[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
MONETARY POLICY AND THE STATE
OF THE ECONOMY
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON
FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
FEBRUARY 12, 2003
__________
Printed for the use of the Committee on Financial Services
Serial No. 108-1
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89-078 WASHINGTON : 2003
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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:
February 12, 2003............................................ 1
Appendix
February 12, 2003............................................ 45
WITNESS
Wednesday, February 12, 2003
Greenspan, Hon. Alan, Chairman, Board of Governors of the Federal
Reserve System................................................. 5
APPENDIX
Prepared statements:
Baca, Hon. Joe............................................... 46
Davis, Hon. Artur............................................ 47
Gillmor, Hon. Paul E......................................... 49
Hinojosa, Hon. Ruben......................................... 51
Shadegg, Hon. John........................................... 54
Greenspan, Hon. Alan......................................... 56
Additional Material Submitted for the Record
Hinojosa, Hon. Ruben:
Introduction of legislation to help Mexican Nationals access
the U.S. Banking System.................................... 72
Lee, Hon. Barbara:
``Who Really Gets Home Loans? Year Nine'', Executive Summary,
California Reinvestment Committee.......................... 78
Maloney, Hon. Carolyn:
State of New York, Office of the State Comptroller letter,
January 14, 2003........................................... 84
Greenspan, Hon. Alan:
Monetary Policy Report to the Congress....................... 86
Written response to questions from Hon. Joe Baca............. 120
Written response to questions from Hon. Judy Biggert......... 122
Written response to questions from Hon. Luis V. Guiterrez.... 124
Written response to questions from Hon. Ruben Hinojosa....... 127
Written response to questions from Hon. Darlene Hooley....... 133
Written response to questions from Hon. Patrick J. Tiberi.... 135
MONETARY POLICY AND THE STATE
OF THE ECONOMY
----------
Wednesday, February 12, 2003
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to call, at 10 a.m., in Room
2128, Rayburn House Office Building, Hon. Michael G. Oxley
[chairman of the committee] presiding.
Present: Representatives Oxley, Leach, Baker, Bachus,
Castle, Royce, Kelly, Paul, Gillmor, Ryun, Biggert, Shays,
Shadegg, Miller of California, Hart, Capito, Kennedy, Feeney,
Hensarling, Garrett of New Jersey, Murphy, Brown-Waite, Barrett
of South Carolina, Harris, Renzi, Frank, Kanjorski, Waters,
Sanders, Maloney, Velazquez, Watt, Hooley, Carson, Meeks, Lee,
Inslee, Moore, Gonzalez, Capuano, Hinojosa, Lucas of Kentucky,
Clay, Israel, Ross, McCarthy, Baca, Matheson, Lynch, Miller of
North Carolina, Emanuel, Scott and Davis.
The Chairman. The committee will come to order. We are
pleased to welcome back the Chairman of the--distinguished
Chairman of the Federal Reserve, the Honorable Alan Greenspan.
Chairman Greenspan, the committee welcomes you and as
always looks forward to your comments. Because of the
importance of your message, it is fitting that just two years
ago, you were the first witness at the committee's first
hearing in this new Congress.
Mr. Chairman, notwithstanding the comments in your prepared
statement about the uncertainties posed temporarily by the
current situation in the Middle East, we are here to discuss
how to further American economic success. For too long the
United States economy has been like a starting quarterback in
its rookie season. All the fundamentals are there, but we are
just not getting the ball across the goal line. Looking at the
replay, we are just not sure what went wrong. In an economy
that saw record high productivity last year, I believe the
third-quarter numbers were the highest in decades, why do we
have diminished consumer confidence and so much market
volatility that we can see nearly a 1,000-point swing in just a
few days?
That said, I think a lot of us are not just the optimists--
seeing the light at the end of the tunnel. Once we resolve the
situation in the Middle East, many believe that the economy
will be free to grow again. I am sure we all hope that comes to
pass.
I appreciate your recent comments about the President's
jobs and growth plan for the economy. Many have referred to
this plan as a short-term stimulus program, but I see it as a
bold attempt to restructure the economy and prepare it for
another long period of expansion. Recognizing your important
point that any such plan must be paid for, I would like to
associate myself with your view that removing the unfair and
counterproductive double taxation of dividends is extremely
important. Without this kind of long-term thinking, any short-
term stimulus program is likely to be both expensive and
ineffective in spurring an economic recovery. You are quite
measured in your remarks about the effects of removing the
double taxation. Mr. Chairman, I hope you are able in the
period reserved for questions to elaborate on that issue.
The President and I share the view that economic growth is
the best way to ward off deficits, and the best way to spur
growth is to keep more money in the hands of the American
family. The way you do that is through lower taxes. Although I
am never happy to see budget deficits, today's forecast
deficits are in terms of the GDP roughly half of what the
deficits were some two decades ago. Perspective is important, I
think, and I hope that you will provide it to us today.
This committee will also be considering a number of
measures important to reinforcing our economic infrastructure.
Among them are reform of the bankruptcy laws, ensuring of
certainty in the netting of derivatives contracts, reform of
the bank deposit insurance system, repeal of some outmoded
banking regulations, streamlining of the check processing
system, some emergency authority for the Securities and
Exchange Commission. These legislative efforts, which would all
make the economy even more resilient as well as more efficient,
are necessary and will be dealt with swiftly by the committee.
Mr. Chairman, despite a number of uncertainties, our
economy has continued to grow, with a 2.4 percent growth rate
for last year and an expected rate of more than 3 percent in
the current year. That is extraordinary. To be sure, some of
the credit goes to you and your masterful handling of monetary
policy. Mr. Chairman, thank you for your willingness to return
to the committee at a later date to continue our discussion on
these and other important matters. And thank you for working
with Ranking Member Frank and myself in that regard. We will
always benefit from your wisdom this morning and certainly in
the future.
The Chair's time has expired, and I yield to the Ranking
Member, the gentleman from Massachusetts Mr. Frank.
Mr. Frank. Mr. Chairman, I want to echo your thanks to the
Chairman for agreeing to come back in April. Neither you nor I
decided that this should be the second largest committee in the
Congress, money being only second to highways in its lure to
Members. So we couldn't accommodate everybody, and we do want
to do that. And we will be protecting all Members' rights
thanks to your and the Chairman's cooperation.
I welcome the Chairman back to what has become an
interesting game. Some people when they were younger played
capture the flag. The game today is capture the Fed. The
question is who can hoist the Chairman to his or her flagpole
in the broader debate. And I sympathize, Mr. Chairman, with
your unrequested role here, but I appreciate the integrity with
which you have addressed this issue in the midst of these
political efforts. And essentially as I read your testimony
yesterday, you stayed true to what you have long argued, namely
that deficits, and particularly ever-increasing deficits into
the future, are a significant negative.
We are in an interesting period in American history. I
think from the intellectual standpoint, we are seeing one of
the greatest examples of hypocrisy in recent times. The
political party that came to power in the Congress in 1995,
having signed a contract with the American people, a contract
of adhesion, I am afraid, that was going to balance the budget
by constitutional amendment, has now basically announced that
they were only kidding, that amending the United States
Constitution to balance the budget may have seemed like a
useful political ploy, but, in fact, they are really not that
all concerned about deficits.
There is a certain bifurcation here. The President has
announced a new millennium challenge plan for foreign aid, and
to qualify that you can't have a budget deficit, but deficits
are okay for us. What we are talking about obviously is an
ideological effort. I first thought this was hypocrisy, as I
said, but I think it is clear that what we are really talking
about is bait and switch. We have a political party in power
that is now denigrating deficits for the purpose of getting a
tax cut through, but if they are successful in getting that
through and adding significantly to the deficit not just this
year, but on into the future, they will then turn around and
rediscover their fear of deficits and use that as a way to
oppose legitimate spending on environmental concerns,
unemployment compensation, extended health care and other
important social needs.
And the fundamental problem we face is this: This President
has decided to make a contribution to economic theory which, to
me, is unwelcome. That contribution is that you can pay for two
wars with three tax cuts. Had the Democrats in 2000 accused the
President of planning to have two wars and pay for it with
three tax cuts, we would have been accused of the worst kind of
unfair campaign tactics, but that is where we are. If, in fact,
you go forward with two wars and pay for those two wars with
three tax cuts, you then have to, A, announce that deficits are
not so bad after all; and B, substantially reduce other
important public programs. That is what is important.
The dividend issue is a question which we should be able to
consider at some point as to what is an ideal tax structure,
but at this point, with another war facing us--and the
President's budget calls for a deficit of over 300 billion
without the war in Iraq, so those who think the war in Iraq is
going to cost us zero and that compensating Turkey and other
countries isn't going to cost us anything, we are probably
talking about a $400 billion deficit this year. We are talking
about a level of deficit which would have gotten us in trouble
if we were in the European Union and indefinite increases into
the future.
So that is the context in which we operate, and I
appreciate it, Mr. Chairman, as I said, what I thought was the
fundamental integrity in the face of a lot of political pulling
and hauling for you to restate that. There are other issues
that obviously we will want to address, but I do think that the
context in which we operate--and I want to close with this
again, Mr. Chairman--the notion that the Nation can pay for two
wars with three tax cuts, war being by far the most expensive
thing you can do and the very expensive aftermath of that war,
obviously is the central factor that confronts us. And the
Chairman has long believed, as have most economists, that while
deficits are not instant death, they are over a long term a
negative for the economy. And I very much appreciate the
Chairman's consistency in reaffirming that in the face of an
awful lot of political praying that he would go the other way.
The Chairman. The gentleman's time has expired.
The Chair is pleased to recognize Mrs. Biggert, the Vice
Chair of the Monetary Subcommittee.
Mrs. Biggert. Thank you, Mr. Chairman, and thank you,
Chairman Greenspan, for coming before our committee this
morning. This is our first hearing in this committee for the
108th Congress, and the fact that you are first, I think,
speaks volumes about the great respect that we have for you and
the priority we place on your stewardship of our economy.
I know subcommittee Chairman King wanted to join us here
today, but unfortunately, he is tied up in another committee
with Secretary Powell in discussions concerning Iraq, so I
appreciate the opportunity to speak as the subcommittee vice
chairman.
It is no secret that we now face some of the most difficult
challenges in our Nation's history. On the foreign policy
front, there is the prospect of military action against Iraq;
North Korea continues to behave like a reckless child in
possession of a dangerous toy; and discord remains among
Israelis and Palestinians, Indians and Pakistanis, and in and
among other nations and groups around the world.
On the domestic front, our Nation's terror alert system
remains high, deficits are mounting, economic growth is down,
and the markets remain skittish. Yet when we take a close look
at the fundamentals of our economy and observe how it has held
up over the last 17 months, I think you'd agree that it is
anything but down, dead, and buried. Last month the
unemployment rate dropped to 5.7 percent, and payroll
employment rose to almost 143,000, almost completely reversing
December's decline. Interest rates remain low. Manufacturing
activity turned up in December. Productivity for all of 2002
grew by 4.7 percent, the strongest showing since 1950, and a
big improvement over the 1.1 percent increase posted in 2001.
But even so, we cannot ignore the fact that something is
holding the economy back from a more vigorous rebound. And it
would be unwise to not discuss the best way to spur consumers
and businesses to spend and invest more, spurring growth and
ultimately reining in public debt. And that is why we are here
today to discuss our Nation's fiscal future and our plan for
short-term and long-term economic growth.
Again, thank you Mr. Chairman for joining us. I look
forward to your remarks.
The Chairman. The gentlelady's time is expired.
The Chair is now pleased to recognize the Ranking Member on
the Monetary Subcommittee, the gentlelady from New York Mrs.
Maloney.
Mrs. Maloney. Thank you, Mr. Chairman.
Good morning, Mr. Chairman, and thank you for joining the
committee to offer the perspective of the Federal Reserve on
the state of our economy.
By practically any measure the economy has deteriorated
significantly over the past 2 years. Unemployment has risen
from 4.2 percent to 5.7. In New York it has reached 7.5
percent. The stock market has lost $5 trillion in value,
lowering the value of ordinary Americans' retirement savings
and 401(k)s dramatically. Most dramatically, the Federal
balance sheet has suffered through the single greatest about
face in our Nation's history.
As an example, the administration's first budget projected
at $262 billion surplus for fiscal year 2004. The second budget
estimated a deficit in 2004 of $14 billion. Now the
administration is projecting a $307 billion deficit for 2004.
Overall the original administration's projection has changed by
$570 billion for a single year, and the long-term picture is
just as bleak. The situation is so dire that, almost in
despair, OMB has stopped issuing 10-year projections
altogether.
Mr. Chairman, in past statements and just yesterday you
have warned eloquently about the negative impact of deficits on
our economy. Just last September you said, and I quote,
``history suggests that an abandonment of fiscal discipline
will eventually push up interest rates, crowd out capital
spending, lower productivity growth, and force harder choices
upon us in the future,'' end quote. I share your concern,
especially about interest rates, and fear that the
administration's new economic plan promoting deficit-expanding
tax cuts will lead to increases in mortgages and credit card
rates for America's working families. Furthermore the State
budgets are hurting, and the new administration's tax proposal
will make things worse.
In New York the administration's dividend tax plan will
reduce State revenue and increase borrowing costs by $9 billion
over the next 10 years, according to New York State comptroller
Allen Hevesi. Two years ago the administration pushed through a
massive tax cut which it justified with rose-colored revenue
projections. Now for the first time in our history, the
executive branch is proposing tax cuts and sending our Armed
Forces onto the battlefield at the same time.
I fear we are headed toward another round of massive
deficit increases, and I look forward to your thoughts this
morning. Thank you for joining us.
The Chairman. Gentlelady's time has expired.
The Chair would ask unanimous consent all Members'
statements may be made part of the record. So ordered.
The Chairman. Mr. Chairman, welcome back to the committee,
and we look forward to your statement.
STATEMENT OF HON. ALAN GREENSPAN, CHAIRMAN, BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
Mr. Greenspan. Mr. Chairman and Members of the committee,
when I testified before this committee last July, I noted that
while the growth of economic activity over the first half of
the year had been spurred importantly by a swing from rapid
inventory drawdown to modest inventory accumulation, that
source of impetus would surely wind down in subsequent
quarters, as it did. We at the Federal Reserve recognized that
a strengthening of final sales was an essential element of
putting the expansion on a firm and sustainable track. To
support such a strengthening, monetary policy was set to
continue its accommodative stance.
In the event, final sales continued to grow only modestly,
and business outlays remained soft. Concerns about corporate
governance, which intensified for a time, were compounded over
the late summer and into the fall by growing geopolitical
tensions. Equity prices weakened further, the expected
volatility of equity prices rose to unusually high levels,
spreads on corporate debt and credit default swaps
deteriorated, and liquidity in corporate debt markets declined.
The economic data and the anecdotal information suggested that
firms were tightly limiting hiring and capital spending and
keeping an unusually short leash on inventories.
By early November, conditions in financial markets had
firmed somewhat. But on November 6, with economic performance
remaining subpar, the Federal Open Market Committee chose to
ease the stance of monetary policy, reducing the federal funds
rate 50 basis points to 1-1/4 percent. We viewed that action as
insurance against the possibility that the still widespread
weakness would become entrenched.
In the weeks that followed, financial market conditions
continued to improve, but only haltingly. Mounting concerns
about geopolitical risks and energy supplies were mirrored by
the worrisome surge in oil prices, continued skittishness in
financial markets, and substantial uncertainty among businesses
about the outlook. Partly as a result, growth of economic
activity slowed markedly late in the summer and in the fourth
quarter. Much of that deceleration reflected a falloff in the
production of motor vehicles from the near record level that
had been reached in the third quarter when low financing rates
and other incentive programs sparked a jump in sales. The
slowing in aggregate output also reflected aggressive attempts
by businesses more generally to ensure that inventories
remained under control. Thus far, those efforts have proved
successful in that business inventories, with only a few
exceptions, have stayed lean.
Apart from the quarterly fluctuations, the economy has
largely extended the broad patterns of performance that were
evident at the time of my July testimony. Most notably, output
has continued to expand, but only modestly. As previously,
overall growth has simultaneously been supported by relatively
strong spending by households and weighed down by weak
expenditures by business. Importantly, the favorable underlying
trends in productivity have continued.
One consequence of the combination of sluggish output
growth and rapid productivity gains has been that labor markets
have remained quite soft. Another consequence of the strong
performance of productivity has been its support of household
incomes despite the softness of labor markets. Those gains in
income combined with very low interest rates and reduced taxes
have permitted relatively robust advances in residential
construction and household expenditures. The increases in
consumer outlays have been financed partly by the large
extraction of built-up equity in homes.
While household spending has been reasonably vigorous, we
have yet to see convincing signs of the rebound in business
outlays. The emergence of a sustained and broad-based pickup in
capital spending will almost surely require the resumption of
substantial gains in corporate profits. Of course, the path of
capital investment will also depend on the resolution of the
uncertainties surrounding the business outlook.
The intensification of geopolitical risks makes discerning
the economic path ahead especially difficult. If these
uncertainties diminish considerably in the near term, we should
be able to tell far better whether we are dealing with a
business sector and an economy poised to grow more rapidly, our
most probable expectation, or one that is still laboring under
persisting strains and imbalances that have been misidentified
as transitory. If, instead, contrary to our expectations, we
find that despite the removal of the Iraq-related
uncertainties, constraints to expansion remain, various
initiatives for stimulus will doubtless move higher on the
policy agenda. But as part of that process, the experience of
recent years may be instructive.
As I have testified before this committee in the past, the
most significant lesson to be learned from recent American
economic history is arguably the importance of structural
flexibility and the resilience to economic shocks that it
imparts. I do not claim to be able to judge the relative
importance of conventional stimulus and increased economic
flexibility to our ability to weather the shocks of the past
few years, but the improved flexibility of our economy no doubt
has played a key role. That increased flexibility has been in
part the result of the ongoing success in liberalizing global
trade, a quarter century of bipartisan deregulation that has
significantly reduced rigidities in our markets for energy,
transportation, communication, and financial services, and, of
course, the dramatic gains in information technology that have
markedly enhanced the ability of businesses to address
festering economic imbalances before they inflict significant
damage. This improved ability has been facilitated further by
the increasing willingness of our workers to embrace innovation
more generally.
It is reasonable to surmise that not only have such
measures contributed significantly to the long-term growth
potential of the economy this past decade, they also have
enhanced its short-term resistance to recession. That said, we
have too little history to measure the extent to which
increasing flexibility has boosted the economy's potential and
helped damp cyclical fluctuations in economic activity. Even
so, the benefits appear sufficiently large that we should be
placing special emphasis on searching for policies that will
engender still greater economic flexibility and dismantling
policies that contribute to unnecessary rigidity. The more
flexible an economy, the greater its ability to self-correct in
response to inevitable, often unanticipated, disturbances, thus
reducing the size and consequences of cyclical imbalances.
Enhanced flexibility has the advantage of adjustments being
automatic and not having to rest on the initiatives of
policymakers, which often come too late or are based on highly
uncertain forecasts.
Policies intended to improve the flexibility of the economy
seem to fall outside the sphere of traditional monetary and
fiscal policy, but decisions on the structure of the tax system
and spending programs surely influence flexibility, and thus
can have major consequences for both the cyclical performance
and long-run growth potential of our economy.
As we approach the next decade, we need to focus attention
on the necessity to make difficult choices from among programs
that, on a stand-alone basis, appear very attractive. Because
the baby boomers have not yet started to retire in force, and
accordingly the ratio of retirees to workers is still
relatively low, we are still in the midst of a demographic
lull. But short of an outsized acceleration of productivity to
well beyond the average pace of the past seven years or a major
expansion of immigration, the aging of the population now in
train will end this state of relative budget tranquility in
about a decade's time. It would be wise to address the
significant pending adjustment and the associated potential for
the emergence of large and possibly unsustainable deficits
sooner rather than later. As the President's just released
budget put it, ``The longer the delay in enacting reforms, the
greater the danger and the more drastic the remedies will have
to be.''
Re-establishing budget balance will require discipline on
both revenue and spending actions, but restraint on spending
may prove more difficult. Tax cuts are limited by the need for
the Federal Government to fund a basic level of services, for
example, national defense. No such binding limit constrains
spending. If spending growth were to outpace nominal GDP,
maintaining budget balance would necessitate progressively
higher tax rates that would eventually inhibit the growth in
the revenue base on which those rates are imposed. Deficits,
possibly ever widening, would be the inevitable outcome.
Faster economic growth, doubtless, would make deficits far
easier to contain, but faster economic growth alone is not
likely to be the full solution to currently projected long-term
deficits. To be sure, underlying productivity has accelerated
considerably in recent years. Nevertheless, to assume that
productivity can continue to accelerate to rates well above the
current underlying pace would be a stretch even for our very
dynamic economy. So, short of a major increase in immigration,
economic growth cannot be safely counted upon to eliminate
deficits and the difficult choices that will be required to
restore fiscal discipline.
By the same token, in setting budget priorities and
policies, attention must be paid to the attendant consequences
for the real economy. Achieving budget balance, for example,
through actions that hinder economic growth is scarcely a
measure of success. We need to develop policies that increase
the real resources that will be available to meet our longer-
term needs. The greater the resources available--that is the
greater the output of goods and services produced by our
economy--the easier it will be providing real benefits to
retirees in coming decades without unduly restraining the
consumption of workers.
These are challenging times for all policymakers.
Considerable uncertainty surrounds the economic outlook,
especially for the period immediately ahead. But the economy
has shown remarkable resilience in the face of the succession
of substantial blows. Critical to our Nation's performance over
the past few years has been the flexibility exhibited by our
market-driven economy and its ability to generate substantial
increases in productivity. Going forward, these same
characteristics in concert with sound economic policies should
help to foster a return to vigorous growth of the U.S. economy
to the benefit of all our citizens.
Mr. Chairman, I have a rather long written statement from
which I have excerpted and would appreciate it being included
for the record.
The Chairman. Without objection.
Mr. Greenspan. And I look forward to your questions.
The Chairman. Thank you, Mr. Chairman.
[The prepared statement of Hon. Alan Greenspan can be found
on page 56 in the appendix.]
The Chairman. And let me indicate to the Members that we
will strictly adhere to the 5-minute rule so everyone can
participate.
The gentleman from Massachusetts.
Mr. Frank. I would ask all the Democratic Members to read a
memo I put on their desk. We had some commitments in terms of
order of questioning from last time, and we have the conflict
with the hearing with the Secretary of State, so I hope
Members--I don't want to take up any more time--would read that
memo. We have tried to accommodate. And I want to repeat: The
Chairman has very graciously agreed to come back in April for
an additional hearing, and any Member that doesn't get a chance
to question today will be, as far as we are concerned on this
side, up first so that people will get the chance to do that in
April.
Thank you again, Mr. Chairman.
The Chairman. And the Chair will also try to follow that on
our side as well.
Mr. Chairman, back when I was in college studying Economics
101, one of the issues at the Federal level was always the
issue of double taxation of dividends and a lot of discussion
about the fact that it was unfair, that it was a drag on the
economy. As you know, the President--one of the major tenets of
the President's proposal was to eliminate the double taxation
of dividends not as a short-term stimulus, but as a long-term
positive change in our Tax Code. Do you think that is a good
idea, and if so, what effect, in your estimation, will it have
on the economy?
Mr. Greenspan. I do, Mr. Chairman. One of the most
important experiences, I think, that we have had as analysts in
the last several years, as I indicated in my prepared remarks,
is the changes that we have observed in the flexibility of the
economy and the resilience that that has imparted to our
capability of essentially deflecting shocks and largely
deflecting major pressures which would have driven us into deep
recessions. Indeed, I would have suspected that the 2001
recession would have been far deeper if we did not have the
flexibility that we had. And, as I have indicated in my
remarks, we have to now start to move, at least in my judgment,
if we are going to get increasing economic growth, to increase
the flexibility and the resiliency of the system.
One of the areas where we can do considerable good in that
regard is to eliminate the double taxation of dividends,
because the double taxation has created a bias towards debt
rather than equity in our economic system. And one of the
concerns that most people looking at the longer term have is
that the notion of flexibility and resilience and great debt
leverage do not go hand in hand. So eliminating the double
taxation will very significantly alter the way in which
investments are financed over time. It won't happen
immediately, because it takes a while for the corporate sector
to adjust to differing incentives, but I have no doubt it will
make some very important contributions to long-term economic
growth.
Let me just say parenthetically, Mr. Chairman, while I do
not support the elimination of the double taxation of dividends
because of short-term stimulus, it does have some short-term
stimulus. That is not the reason I am in favor of it. But it
probably will increase the level of stock prices and the wealth
effect accordingly, and there are some small income effects.
But I do think that the emphasis has to be on what the long-
term implications of such a policy would be.
The Chairman. Mr. Chairman, as you know, this committee was
deeply involved in the whole corporate scandals issue in the
last Congress, culminating in legislation dealing with
corporate governance and more accountability. What role, in
your estimation, did the debt financing play in some of those
corporate scandals, if any?
Mr. Greenspan. Mr. Chairman, it is hard to judge without
having very specific evidence, but there is no question that in
many of the questionable accounting practices which were
unearthed prior to the legislation which you were quite
instrumental in pushing, we observed that odd forms of debt
instruments were crucial to the various different schemes which
were involved to, in my judgment, essentially thwart the
purpose of accounting, namely, to give a clear picture of
whether a corporate strategy is working or not, not to create a
set of accounts to spin the stock price of the firm.
The Chairman. Thank you. My time has expired.
The gentlelady from California Ms. Waters.
Ms. Waters. Thank you very much, Chairman Greenspan. We
thank you for your visit here today. We all await with great
anticipation your creative words of wisdom. However, it appears
that you have left us with more questions than answers.
I am rather surprised by your rather lengthy discussion of
a cash-based accounting versus accrual accounting, where you
basically conclude that you do not have the tools by which to
come to certain conclusions. Usually you are a lot more
definitive than that, and you have always warned us about great
deficits and what we should do to avoid deficits and the kind
of cuts that we should make. So despite the fact that we may
have the most important or the most concise ways to make these
decisions, can you tell us in very simple and clear language,
when you talk about fiscal discipline, do you include tax cuts
along with discussion on the deficit? And will you talk about
our need to cut back on this deficit and what tax cuts are
doing to that, and talk about the tax cuts that we made in 2001
and the tax cuts in the new stimulus package?
Mr. Greenspan. Congresswoman, I testified before the House
Budget Committee in September and very strongly recommended
that the PAYGO and discretionary cap rules, which, in my
judgment, were really quite extraordinarily effective in
restraining deficits over the years, be reinstated. As you
know, they expired in the House on September 30 and will be
expiring in the Senate sometime in the spring. Those rules
effectively limit the capacity to cut taxes without also having
either offsetting revenues or cuts in nondiscretionary
spending. It also stipulates that expenditure programs are--
require the offsets in the other direction.
I do not deny, especially in most recent years when the
surpluses arrived, that there was a lot of game-playing with
that system, and the reason was that it was originally put in
place to constrain deficits. When the surpluses arose, it
seemed to everybody that they no longer made any sense, and
they were widely evaded and effectively disbanded. I think this
is a very bad mistake, and before any actions are taken with
respect to the appropriations for the next fiscal year, I
certainly trust that these rules, that is, the discretionary
caps and PAYGO rules, will be re-established, because what that
will do is enforce the necessity to really put forward only the
major priorities which this Congress has into legislation,
because it is fairly evident that if one merely looks at an
array, as I said in my remarks, of free-standing projects, they
all look good. They wouldn't have made it, in a sense, to the
semifinals if they weren't extraordinarily good projects. The
only problem is that there is an aggregate amount of fiscal
capacity in any economy, and we are very clearly straining the
capacity of the system owing to the inexorable retirement of a
very significant part of our population starting at the end of
this decade and carrying on, as you know, beyond that.
So, without getting into any of the individual programs,
because that is a very crucial and important choice that the
Congress must make for the American people, I do say to you
that looking at it from the point of view of an economist,
looking at what we can afford and what we can't afford, there
are limits, and you have to choose what we do within those
limits. And while I didn't expect it to be as effective as it
was in the years in which it was effective, PAYGO and
discretionary caps really did work.
The Chairman. The gentlelady's time has expired.
The gentleman from Alabama Mr. Bachus.
Mr. Bachus. Chairman Greenspan, I want to focus on one
issue that is not discussed a lot, but which I think is very
important, and that is the Fair Credit Reporting Act. The
preemption provisions will be expiring at the end of this year.
Fair Credit Reporting Act gives us a national credit reporting
system with uniform standards. Would you comment on the
importance of maintaining a national credit reporting system,
the advantages of that, how important you think it is that we
reauthorize the Fair Credit Reporting Act? What may be some of
the detriment if we don't? Today I think it gives us great
flexibility, and we are able to assess credit risk well, and I
think it is very beneficial to have this national system for
consumers and also for our financial institutions, and
obviously will let you comment.
Mr. Greenspan. Well, Congressman, 100 years ago when we
just had small banks dealing with customers, you knew what the
credit quality of your loans was. You knew the families to whom
you were lending, you knew the businesses, and you didn't need
a data bank. But as we became ever larger and far more complex,
and as our financial system, especially that which relates to
consumer credit, became huge in the post-World War II period,
there was no other way to handle a fair evaluation of the
credit standing of individual borrowers unless it was in one
way or another more automated. And we needed to build up some
means of history that would essentially enable us to, as
bankers say, make judgments without knowing the person
personally and not having in front of them a great deal of
information, especially because you may not have any way of
doing that.
These data systems are essential, in my judgment, to enable
consumers to have access to credit. In other words, it is not
that long ago when going into a bank and trying to get a
consumer loan was just never conceived as an appropriate thing
to do. They didn't make consumer loans. That has changed, and
it has had a dramatic impact on consumers and households and
access to credit in this country at reasonable rates. That
system cannot function without data, without credit histories
of individual borrowers, and I should certainly hope that it is
maintained.
Mr. Bachus. It is very important that we reauthorize the
Fair Credit Reporting Act to our economy?
Mr. Greenspan. Yes.
Mr. Bachus. Thank you.
Let me just close by saying I have read your prepared
remarks, the ones you have delivered here today. Let me sort of
capsulize maybe one thing I got out of that, and that is that
we must reform Medicare and Social Security and do it sooner as
opposed to later, and that is of critical importance to our
economy and to our financial stability.
Mr. Greenspan. When you look beyond the next few years,
what strikes you is how significant the retirement of the baby
boomers is to our fiscal system. The number of beneficiaries
for both Social Security or OASDI and Medicare and Medicaid are
really quite startling.
The problems with Social Security, as difficult as they
are, and they are difficult, are nonetheless capable of being
resolved because the Social Security system has the
characteristics of a private defined benefit plan, and we can
judge within some range what types of claims on federal
resources are required.
Medicare is a wholly different type of institution. Because
of the extraordinary gains in technology, the fact that medical
care per se is, as economists say, highly inelastic, meaning
that you demand it without respect to price, where we have a
subsidized third-party payment system, that leaves the
estimates of what the size of medical expenditures are in
general and Medicare in particular, very difficult to judge,
but it is almost open-ended.
And this is why I am very much concerned about having PAYGO
in place, because we are going to have to address these systems
in a manner which will fit them into the overall resources of
the system. That problem, incidentally, exists with or without
the President's economic program. In other words, the change in
the fiscal state subsequent to, say, 2010 or perhaps 2012, is
such that the rate of debt-to-GDP, a measure of the
sustainability of our fiscal affairs, goes up quite abruptly,
and as, in fact, the President reports in his budget, and
indeed so does the Congressional Budget Office, that those
rises are unsustainable.
Something has to be adjusted in order to bring the real
resources available for our total fiscal affairs in line, and
in my judgment, it is none too soon to start that process, to
make it phased-in in a manner which doesn't create abrupt
problems for either those contributing to Social Security or
Medicare trust funds and those receiving the benefits.
The Chairman. The gentleman's time has expired.
And the gentlelady from California, Ms. Lee.
Ms. Lee. Thank you, Mr. Chairman. I want to thank you and
Ranking Member Mr. Frank, and also welcome Mr. Greenspan and
say how timely as always your appearance is.
Let me call your attention to a report which was recently
issued by the California Reinvestment Committee. This is their
ninth annual report as it relates to home lending mortgage
practices in California. It concluded that California's most
active banks have failed to meet the quality benchmark in each
and every instance; secondly, the financial institutions are
clearly ailing in their efforts to average California's African
American and Latino households; thirdly, that the race and
neighborhood of home loan applicants seem to be a factor in how
much they will pay for their loan; and finally, the final
conclusion was that bank holding companies are profiting from
their failure to ensure that borrowers get the best loan
product for which they qualify from their own family of
companies.
What I wanted to ask you is what would be some of your
recommendations to address these very glaring discriminatory
outcomes and practices, and how do you think the Federal
Reserve can weigh in, if you can or not, because, of course,
accumulation of equity in one's home is the primary means of
wealth accumulation for the majority of Americans. That is the
American dream.
Mr. Greenspan. I agree with that, Congresswoman. I think it
has been quite a remarkable track record that we have had in
this country in expanding home ownership and home equity. And
there is no question that if home equity had not existed, we
would not have been able to have had the extraordinary degree
of extraction of equity that has occurred in recent years and
what has accordingly supported the economy, more exactly
supported consumption, when business investment was doing so
poorly. So clearly it has been housing and mortgage
availability which has been a very critical factor in
sustaining the economy, which is obviously of crucial
importance to the Federal Reserve.
The problems in California are difficult in part because
prices are much higher in California, as I recall, than
elsewhere, and that makes it quite difficult for first home
buyers and minorities to get into home ownership as readily as
one would like. And I think what is required in this respect is
to find ways in which to enhance the capability of everyone.
There is very little doubt that even though home ownership
rates for minorities are still well below those of whites, the
gap is, in fact, closing, and we ought to make all sorts of
efforts that we can to continue that progress, because as you
point out, living in a home and accumulating equity is the way
one moves up from the lower-income scales into the middle-
income scales. And it strikes me that whatever can be done
should be done to press that forward, as I have said many times
in the past.
But the Federal Reserve has only limited capabilities in
that regard. We can and do obviously affect mortgage interest
rates, and that is a major factor which I think has been quite
important in expanding that capability. We will look and I hope
we will find other areas which might be helpful, because our
general view is that the greater the home ownership in this
country, the better.
Ms. Lee. Thank you.
Mr. Chairman, I would like to ask unanimous consent to
insert into the record the executive summary of this report by
the California Reinvestment Committee.
The Chairman. No objection.
[The following information can be found on page 78 in the
appendix.]
Ms. Lee. Do I have 1 more second?
The Chairman. You have 38 seconds.
Ms. Lee. Let me just ask you with regard to the elimination
of tax on dividends, would you not agree that this dividend
exemption could make the low-income housing tax credit, which
does give investors a real dollar-for-dollar reduction in taxes
and in return, you know, for their investment in housing and
other tax matters--you know, for that matter, doesn't that make
it less attractive to investors if, in fact, this tax on
dividends is enacted, because the low-income housing tax credit
we know is--has about run out?
Mr. Greenspan. There are lots of impacts of this issue of
eliminating the taxation on dividends. The most important
thing, however, to keep in mind is that by improving the
flexibility of the economy, it almost surely increases the
aggregate level of economic activity, of incomes, and probably
does contribute to rising incomes all across the income scale
when you increase the economy. And generally in the United
States, while there are very obvious differences by income
group, the data do show that everyone benefits.
And in my judgment, the elimination of the double taxation
of dividends will be helpful to everybody. Will it have
negative effects in certain parts of the market? For example,
state and local governors and mayors have been concerned about
the cost of credit of municipal bonds that may actually rise
relatively speaking, and there are other people raising similar
issues. In my judgment, looking at the whole context, there is
no question that this particular program will be, net, of
benefit to virtually everyone in the economy over the long run,
and that is one of the reasons I strongly support it.
The Chairman. The gentlelady's time has expired.
The gentleman from Louisiana, Mr. Baker.
Mr. Baker. Thank you, Mr. Chairman.
Chairman Greenspan, welcome. I always enjoy having your
perspectives presented to the committee. And for the record, I
am not raising a subject that you would be surprised by,
although it was raised yesterday in questions in the Senate
proceedings relative to mortgage-backed securities, MBS. And I
studied your response, and there was an aspect of your answer
relative to interest rate risk that caught my eye. I share
those views, and I want to give you a little background for my
principle question.
The concern over interest rate risk and GSEs is something
that I have had continual concern about, and it was first sort
of publicly quantifiable in the last quarter of 2002 with the
difficulty in managing the negative duration gap numbers. As a
consequence of that, I have a related concern to the growth in
the number of institutions and the notional amount per
institution of GSE securities held by those institutions to
meet their Tier 1 capital requirements. It would appear to me
that, given the obvious now quantified difficulty in
rebalancing asset liability portfolio balance in an interest
rate environment, which fortunately has been very stable and
moving in the right direction, I might add, if we are to return
to an environment where we have a rapid increase in rates,
which we all hope does not happen, should there be careful
assessment given by the committee to establishing some limit on
the amount of GSE securities held by insured financial
depositories in order to minimize adverse systemic consequences
in an interest rate environment which none of us want to see
occur?
As you well know, today there is no such limit despite loan
limits on borrowers and all other credit questions, despite
limits on the prohibitions on holding triple A rated corporate
securities. These appear to be traded without limit, and I am
worried about the consequences of the scope today that now
appears to exist in many of the insured institutions'
portfolios.
Mr. Greenspan. Congressman, we are obviously aware of the
issue that you are raising. Remember that, at bottom,
supervision and regulation in general looks at the safety and
soundness of every institution. And while there are various
different legal limits and the like, any time there is a
concentration of anything, it gets our attention. And the
reason basically is that the history of commercial bank
defaults, and, in fact, defaults of other institutions, has
been too heavily peppered with institutions with concentrations
of something. And the trouble is that you could never in
advance list all the things that people can think up to get too
much of in their balance sheets.
So it is far better to leave it, as far as I can see, in
general, to the underlying process that we currently have. But
it may be that there are discussions within our staff which I
am not aware of that I would just like to quickly double check.
Mr. Baker. Well, my question really went to the validity of
a significant study on the matter, because it appears that the
number of institutions and the amount held per institution
continues to go up because the number of attractive
alternatives for bank investment are fairly limited.
Mr. Greenspan. I think that is correct. But I was curious
to know whether or not we in fact had done something internally
which I had not seen yet.
Mr. Baker. Terrific. I may follow this up with some
correspondence on the matter at a later time.
Mr. Greenspan. Why don't you do that, and we will try to be
responsive.
Mr. Baker. Thank you very much.
The Chairman. The gentleman's time has expired.
The gentleman from Kentucky.
Mr. Lucas of Kentucky. Thank you.
Mr. Chairman, we have a long history as the American people
of being real patriots in a time of war. In my view, the old
adage of guns and butter still prevails in the larger sense. I
think our American people would be willing to make some
sacrifices in deference to the war. Given your knowledge of the
economy, what would be a reasonable economic sacrifice or other
sacrifice for our people to make at this particular troubling
time?
Mr. Greenspan. Congressman, that question came up in the
Senate in a somewhat different form yesterday. Usually when we
have been confronted with guns-and-butter-type issues, the
ratio of defense expenditures to the GDP has been elevated, and
indeed there were limited resources available to do both. And
it is well known that in the Vietnam War, mistakes significant
mistakes, were made in not recognizing that we were in fact
trying to do too much. Fortunately, or unfortunately, depending
on one's point of view, the level of defense expenditures to
GDP is really quite low at this stage. In fact, only two years
ago it was the lowest since before World War II. So we do have
a $10 trillion plus economy and about $400 billion in defense
expenditures, which by no means is a small amount, but it is
not at this stage pressuring on other resources.
So the question is, should we artificially do something?
And I think not. I agree with you, I think the American people
are remarkable in that respect, and their willingness to
sacrifice for the Nation is what has really made us great, and
there will be occasions when those issues will re-arise. I do
not think, however, that in today's environment that there is
any trade-off here that makes any realistic sense.
We used to talk about tax surcharges or various other
things in order to finance abnormal expenditures. But that
doesn't exist as yet because the scale of our economy has
become so large that even as significant an effort as we are
embarked upon in the Middle East doesn't put the type of strain
which, for example, the Korean War put on our economy and later
Vietnam.
Mr. Lucas of Kentucky. With these record deficits as far as
the eye can see, as one of my colleagues said the other day,
which was pretty thought provoking, we are sending our young
men and women to war, and then if and when this is over--and
when it is over, I should say, they are going to come home and
their kids and their grandchildren can pick up and pay the
debt. It is kind of like double jeopardy.
Mr. Greenspan. Actually, it turns out that we do not really
have a fiscal problem of moment until we get beyond the end of
this decade largely because the underlying growth rate and the
structure of interest rates at this stage keep deficits even
under the President's program beyond these next two years in
areas where the rate of debt-to-GDP does not move up in any way
which suggests we are in an unstable system. But when you get
beyond this decade, when you get into 2011, 2012, the ratio of
debt-to-GDP begins to rise in a very worrisome manner. And as I
said in my prepared remarks, because we know that with almost
as high a degree of certainty as we can know anything in the
area of finance, that it would be far better, as indeed the
President's budget suggests, for us to prepare well in advance
and phase-in in a manner which does not require significant
discontinuities, because all of a sudden we are retiring a
large part of our population from productive endeavors into
retirement.
The Chairman. The gentleman's time has expired.
Could we--I am just trying--could we reset the clock here,
the shot clock?
The gentleman from the first State, Mr. Castle.
Mr. Castle. It takes me a long time to shoot here. Thank
you, Mr. Chairman.
It is always a pleasure to see you. You have already
answered the questions about dividend exclusion, and I think I
understand where you are coming from, that it makes a great
deal of sense but as stimulus from doing it now, this deficit
issues, et cetera, that kind of thing. You may not know the
answer to this first question, maybe we can go over it quickly.
But if you change the taxation on dividends to a finite number,
$1,000, $3,000, something of that nature, I mean, as soon as I
saw that Bill Gates was going to get, what, over $95 million of
Microsoft dividends, I thought that was in trouble as a tax
cut. But what if you changed it to a smaller number? Does
that--would that still have the effect of having corporations--
enough pressure on corporations to change the dividend policies
to improve the corporate aspects of this? Or does it have to be
a full exclusion, in your judgment? If you have given any
thought to that.
Mr. Greenspan. I must say to you, I would much prefer it be
done fully, because it makes the issue clear and it lets the
markets function in an effective way. I think you diminish the
effect of the power of what the elimination of the double
taxation does by doing it by capping, for example. Capping
usually undercuts the economic effect far more than the
presumed equity effect that it is employed to address tends to
do. So I must say that you diminish the effect.
Mr. Castle. And your preference on the corporate--deducting
on the corporate level versus the individual?
Mr. Greenspan. I would prefer that the deduction be at the
corporate level, because it immediately impacts the trade-off
between debt and equity. But over the long run I don't think it
really very much matters, because if you put the tax credit--or
you put the deduction at the investor level, it will not take
very long before the pressure to increase dividend payments,
and which this is all about, will occur. So whether it happens
directly at the corporate level or through pressure coming from
investors is more a matter of time than end result.
Mr. Castle. Let me turn to housing for a minute. As you
know, that is the one part of the economy that has held up, and
I am sure you have studied that to a great degree, or you can
call it a housing bubble. My first question is, and for those
of us fortunate to own the houses but also got into the stock
market a little bit late on tech stocks and essentially lost
our shirts, this is a matter of some comfort. But there is a
lot of discussion now by the pundits out there that we are
going to--that the bubble is about to burst and we are going to
have a housing problem. I was wondering if you have any
thoughts about that, and if you have any thoughts and what
would trigger that. I assume higher interest rates are one of
the things that could trigger that. But what are your thoughts
about the next few months, even few years, as far as the
housing circumstances are concerned?
Mr. Greenspan. Well, Congressman, one of the things which
is really quite impressive is that when you measure the level
of new construction additions of housing units, or housing
starts, including mobile home shipments, which are not all that
small, what you find is that it barely is in excess of the
aggregate increase in occupied households or dwellings or of
household formation. What that says is that after making
adjustment for change in vacancies, you get an implicit
demolition or reduction or replacement of the housing stock.
And what is really fascinating is how small that number is,
which suggests that we don't have a demand for housing which
could all of a sudden slip because, with immigration as it is,
having a fairly important impact on the number of new
households, net, which are formed and that number not being all
that far from the number of new homes that we create, we are
effectively not building up a glut of excess housing. And under
those conditions, one would presume, even though we have been
having some fairly strong gains in home prices, it is our
conclusion, without getting into the details of some of the
internals of the market place, that it is unlikely that we are
confronting a housing bubble.
Certainly the analogy to stock market bubbles is
inappropriate. Remember, one crucial thing is that if you sell
your house, you have to move. And if you sell your house, there
is also a very large transaction cost. That in and of itself
prevents the type of speculative housing demand which leads to
bubbles and contractions. So while it is not inconceivable--I
mean, there are conditions under which that can happen, it has
happened in other countries, and it has happened in small
geographic areas, but we have such a broad expanse in our
country that you cannot arbitrage housing demand in Portland,
Maine with Portland, Oregon. And that matters. It is not like
the stock market, where there is a single market and everybody
is trading with everybody else. The housing market is a highly
fragmentized metropolitan area-type market.
Mr. Castle. Thank you, Mr. Chairman. Based on that, I will
take my house off the market. I am just kidding, Mr. Chairman.
The Chairman. The gentleman's time has expired.
The gentleman from Kansas, Mr. Moore.
Mr. Moore. Thank you, Mr. Chairman.
Mr. Chairman, thank you for being here. Two years ago, we
had a $5.6 trillion surplus, and there was discussion around
Washington about the dangers of paying down the debt too soon.
We don't have that problem anymore. Isn't that correct? That is
really a concern we have now, is paying down the debt too soon.
Mr. Greenspan. We do not.
Mr. Moore. Okay. A lot of what we say in the discussion
that is here, I think as much as we would like to believe this
is science, a lot of this is kind of art, isn't it, trying to
figure out what is going to happen in the future, making
educated guesses?
Mr. Greenspan. If you are talking about the economy in
general----
Mr. Moore. Yes, sir.
Mr. Greenspan. ----and the decisions we make?
Mr. Moore. Yes, sir.
Mr. Greenspan. Yes. In fact, the one thing that we know
with a great deal of certainty is that the future is of
necessity unknown. There are very few things we know for
certain, like inventories cannot go below zero. We know
basically with some degree of certainty what the number of
people will be in the population, say, 20 years of age and
over, because they are already born and our experience with
immigration and death rates is reasonably well contained, so we
can make reasonably good forecasts.
When you are dealing with the broader issues, on what the
level of economic growth is going to be, what prices are going
to be, what markets are going to be, we are looking at a very
complex system. And it can only be handled conceptually if we
abstract from that complex system and create models which are
much simpler but which we presume will somehow reflect the
broader forces in the economy. And the reason why there are
differences amongst economists on forecasting is that this
process of abstracting for what is the appropriate model to
represent what is going on is, as you put it, I think, a state
of art, something like that.
Mr. Moore. You have been here several times in the 4 years
I have been in Congress, and you have stated consistently, Mr.
Greenspan, that one of your concerns was deficits and the
growing national debt, which is now approaching $6.4 trillion.
And I think you have been extremely consistent about that, and
in fact today you were consistent again, mentioning your
concern about deficits. I understand things aren't black and
white here and there is a lot of gray area in the middle and
that we need to try to sometimes negotiate our way through that
gray area and find some compromises, but I think one of the
facts that we can state here is, the President has projected
for next year, fiscal year 2004 and for the next year after
that $300-plus billion deficits and deficits beyond that as
well for a while. And I think the other fact that we can
certainly state is, as I understand it, the projected interest
payment on the national debt for next year is about $174
billion, which is a lot of money by anybody's standards. And I
guess my concern is, and you have said here, that in the short
run, in the short next few years maybe we are okay. But you
have raised a red flag, I think, about what happens beyond
2011, 2012, when the boomers start to retire. How do we
reconcile all of this, this $174 billion debt and what I call a
debt tax? Because we have to pay it every year as long as we
have a national debt. And I don't see that national debt
shrinking, and in fact I think it is increasing. So how do we
get ready and maneuver our way into this 2011, 2012, and be
able to take care of that when we are proposing more tax cuts
and some more spending?
I belong to the Blue Dog Coalition, and we try to be
consistent like you have, and saying one of the things we need
to practice is fiscal responsibility.
Mr. Greenspan. I would say there are two things that have
to be done. One is to put in place a process which enforces the
decision making into making choices. The----
Mr. Moore. May I interrupt just one minute? Because I would
like you to answer this, too, and this is my last question and
I will let you just finish then. You mention in your testimony
the permanent tax cuts and what that might do to future
deficits and debt. And I would like you, if you would, just to
touch on that as well, and I am sorry to interrupt you.
Mr. Greenspan. The first thing is to get a process in place
which has two aspects to it. One is the PAYGO and discretionary
caps which we have done over the last decade or so quite
successfully. Second, which would be helpful, is to add an
accrual system to our budgetary accounts, which will enable us
to be able to anticipate exactly how our obligations are
spinning out into cash requirements.
But having done that, all that does for us is tell us what
various alternative sets of choices there are. There is a limit
to what revenue resources are available which are tied to the
GDP. We have done extraordinarily well in that regard in that
we have had a major acceleration in productivity, and that has
raised the tax base quite considerably, which has enabled very
substantial expansion of expenditures which I don't think has
been terribly helpful, but the productivity has been crucial.
We can accelerate further, but it is not as though we are
back in 1990, when the productivity rate was 1 percent, well
below the historical average, and then we moved it up quite
appreciably in the latter part of the 1990s, and currently. So
our leverage to go higher is limited, and therefore we do have,
even under the most optimistic of assumptions, a limit to what
our resources are.
We do not, I might just say parenthetically, have the
capability of a country which is not at the cutting edge of
technology all of a sudden obtaining all sorts of technology
and having its productivity growth rate rise sharply, its tax
base rise sharply, and have a great fiscal capability. We are
at the cutting edge, and history tells us that there are limits
to how far we can go, and we must stretch them. In other words,
that is the reason I think flexibility is so important.
But this is where the issue of permanent comes in. As a
matter of principle, you cannot have permanent anything, either
tax levels or spending programs, because it is quite
conceivable that if you have either tax rates or entitlements,
it is quite possible that the net of those effects may be a
larger drain on our real resources than we actually have
available. Therefore, I have concluded--and I indicated in my
prepared remarks--that we do need triggers or sunset
legislation to enable us to adjust in the event that we find
that programs previously put in place, either a tax structure
or an expenditure program, which combined is in excess of our
capability.
So we need far superior fiscal mechanisms far beyond what
we used to deal with 40 years ago when everything--virtually
everything--was discretionary and all you had to do was make
annual appropriations and that was adequate. We now have
gravitated to the point where two-thirds of our system is
essentially nondiscretionary and on automatic pilot, and we
have to make certain that the fiscal vehicle doesn't run off
the road because it is a new ballgame. We cannot deal with it
the way we did in previous years.
The Chairman. The gentleman's time has expired.
The gentleman from California, Mr. Royce.
Mr. Royce. Thank you, Chairman Oxley.
Chairman Greenspan, welcome. I wanted to ask you about some
testimony you made in the Senate last year in April. You said
before the Senate Banking Committee that while deposit
insurance contributes to overall short-term financial stability
and protection of small depositors, it also induces higher
risk-taking, resulting in a misallocation of resources and
larger long-term financial imbalances that increase the need
for government supervision to protect the taxpayers' interests.
You concluded by saying: Any reforms to deposit insurance
should be aimed primarily at protecting the interest of the
economy overall and not just the profits or market shares of
particular businesses, and that it is unlikely that increased
coverage, even by indexing, would add measurably to the
stability of the banking system today.
I want to ask if your underlying position of skepticism
toward the necessity and net benefit of increasing deposit
insurance coverage levels has changed drastically, or do you
still view an increase in these levels as a solution in search
of a specific problem which would warrant creating the resource
misallocations and long-term imbalances that you see as
inevitably stemming from their increase? In other words, do you
believe that large increases in municipal and retirement
account coverage are warranted?
Mr. Greenspan. All I will say to you, Congressman, is I
stand by the testimony that I gave last year, and I have seen
nothing of which I am aware to alter the evaluation that we
have had with respect to it.
Mr. Royce. Well, I thank you for that answer, Chairman
Greenspan.
And I thank you, Mr. Chairman.
The Chairman. Does the gentleman yield back? The gentleman
yields back.
Mr. Royce. I yield back the balance of my time.
The Chairman. The gentleman from Texas, Mr. Hinojosa.
Mr. Hinojosa. Thank you, Mr. Chairman.
Thank you Chairman Greenspan for coming to visit with us. I
am not certain whether or not you are familiar with matricular
consulars. The matricular consular is a water-sealed photo
identification card issued by the Mexican government to Mexican
nationals that complete an application form in person at any of
the 47 Mexican consulate offices in the United States and
submit a certified copy of a birth certificate, present an
official picture I.D. issued by any Mexican or U.S. authority,
and show proof of residence in the consular's district by
presenting a phone, rent, or power bill. Are you familiar with
these matricula consulars?
Mr. Greenspan. I have read it in the newspapers, but that
is the extent of my knowledge.
Mr. Hinojosa. I come from an area that is trying to
increase trade with Mexico. We have millions of Mexican
nationals who are working in the United States and need to have
the opportunity to open a bank account. At least a third of
them do not have a bank account, and many of those individuals
are trying to send money back to their families and pay
exorbitant amounts to have that done. All this to say that they
need a healthy and intelligent alternative to payday lenders,
wire transfer services, and check cashers in general. And the
question is, should matricula consulars be considered valid
forms of ID for the purposes of opening a bank account. This
committee certainly has jurisdiction on that and would like to
have your thoughts on it.
Mr. Greenspan. Well, Congressman, I don't know enough about
the pros and cons of various different alternatives. But I
certainly will, if you would like, look into it.
Mr. Hinojosa. May I send something to you in writing and
see if maybe you and your staff could look into it? Because I
think we need to think out of the box. I think that we need to
make it easy for individuals, particularly Mexican nationals
with matricular consulars, to be able to open up bank accounts
instead of leaving money in places at home where it can be
stolen, or to violence because they are forced to carry such
large sums of money with them. I would like to include for the
record legislation and a press release on matricula consulars.
Mr. Greenspan. Well, why don't you send us a series of
questions, and we will try to respond expeditiously to them.
Mr. Hinojosa. I would be happy to do that. And a last
question. As you know, there was some debate last year in this
committee as to whether financial institutions, specifically
credit unions, should be allowed to be privately insured. And
over the past couple of years we have seen an increasing number
of credit unions drop their Federal insurance and opt for
private insurance. With the strength of all of the Federal
insured systems such as the Bank Insurance Fund, the Savings
Association Insurance Fund, and the National Credit Unions
Share Insurance Fund, is this something that we should be
concerned with at this time?
Mr. Greenspan. Well, I haven't been aware that the private
insurance has taken hold, because, as you recall, our
experience over the years with private insurance has not been
very impressive. And one of the reasons is that deposit
insurance is a very unusual sort of insurance which is very
difficult for a private insurer to successfully market without
exorbitantly high insurance premiums. And in the past, various
different types of insurers found that out to their dismay and
bankruptcy, I might say.
I am not aware of the extent to which it has re-emerged in
credit unions, but I certainly will be glad to look at it and
again respond to you quickly.
Mr. Hinojosa. Anything we can do to protect the depositors
as Congressmen is very important to me, and I would love to get
your thoughts on what we should be doing in this committee to
improve that, and I thank you for your response.
And thank you, Mr. Chairman.
The Chairman. The gentleman's time has expired. The
gentleman from Texas, Mr. Paul.
Mr. Paul. Thank you.
Welcome, Chairman Greenspan. I have a question relating to
the speech that you gave at the Economic Club in New York in
December, because you introduced your speech with three
paragraphs dealing with gold and monetary policy. And you made
some very pertinent points about gold, indicating that from the
year 1800 to 1929, the price levels were essentially stable
under gold. And after we got rid of the gold restraint on the
monetary authorities, prices have essentially increased by over
tenfold since that time. But you follow that by indicating that
inflation, when it was out of control in 1979, monetary policy
changed direction and they were able to take care of inflation,
more or less conquer inflation, and that now you are more or
less not concerned about inflation, that your concern really is
about deflation.
And it was interesting that you brought up the subject of
gold, of course, and there is a lot of speculation as to
exactly why you did this and what this means. But my question
deals with whether or not we should forget about inflation,
whether or not this has been dead and buried. Federal Reserve
credit for the last 3 months has gone up at the rate of over 28
percent. Inflation is a monetary event, so therefore we have
monetary inflation. The median CPI is almost going up at twice
the rate as the CPI, close to 4 percent. The Commodity Research
Bureau Index is going up, in the last 15 months over 35
percent. Gold is up 36 percent over 18 months or 15 months. Oil
is up 60 percent. So we have a lot of inflation. And we have
medical care costs skyrocketing, housing costs going up, the
cost of education going up, the cost of energy going up. And to
assume that we shouldn't be concerned about inflation, all we
can do now is print money. I would suggest that this is what we
have been doing for 3 years, the monetary authorities. You have
lowered the discount rate 12 times, and there is still no signs
of good economic growth. So when will you express a concern
about an inflationary recession? Because that to me seems like
our greatest threat, because that has existed before. We even
had a taste of it in the 1970s. We called it stagflation.
So I would like you to comment on that as well as follow up
on your comments on just why you might have brought up the
subject of gold at the New York speech.
Mr. Greenspan. First of all, we have not lessened our
concerns about inflation. Indeed, our general presumption is
that we seek stable prices, and stable prices mean no inflation
nor deflation.
The reason I raised the issue of gold is the fact that the
general wisdom during the period subsequent to the 1930s was
that as we moved to an essentially fiat money standard, that
there was no anchor to the general price level. And indeed,
what we subsequently observed is, as you point out, a very
marked increase in general price levels, indeed, around the
world as we removed ourselves from commodity standards, and
specifically gold.
I had always thought that the fiat money system was
chronically and inevitably an inflation vehicle, and indeed,
said so repeatedly. I have been quite surprised, and I must say
pleased, by the fact that central bankers have been able to
effectively simulate many of the characteristics of the gold
standard by constraining the degree of finance in a manner
which effectively has brought down general price levels.
The individual price levels to which you allude are
certainly correct. I might say the gold and the oil issue are
clearly war-related and not fundamental, but we still are
looking at the broadest measures of average inflation, and the
best statistics that we have still indicate very low inflation
with no evidence of an acceleration. That does not mean,
however, that we believe that inflation is somehow
inconceivable any time in the future. We will maintain a
considerable vigilance on the issue of inflation, and are
looking all the time for evidence of an emergence of inflation,
which at this particular time we do not see. But that does not
mean that we believe inflation is dead and that we need not be
concerned about it. We will continue to monitor the financial
system as best we can to make certain that we keep prices
stable. They are stable now, and we hope to be able to continue
that indefinitely into the future.
The Chairman. The gentleman's time has expired.
The gentleman from Missouri, Mr. Clay.
Mr. Clay. Thank you, Mr. Chairman.
Mr. Greenspan, thank you for being here. I am somewhat
confused by the reports that I read and would like some
clarification. You have opposed budget deficits that are to
continue for the long term, and you have had an equal distaste
for surpluses that you thought would compete in the private
markets. You supported the Bush 2001 tax cut, believing that it
would control budget surpluses that would continue for years.
Maybe the tax cut worked better than expected. We no longer
have projected surpluses; all we have now is deficits. The tax
cut contributed greatly to this adverse situation with the
budget deficits. Presently, without any budget surpluses in
sight, we have another tax cut proposed that will push deficits
even higher and extend them for untold numbers of years.
My question is, will you state your position on the
proposed $1.4 trillion Bush tax cut and inform the committee on
its ramifications on the deficit and the national debt?
Mr. Greenspan. Well, I have not commented on any of the
proposals in general except those which are specifically
economic issues, and I have stipulated that I would have hoped
that back in September we would have had a PAYGO system
continuing and that it would be continuing today. And I would
view any proposal that occurs with respect to either taxes or
expenditures be first applied through the PAYGO system.
We have been talking about taxes all along, and nobody has
mentioned spending. There is an awful lot in the way of
spending initiatives out there which, if we had PAYGO rules,
would require that they go through the same process to maintain
budget neutrality as best we can.
So as far as I am concerned, from the point of view of the
central bank, which is interested in the total financial system
and is very crucially interested in the level of federal debt
and the degree to which it preempts private debt issuance, that
is a major issue which is directly in areas which we find
important for monetary policy. The question of how you regulate
taxes versus expenditures and what expenditures you are having
to put forth is something which, as I mentioned before, is, in
my judgment, one of the crucial roles of the Congress, because
it is the only mechanism that we have which enables the will of
the people and their priorities to be constructed in our
various budgetary forms.
The President makes recommendations insofar as he can infer
what he thinks is the best for the American people. It is the
Congress which disposes with the obvious final resolution of
the decisionmaking by whether the President signs or vetoes a
bill, which you can then override. So that, to me, is a process
which we just ought to think about because we are abandoning
that.
Mr. Clay. Well, what do you think about the reversal in
fortunes of the U.S. budget as far as us two years ago having a
$5.5 trillion projected surplus and now looking at a projected
deficit that grows every day?
Mr. Greenspan. Well, one of the reasons that I was in favor
of a tax cut two years ago was to prevent the accumulation of
private assets by the Federal Government, which I think is a
very bad idea and still think it is a very bad idea. Remember,
at that time there were a number of tax cuts on the table. It
wasn't just the President's tax cut. The issue here is if the
President's tax cut didn't pass, another very significant tax
cut would have passed, which I would have thought would have
been fine, because it was needed to take the surplus off the
table, and I think clearly that happened.
What also happened was a major, 50 percent, decline in
stock prices which had the effect of very markedly reducing
revenues beyond what the Congressional Budget Office had
projected when they made that $5.6 trillion surplus projection.
They recognized that there were risks in those longer-term
forecasts. But in the event it came out to the extreme end of
probabilities, it was very unexpected by both the CBO and OMB
analysts.
The Chairman. The gentleman's time has expired.
The gentlelady from Illinois, Mrs. Biggert.
Mrs. Biggert. Thank you, Mr. Chairman.
Chairman Greenspan, I know that the Fed is very involved
with the ongoing Basel negotiations for new risk based capital
standards. And as you know, Chairman Oxley and Ranking Member
Frank are particularly concerned with the proposed new capital
standards for operational risks, and we are going to be looking
into this issue in depth in future hearings. And I don't want
to ask you to comment specifically on the operational risks
section of the rules, but could you please describe to us how
the Federal Reserve and other bank regulators are factoring
into their Basel positions such factors as the impact of the
rules on U.S. banks of all sizes and on the U.S. economy?
Mr. Greenspan. I can't comment on exactly how other
regulatory authorities will address the Basel II implications.
But from the point of view of the United States, for the vast
majority of American banks, Basel II is irrelevant. It is a
specific set of rules which endeavors to address the fact that
we are getting ever-increasingly large global types of
international institutions employing very sophisticated risk
evaluation techniques and models.
The vast majority of American banks, as you know, are
small, are not involved in any of this, and Basel I will, for
all practical purposes, continue to be the operative rules for
those banks. Even those banks, if they so choose, can apply
effectively for regulation under the Basel II procedures, which
essentially endeavor to capture the usefulness of these new
risk evaluation models, which improve immeasurably the
capability of large institutions to contain risk. But in so
doing, what the supervision must then turn to is a much more
sophisticated approach in evaluating how the risk models are
constructed, what the nature of supervision is, and what the
nature of disclosure is of these various different types of
institutions.
But I want to emphasize we are dealing with a handful of
American institutions, and unless and until individual, smaller
banks wish to do the same thing--which they can legally do--it
doesn't apply to them.
In one sense, you have to remember that a small commercial
bank has very considerable control over its risk management
systems. It knows every borrower, as I mentioned before, it
knows the history. It is able to get a far more sophisticated
evaluation of any individual loan than a very large commercial
bank using these mathematical techniques to make a judgment on
a loan. I would much prefer to have the small bank appraisal,
because you are really looking at the core of what is being
done. Because that is not feasible with a very large
institution, you have to fall back on more automated types of
risk evaluation procedures, which is what they are doing. But
there is no way that in any individual loan the quality of
judgment that is made on whether that is a good loan or a bad
loan can be done better mechanically in the way that these risk
management systems do than a small banker fully familiar with
the credit history of a particular borrower and knowing what
his business is all about can do.
Ms. Biggert. So you don't think that a medium-sized bank or
a small bank will think that these big banks are getting so
much benefit that they either need to consolidate with another
bank or that they would need to just voluntarily opt-in to
doing the same thing?
Mr. Greenspan. I think not. I mean, if indeed you could
formalize a credit evaluation through the mathematical
techniques which we now have available, which is superior to
the capability of an individual banker in a small town making a
judgment on the loan, then, yes, I would agree with what you
are saying. But that is not what the issue is.
The Chairman. The gentlelady's time has expired.
The gentleman from Massachusetts, Mr. Frank.
Mr. Frank. Mr. Greenspan, on the proposal for a tax cut now
of $674 billion for the next period, the current tax cut before
us, am I correct your position is that it should not be adopted
outside of the PAYGO rules, specifically unless you were in the
situation where it would take 60 votes in the Senate? Is that a
correct understanding of your position?
Mr. Greenspan. I would say that I am somewhat distressed
that the PAYGO rules were allowed to expire.
Mr. Frank. So you would not have us adopt a major piece of
either the budget or anything else, including a tax cut, until
we have reinstated PAYGO?
Mr. Greenspan. Tax cut or expenditure program. I would
prefer that that had continued and hopefully would put in place
before----
Mr. Frank. It would take 60 votes. So we should not do
either expenditure or tax cut decisions this year until they
get back to a 60-vote rule in the Senate?
Mr. Greenspan. Well, the 60-vote rule still occurs I think
through April, as I recall.
Mr. Frank. Well, but you----
Mr. Greenspan. Yes, the statement that you----
Mr. Frank. Don't be the Senate Parliamentarian. Be the
Chairman of the Fed. In principle, what do you think?
Mr. Greenspan. The answer is yes.
Mr. Frank. Good. Now, that would mean then that any new
significant expenditure or new significant tax cut would have
to be offset, correct?
Mr. Greenspan. Yes, unless obviously emergency issues come
up or other various forms of exemption under the procedures
that have been involved.
Mr. Frank. Now, the question I have is this about the $674
billion. You said that the tax cut in 2001 seemed reasonable to
you at that level. And what then happened was the economy,
picking the stock market, went to the low end of everybody's
projection. Is that what you said?
Mr. Greenspan. That is correct.
Mr. Frank. If you were back in 2001 and you knew that the
tax--that the projections were to go to the low end, would that
have affected the judgment? I mean, it is not anybody's fault.
But would that have affected the judgment?
Mr. Greenspan. I frankly don't know.
Mr. Frank. All right. But then let me ask you this
question. Having said that clearly the projection of the
revenues went to the low end, the tax cut cost us more than we
thought it was going to in some ways, doesn't that argue
against a further large tax cut now? I mean, having
miscalculated doesn't mean we are going to miscalculate again,
but if the fiscal picture is considerably worse than people
reasonably could have thought it would be, where is the
argument for now a further tax cut?
Mr. Greenspan. Not necessarily. Because the types of tax
cuts we are talking about--let me stay with the double taxation
of dividends.
Mr. Frank. No. I want the whole package.
Mr. Greenspan. I will come to the whole----
Mr. Frank. I only have 5 minutes. Come on.
Mr. Greenspan. I understand that. The principle I am trying
to raise is that you need to make judgments when you are
looking at long-term tax and spending policy; what, for
example, the elements of the tax policy do to the GDP and
therefore the revenue-raising capacity of the economy. They are
not all equal. And I happen to think that the types of programs
which have been brought forth which are in the President's
program are of the type of----
Mr. Frank. I am disappointed. I want to be very serious
here.
Mr. Greenspan. Why are you disappointed? I have----
Mr. Frank. Because I think what has happened is this. I
think when you restated yesterday, quite honestly, your long-
held positions on the deficit, and when you disagreed with
those who pooh-poohed deficits, that got presented in this
morning's papers as being critical of the proposal that the
President put forward. And my strong impression today is that
you are seeking now to find the maximum points of agreement to
diminish the impression created that your longstanding
positions would be somewhat negative. You will have a chance to
answer. I just want to throw in one----
Mr. Greenspan. But may I respond to that?
Mr. Frank. I just want to finish. Let me finish the
question.
Mr. Greenspan. Sure.
Mr. Frank. And then I am through. You keep talking, and
this is part of the problem. You say, well, we have no problem
until 2010 or 2011, and then we have a problem. I mean, that is
probably what you are saying. But the world is not divided into
two separate wholes. 2008 leads to 2009 and 2010 and 2011. In
other words, you are saying Social Security and Medicare will
be serious problems for us 10 years from now, but it is
irrelevant if we increase deficits between now and then. The
more we increase deficits between now and then, the more people
who, out of a conservative ideology, want to put pressure to
reduce Social Security and Medicare will be able to argue. And
I am afraid that is the position I infer from you.
Mr. Greenspan. No. The issue basically is this, that if you
are going to start with a question of having an aggregate
capacity, a revenue capacity in which to fit tax cuts and
expenditure increases, then you are dealing with an issue of
making choices amongst various different elements if the total
of all of the programs you are dealing with exceed, as they
always do, the aggregate amount of revenue capacity in the
system. What I am saying to you is this: The way you formulated
what is attributed to me is incomplete. I am not saying that--
let me finish.
Mr. Frank. Incomplete, but not incorrect.
Mr. Greenspan. Well, let me state it, and I don't know
whether or not it is incorrect. I am stating to you the
following: I am saying you cannot get an effectively full
evaluation of whether you should be cutting taxes or making
expenditure programs without knowing the impact of that on the
revenue base. I don't know what the impact is, but I am
basically saying that to make a full judgment about any
particular proposal, you need to have a judgment one way or the
other of the extent to which it affects the tax base. And, as I
said earlier this morning, in my judgment; the elimination of
the double taxation of dividends will have a significant
although admittedly indeterminate impact on the flexibility of
this economy, its growth rate, and therefore its degree of
revenue. Not including that in your evaluation of making a
judgment of how to balance various elements of taxes and
spending I do think is incomplete.
The Chairman. The gentleman's time has expired.
The gentleman from Texas, Mr. Hensarling.
Mr. Hensarling. Thank you, Mr. Chairman.
And Chairman Greenspan, thank you for your testimony today.
As part of your testimony, your prepared remarks, I believe you
said that if spending growth were to outpace nominal GDP,
maintaining budget balance would necessitate progressively
higher tax rates that would eventually inhibit the growth in
the revenue base on which those rates are imposed.
My question, Mr. Chairman, is, isn't that the recent
history of our country if you look back 5, 10, 15 or 20 years,
that indeed the growth of government has outpaced the growth in
GDP? And if that is true, and this trend continues unabated,
given that the average American family has a 40 percent tax
burden, almost at its historic high between its local, State,
and Federal component, I am curious about your opinion on what
the long-term impact will be on our economy and on family
income.
Mr. Greenspan. Well, Congressman, we are fortunate in the
sense that currently the level of debt to the public is at a
reasonably low level historically. That is, we came down quite
considerably from higher levels and we are now in the low-to
mid-30 percent of debt to the public as a percent of the GDP.
So we are in the position where the debt load as represented by
the amount of debt plus interest--interest being low because
interest rates are low--is a great burden on the American
public relative to what it has been in previous periods. So it
is not--it is not a progression of increasing percents of
government expenditures to GDP, because in fact the trend has
been largely flat.
As I stipulated in my prepared remarks, there has been a
big shift from discretionary spending to nondiscretionary
spending, but the numbers have stayed in the area of 18, 20
percent, 21 percent on occasion. So the evidence is that we
have not been having government expenditures growing faster
than the GDP. It is true that we have had nondefense
expenditures growing faster than the GDP and especially
nondefense discretionary. But overall the decline in defense
expenditures has opened up a much larger capacity for the use
of federal revenues for nondefense purposes than we have had in
the past.
Mr. Hensarling. You spoke in your testimony about the
desirability of certain budget constraints such as the PAYGO
rule sunset provisions. In the President's economic growth
package that he has proposed as part of that package is the
goal of restraining the growth of government spending to no
more than the growth in family income. Let us use for the
moment--let us have an overactive imagination and believe that
this Congress could actually achieve that goal of restraining
government spending to the growth in family income. Do you have
a thought of what the long-term impact on the economy would be
if we could achieve that budget discipline?
Mr. Greenspan. Well, strangely enough, we actually have
done that in the sense of the aggregate expenditure because, as
I just mentioned before, of the very dramatic decline in
defense expenditures, going back say 50 years, we have been
able to keep aggregate Federal Government expenditures constant
relative to incomes. However, that is going to change. It is
inevitably going to change because of the fact, as I mentioned
before, with defense as low as it gets, it can't go any lower.
And with the retirees after 2010 or 2012, we have a very
substantial projected increase in nondefense expenditures.
Mr. Hensarling. As we see different policies to promote
economic growth and obviously a rollback in marginal rates as
part of the President's program, we can debate what might
happen in the future, but if we look to the past, hasn't the
history of our Nation been, in the 1980s, the 1960s and 1920s,
that indeed when we roll back these rates that Government
revenue and GDP revenue grew?
Mr. Greenspan. Would you repeat that again? I didn't quite
get it.
Mr. Hensarling. Isn't the history of our Nation when we
roll back marginal rates, as we did in the 1980s, in the 1960s
and the 1920s, that revenues to the government actually
increased and that GDP grew?
Mr. Greenspan. Let us put it this way. It depends on the
conditions. It is very rare that you can reduce a tax rate and
end up with more revenue. It happens on occasion, but it is not
the general case, and I don't think you could argue that in the
aggregate sense in any of those particular episodes that it
invariably happened. But it is certainly the case that if you
have various taxes which inhibit growth and inhibit capital, it
is quite possible that reducing those could create a rise in
the tax base greater than the cut in taxes and therefore you
would get more revenues. That is not the general case, and I
think each case has got to be evaluated on its own.
The Chairman. Gentleman's time has expired. The gentleman
from Pennsylvania, Mr. Kanjorski.
Mr. Kanjorski. Thank you, Mr. Chairman. Mr. Chairman, the
President in his State of the Union Address just several days
ago said we will not pass along our problems to other
Congresses, other Presidents or other generations, and that was
in the very early part of his speech. And quite frankly, when I
heard him say that, I became quite pleased with his intentions
as reflected by that statement. But then as he went on to
develop his plan for America in his State of the Union Address,
and particularly with his tax policies, it seems to me that the
President is saying something very interesting. He is saying
that the Congress should reduce this double taxation on
dividends. And I for one can understand why people would
support reduction of any taxes that are possible. And if these
are economically retarding-type of taxes to our economy, as
your recent answer seemed to indicate, that these are the types
of things we can reform or tailor to stimulate the economy
long-term but with the intention of not doing away with the
revenue source and get out of balance with the budget
considerations. But the President's budget reflects the fact
that, yes, he wants to make this reduction in dividend taxes
and make it up in no other side so that we just basically
increase the deficit accordingly. And for a relatively long
period of time, certainly as long as the budget projects, the
budget will be in deficit and major deficit.
And that brings to my mind--I don't know how long the
President can continue to serve, but I think only 6 more years,
and I do not see a balanced budget in his projections within
those 6 years. This Congress only serves for 2 years, and
clearly the President recognizes there will be major deficits
for the remaining 2 years. And as we look at a minimum of $300
billion deficit and I think closer probably to $500 billion if
you consider the fact that we are taking all of the Social
Security overpayment and misdirecting it to operational
expenses and not accounting for the expenses of the war, which
will be at least $50 billion to $100 billion, I think we can
realistically conclude that at the end of this coming year and
next year we will be in excess of $500 billion of real deficit.
And then our Congress will be over and we will be halfway, or
at the end of the President's first term. If he doesn't go on
to a second term, there will be a new President and passing
that tremendous debt increase on to next generations.
So I have concluded in my own mind, and I am wondering what
your conclusion is--wasn't the State of the Union Address and
this statement by the President of his policy a rather
disingenuous view to put to the American people that you can
have this tax cut now, and as Mr. Frank said, we can fight two
wars and give you the third tax cut and there aren't any long-
term economic consequences to the economy as a whole and to the
fiscal responsibility of the action of the Federal Government
as a whole over the next decade or two? What is your position
on that?
Mr. Greenspan. Congressman, it depends on what the
President does next because there is an extraordinarily
accurate, in my view, evaluation of the long-term budget
outlook in the President's budget, and there is the issue of
the sustainability of the budget in the budget document with a
fairly sophisticated analysis. So I read the combination of the
President's State of the Union plus what is in the President's
budget as that there are new policies to come which effectively
reconcile the issue that you are concerned about. That is the
way I would read it.
Mr. Kanjorski. Well, you said that we can get control of
the fiscal responsibility of the country and the budgetary
positions by either not cutting revenue or counterbalancing a
loss revenue in the dividend reduction or we can cut spending,
and I would tend to think that the emphasis of the President's
budget is cutting the expenditure side. But don't you think it
is both politically and intellectually disingenuous for this
administration and the majority of this Congress to fail now to
tell the American people the consequences of cutting these
expenditures in order to eventually get to a balanced budget?
How can he say we are going to spend more money on education,
on health, on the military and all these other expenditures and
not be honest telling the American people so that they have a
decision process to make? If they want to do away with the
double taxation of dividends, they have to be willing to give
up the solution of the health problems, the education problems,
the military problems of this country.
Mr. Greenspan. I can't speak for the President and won't.
My impression, basically, is that many of these issues are
discussed in some detail in the budget. And I presume that when
you see that sort of thing in budgets, it is usually indicating
what the thrust of an administration's fiscal policy is. And I
would assume that he will make it clear as the time goes on. I
have no way of knowing what specifically in each case the
particular programs direct to, but he does--there is no doubt
in my mind, reading through the budget in full detail, that
there is full awareness of all of the various concerns that you
raise in the budget document itself.
Mrs. Kelly. [Presiding.] Mr. Garrett?
Mr. Garrett. Thank you, and I appreciate the opportunity to
be with you and ask you a couple of questions today and I will
just have two short ones along the lines with regard to the
issues on the deficit. We had the opportunity this past week to
have some administration officials come before the Budget
Committee, and I think they were saying things generally along
the line you were when concerns were raised as we look forward
on the deficit. And one of the responses we had was similar to
what you mentioned just about 5 minutes ago with the comment
that things have to be put into perspective as far as the
deficit as a percentage of the GDP. But the question that
followed on that was, then why was there as much of a concern
just 6 or 7 years ago back in the mid-1990s on the deficit if
as a percentage of the GDP the deficit was around at the 2.5
percent level at the same time back then? What is the
difference in the factors? Since we are staying constant, as
you said, as a percentage, why we should be more concerned back
then than we are now?
Mr. Greenspan. The crucial issue really gets down to simple
arithmetic. If you have debt as a ratio to GDP, say, in the
mid-30 percent, which is where it is now, and you have average
interest rates as a process, you will find that arithmetically
if the ratio of the deficit to the GDP is about 2 percent, that
is equivalent to the ratio of debt-to-GDP being constant. As
you can see, if the budget is in balance and GDP is rising and
the debt by definition is not changing, the ratio of debt-to-
GDP will go down. Put it another way, for the debt-to-GDP ratio
to be stable, it would be consistent with a modest deficit as a
percent of the GDP.
So the question isn't whether or not in the past we were
concerned or not concerned. There were many times in the past
when we weren't concerned when we should have been concerned.
It is really a question of moving forward in time. If you take
the President's program as it stands, you have modest deficits
after the next two years, which are consistent with a level of
debt-to-GDP, which is not significantly different from where it
is now. But as we go beyond the turn of the decade,
expenditures rise quite significantly and the ratio of debt-to-
GDP begins to move up. And when that begins to happen, you have
an unstable system with consequences which are difficult to
judge, and it is that period which has to be addressed.
And one of the reasons I have said it is none too soon to
start thinking about the path of how we get there is that it is
a fairly significant change that occurs as the baby boomers
retire.
Mr. Garrett. Thank you very much, and the other portion of
the question is the spending side, which I guess you alluded to
a couple of minutes ago. You were saying we have sort of
bottomed out on the defense side and then leaving a smaller
percentage as far as the discretionary side, and we are within
the 4 percent figure that we mentioned over here.
Mr. Greenspan. What I am basically saying is the fact that
over the past 50 years the ratio of expenditures-to-GDP has
been constant, has masked a trend towards nondefense
expenditures as a percent of GDP which has actually been rising
quite significantly. And the problem was, even without
September 11, we probably would have found that the ratio of
spending-to-GDP was going to start to rise, not a great deal,
but at least start to rise. And the trend is changing because
the defense budget has gone from a fairly significant percent
of GDP down to 3 or 4 percent.
Mr. Garrett. Where we should be concerned is on the
mandatory side, especially in light of the administration's
proposal where we are significantly adding on to that portion
of the budget?
Mr. Greenspan. Yes, we should be concerned about anything
which is mandatory.
Mr. Garrett. Thank you.
Mrs. Kelly. Mr. Sanders?
Mr. Sanders. Thank you, Madam Chairman, and thank you very
much, Chairman Greenspan, and I look forward to working with
you as the ranking Member of the Financial Institution
Subcommittee.
Mr. Greenspan, I always enjoy your presentation, because
frankly I wonder what world you live in. It is not a world in
which you engage with working people who are struggling harder
than ever to keep their heads above water, with workers who
have lost their jobs, with elderly people who can't afford
prescription drugs. And maybe, and I say this respectfully, you
might want to stop going to all the black tie dinners and
hanging out with the CEOs and come and talk to the middle class
working families of this country, because I think if you do
that you are going to find that your world view and your
economic approach is dead wrong and has caused devastating
impacts for millions of people.
Mr. Greenspan, you have been pushing for years for
unfettered free trade, for energy deregulation, which has given
us Enron, for huge tax breaks for the richest people in this
country. You have opposed any increase in the minimum wage, and
in fact the last time you were here you told us you didn't even
believe in a minimum wage. Your policies call for massive
cutbacks in government programs, such as Social Security,
Medicare, Medicaid, veterans needs, affordable housing and
education. In my view, your policies have been one of the
reasons why the middle class in this country is being
decimated, why more and more Americans are being pauperized and
why the gap between the rich and poor is growing wider. In my
view, you owe millions of Americans who have lost their jobs or
who today are working longer hours for low wages an apology,
and it is high time you rethought your extreme right wing
ideology. In your position, you are supposed to represent all
Americans and not just the wealthy and the CEOs of large
corporations.
Mr. Greenspan, let me introduce you to some reality. Since
January, 2001, 1.7 million jobs have been lost and we have 8.5
million Americans today who are unemployed. In 2001, 1.3
million Americans slipped below the official poverty line. Over
the last few years, trillions of dollars have been lost on the
stock market and millions of workers today in this country have
got to work beyond the time they originally planned to retire.
In the last 2 years the U.S. has had the highest rate of
bankruptcy cases in history. In 2001, the number of Americans
without health insurance rose by 1.4 million, and that number
continues to rise. Today as a result of the policies being
proposed by the Bush administration, it is likely that millions
of workers are going to see a significant reduction in the
pensions that they had been promised by their employers.
Now you in your testimony talked about expanding, quote-
unquote, the liberalized global economy, which you call an
ongoing success. This year we are going to have a $400 billion
trade deficit, including a $100 billion trade deficit with
China. In the last 2 years we have lost 2 million decent paying
manufacturing jobs. At 16.5 million manufacturing jobs, we are
at the lowest ebb position we have been in in 40 years, and you
tell us that that is an ongoing success. If we have more
successes like that, we are not going to have any manufacturing
jobs in America.
Mr. Greenspan, as you know, we have the most unfair
distribution of wealth and income of any industrialized
country. The richest 1 percent of the population own more
wealth than the bottom 90 percent, and yet you here today tell
us that you think it is a good idea to provide more tax breaks
to the wealthiest people by doing away with the tax on
dividends. The fact is that under that proposal people earning
more than a million dollars would get an average tax break of
$27,000 a year while those making less than $75,000 will get an
average break of $42. Why do you advocate tax breaks for the
richest people when we already have the greatest gap between
the rich and poor of any industrialized country?
And what particularly disturbed me about your testimony is
that at a time when millions of elderly people today cannot
afford prescription drugs, can't afford to heat their homes,
you are advocating by monkeying with the CPI major cuts not
only for our seniors but for our veterans.
Mrs. Kelly. Mr. Sanders, your time is up.
Mr. Sanders. Can you respond why you want to cut back on
your Social Security?
Mrs. Kelly. Mr. Sanders, your time is up.
Mr. Sanders. I would like the same time.
Mrs. Kelly. Mr. Sanders, we have been working with the 5-
minute rule. Everyone knew about that. Mr. Greenspan, if you
would like to answer that question.
Mr. Greenspan. I don't wish to cut back on Social Security,
I just merely wish to enforce the law. The law stipulates that
the cost-of-living adjustment is what should be applied to all
tax and certain social insurance programs. I am stipulating, as
I did in my remarks, that the new chain-weighted Consumer Price
Index is a far superior means of measuring the cost of living.
Mr. Sanders. Because it would cut back?
Mr. Greenspan. Do you wish----
Mrs. Kelly. Mr. Sanders, please do not interrupt Mr.
Greenspan.
Mr. Greenspan. If you wish to increase Social Security, you
can do so through statute. I am merely raising a technical
question of trying to adjust to how the statute that you have
passed is best administered.
Mrs. Kelly. Mr. Murphy.
Mr. Murphy. Thank you, Madam Chairman, and thank you,
Chairman Greenspan. First a question on check truncation
issues. The committee intends to consider legislation this year
to modernize the check processing system. As you know,
legislation known as Check 21 is based upon a proposal the
Federal Reserve originally submitted to Congress in December
2001. Can you share with the committee your perspective on the
legislation and what savings in operational efficiencies do you
expect to flow from its enhancement?
Mr. Greenspan. Congressman, we strongly support check
truncation because we think it would very significantly improve
the process of payments within our financial system. You may
recall that we had some fairly significant problems right after
September 11 as a consequence of air traffic problems and the
ability to move checks through the system in an adequate
manner. Had we had check truncation at that time, it would have
made it a far easier problem to resolve. We think it is a
significant advance in our payment system and we hope that the
Congress would address that issue as expeditiously as you can.
Mr. Murphy. Thank you. Another category has to do with the
impact of the economy upon the States. A number of States are
facing fiscal problems and talking among themselves about
cutbacks in services and spending as well as raising taxes.
What are your views on these fiscal problems of the States and
how do you see that impacting the economy as a whole?
Mr. Greenspan. Well, as many people have noted, the
substantial deficits in the general reserve of states are quite
significant. And with the exception of Vermont, as I recall,
all states are required to maintain a balanced budget, which
means essentially that a substantial amount of either
expenditure cuts or tax increases are taking place within the
states so that by the end of the fiscal year, June 30 in most
cases, the law has been adhered to. The question of endeavoring
to be of assistance to the States has to recognize that any aid
that can come from the Federal Government would have to come
not for the current fiscal year because there is no way to get
monies that quickly, but for subsequent years. And so the
question is some of the states by the actions they will be
taking in this fiscal year will, with very stringent changes,
have successfully solved their problem so that when you go to
fiscal 2004 and beyond they may no longer have a problem which
would need to be addressed with federal funds.
Doubtless some states, even if they bring their general
fund to balance in the current fiscal year, nonetheless have
problems in 2004 and beyond, in which case then the question of
federal transfers to those states is on the table. And again,
we are looking at a PAYGO issue, and I think appropriately so.
So it is not an issue which can be readily resolved, as I see
it, currently, because so much will have already taken place
before the first dollar can be transferred to the states, and
by then it probably would be too late unless they wished to
reverse tax increases or programs they have canceled.
Mr. Murphy. One final quick question. Some have said that
if we do a dividend tax cut that it would make States' bonds
look less attractive and might have some impact upon raising
those interest rates. Could you comment about what your
thoughts are about that?
Mr. Greenspan. I think that is probably accurate. The size
is difficult to judge. As I said in a similar question in the
Senate yesterday, it raises a very interesting question as to
whether or not the double taxation of dividends has effectively
been subsidizing municipal finance in the sense of giving them
a fairly improved status in the financial markets, in which
case you would argue the elimination is taking away the
subsidy. The other side is that if we are trying to maintain
the state and local financial systems, the elimination of the
double taxation does have an impact of a negative sort. I am
not sure it is very large, but I don't know because I have
never seen an actual realistic evaluation to know how
significant it is. I think it is correct that it has some
effect, but whether it is minor or significant I frankly do not
know.
Mrs. Kelly. Mrs. Maloney.
Mrs. Maloney. Thank you, Madam Chairwoman, and thank you,
Chairman Greenspan, for your testimony today. I would like to
follow up on the gentleman's question on the impact of the
administration's economic plan on the States. And I have an
analysis that New York State Comptroller Alan Hevesi has done
on the impact and I request permission to place it into the
record.
Mrs. Kelly. So moved.
[The following information can be found on page 84 in the
appendix.]
Mrs. Maloney. In his analysis he describes the
administration's dividend plan more or less as the gift that
keeps on taking, and he estimates or believes that it will
reduce New York State tax revenue and increase borrowing costs
in New York State alone by $551 million this year and by $9
billion over the next 10 years. He estimates that the impact on
New York City will be $160 million in 2003 and $3.3 billion
over the next 10 years.
In your statement earlier, you mentioned that some of these
States would solve their problems this year, but clearly the
only way they can solve these problems is to cut back on
programs that are particularly important to lower income people
in a bad economy or increase taxes. And nationally in his
estimates he put forward in his letter to the New York
delegation, he estimates that the cumulative State deficits are
now between $60 billion and $85 billion. And my question is, do
you think the impact of the administration's plan on State
budgets both from the revenue side and on the borrowing costs,
because tax favored municipal bonds could lose some of their
appeal, this is really going to place a tremendous burden on
our States in a time when they are confronting tremendous
challenges?
Mr. Greenspan. Congresswoman, unless I am mistaken, the
reason why the loss of revenues occurs in the states is because
they use adjusted federal gross income as the base to apply the
state income tax rate. It strikes me that perhaps what some of
the states may want to do is alter that. In other words, what
is occurring in the process is a reduction in state taxes
because there is a lesser amount of income which occurs because
it is tax free. So it may very well be that the solution to
this is for the states to recognize that they don't wish to cut
taxes and they can alter the rates accordingly or alter the
employment of the adjusted gross income that is applied on the
federal form in a manner which doesn't get this flow-over
effect. And I would suspect that a number of states are going
to do that.
Mrs. Maloney. Well, they can, but still overall as the
Comptroller points out, it is a tremendous impact on State
budgets when they are facing huge budget gaps.
Getting back to the deficits that are galloping forth, are
you concerned that the increases in the deficits will push up
interest rates and increase mortgage, car and credit card rates
for working families?
Mr. Greenspan. I am, Congresswoman. I think that what has
been an extraordinarily important prop to this economy through
its very stressful two or three years has been low mortgage
interest rates, which have not only maintained the fairly
pronounced level of residential construction, but have also, in
conjunction with the rise in the prices of homes, facilitated a
fairly substantial extraction of equity from homes, which has
been the means of financing the fairly large part of consumer
expenditures over the years. Clearly if mortgage interest rates
were to move up in any material way I think we would find that
that would have a marked impact on, obviously, house turnover,
which is a major factor in extraction of equity, and clearly on
refinancings and the cash-outs which are associated with them.
So, yes, I am concerned about long-term interest rates
specifically, but mortgage rates in particular, rising.
Mrs. Maloney. And we seem to be going in that direction.
Mrs. Kelly. Excuse me, but your time is up, Mrs. Maloney.
It appears to be my turn to ask questions, Mr. Greenspan, so I
am going to ask you a question that says--tells you I am
reintroducing my business checking legislation in this Congress
and I expect the House is going to pass that fairly quickly. I
take it that the Fed is still behind in supporting my
legislation?
Mr. Greenspan. We certainly are.
Mrs. Kelly. It is my understanding that one of the issues
that has held up the legislation in the Senate was the intent
of some of the Members to add language to the bill to give
State chartered industrial loan companies the ability to also
pay interest on demand accounts. We hear arguments that these
institutions are well regulated by the State and Federal
Deposit Insurance Corporation. There has been a great deal of
debate on this point, but I want to get it on the record.
Mr. Chairman, why should we oppose efforts to allow the
industrial loan companies to pay interest on NOW accounts held
by the businesses?
Mr. Greenspan. Basically because if you make that shift,
they become full commercial banks, and because of their
exemption under the Bank Holding Company Act they can be
purchased by commercial enterprises. Now it has been my
impression that the purpose of Gramm-Leach-Bliley was to limit
the extent of the mixing of banking and commerce and to draw a
line in a specific way, which has been very difficult. At the
moment we don't have that problem with industrial loan
companies who are doing reasonably well, but we would have if
that amendment came into place and it would significantly alter
the intention of Gramm-Leach-Bliley. So it has been our
impression that it is not appropriate for the legislation going
forward.
Mrs. Kelly. I want to make sure that I am clear about this.
If an industrial loan company in a State like Utah is given the
ability to pay interest on NOW accounts that are held by
businesses in the State of Utah, why does the Fed oppose the
State's intent?
Mr. Greenspan. Why don't I ask our General Counsel to--why
don't you come up here--give you a legal--make sure he gets it
right. This is Virgil Mattingly, our General Counsel.
Mrs. Kelly. Excuse me. Sir, would you please just give us
your name for the record?
Mr. Mattingly. My name is Virgil Mattingly. I am General
Counsel to the Federal Reserve, and I think the Chairman has
accurately answered the question. Right now the only federal
restriction on industrial loan companies is on their ability to
offer accounts that function as demand deposits to commercial
entities. If they were to be given the authority to offer
business NOWs or checking accounts to corporations, they would
have all of the powers of an insured bank. In other words, they
would be a substitute for an insured bank. Industrial loan
companies have an exemption from the Bank Holding Company Act,
which means they can be acquired by commercial entities, and
several in Utah are owned by commercial entities. And as the
Chairman indicated, the mixing of banking and commerce would be
inconsistent with the Gramm-Leach-Bliley Act, which was
recently passed by a previous Congress.
Mrs. Kelly. Thank you very much. Mr. Greenspan, I was
interested in reading your testimony in front of the Senate
yesterday, especially the line where you said the ability of
economists to assess the effects of tax and spending programs
is hindered by an incomplete understanding of the forces
influencing the economy. Nice statement. And in light of what
Mr. Sanders said, I would like to invite you to come and take a
look at what the forces of the economy have done to New York.
New York State has not completely recovered from 9/11. I know
that you know where my district is. I know you have come to my
district. I invite you back so you can take a look and perhaps
meet with some of the people. I hope you will answer in the
affirmative, but I am not going to put you on the spot and
force you to answer that question now.
With that I yield the rest of my time and call on Mr.
Inslee.
Mr. Inslee. Thank you. Mr. Chairman, I always enjoy your
presentation for different reasons than my friend Bernie
Sanders, and the reason I enjoy it is because you have been
consistent through time and through administrations in
reminding us of the importance of fiscal discipline and
pointing out the dangers to the United States economy, in jobs,
in interest rates of these deficits. And I want to tell you
that your continued reminding of us is very consistent with
what people are telling me back home.
I represent a district just north of Seattle, and I have to
tell you what I hear on the streets and in the grocery stores
right now. People believe that there is a certain madness that
has descended on Washington, D.C., and they are very, very
angry, and what they are angry about is that they have seen us
work through these deficits during the 1990s that they were
continually concerned about, saw us make some progress on that,
and now seen us have a $7 trillion swing from projections of
surpluses in February to now these big multi-billion dollar
deficits, and they are mad about it for three reasons.
One, they understand the baby boom phenomenon. They
understand this intrinsic gut level belief that we should be
saving for the future when the baby boomers retire. Two, they
understand what you have said, they like low interest rates and
they understand it doesn't do any good to have big tax cuts or
big spending if it results in higher interest rates on their
homes and their cars. And three, they are starting to hear
about the debt tax. They are starting to hear about the fact
that 12 or 14 percent of all the money they pay in income taxes
go to service the Federal debt. They don't like it. They think
that is waste, fraud and abuse. So they really appreciate the
message you have of fiscal discipline and responsibility. But I
want to ask, the reason they are angry is they think a madness
is descending because others have fallen off the fiscal
discipline wagon here, and others have changed their tune.
I want to read a quote from John Snow, November 13, 1995.
It says a balanced Federal budget is the best choice to ensure
a bright future for the Nation's economy. That was then. Now we
hear representatives of the administration, a quote from Mitch
Daniels, January this year, said we have returned to an era of
deficits, but we ought not to hyperventilate about this issue.
If Mr. Daniels was here I would tell him people are breathing
hard, not hyperventilating, and they are very angry about this.
And I guess the question I have is, is there any economic
justification for people who for decades have been telling
America that they believe in balanced budgets, for decades
telling us we had to have fiscal responsibility, for years been
hectoring members of the other political party about this
issue, is there any economic reason that has changed those
fundamental characteristics of Federal deficits?
Mr. Greenspan. Congressman, there is a big dispute on the
question of the extent to which various different types of tax
cuts engender their own revenue increases. The extreme form, as
you know, is the argument that if you cut taxes, the level of
revenues will not change, and there are certain circumstances
in which you can demonstrate that that is the case. That has
been broadly generalized in many respects and it is a question
of fact. It is not an issue of whether or not one has some
ideological view of the way the world works. It is either true
or false, and so it is a factual question. And the trouble is
that it is difficult to basically corral all of the facts to
make definitive cases in which all individuals agree. In recent
years, there has been considerable evaluation and thinking on
this particular question, and I think a number of people have
changed their view or moved from views of the fact that there
were no tax programs which could significantly improve
revenues. You cut taxes, revenues go down. Some people have
revised their views on that issue, and that is the reason you
are getting the results that you are getting.
Mr. Inslee. Have you--I hear what you are saying, but I
want to make sure I understand. What I understand you are
telling the Congress is that whatever you do, if you are going
to cut taxes, whatever you are going to do on spending, it is a
negative for the U.S. Economy to run long-term Federal
deficits? Is that a basic statement that you believe in?
Mr. Greenspan. That is correct.
Mr. Inslee. And do I hear you saying to us----
Mrs. Kelly. Excuse me, Mr. Inslee, your time is up.
Mr. Inslee. It is a great question for April.
Mrs. Kelly. Mr. Kennedy.
Mr. Kennedy. Thank you, Mr. Chairman, in trying to
characterize the world that you live in, I think the gentleman
from Vermont--an outline, that he lives in a bitterly partisan
world and I applaud your patience in enduring that shrill
attack. In the world that I have lived in, in my time period
prior to coming to Congress here, I was in the common sense job
creation world. And as a former chief financial officer, I have
had the opportunity to struggle with that and understand and
applaud your bringing up the fact that the Tax Code really
gives too much of an incentive to debt versus equity and also
applaud the fact that you acknowledge that removing this double
taxation on dividends would give us a better balance that would
make our economy more flexible to attack, less likely to have a
financial structure of a business, cause layoffs and other
things that are harmful to businesses. So I acknowledge and
agree with your statements on that.
I would also like to say, though, as a former chief
financial officer and a CPA that has lived in this job creating
world, I also agree with what you are saying on accrual
accounting. We in government don't allow major businesses to
practice cash accounting. We require them to do accrual
accounting. We don't allow any businesses to intermingle their
pension funds with their operating businesses like we have done
for years. And as you outlined very well in your testimony, the
need to look at our world on an accrual basis, my first
question to you is what can we do? Who would we ask to do what
to get to more of an accrual view of the world?
Mr. Greenspan. Since the Congressional Budget Office is a
creature of the Congress, you could request of them that they
develop effective accrual accounting systems. As I say in my
prepared remarks, on the outlay side we are pretty much there.
We do know the accrued benefits for Social Security and I think
probably can calculate it for Medicare and many of the other
programs that you related. We have more difficulty on the
deferred tax side because what we do know is there is a very
large block of retirement accounts out there which become
taxable on withdrawal, and hence those are appropriately
measurable as deferred assets of the Federal Government. And
clearly, if we have changes in the accrued benefits and the
accrued revenues, we obviously have constructed an accrual
system which in combination with the cash system enables us to
understand how various appropriations and authorizations made
for eventual spending by the Congress spin out through the cash
accounts and how they affect the debt to the public and what
the level of contingent debt is, net, to the public over and
above the little under $4 trillion in debt to the public which
now exists.
Mr. Kennedy. And I strongly agree with our need to do that
approach, and you outline the difficulty in forecasting the
revenue. Part of that difficulty is a reliance on capital gains
tax, which are highly variable depending on which way the
market is going. And the reason we face a deficit today is, as
you mentioned, the dramatic falloff in evaluation. If we
addressed also the capital gains tax, wouldn't that not only be
a very positive thing for our economy but really allow us to
have a more predictable and more dependable view of revenues
for the long-term future?
Mr. Greenspan. I am sorry, do what with the capital gains?
Mr. Kennedy. Either reduce it, eliminate it and not to have
such a heavy reliance on it in our future revenue streams.
Mr. Greenspan. I commented many times in the past,
Congressman, that I think the capital gains tax is a very poor
means of raising revenues. It imposes costs on capital which
are far larger than the equity revenue effects, which, in my
judgment, are the sole purpose of doing that. I would much
prefer that we did not tax capital in the way that we did. I
think it is counterproductive to aggregate economic growth.
Mr. Kennedy. And my last question is if we looked out into
the future and we address these long-term needs to reform and
make sure that we have a balance on our long-term entitlement
pass, would we see a positive impact in our economy today for
addressing those here and now as opposed to letting them fester
for another decade?
Mr. Greenspan. To the extent that the market perceives that
those long-term changes were real, are going to happen, then
clearly they would be discounted in the prices of securities
today.
Mr. Kennedy. Thank you.
Mrs. Kelly. Mr. Watt?
Mr. Watt. Thank you, Mr. Chairman, for being here. I just
have two very quick questions, which hopefully won't take my
full time, and I apologize if they have been asked while I was
out of the room. On pages 7 and on the following pages of your
written testimony, you spend quite a bit of time talking about
some of your concerns about our whole budget process and the
way we account, which is a continuation of the discussion you
were just having with my colleague.
First of all, I just want to be clear, do you have a
position on dynamic scoring? And if so, what is it?
Mr. Greenspan. In principle, Congressman, dynamic scoring
is the way in which we should be estimating the impact of
revenues and expenditure programs. It is theoretically doable,
but it is very difficult to get general agreement on the type
of model that is required to estimate the secondary effects
over and above so-called static scoring. If we could get the
general agreement on how dynamic scoring would be done with
respect to various different types of programs, then it would
be useful because the Congress would know what the various
costs of various programs are in which everyone would agree
that those are the data. But as I have testified before, it is
very difficult to get a model which everybody agrees is the
ideal model, meaning the one in the context of earlier remarks.
Abstraction is a very complex reality.
Mr. Watt. So if they accepted your model, you would have
supported it? If they didn't accept your model, you probably
wouldn't support that?
Mr. Greenspan. Congressman, I trust they wouldn't accept my
model because I know how flaky any model is, mine included. I
fall back to what I would call a less desirable means of
evaluating programs, which is so-called static scoring. I would
like to see us be able to develop dynamic scoring. It is
conceptually superior as a means of doing it. I just don't see
how we are going to do it, but I hope we can try.
Mr. Watt. Second question, on page 14 of your written
testimony, you say something that I am having a little trouble
understanding. You say, ``So short of a major increase in
immigration, economic growth cannot be safely counted upon to
eliminate deficits.'' the reverse of that is will--the
implication is a dramatic increase in immigration might have
some positive impact on growth. Can you just tell me what you
mean by that so I will have a clear understanding of it?
Mr. Greenspan. It is precisely what you just indicated. The
level of immigration in this country, which is a third to a
half of our increase in households, has been a major factor in
the increase in the population, the increase in the labor
force, the increase of employment. And aggregate economic
output is basically output per person times the number of
people, and if you accelerate immigration, you will expand the
labor force and increase the GDP, increase aggregate wages and
salaries, increase contributions to social insurance, increase
individual income tax payments, and in a sense the whole
revenue base goes up accordingly.
Mr. Watt. Well, I could go on and on with that, but I won't
deal with that. I appreciate it. Those are the two questions
that I wanted clarification on. I appreciate your response, and
I yield back the balance of my time.
Mrs. Kelly. I would remind the people in the committee who
are remaining Mr. Greenspan must leave at 1 o'clock, so we are
going to try to get everybody in. But you must keep your
questions succinct and the answers short. With that, Mr. Shays.
Mr. Shays. Thank you, Mr. Greenspan. Thank you for being
here and thank you for your service to our country. I would
like to ask you some questions on derivatives and on the GSEs.
For the last several Congresses, we have attempted to pass
bankruptcy reform legislation, and included in those efforts
were provisions to improve the netting out process of certain
financial contracts. Could you please describe your views on
these netting provisions and what level of importance would you
attach to them?
Mr. Greenspan. We have had very considerable success in
developing a sophisticated financial system in recent years,
which has been a major factor in American economic growth. A
not insignificant part of that has been derivatives, which in
earlier legislation were able to be netted out in a manner in
which bankruptcy courts could essentially make a determination
of who owed what to whom under various different circumstances.
Because of changes that have occurred in recent years, this
needs to be addressed again, and it is terribly important that
individuals are able to net out various differing derivative
obligations owed to them or owed by them in a manner which
could facilitate a much less risky bankruptcy procedure.
So in my judgment, it is crucially important that the
changes that we have been discussing about netting be moved
through as expeditiously as possible either tied to the
bankruptcy laws or essentially as a free-standing piece of
legislation. It is important largely because the ability to net
out clarifies a very significant element of uncertainty in who
owes what to whom under various different stressful conditions.
Mr. Shays. Thank you. When you were before the Senate
Banking Committee you made reference to GSEs as legally private
corporations that should be handled the way private
corporations are handled. As you are aware, there is
legislation to repeal the GSEs' exemption from this Nation's
securities laws and subject them to the SEC disclosure
standards imposed on every other publicly-traded company. Now I
know you can't endorse legislation, but would you basically say
that GSEs should be handled the way private corporations are
handled in general?
Mr. Greenspan. Yes, I would.
Mr. Shays. Just one last question, should there be two-tier
treatment for capital gains or would you prefer to just see
one-tier treatment; in other words, short-term gain versus
long-term gain?
Mr. Greenspan. It is a complex question. I said previously
my view of the capital gains taxes is it is counterproductive.
Mr. Shays. If we are going to have this counterproductive
tax though, would you prefer----
Mr. Greenspan. I prefer short-term and long-term gains
being separated.
Mr. Shays. Be separate.
Mr. Greenspan. Yes.
Mr. Shays. I yield back the balance of my time.
Mrs. Kelly. Mr. Meeks?
Mr. Meeks. Thank you, Madam Chair.
Mr. Chairman, let me just follow up on Congressman Watt,
because I was also intrigued by the statement on page 14.
Conversely, you know, the administration has put into effect
the policy to sharply curtail or maybe even to discourage
because of protecting our borders, et cetera, immigration. So
would you say that by us now curtailing immigration, that that
is a factor, whether it be significant or otherwise, in our
slowing economy?
Mr. Greenspan. Well, obviously the less immigration we
have, the less employment, the less GDP. And I might say that
the fact that so many people are pounding on our doors to get
into this country is a very significant vote of confidence in
what type of economic society we have created here. And my view
is that immigration throughout our history has been a very
important part of the dynamism and the growth that we have had
in this country. And my view is that limits should be less than
they are.
Mr. Meeks. Let me ask another question, and I am going to
try to be brief. I hope I can squeeze somebody else in, so I
will just have this one question. Right now oil prices are
starting to again go through the roof, and they are rising
dramatically. And of course concerns about when we go to war
with Iraq, it just seems that that is inevitable. The political
instability in Venezuela, again, that is driving oil prices
crazy. If the war hypothetically were to last, say, a year, how
much of an inflationary effect would it have on our economy,
and would the Feds see the need to increase the Fed fund rate
to fight the inflation?
Mr. Greenspan. Well, Congressman, it depends very much on
what happens both to Venezuela and to Iraqi crude oil
production. As you know, the Venezuelan production has been cut
to a third. It is rising now, but it is still well below where
it was. And both of these countries' capacity are about three
million barrels a day. If there is a substantial shortfall
which is not made up by the other Gulf states, for example,
Saudi Arabia being the obvious important one, then we are up
against problems of making judgments as to how much leeway
there is between aggregate capacity worldwide on crude oil
production and what consumption is.
Fortunately, in the period immediately ahead, worldwide
consumption is in the seasonal decline. Starting in April, May,
and June, you get a much lower level of oil consumption, which
means that if we had a shutdown, its effect on price would be
modest. But if it went on, as you point out, for a year, it
could be troublesome in how it was handled.
Mr. Meeks. I yield back.
Ms. Kelly. Thank you.
Mr. Greenspan. I should say, I find it unlikely. A year
under any scenario seems to me far beyond anything I could
conceive of. So the more likely scenario is a much shorter one,
obviously.
Ms. Kelly. Thank you.
Mr. Chairman, we are very pleased and we do thank you for
your willingness to come here and be with us today. We have run
out of time. The Chair notes that some Members may have
additional questions, and they may wish to submit those in
writing. So without objection, the hearing record will remain
open for ten days for Members to submit written questions to
these witnesses and to place their responses in the record.
Chairman Greenspan, you are excused with the committee's
great thanks and appreciation for your time. And----
Mr. Frank. I would----
Ms. Kelly. Mr. Frank?
Mr. Frank. Madam Chair, I do note that we do all want to
get together and do this again sometime.
Ms. Kelly. This hearing is adjourned.
[Whereupon, at 1:01 p.m., the committee was adjourned.]
A P P E N D I X
February 12, 2003
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