[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
THE ECONOMIC OUTLOOK AND CURRENT FISCAL ISSUES
=======================================================================
HEARING
before the
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
HEARING HELD IN WASHINGTON, DC, MARCH 2, 2005
__________
Serial No. 109-5
__________
Printed for the use of the Committee on the Budget
Available on the Internet: http://www.access.gpo.gov/congress/house/
house04.html
______
U.S. GOVERNMENT PRINTING OFFICE
99-828 WASHINGTON : 2005
_____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001
COMMITTEE ON THE BUDGET
JIM NUSSLE, Iowa, Chairman
ROB PORTMAN, Ohio, JOHN M. SPRATT, Jr., South
Vice Chairman Carolina,
JIM RYUN, Kansas Ranking Minority Member
ANDER CRENSHAW, Florida DENNIS MOORE, Kansas
ADAM H. PUTNAM, Florida RICHARD E. NEAL, Massachusetts
ROGER F. WICKER, Mississippi ROSA L. DeLAURO, Connecticut
KENNY C. HULSHOF, Missouri CHET EDWARDS, Texas
JO BONNER, Alabama HAROLD E. FORD, Jr., Tennessee
SCOTT GARRETT, New Jersey LOIS CAPPS, California
J. GRESHAM BARRETT, South Carolina BRIAN BAIRD, Washington
THADDEUS G. McCOTTER, Michigan JIM COOPER, Tennessee
MARIO DIAZ-BALART, Florida ARTUR DAVIS, Alabama
JEB HENSARLING, Texas WILLIAM J. JEFFERSON, Louisiana
ILEANA ROS-LEHTINEN, Florida THOMAS H. ALLEN, Maine
DANIEL E. LUNGREN, California ED CASE, Hawaii
PETE SESSIONS, Texas CYNTHIA McKINNEY, Georgia
PAUL RYAN, Wisconsin HENRY CUELLAR, Texas
MICHAEL K. SIMPSON, Idaho ALLYSON Y. SCHWARTZ, Pennsylvania
JEB BRADLEY, New Hampshire RON KIND, Wisconsin
PATRICK T. McHENRY, North Carolina
CONNIE MACK, Florida
K. MICHAEL CONAWAY, Texas
Professional Staff
James T. Bates, Chief of Staff
Thomas S. Kahn, Minority Staff Director and Chief Counsel
C O N T E N T S
Page
Hearing held in Washington, DC, March 2, 2005.................... 1
Statement of Alan Greenspan, Chairman, Board of Directors of the
Federal Reserve System......................................... 7
Prepared statement of:
Hon. Adam H. Putnam, a Representative in Congress from the
State of Florida........................................... 6
Chairman Greenspan........................................... 10
THE ECONOMIC OUTLOOK AND CURRENT FISCAL ISSUES
----------
WEDNESDAY, MARCH 2, 2005
House of Representatives,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to call, at 10 a.m., in room
210, Cannon House Office Building, Hon. Jim Nussle (chairman of
the committee), presiding.
Members present: Representatives Nussle, Ryun of Kansas,
Crenshaw, Putnam, Wicker, Barrett of South Carolina, Lungren,
Bradley, Ryan of Wisconsin, Hensarling, Bonner, Portman,
Spratt, Moore, Edwards, Capps, Cooper, Davis, Case, Jefferson,
Kind, Allen, Cuellar, McKinney, and DeLauro.
Chairman Nussle. Good morning, and welcome to today's
Budget Committee hearing. Today we welcome back to the
committee and we are pleased to have with us the Chairman of
the Federal Reserve Alan Greenspan to discuss the economic
outlook and the Federal budget. I will note to members that
Chairman Greenspan will be available here in the committee
until 1 p.m., so I will stick to the 5-minute rule, and I ask
all members to do so so we can give an opportunity to all
members to ask questions today to as many as possible.
Chairman Greenspan, welcome back to the Budget Committee.
We are ever so pleased that you take time to come and visit
with our committee on a regular basis. It is something that we
look forward to, and we really do appreciate the advice and
counsel that you provide us.
Each time that you appear before the committee, the economy
continues to look better and better. Particularly in the last
few years, we have seen steady improvement, and it is not only
a testament to the resilience and flexibility of our great
American economy, but also to what I would suggest are policy
successes of the past several years, everything from tax relief
to your guidance on monetary policy.
Last year you appeared before this committee on two
occasions, in February and then again in September. When you
were with us in February, we were just beginning to see
stronger real growth as our economy was rebounding from the
recession and other adverse factors that we had faced,
including the bursting of the stock market bubble, corporate
scandals, the terrorist attacks of September 11, the ensuing
global war on terrorism. Yet at that time, just last year, we
were still waiting to see solid evidence of stronger job growth
and success.
When you appeared before us 6 months later, last September,
we had seen continued strong real growth in the economy; in
fact, the best in 20 years. We were finally seeing solid
evidence of improvements in the labor markets with falling
unemployment and increases in payroll jobs. But still there
were many critics who were claiming that it was a jobless
recovery, and it was the worst economy since the Great
Depression. I would certainly hope that we are all thankful
that those critics were wrong.
Today the general consensus of both the public and private
forecasters is that the U.S. economy is now in sustained
expansion with solid growth, real gross domestic product (GDP)
and payroll jobs, and with low unemployment and low inflation.
Today real GDP has increased for 13 consecutive quarters, and
real growth rates in 2004 was 4.4 percent, the strongest growth
in 5 years, and one of the strongest rates of growth in the
past 20 years.
Private forecasters expect solid growth to continue, and
even the Federal Reserve published forecasts expects real GDP
to grow at 3\1/2\ to 4 percent this year and 3\1/4\ to 3\3/4\
next year. Real business equipment investment has increased at
a 15 percent annual rate over the past year and a half, the
best performance in 7 years. The investment tax relief we
passed, I believe, helped to make that happen. We see the best
performance of the housing markets in decades with housing
construction its best in 20 years; and home ownership, record
high for our country.
Perhaps the most important, our labor markets are in much
better shape. Unemployment rate is down to 5.2 percent and is
now lower than the decade averages for the 1970s, 1980s, and
1990s. Payroll employment has increased by 2.7 million jobs
over the past 20 months, and forecasters are expecting ongoing
significant gains of about 190,000 jobs per month, or 2\1/4\
million more jobs by the end of the year. Significant
improvement in jobs and labor markets has occurred and is
expected to continue as new claims for unemployment insurance
are at their lowest levels in over 4 years.
How did we get to this point? Well, certainly, again, we
remember back to what many would suggest was a much better
time. On September 10 of 2001, we were running a surplus. We
all remember those days, and everyone is well aware this Nation
has been through an incredibly difficult number of years
personally, for individuals, for families, for men and women
serving in our military, for our men and women on the front
lines protecting our country, people in our economy who are job
creators, and people who have lost jobs and have gotten
retraining and have gained jobs back, as well as the
uncertainties of our global war on terrorism.
In response, Congress and the President acted together. We
took quick, deliberate action to correct not only the economic
growth deficits that we faced, but also the challenges and
deficits that we faced in our homeland security and military
defense. As a result of this response to those challenges and
the necessary spending associated with that response, we have
seen a return to budget deficits.
Chairman Greenspan, when you were with us last year at this
time, the administration had projected a deficit of $512
billion for fiscal year 2004, and you told us that if we wanted
to reduce that deficit, not only had we better keep the economy
growing in creating jobs, but we had to do a better job of
getting control of Federal spending.
Last year we worked to ensure continuation of critical tax
relief that we had passed, which I believe played a significant
role in boosting the economy out of the recession through
recovery and into a sustained expansion. We also, for the first
time in really a long time, started to get our hands around the
out-of-control discretionary spending that we provide here in
Congress, and lo and behold, the deficit actually started to go
down. We ended last year with a deficit of $412 billion, still
way too high by anyone's count, but $109 billion less than what
we anticipated at the start of the year, 20 percent off the top
of the deficit in 1 year.
That is a good start and one that we have to continue, but
I know, and I think we all know, that strong, sustained
economic growth and tight funding on our discretionary
programs, even level funding for that matter, will not get us
back to balance. Don't get me wrong, we need to do both, and we
have done both, but they are just not enough.
This year President Bush has taken what I believe are some
tough but necessary next steps in his budget for slowing our
currently unsustained rate of spending growth. They are the
same kinds of ideas that we have floated in this committee many
times, but we have the President's commitment and leadership,
and not only does his proposal hold all nonsecurity spending
below inflation, but it begins a process of looking for savings
in the largest part of the Federal budget. Fifty-five percent,
colleagues; 55 percent of our budget is on automatic pilot. It
simply operates as a mandatory expenditure without any
controls. That is that mandatory side of the budget we talked
about, the automatic pilot, the entitlements.
I commend the President for these new efforts, and it is
pretty clear that Congress may not--maybe not in the exact way
that the President has proposed, but in whatever way we decide,
must begin to propose slowing the rate of growth in the
largest, most rapidly growing part of our budget if we even
want to think about reducing the deficit, let alone getting us
back to balance.
I understand the criticism and the complaints and a little
bit of whining has already occurred, because you go into these
mandatory accounts, and all sorts of people come out of the
woodwork to begin their criticism. We have heard from Governors
who say, not yet, not this year, let us do it next year. Trust
us; we will come forward with a reform proposal. And I believe
what we have been able to accomplish in the last week to 10
days a recognition that we can't wait until next year to begin
the discussion of reform proposals.
Take Medicaid as an example. The Governors have told us
seemingly in unison that they don't want an arbitrary number to
drive the policy, but a number will drive the schedule. We have
their attention, and we have them at the table. We have begun
the discussion of reform, and it is an important discussion
that has to be sustained.
So while I understand people will say, well, not in my
backyard, not in this particular area, please don't do it this
year, please don't pick an arbitrary number, the good news is
we are beginning a discussion on the mandatory entitlement side
of the budget, particularly in the health care accounts which
are unsustainable, have been growing out of control, and
without significant reforms through a reconciliation process
that we will go through this year--without that kind of
discipline, they will grow out of control and envelope the
entire budget.
It doesn't mean reconciliation has to begin in May, as is
typically the challenge. We can work with the Governors to
bring forward a reform proposal on Medicaid, invite them to the
table, invite Secretary Leavitt to the table, former Governor,
who is an honest broker who can talk through Medicaid, and we
can have their ideas, their proposals, their reforms considered
the exact same way we did welfare reform back in 1996.
Is this hard work? Yes. Don't let anybody think it isn't
going to be hard work. But we have the right people talking
about it. We have the right people invited to the table. They
are beginning serious discussions about reform proposals, and
it is all because the President brought up his budget, and we
have been discussing reconciliation.
So I understand there will continue to be complaints and
criticism that somehow this is going to be difficult, and
somehow it shouldn't happen this year, and wait until next year
to do reform, which, as my father always said, tomorrow never
comes. Well, tomorrow never comes in the budget process either.
We have to begin that work today, but we can put us on a
schedule on something that is predictable and invite the right
people in for reforms.
So we have asked Chairman Greenspan back with us today to
first review the current economic picture and also to hear what
he believes is the best course for keeping our momentum going
with regard to spending restraint and budget deficit reduction.
I anticipate we will hear more of your views on a very
challenging issue of Social Security reform. I am looking
forward to receiving your testimony on a number of topics that
I know members are interested in inquiring about. We appreciate
your willingness to come before our committee today.
And with that, I will turn it over to my friend and
colleague to Mr. Spratt for any comments he wishes to make.
Mr. Spratt. Thank you very much, Mr. Chairman. And thank
you, Chairman Greenspan, and welcome back to the Budget
Committee. We appreciate you coming.
Picking up on where the chairman left off, we are all
pleased to see the economy back on its feet, but I have to note
that Chairman Greenspan is only one sentence into his statement
before he warns, in Fedspeak, the positive short-term economic
outlook is playing out against a background of concern about
the prospects for the Federal budget, especially over the
longer run.
It is daunting, Mr. Chairman, to compare where we were 5
years ago, sitting on a surplus of $236 billion, to where the
Government is today, $2.2 trillion deeper in debt and only
going deeper. It is demoralizing to see President Bush's budget
with big national security increases, and yet no sense of
shared sacrifice, no effort to pay for the national security,
which we don't dispute the need for; indeed, even more tax cuts
to come, more tax cuts proposed. And so there is no wonder that
we see no end to the deficits in this budget.
The President's budget claims a budget of $390 billion for
the year 2006. Mr. Chairman, you know and I know this is a
piece of budget artifice because it omits the cost of deploying
troops in Iraq and Afghanistan, running at least $5 billion a
month. The President's budget also calls for more tax cuts, but
omits any mention of the alternative minimum tax, which will
cost, by the estimate of the Congressional Budget Office (CBO),
$640 million to correct so we don't see it applied to middle-
income taxpayers for whom it was never intended.
And most incredibly of all, the President calls for Social
Security reform that allows 4 percentage points to be peeled
off FICA taxes and diverted into private accounts beginning in
2009, but his budget breathes barely a word about fiscal
consequences. There is hardly more than a footnote and nothing
in the tables dealing with the $754 billion that the
administration acknowledges that it has to borrow between 2009
and 2015 to pay for the transition. There is nothing close to
full disclosure, by which I mean an honest acknowledgment that
$1.4 trillion must be borrowed the first 10 years this plan is
in effect, and $3.5 trillion must be borrowed during the next
10 years.
If we can put up chart No. 2, this is the consequence of
that kind of borrowing, $4.9 trillion over the next 20 years.
And yet you are only halfway up the mountain when you get to
that level. We have only parts and pieces of the plan the
President is proposing, but using data that the actuaries at
Social Security have supplied, this graph shows how we plot the
rising mountain of debt. Indeed, it is Himalayan, a Mount
Everest of debt under the President's plan, debt increasing, by
our calculation, every year for the next 50 years as a
percentage of GDP. No household and no individual and no
government can run on the basis where every year it accumulates
more debt, its debt grows faster than its income does. When the
President's budget is adjusted just for these several big
realities, the unified deficit goes up, not down, and never
goes away as this graph, graph No. 3, shows. Indeed, it is hard
to figure how we will ever again in our lifetimes see the
budget balanced.
Here are the questions we hope you will address today, Mr.
Greenspan. Is this budget on a sustainable path? Basically is
this budget something that you can put on paper, you can
project these numbers, but can we take this path without
expecting to see some severe consequences down the road? Can
the Government run such deficits and hold harmless our economy
and the value of the dollar? Are deficits of this magnitude
consequential? What risks do we run in the world of financial
markets if financial markets see the deficits as endless and
enormous?
Chart No. 4, for example, shows what we plot to be the
President's budget over the next 10 years. It gets worse, not
better. Deficits cannot go down. They don't go away. And at
that point on the horizon, there is no near-term prospect for
the resolution of the deficits.
There is an old adage attributed to Hippocrates that we
should first do know harm when you find yourself faced with
problems like this. I want to ask you about two particular
applications of that time-honored rule.
First of all, the tax cut passed in 2001 and 2003 were
predicated on surpluses that were acknowledged to be
substantially overestimated. They have gone. They have been
replaced by unending deficits. Recognizing that the projected
surpluses were paper projections and might not obtain, these
tax cuts were written to expire on December 31, 2010, for the
most part.
You have called for the renewal of the Budget Enforcement
Act of 1991 and its strictures, particularly the PAYGO rule and
discretionary spending caps. Do you still hold to the view that
the PAYGO rule should be reinstated, and they should apply to
these expiring tax cuts so they have to be fully offset if they
are renewed?
Secondly, you decry in your testimony the looming deficits.
You have been an advocate of this position for a long time, but
you also support the concept at least of private accounts for
Social Security, partial privatization, which you acknowledge
will add to the deficit in the near term and for a long time to
come.
I know the argument, we have heard it made here before.
What you will be doing in that case is detracting or
subtracting from public saving and adding to private saving.
And maybe it is more than a wash if you put the money in
private accounts beyond the reach of the Government, but
nevertheless, this requires the Government to borrow
substantial sums to bridge transition and borrow these sums at
a time when we were already scheduled to go into the open
markets and convert trust fund debt into publicly funded debt,
because I suppose if we are going to meet our obligations in
the 2020s, 2030s, and onto the 2040s, we are going have to
liquidate our debt from trust fund debt to publicly held debt.
When you put these two together, aren't we tempting fate?
Aren't we straining the economy and taking risks that we should
be wary of taking? What are the consequences of the policy,
what are the risks, the pitfalls, the downside of the proposals
we have before us.
We have a plateful of problems, Mr. Chairman. And we
appreciate your thoughtful testimony and the time you have
taken to come here. We look forward to hearing your testimony
and to ask you questions about it. Thank you for coming.
Chairman Nussle. Thank you Mr. Spratt.
With that, Chairman Greenspan, welcome back to the House
Budget Committee. We are pleased to receive your testimony. I
will ask, before you begin, unanimous consent that all members
have the opportunity to place a statement, an opening
statement, in the record at this point. Without objection, so
ordered.
[The prepared statement of Mr. Putnam follows:]
Prepared Statement of Hon. Adam H. Putnam, a Representative in Congress
From the State of Florida
Mr. Chairman, I am pleased to join with you today to continue our
review and discussion concerning the Fiscal Year 2006 budget, and I
would once again like to welcome Chairman Greenspan.
While our Nation is clearly facing and unsustainable budget
deficit, it is important to acknowledge the remarkable economic
recovery that we are experiencing, the increase in paid jobs that are
being produced, as well as the startling growth in the rate of
homeownership. The final quarter of 2004 was the 13th consecutive
quarter of economic growth for our Nation, with GDP increasing at 3.8
percent, an incredible recovery following the 2000-2001 recession.
Overall, in 2004 the GDP grew 4.4 percent, the strongest annual
performance in the last 5 years. Also in 2004, payroll employment
positions increased by 2.2 million. Unemployment is at 5.2 percent,
lower than the decade average for the three previous decades.
Homeownership is at a record high. Our goal must be to continue on this
path of strong recovery while simultaneously curtailing the rate of
spending that we have seen over the last decade. The economy is strong,
and reigning in spending is a reasonable policy to keep it so.
An issue that we have the responsibility to address sooner, rather
than later, is Social Security. Social Security is safe for today's
seniors--but it is in serious danger for future retirees. Each year,
there are more retirees taking money out of the system, with not enough
additional workers to support them. Currently, Social Security has a
total unfunded obligation under current law of more than $10 trillion.
Personal accounts provide Americans who choose to participate with an
opportunity to share in the benefits of economic growth by
participating in markets through sound investments. Any delay by
Congress in addressing the issue limits options for reform and
increases costs of all options. Addressing Social Security now is
fiscally responsible, and we owe that to our younger workers.
In addition to Social Security, we much address other mandatory
spending programs that have been running on ``automatic pilot'' for
decades. Our current budget is comprised of too high a percentage of
mandatory spending programs. Our role here must be to reevaluate the
justification for their place in the entitlement side of the ledger.
Congress has worked in recent years to ensure that America has the
resources it needs for its security. We are the taxpayer's last line of
defense against excessive or wasteful Federal spending. I believe that
Congress must establish priorities in these difficult times,
recognizing, not ignoring the fact that we are at war, and that defense
needs cannot grow at current rates without concurrent trade-offs in
other parts of the budget.
This year's budget must offer long-term solutions to generational
issues facing us. Social Security, Medicare and Medicaid all find
themselves on unsustainable glide paths into deficit oblivion. War and
the threats to our homeland continue to draw resources our of the
treasury without compounding economic benefit and trade deficits
reflect an unhealthy imbalance. The historic early decisions are behind
us, Mr. Chairman. It is time to earn our keep.
Thank you, Mr. Chairman.
Chairman Nussle. Chairman Greenspan, welcome back to the
committee, and we are pleased to receive your testimony.
STATEMENT OF ALAN GREENSPAN, CHAIRMAN, BOARD OF GOVERNORS OF
THE FEDERAL RESERVE SYSTEM
Mr. Greenspan. Thank you very much, Mr. Chairman, Ranking
Member Spratt, and members of the committee. Let me just first
say that I will be excerpting from my full text and request
that it be included in the record.
Chairman Nussle. It will be.
Mr. Greenspan. I want to emphasize that I will be speaking
on the Federal budget and related issues, but I am speaking for
myself and not necessarily for other members of the Federal
Reserve Board.
The U.S. economy delivered a solid performance in 2004, and
thus far this year activity appears to be expanding at a
reasonably good pace. However, the positive short-term economic
outlook is playing out against the backdrop of concern about
the prospects for the Federal budget, especially over the
longer run. As the latest projections from the administration
and the Congressional Budget Office suggest, our budget
position is unlikely to improve substantially in the coming
years unless major deficit-reducing actions are taken.
In my judgment, the necessary choices will be especially
difficult to implement without the restoration of a set of
procedural restraints on the budget-making process. Reinstating
a structure like the one provided by the Budget Enforcement Act
would signal a renewed commitment to fiscal restraint and help
restore discipline to the annual budgeting process. Such a step
would be even more meaningful if it were coupled with the
adoption of a set of provisions for dealing with unanticipated
budgetary outcomes over time.
The original design of the Budget Enforcement Act could
also be enhanced by addressing how the strictures might evolve
if and when reasonable fiscal balance came into view. I do not
mean to suggest that the Nation's budget problems will be
solved simply by adopting a new set of rules. The fundamental
fiscal issue is the need to make difficult choices among budget
priorities, and this need is becoming ever more pressing in
light of the unprecedented number of individuals approaching
retirement age.
Because the baby boomers have not yet started to retire in
force, we have been in a demographic lull, but this state of
relative stability will end soon. In 2008, just 3 years from
now, the leading edge of the baby-boom generation will reach
62, the earliest age at which Social Security retirement
benefits can be drawn, and the age at which about half of those
eligible to claim benefits have been doing so in recent years.
Just 3 years after that, in 2011, the oldest baby boomers will
reach 65 and thus be eligible for Medicare.
Currently 3\1/4\ workers contribute to the Social Security
System for each beneficiary. Under the intermediate assumptions
of the program's trustees, the number of beneficiaries will
have roughly doubled by 2030, and the ratio of covered workers
to beneficiaries will be down to about two. The pressures on
the budget from this dramatic demographic change will be
exacerbated by those stemming from the anticipated steep upward
trend in spending per Medicare beneficiary.
A combination of an aging population and the soaring costs
of its medical care is certain to place enormous demands on our
Nation's resources and to exert pressure on the budget that
economic growth alone is unlikely to eliminate. To be sure,
favorable productivity developments will help to alleviate the
budgetary strains, but unless productivity growth far outstrips
that embodied in current budget forecasts, it is unlikely to
represent more than part of the answer. Higher productivity
does, of course, buoy revenues, but because initial Social
Security benefits are influenced heavily by economywide wages,
faster productivity growth, with a lag, also raises benefits
under current law. Moreover, because the long-range budget
assumptions already make reasonable allowances for future
productivity growth, one cannot rule out the possibility that
productivity growth will fall short of projected future
averages.
In fiscal year 2004, Federal outlays for Social Security,
Medicare and Medicaid totaled about 8 percent of gross domestic
product. The long-run projections from the Office of Management
and Budget (OMB) suggest that the share will rise to 9\1/2\
percent by 2015 and will be in the neighborhood of 13 percent
by 2030. So long as health-care costs continue to grow faster
than the economy as a whole, the additional resources needed
for such programs will exert pressure on the Federal budget
that seems increasingly likely to make current fiscal policy
unsustainable. The likelihood of escalating unified budget
deficits is of great concern because they would drain an
inexorably growing volume of real resources away from private
capital formation over time and cast an ever larger shadow over
the growth of living standards.
The broad contours of the challenges ahead are clear, but
considerable uncertainty remains about the precise dimensions
of the problem and about the extent to which future resources
will fall short of our current statutory obligations to the
coming generations of retirees.
The uncertainty about future medical spending is daunting.
We know very little about how rapidly medical technology will
continue to advance and how those innovations will translate
into future spending. Technological innovations can greatly
improve the quality of medical care and can in some instances
reduce the costs of existing treatments. But because technology
expands the set of treatment possibilities, it also has the
potential to add to overall spending, in some cases by a great
deal. As a result, the actuaries' projections of Medicare costs
are highly provisional.
These uncertainties, especially our inability to identify
the upper bound of future demands for medical care, counsel
significant prudence in policymaking. The critical reason to
proceed cautiously is that new programs quickly develop
constituencies willing to fiercely resist any curtailment of
spending or tax benefits. As a consequence, our ability to rein
in deficit-expanding initiatives, should they later prove to
have been excessive or misguided, is quite limited.
I fear we may have already committed more physical
resources to the baby-boom generation in its retirement years
than our economy has the capacity to deliver. If existing
promises need to be changed, those changes should be made
sooner rather than later. We owe future retirees as much time
as possible to adjust their plans for work, saving and
retirement spending.
Addressing the Government's own imbalances will require
scrutiny of both spending and taxes. However, tax increases of
sufficient dimension to deal with our looming fiscal problems
arguably pose significant risks to economic growth and the
revenue base. The exact magnitude of such risks is difficult to
estimate, but in my judgment they are sufficiently worrisome to
warrant aiming if at all possible to close the fiscal gap
primarily, if not wholly, from the outlay side. In the end, I
suspect that unless we attain unprecedented increases in
productivity, we will have to make significant structural
adjustments in the Nation's major retirement and health
programs.
Our current largely pay-as-you-go social insurance system
worked well given the demographics of the second half of the
20th century, but as I have argued previously, the system is
ill-suited to address the unprecedented shift of population
from the workforce to retirement that will start in 2008. Much
attention has been focused on the forecasted exhaustion of the
Social Security Trust Fund in 2042, but solving that problem
will do little in itself to meet the imperative to boost our
national saving. Raising national saving is an essential step
if we are to build a capital stock that, by, say, 2030 will be
sufficiently large to produce goods and services adequate to
meet the needs of retirees without unduly curbing the standards
of living of our working-age population.
Unfortunately, the current Social Security System has not
proven a reliable vehicle for such saving. Indeed, although the
trust funds have been running annual surpluses since the mid-
1980s, one can credibly argue that they have served primarily
to facilitate larger deficits in the rest of the budget and
therefore have added little or nothing to national saving.
In my view, a retirement system with a significant personal
accounts component would provide a more credible means of
ensuring that the program actually adds to overall saving and
in turn boosts the Nation's capital stock. The reason is that
money allocated to the personal accounts would no longer be
able to fund other government activities and, barring an
offsetting reduction in private saving outside the new
accounts, would, in effect, be reserved for future consumption
needs.
The challenge of Medicare is far more problematic than that
associated with Social Security. A major reason is the large
variance of possible outcomes mentioned earlier coupled with
the inadequacy of the current medical information base. Some
important efforts are under way to use the capabilities of
information technology to improve the health care system. If
supported and promoted, these efforts could provide key
insights into clinical best practices and substantially reduce
administrative costs. And with time we should also gain
valuable knowledge about the best approaches to restraining the
growth of overall health-care spending.
Crafting a budget strategy that meets the Nation's longer-
run needs will become ever more difficult the more we delay.
The one certainty is that the resolution of the Nation's
unprecedented demographic challenge will require hard choices,
and that the future performance of the economy will depend on
those choices.
Thank you very much, Mr. Chairman. I look forward to your
questions.
Chairman Nussle. I thank you, Mr. Chairman, for your
testimony.
[The prepared statement of Alan Greenspan follows:]
Prepared Statement of Alan Greenspan, Chairman, Board of Governors of
the Federal Reserve System
Mr. Chairman, Ranking Member Spratt, and members of the Committee,
I am pleased to be here today to offer my views on the Federal budget
and related issues. I want to emphasize that I speak for myself and not
necessarily for the Federal Reserve.
The U.S. economy delivered a solid performance in 2004, and thus
far this year, activity appears to be expanding at a reasonably good
pace. However, the positive short-term economic outlook is playing out
against a backdrop of concern about the prospects for the Federal
budget, especially over the longer run. Indeed, the unified budget is
running deficits equal to about 3\1/2\ percent of gross domestic
product, and Federal debt held by the public as a percent of GDP has
risen noticeably since it bottomed out in 2001. To be sure, the
cyclical component of the deficit should narrow as the economic
expansion proceeds and incomes rise. And the current pace of the ramp-
up in spending on defense and homeland security is not expected to
continue indefinitely. But, as the latest projections from the
Administration and the Congressional Budget Office suggest, our budget
position is unlikely to improve substantially in the coming years
unless major deficit-reducing actions are taken.
In my judgment, the necessary choices will be especially difficult
to implement without the restoration of a set of procedural restraints
on the budget-making process. For about a decade, the rules laid out in
the Budget Enforcement Act of 1990 and in the later modifications and
extensions of the act provided a framework that helped the Congress
establish a better fiscal balance. However, the brief emergence of
surpluses in the late 1990s eroded the will to adhere to these rules,
which were aimed specifically at promoting deficit reduction rather
than at the broader goal of setting out a commonly agreed-upon standard
for determining whether the Nation was living within its fiscal means.
Many of the provisions that helped restrain budgetary decisionmaking in
the 1990s--in particular, the limits on discretionary spending and the
PAYGO requirements--were violated ever more frequently; finally, in
2002, they were allowed to expire.
Reinstating a structure like the one provided by the Budget
Enforcement Act would signal a renewed commitment to fiscal restraint
and help restore discipline to the annual budgeting process. Such a
step would be even more meaningful if it were coupled with the adoption
of a set of provisions for dealing with unanticipated budgetary
outcomes over time. As you are well aware, budget outcomes in the past
have deviated from projections--in some cases, significantly--and they
will continue to do so. Accordingly, a well-designed set of mechanisms
that facilitate midcourse corrections would ease the task of bringing
the budget back into line when it goes off track. In particular, you
might want to require that existing programs be assessed regularly to
verify that they continue to meet their stated purposes and cost
projections. Measures that automatically take effect when costs for a
particular spending program or tax provision exceed a specified
threshold may prove useful as well. The original design of the Budget
Enforcement Act could also be enhanced by addressing how the strictures
might evolve if and when reasonable fiscal balance came into view.
I do not mean to suggest that the Nation's budget problems will be
solved simply by adopting a new set of rules. The fundamental fiscal
issue is the need to make difficult choices among budget priorities,
and this need is becoming ever more pressing in light of the
unprecedented number of individuals approaching retirement age. For
example, future Congresses and Presidents will, over time, have to
weigh the benefits of continued access, on current terms, to advances
in medical technology against other spending priorities as well as
against tax initiatives that foster increases in economic growth and
the revenue base.
Because the baby boomers have not yet started to retire in force,
we have been in a demographic lull. But this state of relative
stability will soon end. In 2008--just 3 years from now--the leading
edge of the baby-boom generation will reach 62, the earliest age at
which Social Security retirement benefits can be drawn and the age at
which about half of those eligible to claim benefits have been doing so
in recent years. Just 3 years after that, in 2011, the oldest baby
boomers will reach 65 and will thus be eligible for Medicare.
Currently, 3\1/4\ workers contribute to the Social Security system for
each beneficiary. Under the intermediate assumptions of the program's
trustees, the number of beneficiaries will have roughly doubled by
2030, and the ratio of covered workers to beneficiaries will be down to
about 2. The pressures on the budget from this dramatic demographic
change will be exacerbated by those stemming from the anticipated steep
upward trend in spending per Medicare beneficiary.
The combination of an aging population and the soaring costs of its
medical care is certain to place enormous demands on our Nation's
resources and to exert pressure on the budget that economic growth
alone is unlikely to eliminate. To be sure, favorable productivity
developments would help to alleviate the impending budgetary strains.
But unless productivity growth far outstrips that embodied in current
budget forecasts, it is unlikely to represent more than part of the
answer. Higher productivity does, of course, buoy revenues. But because
initial Social Security benefits are influenced heavily by economywide
wages, faster productivity growth, with a lag, also raises benefits
under current law. Moreover, because the long-range budget assumptions
already make reasonable allowance for future productivity growth, one
cannot rule out the possibility that productivity growth will fall
short of projected future averages.
In fiscal year 2004, Federal outlays for Social Security, Medicare,
and Medicaid totaled about 8 percent of GDP. The long-run projections
from the Office of Management and Budget suggest that the share will
rise to 9\1/2\ percent by 2015 and will be in the neighborhood of 13
percent by 2030. So long as health-care costs continue to grow faster
than the economy as a whole, the additional resources needed for such
programs will exert pressure on the Federal budget that seems
increasingly likely to make current fiscal policy unsustainable. The
likelihood of escalating unified budget deficits is of especially great
concern because they would drain an inexorably growing volume of real
resources away from private capital formation over time and cast an
ever-larger shadow over the growth of living standards.
The broad contours of the challenges ahead are clear. But
considerable uncertainty remains about the precise dimensions of the
problem and about the extent to which future resources will fall short
of our current statutory obligations to the coming generations of
retirees. We already know a good deal about the size of the adult
population in, say, 2030. Almost all have already been born. Thus,
forecasting the number of Social Security and Medicare beneficiaries is
fairly straightforward. So too is projecting future Social Security
benefits, which are tied to the wage histories of retirees. However,
the uncertainty about future medical spending is daunting. We know very
little about how rapidly medical technology will continue to advance
and how those innovations will translate into future spending.
Consequently, the range of possible outcomes for spending per Medicare
beneficiary expands dramatically as we move into the next decade and
beyond. Technological innovations can greatly improve the quality of
medical care and can, in some instances, reduce the costs of existing
treatments. But because technology expands the set of treatment
possibilities, it also has the potential to add to overall spending--in
some cases, by a great deal. Other sources of uncertainty--for example,
the extent to which longer life expectancies among the elderly will
affect medical spending--may also turn out to be important. As a
result, the range of future possible outlays per recipient is extremely
wide. The actuaries' projections of Medicare costs are, perforce,
highly provisional.
These uncertainties--especially our inability to identify the upper
bound of future demands for medical care--counsel significant prudence
in policymaking. The critical reason to proceed cautiously is that new
programs quickly develop constituencies willing to fiercely resist any
curtailment of spending or tax benefits. As a consequence, our ability
to rein in deficit-expanding initiatives, should they later prove to
have been excessive or misguided, is quite limited. Thus, policymakers
need to err on the side of prudence when considering new budget
initiatives. Programs can always be expanded in the future should the
resources for them become available, but they cannot be easily
curtailed if resources later fall short of commitments.
I fear that we may have already committed more physical resources
to the baby-boom generation in its retirement years than our economy
has the capacity to deliver. If existing promises need to be changed,
those changes should be made sooner rather than later. We owe future
retirees as much time as possible to adjust their plans for work,
saving, and retirement spending. They need to ensure that their
personal resources, along with what they expect to receive from the
government, will be sufficient to meet their retirement goals.
Addressing the government's own imbalances will require scrutiny of
both spending and taxes. However, tax increases of sufficient dimension
to deal with our looming fiscal problems arguably pose significant
risks to economic growth and the revenue base. The exact magnitude of
such risks is very difficult to estimate, but, in my judgment, they are
sufficiently worrisome to warrant aiming, if at all possible, to close
the fiscal gap primarily, if not wholly, from the outlay side. In the
end, I suspect that, unless we attain unprecedented increases in
productivity, we will have to make significant structural adjustments
in the Nation's major retirement and health programs.
Our current, largely pay-as-you go social insurance system worked
well given the demographics of the second half of the twentieth
century. But as I have argued previously, the system is ill-suited to
address the unprecedented shift of population from the workforce to
retirement that will start in 2008. Much attention has been focused on
the forecasted exhaustion of the Social Security trust fund in 2042.
But solving that problem will do little in itself to meet the
imperative to boost our national saving. Raising national saving is an
essential step if we are to build a capital stock that by, say, 2030
will be sufficiently large to produce goods and services adequate to
meet the needs of retirees without unduly curbing the standard of
living of our working-age population.
Unfortunately, the current Social Security system has not proven a
reliable vehicle for such saving. Indeed, although the trust funds have
been running annual surpluses since the mid-1980s, one can credibly
argue that they have served primarily to facilitate larger deficits in
the rest of the budget and therefore have added little or nothing to
national saving.
In my view, a retirement system with a significant personal
accounts component would provide a more credible means of ensuring that
the program actually adds to overall saving and, in turn, boosts the
Nation's capital stock. The reason is that money allocated to the
personal accounts would no longer be available to fund other government
activities and--barring an offsetting reduction in private saving
outside the new accounts--would, in effect, be reserved for future
consumption needs.
The challenge of Medicare is far more problematic than that
associated with Social Security. A major reason is the large variance
of possible outcomes mentioned earlier coupled with the inadequacy of
the current medical information base. Some important efforts are under
way to use the capabilities of information technology to improve the
health-care system. If supported and promoted, these efforts could
provide key insights into clinical best practices and substantially
reduce administrative costs. And, with time, we should also gain
valuable knowledge about the best approaches to restraining the growth
of overall health-care spending.
Crafting a budget strategy that meets the Nation's longer-run needs
will become ever more difficult the more we delay. The one certainty is
that the resolution of the Nation's unprecedented demographic challenge
will require hard choices and that the future performance of the
economy will depend on those choices. No changes will be easy, as they
all will involve setting priorities and, in the main, lowering claims
on resources. It falls to the Congress to determine how best to address
the competing claims on our limited resources. In doing so, you will
need to consider not only the distributional effects of policy changes
but also the broader economic effects on labor supply, retirement
behavior, and private saving. In the end, the consequences for the U.S.
economy of doing nothing could be severe. But the benefits of taking
sound, timely action could extend many decades into the future.
Chairman Nussle. Let me barely scratch the surface on a
number of items in my 5 minutes. First, it appears that you
agree that the economy appears to be in some definition of
sustained expansion, that we have had solid GDP growth, jobs,
and low inflation. Even though this should be good news for the
budget outlook in the short run, your testimony indicates that
you don't think we can grow our way out of our budget problems.
Would you expand on your feeling in that regard?
Mr. Greenspan. Yes, Mr. Chairman. The reason basically is
the huge potential expenditure in Medicare concerning which we
have very little understanding and essentially, at this stage,
very little control. Implicit in both the Social Security
System and in Medicare are mechanisms, direct and indirect,
that indicate that in the event of either a rise in inflation
or a rise in real growth in the economy, the benefits in both
of those programs go up over the long run reasonably
proportionately. So in a sense the more we grow, the more the
benefits rise, and as a consequence, we can't work our way out
directly.
Now it is the case that especially in Social Security there
is a substantial lag between the acceleration of productivity
and when it ultimately feeds into benefits through the link
which occurs as a consequence of the fact that initial benefits
are linked to wages, which pick up the productivity changes. So
over the long run, you are effectively, under current law,
guaranteeing real benefits. And while that is not actually the
case on the Medicare system, as a practical matter it is
turning out to be that way. So it does not appear as though we
can look to the mere acceleration in productivity--which, of
course, is the only way we can grow increasingly--as a
resolution to our fiscal problem in this respect.
Chairman Nussle. And yet our economy is growing. We have
seen some great news in the last number of quarters in
particular, so there is growth. And what would you suggest--let
us focus on taxes. There are a number of reasons why we have
seen growth, but if you could focus on tax policy for a moment
and suggest to us which tax policy changes you felt during the
last 3 or 4 years were the most significant in getting us back
on track and accelerating that growth.
Mr. Greenspan. There was a particular part in the recent
changes in tax policy which I thought and continue to believe
was highly desirable, and that is the partial elimination of
the double taxation of dividends. There is a major efficiency
question here with respect to how the economy functions, and it
has always been my view, and it is the view of a number of
economists, that integrating the individual and corporate tax
would improve the efficiency of the economy, increase its
growth rate and in the end increase revenues. And the action
taken with respect to reducing specifically taxation on
dividends received I thought was a very useful and major
structural change in the budget. It is the case that other
elements of the tax cut were effective and instrumental in
reducing the weakness that occurred in the economy in 2001, but
they are no longer playing a role of any significance today.
Chairman Nussle. Taking that tax policy for a moment and
remembering back, as I am sure you can as well as I can, to the
debate at that time, it was one of the more controversial and
partisan tax policy changes that were made. There was not a lot
of broad support for that tax policy change. And as a result,
it was controversial, and as a result of not having arbitrary
rules, such as paying for tax cuts, quote/unquote, as many
people like to use in the parlance of budgetspeak around
Washington--as a result of not having that arbitrary rule, we
were able to pass an elimination, partial elimination, of the
double taxation for dividends.
I would hate to see an arbitrary rule because of--for
partisan purposes only, which appears to be one of the reasons
why they are often put in to prevent us from making a very
important emergency change to our economy and to our Tax Code
in order to elicit a very positive change in our economy, which
you are suggesting occurred and many others are suggesting
occurred. To me, it is important for us to have pay-as-you-go
for spending. But do you really see tax relief as Government
spending--other than obviously earned income tax credits where
we are handing out money--but actual changes in tax policy as
really spending on the part of Government? That to me is not
spending. Why do you stick to this position as you have very
forcefully over the years, when, in fact, something as
important as the double taxation of dividends most likely would
not have been done as a result of an arbitrary budget rule?
Mr. Greenspan. I do so, Mr. Chairman, because I grant you
that if everyone believed as I do, and I realize you do, that
the solution to the budget problem is far more sensibly
addressed on the outlay side, then it wouldn't make very much
difference. But it is an arguable issue, and this is a
democracy, and we do have differing views and people holding
differing views, and compromise is essential in getting a
functional legislature to work its will. And in full
recognition of that, and in recognition of the fact that there
are people who don't agree with either you or me on this issue,
I think we require that to be symmetrical, because it is the
principle that I think is involved here; namely, that you
cannot continuously introduce legislation which tends to expand
the budget deficit, because down the road, the impact of an
ever-rising deficit, especially as a percent of the GDP,
creates some significant weakness in the structure of the
economy. So it is not an issue of economics. It is an issue, if
you want to put it that way, of political economy.
Chairman Nussle. And I won't put words in your mouth. You
are able to do that very well yourself. But let me tell you
what I believe I heard and what that means to me, and that is
there was a time where pay-as-you-go applied to both sides of
the ledger for political compromise. One of the challenges that
we have is that because you stick to that position, there are
those who say that we are not doing proper budgeting out here
because we don't pay for taxes, quote/unquote.
I agree with you. It was part of the political compromise
that was reached a numbers of years ago. It had its impact. It
worked for a time, but it has been used as a political hammer,
an anvil, against good tax policy at a time when our economy
needed that kind of a shot in the arm. I agree with you on the
issue that it needs to be there to pay for spending. That is
what Government pays for is its spending. But taxes are paid by
people, not by Government, and while I understand your point of
view that there may be a political necessity or compromise in
order to reach new budget rules, I happen to also agree with
you that the more important way to address budget discipline is
on the spending side.
With that, I will yield to Mr. Spratt.
Mr. Spratt. Mr. Chairman, let me pick up where you left off
and say that there are few big variables out in the future that
will determine the course of the deficit, and one is what
happens to the tax cuts that were enacted in 2001 and 2003 when
they expire in 2010, at the end of 2010? The chairman has said,
sitting right there in that chair twice before, we should
reenact, renew the Budget Enforcement Act of 1991. You declared
yourself a skeptic, if not a cynic, at one time as to whether
or not those rules would work and came here, and Mr. Copeland
said, I was only too pleased to say that I was wrong. They have
had a more salutary effect than I ever suspected they might
have. And you called twice that I recall, Mr. Chairman, for a
double-edged PAYGO rule. Political compromise or not, it would
apply both to entitlement increases and to tax cuts.
Is it still your position that if we renew the PAYGO rule,
it should apply to both; if we have tax cuts, including the
renewal of the expiring tax cuts in 2010, that these should be
fully offset?
Mr. Greenspan. It is still my position. The principle of
containing budget expansion is the overriding principle here.
And while, as I just indicated before, I could prefer to
structure PAYGO in a different way, that we have some form of
PAYGO system which is agreed upon by the Congress, in my
judgment, is the overriding consideration here, because as you
point out, it was quite effective in actually stemming budget
inefficiencies and expansion during the period when it was in
law.
I argued strenuously before this committee, I think, days
before its expiration in September 2002, that the act should be
renewed. I still do that. And even though I still believe that
partial elimination of the double taxation of dividends
deserves to be extended, because I think it is a fundamentally
important issue, nonetheless, the principle which is important
comes first. If I were voting, which, of course, I don't, I
would vote for continuing the partial elimination of the double
taxation of dividends, but I would also offer PAYGO offsets in
order to implement that.
Mr. Spratt. Let me ask you something about a different
line. You have also been an outspoken opponent for some time
that the Social Security trustees would use the common public
trust fund and invest some portion of it in--invest some
portion of it in equities and the stock market, which is what
private pension plans and public pension plans. The Federal
Reserve pension plan, I believe, is two-thirds invested in
equities. But you have been an opponent of Social Security
doing the same thing.
The administration is now proposing that the set-aside of
these private accounts would be invested in a limited range of
accounts, modeled after the Thrift Savings Plan (TSP);
therefore, it would be created by the Government. The
investment manager would likely be chosen by the Government.
They would operate under statutory provisions that would
structure the program, and from time to time the managers will
be chosen, the thing would be bid and rebid.
Isn't this getting very close to having the trust fund, the
Social Security Trust Fund, invested? The Government is really
the player here calling the shots, which would be the same case
if you had a trustee appointed for the investment of the common
trust fund.
Mr. Greenspan. It is, Congressman. It is the one part that
is as yet an unannounced program, about which I have a certain
pause for exactly the reasons you indicate.
Mr. Spratt. Let me ask you one final question. That is
today's debt is different from a debt when we were taking
economics's 101. And reading Samuelson as college students, we
were all told that the debts--its importance is not that great,
but today's debt is different because increasingly it is held
by foreigners. I have a chart here, I think No. 3, which shows
you the percentage of debt that is increasingly held by foreign
entities, central banks, Government treasuries and foreign
individuals. Is this a qualitatively different kind of debt
from a debt we have incurred and held in past years?
Mr. Greenspan. No, it is not. It is caused, as you know, by
the fact that, one, we have fallen far short in domestic
savings, so-called national savings, and as a consequence, to
maintain our domestic investment, we have had to increase our
borrowing of savings from abroad to a very significant extent.
And to the extent that the evidence of that debt is U.S.
Treasury instruments, it is reflected in the chart that you
have there.
The second issue, remember, is the fact that they choose to
invest here and----
Mr. Spratt. They could choose not to invest here, probably
more readily than domestic citizens.
Mr. Greenspan. They could, but the fact they choose to
invest here suggests they believe that the rates of return in
this country and the nature of the assets which they can hold
under U.S. law are exceptionally attractive. The question
basically is should we not be concerned in the sense that this
is a reflection of the fact that we save too little, and that
if we are concerned about these figures, the answer is not to
prohibit foreigners from purchasing our securities, but rather
to create a situation in which we have enough domestic savings
that the need to borrow foreign savings is reduced
dramatically.
Mr. Spratt. I wasn't going to suggest that we prohibit it.
Far from it. We would be in a terrible crisis if we restricted
foreign acquisition of our debt. But it would seem to me there
comes a time, particularly when we have woefully deficient
domestic savings--there could be a time when foreigners become
satisfied that they have enough and, for portfolio
diversification purposes, they decide to move into other debt.
Mr. Greenspan. Indeed. It is exactly the point I have been
making over the last year or two. It is not an issue only of
the rates of return or the quality of the assets which we
offer, which are world class, but there does come a time when
it is conceivable you are holding too much of your existing
assets in one set of countries. And merely for diversification
purposes, one would evidently start to move.
There is, I must tell you, however, very little evidence
that that is even going on, even though there have been some
rumors in the press and the like that there has been a
significant move out of U.S. dollars. That may occur somewhere
down the line years ahead. Nobody really knows for sure, but
there is very little evidence that what is occurring recently
is more than technical moves backwards and forwards.
Mr. Spratt. Thank you, sir.
Chairman Nussle. Mr. Portman.
Mr. Portman. Thank you, Mr. Chairman.
And, Chairman Greenspan, thank you for being with us today
and for your optimistic assessment of our economy, your good
news about 2004, and also looking forward to 2005, which you
see as sustained growth.
My first question to you would be on the tax side, and if
you could give us an assessment of what you think the role was
of the tax relief in 2001, 2002, and indeed 2003. You talked
about the dividend tax relief. Capital gains relief was also
enacted that year. What role do you think it played in having
us have the relatively strong economic growth we have seen and
the job growth we have seen, over 2 million new jobs in the
last year, 2004? What role will it be going forward in 2005?
Mr. Greenspan. The main effect of tax cuts is on the GDP.
Its effect on employment is indirect in the sense that
sometimes the GDP is created by accelerated output per hour,
which increases standard of living, but doesn't increase
employment, so that an analysis of tax cuts should always focus
on the issue of what they do to economic growth.
It is fairly apparent that tax cuts were a significant
factor in stemming the weakness that was occurring in the
American economy subsequent to the bursting of the bubble in
2000. And while you don't know exactly how and by what amounts,
it is evident from the very shallow recession that occurred as
a consequence of the number of imbalances that were occurring
in the latter 1990s, that a goodly part of the support did come
from tax cuts.
It is less important now in the sense that the economy is
now developing its own momentum. Capital investment is picking
up. The orders are coming in reasonably well. An increasing
number of business executives are indicating that their
business is good and getting better.
Mr. Portman. We have had a discussion of PAYGO, but as a
general rule do you believe as these tax relief provisions that
were put in place in 2001, 2002, and 2003 begin to expire, that
they should be extended, or should we have tax increases, and
what effect would that have on the economy?
Mr. Greenspan. I have only commented on the one which has
always been important to me, which is reducing part of the
double taxation of dividends. All I am saying is that my
general view is I would like to see the tax burden as low as
possible. And in that context, I would like to see tax cuts
continued. But as I indicated earlier, that has got to be, in
my judgment, in the context of a PAYGO resolution.
Mr. Portman. Talking about national savings, my second
question is about that, and I think you rightly pointed out the
challenge is the retirement of the baby boomers, and the fact
between Medicare and Social Security we have an unfunded
challenge.
With regard to national savings, you supported national
personal savings accounts and Social Security. I do believe
there is a big distinction, as Mr. Spratt mentioned, between
the Government investing directly and individuals directing
that investment, even if it is within Social Security, which is
very much what the President's personal account proposal
includes. But with regard to adding to savings, do you also
believe that we should in addition to having personal accounts,
which I support, also encourage savings among employers, among
individuals through 401(k)s? 401(k)s is now almost $2 trillion
in savings, and IRAs over $3 trillion now, and we could do a
lot more. Do you think we should also be as a Congress focusing
on the private savings side and providing more inducements for
that?
Mr. Greenspan. I do, Congressman. There is a dispute
amongst economists about how much, say, the 401(k)s and IRAs
have contributed net to domestic savings. There is an argument
that part, and some argue all, is merely a reshuffling of
existing savings and doesn't add anything net. I suspect that
there is a net increase. It is hard to prove, and I haven't
found any of the analyses both pro and con fully conclusive,
but the issue is of such an overriding consideration that
anything we can do to enhance incentives to save I think we are
obligated to do.
Mr. Portman. I would make one obvious point that this is
about long-term retirement savings. Even if there is some
displacement of other savings, looking at the savings habits of
American households and even businesses, certainly by
encouraging long-term savings, you have net long-term savings,
I believe.
And second, just to warn us all on PAYGO, the PAYGO rules
as applied to that kind of savings doesn't work well when we
are talking about a 10-year budget projection. So much of that
comes back in terms of taxation at the end that cannot be
accounted for in the 10 years.
Chairman Nussle. Mr. Moore.
Mr. Moore. Mr. Chairman, thank you for your service to our
country over the years. I want to follow up on a couple of
questions that Mr. Spratt asked you about, investment by
foreign nations in our debt. You said they made a choice to do
that. What if they decided to disinvest and not hold that debt
anymore? What practical effects would that have on our markets
here for our economy?
Mr. Greenspan. We have examined that in some detail because
the size of both our current account deficit and the extent to
which that impacts on our domestic economy are relevant issues
for policy.
What we have judged is that the fairly significant
purchases of U.S. securities or claims in general on American
citizens have lowered long-term interest rates modestly, but
not to a really considerable extent. And one would presume that
the response is symmetrical. In other words, if it does not
have a more than a moderate effect moving rates down, slowing
the accumulation to zero or even doing some divestiture is
likely to have an impact of equal size in the other case. In
neither event in our judgment does it appear to be a dominant
force.
Now, I have to point out that these are judgments which
always have to be reevaluated at all times, and we continue to
do so. Obviously, we rethink our positions to make sure they
are still sound. And these numbers vary from time to time, but
our general conclusion at this stage is we do not perceive that
as a really significant problem for our domestic economy.
Mr. Moore. Thank you. Chairman Greenspan, as you know, the
payroll and income tax revenue that is credited to the Social
Security Trust Funds is actually deposited into the general
Treasury and effectively becomes part of the Government's
operating account. Many Americans I think are not really aware
of how this takes place, and I think they really believe that
Social Security money that is paid in by American taxpayers is
actually in a Social Security ``trust fund'' instead of used
for current operating expenses of the Government.
As you know, the Social Security trustees have named 2042
as a date that people should be concerned about us when this
account becomes ``insolvent.'' the Congressional Budget Office
says 2052, and the date that you say we should have a great
concern about is 2008, which is a lot closer. Whatever the
date, whatever the date, whether it is 2042, 2052, or 2008, I
think all of us would agree that the threat to the Social
Security Trust Fund is real and needs to be dealt with in a
bipartisan manner.
On February 8, I introduced legislation that would take the
Social Security Trust Fund off budget and say to Congress and
say to the President that money paid for Social Security taxes
cannot be used for any purpose but for Social Security
purposes, and I am talking about partial retirement benefits,
disability, and survivors benefits.
I guess my question to you is, and I want to add also, the
administration's fiscal year 2006 budget, which was released
last month, would spend $2.6 trillion of the projected Social
Security surplus over the next 10 years. If Congress protected
the Social Security surpluses and really credited them to a
Social Security Trust Fund, would that go any step in the right
direction toward trying to preserve and protect Social Security
and extending the solvency and the life of Social Security in
the future?
Mr. Greenspan. I believe it would, Congressman. First of
all, of course, as you know, the previous statutes have
required the bookkeeping to change and, indeed, you will find
on the monthly Treasury statements that the deficit is split
between on budget and off budget, and the off budget is
essentially the Social Security Trust Funds.
The difficulty that we have is that, one, as you pointed
out, that even though there is a trust fund, the question is
not what it is invested in, it is what the funds are used to
finance. And there was back in 2001 sort of a mythical lockbox,
but the trouble with the mythical lockbox is that it should
have been real, because it did convey the notion that these are
funds that should be accumulated to invest directly or
indirectly into the capital assets which are built up so that
when the retirees who are putting the funds into the trust fund
retire, the physical goods that they need for retirement are
being produced, and that the claims which are the benefits that
the Social Security trustee pays out to the beneficiaries can
be used to purchase those real assets.
On a strictly pay-as-you-go system, which worked very well
for a long period of time because the demographics were working
very well, you didn't need a trust fund, it didn't matter, and
indeed the trust fund was there mainly for some semblance that
monies were being accumulated. But the truth of the matter is,
as you point out, that they weren't.
So the issue is if you can separate, you will create
additional savings that are required. But remember what is
implied here. If we are talking, say, roughly a unified budget
deficit of $400 billion and, as I recall, the Social Security
Trust Fund grows in recent years, including interest at $150
billion a year, if you move the Social Security Trust Fund or
just, say, move the whole office to San Francisco into a
special system which is unrelated to Washington, and require
that all budgetary activities of this committee and your
counterparts in the Senate and the rest of the budgetary
processes are required to deal with what would we now call on
budget----
Mr. Moore. Yes, sir.
Mr. Greenspan. We would be dealing with not $400 billion,
but $550 billion.
Mr. Moore. But that is a radical notion, to tell the truth
to the American people, isn't it?
Mr. Greenspan. The presumption is that in doing that, you
will get the Congress to scale that back and every dollar they
scale back from the $550 billion is true net savings to the
economy, which is essentially what a retirement program needs.
The reason I am in favor of private accounts, or one of the
major reasons is, I believe it is easier to move the private
system to California than it is to move the Social Security
Administration.
Mr. Moore. Thank you, Mr. Chairman.
Chairman Nussle. I have a feeling it will move back from
San Francisco in about 2016 when we have to start putting
general funds into Social Security.
Mr. Ryun.
Mr. Ryun of Kansas. Mr. Chairman, thank you. Chairman
Greenspan, I want to thank you for your time today and for
testifying, but also being willing to answer our questions.
Social Security is on the minds of I think all of us, as
well as many back home in our districts, and it has become a
major forefront here in Washington. Some have characterized it
as being a financial crisis; others have said it is doing just
fine, there aren't any real problems with it.
With your insights, how would you characterize and assess
the financial well-being, if you will, of the Social Security
system?
Mr. Greenspan. Well, as I tried to outline in my prepared
remarks, a retirement plan is essentially a plan which enables
you to forego consumption now. As I once put it to a committee,
it is as though you went to the supermarket every week and when
you came home, you put 10 percent of what you bought in your
basement and you then used it when you retired. Effectively,
that is really what a retirement system is.
In a more sophisticated sense, instead of putting the
groceries in the basement, you invest in real productive
capital assets which produce even more physical goods and
services that you need.
The sole purpose of a financial system--which is associated
with the physical volume process--is to facilitate the physical
movement of goods and services, and what the pay-as-you-go
system does not do is have a mechanism which creates a buildup
of savings to create the real resources. And, I must say, your
colleague on the other side of the aisle's notion would help in
that regard, but it is still not fully funded, and one thing
about private accounts is they have at least the capability of
doing that.
Mr. Ryun of Kansas. So if you wouldn't characterize it as
being fine or in crisis, how would you characterize it? If it
is not in crisis, how long do you think it will be before we
actually head toward that?
Mr. Greenspan. This is one's definition of a crisis. If you
are in the financial business, as I am and have been all my
life, a crisis is something that is about to happen, and in
this case, nothing is about to fall off the cliff in the next 2
or 3 years. Indeed, the first sign of a really serious issue is
when the leading edge of the older part of the baby boom starts
to retire 3 years from now. Is it a serious problem? It is an
exceptionally serious problem. How one likes to use terminology
is less relevant than describing what reality is, and reality
is daunting.
Mr. Ryun of Kansas. Thank you very much, Mr. Chairman.
Mr. Portman [presiding]. Mr. Edwards for 5 minutes.
Mr. Edwards. Thank you, Mr. Chairman.
Chairman Greenspan, thank you for what I interpret as your
serious and sober warning to Members of Congress that we better
get our fiscal house in order or the future economy, economic
growth, our children's future will pay a very heavy price,
along with promised benefits to seniors in that generation.
If I could make an observation after 3 years of watching
you testify before this committee, it would be this: that you
honestly come before this committee and say in effect that
trillion-dollar tax cuts, if matched with equal spending cuts,
can increase our savings rate, increase economic growth, and
help the future of our economy. The practical result is, my
Republican colleagues hear your comments about the tax cuts,
implement those, but do not support equal trillion-dollar
spending cuts. It might cut a billion here or a billion there,
although the truth is, even the Bush administration that wants
to sound like a hawk on spending cuts, is increasing three of
the five largest Federal programs of the thousands of programs
we fund, and those five programs represent two-thirds of every
dollar we spend.
So as a consequence, what I have seen after the 3 years of
your testimony here, which has been honest, straightforward,
good advice, is that deficits continue to get larger and we are
at an impasse. I see no way out of this impasse right now,
quite frankly. My Republican colleagues will continue to listen
to your comments about the tax cuts, but be unwilling to even
support some of the cuts proposed in spending in this year's
budget proposed by President Bush.
We Democrats, some of us who would be willing to make some
tough spending cuts to get back to balanced budgets, will not
do so if, in our value system, we think we are going to ask
veterans to make sacrifices on health care, seniors to lose
access to nursing homes, and students to lose access to college
student loans simply to fund tax cuts for Americans making over
$300,000 or $400,000 a year.
So year after year, we are at this impasse. You have
observed this impasse. My question is, first, if we do not
change this impasse, if we do not break this impasse, what will
be the consequences on interest rates and the economy over the
next 10 years, in your judgment?
Secondly, would you care to comment about whether it might
be appropriate to do what former President Bush did in 1990
when he said that a campaign promise of ``Read my lips, no new
taxes,'' isn't as important as the future fiscal soundness of
our economy and brought Democrats and Republicans together,
asking both sides to make compromises; the Republicans to
compromise on tax cuts and Democrats to agree to compromise on
spending increases, once assured those compromises on spending
were not going to just fund tax cuts for the wealthiest.
So, in summary, again, how serious will be the consequences
of this impasse that you have witnessed over the last 3 or 4
years, and is it time for us to do something dramatically
different, perhaps with a bipartisan budget summit led by
President Bush?
Mr. Greenspan. Well, Congressman, if you merely project how
the actuaries interpret current law into future spending and
tax obligations, you have an extraordinary rise in the unified
budget deficit. If that is literally the path on which we find
ourselves, we will find sooner rather than later that long-term
interest rates begin to rise, and that when you begin to do the
arithmetic of what the rising debt level implied by the
deficits tells you and add interest costs to that ever-rising
debt at ever-higher interest rates, the system becomes fiscally
destabilizing, and what you end up with is probably a stagnant
economic system quite conceivably, not only a slowdown in the
rate of growth, which is what I have indicated is the normal
expected outcome of events such as this, but unless we do
something to ameliorate it in a very significant manner, we
will be in a state of stagnation.
And the reason why I seriously raise the question about
trying to solve the problem on the tax side is that what
history does tell us is that when taxes get increased above
certain levels, you begin to get significant slowdown in
economic growth and, therefore, in the revenue base. So you
don't get all of the taxes or, I should say, tax receipts that
you expect to get in raising rates, and I think you have to be
very careful in doing that.
And how one comes together to resolve this overall issue
and what compromises both sides make is obviously up to the
committee to do. But if you ask me what the consequences of
doing nothing are from this stage forward, I would just as soon
not have to contemplate that.
Mr. Edwards. Thank you, Mr. Chairman.
Chairman Nussle. Mr. Putnam.
Mr. Putnam. Thank you, Mr. Chairman, and welcome to you,
Dr. Greenspan.
A number of the reform proposals for Social Security, both
those that involve allowing persons to divert a portion of
their Social Security taxes and those that create personal
accounts above that involve significant transition costs. Could
you please comment on the microeconomic effects of how we
reform the system that, as you very eloquently put in your
written statement, desperately needs it, and possibly personal
accounts provide, in your words, a more credible means of
insuring the program, adds to overall savings and boosts the
Nation's capital stock?
How will the markets react to those intermediate
transitions?
Mr. Greenspan. Congressman, this is the one very difficult
problem of evaluation that we have. In the program, as I read
it in the newspapers, the program would essentially take U.S.
Treasury bonds and sell them, take the proceeds and put them
into a forced savings account. And in terms of the impact on
the supply and demand for securities, because the recipients of
the account can't sell the securities that they get, it should
be a wash, because the amount of money that is moved from
Government savings to household savings is the same. You
increase the unified budget deficit, you increase household
savings, and it is a wash with respect to total domestic or
national savings.
In principle, one would assume that the impact would have
zero effect on interest rates. But we don't know that, and it
is an interesting question that is involved here, and that is
the reason why I have argued in earlier testimony that moving
in this direction should be cautious and gradual, because you
don't want to find that you have a fairly extensive program and
learn that the theoretical change in interest rates, which
seems to make a great deal of sense to economists, is not the
way the markets look at it.
So in this respect, I think it is important to move
gradually and see what the response is. And remember, in the
spirit of taking Social Security off the unified budget,
remember the unified budget was originally constructed for the
purpose of evaluating how Government financial activity impacts
the economy, meaning impacts interest rates. And for the vast
proportion of transactions, the actual unified budget deficit,
plus whether it is increasing or decreasing, is a fairly good
measure of what the impact on the economy is.
In this particular case, where you are setting up forced
savings for a very protracted period of time, the principal
purpose of the unified budget accounting system is being
violated and, in that regard, using the unified budget to
evaluate this process requires an asterisk; but how important
that asterisk is, is something we really don't know and will
not be able to tell until we move forward with this program and
see the extent to which modest changes in private accounts
affect interest rates.
Mr. Putnam. Thank you, sir. Let me also ask, in your
testimony you refer to provisions for mid-course corrections to
deal with unanticipated budgetary outcomes. It appears to
describe triggers, which I believe in the past you, in previous
discussions about tax policy, frowned upon. Could you please
elaborate on that and if you do, in fact, call for some type of
trigger?
Mr. Greenspan. No. In fact, I have testified before this
committee in the past indicating that various initiatives, both
on the tax and on the expenditure side, which have long-term
consequences, require some mechanism for the committee to
reevaluate them after a specific period of time to be assured
that the actual purpose of the program and its financings are
what you voted for. And if it turns out that that is not the
case, then there should be a mechanism, either automatically in
which it happens by some formula, or requiring a reevaluation
and maybe even a revote by the Congress on a particular piece
of legislation, because too often what we find is that we put
in front of the Congress a particular program and with it is an
associated long-term forecast. And the extent to which those
forecasts have not been realized, as you know far better than
I, are too numerous to mention.
We are no longer in the period 50 years ago when the vast
proportion of the budget was what we now call ``discretionary''
and subject to annual evaluation by the Congress. We now have a
very significant part of both the expenditure side and the tax
side, which is an automatic system. And sometimes these things
veer off track and there is no mechanism to address them. And
if we actually had such a mechanism, I think the budget policy
process would be far improved, significantly improved.
Mr. Putnam. Thank you very much.
Chairman Nussle. Mrs. Capps.
Mrs. Capps. Thank you, Chairman Nussle. Chairman Greenspan,
thank you for meeting with us today.
In your opening statement, you made the following comment:
Unless we obtain unprecedented increases in productivity, we
will have to make significant structural adjustments to the
Nation's major retirement and health programs.
I would like to focus on the first half of that statement
and relate it to something you said at the Banking Committee
hearing recently. This is a quote: ``The failure of our society
to enhance the skills of a significant segment of our workforce
has left a disproportionate share with lesser skills. The
effect, of course, is to widen the wage gap between the skilled
and lesser skilled.''
Now, given your concern about the lesser skilled, I would
like to have your comment on the deep cuts in the Department of
Education included in the President's current budget. In
particular, aren't cuts in programs like vocational and
technical education and student loans likely to work against
the creation of a higher-skilled work force; and if we shift
the burden more completely to the States, many of which are in
deficit as well, can we expect them to take over these
responsibilities? More broadly, shouldn't we as a society and
as a Federal Government be investing more in developing our
workforce if we want to see higher rates of productivity and
economic growth?
I have asked this chart be put up, because I know you have
expressed concern in the past about income inequity, and I
would hope that you would tie your comments, if you can, to our
investment in education.
Mr. Greenspan. Well, Congresswoman, I think you are
exposing what the real dilemma of this committee is.
Mrs. Capps. Yes.
Mr. Greenspan. On the one hand, you have issues of trying
to make the economy and the revenue base expand, and on the
other hand you want to increase expenditure, both of which are
valuable choices and valuable programs. But if you put them
together, you get an increasing deficit which causes the
economy to short circuit.
So the question that you have to resolve is how does one
balance these particular choices. And the problem that is
invariably the case under such circumstances is that you are
choosing between things of value. In other words, no program
appears before this committee which is of no value. And if you
have things which increase expenditures and you have things
which reduce revenues, unless you can find a way to repeal the
laws of arithmetic, you are in very serious trouble. And I
think that this is something which is merely a restatement of
what the nature of the problem is.
And I could answer your question, but my answer is
irrelevant because it essentially merely just gets to the issue
which must be resolved by the representatives of the American
people, and it is a very tough choice. If I were a Member of
the Congress, I would have to struggle with it and I would come
up with my own particular choices, but I would recognize that I
would be one of 435 people in this House. And you are far more
adept at political issues than I, judging that I am sitting
here and you are sitting there.
Mrs. Capps. I guess I just have in front of me the vision
of the superintendents of a particular county in California
that I met with on Monday, the day before yesterday, looking at
this proposed budget and what it will do to the very real young
people and retrained workforce people in my communities. And I
am sure this is reflected across the country. We are talking
about an investment in our economy when we invest in education;
is that not true?
Mr. Greenspan. Well, I am not going to repeat what I have
said, but I think it is an issue which you have to debate with
your colleagues, and I trust that in a reasonable period of
time, you will come up with some resolution of what is a very
serious set of choices. And what is causing the set of choices,
to a very large extent, is an unprecedented demographic shift
which we are not going to be able to alter. It is going to be
with us because with the inexorable turn of the calendar, we
are going to get a very large acceleration in the number of
people moving from the labor force into retirement, and that
has very significant fiscal implications, and there is no way
to get around it. You either choose to do something in advance
which will ameliorate the problem but not completely eliminate
it, or wait until the problem is right on you, in which the
solutions are going to be very painful.
Mrs. Capps. Well, I guess I am not getting any comfort from
your response. Thank you very much.
Chairman Nussle. Mr. Wicker.
Mr. Wicker. Thank you, Mr. Chairman, and thank you,
Chairman Greenspan, for your testimony.
You know, for the benefit of people watching on C-SPAN, I
just want to remind our audience what a lengthy and
distinguished record our witness has today: appointed,
designated as Chairman of the Federal Reserve by President
Reagan, by the first President Bush, by President Clinton, and
by our current President. So I think it is fair to say that
everyone realizes, Mr. Chairman, that you do not come here with
a political agenda, and I appreciate that.
Your testimony is not surprising, but in my view, it is
nonetheless profound. You say that there are imbalances,
significant problematic imbalances between our resources as a
Government and the commitments that we have taken on; that
these imbalances very much need to be addressed. Yet you say
that to address these with tax increases would be very
worrisome, and I agree with that.
You also mention the fact that because of the demographics,
this turning of the calendar that you mentioned to Mrs. Capps,
Social Security needs to be fixed, and the sooner the better.
But you also point out that it needs to be repaired in two
respects. One, that we need to solve the problem of having
enough money in the system to make the payments, but also it
should be changed in a way that encourages national savings.
I appreciate you clearing up this sort of alarmist talk
that has been going on around the city about the amount of
American debt that is held by foreigners. Clearly, it is a
concern, but as you pointed out, it is an indication that
people all over the world view investing in the United States
as a very sound investment. And to suggest rather
simplistically that if the Chinese or Koreans decide that they
no longer want our bonds, that somehow they could call them in
and that would create a crisis, I think it is good that that
has been debunked today. If they want to sell our debt, they
could sell it to a willing buyer on the open market, or if they
do not want our debt, they can refuse to purchase any more of
our bonds. But I appreciate your testimony on the record in
that regard.
And then I understand that you said, with regard to the
national debt owned by foreigners, the greatest problem is that
we are not buying it ourselves, that it is not Americans who
are saving money and buying U.S. Treasury instruments, because
we need to increase our national savings. So you say that must
be part of our Social Security fix, and I appreciate that.
There are folks that say going to these individual
investment accounts, even though it would increase investment,
that it dismantles this great program of Social Security, this
social contract that we have had for half a century or more,
that we take care of the needy elderly, that it is too risky. I
find it hard to believe that you would recommend a scheme that
would be too risky for Americans, that you would recommend a
scheme that would somehow violate the Social Security safety
net.
So I would ask you to comment on that. Do you have a
comfort level that we can move to individual accounts,
gradually and cautiously, as you say, without harming this
compact that we have had between the workers and the elderly
and that we will not return to the elderly poor?
Mr. Greenspan. There are numbers of different ways of
essentially guaranteeing a level of benefits in any of these
programs, whether it is under Social Security, whether it is
partial privatization, whether it is any particular form of
retirement structure. As best I can judge, in every case where
people have come up with very different alternatives to some
mix of private and public accounts, there is always some
component in there which is a guarantee against any extreme
problem. And I think there should be.
So that is not where the issue lies. The issue has got to
lie in two areas. One is a critical issue. We cannot have a
pay-as-you-go system when the demographics that confront us
lead us eventually to a position where there will be fewer than
two workers per retiree. It just will not work. In 1935 and for
the next 50 years, it worked exceptionally well because you had
population growing at a sufficiently rapid pace so that there
was always a large number of younger people coming up, as you
increased the population, relative to the number of people who
were retired. But when you get the population growth slowing
down, and especially the extraordinary improvement in life
expectancy after age 65, the arithmetic no longer works for
pay-as-you-go, and what you need is a system which creates the
savings that are invested in real assets to produce the real
consumption in retirement. That is the first issue.
The second issue is that private accounts have one
important element in them, in that instead of a guaranteed
annuity for retirement, which is what Social Security is, you
actually have a claim to wealth; even though that wealth is
immobile until you retire, it is, nonetheless, yours. And the
question of being able, after retirement, to have various
alternatives, including bequeathing it to your children, is a
value which I think is worthwhile developing in this country,
because there is just too little wealth below the median-income
level. And what private accounts will do is to create the
building up of actual individual wealth, which I think is a
value in and of itself.
Mr. Wicker. Thank you, Mr. Chairman. Let me just observe
that I believe in our witness today we have truly a national
treasure, and sometimes I have had to listen to him when I
didn't particularly like the answer. I hope that the American
people and American policymakers are listening to his testimony
today. Thank you for your indulgence.
Chairman Nussle. Mr. Cooper.
Mr. Cooper. Thank you, Mr. Chairman.
Thank you, Chairman Greenspan. I would like to add your
distinguished predecessor to the list of great chairmen,
because Paul Volcker did an outstanding job as well. I know it
is premature, but I already feel sorry for your successors,
because they have tough acts to follow.
Last week, the Blue Dog Coalition, a group of Democrats who
are fiscal and defense hawks, introduced a reform package and
we borrowed proudly from some of our friends across the aisle,
the Republican Study Committee, to come up with bipartisan
reforms that will help us address the deficits we face; such
reforms as discretionary spending caps--and our caps are
actually tougher than the President's in this budget--reforms
such as a cost estimate on every bill so that we know what we
are spending around here; a roll call vote on every bill that
costs $50 million or more, instead of just voicing it through
this Congress; things like identifying earmarks and explaining
them, so that we cannot have willy-nilly pork-barrel spending
around here; commonsense measures including the Balanced Budget
Amendment of the Constitution, which was part of the Republican
Contract With America. But we also included real PAYGO, pay-as-
you-go, and I remember in prior testimony, you could even
recall the day in 2002 when Congress let that provision expire,
that provision that was so helpful to us in curbing our
borrowing and spending appetite. So the Blue Dog program was
introduced last week, we call it a 12-step program, 12 steps to
get our Nation off its borrowing and spending drunken binge
that we are on right now. I would like to invite our colleagues
across the aisle to cosponsor that measure as well as our
Democratic friends, because it includes what you highlight in
your testimony: real PAYGO.
If the gentleman--I am sorry he has left now, our friend
from Mississippi--if he truly values your leadership as he
describes, he will also endorse your call for genuine PAYGO to
curb our spending habits here. So that is a step.
Another step is we started a bipartisan savings caucus last
week, Senator Rick Santorum, Senator Kent Conrad on the Senate
side, joining together in a bipartisan fashion on the House
side to promote voluntary savings and to again implement parts
of your testimony, which we read and admired, to try to boost
our national savings rate.
Let me ask you this, Mr. Chairman. In your testimony you
mentioned the need for mid-course correction, getting us back
on track when we discover we have made a mistake in a spending
or a tax program. Well, in 2003, this Congress voted for a
giant new entitlement program in the Medicare drug benefit. We
know now--and we were only allowed 26 hours to read that bill,
not the usual 3-day period, so very few Members knew what was
in it. We know now that that one piece of legislation will add
$8.1 trillion to the unfunded obligation of our Nation over the
next 75 years. That one bill alone is twice as large as the
total Social Security problem we face. That one bill alone was
passed by this Congress in the dark of night, a vote starting
at 3 o'clock in the morning, that became the longest vote in
American history.
So if we were going to have a mid-course correction,
wouldn't it make sense to trim or perhaps even repeal that
legislation that sunk our Nation deeper into debt than any of
us could possibly have imagined, and a bill that had a cost
estimate that was deliberately hidden from this Congress under
threat of firing of a Federal employee, so we were deprived
even of that knowledge of the true cost of that bill at the
time?
So if we are going to implement your good advice, whether
it be with PAYGO, real PAYGO, as is in the Blue Dog proposal,
or to have a real mid-course correction, wouldn't it make sense
to adopt some of these measures?
Mr. Greenspan. Well, Congressman, all I will say is that
all of the items I indicated in my prepared remarks refer to
the total budget of the United States.
Mr. Cooper. Well, there are very few single votes that we
could cast that would do more to reduce unfunded liabilities of
this Nation, of $8.1 trillion, than what we passed just a year
or two ago.
Mr. Greenspan. I cannot dispute your arithmetic.
Mr. Cooper. Thank you, Mr. Chairman.
Chairman Nussle. Mr. Crenshaw.
Mr. Crenshaw. Thank you, Mr. Chairman.
I would like to ask just a question or two about the
economy and where you think it is headed. You mentioned that
you feel good about the direction of the economy, that it is
fairly healthy, but this issue about the yield curve as it
flattens, it seems to me as you raise short-term rates, you
would expect long-term rates to go up, and that is not
happening. I read somewhere that you describe that as a
conundrum.
The conventional wisdom would say that if long rates don't
go up when short rates go up, that there is some sort of
indication of a slowing of the economy. On the other hand,
people could argue that inflation is under control and the
economy is healthy. I would like you to comment on that. I
mean, what is your view as the yield curve narrows--I guess it
was back at the end of 2001 when it actually inverted and that
kind of foretold some problems in the economy. But if you could
maybe expand on what you mean when you say it is a conundrum;
is it a short-term aberration, or are you concerned at all?
Could you talk a little bit about that?
Mr. Greenspan. Yes, Congressman. The history of most of the
programs of raising short-term rates by the Federal Reserve is
that they have, in the early stages, been matched by rising
long-term rates; and I must add in part that is merely almost
an arithmetically required relationship, because you can view,
say, a 10-year U.S. Treasury note as an average of all interest
rates from 1 or 2 days, 5 years, 7 years, out to 10 years. And
to the extent that the overnight rate or the very short-term
rates have risen, it affects the average and is actually
embodied in the yield of the 10-year note. So the normal
expectation is that when you move, you will move the long-term
rate if for no other reason than you are moving the average in
the very beginning.
Historically, toward the end of a tightening period when it
becomes clear that the impact is to restrain inflation--you
will find that increasing short-term rates does move long-term
rates down, and that is largely because reducing the inflation
premium embodied in long-term rates will bring the yield down.
What we have had in the most recent episode, as you point
out, is we moved up and long-term rates went down far sooner
than is typically the case. And we examined the possibility
that you suggested, namely, this may be an indication that the
economy is about to soften. But if that were the case, we
wouldn't be finding a number of other indicators such as stock
prices going up. And we essentially put that aside as an
explanation, because it was very evident, as I indicated
earlier in my testimony, that this economy is not in the
process of moving into a significant slowdown.
The result of that is we began to look in different areas
as the potential cause, and none of them was without a
qualification, which is the reason I said it is indeed a
conundrum. Now, I must say since then, long-term rates have
moved up, and it is less of a conundrum in that respect. But it
is an unusual change in the way markets behave.
Mr. Crenshaw. Would you distinguish it from 2001 when it
was really more--it was short-term rates were pretty stable and
the long-term rates were coming down, and that created--is that
more of a scary scenario when you are not really moving short
rates up and find that long rates don't follow; but you had
fairly short rates which, for some reason, foretold a softening
of the economy, the long rates actually went below.
Mr. Greenspan. You remember at that time the Federal funds
rate was actually quite high, and we at that particular point,
observing the bubble beginning to unwind, wanted to make
certain that we did not lower the Federal funds rate too much,
too soon, and allow a partially deflated bubble to reinflate
with greater potential problems down the road. So that we held
the short-term rate longer than would ordinarily be the case
until we were reasonably confident that the deflating of the
bubble was well underway. So we had the very unusual pattern
that you alluded to.
The reason that long-term rates went down, obviously, is
that the economy was clearly moving down, or the rate of
increase was slowing fairly dramatically. So that was a very
special case which very rarely happens. And indeed, it wouldn't
be comparable at all to the type of market performance that we
have been observing in the last year or so.
Mr. Crenshaw. Thank you very much.
Chairman Nussle. Mr. Davis.
Mr. Davis. Thank you, Mr. Chairman.
Chairman Greenspan, good morning, good afternoon to you. If
I understand your testimony from listening to it in my office
most of the morning, I certainly understand that you are
concerned about Congress' ability to address the Social
Security shortfall. But I want to draw in my questions a
distinction between addressing the Social Security shortfall,
if you will, and the specific government program the President
wants to institute, and that is adding retirement accounts.
Let me begin by asking about something that Josh Bolten,
the OMB director, said when he came here a few weeks ago. With
respect to the transition costs that we would expect if we move
toward private accounts and the impact it would have on the
current financing of the system, he said, ``The transition
financing does not represent new debt. These are obligations
that the Government already owes in the form of future
benefits.''
Do you agree that the transition costs and the borrowing
that would occur does not represent new debt, Mr. Chairman?
Mr. Greenspan. Well, what he is referring to is how we
would be regarding the Social Security system, were we like the
private sector on accrual accounting, instead of measuring the
impact on Social Security of taxes when they are paid in and
benefits when they are paid out, but not addressing the issue
that the working-age population is accruing under law ever-
increasing benefits, which are obligations of the U.S.
Government. If we had accrual accounting, we would be required
to be including them as expenditures at the time earned and not
at the time paid. If we were under that system, I might point
out parenthetically, our current debt to the public, which is
now roughly $4 trillion, would probably be $10 trillion more
than that, because that is the present value of the obligations
that we owe to people currently in the workforce who will
retire. So that the issue that I believe Josh Bolten was
raising was in the context of a gap accounting system with
accruals, that if you then moved accounts from the public
sector to the private sector, it literally has no effect.
Mr. Davis. Let me ask you a series of follow-ups on that,
Mr. Greenspan. From the standpoint of foreign investors and
domestic investors in the stock market, which would pose the
greater threat to investor confidence, in your opinion, large-
scale borrowing costs to pay for the retirement plan, or a
failure of this Congress to enact the President's plan in the
109th Congress? Which would pose the greater threat to investor
confidence?
Mr. Greenspan. Well, first of all, there is no distinction
between what impacts on foreign versus domestic.
Mr. Davis. I understand that. I understand that.
Mr. Greenspan. I know how I think the markets ought to
behave under various different sets of circumstances. But I
must tell you that I have found, much to my chagrin, that they
do not always work that way, and I only find out why 6 months
or 6 years after the fact.
Mr. Davis. Would you agree that, really, it is only a guess
and there is no particular reason to think that the markets
would be somehow disturbed or investors would be disturbed if
in the 109th Congress we failed to pass retirement accounts?
Mr. Greenspan. Well, the issue is that the market may be
unaffected whether you pass it or you don't pass it.
Mr. Davis. Then let me ask another follow-up question along
those lines. What do you think would produce the more
enthusiastic response from the market if we could somehow snap
our finger and we could choose between reinstituting PAYGO
rules today or passing private retirement accounts? Which of
those two do you think would invoke a greater enthusiasm from
the market?
Mr. Greenspan. I really can't answer that question. It is a
very interesting question, but I really don't know the answer.
Mr. Davis. What about from Alan Greenspan; which would
produce a more enthusiastic response, PAYGO rules or retirement
accounts?
Mr. Greenspan. I would like both, and you put me in the
same situation as I just put your colleague in over there.
Mr. Davis. Before my time runs out, let me put one last
question to you.
Mr. Wicker [presiding]. It seems to have run out.
Mr. Davis. If you will give me 30 seconds, Mr. Chairman.
Let me give you four issues, well, four issues, one question. I
will be extremely brief.
Enacting private accounts for Social Security, that is one
possibility; dealing with what Mrs. Capps asked you about, that
is the gap between skilled and unskilled workers; regulatory
reform for the GSEs, and dealing with the gap; and in the math
and science performance between American high school students
and students in other industrialized nations. If you had to
take those four issues, would you put--again, looking at the
109th Congress, what we will be doing over the next 2 years,
would you put the enactment of private accounts at the top of
that list of four issues for us?
Mr. Greenspan. You were actually listing what I consider to
be probably the four most important issues that will confront
the long term of this economy. I would just hopefully not have
to choose amongst them. I would like to see you move on all of
them.
Mr. Davis. But you wouldn't put private accounts at the top
of that list of four priorities, would you?
Mr. Greenspan. No. They are all very important.
Mr. Wicker. Thank you. Mr. Barrett.
Mr. Barrett of South Carolina. Thank you, Mr. Chairman.
Mr. Chairman, I was looking at the President's 2006 budget.
One of the things that a group of us have been talking about--
us being some fiscal conservatives--what we are talking about
is a projected savings in the President's budget of about $38.7
billion over the next 5 years, and I think over 10 years that
is a little over $70 billion. When we are talking about a $2
trillion-plus budget, a $10 trillion-plus economy, some of the
things that I think that I have seen come from the White House
in the big scheme of things don't seem to add up to a whole lot
of money. And there is a group of us, again, that seem to think
maybe we need to go a little further. Maybe we need to show not
only our constituents, the taxpayers, but the world, that we
are serious about this looming problem.
Is this figure, this $40 billion figure, Mr. Chairman, over
5 years, is that a drop in the bucket; or, in your opinion, do
we need to get some serious numbers, some serious money on the
table?
Mr. Greenspan. Well, Congressman, I have observed this
process for a very long period of time, and I think that what
Presidents tend to do is to try to avoid budgets which--as you
elect to call it--are dead on arrival; and they tend to craft
budgets which they perceive will not be dead on arrival. And it
may very well be that the ones we need to actually consider are
ones which most people think would be dead on arrival but, in
the end, turn out not to be.
The size of our problem is very large. I regret to say that
the word ``billion'' does not encompass the nature of the
problem.
Mr. Bonner [presiding]. The gentleman from Hawaii, Mr.
Case.
Mr. Case. Thank you. Mr. Greenspan, I share with my
colleague, Mr. Cooper, membership on the House Blue Dog Caucus,
and I think you can put my question and comments in that
perspective.
Budgets, of course, are ultimately statements of policy
expressing priorities, and that is what our job is, as you have
definitely and accurately reflected.
I don't believe, as we look at the big picture of our
Federal budget, that the basic facts are at serious issue. We
have increasing expenses. Clearly you have talked to that. We
have leveling revenues, attributable primarily to temporary tax
cuts. The gap has led to chronic deficits and exploding debt.
The policy choices and priorities that are our job to make
are for the most part, unfortunately, portrayed in Congress
from a polar extreme perspective. And I think you can say there
have been two directly different contrasting views expressed in
this debate.
One would be basically that all of the temporary tax
reductions are sacrosanct. We are not going to touch them. We
want to go on with further tax reductions. And we will balance
the budget, if at all, by--in the medium and short term--
accumulating deficits and debt. And in the long term, whether
we balance the budget or not, we will have radical reductions
in Federal spending.
The other view is that we have needs that are growing and
we have got to meet these needs. That is the number one
priority with continued increases in funding, and we can't
really afford to continue all of the tax cuts that we want. And
if we are going to balance the budget, there are consequences
there.
I think I have to say honestly, that personally and frankly
I find both of these formulations not the right formulations. I
cannot accept either one of those formulations as either wise
or palatable or good overall public policy. I think they both,
if carried to their extreme, have serious consequences on the
economic and social fabric of our country.
I am always trying to look for a better formulation. And I
have to confess that my biggest frustration in my service in
Congress is the lack of commitment on a bipartisan basis--Mr.
Edwards spoke to this--to find a better overall formulation,
one which takes the best elements of both of those formulations
but avoids the negatives of both of those formulations. Finding
something that will actually work.
I have been listening to your testimony, and I want to ask
you this straight out. You must have, in your thinking, some
personal PAYGO calculation, some overall balancing of the best
of these formulations and the worst of these formulations, that
works from your perspective, that you believe over the long run
will deal with what you have said and what you must believe is
a chronic problem for our country, which is high deficits and
exploding debt. You have testified to elements of support. For
example, twice this morning you talked about your support of
the continued elimination for the double taxation on dividends.
You have testified on the expense side--and I think it is on
the expense side, at least in the short term, to your support
for some elements of private accounts.
Do you have some overall formulation or set of priorities,
some overall calculus, that is somewhere in the middle of these
two extremes?
Mr. Greenspan. Congressman, yes, I do.
Mr. Case. What is it?
Mr. Greenspan. I am not about to say for just a moment. The
reason why I hope that is true is that there is no way for me
to actually think through what I think is necessary in how the
economy will evolve, given what is currently on the books with
respect to both taxes and outlays. The arithmetic is fairly
obvious when you begin to project it out. And with the
inevitable issue of we are all going to get a year older every
year and, therefore, a very large number of us who are not
retired will, creates a very sharp issue of alternatives. And I
have been thinking of all the various things of what I would do
if I were a Congressman, because unless I did that, I couldn't
be sure that I had all the pieces put together and I would be
making generalizations.
Mr. Case. On the spending side, would you say given your
calculus, the calculus you are talking about, that on the
expense side of things, you are certainly concerned about the
entitlement growth? Would that be correct?
Mr. Greenspan. I think what we have done is we have
promised more to people who are not quite retired, but who will
be retired over the next 20 years, than I actually think we
have the material capability of supplying. I think this is
utterly inappropriate. I think this is unfair. I think we owe
it to those people to only promise to them what we have a
reasonable chance of delivering. Public policy should not be
structured in a manner in which when we promise something to
somebody who really has to depend on it, that we come up late
in the game and say, sorry, we made an arithmetical mistake.
Mr. Case. I am going to conclude with a rhetorical question
because I'm out of time, on the calculus on the revenue side.
At some point, there must be a sense of priorities that you
have in terms of what tax reductions we can afford to extend in
this calculus that will have a benefit to the economy on an
ongoing sustainable basis and what we can't. And I will leave
it at that.
Mr. Greenspan. I obviously do.
Mr. Bonner [presiding]. The gentleman from California, Mr.
Lungren.
Mr. Lungren. Thank you very much, Mr. Chairman.
And thank you, Mr. Chairman, for being here. I observed you
at a distance since I left this place 16 years ago, and it is
fun to be here and hear you directly. I would ask you to revise
your remarks, however. You said that you would like to move
that trust fund from Washington to San Francisco. I wish you
would be 100 miles short of that and just deposit it in
Sacramento.
Mr. Greenspan. So moved.
Mr. Lungren. You talk about the mythical lockbox versus the
real lockbox and you wish we kept the concept of a real
lockbox. Is there any merit to the suggestion that personal
accounts actually amount to a real lockbox? That is, the way I
explained it to my constituents last week when I was home at a
town hall meeting, the only way you can keep my grubby hands
off of it is to make sure it is a personal lockbox. No matter
how we construct it, there is always a temptation of a future
Congress to use that money to fund something else, as we have
been doing for years.
Mr. Greenspan. I agree with that.
Mr. Lungren. There is something I would like to mention to
you. When I had a town hall meeting last week, two-thirds of
the questions at least were on Social Security. And 175 people
were there as a result of MoveOn.org. Some of them were there
as a result of AARP. Some of them were there as a result of
unions getting them there, and some of them that were there
were because they were my constituents who had no other
prompting.
One of the problems we had in discussing it was reference
to testimony you had given either last week or the week before
in which you started to talk about a crisis, and you backed
away from crisis and used other language. I know today you said
it is an extremely serious problem and the reality is daunting.
I would ask you to address the folks that were at my town
hall who used your words to say it was not a crisis as a reason
to say we ought not to do anything about Social Security any
time in the near future. And that is the reaction I got. I know
that was a misunderstanding of what you said. If someone said
that to you in response to you saying it is not a crisis
because you have chosen your words very carefully, how would
you respond to that?
Mr. Greenspan. The term ``crisis'' is in the dictionary
without specification of what the time frame is. I choose to
use it for relatively short-term issues. In that regard, it is
not a crisis, but that doesn't mean that even though the
problem is longer term, that we shouldn't be addressing it
starting now; indeed, we are probably overdue with respect to
when this issue should have been addressed. Indeed, I am
arguing that we historically have made commitments which in
retrospect we probably should not have made. And the reason is
we did not have the ability to actually provide the resources
that those promises required. So in that respect, we are
overdue.
Mr. Lungren. I sit here before you as an example of the
problem you have indicated in demographics. I am 58 and I will
turn 59 later this year. So in 3 years, I will turn 62, part of
that baby boom generation you are talking about. Baby boom
generation, a lot of people forget, it is defined as those
people who came back from World War II and started conceiving
the rest of us, and a tremendous explosion of population. We
have seen a tremendous decrease in population rates since that
time.
I want to throw one question at you, at least to get a
little bit of reaction from you. We are dealing also with
another important public policy question on immigration and
that is unrestrained illegal immigration. I have been dealing
with that for 25 years. One of the concerns I have is an
overreaction to that. People would believe we need to clamp
down on all immigration. If we clamp down on all immigration,
literally closing the doors to immigration, wouldn't that have
a further negative impact on our ability to continue paying for
those promises we have talked about in the future?
Mr. Greenspan. Unquestionably, that is true. However, I
wouldn't argue that our immigration policy should be determined
by the ability to fund the Social Security Trust Funds. I
happen to believe that this country has benefited greatly from
immigration, and indeed it is critical that we keep our doors
open for talented people or anybody who wants to effectively
pick themselves up from where they are and is going to the
trouble of finding something in the United States, which
historically has been what has made this country great.
But, nonetheless, the arithmetic you apply is relevant. And
indeed a considerable amount of Social Security taxes occurs as
a consequence of the fact that a fairly significant part of our
population increase are indeed immigrants.
Mr. Lungren. Thank you very much.
Mr. Bonner. Chairman Greenspan, with your indulgence, let
me inform the committee that the next two members on the
majority side to be recognized in order are Mr. Bradley of New
Hampshire and Mr. Hensarling, and on the minority side, Mr.
Jefferson and Mr. Allen. The gentleman from Louisiana.
Mr. Jefferson. Thank you, Mr. Chairman. I appreciate the
opportunity to ask a question or two.
Mr. Chairman, you have testified in response to a question
I think Chairman Nussle asked this morning about the effects of
the tax cuts on the rebound in the economy, if you will, and
the growth in economic growth. And you are careful not to
pinpoint all of those tax cuts as having an effect on that, but
accepting the one on the elimination or the reduction of taxes
on dividends as having a salutary effect, in your opinion, on
growth. I think you also expressed that whatever effect those
other taxes or any of them might have had, except for that one,
have probably run their course or at least jump-started the
economy.
With that in mind, does it make sense to talk about further
tax reductions in the context of this overall desire on the
part of all of us to reduce the deficit?
Mr. Greenspan. This is the reason why I would like to see
PAYGO and discretionary caps so that the process that is
involved, when bills are brought up either on the tax side as
tax cuts or as new programs of expenditure, it is perfectly
conceivable that in the period where deficit reduction is the
major priority that you would still want to have certain new
spending programs and certain new tax cut programs because you
don't want to freeze the system. It requires adjustment as
years go on, even if you are on a long-term policy of reducing
the deficit. But if you are going to be able to do that, you
need a mechanism which prevents either tax cuts or spending
increases veering you off the long-term track of deficit
reduction.
Unless the Congress reinstitutes a process to handle these
very difficult problems, it is an extraordinarily difficult
thing to do. And were I, as I said before, a Member of the
House, I would have certain views on both taxes and spending,
but I would wish to be constrained in my recommendations in a
manner which requires me to offset as the law requires.
Mr. Jefferson. I think most of us agree that as you set the
paradigm, further tax increases--I don't think there is an
argument here for tax increases nor for thinning reductions. We
recognize there is something to be done there. The dilemma we
find ourselves in is talk about the effectiveness of further
tax reductions in the sense of those that, as you have pointed
out, may have already made that contribution, such as it might
have been, say the dividend aspect of it, without having this
thought of analysis you are talking about when we simply say,
we have them now and let us extend them further.
The trouble--the conversation goes every time you talk
about, well, we might not want to extend that, the other side
says that is a tax increase. That doesn't seem to make any more
sense than saying that when they first enacted it with a
sunset, that it amounted to them voting for a tax increase in
2011. So this is simply a play on words to box in discussion
about that.
And I am wondering if you can help us to get out of this
business by not extending these tax cuts that were designed to
jump-start the economy and argue that these now amount to tax
increases on the part of those who would say, well, they served
their purpose at best and let them fall at the sunset.
Mr. Greenspan. I agree that terminology should not be
policy issue. I mean, the argument that you can make is that if
the markets believe that the tax cuts will be extended and are
taking actions such that capital investment is going forward,
or something like that, then you can argue on the policy
grounds that they should be extended. But I would certainly
agree with you that the mere choice of words as a response to
the question is not an adequate response.
Mr. Jefferson. Thank you, Mr. Chairman.
Mr. Bonner. The gentleman from New Hampshire, Mr. Bradley.
Mr. Bradley. Thank you very much, Mr. Chairman.
And, Mr. Chairman, thank you for your long and
distinguished service to our Nation. I would like to follow up
on my colleague's question from California, Mr. Lungren. When
asked the questions about the looming funding problems, your
answer is that we need to have reform of entitlement spending,
Social Security and Medicare, starting now.
Would you care to discuss with us what happens if that
reform is not in place, what kind of problems will our Nation
face, the impact on short-term and long-term interest rates and
the impact on our economy if we delay?
Mr. Greenspan. Congressman, let me start off by saying that
there are certain things that we know with a reasonable degree
of accuracy and others which we know only very generally. We do
know the number of Social Security and Medicare retirees over
the next 20 years with a reasonably tight degree of numerical
tolerance, and we do know with some degree of accuracy what
under existing law the stream of benefits out of the Social
Security Trust Funds will be. What we know only very
imprecisely is what Medicare per beneficiary is going to be
over the next 20 years, and that is largely because the number
of issues which will determine that are very large and the
variance of each one of those determinants is itself large. And
so it is remarkable how variant it could be, basically because
of the fact that, once committed and once enacted, we have
exhibited considerable difficulty in reversing policies. I
think it is essential that we be quite prudent before extending
policies, because we don't have very much leeway of unwinding
them once they are enacted.
Since I believe that the range of probabilities are such
that we can have exceptionally large Medicare bills, we must
assure ourselves that we are sufficiently prudent to enact laws
which essentially do not get us into a position that does grave
damage to the economy. If we do and we effectively create very
large unified budget deficits, and we are unable to bring them
in in a reasonable period of time, we will find that we will
very significantly destabilize the system, because, as I
mentioned earlier, interest rates would rise as a consequence
and we would have very grave difficulties in restoring balance
to the American economy. And this is an issue which focuses on,
say, 2015 to 2025, or something of that nature, but something
which needs to be addressed sooner rather than later to avoid
that happening.
Mr. Bradley. Thank you for that answer. I believe that when
you testified in front of the Senate a couple of weeks ago, you
indicated that moving to personal retirement accounts alone was
not sufficient to help restore the solvency of Social Security.
Would you care to expand upon that?
Mr. Greenspan. I think there are two ways of coming at
this; namely, what is happening to the full funding and saving
of accounts that are required to create the real resources, and
what happens in strictly the financial system itself.
On the financial system itself, what, as I understand it,
the President's accounts will do is to trade off claims to
benefits in the far distant future for essentially funds now,
the interest on which will create those benefits later on, and
that in essence is a wash. It does not effectively close the
$3.7 trillion, 75-year gap or the $10 trillion gap in
perpetuity. In that regard, I was merely stipulating that from
an accounting point of view, it does not address the particular
gap. But what it does do, in my judgment, is create the
possibility of building real savings in a manner better than
the pay-as-you-go system does. But that is the real resource
side, not the financing side. I was addressing the financing
side.
Mr. Bradley. Thank you.
Mr. Bonner. Time of the gentleman has expired. In an
attempt to inform the members of their next order, the Chair
inadvertently overlooked Mr. Kind. Mr. Kind.
Mr. Kind. Thank you Mr. Chairman.
Chairman Greenspan, you have always been very gracious to
this committee for your time and indulgence and you have shown
that today.
One of the frustrating aspects, getting back to the whole
Social Security issue, is the inability of the Congress and
perhaps mostly the American people to at least agree on the
facts, and that has been frustrating especially in light of
some of the rhetoric that is being used now in terms of
bankruptcy, bust, no money, driving off the cliff. I mean, if
we can't at least agree on the facts in regards to the long-
term challenges we are facing, it is going to be hard to find
the common ground that is going to be needed to lock arms to
address this very important issue. And I think a person in your
position, it would be extremely helpful as far as laying out
the facts, and I think you tried doing that in your most recent
testimony before the Congress and I commend you.
But another challenge that we are facing that is even more
daunting--and you have been very eloquent on this--is the
annual growing structural budget deficits that is going to make
it harder to make these types of decisions. There was a period
of time in the 1990s--and either people are overlooking or
forgetting it--when the Clinton administration was putting
forth some pretty bold proposals on how to save Social Security
first that didn't advance very far, and perhaps it didn't fit
into a certain philosophy of certain people, like calling for
the privatization of the program, and therefore they weren't
interested in working to solve the problem right now.
We are back into an era of annual structural budget
deficits. And I appreciate your honesty and consistency in your
testimony in regards to the need to reinstate the budgetary
tools that worked so well in the 1990s, the pay-as-you-go,
having it apply to both the revenue and spending scheme of the
budget, which you have been very consistent on. And most of us
on this side of the aisle at least did not want to see those
tools expire in 2002 when they did. And we have been calling
for reinstituting them, just to instill a little bit of fiscal
discipline in this equation.
But what is scary to me--and perhaps you can shed some
light given your expertise--what is different with these
deficits today that we didn't experience during the eighties
when they were being accumulated until we were able reverse
things in the 1990s is really two things: One is the increased
foreign ownership of our debt. In fact, 44 percent of the debt
today is being bought up by foreign entities, Japan being the
number one purchaser, soon to be surpassed by China as the
number one purchaser of our Government debt. And I don't
believe it is going to be in our best long-term economic
interest to be so dependent on a country like China to be
floating this money to finance our deficits. And it is
troubling, and I think it is troubling to people back home when
they start hearing this more and more, that there is a new
dynamic in regards to these deficit spendings.
And the second feature is the fact that not since the pound
sterling has the U.S. dollar really faced a rival currency in
the international market. And perhaps we are getting close to
seeing that more and more with the advancement of the euro and
the European Union and the increased value of the euro and the
decline of the dollar we have seen over the last couple of
years.
What type of risk are we facing or what would start raising
your alarm bells in regards to the financial markets and the
financing of these deficits and perhaps the flight of foreign
capital into other areas rather than seeing that invested here
and keeping us afloat at least in the short term?
Mr. Greenspan. Congressman, I think we have to recognize we
have very limited choices. We are now borrowing the equivalent
of almost 6 percent of our GDP annually. And we use that
essentially to finance domestic investment. In order to curtail
that, meaning in order to curtail at least in part the amount
of investment that is being made in the United States, we would
have to either curtail domestic investment in this country--
which I obviously hope we will not be trying to do--or increase
domestic savings. There are no other possibilities. And
granted, we don't want to alter the amount of housing we
construct in this country or the amount of plant and equipment
that enhances our productivity; but the question is how do we
finance it? And there is only one alternative, and the
alternative is basically to increase domestic savings. And that
means either savings as evidenced by the unified budget
balance, or household savings, or savings by corporation and
depreciation reserves or in undistributed profits. That is it.
And so that there are just a limited number of things that we
can do.
And it reminds me of the time in 1983 when I was chairman
of the Social Security Commission. Our first meeting we sat
down and said well, the trust fund is about to run out. We can
either raise taxes, lower benefits, or rely on general
revenues. And there was a remarkable judgment made by Claude
Pepper, who was a member of the committee, that we would not
rely on general revenues. So you had to do one thing or the
other. And I will tell you, for the several meetings
thereafter, the resistance to acknowledging that 2 plus 2
equals 4 was the most dominant aspect of the conversation of
the commission until we finally exhausted ourselves and said,
there is no alternative, we have to act. I trust that that is
eventually what is going to happen in this case.
Mr. Kind. Thank you.
Mr. Bonner. The gentleman from Texas, Mr. Hensarling
Mr. Hensarling. Chairman Greenspan, let me add my voice to
those appreciating your patience and your service to your
country.
CBO says over the next decade, Medicaid is going to grow,
on average, 9 percent a year--Medicaid, almost 8, Social
Security about 5\1/2\, I suppose, in the outlying decades. It
gets only worse.
If I could have slide No. 5, please.
Mandatory spending today is almost 55 percent of our
budget. We have had a lot of discussion on the benefits of a
PAYGO system applied to mandatory. But isn't it true that as
presently conceived this applies to new programs? In other
words, if these present, the big three, Medicare, Medicaid and
Social Security, are growing at these rates and in roughly 20
years we are going from a little less than 50 percent of our
budget to approaching two-thirds of our budget, PAYGO would
have no impact on the growth rate of those; is that correct?
Mr. Greenspan. That is correct.
Mr. Hensarling. In your testimony you say that, in my
judgment, the necessary choices will be especially difficult to
implement without the restoration of the set of procedural
restraints on the budget-making process. Believing that the
world tends to work off of incentives, if we wanted to further
incent Members of Congress to go in and reform some of these
entitlement programs, wouldn't a superior mechanism or process
mechanism be to negotiate some type of cap on the growth of
mandatory programs, thus hopefully giving further impetus to
Congress to make reforms?
Mr. Greenspan. Indeed. And that is what I was hoping I was
expounding on in my prepared remarks when I refer to glide
paths of various programs, because unless you do that, there is
no way to confront any of these issues.
As I indicated before, 50 years ago we had programs which
were mandatory in very narrow areas--we had agriculture, we had
Social Security, but they were very small. And the vast
proportion of the budget was what we now call discretionary,
and none of these things were required back then.
But the world has changed dramatically. Unless you have a
new type of process to regularize your system, it is
extraordinarily difficult to do. So if the type of program you
had in mind is what was implemented, I think that would be a
very major benefit to this country.
Mr. Hensarling. I have seen--if these growth rate trends
are indeed accurate, and have you looked at models, say, over
the next two to three decades of what it would take if we went
the tax increase route in order to keep pace with these
unreformed programs and to balance to our budget, what the tax
rates would have to be on the American people?
Mr. Greenspan. We have run models of that nature.
Mr. Hensarling. What magnitude would the tax increases be?
Mr. Greenspan. They vary significantly, but it is very
difficult to judge because you have to compare experiences at
various different levels of tax regime in various countries
around the world and see how they behave and see if you can
draw general principles from them. It is a very large part of
the economic analysis, and a very good part of what we call
development economics is in this area. And at least as I read
the data, there is no question that the more stable the economy
the slower the growth--in other words, there is a fundamental
tradeoff here between sense of security and a standard of
living. And this country, of course, has gone to both extremes.
In the 1830s, we had rampant laissez faire, caveat emptor, and
an economy which was beginning to develop surprisingly in a
very vigorous way.
We had, during World War II, a centrally planned economy,
which was a wholly different sort of structure. So we have been
in various different areas. And this is one of the very crucial
basic decisions which the Congress has got to make. You know,
what type of society do we want? What part of it should be
guaranteed by Government, what part should be allowed to be
free, competitive, and what are the effects thereof? And this
is where the Congress' choice comes in, because the Congress
essentially is the only vehicle we have which reflects the
value tradeoffs of the American people.
Mr. Bradley [presiding]. The Chair would recognize the
gentleman from Maine, Mr. Allen.
Mr. Allen. Thank you, Mr. Chairman, for being here. I also
like others appreciate the time that you devote to this
committee. I was particularly grateful for the caution and
balance. And in some of your testimony, it was a striking
contrast to the head of OMB and the Treasury Secretary of the
United States who sat in that chair a few weeks ago. And what I
am talking about is that you made it clear that though you
believe in principle, there should be no effect on interest
rates with borrowing for private accounts, you are not willing
to make a $5 trillion bet in 20 years to that effect.
Both Mr. Bolten and Mr. Snow said they talked to Wall
Street analysts and Treasury analysts and that we shouldn't
worry; that there would be no impact on interest rates.
I appreciate the more cautious approach. I also appreciated
the point you made about the tax cuts of 2001 and 2003, that
they did help, you know, bring us out of a down period in the
American economy, but they have no significant impact at the
moment in stimulating the economy.
My question really has to do with your preference--and I
know these preferences, we all have these preferences--just
what balance of expenditure and taxation that we prefer. Back
home in Maine, people tend to think there ought to be a balance
between money coming in and money going out in their personal
lives, in their businesses, and in their government. And I
agree with that. But I am struck by one thing that today, my
understanding is that tax revenues to the Federal Government
are at the lowest level since 1959 as a percentage of our gross
domestic product. That is before Medicaid was created, before
Medicare was created, and clearly the 01 and 03 tax cuts have
had a significant effect, according to CBO, in dropping
revenues to the level they are today. I don't believe, as I am
sure you don't, that the problems with Medicare and the
problems with Social Security can be solved by tax increases.
That is not what we want.
But is there room--you have made it clear that any tax
reduction should be dealt with through a PAYGO process--is
there room for some enhanced revenue to deal with the
challenges we face, knowing that it won't deal with the entire
problem over the next few years by not extending, by not making
permanent the President's upper-income tax cuts to help deal
with the general fund deficit that we have today?
Mr. Greenspan. Well, Congressman, these are the decisions,
as I just indicated to your colleague, that the Congress has to
make, because these are where the critical tradeoffs are. If
you ask me, if we were to move taxes up by X, whatever X is,
does it mean the economy will collapse? If X is very large,
yes. But if it is very small, unlikely. It is an incremental
issue and it is something we have to be careful of because the
real strength of the American economy at this stage is its
exceptional flexibility. We have got the ability to absorb
shocks of all sorts and seemingly rebound.
As recent as 30, 40 years ago, 9/11 would have had major
negative consequences to this economy. The GDP went down
significantly for 6 weeks after 9/11 and then it stabilized.
And that flexibility in part reflects the fact that the size of
government is not all that large in this economy, and that as
you increase the size of government, the flexibility goes down.
You improve the guarantees, but at a cost. And it is that
fundamental view of what type of society you want, which is
what I think is of the most important role of the American
Congress.
Mr. Allen. I take your point about the importance of
balance.
Just one question on trends. It would be normal, would it
not, for a society that is aging as ours is, and as Japan's is,
as the Europeans are, to spend a somewhat larger percentage of
our gross domestic product on retirement and health care as
that population ages, so that that trend line, you would expect
some additional expenditure from the Federal Government?
Mr. Greenspan. Of course.
Mr. Bradley. The Chair now recognizes Mr. Ryan.
Mr. Ryan of Wisconsin. I thank the Chairman.
Mr. Greenspan, thank you for spending time with us today
and I appreciate your indulgence. I wanted to go on to Social
Security and ask you a few questions. We have a few options
ahead of us restoring solvency to Social Security. We can raise
payroll tax rates, we can reduce the benefit formula for future
retirees, or do personal retirement accounts, or a combination
of all of those. I wanted to get your read and your opinion on
the economic benefit in general and the particular benefit to
future retirees on a plan to restore solvency to Social
Security by having a combination of personal retirement
accounts with their typical benefit offset that accompanies
that idea, and possibly a benefit formula change for future
retirees, those under 55, compared to a traditional fix to the
system of a combination of benefit changes and tax increases.
What do you think would be the impact to the economy by
having personal retirement accounts as a component of the plan
that restores solvency in general for the economy and for our
future retirees in particular?
Mr. Greenspan. Congressman, I testified that I think the
existing essentially pay-as-you-go system has become ill-suited
to the demographics of the future. Keeping aside the issue of
private accounts for the moment, a system which is constructed
to work under certain demographic conditions, and indeed did so
for 50 years, is not going to work in my judgment anywhere the
way it is supposed to, or had in the past, with the
demographics that we perceive going forward. So something has
got to give. We can patch the pay-as-you-go system as much as
we want. We could do so if we had to by extending the age of
initial benefits. We could do so by altering the bend points.
We could do so by changing the inflation formula. We could do a
lot of things.
But I think we are touching a system which is fundamentally
inappropriate for the future of this country because of the
nature of the demographics, and the demographics have very
profoundly changed since Social Security was initiated in 1935.
The question therefore arises: What are the alternatives? I
happen to think that going to private accounts is a way in
which we can create the full funding that is essential, and it
is a system by which we can ensure the retirement benefits of
those who will retire in very large numbers in the years ahead.
In the interim, trying to do combinations of both is a
perfectly sensible approach. But as I view it, we have to find
a better model than exists today.
Mr. Ryan of Wisconsin. Having personal retirement accounts
is another way of making a future retiree's benefits more
secure for their retirement.
And also, do you believe personal retirement accounts as a
component to a system of solvency does help improve solvency,
because when you have a personal retirement account policy, if
it is a company with a benefit offset, with that feature in
place do you believe that personal retirement accounts can help
us achieve solvency for the system and make those future
retiree benefits more secure?
Mr. Greenspan. I wouldn't say the pay-as-you-go benefits
are insecure in the sense that there is nothing to prevent the
Federal Government from creating as much money as it wants and
paying it to somebody. The question is, how do you set up a
system which assures that the real assets are created which
those benefits are employed to purchase? So it is not a
question of security. It is a question of the structure of a
financial system which assures that the real resources are
created for retirement as distinct from the cash. The cash
itself is nice to have, but it has got to be in the context of
the real resources being created at the time those benefits are
paid and so that you can purchase real resources with the
benefits, which of course are cash.
Mr. Bradley. The Chair would now recognize the gentleman
from Alabama, Mr. Bonner.
Mr. Bonner. Chairman Greenspan, in Washington, DC, we use
words like ``rescind'' and ``allow tax cuts to expire'' and
things like that, but most communities and most towns in
America really don't use those words. And yet that will be a
discussion that we will have in the coming months in terms of
what we do with the tax cuts that have already been enacted
that do have an expiration date on them if no further action
occurs.
In your view, if Congress--if this Congress or future
Congresses do not find it prudent to make those tax cuts
permanent, and those tax cuts therefore do go away, would you
consider that a tax increase on the American taxpayer given
that we are about 6 weeks away from April 15?
Mr. Greenspan. I would assume that the issue is not
relevant to where we are with reference to April 16. As I was
saying, I would much prefer to raise the question with respect
to policy and not get involved with definitions in the
dictionary. And the reason is, the key question here is to what
extent would extending the tax cuts, which may or may not have
already been discounted in the financial markets, help the
economy or not help the economy, and not get involved in
debates on language because that doesn't produce policy.
And I would just as soon argue the merits of the particular
program. Since I am on the side of extending them, I am
perfectly willing to argue the merits. And I think we ought to
do that. And I hope we could sort of talk policy rather than
language, which is a tendency which we seem to get involved in,
and I can't complain too much because I get involved in it,
too. And I must admit that I am often accused, probably
justifiably, of terminologies that don't exactly enhance
understanding.
Mr. Bonner. I will accept that. But let me ask you to shift
gears for a moment. I would like to follow up to a question
that Mr. Crenshaw started with regard to interest rates,
because taxes and interest rates are two issues that the
American people have to deal with on a daily basis. Interest
rates, back in our communities and around family tables, are an
important factor with regard to whether or not Americans can
buy a new home or buy a new car or make some other purchase
that they would have to borrow the money in hopes of
refinancing or hopes of paying back. And here in Congress,
interest rates are important, obviously, because they are
partially used to determine the budget that we set aside for
debt service. And in a few days, we will be called upon to
produce that budget.
That being the case, I certainly would be interested in
knowing where you could foresee interest rates heading in the
next 5 years. That could be useful information as we go about
our work in the next few days.
Mr. Greenspan. Congressman, if you could tell me where the
inflation rate is going to be in 5 years, I can tell you what
the interest rate will be in a fairly narrow range. So I think
it is appropriate to rethink the question of where interest
rates will be largely in consequence of the inflation
implications of budget deficits and the extent to which that,
because they are perceived that way, impacts interest rates in
advance. Because what we have found is that the history of
interest rates has largely been the history of inflation. When
it is high, interest rates are high. When it is low, interest
rates are low. And yes, they are movements in what we call real
interest rates which is sort of the interest rate excluding the
inflation premium, but those fluctuations are really quite
minor.
So I would just say that I would just track whatever you
perceive the budget deficit projection is likely to be over the
years and translate that into inflation and add it to a fairly
small number, which is the real interest rate. I don't know any
other way to get a forecast to that.
Mr. Bonner. Thank you.
Mr. Bradley. Thank you. The Chair recognizes Mr. Cuellar.
Mr. Cuellar. Thank you, Mr. Chairman. Chairman Greenspan, I
appreciate the work you have done as Chairman of the Board of
Governors for the Federal Reserve Board and, of course, your
staff for so many years. We really appreciate your work.
Let me direct your attention to the trade deficit. The
United States back in 2004 ran a trade deficit on goods and
services in an amount of about $618 million. That was up $121
billion--sorry, billion dollars from the 2003 trade deficit,
which was at $497 billion.
What does that mean when you talk about this large trade
deficit that we have? That is, the net importation of goods and
services, instead of having more exportation--as you know, more
exportation means more jobs for the American people--but when
you look at this large trade deficit that we have, what does
that mean in simple terms to the American economy and what does
that mean in simple terms to the ordinary American?
Mr. Greenspan. Well, first let me just say that all of the
analysis that economists have been involved with over the years
has found little relationship between the trade deficit and
jobs. We have had low unemployment rates with large deficits.
We have had low unemployment rates with large surpluses. The
issue is largely the extent to which we interrelate with the
rest of the world. And it turns out that the net imports of
goods and services moves very closely, with the so-called
current account deficit, which is a measure of how much money
we have to borrow to effectively finance the net trade deficit.
And what we do in that process is open up our economy to a
significant amount of foreign investment, and, at the same
time, open up our economy to very considerable access to goods
from abroad, which we obviously purchased because they are
either cheaper or better than what we produce at home.
And the way things stand at this stage is that the
combination of the desire on the part of the American people to
purchase foreign goods as distinct from American goods and the
willingness of foreigners to finance imports by the amount of
money they are willing to invest here, that combination is what
is creating these numbers.
We would not have a trade deficit, if there was not an
interest on the part of Americans to buy foreign goods.
Remember, there wasn't 50 years ago--I mean we basically had a
large trade surplus and imports were not all that large. But
that has changed, and it has changed because Americans have
perceived that the quality and the price of foreign-made goods
is to our satisfaction. If our views change, that figure is
going to go down. Or if foreigners are increasingly less
willing to invest at the rate, the $600 billion rate they are
investing, we won't be able to finance that. It is basically an
issue of choice on the part of the American people of what we
want to do with our purchasing power.
Mr. Cuellar. You are saying that the trade deficit, when
you look at this chart up there, has no effect on the
employment level in the United States? Is there any concern to
have a trade deficit besides saying Americans want to buy more
foreign goods? Are there any concerns we ought to look at?
Mr. Greenspan. Yes. The concerns really in large part
reflect the fact that the current account deficit, meaning the
borrowing that is done to finance those, accumulates over the
years and that debt to foreigners requires us to pay interest
on the debt, and that hence gets to an even larger amount.
What we have to be sure of is that everything is in
balance. To the extent that we don't want to create too large a
net debt to foreigners who may not wish to finance it at some
point, we obviously should constrain our appetite for imported
goods.
But the one thing that works very well for us is that we
have prices and exchange rates and differential wage rates in
various countries. And markets create a balance of these
things. And it is one of the reasons why globalization has
effectively improved the standard of living in the United
States, very materially in my judgment, and as best I can judge
has improved the standards of living of all of those who have
chosen to engage in open free trade.
It is a very complex set of institutions that are involved
in this and there are a lot of people who are disadvantaged by
severe competition, whether it is domestic competition or
foreign competition. And what we have learned is that as
difficult as competition is for a lot of us, and very few of us
like our competitors, it is tough, we have to acknowledge the
fact that competition has actually enhanced standards of living
and has made us all work harder, better, and created I think a
better society.
Mr. Cuellar. Thank you, Mr. Chairman.
Mr. Bradley. The Chair would recognize Ms. McKinney.
Ms. McKinney. Thank you, Mr. Chairman. And thank you,
Chairman Greenspan, for your indulgence.
Earlier, Chairman Nussle noted that the economy is growing.
And, Chairman Greenspan, you say in your written testimony that
the economy delivered, quote, ``solid performance in 2004.''
but I would suggest that the solid performance, sadly, has been
solid for just a few. I and my constituents would like to take
America's growth personally, but only a few Americans can. For
far too many, especially African Americans and Latinos, health
care, housing, college education are hard to afford. And,
sadly, too many Americans have been left behind.
Of white families, three quarters own their own homes,
while the majority of Asian Americans, Native Americans,
Latinos, and African Americans are renters. In just 6 years,
from 1995 to 2001, wealth for families of color grew for
families--for white families grew by 37 percent, but for
families of color, wealth fell by 7 percent.
Chairman Greenspan, we can grow together or we can grow
apart. And it is clear from these statistics compiled by United
for a Fair Economy, that too many of us are growing apart. When
our country invested in its citizens with the GI bill, Social
Security, civil-rights laws, and affirmative action, we grew
together. But somehow the policies beginning in the 1980s have
resulted in today, that the wealthiest 10 percent own 70
percent of our country's wealth. It is clear that we are
growing apart. And I don't think that is sustainable.
Chairman Greenspan, what policies do you suggest to halt
the trends that are now being created that are creating two
Americas?
Mr. Greenspan. Well, Congresswoman, I agree with almost
everything you said, and I have addressed that in testimony
before various committees of this Congress. As has been
indicated, actually quoting my own testimony, I have been very
much concerned about the fact that we are finding the
distribution of income in this country for the last 20 years,
25 years, has been growing apart. This is essentially, as best
I can judge, tracing back the causes, due to the fact that we
are not educating our children to significantly move through
the 4th to the 12th grade and a goodly number of them into
college and beyond to have the skills that we need to staff an
increasing capital stock, which is getting ever more
sophisticated.
It strikes me the issue really is fundamentally at an
education level. And we have got to find the means by which we
educate our students so that we don't find, as we now find,
that our fourth-grade students are somewhat above average in
world standards, but by the time they reach the 12th grade,
they are in the bottom quarter. The rest of the world somehow
seems to educate their children better than we do ours.
We have got to find out why that is true and remedy it,
because, as I said in testimony on innumerable occasions, a
democratic society does not function in an effective manner
unless everybody in that society has a commitment to the
society's health and advance. And the only way you do that is
to create a level of commitment to the society which ends up
with incomes which may be scattered but don't get continuously
and increasingly concentrated the way they have in the last 20
years.
Ms. McKinney. Thank you, Mr. Chairman, and thank you,
Chairman Greenspan.
Mr. Bradley. The Chair would now recognize Ms. DeLauro.
Ms. DeLauro. Thank you, Mr. Chairman, and thank you,
Chairman Greenspan. I am the last person, so I am between you
and lunch and anything else. So I promise to be brief and I
will ask both of my questions at the same time and they both
have to do with jobs and the economy.
First, even though we have seen GDP growth relatively
strong in the past several quarters, we haven't seen the type
of job growth that was typical in last economic recoveries. I
want to know why you think that is the case. Do you think we
will need higher levels of GDP growth in the future in order to
be able to reach full employment?
Secondly, we have now seen the number of people with
incomes below the poverty line increase by more than 4 million
since 2000. In fact, this administration has seen the highest
average annual increases in poverty levels of any
administration, except the first Bush administration, since the
official poverty statistics were calculated in the 1960s. The
increases occurred in spite of the relatively low unemployment
rates. It appears that low-wage workers are either already
working or have become discouraged and dropped out of the labor
force. But either way, they can't achieve more than a poverty-
level standard of living. Should this be a concern for the
future?
Mr. Greenspan. This is an extension directly of my answer
to Congresswoman McKinney. The basic problem that we have in
this country is that the children from the fourth grade are not
moving forward in their educational progress sufficiently
quickly, and the consequence of that is that you end up with
too few highly skilled people coming out of schools relative to
the demand that the increase in technology is requiring, which
has induced a very rapid increase in the wage rates for the
highly skilled people.
Concurrently, because people have not moved up enough in
the higher skills, and they are left back in the lesser skills
areas where the demand is actually falling--you find that their
wages become stagnant, and you get the inevitable consequence
of an increasing concentration of income. And what this says to
me is that we have got to address this issue, find ways of
improving the skills and moving children up through our
educational system, so that when they come out into the labor
market, we find that there are more than adequate numbers of
skilled workers and that therefore their wages don't go up all
that much and that the balance in the lesser skilled is such
that their wages go up the same as the skilled.
And indeed, as Congresswoman McKinney mentioned, after
World War II the GI bill and all the education that a lot of
men got during the Armed Forces, created degrees of skills for
decades, which essentially kept the spread between skilled and
nonskilled workers relatively constant, and therefore the
concentration of income didn't change. If anything, it actually
went down.
Ms. DeLauro. Let me pursue that for a second. And I suspect
you don't agree with me on this issue, but we are also watching
a very large number, though we don't have a mechanism for
tracking, where there is a range of jobs which require some
skill, or maybe some of the information technology jobs which
awhile ago we thought that that was a real future--and it can
be a real future--but we are watching those jobs at $40, $50,
$60, $75,000-a-year jobs that are going overseas. They were
once blue-collar jobs and we thought, my God, there is no way
they are going to make up that difference.
But we are watching white-collar jobs move overseas,
leaving less of an opportunity and a lower standard of living
for people in this country with nowhere to go, and watching the
Federal Government cut back on education and training programs
and once again, curtailing opportunity.
The question is, where do these people go when--jobs that
require skill and training are now also a portion of what is
happening; those jobs are leaving the country.
Mr. Greenspan. Congresswoman, the most rapidly increasing
aspect of our educational system are the community colleges.
Ms. DeLauro. And vocational education, except we are
cutting vocational education.
Mr. Greenspan. The big issue is the community college. When
I was in high school, we used to call it vocational education,
and I did electrical wiring, and there were significant jobs,
once you got out of high school, high-paying manufacturing
jobs.
The economies change because value preferences of people
change. And what is critical here is that the demand for a
community college is such because they are essentially trying
to address precisely the type of skill gap that you are
mentioning. Will they succeed in doing it fully? I don't know.
I am chagrined by the fact that we have, as I said before, a
significant shortfall in the educational advances of our
children by the time they get to the 12th grade. And I find
that unacceptable, and we have to find out what is it that they
do abroad that we don't.
Ms. DeLauro. Thank you, Mr. Chairman.
Mr. Bradley. Mr. Chairman, thank you for your patience
today. And on behalf of the entire committee, we thank you for
your testimony. And I now declare the hearing adjourned.
Mr. Greenspan. Thank you, Mr. Chairman.
[Whereupon, at 1:07 p.m., the committee was adjourned.]