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



 
                     MONETARY POLICY AND THE STATE


                             OF THE ECONOMY
=======================================================================

                                HEARING

                               BEFORE THE

                              COMMITTEE ON
                           FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                           FEBRUARY 12, 2003

                               __________

       Printed for the use of the Committee on Financial Services

                            Serial No. 108-1








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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:
    February 12, 2003............................................     1
Appendix
    February 12, 2003............................................    45

                                WITNESS
                      Wednesday, February 12, 2003

Greenspan, Hon. Alan, Chairman, Board of Governors of the Federal 
  Reserve System.................................................     5

                                APPENDIX

Prepared statements:
    Baca, Hon. Joe...............................................    46
    Davis, Hon. Artur............................................    47
    Gillmor, Hon. Paul E.........................................    49
    Hinojosa, Hon. Ruben.........................................    51
    Shadegg, Hon. John...........................................    54
    Greenspan, Hon. Alan.........................................    56

              Additional Material Submitted for the Record

Hinojosa, Hon. Ruben:
    Introduction of legislation to help Mexican Nationals access 
      the U.S. Banking System....................................    72
Lee, Hon. Barbara:
    ``Who Really Gets Home Loans? Year Nine'', Executive Summary, 
      California Reinvestment Committee..........................    78
Maloney, Hon. Carolyn:
    State of New York, Office of the State Comptroller letter, 
      January 14, 2003...........................................    84
Greenspan, Hon. Alan:
    Monetary Policy Report to the Congress.......................    86
    Written response to questions from Hon. Joe Baca.............   120
    Written response to questions from Hon. Judy Biggert.........   122
    Written response to questions from Hon. Luis V. Guiterrez....   124
    Written response to questions from Hon. Ruben Hinojosa.......   127
    Written response to questions from Hon. Darlene Hooley.......   133
    Written response to questions from Hon. Patrick J. Tiberi....   135


                     MONETARY POLICY AND THE STATE



                             OF THE ECONOMY

                              ----------                              


                      Wednesday, February 12, 2003

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to call, at 10 a.m., in Room 
2128, Rayburn House Office Building, Hon. Michael G. Oxley 
[chairman of the committee] presiding.
    Present: Representatives Oxley, Leach, Baker, Bachus, 
Castle, Royce, Kelly, Paul, Gillmor, Ryun, Biggert, Shays, 
Shadegg, Miller of California, Hart, Capito, Kennedy, Feeney, 
Hensarling, Garrett of New Jersey, Murphy, Brown-Waite, Barrett 
of South Carolina, Harris, Renzi, Frank, Kanjorski, Waters, 
Sanders, Maloney, Velazquez, Watt, Hooley, Carson, Meeks, Lee, 
Inslee, Moore, Gonzalez, Capuano, Hinojosa, Lucas of Kentucky, 
Clay, Israel, Ross, McCarthy, Baca, Matheson, Lynch, Miller of 
North Carolina, Emanuel, Scott and Davis.
    The Chairman. The committee will come to order. We are 
pleased to welcome back the Chairman of the--distinguished 
Chairman of the Federal Reserve, the Honorable Alan Greenspan.
    Chairman Greenspan, the committee welcomes you and as 
always looks forward to your comments. Because of the 
importance of your message, it is fitting that just two years 
ago, you were the first witness at the committee's first 
hearing in this new Congress.
    Mr. Chairman, notwithstanding the comments in your prepared 
statement about the uncertainties posed temporarily by the 
current situation in the Middle East, we are here to discuss 
how to further American economic success. For too long the 
United States economy has been like a starting quarterback in 
its rookie season. All the fundamentals are there, but we are 
just not getting the ball across the goal line. Looking at the 
replay, we are just not sure what went wrong. In an economy 
that saw record high productivity last year, I believe the 
third-quarter numbers were the highest in decades, why do we 
have diminished consumer confidence and so much market 
volatility that we can see nearly a 1,000-point swing in just a 
few days?
    That said, I think a lot of us are not just the optimists--
seeing the light at the end of the tunnel. Once we resolve the 
situation in the Middle East, many believe that the economy 
will be free to grow again. I am sure we all hope that comes to 
pass.
    I appreciate your recent comments about the President's 
jobs and growth plan for the economy. Many have referred to 
this plan as a short-term stimulus program, but I see it as a 
bold attempt to restructure the economy and prepare it for 
another long period of expansion. Recognizing your important 
point that any such plan must be paid for, I would like to 
associate myself with your view that removing the unfair and 
counterproductive double taxation of dividends is extremely 
important. Without this kind of long-term thinking, any short-
term stimulus program is likely to be both expensive and 
ineffective in spurring an economic recovery. You are quite 
measured in your remarks about the effects of removing the 
double taxation. Mr. Chairman, I hope you are able in the 
period reserved for questions to elaborate on that issue.
    The President and I share the view that economic growth is 
the best way to ward off deficits, and the best way to spur 
growth is to keep more money in the hands of the American 
family. The way you do that is through lower taxes. Although I 
am never happy to see budget deficits, today's forecast 
deficits are in terms of the GDP roughly half of what the 
deficits were some two decades ago. Perspective is important, I 
think, and I hope that you will provide it to us today.
    This committee will also be considering a number of 
measures important to reinforcing our economic infrastructure. 
Among them are reform of the bankruptcy laws, ensuring of 
certainty in the netting of derivatives contracts, reform of 
the bank deposit insurance system, repeal of some outmoded 
banking regulations, streamlining of the check processing 
system, some emergency authority for the Securities and 
Exchange Commission. These legislative efforts, which would all 
make the economy even more resilient as well as more efficient, 
are necessary and will be dealt with swiftly by the committee.
    Mr. Chairman, despite a number of uncertainties, our 
economy has continued to grow, with a 2.4 percent growth rate 
for last year and an expected rate of more than 3 percent in 
the current year. That is extraordinary. To be sure, some of 
the credit goes to you and your masterful handling of monetary 
policy. Mr. Chairman, thank you for your willingness to return 
to the committee at a later date to continue our discussion on 
these and other important matters. And thank you for working 
with Ranking Member Frank and myself in that regard. We will 
always benefit from your wisdom this morning and certainly in 
the future.
    The Chair's time has expired, and I yield to the Ranking 
Member, the gentleman from Massachusetts Mr. Frank.
    Mr. Frank. Mr. Chairman, I want to echo your thanks to the 
Chairman for agreeing to come back in April. Neither you nor I 
decided that this should be the second largest committee in the 
Congress, money being only second to highways in its lure to 
Members. So we couldn't accommodate everybody, and we do want 
to do that. And we will be protecting all Members' rights 
thanks to your and the Chairman's cooperation.
    I welcome the Chairman back to what has become an 
interesting game. Some people when they were younger played 
capture the flag. The game today is capture the Fed. The 
question is who can hoist the Chairman to his or her flagpole 
in the broader debate. And I sympathize, Mr. Chairman, with 
your unrequested role here, but I appreciate the integrity with 
which you have addressed this issue in the midst of these 
political efforts. And essentially as I read your testimony 
yesterday, you stayed true to what you have long argued, namely 
that deficits, and particularly ever-increasing deficits into 
the future, are a significant negative.
    We are in an interesting period in American history. I 
think from the intellectual standpoint, we are seeing one of 
the greatest examples of hypocrisy in recent times. The 
political party that came to power in the Congress in 1995, 
having signed a contract with the American people, a contract 
of adhesion, I am afraid, that was going to balance the budget 
by constitutional amendment, has now basically announced that 
they were only kidding, that amending the United States 
Constitution to balance the budget may have seemed like a 
useful political ploy, but, in fact, they are really not that 
all concerned about deficits.
    There is a certain bifurcation here. The President has 
announced a new millennium challenge plan for foreign aid, and 
to qualify that you can't have a budget deficit, but deficits 
are okay for us. What we are talking about obviously is an 
ideological effort. I first thought this was hypocrisy, as I 
said, but I think it is clear that what we are really talking 
about is bait and switch. We have a political party in power 
that is now denigrating deficits for the purpose of getting a 
tax cut through, but if they are successful in getting that 
through and adding significantly to the deficit not just this 
year, but on into the future, they will then turn around and 
rediscover their fear of deficits and use that as a way to 
oppose legitimate spending on environmental concerns, 
unemployment compensation, extended health care and other 
important social needs.
    And the fundamental problem we face is this: This President 
has decided to make a contribution to economic theory which, to 
me, is unwelcome. That contribution is that you can pay for two 
wars with three tax cuts. Had the Democrats in 2000 accused the 
President of planning to have two wars and pay for it with 
three tax cuts, we would have been accused of the worst kind of 
unfair campaign tactics, but that is where we are. If, in fact, 
you go forward with two wars and pay for those two wars with 
three tax cuts, you then have to, A, announce that deficits are 
not so bad after all; and B, substantially reduce other 
important public programs. That is what is important.
    The dividend issue is a question which we should be able to 
consider at some point as to what is an ideal tax structure, 
but at this point, with another war facing us--and the 
President's budget calls for a deficit of over 300 billion 
without the war in Iraq, so those who think the war in Iraq is 
going to cost us zero and that compensating Turkey and other 
countries isn't going to cost us anything, we are probably 
talking about a $400 billion deficit this year. We are talking 
about a level of deficit which would have gotten us in trouble 
if we were in the European Union and indefinite increases into 
the future.
    So that is the context in which we operate, and I 
appreciate it, Mr. Chairman, as I said, what I thought was the 
fundamental integrity in the face of a lot of political pulling 
and hauling for you to restate that. There are other issues 
that obviously we will want to address, but I do think that the 
context in which we operate--and I want to close with this 
again, Mr. Chairman--the notion that the Nation can pay for two 
wars with three tax cuts, war being by far the most expensive 
thing you can do and the very expensive aftermath of that war, 
obviously is the central factor that confronts us. And the 
Chairman has long believed, as have most economists, that while 
deficits are not instant death, they are over a long term a 
negative for the economy. And I very much appreciate the 
Chairman's consistency in reaffirming that in the face of an 
awful lot of political praying that he would go the other way.
    The Chairman. The gentleman's time has expired.
    The Chair is pleased to recognize Mrs. Biggert, the Vice 
Chair of the Monetary Subcommittee.
    Mrs. Biggert. Thank you, Mr. Chairman, and thank you, 
Chairman Greenspan, for coming before our committee this 
morning. This is our first hearing in this committee for the 
108th Congress, and the fact that you are first, I think, 
speaks volumes about the great respect that we have for you and 
the priority we place on your stewardship of our economy.
    I know subcommittee Chairman King wanted to join us here 
today, but unfortunately, he is tied up in another committee 
with Secretary Powell in discussions concerning Iraq, so I 
appreciate the opportunity to speak as the subcommittee vice 
chairman.
    It is no secret that we now face some of the most difficult 
challenges in our Nation's history. On the foreign policy 
front, there is the prospect of military action against Iraq; 
North Korea continues to behave like a reckless child in 
possession of a dangerous toy; and discord remains among 
Israelis and Palestinians, Indians and Pakistanis, and in and 
among other nations and groups around the world.
    On the domestic front, our Nation's terror alert system 
remains high, deficits are mounting, economic growth is down, 
and the markets remain skittish. Yet when we take a close look 
at the fundamentals of our economy and observe how it has held 
up over the last 17 months, I think you'd agree that it is 
anything but down, dead, and buried. Last month the 
unemployment rate dropped to 5.7 percent, and payroll 
employment rose to almost 143,000, almost completely reversing 
December's decline. Interest rates remain low. Manufacturing 
activity turned up in December. Productivity for all of 2002 
grew by 4.7 percent, the strongest showing since 1950, and a 
big improvement over the 1.1 percent increase posted in 2001.
    But even so, we cannot ignore the fact that something is 
holding the economy back from a more vigorous rebound. And it 
would be unwise to not discuss the best way to spur consumers 
and businesses to spend and invest more, spurring growth and 
ultimately reining in public debt. And that is why we are here 
today to discuss our Nation's fiscal future and our plan for 
short-term and long-term economic growth.
    Again, thank you Mr. Chairman for joining us. I look 
forward to your remarks.
    The Chairman. The gentlelady's time is expired.
    The Chair is now pleased to recognize the Ranking Member on 
the Monetary Subcommittee, the gentlelady from New York Mrs. 
Maloney.
    Mrs. Maloney. Thank you, Mr. Chairman.
    Good morning, Mr. Chairman, and thank you for joining the 
committee to offer the perspective of the Federal Reserve on 
the state of our economy.
    By practically any measure the economy has deteriorated 
significantly over the past 2 years. Unemployment has risen 
from 4.2 percent to 5.7. In New York it has reached 7.5 
percent. The stock market has lost $5 trillion in value, 
lowering the value of ordinary Americans' retirement savings 
and 401(k)s dramatically. Most dramatically, the Federal 
balance sheet has suffered through the single greatest about 
face in our Nation's history.
    As an example, the administration's first budget projected 
at $262 billion surplus for fiscal year 2004. The second budget 
estimated a deficit in 2004 of $14 billion. Now the 
administration is projecting a $307 billion deficit for 2004. 
Overall the original administration's projection has changed by 
$570 billion for a single year, and the long-term picture is 
just as bleak. The situation is so dire that, almost in 
despair, OMB has stopped issuing 10-year projections 
altogether.
    Mr. Chairman, in past statements and just yesterday you 
have warned eloquently about the negative impact of deficits on 
our economy. Just last September you said, and I quote, 
``history suggests that an abandonment of fiscal discipline 
will eventually push up interest rates, crowd out capital 
spending, lower productivity growth, and force harder choices 
upon us in the future,'' end quote. I share your concern, 
especially about interest rates, and fear that the 
administration's new economic plan promoting deficit-expanding 
tax cuts will lead to increases in mortgages and credit card 
rates for America's working families. Furthermore the State 
budgets are hurting, and the new administration's tax proposal 
will make things worse.
    In New York the administration's dividend tax plan will 
reduce State revenue and increase borrowing costs by $9 billion 
over the next 10 years, according to New York State comptroller 
Allen Hevesi. Two years ago the administration pushed through a 
massive tax cut which it justified with rose-colored revenue 
projections. Now for the first time in our history, the 
executive branch is proposing tax cuts and sending our Armed 
Forces onto the battlefield at the same time.
    I fear we are headed toward another round of massive 
deficit increases, and I look forward to your thoughts this 
morning. Thank you for joining us.
    The Chairman. Gentlelady's time has expired.
    The Chair would ask unanimous consent all Members' 
statements may be made part of the record. So ordered.
    The Chairman. Mr. Chairman, welcome back to the committee, 
and we look forward to your statement.

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

    Mr. Greenspan. Mr. Chairman and Members of the committee, 
when I testified before this committee last July, I noted that 
while the growth of economic activity over the first half of 
the year had been spurred importantly by a swing from rapid 
inventory drawdown to modest inventory accumulation, that 
source of impetus would surely wind down in subsequent 
quarters, as it did. We at the Federal Reserve recognized that 
a strengthening of final sales was an essential element of 
putting the expansion on a firm and sustainable track. To 
support such a strengthening, monetary policy was set to 
continue its accommodative stance.
    In the event, final sales continued to grow only modestly, 
and business outlays remained soft. Concerns about corporate 
governance, which intensified for a time, were compounded over 
the late summer and into the fall by growing geopolitical 
tensions. Equity prices weakened further, the expected 
volatility of equity prices rose to unusually high levels, 
spreads on corporate debt and credit default swaps 
deteriorated, and liquidity in corporate debt markets declined. 
The economic data and the anecdotal information suggested that 
firms were tightly limiting hiring and capital spending and 
keeping an unusually short leash on inventories.
    By early November, conditions in financial markets had 
firmed somewhat. But on November 6, with economic performance 
remaining subpar, the Federal Open Market Committee chose to 
ease the stance of monetary policy, reducing the federal funds 
rate 50 basis points to 1-1/4 percent. We viewed that action as 
insurance against the possibility that the still widespread 
weakness would become entrenched.
    In the weeks that followed, financial market conditions 
continued to improve, but only haltingly. Mounting concerns 
about geopolitical risks and energy supplies were mirrored by 
the worrisome surge in oil prices, continued skittishness in 
financial markets, and substantial uncertainty among businesses 
about the outlook. Partly as a result, growth of economic 
activity slowed markedly late in the summer and in the fourth 
quarter. Much of that deceleration reflected a falloff in the 
production of motor vehicles from the near record level that 
had been reached in the third quarter when low financing rates 
and other incentive programs sparked a jump in sales. The 
slowing in aggregate output also reflected aggressive attempts 
by businesses more generally to ensure that inventories 
remained under control. Thus far, those efforts have proved 
successful in that business inventories, with only a few 
exceptions, have stayed lean.
    Apart from the quarterly fluctuations, the economy has 
largely extended the broad patterns of performance that were 
evident at the time of my July testimony. Most notably, output 
has continued to expand, but only modestly. As previously, 
overall growth has simultaneously been supported by relatively 
strong spending by households and weighed down by weak 
expenditures by business. Importantly, the favorable underlying 
trends in productivity have continued.
    One consequence of the combination of sluggish output 
growth and rapid productivity gains has been that labor markets 
have remained quite soft. Another consequence of the strong 
performance of productivity has been its support of household 
incomes despite the softness of labor markets. Those gains in 
income combined with very low interest rates and reduced taxes 
have permitted relatively robust advances in residential 
construction and household expenditures. The increases in 
consumer outlays have been financed partly by the large 
extraction of built-up equity in homes.
    While household spending has been reasonably vigorous, we 
have yet to see convincing signs of the rebound in business 
outlays. The emergence of a sustained and broad-based pickup in 
capital spending will almost surely require the resumption of 
substantial gains in corporate profits. Of course, the path of 
capital investment will also depend on the resolution of the 
uncertainties surrounding the business outlook.
    The intensification of geopolitical risks makes discerning 
the economic path ahead especially difficult. If these 
uncertainties diminish considerably in the near term, we should 
be able to tell far better whether we are dealing with a 
business sector and an economy poised to grow more rapidly, our 
most probable expectation, or one that is still laboring under 
persisting strains and imbalances that have been misidentified 
as transitory. If, instead, contrary to our expectations, we 
find that despite the removal of the Iraq-related 
uncertainties, constraints to expansion remain, various 
initiatives for stimulus will doubtless move higher on the 
policy agenda. But as part of that process, the experience of 
recent years may be instructive.
    As I have testified before this committee in the past, the 
most significant lesson to be learned from recent American 
economic history is arguably the importance of structural 
flexibility and the resilience to economic shocks that it 
imparts. I do not claim to be able to judge the relative 
importance of conventional stimulus and increased economic 
flexibility to our ability to weather the shocks of the past 
few years, but the improved flexibility of our economy no doubt 
has played a key role. That increased flexibility has been in 
part the result of the ongoing success in liberalizing global 
trade, a quarter century of bipartisan deregulation that has 
significantly reduced rigidities in our markets for energy, 
transportation, communication, and financial services, and, of 
course, the dramatic gains in information technology that have 
markedly enhanced the ability of businesses to address 
festering economic imbalances before they inflict significant 
damage. This improved ability has been facilitated further by 
the increasing willingness of our workers to embrace innovation 
more generally.
    It is reasonable to surmise that not only have such 
measures contributed significantly to the long-term growth 
potential of the economy this past decade, they also have 
enhanced its short-term resistance to recession. That said, we 
have too little history to measure the extent to which 
increasing flexibility has boosted the economy's potential and 
helped damp cyclical fluctuations in economic activity. Even 
so, the benefits appear sufficiently large that we should be 
placing special emphasis on searching for policies that will 
engender still greater economic flexibility and dismantling 
policies that contribute to unnecessary rigidity. The more 
flexible an economy, the greater its ability to self-correct in 
response to inevitable, often unanticipated, disturbances, thus 
reducing the size and consequences of cyclical imbalances. 
Enhanced flexibility has the advantage of adjustments being 
automatic and not having to rest on the initiatives of 
policymakers, which often come too late or are based on highly 
uncertain forecasts.
    Policies intended to improve the flexibility of the economy 
seem to fall outside the sphere of traditional monetary and 
fiscal policy, but decisions on the structure of the tax system 
and spending programs surely influence flexibility, and thus 
can have major consequences for both the cyclical performance 
and long-run growth potential of our economy.
    As we approach the next decade, we need to focus attention 
on the necessity to make difficult choices from among programs 
that, on a stand-alone basis, appear very attractive. Because 
the baby boomers have not yet started to retire in force, and 
accordingly the ratio of retirees to workers is still 
relatively low, we are still in the midst of a demographic 
lull. But short of an outsized acceleration of productivity to 
well beyond the average pace of the past seven years or a major 
expansion of immigration, the aging of the population now in 
train will end this state of relative budget tranquility in 
about a decade's time. It would be wise to address the 
significant pending adjustment and the associated potential for 
the emergence of large and possibly unsustainable deficits 
sooner rather than later. As the President's just released 
budget put it, ``The longer the delay in enacting reforms, the 
greater the danger and the more drastic the remedies will have 
to be.''
    Re-establishing budget balance will require discipline on 
both revenue and spending actions, but restraint on spending 
may prove more difficult. Tax cuts are limited by the need for 
the Federal Government to fund a basic level of services, for 
example, national defense. No such binding limit constrains 
spending. If spending growth were to outpace nominal GDP, 
maintaining budget balance would necessitate progressively 
higher tax rates that would eventually inhibit the growth in 
the revenue base on which those rates are imposed. Deficits, 
possibly ever widening, would be the inevitable outcome.
    Faster economic growth, doubtless, would make deficits far 
easier to contain, but faster economic growth alone is not 
likely to be the full solution to currently projected long-term 
deficits. To be sure, underlying productivity has accelerated 
considerably in recent years. Nevertheless, to assume that 
productivity can continue to accelerate to rates well above the 
current underlying pace would be a stretch even for our very 
dynamic economy. So, short of a major increase in immigration, 
economic growth cannot be safely counted upon to eliminate 
deficits and the difficult choices that will be required to 
restore fiscal discipline.
    By the same token, in setting budget priorities and 
policies, attention must be paid to the attendant consequences 
for the real economy. Achieving budget balance, for example, 
through actions that hinder economic growth is scarcely a 
measure of success. We need to develop policies that increase 
the real resources that will be available to meet our longer-
term needs. The greater the resources available--that is the 
greater the output of goods and services produced by our 
economy--the easier it will be providing real benefits to 
retirees in coming decades without unduly restraining the 
consumption of workers.
    These are challenging times for all policymakers. 
Considerable uncertainty surrounds the economic outlook, 
especially for the period immediately ahead. But the economy 
has shown remarkable resilience in the face of the succession 
of substantial blows. Critical to our Nation's performance over 
the past few years has been the flexibility exhibited by our 
market-driven economy and its ability to generate substantial 
increases in productivity. Going forward, these same 
characteristics in concert with sound economic policies should 
help to foster a return to vigorous growth of the U.S. economy 
to the benefit of all our citizens.
    Mr. Chairman, I have a rather long written statement from 
which I have excerpted and would appreciate it being included 
for the record.
    The Chairman. Without objection.
    Mr. Greenspan. And I look forward to your questions.
    The Chairman. Thank you, Mr. Chairman.
    [The prepared statement of Hon. Alan Greenspan can be found 
on page 56 in the appendix.]
    The Chairman. And let me indicate to the Members that we 
will strictly adhere to the 5-minute rule so everyone can 
participate.
    The gentleman from Massachusetts.
    Mr. Frank. I would ask all the Democratic Members to read a 
memo I put on their desk. We had some commitments in terms of 
order of questioning from last time, and we have the conflict 
with the hearing with the Secretary of State, so I hope 
Members--I don't want to take up any more time--would read that 
memo. We have tried to accommodate. And I want to repeat: The 
Chairman has very graciously agreed to come back in April for 
an additional hearing, and any Member that doesn't get a chance 
to question today will be, as far as we are concerned on this 
side, up first so that people will get the chance to do that in 
April.
    Thank you again, Mr. Chairman.
    The Chairman. And the Chair will also try to follow that on 
our side as well.
    Mr. Chairman, back when I was in college studying Economics 
101, one of the issues at the Federal level was always the 
issue of double taxation of dividends and a lot of discussion 
about the fact that it was unfair, that it was a drag on the 
economy. As you know, the President--one of the major tenets of 
the President's proposal was to eliminate the double taxation 
of dividends not as a short-term stimulus, but as a long-term 
positive change in our Tax Code. Do you think that is a good 
idea, and if so, what effect, in your estimation, will it have 
on the economy?
    Mr. Greenspan. I do, Mr. Chairman. One of the most 
important experiences, I think, that we have had as analysts in 
the last several years, as I indicated in my prepared remarks, 
is the changes that we have observed in the flexibility of the 
economy and the resilience that that has imparted to our 
capability of essentially deflecting shocks and largely 
deflecting major pressures which would have driven us into deep 
recessions. Indeed, I would have suspected that the 2001 
recession would have been far deeper if we did not have the 
flexibility that we had. And, as I have indicated in my 
remarks, we have to now start to move, at least in my judgment, 
if we are going to get increasing economic growth, to increase 
the flexibility and the resiliency of the system.
    One of the areas where we can do considerable good in that 
regard is to eliminate the double taxation of dividends, 
because the double taxation has created a bias towards debt 
rather than equity in our economic system. And one of the 
concerns that most people looking at the longer term have is 
that the notion of flexibility and resilience and great debt 
leverage do not go hand in hand. So eliminating the double 
taxation will very significantly alter the way in which 
investments are financed over time. It won't happen 
immediately, because it takes a while for the corporate sector 
to adjust to differing incentives, but I have no doubt it will 
make some very important contributions to long-term economic 
growth.
    Let me just say parenthetically, Mr. Chairman, while I do 
not support the elimination of the double taxation of dividends 
because of short-term stimulus, it does have some short-term 
stimulus. That is not the reason I am in favor of it. But it 
probably will increase the level of stock prices and the wealth 
effect accordingly, and there are some small income effects. 
But I do think that the emphasis has to be on what the long-
term implications of such a policy would be.
    The Chairman. Mr. Chairman, as you know, this committee was 
deeply involved in the whole corporate scandals issue in the 
last Congress, culminating in legislation dealing with 
corporate governance and more accountability. What role, in 
your estimation, did the debt financing play in some of those 
corporate scandals, if any?
    Mr. Greenspan. Mr. Chairman, it is hard to judge without 
having very specific evidence, but there is no question that in 
many of the questionable accounting practices which were 
unearthed prior to the legislation which you were quite 
instrumental in pushing, we observed that odd forms of debt 
instruments were crucial to the various different schemes which 
were involved to, in my judgment, essentially thwart the 
purpose of accounting, namely, to give a clear picture of 
whether a corporate strategy is working or not, not to create a 
set of accounts to spin the stock price of the firm.
    The Chairman. Thank you. My time has expired.
    The gentlelady from California Ms. Waters.
    Ms. Waters. Thank you very much, Chairman Greenspan. We 
thank you for your visit here today. We all await with great 
anticipation your creative words of wisdom. However, it appears 
that you have left us with more questions than answers.
    I am rather surprised by your rather lengthy discussion of 
a cash-based accounting versus accrual accounting, where you 
basically conclude that you do not have the tools by which to 
come to certain conclusions. Usually you are a lot more 
definitive than that, and you have always warned us about great 
deficits and what we should do to avoid deficits and the kind 
of cuts that we should make. So despite the fact that we may 
have the most important or the most concise ways to make these 
decisions, can you tell us in very simple and clear language, 
when you talk about fiscal discipline, do you include tax cuts 
along with discussion on the deficit? And will you talk about 
our need to cut back on this deficit and what tax cuts are 
doing to that, and talk about the tax cuts that we made in 2001 
and the tax cuts in the new stimulus package?
    Mr. Greenspan. Congresswoman, I testified before the House 
Budget Committee in September and very strongly recommended 
that the PAYGO and discretionary cap rules, which, in my 
judgment, were really quite extraordinarily effective in 
restraining deficits over the years, be reinstated. As you 
know, they expired in the House on September 30 and will be 
expiring in the Senate sometime in the spring. Those rules 
effectively limit the capacity to cut taxes without also having 
either offsetting revenues or cuts in nondiscretionary 
spending. It also stipulates that expenditure programs are--
require the offsets in the other direction.
    I do not deny, especially in most recent years when the 
surpluses arrived, that there was a lot of game-playing with 
that system, and the reason was that it was originally put in 
place to constrain deficits. When the surpluses arose, it 
seemed to everybody that they no longer made any sense, and 
they were widely evaded and effectively disbanded. I think this 
is a very bad mistake, and before any actions are taken with 
respect to the appropriations for the next fiscal year, I 
certainly trust that these rules, that is, the discretionary 
caps and PAYGO rules, will be re-established, because what that 
will do is enforce the necessity to really put forward only the 
major priorities which this Congress has into legislation, 
because it is fairly evident that if one merely looks at an 
array, as I said in my remarks, of free-standing projects, they 
all look good. They wouldn't have made it, in a sense, to the 
semifinals if they weren't extraordinarily good projects. The 
only problem is that there is an aggregate amount of fiscal 
capacity in any economy, and we are very clearly straining the 
capacity of the system owing to the inexorable retirement of a 
very significant part of our population starting at the end of 
this decade and carrying on, as you know, beyond that.
    So, without getting into any of the individual programs, 
because that is a very crucial and important choice that the 
Congress must make for the American people, I do say to you 
that looking at it from the point of view of an economist, 
looking at what we can afford and what we can't afford, there 
are limits, and you have to choose what we do within those 
limits. And while I didn't expect it to be as effective as it 
was in the years in which it was effective, PAYGO and 
discretionary caps really did work.
    The Chairman. The gentlelady's time has expired.
    The gentleman from Alabama Mr. Bachus.
    Mr. Bachus. Chairman Greenspan, I want to focus on one 
issue that is not discussed a lot, but which I think is very 
important, and that is the Fair Credit Reporting Act. The 
preemption provisions will be expiring at the end of this year. 
Fair Credit Reporting Act gives us a national credit reporting 
system with uniform standards. Would you comment on the 
importance of maintaining a national credit reporting system, 
the advantages of that, how important you think it is that we 
reauthorize the Fair Credit Reporting Act? What may be some of 
the detriment if we don't? Today I think it gives us great 
flexibility, and we are able to assess credit risk well, and I 
think it is very beneficial to have this national system for 
consumers and also for our financial institutions, and 
obviously will let you comment.
    Mr. Greenspan. Well, Congressman, 100 years ago when we 
just had small banks dealing with customers, you knew what the 
credit quality of your loans was. You knew the families to whom 
you were lending, you knew the businesses, and you didn't need 
a data bank. But as we became ever larger and far more complex, 
and as our financial system, especially that which relates to 
consumer credit, became huge in the post-World War II period, 
there was no other way to handle a fair evaluation of the 
credit standing of individual borrowers unless it was in one 
way or another more automated. And we needed to build up some 
means of history that would essentially enable us to, as 
bankers say, make judgments without knowing the person 
personally and not having in front of them a great deal of 
information, especially because you may not have any way of 
doing that.
    These data systems are essential, in my judgment, to enable 
consumers to have access to credit. In other words, it is not 
that long ago when going into a bank and trying to get a 
consumer loan was just never conceived as an appropriate thing 
to do. They didn't make consumer loans. That has changed, and 
it has had a dramatic impact on consumers and households and 
access to credit in this country at reasonable rates. That 
system cannot function without data, without credit histories 
of individual borrowers, and I should certainly hope that it is 
maintained.
    Mr. Bachus. It is very important that we reauthorize the 
Fair Credit Reporting Act to our economy?
    Mr. Greenspan. Yes.
    Mr. Bachus. Thank you.
    Let me just close by saying I have read your prepared 
remarks, the ones you have delivered here today. Let me sort of 
capsulize maybe one thing I got out of that, and that is that 
we must reform Medicare and Social Security and do it sooner as 
opposed to later, and that is of critical importance to our 
economy and to our financial stability.
    Mr. Greenspan. When you look beyond the next few years, 
what strikes you is how significant the retirement of the baby 
boomers is to our fiscal system. The number of beneficiaries 
for both Social Security or OASDI and Medicare and Medicaid are 
really quite startling.
    The problems with Social Security, as difficult as they 
are, and they are difficult, are nonetheless capable of being 
resolved because the Social Security system has the 
characteristics of a private defined benefit plan, and we can 
judge within some range what types of claims on federal 
resources are required.
    Medicare is a wholly different type of institution. Because 
of the extraordinary gains in technology, the fact that medical 
care per se is, as economists say, highly inelastic, meaning 
that you demand it without respect to price, where we have a 
subsidized third-party payment system, that leaves the 
estimates of what the size of medical expenditures are in 
general and Medicare in particular, very difficult to judge, 
but it is almost open-ended.
    And this is why I am very much concerned about having PAYGO 
in place, because we are going to have to address these systems 
in a manner which will fit them into the overall resources of 
the system. That problem, incidentally, exists with or without 
the President's economic program. In other words, the change in 
the fiscal state subsequent to, say, 2010 or perhaps 2012, is 
such that the rate of debt-to-GDP, a measure of the 
sustainability of our fiscal affairs, goes up quite abruptly, 
and as, in fact, the President reports in his budget, and 
indeed so does the Congressional Budget Office, that those 
rises are unsustainable.
    Something has to be adjusted in order to bring the real 
resources available for our total fiscal affairs in line, and 
in my judgment, it is none too soon to start that process, to 
make it phased-in in a manner which doesn't create abrupt 
problems for either those contributing to Social Security or 
Medicare trust funds and those receiving the benefits.
    The Chairman. The gentleman's time has expired.
    And the gentlelady from California, Ms. Lee.
    Ms. Lee. Thank you, Mr. Chairman. I want to thank you and 
Ranking Member Mr. Frank, and also welcome Mr. Greenspan and 
say how timely as always your appearance is.
    Let me call your attention to a report which was recently 
issued by the California Reinvestment Committee. This is their 
ninth annual report as it relates to home lending mortgage 
practices in California. It concluded that California's most 
active banks have failed to meet the quality benchmark in each 
and every instance; secondly, the financial institutions are 
clearly ailing in their efforts to average California's African 
American and Latino households; thirdly, that the race and 
neighborhood of home loan applicants seem to be a factor in how 
much they will pay for their loan; and finally, the final 
conclusion was that bank holding companies are profiting from 
their failure to ensure that borrowers get the best loan 
product for which they qualify from their own family of 
companies.
    What I wanted to ask you is what would be some of your 
recommendations to address these very glaring discriminatory 
outcomes and practices, and how do you think the Federal 
Reserve can weigh in, if you can or not, because, of course, 
accumulation of equity in one's home is the primary means of 
wealth accumulation for the majority of Americans. That is the 
American dream.
    Mr. Greenspan. I agree with that, Congresswoman. I think it 
has been quite a remarkable track record that we have had in 
this country in expanding home ownership and home equity. And 
there is no question that if home equity had not existed, we 
would not have been able to have had the extraordinary degree 
of extraction of equity that has occurred in recent years and 
what has accordingly supported the economy, more exactly 
supported consumption, when business investment was doing so 
poorly. So clearly it has been housing and mortgage 
availability which has been a very critical factor in 
sustaining the economy, which is obviously of crucial 
importance to the Federal Reserve.
    The problems in California are difficult in part because 
prices are much higher in California, as I recall, than 
elsewhere, and that makes it quite difficult for first home 
buyers and minorities to get into home ownership as readily as 
one would like. And I think what is required in this respect is 
to find ways in which to enhance the capability of everyone.
    There is very little doubt that even though home ownership 
rates for minorities are still well below those of whites, the 
gap is, in fact, closing, and we ought to make all sorts of 
efforts that we can to continue that progress, because as you 
point out, living in a home and accumulating equity is the way 
one moves up from the lower-income scales into the middle-
income scales. And it strikes me that whatever can be done 
should be done to press that forward, as I have said many times 
in the past.
    But the Federal Reserve has only limited capabilities in 
that regard. We can and do obviously affect mortgage interest 
rates, and that is a major factor which I think has been quite 
important in expanding that capability. We will look and I hope 
we will find other areas which might be helpful, because our 
general view is that the greater the home ownership in this 
country, the better.
    Ms. Lee. Thank you.
    Mr. Chairman, I would like to ask unanimous consent to 
insert into the record the executive summary of this report by 
the California Reinvestment Committee.
    The Chairman. No objection.
    [The following information can be found on page 78 in the 
appendix.]
    Ms. Lee. Do I have 1 more second?
    The Chairman. You have 38 seconds.
    Ms. Lee. Let me just ask you with regard to the elimination 
of tax on dividends, would you not agree that this dividend 
exemption could make the low-income housing tax credit, which 
does give investors a real dollar-for-dollar reduction in taxes 
and in return, you know, for their investment in housing and 
other tax matters--you know, for that matter, doesn't that make 
it less attractive to investors if, in fact, this tax on 
dividends is enacted, because the low-income housing tax credit 
we know is--has about run out?
    Mr. Greenspan. There are lots of impacts of this issue of 
eliminating the taxation on dividends. The most important 
thing, however, to keep in mind is that by improving the 
flexibility of the economy, it almost surely increases the 
aggregate level of economic activity, of incomes, and probably 
does contribute to rising incomes all across the income scale 
when you increase the economy. And generally in the United 
States, while there are very obvious differences by income 
group, the data do show that everyone benefits.
    And in my judgment, the elimination of the double taxation 
of dividends will be helpful to everybody. Will it have 
negative effects in certain parts of the market? For example, 
state and local governors and mayors have been concerned about 
the cost of credit of municipal bonds that may actually rise 
relatively speaking, and there are other people raising similar 
issues. In my judgment, looking at the whole context, there is 
no question that this particular program will be, net, of 
benefit to virtually everyone in the economy over the long run, 
and that is one of the reasons I strongly support it.
    The Chairman. The gentlelady's time has expired.
    The gentleman from Louisiana, Mr. Baker.
    Mr. Baker. Thank you, Mr. Chairman.
    Chairman Greenspan, welcome. I always enjoy having your 
perspectives presented to the committee. And for the record, I 
am not raising a subject that you would be surprised by, 
although it was raised yesterday in questions in the Senate 
proceedings relative to mortgage-backed securities, MBS. And I 
studied your response, and there was an aspect of your answer 
relative to interest rate risk that caught my eye. I share 
those views, and I want to give you a little background for my 
principle question.
    The concern over interest rate risk and GSEs is something 
that I have had continual concern about, and it was first sort 
of publicly quantifiable in the last quarter of 2002 with the 
difficulty in managing the negative duration gap numbers. As a 
consequence of that, I have a related concern to the growth in 
the number of institutions and the notional amount per 
institution of GSE securities held by those institutions to 
meet their Tier 1 capital requirements. It would appear to me 
that, given the obvious now quantified difficulty in 
rebalancing asset liability portfolio balance in an interest 
rate environment, which fortunately has been very stable and 
moving in the right direction, I might add, if we are to return 
to an environment where we have a rapid increase in rates, 
which we all hope does not happen, should there be careful 
assessment given by the committee to establishing some limit on 
the amount of GSE securities held by insured financial 
depositories in order to minimize adverse systemic consequences 
in an interest rate environment which none of us want to see 
occur?
    As you well know, today there is no such limit despite loan 
limits on borrowers and all other credit questions, despite 
limits on the prohibitions on holding triple A rated corporate 
securities. These appear to be traded without limit, and I am 
worried about the consequences of the scope today that now 
appears to exist in many of the insured institutions' 
portfolios.
    Mr. Greenspan. Congressman, we are obviously aware of the 
issue that you are raising. Remember that, at bottom, 
supervision and regulation in general looks at the safety and 
soundness of every institution. And while there are various 
different legal limits and the like, any time there is a 
concentration of anything, it gets our attention. And the 
reason basically is that the history of commercial bank 
defaults, and, in fact, defaults of other institutions, has 
been too heavily peppered with institutions with concentrations 
of something. And the trouble is that you could never in 
advance list all the things that people can think up to get too 
much of in their balance sheets.
    So it is far better to leave it, as far as I can see, in 
general, to the underlying process that we currently have. But 
it may be that there are discussions within our staff which I 
am not aware of that I would just like to quickly double check.
    Mr. Baker. Well, my question really went to the validity of 
a significant study on the matter, because it appears that the 
number of institutions and the amount held per institution 
continues to go up because the number of attractive 
alternatives for bank investment are fairly limited.
    Mr. Greenspan. I think that is correct. But I was curious 
to know whether or not we in fact had done something internally 
which I had not seen yet.
    Mr. Baker. Terrific. I may follow this up with some 
correspondence on the matter at a later time.
    Mr. Greenspan. Why don't you do that, and we will try to be 
responsive.
    Mr. Baker. Thank you very much.
    The Chairman. The gentleman's time has expired.
    The gentleman from Kentucky.
    Mr. Lucas of Kentucky. Thank you.
    Mr. Chairman, we have a long history as the American people 
of being real patriots in a time of war. In my view, the old 
adage of guns and butter still prevails in the larger sense. I 
think our American people would be willing to make some 
sacrifices in deference to the war. Given your knowledge of the 
economy, what would be a reasonable economic sacrifice or other 
sacrifice for our people to make at this particular troubling 
time?
    Mr. Greenspan. Congressman, that question came up in the 
Senate in a somewhat different form yesterday. Usually when we 
have been confronted with guns-and-butter-type issues, the 
ratio of defense expenditures to the GDP has been elevated, and 
indeed there were limited resources available to do both. And 
it is well known that in the Vietnam War, mistakes significant 
mistakes, were made in not recognizing that we were in fact 
trying to do too much. Fortunately, or unfortunately, depending 
on one's point of view, the level of defense expenditures to 
GDP is really quite low at this stage. In fact, only two years 
ago it was the lowest since before World War II. So we do have 
a $10 trillion plus economy and about $400 billion in defense 
expenditures, which by no means is a small amount, but it is 
not at this stage pressuring on other resources.
    So the question is, should we artificially do something? 
And I think not. I agree with you, I think the American people 
are remarkable in that respect, and their willingness to 
sacrifice for the Nation is what has really made us great, and 
there will be occasions when those issues will re-arise. I do 
not think, however, that in today's environment that there is 
any trade-off here that makes any realistic sense.
    We used to talk about tax surcharges or various other 
things in order to finance abnormal expenditures. But that 
doesn't exist as yet because the scale of our economy has 
become so large that even as significant an effort as we are 
embarked upon in the Middle East doesn't put the type of strain 
which, for example, the Korean War put on our economy and later 
Vietnam.
    Mr. Lucas of Kentucky. With these record deficits as far as 
the eye can see, as one of my colleagues said the other day, 
which was pretty thought provoking, we are sending our young 
men and women to war, and then if and when this is over--and 
when it is over, I should say, they are going to come home and 
their kids and their grandchildren can pick up and pay the 
debt. It is kind of like double jeopardy.
    Mr. Greenspan. Actually, it turns out that we do not really 
have a fiscal problem of moment until we get beyond the end of 
this decade largely because the underlying growth rate and the 
structure of interest rates at this stage keep deficits even 
under the President's program beyond these next two years in 
areas where the rate of debt-to-GDP does not move up in any way 
which suggests we are in an unstable system. But when you get 
beyond this decade, when you get into 2011, 2012, the ratio of 
debt-to-GDP begins to rise in a very worrisome manner. And as I 
said in my prepared remarks, because we know that with almost 
as high a degree of certainty as we can know anything in the 
area of finance, that it would be far better, as indeed the 
President's budget suggests, for us to prepare well in advance 
and phase-in in a manner which does not require significant 
discontinuities, because all of a sudden we are retiring a 
large part of our population from productive endeavors into 
retirement.
    The Chairman. The gentleman's time has expired.
    Could we--I am just trying--could we reset the clock here, 
the shot clock?
    The gentleman from the first State, Mr. Castle.
    Mr. Castle. It takes me a long time to shoot here. Thank 
you, Mr. Chairman.
    It is always a pleasure to see you. You have already 
answered the questions about dividend exclusion, and I think I 
understand where you are coming from, that it makes a great 
deal of sense but as stimulus from doing it now, this deficit 
issues, et cetera, that kind of thing. You may not know the 
answer to this first question, maybe we can go over it quickly. 
But if you change the taxation on dividends to a finite number, 
$1,000, $3,000, something of that nature, I mean, as soon as I 
saw that Bill Gates was going to get, what, over $95 million of 
Microsoft dividends, I thought that was in trouble as a tax 
cut. But what if you changed it to a smaller number? Does 
that--would that still have the effect of having corporations--
enough pressure on corporations to change the dividend policies 
to improve the corporate aspects of this? Or does it have to be 
a full exclusion, in your judgment? If you have given any 
thought to that.
    Mr. Greenspan. I must say to you, I would much prefer it be 
done fully, because it makes the issue clear and it lets the 
markets function in an effective way. I think you diminish the 
effect of the power of what the elimination of the double 
taxation does by doing it by capping, for example. Capping 
usually undercuts the economic effect far more than the 
presumed equity effect that it is employed to address tends to 
do. So I must say that you diminish the effect.
    Mr. Castle. And your preference on the corporate--deducting 
on the corporate level versus the individual?
    Mr. Greenspan. I would prefer that the deduction be at the 
corporate level, because it immediately impacts the trade-off 
between debt and equity. But over the long run I don't think it 
really very much matters, because if you put the tax credit--or 
you put the deduction at the investor level, it will not take 
very long before the pressure to increase dividend payments, 
and which this is all about, will occur. So whether it happens 
directly at the corporate level or through pressure coming from 
investors is more a matter of time than end result.
    Mr. Castle. Let me turn to housing for a minute. As you 
know, that is the one part of the economy that has held up, and 
I am sure you have studied that to a great degree, or you can 
call it a housing bubble. My first question is, and for those 
of us fortunate to own the houses but also got into the stock 
market a little bit late on tech stocks and essentially lost 
our shirts, this is a matter of some comfort. But there is a 
lot of discussion now by the pundits out there that we are 
going to--that the bubble is about to burst and we are going to 
have a housing problem. I was wondering if you have any 
thoughts about that, and if you have any thoughts and what 
would trigger that. I assume higher interest rates are one of 
the things that could trigger that. But what are your thoughts 
about the next few months, even few years, as far as the 
housing circumstances are concerned?
    Mr. Greenspan. Well, Congressman, one of the things which 
is really quite impressive is that when you measure the level 
of new construction additions of housing units, or housing 
starts, including mobile home shipments, which are not all that 
small, what you find is that it barely is in excess of the 
aggregate increase in occupied households or dwellings or of 
household formation. What that says is that after making 
adjustment for change in vacancies, you get an implicit 
demolition or reduction or replacement of the housing stock. 
And what is really fascinating is how small that number is, 
which suggests that we don't have a demand for housing which 
could all of a sudden slip because, with immigration as it is, 
having a fairly important impact on the number of new 
households, net, which are formed and that number not being all 
that far from the number of new homes that we create, we are 
effectively not building up a glut of excess housing. And under 
those conditions, one would presume, even though we have been 
having some fairly strong gains in home prices, it is our 
conclusion, without getting into the details of some of the 
internals of the market place, that it is unlikely that we are 
confronting a housing bubble.
    Certainly the analogy to stock market bubbles is 
inappropriate. Remember, one crucial thing is that if you sell 
your house, you have to move. And if you sell your house, there 
is also a very large transaction cost. That in and of itself 
prevents the type of speculative housing demand which leads to 
bubbles and contractions. So while it is not inconceivable--I 
mean, there are conditions under which that can happen, it has 
happened in other countries, and it has happened in small 
geographic areas, but we have such a broad expanse in our 
country that you cannot arbitrage housing demand in Portland, 
Maine with Portland, Oregon. And that matters. It is not like 
the stock market, where there is a single market and everybody 
is trading with everybody else. The housing market is a highly 
fragmentized metropolitan area-type market.
    Mr. Castle. Thank you, Mr. Chairman. Based on that, I will 
take my house off the market. I am just kidding, Mr. Chairman.
    The Chairman. The gentleman's time has expired.
    The gentleman from Kansas, Mr. Moore.
    Mr. Moore. Thank you, Mr. Chairman.
    Mr. Chairman, thank you for being here. Two years ago, we 
had a $5.6 trillion surplus, and there was discussion around 
Washington about the dangers of paying down the debt too soon. 
We don't have that problem anymore. Isn't that correct? That is 
really a concern we have now, is paying down the debt too soon.
    Mr. Greenspan. We do not.
    Mr. Moore. Okay. A lot of what we say in the discussion 
that is here, I think as much as we would like to believe this 
is science, a lot of this is kind of art, isn't it, trying to 
figure out what is going to happen in the future, making 
educated guesses?
    Mr. Greenspan. If you are talking about the economy in 
general----
    Mr. Moore. Yes, sir.
    Mr. Greenspan. ----and the decisions we make?
    Mr. Moore. Yes, sir.
    Mr. Greenspan. Yes. In fact, the one thing that we know 
with a great deal of certainty is that the future is of 
necessity unknown. There are very few things we know for 
certain, like inventories cannot go below zero. We know 
basically with some degree of certainty what the number of 
people will be in the population, say, 20 years of age and 
over, because they are already born and our experience with 
immigration and death rates is reasonably well contained, so we 
can make reasonably good forecasts.
    When you are dealing with the broader issues, on what the 
level of economic growth is going to be, what prices are going 
to be, what markets are going to be, we are looking at a very 
complex system. And it can only be handled conceptually if we 
abstract from that complex system and create models which are 
much simpler but which we presume will somehow reflect the 
broader forces in the economy. And the reason why there are 
differences amongst economists on forecasting is that this 
process of abstracting for what is the appropriate model to 
represent what is going on is, as you put it, I think, a state 
of art, something like that.
    Mr. Moore. You have been here several times in the 4 years 
I have been in Congress, and you have stated consistently, Mr. 
Greenspan, that one of your concerns was deficits and the 
growing national debt, which is now approaching $6.4 trillion. 
And I think you have been extremely consistent about that, and 
in fact today you were consistent again, mentioning your 
concern about deficits. I understand things aren't black and 
white here and there is a lot of gray area in the middle and 
that we need to try to sometimes negotiate our way through that 
gray area and find some compromises, but I think one of the 
facts that we can state here is, the President has projected 
for next year, fiscal year 2004 and for the next year after 
that $300-plus billion deficits and deficits beyond that as 
well for a while. And I think the other fact that we can 
certainly state is, as I understand it, the projected interest 
payment on the national debt for next year is about $174 
billion, which is a lot of money by anybody's standards. And I 
guess my concern is, and you have said here, that in the short 
run, in the short next few years maybe we are okay. But you 
have raised a red flag, I think, about what happens beyond 
2011, 2012, when the boomers start to retire. How do we 
reconcile all of this, this $174 billion debt and what I call a 
debt tax? Because we have to pay it every year as long as we 
have a national debt. And I don't see that national debt 
shrinking, and in fact I think it is increasing. So how do we 
get ready and maneuver our way into this 2011, 2012, and be 
able to take care of that when we are proposing more tax cuts 
and some more spending?
    I belong to the Blue Dog Coalition, and we try to be 
consistent like you have, and saying one of the things we need 
to practice is fiscal responsibility.
    Mr. Greenspan. I would say there are two things that have 
to be done. One is to put in place a process which enforces the 
decision making into making choices. The----
    Mr. Moore. May I interrupt just one minute? Because I would 
like you to answer this, too, and this is my last question and 
I will let you just finish then. You mention in your testimony 
the permanent tax cuts and what that might do to future 
deficits and debt. And I would like you, if you would, just to 
touch on that as well, and I am sorry to interrupt you.
    Mr. Greenspan. The first thing is to get a process in place 
which has two aspects to it. One is the PAYGO and discretionary 
caps which we have done over the last decade or so quite 
successfully. Second, which would be helpful, is to add an 
accrual system to our budgetary accounts, which will enable us 
to be able to anticipate exactly how our obligations are 
spinning out into cash requirements.
    But having done that, all that does for us is tell us what 
various alternative sets of choices there are. There is a limit 
to what revenue resources are available which are tied to the 
GDP. We have done extraordinarily well in that regard in that 
we have had a major acceleration in productivity, and that has 
raised the tax base quite considerably, which has enabled very 
substantial expansion of expenditures which I don't think has 
been terribly helpful, but the productivity has been crucial.
    We can accelerate further, but it is not as though we are 
back in 1990, when the productivity rate was 1 percent, well 
below the historical average, and then we moved it up quite 
appreciably in the latter part of the 1990s, and currently. So 
our leverage to go higher is limited, and therefore we do have, 
even under the most optimistic of assumptions, a limit to what 
our resources are.
    We do not, I might just say parenthetically, have the 
capability of a country which is not at the cutting edge of 
technology all of a sudden obtaining all sorts of technology 
and having its productivity growth rate rise sharply, its tax 
base rise sharply, and have a great fiscal capability. We are 
at the cutting edge, and history tells us that there are limits 
to how far we can go, and we must stretch them. In other words, 
that is the reason I think flexibility is so important.
    But this is where the issue of permanent comes in. As a 
matter of principle, you cannot have permanent anything, either 
tax levels or spending programs, because it is quite 
conceivable that if you have either tax rates or entitlements, 
it is quite possible that the net of those effects may be a 
larger drain on our real resources than we actually have 
available. Therefore, I have concluded--and I indicated in my 
prepared remarks--that we do need triggers or sunset 
legislation to enable us to adjust in the event that we find 
that programs previously put in place, either a tax structure 
or an expenditure program, which combined is in excess of our 
capability.
    So we need far superior fiscal mechanisms far beyond what 
we used to deal with 40 years ago when everything--virtually 
everything--was discretionary and all you had to do was make 
annual appropriations and that was adequate. We now have 
gravitated to the point where two-thirds of our system is 
essentially nondiscretionary and on automatic pilot, and we 
have to make certain that the fiscal vehicle doesn't run off 
the road because it is a new ballgame. We cannot deal with it 
the way we did in previous years.
    The Chairman. The gentleman's time has expired.
    The gentleman from California, Mr. Royce.
    Mr. Royce. Thank you, Chairman Oxley.
    Chairman Greenspan, welcome. I wanted to ask you about some 
testimony you made in the Senate last year in April. You said 
before the Senate Banking Committee that while deposit 
insurance contributes to overall short-term financial stability 
and protection of small depositors, it also induces higher 
risk-taking, resulting in a misallocation of resources and 
larger long-term financial imbalances that increase the need 
for government supervision to protect the taxpayers' interests. 
You concluded by saying: Any reforms to deposit insurance 
should be aimed primarily at protecting the interest of the 
economy overall and not just the profits or market shares of 
particular businesses, and that it is unlikely that increased 
coverage, even by indexing, would add measurably to the 
stability of the banking system today.
    I want to ask if your underlying position of skepticism 
toward the necessity and net benefit of increasing deposit 
insurance coverage levels has changed drastically, or do you 
still view an increase in these levels as a solution in search 
of a specific problem which would warrant creating the resource 
misallocations and long-term imbalances that you see as 
inevitably stemming from their increase? In other words, do you 
believe that large increases in municipal and retirement 
account coverage are warranted?
    Mr. Greenspan. All I will say to you, Congressman, is I 
stand by the testimony that I gave last year, and I have seen 
nothing of which I am aware to alter the evaluation that we 
have had with respect to it.
    Mr. Royce. Well, I thank you for that answer, Chairman 
Greenspan.
    And I thank you, Mr. Chairman.
    The Chairman. Does the gentleman yield back? The gentleman 
yields back.
    Mr. Royce. I yield back the balance of my time.
    The Chairman. The gentleman from Texas, Mr. Hinojosa.
    Mr. Hinojosa. Thank you, Mr. Chairman.
    Thank you Chairman Greenspan for coming to visit with us. I 
am not certain whether or not you are familiar with matricular 
consulars. The matricular consular is a water-sealed photo 
identification card issued by the Mexican government to Mexican 
nationals that complete an application form in person at any of 
the 47 Mexican consulate offices in the United States and 
submit a certified copy of a birth certificate, present an 
official picture I.D. issued by any Mexican or U.S. authority, 
and show proof of residence in the consular's district by 
presenting a phone, rent, or power bill. Are you familiar with 
these matricula consulars?
    Mr. Greenspan. I have read it in the newspapers, but that 
is the extent of my knowledge.
    Mr. Hinojosa. I come from an area that is trying to 
increase trade with Mexico. We have millions of Mexican 
nationals who are working in the United States and need to have 
the opportunity to open a bank account. At least a third of 
them do not have a bank account, and many of those individuals 
are trying to send money back to their families and pay 
exorbitant amounts to have that done. All this to say that they 
need a healthy and intelligent alternative to payday lenders, 
wire transfer services, and check cashers in general. And the 
question is, should matricula consulars be considered valid 
forms of ID for the purposes of opening a bank account. This 
committee certainly has jurisdiction on that and would like to 
have your thoughts on it.
    Mr. Greenspan. Well, Congressman, I don't know enough about 
the pros and cons of various different alternatives. But I 
certainly will, if you would like, look into it.
    Mr. Hinojosa. May I send something to you in writing and 
see if maybe you and your staff could look into it? Because I 
think we need to think out of the box. I think that we need to 
make it easy for individuals, particularly Mexican nationals 
with matricular consulars, to be able to open up bank accounts 
instead of leaving money in places at home where it can be 
stolen, or to violence because they are forced to carry such 
large sums of money with them. I would like to include for the 
record legislation and a press release on matricula consulars.
    Mr. Greenspan. Well, why don't you send us a series of 
questions, and we will try to respond expeditiously to them.
    Mr. Hinojosa. I would be happy to do that. And a last 
question. As you know, there was some debate last year in this 
committee as to whether financial institutions, specifically 
credit unions, should be allowed to be privately insured. And 
over the past couple of years we have seen an increasing number 
of credit unions drop their Federal insurance and opt for 
private insurance. With the strength of all of the Federal 
insured systems such as the Bank Insurance Fund, the Savings 
Association Insurance Fund, and the National Credit Unions 
Share Insurance Fund, is this something that we should be 
concerned with at this time?
    Mr. Greenspan. Well, I haven't been aware that the private 
insurance has taken hold, because, as you recall, our 
experience over the years with private insurance has not been 
very impressive. And one of the reasons is that deposit 
insurance is a very unusual sort of insurance which is very 
difficult for a private insurer to successfully market without 
exorbitantly high insurance premiums. And in the past, various 
different types of insurers found that out to their dismay and 
bankruptcy, I might say.
    I am not aware of the extent to which it has re-emerged in 
credit unions, but I certainly will be glad to look at it and 
again respond to you quickly.
    Mr. Hinojosa. Anything we can do to protect the depositors 
as Congressmen is very important to me, and I would love to get 
your thoughts on what we should be doing in this committee to 
improve that, and I thank you for your response.
    And thank you, Mr. Chairman.
    The Chairman. The gentleman's time has expired. The 
gentleman from Texas, Mr. Paul.
    Mr. Paul. Thank you.
    Welcome, Chairman Greenspan. I have a question relating to 
the speech that you gave at the Economic Club in New York in 
December, because you introduced your speech with three 
paragraphs dealing with gold and monetary policy. And you made 
some very pertinent points about gold, indicating that from the 
year 1800 to 1929, the price levels were essentially stable 
under gold. And after we got rid of the gold restraint on the 
monetary authorities, prices have essentially increased by over 
tenfold since that time. But you follow that by indicating that 
inflation, when it was out of control in 1979, monetary policy 
changed direction and they were able to take care of inflation, 
more or less conquer inflation, and that now you are more or 
less not concerned about inflation, that your concern really is 
about deflation.
    And it was interesting that you brought up the subject of 
gold, of course, and there is a lot of speculation as to 
exactly why you did this and what this means. But my question 
deals with whether or not we should forget about inflation, 
whether or not this has been dead and buried. Federal Reserve 
credit for the last 3 months has gone up at the rate of over 28 
percent. Inflation is a monetary event, so therefore we have 
monetary inflation. The median CPI is almost going up at twice 
the rate as the CPI, close to 4 percent. The Commodity Research 
Bureau Index is going up, in the last 15 months over 35 
percent. Gold is up 36 percent over 18 months or 15 months. Oil 
is up 60 percent. So we have a lot of inflation. And we have 
medical care costs skyrocketing, housing costs going up, the 
cost of education going up, the cost of energy going up. And to 
assume that we shouldn't be concerned about inflation, all we 
can do now is print money. I would suggest that this is what we 
have been doing for 3 years, the monetary authorities. You have 
lowered the discount rate 12 times, and there is still no signs 
of good economic growth. So when will you express a concern 
about an inflationary recession? Because that to me seems like 
our greatest threat, because that has existed before. We even 
had a taste of it in the 1970s. We called it stagflation.
    So I would like you to comment on that as well as follow up 
on your comments on just why you might have brought up the 
subject of gold at the New York speech.
    Mr. Greenspan. First of all, we have not lessened our 
concerns about inflation. Indeed, our general presumption is 
that we seek stable prices, and stable prices mean no inflation 
nor deflation.
    The reason I raised the issue of gold is the fact that the 
general wisdom during the period subsequent to the 1930s was 
that as we moved to an essentially fiat money standard, that 
there was no anchor to the general price level. And indeed, 
what we subsequently observed is, as you point out, a very 
marked increase in general price levels, indeed, around the 
world as we removed ourselves from commodity standards, and 
specifically gold.
    I had always thought that the fiat money system was 
chronically and inevitably an inflation vehicle, and indeed, 
said so repeatedly. I have been quite surprised, and I must say 
pleased, by the fact that central bankers have been able to 
effectively simulate many of the characteristics of the gold 
standard by constraining the degree of finance in a manner 
which effectively has brought down general price levels.
    The individual price levels to which you allude are 
certainly correct. I might say the gold and the oil issue are 
clearly war-related and not fundamental, but we still are 
looking at the broadest measures of average inflation, and the 
best statistics that we have still indicate very low inflation 
with no evidence of an acceleration. That does not mean, 
however, that we believe that inflation is somehow 
inconceivable any time in the future. We will maintain a 
considerable vigilance on the issue of inflation, and are 
looking all the time for evidence of an emergence of inflation, 
which at this particular time we do not see. But that does not 
mean that we believe inflation is dead and that we need not be 
concerned about it. We will continue to monitor the financial 
system as best we can to make certain that we keep prices 
stable. They are stable now, and we hope to be able to continue 
that indefinitely into the future.
    The Chairman. The gentleman's time has expired.
    The gentleman from Missouri, Mr. Clay.
    Mr. Clay. Thank you, Mr. Chairman.
    Mr. Greenspan, thank you for being here. I am somewhat 
confused by the reports that I read and would like some 
clarification. You have opposed budget deficits that are to 
continue for the long term, and you have had an equal distaste 
for surpluses that you thought would compete in the private 
markets. You supported the Bush 2001 tax cut, believing that it 
would control budget surpluses that would continue for years. 
Maybe the tax cut worked better than expected. We no longer 
have projected surpluses; all we have now is deficits. The tax 
cut contributed greatly to this adverse situation with the 
budget deficits. Presently, without any budget surpluses in 
sight, we have another tax cut proposed that will push deficits 
even higher and extend them for untold numbers of years.
    My question is, will you state your position on the 
proposed $1.4 trillion Bush tax cut and inform the committee on 
its ramifications on the deficit and the national debt?
    Mr. Greenspan. Well, I have not commented on any of the 
proposals in general except those which are specifically 
economic issues, and I have stipulated that I would have hoped 
that back in September we would have had a PAYGO system 
continuing and that it would be continuing today. And I would 
view any proposal that occurs with respect to either taxes or 
expenditures be first applied through the PAYGO system.
    We have been talking about taxes all along, and nobody has 
mentioned spending. There is an awful lot in the way of 
spending initiatives out there which, if we had PAYGO rules, 
would require that they go through the same process to maintain 
budget neutrality as best we can.
    So as far as I am concerned, from the point of view of the 
central bank, which is interested in the total financial system 
and is very crucially interested in the level of federal debt 
and the degree to which it preempts private debt issuance, that 
is a major issue which is directly in areas which we find 
important for monetary policy. The question of how you regulate 
taxes versus expenditures and what expenditures you are having 
to put forth is something which, as I mentioned before, is, in 
my judgment, one of the crucial roles of the Congress, because 
it is the only mechanism that we have which enables the will of 
the people and their priorities to be constructed in our 
various budgetary forms.
    The President makes recommendations insofar as he can infer 
what he thinks is the best for the American people. It is the 
Congress which disposes with the obvious final resolution of 
the decisionmaking by whether the President signs or vetoes a 
bill, which you can then override. So that, to me, is a process 
which we just ought to think about because we are abandoning 
that.
    Mr. Clay. Well, what do you think about the reversal in 
fortunes of the U.S. budget as far as us two years ago having a 
$5.5 trillion projected surplus and now looking at a projected 
deficit that grows every day?
    Mr. Greenspan. Well, one of the reasons that I was in favor 
of a tax cut two years ago was to prevent the accumulation of 
private assets by the Federal Government, which I think is a 
very bad idea and still think it is a very bad idea. Remember, 
at that time there were a number of tax cuts on the table. It 
wasn't just the President's tax cut. The issue here is if the 
President's tax cut didn't pass, another very significant tax 
cut would have passed, which I would have thought would have 
been fine, because it was needed to take the surplus off the 
table, and I think clearly that happened.
    What also happened was a major, 50 percent, decline in 
stock prices which had the effect of very markedly reducing 
revenues beyond what the Congressional Budget Office had 
projected when they made that $5.6 trillion surplus projection. 
They recognized that there were risks in those longer-term 
forecasts. But in the event it came out to the extreme end of 
probabilities, it was very unexpected by both the CBO and OMB 
analysts.
    The Chairman. The gentleman's time has expired.
    The gentlelady from Illinois, Mrs. Biggert.
    Mrs. Biggert. Thank you, Mr. Chairman.
    Chairman Greenspan, I know that the Fed is very involved 
with the ongoing Basel negotiations for new risk based capital 
standards. And as you know, Chairman Oxley and Ranking Member 
Frank are particularly concerned with the proposed new capital 
standards for operational risks, and we are going to be looking 
into this issue in depth in future hearings. And I don't want 
to ask you to comment specifically on the operational risks 
section of the rules, but could you please describe to us how 
the Federal Reserve and other bank regulators are factoring 
into their Basel positions such factors as the impact of the 
rules on U.S. banks of all sizes and on the U.S. economy?
    Mr. Greenspan. I can't comment on exactly how other 
regulatory authorities will address the Basel II implications. 
But from the point of view of the United States, for the vast 
majority of American banks, Basel II is irrelevant. It is a 
specific set of rules which endeavors to address the fact that 
we are getting ever-increasingly large global types of 
international institutions employing very sophisticated risk 
evaluation techniques and models.
    The vast majority of American banks, as you know, are 
small, are not involved in any of this, and Basel I will, for 
all practical purposes, continue to be the operative rules for 
those banks. Even those banks, if they so choose, can apply 
effectively for regulation under the Basel II procedures, which 
essentially endeavor to capture the usefulness of these new 
risk evaluation models, which improve immeasurably the 
capability of large institutions to contain risk. But in so 
doing, what the supervision must then turn to is a much more 
sophisticated approach in evaluating how the risk models are 
constructed, what the nature of supervision is, and what the 
nature of disclosure is of these various different types of 
institutions.
    But I want to emphasize we are dealing with a handful of 
American institutions, and unless and until individual, smaller 
banks wish to do the same thing--which they can legally do--it 
doesn't apply to them.
    In one sense, you have to remember that a small commercial 
bank has very considerable control over its risk management 
systems. It knows every borrower, as I mentioned before, it 
knows the history. It is able to get a far more sophisticated 
evaluation of any individual loan than a very large commercial 
bank using these mathematical techniques to make a judgment on 
a loan. I would much prefer to have the small bank appraisal, 
because you are really looking at the core of what is being 
done. Because that is not feasible with a very large 
institution, you have to fall back on more automated types of 
risk evaluation procedures, which is what they are doing. But 
there is no way that in any individual loan the quality of 
judgment that is made on whether that is a good loan or a bad 
loan can be done better mechanically in the way that these risk 
management systems do than a small banker fully familiar with 
the credit history of a particular borrower and knowing what 
his business is all about can do.
    Ms. Biggert. So you don't think that a medium-sized bank or 
a small bank will think that these big banks are getting so 
much benefit that they either need to consolidate with another 
bank or that they would need to just voluntarily opt-in to 
doing the same thing?
    Mr. Greenspan. I think not. I mean, if indeed you could 
formalize a credit evaluation through the mathematical 
techniques which we now have available, which is superior to 
the capability of an individual banker in a small town making a 
judgment on the loan, then, yes, I would agree with what you 
are saying. But that is not what the issue is.
    The Chairman. The gentlelady's time has expired.
    The gentleman from Massachusetts, Mr. Frank.
    Mr. Frank. Mr. Greenspan, on the proposal for a tax cut now 
of $674 billion for the next period, the current tax cut before 
us, am I correct your position is that it should not be adopted 
outside of the PAYGO rules, specifically unless you were in the 
situation where it would take 60 votes in the Senate? Is that a 
correct understanding of your position?
    Mr. Greenspan. I would say that I am somewhat distressed 
that the PAYGO rules were allowed to expire.
    Mr. Frank. So you would not have us adopt a major piece of 
either the budget or anything else, including a tax cut, until 
we have reinstated PAYGO?
    Mr. Greenspan. Tax cut or expenditure program. I would 
prefer that that had continued and hopefully would put in place 
before----
    Mr. Frank. It would take 60 votes. So we should not do 
either expenditure or tax cut decisions this year until they 
get back to a 60-vote rule in the Senate?
    Mr. Greenspan. Well, the 60-vote rule still occurs I think 
through April, as I recall.
    Mr. Frank. Well, but you----
    Mr. Greenspan. Yes, the statement that you----
    Mr. Frank. Don't be the Senate Parliamentarian. Be the 
Chairman of the Fed. In principle, what do you think?
    Mr. Greenspan. The answer is yes.
    Mr. Frank. Good. Now, that would mean then that any new 
significant expenditure or new significant tax cut would have 
to be offset, correct?
    Mr. Greenspan. Yes, unless obviously emergency issues come 
up or other various forms of exemption under the procedures 
that have been involved.
    Mr. Frank. Now, the question I have is this about the $674 
billion. You said that the tax cut in 2001 seemed reasonable to 
you at that level. And what then happened was the economy, 
picking the stock market, went to the low end of everybody's 
projection. Is that what you said?
    Mr. Greenspan. That is correct.
    Mr. Frank. If you were back in 2001 and you knew that the 
tax--that the projections were to go to the low end, would that 
have affected the judgment? I mean, it is not anybody's fault. 
But would that have affected the judgment?
    Mr. Greenspan. I frankly don't know.
    Mr. Frank. All right. But then let me ask you this 
question. Having said that clearly the projection of the 
revenues went to the low end, the tax cut cost us more than we 
thought it was going to in some ways, doesn't that argue 
against a further large tax cut now? I mean, having 
miscalculated doesn't mean we are going to miscalculate again, 
but if the fiscal picture is considerably worse than people 
reasonably could have thought it would be, where is the 
argument for now a further tax cut?
    Mr. Greenspan. Not necessarily. Because the types of tax 
cuts we are talking about--let me stay with the double taxation 
of dividends.
    Mr. Frank. No. I want the whole package.
    Mr. Greenspan. I will come to the whole----
    Mr. Frank. I only have 5 minutes. Come on.
    Mr. Greenspan. I understand that. The principle I am trying 
to raise is that you need to make judgments when you are 
looking at long-term tax and spending policy; what, for 
example, the elements of the tax policy do to the GDP and 
therefore the revenue-raising capacity of the economy. They are 
not all equal. And I happen to think that the types of programs 
which have been brought forth which are in the President's 
program are of the type of----
    Mr. Frank. I am disappointed. I want to be very serious 
here.
    Mr. Greenspan. Why are you disappointed? I have----
    Mr. Frank. Because I think what has happened is this. I 
think when you restated yesterday, quite honestly, your long-
held positions on the deficit, and when you disagreed with 
those who pooh-poohed deficits, that got presented in this 
morning's papers as being critical of the proposal that the 
President put forward. And my strong impression today is that 
you are seeking now to find the maximum points of agreement to 
diminish the impression created that your longstanding 
positions would be somewhat negative. You will have a chance to 
answer. I just want to throw in one----
    Mr. Greenspan. But may I respond to that?
    Mr. Frank. I just want to finish. Let me finish the 
question.
    Mr. Greenspan. Sure.
    Mr. Frank. And then I am through. You keep talking, and 
this is part of the problem. You say, well, we have no problem 
until 2010 or 2011, and then we have a problem. I mean, that is 
probably what you are saying. But the world is not divided into 
two separate wholes. 2008 leads to 2009 and 2010 and 2011. In 
other words, you are saying Social Security and Medicare will 
be serious problems for us 10 years from now, but it is 
irrelevant if we increase deficits between now and then. The 
more we increase deficits between now and then, the more people 
who, out of a conservative ideology, want to put pressure to 
reduce Social Security and Medicare will be able to argue. And 
I am afraid that is the position I infer from you.
    Mr. Greenspan. No. The issue basically is this, that if you 
are going to start with a question of having an aggregate 
capacity, a revenue capacity in which to fit tax cuts and 
expenditure increases, then you are dealing with an issue of 
making choices amongst various different elements if the total 
of all of the programs you are dealing with exceed, as they 
always do, the aggregate amount of revenue capacity in the 
system. What I am saying to you is this: The way you formulated 
what is attributed to me is incomplete. I am not saying that--
let me finish.
    Mr. Frank. Incomplete, but not incorrect.
    Mr. Greenspan. Well, let me state it, and I don't know 
whether or not it is incorrect. I am stating to you the 
following: I am saying you cannot get an effectively full 
evaluation of whether you should be cutting taxes or making 
expenditure programs without knowing the impact of that on the 
revenue base. I don't know what the impact is, but I am 
basically saying that to make a full judgment about any 
particular proposal, you need to have a judgment one way or the 
other of the extent to which it affects the tax base. And, as I 
said earlier this morning, in my judgment; the elimination of 
the double taxation of dividends will have a significant 
although admittedly indeterminate impact on the flexibility of 
this economy, its growth rate, and therefore its degree of 
revenue. Not including that in your evaluation of making a 
judgment of how to balance various elements of taxes and 
spending I do think is incomplete.
    The Chairman. The gentleman's time has expired.
    The gentleman from Texas, Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman.
    And Chairman Greenspan, thank you for your testimony today. 
As part of your testimony, your prepared remarks, I believe you 
said that if spending growth were to outpace nominal GDP, 
maintaining budget balance would necessitate progressively 
higher tax rates that would eventually inhibit the growth in 
the revenue base on which those rates are imposed.
    My question, Mr. Chairman, is, isn't that the recent 
history of our country if you look back 5, 10, 15 or 20 years, 
that indeed the growth of government has outpaced the growth in 
GDP? And if that is true, and this trend continues unabated, 
given that the average American family has a 40 percent tax 
burden, almost at its historic high between its local, State, 
and Federal component, I am curious about your opinion on what 
the long-term impact will be on our economy and on family 
income.
    Mr. Greenspan. Well, Congressman, we are fortunate in the 
sense that currently the level of debt to the public is at a 
reasonably low level historically. That is, we came down quite 
considerably from higher levels and we are now in the low-to 
mid-30 percent of debt to the public as a percent of the GDP. 
So we are in the position where the debt load as represented by 
the amount of debt plus interest--interest being low because 
interest rates are low--is a great burden on the American 
public relative to what it has been in previous periods. So it 
is not--it is not a progression of increasing percents of 
government expenditures to GDP, because in fact the trend has 
been largely flat.
    As I stipulated in my prepared remarks, there has been a 
big shift from discretionary spending to nondiscretionary 
spending, but the numbers have stayed in the area of 18, 20 
percent, 21 percent on occasion. So the evidence is that we 
have not been having government expenditures growing faster 
than the GDP. It is true that we have had nondefense 
expenditures growing faster than the GDP and especially 
nondefense discretionary. But overall the decline in defense 
expenditures has opened up a much larger capacity for the use 
of federal revenues for nondefense purposes than we have had in 
the past.
    Mr. Hensarling. You spoke in your testimony about the 
desirability of certain budget constraints such as the PAYGO 
rule sunset provisions. In the President's economic growth 
package that he has proposed as part of that package is the 
goal of restraining the growth of government spending to no 
more than the growth in family income. Let us use for the 
moment--let us have an overactive imagination and believe that 
this Congress could actually achieve that goal of restraining 
government spending to the growth in family income. Do you have 
a thought of what the long-term impact on the economy would be 
if we could achieve that budget discipline?
    Mr. Greenspan. Well, strangely enough, we actually have 
done that in the sense of the aggregate expenditure because, as 
I just mentioned before, of the very dramatic decline in 
defense expenditures, going back say 50 years, we have been 
able to keep aggregate Federal Government expenditures constant 
relative to incomes. However, that is going to change. It is 
inevitably going to change because of the fact, as I mentioned 
before, with defense as low as it gets, it can't go any lower. 
And with the retirees after 2010 or 2012, we have a very 
substantial projected increase in nondefense expenditures.
    Mr. Hensarling. As we see different policies to promote 
economic growth and obviously a rollback in marginal rates as 
part of the President's program, we can debate what might 
happen in the future, but if we look to the past, hasn't the 
history of our Nation been, in the 1980s, the 1960s and 1920s, 
that indeed when we roll back these rates that Government 
revenue and GDP revenue grew?
    Mr. Greenspan. Would you repeat that again? I didn't quite 
get it.
    Mr. Hensarling. Isn't the history of our Nation when we 
roll back marginal rates, as we did in the 1980s, in the 1960s 
and the 1920s, that revenues to the government actually 
increased and that GDP grew?
    Mr. Greenspan. Let us put it this way. It depends on the 
conditions. It is very rare that you can reduce a tax rate and 
end up with more revenue. It happens on occasion, but it is not 
the general case, and I don't think you could argue that in the 
aggregate sense in any of those particular episodes that it 
invariably happened. But it is certainly the case that if you 
have various taxes which inhibit growth and inhibit capital, it 
is quite possible that reducing those could create a rise in 
the tax base greater than the cut in taxes and therefore you 
would get more revenues. That is not the general case, and I 
think each case has got to be evaluated on its own.
    The Chairman. Gentleman's time has expired. The gentleman 
from Pennsylvania, Mr. Kanjorski.
    Mr. Kanjorski. Thank you, Mr. Chairman. Mr. Chairman, the 
President in his State of the Union Address just several days 
ago said we will not pass along our problems to other 
Congresses, other Presidents or other generations, and that was 
in the very early part of his speech. And quite frankly, when I 
heard him say that, I became quite pleased with his intentions 
as reflected by that statement. But then as he went on to 
develop his plan for America in his State of the Union Address, 
and particularly with his tax policies, it seems to me that the 
President is saying something very interesting. He is saying 
that the Congress should reduce this double taxation on 
dividends. And I for one can understand why people would 
support reduction of any taxes that are possible. And if these 
are economically retarding-type of taxes to our economy, as 
your recent answer seemed to indicate, that these are the types 
of things we can reform or tailor to stimulate the economy 
long-term but with the intention of not doing away with the 
revenue source and get out of balance with the budget 
considerations. But the President's budget reflects the fact 
that, yes, he wants to make this reduction in dividend taxes 
and make it up in no other side so that we just basically 
increase the deficit accordingly. And for a relatively long 
period of time, certainly as long as the budget projects, the 
budget will be in deficit and major deficit.
    And that brings to my mind--I don't know how long the 
President can continue to serve, but I think only 6 more years, 
and I do not see a balanced budget in his projections within 
those 6 years. This Congress only serves for 2 years, and 
clearly the President recognizes there will be major deficits 
for the remaining 2 years. And as we look at a minimum of $300 
billion deficit and I think closer probably to $500 billion if 
you consider the fact that we are taking all of the Social 
Security overpayment and misdirecting it to operational 
expenses and not accounting for the expenses of the war, which 
will be at least $50 billion to $100 billion, I think we can 
realistically conclude that at the end of this coming year and 
next year we will be in excess of $500 billion of real deficit. 
And then our Congress will be over and we will be halfway, or 
at the end of the President's first term. If he doesn't go on 
to a second term, there will be a new President and passing 
that tremendous debt increase on to next generations.
    So I have concluded in my own mind, and I am wondering what 
your conclusion is--wasn't the State of the Union Address and 
this statement by the President of his policy a rather 
disingenuous view to put to the American people that you can 
have this tax cut now, and as Mr. Frank said, we can fight two 
wars and give you the third tax cut and there aren't any long-
term economic consequences to the economy as a whole and to the 
fiscal responsibility of the action of the Federal Government 
as a whole over the next decade or two? What is your position 
on that?
    Mr. Greenspan. Congressman, it depends on what the 
President does next because there is an extraordinarily 
accurate, in my view, evaluation of the long-term budget 
outlook in the President's budget, and there is the issue of 
the sustainability of the budget in the budget document with a 
fairly sophisticated analysis. So I read the combination of the 
President's State of the Union plus what is in the President's 
budget as that there are new policies to come which effectively 
reconcile the issue that you are concerned about. That is the 
way I would read it.
    Mr. Kanjorski. Well, you said that we can get control of 
the fiscal responsibility of the country and the budgetary 
positions by either not cutting revenue or counterbalancing a 
loss revenue in the dividend reduction or we can cut spending, 
and I would tend to think that the emphasis of the President's 
budget is cutting the expenditure side. But don't you think it 
is both politically and intellectually disingenuous for this 
administration and the majority of this Congress to fail now to 
tell the American people the consequences of cutting these 
expenditures in order to eventually get to a balanced budget? 
How can he say we are going to spend more money on education, 
on health, on the military and all these other expenditures and 
not be honest telling the American people so that they have a 
decision process to make? If they want to do away with the 
double taxation of dividends, they have to be willing to give 
up the solution of the health problems, the education problems, 
the military problems of this country.
    Mr. Greenspan. I can't speak for the President and won't. 
My impression, basically, is that many of these issues are 
discussed in some detail in the budget. And I presume that when 
you see that sort of thing in budgets, it is usually indicating 
what the thrust of an administration's fiscal policy is. And I 
would assume that he will make it clear as the time goes on. I 
have no way of knowing what specifically in each case the 
particular programs direct to, but he does--there is no doubt 
in my mind, reading through the budget in full detail, that 
there is full awareness of all of the various concerns that you 
raise in the budget document itself.
    Mrs. Kelly. [Presiding.] Mr. Garrett?
    Mr. Garrett. Thank you, and I appreciate the opportunity to 
be with you and ask you a couple of questions today and I will 
just have two short ones along the lines with regard to the 
issues on the deficit. We had the opportunity this past week to 
have some administration officials come before the Budget 
Committee, and I think they were saying things generally along 
the line you were when concerns were raised as we look forward 
on the deficit. And one of the responses we had was similar to 
what you mentioned just about 5 minutes ago with the comment 
that things have to be put into perspective as far as the 
deficit as a percentage of the GDP. But the question that 
followed on that was, then why was there as much of a concern 
just 6 or 7 years ago back in the mid-1990s on the deficit if 
as a percentage of the GDP the deficit was around at the 2.5 
percent level at the same time back then? What is the 
difference in the factors? Since we are staying constant, as 
you said, as a percentage, why we should be more concerned back 
then than we are now?
    Mr. Greenspan. The crucial issue really gets down to simple 
arithmetic. If you have debt as a ratio to GDP, say, in the 
mid-30 percent, which is where it is now, and you have average 
interest rates as a process, you will find that arithmetically 
if the ratio of the deficit to the GDP is about 2 percent, that 
is equivalent to the ratio of debt-to-GDP being constant. As 
you can see, if the budget is in balance and GDP is rising and 
the debt by definition is not changing, the ratio of debt-to-
GDP will go down. Put it another way, for the debt-to-GDP ratio 
to be stable, it would be consistent with a modest deficit as a 
percent of the GDP.
    So the question isn't whether or not in the past we were 
concerned or not concerned. There were many times in the past 
when we weren't concerned when we should have been concerned. 
It is really a question of moving forward in time. If you take 
the President's program as it stands, you have modest deficits 
after the next two years, which are consistent with a level of 
debt-to-GDP, which is not significantly different from where it 
is now. But as we go beyond the turn of the decade, 
expenditures rise quite significantly and the ratio of debt-to-
GDP begins to move up. And when that begins to happen, you have 
an unstable system with consequences which are difficult to 
judge, and it is that period which has to be addressed.
    And one of the reasons I have said it is none too soon to 
start thinking about the path of how we get there is that it is 
a fairly significant change that occurs as the baby boomers 
retire.
    Mr. Garrett. Thank you very much, and the other portion of 
the question is the spending side, which I guess you alluded to 
a couple of minutes ago. You were saying we have sort of 
bottomed out on the defense side and then leaving a smaller 
percentage as far as the discretionary side, and we are within 
the 4 percent figure that we mentioned over here.
    Mr. Greenspan. What I am basically saying is the fact that 
over the past 50 years the ratio of expenditures-to-GDP has 
been constant, has masked a trend towards nondefense 
expenditures as a percent of GDP which has actually been rising 
quite significantly. And the problem was, even without 
September 11, we probably would have found that the ratio of 
spending-to-GDP was going to start to rise, not a great deal, 
but at least start to rise. And the trend is changing because 
the defense budget has gone from a fairly significant percent 
of GDP down to 3 or 4 percent.
    Mr. Garrett. Where we should be concerned is on the 
mandatory side, especially in light of the administration's 
proposal where we are significantly adding on to that portion 
of the budget?
    Mr. Greenspan. Yes, we should be concerned about anything 
which is mandatory.
    Mr. Garrett. Thank you.
    Mrs. Kelly. Mr. Sanders?
    Mr. Sanders. Thank you, Madam Chairman, and thank you very 
much, Chairman Greenspan, and I look forward to working with 
you as the ranking Member of the Financial Institution 
Subcommittee.
    Mr. Greenspan, I always enjoy your presentation, because 
frankly I wonder what world you live in. It is not a world in 
which you engage with working people who are struggling harder 
than ever to keep their heads above water, with workers who 
have lost their jobs, with elderly people who can't afford 
prescription drugs. And maybe, and I say this respectfully, you 
might want to stop going to all the black tie dinners and 
hanging out with the CEOs and come and talk to the middle class 
working families of this country, because I think if you do 
that you are going to find that your world view and your 
economic approach is dead wrong and has caused devastating 
impacts for millions of people.
    Mr. Greenspan, you have been pushing for years for 
unfettered free trade, for energy deregulation, which has given 
us Enron, for huge tax breaks for the richest people in this 
country. You have opposed any increase in the minimum wage, and 
in fact the last time you were here you told us you didn't even 
believe in a minimum wage. Your policies call for massive 
cutbacks in government programs, such as Social Security, 
Medicare, Medicaid, veterans needs, affordable housing and 
education. In my view, your policies have been one of the 
reasons why the middle class in this country is being 
decimated, why more and more Americans are being pauperized and 
why the gap between the rich and poor is growing wider. In my 
view, you owe millions of Americans who have lost their jobs or 
who today are working longer hours for low wages an apology, 
and it is high time you rethought your extreme right wing 
ideology. In your position, you are supposed to represent all 
Americans and not just the wealthy and the CEOs of large 
corporations.
    Mr. Greenspan, let me introduce you to some reality. Since 
January, 2001, 1.7 million jobs have been lost and we have 8.5 
million Americans today who are unemployed. In 2001, 1.3 
million Americans slipped below the official poverty line. Over 
the last few years, trillions of dollars have been lost on the 
stock market and millions of workers today in this country have 
got to work beyond the time they originally planned to retire. 
In the last 2 years the U.S. has had the highest rate of 
bankruptcy cases in history. In 2001, the number of Americans 
without health insurance rose by 1.4 million, and that number 
continues to rise. Today as a result of the policies being 
proposed by the Bush administration, it is likely that millions 
of workers are going to see a significant reduction in the 
pensions that they had been promised by their employers.
    Now you in your testimony talked about expanding, quote-
unquote, the liberalized global economy, which you call an 
ongoing success. This year we are going to have a $400 billion 
trade deficit, including a $100 billion trade deficit with 
China. In the last 2 years we have lost 2 million decent paying 
manufacturing jobs. At 16.5 million manufacturing jobs, we are 
at the lowest ebb position we have been in in 40 years, and you 
tell us that that is an ongoing success. If we have more 
successes like that, we are not going to have any manufacturing 
jobs in America.
    Mr. Greenspan, as you know, we have the most unfair 
distribution of wealth and income of any industrialized 
country. The richest 1 percent of the population own more 
wealth than the bottom 90 percent, and yet you here today tell 
us that you think it is a good idea to provide more tax breaks 
to the wealthiest people by doing away with the tax on 
dividends. The fact is that under that proposal people earning 
more than a million dollars would get an average tax break of 
$27,000 a year while those making less than $75,000 will get an 
average break of $42. Why do you advocate tax breaks for the 
richest people when we already have the greatest gap between 
the rich and poor of any industrialized country?
    And what particularly disturbed me about your testimony is 
that at a time when millions of elderly people today cannot 
afford prescription drugs, can't afford to heat their homes, 
you are advocating by monkeying with the CPI major cuts not 
only for our seniors but for our veterans.
    Mrs. Kelly. Mr. Sanders, your time is up.
    Mr. Sanders. Can you respond why you want to cut back on 
your Social Security?
    Mrs. Kelly. Mr. Sanders, your time is up.
    Mr. Sanders. I would like the same time.
    Mrs. Kelly. Mr. Sanders, we have been working with the 5-
minute rule. Everyone knew about that. Mr. Greenspan, if you 
would like to answer that question.
    Mr. Greenspan. I don't wish to cut back on Social Security, 
I just merely wish to enforce the law. The law stipulates that 
the cost-of-living adjustment is what should be applied to all 
tax and certain social insurance programs. I am stipulating, as 
I did in my remarks, that the new chain-weighted Consumer Price 
Index is a far superior means of measuring the cost of living.
    Mr. Sanders. Because it would cut back?
    Mr. Greenspan. Do you wish----
    Mrs. Kelly. Mr. Sanders, please do not interrupt Mr. 
Greenspan.
    Mr. Greenspan. If you wish to increase Social Security, you 
can do so through statute. I am merely raising a technical 
question of trying to adjust to how the statute that you have 
passed is best administered.
    Mrs. Kelly. Mr. Murphy.
    Mr. Murphy. Thank you, Madam Chairman, and thank you, 
Chairman Greenspan. First a question on check truncation 
issues. The committee intends to consider legislation this year 
to modernize the check processing system. As you know, 
legislation known as Check 21 is based upon a proposal the 
Federal Reserve originally submitted to Congress in December 
2001. Can you share with the committee your perspective on the 
legislation and what savings in operational efficiencies do you 
expect to flow from its enhancement?
    Mr. Greenspan. Congressman, we strongly support check 
truncation because we think it would very significantly improve 
the process of payments within our financial system. You may 
recall that we had some fairly significant problems right after 
September 11 as a consequence of air traffic problems and the 
ability to move checks through the system in an adequate 
manner. Had we had check truncation at that time, it would have 
made it a far easier problem to resolve. We think it is a 
significant advance in our payment system and we hope that the 
Congress would address that issue as expeditiously as you can.
    Mr. Murphy. Thank you. Another category has to do with the 
impact of the economy upon the States. A number of States are 
facing fiscal problems and talking among themselves about 
cutbacks in services and spending as well as raising taxes. 
What are your views on these fiscal problems of the States and 
how do you see that impacting the economy as a whole?
    Mr. Greenspan. Well, as many people have noted, the 
substantial deficits in the general reserve of states are quite 
significant. And with the exception of Vermont, as I recall, 
all states are required to maintain a balanced budget, which 
means essentially that a substantial amount of either 
expenditure cuts or tax increases are taking place within the 
states so that by the end of the fiscal year, June 30 in most 
cases, the law has been adhered to. The question of endeavoring 
to be of assistance to the States has to recognize that any aid 
that can come from the Federal Government would have to come 
not for the current fiscal year because there is no way to get 
monies that quickly, but for subsequent years. And so the 
question is some of the states by the actions they will be 
taking in this fiscal year will, with very stringent changes, 
have successfully solved their problem so that when you go to 
fiscal 2004 and beyond they may no longer have a problem which 
would need to be addressed with federal funds.
    Doubtless some states, even if they bring their general 
fund to balance in the current fiscal year, nonetheless have 
problems in 2004 and beyond, in which case then the question of 
federal transfers to those states is on the table. And again, 
we are looking at a PAYGO issue, and I think appropriately so. 
So it is not an issue which can be readily resolved, as I see 
it, currently, because so much will have already taken place 
before the first dollar can be transferred to the states, and 
by then it probably would be too late unless they wished to 
reverse tax increases or programs they have canceled.
    Mr. Murphy. One final quick question. Some have said that 
if we do a dividend tax cut that it would make States' bonds 
look less attractive and might have some impact upon raising 
those interest rates. Could you comment about what your 
thoughts are about that?
    Mr. Greenspan. I think that is probably accurate. The size 
is difficult to judge. As I said in a similar question in the 
Senate yesterday, it raises a very interesting question as to 
whether or not the double taxation of dividends has effectively 
been subsidizing municipal finance in the sense of giving them 
a fairly improved status in the financial markets, in which 
case you would argue the elimination is taking away the 
subsidy. The other side is that if we are trying to maintain 
the state and local financial systems, the elimination of the 
double taxation does have an impact of a negative sort. I am 
not sure it is very large, but I don't know because I have 
never seen an actual realistic evaluation to know how 
significant it is. I think it is correct that it has some 
effect, but whether it is minor or significant I frankly do not 
know.
    Mrs. Kelly. Mrs. Maloney.
    Mrs. Maloney. Thank you, Madam Chairwoman, and thank you, 
Chairman Greenspan, for your testimony today. I would like to 
follow up on the gentleman's question on the impact of the 
administration's economic plan on the States. And I have an 
analysis that New York State Comptroller Alan Hevesi has done 
on the impact and I request permission to place it into the 
record.
    Mrs. Kelly. So moved.
    [The following information can be found on page 84 in the 
appendix.]
    Mrs. Maloney. In his analysis he describes the 
administration's dividend plan more or less as the gift that 
keeps on taking, and he estimates or believes that it will 
reduce New York State tax revenue and increase borrowing costs 
in New York State alone by $551 million this year and by $9 
billion over the next 10 years. He estimates that the impact on 
New York City will be $160 million in 2003 and $3.3 billion 
over the next 10 years.
    In your statement earlier, you mentioned that some of these 
States would solve their problems this year, but clearly the 
only way they can solve these problems is to cut back on 
programs that are particularly important to lower income people 
in a bad economy or increase taxes. And nationally in his 
estimates he put forward in his letter to the New York 
delegation, he estimates that the cumulative State deficits are 
now between $60 billion and $85 billion. And my question is, do 
you think the impact of the administration's plan on State 
budgets both from the revenue side and on the borrowing costs, 
because tax favored municipal bonds could lose some of their 
appeal, this is really going to place a tremendous burden on 
our States in a time when they are confronting tremendous 
challenges?
    Mr. Greenspan. Congresswoman, unless I am mistaken, the 
reason why the loss of revenues occurs in the states is because 
they use adjusted federal gross income as the base to apply the 
state income tax rate. It strikes me that perhaps what some of 
the states may want to do is alter that. In other words, what 
is occurring in the process is a reduction in state taxes 
because there is a lesser amount of income which occurs because 
it is tax free. So it may very well be that the solution to 
this is for the states to recognize that they don't wish to cut 
taxes and they can alter the rates accordingly or alter the 
employment of the adjusted gross income that is applied on the 
federal form in a manner which doesn't get this flow-over 
effect. And I would suspect that a number of states are going 
to do that.
    Mrs. Maloney. Well, they can, but still overall as the 
Comptroller points out, it is a tremendous impact on State 
budgets when they are facing huge budget gaps.
    Getting back to the deficits that are galloping forth, are 
you concerned that the increases in the deficits will push up 
interest rates and increase mortgage, car and credit card rates 
for working families?
    Mr. Greenspan. I am, Congresswoman. I think that what has 
been an extraordinarily important prop to this economy through 
its very stressful two or three years has been low mortgage 
interest rates, which have not only maintained the fairly 
pronounced level of residential construction, but have also, in 
conjunction with the rise in the prices of homes, facilitated a 
fairly substantial extraction of equity from homes, which has 
been the means of financing the fairly large part of consumer 
expenditures over the years. Clearly if mortgage interest rates 
were to move up in any material way I think we would find that 
that would have a marked impact on, obviously, house turnover, 
which is a major factor in extraction of equity, and clearly on 
refinancings and the cash-outs which are associated with them.
    So, yes, I am concerned about long-term interest rates 
specifically, but mortgage rates in particular, rising.
    Mrs. Maloney. And we seem to be going in that direction.
    Mrs. Kelly. Excuse me, but your time is up, Mrs. Maloney. 
It appears to be my turn to ask questions, Mr. Greenspan, so I 
am going to ask you a question that says--tells you I am 
reintroducing my business checking legislation in this Congress 
and I expect the House is going to pass that fairly quickly. I 
take it that the Fed is still behind in supporting my 
legislation?
    Mr. Greenspan. We certainly are.
    Mrs. Kelly. It is my understanding that one of the issues 
that has held up the legislation in the Senate was the intent 
of some of the Members to add language to the bill to give 
State chartered industrial loan companies the ability to also 
pay interest on demand accounts. We hear arguments that these 
institutions are well regulated by the State and Federal 
Deposit Insurance Corporation. There has been a great deal of 
debate on this point, but I want to get it on the record.
    Mr. Chairman, why should we oppose efforts to allow the 
industrial loan companies to pay interest on NOW accounts held 
by the businesses?
    Mr. Greenspan. Basically because if you make that shift, 
they become full commercial banks, and because of their 
exemption under the Bank Holding Company Act they can be 
purchased by commercial enterprises. Now it has been my 
impression that the purpose of Gramm-Leach-Bliley was to limit 
the extent of the mixing of banking and commerce and to draw a 
line in a specific way, which has been very difficult. At the 
moment we don't have that problem with industrial loan 
companies who are doing reasonably well, but we would have if 
that amendment came into place and it would significantly alter 
the intention of Gramm-Leach-Bliley. So it has been our 
impression that it is not appropriate for the legislation going 
forward.
    Mrs. Kelly. I want to make sure that I am clear about this. 
If an industrial loan company in a State like Utah is given the 
ability to pay interest on NOW accounts that are held by 
businesses in the State of Utah, why does the Fed oppose the 
State's intent?
    Mr. Greenspan. Why don't I ask our General Counsel to--why 
don't you come up here--give you a legal--make sure he gets it 
right. This is Virgil Mattingly, our General Counsel.
    Mrs. Kelly. Excuse me. Sir, would you please just give us 
your name for the record?
    Mr. Mattingly. My name is Virgil Mattingly. I am General 
Counsel to the Federal Reserve, and I think the Chairman has 
accurately answered the question. Right now the only federal 
restriction on industrial loan companies is on their ability to 
offer accounts that function as demand deposits to commercial 
entities. If they were to be given the authority to offer 
business NOWs or checking accounts to corporations, they would 
have all of the powers of an insured bank. In other words, they 
would be a substitute for an insured bank. Industrial loan 
companies have an exemption from the Bank Holding Company Act, 
which means they can be acquired by commercial entities, and 
several in Utah are owned by commercial entities. And as the 
Chairman indicated, the mixing of banking and commerce would be 
inconsistent with the Gramm-Leach-Bliley Act, which was 
recently passed by a previous Congress.
    Mrs. Kelly. Thank you very much. Mr. Greenspan, I was 
interested in reading your testimony in front of the Senate 
yesterday, especially the line where you said the ability of 
economists to assess the effects of tax and spending programs 
is hindered by an incomplete understanding of the forces 
influencing the economy. Nice statement. And in light of what 
Mr. Sanders said, I would like to invite you to come and take a 
look at what the forces of the economy have done to New York. 
New York State has not completely recovered from 9/11. I know 
that you know where my district is. I know you have come to my 
district. I invite you back so you can take a look and perhaps 
meet with some of the people. I hope you will answer in the 
affirmative, but I am not going to put you on the spot and 
force you to answer that question now.
    With that I yield the rest of my time and call on Mr. 
Inslee.
    Mr. Inslee. Thank you. Mr. Chairman, I always enjoy your 
presentation for different reasons than my friend Bernie 
Sanders, and the reason I enjoy it is because you have been 
consistent through time and through administrations in 
reminding us of the importance of fiscal discipline and 
pointing out the dangers to the United States economy, in jobs, 
in interest rates of these deficits. And I want to tell you 
that your continued reminding of us is very consistent with 
what people are telling me back home.
    I represent a district just north of Seattle, and I have to 
tell you what I hear on the streets and in the grocery stores 
right now. People believe that there is a certain madness that 
has descended on Washington, D.C., and they are very, very 
angry, and what they are angry about is that they have seen us 
work through these deficits during the 1990s that they were 
continually concerned about, saw us make some progress on that, 
and now seen us have a $7 trillion swing from projections of 
surpluses in February to now these big multi-billion dollar 
deficits, and they are mad about it for three reasons.
    One, they understand the baby boom phenomenon. They 
understand this intrinsic gut level belief that we should be 
saving for the future when the baby boomers retire. Two, they 
understand what you have said, they like low interest rates and 
they understand it doesn't do any good to have big tax cuts or 
big spending if it results in higher interest rates on their 
homes and their cars. And three, they are starting to hear 
about the debt tax. They are starting to hear about the fact 
that 12 or 14 percent of all the money they pay in income taxes 
go to service the Federal debt. They don't like it. They think 
that is waste, fraud and abuse. So they really appreciate the 
message you have of fiscal discipline and responsibility. But I 
want to ask, the reason they are angry is they think a madness 
is descending because others have fallen off the fiscal 
discipline wagon here, and others have changed their tune.
    I want to read a quote from John Snow, November 13, 1995. 
It says a balanced Federal budget is the best choice to ensure 
a bright future for the Nation's economy. That was then. Now we 
hear representatives of the administration, a quote from Mitch 
Daniels, January this year, said we have returned to an era of 
deficits, but we ought not to hyperventilate about this issue. 
If Mr. Daniels was here I would tell him people are breathing 
hard, not hyperventilating, and they are very angry about this. 
And I guess the question I have is, is there any economic 
justification for people who for decades have been telling 
America that they believe in balanced budgets, for decades 
telling us we had to have fiscal responsibility, for years been 
hectoring members of the other political party about this 
issue, is there any economic reason that has changed those 
fundamental characteristics of Federal deficits?
    Mr. Greenspan. Congressman, there is a big dispute on the 
question of the extent to which various different types of tax 
cuts engender their own revenue increases. The extreme form, as 
you know, is the argument that if you cut taxes, the level of 
revenues will not change, and there are certain circumstances 
in which you can demonstrate that that is the case. That has 
been broadly generalized in many respects and it is a question 
of fact. It is not an issue of whether or not one has some 
ideological view of the way the world works. It is either true 
or false, and so it is a factual question. And the trouble is 
that it is difficult to basically corral all of the facts to 
make definitive cases in which all individuals agree. In recent 
years, there has been considerable evaluation and thinking on 
this particular question, and I think a number of people have 
changed their view or moved from views of the fact that there 
were no tax programs which could significantly improve 
revenues. You cut taxes, revenues go down. Some people have 
revised their views on that issue, and that is the reason you 
are getting the results that you are getting.
    Mr. Inslee. Have you--I hear what you are saying, but I 
want to make sure I understand. What I understand you are 
telling the Congress is that whatever you do, if you are going 
to cut taxes, whatever you are going to do on spending, it is a 
negative for the U.S. Economy to run long-term Federal 
deficits? Is that a basic statement that you believe in?
    Mr. Greenspan. That is correct.
    Mr. Inslee. And do I hear you saying to us----
    Mrs. Kelly. Excuse me, Mr. Inslee, your time is up.
    Mr. Inslee. It is a great question for April.
    Mrs. Kelly. Mr. Kennedy.
    Mr. Kennedy. Thank you, Mr. Chairman, in trying to 
characterize the world that you live in, I think the gentleman 
from Vermont--an outline, that he lives in a bitterly partisan 
world and I applaud your patience in enduring that shrill 
attack. In the world that I have lived in, in my time period 
prior to coming to Congress here, I was in the common sense job 
creation world. And as a former chief financial officer, I have 
had the opportunity to struggle with that and understand and 
applaud your bringing up the fact that the Tax Code really 
gives too much of an incentive to debt versus equity and also 
applaud the fact that you acknowledge that removing this double 
taxation on dividends would give us a better balance that would 
make our economy more flexible to attack, less likely to have a 
financial structure of a business, cause layoffs and other 
things that are harmful to businesses. So I acknowledge and 
agree with your statements on that.
    I would also like to say, though, as a former chief 
financial officer and a CPA that has lived in this job creating 
world, I also agree with what you are saying on accrual 
accounting. We in government don't allow major businesses to 
practice cash accounting. We require them to do accrual 
accounting. We don't allow any businesses to intermingle their 
pension funds with their operating businesses like we have done 
for years. And as you outlined very well in your testimony, the 
need to look at our world on an accrual basis, my first 
question to you is what can we do? Who would we ask to do what 
to get to more of an accrual view of the world?
    Mr. Greenspan. Since the Congressional Budget Office is a 
creature of the Congress, you could request of them that they 
develop effective accrual accounting systems. As I say in my 
prepared remarks, on the outlay side we are pretty much there. 
We do know the accrued benefits for Social Security and I think 
probably can calculate it for Medicare and many of the other 
programs that you related. We have more difficulty on the 
deferred tax side because what we do know is there is a very 
large block of retirement accounts out there which become 
taxable on withdrawal, and hence those are appropriately 
measurable as deferred assets of the Federal Government. And 
clearly, if we have changes in the accrued benefits and the 
accrued revenues, we obviously have constructed an accrual 
system which in combination with the cash system enables us to 
understand how various appropriations and authorizations made 
for eventual spending by the Congress spin out through the cash 
accounts and how they affect the debt to the public and what 
the level of contingent debt is, net, to the public over and 
above the little under $4 trillion in debt to the public which 
now exists.
    Mr. Kennedy. And I strongly agree with our need to do that 
approach, and you outline the difficulty in forecasting the 
revenue. Part of that difficulty is a reliance on capital gains 
tax, which are highly variable depending on which way the 
market is going. And the reason we face a deficit today is, as 
you mentioned, the dramatic falloff in evaluation. If we 
addressed also the capital gains tax, wouldn't that not only be 
a very positive thing for our economy but really allow us to 
have a more predictable and more dependable view of revenues 
for the long-term future?
    Mr. Greenspan. I am sorry, do what with the capital gains?
    Mr. Kennedy. Either reduce it, eliminate it and not to have 
such a heavy reliance on it in our future revenue streams.
    Mr. Greenspan. I commented many times in the past, 
Congressman, that I think the capital gains tax is a very poor 
means of raising revenues. It imposes costs on capital which 
are far larger than the equity revenue effects, which, in my 
judgment, are the sole purpose of doing that. I would much 
prefer that we did not tax capital in the way that we did. I 
think it is counterproductive to aggregate economic growth.
    Mr. Kennedy. And my last question is if we looked out into 
the future and we address these long-term needs to reform and 
make sure that we have a balance on our long-term entitlement 
pass, would we see a positive impact in our economy today for 
addressing those here and now as opposed to letting them fester 
for another decade?
    Mr. Greenspan. To the extent that the market perceives that 
those long-term changes were real, are going to happen, then 
clearly they would be discounted in the prices of securities 
today.
    Mr. Kennedy. Thank you.
    Mrs. Kelly. Mr. Watt?
    Mr. Watt. Thank you, Mr. Chairman, for being here. I just 
have two very quick questions, which hopefully won't take my 
full time, and I apologize if they have been asked while I was 
out of the room. On pages 7 and on the following pages of your 
written testimony, you spend quite a bit of time talking about 
some of your concerns about our whole budget process and the 
way we account, which is a continuation of the discussion you 
were just having with my colleague.
    First of all, I just want to be clear, do you have a 
position on dynamic scoring? And if so, what is it?
    Mr. Greenspan. In principle, Congressman, dynamic scoring 
is the way in which we should be estimating the impact of 
revenues and expenditure programs. It is theoretically doable, 
but it is very difficult to get general agreement on the type 
of model that is required to estimate the secondary effects 
over and above so-called static scoring. If we could get the 
general agreement on how dynamic scoring would be done with 
respect to various different types of programs, then it would 
be useful because the Congress would know what the various 
costs of various programs are in which everyone would agree 
that those are the data. But as I have testified before, it is 
very difficult to get a model which everybody agrees is the 
ideal model, meaning the one in the context of earlier remarks. 
Abstraction is a very complex reality.
    Mr. Watt. So if they accepted your model, you would have 
supported it? If they didn't accept your model, you probably 
wouldn't support that?
    Mr. Greenspan. Congressman, I trust they wouldn't accept my 
model because I know how flaky any model is, mine included. I 
fall back to what I would call a less desirable means of 
evaluating programs, which is so-called static scoring. I would 
like to see us be able to develop dynamic scoring. It is 
conceptually superior as a means of doing it. I just don't see 
how we are going to do it, but I hope we can try.
    Mr. Watt. Second question, on page 14 of your written 
testimony, you say something that I am having a little trouble 
understanding. You say, ``So short of a major increase in 
immigration, economic growth cannot be safely counted upon to 
eliminate deficits.'' the reverse of that is will--the 
implication is a dramatic increase in immigration might have 
some positive impact on growth. Can you just tell me what you 
mean by that so I will have a clear understanding of it?
    Mr. Greenspan. It is precisely what you just indicated. The 
level of immigration in this country, which is a third to a 
half of our increase in households, has been a major factor in 
the increase in the population, the increase in the labor 
force, the increase of employment. And aggregate economic 
output is basically output per person times the number of 
people, and if you accelerate immigration, you will expand the 
labor force and increase the GDP, increase aggregate wages and 
salaries, increase contributions to social insurance, increase 
individual income tax payments, and in a sense the whole 
revenue base goes up accordingly.
    Mr. Watt. Well, I could go on and on with that, but I won't 
deal with that. I appreciate it. Those are the two questions 
that I wanted clarification on. I appreciate your response, and 
I yield back the balance of my time.
    Mrs. Kelly. I would remind the people in the committee who 
are remaining Mr. Greenspan must leave at 1 o'clock, so we are 
going to try to get everybody in. But you must keep your 
questions succinct and the answers short. With that, Mr. Shays.
    Mr. Shays. Thank you, Mr. Greenspan. Thank you for being 
here and thank you for your service to our country. I would 
like to ask you some questions on derivatives and on the GSEs. 
For the last several Congresses, we have attempted to pass 
bankruptcy reform legislation, and included in those efforts 
were provisions to improve the netting out process of certain 
financial contracts. Could you please describe your views on 
these netting provisions and what level of importance would you 
attach to them?
    Mr. Greenspan. We have had very considerable success in 
developing a sophisticated financial system in recent years, 
which has been a major factor in American economic growth. A 
not insignificant part of that has been derivatives, which in 
earlier legislation were able to be netted out in a manner in 
which bankruptcy courts could essentially make a determination 
of who owed what to whom under various different circumstances. 
Because of changes that have occurred in recent years, this 
needs to be addressed again, and it is terribly important that 
individuals are able to net out various differing derivative 
obligations owed to them or owed by them in a manner which 
could facilitate a much less risky bankruptcy procedure.
    So in my judgment, it is crucially important that the 
changes that we have been discussing about netting be moved 
through as expeditiously as possible either tied to the 
bankruptcy laws or essentially as a free-standing piece of 
legislation. It is important largely because the ability to net 
out clarifies a very significant element of uncertainty in who 
owes what to whom under various different stressful conditions.
    Mr. Shays. Thank you. When you were before the Senate 
Banking Committee you made reference to GSEs as legally private 
corporations that should be handled the way private 
corporations are handled. As you are aware, there is 
legislation to repeal the GSEs' exemption from this Nation's 
securities laws and subject them to the SEC disclosure 
standards imposed on every other publicly-traded company. Now I 
know you can't endorse legislation, but would you basically say 
that GSEs should be handled the way private corporations are 
handled in general?
    Mr. Greenspan. Yes, I would.
    Mr. Shays. Just one last question, should there be two-tier 
treatment for capital gains or would you prefer to just see 
one-tier treatment; in other words, short-term gain versus 
long-term gain?
    Mr. Greenspan. It is a complex question. I said previously 
my view of the capital gains taxes is it is counterproductive.
    Mr. Shays. If we are going to have this counterproductive 
tax though, would you prefer----
    Mr. Greenspan. I prefer short-term and long-term gains 
being separated.
    Mr. Shays. Be separate.
    Mr. Greenspan. Yes.
    Mr. Shays. I yield back the balance of my time.
    Mrs. Kelly. Mr. Meeks?
    Mr. Meeks. Thank you, Madam Chair.
    Mr. Chairman, let me just follow up on Congressman Watt, 
because I was also intrigued by the statement on page 14. 
Conversely, you know, the administration has put into effect 
the policy to sharply curtail or maybe even to discourage 
because of protecting our borders, et cetera, immigration. So 
would you say that by us now curtailing immigration, that that 
is a factor, whether it be significant or otherwise, in our 
slowing economy?
    Mr. Greenspan. Well, obviously the less immigration we 
have, the less employment, the less GDP. And I might say that 
the fact that so many people are pounding on our doors to get 
into this country is a very significant vote of confidence in 
what type of economic society we have created here. And my view 
is that immigration throughout our history has been a very 
important part of the dynamism and the growth that we have had 
in this country. And my view is that limits should be less than 
they are.
    Mr. Meeks. Let me ask another question, and I am going to 
try to be brief. I hope I can squeeze somebody else in, so I 
will just have this one question. Right now oil prices are 
starting to again go through the roof, and they are rising 
dramatically. And of course concerns about when we go to war 
with Iraq, it just seems that that is inevitable. The political 
instability in Venezuela, again, that is driving oil prices 
crazy. If the war hypothetically were to last, say, a year, how 
much of an inflationary effect would it have on our economy, 
and would the Feds see the need to increase the Fed fund rate 
to fight the inflation?
    Mr. Greenspan. Well, Congressman, it depends very much on 
what happens both to Venezuela and to Iraqi crude oil 
production. As you know, the Venezuelan production has been cut 
to a third. It is rising now, but it is still well below where 
it was. And both of these countries' capacity are about three 
million barrels a day. If there is a substantial shortfall 
which is not made up by the other Gulf states, for example, 
Saudi Arabia being the obvious important one, then we are up 
against problems of making judgments as to how much leeway 
there is between aggregate capacity worldwide on crude oil 
production and what consumption is.
    Fortunately, in the period immediately ahead, worldwide 
consumption is in the seasonal decline. Starting in April, May, 
and June, you get a much lower level of oil consumption, which 
means that if we had a shutdown, its effect on price would be 
modest. But if it went on, as you point out, for a year, it 
could be troublesome in how it was handled.
    Mr. Meeks. I yield back.
    Ms. Kelly. Thank you.
    Mr. Greenspan. I should say, I find it unlikely. A year 
under any scenario seems to me far beyond anything I could 
conceive of. So the more likely scenario is a much shorter one, 
obviously.
    Ms. Kelly. Thank you.
    Mr. Chairman, we are very pleased and we do thank you for 
your willingness to come here and be with us today. We have run 
out of time. The Chair notes that some Members may have 
additional questions, and they may wish to submit those in 
writing. So without objection, the hearing record will remain 
open for ten days for Members to submit written questions to 
these witnesses and to place their responses in the record.
    Chairman Greenspan, you are excused with the committee's 
great thanks and appreciation for your time. And----
    Mr. Frank. I would----
    Ms. Kelly. Mr. Frank?
    Mr. Frank. Madam Chair, I do note that we do all want to 
get together and do this again sometime.
    Ms. Kelly. This hearing is adjourned.
    [Whereupon, at 1:01 p.m., the committee was adjourned.]

                            A P P E N D I X



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