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