true now and was not true before.
And soI thinktheyield
curve
,commodity
markets
andforeign
exchange
marketwouldbethethree
things
Iwouldpoint
toinsup
portofthe Fed'srecentaction
.
Senator
Mack .Thank you,Mr.Chairman
.
The CHAIRMAN. Thankyou,Senator
Mack.
I'mnextinthequeuehere.But,Senator
Sasser
,didyou want to
pursuea question
now? And I'dbe happytoyield
my timetoyou,
and thengo after
you intheorderon theDemocratic
side
.
Senator
SASSER
.Justonequestion
,ifI may,Mr.Chairman
.
Ihad notedthatDr.Lindsey
isa prolific
writer
and he's
just
published
a new book
, a few monthsago, ifI'm not mistaken
, or
maybeevenmorerecently
thanthat
,dealing
withtheeconomic
matters
and taxpolicy
asI recall
inthedecadeofthe1980's
.
And,Dr.Lindsey
,you wroteinthatbook,and I quote
:
Despite
claims
tothecontrary
,theReagantaxcuts
contributed
onlytrivially
to
theboomingdeficits
ofthe1980's
.
Now ,I findthattobe a veryinteresting
statement
because
, ac
cording
tothe Office
of Managementand Budget
, andthiswas
thenPresident
Reagan's
own Office
ofManagementandBudget
,
the1981taxcutoccasioned
a revenue
loss
ofapproximately
$1.4
billion
.
Now,by theendof this
year
,this
revenue
hemorrhage
isgoing
tobe approaching
$2 trillion
. Imay havesaid$1.4billion
whenI
meant tosay $1.4trillion
a moment ago.
But,when you lookattheincreasing
budgetdeficits
inthe1980's
and theexplosion
,virtual
explosion
thatoccurred
in thenational
debt
,a $2 trillion
increase
intheReagan
-Bushyears
alone
,when
you contrast
thatwiththefactthatit
took us almost200yearsto
build
up an indebtedness
of$950billion
,roughly
,I don't
seehow
youcanignore
thisrevenue
loss
,or saythatitcontributed
only
trivially
to thebudgetdeficits
.
Itappears
tome the biggest
taxcutinhistory
,and we endedup
withthebiggest
deficits
in history
.
And I seemy friend
, the distinguished
Senator
from New
Mexico, has arrivedhere on the committeeand I remember when
hewaschairman
oftheSenate
Budget
Committee
andwasstriving
manfullywith then MajorityLeader Dole to tryto findsome way
tostopthisrevenue
hemorrhage
and tostoptheexplosion
thatwas
taking
place
inthedeficit
.
Now ,how do you explain
thefactthatthistaxcutdidnot con
tribute
significantly
tothis
explosion
inthedeficit
?
Mr.LINDSEY
.Senator
,themethodology
I usedinmy bookwasto
akethe1980fiscal
policy
, President
Carter's
last
fiscal
policy
,asa
baseand comparewhathappened
during
the1980's
compared
to
Carter
fiscal
policy
asa basis
. The basis
forcomparison
was asa
share of GNP .
I took the-
Senator SASSER.The defi
citas a share of GNP ?
Mr. LINDSEY
. That'sright
. The tax, I brokeitdown intotax
share
,domesticspending
, defensespending
and interest
.I
charted—
57
Senator
SASSER
.Allasa percent
ofGNP ?
Mr.LINDSEY
.Allasapercent
ofGNP .
Let me explain
briefly
why I thoughtitimportant
to do that
.
The numberwhichyoucorrectly
cited
wouldbe therevenue
loss
had we maintained
1980taxrates
inplace
.
Now,ifthatwerethecase
,it's
important
tokeepinmindthat
a
marriedcouple
witha taxable
incomeof$45,600
would be inthe
49-percent
marginal
taxrate
bracket
. Thatsingle
individuals
earn
ingbelow-
Senator
SASSER
.Well
,letme stopyouthere
, Dr.Lindsey
. Will
you agreethat
, ifwe had keptthetaxpolicy
inplace
,thatwas in
place
in 1990
,wouldyou agreewiththosewho saythatwe would
now berunning
a budget
surplus
?
Mr. LINDSEY
. I thinkthatthatwouldbe a difficult
question
to
answer. I wouldhave to lookverycarefully
at thenumbers
. My
suspicion
wouldbe thatitwouldhavebeenverydifficult
tohave
had thekindofeconomic
expansion
thatwe had duringthe1980's
when the American middle classhad to share half theiradditional
income at themargin with
youthereandsay
Senator
.Well, ifI couldjustinterrupt
SASSER
so
thesedaysand has beenrepeated
. It's
becomefashionable
this
wisdomthatwe had
becomingsortofconventional
much thatit's
ofthecoun
inthehistory
recovery
economic
thelongest
sustained
.
tryduring
the1980's
That's
notaccurate
,as Iexpect
youknowfromyourstudy
ofeco
nomics
. There havebeen longersustained
periods
of economic
growththantheoneinthe1980's
.
But,we went throughthemostserious
recession
,indeed
,depres
sioninthiscountry
,in1981and 1982since
theGreatDepression
of
the1930's
. And thatoccurred
after
this
taxcutwentintoplace
.
Mr.LINDSEY
.I'mnotsurewhatyourquestion
is
, Senator
. IfI
could— the question
about the levels
of taxescontributing
to
the-
SenatorSASSER
. Well, that's
the thrust
of the question
, so go
aheadandtrytoanswerthat
.
Mr. LINDSEY
. What I didwas,again
, tookthe1980fiscal
policy
of
PresidentCarter as the base.
Senato
r SASSER.Right.
Mr. LINDSEY
.Comparedwhat actually
happenedtothetaxshare
ofGNP ,tothespending
shares
ofGNP ,andtookthose
differences
betweentheCarterlevel
and what actually
happened
, and added
them up.And theresult
was thatabout20percentoftheincrease
in the deficit
could be attributedto the taxes.
The vastbulkwas attributable
totherise
inthedefense
shareof
GNP during
the1980's
.
Senator
SASSER
. Now ,butyou're
talking
intermsofthedeficit
as
percentage
ofGNP .And you're
talking
intermsoftaxesaspercent
of GNP .
Well, now, taxes
, as percent
of GNP , when you takeFederal
,
State
,and local
taxes
,really
,havetheychangedappreciably
over
thepastdecade?
Mr. LINDSEY.We are
Senator
SASSER
. In other
words
,aswe cutFederal
taxes
,local
and Statetaxeshave gone up?
58
Mr. LINDSEY
.I'mmostfamiliar
withtheFederal
numbers
,which
iswhatI useformy book
. Today
,Federal
taxesareroughly
the
samepercentage
ofGNP astheywerein1980.
Theymay be a few
tenths
ofa percent
one way ortheother
.But,essentially
,theyare
thesame percent
ofGNP todayas theywerein1980
.
Senator
SASSER
.And thisisafter
we havebeenaddingbackaddi
tional
revenuesto fill
in the voidthatwas leftby the 1981tax cut.
In otherwords, ifwe'dleft
the 1981tax cutwhere itwas, it
wouldhavebeenas a percent
ofGNP , thetaxes
in 1990would
have been lower
Mr.LINDSEY
.Yes,that's
correct
.
Senator
SASSER
[continuing
].Thantheywerein1980
.
Mr. LINDSEY.Yes .
Senator
SASSER
.Well,my time's
up again
,Mr.Chairman
.
The CHAIRMAN.Thank you,Senator
Sasser
.
SenatorDomenici.
Senator
DOMENICI
.Thank you verymuch,Mr.Chairman
.
And I wantedtosaytoyou thatI know,Mr. Chairman
,I know
you'regenuinely
interested
in some issues
beyondtoday
. And I
wanted
to saytoyouthatI thinkfrommy standpoint
on your
banking reform and BIF and thoseissues
, that I haven'thad a
chance
to tell
you,but I thinkI willhavea little
more timeand
lookforwardtoworkingwith you and SenatorGarn. I thinkwe
oughttoreally
do something
inthatreformarea
.And I want tobe
partofitfortheremainder
of theyear.
Thank you,Mr.Chairman
.
Mr.Lindsey
, let
me askyou.You obviously
area very
,ashistory
ofthis
office
goes
,you're
veryyoungtobeappointed
totheFederal
Reserve
Board
,which
,soyoudon't
misunderstand
, isveryexciting
to me . I'm gladwe didn't
appoint
one oftheBoardofGovernors
fromoutthere
inoneoftheregional
Fed offices
.
And I'mglad we pickedsomebodylike
you.
But,letme askyouwhy do you wantthisjob?
Mr. LINDSEY
. Senator
,I havealways
liked
jobsthatpresent
a
challenge
.And,atthemoment,I can't
thinkofanymore challeng
ingposition
thatI would be considered
for
.
The Board of Governorsmust make difficult
decisions
in the
shorttermaboutthebusiness
cycle
,tryand getus on theroadto
recovery
. As one of the leading
financial
regulatory
institutions
,
it's
gota numberofverydifficult
challenges
aheadofit
.
And I think
, inthelongterm,we havean opportunity
togradu
allyreduce
therateofinflation
inthiscountry
, toreturn
thecoun
trytoa period
ofprice
stability
andsubstantially
lower
interest
rates.
And thosearethreetoughchallenges
.And I'vealwayslikedto
riseto a challenge
.
Senator
DOMENICI
. So,without
makingyourjobtoobig,do you
conclude
, basedupon your knowledge
of theFederal
Reserve's
power,that
,asan independent
agency
,ithasas much or more to
say aboutthe future
of the Americaneconomyand growthand
prosperity
as any institution
around?
Mr. LINDSEY
.I thinkthatit's
toughto saythatone institution
hasasmuch ormore power.What I wouldsayisthattheFed isin
theposition
toprovide
liquidity
oftheeconomy
.The Fed isableto
59
influence
through
monetary
policy
thelevel
ofnominal
GNP inthe
economy.
But,theFedisalsoquite
limited
withregard
totaxand regula
torymatters
, budgetpolicy
. Italsohasa very
, veryimportant
effect
,anda fargreater
effect
onthelevel
ofreal
economic
growth
.
role
,an important
a necessary
that
theBoardplays
SoI think
.Theyallhave
any oneoftheplayers
dowithout
role
,butitcan't
than
veryhardtosayoneismoreimportant
.So it's
tobe involved
the other.
Senator
DOMENICI
.I don't
thinkI saidthat
.Ijust
said
you're
a
veryimportant
Mr. LINDSEY. Very challengi
ng,yes.
Senator
DOMENICI
(continuing
).Institutional
player
inAmerica's
prosperity
and futuregrowth.
Letme askyou.I didn't
readyourbookand I surely
don't
want
my good friend
, the chairmanof the BudgetCommittee
, to at
tribute
tome concerns
thatI may or may nothave. Let me just
suggest
I don't
know thatI was overly
concerned
abouttaxcutsas
I was aboutwhetherornotwe weregoingtospendtoomuch.
I foundatonepoint
thatitwasmore difficult
togetspending
cutsthanitwastorecommend
sometaxincreases
atonepoint
.I
can't
believe
thatthat's
theway things
oughttobe,butI didfind
thattwice
inmy 8-or9-yeartenure
asonewho was movingthe
BudgetCommittee
inoneway oranother
and,thus
,theSenate
.
But,let
me askyouthis
.We hada bigrecession
attheendofthe
Carteradministration
yearsofRonaldReagan
intheearly
.
ession
?
yzedthatrec
Have you everanal
And,ifyou have
, haveyou concluded
thatwhether
or notthe
Federal
Reserve
Board's
policies
had a lottodowiththelength
and depthofthatrecession
ornot?
played
an impor
.I haveno doubtthatFed policies
Mr.LINDSEY
wasmadeinboththelegislative
.Ithink
thata decision
tantrole
branchesand alsothe FederalReservethatwe could
and executive
the
ofinflation
,veryhighrates
thevery
totolerate
notcontinue
.
inthelateseventies
was experiencing
country
And so a decision
was made toend thatinflation
.
ratecame aboutvery,
in the inflation
I thinkthatthereduction
.
expected
towhatmostpeople
,relative
,veryquickly
verysuddenly
in a
inflation
to 4-percent
digit
inflation
We wentfromdouble
quickreduc
,whichwas a remarkably
period
ofabout18months
rate.
tionintheinflation
You werequite
right
inthatthatwasa verypainful
transition
.
But, I don'tknow if I would necessarily
criticize
the dilemma
decision
makersbackthen.Itwas necessary
facing
togetthe rateof
inflation
down,andIthink
theydidsoexpeditiously
andrelatively
efficiently
.
Senator
DOMENICI
.Yes.Ididn't
necessarily
askyoutocriticize
.I
merelyaskedyou tomake an observation
astowhetherornotthe
institution
youseektojoinwas a significant
player
inthelength
and depthofthe recession
.
Mr. LINDSEY.Absol
utely.
Senato
-onquest
.And Imightaskasa follow
r DOMEN
ICI
ion:
What'sthemostimportant
orsignificant
problemthatwe facein
economic
growth
theUnitedStates
withregard
tosustained
?
60
Mr. LINDSEY
.I thinkourNo.1 challenge
probably
isourNation's
educational
system
. Making surethatour workerscan compete
withthosearoundthe world.
Ithink
reducing
theburden
ofFederal
Government
onthecredit
marketsisalsoquite
important
.
I wouldrankthosecertainly
asoneand two.
SenatorDOMENICI
. Well, then, ifthosearethe kindsofthings
thataregoing
tocause
ustohaveless
sustained
economic
prosperi
tyand less
sustained
growththanwe should
otherwise
have,letme
way:
putitanother
What isthesymptomthatwillreflect
itself
inthiseconomythat
willshow we'renot doingas wellas we couldand we coulddo
better
ifwe didbetter
inthese
areas
you're
speaking
of?
Isitinflation
?
Isitlackofproductivities
?
What isit?
Mr.LINDSEY
.Well
,I thinkthatwe do facea productivity
chal
lenge
, notin absolute
senserelative
to our past
, butin thesense
thatother
nations
aremovingquite
aggressively
. And I think
that
problem
we musttackle
thatproductivity
,yes.
Senator
DOMENICI
.Mr. Lindsey
, there
aresomeintheFederal
ReserveSystem
- I don'tknow allofthosethatyou wouldjoinif
you getconfirmed
, but certainly
I'vereadwhat some ofthem out
in the hinterlands
say in thevariousFederalReserveRegional
Boards .
Itseemsto me theyareoverwhelmingly
on thesideofbeing
much liketheWest Germans.They almost
have a total
fearofin
flation
.Theywrite
aboutit
.Theytalkaboutit
.Anything
youall
do up herethatdoesn't
actinthedirection
ofgetting
inflation
down tozero
, you're
harmingtheAmericaneconomy
.In fact
,I
thinksomeofthem wouldlike
negative
inflation
. And I haven't
seenthator heardhow itworked,but
So,letme askyou,itseemstome theFederal
Reserve
Boardis
reacting
cyclically
toinflation
and responds
almost
overwhelmingly
totherateofinflation
as a precursor
toactivities
on their
partto
loosen
money supply
and lessen
thecostofmoney.
Do youagree
thatthatistheprincipal
basis
foraction
inthe
pastand what willyou baseyourson?
Mr.LINDSEY
.On thesecond
partofyourquestion
,I do notbe
lieve
thatthefocus
on inflation
iswhereprimaryemphasis
should
be. I think
thattheprimary
emphasis
should
beon the rateof
nominal
GNP growth
.Ithink
thatiswhattheFedisable
toaffect
most directly
.
I think
,intheintermediate
term,it's
important
tofocus
on rates
ofgrowth
ofmonetary
aggregates
.But, I also
think
it's
important
tolookat theperformance
ofmarketconditions
,thefactthatwe
concern
haveslack
,we haveunemployment
,isofgreat
.
Therearea wholerangeofissues
thatare important
tobalance
.
Inflation
Ithinkwill
bejustoneofthoseconcerns
.
Senator
DOMENICI
.Frankly
, I want you toknow thatI consider
thatanswertobe one ofthemost important
inmy judging
, my po
sition
withreference
toyourconfirmation
.
So, letme ask a foll
ow-on question
.
61
I have heard the Chairman of the Federal Reserve discussAmer
ica's
future
sustained
growthand what he perceives
tobe thekind
of sustained
growththatwe canhavewithout
inflation
,whichI am
not suggesting
thatyou should
notbe concerned
aboutinflation
as
itapplies
tosustained
growth
.
But, tell
us how youasan expert
ineconomics
viewAmerica's
sustained
growthandtheimpactforsustained
growth
oninflation
and aretheresome limiting
aspectsto Americatodaywithrefer
encetosustained
GNP growth
thatishealthy
thatyoumightfeel
strongly
about
.
Mr.
LINDSEY. Withregard
towhattheFederal
Reserve
caninflu
ence,Idobelieve
that
,inthelongrun,ifwe areable
togradually
reducetherate
ofinflation
, attain
something
resembling
price
sta
bility
- andletme define
thataswhereinflation
doesnotenteras
a concern
inbusiness
decisions
—we will
seea decline
inthelong
term costoffunds
, particularly
ofequity
capital
toAmericanbusi
ness .
I think
that
wouldmake a verypositive
contribution
toourrate
of realeconomicgrowth.
So,Iwouldsaythat
,inthecontext
ofwhatthechairman
-what
you saythechairmanissaying
- inthe longrun, thereisno con
flict
betweenprice
stability
and realeconomic
growth
. Becauseof
interactions
withourtaxsystem
, bringing
downinflation
will
help
lowerthecostofcapital
toAmericanbusiness
.
SenatorDOMENICI
. Mr. Chairman
, wheneveryou thinkI should
be through
The CHAIRMAN
. Yes. I want to go anotherroundhere in a
minute
.Why don't
youdo onemore and thenwe'll-
Senator
DOMENICI
. And I'll
stayaroundfora second
round
.I
don't
wanttouseup yourtime
.
The CHAIRMAN .Good.
Senator
DOMENICI
. Letme putthis
question
, this
point
, another
way.And I wanttocomebacktothecost
ofcapital
shortly
, on my
second round.
growth
-population
demographically
But,isthere
a relationship
tosustain
eco
and ourability
and thelike- intheUnitedStates
nomic growthornot?
Mr. LINDSEY
.Thereisno question
thatdemographics
playan im
portant
role
.Ithink
,during
the 1990's
,wehavean opportunity
for
themtoplaya positive
role
,particularly
in real
wages
, since
the
baby-my generation
, thebabyboomers
,arecomingintoourmost
productive
years
,it's
important
thatthecountry
notsquander
that
opportunity
.
But,demographics
areonly
oneofthemanyfactors
that
affect
economic
growth
. The rateofcapital
formation
, therateoftechno
logical
progress
arealsoveryimportant
.
Senator
DOMENICI
. Mr.Chairman
, I'dyield
atthispoint
. And,
thank you forthe time. And ifyou have a secondround, I'll
wait.
TheCHAIRMAN
.Oh,yes
,we will
because
we're
notgoing
tohurry
this
. Thisisan important
confirmation
hearing
and we'veresched
uledittoaccommodate
members
.
And sowe're
going
totakeaslongaswe need
.And I'mveryin
terested
you'reasking
in thequestions
.
Thereareseveral
things
thatI wanttocoveratthis
point
.
46-442 0 - 91 - 3
62
Where didyouvotein1988
?
Mr. LINDSEY.I voted in Massachusetts.
The CHAIRMAN.And was therean election
in 1990in Virginia
?
Warner,forexample
, was
Mr.LINDSEY
. Yes,therewas.Senator
.
on the ballot
The CHAIRMAN
.And wheredidyouvotein1990
? Didyouvotein
Virginia
?
Mr. LINDSEY
.I votedinVirginia
.
TheCHAIRMAN
.Soyou changed
yourvoting
registration
some
time then between 1988 and 1990?
Mr.LINDSEY
.I changed
itveryshortly
after
movingtoVirginia
.
TheCHAIRMAN
.Allright
. Isityourintention
-andI don't
want
youtohedgeon me here.I wantyoutogiveme thefull
answer
.
Notthat
youwouldn't
,butIwanttoemphasize
thefact
.
Thisisa 9-yearterm
. Isityourintention
toserve
thefull
9
years?
Mr. LINDSEY
.Yes, Senator
, as longasI feel
I'mmakinga contri
>
bution
, I willbe a member of theFederal ReserveBoard, to the
year 2000.
The CHAIRMAN .Yes,Iknow ,but Idon'
t want any Mr.LINDSEY.Yes,it
'smy intenti
ontoservethefu
ll9 year
s.
The CHAIRMAN
.OK .I mean,youdon't
really
foresee
exhausting
yourinterest
overthe9 years
,Itakeit
,inthatassignment
?
Mr. LINDSEY.That'scorr
ect.
The CHAIRMAN. Now, I want togo backtoan examplethatyou
ofthe
about
theeffect
Sasser
. You weretalking
usedwithSenator
the
downduring
in1981andwereinplace
thattookplace
taxcuts
fora
incomelevel
to a taxable
1980's
. And I thinkyou referred
like
wassomething
, I thinkthefigure
.IfI heardyouright
couple
$46,900
.
Isthatright
?Or,whatwas thenumber?
Mr. LINDSEY
. Thatcould
be a guess
. I thought
I said$45,600
.
But
The CHAIRMAN
.Well
,youprobably
did
.Forty
-five
thousand
six
hundreddollars
. And thatwas the taxable
incomefigure
fora
family
oftwo?
Mr. LINDSEY.A married couple.
The CHAIRMAN.Americancoupleand
Mr.LINDSEY.Marri
ed coup
le.
The CHAI RMAN .Wh at year ?
Mr.LINDSEY
.Thatwouldbe anytimeup to1980.
Well
,thelast
yearwould be in 1980.
The CHAIRMAN. 1980.
Allright
. Well,let's
take1980
.
Now ,letme tell
you what troubles
me .Giveme yourbestprofes
sional
estimate
astowhatpercent
oftheAmerican
people
in1980
couples
wouldhavehad taxable
incomeof$45,600
ormore?
Mr. LINDSEY
.Marriedcouples
? I wouldsaythenumberwouldbe
20 percent
.
TheCHAIRMAN
.I think
that's
high
.You may beright
andImay
be wrong. My guesswouldbe that
, ifyou go backto 1980
,I think
themedianincomeinthecountry
fora family
at thattime-not
justa coupleoftwo- was probably
around$20,000
,or close
toit
.
63
My guesswouldbe thatfortaxable
incomesfora couple
, $45,600
isprobably
inthetop15percent
,maybehigher
thanthat
.But,you
say 20 percent
.
Let'ssayitis20percent
. If20 percent
atthatlevel
arehigher
,
then 80 percent
are beneath
thatlevel
,aretheynot?
Mr. LINDSEY. Yes .
The CHAIRMAN
. I guess
I'mtroubled
by examples
thatarede
signed
to make a point
thatIthinkhavea loadofideology
in
them . I mean,a pointofviewthatismore concerned
withexam
plesthattalkabout20 percent
ofthepopulation
andnot80 per
cent ofthepopulation
.
And I guess
my concern
wouldbe that
, when an example
like
that isused
, I thinkitreally
tilts
theanalysis
offitsaxis
.I don't
sayit's
anelitist
illustration
,butIthink
it's
adistorted
illustration
interms ofwhat life
islike
formostpeople
inthecountry
.
And that's
why I thinkthereare an awfullotoffrustrated
peopleinthecountry
who don't
evenin 1991earn$45,600
and
neverwillintheir
lifetimes
, andthey're
probably
sick
todeathof
taxpolicies
that
areaimedatsomebody
else
other
thanthemselves
.
Theproblem
istaxes
havegoneup quite
substantially
inthelast
several
years
, partly
because
Social
Security
taxes
havegoneup,
apart
fromtheincometaxchanges
.And,ofcourse
,we've
beentap
pingtheSocial
Security
reserves
topayforthegeneral
cost
ofGov
ernment
,asI'msureyou know.
I askedSenator
Moynihanon thefloor
theotherday:
How much moneyfrom the Social
Security
reserves
had been
transferred
outandtakenoverandspent
onthegeneral
operations
ofGovernment.
And thefigure
thathe gaveIthinkwas $260billion$240to$260
billion
.Itwas inthatrange
. An awful
lotofmoney:
ButI think
it's
a little
bit
ofa shell
gamethat's
beengoing
on
withwho paystaxes
, atwhatmarginal
ratesandwhat's
itreally
done totheeconomy?
And we're
still
left
withthese
yawning
deficits
thatI think
fly
directly
intheface
oftheanalysis
that's
inyourbook
,andwhich
I
think
youessentially
holdtotoday
.Youmay makesome adjust
mentsintheway youpresent
it
,and I've
listened
andIappreciate
thecourtesy
and inthe fashion
inwhichyou putyouranswers
.
But, I haven't
heardanything
yetthatreally
cutsagainst
what
you'vepresented
inthebookasa viewofthe1980's
.And I'mtrou
bledabout
that
view
,quite
frankly
,because
Ithink
it's
off
-base
.
Iwanttohave
you look
attwocharts
.Wouldsomeonetakethese
two charts
down? Ireferred
toone ofthesebefore
. Thisislooking
atdecade
longperiods
. ThisisGovernment
data
,they're
fromthe
Department
ofCommerce
,sothey're
national
income
statistics
.
And on theone,itshowsnetbusiness
investment
asa percent
of
net national
product
. And itshows business
investment
falling
sharply
inthe1980's
inrelationship
towhatithadbeenineachof
thethree
decades
leading
up tothe1980's
. Now,when I say“fall
ingsharply
," whatI meanisbeingcutby 40 percent
. I mean,a
verysubstantial
percentage
reduction
.
Then, ifyou taketheotherchart
,consumption
expenditures
asa
percent
ofnet national
product
overthesamedecades
, whatyou
find
isthat
consumption
jumpedup quite
substantially
.
64
And so,youknow, again
,I studied
someeconomics
attheHar
vardBusiness
School
andother
places
andfromwhatI remember
ofwhat I studied
, in applying
ittothis
, itlookstome as ifwhat
happened
isthattheway we reconfigured
ourpolicies
,we ended
up withmoreconsumption
andless
investment
and we're
paying
forittoday
.
And I justdon'twant thenotions
thatdrovethosekindsof im
balances
and thattilted
us offouraxis
and I thinkhavegivenus
bad results
. I thinkthatdebtornationstatuschartoverthere is
nota badgeofhonorintermsofhow we performed
inthelast
sev
eral
years
withrespect
tobeing
able
tocompete
inthis
internation
aleconomy
.
I don't
thinktheFederal
budgetdeficits
asthey've
accrued
area
badge
ofhonoreither
.And I'mterribly
troubled
about
those
.
.
inoureconomyisa realproblem
Ithinktheunderinvestment
distribution
,although
inincome
And Ithink
someoftheinequities
extent
right
now,I
to getoffonthattoanygreat
I'mnotgoing
here
.
problem
think
areanother
But,itseemstome that
, you know,I guessI wouldfeelthat
therehas to be some effort
made to reconcile
thesetrendlinesin
this
datainlight
ofallofthesupply
side
,ifI may inallduere
spect
sayso,sophistry
that
we heard
downduring
the1980's
.
You know, it's
notjust
therecession
andwhat's
happening
with
theunemployment
levels
, it's
these
longer
termunderlying
trend
lines
theyareactually
in some respects
more disturbing
because
youassumethatyou'll
getsomeimprovement
coming
outofa re
cession
hereatsomepoint
, atleast
God hopethatwe will
.
letyourespond
pointhere,andthen I'll
I wanttomake another
always
ad
we haven't
, I think
thatI'mmaking
tothetwopoints
we probably
requirements
,although
regional
strictly
tothese
hered
it's
im
fora reason
. I think
there
I thinkthey're
should
because
ofthecountry
parts
togetthepeoplefromthedifferent
portant
views
.
regional
those
different
reflecting
Ithinkattributing
youassomeone
fromtheRichmond
District
is
really
essentially
a circumvention
.One cansaythathaving
started
tovoteinVirginia
in1990andowning
a house
there
nowputsyou
3
2
&
2
2
I
inthatregion
.But I don't
thinkthat's
what thelawintended
.
I thinkitwas designed
togetpeople
who had somelongand
deep
knowledge
inthedifferent
regions
ofthecountry
tocomeon
theFederal
Reserve
Boardandtoreflect
thedifferent
geographic
understandings
andrealities
,andsoforth
.
Now, whether
it's
a serious
enoughmatter
inand ofitself
to
4
N
bearinyoursuitability
toserveI thinkisa question
thatmembers
have toweighforthemselves
.
But,IguesswhatI'mmoreactually
concerned
aboutinthatarea
isthequestion
of your
experience
. You're
obviously
a verygood
scholar
anda person
witha veryheavyacademic
and policy
adviso
ry background
in Government
. You obviously
haveenjoyed
the
confidence
ofthepeople
who've
asked
youtodo that
.And I think
that's
a tribute
toyou. I thinkthoseareveryimportant
partsof
your résumé
. And I admirethosethings
. I thinkthosearevery
soliditems to have on a résumé .
I'mnotsure
that
, quite
frankly
, thatiswhatshould
constitute
thebackground
ofsomebody
todaygoingon theFederal
Reserve
1
(
1
8
65
an engaging
todayand you're
. And we'venevermet before
Board
ofthat
.
and I'mveryrespectful
person
andthoughtful
omicand fi
tryisinecon
nkthecoun
ernisI thi
I guessmy conc
y need somevery heavy
nk we reall
ulty
ialdiffic
, and I thi
nanc
e inall
ectiv
of the key
ceandknow-how andpersp
erien
weightexp
ncialpolicy
areas. I thinkwe need thaton the
omicand fina
econ
Fed.
It's
noteasytogetgoodpeople
toserve
inGovernment
, butI
thinkit's
veryimportant
what goesintomonetarypolicy
decisions
,
how practical
istheinsight
,how seasoned
isit
,how deepistheex
perience
basethatsomebody
isdrawing
on,andquite
frankly
, to
havesomeone
with a strongly
heldphilosophy
, whatever
ithap
penstobe. Whetheritagrees
withmine or yoursor somebody
else's
issomething
I putquite
fardownthelist
ofreally
highly
rel
.
evant
qualifications
.
You'reway abovetheintelligence
minimum thatwe wouldneed
because
you're
obviously
an extremely
thoughtful
individual
.
The questio
n here is
:
What'stheexperie
ncebase?
What's the know -how ?
What'stheper
spect
ive
?
What's thevantage poin
t thatone brin
gs?
An d I would hope to getin the timewe have lef
t, in termsof
whatyoumigh
t wanttosay inresp
onsetowhat I'v
ejus
t sai
d and
to fur
Domenici mightask or oth
,
therque
stion
t Senator
ers
s tha
moreofa senseof thedepthof persp
ectiv
t andknow
e andinsigh
how thatyou bringwithrespe
ctto how thiseconomyworks.
That's
why I asked
, who youcall
inthemanufacturing
sector
.
calling
I'msurethere
will
bea lotofpeople
you,assuming
you're
confirmed
forthisseat
. I'm lessinterested
in thatthanwho you
call
andwhereyougetyourinformation
andhowbroad
itisand
how deepitis.
I mean,obviously
,ifyouhadhadsomebusiness
background
,you
know,thenthatautomatically
carries
withita certain
kindofa
preparation
and qualification
; that's
notherein thiscase
.So I'm
interested
inwhatreally
constitutes
thebaseofexperience
upon
which you draw. I wantedto be veryfrankin telling
you what
someofthethings
arethatareinmy mind,andI'dbehappyto
haveyou respond
tothat
.
.
.Thank you,Senator
Mr.LINDSEY
I think
,with regard
tothe 1980's
,there's
a question
ofviewing
theglass
ashalf
full
orhalf
empty
.And there's
many verycompli
catedquestions
involved
withthedata
.
Thestatistics
you present
areofcourse
quite
right
.Theonecon
cernonemighthave
islooking
atthetrends
.Oneofthereasons
,or
thereason
,thatwe saw theresults
inthischartwas theveryhigh
rateofdepreciation
duringthe1980's
.Grossdomestic
investment
.
The share
, ourGNP ,we weredevoting
toactually
setting
aside
as
itcameoffthe- asitwasproduced
- seta record
in1986.
Because
cia
'sbehindthedepre
edquest
ion
licat
:What
A very
,verycomp
ofveryhighdepreciation
,we had a lownetnumber.
tion data ?
So, again
, I thinkthatreasonable
individuals
can lookat the
same dataand say:
66
Istheglass
halffull
orisithalfempty?
Senator
,withregard
to- I'm36years
old
.
The CHAIRMAN. I understand
.
Mr.LINDSEY
.Ihavebeenvery
privileged
inmy current
position
as Special
Assistant
tothePresident
forPolicy
Development
to
meetwithmany individuals
,depending
on theissue
involved
.
Ihavemetwith
CEO's
,withplenty
ofvice
presidents
forGovern
mentrelations
, withregard
totheproblems
thattheyseeinthe
economy
.It's
aregular
part
ofmy job
.
llfor
ssesisI have a lousyreca
se one of my weakne
I suppo
t.
veoff
iceas a resul
neverrun for electi
names.And I guessI'll
.I think
ous cont
acts
allthe time
withpeople
But,I havetremend
rtantpart
b.
sanimpo
ofmy jo
that'
One criticism
of the FederalReservewhich I'm not sure ifit's
true
,butI've
certainly
heard
,istheysitina marblepalace
on Con
stitution
Avenue and don'thave contact
.
Letme assure
you, Senator
, thatthatisnothow I wouldview
my jobasGovernor
.I havealways
felt
thatoneisbestwhenone
seeksa variety
ofviews
, when oneseeksoutindividuals
through
outthecountry
, listens
towhat theyreally
havetosayand, hope
fully
, asa Governor
, oneofmy responsibilities
will
betotravel
aroundthe country
to allthe FederalReserveDistricts
to see
what's
happening
ontheground
tobusiness
conditions
there
.
.
there
TheCHAIRMAN.Well,letme juststopyouright
right
now?
problems
areoureconomic
How serious
You're
taking
a lotoftemperature
readings
, and soforth
. Soam
I.Iwouldlike
tocompare
whatI'mhearing
withwhatyou're
hear
ing.
How serious
areoureconomic
problems
atthemoment?
Mr. LINDSEY
. Thereisa shortrun
issue
and a longrunissue
.The
shortrun
issue
iswithregardto thecurrent
stage
of thebusiness
cycle
. It's
veryhardtotell
whetherwe arenow on theway outof
therecession
,or whether
that
will
bea quarter
orsohence
.
We'vegotsomeverymixedsignals
recently
. Certain
industries
,
particularly
theauto
industry
, isinvery
, verydifficult
shape
.I
think
,inpart
, thathastodo withcredit
marketconditions
.
. Again
,
shape
, verydifficult
isinvery
Commercial
realestate
.
marketconditions
tocredit
attributable
largely
that's
regulatory
andequitable
When I spokeoftheneedforconsistent
.
inmind
inparticular
twomarkets
,Ihadthose
standards
On the other
hand
, ourexport
sector
seemstobe doingquite
improvement
well
.We havehadremarkable
inmanufacturing
pro
ductivity
during
thelast
10years
.Infact
,totherate
that's
compa
rable
tomanufacturing
productivity
growth
inJapan
,andabout3
timesthatinEurope.
So, I think
,insomesectors
,themanufacturing
outside
ofautos
,
we'redoingreasonably
well
.
In theshortrun,therefore
, thepicture
, I thinkisa mixedone.
Inthelonger
run,Ithink
we havelongrun
problems
asa Nation
.
Ishare
yourconcern
about
thesaving
rate
.There's
noquestion
we
needtogetthatup.We needtoimprove
theeducation
ofourchil
dren as well.
Thosearelongrun
factors
.TheFederal
Reserve's
ability
towork
inthelongrun isprimarily
oneofmovingthecountry
gradually
67
towardprice
stability
. With price
stability
,therealafter
-taxcostof
equity
capital
willfall
.
That will
be oneofthebestthings
thatwe coulddo forAmerican
business
. So,asa Federal
Reserve
Governor
dealing
withthelong
runproblem
,Ithink
thatwe dohavetopursue
a consistent
policy
ofreducingthe rateof inflation
The CHAIRMAN.Well,letme
Mr. LINDSE
Y [con
tinui
ng).Inachievi
ngpric
estabilit
y.
The CHAIRMAN
. Earlier
youseemedtoputa lesser
weighton in
flation
fighting
totheextent
thata couple
ofreporters
brokea
chairtogetthaton thewire
. Thathappenswhen you areon the
Federal
Reserve
Board
, youcancreate
thissuddenexodus
ofre
porters
thatrun forthephone.
But,while
tomy earyouseemedtobeputting
a lower
premium
on inflation
perseearlier
,I thought
Ijust
heardyouputa higher
premiumon itnow.
to
,I thinkitisimportant
. Iftherewas a question
Mr. LINDSEY
differentiate
betweentheshortrun and thelongrun.
I think
there
isnoquestion
that
thesingle
long
runobjective
of
theFed throughout
this
decade
, throughout
therest
ofmy term
will
betogradually
reduce
therate
ofinflation
.Thatissomething
we candointhelongrun.
Thediscussion
Iwashaving
atthemoment,andI'msorry
,which
Senator was itwith ?
The CHAIRMAN
.Itmay havebeenSenator
Domenici
orSenator
Mack .
Mr. LINDSEY
. Ithad to do with whetherthereshouldbe an exclu
sivefocus
on inflation
and makingshortrun policy
decisions
.And
thereI do notbelieve
thereshould
be.I believe
inthe shortrun it
isimportant
to strike
a balance
between
theneedforeconomic
growth
,theneedformaintaining
lowunemployment
,andconcerns
about inflation
.
That's
why I am a believer
thattheapproach
toreducing
infla
tionmust be a gradual
one,whichwilltakemostoftherestofthe
decadetoaccomplish
.
The CHAIRMAN . SenatorDomenici.
Senator
DOMENICI
.Letme talkaboutthata little
bit
.
Itseemstome thatessentially
theway youwill
getinflation
undercontrol
ina society
,an economic
systemlikeAmerica's
, isto
increase
productivity
ata sustained
rateand across
theboardif
possible
.
Now,frankly
,oneofthemisunderstandings
ofthedecade
ofthe
1980's
, after
you gotoutoftherecession
,isthatmanufacturing
productivity
intheUnitedStates
,which inthedecadeofthe1970's
was
deplorable
, cametotheforefront
andbecamevery
,veryposi
tive.
Now itmay bethat
itissucha challenging
field
thatwe may
havetobe atitallthetime.Frankly
,theJapanese
don't
beatusin
technology
applications
andscience
breakthroughs
assomepeople
think
. Theyliterally
beatus intheapplication
ofmanufacturing
theproducts
and bringing
theproducts
tomarket
. Not brandnew
ones, but onesthatareneeded.
So itseemstome thatintheUnitedStates
,thosewho areinter
estedin getting
inflation
undercontrol
have to be equally
con
68
cerned
abouthow do you increase
productivity
and whatareits
components
.
Soletme just
askyouifI am correct
,we areverygoodatmeas
uring
productivity
inthemanufacturing
oftheUnited
States
.But
contrary
to public
opinion
, and an average
kindof talkabout
America's
economywherewe saylet's
go lookattheFordplant
andifitisworking
wellwe areincreasing
ourproductivity
,70per
centofAmerica's
GNP isnotmanufacturing
. IfI am right
, only30
percent
is.So70 percent
somewhere
else
.And a lotofthat70per
centisin realservice
-oriented
activities
and then a bunch of itis
ina sortofhybrid
, wherewe don't
quite
know wheretoputityet,
ifI readwhatpeople
like
youwrite
.
Butlet's
takewhereare
we today
andtrytomeasure
productivi
tyofthatservice
sector
. Itseemstome we'reinbadshape
. We
don'tknow how to do it.
Mr. LINDSEY
. Senator
, you're
absolutely
right
. ChairmanBoskin
setpriorities
forimproved
datameasurement
andoneof thelead
ingoneswas getting
atjusttheissues
thatyou aretalking
about
.
A lotofthewaysthatwe measure
productivity
now intheserv
ice
sector
areawfulandwe havetofinda better
way ofdoingit
andimproved
datacollection
isoneofthewaysofdoing
that
.
And Ithink
thechairman
isposing
a series
ofverycost
effective
statistical
improvements
fortheFederal
dataestablishment
.
SenatorDOMENICI
. Do you know whetherthe FederalReserve
Boardhassome way oftrying
tomeasureoverall
productivity
that
includes
their
own special
way ofmeasuring
service
sector
produc
tivity
increases
?
. They
working
atit
. I know theyareconstantly
Mr.LINDSEY
thattheyareconstantly
andI think
there
havea verygoodstaff
looking
.
atchallenges
As faras specifics
, I don'tknow. But thatwouldcertainly
be a
fruitful
areaforresearch
at the Fed.
Senator
DOMENICI
. Letme justtakeoneservice
sector
activity
.
Therearereally
two giants
thatarepublic
innaturethatI know.
One iseducation
andone ishealthcare
. And I assumethatthey
arebothkindofin themonstrous
category
among themyriadof
service
activities
.
younot belie
t,or do youbelie
vethat theeverincreas
vetha
ingcostofhealth care isa sig
nific
rrenttolong-term sus
antdete
Do
tained growth inAmerica,or isitnotrelevant?
Mr. LINDS
EY.Itisa majorproblem.
Senator
DOMENICI
.And thathastodo withsustained
growthand
productivity
increases
asa majorproblem
;isthatcorrect
?
Mr.LINDSEY.Inthehealthcare industry
?
Senator
DOMENICI
.Yes.Tellme why itisa majorproblemeco
.
theway todo it
.Maybe that's
nomicwise
Mr. LINDSEY
.We havea situation
wherewe havevirtually
un
limited
demandandwhenwe measure
productivity
itisveryhard
.
How canyoutell
how much postponing
someone's
death
6 months
,
a year
, 18 months'worth
, you can't
puta price
on it
.The way we
measure
output
isby measuring
input
. And thatisa lousy
way of
figuring
outproduct
activity
.
69
why
.Tellme quickly
Senator
DOMENICI
.Strike
theproductivity
impacton
costof healthcarehave a negative
doesthespiraling
future
.
economic
, ifitdoes
America's
Mr. LINDSEY.We have virtually
no checkson the commitment of
resources
, of new resources
there
. Thoseareresources
thatoften
couldbe usedelsewhere
.And ingeneralthereisno markettypeof
check
,consumer
check
,between
buyinghealth
careorbuying
an
othergoodor investing
inanother
good
. That's
really
theproblem
.
Senator
DOMENICI
.My last
question
hastodo withcapital
forma
tion
. Has the currentsituation
with reference
to theCommunist
regimes
movingtowardcapitalism
and theneedforcapital
there
,
doesithavea negative
effect
on capital
availability
hereandcap
formation
ital
? And ifitdoesordoesn't
, wouldyoujustanswer
when you answerthatquestion
tell
me what isthemajorproblem
youseewithreference
to capital
formation
intheUnited
States
.
Mr. LINDSEY
. The answertothequestion
aboutoverseas
,thereis
no question
thattheworldwide
demand forcapital
hasincreased
as
a result
ofchanges
intheEastern
bloc
.
Withregard
tocapital
formation
intheUnited
States
, I think
thatwe have interaction
betweenour taxsystemand regulatory
policy
andinflation
whichdrives
up thecost
ofequity
capital
.
Andone thing
theFederal
Reserve
cando,in gradually
reducing
theinflation
rate
,istotakeouttheextrainflation
taxinteraction
.
Senator
DOMENICI
.Do youthinkthedecade
ofthe1980's
,once
therecession
abated
,wasa positive
economic
period
fortheUnited
Statesoverall
?
positive
.
,itwasclearly
.Inmy view,Senator
Mr.LINDSEY
SenatorDOMENICI
. I havebeen heardto saythatforallthose
who bemoanitthatifwe could
clone
itforthenext342or4 years
atitspeak,mostpeople
wouldoptforittomorrowmorning
.
And letme close
my remarksby saying
thatI really
believe
we
areconfusing
whathappened
toAmerican
values
withwhathap
penedtotheAmericaneconomy.And I thinkmaybe we oughtto
be concernedaboutvalues
.
But I am not at allsurethattheyarethesame or thatthey
run - thatwe canhaveeconomic
prosperity
and still
havea differ
entvaluesystemthanwe havecurrently
intheUnitedStates
.
The factthatyou are worriedabouteducation
, I am closeto
comingto conclusion
and thenI willquit
, thatour education
systemisnot so bad but thatthe valuesthatare attendant
to
youngpeople
iswhatisscaring
us.But I can't
provethatyet.
Letme tell
youthatI am pleased
tobe hereandI hopethatI
cansupport
you forthis
job.
Thank you.
Mr. LINDSEY.Thank you,Senator.
The CHAIRMAN.I mightjustsayIhavegreatregard
forSenator
Domenici
,and we haveserved
together
fora longtime,and I am
justreflecting
. We useas a national
figure
a highschool
dropout
a point
rateinAmericaofabout26percent
.Itmay be offa
ortwo; it
dependson whereyou are.The Japanese
highschool
dropout
rate
isabout2 percent
.We may havea values
problem
,and I thinkin
some areas
we do havea values
problem
.We alsohavea verytan
gible
highschool
dropout
rateproblem
.I don't
knowhow much it
is drivenor not drivenby values
, but I am convinced
thatifa
46-442 0 - 91 - 4
70
country
runsthose
differentials
yearafter
yearafter
year
,theyare
goingtoend up way down theline
,and thatiswhat ishappening
to us,at least
in thatarea,I think.
SenatorDOMENICI. Mr. Chairman, I am having somebody see
from Colorado
whetheryou'rerightor whetherthatresearcher
Postovertheweek
pagespreadintheWashington
who hada full
,91
,ultimately
.In fact
,he says
good
.He was pretty
endisright
theyearbefore
to graduate
thatwasexpected
oftheclass
percent
States
.
intheUnited
fromhighschool
last
graduated
We don't
makethemall
graduate
whenthey're
supposed
to.We
havean open-endedinand out.And he says
,by thetimewe'refin
ished
,91percent
ofAmericans
thatweresupposed
tograduate
,get
a highschool
diploma
,did.
Now thatdoesn't
mean I'msatisfied
withthesystem
.But I think
thattherearesome veryinteresting
facts
aboutthatthatare
comingoutnow.
TheCHAIRMAN
.Letme askyouthis
,Mr.Lindsey
.Do youthink
the interest
rateshouldbe lowernow ? Can the Fed takethe rates
down fromwheretheyarenow inyourview?
Mr.LIND
SEY.Senato
r,Icannotcommit myself
.
The CHAIRMAN
. I'mnotaskingyou tocommityourself
. I'm
asking
you foran opinion
. When you getthere
,you're
goingto
havetolookatthedataand you may want torevise
youropinion
.
Butyouareobviously
a person
thatdigests
a lotofinformation
.
You arehereas a nomineebecause
you arethought
topossess
an
expertopinion
. And basedon whatyou now know, do you think
thattheratesshould
be lowerthanwhattheyaretoday
?
to lookat is
rate
thatthemostimportant
.Ibelieve
Mr.LINDSEY
.And I think
investment
business
long-term rate.That iswhat drives
ofthe FederalReserveshouldbe togetthat
thatone ofthe focuses
ratedown.
long-term interest
neces
,itdoesn't
,withpropermonetarypolicy
And I thinkthat
policy
monetary
away.Proper
short
rates
right
sarily
meancutting
can getthelongratedown.
The CHAIRMAN.So you rankthe longratehigherthan,say, the
prime rate
, which isobviously
not a longrate
, in termsof its
impacton theeconomy
?
Mr.LINDSEY
.Yes,withbusiness
investment
.
The CHAIRMAN.I thinkthat's
quite
right
on business
investment
ifyou're
trying
tobottom
outofrecession
.
We hadAlanGreenspan
here10daysago.He told
usthereces
sionwasstill
worsening
,andwe hadn't
hitbottom
yet
.He wasn't
sure where the bottom was .
When you're
in thatkindofa condition
how important
isthe
primerate
?
Mr.LINDSEY
.Thereisno question
thattheprimerateisimpor
tant
, particularly
withregard
tobusiness
inventories
, carrying
business
inventories
withregard
tolarge
businesses
.Because
many
cyclical
changes
oftenhavea stronginventory
component
tothem.
Thereisno question
thattheprimeratealsoplays
a role
.
Butwithregard
tolong
-termgrowthinbusiness
investment
,itis
the long-term rate.
The CHAIRMAN. Itisinteresting
.I talkto the headsof the auto
mobile
companies
quite
often
,asyou mightimagine
,because
they
71
are centered
inmy Stateand itisa majorpartofthenational
and
regional
economy
,andcertainly
a majorfactor
inmy State
econo
my .
Auto sales
,ofcourse
, havebeenveryweak and thatispartof
what hascaused
this
recession
.We havehadreported
losses
inthe
domestic
industry
approximating
$5 billion
.Itisa majorproblem
.
They are of the viewthatthe primerate
, ifitwere to come
down , would probably
be more helpful
withrespect
to consumer
psychology
and helping
tobottomoutthisrecession
and getting
economicactivity
toturnup again
.
Wouldyouagree
ordisagree
withthat
?
Mr. LINDSEY
.I thinkfromtheir
view
,theyareon target
. But
what we have isinventories
.I thinkthatisreally
one ofthebig
costsnow intheautoindustry
, thehighcostofcarrying
theinven
tories
.And I thinkthatiscorrect
.I do notarguewiththem atall
.
The CHAIRMAN
.What wouldhappeniftheFedweretodropthe
discount
rate
another
half
a percentage
point
inyouropinion
.
Mr. LINDSEY
.Well,on theshortend,my suspicion
wouldbe that
short
-term rateswoulddropveryclose
to one-halfa point
. With
regardtotheprimeIcouldn't
tell
forsure
.Iwouldsaythatitwould
decline
. Itmay or may notgo a full
one-halfpoint
, but I would
imagineitwouldbe followed
by a decline
inprime
.
The CHAIRMAN.DoestheFed havetheroomtodo that
?
What wouldthatdo tolongrates
,do yousuppose
?
Mr. LINDSEY
.Ithinkthatisthe$64question
.
The CHAIRMAN .What isyourjudgment?
Mr. LINDSEY
.I wouldwanttoreally
lookverylongandhardat
theconditions
intheyield
structure
,in foreign
exchange
markets
and commodity
markets
,particularly
withregard
tothelast
reduc
tionbecausewe justhad a test
.
On thequestion
you areasking
, I wouldwant toseehow mar
ketsrespondoverthenextfewweekstothatlast
reduction
before
deciding
how theywouldrespond
toanother
reduction
.
The CHAIRMAN
.Somepeople
feel
that
theFedhasthelatitude
to
go lowerand theyoughttogo lowerand trytoturnthisrecession
around
.I takeitthatyouarenotprepared
toagree
withthatas
such ?
Mr. LINDSEY . I would like to see the reactionto the last cut
before
deciding
whetherornotitwas timeforanother
cut.
Again
, I hopethatovertimethewholeyield
curvecancome
down, thatwe can bringdown therates
.But whetheror notthat
action
should
takeplace
tomorrow
,nextweek,3 monthsfromnow,
I would want to wait and see.
thisyear running
The CHAIRMAN . Now with the Federaldeficit
not
, let's
$380 billion
- takeiteasy
up in the rangeof probably
break the chairs.
With the Feder
al budge
t thisyear probab
ly goingto come in
around$380bi
llion
,giveor take
- itcou
ldbehig
herthanthatde
pendi
ngon how weak theeconomy remai
ns,becau
sethatisver
y
cost
lyin defici
t terms— how much doesthat redu
ce the lati
tudeof
the FederalReserveBoard with resp
ectto what itcan do with
monetary policy
?
72
Do theFederal
deficits
hem intheFed,and ifso,towhatextent,
intermsofits
latitude
tomovemonetary
policy
aroundtotryto,
say,getlowerinterest
rates
?
Mr.Lindsey
.There's
no question
thatfiscal
policy
hasan impor
tantimpacton theeconomy
,on inflationary
expectations
,on price
movements
, on interest
rates
,what have you. And they then
impacton thedecisions
thattheFed will
make.
Iwill
stress
thatIthink
that
thatrelationship
isan indirect
one
and itisimportant
tostudytheunderlying
dataasopposed
to
whatmay behappening
today
ortomorrow
withregard
tothedefi
cit.
process
,partofthestabilizing
partiscyclical
Thelarge
.
since
theearly1980's
beencyclical
The CHAIRMAN.Theyhaven't
, but theyhavebeen
to a limited
extent
Theyhave beencyclical
,havethey
?
any smaller
gotten
andtheyhaven't
verylarge
Mr. LINDSEY .That iscorrect.
The CHAIRMAN.They seem tobe cyc
lical
on thesideofgetting
bigge
r.
What isyourestimate
astowhenyouthink
we mightseea bal
ancedFederalbudget?
Mr. LINDSEY.Senator
TheCHAIRMAN
.Bythetime
yourtermisup,theyear
2000
?
Mr. LINDSEY
.I wouldhopewe wouldgetonebefore
that
.
The CHAIRMAN. We would allhope thatbut, as a practical
to?
thinkwe'relikely
matter
,do youreally
predict
cannot
whatisgoingto
, I really
Mr.LINDSEY
. Senator
inin large
I willnotbe involved
happen.Itdependson decisions
.
.So I am sorry
,taxdecisions
decisions
:spending
measure
TheCHAIRMAN.Ifwe usethelast
11years
asa guide
,ifwe just
tookthoseas a trendlineguideand tried
to decide
where that
mightbe taking
us,istheremuch reason
tothinkthatwhen ithas
beengoingup likethisovera period
oftimethat
,allofa sudden
,
it's
goingtogo downby thesame amountand gettozero
?
Mr. LINDSEY. I think - I don't know
ifI would follow- I share
yourdesire
forlowerdeficit
.I don't
know ifI woulddo thekindof
extrapolation
linear
you just
did.
The CHAIRMAN
.Maybenot
.Maybeyouseesomething
thatwill
bringusdown and getusoffthattrendline
.
Mr.LINDSEY
.I think
working
infavor
ofdeficit
reduction
is- for
every1 pointincrease
inrealgrowthintheeconomy
,theFederal
Government
collects
substantially
morethan1 percent
morereve
nue.Forinflation
,itisslightly
more than1 percent
more revenue
.
uresin line with
As longas youcankeep the Federalexpendit
e
th, the taxlin
r than GNP grow
fully
lowe
th,or hope
GNP grow
e isno way
n, ther
g line
.But agai
uallycatchthespendin
l event
wil
ined
dingisrestra
tono morethan the
lhappen unlessspen
thatwil
e ofGNP growth.
rat
The CHAIRMAN. How serious
are our bankingproblemsat the
moment ?
Mr.LINDSEY
.I think
theyarea matterofsignificant
concern
.I
thinktosome extentthingshave improvedslightly
.
Ifyou had askedme thatquestion
last
December
, I may have
been
more pessimistic
thanIam now.ButIthink
we arebeginning
toseea response
toregulatory
actions
.
73
I mentioned
,inresponse
toone ofyourearlier
questions
regard
ing the agreement
betweenthevarious
bank regulators
on how one
shouldevaluate
asset
values
forbanks
.One partofthatisstill
out
forpublic
comment
.Ithink
thatwhenthatprocess
isfinished
that
would alsobe helpful
. I alsothinkthatthereduction
in interest
ratessince
thenhasbeenhelpful
withregard
tothebankingsitua
tion.
So although
things
haveimproved
,Ithink
itisstill
a matter
of
serious
concern
.
The CHAIRMAN
.I know you workedon theadministration's
fi
nancial
banking
reform
proposals
. Do yousupport
theproposal
to
allownonfinancial
firms
toacquire
banks
?
Mr. LINDSEY
.I do inthecontext
thatitwas placed
intheadmin
istration
proposal
, and itwas as a way ofincreasing
capital
avail
ability
forthebanking
industry
and itwouldcomeaboutonlyin
circumstances
where therewas adequatecapital
in the bank in
question
.
Letme say
,having
thatasa bottomline
conclusion
,thatthere
are many prosand many constogetting
tothatbottomlineconclu
sion
. AndI fully
appreciate
some ofthe concerns
thatyou and
othershaveexpressed
withregard
tothat
.
The CHAIRMAN
.Letme askyouthis
.Do youfeel
sufficiently
fa
miliar
withtheregulatory
restructuring
proposals
inthat
package
tobe abletosaywhetheryou support
them ornot?
Mr. LINDS
EY.Yes,Isupportthem.
The CHAIRMAN.Any reserv
ation
s?
Mr. LINDSEY
. I wouldphrase
itthisway: The one thingthat
struck
me themostinworking
onthat
issue
wasthat
there
isno
single
right
issue
to any problem
. You'vegota wholerangeof
issuesout there.
What I believe
theTreasury
package
represents
isa list
ofgood
answers
thatwhenputtogether
ina balanced
formprobably
repre
sentsthebestpackagethatcouldhang together
as a wholepack
age. To saythat
,aretherereservations
, couldthings
be done an
otherway,thereisno question
.But thereisno single
right
answer
.
The CHAIRMAN. Ifyou lookat itnow withtheFed haton, the
Fed hasargued
thatitneedssomesupervisory
responsibility
for
international
sizebanks?
Mr. LINDSEY.Yes .
The CHAIRMAN .Would you agreewiththat?
Mr.LINDSEY
.Again,I thinkI wouldbe abletoanswerthatques
there
.The BushTaskForce
I hadsomeexperience
tionbest
after
. Anotheris
backin 1984came up withthatasone ofthechanges
and the
proposal
betweentheTreasury's
oneofthedifferences
.
Bush Task Forcewas justthe pointyou mentioned
Ithink
itisa veryarguable
case
.Ithinkitcango either
way.I
am willing
to say thatthat isnot the kindof difference
thatI
wouldfall
on my swordon. I thinkitisone thatcouldgo either
way .
has advancedtheposition
The CHAIRMAN. The administration
when theFDIC needstoborrowmore money,whichtheyare
that
todo,thattheyoughttocome borrowitfromthe
nowbeginning
?
here
tobesetting
.Isthata goodprecedent
Federal
Reserve
74
Mr. LINDSEY
.The precedent
was setinthe1930's
.Thatwas how
the FDICThe CHAIRMAN .Are we in the 1930's
?
Mr. LINDSEY
.No.But theprecedent
existed
.
The choice
really
— there
werefourchoices
.One, youcouldnot
bailouttheBIF, butI don'tthinkthatisa goodone. You could
havetheFed do it
,youcould
have Treasury
do it
, oryoucould
decide
bothinthecases
ofloans
,oryou couldhaveitthattheBIF
put up the money or theTreasury
or the Fed put up the money
and theBIF didnothavetorepayit
.
Froma fiscal
policy
perspective
,itreally
doesn't
matterwhether
itbe theFedor theTreasury
.And thereason
thattheTreasury
study
picked
theFedwasthatprecedent
that
Ijust
mentioned
.
The CHAIRMAN
. Well
, I understand
thattheypicked
theFed.
We'vegottomakea decision
up here
.Do youthink
itoughttobe
the Fed ?
Mr. LINDSEY.I don'tthinkitmatters
,Senator
.
interesting
The CHAIRMAN.That's
.
Therearesomeother
questions
thatIam going
tosubmit
toyou
fortherecord
and askyou torespond
to.
I wanttoposeoneimportant
question
herethatwe posetoall
prospective
nomineesto independent
regulatory
agencies
, and I
think
itisparticularly
relevant
inyourcasebecause
youcomeout
ofan administration
thatobviously
hasbeendoing
a lot
ofjawbon
ingon the Fed. Thereare some peoplethathavesuggested
that
you are really
designedto be the administration's
man on the Fed
because
youarecoming
fromtheWhiteHouseandyouhavebeen
made toqualify
fortheRichmondseat
, ifyou will
,and I have al
ready
said
that
Ihavesomequestion
about
that
.
I needto know two things
in thisarea
.One isthatyou infact
wouldbean independent
memberoftheFed,andImean absolute
lyindependent
andgive
JohnSununuoranybody
else
thattried
to
impingeon yourindependence
thecoldshoulder
. I needtoknow
thatand thatistheeasiest
part.
And thesecond
partisI needtoknowthatyouhaveenoughin
dependence
ofmind thatyou arenotgoinginwitha fixed
notion
,
whetheritissupplysideeconomics
out ofthe 1980's
orwhatever
,
thatineffect
gives
you a locked
mentality
andwoulddestroy
your
independence
ofthought
, forreasons
ofthefact
that
you've
already
made up yourmind fromsome rigid
ideology
or an ideological
set
of notions.
I wouldlike
you tocommenton bothofthose
.
Mr.LINDSEY
.Senator
,letme assure
youIam absolutely
commit
tedtothecomplete
independence
oftheFed. I thinkthatisits
greatstrength
. My career
, I think
, demonstrates
thatI make up
my own mind and,when attheFederal
Reserve
,I willmake up my
own mind.
With regardto ideology
, I wouldpointout some commentsof
supply
siders
aboutmy books
.One ofthethings
I foundwasthat
the demand sideeffect
from the tax cutswas as large
, perhaps
larger
,thanthesupplysideeffects
. So I don't
thinkthatI havea
rigid
ideological
position
oneway ortheother
.And Ithink Iwill
committhatI will
make every
effort
tokeepmy mindopenwith
regardtothe information
thatcomes beforeme .
75
TheCHAIRMAN
.Iappreciate
that
.
Ithasbeena longhearing
thisafternoon
.We havehad tomove
iton a coupleofoccasions
. We had itscheduled
earlier
as an ac
commodation
toyou.But we had memberson bothsides
who could
not be present
at a datethatwe had before
, so we have had to
changeittomake itbe a day at whichyou couldbe present
and
theycouldbe present
aswell
. So thathastakenus a little
longer
.
Iappreciate
yourcomments
today
andwe thankyouforyourtes
timony.
Mr.LINDSEY
.Thank youverymuch,Senator
.
The CHAIRMAN.Verygood.
The committeestandsinrecess
.
[Whereupon
,at5:11
p.m.
,thehearing
wasadjourned
.]
[Biographical
sketchof nominee
, response
to written
questions
,
and additional
material
supplied
fortherecord
follow
:]
76
STATEMENT FOR COMPLETION BY PRESIDENTIAL
NOMINEES
Name :
L awrenc
Lindsey
Benjamin
e
(OTHER )
(FIRST
(LAST)
tionto which
Posi
nominated:
Governor, Federal Reserve System
Dateofbirth
: (18
DAN
Maritalstatus
:
7
(MONTH)
54
Date of
ination
nom
:
Peekski ll , New York
Place of birth
:
(YEAR)
Married
Fullname of spouse:
Susan Ann
(McGrath ) Lindsey
Name and ages
ofchildren
:
Educatio
n:
Dates
attended
Institution
Bowdoin
Colleg e
Degrees
received
Dates of
degrees
1972-1976
A.B.
Harvard University
1977-1981
M.A.
1981
Harvard University
1984-1
Ph.D.
19 85
985 *
1 976
*During that academic year I was on the faculty as an instructor, pending
completion of my dissertation
I was not an en rolled stud ent
Honors
andawards
: List
below
all
scholarships
,fellowships
,honorary
degrees
,military
medals
,honorary
society
t.
itions
routstanding
service
orachievemen
hips
recogn
fo
members
,andanyotherspecial
Citicorp/Wriston Fellow for Economic Research , 1988.
nal Tax
,
Outstanding Doctoral Dissertation Award Natio
Association, 1985 for Simulating the Response of
Taxpayers to Changes in Tax Rates .
1976 .
Noyes Prize in PoliticalEconomy , Bowdoin College,
Elected to Phi Beta Kappa, Alpha of Maine, 1975.
1
77
Memberships:
,scholarly
,
,fraternal
,business
andoffices
heldinprofessional
List
belowallmemberships
organizat
civic
ions
.
,cha
ritable
andother
Officeheld
(if any )
Organization
Dates
Phi Beta Kap pa
1975 -present
Federal Taxation
Tax
As sociat
Na tional
T ax
Associ
Am erican
Ec onomic
Nation
al
s
ion
& Finan ce
Com m .
19 86-198 9
ation
1984 -present
Ass oc .
1983-present
Employment
record
:List
below
all
positions
held
since
college
,including
the
title
ordescription
ofjob
,name
of
employment
,location
ofwork,and datesofinclusive
employment
.
Special Assistant to the President for Policy Development
The White
Associate
House , 1/90
Director
pre sen t
for Domestic
Economic
Policy , Office
of Policy Development , The White House , 1/89
presen t
(on leave )
Associate Professor, Economics, Harvard University, 7/88- pres.
. 6/85-6/88
, HarvardUniversity
,.Economics
AssistantProfessor
Instructor , Economics , Harvard University
2/84-5 /85
Faculty Research Fellow, National Bureau of Economic Research,
9 / 84-1 / 89
Senior
Staff
Economist
for Tax Policy , Council
of Economic
Advisers, 7/83-8/ 84
Staff Economist, Taxation, Council of Economic Advisers, 9/82
-6/83
Junior Staff Economist, Public Finance, Council of Economic
Advisers, 9/81-6/82
TeachingFellow, HarvardUniversity
, 9/78-8/81
2
Resea rch Assi stant , Nation al Burea u of Ec onomic
6/78-8/81
Researc h
78
Emplo yment
Rec ord
conti nued
TeacherAide for the LearningDisabled, LakelandSchool
district , New York , 1/ 77-6/ 77
Salesperson , Gazelle Products , Waterville , Maine ,
9/ 76-12 / 76
Owner /Operator, The Hot Dog Stand , Bath , Maine , Summers
1975 and 1976 .
79
Government
experience:
List
anyexperience
inordirect
association
with
Federal
,State
,orlocal
governments
,in
.
cluding
anyadvisory
,consultative
,honorary
orother
part
-timeservice
orpositions
.
Special Assistant to the President for Policy Development
The
W hite
Ho use
Associate Director for Domestic Economic Policy , Office
of Policy Development , The White House
Senior Staff Economist for Tax Policy , Council of Economic
Advise rs
Staff Economist , Taxation , Council of Economic Advisers
Junior Staff Economist , Public Finance , Council of Economic
Published
writings
:
Advise rs
Li
stthetitles
,publish
ofbooks
,art
,reports
orotherpublishe
ersanddates
icles
d mater
ials
you have written
.
Pleas
e
see
a ttachm
ent
Politi
cal
s
ation
affili
ities
andactiv
:
List
all
memberships
andoffices
held
inandservices
rendered
toall
political
parties
or
election
committees
during
thelast
10 years
.
Member, Wayland Town Republican Committee , Wayland , MA
1985-89
Chairman , 1988-89
3
80
PUBLICATIONS
The Growth Experiment : How the New Tax Policy Is Transforming the
U.S. Econo my .
Basi c Books , Inc. , New York , 1990 .
"Managing the Variability of the Social Security System With the
Personal Income Tax ", in Weaver (ed . ) Social Security's
Looming Surpluses, American Enterprise Institute, 1991
(forthcoming).
" The University and the Reemergence of Economic Individualism",
in Hanson and Meyerson (ed . ) Higher Education in a Changing
Economy , American Council on Education, 1990 .
"Did
New York's Tax Cuts Work ? " NY : The City
with Ed Rubenstein .
Journal , Autumn
1990
"Let's ,Push Now for Capital Gains Tax Cut , " USA Today, September
21 , 1990 .
"Envy is No Basis for Tax Policy," TheWashington
, Post, March
20 , 1990 .
" It's Time for Another Cut in Tax Rates ," Forbes , March
5 , 1990 ,
pp . 82- 86 .
" Tax Induced Trading : The Effect of the 1986 Tax Reform Act on
Stock
Mar ket Activ ity "
The Jour nal o f Finan ce with
Paul J.
Bolster and Andrew Mitrusi , June 1989 .
"Budget Neutral Options to Encourage Charitable Giving ", in The
Future of the Nonprofit Sector, Jossey-Bass , 1989 .
" The Massachusetts Miracle ", Regulation, December 1988.
"High Risks , High Rewards ", Currents, November/December 1988 ,
pp .1 0- 15 .
"Massachusetts
Miracle
5 , 1988 , p.A33 .
or Mirage ?" The New York Times, October
" Turning Deficit into Surplus " The Boston Herald , October 2 ,
1988 , pp.23-26 .
"Supply Side Lessons for Deficit Reduction " Business Economics :
The Journal of
the American
Association
of Business
Economists, October 1988 .
"Better Child Care Cheaper," The Wall Street Journal
, July 5,
1988 .
"Socialism and the Supply Side in Sweden ", The Wall Street
Journal
Europe , June 6 , 1988 .
81
"Who Managed the Massachusetts Miracle ?"
Journal , April 5 , 1988 .
The
Street
Wall
" The Guru of Tax Cuts " The Sunday Times (London ), March 20 , 1988 .
"Capital Gains "
Tax Notes , January
25 , 1988 with Jane Gravelle .
" Tax Cuts and Taxpayer Behavior : Alternative Explanations of
Income Changes in the 1980s " in Tax Policy and the Economy
Vol 2, Lawrence Summers (ed . ) National Bureau of Economic
Research, 1988 .
"Cut Capital Gains Taxes"
The Journal
of Commerce , December
29 ,
1987 .
"The Wrong Two Percent Solution"
Novem ber
The
Journ al
of
Comme rce ,
19 , 1987 .
"Estimating the Behavioral Response of Taxpayers to Changes in
Tax Rates : 1982-1984 With Implications for the Revenue
Maximizing Tax Rate " Journal of Public Economics July 1987 .
"Federal Deductibility of State and Local Taxes : A Test of
Public Choice by Representative Government ", in Rosen (ed .)
Fiscal Federalism , National Bureau of Economic Research :
Cambridge ", 1987 .
"Capital Gains Taxes Under the Tax Reform Act of 1986 : Revenue
Estimates Under Various Assumptions ", National Tax Journal,
September , 1987 .
"CapitalGains Rates, Realizations
, and Revenues" in The Effects
of Taxes on Capital Accumulation, edited by Martin
Feldstein
, pp.69-97
, Universityof Chicago Press, 1987.
"Criticizing the CBO Analysis of ERTA's Effect on the
Distribution of Income and Taxes ", Tax Notes , May 4 , 1987,
pp.491-496 .
11
Individual Giving Under the Tax Reform Act of 1986", in The
Constitution and the Independent Sector, Independent Sector
and United Way Institute: Washington, March 1987 .
"Rates, Realizations, and Revenue of Capital Gains " in Taxes and
Capital Formation, edited by Martin Feldstein, Chicago :
University of Chicago Press, 1987 .
"Gifts of Appreciated Property : More to consider "
Tax Notes ,
January5, 1987, pp.67-70
.
"Revenue Response to the 1982 Personal Tax Cuts
Notes , October 13 , 1986 .
A Reply", Tax
82
"Misguided Capital Gains Levy " Wall Street Journal, September
10 , 1986 .
"Capital Gains Tax Rates and Tax Revenues ", Testimony before the
.
Senate Small BusinessCommittee
, The CongressionalRecord,
Ju ne 4 , 1 986 .
Lessonsof the 1981 Tax Cut", The Wall Street Journal
, May 6,
1986 .
"Tax Reform and CharitableGiving" in Philanthropy
, Voluntary
Action and the Public Good , Independent Sector and United
Way Institute, March 1986 .
"Revenue Response to the 1982 Tax Cuts ", Tax Notes , March 17 ,
1986 .
" The Effect of the President'sProposalon CharitableGiving",
The National
Tax Journal , March
1986 .
" The 1982 Tax Cut : The Effect of Taxpayer Behavior on Revenue
and Distribution" Proceedings of the National Tax
Association , November
1985 .
"Giving and Tax Cuts: Recent Experience
" Tax Notes, September
16 , 1985 .
"Tax Reform and Charitable Giving ", Testimony before the House
.
Committeeon Ways and Means, The Congressional
Record, July
22 , 1985 .
"Simulating Non-Linear Tax Rules and Non Standard Behavior : An
Application to the Tax Treatment of Charitable
Contributions ", Behavioral Simulation Methods in Tax Policy
Analysis, edited by Martin Feldstein
, Universityof Chicago
Press , 1983 .
"Alternatives to the Maximum Tax on Earned Income ", Behavioral
Simulation Methods in Tax Policy Analysis, edited by Martin
Feldstein, University of Chicago Press, 1983 .
"Is the Maximum Tax on Earned Income Effective ?" National Tax
Journal , June
1981 .
83
Political
contribut
ions:
,campaign
organiza
contributions
of$500 or moretoany individual
itemize
allpolitical
tion
, political
party
. political
action
committee
or similar
entity
duringthelast
eight
yearsand identify
thespecific
amounts
,dates
,and namesoftherecipients
.
N one
Qualifications
:
State
fully
yourqualifications
toserve
intheposition
towhichyouhavebeennamed.
(attach
sheet
)
Future employment
relationsh
ips:
1.Indicate
whether
youwill
sever
all
connections
with
yourpresent
employer
,business
firm
,association
ororganization
ifyouareconfirmed
bytheSenate
.
Yes . Resignation from Harvard effective upon confirmation .
My current employment with the Executive Office of the
President-atso terminates upon the start of my employment
at
the
Fede ral
R eserve
2.Asfarascanbeforeseen
,state
whether
youhave
anyplans
after
completing
govern
.
mentservice
toresume
employment
,affiliation
orpractice
with
yourprevious
em.
ployer
,business
firm
,association
ororganization
.
Non
e
3. Has anybodymade youa commitment
toa jobafter
youleave
government
?
No
ted?
etheful
lter
m forwhichyouhave
beenappoin
4. Doyouexpect
toserv
Yes
84
Qualifications
I beli eve tha t my car eer as a professional economist has
provided me with the tools , background , and insights necessary
to make a significant contribution to the country as a Governor
of the Federa l Rese rve Sys tem .
I h ave
been
fort unate
to
ha ve
been able to participate in the formation of economic policy in
two Adm inist ratio ns as well as cond uct aca demic
re searc h and
develop a university curriculum based on contemporary economic
thought and policy .
As Special Assistant to the President for Policy
Development, I have been responsible for developing policy and
analyzing the range of microeconomic and macroeconomic issues
facing the country today . In recent months , my primary mission
has been to work with the Departmentof Treasuryin developing
a comprehensive banking and financial services reform package .
This has exposed me to the cutting edge of thinking and policy
creation in this important area of Federal Reserve
responsibility. My three years on the staff of the Council of
Economic
Advisors
and two years
at the Office
of Policy
Development have provided me with a broad exposure to the
process of policy formation in two Administrations .
My four and one half years on the faculty of Harvard
University involved both research on key public policy issues
and the development of comprehensive academic curriculum . The
latter included the creation of a course on American Economic
Policy with particular emphasis on the effects of monetary and
fiscal policy. My academic research has been published in
leadingeconomicjournalsincludingthe Journalof Financeand
the
Journal of Public Economics
as well as in research
volumes
sponsored by the American Enterprise Institute and the National
Bureau
of Economic
Research .
This research
has led to awards
from both the NationalTax Associationand the Citicorp
/Wriston
Fellowship.
I believe that this combination of academic and practical
experiencein the realm of public policyqualifiesme to meet
the intellectual and decision making challenges faced by a
Governor
of the Federal
Reserve
System .
85
Potenti
al con
flicts
arrangeme
1.Describ
e anyfina
ncial
agreements
ofinterest
:
ntsordeferre
d compe
nsation
orother
continuing
dealings
withbusinessassociates
, clients
or customerswho willbe af
tected
by policies
whichyouwill
influence
intheposition
towhichyouhavebeen
nominated .
None
2. List
anyinvestments
,obligations
,liabilities
,orother
relationships
whichmight
involve
potential
conflicts
ofinterest
with
theposition
towhich
youhavebeennominated
.
None
3. Describe
anybusiness
relationship
, dealing
orfinancial
transaction
(other
thantax
paying
)whichyouhavehadduring
thelast
10 years
with
theFederal
Government
,
whether
for
yourself
,onbehalf
ofa client
,oracting
asanagent
,that
might
inany
wayconstitute
orresult
ina possible
conflict
ofinterest
with
the
position
towhich
you
have been nominated .
None , except employment
5
86
4. List
anylobbying
activity
during
thepast10 years
inwhichyouhaveengagedfor the
purpose
ofdirectly
orindirectly
influencing
thepassage
,defeat
ormodification
of
anylegislation
atthenational
level
ofgovernment
oraffecting
theadministration
and
execution
policy
ofnational
laworpublic
.
"Capital Gains Tax Rates and Tax Revenues", Testimony
befor e
the
Sen ate
Sma ll
Bu siness
Co mmitte e , T he
Congressional Record , June 4 , 1986
"Tax Reform and CharitableGiving," Testimonybefore
the House Committee on Ways and Means . The conges sion al
Record , July 22 , 1985
5.Explain
howyouwill
resolve
anypotential
conflict
ofinterest
that
maybedisclosed
by
estotheaboveitems.
yourrespons
I will make any divestment , as required ; and alter or
sever any relationships
, as required.
Civil
,criminal
and
inves
tigat
ory
actio
ns:
1.Give
thefull
details
ofanycivil
orcriminal
proceeding
inwhich
youwere
a defendant
oranyinquiry
orinvestigation
a Federal
,State
,orlocal
agency
inwhich
youwere
thesubject
oftheinquiry
orinvestigation
.
N one
2. Givethefull
details
ofanyproceeding
, inquiry
or investigation
by anyprofessional
association
including
anybarassociation
inwhichyouwerethesubject
ofthepro
ceeding
,inquiry
orinvestigation
.
None
6
87
T UT UL
NAFC U
NATIONAL
ASSOCIATION
OFFEDERAL
CREDIT
UNIONS
P.O.Box 3769 WASHINGTON,DC
20007
(703)522-4770
May 6, 1991
The Honorable
DonaldW. Riegl
e
Chairman
Commi
tteeonBankin
g,Housing
and
Urban Affairs
United States
Senate
Washington
,DC 20510
Dear Mr. Chairman:
On behalf
oftheBoardofDirectors
andmembersoftheNational
Association
ofFederal
Credit
Unions
,Iwanttolend
oursupport
tothenomination
ofLawrence
Lindsey
totheBoard
ofGovernors
oftheFederal
Reserve
System
. InDr.Lindsey's
capacity
asAssociate
Director
for
Domestic
Economic
Policy
ofthe
White
House
Office
ofPolicy
andDevelopment
,NAFCU
hashada variety
ofopportunities
todiscuss
economic
andpolicy
issues
ofdirect
consequence
toournation's
14,000
credit
unions
. On these
occasions
we havebeenmostimpressed
byhis
acute
understanding
ofboth
themicro
andmacro
processes
which
define
ournation's
economy
.
We believe
Dr.Lindsey's
experience
andimpressive
accomplishments
within
academia
, the
private
sector
,andnowasaspecial
assistant
tothe
President
amply
qualifies
himfor
this
most
critical
position
.
Mr.Chairman
,Iwanttothank
youandyour
distinguished
colleagues
for
this
opportunity
tocomment
onLawrence
Lindsey's
nomination
tothe
Board
ofGovernors
ofthe
Federal
Reserve
System
. IfNAFCU may be of anyfurther
assistance
during
these
crucial
nominating
proceedings
,please
call
uponus.
Sincerely
,
Jahin Starter
John M. Stanton
Chairman
JMS :smb
88
THE
WHITE
HOUSE
WASHINGTON
May 22 , 1991
Dear
Ms.
Breneman
:
Attached please find the questions submitted by
Senator Riegle and my answers to those questions . I
have adhered to the format outlined in Senator Riegle's
letter
of May 13 .
Thank you for your attention.
hearing from the Committee.
I look forw ard to
Sinc er ely ,
Tau
re
nd
nc
se
eß.Yu
y
Lawrence B. Lindsey
Special Assistant to the President
for Policy Development
Ms. Lory Breneman
Chief Clerk
Committee on Banking , Housing, and
Urban
United
Affairs
States
Senate
534 Senate Dirksen Office Building
Washington, DC 20510-6075
89
In your view , how should the Fed conduct monetary policy?
What should the Fed target and what should it take into
consideration in changing its targets?
Q1 .
Al .
Monetary policy should be directed at achieving the
objectives of high employment, sustainable growth, and price
stab ility . As a practical matter , monetary policy influences
these objectives only indirectly, and with some lag .
Theref ore , the Fe d shoul d mo nitor
othe r ec onomi c data in
gauging whether or not policy is on the right track .
In particular
, trendsin nominalGNP shouldbe watched
closely . Monetary policy has its most immediate impact on the
overall dollar volume of spending . The decomposition
of
nominal spending growth between real output growth and price
increases tends to be determined more by underlying economic
conditions that are not easily influenced by monetary policy .
The goal for nominalGNP growth, in turn, is determinedby the
three principalobjectivesmentionedabove.
I would also attach a good deal of importance to the
behavior of the money stock , especially M2 . Nominal
GNP has
tended over time to follow the trends in M2 growth and M2 is a
variable that the Federal Reserve not only can influence over
spans of a few months , but can monitor on a very current ,
weekly basis . M2 thus provides a reasonably good , if indirect ,
indicator of trends in nominal GNP which might not become
evident
until
much
more
data
becomes
available
.
In highlighting nominal GNP and M2 as key indicators, I do
not mean
to imply
that these
should
be the only
things
considered in a decision about policy. A full range of
information about the condition of labor and capital markets
must be taken into account . In particular, the yield curve in
the credit market , the level and rate of change of commodity
prices , and movements of foreign exchange rates , are all useful
in assessing the efficacy of policy changes .
90
Do you believe the Fed has adequate tools to revive the
economy in the near-term and control inflation in the longer
Q2 .
ter m ?
A2 .
One must be careful not to expect too much of a single
policy tool , and the Federal Reserve should not be expected to
be able to fine-tune the economy's performance , ensuring
continuous healthy growth and consistently stable prices . Over
the long run , monetary policy can be viewed as influencing
primarily the price level , with real activity being more a
function of such variables as population and labor force
growth , technology, and growth of the capital stock
what
economists refer to as "supply " factors . Ho wever , in the short
ru n , Federa l Rese rve act ions can ha ve a substa ntial
influ ence
on the aggregate demand for goods and services, and , when there
are significant recession
ary tendencies in the economy and
tively
lp
nable growth.
risingslackis dim
risk, monetarypolicy
i
nginflat
ionary
can be used effec inish
to
he revive
sustais
Th e
response of the financial markets and the economy to Federal
Re serve
action s may not alway s be the same ,
but
I
see
no
re ason
to think that the System's policy tools are inadequate to
perform these broad functions .
Q3 . How conf ident are you that the re cessio n wi ll end so on ?
Why ?
A3 .
One can never be absol utely
confi dent of any econo mic
forecast, and thus it is important that policymakers constantly
monitor developments and be prepared to change course .
That
said , I belie ve that one can cit e som e in dicat ions that the
economy is in the process of bottoming out . Consum er spendi ng
seems to have firmed in the past few months , since the dropback
in oil prices has reversed some of the prior erosion of
purchasing power; lower interest rates evidently have
stimulated a rise in home sales and housing starts; and
inventory positions have been trimmed , notably in the motor
vehicle sector , where production is rising currently after two
quarters of sharp decline . These developments certainly do not
ensure a quick upturn in business activity , but they have been
important elements in past economic turnarounds and clearly are
a hopeful sign in the present context .
91
g social security, which is funded separately, and
Q4 . Excludin
inte rest costs , wh ich are ca used by def icits , fede ral spen ding
a percent of GNP declined in the 1980s, despite the defense
If tax cuts didn't cause the deficit to soar , wha t
as
buil dup .
did
A4
?
.
that
There is no question , as I say in The Growth Experiment,
th e de ficit s of the 1980s would hav e been smalle r had the
198 1 tax cut not been passed . The combination of demand side
an d supply side effects from the tax rate reductions were not
sufficient , in the aggregate, to fully recoup the revenue which
was lost by reducing tax rates .
Quantifying the extent to which the tax cuts contributed
to the rising deficits is a complicated task , as your question
implies
.
In The Growth
Experiment , I took the 1980 share of
GNP allocated to taxes, defense spending, interest, and non
defense non-interest spending as a baseline . I then compared
the actual share of GNP in each category in each of the years
1981-1987
with the 1980 level .
In
order
to
account
for
the
effect of the added interest costs involved, I assumed that the
government borrowedto make up the differenceand paid the
prevailing interestrate on the amasseddebt. Thus , I
allocated
to tax cuts any interest
that was owed as a result
of
the tax share of GNP falling below its 1980 level. Including
these tax-cut-induced interest costs, the total cost of the tax
cuts amounted to $130 billion of the $529 billion added deficit
during the 1981-1987 period . Using this analysis produces the
conclusionthat the greatmajorityof the rise in the deficit
was attributable to increased defense spending.
While I feel that this " share of GNP method " is the best
approach to estimating the contributions of various factors to
the rise in the deficit , I fully realize that there are other
approaches. Of course , the best approach to fiscal policy is
not necessarily to focus on a given number of deficit or
surplus as optimal . Instead, national welfare is best served
if a level of public spending on each program is selected so
that the benefit of the last dollar spent at least equals the
cost , including excess burden, of each dollar raised. Setting
fiscal policy in line with that criterion will be the challenge
of
the
1990s
.
92
Q5 . You've written that the expansion in the 1980s
"revitalized " the economy . But annual income growth of low and
moderate income families, the bottom 60% of the income
less than 1% per year . Onl y the
distribution, was anemic
ric h did well . Should we be happy with those results?
!
A5 .
Senator, I completely share your concern about the slow
pace of real incomegrowth for low and moderateincome families
in America . In my opinion, we should be neither happy nor
complacent about the results. In The Growth Experiment, I
argued in Chapter 16 , entitled "Fairness for Families", that
moderateincomeworking families
, and particularlyworking
women
,
are still overtaxed, in spite of the substantial tax
rate reductions
of the 1980s .
To help tackle this problem, I recommended in Chapter 19
that we increasethe personalexemptionto $6000 for taxpayers
and $3000 for dependents and couple it with a more generous
child
deduction
care
.
In addition, being particularly
concerned with the affordability of housing for middle income
families, I recommended the substitution of limited
deductibilityof home mortgageinterestpayments(up to
$10,000) for all taxpayers
, for the currentrules allowingfull
deductibility for those who itemize. Under current law ,
itemizers tend to be more well to do , thus skewing the benefits
of the home mortgage interest deduction toward the upper end of
the income
scale .
There are many reasons for the low growth of real family
in recent decades . Some are demographic, some
incomes
economic
.
I believethat the measuresI proposedin The Growth
Experiment, while not a panacea, will go far to meeting the
needs of low and moderateincomeworking familiesin America.
93
26 .
The Administration proposes that deposit insurance
premiums for banks be capped at 30 basis points . If w e a ss ess
banks immediately to replenish the fund and cover what could be
very high losses in the next few years , we run the risk of
further weakening the banking system in what is already a
diff ic ult time . But if we have a cap and set the cap too low ,
we increase the risk unnecessarily that taxpayers will
eventually foot part of the bill for bank failures . A r ece nt
analysis by the CBO suggests that banks do have the capacity to
pay more than 30 basis points , if necessary . Do you su pp ort
the Administration's 30 basis point cap, and, if so, by what
analysis do you choose 30 basis points rather than some other
n umb er ?
6 . There clearly is a trade-off involved here, as your
question quite correctly notes . Unfortunately, even before one
gets to the difficult political judgment about the
appropriateness of placing an additional burden on the
taxpayers, one is confronted with the impossibility of
predicting the precise effects of any given premium level on
the deposit insurance fund . No static comparison of the
presentlevel of bank earningswith alternativeinsurance
charges
even if performed at a detailed, disaggregated level
can yield a reliable estimate of the effects on either the
banking system or the insurance fund . It is to be expected
that a significantchange in the cost structureof banking,
such as would be involved in a major further increase in
premiums, would prompt a variety of adjustments in liability
structures and the pricing of loans, deposits and other banking
services .
The competitiveeffectson banks vis-a-vis other
financial intermediaries and markets would affect , in turn , the
growth of the insurance base and thus the net revenue to the
insurance fund . In the worst case , higher insurance premiums
would increasethe numberof bank failuresenough to add
significantly to costs faced by the fund.
that can simulate
Under
There
is
no
model
all of these variables .
the circumstances
, I think
the best that can be done
is to recognize a couple of simple and obvious facts. First ,
our financial markets are sufficiently competitive that a hike
in insurancecosts probablycannot be passed throughfully to
bank
customers
.
That competitive limitation on the pass
throughof additionalcosts probablyis particularlyrelevant
to the minority
of banks
that are not now in a strong
position ,
with deep capital and healthy earnings; this suggests that the
adverse effects on the banking system of a large increase in
depositinsurancepremiumsmight be greaterthan any simple
aggregative analysis would imply . Second , deposit insurance
premiums have only recently been raised sharply from what they
were just a couple of years ago , and we have not had an
opportunity to observe the impact of that change ; it would seem
prudentto assess that experiencebefore going very much
further .
Whether 30 basis points is just the right number to
set as the cap , I don't think anyone can say . But I believe
94
there is a virtue in settingsome cap, to providethe banking
industry, and investors and others who must assess its
prospects
, with a measureof certaintyabout the operating
environment
for at least a span of time .
At a recent hearing, Paul Volcker pointed out that the
argument for merging banking and commerce depended on an
27 .
assumption that capital market imperfections prevented the
economically optimal flow of capital into banking . He d oubte d
that and questioned whether nonfinancial firms would want to
make portfolio investments in banks without trying to capture
other benefits that the firewalls were designed to prevent . Do
you disagree?
A7 . This is , to be sure , a comple x iss ue , and I under stand
Ch airma n Volc ker's concern s . However , I would approach the
question somewhat differently .
In
a
sens e ,
the existing
limitations on the ownership of banking firms by commercial
enterprises are themselves a capital market imperfection ,
impeding a flow of investment into the banking industry .
It
is
quite possible that, if the barrier were lowered, commercial
firms would be inclined to make such investments . It s eem s to
me a reasonable approach to leave this question to be answered
by the mar ke t , so long as we are comfortable that we have
erected adequate firewalls and other protections to avoid
abuses or undesirable access to the federal safety net , as t he
Tre asur y pro po sal seeks to do .
If com merc ial firm s choo se not
to avail themselves of this opportunity , we'll end up in
essentially the same position we're in now, having lost
nothing . If they do cho os e to inve st , th en we may find that
the resulting firms , by being able to provide a broader range
of serv ices , can more effectively meet the needs of the public ;
whether such economies of scope actually would be realized is
uncertain
, but again would be something for the market to
e
d et e r mi n
.
95
Q8 .
You opposed the 1986 changes in capital gains taxation,
and in a 1987 article projected sharp reductions in revenue
sou rce . Your projection for 1987 was 40% below
from that
actual receipts , and you were 50% low for 1988 . Has t hat
caused you to revise your thinking about the revenue effects of
changes in capital gains tax rates?
A8 .
The 1987 article to which you refer , "Capital Gains Taxes
Und er the Tax Reform Act of 1986 : Revenu e Esti mates
Und er
Various Assumptions , was a technical piece on tax simulation
issues relating to capital gains . A total of 14 separ ate
e estimate series were constructed reflecting differing
revenu
assumptions on the nature, timing, and magnitude of taxpa yer
response to the 1986 tax rate changes , including a "baseline "
or no -tax-change estimate .
You are correct
to note that the estimates , which
were
based on an another work of mine , "Capital Gains Rates ,
Realizations , and Revenues ", were well below
the actual
level
Methodologically, the revenue estimating
process can be separated into two parts . First , a baseline
revenue estimate was generated based on assumptions about the
likely rate of growth of capital gains realizations and
receipts. This baseline assumed no changes in tax law and
consequently, no tax-induced changes in taxpayer behavior .
Second, different sets of behavioral assumptions were applied
to the baseline to see what effect they had on the expected
level of realizations and the consequent impact on tax revenue .
A careful review of this process and the data that has emerged
since the paper was written indicates that the principal reason
for the discrepancy between predicted revenue and actual
revenue can be found in the first step : creating a baseline
revenue
estimate
.
By and large, the discrepancy does not seem
to be caused by the behavioral assumptions used .
of
revenue
collected
.
At the time the paper was written in early 1987 , the
latest detailed tax model data available was the 1983
Individual Tax Model File Public Use Sample . In order to
create a baselinelevel of capitalgains for later years,
an
average annual rate of capital gains growth of 9.6 percent was
assumed .
(A detailed description of the assumptions appears on
pages 495-497 of the paper . ) In fact , realizations grew at an
annual rate of 18.2 percent , nearly twice as fast as predicted ,
and my estimate of baseline realizations
for 1987 was reached
in 1985 . Thus the forecast baseline level of capital gains was
out of date long before the tax law change was implemented.
Given the data we have available today , I would conclude
that of the 14 sets of assumptions examined in the paper , the
one that best fits our experience seems to have been the
Prospectiveversionof the Auten-clotfeltermodel, which was
particularlyeffectiveat predictingthe enormousbehavioral
96
response in 1986 to the prospect of higher capital gains tax
rates
the next year .
In light of these results , the answer to
your question is yes . I have revised my thinking on the
revenue effect of capital gains tax cuts somewhat . The "Auten
Clotfelter" behavioral model implies a revenue maximizing
capital
gains
tax rate of 21 % .
By contrast , the model
I used
as the "Lindsey " model in the paper implied a revenue
maximizing tax rate of 18% . I would thus revise upward my
estimate of the revenue maximizing tax rate for capital gains .
98
Q10 . In your book published last year entitled The Growth
Experiment : How
the New
Tax Policy
is Transforming
the U.S.
Economy, you state that the tax cuts of the early 1980's "made
the
U.S.
once again the leader of the world economy ."
One of your colleagues from Harvard, Professor Benjamin
Friedman
takes
a different
view of the tax and economic
policiesof the ReaganAdministration
in his book entitledDay
of Reckoning. He contends
in that book
that the tax cuts
of
the early 1980's led to our massive budget deficits which we
financein part by foreignborrowing
. These budget deficits,
in his view , contributed to our massive trade deficits . As a
consequence whereas in the early 1980's we were the largest
creditor nation in the world , we are now the largest debtor
nation . He contends this development will undermine our
nation's political and economic leadership role . He states for
example on page 13 of his book :
"World power and influence have historically accrued to
creditor
nations
Over time the respect
deference, that America had earned as
and even
a world
leader
will
graduallyshift to the new creditornationsthat are able
to supply resources where we cannot , and America's
influence over nations and events will ebb . "
Why do you contend then that the policies of the Reagan
Administration have given the U.S. leadership of the world
economy ?
A10 . I fully share your concern about the size of the U.S.
budget deficit and the desirability of increasing our nation's
saving rate . There is no question that our economy would be
better off today had we saved and invested more in the past ;
there is no question that we will be better off in the future
if we invest
more
today .
My former colleague Benjamin Friedman, to whom you
referred in your question , and I debated at the University Club
here in Washington
last July .
To the surprise
of most of those
present, Ben and I agreed on virtually everything . We had
similar estimates of the supply and demand side effects of the
Reagan tax cuts , their effect on the economy , and policy
prescriptions for the economy today . Specifically, we agreed
on those aspects of the 1980s which were successful, and those
which
were
not .
You are correct in noting the deterioration of the net
creditor position of the United States during the 1980s . The
key question is whether the capital imported during the 1980s
was wisely used . Gross private domestic investment rose as a
share of GNP during this period. Some of this capital inflow
also financed public sector capital formation, in the form of
defense capital purchases and R &D . It remains an open question
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