[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
UNITED STATES MONETARY AND ECONOMIC POLICY
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON
FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
APRIL 30, 2003
__________
Printed for the use of the Committee on Financial Services
Serial No. 108-24
87-237 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov Phone: toll free (866) 512-1800; (202) 512�091800
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice JULIA CARSON, Indiana
Chairman BRAD SHERMAN, California
RON PAUL, Texas GREGORY W. MEEKS, New York
PAUL E. GILLMOR, Ohio BARBARA LEE, California
JIM RYUN, Kansas JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio DENNIS MOORE, Kansas
DONALD A. MANZULLO, Illinois CHARLES A. GONZALEZ, Texas
WALTER B. JONES, Jr., North MICHAEL E. CAPUANO, Massachusetts
Carolina HAROLD E. FORD, Jr., Tennessee
DOUG OSE, California RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois KEN LUCAS, Kentucky
MARK GREEN, Wisconsin JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania WM. LACY CLAY, Missouri
CHRISTOPHER SHAYS, Connecticut STEVE ISRAEL, New York
JOHN B. SHADEGG, Arizona MIKE ROSS, Arkansas
VITO FOSELLA, New York CAROLYN McCARTHY, New York
GARY G. MILLER, California JOE BACA, California
MELISSA A. HART, Pennsylvania JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia STEPHEN F. LYNCH, Massachusetts
PATRICK J. TIBERI, Ohio BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota RAHM EMANUEL, Illinois
TOM FEENEY, Florida DAVID SCOTT, Georgia
JEB HENSARLING, Texas ARTUR DAVIS, Alabama
SCOTT GARRETT, New Jersey
TIM MURPHY, Pennsylvania BERNARD SANDERS, Vermont
GINNY BROWN-WAITE, Florida
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
Robert U. Foster, III, Staff Director
C O N T E N T S
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Page
Hearing held on:
April 30, 2003............................................... 1
Appendix
April 30, 2003............................................... 59
WITNESSES
Wednesday, April 30, 2003
Aaron, Henry, Senior Fellow, The Brookings Institution........... 34
Greenspan, Hon. Alan, Chairman, Board of Governors of the Federal
Reserve System................................................. 6
Hassett, Kevin A. Director of Economic Policy Studies, American
Enterprise Institute........................................... 41
Malpass, David, Chief Global Economist, Bear Stearns............. 36
Peterson, Peter G., President, The Concord Coalition............. 38
APPENDIX
Prepared statements:
Oxley, Hon. Michael G........................................ 60
Emanuel, Hon. Rahm........................................... 62
Ford, Hon. Harold E. Jr.,.................................... 64
Gillmor, Hon. Paul E......................................... 65
Aaron, Henry................................................. 66
Greenspan, Hon. Alan......................................... 71
Hassett, Kevin A............................................. 76
Malpass, David............................................... 83
Peterson, Peter G............................................ 95
Additional Material Submitted for the Record
Frank, Hon. Barney:
New Evidence on the Interest Rate Effects of Budget Deficits
and Debts, March 2003...................................... 115
Greenspan, Hon. Alan:
Written response to questions from Hon. Luis Gutierrez....... 136
The Concord Coalition, ``Are we really cutting taxes or just
raising them on our kids?'' article, The New York Times,
February 2, 2003............................................... 138
UNITED STATES MONETARY AND ECONOMIC POLICY
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Wednesday, April 30, 2003
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to call, at 10:00 a.m., in Room
2128, Rayburn House Office Building, Hon. Michael G. Oxley
[chairman of the committee] presiding.
Present: Representatives Leach, King, Lucas of Oklahoma,
Paul, Gillmor, Ryun, Manzullo, Ose, Biggert, Miller of
California, Hart, Capito, Tiberi, Feeney, Hensarling, Murphy,
Brown-Waite, Barrett, Harris, Frank, Waters, Maloney,
Gutierrez, Velazquez, Watt, Hooley, Carson, Sherman, Meeks,
Lee, Inslee, Gonzalez, Capuano, Ford, Hinojosa, Lucas of
Kentucky, Crowley, Israel, McCarthy, Baca, Matheson, Miller of
North Carolina, Emanuel, Scott, and Davis.
The Chairman. The committee will come to order. Today's
hearing is on U.S. economic and monetary policy, and we are
honored to be joined again by the Honorable Alan Greenspan,
Chairman of the Federal Reserve Board of Governors. Before we
get started the Chair has a few housekeeping announcements.
First, pursuant to the Chair's prior announcement in the
rules of the committee, opening statements will be limited to
the Chair and ranking minority member of the full committee and
the Chair and ranking member of the Subcommittee on Domestic
and International Monetary Policy, Trade and Technology for a
total of 16 minutes evenly divided between majority and
minority. All members' opening statements will be made part of
the record.
Secondly, in an effort to permit all members an opportunity
to question Chairman Greenspan, for purposes of questioning the
witness under the 5-minute rule, the Chair will first recognize
majority members who did not get an opportunity to question
Chairman Greenspan at his last appearance before recognizing
other members. The Chair will recognize minority members based
on the list submitted by the ranking minority member. The Chair
recognizes himself for a brief opening statement.
Good morning, Mr. Chairman, and welcome back. First of all,
I would like to thank you for your generosity in agreeing to
come back to the committee and continue the round of questions
for members who weren't able to speak with you in February.
Second, let me offer my congratulations on the President's
comments last week that he would reappoint you to another term
as Chairman when your term expires next summer. I am sure I
speak for the entire committee when I say we appreciate the
strong and steady hand you have exerted in the control of
monetary policy.
A great deal has happened in the 10 short weeks since you
testified before this committee. On February 12, when you were
last here, the war on Iraq seemed certain but its length and
outcome were certainly less so. Today we know that the war was
quick, the dictator was ousted and a free Iraqi people are on
their way to a new and more democratic government. Back in
February, the economy's fundamentals looked good, but
uncertainties about the war and energy prices made it difficult
to predict an economic turnaround. Now with those issues out of
the way, the consensus is for gradual but steady recovery.
Of course, Mr. Chairman, as you know, there are plenty of
things that can throw the recovery off track; namely, the
continued weakness of the global economy and, as yet unknown,
the facts of the SARS epidemic. That is why I believe it is so
important to enact the President's jobs in growth program. It
is important to note that the President isn't seeking a short-
term stimulus. Instead, Mr. Chairman, the President is seeking
long-term restructuring of the Tax Code of the sort that you
have tended to favor over time and that you embraced in your
February appearance. I am particularly interested in the
dividend tax cut and its benefits to investors for the capital
markets and for corporate governance. As to the other parts of
the President's jobs in growth package, you have always said,
Mr. Chairman, you believe that tax predictability is important
and that in general the lower taxes are and the less government
spends, the better, and I certainly couldn't agree more.
Mr. Chairman, I think most in this room would agree that
there is no better time to cut taxes than during an economic
slowdown. It is a little harder to reach into the wallet but
now is when it really counts.
In closing, I think the early indicators are moving in the
right direction and that the economy may finally be ready to
rally. Since the war we have had indications that consumer
spending is up, the market seems to be recovering, and just
yesterday we learned that consumer confidence took its biggest
jump since March of 1991.
Again, Mr. Chairman, I thank you for your consideration in
returning to the committee, and I now yield to the ranking
member, the gentleman from Massachusetts, Mr. Frank.
Mr. Frank. I join the Chairman in extending our
appreciation to Mr. Greenspan for giving us this return
engagement to accommodate this large number of members and also
I have had a longtime interest in trying to rebut stereotypes.
And Mr. Greenspan, I mean this quite seriously, for you, given
where you are, what you have done, your age, your health, for
you to be continuing as if none of this was of any moment and
that the only important thing was doing your job really is an
important lesson that I hope other people learn from. So I
appreciate not just what you do but the way in which you do it.
And I apologize for making a big deal out of something which I
am congratulating you for not making a big deal out of, but I
do think that needed to be said.
When you were here last time, you were asked and will be
asked again about one central question, which is what is the
relevance of a deficit, an ongoing deficit, an increasing
national debt to our economic performance. We have had a great
deal of debate back and forth about the role of the deficit.
When I first got into politics, deficits were considered to be
a bad thing and they were used as weapons against people held
responsible for them. In the 1990s, a consensus appeared to
have emerged in a bipartisan way that deficits should be
brought down, that the debt should be brought down, and
surpluses were a good thing particularly in normal economic
times, particularly in good economic times and we were making
progress in bringing it down. There was some general sense this
contributed to the climate in which long-term interest rates
could be lowered.
We are now in a reverse situation. We are in a situation in
which the national debt is climbing back up again. You noted
when you were here before us last time that we will begin to
run into a problem in the teens of this century with regard to
the demands of Medicare and Social Security. Many of us believe
that this is directly relevant because the question is do we
get to that point with a very large debt or have we begun to
bring that debt down. They are not two separate entities. But
what happens leading up to that period in terms of the debt has
a lot to do with our capacity to deal with it. And in
particular, we have this public policy issue, which is whether
or not at this point it is appropriate to substantially reduce
Federal revenues. I say substantially reduce, because quantity
has become a new issue here. And I have to say as a liberal I
am used to people saying oh, we don't value money enough and
people have said you treat a couple of billion of dollars as if
it is nothing. Well, I guess in that category now I am
officially a piker because the President of the United States
has just announced that $350 billion is, to use his technical
economic term, itty-bitty. If $350 billion is itty-bitty, then
I guess I have more ability to talk about money than before.
And I assume, by the way, and I look forward to seeing this
graphically represented, there is this group, the Club for
Growth, or the Clubbers for Growth, who have begun to put
pressure on Republicans who dare dissent and having accused
Senator Voinovich and Senator Snowe of French leanings, I can
just imagine what they will do with itty-bitty. I look forward
frankly to seeing the next commercial in which Senators
Voinovich and Snowe are in yellow polka dot bikinis. I guess I
really don't look forward to that, but it may happen. So when
we have the President announcing that $35 billion a year, $350
billion over 10 years is itty-bitty then I am worried.
Unfortunately, you know, to quote another former Senator, an
itty-bitty here and an itty-bitty there and pretty soon you are
talking about a lot of itty-bitty. And the question we have for
you is what is the impact of this.
Now I was interested to note the study from Mr. Laubach
which does argue what many have argued that there is a
correlation between increasing national debt and interest
rates, and I would be interested in your evaluation. I realize
that not everything is official and one of the things for which
we value the Fed is the first rate economic research you turn
out, and not everybody agrees with everything but this seems to
me to be pretty persuasive.
Finally, let me say here is what worries me. I think we are
in the midst of bait and switch. We have had people who argued
that deficits were a terrible thing suddenly changing their
position. Indeed, I am reminded of--unfortunately he is French,
Henry of Navarre, who became Henry IV of France. When he was
the heir to the French throne, he was told that as a Protestant
he could not become the King of France so he converted, and
when asked about that said Paris is worth a mass. Well, we have
had people, we have the Secretary of the Treasury, the Chairman
of the Council of Economic Advisers-to-be, the Chief Economic
Advisers to the President, there are people who historically
have been critical of deficits. And I suddenly find now that
their past criticism of deficits has somewhat changed. And I
wonder whether the modern version of Paris is worth a mass has
become Washington is worth a deficit. And I wonder why people
would have changed.
What I am afraid of is this: If they haven't really
changed, if it is bait and switch, that people are now pooh-
poohing the deficit because they want to get a tax cut. But the
real reason for the tax cut is not to be stimulative. As the
chairman said, it is not aimed at short-term stimulus. The real
reason is they want to reduce the revenues of the Federal
Government because philosophically they don't think it is a
good idea to have a country in which there are program
expansions. And once they have succeeded in getting a tax cut,
a double itty-bitty, and have increased the deficit, they will
return to their previous deficit professions and try to use
that as an argument for reducing Social Security benefits, for
further cutting Medicare and for making other cuts.
I appreciate again your willingness to come here and I look
forward to your evaluation of this important issue with the
interactivity of deficits and interest rates.
The Chairman. The gentleman's time has expired. The
gentleman from New York, Mr. King.
Mr. King. Thank you, Mr. Chairman. Mr. Chairman, it is a
pleasure to have you here. I commend you on your quick recovery
and on your stamina. I am going to make a very brief statement,
but I look forward to the questions today. I look forward to
your statement. And if you could cover certain areas, one of
which Chairman Oxley touched on in his opening statement, the
economic impact, the potential economic impact of having a
quick victory in Iraq to the extent that that is going to
restore investor confidence, that perhaps is going to bring in
businesses that were on the sidelines waiting to see what was
going to happen with the war, the positive impact, if any, that
will have on the economy; also on the decrease in energy,
decrease in oil prices, the impact that will have on the
economy as far as putting more money into people's pockets, the
stimulative effect that that could have in the short term and
perhaps even the long term.
On a negative aside, I would be interested in the impact
that the financial crisis that State and local governments are
facing, what that will have on the overall economy as to
whether or not Federal policy or national policy could be
enough to bring it forward or whether or not that is going to
be a permanent anchor on overall economic growth, the fact that
there are so many large deficits being faced by local
governments which are going to cause tax increases in some
cases, layoffs in another, combinations of both in others and
the negative impact that will have.
Also following up on what Congressman Frank said, I am
obviously on the other side of this issue. I would be
interested to the extent that you could address the long-term
impact of tax cuts as far as actually increasing revenues,
providing long-term growth and restructuring that is, I
believe, necessary to the long-term growth of the economy.
With all of that, all of us look forward to your testimony,
and again I want to commend you on making such a quick recovery
and being here. I think some of us could have used your
condition--if it was me I would probably use it as an excuse to
take 6 weeks off and tell my constituents how sick I was and
how they should pray for me. But as I said you are an
inspiration to all of us.
The Chairman. The gentleman's time has expired. The
gentlelady from New York, Mrs. Maloney.
Mrs. Maloney. Thank you, Mr. Chairman, and thank you, Mr.
Chairman, for being here today. Your appearance before this
committee is extremely timely. Just yesterday, Treasury
announced that it will need to borrow $79 billion this quarter,
a startling reversal of more than $100 billion from recent
projections. This is just another step in the massive fiscal
reversal the Federal Government has experienced in the last two
years. Today, using the administration's own estimates, the
deficit is forecast at $304 billion for 2003, in contrast to
the $236 billion surplus the President inherited when he took
office. When the costs of war and rebuilding Iraq are factored
in, the forecasts are even bleaker. In the short term, deficits
may be acceptable if they are forecasted on getting the economy
moving.
Unfortunately, the Congressional Budget Office
macroeconomic analysis of the President's budget found little
economic benefit from his financial and tax plan. CBO did note
the impact on the deficit of the President's budget, a
staggering $2.7 trillion through 2013. Independent economists
at the IMF issued similar findings recently, saying of the
economic plan and tax cuts, and I quote from the IMF, if
enacted in full, they will significantly worsen the medium term
fiscal position, unquote.
Perhaps the most unfortunate aspect of this deficit growth
is that the administration's plan is overwhelmingly backloaded
and not focused on putting people back to work today. This is
an exceptionally serious problem as unemployment is close to 6
percent nationally. In my home city it is 8.8 percent. And
nationally for African Americans it is 10.2 percent. These
numbers, as you know, only cover those who are looking for
work, not the growing number of people who are underemployed or
who have given up looking for work, nor does it include the
100,000 reservists who have gone to the Gulf and will come home
to reclaim their jobs.
I hope you will address the impact of the administration's
economic tax plan on job creation, and I also look forward to
your comments on inflation. Inflation appears to have fallen
below the Fed's implicit target, specifically a measure that I
know that you watch closely. The deflector for personal
consumption expenditure has dropped to .9 percent, very close
to zero. I hope that you will express your level of concern
with this number and what changes and tactics or strategy the
Federal Reserve is contemplating to deal with it.
Again, I thank you for your service to our country and I
thank you very much for being with us today.
The Chairman. Gentlelady's time has expired. We now return
to the distinguished gentleman, Chairman of the Fed, Mr.
Greenspan.
STATEMENT OF THE HON. ALAN GREENSPAN, CHAIRMAN, BOARD OF
GOVERNORS, FEDERAL RESERVE SYSTEM
Mr. Greenspan. Mr. Chairman and members of the committee, I
am pleased to have this opportunity to update you on the
developments of the U.S. economy since mid-February, when I
presented the Federal Reserve's semiannual monetary policy
report.
At that time, I noted that the economic expansion over the
preceding year had been modest. Spending by households had
contributed importantly to the gains in economic activity. The
Nation's strong underlying productivity performance was
providing ongoing support for household income. That rise in
income combined with low interest rates, reduced taxes, and the
availability of substantial home equity had spurred solid gains
in consumer spending and a robust advance in residential
construction.
In contrast, although the contraction in capital spending
appeared to have slowed, we had yet to see any convincing signs
that a sustained pickup in business spending was emerging.
Moreover, heightened geopolitical tensions were adding to the
already considerable uncertainties that had clouded the
business outlook over the preceding three years. The general
climate of caution in the business sector was manifest in a
number of ways, including restrained hiring, reluctance to
invest in new capacity, and aggressive actions to maintain low
levels of inventories.
In late February and early March, the risks and
uncertainties surrounding the economic outlook intensified as
the range of possibilities for the timing, duration, and
economic consequences of the impending war in Iraq appeared to
widen. In financial markets, a greater sense of caution among
investors seemed to bolster the demand for Treasury and other
fixed-income securities at the expense of equities. The price
of crude oil moved up as did the prices of gasoline and home
heating oil and consumer confidence sagged further.
After picking up in January, payroll employment and
manufacturing production turned down again in February and
March. When the onset of the war became imminent, financial
markets rallied and the price of crude oil dropped back. Market
participants seemed buoyed simply by the elimination of
uncertainty about the timing of the start and hence the end of
hostilities, although still a significant amount of unease
inevitably remained about the way the war might progress and
how severely it might disrupt oil production and economic
activity.
In such an environment, we had little ability to
distinguish temporary changes from more persistent shifts in
underlying economic trends. For that reason, the Federal Open
Market Committee at its March 18 meeting refrained from making
a determination about the balance of risks with respect to its
long run goals of price stability and sustainable economic
growth. At the same time, we stepped up our surveillance of
economic developments. As part of that surveillance, we
received virtually continuous information from commodity and
financial markets. The price of crude oil is now well below its
peak of early March as the potential for serious supply
disruptions in world oil markets has diminished. Broad equity
indexes remain well above their lows of mid-March and have been
boosted most recently by incoming information on first quarter
earnings that market participants appear to view as generally
positive.
In contrast, six weeks after the beginning of the war, we
have only limited readings on broader economic conditions and
that information has been mixed. Households appear to have
become somewhat less apprehensive about the economic outlook in
recent weeks, though reports from businesses have not exhibited
a similar improvement in tone. Consistent with this, the
persistent high level of new claims for unemployment insurance
suggests that firms may still be finding it possible to meet
their customers' tepid increases in demand with a leaner
workforce.
Going forward, some further unwinding of the economic
tensions that have been associated with the situation in Iraq
seems likely. As that occurs, the fundamental trends shaping
the economic outlook should emerge more clearly.
As I indicated when I met with you earlier this year, I
continue to believe the economy is positioned to expand at a
noticeably better pace than it has during the past year, though
the timing and extent of that improvement remains uncertain.
Fundamentally, the long run growth potential of the economy
remains solid and the enhanced flexibility inherent in that
trend imparts resilience against shocks of the kinds that we
have experienced in the past few years.
Unfortunately, the future path of the economy is likely to
come into sharper focus only gradually. In the interim, we will
need to remain mindful of the possibility that lingering
business caution could be an impediment to improved economic
performance.
As you may know, the consensus of economic forecasters is
that a material rebound in economic activity will develop in
the second half of this year and certainly a number of elements
should be working in that direction. The recent improvements in
financial markets that I noted earlier, if maintained, would
seem to suggest a turnaround in capital spending. In this
regard, the ongoing decline in risk spreads in corporate bond
markets so far this year is an encouraging development. To be
sure, spreads remain high by historical standards but the
constraint imposed by last fall's huge run-up in risk premiums
now appears to have been put largely behind us.
In addition, businesses should see some relief from the
pressure on profit margins that had developed in recent months
as energy prices rose sharply. An improvement on this front
could be a positive development for capital spending. A
modestly encouraging sign is provided by the backlog of orders
for nondefense capital goods, excluding aircraft, which has
been moving up in recent months. Households, too, are likely to
welcome lower energy bills and a continuation of favorable
conditions in mortgage and credit markets.
As you know, core prices by many measures have increased
very slowly over the last six months. With price inflation
already at a low level, substantial further disinflation would
be an unwelcomed development, especially to the extent it put
pressure on profit margins and impeded the revival of business
spending. The balance of influences on inflation and economic
activity will be among the subjects of discussion by the
Federal Open Market Committee when it meets in six days.
Mr. Chairman, I look forward to your questions.
[The prepared statement of Hon. Alan Greenspan can be found
on page 71 in the appendix.]
The Chairman. Thank you, Mr. Chairman. And let me recognize
first the gentleman from Iowa, Mr. Leach.
Mr. Leach. Thank you, Mr. Chairman. Mr. Chairman, could you
comment on the reasons and implications of weakening exchange
rate of the dollar vis-a-vis the Euro. And secondly, has the
Fed done any studies or are you prepared to comment on the
economic implications of the spread of disease, particularly
AIDS and SARS?
Mr. Greenspan. Mr. Leach, as I think I have indicated on
numerous occasions, we in this government have a special
agreement amongst us that stipulates that any comments with
respect to the exchange rate be left to the Secretary of the
Treasury as our general spokesman. And as much as I would like
to comment, I am obligated not to and I apologize.
Mr. Leach. Do you have the same rule with the NIH on
disease?
Mr. Greenspan. No. And therefore I am fully able to expose
to you my lack of knowledge on a lot of these issues. There is
not terribly much I can add to the issue of AIDS. That is a
fairly well understood and very devastating process, and it is
clearly doing extraordinarily unfortunate and negative things
to a number of areas in the world, especially in Africa.
The SARS issue is more recent, more uncertain and more
difficult to pin down, but we know certain things. We know it
has had a very major negative impact on air transport
obviously, vacations, all aspects of the type of holiday parts
of our economy, if I may put it that way, which rests on travel
and visits. Since a fairly significant part of Southeast Asia
does rest on travel and tourism, it is beginning to have some
effect specifically in Hong Kong, to a lesser extent in
Singapore and China, but it is pretty much contained in that
area. As you know, the World Health Organization just recently
indicated that Vietnam has contained SARS. There is very little
evidence that outside of the tourist-related aspects of the
economies in Southeast Asia that much has been impacted.
You have to remember that there are one-and-a-quarter
billion people in China and even though the numbers on SARS are
large, they are clearly just a negligible part of the total at
this stage. But it is clearing having some modest effects.
Our concern would largely be the fact that in the
manufacturing area, because we have just-in-time techniques
fairly sophisticatedly tied into many of the production
operations in Southeast Asia, that if the production part began
to be eroded by absenteeism or other issues which would contain
production, it could feed back into the United States through
the just-in-time processes. To date, there is just no evidence
of that. Apparently, production is being maintained and we see
no backing up in any significant way of supply lines in the
United States.
Mr. Leach. Thank you, sir.
The Chairman. Gentleman yields back. The gentlelady from
New York, Ms. Velazquez.
Ms. Velazquez. Thank you, Mr. Chairman. Chairman Greenspan,
the questions I am going to ask you I am going to make them
based on the role that I play in the House Small Business
Committee, and I want to take advantage of your presence here
to help me understand the President's stimulus package. He is
proposing an enormous stimulus package, the centerpiece of
which is a dividend tax cut for large corporations. During
previous testimony before Congress, you stated that you support
the principle of the repeal of the dividend tax. One of the
many problems I have with the dividend tax cut is that it
offers no relief to millions of small businesses that are
organized as S corporations, partnerships and individual owners
who will see no benefit from the repeal. The dividend tax cut
is going to create a tremendous incentive to put your
investment dollars into companies that can issue these tax cut
free dividends.
Mr. Chairman, can you explain how investment dollars will
not be shifted away from small and mid-sized firms to these
large corporations who benefit from the repeal of the dividend
tax cut?
Mr. Greenspan. Well, Congresswoman, I think it is important
in the context of the President's proposal to recognize that
there is not only a significant reduction or in fact, depending
on how one ultimately decides this, the potential full
elimination of the double taxation of dividends, but there are
also significant cuts in marginal tax rates. So far as
Subchapter S corporations owners are concerned, that clearly is
a far more significant factor for them than would be the issue
of elimination of the double taxation of dividends, although
obviously I am certain that owners of Subchapter S corporations
are significant holders of common stock.
I must say to you, Congresswoman, I am a very strong
supporter of expanding the scope of Subchapter S corporations,
because in a sense that also eliminates the double taxation of
dividends. That is in fact what a Subchapter S corporation
does. So in that regard, owners of Subchapter S corporations
have already had the double taxation eliminated. And I would
hope that we could expand that particular form of organization,
because as I am sure you are more aware than I, a major part of
economic growth in this country comes out of small business,
certainly the vast proportion comes out of small business.
Anything we can do in that regard to enhance expansion of small
business I think is in the national interest without question.
Ms. Velazquez. Small businesses represent nearly 99.7
percent of all businesses. Small businesses employ collectively
more than half the private sector workforce and generate about
three-fourths of net new jobs each year. In addition, these
firms also generate more than half the revenue of all U.S.
Firms. As Congress continues to consider the size of the final
tax cut package, it is unlikely that both the dividend tax
repeal that large businesses favor and the accelerated income
tax cut and expensing provisions that small businesses favor
will both pass. If you had to choose which of these provisions
will better stimulate domestic economic growth, which one would
you choose?
Mr. Greenspan. I would choose to abstain from answering
that question. First of all, I will not and hope I don't have
to be pressed to get into answering details of the President's
package. But these are complex issues and there are a lot of
different analysts who come up with different judgments, and I
think the second panel will be glad to address that in some
detail. In fact, you will probably not be able to prevent them.
Ms. Velazquez. Mr. Greenspan, I am tired of hearing all the
time when people want to lecture us about our economy how great
small businesses are for our economy, that they are the fuel
for the engine of our economy and they are the ones who take us
out of recession, but when it comes to the final package I just
want to make sure that those provisions that are going to help
small businesses who will stimulate economic growth will be
there.
Thank you, Mr. Chairman.
The Chairman. The gentlelady's time has expired. The
gentleman from New York, Mr. King.
Mr. King. Chairman Greenspan, in your statement and other
economists seem to feel that the economy is growing stronger
and especially in the second half of this year we should see
more growth. Let me ask two questions, one involving national
and one international, as to what could be the impediments to
that growth and see what your response is.
One is that no matter how strongly based our economy is,
how far forward can we go if overseas economies continue to be
weak, particularly Western Europe and Japan? And secondly on
that line, especially Japan, how tied to our economy is Japan?
How tied is Japan's economy? Are we--as far as talking about
large scale long-term growth, is there an opportunity for Japan
to do anything more, because there is economic malaise there
that seems to have been going on up for a better part of a
decade.
Secondly, on the domestic front, one of the strong points
of our economy consistently in recent years has been the
housing market and the housing starts. With local and State
governments faced with budget cutbacks or budget problems, that
is inevitably going to result in property tax increases. How
will those property tax increases impact on housing starts and
on the housing segment of the economy?
Mr. Greenspan. First of all, if you look across the
spectrum of major economies in the world, we are clearly the
most resilient and potentially the most productive of all.
There is no doubt that we depend upon and have gained very
significantly from international trade and obviously that is
determined to a substantial extent by the general level of
economic activity in the world at large. So clearly, if Europe
and Japan are weakened, it will impact on us. But we are still
very substantially a self-contained economy and we have huge
markets here, indeed everyone wants to come here as you well
know. So I would think that yes, residual weakness in Europe
and Japan will have a negative effect but not a very large one.
Far more important is the apparent underlying, still
unexploited, fairly significant capital investments with
potentially significant profitability over the longer run,
which I mentioned here on numerous occasions and specifically
did so last February. That outlook has not changed and, if
anything, it is something that is far more important to project
in the longer-term U.S. outlook than anything else that is
going on elsewhere.
To be sure, Japan is having very considerable difficulties.
They have had them for quite a long period of time. That
underlying trend is already built-in, if I may put it that way,
to our relationship with them in an economic sense. I am not
going to say it is discounted, but we have adjusted to that
particular state of affairs. So I am not terribly concerned
about the international impact on the American economy as such.
So far as the housing issue is concerned, it is certainly
the case that it just remains continuously buoyant. Mortgage
interest rates have been kept down quite significantly. There
is still significant refinancing going on even though it is
clearly off some of the astronomical peaks that we have just
seen, but it is pretty viable. And housing starts and sales and
existing home sales all continue to look reasonably good. To be
sure, if you raise property taxes, it will have some effect,
but my impression is that the order of magnitude of the types
of changes that are likely to occur are sufficiently small as
to probably be lost in the rounding with respect to the
viability of home construction and its importance to the
American economy.
Mr. King. Thank you.
The Chairman. The gentleman yields back. The Chair now
recognizes the gentlelady from Indiana, Ms. Carson.
Ms. Carson. Thank you, Mr. Chairman, for being here and I
am glad to see you are on the rebound. Hope you continue to do
that. I have a very quick question here and I know that you
said you don't want to get into defending the President's tax
package and if it is one of these questions, I will yield back.
The President has now equated tax cuts with jobs and called for
a first round tax cut bill of at least $550 billion. The
recovery is now through 2013. Given that I represent
Indianapolis, where we experience a high rate of bankruptcies,
high rate of home foreclosures, high rates of unemployment,
probably one of the highest segments around the country, I am
wondering if you could feel free to say whether or not you
believe that in fact the stimulus in terms of job recovery, the
$550 billion tax cut.
Mr. Greenspan. Well, Congresswoman, I haven't changed my
view from where I was at this committee in February. I am in
favor of the elimination of the double taxation of dividends.
In fact, I am very strongly in favor of reducing taxes on
capital per se on the grounds that I believe it slows the
economy and effectively undercuts income growth through all
areas of the income distribution.
So in general, I strongly support those types of tax cuts
which remove burdens off capital. But as I also indicated in
February, and indeed as I indicated back in September, I was
very much concerned that the budget rules--which had been, in
my judgment, surprisingly effective, specifically PAYGO and
discretionary caps--were being essentially allowed to lapse and
that I strongly supported their continuation, which in my
recollection, was due to terminate in the House on September
30, and I strongly advocated continuing those.
Now if they had been continued, if I were testifying on a
particular project, I could be strongly supportive of certain
types of tax cuts, as indeed I am but in the context of PAYGO
and a recognition of the necessity to contain what I perceive
to be a trend toward increasing budget deficits. And that left
me with the conclusion that we needed to curb spending far more
significantly than we did. In my judgment, that type of package
would, over the long run, be conducive to a better degree of
economic growth and one would presume that at least part of
that would be reflective in a significant increase in job
creation.
Ms. Carson. I yield back, Mr. Chairman.
The Chairman. Gentlelady yields back. The gentleman from
Ohio, Mr. Gillmor.
Mr. Gillmor. Thank you, Mr. Chairman. I have a couple of
questions regarding the Fair Credit Reporting Act. You have
stated that the FCRA national standards ought to be made
permanent because, among other things, limits on the flow of
information among financial market participants or increased
costs resulting from restrictions that differ based on
geography may lead to an increase in the price of or reduction
in the availability of credit. In light of the important role
that consumer credit has on the economy, could you explain
whether such limits or information flow or increased costs
would have a positive or negative effect on the economy?
Mr. Greenspan. Well, Congressman, we have a really
extraordinary consumer credit market. It has become
unbelievably complex and sophisticated. It was not that many
decades ago that most small bankers, and most bankers were
small bankers, pretty much knew the credit capability of those
to whom they lent and they had pretty sophisticated ways of
controlling credit risks and those markets worked.
But as we got ever larger and more sophisticated, it was no
longer possible for each individual borrower to be readily
evaluated in that old-fashioned way. And what occurred was the
development of a rather extensive credit bureau-type system
which collected information on the credit characteristics of
various different borrowers and set up the capability of being
able to judge individuals more or less on the basis of their
credit records.
There have been a lot of complaints about inaccuracies and
all of that and I am fully aware of that, and I think efforts
are being made to minimize that sort of problem. But there is
just no question that unless we have some major sophisticated
system of credit evaluation continuously updated, we will have
great difficulty in maintaining the level of consumer credit
currently available because clearly without the information
that comes from various credit bureaus and other sources,
lenders would have to impose an additional risk premium,
because of the uncertainty, before they make such loans or
indeed choose not to make those loans at all.
So it is clearly in the interests of consumers to have
information continuously flowing into these markets. It keeps
credit available to everybody, including the most marginal
buyers. It keeps interest rates lower than they would otherwise
be because the uncertainties which would be there otherwise
will not be there. And as I have indicated previously to a
similar question the last time I was here, I think it is
terribly important that we continue forward in this type of
credit evaluation process.
Mr. Gillmor. I think you answered what my second question
is, how that might lead to a reduction of the ultimate sharing
of risks and rewards. Where do you think the likely market
impact of State imposed restrictions on prescreen offers of
creditor insurance and in particular would consumers in rural
or underserved areas have less access to creditor insurance or
pay more?
Mr. Greenspan. I have been in favor of national standards
here for reasons which are technically required. If you have
very significant differences State by State, it would be very
hard to maintain as viable a system as we currently have.
Mr. Gillmor. Thank you, Mr. Chairman.
The Chairman. Gentleman yields back. The gentleman from
Massachusetts, Mr. Frank.
Mr. Frank. Mr. Greenspan, the study that was done by Thomas
Laubach, if I pronounced it correctly, in March and I
understand it is not officially endorsed, but his conclusion is
that there is a four or five basis point increase in long-term
interest rates in response to a percentage point increase in
the debt to GDP ratio. That is in his conclusion on page 13. As
I look at CBO's official statements here, in 2013, the end of
our 10-year projection, according to CBO, on the baseline, the
percentage ratio there was to be 16.8 percent. That was the
baseline. Their estimate based on the President's submitted
budget is 32.2 percent. That is an increase of 14 points. Now
using Mr. Laubach's formula, that becomes about a .6 percent
increase, about 60 basis points, between 56 and 64 percent. We
are not in an area of exactitude and I realize the President's
budget was not enacted or adopted, but it is a close
approximation. Do you think that is a plausible estimate of the
effects of the President's budget as opposed to the baseline?
Mr. Greenspan. Congressman, I can't comment on the specific
calculations, but I can comment on the study itself. I thought
it was an exceptionally good study. It is interesting because
in years past it has always been difficult to infer the impact
of what deficits did to interest rates, and the reason for that
is there was a tendency to use as the interest rate involved
either the 10-year Treasury note or in some cases the 30-year
bond. Now what we know about interest rates is that a 10-year
note, for example, is effectively a weighted average of a whole
series of short-term rates between zero or one day and 10 years
and that with the business cycle inducing very significant
movements in short-term rates, what tended to happen in periods
of recession when deficits went up, you would find that the 10-
year note went down contrary to what one would expect.
What Laubach did, which a number of economists do for other
reasons, was essentially to endeavor to smooth out the business
cycle and the short-term rate impact on the 10-year Treasury
and effectively ask what is the impact on that part of the
Treasury note, as I recall it, that is essentially five-year
interest rates five years from today. And somewhat to my
surprise, it came out far more robust as the relationship
indicated that the greater the deficit, the greater the long-
run interest rate.
Mr. Frank. In other words, your sense, deficits affect
long-term interest rates if anything has been strengthened
since you were last here because you found in Mr. Laubach's
study a more robust relationship than people might have
expected?
Mr. Greenspan. The difference between his analysis and
previous ones, which had difficulty finding that relationship--
--
Mr. Frank. I think this is very relevant and it is a
current issue. There are people who have denied that there is
any deficit long-term interest relationship. I was interested
in reading Mr. Laubach's paper. I skipped over the regressions.
I will do those later. But he does quote another very
distinguished economist who is saying the interest rates
effects of deficits depend on how persistent those deficits are
assumed to be. Now of course we are talking about deficits as
far literally as the eye can see under rules. And the economist
he is quoting is Martin Feldstein. So the consensus of deficits
here seems to be a strong one. I appreciate that and I think
that is a very important point.
We are talking about stimulus. We have had a significant
increase in unemployment with all of the social distress that
complicates everything else. You discussed how trade policies
become harder when people are more afraid of losing their jobs
and health care. You say here that you begin--you see the
economy perhaps getting better. My question is how much short-
term stimulus do you think we need right now, especially given
your view that there was a trade-off between increasing that
debt ratio and interest rates? What is your sense of how much
short-term stimulus we ought to be enacting right away?
Mr. Greenspan. Well, that is an ongoing question in the
sense that we already have a significant amount of stimulus in
place. I mean, clearly, as of now we have got a fairly large
government expenditure trend and clearly low interest rates.
Obviously, I have said in the past, and my belief is that it is
very difficult to fine-tune fiscal policy for short-term
stimulus purposes and I have tended to be strongly supportive
of the employment and fiscal policy for long-term structural
growth issues and leave monetary policy to be applied in the
short run. If it turns out that, contrary to my expectation, we
somehow can fine-tune fiscal policy in timing and in content, I
would change my mind but I have seen no evidence that that is
the case, although I do admit that the 2001 tax cut did turn
out to be extraordinarily well-timed from the point of view of
the economy, but I don't think we can count on that generally.
Mr. Frank. You would not be wanting to repeat that and
especially given that we have the deficit interest rate impact?
Mr. Greenspan. Yes. My view is that clearly we still have
room in monetary policy if we choose to move and if stimulus
was required. So I still have not essentially changed my view
about what the appropriate balance is between----
Mr. Frank. Mr. Chairman, just a second, I would like
unanimous consent to introduce into the record the study by Mr.
Laubach that Mr. Greenspan and I were discussing and maybe want
to pause so that the journalists can run out and call in the
fact that he said there is room for reducing monetary policy.
[The following information can be found on page 115 in the
appendix.]
Mr. Greenspan. That is not news. I have said that on many
occasions.
The Chairman. The gentleman from Illinois, Mr. Manzullo.
Mr. Manzullo. Thank you, Mr. Chairman. I represent
Rockford, Illinois, which in 1981 led the Nation in
unemployment at 24.9 percent. We have a 25 percent
manufacturing base. Our unemployment now is at 11 percent and
it is going right through the roof. The manufacturing orders
and the manufacturing output--the figures that the Fed uses do
not reflect the percentage of imported parts that are going
into manufactured items as they are completed in the United
States. Those figures simply do not exist with the exception of
bonded matter going to Mexico under NAFTA and the NAFTA content
on automobiles. And continuing is the fact that the Defense
Department, particularly the Air Force continues to grant
massive waivers of the Berry amendment and the Buy America
amendment that has allowed, for example, the Russians to
dominate our titanium market and destroy tens of thousands of
jobs related to nickel and titanium and the people who
fabricate those, especially in the State of Pennsylvania and
Ohio. In fact, Ingersoll, 122 years old company in Rockford,
Illinois, went bankrupt last week, and one of the reasons is
that Northrop Grumman decided to send a contract to Spain as
opposed to keeping it in the United States for the U.S. Portion
of the production of the Joint Strike Fighter with NATO, and
Spain is not a member of that seven nation consortium.
My question to you is this. As I read the Fed figures, it
does not indicate the hollowing out of American manufacturing
and the systematic destruction of tens of thousands and now 2-
1/2 million jobs of manufacturing that are never going to come
back. Does the Fed have any way to try to have new studies to
indicate the true nature of the loss of manufacturing jobs so
that we can state that the recovery in this country will not
start until we restart and reestablish our manufacturing base?
Mr. Greenspan. Well, Congressman, I think one of the
problems in a statistical sense is that the share of
manufacturing in the total gross domestic product is not
changing all that much. What is occurring is extraordinary
productivity gains in the manufacturing area, which has to a
very large extent accounted for--as you point out--the dramatic
decline in jobs. There is no question that open borders and
international trade create huge degrees of competition
throughout the system and very specifically in a number of
areas to which you alluded. But overall, as I indicated
earlier, the net effect of general trade has been very
advantageous to the United States for the post-World War II
period.
Mr. Manzullo. I am not talking about trade. What I am
talking about is the fact that there is a coring out of our
domestic manufacturing industry that the trade figures do not--
I have lost 19 percent of my manufacturing jobs in the past
year-and-a-half. That is 10,000 jobs.
Mr. Greenspan. I understand that.
Mr. Manzullo. It is not really trade related.
Mr. Greenspan. It is in a sense that there is a very
significant shift in the capital structure in the United States
from industry to industry and the consequence of that are the
types of numbers to which you allude. I don't want to get into
the national security aspects of some of the issues that you
raised, but that is a different type of issue when we get to
how that is handled. That is more a DOD issue.
Mr. Manzullo. I wish it was yours because the Air Force
doesn't understand.
Mr. Greenspan. The bottom line is that we at the Federal
Reserve endeavor to adjust our policies to maximize long-term
economic growth in the economy as a whole and we cannot and
should not endeavor to implement policies which differentiate
or endeavor to differentiate various different aspects of our
economic structure.
Mr. Manzullo. And you are doing a super job at it, and
thank you for coming.
Mr. Greenspan. Thank you very much.
The Chairman. Gentleman from Illinois Mr. Gutierrez.
Mr. Gutierrez. Mr. Chairman, yesterday, we received
Treasury's final rule regarding section 236 of the U.S. Patriot
Act, which provides guidelines for financial institutions to
identify their customers. Section 326 states, and I quote, ``if
the customer is a non-U.S. Person and does not have a U.S.
Taxpayer identification number, the bank may obtain an
identification number from some other form of government-issued
document evidencing nationality or residence and bearing a
photograph or similar safeguard.''
As I interpret the rule, financial institutions could have
the flexibility to accept government-issued IDs such, as the
Mexican Government's matricular consular card that allows
Mexican nationals currently under FDIC rules and others to open
up bank accounts in the United States.
Given the fact that we have estimated, depending on whose
estimate, Mr. Chairman, 6, 7, 8, maybe 10 million undocumented
workers in the United States of America, and given the fact
that just days prior to September 11 people forget that
President Bush and President Fox were discussing a way of
regularizing the economic activity of Mexican nationals in the
United States, and given that this makes up the fifth pillar of
the Mexican economy, that is remittances back to the United
States, and if you bank, you know, you and I want them to have
the same rate as you and I would at a beach in Acapulco with
our ATM card versus a Western Union or Monogram, which
sometimes fluctuates as much as 16 or 17 percent fewer dollars
than the Wall Street, what do you think of the idea of using
the Mexican Government's consular card and other consular
cards, and is the Fed ready to join the FDIC and others in
supporting the use of the Mexican consular ID card as a form of
identification?
Mr. Greenspan. Congressman, I am familiar with the
particular issues which you raised, but my general view, at
least with the state of my knowledge now, is that I was not
able yet to be exposed to the complexity of the choices and the
alternatives because these are very complex issues, especially
as they have arisen subsequent to September 11. I would prefer
to go back and take a look at some of the details of the
arguments here and perhaps respond to you in writing to give
you a more informed view than I could at this particular point.
Mr. Gutierrez. It is very fair. Thank you very much. We
would just like you to look at it because it seems to me that,
you know, when we listen to the Justice Department and we
listen to others, it is at one moment we are talking about
regularizing a work force, and we are passing all--we are
spending all of this money and passing all of these laws so
that we can find out the activity of everyone, and it just
seems to me that a very simple way of identifying, having a
picture and fingerprints of millions of people in the United
States you would not otherwise be able to get, and so,
therefore, in terms of national security issues it seems that
this is the way to do it. And I called the IRS, and the IRS
really does not care. They just want them to pay their taxes. I
am sorry, Mr. Chairman, that's all the IRS. I talked to Social
Security, and they said, well, just make sure they do not put
any dependents down. So when I talk to them about undocumented
workers, even our Federal Government said, oh, do not worry,
Congressman, just send their applications in, and we will give
them a tax ID number, and then they can go with the matricular
consular and open up their bank accounts. So obviously our
Federal Government is taking their tax dollars in and even
allowing them to submit income tax returns.
A second question, Mr. Chairman, in 2002 you remarked that
the ABA conference, and I will quote you, ``the use of credit
scoring models, whether turnkey models purchased from providers
or proprietary models developed in house, has taught bankers
sometimes through costly experience the value of continually
updating the database on which the model operates,'' end quote.
I would like to get your opinion as to whether there is value
in providing customers, particularly mortgage applicants,
information about their credit score. I mean, not limiting it
just--limiting it to just handing over a number, but providing
sufficient explanation of the rationale for the key factors
that influenced the mortgage applicant's credit score, the date
of the score, the source of the score. Will not disclosure of
this information also help in updating the databases by
consumers who are, in my opinion, in the best position to
ensure the accuracy of the information? Also, does not the lack
of information put consumers who are shopping for a mortgage at
a disadvantage, especially when banks advertise APRs for only
the best-qualified applicant, a near perfect score?
Mr. Greenspan. Well, in general I just want to say that
over the years we have developed a really quite extraordinary
mortgage market, which has been in the last year exhibited in
the form of a huge interaction of the American public with our
mortgage system. We have had, as you know, a huge number of
refinancings, very substantial cashouts, and millions of
transactions, which in general, I think, has helped both
homeowners and the economy in general.
There is no question, however, that it is crucially
important that individual borrowers be fully cognizant of
precisely what they are doing and various choices that they are
making. And having looked at some of the detailed data and
material available in the mortgage processing area, I hope we
can sharpen it somewhat better if we can make it clearer in
many cases.
The Chairman. The gentleman's time has expired.
The gentleman from California Mr. Miller.
Mr. Miller of California. Thank you, Mr. Chairman. It is
great to have you here. I am glad you are well and life's
treating you good.
I really appreciate the gentlewoman's comment regarding
small business and your concerns, and I applaud that. However,
I continue to hear arguments against tax cuts for those in the
upper income tax brackets; yet those are generally the brackets
where small business owners fall within if they are doing a
reasonably good business. If they do not, they are generally
not providing many jobs, and I think we need to do what is
necessary to encourage consumer spending, to promote
investment, both individual and business, and if people do not
have a job, we need to do what we can to create more jobs.
But I am convinced if people do not have cash in their
pocket, they cannot spend it. They can continue to go into
debt, and many will go into debt regardless. They will use
credit cards or whatever. But I know you do not want to defend
the President's tax package, and I am not asking you to do
that, but as you notice, Congress is unwilling to cut spending,
so we keep spending, deficits grow, and things do not seem to
change in Washington. But I think we need to look at what the
market impact might be on the economy with the President's new
package in place, and can you respond to that?
Mr. Greenspan. I cannot specifically, because that would
get involved in certain elements of the program. As I said,
Congressman, I find much to support in the President's program,
provided it is matched by cuts in spending, because----
Mr. Miller of California. That is the key with cuts and not
spending for----
Mr. Greenspan. Let me tell you why it is, and it does rest
on the issue of whether deficits, or expectations of long-term
structural deficits, which is the more important question,
affect long-term interest rates.
Indeed, there are powerful reasons to suspect that, for
example, the elimination of the double taxation of dividends
and significant cuts in higher marginal rates will elevate
long-term productivity in the country. If, however, in the
process you get significant increases in deficits which induce
a rise in long-term interest rates, you will be significantly
undercutting the benefits that would be achieved from the tax
cuts, and therefore, I have concluded all along and continue to
conclude that it is very important for us to maintain the
degree of fiscal restraint over the years ahead, because it is
only under those conditions that I think we can create a fiscal
policy which significantly assists in acceleration of economic
growth, which we will sorely need as we move beyond this
particular decade and run into the very large increase in baby
boomer retirements.
Mr. Miller of California. It seems rather disingenuous on
our part, hearing what you have said, to say on the one hand we
need to stimulate the economy, we need to create more jobs,
yet, on the other hand, we are unwilling to cut spending. I
mean, we tried to do that this time, and it pared way back from
what we were even trying, which was minimal, I believe, in this
budget.
On the other hand, being in the development industry for
probably 30 years myself, I am still doing some investments in
that, and having many friends in there, I am convinced that
they invest money if they have it. And if you look at the upper
brackets, and if a person is paying State income taxes and
such, he is probably paying 50 percent plus other user fees and
taxes that you locally pay. So when you are taking 50 percent
out of the pocket of a business owner that they would otherwise
put back into their business through job creation or
investment--because there is no sense, as you know, putting
money in a bank today and getting a percent and a quarter
interest--they are going to find a better source for their
funds, and that is generally investing it in something that
they will make a profit on, and that in and of itself creates a
job.
It's difficult for me to accept the fact when some say,
well, we need to provide jobs, we need to do what we can to get
people back to work, yet we are unwilling to do our job by
cutting spending, because it creates the deficits if we provide
tax cuts, and yet the only way I see we are going to get job
creation moving in this country is to put more money in the
economy, and that is by allowing people to keep more of their
money by not just giving them a grant, but say keep more of
what you earn; thereby you are able to invest that back into
your business.
Would you comment on if we were willing to cut spending
from the Federal perspective and provide tax cuts to people,
would that not be more beneficial to the economy?
Mr. Greenspan. Oh, indeed. I have argued that over the
years.
Mr. Miller of California. I hope my friends on the other
side of the aisle are listening very closely because I hear
other things than they think they hear. Repeat that again. I
want to make sure everybody heard that.
Mr. Greenspan. I have argued before this committee on
numerous occasions that curtailing deficits and at the same
time lowering taxes on capital is a major way to expand
economic growth in this country and increase the incomes of all
Americans eventually in the process.
Mr. Miller of California. I agree with you.
The Chairman. The gentleman's time has expired.
The gentlewoman from Oregon Ms. Hooley.
Ms. Hooley. Thank you, Mr. Chairman, and thank you for
being here. I thank you for helping keeping the interest rates
low. It's allowed me to refinance my house, as well as many
other people.
I am go going to ask you a couple of questions, and one is
I am very concerned about jobs and job creation. I think most
people here are. I come from a State where we have the highest
unemployment rate at 7.6 percent, so I am very interested in
what is going to help create jobs for people. And we all know
what happens when people do not have those jobs.
I am troubled by a seeming conflict of some numbers. I sit
on the Budget Committee, and in March we were talking about the
President's tax relief package, and they were talking something
like 190,000 jobs would be created with this. More recently, a
month and a half later, we are now talking about 1.4 million
jobs created with this same amount of money. Do you have any
explanation for why that may have changed so dramatically from
190,000 job creations to 1.4 million?
Mr. Greenspan. No, I do not, but I want to point out that
there is a very important issue that I alluded to in my
prepared remarks, and it is that productivity has really been
impressively strong, especially in recent quarters when this
economy has been weak, and what that has meant is that, as I
put it in my prepared remarks, businesses were able to meet
increasing demand, although weak increases, with an ever lesser
work force, which is another way of saying that output per
laborer has gone up significantly.
So part of the weakness in the labor market is the
numerical consequence of this really quite strong and, I must
say from a long-term point of view, highly desirable
improvement in productivity. So we are going to need to get
economic growth rising at a pace sufficiently in excess of the
rate of growth of productivity in order to get the job market
to be far more viable again, and most people's forecasts, in
fact, imply that. If you look across the spectrum of most
economic analysts, even though they and we do not see the
immediate effects of the end of the Iraqi war, and we cannot,
obviously, because it is too soon, most people have got fairly
strong increases in demand and enough to cause a marked
increase in the level of employment.
But it is going to require more than historically has
usually been the case in getting increased growth in the GDP
because the productivity growth is so impressive.
Ms. Hooley. So you think the productivity growth--I mean,
we have just lost--in the last 22 months we have lost 450,000
job. Is that because of productivity?
Mr. Greenspan. We have no evidence that the GDP has been
going down in the current quarter, for example, although its
growth is very low, but clearly a very significant part of the
loss in jobs reflects the fact that economic growth is being
very closely matched by growth in output per hour, leaving very
little room for significant increases in jobs.
I think that will change. I think this is a temporary
phenomenon, and that as we get into the second half, and a
number of the positive forces again begin to emerge, I think
that is going to change, and that has been a view which I think
a very substantial proportion of economic forecasters now hold.
Ms. Hooley. Mr. Chairman, one of the things that I think
all of us are looking for are, in fact, how do we stimulate the
economy, what is the best thing we could do, what is the best
thing we can do short term? So if I ask you to put together a
package, or ask you if there was something in the President's
budget that would provide the most immediate stimulative impact
for jobs, because for the people of my State and, I think,
across the United States, that is what people are interested in
right now, how do we make sure we can create jobs? What would
that one piece or one thing be that would have an immediate
stimulus impact for job creation?
Mr. Greenspan. That is an exceptionally difficult question
to answer in general, and I do not want to get into it because
it will, I am certain, get me more involved in discussing the
relevant choices in the programs which the Congress has now got
to address, and I don't have anything more to add to that than
I did back in February.
The Chairman. The gentlewoman's time has expired.
The gentlewoman from Pennsylvania Ms. Hart.
Ms. Hart. Thank you, Mr. Chairman.
Thank you, Chairman Greenspan, for coming back to visit so
quickly, and I am glad to hear you are doing better healthwise.
I had a question specifically, actually two questions,
regarding the Check 21 Initiative, and I understand that the
legislation that is being considered by our committee has been
supported by the Fed.
Mr. Greenspan. Are you talking about Check 21?
Ms. Hart. It still is supported by the Fed; is that
correct?
Mr. Greenspan. Indeed.
Ms. Hart. Okay. As you know, it would greatly expand the
ability of financial institutions to move checks through the
payment system electronically without the need to have actually
the cancelled check itself move through the system. But there
is a portion of the bill regarding expedited recredit language
that I am especially interested in. It is included in our
proposal on the basis that the compliance burdens would
outweigh the benefits of the recredit. I understand the Fed's
position on that has changed, and I am----
Mr. Greenspan. That is correct.
Ms. Hart. I am interested in why the Fed believes the
current protections under the existing check law are sufficient
to ensure that consumers are not adversely affected by
legislation if the recredit provision was removed, and what
would happen if the expedited recredit provision were extended
to cover all checks?
Mr. Greenspan. We originally included that, as you know, in
our early recommendations with respect to check truncation
legislation. Subsequently, on evaluation in far more detail, it
turns out that most, almost all, of the protection that one
would envisage from that provision is already fairly
conclusively achieved under current law, and that it was our
conclusion, having reviewed this in more detail, that indeed
the additional costs of compliance that the new provision would
impose exceeded by any measure we could find the benefits over
and above the protections currently in the law.
So we have chosen to alter our proposal on the grounds that
we think that it is more balanced, and indeed, as we all
hopefully do when we find out that we can do something better,
we change, and we did.
Ms. Hart. I thank you for that explanation.
Also, on the check truncation issue, can you share with the
committee the images that the check truncation would provide to
the domestic banking system? Some have indicated, not the
members of the committee that is, but others who have testified
have indicated, that they are wary of the legislation because
they believe it will result in confusion with the elimination
of the original check, possible double use of the original
check and the image check. I am interested in your view of
that. Is there a reasonable concern attached to that concern
about the creation of substitute checks and the technology
associated with check imaging?
Mr. Greenspan. I think not. I think we have reviewed all of
the potential things that can go wrong in a system of that
nature, and I do not want to say to you that we know for
certain that upon enactment various things will or will not
happen, but from everything we can see, those are not concerns
which we think are of significance.
Ms. Hart. I thank you for that as well as I yield back.
Thank you, Mr. Chairman.
The Chairman. The gentleman from California Mr. Sherman.
Mr. Sherman. Thank you, Mr. Chairman.
One thing where I guess we will just have to agree to
disagree, Mr. Chairman, is the assumption that private sector
spending is good, it stimulates the economy, and public sector
spending is bad and must be cut back. It would seem to me that
purchasing as a society one more school bus than we have today
creates the same level of expenditure, the same stimulus as if
as a society we buy one more of those new $300,000 Mercedes
Maybachs. But I guess we will have to agree to disagree.
Apparently if we can just make sure that one more very rich
individual buys one more $300,000 Mercedes, that is going to
help the economy.
But, Mr. Chairman, there is in your statement, there is an
implied criticism made--almost an attack, by the more explicit
statements by my friend the gentleman from California Mr. Gary
Miller--in which, it has almost become the joke or cliche where
the serial murderer sends in a note saying, ``stop me before I
kill again.'' What we seem to be hearing from the other side
is, ``stop us before we waste again.'' I would hope that in a
city dominated by Republicans and a White House that has
promised not to spend a single penny more than is necessary,
that we wouldn't need to have to undermine fiscal
responsibility on the tax side in order to get an OMB that
actually limits us to necessary expenditures.
So, Mr. Chairman, I will ask you to consider a parallel
universe, a hypothetical situation in which there is a
government dominated by people who want to avoid unnecessary
expenditures, and they have eliminated all the unnecessary
expenditures, and they will not make any unnecessary
expenditures. Those expenditures are fixed. In other ways this
parallel universe is just like our own. Should that
hypothetical United States run a $200 or $300 billion deficit,
or should it have tax laws to bring in as much revenue as those
necessary expenditures, every one of them signed by a President
dedicated to eliminating every unnecessary expenditure?
Mr. Greenspan. Mr. Sherman, your hypothetical example would
require about 55,000 footnotes to get it into a measure with
which I could deal.
Let me, however, just address, I think, an important point
that you are making about the source of spending and whether or
not it matters where you spend. First of all, I do not think
anybody would argue that a school bus is not necessary, and
that one does that. But we are talking about long-term economic
growth and standards of living of the American people, and that
at root is what we are really all about. It is important to
discuss how you distribute it in certain aspects, but if it is
not there to distribute, you do not have anything.
All of the evidence suggests that what creates economic
growth is capital investment and incentives to innovation, and
that investment in those types of assets does indeed increase
long-term economic growth, whereas other expenditures will not.
And I do say to you that the real criterion is not whether it
is government or nongovernment, it is the question of whether
it is investment or noninvestment.
Mr. Sherman. Mr. Chairman, with my limited time I just want
to underline that comment. We are underinvesting in education,
we are underinvesting in infrastructure, and we are told that
here in Congress that if we can just give millions of dollars,
hundreds of thousands of dollars, to the richest in our
society, they will go out and spend it, and that will be good,
and at the same time we are cutting expenditures on so many
aspects of education.
I gather from your comment that investing in education may
be just as helpful to an economy as private sector investments,
and, of course, our colleagues on the other side of the aisle
preach the importance of not a private sector investment so
much as private sector spending.
Mr. Greenspan. I think it is a question of fact, and you
have to demonstrate that a particular type of capital
investment or innovation increases productivity and long-term
growth, which is easy to do. The difficulty is endeavoring to
trace various different types of educational expenditures into
economic growth, a relationship which one would assume has got
to be there because clearly the quality of the education of
your work force has got to be relevant to what you have got.
So I think the question is a question of fact; I mean, what
is the evidence as best we can infer? But I would emphasize
that the question is essentially consumption versus investment
as the statement number one.
The Chairman. The gentleman's time has expired.
The Chair would announce there is a vote on the floor of
the House. The Chair would indicate we will keep going, and I
will be relieved in the Chair hopefully soon, but in the
meantime we will keep going, recognizing the Chairman has to
leave by noon. And with that, we will recognize the gentleman
from Florida Mr. Feeney.
Mr. Feeney. Thank you, Mr. Chairman.
Mr. Greenspan, thank you for being here today, and just
very quickly, to follow up on my colleague's immediate
question, you indicated that the ideal thing is to eventually--
in terms of growth production is to stimulate capital
investment and incentives to innovate. Without the 50,000
footnotes, in general over the U.S. Economy history and over
the world economy history, which sector has been more efficient
in investing in those two items, the private sector, a free
market, or the public sector?
Mr. Greenspan. It has been my experience that it is clearly
the private sector that has done so. I indeed remember that
there has been an endeavor in this society to move a good deal
of public services into the private sector on exactly that
premise.
Mr. Feeney. Thank you, Mr. Chairman, because I think that
undermines the argument that a lot of us are making.
Now I have a very specific question and then a general
question, if you can, that I am going to leave you with. And
the specific question relates to the Basel Accords and the
rulemaking regarding our unique banking system. We have been
getting some mixed signals in terms of how the Fed intends to
react to the rules that have been promulgated in Switzerland by
the international regulators, and I guess the specific
question, if you can answer it, is whether or not the Fed would
be prepared to take on some major sections of the rules being
promulgated as part of the Basel drawing board if it becomes
clear that they will not work well here under our American
banking system.
Secondly, and then I will end up here, the debate has
focused on whether deficits matter, and I don't remember
anybody saying that deficits never mattered at any time. But I
was thrilled to hear you say earlier today that the recipe for
long-term success is to cut spending and to cut tax rates on
capital, and I think I was using your words, it will raise the
income of all Americans, which is certainly something we would
all aspire to, and is not the more significant ratio, as
opposed to what the temporary debt or deficit is on any given
year, even the more significant ratio be the rate of spending
as a percentage of gross domestic product.
And I say that because the way to pay for that spending is
one of three ways that I know of. You can either print money by
fiat, which has some negative implications for inflation; you
can borrow money, which is deficit spending, which potentially
crowds out some private sector borrowing; or you can raise tax
rates by doing exactly the opposite of your suggestion we need
to be doing in terms of encouraging capital bottom line. Any
one of those three ways to deal with the level of spending has
some adverse consequences at any given time. One way will be
more or less adverse for the economy as a whole than the other
two.
Mr. Greenspan. Well, Congressman, you can preempt private
resources by spending, taxes, regulation, guarantees, a whole
series of mechanisms in which you move private resources into
the public sector. Clearly the ratio of federal outlays to GDP
is a measure of the degree of shifting of resources that are
going on, but you have to distinguish between the issue of what
the interest rate is, which exists either in very heavy
preemption or very light preemption, and the issue of deficits
and finance. In other words, it is possible to have a fairly
high ratio of spending to GDP and low interest rates.
The problem is that if you have a very high ratio of
spending to GDP, history suggests that economic growth suffers
as a consequence, but that can occur with high or low interest
rates, and I say that the deficit interest rate relationship
while I do not deny is not partially related to spending as a
percentage of the GDP obviously, but I think is more
appropriately thought of as a separate issue, related but not
the same thing.
Mr. Feeney. And because of the response to the Basel
rulemaking on banks.
Mr. Greenspan. We have been very careful in the rulemaking
to be highly cognizant that it has to be consistent with rules
in the United States which are effective for us. We have gone
through very detailed analyses of what we call Basel II, and as
best we can judge, these are rules which will clearly be
effective in the United States and not burdensome, in fact less
burdensome and more effective than the previous sets of rules.
It has certainly been our view that we would not in any way
agree to a set of Basel II rules which would serve to the
detriment of the American financial system.
The Chairman. The gentleman's time has expired.
The gentleman from Texas Mr. Gonzalez.
Mr. Gonzalez. Thank you very much, and welcome back,
Chairman Greenspan. And we do have a vote, so I am going to try
to abbreviate everything, including your answer. I am going to
attempt to, because I have been here five years--and to be
honest with you, Mr. Chairman, I will ask something, and later
it's like law school, you are not sure what happened after the
professor turned you around, and you are going to be limited to
the choices of answer. And what would be the appropriate size
of the tax package currently being considered by Congress? I am
not going to give you the perfect choice of the three. It is
just going to be the best under all circumstances. It will not
be the Greenspan answer that will take into consideration
everything that should be taken in consideration, because
Congress is not going to do that, but we are going to arrive at
a figure, so you have a chance under the circumstances today.
Congress is going to make a decision on one of these. Which
would be the most appropriate in the way of the size of the tax
package being considered: A, $728 billion; B, $550 billion; or
C, $350 billion?
Mr. Greenspan. None of the above.
Mr. Gonzalez. There is not a D.
Mr. Greenspan. Look, I am not going to answer that
question, Congressman. I do not have a vote in the Congress,
you do. You have to answer that question.
Mr. Gonzalez. But we rely on people with tremendous
knowledge and expertise, and you fall in that category. And I
know that you defer to us all the time, but the truth is we do
not make these decisions independent of opinions by individuals
such as yourself.
Mr. Greenspan. Congressman, I appreciate that, but there
are certain questions which I do not think are appropriately
answered A or B if A or B is not the way they should come at
them, and I am not going to get involved in what I think is a
very complex set of issues with a simple conclusion because I
don't know what a simple conclusion is.
Mr. Gonzalez. But the end of the process, you are going to
end up with one of the process--Congress is going to end up
with one of these numbers.
Mr. Greenspan. Yes, I understand that.
Mr. Gonzalez. So you could render an opinion relatively
speaking as to which number would best serve the economic
interests of this Nation.
Mr. Greenspan. I cannot answer it in the context in which
you put the question, Congressman. I am sorry.
Mr. Gonzalez. And quickly because I want to, Martin
Feldstein in today's Post--you probably have read the article
about the CBO's analysis of dynamic tax analysis or the
valuation. And I will read the paragraph, then I will ask the
question.
The good feature of the CBO analysis is that it
distinguishes the short-term demand-side effects of the
President's plan from the longer-term supply-side effects. This
distinction is important because the ability of any tax cut to
raise GDP in the short term by stimulating demand depends on
the Federal Reserve's response to the tax cut. There are times
when the Fed responds by raising interest rates to prevent an
increase in demand because it fears the resulting rise in
inflation. But the Fed is now eager to see stronger growth and
would not take any such offsetting action.
So it's the last sentence, obviously, but the Fed is now
eager to see stronger growth and would not take any such
offsetting action, and so again we will go, A, you agree with
that analysis, or, B, you disagree?
Mr. Greenspan. You father was kinder to me, Congressman.
In general I thought that was a thoughtful piece, but I
cannot respond, obviously, because six days from now we have a
Federal Open Market Committee meeting, at which we will be
discussing a lot of these various things.
Mr. Gonzalez. Mr. Chairman, in a very serious way, we
cannot spend ourselves, government cannot spend itself into
prosperity. Nor can it tax-cut itself into prosperity. Somehow
we really have to start bridging the differences and come to
what is prudent government spending, which is investment,
because if dynamic scoring works on the tax side, it should
work for the expenditure side, as Brad was alluding to. If you
spend a dollar on education, what is its return? If you cut
taxes by a dollar, what is its return?
So we really do need your advice and counsel, and maybe it
will not be given to us in this particular forum, but I do look
forward to maybe some private discussions with you. Thank you
very much.
Mr. Greenspan. Thank you.
Mr. Gillmor. [Presiding.] The Chair recognizes the
gentleman from Massachusetts for questions.
Mr. Capuano. Thank you, Mr. Chairman.
Thank you, Chairman Greenspan, for being here again and for
coming back as you said you would. I think you would be happy
to know that since you started speaking, though the market is
down, it's up about 46 points from the time you started
speaking, so keep going. Do not stop.
Deficits in and of itself mean nothing to me. The
consequences of deficits means a lot. The consequences of
deficits to--the short-term consequences of deficit is
increased interest payments, increased debt interest payments.
We are fortunate at the moment to have low interest rates,
fortunately to you, and hopefully you will keep them that way
in a few days, but one thing at a time. But it does bother me
that over the last two years we have had the largest increase
in publicly held debt back to--I don't know how far back, at
least back to the mid-1980s.
Publicly held debt has increased almost $559 billion, just
publicly held. Government-held debt has also increased $423
billion. That is the largest increase we have had since
actually 1990, 1991.
Now, if my memory serves me correctly, the last time we did
this in those early 1990s, the result in the economy was not
very good. It took a big dip, lots of tax cuts, lots of
spending cuts, lots of problems all across the economy. It
concerns me. It concerns me that I have not heard more from
people such as yourself as to what to do about the deficit, how
to deal with the deficit.
For the sake of discussion, we had a roll call at the end
of last year whether to utilize or to discontinue temporarily,
I guess, or permanently at the time, the use of the PAYGO
rules, which I always had problems with on some levels, but I
also thought they kept us disciplined in a crude way, but they
worked. Yet I didn't hear a word from the Fed or very many
other leading economists. That was troubling.
I would like to see you and others speak out more
forcefully not just about the deficit, which is a concept, but
about specifically what this Congress should be doing relative
to that deficit. If you believe tax cuts are necessary, fair
enough, but would that also--if you really do believe deficits
are problematic, that would then, I think, lead to no other
conclusion other than much deeper cuts in spending. There is no
other way.
So I guess at some point I would like to hear more
specifics on that from you or from others, because we do listen
to you. We do not always agree with you, but we do listen, we
take into consideration, and I actually agree with your
concerns about deficits. But again, I am not really terribly
worried--I guess I am a little bit worried about what happens
five and ten years from now, but right now I think we need an
economic stimulus of some sort. We will disagree on some levels
as to what that could be, what that should be, but no matter
how you work it, increasing the deficit is going to lead to
more debt, which can lead to higher interest payments, which is
going to hurt the economy probably in the short run, but
certainly in the long run.
And I would like to hear you be more specific on that as we
go along. I am not silly enough to think that you are going to
do that now, but as time goes, certainly as other votes come up
on things like PAYGO rules or whatever, they might be--if not
tax cuts, fair enough, I understand you want to leave that to
us, but there are some things I think that should be a little
bit more aggressive on speaking about.
I do not want to talk about productivity. We have had this
discussion pretty much every time you come. I agree with you on
the issue of productivity. I actually like the fact that you
tied part of the increase of productivity to the lack of job
creation. I think you are 150 percent correct. But an increase
in productivity does not help the guy who is out of work. They
need a job. To get back to that, I particularly look at the
last quarter's increase in productivity, very, very small;
very, very small. If I am reading it correctly, it is .3
percent just in the last quarter of 2002.
Mr. Greenspan. It is higher in the first quarter.
Mr. Capuano. Okay. Good. If that is the case, if it is
lower or if it is a little higher, then it is back up into the
5 and 6 percent range yet?
Mr. Greenspan. No. The fact that it is increasing at all in
this context is telling you that there is an underlying
structure which is favorably disposed in that direction.
Mr. Capuano. I agree with that. That is good to hear. But
if that is the case, we should have at least stopped losing
jobs in theory if they aren't tied together, and if there is a
delay factor in that connection, how long is that delay? In
your testimony I believe you said that--you did not say, but
you attributed to others that we hope there will be a recovery
in the next half of the year. Does that include jobs, or is
this continuation of a jobless recovery?
Mr. Greenspan. No. I think it includes jobs.
Mr. Capuano. So you think the jobless rate will go down;
jobs will start being created in significant quantities?
Mr. Greenspan. The unemployment rate had in it, in the last
month, a fairly significant increase in the number of people
who still want a job, but are not activity seeking one,
according to the definition of the Bureau of Labor Statistics.
So it is a question of the unemployment rate coming down from a
level of measured joblessness, which includes the standard
definition, plus those who, although they are not as actively
seeking a job as previously, nonetheless would still be willing
and desirous of taking one.
Mr. Capuano. Also has an increase in the level of people
who have had the longer-term unemployment as well.
Mr. Greenspan. That is correct.
Mr. Gillmor. The gentleman's time has expired.
The gentleman from Texas Mr. Hensarling.
Mr. Hensarling. Thank you, Mr. Chairman.
Chairman Greenspan, before I left to go for a vote, I heard
at least one Member announce or articulate that he thinks the
difference between the two parties is a fundamental
disagreement between whether private spending or government
spending is somehow equivalent, I think, with respect to
economic growth. Certainly for those who long for state-
dominated economies, you can no longer look to the Soviet Union
as a model, but certainly Cuba and North Korea and several
other regimes on the face of the planet do have state-dominated
economies.
Do you have an opinion on the difference in economic growth
between State spending and private spending?
Mr. Greenspan. Well, indeed that question came up, I
presume, while you were out of the room, and I indicated that
the evidence strongly suggests that economic growth from
investment in the private sector is greater than that in the
public sector, and indeed I argued further that the indication
that that is apparently the case has moved numerous
municipalities and even states to move a good number of
previously government-funded services essentially into the
private sector in a more direct way.
So I have--I am clearly of the opinion and have stated so
that I strongly support private investment over public
investment as an issue increasing the rate of growth in our
economy.
Mr. Hensarling. If I have listened to your testimony
carefully, obviously you have a concern about budget deficits.
But for budget deficits, I understand in your testimony that
you are an enthusiastic advocate of eliminating the double
taxation on dividends. Is that correct?
Mr. Greenspan. That is correct, Congressman.
Mr. Hensarling. There was questioning earlier about the
impact of lowering rates on small businesses. I believe it was
your observation that lowering marginal rates is favored by
small business. Do you believe that lowering marginal rates,
assuming that such a move would be definitely neutral, would
have a positive effect on the economy?
Mr. Greenspan. That is correct.
Mr. Hensarling. Okay. We also heard a characterization
about the tax relief being proposed, whether it was itty bitty
or not. I do not want to get into the characterization
business, but if I have looked at the numbers carefully in the
budget that was recently passed, we are proposing $28 trillion
of spending over the next 10 years. It seems like the relevant
number today of tax relief is $550 billion over the same 10-
year period. So if I am doing the math correctly, that is
roughly 2 percent assuming that the tax relief promotes no
economic growth whatsoever.
So when once asked why Willie Sutton robbed banks, he said,
the money was there. If we wanted to be focused on deficit
reduction, it would appear to me that perhaps 98 percent of the
problem might be on the spending side as opposed to the 2
percent on the tax relief side. So if Congress is to get
serious about deficit reduction do you have an opinion about
whether restraining the growth of government spending or tax
relief would be a preferred method, or for purposes of economic
growth would you be indifferent between the two?
Mr. Greenspan. Congressman, I have testified before this
committee many times over the years that I strongly support
constraint on the expenditure side, which I think has a chronic
tendency to press on our revenue resources, and that unless we
contain expenditures, it will be very difficult to maintain
balanced budgets.
Mr. Hensarling. I believe earlier in your testimony you
advocated returning to PAYGO and discretionary caps. Are there
other government growth restraint measures that you advocate at
this time?
Mr. Greenspan. One which I raised, I believe implicitly in
February, is the recognition that we have a set of laws in
place on entitlements specifically related to retirement, which
includes, of course, Social Security and Medicare amongst the
major items, which, because of the huge demographic changes
which are inevitable starting next decade, creates more excess
claims on federal revenues than I think we are capable of
creating. So that it is not too soon to begin to evaluate the
impact of what that will mean, and I do not get the impression
that we are moving sufficiently expeditiously to address that
problem.
Mr. Hensarling. Thank you, Mr. Chairman.
Mr. Gillmor. The gentleman from Tennessee Mr. Ford.
Mr. Ford. Thank you, Chairman Greenspan, for coming. Let me
jump right into it, Chairman.
I know you have talked a lot about the taxes, and you don't
want to comment on tax cuts and the impact they may have, but
the reality is that is what we are dealing with, and you have
come in the middle of a time in which the country is focused on
what we are going to do on tax cuts or not.
I happen to be for a tax cut. I take issue with what some
of you said regarding the 2001 tax cut. I can't figure out how
it helped as much as you claim it helped. It certainly didn't
help people in my district as much, but that's perhaps another
conversation.
With regard to the lack of help that we are proposing to
provide for hospitals and schools, particularly through State
aid, I'd asked you this question before because I am not as
smart as you, I don't know math as well as you, but I couldn't
understand how you reconcile the fact that States are faced
with these growing budget shortfalls and by law are required to
balance their budgets. Yet our stimulus package here, the
President's growth plan--and I have done the math in his growth
plan just by--I did do that--that for $726 billion, the
President has promised it will create 1.4 million jobs. Now if
the math is right, that's $519,000 per job to create under the
President's plan. So I guess I have a few questions.
One, is there a more cost-effective way to create jobs?
Number two, as we all know, and you know it far better than me
with your economist background, it seems to be a procyclical
aspect to State budgets. When the economy is good, they do
really good. When it is bad, they have to raise taxes or cut
services, which worsens the situation.
Wouldn't it be in our interests in terms of creating jobs
and helping to put us back on a trajectory that you played a
role in with the former President to help this thing grow to
figure out a way to help the States avoid undermining what we
do here at the Federal level, whatever the tax cut may be? And
two, isn't there a better way to cut taxes to create the things
that you talk about wanting to do in terms of growing this
economy, in growing jobs?
I am opposed to double taxation. I think tax reform should
take place, but if we are going to do something, we ought to
reform the AMT before we go about doing some of the things that
this President has proposed doing.
I know you are reluctant to talk about it, but you kind of
talk around it. I understand there have been some developments
in the last few days about appointments and reappointment, but
I want to know directly and specifically, Mr. Chairman, how can
we say to States and Governors across this country, balance
your budgets, balance your books, cut services, raise taxes,
but then allow a President--when you have talked incessantly
about debt and that being a problem, how can you come before
this committee and suggest that in any way, without responding
in any way, that building and piling up more debt--when States
cannot do it, when they are forced to raise taxes and cut
services, I don't understand how you reconcile that.
Mr. Greenspan. Because I am not advocating piling up more
debt.
Mr. Ford. Won't the President's plan do that?
Mr. Greenspan. No. I am saying in the context of PAYGO and
discretionary caps implicitly a very significant reduction in
the implicit deficit that would be otherwise indicated.
Mr. Ford. Should we not be helping the States, Mr.
Chairman?
Mr. Greenspan. Well, that is another question. I mean,
remember----
Mr. Ford. I know. It is what I am asking. Should we not be
helping the States as a part of the stimulus plan?
Mr. Greenspan. Congressman, I am not going to get involved
in the specifics of these programs, as I said at the beginning.
It is an endless conversation which I don't----
Mr. Ford. I am trying to narrow it down. We helped the
airlines, and I thought that was the right thing to do, the two
packages we provided for them, including Northwest Airlines,
which has a hub in my district. That being the case, would it
not be smart, consistent with what you want to accomplish, Mr.
Chairman, that we provide some assistance for hospitals, for
schools, responsibilities that State and local governments
primarily have? Would that not be intelligent and wise and
something that we could do that would comport with this growth
package?
Mr. Greenspan. I don't think I can effectively deal at the
detailed level. All I can suggest is what I think is important
on a macro level, and that is where I have been all morning,
and I hope to continue to stay there.
Mr. Ford. Would it not be, in your estimation, a better tax
cut, or should I say better and more effective way to help put
money in people's pockets, perhaps a payroll tax which 80
percent of Americans pay, would that perhaps be a better way,
consistent with what the Business Roundtable and others have
called for, to ensure that we can grow jobs and grow this
economy, and would that not be cheaper than the $519,000 per
job that the $726 billion tax cut package the President has
promise will create 1.4 million jobs?
Mr. Greenspan. I am not going to respond, and the reason I
am not going to respond is that this gets into issues of tax
cuts for encouraging consumption and tax cuts for encouraging
investment, and as you well know, as I have said previously, I
am very strongly on the side of tax cuts for investment because
you do not basically increase economic growth by inducing
consumption.
Mr. Ford. You have also said that you are opposed to big
debt and growing deficits, and it seems to me that we are
moving rapidly in that direction.
I know my time is up. I would like to enter into the
record, Mr. Chairman, if I can, in light of the letter in
response to Chairman Baker's comments about congressional
oversight and study of the role of government-sponsored
enterprises in our economy. I know that great steps have been
taken by both Fannie Mae and Freddie Mac, voluntary ones
undertaken, to comply with the whole range of things, and eight
concrete steps that they have taken. I would like to submit
that to the record, Mr. Chairman.
Mr. Gillmor. Without objection.
[The following information can be found on page 64 in the
appendix.]
Mr. Gillmor. The gentleman's time has expired. The Chairman
has to depart. We have made a commitment to him to get him out.
If we could let me recognize Mrs. Capito and Mr. Israel, but
ask both of you to be as concise as possible so we can get the
Chairman on his way.
The gentlewoman from West Virginia.
Mrs. Capito. Thank you, Mr. Chairman. Thank you for your
presentation. My concern is the high cost of health insurance
that is occurring all across the Nation, and many businesses
aren't able to reinvest in capital and other things because of
the raise in the health insurance premiums. Where do you see
this in the long term? And also, I think it will--another
strain on the economy will be if businesses drop their health
insurance coverage, it creates more uninsured, again causing
another economic strain. I would just like to hear your
comments on that.
Mr. Greenspan. Congresswoman, a really difficult problem we
confront is the fact that our technologies in the medical area
are improving so dramatically, they are creating the
availability of significant new medical services, which in the
context of a third-party payment system which is subsidized,
creates an inordinate amount of demand for medical services of
all types, and that inevitably spills over into medical
insurance costs, and it spills over into the difficulties that
a number of companies are involved with.
So the issue is a very difficult one which I don't think is
resolved other than by considering how we approach our total
medical services system and how we finance it. And I doubt very
much if we can solve problems individually without looking at
the fact that, you know, we have got 14 percent of the GDP
going to medical services, and my suspicion is more than that,
in the total proportion of employment, and that means a very
significant part and a growing part of the economy devoted to
health care, which is very important for the American people
and is very important for us each individually. But it does not
produce goods and services, and we have to make these very
difficult trade-offs.
Mrs. Capito. Thank you.
Mr. Gillmor. The gentleman from New York.
Mr. Israel. Thank you, Mr. Chairman. I will try to be as
brief as possible.
Mr. Chairman, in your testimony you note that the
persistent high level of new claims for unemployment insurance
suggests that firms may still be finding it possible to meet
their customers' tepid increases in demand with a leaner work
force. I think that is a rather prosaic way of describing job
losses. Guy comes home, says, honey, good news and bad news.
The bad news is I have been laid off. The good news is that the
firm is finding it possible to meet our customers' tepid
increases in demand with a leaner work force.
I would like to focus on that issue. We created the
Temporary Emergency Unemployment Compensation Program in March
of 2002 and extended it in January, 2003. The Labor Department
reported last week that new applications for unemployment
insurance hit 455,000 in the week ending April 19. There are
now fewer jobs in the labor market than at any point in the
current slowdown. 365,000 workers exhausted their regular
unemployment benefits in March, and the number of exhaustees
has increased for 24 straight months.
Statistics go on. Percentage of workers beginning to
receive unemployment benefits who subsequently exhaust those
benefits without finding work was at the highest level ever
recorded in February.
There are some who say that the best way to help workers
who are falling off the cliff is to cut taxes on people who are
furthest away from the cliff. There are others who say the best
way to stimulate the economy is through unemployment
compensation, that every dollar we provide in unemployment
compensation is necessarily a dollar invested in the economy
because when workers don't have jobs they dramatically scale
back their purchases. A dollar in unemployment compensation
helps increase those purchases.
So my question to you is, as a matter of immediate economic
stimulus, what is a more useful tool? Is it providing another
extension after May 31 of emergency unemployment compensation
or is it not providing that extension and instead sticking with
some of the tax reduction proposals that are on the table?
Mr. Greenspan. I think the crucial issue gets to the
failure to distinguish in a lot of these conversations between
stimulus to capital investment which, ultimately over the long
run, increases everybody's standard of living and, two, short-
term stimulus to consumption which will raise the level of
activity almost by definition and short-term employment but
does nothing over the longer run. And that is a very difficult
trade-off which Congress has got to make because if you do
nothing other than short-term stimulus, you will end up with
economic growth slowing down.
Mr. Israel. Mr. Chairman, on May 31 temporary emergency
unemployment compensation will end. Is it important for the
economy for us to extend that program?
Mr. Greenspan. I frankly have not given that much thought
and I couldn't give you an informed answer.
Mr. Gillmor. The gentleman yields back. Mr. Chairman, with
your indulgence I would like to have one Republican ask one
question and one Democrat ask one question and not take the
full time.
The gentlelady from Florida, Ms. Harris.
Ms. Harris. Thank you, Mr. Chairman. Very quickly, welcome,
Mr. Greenspan. It is wonderful having you back again. I
represent a largely senior population and given the recent loss
of confidence in the markets today, the stock market and other
types of investment, what would you advise Americans,
particularly those nearing retirement on the retirement plans,
specifically the mix between equities and bonds? And can you
comment on possible opportunities that Congress can provide to
expand retirement savings opportunities for those nearing
retirement?
Mr. Greenspan. That is the toughest question I have gotten
all day. That really is a job for a specific investment adviser
who is knowledgeable about the specific conditions of each
person's retirement needs and the like. I think people make
generic recommendations in this regard and I think do a
disservice to individuals. And I think forecasting markets is
very difficult, I would argue at the end of the day, probably
with rare exceptions, almost impossible. But what you can do is
measure the risks. And the risks essentially are different from
somebody who is 30 years old and is saving for retirement or
one who is 55. And I think those types of judgments are crucial
and important for appropriate investment policies for
retirement, and I don't think you can generalize very far down
the road.
Mr. Gillmor. The gentleman----
Mr. Frank. I just wanted to get a little glass of that. So
someone 55 might be retiring in 25 or 30 years and he would
want to be prudent.
Mr. Gillmor. The gentleman from Illinois, Mr. Emanuel, for
one question.
Mr. Emanuel. Thank you. Fifteen months ago the Congress
passed one of the largest tax cuts in the history of the
country, the net result has been two-and-a-half million lost
jobs. Five million more Americans have lost their health
insurance, nearly a trillion dollars worth of corporate assets
have been foreclosed on, and 2 million Americans who formerly
were in the middle class have entered the rolls of poverty in
this country.
USA Today in their paper today noted that in the help
wanted ads, we have the lowest amount of help wanted ads this
March since 1964--available jobs out there. I know I only get
one question and I want to clarify a point that I think you
answered in responding to the ranking member, Barney Frank,
about the role of deficits to the cost of capital. If we have
an increasing amount of deficits and they become perceived by
the market as structural, not temporary, that would have a
direct impact on the cost of capital both to businesses for
their investment and ability to borrow in advance, improvement
in productivity as well as to family incomes as relates to
higher interest rates on mortgages, cars and student loans. The
cost of capital due to ever growing deficits would have a
direct impact on companies and on the ability of families to
meet their needs to provide for their middle class dream?
Mr. Greenspan. That is correct, Congressman. I should say
that you drew a connection between the 2001 tax cut and a whole
series of issues which occurred subsequently in the economy. I
think you would be more proper in saying that they were all
associated with that time frame, but cause and effect is not
evident to me.
Mr. Emanuel. You do see the debt relationship of the
deficit as a cause and effect as it relates to a greater rise
in interest rates and that we have a perception that we would
have a permanent deficit that would have a direct impact on the
cost of capital as it relates to businesses and families as it
provides for their children and for their own livelihood?
Mr. Greenspan. That's correct.
Mr. Gillmor. Mr. Chairman, I want to thank you for
appearing before us. Your testimony as always is informative,
insightful, and if we do this enough, I might understand most
of what you said. Thank you.
We will proceed to the second panel. If the panelists can
take their place at the table we will get underway. Mr.
Peterson is not here yet, but we will proceed. And Mr. Aaron
was first. And we would like our panelists to summarize their
remarks in about 5 minutes and then we can go to questions. Mr.
Henry Aaron, Senior Fellow of the Brookings Institution.
STATEMENT OF HENRY AARON, SENIOR FELLOW, THE BROOKINGS
INSTITUTION
Mr. Aaron. Thank you very much, Mr. Chairman. I wanted to
make five main points and respond to one that was raised in the
course of Mr. Greenspan's testimony. The first point is a
simple confirmation of the evidence from the Congressional
Budget Office and virtually every other forecaster that we face
substantial budget deficits over the next decade even if no tax
cut whatsoever is enacted. Tax cuts will necessarily increase
those deficits. The recent report of the Congressional Budget
Office confirms that fact, notwithstanding the oped that was
referred to this morning by Martin Feldstein. The CBO report
shows it is as likely that dynamic scoring would result in
increased estimates of the revenue loss from the tax cuts as
that it would show decreased costs.
The more serious point I think is that the longer term
budget situation is even more serious than the intermediate
term situation because of reasons that were also covered in Mr.
Greenspan's testimony; namely, the imminent retirement of the
baby boom generation and the attendant increases in pension and
health costs. In that situation, I believe it would be unwise
to institute any further tax cuts of any kind, including an
acceleration of the tax cuts enacted in 2001 or the passage of
additional provisions.
There is a case to be made for some short-term economic
stimulus, but it is a mixed case. We have had a massive amount
of fiscal stimulus over the last couple of years and a massive
amount of monetary stimulus. If there is to be any additional
stimulus, in my view it should sunset very quickly. The so-
called jobs and growth program of President Bush, in my
opinion, is misnamed, because it will create neither jobs nor
economic growth over the long term. Indeed, the forecast of the
very firm on which the Council of Economic Advisers relies
showed precisely that result. Some initial job growth was shown
under their projections for about 18 months, but job reductions
were shown for the remainder of the decade. The overall effect,
therefore, is not increase jobs, despite their assumption that
they assumed that there would be no tightening of monetary
policy in response to the tax cuts.
Finally, I would like to refer back to the discussion that
occurred regarding the relative productivity of public and
private investment. I rarely heard a falser distinction in my
life. The United States has been built on the productive
partnership of public and private investment throughout its
history. The interstate highway system built with public moneys
is the basis for the modern trucking industry, a large private
sector investment. Research, funded publicly through the
National Institutes of Health, helps support major private
investments through the pharmaceutical industry. To be sure,
there are wasteful public investments. Each of you no doubt has
your list and I have mine. But there are wasteful private
investments as well. Consider, for example, the tens of
billions of dollars that have gone into fiber-optic cable that
is at best premature and may be entirely wasteful. And there
are many other cases as well.
The important thing to recognize is that we should be
against wasteful investment, whether it is public or private.
We should undertake public investments that help support
productive private sector investments, and that includes a good
deal of what the Federal Government does. It includes enabling
students from the bottom quartile of the socioeconomic ladder
to attend college if they have as much ability as those at the
upper end of the economic distribution. It includes additional
support for biomedical research and in other areas.
I think it is also hard to make the case that somehow
economic stimulus is on net increased if we cut taxes for
people to encourage private consumption and at the same time
decide not to provide support for States and localities,
thereby resulting in Medicaid enrollees from being cut from the
rolls, schools being closed because there are no funds
available for after school programs and elderly centers being
closed because there are no funds for them either. This is a
choice of priorities. It is not a choice about economic
stimulus.
Thank you.
[The prepared statement of Henry Aaron can be found on page
66 in the appendix.]
Mr. Gillmor. Thank you Mr. Aaron. Mr. David Malpass, Chief
Global Economist, Bear Stearns.
STATEMENT OF DAVID MALPASS, CHIEF GLOBAL ECONOMIST, BEAR
STEARNS
Mr. Malpass. Thank you, Mr. Chairman, and members of the
committee. I am pleased to have the invitation to talk about
these issues. I would like to make several points.
First, I think the economic outlook is actually quite good.
We have had a major improvement in macroeconomic policy since
2000. Specifically interest rates have fallen, real interest
rates have gone negative just in the last few months, and that
is going to encourage inventory and investment. The value of
the dollar has changed substantially and moved to a pro-growth
level after having been at a deflationary level. Inventories
are low now.
Very important in the economic outlook is the issue of the
tax cut and the incentives within the economy. It is true that
there are problems facing the economy. That is true all the
time. But what I think we see right now is a major improvement
in the macro environment since 2000 that will lead to a solid
economic recovery in coming months.
My statement goes through labor market conditions,
describes that even though we have lost a lot of jobs in the
last year the number of people employed in the U.S. economy is
at $130.4 million. That is over a million and-a-half more than
in 1999. And remember 1999 was a boom time. The unemployment
rate was down at 3.8 percent. With more people employed now
than at that time, that will help contribute to the economic
recovery.
My statement goes through some key variables in the
outlook. In general the outlook is good. Some of the variables
are oil prices, business investment and then the tax cut. The
reason the tax cut is important is because of the capital
structure of the United States. We right now have a system that
biases heavily the capital structure toward debt instead of
toward equity, and that reduces the efficiency. It causes the
economy, the private sector to make wrong choices based on tax
policy. In my view, the President's proposal would add strongly
to both the near and longer term growth outlook. It would
provide important benefits in terms of jobs, economic growth,
capital mobility, national savings and corporate governance.
I think the President's proposal is much superior to some
of the alternatives that have been mentioned, either doing
nothing or doing cash rebates or doing consumption oriented tax
cuts or doing targeted investment incentives such as equipment
expensing. What we need to make the economy grow is an
improvement in the quality of investment, as much as in the
quantity, and that would be achieved through the change in the
dividend taxation.
I will mention two side benefits from changing the tax
structure. One is the United States is running a big current
account deficit now. That shows an investment rate that is
above the savings rate. One of the reasons for that is the
heavy taxes on savings, and one of those is the taxation of
dividends. So we would get a side benefit from the tax cut in
added savings.
Also, there are positive implications for the direction of
future tax reforms if this particular tax reform is able to
move forward.
My statement goes through two other issues which I want to
mention. First, the scoring issue. Oftentimes we think of this
$350 billion number or $550 billion number as something that
might be accurate. Remember scoring is distinctly inaccurate.
It has no bearing on what is actually going to happen out of a
tax cut. It also has no bearing on the benefits that are
enjoyed by the economy from a particular change in the tax. In
particular, as they think about scoring a tax cut, they are
focused on how much revenues the government will lose.
Their mission isn't even to try to decide what will happen
to the Nation as a whole. It is a limited mission; how much
will the government lose. In this particular case, one of the
benefits to the economy as a whole is the wealth gain for the
Nation when there is a tax cut.
My statement shows that we have a recent example of the
impact of lower asset taxes on the value of assets and the
related economic impact.
In 1997, Congress lowered the capital gains tax on real
estate. We saw a major increase in the value of real estate and
also in the jobs involved in constructing real estate. I think
what we would see similar reactions to a dividend tax cut, a
massive increase in national wealth and a surge in economic
activity at a relatively small cost to the Federal Government.
The current dividend tax distorts the capital structure. It
creates an expensive wedge or a toll gate between retained
earnings and the shareholder, plus it encourages debt and
unproductive acquisitions. Its elimination would, in my view,
improve the allocation of capital, adding substantially to
near-term and long-term U.S. Economic aspects.
A final part of my testimony is related to the budget
deficits. I will leave you with just one point in this area.
Recall that the projection of budget deficits is an extremely
inexact science. No one really has any idea what the budget
deficit is going to be over the next 10 years. CBO is
projecting that the tax receipts to the Federal Government over
the next 10 years will be $27.4 trillion. So a gigantic amount
of revenue is coming in. You should put a confidence integral
on that. That is plus or minus 5 percent. They really have no
exact way of knowing how much the receipts are, but let us say
that they are close to within 5 percent. That means that you
have a one-and-a-half trillion dollar uncertainty about what
the receipts are going to be.
Congress is arguing about $200 billion of inaccurate
scoring as a way of making tax policies. Instead, Congress
should be thinking about what the right tax system is, what the
right spending system is and spending less time looking at the
budget estimates and the scoring estimates, which everyone is
largely in agreement can't be done at all accurately.
Thank you, Mr. Chairman.
[The prepared statement of David Malpass can be found on
page 83 in the appendix.]
The Chairman. Mr. Peterson, welcome back and it is good to
see you. I think we were on the same panel up in the Big Apple.
Good to see you and welcome.
STATEMENT OF PETER G. PETERSON, PRESIDENT, THE CONCORD
COALITION
Mr. Peterson. Mr. Chairman, in March of 2001, a bipartisan
group of us from the Concord Coalition; namely, Warren Rudman,
Bob Kerrey, Sam Nunn, Paul Volker and myself, stated our views
of what ought to be done about a fiscal stimulus, and we said
it should be temporary, it should be targeted to taxpayers and
businesses most likely to spend it and you should do nothing to
aggravate the long-term fiscal outlook. As we look at the
current plan, I am sure our group would agree that what we see
and the arguments we hear are not terribly persuasive,
particularly against those criteria.
First, a word about worsening fiscal outlook and why it
matters. Two years ago, Mr. Chairman, the CBO told us that the
10-year budget balance would be a mountainous $5.6 trillion. We
at the Concord Coalition believe there is a more realistic
estimate. The 10-year outlook is probably closer to a $4
trillion deficit. That $10 trillion swing is probably the
largest in the history of the country except at times of war.
Also, Mr. Chairman, we have to remember that deficits today
can be justified by surpluses tomorrow, but right now the long-
term deficit outlook is even worse than the 10-year outlook.
Let us keep in mind that we face an unfunded obligation on
Social Security, Medicare and Federal pensions of $25 trillion,
according to the U.S. Department of Treasury. As a share of
payroll, the cost of Social Security and Medicare hospital
insurance programs alone would need to rise from today's 14
percent to somewhere between 24 and 34 percent of pay. I think
most of us would find that unthinkable and unsustainable.
You know, Mr. Chairman, we have gotten used to thinking
about entitlements as a long term problem but in fact it is
beginning to overlap with our near term. The fact is that in
only 5 years the first boomers begin retiring and the entire
generation will be on full benefits in 8 years.
Now why do deficits matter, particularly the long-term
deficits? The problem with long-term deficits is they soak up
national savings and crowd out productive investment. You all
know that America's saving pool is already very shallow and
getting shallower. Regardless of this endless debate of the
effect of deficits on interest rates, increased budget deficits
reduce future income. What really matters is the amount of
national savings that is consumed by deficits and whether it is
offset by private savings. Others argue that we didn't need to
worry about this because foreign savers will pick up the slack.
In the first place, Mr. Chairman, our foreign friends in
Europe face even more daunting entitlement problems than we do
because of the rapidly declining birth rates. In any case,
whatever we borrow from abroad we have to pay back or else fork
over a permanent debt service to foreigners. Any way future
American living standards will be affected.
The current policy, it seems to me, Mr. Chairman,
constitutes an explicit decision by today's adults to
collectively shift the current cost of government from
ourselves to our children and grandchildren. With that
background, let us review the basic arguments that I have heard
with regard to this tax plan.
The first is that the American people want and deserve a
tax cut and a democratic government should respond to their
wish. The administration has described a vision of America in
which government takes and spends less of our money and leaves
more of it in the pockets of those of us who earned it. It is a
vision that resonates with many citizens. But I want to be very
clear that neither I nor the Concord Coalition is opposed to
smaller governments or lower taxes. We simply require that at
the end of the day the revenues are sufficient to cover the
outlays. Washington policymakers must not pretend that we can
have it all, guns, butter, and tax cuts.
In short, I would insist that the bottom line logic of
public finance, that the long-term tax burden is determined by
long-term spending burden and that unless you reduce the long-
term spending burden you don't really cut taxes, you simply
shift the burden of taxes from the present to the future. There
is no public finance textbook that I know about that teaches
you that you can ease the long-term tax burden simply by
cutting the tax. Instead of pretending of accomplishing the
impossible we should be educating the public that when you face
a future of endless huge deficits, you have to cut spending
long term before you cut taxes long term.
Argument number two, okay, let us forget the long-term tax
burden. The tax package still makes sense as a near term
financial stimulus to bring the economy to full capacity.
Today's economy remains fragile largely because business and
consumer confidence remains fragile. Under these circumstances
a stimulus could have a beneficial impact. The problem with the
stimulus justifications that I have heard is it doesn't apply
to the plan under consideration. For fiscal stimulus to be
effective, it has to be put into the consumers' pockets as
quickly as possible. Yet just 5 percent of the administration's
economic growth projections, those that explicitly advertise a
stimulus, would end up in the consumers' pockets this year and
over the 10-year period just 17 percent over the first 3 years.
Argument three, even if it doesn't deliver much near term
stimulus the tax plan does make the Tax Code more efficient,
which translates into less economic waste and a higher standard
of living.
Many supporters of the administration's tax plan argue that
its provisions to eliminate the double taxation and corporate
earnings would make our tax system more efficient. I am
sympathetic to this argument. Personally as a matter of tax
design I wouldn't do it the same way. A better plan would be to
relieve earnings at the corporate level. But my biggest problem
with this provision, however, is not its complex design and
implementation challenges. My biggest problem is that it is
deficit financed. Reducing the taxation on corporate earnings
may marginally improve savings behavior, but not nearly enough
to compensate for the loss in Federal revenue, which adds
directly to Federal debt and in the long term subtracts dollar
for dollar from national savings. Far better it seems to me
would have been to make any proposal revenue neutral; for
example, by genuine tax reform that eliminates many of the
obviously inefficient corporate tax subsidies.
Argument number four, the critics just don't get it. What
this tax package is really about is improving supply side
incentives to work, save and invest. We should all be
acknowledged that the supply side reductions in a context of
punitive tax rates, and indeed they once were, have sometimes
been very successful. And if supply side advocates were less
theological in their interpretation of the data, we should be
able to acknowledge that in other instances the tax rate
reductions have had indifferent or ambiguous results. In fact,
there is plenty of evidence when marginal tax rates are not
high the efficiency gains from cutting them may be modest. The
marginal tax rate, as you probably know, on Federal income and
payroll taxes is now 30 percent. It is among the lowest in the
developed world. And the impact on economic activity can be
ambiguous. In other words, while some people may react to more
after tax income by working more, others may react by working
less. But even if the supply side response to the
administration's tax cuts is both positive and sizeable, the
gains would be canceled out, perhaps overwhelmed by the
sizeable inefficiencies of the deficit that the administration
plans to run in order to pay for it.
According to some of the dynamic models by CBO and several
I have reviewed as chairman of the Federal Reserve Bank in New
York, the tax plan could actually result in significant GDP
losses over the long-term.
Tax plan argument number five, let us be honest. The
ultimate purpose of the tax cut plan has nothing to do with
economics. It is about politics or political philosophy. The
purpose is to starve the government of revenues so that in the
long run the Congress will have no choice but to cut back
spending and with that diminish the size of government. This is
a seductive apologia, but I have three objections to it.
First, I think it is unfair because no end, however
legitimate, can justify such means. Nothing excuses holding the
next generation hostage, including our own children, on the
dubious bet that the other party will have the goodwill to
relent.
Second, it could also be cynical because it assumes that
our democratic process is broken and no longer makes sense to
advocate a policy for the common good, but we have to rely on a
certain amount of subterfuge.
Third, I think it could be considered hypocritical. One
could take the ostensible goal of tax cuts as smaller
government more seriously if we saw the party pushing the tax
cut were also trying with great energy to cut spending both
short term and over the longer term, for example, with genuine
reform of what OMB itself calls are unsustainable entitlement
programs. But we see nothing of the sort. Indeed it is hard to
find the small government argument persuasive when the budget
does nothing to reform entitlements, allows debt service cost
to rise along with that and urges greater spending on defense
and indispensable homeland security when these functions
comprise over four-fifths of all Federal outlays.
Mr. Chairman, our Nation faces at least two history bending
challenges, global terrorism and global aging. Meeting the
first may require marshalling new resources that are far above
the extra spending already legislated. We know that meeting the
second will test the ability of our society to provide a decent
standard of living for the old without imposing a crushing
burden on the young. It seems obvious to me that America should
not approach this fiscal gauntlet uncovered by deficits as far
as the eye can see. To do so would ignore every principle of
public finance, generational equity and long-term economic
stewardship.
Thank you.
[The prepared statement of Peter G. Peterson can be found
on page 95 in the appendix.]
The Chairman. Thank you, Mr. Peterson. And our final
witness, Dr. Kevin Hassett.
STATEMENT OF DR. KEVIN A. HASSETT, DIRECTOR OF ECONOMIC POLICY
STUDIES, AMERICAN ENTERPRISE INSTITUTE
Mr. Hassett. Thank you, Mr. Chairman and Mr. Ranking
Member. It is a great honor to be here. I guess from looking
around it seems like we don't have a baby boomer on the panel
but we are on opposite sides, some of us. And I think looking
at the baby boom problem as sort of the long run fiscal problem
that our Nation faces is very important and provides an
interesting perspective on the current fiscal policy debate,
and that is the intent of my prepared remarks that you have
before you.
Before we can think about the question what solutions
should we pursue, we need to identify the problems. And to my
mind, there are really two big clear problems that I don't
think that you could ignore responsibly going forward. And I
think that once these problems are recognized then when we have
a package like the budget proposed by the President, for
example, then we should take each of the items in the package
and compare them to these problems and see if they help make
them better. And if they do then perhaps they are good policy
ideas.
I think the first problem in the long run, as Chairman
Greenspan mentioned, the long run budget outlook is terrible.
The short run is bad and the long run is terrible. Indeed, the
most recent Congressional Budget Office forecast over the next
75 or so years suggests that Federal deficits as large as 20
percent of GDP will be accomplished absent policy changes. So
it is not that if we keep doing these crazy things we are doing
and spending new moneys on stuff that we are going to have that
big deficit. No. If we keep coasting then we are going to have
a deficit that large.
But I think the interesting perspective that I found in the
CBO study that came out a year ago, and I understand they are
updating this, is that if you try to identify the cause of this
20 percent of GDP deficit, you see that in their forecasts at
least and I share Mr. Malpass' criticism of such forecasts--I
don't know how accurate they are going to be--but in their
forecasts the chart in my testimony which is just reproducing
their chart--that the problem is wholly attributable to a surge
in outlays. Indeed, relative to GDP the CBO is forecasting that
revenues will be about constant but outlays go from a little
bit below 20 percent of GDP to about 40 percent of GDP. Now in
my testimony, I try to put that in perspective. If the U.S.
Were to actually get to the point where we had a Federal
Government of about 40 percent of GDP, then that probably means
that State and local spending would be about 20 percent of GDP,
if it kept up as it normally has, which means about 60 percent
of GDP absent policy changes would be spent on government
things. Now I don't think that we are going to get there. But
again if we did I think it would just be devastating for the
economy.
In my testimony I provided a chart that gave you an idea of
what kind of growth, economic growth experienced countries with
large governments or governments close to that large have had
and it is pretty darn terrible. So what is going to happen is
at some point we are going to recognize that we can't afford
the entitlements that we promised. And I think we are going to
have to come together with good faith from both sides of the
aisle and work out some kind of solution to it. But I think
that recognizing that we kind of face this discrete choice
going forward, are we going to become like a socialist European
country where we have got a very large fraction of GDP devoted
to government or not is a key background debate. And when we
look at the President's proposal, then, for example, the
prescription drug benefit is something that makes this problem
worse and doesn't make it better. I am not an expert on
Medicare, and it could be that we need a reform that provides
drugs as well, but the expenditure on that certainly doesn't
help.
The second problem, I think, and again economic issues can
be complex, the second problem is that the U.S. Corporate tax
code is out of step with the corporate tax code of the rest of
the world. The economics profession has demonstrated I think
almost unanimously over the last couple of decades that high
capital taxes, as Chairman Greenspan mentioned, can
significantly harm economic welfare, even the economic welfare
of workers who don't invest in the stock market. And so the
idea is that when there is a large capital inflow then that
creates jobs and makes wages increase.
I think one of the most interesting facts that demonstrates
this effect is the experience of Ireland. Ireland reduced their
corporate taxes, their tax on capital, and saw their
manufacturing wages for their blue collar workers closed from
about half of that of the U.S. To being almost equal to that of
the U.S. over a decade. And so because of this, much of the
rest of the world has begun cutting their corporate taxes and
their dividend taxes as well to the point where the only
country with a higher combined tax on this type of income than
the U.S. is Japan. And needless to say, I think the Japanese
are not having an economic experience we would like to
reproduce. And so I think the second problem is very important
to keep in mind.
I believe we have reached a point where since we are big
and it is not as urgently obvious as it was to European
countries but countries have made themselves much more
attractive places to operate, it makes sense for our
multinationals to locate their operations overseas. And I think
ultimately the stress for that and indeed stress that applies
to ordinary workers is going to move us to make some kind of
change. And I think therefore when you look at the dividend tax
proposal--and I will try to finish quickly--then you can see
that it does address a very pressing problem.
I think Chairman Greenspan mentioned today that he thought
that it would be a slam dunk no brainer if you could find a
pay-for for that so that it was revenue neutral. But I would
argue that if you were to look at the net effect, the
noneconomic effect of the President's plan absent such a pay-
for, that it would still move you to make this reform because
again if we don't then we are going to fail to address a very
pressing problem.
And with that, I will conclude my remarks.
[The prepared statement of Kevin A. Hassett can be found on
page 76 in the appendix.]
The Chairman. Thank you to all of our panelists. Let me
begin just to follow up on what you mentioned, Mr. Hassett and
Mr. Malpass; that is, this whole idea of a 10-year budget
strikes me as totally unrealistic. We are talking about a $200
billion difference in the House and Senate versions over a 10-
year period. If you were to give some advice to the budgeteers
and how we work or how we try to make some sense out of this
whole budget process, what would each of you recommend maybe in
a sentence that Congress should do? Should we abolish the
budget process or has it been helpful? If we don't abolish the
budget process, should we start to try to focus in on a 5-year
period? Why don't we begin with, Mr. Aaron, and go down the
line?
Mr. Aaron. I think the bad mouthing of the budget
projections is a classic case of shooting the messenger. We
were not of the mind to shoot the messenger two years ago when
we looked at those 10-year projections and concluded that there
was enough revenue to support a very large tax cut. The current
projections dramatically understate the seriousness of the
long-term projection, as Mr. Peterson emphasized. The $200
billion number that you cited counts toward the budget all the
reserve accumulation now occurring in Social Security, Medicare
and Federal employees retirement funds, every penny of which
and more besides will be needed to meet current obligations. It
doesn't include any allowance for the fix that will be needed
for the alternative minimum tax. It doesn't include most of the
costs of the war in Iraq. It doesn't include any additional
costs that may be necessary for homeland security. We are
looking at a very serious 10-year budget projection.
Could we be lucky? Could growth suddenly blossom and might
we avoid that problem? Yes, it is conceivable. But as I said in
my testimony, just because we cannot see with perfect accuracy
what lies over the crest of the hill doesn't mean we should
drive on the wrong side of the road, and that is exactly what
we are doing.
The Chairman. You basically don't have a problem with 10-
year projections?
Mr. Aaron. I have lots of problems with all the projections
because we have to make a lot of assumptions. Would we improve
matters by adopting a shorter horizon? I don't think we would.
I would like to see additional studies and sensitivity
analyses. Fortunately, the Congressional Budget Office has
started to give us those and I think it has improved the
sophistication with which we read their 10-year numbers.
Mr. Malpass. I think the 10-year budget is actually
harmful. It causes you to make decisions that you wouldn't make
under normal circumstances. For example, in the 2001 tax cut
the conclusion was reached to let it expire in 2010 because
that saved money in the 10-year budget window that people were
looking at at that time. This created a complicated set of tax
policies that wouldn't have been arrived at under any other
concept. So I think it should not be done.
What could be put in its place? I think several things. One
is a realistic estimate of what the near term spending
commitments of the government are. A program that starts small
and then grows over time is being heavily underestimated by the
10-year budget window. I am not really a fan of the Medicare
expansions that you are considering now. That would be an area
where, if you look at the 10-year budget window, it is not
really showing you a true look at the cost of what you are
really committing to.
That is of course how we got into the Social Security
problem. Commitments were made at the beginning that didn't
seem all that big. We didn't have a 10-year budget at that
time, but looking beyond 10 years, that is when the problem
occurs. The 10-year budget window creates the impression that
you are making logical decisions when we know from experience
that you are being pushed into illogical decisions. I think I
would dispense with the 10-year budget. I would try to have a
system of entitlement controls that would look at the long-term
effects of the commitments that you are getting into.
The Chairman. Thank you. Mr. Peterson.
Mr. Peterson. I either have the burden, Mr. Chairman, or
the good fortune not to be an economist, so I have great
trouble following some of these models, but I would like to
make just a few points. First of all, on the cost side I would
agree, Mr. Chairman, with Mr. Aaron that it is very likely that
we have grossly underestimated. In addition to those that Henry
mentioned, let me mention one that I know a little about. I
happen to Chair the Council on Foreign Relations and we have a
task force working on the Hart-Rudman recommendations with
regard to homeland security.
I would be very surprised, Mr. Chairman, if a few years
from now you do not find that those needs are so pressing that
you are going to appropriate much more money than you have now.
For example, our ports are hideously vulnerable at the moment.
There are systems available to do something about that, but we
have done almost nothing about it. Now the other big item on
the cost side is obviously the entitlement burden. Let me make
this point about entitlements. They are quite different than
other projections. I heard Bill Safire, I think it was, on Meet
the Press decry 10-year projections, but I think a distinction
should be made between projecting the costs of something like
Social Security and projecting other costs.
Why do I say that? The people that are going to retire, Mr.
Chairman, have already been born and can be counted. The
benefits are in place, and therefore you can make reasonably
reliable estimates it seems to me of what those costs are going
to be.
Secondly, as you can tell from my testimony, I don't take
it seriously as some would like me to take some of the growth
estimates that people have been making for 20 some years now
that I have been in this budget business. I want to remind you
of something you probably know better than I, but in the case
of Social Security the benefits are tied to wages and wages in
turn are tied very largely to productivity. Therefore, as
productivity goes up, the costs go up. And therefore it is a
problem that you are going to have a great deal of trouble by
saying we are going to grow out of this because the economy is
going to get bigger.
I remind you of what happened in Great Britain. Lady
Thatcher decided in 1980 that their entitlement programs were
unsustainable, and she made one very important reform that you
may not agree with but it indicates how important this is. They
decided to index the benefits only to inflation and not to
wages. And because over a period of time, productivity goes up
and wages goes up, it reduced the effect of these on the
economy but it did not lower the benefits from where they were
when the reform went into effect.
So I think it is extremely important that no one think it
is going to be easy to grow out of the entitlement program.
The Chairman. Thank you. Mr. Hassett.
Mr. Hassett. I am reminded that you said one sentence. I
think that the budget process itself is very important. I think
that the $200 billion difference between the House and the
Senate right now is a small difference relative to standard
errors or anything else that we are talking about. But within
that spending, you have to ask yourself is the tax reduction,
if you have got one in there, something that is designed to get
a big bang for the buck or not. And I would argue that
certainly there is a lot of disagreement amongst economists
about how much taxes affect things. But there is less
disagreement about how, say, the user cost of capital, the
thing that the dividend tax reduces affects things than just
about any other area. And so it is somewhat ironic to me that
the dividend tax proposal seems to be the thing that is going
to be thrown out the window in the Senate, or at least that is
the rumor, given that is the part of the proposal that has the
strongest economic merits.
In terms of forecasts, I think I agree wholeheartedly with
Mr. Aaron and Mr. Peterson that any artificial short run cap on
how far out you go or if you stop at 5 years or 10 years
introduces games that I think that some in this room are
probably quite masterful at playing where you can move revenues
forward and expenditures out and make it look like you are
doing better than you are in the 10-year window. I would guess
that anything that is done with prescription drugs would be the
thing that would have the biggest effect in the long run on the
problems we are discussing here and be the most subject to such
games because you only look at a 10-year window. The fact is we
have got these entitlements growing to be 20 percent of GDP
over the CBO's forecast horizon, and that is before we had
these things. And if we stop at a 10-year window, you might
miss that.
The Chairman. The gentlelady from New York, Ms. McCarthy.
Ms. McCarthy. Thank you, Mr. Chairman, and thank you all
for your testimony. We have been here since 10 o'clock this
morning so it is difficult because each person seems to have a
different opinion. My job is to try and figure out what is best
for the country, and I am not an economist. I am someone who
comes from Mineola trying to pay my bills and my mortgage and
make sure that when I retire, I am going to have something that
I can sustain myself on and not count on my family or anybody
else to help me.
You brought up interesting points in my opinion. You are
basically forecasting, in my opinion, a pretty rosy future for
the market. And if that is the case, then why are we even
talking about tax cuts because you are saying we are going to
have a good future. I happen to think this country will come
back. And if I was to take the money, I would personally look
at all our States and I would take that money out of the
Transportation Trust Fund, it is already there, nobody has to
pay for it, we already paid for it, and do what many Presidents
have done in the past, public works projects, working on inner
cities, rebuilding our bridges and our transportation system
and our roadways. The money is there and that is what it is
supposed to be for.
Since I have been here we have been trying to fight to
bring down the debt. But I also know when we are looking down
at Social Security, we are looking at Medicare. We are going to
have a drug plan. I don't know which one will be accepted, but
it is going to come down only because the politicians have
promised it and the people are demanding it. And to be very
honest with you, most of our senior citizens, they actually
need it. So the government is going to have to come up with
some plan that we can actually afford to keep prescription drug
prices down low. And I think that to me is probably the most
challenging thing that we are going to face.
So with all of you, and you all have totally different
opinions--I agree with Mr. Peterson, this idea about debt is
scaring the dickens out of me, because we will be fighting this
war in Iraq for a while, not quite the war but certainly the
conflict that is going to be there. We are going to have to
adjust the AMT and that is coming down the road rapidly.
Politically this place is going to have to do it and they will.
And then what Mr. Peterson has said, no one is paying
attention to our ports. If you want homeland security, this to
me is the scariest thing going on there. And you talk to anyone
that works down on the docks. We have 121 ports of entry in
this country and we are not even going through a dot of the
stuff that is coming in. So we have a long way to go.
So the only thing I can say to all of you is I wish we
could all work together and really come up with the solutions
that we are going to be facing. But I guess my question to all
of you, if you had a choice why can't we have a meeting of the
minds, of yes, possibly a small tax cut but also a public works
program that is coming out of the Transportation Trust Fund
that would help stimulate short term, give our States a 2-year
break not having to match it and have people out there working
which would stimulate each and every part of our cities, which
to me in my own simple little way would be a win-win situation.
And I would ask for a comment on that.
Mr. Malpass. Thank you, Ms. McCarthy. Well, we have a good
future, yes, but one of my assumptions is there will be a tax
cut. I think that is pretty clear. As you think about whether
you want to do a tax cut, put it in terms of jobs and of the
stock market, the national wealth. Right now, Congress is
putting it only in terms of this $350 billion number, which is
an inherently very inaccurate number. It is not a good way to
judge. I think a better way would be to think about whether you
want the unemployment rate 5 years from now to be 5.8 percent
or do you want it to be 5.2 percent and do you want the stock
market to be up 20 percent this year or up only 5 percent this
year. You can put it into concrete terms. I think that is a
better way to think about it than the way that is dominating
the press right now in terms of this $350 billion number.
I will leave you with a final thought. I think you should
look at each of the policy issues before you decide on its
merits. So as you think about the Tax Code, is it going to be
improved by reducing the double taxation of dividends? And the
answer overwhelmingly is yes. What we do now is wrong on the
Tax Code. We tax corporations when they earn the money and then
we tax them again or tax their shareholders when they disburse
the money. That causes corporations not to disburse. And so it
stops up the capital of the country and so it is a bad system.
So you have a choice to improve it, have a lower unemployment
rate and a higher stock market. And it is at a cost that is
within the rounding errors of their ability to really estimate
costs.
Ms. McCarthy. From what I understand from business
executives because productivity is up I mean the chances of
rehiring a lot of people that have been laid off, the
executives are saying they are not going to be doing that
mainly because they are producing more. I don't know how many
jobs we are actually going to bring back in that case.
Mr. Malpass. Retained earnings in this country are immobile
because there is a huge tax placed on them. So if a corporation
has cash, it doesn't really give the cash to the shareholders
and then let some other company get it. The corporation hoards
the cash. The rich keep their pile of money because otherwise
it is subjected to a huge tax rate in order to move it around.
If you lower that tax, you are going to get a lot more mobility
of capital in the country. That means more machines and that is
going to create jobs. Two years and three years out you will
have a lot more people working in this country if you reduce
the double taxation of dividends.
The Chairman. The gentleman's time has expired. The
gentleman from Texas, Mr. Paul.
Mr. Paul. Thank you, Mr. Chairman. I would like to try to
draw attention to a connection between economic policy and
monetary policy. We haven't talked too much about monetary
policy but I think that is pretty important. Obviously spending
is too high and I consider high levels of spending and deficits
to be dangerous to the long-term future of this country. For
that reason I vote for the least amount of spending of anybody
in the Congress.
Mr. Paul. But I also always vote to cut taxes under the
assumption that it is the people's money, and it is never a
cost to government because all I am doing is returning the
money to the people. So, therefore, it doesn't leave a lot of
options of what an individual like myself can do, because the
momentum, and the appetite, for spending is so great.
The welfare-warfare state is in place and the odds of that
changing, I think, are slim to none, because we do believe in
welfare here at home. And both political parties endorse it,
and both parties now endorse military adventurism overseas,
there is absolutely no limitation on spending.
So the exploding deficits shouldn't surprise anyone, but I
think sometimes, though, we deceive ourselves.
I hope the markets turn around, and we do real well, but we
ought not to forget about what's happened in Japan. And we
ought not to deceive ourselves about the GDP, because if we
spend a billion dollar on missiles, we add that into the GDP
because it's government spending. But when you blow up a
missile, it is not like putting a billion dollars into a
hospital or into schools or into housing when you actually
raise the standard of living.
So that can be very deceiving, but my point is that
sometimes we rely on monetary policy. We rely on the Fed to
lower interest rates, that means print more money in order to
stimulate the economy, to generate new revenues to help us out
in Washington.
Generally that worked in 1990s, to a degree, because of
capital gains taxes. And the stock market and revenues came in,
and it seemed to help, but I do not see how we can depend on
the Fed to bail us out as a Congress. Matter of fact, the
system of money we have, I think, encourages us to be
irresponsible because we know that unlike a State government,
if we spend endlessly, and we vote for guns and butter, and we
run up a $500 billion deficit, we always know the Fed is there
to buy these Treasury bills and keep interest rates down.
So the question is, do any of you agree that the system of
monetary policy, the monetary policy we have and the idea that
we can monetize debt is actually an encouragement? Some people
would like to argue it helps us out, but doesn't it actually
encourage us to be irresponsible and to spend and allow the Fed
to pick up the pieces and to buy this debt, because States
can't do that? Do any of you care to comment on that?
Mr. Aaron. I would go back to the statement that it is the
people's money, and, therefore, tax cuts are desirable.
When one cuts taxes in a regime of deficits, it's the
people's debt that is being increased. It is, as Mr. Peterson
said, the obligations that our children will have to bear.
Would it be better if the debt that the Federal Government
wishes to float was liquid and could not be sold on capital
markets? No. I don't think it would be. I think it would
detract from the efficiency with which the U.S. Capital market
operates, which I think all of us here on the panel would agree
is really one of the great glories of modern capitalism and one
of the great strengths of this Nation.
The U.S. Capital market is remarkably efficient in moving
net savings into productive investments. My view is that the
important goal in setting tax policy, the most important goal,
is to make sure that the Federal Government, by running
deficits, does not subtract from national saving and thereby
lower the amount of investment that we can afford to manage
ourselves. As Mr. Peterson said, ``We can borrow abroad, but
then we pay the profits from those investments abroad.'' We
cannot invest a dollar if we don't first save it.
Mr. Paul. So you don't think monetary policy is actually an
incentive for us to be irresponsible?
Mr. Aaron. No, I don't. I think you manage it pretty well
here in Congress without the assistance of Mr. Greenspan.
The Chairman. The gentleman's time has expired.
The gentleman from North Carolina, Mr. Watt.
Mr. Watt. Thank you, Mr. Chairman. I actually have a
question, but I want to make a couple of comments before I get
to the question.
And so I hope you all will indulge me, since the first
comment I want to make is to thank the Chairman for convening
this second panel today. The Members tend to show up and the
press tends to show up and savor every single word that
Chairman Greenspan gives, and he really didn't say much today
to be honest with you, but it's this kind of follow-up
interchange between people who really don't seem to have a
political ax to grind and who really understand the intricacies
of all of these things, that I think are a lot more
enlightening to us, to me. I won't speak for the whole
committee, but they are certainly more enlightening to me than
anything that Mr. Greenspan said, at least today. Although, I
think historically, he has said some things that have been
important.
Second I want to thank the members of this panel for not
bringing a political ax. I think that's very important if we
are going to try to work through this.
Third, I want to give a special thanks to Mr. Peterson. He
doesn't know this, but if I go back to 1992 when I came out of
the private practice of law and really wasn't paying attention
to any of these kinds of discussions, just trying to make a
living, and all of a sudden decided I was going to run for
Congress because they created a district that I thought I could
represent without being a politician, to be honest with you,
every single person at that time was calling me a liberal. And
the liberal position at that time was that it was okay to have
some deficits, and the conservative position at that time was
that deficits were the worst thing that could ever happen to
the country because, you know, they increased the cost of money
and, you know.
So I kind of adopted the liberal position because I was
supposed to be a liberal. And the truth of the matter is, it
was the Concord Coalition, more than any single entity, that
started an evolution on my part. And when I hear people say,
``Well, you have changed your position over the years,'' you
are absolutely right. I have. They are absolutely correct that
I have changed my position, and it was the Concord Coalition
that had more to do with that than any other single institution
that I can think of.
Back 1995 or 1996, somewhere in there, we did this big
modeling project where you were going around into congressional
districts, inviting people into a room and asking them to
balance the budget or create their spending priorities, and I
started to understand that every decision that we make has some
consequences to it. There are short-term consequences; there
are long-term consequences. What I think I have heard Secretary
Greenspan, and to some extent this panel, say today is,
sometimes the short-term impacts of something, the stimulative
impacts, don't necessarily correspond with the long-term
impacts. They can be--they can actually be different, and I
think this discussion has helped me, even Chairman Greenspan's
discussion, helped me this morning to understand that.
I think the thing that is the constant from my perspective
is that, while we can run some deficits sometimes and they are
not inherently bad periodically, that we cannot constantly do
it and, I don't think, regardless of the inaccuracy of the
projections for the next 10 years, there is a person at this
table that thinks we are not in a hell of a terrible situation
for the next 10 years, 15 years when it comes to deficit
spending, and there doesn't seem to be any effective way out of
it.
I seemed to have used all of my time without asking the
questions.
The Chairman. I will yield to the gentleman. Two minutes
for questions.
Mr. Watt. Since I spent 2 minutes for praising the
question.
The Chairman. If the record will reflect it accurately, the
distinguished ranking minority member, it was his idea to have
this panel. So we have to give credit where credit is due.
Mr. Watt. I am glad to have this bipartisan recognition of
a good idea. That's a good sign here, in and of itself.
I want to focus on the stimulative part of this, I guess.
Let us assume that some stimulus is needed in the economy and I
am not looking at the long-term benefits of a restructuring the
tax thing, just at the stimulative effect.
Somebody named economy analysis, that said that just the
stimulus part of this, if you extend Emergency Federal
Unemployment Benefits, you get one $1.73 for every dollar that
you spend. If you accelerate the 10 percent bracket, the lowest
bracket, you get $1.34 for every dollar that you spend. If you
get more aid to State governments, you get $1.24 for every
dollar that you spend. All the way down to the dividend
taxation reduction, where you get a$.09 stimulative effect, not
long-term effect, but stimulative effect, $.09 for every dollar
that you give back on this dividend tax thing.
Just looking at the stimulative part of this, shouldn't we
be--and I had this discussion with some corporate executives
from GE who were sitting at my table at a dinner the other
night--if we need a stimulus, shouldn't we be looking at
extending opportunity employment benefits and accelerating the
10 percent, the lowest bracket increase, so we can get more
money into the economy. Both of those things I think do it.
Just don't worry about the long-term consequences.
I am not arguing with Mr. Malpass or Dr. Hassett about
whether restructuring the tax on corporate earnings and
dividends might be beneficial long-term, but I am looking at
whether it would be beneficial to do something stimulative and
whether those two things might not be the highest priority.
Mr. Malpass. I will give the short answer, and then maybe
others have a longer one.
I don't agree with those estimates that you cited. The $.09
benefit from the dividend tax cut is simply a gross
underexpectation on the economy. That's a really negative
statement on the way the economy works.
Mr. Watt. But that's short-term, now, I am not talking
about long-term.
Mr. Malpass. Markets and people are forward looking. If I
tell you that your tax rate 3 years from now is going to be
much lower than it is today, you are going to get more
education, work harder now, get a better job. You are going to
start today. You are not going to wait for 3 years. You are
going to know that if you are in a better position 3 years from
now, you are going to do more. And that's the same for these S
corporations. If businesses in America know that the capital
structure is going to be more liquid, they are going to start
working harder and more efficiently today.
Mr. Watt. That's exactly the opposite of what the GE
executives told me. They told me they would take the money and
put it in a savings account, and when the economy turned
around, it would have some benefit because they would invest
it. And I acknowledged that, but short-term stimulation, the
next 6 months to a year, is what I'm talking about.
I absolutely disagree with what you just said.
Mr. Aaron. If you want to stimulate in the short run, you
must do it through consumption. Investment plans take a while.
They are not made overnight. For that reason, I think Mr.
Greenspan was entirely right, it does not contribute to long-
term growth by building up the capacity of the Nation to
stimulate consumption in the short run. But he is talking about
stimulating growth through expanding the supply side of the
economy.
Short-term stimulation is about spurring demand, and for
that purpose, you want to get the money out into purchases
fast. The quick way to do that is to cut taxes for people who
have high propensities to spend out of current income. And that
would involve ideally, in my view, a repetition of the per
capita rebate. Not all of it gets spent, much of it does not
because it is temporary. A suspension of part of the payroll
tax with compensation to the trust funds from the general fund
would also stimulate immediate consumption.
Dividend cuts may indeed have long-term effects on
investment and may indeed have long-term effects on consumption
by those who receive the dividend relief. But if you want to
get a big bang for the buck, quick, put it in the hands of
middle- and lower-income households who need to spend
essentially all their income in order to get by.
The Chairman. You may respond briefly, then we will move
on.
Mr. Hassett. It is--I disagree with Mr. Aaron on that, Mr.
Watt, as have most previous Congresses during recessions. We
have very often had investment tax credits during recessions.
They have very often stimulated investment, and the investment
tax credit equivalent of the President's proposal is about a 5
percent investment, not as big as 10 percent ITCs that we have
seen in the past, but it's not tremendously different from the
types of things that President Kennedy was one of the first
ones----
Mr. Aaron. The key to an investment tax credit is that it
has to be temporary. This provision is not a temporary tax
credit. It is a permanent one. The idea of a temporary tax
credit is, you put investment goods on sale, go out and buy
them right now, and you get the discount. If you say that the
price is going to be cut indefinitely, then the stimulus to go
out and buy now is dramatically reduced.
I would agree with Mr. Hassett if he is talking about a
temporary investment tax credit, but not a permanent one.
The Chairman. Gentleman from Washington, Mr. Inslee.
Mr. Inslee. Thank you, Mr. Chairman.
I want to thank all the members of the panel, but again
particularly Mr. Peterson. And just to dovetail, what Mr. Watt
talked about, about his sort of epiphany or renaissance in
regard to the budget deficits, I want to thank you for a
different reason. I came to Congress, at least the first time,
the same year Mr. Watt did, 1993, but I had a different view.
The deficit was one of the reasons I first ran because on
Sunday morning when I would open up the newspaper and be having
a nice omelet, it would be spoiled by looking at what these
idiots in the U.S. Congress were doing, creating this enormous
debt burden for my kids. And I have got three sons, and so I
kind of had that epiphany maybe a little earlier than Mr. Watt,
but I think with the----
Mr. Watt. You are always smarter than me.
Mr. Inslee. It has been in large part because of Concord
Coalition works that you have been instrumental in, and I want
to thank you for getting Americans to understand the depth of
this problem and the source of the problem which is the U.S.
Congress and the Executive Branch.
I just want to give you an impression that I have and just
ask for your comment. My impression is almost on an issue
perhaps of morality as much as economic theory, in that I
believe there is a moral component of when we create this debt
burden for our children. Regardless of economic theory, it's
something we ought not to do and I look at this, I heard one of
the speakers, I think it was maybe John Tanner, during the
floor debate about this, he actually likened this tax cut as
actually the largest tax increase in American society because,
ultimately, it will increase interest rates on the Federal
debt. And you and I know, tax payers pay a debt tax, right now
almost 14 percent of all the income taxes they pay go to pay
the interest on the Federal debt. And in one way or another, I
appreciate your testimony because what you talked about is that
this basically is just shifting the burden to pay for this to a
later period of time. Obviously, at some time, the paper will
have to be paid, and this is shifting it down a generation,
perhaps, and I look at this, I look at this tax cut as an
abject failure of my generation. They talk about the greatest
generation, World War II, well, my generation is the baby boom
generation, and when we retire, this tax cut is an explicit
promise to our kids that they are going to have an enormous tax
increase. They are going to finance my generation's retirement,
and I think there is a moral component to this, and that's why
I feel strongly about it.
So, I guess, I ask you to comment on some of the
sentiments.
Mr. Peterson. If I may, a lecture on morality doesn't come
very convincingly from somebody on Wall Street, but let me take
a crack at it.
There was a German philosopher named Bonhoffer who said,
``The ultimate test of a moral society is the kind of world
that it leaves to its children,'' and I think what we are doing
to our kids is fundamentally immoral.
I would like to respond to a comment that Congresswoman
McCarthy made about why we cannot get together and solve this
problem, because I don't know many people that want to
consciously hurt their own children.
I think we need a common understanding of what the problem
is. And if I could make one suggestion, Mr. Chairman, I would
love to have you have a hearing on the single issue of the
trust fund, because I think that has done more to confuse the
American people and to diminish the importance of this problem
than almost anything that has happened.
My father went to his grave saying, ``I don't know why you
keep writing books about all these long-term liabilities and
stuff. I have got an account, and that money has been set
aside, and that's going to be there when I retire.'' I
collected oxymorons because I was once called a powerful
Secretary of Commerce, and anybody who has ever been here knows
there has never been one in the history of the government. In a
sense, the trust fund is kind of an oxymoron because it says
fund. It's not funded; it's unfunded. It says trust, and I
think it's extremely important, Mr. Chairman, that the American
people have a common understanding of this problem because as
long as they really believe there is a trust fund out there
that has been funded and that's set aside for them, they aren't
going to take this problem seriously. And it is the one thing I
think we all agree on, that it is a real problem.
Mr. Inslee. If I ask Mr. Hassett, we know the arguments for
a removal of the dividend tax, the potential of distorting
impact, but in your view, given certain facts that I think we
all agree on, namely, that people are getting older and medical
care costs are going up, the baby boomers are starting to
retire, the AMT tax will be fixed in some sentiment, defense
costs will go up, Homeland Security increase will go up. All of
these are bipartisan consensus items I have stated.
Given that fact and given the fact that deficits will
increase as a result, would it not be preferable if you believe
you want to remove that distorting impact of the dividend tax,
to find some other means so that we don't end up with these
giant deficits? For instance, closing the Bahamian-Bermuda
Triangle tax dodge that some of our less patriotic corporations
have chosen to take, for instance.
Mr. Hassett. Thank you for the question. I think that the
dividend tax cut is likely an important enough policy that we
should try to think what we can agree on to do in order to get
it passed. I think that we also have to recognize, however,
that, as in my testimony, the charts to my testimony, to the
extent that we are doing this irresponsible or you said immoral
thing to our children because we are setting them up to have
this terrible bill that they are going to have to pay, well,
the reason that we are doing it, first order, big reason is
that the spending is soaring so out of control.
Mr. Peterson mentioned that Margaret Thatcher indexed
retirement benefits to inflation but not to growth. If we did
something like that, it would go a long ways towards fixing the
problem, and whether we do something like that or not, I don't
think is going to be seriously impacted by $200 billion of tax
policy this year.
The Chairman. The gentleman's time has expired. Gentleman
from Massachusetts to close.
Mr. Frank. Mr. Chairman, I want to apologize to our
witnesses. Not for my personal shortcomings, but for the
shortcomings of our political culture. This is a very useful
discussion. I am enormously grateful to these four very busy,
very thoughtful people for having a rational and civil
discussion about some of the most important issues in society.
I am sorry it's not sensational enough to attract the attention
it ought to. I am comforted by the fact that C-SPAN is here and
that people are interested in it and that the number is 10s and
of more thousands, and I think it has been useful time.
I was struck by Mr. Hassett referring back to the Kennedy
Administration, because that's when I was taking Economics 125
and Dr. Aaron was grading me. So I was going to say that's an
irrelevant, so far time gone, but I can't do that. I was going
to suggest to Mr. Peterson that maybe he wasn't governmentally
powerful. I think Herbert Hoover used the Secretaryship of
Commerce to at least some political advantage. He may have been
the only powerful Secretary of Commerce.
Question, first I am struck and I appreciate your honesty.
It's been talked about, Mr. Hassett and Mr. Malpass, too, in
some extent that each side suggests witnesses. Dr. Hassett, you
were particularly explicit in denigrating the marriage-penalty
relief and the child-tax credit. Would you expand on that?
Mr. Hassett. Sure, Mr. Frank. Thank you. I guess you are
trying to get me in trouble but----
Mr. Frank. No, I am reading what you wrote. I am not
bugging you.
Mr. Hassett. I will continue to dig. I think that tax
policy needs to be based on sound economic principles, that we
need to have broad bases.
Mr. Frank. We can stipulate to that. Why does that then
lead you to be critical of marriage-penalty relief and a child-
tax credit?
Mr. Hassett. That's a more complicated answer. I will be
glad to get back to you with that, but there is a reason why.
The concern of the marriage penalty is quite cyclical over
time, and we get really upset about it for a while. Then we fix
it, and the way we fix it, we get upset about that, and then we
put it back.
Mr. Frank. You presumably aren't cyclical about it. Why do
you think it's not very important?
Mr. Hassett. I think that the----
Mr. Frank. From the economic standpoint.
Mr. Hassett. On the economics of it, on the marriage
penalty, you have to decide whether you want every family who
has an income of $100,000 to pay a tax, regardless of where the
$100,000 comes from. Is it one person making $80 and one person
making $20? Or is it two people making $50? Or do you want to
tax everybody who makes $50,000 the same, whether they are
married or not? You have to pick, and if you get upset about
the way the tax code treats one set of people, then you will
change the code.
Mr. Frank. Give me a factual statement now. You say it does
little to strengthen the economy. Why do you say that?
Mr. Hassett. I think that using the tax code to attempt to
shape families is--you are not going to have any use out of
that. It is not going to be effective. So if you want to have
more children, I don't think a child credit is going to make
people have more children. In terms of lowering taxes, we try
to stimulate activity----
Mr. Frank. Neither one of these, in your judgment, would be
likely to increase efficiency or productivity or do those
things ?
Mr. Hassett. Correct.
Mr. Frank. Let me say, I did want to comment, and I respect
the integrity of the gentleman from Texas with whom I am often
aligned on various matters of personal liberty, but I disagree
very much, as Dr. Aaron did, with his formulation that it is
the people's money.
This notion that it is the people's money versus some
entity called the government's money, I think, greatly
misstates things. Of course it is the people's money, but
thoughtful people understand that they have two sets of needs
roughly. There are needs that we can all best deal with
individually, by money that is individually available to us,
but there are also needs that, all the people I know believe,
that can only be dealt with collectively, cleaning the air,
public safety to some extent, public transportation.
So this dichotomy between the people's needs and the
government's needs is a mistaken one. There is a dichotomy
between those needs which we can best fulfill individually and
those which we can best fulfill working together. There are
some questions about the inherent efficiency or inefficiency of
when we work together. I tend to share Dr. Aaron's view on that
but I think that's where we ought to formulate it.
That leads me to this question. We get into debates. Well,
first, one preliminary factual question, seriously, for both
Dr. Hassett and Mr. Malpass. You are critical of the 10-year
window, but to be honest, I wasn't sure whether you want a
shorter or a longer time horizon or both of the above. Should
we substitute for the 10-year window an indefinite, as far as
the eye can see, or should it be 2 or 3 years? I think,
frankly, in your criticisms of the 10-year window, sometimes it
was too long and sometimes it was too short. Could you expand
on that?
Mr. Hassett. I think it's too short in the sense that you
need to look at the total effect of every policy. So I agree
that Mr. Malpass and I were saying different things but we
were----
Mr. Frank. Okay. Mr. Malpass, you seem to be saying sort of
both. By the way, let me just stipulate to one thing. Passing a
tax cut to say 2010 was extremely stupid. I understand. I
didn't vote for it. None of us did, and so I am glad you told
them that, but should we lengthen or shorten the window?
Mr. Malpass. I think we should have both. First, an
indefinite window, meaning in its fully-mature state. If you
develop an entitlement program and you figure out what it is
going to cost down the line, that is a relevant number. By
having a 10-year window, it is encouraging you to minimize the
cost in the first part of that window. You don't get charged
for the long-term, and that's an artificiality that is
distorting your----
Mr. Frank. So both of you say it should go on.
Let me put it this way. When we do a budget, should we then
do it as binding for 1 year, and then the projection is
infinite? We have this 1-year, 5-year. How would you change
your procedures in what terms?
Mr. Malpass. As I mentioned, I think spending restraints on
the size of programs might be useful. The budgeting process
that you use now doesn't help make good decisions.
Mr. Frank. I understand. What would you do instead?
Mr. Malpass. I think you could look at last year's budget
deficit, not a projection of budget deficit, and then have your
rules be based on whether you are meeting your goals.
One kind of goal is the debt to GDP ratio. We are right now
at 35 percent. So you could put in some kind of concept that
when you are above that, then it takes more votes, a super
majority to pass new entitlements.
Mr. Frank. I appreciate that. Is that relevant, because
that's one of the questions, the ratio of debt to GDP? The
argument has been, well, that's really not all that relevant
and if it's relevant why? Does it have effect on interest rates
or you don't think it crowds out savings? Why should I care
what the ratio to debt to GDP is based on your analysis?
Mr. Malpass. I think a debt to GDP analysis is a relevant
way to look at a government's fiscal situation.
Mr. Frank. What harm does a high one do, is my question to
you?
Mr. Malpass. Right now, the U.S. is at 35 percent of GDP.
In Europe, many of the countries are at 60 or 80.
Mr. Frank. What harm does it do if we get too high?
Mr. Malpass. As you get too high, you are going to have
trouble funding that size of a deficit. So it's like a credit
limit. If you think of a person with a given income and then
they say, ``Well, I am borrowing $50,000,'' and the bank says,
``Okay, that amount you can handle,'' and then the person says,
``Well, I want to borrow $100,000,'' and they have a health
problem, that's going to create a problem.
Mr. Frank. Meaning people would charge me more for it?
Mr. Malpass. I don't think the interest rate----
Mr. Frank. But how is it going to be a problem? I want to
borrow more. It sounds like you are now acknowledging that
there is some negative to the higher deficits, and I wasn't
sure of what they are.
Mr. Malpass. I really think that the U.S. debt to GDP ratio
is low enough that more borrowing won't affect interest rates.
Mr. Frank. That is not what I am asking, Mr. Malpass. We
have been very civil here. I am asking you, in your theoretical
terms, what--and we also know it's not either/or, these things
are all cumulative. You have ranges. At exactly what point I am
not asking now. What is the damage that comes if the ratio gets
too high? How does that damage manifest itself?
Mr. Malpass. I think if you get to a high debt to GDP ratio
beyond your creditworthiness, the investment in your country
dries up. People don't want to put money in because they see a
debt crisis coming. The good news is that the U.S. Isn't
anywhere close to that, and I think a better model for thinking
about extra debt now is more in terms of quantity discounts.
There are a lot of corporations where, if they borrow more
money, they get a lower rate.
Mr. Frank. More debt would be a good thing for us right
now?
Mr. Malpass. No.
Mr. Frank. That's what you are telling me. I understand
that, but I am trying to follow the policy implications.
Mr. Malpass. I disagree with the argument that a budget
deficit----
Mr. Frank. I understand that, Mr. Malpass, but isn't the
implication of what you say, your quantity discount, that more
debt could be a good thing?
Mr. Malpass. I think a tax cut would be very good for the
economy now.
Mr. Frank. I know, but I didn't ask you that. Leaving aside
of how we incurred the more debt, what was that reference to
quantity discount? It sounded like there could be some value to
having some more debt, or is that just a throw in that I
shouldn't pay attention to?
Mr. Malpass. No, no. Very practically, for corporations and
for foreign countries, they think about placing debt on the
yield curve in order to lower their borrowing rate. It's a very
practical concept. You know that there is the concept of a
prime rate in the U.S. Who gets prime rate? Is it somebody that
doesn't borrow very much money. No. It's always somebody that
borrows a lot of money. They get a lower rate because they----
Mr. Frank. You think that has relevance to the U.S.
Government?
Mr. Malpass. At our current debt to GDP ratio, yes.
Mr. Frank. Let me take Mr. Aaron's last comment.
Mr. Aaron. Just two specific points.
The Chairman. You can tell what kind of grade you gave.
Mr. Frank. A minus, so I owe him.
Mr. Aaron. A high ratio of debt to GDP means a high ratio
of interest to total budget expenditures, and that is a threat
to the capacity of the government to meet its obligations in
the future. That's point one.
Point two, the more debt that exists, in all likelihood,
the larger the holdings abroad of U.S. Debt and hence the
greater vulnerability of the U.S. Dollar to shifts in sentiment
on the part of foreign debt holders.
The Chairman. The gentleman's time has expired. All time
has expired. We are most in your debt to coin a phrase.
Mr. Frank. And that's a good thing.
The Chairman. We appreciate your patience and your
participation. It was most enjoyable and the committee now
stands adjourned.
[Whereupon, at 1:35 p.m., the hearing was adjourned.]
A P P E N D I X
April 30, 2003
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