[House Hearing, 109 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 NINTH CONGRESS
FIRST SESSION
__________
FEBRUARY 17, 2005
__________
Printed for the use of the Committee on Financial Services
Serial No. 109-4
U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2005
22-160 PDF
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512-1800
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001
HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana PAUL E. KANJORSKI, Pennsylvania
DEBORAH PRYCE, Ohio 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 DENNIS MOORE, Kansas
DONALD A. MANZULLO, Illinois MICHAEL E. CAPUANO, Massachusetts
WALTER B. JONES, Jr., North HAROLD E. FORD, Jr., Tennessee
Carolina RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois JOSEPH CROWLEY, New York
CHRISTOPHER SHAYS, Connecticut WM. LACY CLAY, Missouri
VITO FOSSELLA, New York STEVE ISRAEL, New York
GARY G. MILLER, California CAROLYN McCARTHY, New York
PATRICK J. TIBERI, Ohio JOE BACA, California
MARK R. KENNEDY, Minnesota JIM MATHESON, Utah
TOM FEENEY, Florida STEPHEN F. LYNCH, Massachusetts
JEB HENSARLING, Texas BRAD MILLER, North Carolina
SCOTT GARRETT, New Jersey DAVID SCOTT, Georgia
GINNY BROWN-WAITE, Florida ARTUR DAVIS, Alabama
J. GRESHAM BARRETT, South Carolina AL GREEN, Texas
KATHERINE HARRIS, Florida EMANUEL CLEAVER, Missouri
RICK RENZI, Arizona MELISSA L. BEAN, Illinois
JIM GERLACH, Pennsylvania DEBBIE WASSERMAN SCHULTZ, Florida
STEVAN PEARCE, New Mexico GWEN MOORE, Wisconsin,
RANDY NEUGEBAUER, Texas
TOM PRICE, Georgia BERNARD SANDERS, Vermont
MICHAEL G. FITZPATRICK,
Pennsylvania
GEOFF DAVIS, Kentucky
PATRICK T. McHENRY, North Carolina
Robert U. Foster, III, Staff Director
C O N T E N T S
----------
Page
Hearing held on:
February 17, 2005............................................ 1
Appendix:
February 17, 2005............................................ 51
WITNESS
Thursday, February 17, 2005
Greenspan, Hon. Alan, Chairman, Board of Governors of The Federal
Reserve System................................................. 7
APPENDIX
Prepared statements:
Oxley, Hon. Michael G........................................ 52
Baca, Hon. Joe............................................... 54
Gillmor, Hon. Paul E......................................... 57
King, Hon. Peter T........................................... 58
Greenspan, Hon. Alan......................................... 59
Additional Material Submitted for the Record
Oxley, Hon. Michael G.:
Written letter to Hon. Alan Greenspan, March 1, 2005......... 71
Greenspan, Hon. Alan:
Monetary Policy Report to the Congress....................... 72
Written response to questions from Hon. Michael G. Oxley......... 101
Written response to questions from Hon. Wm. Lacy Clay............ 102
Written response to questions from Hon. Luis V. Gutierrez........ 106
Written response to questions from Hon. Barbara Lee.............. 108
Written response to questions from Hon. Deborah Pryce............ 111
MONETARY POLICY AND
THE STATE OF THE ECONOMY
----------
Thursday, February 17, 2005
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to call, at 10:04 a.m., in Room
2128, Rayburn House Office Building, Hon. Michael Oxley
[chairman of the committee] presiding.
Present: Representatives Oxley, Leach, Baker, Pryce,
Castle, King, Lucas, Ney, Kelly, Paul, Gillmor, Ryun, Manzullo,
Jones, Biggert, Shays, Miller of California, Tiberi, Kennedy,
Feeney, Hensarling, Garrett, Barrett, Harris, Gerlach, Pearce,
Neugebauer, Price, Fitzpatrick, Davis of Kentucky, McHenry,
Frank, Kanjorski, Waters, Sanders, Maloney, Gutierrez,
Velazquez, Watt, Ackerman, Carson, Sherman, Meeks, Lee, Moore
of Kansas, Capuano, Ford, Hinojosa, Crowley, Clay, Israel,
McCarthy, Baca, Matheson, Lynch, Miller of North Carolina,
Scott, Davis of Alabama, Green, Cleaver, Bean, Wasserman
Schultz, and Moore of Wisconsin.
The Chairman. [Presiding.] The committee will come to
order.
We are indeed honored again to have Chairman Greenspan,
Chairman of the Fed, testify before the committee.
And I thank, Mr. Chairman, you in advance for your
testimony and the time that you are going to spend with us
today.
Mr. Chairman, we all know that the economy is nearly
completely recovered. We have had four strong quarters of GDP
growth, and the total number of jobs, a little more than 130
million, is back to its peak from the winter of 2000-2001.
Productivity remains impressive, and the market is strong,
with the Dow looking as if it might touch the 11,000 mark
again.
Job creation remains robust, and the unemployment rate, at
5.2 percent, is at the same level it stood at in 1997, before
the unprecedented period in which it briefly went below 4
percent, a rate few imagine we will ever see again.
So, Mr. Chairman, thanks to the twin injections of
liquidity, the President's tax cuts, and the Fed's lowering of
short-term interest rates, our American economy has once again
shown itself to be resilient enough to withstand multiple
shocks.
Aside from our strong current position, there are continued
challenges ahead that we will discuss today. Among them are the
trade deficit, the budget deficit, and Social Security.
Mr. Chairman, you are perhaps America's most famous budget
hawk. You favor lower taxes as long as they are offset by
spending cuts. I am sure you welcome the President's
initiatives outlined in his budget and in the State of the
Union speech. The President has laid out a cost-cutting
program, and he has faced the Social Security problem head on.
President Bush knows that the numbers don't lie, and they
are clearly on the side of a need to reform the system.
Mr. Chairman, you led the commission that assisted in
significant reform of Social Security under President Reagan in
1983, and I am certain all committee members await your views
on this matter. We all know the facts, that in less than 15
years the system starts paying more out than it is paying in,
and that if we don't do something quickly the options will be
higher taxes, benefit cuts, or some blend of the two.
Chairman Greenspan, I stand in complete agreement with the
President, and in important part the answer is personal
accounts. From its creation, Social Security was never
envisioned as the sole answer to an individual's retirement
needs, but as a supplement.
However, now, two-thirds of its recipients rely on Social
Security for at least half or more of their retirement income.
That isn't good for them, and it isn't good for the country, in
my view.
Mr. Chairman, I believe President Roosevelt, who created
the Social Security system, felt the same way. As the Wall
Street Journal has pointed out, in a speech to Congress in 1935
FDR anticipated the need to move beyond the pay-as-you-go
financing method.
Chairman Greenspan, that is two presidents--the Democrat
founder of Social Security and the Republican to whom it falls
to save the Social Security system--in agreement on the issue
of personal accounts.
There will be some heavy lifting to get the system right,
of course, and this committee will be in support.
We have an obligation to America and to future generations
to address this problem.
So, Mr. Chairman, in the week that baseball reports for
spring training, I think we should view this effort as the
start of a new season as well, a season in which Congress will
step up to the plate with intelligent, long-term reform of
Social Security.
We seek to extend the ownership society to all Americans,
and let us broaden that concept of ownership to retirement.
With that, I am pleased to yield to the Ranking Member, the
gentleman from Massachusetts, Mr. Frank.
Mr. Frank. Thank you, Mr. Chairman.
I am in somewhat less agreement with the President than you
are, although I don't wish to be totally in opposition.
And I must say I look forward to supporting the President
in his attack on bloated and inefficient and wasteful farm
subsidies, and I am sure I will have strong support from these
free market conservatives on the other side as we attempt to
bring the free market principles to the largest sector of the
American economy from which they have long been absent.
With regard to Social Security, I do appreciate the
Chairman making it very clear, as others have, that the
question of private accounts and the question of the solvency
of the system are, in fact, quite separate; that the President
himself has acknowledged this.
So, yes, there are questions about solvency. They are
separate from private accounts. And I will return to them.
But I want to talk about what I think is the overarching
problem in the American economy today. And I want to
congratulate the Chairman--there are some advantages to going
second when the Chairman testifies, and one is that we don't
have to worry about poaching on his right to be the presenter
of his own ideas. He testified yesterday in the Senate.
So I am not reluctant to call attention to page five of his
testimony today in the last couple of paragraphs.
And I think what we have is a serious problem in America.
The economy has begun again to grow, but it is growing in a
way that is exacerbating inequality. We are getting, as the
Chairman has noted--although there are some hopes this may
improve in the future--fewer jobs for each additional unit of
GDP.
We have a failure of wages on the whole to rise
proportionate to the economy. We have--although it isn't
commented on here, we have discussed it--the lack of health
care and the falling away of health care for many people.
Some have said, ``Well, don't worry about inequality; that
is just a sign of pettiness. As long as everything is getting
better, why do you worry about inequality?''
And I want to call attention to the quite profound remarks
of Chairman Greenspan on this subject when he talks about the
problem that we now have where skilled workers' wages, skilled
in terms of this economy, are increasing and we have got a
greater differential between people who are skilled and people
who aren't.
As he says, ``If the skill composition of our work force
meshed fully with the needs of our increasingly complex capital
stock, wage-skill differentials would be stable--for the past
20 years, the supply of skilled, particularly highly skilled
workers has failed to keep up with the persistent rise in
demand for such skills. Conversely, the demand for lesser
skilled workers has declined.''
And this is quite profound.
``In a democratic society,'' you say, Mr. Chairman, ``such
a stark bifurcation of wealth and income trends among large
segments of the population can fuel resentment and political
polarization.''
And I think you have pointed to a central problem, and you
repudiate those who say don't worry about it. And I think you
are right to worry about it, but here is my concern.
You then go on to say that one of the most important tasks
for the social stability of this country, as well as our
economic future--because as you note, a badly polarized society
is going to be one in which efforts to move forward toward
economic rationality will be resisted sometimes when they
shouldn't be; a new rationality may creep in, an anger, a
resistance to economic rationalization.
And what you say is we need to increase the skills of
lesser skilled people, reduce the excess of lesser skilled
workers, expedite the acquisition of skills by all students
both through formal education, by on-the-job training.
I would add that it is also important, since we know this
isn't going to happen instantly, that we alleviate the negative
effects of this while it happens.
You are quite right to note that resentment will build up.
With all the success we could expect in education and on-
the-job training, years will ensue before we make a substantial
dent in this.
We have a couple of problems now.
Public policy, particularly recently, has cut back in
precisely those areas that alleviate the impact of inequality.
We are doing less for those who get less. We are cutting back
there.
Similarly, our ability to go forward, the private sector
will play a major role in on-the-job training and elsewhere.
But no one expects people trying to make a profit to fund all
of that.
Some significant part of that is going to have to be funded
publicly through education, through community colleges, through
payment through on-the-job training.
The problem we have is this. The Chairman said you are a
very famous deficit hawk. You may be one of the few consistent
deficit hawks left here in the capital because people's deficit
hawkishness does appear to ebb and flow according to the
programs.
If, however, we maintain the current situation in which we
have a high priority on reducing the deficit and we continue in
existence all of the tax cuts, then the inevitable consequence
is very substantial reductions in public spending.
With defense out of this loop, with homeland security out
of this loop, all of the programs that either alleviate the
consequences of inequality or help us reduce this skill
disparity in the future are under the gun.
And so I fear--this is a question I would address to you--
how do we alleviate the effects of this inequality so that you
reduce the negative feelings that you correctly point out are a
result? And how do we increase our ability to get these skills
to people; how do we improve education; how do we improve on-
the-job training?
Money is not the only answer. But no one, I think, would
say that you can do something of that magnitude in this society
without additional resources.
And the dilemma is, if you are going to deal with deficit
reduction entirely through reductions in domestic public
spending, at the state and local level and at the federal
level, I think you have a situation in which the situation
which you quite eloquently decry will get worse rather than
better. And that is a subject I hope to pursue.
The Chairman. Gentleman's time has expired.
Now, recognize the chairwoman of the Domestic and
International Monetary committee, the gentlelady from Ohio,
Mrs. Pryce.
Ms. Pryce. Thanks, Chairman Oxley.
Welcome, Chairman Greenspan, and thank you for taking the
time to discuss with us your insights on monetary policy and
many other things I am sure we will hear from you.
I am especially happy to be returning to the committee for
these very special opportunities. This will be an exciting and
very busy year for us. As you know, the President has outlined
an aggressive second-term agenda, which includes Social
Security, tax and legal reform.
Social Security is an issue that, if addressed today, could
safeguard the future of millions of young people, and, if
ignored, could become the biggest shortcoming of a generation.
As you noted yesterday, the existing structure isn't
working, and I am sure that this committee will have plenty of
questions on this issue, and I look forward to hearing your
answers later in the morning.
Last month, the Bureau of Labor Statistics released revised
data showing gains of 2.7 million jobs for 20 straight months,
with those gains beginning of June of 2003, which was 3 months
earlier than previously estimated.
My home state of Ohio, which has been hit hard by
manufacturing job loss over the last 2 years, has recently seen
an increase in workers returning to the job market, and Ohio is
not alone in that recovery. The national unemployment rate
ticked down 0.2 percentage points in January, the lowest rate
since September of 2001.
Mr. Chairman, reflection on the measured rise in inflation
taken by FOMC and the role you had in it, I am particularly
interested in hearing you address the role raising rates will
have on manufacturing states like Ohio, where the manufacturing
sector is a large part of the economy.
Also, I would like to hear how you feel it will affect the
housing market, which has been such a stable influence in the
economy over the last several years.
I appreciate, Mr. Chairman, your support and encouragement
of deregulation and technological innovation. You have said
before that continued movement on these fronts, along with
maintenance of a rigorous and evolving education system, will
drive our economy into the future.
I am particularly interested to hear you speak in more
length on the demands put on our education system. You have
voiced concern in the past that while our fourth graders
outperform their peers around the world in math and science,
our eighth graders are about average, and our 12th graders rank
near the bottom.
How can this happen?
I hope to discuss with you now and in the future possible
reasons for this failure and how best we resolve our education
system to graduate more skilled workers and how that will
affect our economy.
I am also concerned about the state of financial literacy
among all Americans.
I am concerned over the state of our nation's savings rate,
something I was glad to hear you address in yesterday's hearing
and I hope you discuss further today.
We must grow our economy and not our government, and we
must change the current system of Social Security to ensure its
solvency for our children.
Through fiscal discipline and by implementing policies that
increase the rate of personal savings and retirement security,
we can provide financial freedom to all Americans and allow
them to take ownership over their families' future and
prosperity.
I thank you, Mr. Chairman, for your appearance today. I
look forward to your testimony.
And with that, I yield back, Mr. Chairman.
The Chairman. Thank the gentlelady.
Before I recognize the Ranking Member of the subcommittee,
I want to first recognize a good friend, former Ranking Member
from the committee, John LaFalce.
Good to have you back, John. And probably looks a little
different on that side of the dais.
The gentlelady from New York, Ms. Maloney.
Mrs. Maloney. Thank you. It is always a pleasure to welcome
Chairman Greenspan.
I look very much forward to your testimony on the economy
and monetary policy, but I would also like to get your views on
some broader issues regarding the sharp turn in economy policy
from the late 1990s, when we eliminated the deficit and started
to pay down the debt, to now, when once again we see deficits
as far as the eye can see and mounting debt.
The state of the economy at present deeply disturbs me.
This administration has repeatedly set records for debts and
deficits.
In the 1990s, we were looking toward a budget surplus of
$5.6 trillion over 10 years. Now we have a budget deficit of
over $400 billion, with no end in sight. We have raised the
debt limit three times in this administration, and our debt now
stands at well over $7 trillion, an unfortunate record.
That means that $26,000 is owed by every man, woman and
child in America, the highest it has ever been.
Their newest record is an all-time high trade deficit for
last year: nearly $618 billion. The debt and deficit policies
of this administration place a severe burden on our economy
because we are borrowing huge sums from foreign countries. Some
of our allies are warning us that they are approaching the
limit of their willingness to buy our debt.
It has gotten to the point where some European bankers who
were in Washington, D.C., last week were asking if the dollar
will continue to be the reserve currency of the world.
So I want to know, Mr. Greenspan, are you really
comfortable with the policies of what I can only call the debt-
and-deficit Republicans who are now running our economic
policy?
Chairman Greenspan, your testimony explains why the Federal
Reserve is likely to continue what it calls its measured policy
of interest rate increases, but I would hope that you would
take a second look at this policy. I am concerned that we are
not seeing the kind of robust job growth we would normally see
in a strong economy.
The Bush administration is proud of its job creation over
the past 20 months, but when you break it down, we are only
gaining 140,000 jobs per month, barely enough to keep pace with
normal growth in the labor force.
Most indicators of workers' wages show that they are barely
keeping up with inflation, and wages may actually be falling at
the lower end of wage distribution. That hardly sounds like an
economy that needs to be slowed by interest rate hikes.
On the question of debt, I am sure you cannot be happy with
what has happened to the federal budget deficit since 2001. And
frankly, Mr. Chairman, you had something to do with that, when
you gave the green light to the administration's tax policies
in 2001.
But you have repeatedly said that persistent budget
deficits are toxic to the economy and that deficit reduction is
one of the best strategies to have for raising national savings
and boosting future standards of living. And I completely agree
with you on that.
That brings me to the administration's proposal for phasing
out Social Security by privatizing it. I know you share the
President's philosophy about privatized accounts, but you
cannot share his budget arithmetic.
Experts estimate that the creation of privatized accounts
would add upwards of $4 trillion to $5 trillion to our national
debt in the first 20 years alone. I believe that you told the
Senate yesterday that the privatized accounts proposal would do
absolutely nothing to address the solvency of Social Security
and would do nothing to boost national savings, yet it adds new
problems to our debt.
I believe you also said that no one knows how financial
markets would respond to all of that debt coming on the market.
So I ask mainly what possible benefit could there be to
plunging ahead with such a reckless policy when we already have
a deficit and debt problem that is out of control?
As always, I look forward to your testimony.
The Chairman. The gentlelady's time has expired.
We now turn to the distinguished Chairman of the Federal
Reserve. Chairman Greenspan, welcome back to the committee. And
we appreciate your spending some time with us. And take as much
time as you would like.
STATEMENT OF HON. ALAN GREENSPAN, CHAIRMAN, BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
Mr. Greenspan. Thank you very much, Mr. Chairman. I request
that the full text of my remarks be included for the record.
The Chairman. Without objection.
Mr. Greenspan. Mr. Chairman and members of the committee,
in the seven months since I last testified before this
committee, the U.S. economic expansion has firmed; overall
inflation has subsided and core inflation has remained low.
Over the first half of 2004, the available information
increasingly suggested that the economic expansion was becoming
less fragile and that the risk of an undesirable decline in
inflation had greatly diminished. Toward midyear, the Federal
Reserve came to the judgment that the extraordinary degree of
policy accommodation that had been in place since the middle of
2003 was no longer warranted and in the announcement released
at the conclusion of our May meeting signaled that a firming of
policy was likely.
The Federal Open Market Committee began to raise the
federal funds rate at its June meeting, and the announcement
following that meeting indicated the need for further, albeit
gradual, withdrawal of monetary policy stimulus.
Around the same time, incoming data suggested a lull in
activity as the economy absorbed the impact of higher energy
prices. Much as had been expected, this soft patch proved to be
short-lived. Accordingly, the Federal Reserve has followed the
June policy move with similar actions at each meeting since
then, including our most recent meeting earlier this month. The
cumulative removal of policy accommodation to date has
significantly raised measures of the real federal funds rate,
but by most measures it remains fairly low.
The evidence broadly supports the view that economic
fundamentals have steadied. Consumer spending has been well
maintained over recent months, buoyed by continued growth in
disposable personal income, gains in net worth, and
accommodative conditions in credit markets. Households have
recorded a modest improvement in their financial position over
this period, to the betterment of many indicators of credit
quality.
For their part, business executives apparently have become
somewhat more optimistic in recent months. Capital spending and
corporate borrowing have firmed noticeably, but some of the
latter may have been directed to finance the recent backup in
inventories. Mergers and acquisitions, though, have clearly
perked up.
Even in the current, much improved environment, however,
some caution among business executives remains. Although
capital investment has been advancing at a reasonably good
pace, it has nonetheless lagged the exceptional rise in profits
and internal cash flow.
As opposed to the lingering hesitancy among business
executives, participants in financial markets seem very
confident about the future and, judging by the exceptionally
low level of risk spreads in credit markets, quite willing to
bear risk.
This apparent disparity in sentiment between business
people and market participants could reflect the heightened
additional concerns of business executives about potential
legal liabilities, rather than a fundamentally different
assessment of macroeconomic risks.
Turning to the outlook for costs and prices, productivity
developments will likely play a key role. The growth of output
per hour slowed over the past half year, giving a boost to unit
labor costs after 2 years of declines.
Going forward, the implications for inflation will be
influenced by the extent and persistence of any slowdown in
productivity.
To date, with profit margins already high, competitive
pressures have tended to limit the extent to which cost
pressures have been reflected in higher prices.
The inflation outlook will also be shaped by developments
affecting the exchange rate of the dollar and oil prices.
Although the dollar has been declining since early 2002,
exporters to the United States apparently have held dollar
prices relatively steady to preserve their market share,
effectively choosing to absorb the decline in the dollar by
accepting a reduction in their profit margins.
However, the recent somewhat quickened pace of increases in
U.S. import prices suggests that profit margins of exporters to
the United States have contracted to the point where foreign
shippers may exhibit only limited tolerance for additional
reductions in margins should the dollar decline further.
The sharp rise in oil prices over the past year has no
doubt boosted firms' costs and may have weighed on production,
particularly given the sizable permanent component of oil price
increases suggested by distant-horizon oil futures contracts.
However, the share of total business expenses attributable
to energy costs has declined appreciably over the past 30
years, which has helped to buffer profits and the economy more
generally from the adverse effect of high oil and natural gas
prices.
All told, the economy seems to have entered 2005 expanding
at a reasonably good pace, with inflation and inflation
expectations well anchored.
On the whole, financial markets appear to share this view.
In particular, a broad array of financial indicators convey
a pervasive sense of confidence among investors.
Over the past two decades, the industrial world has fended
off two severe stock market corrections, a major financial
crisis in developing nations, corporate scandals, and of
course, the tragedy of September 11, 2001. Yet overall economic
activity experienced only modest difficulties.
Thus, it is not altogether unexpected or irrational that
participants in the world marketplace would project more of the
same going forward.
Yet history cautions that people experiencing long periods
of relative stability are prone to excess. We must thus remain
vigilant against complacency, especially since several
important economic challenges confront policy-makers in the
years ahead.
Prominent among these challenges in the United States is
the pressing need to maintain the flexibility of our economic
and financial system. This will be essential if we are to
address our current account deficit without significant
disruption.
Central to that adjustment must be an increase in net
national saving. This serves to underscore the imperative to
restore fiscal discipline.
Beyond the near term, benefits promised to a burgeoning
retirement-age population under mandatory entitlement programs,
most notably Social Security and Medicare, threaten to strain
the resources of the working-age population in the years ahead.
Real progress on these issues will unavoidably entail many
difficult choices.
But the demographics are inexorable and call for action
before the leading edge of baby boomer retirement becomes
evident in 2008.
Another critical long-term economic challenge facing the
United States is the need to ensure that our workforce is
equipped with the requisite skills to compete effectively in an
environment of rapid technological progress and global
competition.
But technology and, more recently, competition from abroad
have grown to a point at which the demand for the least-skilled
workers in the United States and other developed countries is
diminishing, placing downward pressure on their wages. These
workers will need to acquire the skills required to compete
effectively for the new jobs that our economy will create.
Although the long-term challenges confronting the United
States economy are significant, I fully anticipate that they
will ultimately be met and resolved.
In recent decades, our nation has demonstrated remarkable
resilience and flexibility when tested by events, and we have
every reason to be confident that it will weather future
challenges as well.
For our part, the Federal Reserve will pursue its statutory
objectives of price stability and maximum sustainable
employment, the latter of which we have learned can best be
achieved in the long run by maintaining price stability.
This is the surest contribution that the Federal Reserve
can make in fostering the economic prosperity and well being of
our nation and its people.
Mr. Chairman, thank you very much and I look forward to
your questions.
[The prepared statement of Hon. Alan Greenspan can be found
on page 59 in the appendix.]
The Chairman. Thank you, Mr. Chairman.
Let me begin with some questions, as you might guess, the
issue du jour, Social Security and Social Security reform, and
I think correctly put forward by the President.
You have mentioned, for example, that the baby boomers
really start drawing down on Social Security as early as 2008.
So it does, I think, hopefully focus our attention on that very
real fact and how we deal with it.
This committee, of course, has been very interested in
issues like capital formation, savings rates, interest rates,
and the like, and you have been very helpful over the time that
I have chaired this committee in leading us through some very
difficult issues.
One of the issues that I wanted to talk to you about today
is the individual accounts and how they--not only how they
would be structured, because I think our committee will have a
serious interest in how that is accomplished--and secondly,
what those individual accounts can do for the economy, and I
would be interested in your comments.
It seems to me that given an opportunity to create millions
of worker capitalists in this country--to introduce a large
segment of the population to issues like compound interest,
dollar cost, averaging, building up ownership in one's
retirement--is a pretty exciting proposition. What kind of
increase would we have, for example, in the pool of capital
available to American companies to expand and modernize and be
competitive in a global economy?
I saw a study the other day that said if the average worker
were to invest half of his account in a stock fund, index fund,
and half in a bond index fund, that the creation of those bond
index funds and those savings would double the amount of money
in the current bond market, which I would assume based on what
you have said in the past would have a significant positive
impact on interest rates going forward.
I just throw those out to you because too many times I
think we get lost in the issue of Social Security, and it is an
important issue, but also what the overall effect could be on
our country, that is individual citizens, as well as the
economy.
And I will just turn you loose on that.
Mr. Greenspan. Well, Mr. Chairman, I think the first thing
that we have to focus upon is this extraordinary shift that is
about to occur, starting in 2008, in which roughly 30 million
people are going to leave the labor force over the next 25
years and enter into retirement.
This creates a very significant slowing in the rate of
economic growth. When the rate of growth of the working-age
population relative to the total goes down--and even with
productivity increasing at a reasonably good clip the rate of
growth in GDP per capita must slow down.
This is going to cause a confrontation in the marketplace
between the desire on the part of retirees to maintain
essentially what we call their replacement rate--namely, that a
standard of living relative to the standard of living they
enjoyed just prior to retirement will be maintained.
If that is done, it will put significant pressure on the
working-age-population economic growth, and so we have to find
a way to get a larger pie to solve both sides of this.
The advantage of having individual accounts is over a
fairly broad spectrum, but the one that I think is most
important actually relates to the issue which your Ranking
Member mentioned before.
These accounts, properly constructed and managed, will
create, as you also point out, a sense of increased wealth on
the part of the middle-and lower-income classes of this
society, who have had to struggle with very little capital.
And while they do have a claim against Social Security
system in the future, as best as I can judge, they don't feel
as though it is personal wealth they way they would with
personal accounts. And I think that is a quite important issue
with respect to this.
The major issue of personal accounts is essentially
economic, in the sense that, confronted with the very large
baby boom retirement and the economic difficulties associated
with it, the structure of essentially a pay-as-you-go system,
which is what our Social Security system is, which worked
exceptionally well for almost 50, 60 years, that system is not
well suited to a period in which you do not any longer have
significant overall population growth, and therefore a very
high ratio of workers to retirees.
And it is no longer the case, as existed in the earlier
years, that life expectancy after age 65 was significant. We
have been fortunate in that, for a number of reasons, our
longevity has increased measurably.
But it does suggest that if we are going to create the type
of standard of living that we need in the future for everybody,
we are going to need to build the capital stock, plant and
equipment, because that is the only way we are going to
significantly increase the rate of productivity growth which
will be necessary to supply the real goods and services that
the individuals who are retired at that point and the
individuals who are activity working would sense their right in
this economy.
And if we are going to do that, we have to have a
significant increase in national savings, because even though
it doesn't exactly tie one to one because there are other ways
in which productivity rises, the central core of productivity
increase is capital investment. And to have capital investment
you need to have savings.
Now, we in the United States have had a very low national
or domestic savings rate and have been borrowing a good part of
it from abroad to finance our existing capital investment. We
are obviously not going to be able to do that indefinitely,
which puts even more pressure on building up our domestic
savings.
And what this means is that whatever type of structure we
have for retirement, it has to be fully funded.
The OASI has $1.5 trillion in the trust fund at this stage.
The required full funding is over $10 trillion.
In short, we do not have the mechanisms built into our
procedures for retirement and retirement income and pensions
which are creating a degree of savings necessary to create the
capital assets which are a precondition to get a rate of growth
in productivity, given the slow growth in the labor force which
we project going forward in order to create enough GDP for
everybody.
So my major concern is that the current model, which served
us so well for so many decades, is not the type of model we
would certainly construct from scratch, and we have to move in
a different direction.
And one of the reasons that I think we have to move toward
a private individual account system is they, by their nature,
tend to be significantly fully funded, even if they are defined
contribution plans, because individuals know what they need for
the future and they tend to put monies away adequately to
create the incomes they will need in retirement.
So I think this is an extraordinarily important problem
that exists. And I won't even go on to mention the fact that
the Medicare shortfall, so far as the issue of where full
funding lies, is several multiples in addition to what we
confront in Social Security.
The Chairman. Thank you, Mr. Chairman.
I think the clocks are not working right. We will have to
get a----
Mr. Frank. Don't fix them that quickly. Wait a few minutes.
The Chairman. Gentleman from Massachusetts.
Mr. Frank. I am struck by your last point, Mr. Chairman,
because the President has been talking, I think, in exaggerated
terms about a crisis in Social Security, and I haven't heard
him talk about Medicare. And I welcome your assertion that the
Medicare problem is, if I heard you correctly, several
magnitudes greater.
And it seems to me we are talking about an ideological
agenda. When you put the Social Security issue up front and
ignore the Medicare issue, I do not think you are simply
following what economic necessity would dictate.
On the question of capital formation, it is a question I
would like to ask. We have this problem with the deficit. We
have a problem of money being used up.
One of the areas of federal spending growth that is
obviously, perhaps, the fastest is in the military budget. Now,
some of that is necessary, brought on us by outside enemies. I
voted for the war in Afghanistan--not for the war in Iraq. But
we have some problems here.
On the other hand--and I cited my eagerness to support
conservatives as we defend the administration's effort to
dismantle the bloated agricultural system--I also look forward
to working alongside intellectually honest fiscal conservatives
in supporting proposals to de-fund Cold War weapons that no
longer have a major justification. The administration is going
to be proposing, I am told, the reduction.
Now, I don't ask you to opine about whether or not the
weapons are necessary, but I do solicit your opinion on the
economic impact.
To the extent that the Defense Department can identify
expensive weapon systems that it believes are no longer of a
high priority because they were originally designed with a
different enemy in mind, a thermonuclear enemy, to the extent
that we could reduce the spending there, what is the effect
economically for the country?
Mr. Greenspan. Well, it is obvious that hardware
expenditures, especially the type that was fairly substantial
over the post-World War II period, are a drain on the real
resources of the economy.
And clearly, to the extent that we can cut back in any part
of the budget, dollar for dollar it reduces the deficit,
increases national savings, and does, obviously, contribute to
private capital investment--the very critical need which I
think we have going forward.
Mr. Frank. Well, I appreciate that because when it comes to
reductions in some of these weapons that the Pentagon will say
are unnecessary, I anticipate that some who are in other
contexts quite critical of government spending are going to
sound like Harry Hopkins and Harold Ickes put together as they
talk about the stimulative effect for the economy.
Mr. Greenspan. I assume you mean Ickes Sr.
Mr. Frank. Harold Ickes Sr., yes.
The Harold Ickes of your era, Mr. Chairman.
[Laughter.]
While I am on the subject, as I get into Social Security,
one question of great interest to me, Mr. Chairman, and you are
a distinguished economic authority. Had you been in the
Congress in 1935, would you have voted for Social Security?
Mr. Greenspan. I was pretty young at that time.
Mr. Frank. I understand, Mr. Chairman, but----
[Laughter.]
I said, if you had been there, would you have?
Mr. Greenspan. I cannot answer that question.
Mr. Frank. I didn't think you would be able to, but I do
think, frankly, look, we have an economic aspect here and an
ideological one. And as we have acknowledged, the need to get
to solvency has an economic impact. The question of private
accounts has an ideological one. And many of us, frankly, would
have no question: We would have voted for that. And I think
that is relevant.
Let me go to the question of, leaving aside the ideological
questions, I do say, and I appreciate what you said about
inequality. I do have to express skepticism that telling
workers who are now losing their jobs because of various
factors in the economy or whose real wages are not keeping up,
telling them, ``Do not despair, private accounts are coming, 15
or 20 years from now,'' will be of less of a morale booster
than I think you implied.
But leaving aside the desirability, we do have the question
of how you get there. You say in the monetary policy report, on
page 12, the entire governors say, ``The recent sizable
deficits in the unified budget mean the federal government,
which had been contributing to the pool of national saving from
1997 through 2000 has been drawing on that pool since 2001,''
and you have identified savings, the low savings rate, as a big
problem. The single biggest factor in this appears to be the
federal government.
Net federal savings dropped from positive 2 percent of GDP
in 2000 to a level below negative 3 percent in 2003 and 2004.
There has been a swing of 5 percent with regard to national
savings, entirely attributable to the federal government.
Here is the problem: clearly we are going to have to borrow
to set up private accounts. The administration says it will
cost $700 billion or $800 billion in the next 9 years, but
obviously that is not the end of it. The estimates from the
Democrats on the Budget Committee is $4 trillion.
The administration won't say. Generally, when people won't
say it is because they don't like what they would have to say.
You told Senator Sarbanes yesterday I believe that if we
had to borrow more than a trillion, that could be problematic.
You said over a trillion is large.
Mr. Greenspan. I was referring to the 10-year time frame.
Mr. Frank. Okay.
Mr. Greenspan. That was the context.
Mr. Frank. Let me ask, has the Fed done any kind of costing
out of what the cost of the borrowing will be in the period
after the 10 years?
Mr. Greenspan. No, we haven't. But remember that the
critical issue here is how it affects national savings.
Mr. Frank. The market.
Mr. Greenspan. If you move marketable securities from the
U.S. government and thereby create a deficit into a private
account, but you require that that account not be subject to
withdrawal prior to retirement, you effectively insulate the
issue of a change.
Mr. Frank. But as you said yesterday, that depends on the
market's perception. And I must say yesterday, as I read your
questions----
Mr. Greenspan. That is correct.
Mr. Frank.----you were less assured yesterday. Did
something happen overnight?
Mr. Greenspan. No. I was about to get to that.
Mr. Frank. Okay. I don't want the time to run out before
you did. The clock seems miraculously to have got fixed after
he got through.
[Laughter.]
Mr. Greenspan. As I said yesterday, we are not sure to what
extent and how much the markets respond. I think that basically
the question of moving to private accounts, personal accounts,
individual accounts, whatever you want to call them, is
necessary largely because I think the existing system----
Mr. Frank. But you are off my point, Mr. Chairman. I
understand that. You have said that. But I am asking you about
the impact of the borrowing and the market. And yesterday----
Mr. Greenspan. To the extent--to the extent--that that
affects national savings, and as I say----
Mr. Frank. But it is a separate question. You, at least
yesterday, said market perception was a problem, and you seemed
to indicate that the----
Mr. Greenspan. Let me tell you why I am responding in the
way I am: The unified budget is a mechanism which only partly
reflects the impact of government activity on the economy. It
is an exceptionally good one, and covers most issues. But when
you are dealing with forced savings of any type, the evaluation
is somewhat different.
But to answer your question very specifically, to the
extent that actual government borrowing tends to impact on
interest rates and on the economy, which generally budget
deficits do, then I do think we have to constrain them.
Mr. Frank. Thank you.
The Chairman. The gentleman's time has expired.
The gentlelady from Ohio, Ms. Pryce.
Ms. Pryce. Thank you, Mr. Chairman.
Social Security is the subject du jour, obviously. I will
ask you a question on a different matter, but I also would like
to allow you to complete your answer, if you had more to say,
about the perception.
I was very intrigued. In your testimony you talked about
the perception of wealth, personal perception, then you just
made reference to market perception. Is there more you would
like to say in response to Mr. Frank?
Mr. Greenspan. No. It is just that, as I indicated and the
congressman quoted me, for the last 25 years we have had a
consistent, ever-increasing concentration of income and wealth
in this country. And as I said, that is not conducive to the
democratic process or democratic society.
It is crucial to our stability that people all have a stake
in this system. And I don't perceive that Social Security is
conceived that way. It is very important for people to have a
sense of ownership. In other countries, where shifts have been
made, there is a lot of anecdotal indications that it made a
difference in a lot of places.
Now, I am not saying that the United States is like Chile,
for example. It is not. But I think that it is an issue that
goes beyond the sheer economics of it.
But because we need to find a better vehicle for providing
retirement benefits, and therefore have to move away from the
pay-as-you-go structure, and I think essentially into certain
private accounts or defined benefit programs or something,
because we need the full funding, that it is far more likely
that we will get the type of savings, and therefore the type of
capital investment that we are going to need in order to meet
the promises we have already made to the next generation of
retirees going forward.
Ms. Pryce. All right. Thank you, Chairman.
Now let me shift gears away from Social Security, because I
am sure that that will be dominating the day. But I would like
to ask your insights into the matter of the interchange and how
that is going to be affecting control of monetary policy.
I know that the Fed has an ongoing study and retail
payments research project to estimate the number of
transactions and the value to the retail system.
But it is a very intriguing concept to me, and I would
really like to hear your comments on it, how it affects your
control of monetary policy, how it affects consumer prices and
the economy, and if you believe that there is a privacy or
identity theft peripheral issue to it.
So I know that this is kind of off the subject du jour, but
I would like to hear your insights.
Mr. Greenspan. Well, one of the things which has been quite
impressive is how the financial system has adjusted to the
major increase in information technology and computer
technology. And the payment system has gotten extraordinarily
complex in all the various different areas.
To be sure, we have had privacy questions emerge, and there
has been a significant battle, I may say, between those who
create new encryption programs and those who are trying to
break them.
I think at the end of the day that the mathematics of
encryption are such and the technology is such that we ought to
be able to create systems which will be exceptionally difficult
to break.
If we are going to get the benefits of the payment system
or, as I commented yesterday, the extraordinary potential
benefits of information technology in the health care area, we
have to create security for privacy. And the only way to do
that and still have the availability and use of these
technologies is to find adequate encryption.
I think that is something which continues to improve. In my
judgment, at the end of the day, it is going to become very
difficult as the technology gets more and more complex,
actually to break some of these newer, very clever encryption
systems.
Ms. Pryce. Would you like to comment at all on----
The Chairman. Gentlelady's time has expired.
We are going to try to stay as close to the 5-minute rule--
--
Ms. Pryce. Thank you, sir.
The Chairman.----because we have got so many members to ask
questions.
The gentlelady from New York?
Mrs. Maloney. Thank you, Mr. Chairman.
Mr. Greenspan, the President is drumming up support for his
plan by saying that by 2042, ``the entire system will be
bankrupt.''
To the average person, bankrupt would mean that you would
be totally out of money, that there would be no benefits at
all. Yet, experts say that we will not touch the trust fund
until 2018, and even though the trust fund will be used up by
2042, as the law envisioned, there will be plenty of money
coming in from payroll taxes, enough to pay for three-quarters
of the benefits.
So to say that the entire system is bankrupt in 2042 is not
true. It is misleading. Would you agree, yes or no, Mr.
Greenspan?
Mr. Greenspan. It is certainly true that the amounts of
money, cash, that are available would, assuming that the 2042
is the more accurate than the 2052 which CBO is raising, but
the point I think that is crucial here is that this is mainly
the monies that the Congress is making available.
And I must say, parenthetically, I think the probability
were we in fact to run into zero trust fund at that point, that
benefits would be cut, approaches zero, as indeed it did in
1983, the last time that happened.
But that is not what the issue is. The issue is not whether
or not we have the ability to make payments, but whether we
have built up a sufficient trust fund----
Mrs. Maloney. My question is not that. I question the
statement that by 2042 the entire system will be bankrupt. It
will not be bankrupt. I agree the trust fund will be gone, but
there will still be the money coming in from the payroll taxes,
enough to pay, by all accounts, three quarters of the benefits.
Is that true or not?
Mr. Greenspan. It is true in dollar terms, but I suspect it
may not be true in real terms.
And the reason I am saying that, if we cannot get full
funding and the savings required to build up the capital stock
in time for 2042's production of goods and services, yes, the
individuals may have the cash, but the cash will not buy as
much as they think it would be.
The real problem has got to be real resources, and this
issue of whether or not the OASI goes bankrupt or not bankrupt
is an interesting legal and political question, but it really
doesn't get at the economics of the retirement of 30 million
additional individuals.
Mrs. Maloney. That is true, but the point is in 2042, the
entire system is not bankrupt.
But I would like to get back to your statements in the
Senate yesterday where you pointed out that the President's
plan does nothing to solve the solvency challenge of Social
Security and it does nothing to improve national savings and it
creates new debt that will have trouble being absorbed by the
markets.
So, in other words, the President's plan doesn't address
the real problems and it creates new ones. The cost for
transition has been estimated to be $4 trillion to $5 trillion
over 20 years, and this is on top of the deficit and debt that
we now have and do not seem to be able to control.
We have the highest debt ever, over $7 trillion; the
highest deficit ever, over $400 billion; the highest trade debt
ever, over $600 billion.
And my question is, wouldn't you say that for the immediate
future, the deficit is more of a problem with our economy than
Social Security is, particularly since we do not even have to
touch it, the trust fund, or the principal until 2018?
Mr. Greenspan. No, I think that the problem starts in 2008.
And I don't disagree with you about the size of some of the
numbers, but remember a goodly part of that----
Mrs. Maloney. Especially, Mr. Greenspan, when you said
yesterday in the Senate that the increased debt of over $1
trillion in a 10-year period would be too much for the markets
to absorb.
And so, when we have independent analysis and economists
saying that it will be $4 trillion to $5 trillion over 20
years, doesn't that cause a tremendous problem on top of the
debt and deficits that we already have, yes or no?
The Chairman. The gentlelady's time has expired.
The Chairman may answer yes or no or expand on that.
Mr. Greenspan. All I would say is that when you are getting
out that far, there will be lots of adjustments.
It is important in the process of the adjustment that we be
very careful not to increase the degree of excess inflationary
liquidity in the economy, and adjustments will need to be made.
Mrs. Maloney. Thank you.
The Chairman. The gentleman from Louisiana, Mr. Baker?
Mr. Baker. I thank the Chairman.
And welcome the Chairman back again. It is certainly always
a pleasure to hear your thoughts.
I just want to speak briefly as to the concerns about the
division that apparently will exist in our country going
forward with those accumulating wealth and those without
hopeful opportunity.
I believe we have learned a great deal from some of our
metropolitan woes across the country. As local governments look
for ways to deal with infrastructure problems and meeting
social need, they have raised taxes to confiscatory levels, and
those with the ability have moved to the suburbs, taking their
capital and assets with them, and the spiral downward is only
escalated.
I worry that in our rush to solve this problem that with
additional federal government regulatory encroachment, with
confiscatory tax rates being discussed, that those who have the
ability simply will move offshore, taking their investments,
their manufacturing, and their jobs elsewhere.
And so, we have, indeed, to have a system where everyone
has a stake and a potential to share in the potential outcomes
if we are going to work our way through this very difficult
financial thicket.
I want to turn, however, to a subject which you and I have
talked about over time, and it is not a new concern but one
which has taken on significance in light of recent
developments.
Two years ago, in the fourth quarter of that year, Fannie
Mae disclosed it had a significant problem with what it called
its negative duration gap measurement in ceding their own
internal risk measurement controls.
The resulting action of the GSE in that instance was simply
to go out and acquire additional mortgages to rebalance the
portfolio.
I likened it to being the owner of the Hindenburg and
deciding to add on a new room.
I have come to the conclusion in view of the GSE's
portfolio growth over the last several years that the rate of
growth is indeed a concern, and I believe you have in past
occasions expressed the possible view that maybe some balance
between MBS held and overall portfolio structure might be
something that the Congress should examine.
I am wondering if you have, one, the concern about rate of
growth. Two, is there a remedy in your mind that would be
advisable for us to consider; would you go as far perhaps as
establishing a cap? And four, whatever response you give will
be very informative and helpful.
As you know, we are in the midst now of constructing
legislation on GSE reform, and I frankly would like to include
a provision on growth constraints, but I want to make sure that
from a financial policy perspective you believe it to be
advisable.
Mr. Greenspan. Congressman, I have been thinking, as you
have, about the nature of this problem for the last several
years.
What concerns me is not what Fannie and Freddie have been
doing in the securitization area, which they have been
exceptionally effective as indeed their competitors as well,
have created a very important element within the total
financial system.
And so, let me just stipulate that securitization is
important and has to be maintained and expanded, if at all
possible.
But we have examined the purposes of the so-called huge
build up in the portfolios that Fannie and Freddie are
holding--and remember that it was very small 10 years ago. This
is not something which is implicit in the whole securitization
operation; it is an add-on which occurs as best we can judge--
and we have tried to think of all other possible purposes--very
largely to create increased profits for these organizations.
And the reason that occurs is they have, granted by the
marketplace, a significant subsidy which enables them to sell
their debentures significantly--at a significantly lower
interest rate than their competition. And therefore, no matter
what market-based types of issues they use that money to invest
in, whether it is their own MBS, other MBS, or other assets,
they get an extraordinarily large profit and they have been
using that for a major expansion in earnings of those
corporations.
We have found no reasonable basis for that portfolio above
very minimal needs.
And what I would suggest is that for liquidity purposes
they are able to hold U.S. treasury bills in whatever quantity
they would choose, that they can't exploit the subsidy with
treasury bills, because there is no spread which gives them a
rate of return. In turn, they should be limited to $100
billion, $200 billion--whatever the number might turn out to be
in the size of their aggregate portfolios.
And the reason I say that is there are certain purposes
which I can see in the holding of mortgages which might be
helpful in a number of different areas. But $900 billion for
Fannie and somewhat less, obviously, for Freddie, I don't see
the purpose of it.
And over time--I don't believe that we should have
legislation which essentially requires immediate divestiture,
but over time, several years, that should be done because these
institutions, if they continue to grow, continue to have the
low capital that they have, continue to engage in the dynamic
hedging of their portfolios, which they need to do for interest
rate risk aversion, they potentially create ever growing
potential systemic risks down the road. There is no risk now at
the moment. It is the time, therefore, to act, to do something
to fend off problems, which in my judgment seem almost
inevitable as we look forward into the remainder of this
decade.
The Chairman. The gentleman's time has expired.
The gentleman from Pennsylvania, Mr. Kanjorski?
Mr. Kanjorski. Mr. Chairman, over a number of years now, I
have been looking forward to your addressing the committee. And
I must say that I have always thought that you took a fiscally
conservative position of responsibility for the government. And
I have a few questions that I would like you to answer in terms
of whether I was mistaken or not in that conclusion.
One, am I not correct that 1983 you chaired the Social
Security commission?
Mr. Greenspan. I did.
Mr. Kanjorski. At that time, did you prepare and submit to
the Congress your recommendations as to how to solve the
problem that we are now facing, in the President's word, as a
crisis?
Mr. Greenspan. The commission did, yes.
Mr. Kanjorski. And did you see the crisis coming, or did
you see the problem, or your fix not solving this problem?
Mr. Greenspan. No, we did. We recognized that starting in
the year roughly 2010, which you must have realized was a
quarter-century later, we perceived that there would be a
significant buildup and indeed our mandate was to create over a
75-year period, through 2058, a set of receipts and potential
benefits, a tax rate, which is now the 12.25 percent rate,
which according to the actuaries of that time would have been
enough to carry us through 2058. We are still on track for that
forecast.
Mr. Kanjorski. So you would conclude that--then why is the
crisis today? What happened?
Mr. Greenspan. The crisis today is largely----
Mr. Kanjorski. You agree with the President, it is a crisis
today.
Mr. Greenspan. The word crisis depends on in what terms. We
have a very serious problem with the existing structure is what
I would stipulate. The terms of how you describe it are far
less important than defining what it is.
Mr. Kanjorski. Okay. You also mentioned in your response,
either to the Chairman or the Ranking Member, that as bad a
problem as we have with Social Security, it pales in comparison
to the immediate problem within the next 10 years of Medicare
and Medicaid.
Mr. Greenspan. It does.
Mr. Kanjorski. And I seem to remember that you came before
the committee and I asked you a question of fiscal
responsibility in July of 2003, because I was starting to get
extremely worried about the administration's policies, in every
year asking for a tax cut.
Now, am I mistaken in some way to misconstrue that the
revenues received by the United States government
overwhelmingly come from tax revenues?
Mr. Greenspan. They do.
Mr. Kanjorski. And did you realize that when you were
supporting the tax cuts of 2001, 2002 and 2003, that you were
substantially reducing the revenues of the United States
government in spite of the fact that you knew a major problem
or crisis in Social Security exists, that a major problem or
crisis in Medicare exists, and that a major problem in Medicaid
exists, and you were supporting a policy to reduce the revenues
of the United States. Is that correct?
Mr. Greenspan. Not quite, because from September 2002 going
forward, I strongly supported, and still do, the continuation
of PAYGO. Remember, it was in September----
Mr. Kanjorski. I understand PAYGO is a great concept on
budgets, but it doesn't have a hell of a lot to do with
revenue. Taxes have to deal with revenue. Do you support----
Mr. Greenspan. But, Congressman, you are asking me--let me
finish my sentence. I supported the tax cuts that I felt was a
very important--and I still do--element in expanding the
revenue base of this economy for growth. I stipulated that my
support was in the context of a PAYGO rule, which I supported,
which had been allowed to lapse at that point.
So if I were voting, but I don't vote, I would have voted
to take other actions to offset that because I thought that
that type of tax cut was important.
Mr. Kanjorski. Mr. Chairman, it is also this President's
policy to ask this Congress to make permanent the three
previous tax cuts of his first 3 years in office, which will
continue to reduce revenues of the United States ad infinitum.
Do you support making permanent all the taxes that have been
cut thus far, and make those permanent in nature?
Mr. Greenspan. I can't say all of them. I still support the
partial elimination of the double taxation of dividends, but in
the context of a full PAYGO system, which I trust the Congress
will initiate.
The Chairman. The gentleman's time has expired.
The gentleman from the first state?
Mr. Castle. Thank you, Mr. Chairman.
Chairman Greenspan, actually I have enjoyed the Social
Security discussion a great deal. And I want to change subjects
here a little bit and talk about one of the other two great
problems, Medicare being one. But the other is Medicaid. I did
a little research. And there are 50 million people on Medicaid,
in some way or other, versus 47 million who are receiving
Social Security right now. And their total cost, and as we all
know it is part state, part federal, more federal than state,
today is about $300 billion. I think we pay out about $471
billion in Social Security.
So you are talking about a program which isn't that much
less in terms of its overall economic aspects and individual
aspects than Social Security.
But I have also learned that about two-thirds, actually
more than two-thirds, about 69 percent of Medicaid doesn't pay
for the medical bills of the poor, but it pays for long-term
care of the disabled and the seniors, the disabled being even
more than the seniors.
You indicated earlier in your testimony that I think it was
30 million people over the next 25 years are going to retire.
We know that a percentage of those people at some point become
impoverished, either intentionally or unintentionally, and they
go into the long-term Medicaid program, which costs upwards of
$25,000-plus per year.
I don't have the growth rate this year; I didn't have a
chance to get that. But the growth rate of Medicaid
expenditures is tremendous.
The President and Secretary Leavitt have indicated that
they would like to have flexibility, and maybe there is an
assumption because they proposed it before that the President
has at least some sort of cap on how much would go into
Medicaid if the governors would accept flexibility.
The governors rejected that 2 years ago, out of hand. They
don't seem to be much more receptive to it this year. They have
a meeting in a couple weeks and I suppose they will take it up
again.
But to me, this is just a tremendous economic problem in
terms of the issues that you worry about in this country and in
terms of where we are going with effect to economic security
and balancing our budgets. And it is something that frankly I
don't think is discussed enough. If you could, I would love to
have you allay my concerns. If you can't, any suggestions you
have along these lines or even disagreement with what I just
indicated of how great a problem it is, I would encourage
speaking about as well.
Mr. Greenspan. Well, Congressman, I would say it is part of
the broad medical cost problem that is burgeoning in this
country.
As I said in the Senate yesterday, I think an important
initiative is now under way which is an endeavor to try to get
the total medical system fairly quickly into the full
information system, meaning that we not only digitalize the
whole administrative structure of medical practice, which would
have, undoubtedly, a significant cost improvement, but also to,
assuming we can get the technology involved in broad
information on all patients' history and the various different
problems each individual has being made accessible to the
appropriate parties with encryption.
What we know at this stage is that there are very diverse
procedures involved across the country for various ailments,
and the outcomes are quite different. And if you get a fully
computerized and knowledgeable system, we will have the
capability, and the medical profession will----
Mr. Castle. I don't mean to interrupt you, but my concern
is in the long-term care and the care for the disabled as much
as it is in just medical--because I agree with you completely
in terms of what you are saying, but I have a little trouble
understanding exactly how that is going to make a great
difference in the costs.
Mr. Greenspan. I was about to get to that. The issue is we
are going to eventually get to a clinical best practice, and it
involves the whole sets of procedures that are involved, which
is going to be quite different, in my judgment, from what is
done today. And I think we are going to have to build up, as
quickly as we can, the technology because I don't see how we
can make major long-term structural decisions on Medicare of
which the issue that you are raising, Congressman, is a
critical one because I am fearful if we freeze in a
``solution,'' in quotes, to all of these problems, and we find
that this clinical practice is changing fairly dramatically, we
are going to find as we have frozen in the system which won't
work.
So I can't answer your question specifically, but I will
tell you that there is not only that problem, but a long series
of other problems, which is manifested in a huge potential
expenditure outlook going forward with not only Medicare, but
Medicaid, and I must say with medical expenditures generally.
The Chairman. The gentleman's time has expired.
The gentlelady from California, Ms. Waters?
Ms. Waters. Thank you very much.
Thank you very much for being here today, Chairman
Greenspan. I have wanted to center all of my questions on
Social Security, and I do have one. But I cannot help but raise
another question, based on some of the answers you have given
already.
As I have sat here, and we have all been reminded of the
deficit that we have, the debt that this country is involved
with, the trade deficit, the problems Medicaid and Medicare. I
would think that you as a fiscal conservative would be sounding
the alarm. But you just really shook me up when you stuck to
your support for tax cuts.
Now, given that you are defending your position on tax cuts
in light of all of these problems, what evidence is there that
the revenue base of the country has expanded because of these
tax cuts?
Mr. Greenspan. Let me just say that the evidence does
indicate that the economy was significantly supported by the
tax cuts in their initial form. But that, of course, has
nothing to do with tax cuts going forward in any material way.
Ms. Waters. What is the evidence?
Mr. Greenspan. The evidence is that the economy has
stabilized fairly significantly, and the size of the so-called
recession of 2001 was the mildest in the post-World War II
period. And there is no question that tax cuts had a role in
that.
Ms. Waters. Did those tax cuts have anything to do with job
creation? Or do we have an expanding economy without job
creation?
Mr. Greenspan. The point at issue is that you don't have
jobs unless the economy is expanding.
Ms. Waters. I understand there is a contradiction in the
economy now, and that the jobs have not been created because of
these tax cuts.
Mr. Greenspan. I find no evidence that that is the case.
Let me just respond to the substance of your question.
Ms. Waters. Yes.
Mr. Greenspan. I am not in favor of tax cuts without the
issue of a PAYGO. In other words, I argued a year ago that my
support for the tax cuts is in the context of a PAYGO rule. And
looking out beyond, say, 2008, the problems we have with the
budget deficit are huge. And therefore we need very significant
changes to come to grips with those issues.
So I am not saying that we have no problems. Our problems,
in my judgment----
Ms. Waters. No, I understand that, Mr. Greenspan. But if
you are saying that tax cuts are okay as long as you understand
PAYGO--you got to pay as you go--then that certainly has not
happened with this administration. As a matter of fact, the
debt has increased, the borrowing has increased since the tax
cuts. So you must be very unhappy.
Mr. Greenspan. I am telling you that I have always
supported PAYGO. I think it has been a mistake to allow PAYGO
to lapse. I support PAYGO for both the tax side and the
spending side. And I trust that the Congress will reinstitute
it----
Ms. Waters. Okay.
Mr. Greenspan.--as expeditiously as possible.
Ms. Waters. Well, good. And let me just go to my Social
Security question.
This administration is redefining Social Security as we
know it. They say it is a crisis, and they have got young
people all riled up in this country about the fact that it
won't be there for them. And the President has rolled out with
the personal accounts aspect of this Social Security
redefinition.
What does personal accounts have to do with the solvency of
the Social Security system? Could you please explain that to us
in very simple, factual language, excluding any speculation,
and help us to understand how privatization is going to make
the system solvent?
Mr. Greenspan. The issue is one not of the President's
actual program affecting the long-term shortfall in the OASI
trust fund. It does not. I have said that before, I said it
yesterday.
Ms. Waters. I am sorry, I can't hear you.
Mr. Greenspan. I said it does not.
Ms. Waters. The private accounts do not?
Mr. Greenspan. Not in and of themselves.
What I am saying is that what we need to do is create a
system which the existing system is unable to do; namely, build
up a sufficient full funding in a reserve system.
That can only apparently be done by moving to the private
sector, because we have been utterly unable in the pay-as-you-
go system to create the necessary savings to finance the
capital investment that we are going to need for the future to
create the goods and services that retirees are going to need.
The Chairman. Gentlelady's time has expired.
The gentleman from Texas, Mr. Paul?
Dr. Paul. Thank you, Mr. Chairman.
Mr. Greenspan, yesterday you were quoted as saying it was
imperative that the Congress restore fiscal discipline. And of
course you have made that point, I think, very often over the
years.
I have tried my best to vote accordingly, but sometimes I
find myself in a lonely category.
I have found that we have a group here that is quite
willing to vote for deficits for domestic programs. Then we
have another group that is quite willing to spend for
militarism abroad. Then we have another group that likes both.
So if you look around for people who are willing to cut in
both areas, it is pretty hard to come by.
But you in the past, in answer to some of my questions,
have answered that you believe that central bankers have come
around to getting paper money to act, in many ways, just like
gold, and therefore there was less of an imperative for a gold
standard.
I haven't yet been convinced of that. Take, for instance,
the current account deficit. You know, under the gold standard
there are a lot of self-adjustments, and we certainly wouldn't
have the exchange rate distortions between the renminbi and the
dollar under a gold standard.
So I think there are a lot of shortcomings under the paper
standard with the current account deficit.
Also, although the argument is made that CPI reflects that
there is little or no inflation, if you look at the price of
bonds or if you look at the cost of medicine, if you look at
the cost of energy, there is a lot of price inflation out
there.
And also, if you look at the cost of houses, which are
skyrocketing, which then is reflected in tax increases, the
consumer is still suffering from a lot of price inflation that
we in many ways in Washington try to deny.
But I think in an effort to discipline the Congress, that
the Federal Reserve would have a role to play as well because
in many ways the Federal Reserve accommodates the spending
because you are capable of buying bonds. And when you buy our
debt that we create, you do it with credit out of thin air.
So it is that facility of the monetary system that
literally encourages or actually tells the Congress they don't
need to be disciplined because there is always this fallback
that we don't have to worry, the money is out there, money
which would not be available, obviously, under a gold standard.
I would like to quote from a famous economist that sort of
defends my position. He says, regarding almost the hysterical
antagonism toward the gold standard, ``It is one issue which
unites statists of all persuasions. Government deficit spending
under a gold standard is severely limited.
``The abandonment of the gold standard made it possible for
the welcome statists to use the banking system as a means to an
unlimited expansion of credit. They have created paper reserves
in the form of government bonds.''
Further stating, ``In the absence of the gold standard,
there is no way to protect savings from confiscation through
inflation. Deficit spending is simply a scheme for the
confiscation of wealth. Gold stands in the way of this
insidious process. It stands as a protector of property rights.
If one grasps this, one has no difficulty in understanding the
statists' antagonism toward the gold standard.''
And, of course, I am sure you recognize those words because
this is your argument.
Mr. Greenspan. I do.
Dr. Paul. And I would say that isn't it time that, if we
ever get concern about our deficit spending and we consider it
a real imperative, why shouldn't we talk about serious monetary
reform?
Do you think that the gold standard would limit spending
here in the Congress?
Mr. Greenspan. First of all, that was written 40 years ago,
and I was mistaken in part. I expected things that didn't
happen. And, nonetheless, my general view toward the type of
gold standard effect remains to this day. My forecast of what
was going to happen subsequent to that period has proved,
fortunately, wrong.
And as I have said to you in the past, we have tried to
manage the Federal Reserve over the years, really since October
1979--because, remember, up to that point we were in some very
serious inflationary trouble. Since then I think we have been
remarkably successful, in my judgment.
The Chairman. Gentleman's time has expired.
Mr. Greenspan. And while I still think that the gold
standard served us very considerably during the 19th century,
and mimicking much of what the gold standard does is what we do
today, I think in that context so far we have maintained a
stable monetary system. And I do not think that you could claim
that the central bank is facilitating the expansion of
expenditures in this country.
The Chairman. Gentleman from Vermont, Mr. Sanders?
Mr. Sanders. Thank you, Mr. Chairman.
And nice to see you again, Mr. Greenspan.
I am not going to waste a whole lot of time talking about
the so-called crisis in Social Security because there is not a
crisis. Depending on the studies that you look at, Social
Security is solvent for either 37 years or 47 years. With minor
modifications like doing away with the cap for wealthy people
so they could contribute more into the system, it will be good
for 50 or 60 years. So I don't think we have to waste a lot of
time on that particular crisis.
Let us talk about some real crises facing the American
people today. The health care system is clearly disintegrating.
We are the only country in the industrialized world without a
national health care program. We pay the highest prices in the
world for prescription drugs. We have children sleeping out on
the streets of America today.
We don't give our veterans the benefits that we promise
them. Our middle class in general is in a state of collapse,
with millions of workers working longer hours for lower wages.
There has been an increase in poverty. The gap between the rich
and the poor is growing wider, and the richest 1 percent own
more wealth than the bottom 90 percent.
Now, Mr. Greenspan, representing the CEOs of America and
the wealthiest people of America, you consistently come in here
every year and you tell us how great the economy is doing, and
you tell us how great unfettered free trade is. So that is the
crisis I want to talk about. Talk about unfettered free trade
that you have been supporting for years.
We now have a record-breaking trade deficit of $618
billion. We have a trade deficit with China alone of $160
billion, which has gone up by 30 percent in the last year.
There are economists who tell us that trade deficit is going to
go up and up and up. People who go Christmas shopping
understand that when they walk into a store virtually
everything on their shelves is made in China now.
You have the heads of large information technology
companies in America who basically are telling us, ``Hey, we
ain't going to have information technology in America, no long
white collar jobs, because in 10 or 20 years China is going to
be the information technology center of the world.''
Economists tell us we have lost millions of decent-paying
jobs. We have lost 16 percent of our manufacturing sector in
the last 4 years alone, and we are going to lose more and more
white collar jobs to China. And yet year after year people like
you come here, ``Oh, unfettered free trade, it is just great.''
Question, Mr. Greenspan: After record-breaking trade
deficits, the loss of blue collar jobs, the beginning
hemorrhaging of white collar information technology jobs, the
understanding that if we don't change things China is going to
be the economic superpower of this world in the next 15 or so
years, have you rethought your views on unfettered free trade?
Mr. Greenspan. All I can say to you, Congressman, is that
in spite of the forecasts of the economists that you are
citing, of which I can find a whole slew who will report
exactly the opposite, we have nonetheless created the highest
standard of living of the major industrial economy in this
world.
Mr. Sanders. Really?
Mr. Greenspan. We have.
Mr. Sanders. Really?
Mr. Greenspan. That is what the facts are.
The question of increasing globalization, for which the
trade deficit is a symptom, is something we should be pleased
about, not concerned about, because a considerable amount of
our real wealth creation, our real income creation for a broad
spectrum of our society, even including the problem which I
happen to agree with on the issue of undesirable increase in
wealth concentration, we still have the most prosperous nation
in the world.
Mr. Sanders. Mr. Greenspan, are you telling us that we
should see as a positive thing a record-breaking $618 billion
trade deficit and the loss of 3 million manufacturing jobs in
the last 4 years? That is a positive thing?
Mr. Greenspan. Our unemployment rate is 5.2 percent.
Mr. Sanders. But the new jobs that are being created are
low-wage jobs with minimal benefits, and we are losing our
good-paying jobs.
Mr. Greenspan. That is not factually correct, Congressman.
Mr. Sanders. Really?
Mr. Greenspan. I am sorry. That is not what the facts are.
Mr. Sanders. Well, you tell--you know, maybe, Mr.
Greenspan, one of the problems we have is you talk to CEOs, I
talk to working people. And what working people tell me is they
are losing good-paying jobs, parents are worried about the fact
they are sending their kids to college now for information
technology jobs; those jobs are going to China. You are telling
me we are creating good-paying jobs with good benefits?
Mr. Greenspan. I am telling you----
Mr. Sanders. I don't believe that.
Mr. Greenspan.----that I don't listen to the anecdotal
stuff by itself; I look at the statistics. And the statistics
tell us that we are getting job expansion fairly much across
the board----
Mr. Sanders. You are not worried about the loss of 3
million manufacturing jobs----
The Chairman. The gentleman's time has expired.
The gentlelady from Illinios, Ms. Biggert?
Mrs. Biggert. Thank you, Mr. Chairman.
Welcome, Mr. Chairman. I wanted to switch gears and go to a
subject that hasn't been talked about, and that is Basel II. I
know that the Federal Reserve has been closely involved in the
process of crafting the new Basel accord, and that the final
agreement was issued last summer.
However, the implementation has not taken place in this
country. And there is still some outstanding concerns about the
accord and its impact on the competitiveness of banks that are
not required or not capable of complying with the agreement.
What is the Federal Reserve doing to ensure that the banks
that are not required to comply with the accord are not put at
a disadvantage via the banks that are required to comply?
Mr. Greenspan. Well, Congresswoman, remember that there is
still a long way to go before we get actual implementation of
Basel II. We are doing a considerable amount of research to
determine various areas where certain parts of our banking
system may turn out to be competitively disadvantaged,
inappropriately.
And as a consequence of that, where it is desirable and
purposeful and studies show that, after a considerable amount
of forward analysis on the competitive position, we will make
adjustments as we proceed, as necessary.
Mrs. Biggert. Well, I know that there hasn't been any
significant change to the operational risk.
Mr. Greenspan. Well, the operational risk issue is one in
which we are stipulating that individual banks make their own
judgments about what the risks are. That operational risks
exist is a critical issue. They do exist.
Mrs. Biggert. What about the liability? I think that our
U.S. tort law or liability laws are significantly more onerous
than those in the E.U. or in Asia.
Mr. Greenspan. You are quite right. To the extent that our
tort laws are more onerous than others, it is an objective
increased risk. In other words, our purpose is to appropriately
manage risk. And if in our society we choose to construct a
certain type of tort system which has positive values, or we
wouldn't have it. It also has negative values. And the negative
values is that it does increase certain types of bank risk. And
I think we have to recognize that fact. It is a fact. We can't
believe it doesn't exist; we can't do it.
Mrs. Biggert. In order to assess the regulatory capital for
a global bank, regulators in multiple countries will need to
agree on the methodology and assumptions for the models that
are going to be used to calculate the capital cover in
subsidiaries. What is the Federal Reserve's position on the
relative roles of the home and the host supervisors in
implementing the new capital framework?
Mr. Greenspan. There is actually a committee in Basel, a
subcommittee of the Basel Committee on Supervision and
Regulation, which is trying to coordinate this very critical
issue. From our point of view, for example, because of the
extraordinary complexity of a lot of stuff, we are going to
have to depend, in many cases, on the supervisory actions on
the part of home regulators. That doesn't mean that we don't
operate in it.
But what we are trying to do is to make the transition as
smooth as possible, so that who has authority, the host
regulator or the home regulator, is clearly defined and that it
is done so in a way which implements the particular Basel II
regulations most effectively.
Mrs. Biggert. And then let me just thank you for the work
that you have done on financial literacy. I know that you have
appeared before the commission and the Federal Reserve is
working on that.
We formed a caucus in the House to really address financial
literacy and to get out the word on that, too. Representative
Hinojosa and I have just started this. And I think we all need
to work together to make sure that our young people and adults
are going to be able to live a successful life, without
financial ruin.
Mr. Greenspan. That is a very important endeavor.
Mrs. Biggert. Thank you.
The Chairman. The gentlelady's time has expired.
And let me commend the gentlelady from Illinois and the
gentleman from Texas on their work toward that caucus. It is
extremely important, in financial literacy, and I know the
Chairman appreciates that as well.
The gentlemen from Illinois, Mr. Gutierrez?
Mr. Gutierrez. Thank you very much.
Welcome, Chairman Greenspan.
Tuesday's New York Times indicated that one of the most
important factors in maintaining the solvency of the Social
Security system is the number of immigrants who are allowed to
enter the country legally.
An immigration report authored by a former INS official
under President Bush and based on an analysis of data provided
by the Social Security Administration concludes that if legal
immigration rises by one-third over the next 75 years, the
result will be a 10 percent reduction in the Social Security
deficit.
However if the number of immigrants declines by one-third,
the retirement system shortfall will worsen by the same 10
percent.
The immigration report found that at the present pace new
workers entering the United States, that is the pace of new
immigrants legally entering our workforce, will contribute $611
billion in 2005 dollars over the next 75 years.
Chairman Greenspan, according to these data, doesn't it
make sense that we should reform our immigration system to
allow for a regulated, legal flow of workers to come here,
build jobs, improve our economy, and strengthen Social
Security, so that we can keep the promise we make to our
seniors?
And I say that also, but I would like you to think about it
in terms of the George Bush Department of Labor says that we
will create over the next decade 6 million new low-wage, low-
skill, very little training needed for jobs. Over the next 10
years we are going to create these jobs according to that.
And given the fact we have eight, nine, 10, depending on
who you want to listen to, undocumented workers--workers, I
mean people who are actually working in our economy, do you not
think it would be appropriate that we take a look at our
immigration policy vis-a-vis our economy and specifically our
Social Security issue that we presently are addressing?
Mr. Greenspan. Congressman, as I have said before, I am
always supportive of expanding our immigration policies. I
think that immigration has been very important to the success
of this country, and I fully support it.
I am not sure I would want to give the reason that we are
creating immigration to support our Social Security system. I
think we ought to do it on the grounds that it is good for the
country, but not because it helps the Social Security fund,
because that then suggests that we find other means to solve
the Social Security problem, that we shouldn't be expanding
immigration. And I would not support that.
So I would say I support the general issue of increased
immigration, but I hope we don't do it for that particular
reason.
Mr. Gutierrez. And that isn't why. And so I share that with
you, Chairman.
Unfortunately, the Congress is not made up of such
enlightened 435 people such as yourself. Would it be, I would
not have to ask this question, we could just look at. The fact
is that we have a Social Security problem. We know that they
enter.
And I guess my question to you is I want to reach that goal
that you and I share, that is that immigrants are good for this
country. They are good economically, they are good for the
United States, and all of the other reasons. I want to reach
that goal. Therefore, I have to change the immigration policy
of this nation.
In order to change the immigration policy of this nation,
because not everyone shares our perspective on immigrants, I
have to find new reasons.
So I guess my question to you is, just so that I can say
that even the Chairman Greenspan indicates, is it not true that
we would add money to our Social Security, given their young
age, and would that not help the solvency of Social Security,
understanding that that should not be our principal reason for
doing it?
Mr. Greenspan. You are asking a statistical question. Your
numbers, as best I can judge, are accurate.
Mr. Gutierrez. Thank you.
Secondly, Congresswoman Kelly and I passed legislation
designed to prevent bank examiners from taking a job with a
bank they oversaw immediately following that supervision. We
did that in the last session.
During our consideration of that legislation, the Office of
Government Ethics brought to our attention that most of the
criminal conflict of interest statutes, 18 USC Sections 203,
205, 207 and 209, that cover all federal employees, do not in
fact apply to employees of the Federal Reserve Banks.
For example, 207 prohibits senior employees from
representing a foreign government for 1 year after leaving the
U.S. government or representing any party on whose matter they
substantially and personally participated in while at their
government post. Violation of the statute carries criminal
penalties for every federal government employee, including
employees of the Federal Reserve Board, but not employees of
the Federal Reserve Banks.
I think this is a loophole that should be closed and bring
the employees of the FRB Banks under the same laws that apply
to every other government employee. Would you agree?
The Chairman. The gentleman's time has expired.
Mr. Gutierrez. He can answer the question.
Mr. Greenspan. I will have to--remember that the
supervisory authority of the Federal Reserve Banks comes from
the Federal Reserve Board. In other words, we at the board have
authority under law.
But let me respond to your question a little bit more fully
in writing, because I have to go back and look at the statute
to be sure I can respond appropriately.
Mr. Gutierrez. That is fair.
Thank you very much, Mr. Chairman.
The Chairman. The gentleman from New Jersey, Mr. Garrett?
Mr. Garrett. Good morning, or almost afternoon. And I
appreciate the opportunity to address some questions to you.
And the issue of Social Security obviously has been pretty
well exhausted, I would assume. And I tried to think before I
came out here, is there any other question on Social Security
that you have not been asked today or previously while you were
on the Hill.
Maybe I should put it that way: Is there any question that
no one has asked you yet with regard to Social Security that I
can go back and say I got the last question on Social Security?
Mr. Greenspan. Congressman, I am sure there is, but I can't
think of it.
Mr. Garrett. Then I feel good, that we are on the same--at
least on that aspect we are on the same level.
The question with regard to GSEs was brought a little
earlier ago by the Chairman. And just three quick areas that if
you could touch on.
You began to touch on the aspect, as far as the problems,
as far as the almost trillion dollars in outstanding debt, and
you basically focused your talk at that point as far as the
regulatory aspect and the need for caps and the regulation
aspect of it.
Could you, first of all, maybe just elaborate a little bit
on the aspect of if we do nothing on that area what the impact
is on the overall market and the economy?
Mr. Greenspan. You mean if we do nothing in the GSE areas?
Mr. Garrett. Yes, right.
Mr. Greenspan. The GSEs have a subsidy granted, not by law,
but by the marketplace, which therefore gives them unlimited
access to capital below the normal competitive rates.
And that therefore, given no limits on what they can put in
their portfolios, they can, by merely their initiative, create
an ever larger increasing portfolio, which given the low levels
of capital, means they have to engage in very significant
dynamic hedging to hedge interest rate risks.
If you get large enough in that type of context and
something goes wrong, then we have a very serious problem
because the existing conservatorship does not create the funds
which would be needed to keep the institutions growing in the
event of default, which is what the conservatorship is supposed
to be and we have no obvious stabilizing force within the
marketplace.
So I think that going forward, enabling these institutions
to increase in size, and they will once the crisis in their
judgment passes. They stopped increasing temporarily.
We are placing the total financial system of the future at
a substantial risk. Fortunately, at this stage, the risk is,
the best I can judge, virtually negligible. I don't believe
that will be the case if we continue to expand in this system.
Mr. Garrett. That raises the side question then, as you
allude to, that, I guess the way I am thinking about it is
potentially in the area for the housing market maybe we are--
that proverbial bubble that is out there, that they say could
someday be down the road that eventually collapses. Could you
just touch on that as far as how that would impact on it and
where we are going as far as the slight increases that we see
in interest rates? Are we getting to that proverbial bubble
then, that is potentially out there in the housing market?
Mr. Greenspan. I think we are running into certain problems
in certain localized areas. We do have characteristics of
bubbles in certain areas but not, as best I can judge,
nationwide.
And I don't expect that we will run into anything
resembling a collapsing bubble. I do believe that it is
conceivable that we will get some reduction in overall prices,
as we have had in the past, but that is not a particular
problem.
Remember that there is a very significant buffer in home
equity at this stage because with most of mortgages being of
conforming type with a 20 percent down payment, and even when
it is less, prices since the homes were bought have gone up on
average very considerably, so we have a fairly large buffer
against price declines and therefore difficulties which would
emerge with homeowners.
Mr. Garrett. The bubble is about to burst as soon as I buy
my house down here in the Washington, D.C., area. I assume it
is going to--that is when the market price will start going
down again.
But going back to the GSEs. Assuming we take some action
with regard to the regulatory nature of them, along the lines
that have been suggested, is there some other method that we
could also be looking into, a more efficient way to finance
mortgages back into the private sector, to open up the private
sector to allow them to have a more, if you will, competitive
on a same playing field, that they can compete with the GSEs
and open up that market so that they--if we are not just purely
through the regulatory climate, we are actually allowing them
to bring down that effect as well.
Mr. Greenspan. I think part of the issue is that the GSEs,
as I understand it, essentially define what the issue
constitutes conforming loans is. And indeed with their subsidy,
they had very significant capability of competitive advantage.
It ought to, in my judgment at least, be made clear within
a regulatory structure, which you are about to set up, I trust,
that some definition of what constitutes conforming and non-
conforming is made fairly clear and an awareness of the fact
that we have a viable, a burgeoning market in securitization in
non-conforming loans, so that there is a lot of potential
competition out there, all of which would be very helpful, in
my judgment, to maintain what is really quite a world-class
mortgage market in this country.
Mr. Garrett. Thank you very much.
The Chairman. The gentleman's time has expired.
The gentleman from New York, Mr. Ackerman?
Mr. Ackerman. Thank you very much, Mr. Chairman.
Mr. Chairman, I think I learned today that you are
basically unflappable.
I would like to learn a little bit about what you are
advising us on the tax cuts. You said that you were in favor of
making the tax cuts permanent as long as the Congress invokes
the pay-as-you-go or PAYGO rule. Is that----
Mr. Greenspan. That is correct, Congressman.
Mr. Ackerman. That means, as I understand it, that we have
to have spending cuts in the amount of the tax cuts. Isn't that
what means?
Mr. Greenspan. Spending cuts or increases in other taxes.
Mr. Ackerman. So you would make the tax cuts permanent only
if we have increases in taxes or spending cuts.
Mr. Greenspan. I am basically saying that all such measures
in my judgment should pass through the prism of PAYGO. In other
words, we have very serious----
Mr. Ackerman. But we have to have cuts to make up for the
loss in revenue.
Mr. Greenspan. I think so. If we look forward into the
post-2008 era, we have to make some very major changes to
constrain uncontrollable increases in the unified budget
deficit. So I think that there are going to have to be
extraordinary actions on the part of this Congress.
Mr. Ackerman. I am sorry. That is a pretty big test. So you
are saying that if we the Congress don't make the offsetting
expenditure cuts, that you would not be in favor of making the
tax cuts permanent?
Mr. Greenspan. Well, I am not in the position to make that
judgment. I am just merely stipulating that I think that
specifically the tax cuts in reference to the elimination of
the partial double taxation of dividends is important to
economic growth, and I am basically saying that that is
something we should do. But the overriding consideration is to
make certain that our deficits don't run away because that will
destabilize the whole system.
Mr. Ackerman. So things have to balance is what you are
saying.
Mr. Greenspan. Correct.
Mr. Frank. Will the gentleman yield?
Mr. Ackerman. If I can just finish my thought, Mr.
Chairman.
So if things have to balance, that means in order to make
the tax cuts permanent, we have to cut things such as
agriculture and CDBG and other things, and then find other
taxes to increase in order to offset the tax cuts that we made
permanent otherwise things wouldn't balance. I don't know where
else you would come up with balances. You have to increase
other things and decrease other things and come up----
Mr. Greenspan. That is correct. No, that is what PAYGO is
supposed to do.
Mr. Ackerman. So, Chairman Greenspan, it is safe for me to
say, opposes making the President's proposed tax cuts permanent
unless they go along with increases in other taxes and cutting
expenditures that we now have in other programs.
Mr. Greenspan. I am not in the position to say yes or no to
anybody's proposal. I merely just----
Mr. Ackerman. Okay. I will take out the specifics in
agriculture and CDBG.
Mr. Greenspan. I am basically stipulating that I think
that, one, those tax cuts should go forward, and that we should
make the changes similar to the changes you are suggesting.
Mr. Ackerman. Okay. I just want to understand this clearly.
Chairman Greenspan is saying that he opposes making the
President's proposed tax cuts permanent----
Mr. Greenspan. Congressman, I think I have spoken for
myself in this regard. Your choice of words----
Mr. Ackerman. Yes, but I am trying to--I am speaking for
myself, and I don't--I am trying to understand this.
Mr. Greenspan. No, I am trying to say that I am making two
propositions here.
Mr. Ackerman. I understand you don't want to say you are
opposed to anything the President has said. So maybe I should
phrase it differently so you don't have to say it that way.
Mr. Greenspan. No, I don't want to say I am opposed,
because I am not. I want very much for both the tax cuts--that
tax cut to be in place and the PAYGO changes to be made. I
don't know how else to say it.
Mr. Ackerman. In order for that tax cut to comply with
PAYGO, the changes to be made have to be one or the other or a
combination of other taxes or reducing expenditures. Otherwise
that doesn't comply with PAYGO, and Chairman Greenspan would
not support unless it complies with PAYGO, which is what you
said at the beginning.
Mr. Greenspan. That is what I said, yes.
The Chairman. Gentleman's time has expired.
Mr. Ackerman. Thank you very much.
The Chairman. Gentlelady from New York, Ms. Kelly?
Mrs. Kelly. Thank you, Mr. Chairman.
Chairman Greenspan, after 9/11 this committee passed the
Terrorism Risk Insurance Act to backstop our insurance industry
and allow business development to move forward in this country.
For an administrative cost of only $31 million a year, TRIA
has provided hundreds of billions of dollars worth of new jobs
and investment in our country.
Unfortunately, real estate investment in this country could
eventually come to a halt if TRIA is not reauthorized.
This Congress must act or TRIA will expire, forcing
millions of Americans to choose between not doing business or
losing insurance coverage against terrorism.
Either way, our economy would suffer and terrorism would
win a big psychological battle without even firing a shot.
Some members of this House say that TRIA is unnecessary and
believe that, without evidence, that private reinsurance is
available to cover policies against terrorism.
I asked you a question about that, and in my response to
that question I have a letter that you wrote to me on September
16th, 2004, and I quote from that letter:
``Even with TRIA, reinsurance appears to be virtually
nonexistent for catastrophic damages from nuclear, biological,
chemical and radiologic attacks. These examples suggest that
while there would be likely some coverage available in the
absence of TRIA, the private market for terrorism insurance
would still be quite limited.''
And I am quoting from your letter. Do you have conclusive
evidence that a robust private market for terrorism reinsurance
exists in this country separated from TRIA at this time?
Mr. Greenspan. Not to my knowledge, Congresswoman.
This is a very difficult issue, because remember that
private markets work exceptionally efficiently in a civilized
society in which domestic violence or violence coming from
abroad is not a central factor.
You cannot have a voluntary market system and the creation
of markets, especially insurance markets, in a society subject
to unanticipated violence. And as a consequence, there are
certain types of costs, which is what we have the Defense
Department protecting us from, which we essentially choose to
socialize.
The less of that we have, the better off our society is.
There are, nonetheless, regrettable instances in which markets
do not work. And while I think you can get some semblance of
terrorism insurance, I have not been persuaded that this market
works terribly well.
Although I will tell you, numbers of economists and people
whom I respect highly, don't agree with what I just told you.
They think the markets can be made to work. I have yet to be
convinced.
Mrs. Kelly. The GAO also released a report last year
indicating that a functioning market for terrorism insurance
would not exist if TRIA were allowed to expire.
You further stated to me in this letter that if an
efficient pricing mechanism for terrorism risk did not exist--
and I am quoting you here--``some level of federal involvement
in terrorism insurance may continue to be warranted.''
Without a functioning private market for terrorism
insurance in the absence of TRIA, do you think government can
replace market signals as an arbiter of terrorism insurance
prices?
Mr. Greenspan. I don't think so.
Mrs. Kelly. Thank you, sir.
Yield back.
Ms. Pryce. [Presiding.] Recognize Mel Watt.
Mr. Watt. Thank you, Madam Chair.
Secretary Greenspan, I am over here, in case you are
looking for me.
Mr. Greenspan. I was. Good to see you, Congressman.
Mr. Watt. Good to see you.
I am going to try to understate this because if I said it
as aggressively as I feel it, I suspect I would insult you and
some other people. So I am just going to make a one-sentence
statement about it, and then I am going to move on and ask you
a question about something else, not designed to evoke a
response.
I would have to say that when I hear you, when I hear the
President use as a major justification for this Social Security
reform plan that he is trying to look out for black folk, and
when I hear you use as a major justification for private
accounts that you are somehow trying to look out for poor
people, it makes me nauseous.
I am going to leave that alone and move on. If I said it--
if I dwelled on that, I would probably throw up.
I am moving on, Secretary Greenspan, because I don't--I
mean, I have no interest in getting into a public dispute. I
won't be able to restrain myself on that issue. So the best
thing I can do on it is move on.
Let me ask a question. You made reference to full funding
of Social Security requiring $10 trillion. And I believe you
said that there is $1.5 trillion or will be at some point in
the trust account.
Mr. Greenspan. There is as of now, as best I--roughly that.
Mr. Watt. Okay. Am I clear that the reason there is only
$1.5 trillion in the trust account is that substantial amounts
have been borrowed from the trust account and that, in addition
to the $1.5 trillion that is there a substantial amount of
notes that are due?
Mr. Greenspan. No, actually the $1.5 trillion is actually a
cumulative difference between receipts, namely, the Social
Security taxes, plus interest, minus the cumulative dividend.
So it is actually real savings.
Mr. Watt. I am asking you whether there are substantial
amounts due from bonds, government-backed securities, into the
Social Security trust fund in addition to the $1.5 trillion.
That is the question I am asking.
Mr. Greenspan. There are no additional assets. Is that what
you are referring to?
Mr. Watt. Well, does the federal government owe the trust
fund any money?
Mr. Greenspan. Not to my knowledge.
Mr. Watt. So that is just a myth. Has the federal
government borrowed money out of the Social Security trust
fund?
Mr. Greenspan. Well, remember that what is involved here is
that the----
Mr. Watt. I think that would require either a yes or no
answer. Has the federal government borrowed money from the
Social Security trust fund or hasn't it?
Mr. Greenspan. No.
Mr. Watt. Okay. All right. Then explain why that is not the
case.
Mr. Greenspan. Basically, what the Social Security trust
fund does is it invests in U.S. treasury issues.
I think the question you are raising is a different issue
as to whether in fact that particular fund is segregated and
allowed to actually increase national savings.
Mr. Watt. No, I am not asking that question at all, Mr.
Greenspan. I am asking, does the $1.5 trillion include the
amount that the trust has invested in government-backed
securities?
Mr. Greenspan. That is it. It is $1.5 trillion in U.S.
treasury special notes.
Mr. Watt. Okay. All right. Well, that was the only question
I was trying to get to.
What----
Ms. Pryce. The gentleman's time has just expired.
Mr. Watt. Thank you.
Ms. Pryce. The gentleman from Kentucky, Mr. Davis?
Mr. Davis of Kentucky. Thank you, Madam Chair.
Chairman Greenspan, I appreciated very much your remarks
this morning on the importance of greatly increasing our
national productivity over the long term.
I spent my professional life in the manufacturing sector.
Many of the members on the committee, in fact, represent
districts that depend on competitive manufacturing and a global
economy to sustain our communities.
I was wondering if you could make a comment, from a
strategic perspective. You have seen in your distinguished
career a great ebb and flow in our international
competitiveness, changes in adaptation that we have had to make
in various regions of the country to compete, especially with
Asia.
I was wondering if you would share with us the points that
you feel are most important from a strategic policy standpoint
to assure that we have strong, competitive, and adaptive
manufacturing in the future.
Mr. Greenspan. Congressman, I think that one of the key
aspects of the American economy is its increasing integration
into a global system. Barriers to cross-border trade are coming
down all over the place.
The issue of communications has shrunk the distance that is
involved. I should say communication plus transportation has
shrunk the distance between peoples around the globe.
And what we are finding is, in the same context that say
150 years ago, we gradually in this country developed--went
from local markets to national markets--is that we are going
from national markets now to global markets. And we are
exceptionally competitive in that regard in the sense that of
all the industrial nations in the world, few have gained from
globalization as much as we.
The reason for that is we have an exceptionally flexible
economic system. We have had bipartisan deregulation since the
1970s of a whole series of different industries. The
information technology has created an incredible capability to
develop new financial instruments and to develop basically the
types of things which enable a system to adjust around the
world.
And I think the major focus that we have to maintain is,
one, to keep that degree of resilience and flexibility, which
means eschew issues of protectionism, regulation, and anything
which rigidifies the market's adjustments process which has
served us so well in the last decade or so.
Mr. Davis of Kentucky. Just as a follow-on, how would you
adjust current trade policy to continue to strengthen
international exports in manufacturing?
Mr. Greenspan. I think that we do that by essentially being
competitive, in that we develop skills that create goods and
services which customers and the rest of the world want. And we
have tended to do that.
The issue of the very large trade and current account
deficits we have developed or created is largely because
globalization has increased. We used to have, and indeed still
have, very significant balance of payments deficits between
states in this country. In and of itself, it is not a problem
in that if it is done in a market system they self adjust, as
ours do all the time. We don't know what our current account
balances are between say, New Mexico and Arizona, or any of the
states.
There have been occasions when there have probably been
severe imbalances. But they correct, and they correct basically
because we have a flexible system which enables markets to
adjust.
Mr. Davis of Kentucky. Thank you, Chairman Greenspan.
I yield back my time.
Ms. Pryce. All right.
The Chair would like to put members on notice that there is
going to be a series of votes at about 12:30 that should last
about an hour. So anyone who cares to keep their questioning
short so more of us can have at the Chairman, that would be
great. But because the votes will last about an hour, we will
adjourn the hearing at the time the votes are called.
And the chair now recognizes Mr. Meeks.
Mr. Meeks. Thank you.
Thank you, Mr. Chair. I am really somewhat puzzled from
some of the answers that I have heard today. Let me just see if
I can clear up my own mind.
The first question that I have is, I know the President has
described it as a crisis, et cetera, but I don't think I have
ever heard what your opinion is. The question on Social
Security is it or is it not, in your opinion, a crisis?
Mr. Greenspan. It depends on the----
Mr. Meeks. Yes or no. Is it a crisis or is it not?
Mr. Greenspan. Let me be very specific. You have not heard
me use that word this morning.
Mr. Meeks. That is correct, and that is what I am trying to
find out from you whether in your opinion----
Mr. Greenspan. I did not use it----
Mr. Meeks.----it is or is not a crisis.
Mr. Greenspan. I did not use it yesterday in the Senate. I
consider the problem a very serious one, one that has to be
addressed, in my judgment, quite soon, and certainly to be in
place well before the 2008 leading edge of the baby boom
generation retiring.
Mr. Meeks. So I take that to say, as we sit here today, not
2008, but as we sit here in 2005, that it is not a crisis. It
could be a crisis. It may sometime in the future, but as we sit
here today, it is not a crisis in your humble opinion?
Mr. Greenspan. Well, I don't use the word ``crisis''
because I think the same--defining what it is very specifically
describes what it is. I think it is a very serious issue. It
depends on the way you use the word crisis. I have not chosen
to use that word. Others might.
Mr. Meeks. What about Medicare? Is that a crisis?
Mr. Greenspan. It is a very serious problem. I mean, again,
it has got the same characteristics. And I would not use the
word crisis because I don't think that that properly identifies
what the nature of the problem is.
Crisis to me usually refers to something which is going to
happen tomorrow or is on the edge of going into a very serious
change. That is not going to happen in either Social Security
or Medicare over the next several years.
Mr. Meeks. I don't want to get into this privatization
stuff either, but let me--Social Security. But let me ask
another question then. You know, it seems as though that some
say, and I have heard you say, and I believe I heard you say it
today, that you believe in these private accounts, that that is
a good thing, the private accounts.
Mr. Greenspan. I do.
Mr. Meeks. Okay.
And I have also--I think I heard you say, in reference to
Mr. Watt's, one of his questions, that the $1.5 trillion, et
cetera, we have not taken it out; the feds haven't borrowed the
money. Is that correct?
Mr. Greenspan. That is correct.
Mr. Meeks. All right.
Now, so therefore, when you talk about this solvency
problem, it is talking about, in the end, the money that is
coming in is not going to be sufficient, but the privacy
accounts, allegedly, you are supposed to get a better return on
your money as a result, so that is supposed to help. Is that
correct, when you have these privacy accounts?
Mr. Greenspan. I have not stipulated that increased rates
of return are a significant issue in this debate. What I think,
it is a question of what type of facility more easily
facilitates the type of full funding of these types of programs
that we need if we are going to get the savings to create the
investment which is going to create the goods and services.
This is not a financial question. This has got to do with,
how do we create an adequate amount of real resources for the
retirees and the working-age population in 25 years.
Mr. Meeks. My question then, and then I will just try to
yield so more of my colleagues have a chance to ask a question,
if the securities market--and I guess people are making it up
to be so great--why don't we then, would you recommend, why
don't we invest a portion of the trust fund in the market
itself and eliminate the individual risk? Why do you have to
put the individual at risk? Why don't we just put the money in
the trust fund in and eliminate the individual risk?
Mr. Greenspan. I am sorry, you mean have the Social
Security trust fund invest in----
Mr. Meeks. In securities.
Mr. Greenspan. You could do that, but that still doesn't
give it--you still need $10 trillion, not $1.5 trillion. That
doesn't solve the funding problem.
Mr. Meeks. So basically the proposal that I am hearing from
the President then, I think we all agree, has nothing to do
with the solvency problem, because if you invest the money in
these private accounts on an individual basis, it is the same
as if you were to have done it within the trust fund, and you
don't resolve the solvency problem. So the crises that claims,
or the problem that you claim will not go away based upon these
private accounts. Is that correct?
Mr. Greenspan. The issue is not a solvency question, it is
getting adequate amount of savings in the trust fund to finance
investment. It is a full funding problem, not a solvency
problem.
Ms. Pryce. The gentleman's time has expired.
The gentleman from Georgia, Mr. Price, is recognized for 5
minutes.
Mr. Price. Thank you, Madam Chair. I appreciate that.
It is an honor to be a part of this committee, and it is
indeed a privilege to personally witness your wisdom. And I
commend you for your dexterity and your persistence in your
answers to many of the questions that have come to you today.
I have a comment and then a couple of questions.
I am so pleased to hear you in your written testimony and
in your spoken testimony identify 2008 as the pivotal date as
it relates to the Social Security issue, for two ones.
One, as you appropriately identified, that is when the baby
boomers begin to retire.
The second reason that I believe that needs to be pointed
out, and that is that on the wonderful graph of the incoming
money as it relates to FICA and when we begin to dip, that is
the top of that crest. And then we begin to go down where there
is money going out than coming in. So I commend you for that.
And I don't care whether you call it a crisis or a near
crisis or a looming crisis, as President Clinton called it in
1998, a rose is a rose is a rose. I think the important issue
is that you said clearly, ``There is a call for action before
the leading edge of the baby boomer retirement becomes evident
in 2008,'' and that is within 3 years.
My question relates to our savings rate as a nation. And it
is my understanding that the household savings rate is low as
it relates to our history as a nation, and also as it relates
to other industrialized nations.
And so I would ask you what your thoughts are on anything
that we might do in terms of policy that would positively and
significantly affect our savings rate as a nation.
Mr. Greenspan. It is one of the most difficult problems
government has had, Congressman, in trying to address this
particular question. And the reason is that it is not just a
question, as we tend to do, create vehicles to save, such as
401(k)s or IRAs or the like, because what we really have to do
is to get people to consume less of their income, because that
is what savings is. If you don't consume less of your income
and you are building up a 401(k), it is essentially saying that
you just drew the funds from other forms of savings and you did
not increase your aggregate amount of savings.
So the issue really gets down to the question of how do you
increase income relative to consumption. And that is not very
easy for government to address per se. What we can do is find
measures which will augment the growth rate in the economy,
create incentives for growth and the like.
But unless you impose some things such as a consumption
tax, which economists have argued for, which I suspect has very
little support in the Congress, it is difficult to see how you
come to grips directly with that issue.
I might add that the consumption tax issue arose
essentially because there does not seem to be any other way to
directly get at this issue. My suspicion is that the 1 percent
savings rate, which is what it has been for the last year, is
probably going to be the low point, and we will start to rise
from here. But that has been my expectation for a number of
years, and I can't honestly wish to guarantee it, because it is
a very tricky issue to forecast.
The bottom line, Congressman, is I really can't suggest
anything which is significant, practical and usable to address
this subject and just hope it cures itself, sooner rather than
later.
Mr. Price. I appreciate your response, and I am so pleased
to hear you talk about the consumption tax, because, as you
identified, you have got to have increased income in order--
relative to consumption. If the money never gets to your back
pocket, it isn't income.
So if I heard you correctly, I understood you to say that,
if we were to be able to move to a consumption tax, to a
national retail sales tax, that that would in fact have a
byproduct of increasing national savings as you increase the
amount of money in individual's pocket.
Mr. Greenspan. I would certainly think so, because what you
are doing is you are taxing consumption, not income, and as a
consequence, as people like to say, if you tax it, you will get
less of it. And I think that is probably right.
Mr. Price. Thank you, Mr. Chairman.
I yield back.
Ms. Pryce. Mr. Moore of Kansas?
Mr. Moore of Kansas. Thank you, Madam Chair.
Mr. Chairman, when you talked about the $1.5 trillion in
the so-called Social Security trust fund, I think you used the
words, ``special security notes,'' or words to that effect. So
the fact is, we don't have $1.5 trillion in the fund itself, we
have special security notes, correct?
Mr. Greenspan. That is correct. The point I am making is,
you do have $1.5 trillion of cumulative savings in the
national--in other words, it is contributed cumulative, $1.5
trillion, to savings which is part of national savings.
Mr. Moore of Kansas. All right. Is this a marketable
special note or fund?
Mr. Greenspan. No, it is not. It is not marketable. And it
gets converted to a marketable security when Treasury needs to
raise funds to pay benefits.
Mr. Moore of Kansas. So at some point this is an
obligation, and the full faith and credit of the United States
government's behind this, and at some point in the future funds
will have to be raised to redeem that, correct?
Mr. Greenspan. That is correct.
Mr. Moore of Kansas. Okay. I think there is a lot of maybe
misinformation or lack of information in the general public
about what actually Social Security is. It is a partial
retirement fund, as well as a survivors benefit and a
disability benefit. Is that correct, sir?
Mr. Greenspan. OASI is separate from the disability fund,
but the answer is, you are quite correct.
Mr. Moore of Kansas. But I think there is misinformation
and again lack of information about the fact that about a
third, or 30 percent of funds that are paid out to Social
Security recipients go for survivors and disability and not
just retirement or old age. Is that also your understanding?
Mr. Greenspan. That is correct. There are disability
payments implicit in the OASI fund which relate to disabled
children or survivors----
Mr. Moore of Kansas. Right.
Mr. Greenspan. But there is also, of course, an additional
fund, which is the disability insurance fund, which is for
disability solely.
Mr. Moore of Kansas. And I have heard your statements, Mr.
Chairman, about the President's proposal for partial private
accounts, and you have said generally you support those. And I
am a little confused, because I heard you say that--I think,
correct me if I am wrong, I think that I read that you said
that if we had to borrow $2 trillion you wouldn't be supportive
of something like that; if we had to borrow $1 trillion, you
might support that. Is that correct, sir?
Mr. Greenspan. I said that because of the difficulty of
making judgments as to how markets would behave when you are
moving funds out of the U.S. treasury into a private account,
even though it is forced savings--meaning, you can't do
anything with it--and from a technical point you have not
changed the national savings rate, have not changed the balance
of supply and demand of securities, and have not therefore
presumably affected the price level of bonds, there is still
the issue of how that is perceived by the marketplace, which is
not all that easy to make a judgment on.
My general concern is that if we knew for sure that the
contingent liabilities that now exist are viewed in the private
marketplace as similar to the real debt of the federal
government, then technically moving funds in a carve-out of the
way that the President is talking about would have no effect on
interest rates, no effect, indeed, which would then be an
accounting system which would be based on accrued receipts.
The problem is caused by the fact that we are running
unified budget----
Mr. Moore of Kansas. Moving aside from the interest rates
concern right now, which I understand is a huge concern, if we
were to borrow $2 trillion or $1 trillion right now--and I am
saying right now, over the next several years--to finance these
partially private accounts and divert money out of present
retirement benefits being paid to Social Security recipients,
wouldn't that just pass a debt along to our children and
grandchildren? And is that fair?
Mr. Greenspan. Well, the question is, remember that, at
least as I understand the President's program, which has not
been produced sufficiently as yet, that is offset by potential
benefits to be paid or scheduled to be paid at a later time. So
taking the full context of a particular individual's period,
then the debt in that regard does not change over the long run.
Mr. Moore of Kansas. I understand. But we can have the best
intentions in the world, and when the President talked to
Congress about the Medicare program it was $400 billion, now it
is $754 billion.
Ms. Pryce. Gentleman's time has expired.
Mr. Moore of Kansas. Projections don't always work. Isn't
that correct, sir?
Mr. Greenspan. That is, of course, correct.
Mr. Moore of Kansas. Thank you.
Ms. Pryce. Mr. Barrett is recognized for 5 minutes.
Mr. Barrett. Thank you, Madam Chairman.
Mr. Chairman, I was concerned about your testimony on the
differences in wages from skilled and non-skilled workers. And
I have seen the result in my rural district in South Carolina.
I know that education is an important tool when we are
talking about trying to lessen the differences between the
skilled and the unskilled. But is there anything else we can
do, other than education, to help balance the two?
Mr. Greenspan. The issue of education is so critical to
this that it overwhelms, in my judgment, all alternate policies
to address this issue. Now, you have to include in education,
obviously, on-the-job training, even education which is not
even formal.
And the essential reason is that what makes our country
competitive is in my judgment two things. One, it is our
Constitution, which creates a rule of law which people want to
invest in. And two, it is what is in the heads of our children,
because they are the future of the people who will staff our
increasingly complex capital stock.
I am not sure what else there is to do, because the job is
very large in the issue of education and I would not divert
resources to anything other than that, if the purpose is to
address and resolve this particular issue.
Mr. Barrett. Thank you, Mr. Chairman.
Thank you, Madam Chairman.
Ms. Pryce. Mr. Capuano is recognized for 5 minutes.
Mr. Capuano. Thank you, Madam Chair.
Thank you, Mr. Chairman.
Mr. Chairman, I just want to just point out a couple little
facts. You have repeatedly stated how strongly you support the
PAYGO rules.
And just as a point of information, the last vote this
Congress had on those was November of 2002, as they were
expiring, and only 19 members of the House voted to continue
those rules. Of those 19 members, three of them are on this
panel today. They include myself, Congresswoman Waters and
Congresswoman Lee.
Now, my guess is that, if you don't know the rollcalls,
most people wouldn't have expected the three of us to have
voted to continue the PAYGO rules.
But I guess the reason I say that is, I agree with you. I
think it is fair to have the PAYGO rules in the context of you
get what you pay for, period. Be honest. Without the PAYGO
rules, we run a dishonest accounting system. As far as I am
concerned, for all intents and purposes this government is
bankrupt.
Fair enough. We lost. I think we have to get over it. I
don't think they are going to come back. With only 19 votes on
the floor, I don't think they are going to come back.
So for me, though I agree with you 100 percent that the
PAYGO rules were good and we should readopt them, they are not
going to get readopted. And therefore, we have to look, how
else to we do it? How else do we get back some fiscal sanity;
in my opinion, it is fiscal honesty.
Every time you have come before this committee since I have
been on it, you state your support for tax cuts for the
wealthiest amongst us. I respectfully disagree. I understand
your position. I am not going to challenge you on it. I don't
think you are about to change. But clearly your opinion is that
the tax cuts for the wealthiest amongst us are more important
than programs.
Because if you have it on a system, you only have revenues
and expenditures, we haven't cut back our expenditures as much
as you would need to balance our budget, and especially when we
cut our revenues, so therefore we have an imbalance. We have a
deficit.
And if we are not going to change our expenditures, which
we haven't, we shouldn't change our revenues, I would argue.
And I understand that we disagree.
So I just wanted to make that clear: The PAYGO rules--maybe
I am wrong, but they were killed in 2002. There is no real
serious talk that I have heard of to bring them back, though if
you can generate that talk, I will support you.
But what I do want to talk about is, okay, here we are. We
haven't got PAYGO rules. We have deficits for as long as we can
see, climbing deficits, dangerous deficits. I know you don't
use the word ``crisis,'' but I would, relative to deficits.
Now we have a proposal in front of us for whatever the
program might be, it happens to be Social Security today, but
whatever it might be, that might require this government to
borrow trillions of dollars. I am not going to try to get you
on any of these, because you are too good at avoiding answers
you don't want to answer. You didn't answer it yesterday, I
don't expect you are going to answer it today as to what the
impact of that $2 trillion borrowing might be on today's
market.
But I do want to ask you, based on your own testimony, not
your testimony, but the report that is in front of us, the
table on page 13 clearly indicates something that is a fact,
but the table is not new to me, but it is interesting. Since
the year 2000, the percentage of treasury securities held by
foreign investors as a share of the total treasuries held has
gone up above 45 percent, has increased by 45 percent in just 4
years. Regardless of additional borrowing, do you find that
troubling? Do you think that is good, bad or indifferent?
Mr. Greenspan. I find it difficult to make a judgment for
the following reason: The reason that they are investing in the
United States is they find our U.S. treasury instruments the
safest instruments in the world. And in one sense, I am pleased
by the fact that that is the view of the rest of the world.
As we are becoming increasingly global, there is going to
be a great deal of cross-border investment, and everybody's
portfolio is going to have a very big chunk of foreign
something.
Mr. Capuano. So then these foreign investors think that we
are a good investment. So therefore there is no reason to
believe that the market today would think that the payments
coming due to the Social Security trust fund wouldn't be paid.
Mr. Greenspan. There is no response in the market at this
particular stage that I am aware of.
Mr. Capuano. Good.
And would it be unreasonable or reasonable to presume, to
add these two things together, that if we were to go out for an
additional $2 trillion worth of borrowing, that, based on
statistics today, is it reasonable to presume that 45 percent
of that or 50 percent of that would be bought by foreign
investors?
Mr. Greenspan. It is conceivable that it might be more than
that.
Mr. Capuano. So, therefore, if we are going to mortgage our
children's future in Social Security----
Ms. Pryce. The gentleman's time has expired.
Mr. Capuano.----we would be doing it to the Chinese, the
Japanese, the Saudis and everybody else around the world except
ourselves.
Thank you, Mr. Chairman.
Ms. Pryce. Mr. Jones is recognized for 5 minutes.
Mr. Jones. Madam Chairman, thank you.
Mr. Greenspan, I would like to pick up on what my friend
from Massachusetts was speaking to. And you are a very learned
man. We all have great respect for you, whether we agree or
disagree. But I just have to believe with this debt of this
nation, the deficit of this nation, that there is going to come
a time--and maybe we won't be here--but there is going to come
a time, if we don't get a handle on this, we are going to be in
deep, deep trouble.
This is my question: If Japan owns over $700 billion of the
U.S. debt, mainland China and Hong Kong together hold over $250
billion of U.S. debt, Mr. Chairman, the question is, if this
deficit continues to rise, and it looks like we are not going
to do what needs to be done to hold it from rising, what would
be the impact on U.S. financial markets if Japan or China were
to stop buying U.S. treasury bonds?
This might be a hypothetical, but I would appreciate if you
would give us your opinion.
Mr. Greenspan. Yes. We have looked into that question, and
I think that we have concluded that the effect of foreign
borrowing of U.S. treasury instruments has lowered long-term
interest rates a modest amount. And therefore, if they were to
choose to stop buying or to sell, it would raise interest
rates, but, again, by a modest amount.
And the reason for this is that U.S. treasury securities,
as big as they are, and as important as they are, are only a
fraction of the competing securities around the world, which is
what this market is.
It is a worldwide market. And in a sense, it is a market in
which interest rates in various different localities and for
various different instruments are all arbitraged.
And so if there is a significant purchase or sale of U.S.
treasury security, it is sort of dispersed on the other parts
of the market at the same time, so that the adjustment is not
particularly great.
But the issue you raise is a much deeper one. If we run
into serious trouble with respect to our deficit, it is not a
question of whether foreigners will buy or not buy our
securities, it is whether Americans will buy or not buy our
securities. And that to me is where the critical issues lies.
We are looking at a gulf in our unified budget for all
sorts of reasons, of which Medicare is the largest one, in the
period as we get into the next decade. And unless we address
that issue now, well in advance of its occurring, I am not sure
that we are going to be able to get an appropriate handle on it
before it creates serious problems down the road.
Mr. Jones. Mr. Chairman, I agree with you totally about the
deficit. And thank you so much for being here today.
I had a second question, but I want my colleagues to have
equal time as I have. So I yield back my time. Thank you.
Ms. Pryce. Thank you, Mr. Jones.
Mr. Crowley is recognized.
Mr. Crowley. Thank you, Madam Chair.
And thank you, Mr. Chairman, for being here once again
before our committee.
Mr. Chairman, I want to bring the issue back again to
Social Security. In your view, is it possible to create private
accounts, that my Republican colleagues would like to do, as
the President would like to do as well, without substantially
borrowing for the transition that would have to take place? And
if so, how would you do that?
Mr. Greenspan. The only way to do it is to essentially
either borrow, raise taxes or cut other spending.
Mr. Crowley. So the President's options are--and I will
just repeat them--would either be a massive tax increase on the
American public--we are talking about massive, anywhere between
$1 trillion and $2 trillion, or twice what the IRS took in tax
revenues last year. And I believe you stated yesterday that
anything over $1 trillion is considered--$1 trillion is large,
a large tax increase on the American public. That was A.
B, there would be a huge, potentially huge cut to benefits
to both current and future, I am assuming, retirees, including
the disabled, as well as the dependent children, which is a
real possibility.
But those benefit cuts would have to come to today's
retirees, as I mentioned before, almost immediately in order to
pay the $1 trillion to $2 trillion in borrowing that is needed
for the Social Security privatization plan. Or--and this, I
think, is the most egregious--massive new deficits.
And in essence my colleagues on the other side, I think
very effectively, use the issue of the death tax politically
incredibly well, and I think cornered us in many respects.
What I think is even more immoral and more egregious is the
fact--I have two children, 4 and 5, and, quite frankly, I am
expecting a third child, although I don't think my wife
expected me to say that on national television.
But if you take the fact that my children today owe
$26,000, theoretically, in national debt, each, as we all do,
my unborn child to be, once it comes out of the womb, will have
a price tag of $30,000 that he or she will have to pay--you
know, we are all going to die some day, and maybe we are going
to need the death tax benefit to pay for our birth tax.
And I think that is the most egregious thing about what we
are doing to ourselves with this mess of deficit that we are
putting our children and our children's children into fiscal
disability in the future. Can you comment on that?
Mr. Greenspan. Congressman, the problem we have is that
there is this yawning, unfunded future liability. This issue is
going to emerge, no matter what solution you are talking about,
because we are short of funds. The $1.5 trillion in the OASI
fund is just not adequate.
And the problem that we are going to confront is somewhere
along the line, you are going to have to increase taxes or
reduce spending somewhere, if we are going to keep the deficit
under control.
Mr. Crowley. Mr. Chairman, I appreciate--I am going to
yield back in just a moment. Let me just say, I believe in
personal responsibility. That is not just a Republican adage,
Democrats believe that as well. I do believe that we have to
contribute, ourselves, to our own personal retirement.
And building up ownership in the retirement, as I think the
Chairman mentioned earlier in his opening statement or in his
opening question to you, I believe in that. I think we all have
to contribute in some way toward that.
But Social Security was one leg of the stool, or the chair
or the table, in that vein.
I am 42 years of age. I still don't think about Social
Security. I am not even thinking about retiring. But I also
know that I have to do other things in order to retire, to save
for my retirement. And that includes making sound fiscal
choices.
And I think part of that is investing in the stock market,
is in 401(k) plans, is in other pensions, et cetera, et cetera.
I think that you are right that we will have to do
something, this is a problem that will have to be addressed. It
certainly is not a crisis. And I don't think that it has really
borne well for the President or my colleagues on this side to
present it as a crisis.
It is a problem we all should try to, and I think will work
to solve. But I think it goes beyond just Social Security. It
is about retirement and what we have to do to the American
public to understand that it is about personal responsibility,
they need to be engaged in this, and it is not just a problem
of Social Security.
And I yield back the balance of my time.
Ms. Pryce. Thank you.
The gentleman from Pennsylvania, Mr. Fitzpatrick, is
recognized.
Mr. Fitzpatrick. Thank you, Madam Chair.
Mr. Chairman, I want to go back to the issue of workforce
investment, following up on Mr. Barrett's question earlier.
Even though the unemployment rate has dropped to 5.2
percent, there are many men and women in my district in
Pennsylvania who are still looking for jobs and whose job
skills miss the skill requirements of the jobs that are
actually available in Pennsylvania and across the nation.
And I am a new member of Congress, and find out now, I have
been visited already by the community colleges from my
district. I have heard from my technical high schools. There
are a number of federal programs out there investing in
education and workforce investment.
I was wondering, Mr. Chairman, if you have any thoughts, or
even recommendations on better coordination of education
funding to better meet the needs of the next generation of
Americans, so that they will be prepared to take the jobs that
are actually available?
Mr. Greenspan. Congressman, I think we have two problems in
the area of education. One is to solve the dilemma that one of
your colleagues mentioned earlier, namely that in the fourth
grade our students seem to rank average or somewhat above
average in math and science relative to the rest of the world,
but by the twelfth grade, we are down quite low, in the lowest
quartile, as I recall. In other words, we are not doing
something that the rest of the world does to bring forward the
skills of fourth graders through the end of high school. And we
have got to address that, because it is a really crucial
problem.
Secondly, within the types of institutions generally where
we seem to be getting the most leverage is the community
college, in the sense that people are going back to school, and
as you probably, I am sure, are aware, a significant proportion
of enrollees in community colleges are in their 30s. It is not
just the young kids, just coming out of high school. And they
are going back to pick up the skills which they need to compete
in the world.
And I think the dramatic growth that we have seen in
community colleges suggests that the demand is there for
exactly the type of education, which is an education usually
very specific to a specific profession, it is not a generic
education, which is what the 4-year college tends to do. And
that seems to have been quite effective.
We do have the problem, as I have indicated before, that we
have not solved this question of matching skills with the
requirements of our capital stock, but it is clear that where
we are making progress apparently, or at least doing the right
thing, is in advancing our community colleges.
Mr. Fitzpatrick. Thank you, sir, for your thoughts and for
your service to our nation. I appreciate it.
I yield back my time.
Ms. Pryce. Thank you.
Mr. Clay is recognized.
And let me just say, there has been a vote called, and this
will be the last question of the day.
And you may proceed.
Mr. Clay. Thank you, Madam Chairman.
Chairman Greenspan, I am concerned about the deficit, and
you have voiced concerns numerous times about deficit spending
also. There are those who champion tax cuts without regard for
future budget consequences. Those who championed the tax cuts
of 2001 repeatedly cited the benefits to the economy of that
tax cut.
Of course, there were those of us who said that most of the
cuts were unfunded mandates of a sort and would result in
deficits.
The CBO has released new data that show that the changes
enacted since January 2001 have increased the deficit by $539
billion. They also say that in 2005, the cost of tax cuts
enacted over the past 4 years will be over three times the cost
of increases in domestic spending.
Mr. Chairman, what are your concerns about this huge
deficit? And do you still view the tax cuts as being beneficial
to the economy? Where do you suggest we go from here? And if
you could, elaborate.
Mr. Greenspan. Well, Congressman, I want to emphasize that
our critical first priority is to get the long-term deficits
under control.
In that context, you do have room--or should have room, as
we will indeed have room--to, one, increase spending on certain
programs, and reduce taxes on others. You can't go, with the
huge budget that we have, you can't think in terms that
everything goes in the same direction. That is not the way the
Congress should or does adjust the priorities of the nation.
So I think that I would say the first priority is to assure
that deficits are under control. After that, I think the
resources that we use and in what form we use them are
judgments that the Congress has to make.
I personally think that we would be well served by having
significant elimination of the double taxation on dividends
because I think that is a crucial aspect of economic growth,
which obviously has an effect on the revenue base. But others
can disagree others can have different ideas, but that is where
I come from.
Mr. Clay. But on that point, do we then go through the
budget and slice programs that are wasteful, or do we not make
the 2001 tax cuts permanent, or do we target middle-income
Americans and give them some financial help?
Mr. Greenspan. That is the choice of the Congress. I mean,
the point is, the wonderful thing about our system is we have
elected representatives who have to make these judgments. And
if they don't reach you, somebody else made them, and they are
easy decisions. You only get the tough ones.
Mr. Clay. Thank you for your response.
I appreciate it, Madam Chair.
Ms. Pryce. Thank you, Mr. Clay.
And thank you, Chairman Greenspan, for your service to our
country and for your time that you spent with this committee
today. It is very much appreciated, and we will welcome you
back in about 6 months.
With that being said, the chair notes that some members may
have additional questions for this panel or this witness which
they may wish to submit in writing. Without objection, the
hearing record will remain open for 30 days for members to
submit written questions to this witness and to place their
response in the record.
Hearing nothing further, this hearing is adjourned.
[Whereupon, at 12:52 p.m., the committee was adjourned.]
A P P E N D I X
February 17, 2005
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]
[GRAPHIC] [TIFF OMITTED]