S. HRO. 105-222

NOMINATION OF JANET LOUISE YELLEN

HEARINGBEFORE THE

COMMITTEE ONBANKING, HOUSING, AND URBAN AFFAIRS

UNITED STATES SENATEONE HUNDRED FIFTH CONGRESS

FIRST SESSION

ON

NOMINATION OF JANET LOUISE YELLEN, OF CALIFORNIA, TO BECHAIRMAN OF THE COUNCIL OF ECONOMIC ADVISERS

FEBRUARY 5, 1997

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

44-765 CC

U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 1997

For sale by the U.S. Government Printing Office

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ISBN 0-16-055778-X

'S' +I -1+

COMMITrEE ON BANKING, HOUSING, AND URBAN AFFAIRS

ALFONSE M. D'AMATO, New York, ChairmanPHIL GRAMM, TexasRICHARD C. SHELBY, AlabamaCONNIE MACK, FloridaLAUCH FAIRCLOTH, North CarolinaROBERT F. BENNETT, UtahROD GRAMS, MinnesotaWAYNE ALLARD, ColoradoMICHAEL B. ENZI, WyomingCHUCK HAGEL, Nebraska

PAUL S. SARBANES, MarylandCHRISTOPHER J. DODD, ConnecticutJOHN F. KERRY, MassachusettsRICHARD H. BRYAN, NevadaBARBARA BOXER, CaliforniaCAROL MOSELEY-BRAUN, IllinoisTIM JOHNSON, South DakotaJACK REED, Rhode Island

HOwARD A. MENELL, Staff DirectorSTEVEN B. HARMS, Democratic Staff Director and Chief Counsel

PHILIP E. BECHTEL, Chief CounselPEGGY KUHN, Financial Analyst

MARTIN J. GRUENBERO, Democratic Senior CounselGEORGE E. WHITTLE, Editor

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CONTENTS

WEDNESDAY, FEBRUARY 5, 1997

Page

Opening statem ent of Chairm an D'Am ato ............................................................ 1Prepared statement .......................................................................................... 24

Opening statements, comments, or prepared statements of:Senator Boxer ................................................................................................... 1Senator Sarbanes ............................................................................................. 2Senator M ack ................................................................................................... 4Senator Reed ..................................................................................................... 5Senator Faircloth .............................................................................................. 5Senator Enzi ..................................................................................................... 6Senator Hagel ................................................................................................... 8Senator Ddd .................................................. 8

Prepared statem ent ................................................................................... 24Senator Moseley-Braun .......................................... 16

Prepared statem ent .................................................................................. 24Senator Allard ................................................................................................... 19

Prepared statem ent .................................................................................. 25

NOMINEE

Janet Louise Yellen, of California, to be Chairman of the Council of EconomicAdvisers ....................................................... 9

Biographical sketch of nom inee ....................................................................... 26Response to written questions of:

Senator D'Am ato ....................................................................................... 38Senator Allard ........................................................................................... 38Senator Enzi .............................................................................................. 40

ADDITIONAL MATERIAL SUPPLIED FOR TIlE RECORD

Senator Sarbanes' Chart- Real Growth ................................................................ 45

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NOMINATION OF JANET LOUISE YELLENTO BE CHAIRMAN OF THE

COUNCIL OF ECONOMIC ADVISERS

WEDNESDAY, FEBRUARY 5, 1997

U.S. SENATE,COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS,

Washington, DC.The Committee met at 10:43 a.m., in room SD-538 of the Dirk-

sen Senate Office Building, Senator Alfonse M. D'Amato (Chairmanof the Committee) presiding.

OPENING COMMENTS OF CHAIRMAN ALFONSE M. D'AMATOThe CHAIRMAN. The Committee will come to order.This morning, the Committee is going to consider the nomination

of Dr. Janet Yellen, the distinguished nominee for the position ofChairman of the Council of Economic Advisers.

I just indicated to the nominee, Janet, that she must have greataffection and devotion for the President, as well as this Nation, togive up this magnificent, incredible position she already has-a 14-year term on the Federal Reserve Board-to take this position.

I believe the Doctor's distinguished academic background, record,and her tenure at the Federal Reserve speak for themselves interms of her ability to provide independent economic views. I trustthat this nomination will be handled speedily and anticipate expe-ditious action with respect to the nomination.

I know that Dr. Yellen's friend the U.S. Senator from California,and a Member of this Committee, Senator Barbara Boxer, is herewith a statement.

Senator Boxer.

OPENING STATEMENT OF SENATOR BARBARA BOXER

Senator BOXER. Thank you so much, Mr. Chairman. I will gothrough this very quickly.

My colleagues and friends on the Committee, who I enjoy work-ing with so much, I am very honored to introduce you to Dr. JanetYellen, although I think most of you know her by now, the Presi-dent's nominee to serve as Chairman of the Council of EconomicAdvisers.

Dr. Yellen appeared before this Committee less than 3 years agoand I had the privilege of introducing her then. So we thought wewould kind of keep up this tradition because it worked out verywell the last time. She's been a highly-valued and dedicated mem-ber of the Federal Reserve since her confirmation to that position.

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Dr. Yellen's professional experience and academic background, incombination with her impressive list of publications and honors,make her the perfect candidate for Chairman of the Council of Eco-nomic Advicers. And I will quickly go through her qualifications,which I 'hink are impeccable.

Dr. Yellen graduated from Brown University in 1967, with abachelor of arts in economics, summa cum laude. In 1971, sheearned her PhD in economics from Yale, and then she served as aResearch Fellow at MIT, as an Assistant Professor of Economics atHarvard, and as a Lecturer at the London School of Economics. In1980, she joined the faculty of the University of California atBerkeley, one of the Nation's foremost universities; and in 1992, be-came the Bernard T. Rocca, Jr., Professor of International Businessand Trade at the Haas School of Business at the University of Cali-fornia. In 1994, Dr. Yellen was confirmed as a member of theBoard of Governors of the Federal Reserve with the help of manyof you. She is the wife of George Akerlof, who is here with hertoday, and she is a mom of a teenage son.

As Chairman of the Council of Economic Advisers, Dr. Yellen willbe charged with helping the President formulate economic policy.Dr. Yellen has previously stated that she's interested in pursuingpolicies which, among other things, raise the standard of living foreveryone and encourage higher sustainable, long-range economicgrowth. Those are policies which I believe both Democrats and Re-publicans agree with and are worth pursuing.

Dr. Yellen's wealth of academic and professional experiences willbe an invaluable asset to our country. She will help formulate,guide, and shape economic policy at a critical time in our Nation'shistory when we are moving from an industrial base to a 21st cen-tury global technological base.

It is important that the Chairman of the Council of Economic Ad-visers have an intimate knowledge of international economics andinternational trade. As a scholar, a nationally-recognized inter-national economist, and a distinguished professor of internationaltrade, Dr. Yellen has all of those qualifications.

For those reasons, I hope you will agree that Dr. Yellen will bea credible and valuable addition to the President's economic team,and I congratulate her on her nomination.

I thank the Chairman for his graciousness in giving me the op-portunity to introduce to you once again this outstanding woman.

Thank you very much.The CHAIRMAN. Thank you, Senator.Senator Sarbanes.

OPENING STATEMENT OF SENATOR PAUL S. SARBANESSenator SARBANES. Well, thank you very much, Mr. Chairman.I'm very pleased to join with you in welcoming Janet Yellen back

before the Banking Committee, as we review her nomination to beChairman of the President's Council of Economic Advisers.

She, of course, is already well known to this Committee since wereviewed and overwhelmingly supported her nomination for hercurrent position as a member of the Federal Reserve Board.

The President has now asked Ms. Yellen to leave the Federal Re-serve in order to serve as the Chairman of the Council of Economic

Advisers. I would note that this means giving up a full 14-yearterm on the Fed, for which she has been confirmed-it would notexpire until the year 2008-to serve without any fixed tenure, asI understand it.

The Council of Economic Advisers was established by the Em-ployment Act of 1946 to provide professional economic analysis andadvice to the President. There have been 16 Chairs since the Coun-cil was established.

I was fortunate to work as Administrative Assistant to one ofthem, Walter Heller, who headed the Council under President Ken-nedy, and I have always had a particular appreciation and regardfor the role of the Council, assisting Presidents in the formulationof economic policy. The Council was created out of a concern thatthe Executive Branch should have the capacity for professional eco-nomic analysis of public policy.

In an article in The New York Times, Nobel laureates Jim Tobinand Bob Solow described the role of the Council in the followingterms, and I quote:

Every President must establish his Administration's themes and goals. But trans-lating that vision into legislation requires careful, professional economics committedto his goals by calling the analytical shots as objectively as trained people possiblycan. The character of that advice can significantly affect the substance and qualityof decisions.

Now, Janet Yellen is an economist of the highest professionalstanding who, in my view, would more than meet the standards setby Professors Tobin and Solow.

Ms. Yellen is a summa cum laude graduate of Brown University.She holds a PhD in economics from Yale. She served as an Assist-ant Professor of Economics at Harvard. She was a Lecturer at LSE.And prior to her service on the Federal Reserve Board, she was theBernard T. Rocca, Jr., Professor of International Business andTrade at the Haas School of Business at the University of Califor-nia at Berkeley.

She has published widely in the fields of macroeconomics ancdinternational economics. And much of her work as an economist isfocused on understanding the causes of unemployment and howthey might be alleviated, as well as the causes of price and wagestability.

By all accounts, Ms. Yellen was a respected member of the Fed-eral Reserve Board who carried out her responsibilities with hertypical high professional standard.

On occasion, I've been critical of the Fed for being too insular aninstitution. But I think it's fair to say that Ms. Yellen's service inWashington as a member of the Board has broadened her experi-ence and enhanced her qualifications to serve as Chairman of theCouncil of Economic Advisers.

Mr. Chairman, I am confident that Ms. Yellen will provide thePresident professional economic advice of the highest order and I,therefore, strongly support her nomination to be Chairman of theCouncil of Economic Advisers.

The CHAIRMAN. Thank you, Senator Sarbanes.Do any other Senators want to be heard from before we hear

from Ms. Yellen?Senator Mack.

OPENING STATEMENT OF SENATOR CONNIE MACKSenator MACK. Thank you, Mr. Chairman.Dr. Yellen, welcome. We had the opportunity to meet in my office

a few days ago and I thought our discussion was very valuable.You certainly have a wealth of knowledge and experience in the

field of economics, and I trust your tenure on the Federal ReserveBoard has increased your sensitivity to the Fed that is independentof political pressures and focused on price stability.

Dr. Yellen has been nominated for a very influential position.Last year, the Council of Economic Advisers celebrated its 50th an-niversary. The Council has had the responsibility of advising everyPresident since Harry Truman on our Nation's economic policies. Itis not a position to be taken lightly, since our economic policy deci-sions impact the lives, incomes, and living standards of everyAmerican family.

I am sure that Dr. Yellen would agree that it is critical for oureconomic analysis and statistics to be of the highest quality. It isessential that the President and Congress are provided with rigor-ous and independent economic analysis and advice. Too often, eco-nomic facts are distorted or ignored for political purposes. We mustconstantly strive to improve our existing economic data to keep upwith our rapidly changing economy.

Dr. Yellen, you may be taking over the helm at the CEA at atime when we face many long-term economic challenges. Taxes asa percentage of our economic output is at a record high. Thegrowth of median family income has been anemic in recent years.Many large Federal programs face insolvency and our Federal debtcontinues to mushroom.

The American people have spoken and demanded that we bal-ance the Federal budget. And I am sure you would agree that thelong-term imbalance in our budget only reduces our economicgrowth potential. Simply stated, we must balance the budget sothat all Americans have the opportunity to share in the benefits ofstrong growth.

While the economy has shown slow and steady growth over re-cent years, one of my main concerns is the complacency that seemsto exist over current growth rates. I believe our economy can andshould grow faster. Stronger economic growth would mean morejobs, better paychecks, and a higher standard of living. Fastergrowth would help us in our efforts to balance the budget by boost-ing revenues. Stronger economic growth would bring new opportu-nities to all Americans and a brighter future for our children andour grandchildren.

As you have probably witnessed all too often, Dr. Yellen, the Fed-eral Reserve is often blamed for sluggish economic growth. Yet,simply printing more money or artificially holding down interestrates cannot boost long-term economic growth. Genuine growthcomes from hard work, creativity, and improved productivity andentrepreneurial activity.

Therefore, the President and the Congress have a tremendousresponsibility to make sure that fiscal policies foster and rewardsavings, investing, and risk-taking.

The Federal Reserve is best focused on reducing inflation. Stableprices enhance economic growth by reducing the risk of fluctua-tions in interest rates, currency values, and the cost of inputs.

For most of this century, American families have enjoyed thebenefits of stronger economic growth, with each generation leavingthe next better off. But recently, we have seen our economic growthrate fall from a robust 4.4 percent annual average during the lastfive expansions to about 2.5 percent since 1992. Still many people,including President Clinton, now consider a growth rate of 2.5 per-cent to be acceptable, even laudable. We should not accept suchmediocrity, and I'm sure that with the right policy changes, we cando much better.

In recent years, major tax hikes, increased Government spend-ing, and growing regulation have taken their toll on the economyand the American family. Conversely, the periods of our Nation'sstrongest economic growth were marked by lower taxes, less spend-ing, and fewer Federal regulations. However, I'm optimistic to 'seeour current budget debate focused on bipartisan support for bal-ancing the budget through less spending and lower taxes.

I'm anxious to hear your views on just how fast our economy cangrow. Maybe 2.5 percent growth is all we can expect under today'shigh Federal tax and deficit spending structure. I'm also interestedto hear what pro-growth policy changes that you would suggest tothe President that would raise the bar for our potential economicgrowth level.

And with Dr. Yellen's strong economic skills and experience, Ibelieve she would Chair the Council of Economic Advisers with dis-tinction and I congratulate you on the nomination.

The CHAIRMAN. Senator Reed.

OPENING COMMENTS OF SENATOR JACK REED

Senator REED. Thank you, Mr. Chairman, I'll be very brief.Where I come from, anyone who graduates from Brown Univer-

sity summa cum laude is presumptively confirmable.Dr. YELLEN. Thank you.[Laughter.]Senator REED. Having met with Dr. Yellen, I have been con-

vinced beyond a presumption that that's the case. She is extraor-dinarily well qualified. The breadth of her intellectual interests arestaggering-macroeconomic theory, international economics, andrecently discussions of teen pregnancy rates and the economic con-sequences and causes.

So I believe she brings to this job rare talents and a tremendouscommitment to use her position to influence policy so that we can,as Senator Mack said, quicken the growth of the economy and en-sure that those results are shared fairly throughout our society.

I am pleased that she's here today and that we are moving onher confirmation.

Thank you, Mr. Chairman.The CHAIRMAN. Senator Faircloth.

OPENING COMMENTS OF SENATOR LAUCH FAIRCLOTH

Senator FAIRCLOTH. Thank you, Mr. Chairman.Good morning. It's nice to see you here.

Last week, when you came to my office, as always, I was con-cerned about spending money, and I asked you about the fact thatthree economists in the White House were budgeted for $3.4 mil-lion a year. I thought that that sounded a little expensive. But youimmediately assuaged my doubts by saying that the role of theCouncil of Economic Advisers was to review Government regula-tions and policies, and their impact upon the private sector andpossible adverse effect upon business. Is that correct?

Dr. YELLEN. That's one of the roles of the Council.Senator FAIRCLOTH. Well, in the last 4 years, I can't find a single

rule or regulation the Council objected to, blocked, or stopped. Idon't know how that works out in money per year, but it appearsthat not one rule or regulation was stopped in exchange for that$3.4 million annual budget.

If the Council of Economic Advisers were to perform the role yousaid, it could be worth a lot of money, much more than the $3.4million. But if in 4 years the Council couldn't find one, that raisesa few questions.

There are few people in Government today that are assessing theimpact of the enormous quantity of rules and regulations that arecoming from the Executive Branch and what they are costing U.S.business. Now if the Council of Economic Advisers really can servethat role, then it's a wonderful, wonderful service.

If the Council does its job, then I would think you and the otheradvisers could save millions of dollars in questionable rules andregulations. I hope you will take that part of the job seriously andin so doing you will certainly justify your cost to the overall budget.

If I may ask one personal thing. The first rule that you stop,would you send me a copy of it? I would just like to know one ruleor regulation that came out of the White House that was stopped.

I thank you.Thank you, Mr. Chairman.The CHAIRMAN. Thank you, Senator.Senator Enzi.

OPENING STATEMENT OF SENATOR MICHAEL B. ENZISenator ENZI. Thank you, Mr. Chairman. Good morning, Mem-

bers of the Committee.I want to welcome Dr. Yellen and I appreciated the opportunity

also to get to meet with you last month to talk about the economicstatus and challenges that the country will face.

I enjoyed learning about your collaboration with your husband onthe economic studies. Not every married couple has the opportunityto work together closely like that. My wife and I had the privilegeof working together in our shoe store in Gillette and I shared someof that with you.

Most couples, though, go their separate ways at 8:00 in themorning and don't see each other until very late that evening be-cause both are working usually for the sole purpose of providing in-come for their family. They're working full time because they haveto pay their bills and their taxes, not because they're trying to payfor a second home or luxuries.

Without an income from both people, the family would suffer. Ibelieve we need a sound family Federal economic policy, a policy

that encourages natural wage growth, but provides incentives forsmall businesses and families and promotes long-term economicgrowth, a policy that gives employees individual power over the de-sign of their work week.

We are in an unprecedented era of economic activity and expan-sion. In today's international marketplace, the responsibility ofthose analyzing the macroeconomic conditions of our country andthe world is very great. There are many more factors that influencethe economy today than there were 10 years ago. Factors that haveadded a new dynamic to the economy include the expansion of mar-kets in Asia and the former,Soviet Republics, the increased usageand dependence on technology, and the development of free tradeagreements.

Now even more important than recognizing the expanding inter-national marketplace, in my opinion, is the growing national debt,which is about $5Y4o trillion. That's $20,000 for every man, woman,and child in this country. The only way that we can reduce thatdebt is to begin by balancing the budget.

It's been proven too many times that the intention of balancingthe budget isn't quite good ,'mough. It's not sufficient. We keep add-ing programs and that's going to bankrupt the next generation. Ipersonally believe we need to pass the balanced budget Constitu-tional amendment. It's not easy to balance the budget, but we doneed to learn how to say no to more Government. I am hoping youwill be a part of that.

The economic impacts of a balanced budget will be significant.We talked about how it would lower interest rates, spur economicgrowth, and increase investment.

The financial markets have reacted favorably to suggestions of abalanced budget. The Consumer Price Index also affects the budgetand the economy. The CBO estimates that a lVio percentage pointchange in the CPI will reduce the deficit by $148 billion and thenational debt by $691 billion by 2006. If it's not corrected, entitle-ments will spiral out of control eating up the limited remains ofwhat's called discretionary spending. We talked about that.

Whether we like it or not, the economic policies that we set nowwill have an effect on the economy now and into the future.

If confirmed as Chairman of the Council of Economic Advisers,you will be in the unique position of giving advice to the Presidentand the National Security Council. I am sure you are not takingthis responsibility lightly and I realize the impact of your actionsas Chairman will affect the performance of America's economy forthe long term, the next 50 years that the President talked aboutlast night.

I am looking forward to hearing your viewpoints regarding thelong-term economic stability of the country, as well as how you be-lieve that we can reduce the financial stress on America's workingfamilies, assist educational opportunities, provide tax relief, and doit all under a balanced budget.

Thank you, Mr. Chairman. I yield the remainder of my time.The CHAIRMAN. Senator, thanks very much.Senator Hagel.

OPENING COMMENTS OF SENATOR CHUCK HAGELSenator HAGEL. Mr. Chairman, thank you.Good morning, Dr. Yellen. Nice to have you with us. I appre-

ciated very much the opportunity we had to visit a little bit aboutyour role and background and philosophy as you take on a very im-portant job for the future of our economy. I would just echo whatmy colleagues have presented here this morning on their concerns,my concerns, your concerns, the future economic growth of thiscountry.

We are saddled with burdensome taxes, strangling regulation.The real responsibility we all have in this business is to ensure afuture for our next generation and the generation after that, andyou know that. I will be particularly interested in hearing yourcomments this morning about some of these very specific issues. Iwas rather disappointed in the President's comments last night. Ithought he missed a great opportunity to show some leadership onthe tough issues. What are you going to advise the President to doabout the Consumer Price Index, COLA's, Entitlements? And wehave a Medicare crisis at our doorstep.

Those are tough issues, but that's what leadership is about. Youwill play a pivotal role in that and I look forward to working withyou andI think you'll be an excellent choice for this job.

With that, Mr. Chairman, I would yield back my time.Thank you.The CHAIRMAN. Thank you, Senator.Senator Dodd.

OPENING STATEMENT OF SENATOR CHRISTOPHER J. DODDSenator DODD. Thank you, Mr. Chairman.I ask unanimous consent that my prepared remarks be included

in the record. And let me just congratulate you, Doctor.I presume this has been raised by others already. If it has, then

I don't mind repeating it. If it hasn't, I'll state it.I believe it's remarkable that at a time of public service, the pro-

tection of the Federal Reserve Board is a place where you couldhave stayed and not stepped back into this fray, never have tocome before committees here and engage in the day-to-day battlesand fights that go on and how we try to make the economy movebetter. I think it deserves special recognition. I admire you im-mensely for doing this.

Dr. YELLEN. Thank you.Senator DODD. You are talented, and the fact that you are will-

ing to try and make a difference I think ought to be a model forothers who want to make a difference and not to give up. I reallycommend you and thank you for being that way. I'll submit mysuggestions and you are welcome to comment on them.

Obviously, one can make a case on all different aspects of oureconomy to try and achieve growth and spur job creation in thecountry. My view is that balancing the budget is a very importantissue. I was at a high school in Connecticut the other day and wasasked, why is this important, to hear everyone talking about it,Constitutional amendments, various ideas?

It is important because of what it does for economic growth. Thatis the issue. The issue is economic growth and what are the tools

that we need to have in place in order to achieve that. Balancingthe budget is a critical element, obviously. We have seen the bene-fits of that over the last few years with the Federal Reserve Boardand its reaction to interest rates and so forth that has allowedmoney to be borrowed at lower cost. Businesses have expanded,they hire more people.

Balancing the budget is important, but it is important in the con-text of economic growth and job creation. A-i issue that I think iscritically important in the long term in terms of economic growth,and it doesn't seem to enjoy much political cache or popularity, isurban revitalization. Many of our economic and social problems inthis country reside in our urban areas. And certainly, the Chair-man of the Committee here doesn't need to be lectured about that,representing the State of New York with its many cities. I see itin my State.

The most urbanized States in America are Nevada and Utah. Wethink of the East Coast, New York, and California, but the prob-lems are now affecting cities such as Reno, Las Vegas, and SaltLake City. They are beginning to see these problems. It isn't justthe East Coast or Miami or, as I look around the room here, Provi-dence or Hartford. We need some creative ideas.

I was intrigued by the idea last year of using Washington, DC,as a model for some tax proposals that I might be reluctant to em-brace nationally because I am not sure what the implications are.But given the problems of this city, I think being a bit radical insome of our ideas to try and spur economic growth, job creation,and encouraging people to move back into these areas deservessome consideration.

I don't know if you want to comment specifically on some of theseideas. But I would hope that we would see more of an effort. Ithink people are reluctant to talk about urban politics and urbanrevitalization. I think it's an absolutely essential ingredient if we'regoing to have the kind of long-term stability in this country anddeal with a lot of the underlying social problems that people talkabout with some frequency.

Again, congratulations and thank you immensely for doing it.Dr. YELLEN. Thank you.The CHAIRMAN. Would you stand for the oath, Ms. Yellen?Do you swear or affirm that the testimony you are about to give

is the truth, the whole truth, and nothing but the truth, so helpyou God?

Dr. YELLEN. I do.The CHAIRMAN. Do you agree to appear and testify before any

duly constituted committee of the Senate?Dr. YELLEN. I do.The CHAIRMAN. Thank you very much. We are now pleased and

delighted to hear your testimony.

OPENING STATEMENT OF JANET LOUISE YELLEN, PhDCHAIRMAN-DESIGNATE, COUNCIL OF ECONOMIC ADVISERS

Dr. YELLEN. Thank you very much.Chainan D'Amato, Members of the Committee, I am pleased to

appear before you today as President Clinton's nominee to serve asChairman of the Council of Economic Advisers. I am deeply hon-

ored that the President has nominated me to serve in this position.I would like to thank Senator Boxer for her gracious introductionand all of you for your very supportive comments. I would like tosay how much I have appreciated having the opportunit to meetwith so many Members of this Committee over the last ew weeksto discuss the challenges facing the American economy.

Mr. Chairman, I am grateful to you and to Senator Sarbanes foryour support and for your help in moving my nomination forward.

I would like to introduce my husband, George Akerlof, a Profes-sor of Economics at Berkeley and Senior Fellow at the BrookingsInstitution, who is my partner not only in marriage but also in eco-nomic research. My brother, John Yellen, and my sister-in-law, Al-lison Brooks, who are here today as well.

The Council of Economic Advisers, established by the Employ-ment Act of 1946, has served for 50 years as a trustworthy andpersistent advocate of policies that promote the broad public inter-est. Presidents, since Harry Truman, have turned to the Councilfor economic advice, analysis, and insights to inform the policy-making process. In Republican and Democratic Administrationsalike, the Council has urged policies that facilitate the workings ofthe market, that emphasize the importance of incentives and effi-ciency, and that promote long-term growth. If confirmed, I pledgeto continue this proud tradition.

By many measures, the economy is in very good health. A simpleindex of economic performance that reveals how well the economyis functioning is the "misery index"--defined as the sum of the in-flation and unemployment rates. This index stood at 8.3 percent in1996, with the unemployment rate averaging 5.4 percent and theCPI rising year over year at 2.9 percent. In historical terms, thisrepresents outstanding performance-the best since 1968.

Over 11 million new jobs have been created since 1992 and thejobs have been disproportionately "good" jobs-in industry occupa-tions paying above median wages. The rewards from growth havebeen widely shared, with the poverty rate falling more in 1995than at any time during the last decade. Throughout our long ex-pansion, inflation has remained low and fallen by most broadmeasures; and investment in plant and equipment-the drivingforce of this expansion-has grown at a phenomenal pace. Andconsumer confidence now stands near the highs of recent decades.The Administration's economic policies have contributed to thesesuccesses, in part, by bringing down the Federal budget deficit,thus permitting a larger share of private-sector savings to financethe investments in plant and equipment that equip Americanworkers with the tools they need to be productive on the job.

I believe that the Federal Reserve has also played a positive, andcomplementary role by pursuing monetary policies that have facili-tated this favorable mix shift, while keeping the economy operatingat its potential.

In spite of the favorable combination of low unemployment andlow inflation that we now enjoy, numerous economic challenges re-main. A major task is to raise the rate of productivity growth abovethe pace that we have experienced since the mid-1970's. To accom-plish this, our country needs to invest more-in capital, in people,and in technology. And we need competitive and open markets so

that America's scarce resources flow into their most productiveuses. These are the four major ways of promoting more rapid pro-ductivity growth. The attainment of a balanced budget agree-ment-a shared, top priority of the Administration and Congress-will facilitate faster investment in capital and the payoff from thisinvestment will accrue for many decades to come.

Investing in people through education and training will also helpthe economy grow by ensuring that American workers have theskills they need to be effective in the workplace and to adapt to theshifting demands of the labor market. Education is the key to guar-anteeing all Americans the opportunity to realize their personalpotential and ensuring that the benefits of more rapid growth aredistributed widely among American households.

We need to reverse the disturbing trend that emerged in the1970's toward widening of the gap in earnings between those at theupper end of the wage distribution and those at the bottom. Anda particular challenge will be to alleviate poverty and to ensurethat the transition of low-skilled individuals from welfare to workis successful. We must also anticipate the economic demands thatan aging population will place on the American economy.

Mr. Chairman, less than 3 years ago, President Clinton nomi-nated me to serve as a member of the Board of Governors of theFederal Reserve System and this Committee voted to recommendmy confirmation. I greatly appreciate the confidence that youthereby expressed in my ability to help craft a monetary policygeared to achieve sustainable, non-inflationary growth, and super-visory and regulatory policies oriented toward the safe and soundoperation of our financial system.

It has been a privilege, an honor, and an education to work withChairman Greenspan, Vice Chairmen Rivlin and Blinder, a dedi-cated, knowledgeable, and collegial group of Governors, and theFed's highly able and professional staff in the pursuit of thesegoals. I do greatly regret leaving the Federal Reserve. But I feelfar better prepared to contribute to the work of the Council of Eco-nomic Advisers as a consequence of this prior experience.

Thank you.The CHAIRMAN. I want to thank you for your presentation and

I just want to make one observation.I think it's important-Senator Faircloth has touched on it-that

we look at what the Council has done previously as it relates tolooking at some of the rules and regulations. And I think that'svery important.

More importantly, probably one of the things that we have notdone because of the press of business and oversight is had the in-volvement of the Council, both formally and informally, to get asharing with you of those ideas and those things that you areworking with, at least on a day-to-day basis.

I would hope that we would have that opportunity. You have anextraordinary opportunity to do more than just, let's say, be thespokesperson for the Administration, per se. We expect you to workand undertake and put forth the Administration's view, but toshare with us the kinds of things that we are looking at and why.

I would hope that in our oversight, we would have that oppor-tunity to invite you back for more than just the customary annualreview.

Dr. YELLEN. Right.The CHAIRMAN. I would look forward to it. I think it could be pro-

ductive for all of us.Dr. YELLEN. I would be happy to have a chance to participate in

any way.The CHAIRMAN. Thank you very much.Senator Sarbanes.Senator SARBANES. Mr. Chairman, I want to thank Dr. Yellen for

a very fine statement. I'm anxious to get her on the job, so I reallydon't have any questions. I would just pass.

The CHAIRMAN. OK. Senator Mack.Senator MACK. Well, I am anxious to get her on the job as well,

but I can't pass up the opportunit to ask a couple of questionsthat I believe are not anything other than really the pursuit ofknowledge with respect to economics.

As I listen to you talk about leaving the Fed and the experiencethat you've had there, and Senator Dodd's comments with i espectto your background, in many ways I'm envious of the opportunitythat you have had. Economics has always been a very interestingsubject for me, and so I appreciate the opportunity to have somediscussion with you. I think the place I would start is just to askyou, from your perspective, should we be satisfied with 2V2 percentgrowth?

Dr. YELLEN. Senator, I am not satisfied with 2Y2 percent growthand I don't think any of us should be satisfied with 2V2 percentgrowth. I agree with many of the things that you said in your open-ing statement on this subject.

I think we ought to be focusing on and trying to pursue policiesthat raise that growth rate and for exactly the reasons that youmentioned. Nothing is more important than rapid productivitygrowth to the standard of living of Americans now and in the fu-ture. So I consider it a very important priority.

As you mentioned, the Federal Reserve, does what it can-andI have tried to work with the Federal Reserve to achieve this-byfocusing on attaining price stability and keeping the economy oper-ating near its potential so that the scarce resources we have arefully utilized. And beyond that, there are lots of things that can bedone, I think, to spur growth. As I mentioned in my opening state-ment, the policies fall into four categories.

Right now, balancing the budget is the President's top priority,and I know it's also the top priority of Congress. That is certainlysomething we can do, should do, and need to do to spur productiv-ity growth, and it will result in more of our economy's private sav-ings going into investment.

We have made an awful lot of progress. The Federal deficit hascome way down. We are now at a point where we have a lowerbudget deficit relative to our GDP than any major industrializedcountry in the world. We have further to go, and I hope that wecan complete the job.

And of course, last night, the President emphasized education,which is also very important. I would add to the list policies that

create a favorable environment for research and development andtechnological change.

To promote growth we also need to make sure we have competi-tive markets, to keep firms on their toes trying to compete, to inno-vate, to win markets, and customers. We should also make surethat we keep our own markets open and try to open markets forour firms in the rest of the world.

Senator MACK. Again, I agree with much, if not all, of what youhave said. But there's one area that you did not mention and thatis-and let me ask it in a very broad way. You didn't mention taxpolicy. Do you believe tax policy affects growth rates?

Dr. YELLEN. Senator, I believe that taxes do have impacts. Butthe question is how large those impacts are. Certainly, the taxstructure to, at least, some extent impacts decisions about workand investment. Other things equal, lower taxes are better thanhigher taxes. And the President has emphasized the importance oftrying to achieve some cuts in taxes.

I don't think we are at a point where there is any need to con-template raising taxes to balance the budget. Different kinds oftaxes have different impacts on savings, investment, and work inthe economy and there are important quantitative questions thereabout the impact of different forms of taxes.

Senator MACK. As you know, there's been quite a debate aroundthe Congress for a number of years with respect to tax policy, mar-ginal tax rates, capital gains tax rates. I guess maybe I'm a littledisappointed that there's not more of an emphasis in what you hadto say about tax policy.

Maybe I have a different perspective than you do and feel thattax policy does have a great impact on economic growth. Andmaybe we'll have an opportunity over these next several years totalk more about that.

Dr. YELLEN. I hope we will. I'm sure we will.The CHAIRMAN. Senator Dodd.Senator DODD. Thank you, Mr. Chairman.I raise just the matter of the urban revitalization issue. If you

have a comment you would like to make on it, I would be inter--ested in hearing it.

But, again, I congratulate you on this nomination and look for-ward to working with you.

Dr. YELLEN. Thank you, Senator.I share your view that urban revitalization is important. I think

many of our children are growing up in environments that are notsafe and not conducive to their long-run best development. Theseare complicated problems. I don't know that there is any magic bul-let to solve them, but I certainly agree that urban revitalizationshould be a priority.

I understand that the President may address this in his budget.I've not participated in that, but he may propose some policies thatwould be helpful.

Certainly, during my time at the Federal Reserve, I have had achance to see some of the exciting things that are going on in termsof redevelopment of urban neighborhoods with serious blight, andI have the impression that empowerment zones are having a favor-

44-765 - 97 - 2

able effect in stimulating development in some extremely depressedareas of our country.

Senator DODD. Let me just mention quickly one idea to you, andI won't ask you to comment favorably or unfavorably on it, but tomaybe bring it back to the Council.

There are several of us here who are looking at ways in whichwe might get some more resources into the infrastructure needs ofour States and cities. Obviously, we have budget constraints. We'retrying to balance the budget

The dollars available for the appropriations process are very lim-ited. Given the need that exists I think in the City of New Yorkalone, you could swallow up the entire Federal budget when itcomes to infrastructure and still have a need to be met.

One idea that's being floated around, and it's really an idea atthis point, 3 or 4 years ago we had that 4-cent gasoline tax thatwent on and obviously, a source of some contention. None of thefunds go into the transportation accounts. It went to deficit reduc-tion, that 4 cents. That 4 cents, a little more than 4 cents, as youknow, amounts to about somewhere between $4 and $5 billion ayear that comes into the Treasury. And over years or so, obviously$20 to $25 billion.

There's been some talk of establishing a trust where you wouldleverage that $25 billion to around $100 to $150 billion for infra-structure needs and define infrastructure in broad enough terms soit's not limited to transportation.

States may find that they have other needs other than transpor-tation needs, and allow them to determine what those needs arewithin a definable area of infrastructure, because I, like tax policy,other things, I don't believe you can have economic growth unlessyou have a sound, strong infrastructure At least we've never hadit in our country. And if you don't make those intelligent invest-ments, it's not going to happen.

We don't have the resources in our budget to do it, so we haveto be creative and look for ways in which we might bring some ofthese resources to bear. And as I say, there are a number of usaround here who have been talking about this. We're going to havea discussion next week with some people who have thought aboutthis in a bit more detail.

I wonder if you might just be willing to carry that back and ex-amine that as an idea that we might find some strong bipartisansupport up here for something like that. I would urge you to takea look at it.

Dr. YELLEN. Good. I appreciate that. I will make sure that wedo. It's an interesting suggestion.

The CHAIRMAN. Thank you, Senator.By the way, if I might, we've never really gotten even for mass

transit the full penny that was supposed to be allotted to it out ofthe 5 cents. It just seems to me, and I share with some of my col-leagues who might not quite have in their States the magnitudethat some States have, that some of the Senators here have, thecountry has a significant infrastructure problem.

We are talking about infrastructure. We are talking about sew-age treatment plants. The Federal Government does not providethe kind of 80/20 or 90/10 match that they did some years ago.

We talk about the environment and about wanting a better,cleaner environment. Well, your harbors and your rivers are beingpolluted and the cities do not have the financial wherewithal to un-dertake these clean-up projects. It's important.

And so, we can and should look at the possibilities of having andsharing part of that revenue over a period of time and giving to theStates and local communities the opportunity broadly to utilizethese Federal funds within those infrastructure functions. Perhapsit might be more than simply roads and highways, I think is some-thing that we should examine.

I want to join with the Senator in pointing that out.Senator Faircloth.Senator FAIRCLOTH. Thank you, Mr. Chairman. And I agree with

the direction you're talking about.Ms. Yellen, I notice you said that a balanced budget would spur

the economy, protect the future of the country. And that seems tobe pretty much a universal opinion that we have arrived at as aNation. Would you believe in a Constitutional amendment to as-sure that that happens every year?

Dr. YELLEN. Senator, I am strongly opposed to a Constitutionalamendment to balance the budget. I think it is, as I emphasized,very important to balance the budget and I believe we're makingprogress. I believe the Administration and Congress are both com-mitted to making this happen.

I simply do not think that it is necessary to have a Constitu-tional amendment to balance the budget. It will not help at all inmaking the hard decisions that are necessary to actually achievethe savings to make the books balance. And I'm very concernedthat a balanced budget amendment will have a number of adverseeffects that I'm greatly concerned about.

As you undoubtedly know, over a thousand economists, including11 Nobel Prize winners, have emphasized that they think this isa bad idea. And Chairman Greenspan has also emphasized that hethinks a balanced budget amendment is not the way to proceed.Those are sentiments I certainly share.

Senator FAIRCLOTH. Let me ask you a question. We all agree thata balanced budget is a good idea. But we feel it ought to be leftup to Congress each year to decide whether we do it or not. Wedon't want to enact it into law.

It might not be the world's best analogy, but it might not be theworst one. The First Amendment is a wonderful idea, isn't it?

Dr. YELLEN. Yes.Senator FAIRCLOTH. All right.[Laughter.]I'm glad you agree.[Laughter.]The Congress every year could pass a First Amendment bill

without having it as a Constitutional amendment, couldn't it?Dr. YELLEN. I suppose that's possible.Senator FAIRCLOTH. Possible. It could, couldn't it? Every year,

the Congress, the President could come up with a law, we're goingto have freedom of speech in this country and we're going to passa law this year saying we can.

The balanced budget assures the fiscal responsibility of thiscountry on into the future. I believe it is just as important as theprotection of free speech. It would be ludicrous in this country tothink that we had to debate and go through filibusters and all ofthose things to assure that we had freedom of speech every year,wouldn't it?

Dr. YELLEN. I believe that freedom of speech is the kind of funda-mental right that the Founding Fathers sought to guarantee inperpetuity.

Senator FAIRCLOTH. That is correct. There is nothing more fun-damental in this country than the fiscal integrity of this Nation.We severely need a balanced budget amendment to bring it about.But let me ask you another question.

Ms. Yellen, as Chairman of the Council of Economic Advisersduring the Bush Administration, Michael Boskin has recommendedthat we change the Consumer Price Index formula, which wouldmean a cut in today's formula, and reduce the COLA's for retirees.Do you agree or disagree with his commission's report?

Dr. YELLEN. Senator, I agree with the principle that Social Secu-rity and the tax system should be appropriately indexed to takeaccount of movements in the cost of living.

I believe we need as accurate a measure as we can possibly haveof the cost of living. The issue of what is the appropriate measureis one which should not be politicized. It's something where profes-sionals need to sit down and see if they can find agreement.

I believe that we are now obtaining broad agreement among pro-fessionals that the CPI does overstate the actual increase, properlymeasured, in the cost of living.

Senator FAIRCLOTH. All right. One more question.The CHAIRMAN. Senator, before you raise that question, Senator

Moseley-Braun has another committee hearing and she would liketo put a statement in the record. So could I acknowledge her justfor that purpose?

Senator FAIRCLOTH. Certainly.

OPENING STATEMENT OF SENATOR CAROL MOSELEY-BRAUN

Senator MOSELEY-BRAUN. Thank you very much, Mr. Chairmanand thank you very much, Senator Faircloth.

Ms. Yellen, I did want to put my statement in the record and hadwanted to explore with you the part of the statement which hadto do with the fact that other industrialized nations are goingthrough the same kind of fiscal challenges that we are.

And adjusting our response is the critical issue that in the Con-gress we're trying to take up right now.

I was delighted at your comment about education and picking up,frankly, where Senator Dodd left off, call to your attention thePresident's mentioning last night in the State of the Union addressthe initiative on education infrastructure.

Certainly, education, as the President pointed out, really is amatter of national security in this global economy, in this informa-tion age. And if we can find creative ways to help provide and beefup the Federal support of elementary and secondary education soas to provide an opportunity for our young people to get access tocomputers and the like, then I think that's altogether appropriate.

And while I would like to have asked you a question about it, Ihave a commitment that I'm already a few minutes late for.

I just want to thank the Chairman for his indulgence and callthat to your attention because education and infrastructure is, Ithink, not only appropriate, but also an opportunity for us to dosomething at this level.

Dr. YELLEN. Thank you very much.Senator MOSELEY-BRAUN. Thank you.The CHAIRMAN. Thank you, Senator.Senator Faircloth.Senator ENZI. Mr. Chairman.The CHAIRMAN. Yes?Senator ENZI. Just one moment before he starts. I am going to

have to go preside at the Senate. I would ask for permission to sub-mit some questions in writing.

The CHAIRMAN. Senator, so ordered. Any Senators who wish tosubmit questions, we'll keep the record open through tomorrow sothat they might do that. And we would ask you, Ms. Yellen, if youwould respond to them in writing.

Dr. YELLEN. I would be happy to respond in writing.The CHAIRMAN. We would be deeply appreciative. And that goes

for those who are here, and those Senators, I would indicate totheir staff-don't feel compelled to just make up questions now,staffers.

[Laughter.]We'll keep it open until the end of tomorrow, so that if there are

any questions, Senators or those representatives on behalf of theirSenators-I shouldn't probably open it up because you'll get del-uged with questions. Staff loves to write and phrase questions.

[Laughter.]But seriously, if you have any questions, we will keep the record

open until tomorrow, Senator Enzi.Senator Faircloth, you wanted to finish up that question.Senator FAIRCLOTH. Two quick questions and I would just love

a yes or no answer. Should we reduce the capital gains tax?Dr. YELLEN. I can't give you a yes or no on that. I think it de-

pends on the details, how it s done, and whether or not it's consist-ent with the broad objectives that I agree with that the Presidenthas outlined in this area, namely, that it be targeted at middle-in-come families.

Senator FAIRCLOTH. But you would not on a broad base be sup-portive of a capital gains tax across the board?

Dr. YELLEN. I would not regard it as a high priority at this time.Senator FAIRCLOTH. As a former member of the Federal Reserve

Board, do you think we should modernize the banking system? Ifso, should we go so far as to allowing banks and commerce to mix?

Dr. YELLEN. I do believe it's important to modernize the financialsystem at this time. And on the issue of commerce and banking,I would begin by saying that I am not philosophically opposed tomixing banking and commerce.

On the other hand, it seems to me that we have a lot more expe-rience and knowledge about financial activities, and that most ofthe synergies are probably between banking and other lines ofbusiness that are financial in nature.

I would think that that's an appropriate first step.Senator FAIRCLOTH. OK. Thank you.Dr. YELLEN. My temptation would be to go slow until we have

some more experience with banking and commerce.Senator FAIRCLOTH. Thank you.The CHAIRMAN. Thank you, Senator.Senator Reed.Senator REED. Thank you, Mr. Chairman.Dr. Yellen, I also would like you swiftly and expediently con-

firmed, so I have two quick questions, I hope.One, underlying a lot of the data nationally about the economy,

good and bad, has been some regional divergence. Right now we'reenjoying nationally robust growth. But there are some regions thatare still sort of stuck. Many times it's the Northeast.

I wonder what thoughts or comments you have about it. Perhapsit's an elaboration of Senator Dodd's comments about targeting pro-grams for areas of the country that are distressed. But in terms ofregional recessions and regional problems, how would you proposeto deal with that?

Dr. YELLEN. I think that's an important and difficult question,Senator. I think to some extent our tax and transfer system auto-matically provides cushions for regions that suffer shocks. It cush-ions the tax impact and generates some additional support throughtransfers. Beyond that, I don't have a simple answer as to what wecan do. These are extremely difficult problems and I would behappy to give it some more thought.

Senator REED. Just a follow-up question, that if a Constitutionalamendment to balance the budget would be adopted, those auto-matic provisions which cushion regional recessions- would essen-tially, perhaps not operate?

Dr. YELLEN. Yes. I think if we had a recession that was localized,not national, not uniformly national in scope, and we have cer-tainly seem many examples of that, the pressure to balance thebudget year-in and year-out could make it very difficult to supportregions that had particular difficulties.

Senator REED. Another question, a slightly different question, isthat with Wall Street booming and the stock market running upat fantastic heights, can you just comment generally on the ade-quacy of capital formation today in the United States?

Dr. YELLEN. Well, with respect to capital formation, we haveseen an enormous pick-up in investment spending in this country.We have seen a phenomenal pace of investment in plant, equip-ment, and residential construction. I take that as a very good signfor the future, that capital formation is picking up.

We've had the fastest increase in industrial capacity over the lastfew years that we have seen in decades.

Senator REED. This pace has not been prompted by any specifictax policy to either favor capital formation or-essentially, it hasbeen happening for factors-if I was an economist, I would say,what, exogenous?

Dr. YELLEN. Exogenous, yes.[Laughter.]Senator REED. OK.

Dr. YELLEN. Yes. I think partly because the deficit has comedown so much. Deficits are not the only thing that affect interestrates in our economy, but they are one important factor.

So, I believe that getting those deficits down has led to more fa-vorable financial conditions for investment. Also, we have had astrong economy with the kinds of conditions where I think firmsfeel confident about the future, confident about the management ofour economy, and the likely success they will have if they take achance and invest in this economy. I think that is mainly what'sspurred it.

Senator REED. Thank you very much, Dr. Yellen.Mr. Chairman, thank you.The CHAIRMAN. Thank you, Senator.Senator Allard.

OPENING COMMENTS OF SENATOR WAYNE ALLARDSenator ALLARD. Thank you, Mr. Chairman. I would like to have

permission to insert my opening comments in the record.The CHAIRMAN. So ordered.Senator ALLARD. I appreciate you taking the time to come by my

office and visit with me. The time went too fast while you werethere.

Dr. YELLEN. I appreciate it, too.Senator ALLARD. When we talk about our deficits, can you ever

foresee a scenario where you may advise the President that weshouldn't worry about the deficits?

Dr. YELLEN. I can imagine circumstances where I would not re-gard it as appropriate to take action to eliminate a deficit over ashort period of time.

Senator ALLARD. Can you share with us a couple of exampleswhere you might give that recommendation?

Dr. YELLEN. Well, suppose we had achieved a balanced budget.Sometimes economists distinguish between structural budgets andcyclical budgets or budget deficits.

Suppose our structural budget were in balance and the economywere operating at full employment, and then we had a very severeshock that threw our economy into recession. Without any policychange, a cyclical deficit would emerge. To turn around and imme-

-diately and quickly cut Government spending in order to, within ayear, bring the budget back into balance, in my view, would becounter-productive. It would make the recession worse and wouldbe extremely costly.

That would be a situation where the structural budget would re-main in balance, but we would have a temporary cyclical deficit.

One can imagine-life is very long and one can imagine other cir-cumstances too. Some have been considered in the balanced budgetamendment. But there are natural tragedies and circumstancesthat are hard to spell out in advance where I might regard it asdesirable for some period of time to have a deficit in the budget.

So, can I imagine circumstances? Yes, I can.Senator ALLARD. It sounds to me that you might be described as

a Keynesian. In other words, you think that there is a role for theFederal Government in stimulating the economy.

Dr. YELLEN. Well, I am not talking here about any active role ofGovernment. I am talking about the natural mechanisms that arebuilt into our fiscal policy as it stands, not anything that requiresaction of Congress or the President. An important feature of thetax system is one that operates whenever a shock occurs thatmight propagate and become more severe as it works its waythrough the economy. Individuals whose income fall find that theirneed to pay taxes is reduced. That cushions the shock on theirafter-tax income and it mitigates the impact on their spending.Also, transfers, like unemployment insurance, rise.

That's something that is at work day-in, day-out in our economythat makes recessions less severe than they otherwise would be.

I am not talking here about any conscious fiscal policy. This issimply what's called the built-in automatic stabilizers. And I thinkthat short-circuiting those stabilizers would be a very foolish thing.

Senator ALLARD. Now, more on the long-term. Let's talk aboutthe debt.

Dr. YELLEN. OK.Senator ALLARD. Do you think the debt today of $5.3 trillion has

an adverse impact on our economy?Dr. YELLEN. Well, we have succeeded at this point in stabilizing

the ratio of debt to GDP at about 50 percent. But it does have anadverse effect in the sense that a significant share of the tax reve-nue that's collected now has to be used to pay interest on that debt,and that means that tax rates are higher than they would other-wise need to be, or, alternatively, that we can spend less on otherprograms that we regard as desirable because of the debt.

Senator ALLARD. You do admit that the large debt that we arecarrying right now does have an adverse impact on the economy.In view of that, does it make it more difficult for you to recommendto the President that we should engage in deficit-spending?

Dr. YELLEN. No, it doesn't make it more difficult. As I indicated,I believe right now that a balanced budget is certainly desirable,an extremely desirable goal. And there's no question about that.

Earlier, you asked me, could I ever envision circumstances? AndI would say, never say never. Right now, though, there's not theslightest question in my own mind that we ought to be quicklyworking for a balanced budget.

Senator ALLARD. You and I differ as to whether we need to havea balanced budget amendment. My concern is that we have individ-uals in the Congress, great individuals and well-intentioned indi-viduals. But when politics is at work, Congress ends up spendingmore money than what comes in to the Treasury.

So in light of recent history, where the Congress seems to bowto these political pressures and, as a result, fails to balance thebudget, you still would oppose a balanced budget amendment?

Dr. YELLEN. I would still oppose a balanced budget amendment.I understand the frustration that you must feel about the situationthat's prevailed, in not being able to get agreement.

I think it's very important to get agreement and to balance thebudget now, but I would still strongly oppose the balanced budgetamendment. That amendment would write something into the Con-stitution for all time, and I think that would be a serious error.

Senator ALLARD. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator.Senator Hagel.Senator HAGEL. Mr. Chairman, thank you.Dr. Yellen, I guess we're not going to get you on record support-

ing a balanced budget amendment.Dr. YELLEN. You won't even get me to agree in private.[Laughter.]Senator HAGEL. I would like to pick up on that because, as the

President expressed last night, and my colleagues this morninghave talked about it, everybody is talking about a balanced budget.And I have yet to hear anybody who is opposed to it. Maybe thereis someone, but I have not yet known of that person in this body.

You mentioned that the hard decisions are going to have to bemade. That's right. A balanced budget amendment will not makethe hard decisions. We understand that.

But when you look at the history of this body, 36 out of the last37 budgets have not been balanced. Our former colleague, PaulSimon, had a very interesting New York Times editorial last week.One of the things that Senator Simon observed was that politicianslike to do good things for people. They like to do popular things.And popular things usually require money.

We talk about programs that we're going to do for everybody andsomehow, at least 36 out of the last 37 budgets, the good thingshave outnumbered the resources and we haven't balanced that verywell.

What I would like to ask you, in light of this conversation anddebate, which we will start, as you know, today, about a balancedbudget amendment, and we will debate that out on the Floor of theCongress, as it should be and should engage all of America in thisdebate because it is important. It is about our future and you un-derstand that better than most.

Where do the hard decisions come from? How are you going toadvise the President of the United States to balance the budget?Where do we balance the budget, in your opinion? Do we cut enti-tlement programs? Do we cut defense? How do we get there?

One other thing you mentioned about deficits going down-that'strue. But you have seen the CBO numbers that have just come outrecently where they project deficits going back up. So, in light ofthat, Dr. Yellen, how do you get your arms around advising thePresident? And I know there are others who will advise him. Howdo you make those hard choices and where do you make the toughdecisions to balance this budget if you don't have a balanced budgetamendment Constitutionally mandating some discipline on a veryundisciplined body?

Dr. YELLEN. Well, without any amendment at all, Senator, thebudget deficit has come down, in part, as a consequence of the leg-islation that was passed in 1993.

Senator HAGEL. But they're going back up.Dr. YELLEN. That legislation did entail some difficult decisions.

My understanding-I have not been involved-in the budget processand I will be looking forward to seeing what is in the budget, asI know all of us will-is that the President is going to propose abudget that is balanced by 2002. I have not participated in the dis-cussion about what the trade-offs are. Clearly, this involves dif-

ficult, tough trade-offs. I haven't been involved in this round ofmaking them and I can't comment explicitly.

Senator HAGEL. Dr. Yellen, would you share with the Committeejust some general thoughts? Are we going to have to get these sav-ings out of entitlements?

Dr. YELLEN. Well, Senator, I think that, in the long run, as welook forward to the retirement of the Baby Boomers and to anaging population, we are likely, if things remain as they are, to seerising budget deficits under unchanged policies.

This is a long time in the future. It's not a problem now, but itcertainly would be a good thing to address this early. Personally,I would support attempting to begin to wrangle with the tough is-sues that will loom out there before us in the future as early aswe possibly can.

I look forward to working with the President and Congress.Senator HAGEL. Thank you.The CHAIRMAN. Senator Hagel, I want to tell you, I'm very

pleased that you asked that question. And Dr. Yellen, you areabout as forthcoming as anybody could possibly hope in dealingwith the potentially explosive nature of how your candid answercould be interpreted by various groups and how you could findyourself being assailed.

I think it is refreshing. I think it is important. I think SenatorHagel recognized that. I want to compliment the Senator and Iwant to thank you for your candor. It is refreshing.

I am tremendously pleased that you will be taking on this impor-tant assignment. I think you make a great contribution in termsof your own person in undertaking this. And I work with the Rank-ing Member, who has been, I just want to tell you, one of yourgreatest boosters.

The reason that we have held this hearing today in no small partcomes through the strong recommendation of the Ranking Memberto move the process, and we will look forward with the leadershipof bringing hopefully your nomination to the Floor early during thiscoming week. Certainly, that will be our recommendation and I an-ticipate having a mark-up and a vote, and I anticipate a unani-mous vote out of this Committee.

Dr. YELLEN. Thank you.The CHAIRMAN. We are extremely pleased to have you here with

us today, and I want to thank you.Dr. YELLEN. Thank you. I'm very grateful.The CHAIRMAN. Senator.Senator SARBANES. Mr. Chairman, I want to take one moment to

show this chart and make the point on the automatic stabilizerswhich Dr. Yellen spoke about. I think as we debate the balancedbudget amendment, this chart will become more and more relevant.

We really only accepted as public policy automatic stabilizerssince the end of World War II. And as Dr. Yellen pointed out, whenwe go into an economic downturn, we don't then try to raise taxesor cut spending in order to stay in balance because we recognizethat that would only drive the economy even further down. We tryto cushion the downturn and bring the economy back, and thatserves an ameliorating effect. And this chart is a rather dramaticdemonstration of the consequences of that policy.

As you can see, we still get the business cycle, but we have man-aged to preclude the very deep troughs that we used to experiencein economic fluctuation in this country. And of course, the GreatDepression was the classic example of that.

And these fiscal stabilizers, the automatic ones, plus, in addition,conscious fiscal policy on occasions by the Congress and the Presi-dent joining together, have, in effect, eased the business cycle.

Now, we still get downturns, but, at least, we don't get those-and I think a balanced budget amendment to the Constitution,which, in effect, would, I think, preclude the use of the automaticstabilizers, is going to take us back to the old days. It's going toturn an economic downturn into a recession, and it's going to turna recession into a depression. I think this chart is -a pretty dra-matic illustration of that point. But I don't really press it here.

The CHAIRMAN. Senator, thank you.Dr. Yellen, I want to thank you. I want to thank all of my col-

leagues. We look forward to the speedy reporting out from thisCommittee to the Floor of the Senate. I think the leadership will,in a bipartisan method, be voting on you this coming week.

Again, thank you for your participation.Dr. YELLEN. Thank you very much. I appreciate your support.Thank you.The CHAIRMAN. We stand in recess.[Whereupon, at 12:00 noon, the hearing was recessed.][Prepared statements, response to written questions, and addi-

tional material supplied for the record follow:]

PREPARED STATEMENT OF CHAIRMAN ALFONSE M. JYAMATO

This morning the Committee is hosting Dr. Janet Yellen, the distinguished nomi-nee for the position of the Chairman of the Council of Economic Advisers. Dr. Yellenlast appeared before this Committee nearly 3 years ago, in July 1994, when she wasnominated to serve on the Board of Governors of the Federal Reserve System. Whileon the Board of GoSvernors, Dr. Yellen focused on the important issues of consumercredit and small business lending.

Dr. Yellen, during your distinguished academic background and your tenure atthe Federal Reserve, you have much experience in providing independent economicviews. I trust that Congress can continue to count on you to provide this t pe ofcandid advice to the President E.. the chief economic adviser, particularly on issueslike the importance of a meaningful balanced budget proposal and serious entitle-ment reform.

The Committee anticipates acting expeditiously on Dr. Yellen's nomination. Welook forward to hearing your remarks and to a thoughtful discussion of the impor-tant economic issues facing this country.

PREPARED STATEMENT OF SENATOR CHRISTOPHER J. DODD

Thank you, Mr. Chairman. I appreciate that you have swiftly scheduled today'snomination hearing, and I hope that the Committee will act with similar speed tofavorably report Dr. Yellen to the full Senate.

Dr. Yellen is an excellent choice to be the new Chair of the Council of EconomicAdvisers and I commend President Clinton for convincing her to leave the long-termsecurity of her current position as a Governor of the Federal Reserve Board for thesometimes more elusive satisfactions of a highly-visible Administration position.

Dr. Yellen's qualifications are already well known to many Members on this Com-mittee through her confirmation process in 1994 to be on the Federal ReserveBoard. Suffice to say at this time that she has been one of the Nation's most re-spected academics in the field of international business-a rubric which is broadenough to encompass not only the study of broad economic matters such as wagesand unemployment, but also the study of social trends like teenage pregnancy-andtheir impact on the economic health of our Nation.

There are myriad challenges confronting the top economic adviser to the Presi-dent. In fact, these challenges-balancing the budget, stabilizing Medicare andSocial Security for future generations, stimulating economic growth, paving the wayfor new technologies and industries-are so well known that discussion of them al-most takes on the ritualized cadences of liturgy rather than original discussion.

I would, therefore, like to turn my attention to one area that I believe gets ne-glected in ,ese broad discussions of the role of the Federal Government in Ameri-ca's econo, .c future; I am particularly concerned that we overlook the importanceof urban revitalization as a key element in any plan of sustained economic growth.

This is not necessarily the appropriate forum to engage in a deep discussion ofthe topic. So, I will limit myself to stating that I strongly urge the Council, underDr. Yellen's leadership, to closely examine ways in which Government can not onlyspur business investment in our inner cities, but also ways in which the Govern-ment can help the residents of distressed city neighborhoods build equity in theirown community to foster economic growth from the bottom up, instead of just thefrom the top down.

PREPARED STATEMENT OF SENATOR CAROL MOSELEY-BRAUN

Mr. Chairman, I am very pleased to have this opportunity to be here today asthe Committee considers the nomination of Janet Yellen to be the Chairman of theCouncil of Economic Advisers. Janet Yellen is a distinguished economist. She hasa solid background both in academia and in Government, and I am sure she willserve the President and our country with distinction.

There are a number of economy issues facing our country that will have an enor-mous impact on kind of future the American people will enjoy, and the quality ofthe analysis and advice the Federal Government gets from the CEA will have anenormous impact on the policy choices we make. I, therefore, think it is critical thatthe CEA be headed by an economist of her distinction.

The challenges the future holds for the United States are daunting, even thoughthe current economic news is generally good. The economy continues to expand, and

according to the Congressional Budget Office, in the report it released last monthentitled, 'The Economic and Budget Outlook: Fiscal Years 1998-2007," economicgrowth seems likely to continue into the future. And the Labor Department an-nounced last week that the Wage Cost Index rose only 0.8 percent in the fourthquarter of 1996, indicating that the current recovery is hot likely to overheat, andthat a return of inflation is unlikely.

The budget news is also much better than it was not very many years ago. Thebudget deficit in FY 1996 was only slightly more than one-third of what it was in1982-down from over $290 billion then to only $107 billion in FY 1996. And theCongressional Budget Office's newest projections of Federal baseline deficits overthe next 10 years are "one-third lower than last y,ar's."

Despite the fact that the economy is generally strong, inflation is in abeyance, andthe budget deficit is in retreat, the longer-term outlook illustrates that we are rap-idly running out of time to address the challenges now on the horizon. CBO's sum-mary analysis pointed out that, "Despite the improved outlook through 2007the budget situation will start to deteriorate rapidly only a few years later with theretirement of the first Baby Boomers and the continued growth of per-person healthcare costs."

I therefore hope this Committee will go beyond the relatively good news that wecan reasonably expect over the next few years, and begin to have an honest dialogueabout what is on the horizon, and the challenges the future holds for us and ourchildren. The projections for the rate of economic growth over the next decade arealso far too low, only 2.1 percent.

The CEA has an important role in helping the Congress and the President ad-dress these budget issues, and in helping us create a foundation for a future includ-ing higher economic growth, higher standards of living, and expanded opportunityfor every American.

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 entireindustrialized world has to address the same set of issues. Change is, therefore, im-perative. We can no more ignore the need for change-now-than we can ignore theenormous changes now underway in the world economy. These momentous changesrequire real leadership, which is why the position of Chairman of the Council ofEconomic Advisers is so important. Based on Janet Yellen's record to date, I amconfident she will meet these new challenges, and that she will be an excellentChairman of the CEA. I am pleased to support her nomination, and I hope thisCommittee will act promptly to recommend her to the full Senate.

PREPARED STATEMENT OF SENATOR WAYNE ALLARD

I would like to take this opportunity to welcome you and thank you for the visitthat we had in my office about 2 weeks ago. With your experience as a member ofthe Board of Governors of the Federal Reserve System and your record of publica-tion in the field of economics, I believe that you have a great deal of experience tobring to the Council of Economic Advisers.

You come to this job at a very fortunate time. As a result of the discretionaryspending cuts implemented by the 104th Congress and the 1993 Clinton tax hike,the Federal deficit for FY 1996 fell to $107 billion. In addition, the President andCongress have both professed their willingness to make the tough decisions nec-essary to balance the budget by 2002. But even if Congress and the President dokeep their word and reach an agreement which would balance the budget by 2002,the outlook for the deficit in the longer run is bleak. In the absence of reform, enti-tlements are forecast to consume an ever larger portion of the Federal budget andto fuel a rapidly increasing budget deficit in the years after 2002. I look forwardto hearing your thoughts as to what policies you would encourage the President topursue to provide for the long-term financial stability of the Federal Government.

In addition, I believe that the Federal Government has grown too large and in-trudes far too often into the lives of the American people. The American people needtax relief that is paid for with cuts in spending. In my questions, I will be askingyou for your viewpoint on certain tax policies and the appropriate role of the FederalGovernment in the economy.

Again, I welcome you to the Banking Committee and I look forward to hearingyour thoughts on various economic issues that will directly affect the people of thestate of Colorado in the years to come.

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRSUNITED STATES SENATE

PWoM 50S34 MWgaa S&Ul. Oftle BddngWaghqn.* D.C 20510M2224-M1

STATEMENT FOR COMPLETIONBY PRESIDENTIAL NOMINEES

Procedures formally adopted by the Committee on Banking,Housing, and Urban Affairs, U.S. Senate, on January 25, 1979.establish a uniform questionnaire for all Presidential nomineeswhose confirmation hearings come before this Committee.

This questionnaire shall be made part of the public recordexcept for financial information, which shall be kept confidential.

Nominees are requested to answer all questions, and to addadditional pages where necessary.

All nominees routinely shall testify under oath at theirconfirmation hearings.

27

STATEMENT FOR COMPLETION BY PRESIDENTIAL NOMINEES

Name: Yollen Janet Louise

Position to which Date ofnominated: Chairun, Council of Economic Advisers nomination:_

Date of birth:. 13 8 46 Place of birth: Brooklyn, lev York

Marital status: Married Full name of spouse George Arthur Akerlof

Name and agesof children: Robert Joseph Akerlof, 15

Education: .Institution

Fort Hanilton High SChool

Brovn University

Yale University

Datesattended

1960-1963

1963-1967

1967-1971

Degreesreceived

diploma

B.A.

Ph.D.

Dates ofdegrees

6/63

6/67

12/71

Honors and awards: Ust below 811 scholarshps, fellowships, honorary degrees. military medals, honorasysocletymemberships, and any other special recognitions for outstanding service or achievement.

Phi Beta Kappa, 1966

B.A. um=s cum lauded with highet honors in economics, brovo University

National Science Foundation Graduate Fellovship, L967-1971

Honorary Woodrow Wilson Pellovwbip. 1967

Guxsenbeia Fellow, 1986-1987

Memberships: Ust below all memberships and offi ces held in professional, fraternal, business, scholarly.

civic, charitable and other organizations.

Organ riistion rd AW Oates

council on Foreign Relations None 1976-81

American Economics Association MemberNominating Committee

Advisory Comttee- to Pres.

Com ittee on the Status of NoneWomen in the EconomicsProfession.-

1985-present1988-901986-87

1985-present

International Trade and None 1990-1994

Finance Assn.

Congresation Beth El None -1983-1994

(CONTINUED ON ATTACMKE7T)Employment record: Ust below all positions held since college, Including the title or descrption of job, name of

employment, location of work. and dates of inclusive employment.

1994-present ember, Board of Governors of the Federal Reserve System

1992-present Bernard T. Rocca Jr. Professor of International Businessand Trade, Walter A. Ras School of Business,

University of California, Berkeley

1985-1992 Professor, Walter A. Haas School of Business,University of California, Berkeley

1982-1985 Associate Professor, School of Business

Administration, University of California, Berkeley

1980-1982 Assistant Professor. School of BusinessAdministration, University of California, Berkeley

1978-1980 Lecturer. London School of Economics and Political

Science, London, Easland

1977-1978 Economist, Division of international Finance, Trade

and Financial Studies Section, Board of Governors of

the Federal Reserve System, Washingtcn, D.C.

-1971-1976 Assistant Professor of Economics, arvard University,

Cambridge. KA

1974-1975 Consultant, Division of International Finance, Board

of Governors of the Federal Reserve System, Waahington,D.C.

1969-1971 Teaching Fellov and Research Assistant, Tale University,

Nov Haven, Connecticut

1967 Sumer Intern. Women's Bureau.- U.S. Department of

Labor, Washington, D.C.

29

Memberships - cont'd

OR2ANIATZON OFFICE w.D DATES

Highlands Country club None 1978-presentThe Faculty Club, U.C. Berkeley None 1982-1996California Public Interest Research None 1987-1994

GroupNational Abortion Rights Action None 1988-1995

LeagueCalifornia Abortion Rights Action None 1998-1994

LeaguePlanned Parenthood None 1988-presentYale Club of San Frlancisco None 1993-presentKQED None 1984-1994Hadassah None 1985-presentEconomists Concerned About the None 1989-1994

Arms RaceChevy Chase Recreation Association None 1994-present

Rollingwood Citizens Association None 1996-present(British) Ambassador's Advisory

Council For the MarshallScholarships Member 1996-present

,vernmentexperience:

list all memberships snd offices held in and services rendered to all political parties orelection committees during the last 10 years.

NONE

30

List any experience in or direct association with Federal. State, or kcal governments, In.cluding any advisory. consultative, honorary or other part-time servce or positions.

1994-present Member. Board of Governors of the Federal Reserve System

1993-1994 Congressional Budget Offie-,.anel of Econo-ic Advisers1977-1996 Served on National Sciencd'Foundation Committee ot -

Visitors, Advisory henel in Economics and severalother NSF review panels

1977-1978 Econoist, Division of International Finance, Trade andFinancial Studies Section, board of Governors ox theFederal Reserve Systen Waehington, D.C. "

1974-1975 Consultant, Division of International Finance, boar ofGovernors of the Federal Reserve System, Washington, D.C.

1974-1975 Consultant, Congressional budget Office

Ust the titles, publishers and dates o: books, articles, reports or other published materials

you have written.

SEE AT ACIKENT

Publishedwrtings:

Politicalaffiliationsand activities:

31

Publications of Janet L. Yellen:

"Consequences of a Tax on the Brain Drain for Unemployment and Income Inequality in LesDeveloped Countries," (with Rachel McCulloch). Journal of Development Economics.September 1975; reprinted in J. Bhagwad, editor, The Brain Drain and Taxation:Theory and Empirical Analysis, North Holland, 1976.

"Commodity Bundling and the Burden of Monopoly," (with William James Adams),Quarterly Journal of Economics, August 1976.

The Limits of the Market in Resource Allocation (with Kenneth Arrow and Steven Shavell),Japan Trade Council, monograph, 1977.

'Factor Mobility, Regional Development and the Distribution of Income," (with RachelMcCulloch), Journal of Political Economy. February 1977.

'What Makes Advertising Profitable?" (with William-James Adams), The Economic Journal.September 1977.

'Factor Market Monopsony and the Allocation of Resources,* (with Rachel McCulloch),Journal of International Economics, January 1980.

"On Keynesian Economics and the Economics of the Post-Keynesians," AmericanEconomic Review, Papers and Proceedings, May 1980; reprinted in John MaynardKeynes: Critical Assessments, Vol. 4, John Wood, editor, Croom Helm Ltd., 1983.

'Can Capital Movements Eliminate the Need for Technology Transfer?' (with RachelMcCulloch), Journal of International Economics. May 1982.

'Technology Transfer and the National Interest,' (with Rachel McCullocb), InternationalEconomic Review, May 1982.

"Efficiency Wage Models of Unemployment," American Economic Review, Papers andProceedings. May 1984; reprinted in New Keynesian Economics, Vol. 2, Coordination

Failure and Real Rigidites. N. Gregory Mankiw and David Romer, editors, MIT Press,1991.

"Unemployment through the Filter of Memory,* (with George Akerlof), Quarterly Journal ofEconomics, August 1985.

'A Near-Rational Model of the Business Cycle with Wage and Price Inertia." (with GeorgeAkerlof), Quarterly Journal of Economics, September 1985; reprinted in New

Keynesian Economics, Vol. 1. Imperfect Competition and Sticky Prices. N. GregoryMankiw and David Romer, editors, MIT Press. 1991.

'Can Small Deviations from Rationality Make Significant Differences to Economic

32

Equilibria?* (With George Akerlof), American Economic Review. September 1985.

Efficiency Wage Models of the Labor Market (with George Akedof), an edited collection ofpapers with an introduction by the authors, Cambridge University Press, 1986.

"Rational Models of Irrational Behavior," (with George Akerlof) American Economic ReviewPapers and Proceedings, May 1987.

'Fairness and Unemployment," (with George Akerlof), American Economic Review. Papersand Proceedings. May 1988.

"Discussion" of 'The New Keynesian Economics and the Output-Inflation Trade-off," (withGeorge Akcrlof and Andrew Rose) Brookings Papers on Economic Activity. 1988:1.

"Job Switching and Job Satisfaction in the U.S. Labor Market." (with George Akerlof andAndrew Rose), Brookings Papers on Economic Activity. 1988:2.

"Is There a J-Curve?" (with Andrew Rose), Journal of Monetary Economics. July 198S.

"Introduction" to "Symposium on the Budget Deficit," Journal of Economic Perspectives,Summer 1989.

"Discussion" of 'The Bev-ridge Curve," (with George Akerlof), Brookings Papers onEconomic Activity. 1989:1.

'The Fair Wage/Effort Hypxthesis and Unemployment," (with George Akeriof), QuarterlyJournal of Economics. May 1990.

'How Large are the Losses from Rule of Thumb Behavior in Models of the Business Cycle?"(with George Akerlof; in William Brainard, William Nordhaws and Harold Watts. eads.,Money, Macroeconor mcs and Economic Policy: Essays in Honor of James Tobin,Cambridge. Mass: M.I.T. Press, 1991.

"Waiting for Work," (with Get rge Akedof and Andrew Rose) National Bureau ofEconomic Research Working Paper No. 3385, June 1990.

'East German. In From the Cold: The Economic Aftermalh of Currency Union.' (withGeorge Akerlof, Andrew Rose and Helga Hesseaius). Brookings Papers on EconomicActivity, 1991:1.

'Discussion" of 'Unemployment, Non-Employment and Wages: Why Has the Natural RateIncrased through Tune?" (with George Akerlof) Brookings Papers on EconomicActivity. 1991:2.

Comment on 'East German Econom:c Recoastructioo," by Rudiger Dornhse and HolgerC. Wolf, in The Trawition in astenm Europe, Olivier Jean Blanchard, Kenneth A.

Froot and Jeffrey Sachs. editors, NBER and University of Chicago Press. 1994.

'Gang Behavior, Law Enforcement and Community Values." (with George Akerlof). inHenry Aaron, Thomas Mann and Timothy Taylor, eds., Values and Public Policy,Brookings Institution. 1994.

"An Analysis of Out-of-Wedlock Childbeadng in the United States," (with George Aker;ofand Michael Katz), Quarterly Journal of Economics, May 1996.

"Technology Shock. Demise of Shotgun Marriage, and the Increase in Out-of-WedlockBirths'. (with George Akerlof) Brookings Review. Fall 1996.

"An Analysis of Out-Of-Wedlock Births in the United States." (with George Akerlof)Brookings Policy Brief, August 1996, No. 5.

"Why Kids Have Kids: Don't Blame Welfare, Blame 'Technology Shock', (with GeorgeAkerlof) Slate, November 15, 1996, htp-www.slate.com/Features/TeenPregnancy/TeenPregnancy.asp

"Monetary Policy: Goals and Strategy," Business Economics, July 1996.

"The 'new' science of credit risk management," The Region, Federal Reserve Bank ofMinneapolis. September 1996.

Testimony

"Condition of the Banking Industry's Consumer Credit Loan Portfolios." before theSubcommittee on Financial Institutions and Regulatory Relief. Committee on Banking.Housing and Urban Affairs. U.S. Senate, July 24. 1996

"Small Business' Access to Capital: The Role of Banks," before the Committee on SmallBusiness, U.S. House of Representatives, May 1. 1996.

"Issues Related to Mergers Among U.S. Banking Organizations," before the Subcoitittee onFinancial Institutions and Consumer Credit. Committee on Banking and FinancialServices, House of Representatives, October 17. 1995

34

'oliticalcontributions: Itemize all political contributions of 500 Or more to any indwidual, campaign organize.

tion, political party, political action committee or similar entity during the last eightyears and identify the specific amounts, dates, and names of the recipients,

*Deocratic National Committee (Clinton CApaign) $ 500 1996

*Don Mooera Congressional Campaign $ '500 1996

*Clinton for President Campaign $1,000 1992

*Dukakis for President $1,000 1988

(Contributed jointly by George Akerlof and Janet Yellen)

Qualifications: State fully your qualifications to serve in the position to which you have been named.(attach sheet)

SEE ATTACHED

,ture employmentreltUonships: 1. Indicate whether you will sever all connections with your present employer, business

firm, association or organization if you are confirmed by the Senate.

I vill remain on leave of absence from the University ofCalifornia, Berkeley.

2. As far as can be foreseen, state whether you have any plans after completing govern-ment service to resume employment, affiliation or practice with your previous em-ployer. business firm, association or ownlzation.

I expect to return to the University of California, Berkeley.

3. Has anybody made you a commitment to a job after you leave government?

University of California, Berkeley

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

YES

Qualifications:

I have served as Governor of the Federal Reserve System since August 1994. In thiscapacity, I have analyzed economic developments in the American and world economies andhelped formulate monetary and financial policies conducive to sustainable, long-termeconomic growth with low inflation. I have published original research on a wide variety oftopics in international and macroeconomics. I am beet known for my work exploring thecauses of price and wage rigidity. This work provides a basic rationale for the use ofmonetary policy to stabilize the economy. My research on macroeconomics has also exploredwage-setting policies of firms and their impact on unemployment, alternative measures ofunemployment, and the impact of macroeconomic performance on job switching and jobsatisfaction. In international economics, I have studied the linkages between exchange ratechanges and the U.S. current account deficit and examined the implications of Germanmonetary union for East German reconstruction. I have published papers in the field ofindustrial organization and on social problems. This broad background prepares me to guidethe work of the Council of Economic Advisers in providing economic advice to theAdministration concerning a wide range of issues on the national economic agenda.

Prior to joining the Federal Reserve Board, I served on the faculty of the Walter A.Haas School of Business Administration at the University of California, Berkeley since 1980where I taught international and macroeconomics in the MBA and executive educationprograms of the School. I have been Professor since 1986 and was named to the Bernard T.Rocca Jr. Chair of International Business and Trade in 1992. I am also a two-time winner ofthe Earl F. Cheit Distinguished Teaching Award. I have served as a Senior Adviser to theBrookings Panel on Economic Activity and as a member of the Economics Panel of theCongressional Budget Office.

I received my B.A. summa cum laude from Brown University in 1967 and my Ph. D.in economics from Yale University in 1971. From 1971 to 1976 1 was on the faculty atHarvard University, after which I served as an economist in the International Finance Divisionof the Federal Reserve Board. I was a faculty member at the London School of Economicsand Political Science before moving to Berkeley.

36

1. Describe any financial arrangements or delerred compensation agreements or othercontinuing dealings with business associates, clients or customers who will be at.ltted by policies which you will Influence In the position to which you hive beennominated.

NONE

2. Ust any investments, obligations. liabilities, or other relationships which might Involve

potential conflicts of interest with the position to which you have bee., ruminated.

None of which I an now aware.

3. Describe any business relationship, dealing or financial transaction (other than tax.paying) whih you have had during the last 10 years with the ceder&I Government.whether for yourself, on behalf of a client. or acting as an agent, that might in anyway constitute or result In a possible conflict of Interest with the position to which youhave been nominated.

NONE

Potential conflictsof interest:

37

4. List any lobbying activity during the past 10 years in which you have engaged for thepurpose of directly or Indirectly influencing the passage, defeat or modification ofany legislation at the national level of government or affecting the administration andexecution of national lawor public policy.

NONE

5. Explain how you will resolve any potential conflict of interest that may be disclosed by

your responses to the above items.

I vill sell shares in any invescuents determined to involve a

conflict of interest.

1. Give the full details of an/ civil or criminal proceeding in which you were a defendantor any inquiry or investigation by a Federal. State. or locai agency in which you werethe subject of the inquiry or Investigation.'

NONE

2. Give the full details of any peuceeding. Inquiry or Investiption by any professionalassociation Including any bar association in which you were the subject of the pro-ceeding, inquiry or Investgatkox

NONE

oiil, diminal andInvestigtoyalction;

RESPONSE TO WRITTEN QUESTIONS OF SENATOR D'AMATOFROM JANET LOUISE YELLEN

Q.1. How does the role of the Council of Economic Advisers differfrom that of the National Economic Council? Are there redun-dancies, are we duplicating valuable resources?A.1. The major function of the Council of Economic Advisers is toprovide the President with objective, professional economic analysisand advice on a wide range of domestic and international economicpolicy issues. The CEA also analyzes current economic events forthe President, prepares the monthly "Economic Indicators" for theJoint Economic Committee of the U.S. Congress and produces theannual Economic Report of the President. In contrast, the NationalEconomic Council serves as an "honest broker" in the economicpolicymaking process, bringing together members of the economicteam and presenting their views to the President. The Chairmanof the CEA serves as one of the six Principals on the NEC. TheNEC also monitors implementation of the President's economicagenda. Finally, the CEA is staffed by professional economists. Incontrast, the NEC is staffed primarily by lawyers and policy ex-perts: At the present time there are only 2 PhD economists on theNEC staff. I do not think that there are redundancies resulting ina duplication of valuable resources.

Q.2. Recently, the Federal Reserve has been criticized for the wayit has been run, especially with regard to its expenses. What isyour opinion of the Federal Reserve and its operations?A.2. During my tenure at the Federal Reserve, I have found it tobe an extremely well-run organization that takes its responsibilityto control expenses very seriously. I believe that one of the hall-marks of a well-managed organization is its ongoing efforts to iden-tify areas for continuing improvement and to effectively addressthese areas. In my experience, the Federal Reserve is managed inthis manner. The GAO, in its 1996 report on the Fed's operations,raised a number of interesting and important questions. These is-sues are being seriously reviewed and GAO's recommendations arebeing carefully considered. Prior to the publication of this report,the Federal Reserve already had efforts underway to evaluate anumber of the issues raised by the GAO. Subsequently, it has initi-ated additional efforts. For example, a committee has been estab-lhed to conduct a fundamental review of the Federal Reserve'sparticipation in payment services. Overall, I am confident that theFederal Reserve operates in a cost-conscious manner and has themanagement and mechanisms in place to carry out effectively theresponsibilities entrusted to it by the Congress.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR ALLARDFROM JANET LOUISE YELLEN

Q.1. What do you believe are the effects on the economy of unbal-anced budgets, and, in particular, of large Federal deficits? (Do youbelieve that we are passing on to our children and grandchildrena lower standard of living than they otherwise would have becauseof higher interest rates and lower total savings rates?)A.1. A deficit in the Federal budget constitutes a form of dissaving,likely reducing total national saving. With lower national savings,

39

real interest rates are likely higher and investment spending lower.The impact of lower domestic savings on domestic investment ismitigated to the extent that higher American interest rates attractforeign capital to our shores, and providing an alternative sourceof finance. The counterpart of such capital inflows is a deficit in acountry's current account balance with the rest of the world. A re-duction in domestic investment implies that our children andgrandchildren will enter workplaces which are less well equippedthan otherwise, thereby lowering their productivity. With foreigncapital inflows, our children and grandchildren face a continuingstream of payments to service our foreign debt. In either event,large Federal deficits mean that their standard of living is lowerthan it would be without these deficits.Q.2. From our discussion in my office, I know that you oppose theBalanced Budget Amendment. My 6 years in the House of Rep-resentatives before moving over to the Senate have convinced methe Federal Government has lost all sense of accountability. Wehave racked up in excess of $5.3 trillion in debt at the expense ofour children and grandchildren, and most frightening of all, the en-titlement crisis is threatening to send our deficits out of control.What entitlement reform policies would you advocate the Presidentto pursue so that we can keep our Federal budget balanced in theyears beyond 2002?A.2. I believe that the most urgent task for the Administration andCongress right now is to complete the work of deficit reduction andto enact changes in Medicare so that the Hospital Insurance TrustFund, currently projected to be exhausted by 2001, remains solventfor another decade. The proposals contained in the President'sbudget accomplish these objectives. The Social Security Trust Fundcan pay full benefits well into the next century. However, over thelonger term, I would agree that we will confront a major challengeas the Baby Boom generation retires and the proportion of theelderly in the U.S. population rises sharply. Although long-termforecasts entail considerable uncertainty, it appears quite likelythat without some policy changes, entitlement spending, especiallyfor health care under Medicare and Medicaid, will rise much morerapidly than social insurance taxes and contributions, resulting ingrowing Federal budget deficits. It would be advantageous to tacklethese issues in a timely fashion because deficits in the early years,funded by borrowing, entail mounting interest outlays later. Theissues involved in entitlement reform are complex; many key ques-tions require further study; and a variety of options are availableand deserve consideration to guarantee the financial solvency ofthese important programs. For example, the Quadrennial AdvisoryCouncil on Social Security recently presented not one but three al-ternative plans to put Social Security on a sound financial footingfor the next 75 years. I would advocate a bipartisan process to ad-dress these long-term issues.Q.3. I believe that the American people are overtaxed. They workuntil the beginning of May of each year just to pay their varioustax obligations. Individuals are a much better judge of what to dowith their hard-earned money than the Federal Government, andthese enormous tax bills serve as a disincentive to work. Were you

in favor of the 1993 tax hike? Do you believe that high marginaltax rates and high tax burdens in general are harmful to the econ-omy? Are there any forms of tax relief that you would support?A.3. I supported the President's 1993 Budget package, which wasa balanced mix of spending cuts and revenue increases. The mainincome tax increase in the 1993 Budget package consisted of highermarginal rates on the highest income groups (approximately the1.2 percent of American taxpayers with the highest incomes). Theevidence to date does not indicate that these taxpayers reducedtheir work effort or otherwise shifted income to tax-favored formsto avoid the increased tax burden. Instead, those with the highestincomes have enjoyed steady income growth since the 1993 taxincreases were enacted. Moreover, the entire economy has grownconsistently since 1993, in contrast to the dire predictions made bycritics during the debate over the 1993 budget package.

While high marginal tax rates and high tax burdens can, if ex-cessive, be a drag on the economy, the evidence suggests that taxburdens in the United States are not so high as to be detrimentalto the overall economy. As a percentage of GDP, Federal tax bur-dens of the past few decades have been remarkably stable, mostlyfluctuating in the narrow range of 17-20 percent. And overall taxburdens (including Federal, State, and local taxes) also have beenrelatively stable, fluctuating between 26 and 30 percent of GDP,despite extensive changes to major tax structures over that time.Moreover, international comparisons consistently show the U.S. tohave among the lowest tax burdens of all industrial countries.These factors, along with the steady growth of the U.S. economy,indicate that the tax burden for AmeAcans is not so high as to neg-atively affect the economy.

While the Federal tax burden as a share of the economy is notoverwhelmingly high, there are instances where families feel bur-dened by financial obligations. It seems appropriate to target taxrelief toward these families. This is precisely what the Presidenthas proposed in the FY 1998 Budget, with a tax credit for familieswith children, a tax credit/tax deduction plan for post-secondaryeducation, and expanded access to IRA's, all are targeted to middle-income families. These are the types of tax relief I would support.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR ENZI FROMJANET LOUISE YELLEN

Q.1. The Federal Government is replete with duplicate programs.For example, the Small Business Association, the U.S. Departmentof Agriculture, Department of Housing and Urban Development,and Department of Commerce all provide assistance in some shapeor form to small businesses. The funding of the various programsis not maximized because there is not a coordinated effort amongagencies. How might your leadership serve to bring about a coordi-nation of efforts so that more could be done with the limited fund-ing available? Have you thought about establishing an InteragencyWorking Group to address issues of duplication in funding and pro-gram goals to maximize the leverage of scarce Federal funds?A.1. One of the major objectives of Vice President Gore's "Reinvent-ing Government" initiative is to enhance coordination among theagencies to eliminate duplication of effort, to improve the effective-

ness of programs, and to achieve cost savings. These efforts havealready produced results, but more undoubtedly remains to bedone. One example of successful coordination is the joint effort ofCommerce, SBA, the Ex-Im Bank, and USAID to work with Stateagencies to create jointly staffed Export Assistance Centers thatprovide one-stop service to exporting businesses. Treasury, Labor,IRS, and Social Security have signed a memorandum of under-standing to collaborate on a streamlined wage and income report-ing system, aimed at a one-stop electronic filing system for Federaland State Governments. I appreciate your suggestion concerningan Interagency Working Group to identify additional possibilitiesfor coordination of effort. And if confirmed, I will pass your sugges-tion along to the NEC, whose job it is to manage the interagencyprocess.Q.2. Did you support the minimum wage increase recently put intoeffect? What criteria do you use to determine if and when to raisethe minimum wage?A.2. I supported the minimum wage increase recently put into ef-fect. The increase was the first since 1991 and the second since1981 when the minimum wage was increased to $3.35. Over thislong period, inflation had eroded the real value of the minimumwage significantly and even by next September, when the mini-mum wage is raised to $5.15, its real value will still be roughly 16percent belaw its 1981 level in real terms. I supported the mini-mum wage increase because it had fallen so much in real termsand because I believe it provides a powerful tool, combined withthe Earned Income Tax Credit and other benefits, to make workpay enough so that hard-working families are lifted above the pov-erty line. Given the size of the minimum wage increase and theexisting evidence concerning the impact of the minimum wage onemployment, I would not expect it to have significant effects on em-ployment.Q.3. I am particularly interested in growth, particularly for smallbusiness. Do you have in mind any incentives for small businessgrowth? If small business and families are strengthened, I thinkour country will be strengthened. Do you have any financial poli-cies that might reduce family financial stress that you would sug-gest to the President?A.3. Over the past several years, the Administration has proposedand supported numerous incentives for businesses, with special em-phasis placed on the situation faced by smaller businesses. Severalprovisions that seem particularly appropriate are: Increasing themaximum amount of equipment that can be expensed by smallerbusinesses in the year purchased from $10,000 to $25,000 (in stepsthrough 2003); substantially reducing the paperwork burden forsmall businesses applying for loans guaranteed by the Small Busi-ness Administration; establishment of the Community Develop-ment Financial Institutions Program, which will provide access tocapital for borrowers who may be overlooked by the larger banks;and the expanded access to low-interest installment loans to payestate taxes that the President proposed in the FY 1998 Budget.These incentives include both spending and tax initiatives, depend-ing in part on which delivery mechanism is more efficient.

The President's FY 1998 Budget contains several tax cuts tar-geted at middle-class Americans that should help relieve financialstress for those whose burdens are the largest. For example, theproposed tax credit/tax deduction for post-secondary education costswill reduce tax burdens on families who are undertaking largefinancial obligations to help pay for education. This financial aid(provided through the Tax Code) will help relieve stress on thesefamilies.Q.4. Exports of the United States are not always on a level playingfield with other countries because of the subsidies that many for-eign nations give their companies. This can put American compa-nies and goods at a disadvantage. The Export-Import Bank playsan important role in leveling the playing field for U.S. companies.In light of balancing the budget, should the Ex-Im Bank raise itsexposure fees to increase subsidy savings?A.4. Foreign nations do subsidize their companies and exportsthrough a variety of means and this has negatively affected thecompetitiveness of U.S. exports. Rather than engage in an expen-sive export subsidy race, the U.S. has pressed its allies/competitorsto reduce their own subsidy programs. In this vein, the U.S. hasworked diligently through the OECD's Export Credit Arrangementto level the playing field for U.S. firms by encouraging other na-tions to rely on market terms for official export financing. From1993-1995, U.S. negotiations with the Export Credit Arrangementsuccessfully reduced the levels of OECD tied aid by $18 billion. As-sistance to developing countries in the form of tied aid has oftenworked to the detriment of U.S. exporters, and its negotiated re-duction is estimated to have resulted in about an extra $1 billiona year in U.S. exports.

Currently, the United States is negotiating through the ExportCredit Arrangement to raise exposure fees charged to foreign gov-ernments. If an agreement is reached, the Export-Import Bank canraise its exposure fees without harming the competitiveness of U.S.exporters. I favor the continuation of these negotiations with theExport Credit Arrangement.Q.5. The Administration wants to offer grants to students for thefirst 2 years of college. I strongly believe in the importance of edu-cation, but will the Administration's proposal drive up the cost ofeducation and make it more difficult for students to continue col-lege after those first 2 years? Will this be a new entitlement pro-gram put in place before we have the problems with the existingentitlements solved?A.5. The Administration's proposal to provide $1,500 tax creditsper year for the first 2 years of college is designed to make 2 addi-tional years of education the norm for students graduating fromhigh school. Encouraging students to pursue additional schoolingbeyond that point is obviously desirable and the tuition deductionfor post-secondary tuition and fees up to $5,000 in 1997 and 1998,and $10,000 starting in 1999 will help reduce the cost for thovewho attend college, including their third and fourth years. Someanalysts have suggested that the tuition tax credit could conceiv-ably induce States to reduce their own subsidies to higher edu-cation, resulting in higher tuition. This is a hypothesis-not an ob-

served outcome of actual experience. Because the avowed purposeof State subsidies has been to expand access to college education,I find it hard to envision how any offset of this type could be largeenough to actually endanger access to education beyond the first 2years. At most, there could be some substitution of Federal fortat spending.Tax breaks for college are not an entitlement but instead, a tax

cut designed to benefit the middle class. They are given to thosewho are willing to make investments in their own human capital,enhancing their own productivity and that of the Nation. Accord-ingly, the proposed tax policy toward higher education is an invest-ment, not an entitlement program. The need to address problemswith existing programs is very strong and the Administrationneeds to work with Congress in a bipartisan manner to tacklethese tough problems, regardless of our education policies.Q.6. If the economy is doing well, what is the reason for the in-crease of the number of personal bankruptcies, delinquent loans,and consumer debt?A.6. With strong job formation, a falling unemployment rate, risingpersonal income and a dramatic rise in the stock market, economicconditions in the United States in recent years have been ex-tremely favorable to growth in spending and borrowing by thehousehold sector and to strong growth in consumer lending by U.S.banks. In addition, the declining residential mortgage rates haveenabled many households to lower their monthly payments onmortgage debts. Combined, these favorable developments may havelaid the foundation for many households to incur additional debt tofinance major purchases. The rapid rise we have seen in nonmort-gage consumer debt is not unusual for a period of economic expan-sion. However, the Federal Reserve's Survey of Consumer Financessuggests that the proportion of low-income households with an un-usually high fraction of their income absorbed by debt repaymentshas been rising-and rising loan delinquency rates and personalbankruptcies suggest that some households may have let theirdebts build to the point where they are having increasing difficultyservicing them.

An independent factor contributing to the growth in consumerloans and, rising delinquencies is the increasing competition amonglenders to make consumer loans, reflected in falling rates and feeson consumer financing products, including credit card rates. Com-mercial banks and other credit card lenders have been aggressivelymarketing credit cards with pre-approved lines of credit based onthe results of credit scoring models that statistically evaluate anindividual's creditworthiness. Because credit card lending has beenhighly profitable, some lenders have been willing to take on greaterrisk in the interest of increasing loan volumes. This competitiveprocess may have attracted weak or marginal borrowers with high-er probabilities of delinquency or bankruptcy. Personal bankrupt-cies have been trending upward since the early 1980's. Changes inthe bankruptcy law in 1978 made the consequences of bankruptcyless onerous for individuals; moreover, the stiga associated withpersonal bankruptcy has undoubtedly declined, leading to greatersocial acceptability of the practice. Perhaps the trend is also fueled

by the willingness of banks and nonbanks to continue to lend to in-dividuals whose credit history is dubious.

Q.7. You said that the monetary policy put in place affects theeconomy for a "very long time into the future." How would you saythat the monetary and economic policies of past Administrationsand the Clinton Administration are affecting the economy today?A.7. A "narrow" sense in which monetary policy affects the econ-omy for a "very long time into the future" is that monetary policyoperates with long lags. Large scale econometric models of theAmerican economy suggest that less than 10 percent of the impactof a change in the Federal Funds Rate, the Federal Reserve's pri-mary monetary policy instrument, is experienced during the first6 months and only about half during the first year. This explainswhy the Federal Reserve seeks to be forward looking, sometimesacting to tighten monetary policy in advance of observing any in-crease in inflation. For example, between February 1994 and Feb-ruary 1995, the Federal Reserve raised the Federal Funds Ratefrom 3 percent to 6 percent. The objective was to moderate thegrowth of demand enough to avoid pushing against capacity con-straints in labor and product markets, with inflationary con-sequences. This policy, implemented before the economy's slack hadbeen exhausted, was successful in achieving a "soft landing" withthe American economy now operating in the vicinity of its poten-tial, with most forecasters predicting sustainable growth going for-ward, and with inflation stable or, according to many broad meas-ures, continuing to decline.

There is also a broader sense in which monetary and economicpolicies affect the economy for a "very long time into the future."Over the very long term, the Federal Reserve's monetary policy pri-marily affects the overall rate of inflation in the economy, whilefiscal policy, particularly the level of the Federal budget deficit,affects saving, investment, and long-term growth. In this sense, themonetary policies initiated by Chairman Volcker succeeded inbringing inflation down from unacceptably high levels in the1970's. The Greenspan Fed has solidified those gains and achievedfurther progress toward the goal of price stability. An environmentof price stability, in my view, provides a favorable climate forgrowth-creating investments in capital, in people and in R&D. TheClinton Administration's fiscal policies have also promoted growth.

Most importantly, the Federal budget deficit has been reducedfrom 4.7 percent of GDP in 1992 to 1.4 percent in 1996-the lowestratio in any major industrialized country. The ratio of the Federaldebt to GDP has finally stabilized and the national saving rate hasincreased. With less Federal Government drain on the privatesavings pool more has been available for investment. We have con-sequently enjoyed an extraordinarily robust pace of investmentspending with the most rapid pace of expansion in industrial capac-ity we have seen in decades. Thege developments will have favor-able consequences for productivity and growth for decades to come.

45

Real GrowthPercent Change, Real GDP or GNP

20

15

10 1

0

-10

-15I