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s. HRG.

102-470

NOMINATIONS OF SUSAN M. PHILLIPS, PAUL G.
WONNACOTT, AND DAVID F. BRADFORD
HEARING
BEFORE THE

COMMITTEE ON
BANKING, HOUSING, AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SECOND CONGRESS
FIRST SESSION
ON
NOMINATIONS OF:
SUSAN MEREDITH PHILLIPS, OF IOWA, TO BE A MEMBER OF THE
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM FOR THE
UNEXPIRED TERM OF 14 YEARS FROM FEBRUARY l, 1984;
PAUL G. WONNACO'IT, OF MARYLAND, TO BE A MEMBER OF THE
COUNCIL OF ECONOMIC ADVISERS;
DAVID F. BRADFORD, OF NEW JERSEY, TO BE A MEMBER OF THE
COUNCIL OF ECONOMIC ADVISERS
OCTOBER 25, 1991

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

U .S. GOVERNMENT PRINTING OFFICE

50-460"'

WASHINGTON : 1992

For sale by the U.S. Governme nt Printing Office
Superintendent of Documents. Congressional Sales Office. Washington. DC 20402

ISBN 0-16-037636-X

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
DONALD W. RIEGLE, JR., Michigan, Chairman
ALAN CRANSTON, California
JAKE GARN, Utah
PAULS. SARBANES, Maryland
ALFONSE M. D'AMATO, New York
PHIL GRAMM, Texas
CHRISTOPHER J . DODD, Connecticut
ALAN J . DIXON, Illinois
CHRISTOPHER S. BOND, Missouri
JIM SASSER, Tennessee
CONNIE MACK, Florida
TERRY SANFORD, North Carolina
WILLIAM V. ROTH, JR. , Delaware
RICHARD C. SHELBY, Alabama
PETE V. DOMENICI, New Mexico
BOB GRAHAM, Florida
NANCY LANDON KASSEBAUM, Kansas
JOHN H. CHAFEE, Rhode Island
TIMOTHY E. WIRTH, Colorado
JOHN F. KERRY, Massachusetts
RICHARD H. BRYAN, Nevada
STEVEN B. HARRIS, Staff Director and Chief Counsel
LAMAR SMITH, Republican Staff Director and &onomist
PATRICK J. LAWLER, Chief &onomist
(II)

CONTENTS
FRIDAY, OCTOBER 25, 1991
Page

Opening statement of Chairman Riegle .............................. ........................................
Opening statements of:
Senator Sarbanes............................................................. ... .......... ............................
Senator Dixon ........................................... ............. ..... ............. .................................
Senator Sasser...........................................................................................................
Senator Sanford ....................................... .................................................................
Senator Shelby............. .. ...........................................................................................
Senator D'Amato ......................................................................................................

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4
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WITNESSES

U.S. Senator Charles Grassley ......................................................................................
Susan Meredith Phillips, of Iowa, to be a Member of the Board of Governors
of the Federal Reserve System for the unexpired term of 14 years from
February 1, 1984 .......................................................................................................... .
Prepared statement ................................................................................................ .
Response to questions raised by Senator Sarbanes ...........................................
Response to written questions of:
Senator Riegle .................................................................................................. .
Senator Sasser .................................................................................................. .
Senator Sanford ............................................................................................... .
Biographical sketch of nominee ........................................................................... .
Paul Wonnacott, of Maryland, to be a member of the Council of Economic
Advisers ......................................................................................................................... .
Prepared statement ........................................................ .........................................
Response to written questions of:

t~::~ f!~~~~l::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::

Senator Garn ... ..................................................................................................
Biographical sketch of nominee ................................................... ... ..................... .
David F. Bradford, of New Jersey, to be a member of the Council of Economic
Advisers ..........................................................................................................................
Prepared statement .................................................................................................
U.S. Senator William Bradley .......................................................................................
Response to written questions of:
Senator Riegle .................................................................................................. .
Senator Sanford ............................................................................... ................ .
Senator Garn .................................................................................................... .
Biographical sketch of nominee ..............................................._. ........................... .

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NOMINATIONS OF SUSAN MEREDITH PHILLIPS,
OF IOWA, TO BE A MEMBER OF THE BOARD
OF GOVERNORS OF THE FEDERAL RESERVE
SYSTEM FOR THE UNEXPIRED TERM OF 14
YEARS FROM FEBRUARY 1, 1984; PAUL WONNACOTT, OF MARYLAND, TO BE A MEMBER
OF THE COUNCIL OF ECONOMIC ADVISERS;
DAVID F. BRADFORD, OF NEW JERSEY, TO BE
A MEMBER OF THE COUNCIL OF ECONOMIC
ADVISERS
FRIDAY, OCTOBER 25, 1991
U.S. SENATE,
CoMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS,

Washington, DC.
The committee met at 11:05 a.m., in room SD-538 of the Dirksen
Senate Office Building, Senator Donald W. Riegle, Jr. (chairman of
the committee) presiding.
OPENING STATEMENT OF CHAIRMAN DONALD W. RIEGLE JR

The CHAIRMAN. The committee will come to order.
I have an opening statement that I will make in due course, and
then call on Senator Sarbanes and Senator Dixon.
Senator Grassley is here with us and wants to make some introductory comments to one of our witnesses.
So let me call on you, Senator Grassley, for your remarks, and
then we will excuse Ms. Phillips until we have made our statements, and then we will proceed.
We are delighted to have you here with us this morning.
STATEMENT OF CHARLES GRASSLEY, U.S. SENATOR FROM THE
STATE OF IOWA

Senator GRASSLEY. Thank you very much, Mr. Chairman, and
Senator Sarbanes, and Senator Dixon, as well.
It is my pleasure to introduce a constituent of mine, Dr. Susan
Phillips. She is President Bush's choice for a seat on the Federal
Reserve Board.
Now Dr. Phillips has already been confirmed by the Senate on
three previous occasions:
Once as Commissioner of the CFI'C; and
Twice as Chairman of the CFI'C.
(1)

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So I am sure_that _you already know a lot about Dr. Phillips, but
she has-espec1ally m our State-distinguished herself at the University of Iowa for almost 20 years.
She h~s. progre~sed froi:n being an assistant professor to her current pos1t10n of vice president for Finance and Universal Services
and also as a full professor of Finance in the University's Colleg~
of Business.
Her present capacity is as chief financial officer of this major research university and has required that she be involved in major
debt financing and business operations of a nearly $1 billion a year
enterprise.
Considering the economic conditions of recent years and the
budget restraints of State governments, this has been a particularly difficult challenge for anyone in that position, but she has carried out those duties very well.
Her record of publication is equally impressive. Dr. Phillips has
written over 40 pieces that have been published in magazines, journals, and books.
Additionally, she has testified before numerous committees and
decision-making bodies, and served on over a dozen boards, and
some of these boards, Mr. Chairman, have been in the private
sector.
This has given her an opportunity to feel the pressures that are
facing today's business people and the impact of the economy upon
our business people.
Dr. Phillips distinguished herself through her accomplishments
at the Commodity Futures Trading Commission from 1981 to 1987.
As a Commissioner for 4 years, she was known as a proponent of
industry growth and innovation, and was a firm believer in selfregulation.
She was also active in the reauthorization of the Commodities
Futures Trading Act.
Some of the regulatory initiatives strengthened the enforcement
and oversight processes of the CFTC.
So, Mr. Chairman, without going on-and there is a lot more
that could be said about this constituent of mine and the President's nominee, I think the fact that she has been before the
Senate now this fourth time for confirmation speaks better than
anything I can say about her qualifications.
I am pleased to present to this committee and to the U.S. Senate,
the President's nomination of Dr. Phillips to the Federal Reserve
Board, and I am confident that she will be successful in her service.
Thank you.
·
Senator DIXON. Mr. Chairman, may I simply say for the record
that this Senator believes that Ms. Phillips as Chairperson of the
CFTC was tough but fair. That is a quality we ought to have from
people in public service.
Senator RIEGLE. Thank you very much, Senator Grassley.
Let me excuse you at this time, unless you wish to stay, and you
are of course invited to stay.
Let me now indicate what we will be doing this morning. I might
just say that we are a little late in starting because I was down at
the White House this morning at the signing of a consortium
agreement between the three domestic auto companies-General

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Motors, Ford, and Chrysler, and the Federal Government-the Department of Energy-to work together on a consortium effort to develop an advanced battery that can power cars and vehicles here in
the United States.
It is a very important example of business and Government
working together and attempting to upgrade the technology and
move the United States ahead of foreign countries in this area.
So it is a very important event, and it is the occasion for us starting about 5 minutes behind schedule today.
We have three Presidential nominees for very important economic policy positions. Clearly the state of our economy is poor.
In today's USA Today, there are two lead stories. One says: "Two
Reports Deepen Gloom for Economy," the lead story, and then underneath that it says: "Stock market sags as optimism fades."
There is also data out on the rise in new unemployment claims,
and there is a lot of dismal economic news out there. Clearly the
economic strategy that has been employed by the administration is
not working. We need to get into that today in some detail, and we
will.
After a year-and-a-half of anemic growth, we slipped into a recession 15 months ago. While the economy has shown some limited
signs of life in the spring, there is a growing consensus that no
solid recovery has yet begun, and we may in fact be starting down
on a second leg in this recession.
The unemployment rate has been holding steady at the highest
levels that we have seen in 5 years. But in my own home State of
Michigan, the rate has gone up to 9.7 percent.
Nationwide, we have well over a million workers who have been
unemployed now for longer than 6 months, and none are receiving
extended benefits.
Housing starts this years are averaging well below 1 million
units for the first time since 1946. Domestic auto sales remain
stuck at an annual rate of just 6 million cars. That is a devastating
level.
You have seen the domestic auto companies in combination lose
now a figure approaching $10 billion through the latest quarter.
Bank loans have also declined over the past year for the first
time since the mid-1970's.
The nominees before us today will have much to say about whatever policies may be used to get the economy back on track.
I hope they have some specific plans, because that to me is the
first requirement to come forward in behalf of any of these positions.
First we will have Ms. Susan Phillips who was just introduced by
Senator Grassley and who has been nominated for the Federal Reserve Board, to be followed by Paul Wonnacott and David Bradford,
both for the President's Council of Economic Advisers.
We will be starting with Ms. Phillips.
Let me say that, Ms. Phillips, you have a strong background in
financial regulatory policy issues and Government experience.
You were head of the CFTC for 4 years, and a Commissioner for
2 years before that.

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You worked 2 years as a Brookings Fellow at the SEC, and you
have been a Finance Professor for 10 years with a long list of published articles and professional papers.
You have now been nominated to fill the remaining portion of a
term ending in 1998 as Governor of the Board of Governors of the
Federal Reserve System.
The Fed of course has major regulatory responsibilities, and I
think we will want to explore with you how your research and
your experience have shaped your views on regulation in general,
and specifically on some of the issues that are before the Fed Board
at this time.
The Fed's most important job, however, is monetary policy.
Given the current shape of our economy, decisions by the Fed on
interest rates are particularly critical. Your record, while extensive
on the regulatory side, provides little indication as to how you
would approach the single most important job at the Fed, namely
monetary policy issues.
So this morning we will want this hearing to go into that area in
some detail.
Let me now call on Senator Sarbanes.
OPENING STATEMENT OF SENATOR PAULS. SARBANES

Senator SARBANES. Well thank you very much, Mr. Chairman.
On Wednesday, the Federal Reserve released an economic survey
reporting that the American economy was weak, or growing slowly
in nearly every region of the country.
The report by the Fed found that retail sales have been virtually
flat in recent weeks, and that factory output was growing, but
more slowly than before.
The report also found that auto sales and bank lending, which
have been performing poorly in recent months, remained weak
across much of the country.
Now only yesterday, as reported in this morning's paper, the
Commerce Department announced that orders received by manufacturers last month for long-lasting durable goods such as cars,
aircraft, steel, and machinery fell 3.2 percent. This was the second
monthly drop in a row.
The previous month's figures were revised from a 3.9 percent
drop to a 4.1 percent drop.
So in other words, it was even worse than had previously been
estimated. We have now had two successive months of drop in the
durable good orders, 4.1 percent and 3.2 percent.
In the paper in The New York Times this morning, analysts are
quoted, and I quote:
If you wanted to sift the tea leaves in the most optimistic way, there is not much
to make you feel good, said Joel Prankin, an economist with Lawrence H. Meyer &
Associates, a St. Louis forecasting service.

John Albertine who heads a forecasting service here in Washington said:
September orders for durables reveal a recovery that is still no the skids and
shows few signs of strength.

Aud an economist with NorWest Corporation in Minneapolis
said, and I quote:

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This gloomy looking figure, in conjunction with other statistics such as higher unemployment claims, indicate the sustainability of the expansion is in question.

Now that reference to higher unemployment claims is of course
the other major story in this morning's paper headed, "Troubling
Trend in Jobless Data."
The number of first-time applications for unemployment benefits climbed 6.8 percent to 452,000 in the second week of October, the highest level since May, the
Labor Department reported today. This was in this morning's paper.
There is evidence that the job situation is getting worse again, commented Robert
A. Bruska, Chief Economist for NECO Securities in New York. There are some real
signs of deterioration.

Now this jump in the initial weekly unemployment claims is of
course a very, very serious indicator.
What has happened is, whereas the moving average had dropped
somewhat in August, off the August figures, it is now climbing
back up again. And this latest weekly report of the 452,000 is, as
this article indicated, the highest since last May.
Now, Mr. Chairman, I submit that these reports are further evidence-the Federal Report, the Consumer Durable Goods Report,
the Durable Goods Report from the Commerce Department, and
this Unemployment Claims Report from the Labor Department,
are further evidence that the U.S. economy has not turned the
corner, as the President is given to saying, something we have been
promised since the beginning of this years.
We were told that this is a short and shallow recession. Well, it
is nothing of the sort. I mean, this recession now in length almost
tracks-almost equals the two longest post-World War II recessions
that we have experienced. It is just shy by a couple of months.
It is now "shallow" in terms of its impact on the labor force.
My own view is that we have a very serious situation on our
hands.
In that regard, this hearing comes at an opportune time-these
hearings. I mean, we have before us now a nominee for the Federal
Reserve Board, critical in the formulation of U.S. economic policy,
and I hope to go into that in some detail with the nominee here
this morning.
Then we will have before us the nominations of two respected
economists, Paul Wonnacott of the University of Maryland, and
David Bradford of Princeton for membership on the Council of Economic Advisers to join Michael Boskin there as the three-member
Council of Economic Advisers.
Both of these men are respected within the profession, but I
want to explore with them as well, obviously, the current economic
situation in which we find ourselves, how they perceive it, how
they analyze it, and what might be done about it.
So, Mr. Chairman, while we are late starting, I assume we will
go on for some time. I do not think we are going to be interrupted
by votes on the Floor.
I will have to excuse myself at one point just for a short period of
time for a meeting that had earlier been arranged before this meeting was scheduled, but I hope to be able to both engage in an extended dialog with both Ms. Phillips and with the two members
about our economic policies.
The CHAIRMAN. Senator Sarbanes, thank you for your comments.

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Let me just say, it is my intention that we will continue. I don't
foresee even breaking for lunch. I want to go right on through and
take whatever time is needed today.
If we cannot finish today, we will go on another day. But we are
going to get into these issues thoroughly.
OPENING STATEMENT OF SENATOR ALAN J. DIXON

Senator D1xoN. Well, Mr. Chairman, I fully agree with the very
powerful statement just made by my friend, the distinguished
Senior Senator from Maryland.
I believe we are considering these three nominees to important
economic posts in our Government at a time of real economic peril
in our country.
A couple of days ago, Mr. Chairman, I had seven contractors in
my office from around the country. They all said their business
was now worse that it was even a month ago when I spoke to the
Associated General Contractors in St. Louis, and their business was
terrible then.
Unfortunately, this is not an isolated example.
It is not limited to the construction and real estate development
sectors of our economy.
Business is bad, and business is getting worse. Working Americans are anxious about their future. They are justifiably worried
about the security of their jobs and their future.
Unemployed Americans are even more anxious. They do not
know how they are going to make ends meet, and they do not know
how or when they are going to find a new job, particularly jobs
that pay enough to meet their family's needs.
Consumers have no confidence. The banking system is in trouble.
Business is as pessimistic as consumers. And what makes all of this
worse is that this is a recession that is unlike any that we have
ever experienced in the past. This country is drowning in debt.
Government, business, and consumers are all in debt up to their
eyeballs. As a country, we seem to have mortgaged our future.
That means that the standard economic remedy using Government
deficit spending to get more money into the economy to get the
country moving again may not work this time. Think of it.
We are experiencing the largest single year Federal deficit in our
history, yet the economy is weakening, not strengthening. The deficit is not making the economy better; it may even be making it
worse. And as terrible as this recession is, it is not the only economic problem we face. Unfortunately, our fundamental economic
problems will not be solved even when we eventually come out of
this recession. The administration likes to point with pride to the
fact that until now this country enjoyed steady economic growth
since the 1982 recession.
Unfortunately, Mr. Chairman, the average American did not
seem to benefit from those eight so-called good years. The truth is
that the average American has not benefited. Many families now
have to have two wage earners to equal a standard of living that
their parents achieved with only one wage earner. And even with
two incomes, an increasing number of our citizens cannot achieve
what every American family most wants. They cannot afford to

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buy a home of their own. The economy may have grown, but their
real income has declined. More and more working Americans are
being priced out of the American dream. What we need is a change
of direction. What is needed is leadership.
Americans are justifiably concerned about their future and their
children's futures. They need their Government to act. They expect
their Government to act. They are entitled to have their Government act and confront these problems.
Government may be part of the problem but, Mr. Chairman,
Government can also lead the way to solutions. That is why we
elect a President, and that is why you and I are in public service.
Government, Mr. Chairman, has to meet this challenge. I say we
must act.
The CHAIRMAN. Thank you very much, Senator Dixon. Very powerfully said.
Senator Sasser, Chairman of the Budget Committee.
OPENING STATEMENT OF SENATOR JIM SASSER
Senator SASSER. Thank you very much, Mr. Chairman.

I just want to join in some of the statements that have been
made here this morning, particularly the statement made by the
distinguished Chairman of the Joint Economic Committee, Senator
Sarbanes of Maryland, who is a distinguished economist of some
note in his own right other than being a U.S. Senator. Also, the
statement made by the Senator from Illinois, Mr. Dixon.
The three nominees that this committee will consider today are
going to hold positions of great influence, positions of great influence particularly on the part of Ms. Phillips, for many, many years
to come, if she is confirmed by the Senate. Each of these nominees
are going to be responsible for assisting our economy in its efforts
at recovery. I think it is important that we know where each of
them stands on the important economic issues that are before the
country today. Now, Mr. Chairman, it has been almost, or really
over almost a year-and-a-half since this recession began. It began in
July 1990. The administration finally acknowledged in December
1990 that we did have a recession, but at the same time Dr. Boskin
said the recession is over, or will be over very shortly. We are now
on the threshold of 1992 still in the grip of a recession. Indeed, I
would submit that the economic future is very grim.
Statistics included in the Federal Reserve's Beige Book, released
this Wednesday, depict a very sluggish economic to say the lease.
This week, new signs of weakness emerged in two key sectors-as
Senator Sarbanes has indicated, manufacturing and exports. Housing starts were down last month. Over the past 2 months, consumer spending has remained flat. It shows literally no signs of improving. The consumers are broke. These consumers account for
two-thirds of economic activity, and they don't have the means or
the confidence, if they had the means, to lead this economy out of a
recovery.
It is no surprise that a recent poll by The Washington Post and
the American Broadcasting Corporation Network show that an increase in the number of Americans who think things are getting
worse economically is up from 41 percent to now a majority of the

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American people by 56 percent who think this economy is getting
worse. The lack confidence in it. They think the country is moving
in the wrong direction. Now I think if we continue on the present
course that this administration has charted, our hopes of recovery
are slim any time in the near term, or perhaps even the long term
for that matter.
We have waited for the Federal Reserve to take action, I think
months after they should have, still fighting the battles of inflation
that have been won sometime ago. They did begin easing on the
rates, but I think too late. We have waited on the administration
and the President has done absolutely nothing. I think the Fed has
not done enough, and this administration has simply ignored the
economic problems of this country.
Now the President's hold that this economy is going to do an
abrupt about-face simply does not square with economic reality.
The President's Hooveresque view that prosperity is just around
the corner does not put food on the table for millions of Americans
who want to work but cannot find jobs. That is a very heavy price
indeed to pay for this administration's economic record.
I might say, parenthetically, Mr. Chairman, that this administration has compiled the worse GNP growth record of any President
since World War II.
If we might just view a chart here, it might be helpful for our
colleagues and those who are going to testify this morning to look
at this chart.

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ECONOMIC GROWTH RECORDS OF PRESIDENTS
DURING POST-WAR ERA

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AVERAGE ANNUAL REAL PER CAPITA GNP GROWTH(%)

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Senator SASSER. This is the economic growth record of all Presidents beginning with Kennedy and ending-well, actually beginning with Truman, and ending with President Kennedy. It is the
average annual real per capita GNP growth.
This is what is used traditionally by economists to chart how
well Mr. and Miss and Mrs. America are doing economically.
H we look at this chart, we find that the administration, under
the administration of John Fitzgerald Kennedy, had an average
annual real per capita GNP growth that stood at 3.5 percent. He
was the leader of the post-war Presidents, followed closely by President Johnson at 3.3 percent real growth. President Reagan 2.1 percent. President Truman 2 percent. And President Carter, whom we
have heard defamed I think by many over a period of time, he
stood at 1.7 percent average annual real per capital GNP growth.
President Ford, 3/ioths of 1 percent. President Eisenhower-and I
well remember those recessions in the mid-1950's-1/ioths of 1 percent. George Bush, the only President since World War II with a
negative average annual real per capita GNP growth at
negative-3/ioths of 1 percent.
Now, Mr. Chairman, that is the economic performance of this administration over the past 3 years. To make matters worse-this
President has gone so far as to snub the very individuals who need
help the most.
Members of this committee under the leadership of the distinguished Chairman of the Joint Economic Committee have fought
repeatedly to extend unemployment benefits to these Americans
who have exhausted them because they have earned them. They
have paid for them. Also, because we need some modicum of stimulus in this economy.
The President has seen fit to veto on two occasions the efforts of
this Congress in a bipartisan way to extend unemployment insurance compensation benefits to the millions of Americans who have
exhausted them.
Now we have before us this morning individuals who I think are
going to have significant impact on the economic thinking of this
administration.
I am pleased that we do have two very distinguished economists
coming before us this morning, and Ms. Phillips is going to have a
very significant impact on the policy of the Federal Reserve Board
in the coming years, if she is confirmed. So I look forward to hearing their statements this morning, Mr. Chairman. We are considering critical appointments, and I shall be here as long as time permits.
Thank you.
The CHAIRMAN. Very good. Thank you, Senator Sasser.
I have statements from Senators Sanford and Shelby for insertion in the record.
OPENING STATEMENT OF SENATOR TERRY SANFORD

I would like to thank the Chairman for holding this important
hearing this morning. Concerns over the State of the Nations economy are mounting. financial stories have moved from the newspaper's business section to the front page. "Credit crunch" has

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become part of our everyday vocabulary. It is more important than
ever that we ensure that the people placed in supervisory and advisory positions are effective and objective. I commend the Chairman's efforts to thoroughly examine the qualifications of the nominees that come before this committee.
The primary task of the Council of Economic Advisers is to analyze the various segments of the Nation's economy and make policy
recommendations to the President. The importance of this position
is increasing daily. Individuals who serve on this Council must be
able to objectively communicate the State of the economy and
make policy recommendations to the President that truly promote
economic growth and stability. I am concerned that the President
at times seems to view the nation's economy through a pair of rosecolored glasses. Unemployment lines are growing rapidly and there
is no food on the table in many homes, it is obvious that the economy is suffering tremendously. Maybe he is not receiving all the
facts. I want to ensure that his advisers are capable of giving him
honest objective assessments, not false rosy pictures.
The Federal Reserve Board is also charged with promoting
growth and productivity. The main objective of the Board is to develop monetary policy by responding to the needs of the country.
The Federal Reserve Board was carefully designed to represent the
diversified interest of the Nation. The system is divided into seven
geographical districts. The Board has seven members, each of
whom represent a specific area of the country. It is imperative that
the Board maintain adequate geographical distribution and representation to initiate a balanced approach to handling the economy
of the entire country. I am very concerned that every nominee possess professional contacts, work experience in, or have close knowledge of the business or financial communities within the district
from which they are nominated. A nominee to the Board of Governors should possess the tools, background, and insight to make a
significant and unique contribution to the Board.
Again, I want to thank the Chairman for holding this hearing. I
look forward to hearing the comments of the nominees.
STATEMENT OF SENATOR RICHARD SHELBY

Mr. Chairman, I appreciate your holding this morning's hearing
so that we might expedite the confirmation of these nominees.
Each of this morning's nominees has been selected to serve in a
most important position, particularly in this period of economic recession.
I will be brief because it is the witnesses that we are here-to-hear
and my comments apply to all of the witnesses.
Each of you appears well-qualified. You possess excellent academic credentials, from some of this Nation's most prestigious universities.
In the positions for which you have been nominated, you will be
responsible for guiding the state of the U.S. Economy. Consequently, your actions, the policies you recommend, will affect the lives of
each of this country's 250 million citizens.

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We are now in a recession. Hundreds of thousands of Americans
are without work. Families are without money for basic necessities
such as food, heating oil, and rent.
As members of the Council of Economic Advisers and the Board
of Governors of the Federal Reserve, you will move in very distinguished circles, just as you did in the prestigious universities that
you come from. You will attend State dinners, play tennis at the
White House, and represent this country in powerful circles
abroad. Within the marble buildings, behind the gates and high
walls of powerful Washington, it is very easy to lead an insular
life, forgetful of the problems of average Americans.
It is important for all of us in this city to remember that not all
Americans are as fortunate as you or I or other members of this
committee. It is the jobless, the homeless, the single mothers trying
to provide for their children that I would encourage you to keep in
mind as you help shape this Nation's economy. If you err, err on
the side of growth. Err on the side of economic opportunity for everyone. That is all I would like to say at this time, Mr. Chairman. I
congratulate each of the nominees on their selection and I trust
that they will do a good job.
The CHAIRMAN. I think it is fair to say, after the statements by
the members who carry important duties in economic policy matters, that this administration has the weakest economic team of
any that I have seen.
I think it is borne out by the performance of the economy. I
think the real question here is: Will you strengthen that economic
team? Will you make it stronger, and sounder, and more active,
and better than it is now? If so, then I think that is a very important consideration in your favor. If it is going to be more of the
same, or, the view that "if it ain't broke, don't fix it," then, quite
frankly, you are not the people for these jobs, in my view.
We need action, and we need some response in this economy, and
not just a lot of shuffling of feet and making of excuses, and the
notion that somehow if we are just patient, everything will work
out fine. It is easy for people who have jobs, or who have tenure, to
take that position. In my home State of Michigan, the unemployment rate today is 9.7 percent. I have 170,000 workers in my State
who have been unemployed over 6 months who desperately need
extended unemployment compensation benefits. In every other recession under Presidents of both Republican and Democratic parties, we have provided extended unemployment compensation benefits.
What we see today is an administration unwilling to do that,
with no plan to get this economy moving. I want to hear what
ideas you have, what sense of urgency you have; and that is going
to be the thing that I think is going to matter both to your nominations and to the country. These are not figurehead jobs. These are
some of the most important jobs in our Government today.
Let me now ask you to stand, Ms. Phillips, and take the oath if
you would, please. [Dr. Phillips stands and raises her right hand.]
The CHAIRMAN. Do you swear that the testimony you are about
to give is the truth, the whole truth, and nothing but the truth, so
help you God?
Dr. PHILLIPS. Yes, sir, I do.

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The CHAIRMAN. Do you agree to appear to testify before any duly
constituted committee of the Senate?
Dr. PHILLIPS. Yes, I do.
The CHAIRMAN. Very good.
Let me welcome you again this morning. You have had very complimentary comments made first by Senator Grassley, a respected
Member of the Senate, and nice comments by Senator Dixon, as
well.
You bring an impressive personal resume with you today.
Do you have members of your family here that you would like to
introduce to the committee? If so, now would be the time to do
that.
Dr. PHILLIPS. Yes, sir. Thank you, very much.
My Aunt and Uncle, Mary and Alan Loew from Maryland are
here.
The CHAIRMAN. Very good. We welcome them, and we are delighted that they are here.
Let me invite you now to make an opening statement.
OPENING STATEMENT OF SUSAN MEREDITH PHILLIPS, OF IOWA
TO BE A MEMBER OF THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM FOR THE UNEXPIRED TERM OF 14
YEARS FROM FEBRUARY 1, 1984

Dr. PHILLIPS. Thank you very much.
Chairman Riegle, members of the committee, I am pleased to
appear before you today as President Bush's nominee to serve on
the Board of Governors of the Federal Reserve System.
I was deeply honored when President Bush asked me to serve in
this capacity. If I am confirmed, I will commit myself to furthering
the Federal Reserve's mission of preserving the stability and
growth of the U.S. economy in an environment of reasonable price
stability.
Mr. Chairman, I want to particularly thank you for scheduling
this hearing so quickly following my nomination.
I know that this committee, as does the full Senate, has a busy,
full schedule this fall. Your efforts to expedite this hearing on my
behalf are greatly appreciated.
As the Central Bank of the United States, the Federal Reserve
has the responsibility of promoting growth and stable prices
through judicious exercise of monetary policy.
In the long run, I believe that stable prices will assist in providing an environment conducive to economic growth. In the short
run, stimulative policy may be appropriate or necessary to assist
growth, and such actions may create or exacerbate a price inflation. It is this delicate balance that requires the Board and the
staff to monitor a myriad of indicators and aggregates, as well as
hearing from a broad spectrum of economic participants.
At the same time, the Board of Governors and the Regional Reserve Banks have major responsibilities for deposit clearance and
settlement, specified bank supervision and regulation, and administration of some consumer laws.
I have had the opportunity to work with the Board and staff of
the Federal Reserve System on several issues arising out of my

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work with the Securities and Exchange Commission and the Commodity Futures Trading Commission, namely in the areas of
margin regulation, security derivative products, capital, bank use
of futures, and bank entry into futures' brokerage.
I have the utmost respect for the Board and its staff. If I am confirmed, I hope that my background and experience will allow a constructive contribution to the Board.
My research, writing, and teaching have been in the areas of
managerial finance, securities and investments, financial intermediation, options and futures, and the economic theory of regulation.
During my service at the CFTC, I had the opportunity to gain
experience in administrative law procedures, foreign and domestic
financial market regulation, regulation of commodity professionals,
exchanges, and other self-regulatory organizations.
The major initiatives while I chaired the Commission included
implementation of the 1982 reauthorization legislation; development of increased self-regulatory organization responsibilities; improved audit programs; and the 1986 reauthorization.
Although futures and options are tangential to the main work of
the Federal Reserve Board, I hope I can facilitate increased understanding of these complicated but increasingly important risk-management tools in the financial and physical commodity markets.
My work as chief financial officer at the University of Iowa involves very pragmatic responsibilities: budgeting, financing of capital projects, facilities' management, such treasury operations as
cash management, debt financing, and investment management;
business office and auditing; technology transfer; and even intercollegiate athletics and recreation. I can assure you that in a period of
declining enrollments and diminishing State resources, this has
been a particularly challenging job. I am also a member of several
corporate boards which has allowed me to gain private-sector experience in utilities, insurance, and futures' markets.
Each of these industries has faced unique challenges in the past
several years, from economic stress, competition, and even increased regulation.
Corporate board participation has made me very sensitive to the
economic pressures facing the U.S. business economy.
In conclusion, and if I am confirmed, I look forward to working
with this committee to address the challenges facing the Federal
Reserve System. I am committed to the independence of the
agency. Only through a strong, independent Central Bank can the
difficult, long-term challenges of promoting economic growth and
price stability be successfully addressed. In an age of rapid technological development where monetary policies no longer adhere
strictly to national boundaries, the challenges of central banks
become exponential.
Developing and socialist countries are requiring more and more
expert assistance to set up the financial infrastructure necessary to
meet their potential. The Federal Reserve Board is the key in addressing these economic problems. If confirmed, I look forward to
committing myself fully to these challenges.
Thank you, Mr. Chairman.
[The complete prepared statement of Susan M. Phillips follows:]

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COMPLETE PREPARED STATEMENT OF SUSAN M. PHILLIPS

Chairman Riegle, members of the committee, I am pleased to
appear before you today as President Bush's nominee to serve on
the Board of Governors of the Federal Reserve System. I was
deeply honored when President Bush asked me to serve in this capacity. If confirmed, I will commit myself to furthering the Federal
Reserve's mission of preserving the stability and growth of the
United States economy in an environment of reasonable price stability.
Mr. Chairman, I want to particularly thank you for scheduling
this hearing so quickly following my nomination. I know that this
committee has a full schedule, as does the Senate this Fall. Your
efforts to expedite this hearing on my behalf are greatly appreciated.
As the central bank of the United States, the Federal Reserve
has the responsibility of promoting economic growth and stable
prices through judicious exercise of monetary policy. Those dual
goals often create particular challenges. In the long run, I believe
that stable prices will assist in providing an environment conducive to economic growth. In the short run, stimulative policies may
be appropriate or necessary to assist growth and such actions may
create or exacerbate price inflation. It is this delicate balance that
requires the Board and its staff to monitor the pulse of the economy by reviewing a myriad of indicators and aggregates as well as
hearing from a broad spectrum of economic participants. At the
same time, the Board of Governors and the Regional Reserve
Banks have major responsibilities for deposit clearance and settlement, specified bank supervision and regulation and administration of some consumer laws.
I have had the opportunity to work with the Board and staff of
the Federal Reserve System on several issues arising out of my
work with the Securities and Exchange Commission and the Commodity Futures Trading Commission, namely in the areas of
margin regulation, security derivative products, capital, bank use
of futures and bank entry into futures brokerages. I have the
utmost respect for the Board and its staff.
If I am confirmed, I hope my background and experience will
allow a constructive contribution to the Board. My research, writing and teaching have been in the areas of managerial finance, securities and investments, financial intermediation, options and futures and the economic theory or regulation.
During my service at the CFTC, I had the opportunity to gain
experience in administrative law procedures, foreign and domestic
financial market regulation, and regulation of commodity professionals, exchanges and other self-regulatory organizations. The
major initiatives while I chaired the Commission included implementation of the 1982 reauthorization, development of increased
SRO responsibilities, improved audit programs and the 1986 reauthorization. Although futures and options markets are tangential
to the main work of the Federal Reserve Board, I hope I can facilitate increased understanding of these complicated, but increasingly
important, risk management tools in the financial and physical
commodity markets.

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My work as chief financial officer at the University of Iowa involves very pragmatic responsibilities-budgeting, financing of capital projects, facilities management, such treasury operations as
cash management, debt financing, and investment management,
business office and auditing, technology transfer, and even intercollegiate athletics and recreation. I can assure you that in a period of
declining enrollments and diminishing state resources, this has
been a particularly challenging job.
I am also a member of several corporate boards which has allowed me to gain private sector experience in utilities, insurance,
and futures markets. Each of these industries has faced unique
challenges during the past several years from economic stress, competition and increased regulation. Corporate board participation
has made me sensitive to the economic pressure facing the U.S.
business community.
In conclusion and if I am confirmed, I look forward to working
with this committee to address the challenges facing the Federal
Reserve System. I am committed to the independence of the
agency-only through a strong, independent central bank can the
difficult long term challenges of promoting economic growth and
price stability be successfully addressed. In an age of rapid technological development, where monetary policies no longer adhere
strictly to national boundaries, the challenges of central banks
become exponential. Developing and socialist countries are requiring more and more expert assistance to set up the financial infrastructure necessary to meet their potential. The Federal Reserve
Board is key to addressing these economic problems. If confirmed, I
look forward to committing myself fully to these challenges.
The CHAIRMAN. Thank you, Ms. Phillips.
Senator D' Amato has joined us.
Senator D' Amato, did you have an opening comment in relationship either to this nominee or to the others?
Senator D'AMATO. Well, Mr. Chairman, it is good to see Ms. Phillips. I am going to ask that my statement, in the interests of time,
be submitted for the record as if read in their entirety.
The CHAIRMAN. Without objection, it is so ordered.
STATEMENT OF SENATOR ALFONSE M. D'AMATO

Senator D' AMATO. Mr. Chairman, I commend you for calling
today's nomination hearings. I think its important that this committee move expeditiously in nomination hearings for these important position-particularly given the state of the economy.
I have been vocally concerned about our economy and the credit
crunch for the last 9 months. Indicators continue to show that
there are no meaningful signs of economic recovery. The Fed reported Wednesday in its "beige book" the results of a survey revealing that any momentum towards recovery has stalled.
The unavailability of credit, exacerbated by a loss in consumer
confidence, has forestalled economic recovery before it has even
had a chance to idle.
The nominees here today each have impressive resumes. I will be
interested in hearing their responses to questions from this com-

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mittee about various economic issues, particularly those about the
credit crunch.
Thank you, Mr. Chairman.
The CHAIRMAN. Ms. Phillips, how serious is the economic situation facing America today?
Dr. PHILLIPS. Well, Senator, I, like you and other Senators this
morning have been very disappointed in the recent rather disappointing news that is coming out.
I had hoped that we were sort of bumping along the bottom and
that we were getting ready to turn up. I must say that, from my
own part of the country, the Midwest, we seem to be doing a little
better than the east coast or the west coast. But this news is somewhat distressing.
It is true that the economy has gone through a very difficult
time, and there is a large debt overhang. I think as Senator Dixon
pointed out, with this large debt overhang, the solutions that we
can look at at this point in time are going to present us with some
very challenging, perhaps even conflicting sets of decisions.
The CHAIRMAN. Well what do you think should be done about it?
Dr. PHILLIPS. Well of course from a Federal-the Federal Reserve's administration of monetary policy is one piece of the overall
policies that need to be addressed; other initiatives are needed certainly by the administration and Congress.
With respect to monetary policy, as you cited, there have been
some easing this past year since last December.
Most recently there was a fairly major easing in mid-September.
I think there are lags, quite frankly, in the effects of these kinds of
actions.
Nevertheless, I think that the Federal Reserve is-and if I am
confirmed, I would hope to participate in assuring that, as we
watch these aggregates, that the Federal Reserve be prepared to
ease, if additional easing is appropriate.
The CHAIRMAN. Do you think additional easing is needed now?
Dr. PHILLIPS. Right at this minute, I am not sure about that. I
think we need to take a look to see what kind of effect the September 30 action is having. I do think that the policies that are being
announced most recently, a number of tax easing proposals, are
certainly making the bond markets somewhat nervous.
I think it may be appropriate within the next couple of months
to look at additional measures.
The CHAIRMAN. Do you think we need fiscal stimulus?
Dr. PHILLIPS. Of course again that is not in the Federal Reserve's
bailiwick. I must say that I do feel strongly that the overhanging
debt situation at this point is a major concern.
I would hope that if there are fiscal stimulus measures that come
forward, that they are of a nature that will promote savings, and
will not add to the ballooning deficit.
I do think it is possible to set some priorities. It may be necessary to craft a stimulus policy at this point. But the budget agreement that it took so long to come to last year and it was a very
constructive measure. I am hopeful that if stimulus packages come
forward, that that agreement would not be necessary be rewritten.

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The CHAIRMAN. Well, that agreement does not seem to be doing
us very much good at the moment, but that is a debatable proposition. Why is the economy performing so poorly, in your view?
Dr. PHILLIPS. Again, I think that the period of the 1980's experienced was significant growth. A lot of that growth was financed by
debt. The overhang that we have of debt is not just the Federal deficit, but it is also fairly massive consumer debt that people have
taken on. That was mentioned this morning. It may be difficult for
consumers to take on additional debt in order to try to lead the
economy out of recession.
So I think that there are a number of factors, but I certainly
agree with the comments that were made this morning that this is
a different kind of recession.
It may not react in the same ways. The economy may not react
in the same ways to stimulus packages that have been tried in the
past I am not sure they will necessarily work.
The CHAIRMAN. Senator Bradley the other day commented on
this and used a term I had not heard before to the effect that he
thought that we were now caught in kind of a slow motion depression, that the erosion which shows up in that chart that Senator
Sasser had earlier is a kind of an erosion that is so deeply rooted
and self-reinforcing that it can't be corrected without some major
new economic strategy.
I would like your reaction to my effort to summarize what I understood him to be saying.
Dr. PHILLIPS. I had not heard the term "slow motion depression."
The CHAIRMAN. He may have phrased it slightly differently, but
that is what he was describing.
Dr. PHILLIPS. I would have characterized it somewhat differently.
I think, in going into a recession, we came along the bottom all
through the summer, and I had hoped we were prepared to turn up
this fall.
As I say, I think that the overhanging debt the generally low
savings rate in this country, the changes internationally in terms
of capital flows are making it harder to come out of this recession.
So I am afraid it may be a longer, slower climb out than I think
any of us had hoped.
The CHAIRMAN. Well there is a difference between a long, slow
climb out and a continuing decline.
He was offering the opinion that he thought that as things were
now they were more likely to give us continuing decline.
I am very concerned about that possibility. As workers are laid
off and exhaust their savings and their unemployment benefits,
and as other workers have their hours reduced so that they work
fewer hours and have less income, you have a situation where confidence is affected. People are very apprehensive. They stop buying.
They do not buy as much because they cannot afford to buy as
much, and they are concerned about what is ahead.
How do we break that spiral? Is that not self-reinforcing? Does
not one layoff tend to create another layoff, tend to create another
layoff?
Dr. PHILLIPS. I might say that I am very sympathetic to that situation, because at the University of Iowa we have had to reduce,

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since May, 475 positions at the university. So I know that it is a
very painful, painful process.
I will say that I think that is why the people at the Federal Reserve Board look at a variety of measures. While the headlines certainly picked out some measures, and the statistics that were
quoted this morning in terms of unemployment applications were
ve1.) distressing, there are mixed signals out there.
In some segments of the country, we are seeing at least some stabilization. We are even seeing some modest growth. So I think at
this point it is somewhat of a mixed picture, and 1 would not have
painted it quite as clearly in one direction or other that is, sliding
into a recession, or sliding into a depression.
The CHAIRMAN. Before I yield, and maybe you can give me a
"yes" or "no" on this, as you sit here right now are you confident
that the economy, if just left to its own devices, is going to get
stronger and come out of this recession and give us good, strong,
steady growth?
Dr. PHILLIPS. No, sir, I am not.
The CHAIRMAN. Thank you.
Senator Sasser.
Senator SASSER. Thank you very much, Mr. Chairman.
Ms. Phillips, you said this was a different kind of recession. In
what way is it a different kind of recession? What prompts you to
make that statement?
Dr. PHILLIPS. For me, the major thing that I think is going to
make it difficult to re-enter, or whatever kind of term you want to
use, is and I come back to this question of debt.
It is certainly the Federal deficit, but also it is the low savings
rate and generally consumer debt that has been taken on. I think
for those reasons, there is the uncertainty about consumers being
able to climb out-you know, if you have a lot of debt, you are just
not as comfortable going out and buying new things.
So I think for me that is one thing that has characterized this
recession as being somewhat different.
Senator SASSER. Well do you consider the corporate debt that is a
result of much of the leveraged buy out mania that occurred in the
decade of the 1980's, do you consider that also a problem with
regard to the recession?
Dr. PHILLIPS. As a finance professor, we used to spend a lot of
time on the debt/equity mix. I do think that corporate debt is a
consideration, but I do not think it is as much of a problem.
I also think that the stock market has been reasonably strong, so
we have had new equity issues more recently. The balance on the
corporate side is not quite as precarious as I see it more on the consumer side and the Federal side.
Then you have the whole State situation. Because of the policies
that shifted more and more of the responsibility of certain kinds of
activities to the State level, States are having a hard time trying to
absorb these new responsibilities.
So I think there are a variety of pressures that are making this
recession a little more difficult.
Senator SASSER. Of course I agree, and of course the problem of
shifting responsibilities to the State is really a result of the Federal
Government during the period of the 1980's abdicating many of

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these responsibilities that they had previously shouldered, and
pushing them back on the States.
So we see the State Governments now struggling all across this
country and laying off people, and contributing to a decline in the
economy.
Now I quite agree with you-just let me say this. Let me continue down that line of thought, if I may.
I think my own view is that we are paying the price for the economic foolishness of the 1980's, sort of a period of speculation, depriving the Federal Government of the revenues that it really
needed to operate, a period of enormous Federal Government deficits, borrowing money to finance the operations of the Federal Government, all of that I think is coming home to roost on us.
But the question is: What do we do about it now?
Do we want to stay in a long twilight recession or depression, as
Senator Bradley has indicated, or do we try to climb out of it?
Now I quite agree with you that consumers are in trouble. They
are in debt. They are broke. Given that situation, do you not think
it would be prudent at this time to try to put some more purchasing power into the hands of consumers so that we get some kind of
stimulative effect?
Now I have proposed, for example, that we modify this budget
agreement that makes defense spending sacrosanct and you cannot
use that money for anything else except to buy tanks, bombs, et
cetera.
I have suggested that we modify this budget agreement and take
$70 billion or $80 billion out of defense over the next 5 years and
use that money to give us an immediate $30 billion tax cut that
would be targeted to middle-income Americans, those making
below $70- to $60,000, pass that legislation now, and let them get
that money as a tax refund coming from their calendar year 1991
taxes, paid for over the long-term with cuts in the defense spending.
Now would that not give us the kind of stimulation that we need
to perhaps assist us out of this recession, in your judgment? It
would give consumers some additional purchasing power.
Dr. PHILLIPS. Senator, if I might, going back to an earlier comment, I did not mean to imply that I thought that shifting to States
was necessarily a bad thing. It is just that they are having a hard
time making that adjustment. That is just one factor.
Senator SASSER. Well, if they cannot pay for the services which
we find most States not being able to pay for, and they do not have
the revenues, then frankly I think it is a bad thing. But that is my
view on it.
Dr. PHILLIPS. But there are some dislocation effects, as I have indicated for example in higher education. That is a problem.
Let me get back to the main thrust of your question. I do not
know the details of your proposal which I think has just come out
recently. But as a general matter in proposing tax cut stimulus
packages, I would hope that they would be of the nature to encourage saving.
I mean, one can certainly imagine that reductions in defense
spending can have other kinds of problems. That in fact may be
contributing to the decline in durable good orders.

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So defense spending does have some kinds of its own stimulative
effects.
Senator SASSER. There is no question about that, but I think most
economists would agree that you get less of a leveraging in defense
spending than you do in consumer spending.
Dr. PHILLIPS. I think there is disagreement generally on that,
and whether or not we should look to longer term proposals that
would promote longer term savings.
Senator SASSER. Well I am in favor of saving, but how is saving
going to help consumers come out of this recession? In other words,
if you have got all the money in the bank and nobody is buying
anything, I do not see that that is going to have much of a stimulative effective.
I am all in favor of capital formation. I am all in favor of savings. That is one of the great problems that we have I think in our
present economy, and I think sort of the go-go-go burn the candle
at both ends mentalities of the 1980's certainly did not put a premium on saving either at the private level, the corporate level, or the
Government level.
But it appears to me that what we need now is not savings, but
some stimulus to get this economy moving again. I think consumer
spending, from what I can see, is going to have to be the stimulus
to do it.
Do you disagree with that?
Dr. PHILLIPS. Well, certainly there is a connection between savings and capital formation, and in the long run hopefully that
would provide jobs and provide some economic stimulus through
some real growth and improvement in productivity generally.
I do think that consumer spending would be helpful. Yes, but I
think that it may not help in the long-term the growth of the economy. It may have more short-term effects.
Senator SASSER. There is no question. I mean, I would not debate
that point with you. What we are talking about here is a shortterm stimulus to try to get the economy moving and pull it out of
the hole that it is in, and perhaps reverse the psychology.
We are talking about a short-term stimulus here. It is my view
that consumer spending could do a lot to move us along.
Now you said that before taking a position on whether or not the
Fed should ease further, you would want to see what the lag effect
was of last month's easing.
Well, now the Fed has been easing for a year now. Even with the
lag from last month's easing, should we not start seeing some results from the easing that the Fed has been doing over the past few
months?
Dr. PHILLIPS. I think we should start seeing some effect now, but
that was only a month ago. So it is fairly soon following that
action. But we have started to see some effects in the markets already.
Senator SASSER; The President claims that the bank regulators
have in many cases intimidated banks from lending. He has maintained that the credit crunch is a product of artificial restraints in
the banking industry. That is a curious claim from one who appoints the Comptroller of the Currency and has the responsibility

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for bank regulators, but nevertheless the administration and the
President is making this claim.
Do you believe that credit restraints-Senator SARBANES. If the Senator would yield on that point?
Senator SASSER. Yes. I would be pleased to yield.
Senator SARBANES. It is a wonderful fantasyland. I mean, the
President says the regulators are causing a problem here, and
these are his regulators. They are his appointees.
The Comptroller of the Currency has been sent up for another
term. We are now looking into that nomination. He has been sent
up by President Bush.
Then President Bush calls a meeting down at the White House.
He gets all these people down there, and he says:
We've got a big problem here with these regulators in terms of making credit
available. And the regulator he is having a big problem with, who has jurisdiction
over all the national banks-which of course in money terms is a major part of the
system-is the very person he is reappointing.

I mean, the Senator is absolutely right on that point.
Senator SASSER. I thank you, Senator Sarbanes, but the question,
Ms. Phillips, do you agree that this is the case, that there is a restraint on credit by the banks?
Are the regulators being overly stringent, and that is a break on
the economy and one of the things that is causing the problems in
coming out of this recession?
Dr. PHILLIPS. I do think that the credit crunch is real in many
areas. I think that banks have gone through a period where they
did have a number of bad loans. They have just gotten to a point
where they have written down those loans and gotten their balance
sheets straightened out from the early 1980's.
So there may well be some caution out there. I do believe that
the Treasury, supported by the Federal Reserve, is taking some
steps to try to address that.
I do not think it is a question of necessarily more regulation
being needed, but more strict enforcement and oversight to assure
that over zealousness is not occurring.
Senator SASSER. Well, some of the business people in my area tell
me that they do-one told me the other day, said, Senator, I do not
care if the interest rates are 2 percent. If the bank will not loan me
the money, it does not make any difference. I cannot get the credit.
So apparently there is a sense in the business community that
there is a credit crunch out there. Now the banks are saying this is
brought on by over zealous regulators.
Would you agree with that, Ms. Phillips, or not?
Dr. PHILLIPS. I have a hard time with that. I would hope that
bank examiners would look carefully to assure that inappropriate
loans are not underwritten.
So I guess I have a bit of a hard time with that. I do think that
there has been generally a tightening, and that certainly people
are feeling the credit crunch.
Now whether or not those were good loans and they should have
been made, I cannot make that decision. Those decisions really
have to be made on a case-by-case basis at the banking level.
Senator SASSER. Well, clearly some of them were not good loans
because you have banks falling over like a house of cards all across

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the country. There are more bank failures at any time since the
Great Depression year. So clearly many of these loans were not
good loans.
My time has expired, Mr. Chairman.
The CHAIRMAN. Thank you very much, Senator Sasser.
Senator Sarbanes.
Senator SARBANES. Well thank you very much, Mr. Chairman.
Dr. Phillips, first I want to just pursue briefly a point that Senator Sasser was making.
Paul Wonnacott is going to follow you to the table. He has been
nominated to go on the Council of Economic Advisers. In 1984that is the latest edition-he had a college level textbook on macro
economics, which is very well thought of.
In that, he points out that there is some lower limit to interest
rates beyond which further monetary expansion will provide no additional stimulus to the economy.
First of all, do you agree with that sort of analytical observation?
Dr. PHILLIPS. I think I do.
Senator SARBANES. OK.
Dr. PHILLIPS. I have heard the term "pushing on a wet noodle"
now, and the Fed certainly has eased considerably. The question is
whether or not you can lead a horse to water, and whether or not
those are good loans out there that should be made.
Senator SARBANES. All right. Now my next question, having accepted the premise of this analysis, are interest rates down to that
level now? Or could the Fed do more to stimulate the economy?
If you accept as an analytical proposition that there is a lower
limit to interest rates beyond which further monetary expansion
would not provide stimulus to the economy, are interest rates now
at that level? Or could the Fed do more to stimulate the economy?
Dr. PHILLIPS. I am not sure right now whether or not there is additional capacity on the down side to lower rates. My feeling is
there probably is.
Senator SARBANES. What do you mean by "capacity"? What capacity are you talking about?
Dr. PHILLIPS. Well, if you-Senator SARBANES. There is certainly unused plant and equipment, and certainly unused labor force, is there not?
Dr. PHILLIPS. I meant capacity on the financial side, not the
physical side.
First of all, I am not quite sure what would be the amount of
that lower level that Professor Wonnacott referred to.
I think that the-Senator SARBANES. Do you think that we are anywhere near that
level, given historical experience, and particularly if you think in
terms of real interest rates?
Dr. PHILLIPS. I think interest rates could go further down.
Senator SARBANES. So you do not think we are at that point?
Dr. PHILLIPS. No, I do not believe we are.
Senator SARBANES. You think they could go down?
Dr. PHILLIPS. Yes.
Senator SARBANES. All right. So the Fed could stimulate the
economy.
Dr. PHILLIPS. Pardon?

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Senator SARBANES. You think the Fed could stimulate the economy by reducing interest rates.
Dr. PHILLIPS. I am not sure that the timing is exactly right to do
that, but it may well be that additional easing is warranted.
Senator SARBANES. Well what is it that you are looking for in the
"timing" in order to make it right?
I mean, what is it that is there?
I mean, if you say that interest rates are not at such a low level
that lou could not get any additional stimulus, what is it about
this ' timing" that makes it not right to lower interest rates?
I mean, you have got excess capacity in plant and equipment.
You have got-we gave these labor force figures here this morning.
You do not have a serious inflationary problem. What is it then
that inhibits you from giving additional stimulus?
Dr. PHILLIPS. Well, I think there are two sides to that market. I
mean, if the Fed does go ahead and ease further now, it may not
make that much difference in real production at this point.
So I think the balancing is looking at everything that is going on
in the economy, not just-Senator SARBANES. Well, let us assume it would not make a big
difference, but it would make a little difference. Why do we not
want the little difference? What is the reason not to do it?
Dr. PHILLIPS. I am not saying that it should not be done. I am
saying that it would be useful to look at what the impacts have
been to make sure the aggregates have really caught up with the
change that was made in September.
Senator SARBANES. Well, of course all the indicators have worsened since September. I mean, all the arguments for making further change have been enhanced, not diminished, have they not?
What indicators since September have moved in a direction that
would lead you not to want an even more active monetary policy.
It seems to me all the indicators have moved in the direction of
wanting further active monetary policy.
I mean, we just quoted you durable goods, and we quoted you unemployment claims. New house sales are down 4.3 percent today.
Everyone thought that the somewhat lowering of the mortgage
rates would bring an increase in new house sales. It has not done
that. New house sales are down.
What is it that you see in the economic picture that argues for
sort of biding your time?
Dr. PHILIJPS. Well, I do not disagree. It may well be when they
get together, to look at all of those data. It may well be a timing
issue.
So I do not disagree that the economy has worsened. In fact, as I
said, I was disappointed that we were not seeing improvement
more quickly.
Senator SARBANES. I am always curious as to how these nominations come about. I mean, just what the dynamics are that end up
putting a nominee before us at the table. I would be interested in
the odyssey of how you ended up here today before us, having been
nominated for a seat on the Federal Reserve Board.
Could you develop that for the committee, please?
Dr. PHILLIPS. I am not sure I know everything that happened. I
did-

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Senator SARBANES. That is often the case with nominees, I might
add, yes.
Dr. PHILLIPS. I suspect that-I am sure that is right.
I did receive a call in the spring from somebody at Department
of Treasury asking if I would be interested in being considered. I
said I would, and they asked me to come in and talk to some folks
at Treasury, which I did.
Senator SARBANES. Who did you talk with at Treasury?
Dr. PHILLIPS. I spoke with Secretary Brady, John Robson, Hollis
McLaughlin-I think he works for Secretary Brady. Sidney Jones,
one of the economists there and Bob Glauber. I think those are the
main ones that I talked to at Treasury.
Senator SARBANES. This was after you had gotten a call asking
whether you would be interested, and then asking you to come in
and discuss the matter with them?
Dr. PHILLIPS. Right. Yes, sir. Those are the people that I talked
to when I came into Washington.
Senator SARBANES. OK. And then what happened?
Dr. PHILLIPS. Then about a week later, they called back and said
that they, as I understand it, were screening or assisting to screen
nominees on behalf of the White House. They asked if I would
come back and talk to some people at the White House.
So I came back and talked to a couple of people at the White
House.
Senator SARBANES. Who did you talk to at the White House?
Dr. PHILLIPS. Michael Boskin, Chairman of the Council of Economic Advisers. Governor Sununu, just very, very briefly. And
Chase Untermeyer.
Senator SARBANES. Now-Go ahead. Sorry. Yes. Anyone else?
Dr. PHILLIPS. Well, the only other person was after the nomination, then I was contacted by Brian Wademan in Congressional Relations from the White House.
Senator SARBANES. Now were those conversations, did they deal
with sort of what your policy views were about the economy?
Dr. PHILLIPS. I could not say specifically. They were more interested in what kinds of things I would look at in making decisions.
They had a lot of questions about my regulatory experience, what I
had done at the CFTC, mostly background kinds of questions.
Senator SARBANES. Did the CFTC experience come up in your
conversations with Secretary Brady?
Dr. PHILLIPS. Secretary Brady?
[Pause.]
I do not remember that, specifically. Actually, I think he did
mention-there were some discussions at that time having to do
with CFTC reauthorization, and he mentioned that he was involved
in that.
But it was in passing, a passing comment.
Senator SARBANES. Now how long were you on the CFTC?
Dr. PHILLIPS. I went in 1981 as a Commissioner, became Chairman in 1983, and I left in 1987. I was reappointed for a second
term.
Senator SARBANES. So July 1987 you left?
Dr. PHILLIPS. Yes, sir.
Senator SARBANES. Was that at the end of your term?

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Dr. PHILLIPS. No, sir.
Senator SARBANES. You left during your term?
Dr. PHILLIPS. Right.
Senator SARBANES. What prompted you to do that?
Dr. PHILLIPS. An opportunity came for me to return to the University of Iowa. I had been at the University before the CFTC. Actually, I had moved to the University of Iowa in 1974. So this was
an opportunity for me to return to the University as vice president
for Finance.
Senator SARBANES. How did your selection-because this is obviously relevant, because you have been an actor before in a Federal
position of consequence-how did your selection, or your nomination to go on the CFTC come about back in 1981? Do you recall?
Dr. PHILLIPS. As best I recall at that time-I am sure, as you are
aware, the agricultural futures were a large, predominant part of
the volume of futures' markets, but some of the financial futures
were coming-were on the drawing boards for consideration.
I believe that at that time the White House was literally looking
for someone from the Midwest. They called the Dean of the College
of Business and asked for nominations.
So I think it was a broad screen or net that caught me.
Senator SARBANES. Now while you were at the CFTC, it shifted
markedly into financial futures rather than commodity futures. Is
that correct?
Dr. PHILLIPS. Than physical commodity futures?
Senator SARBANES. Yes.
Dr. PHILLIPS. yes.
Senator SARBANES. Was that a program of yours?
Dr. PHILLIPS. No, not particularly. It was really a function of the
development of the markets during that period.
Senator SARBANES. Are you currently on the board of governors
of the Chicago Mercantile Exchange?
Dr. PHILLIPS. Yes, I am.
Senator SARBANES. When did you go on the board of the Mercantile Exchange?
Dr. PHILLIPS. I believe it was in the spring or summer of 1988.
Senator SARBANES. And when did you step down as Chairman of
theCFTC?
·
Dr. PHILLIPS. 1987.
Senator SARBANES. In the summer of 1987?
Dr. PHILLIPS. July.
Senator SARBANES. Of course you were the regulator of the Mercantile Exchange, I take it. Is that correct?
Dr. PHILLIPS. Yes.
Senator SARBANES. Is the position on the board of governors of
the Mercantile Exchange a paid position?
Dr. PHILLIPS. Yes, it is. I am a public governor.
Senator SARBANES. Is the amount of that salary a matter of
public record? I do not want to put it out in the public if it is not,
but if it is a matter of public record I would like to have it entered
into the record.
Dr. PHILLIPS. Yes, it has been submitted to this committee as
part of my financial disclosures.
Senator SARBANES. Is it publicly known?

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Dr. PHILLIPS. I do not believe it is.
Senator SARBANES. Were you troubled at all by any sort of revolving door impression that that might brive? You know, that is a
constant issue that we wrestle with here of going from being the
regulator, in fact the Chairman of the Commission that does the
regulating, onto the Board of one of the principal institutions that
you were regulating. It would be fair to say that the Mercantile Exchange is one of the principal institutions that the CFI'C is charged
with regulating, would it not?
Dr. PHILLIPS. Yes. That is correct.
I was not-I was not troubled. And in fact, I hoped that I could
make a contribution from a public and from a regulatory perspective.
Senator SARBANES. Now was former Senator Eagleton a member
of the board of governors of the Mercantile Exchange while you
were on the board?
Dr. PHILLIPS. We did cross over for a period of time.
Senator SARBANES. Do you recall how long that was?
Dr. PHILLIPS. No, sir, I do not. Maybe a year. I really do not remember.
Senator SARBANES. Now shortly after you left the Commodity Futures Trading Commission as its Chairman, which was in July
1987, we had the stock market crash in October 1987, some 3
months later.
The Brady Commission which investigated the stock market
crash of October 1987, put forth as one of its principal findings the
following, and I am now quoting from the Brady Commission which
was chaired by now Secretary Brady. He was not then.
Stock, stock index futures, and stock options constitute one market mandating a
regulatory structure designed to be consistent with this economic reality. The failure of these market segments to perform as one market contributed to the violence
of the market break of October 1987 and brought the financial system near to a
breakdown.
To a large extent, the failure was rooted in institutional and regulatory rigidities,
as well as misconceptions of market participants. That this crisis was precipitated to
a large extent by the activity of a few active institutions illustrates the vulnerability of the financial system and the need for remedial action.

The Commission recommended, the Brady Commission recommended that one agency should coordinate the few but critical regulatory issues that have an impact across related market segments
and throughout the financial system.
A margin should be made consistent to control speculation and
financial leverage, and circuit breaker mechanisms should be formulated and implemented to protect the market system.
What is your view of the recommendations of the Brady Commission?
Dr. PHILLIPS. Well, I believe there were a variety of things that
they recommended, and you have cited several of them.
The circuit breakers was one of the things that, from an economic perspective, I find somewhat troubling but I do believe that
there are some lags and discontinuties because of just the timing of
information transmission from one market to another.
I think that the circuit breakers that have been put into place,
from what I can tell-and please understand, I have not been on
the inside in reviewing those kinds of monitoring systems for the

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last 4 years-but from what I can tell, the circuit breakers, to the
extent there has been market volatility, have worked reasonablyin fact quite well.
So as I say, from an economic perspective, I might have been concerned about those kinds of barriers put on market moves. Nevertheless, from what I can tell, with the timing lags that occur across
markets, the circuit breakers do seem to have worked.
With respect to some of the other recommendations of the Brady
Commission, as you may know, as a public governor I did sit on a
panel that was put together by the Exchange to look at some
market reforms that the Exchange itself could initiate following
that crash.
A number of reforms were made to try to strengthen the regulatory system at the self-regulatory organization level.
Senator SARBANES. What about the margins' question?
Dr. PHILLIPS. Well, margin regulation, I mean as you are well
aware, in the futures' markets have traditionally been done at the
Exchange level. It is a self-regulatory function of the Exchanges.
While I was at the CFTC, I did participate in a joint study with
the Federal Reserve and the SEC on margin regulation, and the
conclusion of that study was-and I agreed with it-it was not an
area that required on the futures' side, required Federal intervention; that there are incentives at the self-regulatory organization
level to assure that there are adequate margins for clearinghouse
safety and soundness.
Through the 1987 market break, and there was another break in
1989, they appeared to have worked quite well. So it is not an area
that I think one need immediately bring in additional regulatory
tools. I agree that additional coordination among the markets is
not only appropriate but necessary.
And I think the question becomes whether or not the futures
market have become such a large part of the economic fabric that
margin regulation becomes a systemic question.
Senator SARBANES. Well now there is legislation in the Congress
to give the Federal Reserve authority to set margin requirements
for financial futures.
Dr. PHILLIPS. So I understand.
Senator SARBANES. Do I understand that response to mean you
disagree with that legislation?
Dr. PHILLIPS. It is not, as I say, it is not an area that I felt that
regulation is necessary. I think, like a number of areas, if there is
regulation, if the Federal Reserve has oversight, I would hope that
it would be administered in such a way so as not to inhibit the liquidity of those markets.
Senator SARBANES. Well, now, Secretary Brady has sat right
where you are sitting and testified very strongly in favor of this authority, and so has Chairman Greenspan about the desirability of
this authority for the Fed to set margin requirements for financial
futures.
I take it from your responses that you differ with them?
Dr. PHILLIPS. Yes, sir.
Senator SARBANES. Now I take it that in your statement, if you
will just bear with me a moment while I try to find it--{Pause.]

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In your statement, you put forth as one of the reasons, as I understand it, on page 2 as to why you ought to go on the Board of
Governors of the Federal Reserve, your service at the CFI'C and
the experience you have gained in the regulation of commodity organizations.
I am now quoting from your statement:
Although futures and options markets are tangential to the main work of the
Federal Reserve Board, I hope I can facilitate increased understanding of these complicated, but increasingly important, risk management tools in the financial and
physical commodity markets.

So you have in effect sort of put forth this area as one area of
expertise which argues as to why you should go, in your view, go
on the Board of the Federal Reserve. And yet on a very important
policy issue on which we have been strongly importuned by both
the Secretary of the Treasury and the Chairman of the Federal Reserve, directly in the area which you have put forth as your expertise, you are in sharp disagreement with them.
Is that correct?
Dr. PHILLIPS. Well, perhaps "sharp" is too strong a word. I had
seen no evidence when I was at the CFTC that margin regulation
was something that was necessary.
Nevertheless, if Congress determines that there should be Federal oversight of margin regulation, what I would hope is that we can
administer it in a way so as not to inhibit the liquidity of those
markets.
Senator SARBANES. The Des Moines Register in an article in midJuly after your nomination in the course of discussing, labeled the
Commission-this is the CFl'C-as a "fairly docile watchdog."
Those are not my words; those are the words of this article about
your nomination, and about the work of the Commission.
It then goes on to say:
In 1987, the U.S. Justice Department, apparently unbeknownst to Phillips'
agency, began a sting operation in the pits of two Chicago Futures Exchanges, secretly tape-recording traders involved in insider trading.
Among the practices involved in the investigation were personal trades made by
traders just before placing large market-moving orders for their customers. 34 of the
46 traders indicted pleaded guilty in 1989.

Is it correct that the Justice Department-that the CFl'C, the
agency you were then chairing, was unaware of the Justice Department activities?
Dr. PHILLIPS. First of all, let me say that I do not agree with the
characterization by the Des Moines Register that the CFTC was a
"docile agency."
Senator SARBANES. "Fairly docile."
Dr. PHILLIPS. "Fairly docile"?
Senator SARBANES. Yes.
Dr. PHILLIPS. OK. I do not even agree with that.
Second, let me say that the sting operation apparently was after
the period that I was there. Nevertheless, let me say that during
the period that I was there, we were in fact trying to encourage
more joint efforts among the regulatory and enforcement agencies.
If we believed there was criminal activity, we in fact tried to get
the involvement of the Justice Department. So during my period,

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we were urging State regulators and the Justice Department to get
more actively involved in white collar crime enforcement activities.
So I am not very surprised. Although as I say it is after the
period of time I was at the CFTC. But when I was there, I was encouraging the CFTC to support any investigations that might be of
a criminal nature that might be undertaken by the Justice Department.
So I would be very surprised if the CFTC did not know about it.
And seeing the press reports following those indictments, my understanding is that the CFTC staff and the entire agency participated in and supported those investigations. My understanding is
that they were part of them.
Senator SARBANES. Well, let me ask you. I am going to quote to
you from a statement that Senator Eagleton made before this committee in July 1990, in fact when we were considering this very legislation that I am now talking about that is now pending on which
we had also heard from Secretary Brady and Chairman Greenspan.
I would like to get your reaction to these comments. I am now
quoting from Senator Eagleton:
For almost 3 years, 1987 to 1989.

And let me just say, a part of that period overlaps your tenure
on the Mercantile Exchange as I understand it.
Is that correct?
Dr. PHILLIPS. Yes. So we must have overlapped about a year.
Senator SARBANES. Yes. A year, a year-and-a-half.
For almost 3 years, 1987 to 1989, I served as a member of the board of governors
of the Chicago Mercantile Exchange. I resigned from the Mere Board in November
of last year.

That would have been November 1989.
I came to the considered belief that the Mere was being operated by insiders for
the benefit of insiders, and that Joe Average Guy was not getting a fair shake. The
final straw in terms of triggering my resignation was the way the Mere and certain
of its principals handled, I should say mishandled, the CFTC fraud investigation involving Brian Monieson, a former Director and Chairman of the Mere, and his firm,
GNP Commodities, Inc.
In May of this year, Mr. Monieson, GNP Commodities, and two of the firm's brokers were fined and permanently barred from the futures' industry.
While this matter was the immediate and proximate cause of my resignation from
the Merc's Board, the Merc's handling of the affair was merely symptomatic of
much broader ailments affecting the regulation of our country's futures' exchanges.
Stated quite simply, the current system of self-regulation, which the Chicago Exchanges tout as the be-all and end-all in assuring the integrity of the futures' exchanges, does not work.
I state this flat out. The futures' industry deals in billions and billions of dollars
and millions and millions of transactions each year. In terms of its fiduciary relationship to the public, the futures industry is akin to a bank or a savings and loan
institution.
No one in this day and age would espouse that the banking or S&L industry be
collectively self-regulated. Compounding the failure of self-regulation is the benign
and timid supervision of the futures' exchanges by the CFTC.
The CFTC is about as sluggish a regulatory agency as one can find.

I would like to get your comments on that statement.
Dr. PHILLIPS. I am not sure what he was referring to with respect
to the Exchange's handing of I guess it is Brian Monieson's situation. I am not familiar with the details of that.

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I do not agree with Senator Eagleton that the agency was a sluggish agency. In fact, when I was at the CFI'C, at that time we were
engaged in trying to assure stronger audit trails at the Exchanges.
At that time, certainly the Exchanges were unhappy with this
kind of regulatory oversight, but it was precisely for the reason
that we thought it was appropriate that the CFl'C as the oversight
agency, a regulatory organization, should have in its hands the capability to be able to track all trades, and to be able to discern the
timing of those trades.
So I felt that we were really quite aggressive in trying to put into
place the systems and the tools that would allow and permit a
more aggressive enforcement program.
And it may well be that he was referring to a need for more regulation. I felt that certainly the regulatory tools needed to be
sharpened, but that enforcement was one of the strongest areas
that the CFI'C needed to be active in.
Senator SARBANES. Well, let me turn to your service on the
Board of the Exchange itself.
In November 1989, when Senator Eagleton stepped down, he
wrote an article in The New York Times, and I am now quoting
him:
For close to 3 years, I have served as a public member of the board of governors of
the Chicago Mercantile Exchange. Last week, I resigned. There is one member besides me to whom the word "public" would apply. The rest make their living in connection with activities of the Exchange. Therein lies a large part of the problem
with most of the Nation's futures' exchanges.
They are operated by insiders for the benefit of insiders.

He then goes on and discusses this particular situation, but later
he says:
The truth, regrettably, is that the public cannot invest in the futures' exchanges
and be confident that it is getting a fair deal. Why isn't self-regulation working?

Then he talks about insiders making the ground rules, sluggish
CFI'C.
At the time, did this resignation cause you to think about your
own role? I take it you were the other public member to whom the
word-the other member to whom the word "public" would apply?
I think you have said you were a public member of the Chicago
Mercantile Exchange. Is that correct?
Dr. PHILLIPS. Yes, sir.
I think that I would have been the person to wham he was referring, although there was at that time another person that I would
have thought would have been also characterized as a public governor.
Senator SARBANES. Well, in any event, I mean that is not directly
relevant.
In light of this, did you consider taking similar action, or in some
way trying to bring attention or call a halt to some of these practices that were going on?
Dr. PHILLIPS. I think my view at the time was that it was more
appropriate for me to try to encourage reform within the system,
as opposed to stepping out of the system and making public comments.
Senator SARBANES. Did you think Eagleton was off-base, or
wrong, essentially wrong in his criticism?

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Dr. PHILLIPS. I disagreed certainly with the characterizations
that you just suggested, but I do think that there were some reforms that could and should be made, and in fact the Exchange did
undertake a number of those reforms.
I believe the CFI'C has also followed up with some additional requirements. So the fact that we both believed that change was necessary I think is self-evident.
The question is: How do you do it?
Senator SARBANF.S. The Federal Reserve, in addition to setting
monetary policy, carries out a goodly number of regulatory functions.
Do you think they need to recede from some of those regulatory
functions? That they are over-regulating?
Dr. PHILLIPS. I am sorry? I do not understand the question.
Senator SARBANF.S. I said, the Federal Reserve, in addition to setting monetary policy, engages in a number of regulatory functions.
Do you think that they are over-regulating and need to recede
from some of those regulatorx functions?
Dr. PHILLIPS. Oh, "recede. ' That was the word I did not catch.
I am not as familiar with the details of banking regulation. From
what I can observe more from a generalist's perspective, at this
point I do not see major problems. But I suspect that there are
some areas where some significant fine-tuning may well be necessary.
Senator SARBANES. And of course one of the areas, as we have
previously developed, is that you actually do not think they ought
to get into this setting margin requirements for financial futures.
Dr. PHILLIPS. Senator, with respect to margin requirements, if
that-if the Congress enacts that-Senator SARBANES. I understand that. I obviously would expect
that if it becomes the law of the land, that you would carry out the
law of the land. 1 mean-Dr. PHILLIPS. Absolutely.
Senator SARBANES. -I think we have to be in the position here
of assuming that that would be the case without having to draw
that out of the nominees.
But as a matter of policy, you do not support that? Those were
your previous answers here this morning.
Dr. PHILLIPS. As a matter of policy, I have not seen the need for
that kind of regulation.
Senator SARBANES. And you did not discuss that with Secretary
Brady when you had the talk with him?
Dr. PHILLIPS. No.
Senator SARBANF.S. So he does not know that. This would come as
something of a surprise to him, I take it?
Dr. PHILLIPS. Since I participated in a study, a study that in fact
the Treasury participated in, and that was the conclusion, those
views are well-known, I believe.
Senator SARBANES. Thank you, Mr. Chairman.
The CHAIRMAN. Thank you, Senator Sarbanes.
Ms. Phillips, there is a very troubling item today in The New
York Times. I am going to quote it to you in a second. It relates to
the independence issue, the independence of organizations within
our Government like the Federal Reserve, like the Federal Deposit

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Insurance Corporation, and others that are set up to function independently.
Persons are nominated to those boards and agencies. They come
before us, such as you do. They are in due course in most instances
confirmed. And then they take on a special status within our Government where they actually are independent in their judgment,
and should so be.
I want to read to you a quote from today's New York Times in
an article by Steven Labaton. He says:
Mr. Brady's own Treasury officials had privately told the Federal Deposit Insurance Corporation to delay an increase in the premiums banks pay to finance the
deteriorating Deposit Insurance Fund. The current rate is 23 cents for each $100 in
deposits.
Their opposition [meaning the Treasury Department] was motivated by the belief
that any increase would aggravate what is perceived at the Treasury as the number
one economic problem, tight credit, by raising bank expenses.

Now I do not know whether this report is accurate. If it is accurate, I think it is a very serious matter.
Congress has given the FDIC not the Treasury Department, sole
discretion over the issue of Deposit Insurance premiums.
If the Treasury Department has interfered in this fashion, it may
increase the chance that taxpayers are going to have to pay for the
bailout of the Bank Insurance Fund at a time when every officer of
thjs Government, in my view, ought to be joining with the Congress to avoid the prospect of another taxpayer bailout in the banking system.
I think we need an open and accountable process as to how these
premiums are established. If the Treasury Department has the
belief that an increase in the premiums would harm the economy
more so than it would protect the taxpayers, then I think they
ought to present that analysis publicly and get it out into the light
of day.
I am concerned about the administration in effect dictating decisions in other areas of Government that are established to be independent, as the FDIC is.
I see the Federal Reserve in the same capacity. I would like to
hear your thoughts on the independence of the Fed, and your own
views on independence.
Dr. PHILLIPS. I definitely support the independence of the Fed. I
think that only through an independent agency can some of the
long-term views be taken with respect to monetary policy.
The CHAIRMAN. Well, if you were confirmed to the Fed and somebody from the Treasury Department, maybe one of these people
that interviewed you, called you on the phone or invited you to
lunch and made it clear to you how they thought you ought to go
with respect to a monetary policy decision, or some other regulatory decision over at the Fed, what would be your reaction to that?
Dr. PHILLIPS. I would listen. I would listen as I would to a wide
range of people. But that is certainly one voice in the kinds of decisions that the Fed has to make, but I certainly do not see it as the
only, or the dominant voice.
The CHAIRMAN'. What if they ask you to take an action, for whatever the reasons?
Dr. PHILLIPS. I would tell them I would think about it.

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34
The CHAIRMAN. Do you not think it would be a good idea to tell
them that you are in an independent position and you are going to
make an independent judgment, and you do not intend to be
pushed off your independence by whatever pressure they are applying?
Dr. PHILLIPS. I would certainly feel comfortable in doing that,
and would imagine I would do so, as a matter of fact. That was the
position I was in at the CFTC, also.
The CHAIRMAN. Well, I think this is an illustration today of part
of the problem that we have in Government today, and it is going
to have to be dealt with.
I want to take you through some information.
First of all, let me ask you about Midwest Resources, Inc., formerly Iowa Resources. I see you have been serving as a member of
the board of directors of that organization since 1987.
What is Midwest Resources?
Dr. PHILLIPS. It is a utility holding company.
The CHAIRMAN. And what is the range of their activities?
Dr. PHILLIPS. Well, it is basically predominantly power companies based in the Des Moines area. The two sectors are the Des
Moines area and western Iowa, Sioux City.
They also have a number of other smaller activities such as communications and so on, but they are generally getting out of those
and concentrating on utilities.
The CHAIRMAN. I want to take you through a couple of charts
here.

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36
The CHAIRMAN. I want to get your sense for this economic dilemma that we are in right now. I am going to show you three charts.
Then I am going to ask you a couple of questions.
First of all, we are right now attempting to finish work on a
major banking reform bill, because the deposit insurance fund for
all practical purposes is empty. The reason it is empty is that we
have gone through a period of deregulation during the 1980's, some
of which you, yourself, referenced in your earlier testimony this
morning, that really set the stage for a substantial collapse of a
substantial part of the banking industry of this country.
Now this chart starts back in the 1930's and comes up decade by
decade up into the 1990's.
This shows the number of bank failures in the country that were
insured by the Federal Deposit Insurance System, and you see the
burst of bank failures back during the Depression.
Once we got out of the Depression and got back on a solid footing, and it took a certain regulatory regime to get the banking
system stabilized and to screen off certain activities and so forth,
you can see we came up through several decades with a relatively
strong performance in the banking sector with very few failures
relative to these extreme cases until we get up into the middle
1980's.
As you can see here, in about 1983, and then going up through
the rest of the 1980's and into the 1990's now, we have had an
enormous explosion of bank failures.
That has drawn down the Bank Insurance Fund now until it is
virtually empty. It will be empty by the end of this year. So we are
being asked to go out and borrow $70 billion from the American
taxpayers in order to refinance the Bank Insurance Fund so we
can pay off depositors for failures that are still ahead of us.
We have just had an estimate come to us from the FDIC that
they envision many more bank failures over the next 2 or 3 years.
So in order to be able, when those banks fail, to pay off the insured
deposits, they will not have enough money in the Fund unless the
Government now borrows this $70 billion and puts it into the
Fund.
This comes after the savings and loan collapse, which is every bit
as dramatic if it is on a chart here, and perhaps before the full
extent of the insurance industry and pension fund industry problems are fully appreciated and understood.
I think we have got some built-in problems there that are still
out in front of us. I want you to keep this in mind, though, in
terms of the structural damage that has been done and is being
done in the banking system, and then I want to show you two
other charts.

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39
I want to show you a chart that relates to the United States
trade situation and international credit position. You have probably seen data somewhat similar to this. This time line starts in
1977. This is scaled in $100 billion segments.
It shows that up through the mid-1980's, the United States was a
creditor nation, as represented by this blue area. In fact we have
been a creditor nation going all the way back to 1914. So we have
had a long, uninterrupted period where we were performing very
strongly with respect to our international financial standing and
relationships.
But as you can see in the mid-1980's, the United States position
crossed over this zero line and got down into the negative numbers,
which is illustrated by the red area here, and we became a debtor
nation. We have increased the debt very dramatically coming down
this curve into 1991.
We now owe the rest of the world net something on the order of
$700 billion, but the figure continues to grow. Our trade situation
has just started to worsen again, and we are headed down this
track.
In all my experience in studying financial data, I cannot think of
another situation that I have seen short of a failing company
where I have seen such a dramatic reversal in baseline circumstance and the erosion of a financial position.
Now bear in mind that this erosion occurs right in the middle of
the 1980's, like that pattern of bank failures I showed you a
moment ago, because I think there is a relationship.
Now I want to lay one other thing on top of it. I want to show
you what the Federal budget deficit looks like, as well. I want to go
into this with our economic adviser candidates at a later time, so it
is important that they think about this, as well.
This particular chart shows what has been happening with our
Federal budget deficits from 1981 up through 1992. You can see a
rather dramatic rise in these deficits. This scale is notched in $50
billion increments.
You will see that out in 1992 we are looking at a deficit that is
now approaching a half-a-trillion dollars for a single year.
Now these lines here are made up of three components. One is
what is known as the basic deficit figure in terms of the standard
accounting that the Government uses, and the other two are trust
funds to cover additional spending.
This somewhat differently shaded area here constitutes unused
balances in trust funds like the Highway Trust Fund and the Airport trust fund, and each year we are taking money in those trust
funds that we do not spend for those specific purposes and we are
assigning the value of those dollars to offset other Government
spending.
So our actual deficit is running up to this level [indicating]. This
area here [indicating] that you see coming into the picture, which
is sort of the candy striped area, shows the amount of money that
we are now taking out of the Social Security Trust Fund and assigning against the Federal budget deficit for the purpose of
making the deficit look lower than it really is.
For example, in 1991-1992, under the standard accounting
format we say the deficit is this figure [indicating], but the cold

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40

fact is that we are taking trust fund surpluses and assigning them
as an offset to make this number appear lower than it really is. In
fact, we are spending this amount of money [indicating], but we are
also spending this amount of money [indicating], and this amount
of money [indicating] for things totally unrelated to the purposes of
those two trust funds.
Now let me just finish here.
I want to show you what these black lines are on here. These are
the Gramm-Rudman-Hollings so-called budget agreements that
were put into place at different times in the past.
This first Gramm-Rudman-Hollings agreement was designed to
bring these deficits off this pattern and down on this line to a balanced budget by 1991. It is obvious now that did not work. As it
became apparent that was not working, this [indicating] was discharged and Gramm-Rudman-Hollings II was put in its place to try
to bring these deficits down on this path.
Instead, we saw deficits like this [indicating].
This is the Gramm-Rudman-Hollings III that is now in place.
This is the current budget deal. You said at the outset today, if I
remember you correctly, that you were reluctant to see us break
that budget agreement.
Dr. PHILLIPS. [Nods in the affirmative.]
The CHAIRMAN. You are nodding in the affirmative.
That budget agreement purports to put us on a deficit path that
is supposed to look like this [indicating]. Now, as a member of the
Senate Budget Committee as well as the Chairman of this committee, I do not believe there is a scrap of information available today
that supports in a meaningful way the notion that this line is going
to give us this kind of a declining set of deficits any more than
these lines [indicating] gave us declining deficits as opposed to
what we really saw, which was this explosion in the Federal budget
deficits.
Now if you are not prepared to talk about changing this, I would
assert to you that I think this is a fiction . I think it is a fiction
designed to get us past the 1992 election.
I think what we are likely to see out here is a continuation of
this trend line. Now if you do not believe that, I want to hear
today, now, the arguments as to why you do not believe it. Because
you are an economist, and you do pay attention to these things.
I also want you to think now in terms of these three things going
on together.
I think we have got an economy right now that is in genuine
peril. I think these trend lines are very, very dangerous to the
country. I do not think they can be allowed to continue.
Now you are a professional economist. You have written. You
have studied in the field. You have held important Government positions in the past. You served on the Deregulation Task Force for
Vice President Bush back in the mid-1980's when a lot of the decisions I think were made, frankly, to set in motion policies that I
think have had a lot to do with creating these trend lines.
I do not know what your role was or was not in terms of those
debates and those decisions.

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41
Let me just ask you about that right now, and then I will go to
the question of your analysis of what these charts mean and where
they are taking us.
You say in your statement that you were on Vice President
Bush's Task Force on the Regulation of Financial Services from
1983 to 1984. Is that correct?
Dr. PHILLIPS. That is correct.
The CHAIRMAN. Did you in that time deal with the question of
the deregulation in the banking system and the savings and loan
system and financial markets generally?
Dr. PHILLIPS. I would not have characterized it necessarily as a
"deregulatory" move. It was, as much as anything, an effort to look
at some reorganization of banking regulation. Indeed it was all financial services, which is why I was on it.
It included the heads of all financial regulatory agencies, and I
mean credit unionsThe CHAIRMAN. But is it not fair to say that the policy changes
that were implemented-Dr. PHILLIPS. I do not believeThe CHAIRMAN. -were principally deregulation policy initiatives, as opposed to additional regulation policy initiatives?
Dr. PHILLIPS. I do not believe, quite frankly, that very many of
the recommendations that came out of that task force were implemented.
The CHAIRMAN. Well, whether they were implemented or not,
was it not essentially a deregulation orientation? That clearly was
what was being said at the time. I think that is the way most
people remember it.
Are you saying it was not? Was it a regulation task operation?
Dr. PHILLIPS. It was more to reorganize who was doing what. I
think there was a feeling that there was some overlapping regulation. So it was an effort to reorganize who was overseeing various
different types of banks.
I think there was a sense at that time that there was duplicate
regulation.
The CHAIRMAN. Did you take a look at the standards by which
banks could lend for commercial real estate investment?
Did you look at things like that?
Dr. PHILLIPS. I really do not remember that detail.
The CHAIRMAN. Back in 1982 in the Garn-St Germain legislation,
there was an authority given to the regulators to establish regulatory standards for what kinds of loans could be made on commercial real estate.
They have never been established. Did you know that? To this
day?
Was that ever discussed by this task force?
Dr. PHILLIPS. I do not remember that. I do remember discussions
of capital adequacy. And there were, beginning at that time, concerns about capital adequacy particularly with respect to S&L's,
and even banks at that point. So there were efforts to try to
strengthen the capital requirements.
The CHAIRMAN. Well, unfortunately what happened, without reciting all the history, is that regulation was in fact relaxed. The
number of regulators was reduced. The scope of regulatory effort

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42
was narrowed. We moved away from generally accepted accounting
principles to RAP-accounting, which is a regulatory kind of accounting principle.
That was one of the major fiascoes in the savings and loan situation.
What I am trying to understand is what went on when the decisions were being made in the early and middle 1980's that may
have had a bearing on the dismal performance in the later 1980's
and now into the 1990's.
That goes to these 3 charts. I would like your sense. When you
see these 3 charts and you think about them, separately, and then
more importantly together, what does it tell you about the direction that the country is taking?
Dr. PHILIJPS. Well, I think that if some of the recommendations
that did come out of that task force had been implemented, the
capital situation may have been stronger.
With respect to the debt, I certainly agree that the concern of
overhanging debt is one of the major drags on the economy now. So
I am quite in agreement with some of the points you have made.
The CHAIRMAN. But how serious is this when you see these three
things together? We have very few positions that we can give out
for people to be on the Federal Reserve Board. It is one of the most
important economic policy positions in the country today.
What you think and your sense of urgency is, in my view, the
single most important measure of your suitability to the Board at
this time. This assumes that you have some base level of qualification, which clearly you do, but beyond that is the question of your
sense of what is going on in the economy and how serious and how
urgent the problems are.
The charts I have just shown you are all taken from Government
data.
What do they tell us, do you think?
Dr. PHILIJPS. Again, I do think that there is a problem.
The CHAIRMAN. How serious is it?
Dr. PHILLIPS. I have been very disappointed. I think that the
news that has come out in the last few days is really quite distressing. So I think it is time to look at some measures.
The CHAIRMAN. And what might those be?
Dr. PHILLIPS. Well, I think that at this point, some of the measures that probably would be appropriate are on the fiscal side, not
necessarily on the monetary side, although the monetary side
must--! would hope, anyway-accommodate some of some stimulation. I would hope also that the kinds of measures that are enacted
will be of a long-term nature to attempt to increase savings generally.
The CHAIRMAN. So am I to conclude from that you think it is
time for a fiscal stimulus?
Dr. PHILLIPS. I am not specific on what kind, but I think it might
be appropriate at this time.
The CHAIRMAN. How much?
I mean, leaving aside the issue of how it might be done, what are
we talking about? How much stimulus do you think is needed?
Dr. PHILLIPS. I am not sure I can give you, in terms of amount a
specific answer.

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43

The CHAIRMAN. Well no, I am looking more at finding out if you
think the economy needs, in the way of fiscal stimulus, a $10 billion shot in the arm, a $20 billion shot in the arm, a $30 billion
shot in the arm?
What do you have in mind?
Dr. PHILLIPS. I am not sure of the right amount. I think that
some stimulus should occur. At the same time we need to be watching very carefully to see what kinds of effects that might have on
the deficit, because you do not want that big red area on your
charts to get bigger.
So that I think we have to be watching at the same time what
kind of effect those stimulus proposals would have on the deficit,
and at the same time inflation, because that also can be a very
long-term-The CHAIRMAN. Do you see an "inflation" danger now?
Dr. PHILLIPS. I think that there has been a good deal of progress
made with respect to inflation.
The CHAIRMAN. Well, everybody says that. Is there an inflation
danger now?
Dr. PHILLIPS. "Danger"?
The CHAIRMAN. Yes.
Dr. PHILLIPS. Right now?
The CHAIRMAN. Yes.
Dr. PHILLIPS. I think that it has lessened significantly.
The CHAIRMAN. Has it lessened to the point where it is not something that we need to concern ourselves with at the moment?
Dr. PHILLIPS. I would not go that far. I think that with respect to
long-term price movement, that monetary authorities should be
ever vigilant on that.
The CHAIRMAN. Well, of course that is a stock answer, with all
due respect. If we are not "ever vigilant," then we are not at our
duty stations.
What level of inflation do you think is the minimum that we can
get to and hold over a period of time? Three percent a year?
We have not managed to do any better than that, have we, on a
sustained basis?
Dr. PHILLIPS. Right, on a sustained basis. Oh, there have been periods of time-The CHAIRMAN. But not in recent history.
Dr. PHILLIPS. I agree. Yes, I agree.
But, you know, I hate to point to the measurement problems, but
price movements are variable and sticky throughout the economy
and they move at different rates. So I think it is always a moving
figure that you are looking at.
I am not sure that I could name a bottom level-The CHAIRMAN. Well, let me get back-Senator SARBANES. Are you one of those people whoThe CHAIRMAN. Go ahead, Senator Sarbanes.
Senator SARBANES.-subscribes in a serious way to the goal of a
zero inflation rate?
Dr. PHILLIPS. I think it is a good theoretical target. I do not think
you ever know if you have gotten there. I think that you really
have to look at a variety of price movements at any one point in
time.

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44
I am just not as convinced that our measurement techniques are
so perfect that we would know if we got there.
Senator SARBANES. Well, as a policy maker, which you will be at
the Fed, would you be seeking to achieve a zero inflation rate?
Dr. PHILLIPS. I think that there are times that if inflation is at a
higher level, that then you should be working toward getting it
down. But I think at times when the economy may need some stimulus, and inflation is not a problem, that then stimulative monetary policies would be appropriate.
Senator SARBANES. Well, what would the consequence be in practice-I am not talking about in theory-in practice of trying to go
to a zero inflation rate?
Dr. PHILLIPS. The problems, in practice, of going-Senator SARBANES. Yes. I mean, even the West Germans do not
have a zero inflation rate.
Dr. PHILLIPS. If one were to-Senator SARBANES. I mean, how realistic a goal is that?
Dr. PHILLIPS. I think that is exactly what I am questioning.
Senator SARBANES. You do not think it is realistic?
Dr. PHILLIPS. Right. I think that it is something that one has to
hold out as a goal, but I do not think you can in fact get there.
Senator SARBANES. I wanted to ask again, in your Qualifications
Statement, you say-this is paragraph three of your-Dr. PHILLIPS. The first page?
Senator SARBANES. No, the Statement for Completion by Nominees. There is a qualification statement for membership on the
Board of Governors of the Federal Reserve System.
You state in Paragraph 3:
Scholarly research and writing have included the following areas relevant to the
responsibilities of the Federal Reserve System: Financial futures and options; equity
markets; financial regulation; international financial markets; margin requirements; private pension and pension regulation; the economic theory of regulation.

So we really come back to this issue I have been pursuing with
you earlier, because even in your own statement of qualifications
you give a great deal of emphasis to financial futures and options,
margin requirements, and so forth.
Are you familiar with the legislation that is pending in the Congress?
Dr. PHILLIPS. Not the details of it. I have read reviews of it, or
summaries of it.
The banking bill? Is that what you are referring to-the Senate
Banking bill?
Senator SARBANES. No, on setting margins, putting the margin
setting authority in the Federal Reserve.
Dr. PHILLIPS. CFTC, yes, reauthorization, yes.
Senator SARBANES. You are familiar with that legislation?
Dr. PHILLIPS. Again, I have read summaries of it. I have not read
the specific bill that has been proposed.
Senator SARBANES. Well, I would like you to do this. I would like
you to read the legislation, the committee consideration of it, and
in particular the testimony by_ Secreta~y Bra~y and by Chairman
Greenspan on this issue of settmg margm reqm~eme;11ts, and where
that authority ought to be, and why they thmk 1t ought to be
placed in the Fed.

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45

The, submit in writing to the committee your thinking on that
issue in the light of-are you familiar with the Greenspan and
Brady presentations on that issue?
Dr. PHILLIPS. Not their presentations; with their positions. All I
have read are the press reports of them.
Senator SARBANES. If you could do that and submit it to the committee, it would be helpful.
Dr. PHILLIPS. Yes, sir.
[The following was subsequently submitted for the record:]
SUSAN PHILLIPS RESPONSE TO QUESTIONS RAISED BY SENATOR
SARBANES

Following the hearing, I read title III of the Senate Amendment

to H .R. 707, in particular the sections relating to margin regula-

tion. I also reviewed the testimony and comments by Chairman
Alan Greenspan and representatives of the Department of Treasury, including Secretary Nicholas Brady, during hearings held in
1990 and 1991 relating to margin regulation before this and other
committees. Those views and comments are part of the hearing
records and I need not repeat them. Nevertheless, to respond to
this question in brief, my understanding of Secretary Brady's views
is that he believes that Federal regulation of futures margins and
coordination of that regulation with stock margin regulation are
necessary, consistent with his view that stocks and stock index futures and options are one market. Chairman Greenspan on behalf
of the Board has indicated that margin regulation should be for
prudential purposes, and that Federal regulation resulting in
higher futures margins appears appropriate in order to prevent liquidity pressures on customers, lenders, payment and clearing systems if margins are raised in stressed market situations, particularly in a rapidly declining stock market situation.
Having now reviewed the various market break studies, subsequent pertinent testimony and the evidence relating to seller activity in the futures markets, during declining stock markets, their
still does not appear to be sufficient evidence for me to now advocate Federal regulation of futures margins. The calls for futures
margin regulation over the years have been based on theories of
margins serving to allocate credit, limit speculation, and limit price
volatility. There seems to be general agreement that margin regulation will not be effective to serve any of those three purposes.
The current call for margin regulation as articulated by Chairman
Greenspan and Secretary Brady is based on the need to prevent
systemic risk in the financial market and banking system in times
of market stress. Setting margins for prudential purposes, thereby
assuring the financial integrity of the markets, still seems to me to
be appropriate even in times of market stress. Moreover, there
have been some changes in the futures trading environment which
will assist in strengthening the margining system such as intraday
margin calls, more timely clearance, and circuit breakers. Further,
if the banking system was experiencing reduced reliability during a
market downturn and margin calls were thought to be a contributing factor, the CFTC's emergency power could be invoked to address the situation.

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46
Having said all of the above, I realize I have not been taking the
financial regulatory pulse for the past four years and I certainly
respect the opinions of those now calling for regulation of stock
index futures. In any case, if title III is passed, and if I am confirmed, I would hope to assist in the development of a regulatory
environment which would assure not only the integrity of the markets and the banking system, but also the liquidity of the markets.
Senator SARBANES. You are nominated from which Reserve District?
Dr. PHILLIPS. Seven, Chicago.
Senator SARBANES. And that encompasses what?
Dr. PHILLIPS. Iowa, the whole State of Iowa, part of Illinois, part
of Indiana, and part of Michigan.
Senator SARBANES. And part of Wisconsin, I think?
Dr. PHILLIPS. Yes, I believe it does.
Senator SARBANES. We have had trouble with a fellow nominee
on having a really relationship with their district. That does not
seem to be a problem in your case. I think it might be helpful if
you put into the record the basis of your connection with the 7th
Federal Reserve District.
In some of these instances, what they do-and we have another
nominee up here who has no real-life connection with the Federal
Reserve District for which he is being nominated. He happens to
live in it right now because he holds a job here in Washington, DC.,
but he has no connection with the business or commercial or agricultural sectors of that district.
I do not perceive the same problem in your case. In fact, I perceive just the reverse. But I think it might be helpful if you laid on
the record, first of all, your understanding of that requirement in
the Federal Reserve Act, if you have such an understanding, and
then the basis of your connections which you think meet the requirements of the Federal Reserve Act.
Dr. PHILLIPS. My understanding of that provision of the Act is
that the appointments should be from different geographical areas,
different Federal Reserve Districts.
I have assumed that goes to not having too many governors from
any one Federal Reserve District. The goal was to get some geographic balance.
With respect to my connection with the Chicago District, of
course as I have indicated it does encompass the entire State of
Iowa. I have lived in Iowa off and on since 197 4, except for the two
periods of time when I was with the Federal Government.
So I have actually moved to Iowa three times. I have lived in
Iowa longer than any other State. My father was in the service. We
moved around, but I have lived in Iowa over 9 years, not contiguous years. Most recently, over 4 years.
As has been mentioned, the University is a major research institution within the State. My universite position has gotten me involved with a large variety of both business and educational and
agricultural interests within the State.
I have also been involved on the University's behalf in attempting to assist in providing leadership for the University in technology transfer to assist in economic growth for the State of Iowa.

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47
Then of course, as has already been mentioned in questions
about my serving on originally Iowa Resources, and also now Resources. So I am directly involved in the business activities of the
State of Iowa.
Senator SARBANES. Well, I simply want to make this observation.
As I read your resume, in effect since you got your Ph.D. from the
Louisiana State University, with the year there, you then went to
the University of Iowa and in effect you have been at the University of Iowa in a sense ever since, with these departures to come to
Washington to do the CFTC work.
Would that be correct, essentially?
Dr. PHILLIPS. That is correct.
Senator SARBANES. I read the requirement not only-not to have
too many people from one district; I think that is obvious-but also
that the people who come from these districts should have some acquaintance and knowledge with the economic life and activity of
the particular district they are coming to represent so that they
bring to the Fed not only the fact that they live in a different district, but they bring knowledge about the economic activities of
their district.
In fact, the law says:
In selecting the members of the Board, not more than one of whom shall be selected from any one Federal Reserve District, the President shall have due regard to
a fair representation of the financial, agricultural, industrial, and commercial inter•
ests in geographical divisions of the country.

I simply, I think for purposes of the record, do not perceive any
problem in your instance in meeting this standard that I think is
in the law.
I mean, I think you have had this experience at the University.
We may differ about the activities of the Mercantile Exchange, but
you have had that experience in Chicago, and you have had your
CFTC experience, much of which of course was related to this area
of the country.
I think you said earlier that one of the reasons you thought they
had suggested you for the CFTC was to get someone out of the Midwest, as I recall.
Dr. PHILLIPS. I believe so-that is my guess.
Senator SARBANES. Mr. Chairman, it is an issue I have pursued
with other nominees, and I simply wanted to put on the record in
this instance that I do think that this nominee has, as it were, a
connection with the District from which she has been nominated
which is of the sort that the law was intended to bring about.
The CHAIRMAN. Let me just indicated that Senator Sasser was required to catch a plane and had to leave. He has some questions for
the record that he wants to ask you and have you respond to for
the record.
So we will have you do that.
I have a few more questions here, and then I want to conclude
our discussion and move to our next nominees.
In your professional work, have you spent any meaningful
amount of time on looking at the effects of the tax cuts during the
1980's on the economy, and how they have had an impact on our
deficits, and our growth, and things of that kind?
Dr. PHILLIPS. No, sir, I really have not.

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The CHAIRMAN. So you do not hold yourself out as a person who
has really looked at the whole question of tax policy as a way to
stimulate the economy?
Dr. PHILLIPS. No, sir.
The CHAIRMAN. Let me give you a statistic. I think the tax
changes of the 1980's have had a lot to do with the buildup of
damage, financial damage, in the late 1980's and the early 1990's,
in financial sectors and in the economy generally.
I asked in an earlier question that we go back and take a look at
just one year out of the 1980's. The year is 1988. There are people
in this country, obviously, who have taxable incomes above
$500,000. In 1988, they paid a lot less in Federal taxes than they
would have paid had the tax laws that were in place back in 1981
been left as they were. As you know, there were some series of tax
changes down through the 1980's that cut the tax rates substantially for people at the high income levels.
Would you have any idea as to how much revenue was lost to the
Government in the year 1988 because lower tax rates were put in
place during the 1980's for people who had taxable incomes above
$500,000?
Dr. PHILLIPS. No, sir, I do not. I am sorry.
The CHAIRMAN. Would you be surprised if I told you that the
figure is just about $39 billion in 1 year? Does that sound like a
lot?
Dr. PHILLIPS. I am surprised. That seems like a lot of money.
The CHAIRMAN. It is a lot of money. $39 billion is what the official tax analysis found is the amount of tax revenue foregone, or
the amount of tax relief just for that group of taxpayers.
Senator SARBANES. Which group is this, now?
The CHAIRMAN. These are taxpayers with taxable incomes over a
half-a-million-dollars. In other words, those that would have earned
more than that, presumably, but this amount is after their deductions and writeoffs and so forth. This would just be the amount of
income actually subject to tax.
That's a very specialized group of fortunately situated individuals in our society that would have had taxable income of $500,000
or more.
The tax savings for that group in just 1 year, is $38.7 billion, essentially $39 billion.
It is interesting to wonder what happened to the money. The
theory was that there was going to be a supply side miracle, and
that the people in the high income part of our economy, if they
were given big tax cuts, would somehow invest this money so that
we would have a wonderful surge in the economy that would provide lots of jobs and help get rid of the Federal debt.
It did not work that way. It has all worked the other way. It is
one of the astonishing consequences of looking back at the 1980's,
that that whole strategy worked almost exactly the opposite of the
way it was supposed to work.
It was supposed to create a whole lot of jobs and solve the deficit
problem, and in fact the deficit problem now is much worse. There
are not enough jobs, and we are in a deeper hole than we were
when we started.

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It is not exactly clear where all that money went from these tax
cuts for people at high-income levels.
From what one can see, a lot of it went for just discretionary expenditures. You live out in Iowa I expect in a fairly modest circumstance, but I gather from what I read that in New York City, for
example, where a lot of the big shooters who got these massive tax
cuts live, the cost of elegant apartments on Fifth Avenue went up
to a very high price.
The prices on very fine paintings auctioned at Sotheby's went
way up I think in part because this tax-cut money was chasing
these kinds of items and driving the price levels up.
Do you have any thoughts as to-recognizing that you are not a
tax expert as such-is it possible that we need to go back and get
some of that tax revenue at least from that group, to try to get
these deficits down a bit?
Dr. PHILLIPS. Again, I am sorry but this is not an area in which
IThe CHAIRMAN. No, you are not an expert, but you are a citizen,
and you are an economist, and you are a very thoughtful person,
and you have been in this town a long time. Does that kind of an
idea seem like one that we ought to start to think about?
Dr. PHILLIPS. I certainly think it is something that could be
looked at. I do not know what the effects would be of a tax of that
nature.
The CHAIRMAN. Well, you know what the effects of the tax cut
were in terms of the dollar savings to that crowd. They are certainly paying a lot less tax now. One of the problems is that deficits
have gotten bigger.
We have had a weak economy, and we have had a shortfall in
revenue, and part of the shortfall in revenue is because we gave a
great, big tax cut at least in aggregate amounts to people at high
income levels.
In your perceptions and training as an economist, does that not
set off some concerns?
Dr. PHILLIPS. I think you have hit the nail on the head in terms
of what did they spend the money on. Was it in terms of pure consumption? Or was it in terms of spending that would have had
other stimulative effects?
That is something that I am just not as familiar with. But I
think those are the kinds of things that would be useful to look at
. in considering such a tax.
Senator SARBANES. We are just trying to find out whether there
is a trace of Midwestern prairie populism in you, Ms. Phillips.
The CHAIRMAN. Yes, I see. [Laughter.]
Senator SARBANES. It is a hallowed tradition out there in your
part of the country. While you did not grow up there, we thought
some of it might have rubbed off during the course of your stay
there.
Dr. PHILLIPS. I have not seen the proverbial $4 corn and $6 beans
coming out of this tax change.
The CHAIRMAN. Well, let me take you one State further east.
You have had experience with the commodities markets in Chicago, so you certainly have a sense for, beyond Iowa, the Illinois economy, or that part of the Illinois economy.

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How familiar are you with the Michigan economy, a large part of
which you would represent of the geographic zone that you have
been assigned?
Dr. PHILLIPS. It is certainly a lot more diverse than Iowa. Of
course the heavy concentration of the auto industry is what in my
mind dominates much of the Michigan economy.
Iowa is part of the Big Ten, and so I have had active communication with my counterparts at both Michigan and Michigan State,
and I know that that State has had some difficult times.
The CHAIRMAN. Now you would represent the lower Peninsula of
Mi-:higan, on the Federal Reserve, would you not?
Dr. PHILLIPS. I would be from that Federal Reserve District.
The CHAIRMAN. Yes, that is what I mean.
Dr. PHILLIPS. Yes.
The CHAIRMAN. You are specifically appointed from the geographic region that covers within its boundaries that part of the
State of Michigan?
Dr. PHILLIPS. That is correct.
The CHAIRMAN. That would constitute about 90 percent of the
population of the State. It includes the lion's share of the State
,:,conomy.
What is your sense for how the domestic auto industry is doing
these days?
Dr. PHILLIPS. It is having a very difficult time. I think that the
announcements this week have been very distressing. I was interested to hear in your opening remarks, I am hopeful that some of
the efforts that are being undertaken to get that industry going
will be of some help.
The CHAIRMAN. Well, those developments in new technology, unfortunately, are some years down the road. They have got an immediate problem. They have got an immediate cash flow problem
and a lack of sales problem.
Do you have any real familiarity with those problems? Have you
studied it?
Dr. PHILLIPS. In a general sense, yes. That economy is a lot more
diverse than the Iowa economy and the manufacturing segment is
much more predominant.
The CHAIRMAN. Are you aware of any time in the last several
decades when the domestic auto industry has been in a position of
distress as acute as it is at the present time?
Dr. PHILLIPS. It seems to me worse now.
The CHAIRMAN. It is far worse now. As a matter of fact, Ford and
General Motors have just announced their losses for the last 90
dhys. It is close to $2 billion for the two combined. Chrysler's figures will come out very shortly, and I am afraid they are going to
be pretty alarming, as well.
There has been a massive capital drain out of the industry over
the last several quarters. The aggregate losses now would be something in the range of $10 billion.
We have never had a capital hemorrhage like that before. We
have got major layoffs in the industry. Unfortunately, we do not
have any extended unemployment benefits for workers who have
been out of work for over 6 months, and many of them are auto
workers or have jobs related to the auto industry.

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We have a terribly serious problem in that area. In my time
here, I have not seen a more difficult or advanced or deeply rooted
set of economic problems in the domestic auto industry than I see
right now.
It seems to me that it is one of the things that you must look at,
not only because it is important within the region that you are
being named to represent, but also because it continues to be a
very major part of the national economic system.
Autos are one of the few high value added products that we still
make in this country and consume in large numbers. The auto industry has a very substantial effect of the economy as a whole.
I want to talk to you about this before we move ahead here. I
would like you to make it a point to get an update on the problems
in the auto industry. I do not just ask this from a Michigan perspective. There is a very substantial auto industry presence in virtually all of the States within your geographic region.
A lot of it is centered in Michigan, but the other States, even
Iowa, have major auto concentrations, as well. I would like you to
take a look at that and I would like you to try to size it up, because
I think this is one area where monetary policy and the level of interest rates, and the availability of credit is terribly important, because very few people pay cash for cars.
We are now finding that some dealers, for example, are finding it
very difficult to finance not only putting cars in show rooms for
people to come and look at, but also providing credit for the few
people who want to buy.
There are some major problems in the auto industry. I just left a
meeting, as I mentioned, where I was talking with some of the
people in that industry, and they have never seen anything like it.
It is beyond the current memory of anybody in the auto industry, a
time as difficult and as dangerous as it is at the present time.
I need you to understand that, and I think the country needs to
have you understand it, very particularly because you come from
that region of the country and are so assigned.
So let me ask you to undertake that assignment. I would like you
to do it promptly, because I would like to then talk to you about it
and what might be done about it.
I think there are some Fed policy initiatives that relate to this,
and whether they can be pursued or not is a judgment that you, if
confirmed, will have to make as the other Governors would have to
make.
It is a deadly serious matter. I think if Senator Bradley's description, which I find I did quote properly, that we are in a kind of
slow motion depression is true, and I am inclined to think there is
a lot of weight that supports that, the auto industry may be today
one of the lead indicators of the problem.
I do not want us to find ourselves in a situation where we are
accumulating permanent damage that we will not have the
strength to undo or to correct at a later point in time.
I think if you contact the companies, they would be happy to talk
to you. I would like you to apply your economic credentials, and
history, and know-how to this problem, because this is one of the
problems you are going to have to articulate on the Board, if confirmed.

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I know of no industry right now in America that is in greater
distress, quite frankly. There are a lot that are being hammered.
Certainly the commercial real estate industry is, but that is spread
out all over the place. In terms of a rather concentrated industry,
the only one I am aware of is the auto industry.
So I would ask you to make an effort to get on top of that.
Senator Sarbanes, anything else from you at this time?
Senator SARBANES. Ms. Phillips, did you talk with Chairman
Greenspan or other members of the Federal Reserve Board in the
course of eventually being nominated for this post?
Dr. PHILLIPS. Yes, very briefly I did talk with Chairman Greenspan, and I met Governor Angel just this week.
Senator SARBANES. And when did you talk with Chairman
Greenspan in the course of this process? As I understand it, you
originally talked with people at the Treasury, and subsequently to
people at the White House.
Dr. PHILLIPS. I believe that it was sometime in the summer. I
think it was sometime in July. I had come into Washington for
something else. He had indicated if I were in Washington to stop
by and see him. He would like to meet me, and I did.
Senator SARBANES. That was after you had been nominated?
Dr. PHILLIPS. It was during the period of time when the FBI investigation was ongoing. So the process was underway.
Senator SARBANES. So at that point you had been picked by the
administration to be, assuming nothing came up in the FBI report,
to be the nominee for the Fed?
Dr. PHILLIPS. I believe that is correct. I was not actually nominated until September.
Senator SARBANES. When were you actually nominated?
Dr. PHILLIPS. I think it was September 27.
Senator SARBANES. September? Mr. Chairman, I just want to
note for the record that this hearing is being held within a month
of the nomination.
I want it very clear, because of the things that happens is, on
July 14, the Des Moines Register carried a story saying that-well,
it goes back even further.
Word spread this spring that you were being considered for another top level Government position. Then they have this story
now:
Is poised for nomination by President Bush to the Federal Reserve Board.

Now what happens in this nomination situation-this has not
much to do with you, but-is the President, or word goes into the
public arena that a nomination is going to be made, but then develops a view that the Congress is delaying this nomination, relating
it back as a starting point to when it goes into the public domain
that this nomination is going to be made.
Now you were in the public domain in mid-July as a nominee to
the Federal Reserve Board, but we did not actually get your
papers, and you were not a ~ominee as f~r as we were concerned
here in the Congress to c~ms1der_you until t~e e~d of September.
So in a sense the delay m movmg your nommat10n forward from
the time it wa~ first announced is more downt9wn than it is up

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here on the Hill. That has happened repeatedly in nominations
that I have been involved in.
Now there are some nominations that are highly controversial in
which there is a delay here in the Congress while we try to examine whether the nominees ought to be approved or not, but you
have come in here for your hearing in fairly quick order.
And the longer period, the significantly longer period of time,
was from the sort of public knowledge about your nomination and
the actual submission of your papers.
The CHAIRMAN. I might say that Ms. Phillips made an acknowledgement at the outset that she appreciated the speed with which
we moved. We received your questionnaire about less than 2 weeks
ago. So we have made every effort to try to accommodate you here
today, and we want to do so with the nominees to follow you.
There is intense interest in this nomination. Today a number of
members have had to leave town for requirements that they have
in their home States over the weekend and so forth, so you ought
not to in any way draw the conclusion that members who are not
present do not have an intense interest in this nomination.
This is one of the most important positions in Government. The
country I think is in deep economic trouble. I have given you some
indication of that today with these charts, but the daily news
today, yesterday, the day before, repeats it in every manner and
form and example.
The decisions that you will be a part of, if you are over there, are
going to decide whether we pull out of this tailspin and start getting some traction in the economy and some good, long-term
growth, or whether we are going to go into a further decline.
I do not think we can afford a further decline. If you are not aggressive and full of ideas about getting this economy turned
upward and moving strongly, then you should not take the job. As
much as you might want it, and as much as it might fit in a professional progression, if you do not have a great sense of urgency
about getting this economy going and on a sustained path of economic growth, then this is not the right job for you .
. We need that action now. We particularly need it over in the economic team in the administration, and we will get to the two
people who have been appointed to positions there, but I would ask
you to reflect further on that, as well.
Because when we talk about the status of the automobile industry and where that stands right now, I am going to want to talk to
you further about your sense of urgency about where the economy
is and what might be done to get it moving at a much stronger
rate.
Dr. PHILLIPS. Thank you, very much. I do appreciate your bringing this forward so very quickly.
The CHAIRMAN. Thank you.
Let me excuse you now and invite our other two nominees to the
table today, David Bradford and Paul Wonnacott.
Let me also welcome our colleague, Senator Bradley, from New
Jersey who is here and I know wants to introduce one of the nominees today.
We will just wait one moment. [Pause.]

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Senator Bradley, we are pleased to have you before the committee today. I know you are here for purposes of an introduction, and
we would like to hear that now.
STATEMENT OF WILLIAM BRADLEY, U.S. SENATOR FROM THE
STATE OF NEW JERSEY
Senator BRADLEY. Thank you very much, Mr. Chairman, for affording me the courtesy of coming before the committee. I am very
pleased to be here today to introduce Professor David Bradford to
the committee.
I met Professor Bradford many years ago when we were fighting
for tax reform.
As Deputy Assistant Secretary for Tax Policy in the U.S. Treasury Department, Professor Bradford was instrumental in preparing
the blueprints for the Tax Reform Act of 1986.
His work played a similar role, I think, in developing Treasury's
thinking about tax reform. Professor Bradford is highly qualified to
serve on the Council of Economic Advisers.
He is a Phi Beta Kappa graduate of Amherst, holds advanced degrees from Harvard and Stanford, has many honors including the
National Woodrow Wilson Fellowship, and the U.S. Treasury Department of Exceptional Service Award.
He is currently on leave from Princeton University and the National Bureau of Economic Research. He has been a Princeton faculty member since 1966. He served as Professor of Economics and
Public Affairs as Associate Dean at the Woodrow Wilson School of
Public and International Affairs, and Director of the John M.
Olden Program for the Study of Economic Organization and Public
Policy.
He has also been a Director of the Tax Program for the National
Bureau, a member of the Economic Policy Council of the State of
New Jersey, and vice chairman of the New Jersey State and Local
Expenditure and Revenue Policy Commission.
Perhaps more important, Professor Bradford has greatly contributed to the exchange of ideas in economics. He is an indispensable
reference on the microeconomics of public finance. His papers on
the income tax system and, more specifically, on the taxation of
private investment, savings, and financial decisions in my opinion
are both innovative and timely.
Finally, David is a person of great personal and intellectual integrity. He has the courage to advance views that go against the
prevailing winds. I am confident that his counsel will be invaluable
as the United States addresses many tough questions on how to get
our economy back on track.
So, Mr. Chairman, it is a great pleasure for me to be here and
introduce David to the committee. I know you will find him to be a
very cooperative and informative witness in any way you choose to
direct the conversation.
I thank you very much for allowing me to be here.
The CHAIRMAN. Thank you, Senator Bradley. You are welcome to
stay, or we will excuse you now if you have other things to attend
to.

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Let me introduce in a formal way both of our nominees here. I
will start with David Bradford who has just been mentioned, who
serves as a Professor of Economics at Princeton and an Associate
Dean of the Woodrow Wilson School there.
He is, as Senator Bradley has said, considered to be an expert on
tax policy. During the mid-1970's, he served a stint as Deputy Assistant Treasury Secretary for Tax Policy and apparently was the
principal author of Blueprints for Basic Tax Reform, which helped
set in motion what eventually became the Tax Reform Act of 1986.
That will be something that we will want to go through with you
in some detail.
As the Council's microeconomist, Mr. Bradford would traditionally be asked to provide technical advice on structural, regulatory,
and specific industry issues.
Paul Wonnacott has also been nominated to serve as a member
of the Council of Economic Advisers. Mr. Wonnacott is a Professor
of Economics at the University of Maryland.
He has worked for brief periods for the Department of State, the
Treasury Department, the Federal Reserve, and at a much earlier
stage in his career as a staff economist at the Council of Economic
Advisers.
He was a long-term proponent of the United States-Canada Free
Trade Agreement. As the Council's macroeconomist, he would be
asked to concentrate on broad issues affecting the health and
growth of the U.S. economy.
Gentlemen, let me welcome you both. I am going to ask you both
to stand, and I will administer the oath to both of you at the same
time.
Do you swear that the testimony you are about to give is the
whole truth and nothing but the truth, so help you, God?
Dr. BRADFORD. I do.
Dr. WONNACOTT. I do.
The CHAIRMAN. Do you agree to appear and testify before any
duly constituted committee of the Senate?
Dr. BRADFORD. I do.
Dr. WoNNACOTI. I do.
The CHAIRMAN. Very good.
Let me now invite you-you have been very patient this morning. We have made an effort to accommodate your nominations,
the papers of which have also arrived not all that long ago.
I want to go as far as we can today. I am not confident, given the
lateness of the hour and the time spent on the first nominee, that
we will be able to finish today, but I want to get as far as we can,
and then get you back to finish up promptly, as well.
Mr. Bradford, let me invite you first to introduce any members of
your family that may be present, and then Mr. Wonnacott, and
then I am going to call on you each in sequence to make your own
opening statements.
Mr. Bradford, do you have anybody here you would like to introduce to us?
Dr. BRADFORD. Senator Riegle, thank you very much. I in fact
have a rather large clan here.
The CHAIRMAN. Good.

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Dr. BRADFORD. I hope I can remember all of their names in this
situation. [Laughter.]
Let me start with my mother, Mrs. Mark Bradford, and my
father Mark Bradford.
The CHAIRMAN. Yes.
Dr. BRADFORD. My mother-in-law, Mrs. Gudrun Huober, who is
from Germany. My wife, Gundel, here. My daughter, Catherine, is
at school in Massachusetts; and Theodore is at school in Minnesota.
The CHAIRMAN. Very good. We welcome your family and we are
delighted that they are here with you, and particularly that you
have a guest here from Germany.
Dr. Wonnacott?
Dr. WONNACOTT. I think that Mr. Bradford has enough for both
of us, sir. [Laughter.]
The CHAIRMAN. Enough family for the two of you, eh? [Laughter.]
Very good. Let us continue then with you, Mr. Wonnacott. Let us
have your opening statement at this time, and then we will go to
Mr. Bradford.
OPENING STATEMENT OF PAUL WONNACOTI', PH.D., OF MARYLAND, TO BE A MEMBER OF THE COUNCIL OF ECONOMIC ADVISERS

Dr. WONNACOTT. Mr. Chairman and distinguished members of
the committee on Banking, Housing and Urban Affairs.
I am pleased and honored today to appear before you as a nominee to be a member of the President's Council of Economic Advisers.
I particularly appreciate the timely way that this hearing has
been scheduled. It is a particular honor to follow in the footsteps of
distinguished economists who have preceded me in this position, including Paul McCracken, Herbert Stein, and Nobel Laureate James
Tobin.
Before being nominated as a member of the Council of Economic
Advisers, I was on the Economics Faculty of the University of
Maryland since 1962, prior to which I spent 4 years as a faculty
member at Columbia University.
My fields of academic specialization are international economics,
both trade and finance, and macroeconomics. If confirmed, I will
concentrate on these areas at the Council.
Having been a tenured professor for many years, I think that it
is particularly important for me to be sensitive to the plight of
those who are less fortunate, particularly those who have been
thrown out of work in the recent recession.
I have periodically interspersed my academic career with Government service. Between 1968 and 1970, I served as a Senior Staff
Economist at the Council, first under Arthur Okun, and then later
under Paul McCracken.
I am pleased, as I left the Council, to have recommended Marina
Whitman to succeed me. She later went on to become a member of
the Council.
During 1974 to 1975, I served in the International Finance Division of the Board of Governors of the Federal Reserve System. In

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1979, I held a position briefly as a visiting research scholar at the
U.S. Treasury.
During the past year and a half I was Economic Adviser to the
Under Secretary of State.
I have tried as a professional economist to give advice based on
sound and objective economic analysis and facts. If confirmed, I
will make every attempt to continue to do so as a member of the
Council of Economic Advisers.
In appearing this morning, I welcome any questions you and the
members of the Committee may have.
[The complete prepared statement of Paul Wonnacott follows:]
COMPLETE PREPARED STATEMENT OF PAUL WONNACOTT

Mr. Chairman and distinguished members of the committee on
Banking, Housing and Urban Affairs: I am pleased and honored
today to appear before you as a nominee to be a member of the
President's Council of Economic Advisers.
It is a particular honor to follow in the footsteps of distinguished
economists who have preceded me in this position, including Paul
McCracken, Herbert Stein, and Nobel Laureate James Tobin.
Before being nominated as a member of the Council of Economic
Advisers, I was on the economics faculty of the University of Maryland since 1962, prior to which I spent 4 years as a faculty member
at Columbia University. My fields of academic specialization are
international economics-both trade and finance-and macroeconomics. If confirmed, I will concentrate on these areas on the council.
I have periodically interspersed my academic career with Government service. Between 1968 and 1970, I served as a Senior Staff
Economist on the council, first under Arthur Okun, and then
under Paul McCracken. I am pleased, as I left the Council, to have
recommended Marina Whitman to succeed me. She later went on
to become a member of the Council. During 1974-75, I served in the
International Finance Division of the Board of Governors of the
Federal Reserve System. In 1979, I held a position as visiting research scholar at the U.S. Treasury. During the past year-and-ahalf, I was Economic Adviser to the Under Secretary of State.
I have tried, as a professional economist, to give advice based on
sound and objective economic analysis and facts. If confirmed, I
will make every attempt to continue to do so as a member of the
Council of Economic Advisers. In appearing this morning, I welcome any questions you and the Members of the committee may
have.
The CHAIRMAN. Very good. Mr. Bradford, let us have your opening statement now, please.
OPENING STATEMENT OF DAVID F. BRADFORD, OF NEW JERSEY,
TO BE A MEMBER OF THE COUNCIL OF ECONOMIC ADVISERS

Dr. BRADFORD. Thank you, Mr. Chairman.
Mr. Chairman and distinguished members of this committee, it is
a great honor for me to appear before you today as a nominee to be
a member of the President's Council of Economic Advisers.

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Many fine economists have preceded me at the Council, and I believe the Council has played an important role through the years. I
look forward to the opportunity to continue that distinguished tradition.
At the time I was invited to serve on the Council, I was Professor
of Economics and Public Affairs at Princeton University a n d ~
ciate Dean at Princeton's Woodrow Wilson School of Public and
International Affairs.
I have been a member of the Princeton faculty for 25 years since
leaving graduate school at Stanford University. I hasten to add
that I have from time-to-time ventured outside of Princeton during
those years in my activities in consulting, visiting teaching, research, and public service.
For a year-and-a-half, as has been mentioned, during the Ford
administration I was fortunate to have the opportunity to serve as
Deputy Assistant Secretary of the Treasury for Tax Policy.
My academic research has involved the application of microeccr
nomics to a variety of policy issues. I was happy to find at Treasury
that my general training in microeconomics enabled me to contribute quickly to the specifics of tax design.
I believe that my background would also be beneficial to the
council, where my responsibilities would include the microeconomics of tax issues, but also extend over a broader range of policies, such as in the areas of energy, environment, health care, communications, transportation, and financial institutions.
As a professional economist, if I am confirmed, I would make
every effort to give advice based on objective, sound, and comprehensive economic analysis. I would gladly be available to discuss
economic issues with, and to receive input from any Member of
this committee, and any other Member of Congress.
In conclusion, I would like to thank you and the committee for
considering my nomination, and for scheduling this hearing so
promptly after my nomination.
Mr. Chairman, I would be happy to answer any questions you or
other members of the committee might have.
[The complete prepared statement of David F. Bradford follows:]
COMPLETE PREPARED STATEMENT OF DAVID F. BRADFORD

Mr. Chairman and distinguished members of the committee, it is
a great honor for me to appear before you today as a nominee to be
a member of the President's Council of Economic Advisers.
Many fine economists have preceded me, and I believe the Council has played an important role through the years. I look forward
to the opportunity to continue that distinguished tradition.
At the time I was invited to serve on the Council, I was Professor
of Economics and Public Affairs at Princeton University, and ~
ciate Dean of Princeton's Woodrow Wilson School of Public and
International Affairs. I have been a member of the Princeton faculty for the 25 years since leaving graduate school at Stanford University. I hasten to add that I have from time-to-time ventured outside of Princeton during those years in my activities in consulting,
visiting teaching, research and public service. For a year-and-a-half
during the Ford administration, I was fortunate to have the oppor-

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tunity to serve as Deputy Assistant Secretary of the Treasury for

Tax Policy.

My academic research has involved the application of microeconomics to a variety of policy issues. I was happy to find at Treasury
that my general training in microeconomics enabled me to contribute quickly to the specifics of tax design. I believe that my background would also be beneficial to the council, where my responsibilities would include the microeconomics of tax issues, but also
extend over a broader range of policies, such as in the areas of
energy. environment, health care, communications, transportation,
and financial institutions. As a professional economist, I would
make every effort to give advice based on objective, sound, and
comprehensive economic analysis. I would gladly be available to
discuss economic issues with and to receive input from any
member of this committee and any other Member of Congress.
In conclusion, I would like to thank you and the committee for
considering my nomination. Mr. Chairman, I would be happy to
answer any questions you or other members of the committee
might have.
The CHAIRMAN. Let us start, Mr. Bradford, with you.
You were involved in the tax policy decisions during the 1980's,
at least some of those decisions, within the administration. Is that
correct?
Dr. BRADFORD. Mr. Chairman, that is not strictly correct. I was in
the Government during the Ford administration in the 1970's.
During the 1980's I, from time-to-time, testified before Congress,
but I was not involved in making policy in the administration at
that time.
The CHAIRMAN. I see. So you had no hand in any of the tax
policy issues of the 1980's?
Dr. BRADFORD. Not as an official, sir. No, sir.
The CHAIRMAN. Well what did you do in an unofficial-Dr. BRADFORD. Well, as I indicated, I did from time-to-time testify
before congressional committees.
The CHAIRMAN. You are sort of an expert on tax policy, or you
are certainly advertised as one.
You heard part of the discussion that I had with the previous
nominee. A large part of the tax cut strategy of the 1980's was
predicated on the notion that it would give us a supply side miracle; that if we cut taxes, it would set off an investment boom and a
growth boom that would really put America on a strong economic
path into the future and solve our deficits, and a lot of other
things.
I must say that as I examine the data now at the end of the
decade of the 1980's, and as we are now into the 1990's, it was a
false promise and it did not turn out that way. I think you saw the
charts I had before. There are any number of others that we could
bring out here, and probably will in the course of the discussion.
What went wrong?
Dr. BRADFORD. Senator, I think probably you need to distinguish
two major epochs in tax policy during the 1980's, and you might
even want to look back to the 1970's and what happened at the
time.

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In the latter part of the 1970's, we had a situation of relatively
high, certainly by today's standards, marginal rates-I am now
speaking of the income tax-and we had a situation where inflation was steadily pushing people up through the income tax.
So we had bracket creep going on, and a general increasing role
of the tax system in people's lives. There was a sequence of efforts
to change this, and a sequence of reform proposals. President
Carter had one, and then there-but these things cumulated to a
major policy reversal in 1981 which involved a radical reduction in
the taxation of investment, radical increases in the amount of
writeoff of equipment, and so on.
Again I will not recite for you all of the details of that development. Many of those steps-and let me single out one other change
that happened then, I believe it happened in 1980, which was the
indexing of the, individual tax brackets and major structural features of the individual tax at that time for inflation.
These changes had a major effect, some of them good, and I
would to this day endorse many of them as desirable directions for
policy.
Some of them were not so good, although I do not know if I
would be on record at the time as stating this, but a lot of people
said at the time that we are going to quickly and giving up too
much revenue; the deficit is going to be a problem, and many pr~
fessional economists argued that this will tend to offset some of the
positive effects that we are trying to encourage with the tax
changes in 1981.
Nineteen hundred and eighty-six was totally different. It was
really another total reversal in tax policy. In 1986, the stresses that
were created by the rule changes in 1981-and let me just summarize those in the one phase of "tax sheltering"-led to a kind of revulsion and a very radical shift in tax policy, again, not all of
which was perhaps the best way to go, but a very radical shift in
tax policy which had two pieces.
One was a very significant broadening of the investment tax
base, bringing into the tax base much more of the investment
spending, and the second was a lowering of the rates. The 1986 reforms also included setting up a whole series of rules to limit the
ability of individuals to shelter income, to engage in what was perceived as mischievous behavior.
I would generalize by saying that the shift that took place in
1986 in bringing down the rates and trying to rationalize the
system, on balance, put us on quite a good course.
They did reduce the importance of the tax system in individual
decisions and reduced the distortions that were created.
The CHAIRMAN. Did we get the supply side miracle out of these
two sets of tax changes which, as you have described, came at dif.
ferent times and were different in content? Have we gotten it? Are
we going to get it?
Dr. BRADFORD. If the supply side miracle was advertised as bringing in more revenue than it cost us in tax cuts, we did not get it. If
the supply side miracle is reducing the distortionary effects of the
tax system in our business lives, I think we did get a great deal of
it.

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There was a considerable reduction of these distortions. Now
there is work to be done in that respect, but I think we did get
quite a bit of benefit out of those changes in the 1980's.
We did pay a price though I think for failing to collect enough
revenue, particularly in the early years.
The CHAIRMAN. Well, you heard the statistic I cited to the last
nominee that in 1988 if you look at the amount of tax paid by the
group of individuals with taxable incomes of $500,000 a year or
higher versus what that same group would have paid under the tax
laws pre-1981, you see there is a difference of $38.7 billion that was
not paid in.
Any idea where that money went? How much good did that tax
relief do us in aggregate economic terms?
Dr. BRADFORD. Senator, I think that is not an easy question.
The CHAIRMAN. I understand, but you have got a big mind and
you are the kind who can crack it apart and give us an answer.
Dr. BRADFORD. I would try to parse it in a couple of ways. One is
to sort of pick apart the statistic, because I am not sure what to
make ofit.
The argument of the 1986 Act certainly was what we wanted to
do was to even things out.
The CHAIRMAN. Let me help you. Let me help you a little bit. We
have got other data here that shows that people at the lower
income levels picked up more of the tax load. We gave a lot of tax
relief to very wealthy people in this country.
I want to know, in as simple a way as you can put it, if we have
gotten a great big economic bonanza out of that in terms of the
economy as a whole, or have we not?
Dr. BRADFORD. Senator, I think I am sorry, I have to answer a
little slowly-the way I would want to think about that is did we
get more income at the upper levels in general, did we get particularly more income being reported on tax returns as a result of the
tax rules? And my suspicion is, yes, we got more partly behaviorally. People probably did undertake more investment and undertake
more efforts of all kinds, and we probably got more reported on tax
returns because we got less sheltering in part because of the rules
that were introduced in 1986.
So a part of the answer is, yes, I think you probably did get a
response, and possibly more than offsetting. In fact, I would think
it not unlikely that there was more than an offsetting response
from that very top group.
But let me make a remark about-Senator SARBANES. Where does the offset come from?
Dr. BRADFORD. I do not understand your question, Senator.
Senator SARBANES. You said, "more than an offsetting response."
Where does the offset come from?
Dr. BRADFORD. The question is: Do you have a sufficiently larger
quantum of income appearing in the income tax returns to produce
the revenue, to make up the revenue that is being arguably lost by
cutting the rates? And it may well be that we did.
The CHAIRMAN. Well, the way the table reads is that that group,
the people above $500,000 in income, because of the effective tax
rates in 1988, paid nearly $39 billion less-less-in taxes than that

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same group would have paid had the tax rates in effect in 1981
been the tax rates that would have been applied to their income.
Dr. BRADFORD. I take it that means before the cuts, the new rate
cuts?
The CHAIRMAN. Yes. Exactly. In other words, if you went back
pre-the 1981 cuts-Dr. BRADFORD. That is an exampleThe CHAIRMAN. -for me, I sort of think of that as a net number.
Dr. BRADFORD. I think we would call that a static revenue estimate in today's jargon.
The CHAIRMAN. Tell me what I am missing. It looks to me like
$39 billion disappeared because of tax relief to people that earn
more than a $500,000 a year.
Dr. BRADFORD. Senator, I would rather say that perhaps it did
not disappear, because I believe-and again I would have to look at
the tables; I may be just wrong-but t:he typical way those sorts of
tables are put together, you take the quantity of income reported
on the tax return, and you apply it to the tax rates in 1981, and
then you apply the tax rates in 1988 and compare the difference.
The CHAIRMAN. Yes.
Dr. BRADFORD. What you do not know is the amount of tax revenue that would have been collected appearing in 1988 under the
1981 tax notes, and the amount of income appearing in that category, and it certainly would not be the same as what was actually
experienced, Actually 1988 income was certainly higher. Whether
it is enough more to makeup for the tax loss by the tax cut, that
was what the argument would be about.
It certainly could be, is my answer.
The CHAIRMAN. Let me tell you what my own view is-and this
gets into the world of where the mind of the economist goes-I
think the economy is in trouble today.
Do you think it is in trouble?
Dr. BRADFORD. I tend to defer-I do not mean to quibble-I tend
to defer on the details of the business cycle situation to my colleague, Paul Wonnacott, but certainly anyone can look around and
see that the economy is in trouble. There are a lot of people in
trouble.
The CHAIRMAN. I do not want you to defer to anybody, because
you are taking one of the spots on the Council of Economic Advisors, and if you do not have an opinion you should not take the
spot, quite frankly. And I do not say that-Dr. BRADFORD. The economy is in trouble, Senator.
The CHAIRMAN. Well, how much trouble?
Dr. BRADFORD. I do not know how you propose to measure that,
sir.
Senator SARBANES. Do you think that-The CHAIRMAN. But that is the whole idea of the job. I mean, the
Council of Economic Advisers for the President is designed, as I understand it, to try to make a judgment about that. You have got to
be able to try to examine the picture for the country and give some
kind of a composite assessment as to where we are, what the problems are, and what we ought to do about it.
Is that not what the job is?

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Dr. BRADFORD. Senator, again we have a certain division of labor
in the Council, and matters of business cycle conditions are not
where I would generally be expected to be heavily involved.
When I observe that the economy seems to be in trouble, I am
reading the same sort of newspaper stories and looking at the same
data that comes very quickly through the Council and into the
press. So there is no difference there, and I am observing people
that I talk to-the taxi drivers, the painter, the friend whose business is going under, and so on.
The CHAIRMAN. But it is not just anecdotal data like that.
Dr. BRADFORD. No.
The CHAIRMAN. It is just what cab you happen to get in. You
have been at this a long time. Presumably the members of the
Council of Economic Advisers ought to have the biggest storehouse
of up-to-date information and assessments and analysis and prescriptions as to what can be done as any that can be found in the
whole country.
We are picking you out of 250 million people because you are
supposed to have a view in that area. I do not want to have you tell
me you do not have a view in that area, because then I ask myself
the question, well, why are you here?
I do not say that disrespectfully, but what you are supposed to
bring into the room, is some sense of where we are and how serious
the problem is, and what might be done about it.
Is that not the nature of the job?
Dr. BRADFORD. With all due respect, Senator, the way we tend to
organize the Council, my principal focus in our jargon is on structural matters, which would have to do with questions like would a
particular regulation be likely to produce benefits in excess of
costs?
What do we need to do to strengthen competition in this or that
aspect?
The CHAIRMAN. Well, what about-Senator SARBANES. I cannot believe this.
The CHAIRMAN. Yes. Go ahead, Senator Sarbanes.
Senator SARBANES. I worked a year for Walter Heller when he
was the Chairman of the Council of Economic Advisers. That was a
Council that had Jim Tobin and Kermit Gordon on it, a very distinguished Council of Economic Advisers.
Sure, they had specialties. They had areas in which they focused,
and I know even more so in recent years they tend to get a microeconomist and a macroeconomist, but I cannot believe that a
person with your kind of academic credentials and experience, Associate Dean of the Woodrow Wilson School, which I was pleased to
be an undergraduate of, is coming in here and telling the committee, well, look, I do not have any thoughts about these major issues
of broad public policy, about fiscal policy, and monetary policy, and
unemployment.
Now if you want to ask me whether this particular regulation on
a plus-minus analysis is being talked about, how that works out
under some kind of analytical analysis or something, you are a full
member of the Council. You are one of three members. I do not
assume Michael Boskin-1 mean, are you going to have communication? Or are Boskin and Wonnacott going to be doing all the big

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work, and you are just going to be sitting off in a comer doing
these little things?
Not that they are unimportant; they are important to the econ~
my, but this does not do justice to the record you bring to the committee. I mean, this is a distinguished record here. But I do not see
these responses to the Chairman-I mean, I do not think you are
doing yourself justice.
You just had Bill Bradley in here, who is a respected colleague of
ours, who had a lot of nice things to say. I just am stymied by this
kind of reaction to the Chairman. You must have some views about
these broader issues. These are some of the issues we want to explore with you.
Dr. BRADFORD. Senator, we microeconomists might differ about
whether only macroeconomics is important, but there is a high
degree of specialization within the profession now, and I am sure it
has increased since Jim Tobin and Kermit Gordon were on the
Council.
The CHAIRMAN. With all due respect, I do not think that is a sufficient answer. You must have some broad view of where the economy is these days.
You have not just arrived from Mars. You observe the economy.
You have got a good mind. You are well trained. You have got to
be able to give us some analysis as to what is going on in the economy.
The sense that I think most people in the Senate have is that the
economy is in deep trouble. Now I gather you are not convinced
that that is so? Or are you partly convinced?
What is your assessment of the economy?
Dr. BRADFORD. Senator, I am a well enough trained economist to
listen intelligently to what my colleagues say about it, and they
say that in their experience in looking at business cycle data the
economy entered a recession, and the evidence is still consist.ent
with the view, as I understand it, that the bottom point, as the
people who work in this field date these things, occurred in the
spring, and the evidence is still consistent with that being the case.
No one is happy with the recent flow of information. So I am expressing I think a general view on that.
The CHAIRMAN. But so where are we?
Dr. BRADFORD. Well, I would say from that judgment we are in a
weak recovery out of a recession.
The CHAIRMAN. What do we do about it?
Dr. BRADFORD. Well, there are various steps we could take. The
administration, as I am sure you are aware, has proposals to attempt to strengthen the economy.
The CHAIRMAN. But what do you think we should do?
Dr. BRADFORD. Well, I think those are good proposals.
The CHAIRMAN. Which ones? What are you talking about?
Dr. BRADFORD. Well, I believe the administration has for some
time had a proposal to lower the inclusion rate of capital gains; to
enhance the ability of households to save; to permit an increased
access to funds for lower-income households, or for purchase of
modest value homes; and to extend some assistance to some of the
urban areas through a series of coordinated programs there.

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Senator SARBANF.S. What are those programs, "to assist the
urban areas#? They are news to me. I do not know of any program
downtown to help the urban areas. What are those?
Dr. BRADFORD. It is not a part of the program with which I am
very familiar, Senator.
The CHAIRMAN. May I ask-Senator SARBANF.S. I think probably no one is familiar with it. I
do not think there is a program there.
Dr. BRADFORD. This is the Enterprise Zone initiative.
The CHAIRMAN. I take it that from memory you are listing the
things that you understand the administration is thinking about
right now.
Dr. BRADFORD. Yes.
The CHAIRMAN. Did you prepare that list for them, or help prepare that list?
Dr. BRADFORD. Well, during the last few weeks I have been doing
my best to learn what is the policy of the administration and what
is going on.
The CHAIRMAN. Well, we have the same problem you do. We are
not having an easy time of it. I take it you have not gotten it figured out yet, either?
Dr. BRADFORD. If I could continue to answer your question about
what I think would help the economy, I do think being-The CHAIRMAN. No, I do not want to go to that yet because we
are on a key point here. I want to just freeze the frame for a
minute on what you understand to be the administration's ideas.
I just want to be clear that those are not ideas at the moment
that you have suggested to them. In other words, the list has been
developed before your arrival on the scene? Is that correct?
Dr. BRADFORD. Those are the policies of the administration, as I
understand it, sir.
The CHAIRMAN. Now let me tell you what I am interested in. I
am interested in what you bring to the table as some fresh ideas. I
mean, if you do not have a list of ideas with this resume, then we
really are in trouble.
What does your list look like?
Do you have a list?
Dr. BRADll'ORD. My list, Senator, would be quite long-term and I
do not think is responsive to your question of what can we do right
now.
The CHAIRMAN. Well, let us hear about the long-term part.
Dr. BRADll'ORD. And I would preface my remarks by saying that it
seems to me very important, as illustrated by that chart you put
up which showed our succession of experiences with the attempts
to control the Federal budget. It seems to me very important to
come to terms with the Federal budget.
Therefore, all policy is being put under constraint. Therefore,
when I speak about the desirability of moving the tax system, for
example, in a direction that would make it more attractive to save
or that I think we should address the problems again in the tax
area of the distortions between debt and equity, I am talking about
something that may never become Administration policy because
we may be prohibited by the constraints of the budget, which I do
think is very important that we live within.

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It was mentioned that I worked a little on the taxation of financial instruments. The complexity in that area is really horrendous,
and the inconsistency with which different elements are treated is
horrendous. If over the longer run I could contribute to rationalizing that a bit, or reducing the importance of those distortions, I
would regard that as a major contribution.
These things I do think are important for the economic system,
and I hope that I can assist in the design of rules that will make
the regulation of the environment one that will be less, rather than
more, costly; more, rather than less, effective.
We have a lot of rules in that area which I think are-again, I
am learning fast, but my impression is that they impose more costs
than necessary to accomplish new objectives. This is the sort of
issue to which I am very anxious to contribute.
The CHAIRMAN. Well let me ask you this question. I hear you,
and you are laboring a bit, and that may be the hour of the day or
the way we are posing the questions, or just the difficulty of the
subjects, but I am sure you have seen public opinion data that was
out last week that says most of the people of the country think the
economy is on the wrong track heading into the future.
Even though you are in an academic setting, Paul Sarbanes has
been in one, and I have been in one, we understand something
about what it is like, out in the nonacademic world where everybody is struggling to try to make a living and pay the bills and so
forth, where there is a tremendous sense of unease.
Every business person that I talk to, and I dare say 99 percent of
the business people that the President talks to, are telling him that
there is a major problem in the economy and something needs to
be done about it.
That reality is really quite manifest. Looking at newspaper ell~
pings out of The New York Times, The Wall Street Journal and
the other national newspapers over the last 90 days on job cuts,
virtually every corporation in America, large and small, is getting
rid of people. Even Wal-Mart just announced it is getting rid of
people.
Now there is a big economic problem out there. So far, at least,
the sense I am getting from you is, either you do not really see it,
or if you see it that is not the kind of thing that you pay attention
to in any near-term sense, and you really do not have any ideas
about what to do about it now or in the near-term.
Is that an unfair summary? That is what I am gaining.
Dr. BRADFORD. Senator, my belief about the system is that the
near-term is dependent upon people's expectations about the longer
term. I am not saying every household says "What is happening to
the budget deficit", or the unemployed worker knows what is happening to the budget deficit, but these things are linked.
Confidence of households in the financial institutions, of businesses in the regulatory structure, in the investment climate, not
only now, in public investment activities, not only now, in the prudence of Government, not only now, I believe is something that
probably people are worried about now.
Therefore, how we see ourselves as setting a course for the
longer term structural issues I think will have an effect now.

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When people say they are not confident now, it is because their
employers are not confident. The employers are not confident
partly because they are not sure where our economic system is
heading.
So that I do not think they are totally unconnected.
The CHAIRMAN. Well, but I must say-and I am going to yield to
Senator Sarbanes-you cannot have it both ways. You cannot say
on the one hand that the deficit is the big problem and we have got
to get it down to improve expectations about the future and lift
confidence, and then when you are asked for a prescription the
only thing you can point to are the things on the administration's
list which are revenue losers which increase the deficit.
Somewhere something has got to add up. I am not hearing anything yet, respectfully, that adds up here.
Dr. BRADFORD. The long-term list, sir, I think probably one could
not really say whether it is a revenue loser or gainer. As to the
short-term lists, again, I hardly need to rehearse the controversy
about whether a capital gains cut would raise or lose revenue.
I think it is a genuinely unresolved issue.
The CHAIRMAN. Well, the latest estimate that we have gotten
from the Joint Tax Committee, which I think most people think is
the best and the most objective group around who do that, says
that over 5 years it is a net revenue loser.
Now maybe you do not believe that, and maybe you make a very
compelling argument.
Let me yield to Senator Sarbanes, because I am still looking for
your strategy to get the economy going but, frankly, I am sort of
right where I started.
Senator SARBANES. Well thank you very much, Mr. Chairman.
Professor Bradford, I think it was Harry Hopkins in the Depression, when someone was talking about the long run, and Hopkins
said, "People don't eat in the long run; they eat in the short run."
We have got a lot of people in this country right now faced with
that problem. In fact, I want to get into it with both of you, but
before I do that, let me ask each of you how this nomination came
about.
You heard me put that question to Ms. Phillips, and I would be
interested in hearing from each of you how you ended up sitting in
front of us at the table today having been nominated to become
members of the Council of Economic Advisers.
Dr. BRADFORD. Shall I start, Senator Sarbanes?
Senator SARBANES. Sure, if you want.
Dr. BRADFORD. In my own case, I am not precise on the dates, but
sometime during the spring I had a call from the Chairman, Michael Boskin, whom I know, saying that Dick Schmalensee, the
microeconomics member, was going to be leaving, and did I have
suggested names for the short list?
We talked about various names, and I said, by the way, I would
be delighted to be on the short list.
Sometime later, again perhaps 6 weeks later, he called me up
and said "you are on the short list," and sometime after that, he
called me up and said, I would like you to come. The President will
want you to come.

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Senator SARBANF.S. You never came down here and went through
an interview process with anyone?
Dr. BRADFORD. I don't think so. No, sir. Not one that I remember.
Senator SARBANF.S. Well, I am rather interested in this. I would
like you to take a moment to just reflect back on it. Were you
interviewed either here or elsewhere by someone in the White
House?
Dr. BRADFORD. Not before Michael had said "I want you to do it."
I guess I would not say I was interviewed at all. I sent in forms,
and I think I had to answer some questions about the forms.
Senator SARBANF.S. Questions concerning personal finances?
Dr. BRADFORD. Yes, that sort of thing.
Senator SARBANF.S. Not policy positions?
Dr. BRADFORD. No. No, I was never asked about my policy positions by anyone.
Senator SARBANF.S. And you did not discuss it with anyone in the
White HouseDr. BRADFORD. No.
Senator SARBANF.S.-sort of excluding Michael out of the White
House when I say that.
Dr. BRADFORD. No.
Senator SARBANF.S. OK. Mr. Wonnacott?
Dr. WoNNACOTr. I first heard about this job in early June, I believe it was, when Michael called me and said that Mr. Taylor was
leaving, and he asked me if I would come down to see him which I
did.
I suppose that would be June 10, or 15, something like that.
We had an interview I suppose of half-an-hour or so. He asked
me if I wanted to be on the list of candidates. I said I would have to
think about it. I got back to him in a couple of weeks and I said.
yes, I would.
Then I talked to some people on the White House legal office
about various forms and so on, and the requirements. Then shortly
thereafter I said to Michael Bosken, yes, I would like to be on the
short list, and he called me back not too long afterwards and said
the short list is becoming very short. Would you like the job?
And I said, yes.
Senator SARBANF.S. OK. So the perception of both of you is essentially the Chairman of the Council in effect did the screening, as
best you know, and the two of you were asked to become members?
Dr. WONNACOTT. Certainly he did the screening. I assume he
talked to other people about it.
Dr. BRADFORD. I only spoke to theSenator SARBANF.S. That is an assumption?
Dr. WoNNACOTr. Yes. I do not know. I mean, I am assuming.
Dr. BRADFORD. In my case, I only talked to the Chairman, and I
do not know what other screening may have been carried out.
Senator SARBANES. Now for how long does each of you understand that, if confirmed, you are to be a member of the Council?
Leaving aside the 1992 election, or maybe even taking it into account since it may affect what your thinking is. For how long do
you all-what kind of commitment do you understand you are
making to this position?

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Dr. WONNACOTT. We did-I did not make an explicit commitment. I understand that I would be committed through the election.
Senator SARBANES. So you figure your commitment is to the end
of next year?
Dr. WONNACOTT. That is correct, Senator.
I might say, Senator, I have not talked at all to Mr. Boskin about
his plans, but I do not think there has ever been a Chairman of the
Council of Economic Advisers who has lasted the full 8 years. I just
assumed that one does not make long-term plans beyond one administration.
Again, I have not talked to Michael about this, but I thought it
was inappropriate to say to him, could I stay for 3 years, because I
do not think that sort of question should arise at this point.
Dr. BRADFORD. Senator, I am committed to stay through the
summer-after-next, 2 years.
Senator SARBANES. So in your situation, even if the opportunity
arose to stay longer, you would not stay longer than the summer of
1993?
Dr. BRADFORD. I would not prejudge it. Princeton will rather routinely give me 2 years of leave, or rather a succession of two 1-year
leaves. They will not at all give me routinely any extension beyond
that, and I would have to think very hard before I would give up
going back to Princeton.
Senator SARBANES. Now I have another sort of easy question for
you all--{Laughter.]
Or maybe they will all be easy. I am interested in the-are you
aware of the Boskin initiatives in the statistics area?
Dr. BRADFORD. Yes, sir.
Senator SARBANES. Well, the Joint Economic Committee, which I
chair-it is another assignment I have besides this one-has taken
a very keen interest in trying to protect our statistical infrastructure from the cuts that the Reagan administration sought to make,
particularly in the President's first term. It got somewhat better
after that.
Also, to support this effort to improve the quality of the economic statistics.
How important do you regard that effort as being?
Does either of you have any view on that?
Dr. WONNACOTT. I think that is very important, Senator. And I
thinkSenator SARBANES. Are you familiar with what is perceived, at
least as I understand it in the profession, as a deterioration, or at
least a growing concern with the quality of our statistics?
Dr. WoNNACOTl'. I am familiar with the general concern, yes.
Incidentally, I might say, if I might, Senator, that it seems to me
there is an additional problem as well. That is, we are living in a
complicated world in which some of the questions themselves have
become more difficult.
I do not want to get into niggling about specific statistics, but
some questions arise about some of the statistics which were shown
us this morning. These are, in part, a matter of definition, and
measurement, and so on.

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So I think we are dealing with a situation where statistics are
more important than they have been, and where we should be
spending more, not less, on statistics.
Senator SARBANES. Professor Bradford?
Dr. BRADFORD. Senator, I endorse that in general. It is just not
an area in which I have a great deal of expertise, but the general
impression is one I share. I am certainly very pleased that this initiative is going forward.
Senator SARBANES. It is liable to be considered a microeconomic
issue, though. It might end up on your agenda. [Laughter.]
Dr. BRADFORD. I will do my best to advance it, Senator.
Senator SARBANES. Are you both acquainted with Janet Norwood?
Dr. BRADFORD. Yes, sir.
Dr. WoNNACOTI'. Yes, sir. We had lunch together with her 2
weeks ago, approximately.
Senator SARBANES. Good. She is stepping down, as you know, at
the end of this year.
Dr. WoNNACOTI'. That is correct.
Senator SARBANES. I regard her as one of the really extraordinarily able professionals in the Federal service, and in many respects I
think it is a great shame that in a sense we are losing her, although her retirement time has come and gone, so to speak, but
she is going into the Urban Institute and is going to take a continuing interest in this particular area and I would hope-I think
Boskin will be consulting with her, and I hope you all will do so, as
well.
It is not much money we are talking about, but it could make a
significant difference. Large decisions involving large amounts of
money are in fact made off of these statistical determinations.
So in a sense, the investment of a few more dollars to upgrade
the statistics has a significance in terms of very large amounts of
money. The Consumer Price Index is but one example of that.
I want to ask you both about the unemployment insurance
system. I take it unemployment insurance benefits are really our
first line of defense as far as automatic stabilizers are concerned.
Would either of you disagree with that?
Dr. WoNNACO'IT. That is correct, Senator, although some people
would say there are two: One of which is the automatic reduction
in income tax collections as incomes fall. But certainly those are
the two which people mention.
Senator SARBANES. Do you agree with that, Mr. Bradford?
Dr. BRADFORD. Yes, sir.
Senator SARBANES. Now the Unemployment Insurance System is
set up with a committed tax. Is that correct?
Dr. BRADFORD. Yes, sir.
Senator SARBANES. So that when the system was structured,
when we faced the problem of where the revenue is going to come
from to fund the system, the answer was provided in the very beginning by levying these unemployment insurance taxes upon the
employers, and committing the revenues from those taxes, both at
Federal and State level, into designated trust funds for that purpose.
Is that correct?

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Dr. BRADFORD. Senator, I cannot speak to the details of that
structure. Broadly, the idea that the Social Security tax would fund
the Social Security benefits is certainly one that I understand to be
correct.
Senator SARBANES. No, this is not the Social Security-Dr. BRADFORD. I beg your pardon, unemployment insurance,
excuse me.
Dr. WoNNACOTI'. Did you want me to answer that, Senator?
Senator SARBANF.S. Yes. I am engaging both of you, if you want
to add to that, sure.
Dr. WoNNACOTI'. Well, it is clear that there was a trust fund for
unemployment insurance. My understanding is that the budget
agreement is somewhat of a qualification, not in terms of changing
the earmarking, but saying in effect that because it was part of the
general category of entitlements, there would be no change in the
law without ways of paying for it.
So that it is quite clear that that money is to be used for the unemployed, but as I understand the budget agreement, there is to be
no change in the terms on which you can draw unemployment insurance without there being a compensating change on taxes, or
some other way of finding revenue.
Senator SARBANF.S. Well, unless you declare it an emergency.
Dr. WoNNACOTI'. Oh, I am sorry. Of course, sir. Of course, Senator. We of course already have a bill which says that benefits can
be extended if there is an emergency, and the emergency as I understand would then override the budget agreement on that.
Senator SARBANF.S. Well, now, the President this year-are you
aware-has found emergencies in order to send money overseas
outside of the parameters of the budget agreement?
Dr. WoNNACOTI'. In the Middle East; yes, sir.
Senator SARBANF.S. You are aware of that?
Dr. WoNNACOTr. Yes, sir.
Senator SARBANES. So the President came to the Congress in
those instances and said, I think there is an emergency. We need to
send money over here to help the Kurds, and the Turks, and
others, and the Government Congress actually acceded to that
judgment and concurred with the President that it was an emergency, and did send money outside of the parameters of the budget
agreement.
Is that correct?
Dr. WONNACOTT. That is correct. As I understand it, that was a
joint decision, and the amounts were reasonably small.
Senator SARBANES. Well now in this instance of course we have a
situation which the Congress has asserted that it is an emergency,
but we cannot get the President to agree with that.
Is that correct?
Dr. WONNACOTT. That is correct, Senator, with respect to that
specific bill. Of course-Senator SARBANF.S. Now let me ask you, from the point of view of
the employer paying in the taxes, though, in effect the social contract that was made with the employers at the time the whole
system was put into place, and the purpose of doing this was to get
a system that would work more or less automatically-I mean, obviously you do not want a system where every time you need to

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pay more unemployment benefits you have to go through a difficult
period of how is the money going to be raised to pay them, because
that costs you time.
Second, you would be trying to raise the money in a downturn
which might well have a contracting effect. So you build the Fund
up in the better times in order to use it in the worst times.
Is that correct?
Dr. WoNNACOTr. That is correct, Senator.
Senator SARBANES. Is that not part of the theory, in other words?
Dr. WoNNACOTr. But, excuse meSenator SARBANES. When unemployment is down, things are
looking pretty good, you levy these taxes, you build this fund up,
and a balance goes. You are not paying out a lot of unemployment
insurance benefits.
Then, things look bad, unemployment goes up, you have a fund
there on which you can draw in order to pay the benefits.
Is that correct?
Dr. WoNNACOTr. That is correct.
Senator SARBANES. Is that not the theory of the system?
Dr. WoNNACOTr. That is correct, Senator.
Senator SARBANES. Now let me just show you a couple of charts.

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Extended Benefit Trust Fund Balance*
In Millions of Dollars
$10,000,. . . - - - - - - - - - - - - - - - - - - - - - - ,
$9,000+ - - - - - - - - - - - - - - - - 1

$8,0001+---------------$7,000•-1--------------$6,0001-+----------------

0

-g:
N

CD
Q.

!I

L)
0

~

$5,ooo,-------------$4,ooo,-------------$3,ooo,------------$2,ooo,-------------

~

$1,000--

~

$0

1980

1982

1984 1986 1988
Fiscal Years

* Excludes transfers to loan account.

1990

1992

Persons Receiving Extended UI Benefits
Monthly Average

1000------------------------,

en
"O
C:

m
:J

...

-:a

0

E.
g
0.

0

L)
0

&

~

-200 \iiiiriiiliiiilhliilhhlhiilhliiihiiiiiiiiiiiiiiiiiihiliHlllhiiiiliilliiiiiiliiiililiiiiillhhillililiililiiiiliiiiiihiihiiiiilihfililliiliiiiiiilhiilhiilhliiiNllidilililliillliiliil/
1974

1976

1978

1980

1982

1984

1986

1988

1990

Note: Excludes Federal Supplemental Benefits and Federal Supplemental
Compensation recipients.

75
Senator SARBANES. This is the extended benefit-the trust fund
balance for extended benefits, the benefits beyond the 26-week
period.
The CHAIRMAN. Would you hold it up a little higher there?
Senator SARBANES. It is now at above $8 billion. It is projected to
go almost to $10 billion next year. In fact, the trust fund right in
the middle of a recession, in which we now find ourselves, unemployment at 6.7 percent-Dr. WONNACOTI'. 6.7-Senator SARBANES. -and we have a new figure coming out a
week from today, 6.7 percent, and the trust fund is actually building up a balance, an additional surplus, of over $1 billion a year.
That trust fund is taking in about $700 million in taxes, taxes
specifically levied on the employer for this purpose, the balance is
earning about another $700 million, $1.4 billion coming in, and it is
paying out less than $200 million. In fact, I think even less than
$100 million.
There is no State now in the Union of the 50 States in which extended benefits are being paid, even though there are States with
unemployment rates of 8, 8.5, 9, 9.5 percent-what is it in Michigan?
The CHAIRMAN. 9.7 percent.
Senator SARBANES. 9. 7 percent in Michigan.
The CHAIRMAN. And we have 170,000 people right now that are
in this situation where they would normally qualify for unemployment benefits.
Senator SARBANES. Now in every previous-I mean, I have not
tracked them all the way back, but I have just gone back to Ford. I
just want to make this nonpartisan in terms of this. This is Ford,
Carter, Reagan with downturns, and these are the number of persons receiving extended unemployment insurance benefits.
So as you can see, what happened in each of these downturns,
the number of people drawing these extended benefits increased
significantly.
Then it came back down as the economy rose again. The economy went down. It went back up again. This is this recession [indicating the chart.] This is the Bush administration over here,
number of people receiving extended unemployment insurance benefits.
Now we were told that this was a short and shallow recession. Of
course it has not been anything of the sort. I mean, the President
finally thinks there is a problem and has started convening meetings at the White House.
When was the first one? Two weeks ago? Three weeks ago?
The CHAIRMAN. Yes. It has been very recent.
Senator SARBANES. Up until then, there was nothing wrong with
the economy. And yet, here is this.
So of course the result is you have this huge balance that was
built up into the trust fund for the express purpose of paying extended benefits, and you have no extended benefits being paid.
Now let me just ask you as the economist. I just want to ask
El()me theoretical questions now not related. As an economist, what
rationale is there for building up the surplus of an Unemployment

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Insurance Trust Fund to pay extended benefits in the middle of a
recession?
Why would you do that?
Would that not be the very period when you would draw down
the surplus in order to pay out the extended benefits?
Dr. BRADFORD. Senator, if I understand the design of the system,
it is an ongoing program with, in effect, benefit rules much like the
ordinary Unemployment Insurance System. If you meet the conditions of the rules, then you draw the benefits.
And if I understand it, the situation we are in is that under the
rules of the program there are not benefits of the magnitude that
were experienced in earlier recessions to be paid, under the rules of
the program.
Senator SARBANF..S. Well, first of all-Dr. BRADFORD. But the program is still in place, and should those
circumstances, let us hope not, but should those circumstances be
reached, the benefits will be paid.
Senator SARBANF..S. Should what circumstances be reached?
Dr. BRADFORD. The sorts of circumstances that would trigger the
extended UI benefits.
Senator SARBANF..S. Well, the law is totally inadequate now. I
mean, the law was changed, and it is quite true, but it is obviously
not working in this recession. It obviously calls out for some adjustment.
Now in fact the law was changed here [indicating] and here [indicating] in order to extend the benefits, not in this one [indicating].
The existing law at the time was, as it were, sufficient to the task;
as the economy went down, the benefits went up. In these other
two instances, changes were made jointly by the President and the
Congress.
This is a Republican President here. It is a Democratic President
here. This is a Republic President here [indicating]. This is the first
time-and the experience earlier on is comparable. I mean, I do
not have those recessions tracked here, but those are comparable to
what is happening.
This is the first time we have gone into this period without
paying extended benefits. Now the basic program is only 26 weeks.
If you lost your job a year ago, 52 weeks ago, the unemployment
rate was at 5.8, 5.9 percent in the last quarter of 1990.
You would have lost your job. You would have used up your 26
weeks of basic benefits. You would now be looking for a job in a job
market with 6.7 percent unemployment, which is more difficult
and worse than the job market at the time you lost your job.
Now is it not long past due to recognize that something needs to
be done for these people?
Dr. BRADFORD. Senator, I think the difference between now and
earlier periods is the budget agreement. I think that is the major
difference in terms of our thinking about alterations in policy.
The necessity is to live within the budget agreement which has
long-term payoff, I think. If we can make people confident that we
are going to live within our plans, then when we need to do something we are going to find a way, we are going to give up something else, or pay for it in some other way.
Senator SARBANF..S. How would you pay for it?

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Dr. BRADFORD. I am afraid I am not prepared to come in with
proposals
Senator SARBANES. Now wait a second. Wait a second. You have
got millions of Americans that are desperate to get these benefits.
We are getting flooded with letters that will tear your heart out.
Dr. BRADFORD. Sure.
Senator SARBANES. I mean, these are working people. By definition, you cannot draw unemployment benefits if you have not established a continuous work record. It is a requirement to draw the
benefits.
So you are not talking about people who have not been working.
You are talking, by definition, about people who have been working. I am getting letters from people with 10, 12, 14 years on a job.
Now they have lost their job.
They are confronted with losing their homes, losing their cars.
Now this is an immediate problem that needs to be addressed.
Dr. BRADFORD. Senator, my understanding is that there is a bill
that has been proposed by Senators Dole and Domenici that the
President has said he would sign that does, in his opinion, meet the
budget-The CHAIRMAN. Do you understand the bill?
Have you looked at it?
Senator SARBANES. Have you looked at that bill?
The CHAIRMAN. Mr. Bradford, do you understand this issue?
Dr. BRADFORD. The broad outlines, yes, sir.
The CHAIRMAN. Well, do you understand the details? You are the
micro-economist. This is a micro issue.
Do you understand the micro nature of this issue?
Do you know the details of it?
Dr. BRADFORD. I think so.
The CHAIRMAN. Well, let's hear them.
Dr. BRADFORD. I believe it would extend unemployment benefits
for 10 weeks. It would finance them by-The CHAIRMAN. What is the trigger? Do you know what the trigger is? How a State triggers on?
Dr. BRADFORD. I believe it would use the UI rate of a-the one
from the unemployment records, but it would add to the numerator
people who have exhausted their unemployment benefits and use
that as a trigger for the benefits.
The CHAIRMAN. And you are for that?
Dr. BRADFORD. The President is-The CHAIRMAN. I did not ask you about the President. He is not
in here testifying. You are in here testifying. Do you have an opinion of your own? I would like to hear it.
Dr. BRADFORD. It sounds reasonable to n,e, Senator. Yes, sir.
Senator SARBANES. How is it being paid for?
Dr. BRADFORD. I believe the sources are an extension of a law to
collect outstanding debts through the tax system.
Senator SARBANES. How does that work? Tell me about that?
This is_your specialty, the tax system. How does that aspect of it
work? That is phony baloney, but I-or at least I think it is phony
baloney-and if you do not, I would like to hear you explain how it
works.

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Dr. BRADFORD. I guess I would have to ask to see the details, sir.
I am only told that that is how it is to be done, and this is a proposal that would raise additional revenues.
Senator SARBANF.S. Well, we have a proposal. We have a law that
says if you took out student loans, and if you have not paid them
back, they will withhold amounts from any income tax refund to
which you are entitled.
That law is due to expire in 1994.
It is now proposed to extend it until 1996. By extending it to
1996, you will then impute to the loan a different value because
you have a greater period for its collection, and therefore you
impute this value which supposedly helps to meet the cost of the
program.
There is not another dollar that comes into the Treasury this
year or next year or the year after, is there?
Dr. BRADFORD. Accepting your description, which I am sure is accurate, sir.
Senator SARBANES. I mean, it is wonderful. I mean, I think what
we should do, frankly, is extend it to the year 2050. Then we could
pay for a lots of things, couldn't we? Could we not do that?
Dr. BRADFORD. My guess is-Senator SARBANES. Why do we not just carry this thing out to its
logical extension-Dr. BRADFORD. My guess is that would not significantly increment the accrual currently, because that would not significantly
increase the present value of collections, Senator.
Senator SARBANF.S. OK. Well, then, we should do it at least as
long as we keep increasing the accrual. It is a gimmick, is it not?
Dr. BRADFORD. If we were to start picking apart the scoring rules
under the budget agreement, I am sure 1 would be very quickly
over my head. I would have to go one by one, and pick them apart.
The CHAIRMAN. You know-Senator SARBANES. Let me just-Go ahead.
The CHAIRMAN. I just have to tell you, I represent 9.5 million
people in Michigan. They are worried about the economy. A lot of
them have lost their jobs. A lot of them are working reduced levels
of hours. They are having a terrible time making ends meet.
The Census data just out shows that the median income for a
family of four last year actually dropped in real terms by about
$570. A lot of people are sliding backward in the economy, and a
lot of them are watching presumably on C-SPAN camera, and they
want to get some sense that there is somebody who understands
the problem and who can do something about it.
Now the two of you are the two people in the whole country that
have been selected to come in and advise the President on the economic situation and try to figure out what the problem is, and
most people in the country clearly think there is a problem.
I am not really clear yet on whether you think there is a very
serious problem, or there is not.
You have kind of hedged it a lot of different ways. Most people
think there is.
You two carry an awful lot of the hopes of the country as seasoned professional economists with a lot of in.depth knowledge

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about how this economic system works and who can help the President figure out what we do to help the economy.
Now maybe your perception is different than ours.
Do you not see your assignments that way?
What about you, Mr. Wonnacott?
Dr. WoNNACOTI'. Yes, I think that is a fair statement.
The CHAIRMAN. May I just ask, then, how serious are the economic problems today as you see them?
Dr. WoNNACOTI'. I think the easiest way to talk about the economic problem is to talk about the unemployed. Since the recession
began, or during the recession the unemployment rate went up 1.5
percent, which is between 1.5 and 2 million people.
The number of people who have been unemployed for over 15
weeks has gone up to 800,000. The recession is also seen in terms of
lost output.
The CHAIRMAN. When you take it all together, do we have a serious economic problem on our hands or not?
Dr. WONNACOTT. The answer is, yes, but there is always the question of compared to what. Yes, certainly. Clearly for the 1.5 million
to 2 million people who are unemployed, and particularly the
800,000 who have been unemployed for 15 weeks, they have got a
big problem. Yes.
Senator SARBANES. Well, what about the discouraged workers?
Over a million-there are 6.4 million workers working part-time
who want to work full-time-not people who want to work parttime. People who want to work full-time are forced to work parttime for economic reasons, 6.5 million.
Over 1 million people are discouraged workers. In 1990, nearly 20
million Americans experienced at least one period of unemployment sometime during the year. It was not 20 million unemployed
all at one time, but during the course of the year-and it is estimated that this year, the figure will be closer to 25 million Americans.
Now I want to put a human dimension on this, Mr. Chairman, if
I could just take a moment.
The CHAIRMAN. Please. Yes.
Senator SARBANES. Because I agree with the Chairman. You are
going to be two-thirds of the Council of Economic Advisers. Neither
of you will be the chairman of it, but nevertheless you are in a position to have some impact.
We think there is a human problem out there that is not being
addressed. I feel very strongly that the President should have declared an emergency; that these funds in the trust fund are being
abused by not being applied for the purpose for which they were
raised, and the purp<>se for which employers paid them.
Here is one letter I got from an unemployed person:
Dear Senator Sarbanes:

I am writing thia letter to you after watching the hearing on television on the
problems of the unemployed people in AMERICA [and America is spelled in capital
letters here]. The reuon I put that in capital letters is because we would be better
off if we were from a foreign country so that President Bush would see it in his
heart to help us out.
He does nothing_ for the Americana that are suffering. I only hope you will be able
to get through to Buah and make him realize that we are in an emergency situation
in our own country.

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What we as unemployed people want is to be able to rebuild our self-esteem, pay
our bills, and contribute to this country. We are not looking for handout, but right
now we need help.
It is sad to know the funds are there, but the President will not release them.
People have this idea being unemployed is fun. It isn't. It is extremely depressing.
Everyone thought I was lucky having the summer off. I did not enjoy one day of this
summer as I was worrying about getting a job. It is on your mind constantly from
when you wake up in the morning till you go to bed at night.
Then, if you should wake up during the night, it is right there hounding you.
If you want statistics, I will give you mine:
I am a white, middle-aged female, single-parent of two, head of household. I raised
my sons basically on my own since they were 3 and 5. I worked full-time from when
they were 7 and 9.
I worked 10 minutes from the house so I could be available if something happened
to them and they needed me. My sons are turning out to be good men. They are
both in college and have always been clean, decent individuals. They really never
gave me any major problems, just the normal ones every parent has with their children.
I don't want any praise or desire any for what I have done. They were my responsibility and I lived up to it. What I want now is help from the Government until
things get better for me and all the thousands of people that are in the same situation.
Please do what you can to help all of us out. We don't want it, but we need it, and
we need it now. Please see what you and your fellow Senators can do to help get
this country back on its feet or else this country will be gone.
I know it sounds stupid, but I think it could happen if we don't help ourselves and
each other. We are falling off the face of the Earth and no one cares.

Now this is a lady who had a job for almost 12 years before she
got laid off because of economic conditions, and they closed out her
department.
The CHAIRMAN. Senator Sarbanes, if you will yield to me just at
that point, Mr. Wonnacott earlier, just a moment ago, you estimated, and you may have misspoken, or I may have misheard you,
something to the effect of there are about 200,000 workers that
have been out of work for 15 weeks or more.
Dr. WoNNACO'M'. I said 800,000, I believe, Senator.
The CHAIRMAN. Well, let me tell you that the figure is 2.4 million. Let me tell you where that comes from.
We have got 8.5 million unemployed today in the country. The
latest data is that 28.6 percent of those have been unemployed for
15 weeks or more. So that is about 2.4 million.
Dr. WoNNACO'M'. You are correct, Senator. I misspoke. I was talking about the increase in unemployment. I meant to say, the
number of unemployed out of work for over 15 weeks has gone up
about 800,000 since the summer of 1990.
The CHAIRMAN. That is easy to do. It is late in the day, but it is
important to go back. You have the ability to make the analysis,
but you have got to have some concern about what is happening to
people in the country.
I see a real problem right now in the administration on that
issue.
This idea of reaching forward some number of years to find
future revenue and apply it in today's budget deal is as phony as a
$3 bill.
If one of your students on one of your economics exams came
back with an answer like that to a serious problem, you would not
accept it. If you did, then you are not the kind of professor that I
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The same is true for yourselves. If you are going to go in there
with no ideas of your own and just parrot the line that we have
today, I do not see what the point is of going.
I frankly do not understand why it is even worth filling the seats
and paying the salaries, if nothing is going to change. If we are
going to stay on this track, we can stay on this track with you fellows continuing to work in the private sector.
Mr. Wonnacott, you really have not had a chance to comment
yet.
I would like to hear what you think the problem is, and how serious it is, and what ought to be done about it. That is what I would
like to hear.
Dr. WONNACOTI'. As I said earlier, Senator, I think it is a very
serious problem for the extra million-and-a-half people who lost
their jobs, particularly those who are long-term unemployed.
I would like to go back and change the impression that was left
by some of the testimony this morning, and I do so-I need to take
some time to do so, because I do not want to be misunderstood.
The recession, as is usually measured by economists, is over but
the effects of the recession are not over-in particular the recession is not over in some major parts of the economy.
But if you look at the aggregates, the overall position, a recession
is defined as a time when you are on your way down. The trough of
the recession occurs when you hit the bottom point and you start
on the way up.
One of the reasons we have had so much confusion, I think, in
the past several months in the newspapers and in the press is that
economists have said the recession is over, and people say the recession is not over; I still feel the pain.
Of course they still feel the pain because, to make things very
simple, if you had a V-shaped recession, there would be one bad
month on the way up for every bad month on the way down. So
that the recovery from the recession in terms of people's pain and
suffering is just as bad as the recession, although in some ways it is
getting better.
Of course in terms of extended unemployed, you have the people
who have been through the bottom and are still unemployed on the
way up. So that the number of extended unemployed is larger after
you are out of the recession when you are just beginning your way
up than it was on the way down.
So that there is a problem here of-Senator SARBANES. Exactly. If I could just interject there, that is
a very valid point, and it is a very serious problem, and it is all the
more reason why extended benefits need to be paid.
I mean, I am sending for a chart that shows that in the previous
recessions, if you take the point at which the recession was judged
to have ended, the number of long-term unemployed, and therefore
the people needing extended benefits, continued to rise for a
number of months after the point at which the recession supposedly ended.
So for the people that I am quoting to you in this letter, the
problem will continue to worsen for them for a significant period of
time, even if, as you assert, we have come out of the recession.

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Now there are some who feel we may be in for a double-dip recession, and I think you all need to address that point at some
point here this morning, what the prospects are for the double-dip
recession.
I assume we are going to get a positive GNP figure for the third
quarter in the report that is going to be made, but we have had
three consecutive quarters of negative GNP, and we have had previous recessions in which we got a blip up in the real GNP figure,
and then it went back down again.
The CHAIRMAN. Well, let me ask-Dr. WoNNACOTI'. Senator, did you want me to respond to that?
The CHAIRMAN. Yes. Please do. Then I want you to come back
and go on through the rest of the analysis that you had started.
Dr. WoNNACOTr. I am not sure I will remember all these questions, but let meSenator SARBANES. I was just backing the analysis which says
there are going to be more long-term unemployed, even after you
determine that the recession is over with, and that this problem
will be compounded even after you start coming out of the recession, which is the point, I take it, you were making.
Dr. WONNACOTT. That is precisely correct, Senator.
If I could-The CHAIRMAN. Yes, pick up and go ahead.
Dr. WoNNACOTI'. Pick up with his question?
The CHAIRMAN. You take your choice. You are going to have to
answer them both. Take them in the order that you prefer.
Dr. WONNACOTT. You have stated correctly of course what has
happened in the last several quarters and what we expect for the
third quarter.
We expect that the expansion will continue at a modest rate of
between 2.5 to 3 percent for the next quarter. I would hasten to
add that that is substantiated by the majority of private forecasters.
If I might read, Senator, just for a moment from the last Blue
Chip Report, which says:
The consensus remains firm in the view that the recession is over.

Now again I emphasize that I am talking about a number of
economists who are talking. That is, they are talking about the recession in a very technical way.
If I could come back to this question of the Dole bill and the
questionable accounting-and you have made a reference about
flunking studen~ne of the difficulties of Washington of course
is it is a very messy place, if I may be so indelicate, and some rules
sometimes get established which from the outside it is hard to
fathom.
As I recall, coming to the budget agreement was an extremely
difficult thing. It was one of the messier political events that I can
remember. There were some rules set up at that time as a result of
political compromises.
My understanding is that the Congressional Budget Office has
ruled that, yes, indeed, the Dole bill does meet the requirements of
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Now there are a couple of issues which can arise here, one of
which I think is an importance in getting extended unemployment
benefits quickly to those who need it. If the Dole bill meets that
and can do so without technically breaking the rules, although one
may say the rules are very arcane, it seems to me that that is
something where one might reasonably swallow some peculiar
rules and go ahead.
Senator SARBANES. I just want to make this observation. In midAugust, the President of the United States, George Bush, could
have made extended unemployment benefits available to the American people by declaring an emergency under the legislation that
had been sent to him by the Congress.
Now, again in October he could have made unemployment benefits available to the American people by signing the legislation that
was sent to him by the Congress.
Now unfortunately he vetoed that legislation. So we have had
two instances extending back now almost 3 months for the first opportunity to make unemployment benefits available to these longterm workers-I mean, to make the system work the way it was
established to work, and the way it ought to work.
I assume that if you are driving down a road and they tell you
the bridge down the way has been washed out, and if you keep
driving you are going to plunge into the river, you do not keep
driving. Would that be correct?
Dr. WoNNACO'M'. Of course.
Senator SARBANES. OK. Well, circumstances change.
What did the Council of Economic Advisers predict in the late
summer of last year the unemployment rate would be now?
[Pause.]
Dr. WONNACOTl'. I am sorry, Senator, I cannot give you that.
Senator SARBANES. 5.9 percent. That is what they predicted, and
that was the mindset at the time that this budget agreement was
being talked about, and the way the economy was expected to go.
It is not there. The economy is a lot worse than they predicted,
and this problem of the long-term unemployed is a lot more serious.
Senator Riegle has got 9.7 percent unemployment in his State.
This chart that shows the long-term unemployed continue to go up
after a recession is over, I mean these are the points at which-the
solid line is the point at which the recession is ended, and you can
see that after you still get a rise in the number of the long-term
unemployed, which is of course exactly what is going to happen
here, even assuming that you and the forecasters are right in
saying that the recession is over.
Some of us have some doubts about that. We are worried about a
double-dip recession.
The CHAIRMAN. In Michigan, where we happen to be one of the
worst cases in terms of high unemployment and a lot of long-term
unemployment now-I am doing this from memory and I am getting it checked-the bill that we passed would provide a 20-week
extension.
We feel we need that, because the job picture is so bleak in
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people to go back into the work force, the best judgment is to take
an extension like that.
The reason employers pay into the unemployment benefits fund
is they want to try to keep their work force intact during the time
of an economic downturn so that when things pick up again, they
can reemploy the same people so they do not have to start from
scratch and retrain people.
That just makes good sense.
I think the Dole bill would provide either 5 or 6 weeks of extended benefits in Michigan.
The problem with that is that it is not sufficient.
Quite frankly, it was not designed to be sufficient. It is really, in
my view, cosmetic.
There was no Dole plan until the plan that was originated by
myself and a few others really took on a measure of support including some Republic support.
Quite frankly, the way the Dole plan is paid for is highly suspect.
But, for the sake of the analysis that I want to have you continue
with, let us say the Dole bill passed and is in effect.
What more do you think needs to be done for the economy at
this point?
What is your prescription for dealing with the problems that you
see out there?
Or is the problem only that block of unemployed people?
Dr. WONNACOTI'. Oh, no, Senator.
Certainly the block of unemployed people are related to a whole
lot of things. I mean, they are a reflection of the recession.
They are a reflection of the fact that you have very slow automobile sales.
The CHAIRMAN. But I - Dr. W0NNACOTI'. I am sorry, Senator? Have I misunderstood your
question?
The CHAIRMAN. No, no.
What I am trying to get at is, what more should be done? What
is the rest of the plan that you are prepared to recommend that we
take, if anything, to try to make the economy stronger?
Or is this a problem that is self-correcting?
Are we in a situation in which, if we are just patient and leave
things as they are, the economy is going to snap back, and it is just
a question of gritting our teeth and letting nature take its course?
Dr. WONNACOTI'. In my opinion, there are some elements of a
self-correcting nature in the economy.
There are also places where you should not leave it to self-correcting mechanisms.
I mean, clearly, to use just the most wildly dramatic case, to say
we are going to leave it to the self-correcting effects in the Great
Depression was absurd. There were some people who argued that.
The bigger and the longer the recession, the stronger is the case
for doing something about it.
The CHAIRMAN. Well, can you give me a sense as to what other
things beyond the Dole bill you think we ought to do now?
Dr. WoNNACOTI'. One of the really difficult things about the
present, Senator, is that we have gotten ourselves into a situation

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where we apparently have very little elbow room in traditional
fiscal policy of the sort that Senator Sarbanes spoke of.
The difficulty is that, because of the very large increases in deficits which you showed so dramatically on your charts, we cannot
do what we could have or would have done in 1972.
That is, if you had asked me that question at the beginning of
the 1970's, or in 1974, if you had asked me that question in 1974
when I was at the Federal Reserve Board I would have said we
should have had a much more expansive monetary policy, for example.
We are in a situation now where we have in a sense blocked
some of our options.
I think Alice Rivlin at the Brookings Institution has said this is
one of the legacies of the deficits of the past 10 or 15 years that we
have gotten into a situation so that when we need fiscal policy in a
recession, we have very little elbow room.
Now I find that appalling. I can remember in the 2 weeks before
I took the job talking to people, some of the people I had worked
with previously at the Council, saying this is a much, much more
difficult time than we normally have because we are so blocked in
on what we can do, particularly in terms of fiscal policy.
One of the things that concerns me-and I did not mean to be
flippant about the comment about the accounting being somewhat
imaginative, or I have forgotten exactly the word I used-one of
the things that concerns me is that the Budget bill itself has
become a symbol.
It is not only difficult to negotiate, but it has become a symbol.
I was quite concerned, for example, twice in the last 10 days
when it looked as though the Budget Bill might be set aside.
You had very quick upward movements in interest rates. That is
very difficult for the housing sector.
It is very difficult for-you have already mentioned about automobiles, and there are other interest-sensitive sectors as well.
So that we are in a situation where we have very little room to
use the traditional fiscal policy.
The CHAIRMAN. I appreciate what you have said, and I am listening to it very carefully. You see us as being blocked to do much in
the way of fiscal stimulus.
·
The scale-down plan on extended benefits-it is 6 weeks for the
State of Michigan, for example-you are prepared to see that done.
I can see what you say about where the blockages are.
Is there anything else that we can do in the near-term to
strengthen the economy?
Are there other routes open to us that you are prepared to suggest here or in a policy circle as an economic initiative, that we
should take now to strengthen the economy?
Dr. WoNNACO'IT. As I am not a member of the Council, Mr.
Chairman, I have not been in on the present state of play.
That is, there have been a lot of meetings. I just do not know
what has gone on.
The CHAIRMAN. So you have got total freedom now to tell us
what you see as the options.
Dr. WoNNACO'M'. I am going to give you a frank answer, Senator,
which I - -

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The CHAIRMAN. I would appreciate it.
Dr. WoNNACOTT.-am afraid you may not find satisfactory, but I
have been quite concerned that a lot of fiscal steps that have been
taken in the past have not necessarily turned out as well as expected.
What is happening now gives me just a bit of the smell of where
we were in 1971.
We were then coming very-I think that was comparable to getting out of the recession that we are going through now. That is, it
was very slow and there was a tremendous amount of talk of we
must do something, and a lot of things were done.
Some of those things were good.
Some of those things were good fiscal stimulus but not open to us
at present.
One of the good things I remember being done, for example, was
that they eliminated the tax on automobiles to help your particular
State.
Unfortunately, they do not have the tax on automobiles to eliminate now. But what happened at that time was that we also did
some things which I think made what happened in the rest of the
1970's very unfortunate.
That is, we introduced wage and price freeze, which raised all
sorts of problems of the interpretation of what was going on in the
part of the Federal Reserve.
In my opinion, the Federal Reserve thereupon overexpanded and
then reacted much too strongly to bring on the recession of 197 4.
There was the oil crisis of course as well.
Well, that is all a very long-winded introduction to my response
to your question.
One of the things that I will be responsible for-I have talked
about the last two quarters of 1991-it seems to me that, given the
difficulties in lags of policy, of course, what we should be thinking
about when we are looking at policy is what we expect to happen
in 1992.
We are just beginning the exercise of forecasting which will go
on for some weeks.
I guess as the new man on the block I would be a bit reluctant to
come in with a whole long shopping list until I had gone through
an exercise to evaluate in my own mind what I think ought to be
done.
The CHAIRMAN. Well, let meDr. WoNNACO'M'. Again, if I might, if I were the person who-if I
were the person who wrote that letter, which the feeling comes
through very clearly, I am sure that I would be completely unsatisfied with the answer I have just given.
The CHAIRMAN. Yes, well, let me putSenator SARBANES. Well, is there not something-The CHAIRMAN. If I may, just let me put it this way.
You have some freedom right now because you have not been in
those policy discussions, and you are bringing in your own perspectives.
You are here at Maryland. You are living in this area.
You have some sense of the problems in this part of the country.
Certainly you follow the news of the day.
·

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I assume you talk to a lot of people. You are getting a lot of
input.
When I asked you before what you thought were available as
policy options, I was really interested in your ideas. But what I
have heard, without reading the record back to you, is you have
told me where the blockages are, and you have told me things that
were tried in the past did not work.
You have said you would buy the narrowed down unemployment
extended benefits bill, but you have not suggested a single other
thing that you think we ought to consider doing.
Not one.
Did I miss it?
I have not heard even one idea suggested as to what might be
done to give the economy a surge.
Now if you start from the premise that it does not need one and
that things are fine, and that they are self-correcting, then I will
understand that and you will be clearly on the record on that
point.
Then that in a sense becomes a predicate for saying there really
is no policy option that we should consider taking or that is open to
us.
But frankly I guess I was expecting more than that. I guess I was
expecting you to say: "Look, I have thought about it. Here are five
or six options that are open to us. I have looked at these. These do
not look very promising, either because they have been tried before
and they have got lag effects and other things that are minuses.
Here are two or three things that I think we really ought to do."
I think if you are of the view that things are fine, or if they are
not, they will self-correct, then I worry very much about whether
you are going to bring much to this job right now.
Not that you are not entitled to that view. I do not even think
the President believes that these days.
But what I hear you saying, and maybe you are just being ultracautious, is that as the best macro economist in the country that
could be found, you do not have any ideas right now as to what
should be done to strengthen the economy. Or at least if you have
them, you are not prepared to tell us what they might be, beyond
this very narrow extended unemployment benefits bill.
Is that a fair summary?
Dr. BRADFORD. Senator, could I - The CHAIRMAN. Well, no.
I want to ask Mr. Wonnacott. I am really interested in his views.
I am trying to make a fair judgment of what you are saying, but
you are really not-is there any other conclusion I can reach, based
on what you have said?
[Pause.]
Dr. WoNNACOTI'. I will proceed, Senator, if I might state ahead of
time that I will chicken out at the difficult point.
Clearly I have rather limited role in Government, and clearly I
also feel under some constraints.
You had a discussion this morning where there was a discussion
of both monetary and fiscal policy. And as I heard it, the conclusion was that it should be left up to fiscal policy.
I think I would be inclined to say this is the wrong way around.

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The CHAIRMAN. I would not want you to think that was my conclusion.
Dr. W0NNACOTI'. No, I did not say your conclusion.
I was not attributing that to you. I was attributing that to someone else.
Now there is really a major difficulty here.
There is really a major difficulty here because clearly we haveand I think we should have-an independent Federal Reserve.
The CHAIRMAN. Well, you and I agree on that.
We ought to have an independent Federal Reserve, but can I
come to any other summary or footing in terms of what you have
said today other than the way I have described it before?
I want to be absolutely fair in trying to summari7.e what I think
you are giving us in the way of any kind of a set of policy options
that are open to us, if there are any open to us, to try to strengthen the economy.
I have not heard you suggest any, and I am wondering if there
are some that you see that you can describe for us, or if we are just
out of options; if we are blocked here; we are blocked there; we are
blocked on fiscal policy; we are blocked on things we have tried
before in the past that were counterproductive, and therefore there
really is not any additional policy option open to us today in terms
of economic policy adjustment.
Or are there some?
Do you see some?
Dr. WoNNACOTl'. I am not sure I can add anything further to
what I have said, Senator.
Senator SARBANES. What about cutting the defense budget and
either investing it in programs, or reducing taxes, or a combination
thereof, or even reducing the deficit somewhat?
You could have a three-pronged strategy off of a defense cut.
What is wrong with that?
I mean, are we frozen in time? Are we going to continue to perceive the international environment in the precollapse of the Eastern Bloc terms and continue a military commitment that was
geared to a different set of circumstances and a different threat?
It seems to me that cries out for some adjustment right there, as
starters.
Then you say, well, what will we do with it?
Well, you could do some investment in infrastructure and education.
You can do some tax changes, both of which would provide stimulus to the economy. Or you could and/or reduce the deficit somewhat, which I assume would provide a stimulus in a different way
as a confidence building measure.
What is wrong with that?
Dr. BRADFORD. Shall I take a try?
Senator SARBANES. Sure. Either one of you.
Dr. BRADFORD. I think basically there is nothing wrong with that.
The difficulty is in making budgetary planning decisions. They
need to be made carefully and with due weight to the costs and
benefits of the course of policy.
Were those who have appropriate expertise and knowledge to
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and I have no way, certainly not at this stage, and I may never
have the ability to judge that independently-some of those measures would be certainly desirable.
Senator SARBANF.S. Well, how serious do you regard our situation? I mean, we have been talking about largely the short-term
economic outlook. But what about these long-term trends?
We have gone from being a creditor to being a debtor Nation.
We now have to budget into the Federal budget a huge interest
payment as a given that simply draws off of the other areas in
terms of what is available to do.
If these test scores in education mean anything, we can take
little comfort from those.
I mean, American students are ranking 15 and 20, well behind
other advanced countries.
We are the only major industrial country without a comprehensive health coverage for our people, other than South Africa.
All the others have some form of comprehensive health coverage
for their population.
We invest a smaller percent of our GNP in nondefense R&D
than do Germany and Japan.
We are running close to a $40 billion to $50 billion trade deficit
with Japan.
The PRC is on its way to taking us to the cleaners on trading
relationships.
It is now up to $12 billion to $14 billion and climbing all the time
through the manipulation of the currency, restrictions on imports,
a whole complex of controls which the administration finally is
going to start talking to them about.
I mean, here we are looking at the world and confronting a difficult economic situation.
Japan and Germany on international measurement is running
very strong economies. The European community is coming together.
What about those problems?
Do you think we are spending too much in the public sector?
Dr. BRADFORD. I would not make that generalization. I think
there are--my sense is we could do some reallocations and improve
things.
Senator SARBANF.S. Where do you think we are spending too
much?
Dr. BRADFORD. I think I would probably run into big political
trouble if I pointed out specific programs which strike me personally as ones where I would prefer to see us reallocate, but I would
rather instead, Senator, agree with the concerns that you expressed and hope that we will be able to move our policies to address the weakness in education-Senator SARBANF.S. Let me ask you this question, Mr. Bradford.
You are a tax expert.
How does the tax burden in the United States compare with the
tax burden in other advanced industrial countries?
Dr. BRADFORD. We run less through the public sector than most
other advanced industrial countries.
That would translate into the tax burden being lower here than
in most other countries, or any other--

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Senator SARBANES. So compared with people in other advanced
industrial countries, our people, although they do not begin to
think this, but our people are carrying relatively speaking a lesser
tax burden than these other countries? Is that correct?
Dr. BRADFORD. I guess Japan would be a notable exception.
Senator SARBANES. It is about the same as ours, I think, in
Japan, in percentage terms.
Dr. BRADFORD. I am not sure, sir.
Senator SARBANES. And I am talking about Federal, State, and
local, and I am adding all of the tax bill up. Is that not correct?
Dr. BRADFORD. I am not sure. I would have to go back to the
tables.
Senator SARBANES. And in Japan it is in part because they do
not run the retirement through the public sector.
They do not have a comparable Social Security System, although
I gather they are now starting to look at that. That is being perceived in Japan as a deficiency and not necessarily an asset.
Would you favor increasing consumption taxes?
Dr. BRADFORD. I would favor a-I would rather describe it as favoring, again this would not be administration policy, but I would
favor in the longer run tilting the, what I would describe as tilting
the tax system in the direction of consumption, yes, sir.
Senator SARBANES. What are examples of this "tilt," as you see
it?
Dr. BRADFORD. Well, features of the tax system that we have had
in the past which would reflect that is the retirement system in
which money set aside for retirement is not taxed until it is taken
out, or IRA's, would be examples of features of the tax system.
Senator SARBANES. Would be examples of what?
Dr. BRADFORD. Features of the tax system which are in the consumption direction rather than the income direction.
Senator SARBANES. And those are things you would be against,
because you want to move it away from consumption?
Dr. BRADFORD. No.
I am in favor of those things, because those things tend to be features of the tax system which move it in the direction of taxing on
consumption rather than on earnings from savings.
Intuitively, taxing savings once is the underlying idea of taxing
on the basis of consumption. There are many, many other instances.
Senator SARBANES. Like what?
Dr. BRADFORD. The one that pops into most people's head when
you say "consumption tax" is a value added tax.
Sales taxes tend to be consumption taxes if they are not applied
at tne retail level. Those would be examples of consumption taxes.
Those happen to be proportional consumption taxes, not progressive, but they would be examples, also.
Senator SARBANES. Are you concerned about the equity of the tax
system at the moment? Do you think it is disproportionately beneficial to the people at the top end of the income scale?
Dr. BRADFORD. I do not think I would make that generalization.
This is a political balancing act, obviously. What people are prepared to do for others, and what the incentive effects of the tax
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this is a judgment to be made in the political setting, how progressive or how much you should be taxing at different levels.
The point I am making about moving in a consumption direction,
though, is independent of that judgment.
Senator SARBANES. There are some writers who have said that
they think one of the reasons the Pacific Rim countries are doing
well economically is because they have a fairly short ratio between
what the top person makes and what the bottom person makes;
that if you go into a plant in Korea or Taiwan or Singapore and
compare the ratio of the earnings of the janitor and the earnings of
the manager, I mean obviously they differ and they differ significantly, but the ratio is much closer than in the United States
where it tends to be much more extreme.
I have seen writings that have attributed some of the dynamism
that they attribute to those economies to this factor.
Do you think there is anything to that?
Dr. BRADFORD. I assume that in those countries, that works out
as a result of the operation of the labor market.
So I would want, I guess before 1-1 am not familiar with that
literature-but I would want to think about it in terms of why it is
that this distribution emerges from the labor market.
I would guess that that has more to do with the observation than
a causal relationship' running from that result to the performance.
The CHAIRMAN. Senator, if you would just yield to me for a
minute, I want to indicate where we are scheduling wise.
It has been a long day. You folks have been here a long time,
and so have we.
We have been working to try to get on through some of these
things, and it just takes time because these are complex subjects,
and these are urgent issues as we see them.
I reflect that view as Chairman of the Banking Committee, and
Senator Sarbanes reflects it as Chairman of the Joint Economic
Committee.
These are matters of great urgency to us, and it is very important we understand your thoughts, your ideas, what difference you
might make if you are confirmed to these positions.
We are not going to be able to conclude today. I will try to get
you back in here as quickly as I can.
I do not want to have there be a long delay between this discussion today and concluding this discussion in a subsequent day.
We are now at a 3:45 p.m. I do not think you have probably
broken for lunch, either, at this point. So we have been at it a
good, long time.
Here is what I would like to ask you to do between now and the
next time you are here, and this is a very serious request, and I
trust you will appreciate it as such and will take it as such.
I think we have to have some clearer sense from you as to the
nature of the economic problems that beset the country now, what
ones are of genuine concern to you short-term, medium-term, longterm.
I would like a clear explanation of exactly how you think the
economy is doing, what kind of trend lines we are on, and I would
appreciate it if you would make some reference to the kind of
charts that I started out with today.

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92

Take a look at the problems in the financial structure, the buildup of public and private, debt the trade deficit, etc.
If you think things are basically fine, then I suppose you have
got very little to suggest in the way of policy options.
If you in fact think there are problems, then I have got to hear
more from you as to what you think might be done about them.
I think you have an obligation to be very forthcoming on these
issues.
The whole purpose of the hearing is to get some clear exposition
of your sense as to what the problems are out there, and what
might be done about them.
With all due respect, we have been through quite a length of
time today, but I do not think we have gotten too much in that
area yet.
Maybe we are not asking the right questions.
Maybe you are being very cautious because you do not want to
offend anybody who has been at work on these things and who is
part of the inner discussions that may be going on, and so forth,
and I do not know what all may be going on.
But I think you must be more explicit about your sense for economic problems and what you think might be done, if anything,
and we have an obligation to get that from you.
It will be difficult for us to take your nominations to the floor if
you are both blank slates.
We are carrying forward your ideas and your thoughts to the
Senate as a whole. So you have got to give us something to work
with.
So let me ask you to think about that.
I am going to have to-Senator Sarbanes has no additional questions.
Senator SARBANES. Not today.
The CHAIRMAN. Are either of you familiar with this book, "The
Day of Reckoning" by Benjamin Friedman?
Dr. WONNACOTT. I have not read it.
Dr. BRADFORD. No.
The CHAIRMAN. I am going to ask you some questions about it
when we see each other next, just so you are not caught flat footed.
You might take a look at it. It is a very good book about how the
economy has been performing over the last decade with tax policy
and structural policy, and I will want to engage you on some points
that are raised here.
If you would, just take a look at it and I think that would help us
both.
Gentlemen, thank you very much for your appearance today. We
will have you back in just as soon as we can work out the scheduling.
Dr. WONNACOTT. Thank you, Senator.
Dr. BRADFORD. Thank you, Senator.
The CHAIRMAN. The committee stands in recess.
[Whereupon, at 3:50 p.m., the hearing was recessed, subject to
the call of the chair.]
[Response to written questions with biographical sketch of nominees and additional material supplied for the record follows:]

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93
THE UNIVERSITY OF IOWA

I

November 5, 1991

The Honorable Donald W. Riegle, Jr.
105 Dirksen Senate Office Building
Constitution Avenue between
First St. and Second St. NE
Washington, DC 20510-2201
Dear Chalnnan Riegle:
In response to the request of the Senate Committee on Banking, Housing, and
Urban Affairs and with regard to the consideration by that Committee of my
nomination by President Bush for membership on the Board of Governors of the
Federal Reserve System, attached are r,,y responses to the additional questions
posed for the hearing record. Also attached is a response to the question
raised by Senator Sar-banes in tne hearing on margin regulation to be inserted
in the hearing record (p. 92).
Chairman Riegle, I believe the attached response to your question relating to
the aut0t11otive industry is also responsive to the auto issues raised by you
in the Committee hearing. As elaborated in the response, following the
hearing, I contacted 8111 Mi lier, who does portfolio management for the GM
Pension fund. We have served on several committees together. He arranged
for 111e to speak with senior ex-.cutives of the Big Three auto companies. Not
only did they fully brief me, but they also offered a continuing dialogue to
keep me apprised of the health and fundamentals of the auto industry. I
would be 1110re than happy to talk further with you about what I have learned
at your convenience by phone from Iowa or I could come to Washington.
Alternatively, if I am confirmed, we could talk further when I join the Board
and am in Washingtcn .
Again, I appreciate the courtesy and assistance of the Committee and its
staff in facilitating consideration of my r.omination so promptly. If
confirmed, I look forward to working with the Committee.

Sincerely,

.-t--- ?I,, ~tit;
Susan M. Phillips
Vice President
Enclosures

Iowa City, Iowa 52242

50-460 0 - 92 - 4

Office ot the Viet Pmldent for
Anance and University Services

J05Jes,upH.U

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94
RESPONSE TO WlUTTEi.'f QUESTIONS OF SD.A.TOR RIEGLE FROlt

SUSAN PBILLIP8
Q.l.

Earlier this year the Fed's Open Market Committee
emphasized that money growth "noticeably above the lower
end of the (target) range likely would be needed to
foster a satisfactory performance of the economy in
1991." It looks like they were ri9ht . Money growth
has been below the target range and the economy has
been lousy. What do you think the Fed should do to
get money growth back on track, or do we not need to
worry about it?

A.l.

While nominal and real GNP growth appears to be
somewhat weaker than most analysts anticipated earlier
this year, the shortfall in M2 has been particularly
pronounced. M2, which has been virtually at a standstill since midyear, has recently dipped below the
lower bound of its target cone and has fallen well
short of predictions based on historical relationships with income and interest rates.
It has been
especially troubling that this anemic growth in M2 has
occurred against a backdrop of falling interest rates,
as the Federal Reserve has taken a series of steps to
ease reserve availability. With last week'.s action,
the federal funds rate is at its lowest level in more
than a decade, and most short-term rates are nearly
3 percentage points below the levels of the spring of
1990. Long-term interest rates stand about 1-1/4 percentage points below their peaks reached last summer.
Over the long haul, M2 has borne a fairly tight
relationship with nominal income so that its weakness
prompts legitimate concern. However, its recent
sluggish pace in part may owe to factors other than
income. These influences include: an apparent
increased willingness by households to reallocate their
portfolios away from M2 balances and toward capital
market instruments; an effort by households and businesses to scale back their balance sheets in light of
a widening gap between rates on deposits and rates on
consumer and business credit and mortgage debt; and a
secular increase in the volume of credit funded in open
markets rather than by depository institutions . These
factors suggest that the current weak performance of
M2 does not reflect solely current and prospective rates
of economic growth . Nevertheless, the shortfall of
monetary growth is quite disturbing, and I see the
Federal Reserve•s recent policy actions as appropriately
directed at boosting monetary and credit growth and thus
providing some stimulus to economic expansion.

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Chairman Donald w. Riegle
Questions for Susan Phillips (continued)

Q.2.

Following the Salomon Brothers scandal, numerous
questions have been raised about unclear divisions
of regulatory responsibility and antiquated auction
procedures. The Fed has a critical role in the
government securities market and you have years of
experience in financial market regulation. What
regulatory or structural changes would you make in
this market to make it work more honestly and
effectively?

A. 2.

The government securities market is rightly viewed as
the most important market in the world. With unrivaled
depth and liquidity, it determines the interest burden
that all taxpayers must ultimately shoulder as well the
base rates influencing most private market returns .
Further, operations in the government securities market are
the primary lever through which the Federal Reserve seeks
to influence the economy. Too much is at stake to make
hasty recommendations to correct the obvious problems
that have come to light--the price distortions in certain
securities, the admission of wrongdoing by Salomon
Brothers, and the allegations of further misconduct.
This episode has presented us with an opportunity to
research, design, and then implement fundamental improvements in market structure and regulation.
But such
changes take time.
Already, some progress has been made. The Treasury, the
Federal Reserve, and the SEC have undertaken an intensive
study of the government securities market. Meanwhile,
the Federal Reserve Bank of New York has put in place a
procedure to contact large customers that bid through
dealers to confirm the accuracy of those bids, and the
Treasury and the FRBNY have accelerated efforts to automate the auction process. As part of this process, there
should be an in-depth look at auction rules, since
current Treasury practice may tend to increase incentives
for abuse.
I think continued monitoring and some experimentation may
be necessary as improvements are put in place. Other
auction markets may assist in providing models for the
Treasury auction market.

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Chairman Donald w. Riegle
Questions for Susan Phillips (continued)
Q.3.

In your ·1981 book The SEC and the Public Interest. you
and your co-author (Richard Zecher) conclude after an
examination of the SEC's corporate disclosure rules
that "the costs appear to far outweigh the benefits,
if any, to society."
Do you still hold those views? Are there other major
areas of financial regulation that you believe we
should abandon?

A.3.

The economic cost-benefit analysis of the SEC's corporate
disclosure rules in the book referenced above indicates
that the cost of such disclosure, particularly to U.S.
corporations, is very burdensome. The major direct users
of such information appear to be the financial intermediation community (security analysts, brokers, underwriters, etc.), not the public, although the public may
well avail itself of the reports of security specialists. Corporate information demanded and used by
public investors appears to be much simpler and shorter
than the SEC disclosures. It is also possible that
perhaps public disclosure could even be overseen by the
self-regulatory accounting organizations, thereby
reducing duplicative disclosure requirements on corporations. Although I have not followed accounting disclosure as closely as other areas since the book was
written, I believe that the SEC has made some progress
in simplifying and mechanizing disclosure requirements.
Nevertheless, it is possible that additional steps could
be taken to reduce the disclosure cost burdens further,
which could in turn assist U.S. corporations in being
more competitive internationally. I am not aware of
other areas of financial regulation which should be
examined, but you may be assured that if I am confirmed
I will be vigilant to identify areas where simplification or deregulation could be accomplished to lower
costs to U.S. financial entities if safety and soundness,
and the public protection are not compromised.

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Chairman Donald w. Riegle
Questions for Susan Phillips (continued)

Q.4.

The same book also espouses the view that regulation
often "reflects the relative power of competing
interest groups ... and has little to do with correcting
failures in the marketplace . " Does that characterization hold true for current regulation at the Fed? Does
it hold true for the changes in regulation contained in
the Banking legislation currently under consideration?

A.4.

The basis of the U.S. banking regulatory structure
appears to center around concern for the overall safety
and soundness of the nation's banking system to assure
the availability of adequate, appropriate credit and the
soundness of U.S. currency. The regulations which flow
from those purposes clearly have an overriding public
objective. However, there do appear to be some restrictions on bank entry into certain lines of business
(securities, insurance, etc.) which are limiting U.S.
banking competitiveness internationally and which, if
eased, would not necessarily endanger the safety and
soundness of the nation's banking system. Those
restrictions at one time may have had safety and
soundness underpinnings, but their maintenance may now
be a function of various interest groups. In a changed
international competitive environment with the capability for computerized audit trails, improved enforcement programs, and instantaneous worldwide communication
facilities, it seems appropriate to re - examine some of
those banking regulations.
I believe that the banking
reform proposals now before the Senate, if enacted,
will assist in permitting some easing of these restrictions and in examining which additional restrictions
can be considered for possible future alteration.

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Chairman Donald w. Riegle
Questions for Susan Phillips (continued)
Q.5.

some have criticized our financial system as failing to
promote long-term capital investment adequately,
particularly in comparison to our major international
competitors. Do you agree with this assessment? If so,
what changes should be considered?

A.5 .

This is not an easy matter to pin down.
I certainly
would not dismiss the notion that the allocation of
capital might be distorted to a slight degree by a shortterm trading focus on the part of many investors
including institutions. But I find it difficult to
believe that this is at the core of the capital formation
and competitiveness problems in the United States. Care
must be given in developing reform proposals that we do
not ultimately do more damage than good with respect to
the efficiency of our financial markets.
Policies which
assist in lowering the deficit, reducing the capital
gains tax, and eliminating unnecessary regulatory burdens
would further long-term capital investment.

Q.6 .

During the hearing I asked you to take a careful look at
the problems of the auto industry and their effect on the
economy. What do you think the prospects for improvement
are and what public policy steps can be taken to increase
these prospects?

A.6.

Following the hearing, I called William P. Miller II who
directs Asset Mix Management for the General Motors
Investment Management Corporation. He and I served on
the Futures Industry Institute together and had previously been acquainted through his advisory work to the
CFTC. Mr. Miller forwarded some general industry information to me and put me in touch with key senior economic executives at General Motors, Chrysler, and Ford.
Not only did those executives brief me on current issues
facing the automotive industry, but they also offered a
continuing dialogue to assure that I am fully familiar
with economic conditions and issues facing their
industry.
In brief and in the context of the current business
cycle, the outlook for the automotive industry is less
optimistic than it was even several months ago. Although
a shallow recession was anticipated for the first half of
1991 with a reasonable recovery in the second half, the
pause in new order demand for August, September, and the

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99
Chairman Donald W. Riegle
Questions for Susan Phillips (continued)
first part of October is causing consideration of downward revisions in the forecasts for production needs

for the remainder of 1991 and possibly even 1992. There
had been some slight improvement in the third quarter
production figures (12.8 million units seasonally
adjusted through July in 3Q Y.lh 12.6 for 2Q), but the
demand in the first few weeks of October continues to
appear weak. Consumer confidence appears to be lower
than would be justified by the burden of consumer debt
and the economic fundamentals. If orders do not turn
around soon, production levels for the Big Three will
likely be curtailed further. These cyclical trends are
complicated by the secular pressures of the "transplants"
to crowd out the Big Three in the U.S. market. In
addition to product competition, higher pension and
health benefit costs for U.S. companies as well as
environomental and fuel efficiency regulations have been
cited as some of the reasons for this crowding out
effect.
The focus of the attention and the current calls for
policy intervention, however, center around business
cycle considerations. Although the Federal Reserve
has lowered the discount rate considerably in the last
year, and the federal funds rate has also been eased,
the spread between the federal funds rate and the
prime still seems to be wide. Since auto dealers
often borrow at l percent above prime which now is
generally at 8 percent, the real cost of borrowing
for fixed price inventory is 9 percent. At this rather
high rate, there is little incentive to build inventories. on the bright side, however, inventories are
generally low, so if consumer confidence picks up,
generating automobile orders, increased production demand
will be triggered quickly.
The keys to recovery of the auto industry appear to be
consumer confidence and narrowing the spread in various
interest rates. It may be difficult to craft a fiscal
stimulus initiative which would not add significantly
to the deficit, yet get money back to consumers
quickly. Further, unless confidence turns around, consumers might even "pocket" the proceeds of the stimulus,
thereby defeating its purpose. I would hope the
Federal Reserve can chart a course for monetary policy
that will encourage getting the prime and other intermediate and longer term rates down . Such initiatives

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100
Chairman Donald w. Riegle
Questions for Susan Phillips (continued)
could include the various avenues of moral suasion,
encouraging banks to extend prudent credit to ease the
crunch, and the easing of rates further if and when
other interest rates and the monetary aggregates come
into more normal alignment.

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101
RESPONSE TO WRITTE~ QUESTIONS OF SENATOR SASSER FROM

SUSANPBILLIPS
Q.1.

Last year's budget agreement tied the hands of fiscal
policy makers in many respects. It was widely understood
that if the congress agreed to the spending cuts and a
revenue increase package, the country would come to rely
on the Federal Reserve to compensate through monetary
policy. I do not believe that the Federal Reserve has
compensated for fiscal restraint. The Fed has consistently underestimated the severity of the
recession and overestimated the potential of renewed
inflation.
On July 18, 1990, after we now know that the recession
had begun, Chairman Greenspan testified before the Senate
Banking Committee. At this time he stated that the
"economy still appears to be growing and the likelihood
of a near-term recession seems low."
a)

How do you evaluate the Federal Reserve's

performance? Should the Fed have done more to avert
the recession?

A.l.a.

b)

was Chairman Greenspan on the mark?
of improvement?

Do you see signs

c)

Interest rates are still historically high and inflation has remained flat for the most part. Is the
conservative approach of the Fed warranted?

d)

Does the Fed need to do more now?

To be fair, one must be cautious in applying 20/20
hindsight to such an analysis. The Federal Reserve was
confronted in July 1990 with a great deal of uncertainty;
the developments in the Persian Gulf posed risks of
both recession and inflation. As events unfolded, oil
prices eased as supplies seemed assured, and the
recession risk proved to be the greater concern. It was
not until October that activity actually did begin to
fall significantly, and the Federal Reserve did begin to
ease substantially during the closing months of the year.
In retrospect, knowing how the economy has performed, I'd
have to say that more could have been done in the fall of
1990. It would not have averted the recession, but it
likely would have given greater impetus to the subsequent
recovery.

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102
Senator Jim Sasser
Questions for Susan Phillips
A. l.b.

The economy does appear to have turned up in the second
quarter, but the recovery to date has been subpar by
historical standards and it is not clear that the upturn
has developed any self-sustaining momentum. The signals
at this point are mixed; the recovery seems to be moving
forward with fits and starts.

A.l.c.

The Federal Reserve must always be mindful of inflation
risks, and the fact is that consumer prices have risen 44-1/2 percent over the past year. However, I believe
that inflation is on a slowing trend and that the threat
of a reversal of that process in the near term is small,
which should make it possible to give some emphasis to
ensuring that the recovery does not abort.

A.1.d.

I gather that the Federal Reserve has taken an easing
step in recent days, and I support that move. I would
not rule out the possibility that further action might be
necessary; I will be watching carefully in the period
ahead the responses of the financial markets and the
economy more generally.

Q.2.

Recently, disagreements have developed between Federal
Reserve Governors and the district bank presidents over
the authority of the Chairman to lower interest rates.
Such disagreement has been a particular problem between
meetings of the Federal Open Market Committee and has
caused concern about the ability of the Fed to respond
quickly to market developments.
a)

What recommendations would you make to resolve
conflicts among the members of the FOMC?

b)

Are the public policy purposes of the
Federal Open Market Committee hindered by the narrow
focus of some
particularly the district bank
presidents -- on inflation?

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103
Chairman Jim Sasser
Questions for Susan Phillips
A.2 . a.

Since I have not observed directly the FOMC meetings, it
is a bit difficult for me to make a recommendation on how
conflicts among the members of the FOMC may be resolved.
Other than the differences in views on the appropriate
direction in interest rates reported in the newspapers,
I am not sure what conflicts exist. In the case of
interest rates, I believe that expressions of different
views are constructive, reflective not only of different
theoretical perspectives, but also of different economic
conditions throughout the country. The very structure
of the FOMC appears to have been designed to permit
expression of this diversity of views; i.e ., the
balance of seven governors and five regional reserve
bank presidents. While consensus might always be nice,
I believe that constructive diversity of views is more
important . Further, the structure of the FOMC with its
required balance should allow administration of monetary policy even with different viewpoints . If I am
confirmed, I will commit to working within the FOMC to
assist in constructive decision-making and in the
development of an environment conducive to broad and
thorough exploration and discussion of economic conditions which would facilitate administration of monetary policy.

A.2.b.

On the surface, the Federal Reserve Act, as amended by
the Humphrey-Hawkins legislation, presents the Federal
Open Market Committee with a conflicting mandate that
orders policy to maintain the growth rate of the
economy at its potential while promoting price stability. That conflict is apparent, not real, since
economic growth is best supported when concerns over
the general price level do not materially interfere
with the decisions of households and firms.
Thus,
the ultimate goal -- and responsibility -- of a
central bank must be price stability. However,
policymakers may differ in their assessment of the
best approach to that goal. And the theory and
practice of economics does not provide a clear-cut
way of judging who is right. It is in these uncertain
circumstances that Board members and district bank
presidents bring to the FOMC an exchange of
knowledge and opinion that can put difficult issues
into perspective. Further, policy opinions are not
set in stone : Board members and district bank
presidents frequently shift their emphasis with
incoming economic information, lending flexibility
to short-term monetary policy that need not threaten
the Federal Reserve's long-term responsibility for
price stability .

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104
Senator Jim Sasser
Questions for Susan Phillips (continued)
Q.3.

Consumer spending accounts for two-thirds of our economic
activity. However, consumers seem to have fallen off the
economic map. Slow income growth, a downturn in the real
estate market (in which most consumers have their
wealth), and little decline in interest rates on
installment loans have left consumers counting their
pennies.
It is certainly going to be difficult to stage a recovery
without a pick-up in consumer confidence. Retail sales
figures released last week show that consumer spending
remains at best, anemic -- and shows no sign of
improving.
a)

b)

How are we going to stimulate consumer confidence
and achieve the short-term stimulus that we need to
start the economy moving again?
I appreciate your desire to increase the level of
savings, however, are savings incentives adequate
and will they provide economic stimulus in the
short-term? savings are critical to long-term
capital formation, but are savings incentives what
is needed to jump start the economy right now?

A.3.a.

Consumer confidence has deteriorated noticeably and I
find this quite worrisome in terms of the economic
outlook. I think it is interesting to note that, despite
their concerns, it would appear that consumers have been
increasing their spending this year, according to the
commerce Department's figures. Indeed, they have been
spending an exceptionally large percentage of their
income. This observation suggests to me that one key
to increasing consumer spe~ding wilr be enhancing the
thrust to job and income creation across the economy. We
need not focus narrowly on stimulating consumption in
order to boost the economy.

A.3.b.

The direct effect of a step-up in household saving--which
means curtailment of consumption--would be to reduce
aggregate demand for goods and services and thus depress
activity. However, the increase in saving, all other
things equal, would tend to lower interest rates, and
thus stimulate investment. Especially if a fiscal
package were also to include other incentives for
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105
Senator Jim Sasser
Questions for Susan Phillips (continued)
the consumption effect on aggregate demand. To this
rather mechanical analysis I would also add the
observation that, if people--businessmen and consumers-were to view the government's action as a positive step
to address the factors inhibiting our economy's long-run
growth performance, the boost to confidence might be very
salutary for the near-term growth of demand. The bottom
line of this analysis is that it is important that any
fiscal package be designed with great care and with a
view to ensuring that it bolsters confidence in the
government's management of the economy; in this regard,
given the widespread and appropriate concerns about the
size of the federal deficit, it is essential that the
longer-run consequences for the federal budget be given
careful consideration.
Q. 4.

As a member of the Federal Reserve Board of Governors,

you will have significant responsibility for regulating
the nation's banks. The Federal Reserve is the primary
regulator of the nation's state-chartered member banks,
and is also the regulator of bank holding companies. As
you are well aware, the nation's banking system is facing
an unprecedented crisis. The FDIC is projected to be
insolvent. According to the Congressional Budget Office,
over the next four years at least 558 banks will fail at
a cost to the FDIC of $31 billion. The Bush Administration has requested a $70 billio~ line of credit from
the Treasury to the FDIC to pay for these failures. In
view of the exposure of the taxpayers, I think that the
quality and rigor of bank regulation over the next few
years is absolutely critical.
a)

I note that you have financial experience, but it
appears to be primarily in the securities and futures
area. What is your experience in bank regulation?

b)

According to the Wall Street Journal, while at the
Commodity Futures Trading Commission you, "sought to
limit government regulation of financial markets."
Might you bring a laissez-faire philosophy to the
Federal Reserve?

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106
Senator Jim Sasser
Questions for Susan Phillips (continued)
A.4.a .

It is true that I have no direct experience in bank regulation, but I have had indirect experience through my
service at the Commodity Futures Trading Commission and
the University of Iowa. First, the capital requirements
of the CFTC for futures commission merchants (FCM),
including bank FCM's, and clearinghouses had to be
coordinated and consistent with bank capital requirements
thereby requiring some knowledge of bank regulation.
Other areas of futures regulation which required an
understanding of and coordination with banking
regulations include margin requirements, clearance and
settlement, currency contract terms and conditions, bank
use of futures and options, sales practice considerations
for bank FCM's and line-of-business restrictions also for
bank FCM's.
In addition, I served on the Vice President's Task Force
on financial service regulation while I was chairman of
the CFTC. That group examined, among other things, bank
regulation reform. Although as a professor of finance I
had studied and taught in the areas of financial intermediation, including banking, the work of the Task Force
required that I learn a great deal more about bank regulation. As Vice President for Finance and University
Services at the University of Iowa, I oversee the
business operations of a major institution requiring
extensive banking services, which puts me in touch with
bank regulation from a customer or user's perspective.
Although I was asked to serve on the board of a local
bank, which would have given me more direct experience in
banking and its regulation, I declined because that would
have caused a conflict of interest for me in my position
at the University. Thus, although my exposure to bank
regulation has been somewhat indirect, I believe I have
been quite involved in banking and its regulatory
environment through my work at the CFTC and the
University.

A.4.b.

I do not completely agree with the assertion by the
Wall Street Journal that I 11 • • • sought to limit
government regulation of financial markets" or had a
laissez-faire philosophy while I was at the CFTC.
While I was Chairman of the Commodity Futures Trading
Commission, we undertook major programs to strengthen
exchange audit trails, self-regulatory organization
oversight, enforcement initiatives and CFTC audit
activities in the areas of trade practice, financial,
market surveillance and audit trail regulation and
compliance. I believe that the Commission tried to
strike a balance between sufficient, appropriate

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107
Senator Jim Sasser
Questions for Susan Phillips (continued)
regulation and enough flexibility for the futures
industry to be competitive internationally and to develop
futures and options products which would serve the risk
management needs of the U.S. industrial, commercial, and
financial communities. A regulatory environment which
successfully achieves such a balance can also provide
confidence in the integrity of the market or system
while encouraging vitality and innovation. I believe
such an approach is also appropriate for serving on the
Board of Governors of the Federal Reserve system; i.e.,
creation and maintenance of a regulatory environment
which assures the safety and soundness of the banking
system while at the same time allowing banks to compete
and develop products and services to meet the needs of
their customers.

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108
RESPOOSE TO WRI'ITEN ~1005 OF SENATOR S.\N!ORD FFOI

SUSAN PBILLIP8
Q.l.

Ma. Phillipa, aa you know, the Federal Reaerve Act

requires that nomin••• tor th• Board of Governors be
selected with due regard for the financial, agricultural, industrial, and commercial interests and
geographical diversity of the country to adequately
represent the district from which they are nominated.
I am concerned that every governor possess the
tools, background, and insight to make a significant
and unique contribution to the Board which is properly reflective of their district.
Exactly what significant professional contacts, work
experience or close knowledge of the business or
financial communities within the seventh district do
you possess that would allow you to contribute to
the diversified nature of the Board.

A.l.

As Vice President for Finance and University services

at the University of Iowa, I have had the opportunity
to participate directly in the economic life of the
state of Iowa through the University's various
initiatives, most particularly its technology transfer programs, the development of a University research
park, and assisting the state executive and legislative
branches in state economic development involving the
University. The University, with its broad educational,
research, and public service programs is among the
largest employers in the state of Iowa and has a major
direct and multiplier effect on the economy of the state.
By virtue of my office, I serve on the boards of
several small Iowa corporations which are either spinoffs from the University's technology transfer efforts or
University investment entities . As a representative of
the University, I also serve on the board of the Iowa
City Area Development Group which is engaged in economic
development for Iowa City and surrounding communities.
In addition, I serve on the boards of several major
corporation based in the seventh district including
Midwest Resources, Inc., (Des Moines, Iowa), the Chicago
Mercantile Exchange, and State Farm Mutual Automobile
Insurance Company and several of its subsidiaries (home
office: Bloomington, Illinois). Membership on these
boards has allowed me to gain significant experience in
the utility, futures, and insurance industries
respectively. Finally, while on the Commodity Futures
Trading Commission, I became more fully acquainted with
the fundamentals of the underlying markets in agriculture
and energy, both important industries in the seventh
district.

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EXECUTIVE OFFICE OF THE PRESIDENT
COUNCIL OF ECONOMIC ADVISERS
WASHINGTON, O.C. 20500

November 4, 1991

Dear Mr. Chairman:

Enclosed are my answers to the questions you submitted to me on

October 29, following the October 25 hearing on my nomination to be a Member of
the Council of Economic Advisers.
If there are any other materials the Committee would desire in connection
with my nomination to the Council, please do not hesitate to call on me.
Sincerely,

Paul W. Wonnacott
Member-Designate

The Honorable Donald W. Riegle, Jr.
Chairman
Committee on Banking,
Housing and Urban Affairs
U. S. Senate
Washington, D.C. 20510
Enclosures

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110
RESPONSE TO WRITTE,.~ QUESTIONS OF SDATOR RIEGLE FROM
PAUL WONNACOTI'
Q. 1. What is your professional assessment of the nature and
seriousness of the economic problems facing America? This
assessment should include the immediate and short-term
outlook and the longer term outlook as well.
A.1. The United States economy remains the richest in the world,

providing the world's highest standard of living. The idea
of a market system, which provides the principal source of
prosperity, vigor, and growth to the U.S. economy, has in
recent years gained many new adherents around the globe.
The principal competitor -- the old system of the Soviet
Union, which not so long ago some people considered a
serious alternative -- has collapsed. In many ways, the
future we face is the brightest that has ever existed -- the
prospect of peace and prosperity. I think that this
positive side is worth emphasizing before writing about the
very real problems we face.
The principal short-run problems we face are those caused by
the recent recession. Although this recession was not deep
by historical standards, with the economy falling only about
half as much from peak to trough as in the average recession
of the past 40 years, it was preceded by a period of slow
growth for over a year. The recovery to this point has been
weaker than the typical recovery because, among other
reasons, the recession was shallower and shorter than the
typical recession. As a result, there is now considerable
slack in the economy. This shows up in the unemployment
rate, which is now 1 . 5% higher than it was in June of 1990
(seasonally adjusted). As I mentioned in my testimony, the
recession is over; economic activity has begun to recover
from its trough. This does not, however, mean that the pain
of the recession is over; we are still well short of where
we were at the peak. The number of those who have been
unemployed for more than 15 weeks is about 800,000 more now
that it was in the summer of 1990.
The short-term outlook is for the continuation of the
recovery. There is significant uncertainty in the shortterm outlook for a number of reasons, including the
volatility of consumer and business confidence, and
uncertainty regarding inventory behavior. Next year, I
expect the rate of expansion to increase.

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2

For the longer term, improvements in productivity hold the
key to improved incomes and standards of living .
One of the drags on productivity and growth has been the
large government deficits of the past decade. Part of the
current deficit is due to the large transitory expenditures
associated with the Savings and Loan cleanup. Excluding
these expenditures, the Federal budget deficit declined from
its high of 6.3 percent of GNP in fiscal 1983 to 3.6 percent
in fiscal 1991. However, the deficit continues to make
major claims on U.S. saving; it continues as a major
constraint on fiscal policies; and it remains a serious drag
on U.S. growth.
number of other important problems, such as poverty, the
special difficulties of the cities, and ensuring access to
health care, have both short-term causes and longer-term,
structural roots. The recession exacerbated all of these
problems. It added to poverty by throwing people out of
work. When people lose their jobs, they often lose their
medical insurance. The recession has depressed incomes and
tax payments, and therefore reduced the ability of both
state and local governments to deal with their problems.
But, while the recovery from the recession will ease these
problems, it will not solve them .

A

Q.2 . Based upon your assessment of the economic problems facing
America at this time, what policy recommendations do you
believe should be seriously considered to improve the
situation?
A.2. I favor an extension of unemployment benefits, provided this
is done within the budget agreement, such as in the DoleDomenici bill . I also favor the temporary relaxation of
rules for IRAs, to waive the early-withdrawal penalty for
those buying homes or those helping their children to buy
homes. I cannot promise that this would provide a large
stimulus to the economy, but it would be a step in the right
direction.
As I mentioned in my testimony, the legacy of high
government deficits leaves very little scope for traditional
fiscal policies -- that is, broad tax cuts or spending
increases -- to stimulate aggregate demand. The reason is
that it is important to adhere to the budget agreement with

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3

its commitment to progressively reduce the structural
deficit; not to do so would cause an upward movement in
interest rates, with adverse effects on housing, autos, and
other interest-sensitive sectors. This view -- that we have
relatively little elbow room for broad fiscal policies
is, I believe, broadly shared by economists, including those
from both political parties.
With the limits on fiscal actions, monetary policy has
increased in importance. In this regard, I welcome the
recent reversal of the downward trend in the quantity of
money M2, and the movement of M2 back up into the target
range set by the Federal Reserve.
But if there is little scope for active short-term fiscal
policy at present, fiscal policy is very important for
longer term developments .i n the economy. In particular, one
of the most important contributions that can be made to
longer term growth is to enforce budget discipline, reduce
the claim of the government on the nation's saving, and make
more resources available for investment. I would also favor
other steps to encourage saving, such as the extension of
IRA-type legislation, although I am aware of the conflicting
evidence regarding the effectiveness of such legislation in
stimulating saving.
Of the problems noted in the last paragraph to answer 1, I
would expect that health care would be near the top of the
national agenda during the next several years. I am
impressed with the complexity of this issue, and in
particular the complexities of building upon an existing
structure to provide greater accessibility to health care,
while maintaining due concern for costs. Some of the issues
in this area strike me as challenges for a philosopher king,
particularly the problems surrounding the treatment of the
terminally ill.
Q.3. A number of recent proposals, including some by my
colleagues here, have included some sort of broad-based tax
cut . Will you recommend that?
A.3. I do not support a broad-based tax cut at this time, because
it would violate the budget agreement. In my opinion, a
debate of a broadly based tax cut at this time would cause
an increase in interest rates; public discussions of a
possible breaking of the budget agreement led to increases

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4

in long-term interest rates in late October . Such increases
in interest rates have negative effects on such sectors as
real estate and automobiles.
There are some suggestions that a broad-based tax cut be
financed by an acceleration of cuts in the Defense budget.
I do not believe that such a package, including equal
additional cuts in the defense budget and cuts in taxes,
would stimulate the economy in the short run.
I also would not support a broad-based tax cut now because
of longer-term considerations . Unlike extended unemployment
benefits (discussed in Answer f2), which automatically
decline as the economy recovers, broad tax cuts would remain
as the economy recovers, and thus make it more difficult to
reduce deficits in the future. In my opinion, broad tax
cuts are inappropriate until we have gotten our budge t
deficit under much better control. My views on this point,
and on the use of the peace dividend are explained in more
detail in the response to question 19.
Q.4. You have written e xtensively on the U.S . -Canada Free Trade
Agreement and the auto industry. One of the key issues in
the FTA was the North American auto content standard . The
agreement includes a 50% standard, but a binational expert
panel recommended an increase of 50 % to 60%. As part of its
approval of the FTA, Congress required the Administration to
go back and try to negotiate a higher standard. Do you
believe a higher standard is appropriate?
A.4 . I personally am in favor of the 50% content provisi on in the

U.S.-Canada Free Trade Agreement.
Q.5. Should a provision to ensure enforcement of labor and
environmental standards in Mexico be included in a North
American Free Trade Agreement?
A.5. I think that it is appropriate to have agreements on labor
and environmental standards in conjunction with a North
American Free Trade Agreement.
The most important environmental
incentive for any corporation to
Mexican border region because of
enforcement, particularly if the

issue is to eliminate any
establish plants in the
lax environmental
resulting pollution comes

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5

by air or water into the contiguous U.S. States. I
understand that the principal problem here is not Mexican
law, but rather the enforcement of this law.
The question of law enforcement regarding labor standards is
also an appropriate issue . However, this does not mean that
U. S . standards should necessarily be applied to Mexico. In
particular, it is not desirable for U. S. minimum wage laws
to be applied to Mexico, just as it is inappropriate to
apply the minimum wage laws of the United States to Puerto
Rico.
Q.6. a.

How should public policy respond to a situation in
which a foreign government engages in industrial
targeting of a high value-added American industry, that
may be critical to our military capabilities, and that
is shrinking dramatically?

b.

Suppose that the U.S. manages to maintain a presence in
the critical industry, but the presence is in the form
of subsidiaries of foreign companies. Is this cause
for concern?

A.6. a.

I am generally in favor of the relatively free movement
of goods and capital across national borders. Such
movements generally contribute to the prosperity of
both countries; there are mutual gains from
international trade and investment.
However, the mutual gains point does not apply to
military industries. If, through international trade
and investment, all countries end up with more weapons
-- including both us and any potential adversaries -then we are not all better off; we may all be worse
off. Thus, propositions that apply to civilian goods
and civilian trade do not necessarily apply to military
goods .
Consequently, it may be desirable to restrain imports
and investment in industries that are critical to
national defense, whether or not those industries are
specifically targeted by foreign industrial policies.
With the change in the international environment, there
may be changes in the industries that are essential to
national defense. I will look to the Defense

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6

Department for judgments on what industries are, in
fact, essential to national defense.
On a related matter, I believe that a case for
restraints may arise even for an expanding industry,
when technology related to military power is involved .
For example, as part of the effort to limit the
proliferation of weapons of mass destruction, it is
important to regulate the export of some goods, and to
prevent foreign firms from trying to acquire technology
by buying relevant U.S. firms, perhaps through front
organizations.
b.

It depends. If foreign ownership is deemed likely to
interrupt the development of a technology critical to
our national defense, specific policy steps may be
desirable. The appropriate response may vary from case
to case. For example, it is desirable for the Defense
Department to direct research contracts predominantly
to U.S.-owned firms; this discourages foreign
investment in industries with rapidly-developing
military technology.
There are also cases, particularly where close allies
are concerned, where international investment in either
or both directions is desirable, or where joint
ventures are desirable. There are major economies of
scale in many military products, and close
international ties with allies can lower costs of
military equipment .

Q.7. Mr. Boskin was quoted once as saying it didn't matter
whether the U.S. builds computer chips or potato chips as
long as the overall dollar value of production was the same.
Do you agree?
I note for the record that Chairman Baskin
never made any such statement, nor anything like it. Please
see attachments.

A.7. At the outset,

I do not agree with the idea that it doesn't matter whether
the U.S. builds computer chips or potato chips. Incomes are
on average higher in the computer chip industry than in the
potato chip industry, and it is desirable for the United
States to specialize in high-income industries.

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AT'l2'alHENI' l

(senator Riegle ~st.ion 17

u

p

T

D

RUNNING DOWN AQUIP ABOUT CHIPS IS NO SNAP
IY&UNall ii the case

C

be 100 g<X>d

o( the quot...- 1h.11 mo1v
10 be 1ruc. A!> dCtlillC

heats up over t!le fu1urc of the
~~igcd U.S semicondu,:tor ,ndu,try.
rh,: Whuc HouSol! has ttccn 1.lro1w111t? ~ lot

of Oak from mdusuy instekrs and Members of Congrc-M for its hand1.'"(lfl policy.

One

to get

Council of Economic Advisers . The
s1a1cmcnT . ag;Hn a1111huted 10 Boskin ,
ha!, been repeated in T«hno/Of:1 Review,
a pubhca11on of 1hc Massachuscus Institute of Technolog)' Alumni As.sociatK>n;
th<- LM Anc,..-lc.1 Tunn: and Forrunc magazmc . No11omiJ Journal u)Cd 1he quotatK>n in II recent s1ory on 1echnology poli-

cy. (Stt NJ. 7161'11. p . 168/JJ

under everybody·!. skin is 1111~: .. Por.uo

The sta1emcn1 has also been widely
circulated among members of the semi-

chip,,. scmiconduc1or chip-.. wha(s 1he

conductor industry and

dirfe rcncc? They arc all ch,rr.,.. A hun •
OM or a hundred
dollar!> wo nh of the 01hcr •~ , 1111 a hun dred dollars.·•
Some people com,ickr tlw ,tah:m...-01 .i
pithy. highly quotaMc ~umm;1111111 ,1r 1hc.·
Whuc House- ~''"'" ll . c.,plur.:, !i-Ul' •

who deal wi1h them . Washington lcch•
nology wa1cf'le" 1ell vemons of 1he story
1ha1 havt Boslon uuering lhc: words in
early 1989 ei1he r 10 11 p r iva te While
llouse m~c11ni; of, or a sinularly exclu~vc cock1a11 recep1ion for the chief exccu11vc officers or 1hi: country's most power ful chip m..inufactu rers Intel C orp.
prc,1ck:n1 Andre"· Gwvc h;h rcponedly
u s ed The comment tn speeches and
auributed 11 10 Bos&.:in
A Thud version o( 1he story place!ii
Bosk1n and the alleged comn1cn1 .11 a
met1ing of officials o( the Stmiconduc1or Industry As§OCiation. bul associa1ion
!tpokcsman Thomas G. Beermann said.
.. I can 1cll you plainly i1 was not somc1hing s.-iid 10 a group of our executives...
O1hers s.iy equally plainly that lhcy
heard the comment from close tr.ends or
colleagues who ~y they heard it first•

s1atcmcn1 1ha1 S\.' Cms

du~d dollar\ wonh or

cir.t·tlv the c s.;em.'C t1f

Clvd1.: V Prcsh~'ll 7.

;i

l11c d,: h,111.·

'-utl

fot~l1.' f l'(ltlll"-C!lnr

lo ; Jap.tncsc all :urs to tht· Crn11m1.·rcc
Sccn:1;:ir)' o1nd now prcs1dl·n1 \ Ir Ill\: L: n1•
11nn11c S1ra1c gy lns1i1u1c . a W,1~h111gton
thin&.: 1;111k
1111:rc ·) one proM cm . An:,1um!. vary
al'l«•ul who in !ht.· Wh11c Htit"'-" made 1h~
sr;ucmcn1 . And wht'n . And wh..:1hc r i i
...,..,._ ever mack a1 .all .
In 1cstimony la s, Scp1t""mtk•r 10 1hc
t.."ungrcs.sional Joint Economic ( \ 11111n11tc..:, Prestow11 z ;111nhutcc.l 1h..: M;11cmc111

IO Mich.acl J. llt,!-1.in. chair111;1n or !ht.·

policy makers

hand . Boskin "absolutely satd it, early on

in the: Adminimation ," a former h1ghranlung Commtrct orficial declared. A
wcll -c011nec1cd 1ndus1ry source sa id .
.. People know (Boskin) said ii, bu1 you·re
not going to gel anybody to pu1 their
name to th3t 1n a campaign year :· GI.>'··
cmmcn1 officiats and indusuy members
interviewed refused 10 name e i1her the
location or the date when 1hey first
heard the comment, or even 10 be quOI·
ed by name.
In a Jufv 9 lcuer 10 Notionol loumol.
however, Boskin criticized lhe magazine
for using 1hc quo1a1ion, saying 1h11 no
one from 1hc publicatio n had "con111etcd
me or any OKmbcr of my stalf 10 verify
tha1 I had rvc r madt such a comment. I
have . in fac,. never done so:·
P,cs1ow11z. asl.ed for 1he origin of 1hc
!<tlatemcnl he h;uJ quoted. replied ...<\,
far as I know. llo)km did nol ac1u:1lly ~y
1ha1 . !fo rmer depuly Commerce sc..:re1ary Thomas J.) Murrin 1old me ii was a
commcn1 by (cunent Commerce under•
secretary for economic aff,u~I Michael

(R .) Darby. Somehow. i1 gu1 a11nbu1cd
toBoskm ...
Murrin. who is now dean of 1hc school
of bu s iness and admini s 1ra1ion a l
Duquesne Uni\'crsiry in Pinsburgh, sate.I
he dtd no1 ..ever remember making tha1
s1a1eme n1 10 Clyde Pres1owitz."
·· I wa~ 1okJ 111 1h,· Whnl· llou .....• ...._.\·•
er.ii 1imcs: · he nmlmul·J. · ~ -\-,\·I.in
Mur11n. ~>u should umk1,1t1ntl th.11 ;I
dt-...:, not m;1kc .1 m thfkll·nt..·l° rn:.irJ .
in~ our country whl"lhl· 1 \Ir t\\ll ,\:. ,uc
o_;tst ,,nc.lint in po1:.10 dup, 1)1 l"t)m•
putc1 (hips · My i"l".l\"11<111 .1h,,,~, \\ . t\ .
'My God, ii
m;ik,· a hug.: t1ifh: r-

"tlC~

cnce.' •·
So who ~id it, ;mJ Y.h,·1i".1 .. L,h· thtlawycrs 1cll you 10 !-.ty ,o 1.kpt~111t11b,
no1 clear on the dt·Lul,.·· Murrin
responded. "11 wa!. •• Ion~ 11mi: ag,1:
Darby didn·1 re1urn" 1CptHlc1 ·, t"all
In ttM.- m.:an1tmc:. s.:,t..·r,11 ,01irn·, -.:1ic.l
1hey though1 1h..: ,1;1lt·m,·111 1111~1n.11cd
w11h Oflit"t" ol M ,111,1:.:l· ml' III .111d Bud
gc1 director R,rha~HI G th ,m a n.
whose name nf1cn, ,u,t.,n:, ;i , lhl·
~uo1;1t1on·, ,1111h111 111 "-"'"'"" 1,I 1lw

rm

~Ill()' Not -...1. ;1l"t"1 •11hn!-'. lo "-1111 I 1111 •

nu111~ U 1hwn. O,uman, 111,·" .....-n,.· ·
1,uy ··\Vl· ha\lC n\, 1l·n1lkn111n ,,1 ;111~
,ul"h ,1 ;1tl·mcn1 h~ Mr l),11m;111 ,h,·

-.auJ

S..: ..,e1.1I 1cd111t1i11~, ,111 .,h·,1, ''''"I,;
anti t1111-..tk 1hi: W;,,h1n!;t11n lkh\\,n·
{

1:-ilO "\. \ 11•1"\ \ I HH l{ :\\ I

•uJ

insis11: d th;lt thi: ,t;1tl·nh.:~11 ---\\h;1tl·wr
11 ., 11ru:an- acrur;,1d\ rl·lkn, 0111 ..: 111
l"l·on~1111t.." 1h i nl.i11~ .11 1hc \\'lllll'
I louw ·· 11 ·, 1110 h;itl lh,,1 ,1, , 1~ l·,111 1 h,:
p11u1,,: t.l d owu.
, :11.I

0

;1 l llll )!ll. ""'"•d

··tr ·, ,· .. ,,. ,,,, .. ,.. ..

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,udt..·
■

••

117

A'l'l'I\OlMENI' 2

(Senator RJ.egle C,\Je st1on #7)

Amrrican companies

wn inimteal to

lhat poli•

cy, and ii was 1hcrcforc more his func1ion 10
indigenous companics, against American oompeti1KIO than ii was to aMist in pcnc1~1ing the market.
CAkL EsTEs II
Attomey
pro1«1

Hous10tt

WIEN TIE S'lllll: SIIOUIJ) CHIP IN
In "The Thaw in Washin~on" (Special Issue)
you assen that I "used to say il makes no difference whether the country turns oul computer
chips or potato chips." I have. in fact , never

"""'"'·
Th: notion -undertying the alkgtd s1a1cmcn1
ii,, o( courx, a caricature of the rypcs o( technology policy choices faced in the real world. The
Administration's policy. which has been imple·
mcntcd from the beginning and which has not
chang<-d one iota. is that federal support of basic
and applied civilian research projects ts warranted when, and only when, (I) the project promisct widcspcud societal benefits exceeding the

COSl!'i and t2) 1hc rclums c,1rncJ hy rrwatc firms
will be m1,ullic.en1 10 jusuty the nc:ccs~ry pn·

vale inves1mcn1.
Con~1,1cn1 application of 1h1s policy hai, led 10
a significanl incrca!>C m ~icncc anJ tcchnnlogy
funding w1thou1, as you correctly note. engaging
in a heavy-handed mdum,al polic)' m which lhc
governmcn1. rather 1han lh<' markel. f"ck '- com•
merc1aJ winner':> ,ind losers.
By lhc way, my own acatkmic rcs.carch cm•
phasrtcs 1hc imponance of technology develop·
mcn1 to econonuc growth.
MICHAEL l

8oSKJ,..

Chairman
Council of Ec:onomu: Ad1·i.un
Washmgron

IE MS NO SECOND BANANA
Re "Scc,ets of Great Second Bananas" (May
6). in wh,ch I was mcntlOOCd in the ho.It, "More
Second Bananas & One Bad Appk": David
Rod;cfcllcr and I officially shared the rcsponsi•
bility of running Chase Manhallan in lhc 1960s.
However. bcfo,c I accepted that arrangement,

David wrote a memorandum ,1aung 1ha1 I
woukl have primary rc,pt1n'lb1hty for k>ans. operations. trusb. 1ntcrna111mal. and mvc,1mcms.
As he put 11, "In fact. J'OU will l\c running the
bank ." h was only under tho\.C cond1uon, thal I
would accept the pubhc ,1a1cmcn1 tlla1 we
shared rcspons1bili1y
When I wa, l·h;urnian . .,r mJJt· no 111.,n, to
dcvdoptng coun1ncs. we had an a,sels-lO·capi •
tal ratio of JO 10 I, and. 1ndccd. wkl S4C10 million
of subordinated notel<I to 1ncrea!tC tha1 ratio. We
had a very profitable real cstale program of fl.
nancing the top comuuccmn companies; we
made oo long-term commitmenh.
You can s.cc from the changcl<t that tool\ place
upon my rcuremcnt 1ha1 none of these polides
were pursued by David. He had indeed hved up
10 our origin.al agreement.
GEORGE C HAMPION

NtlN York City
Addreu lencn 10 FouuNl, Tun,: & Life- Bu1klmg.
R,xkcfelkr Cen1i:t. New York. N. Y 100:?U. Lc11cn
maybe edi1ed for pu~olclantyOf ~
.

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7

Q. 8. What are long-term consequences for income growth of
Americans running large budget deficits, if those deficits
produce low national savings and require us to finance our
domestic investment with foreign capital?
A.8. For every $100 deficit that is financed by borrowing $100

from abroad, the United States accumulates an additional
$100 in foreign debt. As a result, we will have to pay
something like $8 per year in interest to foreigners until
the debt is repaid; if the debt is not repaid, we will have
to pay the interest into the indefinite future. Thus,
deficits and the accumulation of foreign debt represent an
accumulation of claims on us and our children in the future.
The important analytical point is that we would be worse off
without foreign investment to redress the imbalance of our
saving and investment needs . Yet we would be better off
still if we increased saving and investment ourselves.
Q.9. In 1988 Harvard economist Benjamin Friedman wrote a book
entitled Day of Reckoning; The Consequence of America's
Economic Policy Under Reagan. He stated in that book that
since 1980 we have lived well
by running up our debt and selling off our
assets. America has thrown itself a party
and billed the tab to the future . The costs,
which are only beginni ng to come due, will
include a lower standard of living for
individual Americans and reduced American
influence and importance in world
affairs ... in short our prosperity in the
1980's was a false one, built on borrowing
from the future."
Do you agree with Professor Friedman's analysis?
with what part of it do you disagree?
A. 9

If not,

I agree with some of the main points in this quotation,
although I would modify some of his conclusions .
The United States ran large budgetary deficits during the
1980s, and these budgetary deficits were a major cause of
the U.S. current account deficits (as emphasized by

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8

Friedman, p. 10-11 and elsewhere).
deficits were undesirable.

Both of these large

However, I would not agree with the statement that "America
has thrown itself a party and billed the tab to the future."
This statement implies to me that we have been spending more
than our incomes, and dissaving on a net basis. This is not
the case.
Q. 10. Dr. Friedman in his book Day of Reckoning: The Consequences
of America's Economic Policy Under Reagan not only pointed
out that America's 1980 prosperity was a false one because
it was based on borrowing but that it was partially based on
borrowing from abroad to finance consumption at home.
Dr. Friedman contends that because these borrowings were not
used to finance investment in productive assets, but rather
consumption, when we begin to pay it back it will depress
our economic prospects further.
Do you agree with his analysis on that point?
A.10. We indeed did borrow from abroad, on a net basis, during
the past decade. A major cause for the foreign borrowing
was a high level of consumption, both private and public.
In that sense I would substantially agree with Dr. Friedman.
However, I am not sure that it is entirely correct to say
that the foreign borrowings were used to finance consumption
rather than investment. Suppose that we had run large
government deficits, but had not had access to foreign
capital. Interest rates would have been higher in the
United States. The probable effect would have been to
depress domestic investment in the United States. Insofar
as this is the case, it is correct to say that, because of
our budget deficits, our national saving was too low to
finance a healthy level of domestic investment. We
therefore turned to foreign borrowings to finance some of
our investment . I would note that foreigners have invested·
in the United States because of the attractiveness of our
economy.
According to official statistics that were commonly used
until recently, the U.S. had a net negative international
investment position of about $700 billion. But this figure
was based on historical costs, and it is clear that many of
our overseas investments are worth much more than U.S.

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In order to correct
businesses originally paid for them.
this problem, the Commerce Department has recently published
data which reflect investments at current replacement cost
and at market value. When so evaluated, the net investment
position of the United States at the end of 1990 was
negative $412 billion and negative $361 billion,
(See Survey of Current Business, June 1991,
respectively.
p. 24 .)
Even these numbers may give an overly pessimistic picture.
The United States now receives about the same income from
our investments abroad that foreigners receive from their
In 1990, the United
investments in the United States.
States had net investment receipts of about $12 billion,
although we might have had net payments in the absence of
differences in U.S. and foreign business cycles.
Once more, this is not to deny that we have been headed in
the wrong direction, and that it is important to reduce our
twin deficits .
Q.11. Dr. Friedman in his book Day of Reckoning: The Consequences
of America's Economic Policy Under Reagan predicted that the
economic policies of borrow and spend practiced by that
Administration would lead to an economically stagnant
America--which we seem now to be seeing. He further stated :
"Economically stagnant countries cannot lead
the world, no matter what their military
In time other nations with
strength.
stronger economies first match and then
surpass their ability to produce goods and
services for internal use as well as for
export. Eventually these materially more
successful nations become dominant in
international affairs.•
It seems the Soviet Union's decline shows the truth of
Professor Friedman's observation. Do you think his
observation is a correct one, and, if so don't you think
President Bush should focus on our domestic economic health
more if we are to play a lead role internationally?
A.11. In my mind, there is no doubt that the growth of U.S. real
income would have been more rapid during the past decade if
we had had smaller deficits.

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The United States remains the fl country economically, both
in terms of real per capita GNP (measured internationally at
purchasing power parities), and even more so in terms of
total GNP. The Soviet Union was a completely different
and non-comparable case. CEA Chairman Boskin has testified
before the Congress that total Soviet GNP is estimated to be
a small fraction of that of the United States.

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RESroNSE TO WRITI'EN ~!CNS OF SENATOR SANFORD FJOI

PAUL WONNACOTI'
Q.l. Specifically, what is your honest assessment of the economy?
Do you think that the economy is on the right track? Are
our problems self-correcting or do you believe that there is
a need for a new directive policy?
A.l

After the longest-peacetime expansion in history, the
economy entered a recession in the middle of 1990 .. Although
this recession was not deep by historical standards, with
the economy falling only about half as much from peak to
trough as in the average recession of the past 40 years, it
was preceded by a period of slow growth for over a year. The
recovery to this point has been weaker than the typical
recovery . As a result, there is now considerable slack in
the economy. This shows up in the unemployment rate, which
is now 1.5% higher than it was in June of 1990 (seasonally
adjusted) . As I mentioned in my testimony, the recession is
over; economic activity has begun to recover from its
trough . This does not, however, mean that the pain of the
recession is over; we are still well short of where we were
at the peak . The number of those who have been unemployed
for more than 15 weeks is about 800,000 more now that it was
in the summer of 1990 .
The short-term outlook is for the continuation of the
recovery. There is significant uncertainty in the shortterm outlook for a number of reasons, including the
volatility of consumer and business confidence, and
uncertainty regarding inventory behavior . Next year, I
expect the rate of expansion to increase.
There are some aspects of the economy which are self
correcting. Inventories drop in a recession, but they
cannot continue to drop forever. During a recession, people
can often put off the purchase of consumer durables, but
they are driven back into the market as time passes and old
durables approach the end of their useful life.
In my view, policies should be adjusted from time to time; I
am not a monetarist who believes in a simple monetary rule,
depending completely on the self-adjusting forces in the
economy. Policies are discussed in the next answer.

Q. 2. As a new member of the Council of Economic Advisers, what
kind of ideas and initiatives do you have to generate a
strong recovery? What ki~d of policy recommendations could

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you make that would improve the economic prosperity of all
Americans, not just a select few?
A.2. I favor an extension of unemployment benefits, provided this
is done within the budget agreement, such as in the DoleDomenici bill. I also favor the temporary relaxation of
rules for IRAs, to waive the early-withdrawal penalty for
those buying homes or those helping their children to buy
homes. I cannot promise that this would provide a large
stimulus to the economy, but it would be a step in the right
direction.
As I mentioned in my testimony, the legacy of high
government deficits leaves very little scope for traditional
fiscal policies -- that is, broad tax cuts or spending
increase to stimulate aggregate demand. The reason is that
it is important to adhere to the budget agreement with its
commitment to progressively reduce deficits; not to do so
would cause an upward movement in interest rates, with
adverse effects on housing and other interest-sensitive
sectors. This view -- that we have relatively little elbow
room for broad fiscal policies -- is, I believe, broadly
although not universally shared by professional economists,
including those from both political parties.
With the limits on fiscal actions, monetary policy has
increased in importance. In this regard, I welcome the
recent reversal of the downward trend in the quantity of
money M2, and the movement of M2 back up into the target
range set by the Federal Reserve.
But if there is little scope for active short-term fiscal
policy at present, fiscal policy is very important for
longer term developments in the economy. In particular, one
of the most important contributions that can be made to
longer term growth is to enforce budget discipline, reduce
the claim of the government on the nation's saving, and make
more resources available for investment. I would also favor
other steps to encourage saving, such .as the extension of
IRA-type legislation, although I am aware of the conflicting
evidence regarding the effectiveness of such legislation in
stimulating saving .
Q.3. What are your thoughts on -the recently introduced tax
packages? Are you concerned with the equity or lack of
equity in our tax system?

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A.3. I do not support the suggestions that have been made for a
broadly-based tax cut at this time, because it would violate
the budget agreement. In my opinion, a debate of a broadly
based tax cut at this time would cause an increase in
interest rates; public discussions of a possible breaking of
the budget agreement led to increases in long-term interest
rates in late October. Such increases in interest rates
have negative effects on such sectors as real estate and
automobiles.
There are some suggestions that a broad-based tax cut be
financed by an acceleration of cuts in the Defense budget.
I do not believe that such a package, including equal
additional cuts in the defense budget and cuts in taxes,
would stimulate the economy in the short run.
I also would not support a broad-based tax cut now because
of longer-term considerations. They would make it more
difficult to reduce deficits in the future, and thus would
continue the drain of the deficits on national saving. In
my opinion, broad tax cuts are inappropriate until-we have
gotten our budget deficit under much better control. I have
views on the equity of the tax system.
I do not believe
that the general tax code should be opened up at this time .
Most of the distributional effects are produced through
transfers. I believe the tax system should be fair, as
perceived by the general population.
I support the general idea of the 1986 tax reform. Although
it cut income tax rates for the rich -- and for those with
low incomes, too -- it broadened the tax base. In my
opinion, tax rates of 50 percent on high-income people,
combined with readily available tax shelters, gave us the
worst of both worlds.
The rich had a strong incentive to
avoid taxes, while savings were diverted into tax shelters
rather than being directed toward investments where the
economic return is highest. Tax shelters promoted
overbuilding of office buildings and other commercial
structures; this overbuilding of the past will remain a drag
on the economy for some years to come.

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RESPCJiSE '10 WRITI»f 'llESTICH3 OF SEKMial GAmi m:11

PAUL WONNACOTI'
Q.l . What assurances can you give the Committee that you will
provide totally objective advice to the Administration if
you are confirmed as a member of the Council of Economic
Advisors?
A. l. I have tried, in my previous government service, to give the
best, most objective advice, and I will do so at the Council
if confirmed. The best assurance that the Committee could
have would be gained by checking with people with whom I
have worked in the past. If the Committee wishes, I will be
pleased to provide a list of such people.
Q. 2. What assurances can you give the Committee that you are not
an idealogue?
A.2. The best evidence I can give is my writings, particularly
the first edition of my Macroeconomics text. I presented a
balanced treatment of the Keynesians and Classical schools.
I particularly attempted to present various views in terms
that the proponents of these views would recognize; I tried
to avoid the creation of straw men.
Q.3. What role do you believe should be played by political
considerations in performing your work on the Council?
A.3. The function of the Council is to give the best, most
objective economic advice that we can.
There is one way in which I can see political
considerations, broadly defined, as having an effect on what
I do at the Council. If there are two policies that I think
are equally desirable and important, I would concentrate my
attention on the one which I thought was more likely to be
seriously considered in the political process. I consider
this part of my obligation to the public, which is paying my
salary, and which has a right to expect me to be effective.
Q.4. What changes would you like to make in the way the Council
functions or interrelates with the other parts of the
Executive Branch?

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A.4. At this stage, inasmuch as I have been serving only as a
Member-designate, I have not developed a view as t6 how the
operations of the current Council might be improved.
Q. 5. Do you view the Council as having a major role in applying
current academic economic research to bear on policymaking
within the Administration?
A.5. Yes, particularly major empirical and policy-oriented
studies
for example, academic studies of the possible
effects of changes in our commercial policies, or empirical
studies of the effects of various taxes.
Q.6., Q.8. Are you concerned about the adequacy of the statistics
on the domestic economy available to policymakers? Are you
concerned about the adequacy of the statistics on the
international economy available to policymakers?
A. 6 . , A.8. I would like to see more work done on domestic
statistics, particularly regarding employment and income
series. In my answer to Senator Riegle's Question flO, I
noted recent revisions in the international investment
statistics of the United States. It would have been
desirable for these data to have been revised earlier, when
the large swing in the U.S. net international investment
position began.
Q.7., Q.9. If so, what should be done?
A. 7 . ,A.9. The Boskin initiative, approved by the President in
November 1989, will result in a major improvement in U. S.
statistics. To date, it has been only partially approved by
the Congress. I would recommend that the remaining parts be
approved.

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EXECUTIVE OFFICE OF THE PRESIDENT
COUNCIL OF ECONOMIC AD\IISERS
WASHINGTON, D.C. 20l!IOO

November 4, 1991

Dear Senator Riegle:
Please find enclosed my responses to the questions you and
Senators Garn and Sanford sent in connection with the hearing on
October 25 on .my nomination to be a Member of the Council of
Economic Advisers. I appreciate the opportunity you and your
colleagues have given me to think about the challenging issues
raised by the questions. I believe the effort will iaprove my
ability to serve on the Council of Economic Advisers.
Sincerely,

Member-Designate
The Honorable Donald w. Riegle, Jr.
Chairman, co-ittee on Banking,
Housing and Urban Affairs
534 Senate Dirksen Office Building
Washington, o.c.
20510-6075
Enclosures

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RESPONSE TO IRITl'E.'i QUESTIONS OF SENATOR RIEGLE FROM

DAVID BRADFORD
Q.l. What is your professional assessment of the nature and
seriousness of the economic probl_. facing Allerica? This
assessment should include the i-ediate and short-term
outlook and the long term outlook as well.
A.l. My assessment of the i-ediate outlook for the U.S. economy
is in line with that of the profession generally, naaely,
that the economy is emerging from a recession, but at a pace
considerably slower than the average in the early phases of
post-war recoveries. The longer term probl-s are to
maintain a framework within which a competitive economy can
deliver steadily improving opportunities to all Allericans.
These ideas are elaborated upon in my answers below.
Q.2 . Based upon your assessment of the economic probleas facing
America at this time, what policy reco-endations do you
believe should be seriously considered to improve the
situation?
A.2. One might be inclined to think that the current influence of
fiscal policy on the economy is relatively expansionary in

light of the large Federal budget deficit. In my view,
however, the current fiscal policy is probably somewhat
contractionary. By generally accepted analysis, the
component of the budget deficit that represents the
financing of the deposit insurance problem is of little
aggregate influence on the economy. When the government
issues debt and then promptly purchases the same amount of
financial assets in taking over a failed bank, the stock of
financial assets in the economy is unaffected . Those
holding insured deposits do not perceive their circuastances
as having changed, so they do not change their behavior. I
think it is likely that the extra deficit financing for the
RTC is associated with a contractionary effect of the
Federal budget, since it corresponds to new information
about the seriousness of the state of the financial system
and to newly implied tax burdens in the future to service or
repay the debt.

Another aspect of the current budgetary picture is the
declining level of Federal spending foreseen in the budget
agreement. A shift in the composition in demand, even a

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well-anticipated one, imposes costs of shifting resources,
some of which may be making themselves felt currently.
However, I do not feel that we should ease fiscal policy
broadly in response to the current recovery situation. For
t1110 reasons, I feel that this is not a promising approach to
deal with the particular business cyclical situation we now
face. The first reason is the choice expressed in the
budget agreement, that we should redress the tendency to
shift the burden of government to future generations. The
second is more •tactical•: It is likely that the adverse
reactions of capital markets to an apparent abandonment of
fiscal discipline would tend to offset the short-run
positive effect on some markets of fresh cash flow (assuming
fiscal policy changes could be implemented quickly, as,
e.g., in the case of the UI extensions that have been under
consideration) •
Given there appears to be little promise in a general easing
of fiscal policy, the usual instrument for influencing
short-term conditions is monetary policy. If conditions
such as the modest rates of inflation, slack in labor
markets and evidence of a credit crunch continue, it seems
to ae further easing of monetary restraint would be in
order.
These statements should not be read as saying that I do not
see any fiscal moves that could ameliorate the current
situation. Fiscal policies with the effect of improving the
liquidity situation in the short run without jeopardizing
the budget discipline would, I believe, be helpful now. An
extended UI benefit plan would put purchasing power in the
hands of cash-strapped families; the Dole-Domenici proposal
is an example of such a plan. Another fiscally sound
example would be the Administration's capital gains tax
proposal. I recognize that the revenue projections of that
proposal are disputed, and that it raises fairness issues,
which I will address in response to question 3. As far as
the revenue estimates are concerned I have reviewed them,
and regard the claim that the proposal would raise revenue
to be quite reasonable -- the debate in any case is whether
one will get a little more or a little less than a dollar
back per dollar of "static" revenue loss. A capital gains
tax cut would have favorable effects on the long-term
investment outlook and long-term growth prospects. It would
also have a positive effect on asset markets, which in turn
would ameliorate the situation in the financial system,
including the RTC.
Several policies and programs with long-term implications
would also be very helpful in the short term, because many
businesses, large and small, as well as other actors in
capital markets have long planning horizons. As a

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consequence expectations about future goverruaent policy are
i•portant. Several significant policy decisions are now i.n
the process of resolution through legislation. For exampl.e,
the course of future spending on transportation i• currentl.y
being debated in the Congress, and provision of funding to
enable the FDIC to deal proaptly with -erging probl-s in
the banking sector is also subject to much discussion and
concern. Reaching conclusions on these pending policies,
consistent with the budget agre-nt, would have the
favorable effect now of boosting business and consWDer
confidence.
In my view, the moat pressing long-term probl- of the
country ia an improv-ent in productivity, including
especially the productivity of currently leas-productive
workers. One way that I feel this can be addressed i• by
improv-ents in tax rule• affecting saving and investment.
The much-debated capital gains rules and proposals to extend
tax-sheltered savings plans such as IRAs are partial steps
in the right direction. These are elements of a shift in
policy away from taxing savers and investors more heavily
than non-savers and non-investors (at each income level).
As I suggested in •Y oral testimony, a way less familiar in
the political debate, but preferable as I see it would be a
more systematic and uniform effort to reorient the tax
syst- in the direction of a conawaption base. Another
area, in which we are out of step with •ost of the advanced
econo•ies, is in the taxation of corporations. It would be
desirable to seek to reduce the influence of an unintegrated
corporation inco•e tax on the financial and organizational
structure of our econ011y. (An •integrated• corporation tax
moderates or eliminates the double-taxation effect by which
corporate equity income is taxed once at the company level
and again at the shareholder level. Most major industrial
countries have some version of an integrated ~orporate tax . )
The tradition in Allerica is for inculcation at all econo•ic
levels of values of honesty, respect for others, respect for
work and learning. The family and co-unity structure that
supports these values has diminished, and the •ain forces
having this effect seem to be social movements over which
government has little direct policy influence. But I
believe it should be possible to try to assure that at the
•argin, policy supports a strengthening of the family and
the rewards of participation in the labor market. In the
tax syate•, the use of the earned income credit, and its
responsiveness to family size are desirable directions in
which policy has been tending recently.
I will co-ent below on health care issues. On the
enviroruDent, I would si•ply point to the desirability of
dealing with our environaental proble- -- I do not share

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the view of •o- that value generated through improv-ent in
our environaent i• not •economic• value, even though it is
not aea•ured in the GNP statistic• -- but also to the need
to avoid unnecessarily costly regulatory approaches to
achieving enviro1111ental goals. The tradeable emi••ions
allowance •Y•t- under last year•• Clean Air Act Allendllents
is an example of the sort of in•titutional development I
would hope we would apply more broadly.

Q.3. What tax change• can you reco-end that would help stimulate
growth without aaking the •ystem even more unfair?
A.3

I have mentioned in respon•e to que•tion 2 my view• on the
general approach toward tax policy likely to contribute to
long-term prosperity. on the question of fairness, I would
say first that it i• very much a matter of perception. The
corporation income tax is a good example of the perception
probl-. People often forget the corporate tax in
discussing the distribution of tax burdens. Who actually
bears the corporation income tax is an unresolved question.
so- studie• place the tax on shareholders, some on all
capital income, some partially on earnings of labor. I
think it i• fair to say that any of the conventional ways of
allocating the corporation tax will increase the measured
progres•ivity of the tax system.
The capital gains tax controversy is another example. The
Treasury Departllent has estimated that a capital gains tax
cut would re•ult in an increase in tax payments by
high-inco- people, when one takes into account the induced
realizations that more than offset the static revenue loss
for the high-inco- taxpayers. Although I find this
analy•i• reasonable, I recognize that the exact estimates
are in di•pute. Yet the general point is not disputed. I
have not seen JCT estimates incorporating induced revenue
feedback distributed by income class, but I would be
surpri•ed if they did not conform to the Treasury's
estiaate• in thi• general distributional effect. In other
words, the tax penalizes high-income taxpayers even at a
likely coat to other taxpayers. Taking into account the
likely improvement in wages that would result from the
economic effects of the tax change would reinforce this
paradox. I understand the political and perception probl-,
but it is an ironical situation.
There are fairnes• problems in the tax system wholly
unrelated to the rich vs. poor dimension that tends to
dominate the discussion but about which economics as an
objective scientific matter cannot say too much. To cite
another instance related to capital gains, a careful study
of tax return data for 1973 revealed that taxpayers reported
a total gain from the sale of stock of $4.6 billion and paid

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tax•• accordingly. When the ba ■ i• in the ■hare• wa ■
corrected tor inflation during the holding period ot those
as ■et■ , it turned out that what the taxpayers had actually
experienced wa■ not a gain ot $4.6 billion but a ls2u ot
$0.9 billion (1973 dollars). Since the general price level
has continued to rise (by a factor ot almo■t three ■ ince
1973, tor exa11ple), we can be ■ure there continue■ to be a
significant tax on purely inflationary gain■• And thi• is
but a ■ ingle exlllllple ot the way inflation distort■ the
mea■ur-nt of inco-, with consequences not only for
efficiency but also for fairness a■ -ny would ■ ee it.
The

■tandard to which the aea ■ur-nt is■ues ju■t discussed
refer■ is taxation of the reward to ■aving.
In •Y view
there is a fairnes ■ question here too. If two people have
the same profile of earning■ over a period of years, but one

of them chooses to save during the early year■ to consUJ1e
later, the -var bears a heavier burden under an income tax.
Thi• re■ult s e - to me questionable as a -tter of
tairne■ s.

Q.4. Do IRA• really stimulate private saving enough to offset the
tax losses, which increase public dissaving? Does it matter
how they are structured?
A.4. IRAs are usually structured with a limit on deposit■ in any
year. In a frictionless financial sy■t- one might expect
people to shift savings from an unsheltered form to an IRA,
up to the limit, and not to increase ■aving. However, there
are impediments to access to IRA ■aving■ (the withdrawal
penalties) and furthermore we do not live in a frictionless
financial system of perfectly calculating savers. My
impression of the evidence is that the IRA provision■ in the
past did generate additional saving; how much is clearly a
matter of dispute. The tax lo•• is mismeasured in our
budgetary accounting system, and this introduces incentives
in the budgetary context to structure plans in particular
ways. To put the matter simply, the deposit in a deductible
IRA generates a reduction in tax receipt■ today that should
be measured against an addition to the tax receipts in the
future, when the savings are withdrawn.
Although they are economically equivalent for a person whose
tax rate is constant, "front-loaded" IRAs and "back-loaded"
IRAs are treated differently in the budget. There is an
additional factor, which causes front-loaded IRAs to tend to
have a greater revenue cost (and also stronger incentive
effect), in that a person's marginal tax rate tends to be
higher in the earning years and lower in the retir-ent
years. For example, a person who depo■ ited a dollar in an
IRA when his tax rate was 281 would give up $.72 in
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saving. I t the next year he retired and had a ■arginal tax
rate ot 151, he could withdraw the same dollar and enjoy
$.85 in additional consWDption, picking up $.13 on the tax
syst- (in addition to any earning■ on the tunds). This
ditterence apart, the economic effect ■ ot front- and backloaded IRAs are predicted to be the same, and how they would
actually differ in practice would depend on questions ot
-rketing and the like.
Q.5. Health care costs have been growing ■uch faster than the
general rate ot inflation, forcing us to concentrate
increasing portion■ of our economic resources to health
care. At the same time million■ of Americans have no
insurance coverage and are increasingly unable to ■eat the
costs. Have you considered how we might increase coverage
and do a better job of controlling costs?
A.5. Although I hope to have a significant involvement in the
ongoing discussions of health care, I am just beginning to
dig in on the subject. It is clearly a situation in which
the existing institutions will have a major bearing on
directions for effective policy changes to deal with such
proble■■ as:
access for all (this is not simply a matter of
poverty), the lack of portability of insurance which
threatens mobility in the job market, the fact that small
businesses (and this means the employees of small
businesses) effectively must self-insure, and need for cost
containment. If I am confirmed, I expect to be actively
involved in the process of thinking through the alternatives
during the coming months.
Q.6. Tax changes have had a large impact on real estate prices
over the past decade--first pushing them up and then shoving
th- down. The consequences for financial institutions have
been enormous. In your view, have we gone too far or does
real estate taxation as it now stands provide an appropriate
balance?
A.6. The influence of fiscal policy on real estate is not limited

to the effect of the tax rules applicable to real estate
invest■ent.
For example, to the extent that the tax changes
in 1981 contributed to the rise in the value of the dollar,
they affected the value negatively of real estate in the
-nufacturing mid-west. Real estate, like other asset
■arkets, is susceptible to significant movements as a
consequence of shifting expectations about the future. The
general presumption I would bring to the question of the
appropriate treatment of real estate under the income tax is
that the effort should be to tax the returns to investment
uniformly. This objective is difficult to implement in
general, which is one reason the income tax is so
complicated, and particularly difficult to implement in the

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case of real estate where the return ■ are hard to aeasure,
and any single set of, for exaaple, depreciation rules is
bound to be wrong moat of the time. Real estate is also an
industry in which capital gains are likely to be a
significant portion of returns.
These observations go to the question how one ought to tax
real estate in an ideal world. In the actual world, I think
it is correct to say that we have shifted from a situation
in which real estate was more lightly taxed than, say
industrial equip-nt, to one in which it is more heavily
taxed, probably too heavily taxed relative to a true income
aeasure. Thia has had adverse consequences for the building
industry.
Q.7. In 1988 Harvard economist Benjamin Friedman wrote a book
entitled pay of Reckoning; The consequences of America's
Economic Policy Under Reagan. He stated in that book that
since 1980 we have lived well.
"by running up our debt and selling off our assets.
America has thrown itself a party and billed the tab to
the future . The coats, which are only beginning to
come due, will include a lower standard of living for
individual American■ and reduced American influence and
importance in world affairs ••• in short our prosperity
in the 1980'& was a false one, built on borrowing from
the future."
Do you agree with Professor Friedman's analysis?
with what part of it do you disagree?

If not,

A.7. I do not agree with Friedman's view that the prosperity of
the sos was false. The prosperity of the sos was the result
of a high and rising level of employment.
Friedman's statement can be read as the view that the
relatively high consumption rates of the •sos were somehow
frivolous. I would certainly disagree with this view. For
example, the achievement of the Social Security system of
greatly reducing poverty among the elderly resulted in
higher levels of consumption in that group than they would
have enjoyed in an earlier period. Nor do I think there is
anything inherently wrong with free people choosing to
consume more now and leas later, if they wish.
·With that as pr-mble, I would express agreement with
Friedman's concern about future generations and the effect
of the fiscal policy of the sos on the accumulation of
wealth. In retrospect, of course, it is easy to say it
would have been better if we had saved more in the past.
·This is true for individuals as well as nations. I would

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have preferred a fiacal policy that did not ■hift the
financing of governaent toward the future a■ 1111ch a■ wa■
done.
J:n thinking about thi ■ i ■■ue, it i ■ i11p0rtant to k-p in
■ind that re■ ident■ of the United State ■, taken a■ a whole,
did continue to incr•••• their w-1.t h during the 80■, ■ore
or le■■ on the trend line of the pa■t fifty year■•
According to the
Federal Re■erve Board, the aggregate U.S. private -•1th per
capita, ut of national debt, ro■• frOJI $51 thou■and to $62
tbouaand (expre■■ed in 1990 dollar■) frOJI the end of 1979 to
the end of 1989,

Q.s. or. Pried■an in hi■ book pay of Reckoning; The con■-quencea
Pt ANrica•• Econoaic Policy under Reagan not only pointed

out that Aaerica•• 1980 pro■perity wa■ a fal ■e one becau■•
it waa based on borrowing but that it was partially baaed on
borrowing frOJ1 abroad to finance con ■Wlption at hOJle,
Dr, Pried■an contend■ that becau■e these borrowing■ were not
used to finance inve ■t■ent in productive asset■, but rather
con■u■ption, when we begin to pay it back it will depr•••
our economic pro■pect ■ further.
Do you agree with his analysis on that point?

A.8. J:t i■ not clear to - what the counterfactual i ■ again■t
which to ass••• Friedman•• position on investment fro■
abroad. J:f he i• to be understood a• suggesting we would be
better off today if international capital markets had been
clo■ed J: would diaagree.
Given the desired acCUJ1ulation of
wealth by residents of the United States, it was in our
intere■t (and especially in the interest of resident
Aaerican workers) to have residents of other countries
provide capital to finance project ■ that were worth
undertaking froa their per■pective but not sufficiently
attractive to draw forth ■ore domeatic savings. If we
imagine a policy that might have cut off foreign investment,
for example, a punitive tax on the investment returns
accruing to foreigners, the point is clear. We would not
have liked the results
Paying back the foreign investor■ is like any other form of
acC\Ululation of wealth. It does not depress our economic
prospect■ to acc\Ululate wealth.
We accwaulate wealth in the
firat instance by investing wisely, where the return is
highe■t.
We can also acCWDulate wealth by saving ■ore,

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9

which -an■ con■uaing l•••· That doe■ not depre•• our
econoaic proapect ■ 1 it trade ■ otf a reduced level of
con■uaption today tor a higher level ot con■uaption, for
ourselve■ or our children, in the future.
Q.9. Dr. FriedJlan in hia book Day of Reckoning;

The Consequences

of America 's Economic Policy Under Reagan predicted that the
econoaic policies of borrow and ■pend practiced by that
Adaini ■tration would lead to an econoaically ■tagnant
Allerica--which we seem now to be ■eeing. He further stated:
•Econoaically ■tagnant countri•• cannot lead the world,
no -tter what their ailitary ■trength. In tiae other
nations with stronger economies first aatch and then
surpass their ability to produce goods and ■ervices tor
internal uae as well as for export. Eventually the■e
aaterially more successful nation■ beco- doainant in
international affairs.•

It ■eem■ the Soviet Union's decline ■how■ the truth ot
Professor Friedaan'a observation. Do you think hi ■
observation is a correct one and, i t ■o don't you think
President Bush should focus on our doaestic econoaic health
aore if we are to play a lead role internationally?
A.9. One of the services performed by Friedman's book is to
dispel the idea that the deficits ot the 80s iaply increased
likelihood of cyclical downturn. The problem ia not that we
will fall off a cliff. The problem is that we will not
accumulate wealth as rapidly, and that ia to the
disadvantage of our own and our children's tuture. I do not
read the current recession as related to the fiscal policies
of the aoa.
The main lesson we and other nations can draw troa the
economic circumstances of the Soviet Union is a warning
about what can happen if we substitute political tor market
mechanisms as the principal institution for creating wealth
and allocating resources. I do regard a steady iaproveaent
in the opportunities of Americana as an extreaely iaportant
goal of the government. And I would agree that ■erving that
goal well will itself be an important ■ource of influence in
the world.
·

137
~

10 WRITI'EN QUESTIOlS OF SENATOR SANFORD m::t.l

DAVID BRADFORD
Q.1. Specifically, what is your honest ass•s-•nt of th• econoay?
Do you think that the econoay is on the right track? Are our
probl_. self-correcting or do you believe that there is a
need for a new directive policy?
A.1. My assessaent of the immediate outlook for the U.S. econoay
is in line with that of the profession generally, na11ely,
that the economy is emerging from a recession, but at a pace
considerably slower than the average in the early phases of
post-war recoveries. The longer term problems are to
-intain a framework within which a competitive economy can
deliver steadily improving opportunities to all Americans.

I do not regard our problems as self-correcting in the sense
that there is no need for good economic policy. On the
contrary, I regard some of the legislation now being
developed in Congress, for example to reform the banking
system, and to provide for transportation improvements, as
very important elements of policy. There are other ways in
which policy could be improved. For example, it would be
desirable to reduce the distorting effects of the
corporation income tax. But I do not see the need for a
radical change in the policy framework.
Q.2. As a new member of the Council of Economic Advisers, what
kind of ideas and initiatives do you have to generate a
strong recovery? What kind of policy recommendations could
you -ke that would improve the economic prosperity of all
Americans, not just a select few?
A.2. bong the specific impediments to short-term improvement

that I see are lack of confidence in the financial system,
liquidity constraints associated with a "credit crunch," and
uncertainty about where demand is going to come from in a
period of declining defense and other government spending
programs. Among the specific longer term economic problems
that we face as a nation are improving the investment
situation, finding ways to increase productivity, especially
for currently less productive workers, improving our health
care system, and improving the environment without imposing
unnecessary costs .

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one aight be inclined to think tbat the current influence of
fiscal policy on the econoay i• relatively expansionary in
light of the large Federal budget deficit. In •Y viev,
however, the current fiscal policy is probably so-vbat
contractionary. By generally accepted analysis, the
coaponent of the budget deficit that represent• the
financing of the deposit insurance probl- ia a of little
aggregate influence on the econoay. Whan the governaent
iaauea debt and then proaptly purcha••• the aaae U10unt of
financial asaeta in taking over a failed bank, th• stock of
financial assets in the econoay i• unaffected. Those
holding insured deposit• do not perceive their circuastances
aa having changed, so they do not change their behavior. I
think it is likely that the extra deficit financing for the
RTC is associated vith a contractionary effect of the
Federal budget, since it corresponds to nev inforaation
about the seriousness of the state of the financial aystand to newly iaplied tax burdens in the future to service or
repay the debt.
Another aspect of the current budgetary picture is the
declining level of Federal spending foreseen in the budget
agre-ent. A shift in the coaposition in deaand, even a
well-anticipated one , iapoaea coat• of shifting resources,
some of which aay be aaking theaselvea felt currently.
However, I do not feel that we should ease fiscal policy
broadly in response to the current recovery situation. For
two reasons, I feel that this is not a proaiaing approach to
deal vith the particular business cyclical situation ve now
face. The first reason is the choice expressed in the
budget agreeaent, that we should redress the tendency to
shift the burden of government to future generations. The
second is more •tactical•: It is likely that the adverse
reactions of capital markets to an apparent abandonment of
fiscal discipline would tend to offset the short-run
positive effect on some markets of fresh cash flov (assuming
fiscal policy changes could be i■pl-ented quickly, as,
e.g., in the case of the UI extensions that have been under
consideration).
Given there appears to be little proaise in a general easing
of fiscal policy, the usual instrument for influencing
short-term conditions is monetary policy. If conditions
such as the modest rates of inflation, slack in labor
markets and evidence of a credit crunch continue, it se...
to me further easing of monetary restraint would be in
order.
These statements should not be read as saying that I do not
see any fiscal moves that could ameliorate the current
situation. Fiscal policies with the effect of iaproving the

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liquidity situation in the short run without jeopardizing
the budget discipline would, I believe, be helpful now. An
extended UI benefit plan would put purchasing power in the
hands of cash-strapped faailiea; the Dole-Doaenici proposal
is an exaaple of such a plan. Another fiscally sound
exaaple would be the Adllinistration•a capital gains tax
proposal. I recognize that the revenue projections of that
proposal are disputed, and that it raises fairness issues,
which I will address in response to question 3. As far as
the revenue estiaates are concerned I have reviewed th-,
and regard the clai■ that the proposal would raise revenue
to be quite reasonable -- the debate in any case is whether
one will get a little more or a little leas than a dollar
back per dollar of •static• revenue loss. A capital gains
tax cut would have favorable effects on the long-tera
investment outlook and long-term growth prospects. It would
also have a positive effect on asset markets, which in turn
would aaeliorate the situation in the financial systea,
including the RTC.
Several policies and programs with long-term implications
would also be very helpful in the short term, because aany
businesses, large and small, as well as other actors in
capital aarket■ have long planning horizons. As a
consequence, expectations about future govern■ent policy are
iaportant. Several significant policy decisions are now in
the process of resolution through legislation. For exaaple,
the course of future spending on transportation is currently
being debated in the Congress, and provision of funding to
enable the FDIC to deal promptly with emerging problems in
the banking sector is also subject to much discussion and
concern. Reaching conclusions on these pending policies,
consistent with the budget agreement, would have the
favorable effect now of boosting business and consuaer
confidence.
In my view, the most pressing long-term problem of the
country is an improvement in productivity, including
especially the productivity of currently less-productive
workers. One way that I feel this can be addressed is by
improvements in tax rules affecting saving and inve■taent.
The much-debated capital gains rules and proposal ■ to extend
tax-sheltered savings plans such as IRAs are partial steps
in the right direction. These are elements of a shift in
policy away from taxing savers and investors aore heavily
than non-savers and non-investors (at each incoae level).
As I suggested in my oral testimony, a way leas faailiar in
the political debate, but preferable as I see it would be a
aore systematic and uniform effort to reorient the tax
system in the direction of a consuaption base. Another
area, in which we are out of step with moat of the advanced
economies, is in the taxation of corporations. It would be

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desirable to ■eek to reduce the influence ot an unintegrated
corporation inco■e tax on the financial and organizational
structure of our economy. (An "integrated" corporation tax
■oderates or eliminates the double-taxation effect, by which
corporate equity income is taxed once at the company level
and again at the shareholder level. Most ■ajor industrial
countries have some version ot an integrated corporate tax.)
The tradition in A■erica is tor inculcation at all econo■ic
levels ot values ot honesty, respect for others, respect tor
work and learning . The tamily and co-unity structure that
supports these values has diminished, and the main torces
having this effect seem to be social ■ovements over which
government has little direct policy influence. But I
believe it should be possible to try to assure that at the
margin, policy supports a strengthening of the tamily and
the rewards of participation in the labor market. In the
tax system, the use ot the earned income credit, and its
responsiveness to family size are desirable directions in
which policy has been tending recently.
Health care is another area of policy with major
i■plications for all Americans.
It is clearly a situation
in which the existing institutions will have a ■ajor bearing
on directions tor effective policy changes to deal with such
problems as : access for all (this is not simply a ■atter of
poverty), the lack of portability of insurance which
threatens mobility in the job market, the fact that small
businesses (and this means the e■ployees of small
businesses) effectively must self-insure, and need tor cost
containment. If I am confir■ed , I expect to be actively
involved in the process ot thinking through the alternatives
during the coming ■onths .
On the environment, I would simply point to the desirability
of dealing with our environmental problems -- I do not share
the view of some that value generated through improvement in
our environment is not "economic" value, even though it is
not measured in the GNP statistics -- but also to the need
to avoid unnecessarily costly regulatory approaches to
achieving environmental goals. The tradeable emissions
allowance system under last year's Clean Air Act Amendments
is an example of the sort of institutional development I
would hope we would apply more broadly.
Q.J. What are your thoughts on the recently introduced tax

packages? Are you concerned with the equity or lack ot
equity in our tax system?

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A.3. I understand the question about tax packages to refer to the
ideas for cutting taxes for "middle incoae" taxpayers, and
financing the change by some combination of defense
expenditure cuts and increased taxes on high-incoae
taxpayers. One question is whether such policy shifts would
serve to assist the econoay in its path out of recession.
In •Y judg-nt, these packages would not be helpful for
that purpose. There are several reasons. The tax cuta
would not have any significant iapact on the cash flow of
households until the future, and even then they would fall
on households that tend not to be liquidity-constrained
(which should not be understood to say they don't deserve
help). Secondly, tax rate increases would have more than
equal and opposite effects, because they would tend to have
the sort of feedback effects familiar from the discussion of
capital gains, whatever one aakes of arguments about who
deserves to pay the taxes. Thirdly, defense cuts, assuming
they are judged to be prudent and actually feasible -- a
aatter on which I do not have an informed view -- would tend
to have a depressing effect, even currently, in a situation
where defense industries are already on a build-down path.
On the broader question concerning equity, which I take to
be whether the packages would contribute to the equity of

the tax syatea, I do not think there i• a siaple answer.
There are ■any details of the current system that s011e
paople regard as unfair. The taxation of inflationary gains
and the inflation component of interest received would be
exaaples. certainly one equity issue that would concern is the distribution of burdens between present and future
generations, and whether we are leaving an adequate
inheritance to the future.

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142
l!F.SKNSE TO WRITI»f r,iJESTICffi OF Sfm'Ial GAffl FlOI

DAVID BRADFORD
Q.l

What as ■urances can you give the co-itt•• that you will
provide totally objective advice to the Adaini ■tration if
you are confirmed as a ■ellber ot the council of Economic
Advisers?

A.l

I believe my career record to date indicates that, it
confirmed as a Member of the President' ■ Council ot Econo■ic
Advisers, I will be able to offer objective advice on
economic policy matters. I have had prior experience
applying economics in a policy setting as Deputy Assistant
Secretary of the Treasury for Tax Policy, as a member of the
National Commission on Railroad Retir-ent Reform and as
vice-chairman of the New Jersey State and Local Expenditure
and Revenue Policy Commission. I believe I was able to
offer objective advice in each of those positions.

Q.2. What assurances can you give the co-ittee that you are not
an ideologue?
A.2. I do not think anyone who knows me would describe ma as an
ideologue.
Q.J. What role do you believe should be played by political
considerations in performing your work on the Council?
A.J. I believe the main obligation of an economist is to lay out
for political decision-makers as objectively as possible the
economic consequences of alternative policies, and to help
develop policies that will serve to enhance econo■ ic
opportunities for Americans.
Q. 4. What changes would you like to make in the way the council
functions or interrelates with the other parts of the
Executive Branch?
A.4.

The general impression I have is that the Council ot
Economic Advisers is currently playing a significant and
constructive role within the Executive Branch. I will be
able to reach a more informed judgment about whether changes
in the way the Council functions would be desirable after I
have had a chance to participate as a Mellber.

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Q.5. Do you view the Council aa having a aajor role in applying
current acad-ic economic reaearch to bear on policyaaking
within the Adainiatration?
A. 5. An illportant aapect ot the Council ot Econoaic Advi••r• i•
it• capacity to bring to bear on que■tiona ot policy
high-quality acientific thinking, including the aoat recent
acad-ic vork.
Q.6. Ar• you concerned about the adequacy ot the ■tatiatica on
th• doaeatic econoay available to policyaakere?
A.6. llbil• I believe the United State• ia ■till a world leader in
it■ ■tati ■tical -rvicea, I alao believe work need■ to be
done to improve the economic statiatics, relating to both
the doaeatic and the international econoaiea, produced by
the u.s. governaent.
Q.7. It ao, what ahould be done?
A.7. With regard to the doaeatic econoay, our atatiatical aysthas not kept up with the rapid pace of change in today••
econoay, particularly in high technology indu■tri•• and in
the ••rvice ■ector. There i• a serioua need to improve our
coverage and -asur-ent ot activity in th••• area■ • We
alao need to bring our national account atatiatic• into line
with the United Nation• syst-, to augment th- with
■atellit• accounts in specific policy areas (tor example,
natural reaourcea), and to iaprove the speed with which
■tati■tical benchllark• are produced.
Recent diacu■■ ion ot
policy concerning unemployment benefits has dramatized how
ve can el ■o benefit troa improved atatistic• on the labor
-rket.
Q.8. Are you concerned about the adequacy ot the ■tatiatica on
the international economy available to policyaak•r•?
A.8.

I -ntioned in response to queation 6, I believe
iaprov-,ita would be deairable in both the doaeatic and
international economic statistics

A■

Q.9. rt so, what should be done?
A.9. I have been pleased to learn about efforts to extend the
international econoaic account• to follow the International
Monetary Fund guidelines and, within the existing
international accounting system, to improve the e■timates ot
capital flows, trade in services, and aerchandi•• trade.

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144

STATEMENT FOR COMPLETION BY PRESIDENTIAL NOMINEES
" - : . Phil lips

Susan

....,

.,_

Meredith

Pasltlon to which Mellber, Board of Governors of the
~
Federal Reserve Syste■
DIiie of blrth: __2;;,;J.,~--,,;l,;;2~__,,,~,;.,4;,.- Plew of bllth: Richllond
Marfta1 IIMul:

Fun - o f spcius

single

-

---------

Oate~lnatlon: 9/27/91
VA

not applicable

Nameand ....

of cllld1M:_...n,.on,..e...__ _ _ _ _ __

Educallan:

......
Olla&

lllltllutlon
Choctawhatchee Hi1h School

9/60-6/63

Apes Scott Colle1e

6/63-6/67

Louisiana State University

9/69-6/73

= ....

Dllaaof

H.S. DiJ!l,_

6/63

B.A.

6/11/67

N,S,

1/23/71

Ph.D •

8/11/73

fllallllllpa.llonaraJ__,..._,.....,.._,.,_...,

........ _ , _ . Ullblllw•id. . . . .
.-...a111pe, and -,-..apec11111e1111llllonl foroublandlnl .... arldd1 - I L
Phi Beta ICaPl)a, Apes Scott Colle1e
Beta C - Sipa 1 Louisiana State University
Dissertation Grant fr011 State Pan Foundation, 1972
Chicago Board Options Exchange P011erance Prize Awrd (Outstanding Research

in 9PtiPDI) Doceber 1980

Outstanding AlUlllla Award, Agnes Scott Colleae, AJ>ril, 1982

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1'6
Membershlpc

List below 111 memberships and offices held in professional, fraternal, businas, scholarly,
civic, charitable and other or11nizations.

(d any)
Ofllce
-

0,pnintlon

President and other

Southern Risk I Insurance

A.SSQl'"

various offices

1975-present

Metlber, Board of
es Scott Colle e
Trustees (Vice-Chair,
1987 -present
Midwst Resources, Inc,
1987-1989)
(foraerl~ Iowa Resources. Jnc.)Me,l>er Board of Directors
1987-arcsent
Johnson ounty Youth Services
Foundation
Metlber, Board of Di rectors
1988-present
Public Governor; lloard
Chica10 Mercantile Exchange
of Governors
1988-present
State Fan llatual Aut0110bile Ins.
Co. (and subsidiaries)
Me■ber, Board of Directors
1988-PJ:C$ent
National Assoc. of ·college g
University Business Officers
Meal>er, Board of Directors 1989-prcsent

col-

Ei..-.11•1l .-.I: Ult blllllf al pGlillana held since
lncludlnc Ille tlle•dNcltpllan of Job, - o f
~ . location o f ~ and dltea DI lnclusM ~ 1967-69,
Research Assistant, later Research Technician in Group Pension
s.-r 1970 Actuarial and Research
rtltellt John Hancock llatual Life
Jan.,
nsurance Co., Boston MA

1973-1974
1974-1978
July 1976July 1978
April

1978- Associate Professor, Finance Departaent, University of Iowa
1984

Peb.,
Nov., 1981
-Nov.,

Assistant Professor, Finance Departaent, Louisiana State
University
Assistant Professor, Depart■ent of Business Adllinistration,
ltniversity of Iowa (on leave fro■ June 1976 to July 1978)
Brookings Econo■ic Policy Fellow (1!176-77) and SEC l:cono■ ic
Fellow 1977-78
Directorate of Econo■ ic
d Polic Research,
Secur1t es and Exchange ColBission
(on leave fro■ Nove■ ber 1981 to 1984
ssoc1ate V ce President or Finance and University Services,
Universit of Iowa Interi ■ Assistant Vice President
Fe .,
9- une, 1980

1981- Coa>dlty Futures Trading Coaission, W&shincton,

July, 1987

DC

co-issioner, Nov. 1981-May 1983
Xchng Cha1nan & co-1ssioner, May 198l-Nov. 198l
Chair■ an g co-issioner, Nov. 1983-July 1987
ADI•, 19111- Vice President for Finance and University Services, and
pres~en~t_ _ _P~ro~f~e~•~s~o~r~o~f_F~i~·n~a~n~c~e~•:...;C~o~l~l~eg~e;:...;o~f:...;Bu=•~i~n~e~s~s_Ad■
=~•~·n~i~s~t~r~a~t~i~on=•Onivers1ty of Iowa

2

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146
GCIV9rnmant
4111p1ri111c1.

Uat any ..,,...'- in or dinict association with fedlral. Stall, or local PlfflffllllU, i11chldln1 any advisory, consultative, honorary or other part-tima IIMCI or positions.
Securities and Exchange Co•ission - Econoaic Fellow, 1976-78 . (full-ti•e
eaployaent)
Co-,dity Futures Trading Co•ission - Coaissioner, 1981-83;
· Chairun, 1983-87 <full-time mieYNDtl,
Metlber, COIIJ)troller General •s Advisory Panel, Review of events Relating
to the Recent Decline in the Securities and Putures Mlrket 1 General
Accountin1 Office, 1987-88 .

Naber, U. S. Consress Office of Teclmolosr AsHssaent Advisory Panel,
+ssesSNDt of Sener1t1os Nerkets end InforeetiAD lerbnritau 1918-90.
Naber, c-dity Futures Trading ec-lssion Replatory Coordination
Mvi ,m:y Cmei ttM 1991 -preset
l'lllllllhld
wrttlnp:

Lllltlietltlll, pulllllhnlllll . . . of baolla, artlclN, ,wportaorahrpulllllhed lllll!llftlls

,ou'-N-.

s,, attached ressae

........

Pllllllcll

11111 aclMllea:

Lilt Ill ___,.. 11111 - - hlld In 11111 ..,,,._ ,....._ to Ill polftlcll parties or
lllctlon COlllffllttlll durtnc the lat 10 ,..,._

Nwber, !isenhover Club, Johnson County Republican ec-lttee

I

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147
Political
CCfltributlons: -

Itemize all political contributions of $500 or more to any individual, campaisn orpnin•
tion, political party, political action committee or similar entity during the last eight
years and identify the specific amounts, dates, and names of the recipients.
·

George Bush for President; $500 ; 12/6/87; President Bush
George Bush for President; $500; 1/16/88 ; President Bush

Qwlllcalluiw:

.... ......,

$111111 Mir yaur qualfflcallons 11D -

In~ poeltlan 11D wNc:11 ,au'- ... IWMd.

Attached.
Fulul• •liifllo,fwll
rallliGlllhlps:

1. lndlcaa whetlw ,au will ell www-.:tiww wllh ,.,.., .,.__. .....,_,
tlnll, ..-latlon ororpulutiou If ,au - cmlrmed II, die 9-1111.

~

Yes

2. Aatar•e11 1•~ . . . .......,,.,_., ,, . . __

_......l!Mffl-

mn ..... lO_wnpla,i ....,alllllitla llor,...wllh, -p,MIUI...,_,~1nn,.. -1a11on ... wesL II •

I have no such plans .
3. HM M,tlodJ ..--,au a wuw.1.-.-1111D a job lftlr yau i.... . . . . . . .er
No

4. Do ,au ..-ct la -

tfle full term tor whlc:ll ,au , _ . . . appolnlad1

Yes

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148
Qulllificationa Stat..ent by luau, N. Phillipa for N..barahip on th• Board of
Governor■ of the Federal lea•"• Syat.. ,
·1.

Ny collegiate and areduate educational bacqrouod concentratina ill
uth...tica, fillu,ce, and illauru,ce ia directly relevu,t to the ■ iaaioa and
- r t of the Federal lea•"• Syat...

2.

II)' teacbina reapouf.bilitiea at Louiaiua State Uninraity and the Uninraity

of Iowa included coaraea at all lenl■ ill ■anqerial finance, Hcuritiea
ual,aia, financial illteraecU.atioa (illcludina bankina), illveat■at■ and
portfolio ualyaia, all of which relate to the r9&11latory overai&bt and
-•tar, rupouihiliti.. of the Federal IN•"• S,atM.
3.

Sdlolarly rNearcla ad writina ban included the followina • r - relevu,t to
the rNpouf.bilitiN of tba Federal INerve SyatM: finaacial futurN ad
opti-, equlty Mrketa, finaacial reavlatiOD, illtemati-1 finaacial
Mrketa, Mr&ill requir-ta, private penal- ad pouioe reavlatioe, and the
- i c theory of reavlatiOD.

4.

II)' ~ • h i p OD ud cbainuahip of the Coaodity hturN Tndina CoaiaaiOD

illcluded direct reapoesf.bility for the reavla,ioe ad cwanfpt of U.S.
futurN ud ..-odit1 -,ptioe Mrketa, provtdina rel.vat a p e r i - ill tbe
followina ar_, adailliatratin ln ad , - • ; r•latiOD of f1Daacial
Mrketa; ..-odity ad financial Mrket diaturbacea; reavlatioe ad overai&bt
of Mrket prof-ioeala, acbaqea ad other Hlf·reavlatory oqaisatiODa;
■anaa-t of • federal apncy ad iateractiOD with other U.S. federal
financial apaciea ad -terparta ill foretp aov•~ta. llajor illitiativN
IIDdertalt• durina -, t - r e u Cbaina included iapl-tatiOD of the 1912
act reautborisina the qucy, developina ad iapl-tina reavlar financial,
aalN practice, trade practice and Mrket Hneill- audit ,ieosr- for
ucbaqea ad other Hlf•reavlatory oraauati-, cwaneeina denlapNDt ad
del. .tiOD of ntbority to the Nati-1 PllturN AaaociatiOD, atr-ath•ina the
.reportina relat1-laipa with CoDarNai-1 overai&bt - i t t - , -rktaa aa
1916 enc reautboruatioe ad cweraeeina reavlatory proar- for acbaap
audit traila.

s.

Oeorae laab) , .... Graap OD
leavlatiaa of Finaacial Se"i- (191S-84) aan N the opportuaity to reviw
buJc ad other fiaacial iaatitutiaa ud aarbt r•l•tt.a u well u to
develop rec-•datioea for f'inaacial aervice reavlatory refora.

6.

u claief fiaactal officer of • Mjor rNearcla ainraity
baa allowed N to aaill aperience ill tr-ury opereti-, fiaaci.Da of laqe
capital projecta, auditi.Da, badaet, teclmoloe, truafer ad -11 buiDNa
develop■ent, ad a-eral adlliniatratioa.

7.

II)' ■-llerahip oa HHHl corporate boards bu perattted N

S.

Aleo, ••• attached reau■e for other related ■enice, -,lOJHDt aperi•c•,
and puhlicatioaa.

II)' participatioe ill tbe Vice PrNtdMt'• (tbu

II)' curr•t poaitioa

to aaill aped•c•
ill illauruce operatioea ad reavlatioa, ..-odity acbu&• operatioea ad
utility operatiODa ad reavlatory envil'ODll9Dt.

4a

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149
Pallntial cantllcts

of.....,

l. Dncribe any financial arrangements or defernd compensation 11........,ts or other
cantinuin& dulinp with business associates, clients or customers who will be af,
fectecl by polici• which you will i n n - in Ille ~ion to which you hM been
nominated.
(1) Deferred CO'"J>ensation plan for director's fees earned during pendency

of ae■bership on Board of Directors of Midwest Resources, Inc. -l'nePe will be no cont1nu1ng relat1onsh1p with this f1m.

(ZJTIM/CREF -- Retirement benefits earned during

e■ployaent at the
University of Iowa -- There will be no continuing relationship
with the On1vers1ty of Iowa.

2. Lilt an, lnllllltl,,.,ts, obliptlons, liabilities, or other l'llatlonllllps which mlahl lfflOlv9
patential canftids of 1-.. wllll Ille s-itiorl IDwhidl i,1111 ~ been namlnmd.

None

1 IJllcrlbe an,...,_ ralationalllp, . . . . . or fllwlclal traNKtlon (ollw' tlWI - ·
s-,1111) wlll.:II i,1111 ~ had durlnlllle lat 10 JW'I wllh t h e ~ 0-0,Nnt,
....._ for ,vunllt, on blhalf of • clllnt. or ■ct1n1 u ■n ...., that mlpt In an,
-,Cllllltlllllt orrault In• paalble canfllct of lnt■rllt wllh the s-itiorltowhk:h ,oi,
~been .........
None

I

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150
4. List any lobbyin& activity durinc the pat 10 years in which )11111 ' - en...,.i tar the
purpose of directly or Indirectly influencln& the pasu,., defeat or modlficatlQn of
any ie,islation at the natiOnlll .....i of ,ovemrnent or aflectln& the administration and
UKUtlon of national law or public policy.

Jbere has been oo lobbvin1 1siixit.Y

As Cbeimea of tho CowocUtx

Futures Tradin& Coaission, I worked 11ith the House and Senate

Agriculture Coaaittees on the 1986 reauthorization of the •&ency.

5. &plain hw ye;, wlN . . . . . . . pallnllal canllct ol ...... lhlt ffllJ lledllClalld ,our~tllthealllMl!aml.

I will resi,n ■y -etoyaent 11ith the University of Io,.. and Mabership
on all corporate boards.
(M,alllllnll..S
ill l!la I '
adlanl:

1. GM the fuH detalls of lftY cMI or crimlna9 pnaedln& in whldl y:111 • clltllldant
or a,iy Inquiry or IIMltlptlon by• F9derll, Slate, or local 191ftCY In whldl p i _
the sublld of the Inquiry or bMstlp!lon.
None

2. QM the fu99 dNi9s of lftY ~... inquiry or lm411tip'IOII !Ir lftY profluionll
NICIClatlon lncludln& 1ftY blr anociatlon in which )11111 the Mljact of the ~
Cllldlnl, lnqulryor ilMltlplion.
None

6

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151
July, 1991
SUSAN M. PBlLUPS

OTTlC•

BOIU

105 Jessup tt.11

1409 E. Davenport St.

University of Iowa
Iowa City, IA 52242
(319) 335-3552

Date and Place of Birth:

Iowa City, IA 52245
(319) 351-3294

Dec:aber 23, 1944; Ricta,nct, Yirtinia

DJUCA'TIOH

1967

I.A. (Nlt'-ttcs, Chahtry); AgHs Scott College

1971

N.S. (Finance, Ec-ics); louisiana State University

1973

Ph.D. (Finance; ■inors: Ec-ics, Nlnav-t); louisiana State
University (DtsHrtation: •n. Portability Concept:
Developaent, Growth, and Future Dtrectton•; State Far■
Ca■panies Fouadatton DhHf'Utton GN•t)

all'£01'111N'J'

1967-69,

s-r 1970,

Jan. 1971

R1111rch A11i1tant, later R1111rch Technicfan in 8roup Pension
Acwarial and ReSNrch Departaent, John tt.ncock Muat ltfe
I n - Co., Boston, M

1973-1974

Assistant Professor, Finance Departaent, Louisiana State
U.ivenity

1974-1978

Assistant Professor, Departaent of Business Adlintstratton,
University of 1 - (on leave fro■ June 1976 to July 1978)

July 1976July 1978

lnoti"'s Ecaioaic Policy Fellow (1976-n) and SEC Econoaic
Fellow (1977-78), Directorate of Econoaic and Policy Research,
Securities and Exchante c-ission

April 19781984

Associate Professor, Finance Departaent, University of Iowa (on
leave fro■ Novellber 1981 to 1984)

Feb. 1979Nov, 1981

Associate Vice President for Finance and University Services,
University of Iowa (lnteria Assistant Vice President, Feb. 1979 June 1980)

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152
. Susan M. Phillips

Page 2

gMPLOYIUHT (_,'d)

llov. 1981July 1987

C~ity Futures Trading c-fsslon, lfash1ngton, DC
c-hsloner, Nov. 1981 - Nay 1983
Acting Chllll"llln and c-1ssloner, Nay 1983 - Nov. 1983
Chll11"111n and C-hsioner, Nov. 1983 - July 1987

Aug. 1987P"sent

Vice P"stdent for Finance alld University Services,
alld PNfessor of Finance, Coll• of Business
Adalnhtratton, University of Iowa

l'ROTHSIOHAL AlnUATIOHS AND ACTIVITigs

Southern Rhk alld· InsuHnce Assoclatton (Stc"tary/T"as""r, 1975-76; Stcolld
Vice P"sldent • Progr• Chall"llln, 1976-77; First Vtce P"stdent, 1977-71;
P"stdent, 1971-79)
Board of Trusues, Atnts Scott Coll• (lllllbtr, 1983-p"SNt; Ytce Clll11"111n, 1987-

1989)

Board of Dt~tors, Ntclllest Resources, Inc. (fol'Wlrly Iowa Resources, Inc.)

(lllllbtr, 1987-p"SNt)
of Dt~tors, Nusser-Davh Lalld Co. (1987-prwSNt)
of Dt~tors, Nelll"Clt~, Inc. (Stc"tary, 1987-p".-t)
of Dt~tors, Iowa N t a - t Re-rch Fowidltton (TreesuNI', 1987-p"sent)
of Dt~tors, John- Co•lftty Youtll Strvtces Focadatton (1--P"Mllt)
of Dt~tors, Futur9s hdustry Assoctat10II (1--1990)
Revt-r, JIit Journal
Fuwm Nerktts (1987-preMllt)
Board of 8"el'IIOrs, cli cqo '4trcant11e Exchute (lllllbtr, 1--P"Mllt)
Board of D1~rs, State Fal'II Nutual Aui..bile lnsw._ C....., (1--p"Mllt)
Subs1d1ary Board, State Fal'II General lnsuruce Collpuy (1991..,...Hllt).
Subs1d1ary Board, State Fal'II Ft" & casualty C.,.n, (1991-pre.-t)
. Subs1d1ary Board, State Fal'II C.,.nles FoadatlOII (lftl·P"Mllt)
Board of Trusi.s, Futures Illdustry Institute (1989-1991)
Board of D1~~. llat10111l Assoc1at1on of Coll• alld lln1Yfflfty •st•ss
Dff1cers (
) (1989-p"SNt)

Board
Board
Board
Board
Board

J'

"'11UC TPIDIOHf AND ffBYICI (.,,_ ,,_. ..,._.....,..,
Expert Witness on Private Pension ·Portlb111ty Befo" tht Subc:-1ttN on
Reth'-nt Inc- alld Eaployaent of tht Select C-ttue on Agl119, U.S. House of
Rep"sentattves, Aprtl 6, 1971.

lllllbtr, Vice P"s1dent's Task Gl"Clllp on R19u1at1on of F1nanc1al Strvtces, 1983-14.
lllllbtr, CClllptN11er General's Advisory Panel, Review of Events Relat1119 to tht
Recent Dec11ne 1n the Stcurttles and Fut""s Nlmt, General Ac~t1111 Dfftce,
1987-N.

lllllbtr, U.S. Cong"ss Dfftce of Technology Asses-nt Advisory Panel, Asses-nt
of Securities Markets and lnfot'Wltlon Technology, 1911-90.
Co-Vice Chllil"llln, Special Panel to Review Trading Practices, Chicago Narcant11e
Exchange, 1989.
Mellber, Regulatory Coordination Advisory c-lttee, C~lty Futures Trading
c-fssion {1991-present)

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153
Susan M. Phi 111 ps

Page 3

BOHOllS AND AWARDS

Phi Beta 'Kappa, Agnes Scott Co 11 •g•
Bet& 6 - SiJIN, Louisiana State University
Chicago Board Options Exchange Pc..rance Prize Award (Outstanding Research
1980
in Options),
Outst&lldfng Ah-• AINl'd, Agnes Scott College, Apr11 1982
Vho's Vho fn Aaerica, 45th • 46th Edition
Vho's Vho 1n Aaertcan Polftfcs, 12th Edition
Vho's Vho of Aaerlcan V - , 16th• 17th Edition
Vho's Vho In finance and Industry, 26th• 27 Edition
Vho' s Vho In the Vorld, 9th Edition

Dec:_.,.,.

R&sJAaCII AND
-r:tr ■n..:

Pf/BUCATIOHS

•Eua1n1119 the Equity Markets.• look re-,few of Eawit~rkets: S t ~ ,
Trld1na, and Perfor111nce by ltebert A. Schwartz.sness, Vtnte~,

'3.

•I111111cet1ons for Refo,..• Proceedfnas of the Confere~ on~ f"•sh of
'87, College of BuslNSS Aatntstr1tton, Unlnrslty of cin,rc 15, 1988.

•n. 111W f1nanc11l

Markets.• Policy for,a on Financial Futures, AMrfc:an
Enterprise llstftute for Publtc Policy Resurch, July 9, 1987.

•u.s. lelulators Respolld to Industry Chantes• wtth Kenneth P. Aclr.er111e.
Joint) of C.,rce, Mal"CII ,. 1985.

•n. eo.odity

Futures Tl'ed1119 C:0.1ss1on:
Institute, 1915,

•aattle

a.._.•

The

Cu!'Nnt Issues.• Pract1c1ng Law

Futures Naaulne, January 1984.

11£.!T:nar,of tt:£.rchr

•1t,ulat1on of Futures Markets : Theory and Practice.•
1M~s "rkets, Proceedings of the Industry Research
I , o • l, No. z, 1984.

•Intal"Mt1-1 Exchange Links: A Regulator's Vfew. • The Joul'llll of
~ . October 17, 1983.
•a.nlr.s Trldl119 tn Futures -- Confront 111W Regulator.• Allertcan Banker,
October 10, 1983.
•vtable incl Safe Markets - The Role of the C-«lfty futures Trad1ng
Coahston.• National Journal, Sept_.,.r 3, 1983. (Also fn the llattonal
t'£::!a!
Issues Boo[ entitled The Futures Markets and Natfonal PCi1'Tci":""""
_
for the 1980's, 1983.)
•tFTC's View of Flnancfal Futures.• Vorld Financial Futures Conference
Proceedings, Financial Tl•s, London, Septetlber, 1982.

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154
Susan M. Phi 11 i ps

Page 4

•A COlll)ar1son of Margfn Requir-nts for Options and Futures• with Paula A.
Tosini. Financial Analnts Journal, Novlllbtr·Oeclllbtr 1982.
•Exchange Lfstfng and the Cost of Equfty Capital• wfth J. Rfchard Zecher. U.S.
Securftfes and Exchange c-issfon Capftal Market Workfng Papers, No. 8, March
1982.
•A COIIPlrlson of Options and Futures fn tho Nanag-t of Portfolfo Rfsk• wfth
Eugene Morfarfty and Paula Tosint. Financfal Analnts Journal,
January-February 1981.
•Trading Costs for Listed Optf011s; The l11plfcatf011s for Market Efffcfency" with
Clffford W. Saith. ~ a l of Ff11111efal Ee-~, 8, 1980. Reprinted in
~teal Re'i:Ot liioftal Markets, Q. V . r t & C. W. Saith (Eds.),
n-Rfll
Coiiipiny. IHI) •

•The Sup,,_ Court's OecfsiOII on The Daniels' Case: l11p1fcetf011s for Pension
Resulatl011. • Journal of Risk and Insurance, Oeclllbtr 1979.
•The Cost of Fundi, Benefits Under tho ERJSA: A Statfsttcal Survey •
c-nt: Authors' eply, • wfth Linda Pfcltthorne Fletcher.- JOUfflfl of llfslt
and Insurance • .Nardi 1978; Second Reply, Oeclllbtr 1979.

•The Future of the Portable Pension Concept,• wfth Linda Pfcltthorne Fletcher.
lnclustrfal arid Labor Relatfons Revtw. January 1977.
•The Cost of Fundfnt Accrued Benefits Under the fllployw R,tt,,_.t 1-.;Security Act of 1974: A Statfstfcal Sul'fty,• wtth Linda Pfcltthorne Fletcher•

. The Journel of Rfslt and Insurance, Oeclllbtr 1976.

•Potentfal Eff14;ts of Recent Pension Lettslatfon. • Best's Revtw. Lffe and
Health Edttfon, March 1975.
·
•The Token W-n, • with ltnda Ptcltthornt Fletcher, lntercollestate Case

Clearing House (Ha"ard Untver~tty), Case LCCH-19475729. lleprtntecl tn the
following case texts:
li•p.r;:.:::;;.:.;i;::..:~~
Gates Eds.)
n (Eds.)
· 2 :;;~r.:Y.~n~=~r~
· 3
vtor, Justin G.

i

iii(1i !~~:::tr,=fut~~0:.;iffl~M~~baj:Je:

D~~r::Y!nson

ah of Nanaaant, Jon L. Pierce and llandall 8. Dunha.

•The Ffnance Course:

Education, Fall 1974.

An Industry View -

c-nt.• Journal of Ffn111cfal

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165
Susan M. Phf 11 fps

Boob

...r

Page 5

JJoolt CantrfbuU.,..:

•s.curftfes and Exchange C-fssfon •· Eco-fc Analysts,• wfth J. Rfchal'd
Zecher. In Second Thouqhts, edfted by Donald McClosltey (Oxfol'd University
Press, fn press, 1991).

•111e Increasing Iapact of Collputer Tecwlogy.• The Challellff of Infol'Mtfon
Technol:"!afwthe S.Cur1tfes Markets: LfqufdftY, Volatflfty, and Global
f
by lliiiry C. Lucas, Jr. and Robert A. Schwartz (Dow-Jones Irwfn
rs, 1989).
.

kt/1":.

•Regulation and the Futures Markets.• Market Nllt!e and t~ ~"Pf!!f
Struc:ture
the :,,irttfes fndustr:x, edfted by R rt A. 7iwartz, altov
AiiUiuci, a1 'hi;iiis • Y. Ho Lixtngtoll Books, March 1985).

J'

The

SEC yd V,,

Np11c

Interest. wfth J. Rtchal'd Zecher (NIT Press, 1981).

"Oe"'9ul1tfot1 of Fixed C-fiston Rates fn the S.Curftfes Illdustl')', • wfth Dan
Roberts and J. IUchal'd Zecher. In The 0.~latfon of ~ ~nd
edfted by l.ewrence~Goldlel'9 I
• Vllfte
x ngtoll a•trf,,
s.6.. IINth
ucl C:O.,U,, 1979).

tt!"f'""

In"Jfflf

co-

•

'9l&13C;J
~Jnh Md Altel'llltfves: A look of nt9J111s,
c
A. tevenson (West Publhhfng c.,in,,
.

•Ytelcl-Rfsk Perfol'Mnce of Convertible S.Curftfes, • wfth Robert N. Soldofsky
atld Rfchal'd A. StnN-. In Iavestaent Envt-i, ~lflfs
AlterMtf'ffi ~ f Rt=s. edti.a by Susan N.1 ps
Rfchal'd A.
Stev111son
st
tng
111, 1977) •

::S ·

.:trJ:!lro:=
••R"f..thl"II. 'l:ffIt;; :!ci":~~m.";~1t:1::::h;r~ ,"l:.!:!~Hm.
1975). ·
•s- EIIYfrowtit.1 Challtllfes.• In m11fut1011s; ~ •f. ltfl1or. by
llel'tlert Hieb and C. Rq 81111ttt fn coiboratfon • • ~ • ~ f p s and
Vf11f• S. Slau,hter III (Nclrew-Hfll, 1975).
"Oecfsfot1 Nlltfng. • 111 ~n1zatfons: Theory •~ nJfor, by Herbert Hf cits
111d c. aq 81111ttt 111 coaboratlon wlili Susan ~ f p s and Vfllf• s.
Slaughter 111 (Ndlraw-Hfll, 1975).

R
•C11anttng Ffnancfal Markets -- R19ulatol')' laplfcatfons. • Presentation to the
Hnuaf Meting of Allerfcan Society of Corporate Secretaries, Colorado Springs,
co, J - 28, 1988.
•1nfo1"Mtfon Technology and Market Volatflfty.• Panel pres111tat1on at the
Conference on lnforut1on Technology and S.Curftfes Markets Under Stress, 1ft
York Unfvtrsfty's Graduate School of Business Adllfnfstratfon, 1ft York, Nay 17,
1988.

•The Crash of '87 -- Causes, Consequences, and Iaplfcatfons. Possfblt
Rtforas.• Presentatfo■ at the Unfvtrsfty of Iowa Collttt of Busfness
Adllfnfstratton S.fnar, Das Nofnes and Cedar Rapids, Iowa, March 15, 1988.

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156
Susan M. Phillips

Page 6

n.-h n.sult• and ,,_,. ,.,.__,.,,_ (-t'd):
•Options and Futures Markets : Guilty or Innocent in the Stock lllrlr.et Crash?•
PresenUtfon at the Undef'11r&duate Econ•fcs Forua, Unfversfty of Iowa, February
24, 1988 • .
•stock Index Futures Tradfng: R19ulatory and L19fsl1tfve Issues.• Proceedfngs
of Conference on the Iapact of Stock Index Futures Tradfng; Colllllbfa Unfversfty
Center for the Stucb of Futures lllrlr.ets, June 8, 1987.
•u.s. Futures lllrklt lt19ul1tfon •· Yarfatfons on a Tradftfonal Thal.• Paper
presented at the Futures lllrtr.ets and V.lfare Scfentfffc Jofnt Progr•,
Internatfon«l Futures a, c-dftfes Institute/Colllllbia Center for Stucb of
Futures lllrlr.•t~. J1111• ZO, 1985, Geneva, Switzerland.
•An Analysh of the lllrket Structure for Dually Trtdld Optfoas, • wfth Dan
Roberts. Mfdftst Fin«IICI Assocfatfon, April 1979, Chicago, I11fnoh.
c-tlt on papar "tftled •Put-Call Parity and .l llrktt EfficfttlCY, • by Robert C.
Kleakosky and Bruce a. Resnfck. Southern Ffn«nce Assocfatfon, Novtllber 1978,

Vashf 119ton DC.

..

•The Dtlta Factor • Iaplfcatfons for Rfsk llln«gta11t, lllrket Miking, and the
Monftorf119 of Credft Usage and Ffnancfal Stabflfty, • wfth J. Richard Zecher.
U.S. Securftfts and Exchange C-fssfon, J - 1978, W1shf119ton, DC.

Accl'utd

•Effects on the Ffn«11efal Structure of Assuaf119 the Unfundtd
Lfabflfty
as Iaposed by the !-flOYN Rtthwtnt Inc- Securfty Act of 1974 -- The Cast
of IIIJor U.S. Ffl'lls, wfth Lfnda Pfckthornt Flttchtr. Ffu11efa1 Mana.-nt
Assocfatfon, October 1977, Seattle, Washt119ton •
. •Analysts of Ffna11efa1 Data of Specfalfsts• Operations,• wfth J. Richard
Zecher; Roger W. Spencer, Lo llllnh Trf, J-s P. luf'111ss, and Jeffrey L. Dtvts.
National lllarktt Advisory Board, Securftfes and Exchante C-ission,
Novaber 15, 1916, Washillgton, DC.
c-tlt on a paper entitled •The Effects of Taxes on tho Cost of Equity
Capital,• by Tfaothy Mantell and Robert Carson. Nfdftst Ffnanct Assocfatfon,
Aprfl 1976, St. Louts, Nfssourf.
•L11119 Ttl'II Structure of the Secondary Equtty lllarlr.et.• Ffnancfa1 llln19-t
Assocfatfon, October 1975, Kansas Cfty, Kansas.
•Afffl'llltfve Actfon fn Recruftfnt Ffnance Faculty: c-tlts on the Supply
Stele.• Colloqufua Sessfon on Afffl'llltfve Actfon fn Recruftfng at the Ffnancfal
lllnag-t Assocfatfon -tfng, October 1974, San Dfego, Calffornfa.

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157

STATEMENT FOR COMPLETION BY PRESIDENTIAL NOMINEES
GORDON

,.._ _ _w_o_N_N_A_c_o"'TT=----IUII)

to which
Pl:lsltlon
Member,
nomlnatad:

33

03

Data of birth: 16

(OTNUJ

(FIIIST)

01 .
1991
Sept•
c ounci· 1 of Economic Advise~le
_ __
__
_ _ 6,
_
nom,natoon:
Place of

birth:

London• Canada

Elizabeth Cochrane Wonnacott
n.....
Marital status: ~H=a=r=r=ie=d'----- Full name of spou~_n_n_a_ _ _ _ _ _ _ _ _ _ _ __
•

<TWD

IIIOlfflO

.,.,

"-and ....

· d-==-2_1_ _ __
of chlldrwi: _ _D_a_v_i_
Ann 25

Alan

Bruce

19

21
Institution

Princeton University
University of western
Onta.i;:,i.o

Dates

Data of

Degrees

~

received

attended

1955-57

HA, PhD.

1951-55

BA

1957, 1959

1955

Hanan ..S _ . i c Ust bllow aft scholarship&, fellowslllps, honora,y degrws, mlllta,y m.s.11, honora,y society

nwnberlhlps, and any other special rec:ocnltlons for outstandln1 service or a c h ~

International Finance FelloWShiP, Princeton UniVefSity,
1955-57

Brookings Doctoral Fellowship, 1957-58
Ford Foundation Faculty Fellowship, 1963-64

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158
Memberships:

List below all memberships and offices held in professional, fraternal, business, scholarly,
civic, charitable and other organizations.

Office hetd
(1t any)

Oraanization

Dates

Ameticah ECOhOffiiC

Association
Canadian Economic
Association
Royal Economic Society

1958-Present
1958-Present
1963-67

Association tot Canadian

Studies in the United States
Country Glen club
--------(Potomac, HD)
National Federation or cana- International
dian University Students
Affairs CollUllis-

1991
1967-Present
1954-55

s1.onet

E ~ record: Ult below all positions held since college, including the title or description of job, name of
employment, location of work, and dates of inclusive ernplOyment.

Associate Pr~fessor (1962-196 7 ) and Professor (1967 - 1991)
of Economics, Economics Dept, Univ. of Maryland, College
Park, HD

Economic Adviser to Under Secretary of State, U.S. State
Dept., Washington, DC , Jan 1990-Hay 1991
Visiting Fellow, Institute for International Economics,
Washington, DC 1986
Visiting Research Associate, U. S. Treasury Dept . ,
Washington, DC, 1980
Associate Director, International Finance Division, Federal
Reserve Board, Washington, DC, 1974-75
Senior Staff Economist, Council of Economic Advisers,
Washington, DC, 1968-70
Research Economist, Canadian Royal Co11U11ission on Banking t
Finance, Toronto, Canada, 1962
Instructor & Assistant Professor, Economics Dept.,
Columbia University, New York, NY, 1958-62
Doctoral Fellow, Brookings Institution, Washington, DC, 1957-58

2

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159
Government

experience:

List any experience in or direct association with Federal, State. or k>cal governments, including any advisory. consultative. honorary or other part-time service or positions.

Economic Adviser to Under Secretary of State, State Dept . ,
Jan 1990-May li~U __
Visiting Research Associate, U.S. Treasury Dept,
19-=~--- -- - -- - - - - - - - - - - - - - - - - ~ ~ ~

Associate Director, International Finance Division, Federal
Reserve Board 1974-75
Consultant, Council of Economic Advisers, 1970-71
Senior Staff Economist, Council of Economic At1vtse1s,
1968-70

Published

writings:

List the titles, publishers and dates of books, articles, reports or other published materials
you have written.

SEE ATTACHED VITAE

Political
affiliations
and ac:tlvitles:

List all memberships and offices held in and services rendered to all political parties or
election committees during the last IO years.

Together with a group of economists, I met with Governor
Askew to discuss the economy when he was considering a run
for the Presidency.

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160
Political
contributions·

ltem,1e all poll1tc 21 con tribu!1ons of $SOO or more to any i!'ldividual. campaign organiza11on . pohl1cal r,artv ~0111,cal ~c t,on co rnm11tee or similar entity during lhe las~ eight
}'edf s .:.nd 1de11: rlv the spec 1!1c 2mount c.. . dates. and names of the rec1p1ents

Quahfications:

State fully your Qualif,cat,ons to serve ,n !he pos,tton to which you have been named.
(attach sheet )

I have worked at senior staff level positions at the
Council of Economic Advisers, the Federal Reserve Board and
the State Department.
In my academic work, I have written
a number of papers on 1mportant policy issues. For further
Future employment details, see attached vitae.
relationships:

1. Indicate whether you will sever all connections with your present employer. business
firm. assoc1at1on or organ,zat,on 1f you are confirmed by the Senate.

I am on term1nal l eave at the University of Maryland a~d
will be rec11111g at the eiid of this academic yeat.
2. As far as can be foreseen. state whether you have any plans after completing eo-nment service to resume employment. affiliation or practice with your previous employer. business firm, as~ialion or organization.

No plans.

3. Has anybody made you a commitment to a job after you leave govemrnent?
NO.

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

Yes .

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161
Potential conflicts
of interest:

1. Describe any financial arrangemenls or deferred compensation agreements or other
continuing dealrngs with business associat«!S, clients or customers who will be af•
fected by policies which you will influence in the position to which you haive been
nominated.

I will be receiving retirement benefits from
On1vers1ty of Maryland.

the

I will be receiving royalties for text books.

2. list any investments. oblisations, liabilities. or other relationships which might involve

potential conflicts of interest with the position to which you have been nominated.

Held in Keough account: Fed~ral National Mortgage
--XS-Soc1at1on Bonds ($30,000) and Digital Equipment
Common Stock ($11,000).

3. Describe any business relationship, '.lealing or financial transaction (other than llx•
payinl) whi:h you have had durir.g the last IO years with the ~ederal Government,
whether for yourself, on behalf r,I a client, or acting as an agent, that mict>t in any
way constitute or result in a possible conflict of interest with the position to which you
haw been nominated.

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162
4 . List any lobby,ng ac:1v1ty during the past JO years ,n wh,ch you have engaged for the
purpose of directly or indirectly ,n11uenc,ng the passage. deteat or mod,f,cat,on of
any leg,sla!,on at the national level of governmen1 or affecting the adm1n1strat,on and
execution of nat,0:1.'!I law or public policy

NONE, .!?u_t _!_ did _testify __as an academic _witness before
~en~~ommittee _on Govern_ment..<!..l.___Affairs in fayer
of the U.S.-Canadian free trad~ ~qr~e=e=m =e=n~t~-~------· --- -· - ·- -

------- · - - - - - - - - - - - -

5. Explain how you wdl ~esolve any potential conflict ot interest that may be disclosed by
your responses to 1ne above items.

I will sell•assets listed in item 2 if requested to do
so.
Civil, coiminal and
investipto,y
actions:

1. Give the full d~!ai ls of any civil or criminal proceeding in which f.)U were a defendant
or any inquiry or investigation by a Federal, State, or local agency in which you were
the subject of the inquiry or investigation.

NONE

2. Give the lull details of any proceeding. inquiry or investigation by any professional
association including any bar association in which you were the subject of the proceeding, 1nqu1ry or 1nvestigat1on.

NON

6

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163
June 1991
PAUL WONNACOTT
Professor
Department of Economics
University of Maryland
College Park, Md . 20742
Home Address:
10100 Bevern Lane
Potomac, Md. 20854
Tel: 301-294-25b9
Date and Place of Birth:
March 16 , 1933; London, Canada
Citizenship : US
Personal:
Children:
Education:

Harried Donna Cochrane. July 2 , 1960
David (1963), Ann (1966), Alan (1970),
and Bruce (1972)
(Honors History), 1955,
University of Western Ontario
(Econ . ), 1957, Princeton University
Ph.D. (~con.), 1~59, Princeton University
B.A.

M.A.

Dissertation: The Canadian Dollar

Fields:

International Economics
Macroeconomics

POSITIONS:

Brookings Fellow, 1957-58
Instructor and Assistant Professor of Economics
Columbia University , 1958-62
Research Staff, Canadian Royal Commission on
Banking and Finance, 1962
Associate Professor of Economics
University of Maryland, 1962-67
Professor of Economics
University of Maryland, 1967-present
Ford Foundation Fellow, 1963-64
Senior Staff Economist
Council of Economic Advisers, 1968-70
Associate Director
Division of International Finance
Board of Governors of Federal Reserve System
1974-75
Visiting Scholar
Office of International Monetary Research
U.S. Treasury, 1980
Graduate Record Examination Committee (Econ.)
1982-83
Visiting Fellow
Institute for International Economics, 1986
Economic Adviser to Under Secretary of State, 1990-91

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164
-2PUBLICATIONS
Books
Univers i ty o f To ronto Press, 1960; 2nd

l.

The Can a dian Do llar.
ed., 1965.

2.

Free Trade between the United S ta tes and Canada: The Potential
Ec ono mic Effects (with R.J. Wonn aco tt). Harvard Un1vers1ty
Press, Harvard Economic Studies fl29, 1967.

3.

Harmonization of Nationa l Ec ono mic Policies under Free Trade
Un i versity of
{with Harry G. Joh n s o n a nd Hi ro f urn i S h ibata).
Toronto Press, 1968 .

4.

Macroeconomics .
ed., 1984

5.

Economics (with R.J. Wonnacott). McGraw-Hill, 1979; 2nd ed.,
1982; 3rd ed., 1986; John Wiley, 4th ed., 1990. Canadian ed.
(with R.J. Wonnacott and Ake Bl o mqvist), 1983; 2nd ed., 1987 ;
3rd ed., 1990. Spanish edition (with R.J. Wonnacott), 1981; 2nd
Portugijese edition (with R.J . Wonnacott, Y.R.
ed, 1984.
Crusius, and C.A. Crusius) , 1982; 2nd ed., 1985.

6.

The United States and Canada: The Quest for Free Trade (with an
Institute for International
Appendix by John Williamson).
Economics, Policy Analyses in International Economics, fl6, 1987.

Richard D. Irw i n , 1974; 2nd ed., 1978 ; 3rd

Shorter Publications
l.

"Exchange Stabilization i n Canada, 1950-54 : A Comment,"
Canadian Journal of Economics and Political Science, Hay 1958,
262-6 •

2.

"Neutral Honey in Patinkin's Money, Interest and Prices,"
Review of Economic Studies, 1958, 70-71.

3.

"Employment, Growth and Price Levels," Political Science
Quarterly, 75 (4), December 1960, 560-71

4.

"Disguised and Overt Unemployment in Less Developed
Economies," Quarterly Journal of Econo mics, 76 (2), Hay 1962,
279-97.

5.

The Height, Structure, and S i gnificance of Interest Rates.
Study for the Canadian Ro yal Commission on Banking and
Finance, 1962.

6.

"A Suggestion for the Revaluation of Gold," Journal of
Finance, 18 (1), March 1963, 49-55.

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165
-37.

NCanadian Automotive Protection: Content Provisions, the
Bladen Plan,

and Recent Changes," Canadian Journal ot

Economics and Political Science, 31 (l), February 1965, 98-116.
8.

"The Auto11otive Agree11ent of 1965" (with R.J. Wonnacott),
Canadian Journal of Economics and Political Science, 33 (2),
May 1967, 269-84.

9.

"The Similarity of Quantity Theory and Keynesian Policy
Prescriptions in Recent Years," 10 George Horwich, ed.,
Monetary Process and policy. Richard D. Irwin, 1967.

10. U.S.-Canadian free Trade: The Potential Im act on the Canadian
conomy

with R.J. Wonnacott

.

Nat1onnl Planning Assoc1at1on,

1968.
11. "Monetary and Fiscal Policy for an ~conomy with Fixed Exchange
Rates: A Com11ent," Journal of Political Economy, July 1968,
II, 944-46.

12. The Wage Parity Question (with R.J. Wonnacott). Study for the
Canadian Task For~e on Labour Relations, July 1968.
13. "Tax Adjust11ents on Internationally-Traoed Goods," in United
States International Economic Polic in an Interde e n d ~
orl • Papers o the U.S. Commission on International Trade
andlnvestment Policy (the Willia11s Commission), I, July 1971.
14. "U.S. Investment in the Canadian Econo11y," International
~ (Toronto), 27 (2), Spring 1972, 276-86.
15. The Floating Canadian Dollar: Exchange Flexibility and
Monetar¥ Independence. Foreign Affairs Study, American
Enterprise Institute, Hay 1972.
16. Reassessing North-South Economic Relations (participant).
Tripartite Report by Thirteen Experts, Brookings Institution,
December 1972.
17. "Exchange Flexibility and Monetary Independence: The Puzzle of
Recent History.'" In Carl Ste11 et. al., Eurocurregcies and the
International Monetary System. American Enterprise Institute,
1976.
18. "Problems that Trade Barriers and Foreign Ownership Raise for
In Ontario Economic
Canada" (with Ronald J. Wonnacott).
Council, Developments Abroad and the Domestic Economy, II,
1980, 43-70.

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166
-4-

19. "The Marginal Utility o f Inco me Do es Not Increase: Borrowing,
Lending, and Fri e dma n-Sa va g e Ga mbl e s " (with Hartin Bailey and
Hancur Olson), Ameri c an Eco no mic Review, 70 (2), June 1980,
372-79.
20. "Is Unilateral Tariff Reduction Preterable to a Customs Union?
The Curious Case of the Hissing Foreign Tariffs" (with Ronald
J. Wo nnacott), Americ a n Econo mic Re view, 71 (4), Sept . 1981,
704-14.
21. "Free Trade between the United States and Canada: Fifteen
Years Later" (with Ro nald J. Wonnaco tt), Canadian Public
Policy, October 1982.
22. U.S. Intervention in th e Ma r ke t for OM.
International Financ e, t51 , 1982 :

Princeton Studies in

23. "U.S.-Japanese Economic Relations" (with Carles Morrison and
In Report o f Sixth Shimada Conference, Japan
Sueo Sekiguchi).
Society, 1983, 17-32.
24. "Industrial Alloc~tion in the Andean Pact."

In Jose Nunez del

Arco et al., eds., The Eco no mic Integration Porcess of Latin

AmP. rica in the 1980 s .
103-14.

Inter-American Development Bank, 1984,

25. "Hew General Is the Case for Unilateral Tariff Reduction?"
(with Ronald J. Wonnacott), Ameri c an Economic Review, June
1984, 491.
26. "Toward Free Trade Between Canada and the United States" (with
Ronald J. Wonnacott), Can a dian Business Review, Autumn 1985.
27. "The Nominal Deficit Really Matters," Challenge, September

1986, 48-51. Reprinted in Thomas R. Swartz and Frank J.
Bonello, eds., Taking Sides : Clashing Views on Controversial
Economic Issues, 4th ed., Duskin, 1988.
28. U.S . and Canadian Auto Policies in a Changing World
Enviro nment. Canadian-Ame rican Committee, C.D. Howe Institute
and National Planning Association, August 1987.
29. "The Automotive Sector in US-Canadian Free-Trade Agreement.•
In Murray G. Smith and Frank Stone, eds., Assessing the
Canada-U.S. Free Tra d e Agreement. Ottawa: Institute for
Research on Public Policy, Dec. 1987, 73-77.
JO. Western Economic Association Roundtable on Free Trade between
the United States and Canada (Herbert Grubel, Anne Hughes,
Alan Nymark, Paul Wonnacott), Contemporary Policy Issues, Jan.
1988, 1-27.
31. "Canada: Rich by Nature, Poor by Policy?" Journal of Economic
and Monetary Affairs , Winter 1988, 87-89.

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167
-532. The Free Trade Agreement and the Auto Pact.
Issue t2 of Trade
Monitor. Toronto : CO Howe Institute, March 1988.
33. "The Auto Sector.• In Jeffrey J . Schott and Murray G. Smith,
eds., The Canada-United States Free TraJe Agreement : The
Global Impact . Washington and Ottawa: Institute for
International Economics and Institute tor Research on Public
Policy, 1988, 101-16.

34. "The u.s.-canadian Free Trade Agreement: What's at Stake?"
Statement and testimony before the Committee on Governmental
Affairs, U.S. Senate, 1-iay 9, 1988 . Printed in United
States-Canada Free Trade Agreement, Hearing before the
Committee on Governmental Affairs, United States Senate, May
9, 1988, 32-38, 147-72.
35. "Autos and the Free Trade Agreement: The Auto Pact, Plus or
Minus?" In John Crispo, ed., Free Trade: The Real Story.
Toronto: Gage, 1988, 54-65 .
36. "Autos and the Free Trade Agreement: Toward a More Secure
Trading Relationst,ip. " In Marc Gold and David Leyton-Brown,
eds., Trade-Offs on Free Trade: The Canada-U.S. Free Trade
Agreement . Toronto: Carswell, 1988, 269-75.
37. "International Trade," Encyclopaedia Britannica, Macropaedia,
vol. 21, 824-54. [Incorporates passages by Bela Balassa and
others from earlier editions . ]
38. "Is There a Case for More Free Trade Areas?" (with Mark
Lutz).
In Jeff Schott, ed., Free Trade Trade Areas and U.S.
Trade Policy. Washington: Institute for International
Economics, 1989, 59-89.
Reprinted, in abridged form, in
Ecor,omic Impact. U.S. Information Agency, 1989, 4, 26-32.
39. "Canadian-U.S. Free Trade: Retrospect and Prospect, " (with
Ronald J . Wonnacott), North American Review of Economics and
Finance, forthcoming.
40. "The Customs Union Issue Reopened" (with Ronald J. Wonnacott),
Manchester School, forthcoming.

PARTICIPA'l'ION IN RECENT CONFERENCES AND RECENT TESTIMONY
"U.S. and Canadian Auto Policies in a Changing World Environment . "
Paper presented to Canadian-American Committee (C . D. Howe Institute
and National Planning Association). Chicago, March 20, 1987
Participation in Panel on "Canadian-U.S. Trade," General Session,
Western Economic Association. Vancouver, July 9, 1987.

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168
-6"Issues in U.S.-Canadian Free-Trade Negotiations." Paper presented
to Canada/U.S. Legislative Project (Canadian Provincial legislators
and National Conference of State Legislatures).

Opening session,

Vancouver, July 17, 1987.
"The Automotive Sector in the US-Canadian Free-Trade Agreement.•
Paper presented to Conference of Institute for Research on Public
Policy: Toronto, Oct . 28, 1987.
"The US-Canadian Free-Trade Agreement: A US Viewpoint." Paper
presented to conference of Institute for Policy Analysis,
University of Toronto, Conf e rence on "Ch a llenges of the
1990's," Dec. 11, 1987 (reproduced as PEAP Policy Study t88-2).
"The Auto Sector," Paper presented to conference of Institute

for International Economics and Insti-tute for Research on
Public Policy, "The United States-Canada Free-Trade Agreement,•
Jan. ll, 1988.
"Toward a More Secure Trading Relationship: The Auto Provisions
of the Free Trade Agreement," Paper for National Conference on
the Free Trade Agreem~nt, Centre for Research on Public Law and
Public Policy, Osgoode Hall Law School, March 18, 1988.

Informal discussion with Finance Committee, Province of
Ontario, on US-Canadian Free Trade Agreement, March 28, 1'188.
"The US-Canadian Free Trade Agreement: What's at Stake?"
Statement before the Committee on Governmental Affairs, United
States Senate, May 9, 1988.
"More Free Trade Associations?" Lead-off paper at Conference
Institute of International
on "More Free Trade Associations? ..
Economics, Washington, Oct. 31-Nov. l, 1988 (with Mark Lutz).
"Response," at joint session of American Economic Association
and North American Economics and Finance Association on
Canada-U.S. Free Trade A reement: The Wonnacotts after 20
Years, Atlanta, Dec. 28, 1989 with Ronald Wonnacott
Participant, Round Table on "Free Trade Areas and Common
Markets: Improvement or Not on GATT?" North American Economics
and Finance Association, Atlanta, Dec. 29, 1989.
Participant, with John Taylor (Council of Economic Advisers)
and Joseph Minarik (Staff, Joint Economic Committee),
Roundtable on Current Economic Issues, Southern Economic

Association Annual Meetings, 1990, New Orleans.

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169

STATEMENT FOR COMPLETION BY PRESIDENTIAL NOMINEES
_ _ _B_RAD
__F_O-.1:.,=----

DAVID .,...

""='..:..:

FRA::;

whlcll MEMBER, CXlJICIL OF EXXtOIIC ADVISERS

Dale ol lllrtll:

08
• .,,

01
GIOlfflO

39

Pl_ of birth:

Dat~nation:
SEPTEMBER 6, 19 91
CAMBRIDGE, MASSACHUSETTS

fftMt

...... _ _MA_R_R_I_E_D_ _ _ Full -

of spoute _ _G_U_N_T_H_I_L_D_K_._B_RAD
__F_o_RD
_ _ __

'-:-C::::. THEODORE HUOBER BRADFORD

- DECEMBER 28, 1967 (NOW 23)
CATHERINE LOUISE BRADFORD - DECEMBER 23, 1969 (NOW 21)

lttDalN

lllllltutlon

AJ.IHERST COLLEGE
STANFORD UNIVERSITY

Dec,-.

1-.ol

received

_!!!I!!'!!_

1956-1960

B.A.

1960

1960-1961

Ph.D.

1966

1962-1963

126:i::l~!ili
HARVARD UNIVER.HTY

1961-1962

CHURCHILL COLLEGE
CAMBRIDGE UNIVERSITY
ENGLAND

1963-1964

ECONOMICS
M.S .
APPLIED

1962

tlAIUl;;tlll:UC

Hanan-_. Uat-•ff scholal'lhlps, fel-lps,
membanhlps, and any

-■ry~

other-•• ,_Ilion,

military m e d a l s , - . , ~
for - l n 1 safYiceor ec11---.

FELLOW, CENTER FOR ADVANCED STUDY IN THE BEHAVIORAL SCIENCES
STANFORD, CA, 1988-1989
DOCTOR OF HUMANE LETTERS, HONORIS CAUSA, AMHERST COLLEGE, 1985
FULBRIGHT FELLOW, LOUVAIN, BELGIUM - 1977
U.S . TREASURY DEPARTMENT EXCEPTIONAL SERVICE AWARD - 1976
FORD FOUNDATION DISSERTATION FELLOWSHIP - 1963-1964
WORKSHOP FELLOWSHIP, STANFORD UNIVERSITY - 1962-1963

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170
HONORS ANO AWARDS (CONTINUED):
PHI BETA KAPPA, B.A. MAGNA CUM LAUDE - 1960
ASSOCIATE CONFEREE, MERRILL CENTER FOR ECONOMICS - 1959
NATIONAL MERIT SCHOLARSHIP - 1956-1960

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171
Membenhlpc

List below 111 membenhips and offices held in professional, frat.,.,.I, bllsl.-s, scholarly,
civic, charitable and other or1anizations.

Orpni.utlon

~N_ _ _ _ __
AMERICAN ECONOMIC ASSOCIA~T~I~O

1965-PRESENT

ECONOMETRIC SOCIETY

1965-PRESENT

NATIONAL TAX ASSOCIATION
CENTER FOR ECONOMIC

------ -STUDIES
------ --

UNIVERSITY OF MUNICH

COUNCIL

1977-PRESENT

1990-1991

AMERICAN TAX POLICY INSTITUTE BOARD OF

ADVISORS

1990-1991

'
Emp1o,m1nt - . I : u.t bel.- Ill positions held 11- coll.... lncludl111 the title or clllcrlpllon of job, - "
~ . location of work, and dat• of Inclusive employment.

ASSOCIATE DEAN OF THE WOODROW WILSON SCHOOL OF PUBLIC AND
INTERNATIONAL AFFAIRS, PRINCETON UNIVERSJU, 1985-1988,
1989-1991
PROFESSOR OF ECONOMICS AND PUBLIC AFFAIRS, PRINCETON
UNIVERSITY, 1975VISITING PROFESSOR OF LAW, HARVARD UNIVERSITY
CAMBRIDGE, MA , 1991
ACTING DEAN OF THE WOODROW WILSON SCHOOL OF PUBLIC AND
INTERNATIONAL AFFAIRS, PRINCETON UNIVERSITY,
PRINCETON, NY, 1980, 1987
ASSOCIATE DEAN AND DIRECTOR OF THE GRADUATE PROGRAM OF THE
WOODROW WILSON SCHOOL OF PUBLIC AND INTERNATIONAL AFFAIRS,
PRINCETON UNIVERSITY, PRINCETON, NJ, 1974 - 75, 1978 - 1980
DEPUTY ASSISTANT SECRETARY FOR TAX POLICY (TAX ANALYSIS), U.S.
TREASURY DEPARTMENT, WASHINGTON, DC, 1975-1976
2

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172
MEMBERSHIPS (CONTINUED):
ORGANIZATION

OFFICE HELD

DATES

ECONOMICS LETTERS

BOARD OF EDITORS

1978-1991

ZEITSCHRIFT FUER
NATIONALOEKONOMIE

ASSOCIATE EDITOR

1988-1991

MCCARTER THEATER COMPANY
PRINCETON, NJ

BOARD OF TRUSTEES

1978-1990

FISCL POLICY STUDIES PROGRAM
AMERICAN ENTERPRISE INSTITUTE

ADVISORY COUNCIL

1978-1989

JOURNAL OF PUBLIC ECONOMICS

ASSOCIATE EDITOR

1982-1988

TAXATION WITH REPRESENTATION FUND

BOARD OF DIRECTORS

1980-1987

JOURNAL OF ECONOMIC LITERATURE

BOARD OF EDITORS

1985-1987

NATIONAL TAX ASSOCIATIQN
- TAX INSTITUTE OF AMERICA

BOARD OF DIRECTORS

1981-1984

AMERICAN ECONOMIC REVIEW

BOARD OF EDITORS

1977-1979

ACLU OF NJ

1966- 1970

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173
EMPLOYMENT RECORD (CONTINUED),
ASSOCIATE PROFESSOR OF ECONOMICS AND PUBLIC AFFAIRS, PRINCETON
UNIVERSITY, PRINCETON, NJ, 1971-1975
ASSISTANT PROFESSOR OF ECONOMICS, PRINCETON UNIVERSITY, PRINCETON,
NJ, 1966-1971
ACTING INSTRUCTOR IN ECONOMICS AND RESEARCH ASSOCIATE, STANFORD
UNIVERSITY, STANFORD, CA, 1965-1966
CONSULTANT (FULL TIME), MILITARY MANPOWER POLICY STUDY, OFFICE
OF THE ASSISTANT SECRETARY OF DEFENSE, BONN, GERMANY; LONDON,
ENGLAND; AND WASHINGTON, DC, 1964-1965
RESEARCH ECONOMIST, OPERATIONS EVALUATION GROUP, CENTER FOR NAVAL
ANALYSIS, WASHINGTON, DC, SUMMER 1962
RESEARCH ASSISTANT, FEDERAL RESERVE BANK OF BOSTON, BOSTON, MA,
SUMMER 1961

174
Government
exper ience :

List any experience in or direct as soc iation with Federal, State . or local governments. ,n.
cludmg any aciv1sory, consultall ve. honorary or other part -time service or pos,t1ons

MEMBER, NATIONAL COMMISSION ON RAILROAD RETIREMENT REFORM,
1988-1990
ECONOMIC POLICY COUNCIL OF THE STATE OF NEW JERSEY, 1984-1991
CONSULTANT (EXPERT WITNESS), U.S. INTERNAL REVENUE SERVICE,
1987
VICE CHAIRMAN, NEW JERSEY STATE AND LOCAL EXPENDITURE AND

Published
writings:

REVENUE POLICY COMMISSION, 1985-1988
CONSULTANT (EXPERT WITNESS), U.S. DEPARTMENT OF JUSTICE, 198!
list the titles. publishers and dates of books. articles. reports or other published materials
you have written.

SEE ATTACHED C.V.

Political

affiliftions

and activities:

List all memberships and offices held in and services rendered to all political parties or
election committees during the last 10 years.

FROM TIME TO TIME I RESPOND AS

A

PROFESSIONAL TO REQUESTS

FROM CANDIDATES FOR COMMENTS ON ISSUES, MOST NOTABLY FROM
SENATOR ROBERT DOLE IN CONNECTION WITH HIS CANDIDACY FOR
NOMINATION FOR PRESIDENT.

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175
GOVERNMENT EXPERIENCE (CONTINUED):
ENERGY RESEARCH ADVISORY BOARD, DEPARTMENT OF ENERGY, 1978-1980
DEPUTY ASSISTANT SECRETARY FOR TAX POLICY (TAX ANALYSIS), U.S.
TREASURY DEPARTMENT, 1975-1976
CONSULTANT (FULL TIME), MILITARY MANPOWER POLICY STUDY, OFFICE OF
THE ASSISTANT SECRETARY OF DEFENSE, 1964-1965

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176
Political
coritributions:

Itemize all politk:al contributions of $500 or more to any indivtdual, campaisn organization , political party, political action committee or similar entity durin1 the last ei&ht
years and identify the specific amounts. dates, and names of the recipients.
·

NONE

Qualifications:

(--

State fully your qualifications to

..,.. in the PoSition to which you t.ft -

-.

PREVIOUS GOVERNMENT EXPERIENCE, ACADEMIC RESEARCH, TEACHING,
ANO ADMINISTRATION WELL FITTED TO THE POSITION. SEE
ATTACHED C.V.

Future employnMnt
l. Indicate whether you will ..,., all connections with your ~ employer, ~
relationships:
finn, association or organizatKM'I if you are confirmed by the s.n.te.
·
I AM ON UN-PAID LEAVE OF ABSENCE FROM PRn:cETON UNIVERSITY,

CONTINUING TENURE AS

A

WITH
PROFESSOR, ANO F~t•M THE NATIONAL BUREAU

OF ECONOMIC RESEARCH.
2. As far as can be - · state whether you -

any plans

lfta' completinc.....,..

ment servic» to resume employment, affiliation or practice player, business firm , association or orpnization.

,aur

~

.,,_

I EXPECT TO RETURN TO MY POSITIONS AS A PROFESSOR AT PRINCETON
UNIVERSITY AND AS A RESEARCH ASSOCIATE AT THE NATIONAi BPREAU
OF ECONOMIC RESEARCH.
3. Has anybody made you • commitment to• job afte, you -

--

OTHER THAN THE ABOVE, NO.

4 . Do you expect to

..,.. the full term for which you have -

■ppohad7

YES.

4

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177
~lconftids
of ltaNSI:

1. Describe any financial arran~s a, deferred compensation I C - a, continu ina de.alinp with bu$1nffS assoc,ates.. cl.ents or customers who will be affected by Policies which you will influence in the position to which you hM _ ,
nominated.

I WILL CONTINUE TO QUALIFY FOR THE COLLEGE TUITION ASSISTANCE
PROGRAM, AND FOR THE LIFE ANO HEALTH INSURANCE PLANS AT
PRINCETON UNIVERSITY .

2. Ust any lm,estments. obligations. liabmties. or relationships which miflht I,.,.,.,,.
potential confticts of interest with the poortion to which you haw _ , nomi-.

I DO NOT BELIEVE I HAVE ANY SUCH SOURCES OF POTENTIAL
CONFLICT OF INTEREST.

3. Describe any busi- . relationship, - •inc a, financial transaction ( - than tu•
payin&) whi:h you have had during the last 10 years with the ~---1 Gov9m--i,
_.,.,. lo, yourself. on behalf of a client, or actinc H an qant, that mict,t In any
- constitute or result In a possible conflict of lntarast with the poortion lo whicll you
have_, nomi- .

I DO NOT BELIEVE ANY OF MY PAST DEALINGS WITH THE FEDERAL
GOVERNMENT WOULD RESULT IN A CONFLICT OF INTEREST •

•

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178
4 . List any lobbying activity during the past 10 yea,. in which you"- enpaecl for the
purpose of diree1·1y or indirectly influencing the passaae, defeat or modlficatiQn of
any legislation at the national level of gowrnment or affectln1 the ldmlnlsttatlon and
execution of national law or public policy.

IN THE CONTEXT OF THE TAX REFORM DEBATE. 1985-85. I ASSISTED
A COMPANY IN ASSESSING THE IMPLICATIONS FOR PUERTO RICO
OF PROPOSED FEDERAL TAX CHANGES AND IN PRESENTING THAT
ANALYSIS TO THE TREASURY DEPARTMENT,
IN ADDITION. I
PROVIDED INVITED TESTIMONY ON TAX POLICY ISSUES BEFORE
VARIOUS CONGRESSIONAL COMMITTEES, (SEE ATTACHED LIST.)

5. Explain ' - you will ,_... any potential conllict of ; , . . 1hat

_, be dltdoled bJ

your NSporlMS to the above 1 - .

I 00 NOT THINK THERE ARE SUCH POTENTIAL CONFLICTS OF
INTEREST.
CMl,almlnaland
lnvestlplmy
actions:

l. Give the full details of any clvil or criminal pn,ceminc in whidl ~ - . a cllf9ndant
or any lnqui,y or i...-;p!ion by a F-.1, State, or local ..-,cy In wlllch you _ .
the subject of the inqui,y or 1,-t;ptlon.

NONE.

2. Gi,,e the full details of any proceedinc. lnqul,y or 1.-iption by an, prof9ssional
association includin1 any bar association In which you - . the subject of the proceedin1. inqui,y or inve~iaation.

NONE.

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179
Septeaber 29, 1991
Dl'B li■t ot teati■onie■ tor contir■ation

-t•rial•

Invited te■ti■ony on tax policy, Task Force on Econo■ ic
Policy and Productivity ot the co-ittee on the Budget,
BOU8■ ot Repreaentatives, March 12, 1981
te■ti■ony
Fi■cal Policy

Invited
and

19, 1982
Invited

te■ti■ony

on tax policy, Subco-ittee on Monetary
Econo■ ic co-ittee, August

ot the Joint

on tax policy, Subco-ittee on oversight

ot tb• Internal Revenue Service ot the Senate Finance
CoaaittM, Septeaber 17, 1984

Invited tuti■ony on tax policy, co-ittee on Ways and
Bou•• ot Representatives, September 26, 1984

llealul,

Invited te■ti■ony on tax policy, co-ittee on Way• and
Bou•• ot Representative■, June 11, 1985

llealul,

Invited tuti■ony oh tax policy, Senate Finance co-ittee,
october 10, 1985

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180
lepteaber 27, 1991
DAVID P. DADl'oaD

CVCiPMlW VJ.He

ICM M4Atl•
SO Pine I t ~
Princeton, a- .Jeraey 015'2
Tel. 609-924-7431

Place

yd Qat;•

of lirt;b1

ca.bridge, NaaNcbuNtt• - .January 8, 1939

CitilllDlbiR•
United ltat•• of Aaerica

ldusatioo•
Allberat 0011-ve - 1956-1960.

a.A.,

1960

Stanford Uni.,.r•ity - 1960-1961
BarTard Uni.,.r•ity - 1961-1962. •·•·• Applied Nati-&tic•, 1962
Cbucbill 0011898, ca.bridge Uni...r•ity, llngland - 1963-1964
Stanford Uni...r•ity - 1962-63, 1965-66. Pb.D., isco-ic•, 1966
IIRIIRU•
■ational llllrit lcbolar•bip - 1956-1960
Maociat• COnf-, llllrrill c.ntu for a - J . • - 1959
Pbi a.ta Kappa, a.A. 11aCJM cua Laude - 1960
Woodrow Wilaon Pell0118bip • 1960-1961
WOrk•bop Pell0118bip, Stanford Uni.,.r•ity - 1962•1963
rord Pouftdation Di•Hrtation Pell0118bip - 1963-1964
u. a. TreHury Departaent bceptional . .n>ice Award - 1976
-Pulbrigbt Pell-, LouYain, a.lgia • 1977
Dcctor of R - Letter•, bonori• cau•a lllllar•t 0011-ve, 1985

Pell-, Center for lldYanced ltudy in the a.ba•ioral lci•nc•••
Stanford, CA, 1988-1989
lmRlPYNDtl

A••ociat• Dean of tbe Woodrow Wilaon acbool of Public and International
Affair•, Princeton Uni.,.r•ity, 1985-1988, 1989-1991
Prof•••or of Scon..ica and Public Affair•, Prine.ton Uni.,.r•ity, 1975•
Viaitin9 Profeaaor of Law, Ban>ard Uni.,.raity, 1991
Acting Dean of th• Mood~ Wilaon lcbool of Public and Int•rnational
Affair•, Princeton Uni.,.raity, 1980, 1987
A••ociate Dean and Director of tbe Graduate Progr- of tbe Woodrow
Wilaon School of Public and International Affair•, Princeton
Univereity, 1974-75, 1978-1980

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181
Dav.ld

r. Bradford

2

Deputy aaaietant a.cretary for Tu Policy (Tu Analyeb), u . a. TrHeury
~ t . 1975-1976
Aa■ociate Prof-■■or
Uni-r■ ity,

of lco-ice and Public Affair•, Princeton

1971-1975

of aco-ica, Princeton Univereity, 1966-1971
Inetructor in lconoaic■ and llaeearcb Aa■ociate, Stanford
Uni..raity, 1965-1966
0oanltant (1'\111 Tia■), Military llanpower Policy Study, Office of tbe
aaaietant a.cretary of Def-, leptaaber 1964 to Auquet 1965
c-rld119 in aona, oeraany, London, llnqland1 and waehinqton , o . c . )
-■-rcb ~ e t , Operation■ lvaluation Group, Center for ■aval
Anal,.-, Waahinqton, D.c., s - 1962
a.-rcll Aaeietant, Pederal lla■-rve 8ank of aoeton, • - 1961

A■■ ietant Prof-■■or

acting

OtbeE PEefuelPR1\ lfiitiitit.1•■ •
-■-rcb Aa■ociate, ■ational Bureau of lconoaic llaeearcb, 1977Director of llaeearcb in Taxation, ■ational Bureau of leonoaic lla■-areb,

1977-91

ColMlultant, International Bank for Reconetruction and ~lopeent, 19841986

0ouacil, Center for leonoaic Studi-■, Departaent of lco-ie■,
Uni-reity of IIUnicb, 1990-1991
IOard of Advi ■or■, -riean Tu Policy Inetitute, 1990-1991
■ ational CC-iaeion on Railroad a.ti.--nt llafora, 1988-1990
lco-ic Policy Council of tbe State of llew Jereey, 1984-1990
Vice Cbairaan, Jer■-y State and Local IIXpenditur• and aa-nue
Policy cc-i ■■ ion, 1985-190
Advi ■ory Council , r i■cal Policy Studi•• Progr-, Aaerican
lnterpri■- Inetitute, 1978-1989
8oard of Director•, Taxation with llapre■-ntation l'\lnd, 1980-1987
Inergy lla ■-arcb Advieory Board, Departaent of Inergy, 1978•1980

service for Prof•••ional or9aniaationa1
Board of lditore. 1con99ic1 Letttr■• 1978-1991
lditor. Journal of Public 1con911ic1. 1982-1988
Board of lditora. Journal of lconomic Literatur•. 1985-1987
Board of Director•, ■ational Tax Aaeoeiation - Tu In■titute of
-rica, 1981-1984
aoard of lditore. American 1conomic Review. 1977- 1979
Aa■ociate lditor, za1t1chrift fuer Nationaloekonomia. 1988-1991
Aa■ociate

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182
3

DaYid •• lradford

Lea.,.• for

Scholar ■ hip1

Center for AdYanced Study in the

Stanford,

■-haYioral Science ■,

CA, 19. .-1989

center for Operation■ --■-arch and S-tric■, touYain, ■-191-,
Spring -■tar, 1977
In■titut fu•r -h•ra Studian und Wirt■chaft ■ for■chung, Vi■Ma,
Au■tria, Spring -■t■r, 1972
In■titut fuar Soaialvi■-■chaft_, ■-■-1, 8vitaarland, Spring
-■t ■r,

1969

Mfili1&iPM 1
-ican Sconoaic A■■ociation
■co-ric Society
•ational T■- Aa■ociati-

PyblicatiRM•
IPPM M4 1PDPPrlPb1 •
'
Maice. Princeton
P9CtVMPt Pplicy in Mlact;iD
.. lation■ sact1-,

--■-arch

Oni.,.r■ ity Indu■trial

llaport . .ri•• •o. 113, 1969, 64 pp.

(pr Mlis Ty M(pra. 2nd ad. (with o.s. Tr■ a■ ury T■- Policy
Staff), Arlington, VA, Tu Aaaly■t ■, 1914 (original edition
publi■had aa U.S. Tr-aury ■tudy, 1977) 1 aia, 194 PP•I al ■o
publi■had in Spani■ h .. Prpga-■ty para RM M(praa Tributaria
In■tituto de l■tudio■ Piacala■, 1986.
J&■W, lladrid1

Blupprint ■

JJlRNNllinq tha lnc;cwe Ty. Ca.bridge, 11A1

llarYard

Univar■ ity Pr■ H,

1916, ., 316 pp.

Ty Policy

yd ty
1990.

lconqay. Vol..-

4 (ad.), Ca.bridge, 11A1

The IIIT

Pre■■ ,

Joumal

Articl■I

"The

and Ch1E1r1 in 199k1,

lnli ■taant Daci ■ ion

IAADARic■ .

"The

■--bar

Ondar Draft Uncertainty,•
1968, pp. 621-631.

Opart;■rly

Jpurnal pf

IYidanc• and
Coat of Local Public . .nicaa1 . .flaction■• (vith •·•·oat■■ and R. 11&lt), National Ty
June 1969, pp. 185-202 • .

Ri■ ing

•■aluaca

OD UnbalUlcad Growth,·

Jpurnal.

l■ it,chrift fu■r lfatigpalg■ kgnswi•,

1969, pp. 291-304.

frca llarginal Coat Pricing• (With•· J. lauaol),
R■ yi■y. June 1970, pp. 265-283 . . .printed (in
Japan■■■) in IIP[IIIYAYI and AutCWQbil■■, Vol. XIV, 1971, Wo■• 4,
pp. 83-891 and 5, pp. 77-85.

•0pt1-&l

Departure ■

Aaerican 1coosw1c

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183
Dadd r. Bradford

•eonatraint■

4

on Public Action and

Ibale■

for IOoial

Deci■ion,•

IM£ipy

IS9DSPIS MYift• a.pteaber 1970, pp. 642-652.
•-fit-C:Oat Analyai■ and o-nd cur.ea for Public Gooda,• ~ .
DIII-3, a.pteaber 1970, PP• 775-791.
Trwlation (with•• J. Bauaol) of N. aoit■w1• ■ •On tba llanagMllllt of
Public IIOnopoli-■ Subject to llwl9etary conatrainta,• wbicb
ori91Dally appeared in 1S9DSPetdca. Vol. 24, 110. 1, January 1956,
JAVMl pf IGOPSPIS Deen- Vol. 3, llo. 3, a.pteaber 1971, pp.
219-240.

......,11.

·'lb■ Allaly■ i■

of
Sbarin9 in a AppEo■cb to COllec:th• ri■ cal
Decielona• (with •· •· oat.•), 9etrter:lx JAVMl Pf Pmnsets■ ,
Vol. LXDV, Au911at 1971, pp. 416-439. a.printed (in Spllniab) in

a. cu.al•••
lldic1-■,

ec1.,

rtnensiesipp 4e lu 1Mtence1u.,

Madrid•

a. a1uae

1979, pp. 163-117.

a Predicthe 'lbeory of I n t ~ a l Grant•• (with w. •·
Oatea), IM£ipp IS9DSP1s MYi.ft• Vol. LXI, Ney 1971, PP• 440-448.
11.eprinted (in Spapi■ b) in A. Giainea, ed. !IDIDF!SCipp 48 lu
I\Yt;AD99ltl, lladridt 8. 11- Sdioi-, 1979, PP• 143-162.

•Toward■

•an

~ r i c llodel of the r119bt to the lluburba• (with 8. 8.
blejian), delhered to the S4lcoDd World
of the
• - r i c IOoiety, CUlbr149■ , Sft9land, a.pteaber 1970, ilmlDl&1
of Political !FRD99Y, LUZI-3, Nay/Juz» 1973, PP• 566-519.

COIMJn••

•oetriaental lbrternalitie■ and _-con,,..ity of the Production aet•
(witb •• J . . .,_1,, IF9DSRiSI, Vol. rmx, ..., 1972, PP• 160-176.
Incorporated a• Cb. I, •Detriaental Sxternaliti•• and - con,,..iti-■ in tba Producti- aet, in•· J. ■--1 and•· •·
oat-■ , nw n,pry of IPYkwPMte\ Poligy. Sft9lewood Cliff••
Prentice-Ball, Inc., 1975, pp. 102-123.
•Joint

Product■,

COllec:the

Good■ ,

and Sxternal Sffec:t••

Jourpal of Political IFRPSWY· Vol. 79

A

c-nt•,
1971).

(-■pt...,.r/october

pp. 1119-1121.

•suburban llaploitation of central Citi•• and Go9enaenta1 ltructure•
(with•·•· oat■■ >, in 8. •· Bocbaan and o. •· Pet•r-n, eda.,
•esUetribution Thrgyph Public Chpic•. - York, COluabia
0ni-r■ ity Pre••• 1974, pp. 43-90.
•conatraint■ on 00-na■nt I n - • - Opportuniti•• and the Choice of
Di■ count Rate,• IM£icy lmns,ic Rayi.ft. Dece11ber 1975, pp. 1171991 a ■bortened ~•ion i■ reprinted u •'lb■ Choice of Di■ count
Rat• for 00-na■nt I n - - t • in IIObert 8.
and Juliu•

aa,,_

Nar90li■,

aoaton,

eda •• Public 1&M4it»re ID4 Pplipy 1n11xt1•• 3rd ed.,
8ou9bton Mifflin, 1913, pp. 129-144.

•A roraal Model of lbrternal Sffect• and correc:ti- Tu•••• App■ndia to
Chapter 8 of 11. J. lauaol and 11. s. oat-■, Vw 'Vl99ry of

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184
DHid P. Bradford

IPYV'91PPPttl Policy. lhl9lewood Cliffe,

5

Prantic-Ball, Inc.,

1975, pp. 125-128.
"llenefita and coata, Winner• and Loaera• (witb a. A. hheaon), in a. A.
re1Yeaon, s. •· Linden, and a. •· aocolow, eel•·• 19Ynderie■ of
IMlx■J.11
IP JnqyJ,ry iptq the tesM ItlM4 PM Cppt.mnru,
c:aabridge, NuHclluNttaa Balll.Jl9er Publ1allin9 CO., 1976, PP•
. 125-158.
•Tile Optiaal Tuatioa of c:-ctiti•• and 1 - • (witb a. 8. Jtoaen),

IMEiSIQ 199P9elo leYift. Vol. 66 (Nay 1976). PP• 94-101.
•coneuapti- • • • I - .... T - • Tile ~ t o n Ground9 of Squity
and 8illplicity• (witb Bric Toder), P&'PSM4ipcg pf t;M Jat;ipnal tu
MIPSiAAipp, 1976, pp. 25-31.
•ObHnabl• Praferencea for Public Qooda• (witb G. c. Hildebrandt),
Jpyrpal pf Pyblig 199P9PIS•• Vol. VII, 1977, pp. 111-131.

crop Porecaatin9 in a Market 8yat_, Theoretical IHUH" (witb a. a. blejiu), Buift pf IE9J¥WiC
B114J.aa, Vol. n1'v, oct. 1977, pp. 519-531.

•TIie Value of Inforaation for

•Tb• Value of Inf-tion for crop Porecaatift9 with Bayeaian
8peculatora, Theory and lillpirioal . .ault•• (witb a. a. blejiu),
tile 1911 Jpurpal pf l179119Pt91• Vol. 9, 8prift9 1978, pp. 123-144.
•cuttift9 and . .foralft9 the Peraonal I n - Tu,• in Rudolph o. - •
ed., tu fpligie■ ip t;ba 1979 l9dgpt;. lfaabin<Jton, D. c., Merican
SDterpriH Inatitute, 1978, PP• 31-42.
•ractor PricH Nay . . Conatant lllat ractor a.turna Are Kot,• ISPQ98ist
1,at;t;Kt, Vol. 1, 1978, PP• 199-203.
•Tile ca.. for a Peraonal conawaption Tu,• in Joaepb Pecbaan, ed., llltt.
Sbpuld be 'fM9ds IQSIM PE IIJleAd!tYA· 1faallin¢on, D.C.1 Tile
lrook1ft9• Inetitution, 1979, pp. 75-113.
•Tu Kautrality and tile In-•-nt Credit,• in Benry J. Aaron and
Nicbaal .J. loakin, ede., Tba lcpQ981C■ pf Tyat;ion, 1fHllln¢on, D.
c., The lrookift9• Inatltution, 1980, pp. 281-298.
•Tile tconoeica of Tu Policy t-ard aa•ln9a,• in Geor99 N. YOn
Puratenber9, ed., tu 99YPEJMAA IA4 capital '9£Ntion, c:aabddCJ8,
NA., Ballin99r, 1980, pp. 11-71.
•Taxation and tile Stock Narlcat Valuation of capital Gain• and Di•ldenda1
Theory and llmplrical --•ult•• (with a. a. Gordon), Jpurnal of
Public Jcpnqpic■• Vol. 14, october 1980, pp. 109-136.
•Tile Incidence and Allocation lffecta of a Tu on corporate
Diatrlbutiona,• Journal of Pyblic Jconomic■• xv, 1981,

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185
Dad.d r. Bradford

6

•The Value of Inforaation in· a storage Model with Open- and Cloaed-Loop
control•• A "'-deal lxaapla• (with a. a. lelajian), Journal of
1c;o099ic pynpic■ M4 epntro1, III, 1911, pp. 307-317.
•Iaauaa in tba Daai911 of la•in<J■ and InY&■ta■nt IncantiY&■,• in Charla■
R. Bult.on, ed., PnE9Sil1ii9P and tb9 TMatiPD Of IPSSM fra
~ . Wa■bin<Jton, D.C.1 Tha Urban Inatituta Pra••• 1981, pp.
11-47.

in tba COD■tructiOD and u- of lffactiY& TU Rat••· (with Don
Fullerton), in Charlaa R. Billton, ad., Depreciatiop yd tbe
Tyat.ion of JOCi!WI fraa capital, wa■h1n9ton, D.c., Tba urban
ID■tituta Pre■■ , 1981, pp. 251-278.

"Pitfall■

lot;•••

"The c:boica ~ I n - a n d CODal&llption Tua■ ,• ZN
XVI-I,
Allgll■t 23, 1982, pp. 715-7231 r&Yiaed -..raion publi■had in Charla
I. Walllar and Nark A. llocafiald, ada., In Diqctiop■ ip bsl9nl
ZN Pplic;y for tba 1980•. CUbrid9&, lllh Ballinger, 1983, pp.
229-252.
•Tba Poaaibilitiaa for ,m lxp&Dditura Tu,•
3, laptaber 1982, pp. 243-251.

Jational IM Jourpal. xxxv-

Ih9 ZNttion of JOCi!WI (raa capital (collaborat1119 author), Mervyn A.
IUDg, and Don Fullerton, ad■ ., Chicago, UniY&r■ ity of Chica90
Pra■■,

1984.

•Prafaca to tha 8acond ldition,• in Da•id r. Bradford at al., Blueprint•
for M■ ic IM Mfora. Arlin<Jton, va, Tu Analyata, 1984, pp. x111xia.
•Iaauaa in tba Naaaur-nt and Interpretation of lffactiY& Tu Rataa,•
(with c. Stuart), ■ational ZN Jourpal. UXIX-3, lapteabar 1986,
pp. 307-316.
"A Probl- of Financial llarkat lquilibri- Wban tha Tl..aitMJ of Tu
Payaant ■ 1• Indatarainate,• in Walter P. Ballar,
N. Starr and
Da•id A. Starratt, ada •• Spcial Choi;• M4 Public paci ■ ion llaltipqf
111ax, in Honor of Kenneth J. Arrow, vol. 1, ca.bridCJe un1. .raity
Praaa, 1986, pp. 177-188.

Ro••

•On tha Incidanca of con■Wlption TUN,• (in Charla 1. Walker and Nark
A. llocetiald, ad■ .). Th• Cpn■yaption ZN! A letter Alternatiya,
CUlbridga, NA• Ballin9ar, 1987, pp. 243-2611 raviaed Y&raion
publiahad u •llhat Ar• COn■waption Tax•• and llho Baar■ ~ 7 • ZN
Jot.la, Vol. 39-3, April 18, 1988, pp. 383-391.
•savin9■ Incentive■

in a Hybrid Income Tax• (with 111111- D. Andr-),
in Henry J. Aaron and Joeeph A. Pechman, eel■., UOIIIY Cqpprai■II
ProblWPI of a Hxbrid Ioc9Ptl-Coo1wpption TN, waebington, o.c.,
Th■ Brookin9■ Inatitution, 1988.

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186
Da•id P. lradford

7

•An Uncluttered Inccaa Tax, The Rast . .fora A9aftda7• in Gerbard Pala
and ceorve •· YOD rur■tenber9, ec1a., I IMPPlY Iida teendt fer
!ialalllX, lprin9&r varla,a, 1911.
•Tax bpanditur•• and tba probl- of AcCOW1tin9 for ~ t , • in Nail

ance, ed., TM lneP41turw M4 99YVPPIDt '9liFY• lllMJeton,
Ontario, QIINn'• Uni-raity, Jobn Deutacb Institute for tba study
of Sco-1c Policy, 1911, pp. 427-434.
•Taxing International I n _ , All Aaalyaia of tba u.a. ly•t- and It•
• - i c Praal-,• (witb BlllJb J. Ault) in .....f aaain and J-1

8laarod, eda., TuetiPO

1p

t.N Globe) IA

,, Clllc:avo, IL,

Uni99raity of Cbie&,JO Prue, 1990, pp. 11-52.
•1111at 1a Rational la•in971 Altarnati- - - . 1A Biatorical and
International Context,• in Charla S. Walker, Jlark A. 11-iiald,
and llar90 'l'bonin9, ..s.. · De P,I, IUipq• Sl!tlllllKlft• Policy
APtiPPI for Pgpdyet;iyitx IP4 Qrgwt;b,. 9oulder, COi W.etYiaw Pre■■,
1990, pp. 31-75.
Incidence and Allocatiqn Sffacta of tba Property Tax and a Proposal for
. .fora,• (with Willi- T. aGgart) in ROllert D. Del Nriaa ad.,
leNN:sh lp prbap. !conmts■, Vol.I, Mark Alan llu9be• and There..
A. JlcGuln, eda. Jat;ippal Tno41 apd Lpc;el IPlisie■ 1p JJrbM
~ . G~ich, CTI JJU Pn•• Ltd., 1990, pp. 59-12.
Sin 1Ja9 aur at-arYerainfachWMJ,• in llanfrad IIION, ad.,
8prlngerVarlA9 Baidalbar9, 1991, pp. 175-191.

•Dia X-lt-r1

IAMVFrieoti•rt• MYPrdpupq •• ISiWf9EUG-· ..rlin1

•optiaal TaxH and Pdcin91 bply• (witb W. J. Ba,aol), IMEiRIA
IC9DSP:&S Rayift. LXII, March 1972, pp. 175-6.
C:-nt on IIIObart P. S119la III at al, •1111 Sconcaatric liaulati- lladal
of Intra-Natropolitan Bouai119 Location, Bouain9, 1111•1-•,
Tranaportation, and Local oo-riaent,• I\NKipan IC9DSP:&s hY&W,
LXII, Nay 1972, PP• 100-102.
Diacuaaion of Cbarl•• J. Cicchetti and V. brry laitb, •Tba Naa■ur-nt
of Indi•idual Congaation Coat■,• in • t - A. r. Lin, ad., %11,ga
and ,...,ur-nt of lseoseic 11:t1rnalit;ie1 XArk 1 Acadaaic
Praaa, 1976, pp. 201-203.
Di ■cuaaion

of Iapact of a.cant -lopaenta in Public Pinanca Tbaory on
Public Policy Dacbiona, ftNriRIA IRPDaig Rayift. Pabruary 1977,
pp. 314-315.

of Gregory v. Jump, •Tax IncantiYN to Proaota Paraonal
•a•ing, - n t Canadian Sxparianca,• in saying and qoyerQNnt
221J.s.x, Padaral Re ■er.e Banlt of Boaton conference aerie• Ro. 25,
octobar 1912, pp. 73-78.

Diacua■ ion

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187
Da•id P, Bradford

8

C-nt oa •Tu Loa• carry Porvard■ and Corporate Tu IncantiY■■,• by
Alan J. Auerbach and J - •· Poterba, in Hartin hldatein, ad.,
' " lffffll pf TMltiOP 9P caait.al ISSYWfletiPD• Oni••r•ity of
Chicago Pre••• Nay 1987,
of Alan J. Auerbach, "Ta Policy and corporate Borrowing,• in
Riobard•• Jtopclut and Sdc a. Ro■-119ran, ad■ ,, I\A tbp pi ■tinqtiop
- - Dabt and lqyity Di■1P9M&:inq, Padaral --■-r.. llaak· of
ao■ton Confarance aerie■ llo. 33, octobar 1989,

Di ■ cu■ aion

- t OD "Di■tift9ui■bin9 Debt fro■ Squity . in tba Junk Bond Sra,• by
J e ~ I, 11111-, Lawrance
and Victoria P, • - • • in
John 8, SboY■n and Joel Waldf099l, ada., Qlbt., %AMI• and
Qprpprat.■ BIISi:rus;t;uripq . WubJ.ngton, o.c.1
Brooking• In■titutlon,
1990, pp. 166-169.

a.•-•

•c-nt on 8cott and Sianar,• in Journ■ l
DVIII, 8apt, 1990, pp. 1183-1186,

of Jconc;wic Literature.

Vol

Bgok l4Yift1 I

De Pria MsbMlM IP4 t.H NetPiDS of lltlenel JQCRN f$Ui1t.ic:1,
Dan Uabar, IYJlloa, D?II-2, 1970.

De

Pftllld and fypply
(1970).

The

ftryqt.ug

of Public

9md■,

by J - lluchanan, ltykloa, IIII-1

::Uat.iPPI IGPrt of I cn-tt.SiN
b:9f91l9E .J, I, . . . . J9Vlltl pf PF9Pselc L"VHHU,

and BefPA pf pi.gqt;

Qalgd bv

by

June 1979, pp. 574-575,

188
Septeaber 29, 1991

Attac:haent to confirmation •aterials for David F. Bradford:
Invited testi•onies on tax policy before Congressional
co-ittees.
Task Force on Econo•ic Policy and Productivity of the
Ca-ittee on the Budget, House of Repreaentativ-, March 12,
1981
Subca-ittee on Monetary and Fiscal Policy of the Joint
Econ011ic Ca-ittee, August 19, 1982
Subco-ittee on oversight of the Internal Revenue Service of
the senate Finance co-ittee, Septellber 17, 1984
co-ittee on waya and Means, House of Representatives,
septeaber 26, 1984
co-ittee on Waya and Means, House of Representatives, June
11, 1985
Senate Finance co-ittee, october 10, 1985