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



 
                ECONOMIC OUTLOOK AND THE FEDERAL BUDGET
=======================================================================

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

           HEARING HELD IN WASHINGTON, DC, SEPTEMBER 12, 2002

                               __________

                           Serial No. 107-34

                               __________

           Printed for the use of the Committee on the Budget


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





                       U. S. GOVERNMENT PRINTING OFFICE
81-696                          WASHINGTON : 2002
___________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512-1800  
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001








                        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
GARY G. MILLER, California           BOB CLEMENT, Tennessee
PAT TOOMEY, Pennsylvania             JAMES P. MORAN, Virginia
WES WATKINS, Oklahoma                DARLENE HOOLEY, Oregon
DOC HASTINGS, Washington             TAMMY BALDWIN, Wisconsin
JOHN T. DOOLITTLE, California        CAROLYN McCARTHY, New York
ROB PORTMAN, Ohio                    DENNIS MOORE, Kansas
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              [Vacancy]
ADAM PUTNAM, Florida
MARK KIRK, Illinois
[Vacancy]

                           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, September 12, 2002...............     1
Statement of Hon. Alan Greenspan, Chairman, Board of Governors, 
  Federal Reserve System.........................................     5
Prepared statement and additional submission of:
    Hon. Jim Nussle, a Representative in Congress from the State 
      of Iowa....................................................     2
    Hon. Mark Kirk, a Representative in Congress from the State 
      of Illinois, question regarding year-to-year 
      ``backcasting''............................................     4
    Chairman Greenspan...........................................     7


                ECONOMIC OUTLOOK AND THE FEDERAL BUDGET

                              ----------                              


                      THURSDAY, SEPTEMBER 12, 2002

                          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, Bass, Gutknecht, 
Thornberry, Collins, Toomey, Watkins, Brown, Crenshaw, Putnam, 
Spratt, McDermott, Bentsen, Davis, Price, Moran, Baldwin, 
McCarthy, Moore, Honda, and Matheson.
    Chairman Nussle. The House Budget Committee will come to 
order. This is a full committee hearing on the economic outlook 
and the Federal budget. We are very honored to have returning 
to our committee the very distinguished chairman of the Federal 
Reserve Board, Alan Greenspan. Chairman Greenspan has a 12:30 
commitment that is one that he cannot break. And so, what I 
would suggest to all members is that we move as quickly as we 
can to his testimony.
    Let me lay out that on behalf of all the members of the 
Budget Committee, we welcome you here today. It has always been 
true that everyone is interested in what you have to say, but 
given the economic and budgetary developments of the past 2 
years, we have a particular interest in your views on the 
outlook of the economy and monetary and fiscal policies.
    When this Congress took office, the economic and budgetary 
outlook were quite different than they are today. As we look 
back on the economic slowdown and the recession of the years 
2000 and 2001, with the benefit of hindsight and a new 
government and new government data, we realize just how slow 
the economy was in the second half of 2000, even before the 
107th Congress got started. And then a year ago--a year ago 
yesterday--we were hit with the shock of September 11 and its 
obvious economic and budgetary consequences.
    So we have had to deal unexpectedly with a triple threat: a 
national emergency in the form of a continuing threat to our 
homeland; the war against international terrorism; and a 
slowdown and recession in our economy. We have done our best to 
work with the President to promote and adopt the policies that 
would help our economy. Last year's tax cuts have been roundly 
credited as being the right policy at the right time to help 
promote consumption and to boost the economy. Last fall, and 
this summer as well, in a bipartisan way we adopted emergency 
provisions to help with the rebuilding and the war efforts. 
Earlier this spring, again in a bipartisan way, we passed the 
stimulus package with investment tax incentives and 
unemployment benefits.
    Although these policies have helped, ultimately it is the 
people of this country who have continued to press on and to 
make things work and to get the economy moving again. The one 
word I keep hearing again and again back home as well as around 
the country, and certainly from economists, is that our economy 
is ``resilient.'' Our Nation and its economy have been tough, 
yet flexible enough to adapt, and they cannot break our spirit 
and they cannot break our economy.
    Even so, we have an unemployment rate that is too high, 
news today that continues to be concerning and that is not 
acceptable. We need to do our best to promote jobs and high 
real wages. It is true in my home state of Iowa and it is true 
around the country. Getting the economy growing at a healthy 
pace again is the best way to promote income growth and a 
predictable Federal budget revenue stream.
    Ultimately we need to control what we can control. And this 
means Federal spending, particularly in the time we have 
remaining for this 107th Congress. Spending has already 
increased to accommodate necessary emergency spending and to 
stimulate the economy. Now we hear that the other body, the 
Senate, is considering appropriations spending for the next 
fiscal year that is well above the House budget that has been 
passed, and is the only budget that has been passed in this 
Congress, as well as the President's requested levels. These 
bills that they are considering have costs that are 
significantly higher than they have even advertised and that 
they even have at self-imposed internal levels. If adopted as 
proposed, these measures would result in a discretionary 
spending increase of about $15-billion larger than proposed by 
the President and the House. And that is even before you 
mentioned the close to $6 billion in agriculture emergencies. 
Over the next 10 years, this increase would raise the baseline 
spending by $225 billion. Faced with such spending demands, I 
am obviously very interested today in your views on the need 
for budgetary and spending restraint.
    I welcome you here today, Mr. Chairman, and I am glad to 
hear your views on the economy.
    [The prepared statement of Mr. Nussle follows:]

  Prepared Statement of Hon. Jim Nussle, a Representative in Congress 
                         From the State of Iowa

    On behalf of all the members of the Budget Committee, let me 
welcome you here today. We are pleased that you agreed to come before 
us today to discuss the economic outlook and the Federal budget.
    It is always true that everyone is interested in what you have to 
say. But given the economic and budgetary developments of the past 2 
years, we have a particular interest in your views on the outlook for 
the economy and fiscal policies.
    When this 107th Congress took office, the economic and budget 
outlook were quite different from what they are today. As we look back 
at the economic slowdown and recession of 2000-01, with the benefit of 
hindsight and new government data, we realize just how slow the economy 
was in the second half of 2000, before the 107th Congress even started. 
And then, a year ago, we were hit with the shock from September 11 and 
its budget consequences.
    So, we have had to unexpectedly face a triple threat: a National 
emergency in the form of a continuing threat to our homeland; a war 
against international terrorism; and a slowdown and recession in our 
economy.
    We've done our best to work with President Bush to promote and 
adopt policies that would help the economy: last year's tax cuts have 
been roundly credited as being the right policy at the right time to 
help promote consumption and boost the economy; last fall and this 
summer as well, we adopted emergency provisions to help with rebuilding 
and war efforts; earlier this spring we passed the stimulus package 
with investment tax incentives and unemployment benefits.
    Although these policies have helped, ultimately it is the people of 
this country who have continued to press on and make things work to get 
the U.S. economy moving again. The one word I keep hearing again and 
again in reference to the economy's performance is ``resilience.'' Our 
Nation and its economy have been tough, yet flexible enough to adapt. 
And they can't break our Spirit.
    Even so, we still have an unemployment rate that is too high, and 
that is not acceptable. We need to do our best to promote jobs and high 
real wages. Getting the economy growing at a healthy pace again is the 
best way to promote income growth and increases in Federal budget 
revenues.
    Ultimately, we need to control what we can control. That means 
Federal spending. Spending has already increased to accommodate 
necessary, emergency spending and stimulate the economy. And now, the 
Senate is considering appropriations spending for next fiscal year well 
above the President's request. The bills they're considering have costs 
that are significantly higher than advertised. If adopted as proposed, 
the measures would result in a discretionary spending increase about 
$15 billion larger than proposed by the President. Over the next 10 
years, this increase would raise baseline spending by $225 billion. 
Faced with such spending demands, I'm very interested in hearing your 
views on the need for spending restraint.
    I welcome you here today and I will be glad to hear of your views 
on the economy, Federal budget issues, and the policies that will bring 
us back to full employment.

    Chairman Nussle. And now I would like to recognize my 
friend Mr. Spratt for any comments he wishes to make.
    Mr. Spratt. Mr. Chairman, I join Chairman Nussle and 
welcome you to our committee, the Budget Committee. We are 
grateful to have you and we look forward to your testimony.
    Obviously we hope that you will bring us good news about 
the budget today, about the economy today, but we also hope 
that you can help us reconnect to what is happening in the 
economy and what ought to be happening in our budget. This is 
the role of the Budget Committee.
    In the maelstrom of other matters--terrorism, recession, 
corporate fraud, decline in the stock market, equity markets, 
and 5- to $7-trillion loss in net worth--we have lost sight of 
the budget's bottom line. And while we weren't paying close 
attention to the black bottom line that we had just 2 years 
ago, the surplus estimated at $5.6 trillion is all but 
disappeared.
    Just a few weeks ago, the Congressional Budget Office did 
its annual update and came to the conclusion that assuming 
current policies, we had a surplus of $336 billion over the 
next 10 years versus $5.6 trillion just 2 years ago, down $1.3 
trillion since March alone in their estimation.
    Obviously, that is not a course that is sustainable. It may 
be understandable that we have had our focus diverted. 
Terrorism is a huge problem, and some of these things truly do 
override the budget. But I don't think it is excusable--or in 
the long run sustainable--that we just forget the budget 
altogether and go off in attention to these other priorities.
    Right now, we are back into the kind of phase where if you 
back out Social Security, as I think you should, we have got 
deficits for as far as the eye can see, for as far as we cast 
our forecast.
    Two years ago we were in earnest, both sides, talking about 
lockboxes, about not spending ever again the surpluses in 
Social Security and, for that matter, Medicare too. Now, we 
have virtually fully consumed the surplus in Medicare for the 
next 10 years and we have spent most of the surplus in Social 
Security also for the next 10 years.
    Two years ago we were talking seriously about being able to 
retire most of the debt held by the public over the next 10 to 
12 years. Now if we continue on the course we are on, we not 
only will not retire that debt, we will actually add to that 
debt. We will add to the net national debt held by the public.
    You told us 3 years ago, when we were sitting around 
wondering what should be the fiscal policy in light of these 
surpluses that we seemed to see rising on the horizon; that if 
we could muster the will to have a fiscal policy in which the 
public had confidence, we could drive down long rates; that you 
at the Fed could control short rates, but that your control 
over long rates was not nearly what it is over short rates; and 
that the markets would look to us, and their confidence in 
fiscal policy would determine whether or not we would be able 
to drive long rates down to the level they were in, say, the 
1950s. I think you mentioned one of the rewards you might 
attain if you can genuinely achieve this kind of confidence 
equal to what we have achieved at the Fed in terms of monetary 
policy, you may see long rates down at 4\1/2\ percent. And if 
you can drive long rates down to that, drive the cost of 
capital down like that, you will see stable growth for years to 
come. And growth, of course, is what makes possible many of the 
promises, keeping the promises that we have made.
    I hope, therefore, you can help us, as I said, reconnect 
the budget to the economy, reemphasize the primacy of the 
budget. After all, 20 percent of our GDP in effect flows 
through the Federal budget. It has a profound effect. And we 
saw in the 1990s what happens when you have a complementary of 
monetary and fiscal policy. As we were reducing and improving 
the bottom line of the budget every year for nearly 8 straight 
years, the economy got better and better as well. There had to 
be some kind of connection between the two, and we have lost 
sight of that. And we hope in your testimony today, in addition 
to talking about the economy, you can talk about the primacy of 
the budget, about our need to get back on course to where we 
were just 2 years ago--saving instead of spending--and moving, 
keeping the economy in surplus, if not avoiding the deficits we 
have accumulated.
    Once again, thank you for coming and we look forward to 
your testimony.
    Chairman Nussle. All members will have 7 days to submit 
statements at this time. Mr. Chairman, we welcome you to the 
committee and we are pleased to receive your testimony.
    [Question submitted for the record by Mr. Kirk follows:]

        Question Posed to Chairman Greenspan by Congressman Kirk

    Question: Establishing a Federal budget is always challenging, but 
it gets harder when the forecasts we depend on shift by a hundred 
billion dollars in just 6 months. Do you believe that year-to-year 
``backcasting,'' which would compare annual budget projections to 
actual performance, could improve these forecasts?
    Answer: I believe that the budget forecasts at CBO and OMB are well 
aware that large forecast revisions related to surplus developments, 
such as this spring's lower than expected tax collections, greatly 
complicate the process of developing sound budget policies. Therefore, 
they strive to minimize such revisions by taking account of all the 
useful information that is available at the time they make their 
projections. As you suggest, an analysis of the differences between 
past budget projections and actual outcomes can be a useful input to 
this forecast process, and indeed CBO is thinking very much along the 
same lines (see, for example, CBO, ``Budget Resolution Targets and 
Actual Outcomes,'' Appendix C, The Budget and Economic Outlook: Fiscal 
Years 2003-2012).

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

    Mr. Greenspan. Thank you very much, Mr. Chairman. Is the 
microphone on? Thank you, Mr. Chairman. I am not used to your 
new structure here, but it is a very interesting improvement. 
Technology spills everywhere; let me put it that way.
    I am especially pleased to appear here today to discuss 
some of the important issues related to the outlook for the 
economy and the attendant implications for the formulation of 
fiscal policy. The views I will be expressing are my own and 
not necessarily those of the Federal Reserve Board.
    The U.S. economy has confronted very significant challenges 
over the past year: major declines in equity prices, sharp 
retrenchment in investment spending, and the tragic terrorist 
attacks of last September, a year ago. To date, the economy 
appears to have withstood this set of blows well, although the 
depressing effects still linger and continue to influence, in 
particular, the Federal budget outlook.
    A year ago, the Congressional Budget Office expected the 
unified budget to post large and mounting surpluses over the 
coming decade. As you know, CBO is currently forecasting that 
if today's policies remain in place, the unified budget will 
post deficits through fiscal year 2005. For the fiscal year 
just ending, CBO now projects a budget balance that is more 
than $300-billion below the level it had projected a year ago.
    To a degree, the return to budget deficits resulted from 
temporary factors, especially the fall-off in revenues and the 
increase in outlays associated with the economy's downturn. But 
some of the factors accounting for the weaker budget outlook 
will have longer-lasting effects. A large portion of this 
year's decline in individual income tax revenues is clearly 
related to the retrenchment in equity markets. The sharp 
decline in stock prices appears to have markedly reduced final 
settlements for the 2001 tax year, as well as receipts on 2002 
income. This effect works directly through less tax revenue 
from capital gains realizations, and indirectly through less 
revenue collected from the exercise of stock options, from 
stock-price-related bonuses, and from withdrawals from IRAs and 
401(k) plans that have been augmented by capital gains.
    Although official projections had been based on the 
assumption that tax collections related to the stock market 
would eventually decline from the elevated levels of the late 
1990s, the sharp drop in equity markets was not expected, and 
the fallout from it will dampen tax revenues relative to 
earlier expectations for some time. Furthermore, the 
precipitous fall in tax receipts may have resulted from other 
factors as well--for example, a shift in the distribution of 
income from higher to lower tax brackets and a change in the 
timing of tax collections. The recent surge in discretionary 
spending, necessitated only in part by the war on terrorism and 
the need for enhanced homeland security, has also made the 
budget picture less sanguine.
    Nonetheless, despite the budget erosion over the past year, 
our underlying fiscal situation today remains significantly 
stronger than that of a decade ago when policymakers were 
struggling to rein in chronic large deficits and the ratio of 
Federal debt to GDP was approaching 50 percent and climbing. 
This turnaround was a result of several factors. To an extent, 
the fiscal improvement can be traced to the emergence of forces 
largely external to the fiscal process. The end of the cold war 
yielded a substantial peace dividend, and the pickup in 
productivity growth and surging stock market substantially 
boosted tax collections.
    But such forces alone cannot wholly account for the 
improvement in the fiscal situation. Prudent policy also played 
an important role. After years of budgetary profligacy, a 
political consensus to move toward a balanced budget slowly 
emerged. Beginning in the late 1980s, impressive progress was 
made in restraining Federal expenditures and restoring a better 
balance between spending and revenues. Even with the consensus 
to balance the budget, such progress might have been evasive 
were it not for the procedural mechanisms that were developed 
to enforce that political consensus. The Budget Enforcement Act 
of 1990, building on earlier initiatives, provided such 
mechanisms. The statutory limits on discretionary spending and 
the so-called PAYGO rules requiring changes in mandatory 
spending and revenue policies to be budget-neutral, backed by a 
60-vote point of order in the Senate, served as useful tools to 
control the deficits. In essence, the rules provided a means 
for advancing the broader good of sound fiscal policy over 
narrower interests.
    The budget rules worked far better than many skeptics, 
myself included, had expected. Between 1990 and 1998, 
discretionary spending fell from more than 10 percent of GDP to 
less than 6\1/2\ percent. The end of the cold war was clearly a 
critical factor behind this decline, but the statutory caps 
helped to hold nondefense discretionary expenditure in check, 
and allowed the benefits of the decline in defense needs to go 
toward reducing deficits rather than toward facilitating 
increases in other spending. The PAYGO rules changed the way 
policymakers analyzed fiscal policy proposals; rather than 
focusing solely on the benefits of a proposal, policymakers 
were required to recognize the costs as well.
    The Budget Enforcement Act was intended to address the 
problem of huge deficits. In 1990, the possibility that 
surpluses might emerge within the decade seemed remote indeed. 
When they unexpectedly arrived, the budget control measures 
appeared to be addressing a problem that had been solved. 
Fiscal discipline seemed to be a less pressing priority and was 
increasingly abandoned. Though the 1990 act was not amended, 
policymakers found ways to circumvent the discretionary caps 
and the PAYGO rules. They did not anticipate and, indeed, there 
were few indications that deficits were about to reemerge. 
Given the recent change in the budget outlook, the commitment 
to fiscal responsibility that served us so well must now be 
reestablished.
    The budget enforcement rules are set to expire on September 
30. Failing to preserve them would be a grave mistake in my 
judgment. For without clear direction and constructive goals, 
the in-built political bias in favor of budget deficits likely 
will again become entrenched. We are all too aware that 
government spending programs and special tax benefits can be 
easy to initiate or expand, but extraordinarily difficult to 
trim or shut down once constituencies develop that have a stake 
in maintaining the status quo. The bottom line, Mr. Chairman, 
is that if we do not preserve the budget rules and reaffirm our 
commitment to fiscal responsibility, years of hard effort could 
be squandered.
    Besides the near-term budgetary shortfalls that we 
currently face, the aging of the population presents a daunting 
long-term fiscal challenge. With the baby boomer generation 
beginning to retire in just six short years, we need to begin 
deciding exactly how to reform our retirement programs to close 
the gap between unified budget outlays and revenues. In 
essence, we will have to decide how to allocate available 
resources. All possible policy solutions should be on the 
table.
    Recently, the Bureau of Labor Statistics introduced a new 
index that could provide a more accurate measure of the cost of 
living for the indexation of both the retirement benefits and 
tax brackets. More fundamentally, the way to prepare for the 
challenges ahead is to increase the real resources that will be 
available to meet those looming needs. The greater the 
resources available, the easier it will be to provide real 
benefits to retirees without unduly restraining the consumption 
of workers and without imposing large tax increases that would 
dampen incentives and reduce economic growth.
    To summarize, then, now is not the time to abandon the 
discipline and structure that worked so well for so long. The 
framework enacted in the Budget Enforcement Act of 1990, and 
extended several times, must be preserved. Current budget 
projections remain relatively favorable, but those projections 
will be realized only under a disciplined approach to fiscal 
policy. Though undeniably difficult, following such a strategy 
will best prepare us for the fiscal pressures that will almost 
surely arise as the baby boomer generation begins to retire.
    Mr. Chairman, I have a rather longer official statement, 
and request that it be included for the record.
    Chairman Nussle. Without objection, your entire statement 
will be made part of the record, and we appreciate you 
summarizing your statement for us.
    [The prepared statement of Dr. Greenspan follows:]

  Prepared Statement of Alan Greenspan, Chairman, Board of Governors, 
                         Federal Reserve System

    I am pleased to appear here today to discuss some of the important 
issues related to the outlook for the economy and the attendant 
implications for the formulation of fiscal policy. The views I will be 
expressing are my own and not necessarily those of the Federal Reserve 
Board.
    The U.S. economy has confronted very significant challenges over 
the past year--major declines in equity markets, a sharp retrenchment 
in investment spending, and the tragic terrorist attacks of last 
September. To date, the economy appears to have withstood this set of 
blows well, although the depressing effects still linger and continue 
to influence, in particular, the Federal budget outlook. A year ago, 
the Congressional Budget Office expected the unified budget to post 
large and mounting surpluses over the coming decade. As you know, CBO 
is currently forecasting that, if today's policies remain in place, the 
unified budget will post deficits through fiscal year 2005. For the 
fiscal year just ending, CBO now projects a budget balance that is more 
than $300 billion below the level it had projected a year ago.
    To a degree, the return to budget deficits resulted from temporary 
factors, especially the fall-off in revenues and the increase in 
outlays associated with the economic downturn. But some of the factors 
accounting for the weaker budget outlook will have longer-lasting 
effects. A large portion of this year's decline in individual income 
tax revenues is clearly related to the retrenchment in equity markets. 
The sharp decline in stock prices appears to have markedly reduced 
final settlements for the 2001 tax year, as well as receipts on 2002 
income. This effect works directly through less tax revenue from 
capital gains realizations, and indirectly through less revenue 
collected from the exercise of stock options, from stock-price-related 
bonuses, and from withdrawals from IRAs and 401(k) plans that have been 
augmented by capital gains.
    Although official projections had been based on the assumption that 
tax collections related to the stock market would eventually decline 
from the elevated levels of the late 1990s, the sharp drop in equity 
markets was not expected, and the fallout from it will likely dampen 
tax revenues relative to earlier expectations for some time. 
Furthermore, the precipitous fall in tax receipts may have resulted 
from other factors as well--for example, a shift in the distribution of 
income from higher to lower tax brackets and a change in the timing of 
tax collections. The recent surge in discretionary spending, 
necessitated only in part by the war on terrorism and the need for 
enhanced homeland security, has also made the budget picture less 
sanguine.
    Nonetheless, despite the budget erosion over the past year, our 
underlying fiscal situation today remains significantly stronger than 
that of a decade ago, when policymakers were struggling to rein in 
chronic large deficits and the ratio of Federal debt to gross domestic 
product was approaching 50 percent and climbing. This turnaround was 
the result of several factors. To an extent, the fiscal improvement can 
be traced to the emergence of forces largely external to the fiscal 
process. The end of the cold war yielded a substantial peace dividend, 
and the pickup in productivity growth and surging stock market 
substantially boosted tax collections.
    But such forces alone cannot wholly account for the improvement in 
the fiscal situation. Prudent policy also played an important role. 
After years of budgetary profligacy, a political consensus to move 
toward a balanced budget slowly emerged. Beginning in the late 1980s, 
impressive progress was made in restraining Federal expenditures and 
restoring a better balance between spending and revenues.
    Even with a consensus to balance the budget, such progress might 
have been elusive were it not for the procedural mechanisms that were 
developed to enforce that political consensus. The Budget Enforcement 
Act of 1990, building on earlier initiatives, provided such mechanisms. 
The statutory limits on discretionary spending and the so-called PAYGO 
rules requiring changes in mandatory spending and revenue policies to 
be budget-neutral, backed by a 60-vote point of order in the Senate, 
served as useful tools to control deficits. In essence, the rules 
provided a means for advancing the broader good of sound fiscal policy 
over narrower interests.
    The budget rules worked far better than many skeptics, myself 
included, had expected. Between 1990 and 1998, discretionary spending 
fell from more than 10 percent of GDP to less than 6\1/2\ percent. The 
end of the cold war was clearly a critical factor behind this decline, 
but the statutory caps helped to hold nondefense discretionary 
expenditures in check, and allowed the benefits of the decline in 
defense needs to go toward reducing deficits rather than toward 
facilitating increases in other spending. The PAYGO rules changed the 
way policymakers analyzed fiscal policy proposals: Rather than focusing 
solely on the benefits of a proposal, policymakers were required to 
recognize the costs as well.
    The Budget Enforcement Act was intended to address the problem of 
huge deficits. In 1990, the possibility that surpluses might emerge 
within the decade seemed remote indeed. When they unexpectedly arrived, 
the budget control measures appeared to be addressing a problem that 
had been solved. Fiscal discipline seemed a less pressing priority and 
was increasingly abandoned. Though the 1990 act was not amended, 
policymakers found ways to circumvent the discretionary caps and the 
PAYGO rules. They did not anticipate--and, indeed, there were few 
indications--that deficits were about to reemerge. Given the recent 
change in budget outlook, the commitment to fiscal responsibility that 
served us so well must now be reestablished.
    The budget enforcement rules are set to expire on September 30. 
Failing to preserve them would be a grave mistake. For without clear 
direction and constructive goals, the in-built political bias in favor 
of budget deficits likely will again become entrenched. We are all too 
aware that government spending programs and special tax benefits can be 
easy to initiate or expand but extraordinarily difficult to trim or 
shut down once constituencies develop that have a stake in maintaining 
the status quo. However, spending and tax-cutting restraint are not 
symmetrical. While there is no upside limit to spending, taxes cannot 
go below zero. In any case, the bottom line is that if we do not 
preserve the budget rules and reaffirm our commitment to fiscal 
responsibility, years of hard effort could be squandered.
    In considering the extension of the Budget Enforcement Act, some 
have suggested amending the budget rules to limit the scope for 
circumventing the spending caps through the use of an ``emergency'' 
spending designation. Others have suggested rules that would be more 
flexible in the event of budget surpluses. These are thoughtful 
initiatives, but they are secondary to ensuring that the basic 
framework not be abandoned. Restoring fiscal discipline must be a high 
priority.
    Besides the near-term budgetary shortfalls that we currently face, 
the aging of the population presents a daunting long-term fiscal 
challenge. Indeed, the extent of that challenge is not adequately 
reflected in conventional measures of the Federal budget.
    Scoring the budget on an accrual basis--the private sector norm 
and, I believe, a sensible direction for Federal budget accounting--
would better underscore the tradeoffs we face. Under accrual 
accounting, benefits would be counted as they are earned by workers 
rather than when they are paid out by the government. This method 
allows us to keep better track of the future obligations that the 
government has incurred. Under full accrual accounting, the Social 
Security program would have shown a substantial deficit last year, 
rather than the surplus measured under our current cash-accounting 
regimen.
    Such accruals take account of still-growing contingent liabilities, 
which currently, under most reasonable sets of actuarial assumptions, 
amount to many trillions of dollars for Social Security benefits alone. 
The contingent liabilities implicit in the Medicare program are much 
more difficult to calculate--but they are also likely in the trillions 
of dollars. These liabilities are fast approaching their due date. With 
the baby boom generation beginning to retire in just six short years, 
cash benefits will soon begin to rise rapidly, exerting pressure on the 
unified budget.
    Given the imminence of these demographic pressures, we need to 
begin deciding exactly how to reform our retirement programs to close 
the gap between unified budget outlays and revenues. In essence, we 
will have to decide how to allocate available resources. All possible 
policy should be on the table. Recently, the Bureau of Labor Statistics 
introduced a new index that could provide a more accurate measure of 
the cost of living for the indexation of both retirement benefits and 
tax brackets.
    More fundamentally, the way to prepare for the challenges ahead is 
to increase the real resources that will be available to meet those 
looming needs. The greater the resources available, that is, the 
greater the output of goods and services produced by our economy, the 
easier it will be to provide real benefits to retirees without unduly 
restraining the consumption of workers and without imposing large tax 
increases that would damp incentives and reduce economic growth.
    Although other elements are involved in long-run productivity 
growth, clearly, the more capital that is available per worker, the 
greater productivity will be, all other things being equal. The level 
of national savings, the primary source of capital investment 
financing, is significantly affected by the level of government saving 
(surpluses) or dissaving (deficits). Between 1992 and 2001, decreasing 
Federal budget deficits followed by surpluses were important in 
maintaining national saving in the face of declining private saving, a 
factor likely contributing to the marked step-up in productivity 
growth.
    Returning to a fiscal climate of continuous large deficits would 
risk returning to an era of high interest rates, low levels of 
investment, and slower growth of productivity. To be sure, at the 
moment, Treasury rates are at the lowest level in more than forty 
years, and I can scarcely argue that deficits are pressuring interest 
rates. And, indeed, our current fiscal situation remains more favorable 
than it has over much of the past few decades. But history suggests 
that an abandonment of fiscal discipline will eventually push up 
interest rates, crowd out capital spending, lower productivity growth, 
and force harder choices upon us in the future.
    To summarize, now is not the time to abandon the discipline and 
structure that worked so well for so long. The framework enacted in the 
Budget Enforcement Act of 1990, and extended several times, must be 
preserved. Current budget projections remain relatively favorable, but 
those projections will be realized only under a disciplined approach to 
fiscal policy. Though undeniably difficult, following such a strategy 
will best prepare us for the fiscal pressures that will almost surely 
arise as the baby boom generation begins to retire.

    Chairman Nussle. Let me begin with the statement that you 
make as the bottom line. You say the bottom line is that if we 
do not preserve the budget rules and reaffirm our commitment to 
fiscal responsibility, years of hard effort could be 
squandered. What would the market reaction be as well? Years of 
hard effort looks behind us. What will be the years that we 
look ahead to and the reaction of our economy to market if we 
fail to continue budget discipline and fiscal responsibility?
    Mr. Greenspan. Mr. Chairman, it took many years for the 
markets to take seriously the efforts of the budget committees 
to construct mechanisms to hold spending and budget deficits in 
check. As they did, as they began to take it seriously, really 
realizing that in fact it was a very potentially productive 
effort, you could see markets adjust. Long-term interest rates 
did come down. You could see expectations of inflation fall. 
You could see a whole series of positive elements emerging in 
the financial markets, which had been for years beset by the 
crowding out of American savings for the need to finance the 
unified budget deficit.
    As that began to change, there was far more credibility 
given to the government budget process. And even now as 
deficits begin to emerge, that credibility is still intact; and 
the way we can tell is that, indeed, we have interest rates 
which reflect low inflation expectations and essentially a 
control of fiscal policy. If that process breaks down, I think 
the whole process will reverse.
    Chairman Nussle. Mr. Chairman, 8 months ago the President, 
in reaction to the emergencies of September 11, 2001, in 
reaction to and planning for the war on terrorism, and with an 
eye toward stimulating an economy that had been in a downturn 
for, at that point, apparently over a year, produced a budget 
in February to meet those challenges. This committee passed a 
budget to meet those challenges in February, and in March the 
full House passed that budget, that budget plan.
    That budget plan has been deemed to be the budget. The 
President has indicated his support for that budget plan. Yet 
we are now 8 months into this process, and still there is no 
proposal on the table that is anywhere near the majority 
support that is required in the Senate in order to adopt any 
kind of budget discipline. And what my friend Mr. Spratt calls 
budget primacy, in order to have the primacy of the budget, you 
need a budget.
    It is kind of hard to have the primary focus of the Federal 
Government as far as architectural design, fiscal 
responsibility, to be the budget if you don't have a budget. 
The President has a budget. The House has a budget. We intend 
in the House of Representatives to enforce that budget.
    Let me, if I can, go to a chart that indicates what happens 
if we don't enforce that budget, and move to what we are 
hearing the Senate may do as a result of not having any amount 
of fiscal discipline or spending restraint.
    If you look at this chart, if you follow our budget, by 
CBO's projections, which seems to be the most pessimistic and 
that is fine--let's use the most pessimistic data that is on 
the table. We do go back to a unified surplus, balanced budget 
by the year 2006, 2005; but as you can see by the red line, 
that is where the Senate currently is setting its discretionary 
spending, based on the numbers that the Senate Appropriations 
Committee is using in order to report their legislation. As you 
can see from that line, according to CBO, you never get back to 
anybody's definition of budget discipline or balanced budget in 
any time during the next 10 years.
    The concern I have is that in order for us to enforce 
discipline, as you said, the first thing you need is you need 
to have a budget. It is our intention to enforce the House-
passed levels.
    My question for you is, if we do not, and if we, in fact, 
meet somewhere halfway, which, by the way, halfway means below 
balanced budget as well, how will that effect the markets? How 
will you react to that level of spending discipline, given your 
testimony here today?
    Mr. Greenspan. Well, Mr. Chairman, it is difficult for me 
to make explicit projections of what the economy will look like 
4 or 5, 6 years out. I think our ability to do that is clearly 
limited.
    My discussions with a number of your colleagues in the 
Senate suggest that they, too, have a sense of frustration 
about not being able to put a budget together. I can't go much 
beyond what I said in my prepared statements. I think that we 
are clearly eroding the underlying structure of budget 
constraint that had characterized the Congress for quite a 
significant number of years. Fortunately, it has not yet gotten 
to the point where it has had significant negative market 
consequences. I can't obviously comment on what we at the 
Federal Reserve would do, because we respond not to fiscal 
policy per se, as I have said many times in the past, but to 
what the impact on the economy is, and we respond effectively 
to the economy.
    Chairman Nussle. Well, then let me just wrap up and keep us 
moving here so that other members can ask questions. But let me 
report to you in conclusion that this committee is on record 
supporting the extension of those measures of fiscal discipline 
and PAYGO and the caps. We have passed a budget here in the 
House. If we are going to have budget discipline, if we are 
going to have spending discipline, if we are going to have 
fiscal restraint and responsibility, if we are going to have 
budget primacy, you need a budget. And the President has 
demonstrated an ability to present a budget, the House has 
demonstrated its ability to present a budget, and as of yet no 
one else has either presented a budget or passed a budget that 
meets those tests at any time during the last 8 months. We hope 
that will change here in the time that we have left in this 
fiscal year and in this 107th Congress.
    With that, I return to my friend, Mr. Spratt.
    Mr. Spratt. Mr. Chairman, I believe the Senate Democrats 
did report a budget; the problem they have is getting it off 
the Senate floor if they would bring it to the Senate floor.
    Let me share with you a chart just to join the debate, 
which is our projection of what happens under the President's 
proposals in July of this year in the Mid-Session Review sent 
us by OMB. Based upon this simple table, you start out with 
$5.6 trillion. By August it was down to 3.4. By March it was 
down to $1.7 trillion. By August, per CBO, it was down to $336 
billion, from $5.6 trillion, to $336 billion. And if you factor 
into that baseline forecast by CBO--which was a current policy 
forecast, assuming no new policies--if you factor in just the 
policies proposed by President Bush as recently as July in the 
mid-session review, the surplus becomes a net deficit of $480 
billion, and there is only a black bottom line, because all of 
that is a Social Security surplus.
    We don't have a budget now, and one of the problems with 
the budget process rules, Mr. Chairman, that you mentioned is 
that they were always passed and coupled with a plan. We had 
the budget summit in 1990 which we made with the first 
President Bush. We had President Clinton's budget in 1993, and 
we had the Balanced Budget Agreement of 1997. Every time we 
renewed those budget process rules, they worked, because they 
were coupled with a specific plan. Now, we fudged on the plan. 
We did not fully comply with the plan, but by and large it was 
a template which kept us in balance and helped us move the 
budget from $290 billion in deficit in 1992 to a surplus in the 
year 2000; phenomenal progress with the budget.
    Let me ask you about budget process rules, and one in 
particular which you mentioned. A year or two ago, as we were 
debating whether or not to have a tax cut of $1.35 trillion, 
you suggested that we might have to trigger surplus-affecting 
policies, either spending or tax policies, that might be kept 
in balance if they were phased in, No. 1; and No. 2, if the 
forecast didn't fulfill itself, if it didn't obtain and the 
budget went deeper in deficit and surpluses disappeared, we 
might want to trigger off those surplus-affecting policies.
    Do you still support some sort of mechanism like that as 
well as the other two you mentioned?
    Mr. Greenspan. I do, Congressman, and the reason I do is 
that it has become evident over the years that the commitments 
that we make within the budget are increasingly longer-term and 
have long lives to them. Because as we very clearly 
demonstrated in the last year or so, long-term forecasts are 
difficult to make, and yet we note with reasonable certainty 
that we are going to have a very large increase in retirees as 
the so-called baby boomers begin to retire in large numbers. So 
we know that we have a fiscal problem of significant dimensions 
out there.
    So I have argued, and I would continue to argue, that it is 
very important not only to have short-term budget plans, but to 
have plans which phase us into a very dramatic change that 
occurs in the fiscal outlook as we get into the next decade.
    Mr. Spratt. And phase us out if the underlying forecast 
does not obtain.
    Mr. Greenspan. Therefore, because it is so difficult to 
forecast, I think it is essential that we have triggering 
mechanisms of one form or other on both taxes and spending 
initiatives.
    Mr. Spratt. We have a pie chart that shows our 
apportionment of the causes for the deterioration in the 
surplus over the next 10 years, and our pie chart shows that 
tax cuts account for about 40 percent, but the economy and 
technical factors account for 33 percent. In other words, there 
was a misestimation of the aggregate surplus over 10 years to 
the extent of about 43 percent, 10 percent for not correctly 
calculating the growth of the economy, but a large 33 percent 
for technical factors. Even though the economy is growing as 
anticipated in the outyears, the economy is still not 
generating the tax revenues that were anticipated in 2001. We 
got a sharp reminder of that in the CBO report that came up 
here on August 27. That report showed that even though they are 
assuming that the economy will grow this year at 2.3 percent, 
recover to 3 percent next year, and then bottom out at about 
3.2 percent for the last of the forecast period--even though 
they are assuming reasonable growth, we still have a technical 
shortfall in tax revenues expected over that period of time of 
$668 billion over the 10-year period, 2003 to 2012.
    Do you share the opinion that we missed it a couple of 
years ago? That we grossly over-calculated what the surplus 
was, and therefore do we need to reconsider in light of the 
fact that the premises no longer apply?
    Mr. Greenspan. Well, there were very considerable technical 
difficulties in budget estimates which confronted both OMB and 
CBO. We all knew that the rise in individual income tax 
receipts were far in excess of anything that could be 
determined by what we would call the tax base. We knew that a 
very substantial part of that rise in revenues relative to 
income was a consequence of stock price effects one way or the 
other. What we did not anticipate, or--I will put it this way: 
in the long-term projections, as I indicated in my prepared 
remarks, the CBO and indeed OMB projected that the market would 
come back to some average level and that the very significant 
amount of tax revenues which were raised because of stock 
option grant realizations would come down to normal, or to what 
they had been in the previous period.
    Even though we do not yet have the full details and will 
not until we have the statistics of income for 2001, the 
decline in capital gains taxes, plus the stock option 
realizations apparently fell far faster than we expected, 
because you could see it in the final settlements, the receipts 
that occurred in April, and you could see it in the estimated 
tax receipts.
    What that essentially means is that the expectations of the 
relationship between the stock market, capital gains, stock 
options, bonuses, withdrawals from 401(k)s and IRAs all were 
overestimated. That is what that technical 33 percent largely 
picks up.
    We still don't know whether the forecasts are right. They 
may be too low for all I know going forward. But CBO and OMB do 
the best that they can. They are the only real players in the 
game, because they are the only ones who have the really very 
detailed budget and tax revenue data systems.
    So I guess the best thing to do is to wish them well in 
making better estimates, but it is tough.
    Mr. Spratt. But in addition to that, being honest, looking 
back, saying ``hey, what we expected has not happened,'' 
therefore we do have to change the plans that we based upon 
those expectations?
    Mr. Greenspan. Oh, absolutely. Not only did it not happen, 
but things that we never even thought about happened.
    Mr. Spratt. One thing you popped out of your box on us in 
this testimony that is different from PAYGO rules, and 
discretionary spending caps is accrual accounting. It has been 
talked about for a long time. It is not easy to apply accrual 
accounting to government accounts, but if we had accrual 
accounting, we would have a deficit, would we not, for as far 
as the eye sees, irrespective of these underlying numbers, 
because the accrual for Medicare and Social Security future 
liabilities alone would drive the bottom line down?
    Mr. Greenspan. Yes, that is right, Congressman. If you take 
a look at any reasonable estimates of what the accruals are, 
and remember they require fairly sophisticated judgments with 
respect to the future, you end up with accruals being 
significantly above actual cash benefits on both OASDI, and on 
the Medicare programs. So that we are still accumulating 
contingent liabilities which obviously reflect both the 
difference between accruals and benefits, and the interest 
earned on those contingent liabilities, if you look at the 
aggregate contingent liabilities that are involved we are now 
somewhere in the area of $10 trillion for Social Security 
alone.
    So the numbers are quite significantly different, and it is 
certainly the case were we to go to accrual accounting, which 
in principle we ought to; that is what the private sector does.
    Mr. Spratt. If we had it on an accrual accounting Federal 
budget, and also a strictly observed PAYGO rule, we could not 
have any entitlement increases or spending cuts or tax cuts for 
a long time to come, could we?
    Mr. Greenspan. I think it would be a very sobering 
budgetary experience.
    Mr. Spratt. One final question, because others want to ask 
you questions.
    Right now we sort of are lulled into complacency, I think, 
because we have been able to run large deficits and have 
budgets that forecast large deficits, but we have not yet seen 
or felt the effects apparently in the long-term interest rate 
markets.
    Mr. Greenspan. That is certainly correct. Indeed, it is 
hard to find any evidence of the move from surplus to deficits 
in long-term riskless Treasury instruments. One of the reasons, 
as I indicated before, is not only obviously that the economy 
has slowed down through the last year or two, but also there is 
still a degree of expectation that the fiscal policy process is 
under control.
    Mr. Spratt. Nevertheless, you still think there is a 
connection. You made a landmark speech at Jackson Hole recently 
and there were some economists there from Georgetown who I 
understand presented papers saying that even CBO's projection 
of long-term deficits had an effect on long-term interest 
rates. Do you think that there is still a serious connection 
there and that could hamper the long-term growth of the 
economy?
    Mr. Greenspan. There is a large dispute within the 
economics profession of the impact of government debt and 
deficits on long-term interest rates. I am in the camp which 
believes there is a very close connection over the long run. To 
be sure, there are many other factors which affect long-term 
interest rates, but if you watch the way markets behave, and 
indeed the economics of it very strongly suggest that long-term 
interest rates, both real and nominal, are affected in a 
significant manner by the long-term fiscal outlook, and when 
you change the long-term fiscal outlook or, more exactly, when 
the markets perceive a change in the long-term fiscal outlook, 
interest rates react immediately.
    Mr. Spratt. And long-term rates are critically important in 
determining investments in plant and equipment, fixed long-term 
investments?
    Mr. Greenspan. Long-term interest rates have been 
extraordinarily important, not only, as you point out, in the 
corporate sector, but they have been a major factor in inducing 
the extraction of equity from homes which been a very large 
contributor to the support the economy has had through this 
period of very severe equity market contraction.
    Mr. Spratt. Thank you very much, sir.
    Chairman Nussle. Given the time constraints, I am going to 
ask members to hold very closely to the 5 minutes, and I will 
try to enforce that respectfully.
    Mr. Gutknecht.
    Mr. Gutknecht. Thank you, Mr. Chairman. Thank you, Dr. 
Greenspan. It is always good to have you here.
    Mr. Greenspan. Thank you.
    Mr. Gutknecht. I am reminded sort of in listening to some 
of your presentation of something my old German grandmother 
says. ``So soon old and so late smart.'' It seems that we sort 
of have to relearn things so many times. In terms of predicting 
what the economy is going to do in the future, it is a very 
difficult business.
    I want to first of all talk about something that our 
friends on the other side continue to talk about, and that is 
the tax cuts. Given the fact that the economy has been much 
more sluggish than we originally predicted, do you think we did 
the right thing in reducing taxes last year?
    Mr. Greenspan. Oh, I do, Congressman.
    Mr. Gutknecht. Let me go to the other side of the equation. 
Since we found out it is much more difficult to predict how 
much money is going to be coming into the Federal Government 
than we used to think, let's talk about the spending side. In 
the past you have said, I don't know if it is a direct quote, 
in the past you have said that the credibility of fiscal 
discipline such as discretionary spending caps promoted market 
confidence and thereby helped support economic growth. Do you 
still believe that? And perhaps you can expand upon that.
    Mr. Greenspan. I do, Congressman. I don't think it is 
necessary to expand. It is well phrased.
    Mr. Gutknecht. Yes, it is.
    Well, that is the dilemma we are going to face here on this 
committee as we finish up the appropriation process for this 
year and look down the path. And we would certainly hope that 
you would continue to voice that opinion, because sometimes we 
are at a big minority here in Congress, because the demand for 
spending is enormous, and it comes from all quarters. Those of 
us who believe we have to continue to apply fiscal discipline 
are many times outnumbered.
    I want to ask sort of an unrelated question, because there 
are really two, I think, important powers that the Federal 
Reserve has. One relates to the Fed funds rate, and I think you 
folks have responded appropriately there.
    The other is with relation to margins. Maybe you could talk 
a little bit about what you do, and was there a way that you 
could have used that power in retrospect looking at what you 
have described as the bubble in the market?
    Mr. Greenspan. Congressman, we looked at that very 
carefully and concluded that by every analysis we were able to 
make our margin authority have virtually no effect on any 
speculative activity. And the reason, basically, is that margin 
debt is just a little over 1 percent of the value of the stock 
market, and the vast, vast proportion of traders in the market 
have access to borrowing to finance their purchases from a 
variety of sources. We concluded that the only thing that an 
increase in margin requirements would have done would be to 
restrain the very small investor whose access to lending was 
nowhere near that available to everybody else. It clearly would 
have had no effect on the speculation that was going on, and we 
concluded that as a consequence of that, rather than do 
something which seemed to be a major factor and was not, action 
on margins would only undermine the credibility of the whole 
monetary process itself.
    Mr. Gutknecht. One last question. Some on Wall Street have 
been saying that Congress has been maybe too aggressive in 
beating up on corporate America relative to the corporate 
scandals. In your opinion, have we been too tough, not too 
tough, or just about right?
    Mr. Greenspan. Well, I trust that we have learned 
everything that is going to come out, and I think it depends to 
a large extent on what that is. I do think that there were 
numbers of egregious acts that took place in the name of 
corporate governance over these years. My own impression is 
that the Sarbanes-Oxley Act has appropriately addressed 
everything of which I am aware should be addressed. Indeed, the 
major problem that I perceived and stated on several occasions, 
both in testimony and in speeches, was that the problem 
essentially rested with the chief executive officer and that 
those chief executive officers who wanted to spin the 
accounting system in order to give an impression of success 
where success did not exist, those would be duly restrained 
under the existing statute.
    We see a lot of activities out in the corporate governance 
area which are essentially a reflection of the fact that 
companies tend to themselves reflect what CEOs try to put forth 
as the goal of the company. Those companies, or I should say 
those CEOs who called in their outside auditors early on and 
said, ``Do not do me any favors about giving me numbers which 
look good. I have a corporate strategy out there. I need to 
know whether or not that strategy is working or not working, 
and if you give me numbers which fuzz up whether it is working 
or not, it doesn't allow me to correct mistakes, which I need 
to do.''
    I submit that very, very many corporate CEOs who did that 
turned out to have no problems whatever. There are a few--a 
larger number than I would like to have seen--who did get 
caught up in the short-term earnings game and its impact on 
stock prices, and that will very readily be addressed and, I 
think, fairly completely, by Sarbanes-Oxley.
    Mr. Gutknecht. Thank you.
    Chairman Nussle. Thank you.
    Mr. Bentsen.
    Mr. Bentsen. Thank you, Mr. Chairman. Mr. Chairman, 
Chairman Greenspan, good to see you again. I have a couple of 
questions that I would like to get in if I could. The first 
one, I want to go back to your testimony that you gave before 
the Financial Services Committee in July. During that time you 
said the Fed's tendency for growth in 2002 would be between 
3\1/2\ and 3\3/4\ percent in real GDP growth, and then later, 
3\1/2\ to 4 percent. Is that still the general tendency of the 
Fed?
    Mr. Greenspan. I don't know that, and the reason is that, 
as you know, Congressman, those numbers are the projections of 
all of the members of the Federal Open Market Committee that we 
compile before the FOMC meeting. I would presume that, like the 
whole coterie of other forecasters out there, that were we to 
reestimate those numbers they would be somewhat lower. But that 
is not the forecast, I might say, of the staff, that is the 
forecast of the range of all of the 19 members on the Federal 
Open Market Committee.
    Mr. Bentsen. Thank you. The other question, I want to go 
back to what Mr. Spratt was asking and a little bit of Mr. 
Gutknecht as well.
    In your testimony, you give a strong defense, and I think 
an appropriate defense, of the 1990 Budget Act and the PAYGO 
rules and caps that were put in place that expire at the end of 
this year and the caps arguably expired long before 2002. You 
also mentioned that discretionary spending during that time, at 
least between 1990 and 1998, fell by about 35 percent as a 
percentage of GDP. I know Mr. Gutknecht brought up concerns 
about rising discretionary spending and earlier this year I 
think we raised discretionary spending, the bulk of which went 
into defense and homeland security accounts, which I think most 
Members--this Member feels is appropriate spending.
    But you also said that you still agree with your comments 
last January, or January of 2001, in which you believed there 
should be some sort of triggering mechanism in tax reductions 
in conjunction with some sort of triggering mechanisms with 
spending assumptions.
    Given the fact that you believe that we ought to extend 
PAYGO, and I think you are correct in that assumption, do you 
think it is appropriate that the Congress consider at this 
point in time--given that we have lost $5 trillion in surplus 
value in the last year--that we should very seriously consider 
freezing the further reductions assumed in the 2001 tax cut? 
Secondarily, do you assume that a freezing of a future 
reduction is in itself a tax increase, or is it just 
forestalling future reductions? Because that is really what we 
are coming down to. I think we are going to have to have 
spending cuts, we are going to have to have caps again, we are 
going to have to have PAYGO offsets. But it seems to me that we 
cannot say we are for triggers, but then not exercise them as 
it relates to the 2001 tax cuts. So do you think we need to go 
back and look at the 2001 tax cut in conjunction with PAYGO and 
caps?
    Mr. Greenspan. Well, I think it is important to remember 
that of the tax cut of $1.5 trillion plus, including debt 
service, there is only $500 billion left to be initiated, and I 
might say that part rescinding of that you will find would run 
into resistance from a significant majority of the Congress, so 
that there is not all that much to change. My own view is that 
I would prefer not. And one of the reasons I would prefer not 
is that there is a significant segment of the business 
community, largely small businesses, who have presumably made 
capital investment commitments in the context of expecting that 
the long-term tax structure would remain in place. They 
presumably would think that if you rescinded it they would 
consider it a tax increase.
    What constitutes a tax increase or not is clearly an issue 
of definition. Some would say yes, some would say no.
    Mr. Bentsen. Well, if I might in my remaining few seconds 
ask, given the fact that in your own testimony you say with the 
looming liabilities of Social Security and Medicare that need 
to be addressed, the long-term prognosis is not very positive 
for fiscal policy and your belief that there is a coordination 
between deficits and long-term interest rates, would not we be 
putting on those same small business people the rising cost of 
capital, particularly in the short-term markets where they 
participate the most that would offset any reduction that they 
might be getting through the tax cut?
    Mr. Greenspan. Well, rather than focus on any individual 
part of the budget, I think I can just merely stipulate that 
what is required here is to look at the total. The particular 
political decisions of whether spending is cut or taxes are 
raised or vice versa I think is very properly in this committee 
and amongst your colleagues in the various appropriations 
committees, so I don't particularly wish to focus on any 
specific part of the budget. As I said, my own personal view 
would be, I trust that you do not rescind the tax cut, but that 
is a much broader question and I think it should not be 
answered without looking at the whole context of where you want 
this budget to be and in what form in, say, the year 2012.
    Mr. Bentsen. Thank you.
    Thank you, Mr. Chairman.
    Chairman Nussle. Thank you.
    Mr. Thornberry.
    Mr. Thornberry. Thank you, Mr. Chairman.
    Chairman Greenspan, one of the reasons, it seems to me, 
that economics is as much an art as it is a science is that in 
some way you judge the reaction of the economy to various 
policy decisions which are made in Washington, reactions of 
markets and investors, consumers, businesses and so forth. I 
want to ask you about several policy options that are before us 
in the short term and your judgment as to whether it would be 
beneficial to the economy and attitudes about the economy.
    One you have already, I guess, addressed somewhat. If we 
are able to finish our business this year with relatively 
restrained discretionary growth in spending, is that a positive 
thing for the economy? What sort of effects would that have?
    Mr. Greenspan. It would be positive. The reason I say that 
is I know there are a lot of people out there who are arguing 
that what we need very significantly is fiscal stimulus, but 
the amount of stimulus already in the pipeline is really quite 
large. And, remember that we are looking at a CBO budget which 
is a current services budget. It does not have in it fairly 
substantial potential additional initiatives which are 
evidently important to the Congress, but they are not in the 
budget. I should think that the problems that are going to 
occur in the period immediately ahead are going to be more an 
issue of restraint than the need for any additional fiscal 
stimulus.
    Mr. Thornberry. Let me ask about a second area. We have 
before us in Congress several things related to homeland 
security, reorganizing the government, terrorism insurance. If 
we are able to achieve those things before we leave this year, 
does that help the economy by giving some greater confidence 
that the government is actively protecting us?
    Mr. Greenspan. Congressman, anything that reduces 
uncertainty is almost universally favorable to markets and to 
the economy, so to the extent that there are uncertainties 
hanging out there as to which way, for example, the terrorism 
issue is going to be handled, anything that can be done to 
remove that uncertainty would be helpful.
    Mr. Thornberry. That answer may apply to this question, 
too. Before us is an energy bill. If we are able to take some 
action that will reduce our dependence upon foreign energy, for 
example, what is the reaction in the economy to that? Some 
speculation is that people are reluctant to invest because 
depending on events in the Middle East, that could have 
consequences to energy markets and the economy as a whole.
    Mr. Greenspan. I would say anything we can do to increase 
our energy security is clearly to the advantage of the long-
term outlook.
    Mr. Thornberry. Let me ask you about one other area that is 
kind of on our plate in the short term.
    There are those who suggest that we should take some action 
in the Tax Code to boost investor confidence. Some suggest 
further reductions in capital gains; others argue that making 
dividends deductible would be a good thing for investors, but 
would also help provide some stability dealing with some of the 
issues you and Mr. Gutknecht talked about. What is your 
judgment as to the advisability of some sort of a tax bill this 
year in the short-term dealing with these investor-type issues?
    Mr. Greenspan. Well, I am not certain you can do it this 
year obviously, because you are going to be running out of 
time, but over the future, it is clearly for economic reasons 
desirable in some way, in some manner, to lower or hopefully 
basically eliminate the so-called double taxation on dividends. 
That is not very helpful for long-term capital investment or 
the allocation of capital, and, as I have said on other 
occasions, I am also in favor of reducing capital gains taxes 
and indeed eliminating them completely on the grounds that it 
is a very poor way of raising revenue.
    But having said that, in the context of the requirement 
that we maintain an appropriately fiscally disciplined system, 
we cannot make and should not be making decisions without 
fitting them into the context of the long-term fiscal 
situation. There is no doubt in my mind that it would be 
desirable, for example, to increase the availability of 
subchapter S corporations which effectively eliminates the 
double taxation of dividends. There are a number of other 
things which I think would be quite helpful and to which we 
ought to aspire, but in the context of an overall budgetary 
fiscal posture.
    Mr. Thornberry [presiding]. The Chair recognizes the 
gentleman from Virginia, Mr. Moran.
    Mr. Moran. Thank you, Mr. Chairman.
    Mr. Greenspan, we are all aware that you are the most 
credible economic analyst in the country today, and so in many 
ways our country's fiscal solvency in the years ahead rests on 
your able shoulders. But your intellectual ability, of course, 
is only as constructive as your political independence. I have 
a little concern and I am feeling some frustration in that 
regard.
    The current CBO Director has had the intellectual 
integrity, though a Republican, to tell his own party what they 
needed to know instead of what they wanted to hear. In his 
latest report he shows that the single greatest component to 
the erosion of the $5.6 trillion budget surplus, and this 
projection of deficits in excess of $200 billion a year, is 
primarily attributable to the tax cuts.
    Mr. Greenspan. That is factually accurate.
    Mr. Moran. Well, I know that. And as a result, I suspect he 
is going to be removed. But in your testimony, you seem to 
studiously avoid what I think is a very important 
consideration. You knew that that $5.6 trillion budget surplus 
was not sustainable. You knew and warned us that the equities 
markets were hyper-inflated and any number of contributing 
factors made you more aware than most people that the money was 
not there, and if we used the $5.6 trillion figure to justify a 
substantial tax cut, that money was eventually going to have to 
be borrowed from the Social Security and Medicare Trust Funds, 
and that is exactly what has happened.
    Mr. Greenspan. I testified a year ago, in which I took the 
CBO numbers as they stood, and if you look at what they were 
doing and the way they handled it, those estimates were 
professionally as good as you could do. We all--what I 
testified to is that these are variable estimates, but I didn't 
necessarily know that they were too high or too low.
    Mr. Moran. You were telling us that the equity market was 
not sustainable.
    Mr. Greenspan. But remember, the $5.6 trillion was based on 
the presumption that the equity market would be coming down 
over the long run.
    Mr. Moran. Well, I don't want to be too argumentative here 
with you, but you do acknowledge that the principal cause of 
the deficit today is the tax cut; it is anywhere from 35 to 40 
percent, and the excess spending, additional spending is maybe 
12 to 15, depending upon who you believe, and the sluggish 
economy maybe 15 percent of the deficit. That is where the 
emphasis, though, is being placed.
    In your statement, if you read your statement without any 
larger context, you would think that the domestic discretionary 
spending is primarily attributable to the deficit, and that is 
where we need to focus almost exclusively our energies. But you 
also know that we reduced domestic discretionary spending from 
about 10 percent down to 6.5, 7 percent. So you know that there 
is just not that much more----
    Mr. Greenspan. That includes defense.
    Mr. Moran. Well, I don't feel that you have indicated that 
you think the defense budget should be cut. I would be 
interested to know that if you think that it should be.
    Mr. Greenspan. No.
    Mr. Moran. It seems to me that the only discretion we have 
is in domestic spending. That is where the argument over 
appropriations bills is going to be. That is why we are going 
to get stuck with a continuing resolution, because we can't 
come up with the money for the Labor, Health and Human Services 
bill. So we are not arguing over defense. But in your 
statement, if we do what you are implying we should do, we 
would further cut domestic discretionary spending. It just 
seems to me there is very little wiggle room left there.
    Mr. Greenspan. No, I think that my statement was 
essentially an effort to indicate that we ought to have a long-
term fiscal policy and adhere to it. I, hopefully, studiously 
avoided endeavoring to get involved in any specific way in 
which that should be achieved because that is the Congress' 
prerogative.
    Mr. Moran. Well, Mr. Chairman, the President has proposed 
additional tax cuts of about $260 billion over the next 10 
years. Do you think those should be implemented now, given the 
fact that they would have to be paid for out of Social Security 
and Medicare? Would you support delaying those until we can pay 
for them?
    Mr. Greenspan. As I said to your colleague across the 
aisle, my own view is that all initiatives, both on the tax and 
the spending side, have to be made, in my judgment, in the 
context of what the long-term fiscal policy outlook is and what 
the goals of the Congress, hopefully in this committee and your 
colleagues in the Senate, decide is the appropriate stance.
    Mr. Gutknecht [presiding]. The gentleman's time has 
expired, and Chairman Nussle would like to keep the committee 
meeting going during this vote, so I will recognize the 
gentleman from Georgia, Mr. Collins, for 5 minutes, and I 
understand Dr. Greenspan can only stay until about 12:30. If 
you need to go and vote, we are going to try and keep this 
going. The Chair will come back, and the Chair recognizes the 
gentleman from Georgia.
    Mr. Collins. Thank you, Chairman Gutknecht.
    I really appreciate the fact that you adhered to my advice 
with your most recent comment there, and that is you will leave 
the spending and the taxing to Congress and you will handle the 
interest rate based on Federal funding.
    You know, when you testified here, I believe it was last 
year, the question was asked about interest rates; did you feel 
like you had raised interest rates too quick and too high, and 
of course you said no, that the purpose of raising those rates 
was to slow down corporate investments.
    Mr. Greenspan. Did I say that?
    Mr. Collins. You said that, sir, and I believe you achieved 
your goal. In fact, I think it kind of dried up. That might be 
about the time you spoke about the bubble, about when the 
bubble bursts.
    Also at that same time is when we began to see a decline in 
revenues as far as the Federal Government, State governments 
and local governments. Also we began to see an erosion in 
consumer confidence, and consumer confidence, as you well know, 
is the marketplace and the economy, the cash flow of 
individuals.
    A lot of that consumer confidence began to erode because of 
job loss. Job loss has required digging into many savings 
accounts and, as you said in your comments, there have been 
some 401(k)s cashing in and IRAs and such to pull those funds 
out to meet the needs of the family budget. Retirement funds 
have declined, based on the fact that the market is way down, 
and that too has sent some shock waves throughout the consumer 
environment. Spending has not declined as such by the Federal 
Government. Even though we have seen a shortfall in revenues, 
we have been unable to tend to our own business and adjust our 
own cash flow accordingly.
    My concern is, too, that there has been a lot said about 
the previous budgets, based on 1992 through the year 2000 and 
how we had a tremendous growth in revenue. I am reminded in 
1993 that the party in charge then, their approach to budget 
deficit was to increase taxation. In January 1995, deficits 
were $200 billion a year as far as you could even estimate. 
Also, in January 1995, the stock market was at 3,800 points, 
and in 2000 it rose to 11,000 points. A lot of that came, as 
you said in your statement, from the fact that there was some 
budget discipline that was beginning to take place within the 
Congress. I am sorry to say that budget discipline itself has 
eroded.
    But my question to you, sir, is where do revenues for the 
government, where are they actually derived? Where do they come 
from?
    Mr. Greenspan. They come from the taxable incomes of the 
American people.
    Mr. Collins. From the American people, as far as the 
individual. And the corporate income tax, where does it come 
from?
    Mr. Greenspan. It comes from the same people.
    Mr. Collins. It comes from the fact that there is an 
earnings, a positive earnings within the corporate community.
    Mr. Greenspan. True.
    Mr. Collins. Those positive earnings in the corporate 
community are also responsible for the fact that it is the cash 
flow of the individual which puts them in a taxable situation, 
is that not true?
    Mr. Greenspan. That is correct, Congressman.
    Mr. Collins. We have a situation in this country, and I 
believe you referred to it, too, that we have imports that far 
exceed exports. We are in a global marketplace, is that not 
true?
    Mr. Greenspan. It is.
    Mr. Collins. Do you know, or are you aware of, a 
considerable number of differences between the tax provisions 
that we impose, which is cost to business in this country, 
which directly affects payrolls, which has led to the decline 
in the number of jobs, how our provisions relate and compare to 
provisions of other nations?
    Mr. Greenspan. Well, there is very clearly an increasing 
amount of competition amongst nations to attract companies and, 
as a consequence of that, there is an ever-increasing 
convergence of tax structures amongst nations because of the 
competition.
    Mr. Collins. Well, let's get a little bit more specific 
with some of the differences. We tend to have a higher capital 
gains rate than most industrialized nations, is that not true?
    Mr. Greenspan. I believe that is still correct.
    Mr. Collins. We have a higher rate than some nations, not 
all. We also have the corporate and the personal alternative 
minimum tax. Do you know of another nation that imposes such a 
tax?
    Mr. Greenspan. I am not familiar with it, but that is only 
because of----
    Mr. Collins. As compared to the Europeans, we double tax 
stock dividends which are directly related to portfolios and 
retirement of the individuals who work for businesses. In fact, 
the individuals make up the business; the business is only the 
name. Are you aware that the Europeans do not double tax?
    Mr. Greenspan. Remember, the Europeans get a significant 
amount of their revenue from the value added tax, which 
essentially eliminates----
    Mr. Collins. That is true, and a lot of our revenue in this 
country for our local and our State governments come from 
consumption taxes, too.
    We also treat depreciation much different. We have 
oftentimes a double depreciation length of time versus an 
amortization of a capital investment. In your comments, you say 
the more capital that is available per worker--you are taking 
it right back down to the per worker basis--is very important. 
And so if we are not competitive in the world market, should 
we--well, no that is our question; that is the decision we have 
to make. But my statement is we should address the differences 
between our tax provisions in this country versus our 
competition in other parts of the world. If we have a team that 
weighs 150 pounds and we are up against 300-pound gorillas, we 
need to do something about our team, and our team is now the 
lesser on the field because of the competition and the lack of 
the provisions that we need to be competitive and the costs 
that we impose on businesses and on individuals in this 
country, because business only collects from its customers, it 
does not generate.
    Thank you, Mr. Greenspan.
    Chairman Nussle [presiding]. Mr. Chairman, I have a couple 
of follow-up questions. I know there are members who are trying 
to get to the floor to vote and then I know there is at least 
one, maybe two, who may come back and have final wrap-up 
questions. But before they come back, let me just ask you, you 
had mentioned in response to Mr. Spratt and others--and I share 
the frustration that so many have about the inaccuracies of the 
forecasts and the inaccuracies that appear to be either within 
the models that are used or the judgments that are provided--
there is a tendency to shoot the forecasters, and that is, I 
suppose, I have done my fair share of shooting the messengers 
or shooting the forecasters.
    Was there any way to predict this? I mean one thing that I 
recall as far as the downturn in revenue, one thing I recall in 
the opening predictions of the Congressional Budget Office, 
this would have been back in, oh, I want to say it was all the 
way back a year ago in February, so now a year-and-a-half ago, 
is they had built into their forecast of the $5.6 trillion 
``surplus'' a recession. In fact, they cheerfully testified to 
that fact, OMB testified to that fact, that was part of the 
advertisement, and yet even with this ``built into the 
forecasts,'' whatever happened, happened much larger than 
previously forecasted or explained.
    Could this have been foreseen? Obviously hindsight is 
always 20/20, but should we be trying to figure out as we look 
forward into the nut a better way to forecast these kinds of 
things, either short term or long term?
    Mr. Greenspan. Well, a very large part of the error occurs 
not as a consequence of misforecasting the economy--in other 
words, misforecasting the GDP and the wage and salary income 
and dividends and all of the standard means that we use to 
calculate taxable incomes. It occurs to a very substantial 
extent in relating the changes in, say, stock prices to capital 
gains taxes on the realizations of stock sales.
    Remember, merely looking at a stock price pattern doesn't 
tell you what the actual realizations are. It gives you a rough 
cut, but you will find that it is not a simple issue to 
translate rising stock prices or rising values of real estate 
into taxes, because you don't know when these particular assets 
are going to be sold. So there has been a great deal of effort 
to try to get a better handle on that, and I hope we will 
continue to improve the techniques that we now have.
    We had a reasonable shot, I think, at picking up the 
potential decline in income taxes paid on stock option 
exercises, and I think to a certain extent probably were able 
to get some judgments about the other areas which were affected 
by stock prices; but we did not get by any means the whole 
thing, because even making all of those adjustments, the final 
settlements numbers which showed up in the April tax 
collections implicitly came in far short of what we would have 
expected, and my belief is that I expect that the implied 
estimated taxes that show up in the non-withheld components for 
certain months also were coming in below those expectations. We 
won't know what the nature of the mistake was until we get the 
full detailed statistics of income for calendar year 2001 and 
are able to see what actually did happen.
    Do we need to improve the techniques? I think we do. Do we 
have the capacity to do it? I am not sure at this particular 
stage, but we have no alternative but to continue to try.
    Chairman Nussle. Thank you. I indicated that it was Mr. 
Toomey, and I apologize; it was Mr. Moore first. The gentleman 
is recognized.
    Mr. Moore. Thank you, Mr. Chairman. And Chairman Greenspan, 
thank you for being here.
    You did testify, and this is not an exact quote, but I 
think it is close, the amount of stimulus in the pipeline 
already is really quite large, is that correct, sir?
    Mr. Greenspan. That is correct.
    Mr. Moore. You talked some in answer to various questions 
here about additional tax cuts, and you said I think, and 
correct me if I am wrong, that there may be some need or a 
desire to further stimulate the economy in the future?
    Mr. Greenspan. Well, tax cuts in the context that I was 
discussing them work to improve the underlying structure of the 
economy, not as short-term economic stimulus.
    Mr. Moore. There was a tax cut that was voted on, presented 
in the House of Representatives and voted on and passed, the 
House at least, and that was what was called permanent repeal 
of the estate tax, and I voted for the $1.35 trillion tax--I am 
sorry, the $1 trillion tax cut proposed by the President last 
year. Would this permanent repeal stimulate the economy?
    Mr. Greenspan. Well, I think over the long run, it clearly 
would be removing a tax on capital which tends over the long 
run to improve the capital efficiency of the system.
    Mr. Moore. What would it do, though, what would it do to 
our financial condition as a Nation?
    Mr. Greenspan. Well, as I responded to another one of your 
colleagues earlier, the application of any form of spending 
initiatives and tax cuts, even though they are in and of 
themselves clearly of value and would be perceived as having 
value to a majority of both Houses, there is still the question 
that you have a budget which must at some point balance or, if 
it is not balanced, be unbalanced for very conscious reasons. 
So there is a two-stage question here: One, other things being 
equal, is a particular tax cut or a spending initiative of 
value; and does it fit into the overall budget program, long 
term, in the context of the various priorities which presumably 
are passed by both this committee and your counterparts in the 
Senate?
    Mr. Moore. I believe you also said, and this is not a 
direct quote, but it is difficult to make projections 4 or 5 or 
6 years out. Is that correct?
    Mr. Greenspan. It is easy to make projections of certain 
things such as population, age distribution, and a number of 
things which essentially are currently almost inexorably 
evolving.
    Mr. Moore. Sure.
    Mr. Greenspan. But the broader aspects of economic 
forecasting create fairly large uncertainties when you get 
beyond the immediate short-term period.
    Mr. Moore. Last year, shortly after the vote on the tax 
cut, in fact, a couple of months after the vote on the tax cut, 
I was at a high school government class talking to high school 
seniors about Chairman Greenspan on the economy and the wisdom 
of fiscal restraint and responsibility. And I told them last 
year, last February, we as a Nation had a $5.6 trillion 
projected surplus over the next 10 years. And then this was 
this year, I guess, because I said now, the projected surplus a 
year later was $1.6 trillion, and somebody said to me what did 
you guys in Congress do with that surplus, the $4 trillion? I 
said it was projected. I asked this high school class, how 
would you define projected surplus. This one girl raised her 
hand and she said, ``maybe yes, maybe no.'' Is that a good 
definition?
    Mr. Greenspan. I fear it might be better than most.
    Mr. Moore. I said to her, I would like you to teach some of 
my colleagues in Congress about projected surpluses and the 
wisdom of spending projected surpluses.
    I guess my question is, what do we do? What do we do now to 
get back? I don't want to play politics here. I want to talk 
about would it be advisable for the President and Congress to 
get to the leadership at least and say, here is what we need to 
do to get back to a balanced budget.
    Mr. Greenspan. It is the fundamentals of our political 
process or a democratic process to resolve these issues and, 
indeed, we have done it in the past. We have to do it in some 
way, in some manner. How specifically it is done is a political 
judgment.
    Mr. Moore. OK. Well, you always say that when you don't 
want to comment on it, and I think you are probably one of the 
most skilled politicians I have ever seen, and that is intended 
as a compliment, not as something bad.
    Mr. Greenspan. Thank you.
    Mr. Moore. I have also heard you talk about keeping the 
triggers, or getting a trigger, keeping PAYGO and discretionary 
spending caps.
    Now, the last question I guess--I am out of time here--is 
in view of our conversation about the problems with projecting 
what is going to happen in the future beyond just a few years, 
would it be advisable for us to stop these 10-year projections 
in terms of budgets and start going to maybe 3 years? Would 
that make more sense?
    Mr. Greenspan. No, it doesn't, largely because the 
commitments we are making, especially now in the context of the 
fact that we have this major demographic shift, really require 
us to look deep, as deep into the future as we can. We are 
doing that implicitly by every passage of a bill that comes to 
the floor of this House. It is far better to at least focus on 
it. We may not know any more or learn any more by focusing on 
it, but it has to be an improvement over just making believe 
there is no problem.
    Mr. Moore. Thank you, sir.
    Chairman Nussle. Mr. Toomey.
    Mr. Toomey. Thank you, Mr. Chairman.
    Chairman Greenspan, thanks for being here, once again.
    I would like to really focus on the issue, maximizing 
economic growth. The first point though I think I would like to 
just develop briefly is something I think you alluded to. The 
biggest budgetary problems and challenges that we face seem to 
me by far to come from the inexorable demographics that are 
catching up to our Social Security and Medicare programs. Those 
strike me as far larger than the annual cash flow shortage and 
surplus that we have had in recent years. It seems to me that 
we are not going to be able to tax our way to a solution long 
term for those programs, we are not going to be able to cut 
spending as a way to achieve the solution; the only way we are 
going to solve that problem is profound, systemic reforms of 
those programs. Do you share that view?
    Mr. Greenspan. I would tend to be in that direction, 
Congressman, yes.
    Mr. Toomey. Then I think--and I fully believe we need to do 
that, and that should be a very high priority because every day 
that passes it becomes a more difficult challenge, certainly 
economically; politically it may or may not be. But with 
respect to the other issues, aside from those programs, and of 
course it is all related; but I wonder sometimes if the tail 
isn't wagging the dog a little bit. When we focus so much on 
the Federal budget per se and whether it is exactly how big the 
deficit is in a given year versus the next year, whether it is 
Social Security or outside Social Security. On page 5 you make 
a point which I think goes to the heart of what we in Congress 
ought to be focusing on, which is to increase the real 
resources that are available, and if the economy is growing in 
a robust fashion, then almost every single problem we address 
is much easier to solve. So I look at programs, I look at 
ideas, such as some that we have discussed briefly earlier, 
ideas that we know, or at least we have a very high degree of 
confidence would improve the capital structure and the savings 
rate for America, lowering the taxes on capital, such as 
capital gains, lowering the taxes on dividends which are at 
minimum doubly taxed. Since we know that that does long-term 
economic good for our economy, isn't it worth going ahead and 
doing that and accepting that maybe next year we may see a 
negative Federal revenue impact from that, but it is going to 
in the long run do more good than harm?
    Mr. Greenspan. In principle, you can make that statement. 
The question is, it is very difficult to make a judgment as to 
when, by increasing deficits and hence an incursion of the 
government debt on private savings begins to actually act as a 
negative force, you would be overriding the positive forces 
which you are very clearly enunciating.
    So it is a really very tricky balance, but the process as 
you describe it I think is an accurate one.
    Mr. Toomey. Well, to get to where we are in that balance--
because I agree at a certain point a certain level of debt 
would be doing more harm to the national economy than good--but 
in recent decades it seems to me it is hard to show a 
correlation between the annual budget deficits or surpluses and 
the level of real or nominal interest rates. And if you look 
where we are right now obviously, in the last couple of years 
we have had this huge swing from big surpluses to deficits; and 
we have had a huge reduction in most interest rates across the 
yield curve.
    Mr. Greenspan. But, as I pointed out before, I think that 
you have to be very careful in drawing conclusions like that 
because all the evidence that we have is that, at the end of 
the day, very large Federal debt does have an impact on 
interest rates and interest rates affect a very large part of 
the capital structure of our economy which we are trying to 
make more efficient.
    Mr. Toomey. I understand. I am very limited on time, so if 
I could just go onto my last point which is, is it not possible 
or credible or plausible or what are your views on the 
possibility that it is really the total magnitude of Federal 
spending that has a bigger impact than whether or not we have a 
marginal deficit or surplus? And are we at a point in terms of 
Federal spending now as a percentage of GDP where we are, by 
virtue of the magnitude of spending, impeding the economic 
growth? We could have greater economic growth, in other words, 
if we diminish that level of spending.
    Mr. Greenspan. That is my own personal impression, but I 
must tell you that the economic evidence is very mixed on this 
issue. Very clearly if you get to very substantial parts of the 
GDP being absorbed by government, you could very readily 
demonstrate that has a significant negative effect. But in 
areas where we currently exist, it is very difficult to find 
the data to demonstrate that. My own impression is that it is 
the difficulty of analysis in finding that relationship, rather 
than the true relationship that is involved. But, ultimately, 
you have to, in a democratic society, demonstrate that certain 
things are important.
    Mr. Toomey. Thank you very much.
    Chairman Nussle. Thank you.
    Dr. McDermott.
    Mr. McDermott. Thank you, Mr. Chairman.
    I am sorry, Mr. Greenspan. I was over on the floor fighting 
another tax giveaway, and I was unable to hear all your 
testimony. So I have got a question or two, and it may be 
redundant.
    Do you believe that from this point forward we ought to 
apply PAYGO rules to any tax bill, whether it is an extension 
or any new one?
    Mr. Greenspan. My view is that the simplest thing to do is 
merely extend the existing statute. But if you find ways to 
improve upon it and make it far more effective, I think that 
would be most helpful.
    Mr. McDermott. So what you are saying is that all these 
things that were put in temporarily last year, they can be 
extended with no problem and we don't have to worry about how 
much they cost or anything else.
    Mr. Greenspan. No, no. I am basically saying that I am 
worried that as of October 1, the whole process will disappear, 
and so I am saying, as a start, let's make certain that that is 
extended. If you can do other things on top of that, by all 
means.
    Mr. McDermott. All new tax cuts PAYGO should apply to, in 
your opinion? I mean, you would encourage us to put that in 
process?
    Mr. Greenspan. Well, yes, certainly. In other words, if you 
have PAYGO, it applies, and it applies to new tax cuts, it 
applies to new spending initiatives.
    Mr. McDermott. And that is also for the President's plan to 
extend these taxes that we have put in temporarily.
    Mr. Greenspan. That is up to the Congress to make a 
decision of what it is you mean by the particular structure of 
the law.
    Mr. McDermott. I know that. But I would like to know what 
you think.
    Mr. Greenspan. What I think?
    Mr. McDermott. I know the task.
    Mr. Greenspan. OK. Let me put it to you this way. I am not 
going to comment on individual items, which really I know far 
less about in the process sense than members of this committee. 
I will try to state what I believe on things I think I know 
something about.
    But if you are asking me, do I think that we ought to 
maintain as strict a fiscal discipline as we can manage, the 
answer is yes. If, in your judgment, that requires that you put 
PAYGO on various different items already in process, that is a 
judgment which I think legitimately needs to be made.
    Mr. McDermott. OK. Can we do dynamic scoring? I mean, do 
you believe in that concept?
    Mr. Greenspan. Well, dynamic scoring is the ideal in 
endeavoring to evaluate any spending or tax program. The reason 
we tend not to do it and go to what we call static scoring is 
that it is very difficult to get general agreement on what the 
feedback effects of various different programs are, whereas 
there seems to be a general agreement on getting the gross 
impact of a program that is through static scoring, so that we 
have a general consensus. If we could find a way in which there 
was a general consensus as to how the economy fed back the 
impact of those various programs in secondary and tertiary 
ways, that would be an improvement on our techniques to 
determine the impact of various programs. We have not been able 
to do that.
    Mr. McDermott. Is the Fed trying to find a way to do that, 
or do you think?
    Mr. Greenspan. Well, I think all the academic community is 
endeavoring. We are. Most everybody is. We have not yet come to 
an agreement, and the reason basically is that none of us have 
a model of how the economy works which has been wholly 
successful. Until we get there, we really don't know the answer 
to these questions.
    Mr. McDermott. I have one last question. I would like to 
hear your estimate of what you expect that going to war in Iraq 
would do to oil prices. Would you expect them to go up? I 
notice you talk about it being--the price of oil being a real 
drag on the economy. Would the price go up? Would the price go 
down? What would be your thinking, if you were talking to the 
President about whether or not he ought to go and the impact it 
would have on the economy if oil prices went up to $350?
    Mr. Greenspan. Well, my general view is that issues of 
foreign diplomacy and military strategy really ought not to 
take into consideration what the impact on the American economy 
is, but we do obviously need to know that as we go on. In other 
words, when we look at the oil market, we recognize certain 
things. First of all, the amount of oil per dollar of GDP has 
been coming down quite significantly over the years so that the 
impact now of a spike in oil prices presumably would be less 
than it has been in the past.
    Having said that, it is factually the case that spikes in 
oil prices have preceded recent recessions. We think that is 
accidental because when we work through as much as we know of 
what the impact of an oil price spike is, it shouldn't have as 
large an effect as it did in the past.
    But how military action, if it occurs, impacts on the price 
of oil is obviously a function of how long it takes, and the 
only example that we have which is really usable in this 
context is the experience of the Gulf war. As you may recall, 
big surges in prices occurred, and as soon as it became 
apparent that the war was going to be over quickly the markets 
came down very dramatically.
    Mr. McDermott. If I can interpret that, you are saying that 
if we were to go to war, it would not surprise you if there 
were a spike in oil prices and a recession followed that or 
depression followed that.
    Mr. Greenspan. It would surprise me.
    Mr. McDermott. It would.
    Mr. Greenspan. It would. Because I don't think that the 
effect of oil as it stands at this particular stage is large 
enough to impact the economy, unless the hostilities are 
prolonged. If that is the case, then we could run into 
difficulty.
    Mr. McDermott. The Gulf war was less than a month, or it 
was a month.
    Mr. Greenspan. The Gulf war--if we go through a timeframe 
such as the Gulf war, it is unlikely to have a significant 
impact on us.
    Mr. McDermott. Thank you.
    Thank you, Mr. Chairman.
    Chairman Nussle. Thank you.
    Mr. Greenspan, I have kept my promise to you with 5 minutes 
to spare. We appreciate your testimony today, and we look 
forward to the next opportunity to visit.
    Mr. Greenspan. Thank you very much, Mr. Chairman.
    Chairman Nussle. Thank you.
    This hearing is adjourned.
    [Whereupon, at 12:26 p.m., the committee was adjourned.]