[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



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                            WASHINGTON : 2005
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                 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

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