Speech Project #2
Speaking persuasively
Introduction by Toastmaster:
Every six months, the Chairman of the Board of Governors of the Federal Reserve, who is presently Alan Greenspan, must testify before congressional committees to review the degree of achievement of the Fed’s dual objectives, the maintenance of price stability and full employment. Those committees can seek other testimony. During the next speech, please imagine that you are a member of a congressional committee that, after hearing from the Fed Chairman, has invited the next speaker to address it.
Speech #2:
Thank-you Mr. Chairman, esteemed representatives, and guests. I am grateful for the opportunity to speak to you today. I would like to lead off with a statement, and would be delighted to respond to your questions following the other scheduled speakers.
You have just heard Fed Chairman Greenspan’s remarks, citing the exemplary performance of the American economy, unemployment falling to a 28-year low while both consumer and wholesale price inflation remain at benign levels. Yet, he was obliged to mention that the Fed’s open market committee has shifted its stance to a bias favoring restraint, meaning that the next move in interest rates will probably be upwards. This represents an evolution in our central bank’s behavior, over which this committee may choose to exercise its oversight authority.
First, let me join the multitude of those who have expressed their admiration for the way monetary policy has been conducted under Chairman Greenspan. There are always critics. So called “doves” favor lower rates and easier money, ostensibly because that traditionally boosts job growth. Frequently the real reason for such views is either a short-term political objective, such as getting their candidate re-elected, or a hidden pro-inflation special-interest agenda, most commonly found among over-ambitious or over-extended real estate developers with unsold vacant properties. “Hawks”, on the other hand, see inflation as dire threat, and seek to eradicate its existence, no matter what the cost in economic growth. Some radical environmental groups with extreme anti-growth stances would probably choose to support a more restrictive policy as well. This balance of criticism itself is a favorable indicator that monetary policy is about right, and the Fed Chairman has been doing a good job.
By historical standards, the economy seems “to good to be true”. Unemployment is at levels low enough such that wage inflation would be expected; yet this hasn’t happened. Money supply, as measured by M2, has grown at over 10% per annum recently, yet price inflation remains low with no signs of rebounding. If a graph of inflation were switched with an electrocardiogram in ER, the actors would shout “Code Blue - Stat” and begin administering CPR. One group of pundits has labeled this the “New Economic Order” saying that things are now different. The fear of job losses through corporate downsizing has made employees more concerned about keeping a good job; thus less demanding of wage increases beyond growth in productivity. Freer world trade has brought increased international competition, which keeps a lid on prices. People with this viewpoint object to the decision to lean towards tightening, as they don’t feel it is necessary, believing the economy can sustain its healthy non-inflationary high growth rate indefinitely.
The other camp is now concerned about the prospect of an asset price bubble developing in the U.S. Examination of other such bubbles leads to the conclusion that asset price inflation will produce general wage and price inflation, and when the bubble bursts; there is always a sharp economic contraction. The British magazine, “The Economist” has been advocating a near term increase in U.S. interest rates to let some pressure out of the bubble, on the grounds that the longer the bubble lasts, the more severe the ensuing contraction. Chairman Greenspan’s comments last year about the need to avoid “irrational exuberance” in the stock market indicate his receptivity to such arguments.
My personal viewpoint is that while both the “New Economic Order” and asset bubble camps have a grain of logic in their arguments, they are for the most part incorrect. Certain changes, like welfare reform, have probably made the minimum non-inflationary unemployment rate lower than it was in the 70’s and 80’s, but most of the fortuitous news on inflation is due to events that can’t or won’t continue. The two most obvious are the decline in oil prices resulting from the return to production in Iraq, and the transition from traditional health insurance to HMO’s. That is not to say that genuine progress hasn’t been made in controlling inflation, and the resulting healthy economy has solidified the political will to back anti-inflation policies should they be required again. This is facilitated by a global consensus with similar anti-inflation progress in most countries.
Much of what the some claim to be an asset bubble is really a delayed by-product of the effort to root out past inflation. Economic memories are very persistent. My parents’ generation was deeply influenced by the memory of the great depression. Our experience with inflation of the 70’s and 80’s makes it difficult to act as if inflation were not about to return. This behavior can be observed in the acceptance of low returns from the new inflation-adjusted treasury notes. The increased value of shares and houses is partly due to the reduction in the implicit inflation-premium we require in the discount rate by which we evaluate the future income or utility of these assets.
I have no disagreement with the Fed’s decision to adopt a tightening bias, as I expect the impact of inflation-lessening special factors will diminish, so they will need to remain vigilant. However, I would be sorely vexed by a reaction motivated solely by increased asset prices, as I do not buy that argument at all. Furthermore, it would be in direct contradiction to the legislatively established objectives of the Federal Reserve System, and therefore should not be done without your explicit modification of thereof. No one individual or small group can determine what is the “right” level for the Dow Jones, not even one so wise as Alan Greenspan. The evolution of monetary policy or of economics in general has shown us, time and again, the necessity of relying on the market to determine such matters. I am sure your constituents agree with me. Please ask them!
Self-critism: This speech was more like an article than a speech, I was to used to writing memos, not speeches. That is the point of Toastmasters, to get evaluation and improve.