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



 
                        MONETARY POLICY AND THE
                          STATE OF THE ECONOMY

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 21, 2004

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 108-104



                   Goverment Printing Office
96-942 PDF             Washington :  2004

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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

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

                 Robert U. Foster, III, Staff Director

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 21, 2004................................................     1
Appendix:
    July 21, 2004................................................    35

                               WITNESSES
                        Wednesday, July 21, 2004

Greenspan, Hon. Alan, Chairman, Board of Governors of the Federal 
  Reserve System.................................................     4

                                APPENDIX

Prepared statements:
    Oxley, Hon. Michael G........................................    36
    Gillmor, Hon. Paul E.........................................    37
    King, Hon. Peter T...........................................    38
    Greenspan, Hon. Alan.........................................    40

              Additional Material Submitted for the Record

Greenspan, Hon. Alan:
    Monetary Policy Report to the Congress.......................    50
    Written response to questions from Hon. Sue W. Kelly.........    76
    Written response to questions from Hon. Doug Ose.............    80


                        MONETARY POLICY AND THE
                          STATE OF THE ECONOMY

                              ----------                              


                        Wednesday, July 21, 2004

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to call, at 10:06 a.m., in Room 
2128, Rayburn House Office Building, Hon. Michael G. Oxley 
[chairman of the committee] Presiding.
    Present: Representatives Leach, Baker, Bachus, Castle, 
Royce, Lucas of Oklahoma, Kelly, Paul, Gillmor, Miller of 
California, Hart, Capito, Tiberi, Kennedy, Hensarling, Murphy, 
Brown-Waite, Barrett, Harris, Frank, Waters, Sanders, Maloney, 
Velazquez, Ackerman, Sherman, Meeks, Lee, Moore, Capuano, Ford, 
Lucas of Kentucky, Crowley, Clay, Israel, McCarthy, Matheson, 
Miller of North Carolina, Emanuel, Scott, Davis and Bell.
    The Chairman. The committee will come to order.
    This morning we are pleased to welcome back the chairman of 
the Federal Reserve, the Honorable Alan Greenspan.
    Good morning, Mr. Chairman. We welcome you once again to 
the Financial Services Committee. Thank you for taking the time 
to discuss monetary policy and the economy and topics of 
interest to every Member of this committee and certainly to all 
Americans.
    Chairman Greenspan, I first want to congratulate you on 
your reappointment and reconfirmation. I know I speak for most 
Americans and Members of this committee when I say we are happy 
to have your steady hand on the monetary policy tiller. I know 
you would probably like to spend a little more time on your 
golf game, and it definitely needs it, but we appreciate your 
dedication and service to the Fed.
    Mr. Chairman, when the uptick in energy prices this spring 
brought with it a spike in inflation, many imagined that your 
well-advertised fist tightening of monetary policy would be 
more aggressive than the quarter-point move that the Open 
Market Committee made at the end of June.
    All spring you said the tightening would be as swift and 
strong as necessary, and the second half of your statement was 
that the tightening would be gradual. As usual, you were 
correct on both counts.
    More important, Mr. Chairman, is an issue you raised at 
your last appearance before this committee, and that is how we 
prepare our workers for the jobs of the 21st Century. You made 
the point that the best way to push up wages over time was to 
make sure that our workers are educated and ready to fill the 
new higher-skill jobs this vibrant economy creates as lower-
skill, lower-wage jobs cycle offshore.
    I know that that continues to be a strong interest for you, 
and rightly so. Creating jobs is a goal we all share. We all 
like to see lower unemployment than the current 5.6 percent 
rate and know that lower unemployment also means higher wages. 
The economy has averaged creating 250,000 jobs a month for this 
year, and I think the new jobs figure for June of 112,000 was 
an aberration.
    I think that job creation will pick up, and that the 
average employment level for this year will be at or higher 
than the average for 2000 of 131.8 million. It is already at 
131.4 million, even with that June low.
    Mr. Chairman, we look forward to your testimony and to the 
discussion today.
    With that, I yield to the distinguished ranking Member, the 
gentleman from Massachusetts.
    [The prepared statement of Hon. Michael G. Oxley can be 
found on page 36 in the appendix.]
    Mr. Frank. Thank you, Mr. Chairman.
    Mr. Chairman, on April 21st, you gave very powerful 
testimony to the Joint Economic Committee in which you noted 
that the good news was great increases in productivity, which 
were continuing, and you have been proven right against some of 
the skeptics who thought that the productivity increases in the 
late 1990s were transitory and that we would slip back to the 
normal, what had been the lower normal average.
    But you also noted, and I was pleased that you did that, 
that virtually all of the gains from increased productivity had 
gone to pretax profits of nonfinancial corporate entities. And 
I would just say as an aside, if they are doing well pretax 
corporate, pretax profits these days, they are doing even 
better with after-tax profits. You noted that virtually none of 
the increase has gone to people who are getting paid wages. And 
as a result, the ratio in the economy, wages paid, compensation 
paid and wages to pretax corporate profits was really quite low 
by normal standards.
    In the report today, you note that there has been some 
increase in employment costs as we measure it. But I also 
note--and I appreciate your being careful to point this out in 
the statement of the report--that what we have seen is an 
increase in employer contributions to health plans and an 
increase in employer contributions to pensions. But wage 
payments to workers, nonsupervisory workers, have, in fact, 
lagged inflation, and that is a serious social and economic 
problem.
    I appreciate the fact that, unlike many others, you have 
noted that inequality is in and of itself a problem, and I 
thank you for doing that. There are some who try to ignore it. 
There are people who probably argue that, as long as the 
absolute level is fine, then inequality is not a problem. But 
we know in economics that the absolute level that is acceptable 
is in fact engined by what is available and what others have 
and what that does to prices, et cetera.
    So this is the dilemma that we have. We have a situation in 
which we have begun to grow, although there has been some 
slowing down. We hope it is temporary, and we hope that the 
next months will be better. But it has not been as fairly 
distributed as we would like it to be, and even by historical 
standards, it has lagged.
    That seems to me to have two problems. First of all is a 
political problem. You note in your statement, in the report, 
that protectionist sentiment is increasing. It will continue to 
increase. We are not India, but there is a lesson in India, 
when a government that had done very well in the macroeconomics 
area through its free-market policies unexpectedly lost an 
election, in part because they boasted with their slogan of 
India Shining about their success. And a lot of Indian people 
said, ``Shine this, because, in effect, where is my piece of 
it?"
    There was an article in the New York Times a while ago on 
the front page about how democracy in Latin America is no 
longer as universally or widely supported as we would like it 
to be because people there have seen no connection between 
democracy--that they have been told--and some improvement in 
their lives.
    In America, you run the risk that there are people who 
increasingly believe people who work hard for a living, that 
they have no real skin in the game of economic advance. Now, 
you and I don't agree with that, but it is a factor that you 
have to take into account. And, indeed, to the extent that we 
continue to have great progress in the macro economy but real 
wages don't go up--and I suppose, workers should be grateful 
that the boss is now paying more for health care--but the 
worker is not any better off. The boss is paying more for the 
same health care and real wages are lagging, and so he and she 
understandably feel worse off.
    There is also an economic problem. At some point, 
insecurity, instability, lack of liquidity is going to cause 
some problems for people, and so that is something that I think 
we need to address.
    Last point is this: I want to say that I know you have 
gotten some pressure to increase interest rates more quickly 
through the Federal Reserve Open Market Committee. I hope you 
will continue to resist it. I would just remind people, we had 
this argument to some extent in the late 1990s. I admired the 
fact then that you were willing to defy what had sort of been 
conventional wisdom that, if unemployment got below 5.5 
percent, it would be highly inflationary, you would get a lot 
of pressure from a lot of places, editorial pages and 
elsewhere, to raise interest rates simply because a lower 
unemployment rate would be inherently inflationary. It got to 
3.9 percent without inflation. You argued, I think correctly, 
that productivity was making this possible.
    You are again under some pressure from people to raise 
rates more quickly. I would just urge people to think about the 
implications that unemployment is still 5.6 percent. We had 
gotten it down to 3.9. But your report says that, at the end of 
2005, you expect unemployment to be between 5 and 5.25 percent. 
As much as 1.3 percent higher, 20 percent higher in terms of 
where they are, 25 percent than it was, this is not a time to 
slow down the macro economy.
    The people in the business community and elsewhere who 
focus on the fact that, well, maybe macro growth is too high 
and we begin to see a little bit of inflation, for them to urge 
on you measures that would slow things down at a time when 
unemployment is still much higher than it should be at 5.6 
percent, when the percentage of Americans working is low, 
because part of what we have seen is a lower percentage of 
adult Americans working, when real wages have lagged, when real 
wages have been eroded, to argue at this point that you should 
slow down the macro economy is to exacerbate a situation that I 
think is already socially and potentially economically 
dangerous for the U.S.
    So I urge you not to accept those kinds of pressures, but 
also, I hope you will join with us in thinking of ways--you 
have documented the problem. You have documented the problem of 
increasing inequality very well. It does not appear to me to be 
getting significantly better on its own, and I would hope you 
would join with us in figuring out ways to deal with it.
    Thank you, Mr. Chairman.
    The Chairman. The gentleman's time has expired.
    We now turn to the distinguished chairman of the Federal 
Reserve, Dr. Alan Greenspan.
    Again, we welcome you, Mr. Chairman, and good to have you 
back.

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

    Mr. Greenspan. Thank you very much, Mr. Chairman. Thank you 
very much. I will excerpt from my prepared remarks and request 
that the full text be included for the record.
    The Chairman. Without objection.
    Mr. Greenspan. Thank you.
    Mr. Chairman and Members of the committee, I am pleased as 
always to be here today to present the Federal Reserve's 
monetary report to the Congress. Economic developments in the 
United States have generally been quite favorable in 2004, 
lending increasing support to the view that the expansion is 
self-sustaining. Not only is economic activity quickened, but 
the expansion has become more broadbased and has produced 
notable gains in employment.
    The evidenced strength in demand that underlies this 
improved performance doubtless has been a fact contributing to 
the rise in inflation this year. But inflation also seems to 
have been boosted by transitory factors such as the surge in 
energy prices. Those higher prices, by eroding households' 
disposable income, have accounted for at least some of the 
observed softness in consumer spending of late, a softness 
which should prove short-lived.
    When I testified before this committee in February, many of 
the signs of the step-up in economic activity were already 
evident. Capital spending had increased markedly in the second 
half of last year, no doubt spurred by significantly improved 
profits, a low cost of capital and the investment tax 
incentives enacted in 2002 and enhanced in 2003.
    Renewed strength in capital spending carried over into the 
first half of 2004. Orders in shipments of nondefense capital 
goods have been on the rise, and the backlogs of unfilled 
orders for new equipment continue to build.
    A key element of the expansion that was still lacking in 
February, however, was evidence that businesses were willing to 
ramp up hiring to meet the stepped-up pace of sales and 
production. Businesses' ability to boost output without adding 
appreciably to their workforces likely resulted from a backlog 
of unexploited capabilities for enhanced productivity with 
minimal capital investment, which was an apparent outgrowth of 
the capital goods boom of the 1990s.
    Indeed, over much of the previous 3 years, managers had 
seemed to pursue every avenue to avoid new hiring, despite 
rising business sales. Their hesitancy to assume risks and 
expand unemployment was accentuated and extended by the 
corporate accounting and governance scandals that surfaced in 
the aftermath of the decline in stock prices and also, of 
course, by the environment of heightened geopolitical tensions.
    Even now, following the pattern of recent quarters, 
corporate investment in fixed capital and inventories 
apparently continues to fall short of cash flow. The protracted 
nature of this shortfall is unprecedented over the past 3 
decades. Moreover, the proportion of temporary hires relative 
to total employment continues to rise, underscoring that 
business caution remains a feature of the economic landscape.
    That said, there have been much clearer indications over 
recent months that conditions in the labor market are 
improving. Most notably, gains in private non-formed payroll 
unemployment have averaged about $200,000 per month over the 
past 6 months, up sharply from the pace of roughly $60,000 per 
month registered over the fourth quarter of 2003.
    The improvement in labor market conditions will doubtless 
have important follow-on effects for household spending. 
Expanding employment should provide a lift to disposable 
personal income, adding to the support stemming from cuts in 
personal income taxes over the past year. In addition, the low 
interest rates of recent years have allowed many households to 
lower the burdens of their financial obligations.
    Although mortgage rates are up from recent lows, they 
remain quite attractive from a long-term perspective and are 
providing solid support to home sales. Despite the softness of 
recent retail sales, the combination of higher current and 
anticipated future income, strength in balance sheets and 
still-low interest rates bodes well for consumer spending.
    Consumer prices, excluding food and energy, so-called core 
prices, have been rising more rapidly this year than in 2003. 
For example, a 12-month change in the core personal consumption 
expenditures price index stood at.8 percent in December of last 
year and climbed to 1.6 percent by May of this year.
    Core inflation, of course, has been elevated by the higher 
index of energy prices and business costs and by increases in 
non-oil import prices that reflect past dollar depreciation and 
the surge in global prices for primary commodities.
    But the acceleration of core prices has been augmented by a 
marked rise in profit margins, even excluding domestic energy 
corporations. Businesses are limited in the degree to which 
they can raise margins by raising prices. An increase in 
margins should affect, mainly, the level of prices, associated 
with any given level of unit costs but, by itself, should not 
prompt a sustained pickup in the rate of inflation going 
forward.
    Indeed, some leveling or downward pressure on profit 
margins may already be in train, owing to a pickup in unit 
labor costs. Although advances in productivity are continuing 
at a rate above the long-term average, they have slowed from 
the extraordinary pace of last summer and are now running below 
increases in hourly compensation.
    The available information suggests that hourly compensation 
has been increasing at an annual rate of about 4.5 percent in 
the first half of this year. To be sure, the increases in 
average hourly earnings of nonsupervisory workers have been 
subdued in recent months and barely budged in June. But other 
compensation has accelerated this year, reflecting continued 
sizeable increases in health insurance costs, a sharp increase 
in business contributions to pension funds and an apparently 
more robust rate of growth of hourly earnings of supervisory 
workers.
    The larger wage gains for supervisory workers together with 
anecdotal reports of growing skill shortages are consistent 
with earlier evidence of rising wage premiums for skilled 
workers, relative to less-skilled workers.
    As always, considerable uncertainties remain about the pace 
of the expansion and the path of inflation. Some of those 
uncertainties, especially ones associated with potential 
terrorism, both here and abroad, are difficult to quantify. 
Such possibilities have threatened the balance of world supply 
and demand in oil markets in recent months, especially as 
demand has risen with the pace of world economic growth. Yet 
aside from energy, markets exhibit little evidence of 
heightened perceptions of risk. Credit spreads remain low, and 
market-based indicators of inflation expectations, after rising 
earlier this year, have receded.
    With growth of aggregate demand looking more sustainable 
and with employment expanding broadly, the considerable 
monetary accommodation put in place starting in 2001 is 
becoming increasingly unnecessary. If economic developments are 
such that monetary policy neutrality can be restored at a 
measured pace, as the FOMC, expects a relatively smooth 
adjustment of businesses and households to a more typical level 
of interest rates seems likely.
    Even if economic developments dictate that the stance of 
policy must be adjusted in a less gradual manner to ensure 
price stability, our economy appears to have prepared itself 
for a more dynamic adjustment of interest rates. Of course, 
considerably more uncertainty and, hence, risk surrounds the 
behavior of the economy with a more rapid tightening of 
monetary policy than is the case when tightening is more 
measured. In either scenario, individual instances of financial 
strain cannot be ruled out.
    In sum, financial markets, along with households and 
businesses seem to be reasonably well prepared to cope with a 
transition to a more neutral stance of monetary policy. Some 
risks necessarily attend this transition, but they are 
outweighed, in our judgment, by those that would be associated 
with maintaining the existing degree of monetary policy 
accommodation in the current environment.
    Although many factors may affect inflation in the short 
run, inflation in the long run, it is important to remind 
ourselves, is a monetary phenomenon. As we attempt to assess 
and manage these risks, we need, as always, to be prepared for 
the unexpected and to respond promptly and flexibly as 
situations warrant.
    But although our actions need to be flexible, our 
objectives are not. For 25 years, the Federal Reserve has 
worked to reestablish price stability on a sustained basis. An 
environment of price stability allows households and businesses 
to make decisions that best promote the longer-term growth of 
our economy and, with it, our Nation's continuing prosperity.
    Thank you very much, Mr. Chairman, and I look forward to 
your questions.
    [The prepared statement of Hon. Alan Greenspan can be found 
on page 40 in the appendix.]
    The Chairman. Thank you, Chairman Greenspan for appearing 
before this committee.
    We have had this discussion before, and it is one I would 
like to return to, and that is the resilience of our American 
economy. Considering the fact that we have gone through some 
remarkable, markedly difficult times over the past 3 years, 
with the recession, the tragedy of 9/11, the following need to 
fight the war on terror with increased defense spending and the 
like, the business scandals that you referred to in your 
statement, I have said before, I would doubt there is any 
country or any economy in the world that could have sustained 
those kinds of body blows and yet, 3 years later, be in as 
strong a position as we are economically.
    Were we just lucky? Or what is it about our system, 
monetary fiscal policy, our overall system, meaning the private 
sector and the Government and the like, what is it about the 
American economy and the American attitude that would allow us 
to make that kind of recovery in a relatively short period of 
time?
    Mr. Greenspan. Mr. Chairman, you are raising what probably 
is the most important issue that has been on the policy agenda 
for the last number of years.
    We were quite startled and, I must say, pleased, obviously, 
that this economy was able to absorb the very significant 
shocks to which you allude without contracting as, in most 
everybody's judgment, it almost surely would have, say, had 
they happened 20 or 30 years ago.
    It is quite apparent that the most important element in 
this very evident increasing resiliency of our system is the 
associated flexibility in both financial markets and in the 
economy generally. I tried to address this issue in a number of 
presentations a few years ago, and it looked to me at the time 
as though the causes were several.
    First and quite important was the bipartisan trend towards 
deregulation which started in the 1970s and has indeed gotten 
to the point where the notion of economic reform as a concept 
in the world is usually related to the questions of increasing 
deregulation and privatization. In a sense, the process that we 
have been going through is now increasingly being replicated 
elsewhere in the world.
    In addition, obviously, there has been a significant 
increase in technological capabilities, especially information 
technologies, which enable businesses to respond in a far more 
expeditious way and respond to imbalances in demand and supply, 
and that has prevented significant problems from emerging 
before they were addressed.
    And the broad areas of increasing globalization, as we have 
lowered our tariff barriers and broadened our interface with 
the rest of the world, have also been a major factor here in 
creating flexibility, because we can interact with our trading 
partners in the way in which shocks are absorbed by all of us 
and contained rather readily.
    So the general proposition that I think we have learned 
from this, and, indeed, we have learned because it was not 
something that one would have put high on the agenda 3 or 4 
decades ago, is that flexibility, anything that improves 
flexibility in the financial system or the economic system, is 
in and of itself a very important advance to enable the economy 
to grow and prosper.
    The Chairman. Would you, in terms of fiscal policy--I know 
that you mentioned in your remarks at least twice the tax cuts 
and their affect on rejuvenating the economy. Was that, the 
fiscal aspect and the monetary aspect working together, was 
that a major factor also in getting us where we are today?
    Mr. Greenspan. I think the tax cuts were effective in 
stemming the extent of the weakness of the economy several 
years ago. And, indeed, I have mentioned it, in fact, in my 
prepared remarks. There is no question in my mind that, 
somewhat to my surprise, the timing of the tax cuts came at a 
point when increasing effective demand to absorb the 
adjustments coming from the sharp stock market and capital 
goods decline of 2000 were necessary. So, in that regard, I 
would say yes.
    Clearly, there was significant improvement in tax policy 
over the years, but I think we may have reached the peak in 
that regard in the 1986 act, and I cannot argue strenuously 
that we have made all that much improvement since then. Indeed, 
I think we have had a certain backup in a number of things that 
we have done. But, overall, I would say that looking forward, 
fiscal policy is going to become a very critical issue on the 
agenda for macroeconomic policy.
    The Chairman. If I might add, I know that you have said 
that you enjoyed these sessions partly from the feedback that 
you get from Members all over the country, anecdotal instances 
and so forth.
    For instance, I had a discussion with a trucking industry 
executive in my hometown a couple years ago, and he was last 
year's chairman of the American Trucking Association. He was 
all over the country, and I asked him how the transportation 
industry in general was doing, particularly the trucking 
industry. And he said they were doing very, very well, which is 
usually a pretty good harbinger of things to come, and I asked 
him specifically about his own company. He said he could hire 
20 drivers without any problem. He could expand that much.
    His problem, in his case, was finding qualified drivers, 
and I think it does point out perhaps the conundrum we have of 
trying to fit job skills and background and education with 
those jobs. I don't want to get a discussion going now. I just 
thought I would pass that on in that regard.
    I am over my time and recognize Mr. Frank.
    Mr. Frank. Thank you.
    Mr. Chairman, I was actually fascinated by your response on 
the tax question because, I must say, it sounded to me like you 
were giving a pretty good demand-side justification for the tax 
cuts, but you were ambivalent at best about the supply-side 
justification. And I would say, to the extent that you have 
said we have reached good tax policy in 1986, I am inclined to 
agree. I just hope we are not about to make that even worse.
    So I think there is general agreement in the country that 
demand-side stimulus works, and we did, as you say, manage to 
get the timing right. I think there were other ways to provide 
that demand stimulus, but I am struck by your being more 
enthusiastic about the demand-side aspect than the other.
    But there is another aspect of the tax cuts that you 
address in the monetary report. Let me read to you page 9: 
``The deficit in the Federal unified budget has continued to 
widen. In large part, the rise in the deficit is attributable 
to further rapid increase in spending on defense and other 
programs and the loss of revenues resulting from the tax 
legislation enacted in recent years.''
    You go on to say on the next page: ``As of the first 
quarter of 2004, national saving measured net of estimated 
depreciation was still equal to just about 2 and a half percent 
of GDP compared with a recent high of 6 and a half percent in 
1998. If not reversed over the longer haul, such low levels of 
national saving could eventually impinge on private capital 
formation and thus slow the rise of living standards.''
    You do say in here that the major reason for this drop, 
substantial drop, in national saving from 6.5 percent in 1998 
to 2.5 percent today is the swing in the Federal budget from 
surplus to deficit. So, what you are saying is that, the tax 
cuts had some positive near-term demand-side impact. We also 
have to deal with the fact they contributed substantially, 
according to the report--not alone, but substantially--to an 
increasing deficit which has, in fact, been a major reason for 
a substantial drop in the savings rate.
    You note that, if this is not reversed over the longer 
haul, it could impinge on private capital formation and slow 
the rise of living standards. I agree with you. What do we do 
about it?
    Mr. Greenspan. Well, first of all, let me just say that, as 
I have indicated before this committee before, I do think that 
the partial elimination of the double taxation of dividends was 
an important long-term structural supply-side change, so I 
would like to amend your remarks in that context.
    The issue in the short run, with respect to the fiscal 
policy, is unlikely to be a problem, largely because increasing 
revenues----
    Mr. Frank. That is why I asked about the long run. Let me 
ask the next question--I only have 5 minutes, Mr. Chairman. You 
have sketched this out as a long-range problem, that the tax 
cuts had a short-term stimulative effect with a little bit of 
supply-side capital gains, and they are having a longer-term 
potentially negative effect.
    What I am asking, is there some way we can deal with these 
negative effects without doing the long term, so I am 
interested in the long haul.
    Mr. Greenspan. Well, I think there is a much broader 
question, which comes down to fiscal policy at this stage, and 
it relates to the fact that, in budgets put together 30, 40 
years ago, we had very few programs which extended beyond a few 
years. True, we would have, for example, an aircraft program 
which would be a 3- or 4-year program. We would have some 
agricultural programs. But long-term commitments, either on the 
tax side or on the expenditure side, were rare.
    This has turned around 180 degrees, and what we are missing 
is a process which essentially can address a long-term outlook 
where the ability to forecast, either revenues or mostly 
expenditures on key programs, is clearly quite poor.
    This means, in my judgment, that you need a mechanism which 
adjusts programs as you move forward. Therefore, I would say 
not only do we need PAYGO, which is an important, in my 
judgment, critical issue in budget programming, as well as 
discretionary spending caps, but I think we also have to begin 
to think of how we nudge programs back to where we thought we 
were pushing them in legislation, either through triggers or 
sunset legislation or other----
    Mr. Frank. But you ignore the tax side, and that 
disappoints me, Mr. Chairman----
    Mr. Greenspan. Well, I----
    Mr. Frank. Let me, just to summarize, you thought from the 
tax policy, with the exception of the capital gains, we were 
better off in 1986 than we have been since in terms of the 
structure of the tax policy. You also said that the tax cuts 
that we had, while they had a demand-side impact when we were 
in trouble, but we don't need that now, that they have a long-
term--they have been a significant contributor to the deficit, 
the swing from negative--from positive to negative in the 
reduction in the savings rate.
    What about the question of tax policy going forward? We are 
about to talk about another major tax cut, beginning with the 
world trade decision but going much beyond that. Have you 
nothing to say about tax policy?
    Mr. Greenspan. Well, I will say this, as I have said it to 
you before, I think it was a mistake not to extend PAYGO both 
for tax and expenditure programs and let it expire in September 
2002 and that I, myself, as you know, prefer a lower tax burden 
in general because I think it assists economic growth and 
increases the revenue base. But, ultimately, that determination 
is the Congress's.
    The question that I think is necessary to focus on is to 
put a structure out of where the Congress can make those 
decisions, where I don't think you can at this point.
    Mr. Frank. Well, I will call the gentleman, I thank you.
    Mr. Chairman, I appreciate this rare burst of deference to 
us on the tax issues. You haven't been reticent about making 
recommendations that are within our constitutional 
jurisdiction, and you shouldn't be. So, when you somehow decide 
it would be inappropriate for you to recommend tax levels, I am 
a little bit puzzled.
    Mr. Greenspan. I am just essentially saying, I have stated 
before, and I haven't changed my view, I prefer lower taxes.
    Mr. Frank. Even if it makes the deficit worse----
    Mr. Greenspan. I am sorry.
    Mr. Frank. But even if it makes the deficit worse and has 
this long-term negative effect on national savings----
    Mr. Greenspan. Well, then you get a trade-off. I would 
prefer lower spending, lower taxes and lower deficits.
    Mr. Frank. Thank you.
    I yield to the Chair.
    The Chairman. The gentleman from Iowa, Mr. Leach.
    Mr. Leach. Thank you, Mr. Chairman.
    In your statement today and the last month, you have 
dwelled on a macroeconomics discussion I have never heard 
discussed by the Fed, and that is that there is greater cash 
flow in the economy, at least on the business side of the 
economy, than on investment. You described this as a risk-
averse corporate America today.
    Could you meat that out a bit, and then you have indicated 
in prior speeches that one aspect of this is that it looks like 
the economy coming through this year looks like it is going to 
be pretty steady growth. But the fact that there is less 
investment than might be the case probably implies that, coming 
into next year, we are going to have a sustained economic 
growth, and that is probably pretty good for whatever 
administration takes place, whether it be the lower-tax 
administration of today or perhaps a higher-tax administration 
of tomorrow, but that the basic underpinning of the economy 
looks pretty good going into next year.
    Is that a valid observation or a valid conjecture on your 
part?
    Mr. Greenspan. Well, Congressman, you raise an interesting 
aspect to the issue with respect to the obvious reluctance on 
the part of the business community to be aggressively 
expansionary at this stage of the business cycle, as they have 
typically been in the past. It has usually been advance hiring, 
advance capital investment, and notions of restructuring 
companies, to be prepared for increasing market shares, in 
other words, all in anticipation of significant improvement.
    The fact that, for the first time in 3 decades, we are 
getting in an expansion period, a very significant shortfall in 
the level of capital investment plus inventory accumulation 
relative to cash availability says that we are far from 
behaving the way we typically did. As you point out, the 
reasons that I presume are the cause of it are a number of 
caution-creating factors.
    But to the extent that these are capable of being assuaged, 
what it probably will be doing is, rather than creating a large 
surge in economic activity, to gradually stretch out economic 
activity if, indeed, a degree of confidence gradually returns. 
And that would be one of the reasons why a gradual expansion, 
which we now seem to be experiencing, does bode well for next 
year.
    Mr. Leach. Let me raise one final question, and it is an 
issue of priorities and advice to Congress. For three or four 
Congresses now this committee has passed a bill on the orderly 
unwinding of contracts, a netting bill. And it has been tied up 
with another committee, the Committee on Judiciary, and 
bankruptcy provisions, which are quite controversial.
    Would you advise the Congress to go ahead with the netting 
provision unrelated to the bankruptcy bill in order to get this 
underpinning of financial stability out of the way in a legal 
sense?
    Mr. Greenspan. I most certainly would, Congressman. We have 
been concerned for quite a while that the failure to include a 
number of these newer instruments into netting legality, if I 
may put it that way, puts us at risk in the event of some 
untoward event which would create significant financial 
problems.
    I know of no resistance in the Congress to netting per se, 
and, of course, as you point out, the reason why the bill has 
not been moved forward is it has been tied to the bankruptcy 
bill, with its other problems. It strikes me that we are taking 
undue risk and really unnecessary risk in allowing that tie to 
exist rather than breaking the bill out from the bankruptcy 
bill and I would presume passing it very readily in both Houses 
of the Congress.
    Mr. Leach. Thank you very much, Mr. Chairman.
    The Chairman. I would just say, ``hear, hear,'' to that, 
Mr. Chairman. That is a great idea.
    The gentlewoman from New York, Mrs. Maloney.
    Mrs. Maloney. Welcome here today, Mr. Greenspan.
    Your arguments today provide support for the argument that 
the economy is recovering from the recession of the last few 
years, but that may not be the picture from the point of view 
of the American worker.
    The latest figures for job growth show only a small 
increase, much less than would be expected if, as you suggest, 
the economy is growing significantly. There are 1.2 million 
fewer jobs now than there were at the official start of the 
recession in March of 2001. This is the worst job deficit since 
the Great Depression. The unemployment rate is 5.6 percent 
nationally. This is a 1.3 percent higher than when the 
recession officially began. In New York, in my hometown, it is 
now at 7.4 percent, up almost half of 1 percent from last 
month.
    If we look at jobs as most persons do, as a measure of our 
economy, things have been getting generally worse over the span 
of the last 3.5 years. We still have not made up for the jobs 
lost in this Administration. If you include workers who are 
working part-time because they cannot find a full-time job and 
workers who want to work but are not in the labor force, the 
unemployment rate is roughly 9.6 percent. This is perhaps the 
worst figure of all, is the number of long-term unemployed, 22 
percent of unemployed workers, 1.8 million people, have been 
jobless over half a year. This is a record setter, the longest 
period of such high long-term unemployment since this statistic 
was first collected over 50 years ago.
    I would like to hear about who has benefitted from the 
improved figures that you cite. It is certainly not the 
workers. Real weekly earnings have fallen by 1.4 percent over 
the past year. Wages are not keeping up with inflation. We are 
setting records on low wages, too. The share of aggregate wages 
and salaries and national income is the lowest it has been in 
over 50 years, and the data shows that private--profits in 
businesses have soared while average wages have not. Aggregate 
wages and benefits of workers have grown only 8 percent while 
business profits have increased 62 percent and after-tax 
profits 83 percent.
    This might be very good news for shareholders, but for 
workers, it is pretty depressing.
    My question is, why has recent economic growth not 
translated into robust job growth and wages keeping pace with 
profits?
    Mr. Greenspan. There are basically two reasons why the 
level of total employment has lagged in this recovery relative 
to previous recoveries.
    The first is that we have had a historic rise in 
productivity, which means that even though the economy was 
rising, that most of the rise was supplied by increasing 
efficiencies rather than new employees.
    Secondly, the extent of the recession in 2001 was the 
shallowest in post-World War II history. As a consequence of 
that, you didn't get the rebound that we historically have had.
    As I point out in my remarks and, indeed, as I think I said 
in February as Congressman Frank had indicated, that all of the 
increase in productivity, which has been a factor in the last 
year or so in the acceleration in economic growth, has been 
reflected in increasing profit margins rather than an 
acceleration of real wages.
    Nonetheless, real wages have been rising, but, as I pointed 
out in, my prepared remarks, that there has been a 
disproportionate rise in the 20 percent of payrolls, which were 
supervisory workers, relative to nonsupervisory.
    Indeed, as I point out, this is consistent with other 
evidence that suggests that the difference in skill training 
for skilled workers versus lesser-skilled, continues to widen. 
It is showing up in a distribution of income which is reflected 
in the long-term rise in average hourly pay of supervisory 
workers relative to the average hourly earnings numbers to 
which you were alluding.
    This, as I have argued in the past, I think is a major 
problem of matching skills of workers to the technological base 
of the economy, which I believe is an education issue and 
requires that we address that as quickly and broadly as we can.
    Mrs. Maloney. Thanks, Mr. Chairman.
    The Chairman. The gentlewoman's time has expired.
    The gentleman from Louisiana, Mr. Baker.
    Mr. Baker. Thank you, Mr. Chairman.
    Chairman Greenspan, I have noted that historians often 
critique the general's battle plan after the hostilities have 
ceased, but historians notably remain awfully quiet during the 
heat of the battle.
    With that observation having been made, when you testified 
before the committee in February, many signs of the stepup in 
the economy were already evident. Renewed strength in capital 
spending apparent in 2003 carried over into the first half of 
2004.
    Going on with your testimony, there have been much clearer 
indications over recent months that conditions in the labor 
market are improving. Most important, most notably gains in 
private non-farm payroll employment averaged about $200,000 per 
month over the past 6 months, up sharply from the pace of the 
fourth quarter of 2003.
    You go on, the combination of higher current and 
anticipated future income, strength in balance sheets and 
still-low interest rates bode well for consumer spending. 
Profits of nonfinancial corporations rebounded to 12 percent in 
the first quarter of 2004, a pace of advance not experienced 
since 1983, as consolidated unit costs for nonfinancial 
corporate business sector actually declined during the same 
period.
    In general, financial intermediaries are profitable, well 
capitalized and appear to be well positioned to manage in a 
rising wage environment. In short, financial markets along with 
households and businesses seem to be reasonably well prepared 
to cope with the transition to a more neutral stance of 
monetary policy.
    I consider this to be not just good news but excellent 
news. I think the generals at the Federal Reserve have 
conducted a battle plan that has shown to be highly successful 
moving us in a stable and methodical direction. For that, I 
just want to publicly commend you and those at the Fed for your 
leadership in this manner.
    I wish to, however, move to an era--or area of examination 
pursuant to the adoption of Sarbanes-Oxley, which was generated 
in an environment where many of us shared great disappointment 
in our free enterprise professionalism, where it was apparent 
that there were those in positions of responsibility that did 
not meet either their professional or fiduciary 
responsibilities.
    To that end, after the implementation of a higher 
disclosure standard, higher accountability, independence of 
audit committees, there still remains one area not addressed by 
the Congress, which I am reluctant to bring up but which I 
would welcome your thoughts, and that is the tone at the top.
    I recently reviewed a report of diversified financial 
institutions where, on average, the CEO was compensated at a 
basis of $12 million a year, and the average value of stock 
held in the institution they managed, not net worth, was 
reported to be $800 million. Now, that in itself is not 
troubling to me, because I believe, as a free enterpriser, 
innovative people should be awarded in accord with their 
success.
    What was troubling about this report is these average 
levels of compensation appeared to have no profitability or 
losses of the corporation being governed. Compensation in 
itself does not indicate a problem, but it does indicate what 
the tone of management is with regard to their fiduciary 
obligations to shareholders.
    In his appearance before the committee just last month, 
Chairman McDonough, chairman of the Public Company Accounting 
Oversight Board, indicated that compensation committees should 
act, if not boards should act and shareholders should act, but 
if, failing that, the Congress may at some time find it 
appropriate to act in this arena, not necessary to regulate or 
establish some formula by which one is compensated, but at 
least to provide additional notice, earlier awareness by 
shareholders of plans to be taken by boards.
    In fact, the gentleman from Alabama, Congressman Terry 
Everett has recently submitted legislation to me which he is 
contemplating introducing relative to prior notice with regard 
to pension plan adjustments which may be adopted by a board in 
a public operating company. I think this is just a first step 
in a very long discussion about how we incent CEOs, CFOs and 
managers at the very highest levels to invest for the long 
term, to not be so concerned about beating the street every 90 
days, to in fact bill value for shareholders and not be so 
concerned about the value of shares they own but the value of 
the corporation they are charged with leading.
    I don't have a specific question to pose this morning, but 
merely wanted to have on the record my concerns about these 
matters in the context of our overall long-term economic 
fortunes and would ask and request the Fed's counsel and advice 
as we move forward in this very difficult area as to whether 
any action might be justifiable, whether examination over the 
course of the coming months is warranted or any direction which 
you or the Board may choose to advance in this arena. And I 
yield back the balance of my time.
    Mr. Greenspan. To the extent that we have expertise in that 
area and, in some areas, we do and, some, we do not, we will be 
glad to make available to you what it is we have.
    But fundamentally, these are value judgments as to how you 
want corporate governance to behave, and the shareholders still 
own the corporation, and it is their money that is being 
employed for purposes of CEO and general executive 
compensation. And if the Government gets too heavily involved 
in that transaction, I am fearful that, in an endeavor to 
improve corporate governance, we may in fact go in the wrong 
direction.
    Mr. Baker. Often, mere examination is very helpful.
    Thank you.
    The Chairman. The gentleman's time has expired.
    The gentleman from New York, Mr. Meeks.
    Mr. Meeks. Thank you, Mr. Chairman.
    Let me do this first, just follow up on Mr. Frank, when he 
talked about tax policy. For example, some people are born on 
the top side of the mountain, and some people are born on the 
rough side of the mountain. I happened to grow up on the rough 
side of the mountain, and I had to climb up.
    When you look at the tax policies that we are talking 
about, sometimes, it benefits just 2 percent of America and 
doesn't consider individuals who have grown up on the rough 
side of the mountain, You know, without hope and opportunity. I 
would not be here if it were not for public education, public 
housing and public--and some sort of health care that my 
parents had.
    When you talk about the tax policies we put forth, I never 
hear the considerations taking place in regards to that, so we 
don't have to worry about countries, as the report indicated, 
in South America who no longer want to be part of a democracy.
    That being said, I would like some time, not today, you 
know, when we talk about the tax policy, the effect that it may 
have on individuals who are on the rough side of the mountain 
and may need a hand up.
    Let me ask these questions, I will just try to ask three 
questions, different subject matters, real quick because I know 
that time expires real fast, just so we can get some answers to 
them.
    The first question is whether or not a comparative 
advantage still holds true for the American economy. Because, 
you know, one of the biggest issues that we are talking about 
now is outsourcing and traditional economic daily reports, free 
trade based upon the concept of comparative advantage.
    We thought that the service jobs, the technological jobs 
would stay here in America. We are now finding that they are 
going oversees or to individual countries where there are 
highly educated but less-expensive workers.
    So my first question is, do you believe that we need to 
rethink our ideas about free trade in light of what might be 
diminishing comparative advantage and technology and education 
in the United States? That is number one.
    Then, I want to switch to just the question, in regard to 
what is taking place in the Senate Committee, with Richard 
Shelby, who is planning to introduce legislation that would 
create a stand-alone regulator for the GSEs that would be 
completely separate from Treasury and HUD and that the new 
regulator would have the authority over mission, goals, 
products and risk-based capital.
    I want to get your thoughts on such a proposal, 
particularly in light of the fact that the Federal Reserve has 
moved to strip Fannie Mae and Freddie Mac and other government-
sponsored enterprises of their ability to obtain daily 
interest-free loans from the Fed.
    Lastly, if we get a chance to, on another topic that has 
been very much before this committee. I know that you are a 
bank regulator, but I wanted to ask you a question about the 
securities industries, because both John Reed, as interim 
chairman of the New York Stock Exchange, and now John Thane, as 
CEO, are making various changes to their structure, 
particularly in separation of regulatory structure, from 
running the securities auction.
    Nevertheless, there are some who will say that the era of 
self-regulation is over. I want to know whether or not you 
believe that self-regulation should end and be replaced by 
direct regulation, and what do you think about the trade-
through rule? Should it end or be expanded?
    Mr. Greenspan. Well, I will try to answer those fairly 
quickly. Each one is a 20-minute lecture, as you well know.
    I would merely repeat on the first question of free trade, 
I think the United States has immeasurably gained from the 
opening up of markets in the post-World War II period. And we, 
more than anybody, have gained by the tremendous rise in trade 
throughout the last half century.
    I think were we to start pulling our horns in any way, 
because we are fearful of competition, which we seem to be 
handling rather well, I think we will find at the end of the 
day that it will diminish our growth and standards of living, 
and we will likely find that a number of consequences which we 
hadn't expected would create a far more negative view of the 
way the world is working than we would like.
    So I would emphasize, as I did to the Chairman, that the 
advantages of globalization have been profound for the United 
States, and I hope we carry them forward. We do have problems 
with the distribution of income, which I have addressed with 
you previously. But that is a different issue and does not 
relate to the question of whether we have free trade or not.
    With respect to the GSE regulator issue, I have not 
commented, you know, nor have any of my colleagues on the 
specific structure or the form of the regulator. In our 
testimony, I have argued the necessity of increasing the share 
of home mortgages purchased by the GSEs which are securitized 
rather than kept in portfolios at--we at the Fed perceive--a 
significant subsidized rate. But we haven't thought through any 
of the issues with respect to where the regulator is located 
and what he does. With respect to the so-called overdrafts that 
the Federal Reserve essentially has been changing, what 
happened was that initiallly we perceived that, as a matter of 
convenience, it was quite helpful to treat GSEs differently 
from other private corporations in various different things, 
specifically the payment principal and interest to the banks.
    What occurred as a consequence of our varying from how we 
handle other private corporations, was a huge increase in what 
we call daylight overdrafts, which are very large, intraday 
lending. And what we chose is that, as these drafts got very 
large and these institutions got very large and the amounts got 
very large, was to effectively handle these issues of payments 
exactly the way all private organizations do; we would be 
working in that direction, and I think it is very much to the 
advantage of the financial system as a whole. But that in and 
of itself has got nothing to do with the regulator question in 
any sense.
    And with regard to your final question, I think self-
regulation is an extraordinarily important issue--I would be 
more general. Private-sector generation, essentially counter-
party regulation or self-regulation, is a very important 
element in the regulatory structure generally. And I trust that 
we, in our endeavor to get the proper balance between Federal, 
State, and private regulation, keep in mind our purpose is to 
get the optimum functioning of our particular financial and, 
business organizations as well.
    The Chairman. The gentleman's time has expired.
    The gentleman from California, Mr. Royce.
    Mr. Royce. Thank you, Mr. Chairman.
    Chairman Greenspan, you said you are very optimistic about 
the economic outlook for the country. But at the same time, you 
said business caution remains a feature of the economic 
landscape. And I wonder what you think the sources of that 
caution are and what would end that caution? Is that caution 
merely a protracted convalescence from the bursting of the 
bubble and the aftermath of that? Or has the regulatory 
environment inadvertently inspired hesitancy on the part of 
business investment? And, perhaps, are there some other 
factors?
    You know, we hear from executives and from economists 
warning about the litigation risk in America today. Whether it 
is from some State Attorney General or from an ambitious 
plaintiff lawyer, there is that factor. But whatever it is, we 
know one thing: To my knowledge, there is only one European 
firm that has listed its stock in the United States this year. 
So whether it is litigation costs and fear of that or concern 
about the cost of Section 404 audits or the regulatory costs, 
for some reason, capital that once flooded into our capital 
markets is hesitant from overseas. And at the same time, you 
cite this business caution here domestically. And I was 
wondering if you would give us, in your view, the sources that 
generate that.
    Mr. Greenspan. Congressman, I think we know that the 
caution exists because we can measure it, the extent of how 
they behave.
    What causes that obviously has got to be conjecture, 
because we are trying to delve into the psyche of individual 
decision-makers. I think that there is no question that the 
aftermath of the bursting of the bubble and the corporate 
scandals still linger and induce a sense of unwillingness to 
take the types of risk that businesses had invariably taken in 
the past. And that was reflected in the fact that, as I 
indicated earlier, capital expenditures tend to generate to 
significantly exceed cash flow in the recovering stage of the 
business cycle with a very substantial implicit rise in 
corporate debt, which, of course, we are not having at this 
particular stage.
    To the extent that there is a fear of making the mistakes, 
it gets down to some degree of being unsettled, as indeed I 
suspect they should be, at seeing the type of corporate 
behavior which nobody believed was consonant with an American 
capitalist system. And that has undoubtedly had an effect on 
its aftermath.
    I think that the issue of potential terrorism is latent. It 
is there. I have no way of making a judgment as to how 
significant it is. It is very difficult to find any evidence 
outside of the long-term futures markets in crude oil, which 
presumably reflect some degree of world instability in supply. 
But if you look at the United States' financial system with all 
of its various spreads and relationships, trying to measure 
this type of risk, it is very hard to find.
    So it is something which we don't really know all that much 
about. We observe it. We get the same sort of response when we 
speak to corporate executives that you do. There is an issue of 
litigation risk in here, but there has always been litigation 
risk. But when it is tied up in the question of corporate 
behavior and responsibilities, it clearly is inducing a higher 
level of caution than probably existed in the past.
    Mr. Royce. Mr. Chairman, if I have time for one other 
question.
    Chairman Greenspan, in preparing for your visit here, I 
read an economic research note from a very respected economist 
in which he called the Federal Reserve, in his view, the 
world's biggest hedge fund. And his rationale for making that 
claim is that the Fed has encouraged the financial markets to 
participate, in his view, in the carry trade where one can 
borrow cheaply on the short end of the yield curve and invest 
those borrowings in a longer-dated security. So, according to 
this economist, the Fed encouraged the carry trade in 1993 when 
they took the Fed funds down to where it equaled the rate of 
inflation. And the current period is cited as another era, in 
his view, of the carry trade, since the Fed funds rate is 
negative or below the rate of inflation.
    The risk cited in this paper of his is that these Fed-
encouraged carry trades can encourage artificial bubbles in 
asset prices. This claim is applied to the housing bubble 
today. But, you know, the equity bubble in the 1990s could also 
be explained from that perspective. And I just wanted to get 
your thoughts on this critique of Fed policy.
    Mr. Greenspan. Well, Congressman, so long as the normal 
tendency is for long-term rates to be higher than short-term 
rates, there will always be some carry trade. And, indeed, one 
can even argue that commercial banks are largely carry trade 
organizations.
    But as I point out in my prepared remarks, the awareness 
currently of the risks in taking extended positions in the 
carry trade markets is clearly being unwound. And our judgment 
is that, while there is some and there will always be some, it 
has not been a problem.
    Certainly, if you have an extended period and you lock in 
these differences, you can create great distortions. But when 
we move rates down, as we have on several different occasions, 
we are acutely aware that, in that process, we will increase 
the carry trade.
    The more important question is, what is the significance if 
we do that? And if we perceive that that was creating bubbles 
or distortions, obviously, we wouldn't do that. We are well 
aware of what happens when we move, but we try to adjust our 
policies in such a manner as to significantly minimize any 
secondary consequences of such actions. And, indeed, I think 
the recent history suggests that, so far at least, we are 
successful in doing that.
    The Chairman. The gentleman's time has expired.
    The gentleman from North Carolina, Mr. Miller.
    Mr. Miller of North Carolina. Thank you.
    Good morning, Mr. Chairman. In your testimony earlier 
today, you said the increases in average hourly earnings of 
nonsupervisory workers had been subdued in recent months and 
barely budged in June.
    I have had some difficulty actually finding some job-to-job 
comparisons. I have seen industry-to-industry comparisons, that 
the industries that are gaining jobs pay 21 percent less than 
the industries that are losing jobs. The manufacturing sector 
has been losing. The service sector has been gaining. They are 
also less likely to pay health care benefits and have 
retirement benefits. And, of course, you know that we have had 
significant manufacturing job loss throughout the country and, 
in my own State of North Carolina, more than almost 160,000 
manufacturing jobs lost in the last four years.
    The figures I have show that the jobs created in North 
Carolina have paid about $4,000 less than the jobs that we have 
lost and were about 10 percent less likely to have health care.
    Mr. Greenspan. That is in your State, not in the country, 
you are saying?
    Mr. Miller of North Carolina. In my State.
    What are the job comparisons? How much are the jobs that we 
are losing in the last 4 years? How much have they paid? How 
much of the jobs have we gained paid? And what is also the 
total compensation, including health care and retirement 
benefits?
    Mr. Greenspan. Well, we have tried to address that question 
and tried to analyze the aggregate structure of employment 
relative to the question as to whether the job increases over 
the last year, for example, have been in industries which have 
below-average wages.
    Mr. Miller of North Carolina. Right.
    Mr. Greenspan. And what we have found is that that is true 
but to a very small extent.
    Conversely, when we have done the same type of calculation, 
not by industry but by occupation, we get the other result. 
Namely, that there seems to be an upgrading in the types of 
jobs when looked at from an occupational point of view.
    Now, both of these data of changes are very small. But even 
if you want to look at them as though they are meaningful, it 
is not inconsistent and it may, in fact, be the case that, 
within industries, you are getting a slight shift towards 
industries with lower average earnings but, at the same time, 
an upgrading within the industries with respect to occupations.
    But I think the bottom line of all of this is that we have 
not been able to find a significantly meaningful change in the 
quality of the jobs being produced relative to the quality of 
jobs being lost for the Nation as a whole over the past year. 
It is conceivable that, if we had far greater detailed data, we 
might unearth something significant. But, so far, our 
statisticians using the full details that the Bureau of Labor 
Statistics publishes both with respect to occupation and with 
respect to industry, there is very little evidence of a 
particular bias one way or the other.
    Mr. Miller of North Carolina. It sounds like that fairly 
long answer said, the reason I can't find jobs or job 
comparisons is that they really aren't there but that you would 
agree with me, that, if North Carolina jobs--new jobs--are 
paying $4,000 less than the manufacturing jobs that we have 
lost, that is pretty subdued.
    Mr. Greenspan. Well, I am saying that, when you look at it 
from the point of view of the economy as a whole, it balances 
out from, there are good and bad.
    Remember, there is a more interesting question which surely 
is what this issue is about which we cannot make a judgment on. 
Most of the data that everybody quotes are the net change in 
jobs from one period to the next. The type of question that you 
should really be interested in, and I think we all are, is if 
we had gross figures. In other words, the total number of not 
net jobs but gross additional additions to jobs and what they 
pay relative to the jobs that were lost and what they pay. The 
Bureau of Labor Statistics does not have data at that level of 
detail. And until we did have data of that sort, we really 
can't answer this question in any meaningful sense.
    The Chairman. The gentleman's time has expired.
    Mr. Miller of North Carolina. Well, not quite.
    The Chairman. The gentleman from Texas, Mr. Paul.
    Mr. Paul. Thank you, Mr. Chairman.
    Good morning, Chairman Greenspan. Yesterday's testimony was 
received in the press as you painting a pretty rosy picture of 
the economy. You have already remarked a second time on one 
statement you made that I would like to comment on again, 
because I think my colleagues should pay close attention to it: 
And that is your statement that corporate investment in fixed 
capital and inventory has apparently continued to fall short. 
The protracted nature of this shortfall is unprecedented over 
the past 3 decades. The proportion of temporary hires relative 
to total employment continues to rise.
    I think that is very, very significant and probably should 
be taken in the context of the rosy picture of the economy.
    Also, at the end of your statement, you make a comment 
about inflation in the long run, which I entirely agree with. 
And that is, it is important to remind ourselves, you say, that 
inflation in the long run is a monetary phenomenon. However, 
you sort of duck the issue on the short run, that various 
factors affect inflation in the short run, and yet I think 
monetary policy is pretty important in the short run. And our 
temptation here and too often with central banks is to measure 
inflation only by Government measurement of CPI, where the 
free-market economists, from Ricardo to Mises to the current 
free-market economists, argue the case that, once a central 
bank interferes with interest rates and lowers them below the 
real rate, that investors and others do make mistakes, such as 
overinvestment and now investment over-capacity, excessive 
debt, and speculation. And, therefore, I think that we should 
concentrate more on the short run effects of monetary policy
    Over the last several months, you had been hit by two 
groups. One half is saying that you are raising rates too fast, 
and the other half says you are way too slow. And of course it 
begs the question of whether or not you are really right on 
target. But from a free-market perspective, one would have to 
argue that you can't know and you don't know, and only the 
market can decide the proper money supply and only the market 
can decide the right interest rates. Otherwise, we invite these 
many problems that we face.
    As the economy slowed in 2000, 2001, of course, there was 
an aggressive approach by inflating and lowering the interest 
rates to an unprecedented level of 1 percent. But lo and 
behold, when we look back at this, we find out that 
manufacturing really hasn't recovered, savings hasn't 
recovered, the housing bubble continues, the current account 
deficit is way out of whack, continuing to grow as our foreign 
debt grew, and consumer debt is rising as well as Government 
debt.
    So it looks like this 1 percent really hasn't done much 
good other than prevent the deflating of the bubble, which 
means that, yes, we have had a temporary victory, but we have 
delayed the inevitable, the pain and suffering that must always 
come after the distortion occurs from a period of time of 
inflating.
    So my question to you is, how unique do you think this 
period of time is that we live in and the job that you have? To 
me, it is not surprising that half the people think you are too 
early and the other half think you are too late on raising 
rates. But since fiat money has never survived for long periods 
of time in all of history, is it possible that the funnel of 
tasks that you face today is a historic event, possibly the 
beginning of the end of the fiat system that replaced Brenton 
Woods 33 years ago? And since there is no evidence that fiat 
money works on the long run, is there any possibility that you 
would entertain that, quote, ``We may have to address the 
subject of overall monetary policy not only domestically but 
internationally in order to restore real growth''?
    Mr. Greenspan. Well, Congressman, you are raising the more 
fundamental question as to being on a commodity standard or 
another standard. And this issue has been debated, as you know 
as well as I, extensively for a significant period of time.
    Once you decide that a commodity standard such as the gold 
standard is, for whatever reasons, not acceptable in a society 
and you go to a fiat currency, then the question is 
automatically, unless you have Government endeavoring to 
determine the supply of the currency, it is very difficult to 
create what effectively the gold standard did.
    I think you will find, as I have indicated to you before, 
that most effective central banks in this fiat money period 
tend to be successful largely because we tend to replicate 
which would probably have occurred under a commodity standard 
in general.
    I have stated in the past that I have always thought that 
fiat currencies by their nature are inflationary. I was taken 
back by observing the fact that, from the early 1990s forward, 
Japan demonstrated that fact not to be a broad universal 
principle. And what I have begun to realize is that, because we 
tend to replicate a good deal of what a commodity standard 
would do, we are not getting the long-term inflationary 
consequences of fiat money. I will tell you, I am surprised by 
that fact. But it is, as best I can judge, a fact.
    The Chairman. The gentleman's time has expired.
    The gentleman from Alabama, Mr. Davis.
    Mr. Davis. Good morning, Mr. Chairman.
    One of the challenges that I think we deal with as 
lawmakers and policymakers is that, frankly, a lot of the 
public and the constituency that we serve doesn't necessarily 
understand a lot of the economic policymaking process in this 
Country, that they don't have a good understanding of the facts 
beyond a lot of the political rhetoric. And I think that that 
is a bipartisan concern that we have, that there is this kind 
of nebular fog that exists around making sound economic 
decisions as policymakers.
    And another related concern that we have is, sometimes, 
some of our own officials contribute to that confusion by the 
way they talk about these issues.
    So with that as the backdrop, Mr. Chairman, let me ask you 
about some very specific observations that President Bush has 
made, and let me ask you to comment on their accuracy. And 
these are taken from one particular speech the President gave 
on April 24, 2003, but I will represent to you that they are a 
pretty consistent rendition of other comments he has made on 
the issue of deficits.
    Quoting the President, ``now you hear talk about deficits. 
And I am concerned about deficits. But this Nation has got a 
deficit because we have been through a war, and I told the 
American people, we would spend what is necessary to win the 
war,'' close quote.
    I am going to ask you to comment on the accuracy of that 
assertion which, as I read it from the President, is that the 
proximate cause of the deficit was the spending on the war, by 
which he presumably means Afghanistan and Iraq.
    And then I want you to comment on this observation by the 
President: ``And the best way to deal with the deficit is to 
address the two things that affect the deficit. First, increase 
revenues to the Treasury through economic growth and 
vitality.''
    That observation, as I understand it, is the President's 
comment that the best strategy for getting the deficit down is 
to raise revenues through growth and vitality, presumably the 
kind of growth that he would argue comes from his tax cuts.
    I want you to comment on the accuracy of that statement, 
that the best glide path to bringing the deficit down is to 
increase revenues.
    Third observation from the President, remember, he 
mentioned two things that affect the deficit. And he said: 
``And, second, make sure Congress does not overspend your 
money. Make sure it focuses on the things that we need and 
doesn't spend beyond the things that we need.''
    I take that to be the President's observation that 
discretionary spending by Congress is the next most significant 
factor in the rising deficit. And I am presuming that he means 
to distinguish discretionary spending from an entitlement-based 
spending such as Medicare and Social Security. That also 
strikes me as a controversial proposition.
    So to make sure you understand my question, can you comment 
on the accuracy of all three of those observations by the 
President, first of all, the primary cause of the deficit--or 
the cause of the deficit, spending on the war. Second of all, 
that the best glide path for reducing the deficit is raising 
revenues through tax. And, third of all, that it is 
discretionary spending and not entitlement base spending. And 
if you believe that the President is inaccurate in all of those 
observations, does that concern you that the chief executive 
has gotten it so fundamentally wrong when it comes to 
describing the state of our economy?
    Mr. Greenspan. Well, Congressman, I am not going to comment 
on the specific views of the President. I happen to agree with 
him.
    Mr. Davis. Can you comment on the accuracy?
    Mr. Greenspan. Well, the point of the issue is the question 
of the extent to which military spending is part of the 
increase in spending and therefore the deficit is a numerical 
issue. And, I mean, there is no question that the deficit would 
be smaller if we did not have military spending.
    Mr. Davis. Do you agree that that is the primary reason 
that we have the debt?
    Mr. Greenspan. I frankly don't know. I think that clearly 
part of the deficit--well, it depends on where you start. If 
you start say several years ago and come from here, a goodly 
part has been the loss of the very high revenues we were 
getting from the capital gains taxes and from the exercise of 
stock options. And the elimination of those revenues were a 
significant factor in the rise in the deficit, as well as 
declining revenues as a consequence of the economy going down.
    Mr. Davis. Would the tax reductions also be a factor on 
those declining revenues?
    Mr. Greenspan. Yes. But I don't have the numbers directly 
in front of me. There are all sorts of reasons. But over the 
broader term, of the major issues in the debates on fiscal 
policy is the question of the extent to which certain tax 
policies, by increasing the efficiency and the growth of the 
economy, will increase the revenue base.
    And I have always been one of those who believe that that 
is a very important issue and policy. There are others who 
believe that the mechanisms work in different ways. There is 
not, as best I can judge, complete agreement about a number of 
these issues. And when you say, in certain senses, there is 
fact. Certain of the statements you raised are questioning of 
fact. Others are a question of interpretation of the way the 
economy functions.
    And I would say I would agree with a goodly part of the 
general thrust of what the President has been saying with 
respect to that, but not necessarily with the specific numbers, 
because I had not actually done the arithmetic that would be 
required to make that judgment.
    The Chairman. The gentleman's time has expired.
    The gentlelady from Pennsylvania, Ms. Hart.
    Ms. Hart. Thank you, Mr. Chairman.
    And thank you for spending some time with us today, 
Chairman Greenspan.
    I want to go back to some comments you made briefly and 
alluded to a little bit about the skills of the American 
workers, many of the workers who are currently unemployed, not 
matching the needs of our growing technological base and that, 
further, you stated, that, analyzed by occupation, job growth 
has been kind of higher in some of the higher-wage areas, which 
I am assuming means the ones that require more skill. And you 
have talked about improving our education system in the past.
    The President has a plan to move forward and improve 
elementary and secondary schools as we have been working on 
but, recently, announced an initiative to also improve 
community colleges' ability to train workers and retrain them 
as technology improves. Do you believe that community colleges 
should be involved in this process? Is that the level of 
training that you are talking about, number one, and is it 
possible that a large number of the workers who are currently 
unemployed are just not employable in the new jobs or the new 
economy, that we need to take those workers and that those are 
the ones that are causing some of the more stubborn 
unemployment?
    Mr. Greenspan. Well, Congresswoman, I have observed in the 
past that one of the major growth industries in this Country is 
community colleges. And the reason for that is that they have 
recognized that this rapidly changing structure of skill 
requirements in the labor force requires that education not end 
at some point in one's life, but it is an ongoing issue. 
Because, with the skill level requirements changing so 
continuously, unless you are continuously updating your 
capabilities, you are going to fall behind the curve, and 
indeed that has been a major problem.
    The community colleges have seen this particular niche 
requirement in our society, and they have obviously addressed 
it successfully. If they hadn't, the enrollments would not be 
surging to the extent to which they are. And in that regard, I 
find it difficult to believe that we could address the 
educational issues with respect to the question of maintaining 
the skills of the American workforce without recognizing that 
there are several different types of levels of knowledge that 
we need. First, obviously, is basic primary education, because 
if you don't have that, if you can't read well or can't do 
arithmetic well, you are stymied in moving forward. But, then, 
there is the very broad abstraction of being able to learn, 
which is what our school systems are trying to do. And beyond 
that is the application to specific types of skills and jobs, 
which is what the curricula of the community colleges tend to 
be. And people find, I gather, that what they gain from those 
community colleges is very significantly worth the cost.
    Ms. Hart. Okay. That having been said, do you see, in an 
analysis of those people who are unemployed, though, a lot of 
them being the folks who could benefit the most from that skill 
updating?
    Mr. Greenspan. Well, as we know from the data, that when 
people get laid off, they usually have difficulty regaining the 
wage level that they had before they were laid off. And this 
leads to the question as to whether they could do better by 
shifting the profession they are in. And lots of them have 
decided, because of the type of jobs that they had, that they 
would do better doing something different. And here is where 
community colleges, I think, really do a good job.
    Because we have--the nature of the turnover in our labor 
force is really extraordinarily large and rising. And it 
implies that not only do you not have lifetime employment, as 
they used to have in Japan, but we are finding more and more 
that many people, maybe even most, have more than one 
profession during their working lives. And this is the reason 
why we see that there has been such a remarkable pickup in 
enrollments, say, during the period when recession occurs, that 
the labor shrinks. And when they trace down what happens, they 
are all going back to school. And when, in effect, the economy 
picks up, they come back into the labor force. And this, I 
might add, is one of the reasons why, despite the surge in 
employment, the unemployment rate has not gone down 
commensurately.
    Ms. Hart. Thank you, Mr. Chairman.
    The Chairman. The gentlelady's time has expired.
    The gentleman from Georgia, Mr. Scott.
    Mr. Scott. Thank you very much, Mr. Chairman.
    Chairman Greenspan, in your report, you mention that there 
is the--conditions in the labor market are improving. You also 
mentioned they are improving at a rate of 200,000 jobs per 
month, new jobs per month.
    This is not the case in the African-American community. The 
unemployment level among African-Americans at the same period 
has risen from 9.7 percent to 10 percent, while the 
unemployment rate among white Americans is 5 percent. That is 
double. And the situation is very drastic, and most drastic 
among African-American males between 20 and 45 years of age, 
nearly 700,000 unemployed, African-American women, nearly 
700,000, in those very critical, most-productive earning years 
between the ages of 20 and 45.
    As our foremost economist, as our authority on these 
matters, I would be interested and I think the Nation would be 
interested to know, why is this? Can you pull the covers off of 
this racial imbalance and explain to this Nation why this 
imbalance among African-Americans, this growing economy that is 
moving and yet the African-American unemployment rate is 
increasing?
    If, in fact, the Nation's unemployment rate was 10 percent, 
it would be catastrophic. And it is a catastrophic situation in 
the African-American community. Why is it, and what must we do 
in Congress to correct this imbalance?
    Mr. Greenspan. Well, Congressman, I think you are 
addressing one of the failures of our society. And I think that 
having such large groups of potentially productive workers not 
operating at their highest potential level is a vast misuse of 
resources.
    I think the matter, any way we cut it, part of it is 
discrimination. We try to hide that fact, but I don't think it 
has been eliminated. I think it has improved somewhat, but it 
is clearly a major factor.
    We have got to find a way to enhance the educational skills 
of all of our workforce. And where there are significant 
problems, as there are in the African-American workforce, which 
you point out, I think we have to make certain that we double 
up on our efforts.
    But aside from education, I am not sure that there is an 
answer. I am reasonably sure that, if we can get sufficient 
education and get skill levels up, the pressure of the 
marketplace, even though there is significant residual 
discrimination, will create a major improvement. But without 
starting at the education level, I would be discouraged with 
the capability of success.
    With education, I think we have got a reasonably strong 
case to resolve this issue once and for all.
    Mr. Scott. How do you account for the fact, Mr. Chairman, 
that there are African-Americans with MBAs, there are African-
Americans with this education? That, I think you hit it on the 
head in your first comment, discrimination.
    Wouldn't it be appropriate that there be called, at the 
highest levels of Government and industry, a summit to address 
this critical issue? It is not going to go away. And if, in 
fact, it is, as you say--and I think you speak the truth, that 
it is rank discrimination--it is rank racism in the employment 
marketplace, that we should hold accountable chief executive 
officers of our major companies, the movers and the shakers, 
the decision-makers, and that, as our chief spokesman for the 
economy, that you could provide that leadership to say, once 
and for all, let us deal with this issue?
    I assure you that, if the Nation's unemployment level 
overall was 10 percent unemployment, there would be a summit. 
There would be action taken. Don't you think that that would be 
a critical movement on the part of the leadership of us in 
public policy and the Congress and the White House and the 
Executive Branch and in industry?
    The Chairman. The gentleman's time has expired. The 
Chairman may respond.
    Mr. Greenspan. I was just going to say, anything that can 
be done in this area is clearly important to move forward on.
    The Chairman. The gentleman from Alabama.
    Mr. Bachus. Thank you, Mr. Chairman.
    Mr. Chairman, let me start with a given. And that is that 
our economy depends on an efficient transportation network. I 
believe you would agree with that. Would you not?
    You are saying that you do?
    Mr. Greenspan. I do. Yes.
    Mr. Bachus. You have predicted sustained economic growth, 
increase in output orders.
    My question to you, in making your calculations, in making 
your forecast, in deliberating, did you calculate the present 
inefficiencies in our transportation network, the limitations 
in our transportation network? I mean, I could give you some 
examples. For instance, our transcontinental railroads are 
jammed. Our velocity and train speed is actually decreasing. 
You know, our interstate highways are heavily congested. Our 
transit times, in the last 10 years, have decreased 
significantly. Does this threaten--particularly in a global 
economy where we are predicting border crossings to double in 
the next 10 years, are you concerned over the limitations in 
our transportation infrastructure?
    Mr. Greenspan. I think the deregulation of trucking, 
railroads, and airlines, and air transport unwound what was, I 
thought, the really serious set of problems which very 
significantly reduced the flexibility of our system.
    So while I don't deny--and, indeed, the Chairman was 
mentioning the shortages of skilled drivers for trucking--I 
don't deny that there are bottlenecks here and problems there, 
but I would not indicate that I thought that transportation 
inefficiencies were a serious problem, certainly nowhere near 
what they were 30 years ago.
    I think we have got problems, obviously, with rail 
transport, specifically endeavoring to subsidize the Amtrak 
system and related sorts of rail transport. But we are, 
remember, a very heavily passenger-car, light-truck, SUV 
society.
    Mr. Bachus. I agree.
    You mentioned 30 years ago. Are you aware that--just take 
the year 1970--that, since 1970, we have actually had a 
tripling of mileage driven by Americans. During the same period 
of time, we have twice as many registered drivers. We have 
something like three times as many tractor trailers on the 
road. Yet, our roads, our network of roads, has only grown by 6 
percent.
    So I do agree with you that the competition and the 
deregulation helped tremendously and brought some efficiencies 
into the market. But I would urge you to pay close attention to 
that transportation grid and the just-in-time economy that we 
are in. Because I believe that it is seriously restraining our 
economy now. I think some reason why you have a backlog on 
orders and you have unfilled orders is you have many places 
where it takes 30 to 60 days to get a rail car, where, 5 years 
ago, it took 3 to 6 days.
    And, in your calculations, begin to take a look at that. We 
are projecting that it will cost--that it will take $375 
billion over the next 6 years just to maintain our interstate 
highway system, our national network of roads and rail and 
maritime, and yet the projections are to spend $300 billion. So 
we are going to actually spend an amount that is less than the 
amount to simply maintain it.
    And if these projections which you are making--and I don't 
doubt the demand is there, the productivity is there--that we 
look at that as perhaps a weak link in our system and become 
aware of that.
    And with that, I will yield back the balance of my time. 
But if you would like to respond to that.
    Mr. Greenspan. You are raising an issue of priorities in 
funding for both State finance and Federal finance. And I think 
that, while I don't deny the numbers you are positioning, there 
is the question of, if you lined up all of the priorities that 
one can assert with respect to all claims on the Federal 
budget, they would be unfinanceable.
    And so we, of necessity, have to make choices, and these 
are choices which are very difficult to make. And I think where 
economists can be helpful, we are. Where we don't know as much 
as we need to know--and I don't know myself as much as I think 
I would need to know--to make judgments, we are not very 
helpful.
    Mr. Bachus. And I know----
    The Chairman. The gentleman's time has expired.
    Mr. Bachus. In making these calculations, I wish you would 
pay close attention--I am not--to what we have. There has been 
a lot of congestion out there and a lot of inefficiencies.
    The Chairman. The gentleman's time has expired.
    The gentlelady from New York, Ms. Velasquez.
    Ms. Velasquez. Thank you, Mr. Chairman.
    Mr. Greenspan, the trade deficit grew to approximately $145 
billion in the first quarter of this year, escalating from a 
$127 billion deficit in the final quota quarter of 2003. To 
finance this trade deficit, the U.S. must borrow from 
foreigners at a rate of approximately $1.6 billion a day. Do 
you believe that our substantial budget deficit, which is 
adding considerably to our outstanding public debt, will 
undermine foreigners' confidence that the U.S. will be able to 
pay back this constantly growing debt?
    Mr. Greenspan. So far, as best we can judge, the foreign 
willingness to hold long-term obligations of the U.S. 
Government has not diminished.
    Clearly, I can't say to you that there is no level at which 
they will start to respond negatively. And, indeed, as I was 
indicating in conversations at the Senate yesterday, that, with 
respect to financing our current account deficit, I think our 
concern is that unless we bring it down in some form or another 
we will begin to build up a level of dollar claims against 
American residents, which will eventually place our foreign 
trading partners in a position where, even though they may say 
the rate of return here is very good, that they have to 
diversify out of the heavy accumulation of U.S. dollar 
obligations. There is, as I said yesterday, no evidence that we 
are anywhere near a problem of that nature. But if you project 
down the road, I can't see how we can avoid it one way or 
another.
    Ms. Velasquez. But, Mr. Chairman, many economists believe 
that if foreigners lose interest in loaning us money or in 
buying up our assets, interest rates could soar, making it 
impossible to pay down our debt. With no buyers to be found, 
stock prices and real estate values could plummet and America 
could find itself in a long-term depression.
    Do you agree with this assessment?
    Mr. Greenspan. No, I do not. I do not, largely because I 
cannot believe that we will allow ourselves to get in a 
position where, in order to finance our Federal Government 
deficit, we would have to be reaching out both domestically and 
abroad to borrow money at very high interest rates.
    Ms. Velasquez. And how we will not allow ourselves to find 
ourselves in that position? By reducing the deficit and I guess 
rolling back taxes?
    Mr. Greenspan. As I indicated earlier, what we are missing 
at this particular stage is a process for approaching fiscal 
policy in the sense that we are confronted with something new, 
namely that our commitments are now very long term and our 
ability to forecast the way it is going to come out is rather 
limited. This suggests to me that we have got to find ways in 
which we not only project short-term budgets but we project 
long-term budgets and simultaneously find means by which, if 
our forecasts are turning out to be wrong, there are automatic 
adjustment process triggers, for example, which alter either 
tax rates or expenditure programs. That would ensure that the 
deficit does not get to the point of extraordinary imbalance 
where we would be forced into a position where we could not get 
money to finance our deficits except at exceptionally high 
interest rates.
    Ms. Velasquez. Mr. Chairman, with the final approval of the 
JP Morgan Bank One merger coming on the heels of the Bank of 
America Fleet merger, the rise of a super tier of U.S. banks is 
evident. These banks will each control $1 trillion in assets, 
together controlling more than 40 percent of the industry's 
total assets.
    First, does such concentration pose risks to the banking 
system and, as a result, to the U.S. economy? And, second, do 
you believe that our current system of regulation is sufficient 
to oversee such large and diverse corporations that pose such 
great risk to the financial system?
    Mr. Greenspan. Well, first of all, we obviously are 
observing the phenomenon and the trends to which you allude. 
And were, in our judgment, that we were in a potentially 
serious supervisory regulatory State with respect to these 
large institutions, I would indeed be most concerned. These 
institutions are very large, but the crucial issue of concern 
is the degree of concentration in specific types of businesses 
or products. And in many instances, although these are very 
large institutions, they are quite diversified and, hence, they 
don't have the type of--they don't create the type of threat of 
systemic problems, which could readily be the case were there a 
significant concentration. Nonetheless, we do continuously 
monitor this issue; and I trust that the combining of both 
Federal and, where applicable, State supervision and the 
private sector's counterparty's supervision will remain 
sufficiently adequate to sustain what is in effect a reasonably 
good balance at this stage in our financial structure.
    The Chairman. The gentlelady's time has expired.
    The gentleman from Minnesota.
    Mr. Kennedy. Thank you, Chairman, for your service and for 
spending time with us today. I would like to continue on the 
discussion on trade deficits and move from problem focus to 
solution focus.
    You know, we had a good export growth, and we were growing 
exports largely in some cases because of a weaker dollar. But 
with our growing economy, our imports are growing; and we find 
the rest of the world not growing at quite the same pace, with 
Europe still behind us, with China having some concern as to 
whether the growth is too fast and they need to move towards a 
lower level of growth, a soft landing.
    We also have to make sure we are keeping American exports 
competitive. And you have talked at great length today how part 
of that is making sure we have a low tax, low spending, you 
know, low deficit environment. You have talked at great length 
about the need for us to improve our education system so that 
all members of our society are qualified for the work of the 
future. You have talked about how we need to keep trade open, 
that we need to continue to expand trade--yes, enforce our 
agreements, but expand trade. And of course, we need to keep 
the regulatory burden that you have also talked about moving so 
it is a less heavy hand in our environment.
    But I would like to ask you about three things. Number one, 
when we are talking about keeping America competitive to get 
this trade deficit down, how impactful is the significant 
differences and the weight on the economy from excessive 
lawsuits in this country versus others?
    Secondly, international taxes. We have got an international 
tax bill that we are trying to work through this Congress and 
get to the President's desk. But even with that passing, with 
European countries being able to rebate their back taxes at the 
border, how significant is that international tax difference in 
our ability to be competitive and our ability to reduce this 
trade deficit?
    And then, thirdly, is there anything that we ought to be 
pushing our foreign trade partners, whether in Europe or in 
China, to do to help us, have them take more of the burden of 
carrying the economy rather than us always being the growth 
engine of the world?
    Mr. Greenspan. Well, Congressman, we have a longstanding 
problem in our trade accounts. And that is, the propensity of 
Americans to import relative to our incomes is much larger than 
our trading partners' willingness to import relative to their 
incomes at any given structure of prices or exchange rates.
    What that means is that, other things equal, with everybody 
growing at the same rate, hypothetically, we would be incurring 
an ever-larger trade and therefore current account deficit. And 
this has been a fundamental problem which we have confronted--
it was identified, I might add, 40 years ago, and it hasn't 
changed except at the edges. So we are essentially in a 
position where, in order to keep our trade deficit down, we 
have to work in a sense far more effectively than our trading 
partners.
    Clearly, the price and exchange rate structure has not 
fully adjusted to this differential, because, had it done so, 
it would have readjusted our trade accounts accordingly. This 
means that our trade problems are essentially becoming our 
finance problems and how we finance the debt that is implicit 
here.
    With respect to, very specifically, our competitive export 
capabilities, we obviously are at the cutting edge of the 
world's technologies, and American products do have very 
significant competitive capabilities. And I think we do a 
reasonably good job. But as you would point out, to the extent 
to which our exporters are burdened by various different types 
of regulations or litigation relative to our trading partners, 
we are at some disadvantages in certain bilateral 
relationships.
    But I am not sure how one carries the tax issue forward. 
There is a great deal of literature on the issue of the valuate 
added tax and rebates with respect to the United States, which 
doesn't have such a system, and what the impact is. I am not 
sure I know enough about how those have come out to give you 
any useful insight.
    The Chairman. The gentleman's time has expired.
    The gentleman from Kansas, Mr. Moore.
    Mr. Moore. Thank you, Mr. Chairman.
    The Chairman. If the gentleman would yield. We are trying 
to meet this vote and dismiss the Chairman, so we will go for 
about six, seven minutes.
    Mr. Moore. I will be as quick as I can.
    Mr. Moore. Mr. Chairman, thank you for being with us today. 
You know several promising trends in our economy. And I hope 
that our economy recovery is strong enough to withstand 
potential threats such as a slowly rising inflation state. In 
your written statement, you emphasize the importance of 
allowing households and businesses to make decisions that best 
promote the longer-term growth of our economy and with it our 
Nation's continuing prosperity.
    Unfortunately, Mr. Chairman, many people in my district and 
throughout our country are finding it, I think, difficult to 
make the decisions that are best for themselves and their 
families. Many people are struggling to pay for the basics such 
as food, shelter, education and health care.
    Inflation, and health care. Inflation and health care, I 
believe, are the greatest problems facing our country, and as 
our population continues to age, I think it is only going to 
get worse. I hear about this virtually every week and from 
individuals and small businesses when I go back to Kansas. 
According to the Department of Health and Human Services, 
health care spending was up 9.3 percent for 2002, which 
followed an 8.5 percent increase in 2001. The Urban Institute 
estimates that American households will spend an average of 
$15,000 on health care costs in 2004. Health care now accounts 
for nearly 20 percent of household personal income, and this 
situation is causing some families and individuals to choose 
between basic health care and other priorities or to go without 
necessary health care altogether.
    Mr. Chairman, in your testimony you mentioned that our 
country's continued sizeable increases in health insurance--you 
talk about our health insurance costs. Since 2000, annual 
health insurance premiums for Americans have risen 37 percent 
for individuals and 41 percent for families, and the rising 
cost of health care is also putting a substantial burden and 
pressure, I think, on small businesses in our country.
    Would you agree that sizeable increases in health care and 
health insurance costs presents our economy and families and 
small businesses with a potentially serious problem now and in 
the coming years?
    Mr. Greenspan. I do, Congressman. In the context in which 
you quoted me, I was referring to the fact that a stable price 
level or noninflationary environment, history has indicated to 
us, is conducive to maximum sustainable long-term economic 
growth. That does not mean that there are not innumerable 
problems that would exist as a consequence of that, and I 
regret that I agree with you in your analysis of health care 
cost problems, because they will be, as best I can judge, the 
really major issue that fiscal policy is going to have to 
address in the years ahead.
    Mr. Moore. Secretary Thompson of Health and Human Services 
was quoted in a national newspaper yesterday that the cost of 
records and recordkeeping in health care is almost $140 billion 
a year and could be saved if they converted from paper, 
basically, to high-tech computers. Would you agree that that 
might be a good move for the health care industry?
    Mr. Greenspan. I don't know about the size of the estimate. 
Those numbers tend usually to be a little larger than actually 
is achieved.
    Mr. Moore. Oh, really.
    Mr. Greenspan. But they are still writing prescriptions on 
pieces of paper.
    Mr. Moore. Yes.
    Mr. Greenspan. And how they understand what is on that 
piece of paper has never been clear to me. And digitalizing, a 
very significant part of the system, is undoubtedly a major 
priority for addressing the cost issue.
    Mr. Moore. And the last very quick question, I got here a 
little bit late, but I heard you talking about pay-go rules and 
budget enforcement rules that I think you said expired in 2002; 
is that correct, Mr. Chairman?
    Mr. Greenspan. September 2002.
    Mr. Moore. And I believe you said it would be worthwhile 
for Congress to implement that budget pay-go enforcement rules 
that apply not only to new spending, but also to tax cuts as 
well. Is that correct, sir?
    Mr. Greenspan. That is correct.
    Mr. Moore. Thank you very much. I yield back.
    The Chairman. The gentleman from Texas for a couple of 
minutes.
    Mr. Bell. I will roll everything into one question, Mr. 
Chairman. Thank you for recognizing me, and thank you, Chairman 
Greenspan.
    I wanted to refer to the topic of wages that came up 
earlier today. In your statement you say, to be sure, the 
increases in average hourly earnings of nonsupervisory workers 
have been subdued in recent months and barely budged in June. I 
think that is reflective of a pattern that has occurred over 
several years now. You go on to say, other compensation has 
accelerated this year, which suggests that the money is there, 
it is just not going to the nonsupervisory workers.
    As you are aware, the minimum wage, the Federal minimum 
wage, has not been increased since 1997. Those who are forced 
to live based solely on the minimum wage live at or very close 
to the poverty line, and I am just curious if you feel as if 
this wage situation in America is cause for alarm, and, if so, 
have we reached the point that it is time to look at increasing 
the minimum wage? In your opinion, what impact on the overall 
economy would an increase in the minimum wage have at this 
time?
    Mr. Greenspan. As I have testified in the past, my concern 
with the minimum wage is that it increases unemployment and, 
indeed, prevents people who are at the early stages of their 
careers from getting a foothold in the ladder of promotions. 
And the evidence does suggest that it tends to be more 
counterproductive than not. As a consequence, raising the 
minimum wage is not, in my judgment, an effective way to 
address what is a significant problem in the distribution of 
income, which is what I discussed in my earlier remarks.
    The Chairman. The gentleman's time has expired. We are 
going to have to break now.
    Again, our thanks to the gentleman from Texas.
    Mr. Chairman, it is always good to have you here, and we 
look forward to----
    Mr. Frank. Let me say, just add to it, I would thank the 
Chairman, but I would say on the topic the gentleman raised, I 
am still waiting for the Fed analysis of the economic impact on 
employment of the last minimum wage increase. It has been 
overdue. I think, frankly, there was an absence of bad news 
that led us not to get the analysis.
    The Chairman. The Chair would indicate that Members may 
submit written questions for the Chairman.
    [The following information can be found on pages 76 and 80 
in the appendix.]
    The Chairman. With that, the committee stands adjourned.
    [Whereupon, at 12:06 p.m., the committee was adjourned.]

                            A P P E N D I X



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