Prepared Testimony of U.S. Senator Carol Moseley-Braun (D-IL)

Hearing on the Federal Reserve's First
Montary Policy Report to Congress (Humphrey-Hawkins)

Mr. Chairman, I am very pleased to have this opportunity to hear the distinguished Chairman of the Federal Reserve Board, Alan Greenspan, present his views on the conduct of monetary policy and the state of our economy.

At the outset, I think it is worth noting that the current economic news is generally good. We have produced over 11 million new jobs over the last four years. The economy continues to expand, and according to the Congressional Budget Office, in the report it released last month entitled, "The Economic and Budget Outlook: Fiscal Years 1998 - 2007", economic growth seems likely to continue into the future. The Wage Cost Index rose only 0.8 per cent in the fourth quarter of 1996, indicating that the current recovery is not likely to overheat, and that a return of inflation is unlikely.

The budget news is also much better than it was not very many years ago. The budget deficit in FY '96 was only slightly more than one-third of what it was in 1982 -- down from over $290 billion then to only $107 billion in FY '96. And the Congressional Budget Office's newest projections of federal baseline deficits over the next 10 years are, "one-third lower than last year's."

This good news is a testament to the deft way Chairman Greenspan has conducted monetary policy since he became the head of the Federal Reserve Board. President Clinton and Secretary Rubin also deserve a commendation from this Committee for the roles the President and Secretary played in producing this economic and budget success.

Despite the fact that the economy is generally strong, inflation is in abeyance, and the budget deficit is in retreat, the longer-term outlook illustrates that we are rapidly running out of time to address the challenges now on the horizon. CBO's summary analysis pointed out that, "Despite the improved outlook through 2007...... the budget situation will start to deteriorate rapidly only a few years later with the retirement of the first baby boomers and the continued growth of per-person health care costs." The projections for the rate of economic growth over the next decade are also far too low, only 2.1 per cent. I therefore hope this Committee will go beyond the relatively good news that we can reasonably expect over the next few years, and begin to have an honest dialogue about what is on the horizon, and the challenges the future holds for us and our children.

I think we need to focus on two interrelated issues: enhancing retirement security and creating public policies that encourage greater efficiency in our economy and higher rates of economic growth. There is no issue more important than retirement security; there is no issue more important to the future of every American. The challenges we face in ensuring that future generations of Americans will be able to enjoy the same kind of retirement security that current retirees have is immense. Social Security, the cornerstone of retirement security in this country, is currently underfunded and needs substantial reform to fulfill its mission in a future where there will only be two working Americans for every retiree, instead of the three there are now, and the five there were not very many years ago. And, ensuring that Social Security will continue to serve the needs of Americans in the future becomes even more important as we consider the impact of the changeover in private pension plans from defined benefit plans to defined contribution plans -- a change that could add to the uncertainty facing future generations of retirees. And despite the good news on the deficit reduction front, private savings rates in the U.S. are still far too low. about half of all U.S. families have less than $1,000 in net financial assets.

As we attempt to come to grips with these issues, however, it is worth keeping in mind that the health care and retirement programs, which, together with the huge run-up in debt service costs, are driving the increases in federal spending, are amazing successes. Poverty among the elderly is currently at the lowest level since we have been keeping statistics, in no small part because of the retirement and health security provided by Social Security, Medicare and Medicaid. It is impossible to underestimate the difference these federal programs have made in the lives of literally tens of millions of Americans, and to our country generally. What makes the achievement even more remarkable is that we have accomplished this goal while holding Social Security administrative costs below 1 per cent of benefits paid, and Medicare administrative costs below 3 per cent of benefits paid -- levels far below anything the private sector has been able to achieve.

We in this Committee can make an important contribution in addressing all of these issues for at least two reasons: this Committee plays the key role in protecting the savings of the American people, and this Committee has jurisdiction over our financial system, which is critically important to both our future economic health and the retirement security of American families. I would hope that Chairman Greenspan, the President, and all of the members of this Committee will do three things:

1. focus on the long-term now, rather than wait until we face a crisis in little more than a decade from now;
   
   
2. begin bringing the American people into the dialogue now by ensuring the American people have all of the information they need to fully participate in the critically important decisions that must be made; and
   
   
3. approach the reforms that will need to be made in federal retirement security programs and other federal economic policies with a full appreciation of the enormous success we have already achieved, and with a determination to build on that success for the future.. If we do that, we will have met our responsibility to the public we serve.

I want to conclude by stating one final truth, which is that the demographic, budget, and fiscal challenges we face are not unique to the United States. The entire industrialized world has to address the same set of issues. Change is therefore imperative. We can no more ignore the need for change -- now -- than we can ignore the enormous changes now underway in the world economy. These momentous changes require real leadership, which is why it is particularly important that the Chairman of the Federal Reserve is with us this morning. The Federal Reserve has a vital role to play in this time of momentous change. Based on the skill and competence with which the Chairman has met his responsibilities so far, I am confident that the Federal Reserve will be a positive force in addressing the budgetary and economic challenges that we must all face.

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