[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
THE ECONOMIC OUTLOOK AND CURRENT FISCAL ISSUES
=======================================================================
HEARING
before the
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
HEARING HELD IN WASHINGTON, DC, SEPTEMBER 8, 2004
__________
Serial No. 108-24
__________
Printed for the use of the Committee on the Budget
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house04.html
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COMMITTEE ON THE BUDGET
JIM NUSSLE, Iowa, Chairman
CHRISTOPHER SHAYS, Connecticut, JOHN M. SPRATT, Jr., South
Vice Chairman Carolina,
GIL GUTKNECHT, Minnesota Ranking Minority Member
MAC THORNBERRY, Texas JAMES P. MORAN, Virginia
JIM RYUN, Kansas DARLENE HOOLEY, Oregon
PAT TOOMEY, Pennsylvania TAMMY BALDWIN, Wisconsin
DOC HASTINGS, Washington DENNIS MOORE, Kansas
ROB PORTMAN, Ohio JOHN LEWIS, Georgia
EDWARD SCHROCK, Virginia RICHARD E. NEAL, Massachusetts
HENRY E. BROWN, Jr., South Carolina ROSA DeLAURO, Connecticut
ANDER CRENSHAW, Florida CHET EDWARDS, Texas
ADAM PUTNAM, Florida ROBERT C. SCOTT, Virginia
ROGER WICKER, Mississippi HAROLD FORD, Tennessee
KENNY HULSHOF, Missouri LOIS CAPPS, California
THOMAS G. TANCREDO, Colorado MIKE THOMPSON, California
DAVID VITTER, Louisiana BRIAN BAIRD, Washington
JO BONNER, Alabama JIM COOPER, Tennessee
TRENT FRANKS, Arizona RAHM EMANUEL, Illinois
SCOTT GARRETT, New Jersey ARTUR DAVIS, Alabama
J. GRESHAM BARRETT, South Carolina DENISE MAJETTE, Georgia
THADDEUS McCOTTER, Michigan RON KIND, Wisconsin
MARIO DIAZ-BALART, Florida
JEB HENSARLING, Texas
GINNY BROWN-WAITE, Florida
Professional Staff
Rich Meade, Chief of Staff
Thomas S. Kahn, Minority Staff Director and Chief Counsel
C O N T E N T S
Page
Hearing held in Washington, DC, September 8, 2004................ 1
Statement of:
Hon. Alan Greenspan, Chairman, Board of Governors of the
Federal Reserve System..................................... 6
Prepared statement:
Mr. Greenspan................................................ 8
THE ECONOMIC OUTLOOK AND
CURRENT FISCAL ISSUES
----------
WEDNESDAY, SEPTEMBER 8, 2004
House of Representatives,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to call, at 10:35 a.m., in room
210, Cannon House Office Building, Hon. Jim Nussle (chairman of
the committee) presiding.
Members present: Representatives Nussle, Gutknecht,
Thornberry, Ryun, Toomey, Hastings, Brown, Wicker, Bonner,
Barrett, Hensarling, Brown-Waite, Shays, Garrett, Crenshaw,
Portman, McCotter, Franks, Spratt, Moran, Moore, Neal, Edwards,
Ford, Capps, Baird, Cooper, Emanuel, Kind, Thompson, Lewis,
Hooley, DeLauro, Scott, and Davis.
Chairman Nussle. Good morning and welcome back--members of
the Budget Committee and colleagues--to our hopefully brief
September session, getting our work done and going home as
quickly as possible. We have two hearings. This will be the
first of two hearings on the economy and the budget that the
committee will hold today.
This morning we have back with us the chairman of the
Federal Reserve, Alan Greenspan, to discuss the economic
outlook and the Federal budget. Let me note for members that
the chairman is available to be with us today until about
12:30, which is about 2 hours, so I will ask everyone to keep
their questions to the allotted time, including myself, and we
will get in as many questions as possible.
Mr. Chairman, welcome back to the Budget Committee. You
were always very generous and gracious with your time coming
before all of our committees, but particularly the Budget
Committee, and we welcome you back. It has been about 6 months
since you last testified before this committee. And at this
time--I should say at that time, we were already seeing some
stronger, real GDP growth. In fact, at that time, it was the
largest growth, the strongest growth we have seen in about 20
years. But we are still waiting for evidence of stronger jobs
growth. We have seen good jobs growth. It could be better. We
are all obviously very interested in much more sustained growth
in jobs for all sectors.
Since you last came before us, the U.S. economy has created
about 1.2 million new jobs. Total employment has risen to a
record high of nearly 140 million. Just last week, we saw an
employment report showing 144,000 new jobs in August and the
unemployment rate falling to 5.4 percent.
Alone, these numbers may be impressive, but we really can't
appreciate or understand the significance of these numbers
without putting them in some context to the last few years. We
all know the circumstances well: the economic downturn and
recession that began in 2000; the September 11 attacks and the
resulting international war against terrorism. There was a
perfect storm, if you will--as it has been called by many--of
extraordinary circumstances converging on our country and on
our economy, one on top of the other. Thankfully Congress came
together, together with the President, and did what it had to
do. We took quick, aggressive action to correct some of the
deficits in the past, the homeland security deficit, the
military defense deficits; we had to protect our country and,
for that matter, the growth in our economy, the deficit
economic growth which will be part of our discussion today. We
needed to boost the economy and to help get Americans back to
work, so we passed tax relief in the year 2001. Passed it again
in the year 2002. And passed tax relief again in 2003. We now
know without question that those economic policies are working
and beginning to show sustained growth.
Let me show you a chart of the strong, real GDP growth and
expected growth that we believe will continue. The Blue Chip
forecast, as you can see since the end of 2001, but
particularly since the end of 2002, we have seen good, strong
growth. The economy first went negative in the third quarter of
2000, before President Bush took office. And after that, the
biggest quarterly decline happened in the third quarter of
2001, coinciding with the September 11 attacks. But today our
economy is in a much different and certainly much better
position than we were 4 years ago, when the stock market bubble
was bursting, when manufacturing activity and jobs were
falling, and when the economy was entering a recession.
Over the past year the U.S. economy has grown at a 4.7
percent rate, one of the strongest growth performances in 20,
years and the Blue Chip private economists expect real GDP
growth to be strong and continue at a 4 percent rate in the
second half of this year.
Let's turn to manufacturing activity. Manufacturing
activity and the industrial production are growing strongly.
Manufacturing activity recently has been at its strongest pace
in 20 years. The home ownership rate is at a record high, and
housing markets have recently been running at their highest
levels in 20 years.
Next on unemployment, perhaps most important, labor markets
are improving. The unemployment rate is down to 5.4 percent
from 6.3 percent in June of last year. That is a lower
unemployment rate than the averages for any of the last three
decades, the 1970s, the 1980s and the 1990s. There is good news
on jobs. Payroll employment has increased by over 1.7 million
jobs in the past year. Manufacturing employment has increased
by 100,000 over the past 6 months.
Let me repeat that because it is important to show what
kind of growth we are creating: 100,000 jobs have been created
in manufacturing along in the past 6 months. More Americans are
working today than at any time in our Nation's history, as
total employment is at a record high of 140 million people.
So, again, let us be clear. The tax relief that we passed
happened at the right time to help get this economy and jobs
growing again, and we are finally getting back to work. Without
the tax relief, today real GDP would be lower, unemployment
would be higher, and there would be fewer jobs that had been
created.
Even with this good news that we have seen, there still is
work that needs to be done, as every one of us in this room and
every member of this committee who has returned from their
district knows. There are still too many Americans who want to
work but still can't find a job, so our work is clearly not
done. We need an economy that continues to produce steadily
expanding job opportunities so that everyone who wants to work
can work.
So we have asked Chairman Greenspan back with us today not
only to review the current economic picture, but also to hear
what he believes is our best course for keeping this momentum
going.
This discussion certainly wouldn't be complete without a
review of our deficit situation. Just yesterday morning, we
heard from the Congressional Budget Office that the deficit is
coming in lower than expected, because tax receipts are growing
faster than expected. That proves what we have been saying,
that one of the best ways to reduce the deficit is to have
strong economic growth. But we are still clearly not where we
want to be. We have seen budget deficits now for the last
couple of years, and I am sure we will take some time today to
do the usual round of finger pointing of how we got here.
So let us review, just in case there are any questions. We
incurred these deficits because of an economic slowdown and a
recession that began in 2000 and continued into 2001 that
President Bush inherited when he took office and because of the
spending policies that were adopted after September 11. The
response to September 11 required an increase in spending that
was intentional. In fact, most of us in this room voted for
those spending increases. They were very necessary spending
increases to rebuild and shore up our homeland security and our
defense and to fight the ongoing war against international
terrorism.
Even though we have seen a return to deficits, I believe
that we have adopted the right policies at the right time to
protect America and to get our Nation's economy moving again.
But now we have got to work just as hard and just as
passionately to get ourselves back on the path to balance. And
I know full well what I believe we need to do to get that done.
As I know Chairman Greenspan has said time and time again, not
only do we have to keep the economy growing and creating jobs,
but we have to control Federal spending. It is really a pretty
simple concept. Deficits are a result of overspending, so to
reduce our deficits we need to restrain our spending.
I am proud to say this committee has been at the forefront
of the efforts in this Congress to do just that. We wrote a
tight budget and fully funded our priorities, but that also
compelled us to restrain lower priority items. We passed a
budget in this committee and from the House that froze spending
except for our national security issues. Did we hear people
scream and yell not only for every program, but for every
policy which was somebody's pet project? Yes, we did. It has
not been an easy process, but we are doing it and sticking to
the budget, in the House of Representatives in particular, and
it is making a difference.
Chairman Greenspan, you have urged this Congress and this
committee to restore statutory budgetary controls, known as
discretionary spending caps and pay-as-you-go requirements. I
want you to know your desire for return to budgetary controls
in this law has been shared by many of us in Congress. You
cannot manufacture a consensus for statutory controls when the
consensus for budgetary discipline is not strong enough. While
there are many Representatives and Senators who are deeply
concerned about excessive spending and budget deficits, I don't
believe, unfortunately, there is yet enough consensus to enact
budgetary controls into law. I have now tried twice to push
legislation through Congress to extend budgetary controls, a
more comprehensive reform in 2000 and a much more modest
proposal this year. And while I was able to obtain a majority
vote in this committee, we were unable to obtain a majority in
the House for either the comprehensive proposal or a more
limited package. Just because there is not a consensus does not
mean that there aren't those of us who aren't deeply concerned
about excessive spending and budget deficits, and we will not
stop advocating for those budgetary controls.
Additionally, we must keep the same vigilance for adhering
to our budget resolution, once passed, and I intend to do that
for the remainder of this year and the remainder of my term as
chairman of the committee.
I will turn it over to Mr. Spratt for any comments he
wishes to make at this time. Mr. Spratt.
Mr. Spratt. Thank you, Mr. Chairman. And Chairman
Greenspan, welcome once again. You come at a good time.
Yesterday, the Congressional Budget Office told us that the
Federal Government this year will run the largest deficit in
our history, at least in normal terms, $422 billion; $574
billion when the Social Security surplus is excluded. This
surpasses last year's deficit by $47 billion. Although the
economy seems to be getting better, the bottom line of the
budget is it is clearly getting worse and it is not supposed to
work that way, at least--except when you have a structural
deficit.
CBO assumes 4\1/2\ percent growth this year, 4.1 percent
growth next year, 3 percent thereafter. But it also shows,
based upon those assumptions, that between now and 2010
deficits hover in the range of $300 billion. They barely go
down and they never go away. That is a definition of a
structural deficit.
CBO's forecast also shows that deficits will drop
dramatically after 2010, for one salient reason. At the end of
calendar year 2010, the tax cuts sought by the Bush
administration, enacted by Congress mostly with the votes of
our Republican colleagues, will expire. This event alone, the
expiration of the Bush tax cuts, will move the deficit from
$298 billion in 2010 to $70 billion in 2012. That to me speaks
volumes about the source of the problem, the source of today's
deficits.
CBO's forecast is what we call a baseline of current
services forecast. And as you know better than we, by law CBO
is required to assume that appropriations this year, including
defense supplementals, will be repeated next year; that tax
cuts that are written to expire on their own term on a date
certain do, in fact, expire. They have to assume that by law.
On our side, we have gone back and factored some political
reality into these forecasts. We have adjusted the baseline and
adjusted it slightly lower, and we think a more realistic level
of defense spending. Let us hope we don't have a recurring cost
of $115 billion a year for the Iraqi and Afghan deployments.
We have extended all the tax cuts except for bonus
depreciation. And we have added to the tax cuts an alternative
minimum tax, because we think that is politically inevitable
and realistic. We simply indexed the key variables. When you
hold the tax cuts constant and don't assume their expiration or
appeal and let defense spending grow as CBO projects, here is
what happens to the bottom line. Those numbers are a little
small, but you can see that we go from $422 [billion] down to
$361 [billion] and thereafter, the deficit never dropped below
$320 billion. By the end of our forecasting period, 2014, the
deficit is $504 billion. That means the unified deficit, the
deficit after deducting Social Security surpluses between 2005
and 2014, adds to $3 trillion, $911 billion. Deficits in the
basic budget without Social Security's offsetting surplus comes
to $6.3 trillion. Debt held by the public will be $4.3 trillion
at the end of this fiscal year. It will be $8.4 trillion by the
end of 2014, a little more than double. Total statutory debt,
including debt held by government trust funds today is $7.4
trillion. By 2014, according to our calculations, when you make
the adjustments we have made to the CBO forecast, total
statutory debt will be $14.9 trillion. It will double, more
than double between now and 2014 if we follow this course.
Basically, that is our question to you today, Mr.
Greenspan. These are numbers on paper. We would like your
candid assessment of what could happen if we take this fiscal
path into the future. Is this course even sustainable? What are
the consequences of running budget deficits and accumulating
debt of this magnitude over a 10-year period of time?
Secondly, we would like to hear you testify again what you
have told us several times before. It has been within the last
year that I think you pronounced yourself a convert, a
believer; that you were skeptical of the efficacy of budget
process reforms in the early 1990s, but you believe that those
reforms we adopted in the Budget Enforcement Act actually
contributed significantly to our successes in the 1990s. We
have allowed those to expire. Congress has allowed those to
expire, and we would like to hear again your reaffirmation that
those are part of the solution to this problem that confronts
us right now.
Thirdly, of course, is the overarching question of the
state of our economy. A lot of forecasters are beginning to
talk about an economy that has been running on tax cut stimuli
and mortgage refinancing cash. And now that those forces are
pretty basically spent, we are wondering if the shock of the
spike in oil prices is going to affect the recovery and make
this a precarious economy.
And, finally, with respect to jobs, we hope you will touch
upon this topic, too, because there are today 1.650 million
fewer jobs in the private sector than there were in January,
2001; 1.650 million fewer jobs. Why is this recovery so laggard
despite huge fiscal stimulus in creating jobs in the private
sector?
In addition, you have often spoken, Mr. Chairman, in
support of the establishment survey as being the more
definitive estimate of the job situation in the country as
opposed to the household survey. And since this topic comes up
every time the jobs picture is discussed, we would appreciate
your opinions on that.
That is enough for me to lay in front of you. I hope you
will be able to address in your direct testimony, or the
answers you give us to the questions we have, those particular
topics because I think those are the ones of preeminent
concern.
Thank you. We look forward to your testimony.
Chairman Nussle. Mr. Greenspan, your entire testimony will
be made part of the record and you may proceed and summarize as
you wish. Welcome back again to the Budget Committee.
STATEMENT OF HON. ALAN GREENSPAN, CHAIRMAN, BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
Mr. Greenspan. Thank you very much, Mr. Chairman, and
members of the committee. I will excerpt from my rather
extended prepared remarks.
I am pleased to be here today to offer views generally on
the economy and on current fiscal issues, but I want to
emphasize I speak for myself in a number of these areas and not
necessarily for the Federal Reserve, as I do on numerous other
occasions officially before the Congress.
As you know, economic activity hit a soft spot in late
spring after having grown briskly in the second half of 2003
and the first part of 2004. Consumer spending slowed materially
and employment gains moderated notably after the marked step-up
in early spring. That softness in activity no doubt is related
in large measure to this year's steep increase in energy
prices.
The most recent data suggests that, on the whole, the
expansion has regained some traction. Consumer spending and
housing starts bounced back in July after weak performances in
June, although early readings on retail sales in August have
been mixed. In addition, business investment remains on a solid
upward trend.
In the manufacturing sector, output has continued to move
up in recent months, though part of that rise likely reflected
an increase in inventory investment. In the labor market,
though job gains were smaller than those of last spring, non-
foreign payroll employment growth picked back up in August.
Despite the rise in oil prices through mid-August,
inflation and inflation expectations have eased in recent
months. To be sure, unit labor costs rose in the second quarter
as productivity growth slowed from its extraordinary pace of
the past 2 years and employee compensation per hour remained on
an upward trend. As best we can judge, the growth in profit
margins of nonenergy, nonfinancial corporations which, at least
from an accounting perspective, had contributed significantly
to price pressures earlier, has recently slowed. Moreover,
increases in non-oil import prices have lessened, a development
that, coupled with the slowing of profit margin growth, has
helped to lower core consumer price inflation in recent months.
Crude oil prices have come off their highs of mid-August and
gasoline prices, which rose rapidly last spring, have fallen.
Nevertheless, the outlook for oil prices remains uncertain.
Higher prices have damped the consumption of oil, but the
growing concerns about long-term supply along with large
prospective increases in demand from the rapidly growing
economies of China and India have propelled prices of distant
futures to levels well above their ranges of recent years.
Meanwhile, despite the paucity of new discoveries of major oil
fields, improving technology has significantly increased the
ultimate recovery of oil from our already existing fields.
Future balances between supply and demand will remain
precarious and incentives for oil consumers in developed
economies to decrease the oil intensity of their economies will
doubtless continue. Presumably, similar developments will
emerge in the large oil-consuming, developing economies.
The prospects for the Federal budget over the longer term
remain troubling. With the baby boomers starting to retire in a
few years and health spending continuing to soar, our budget
position will almost surely deteriorate substantially in coming
years if current policies remain in place. The enormous
improvement of the Federal budget balance in the second half of
the 1990s and early in the current decade was due importantly
to the rapid growth in labor productivity during that period,
which led to a vast but, in retrospect, temporary increase in
revenues.
The Budget Enforcement Act of 1990 and the later
modifications and extensions of the act almost surely
contributed to the better budget outcomes as well, before the
brief emergence of surpluses eroded the will to adhere to its
deficit containment rules. The key provisions of the BEA
expired in 2002 and no replacement has been adopted.
Reinstatement of a structure like the BEA would signal a
renewed commitment to fiscal restraint and would help restore
the discipline to the budgeting process, but it would only be a
part of any meaningful endeavor to establish a framework for
fiscal policy choices. The BEA was designed to constrain
legislative actions on new initiatives. It contained no
provisions for dealing with unanticipated budgetary outcomes
over time. It was also not designed to be the centerpiece for
longer-run budget policy. Importantly, the BEA did not set a
clear objective toward which fiscal policy should aim.
Budget outcomes over the next decade will deviate as they
always have from projections, perhaps significantly.
Accordingly, it would be quite helpful to have mechanisms in
place that assist the Congress in making midcourse corrections
as needed. A well-designed set of such mechanisms would likely
include measures that force a midcourse correction when
estimated future costs for a program or tax provision exceed a
specified threshold.
I do not mean to suggest that our budget problems will be
solved simply by adopting a set of budget rules that restrain
new legislation, even if those rules are augmented by effective
mechanisms for making midcourse corrections. The fundamental
challenge that we face is to come to grips with the adverse
budgetary implications of an aging population and current
health entitlements and with the limits on our ability to
project the likely path of medical outlays.
The rapid increase in revenues during the 1990s
significantly muted the necessity for making choices between
high-priority tax and spending initiatives. In the context of
an unprecedented increase in retirees, the need to make stark
choices among budget priorities will again become pressing.
Federal funding of access to advances in medical technology,
for example, likely will have to be weighed against other
spending programs as well as tax initiatives that foster
increases in economic growth and the revenue base.
In 2008, just 4 years from now, the leading edge of the
baby boom generation will reach 62, the earliest age at which
Social Security retirement benefits may be claimed and the age
at which about half of prospective beneficiaries have retired
in recent years. In 2011, these individuals will reach 65 and
will thus be eligible for Medicare. The pressures on the
Federal budget from these demographic changes will come on top
of those stemming from the relentless upward trend in
expenditures in medical care. Moreover, projections of health
spending are subject to extraordinary uncertainty. The reason
is that we know very little about how rapidly medical
technology will continue to advance and how those innovations
will translate into future spending. Technological innovations
can greatly improve the quality of medical care and can, in
some instances, reduce the costs of existing treatments. But
because technology expands the set of treatment possibilities,
it also has the potential to add to overall spending, in some
cases by a great deal.
Developing ways to deal with these uncertainties will be a
major part of an effective budget strategy for the longer run.
Critical to that evaluation is the possibility that as a Nation
we may have already made promises to coming generations of
retirees that we will be unable to fulfill. If on further study
that possibility turns out to be the case, it is imperative
that we make clear what real resources will be available so
that our citizens can properly plan their retirements.
This problem raises a more general principle of public
policy prudence. If, as history strongly suggests, entitlement
benefits and tax credits once bestowed are difficult to repeal,
consideration should be given to developing a framework that
recognizes that potential asymmetry. A significant improvement
in the budget in the 1990s reflects persistent efforts on the
part of this committee and others. If similar efforts are made
now, they should assist in preparing our economy for the fiscal
challenges that we will face in the years ahead.
Thank you very much. I look forward to your questions.
[The prepared statement of Mr. Greenspan follows:]
Prepared Statement of Alan Greenspan, Chairman, Board of Governors of
the Federal Reserve System
Mr. Chairman and members of the committee, I am pleased to be here
today to offer my views on the state of the U.S. economy and current
fiscal issues. I speak for myself and not necessarily for the Federal
Reserve.
As you know, economic activity hit a soft patch in late spring
after having grown briskly in the second half of 2003 and the first
part of 2004. Consumer spending slowed materially, and employment gains
moderated notably after the marked step-up in early spring. That
softness in activity no doubt is related, in large measure, to this
year's steep increase in energy prices.
The most recent data suggest that, on the whole, the expansion has
regained some traction. Consumer spending and housing starts bounced
back in July after weak performances in June, although early readings
on retail sales in August have been mixed. In addition, business
investment remains on a solid upward trend. In the manufacturing
sector, output has continued to move up in recent months, though part
of that rise likely reflected an increase in inventory investment. In
the labor market, though job gains were smaller than those of last
spring, nonfarm payroll employment growth picked back up in August.
Despite the rise in oil prices through mid-August, inflation and
inflation expectations have eased in recent months. To be sure, unit
labor costs rose in the second quarter as productivity growth slowed
from its extraordinary pace of the past 2 years and employee
compensation per hour remained on an upward trend. But, as best we can
judge, the growth in profit margins of non-energy, nonfinancial,
corporations, which, at least from an accounting perspective, had
contributed significantly to price pressures earlier, has recently
slowed. Moreover, increases in non-oil import prices have lessened--a
development that, coupled with the slowing of profit-margin growth, has
helped to lower core consumer price inflation in recent months.
Movements in energy prices have been a major influence on overall
inflation this year. In the second quarter, gasoline prices rose
rapidly as a marked pickup in gasoline demand strained refinery
capacity and resulted in sharply higher profit margins. In May and
June, refinery and marketing margins rose to levels that were 25 cents
to 30 cents per gallon over typical spreads going into the summer
driving season.
As a consequence of the steep run-up in prices, demand for gasoline
eased, and an accompanying increase in inventories helped to reverse
the bulge that had occurred in refinery and marketing margins. That
reduction in margins resulted in a decline in the price of regular
gasoline of about 20 cents per gallon despite the concurrent sharp rise
in the price of crude oil. With margins having returned to more typical
levels, prices of both gasoline and home heating oil are likely to
reflect changes in crude oil prices more directly.
Evaluating the impact of rising oil prices on economic activity in
the United States has long been a subject of dispute among economists.
Most macroeconomic models treat an increase in oil prices as a tax on
U.S. residents that saps the purchasing power of households and raises
costs for businesses. But economists disagree about the size of the
effects, in part because of differences in the key assumptions employed
in the statistical models that underlie the analyses. Moreover, the
models are typically based on average historical experience, which is
dominated by periods of only moderate fluctuations in oil prices and
thus may not adequately capture the adverse effects on the economy of
oil price spikes. In addition to the difficulties of measuring the
impact of oil prices on economic growth, the oil price outlook itself
is uncertain.
Growing concerns about the long-term security of oil production in
the Middle East, along with heightened worries about the reliability of
supply from other oil-producing regions, led to a pronounced increase
in the demand to hold inventory at a time when the level of world
commercial oil stocks was rising only modestly. Some of that increased
demand came from investors and speculators who took on larger net long
positions in crude oil futures, especially in distantly dated
contracts. Crude oil prices accordingly rose sharply, which, in turn,
brought forth increased production from OPEC and induced some investors
to take profits on long inventory positions. The resulting reduction in
the speculative demand for inventories has, at least temporarily,
reduced pressures in these markets, and crude prices have come off from
their highs of mid-August.
Nevertheless, the outlook for oil prices remains uncertain. Higher
prices have damped the consumption of oil--for example, U.S. gasoline
consumption, seasonally adjusted, fell about 200,000 barrels a day
between April and July. But the growing concerns about long-term
supply, along with large prospective increases in demand from the
rapidly growing economies of China and India, both of which are
expanding in ways that are relatively energy intensive, have propelled
prices of distant futures to levels well above their ranges of recent
years.
Meanwhile, despite the paucity of new discoveries of major oil
fields, improving technology has significantly increased the ultimate
recovery of oil from already existing fields. During the past decade,
despite more than 250 billion barrels of oil extracted worldwide, net
proved reserves rose well in excess of 100 billion barrels. That is,
gross additions to reserves have significantly exceeded the extraction
of oil the reserves replaced. Indeed, in fields where, two decades ago,
roughly one-third of the oil in place ultimately could be extracted,
almost half appears to be recoverable today. Gains in proved reserves
have been concentrated among OPEC members, though proved reserves in
the United States, essentially offshore, rose 3-1/2 percent during the
past 5 years. The uptrend in proved reserves is likely to continue at
least for awhile. Oil service firms continue to report significant
involvement in reservoir extension and enhancement.
Nevertheless, future balances between supply and demand will remain
precarious, and incentives for oil consumers in developed economies to
decrease the oil intensity of their economies will doubtless continue.
Presumably similar developments will emerge in the large oil-consuming
developing economies.
The remainder of my remarks will address the Federal budget, for
which the incoming data suggest that the unified deficit has recently
leveled out. With the economy continuing to improve, the deficit is
more likely to decline than to increase in the year ahead.
Nonetheless, the prospects for the Federal budget over the longer
term remain troubling. As yet, concerns about the budget do not appear
to have left a noticeable imprint on the financial markets. In recent
years, even as fiscal discipline has eroded, implied 1-year forward
Treasury rates at long horizons, which history suggests are sensitive
to changes in the fiscal outlook, have held fairly steady. Various
measures of long-term real interest rates have also remained at
moderate levels over this period.
These developments, however, do not warrant complacency about the
fiscal outlook. With the baby boomers starting to retire in a few years
and health spending continuing to soar, our budget position will almost
surely deteriorate substantially in coming years if current policies
remain in place.
The enormous improvement of the Federal budget balance in the
second half of the 1990s and early in the current decade was due
importantly to the rapid growth in labor productivity during that
period, which led, both directly and indirectly, to a vast but, in
retrospect, temporary increase in revenues. The Budget Enforcement Act
(BEA) of 1990, and the later modifications and extensions of the act,
almost surely contributed to the better budget outcomes as well, before
the brief emergence of surpluses eroded the will to adhere to its
deficit-containment rules. The key provisions of the BEA expired in
2002, and no replacement has been adopted.
Reinstatement of a structure like the BEA would signal a renewed
commitment to fiscal restraint and would help restore discipline to the
annual budgeting process. But it would be only a part of any meaningful
endeavor to establish a framework for fiscal policy choices. The BEA
was designed to constrain legislative actions on new initiatives. It
contained no provisions for dealing with unanticipated budgetary
outcomes over time. It was also not designed to be the centerpiece for
longer-run budget policy; importantly, the BEA did not set a clear
objective toward which fiscal policy should aim.
Budget outcomes over the next decade will deviate, as they always
have from projections--perhaps, significantly. Accordingly, it would be
quite helpful to have mechanisms in place that assist the Congress in
making mid-course corrections as needed. Four or five decades ago, such
mechanisms were unnecessary, in part because much of the budget was
determined on an annual basis. Indeed, in the 1960s, discretionary
spending, which is subject to the annual appropriations process and
thus comes under regular review by the Congress, accounted for about
two-thirds of total outlays. That share dropped markedly in the 1970s
and 1980s as spending on retirement, medical, and other entitlement
programs rose sharply. In the early 1990s, it fell below 40 percent,
where it has remained over the past decade.
The rise in the share of expenditures that is not subject to annual
review complicates the task of making fiscal policy by effectively
necessitating an extension of the budget planning horizon. In the 1960s
and early 1970s, the President's budgets provided information mainly
for the upcoming fiscal year. The 1974 legislation that established a
new budget process and created the Congressional Budget Office required
that CBO provide 5-year budget projections. By the mid-1990s, CBO's
projection horizon had been pushed out to 10 years.
Given the changing composition of outlays, these longer planning
horizons and the associated budget projections were essential steps
toward allowing the Congress to balance budget priorities sensibly.
Among other things, this change has made the budget process more
reliant on forecasting. To be sure, forecasting has become more
sophisticated as statistical techniques and economic models have
evolved. But because of the increasing complexity of our markets, the
inaccuracy of forecasts--especially those that go beyond the near
term--is a large problem.
A well-designed set of measures for mid-course corrections would
likely include regular assessments of existing programs to verify that
they continue to meet their stated purposes and cost projections.
Although the vast majority of existing programs would doubtless be
extended routinely, some that face appreciable opposition and offer
limited societal benefit might not clear hurdles set by the Congress
unamended, if at all. More generally, mechanisms, such as triggers, to
bring the budget back into line if it goes off track should be
considered, particularly measures that force a mid-course correction
when estimated future costs for a program or tax provision exceed a
specified threshold.
I do not mean to suggest that our budget problems will be solved
simply by adopting a set of budget rules that restrain new
legislation--even if those rules are augmented by effective mechanisms
for making mid-course corrections. The fundamental challenge that we
face is to come to grips with the adverse budgetary implications of an
aging population and current health entitlements and with the limits on
our ability to project the likely path of medical outlays. The rapid
increase in revenues during the 1990s significantly muted the necessity
of making choices between high-priority tax and spending initiatives.
In the context of an unprecedented increase in retirees, the need to
make stark choices among budget priorities will again become pressing.
Federally funding access to advances in medical technology, for
example, likely will have to be weighed against other spending programs
as well as tax initiatives that foster increases in economic growth and
the revenue base.
Because the baby boomers have not yet started to retire in force
and accordingly the ratio of retirees to workers remains relatively
low, we are in a demographic lull. But short of an outsized
acceleration of structural productivity or a major expansion of
immigration, this state of relative tranquility will soon end.
In 2008--just 4 years from now--the leading edge of the baby boom
generation will reach 62, the earliest age at which Social Security
retirement benefits may be claimed and the age at which about half of
prospective beneficiaries have retired in recent years. In 2011, these
individuals will reach 65 and will thus be eligible for Medicare.
The pressures on the Federal budget from these demographic changes
will come on top of those stemming from the relentless upward trend in
expenditures on medical care. Indeed, outlays for Medicare and Medicaid
have grown much faster than has nominal GDP in recent years, and no
significant slowing seems to be in the offing.
In 2003, outlays for Social Security and Medicare amounted to about
7 percent of GDP; according to the programs' trustees, by 2030 that
ratio will nearly double. Moreover, such projections are subject to
considerable uncertainty, especially those for Medicare. Unlike Social
Security, where benefits are tied in a mechanical fashion to retirees'
wage histories and we have some useful tools for forecasting future
benefits, the possible variance in medical spending rises dramatically
as we move into the next decade and beyond. As with Social Security,
forecasting the number of Medicare beneficiaries is reasonably
straightforward. But we know very little about how rapidly medical
technology will continue to advance and how those innovations will
translate into future spending. Technological innovations can greatly
improve the quality of medical care and can, in some instances, reduce
the costs of existing treatments. But because technology expands the
set of treatment possibilities, it also has the potential to add to
overall spending--in some cases, by a great deal. Other sources of
uncertainty--for example, about how longer life expectancies among the
elderly will affect medical spending--may also turn out to be
important. As a result, the range of future possible outlays per
recipient is extremely wide.
Developing ways to deal with these uncertainties will be a major
part of an effective budget strategy for the longer run. Critical to
that evaluation is the possibility that, as a nation, we may have
already made promises to coming generations of retirees that we will be
unable to fulfill. If, on further study, that possibility turns out to
be the case, it is imperative that we make clear what real resources
will be available so that our citizens can properly plan their
retirements. This problem raises a more-general principle of public
policy prudence. If, as history strongly suggests, entitlement benefits
and tax credits, once bestowed, are difficult to repeal, consideration
should be given to developing a framework that recognizes that
potential asymmetry.
Re-establishing an effective procedural framework for budgetary
decisionmaking should be a high priority. But it is only a start. As we
prepare for the retirement of the baby boom generation and confront the
implications of soaring expenditures for medical care, a major effort
by policymakers to set priorities for tax and spending programs and to
start making tradeoffs is long overdue.
The significant improvement in the budget in the 1990s reflected
persistent efforts on the part of this committee and others. If similar
efforts are made now, they should assist in preparing our economy for
the fiscal challenges that we will face in the years ahead.
Chairman Nussle. Thank you, Chairman Greenspan. A number of
things in your testimony hit a chord with me and particularly
with regard to the fiscal management issues. I agree with a
number of the points you made and we will continue to work with
you and with those in Congress that want to try and work on
these issues. The excuses are over with regard to the fiscal
situation that we find ourselves in post-9/11. Those are all
very important reasons why we find ourselves in the situations
that we do right now. We needed to spend money in order to deal
with homeland security and national defense and intelligence. I
don't think anyone, or at least there are very few who voted
against those proposals and very few in the country, who would
have suggested that we should hesitate for a moment to fulfill
those important priorities at the time they were made. But now
is also the time to get back to that business of fiscal
prudence, as you have said, and we will start that from this
committee, as we did this last year with a freeze budget.
If I could, let me put up the first chart, which is with
regard to the budget, talking about the surplus and deficits as
a share of GDP. I am amazed to continue to hear and, for that
matter, see the headlines of record deficits when it is
comparing it with thin air, its nominal terms. Those are big
numbers, but you have to compare them to something. My Visa
card bill is--well, I know my wife may be listening, but
something my wife and I have to manage and we usually can on a
month-to-month basis, but for Donald Trump, it is probably not
much of a heavy lift to manage our Visa bill. You have to
compare the debt to something. And the deficit we have is
compared to the gross domestic product. And if you compare it
to that, you will see that not only is it not the worst, but if
managed, as you said, it can be dealt with.
In fact, we did an analysis of where this deficit ranks in
comparison to other post-World War II deficits, and it is not
even in the top 10 of the years of deficits since World War II.
That is not to mean that there is some excuse that we don't
have to worry about it. I don't mean to suggest that at all.
This committee has led on that issue. But it needs to be
compared with the economy; and with that comparison, as a
percentage of GDP, 2004 is only 3.6 percent as compared with
1983, which was 6 percent. So we have a long way to go before
we are unable to manage it or before it is structural.
Second, let me say, one of the things that you didn't touch
on, and I will touch, and that is managing for emergencies. We
just saw our second hurricane. We have the possibility of yet
another hurricane, and FEMA is underfunded. We will rush to the
floor today an emergency supplemental because, yet again,
Congress does not manage and does not prepare for emergencies
that we know are coming and that we should begin to plan for.
And I will continue to advocate for that. I know there are many
in Congress who will continue to work to fund for these natural
disasters that we hope and pray will not occur, but are always
wrong in our hopes and our prayers.
Thirdly, let me turn to the economy. Let me read you some
of these. I hear people talking down the economy and I want to
read these. Real GDP grew at 4.7 percent over the past year.
Payroll jobs have increased by 1.7 million. Jobs over the last
12 months, manufacturing employment rose by 22,000 in August
alone and increased by 100,000 jobs in the past 6 months.
Unemployment, as measured by the household survey, we have now
grown the amount of people working in this country to 140
million in August. That is the most ever. Unemployment rate is
down to 5.4 percent from last year in August of 6.3 percent.
Manufacturing activities soared from the end of 2003 to the
first half of 2004. It is the highest pace of manufacturing
activity in 20 years.
Industrial production, the output of our Nation's
factories, mines, and utilities is up 4.8 percent over the past
year. Real business equipment investment rose up 13.7 percent.
People are investing in the equipment, which production creates
jobs. Housing starts and building permits have been running at
their highest level in 20 years. And the home ownership rate is
at a record high of 69.2 percent.
Chairman Greenspan, you said the economy has regained
traction. I keep hearing people talk down the economy. Where is
the bad news? Is there a number I am missing? I just read a
number of numbers. But where are the numbers that say that the
economy is heading in the wrong direction?
Mr. Greenspan. Well, Mr. Chairman, I think in any period of
excellent or even moderate economic growth, you will find
innumerable areas of our very complex economy which are doing
poorly. And I think we will hear that this morning and I think
that is important to recognize. But it is important, as you
point out, to look at the overall scope of where the economy is
going. And while as I pointed out earlier, we have moved into a
soft patch, after very strong growth, subsequent to our meeting
I think 6 months ago, despite that fact, the underlying
structure of the recovery is still there. In my judgment, were
it not for the very sharp rise in oil prices, we would be
seeing some fairly strong growth, the strong growth typical of
that earlier period. So we still have problems and there are
innumerable problems, and I think I will address these problems
later, but I think the economy is doing reasonably well.
Chairman Nussle. If the recipe is an energy strategy and,
as you said, medical care costs and having some kind of
predictability there, certainly we believe liability controls
from frivolous lawsuits is an important issue. This committee
has held hearings on not only tax cuts--reducing taxes is
certainly a favorite pastime for many--but tax reform to
unleash this burdensome and complicated tax system. These are
areas I believe we can work on. But as far as the economy
heading in a positive direction, I think it is very clear that
from an overall standpoint, that is the case. We are not going
to rest until people have jobs. That is part of the reason we
are having this hearing today. But for political purposes,
talking down the economy at this point in time does nothing to
help our markets or our economy. And I would hope that people
will start being specific in their proposals to fix this as
opposed to just suggesting that we need tax increases.
With that, I will turn to Mr. Spratt and recognize him for
any questions.
Mr. Spratt. Mr. Greenspan, let me go back to the simple
chart that I put up and explain what we have done here is
adjust the CBO baseline. No. 1, I don't hope certainly we will
have $115 billion a year recurring defense cost to add on top
of the already enormous defense budget. We have assumed as a
parameter that the tax cuts will not expire despite their
written terms. And we have assumed with respect to
discretionary spending that it will be current services.
The results are pretty dramatic, at least they are to me,
$422 billion is the confirmed number this year; 361 doesn't
take into account what we are likely to spend through FEMA for
Florida next year. You could add easily another $10 [billion]
to $20 billion on top of that. The deficit never dropped below
$320 billion. It rises to $504 billion in 2014.
My question to you is are these numbers consequential? Can
we take this fiscal path without some adverse effects that
disrupt the economy, disrupt the growth of our economy, jobs,
interest rates, and affect other things that are important to
us?
Mr. Greenspan. I think not, Congressman. Were it not for
the extraordinary problems we have in medical care and
basically the fairly dramatic rise in the average expenditure
per Medicare enrollee, we probably could live with the type of
numbers you are projecting because the growth in the debt would
not be all that large.
Having said that, it is very difficult to get around the
issue, that when you look out into the period, especially in
the years immediately following the end of your projection, you
begin to get some very severe fiscal pressures coming because
of the very sharp increase in retirement benefits from an ever-
larger increase in retirees. The consequence of that, unless we
address it, is a highly unstable, long-term fiscal situation.
The one thing we can say with a degree of certainty is that the
very large baby boom generation, which is currently working,
will not be working in large measure in those years. And if you
project that with any reasonable set of numbers, you get into a
situation which suggests that current fiscal policy should try
to keep the debt level down as low as we can, because we are
going to be running into very severe pressures in the later
years. And the better we are prepared in moving into that
period, the more likely it is that we will address it in a
rational and sensible way.
Mr. Spratt. What form would the consequences take? Are much
higher interest rates likely if we sustain this kind of debt?
Mr. Greenspan. That is correct. Federal Reserve studies
have indicated over the years, and more recently in some fairly
sophisticated analyses, that if you get to a point of fairly
significant long-term structural budget deficits, it begins to
impact on the level of long-term interest rates, which, in
turn, of course, creates higher levels of interest payments and
therefore higher deficits. And if you take the arithmetic
progression, you can demonstrate that under certain scenarios
that is an unstable situation. Obviously, we must not even get
close to those types of scenarios, because if you get into that
sort of debt maelstrom, it is a very difficult situation to get
out of.
Mr. Spratt. You mention in your testimony that we have not
yet seen the financial imprint of these deficits in the
financial markets. Is that because agents, foreigners, are
buying most of our deficit today, holding most of our debt
today, and it has not been a drawdown as yet on the domestic
pool of capital and savings?
Mr. Greenspan. I think not, because were that the case, we
would find that in corporate debt, we would be getting
significant increases in long-term rates. And of course, we are
not. I think that there is a general presumption out there that
the longer-run problems in the deficit will get resolved one
way or the other and the markets at this stage are not focusing
on that as a materially difficult problem. I would like to add
quickly, however, that I can't say how long into the future
that would exist if we continue to fail to address what strikes
me as a problem of potential instability.
Mr. Spratt. You are telling us that there is a connection
between high deficits and high interest rates that sooner or
later comes to bear?
Mr. Greenspan. Yes.
Mr. Spratt. Let me ask you with respect to the job market,
our numbers indicate we are still 1.65 million jobs short of
the number of private sector jobs that were in existence on
January 1, 2001. This makes this recovery unlike any of the
other nine recoveries in the postwar recessions. How do you
account for the slow, sluggish growth in jobs given the amount
of the fiscal stimulus that the Federal budget has been
applying to the economy?
Mr. Greenspan. Congressman, the answer lies in two areas.
We have had an extraordinary rise in productivity. Indeed, the
rate of productivity growth itself has been rising over the
last decade. This is unprecedented in the data that we have
access to. This suggests that as demand picked up in the post-
2001 period in a modest manner, the increases in efficiency,
which in the longer run are obviously very beneficial to
standards of living, was sufficient to enable businesses to
meet their increased orders without hiring significant numbers
of people and in many cases, even actually paring employment as
their orders and sales and shipments rose.
Secondly, the recession that we had been through was the
shallowest in the post-World War II period and consequently,
you don't get a rebound out of the shallow recession.
So the combination of those two factors, the very major
increase in efficiencies and the shallowness of the recession,
statistically account for the major decline in employment. As
the rate of productivity growth slows down, as it has recently,
we are beginning to see the labor markets begin to pick up. And
indeed, the report this morning by the Bureau of Labor
Statistics on job openings--this is a new series--show a marked
increase in private job openings indeed the series itself,
which is also reflective of hires and separations, is
consistent with a moderate rise in the establishment employment
data.
Mr. Spratt. Mr. Chairman, one last question so others will
have an opportunity. You have testified before that the budget
process rules we adopted in 1990 and 1991 and carried forward
in 93 and 97, the PAYGO rules, the discretionary spending caps,
the sequestration enforcement mechanism, all had a significant
role to play in our budget successes of the 1990s. Do you still
support and favor the reenactment of those rules in the
original form and particularly the PAYGO rule which applied
both the tax cuts as well as entitlement increases?
Mr. Greenspan. I do.
Chairman Nussle. Mr. Shays.
Mr. Shays. Thank you, Mr. Greenspan, for being here. You
have made two points that we could add to the list that the
chairman made. And one is he didn't cite the extraordinary rise
in productivity. You also made the point that this is one of
the shallowest recessions in recent history, which to me
suggests that economic policy is headed in the right direction.
I would like you to tell me, it is my understanding that
productivity gains are one of the significant ways you increase
wealth. Is that accurate or not?
Mr. Greenspan. In one sense, Congressman, it is the major
way in which we increase real wealth. I am not talking about
stock market values or anything, but about real assets and
assets which enable the economy to produce ever increasing
amounts of real goods for people to consume and to increase
their standard of living.
Mr. Shays. How many months or years have we seen
productivity growth in the United States?
Mr. Greenspan. The best way of evaluating it, we started
with an annual rate of growth about 1, 1\1/2\ percent in the
early 1990s, and the rate of growth has continued to accelerate
to, most recently, in the 4 percent annual growth rate area.
Mr. Shays. I am talking about productivity. You are saying
a 4 percent growth of productivity?
Mr. Greenspan. In the last number of quarters, with the
exception of the last two. In other words, productivity growth
has come off in the last couple of quarters, but it is growing.
But the growth rate has been quite extraordinary for a number
of years.
Mr. Shays. It strikes me as quite significant, particularly
given September 11. I would love for you to talk about
September 11, because it is my understanding we have lost over
a million jobs. And I have met constituents of mine who have
never recuperated from those job losses. So could you put some
kind of perspective in terms of 9/11 and jobs?
Mr. Greenspan. Immediately after 9/11, we had expected a
very significant contraction in economic activity, which seemed
likely to be prolonged. Within a matter of weeks or a few
months at the longest, it became quite evident that the economy
had achieved a degree of resiliency which we had not suspected
it had, and it stabilized reasonably quickly and started to
grow again at a fairly modest but eventually accelerating pace.
But also, remember we were in the tail end of a very protracted
increase in the growth rate in productivity, which means
obviously that productivity itself is accelerating. As a
consequence of the increased efficiencies which tended to focus
on how does one reduce costs and improve the value added of the
economy, it turned out that the significant part of cost
reduction, two-thirds of it, is invariably labor costs and
therefore there was considerable pressure on labor costs. And
indeed one of the reasons why the labor markets were so poor is
that efficiency was so high.
It is an odd combination of events. Something which is
extraordinarily important and good for the economy over the
longer run was creating very significant problems for a number
of Americans who were losing their jobs.
Mr. Shays. But we heard after 9/11 there were over a
million jobs lost and a number of those didn't come back. It
would be fair to say--and I don't mean 9/11, I call it
September 11. The tragedies of September 11, had they not
occurred, we could make a significant assumption that there
would be significant or greater employment today; is that not
true?
Mr. Greenspan. I don't know the answer to that. It is
fairly apparent that the job losses, for example, in
manufacturing, which are still not recovered, were the
consequence of extraordinary increases in efficiency. So I have
to assume, obviously, with the general weakness in the economy,
that part of the job loss was there. But as the chairman
pointed out in the GDP data, there was one quarter of decline
and it wasn't a very large decline at that.
Mr. Shays. Thank you.
Chairman Nussle. Let me announce to my colleagues, I
believe the floor is anticipating one vote on the previous
question to a rule and then the rule we anticipate going on
voice. So we will continue this hearing through the vote and
members will be asked to come back as quickly as possible.
Mr. Moran.
Mr. Moran. Thank you, Mr. Chairman.
Mr. Chairman of the Federal Reserve, I thank you for
testifying. I ran for office in 1990, so I served 14 years and
I have listened to you very carefully because you are a
brilliant economist. But I have to say you leave me a bit
confused as to where you really stand. In 1990, when I was
running for office, there was an historic economic summit, and
Bush senior made a tough decision. He decided to put in some
real spending limits into the budget and to develop a course of
the budgetary decision that would lead to it being balanced,
and it started to work. I think it may have been his political
downfall, but it was successful in terms of its objective.
President Clinton came in, an economic plan in 1993, not
one Republican vote. It became a very partisan vote, but that
led to a chart that I want the chairman to put back up. It is
the chairman's own chart that I want to look at these dramatic
increases during the Clinton administration and even more
dramatic fall-off in economic growth in the first 3\1/2\ years
of the Bush administration. The results were telling. But it
seems to me it shows a dramatic difference in economic policy.
That is what I am getting at.
On the one hand, President Clinton not only reformed the
welfare program and did restrain spending, but he did increase
taxes so he would at least get a balanced budget, a surplus,
and then work his way toward a combination of investment and
tax reduction. This administration's sole objective appears to
be to cut taxes, and I don't see much else, because the PAYGO
provision, which you had supported very strongly--I have a
number of quotes of how much you felt that that played an
instrumental role in budget balancing--has been thrown out. The
PAYGO provision now only applies to spending. It doesn't apply
to tax cuts. And while our ranking member asked you that, I
want to find--I want to know from you which is the most
responsible approach, because we have two vastly different
approaches to economic policy. They have two vastly different
results.
We debate on the floor of the House constantly between
these two different approaches. It seems to me that results are
quite telling, but I want you to tell us which you think is the
most responsible. How important do you think it is not to have
a balance between tax cuts, the PAYGO policy that applies to
tax cuts, as well as spending.
Mr. Greenspan. Well, Congressman, if you are going to want
a long-term strategy which seeks to have stability, a sense in
which the whole budget balance process is sustainable over the
long run, a necessary condition in my judgment is that you need
a structure for making policy choices, a mechanism which
enables you to choose between policy X and policy Y, but you
cannot have both. The only way I can think of which has any
practical possibility of working, which it has, and it has
worked in the past, is a balanced PAYGO. I personally would
much prefer to have lower taxes and lower spending but, of
necessity, a balanced budget.
Others may choose higher taxes and higher spending. I think
that that would make the level of economic activity less, but
that is a debatable point. But choices have got to be made, and
unless you have a structure which enables people in the House
and the Senate to make those choices, I don't see how you come
up with a credible budget
Mr. Moran. So the structure, you are saying, is imperative.
I am glad to have that clarified. The fact is that controlling
the White House, the House of Representatives, the Senate,
still the party in power has had an 8 percent annual spending
increase, $30 billion of it attributable to homeland security.
Mr. Shays [presiding]. The gentleman's time has expired.
Mr. Moran. OK.
Mr. Shays. Mr. Gutknecht.
Mr. Gutknecht. Thank you, Mr. Chairman. And, Dr. Greenspan,
we are always delighted to have you up here. I appreciate the
roadmap that you have outlined.
I would share with you one of my favorite people from
history. Winston Churchill once observed that Americans always
do the right thing once we have exhausted every other
possibility. And my sense is that when you talk about some of
the real reforms that you mention, I really do think that this
Congress will begin to take those more seriously as we go
forward; among those, PAYGO and spending caps. And frankly, I
am one who believes they ought to apply to both sides, and
perhaps by next year we can reach a more bipartisan agreement
on that.
Secondly, as a baby boomer, I was born in 1951. I think the
demographics prove that there were more babies born in 1951
than any other year, and so we have a really strong vested
interest in reforming Social Security and Medicare and making
those systems look more like the market for health care and the
way everybody else deals with retirement.
So there are a number of things we can and I think will do,
but I would like to call up chart No. 13 and just because I
think sometimes we need to put this in a bit of historical
perspective. Can we call up No. 13? Because those who weren't
here back in 2000 and 2001, in case we forget, just a little
over 3 years ago, the Congressional Budget Office was
projecting a projected surplus over the next 10 years of $5.6
trillion. OK? And as late as September 5, 2001, testifying
before this very committee, the Congressional Budget Office
projected that--this was after we had passed some of the tax
cuts--that we would still have surpluses over the next 10 years
of $3.4 trillion.
Now, I think history will record that they were wrong. No
one could have predicted what happened just 6 days after they
were here on September 5th. No one could have predicted those
unanticipated expenditures. No one could have anticipated what
would happen to the economy. I don't think anyone back then
would have guessed we would say $47 a barrel oil.
I say all that just because I do think we have to put it in
perspective, and if there is anything that has surprised me in
the past 3 years it is how incredibly resilient the American
economy really is. And I wonder if you would comment, because
you touched on it briefly, have you or any of the economists
that you have worked with put any kind of numbers to how much
of a dampening effect $47-a-barrel oil has had? In other words,
how much stronger would the economy be right now if oil were
still down around $30 a barrel?
Mr. Greenspan. Congressman, it is difficult to tell, for
reasons which I explore in my prepared remarks. Economists have
been focusing on the consequences of oil price spikes for many
years and have been puzzled by the fact that the average
evaluation of what oil prices do to GDP, when you look at the
full spectrum of price change, most of which is at lower levels
and small changes, if you extrapolate that, you don't get
anything which resembles the type of economic weakness that we
tend to see. So that we suspect that there are elements
involved when oil spikes occur that, say, impact confidence in
one form or another, which have impacts on the economy which
are difficult to evaluate.
I don't think anybody has a number which I would feel
comfortable with. In other words, I know it has an effect. I
know it is there, and I am almost certain that at $30 for oil,
we would be doing better than we are today, but by how much I
think is extraordinarily difficult to judge.
Mr. Gutknecht. Well, Mr. Chairman, I would hope that if you
get a chance to talk to our friends over in the Senate, we are
a few votes short of passing a comprehensive energy bill over
there, and I think if there is one thing we can do before we go
home in October, if we could pass comprehensive energy
legislation and give confidence to the markets that we are
serious about a long-term strategy to deal with energy prices,
it strikes me that that would have a very positive
psychological effect, if nothing else, on the American consumer
as well as American business. Would you like to comment on
that?
Mr. Greenspan. Well, I think there are a lot of elements
within that energy bill which are very important, good, and
should be enacted, and others which I would suggest are
otherwise.
Mr. Gutknecht. Well, I think we can compromise on those
things; and, frankly, the bill that passed the House was
probably a little larger than it needed to be, but I think
there is room for that.
Again, I want to thank you, and I hope you will continue to
speak out on budgetary reform, on Social Security reform, on
Medicare reform. I think these are all very, very important
issues whose time is clearly coming. Thank you very much.
Chairman Nussle [presiding]. Ms. Hooley.
Ms. Hooley. Thank you. Thank you for being here. I
appreciate your comments.
We have talked a lot about PAYGO, whether or not it should
cover just tax cuts--rather, should it just cover spending, or
should it cover both tax cuts and spending. You look at what
the numbers show where we are going to be in debt in 2014. I am
incredibly worried about what our economy is going to be like
in the future. Right now in Oregon, the average wage is down
$3,000, cost of living up. Poverty is up. We have less people
on health insurance. So I am very worried about what our
economy is in the future.
In 2010, all the tax cuts will expire. Other than the PAYGO
rule that would cover both tax cuts and spending, what do you
see as a framework for our economy in the future? And knowing
Congress as well as I do, I can't imagine that we are going to
let those tax cuts expire, which is going to add to our
deficit. What do you suggest we do in regards to tax cuts that
are expiring in 2010? We haven't dealt at all with the
alternative minimum tax, which is impacting more and more
people every year. What is your suggestion on PAYGO?
Mr. Greenspan. Well, Congresswoman, the reason I think it
is important to get a policy structure in place before you try
to get at the substance of trade-offs is that you have to have
rules which require you to choose between high-priority items.
In other words, largely as a consequence of the acceleration of
productivity and increasing revenues, we have lost the ability
to realize that we have to make choices, and the choices are
between two things, both of which have exceptional value to the
economy, to the society or to particular constituents. The
trouble is we cannot continue to just go on without saying we
can have this but not this, and PAYGO embodies that mechanism.
But that is only for new initiatives, as I point out.
What we need in addition, so far as I am concerned, is some
form of ongoing structure such as triggers, for example, which
would be applied to specific programs which would require that
in the event that they veer off projected courses of cost, that
they get automatically readjusted, or at least there is a
mechanism which restructures those particular programs.
Unless you have got the decisionmaking structure in place,
I don't see how you can take the huge budget that we have and
try to make the determination of what is important and what is
not, unless you break it down into specific decisions. Once you
do that, I do think you have the capability. But in answer
specifically to your question, I would say PAYGO is a
sufficient mechanism to make the types of decisions you are
asking.
Ms. Hooley. Thank you, Mr. Chairman.
Chairman Nussle. Mr. Hensarling.
Mr. Hensarling. Thank you, Mr. Chairman.
Chairman Greenspan, we have heard a lot today about the
deficit, and obviously most of us believe it is too large,
although obviously in terms of the size of the economy,
historically it ranks about 12th or 13th.
There is a big debate that is ensuing today about whether
tax relief is part of the deficit problem. As I look at the
numbers, I see in the fiscal year 2005 budget that the House
passed, we passed $153 billion of tax relief compared to $13.1
trillion of spending, and if I do the math correctly, the tax
relief is approximately 1 percent--1.2 percent to be exact--of
the spending, which would lead me to conclude that it is very
difficult to make the case that somehow the deficits that we
have today are tax-relief driven.
I also believe that for some reason the tax relief was a
line item in our budget. Say, for example, if it was a line
item for the widget production reformation administration, that
many in this committee would instead propose increased funding
for that line item; but somehow when we let taxpayers keep more
of what they earn, it somehow is a major driver of the deficit.
Another observation I have--and I am curious whether you
have seen the same figures--but under a static analysis, I
guess it would suggest that the tax relief would cost us
roughly 1 percent of the Federal budget; but instead, the
latest reports I see from Treasury indicate that revenue is
actually up since we passed the latest round of tax relief.
Reports I have seen have shown that the Treasury has collected
$70 billion more for the first three quarters of fiscal year
2004, over the first three quarters of fiscal year 2003, a 6.3-
percent increase, seemingly suggesting that at least in this
particular case, that maybe tax relief did help ignite an
economic recovery that has added revenues to the Treasury and
actually helped become part of the deficit solution as opposed
to part of the deficit problem.
So my first question is, have you seen these reports from
Treasury, and do you concur that revenues are up now over what
they were a year ago?
Mr. Greenspan. Well, Congressman, I think the general
conclusion about the fact that revenues are lower than they
would otherwise be without the tax cut, but higher because of
the tax cut, is best described by saying that a tax cut will
immediately lose revenue, and then to the extent that it
increases economic activity and generates a larger revenue base
will gain some of it back. It is very rare, and very few
economists believe that you can cut taxes and you will get the
same amount of revenues. But it is also the case that if you
cut taxes, you will not lose all the revenue that is implicit
in the so-called static analysis.
Mr. Hensarling. Let's examine the spending side of the
equation. I believe in our lost budget, the Federal--the
Federal budget rose by over 3 percent, roughly twice over
inflation, which, compared to recent trends, is actually an
improvement. Many have argued again that these are tax relief
driven deficits; yet I know that the Democrat substitute budget
that was offered contains $135 billion more spending. There
were at least 31 amendments offered in budget markup to
increase spending, and I am curious about the role of spending
in the deficit equation. And as our chairman pointed out
recently, the House had an opportunity to vote on a number of
budget enforcement mechanisms, including spending caps, rainy
day fund, a version of enhanced rescission or a legalized
version of the line-item veto.
To what extent does spending play a role in the deficit,
and how much have we been set back by voting down these various
spending restraints?
Mr. Greenspan. I don't know, but I have testified before
that I think there is a fairly significant constituency for tax
reduction and a fairly significant constituency for spending
increases, but none that I can find which is in favor of
reducing the deficit. And the only way you can reconcile this
process, in my judgment, is to bring PAYGO and a number of
other structural elements back in the decisionmaking process,
so that you can actually debate between two programs rather
than try to introduce both.
Mr. Hensarling. Thank you, Mr. Chairman. My time is up.
Chairman Nussle. Mr. Moore.
Mr. Moore. Thank you, Mr. Chairman.
Mr. Chairman Greenspan, thank you for being with us. We
have in this country a $7.3 trillion national debt, a deficit
for 2004 of $422 billion. Interest for 2004 is projected to be
about $322 million, not quite, but almost, a billion dollars a
day; and by 2006, it is well more than a billion dollars a day
interest on our national debt. Is that basically correct so
far?
Mr. Greenspan. It sounds fairly accurate, yes.
Mr. Moore. I speak on a fairly regular basis to high school
and college students, and last week I spoke to a group of high
school students in a government class. And I told them what I
just told you about our deficit and our debt, and I said to
this class, why should you even care about the $47.3 debt? A
senior girl raised her hand and said, ``Because we are going to
have to pay it off.''
Well, good luck. And I tell students when I talk to them
about this, ``You should be angry at Congress for what Congress
is doing to you and future generations in this country.''
You have already testified, Mr. Chairman, that in 2008 the
first wave of the baby boomers begins to retire. Is that
correct?
Mr. Greenspan. That is correct.
Mr. Moore. Alright. You have heard the term ``Social
Security Trust Fund.'' is there in fact a Social Security Trust
Fund where money is segregated for Social Security, not used
for any other purpose?
Mr. Greenspan. Well, the answer is no, and this gets to the
question of the difference between the $7.3 billion that you
point out which is----
Mr. Moore. Trillion.
Mr. Greenspan. Trillion--which is the public debt and a
figure of roughly $4 trillion which is the debt to the public.
Mr. Moore. I understand.
Mr. Greenspan. And the counsel for the unified deficit
essentially assume in effect that there is no separate trust
fund in which there are segregated revenues, because obviously
we use general revenues to pay for Social Security and
everything else.
Mr. Moore. Yes, sir. In fact, right now Social Security
revenues are being used for other purposes as well. Isn't that
correct?
Mr. Greenspan. Well, the difference between Social Security
tax receipts and benefit payments are obviously going to
finance other aspects of the Federal budget.
Mr. Moore. Yes, sir. And I believe by your testimony--but I
want to ask you the question--do you have concerns about my
children--I am a baby boomer, I am going to retire in the not-
too-distant future--about the rest of America's children
providing for the baby boomers' retirement, servicing the debt,
paying down the debt, if that is at all possible? Are we
putting America's children in a financially or economically
unsustainable position in the future with all of those burdens?
Mr. Greenspan. Congressman, I don't know the answer to that
question, but the fact that I don't disturbs me.
Mr. Moore. Me too.
Mr. Greenspan. In other words, I cannot say with any degree
of confidence that we have not made commitments which we cannot
deliver. And unless and until we are in a position where we can
say we have not made these commitments, we do not know the
resources will be available to meet the needs of retirees but
also the needs of workers who will be presumably requiring, as
their parents and grandparents had, a rising standard of
living.
Mr. Moore. I practiced law for 28 years before I came to
Congress, and under Kansas law attorneys were required to have
what is called a trust fund to segregate their own funds from
their clients' funds. And you have heard about that, I am sure.
And it is an absolute no-no for an attorney to violate that and
to use a--to commingle the clients' funds with his or her own
funds. That is what a trust fund is about. Correct?
Mr. Greenspan. That is what it is in the private sector.
Mr. Moore. That is not the way it is in Congress, is it?
Mr. Greenspan. It is not.
Mr. Moore. And in fact, there is no Social Security Trust
Fund, as we discussed, because those funds are commingled for
general revenues and used for whatever purpose Congress deems
necessary. Is that correct?
Mr. Greenspan. Well, that is what happens in the budgeting
process, yes, sir.
Mr. Moore. Would there be any advantage to actually
establishing a Social Security Trust Fund? You remember a few
years ago we talked about a lockbox, and the lock seems to have
gotten picked. And we talked about the possibility 3 or 4 years
ago about maybe starting to pay down debt. And there was even
concern about paying down the debt too soon. Well, we sure took
care of that problem, didn't we?
Mr. Greenspan. Yes, sir.
Mr. Moore. Thank you, Mr. Chairman.
Chairman Nussle. Mr. Thornberry.
Mr. Thornberry. Thank you, Mr. Chairman.
Chairman Greenspan, as I listen to your testimony, I am
struck, among other things, about the role of uncertainty and
the possibility of external events and how they can impact our
economy. You talked about energy. It doesn't take a great
imagination to think of some event in the Middle East or in
South America that could aggravate energy prices substantially
and have enormous consequences for our economy.
Certainly the attacks of September 11, had enormous
consequences for our economy. Part of what we have been trying
to do is pursue those defense and homeland security policies
that prevent future attacks or limit them as much as possible.
But I want to ask you, because I am sure you have thought a lot
about how best to insulate our economy from the consequences of
some future terrorist attack. We know that the terrorists are
targeting in on our economy. They have said so, and it is clear
that they see that as a way to hurt us. You said earlier that
after September 11, our economy seemed more resilient than you
thought it would be in bouncing back, which is encouraging, of
course; but have we taken the steps you think are needed to
help minimize, I guess, the economic consequences of some
future attack, should that occur?
Mr. Greenspan. Well, Congressman, extending our experiences
of 9/11, it is fairly apparent that what helped us during that
period and immediately thereafter was the extraordinary amount
of flexibility in both our financial and product and labor
markets. We had the ability to absorb shocks and rebound. I
have argued in many forums in recent years that a great part of
that flexibility has come from increasing globalization and
very specifically our part involved in it from a bipartisan
deregulation of our economy generally, which started in the
1970s and has essentially preceded more or less to this day,
and, of course, the extraordinary advances in technology which
have many causes but have been a major factor in the American
economy.
The difficulty is that an economy such as ours is based on
voluntary actions of people acting largely on bilateral trust.
People have created wealth by interacting, and what terrorism
does is to induce fear and withdrawal. And if you withdraw from
the specialization of labor, as economists like to put it, the
GDP comes down. And so the question essentially is how do we
create a sufficiently flexible system so that, short of
remarkably large terrorist attacks, we can recover?
I think we did that inadvertently. We didn't do it as a
part of an antiterrorism economic policy. We lowered our
tariffs. We increased globalization. We deregulated the
airlines. We did transportation deregulation in general. We did
a large number of things, especially in the financial area. All
of those things, while not directed at the issue of terrorism,
per se, have been the reason why I think we do have a degree of
flexibility, which means that short of very large impacts, our
economy will recover.
Mr. Thornberry. And as that applies to us, steps that we
might take that would go back on regulation or diminish the
globalization or the contacts or diminish the flexibility in
our economy, it would make it more difficult to recover?
Mr. Greenspan. That is what concerns me most. I am most
concerned about protectionism, largely because if we start to
remove the international flexibility that has developed in
recent decades, I think the rigidity, the calcification of our
economy would get to a point where it could be quite vulnerable
to terrorist attacks.
Mr. Thornberry. Thank you.
Chairman Nussle. Mr. Neal.
Mr. Neal. Thank you, Mr. Chairman.
Nice to see you again, Chairman Greenspan. Considering that
we all take such great satisfaction in what it is that you have
to say, and I follow it closely every single day, and certainly
you are without peer as it relates to reflecting on the state
of markets across not only America but the entire world, I am
just going to refer to you from now on as, ``Your Excellency''
with your commentary.
Now, let me ask you a couple of questions based on
observations. I think you would agree that we are fighting two
wars with three tax cuts.
Mr. Greenspan. I can count, but I don't know what I am
counting necessarily.
Mr. Neal. Would you acknowledge, based upon your suggestion
back in February, that the Budget Committee considered cutting
Social Security because of the budget situation and demographic
pressures caused by the imminent retiring of baby boom
generations? Would you acknowledge that the Social Security
Trust Fund, or the financial status of Social Security has been
weakened by a decision to yank $2.3 trillion out of the budget
over the next 10 years?
Mr. Greenspan. Congressman, as I indicated in my prepared
remarks, Social Security is out of balance and will require
certain adjustments, either on the tax side or on the benefit
side or in a number of other related areas.
The problem that I have is that everyone acknowledges that
there is a gap, but no one agrees that anything that will close
the gap is acceptable.
Mr. Neal. Except, Mr. Chairman, we did take $2.3 trillion
out of the budget over the next decade. Has that strengthened
or weakened the Social Security program?
Mr. Greenspan. I don't know how to answer that, largely
because I think that the Social Security program should stand
on its own. And if you have a system in which there are and
should be trust funds, those revenues, as it was indicated by
one of your colleagues, in my judgment, ought to be segregated.
Mr. Neal. Mr. Chairman, let me follow up on that. We are in
the midst of a war in Iraq, as we would all acknowledge, and
Lawrence Lindsey, the President's chief economic adviser at the
time, said it might cost up to $300 billion. That looks now as
though it is going to be a low figure. He lost his job for
saying that.
My point is that we have a natural disaster occurring in
Florida as we speak where there is going to be up to $40
billion or more required to help those folks out, deservedly
so. We are in the midst of an international crisis fighting a
war in Iraq and fighting a war in Afghanistan, with troops
stationed in Bosnia and Haiti. We have increased defense
spending by significant numbers, as an overwhelming majority of
this Congress voted for, myself included, and we have all
acknowledged that there have been downturns in this economy,
bumps along the road. And then we hear that Social Security has
problems, that Medicare has problems, and we fail to connect
the dots between the problems that we have and the obligations
we are going to have. And the $2.3 trillion that has been
yanked from the economy over 10 years strikes me as being
irresponsible.
Now, there were a number of things that we did in the 1990s
that took some courage, Bush I, Clinton twice, a majority of
Congress, including the Republican leadership for the most
part, that voted for those positions; certainly the Republican
leadership in the Senate voted for those positions. And now we
find ourselves back in a situation with a mounting deficit,
international obligations that are going to incur huge costs
for the American people, Social Security position that has been
jeopardized, money for Florida, and we hear about a trip to
Mars. Can you do all of this with the tax cuts that we have
embraced?
Mr. Greenspan. Well, Congressman, I think you have made the
case for restoring PAYGO. Those types of problems that you
assert would exist, if the Congress agreed with your
priorities, would not exist if we had a mechanism in which the
Congress was forced to choose between A and B rather than just
go along, doing both A and B.
Mr. Neal. I will go back and reread your comments to seek
that clarity. I want to say this, lastly. There is a clever
game that is played here, as you know very well, and that is
Members who preach fiscal responsibility run to the
appropriators faithfully asking that their favorite program be
funded. The easiest way, as Mr. Nussle and I have discussed in
the past, to perhaps speak to the issue you have raised is to
publish the letters of those who ask for spending. Put it out
there. They go back to the appropriators. They ask for money,
and then they go back home and preach fiscal discipline, at the
same time Mr. Nussle and I discussed, they attend
groundbreakings and ribbon cuttings.
Thank you, Your Excellency.
Chairman Nussle. The gentleman's time has expired.
I am going to try this. Please listen to my unanimous
consent request that the chairman has to leave at 12:30 as I
have stated. I will ask unanimous consent that all members be
allowed to question the witness for 3 minutes so that we have
more members that are allowed to question. I ask unanimous
consent that we be allowed to do that. I know that is
unfortunate, but I want to get in as many as possible.
Without objection, so ordered.
The gentleman from Pennsylvania is recognized.
Unfortunately, only for 3 minutes.
Mr. Toomey. Thank you, Mr. Chairman. And let me commend my
colleague Mr. Neal for a very constructive suggestion he made
at the end of his questioning.
Chairman Greenspan, thanks for being back. My question goes
to what I sometimes think of as some of the self-inflicted
wounds that we have with respect to our economic challenges,
and one that comes to my mind is the ongoing problem of
excessive litigation. I say self-inflicted, because of course
the political establishment currently tolerates a system--a
legal system that I think in some ways has actually run amok.
The Rand Institute for Civil Justice estimates that litigation
and settlement expenses cost as much as $60 billion since 1982.
Two Council of Economic Advisers estimated in April of 2002
that the U.S. tort system consumes 1.8 percent of GDP, double
the average cost of other industrialized nations.
Another way of looking at is they estimate that excessive
tort claims are equivalent to a 3 percent tax on wages or a 5
percent tax on capital income.
My question for you, Mr. Chairman, No. 1, do you believe
that tort claims are excessive, and to the extent that tort
claims are economically excessive, do you believe that they are
equivalent in some ways to a tax on individuals or business?
Mr. Greenspan. Well, Congressman, a judgment as to whether
they are excessive or not depends essentially on what you are
trying to do with your tort system. Clearly, a capitalist
market economy cannot function unless there is a rule of law,
and that contracts need to be protected, and we need a
structure of law which enables individuals to address wrongs
both from the business sector and from business reasons and
otherwise.
It is also clear that if everybody who has a legal right to
move into adjudication were to do so, the court system, our
legal system, would be swamped into immobility. And so it is
clearly a system which implicitly requires voluntary restraint
on expansion of it. Where that line is, I don't have a
judgment.
Mr. Toomey. I understand that. Let's for a moment assume
that to the extent that there were to be an excess beyond what
is appropriate and necessary, could it be described fairly as
equivalent to a tax?
Mr. Greenspan. It would have the same effect.
Mr. Toomey. It would have the same net economic effect as a
tax, which is, of course, to curb economic growth?
Mr. Greenspan. Well, I just want to speak in general terms,
because there are differences in the incidence of those
particular types of actions, but it has an economic impact
which is similar to a tax.
Mr. Toomey. Thank you, Mr. Chairman.
Chairman Nussle. Mr. Edwards.
Mr. Edwards. Mr. Chairman, following up on your testimony
over the past year, it seems to me once again Congress has made
the mistake of listening to your goal of lower taxes in the
long run, but totally ignoring your strong recommendations to
have pay-as-you-go rules for new tax cuts and for new spending
increases. Consequently, we are facing $422 billion deficit
over the fiscal year 2004, and my concern is that Congress is
going to, once again, do this year what it did last year. It is
going to listen to your advice about overall it would be nice
to have lower taxes, but I wouldn't bet a dime of my family's
net worth that Congress is going to put strict limits on
Medicare and Social Security expenditures. If anything, this
Congress, through its leadership, just invested another $550
billion of taxes for those purposes.
My question to you is in your testimony you talked about if
we don't make major policy changes and we continue down this
road of increasing deficits that ultimately it could lead to--
and I believe you used the word instability.
My question to you is would you define instability in the
worst case scenario as you define it, and also how you would
define a more moderate level of instability if we keep going
down this path of ever-increasing national deficits?
Mr. Greenspan. Congressman, I think you make a good point
in making certain that these definitions are exact and not
general. The ultimate instability is the case I described
earlier where you get to a point where the budget deficit is
large enough and therefore adding to the national debt, which
in conjunction with rising interest rates because of that
creates an unstable statistical or arithmetical system which
leads to a major breakdown of the fiscal system.
Now, that has happened in the past, not obviously in the
United States, but we have cases in other countries over the
generations where that has happened. We are nowhere near
anything resembling that, as evidenced by the fact that there
is no inflation premium of any significance in our monetary
system, but it is certainly conceivable that if we wholly
disregard fiscal restraint and merely go on our way of, as I
said before, advocating ever-increasing deficits, which is the
implication of a lot of the actions that we take, then I think
we start to risk problems.
The situation that probably most in a practical sense we
need to avoid is not an unstable breakdown of the system but
significantly higher rates of inflation and of inflation
premiums embodied in long-term interest rates, and what we used
to call--I guess we still would--stagflation. And that is what
lies in front of us if we don't restore balance to our fiscal
processes.
Mr. Edwards. Thank you.
Chairman Nussle. Mr. Brown.
Mr. Brown. Thank you, Mr. Chairman.
Chairman Greenspan, we are glad to have you here today. My
question is, I notice when you mentioned in trying to control
the expansion of government, one would be using PAYGO, and you
mentioned that by using it to increase appropriations, you
ought to find some other way to cut. But you used the same
example for tax cuts, and I was just curious as to the money
coming in from the people is certainly their money already, and
just to take less, we need to make an offset. Tell me how you
would do that.
Mr. Greenspan. Well, Congressman, I, as I indicated
earlier, would prefer both lower taxes and lower spending. What
I would not think is desirable is spending with borrowed money,
which is what the issue is. If you are going to lower taxes,
you shouldn't be borrowing essentially the tax cut; that over
the long run is not a stable fiscal situation.
Longer-term growth, in my judgment, is probably maximized
by keeping the level of expenditures low and therefore having
the capacity to keep taxes low, which, as far as I can judge,
would probably, from a fiscal policy point of view, create
maximum economic growth and sustainability.
Mr. Brown. If I could follow up, then, the multiplied
effect of the tax cuts should be sufficient enough, I think, to
absorb any deficit because of the spending in the private
sector?
Mr. Greenspan. That may be the consequence, but all of the
evidence is that does not happen to be the case. That is, as I
mentioned before, it is true that when you cut taxes you gain
some revenue back--we don't know exactly how much it is, it is
not small, but it is also not 70 percent or anything like that;
so that we do know that if you cut taxes, you will increase the
deficit, but by not as much as the tax cut.
Chairman Nussle. Mr. Ford.
Mr. Ford. Thank you, Chairman Greenspan and Mr. Nussle.
Real quick, Mr. Chairman Greenspan, I know my time is
short, there seems to be a big disconnect. I heard Chairman
Nussle and others talk about these numbers and this growth, and
I heard all this talk about tax cuts and not adding to the
deficit. But I think we forget there are more people living in
poverty today than there were 3 years ago. We can put all the
numbers and talk about growth here and growth there. People
have seen increases in property and in State and local taxes.
People are seeing their light and power bills go up because of,
as you talked about, the uncertainty of oil prices. And I think
at some level we have to be willing to take some responsibility
for tuition increases at the University of Alabama and
University of Tennessee. We have seen a 60 percent increase
over the last 3\1/2\ years at our State schools across the
State.
Mr. Nussle mentioned that more people are working today.
Sure there are, but there are more people living today in
America than there were 3 years ago, so one would expect that
number to increase.
I have heard you talk about the entitlement challenge and
how that crushing blow to my generation, other younger
Americans will face here in the coming years, and you have
talked about how we have got to get our arms around it. Do you
believe we should raise the eligibility age, No. 1? And should
we means test entitlement programs before we, perhaps, rush
down the path that some have suggested in terms of a new
ownership society and privatizing parts of Social Security?
I have only got 3 minutes, Mr. Chairman. I hate to be rude
to you, but I wanted to ask one more to you as well.
Mr. Greenspan. Well, Congressman, I would basically say
that there are choices of how one confronts this problem, and
that is the purpose of having a process such as PAYGO or other
structural additions to the budget process.
Mr. Ford. What do we say--and we are Democrat and
Republican up here who have got this problem. The people we
point to, jobs being created, we all know the data shows that
people are making less money than they were before. What do we
say to those who say, you guys are cutting taxes and middle-
class people now pay more, if I am not mistaken, a higher
percentage of their income in taxes than those of us in the top
1 percent, what do we say to those people?
We have said now for 2 years--I was here when the
President's tax plan passed and he promised this and he
promised that, and those things just have not happened. So what
do we say? Just keep waiting, and those at the top 1 percent
will enjoy a bigger tax cut and bigger benefits, and those of
you who are struggling to send your kids to college and pay
gasoline prices and pay higher property taxes, you guys hang in
there, because we are turning the corner and better days are
coming? Should we just continue to say those things?
I would even ask my friends on the other side, because I
know we are not alone in here in these things--Mr. Gutknecht,
you talked about some of these things in your questioning. You
have to be hearing the same things. You promised and others
promised that this tax cut would produce all these wonderful
things. I wish I could sit here today and say I was wrong, but
unfortunately the numbers, as much as we try to put a spin on
these things, we have got a $422 deficit, and we are here
bragging about it. We have got more people living in poverty
today. Health care premiums are going up for people, and we are
sitting here acting as if we have done something good for
folks.
So I am just curious. Do we keep telling them that we are
turning a corner and that good times are coming, or is there
something else that we should be saying? Now, I understand all
these numbers and all, but I am just curious, what else should
we be saying to everyday folks?
Mr. Greenspan. Well, I don't think it is what we should be
saying. It is what we should be doing. And I think the problem
is a broader question. One issue on which I have testified
previously, relates to the fact that we have had a very
significant increase in skill differentials. People who have
gone through college and graduate school have a significant and
increasing wage premium compared to those who have gone to high
school or less. We have got a problem in this country in which
the distribution of wealth and income is getting increasingly
concentrated. This is largely because our educational system
has not, in my judgment, been up to the task to sufficiently
bring up our younger children through primary and secondary
education and through high school and college so that the
supply of skilled workers increases relative to demand, so that
those wage premiums go down and the increasing concentration of
income slows down. I have argued that we have to confront this
issue, and unless and until we do, we have some very serious
problems. It is not what we say to people, it is what we do to
resolve these types of problems.
Chairman Nussle. Thank you, Mr. Ford. That may be one of
the most important statements you have made all day. I
appreciate it.
Mr. Bonner.
Mr. Bonner. Thank you, Mr. Chairman. And before I address
the chairman, I would just like to say to my friend from
Tennessee, if the people of Tennessee are paying 60 percent
more to attend the University of Tennessee today than they were
3 years ago, they ought to come to the University of Alabama.
They can get more for their money.
Mr. Ford. Mr. Chairman, I will let that one slide till late
September, Bonner.
Mr. Bonner. Mr. Chairman, we have talked a lot about
manufacturing job loss and higher productivity in this country.
If I am not mistaken, other countries have seen job losses as
well. Japan, China, Brazil and other countries have seen
increasingly alarming job losses and many have also seen
increasing productivity levels as well, although not to the
extent of the United States.
I have contended since I first came to Congress 20 years
ago as a staffer, and certainly feel so today as a Member, that
as a Nation we do a very poor job of trying to grow the economy
or grow jobs when we place burden after burden after burden on
business and industry, from the rules that come out of the
various agencies and departments, to our very tax system. And
so my question to you is related to one of the discussions I
think we will be having during this election season and that is
not necessarily tax cuts but tax reform.
Have you ever taken a public position about whether we
could simplify our tax system to make it less burdensome on
business and industry so they can go out and create more new
jobs as opposed to what has happened in the last few years?
Mr. Greenspan. I must say I thought the 1986 Tax Act was
what most economists would consider an ideal system in our
political context. We initiated that, and then observed year
after year as it began to deteriorate and return to what it
eventually looked like prior to the 1986 act.
It strikes me that as with all programs that deteriorate,
we have to go back and refix them, and probably we continually
do that every 20 years or so. I think what we need is what we
had. I thought that was an extraordinarily sensible balance of
priorities in the country, and as I recall, it was reasonably
well accepted by our society. Let's try it again.
Mr. Bonner. Thank you very much.
Chairman Nussle. Mrs. Capps.
Mrs. Capps. Mr. Greenspan, to continue Mr. Ford's line of
thinking, you are dead on, dead right with respect to the
importance of education to our economic future, I believe, and
particularly to the future of our now underachieving youth.
Would that mean, perhaps, that we have to make resources
available at the Federal level, and would that might mean we
might have to reconsider other priorities, including tax cuts?
Mr. Greenspan. Well, this is the reason why I am so
strongly in favor of getting a structure in which the Congress
can debate these choices and decide where our limited resources
go. And I can't tell you what this committee ought to come up
with, but it is essentially the charter of this committee to
make these very broad judgments and to try to reflect the value
systems of the American people and what their trade-offs are.
Mrs. Capps. Let me try that from another angle, and I agree
with you we ought to be tackling this.
You made it clear, for example, on numerous occasions that
you think cutting taxes in tandem with spending cuts does
increase economic growth, but this is kind of a King Solomon
tack on it. Which is preferable, unfunded tax cuts and large
deficits or no tax cuts and balanced budgets?
And maybe to illustrate, President Reagan in 1982 realized
that the full scope of his tax program would have dire
consequences for the fiscal health of the Federal Government,
and so he signed into law a bill which scaled back some of his
tax cuts. Was this a good idea or not? That is the question.
The Bush administration has shown some flexibilities by
having sunset dates. That might be what we might call a trigger
effect, and given that the majority--now the Republican
leadership has not dealt with this, as you have just
indicated--would it be better to let some tax provisions lapse
rather than to make them permanent at the cost of continuing
such large deficits which make it hard to pay for education?
Mr. Greenspan. Well, I have always said before you start
any fiscal policy, it has got to be balanced in some form or
another, and that is the reason why I think structure is
important. I personally, were I a member of this committee,
would probably be consistently voting for lower taxes and lower
spending, but there are many more members in this committee
than any individual, and fortunately what this committee tends
to reflect, and indeed the House of Representatives more
generally, is where the American people are, where their trade-
offs are and where their choices are.
I can tell you that if we cut taxes, we will, other things
equal, increase economic growth and ultimately the revenue base
in a way which, without getting into the numbers, general
growth would be very substantial.
I think that is a very important thing to do, but I fully
recognize that there are others who would prefer alternatives,
where longer-term growth, which is a function in my judgment of
tax policy, is longer term, and other people would prefer, say,
shorter-term programs because they have very specific issues to
deal with. I don't know how you trade that off, except by a
PAYGO type of discussion.
Mrs. Capps. You keep coming back to that. Thank you very
much.
Chairman Nussle. Mr. Portman.
Mr. Portman. Thank you, Mr. Chairman.
I thank you, Chairman Greenspan, for being here. As you
know, our Federal education funding through this committee has
actually increased dramatically during Ms. Capps' tenure,
partly because of her, I suppose; a 49-percent increase over
the last 3\1/2\ years. So it is not for lack of funding, but it
is obviously a balance, as you said.
The deficits that we have heard as record deficits, I tell
you when I was elected and ran 12 years ago, our deficit was
4.7 percent of the GDP. This year we hope it will be about 3.6
percent, maybe a little less, and it is projected to go down.
The economy you talked about, Chairman Greenspan, we have added
1.7 new jobs in the last--1.7 million new jobs in the last
year, as you know. I am looking at your August 10, Federal Open
Markets committee release where you decided to raise the target
for Federal funds by 25 basis points. In that, the committee
said the economy appears poised to resume a stronger pace of
expansion going forward. That was a few weeks ago. Do you still
believe that is true?
Mr. Greenspan. Well, that statement was made at a time when
the data that we had were for the month of June in a broad
sense, which were quite weak, and we had early data for July.
And as a consequence of that, the soft patch which we
identified appeared to be converting into some pickup in
economic activity. We had a big increase in automobile sales in
July. Housing starts came up, as I indicated in my prepared
remarks. If it weren't for the oil price spike, I would be very
optimistic about where the economy is going.
Mr. Portman. Do you still believe, though, that the economy
is poised for growth?
Mr. Greenspan. Yes, as I said in my prepared remarks today.
Mr. Portman. You talk about the BLS data you had, it is
hopeful. Those of us who don't have access to that information
I think should in part defer to the Fed, and by your decision a
few weeks ago and by your statement today, I am encouraged by
our economic growth.
Tax cuts, we have heard today that this is a burden on our
economy, that we need to stop the tax relief. I know you feel
differently about it, but I guess I would ask you specifically,
were the tax cuts a good idea and was the timing appropriate?
Mr. Greenspan. Well, I have suggested that they were a good
idea. In fact, I particularly thought that making a structural
change in gradually reducing the double taxation on dividends
was a very important structural advance, which I think in the
long run has very important positive aspects for economic
growth.
So I couldn't at the time suggest that the timing was going
to be appropriate for short-term economic change. It turned
out, I think more by chance than anything else, to be in fact
very proper timing, but I don't think that economists can
forecast that closely to use fiscal policy for short-term
economic stimulus.
Mr. Portman. We will hear proof of that this afternoon from
CBO, where they are going to adjust the deficit down $60
billion for this year because revenues have actually increased
this year despite the tax relief.
Thank you, Mr. Chairman.
Chairman Nussle. Mr. Baird.
Mr. Baird. Mr. Chairman, I thank the chairman for being
here.
Mr. Chairman, we read today in the paper that the GAO has
apparently indicated that Tom Scully, the former head of CMS,
should not be receiving his salary, because at the time, he
instructed a Medicare actuary to not give actuarial information
to the United States Congress. Specifically, he apparently told
the actuary that if he told the Congress that the Medicare drug
bill would cost $530 billion instead of $400 billion, he would
be fired.
I put that in the context of the President of the United
States, who when he was running for office told the American
people he would put Social Security in a lockbox, the trust
funds; and, yet, when he talks about cutting the deficit in
half, we would see, according to CBO numbers, that we would
borrow not $150 billion from Social Security, as we do now, but
$256 billion in 2010.
Secretary Wolfowitz was here right before the Iraq war and
said to this committee that the notion that the war in Iraq
would cost $100 billion and would require 100,000 troops was
nonsense.
Now, I add those three up, and as we try to plan our
financial future, if we are borrowing a quarter trillion
dollars from Social Security when we said we would borrow
nothing, if Medicare costs $130 billion, as we have been told,
if the costs of the war are at least double what Secretary
Wolfowitz said, it seems to me it makes it rather difficult for
this Congress to pass appropriate policy.
Do you have any thoughts on that?
Mr. Greenspan. Not on what you have said, no.
Mr. Baird. Let me ask you a different question, then.
We have heard today that the economy went up, and we are
glad that it did, and it is because of tax cuts. Have you given
any examination to what would happen or might have happened to
jobs, growth, et cetera, if instead of tax cuts to the top 1
percent of income, individuals in this country, we had invested
in transportation infrastructure? There were legislation
proposed to put, for example, $40 billion into infrastructure,
roads, highways, bridges, et cetera. Any thoughts about the
relative merit in terms of growth stimulation, job creation, et
cetera, of infrastructure investment vis-a-vis tax cuts?
Mr. Greenspan. Congressman, those turn out to be very
difficult judgments to make. You will find that you can get an
array of economists up here, and you will find you have gotten
four economists with seven answers. And the reason is that we
have an exceptionally complex economy, and it is exceptionally
difficult to trace the effects of a number of these various and
different initiatives.
Mr. Baird. Given that, would it be fair to say that we
cannot merely look at, yes, taxes were cut and the economy
improved, and say that was the only thing that could have been
done?
Mr. Greenspan. That is a fair statement.
Mr. Baird. That there are other things that could have been
done that might have stimulated the economy more?
Mr. Greenspan. I can't deny that.
Mr. Baird. Thank you, sir. Thank you, chairman.
Chairman Nussle. Mr. Garrett.
Mr. Garrett. I will yield.
Chairman Nussle. Then Mr. McCotter.
Mr. McCotter. Thank you, Mr. Chairman.
I want to touch on a couple of points. When we talk about
the PAYGO system, that would be a statutory remedy to Federal
spending, would it not?
Mr. Greenspan. It would.
Mr. McCotter. And the more stringent it would be for
Congress to break through it, the happier, you think, the
markets would be?
Mr. Greenspan. I would assume so.
Mr. McCotter. So then would not a constitutional balanced
budget amendment, which would be even more stringent and more
difficult for Congress to break through, be better?
Mr. Greenspan. It depends on a broad question here of what
one perceives the Constitution should cover, as distinct from
statutes. I have been on both sides of this issue, and I think
it has nothing to do with economics. It has more to do with how
one views our constitutional system.
Mr. McCotter. I would think it would be more stringent.
Mr. Greenspan. It certainly would be more stringent. The
question is, do you want the Constitution to create economic
policy in that context.
Mr. McCotter. I think that the Constitution is required
because you need something greater than the power of Congress
to break through the statutes that can or cannot pass, to bind
our hands, to protect us, which would make it more stringent.
Mr. Greenspan. If you believe that, then I think the answer
is yes.
Mr. McCotter. The question then for me is something that
Representative Thornberry touched on, and I think it is kind of
lost. It seems to me from every family board room to a
corporate board room, family living room, when they make
economic decisions, they try to make them on a rational basis.
And what we have seen on September 11, and even sooner for
some, was, we now have to factor in the inherently irrational
act of terrorism in economic decisions. You said since
September 11, the country has been resilient, but there is no
way for anyone to understand when the American public as a
whole, as an aggregate of these individual decisions, will feel
comfortable enough factoring that decision into their long-term
economic projections.
I ask that because my concern is, we are going to continue
to see despite ourselves and despite fiscal policy in general,
there are spits and sputters in the American economy as
external events and the threat of terrorists continue to
intercede. It might be one more reason for a company not to
make a hire, for a family not to make an investment or a
purchase, and we may see continued sputtering in this economy
because of that.
Mr. Greenspan. I wouldn't disagree with what you said. To
the extent you have these external events occurring in a
voluntary economy, we are subject to that. And the only thing
we can do is, one, try to find a way to eliminate the
initiation of the terrorism, or two, structure an economy which
is sufficiently flexible to absorb the shocks that those
terrorist acts create.
Mr. McCotter. Or both, which is what we are trying to do
now.
Chairman Nussle. Mr. Cooper.
Mr. Cooper. Thank you, Mr. Chairman.
To simplify this hearing, it seems you have come to us
today and asked for a reinstatement of the budget rules that we
lived under quite successfully for some 12 years after 1990.
And those budget rules expired in 2002, and this Congress let
them expire.
The key rule is PAYGO, which you offset by either spending
increases or tax cuts. And I think essentially what you are
hearing from this committee today is that even though you are
in your forceful way asking us for those, this committee is
letting you walk away empty-handed because the majority of this
committee has been offered the vote on real PAYGO several times
and the majority of this committee has refused to endorse it.
Even though those budget rules worked quite successfully,
according to your view, for 12 years, we let them lapse in
2002, and all we need to do is reinstate them. And yet this
committee is refusing to do so even though you say quite
clearly in your testimony, it would help our economy to do
that.
One of our gentleman friends on the other side is
suggesting, well, we can't do PAYGO, let's do a constitutional
amendment, which takes years to pass and implement, when we can
do PAYGO this month if we wanted to.
So it is important to highlight in clear, simple terms, you
are coming asking for PAYGO. The majority of this committee,
the Republican majority of this committee, is making you walk
away empty-handed; and I think that is tragic for our economy,
because we know what to do, we know how to do it, and you are
recommending it to us, and it has worked well for 12 years. And
yet, we are not allowing that good policy to be reinstated.
That is a sad day for this country, when the solution is so
close to our grasp, but yet the majority of this committee is
refusing to grasp it.
You, in very gentle terms, told Mr. Brown that the supply
side doesn't work. Assuming my colleagues on the other side
want to continue to believe that tax cuts always pay for
themselves, there is some offsetting revenue effect, but you
stated to Mr. Brown that he was mistaken in his view, that they
always pay for themselves.
We appreciate the economic reality you bring to this
committee, but I wish a majority of this committee would give
you what you came here asking for, which is PAYGO--PAYGO now to
reinstate those rules that we lived with so successfully from
1990-2002. Would you care to comment?
Mr. Greenspan. I prefer not.
Mr. Cooper. Thank you.
Chairman Nussle. Mr. Franks.
Mr. Franks. Thank you, Mr. Chairman.
Chairman Greenspan, thank you for being here. The last time
you were here, you made some similar statements related to some
of the entitlements. We have been on an unsustainable
trajectory. And those are things that a lot of us have been
saying for a long time, suggesting that the best way to affect
that is in the market reforms on the finance side.
Having said that, I think your erudite voice has been more
compelling than just some conservative Congressman saying that.
And I just hope that you continue to say that, because I think
it may prevent this country from facing a mathematical paradox
that could be addressed only by nothing short of a political
cataclysm.
I would suggest to you that you said something else today
that is equal in nature, and that is, you said--not to put
words in your mouth--that this premium that skilled workers had
over nonskilled workers was largely responsible for the
differences in living standards in our society. And I believe
that what you are saying is correct.
I believe that we economically segregate children at a very
early age. I used to be the director of the governor's office
for children in our State, and I am more convinced of that as
we go along. And if you believe that, and I am convinced that
you do, do you think that market forces and parental choice are
reasonable elements to employ to try to correct that economical
segregation? And if so, do you have other thoughts as well?
Mr. Greenspan. I think it is essential. First of all, let
us remember that the real concern that we should have is that
recent studies about the status of our schoolchildren relative
to their counterparts in the rest of the world are not very
favorable.
We start, for example, with studies showing that fourth
graders in math and science do reasonably well relative to the
rest of the world. By the 12th grade, they are all the way
close to the bottom. Obviously, it can't be the children, the
same children who existed in the fourth grade; we are doing
something to them in the process, which other countries are not
doing. And we ought to find out what it is that we are doing
wrong and they are doing right.
Because unless we bring a significant proportion of those
who are now ending up as lesser skilled in our society and,
hence, creating a surplus of the lesser skilled relative to the
demand in a highly technologically based economy, unless we
reduce that level of surplus by moving them up to the skilled
level and thereby raise the wage rates at the lesser-skilled
level and lower them at the upper-skilled level, we are going
to be confronted with what I think in a democratic society is a
very difficult problem.
Mr. Franks. Thank you, Mr. Chairman.
Chairman Nussle. Mr. Emanuel.
Mr. Emanuel. Thank you Mr. Chairman. I also have a question
on skill sets, but two things I want to say beforehand.
One is, a number of colleagues have cited economic
statistics. What they left out is, we have 44 million Americans
without health insurance, which--33 million Americans work
without health care; 4 million more Americans live in poverty
today than did in 2001; wages and median income for families
have been frozen or declined in the last 2 years; and health
care costs and college costs, at the same time, have gone up by
a third in the very year that the Congress is supposed to
reauthorize the Higher Education Act.
All the economic statistics cited by the other side pointed
to the board room, and none of the economic statistics they
cited ever pointed to anybody's pay stub. If you went down to
somebody's pay stub, income is flat and costs are up and that
has been the impact of the economy.
In 1994, on January 31, you said the actions taken last
year to reduce the Federal budget deficit have been
instrumental in creating the basis for declining inflation
expectations and easing pressures on long-term interest rates.
On February 20, 1996, you said the deficit reduction in
President Clinton's 1993 economic plan was an unquestioned
factor in contributing to the improvement in economic activity
that occurred thereafter. On January 4, 2000, you said, my
colleagues and I have been very appreciative of your--President
Clinton's--support of the Fed over the years. Your commitment
to fiscal discipline which, as you know and indeed have
indicated, has been instrumental in achieving, one, of the past
few weeks, as you point out, will be the longest economic
expansion in the Nation's history.
If fiscal discipline was good then, and you cited it over 9
years as good, I would assume it is good now. And if fiscal
discipline was good for economic growth and economic activity,
and if the chemistry in which we used to create that condition
was good then, then the opposite of what we have today, which
are higher deficits, in fact are not good for long-term
interest rates and long-term economic growth.
I don't want to give you another question, but if the basis
of your points over 6 years about deficit reduction being good
for the economy was good then, it would be good now.
You and I at another point discussed the skill gap as
really underscoring the income gap that we have here, and it is
really the gap that exists in our society in that we can't
sustain as a society that kind of gap. Have you looked at maybe
making the first 2 years of college universal and free, like we
made 4 years universal and free at the beginning of the
Industrial Revolution; that we would do something different
about higher education for the new economy and the new stage we
are in, in the same way we did for high school education at the
early stages of the Industrial Revolution? Has the Fed ever
looked at that from a policy analysis?
Mr. Greenspan. We haven't, and the reason is, you are
getting into the details of our educational system, which I--
and I presume most of my colleagues--don't have the expertise
to make judgments about.
But clearly community colleges, one can judge, have been
growing very rapidly. In fact, they are the most rapidly
growing aspect of our educational system. And that is saying
that the markets are working because they are in the forefront
of what I would call lifetime education. People are
continuously going back to community colleges. I think the
average age of full-time students is in the high 20s, and what
that tells me is that there is a huge demand out there for
these new types of educational skills.
And it is that type of focus that is needed in a system
such as ours in which the job requirements are continuously
churning and in which the turnover of jobs is extraordinary.
Remember, we hire a million people a week in our economy and
separate roughly the same number. And this particular process
means that unless you move the people on the wrong side of that
million, the ones who are losing their jobs, and find ways to
move up their skill levels, we are not going to address this
problem in an appropriate way, in my judgment.
Mr. Emanuel. Thank you, Mr. Chairman.
Chairman Nussle. I have three members and if we do this in
3 minutes, we will get you out of here. Mr. Lewis.
Mr. Lewis. Thank you, Mr. Chairman. I will be very brief.
Thank you, Mr. Chairman, for being here today. You have
been very patient. I want to know, do you favor this proposal
that we should be allowed to privatize part of Social Security?
I know there were others in the administration--where do you
come down?
Mr. Greenspan. I have been in favor of finding some way to
get away from a defined benefit type of program, which is
essentially what Social Security is. But it is a very complex
issue, Congressman, and I don't know if I can do it justice in
this very short period of time. But it is a major issue which
the Congress needs to address.
Mr. Lewis. Do you think or have any feeling where we engage
in these unbelievable tax cuts that we are taking from the
well-being of Social Security and maybe Medicare?
Mr. Greenspan. I didn't get the question.
Mr. Lewis. I don't want to use the word ``stealing,'' but
do you think we are taking from the strength, the welfare of
Social Security and Medicare?
Mr. Greenspan. The purpose of the tax cuts is essentially
to increase the growth rate of the economy and the overall
depth of the economy, which over the longer run would mean that
if it is working properly that it would be easier to finance
Social Security benefits. So I don't think that you can call it
``stealing.''
I think what you can say is, it is a different point of
view as to the way our society and economy will function. And
consequently, I think everybody is in favor of higher benefits
for retirees and higher medical expenditures as is feasible.
And the only question, I think, that is involved here is what
is the most feasible way to address that question.
And there are disputes and there will be dispute amongst
economists on these issues as there will be in the Congress.
And there is no shortcut to concluding other than debating the
issues and each Member of the Congress coming to a conclusion.
Mr. Lewis. In your statement, you imply that we don't have
much time and time is not on our side in dealing with the
question of health care and also retirement.
Mr. Greenspan. We do have several years. It is not
something that needs to be addressed tomorrow or the day after.
But unless we start the process fairly soon, the inexorable
turn of the clock is going to find us up against a very
significant problem without having prepared our budgetary
system for it.
Chairman Nussle. Mr. Scott.
Mr. Scott. Thank you, Mr. Chairman.
And, Mr. Greenspan, I appreciate your patience. I had a
couple of charts I wanted to--on this one. This is a time
period going back to Herbert Hoover, the number of--the job
growth since Herbert Hoover, a time period that includes Pearl
Harbor, World War II, the Korean War, Vietnam, the cold war,
hostages in Iran, Persian Gulf War--does that reflect the
number of jobs created by each administration showing that this
administration is the worst since Herbert Hoover?
Mr. Greenspan. Yes. I would also think that if you put up a
productivity chart of a similar nature, you would find that
this has been the period amongst all of those different,
varying Presidential regimes that has the highest rate of
growth in productivity; and yet the trouble, unfortunately, is
that one is causing the other. And that is what I mentioned
earlier with respect to the productivity issue and the
shallowness of the recession, which has been the major
contributor to job loss.
Mr. Scott. Without the explanation, this does show the job
loss?
Mr. Greenspan. That is an accurate chart.
Mr. Scott. You are familiar with this chart that shows the
deficit. The green in the middle is the Clinton administration
when we had PAYGO. Does this chart represent a $650 billion
deterioration in the budget? Is that chart accurate, to the
best of your knowledge?
Mr. Greenspan. As far as I can judge.
Mr. Scott. Next is the present value of the Social Security
and Medicare deficits and the present value of this
administration's tax cuts. It shows that the administration's
tax cuts, the present value of those is significantly more than
the Social Security shortfall and the Medicare shortfall
combined. Does that reflect the choice we had? We can cut taxes
and take care of Medicare and Social Security?
Mr. Greenspan. I can't confirm those numbers. I don't know
if they are accurate or not, but just reiterate my of earlier
statements, what has been missing in this budgetary process for
a number of years since September of 2002 is the necessity to
make choices.
Mr. Scott. And the final chart shows that we have in the
last few years increased new debt by $638 billion, the foreign
portion purchased by foreigners, approximately $729 billion.
Can you say what the foreign policy and national security
implications are of a substantial portion of our debt being
owned by foreigners?
Mr. Greenspan. It is an interesting question, which we at
the Federal Reserve have given considerable thought to, because
clearly we, at the end of the day, are responsible for the
American financial system. We are the lender of last resort in
that sense.
It turns out that a very large part of the foreign
purchases--is that the Federal debt numbers you have up there?
Mr. Scott. Yes.
Mr. Greenspan. Federal debt. It is very substantially--I
just can't see some of the numbers up there--it is very
substantially very short-term instruments, and these
instruments compete in a very huge market in the private
sector. So that in response to the implication that you are
trying to raise, namely that were foreigners, either for
purposes malicious or otherwise, withdrawing from purchasing
substantial amounts, would that have a major impact on our
interest rates and on our economy and the financial structure
generally, our conclusion is ``no.'' And the reason for the
``no'' is that such a substantial part of the debt competes
with vast amounts of private instruments.
Does it have some effect? Yes, it does have some effect,
but it is not the type of effect which raises significant
problems with respect to our foreign posture.
Mr. Scott. Thank you, Mr. Chairman.
Chairman Nussle. Mr. Davis.
Mr. Davis. Thank you for letting all the members--and,
Chairman Greenspan, thank you for your indulgence. You talked a
fair amount in this hearing about the impact on the psychology
of the market if some of the tax cuts were suspended and how
that could impact investor confidence and a number of other
things. Let me focus on a slightly different problem.
Let us say that the institutional moment arrived when
Congress decided to make draconian cuts in entitlement
programs--Social Security, Medicare, for example. If that
institutional moment arrived, a concern of mine is that that
would also have a profound impact on the psychology of the
economy in this country. Significant numbers of seniors would
feel that their investments, or what they perceive as their
investments, were imperiled, or that programs that could
provide a lifeline to them were somehow imperiled.
Can you comment on that for a moment? And then I have one
last question I want to ask you.
Mr. Greenspan. It is hard to know what the psychological
effect is, but I agree there could be some response, which is
the reason why I think you have to address these problems in a
gradualist way and not find yourself up against a crisis which
requires an immediate and draconian fiscal policy.
We are talking about 2015 as sort of a critical year when
these things begin to mushroom. I should think that if we can
anticipate out that far, which I believe we can, we can
certainly reorder our priorities in a manner with people who,
instead of finding at the last minute that all of a sudden they
had programmed into their retirement incomes and expenditures
funds which they will not get--that that, I think, is
extraordinarily unfair, and we have to act well in advance.
Mr. Davis. I agree with you. And let me slip in another
observation as my time and your time run out.
You made the point accurately before in other hearings that
there is a fundamental problem, or the risk of a fundamental
problem, when it comes to inequity in our society; and you have
made the accurate observation that the perception of inequity
can sometimes be devastating in its own right.
I would end with this observation: If Congress at some
point makes draconian cuts to entitlement programs, when you
combine that with the tax burden in this country rising on
middle-income people as it proportionately falls on upper-
income people, and when you combine one other factor, the
impact on income assistance programs, if we cut those, my
concern--if I could close out--my concern is that we could put
ourselves in very much the bind that you have described to this
committee and others, that we could make choices that don't
appear to be equitable to the American people, and we could
make choices that are inequitable on their face.
And if you could react to that, I would appreciate it.
Mr. Greenspan. I think a democratic society functions only
if people believe that it is a fair and equitable society.
Those which have had problems occur to a large extent because
there is a deep-seated belief that there is an underlying lack
of fairness.
I think the success of our society over the generations has
been, there is a sense of opportunity and freedom, which has
been crucial to the development of a sense of values which are
held virtually by every American. Indeed, the Bill of Rights,
for example, is essentially, I would say agreed to possibly by
not 100 percent, but close to 100 percent of our population.
Mr. Davis. You said it better than Senator Kerry says it
some days.
Chairman Nussle. It is tempting.
Mr. Chairman, we congratulate you for re-upping for another
term. We look forward to working with you and for your
generosity of time to come before this committee.
Unless you have anything else to say before this
committee--if you do, I would be happy to hear it. Otherwise,
we would stand adjourned.
Mr. Greenspan. Thank you very much.
[Whereupon, at 12:55 p.m., the committee was adjourned.]