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Saxton-Greenspan Conversation

Federal Reserve Chairman Alan Greenspan Tells Rep. Jim Saxton U.S. Private Sector Continues To Reduce Costs, A Contingency Which “Increases Productivity And Moderates Price Increases”

“Monetary Policy Should Take The Lead” In The Economic Arsenal Because “Decisions Can Be Made In Twenty Minutes Or Ten Minutes, If Necessary”, Greenspan Says

Congressman Jim Saxton, who represents most of Ocean County, is a member of the Joint Economic Committee which monitors economic and fiscal policy for the U. S. Senate and the House Of Representatives.

OceanCountyPolitics’ recent HardCopy edition promised a report on the May Committee meeting at which Saxton led off with a series of questions for Federal Reserve Chairman Alan Greenspan, who testified on current economic policy.

A Burgeoning Deficit Situation

Saxton asked Greenspan to comment on how the federal government could deal with a burgeoning deficit situation.

Greenspan says productivity in the private sector continues to rise as business “continues to access new areas of cost reduction which has the effect of increasing productivity and moderating price increases”.

“Not so with productivity in government, which continues to suffer, translating into more deficits and cost increases”, the Fed Chairman noted.

“Productivity Increases Are Never Negative -
This Is Where Real Wealth Comes From”

“We should never look at productivity increases as negative because this is where a better standard of living comes from”, Greenspan said.

“This is where real wealth comes from”, he added.

Saxton asked Greenspan if fiscal policy would produce immediate benefits with respect to the recent tax reduction.

Monetary Policy Should Always Take The Lead

The Chairman replied that “monetary policy should always take the lead because decisions can be made in twenty minutes or ten minutes if necessary, whereas fiscal policy cannot be changed quickly. I have always perceived fiscal stimulus as a medium to longer term tool”.

Saxton asked Greenspan how the fed could contend with deflationary tendencies in the economy.

The Chairman told the committee if the fed funds rate gets “close to zero, the fed can move out on the yield curve” (adjust rates on six month, one year, two year paper).

“No Credible Possibility That We Will Run
Out Of Monetary Ammunition”

“There is no credible possibility we will run out of monetary ammunition”, Greenspan said.

The Federal Reserve is expected to ease on interest rates by reducing the federal funds rate, now 1.25%, by another 1/4 or 1/2 percent next week when the Fed meets to consider the level of interest rates. This would be the twelfth downward rate adjustment in three years since the stock market topped out in March of 2000.

Greenspan noted the emergence of “serious issues” with the elimination of the gold standard: “most economists believed the objective was to deal with chronic inflation."

The Chairman told Saxton and the committee he believes the chance of a destructive and chronic deflation is very small, although he acknowledged “a remote possibility that cannot be entirely discounted.”  6/20/03