[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]



                         CURRENT FISCAL ISSUES

=======================================================================

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

             HEARING HELD IN WASHINGTON, DC, MARCH 2, 2001

                               __________

                            Serial No. 107-4

                               __________

           Printed for the use of the Committee on the Budget


  Available on the Internet: http://www.access.gpo.gov/congress/house/
                              house04.html

                               __________

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                        COMMITTEE ON THE BUDGET

                       JIM NUSSLE, Iowa, Chairman
JOHN E. SUNUNU, New Hampshire        JOHN M. SPRATT, Jr., South 
  Vice Chairman                          Carolina,
PETER HOEKSTRA, Michigan               Ranking Minority Member
  Vice Chairman                      JIM McDERMOTT, Washington
CHARLES F. BASS, New Hampshire       BENNIE G. THOMPSON, Mississippi
GIL GUTKNECHT, Minnesota             KEN BENTSEN, Texas
VAN HILLEARY, Tennessee              JIM DAVIS, Florida
MAC THORNBERRY, Texas                EVA M. CLAYTON, North Carolina
JIM RYUN, Kansas                     DAVID E. PRICE, North Carolina
MAC COLLINS, Georgia                 GERALD D. KLECZKA, Wisconsin
ERNIE FLETCHER, Kentucky             BOB CLEMENT, Tennessee
GARY G. MILLER, California           JAMES P. MORAN, Virginia
PAT TOOMEY, Pennsylvania             DARLENE HOOLEY, Oregon
WES WATKINS, Oklahoma                TAMMY BALDWIN, Wisconsin
DOC HASTINGS, Washington             CAROLYN McCARTHY, New York
JOHN T. DOOLITTLE, California        DENNIS MOORE, Kansas
ROB PORTMAN, Ohio                    MICHAEL E. CAPUANO, Massachusetts
RAY LaHOOD, Illinois                 MICHAEL M. HONDA, California
KAY GRANGER, Texas                   JOSEPH M. HOEFFEL III, 
EDWARD SCHROCK, Virginia                 Pennsylvania
JOHN CULBERSON, Texas                RUSH D. HOLT, New Jersey
HENRY E. BROWN, Jr., South Carolina  JIM MATHESON, Utah
ANDER CRENSHAW, Florida
ADAM PUTNAM, Florida
MARK KIRK, Illinois

                           Professional Staff

                       Rich Meade, Chief of Staff
       Thomas S. Kahn, Minority Staff Director and Chief Counsel

                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, March 2, 2001....................     1
Statement of Hon. Alan Greenspan, Chairman, Board of Governors of 
  the Federal Reserve System.....................................     3
Prepared statement of:
    Hon. Ander Crenshaw, a Representative in Congress from the 
      State of Florida...........................................     2
    Chairman Greenspan...........................................     7
    Chairman Greenspan's written response to questions posed by 
      Mr. Bentsen................................................    19

 
                         CURRENT FISCAL ISSUES

                              ----------                              


                         FRIDAY, MARCH 2, 2001

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10 a.m. in room 
210, Cannon House Office Building, Hon. Jim Nussle (chairman of 
the committee) presiding.
    Members present: Representatives Nussle, Sununu, Bass, 
Gutknecht, Collins, Hastings, Culberson, Crenshaw, Putnam, 
Spratt, Bentsen, Davis, Clayton, Price, Moran, McCarthy, 
Capuano, and Honda.
    Chairman Nussle. Good morning. I call the hearing to order. 
This is the full committee hearing on current fiscal issues. 
The witness today is the Honorable Alan Greenspan, Chairman of 
the Board of Governors of the Federal Reserve System. We are 
honored to have the Chairman with us this morning.
    I have a brief statement that I would like to make, and 
then I will offer Ranking Member Spratt the opportunity as 
well, and then we would enjoy hearing from our witness.
    In town meetings across Iowa, I often hear and have heard 
throughout my tenure in Congress many different statements from 
constituents with regard to budget advice. As long as 10 years 
ago they said balance the budget, pay down the debt, take 
Social Security off the table, fix Medicare. Wise advice; 
common sense advice that I know many of my colleagues have 
heard from their constituents.
    This year not only do we hear pay down the national debt, 
but we also hear, you know, that surplus should not be left in 
Washington; give us some tax relief.
    While the President has presented a budget that does all of 
those things, and does them in a way that I believe is 
successful and one that we can work with as a foundation based 
on the now fifth year that we will go into balanced budgets, 
having paid down $625 billion of national debt, providing tax 
relief already, even before we begin this budget process for 
Americans, and trying to hold as best we can the line on 
spending for at least 4 of those 6 years, last year, of course, 
being a grave exception to that, as we go into the budget 
season this year, it is an honor to have the Chairman here to 
give us his advice with regard to a number of issues.
    I have three questions that I would be interested in 
covering with the Chairman. First, what is the state of the 
economy? It is a pretty broad question, but a pretty important 
question as we look at the budget not only for this year, but 
as we plan and set the foundation for the next 10 years. Number 
two is how will tax relief, how will the tax plan, and how will 
the budget plan provide stimulus or provide assistance in 
answering the concerns of our current economy? Number three is 
any recommendations he has with regard to paying down the 
national debt.
    Yesterday we heard from Mitch Daniels, the Director of the 
Office of Management and Budget, who has written a budget, 
together with the President, which pays down all of the 
redeemable debt within the next 10 years using $2 trillion of 
surplus money over the next 10 years to pay down that national 
debt. This is what they say is all that we can financially 
practicably pay down during this 10-year period, and I am 
interested in hearing from the Chairman his advice with regard 
to that portion of the plan as well.
    We are happy to have the Chairman here, and before I 
recognize the Chairman for his testimony, I would like to 
recognize my friend and colleague Mr. Spratt, the Ranking 
Member of the Budget Committee.
    Mr. Spratt. Mr. Chairman, let me express my admiration also 
for your work and welcome you once again to our committee. I 
know you have testified many other places before coming here, 
but we are glad to have you here, and we have some important 
questions to put to you today. We are grateful that you have 
come.
    Mr. Greenspan. Thank you.
    Chairman Nussle. Chairman Greenspan, welcome, and your 
entire testimony, of course, will be made part of the record, 
as, without any objection, all Member statements will be made 
part of the record in total.
    [The prepared statement of Ander Crenshaw follows:]

PREPARED STATEMENT OF HON. ANDER CRENSHAW, A REPRESENTATIVE IN CONGRESS 
                       FROM THE STATE OF FLORIDA

    Thank you, Mr. Chairman, for holding this hearing today. And, thank 
you, Chairman Greenspan for coming here to share your views on the 
economy, the budget, and our prospects for significant tax relief this 
year.
    It is my view that the President has laid out a very sound, 
fiscally responsible course of action in his budget. He uses Social 
Security surplus for Social Security and Medicare money for Medicare. 
He proposes continuing to pay down the debt at an historic pace until 
there is no redeemable debt left to retire without paying tremendous 
premiums, and then he continues to retire it as it matures. He 
prioritizes his funding requests to reflect a vision for our nation's 
future, including improving public education, increasing medical 
research, and meeting the quality-of-life needs of America's 
servicemembers.
    President Bush also sets aside $1 trillion to establish a sort of 
``rainy day'' fund. Never before has our nation done this--set aside 
money for unexpected contingencies and long-range reforms. But, now 
that it has been contemplated, it seems so obvious.
    And, even after all that, President Bush makes sure that the 
American taxpayers get to keep a little more of their hard-earned 
money, instead of sending it to Washington. When I was President of the 
Senate in Florida, we passed our first balanced budget without raising 
taxes. We did it by prioritizing our spending needs and making tough 
choices. Here, in Congress, with these historic surpluses, we have an 
opportunity to do still more for the people we represent. Applying the 
same principles--prioritizing our spending and making tough choices--we 
can actually reduce the tax burden on American taxpayers and let them 
use the money for their own household spending needs.
    I appreciate your candor, Chairman Greenspan, and look forward to 
working with you on these important issues.
    1. In testimony before the Senate Budget and Banking Committees 
earlier this year, you indicated your support for a substantial tax 
relief package. Your statements have also implied tepid support for a 
trigger mechanism that would slow down or stop the gradual 
implementation of tax relief should the surpluses not appear as 
projected. Senator Kent Conrad, the Ranking Member on the Senate Budget 
Committee, has rejected the trigger concept out-of-hand, saying, ``You 
would be raising taxes at a time of an economic slowdown. That is 
exactly the wrong thing to be doing.'' Could you please settle the 
record on whether you support or oppose a trigger mechanism? And, if 
you do support one, how would you suggest we structure it?
    2. I was wondering if you could comment on the President's proposal 
for a contingency fund. There comes a point when we retire all of our 
redeemable debt and to pay it down beyond that would mean paying 
enormous premiums. So, we accumulate a surplus that the President would 
set aside to meet unexpected needs, to tackle the kind of long-range 
reforms in programs like Medicare and Social Security that Congress 
typically puts off as too daunting, or to act as an economic cushion. 
Do you have any thoughts on how this contingency fund might affect the 
broader economy? Do you think its presence could buoy consumer 
confidence?

    Chairman Nussle. You may summarize or proceed as you wish. 
Chairman Greenspan.

 STATEMENT OF ALAN GREENSPAN, CHAIRMAN, BOARD OF GOVERNORS OF 
                   THE FEDERAL RESERVE SYSTEM

    Mr. Greenspan. Thank you very much, Mr. Chairman and 
members of the committee. I am most pleased to appear here 
today to discuss some of the important issues which you raise 
surrounding the outlook of the Federal budget and the attendant 
implications for the formulation of fiscal policy. In doing so, 
I want to emphasize that I speak for myself and not necessarily 
for the Federal Reserve.
    The challenges we face both in shaping the budget for the 
coming year and in designing a long-run strategy for fiscal 
policy has been brought into sharp focus by the budget 
projections that have been released in the past month and a 
half. Both the Bush administration and the Congressional Budget 
Office project growing on-budget surpluses under current policy 
over the next decade. Indeed, growing on-budget surpluses were 
projected even under the more conservative assumptions of the 
Clinton administration's final budget projections.
    The key factor driving the cumulative upward revisions in 
the budget picture in recent years has been the extraordinary 
pickup in the growth of labor productivity that appears to be 
causing economists to raise their forecasts of the economy's 
long-term growth rates and budget surpluses. This increased 
optimism receives support from the forward-looking indicators 
of technological innovation and structural productivity growth, 
which have shown few signs of weakening despite the marked 
curtailment in recent months of capital investment plans for 
equipment and software.
    To be sure, these impressive upward revisions to the growth 
of structural productivity and economic potential are based on 
inferences drawn from economic relationships that are different 
from anything we have considered in recent decades. The 
resulting budget projections, therefore, are necessarily 
subject to a relatively wide range of uncertainty. CBO, for 
example, expects productivity growth rates through the next 
decade to average roughly 2\1/2\ percent per year, far above 
the average pace from the early 1970's through the mid-1990's, 
but still below that of the past 5 years.
    The most recent projections from OMB and CBO indicate that 
if current policies remain in place, the total unified surplus 
will reach about $800 billion in fiscal year 2010, including an 
on-budget surplus of almost $500 billion. Moreover, the 
admittedly quite uncertain long-term budget exercises released 
by CBO last October maintain an implicit on-budget surplus 
under baseline assumptions well past 2030, despite the 
budgetary pressures from the aging of the baby boom generation, 
especially on the major health programs.
    These most recent projections, granted their tentativeness, 
nonetheless make clear that the highly desirable goal of paying 
off the Federal debt is in reach and, indeed, would occur well 
before the end of the decade under baseline assumptions. This 
is in marked contrast to the perception of a year ago when the 
elimination of the debt did not appear likely until the next 
decade at the earliest. But continuing to run surpluses beyond 
the point at which we reach zero or near-zero Federal debt 
brings to center stage the critical long-term fiscal policy 
issue of whether the Federal Government should accumulate large 
quantities of private or, more technically, non-Federal assets.
    At zero debt, the continuing unified budget surpluses now 
projected under current law imply a major accumulation of 
private assets by the Federal Government. Such an accumulation 
would make the Federal Government a significant factor in our 
Nation's capital markets and would risk significant distortion 
in the allocation of capital to its most productive uses. Such 
a distortion could be quite costly, as it is our 
extraordinarily effective allocation process that has enabled 
such impressive increases in productivity and standards of 
living despite a relatively low domestic saving rate.
    I doubt that it is possible to secure and sustain 
institutional arrangements that would insulate Federal 
investment decisions, over the longer run, from political 
pressures. To be sure, the roughly $100 billion of assets in 
the Federal Government's defined-contribution Thrift Savings 
Plan have been well insulated from political pressures. But the 
defined contribution nature of this plan means that it is 
effectively self-policed by individual contributors, who would 
surely object were their retirement assets to be diverted to 
investments that offered less-than-market returns.
    But such countervailing forces may be greatly attenuated 
for Federal Government defined-benefit plans, such as Social 
Security. To the extent that benefits are perceived to be 
guaranteed by the government, beneficiaries may be much less 
vigilant about the stewardship of trust fund assets.
    Requiring the Federal Government to invest in indexed funds 
arguably would largely insulate the investment decision from 
political tampering. But such assets, by definition, can cover 
only publicly traded securities, perhaps three-fifths of total 
private capital assets. With large allocations of public funds 
invested in larger enterprises, our innovative, smaller, 
nonpublicly traded businesses might find themselves 
competitively disadvantaged in obtaining financing. To be sure, 
there is not universal agreement among economists on this 
point, but it is a consideration that should be kept in mind.
    More generally, the problematic experiences of some other 
countries with large government accumulation of private assets 
should give us pause about moving in that direction. To repeat, 
over time, having the Federal Government hold significant 
amounts of private assets, in my judgment, would risk 
suboptimal performance by our capital markets, diminished 
economic efficiency, and lower overall standards of living than 
would be achieved otherwise.
    Private asset accumulation, however, may be forced upon us 
well short of reaching zero debt. Both CBO and OMB project an 
inability of current services unified budget surpluses to be 
applied wholly to repay debt by the middle of this decade. 
Without policy changes, private asset accumulation is likely to 
begin in just a few short years.
    In summary, then, the Congress needs to make a policy 
judgment regarding whether and how private assets should be 
accumulated in Federal Government accounts. This judgment will 
have important implications for the level of saving and, hence, 
investment in our economy, as well as for the nature of 
government programs. If, for example, the accumulation of 
assets is avoided by eliminating unified budget surpluses 
through tax and spending changes, public and presumably 
national savings may well fall from already low levels. If so, 
over time, capital accumulation and the productive capacity of 
the economy presumably would be reduced through this channel. 
Eliminating unified surpluses by transforming Social Security 
into a defined-contribution system with accounts held in the 
private sector would likely better maintain national savings 
levels, but the nature of Social Security would at the same 
time be fundamentally changed. Alternatively, unified surpluses 
could be used to establish mandated individual retirement 
accounts outside the Social Security System, also mitigating 
the erosion in national savings.
    The task before the administration and the Congress in the 
years ahead is likely to prove truly testing. But, of course, 
the choices confronting you are far more benign than having to 
deal with deficits ``as far as the eye can see.''
    Returning to the broader fiscal picture, I continue to 
believe, as I have testified previously, that all else being 
equal, a declining level of Federal debt is desirable because 
it holds down long-term real interest rates, thereby lowering 
the cost of capital and elevating private investment. The rapid 
capital deepening that has occurred in the U.S. economy in 
recent years is a testament to these benefits. But the sequence 
of upward revisions to the budget surplus projections for 
several years now has reshaped the choices and opportunities 
before us.
    Indeed, in almost any credible baseline scenario, short of 
a major prolonged economic contraction, the full benefits of 
debt reduction are now achieved well before the end of this 
decade, a prospect that did not seem reasonable only a year or 
even 6 months ago. Thus, the emerging key fiscal policy need is 
now to address the implications of maintaining surpluses beyond 
the point at which publicly held debt is effectively 
eliminated.
    Though special care must be taken not to conclude that 
wraps on fiscal discipline are no longer necessary, at the same 
time we must avoid a situation in which we come upon the level 
of irreducible debt so abruptly that the only alternative to 
the accumulation of private assets would be a sharp reduction 
in taxes or an increase in expenditures. These actions might 
occur at a time when sizable economic stimulus would be 
inappropriate. Should this Congress conclude that this is a 
sufficiently high probability, it is none too soon to adjust 
policy to fend off such potential imbalances.
    For reasons I have testified to previously, if long-term 
fiscal stability is the criterion, it is far better, in my 
judgment, that the surpluses be lowered by tax reductions than 
by spending increases. The flurry of increases in outlays that 
occurred near the conclusion of last fall's budget 
deliberations is troubling because it makes the previous year's 
lack of discipline less likely to have been an aberration.
    As for tax policy over the longer run, most economists 
believe that it should be directed at setting rates at the 
levels required to meet spending commitments while doing so in 
a manner that minimizes distortions, increases efficiency, and 
enhances incentives for saving, investment, and work.
    In recognition of the uncertainties in the economic and 
budget outlook, it is important that any long-term tax plan, or 
spending initiative for that matter, be phased in. Conceivably, 
it could include provisions that, in some way, would limit 
surplus-reducing actions if specified targets for the budget 
surplus or Federal debt levels were not satisfied. Only if the 
probability were very low that prospective tax cuts or new 
outlay initiatives would send the on-budget accounts into 
deficit, would unconditional initiatives appear prudent.
    The reason for caution, of course, rests on the 
tentativeness of our projections. To be sure, unless the 
current economic weakness reveals a less favorable relationship 
between tax receipts, income, and asset prices than has been 
assumed in recent projections, receipts should be reasonably 
well maintained in the near term, as the effects of earlier 
gains in asset values continue to feed through with a lag into 
tax liabilities. But the longer-run effects of movements in 
asset values are much more difficult to assess, and those 
uncertainties would intensify should equity prices remain 
significantly off their peaks.
    In the end, the outlook for Federal budget surpluses rests 
fundamentally on expectations of longer-term trends in 
productivity, fashioned by judgments about the technologies 
that underline these trends. Economists have long noted that 
the diffusion of technology starts slowly, accelerates, and 
then slows with maturity. But knowing where we now stand in 
that sequence is difficult, if not impossible, in real time. 
Faced with these uncertainties, it is crucial that we develop 
budgetary strategies that deal with any disappointments that 
could occur.
    That said, the changes in the budget outlook over the past 
several years are truly remarkable. Little more than a decade 
ago, the Congress established budget controls that were 
considered successful because they were instrumental in 
squeezing the burgeoning budget deficit to tolerable 
dimensions. Nevertheless, despite the sharp curtailment of 
defense expenditures under way during those years, few believed 
that a surplus was anywhere on the horizon, and the notion that 
the rapidly mounting Federal debt could be paid off would not 
have been taken seriously.
    But let me end on a cautionary note. With today's euphoria 
surrounding the surpluses, it is not difficult to imagine the 
hard-earned fiscal restraint developed in recent years rapidly 
dissipating. We need to resist those policies that could 
readily resurrect the deficits of the past and the fiscal 
imbalances that followed in their wake.
    Thank you very much. I look forward to your questions, Mr. 
Chairman.
    Chairman Nussle. Thank you, Mr. Chairman.
    [The prepared statement of Alan Greenspan follows:]

PREPARED STATEMENT OF HON. ALAN GREENSPAN, CHAIRMAN, BOARD OF GOVERNORS 
                     OF THE FEDERAL RESERVE SYSTEM

    I am pleased to appear here today to discuss some of the important 
issues surrounding the outlook for the Federal budget and the attendant 
implications for the formulation of fiscal policy. In doing so, I want 
to emphasize that I speak for myself and not necessarily for the 
Federal Reserve.
    The challenges you face both in shaping a budget for the coming 
year and in designing a longer-run strategy for fiscal policy have been 
brought into sharp focus by the budget projections that have been 
released in the past month and a half. Both the Bush Administration and 
the Congressional Budget Office project growing on-budget surpluses 
under current policy over the next decade. Indeed, growing on-budget 
surpluses were projected even under the more conservative assumptions 
of the Clinton Administration's final budget projections.
    The key factor driving the cumulative upward revisions in the 
budget picture in recent years has been the extraordinary pickup in the 
growth of labor productivity experienced in this country since the mid-
1990's. Between the early 1970's and 1995, output per hour in the 
nonfarm business sector rose about 1\1/2\ percent per year, on average. 
Since 1995, however, productivity growth has accelerated markedly, 
about doubling the earlier pace, even after one takes account of the 
impetus from cyclical forces. Though hardly definitive, the apparent 
sustained strength in measured productivity in the face of a pronounced 
slowing in the growth of aggregate demand during the second half of 
last year was an important test of the extent of the improvement in 
structural productivity. These most recent indications have added to 
the accumulating evidence that the apparent increases in the growth of 
output per hour are more than transitory.
    It is these observations that appear to be causing economists to 
raise their forecasts of the economy's long-term growth rates and 
budget surpluses. This increased optimism receives support from the 
forward-looking indicators of technical innovation and structural 
productivity growth, which have shown few signs of weakening despite 
the marked curtailment in recent months of capital investment plans for 
equipment and software.
    To be sure, these impressive upward revisions to the growth of 
structural productivity and economic potential are based on inferences 
drawn from economic relationships that are different from anything we 
have considered in recent decades. The resulting budget projections, 
therefore, are necessarily subject to a relatively wide range of 
uncertainty. CBO, for example, expects productivity growth rates 
through the next decade to average roughly 2\1/2\ percent per year--far 
above the average pace from the early 1970's to the mid-1990's, but 
still below that of the past 5 years.
    Had the innovations of recent decades, especially in information 
technologies, not come to fruition, productivity growth during the past 
five to 7 years, arguably, would have continued to languish at the rate 
of the preceding twenty years. The sharp increase in prospective long-
term rates of return on high-tech investments would not have emerged as 
it did in the early 1990's, and the associated surge in stock prices 
would surely have been largely absent. The accompanying wealth effect, 
so evidently critical to the growth of economic activity since the mid-
1990's, would never have materialized.
    In contrast, the experience of the past 5 to 7 years has been truly 
without recent precedent. The doubling of the growth rate of output per 
hour has caused individuals' real taxable income to grow nearly 2\1/2\ 
times as fast as it did over the preceding 10 years and has resulted in 
the substantial surplus of receipts over outlays that we are now 
experiencing. Not only has taxable income risen with the faster growth 
of GDP, but the associated large increase in asset prices and capital 
gains has created additional tax liabilities not directly related to 
income from current production.
    The most recent projections from OMB and CBO indicate that, if 
current policies remain in place, the total unified surplus will reach 
about $800 billion in fiscal year 2010, including an on-budget surplus 
of almost $500 billion. Moreover, the admittedly quite uncertain long-
term budget exercises released by the CBO last October maintain an 
implicit on-budget surplus under baseline assumptions well past 2030 
despite the budgetary pressures from the aging of the babyboom 
generation, especially on the major health programs.
    These most recent projections, granted their tentativeness, 
nonetheless make clear that the highly desirable goal of paying off the 
Federal debt is in reach and, indeed, would occur well before the end 
of the decade under baseline assumptions. This is in marked contrast to 
the perception of a year ago, when the elimination of the debt did not 
appear likely until the next decade. But continuing to run surpluses 
beyond the point at which we reach zero or near-zero Federal debt 
brings to center stage the critical longer-term fiscal policy issue of 
whether the Federal Government should accumulate large quantities of 
private (more technically, nonfederal) assets.
    At zero debt, the continuing unified budget surpluses now projected 
under current law imply a major accumulation of private assets by the 
Federal Government. Such an accumulation would make the Federal 
Government a significant factor in our nation's capital markets and 
would risk significant distortion in the allocation of capital to its 
most productive uses. Such a distortion could be quite costly, as it is 
our extraordinarily effective allocation process that has enabled such 
impressive increases in productivity and standards of living despite a 
relatively low domestic saving rate.
    I doubt that it is possible to secure and sustain institutional 
arrangements that would insulate Federal investment decisions, over the 
long run, from political pressures. To be sure, the roughly $100 
billion of assets in the Federal Government's defined-contribution 
Thrift Savings Plan have been well insulated from political pressures. 
But the defined-contribution nature of this plan means that it is 
effectively self-policed by individual contributors, who would surely 
object were their retirement assets to be diverted to investments that 
offered less-than-market returns.
    But such countervailing forces may be greatly attenuated for 
Federal Government defined-benefit plans such as Social Security. To 
the extent that benefits are perceived to be guaranteed by the 
government, beneficiaries may be much less vigilant about the 
stewardship of trust fund assets.
    Requiring the Federal Government to invest in indexed funds 
arguably would largely insulate the investment decision from political 
tampering. But such assets, by definition, can cover only publicly 
traded securities, perhaps three-fifths of total private capital 
assets. With large allocations of public funds invested in larger 
enterprises, our innovative, smaller, non-publicly traded businesses 
might find themselves competitively disadvantaged in obtaining 
financing. To be sure, there is not universal agreement among 
economists on this point, but it is a consideration that should be kept 
in mind. More generally, the problematic experiences of some other 
countries with large government accumulation of private assets should 
give us pause about moving in that direction. To repeat, over time, 
having the Federal Government hold significant amounts of private 
assets would risk suboptimal performance by our capital markets, 
diminished economic efficiency, and lower overall standards of living 
than would be achieved otherwise.
    Private asset accumulation may be forced upon us well short of 
reaching zero debt. Obviously, savings bonds and state and local 
government series bonds are not readily redeemable before maturity. But 
the more important issue is the potentially rising cost of retiring 
long-maturity marketable Treasury debt. While shorter-term marketable 
securities could be allowed to run off as they mature, longer-term 
issues could only be retired before maturity through debt buybacks. The 
magnitudes are large: As of January 1, for example, there was in excess 
of three quarters of a trillion dollars in outstanding nonmarketable 
securities, such as savings bonds and state and local series issues, 
and marketable securities (excluding those held by the Federal Reserve) 
that do not mature and could not be called before 2011. Some holders of 
long-term Treasury securities may be reluctant to give them up, 
especially those who highly value the risk-free status of those issues. 
Inducing such holders, including foreign holders, to willingly offer to 
sell their securities prior to maturity could require paying premiums 
that far exceed any realistic value of retiring the debt before 
maturity. Both CBO and OMB project an inability of current services 
unified budget surpluses to be applied wholly to repay debt by the 
middle of this decade. Without policy changes, private asset 
accumulation is likely to begin in just a few short years.
    In summary, the Congress needs to make a policy judgment regarding 
whether and how private assets should be accumulated in Federal 
Government accounts. This judgment will have important implications for 
the level of saving and, hence, investment in our economy, as well as 
for the nature of government programs. If, for example, the 
accumulation of assets is avoided by eliminating unified budget 
surpluses through tax and spending changes, public and presumably 
national saving may well fall from already low levels. If so, over 
time, capital accumulation and the productive capacity of the economy 
presumably would be reduced through this channel. Eliminating unified 
surpluses by transforming Social Security into a defined-contribution 
system with accounts held in the private sector would likely better 
maintain national saving levels. But the nature of Social Security 
would at the same time be fundamentally changed. Alternatively, unified 
surpluses could be used to establish mandated individual retirement 
accounts outside the Social Security system, also mitigating the 
erosion in national saving.
    The task before the Administration and the Congress in the years 
ahead is likely to prove truly testing. But, of course, the choices 
confronting you are far more benign than having to deal with deficits 
``as far as the eye can see.''
    Returning to the broader fiscal picture, I continue to believe, as 
I have testified previously, that all else being equal, a declining 
level of Federal debt is desirable because it holds down long-term real 
interest rates, thereby lowering the cost of capital and elevating 
private investment. The rapid capital deepening that has occurred in 
the U.S. economy in recent years is a testament to these benefits. But 
the sequence of upward revisions to the budget surplus projections for 
several years now has reshaped the choices and opportunities before us.
    Indeed, in almost any credible baseline scenario, short of a major 
and prolonged economic contraction, the full benefits of debt reduction 
are now achieved well before the end of this decade--a prospect that 
did not seem reasonable only a year or even 6 months ago. Thus, the 
emerging key fiscal policy need is now to address the implications of 
maintaining surpluses beyond the point at which publicly held debt is 
effectively eliminated.
    But, though special care must be taken not to conclude that wraps 
on fiscal discipline are no longer necessary, at the same time we must 
avoid a situation in which we come upon the level of irreducible debt 
so abruptly that the only alternative to the accumulation of private 
assets would be a sharp reduction in taxes or an increase in 
expenditures. These actions might occur at a time when sizable economic 
stimulus would be inappropriate. Should this Congress conclude that 
this is a sufficiently high probability, it is none to soon to adjust 
policy to fend off such potential imbalances.
    In general, for reasons I have testified to previously, if long-
term fiscal stability is the criterion, it is far better, in my 
judgment, that the surpluses be lowered by tax reductions than by 
spending increases. The flurry of increases in outlays that occurred 
near the conclusion of last fall's budget deliberations is troubling 
because it makes the previous year's lack of discipline less likely to 
have been an aberration.
    As for tax policy over the longer run, most economists believe that 
it should be directed at setting rates at the levels required to meet 
spending commitments, while doing so in a manner that minimizes 
distortions, increases efficiency, and enhances incentives for saving, 
investment, and work.
    In recognition of the uncertainties in the economic and budget 
outlook, it is important that any long-term tax plan, or spending 
initiative for that matter, be phased in. Conceivably, it could include 
provisions that, in some way, would limit surplus-reducing actions if 
specified targets for the budget surplus or Federal debt levels were 
not satisfied. Only if the probability were very low that prospective 
tax cuts or new outlay initiatives would send the on-budget accounts 
into deficit, would unconditional initiatives appear prudent.
    The reason for caution, of course, rests on the tentativeness of 
our projections. What if, for example, the forces driving the surge in 
tax revenues in recent years begin to dissipate or reverse in ways that 
we do not now foresee? Indeed, we still do not have a full 
understanding of the exceptional strength in individual income tax 
receipts during the latter years of the 1990's. To the extent that some 
of the surprise has been indirectly associated with the surge in asset 
values in the 1990's, the softness in equity prices over the past year 
has highlighted some of the risks going forward.
    To be sure, unless the current economic weakness reveals a less 
favorable relationship between tax receipts, income, and asset prices 
than has been assumed in recent projections, receipts should be 
reasonably well maintained in the near term, as the effects of earlier 
gains in asset values continue to feed through with a lag into tax 
liabilities. But the longer-run effects of movements in asset values 
are much more difficult to assess, and those uncertainties would 
intensify should equity prices remain significantly off their peaks. Of 
course, the uncertainties in the receipts outlook do seem less 
troubling in view of the cushion provided by the recent sizable upward 
revisions to the 10-year surplus projections. But the risk of adverse 
movements in receipts is still real, and the probability of dropping 
back into deficit as a consequence of imprudent fiscal policies is not 
negligible.
    In the end, the outlook for Federal budget surpluses rests 
fundamentally on expectations of longer-term trends in productivity, 
fashioned by judgments about the technologies that underlie these 
trends. Economists have long noted that the diffusion of technology 
starts slowly, accelerates, and then slows with maturity. But knowing 
where we now stand in that sequence is difficult--if not impossible--in 
real time. Faced with these uncertainties, it is crucial that we 
develop budgetary strategies that deal with any disappointments that 
could occur.
    That said, the changes in the budget outlook over the past several 
years are truly remarkable. Little more than a decade ago, the Congress 
established budget controls that were considered successful because 
they were instrumental in squeezing the burgeoning budget deficit to 
tolerable dimensions. Nevertheless, despite the sharp curtailment of 
defense expenditures under way during those years, few believed that a 
surplus was anywhere on the horizon. And the notion that the rapidly 
mounting Federal debt could be paid off would not have been taken 
seriously.
    But let me end on a cautionary note. With today's euphoria 
surrounding the surpluses, it is not difficult to imagine the hard-
earned fiscal restraint developed in recent years rapidly dissipating. 
We need to resist those policies that could readily resurrect the 
deficits of the past and the fiscal imbalances that followed in their 
wake.

    Chairman Nussle. I would like you, if you would, to 
highlight from your testimony and from your opinion what you 
believe the state of the economy is as we speak and in the near 
future. The concern of markets, our constituents, consumers 
throughout the country is something that is certainly on the 
minds of all of us as we begin the job of writing the budget 
for this year. And, in fact, it certainly was on the mind of 
the President as he made his first proposal.
    I am particularly interested in your views about what would 
be the greatest assistance that we could provide from this 
budget; what is the greatest assistance to the economy from our 
budgetary decisions; and what would be the greatest threat to 
the economy as you see it today from the decisions we are about 
to make on the budget.
    Mr. Greenspan. Well, Mr. Chairman, I outlined in some 
detail my views of the short-term outlook at the House 
Financial Services Committee recently, and I will not go into 
detail on that, but just let me say that the crucial issue that 
I think confronts you is the fact that the projections that we 
are looking at are being driven to a very substantial extent by 
longer-term considerations, in part because a large part of the 
receipts that we are observing, that are coming on stream in a 
manner which are well above expectations, seem to be to a 
significant extent the result of the huge rise in asset values, 
especially in households, and the rise in asset values that has 
reflected itself in increased tax liabilities, especially in 
individual tax returns.
    There is a long lag in the translation of capital asset 
values into their realization and taxation, whether it be 
literally the capital gains tax itself or, just as importantly, 
the effect of capital gains on taxable incomes. Because there 
is a very long lag in that process, the actual short-term 
budget outlook is not going to be as closely aligned to what 
economic forces are as it always has been in the past because 
of these significant differences. So the crucial issue is 
really going to have to emphasize more the longer-term view.
    And in response to your last question, Mr. Chairman, I 
think that the most important thing that the budget should do 
is to create a sense of stability and long-term coherence in 
budget policy. That, in my judgment, can create the most 
effective backstop for economic decisions in this country. And 
I would hope that what we do is get on a path of budget policy 
which we do not back and fill from too readily, because that 
creates uncertainties in the marketplace. And, presumably, if 
it occurs to a substantial extent, then I think it will induce 
negative effects on capital investment.
    But above all, as I said in my closing remarks, these are 
extraordinary times. These surpluses have done extraordinarily 
positive things for our economy. Let us remember that deficits 
for a very protracted period of time dominated the discussions 
of this committee. Hopefully we will not get back and should 
not get back into those types of discussions again.
    Chairman Nussle. One of the advantages that I believe we 
have had in forecasting and putting our budgets together is 
that we have been relatively pessimistic with regard to the 
economic growth potential that we anticipate within the current 
budget, let alone for the 10-year forecast that we put into 
play, and that has resulted in as much as $80 billion increases 
in overforecast of our revenues.
    Do you have any opinion with regard to the forecasts or 
with regard to the growth figures that are being contemplated 
for this budget? We are using what many are suggesting are 
pessimistic views, certainly below the blue-chip averages that 
are being suggested right now. That, to me, appears to be not 
only pessimistic, but realistic with regard to your concerns. 
If that is true, then that should, to some extent, alleviate 
some of the concern you have with regard to our budgeting.
    Mr. Greenspan. Well, Mr. Chairman, we have looked at the 
various projections of both OMB and CBO and the previous 
administration's OMB. They are all very close. And they are all 
close not because the outlook is so sharply in focus that it is 
very difficult to deviate, but what tends to happen in periods 
such as this is you try to get a sense of what the various 
probabilities are out there, and while the range of 
probabilities may be rather wide, there is sort of a maximum 
likelihood estimate that is pretty much convergent around the 
types of numbers that we have seen in these various 
projections. So it is reasonable to do that.
    Let me just say that being conservative for conservative's 
sake is a mistake, because that, by definition, means you have 
a suboptimal forecast, and you don't want to do that. You want 
to get the best estimate you can and then focus on the obvious 
problems of how accurate that forecast is. But one doesn't 
solve that problem by taking an especially either overly 
optimistic or overly pessimistic view. That doesn't help you 
make projections, it just helps you make mistakes.
    So the question should not be whether you are conservative 
or not, but what is the most likely outcome and what is the 
range, the realistic range, that one can expect when you are 
dealing with 5- and 10-year forecasts.
    Chairman Nussle. It seems to me what you are telling us is 
that these forecasts that we are using from OMB and CBO appear 
to be at least realistic within our current understanding of 
where the economy is going.
    Mr. Greenspan. Mr. Chairman, let me just say that the 
crucial factor, as I pointed out in my prepared remarks and in 
other testimony, is the increasing evidence that the underlying 
structural productivity growth of this economy has picked up to 
levels quite significantly above where it was, for example, in 
the 20 years preceding 1995. To be sure, it's likely to be 
coming down, as indeed the data do show for the third and the 
fourth quarters, and certainly will show for the first quarter. 
The productivity, the actual output-per-hour growth rates, are 
going to come down quite significantly, but that is to be 
expected and not inconsistent with the general view that the 
longer-term productivity numbers are going to be running at 
rates of increase above where they have been in the past.
    If that assumption is made, a whole series of other 
calculations fall into place. Of all the assumptions we make 
about the deliberations on the budget, that is the critical 
one. If that one is right, you can be wrong on a large number 
of other things. If that one turns out to be wrong, then the 
outlook is really quite fundamentally different from anything 
we have seen in the numbers of projections that you have been 
exposed to.
    Chairman Nussle. Because there is a certain level of 
uncertainty with regard to projections, the President has put 
together a plan which suggests that we can pay down all of the 
redeemable debt between now and 2011, as part of the plan, $2 
trillion; that another substantial portion of that, $1.6 
trillion, should be returned from that tax surplus to the 
people that pay the taxes in the form of tax relief. The Ways 
and Means Committee just yesterday moved the first piece of 
that legislation. Finally, that there should be approaching a 
$1 trillion reserve fund for a contingency. And I suppose to 
some extent that contingency may be that some of those 
surpluses may not be realized to their fullest extent.
    Does this general matrix appear to be wise within the 
counsel that you are providing us today, cautioning us about 
the surpluses actually coming to fruition in years to come?
    Mr. Greenspan. Mr. Chairman, I would like to respond by 
repeating what I have said many times in the past. These 
judgments are fundamentally political judgments in the best 
sense of the term; they are based on value judgments made by 
our elected representatives, and the issues that I would raise 
relate to the macroeconomic effects and the broader issues. But 
I hesitate to raise issues on the very details of any 
particular program because they are very difficult decisions, 
and there are pluses and minuses on both sides.
    At the root, these are value judgments and judgments about 
where the future of this country is going and what type of 
budgetary processes we want. And if I may, I would like to 
eschew giving personal opinions. Even though I am a voter with 
one vote, it is out of a rather large voting population, and I 
don't think I want to put more weight on it than I think it 
deserves.
    Chairman Nussle. I appreciate that.
    One final question, then, to just zero in on one of the 
pieces I think you might be willing to comment on, and that is 
your consistent advice over the years with regard to paying 
down as much of the publicly held debt as possible. That 
appears to be a goal that can be accomplished. You mentioned it 
as a highly desirable goal. It appears to be a goal that we can 
achieve by probably the midpoint in this 10-year process, if 
not $2 trillion by the end of 2011.
    Do you believe that at least meets, to your satisfaction, 
the goal that you believe is highly desirable?
    Mr. Greenspan. When I originally raised the issue of the 
first priority that we should have with respect to lowering the 
debt from an economic point of view, and I emphasize, I made 
that issue not as a judgment on values, but on a judgment as to 
what my view was when asked with respect to the effects of a 
lowering of debt on real interest rates, on the cost of capital 
and, therefore, on rising productivity and standards of living.
    I think that it is a very rare event--that policies which 
endeavor to do something, like effectively reduce and, at the 
end of the day, eliminate, for all practical purposes, the 
Federal debt, are very likely to be achieved except if 
something extraordinarily unforeseen occurs. And that is a 
major achievement in this country, and it has had and will 
continue to have as it goes forward a very positive effect.
    But once we get down to the irreducible minimum, no further 
benefits are possible. So in that sense, we declare victory and 
go on to the next issue that is relevant to deliberations.
    Chairman Nussle. Thank you, Mr. Chairman.
    Mr. Spratt.
    Mr. Spratt. Mr. Greenspan, when you mentioned that you had 
one vote, I was reminded of George Orwell's comment that 
sometimes some voters are more equal than others. I think your 
vote is a very important one.
    Mr. Greenspan. I believe in democracy; one vote per person.
    Mr. Spratt. I do, too.
    You have described the path we are trying to find as a 
glidepath, the Greenspan glidepath. To establish that 
glidepath, we need to know where we are and where we are going, 
and that means we need to have some kind of fix on what is the 
irreducible amount of debt within the foreseeable future.
    I never thought we would have this dispute, but the 
administration suggests that there is as much as $1.288 billion 
of Treasury debt that is unredeemable, not callable; CBO 
developed a figure to arrive at $818 billion; as I read your 
testimony here, you have a figure close to $750 billion; and 
Gary Ginsler, who used to be the Under Secretary of the 
Treasury, responsible for debt management, said perhaps we 
could get the debt down to $410 billion or $500 billion over 
the same period without paying prohibitive penalties.
    Could you give us an idea of, within the next 10 years, 
what is the lowest point that we should try to achieve on this 
Greenspan glidepath?
    Mr. Greenspan. First of all, let me just say the reason for 
the glidepath, as I hope I was able to elaborate, is basically 
my concern that if we were to come up to a very large surplus 
and choose to eliminate it because we were fearful of 
accumulating private assets in government accounts, an abrupt 
change at that point would be highly undesirable. And, 
therefore, the glidepath I was talking about was a mechanism 
which would reduce the probability of our coming up against 
that sort of phenomenon and having to very rapidly adjust, in 
an inappropriate manner, the fiscal policy of this country.
    The question of what is the irreducible level has a number 
of variables in it. It depends on how you calculate it and, 
most importantly, at what time you are indicating the actual 
level is breached. There is no ambiguity whatsoever about what 
the debt is. There are certain elements in our debt which would 
be very difficult, and indeed, inappropriate probably to 
reduce. One, obviously, is savings bonds. Two is the State and 
local government savings which facilitates the capacity of 
State and local governments to take moneys they raise in debt 
issuance and escrow them into a particular Federal Government 
debt facility. These are valuable things that are extremely 
unlikely to be reduced, or should not be reduced.
    Then there is a very large component of marketable Treasury 
securities, to a large extent held by foreign central banks and 
foreign businesses and individuals, who hold those assets 
because they perceive them to be an extraordinarily valuable, 
risk-free, dollar-denominated obviously, asset which, even 
though they may get, say, 5 percent on them annually, they 
would be willing to hold them at 3 percent or less, meaning, to 
get them to disgorge those securities prior to their maturity 
would be extraordinarily expensive and obviously undesirable to 
do. The level of what that number is, is a judgmental factor, 
and it can vary. The first two I don't think really vary in the 
slightest. That Treasury marketable securities is an issue, 
what can be bought back and what cannot, is an open question.
    Finally, there are obviously but not explicitly stated 
different assumptions about what is going to be happening to 5- 
and 10-year note issuance and 30-year bond issuance, because, 
clearly, to the extent that those issues are expanded between 
now and, say, 2006 or 2008 or 2010 will pretty much determine 
what the level of unredeemable debt is without a very 
significant amount of premium paid for outstanding debt. So 
there is an issue of indeterminacy here which, in part, will 
reflect to a very substantial extent the particular year in 
which we run into a point when surpluses can no longer redeem 
debt and, two, what Treasury policy is with respect to the 
issuances of 5-, 10-, and 30-year coupon securities.
    Mr. Spratt. Well, am I reading your testimony correctly to 
indicate you think it might be as low as $700 billion, though?
    Mr. Greenspan. Well, the number I wrote down there is 
actually a different number from what others are using because 
it is calculated differently. I was merely referring to what 
the number was as of January 1 of this year, but that is not a 
relevant number in that regard. I was using it merely as an 
example of what the size and order of magnitude is, because we 
will not get to a point of irredeemable debt for a number of 
years, and as a consequence, the calculation must be made as of 
that forward point.
    Mr. Spratt. Let me ask you about the projections, which are 
pretty phenomenal if you have been around here as long as I 
have and grappled with the deficit and wondered if we would 
ever see the budget in surplus.
    You stressed in your testimony the ``tentativeness'' of 
these projections because primarily of the fact that they rest 
upon assumptions about productivity growth that is going on in 
the economy now.
    The question, I guess, is, is this systemic and sustained, 
or is it something episodic, or, indeed, are we even reading 
the evidence wrong?
    CBO, when it did its book here, its latest forecast, to 
emphasize the primacy of these factors in its forecast put it 
on its cover. They show the productivity in the economy between 
51 and 73, which was 2.7 percent. They show that productivity 
dropped to 1.5 percent between 1974 and 1995, and now they are 
assuming that it will continue at a level of about 2\1/2\ 
percent.
    Now, they say in their report, however, on page 100, that 
if this factor doesn't obtain, and if we revert to the 
productivity growth rate of the previous 25-year period, and if 
the cost assessment of Medicare and Medicaid is off by 1 
percent, and if tax revenues don't grow faster than underlying 
incomes that are taxed, then we are not on an ascending path of 
higher and higher surpluses. Indeed, we will have an on-budget 
deficit by as early as 2003, 2004.
    Would you share that view? Have you read the budget 
estimate yourself to include that particular chapter?
    Mr. Greenspan. Well, I don't know about the 2003-2004 
issue. Let me say this: The issue of productivity is beyond 
2003 and 2004, because the period immediately ahead is far less 
relevant than the more deep-seated question of what the broader 
productivity patterns are going to be in, say, 2005 and 
forward. If it turns out that productivity has only a 1.5 
percent annual growth rate leaving out Medicare and all the 
other issues, you have a fundamentally different issue.
    But remember that there are two sides to this. That is, 
what both CBO and OMB are trying to do is give you a middle 
estimate, and they can just as easily be wrong by being too low 
as being too high.
    So we have to confront the possibility of both types of 
problems, and I think they are problems in the sense that 
having very large chronic surpluses, while obviously a far more 
benign phenomenon than having large deficits, nonetheless do 
create significant economic problems in the allocation of 
capital. We ought to be aware that allowing either side--either 
extremely large surpluses or extremely large deficits--both 
have significant negatives.
    So one of the real issues that confronts us is to get a 
sense of where we are in all of this. That is why I think, as 
CBO and indeed OMB point out very correctly, the crucial issue 
here is these long-term productivity growth numbers. And we 
will not get a truly effective fix on them, one that creates a 
good deal of confidence, until we have been through this full 
cycle, which we are now working our way through, and see where 
we come out when we are back to normal.
    The data to date, as I indicated in my prepared remarks, 
are quite encouraging in that regard, but we are not there yet, 
and there are considerable possibilities that the numbers that 
are being projected can turn out to be significantly off.
    Mr. Spratt. Well, in light of that, you have recommended 
some caution on our part in not going too far with the policy 
actions that we take that would be irreversible. And yet you 
were saying today you are concerned about instability in the 
marketplace. You would like to see a stability of fiscal 
policy.
    I infer from that, then, that you are being a little 
skeptical of triggers that would turn off and turn on tax cuts 
and leave the market wondering what may happen?
    Mr. Greenspan. If you put on triggers, there is no question 
that you do create an element of uncertainty with respect to 
economic decisionmaking that is based upon presumptions of 
longer-term tax cuts or, for that matter, expenditure 
increases.
    The trigger by itself, wholly from the point of view of 
looking at the certainty issue and its effect on economic 
decisions, is a negative. In my judgment, however, the ability 
to have a far more calibrated pattern of unified surpluses and 
a more balanced system, which triggers help to achieve to a 
considerable extent, is a more important value, from my point 
of view, than the question of how the tax system is affecting 
economic activity.
    The reason I say that, Congressman, is that we have at this 
moment an extraordinary productive set of incentives in our 
economy in the sense that we are clearly only part way through 
this major technological revolution which has been creating 
very high long-term rates of return on new facilities. The 
problem is not the long-term earnings expectations, which are 
currently creating problems. It is the discount factor, as best 
I can judge, namely, a very high degree of uncertainty and 
risk.
    As I indicated in comments before the House Financial 
Services Committee, it is that sharp increase in the discount 
factor which has brought the present value of assets down and 
curbed capital investment in the short run. But that is an 
issue which relates to the short run, and I don't perceive that 
what we are missing at this point are long-term incentives.
    I did also say in previous testimony, and indeed I have 
commented on occasion, that if you think of the Tax Code and 
potential tax cuts as a stimulus to the economy, it is very 
unlikely that in the short run you can really significantly 
affect the evolution of what is going on in the economy now, 
unless you moved extraordinarily rapidly. It would have a value 
only if the adjustment process we are now undergoing stretched 
out inordinately, in which case having lower taxes rather than 
having higher taxes undoubtedly would be helpful.
    So it is a very complex set of decisions that are involved 
here, and a lot rests upon forecasts which we can make only 
tentatively.
    Mr. Spratt. Thank you, Mr. Chairman. Let me yield to 
others. I may have some questions when we get to the end. Thank 
you very much, though.
    Chairman Nussle. Mr. Sununu.
    Mr. Sununu. Thank you very much.
    Welcome, Mr. Chairman.
    If I were an economist, I would be very focused on the 
issues and the statistics and assessments of productivity and 
economic growth, and I would go back to my office and maybe 
make adjustments on the economic model I had on my computer. 
But I am not an economist, and I don't have such a model. I am 
a budgeteer right now working on the Budget Committee. And 
rather than focus on productivity, I am focused on revenue 
growth, on projecting revenue growth, and I know the economy 
plays into that.
    But there are other factors, in particular the assumption 
one makes about the percentage of the national economy that is 
consumed or collected at the Federal level on taxes. On that 
point, both the Budget Office and the OMB assume a reduction, a 
declining level of tax collection as a percentage of our 
Nation's economy. That confuses me a little bit. But more to 
the point, it results in an assessment of revenue growth that 
is significantly below historic averages.
    If you go over any 10-year period, say, in the second half 
of the 20th century, look at the 1950's, the 1960's, look at 
the decade of the 1970's even, when productivity was low, the 
decade of the 1980's or 1990's, in each of those decades 
revenue growth ran between 7 and 9 percent per year. Now, we 
are putting together a 10-year budget. If I was putting 
together a 1- or 2-year budget, I might be more inclined to 
look at the statistics you look at, inventories, productivity, 
unemployment, et cetera. But over a longer period, I think that 
the historic average does bear some importance.
    Over the 10 years of this budget, we forecast a nominal 
revenue growth of 5 percent per year, and that is markedly less 
than the minimum of 7 percent per year over the decade periods 
I have spoken about. You indicated it doesn't make sense to be 
conservative just to be conservative, but my question is, 
doesn't that strike you as too great a refutation of the 
historic record or what might be different that would justify 
thinking that the next 10 years would be so different than any 
10-year period in the country's modern history?
    Mr. Greenspan. Well, Congressman, you are quite correct 
that the ratio of receipts to gross domestic product and 
nominal value are projected down. And the reason they do that 
relates to the issue I raised earlier; that in the most recent 
period, a significant proportion of tax revenues are coming 
directly or indirectly from capital gains either realized or 
unrealized. And if you add that to the receipts that come 
directly from taxes on earned income, you will end up with a 
higher ratio relative to nominal GDP, which excludes capital 
gains.
    As a consequence of that, and I don't think they exactly do 
it this way, but if you were able to strip out of the receipts 
the parts that were not related to capital gains or changes in 
asset values, and you took that as a projection, as a ratio to 
the GDP, my impression is it would be pretty flat and, indeed, 
would look very much like earlier periods.
    So what is happening is this huge bulge in asset values is 
distorting the ratio, and, implicitly or explicitly, both CBO 
and OMB are taking those asset values and they are bringing 
them down so that a smaller proportion of aggregate receipts 
will be capital gains related. And, hence, since the GDP 
doesn't include capital gains--that is the denominator--then 
the ratio will fall.
    And in that regard, I suspect they are correct in that it 
is just a shorthand way of going through a more sophisticated 
and very difficult calculation. But you are certainly correct, 
there is no reason to project less than we have seen in the 
past, after you adjust for a presumed capital gains bulge and 
then some slowing down in that asset set of values.
    Mr. Sununu. Slowing down in the asset values or declining 
in the asset values?
    Mr. Greenspan. I frankly don't know what their actual 
estimates are. My presumption is that they probably have 
adjusted for the decline in asset values in equities. Remember, 
equities are only part of the issue here.
    Mr. Sununu. Not that I don't have great respect for your 
presumption, but you are presuming that this is the way they 
have structured the model? It is not necessarily the way you 
have analyzed economic growth. They do not send the model over 
to you for your thumbs up, do they?
    Mr. Greenspan. No. What I am trying to do is to infer why 
they might have done it that way. I haven't had a chance to 
look at the detail. But what I'm really saying is that if I 
want to just summarize, it doesn't necessarily follow that 
taking the projection as a ratio to the GDP and lowering it is 
an incorrect assumption. But you are correct, I don't know that 
firsthand.
    Mr. Sununu. I want to address the issue that Mr. Spratt 
raised, not to get into it in too much detail, but on the 
irredeemable debt--the savings bond, and State issues you 
talked about--is today about $360 billion. The longer-term 
notes, 10 to 30 years, is roughly $790 billion. You had a 
number as of January 1 this year of $750 billion.
    I assume you took a portion of the 10-to 30-year 
securities, roughly half, and said half of it might be held by 
foreign banks, where there is a much greater reluctance to sell 
without a significant premium, and that half might be purchased 
in the open market at a modest or insignificant premium. Is 
that a reasonable way of describing how the calculation is 
made?
    Mr. Greenspan. The number is calculated in a somewhat 
different way from the way it should be if one is endeavoring 
to get at the irredeemable debt. I calculated the number as 
what basically was in the existing set of liabilities which 
were not either matured or callable prior to the year 2011. 
Now, the reason I did that was that no one had been discussing 
this irredeemable debt previously, and I am just trying to give 
an example. But I wouldn't use my numbers as being that 
calculated.
    Mr. Sununu. Aside from the issue of the premium that has to 
be paid, as we approach that level, whatever it might be in 6 
or 7 years, are there any other concerns or issues that we 
should be aware of that will be raised by the capital markets; 
in other words, the treasuries that are used by our banking 
system and financial services system for collateral or that 
play a role in other transactions?
    Aside from the premium issue, are there going to be some 
concerns raised by those elements of the capital markets as 
these securities become more and more scarce?
    Mr. Greenspan. Congressman, I think not. There is no doubt 
that our Treasury issues have been an extraordinarily useful 
benchmark security for not only our domestic financial markets, 
but really for the rest of the world. And the question 
basically is can we do without them if we have to? And the 
answer is yes.
    We at the Federal Reserve, for example, who hold over $500 
billion in U.S. Treasury issues, are, as I have indicated 
previously, undergoing a fairly extensive examination of how we 
would operate an open market policy without this very 
substantial amount of debt. It is obviously a little more 
difficult to do it that way, but the advantages of reducing the 
debt are such that this should be our first priority, and the 
markets will adjust.
    New benchmarks will arise. You will get the private markets 
creating near riskless securities, quadruple-A securities, so 
that while it clearly would be better, other things equal, to 
have that Treasury debt out there, other things are not equal. 
And the other things that are not equal is the value of having 
very negligible amounts of U.S. Treasury debts outstanding.
    Mr. Sununu. Thank you very much.
    Chairman Nussle. Mr. Bentsen.
    Mr. Bentsen. Mr. Chairman, always good to see you. I want 
to follow up briefly on the point you were just getting on, and 
I will ask a couple of questions for the record on that.
    I did read your testimony from a couple of weeks ago before 
the Senate Banking Committee where you talked about the study 
that is going on at the Fed for its open market activities.
    And, in fact, the Fed is engaging in using agency debt, 
some of the GSE debt, and other types of securities, and you 
are exploring, as I understand it, even going beyond State and 
local debt. I am curious as to what other types of debt or 
collateral you would be looking at. So I would like to hear for 
the record, to the extent you could provide me where you are on 
your study and the types of debt you are looking at, because 
the Fed is facing the same problem that the general government 
is facing--for different reasons, but nonetheless the same 
problem.
    I also would like for the record, because I don't think we 
want to engage too much in this back and forth--and I have 
asked the Chairman of the Financial Services Committee to hold 
a hearing on this issue, the possibility of why--and the 
efficiency or lack thereof of the Federal Government, the 
Treasury Department in its debt management using unexpended 
balances to decrease to maturity otherwise irreducible debt, 
because I think it is interesting and we ought to discuss it.
    If there is anyplace that you can earn arbitrage, legal 
arbitrage, it is through the Federal Government. So I would ask 
that your staff, if they could prepare a response to that, 
whether or not that would be a feasible opportunity for us in 
the future as a way of debt management and to get after this 
trillion, 700 billion, 400 billion, whatever it is, that there 
might some other market mechanisms that we might use.
    [The information requested follows:]

    Chairman Greenspan's Response to Questions Posed by Mr. Bentsen

    As you noted, in my testimony before the Committee on Banking, 
Housing, and Urban Affairs of the U.S. Senate on February 13, I stated 
that, at its late January meeting, the Federal Open Market Committee 
announced additional study of the possibility of moving beyond current 
practice by expanding the scope of eligible assets for open market 
operations or enhancing the role of the discount window. The minutes of 
that meeting, which were released on March 22, provided further 
elaboration of the content of the FOMC's discussion.
    The FOMC decided to proceed cautiously and has asked Federal 
Reserve staff to review a broad range of alternatives recognizing that 
relative to investments in Treasury securities, all of the options 
could entail significant drawbacks, including increases in credit risk 
in the Federal Reserve's portfolio, reductions in its liquidity, and 
potentially distorting effects on relative prices in financial markets.
    In the near term, the FOMC asked the staff to investigate the 
option of authorizing the Desk to engage in repurchase transactions 
using assets that could be purchased under existing legal authority but 
are not currently permitted by the FOMC--specifically, certain debt 
obligations of U.S. state and local governments and of foreign 
governments. Before the FOMC could decide on such an additional 
diversification of the System's temporary holdings of financial assets, 
a number of issues would need to be resolved that would necessitate 
consultation with the Congress and market participants.
    From a somewhat longer-term perspective, the FOMC also requested 
the further study of certain other issues. One involved the appropriate 
reliance on outright purchases versus temporary short-term transactions 
that would be undertaken through intermediaries--such as repurchase 
agreements with securities dealers and discount window loans to 
depository institutions. The role of the discount window might be 
expanded by auctioning such credit to financially sound institutions.
    Another issue involved adding new assets not currently allowed by 
law either to the permanent Federal Reserve portfolio or on a temporary 
basis through a still wider range of underlying collateral for 
repurchase agreements. Such use of private securities would have a 
number of risk management and accounting implications that would need 
thorough examination. The appropriate speed and extent of diversifying 
the Federal Reserve's portfolio also would have to be carefully 
considered. The Committee did not specify particular types of assets it 
wanted to study further. Rather, it is still at the stage of looking at 
broader issues of strategy relative to approaches to diversification, 
liquidity, and risk should it need to utilize assets beyond those 
currently authorized by the Federal Reserve Act.
    You also asked about the merits of defeasing Federal debt that 
cannot readily be paid down. Private borrowers typically defease debt 
in order to remove it from their balance sheets, which may help them 
gain access to credit on more favorable terms. The U.S. Treasury, of 
course, already can borrow on very favorable terms, because the long-
term health of the U.S. economy and the strengths of its political 
system provide investors with an extremely high level of assurance that 
the Federal Government will have sufficient revenues to repay its debt 
obligations. Thus, defeasing its debt is unlikely to improve the terms 
on which the Treasury can borrow. You seem to be suggesting, however, 
that the Treasury also could make an arbitrage profit by investing 
funds in the liabilities of private issuers at a higher interest rate 
than it pays on its debt. But the higher interest rate on such private 
instruments importantly reflects higher risks that investors must bear. 
Moreover, as you know, I am deeply concerned about the potential for 
distorting financial markets if the Federal Government were to become a 
major investor in private assets. I believe it would be virtually 
impossible to shield investments by the Treasury's general fund from 
political influence, and the resulting override of the market's 
allocation of credit would lead to financial and economic 
inefficiencies.

    Mr. Bentsen. Let me go further to your testimony. I do want 
to highlight for the record--some of the points you hit, and I 
think it is important that we go through them again. On page 7, 
you say limit surplus, reducing actions of specified targets 
for the budget surplus, or Federal debt levels were not 
satisfied. The reason for caution, of course, rests on the 
tentativeness of our projections, but the risk of adverse 
movements and receipts is still real. The probability of 
dropping back into deficit as a consequence of imprudent fiscal 
policies is not negligible. With today's euphoria surrounding 
the surpluses, it is not difficult to imagine the hard-earned 
fiscal restraint developed in recent years rapidly dissipating.
    Those are notes of caution as I read it. I would further 
ask, I think the laws of economics are fairly clear that a 
dollar today is worth a lot more than a dollar tomorrow. Yet it 
seems that we are moving in a path, with the President's 
budget, of treating a dollar 10 years from now as a dollar that 
we have in hand today, with no discounting at all. Except I 
read your testimony to be a little different. I would like you 
to comment on that.
    The second thing I would like to ask you relates to the 
President's budget and the treatment of the trust fund 
surpluses. And I won't engage in the debate over the Medicaid 
Trust Fund surplus that we had yesterday because that is an 
intergovernmental function. But more to the point, and you 
testified on this many times before this committee and other 
committees, with respect to Social Security Trust Funds and 
Medicare Trust Funds, there is a fiscal gap in both the Social 
Security Trust and the Medicare Trust. In the past, I believe 
you have testified that the best thing the government could do 
would be to use surplus funds to pay down debt because in the 
future we will have to regain debt that is held by the trust 
funds and pay out the benefits. To spend that money--to take 
surpluses and try and use those to paper over that fiscal gap 
would not work because those funds are already obligated. And 
yet it would appear from looking at the President's budget that 
in some cases they are contemplating using perhaps $600 billion 
from projected Social Security Trust Fund receipts for 
privatization of the Social Security System. Would that not be 
exacerbating the fiscal gap that is there already, or does that 
mean that you have to make up that $600 billion by making 
structural changes in the program as it relates to benefits in 
the future?
    The same would be said for the Medicare program. You have 
trust fund assets that are obligated funds for future retirees, 
but the administration seems to be poised to use those funds on 
hand to restructure the program. Don't we have to make those 
moneys up somewhere down the line? Those are not unencumbered 
assets, in my reading of what I think you have said in the 
past. Is that correct? And you, of course, have great expertise 
in this area.
    Mr. Greenspan. The problems arise because of the way we 
keep the books in the unified budget system. If we try to 
separate the issue of what the budget would look like on an 
accrued basis as distinct from a unified cash basis, which is 
what it is, we would still have a small deficit. And the reason 
that would be the case is if you take Social Security by 
itself, we are still increasing the net contingent liabilities 
which are in the program, which now represent roughly $9 
trillion or thereabouts. What that basically means is if you 
are going to move part or indeed all of the Social Security 
Trust Fund into the private sector, you move the obvious 
receipts out of the unified budget, and you put them in the 
private sector. But you also remove the obligations--the 
government's obligations--and one way you can do that is by 
creating what is called recognition bonds, the way the Chileans 
did, in which what you pick up is the liability which each 
individual worker has created for the Federal Government, 
meaning the benefits that have accrued to that worker on the 
basis of the existing Social Security benefit rules. And if you 
even assume at this particular point that you are asking what 
is the liability to that individual worker when he or she 
retires, that is not on our books in the unified budget at this 
time. And that is what that $9 trillion, $10 trillion number 
is.
    If you move part of Social Security to the private sector, 
you move the receipts and you move the contingent liability, 
meaning instead of a contingent liability which presumes the 
Congress could change it, you hard-wire those liabilities and 
make them indistinguishable from liabilities that the 
government now must pay, the $3.4 trillion, for example. What 
you then do is you increase the debt to the public by the 
amount of recognition certificates that move into the private 
sector.
    So the issue here really relates to, when you make these 
decisions, you have to take into consideration exactly what the 
obligations of future benefits are going to be. And the 
standard model that most people use, the Chilean model, which 
is the one which is the cleanest one in that regard, is that 
what they did is that they moved a significant part, in fact 
virtually all, as I recall, of their contingent liabilities, 
made it official debt of the government, created recognition 
certificates, in a sense privatized Social Security.
    Now, nobody is arguing to do that at this particular stage. 
They are all arguing one form or another of whether you move 
part of Social Security. The crucial issue here is in that 
process do you move the benefit obligations to the private 
sector as well, or do you increase the total benefits by adding 
new benefit calculations that are coming from, say, the defined 
contribution plan, which occurs as you move part of the Social 
Security receipts over, or do you basically move the 
requirement to pay benefits to the private account as well?
    The crucial question that must be asked here: Are aggregate 
Social Security benefits being increased or left the same?
    Mr. Bentsen. Mr. Chairman, if I could ask for just an 
English translation from the Chairman on this because I know my 
time is up. On the issue of when you make that transfer, it is 
not necessarily a dollar-for-dollar transfer of benefits. I 
believe what you were saying, is when you transfer the benefits 
from the government obligation to the private sector 
obligation, the question then is, is the safety net which 
existed in the government obligation, does it still exist in 
the private obligation, or is the private obligation solely 
contingent upon market value?
    Mr. Greenspan. That is correct, Congressman. Implicit in 
all of these discussions is usually some form of safety net 
imposed not as part of the Social Security structure itself, 
but an endeavor to catch those, who would be a small minority, 
who invest poorly and as a consequence find themselves at the 
point of retirement in some dire straits.
    Mr. Bentsen. So that is not free.
    Mr. Greenspan. Correct, it is not free.
    Mr. Bentsen. Thank you, Mr. Chairman.
    Chairman Nussle. Mr. Bass.
    Mr. Bass. Thank you, Mr. Chairman, and thank you, Chairman 
Greenspan, for being here today. I have three--peer between 
these two heads here--three questions for you. First is 
relevant--first two are relevant to Mr. Bentsen's comments, or 
first one is at least.
    Ultimately, what happens to the unredeemable surplus? You 
talked in your testimony about not wanting to have private 
investment. Maybe index funding is an interesting option. You 
just talked about the possibility of privatization of Social 
Security. I am not going to put words in your mouth. You 
certainly don't support spending it, I don't think. So 
ultimately from cash flow as well as a money management 
standpoint, what happens to this surplus if it occurs? It is a 
delightful debate, but we really don't know what to do with it.
    My second question refers to the Goldilocks statement of 
the President the other night. If you were economic emperor for 
a day, and some might say you already are, would you agree with 
the President that his tax cut is just about right?
    The third question, and I will be quick here, which is a 
different one, but we are going to be considering the 
reintroduction of fast-track trade. It has got a new name now. 
It is called trade promotion authority. Don't you believe that 
this is an important economic priority for this country, and 
the President, having been without fast track promotion 
authority for over 7 years, needs it, and it needs to enacted 
as soon as possible?
    Mr. Greenspan. Congressman, let me go backwards. The 
authority to enable the President to negotiate in an effective 
manner on trade issues is a very crucially important 
requirement if we are going to maintain open and expanding 
markets. I think the evidence is highly impressive that trade 
during the post-World War II period has been extraordinarily 
beneficial to all parts of the world, especially the United 
States. And it would be really tragic if we, who have led the 
world in openness, don't continue to be the leader in opening 
up markets, creating competition, and raising standards of 
living everywhere.
    So I think it is a very important issue, and hopefully I 
will be able to expand on it. I have been invited by another 
committee to discuss this issue, and I will try to be as 
expansive as I can because it is a terribly important issue.
    I am not going to comment on the Goldilocks issue. That is 
an issue which the President and the Congress have to decide, 
and I don't have anything useful to add, but would you just 
give me a quick review? I have forgotten the first question.
    Mr. Bass. Ultimately what happens to that unredeemable 
surplus, the ultimate bottom line, after everything--we 
actually have more money, Social Security, everything is paid, 
is accounted for, there is still more cash coming in, what 
could happen?
    Mr. Greenspan. The simplest thing to do, leaving aside the 
obvious issues of spending it or reducing taxes, because one of 
the things you want to be careful about is not to reduce 
national savings when you begin to move, is you take the 
unified surplus and you try to bring it down to zero. A simple 
way to do it, and it sounds a lot simpler than it probably is, 
is to take individual retirement accounts, take them from the 
government account, and put them in the private account. You 
reduce the unified budget surplus by exact dollar for dollar of 
what you take out. You put mandated individual retirement 
accounts in the private sector. The presumption is that, one, 
you don't have the problem which I am concerned about, namely 
the issue of the Federal Government investing in private 
securities, and, two, you don't have a material change in the 
national savings rate. All you have done is move savings from 
the government sector to the private sector, and that, frankly, 
is probably highly desirable if you can do that.
    So whether or not you do it through the Social Security 
Trust Funds or IRAs or other mechanisms of that nature is a 
matter of choice, but the ideal choice is to try to move the 
unified budget surplus to the private sector with as minimum an 
impact as you can get on overall national savings.
    Mr. Bass. Thank you, Mr. Chairman.
    Chairman Nussle. Mr. Davis.
    Mr. Davis. Thank you, Mr. Chairman.
    Chairman Greenspan, one of the points you have highlighted 
in your testimony are the benefits of increased productivity 
associated with technology. My first question is what would you 
recommend that Congress do by way of tax policy or spending to 
contribute to continued short-term and long-term benefits in 
productivity associated with technology?
    Mr. Greenspan. The first thing I would do is to try to find 
a general view from those who are the innovators, or have been 
the innovators in recent years, and try to ask them and get 
some insight from them as to what various different tax 
policies and actions by the American Government would enhance 
their incentives to do the types of things they have been 
doing.
    It is very easy for an economist to sit here and 
hypothesize on how people will respond. There is a far simpler 
way of finding out: You ask them. And I don't know what they 
are going to say, but I would listen closely to their 
recommendations because they may tell you that taxes don't 
matter all that much, or they may tell you they are very 
crucial. They may tell you that the capital gains tax is a 
great inhibition to what they are doing, or they may not. But 
it is important to find out from the people who are on the 
firing line rather than from commentators who try to make 
inferences about what makes people behave.
    Mr. Davis. Chairman Greenspan, this is our second day of 
hearings on the budget, as you know. Yesterday, the House Ways 
and Means Committee passed a tax cut that is estimated between 
$950 billion and $1 trillion. You have gone out of your way to 
highlight the fearful pattern that is developing in terms of 
last-minute bloated spending in this Congress. I think it is 
fair to say that the failure of the budget resolution process 
has certainly contributed to that. We are starting back down 
that road again now.
    Would you offer us any caution about the process we ought 
to use in terms of developing the budget resolution in relation 
of taking up and passing tax cuts?
    Mr. Greenspan. Congressman, I thought that the whole set of 
rules that you set up following the 1974 act on endeavoring to 
contain the budget, in my judgment, had very little chance of 
working. I was wrong, it really did matter, much to my 
surprise. The PAYGO rules, the whole issue of how various 
different programs were handled, which theoretically could have 
been overthrown by a majority of the Congress and wasn't, and 
the reason it wasn't is there obviously was something that was 
happening which the American public thought was very important.
    As I indicated in my prepared remarks, I thought that the 
appropriations process of the last couple of years which 
essentially breached all of those various constraints has been 
most unfortunate, and unless and until we can get back to some 
form of budget discipline, I don't care what type of surplus 
projections you have, they won't happen.
    Mr. Davis. Would you care to comment in that regard on what 
the appropriate sequence of events would be for us to take up 
with regard to the budget resolution and tax cuts?
    Mr. Greenspan. Well, I don't want to get specifically into 
any individual programs because I suspect you will know the 
answer to that far better than I, Congressman.
    Mr. Davis. Chairman Greenspan, if we are to preserve the 
opportunity to increase general revenue funding to preserve the 
solvency of Social Security and Medicare as the baby boomers 
are getting ready to retire, how should that factor into our 
decisions about the magnitude of the tax cut to proceed with 
over the next few years?
    Mr. Greenspan. Again, Congressman, I can't really comment 
on it. Those are the key decisions which are really 
fundamentally deep and very important value judgments about the 
future of our Nation, and I think the elected representatives 
are the most qualified people to reflect the values of the 
population as a whole. This type of debate which we are now 
seeing is, I think, an extraordinarily valuable picture of 
democracy in action, and it credits the Congress, and it 
credits the administration, I think, very effectively.
    Mr. Davis. Chairman Greenspan, there has been a proposal to 
set up a contingency fund that is estimated to amount to $1 
trillion. There are also a number of spending proposals by the 
President that many of us support in defense and education and 
others that are yet to be costed. If the cost of those 
proposals were to exceed the amount of this contingency fund, 
and we had to choose between reducing the rate of proposed debt 
retirement and the size of the tax cut, which should we choose, 
in your judgment?
    Mr. Greenspan. Well, again, Congressman, I said that from 
my point of view I thought that debt reduction was the highest 
priority; that is, as best I can judge, through virtually every 
particular evaluation of the potential uses of the unified 
surplus, the debt does get paid down to an irreducible minimum. 
So in that regard, I don't have a horse in this race, if I may 
put it that way.
    Mr. Davis. One last question, Mr. Chairman. The National 
Conference of State Legislators has recently indicated that 
approximately 25 States are now beginning to experience some 
serious problems in their revenue streams. Does that give you 
any pause as you look at how optimistic the projections are 
that we are relying upon as we proceed with the surplus we have 
discussed today?
    Mr. Greenspan. I think not, Congressman. Each individual 
State has handled its significant improvement in revenues 
differently. Remember, early on, the big surge in receipts 
showed up in State and local governments as well as the Federal 
Government. There has been, I think, a far greater spread of 
alternate uses of those funds, and a number of States have cut 
taxes substantially, and a number of States have increased 
expenditures substantially, far more than the Federal 
Government has in either case.
    And in that regard, there is very little to be learned 
about the Federal Government revenue outlook from what we are 
seeing in the States. In other words, it has not added anything 
to our knowledge because they are all coming off the same 
income base, and they are just handling it differently. So I 
wouldn't say that one learns very much what the Federal budget 
outlook is from what is happening to the States.
    Mr. Davis. Thank you.
    Thank you, Mr. Chairman.
    Chairman Nussle. Mr. Gutknecht.
    Mr. Gutknecht. Thank you, Mr. Chairman.
    Chairman Greenspan, it is always delightful to have you 
here even though you tend to speak in cryptic tones, which we 
all tend to interpret depending on our own particular political 
philosophy.
    Let me just review, at least from my perspective, what you 
have told us so far today. One of the most important things you 
have said is that essentially you believe that we are moving 
into an era of surpluses. And you suggested that perhaps by the 
year 2010, we could see a $800 billion on-budget surplus.
    Mr. Greenspan. Under current services. I don't expect that 
to happen because what is going to occur are changes in policy 
which will alter that path. But I think the crucial issue, as 
you point out, quoting me and my quoting CBO, is that there are 
very large surpluses under what we call current services 
budget.
    Mr. Gutknecht. And you have also told us one of the real 
key factors is rising productivity, and I think that is 
important. We need to watch that as we go forward. I think the 
most important thing you have told us, and this is for the 
benefit of all the members of the committee, is that tax 
reductions will be much preferred over spending increases. And 
I think that is going to be the real critical task not only for 
this committee, but for the Congress in the next several years 
because the temptation to dip into this growing surplus--if we 
get back on an economic growth path, I think the temptations 
are going to be enormous.
    To that extent I strongly support what the President is 
trying to do to limit the growth in the Federal budget, to 
lessen the growth in the average family budget.
    I want to come back to a question that is really more 
directed to you as Chairman of the Federal Reserve. Benjamin 
Franklin said, ``I know no lamp by which to see the future than 
that of the past.'' We know now looking backwards in the last 6 
months or so that the economy began to slow in the September-
October period. Do you think that perhaps the Fed waited a 
little long to lower interest rates? And you have already 
indicated that there won't probably be another action by the 
Fed until your March meeting, but do you believe that you may 
have waited a little too long to lower interest rates?
    Mr. Greenspan. Well, first of all, I hope I was 
sufficiently ambiguous not to have indicated the timing of when 
or if we would move. I was peculiarly adept--I hope I was 
adept--at what we termed Fedspeak on that issue at the House 
Financial Services Committee a couple of days ago.
    The answer to your first question is no, meaning that 
remember when you are involved, as we were, in confronting a 
period where from early 1999 through the early spring of 2000, 
we had a major acceleration in underlying investment demand, 
real capital asset demand, relative to underlying savings in 
the economy. The effect of that was to put very significant 
pressure on real long-term corporate interest rates. In other 
words, their cost of capital from the debt side was rising 
quite significantly.
    We at the Fed in such an environment always join the 
markets in endeavoring to contain those saving-investment 
imbalances. Because were we not to increase interest rates as 
we did from June 1999 forward, it could have been done only by 
holding down the interest rates and thereby accelerating money 
supply growth and liquidity. And so we would have created a 
much different environment as we moved into the year 2000 than 
indeed occurred. We would have had a highly buoyant economy 
with rapidly increasing imbalances.
    We had significant imbalances as it was, and they started 
to adjust, actually, probably quite visibly by the spring of 
2000. Indeed that was the peak in long-term interest rates. Had 
we moved too soon, in our judgment, we would have altered the 
path of adjustment and conceivably created a higher level of 
economic activity than we are currently seeing, but inducing 
far greater imbalances and a far greater correction of 
adjustment than we are now undergoing.
    So the timing of when one moves on monetary policy is a 
very crucial issue with respect to trying to get to a glidepath 
in economic activity, which is what we would call the maximum 
sustainable economic growth. In my judgment and the judgment of 
my colleagues, had we moved sooner, we would have threatened 
that adjustment process. It is a very difficult judgment to 
make. But in retrospect I see nothing that we did which strikes 
me as inappropriate as far as policy is concerned.
    Mr. Gutknecht. One final follow-up. You don't disagree, it 
is more than possible--and I don't want to--yes, I do want to 
put words in your mouth--but the President is really talking 
about and the CBO and OMB are all talking about getting back to 
an economic growth rate of roughly 3 to 3.1 percent average 
over the next 10 years. You don't think that is an unreasonable 
target, do you?
    Mr. Greenspan. It presupposes about a 2\1/2\ percent annual 
productivity increase, which, considering that we have been 
running 3 percent over the last 5 years, adjusting for cyclical 
change and a variety of other technical problems, no, it is not 
an unreasonable estimate.
    Mr. Gutknecht. Over the long term, you told us 5 years ago, 
I remember when you testified before the committee, that if the 
Congress was serious about balancing the budget and if we would 
continue to apply a certain level of fiscal restraint, that 
ultimately long-term interest rates would come down. That 
pretty much has been true. Can we expect then at least long 
term--and I don't want to get into March's meeting or what may 
happen in the next 6 months. I do think we have to think long 
term. But long term it is fair to say if we continue to pay 
down debt, exercise fiscal restraint by this Congress, that 
long-term interest rates will be relatively lower than they 
would have been, right?
    Mr. Greenspan. Absolutely.
    Mr. Gutknecht. Thank you.
    Chairman Nussle. Mrs. McCarthy.
    Ms. McCarthy. Thank you, Mr. Chairman, and thank you, 
Chairman Greenspan. It has been a pleasure listening to you. I 
am new on this committee, and so I am sitting here and I am 
absolutely fascinated the last 3 days of everything that I have 
heard.
    Here are my concerns. Since I have been in Congress, and I 
am just going on my third term, in 1997 we did the balanced 
budget amendment, which I thought was terrific. I voted for it. 
I think the majority of people here believe in fiscal 
restraint. One of the things that we did do, though, was 
unfortunately hurt our health care system, hurt certainly our 
hospitals, because we didn't take in the amount of money that 
we were giving back to our hospitals. And we have spent the 
last 2\1/2\ years now trying to correct that. So we here in 
Congress sometimes make mistakes.
    To be here at this point to see that we have a surplus I 
think is terrific. But I am like you, I believe in paying down 
the debt. When I had a mortgage, twice a year I tried to double 
the payments so I could reduce it. I don't believe in having a 
heck of a lot of debt. I don't like it. It is something that is 
holding over me.
    My concern is the class of 1946. They would be our baby 
boomers. They are going to be retiring. Now we are hearing that 
an awful lot of people will probably continue to work because 
they are healthier. Some might. I also know that those that 
have done very well economically will probably retire early so 
they can enjoy their later years.
    Here is what my problem is: With this development wouldn't 
that suggest that we need an extra margin of safety in our 
budget policy, because when we see our baby boomers starting to 
retire, whether it is Social Security or whether it is 
Medicare, we are going to see great outlays of money unless we 
correct it between now and then, which is 7\1/2\ years away. I 
don't know if the will of Congress will do what it has to do 
for Social Security and Medicare, and this is why I get scared.
    Medical technology is advancing rapidly, which I think is 
wonderful, but that means that our constituents are obviously 
going to want that medical care. What I am trying to get at, if 
we pay down the debt--and by the way, all of us want tax cuts. 
This side of the aisle, that side of the aisle, no one is 
disputing that. It is just probably how much should a tax cut 
be so that we can have a rainy day. I come from an up bringing, 
I guess, where you always try to have a nest egg. You always 
try to save some money for that day when my furnace breaks down 
or my car breaks down. I am trying to apply that here.
    So we hear both sides of the aisle saying we are going to 
have the money. I don't know if I believe that. And I guess I 
got to go that way. Do I want a tax cut? Yes. And I do. 
Certainly would help my son, my brothers and sisters and 
everybody else. But it is really--and this is my problem--there 
is such a considerable measure of uncertainty in the 
projections of the course of the baby boomers' retirement that 
how are we going to prepare for this?
    Mr. Greenspan. This is an issue which I think was very much 
of a concern as recently as a year ago because the Trustees' 
report for Social Security indicated significant problems as we 
moved beyond 2010 or 11 and ultimate exhaustion of the fund in 
2037.
    Those estimates were made with relatively low productivity 
growth projections. We will have another estimate next month or 
late this month. It isn't clear as to whether or not they are 
going to include in those estimates the type of productivity 
increases which we now see in both CBO and OMB. If they did, 
then the receipts for Social Security, OASDI in total, for 
example, would be enough under existing benefit formulas to 
essentially maintain a continued gap between receipts and 
benefits even without interest accumulation. So that I should 
say through a good part of the next decade what that implies is 
that despite the fact that there is a very dramatic rise, as 
you point out, in the number of the 1946 generation going into 
retirement, the effect of this acceleration in productivity is 
such that it just turns out that the receipts, especially 
including interest, are more than adequate to meet that big 
surge through a goodly part of a decade subsequent to 2010.
    In the health care area, it is a different issue, and it is 
highly indeterminate. As you pointed out very importantly, the 
degree of technology that is coming on is truly awesome. There 
is pharmacology on the one side and the electronic technologies 
that brought us MRI and CAT scan and a whole variety of other 
medical advances, just altering the path of medical care in a 
dramatic way which we really cannot forecast. And so we don't 
know whether a lot of this technology is going to reduce costs 
or whether it is going to significantly make available so much 
potential health care that the effect of rationing that goes on 
today would become far more widespread. In other words, you 
bring on MRI, and the number of people who want to use that 
machine right at that point is far in excess of what you have 
available. So a rationing process is implicit in our system, 
which works remarkably well. It is the physicians who basically 
do the rationing.
    As a consequence of these factors, estimating the costs of 
health care is a serious problem because we don't know what the 
outlook is out there. Just parenthetically I was talking to the 
Secretary of the Treasury, who has got some very interesting 
ideas on this issue. I don't know if he raised them with you.
    Ms. McCarthy. I talked to him yesterday about them.
    Mr. Greenspan. Did he raise with you the issue of changing 
the way we do prescriptions for drug purposes?
    Ms. McCarthy. No, we actually didn't get into that.
    Mr. Greenspan. He was involved with the Pittsburgh 
operation, which I thought was really quite unusual.
    But the bottom line here is, whereas Social Security seems 
to be moving in a less concerned path than we thought a year 
ago, largely because of the productivity numbers we have been 
looking at, medical outlays are a whole different issue. They 
are going to require some very thoughtful insights on the part 
of both the Congress and the administration.
    Ms. McCarthy. Thank you, Mr. Greenspan.
    Chairman Nussle. Mr. Collins.
    Mr. Collins. Thank you, Mr. Chairman.
    Mr. Greenspan, it is always interesting to listen to your 
comments. Some of them are very direct and easy to understand. 
Some of them remind me of a squirrel trying to cross the road 
with an oncoming high speed automobile looking down at him. He 
zigzags back and forth and many times winds up laying dead in 
the road.
    You know, your comments about productivity, productivity 
has been up, we have seen it in business, and I am a small 
business person, have been for 38 years, actually a little 
longer than that. We have been going through a correction 
period. And we do this. I saw it early in 1974 and almost bit 
the dust as a small business person then. And I saw it again in 
the 1980's. Several things contribute to that correction. One 
is the interest rates in which the Federal Reserve has a hand 
in. Another was fuel costs, which affects all consumer 
products. I am in the transportation business. Another one is 
the cost of energy during the winter months. But I fully 
believe, as you do the bottom line of that correction period, 
it will still leave productivity higher than it was in 1995. 
But in my opinion, neither the Federal Reserve nor the Congress 
can micromanage the economy.
    I think there are three things that play a principal role 
in what happens to the economy from this day forward. One you 
are very much involved with interest rates, and I appreciate 
the fact that you are moving interest rates downward. And I 
understand why you moved them upward; because of the 
corporate--the heavy corporate capital investments. And most of 
those corporations borrow on prime rate, fixed rates.
    But I think you need to increase the downward movement of 
interest rates because there are a lot of small business people 
who borrowed money on floating rates, and as those corporates 
tightened up because of the change in interest rates and those 
investments that they want to continue to make, they begin to 
shift their cash flows, and oftentimes it was at the expense of 
a lot of their suppliers and the small business people in the 
form of their payables, receivables to those small businesses, 
which has put those small business people, many of them, in 
kind of a tight situation. Credit is tight, interest rates are 
up. They are on floating rates. They go to the banks to borrow 
operating capital. It is difficult to do, and it has forced 
many of them to go under. We need to take that into 
consideration between now and your next meeting in March, the 
later part of this month.
    Another area that we must look at is tax relief and the 
budget. I think the President of the United States is on the 
right track. As you told us 2 years ago, January 20, 1999, 
before the Ways and Means Committee, that marginal rates is an 
area that we should look at and make adjustments in.
    Budget discipline. This President has put forth a budget 
with a 4 percent increase. What bothers me, that I am already 
hearing Members of Congress, chairmen, even the chairman of our 
committee here, talk about how there are certain areas that we 
must have more money for. I heard them--that the Chairman of 
the Senate Budget Committee says we don't need to look at 4 
percent, we need to consider more like 6 percent. That is not 
good budget discipline.
    When it comes to the Medicare and Social Security, you have 
said, too, in that same presentation to the Ways and Means 
Committee if you are ever going to solve the problems of Social 
Security, you have got to end the pay-as-you-go system. The 
Congress has got to have the backbone to do so. The President 
ran on the campaign to do so. Because once you lay it out as to 
how you are going to reform and end those pay-as-you-go 
systems, which is both Medicare and Social Security, then you 
can tell the American people exactly what it is going to cost 
them from the general funds to sustain those programs which 
will make them self-sustaining after a long period of time.
    It bothers me, too, that when it comes to tax relief, we 
have a sizable group of people in the Congress who are not 
looking at the cash flow of the individual wage earner or the 
individual person, they are singling out and targeting just 
certain ones to try to enhance their cash flow at the expense 
of others. I call it transfer of paycheck receipts, because 
when you take from one's paycheck and you enhance another's 
income, that is just a transfer of paycheck money. That is 
wrong.
    The third area that we must look at, and I believe the 
President has also campaigned on this and put forth a group to 
address this problem, it is called energy policy, a domestic 
energy policy, how we are going to overcome our dependency on 
others and yet still provide the energy we need.
    I was given a question to ask you. In a paper from the 
National Bureau of Economic Research called, quote, What Ends 
Recessions, end of quote, Christina and David Romer argued that 
tax cuts in the past failed to deliver the economy from 
recession because the cuts passed were generally too small and 
too late. They found that the small cuts that did occur, 
however, did provide a noticeable economy boost.
    I am not going to ask you to answer whether they were right 
or wrong, because, Mr. Greenspan, I think it is wise that you 
tend to interest rates and you leave the tax policy up to the 
Congress. Thank you.
    Chairman Nussle. Mr. Capuano.
    Mr. Capuano. Thank you, Mr. Chairman.
    Chairman Greenspan, the other day I had the pleasure of 
listening to you at the Financial Services Committee, and we 
had a brief discussion about productivity. I am very glad today 
that you came back with what I consider to be reassurances 
about what the potential for productivity increase is, though I 
still have to tell you I sit here with some reservations and 
some doubt, which you have expressed, but your reassurances 
overwhelm my concern, and I am glad to say that today.
    I also particularly like the suggestion that you have made 
in your statement today relative to a trigger. I heard your 
concerns. I share them. I think that any trigger for any tax 
cuts on spending proposals does bring some problems with it, 
but I also share your comments that a trigger might probably be 
a very good way to go. Just rereading it, it could include 
provisions that in some way would limit surplus reduction 
actions if specified targets for the budget surplus or Federal 
debt levels were not satisfied. Only if the probability were 
very low that prospective tax cuts or new outlay initiatives 
would send the on-budget accounts into deficit would 
unconditional initiatives appear prudent. I agree with that 
statement 100 percent. I thank you for making it. I hope that 
this Congress pursues the concepts. Hopefully we can draft 
something--first of all draft then adopt something that would 
work that would address as many of the concerns that you 
mentioned as we could possibly do.
    I also want to talk a little bit about the surpluses that 
you have discussed. Today you seem to concentrate a lot on 
government investment in private assets. I kind of wonder where 
that came from, because up until just yesterday when we had the 
Budget Director here, I hadn't heard anybody concerned about 
that issue. It is a fair issue. We did have that discussion 
last year relative to Social Security. It hasn't really been 
brought up. I guess it is a very fair point to raise.
    But I also--I guess I want to make sure that most people 
were listening and people who were asking me have a very good 
understanding that as we speak right now, right this very 
minute, probably the largest investor in the private market, 
the one if not the largest investor, is government. Now, that 
is not the Federal Government, but it is State and local 
governments through their retirement accounts and other such 
trust funds, and they are huge investors in the private market.
    I was vehemently opposed to privatizing the Social Security 
System last year for this very reason. I agree with you, but I 
don't think the Social Security System should be in the private 
market. At the same time, government investment in private 
accounts is not new, and, therefore, I think we are already 
beyond the question, unless either you or somebody wants to 
start raising the issue of whether or not the California 
retirement system, the Florida retirement system, the Texas 
retirement system, et cetera, et cetera, whether anybody wants 
to raise that issue as to whether they shouldn't be in the 
private markets. But on the presumption that no one has raised 
that thus far that I am aware of, we all accept that as 
reasonable and probably not capable of moving the market in and 
of itself.
    But on that presumption that we all take that as an 
acceptable fact, that some government involvement in the 
private market is not necessarily bad, and as we get to 
surpluses, I hope that some people start wondering and 
questioning and discussing whether we should have some 
government involvement in private things, such as mortgage-
backed securities.
    One of the biggest problems in my district is people can 
simply not afford to buy or maintain their homes, just can't do 
it. That is true in the general Washington area as well. Most 
working-class people cannot afford to move into many housing 
markets. I think there would be some legitimate question as to 
whether some Federal money or Federal trust fund money should 
be put into helping reduce mortgage rates or down payment 
assistance at some point; not now, not today, I know that. But 
I hope that when the time comes when we get to that position, 
that those issues are at least fully discussed and not just 
dismissed out of hand. I don't think I heard that from you 
today, but I just hope that others don't hear it as well.
    I do want to ask you a couple of questions. I want to talk 
particularly on the current circumstances. I understand and I 
actually respect that you prefer tax cuts to spending increases 
as a general proposition. You said that before, you are 
consistent on it, and I appreciate it. I don't want to get into 
specifics of the tax cut because I do agree that is the 
prerogative of Congress, and I accept that, but I also want to 
make a statement as well that every time we do a tax proposal, 
every single time we do a tax proposal, somebody wins, somebody 
loses.
    The current tax proposal we have in front of us has 40 
percent of the tax cut going to people that only pay 20 percent 
of the taxes. That is a fair judgment. You can make the 
argument if you believe it, that is fair, but that is a 
judgment. It is not dollar for dollar the money that you pay in 
taxes that get back with a tax cut or any tax cut I have ever 
seen.
    I don't want to talk to you about the specifics. I also 
don't want to talk to you about the specifics about many of the 
spending proposals, because I agree it is not your role to 
discuss social issues such as health care, such as K-through-8 
education, such as whether we want to get into prescription 
drugs. I understand and respect your decision that that is our 
proper role, and I agree with it.
    I also think it is important to get your opinion on as to 
whether it should be 4 percent increases, 6 percent increases, 
2 percent increases. Again, that is a fair argument. But once 
we get to a decision, a political decision, that says we are 
going to have X percent of increase or even a decrease in 
spending, there are some Federal Government spending programs 
that strike me as having a direct impact on the economy. And 
there were two in particular that I want to talk to you about, 
one of which I talked to you about the other day at the 
Financial Services Committee, and the other one I talked to the 
Budget Director about yesterday.
    First one is the unemployment. You said consistently, I 
assume nothing has changed since the other day, but your 
expectation at the moment is unemployment is going to rise over 
the foreseeable future, next year or so, regardless of any tax 
proposal we currently have on the table.
    Given this, I have two questions: First one on the 
unemployment, isn't it reasonable, or do you think it is 
reasonable, for government spending to have as a priority 
retraining programs to take those newly or soon to be 
unemployed American citizens to retrain them into new jobs that 
they will be able to have a better market value with and help 
improve the economy in the future?
    The second question has to do with research and 
development. You said repeatedly in the past you think it is a 
fair thing for the government to have a spending priority 
relative to research. If I remember correctly, and I won't put 
words in your mouth, but what the heck, everybody else does, I 
may as well try, that basic research is a particularly 
important government priority. I agree with you, if that is an 
accurate statement. I agree with that statement whether you 
agree with it or not, particularly when it comes to the things 
right now, some of the comments have been made as well that 
energy prices are driving everything up. How are we going to 
get those energy prices down? There is only so much oil in the 
ground; there are only so many ways to get it out. We have to 
have more efficient fuel economies. We have to do all kind of 
things to heat our homes smarter and better, and that only 
comes through research.
    My two questions to you, sir, are relative to retraining 
unemployed workers in this current situation and continuing, if 
not increasing, government support for research, particularly 
basic research.
    Mr. Greenspan. Well, Congressman, first let me say that the 
crucial question that has to be answered before you can draw a 
conclusion is to make judgments of how successful the types of 
training programs we have had over recent years have been. As I 
am sure you know better than most, the record is rather mixed.
    Mr. Capuano. I agree.
    Mr. Greenspan. But what we do learn from a number of the 
studies that one has seen is that the training programs that 
work most effectively are those as close as you can get to a 
specific job. On-the-job training is very clearly the most 
effective mechanism that we have. And those types of 
governmental-sponsored programs which effectively enhance on-
the-job training, as far as I understand it, have been the most 
effective.
    There is no question, as you point out, that you get 
significant increase in the market value of a person if they 
have skills which are required and usable elsewhere, and 
anything that one can do with respect to transitions is a very 
valuable thing to do. And I have argued this with respect 
specifically to trade policy; that is, we have a number of 
areas where individuals, through no fault of their own, get 
laid off because they are in industries which are caught up in 
very competitive prospects. And I do think, as I have said in 
the past, that endeavoring to build new training capabilities 
into those programs rather than go to a protectionist mode is a 
very valuable policy with respect to enhancing the capability 
of individuals to work and earn a living.
    So I think that training programs have a role, 
unquestionably. I do, however, wish to caution that merely 
expanding programs that we have done in the past is a mistake. 
And I hope we are willing to move as indeed periodically 
governments have done, to consolidate previous programs and the 
like.
    On the issue of research, there is just no question that if 
you are going to have technology as the base of your economy, 
which we do, research is crucial. It is another issue to make a 
judgment as to where that research should take place, and that, 
again, is really a fundamental judgment of the Congress. And it 
is a tricky question of how much applied research should 
government do, how much basic research and where. As you know, 
there are large discussions and debates on that. But that we 
should in some way or other enhance the incentives to do 
research in this economy, there is just no question. If we 
don't, we are going to find that we are in position where we 
may have awesome technologies, but if you don't continuously 
nurture them, they won't continue to exist.
    Mr. Capuano. Thank you very much.
    Chairman Nussle. Mr. Chairman, we have come to the 2-hour 
mark. You asked if we could try and get you out of here by 
noon, and I guess what I would ask from the other Members, are 
there any other Members that have a quick question in the last 
couple of minutes that we have?
    Mr. Hastings, you would be recognized for a quick question. 
Real quick.
    Mr. Hastings. Thank you very much.
    Mr. Greenspan, good seeing you again. There has been a lot 
of talk to questions a number of times regarding productivity, 
and even in your statement you talked about productivity, but 
you specifically said nonfarm productivity. I come from an 
agriculture State, agriculture district, the State of 
Washington. We have Boeing, Microsoft, Starbucks, but when you 
put all of the total economy together in Washington State, 
agricultural is the biggest portion of that economy. I am not 
talking about major crops. We do have wheat, but we have 
apples, and potatoes, and cherries, and asparagus, and so on.
    Would you talk about, number one, the productivity of 
agriculture and how that rates to the overall economy. And as a 
follow-up to you--Congressman Bass' question to you regarding 
trade, fast-track authority, and maybe the global economy in 
general as it relates to agriculture.
    Mr. Greenspan. Well, as you imply, Congressman, the 
productivity rate of increase in agriculture has matched that 
in the nonfarm area, and indeed in certain periods has actually 
exceeded it, as you know better than anyone. Yields have gone 
up extraordinarily on crops. The technical capabilities we have 
in maximizing the way we move livestock to market is really 
quite a different agricultural system than we had 50 years ago.
    The problem that occurs as a consequence, however, is that 
we produce significantly more than the American people can 
consume, and, as you know, in wheat we export half of our crop. 
We export huge proportions of a whole series of other crops 
and, indeed, livestock. And for farm prices and farm income to 
hold up in the United States, in my judgment, it is essential 
that we have an enlarged export market, and one of the ways 
which I think we can do that is to find ways to break down 
barriers abroad where, as you well know, the restraint on 
American products is increasing. And fast track, or whatever we 
now want to call it, is clearly a mechanism which would give 
our trade people the capabilities of initiating a broadening or 
opening up of markets, which, in my judgment, is absolutely 
crucial for American agriculture.
    Mr. Hastings. Thank you very much.
    Chairman Nussle. Mrs. Clayton, do you have a question?
    Mrs. Clayton. Yes, I do, Mr. Chairman.
    Mr. Chairman, I was struck by your consistency in terms of 
the debt reduction, constraint, taxes versus spending. All of 
those are issues that the Committee on the Budget must 
consider. You have also emphasized the uncertainty both for 
revenue and uncertainty in terms of unforeseen costs.
    I just want you to comment on the health issue. We have 
already commented on the Medicare. In the report coming from 
the Federal Reserve in February, you indicated the one cost 
that was causing more uncertainty was not Medicare, but the 
uncertainty of Medicaid, and the substantial amount of moneys 
being spent on Medicaid that have never been spent before.
    If you couple that with the undercount possible in the 
census projection, those people do not have eligibility that is 
not accounted for, how would you advise us in the Committee on 
the Budget to prepare for that uncertainty of that health cost?
    Mr. Greenspan. Well, Congresswoman, the reason we know or 
suspect there are certain undercounts is we do certain types of 
samples. And when you are dealing with trying to make judgments 
as to what type of costs there will be in various different 
types of populations, all of these data are subject to error. 
And, indeed, the sampling materials which the Census has 
employed and which are usable have ranges of error in them as 
well.
    But what I think is necessary to do is to get the best 
estimates that you can of various different types of 
populations in various different areas and try to make 
judgments as to what the underlying costs of those various 
programs are.
    We have not been successful, as you know better than 
anyone, in really projecting Medicaid data effectively. 
Forecasts have been awful, if I may put it that way, and we 
have to improve them. And any additional data that can come on 
to help that be done, I think, is an extraordinarily important 
thing for this committee and for the Congress in general to 
engage in.
    Mrs. Clayton. Thank you.
    Chairman Nussle. Mr. Culberson.
    Mr. Culberson. Thank you, Chairman Nussle.
    Chairman Greenspan, in the interest of time, I want to 
reduce all my questions to one. I am John Culberson; I was 
elected to succeed Mr. Archer from west Houston, and I am 
particularly interested in identifying some procedural 
institutional changes that we can implement in Congress to 
restrain our institutional instinct to increase spending in the 
years ahead. As you have correctly identified, that is a real 
problem.
    I want to ask you, sir, if you could tell us, recommend to 
us, any specific institutional and procedural changes that this 
Committee on the Budget should consider implementing for the 
years ahead to restrain spending that in your opinion have 
worked effectively either in State constitutions or in previous 
sessions of Congress. What do you recommend to us that we 
should adopt?
    Mr. Greenspan. Well, Congressman, as I indicated before, I 
was quite surprised at how well some of the various measures 
that have been implemented by the Congress have essentially 
constrained discretionary spending over a number of years, 
until the last couple. And merely moving back to some version 
of those earlier very specific vehicles strikes me as the type 
of thing that ought to be done. And my impression is that if 
you succeed, it will be very helpful.
    Mr. Culberson. I am a freshman Member. Can you tell me 
specifically which reforms are you referring to?
    Mr. Greenspan. The PAYGO, for example, has always been very 
useful. There are a whole series that come out of the 1974 
Budget Impoundment Act and that have been developed over the 
years. Some have been changed, some have been altered, but what 
is clearly quite remarkable is a very large number of them have 
worked.
    And I think you will find the staff of this committee is 
very well versed on which of the particular ones the committee 
has found most useful over the years.
    Mr. Culberson. One quick follow-up on that.
    Chairman Nussle. I apologize, but I am going to have to 
move on.
    Mr. Moran, do you have a question to finish up the hearing?
    Mr. Moran. Thank you, Mr. Chairman. There is so much 
context and so many questions I have to ask, but out of 
consideration of all the time you have spent, let me focus on 
one.
    The equity markets have pretty well factored in what Wayne 
Angell has suggested; that there may be as much as a 90 percent 
chance that you are going to make a dramatic reduction in 
interest rates in the short term. But I remember back in 1988, 
you were under similar pressure, and have been any number of 
times since, to reduce interest rates and stimulate the 
economy, and your response at that time was that you wanted to 
keep focused on the law; that the law says that the Federal 
Reserve's role is to maintain stable prices, or low inflation, 
and economic growth that could be sustainable year after year.
    What I would like to know, because we don't hear so much of 
what the other side of the picture is, what do we need to fear 
on the other side of the equation in terms of inflation, energy 
and food prices? Some of the latest economic statistics show 
that inflation may be increasing again. We don't know whether 
this is long term or just a blip. But, also, if we make this 
substantial tax cut and make it retroactive so that it is 
immediately available, that is a significant stimulus to the 
economy. The President has said that is one of the principal 
motivating factors for it.
    What other considerations are in your mind in terms of 
maintaining that stable rate of noninflationary economic 
growth, Mr. Chairman?
    Mr. Greenspan. Well, Congressman, let me address the issue 
of where we view the inflation problem is. As I indicated in my 
remarks to the Financial Services Committee, we think inflation 
at the moment is very well contained. The specific blip that we 
saw in the Producer Price Index and the CPI don't appear 
anywhere else on our radar screens, which suggests that unless 
something is happening which we have not yet captured, pricing 
restraint is really quite broad and deep, so that the problem 
that we see at this particular point is not an immediate 
emergence of inflationary pressures.
    What we are concerned about generally is to maintain a 
stable, long-term environment. And, indeed, as you put it, the 
term we actually use is maximum long-term sustainable economic 
growth. And while we obviously are aware of what various 
different fiscal policies do to the economy, we don't respond 
to fiscal policy per se. What we do respond to is how various 
different budgetary policies impact on the economy, and it is 
the economy to which we respond.
    And so I can't say in any specific detail what we will or 
will not do, but there are a whole series of forces, both in 
government and out of government and in the marketplace and 
internationally, which have fairly dramatic impacts on what our 
economy is doing, and it is that to which we generally respond.
    Mr. Moran. Thank you very much, Mr. Chairman. We are all 
very interested to know whether you think the irrational 
exuberance of the stock market has been pretty much squeezed 
out. But unless you want to volunteer an answer, we thank you 
very much.
    Chairman Nussle. Mr. Putnam, do you have a question?
    Mr. Putnam. Thank you, Mr. Chairman, very briefly.
    And thank you, Chairman Greenspan, for your patience.
    Much has been made and discussed of the impacts that will 
occur in this country and on this Congress arising from the 
opportunities to rapidly reduce our debt. But considering the 
high volume of debt that is held by foreign nations and foreign 
businesses, what are our friends and neighborhoods around the 
world doing to prepare for the change that will be coming 
sooner than is expected? Where will those resources flow, and 
what type of destabilizing impact would our economic prowess 
have on their decisions?
    Mr. Greenspan. My impression is that foreigners are 
investing in U.S. Treasury securities for two reasons: One is 
the riskless nature of those securities, and, two, it is the 
dollar.
    Now, to be sure, you cannot replicate the degree of 
risklessness in U.S. Treasury securities fully in the private 
market. You can get very close, and, indeed, a number of 
foreign accounts of which I am aware, when U.S. Treasury 
interest rates began to fall in part because the size of the 
outstanding debt was declining, shifted from U.S. Treasuries 
into other dollar-denominated securities in order to enhance 
their rate of return, and I think that process will continue.
    I do think that the overall propensity to hold U.S. dollars 
will continue, and, hence, to the extent that the available 
Treasury issues decline, the switch will be substantially into 
other dollar-denominated private or State and local-type 
assets. It is a shift that should not have any material effect 
of which I am aware.
    Mr. Putnam. Thank you, Mr. Chairman.
    Chairman Nussle. Thank you, Mr. Greenspan, for indulging us 
an extra 10 minutes there. We appreciate your attendance today.
    I ask unanimous consent that all Members have 7 legislative 
days to submit statements and questions for the record.
    Without objection, that is so ordered.
    And with that, we are adjourned.
    [Whereupon, at 12:15 p.m., the committee was adjourned.]

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