[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 11, 2004

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 108-67



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                            WASHINGTON : 2003
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska              PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana          MAXINE WATERS, California
SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York              NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California          MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma             GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio                  DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair   JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                GREGORY W. MEEKS, New York
JIM RYUN, Kansas                     BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio           JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
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 FOSSELLA, 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              ARTUR DAVIS, Alabama
MARK R. KENNEDY, Minnesota           RAHM EMANUEL, Illinois
TOM FEENEY, Florida                  BRAD MILLER, North Carolina
JEB HENSARLING, Texas                DAVID SCOTT, Georgia
SCOTT GARRETT, New Jersey            CHRIS BELL, Texas
TIM MURPHY, Pennsylvania              
GINNY BROWN-WAITE, Florida           BERNARD SANDERS, Vermont
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 11, 2004............................................     1
Appendix:
    February 11, 2004............................................    45

                               WITNESSES
                      Wednesday, February 11, 2004

Greenspan, Hon. Alan, Chairman, Board of Governors, Federal 
  Reserve System.................................................     6

                                APPENDIX

Prepared statements:
    Oxley, Hon. Michael G........................................    46
    Baca, Hon. Joe...............................................    48
    Castle, Hon. Michael N.......................................    49
    Emanuel, Hon. Rahm...........................................    50
    Gillmor, Hon. Paul E.........................................    52
    Harris, Hon. Katherine.......................................    53
    Maloney, Hon. Carolyn B......................................    55
    Greenspan, Hon. Alan.........................................    57

              Additional Material Submitted for the Record

Greenspan, Hon. Alan:
    Monetary Policy Report to the Congress.......................    70
    Written response to questions from Hon. Joe Baca.............   101
    Written response to questions from Hon. Judy Biggert.........   103
    Written response to questions from Hon. Sue W. Kelly.........   106
    Written response to questions from Hon. Barbara Lee..........   112
    Written response to questions from Hon. Doug Ose.............   114


                          MONETARY POLICY AND
                        THE STATE OF THE ECONOMY

                              ----------                              


                      Wednesday, February 11, 2004

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to call, at 11:04 a.m., in Room 
2128, Rayburn House Office Building, Hon. Michael G. Oxley 
[chairman of the committee] presiding.
    Present: Representatives Oxley, Leach, Baker, Castle, 
Royce, Lucas of Oklahoma, Ney, Kelly, Paul, Gillmor, Ryun, 
Manzullo, Jones, Ose, Toomey, Hart, Capito, Feeney, Hensarling, 
Garrett of New Jersey, Murphy, Brown-Waite, Barrett of South 
Carolina, Harris, Frank, Kanjorski, Waters, Sanders, Maloney, 
Velazquez, Watt, Hooley, Carson, Sherman, Meeks, Lee, Inslee, 
Moore, Capuano, Hinojosa, Lucas of Kentucky, Crowley, Clay, 
Israel, Ross, McCarthy, Baca, Miller, Emanuel, Scott, Davis, 
and Bell.
    The Chairman. This hearing of the Committee on Financial 
Services will come to order.
    We are meeting today to receive the semiannual testimony of 
the Chairman of the Federal Reserve Board of Governors. 
Pursuant to the Chair's prior announcement and Rule 3(f)(2) of 
the rules of the committee, the Chair will recognize the Chairs 
and ranking members of the full committee and the Subcommittee 
on Domestic and International Monetary Policy, Trade, and 
Technology, leave their respective designees for opening 
statements. The statements of all the members may be placed in 
the record.
    The Chair now recognizes himself for 5 minutes.
    Good morning, Mr. Chairman, and welcome back to the 
committee. All of us on the Financial Services Committee look 
forward to our discussions with you on U.S. economic 
performance, which so directly affects the lives and 
livelihoods of all Americans.
    At this unique moment of war and renewal there are many who 
deserve credit for the recovering economy. First and foremost 
are the American people, the American investor who never 
panicked and never lost faith, and the American consumer who 
believes that the economy will continue to improve.
    Our American companies have retooled in accordance with the 
Sarbanes-Oxley Act, thus improving financial reporting and 
bolstering confidence. Our markets continue to be the most 
productive capital creation organizations in the world.
    Despite predictions that companies would delist, they have 
not done so. In fact, companies continue to seek new listings 
in our deep and vibrant U.S. markets.
    Mr. Chairman, the economy is recovering nicely from the 
mild recession of 2001. The market is back to pre-recession 
levels, fixed investment is up, unemployment is down from its 
peak, exports are up, the balance of payments is down, and none 
of the Blue Chip 50 forecasters predict growth rates of less 
than the mid-3 percent rate or inflation higher than the mid-2 
percent range for this year or next. Most of the Blue Chip 
forecasts are much more optimistic.
    Two items that have everyone's attention are the employment 
figures and the deficit numbers. There is understandable 
concern about both. I am sure we would all prefer budget 
surpluses and would like every American who seeks a job to have 
one right now. However, I believe these are temporary problems 
attributable to temporary conditions.
    Despite some alarmist commentary, the deficit of numbers 
for this year are understandable given the terror attack, a 
recession, corporate governance problems, and war. While they 
are higher than we would like, even after all of these events 
the deficit is still at about 3.5 percent of GDP. According to 
the President's budget, the deficit will be half that level in 
5 years. The alternative would be to stop investing in economic 
stimulus or to fight against terror on the cheap, and I don't 
think the American people would want either of these options.
    Mr. Chairman, I know you favor pay-as-you-go budgeting. 
However, the President's tax cuts have helped to sustain the 
U.S. economy, especially in the face of recent shocks. In 
addition to the headline grabbers of terrorism, war, and 
corporate scandal, we faced a European currency unit that sank 
in value by a third, which damaged the value of our exports.
    Regarding employment levels, Mr. Chairman, I hope that you 
will be able to add some perspective to the national debate. 
When I studied economics and until just a few years ago, the 
accepted theory was that roughly 6 percent was considered full 
employment. This is about where we are now. During the bubble 
economy of the late 1990s, that rate went down in the 4 percent 
range and briefly hovered near 3.9 percent. To many of us it 
seemed as if one of the laws of economics had been repealed. 
Then, with the recession, unemployment increased again over 6 
percent, though I should quickly add that we have been seeing 
steady job creation since last July.
    Mr. Chairman, I think most of us on both sides of the aisle 
believe the American economy will create additional jobs and 
their quality will improve as the economy continues to adapt to 
changing times. We would welcome your thoughts on job creation 
and what we in Congress might do to help.
    With that, Mr. Chairman, I look forward to your appearance 
here again, which is always a great occasion for this 
committee. We thank you for your stewardship of the economy.
    And I now yield to the gentleman from Massachusetts, Mr. 
Frank, for his opening statement.
    [The prepared statement of Hon. Michael G. Oxley can be 
found on page 46 in the appendix.]
    Mr. Frank. Thank you, Mr. Chairman.
    Chairman Greenspan, in your appearance today I think you 
come at a time when one of the subjects that is often debated 
here, namely the appropriate level for the interest rates that 
you set, is not really controversial. There is a general 
consensus that the current rate is appropriate. Indeed, we are 
apparently a sort of historic low, at least in recent times, 
both for your weight and interest rates, and I congratulate you 
on both.
    But there is a broader set of questions that is really 
deeply troubling. We may be at an inflection point in the 
American economy, and I think we are at the point where the old 
phrase of political economy has become very relevant because we 
are, as has been noted, in a period of growth, significant 
growth.
    We are coming out of a recession. Unfortunately, we are 
coming out of this recession with less job growth than we have 
seen, I think, ever, and certainly in any recent history. To 
the extent that there is something somewhat prolonged about 
this--I won't say permanent because nothing is permanent, but 
if it is prolonged, and today we have this problem, it does 
appear clearly that the amount of job growth we are getting, 
given the level of GDP, has dropped significantly.
    What we have, however, is not simply that fact. There is a 
growing perception in the country that the benefits of growth 
and of increased productivity are being very unequally shared, 
excessively unequally shared.
    Let us be very clear. We are capitalists, as we should be. 
Inequality is not a bad thing; it is necessary to our system. 
Our market system with its incentives and its allocation 
mechanisms doesn't work without inequality. On the other hand, 
I think it is clear that inequality left entirely unchecked 
might get out of the bounds where it is reasonable. And too 
much inequality can have serious negative consequences.
    I think our job is, in part, to try to contain excessive 
inequality, because we can't have inequality that is more than 
we need for efficiency--we obviously need some--and can have 
damaging social consequences. I think we are on the verge of 
that.
    Three levels: First of all, there are the real effects of 
inequality--people without jobs, people without health care, 
people inadequately educated. I and many of my colleagues are 
moved primarily by that. But I recognize that dwelling simply 
on the moral aspects and the social cost of inequality may not 
be enough.
    As Adlai Stevenson once said when he was told he had all 
the thinking people on his side, Yes, but I need a majority. 
Because it was cracks like that that helped him not get a 
majority.
    But I don't, unfortunately, believe that moral arguments 
are enough, so let me give you two other arguments, some of 
which you have yourself, I think, taken note of as to why we 
have got to tackle this inequality thing which is being 
exacerbated by the reality today of jobs which are lagging what 
they should be by normal rules in the economy.
    Essentially what we have, I think, is a situation in which 
a combination of factors--and you talked about this in the 
recent speech about flexibility. The rewards of capital have, I 
think, gone beyond what they should be relative to labor. That 
is, I think there is both the reality and certainly a 
perception--I believe the reality--that the owners of capital 
are getting a disproportionately unequal share, damagingly so, 
of the gains.
    Now, that is partly by technology, it is partly by a number 
of real economy factors, but it has been exacerbated by public 
policy--not by the fact of tax cuts, but by the composition of 
the tax cuts, by policies that have eroded the ability of 
organized labor to represent people, by a failure to keep the 
minimum wage updated, by a number of policies, by the way in 
which globalization has been pursued. And in consequence you 
have the following, not simply, as I said, the negative 
consequences.
    You have a resistance in this country increasingly to 
policies that you and many others think are in our best 
interest. Trade treaties will have a very hard time. The 
objections to outsourcing, no matter what the Chairman of the 
Council of Economic Advisers says about it, you are going to 
see increasing legislation restricting outsourcing. You are 
seeing difficulty in other public policies that people think 
are in our overall interest.
    And the reason is in part--I was in Davos, and I heard 
someone make a very interesting formulation; namely, that 
inequality has two aspects, between countries and within 
countries. Now, globalization has as its advantage reducing 
inequality between countries. But if it is carried out in a way 
that exacerbates inequality within countries, resistance will 
grow. And we are at that point.
    So we are at that point--and I will finish in 30 seconds, 
Mr. Chairman. We are at the point where I believe that 
resentment at the excessive inequality is now an obstacle to 
many of the policies you would like to see and you warn against 
them.
    And finally--and this one isn't certain yet, but we may be 
reaching a point, if we cannot change the situation or if the 
situation doesn't change, if job growth does not accelerate, it 
could have macroeconomic effects. To the extent that job gains 
are not what we would ordinarily see both in real spending 
power and in perception and consumer confidence, you may begin 
to see the consumer spending sector lag and not do what it 
ought to do in our economy.
    So, as I said, it is not just the morality of it. Clearly, 
we are at the point where political resistance to much of what 
you think is wise in terms of increased efficiency, and 
increased flexibility is a significant factor, and we may be at 
the point where macroeconomically this also is a problem.
    The Chairman. The gentleman's time has expired.
    The Chair now recognizes the gentlelady from New York, Mrs. 
Kelly.
    Mrs. Kelly. Thank you, Mr. Chairman.
    Over the past 2-1/2 years, our country has experienced 
monumental and extraordinary events that shaped the nature of 
our work here in Washington and shaped our agenda. When we 
began last Congress, little did we know that we were going to 
be moving to block terrorist financing, oversee the longest 
close of the securities market since World War I, and push 
legislation that had to be pushed through to ensure the 
availability of commercial terrorism insurance. Certainly, I 
don't think anyone could have predicted the collapse at that 
point of Enron, Global Crossing, and WorldCom, or the 
subsequent loss of confidence that our markets endured.
    But our committee and this Congress responded quickly to 
restore stability and confidence for the American people, and 
we passed legislation to improve our security and dry up 
terrorist financing with the Patriot Act.
    As we crafted legislation, and especially the Sarbanes-
Oxley Act, we were directed to try to improve on----
    The Chairman. You might make sure your mike is on.
    Mrs. Kelly. My mike is on. Yes, it is.
    We crafted legislation to improve corporate responsibility 
and increase the accounting oversight. We also passed 
legislation that would stimulate the economy. And we are very 
pleased, Mr. Chairman, that the Federal Reserve chose to keep 
the interest rates down and keep ratcheting them down, which 
helped to bring--stabilize the economy and bring our economy 
now into the more active phase that we have entered.
    I think with these reforms and many others, we all feel 
like protecting the security of the American people--whether it 
is national security, health, or economic and retirement 
security--is the most important thing that we should be doing 
here.
    Today, as we hear from you, Mr. Greenspan, Chairman 
Greenspan, I know members of the committee have a lot of 
important questions, but I think most of us are very concerned 
about what our ranking member just spoke about. And that is, we 
need to know how--what we can do, what you are doing and what 
we can do, from implying from what you say to us this morning, 
to continue to strengthen our dollar and to create new jobs and 
to support this economic growth.
    I thank you, Mr. Chairman, for appearing with us here 
today, and I look forward to your testimony.
    The Chairman. The gentlelady yields back.
    The Chair is now pleased to recognize the gentlelady from 
New York, Mrs. Maloney.
    Mrs. Maloney. Thank you, Mr. Chairman.
    And good morning, Mr. Greenspan.
    As Americans watch the hearing today, for many, their 
greatest economic concerns are the loss of 3 million private-
sector jobs and a record-breaking $521 billion deficit. Despite 
improvement in some economic statistics, including GDP growth, 
the economy continues to perform extraordinarily poorly for the 
many people without jobs and for the large number of people 
with jobs who aren't enjoying any wage growth.
    The Fed had done its part by putting its foot on the gas; 
the Federal funds rate is effectively zero. But we still have a 
net job loss of 2.2 million jobs, and President Bush is on 
track to be the first president since Herbert Hoover to end his 
term with fewer jobs than when he started.
    The President claims to have a plan for both the jobs 
crisis and the deficit. The administration now says 2.6 million 
jobs will be created this year, and that their budget will cut 
the deficit in half in 5 years. Yet, a year ago, the 
administration estimated that nearly 2 million jobs would be 
created in the second half of 2003, and only 200,000 jobs were 
produced. Even worse, the President's chief economist is now 
praising the outsourcing of U.S. jobs to foreign countries. 
Headlines across the country responded with astonishment this 
week, reading, Bush Supports Shift of Jobs Overseas. And here 
we have some of the headlines across the country.
    On the spending side, the President's new budget is a total 
fiction. Already the claim that it will cut the deficit in half 
in 5 years has been panned by Goldman Sachs, the Concord 
Coalition, the Committee for Economic Development, and Decision 
Economics, all of whom continue to forecast $500 billion 
deficits and more into the future.
    The administration claims it will control spending by 
limiting domestic discretionary spending to under 1 percent 
this year, but domestic discretionary spending is only 15 
percent of the entire budget, not enough to make a serious 
impact.
    The budget also totally misleads by leaving out spending we 
know is coming, including but not limited to post-election 
funding for our troops in Afghanistan and Iraq; the long-term 
cost of the President's number one domestic priority, making 
tax cuts permanent; the cost of fixing the alternative minimum 
tax; the President's Mars space initiative; and more.
    Chairman Greenspan, I hope you will address the problems of 
the job deficit and the budget deficit at length in your 
testimony today. Thank you for being here.
    The Chairman. The gentlelady's time has expired.
    We now turn to the distinguished Chairman of the Fed, 
Chairman Greenspan. Thank you again for appearing, and welcome 
back.
    [The prepared statement of Hon. Carolyn B. Maloney can be 
found on page 55 in the appendix.]

 STATEMENT OF ALAN GREENSPAN, CHAIRMAN, FEDERAL RESERVE SYSTEM

    Mr. Greenspan. Thank you very much, Mr. Chairman.
    Before I start, I would like to wish you a happy birthday. 
And as said to you inside, I trust you will soon be shooting 
your age on the golf course. The trouble is, you probably will.
    The Chairman. Mr. Chairman, I hope I am playing with you at 
the time.
    Mr. Greenspan. I will be duly impressed.
    May I request that the full statement that I am about to 
excerpt from be included for the record?
    The Chairman. Without objection.
    Mr. Greenspan. Mr. Chairman and members of the committee, I 
am pleased to be here today to present the Federal Reserve's 
Monetary Policy Report to the Congress. When I testified before 
this committee in July, I reported that conditions had become a 
good deal more supportive of economic expansion over the 
previous few months. A notable reduction in geopolitical 
concerns, strengthening confidence in economic prospects, and 
an improvement in financial conditions boded well for spending 
and production over the second half of the year. Still, 
convincing signs of a sustained acceleration and activity were 
not yet in evidence.
    Since then, the picture has brightened. The gross domestic 
product expanded vigorously over the second half of 2003. 
Progress in creating jobs, however, has been limited.
    Looking forward, the prospects are good for sustained 
expansion of the U.S. economy. At the same time, increases in 
efficiency and a significant level of underutilized resources 
should help keep a lid on inflation.
    In retrospect, last year appears to have marked a 
transition from an extended period of subpar economic 
performance to one of more vigorous expansion. Once again, 
household spending was the mainstay. Last year's reductions in 
personal income tax rates and the advance of rebates to those 
households that were eligible for the expanded child tax credit 
boosted the growth of real disposable personal income. The very 
low level of interest rates also encouraged household spending 
through a variety of channels.
    The strengthening in capital spending over 2003 contributed 
importantly to the acceleration of real output. A growing 
confidence of business executives and the durability of the 
expansion, strong final sales, the desire to renew capital 
stocks after replacements had been postponed, and favorable 
financial conditions all contributed to a turnaround in 
equipment spending.
    To a considerable degree, the gathering strength of capital 
spending reflects a substantial improvement in the financial 
condition of businesses over the past few years. Firms' profits 
rose steeply during 2003, following smaller gains in the 
previous 2 years. The profitability of the business sector was 
again propelled by a stunning increase in productivity. The 
vigorous advance represents a notable extension of the pick-up 
that started around the mid-1990s. Apparently, businesses are 
still reaping the benefits of the marked acceleration in 
technology.
    The strong gains in productivity, however, have obviated 
robust increases in business payrolls. To date, the expansion 
of employment has significantly lagged increases in output. 
Gross separations from employment, two-fifths of which have 
been involuntary, are about what one would have expected from 
past cyclical experience, given the current pace of output 
growth. New hires and recalls from layoffs, however, are far 
below what historical experience indicates. To a surprising 
degree, firms seem to be able to continue identifying and 
implementing new efficiencies in their production processes, 
and thus have found it possible so far to meet increasing 
orders without stepping up hiring.
    Productivity over the past few years has probably received 
a boost from the efforts of businesses to work off the stock of 
inefficiencies that had accumulated in the boom years. As those 
opportunities to enhance efficiency become scarcer and as 
managers become more confident in the durability of the 
expansion, firms will surely once again add to their payrolls.
    A consequence of the rapid gains in productivity and slack 
in our labor and product markets has been sustained downward 
pressure on inflation. Inflation last year was in a range 
consistent with price stability. The recent performance of 
inflation has been especially notable in view of the 
substantial depreciation of the dollar in 2003. Ordinarily, 
currency depreciation is accompanied by a rise in dollar prices 
of imported goods and services because foreign exporters 
endeavor to avoid experiencing price declines in their own 
currencies which would otherwise result from the fall in the 
foreign exchange value of the dollar.
    Reflecting the swing from dollar appreciation to dollar 
depreciation, the dollar prices of goods and services imported 
into the United States have begun to rise after declining on 
balance for several years, but the turnaround to date has been 
mild.
    Although prospects for the U.S. economy look quite 
favorable, we need to remind ourselves that all forecasts are 
projections into an uncertain future. The fact that most 
professional forecasters perceive much the same benign short-
term outlook that is our most likely expectation provides scant 
comfort. When the future surprises, history tells us, it often 
surprises us all. We must, as a consequence, remain alert to 
risks that could threaten the sustainability of the expansion.
    Besides the chronic concern about a sharp spike in oil or 
natural gas prices, a number of risks can be identified. Of 
particular importance to monetary policymakers is the 
possibility that our stance could become improperly calibrated 
to evolving economic developments. To be sure, the Federal Open 
Market Committee's current judgment is that its accommodative 
posture is appropriate to foster sustainable expansion of 
economic activity. But the evidence indicates clearly that such 
a policy stance will not be compatible indefinitely with price 
stability and sustainable growth. The real federal funds rate 
will eventually need to rise toward a more neutral level. 
However, with inflation very low and substantial slack in the 
economy, the Federal Reserve can be patient in removing its 
current policy accommodation.
    The outlook for the Federal budget deficit is another 
critical issue for policymakers. As you are well aware, after a 
brief period of unified budget surpluses around the beginning 
of this decade, the Federal budget has reverted to deficits. 
Budget projections from the Congressional Budget Office and the 
Office of Management and Budget indicate that very sizeable 
deficits are in prospect in the years to come.
    As I have noted before, the debate over budget priorities 
appears to be between those advocating additional tax cuts and 
those advocating increased spending. Although some stories in 
recent weeks in the Congress and elsewhere have been directed 
at actions that would lower forthcoming deficits, to date, no 
effective constituency has offered programs to balance the 
budget. Our demographics, especially the retirement of the baby 
boom generation beginning in just a few years, mean that the 
ratio of workers to retirees will fall substantially. Without 
corrective action, this development will put substantial 
pressure on our ability in coming years to provide even minimal 
government services while maintaining entitlement benefits at 
their current level without debilitating increases in tax 
rates.
    The fiscal issues that we face pose long-term challenges, 
but Federal budget deficits could cause difficulties even in 
the relatively near term. Should investors become significantly 
more doubtful that the Congress will take the necessary fiscal 
measures, an appreciable backup in long-term interest rates is 
possible, as prospects for outsized Federal demands on national 
saving become more apparent.
    Addressing the Federal budget deficit is even more 
important in view of the widening U.S. current account deficit. 
These deficits are related because the large Federal dissavings 
represented by the budget deficit, together with relatively low 
rates of U.S. private saving, implies a need to attract savings 
from abroad to finance domestic private investment spending. To 
date, the U.S. current account deficit has been financed with 
little difficulty. Nonetheless, given the already substantial 
accumulation of dollar-denominated debt, foreign investors, 
both private and official, may become less willing to absorb 
ever-growing claims on U.S. residents.
    Taking steps to increase our national saving through fiscal 
action to lower Federal budget deficits would help diminish the 
risks that a further reduction in the rate of purchase of 
dollar assets by foreign investors could severely crimp the 
business investment that is crucial for our long-term growth.
    The large current account deficits and the associated 
substantial trade deficits pose another imperative, the need to 
maintain the degree of flexibility that has been so prominent a 
force for U.S. economic stability in recent years. The greatest 
current threat to that flexibility is protectionism. The costs 
of any new protectionist initiatives in the context of wide 
current account balances could significantly erode the 
flexibility of the global economy; consequently, creeping 
protectionism must be thwarted and reversed.
    In summary, Mr. Chairman, in recent years, the U.S. economy 
has demonstrated considerable resilience to adversity. It has 
overcome significant shocks that in the past could have hobbled 
growth for a much longer period than they have in the current 
cycle. As I have noted previously, the U.S. economy has become 
far more flexible over the past 2 decades, and associated 
improvements have played a key role in lessening the effects of 
the recent adverse developments on our economy.
    Looking forward, the odds of sustained robust growth are 
good although, as always, risks remain. The Congress can help 
foster sustainable expansion by taking steps to reduce Federal 
budget deficits and, thus, contribute to national saving and by 
continuing to pursue opportunities to open markets and promote 
trade.
    For our part, the Federal Reserve intends to use its 
monetary policy tools to promote our goals of economic growth 
and maximum employment of our resources in an environment of 
effective price stability.
    Thank you, Mr. Chairman. I look forward to your questions.
    [The prepared statement of Hon. Alan Greenspan can be found 
on page 57 in the appendix.]
    The Chairman. Thank you, Mr. Chairman.
    And let me begin by referring to what I indicated in my 
opening remarks. That is, most of us, when we studied 
economics, were led to believe that 6 percent was considered to 
be full employment. And because of the boom in the late 1990s, 
some would say maybe a ``bubble,'' the unemployment rate went 
down at one point briefly to 3.9 percent.
    Was the 3.9 or 4 percent an aberration? Would we expect to 
come back to what would traditionally be 6 percent? I think 
even the Humphrey-Hawkins legislation was based on the concept 
of full employment which, my understanding, was 6 percent.
    So, I guess, let us start with that. It is almost like 
going back to Econ 101. And I can't think of a better professor 
than you to help the committee understand what changes, if any, 
have taken place over the last few years to perhaps change that 
equation.
    Mr. Greenspan. Mr. Chairman, you are raising one of the 
most important questions which bedevil economists in our 
endeavor to get a sense of where the economy is going and what 
it is likely to look like, say, 10 years hence.
    What we do know is that the change in the structure that 
evolved through the 1990s did bring the effective unemployment 
rate down. And indeed you may recall that we reached the 4 
percent level and slightly less at essentially a low inflation 
rate, so that there was no evidence at that particular point 
that as the unemployment rate fell, we were raising 
inflationary pressures of the type that in earlier years we 
would almost have certainly seen.
    Obviously, the changes in technology which have created a 
major improvement in productivity growth have been key factors 
here. And as we have observed in recent years, despite the 
weakness in economic activity, productivity has grown at an 
extraordinary pace. We must conclude from that, there have been 
some underlying shifts in the long-term structure of the 
American economy; and in my judgment, while we may not know 
where the unemployment rate, which is consistent with stable 
inflation--actually, I should say--stable prices, we don't know 
where it is, but it is clearly, from what we can judge, well 
under 6 percent.
    And I would not rule out the possibility that it is close 
down to the 4 percent level, and I would merely suggest that so 
far as policy is concerned, we don't hold a fixed view, but as 
policy evolves, try to get judgments as to what actually is 
happening in the economy to make judgments as to how far down 
unemployment can go and stay there.
    The Chairman. So essentially you are saying that 6 percent 
is no longer the benchmark that we would consider full 
employment that we relied on for, what, 50 years?
    Mr. Greenspan. Well, it varied over time. Remember, in the 
early part of the post-World War II period, the general view 
was that, indeed, 4 percent was the unemployment rate which was 
consistent with price stability. It then altered very 
significantly during the 1970s and the 1980s, and it has since 
come probably almost all the way back down to where it was in 
the early part of the post-World War II period.
    My own personal impression is that we have created a degree 
of flexibility in our economy which will enable us to have a 
functioning economy at unemployment rates lower than we had 
previously perceived in the last quarter century.
    The Chairman. Is it true that the tech bubble in the late 
1990s coincided with the unemployment rate going as low as 3.9 
percent?
    Mr. Greenspan. It did. But I wouldn't necessarily relate 
the two.
    The Chairman. You would not relate the two?
    Mr. Greenspan. Well, certainly the labor expansion and 
asset prices were a factor in economic activity. But if the 
structure of the labor market had been exceptionally rigid at 
the time, we would have found that prices and wages would have 
begun to move, as demand and supply pressures would have been 
out of balance. And so while, true, they are related in time, I 
am not sure I would relate them conceptually.
    The Chairman. Thank you. My time has expired.
    The gentleman from Massachusetts.
    Mr. Frank. Mr. Chairman, just to begin on that question. 
One of the reasons we were able, I think, to get to that quite 
healthy level, both socially and economically, was your 
willingness to challenge other people who believe that somehow 
automatically if we got that lower, the unemployment rate, it 
was going to be inflationary. And I continue to think that was 
one of the great services you performed by challenging what was 
then perceived wisdom in a lot of places, that we simply 
couldn't get below--remember, they had this concept of denial, 
when it seemed to me to be a lagging indicator--whenever 
unemployment dropped, it dropped. But fortunately you were not 
fraught by that, and your willingness to accommodate that drop 
was very helpful.
    One very specific question, because I was struck again by 
your comments on the negative consequences of the deficit, the 
inescapable negative consequences of the deficit: Have you ever 
discussed deficits with Vice President Cheney?
    Mr. Greenspan. The reason I hesitate, essentially----
    Mr. Frank. I know why you hesitate; you don't want to 
answer. That is stipulated.
    Mr. Greenspan. Well, I just want to say that the reason for 
my hesitation is that I don't discuss----
    Mr. Frank. Okay. Fortunately, Paul O'Neill does, so we will 
go elsewhere to get that information.
    On the question of unemployment, we share your hope that we 
will be able to get it down, but clearly we haven't yet. And 
here is the problem. I read your December speech, and, yes, the 
flexibility helps in the macroeconomic sense. You acknowledge 
that the process of adjustment causes some pain to some people, 
that overall the country benefits, but it does mean people get 
thrown out of work.
    What troubles me is, I think you are not sufficiently 
attendant to the importance--both, I think, socially, but even 
economically--of alleviating some of that distress.
    In that December speech about flexibility, you did cite 
one--only, really, one amelioration, and that was to retrain 
people through the community colleges. I appreciate that, but 
you know, the outsourcing now is taking place in many of the 
jobs that we used to retrain people for. I mean, if you go back 
to what we were retraining people for 10 years ago, some of 
those jobs are being outsourced. I don't think we can stop the 
economy, but it is going to stop if we don't do a better job of 
alleviating this.
    As you know, the people who are losing their jobs may not 
be the ones who get the new jobs. There is a particular 
problem, and that is that many of the jobs being lost carried 
with them some reasonable degree of health benefits. And one of 
the terrible social problems in this country--and again, all 
these social problems have an economic kick back--the 
percentage of full-time employed people who get health benefits 
through their employment is dropping, and new jobs do not have 
the health benefits, partly because of different structures, 
partly because of the weakness of labor unions which has been a 
conscious policy as well as an economic factor, probably 
because when people start from scratch they figure they don't 
have to do it.
    What--and I have to say also, Mr. Chairman, I think you 
exacerbate it one other way. Your comments on the deficit and 
its dangers are very strong. Not here, but elsewhere you have 
advocated that the great bulk of deficit reduction comes 
through spending reductions, not through any reincreasing in 
tax rates at any level. And we are not now talking obviously 
about tax reduction that was short-term stimulative; we are 
talking about longer questions in the economy.
    I have to tell you that if we were to follow the 
prescription that I think you have made, that all--almost all 
of the adjustment--fairly substantial adjustment to get rid of 
these huge deficits, if it all comes on the spending side, our 
ability to ameliorate the social distress, that you acknowledge 
is the inevitable consequence of economic adjustment, will 
dwindle. And if that happens, you are going to continue to see 
resistance.
    Now, you do tell people in your speeches, don't be 
protectionists. But as I have told you before, preaching 
Schumpeter. His theory of creative destruction buys you less in 
terms of a tolerance on the part of the people who are the 
short-term victims than you might ask, and I would really urge 
you--and I will hope you have something to say about it now--to 
join us in trying to do a better job.
    I don't think we can, as a country, stop transitions, but 
if we don't do a better job of managing the social costs of 
these transitions to real people in large numbers, they are 
going to slow down the transitions and, in some cases, stop 
them. And we can't do that if we adjust all of this deficit by 
spending reductions and none of it by looking at the revenue 
side.
    Mr. Greenspan. What I said, Congressman, and I will say 
again is that the longer-term problem is on the expenditure 
side, and that is a fact; and in a sense that you can by 
looking at the data, that we have very considerable difficulty 
in meeting the long-term projections for the commitments we 
have made without a significant increase in tax rates.
    Mr. Frank. Is it a fact that we have to reduce, abolish the 
estate tax altogether? That is not a fact; that is a value 
judgment.
    Mr. Greenspan. No. I am referring to the numbers. If you 
look at the numbers, what the numbers tell you--and this is 
CBO, OMB, and in fact virtually every major private analyst who 
looks at it--we have a very serious problem in the future.
    The point that I think we have to recognize is the fact 
that we don't know the extent to which tax increases curtail 
economic activity and, therefore, the revenue base. We do know 
that it is a risk, and therefore, in my judgment, we ought to 
be looking at getting as much as we can in the longer run in 
the way of expenditure restraint before we look at the issue of 
filling the gap on the tax side in order to get a viable fiscal 
policy.
    I am talking about process.
    The Chairman. The gentleman's time has expired.
    The gentleman from California, Mr. Royce.
    Mr. Royce. Thank you, Mr. Chairman.
    Chairman Greenspan, welcome. One of the questions I wanted 
to ask you was about the condition today where the Asian 
central banks, particularly China and Japan, are buying U.S. 
Treasuries in record numbers, and they are doing that to keep 
their currency from rising against the dollar. And my question 
is, if the dollar reaches some equilibrium and the Asian 
central banks stop this intervention, could their absence from 
the Treasury market cause interest rates to rise unexpectedly 
as a result of that? And is the Fed concerned about that 
possibility?
    Mr. Greenspan. It is generally well-known in the 
marketplace that the maturity of those instruments which have 
been accumulated are relatively short-term, as indeed our 
overall outstanding debt is.
    As a consequence, to take your question just even a step 
further and say what would happen if the holders of U.S. 
Treasury instruments began to sell them, would that put 
particular disruption on the price structure in the markets 
that occur here? And the answer is, it is unlikely. And the 
reason it is unlikely is, first, that even though there are 
very significant holdings of U.S. Treasury instruments in 
official foreign accounts, they are still a relatively small 
proportion of the aggregate competing securities, including 
private securities, which these markets integrate with.
    It is also important that because the maturities are short, 
when you sell them, you don't significantly alter the price 
because, obviously, the price of a very short-term instrument 
can't fluctuate much so long as the maturity at par is a very 
short distance away.
    So I think that the concerns that have been expressed about 
serious problems in our financial markets as a consequence of 
an ending of intervention of that sort are misplaced. I don't 
deny that there will be adjustments; there always are when any 
large block of securities moves back and forth. But it is not 
something which I would consider to be of major import in the 
financial markets.
    Mr. Royce. I appreciate that answer.
    Another question I was going to pose to you is, you said 
this morning that a strengthening in capital spending over this 
last year contributed to the acceleration of real output. If 
the Congress were to suddenly repeal the dividend tax cut that 
we enacted, would not that have a negative effect on equity 
prices, especially on those stocks that pay a dividend? And as 
a result, could business investments suffer because of the 
resulting increase in the cost of capital to the private 
sector?
    Mr. Greenspan. Congressman, you may remember a year ago 
there was considerable discussion about the interrelationship 
between cutting or removing a significant part of the double 
taxation of dividends and yields and, hence, equity prices. I 
don't think the evidence in retrospect is all that sharp.
    I do believe that when you reduce the tax on dividends, 
over the long run you invariably get higher levels of stock 
prices. But I don't think that the evidence is sufficiently 
sharp at this stage to suggest that it has been a major issue. 
But certainly if indeed stock prices were to fall, if history 
is any guide, they do have an impact on capital investment 
largely because, one, the direct increase in the equity cost of 
capital, and secondly, because of the capital values in a 
system impacting on what capital investment is.
    Obviously, if you have, say, a residential building or, I 
should say, an apartment building or an office building which 
has a market value which is significantly greater than the cost 
that would be required to build it, you will be very much 
inclined to build apartment buildings or office building. If, 
however, the value in the market goes down, you will be less so 
inclined.
    Mr. Royce. Thank you.
    My last question was to the issue that is--as far as I 
remember, as this process of forecasting interest rates has 
gone on, it has been focused on unemployment, productivity, the 
Consumer Price Index; and the last element of that that is 
always talked about is consumer confidence.
    I would like to know how asset prices play into the 
monetary policy calculations. I would like to know how much 
emphasis these days does the Fed play on asset price levels of 
things like equities and credit spreads, home prices, 
commodities, the yield curve. When you are considering 
adjustments to policy, is that part of the prescription?
    Mr. Greenspan. Well, Congressman, remember that our central 
focus is on the overall economy. I mean, our mandate is to 
create maximum sustainable growth in the context of price 
stability. And it is clear, all of the variables you just 
outlined have significant impacts on the pattern of both 
product prices and on economic output and employment. And to 
that extent, obviously, we watch them, we look at them, we 
evaluate them, and we try to integrate their effects into an 
overall view of the way the economy is functioning.
    But as far as policy is concerned, our ultimate objective 
is on how the economy is functioning overall. And we do not 
endeavor in any way to apply monetary policy towards altering 
any of the individual variables that you outlined.
    Mr. Royce. I see. Thank you, Chairman Greenspan.
    The Chairman. The gentleman's time has expired.
    The gentleman from Pennsylvania, Mr. Kanjorski.
    Mr. Kanjorski. Thank you, Mr. Chairman.
    Dr. Greenspan, listening to the beginning of your 
presentation, I heard a great deal of optimism. And then the 
rest of your speech, as indicated, a great deal of mines that 
exist that we could step on in a very short period of time 
could be very disruptive of the economy.
    But I think, going back to something that Mr. Frank first 
mentioned and you just referred to in your response to the last 
question, your position is to study and support a strong 
economy; and that is very good in practice, but it is what part 
of the American population experiences that very strong 
economy? And where I would like to direct our attention today 
is to several questions.
    The President on three prior occasions has asked the 
Congress to adopt a policy of tax reduction, which it followed; 
and in every one of those presentations the President indicated 
to the American people and their representatives in Congress 
that it would cause substantial job increase. In one instance, 
they indicated the creation of 1,200,000 new jobs.
    This creation of jobs has not occurred to date. And to 
date, we have 42 consecutive months of loss of manufacturing 
jobs in the country. So I guess my first question to you, can 
you or do you support the projection presently made by this 
President that, with making permanent the tax cuts that were 
previously enacted, they will create over the next year 2.6 
million jobs; or is that a wish and a hope that cannot be 
realized?
    And two, if we are going to have a good economy, but it is 
unequal as its benefits are distributed around this country, 
what are we to say to the citizens of Michigan, Ohio, 
Pennsylvania, New York, that have had substantial loss of 
manufacturing jobs? And from my observation, I see nothing on 
the horizon to see a replacement of those jobs or a growth in 
the manufacturing field.
    Could you try and respond to that?
    Mr. Greenspan. Certainly.
    The major problem in forecasting jobs is essentially 
forecasting what productivity growth will be. I believe why the 
administration's forecast in the past fell short, as indeed 
most private economists' forecasts fell short, is that none of 
us perceived how large the increase in output per hour or 
productivity was going to be; and we still, in retrospect, do 
not fully understand why the extent of the efficiencies that 
have occurred has been as large as it has.
    My own expectation is that the rate of productivity 
advance, which has been 5 percent-plus over the recent past, is 
going to slow down significantly. And it is just a matter of 
arithmetic that if overall growth in demand stays essentially 
where it is, you will begin to create significant job growth.
    Is the administration's forecast, the current one, 
feasible? If productivity growth slows down to a more historic 
level, it is probably feasible. But we have not as yet seen any 
evidence that that is indeed the case. In other words, we are 
still seeing very little evidence of new job hiring.
    Mr. Kanjorski. Well, then let me interrupt a second. I 
mean, it is a simple question, it seems to me.
    Over the next 12 months, do you see a significant change 
from productivity that is going to fall to historic levels and 
be an increase in jobs? Or is that fantasyland?
    Mr. Greenspan. No, I don't think it is fantasyland. I think 
it is probably the most likely projection. Indeed, I think 
that--as I indicated in my prepared remarks--that goodly parts 
of the extraordinary rise in productivity are looked at in an 
obverse sense.
    The failure of net job creation to occur with the growth 
and output is largely a consequence of a substantial amount of 
inefficiencies that invariably build up during a boom period, 
which occurred in the previous 1995 to 2000 period. And as a 
consequence of that, the possibilities for significant rates of 
return in either capital investment or just management 
shuffling has induced a very major improvement in the way 
business is done.
    My impression is, however, that that backlog of unexploited 
inefficiencies is probably running out. And if so, we will fall 
back to a more normal level of productivity growth. And if that 
happens, then a number not terribly different from what the 
administration is forecasting is a likely one.
    It, however, depends on the productivity forecast. And I 
must say to you that our ability to forecast that has not been 
sterling.
    The Chairman. The gentleman's time has expired.
    The gentleman from Louisiana, Mr. Baker.
    Mr. Baker. Thank you, Mr. Chairman.
    Welcome, Chairman Greenspan. I wish to turn to a subject 
you and I have had previous discussions about and, first, 
simply to make a request. Given the inadequacy of current 
financial reporting, apparently, at least at one of the GSEs, 
and the pending restatement issues, I have concerns that our 
ability to accurately assess financial condition may be 
significantly impaired.
    To that end, one indicator that your agency is the 
repository of the information could be quite useful and helpful 
to those on the committee with interest in this matter, would 
be a report by you, if appropriate, on the failure of either 
enterprise to meet the traditional 4 o'clock settlement 
obligations in their P&E accounts--the amounts, the durations--
and perhaps contrast that with a similar frequency of financial 
institutions of similar financial scale to give us some idea 
about whether these are aberrant behaviors or whether it is 
consistent with a broader financial market.
    And I don't expect a comment today, I just wanted to get a 
request on the record.
    Secondly, time permitting, for you to express your opinion 
with regard to a regulator having the authority to adjust 
minimum capital unilaterally, based on concerns of safety and 
soundness, and whether the authority to adjust minimum capital 
is a significant regulatory tool which other financial 
regulators utilize.
    But most importantly, for you to respond to statements made 
by others pursuant to the release of a report in December by 
the Fed which examined the value of the implied subsidy, the 
potential cost to taxpayers of the GSEs in utilization of that 
subsidy, the response of which by one GSE to that report was, 
``It is the work of only one uninformed employee and does not 
represent the views of anyone else.''
    Mr. Baker. I wanted to give you the opportunity to express 
either your personal or board opinion concerning the efficacy 
of that report. And do you believe that based on the findings 
of that report, as I have read it, that the employed subsidy 
does not provide significant benefits to the mortgage market 
while costing taxpayers billions?
    Mr. Greenspan. Well, Congressman, with respect to your 
second question, I would broaden it and say that any regulator, 
either a banking or a financial institution, cannot function 
appropriately without the capability of adjusting the capital 
of those entities which are supervised. If you have a fixed 
amount of capital with which to deal, it is very readily 
possible that you will run into a regulatory problem which is 
not solvable, so I think that without the ability of a 
regulator to have essentially full capabilities, or a very wide 
range of capabilities, to adjust capital of the entities which 
are being regulated, I would say that that regulation is half 
functioning. It is basically tying one or one and a half hands 
behind your back. And I would strongly recommend to the 
Congress that whatever regulator structure is constructed, that 
that regulator have control of the capability of capital 
because without it, regulation, in my judgment, will be 
deficient.
    With respect to the second question, I read the report of 
Wayne Passmore. I read it twice. I think it is an exceptionally 
good analytical report. I haven't checked the econometric 
details of his data input or his calculation of T values or the 
like, but the structure and the way he came at the particular 
analysis, I thought, was first rate. And if others think it can 
be improved upon, and indeed we are asking for inputs to 
improve upon it, we would like to hear any criticisms, any data 
which contradicted it, or in fact anything which would improve 
the evaluation. We have no vested interest in the final 
conclusion of the report. We do have a vested interest that it 
be accurate.
    Mr. Baker. Mr. Chairman, I would offer that in the event 
that you choose to do so, I am very anxious to hear the 
criticism validity, and should it be advisable at some future 
time to have a little get-together and talk about it, I would 
be more than willing to facilitate such a meeting. And I thank 
you for your courtesy.
    The Chairman. The gentleman's time has expired. The 
gentlelady from California, Ms Waters.
    Ms. Waters. Thank you very much, Mr. Chairman. Mr. 
Greenspan, we welcome you. We always are delighted to have you 
here and I bring you greetings from my district. My 
constituents still have fond memories of your visit there and 
we welcome you back. But they told me to ask you----
    Mr. Greenspan. I remember it fondly as well, I must say to 
you.
    Ms. Waters. Thank you. But they did tell me to talk with 
you about jobs today. You are going to hear, particularly on 
this side of the aisle, many questions about jobs, job creation 
and outsourcing. As we welcome you here, we seek your wise 
counsel and advice about how we as public policymakers can 
reconcile the dilemma that you describe in your statement as 
the economy having made impressive gains in output and real 
incomes and only limited progress in creating jobs.
    Mr. Chairman, as you know, having a job is like motherhood 
and apple pie in America. And when we look at what is happening 
to jobs, I see in my own State job loss numbers from the Bureau 
of Labor Statistics that show that my State of California has 
lost 284,900 nonfarm payroll jobs since January 2001, including 
8,400 such jobs in December. As of December 2003, there were 
1,125,890 persons in California who were unemployed, 329,875 
more than in January 2001. There are a lot of other numbers 
that I could give you, but I want you to know as we look at 
this national job picture, the job picture is even worse for 
minorities. The national African American unemployment rate is 
10.5 percent and the Hispanic employment rate is now 7.3 
percent.
    Now, to add insult to injury, Mr. Chairman, we have this 
outsourcing. We started to talk about this 15, almost 20 years 
ago. When I was in the State legislature one of my biggest 
pieces of legislation had to do with plant closure, and we 
warned that the loss of manufacturing jobs and the exportation 
of jobs to third world countries was going to create this kind 
of job picture. And we were told by economists, don't worry, 
there will be different kinds of jobs. And yet that has not 
happened.
    Mr. Chairman, what advice do you give us? Do you believe 
that this administration can make the Bush tax cuts permanent, 
continue to spend and create this huge deficit, not unveil to 
the American public what the war in Iraq and Iran is costing 
us--it wasn't shown in the budget--and somehow create jobs and 
turn this picture around? What is your advice? And do you 
believe that when we look at the President's expenditures and 
this huge deficit that we can have new spending such as the 
space program that he described in the budget, the creating of 
the space station on the moon and going to Mars? And Mr. 
Chairman, what is this business about training for what jobs in 
the community colleges? And shouldn't we be attaching to the 
tax cuts and evaluating whether or not that money is seeing its 
way back into the economy and doing job creation? How can we 
solve this dilemma? What advice would you give this 
administration and us?
    Mr. Greenspan. Well, first of all, the major problem with 
jobs is not economic growth. It is not demand. It is not the 
structure of the elements which are involved in taxes or 
anything which impacts on the gross domestic product. If that 
were the case, and we were in a period of historically low 
productivity growth, our job creation numbers would be huge at 
this point. So what is involved here is this very difficult 
problem that we have got. On the one hand we obviously look 
with great favor on the efficiencies that are occurring because 
at the end of the day that will elevate standards of living of 
the American people. On the other hand, it is very clearly 
creating a significant shortfall in new hires. Now, unless I am 
mistaken, my view is that this pattern is about to change. I 
don't know when it is going to change. I just find it highly 
difficult to imagine that we can continue to advance 
efficiencies as quickly as we are doing. But I will say this, 
that it is only a slowdown in productivity or an incredible and 
unexpected rise in economic growth from an already high level 
that will create jobs. And I don't think that the question 
really at this point is involved in the budget or fiscal 
policy, although, for reasons I try to outline in my prepared 
remarks, it is a very critical issue down the road, so to 
speak.
    The Chairman. The gentlelady's time has expired. Gentlelady 
from New York, Ms. Kelly.
    Mrs. Kelly. Thank you, Mr. Chairman. Your office has worked 
with my--with the oversight subcommittee on issues that are 
related to critical infrastructure and the implementation of 
the anti-money laundering legislation. This committee drafted 
title III of the USA PATRIOT Act. Part of what that did was aim 
at monitoring the flow of illicit money. Since the gentlelady 
raised the issue of what is going on with regard to that aspect 
of things, I would like to get some information from you. These 
provisions expire in that--in the PATRIOT Act in 2005. I would 
like to know what your thoughts are on the use of title III, 
including the requirement that foreign countries and financial 
institutions share cross-border information in order to do 
business with the United States.
    Mr. Greenspan. Congresswoman, I am aware of what obviously 
we are doing and I am obviously aware of what others are doing. 
But I am unclear in my own mind of where it is classified and 
where it is not classified. So I am in a difficulty answering 
your question. What I may like to do, if you don't mind, is 
answer you in written form with respect to that issue and try 
to give it some context. I will try to do that as soon as I can 
if I may.
    Mrs. Kelly. Mr. Chairman, I appreciate your sensitivity and 
I am certainly delighted. Any venue at all that we could have a 
dialogue about that I would appreciate. One of the things, 
also, there have been some concerns raised about the potential 
impact about a patchwork of securities regulation which 
includes efforts by the Federal Government and the State 
governments in a way to set and regulate prices in the market. 
Some of the people have said that the more cops on the beat the 
better. But then I am wondering if it isn't appropriate to say 
that the more cops that are on the beat working in coordination 
with each other is better.
    Do you think that investors and the American people benefit 
from coordination between the State and Federal regulators to 
maximize the enforcement and ensure the highest level of 
expertise with regards to the markets? Also, through--just a 
second question there. Maximizing returns that go directly back 
to the investors is something we have talked about. I want to 
know if your opinion has changed on that also. So I have asked 
you basically two questions.
    Mr. Greenspan. Are you referring mainly to mutual funds 
when you are posing your question?
    Mrs. Kelly. Well, let's just frame it--it was more a 
general question. But if you can frame it within mutual funds 
it is fine with me.
    Mr. Greenspan. Well, the thing we have to be aware of is 
that a market based capitalist system cannot function if there 
is a great deal of criminality involved or violence. When we 
talk about a rule of law, one of the rules is that thou shalt 
not steal. And some of what has been involved in with respect 
to the mutual fund industry, if the charges turn out in fact to 
be true, which some of them presumably are, is basically one 
group of people stealing from another. That is called a felony. 
And in my judgment, we have to be very assiduous in maintaining 
to eliminate that from the system because otherwise it will be 
difficult to get our system to function.
    Having said that, it is also important to recognize that it 
is very easy in the process of enforcing the law against 
criminality to inadvertently involve ourselves in functions 
which are not criminal and which restrict market competition 
and, in so doing, will undermine the efficacy of the 
institutions that we are concerned about, institutions which 
are very important to the functioning of the American financial 
system. And in my judgment, we have to be aware of how 
important these institutions are, not only to individual 
investors, which they are, but also to the liquidity and the 
functioning of the aggregate financial system and their 
importance in enabling the type of flexibility which I have 
said so much about recently as being one of the critical 
factors in why, despite all of the shocks that we have seen to 
this economy starting from the stock market crash, all the way 
to 9/11 and the Afghan and Iraqi wars, we have had very little 
in the way of economic contraction, and I attribute that in 
large measure to the flexibility that has emerged in our 
financial system, amongst other places. And I would be very 
concerned were we in our endeavor to root out very properly 
criminality from our institutions know where the boundary line 
was.
    The Chairman. The gentlelady's time has expired. The 
gentleman from Vermont.
    Mr. Sanders. Thank you, Mr. Chairman. Mr. Greenspan, nice 
to see you again. I always enjoy your presentations, as you 
know, and I never cease to be astounded about how your 
observations about our economy are so far removed from the 
reality that I see every day in my State, middle class people 
and what I see all over the country. It is like we live in two 
different worlds. You talk about optimism. I see in my State 
and around this country that the middle class is shrinking, 
that ordinary people are working longer hours for lower wages. 
I see that since 2001, three million more Americans have become 
poor. I see more and more Americans without any health 
insurance. I see retirees now losing the benefits that 
corporate America promised to them. I see older workers worried 
about the pensions that they were promised but which they may 
never get. And that is what I see. That is the bad news.
    But the good news, which I haven't talked about enough, is 
that many of your friends, the wealthiest people in this 
country are doing phenomenally well. While over the last 27 
years the real income of the bottom 90 percent of American 
taxpayers actually fell by 7 percent, the income of the top 1 
percent rose by 148 percent and the income of the richest one-
hundredth of 1 percent, the really good friends of yours, they 
rose by 599 percent. So maybe that is the difference in 
perception.
    Some of us go out and we talk to middle class people and 
working people. Now, Mr. Greenspan, over the last 3 years the 
U.S. has lost almost three million good paying manufacturing 
jobs, representing 16 percent of our total factory work force. 
Manufacturing employment has gone down 43 consecutive months, 
which hasn't happened since the Great Depression. Due to our 
disastrous trade policies, which you advocate for very, very 
strongly, American companies have shipped millions of decent 
paying jobs overseas to countries like China, where if workers 
try to form a union they get fired. If they try to protect the 
environment they may go to jail. People like the CEO of General 
Electric, Jeffrey Immelt, and many others stand up proudly to 
advocate how they are going to shut down plants in America and 
move to China. And while decent paying manufacturing jobs in 
this country decline, the largest employer in the United States 
is now Wal-Mart, who pays people--which pays people poverty 
wages, fights unions ruthlessly and provides miserable 
benefits.
    A new study came out, as you may be aware of, that 
indicated that the new jobs being created in this country, 
primarily service jobs, Wal-Mart type jobs, pay 21 percent less 
than the old jobs that we are losing. Not only are we losing 
manufacturing jobs, we are now losing white collar information 
technology jobs because they are going to India.
    Now, last year what I thought was an incredible statement 
you stated, and let me quote it. Quote, is it important for an 
economy to have manufacturing? There is a big dispute on this 
issue. If there is no concern about access to foreign producers 
of manufactured goods, then I think you can argue it does not 
really matter whether or not you produce them or not. End of 
quote. Mr. Alan Greenspan. In other words, according to you, it 
doesn't matter whether we get our goods purchased in China, 
from people making 20 cents an hour, or they are produced in 
the United States from people making $20,000--$20 an hour.
    Now interestingly, and this is my question, the Bush 
administration apparently agrees with you. According to the 
Seattle Times, the Bush administration believes, and I quote, 
the movement of American factory jobs and white collar work to 
other countries is part of a positive transformation that will 
enrich the U.S. economy.
    So my question is, do you agree with the Bush 
administration that it doesn't matter if we lose good paying 
manufacturing and information technology jobs and they are 
replaced by low wage Wal-Mart jobs?
    Mr. Greenspan. Congressman, let me actually agree with some 
of your figures, but give you a different perspective on what 
creates them. First of all, if all of the jobs being lost in 
the United States over the years and this goes back to the 
problems we used to have where we were losing jobs to low wage 
Japan, then we were losing jobs to low wage Mexico, then to low 
wage China, now the Mexicans are complaining that they are 
losing jobs to low wage China. Through all of this, the real 
wage of the average American has been rising and rising at a 
reasonably strong clip. The question that you I think properly 
raise is the income distribution question because it is the 
case that people at the lower end of the skills spectrum have 
had very considerable difficulty in raising their real wages 
where those at the upper end have shown significant so-called 
skill premiums. And what this turns out to be regrettably is a 
problem of a mismatch between a growing more sophisticated 
conceptual capital stock, meaning the means by which we produce 
goods and services in this country is ever increasingly more 
ideas and skills and less physical input and manual labor. That 
has been the long----
    Mr. Sanders. I don't mean to interrupt you.
    The Chairman. The time of the gentleman has expired.
    Mr. Sanders. You didn't answer my question.
    The Chairman. The gentleman's time has expired. The 
gentleman from the first State, Governor Castle.
    Mr. Sanders. Can he answer the questions?
    Mr. Greenspan. I can't answer the question without 
answering the question and I am trying do that.
    The Chairman. Gentleman from Delaware.
    Mr. Castle. Mr. Chairman.
    Mr. Greenspan. The point that I am trying to suggest to 
you, Congressman, is that the gross domestic product in this 
country is becoming increasingly more conceptual as the years 
go on over the generations and that it is important for our 
work force of necessity to match the skills that are required 
to produce the goods and services we do. Regrettably, we need 
to do more as far as education is concerned to move our skills 
level in line with, the growth in the conceptual underlying 
technology of what it is we produce. We have not been able--
please.
    The Chairman. The gentleman's time has once again expired. 
The gentleman from Delaware.
    Mr. Greenspan. May I just make one final sentence, please?
    The Chairman. Go ahead.
    Mr. Greenspan. The point at issue here is that we are 
ending up with an inadequate ability to move skills up 
sufficiently quickly. And this, as you point out, has created a 
problem of excess supply versus demand amongst our lowest 
skills and the reverse in the top. And that is something we 
have to address. And I happen to agree with Congressman Frank, 
that it is very important in this country not only to have an 
equitable society, but to have it perceived as being equitable 
because no democratic system can function unless the people 
believe it is equitable. And I think that it is crucially 
important for us to reduce the income inequality in this 
country and I think the way that one has to do that is through 
education. And I must say to you the community colleges in this 
country have been in the forefront of a major change in the 
quality of what we are doing with respect to reestablishing 
skills.
    So I agree with your numbers. I just disagree with the 
conclusion you have come to.
    The Chairman. The gentleman from the first State.
    Mr. Castle. I thank you, Mr. Chairman. I want to sort of 
build on what you were just talking about, Mr. Chairman. And 
you talked about income inequality and you brought in 
education. And I serve as the head of an education subcommittee 
and I have been involved with No Child Left Behind and I also 
serve on the Higher Education Subcommittee as well. And I would 
like your views on what role that you see for our country's 
educational system and preparing and supplying properly trained 
workers for our economic society and our society at large. And 
like everybody else I am concerned about the job drain, et 
cetera. And I happen to believe that some of this is 
educationally related to a great degree. You mentioned junior 
colleges, but there is also the whole function of the quality I 
think that we need in K through 12th grade as well as 
opportunities to go to all colleges, et cetera, in this 
country. And I think it is a more significant part of our 
economic broad picture than perhaps meets the eye and I would 
be interested in your views on that, sir.
    Mr. Greenspan. Well, Congressman, I find discouraging the 
fact that the recent evaluations of the ranking of our students 
internationally in math and science, find the American students 
sort of average, maybe slightly better than average in the 
fourth grade and by the time they get to the eighth and the 
12th grade we have deteriorated significantly. And what this 
suggests to me is that we are falling short in getting an 
adequate number of people through our elementary and secondary 
schools into colleges, and thereby increasing the supply of 
skilled workers and effectively bringing down the so-called 
skill premium, which would be a major factor in reducing income 
inequality in this country. Not only is the issue one of moving 
students much more rapidly from fourth grade through high 
school and into colleges, and its impact obviously on higher 
skills, but in doing that, you also reduce the supply in a 
number of the lower skills which will raise their wages and 
have an effect of rebalancing the structure of wage changes in 
the United States, so that the skill differentials are 
significantly different from where they are at this particular 
stage. And that, to me, says that we have to find ways to 
create a curriculum which enables us to compete with a 
significant part of the rest of the world, and a lot of the 
rest of the world to which I am referring to is the so-called 
developing world. And I don't know enough about the specifics 
of curricula and how one would improve that, but I do know what 
the effect is. And I do know that it is obviously possible, 
because they are doing it everywhere else in the world and we 
are not. And if we want to maintain an economy and a society 
which has been at the cutting edge of technology, with the 
highest real incomes of any major country, we have to enhance 
the capability and the skills of people coming out of our 
schools. You cannot have a highly complex capital structure 
without skilled people to essentially staff it. I think 
immigration is obviously one thing that is helping in part. It 
is filling in a lot of the slots where skills are required. But 
we shouldn't be needing to do that. We should be doing it with 
our own students and enhancing their capabilities in a manner 
which would enable our increasingly complex capital stock to 
function and maintain these very long term improvements in 
productivity, which even though I expect them to slow down from 
the recent pace, nonetheless, even at half of where they have 
recently been, it would be a major advance over what we 
experienced in the period of say the 1970s and the 1980s.
    Mr. Castle. Well, I agree with you, Mr. Chairman, and my 
time is going to expire here and I think it is very important 
that the whole country understands that tie between education, 
our economy and the significance of it individually and 
individuals and families as well as the overall economy. And 
while I won't have time to ask the question, I would just like 
to credit your comments in your statement on the deficit. There 
is a lot of wisdom there in terms of what we have to do. I am 
one of those who believes that we have to put everything on the 
table all the way from looking at the tax cuts to homeland 
security and defense and as well as other discretionary 
mandatory spending, and make some hard and fast decisions. And 
I think you have underlined that very well in your statement 
and I hope that all of us can learn from it as well. And I did 
note, by the way, that the stock market is up a little bit 
which always makes me feel good when you are testifying, and I 
yield back, Mr. Chairman.
    The Chairman. The gentleman's time has expired. The 
gentlelady from New York.
    Mrs. Maloney. Thank you, Mr. Chairman. And Dr. Greenspan, 
we all have a great deal of respect for your knowledge of the 
economy, and that is why I have to ask why is the economy so 
bad for so many of my constituents? Even though the economic 
indicators look good, the GDP growth is up, there has been 
improvement in many areas, but still there are no jobs. And I 
represent a highly educated and skilled constituency. And 
still, highly educated, skilled people cannot find jobs. And 
this is very, very troubling. I know that you have lowered 
interest rates 13 times since President Bush was elected and 
interest rates are at a historic low. But some observers 
believe that you are keeping a low Federal fund rate because of 
the stagnant job situation. The economy needs to create 125,000 
to 150,000 jobs a month just to keep up with the growing labor 
force, and last month we created only 112,000 jobs. So my 
question is, how heavily is the job situation and job 
stagnation affecting the Federal Reserve interest rate policy? 
I know that there are many different variables. I am not 
talking about the other variables. But what we are seeing is 
all the other variables are going up, yet the jobs are 
continuing to fall basically. We can't even get up to where we 
began when President Bush took office. So my question is, is it 
the job stagnation that is keeping this historic low rate?
    Mr. Greenspan. No. It is basically our overall view of what 
the balance of forces is in the economy, and what we have tried 
to indicate is that given our evaluation of what the economic 
outlook is, what we view as the outlook for inflation, for 
growth, for productivity and jobs, all in combination, has 
placed us at a point where we believe the most appropriate rate 
is 1 percent for the Federal funds rate. And I don't want to 
get involved into any more of the particular details, but I 
would scarcely say, as I indicated to one of your colleagues a 
moment ago, that any particular variable in our economy is 
driving monetary policy. Obviously, for reasons I mentioned 
before with respect to the question of concerns about people 
who are not only having difficulty finding jobs because the 
hiring rate is so low, but there is also the problem that no 
one has mentioned which is a difficult issue, that when people 
get laid off and they do seek jobs, on average, for a while at 
least, their income rate goes down. And that is a factor which 
has been clearly over the years a significant issue, 
suppressing the overall growth in real incomes in the society. 
So what we have got is a highly mobile population, and it is 
one in which the job turnover numbers are awesome. We, in fact, 
hire a million people a week in this country, and more or less 
a million people lose jobs or quit jobs during the week. So 
there is a huge churning, but that means there is a very 
substantial number of people who are on the wrong side of that 
churning, for example, I mean currently two million have been 
looking for jobs for over a year and can't find them. So I mean 
it may be a relatively small part of the population, but it is 
still millions, and we are acutely aware of what these elements 
do to a society. So we may be Governors of the Federal Reserve 
but we are also citizens of this country.
    Mrs. Maloney. So given what you have said today in your 
testimony, and given the fact that you have accommodated this 
with a very low Federal funds rate, a historically low one, and 
is it safe to say that you disagree with the report that came 
out yesterday from the Bush administration's Economic Policy 
Advisers that next year we will create 2.6 million jobs? That 
is what this report says. That is what the report came out.
    Mr. Greenspan. I haven't read the specific----
    Mrs. Maloney. Well, it says we are going to create 2.6 
million jobs.
    Mr. Greenspan. I haven't read the specific details of their 
forecast. My impression is that they have a significant decline 
in the rate of productivity advance from where it has been 
recently, and if you get----
    Mrs. Maloney. Do you agree or disagree?
    The Chairman. The gentlelady's time has expired.
    Mr. Greenspan. I haven't read it. I said to one of your 
colleagues earlier it is a credible forecast if the rate of 
productivity slows down to a more historical average.
    The Chairman. The gentlelady's time has expired. The 
gentleman from Texas, Mr. Paul.
    Mr. Paul. Thank you, Mr. Chairman. Welcome, Chairman 
Greenspan. I certainly was pleased that you brought up the 
subject of deficits, because deficits obviously do cause a 
problem and you mention that deficits may eventually cause 
interest rates to go up. But I also would like to suggest that 
deficits alone are not the problem, because whether you borrow 
the money or tax the money out of the economy, deficits still 
put pressure on the capital market. So deficits alone are not 
the problem. It is big government. It is big spending and the 
amount we spend here that really, really counts. But you said 
the deficits could--future expectations of deficits could raise 
interest rates and I certainly would agree with that. But we 
also must remember that future expectations of the inflation 
rate and the future expectations of the value of the dollar 
also can raise interest rates. And those caused by monetary 
policy. And therefore, the pressure or the emphasis or the 
blame for high interest rates that will come can't be put on 
the deficit alone. It has to be put on those who manage 
monetary policy.
    Also, you warned on page seven that the printing presses 
won't run indefinitely. You use the word ``indefinitely.'' and 
that is good because if they do run this fast indefinitely, we 
all know what will and can happen. So that is good that 
eventually you will turn the printing presses off. But for now 
you said you can be patient, and that means we will just let 
the money flow and see what happens, which I think is a risky 
proposition.
    But you mentioned the condition of protectionism. You are 
worried about protectionism, which I think is characteristic in 
all societies that destroy their currency, and especially when 
you have a fluctuating fiat currency. People yield to the 
temptations of protectionism. But once again, there are 
different ways of bringing about protectionism. There are the 
tariffs. But there is also the competitive devaluations and the 
exchange rate of the dollar, which is a reflex of monetary 
policy.
    But my question is related a little bit to the wording of 
indefinitely and being patient because they are arbitrary. They 
are subjective. And in January your report, FOMC report omitted 
two words, two words that were subjective, and that was 
``considerable period.'' and I find very interesting, and also 
very alarming, the amount of clout, the amount of power that we 
as a nation and we as a committee have allowed to get into the 
hands of one or two individuals or a committee. From the time 
the market was up to the release of that report the stock 
market lost $250 billion as a reflection of the concern about 
the dropping of two words. Frederick Hayek was fond of saying 
that the managed economy was in danger because it was based on 
a pretense of knowledge, that certain things the economic 
planners don't know and, for instance, he would agree with me 
that we don't know, you don't know, the Congress doesn't know 
what the overnight rates ought to be, yet we reject the 
marketplace. But it is part of the system. And I understand 
that. But doesn't it ever occur to you that maybe there is too 
much power in the hands of those who control monetary policy, 
the power to create the financial bubbles, the power to maybe 
bring the bubble about, the power to change the value of the 
stock market within minutes? That to me is just an ominous 
power and challenges the whole concept of freedom and liberty 
and sound money.
    Mr. Greenspan. Congressman, as I have said to you before, 
the problem you are alluding to is the conversion of a 
commodity standard to fiat money. We have statutorily gone onto 
a fiat money standard, and as a consequence of that it is 
inevitable that the authority, which is the producer of the 
money supply, will have inordinate power. And that is one of 
the reasons why I have indicated because of that, and because 
of the fact that we are unelected officials, it is mandatory 
that we be as transparent as we conceivably can, and remember 
that we are accountable to the electorate and to the Congress. 
And the power that we have is all granted by you. We don't have 
any capability whatsoever to do anything without the agreement 
or even the acquiescence of the Congress of the United States. 
We recognize that and one of the reasons I am here today is to 
endeavor to convey why we are doing what we are doing. And I 
will continue to do that, and I am sure that all of my 
colleagues are fully aware of the responsibility that the 
Congress has given us, and I trust that we adhere to the 
principles of the Constitution of the United States more so 
than one would ordinarily do.
    The Chairman. The gentleman's time has expired.
    Mr. Paul. And I agree with you that the responsibility is 
here in Congress.
    The Chairman. The gentleman's time has expired. The 
gentleman from North Carolina.
    Mr. Watt. Thank you, Mr. Chairman. Chairman Greenspan, 
welcome once again. And I always try to take your macro 
approach which you have responsibility for and put it in my own 
context because while economics may be macro, politics is 
local, which is a little bit micro. And so I have been 
listening intently to what you have to say and trying to put it 
in the context of the North Carolina situation, and I want to 
read a little excerpt and then ask you a question or two. This 
excerpt from a report says in nine States that cover most 
regions of the country, and North Carolina is one of those 
States, the number of unemployed workers projected to exhaust 
their regular benefits between January and June 2004, without 
receiving any further assistance, is larger than the number for 
any previous January to June period on record. And then it says 
the most dramatic story is in North Carolina. The 61,600 
unemployed workers who are expected to exhaust their regular 
benefits without being able to receive further aid is 50 
percent higher than the next highest level on record.
    Now, I am trying to apply what you have said to North 
Carolina, and I know you have got the whole 50 States to apply 
it to. But if I do so, a couple of things jump out at me. 
Number one, North Carolina is reputed to have among the best 
community college systems in the country. Number two, I am 
trying to figure out exactly how productivity, which is what 
you say is sustaining the failure to hire people, how that kind 
of plays out in North Carolina with all of the plant closings 
that we have had, because a closed plant can't either be 
productive or unproductive. I mean there is not going to be any 
jobs there.
    So I guess my question is, number one, would extending 
unemployment benefits be stimulative to the economy, first of 
all? And number two, can you put in context the micro--macro 
analysis you have done and help me feel better about what is 
going on in North Carolina on the micro or local political 
level?
    Mr. Greenspan. Congressman, I wouldn't put the issue of 
extending unemployment benefits in North Carolina or anywhere 
else as an issue related to trying to stimulate the economy. 
The economy has got plenty of stimulus. If you are going to 
move on extending unemployment benefits, it should not be for 
that reason. It should be for the reason of trying to help 
people, 61,000, who presumably need it, although I suggest to 
you that unless I am mistaken, for the economy as a whole we 
are going to find that those exhaustees, so to speak, coming 
off 26 weeks of unemployment insurance will be heading down in 
numbers really quite significantly. But I think the important 
question is what does one do in a world in which a number of 
the industries, which are running into trouble in this highly 
dynamic economy with major changes in technology, what does 
that type of economy do? I remember working with a number of 
the textile plants in North Carolina. I did a lot of work for 
Burlington and a number of other operations in the area, and 
20, 30 years ago, these were really extraordinarily first class 
operations. And over the years, as has happened in so many 
industries, competition created very difficult conditions for 
them, and they gradually shrunk in size and many of them have 
gone out of business, as you know better than I.
    What I think is crucially important to do under those 
conditions is to find ways in which to recognize that the level 
of real income of a geographical area depends to a very 
substantial extent on the degree of skill of the population, 
not the particular jobs that they happen to be in. Over the 
years people have held very different jobs through North 
Carolina, and real income has risen materially. What is crucial 
is to find a way to be sure that new jobs, new ways of doing 
things can be done because as occurred in many areas of our 
country, we have seen big shifts, for example, from steel. 
Manufacture to health care in geographical regions in which, as 
steel income went down, real incomes went up because of very 
major facilities coming on in the health care industry. And 
there are innumerable examples like that. But it happens over 
time and while it is happening, it is very distressful to 
people. The trouble is that you cannot readily stop progress. 
You can try, but invariably you will fail. And the reason why I 
say it is very important for us to make certain that our school 
systems and, as you pointed out, the excellent community 
colleges in North Carolina, it is important to find new ways in 
which the inherent skills of a population can be converted into 
high real incomes, wholly irrespective of what particular jobs 
or industries they are in.
    The Chairman. The gentleman's time has expired.
    Mr. Greenspan. It is not an easy issue, but I am not sure I 
know of a real alternative to that.
    The Chairman. Gentleman from Illinois, Mr. Manzullo.
    Mr. Manzullo. Thank you, Mr. Chairman. Mr. Chairman, on 
Monday Dr. Gregory Mankiw, Chairman of the President's Council 
of Economic Advisers said shipping jobs to low cost countries 
is, quote, the latest manifestation of the gains from trade 
that economists have talked about, end of quote, for centuries. 
And he also stated in the report that he issued that Chinese 
exports to the United States, quote, are not a primary factor 
in the displacement of the American manufacturing workers, end 
of quote. As a Member of Congress whose unemployment in the 
largest city, Rockford, Illinois, which led the nation in 
unemployment at 25 percent in 1981 and whose unemployment now 
is still over 11 percent, not counting the four factories that 
have decided to close and whose numbers are not counted in the 
unemployment, two questions. First of all, do you agree with 
the statement and, second of all, his further statement was 
that new jobs will be created, and I would like to know, my 
constituents would like to know, what are the new jobs? When 
are they going to be created? What sectors are they involved 
in?
    Mr. Greenspan. Congressman, first let me say first that I 
haven't read the article to which you are alluding at this 
moment nor have I seen other than the quotes in the press this 
morning concerning what Dr. Mankiw has said. Let me just say, 
first, that he is a first rate economist and I must say he is 
held in the highest esteem amongst his colleagues. I can't 
comment on specifically what he said with respect to 
outsourcing because I haven't read it. But with respect to 
China, I have said very much the same thing and for a very 
important reason. It has often been argued that the exchange 
rate in China is too low and that if it were raised it would 
create jobs in the United States. The implication there is that 
the other sources of low labor input, low labor cost jobs would 
not displace China as indeed China displaced a number of East 
Asian jobs. I think that there are very serious job problems 
and there are very serious problems specifically in your area 
of the United States and I think we are all acutely aware of 
the difficulties involved there. I would not, however, try to 
figure out a policy which would somehow restrict the exports 
from China.
    Mr. Manzullo. I am not talking about a policy. I am talking 
about the statement.
    Mr. Greenspan. No, but his statement, as you have alluded 
to, is that China is not the problem of loss of jobs in the 
United States.
    Mr. Manzullo. I can give you the names of Gear 
Manufacturing, Barry Manufacturing, I can give you lists and 
lists and lists of American manufacturers, including thousands 
of unemployed people in my district who have lost their jobs 
specifically, specifically because those products are now being 
made in China.
    Mr. Greenspan. No, no. I don't disagree that this is indeed 
happening. I am just merely saying that if China stopped 
exporting to the United States that others would take up the 
slack and I think in that regard you would find that it is not 
a Chinese issue. It is a basic issue of competition 
internationally.
    Mr. Manzullo. The January 30th edition of Wall Street 
Journal had an article where China is now outsourcing to North 
Korea and Vietnam because $150 a month is too much to pay. But 
the reason I asked the question is I think it is extremely 
upsetting to my constituents and several Members of Congress 
when the President comes out with a tremendous package on 
manufacturing and then right behind his back, almost 180 
degrees, the head of the Council of Economic Advisers says 
there is no problem with stuff coming in from China. That is 
not the case. We have got a serious problem going on, and I 
think we need to address that. But first, the chief, Council of 
Economic Advisers has to recognize that there is a problem.
    Mr. Greenspan. Is there a question in that last----
    Mr. Manzullo. No, it was just a nice statement. But thank 
you for your input. I appreciate it.
    The Chairman. The gentleman yields back? The gentleman from 
the evergreen State.
    Mr. Inslee. Thank you, Mr. Chairman. Doctor, we are glad 
you are here because we need your help restoring some measure 
of fiscal sanity to the United States Government. With the 
deficits that we are now running over 500 billion, you know, I 
had one constituent the other day that says, you know what you 
guys look like, you make Enron look like Mother Theresa ran the 
shop. And the unfortunate situation is that with this exploding 
deficit, we still have those here in this administration and in 
Congress who want to continue on this glidepath of continuing 
this course of adding debt to future generations and continuing 
to ignore the known fact that the baby boomers are coming and 
we are coming pretty soon. And in preparation of our discussion 
today, I thought it was useful to look at a little history and 
so I looked at a little history and if I can refer you to a 
chart over to your right, Doctor, this is a graph basically of 
our deficits starting in 1989. And to reference those who are 
looking at the graph, up is good, down is bad. When the graph 
is going down the deficits are increasing. And if you look at 
the history of this thing, in 1989 to 1992 the deficit was 
increasing and I don't mean to blame the first President Bush 
for that because he actually did some things to try to reduce 
the deficit at the end of his term. Then from 1992 to 2001 we 
saw us on a continuous and surprisingly continuous and reliable 
improvement of our fiscal condition up to surpluses up to the 
year 2000, 2001. And since that time we have not seen a general 
or gentle diminution of our fiscal process. We have seen a 
precipitous fall into deficits down where we are 521 billion in 
the hole at this time. And we are in a situation right now that 
some want to essentially continue the course of increasing 
spending on the one side and decreasing revenues on the other.
    So I asked myself, well, maybe there is a reason for that. 
Maybe it is to create jobs. So if we can look at the next 
graph. We will look and see if these policies--what impact they 
have had on our job creation in this country. And what this is, 
is a graph of the job creation during respective presidents 
going back to Truman, 4.6 million increase. One point nine 
million for Eisenhower. Four hundred seven million for Nixon. 
Reagan, 5.3 million the first time, 9.3 million in the second. 
We get down to the last 3 years, and we see the first 
meaningful negative number of 3 million jobs lost net during 
this last term of office. So job creation has not been an 
excuse, if you will, for the creation of these enormous 
deficits.
    So where do we go from here? Well, I need to ask your 
thoughts because what we have seen and you alluded to in your 
testimony is you have alluded to an increase in spending, both 
in defense and in discretionary domestic, during this current 
management of the U.S. Government. But we have also seen 
attempts and future attempts to reduce the revenues of the 
United States Government. And I just want to ask you a general 
question. Given the deficits that we have seen, given the fact 
that you and I both know this is a fantasy that we are going to 
cut them in half within 5 years, when we know that we haven't 
even included the cost of the Iraq war or the Afghanistan war 
or the AMT or the trip to Mars, given that we both know that, 
does it make sense, is it irresponsible to continue on a course 
of greater spending and reduced Federal revenues and, if not 
irresponsible, is it inadvisable and, if not inadvisable, is it 
risky? And if not risky, should we have a yellow flag up, which 
I hope you will show to this country, to change these policies 
from increased spending and decreased Federal revenues?
    Mr. Greenspan. Well, Congressman, I think that much of what 
you have said and much of the concern that you have expressed 
is actually stated in the President's most recent budget 
document. In short, I certainly know that the financial people 
within this administration are acutely aware of all of these 
issues and to my knowledge, the President is as well. So I have 
no reason to disbelieve that he is going to make every effort 
to in fact move in the direction which you are suggesting.
    Mr. Inslee. Well, let me suggest a reason that I am 
concerned about--if we can have the next chart.
    The Chairman. The gentleman's time has expired. One more 
chart.
    Mr. Inslee. Would you allow me 30 seconds or not, Mr. 
Chair?
    The Chairman. Of course.
    Mr. Inslee. Thank you very much.
    The reason that I am concerned is the President has 
suggested new spending, namely a war in Iraq, which is not in 
his budget, number one. And number two, we have folks here who 
are suggesting increased reductions in Federal revenues by 
making tax cuts permanent for upper-income folks that will cost 
$1.3 trillion. We have new tax proposals in this budget of 
about $135 billion, and we have an increased debt service of 
over $700 billion associated with the new debt my constituents 
are paying due to the debt created on this President's watch.
    So I guess the question is, is there some reason for 
concern if you believe, as I do, that these proposals have the 
prospect of reducing Federal revenues over the long term?
    Mr. Greenspan. Congressman, the first thing I would do is 
something I regrettably haven't done in the last year or 2, 
that is to urge you to restore pay-go and discretionary caps, 
because unless you get a budget process system in place which 
enables you to handle decisionmaking so that priorities can be 
constructed in a manner which will ultimately get you to where 
you want to go, I don't know how you do it. And I, remember, 
had a long regrettable session before a committee of this House 
in September of 2002 in which I urged that the then-expiring 
pay-go and discretionary caps be reinstated largely because, 
much to my surprise, they had been very successful during the 
period of their existence in requiring an evaluation by the 
Congress of various alternatives, and recognizing that there is 
double-entry bookkeeping that one is required to adhere to; 
that the books have to balance in one way or another, or you 
have to borrow. And so I think as step number one, that is what 
I think ought to be done.
    Mr. Inslee. Thank you.
    Thank you, Mr. Chair.
    Mr. Frank. Mr. Chairman, I would just ask unanimous consent 
for 10 seconds to express the hope that at some point Mr. 
Greenspan will explain what he meant by regrettable in that 
last characterization.
    Mr. Greenspan. I am sorry. Regrettable in what context?
    Mr. Frank. You said there was a regrettable appearance 
before the committee.
    Mr. Greenspan. Well, I regret the fact that in retrospect I 
was utterly unsuccessful.
    The Chairman. The gentleman's time has expired.
    The gentleman from California Mr. Ose.
    Mr. Ose. Thank you, Mr. Chairman.
    It is interesting sitting up here listening to the other 
Members' comments. Coming from California with an embedded 
unemployment rate of 6-1/2 or 7 percent, we would relish, for 
instance, the unemployment rate in Vermont of around 3.2 
percent. I don't know what the gentleman refers to when he is 
otherwise berating you, but we would welcome a 3.2 percent 
unemployment rate in California.
    Mr. Chairman, I am overtaxed, overregulated, and 
overlitigated, just pure and simple, and I am trying to do 
everything I can to reduce every one of those burdens. I have 
three primary questions, two of which I would like to submit 
verbally to you, and then, as I understand it, you can respond 
in writing.
    The first has to do with the Executive Life situation. U.S. 
Attorney Deborah Yang in Los Angeles recently negotiated a plea 
with Credit Lyonnais in which they pay the Federal Reserve a 
penalty of $100 million for certain transgressions they 
admitted to. I am curious how the Fed came to that $100 million 
number. I am curious how the Fed intends to use that money. Is 
it going to go to offset the damages that the policyholders of 
Executive Life suffered, or is it going to be used for some 
other purpose? That is my first question. I would be happy to 
submit that in writing.
    Mr. Greenspan. Well, let me respond to it, if I may.
    Mr. Ose. All right.
    Mr. Greenspan. The actual agreement, as I recall it, is 
that $375 million is involved in restoration of losses to 
policyholders, and that an additional $175 million is involved 
from third parties. The 100 million you refer to is a civil 
penalty related to a violation of the Bank Holding Company Act, 
and we are required by law to pay that over to the United 
States Treasury, so that we don't do anything with it.
    I believe that the reason it turns out to be that amount is 
it is the judgment of all the people involved that that was the 
appropriate amount of fine given the nature of the particular 
transgression that was involved in that episode. So it is in 
relation to other related types of violations of the Bank 
Holding Company Act. I am not sufficiently knowledgeable to 
know what the general level of fines is but relative to what 
other transgressions there were, that did, when I heard the 
number, seem to be the right approximation.
    So should those numbers be five times as large or one-third 
as large? I don't think one can argue. But I do think that for 
this particular episode, relative to all others, seemed to me, 
as I had to vote on it, the appropriate number.
    Mr. Ose. Do I understand you to say that the $100 million, 
the Fed will not get involved in the decision of what happens 
to that 100 million; that it gets paid over to the Treasury?
    Mr. Greenspan. That is correct.
    Mr. Ose. Thank you.
    A question I would like to submit for response in writing 
has to do with the differing reports regarding job growth, I 
think, from the Department of Labor in December and a second 
Federal agency in early January. One showed significant growth, 
and one showed at best generally flat employment numbers. I 
will be happy to forward that to you accordingly.
    Mr. Ose. But my time being constrained, I want to follow up 
on Mr. Royce's question. He had asked you about the impact of 
sales of instruments held by foreign entities on the currency 
exchange rates, and your response had focused on short-term 
instruments. And I think your point was that the duration of 
the instrument is more influential for short-term instruments 
than otherwise. I am curious of your position of the sale or 
transactions dealing with longer-term instruments.
    Mr. Greenspan. Well, clearly if longer-term instruments are 
sold, the tendency is to have larger price changes, larger 
capital gains and losses. The reason I raise the issue about 
the maturity is that central banks try to be highly liquid in 
their holdings of foreign exchange reserves, which means they 
tend to have relatively short maturities. And consequently, if 
they are going to sell, one would presume that of necessity a 
significant part is going to have to be short-term maturities, 
which will have only a de minimis effect on interest rates in 
the United States because the short-term rates are heavily 
impacted by Federal Reserve policy; longer-term rates are not. 
And were it the fact that any significant slowdown in 
accumulation or liquidation were involved, then I would say 
there would be a greater impact, but my understanding of what 
the usual holdings of these institutions are, that does not 
seem to be a significant threat, as best I can judge.
    The Chairman. The gentlemen's time has expired.
    Mr. Ose. Just one follow-up, if I may.
    The Chairman. Briefly.
    Mr. Ose. Is it your point, then, that the impact of the 
central bank transactions is constrained due to the duration of 
the instrument that they are using?
    Mr. Greenspan. You mean on their part?
    Mr. Ose. Yes.
    Mr. Greenspan. No, it is not constrained. They are doing it 
voluntarily. I am just merely saying people who are concerned 
about significant liquidations or changing in investment policy 
on the part of foreign central banks on interest rates on U.S. 
Treasury securities are, I think, more concerned than they 
should be.
    Mr. Ose. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. The gentleman's time has expired.
    The gentleman from California Mr. Sherman.
    Mr. Sherman. Thank you, Mr. Chairman.
    This has been a surprising week. I opened my L.A. Times 
yesterday, went to the headline ``Bush Supports Shift of Jobs 
Overseas,'' and then I come to this committee, and just to 
comment about your opening statement, Mr. Chairman, where you 
put forth the idea that 6 percent might have once been defined 
as full employment.
    Mr. Greenspan. I don't remember my saying that.
    Mr. Sherman. No, no, you didn't. The other chairman. We 
have two chairmen in the room.
    Mr. Greenspan. I beg your pardon.
    Mr. Sherman. And I was would say that I think we are about 
the same age. When I was studying economics, they told me 3 
percent was full employment. A decade or two later, maybe 4 
percent. And if 6 percent was full employment, then today we 
would have an unemployment rate that was too low, which is at 
least not what I am hearing from my constituents.
    The other Mr. Chairman. Back in 1997, you testified to us, 
I was a green Member of this House, before the Budget 
Committee, that the CPI as calculated overstated the rate of 
inflation, and that hence the inflationary increases to Social 
Security checks are a point, a point and a half higher than 
they need to be to maintain purchasing power. Is that still 
your position, or have they made such enormous improvements 
over at the Bureau of Labor and Statistics that we now can rely 
that that CPI Index is something you would support?
    Mr. Greenspan. The Bureau of Labor and Statistics has 
indeed made significant changes and very materially improved 
the existing published index. However, they also have an index 
called the CPI Chained Index, which is far more realistic with 
respect to measuring the cost of living. That is not officially 
employed in either indexing of the tax system or of outlays or 
benefits. If it were or, say, had been employed instead of the 
current published CPI, we would have had a fairly significant 
reduction cumulatively in the budget deficit. About 60 percent, 
as I recall, would have come out of increased revenues, because 
the indexing would have been slower, and about 40 percent out 
of entitlements. So----
    Mr. Sherman. So if this superior index had been used, 
today's Social Security check would be 4 or 5 percent lower 
than the checks we just made out?
    Mr. Greenspan. No, that is a larger number than I think.
    Mr. Sherman. But it would be, what, about a point a year 
over the last 5 years, or less than that?
    Mr. Greenspan. No. It would be in the few tenths per year, 
and the tax revenues would have been higher by a somewhat 
higher proportion.
    Mr. Sherman. We have got the largest trade deficit in 
history. We are perhaps the only government in history that 
thinks exporting jobs is good, imports are good. You have got 
two large Asian governments that are pushing their currencies 
down vis-a-vis ours both by buying U.S. Treasuries on the one 
hand, and, in the case of China, adding to that a fixing of its 
rate of exchange with us.
    If the Japanese and Chinese Government simply abandon all 
efforts to influence currency values, what effect would that 
have on the yen and yuan dollar exchange rate, and what effect 
would that have on the trade deficit? This is no small 
question, I realize.
    Mr. Greenspan. The general view in the marketplace is that 
there is a so-called home bias in Japan with respect to holding 
yen as distinct from foreign currencies. The consequence of 
that is basically to raise the long-term value of exchange rate 
in international markets, because obviously if households are 
not buying any foreign asset, nor, in fact, are financial 
institutions, in any significant measure, you are having an 
abnormal reduction in the demand for external currencies, which 
means you have upward pressure on the yen.
    The institution, the ministry Finance has been, as you well 
know, endeavoring to hold the rate down by significant 
purchases of dollars. And one must presume that were that 
procedure abandoned, for a short time at least, the yen 
exchange rate would go up. My own impression is it would only 
go up for a while, but not stay there.
    The issue of China is a little more complex in the fact 
that they have capital controls in place. But, again, what that 
does is to create a lesser demand for foreign currencies 
because Chinese residents are inhibited in what they can buy 
with respect to what they can invest in foreign currency. So 
one also presumes that were the purchases reduced or ceased, 
then exchange rates would rise accordingly.
    The Chairman. The gentleman's time has expired.
    The gentleman from North Carolina.
    Mr. Jones. Mr. Chairman, thank you very much.
    Mr. Greenspan, I would like to ask you a yes or no 
question. Have you had a chance to read Paul O'Neill's book, 
The Price of Loyalty?
    Mr. Greenspan. I have glanced at it. I have not had a 
chance yet to read it.
    Mr. Jones. Well, I have found it in a positive way very 
interesting, the relationship, a positive relationship of you 
and Mr. O'Neill and how you discuss the monetary issues that we 
are facing in our Nation under the new President. And for any 
of my colleagues, whether they be Republican or Democrat, if 
they haven't read it, I think they would find it very 
interesting.
    I do want to pick up very briefly, because you have 
answered both sides as it relates to outsourcing. I am from 
North Carolina. I share the concern of Mr. Watt, who spoke 
earlier; Mr. Manzullo, who just spoke. You were quoted in the 
Washington Post yesterday, and I want to read this accurately. 
It says: Greenspan counsels that workers hurt by outsourcing 
can be confident that new jobs will be displaced over old ones, 
as they always have. Yet you answered a question on one of the 
questions earlier that said that you know that approximately 2 
million people have been out of work for 1 year who are out 
here looking for jobs.
    My question is, when you give an answer to a person or a 
group of people that are losing their jobs, and they are doing 
the very best they can, trying to get educated in different 
areas of training so they can get a job, how long does it take 
for this transition to take place?
    Mr. Greenspan. I think that is obviously the relevant 
question. And the context in which I was using it was over a 
period of several years, because if you look at the data that 
underlies all of these relationships, it appears that over time 
we, in effect, employ 94, 95 percent of the workforce, and that 
as jobs are lost, they obviously must have been replaced, and 
indeed at increasingly higher wage rates, because the real 
incomes are going up as well.
    It is the transition which is so difficult and so stressful 
for people, because as I mentioned before, we are dealing with 
a weekly turnover of a million jobs. And the fact that a 
significant part of them, like two-fifths, are involuntary 
means that a lot of people are losing their job every week.
    Yet if you look over a protracted period of time, you find 
that an ever-increasing number of Americans are employed in 
ever-higher-paying jobs. Something must have happened between 
state one and state two, so to speak. And is basically human 
ingenuity always finds new ways of doing things, and there are 
always new jobs being created. And indeed that must be the 
fact, or our numbers are all wrong, and we have every reason to 
believe that they are fairly accurate.
    The reason it is a problem is that most of the new jobs are 
relatively high-tech, and one of the things you can't do is 
forecast what innovation is going to be. And so when you ask, 
you know, what new jobs will there be, and where are they, it 
is very difficult to tell in advance. But they are there, as I 
put it, the quote is correct, as they always have been. And I 
know of nothing to suggest that that process is in any way 
changed in this particular period.
    Mr. Jones. Well, I have great respect for your knowledge 
and ability, and I can only say that I hope that this 
transition takes a fast--is in a faster pace than it is now, 
because people are hurting throughout this country. And I have 
never seen quite the frustration I have seen. My father was in 
Congress for 26 years; he was a Democratic Congressman. I am 
here as a Republican, came in 1994. And some of my colleagues 
have said this: I have never seen the frustration I am seeing 
now. So I hope we as a government and Congress and the 
Presidency and you and the Fed, that we can somehow bring some 
confidence to a lot of people that I think are hurting pretty 
badly.
    Let me touch on one other issue, and then this will be my 
last question, Mr. Chairman.
    As people are losing their jobs, and some are getting 
lesser jobs, meaning income, lesser jobs, do you see any signs 
that concern you or the Fed that the consumer using his credit 
card is beginning to get into a dangerous area?
    Mr. Greenspan. There is a general rule that we usually 
adhere to which sometimes is right, most of the time is right, 
sometimes is wrong: That the person who knows best about what 
they can take on in credit is usually the consumer himself, and 
that as a general proposition has proved over the years.
    We are nonetheless aware that there are innumerable cases 
and highly publicized cases of egregious behavior on the part 
of numbers of people in the financial area. The debt servicing 
charges of credit cards are rising, and it is hard to tell 
whether there is merely the fact that technology is improving, 
finance is improving, and this is just a normal course of how 
people deal.
    I mean, for example, we have this great concern that 
mortgages continue to rise relative to income. Well, it has, it 
is, and it is rising significantly, but that has been going on 
for 50 years. And the problem is that the asset side of the 
household balance sheet has been rising as well, and hence the 
true burden of the debt is matched by the assets.
    And I suspect, but I don't know for sure, that in most 
cases that is largely the issue with credit card debt; that 
merely looking at the debt or what the monthly payment is 
relative to income forgets the fact that assets in households 
relative to income are also rising progressively. And as a 
consequence, we at this stage are not overly concerned that 
there are debt burdens which are very difficult for the 
American public to handle on average. I mean, obviously when 
you integrate that with the job problem of people losing jobs, 
that is where most of the difficulty occurs, but on an ongoing 
basis, people who are employed are reasonably successful in 
knowing how to handle their credit cards and their debt burdens 
generally.
    The Chairman. The gentleman's time has expired.
    The Chair would announce that we have been notified by the 
floor we will have a vote somewhere between 1:30 and 2:00. The 
Chairman has been kind enough to stay--announce he is going to 
stay until 2:00. I want to let everybody have an opportunity to 
answer questions. We are going to try to stay strictly to 5 
minutes as best we can. And I thank the Chairman.
    And I would now recognize the gentlelady from Oregon Ms. 
Hooley.
    Ms. Hooley. Thank you.
    Chairman Greenspan, we are glad you are here. Thank you for 
coming. I have a couple questions.
    We see every day that there are new corporations that are 
offshore outsourcing. In fact, it reminds me about 3 years ago 
of a train going up a hill, and all of a sudden we reach the 
top of the hill, and now outsourcing is like that train going 
quickly down the tracks. I am very interested in your views 
about this trend, and I am particularly interested in how you 
feel about American consumers' personal financial, medical 
information being sent abroad to call centers, to filing 
centers. The consumer reporting agencies are now sending their 
credit files abroad because of outsourcing, and I am concerned 
about exactly what happens, or what could happen, once that 
information is outside our borders.
    Do you believe this information is adequately protected 
when it crosses our borders, and do you feel that anything 
should be done to increase the protection of this sensitive 
data? First question.
    Let me get you the second question quickly. We just had a 
discussion about the outsourcing, where the new job is going to 
be. I can remember when we had talks about trade, and during 
those debates it was argued that while manufacturing jobs may 
be lost because of a result of those agreements, that overall 
this loss would serve a greater good by refocusing our economy 
and displaced workers on more productive sectors such as high-
tech or service industry jobs. And now those jobs are being 
outsourced to foreign countries.
    My question is this--second question: Now that we have 
exported our manufacturing jobs, now that we are exporting our 
high-tech jobs and our service jobs, what areas are left for us 
to devote our productivity toward? I mean, we talked about 
people being unemployed. I mean, these people are desperate, 
they can't find a job. They have said to me over and over 
again, look, we want retraining, we just need to know what is 
out there in the future, what direction should we go when we 
are being retrained. And I just want to know, you know, what 
sectors of our economy are going to drive this massive job 
growth? People want to know that.
    And you are right, the transition is hard, but what do you 
tell people how should they be retrained? What does our future 
economic growth look like?
    Mr. Greenspan. Well, Congresswoman, with respect to your 
first question, I think it is an interesting issue with respect 
to the privacy and security of a number of the types of issues 
that occur when you are moving information and data over 
satellite transmission. I assume that everything is 
appropriately encrypted and that the security is as good as you 
can make it. And, indeed, we have that problem domestically 
with a vast proportion of data of a very private nature moving 
across our own country. My own impression is that the 
encryption is not bad, and, in fact, they do a reasonably good 
job, but I don't know that for sure.
    On the issue of the outsourcing and the jobs question, 
there are two problems here--factual questions. Let me take a 
step back. What we do know is that, as I have mentioned several 
times here today, that we are confronted with the fact that 
jobs continuously increase in the country over, say, 3-year 
moving averages at ever higher real wages, meaning wages that 
enable people who earn them to effectively purchase ever more 
amounts of real goods. And so we have this problem which how is 
it possible that on the one hand our data system is saying that 
jobs are forthcoming and at ever higher wages, but we hear of 
all of these problems which everyone is having? And they are 
real problems. It is not just anecdotal, minor issues. There 
are real hardships out there for very large numbers of people.
    I suspect that part of the reason why we are running into 
this issue is the fact that jobs, the level of jobs has 
actually gone down as much as it has gone down for a 
significant period of time, and that in turn is directly 
related to this extraordinary acceleration in productivity. And 
that puts us in a very difficult dilemma.
    We cannot, I would hope, be against increased efficiency 
and increased productivity which enhances the standard of 
living, yet we cannot deny that there has been a fairly 
significant reduction in jobs as a consequence of that. And 
what that then does is it emphasizes all of the problems of 
perceived job loss occurring as a result of imports, whether it 
is goods or services or outsourcing or whatever. And I believe, 
although obviously it is a forecast, that this is going to 
change, and it is going to change because I find it utterly 
inconceivable that an advanced society such as ours can 
continue to grow output per hour at the rate we have been going 
at, and that it must eventually regress back to a more 
sustainable normal level. When that happens, things will 
change, but until it happens, I think we have the types of 
problems which you are very correctly outlining.
    The Chairman. The gentlewoman's time has expired.
    The gentleman from Iowa.
    Mr. Leach. Thank you, Mr. Chairman.
    Mr. Chairman, in thinking through your testimony today, 
frankly, in prior testimony yourself and prior Fed Chairmen, it 
strikes me that the Fed congressional exchange is largely about 
the politics of economics and the economics of politics. And on 
the first side we in the elected branch ask you questions about 
interest rates, price stability, economic growth, jobs. And as 
I look and think over this testimony, there is very little 
complaint on the first two. In fact, your records are--as 
Chairman of the Federal Reserve, is sterling on interest rates, 
it is sterling on price stability.
    On the jobs front, of which you share accountability with 
all sorts of sectors of the economy as well as the government, 
we are in an imperfect situation. But I am hard pressed not to 
think, A, that you are very wise to suggest that our current 
job situation could improve without affecting price stability; 
and that is excellent advice; but secondly, that we would be in 
far worse shape even though the situation is currently 
imperfect if we didn't have price stability and didn't have low 
interest rates.
    And so it is hard from a congressional perspective on the 
subject of the politics of economics not to give you 
exceedingly high marks. And then on the reverse, on the 
economics of politics, it is hard to think that you are not 
giving Congress rather low marks, and that you are warning 
about the deficits, and you are also warning in a--what I think 
is a most abnormal part of your testimony today--and not that 
it is abnormal to your thinking, but abnormal in your 
emphasis--to raise the protectionist warning. And as we look at 
politics, that is becoming an increasingly significant issue.
    And so what I would like to ask you today is two questions. 
One, if you could mete out further your concerns on 
protectionism. I mean, for instance, I have always thought that 
protectionism, the jobs it really most protects are those in 
politics rather than those in the economy. But is it your view 
that if America moves in a far more protectionist direction, we 
will lose or we will gain jobs? And can you assess that for the 
committee as an observation from a professional economics and 
from a monetary authority perspective? And then I have one 
further question after that.
    Mr. Greenspan. I think it is indeterminate. I think one 
thing that you can say about protectionism is it will reduce 
the average standard of living, but it doesn't offer any 
significant insight into what the level of jobs will be, 
because the issue of jobs is determined in a broader 
international context. And while I don't deny that there are 
relationships between protectionism and jobs, I would say that 
is not the issue. The issue is standard of living and the 
stability of the economics system.
    My concern about protectionism is that it could create very 
significant distortions in the financial system, international 
financial system. And importantly and almost without question, 
to the extent that we succeeded in closing our borders to 
trade, our standard of living would invariably decline. It may 
decline in the context of a very high rate of employment or a 
very high rate of unemployment. But the one thing is certain is 
that our standard of living will decline.
    Mr. Leach. My second question relates to the other somewhat 
abnormal part of your testimony which relates to the changing 
value of the dollar relative to other currencies. And one of 
the great questions in the international economy today is that 
if the value of the dollar depreciates further, will this cause 
inflationary pressures in the United States of any 
significance? Or do you think that that is a circumstance that 
is offset by increases in productivity and the continued 
increase in productivity abroad as well as here?
    Mr. Greenspan. As I pointed out in my prepared remarks, 
Congressman, we have seen, as you know, quite a significant 
reduction in the value of the dollar on a trade-weighted basis, 
and we would have expected to see a corresponding rise in the 
dollar value of the imports or the dollar price of imports if 
foreign exporters were successful in keeping their profit 
margins in their domestic currencies constant.
    Now, what we find in the data is that the increase in the 
dollar price of imports has gone up much less than that which 
would have kept the exporters' margins constant, which leads me 
to conclude that they have had a margin squeeze, but observing, 
let us say, amongst the Europeans that exports out of Europe 
denominated in euros have been relatively flat. Now, what that 
says is that the incentives that one would have expected to be 
cut off by the sharp rise in the euro and the decline in the 
dollar would have induced a significant contraction of exports 
from Europe to the United States. That did not happen.
    We conclude on the basis of other data that there has been 
a very major increase in hedging by foreign exporters 
essentially shorting the dollar, and the realized capital gains 
from the hedged short position offset in part the loss in 
profits that occurred as a consequence of the rise in the euro 
vis-a-vis the dollar. And that is one of the reasons why we 
have not seen a significant impact at all on domestic U.S. 
inflation as a consequence of the decline in the dollar if you 
don't generalize that type of analysis worldwide.
    However, as I also indicated, that cannot go on 
indefinitely. The adjust processes will invariably occur if the 
exchange rate were to continue lower.
    The impact, however, has certainly to date been very 
modest. But in principle, over time you have to get a 
reflection in the domestic price level because you cannot 
continuously hedge in these markets, because hedging is 
actually quite expensive.
    So the answer is to date we have seen very little effect of 
the decline in the dollar on American inflation. If it should 
continue, however, then we would begin to see some rise in 
import prices, and, because of that, some impact on overall 
American inflation. But even under those conditions, the 
numbers look really quite small, and as a consequence it is not 
something which gives us considerable concern at this point.
    The Chairman. The gentlelady from California.
    Ms. Lee. Thank you, Mr. Chairman.
    Once again, Mr. Greenspan, it is good to see you here 
today.
    Let me follow up with Ms. Hooley's question in terms of 
your response. First of all, with regard to outsourcing, you 
indicated it does put us in a dilemma, which we all understand. 
But you also mentioned that there is a perceived problem of job 
loss as a result of imports. But I think that problem is not 
perceived, Mr. Chairman. That is very real. We have lost 3 
million jobs, many of which----
    Mr. Greenspan. No, may I interrupt you? When I uttered that 
word, I said I wish I could edit that word out.
    Ms. Lee. Well, please do.
    Mr. Greenspan. I just did.
    Ms. Lee. Thank you very much, Mr. Chairman. You know, I 
gave you that opportunity, so I am glad I was here to hear 
that.
    Let me ask you, though, where are the jobs of the future? 
We are telling our young people get trained, go to school. They 
are playing, most of them, playing by the rules only to find 
that when they get out of school, there are no jobs. 
Manufacturing, high-tech, service jobs are gone. So what do we 
tell our young people, especially in communities of color? We 
have young people who just can't get jobs, who resort to 
economic activity that leads to crime, to incarceration. Where 
are the jobs of the future? And how do we convince our young 
people that going to school, playing by the rules is still the 
thing to do?
    Mr. Greenspan. I think that is a very important issue, and 
what I would say to you is the following: That what we do know 
is that those individuals who are highly schooled, who have 
capabilities in math and the sciences or who are literate, or 
who have specific skills which are competitive skills, those 
people when they get jobs do well. When you have hiring 
virtually stagnant, what skills you have doesn't matter.
    If I believe that were going on indefinitely, then I would 
say to you, I don't know what to answer, but I am reasonably 
sure that this is a temporary phenomenon that will change. But 
even when the job market opens up and people start to hire, I 
would still have some problems in actually designating where 
those jobs are going to be, because, as I mentioned before, a 
significant part of these jobs are from innovation, and it is 
very difficult to forecast what is going to happen.
    All I can say to you is that what history tells us is that 
those people who are most educated, who have the most general 
skills, meaning those who can write well, who can do arithmetic 
or beyond that, who have generic skills which you basically 
learn through elementary school, through high school mainly, 
those people are positioned to take whatever jobs are created 
even if you don't know in advance what they will be.
    Ms. Lee. Mr. Chairman, it is hard to convince young people 
then to stay in school and acquire these skills when, in fact, 
they are looking for a job at the end of the road.
    Mr. Greenspan. I cannot disagree with what you said. It is 
not an easy issue. And if there were a simple way, I could tell 
you, tell them X, Y, and Z; I would give you X, Y, and Z. All I 
can tell you is what the facts are. But to try to convince 
somebody of a fairly complex issue, namely if you do this, this 
will happen, that is not an easy----
    Ms. Lee. It is not easy, but it is a sad state of affairs 
if we can't figure that out, Mr. Chairman, because we have 
millions of young people who want us to figure that out in 
terms of their educational pursuits.
    Let me also say to you that those individuals with highly 
developed skills, with graduate degrees in math and science and 
technology, we are finding now that engineers are laid off. 
They can't find work. You look at what has happened in Silicon 
Valley, people with those types of backgrounds are unemployed, 
and so we can't even say that they are part of the future in 
this country. So I am not so sure if we have actually looked in 
the right direction for the right answers.
    Finally, let me just ask you about the unemployment rate in 
the Latino and African American community. Given the fact that 
this administration doesn't believe much in stimulative 
spending, what do you think is the answer given the historical 
neglect of many of our communities of color? What do we do in 
terms of encouraging African Americans and Latinos to develop 
their skills and find jobs when, in fact, the unemployment 
rates are going up and not down?
    Mr. Greenspan. If jobs are not available, you have a 
hopeless task. The only way that you have possibilities of 
success is if you have an economy in which jobs are growing and 
opportunities are growing. And, indeed, as I mentioned several 
times before, that has been the history of this country, and I 
see no reason to expect that it will change.
    It doesn't take very much to go back in earlier periods, 
early 1980s, 1975, earlier periods especially before World War 
II or even the Great Depression. I mean, things were really 
awful. I mean, it is very tough, and it is very discouraging, 
but we came out of that. In other words, there were people in 
1975, and I remember I was working in government, that we were 
not going to get out of the recession that we were in, and that 
job loss was horrendous, the stress and difficulties people had 
were never going to change. And if you believe that, it is very 
discouraging.
    I happen not to believe that. And I understand that there 
are very significant problems currently in the job market, and 
if I didn't believe it was going to change, I would be very 
discouraged. But I think it will.
    The Chairman. The gentlelady's time has expired.
    The gentleman from Pennsylvania.
    Mr. Toomey. Thank you, Mr. Chairman.
    Thank you, Chairman Greenspan, for your testimony today. I 
have two questions for you. The first is kind of a follow-up on 
this jobs question. More specifically--and I apologize if you 
have addressed this earlier, but my understanding is we haven't 
developed this, and that is what, if I am correct, is a growing 
recent discrepancy between the payroll job numbers and the 
household survey numbers. It seems to me that in recent months 
that discrepancy has been wider than it has been historically. 
And at first blush one looks at this and says, well, we know 
that the payroll job growth necessarily excludes many people 
from the workforce, namely those who are not on someone's 
payroll. The household survey therefore would seem to have the 
merit of being broader in the sense that it captures those 
people who are individual proprietors working from their home 
not on a payroll.
    I guess my question is, on the household survey basis, job 
growth has been quite strong actually in at least recent 
months, reasonably strong, much stronger than payroll. Is there 
something systemic going on in the economy where the picture is 
actually better than what the payroll numbers suggest? Is the 
household survey more reliable than it once was? Is there 
something that we should be looking at between these two?
    Mr. Greenspan. Well, Congressman, I wish I could say the 
household data were the more accurate. Everything we have 
looked at suggests that it is the payroll data which are the 
series which you have to follow, and for several reasons. 
First, the payroll data are essentially based on quarterly 
estimates from the Unemployment Insurance Fund data system, 
which picks up a very big chunk of wage and salary incomes and 
hence employment. So it is benchmarked on reasonably hard data.
    The payroll series, to be sure, does not include 
proprietors, does not include farm workers, and there is a 
whole series of other; it includes multiple jobs. But when you 
make all of those conceptual reconciliations, you still have a 
yawning gap between these two trends. If you believe the 
household data, jobs are recovering measurably. If you believe 
the payroll data, that is not the case.
    What one of the things I suspect is the problem is that we 
have estimates of population which we link to the last census 
data, which is 2000. We add births, subtract deaths, and we add 
net immigration. The household data, remember, is a 50,000 or 
60,000 sample of households, and all they get are ratios of the 
total people in the household, how many are employed, how many 
are not employed. And those ratios are linked to the 
independent estimate of population. And, hence, you get your 
employment data as a direct reflection of the population 
numbers, which we suspect are overestimating the growth in the 
population of the United States.
    Working backwards, assuming that all of the workers who 
report to the unemployment insurance system, which is full 
coverage for certain groups of people, and then try to add to 
that proprietors who we pick up from the household survey and a 
number of other relationships, we can build up to a synthetic 
population number measured independently of the way it is done 
in the Census Bureau. And, lo and behold, what we find is a 
much slower rate of population growth and, by implication, a 
lower rate of net immigration.
    I would point out that in the figures just released for the 
month of January, they have already made a correction of 
something of like about 400,000 jobs and about a half a million 
in population. So the issue is being joined.
    All I can say to you is having looked at both sets of data 
in some considerable detail, it is our judgment that as much as 
we would like the household data to be the more accurate, 
regrettably that turns out not to be the case.
    Mr. Toomey. Is there a reason that this discrepancy has 
widened in recent months versus the past?
    Mr. Greenspan. Well, part of it is that remember that even 
though it is a very large sample, the household is a sample, 
and it has so-called variance or discrepancy in it. When you 
basically take the households from 50,000 or 60,000 up to 
something over 100 million, you happen to have a large 
potential element of error there, and I think that that is part 
of the problem.
    The Chairman. The gentleman's time has expired.
    The gentleman from Kansas will be our last questioner.
    Mr. Moore. Thank you, Mr. Chairman.
    And thank you, Chairman Greenspan, for being here.
    In the 25 years I practiced law before coming here, I 
learned there are at least two sides to every story. And I 
appreciate the fact of the 5 years I have been in Congress, you 
have come here and shown at least both sides and some good news 
and bad news about any situation.
    The good news here obviously is we have come through some 
rough economic times, and we are still maybe in those economic 
times. But you point out there are some positive indicators, 
such as the lowest interest rates in 45 years, increased 
productivity, and low inflation. You also expressed some 
concerns; for example, the imbalance in the Federal budgetary 
situation unless addressed soon will pose serious longer-term 
fiscal difficulties. And also Federal budget deficits could 
cause difficulties in the relatively near term. And you also 
cite a statement from OMB that says very sizable deficits are 
in prospect in the years to come.
    My comment then here is this. I have concerns as well, Mr. 
Chairman. I would like your reaction, I guess. We have a $7.1 
trillion national debt, we have a projected deficit of $521 
billion, and not including the Iraqi supplemental that the 
Director of the OMB talked about. We have a debt tax of almost 
a billion dollars a day of interest rate on the national debt, 
of a billion dollars a day. And I am concerned, I guess, and 
remembering back on your testimony for the 5 years I have been 
here and trying to put this all in perspective, you have 
cautioned us about the prospect of rising interest rates if--
not if, but when our economy takes off, if we are not acting in 
a fiscally responsible manner. And I am old enough to remember 
the 1970s, and I remember interest rates of 12, 14, 16 percent, 
which I think would be absolutely devastating to the business 
community and this country, to real estate, to consumer 
borrowing, all of those things if that happened again. Should I 
be concerned about that, or is that not a concern, Mr. 
Chairman?
    Mr. Greenspan. I frankly cannot conceive that returning to 
us. It would require a highly inflationary economy, which I 
trust that we have learned to avoid in this country. Certainly 
the Federal Reserve, having been through those earlier periods, 
is acutely aware of the critical importance of maintaining 
price stability, and with price stability, we won't see those 
interest rates.
    We have to be aware of what the longer-term outlooks are 
and where changes are required and what we can do about them. 
The longer-term fiscal problems things are very easy to 
forecast, because one thing which we know for a reasonable 
certainty is that the baby boom generation currently in the 
labor force will gradually move from the labor force and 
productive work, creating tax revenues, to retirement. And we 
have on the books at this stage levels of entitlement 
commitments which, when you multiply them by the relatively 
certain level of retirees we are going to have out there, we 
have got some very serious problems of fiscal balance that have 
got to be addressed. And the sooner we do that and the sooner 
we start to take action to glide-path into those types of 
problems, the less the adjustments are going to be. And so I 
have argued that the sooner we can come to grips with them, the 
better off we will be for lots of different reasons.
    Mr. Moore. If we don't do that soon or do it later, what 
happens to future generations, our children and grandchildren, 
when we start to retire--and I am saying we, and I am a baby 
boomer--what happens?
    Mr. Greenspan. Well, the basic problem is the long-term 
Federal debt. I might add, the 7 trillion figure that you use, 
that is a gross number.
    Mr. Moore. Yes, sir.
    Mr. Greenspan. But the net figure, which is half that, does 
not include the contingent liabilities that we have. I mean, we 
call our commitments under Social Security contingent 
liabilities, but I find it utterly noncredible that the 
Congress is going to significantly alter the general path in a 
way which is going to be other than a fraction of what is now a 
$10 trillion contingent liability. I don't deny that it can be 
cut back, but a very large part of that 10 trillion to me is 
real debt and indistinguishable.
    Mr. Moore. Thank you very much.
    The Chairman. The gentleman's time has expired.
    Before dismissing our witness, let me say the Chair notes 
that some Members may have additional questions for the 
Chairman which they may wish to submit in writing. Without 
objection, the hearing record will remain open for 30 days for 
Members to submit written questions to the witness, and to 
place their responses in the record.
    Mr. Chairman, once again we thank you for your excellent 
testimony. It is always good to have you here, and we look 
forward--I don't know whether you will or not, but we will look 
forward to having you back in about 6 months.
    The hearing is adjourned.
    [Whereupon, at 1:58 p.m., the committee was adjourned.]


                            A P P E N D I X



                           February 11, 2004


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