[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]





               UNITED STATES MONETARY AND ECONOMIC POLICY

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

                                HEARING

                               BEFORE THE

                              COMMITTEE ON
                           FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 30, 2003

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 108-24



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                            WASHINGTON : 2003
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska              PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana          MAXINE WATERS, California
SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York              NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California          MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma             GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio                  DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice         JULIA CARSON, Indiana
    Chairman                         BRAD SHERMAN, California
RON PAUL, Texas                      GREGORY W. MEEKS, New York
PAUL E. GILLMOR, Ohio                BARBARA LEE, California
JIM RYUN, Kansas                     JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio           DENNIS MOORE, Kansas
DONALD A. MANZULLO, Illinois         CHARLES A. GONZALEZ, Texas
WALTER B. JONES, Jr., North          MICHAEL E. CAPUANO, Massachusetts
    Carolina                         HAROLD E. FORD, Jr., Tennessee
DOUG OSE, California                 RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois               KEN LUCAS, Kentucky
MARK GREEN, Wisconsin                JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania      WM. LACY CLAY, Missouri
CHRISTOPHER SHAYS, Connecticut       STEVE ISRAEL, New York
JOHN B. SHADEGG, Arizona             MIKE ROSS, Arkansas
VITO FOSELLA, New York               CAROLYN McCARTHY, New York
GARY G. MILLER, California           JOE BACA, California
MELISSA A. HART, Pennsylvania        JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia  STEPHEN F. LYNCH, Massachusetts
PATRICK J. TIBERI, Ohio              BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota           RAHM EMANUEL, Illinois
TOM FEENEY, Florida                  DAVID SCOTT, Georgia
JEB HENSARLING, Texas                ARTUR DAVIS, Alabama
SCOTT GARRETT, New Jersey             
TIM MURPHY, Pennsylvania             BERNARD SANDERS, Vermont
GINNY BROWN-WAITE, Florida
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona

                 Robert U. Foster, III, Staff Director


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    April 30, 2003...............................................     1
Appendix
    April 30, 2003...............................................    59

                               WITNESSES
                       Wednesday, April 30, 2003

Aaron, Henry, Senior Fellow, The Brookings Institution...........    34
Greenspan, Hon. Alan, Chairman, Board of Governors of the Federal 
  Reserve System.................................................     6
Hassett, Kevin A. Director of Economic Policy Studies, American 
  Enterprise Institute...........................................    41
Malpass, David, Chief Global Economist, Bear Stearns.............    36
Peterson, Peter G., President, The Concord Coalition.............    38

                                APPENDIX

Prepared statements:
    Oxley, Hon. Michael G........................................    60
    Emanuel, Hon. Rahm...........................................    62
    Ford, Hon. Harold E. Jr.,....................................    64
    Gillmor, Hon. Paul E.........................................    65
    Aaron, Henry.................................................    66
    Greenspan, Hon. Alan.........................................    71
    Hassett, Kevin A.............................................    76
    Malpass, David...............................................    83
    Peterson, Peter G............................................    95

              Additional Material Submitted for the Record

Frank, Hon. Barney:
    New Evidence on the Interest Rate Effects of Budget Deficits 
      and Debts, March 2003......................................   115
Greenspan, Hon. Alan:
    Written response to questions from Hon. Luis Gutierrez.......   136
The Concord Coalition, ``Are we really cutting taxes or just 
  raising them on our kids?'' article, The New York Times, 
  February 2, 2003...............................................   138

 
               UNITED STATES MONETARY AND ECONOMIC POLICY

                              ----------                              


                       Wednesday, April 30, 2003

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to call, at 10:00 a.m., in Room 
2128, Rayburn House Office Building, Hon. Michael G. Oxley 
[chairman of the committee] presiding.
    Present: Representatives Leach, King, Lucas of Oklahoma, 
Paul, Gillmor, Ryun, Manzullo, Ose, Biggert, Miller of 
California, Hart, Capito, Tiberi, Feeney, Hensarling, Murphy, 
Brown-Waite, Barrett, Harris, Frank, Waters, Maloney, 
Gutierrez, Velazquez, Watt, Hooley, Carson, Sherman, Meeks, 
Lee, Inslee, Gonzalez, Capuano, Ford, Hinojosa, Lucas of 
Kentucky, Crowley, Israel, McCarthy, Baca, Matheson, Miller of 
North Carolina, Emanuel, Scott, and Davis.
    The Chairman. The committee will come to order. Today's 
hearing is on U.S. economic and monetary policy, and we are 
honored to be joined again by the Honorable Alan Greenspan, 
Chairman of the Federal Reserve Board of Governors. Before we 
get started the Chair has a few housekeeping announcements.
    First, pursuant to the Chair's prior announcement in the 
rules of the committee, opening statements will be limited to 
the Chair and ranking minority member of the full committee and 
the Chair and ranking member of the Subcommittee on Domestic 
and International Monetary Policy, Trade and Technology for a 
total of 16 minutes evenly divided between majority and 
minority. All members' opening statements will be made part of 
the record.
    Secondly, in an effort to permit all members an opportunity 
to question Chairman Greenspan, for purposes of questioning the 
witness under the 5-minute rule, the Chair will first recognize 
majority members who did not get an opportunity to question 
Chairman Greenspan at his last appearance before recognizing 
other members. The Chair will recognize minority members based 
on the list submitted by the ranking minority member. The Chair 
recognizes himself for a brief opening statement.
    Good morning, Mr. Chairman, and welcome back. First of all, 
I would like to thank you for your generosity in agreeing to 
come back to the committee and continue the round of questions 
for members who weren't able to speak with you in February. 
Second, let me offer my congratulations on the President's 
comments last week that he would reappoint you to another term 
as Chairman when your term expires next summer. I am sure I 
speak for the entire committee when I say we appreciate the 
strong and steady hand you have exerted in the control of 
monetary policy.
    A great deal has happened in the 10 short weeks since you 
testified before this committee. On February 12, when you were 
last here, the war on Iraq seemed certain but its length and 
outcome were certainly less so. Today we know that the war was 
quick, the dictator was ousted and a free Iraqi people are on 
their way to a new and more democratic government. Back in 
February, the economy's fundamentals looked good, but 
uncertainties about the war and energy prices made it difficult 
to predict an economic turnaround. Now with those issues out of 
the way, the consensus is for gradual but steady recovery.
    Of course, Mr. Chairman, as you know, there are plenty of 
things that can throw the recovery off track; namely, the 
continued weakness of the global economy and, as yet unknown, 
the facts of the SARS epidemic. That is why I believe it is so 
important to enact the President's jobs in growth program. It 
is important to note that the President isn't seeking a short-
term stimulus. Instead, Mr. Chairman, the President is seeking 
long-term restructuring of the Tax Code of the sort that you 
have tended to favor over time and that you embraced in your 
February appearance. I am particularly interested in the 
dividend tax cut and its benefits to investors for the capital 
markets and for corporate governance. As to the other parts of 
the President's jobs in growth package, you have always said, 
Mr. Chairman, you believe that tax predictability is important 
and that in general the lower taxes are and the less government 
spends, the better, and I certainly couldn't agree more.
    Mr. Chairman, I think most in this room would agree that 
there is no better time to cut taxes than during an economic 
slowdown. It is a little harder to reach into the wallet but 
now is when it really counts.
    In closing, I think the early indicators are moving in the 
right direction and that the economy may finally be ready to 
rally. Since the war we have had indications that consumer 
spending is up, the market seems to be recovering, and just 
yesterday we learned that consumer confidence took its biggest 
jump since March of 1991.
    Again, Mr. Chairman, I thank you for your consideration in 
returning to the committee, and I now yield to the ranking 
member, the gentleman from Massachusetts, Mr. Frank.
    Mr. Frank. I join the Chairman in extending our 
appreciation to Mr. Greenspan for giving us this return 
engagement to accommodate this large number of members and also 
I have had a longtime interest in trying to rebut stereotypes. 
And Mr. Greenspan, I mean this quite seriously, for you, given 
where you are, what you have done, your age, your health, for 
you to be continuing as if none of this was of any moment and 
that the only important thing was doing your job really is an 
important lesson that I hope other people learn from. So I 
appreciate not just what you do but the way in which you do it. 
And I apologize for making a big deal out of something which I 
am congratulating you for not making a big deal out of, but I 
do think that needed to be said.
    When you were here last time, you were asked and will be 
asked again about one central question, which is what is the 
relevance of a deficit, an ongoing deficit, an increasing 
national debt to our economic performance. We have had a great 
deal of debate back and forth about the role of the deficit. 
When I first got into politics, deficits were considered to be 
a bad thing and they were used as weapons against people held 
responsible for them. In the 1990s, a consensus appeared to 
have emerged in a bipartisan way that deficits should be 
brought down, that the debt should be brought down, and 
surpluses were a good thing particularly in normal economic 
times, particularly in good economic times and we were making 
progress in bringing it down. There was some general sense this 
contributed to the climate in which long-term interest rates 
could be lowered.
    We are now in a reverse situation. We are in a situation in 
which the national debt is climbing back up again. You noted 
when you were here before us last time that we will begin to 
run into a problem in the teens of this century with regard to 
the demands of Medicare and Social Security. Many of us believe 
that this is directly relevant because the question is do we 
get to that point with a very large debt or have we begun to 
bring that debt down. They are not two separate entities. But 
what happens leading up to that period in terms of the debt has 
a lot to do with our capacity to deal with it. And in 
particular, we have this public policy issue, which is whether 
or not at this point it is appropriate to substantially reduce 
Federal revenues. I say substantially reduce, because quantity 
has become a new issue here. And I have to say as a liberal I 
am used to people saying oh, we don't value money enough and 
people have said you treat a couple of billion of dollars as if 
it is nothing. Well, I guess in that category now I am 
officially a piker because the President of the United States 
has just announced that $350 billion is, to use his technical 
economic term, itty-bitty. If $350 billion is itty-bitty, then 
I guess I have more ability to talk about money than before.
    And I assume, by the way, and I look forward to seeing this 
graphically represented, there is this group, the Club for 
Growth, or the Clubbers for Growth, who have begun to put 
pressure on Republicans who dare dissent and having accused 
Senator Voinovich and Senator Snowe of French leanings, I can 
just imagine what they will do with itty-bitty. I look forward 
frankly to seeing the next commercial in which Senators 
Voinovich and Snowe are in yellow polka dot bikinis. I guess I 
really don't look forward to that, but it may happen. So when 
we have the President announcing that $35 billion a year, $350 
billion over 10 years is itty-bitty then I am worried. 
Unfortunately, you know, to quote another former Senator, an 
itty-bitty here and an itty-bitty there and pretty soon you are 
talking about a lot of itty-bitty. And the question we have for 
you is what is the impact of this.
    Now I was interested to note the study from Mr. Laubach 
which does argue what many have argued that there is a 
correlation between increasing national debt and interest 
rates, and I would be interested in your evaluation. I realize 
that not everything is official and one of the things for which 
we value the Fed is the first rate economic research you turn 
out, and not everybody agrees with everything but this seems to 
me to be pretty persuasive.
    Finally, let me say here is what worries me. I think we are 
in the midst of bait and switch. We have had people who argued 
that deficits were a terrible thing suddenly changing their 
position. Indeed, I am reminded of--unfortunately he is French, 
Henry of Navarre, who became Henry IV of France. When he was 
the heir to the French throne, he was told that as a Protestant 
he could not become the King of France so he converted, and 
when asked about that said Paris is worth a mass. Well, we have 
had people, we have the Secretary of the Treasury, the Chairman 
of the Council of Economic Advisers-to-be, the Chief Economic 
Advisers to the President, there are people who historically 
have been critical of deficits. And I suddenly find now that 
their past criticism of deficits has somewhat changed. And I 
wonder whether the modern version of Paris is worth a mass has 
become Washington is worth a deficit. And I wonder why people 
would have changed.
    What I am afraid of is this: If they haven't really 
changed, if it is bait and switch, that people are now pooh-
poohing the deficit because they want to get a tax cut. But the 
real reason for the tax cut is not to be stimulative. As the 
chairman said, it is not aimed at short-term stimulus. The real 
reason is they want to reduce the revenues of the Federal 
Government because philosophically they don't think it is a 
good idea to have a country in which there are program 
expansions. And once they have succeeded in getting a tax cut, 
a double itty-bitty, and have increased the deficit, they will 
return to their previous deficit professions and try to use 
that as an argument for reducing Social Security benefits, for 
further cutting Medicare and for making other cuts.
    I appreciate again your willingness to come here and I look 
forward to your evaluation of this important issue with the 
interactivity of deficits and interest rates.
    The Chairman. The gentleman's time has expired. The 
gentleman from New York, Mr. King.
    Mr. King. Thank you, Mr. Chairman. Mr. Chairman, it is a 
pleasure to have you here. I commend you on your quick recovery 
and on your stamina. I am going to make a very brief statement, 
but I look forward to the questions today. I look forward to 
your statement. And if you could cover certain areas, one of 
which Chairman Oxley touched on in his opening statement, the 
economic impact, the potential economic impact of having a 
quick victory in Iraq to the extent that that is going to 
restore investor confidence, that perhaps is going to bring in 
businesses that were on the sidelines waiting to see what was 
going to happen with the war, the positive impact, if any, that 
will have on the economy; also on the decrease in energy, 
decrease in oil prices, the impact that will have on the 
economy as far as putting more money into people's pockets, the 
stimulative effect that that could have in the short term and 
perhaps even the long term.
    On a negative aside, I would be interested in the impact 
that the financial crisis that State and local governments are 
facing, what that will have on the overall economy as to 
whether or not Federal policy or national policy could be 
enough to bring it forward or whether or not that is going to 
be a permanent anchor on overall economic growth, the fact that 
there are so many large deficits being faced by local 
governments which are going to cause tax increases in some 
cases, layoffs in another, combinations of both in others and 
the negative impact that will have.
    Also following up on what Congressman Frank said, I am 
obviously on the other side of this issue. I would be 
interested to the extent that you could address the long-term 
impact of tax cuts as far as actually increasing revenues, 
providing long-term growth and restructuring that is, I 
believe, necessary to the long-term growth of the economy.
    With all of that, all of us look forward to your testimony, 
and again I want to commend you on making such a quick recovery 
and being here. I think some of us could have used your 
condition--if it was me I would probably use it as an excuse to 
take 6 weeks off and tell my constituents how sick I was and 
how they should pray for me. But as I said you are an 
inspiration to all of us.
    The Chairman. The gentleman's time has expired. The 
gentlelady from New York, Mrs. Maloney.
    Mrs. Maloney. Thank you, Mr. Chairman, and thank you, Mr. 
Chairman, for being here today. Your appearance before this 
committee is extremely timely. Just yesterday, Treasury 
announced that it will need to borrow $79 billion this quarter, 
a startling reversal of more than $100 billion from recent 
projections. This is just another step in the massive fiscal 
reversal the Federal Government has experienced in the last two 
years. Today, using the administration's own estimates, the 
deficit is forecast at $304 billion for 2003, in contrast to 
the $236 billion surplus the President inherited when he took 
office. When the costs of war and rebuilding Iraq are factored 
in, the forecasts are even bleaker. In the short term, deficits 
may be acceptable if they are forecasted on getting the economy 
moving.
    Unfortunately, the Congressional Budget Office 
macroeconomic analysis of the President's budget found little 
economic benefit from his financial and tax plan. CBO did note 
the impact on the deficit of the President's budget, a 
staggering $2.7 trillion through 2013. Independent economists 
at the IMF issued similar findings recently, saying of the 
economic plan and tax cuts, and I quote from the IMF, if 
enacted in full, they will significantly worsen the medium term 
fiscal position, unquote.
    Perhaps the most unfortunate aspect of this deficit growth 
is that the administration's plan is overwhelmingly backloaded 
and not focused on putting people back to work today. This is 
an exceptionally serious problem as unemployment is close to 6 
percent nationally. In my home city it is 8.8 percent. And 
nationally for African Americans it is 10.2 percent. These 
numbers, as you know, only cover those who are looking for 
work, not the growing number of people who are underemployed or 
who have given up looking for work, nor does it include the 
100,000 reservists who have gone to the Gulf and will come home 
to reclaim their jobs.
    I hope you will address the impact of the administration's 
economic tax plan on job creation, and I also look forward to 
your comments on inflation. Inflation appears to have fallen 
below the Fed's implicit target, specifically a measure that I 
know that you watch closely. The deflector for personal 
consumption expenditure has dropped to .9 percent, very close 
to zero. I hope that you will express your level of concern 
with this number and what changes and tactics or strategy the 
Federal Reserve is contemplating to deal with it.
    Again, I thank you for your service to our country and I 
thank you very much for being with us today.
    The Chairman. Gentlelady's time has expired. We now return 
to the distinguished gentleman, Chairman of the Fed, Mr. 
Greenspan.

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

    Mr. Greenspan. Mr. Chairman and members of the committee, I 
am pleased to have this opportunity to update you on the 
developments of the U.S. economy since mid-February, when I 
presented the Federal Reserve's semiannual monetary policy 
report.
    At that time, I noted that the economic expansion over the 
preceding year had been modest. Spending by households had 
contributed importantly to the gains in economic activity. The 
Nation's strong underlying productivity performance was 
providing ongoing support for household income. That rise in 
income combined with low interest rates, reduced taxes, and the 
availability of substantial home equity had spurred solid gains 
in consumer spending and a robust advance in residential 
construction.
    In contrast, although the contraction in capital spending 
appeared to have slowed, we had yet to see any convincing signs 
that a sustained pickup in business spending was emerging. 
Moreover, heightened geopolitical tensions were adding to the 
already considerable uncertainties that had clouded the 
business outlook over the preceding three years. The general 
climate of caution in the business sector was manifest in a 
number of ways, including restrained hiring, reluctance to 
invest in new capacity, and aggressive actions to maintain low 
levels of inventories.
    In late February and early March, the risks and 
uncertainties surrounding the economic outlook intensified as 
the range of possibilities for the timing, duration, and 
economic consequences of the impending war in Iraq appeared to 
widen. In financial markets, a greater sense of caution among 
investors seemed to bolster the demand for Treasury and other 
fixed-income securities at the expense of equities. The price 
of crude oil moved up as did the prices of gasoline and home 
heating oil and consumer confidence sagged further.
    After picking up in January, payroll employment and 
manufacturing production turned down again in February and 
March. When the onset of the war became imminent, financial 
markets rallied and the price of crude oil dropped back. Market 
participants seemed buoyed simply by the elimination of 
uncertainty about the timing of the start and hence the end of 
hostilities, although still a significant amount of unease 
inevitably remained about the way the war might progress and 
how severely it might disrupt oil production and economic 
activity.
    In such an environment, we had little ability to 
distinguish temporary changes from more persistent shifts in 
underlying economic trends. For that reason, the Federal Open 
Market Committee at its March 18 meeting refrained from making 
a determination about the balance of risks with respect to its 
long run goals of price stability and sustainable economic 
growth. At the same time, we stepped up our surveillance of 
economic developments. As part of that surveillance, we 
received virtually continuous information from commodity and 
financial markets. The price of crude oil is now well below its 
peak of early March as the potential for serious supply 
disruptions in world oil markets has diminished. Broad equity 
indexes remain well above their lows of mid-March and have been 
boosted most recently by incoming information on first quarter 
earnings that market participants appear to view as generally 
positive.
    In contrast, six weeks after the beginning of the war, we 
have only limited readings on broader economic conditions and 
that information has been mixed. Households appear to have 
become somewhat less apprehensive about the economic outlook in 
recent weeks, though reports from businesses have not exhibited 
a similar improvement in tone. Consistent with this, the 
persistent high level of new claims for unemployment insurance 
suggests that firms may still be finding it possible to meet 
their customers' tepid increases in demand with a leaner 
workforce.
    Going forward, some further unwinding of the economic 
tensions that have been associated with the situation in Iraq 
seems likely. As that occurs, the fundamental trends shaping 
the economic outlook should emerge more clearly.
    As I indicated when I met with you earlier this year, I 
continue to believe the economy is positioned to expand at a 
noticeably better pace than it has during the past year, though 
the timing and extent of that improvement remains uncertain. 
Fundamentally, the long run growth potential of the economy 
remains solid and the enhanced flexibility inherent in that 
trend imparts resilience against shocks of the kinds that we 
have experienced in the past few years.
    Unfortunately, the future path of the economy is likely to 
come into sharper focus only gradually. In the interim, we will 
need to remain mindful of the possibility that lingering 
business caution could be an impediment to improved economic 
performance.
    As you may know, the consensus of economic forecasters is 
that a material rebound in economic activity will develop in 
the second half of this year and certainly a number of elements 
should be working in that direction. The recent improvements in 
financial markets that I noted earlier, if maintained, would 
seem to suggest a turnaround in capital spending. In this 
regard, the ongoing decline in risk spreads in corporate bond 
markets so far this year is an encouraging development. To be 
sure, spreads remain high by historical standards but the 
constraint imposed by last fall's huge run-up in risk premiums 
now appears to have been put largely behind us.
    In addition, businesses should see some relief from the 
pressure on profit margins that had developed in recent months 
as energy prices rose sharply. An improvement on this front 
could be a positive development for capital spending. A 
modestly encouraging sign is provided by the backlog of orders 
for nondefense capital goods, excluding aircraft, which has 
been moving up in recent months. Households, too, are likely to 
welcome lower energy bills and a continuation of favorable 
conditions in mortgage and credit markets.
    As you know, core prices by many measures have increased 
very slowly over the last six months. With price inflation 
already at a low level, substantial further disinflation would 
be an unwelcomed development, especially to the extent it put 
pressure on profit margins and impeded the revival of business 
spending. The balance of influences on inflation and economic 
activity will be among the subjects of discussion by the 
Federal Open Market Committee when it meets in six days.
    Mr. Chairman, I look forward to your questions.
    [The prepared statement of Hon. Alan Greenspan can be found 
on page 71 in the appendix.]
    The Chairman. Thank you, Mr. Chairman. And let me recognize 
first the gentleman from Iowa, Mr. Leach.
    Mr. Leach. Thank you, Mr. Chairman. Mr. Chairman, could you 
comment on the reasons and implications of weakening exchange 
rate of the dollar vis-a-vis the Euro. And secondly, has the 
Fed done any studies or are you prepared to comment on the 
economic implications of the spread of disease, particularly 
AIDS and SARS?
    Mr. Greenspan. Mr. Leach, as I think I have indicated on 
numerous occasions, we in this government have a special 
agreement amongst us that stipulates that any comments with 
respect to the exchange rate be left to the Secretary of the 
Treasury as our general spokesman. And as much as I would like 
to comment, I am obligated not to and I apologize.
    Mr. Leach. Do you have the same rule with the NIH on 
disease?
    Mr. Greenspan. No. And therefore I am fully able to expose 
to you my lack of knowledge on a lot of these issues. There is 
not terribly much I can add to the issue of AIDS. That is a 
fairly well understood and very devastating process, and it is 
clearly doing extraordinarily unfortunate and negative things 
to a number of areas in the world, especially in Africa.
    The SARS issue is more recent, more uncertain and more 
difficult to pin down, but we know certain things. We know it 
has had a very major negative impact on air transport 
obviously, vacations, all aspects of the type of holiday parts 
of our economy, if I may put it that way, which rests on travel 
and visits. Since a fairly significant part of Southeast Asia 
does rest on travel and tourism, it is beginning to have some 
effect specifically in Hong Kong, to a lesser extent in 
Singapore and China, but it is pretty much contained in that 
area. As you know, the World Health Organization just recently 
indicated that Vietnam has contained SARS. There is very little 
evidence that outside of the tourist-related aspects of the 
economies in Southeast Asia that much has been impacted.
    You have to remember that there are one-and-a-quarter 
billion people in China and even though the numbers on SARS are 
large, they are clearly just a negligible part of the total at 
this stage. But it is clearing having some modest effects.
    Our concern would largely be the fact that in the 
manufacturing area, because we have just-in-time techniques 
fairly sophisticatedly tied into many of the production 
operations in Southeast Asia, that if the production part began 
to be eroded by absenteeism or other issues which would contain 
production, it could feed back into the United States through 
the just-in-time processes. To date, there is just no evidence 
of that. Apparently, production is being maintained and we see 
no backing up in any significant way of supply lines in the 
United States.
    Mr. Leach. Thank you, sir.
    The Chairman. Gentleman yields back. The gentlelady from 
New York, Ms. Velazquez.
    Ms. Velazquez. Thank you, Mr. Chairman. Chairman Greenspan, 
the questions I am going to ask you I am going to make them 
based on the role that I play in the House Small Business 
Committee, and I want to take advantage of your presence here 
to help me understand the President's stimulus package. He is 
proposing an enormous stimulus package, the centerpiece of 
which is a dividend tax cut for large corporations. During 
previous testimony before Congress, you stated that you support 
the principle of the repeal of the dividend tax. One of the 
many problems I have with the dividend tax cut is that it 
offers no relief to millions of small businesses that are 
organized as S corporations, partnerships and individual owners 
who will see no benefit from the repeal. The dividend tax cut 
is going to create a tremendous incentive to put your 
investment dollars into companies that can issue these tax cut 
free dividends.
    Mr. Chairman, can you explain how investment dollars will 
not be shifted away from small and mid-sized firms to these 
large corporations who benefit from the repeal of the dividend 
tax cut?
    Mr. Greenspan. Well, Congresswoman, I think it is important 
in the context of the President's proposal to recognize that 
there is not only a significant reduction or in fact, depending 
on how one ultimately decides this, the potential full 
elimination of the double taxation of dividends, but there are 
also significant cuts in marginal tax rates. So far as 
Subchapter S corporations owners are concerned, that clearly is 
a far more significant factor for them than would be the issue 
of elimination of the double taxation of dividends, although 
obviously I am certain that owners of Subchapter S corporations 
are significant holders of common stock.
    I must say to you, Congresswoman, I am a very strong 
supporter of expanding the scope of Subchapter S corporations, 
because in a sense that also eliminates the double taxation of 
dividends. That is in fact what a Subchapter S corporation 
does. So in that regard, owners of Subchapter S corporations 
have already had the double taxation eliminated. And I would 
hope that we could expand that particular form of organization, 
because as I am sure you are more aware than I, a major part of 
economic growth in this country comes out of small business, 
certainly the vast proportion comes out of small business. 
Anything we can do in that regard to enhance expansion of small 
business I think is in the national interest without question.
    Ms. Velazquez. Small businesses represent nearly 99.7 
percent of all businesses. Small businesses employ collectively 
more than half the private sector workforce and generate about 
three-fourths of net new jobs each year. In addition, these 
firms also generate more than half the revenue of all U.S. 
Firms. As Congress continues to consider the size of the final 
tax cut package, it is unlikely that both the dividend tax 
repeal that large businesses favor and the accelerated income 
tax cut and expensing provisions that small businesses favor 
will both pass. If you had to choose which of these provisions 
will better stimulate domestic economic growth, which one would 
you choose?
    Mr. Greenspan. I would choose to abstain from answering 
that question. First of all, I will not and hope I don't have 
to be pressed to get into answering details of the President's 
package. But these are complex issues and there are a lot of 
different analysts who come up with different judgments, and I 
think the second panel will be glad to address that in some 
detail. In fact, you will probably not be able to prevent them.
    Ms. Velazquez. Mr. Greenspan, I am tired of hearing all the 
time when people want to lecture us about our economy how great 
small businesses are for our economy, that they are the fuel 
for the engine of our economy and they are the ones who take us 
out of recession, but when it comes to the final package I just 
want to make sure that those provisions that are going to help 
small businesses who will stimulate economic growth will be 
there.
    Thank you, Mr. Chairman.
    The Chairman. The gentlelady's time has expired. The 
gentleman from New York, Mr. King.
    Mr. King. Chairman Greenspan, in your statement and other 
economists seem to feel that the economy is growing stronger 
and especially in the second half of this year we should see 
more growth. Let me ask two questions, one involving national 
and one international, as to what could be the impediments to 
that growth and see what your response is.
    One is that no matter how strongly based our economy is, 
how far forward can we go if overseas economies continue to be 
weak, particularly Western Europe and Japan? And secondly on 
that line, especially Japan, how tied to our economy is Japan? 
How tied is Japan's economy? Are we--as far as talking about 
large scale long-term growth, is there an opportunity for Japan 
to do anything more, because there is economic malaise there 
that seems to have been going on up for a better part of a 
decade.
    Secondly, on the domestic front, one of the strong points 
of our economy consistently in recent years has been the 
housing market and the housing starts. With local and State 
governments faced with budget cutbacks or budget problems, that 
is inevitably going to result in property tax increases. How 
will those property tax increases impact on housing starts and 
on the housing segment of the economy?
    Mr. Greenspan. First of all, if you look across the 
spectrum of major economies in the world, we are clearly the 
most resilient and potentially the most productive of all. 
There is no doubt that we depend upon and have gained very 
significantly from international trade and obviously that is 
determined to a substantial extent by the general level of 
economic activity in the world at large. So clearly, if Europe 
and Japan are weakened, it will impact on us. But we are still 
very substantially a self-contained economy and we have huge 
markets here, indeed everyone wants to come here as you well 
know. So I would think that yes, residual weakness in Europe 
and Japan will have a negative effect but not a very large one.
    Far more important is the apparent underlying, still 
unexploited, fairly significant capital investments with 
potentially significant profitability over the longer run, 
which I mentioned here on numerous occasions and specifically 
did so last February. That outlook has not changed and, if 
anything, it is something that is far more important to project 
in the longer-term U.S. outlook than anything else that is 
going on elsewhere.
    To be sure, Japan is having very considerable difficulties. 
They have had them for quite a long period of time. That 
underlying trend is already built-in, if I may put it that way, 
to our relationship with them in an economic sense. I am not 
going to say it is discounted, but we have adjusted to that 
particular state of affairs. So I am not terribly concerned 
about the international impact on the American economy as such.
    So far as the housing issue is concerned, it is certainly 
the case that it just remains continuously buoyant. Mortgage 
interest rates have been kept down quite significantly. There 
is still significant refinancing going on even though it is 
clearly off some of the astronomical peaks that we have just 
seen, but it is pretty viable. And housing starts and sales and 
existing home sales all continue to look reasonably good. To be 
sure, if you raise property taxes, it will have some effect, 
but my impression is that the order of magnitude of the types 
of changes that are likely to occur are sufficiently small as 
to probably be lost in the rounding with respect to the 
viability of home construction and its importance to the 
American economy.
    Mr. King. Thank you.
    The Chairman. The gentleman yields back. The Chair now 
recognizes the gentlelady from Indiana, Ms. Carson.
    Ms. Carson. Thank you, Mr. Chairman, for being here and I 
am glad to see you are on the rebound. Hope you continue to do 
that. I have a very quick question here and I know that you 
said you don't want to get into defending the President's tax 
package and if it is one of these questions, I will yield back. 
The President has now equated tax cuts with jobs and called for 
a first round tax cut bill of at least $550 billion. The 
recovery is now through 2013. Given that I represent 
Indianapolis, where we experience a high rate of bankruptcies, 
high rate of home foreclosures, high rates of unemployment, 
probably one of the highest segments around the country, I am 
wondering if you could feel free to say whether or not you 
believe that in fact the stimulus in terms of job recovery, the 
$550 billion tax cut.
    Mr. Greenspan. Well, Congresswoman, I haven't changed my 
view from where I was at this committee in February. I am in 
favor of the elimination of the double taxation of dividends. 
In fact, I am very strongly in favor of reducing taxes on 
capital per se on the grounds that I believe it slows the 
economy and effectively undercuts income growth through all 
areas of the income distribution.
    So in general, I strongly support those types of tax cuts 
which remove burdens off capital. But as I also indicated in 
February, and indeed as I indicated back in September, I was 
very much concerned that the budget rules--which had been, in 
my judgment, surprisingly effective, specifically PAYGO and 
discretionary caps--were being essentially allowed to lapse and 
that I strongly supported their continuation, which in my 
recollection, was due to terminate in the House on September 
30, and I strongly advocated continuing those.
    Now if they had been continued, if I were testifying on a 
particular project, I could be strongly supportive of certain 
types of tax cuts, as indeed I am but in the context of PAYGO 
and a recognition of the necessity to contain what I perceive 
to be a trend toward increasing budget deficits. And that left 
me with the conclusion that we needed to curb spending far more 
significantly than we did. In my judgment, that type of package 
would, over the long run, be conducive to a better degree of 
economic growth and one would presume that at least part of 
that would be reflective in a significant increase in job 
creation.
    Ms. Carson. I yield back, Mr. Chairman.
    The Chairman. Gentlelady yields back. The gentleman from 
Ohio, Mr. Gillmor.
    Mr. Gillmor. Thank you, Mr. Chairman. I have a couple of 
questions regarding the Fair Credit Reporting Act. You have 
stated that the FCRA national standards ought to be made 
permanent because, among other things, limits on the flow of 
information among financial market participants or increased 
costs resulting from restrictions that differ based on 
geography may lead to an increase in the price of or reduction 
in the availability of credit. In light of the important role 
that consumer credit has on the economy, could you explain 
whether such limits or information flow or increased costs 
would have a positive or negative effect on the economy?
    Mr. Greenspan. Well, Congressman, we have a really 
extraordinary consumer credit market. It has become 
unbelievably complex and sophisticated. It was not that many 
decades ago that most small bankers, and most bankers were 
small bankers, pretty much knew the credit capability of those 
to whom they lent and they had pretty sophisticated ways of 
controlling credit risks and those markets worked.
    But as we got ever larger and more sophisticated, it was no 
longer possible for each individual borrower to be readily 
evaluated in that old-fashioned way. And what occurred was the 
development of a rather extensive credit bureau-type system 
which collected information on the credit characteristics of 
various different borrowers and set up the capability of being 
able to judge individuals more or less on the basis of their 
credit records.
    There have been a lot of complaints about inaccuracies and 
all of that and I am fully aware of that, and I think efforts 
are being made to minimize that sort of problem. But there is 
just no question that unless we have some major sophisticated 
system of credit evaluation continuously updated, we will have 
great difficulty in maintaining the level of consumer credit 
currently available because clearly without the information 
that comes from various credit bureaus and other sources, 
lenders would have to impose an additional risk premium, 
because of the uncertainty, before they make such loans or 
indeed choose not to make those loans at all.
    So it is clearly in the interests of consumers to have 
information continuously flowing into these markets. It keeps 
credit available to everybody, including the most marginal 
buyers. It keeps interest rates lower than they would otherwise 
be because the uncertainties which would be there otherwise 
will not be there. And as I have indicated previously to a 
similar question the last time I was here, I think it is 
terribly important that we continue forward in this type of 
credit evaluation process.
    Mr. Gillmor. I think you answered what my second question 
is, how that might lead to a reduction of the ultimate sharing 
of risks and rewards. Where do you think the likely market 
impact of State imposed restrictions on prescreen offers of 
creditor insurance and in particular would consumers in rural 
or underserved areas have less access to creditor insurance or 
pay more?
    Mr. Greenspan. I have been in favor of national standards 
here for reasons which are technically required. If you have 
very significant differences State by State, it would be very 
hard to maintain as viable a system as we currently have.
    Mr. Gillmor. Thank you, Mr. Chairman.
    The Chairman. Gentleman yields back. The gentleman from 
Massachusetts, Mr. Frank.
    Mr. Frank. Mr. Greenspan, the study that was done by Thomas 
Laubach, if I pronounced it correctly, in March and I 
understand it is not officially endorsed, but his conclusion is 
that there is a four or five basis point increase in long-term 
interest rates in response to a percentage point increase in 
the debt to GDP ratio. That is in his conclusion on page 13. As 
I look at CBO's official statements here, in 2013, the end of 
our 10-year projection, according to CBO, on the baseline, the 
percentage ratio there was to be 16.8 percent. That was the 
baseline. Their estimate based on the President's submitted 
budget is 32.2 percent. That is an increase of 14 points. Now 
using Mr. Laubach's formula, that becomes about a .6 percent 
increase, about 60 basis points, between 56 and 64 percent. We 
are not in an area of exactitude and I realize the President's 
budget was not enacted or adopted, but it is a close 
approximation. Do you think that is a plausible estimate of the 
effects of the President's budget as opposed to the baseline?
    Mr. Greenspan. Congressman, I can't comment on the specific 
calculations, but I can comment on the study itself. I thought 
it was an exceptionally good study. It is interesting because 
in years past it has always been difficult to infer the impact 
of what deficits did to interest rates, and the reason for that 
is there was a tendency to use as the interest rate involved 
either the 10-year Treasury note or in some cases the 30-year 
bond. Now what we know about interest rates is that a 10-year 
note, for example, is effectively a weighted average of a whole 
series of short-term rates between zero or one day and 10 years 
and that with the business cycle inducing very significant 
movements in short-term rates, what tended to happen in periods 
of recession when deficits went up, you would find that the 10-
year note went down contrary to what one would expect.
    What Laubach did, which a number of economists do for other 
reasons, was essentially to endeavor to smooth out the business 
cycle and the short-term rate impact on the 10-year Treasury 
and effectively ask what is the impact on that part of the 
Treasury note, as I recall it, that is essentially five-year 
interest rates five years from today. And somewhat to my 
surprise, it came out far more robust as the relationship 
indicated that the greater the deficit, the greater the long-
run interest rate.
    Mr. Frank. In other words, your sense, deficits affect 
long-term interest rates if anything has been strengthened 
since you were last here because you found in Mr. Laubach's 
study a more robust relationship than people might have 
expected?
    Mr. Greenspan. The difference between his analysis and 
previous ones, which had difficulty finding that relationship--
--
    Mr. Frank. I think this is very relevant and it is a 
current issue. There are people who have denied that there is 
any deficit long-term interest relationship. I was interested 
in reading Mr. Laubach's paper. I skipped over the regressions. 
I will do those later. But he does quote another very 
distinguished economist who is saying the interest rates 
effects of deficits depend on how persistent those deficits are 
assumed to be. Now of course we are talking about deficits as 
far literally as the eye can see under rules. And the economist 
he is quoting is Martin Feldstein. So the consensus of deficits 
here seems to be a strong one. I appreciate that and I think 
that is a very important point.
    We are talking about stimulus. We have had a significant 
increase in unemployment with all of the social distress that 
complicates everything else. You discussed how trade policies 
become harder when people are more afraid of losing their jobs 
and health care. You say here that you begin--you see the 
economy perhaps getting better. My question is how much short-
term stimulus do you think we need right now, especially given 
your view that there was a trade-off between increasing that 
debt ratio and interest rates? What is your sense of how much 
short-term stimulus we ought to be enacting right away?
    Mr. Greenspan. Well, that is an ongoing question in the 
sense that we already have a significant amount of stimulus in 
place. I mean, clearly, as of now we have got a fairly large 
government expenditure trend and clearly low interest rates. 
Obviously, I have said in the past, and my belief is that it is 
very difficult to fine-tune fiscal policy for short-term 
stimulus purposes and I have tended to be strongly supportive 
of the employment and fiscal policy for long-term structural 
growth issues and leave monetary policy to be applied in the 
short run. If it turns out that, contrary to my expectation, we 
somehow can fine-tune fiscal policy in timing and in content, I 
would change my mind but I have seen no evidence that that is 
the case, although I do admit that the 2001 tax cut did turn 
out to be extraordinarily well-timed from the point of view of 
the economy, but I don't think we can count on that generally.
    Mr. Frank. You would not be wanting to repeat that and 
especially given that we have the deficit interest rate impact?
    Mr. Greenspan. Yes. My view is that clearly we still have 
room in monetary policy if we choose to move and if stimulus 
was required. So I still have not essentially changed my view 
about what the appropriate balance is between----
    Mr. Frank. Mr. Chairman, just a second, I would like 
unanimous consent to introduce into the record the study by Mr. 
Laubach that Mr. Greenspan and I were discussing and maybe want 
to pause so that the journalists can run out and call in the 
fact that he said there is room for reducing monetary policy.
    [The following information can be found on page 115 in the 
appendix.]
    Mr. Greenspan. That is not news. I have said that on many 
occasions.
    The Chairman. The gentleman from Illinois, Mr. Manzullo.
    Mr. Manzullo. Thank you, Mr. Chairman. I represent 
Rockford, Illinois, which in 1981 led the Nation in 
unemployment at 24.9 percent. We have a 25 percent 
manufacturing base. Our unemployment now is at 11 percent and 
it is going right through the roof. The manufacturing orders 
and the manufacturing output--the figures that the Fed uses do 
not reflect the percentage of imported parts that are going 
into manufactured items as they are completed in the United 
States. Those figures simply do not exist with the exception of 
bonded matter going to Mexico under NAFTA and the NAFTA content 
on automobiles. And continuing is the fact that the Defense 
Department, particularly the Air Force continues to grant 
massive waivers of the Berry amendment and the Buy America 
amendment that has allowed, for example, the Russians to 
dominate our titanium market and destroy tens of thousands of 
jobs related to nickel and titanium and the people who 
fabricate those, especially in the State of Pennsylvania and 
Ohio. In fact, Ingersoll, 122 years old company in Rockford, 
Illinois, went bankrupt last week, and one of the reasons is 
that Northrop Grumman decided to send a contract to Spain as 
opposed to keeping it in the United States for the U.S. Portion 
of the production of the Joint Strike Fighter with NATO, and 
Spain is not a member of that seven nation consortium.
    My question to you is this. As I read the Fed figures, it 
does not indicate the hollowing out of American manufacturing 
and the systematic destruction of tens of thousands and now 2-
1/2 million jobs of manufacturing that are never going to come 
back. Does the Fed have any way to try to have new studies to 
indicate the true nature of the loss of manufacturing jobs so 
that we can state that the recovery in this country will not 
start until we restart and reestablish our manufacturing base?
    Mr. Greenspan. Well, Congressman, I think one of the 
problems in a statistical sense is that the share of 
manufacturing in the total gross domestic product is not 
changing all that much. What is occurring is extraordinary 
productivity gains in the manufacturing area, which has to a 
very large extent accounted for--as you point out--the dramatic 
decline in jobs. There is no question that open borders and 
international trade create huge degrees of competition 
throughout the system and very specifically in a number of 
areas to which you alluded. But overall, as I indicated 
earlier, the net effect of general trade has been very 
advantageous to the United States for the post-World War II 
period.
    Mr. Manzullo. I am not talking about trade. What I am 
talking about is the fact that there is a coring out of our 
domestic manufacturing industry that the trade figures do not--
I have lost 19 percent of my manufacturing jobs in the past 
year-and-a-half. That is 10,000 jobs.
    Mr. Greenspan. I understand that.
    Mr. Manzullo. It is not really trade related.
    Mr. Greenspan. It is in a sense that there is a very 
significant shift in the capital structure in the United States 
from industry to industry and the consequence of that are the 
types of numbers to which you allude. I don't want to get into 
the national security aspects of some of the issues that you 
raised, but that is a different type of issue when we get to 
how that is handled. That is more a DOD issue.
    Mr. Manzullo. I wish it was yours because the Air Force 
doesn't understand.
    Mr. Greenspan. The bottom line is that we at the Federal 
Reserve endeavor to adjust our policies to maximize long-term 
economic growth in the economy as a whole and we cannot and 
should not endeavor to implement policies which differentiate 
or endeavor to differentiate various different aspects of our 
economic structure.
    Mr. Manzullo. And you are doing a super job at it, and 
thank you for coming.
    Mr. Greenspan. Thank you very much.
    The Chairman. Gentleman from Illinois Mr. Gutierrez.
    Mr. Gutierrez. Mr. Chairman, yesterday, we received 
Treasury's final rule regarding section 236 of the U.S. Patriot 
Act, which provides guidelines for financial institutions to 
identify their customers. Section 326 states, and I quote, ``if 
the customer is a non-U.S. Person and does not have a U.S. 
Taxpayer identification number, the bank may obtain an 
identification number from some other form of government-issued 
document evidencing nationality or residence and bearing a 
photograph or similar safeguard.''
    As I interpret the rule, financial institutions could have 
the flexibility to accept government-issued IDs such, as the 
Mexican Government's matricular consular card that allows 
Mexican nationals currently under FDIC rules and others to open 
up bank accounts in the United States.
    Given the fact that we have estimated, depending on whose 
estimate, Mr. Chairman, 6, 7, 8, maybe 10 million undocumented 
workers in the United States of America, and given the fact 
that just days prior to September 11 people forget that 
President Bush and President Fox were discussing a way of 
regularizing the economic activity of Mexican nationals in the 
United States, and given that this makes up the fifth pillar of 
the Mexican economy, that is remittances back to the United 
States, and if you bank, you know, you and I want them to have 
the same rate as you and I would at a beach in Acapulco with 
our ATM card versus a Western Union or Monogram, which 
sometimes fluctuates as much as 16 or 17 percent fewer dollars 
than the Wall Street, what do you think of the idea of using 
the Mexican Government's consular card and other consular 
cards, and is the Fed ready to join the FDIC and others in 
supporting the use of the Mexican consular ID card as a form of 
identification?
    Mr. Greenspan. Congressman, I am familiar with the 
particular issues which you raised, but my general view, at 
least with the state of my knowledge now, is that I was not 
able yet to be exposed to the complexity of the choices and the 
alternatives because these are very complex issues, especially 
as they have arisen subsequent to September 11. I would prefer 
to go back and take a look at some of the details of the 
arguments here and perhaps respond to you in writing to give 
you a more informed view than I could at this particular point.
    Mr. Gutierrez. It is very fair. Thank you very much. We 
would just like you to look at it because it seems to me that, 
you know, when we listen to the Justice Department and we 
listen to others, it is at one moment we are talking about 
regularizing a work force, and we are passing all--we are 
spending all of this money and passing all of these laws so 
that we can find out the activity of everyone, and it just 
seems to me that a very simple way of identifying, having a 
picture and fingerprints of millions of people in the United 
States you would not otherwise be able to get, and so, 
therefore, in terms of national security issues it seems that 
this is the way to do it. And I called the IRS, and the IRS 
really does not care. They just want them to pay their taxes. I 
am sorry, Mr. Chairman, that's all the IRS. I talked to Social 
Security, and they said, well, just make sure they do not put 
any dependents down. So when I talk to them about undocumented 
workers, even our Federal Government said, oh, do not worry, 
Congressman, just send their applications in, and we will give 
them a tax ID number, and then they can go with the matricular 
consular and open up their bank accounts. So obviously our 
Federal Government is taking their tax dollars in and even 
allowing them to submit income tax returns.
    A second question, Mr. Chairman, in 2002 you remarked that 
the ABA conference, and I will quote you, ``the use of credit 
scoring models, whether turnkey models purchased from providers 
or proprietary models developed in house, has taught bankers 
sometimes through costly experience the value of continually 
updating the database on which the model operates,'' end quote. 
I would like to get your opinion as to whether there is value 
in providing customers, particularly mortgage applicants, 
information about their credit score. I mean, not limiting it 
just--limiting it to just handing over a number, but providing 
sufficient explanation of the rationale for the key factors 
that influenced the mortgage applicant's credit score, the date 
of the score, the source of the score. Will not disclosure of 
this information also help in updating the databases by 
consumers who are, in my opinion, in the best position to 
ensure the accuracy of the information? Also, does not the lack 
of information put consumers who are shopping for a mortgage at 
a disadvantage, especially when banks advertise APRs for only 
the best-qualified applicant, a near perfect score?
    Mr. Greenspan. Well, in general I just want to say that 
over the years we have developed a really quite extraordinary 
mortgage market, which has been in the last year exhibited in 
the form of a huge interaction of the American public with our 
mortgage system. We have had, as you know, a huge number of 
refinancings, very substantial cashouts, and millions of 
transactions, which in general, I think, has helped both 
homeowners and the economy in general.
    There is no question, however, that it is crucially 
important that individual borrowers be fully cognizant of 
precisely what they are doing and various choices that they are 
making. And having looked at some of the detailed data and 
material available in the mortgage processing area, I hope we 
can sharpen it somewhat better if we can make it clearer in 
many cases.
    The Chairman. The gentleman's time has expired.
    The gentleman from California Mr. Miller.
    Mr. Miller of California. Thank you, Mr. Chairman. It is 
great to have you here. I am glad you are well and life's 
treating you good.
    I really appreciate the gentlewoman's comment regarding 
small business and your concerns, and I applaud that. However, 
I continue to hear arguments against tax cuts for those in the 
upper income tax brackets; yet those are generally the brackets 
where small business owners fall within if they are doing a 
reasonably good business. If they do not, they are generally 
not providing many jobs, and I think we need to do what is 
necessary to encourage consumer spending, to promote 
investment, both individual and business, and if people do not 
have a job, we need to do what we can to create more jobs.
    But I am convinced if people do not have cash in their 
pocket, they cannot spend it. They can continue to go into 
debt, and many will go into debt regardless. They will use 
credit cards or whatever. But I know you do not want to defend 
the President's tax package, and I am not asking you to do 
that, but as you notice, Congress is unwilling to cut spending, 
so we keep spending, deficits grow, and things do not seem to 
change in Washington. But I think we need to look at what the 
market impact might be on the economy with the President's new 
package in place, and can you respond to that?
    Mr. Greenspan. I cannot specifically, because that would 
get involved in certain elements of the program. As I said, 
Congressman, I find much to support in the President's program, 
provided it is matched by cuts in spending, because----
    Mr. Miller of California. That is the key with cuts and not 
spending for----
    Mr. Greenspan. Let me tell you why it is, and it does rest 
on the issue of whether deficits, or expectations of long-term 
structural deficits, which is the more important question, 
affect long-term interest rates.
    Indeed, there are powerful reasons to suspect that, for 
example, the elimination of the double taxation of dividends 
and significant cuts in higher marginal rates will elevate 
long-term productivity in the country. If, however, in the 
process you get significant increases in deficits which induce 
a rise in long-term interest rates, you will be significantly 
undercutting the benefits that would be achieved from the tax 
cuts, and therefore, I have concluded all along and continue to 
conclude that it is very important for us to maintain the 
degree of fiscal restraint over the years ahead, because it is 
only under those conditions that I think we can create a fiscal 
policy which significantly assists in acceleration of economic 
growth, which we will sorely need as we move beyond this 
particular decade and run into the very large increase in baby 
boomer retirements.
    Mr. Miller of California. It seems rather disingenuous on 
our part, hearing what you have said, to say on the one hand we 
need to stimulate the economy, we need to create more jobs, 
yet, on the other hand, we are unwilling to cut spending. I 
mean, we tried to do that this time, and it pared way back from 
what we were even trying, which was minimal, I believe, in this 
budget.
    On the other hand, being in the development industry for 
probably 30 years myself, I am still doing some investments in 
that, and having many friends in there, I am convinced that 
they invest money if they have it. And if you look at the upper 
brackets, and if a person is paying State income taxes and 
such, he is probably paying 50 percent plus other user fees and 
taxes that you locally pay. So when you are taking 50 percent 
out of the pocket of a business owner that they would otherwise 
put back into their business through job creation or 
investment--because there is no sense, as you know, putting 
money in a bank today and getting a percent and a quarter 
interest--they are going to find a better source for their 
funds, and that is generally investing it in something that 
they will make a profit on, and that in and of itself creates a 
job.
    It's difficult for me to accept the fact when some say, 
well, we need to provide jobs, we need to do what we can to get 
people back to work, yet we are unwilling to do our job by 
cutting spending, because it creates the deficits if we provide 
tax cuts, and yet the only way I see we are going to get job 
creation moving in this country is to put more money in the 
economy, and that is by allowing people to keep more of their 
money by not just giving them a grant, but say keep more of 
what you earn; thereby you are able to invest that back into 
your business.
    Would you comment on if we were willing to cut spending 
from the Federal perspective and provide tax cuts to people, 
would that not be more beneficial to the economy?
    Mr. Greenspan. Oh, indeed. I have argued that over the 
years.
    Mr. Miller of California. I hope my friends on the other 
side of the aisle are listening very closely because I hear 
other things than they think they hear. Repeat that again. I 
want to make sure everybody heard that.
    Mr. Greenspan. I have argued before this committee on 
numerous occasions that curtailing deficits and at the same 
time lowering taxes on capital is a major way to expand 
economic growth in this country and increase the incomes of all 
Americans eventually in the process.
    Mr. Miller of California. I agree with you.
    The Chairman. The gentleman's time has expired.
    The gentlewoman from Oregon Ms. Hooley.
    Ms. Hooley. Thank you, Mr. Chairman, and thank you for 
being here. I thank you for helping keeping the interest rates 
low. It's allowed me to refinance my house, as well as many 
other people.
    I am go going to ask you a couple of questions, and one is 
I am very concerned about jobs and job creation. I think most 
people here are. I come from a State where we have the highest 
unemployment rate at 7.6 percent, so I am very interested in 
what is going to help create jobs for people. And we all know 
what happens when people do not have those jobs.
    I am troubled by a seeming conflict of some numbers. I sit 
on the Budget Committee, and in March we were talking about the 
President's tax relief package, and they were talking something 
like 190,000 jobs would be created with this. More recently, a 
month and a half later, we are now talking about 1.4 million 
jobs created with this same amount of money. Do you have any 
explanation for why that may have changed so dramatically from 
190,000 job creations to 1.4 million?
    Mr. Greenspan. No, I do not, but I want to point out that 
there is a very important issue that I alluded to in my 
prepared remarks, and it is that productivity has really been 
impressively strong, especially in recent quarters when this 
economy has been weak, and what that has meant is that, as I 
put it in my prepared remarks, businesses were able to meet 
increasing demand, although weak increases, with an ever lesser 
work force, which is another way of saying that output per 
laborer has gone up significantly.
    So part of the weakness in the labor market is the 
numerical consequence of this really quite strong and, I must 
say from a long-term point of view, highly desirable 
improvement in productivity. So we are going to need to get 
economic growth rising at a pace sufficiently in excess of the 
rate of growth of productivity in order to get the job market 
to be far more viable again, and most people's forecasts, in 
fact, imply that. If you look across the spectrum of most 
economic analysts, even though they and we do not see the 
immediate effects of the end of the Iraqi war, and we cannot, 
obviously, because it is too soon, most people have got fairly 
strong increases in demand and enough to cause a marked 
increase in the level of employment.
    But it is going to require more than historically has 
usually been the case in getting increased growth in the GDP 
because the productivity growth is so impressive.
    Ms. Hooley. So you think the productivity growth--I mean, 
we have just lost--in the last 22 months we have lost 450,000 
job. Is that because of productivity?
    Mr. Greenspan. We have no evidence that the GDP has been 
going down in the current quarter, for example, although its 
growth is very low, but clearly a very significant part of the 
loss in jobs reflects the fact that economic growth is being 
very closely matched by growth in output per hour, leaving very 
little room for significant increases in jobs.
    I think that will change. I think this is a temporary 
phenomenon, and that as we get into the second half, and a 
number of the positive forces again begin to emerge, I think 
that is going to change, and that has been a view which I think 
a very substantial proportion of economic forecasters now hold.
    Ms. Hooley. Mr. Chairman, one of the things that I think 
all of us are looking for are, in fact, how do we stimulate the 
economy, what is the best thing we could do, what is the best 
thing we can do short term? So if I ask you to put together a 
package, or ask you if there was something in the President's 
budget that would provide the most immediate stimulative impact 
for jobs, because for the people of my State and, I think, 
across the United States, that is what people are interested in 
right now, how do we make sure we can create jobs? What would 
that one piece or one thing be that would have an immediate 
stimulus impact for job creation?
    Mr. Greenspan. That is an exceptionally difficult question 
to answer in general, and I do not want to get into it because 
it will, I am certain, get me more involved in discussing the 
relevant choices in the programs which the Congress has now got 
to address, and I don't have anything more to add to that than 
I did back in February.
    The Chairman. The gentlewoman's time has expired.
    The gentlewoman from Pennsylvania Ms. Hart.
    Ms. Hart. Thank you, Mr. Chairman.
    Thank you, Chairman Greenspan, for coming back to visit so 
quickly, and I am glad to hear you are doing better healthwise.
    I had a question specifically, actually two questions, 
regarding the Check 21 Initiative, and I understand that the 
legislation that is being considered by our committee has been 
supported by the Fed.
    Mr. Greenspan. Are you talking about Check 21?
    Ms. Hart. It still is supported by the Fed; is that 
correct?
    Mr. Greenspan. Indeed.
    Ms. Hart. Okay. As you know, it would greatly expand the 
ability of financial institutions to move checks through the 
payment system electronically without the need to have actually 
the cancelled check itself move through the system. But there 
is a portion of the bill regarding expedited recredit language 
that I am especially interested in. It is included in our 
proposal on the basis that the compliance burdens would 
outweigh the benefits of the recredit. I understand the Fed's 
position on that has changed, and I am----
    Mr. Greenspan. That is correct.
    Ms. Hart. I am interested in why the Fed believes the 
current protections under the existing check law are sufficient 
to ensure that consumers are not adversely affected by 
legislation if the recredit provision was removed, and what 
would happen if the expedited recredit provision were extended 
to cover all checks?
    Mr. Greenspan. We originally included that, as you know, in 
our early recommendations with respect to check truncation 
legislation. Subsequently, on evaluation in far more detail, it 
turns out that most, almost all, of the protection that one 
would envisage from that provision is already fairly 
conclusively achieved under current law, and that it was our 
conclusion, having reviewed this in more detail, that indeed 
the additional costs of compliance that the new provision would 
impose exceeded by any measure we could find the benefits over 
and above the protections currently in the law.
    So we have chosen to alter our proposal on the grounds that 
we think that it is more balanced, and indeed, as we all 
hopefully do when we find out that we can do something better, 
we change, and we did.
    Ms. Hart. I thank you for that explanation.
    Also, on the check truncation issue, can you share with the 
committee the images that the check truncation would provide to 
the domestic banking system? Some have indicated, not the 
members of the committee that is, but others who have testified 
have indicated, that they are wary of the legislation because 
they believe it will result in confusion with the elimination 
of the original check, possible double use of the original 
check and the image check. I am interested in your view of 
that. Is there a reasonable concern attached to that concern 
about the creation of substitute checks and the technology 
associated with check imaging?
    Mr. Greenspan. I think not. I think we have reviewed all of 
the potential things that can go wrong in a system of that 
nature, and I do not want to say to you that we know for 
certain that upon enactment various things will or will not 
happen, but from everything we can see, those are not concerns 
which we think are of significance.
    Ms. Hart. I thank you for that as well as I yield back.
    Thank you, Mr. Chairman.
    The Chairman. The gentleman from California Mr. Sherman.
    Mr. Sherman. Thank you, Mr. Chairman.
    One thing where I guess we will just have to agree to 
disagree, Mr. Chairman, is the assumption that private sector 
spending is good, it stimulates the economy, and public sector 
spending is bad and must be cut back. It would seem to me that 
purchasing as a society one more school bus than we have today 
creates the same level of expenditure, the same stimulus as if 
as a society we buy one more of those new $300,000 Mercedes 
Maybachs. But I guess we will have to agree to disagree. 
Apparently if we can just make sure that one more very rich 
individual buys one more $300,000 Mercedes, that is going to 
help the economy.
    But, Mr. Chairman, there is in your statement, there is an 
implied criticism made--almost an attack, by the more explicit 
statements by my friend the gentleman from California Mr. Gary 
Miller--in which, it has almost become the joke or cliche where 
the serial murderer sends in a note saying, ``stop me before I 
kill again.'' What we seem to be hearing from the other side 
is, ``stop us before we waste again.'' I would hope that in a 
city dominated by Republicans and a White House that has 
promised not to spend a single penny more than is necessary, 
that we wouldn't need to have to undermine fiscal 
responsibility on the tax side in order to get an OMB that 
actually limits us to necessary expenditures.
    So, Mr. Chairman, I will ask you to consider a parallel 
universe, a hypothetical situation in which there is a 
government dominated by people who want to avoid unnecessary 
expenditures, and they have eliminated all the unnecessary 
expenditures, and they will not make any unnecessary 
expenditures. Those expenditures are fixed. In other ways this 
parallel universe is just like our own. Should that 
hypothetical United States run a $200 or $300 billion deficit, 
or should it have tax laws to bring in as much revenue as those 
necessary expenditures, every one of them signed by a President 
dedicated to eliminating every unnecessary expenditure?
    Mr. Greenspan. Mr. Sherman, your hypothetical example would 
require about 55,000 footnotes to get it into a measure with 
which I could deal.
    Let me, however, just address, I think, an important point 
that you are making about the source of spending and whether or 
not it matters where you spend. First of all, I do not think 
anybody would argue that a school bus is not necessary, and 
that one does that. But we are talking about long-term economic 
growth and standards of living of the American people, and that 
at root is what we are really all about. It is important to 
discuss how you distribute it in certain aspects, but if it is 
not there to distribute, you do not have anything.
    All of the evidence suggests that what creates economic 
growth is capital investment and incentives to innovation, and 
that investment in those types of assets does indeed increase 
long-term economic growth, whereas other expenditures will not. 
And I do say to you that the real criterion is not whether it 
is government or nongovernment, it is the question of whether 
it is investment or noninvestment.
    Mr. Sherman. Mr. Chairman, with my limited time I just want 
to underline that comment. We are underinvesting in education, 
we are underinvesting in infrastructure, and we are told that 
here in Congress that if we can just give millions of dollars, 
hundreds of thousands of dollars, to the richest in our 
society, they will go out and spend it, and that will be good, 
and at the same time we are cutting expenditures on so many 
aspects of education.
    I gather from your comment that investing in education may 
be just as helpful to an economy as private sector investments, 
and, of course, our colleagues on the other side of the aisle 
preach the importance of not a private sector investment so 
much as private sector spending.
    Mr. Greenspan. I think it is a question of fact, and you 
have to demonstrate that a particular type of capital 
investment or innovation increases productivity and long-term 
growth, which is easy to do. The difficulty is endeavoring to 
trace various different types of educational expenditures into 
economic growth, a relationship which one would assume has got 
to be there because clearly the quality of the education of 
your work force has got to be relevant to what you have got.
    So I think the question is a question of fact; I mean, what 
is the evidence as best we can infer? But I would emphasize 
that the question is essentially consumption versus investment 
as the statement number one.
    The Chairman. The gentleman's time has expired.
    The Chair would announce there is a vote on the floor of 
the House. The Chair would indicate we will keep going, and I 
will be relieved in the Chair hopefully soon, but in the 
meantime we will keep going, recognizing the Chairman has to 
leave by noon. And with that, we will recognize the gentleman 
from Florida Mr. Feeney.
    Mr. Feeney. Thank you, Mr. Chairman.
    Mr. Greenspan, thank you for being here today, and just 
very quickly, to follow up on my colleague's immediate 
question, you indicated that the ideal thing is to eventually--
in terms of growth production is to stimulate capital 
investment and incentives to innovate. Without the 50,000 
footnotes, in general over the U.S. Economy history and over 
the world economy history, which sector has been more efficient 
in investing in those two items, the private sector, a free 
market, or the public sector?
    Mr. Greenspan. It has been my experience that it is clearly 
the private sector that has done so. I indeed remember that 
there has been an endeavor in this society to move a good deal 
of public services into the private sector on exactly that 
premise.
    Mr. Feeney. Thank you, Mr. Chairman, because I think that 
undermines the argument that a lot of us are making.
    Now I have a very specific question and then a general 
question, if you can, that I am going to leave you with. And 
the specific question relates to the Basel Accords and the 
rulemaking regarding our unique banking system. We have been 
getting some mixed signals in terms of how the Fed intends to 
react to the rules that have been promulgated in Switzerland by 
the international regulators, and I guess the specific 
question, if you can answer it, is whether or not the Fed would 
be prepared to take on some major sections of the rules being 
promulgated as part of the Basel drawing board if it becomes 
clear that they will not work well here under our American 
banking system.
    Secondly, and then I will end up here, the debate has 
focused on whether deficits matter, and I don't remember 
anybody saying that deficits never mattered at any time. But I 
was thrilled to hear you say earlier today that the recipe for 
long-term success is to cut spending and to cut tax rates on 
capital, and I think I was using your words, it will raise the 
income of all Americans, which is certainly something we would 
all aspire to, and is not the more significant ratio, as 
opposed to what the temporary debt or deficit is on any given 
year, even the more significant ratio be the rate of spending 
as a percentage of gross domestic product.
    And I say that because the way to pay for that spending is 
one of three ways that I know of. You can either print money by 
fiat, which has some negative implications for inflation; you 
can borrow money, which is deficit spending, which potentially 
crowds out some private sector borrowing; or you can raise tax 
rates by doing exactly the opposite of your suggestion we need 
to be doing in terms of encouraging capital bottom line. Any 
one of those three ways to deal with the level of spending has 
some adverse consequences at any given time. One way will be 
more or less adverse for the economy as a whole than the other 
two.
    Mr. Greenspan. Well, Congressman, you can preempt private 
resources by spending, taxes, regulation, guarantees, a whole 
series of mechanisms in which you move private resources into 
the public sector. Clearly the ratio of federal outlays to GDP 
is a measure of the degree of shifting of resources that are 
going on, but you have to distinguish between the issue of what 
the interest rate is, which exists either in very heavy 
preemption or very light preemption, and the issue of deficits 
and finance. In other words, it is possible to have a fairly 
high ratio of spending to GDP and low interest rates.
    The problem is that if you have a very high ratio of 
spending to GDP, history suggests that economic growth suffers 
as a consequence, but that can occur with high or low interest 
rates, and I say that the deficit interest rate relationship 
while I do not deny is not partially related to spending as a 
percentage of the GDP obviously, but I think is more 
appropriately thought of as a separate issue, related but not 
the same thing.
    Mr. Feeney. And because of the response to the Basel 
rulemaking on banks.
    Mr. Greenspan. We have been very careful in the rulemaking 
to be highly cognizant that it has to be consistent with rules 
in the United States which are effective for us. We have gone 
through very detailed analyses of what we call Basel II, and as 
best we can judge, these are rules which will clearly be 
effective in the United States and not burdensome, in fact less 
burdensome and more effective than the previous sets of rules.
    It has certainly been our view that we would not in any way 
agree to a set of Basel II rules which would serve to the 
detriment of the American financial system.
    The Chairman. The gentleman's time has expired.
    The gentleman from Texas Mr. Gonzalez.
    Mr. Gonzalez. Thank you very much, and welcome back, 
Chairman Greenspan. And we do have a vote, so I am going to try 
to abbreviate everything, including your answer. I am going to 
attempt to, because I have been here five years--and to be 
honest with you, Mr. Chairman, I will ask something, and later 
it's like law school, you are not sure what happened after the 
professor turned you around, and you are going to be limited to 
the choices of answer. And what would be the appropriate size 
of the tax package currently being considered by Congress? I am 
not going to give you the perfect choice of the three. It is 
just going to be the best under all circumstances. It will not 
be the Greenspan answer that will take into consideration 
everything that should be taken in consideration, because 
Congress is not going to do that, but we are going to arrive at 
a figure, so you have a chance under the circumstances today.
    Congress is going to make a decision on one of these. Which 
would be the most appropriate in the way of the size of the tax 
package being considered: A, $728 billion; B, $550 billion; or 
C, $350 billion?
    Mr. Greenspan. None of the above.
    Mr. Gonzalez. There is not a D.
    Mr. Greenspan. Look, I am not going to answer that 
question, Congressman. I do not have a vote in the Congress, 
you do. You have to answer that question.
    Mr. Gonzalez. But we rely on people with tremendous 
knowledge and expertise, and you fall in that category. And I 
know that you defer to us all the time, but the truth is we do 
not make these decisions independent of opinions by individuals 
such as yourself.
    Mr. Greenspan. Congressman, I appreciate that, but there 
are certain questions which I do not think are appropriately 
answered A or B if A or B is not the way they should come at 
them, and I am not going to get involved in what I think is a 
very complex set of issues with a simple conclusion because I 
don't know what a simple conclusion is.
    Mr. Gonzalez. But the end of the process, you are going to 
end up with one of the process--Congress is going to end up 
with one of these numbers.
    Mr. Greenspan. Yes, I understand that.
    Mr. Gonzalez. So you could render an opinion relatively 
speaking as to which number would best serve the economic 
interests of this Nation.
    Mr. Greenspan. I cannot answer it in the context in which 
you put the question, Congressman. I am sorry.
    Mr. Gonzalez. And quickly because I want to, Martin 
Feldstein in today's Post--you probably have read the article 
about the CBO's analysis of dynamic tax analysis or the 
valuation. And I will read the paragraph, then I will ask the 
question.
    The good feature of the CBO analysis is that it 
distinguishes the short-term demand-side effects of the 
President's plan from the longer-term supply-side effects. This 
distinction is important because the ability of any tax cut to 
raise GDP in the short term by stimulating demand depends on 
the Federal Reserve's response to the tax cut. There are times 
when the Fed responds by raising interest rates to prevent an 
increase in demand because it fears the resulting rise in 
inflation. But the Fed is now eager to see stronger growth and 
would not take any such offsetting action.
    So it's the last sentence, obviously, but the Fed is now 
eager to see stronger growth and would not take any such 
offsetting action, and so again we will go, A, you agree with 
that analysis, or, B, you disagree?
    Mr. Greenspan. You father was kinder to me, Congressman.
    In general I thought that was a thoughtful piece, but I 
cannot respond, obviously, because six days from now we have a 
Federal Open Market Committee meeting, at which we will be 
discussing a lot of these various things.
    Mr. Gonzalez. Mr. Chairman, in a very serious way, we 
cannot spend ourselves, government cannot spend itself into 
prosperity. Nor can it tax-cut itself into prosperity. Somehow 
we really have to start bridging the differences and come to 
what is prudent government spending, which is investment, 
because if dynamic scoring works on the tax side, it should 
work for the expenditure side, as Brad was alluding to. If you 
spend a dollar on education, what is its return? If you cut 
taxes by a dollar, what is its return?
    So we really do need your advice and counsel, and maybe it 
will not be given to us in this particular forum, but I do look 
forward to maybe some private discussions with you. Thank you 
very much.
    Mr. Greenspan. Thank you.
    Mr. Gillmor. [Presiding.] The Chair recognizes the 
gentleman from Massachusetts for questions.
    Mr. Capuano. Thank you, Mr. Chairman.
    Thank you, Chairman Greenspan, for being here again and for 
coming back as you said you would. I think you would be happy 
to know that since you started speaking, though the market is 
down, it's up about 46 points from the time you started 
speaking, so keep going. Do not stop.
    Deficits in and of itself mean nothing to me. The 
consequences of deficits means a lot. The consequences of 
deficits to--the short-term consequences of deficit is 
increased interest payments, increased debt interest payments. 
We are fortunate at the moment to have low interest rates, 
fortunately to you, and hopefully you will keep them that way 
in a few days, but one thing at a time. But it does bother me 
that over the last two years we have had the largest increase 
in publicly held debt back to--I don't know how far back, at 
least back to the mid-1980s.
    Publicly held debt has increased almost $559 billion, just 
publicly held. Government-held debt has also increased $423 
billion. That is the largest increase we have had since 
actually 1990, 1991.
    Now, if my memory serves me correctly, the last time we did 
this in those early 1990s, the result in the economy was not 
very good. It took a big dip, lots of tax cuts, lots of 
spending cuts, lots of problems all across the economy. It 
concerns me. It concerns me that I have not heard more from 
people such as yourself as to what to do about the deficit, how 
to deal with the deficit.
    For the sake of discussion, we had a roll call at the end 
of last year whether to utilize or to discontinue temporarily, 
I guess, or permanently at the time, the use of the PAYGO 
rules, which I always had problems with on some levels, but I 
also thought they kept us disciplined in a crude way, but they 
worked. Yet I didn't hear a word from the Fed or very many 
other leading economists. That was troubling.
    I would like to see you and others speak out more 
forcefully not just about the deficit, which is a concept, but 
about specifically what this Congress should be doing relative 
to that deficit. If you believe tax cuts are necessary, fair 
enough, but would that also--if you really do believe deficits 
are problematic, that would then, I think, lead to no other 
conclusion other than much deeper cuts in spending. There is no 
other way.
    So I guess at some point I would like to hear more 
specifics on that from you or from others, because we do listen 
to you. We do not always agree with you, but we do listen, we 
take into consideration, and I actually agree with your 
concerns about deficits. But again, I am not really terribly 
worried--I guess I am a little bit worried about what happens 
five and ten years from now, but right now I think we need an 
economic stimulus of some sort. We will disagree on some levels 
as to what that could be, what that should be, but no matter 
how you work it, increasing the deficit is going to lead to 
more debt, which can lead to higher interest payments, which is 
going to hurt the economy probably in the short run, but 
certainly in the long run.
    And I would like to hear you be more specific on that as we 
go along. I am not silly enough to think that you are going to 
do that now, but as time goes, certainly as other votes come up 
on things like PAYGO rules or whatever, they might be--if not 
tax cuts, fair enough, I understand you want to leave that to 
us, but there are some things I think that should be a little 
bit more aggressive on speaking about.
    I do not want to talk about productivity. We have had this 
discussion pretty much every time you come. I agree with you on 
the issue of productivity. I actually like the fact that you 
tied part of the increase of productivity to the lack of job 
creation. I think you are 150 percent correct. But an increase 
in productivity does not help the guy who is out of work. They 
need a job. To get back to that, I particularly look at the 
last quarter's increase in productivity, very, very small; 
very, very small. If I am reading it correctly, it is .3 
percent just in the last quarter of 2002.
    Mr. Greenspan. It is higher in the first quarter.
    Mr. Capuano. Okay. Good. If that is the case, if it is 
lower or if it is a little higher, then it is back up into the 
5 and 6 percent range yet?
    Mr. Greenspan. No. The fact that it is increasing at all in 
this context is telling you that there is an underlying 
structure which is favorably disposed in that direction.
    Mr. Capuano. I agree with that. That is good to hear. But 
if that is the case, we should have at least stopped losing 
jobs in theory if they aren't tied together, and if there is a 
delay factor in that connection, how long is that delay? In 
your testimony I believe you said that--you did not say, but 
you attributed to others that we hope there will be a recovery 
in the next half of the year. Does that include jobs, or is 
this continuation of a jobless recovery?
    Mr. Greenspan. No. I think it includes jobs.
    Mr. Capuano. So you think the jobless rate will go down; 
jobs will start being created in significant quantities?
    Mr. Greenspan. The unemployment rate had in it, in the last 
month, a fairly significant increase in the number of people 
who still want a job, but are not activity seeking one, 
according to the definition of the Bureau of Labor Statistics. 
So it is a question of the unemployment rate coming down from a 
level of measured joblessness, which includes the standard 
definition, plus those who, although they are not as actively 
seeking a job as previously, nonetheless would still be willing 
and desirous of taking one.
    Mr. Capuano. Also has an increase in the level of people 
who have had the longer-term unemployment as well.
    Mr. Greenspan. That is correct.
    Mr. Gillmor. The gentleman's time has expired.
    The gentleman from Texas Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman.
    Chairman Greenspan, before I left to go for a vote, I heard 
at least one Member announce or articulate that he thinks the 
difference between the two parties is a fundamental 
disagreement between whether private spending or government 
spending is somehow equivalent, I think, with respect to 
economic growth. Certainly for those who long for state-
dominated economies, you can no longer look to the Soviet Union 
as a model, but certainly Cuba and North Korea and several 
other regimes on the face of the planet do have state-dominated 
economies.
    Do you have an opinion on the difference in economic growth 
between State spending and private spending?
    Mr. Greenspan. Well, indeed that question came up, I 
presume, while you were out of the room, and I indicated that 
the evidence strongly suggests that economic growth from 
investment in the private sector is greater than that in the 
public sector, and indeed I argued further that the indication 
that that is apparently the case has moved numerous 
municipalities and even states to move a good number of 
previously government-funded services essentially into the 
private sector in a more direct way.
    So I have--I am clearly of the opinion and have stated so 
that I strongly support private investment over public 
investment as an issue increasing the rate of growth in our 
economy.
    Mr. Hensarling. If I have listened to your testimony 
carefully, obviously you have a concern about budget deficits. 
But for budget deficits, I understand in your testimony that 
you are an enthusiastic advocate of eliminating the double 
taxation on dividends. Is that correct?
    Mr. Greenspan. That is correct, Congressman.
    Mr. Hensarling. There was questioning earlier about the 
impact of lowering rates on small businesses. I believe it was 
your observation that lowering marginal rates is favored by 
small business. Do you believe that lowering marginal rates, 
assuming that such a move would be definitely neutral, would 
have a positive effect on the economy?
    Mr. Greenspan. That is correct.
    Mr. Hensarling. Okay. We also heard a characterization 
about the tax relief being proposed, whether it was itty bitty 
or not. I do not want to get into the characterization 
business, but if I have looked at the numbers carefully in the 
budget that was recently passed, we are proposing $28 trillion 
of spending over the next 10 years. It seems like the relevant 
number today of tax relief is $550 billion over the same 10-
year period. So if I am doing the math correctly, that is 
roughly 2 percent assuming that the tax relief promotes no 
economic growth whatsoever.
    So when once asked why Willie Sutton robbed banks, he said, 
the money was there. If we wanted to be focused on deficit 
reduction, it would appear to me that perhaps 98 percent of the 
problem might be on the spending side as opposed to the 2 
percent on the tax relief side. So if Congress is to get 
serious about deficit reduction do you have an opinion about 
whether restraining the growth of government spending or tax 
relief would be a preferred method, or for purposes of economic 
growth would you be indifferent between the two?
    Mr. Greenspan. Congressman, I have testified before this 
committee many times over the years that I strongly support 
constraint on the expenditure side, which I think has a chronic 
tendency to press on our revenue resources, and that unless we 
contain expenditures, it will be very difficult to maintain 
balanced budgets.
    Mr. Hensarling. I believe earlier in your testimony you 
advocated returning to PAYGO and discretionary caps. Are there 
other government growth restraint measures that you advocate at 
this time?
    Mr. Greenspan. One which I raised, I believe implicitly in 
February, is the recognition that we have a set of laws in 
place on entitlements specifically related to retirement, which 
includes, of course, Social Security and Medicare amongst the 
major items, which, because of the huge demographic changes 
which are inevitable starting next decade, creates more excess 
claims on federal revenues than I think we are capable of 
creating. So that it is not too soon to begin to evaluate the 
impact of what that will mean, and I do not get the impression 
that we are moving sufficiently expeditiously to address that 
problem.
    Mr. Hensarling. Thank you, Mr. Chairman.
    Mr. Gillmor. The gentleman from Tennessee Mr. Ford.
    Mr. Ford. Thank you, Chairman Greenspan, for coming. Let me 
jump right into it, Chairman.
    I know you have talked a lot about the taxes, and you don't 
want to comment on tax cuts and the impact they may have, but 
the reality is that is what we are dealing with, and you have 
come in the middle of a time in which the country is focused on 
what we are going to do on tax cuts or not.
    I happen to be for a tax cut. I take issue with what some 
of you said regarding the 2001 tax cut. I can't figure out how 
it helped as much as you claim it helped. It certainly didn't 
help people in my district as much, but that's perhaps another 
conversation.
    With regard to the lack of help that we are proposing to 
provide for hospitals and schools, particularly through State 
aid, I'd asked you this question before because I am not as 
smart as you, I don't know math as well as you, but I couldn't 
understand how you reconcile the fact that States are faced 
with these growing budget shortfalls and by law are required to 
balance their budgets. Yet our stimulus package here, the 
President's growth plan--and I have done the math in his growth 
plan just by--I did do that--that for $726 billion, the 
President has promised it will create 1.4 million jobs. Now if 
the math is right, that's $519,000 per job to create under the 
President's plan. So I guess I have a few questions.
    One, is there a more cost-effective way to create jobs? 
Number two, as we all know, and you know it far better than me 
with your economist background, it seems to be a procyclical 
aspect to State budgets. When the economy is good, they do 
really good. When it is bad, they have to raise taxes or cut 
services, which worsens the situation.
    Wouldn't it be in our interests in terms of creating jobs 
and helping to put us back on a trajectory that you played a 
role in with the former President to help this thing grow to 
figure out a way to help the States avoid undermining what we 
do here at the Federal level, whatever the tax cut may be? And 
two, isn't there a better way to cut taxes to create the things 
that you talk about wanting to do in terms of growing this 
economy, in growing jobs?
    I am opposed to double taxation. I think tax reform should 
take place, but if we are going to do something, we ought to 
reform the AMT before we go about doing some of the things that 
this President has proposed doing.
    I know you are reluctant to talk about it, but you kind of 
talk around it. I understand there have been some developments 
in the last few days about appointments and reappointment, but 
I want to know directly and specifically, Mr. Chairman, how can 
we say to States and Governors across this country, balance 
your budgets, balance your books, cut services, raise taxes, 
but then allow a President--when you have talked incessantly 
about debt and that being a problem, how can you come before 
this committee and suggest that in any way, without responding 
in any way, that building and piling up more debt--when States 
cannot do it, when they are forced to raise taxes and cut 
services, I don't understand how you reconcile that.
    Mr. Greenspan. Because I am not advocating piling up more 
debt.
    Mr. Ford. Won't the President's plan do that?
    Mr. Greenspan. No. I am saying in the context of PAYGO and 
discretionary caps implicitly a very significant reduction in 
the implicit deficit that would be otherwise indicated.
    Mr. Ford. Should we not be helping the States, Mr. 
Chairman?
    Mr. Greenspan. Well, that is another question. I mean, 
remember----
    Mr. Ford. I know. It is what I am asking. Should we not be 
helping the States as a part of the stimulus plan?
    Mr. Greenspan. Congressman, I am not going to get involved 
in the specifics of these programs, as I said at the beginning. 
It is an endless conversation which I don't----
    Mr. Ford. I am trying to narrow it down. We helped the 
airlines, and I thought that was the right thing to do, the two 
packages we provided for them, including Northwest Airlines, 
which has a hub in my district. That being the case, would it 
not be smart, consistent with what you want to accomplish, Mr. 
Chairman, that we provide some assistance for hospitals, for 
schools, responsibilities that State and local governments 
primarily have? Would that not be intelligent and wise and 
something that we could do that would comport with this growth 
package?
    Mr. Greenspan. I don't think I can effectively deal at the 
detailed level. All I can suggest is what I think is important 
on a macro level, and that is where I have been all morning, 
and I hope to continue to stay there.
    Mr. Ford. Would it not be, in your estimation, a better tax 
cut, or should I say better and more effective way to help put 
money in people's pockets, perhaps a payroll tax which 80 
percent of Americans pay, would that perhaps be a better way, 
consistent with what the Business Roundtable and others have 
called for, to ensure that we can grow jobs and grow this 
economy, and would that not be cheaper than the $519,000 per 
job that the $726 billion tax cut package the President has 
promise will create 1.4 million jobs?
    Mr. Greenspan. I am not going to respond, and the reason I 
am not going to respond is that this gets into issues of tax 
cuts for encouraging consumption and tax cuts for encouraging 
investment, and as you well know, as I have said previously, I 
am very strongly on the side of tax cuts for investment because 
you do not basically increase economic growth by inducing 
consumption.
    Mr. Ford. You have also said that you are opposed to big 
debt and growing deficits, and it seems to me that we are 
moving rapidly in that direction.
    I know my time is up. I would like to enter into the 
record, Mr. Chairman, if I can, in light of the letter in 
response to Chairman Baker's comments about congressional 
oversight and study of the role of government-sponsored 
enterprises in our economy. I know that great steps have been 
taken by both Fannie Mae and Freddie Mac, voluntary ones 
undertaken, to comply with the whole range of things, and eight 
concrete steps that they have taken. I would like to submit 
that to the record, Mr. Chairman.
    Mr. Gillmor. Without objection.
    [The following information can be found on page 64 in the 
appendix.]
    Mr. Gillmor. The gentleman's time has expired. The Chairman 
has to depart. We have made a commitment to him to get him out. 
If we could let me recognize Mrs. Capito and Mr. Israel, but 
ask both of you to be as concise as possible so we can get the 
Chairman on his way.
    The gentlewoman from West Virginia.
    Mrs. Capito. Thank you, Mr. Chairman. Thank you for your 
presentation. My concern is the high cost of health insurance 
that is occurring all across the Nation, and many businesses 
aren't able to reinvest in capital and other things because of 
the raise in the health insurance premiums. Where do you see 
this in the long term? And also, I think it will--another 
strain on the economy will be if businesses drop their health 
insurance coverage, it creates more uninsured, again causing 
another economic strain. I would just like to hear your 
comments on that.
    Mr. Greenspan. Congresswoman, a really difficult problem we 
confront is the fact that our technologies in the medical area 
are improving so dramatically, they are creating the 
availability of significant new medical services, which in the 
context of a third-party payment system which is subsidized, 
creates an inordinate amount of demand for medical services of 
all types, and that inevitably spills over into medical 
insurance costs, and it spills over into the difficulties that 
a number of companies are involved with.
    So the issue is a very difficult one which I don't think is 
resolved other than by considering how we approach our total 
medical services system and how we finance it. And I doubt very 
much if we can solve problems individually without looking at 
the fact that, you know, we have got 14 percent of the GDP 
going to medical services, and my suspicion is more than that, 
in the total proportion of employment, and that means a very 
significant part and a growing part of the economy devoted to 
health care, which is very important for the American people 
and is very important for us each individually. But it does not 
produce goods and services, and we have to make these very 
difficult trade-offs.
    Mrs. Capito. Thank you.
    Mr. Gillmor. The gentleman from New York.
    Mr. Israel. Thank you, Mr. Chairman. I will try to be as 
brief as possible.
    Mr. Chairman, in your testimony you note that the 
persistent high level of new claims for unemployment insurance 
suggests that firms may still be finding it possible to meet 
their customers' tepid increases in demand with a leaner work 
force. I think that is a rather prosaic way of describing job 
losses. Guy comes home, says, honey, good news and bad news. 
The bad news is I have been laid off. The good news is that the 
firm is finding it possible to meet our customers' tepid 
increases in demand with a leaner work force.
    I would like to focus on that issue. We created the 
Temporary Emergency Unemployment Compensation Program in March 
of 2002 and extended it in January, 2003. The Labor Department 
reported last week that new applications for unemployment 
insurance hit 455,000 in the week ending April 19. There are 
now fewer jobs in the labor market than at any point in the 
current slowdown. 365,000 workers exhausted their regular 
unemployment benefits in March, and the number of exhaustees 
has increased for 24 straight months.
    Statistics go on. Percentage of workers beginning to 
receive unemployment benefits who subsequently exhaust those 
benefits without finding work was at the highest level ever 
recorded in February.
    There are some who say that the best way to help workers 
who are falling off the cliff is to cut taxes on people who are 
furthest away from the cliff. There are others who say the best 
way to stimulate the economy is through unemployment 
compensation, that every dollar we provide in unemployment 
compensation is necessarily a dollar invested in the economy 
because when workers don't have jobs they dramatically scale 
back their purchases. A dollar in unemployment compensation 
helps increase those purchases.
    So my question to you is, as a matter of immediate economic 
stimulus, what is a more useful tool? Is it providing another 
extension after May 31 of emergency unemployment compensation 
or is it not providing that extension and instead sticking with 
some of the tax reduction proposals that are on the table?
    Mr. Greenspan. I think the crucial issue gets to the 
failure to distinguish in a lot of these conversations between 
stimulus to capital investment which, ultimately over the long 
run, increases everybody's standard of living and, two, short-
term stimulus to consumption which will raise the level of 
activity almost by definition and short-term employment but 
does nothing over the longer run. And that is a very difficult 
trade-off which Congress has got to make because if you do 
nothing other than short-term stimulus, you will end up with 
economic growth slowing down.
    Mr. Israel. Mr. Chairman, on May 31 temporary emergency 
unemployment compensation will end. Is it important for the 
economy for us to extend that program?
    Mr. Greenspan. I frankly have not given that much thought 
and I couldn't give you an informed answer.
    Mr. Gillmor. The gentleman yields back. Mr. Chairman, with 
your indulgence I would like to have one Republican ask one 
question and one Democrat ask one question and not take the 
full time.
    The gentlelady from Florida, Ms. Harris.
    Ms. Harris. Thank you, Mr. Chairman. Very quickly, welcome, 
Mr. Greenspan. It is wonderful having you back again. I 
represent a largely senior population and given the recent loss 
of confidence in the markets today, the stock market and other 
types of investment, what would you advise Americans, 
particularly those nearing retirement on the retirement plans, 
specifically the mix between equities and bonds? And can you 
comment on possible opportunities that Congress can provide to 
expand retirement savings opportunities for those nearing 
retirement?
    Mr. Greenspan. That is the toughest question I have gotten 
all day. That really is a job for a specific investment adviser 
who is knowledgeable about the specific conditions of each 
person's retirement needs and the like. I think people make 
generic recommendations in this regard and I think do a 
disservice to individuals. And I think forecasting markets is 
very difficult, I would argue at the end of the day, probably 
with rare exceptions, almost impossible. But what you can do is 
measure the risks. And the risks essentially are different from 
somebody who is 30 years old and is saving for retirement or 
one who is 55. And I think those types of judgments are crucial 
and important for appropriate investment policies for 
retirement, and I don't think you can generalize very far down 
the road.
    Mr. Gillmor. The gentleman----
    Mr. Frank. I just wanted to get a little glass of that. So 
someone 55 might be retiring in 25 or 30 years and he would 
want to be prudent.
    Mr. Gillmor. The gentleman from Illinois, Mr. Emanuel, for 
one question.
    Mr. Emanuel. Thank you. Fifteen months ago the Congress 
passed one of the largest tax cuts in the history of the 
country, the net result has been two-and-a-half million lost 
jobs. Five million more Americans have lost their health 
insurance, nearly a trillion dollars worth of corporate assets 
have been foreclosed on, and 2 million Americans who formerly 
were in the middle class have entered the rolls of poverty in 
this country.
    USA Today in their paper today noted that in the help 
wanted ads, we have the lowest amount of help wanted ads this 
March since 1964--available jobs out there. I know I only get 
one question and I want to clarify a point that I think you 
answered in responding to the ranking member, Barney Frank, 
about the role of deficits to the cost of capital. If we have 
an increasing amount of deficits and they become perceived by 
the market as structural, not temporary, that would have a 
direct impact on the cost of capital both to businesses for 
their investment and ability to borrow in advance, improvement 
in productivity as well as to family incomes as relates to 
higher interest rates on mortgages, cars and student loans. The 
cost of capital due to ever growing deficits would have a 
direct impact on companies and on the ability of families to 
meet their needs to provide for their middle class dream?
    Mr. Greenspan. That is correct, Congressman. I should say 
that you drew a connection between the 2001 tax cut and a whole 
series of issues which occurred subsequently in the economy. I 
think you would be more proper in saying that they were all 
associated with that time frame, but cause and effect is not 
evident to me.
    Mr. Emanuel. You do see the debt relationship of the 
deficit as a cause and effect as it relates to a greater rise 
in interest rates and that we have a perception that we would 
have a permanent deficit that would have a direct impact on the 
cost of capital as it relates to businesses and families as it 
provides for their children and for their own livelihood?
    Mr. Greenspan. That's correct.
    Mr. Gillmor. Mr. Chairman, I want to thank you for 
appearing before us. Your testimony as always is informative, 
insightful, and if we do this enough, I might understand most 
of what you said. Thank you.
    We will proceed to the second panel. If the panelists can 
take their place at the table we will get underway. Mr. 
Peterson is not here yet, but we will proceed. And Mr. Aaron 
was first. And we would like our panelists to summarize their 
remarks in about 5 minutes and then we can go to questions. Mr. 
Henry Aaron, Senior Fellow of the Brookings Institution.

    STATEMENT OF HENRY AARON, SENIOR FELLOW, THE BROOKINGS 
                          INSTITUTION

    Mr. Aaron. Thank you very much, Mr. Chairman. I wanted to 
make five main points and respond to one that was raised in the 
course of Mr. Greenspan's testimony. The first point is a 
simple confirmation of the evidence from the Congressional 
Budget Office and virtually every other forecaster that we face 
substantial budget deficits over the next decade even if no tax 
cut whatsoever is enacted. Tax cuts will necessarily increase 
those deficits. The recent report of the Congressional Budget 
Office confirms that fact, notwithstanding the oped that was 
referred to this morning by Martin Feldstein. The CBO report 
shows it is as likely that dynamic scoring would result in 
increased estimates of the revenue loss from the tax cuts as 
that it would show decreased costs.
    The more serious point I think is that the longer term 
budget situation is even more serious than the intermediate 
term situation because of reasons that were also covered in Mr. 
Greenspan's testimony; namely, the imminent retirement of the 
baby boom generation and the attendant increases in pension and 
health costs. In that situation, I believe it would be unwise 
to institute any further tax cuts of any kind, including an 
acceleration of the tax cuts enacted in 2001 or the passage of 
additional provisions.
    There is a case to be made for some short-term economic 
stimulus, but it is a mixed case. We have had a massive amount 
of fiscal stimulus over the last couple of years and a massive 
amount of monetary stimulus. If there is to be any additional 
stimulus, in my view it should sunset very quickly. The so-
called jobs and growth program of President Bush, in my 
opinion, is misnamed, because it will create neither jobs nor 
economic growth over the long term. Indeed, the forecast of the 
very firm on which the Council of Economic Advisers relies 
showed precisely that result. Some initial job growth was shown 
under their projections for about 18 months, but job reductions 
were shown for the remainder of the decade. The overall effect, 
therefore, is not increase jobs, despite their assumption that 
they assumed that there would be no tightening of monetary 
policy in response to the tax cuts.
    Finally, I would like to refer back to the discussion that 
occurred regarding the relative productivity of public and 
private investment. I rarely heard a falser distinction in my 
life. The United States has been built on the productive 
partnership of public and private investment throughout its 
history. The interstate highway system built with public moneys 
is the basis for the modern trucking industry, a large private 
sector investment. Research, funded publicly through the 
National Institutes of Health, helps support major private 
investments through the pharmaceutical industry. To be sure, 
there are wasteful public investments. Each of you no doubt has 
your list and I have mine. But there are wasteful private 
investments as well. Consider, for example, the tens of 
billions of dollars that have gone into fiber-optic cable that 
is at best premature and may be entirely wasteful. And there 
are many other cases as well.
    The important thing to recognize is that we should be 
against wasteful investment, whether it is public or private. 
We should undertake public investments that help support 
productive private sector investments, and that includes a good 
deal of what the Federal Government does. It includes enabling 
students from the bottom quartile of the socioeconomic ladder 
to attend college if they have as much ability as those at the 
upper end of the economic distribution. It includes additional 
support for biomedical research and in other areas.
    I think it is also hard to make the case that somehow 
economic stimulus is on net increased if we cut taxes for 
people to encourage private consumption and at the same time 
decide not to provide support for States and localities, 
thereby resulting in Medicaid enrollees from being cut from the 
rolls, schools being closed because there are no funds 
available for after school programs and elderly centers being 
closed because there are no funds for them either. This is a 
choice of priorities. It is not a choice about economic 
stimulus.
    Thank you.
    [The prepared statement of Henry Aaron can be found on page 
66 in the appendix.]
    Mr. Gillmor. Thank you Mr. Aaron. Mr. David Malpass, Chief 
Global Economist, Bear Stearns.

   STATEMENT OF DAVID MALPASS, CHIEF GLOBAL ECONOMIST, BEAR 
                            STEARNS

    Mr. Malpass. Thank you, Mr. Chairman, and members of the 
committee. I am pleased to have the invitation to talk about 
these issues. I would like to make several points.
    First, I think the economic outlook is actually quite good. 
We have had a major improvement in macroeconomic policy since 
2000. Specifically interest rates have fallen, real interest 
rates have gone negative just in the last few months, and that 
is going to encourage inventory and investment. The value of 
the dollar has changed substantially and moved to a pro-growth 
level after having been at a deflationary level. Inventories 
are low now.
    Very important in the economic outlook is the issue of the 
tax cut and the incentives within the economy. It is true that 
there are problems facing the economy. That is true all the 
time. But what I think we see right now is a major improvement 
in the macro environment since 2000 that will lead to a solid 
economic recovery in coming months.
    My statement goes through labor market conditions, 
describes that even though we have lost a lot of jobs in the 
last year the number of people employed in the U.S. economy is 
at $130.4 million. That is over a million and-a-half more than 
in 1999. And remember 1999 was a boom time. The unemployment 
rate was down at 3.8 percent. With more people employed now 
than at that time, that will help contribute to the economic 
recovery.
    My statement goes through some key variables in the 
outlook. In general the outlook is good. Some of the variables 
are oil prices, business investment and then the tax cut. The 
reason the tax cut is important is because of the capital 
structure of the United States. We right now have a system that 
biases heavily the capital structure toward debt instead of 
toward equity, and that reduces the efficiency. It causes the 
economy, the private sector to make wrong choices based on tax 
policy. In my view, the President's proposal would add strongly 
to both the near and longer term growth outlook. It would 
provide important benefits in terms of jobs, economic growth, 
capital mobility, national savings and corporate governance.
    I think the President's proposal is much superior to some 
of the alternatives that have been mentioned, either doing 
nothing or doing cash rebates or doing consumption oriented tax 
cuts or doing targeted investment incentives such as equipment 
expensing. What we need to make the economy grow is an 
improvement in the quality of investment, as much as in the 
quantity, and that would be achieved through the change in the 
dividend taxation.
    I will mention two side benefits from changing the tax 
structure. One is the United States is running a big current 
account deficit now. That shows an investment rate that is 
above the savings rate. One of the reasons for that is the 
heavy taxes on savings, and one of those is the taxation of 
dividends. So we would get a side benefit from the tax cut in 
added savings.
    Also, there are positive implications for the direction of 
future tax reforms if this particular tax reform is able to 
move forward.
    My statement goes through two other issues which I want to 
mention. First, the scoring issue. Oftentimes we think of this 
$350 billion number or $550 billion number as something that 
might be accurate. Remember scoring is distinctly inaccurate. 
It has no bearing on what is actually going to happen out of a 
tax cut. It also has no bearing on the benefits that are 
enjoyed by the economy from a particular change in the tax. In 
particular, as they think about scoring a tax cut, they are 
focused on how much revenues the government will lose.
    Their mission isn't even to try to decide what will happen 
to the Nation as a whole. It is a limited mission; how much 
will the government lose. In this particular case, one of the 
benefits to the economy as a whole is the wealth gain for the 
Nation when there is a tax cut.
    My statement shows that we have a recent example of the 
impact of lower asset taxes on the value of assets and the 
related economic impact.
    In 1997, Congress lowered the capital gains tax on real 
estate. We saw a major increase in the value of real estate and 
also in the jobs involved in constructing real estate. I think 
what we would see similar reactions to a dividend tax cut, a 
massive increase in national wealth and a surge in economic 
activity at a relatively small cost to the Federal Government.
    The current dividend tax distorts the capital structure. It 
creates an expensive wedge or a toll gate between retained 
earnings and the shareholder, plus it encourages debt and 
unproductive acquisitions. Its elimination would, in my view, 
improve the allocation of capital, adding substantially to 
near-term and long-term U.S. Economic aspects.
    A final part of my testimony is related to the budget 
deficits. I will leave you with just one point in this area. 
Recall that the projection of budget deficits is an extremely 
inexact science. No one really has any idea what the budget 
deficit is going to be over the next 10 years. CBO is 
projecting that the tax receipts to the Federal Government over 
the next 10 years will be $27.4 trillion. So a gigantic amount 
of revenue is coming in. You should put a confidence integral 
on that. That is plus or minus 5 percent. They really have no 
exact way of knowing how much the receipts are, but let us say 
that they are close to within 5 percent. That means that you 
have a one-and-a-half trillion dollar uncertainty about what 
the receipts are going to be.
    Congress is arguing about $200 billion of inaccurate 
scoring as a way of making tax policies. Instead, Congress 
should be thinking about what the right tax system is, what the 
right spending system is and spending less time looking at the 
budget estimates and the scoring estimates, which everyone is 
largely in agreement can't be done at all accurately.
    Thank you, Mr. Chairman.
    [The prepared statement of David Malpass can be found on 
page 83 in the appendix.]
    The Chairman. Mr. Peterson, welcome back and it is good to 
see you. I think we were on the same panel up in the Big Apple. 
Good to see you and welcome.

    STATEMENT OF PETER G. PETERSON, PRESIDENT, THE CONCORD 
                           COALITION

    Mr. Peterson. Mr. Chairman, in March of 2001, a bipartisan 
group of us from the Concord Coalition; namely, Warren Rudman, 
Bob Kerrey, Sam Nunn, Paul Volker and myself, stated our views 
of what ought to be done about a fiscal stimulus, and we said 
it should be temporary, it should be targeted to taxpayers and 
businesses most likely to spend it and you should do nothing to 
aggravate the long-term fiscal outlook. As we look at the 
current plan, I am sure our group would agree that what we see 
and the arguments we hear are not terribly persuasive, 
particularly against those criteria.
    First, a word about worsening fiscal outlook and why it 
matters. Two years ago, Mr. Chairman, the CBO told us that the 
10-year budget balance would be a mountainous $5.6 trillion. We 
at the Concord Coalition believe there is a more realistic 
estimate. The 10-year outlook is probably closer to a $4 
trillion deficit. That $10 trillion swing is probably the 
largest in the history of the country except at times of war.
    Also, Mr. Chairman, we have to remember that deficits today 
can be justified by surpluses tomorrow, but right now the long-
term deficit outlook is even worse than the 10-year outlook. 
Let us keep in mind that we face an unfunded obligation on 
Social Security, Medicare and Federal pensions of $25 trillion, 
according to the U.S. Department of Treasury. As a share of 
payroll, the cost of Social Security and Medicare hospital 
insurance programs alone would need to rise from today's 14 
percent to somewhere between 24 and 34 percent of pay. I think 
most of us would find that unthinkable and unsustainable.
    You know, Mr. Chairman, we have gotten used to thinking 
about entitlements as a long term problem but in fact it is 
beginning to overlap with our near term. The fact is that in 
only 5 years the first boomers begin retiring and the entire 
generation will be on full benefits in 8 years.
    Now why do deficits matter, particularly the long-term 
deficits? The problem with long-term deficits is they soak up 
national savings and crowd out productive investment. You all 
know that America's saving pool is already very shallow and 
getting shallower. Regardless of this endless debate of the 
effect of deficits on interest rates, increased budget deficits 
reduce future income. What really matters is the amount of 
national savings that is consumed by deficits and whether it is 
offset by private savings. Others argue that we didn't need to 
worry about this because foreign savers will pick up the slack.
    In the first place, Mr. Chairman, our foreign friends in 
Europe face even more daunting entitlement problems than we do 
because of the rapidly declining birth rates. In any case, 
whatever we borrow from abroad we have to pay back or else fork 
over a permanent debt service to foreigners. Any way future 
American living standards will be affected.
    The current policy, it seems to me, Mr. Chairman, 
constitutes an explicit decision by today's adults to 
collectively shift the current cost of government from 
ourselves to our children and grandchildren. With that 
background, let us review the basic arguments that I have heard 
with regard to this tax plan.
    The first is that the American people want and deserve a 
tax cut and a democratic government should respond to their 
wish. The administration has described a vision of America in 
which government takes and spends less of our money and leaves 
more of it in the pockets of those of us who earned it. It is a 
vision that resonates with many citizens. But I want to be very 
clear that neither I nor the Concord Coalition is opposed to 
smaller governments or lower taxes. We simply require that at 
the end of the day the revenues are sufficient to cover the 
outlays. Washington policymakers must not pretend that we can 
have it all, guns, butter, and tax cuts.
    In short, I would insist that the bottom line logic of 
public finance, that the long-term tax burden is determined by 
long-term spending burden and that unless you reduce the long-
term spending burden you don't really cut taxes, you simply 
shift the burden of taxes from the present to the future. There 
is no public finance textbook that I know about that teaches 
you that you can ease the long-term tax burden simply by 
cutting the tax. Instead of pretending of accomplishing the 
impossible we should be educating the public that when you face 
a future of endless huge deficits, you have to cut spending 
long term before you cut taxes long term.
    Argument number two, okay, let us forget the long-term tax 
burden. The tax package still makes sense as a near term 
financial stimulus to bring the economy to full capacity. 
Today's economy remains fragile largely because business and 
consumer confidence remains fragile. Under these circumstances 
a stimulus could have a beneficial impact. The problem with the 
stimulus justifications that I have heard is it doesn't apply 
to the plan under consideration. For fiscal stimulus to be 
effective, it has to be put into the consumers' pockets as 
quickly as possible. Yet just 5 percent of the administration's 
economic growth projections, those that explicitly advertise a 
stimulus, would end up in the consumers' pockets this year and 
over the 10-year period just 17 percent over the first 3 years.
    Argument three, even if it doesn't deliver much near term 
stimulus the tax plan does make the Tax Code more efficient, 
which translates into less economic waste and a higher standard 
of living.
    Many supporters of the administration's tax plan argue that 
its provisions to eliminate the double taxation and corporate 
earnings would make our tax system more efficient. I am 
sympathetic to this argument. Personally as a matter of tax 
design I wouldn't do it the same way. A better plan would be to 
relieve earnings at the corporate level. But my biggest problem 
with this provision, however, is not its complex design and 
implementation challenges. My biggest problem is that it is 
deficit financed. Reducing the taxation on corporate earnings 
may marginally improve savings behavior, but not nearly enough 
to compensate for the loss in Federal revenue, which adds 
directly to Federal debt and in the long term subtracts dollar 
for dollar from national savings. Far better it seems to me 
would have been to make any proposal revenue neutral; for 
example, by genuine tax reform that eliminates many of the 
obviously inefficient corporate tax subsidies.
    Argument number four, the critics just don't get it. What 
this tax package is really about is improving supply side 
incentives to work, save and invest. We should all be 
acknowledged that the supply side reductions in a context of 
punitive tax rates, and indeed they once were, have sometimes 
been very successful. And if supply side advocates were less 
theological in their interpretation of the data, we should be 
able to acknowledge that in other instances the tax rate 
reductions have had indifferent or ambiguous results. In fact, 
there is plenty of evidence when marginal tax rates are not 
high the efficiency gains from cutting them may be modest. The 
marginal tax rate, as you probably know, on Federal income and 
payroll taxes is now 30 percent. It is among the lowest in the 
developed world. And the impact on economic activity can be 
ambiguous. In other words, while some people may react to more 
after tax income by working more, others may react by working 
less. But even if the supply side response to the 
administration's tax cuts is both positive and sizeable, the 
gains would be canceled out, perhaps overwhelmed by the 
sizeable inefficiencies of the deficit that the administration 
plans to run in order to pay for it.
    According to some of the dynamic models by CBO and several 
I have reviewed as chairman of the Federal Reserve Bank in New 
York, the tax plan could actually result in significant GDP 
losses over the long-term.
    Tax plan argument number five, let us be honest. The 
ultimate purpose of the tax cut plan has nothing to do with 
economics. It is about politics or political philosophy. The 
purpose is to starve the government of revenues so that in the 
long run the Congress will have no choice but to cut back 
spending and with that diminish the size of government. This is 
a seductive apologia, but I have three objections to it.
    First, I think it is unfair because no end, however 
legitimate, can justify such means. Nothing excuses holding the 
next generation hostage, including our own children, on the 
dubious bet that the other party will have the goodwill to 
relent.
    Second, it could also be cynical because it assumes that 
our democratic process is broken and no longer makes sense to 
advocate a policy for the common good, but we have to rely on a 
certain amount of subterfuge.
    Third, I think it could be considered hypocritical. One 
could take the ostensible goal of tax cuts as smaller 
government more seriously if we saw the party pushing the tax 
cut were also trying with great energy to cut spending both 
short term and over the longer term, for example, with genuine 
reform of what OMB itself calls are unsustainable entitlement 
programs. But we see nothing of the sort. Indeed it is hard to 
find the small government argument persuasive when the budget 
does nothing to reform entitlements, allows debt service cost 
to rise along with that and urges greater spending on defense 
and indispensable homeland security when these functions 
comprise over four-fifths of all Federal outlays.
    Mr. Chairman, our Nation faces at least two history bending 
challenges, global terrorism and global aging. Meeting the 
first may require marshalling new resources that are far above 
the extra spending already legislated. We know that meeting the 
second will test the ability of our society to provide a decent 
standard of living for the old without imposing a crushing 
burden on the young. It seems obvious to me that America should 
not approach this fiscal gauntlet uncovered by deficits as far 
as the eye can see. To do so would ignore every principle of 
public finance, generational equity and long-term economic 
stewardship.
    Thank you.
    [The prepared statement of Peter G. Peterson can be found 
on page 95 in the appendix.]
    The Chairman. Thank you, Mr. Peterson. And our final 
witness, Dr. Kevin Hassett.

STATEMENT OF DR. KEVIN A. HASSETT, DIRECTOR OF ECONOMIC POLICY 
             STUDIES, AMERICAN ENTERPRISE INSTITUTE

    Mr. Hassett. Thank you, Mr. Chairman and Mr. Ranking 
Member. It is a great honor to be here. I guess from looking 
around it seems like we don't have a baby boomer on the panel 
but we are on opposite sides, some of us. And I think looking 
at the baby boom problem as sort of the long run fiscal problem 
that our Nation faces is very important and provides an 
interesting perspective on the current fiscal policy debate, 
and that is the intent of my prepared remarks that you have 
before you.
    Before we can think about the question what solutions 
should we pursue, we need to identify the problems. And to my 
mind, there are really two big clear problems that I don't 
think that you could ignore responsibly going forward. And I 
think that once these problems are recognized then when we have 
a package like the budget proposed by the President, for 
example, then we should take each of the items in the package 
and compare them to these problems and see if they help make 
them better. And if they do then perhaps they are good policy 
ideas.
    I think the first problem in the long run, as Chairman 
Greenspan mentioned, the long run budget outlook is terrible. 
The short run is bad and the long run is terrible. Indeed, the 
most recent Congressional Budget Office forecast over the next 
75 or so years suggests that Federal deficits as large as 20 
percent of GDP will be accomplished absent policy changes. So 
it is not that if we keep doing these crazy things we are doing 
and spending new moneys on stuff that we are going to have that 
big deficit. No. If we keep coasting then we are going to have 
a deficit that large.
    But I think the interesting perspective that I found in the 
CBO study that came out a year ago, and I understand they are 
updating this, is that if you try to identify the cause of this 
20 percent of GDP deficit, you see that in their forecasts at 
least and I share Mr. Malpass' criticism of such forecasts--I 
don't know how accurate they are going to be--but in their 
forecasts the chart in my testimony which is just reproducing 
their chart--that the problem is wholly attributable to a surge 
in outlays. Indeed, relative to GDP the CBO is forecasting that 
revenues will be about constant but outlays go from a little 
bit below 20 percent of GDP to about 40 percent of GDP. Now in 
my testimony, I try to put that in perspective. If the U.S. 
Were to actually get to the point where we had a Federal 
Government of about 40 percent of GDP, then that probably means 
that State and local spending would be about 20 percent of GDP, 
if it kept up as it normally has, which means about 60 percent 
of GDP absent policy changes would be spent on government 
things. Now I don't think that we are going to get there. But 
again if we did I think it would just be devastating for the 
economy.
    In my testimony I provided a chart that gave you an idea of 
what kind of growth, economic growth experienced countries with 
large governments or governments close to that large have had 
and it is pretty darn terrible. So what is going to happen is 
at some point we are going to recognize that we can't afford 
the entitlements that we promised. And I think we are going to 
have to come together with good faith from both sides of the 
aisle and work out some kind of solution to it. But I think 
that recognizing that we kind of face this discrete choice 
going forward, are we going to become like a socialist European 
country where we have got a very large fraction of GDP devoted 
to government or not is a key background debate. And when we 
look at the President's proposal, then, for example, the 
prescription drug benefit is something that makes this problem 
worse and doesn't make it better. I am not an expert on 
Medicare, and it could be that we need a reform that provides 
drugs as well, but the expenditure on that certainly doesn't 
help.
    The second problem, I think, and again economic issues can 
be complex, the second problem is that the U.S. Corporate tax 
code is out of step with the corporate tax code of the rest of 
the world. The economics profession has demonstrated I think 
almost unanimously over the last couple of decades that high 
capital taxes, as Chairman Greenspan mentioned, can 
significantly harm economic welfare, even the economic welfare 
of workers who don't invest in the stock market. And so the 
idea is that when there is a large capital inflow then that 
creates jobs and makes wages increase.
    I think one of the most interesting facts that demonstrates 
this effect is the experience of Ireland. Ireland reduced their 
corporate taxes, their tax on capital, and saw their 
manufacturing wages for their blue collar workers closed from 
about half of that of the U.S. To being almost equal to that of 
the U.S. over a decade. And so because of this, much of the 
rest of the world has begun cutting their corporate taxes and 
their dividend taxes as well to the point where the only 
country with a higher combined tax on this type of income than 
the U.S. is Japan. And needless to say, I think the Japanese 
are not having an economic experience we would like to 
reproduce. And so I think the second problem is very important 
to keep in mind.
    I believe we have reached a point where since we are big 
and it is not as urgently obvious as it was to European 
countries but countries have made themselves much more 
attractive places to operate, it makes sense for our 
multinationals to locate their operations overseas. And I think 
ultimately the stress for that and indeed stress that applies 
to ordinary workers is going to move us to make some kind of 
change. And I think therefore when you look at the dividend tax 
proposal--and I will try to finish quickly--then you can see 
that it does address a very pressing problem.
    I think Chairman Greenspan mentioned today that he thought 
that it would be a slam dunk no brainer if you could find a 
pay-for for that so that it was revenue neutral. But I would 
argue that if you were to look at the net effect, the 
noneconomic effect of the President's plan absent such a pay-
for, that it would still move you to make this reform because 
again if we don't then we are going to fail to address a very 
pressing problem.
    And with that, I will conclude my remarks.
    [The prepared statement of Kevin A. Hassett can be found on 
page 76 in the appendix.]
    The Chairman. Thank you to all of our panelists. Let me 
begin just to follow up on what you mentioned, Mr. Hassett and 
Mr. Malpass; that is, this whole idea of a 10-year budget 
strikes me as totally unrealistic. We are talking about a $200 
billion difference in the House and Senate versions over a 10-
year period. If you were to give some advice to the budgeteers 
and how we work or how we try to make some sense out of this 
whole budget process, what would each of you recommend maybe in 
a sentence that Congress should do? Should we abolish the 
budget process or has it been helpful? If we don't abolish the 
budget process, should we start to try to focus in on a 5-year 
period? Why don't we begin with, Mr. Aaron, and go down the 
line?
    Mr. Aaron. I think the bad mouthing of the budget 
projections is a classic case of shooting the messenger. We 
were not of the mind to shoot the messenger two years ago when 
we looked at those 10-year projections and concluded that there 
was enough revenue to support a very large tax cut. The current 
projections dramatically understate the seriousness of the 
long-term projection, as Mr. Peterson emphasized. The $200 
billion number that you cited counts toward the budget all the 
reserve accumulation now occurring in Social Security, Medicare 
and Federal employees retirement funds, every penny of which 
and more besides will be needed to meet current obligations. It 
doesn't include any allowance for the fix that will be needed 
for the alternative minimum tax. It doesn't include most of the 
costs of the war in Iraq. It doesn't include any additional 
costs that may be necessary for homeland security. We are 
looking at a very serious 10-year budget projection.
    Could we be lucky? Could growth suddenly blossom and might 
we avoid that problem? Yes, it is conceivable. But as I said in 
my testimony, just because we cannot see with perfect accuracy 
what lies over the crest of the hill doesn't mean we should 
drive on the wrong side of the road, and that is exactly what 
we are doing.
    The Chairman. You basically don't have a problem with 10-
year projections?
    Mr. Aaron. I have lots of problems with all the projections 
because we have to make a lot of assumptions. Would we improve 
matters by adopting a shorter horizon? I don't think we would. 
I would like to see additional studies and sensitivity 
analyses. Fortunately, the Congressional Budget Office has 
started to give us those and I think it has improved the 
sophistication with which we read their 10-year numbers.
    Mr. Malpass. I think the 10-year budget is actually 
harmful. It causes you to make decisions that you wouldn't make 
under normal circumstances. For example, in the 2001 tax cut 
the conclusion was reached to let it expire in 2010 because 
that saved money in the 10-year budget window that people were 
looking at at that time. This created a complicated set of tax 
policies that wouldn't have been arrived at under any other 
concept. So I think it should not be done.
    What could be put in its place? I think several things. One 
is a realistic estimate of what the near term spending 
commitments of the government are. A program that starts small 
and then grows over time is being heavily underestimated by the 
10-year budget window. I am not really a fan of the Medicare 
expansions that you are considering now. That would be an area 
where, if you look at the 10-year budget window, it is not 
really showing you a true look at the cost of what you are 
really committing to.
    That is of course how we got into the Social Security 
problem. Commitments were made at the beginning that didn't 
seem all that big. We didn't have a 10-year budget at that 
time, but looking beyond 10 years, that is when the problem 
occurs. The 10-year budget window creates the impression that 
you are making logical decisions when we know from experience 
that you are being pushed into illogical decisions. I think I 
would dispense with the 10-year budget. I would try to have a 
system of entitlement controls that would look at the long-term 
effects of the commitments that you are getting into.
    The Chairman. Thank you. Mr. Peterson.
    Mr. Peterson. I either have the burden, Mr. Chairman, or 
the good fortune not to be an economist, so I have great 
trouble following some of these models, but I would like to 
make just a few points. First of all, on the cost side I would 
agree, Mr. Chairman, with Mr. Aaron that it is very likely that 
we have grossly underestimated. In addition to those that Henry 
mentioned, let me mention one that I know a little about. I 
happen to Chair the Council on Foreign Relations and we have a 
task force working on the Hart-Rudman recommendations with 
regard to homeland security.
    I would be very surprised, Mr. Chairman, if a few years 
from now you do not find that those needs are so pressing that 
you are going to appropriate much more money than you have now. 
For example, our ports are hideously vulnerable at the moment. 
There are systems available to do something about that, but we 
have done almost nothing about it. Now the other big item on 
the cost side is obviously the entitlement burden. Let me make 
this point about entitlements. They are quite different than 
other projections. I heard Bill Safire, I think it was, on Meet 
the Press decry 10-year projections, but I think a distinction 
should be made between projecting the costs of something like 
Social Security and projecting other costs.
    Why do I say that? The people that are going to retire, Mr. 
Chairman, have already been born and can be counted. The 
benefits are in place, and therefore you can make reasonably 
reliable estimates it seems to me of what those costs are going 
to be.
    Secondly, as you can tell from my testimony, I don't take 
it seriously as some would like me to take some of the growth 
estimates that people have been making for 20 some years now 
that I have been in this budget business. I want to remind you 
of something you probably know better than I, but in the case 
of Social Security the benefits are tied to wages and wages in 
turn are tied very largely to productivity. Therefore, as 
productivity goes up, the costs go up. And therefore it is a 
problem that you are going to have a great deal of trouble by 
saying we are going to grow out of this because the economy is 
going to get bigger.
    I remind you of what happened in Great Britain. Lady 
Thatcher decided in 1980 that their entitlement programs were 
unsustainable, and she made one very important reform that you 
may not agree with but it indicates how important this is. They 
decided to index the benefits only to inflation and not to 
wages. And because over a period of time, productivity goes up 
and wages goes up, it reduced the effect of these on the 
economy but it did not lower the benefits from where they were 
when the reform went into effect.
    So I think it is extremely important that no one think it 
is going to be easy to grow out of the entitlement program.
    The Chairman. Thank you. Mr. Hassett.
    Mr. Hassett. I am reminded that you said one sentence. I 
think that the budget process itself is very important. I think 
that the $200 billion difference between the House and the 
Senate right now is a small difference relative to standard 
errors or anything else that we are talking about. But within 
that spending, you have to ask yourself is the tax reduction, 
if you have got one in there, something that is designed to get 
a big bang for the buck or not. And I would argue that 
certainly there is a lot of disagreement amongst economists 
about how much taxes affect things. But there is less 
disagreement about how, say, the user cost of capital, the 
thing that the dividend tax reduces affects things than just 
about any other area. And so it is somewhat ironic to me that 
the dividend tax proposal seems to be the thing that is going 
to be thrown out the window in the Senate, or at least that is 
the rumor, given that is the part of the proposal that has the 
strongest economic merits.
    In terms of forecasts, I think I agree wholeheartedly with 
Mr. Aaron and Mr. Peterson that any artificial short run cap on 
how far out you go or if you stop at 5 years or 10 years 
introduces games that I think that some in this room are 
probably quite masterful at playing where you can move revenues 
forward and expenditures out and make it look like you are 
doing better than you are in the 10-year window. I would guess 
that anything that is done with prescription drugs would be the 
thing that would have the biggest effect in the long run on the 
problems we are discussing here and be the most subject to such 
games because you only look at a 10-year window. The fact is we 
have got these entitlements growing to be 20 percent of GDP 
over the CBO's forecast horizon, and that is before we had 
these things. And if we stop at a 10-year window, you might 
miss that.
    The Chairman. The gentlelady from New York, Ms. McCarthy.
    Ms. McCarthy. Thank you, Mr. Chairman, and thank you all 
for your testimony. We have been here since 10 o'clock this 
morning so it is difficult because each person seems to have a 
different opinion. My job is to try and figure out what is best 
for the country, and I am not an economist. I am someone who 
comes from Mineola trying to pay my bills and my mortgage and 
make sure that when I retire, I am going to have something that 
I can sustain myself on and not count on my family or anybody 
else to help me.
    You brought up interesting points in my opinion. You are 
basically forecasting, in my opinion, a pretty rosy future for 
the market. And if that is the case, then why are we even 
talking about tax cuts because you are saying we are going to 
have a good future. I happen to think this country will come 
back. And if I was to take the money, I would personally look 
at all our States and I would take that money out of the 
Transportation Trust Fund, it is already there, nobody has to 
pay for it, we already paid for it, and do what many Presidents 
have done in the past, public works projects, working on inner 
cities, rebuilding our bridges and our transportation system 
and our roadways. The money is there and that is what it is 
supposed to be for.
    Since I have been here we have been trying to fight to 
bring down the debt. But I also know when we are looking down 
at Social Security, we are looking at Medicare. We are going to 
have a drug plan. I don't know which one will be accepted, but 
it is going to come down only because the politicians have 
promised it and the people are demanding it. And to be very 
honest with you, most of our senior citizens, they actually 
need it. So the government is going to have to come up with 
some plan that we can actually afford to keep prescription drug 
prices down low. And I think that to me is probably the most 
challenging thing that we are going to face.
    So with all of you, and you all have totally different 
opinions--I agree with Mr. Peterson, this idea about debt is 
scaring the dickens out of me, because we will be fighting this 
war in Iraq for a while, not quite the war but certainly the 
conflict that is going to be there. We are going to have to 
adjust the AMT and that is coming down the road rapidly. 
Politically this place is going to have to do it and they will.
    And then what Mr. Peterson has said, no one is paying 
attention to our ports. If you want homeland security, this to 
me is the scariest thing going on there. And you talk to anyone 
that works down on the docks. We have 121 ports of entry in 
this country and we are not even going through a dot of the 
stuff that is coming in. So we have a long way to go.
    So the only thing I can say to all of you is I wish we 
could all work together and really come up with the solutions 
that we are going to be facing. But I guess my question to all 
of you, if you had a choice why can't we have a meeting of the 
minds, of yes, possibly a small tax cut but also a public works 
program that is coming out of the Transportation Trust Fund 
that would help stimulate short term, give our States a 2-year 
break not having to match it and have people out there working 
which would stimulate each and every part of our cities, which 
to me in my own simple little way would be a win-win situation. 
And I would ask for a comment on that.
    Mr. Malpass. Thank you, Ms. McCarthy. Well, we have a good 
future, yes, but one of my assumptions is there will be a tax 
cut. I think that is pretty clear. As you think about whether 
you want to do a tax cut, put it in terms of jobs and of the 
stock market, the national wealth. Right now, Congress is 
putting it only in terms of this $350 billion number, which is 
an inherently very inaccurate number. It is not a good way to 
judge. I think a better way would be to think about whether you 
want the unemployment rate 5 years from now to be 5.8 percent 
or do you want it to be 5.2 percent and do you want the stock 
market to be up 20 percent this year or up only 5 percent this 
year. You can put it into concrete terms. I think that is a 
better way to think about it than the way that is dominating 
the press right now in terms of this $350 billion number.
    I will leave you with a final thought. I think you should 
look at each of the policy issues before you decide on its 
merits. So as you think about the Tax Code, is it going to be 
improved by reducing the double taxation of dividends? And the 
answer overwhelmingly is yes. What we do now is wrong on the 
Tax Code. We tax corporations when they earn the money and then 
we tax them again or tax their shareholders when they disburse 
the money. That causes corporations not to disburse. And so it 
stops up the capital of the country and so it is a bad system. 
So you have a choice to improve it, have a lower unemployment 
rate and a higher stock market. And it is at a cost that is 
within the rounding errors of their ability to really estimate 
costs.
    Ms. McCarthy. From what I understand from business 
executives because productivity is up I mean the chances of 
rehiring a lot of people that have been laid off, the 
executives are saying they are not going to be doing that 
mainly because they are producing more. I don't know how many 
jobs we are actually going to bring back in that case.
    Mr. Malpass. Retained earnings in this country are immobile 
because there is a huge tax placed on them. So if a corporation 
has cash, it doesn't really give the cash to the shareholders 
and then let some other company get it. The corporation hoards 
the cash. The rich keep their pile of money because otherwise 
it is subjected to a huge tax rate in order to move it around. 
If you lower that tax, you are going to get a lot more mobility 
of capital in the country. That means more machines and that is 
going to create jobs. Two years and three years out you will 
have a lot more people working in this country if you reduce 
the double taxation of dividends.
    The Chairman. The gentleman's time has expired. The 
gentleman from Texas, Mr. Paul.
    Mr. Paul. Thank you, Mr. Chairman. I would like to try to 
draw attention to a connection between economic policy and 
monetary policy. We haven't talked too much about monetary 
policy but I think that is pretty important. Obviously spending 
is too high and I consider high levels of spending and deficits 
to be dangerous to the long-term future of this country. For 
that reason I vote for the least amount of spending of anybody 
in the Congress.
    Mr. Paul. But I also always vote to cut taxes under the 
assumption that it is the people's money, and it is never a 
cost to government because all I am doing is returning the 
money to the people. So, therefore, it doesn't leave a lot of 
options of what an individual like myself can do, because the 
momentum, and the appetite, for spending is so great.
    The welfare-warfare state is in place and the odds of that 
changing, I think, are slim to none, because we do believe in 
welfare here at home. And both political parties endorse it, 
and both parties now endorse military adventurism overseas, 
there is absolutely no limitation on spending.
    So the exploding deficits shouldn't surprise anyone, but I 
think sometimes, though, we deceive ourselves.
    I hope the markets turn around, and we do real well, but we 
ought not to forget about what's happened in Japan. And we 
ought not to deceive ourselves about the GDP, because if we 
spend a billion dollar on missiles, we add that into the GDP 
because it's government spending. But when you blow up a 
missile, it is not like putting a billion dollars into a 
hospital or into schools or into housing when you actually 
raise the standard of living.
    So that can be very deceiving, but my point is that 
sometimes we rely on monetary policy. We rely on the Fed to 
lower interest rates, that means print more money in order to 
stimulate the economy, to generate new revenues to help us out 
in Washington.
    Generally that worked in 1990s, to a degree, because of 
capital gains taxes. And the stock market and revenues came in, 
and it seemed to help, but I do not see how we can depend on 
the Fed to bail us out as a Congress. Matter of fact, the 
system of money we have, I think, encourages us to be 
irresponsible because we know that unlike a State government, 
if we spend endlessly, and we vote for guns and butter, and we 
run up a $500 billion deficit, we always know the Fed is there 
to buy these Treasury bills and keep interest rates down.
    So the question is, do any of you agree that the system of 
monetary policy, the monetary policy we have and the idea that 
we can monetize debt is actually an encouragement? Some people 
would like to argue it helps us out, but doesn't it actually 
encourage us to be irresponsible and to spend and allow the Fed 
to pick up the pieces and to buy this debt, because States 
can't do that? Do any of you care to comment on that?
    Mr. Aaron. I would go back to the statement that it is the 
people's money, and, therefore, tax cuts are desirable.
    When one cuts taxes in a regime of deficits, it's the 
people's debt that is being increased. It is, as Mr. Peterson 
said, the obligations that our children will have to bear.
    Would it be better if the debt that the Federal Government 
wishes to float was liquid and could not be sold on capital 
markets? No. I don't think it would be. I think it would 
detract from the efficiency with which the U.S. Capital market 
operates, which I think all of us here on the panel would agree 
is really one of the great glories of modern capitalism and one 
of the great strengths of this Nation.
    The U.S. Capital market is remarkably efficient in moving 
net savings into productive investments. My view is that the 
important goal in setting tax policy, the most important goal, 
is to make sure that the Federal Government, by running 
deficits, does not subtract from national saving and thereby 
lower the amount of investment that we can afford to manage 
ourselves. As Mr. Peterson said, ``We can borrow abroad, but 
then we pay the profits from those investments abroad.'' We 
cannot invest a dollar if we don't first save it.
    Mr. Paul. So you don't think monetary policy is actually an 
incentive for us to be irresponsible?
    Mr. Aaron. No, I don't. I think you manage it pretty well 
here in Congress without the assistance of Mr. Greenspan.
    The Chairman. The gentleman's time has expired.
    The gentleman from North Carolina, Mr. Watt.
    Mr. Watt. Thank you, Mr. Chairman. I actually have a 
question, but I want to make a couple of comments before I get 
to the question.
    And so I hope you all will indulge me, since the first 
comment I want to make is to thank the Chairman for convening 
this second panel today. The Members tend to show up and the 
press tends to show up and savor every single word that 
Chairman Greenspan gives, and he really didn't say much today 
to be honest with you, but it's this kind of follow-up 
interchange between people who really don't seem to have a 
political ax to grind and who really understand the intricacies 
of all of these things, that I think are a lot more 
enlightening to us, to me. I won't speak for the whole 
committee, but they are certainly more enlightening to me than 
anything that Mr. Greenspan said, at least today. Although, I 
think historically, he has said some things that have been 
important.
    Second I want to thank the members of this panel for not 
bringing a political ax. I think that's very important if we 
are going to try to work through this.
    Third, I want to give a special thanks to Mr. Peterson. He 
doesn't know this, but if I go back to 1992 when I came out of 
the private practice of law and really wasn't paying attention 
to any of these kinds of discussions, just trying to make a 
living, and all of a sudden decided I was going to run for 
Congress because they created a district that I thought I could 
represent without being a politician, to be honest with you, 
every single person at that time was calling me a liberal. And 
the liberal position at that time was that it was okay to have 
some deficits, and the conservative position at that time was 
that deficits were the worst thing that could ever happen to 
the country because, you know, they increased the cost of money 
and, you know.
    So I kind of adopted the liberal position because I was 
supposed to be a liberal. And the truth of the matter is, it 
was the Concord Coalition, more than any single entity, that 
started an evolution on my part. And when I hear people say, 
``Well, you have changed your position over the years,'' you 
are absolutely right. I have. They are absolutely correct that 
I have changed my position, and it was the Concord Coalition 
that had more to do with that than any other single institution 
that I can think of.
    Back 1995 or 1996, somewhere in there, we did this big 
modeling project where you were going around into congressional 
districts, inviting people into a room and asking them to 
balance the budget or create their spending priorities, and I 
started to understand that every decision that we make has some 
consequences to it. There are short-term consequences; there 
are long-term consequences. What I think I have heard Secretary 
Greenspan, and to some extent this panel, say today is, 
sometimes the short-term impacts of something, the stimulative 
impacts, don't necessarily correspond with the long-term 
impacts. They can be--they can actually be different, and I 
think this discussion has helped me, even Chairman Greenspan's 
discussion, helped me this morning to understand that.
    I think the thing that is the constant from my perspective 
is that, while we can run some deficits sometimes and they are 
not inherently bad periodically, that we cannot constantly do 
it and, I don't think, regardless of the inaccuracy of the 
projections for the next 10 years, there is a person at this 
table that thinks we are not in a hell of a terrible situation 
for the next 10 years, 15 years when it comes to deficit 
spending, and there doesn't seem to be any effective way out of 
it.
    I seemed to have used all of my time without asking the 
questions.
    The Chairman. I will yield to the gentleman. Two minutes 
for questions.
    Mr. Watt. Since I spent 2 minutes for praising the 
question.
    The Chairman. If the record will reflect it accurately, the 
distinguished ranking minority member, it was his idea to have 
this panel. So we have to give credit where credit is due.
    Mr. Watt. I am glad to have this bipartisan recognition of 
a good idea. That's a good sign here, in and of itself.
    I want to focus on the stimulative part of this, I guess. 
Let us assume that some stimulus is needed in the economy and I 
am not looking at the long-term benefits of a restructuring the 
tax thing, just at the stimulative effect.
    Somebody named economy analysis, that said that just the 
stimulus part of this, if you extend Emergency Federal 
Unemployment Benefits, you get one $1.73 for every dollar that 
you spend. If you accelerate the 10 percent bracket, the lowest 
bracket, you get $1.34 for every dollar that you spend. If you 
get more aid to State governments, you get $1.24 for every 
dollar that you spend. All the way down to the dividend 
taxation reduction, where you get a$.09 stimulative effect, not 
long-term effect, but stimulative effect, $.09 for every dollar 
that you give back on this dividend tax thing.
    Just looking at the stimulative part of this, shouldn't we 
be--and I had this discussion with some corporate executives 
from GE who were sitting at my table at a dinner the other 
night--if we need a stimulus, shouldn't we be looking at 
extending opportunity employment benefits and accelerating the 
10 percent, the lowest bracket increase, so we can get more 
money into the economy. Both of those things I think do it. 
Just don't worry about the long-term consequences.
    I am not arguing with Mr. Malpass or Dr. Hassett about 
whether restructuring the tax on corporate earnings and 
dividends might be beneficial long-term, but I am looking at 
whether it would be beneficial to do something stimulative and 
whether those two things might not be the highest priority.
    Mr. Malpass. I will give the short answer, and then maybe 
others have a longer one.
    I don't agree with those estimates that you cited. The $.09 
benefit from the dividend tax cut is simply a gross 
underexpectation on the economy. That's a really negative 
statement on the way the economy works.
    Mr. Watt. But that's short-term, now, I am not talking 
about long-term.
    Mr. Malpass. Markets and people are forward looking. If I 
tell you that your tax rate 3 years from now is going to be 
much lower than it is today, you are going to get more 
education, work harder now, get a better job. You are going to 
start today. You are not going to wait for 3 years. You are 
going to know that if you are in a better position 3 years from 
now, you are going to do more. And that's the same for these S 
corporations. If businesses in America know that the capital 
structure is going to be more liquid, they are going to start 
working harder and more efficiently today.
    Mr. Watt. That's exactly the opposite of what the GE 
executives told me. They told me they would take the money and 
put it in a savings account, and when the economy turned 
around, it would have some benefit because they would invest 
it. And I acknowledged that, but short-term stimulation, the 
next 6 months to a year, is what I'm talking about.
    I absolutely disagree with what you just said.
    Mr. Aaron. If you want to stimulate in the short run, you 
must do it through consumption. Investment plans take a while. 
They are not made overnight. For that reason, I think Mr. 
Greenspan was entirely right, it does not contribute to long-
term growth by building up the capacity of the Nation to 
stimulate consumption in the short run. But he is talking about 
stimulating growth through expanding the supply side of the 
economy.
    Short-term stimulation is about spurring demand, and for 
that purpose, you want to get the money out into purchases 
fast. The quick way to do that is to cut taxes for people who 
have high propensities to spend out of current income. And that 
would involve ideally, in my view, a repetition of the per 
capita rebate. Not all of it gets spent, much of it does not 
because it is temporary. A suspension of part of the payroll 
tax with compensation to the trust funds from the general fund 
would also stimulate immediate consumption.
    Dividend cuts may indeed have long-term effects on 
investment and may indeed have long-term effects on consumption 
by those who receive the dividend relief. But if you want to 
get a big bang for the buck, quick, put it in the hands of 
middle- and lower-income households who need to spend 
essentially all their income in order to get by.
    The Chairman. You may respond briefly, then we will move 
on.
    Mr. Hassett. It is--I disagree with Mr. Aaron on that, Mr. 
Watt, as have most previous Congresses during recessions. We 
have very often had investment tax credits during recessions. 
They have very often stimulated investment, and the investment 
tax credit equivalent of the President's proposal is about a 5 
percent investment, not as big as 10 percent ITCs that we have 
seen in the past, but it's not tremendously different from the 
types of things that President Kennedy was one of the first 
ones----
    Mr. Aaron. The key to an investment tax credit is that it 
has to be temporary. This provision is not a temporary tax 
credit. It is a permanent one. The idea of a temporary tax 
credit is, you put investment goods on sale, go out and buy 
them right now, and you get the discount. If you say that the 
price is going to be cut indefinitely, then the stimulus to go 
out and buy now is dramatically reduced.
    I would agree with Mr. Hassett if he is talking about a 
temporary investment tax credit, but not a permanent one.
    The Chairman. Gentleman from Washington, Mr. Inslee.
    Mr. Inslee. Thank you, Mr. Chairman.
    I want to thank all the members of the panel, but again 
particularly Mr. Peterson. And just to dovetail, what Mr. Watt 
talked about, about his sort of epiphany or renaissance in 
regard to the budget deficits, I want to thank you for a 
different reason. I came to Congress, at least the first time, 
the same year Mr. Watt did, 1993, but I had a different view. 
The deficit was one of the reasons I first ran because on 
Sunday morning when I would open up the newspaper and be having 
a nice omelet, it would be spoiled by looking at what these 
idiots in the U.S. Congress were doing, creating this enormous 
debt burden for my kids. And I have got three sons, and so I 
kind of had that epiphany maybe a little earlier than Mr. Watt, 
but I think with the----
    Mr. Watt. You are always smarter than me.
    Mr. Inslee. It has been in large part because of Concord 
Coalition works that you have been instrumental in, and I want 
to thank you for getting Americans to understand the depth of 
this problem and the source of the problem which is the U.S. 
Congress and the Executive Branch.
    I just want to give you an impression that I have and just 
ask for your comment. My impression is almost on an issue 
perhaps of morality as much as economic theory, in that I 
believe there is a moral component of when we create this debt 
burden for our children. Regardless of economic theory, it's 
something we ought not to do and I look at this, I heard one of 
the speakers, I think it was maybe John Tanner, during the 
floor debate about this, he actually likened this tax cut as 
actually the largest tax increase in American society because, 
ultimately, it will increase interest rates on the Federal 
debt. And you and I know, tax payers pay a debt tax, right now 
almost 14 percent of all the income taxes they pay go to pay 
the interest on the Federal debt. And in one way or another, I 
appreciate your testimony because what you talked about is that 
this basically is just shifting the burden to pay for this to a 
later period of time. Obviously, at some time, the paper will 
have to be paid, and this is shifting it down a generation, 
perhaps, and I look at this, I look at this tax cut as an 
abject failure of my generation. They talk about the greatest 
generation, World War II, well, my generation is the baby boom 
generation, and when we retire, this tax cut is an explicit 
promise to our kids that they are going to have an enormous tax 
increase. They are going to finance my generation's retirement, 
and I think there is a moral component to this, and that's why 
I feel strongly about it.
    So, I guess, I ask you to comment on some of the 
sentiments.
    Mr. Peterson. If I may, a lecture on morality doesn't come 
very convincingly from somebody on Wall Street, but let me take 
a crack at it.
    There was a German philosopher named Bonhoffer who said, 
``The ultimate test of a moral society is the kind of world 
that it leaves to its children,'' and I think what we are doing 
to our kids is fundamentally immoral.
    I would like to respond to a comment that Congresswoman 
McCarthy made about why we cannot get together and solve this 
problem, because I don't know many people that want to 
consciously hurt their own children.
    I think we need a common understanding of what the problem 
is. And if I could make one suggestion, Mr. Chairman, I would 
love to have you have a hearing on the single issue of the 
trust fund, because I think that has done more to confuse the 
American people and to diminish the importance of this problem 
than almost anything that has happened.
    My father went to his grave saying, ``I don't know why you 
keep writing books about all these long-term liabilities and 
stuff. I have got an account, and that money has been set 
aside, and that's going to be there when I retire.'' I 
collected oxymorons because I was once called a powerful 
Secretary of Commerce, and anybody who has ever been here knows 
there has never been one in the history of the government. In a 
sense, the trust fund is kind of an oxymoron because it says 
fund. It's not funded; it's unfunded. It says trust, and I 
think it's extremely important, Mr. Chairman, that the American 
people have a common understanding of this problem because as 
long as they really believe there is a trust fund out there 
that has been funded and that's set aside for them, they aren't 
going to take this problem seriously. And it is the one thing I 
think we all agree on, that it is a real problem.
    Mr. Inslee. If I ask Mr. Hassett, we know the arguments for 
a removal of the dividend tax, the potential of distorting 
impact, but in your view, given certain facts that I think we 
all agree on, namely, that people are getting older and medical 
care costs are going up, the baby boomers are starting to 
retire, the AMT tax will be fixed in some sentiment, defense 
costs will go up, Homeland Security increase will go up. All of 
these are bipartisan consensus items I have stated.
    Given that fact and given the fact that deficits will 
increase as a result, would it not be preferable if you believe 
you want to remove that distorting impact of the dividend tax, 
to find some other means so that we don't end up with these 
giant deficits? For instance, closing the Bahamian-Bermuda 
Triangle tax dodge that some of our less patriotic corporations 
have chosen to take, for instance.
    Mr. Hassett. Thank you for the question. I think that the 
dividend tax cut is likely an important enough policy that we 
should try to think what we can agree on to do in order to get 
it passed. I think that we also have to recognize, however, 
that, as in my testimony, the charts to my testimony, to the 
extent that we are doing this irresponsible or you said immoral 
thing to our children because we are setting them up to have 
this terrible bill that they are going to have to pay, well, 
the reason that we are doing it, first order, big reason is 
that the spending is soaring so out of control.
    Mr. Peterson mentioned that Margaret Thatcher indexed 
retirement benefits to inflation but not to growth. If we did 
something like that, it would go a long ways towards fixing the 
problem, and whether we do something like that or not, I don't 
think is going to be seriously impacted by $200 billion of tax 
policy this year.
    The Chairman. The gentleman's time has expired. Gentleman 
from Massachusetts to close.
    Mr. Frank. Mr. Chairman, I want to apologize to our 
witnesses. Not for my personal shortcomings, but for the 
shortcomings of our political culture. This is a very useful 
discussion. I am enormously grateful to these four very busy, 
very thoughtful people for having a rational and civil 
discussion about some of the most important issues in society. 
I am sorry it's not sensational enough to attract the attention 
it ought to. I am comforted by the fact that C-SPAN is here and 
that people are interested in it and that the number is 10s and 
of more thousands, and I think it has been useful time.
    I was struck by Mr. Hassett referring back to the Kennedy 
Administration, because that's when I was taking Economics 125 
and Dr. Aaron was grading me. So I was going to say that's an 
irrelevant, so far time gone, but I can't do that. I was going 
to suggest to Mr. Peterson that maybe he wasn't governmentally 
powerful. I think Herbert Hoover used the Secretaryship of 
Commerce to at least some political advantage. He may have been 
the only powerful Secretary of Commerce.
    Question, first I am struck and I appreciate your honesty. 
It's been talked about, Mr. Hassett and Mr. Malpass, too, in 
some extent that each side suggests witnesses. Dr. Hassett, you 
were particularly explicit in denigrating the marriage-penalty 
relief and the child-tax credit. Would you expand on that?
    Mr. Hassett. Sure, Mr. Frank. Thank you. I guess you are 
trying to get me in trouble but----
    Mr. Frank. No, I am reading what you wrote. I am not 
bugging you.
    Mr. Hassett. I will continue to dig. I think that tax 
policy needs to be based on sound economic principles, that we 
need to have broad bases.
    Mr. Frank. We can stipulate to that. Why does that then 
lead you to be critical of marriage-penalty relief and a child-
tax credit?
    Mr. Hassett. That's a more complicated answer. I will be 
glad to get back to you with that, but there is a reason why. 
The concern of the marriage penalty is quite cyclical over 
time, and we get really upset about it for a while. Then we fix 
it, and the way we fix it, we get upset about that, and then we 
put it back.
    Mr. Frank. You presumably aren't cyclical about it. Why do 
you think it's not very important?
    Mr. Hassett. I think that the----
    Mr. Frank. From the economic standpoint.
    Mr. Hassett. On the economics of it, on the marriage 
penalty, you have to decide whether you want every family who 
has an income of $100,000 to pay a tax, regardless of where the 
$100,000 comes from. Is it one person making $80 and one person 
making $20? Or is it two people making $50? Or do you want to 
tax everybody who makes $50,000 the same, whether they are 
married or not? You have to pick, and if you get upset about 
the way the tax code treats one set of people, then you will 
change the code.
    Mr. Frank. Give me a factual statement now. You say it does 
little to strengthen the economy. Why do you say that?
    Mr. Hassett. I think that using the tax code to attempt to 
shape families is--you are not going to have any use out of 
that. It is not going to be effective. So if you want to have 
more children, I don't think a child credit is going to make 
people have more children. In terms of lowering taxes, we try 
to stimulate activity----
    Mr. Frank. Neither one of these, in your judgment, would be 
likely to increase efficiency or productivity or do those 
things ?
    Mr. Hassett. Correct.
    Mr. Frank. Let me say, I did want to comment, and I respect 
the integrity of the gentleman from Texas with whom I am often 
aligned on various matters of personal liberty, but I disagree 
very much, as Dr. Aaron did, with his formulation that it is 
the people's money.
    This notion that it is the people's money versus some 
entity called the government's money, I think, greatly 
misstates things. Of course it is the people's money, but 
thoughtful people understand that they have two sets of needs 
roughly. There are needs that we can all best deal with 
individually, by money that is individually available to us, 
but there are also needs that, all the people I know believe, 
that can only be dealt with collectively, cleaning the air, 
public safety to some extent, public transportation.
    So this dichotomy between the people's needs and the 
government's needs is a mistaken one. There is a dichotomy 
between those needs which we can best fulfill individually and 
those which we can best fulfill working together. There are 
some questions about the inherent efficiency or inefficiency of 
when we work together. I tend to share Dr. Aaron's view on that 
but I think that's where we ought to formulate it.
    That leads me to this question. We get into debates. Well, 
first, one preliminary factual question, seriously, for both 
Dr. Hassett and Mr. Malpass. You are critical of the 10-year 
window, but to be honest, I wasn't sure whether you want a 
shorter or a longer time horizon or both of the above. Should 
we substitute for the 10-year window an indefinite, as far as 
the eye can see, or should it be 2 or 3 years? I think, 
frankly, in your criticisms of the 10-year window, sometimes it 
was too long and sometimes it was too short. Could you expand 
on that?
    Mr. Hassett. I think it's too short in the sense that you 
need to look at the total effect of every policy. So I agree 
that Mr. Malpass and I were saying different things but we 
were----
    Mr. Frank. Okay. Mr. Malpass, you seem to be saying sort of 
both. By the way, let me just stipulate to one thing. Passing a 
tax cut to say 2010 was extremely stupid. I understand. I 
didn't vote for it. None of us did, and so I am glad you told 
them that, but should we lengthen or shorten the window?
    Mr. Malpass. I think we should have both. First, an 
indefinite window, meaning in its fully-mature state. If you 
develop an entitlement program and you figure out what it is 
going to cost down the line, that is a relevant number. By 
having a 10-year window, it is encouraging you to minimize the 
cost in the first part of that window. You don't get charged 
for the long-term, and that's an artificiality that is 
distorting your----
    Mr. Frank. So both of you say it should go on.
    Let me put it this way. When we do a budget, should we then 
do it as binding for 1 year, and then the projection is 
infinite? We have this 1-year, 5-year. How would you change 
your procedures in what terms?
    Mr. Malpass. As I mentioned, I think spending restraints on 
the size of programs might be useful. The budgeting process 
that you use now doesn't help make good decisions.
    Mr. Frank. I understand. What would you do instead?
    Mr. Malpass. I think you could look at last year's budget 
deficit, not a projection of budget deficit, and then have your 
rules be based on whether you are meeting your goals.
    One kind of goal is the debt to GDP ratio. We are right now 
at 35 percent. So you could put in some kind of concept that 
when you are above that, then it takes more votes, a super 
majority to pass new entitlements.
    Mr. Frank. I appreciate that. Is that relevant, because 
that's one of the questions, the ratio of debt to GDP? The 
argument has been, well, that's really not all that relevant 
and if it's relevant why? Does it have effect on interest rates 
or you don't think it crowds out savings? Why should I care 
what the ratio to debt to GDP is based on your analysis?
    Mr. Malpass. I think a debt to GDP analysis is a relevant 
way to look at a government's fiscal situation.
    Mr. Frank. What harm does a high one do, is my question to 
you?
    Mr. Malpass. Right now, the U.S. is at 35 percent of GDP. 
In Europe, many of the countries are at 60 or 80.
    Mr. Frank. What harm does it do if we get too high?
    Mr. Malpass. As you get too high, you are going to have 
trouble funding that size of a deficit. So it's like a credit 
limit. If you think of a person with a given income and then 
they say, ``Well, I am borrowing $50,000,'' and the bank says, 
``Okay, that amount you can handle,'' and then the person says, 
``Well, I want to borrow $100,000,'' and they have a health 
problem, that's going to create a problem.
    Mr. Frank. Meaning people would charge me more for it?
    Mr. Malpass. I don't think the interest rate----
    Mr. Frank. But how is it going to be a problem? I want to 
borrow more. It sounds like you are now acknowledging that 
there is some negative to the higher deficits, and I wasn't 
sure of what they are.
    Mr. Malpass. I really think that the U.S. debt to GDP ratio 
is low enough that more borrowing won't affect interest rates.
    Mr. Frank. That is not what I am asking, Mr. Malpass. We 
have been very civil here. I am asking you, in your theoretical 
terms, what--and we also know it's not either/or, these things 
are all cumulative. You have ranges. At exactly what point I am 
not asking now. What is the damage that comes if the ratio gets 
too high? How does that damage manifest itself?
    Mr. Malpass. I think if you get to a high debt to GDP ratio 
beyond your creditworthiness, the investment in your country 
dries up. People don't want to put money in because they see a 
debt crisis coming. The good news is that the U.S. Isn't 
anywhere close to that, and I think a better model for thinking 
about extra debt now is more in terms of quantity discounts. 
There are a lot of corporations where, if they borrow more 
money, they get a lower rate.
    Mr. Frank. More debt would be a good thing for us right 
now?
    Mr. Malpass. No.
    Mr. Frank. That's what you are telling me. I understand 
that, but I am trying to follow the policy implications.
    Mr. Malpass. I disagree with the argument that a budget 
deficit----
    Mr. Frank. I understand that, Mr. Malpass, but isn't the 
implication of what you say, your quantity discount, that more 
debt could be a good thing?
    Mr. Malpass. I think a tax cut would be very good for the 
economy now.
    Mr. Frank. I know, but I didn't ask you that. Leaving aside 
of how we incurred the more debt, what was that reference to 
quantity discount? It sounded like there could be some value to 
having some more debt, or is that just a throw in that I 
shouldn't pay attention to?
    Mr. Malpass. No, no. Very practically, for corporations and 
for foreign countries, they think about placing debt on the 
yield curve in order to lower their borrowing rate. It's a very 
practical concept. You know that there is the concept of a 
prime rate in the U.S. Who gets prime rate? Is it somebody that 
doesn't borrow very much money. No. It's always somebody that 
borrows a lot of money. They get a lower rate because they----
    Mr. Frank. You think that has relevance to the U.S. 
Government?
    Mr. Malpass. At our current debt to GDP ratio, yes.
    Mr. Frank. Let me take Mr. Aaron's last comment.
    Mr. Aaron. Just two specific points.
    The Chairman. You can tell what kind of grade you gave.
    Mr. Frank. A minus, so I owe him.
    Mr. Aaron. A high ratio of debt to GDP means a high ratio 
of interest to total budget expenditures, and that is a threat 
to the capacity of the government to meet its obligations in 
the future. That's point one.
    Point two, the more debt that exists, in all likelihood, 
the larger the holdings abroad of U.S. Debt and hence the 
greater vulnerability of the U.S. Dollar to shifts in sentiment 
on the part of foreign debt holders.
    The Chairman. The gentleman's time has expired. All time 
has expired. We are most in your debt to coin a phrase.
    Mr. Frank. And that's a good thing.
    The Chairman. We appreciate your patience and your 
participation. It was most enjoyable and the committee now 
stands adjourned.
    [Whereupon, at 1:35 p.m., the hearing was adjourned.]


                            A P P E N D I X



                             April 30, 2003


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