June 23, 2005, 9:02 a.m.
Civics Lessons, Courtesy of the Fed
Tune in to the inanity of our public officials.

According to the Office of Superintendent of Public Instruction for the State of Washington, one definition of Social Studies (we used to call it Civics) goes as follows:

… Social studies comprises the study of relationships among people, and between people and the environment. Social studies recognizes the challenges and benefits of living in a diverse cultural and ideological society. The resulting interactions are contextualized in space and time and have social, political, economic, and geographical dimensions ...

Yikes! Now I know why I never really understood what Civics was all about in the first place.

For my purposes here, I want focus on the political and economic components of Social Studies, and the real-world human interactions that have so much to teach us on these fronts. A teacher might ask: How do I expose my students to the interactions that Social Studies implies, especially when it comes to politics and government? I have the answer, one that will get students deeply involved in the process.

Each quarter, Alan Greenspan, chairman of the Federal Reserve Board, addresses the Joint Economic Committee of Congress. His testimony is required by the Humphrey-Hawkins law and is designed to provide a glimpse of the economy’s health from the chairman’s perspective. Greenspan has been head of the Fed since 1987, so he is well practiced in making these appearances before Congress. The chairman’s testimony occurs during the daytime, so students may not be able to watch the testimony. Yet if a Social Studies classroom is equipped with a television and an appropriate connection to a cable news outlet like CNBC or Fox, there’s every reason to tune in.

Greenspan was the head of his own economic consulting firm before he took the top job at the Fed. He knows what he is talking about and can speak from experience. Certainly, the advantage of economic experience comes in handy during these sessions. But the value in watching in these hearings doesn’t directly stem from the chairman’s testimony — his prepared opening salvo once he takes his seat. The real value comes from the subsequent question-and-answer period. Not too long ago the news media would cut out right after Greenspan’s testimony, so very few people got a perspective on what members of the committee were thinking or not thinking. But once the cable stations began to cover the entire proceedings, Americans were given a unique opportunity to enhance their breadth of understanding of the political process.

I watch these hearings all the time and I am constantly shocked by the questions asked by some politicians. Obviously, perspective on the way the world works is widely divergent between Democrats and Republicans, so one can generally anticipate what a politician with a specific label will say. Even though we are fully aware of this dichotomy, these hearings do a great service in revealing just how little many politicians know about how the economy works.

One reason for this might be the fact that politicians don’t have to pass an exam to be elected — they just need to grab the majority of the vote. In many elections competency has nothing to do with winning. It’s all about party affiliation or personal relationships. Just think of those cases where the nominee has passed away before the election and, in a strange turn of events, the spouse has stood in — and won!

Students studying economics will find these Fed hearings of special interest. They will see politicians spout economic principles that have no basis in the real world, and make their absurd statements over and over again. Here’s but one example, in the form of a “question” posed by Rep. Ron Paul of Texas:

Thank you, Mr. Chairman. I have two brief points to make, then I have a couple of questions.

First, your comment about the deficit is very important in keeping interest rates high. It seems to me that the level of government spending has to be even more important, because if you have a $2 trillion budget, and you tax that money out of the system, that is very detrimental, just as detrimental as if you borrowed out of the economy. So I think the level of spending is probably more important.

And as a follow-up to the question from the gentleman from Washington on the currency, we certainly do export a lot of our currencies. More than 60 percent ends up in foreign hands. And it serves a great benefit to us because it is like a free loan. It is not in our own country, it does not bid up prices, so we get to export our inflation. At the same time, they are willing to hold our debt; central banks are holding $600 billion worth of our debt. So again, we get to export our inflation, and the detriment is the consequence of what we are seeing in Southeast Asia.

But the real problem, though, is not the benefits that we receive temporarily, but the problem is when those dollars come home, like in 1979 and 1980, and then we have to deal with it because it is out of your hands, this money has been created. So I think we should not ignore that.

But my first question has to do with Mexico. It is bragged that we had this wonderful bailout of Mexico three years ago, and yet Mexico still has some of its same problems. They have tremendous bank loans occurring right now. The peso has weakened. Last month it went down 5 percent. Since the conditions are essentially the same, my question to you is when do you anticipate the next currency crisis in the Mexican peso?

And then another question that I would like to get in as well has to do with a follow-up with the gentleman from Massachusetts dealing with the inequity in the distribution of income. And in your statement you come across almost hostile or fearful that wages might go up. And I understand why you might be concerned about that, because you may eventually see the consequence of monetary inflation, and it will be reflected in higher wages. But where has the concern been about the escalation of [the] value of stocks? People are expecting them to go up 30 percent a year. They are benefiting, but labor comes along and they want to get a little benefit. They want to raise their salaries 5 or 10 percent. Unlike the other side, I think the worst thing to do is interfere in the voluntary contract and mandate an increase in wages and give them minimum wage rates. That is not the answer.

But to understand the problem I think is very important. … a natural consequence of monetary inflation is that there is an equal distribution of income.

I would like you to address that and tell me if there is any merit to this argument and why you seem to have much greater concern about somebody making a few bucks more per hour versus the lack of concern [over] a stock market that is soaring at 30 percent increases per year.

Maybe these politicians simply improvise around the questions their interns write for them. But more than likely they have no clue what they’re talking about. Of course, there’s ample entertainment value to all this. Just look at the faces of the legislators after Greenspan has answered their questions: Their expressions of puzzlement are priceless. Then there are the politicians who use 80 percent of their allotted time to campaign for office, not asking one meaningful question of the chairman. What a show!

Most of us embrace democracy as the best form of government in a modern society. However, a shiver runs up one’s spine when one witnesses the powerbrokers behind our system asking such inane questions of the chairman of the Federal Reserve.

Books continue to be the preferred medium of communication in our schools today, but technology is playing an ever more important role in accelerating the learning process of our kids. It’s time for more schools to plug in. The Fed hearings before Congress are news events that should be an important part of the social study of our political process. Students, don’t miss them. Teachers, particularly those of you who are responsible for Civics and economics, be sure your classes are hooked to cable television.

These programs should be mandatory viewing for all those who are preparing for life in the real world.

— Thomas E. Nugent is executive vice president and chief investment officer of PlanMember Advisors, Inc. and principal of Victoria Capital Management, Inc.

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