[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
SECOND SESSION
__________
JULY 21, 2004
__________
Printed for the use of the Committee on Financial Services
Serial No. 108-104
Goverment Printing Office
96-942 PDF Washington : 2004
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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 Chair JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio GREGORY W. MEEKS, New York
JIM RYUN, Kansas BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
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 FOSSELLA, 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 CHRIS BELL, Texas
TIM MURPHY, Pennsylvania
GINNY BROWN-WAITE, Florida BERNARD SANDERS, Vermont
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:
July 21, 2004................................................ 1
Appendix:
July 21, 2004................................................ 35
WITNESSES
Wednesday, July 21, 2004
Greenspan, Hon. Alan, Chairman, Board of Governors of the Federal
Reserve System................................................. 4
APPENDIX
Prepared statements:
Oxley, Hon. Michael G........................................ 36
Gillmor, Hon. Paul E......................................... 37
King, Hon. Peter T........................................... 38
Greenspan, Hon. Alan......................................... 40
Additional Material Submitted for the Record
Greenspan, Hon. Alan:
Monetary Policy Report to the Congress....................... 50
Written response to questions from Hon. Sue W. Kelly......... 76
Written response to questions from Hon. Doug Ose............. 80
MONETARY POLICY AND THE
STATE OF THE ECONOMY
----------
Wednesday, July 21, 2004
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to call, at 10:06 a.m., in Room
2128, Rayburn House Office Building, Hon. Michael G. Oxley
[chairman of the committee] Presiding.
Present: Representatives Leach, Baker, Bachus, Castle,
Royce, Lucas of Oklahoma, Kelly, Paul, Gillmor, Miller of
California, Hart, Capito, Tiberi, Kennedy, Hensarling, Murphy,
Brown-Waite, Barrett, Harris, Frank, Waters, Sanders, Maloney,
Velazquez, Ackerman, Sherman, Meeks, Lee, Moore, Capuano, Ford,
Lucas of Kentucky, Crowley, Clay, Israel, McCarthy, Matheson,
Miller of North Carolina, Emanuel, Scott, Davis and Bell.
The Chairman. The committee will come to order.
This morning we are pleased to welcome back the chairman of
the Federal Reserve, the Honorable Alan Greenspan.
Good morning, Mr. Chairman. We welcome you once again to
the Financial Services Committee. Thank you for taking the time
to discuss monetary policy and the economy and topics of
interest to every Member of this committee and certainly to all
Americans.
Chairman Greenspan, I first want to congratulate you on
your reappointment and reconfirmation. I know I speak for most
Americans and Members of this committee when I say we are happy
to have your steady hand on the monetary policy tiller. I know
you would probably like to spend a little more time on your
golf game, and it definitely needs it, but we appreciate your
dedication and service to the Fed.
Mr. Chairman, when the uptick in energy prices this spring
brought with it a spike in inflation, many imagined that your
well-advertised fist tightening of monetary policy would be
more aggressive than the quarter-point move that the Open
Market Committee made at the end of June.
All spring you said the tightening would be as swift and
strong as necessary, and the second half of your statement was
that the tightening would be gradual. As usual, you were
correct on both counts.
More important, Mr. Chairman, is an issue you raised at
your last appearance before this committee, and that is how we
prepare our workers for the jobs of the 21st Century. You made
the point that the best way to push up wages over time was to
make sure that our workers are educated and ready to fill the
new higher-skill jobs this vibrant economy creates as lower-
skill, lower-wage jobs cycle offshore.
I know that that continues to be a strong interest for you,
and rightly so. Creating jobs is a goal we all share. We all
like to see lower unemployment than the current 5.6 percent
rate and know that lower unemployment also means higher wages.
The economy has averaged creating 250,000 jobs a month for this
year, and I think the new jobs figure for June of 112,000 was
an aberration.
I think that job creation will pick up, and that the
average employment level for this year will be at or higher
than the average for 2000 of 131.8 million. It is already at
131.4 million, even with that June low.
Mr. Chairman, we look forward to your testimony and to the
discussion today.
With that, I yield to the distinguished ranking Member, the
gentleman from Massachusetts.
[The prepared statement of Hon. Michael G. Oxley can be
found on page 36 in the appendix.]
Mr. Frank. Thank you, Mr. Chairman.
Mr. Chairman, on April 21st, you gave very powerful
testimony to the Joint Economic Committee in which you noted
that the good news was great increases in productivity, which
were continuing, and you have been proven right against some of
the skeptics who thought that the productivity increases in the
late 1990s were transitory and that we would slip back to the
normal, what had been the lower normal average.
But you also noted, and I was pleased that you did that,
that virtually all of the gains from increased productivity had
gone to pretax profits of nonfinancial corporate entities. And
I would just say as an aside, if they are doing well pretax
corporate, pretax profits these days, they are doing even
better with after-tax profits. You noted that virtually none of
the increase has gone to people who are getting paid wages. And
as a result, the ratio in the economy, wages paid, compensation
paid and wages to pretax corporate profits was really quite low
by normal standards.
In the report today, you note that there has been some
increase in employment costs as we measure it. But I also
note--and I appreciate your being careful to point this out in
the statement of the report--that what we have seen is an
increase in employer contributions to health plans and an
increase in employer contributions to pensions. But wage
payments to workers, nonsupervisory workers, have, in fact,
lagged inflation, and that is a serious social and economic
problem.
I appreciate the fact that, unlike many others, you have
noted that inequality is in and of itself a problem, and I
thank you for doing that. There are some who try to ignore it.
There are people who probably argue that, as long as the
absolute level is fine, then inequality is not a problem. But
we know in economics that the absolute level that is acceptable
is in fact engined by what is available and what others have
and what that does to prices, et cetera.
So this is the dilemma that we have. We have a situation in
which we have begun to grow, although there has been some
slowing down. We hope it is temporary, and we hope that the
next months will be better. But it has not been as fairly
distributed as we would like it to be, and even by historical
standards, it has lagged.
That seems to me to have two problems. First of all is a
political problem. You note in your statement, in the report,
that protectionist sentiment is increasing. It will continue to
increase. We are not India, but there is a lesson in India,
when a government that had done very well in the macroeconomics
area through its free-market policies unexpectedly lost an
election, in part because they boasted with their slogan of
India Shining about their success. And a lot of Indian people
said, ``Shine this, because, in effect, where is my piece of
it?"
There was an article in the New York Times a while ago on
the front page about how democracy in Latin America is no
longer as universally or widely supported as we would like it
to be because people there have seen no connection between
democracy--that they have been told--and some improvement in
their lives.
In America, you run the risk that there are people who
increasingly believe people who work hard for a living, that
they have no real skin in the game of economic advance. Now,
you and I don't agree with that, but it is a factor that you
have to take into account. And, indeed, to the extent that we
continue to have great progress in the macro economy but real
wages don't go up--and I suppose, workers should be grateful
that the boss is now paying more for health care--but the
worker is not any better off. The boss is paying more for the
same health care and real wages are lagging, and so he and she
understandably feel worse off.
There is also an economic problem. At some point,
insecurity, instability, lack of liquidity is going to cause
some problems for people, and so that is something that I think
we need to address.
Last point is this: I want to say that I know you have
gotten some pressure to increase interest rates more quickly
through the Federal Reserve Open Market Committee. I hope you
will continue to resist it. I would just remind people, we had
this argument to some extent in the late 1990s. I admired the
fact then that you were willing to defy what had sort of been
conventional wisdom that, if unemployment got below 5.5
percent, it would be highly inflationary, you would get a lot
of pressure from a lot of places, editorial pages and
elsewhere, to raise interest rates simply because a lower
unemployment rate would be inherently inflationary. It got to
3.9 percent without inflation. You argued, I think correctly,
that productivity was making this possible.
You are again under some pressure from people to raise
rates more quickly. I would just urge people to think about the
implications that unemployment is still 5.6 percent. We had
gotten it down to 3.9. But your report says that, at the end of
2005, you expect unemployment to be between 5 and 5.25 percent.
As much as 1.3 percent higher, 20 percent higher in terms of
where they are, 25 percent than it was, this is not a time to
slow down the macro economy.
The people in the business community and elsewhere who
focus on the fact that, well, maybe macro growth is too high
and we begin to see a little bit of inflation, for them to urge
on you measures that would slow things down at a time when
unemployment is still much higher than it should be at 5.6
percent, when the percentage of Americans working is low,
because part of what we have seen is a lower percentage of
adult Americans working, when real wages have lagged, when real
wages have been eroded, to argue at this point that you should
slow down the macro economy is to exacerbate a situation that I
think is already socially and potentially economically
dangerous for the U.S.
So I urge you not to accept those kinds of pressures, but
also, I hope you will join with us in thinking of ways--you
have documented the problem. You have documented the problem of
increasing inequality very well. It does not appear to me to be
getting significantly better on its own, and I would hope you
would join with us in figuring out ways to deal with it.
Thank you, Mr. Chairman.
The Chairman. The gentleman's time has expired.
We now turn to the distinguished chairman of the Federal
Reserve, Dr. Alan Greenspan.
Again, we welcome you, Mr. Chairman, and good to have you
back.
STATEMENT OF HON. ALAN GREENSPAN, CHAIRMAN OF THE FEDERAL
RESERVE BOARD OF GOVERNORS
Mr. Greenspan. Thank you very much, Mr. Chairman. Thank you
very much. I will excerpt from my prepared remarks and request
that the full text be included for the record.
The Chairman. Without objection.
Mr. Greenspan. Thank you.
Mr. Chairman and Members of the committee, I am pleased as
always to be here today to present the Federal Reserve's
monetary report to the Congress. Economic developments in the
United States have generally been quite favorable in 2004,
lending increasing support to the view that the expansion is
self-sustaining. Not only is economic activity quickened, but
the expansion has become more broadbased and has produced
notable gains in employment.
The evidenced strength in demand that underlies this
improved performance doubtless has been a fact contributing to
the rise in inflation this year. But inflation also seems to
have been boosted by transitory factors such as the surge in
energy prices. Those higher prices, by eroding households'
disposable income, have accounted for at least some of the
observed softness in consumer spending of late, a softness
which should prove short-lived.
When I testified before this committee in February, many of
the signs of the step-up in economic activity were already
evident. Capital spending had increased markedly in the second
half of last year, no doubt spurred by significantly improved
profits, a low cost of capital and the investment tax
incentives enacted in 2002 and enhanced in 2003.
Renewed strength in capital spending carried over into the
first half of 2004. Orders in shipments of nondefense capital
goods have been on the rise, and the backlogs of unfilled
orders for new equipment continue to build.
A key element of the expansion that was still lacking in
February, however, was evidence that businesses were willing to
ramp up hiring to meet the stepped-up pace of sales and
production. Businesses' ability to boost output without adding
appreciably to their workforces likely resulted from a backlog
of unexploited capabilities for enhanced productivity with
minimal capital investment, which was an apparent outgrowth of
the capital goods boom of the 1990s.
Indeed, over much of the previous 3 years, managers had
seemed to pursue every avenue to avoid new hiring, despite
rising business sales. Their hesitancy to assume risks and
expand unemployment was accentuated and extended by the
corporate accounting and governance scandals that surfaced in
the aftermath of the decline in stock prices and also, of
course, by the environment of heightened geopolitical tensions.
Even now, following the pattern of recent quarters,
corporate investment in fixed capital and inventories
apparently continues to fall short of cash flow. The protracted
nature of this shortfall is unprecedented over the past 3
decades. Moreover, the proportion of temporary hires relative
to total employment continues to rise, underscoring that
business caution remains a feature of the economic landscape.
That said, there have been much clearer indications over
recent months that conditions in the labor market are
improving. Most notably, gains in private non-formed payroll
unemployment have averaged about $200,000 per month over the
past 6 months, up sharply from the pace of roughly $60,000 per
month registered over the fourth quarter of 2003.
The improvement in labor market conditions will doubtless
have important follow-on effects for household spending.
Expanding employment should provide a lift to disposable
personal income, adding to the support stemming from cuts in
personal income taxes over the past year. In addition, the low
interest rates of recent years have allowed many households to
lower the burdens of their financial obligations.
Although mortgage rates are up from recent lows, they
remain quite attractive from a long-term perspective and are
providing solid support to home sales. Despite the softness of
recent retail sales, the combination of higher current and
anticipated future income, strength in balance sheets and
still-low interest rates bodes well for consumer spending.
Consumer prices, excluding food and energy, so-called core
prices, have been rising more rapidly this year than in 2003.
For example, a 12-month change in the core personal consumption
expenditures price index stood at.8 percent in December of last
year and climbed to 1.6 percent by May of this year.
Core inflation, of course, has been elevated by the higher
index of energy prices and business costs and by increases in
non-oil import prices that reflect past dollar depreciation and
the surge in global prices for primary commodities.
But the acceleration of core prices has been augmented by a
marked rise in profit margins, even excluding domestic energy
corporations. Businesses are limited in the degree to which
they can raise margins by raising prices. An increase in
margins should affect, mainly, the level of prices, associated
with any given level of unit costs but, by itself, should not
prompt a sustained pickup in the rate of inflation going
forward.
Indeed, some leveling or downward pressure on profit
margins may already be in train, owing to a pickup in unit
labor costs. Although advances in productivity are continuing
at a rate above the long-term average, they have slowed from
the extraordinary pace of last summer and are now running below
increases in hourly compensation.
The available information suggests that hourly compensation
has been increasing at an annual rate of about 4.5 percent in
the first half of this year. To be sure, the increases in
average hourly earnings of nonsupervisory workers have been
subdued in recent months and barely budged in June. But other
compensation has accelerated this year, reflecting continued
sizeable increases in health insurance costs, a sharp increase
in business contributions to pension funds and an apparently
more robust rate of growth of hourly earnings of supervisory
workers.
The larger wage gains for supervisory workers together with
anecdotal reports of growing skill shortages are consistent
with earlier evidence of rising wage premiums for skilled
workers, relative to less-skilled workers.
As always, considerable uncertainties remain about the pace
of the expansion and the path of inflation. Some of those
uncertainties, especially ones associated with potential
terrorism, both here and abroad, are difficult to quantify.
Such possibilities have threatened the balance of world supply
and demand in oil markets in recent months, especially as
demand has risen with the pace of world economic growth. Yet
aside from energy, markets exhibit little evidence of
heightened perceptions of risk. Credit spreads remain low, and
market-based indicators of inflation expectations, after rising
earlier this year, have receded.
With growth of aggregate demand looking more sustainable
and with employment expanding broadly, the considerable
monetary accommodation put in place starting in 2001 is
becoming increasingly unnecessary. If economic developments are
such that monetary policy neutrality can be restored at a
measured pace, as the FOMC, expects a relatively smooth
adjustment of businesses and households to a more typical level
of interest rates seems likely.
Even if economic developments dictate that the stance of
policy must be adjusted in a less gradual manner to ensure
price stability, our economy appears to have prepared itself
for a more dynamic adjustment of interest rates. Of course,
considerably more uncertainty and, hence, risk surrounds the
behavior of the economy with a more rapid tightening of
monetary policy than is the case when tightening is more
measured. In either scenario, individual instances of financial
strain cannot be ruled out.
In sum, financial markets, along with households and
businesses seem to be reasonably well prepared to cope with a
transition to a more neutral stance of monetary policy. Some
risks necessarily attend this transition, but they are
outweighed, in our judgment, by those that would be associated
with maintaining the existing degree of monetary policy
accommodation in the current environment.
Although many factors may affect inflation in the short
run, inflation in the long run, it is important to remind
ourselves, is a monetary phenomenon. As we attempt to assess
and manage these risks, we need, as always, to be prepared for
the unexpected and to respond promptly and flexibly as
situations warrant.
But although our actions need to be flexible, our
objectives are not. For 25 years, the Federal Reserve has
worked to reestablish price stability on a sustained basis. An
environment of price stability allows households and businesses
to make decisions that best promote the longer-term growth of
our economy and, with it, our Nation's continuing prosperity.
Thank you very much, Mr. Chairman, and I look forward to
your questions.
[The prepared statement of Hon. Alan Greenspan can be found
on page 40 in the appendix.]
The Chairman. Thank you, Chairman Greenspan for appearing
before this committee.
We have had this discussion before, and it is one I would
like to return to, and that is the resilience of our American
economy. Considering the fact that we have gone through some
remarkable, markedly difficult times over the past 3 years,
with the recession, the tragedy of 9/11, the following need to
fight the war on terror with increased defense spending and the
like, the business scandals that you referred to in your
statement, I have said before, I would doubt there is any
country or any economy in the world that could have sustained
those kinds of body blows and yet, 3 years later, be in as
strong a position as we are economically.
Were we just lucky? Or what is it about our system,
monetary fiscal policy, our overall system, meaning the private
sector and the Government and the like, what is it about the
American economy and the American attitude that would allow us
to make that kind of recovery in a relatively short period of
time?
Mr. Greenspan. Mr. Chairman, you are raising what probably
is the most important issue that has been on the policy agenda
for the last number of years.
We were quite startled and, I must say, pleased, obviously,
that this economy was able to absorb the very significant
shocks to which you allude without contracting as, in most
everybody's judgment, it almost surely would have, say, had
they happened 20 or 30 years ago.
It is quite apparent that the most important element in
this very evident increasing resiliency of our system is the
associated flexibility in both financial markets and in the
economy generally. I tried to address this issue in a number of
presentations a few years ago, and it looked to me at the time
as though the causes were several.
First and quite important was the bipartisan trend towards
deregulation which started in the 1970s and has indeed gotten
to the point where the notion of economic reform as a concept
in the world is usually related to the questions of increasing
deregulation and privatization. In a sense, the process that we
have been going through is now increasingly being replicated
elsewhere in the world.
In addition, obviously, there has been a significant
increase in technological capabilities, especially information
technologies, which enable businesses to respond in a far more
expeditious way and respond to imbalances in demand and supply,
and that has prevented significant problems from emerging
before they were addressed.
And the broad areas of increasing globalization, as we have
lowered our tariff barriers and broadened our interface with
the rest of the world, have also been a major factor here in
creating flexibility, because we can interact with our trading
partners in the way in which shocks are absorbed by all of us
and contained rather readily.
So the general proposition that I think we have learned
from this, and, indeed, we have learned because it was not
something that one would have put high on the agenda 3 or 4
decades ago, is that flexibility, anything that improves
flexibility in the financial system or the economic system, is
in and of itself a very important advance to enable the economy
to grow and prosper.
The Chairman. Would you, in terms of fiscal policy--I know
that you mentioned in your remarks at least twice the tax cuts
and their affect on rejuvenating the economy. Was that, the
fiscal aspect and the monetary aspect working together, was
that a major factor also in getting us where we are today?
Mr. Greenspan. I think the tax cuts were effective in
stemming the extent of the weakness of the economy several
years ago. And, indeed, I have mentioned it, in fact, in my
prepared remarks. There is no question in my mind that,
somewhat to my surprise, the timing of the tax cuts came at a
point when increasing effective demand to absorb the
adjustments coming from the sharp stock market and capital
goods decline of 2000 were necessary. So, in that regard, I
would say yes.
Clearly, there was significant improvement in tax policy
over the years, but I think we may have reached the peak in
that regard in the 1986 act, and I cannot argue strenuously
that we have made all that much improvement since then. Indeed,
I think we have had a certain backup in a number of things that
we have done. But, overall, I would say that looking forward,
fiscal policy is going to become a very critical issue on the
agenda for macroeconomic policy.
The Chairman. If I might add, I know that you have said
that you enjoyed these sessions partly from the feedback that
you get from Members all over the country, anecdotal instances
and so forth.
For instance, I had a discussion with a trucking industry
executive in my hometown a couple years ago, and he was last
year's chairman of the American Trucking Association. He was
all over the country, and I asked him how the transportation
industry in general was doing, particularly the trucking
industry. And he said they were doing very, very well, which is
usually a pretty good harbinger of things to come, and I asked
him specifically about his own company. He said he could hire
20 drivers without any problem. He could expand that much.
His problem, in his case, was finding qualified drivers,
and I think it does point out perhaps the conundrum we have of
trying to fit job skills and background and education with
those jobs. I don't want to get a discussion going now. I just
thought I would pass that on in that regard.
I am over my time and recognize Mr. Frank.
Mr. Frank. Thank you.
Mr. Chairman, I was actually fascinated by your response on
the tax question because, I must say, it sounded to me like you
were giving a pretty good demand-side justification for the tax
cuts, but you were ambivalent at best about the supply-side
justification. And I would say, to the extent that you have
said we have reached good tax policy in 1986, I am inclined to
agree. I just hope we are not about to make that even worse.
So I think there is general agreement in the country that
demand-side stimulus works, and we did, as you say, manage to
get the timing right. I think there were other ways to provide
that demand stimulus, but I am struck by your being more
enthusiastic about the demand-side aspect than the other.
But there is another aspect of the tax cuts that you
address in the monetary report. Let me read to you page 9:
``The deficit in the Federal unified budget has continued to
widen. In large part, the rise in the deficit is attributable
to further rapid increase in spending on defense and other
programs and the loss of revenues resulting from the tax
legislation enacted in recent years.''
You go on to say on the next page: ``As of the first
quarter of 2004, national saving measured net of estimated
depreciation was still equal to just about 2 and a half percent
of GDP compared with a recent high of 6 and a half percent in
1998. If not reversed over the longer haul, such low levels of
national saving could eventually impinge on private capital
formation and thus slow the rise of living standards.''
You do say in here that the major reason for this drop,
substantial drop, in national saving from 6.5 percent in 1998
to 2.5 percent today is the swing in the Federal budget from
surplus to deficit. So, what you are saying is that, the tax
cuts had some positive near-term demand-side impact. We also
have to deal with the fact they contributed substantially,
according to the report--not alone, but substantially--to an
increasing deficit which has, in fact, been a major reason for
a substantial drop in the savings rate.
You note that, if this is not reversed over the longer
haul, it could impinge on private capital formation and slow
the rise of living standards. I agree with you. What do we do
about it?
Mr. Greenspan. Well, first of all, let me just say that, as
I have indicated before this committee before, I do think that
the partial elimination of the double taxation of dividends was
an important long-term structural supply-side change, so I
would like to amend your remarks in that context.
The issue in the short run, with respect to the fiscal
policy, is unlikely to be a problem, largely because increasing
revenues----
Mr. Frank. That is why I asked about the long run. Let me
ask the next question--I only have 5 minutes, Mr. Chairman. You
have sketched this out as a long-range problem, that the tax
cuts had a short-term stimulative effect with a little bit of
supply-side capital gains, and they are having a longer-term
potentially negative effect.
What I am asking, is there some way we can deal with these
negative effects without doing the long term, so I am
interested in the long haul.
Mr. Greenspan. Well, I think there is a much broader
question, which comes down to fiscal policy at this stage, and
it relates to the fact that, in budgets put together 30, 40
years ago, we had very few programs which extended beyond a few
years. True, we would have, for example, an aircraft program
which would be a 3- or 4-year program. We would have some
agricultural programs. But long-term commitments, either on the
tax side or on the expenditure side, were rare.
This has turned around 180 degrees, and what we are missing
is a process which essentially can address a long-term outlook
where the ability to forecast, either revenues or mostly
expenditures on key programs, is clearly quite poor.
This means, in my judgment, that you need a mechanism which
adjusts programs as you move forward. Therefore, I would say
not only do we need PAYGO, which is an important, in my
judgment, critical issue in budget programming, as well as
discretionary spending caps, but I think we also have to begin
to think of how we nudge programs back to where we thought we
were pushing them in legislation, either through triggers or
sunset legislation or other----
Mr. Frank. But you ignore the tax side, and that
disappoints me, Mr. Chairman----
Mr. Greenspan. Well, I----
Mr. Frank. Let me, just to summarize, you thought from the
tax policy, with the exception of the capital gains, we were
better off in 1986 than we have been since in terms of the
structure of the tax policy. You also said that the tax cuts
that we had, while they had a demand-side impact when we were
in trouble, but we don't need that now, that they have a long-
term--they have been a significant contributor to the deficit,
the swing from negative--from positive to negative in the
reduction in the savings rate.
What about the question of tax policy going forward? We are
about to talk about another major tax cut, beginning with the
world trade decision but going much beyond that. Have you
nothing to say about tax policy?
Mr. Greenspan. Well, I will say this, as I have said it to
you before, I think it was a mistake not to extend PAYGO both
for tax and expenditure programs and let it expire in September
2002 and that I, myself, as you know, prefer a lower tax burden
in general because I think it assists economic growth and
increases the revenue base. But, ultimately, that determination
is the Congress's.
The question that I think is necessary to focus on is to
put a structure out of where the Congress can make those
decisions, where I don't think you can at this point.
Mr. Frank. Well, I will call the gentleman, I thank you.
Mr. Chairman, I appreciate this rare burst of deference to
us on the tax issues. You haven't been reticent about making
recommendations that are within our constitutional
jurisdiction, and you shouldn't be. So, when you somehow decide
it would be inappropriate for you to recommend tax levels, I am
a little bit puzzled.
Mr. Greenspan. I am just essentially saying, I have stated
before, and I haven't changed my view, I prefer lower taxes.
Mr. Frank. Even if it makes the deficit worse----
Mr. Greenspan. I am sorry.
Mr. Frank. But even if it makes the deficit worse and has
this long-term negative effect on national savings----
Mr. Greenspan. Well, then you get a trade-off. I would
prefer lower spending, lower taxes and lower deficits.
Mr. Frank. Thank you.
I yield to the Chair.
The Chairman. The gentleman from Iowa, Mr. Leach.
Mr. Leach. Thank you, Mr. Chairman.
In your statement today and the last month, you have
dwelled on a macroeconomics discussion I have never heard
discussed by the Fed, and that is that there is greater cash
flow in the economy, at least on the business side of the
economy, than on investment. You described this as a risk-
averse corporate America today.
Could you meat that out a bit, and then you have indicated
in prior speeches that one aspect of this is that it looks like
the economy coming through this year looks like it is going to
be pretty steady growth. But the fact that there is less
investment than might be the case probably implies that, coming
into next year, we are going to have a sustained economic
growth, and that is probably pretty good for whatever
administration takes place, whether it be the lower-tax
administration of today or perhaps a higher-tax administration
of tomorrow, but that the basic underpinning of the economy
looks pretty good going into next year.
Is that a valid observation or a valid conjecture on your
part?
Mr. Greenspan. Well, Congressman, you raise an interesting
aspect to the issue with respect to the obvious reluctance on
the part of the business community to be aggressively
expansionary at this stage of the business cycle, as they have
typically been in the past. It has usually been advance hiring,
advance capital investment, and notions of restructuring
companies, to be prepared for increasing market shares, in
other words, all in anticipation of significant improvement.
The fact that, for the first time in 3 decades, we are
getting in an expansion period, a very significant shortfall in
the level of capital investment plus inventory accumulation
relative to cash availability says that we are far from
behaving the way we typically did. As you point out, the
reasons that I presume are the cause of it are a number of
caution-creating factors.
But to the extent that these are capable of being assuaged,
what it probably will be doing is, rather than creating a large
surge in economic activity, to gradually stretch out economic
activity if, indeed, a degree of confidence gradually returns.
And that would be one of the reasons why a gradual expansion,
which we now seem to be experiencing, does bode well for next
year.
Mr. Leach. Let me raise one final question, and it is an
issue of priorities and advice to Congress. For three or four
Congresses now this committee has passed a bill on the orderly
unwinding of contracts, a netting bill. And it has been tied up
with another committee, the Committee on Judiciary, and
bankruptcy provisions, which are quite controversial.
Would you advise the Congress to go ahead with the netting
provision unrelated to the bankruptcy bill in order to get this
underpinning of financial stability out of the way in a legal
sense?
Mr. Greenspan. I most certainly would, Congressman. We have
been concerned for quite a while that the failure to include a
number of these newer instruments into netting legality, if I
may put it that way, puts us at risk in the event of some
untoward event which would create significant financial
problems.
I know of no resistance in the Congress to netting per se,
and, of course, as you point out, the reason why the bill has
not been moved forward is it has been tied to the bankruptcy
bill, with its other problems. It strikes me that we are taking
undue risk and really unnecessary risk in allowing that tie to
exist rather than breaking the bill out from the bankruptcy
bill and I would presume passing it very readily in both Houses
of the Congress.
Mr. Leach. Thank you very much, Mr. Chairman.
The Chairman. I would just say, ``hear, hear,'' to that,
Mr. Chairman. That is a great idea.
The gentlewoman from New York, Mrs. Maloney.
Mrs. Maloney. Welcome here today, Mr. Greenspan.
Your arguments today provide support for the argument that
the economy is recovering from the recession of the last few
years, but that may not be the picture from the point of view
of the American worker.
The latest figures for job growth show only a small
increase, much less than would be expected if, as you suggest,
the economy is growing significantly. There are 1.2 million
fewer jobs now than there were at the official start of the
recession in March of 2001. This is the worst job deficit since
the Great Depression. The unemployment rate is 5.6 percent
nationally. This is a 1.3 percent higher than when the
recession officially began. In New York, in my hometown, it is
now at 7.4 percent, up almost half of 1 percent from last
month.
If we look at jobs as most persons do, as a measure of our
economy, things have been getting generally worse over the span
of the last 3.5 years. We still have not made up for the jobs
lost in this Administration. If you include workers who are
working part-time because they cannot find a full-time job and
workers who want to work but are not in the labor force, the
unemployment rate is roughly 9.6 percent. This is perhaps the
worst figure of all, is the number of long-term unemployed, 22
percent of unemployed workers, 1.8 million people, have been
jobless over half a year. This is a record setter, the longest
period of such high long-term unemployment since this statistic
was first collected over 50 years ago.
I would like to hear about who has benefitted from the
improved figures that you cite. It is certainly not the
workers. Real weekly earnings have fallen by 1.4 percent over
the past year. Wages are not keeping up with inflation. We are
setting records on low wages, too. The share of aggregate wages
and salaries and national income is the lowest it has been in
over 50 years, and the data shows that private--profits in
businesses have soared while average wages have not. Aggregate
wages and benefits of workers have grown only 8 percent while
business profits have increased 62 percent and after-tax
profits 83 percent.
This might be very good news for shareholders, but for
workers, it is pretty depressing.
My question is, why has recent economic growth not
translated into robust job growth and wages keeping pace with
profits?
Mr. Greenspan. There are basically two reasons why the
level of total employment has lagged in this recovery relative
to previous recoveries.
The first is that we have had a historic rise in
productivity, which means that even though the economy was
rising, that most of the rise was supplied by increasing
efficiencies rather than new employees.
Secondly, the extent of the recession in 2001 was the
shallowest in post-World War II history. As a consequence of
that, you didn't get the rebound that we historically have had.
As I point out in my remarks and, indeed, as I think I said
in February as Congressman Frank had indicated, that all of the
increase in productivity, which has been a factor in the last
year or so in the acceleration in economic growth, has been
reflected in increasing profit margins rather than an
acceleration of real wages.
Nonetheless, real wages have been rising, but, as I pointed
out in, my prepared remarks, that there has been a
disproportionate rise in the 20 percent of payrolls, which were
supervisory workers, relative to nonsupervisory.
Indeed, as I point out, this is consistent with other
evidence that suggests that the difference in skill training
for skilled workers versus lesser-skilled, continues to widen.
It is showing up in a distribution of income which is reflected
in the long-term rise in average hourly pay of supervisory
workers relative to the average hourly earnings numbers to
which you were alluding.
This, as I have argued in the past, I think is a major
problem of matching skills of workers to the technological base
of the economy, which I believe is an education issue and
requires that we address that as quickly and broadly as we can.
Mrs. Maloney. Thanks, Mr. Chairman.
The Chairman. The gentlewoman's time has expired.
The gentleman from Louisiana, Mr. Baker.
Mr. Baker. Thank you, Mr. Chairman.
Chairman Greenspan, I have noted that historians often
critique the general's battle plan after the hostilities have
ceased, but historians notably remain awfully quiet during the
heat of the battle.
With that observation having been made, when you testified
before the committee in February, many signs of the stepup in
the economy were already evident. Renewed strength in capital
spending apparent in 2003 carried over into the first half of
2004.
Going on with your testimony, there have been much clearer
indications over recent months that conditions in the labor
market are improving. Most important, most notably gains in
private non-farm payroll employment averaged about $200,000 per
month over the past 6 months, up sharply from the pace of the
fourth quarter of 2003.
You go on, the combination of higher current and
anticipated future income, strength in balance sheets and
still-low interest rates bode well for consumer spending.
Profits of nonfinancial corporations rebounded to 12 percent in
the first quarter of 2004, a pace of advance not experienced
since 1983, as consolidated unit costs for nonfinancial
corporate business sector actually declined during the same
period.
In general, financial intermediaries are profitable, well
capitalized and appear to be well positioned to manage in a
rising wage environment. In short, financial markets along with
households and businesses seem to be reasonably well prepared
to cope with the transition to a more neutral stance of
monetary policy.
I consider this to be not just good news but excellent
news. I think the generals at the Federal Reserve have
conducted a battle plan that has shown to be highly successful
moving us in a stable and methodical direction. For that, I
just want to publicly commend you and those at the Fed for your
leadership in this manner.
I wish to, however, move to an era--or area of examination
pursuant to the adoption of Sarbanes-Oxley, which was generated
in an environment where many of us shared great disappointment
in our free enterprise professionalism, where it was apparent
that there were those in positions of responsibility that did
not meet either their professional or fiduciary
responsibilities.
To that end, after the implementation of a higher
disclosure standard, higher accountability, independence of
audit committees, there still remains one area not addressed by
the Congress, which I am reluctant to bring up but which I
would welcome your thoughts, and that is the tone at the top.
I recently reviewed a report of diversified financial
institutions where, on average, the CEO was compensated at a
basis of $12 million a year, and the average value of stock
held in the institution they managed, not net worth, was
reported to be $800 million. Now, that in itself is not
troubling to me, because I believe, as a free enterpriser,
innovative people should be awarded in accord with their
success.
What was troubling about this report is these average
levels of compensation appeared to have no profitability or
losses of the corporation being governed. Compensation in
itself does not indicate a problem, but it does indicate what
the tone of management is with regard to their fiduciary
obligations to shareholders.
In his appearance before the committee just last month,
Chairman McDonough, chairman of the Public Company Accounting
Oversight Board, indicated that compensation committees should
act, if not boards should act and shareholders should act, but
if, failing that, the Congress may at some time find it
appropriate to act in this arena, not necessary to regulate or
establish some formula by which one is compensated, but at
least to provide additional notice, earlier awareness by
shareholders of plans to be taken by boards.
In fact, the gentleman from Alabama, Congressman Terry
Everett has recently submitted legislation to me which he is
contemplating introducing relative to prior notice with regard
to pension plan adjustments which may be adopted by a board in
a public operating company. I think this is just a first step
in a very long discussion about how we incent CEOs, CFOs and
managers at the very highest levels to invest for the long
term, to not be so concerned about beating the street every 90
days, to in fact bill value for shareholders and not be so
concerned about the value of shares they own but the value of
the corporation they are charged with leading.
I don't have a specific question to pose this morning, but
merely wanted to have on the record my concerns about these
matters in the context of our overall long-term economic
fortunes and would ask and request the Fed's counsel and advice
as we move forward in this very difficult area as to whether
any action might be justifiable, whether examination over the
course of the coming months is warranted or any direction which
you or the Board may choose to advance in this arena. And I
yield back the balance of my time.
Mr. Greenspan. To the extent that we have expertise in that
area and, in some areas, we do and, some, we do not, we will be
glad to make available to you what it is we have.
But fundamentally, these are value judgments as to how you
want corporate governance to behave, and the shareholders still
own the corporation, and it is their money that is being
employed for purposes of CEO and general executive
compensation. And if the Government gets too heavily involved
in that transaction, I am fearful that, in an endeavor to
improve corporate governance, we may in fact go in the wrong
direction.
Mr. Baker. Often, mere examination is very helpful.
Thank you.
The Chairman. The gentleman's time has expired.
The gentleman from New York, Mr. Meeks.
Mr. Meeks. Thank you, Mr. Chairman.
Let me do this first, just follow up on Mr. Frank, when he
talked about tax policy. For example, some people are born on
the top side of the mountain, and some people are born on the
rough side of the mountain. I happened to grow up on the rough
side of the mountain, and I had to climb up.
When you look at the tax policies that we are talking
about, sometimes, it benefits just 2 percent of America and
doesn't consider individuals who have grown up on the rough
side of the mountain, You know, without hope and opportunity. I
would not be here if it were not for public education, public
housing and public--and some sort of health care that my
parents had.
When you talk about the tax policies we put forth, I never
hear the considerations taking place in regards to that, so we
don't have to worry about countries, as the report indicated,
in South America who no longer want to be part of a democracy.
That being said, I would like some time, not today, you
know, when we talk about the tax policy, the effect that it may
have on individuals who are on the rough side of the mountain
and may need a hand up.
Let me ask these questions, I will just try to ask three
questions, different subject matters, real quick because I know
that time expires real fast, just so we can get some answers to
them.
The first question is whether or not a comparative
advantage still holds true for the American economy. Because,
you know, one of the biggest issues that we are talking about
now is outsourcing and traditional economic daily reports, free
trade based upon the concept of comparative advantage.
We thought that the service jobs, the technological jobs
would stay here in America. We are now finding that they are
going oversees or to individual countries where there are
highly educated but less-expensive workers.
So my first question is, do you believe that we need to
rethink our ideas about free trade in light of what might be
diminishing comparative advantage and technology and education
in the United States? That is number one.
Then, I want to switch to just the question, in regard to
what is taking place in the Senate Committee, with Richard
Shelby, who is planning to introduce legislation that would
create a stand-alone regulator for the GSEs that would be
completely separate from Treasury and HUD and that the new
regulator would have the authority over mission, goals,
products and risk-based capital.
I want to get your thoughts on such a proposal,
particularly in light of the fact that the Federal Reserve has
moved to strip Fannie Mae and Freddie Mac and other government-
sponsored enterprises of their ability to obtain daily
interest-free loans from the Fed.
Lastly, if we get a chance to, on another topic that has
been very much before this committee. I know that you are a
bank regulator, but I wanted to ask you a question about the
securities industries, because both John Reed, as interim
chairman of the New York Stock Exchange, and now John Thane, as
CEO, are making various changes to their structure,
particularly in separation of regulatory structure, from
running the securities auction.
Nevertheless, there are some who will say that the era of
self-regulation is over. I want to know whether or not you
believe that self-regulation should end and be replaced by
direct regulation, and what do you think about the trade-
through rule? Should it end or be expanded?
Mr. Greenspan. Well, I will try to answer those fairly
quickly. Each one is a 20-minute lecture, as you well know.
I would merely repeat on the first question of free trade,
I think the United States has immeasurably gained from the
opening up of markets in the post-World War II period. And we,
more than anybody, have gained by the tremendous rise in trade
throughout the last half century.
I think were we to start pulling our horns in any way,
because we are fearful of competition, which we seem to be
handling rather well, I think we will find at the end of the
day that it will diminish our growth and standards of living,
and we will likely find that a number of consequences which we
hadn't expected would create a far more negative view of the
way the world is working than we would like.
So I would emphasize, as I did to the Chairman, that the
advantages of globalization have been profound for the United
States, and I hope we carry them forward. We do have problems
with the distribution of income, which I have addressed with
you previously. But that is a different issue and does not
relate to the question of whether we have free trade or not.
With respect to the GSE regulator issue, I have not
commented, you know, nor have any of my colleagues on the
specific structure or the form of the regulator. In our
testimony, I have argued the necessity of increasing the share
of home mortgages purchased by the GSEs which are securitized
rather than kept in portfolios at--we at the Fed perceive--a
significant subsidized rate. But we haven't thought through any
of the issues with respect to where the regulator is located
and what he does. With respect to the so-called overdrafts that
the Federal Reserve essentially has been changing, what
happened was that initiallly we perceived that, as a matter of
convenience, it was quite helpful to treat GSEs differently
from other private corporations in various different things,
specifically the payment principal and interest to the banks.
What occurred as a consequence of our varying from how we
handle other private corporations, was a huge increase in what
we call daylight overdrafts, which are very large, intraday
lending. And what we chose is that, as these drafts got very
large and these institutions got very large and the amounts got
very large, was to effectively handle these issues of payments
exactly the way all private organizations do; we would be
working in that direction, and I think it is very much to the
advantage of the financial system as a whole. But that in and
of itself has got nothing to do with the regulator question in
any sense.
And with regard to your final question, I think self-
regulation is an extraordinarily important issue--I would be
more general. Private-sector generation, essentially counter-
party regulation or self-regulation, is a very important
element in the regulatory structure generally. And I trust that
we, in our endeavor to get the proper balance between Federal,
State, and private regulation, keep in mind our purpose is to
get the optimum functioning of our particular financial and,
business organizations as well.
The Chairman. The gentleman's time has expired.
The gentleman from California, Mr. Royce.
Mr. Royce. Thank you, Mr. Chairman.
Chairman Greenspan, you said you are very optimistic about
the economic outlook for the country. But at the same time, you
said business caution remains a feature of the economic
landscape. And I wonder what you think the sources of that
caution are and what would end that caution? Is that caution
merely a protracted convalescence from the bursting of the
bubble and the aftermath of that? Or has the regulatory
environment inadvertently inspired hesitancy on the part of
business investment? And, perhaps, are there some other
factors?
You know, we hear from executives and from economists
warning about the litigation risk in America today. Whether it
is from some State Attorney General or from an ambitious
plaintiff lawyer, there is that factor. But whatever it is, we
know one thing: To my knowledge, there is only one European
firm that has listed its stock in the United States this year.
So whether it is litigation costs and fear of that or concern
about the cost of Section 404 audits or the regulatory costs,
for some reason, capital that once flooded into our capital
markets is hesitant from overseas. And at the same time, you
cite this business caution here domestically. And I was
wondering if you would give us, in your view, the sources that
generate that.
Mr. Greenspan. Congressman, I think we know that the
caution exists because we can measure it, the extent of how
they behave.
What causes that obviously has got to be conjecture,
because we are trying to delve into the psyche of individual
decision-makers. I think that there is no question that the
aftermath of the bursting of the bubble and the corporate
scandals still linger and induce a sense of unwillingness to
take the types of risk that businesses had invariably taken in
the past. And that was reflected in the fact that, as I
indicated earlier, capital expenditures tend to generate to
significantly exceed cash flow in the recovering stage of the
business cycle with a very substantial implicit rise in
corporate debt, which, of course, we are not having at this
particular stage.
To the extent that there is a fear of making the mistakes,
it gets down to some degree of being unsettled, as indeed I
suspect they should be, at seeing the type of corporate
behavior which nobody believed was consonant with an American
capitalist system. And that has undoubtedly had an effect on
its aftermath.
I think that the issue of potential terrorism is latent. It
is there. I have no way of making a judgment as to how
significant it is. It is very difficult to find any evidence
outside of the long-term futures markets in crude oil, which
presumably reflect some degree of world instability in supply.
But if you look at the United States' financial system with all
of its various spreads and relationships, trying to measure
this type of risk, it is very hard to find.
So it is something which we don't really know all that much
about. We observe it. We get the same sort of response when we
speak to corporate executives that you do. There is an issue of
litigation risk in here, but there has always been litigation
risk. But when it is tied up in the question of corporate
behavior and responsibilities, it clearly is inducing a higher
level of caution than probably existed in the past.
Mr. Royce. Mr. Chairman, if I have time for one other
question.
Chairman Greenspan, in preparing for your visit here, I
read an economic research note from a very respected economist
in which he called the Federal Reserve, in his view, the
world's biggest hedge fund. And his rationale for making that
claim is that the Fed has encouraged the financial markets to
participate, in his view, in the carry trade where one can
borrow cheaply on the short end of the yield curve and invest
those borrowings in a longer-dated security. So, according to
this economist, the Fed encouraged the carry trade in 1993 when
they took the Fed funds down to where it equaled the rate of
inflation. And the current period is cited as another era, in
his view, of the carry trade, since the Fed funds rate is
negative or below the rate of inflation.
The risk cited in this paper of his is that these Fed-
encouraged carry trades can encourage artificial bubbles in
asset prices. This claim is applied to the housing bubble
today. But, you know, the equity bubble in the 1990s could also
be explained from that perspective. And I just wanted to get
your thoughts on this critique of Fed policy.
Mr. Greenspan. Well, Congressman, so long as the normal
tendency is for long-term rates to be higher than short-term
rates, there will always be some carry trade. And, indeed, one
can even argue that commercial banks are largely carry trade
organizations.
But as I point out in my prepared remarks, the awareness
currently of the risks in taking extended positions in the
carry trade markets is clearly being unwound. And our judgment
is that, while there is some and there will always be some, it
has not been a problem.
Certainly, if you have an extended period and you lock in
these differences, you can create great distortions. But when
we move rates down, as we have on several different occasions,
we are acutely aware that, in that process, we will increase
the carry trade.
The more important question is, what is the significance if
we do that? And if we perceive that that was creating bubbles
or distortions, obviously, we wouldn't do that. We are well
aware of what happens when we move, but we try to adjust our
policies in such a manner as to significantly minimize any
secondary consequences of such actions. And, indeed, I think
the recent history suggests that, so far at least, we are
successful in doing that.
The Chairman. The gentleman's time has expired.
The gentleman from North Carolina, Mr. Miller.
Mr. Miller of North Carolina. Thank you.
Good morning, Mr. Chairman. In your testimony earlier
today, you said the increases in average hourly earnings of
nonsupervisory workers had been subdued in recent months and
barely budged in June.
I have had some difficulty actually finding some job-to-job
comparisons. I have seen industry-to-industry comparisons, that
the industries that are gaining jobs pay 21 percent less than
the industries that are losing jobs. The manufacturing sector
has been losing. The service sector has been gaining. They are
also less likely to pay health care benefits and have
retirement benefits. And, of course, you know that we have had
significant manufacturing job loss throughout the country and,
in my own State of North Carolina, more than almost 160,000
manufacturing jobs lost in the last four years.
The figures I have show that the jobs created in North
Carolina have paid about $4,000 less than the jobs that we have
lost and were about 10 percent less likely to have health care.
Mr. Greenspan. That is in your State, not in the country,
you are saying?
Mr. Miller of North Carolina. In my State.
What are the job comparisons? How much are the jobs that we
are losing in the last 4 years? How much have they paid? How
much of the jobs have we gained paid? And what is also the
total compensation, including health care and retirement
benefits?
Mr. Greenspan. Well, we have tried to address that question
and tried to analyze the aggregate structure of employment
relative to the question as to whether the job increases over
the last year, for example, have been in industries which have
below-average wages.
Mr. Miller of North Carolina. Right.
Mr. Greenspan. And what we have found is that that is true
but to a very small extent.
Conversely, when we have done the same type of calculation,
not by industry but by occupation, we get the other result.
Namely, that there seems to be an upgrading in the types of
jobs when looked at from an occupational point of view.
Now, both of these data of changes are very small. But even
if you want to look at them as though they are meaningful, it
is not inconsistent and it may, in fact, be the case that,
within industries, you are getting a slight shift towards
industries with lower average earnings but, at the same time,
an upgrading within the industries with respect to occupations.
But I think the bottom line of all of this is that we have
not been able to find a significantly meaningful change in the
quality of the jobs being produced relative to the quality of
jobs being lost for the Nation as a whole over the past year.
It is conceivable that, if we had far greater detailed data, we
might unearth something significant. But, so far, our
statisticians using the full details that the Bureau of Labor
Statistics publishes both with respect to occupation and with
respect to industry, there is very little evidence of a
particular bias one way or the other.
Mr. Miller of North Carolina. It sounds like that fairly
long answer said, the reason I can't find jobs or job
comparisons is that they really aren't there but that you would
agree with me, that, if North Carolina jobs--new jobs--are
paying $4,000 less than the manufacturing jobs that we have
lost, that is pretty subdued.
Mr. Greenspan. Well, I am saying that, when you look at it
from the point of view of the economy as a whole, it balances
out from, there are good and bad.
Remember, there is a more interesting question which surely
is what this issue is about which we cannot make a judgment on.
Most of the data that everybody quotes are the net change in
jobs from one period to the next. The type of question that you
should really be interested in, and I think we all are, is if
we had gross figures. In other words, the total number of not
net jobs but gross additional additions to jobs and what they
pay relative to the jobs that were lost and what they pay. The
Bureau of Labor Statistics does not have data at that level of
detail. And until we did have data of that sort, we really
can't answer this question in any meaningful sense.
The Chairman. The gentleman's time has expired.
Mr. Miller of North Carolina. Well, not quite.
The Chairman. The gentleman from Texas, Mr. Paul.
Mr. Paul. Thank you, Mr. Chairman.
Good morning, Chairman Greenspan. Yesterday's testimony was
received in the press as you painting a pretty rosy picture of
the economy. You have already remarked a second time on one
statement you made that I would like to comment on again,
because I think my colleagues should pay close attention to it:
And that is your statement that corporate investment in fixed
capital and inventory has apparently continued to fall short.
The protracted nature of this shortfall is unprecedented over
the past 3 decades. The proportion of temporary hires relative
to total employment continues to rise.
I think that is very, very significant and probably should
be taken in the context of the rosy picture of the economy.
Also, at the end of your statement, you make a comment
about inflation in the long run, which I entirely agree with.
And that is, it is important to remind ourselves, you say, that
inflation in the long run is a monetary phenomenon. However,
you sort of duck the issue on the short run, that various
factors affect inflation in the short run, and yet I think
monetary policy is pretty important in the short run. And our
temptation here and too often with central banks is to measure
inflation only by Government measurement of CPI, where the
free-market economists, from Ricardo to Mises to the current
free-market economists, argue the case that, once a central
bank interferes with interest rates and lowers them below the
real rate, that investors and others do make mistakes, such as
overinvestment and now investment over-capacity, excessive
debt, and speculation. And, therefore, I think that we should
concentrate more on the short run effects of monetary policy
Over the last several months, you had been hit by two
groups. One half is saying that you are raising rates too fast,
and the other half says you are way too slow. And of course it
begs the question of whether or not you are really right on
target. But from a free-market perspective, one would have to
argue that you can't know and you don't know, and only the
market can decide the proper money supply and only the market
can decide the right interest rates. Otherwise, we invite these
many problems that we face.
As the economy slowed in 2000, 2001, of course, there was
an aggressive approach by inflating and lowering the interest
rates to an unprecedented level of 1 percent. But lo and
behold, when we look back at this, we find out that
manufacturing really hasn't recovered, savings hasn't
recovered, the housing bubble continues, the current account
deficit is way out of whack, continuing to grow as our foreign
debt grew, and consumer debt is rising as well as Government
debt.
So it looks like this 1 percent really hasn't done much
good other than prevent the deflating of the bubble, which
means that, yes, we have had a temporary victory, but we have
delayed the inevitable, the pain and suffering that must always
come after the distortion occurs from a period of time of
inflating.
So my question to you is, how unique do you think this
period of time is that we live in and the job that you have? To
me, it is not surprising that half the people think you are too
early and the other half think you are too late on raising
rates. But since fiat money has never survived for long periods
of time in all of history, is it possible that the funnel of
tasks that you face today is a historic event, possibly the
beginning of the end of the fiat system that replaced Brenton
Woods 33 years ago? And since there is no evidence that fiat
money works on the long run, is there any possibility that you
would entertain that, quote, ``We may have to address the
subject of overall monetary policy not only domestically but
internationally in order to restore real growth''?
Mr. Greenspan. Well, Congressman, you are raising the more
fundamental question as to being on a commodity standard or
another standard. And this issue has been debated, as you know
as well as I, extensively for a significant period of time.
Once you decide that a commodity standard such as the gold
standard is, for whatever reasons, not acceptable in a society
and you go to a fiat currency, then the question is
automatically, unless you have Government endeavoring to
determine the supply of the currency, it is very difficult to
create what effectively the gold standard did.
I think you will find, as I have indicated to you before,
that most effective central banks in this fiat money period
tend to be successful largely because we tend to replicate
which would probably have occurred under a commodity standard
in general.
I have stated in the past that I have always thought that
fiat currencies by their nature are inflationary. I was taken
back by observing the fact that, from the early 1990s forward,
Japan demonstrated that fact not to be a broad universal
principle. And what I have begun to realize is that, because we
tend to replicate a good deal of what a commodity standard
would do, we are not getting the long-term inflationary
consequences of fiat money. I will tell you, I am surprised by
that fact. But it is, as best I can judge, a fact.
The Chairman. The gentleman's time has expired.
The gentleman from Alabama, Mr. Davis.
Mr. Davis. Good morning, Mr. Chairman.
One of the challenges that I think we deal with as
lawmakers and policymakers is that, frankly, a lot of the
public and the constituency that we serve doesn't necessarily
understand a lot of the economic policymaking process in this
Country, that they don't have a good understanding of the facts
beyond a lot of the political rhetoric. And I think that that
is a bipartisan concern that we have, that there is this kind
of nebular fog that exists around making sound economic
decisions as policymakers.
And another related concern that we have is, sometimes,
some of our own officials contribute to that confusion by the
way they talk about these issues.
So with that as the backdrop, Mr. Chairman, let me ask you
about some very specific observations that President Bush has
made, and let me ask you to comment on their accuracy. And
these are taken from one particular speech the President gave
on April 24, 2003, but I will represent to you that they are a
pretty consistent rendition of other comments he has made on
the issue of deficits.
Quoting the President, ``now you hear talk about deficits.
And I am concerned about deficits. But this Nation has got a
deficit because we have been through a war, and I told the
American people, we would spend what is necessary to win the
war,'' close quote.
I am going to ask you to comment on the accuracy of that
assertion which, as I read it from the President, is that the
proximate cause of the deficit was the spending on the war, by
which he presumably means Afghanistan and Iraq.
And then I want you to comment on this observation by the
President: ``And the best way to deal with the deficit is to
address the two things that affect the deficit. First, increase
revenues to the Treasury through economic growth and
vitality.''
That observation, as I understand it, is the President's
comment that the best strategy for getting the deficit down is
to raise revenues through growth and vitality, presumably the
kind of growth that he would argue comes from his tax cuts.
I want you to comment on the accuracy of that statement,
that the best glide path to bringing the deficit down is to
increase revenues.
Third observation from the President, remember, he
mentioned two things that affect the deficit. And he said:
``And, second, make sure Congress does not overspend your
money. Make sure it focuses on the things that we need and
doesn't spend beyond the things that we need.''
I take that to be the President's observation that
discretionary spending by Congress is the next most significant
factor in the rising deficit. And I am presuming that he means
to distinguish discretionary spending from an entitlement-based
spending such as Medicare and Social Security. That also
strikes me as a controversial proposition.
So to make sure you understand my question, can you comment
on the accuracy of all three of those observations by the
President, first of all, the primary cause of the deficit--or
the cause of the deficit, spending on the war. Second of all,
that the best glide path for reducing the deficit is raising
revenues through tax. And, third of all, that it is
discretionary spending and not entitlement base spending. And
if you believe that the President is inaccurate in all of those
observations, does that concern you that the chief executive
has gotten it so fundamentally wrong when it comes to
describing the state of our economy?
Mr. Greenspan. Well, Congressman, I am not going to comment
on the specific views of the President. I happen to agree with
him.
Mr. Davis. Can you comment on the accuracy?
Mr. Greenspan. Well, the point of the issue is the question
of the extent to which military spending is part of the
increase in spending and therefore the deficit is a numerical
issue. And, I mean, there is no question that the deficit would
be smaller if we did not have military spending.
Mr. Davis. Do you agree that that is the primary reason
that we have the debt?
Mr. Greenspan. I frankly don't know. I think that clearly
part of the deficit--well, it depends on where you start. If
you start say several years ago and come from here, a goodly
part has been the loss of the very high revenues we were
getting from the capital gains taxes and from the exercise of
stock options. And the elimination of those revenues were a
significant factor in the rise in the deficit, as well as
declining revenues as a consequence of the economy going down.
Mr. Davis. Would the tax reductions also be a factor on
those declining revenues?
Mr. Greenspan. Yes. But I don't have the numbers directly
in front of me. There are all sorts of reasons. But over the
broader term, of the major issues in the debates on fiscal
policy is the question of the extent to which certain tax
policies, by increasing the efficiency and the growth of the
economy, will increase the revenue base.
And I have always been one of those who believe that that
is a very important issue and policy. There are others who
believe that the mechanisms work in different ways. There is
not, as best I can judge, complete agreement about a number of
these issues. And when you say, in certain senses, there is
fact. Certain of the statements you raised are questioning of
fact. Others are a question of interpretation of the way the
economy functions.
And I would say I would agree with a goodly part of the
general thrust of what the President has been saying with
respect to that, but not necessarily with the specific numbers,
because I had not actually done the arithmetic that would be
required to make that judgment.
The Chairman. The gentleman's time has expired.
The gentlelady from Pennsylvania, Ms. Hart.
Ms. Hart. Thank you, Mr. Chairman.
And thank you for spending some time with us today,
Chairman Greenspan.
I want to go back to some comments you made briefly and
alluded to a little bit about the skills of the American
workers, many of the workers who are currently unemployed, not
matching the needs of our growing technological base and that,
further, you stated, that, analyzed by occupation, job growth
has been kind of higher in some of the higher-wage areas, which
I am assuming means the ones that require more skill. And you
have talked about improving our education system in the past.
The President has a plan to move forward and improve
elementary and secondary schools as we have been working on
but, recently, announced an initiative to also improve
community colleges' ability to train workers and retrain them
as technology improves. Do you believe that community colleges
should be involved in this process? Is that the level of
training that you are talking about, number one, and is it
possible that a large number of the workers who are currently
unemployed are just not employable in the new jobs or the new
economy, that we need to take those workers and that those are
the ones that are causing some of the more stubborn
unemployment?
Mr. Greenspan. Well, Congresswoman, I have observed in the
past that one of the major growth industries in this Country is
community colleges. And the reason for that is that they have
recognized that this rapidly changing structure of skill
requirements in the labor force requires that education not end
at some point in one's life, but it is an ongoing issue.
Because, with the skill level requirements changing so
continuously, unless you are continuously updating your
capabilities, you are going to fall behind the curve, and
indeed that has been a major problem.
The community colleges have seen this particular niche
requirement in our society, and they have obviously addressed
it successfully. If they hadn't, the enrollments would not be
surging to the extent to which they are. And in that regard, I
find it difficult to believe that we could address the
educational issues with respect to the question of maintaining
the skills of the American workforce without recognizing that
there are several different types of levels of knowledge that
we need. First, obviously, is basic primary education, because
if you don't have that, if you can't read well or can't do
arithmetic well, you are stymied in moving forward. But, then,
there is the very broad abstraction of being able to learn,
which is what our school systems are trying to do. And beyond
that is the application to specific types of skills and jobs,
which is what the curricula of the community colleges tend to
be. And people find, I gather, that what they gain from those
community colleges is very significantly worth the cost.
Ms. Hart. Okay. That having been said, do you see, in an
analysis of those people who are unemployed, though, a lot of
them being the folks who could benefit the most from that skill
updating?
Mr. Greenspan. Well, as we know from the data, that when
people get laid off, they usually have difficulty regaining the
wage level that they had before they were laid off. And this
leads to the question as to whether they could do better by
shifting the profession they are in. And lots of them have
decided, because of the type of jobs that they had, that they
would do better doing something different. And here is where
community colleges, I think, really do a good job.
Because we have--the nature of the turnover in our labor
force is really extraordinarily large and rising. And it
implies that not only do you not have lifetime employment, as
they used to have in Japan, but we are finding more and more
that many people, maybe even most, have more than one
profession during their working lives. And this is the reason
why we see that there has been such a remarkable pickup in
enrollments, say, during the period when recession occurs, that
the labor shrinks. And when they trace down what happens, they
are all going back to school. And when, in effect, the economy
picks up, they come back into the labor force. And this, I
might add, is one of the reasons why, despite the surge in
employment, the unemployment rate has not gone down
commensurately.
Ms. Hart. Thank you, Mr. Chairman.
The Chairman. The gentlelady's time has expired.
The gentleman from Georgia, Mr. Scott.
Mr. Scott. Thank you very much, Mr. Chairman.
Chairman Greenspan, in your report, you mention that there
is the--conditions in the labor market are improving. You also
mentioned they are improving at a rate of 200,000 jobs per
month, new jobs per month.
This is not the case in the African-American community. The
unemployment level among African-Americans at the same period
has risen from 9.7 percent to 10 percent, while the
unemployment rate among white Americans is 5 percent. That is
double. And the situation is very drastic, and most drastic
among African-American males between 20 and 45 years of age,
nearly 700,000 unemployed, African-American women, nearly
700,000, in those very critical, most-productive earning years
between the ages of 20 and 45.
As our foremost economist, as our authority on these
matters, I would be interested and I think the Nation would be
interested to know, why is this? Can you pull the covers off of
this racial imbalance and explain to this Nation why this
imbalance among African-Americans, this growing economy that is
moving and yet the African-American unemployment rate is
increasing?
If, in fact, the Nation's unemployment rate was 10 percent,
it would be catastrophic. And it is a catastrophic situation in
the African-American community. Why is it, and what must we do
in Congress to correct this imbalance?
Mr. Greenspan. Well, Congressman, I think you are
addressing one of the failures of our society. And I think that
having such large groups of potentially productive workers not
operating at their highest potential level is a vast misuse of
resources.
I think the matter, any way we cut it, part of it is
discrimination. We try to hide that fact, but I don't think it
has been eliminated. I think it has improved somewhat, but it
is clearly a major factor.
We have got to find a way to enhance the educational skills
of all of our workforce. And where there are significant
problems, as there are in the African-American workforce, which
you point out, I think we have to make certain that we double
up on our efforts.
But aside from education, I am not sure that there is an
answer. I am reasonably sure that, if we can get sufficient
education and get skill levels up, the pressure of the
marketplace, even though there is significant residual
discrimination, will create a major improvement. But without
starting at the education level, I would be discouraged with
the capability of success.
With education, I think we have got a reasonably strong
case to resolve this issue once and for all.
Mr. Scott. How do you account for the fact, Mr. Chairman,
that there are African-Americans with MBAs, there are African-
Americans with this education? That, I think you hit it on the
head in your first comment, discrimination.
Wouldn't it be appropriate that there be called, at the
highest levels of Government and industry, a summit to address
this critical issue? It is not going to go away. And if, in
fact, it is, as you say--and I think you speak the truth, that
it is rank discrimination--it is rank racism in the employment
marketplace, that we should hold accountable chief executive
officers of our major companies, the movers and the shakers,
the decision-makers, and that, as our chief spokesman for the
economy, that you could provide that leadership to say, once
and for all, let us deal with this issue?
I assure you that, if the Nation's unemployment level
overall was 10 percent unemployment, there would be a summit.
There would be action taken. Don't you think that that would be
a critical movement on the part of the leadership of us in
public policy and the Congress and the White House and the
Executive Branch and in industry?
The Chairman. The gentleman's time has expired. The
Chairman may respond.
Mr. Greenspan. I was just going to say, anything that can
be done in this area is clearly important to move forward on.
The Chairman. The gentleman from Alabama.
Mr. Bachus. Thank you, Mr. Chairman.
Mr. Chairman, let me start with a given. And that is that
our economy depends on an efficient transportation network. I
believe you would agree with that. Would you not?
You are saying that you do?
Mr. Greenspan. I do. Yes.
Mr. Bachus. You have predicted sustained economic growth,
increase in output orders.
My question to you, in making your calculations, in making
your forecast, in deliberating, did you calculate the present
inefficiencies in our transportation network, the limitations
in our transportation network? I mean, I could give you some
examples. For instance, our transcontinental railroads are
jammed. Our velocity and train speed is actually decreasing.
You know, our interstate highways are heavily congested. Our
transit times, in the last 10 years, have decreased
significantly. Does this threaten--particularly in a global
economy where we are predicting border crossings to double in
the next 10 years, are you concerned over the limitations in
our transportation infrastructure?
Mr. Greenspan. I think the deregulation of trucking,
railroads, and airlines, and air transport unwound what was, I
thought, the really serious set of problems which very
significantly reduced the flexibility of our system.
So while I don't deny--and, indeed, the Chairman was
mentioning the shortages of skilled drivers for trucking--I
don't deny that there are bottlenecks here and problems there,
but I would not indicate that I thought that transportation
inefficiencies were a serious problem, certainly nowhere near
what they were 30 years ago.
I think we have got problems, obviously, with rail
transport, specifically endeavoring to subsidize the Amtrak
system and related sorts of rail transport. But we are,
remember, a very heavily passenger-car, light-truck, SUV
society.
Mr. Bachus. I agree.
You mentioned 30 years ago. Are you aware that--just take
the year 1970--that, since 1970, we have actually had a
tripling of mileage driven by Americans. During the same period
of time, we have twice as many registered drivers. We have
something like three times as many tractor trailers on the
road. Yet, our roads, our network of roads, has only grown by 6
percent.
So I do agree with you that the competition and the
deregulation helped tremendously and brought some efficiencies
into the market. But I would urge you to pay close attention to
that transportation grid and the just-in-time economy that we
are in. Because I believe that it is seriously restraining our
economy now. I think some reason why you have a backlog on
orders and you have unfilled orders is you have many places
where it takes 30 to 60 days to get a rail car, where, 5 years
ago, it took 3 to 6 days.
And, in your calculations, begin to take a look at that. We
are projecting that it will cost--that it will take $375
billion over the next 6 years just to maintain our interstate
highway system, our national network of roads and rail and
maritime, and yet the projections are to spend $300 billion. So
we are going to actually spend an amount that is less than the
amount to simply maintain it.
And if these projections which you are making--and I don't
doubt the demand is there, the productivity is there--that we
look at that as perhaps a weak link in our system and become
aware of that.
And with that, I will yield back the balance of my time.
But if you would like to respond to that.
Mr. Greenspan. You are raising an issue of priorities in
funding for both State finance and Federal finance. And I think
that, while I don't deny the numbers you are positioning, there
is the question of, if you lined up all of the priorities that
one can assert with respect to all claims on the Federal
budget, they would be unfinanceable.
And so we, of necessity, have to make choices, and these
are choices which are very difficult to make. And I think where
economists can be helpful, we are. Where we don't know as much
as we need to know--and I don't know myself as much as I think
I would need to know--to make judgments, we are not very
helpful.
Mr. Bachus. And I know----
The Chairman. The gentleman's time has expired.
Mr. Bachus. In making these calculations, I wish you would
pay close attention--I am not--to what we have. There has been
a lot of congestion out there and a lot of inefficiencies.
The Chairman. The gentleman's time has expired.
The gentlelady from New York, Ms. Velasquez.
Ms. Velasquez. Thank you, Mr. Chairman.
Mr. Greenspan, the trade deficit grew to approximately $145
billion in the first quarter of this year, escalating from a
$127 billion deficit in the final quota quarter of 2003. To
finance this trade deficit, the U.S. must borrow from
foreigners at a rate of approximately $1.6 billion a day. Do
you believe that our substantial budget deficit, which is
adding considerably to our outstanding public debt, will
undermine foreigners' confidence that the U.S. will be able to
pay back this constantly growing debt?
Mr. Greenspan. So far, as best we can judge, the foreign
willingness to hold long-term obligations of the U.S.
Government has not diminished.
Clearly, I can't say to you that there is no level at which
they will start to respond negatively. And, indeed, as I was
indicating in conversations at the Senate yesterday, that, with
respect to financing our current account deficit, I think our
concern is that unless we bring it down in some form or another
we will begin to build up a level of dollar claims against
American residents, which will eventually place our foreign
trading partners in a position where, even though they may say
the rate of return here is very good, that they have to
diversify out of the heavy accumulation of U.S. dollar
obligations. There is, as I said yesterday, no evidence that we
are anywhere near a problem of that nature. But if you project
down the road, I can't see how we can avoid it one way or
another.
Ms. Velasquez. But, Mr. Chairman, many economists believe
that if foreigners lose interest in loaning us money or in
buying up our assets, interest rates could soar, making it
impossible to pay down our debt. With no buyers to be found,
stock prices and real estate values could plummet and America
could find itself in a long-term depression.
Do you agree with this assessment?
Mr. Greenspan. No, I do not. I do not, largely because I
cannot believe that we will allow ourselves to get in a
position where, in order to finance our Federal Government
deficit, we would have to be reaching out both domestically and
abroad to borrow money at very high interest rates.
Ms. Velasquez. And how we will not allow ourselves to find
ourselves in that position? By reducing the deficit and I guess
rolling back taxes?
Mr. Greenspan. As I indicated earlier, what we are missing
at this particular stage is a process for approaching fiscal
policy in the sense that we are confronted with something new,
namely that our commitments are now very long term and our
ability to forecast the way it is going to come out is rather
limited. This suggests to me that we have got to find ways in
which we not only project short-term budgets but we project
long-term budgets and simultaneously find means by which, if
our forecasts are turning out to be wrong, there are automatic
adjustment process triggers, for example, which alter either
tax rates or expenditure programs. That would ensure that the
deficit does not get to the point of extraordinary imbalance
where we would be forced into a position where we could not get
money to finance our deficits except at exceptionally high
interest rates.
Ms. Velasquez. Mr. Chairman, with the final approval of the
JP Morgan Bank One merger coming on the heels of the Bank of
America Fleet merger, the rise of a super tier of U.S. banks is
evident. These banks will each control $1 trillion in assets,
together controlling more than 40 percent of the industry's
total assets.
First, does such concentration pose risks to the banking
system and, as a result, to the U.S. economy? And, second, do
you believe that our current system of regulation is sufficient
to oversee such large and diverse corporations that pose such
great risk to the financial system?
Mr. Greenspan. Well, first of all, we obviously are
observing the phenomenon and the trends to which you allude.
And were, in our judgment, that we were in a potentially
serious supervisory regulatory State with respect to these
large institutions, I would indeed be most concerned. These
institutions are very large, but the crucial issue of concern
is the degree of concentration in specific types of businesses
or products. And in many instances, although these are very
large institutions, they are quite diversified and, hence, they
don't have the type of--they don't create the type of threat of
systemic problems, which could readily be the case were there a
significant concentration. Nonetheless, we do continuously
monitor this issue; and I trust that the combining of both
Federal and, where applicable, State supervision and the
private sector's counterparty's supervision will remain
sufficiently adequate to sustain what is in effect a reasonably
good balance at this stage in our financial structure.
The Chairman. The gentlelady's time has expired.
The gentleman from Minnesota.
Mr. Kennedy. Thank you, Chairman, for your service and for
spending time with us today. I would like to continue on the
discussion on trade deficits and move from problem focus to
solution focus.
You know, we had a good export growth, and we were growing
exports largely in some cases because of a weaker dollar. But
with our growing economy, our imports are growing; and we find
the rest of the world not growing at quite the same pace, with
Europe still behind us, with China having some concern as to
whether the growth is too fast and they need to move towards a
lower level of growth, a soft landing.
We also have to make sure we are keeping American exports
competitive. And you have talked at great length today how part
of that is making sure we have a low tax, low spending, you
know, low deficit environment. You have talked at great length
about the need for us to improve our education system so that
all members of our society are qualified for the work of the
future. You have talked about how we need to keep trade open,
that we need to continue to expand trade--yes, enforce our
agreements, but expand trade. And of course, we need to keep
the regulatory burden that you have also talked about moving so
it is a less heavy hand in our environment.
But I would like to ask you about three things. Number one,
when we are talking about keeping America competitive to get
this trade deficit down, how impactful is the significant
differences and the weight on the economy from excessive
lawsuits in this country versus others?
Secondly, international taxes. We have got an international
tax bill that we are trying to work through this Congress and
get to the President's desk. But even with that passing, with
European countries being able to rebate their back taxes at the
border, how significant is that international tax difference in
our ability to be competitive and our ability to reduce this
trade deficit?
And then, thirdly, is there anything that we ought to be
pushing our foreign trade partners, whether in Europe or in
China, to do to help us, have them take more of the burden of
carrying the economy rather than us always being the growth
engine of the world?
Mr. Greenspan. Well, Congressman, we have a longstanding
problem in our trade accounts. And that is, the propensity of
Americans to import relative to our incomes is much larger than
our trading partners' willingness to import relative to their
incomes at any given structure of prices or exchange rates.
What that means is that, other things equal, with everybody
growing at the same rate, hypothetically, we would be incurring
an ever-larger trade and therefore current account deficit. And
this has been a fundamental problem which we have confronted--
it was identified, I might add, 40 years ago, and it hasn't
changed except at the edges. So we are essentially in a
position where, in order to keep our trade deficit down, we
have to work in a sense far more effectively than our trading
partners.
Clearly, the price and exchange rate structure has not
fully adjusted to this differential, because, had it done so,
it would have readjusted our trade accounts accordingly. This
means that our trade problems are essentially becoming our
finance problems and how we finance the debt that is implicit
here.
With respect to, very specifically, our competitive export
capabilities, we obviously are at the cutting edge of the
world's technologies, and American products do have very
significant competitive capabilities. And I think we do a
reasonably good job. But as you would point out, to the extent
to which our exporters are burdened by various different types
of regulations or litigation relative to our trading partners,
we are at some disadvantages in certain bilateral
relationships.
But I am not sure how one carries the tax issue forward.
There is a great deal of literature on the issue of the valuate
added tax and rebates with respect to the United States, which
doesn't have such a system, and what the impact is. I am not
sure I know enough about how those have come out to give you
any useful insight.
The Chairman. The gentleman's time has expired.
The gentleman from Kansas, Mr. Moore.
Mr. Moore. Thank you, Mr. Chairman.
The Chairman. If the gentleman would yield. We are trying
to meet this vote and dismiss the Chairman, so we will go for
about six, seven minutes.
Mr. Moore. I will be as quick as I can.
Mr. Moore. Mr. Chairman, thank you for being with us today.
You know several promising trends in our economy. And I hope
that our economy recovery is strong enough to withstand
potential threats such as a slowly rising inflation state. In
your written statement, you emphasize the importance of
allowing households and businesses to make decisions that best
promote the longer-term growth of our economy and with it our
Nation's continuing prosperity.
Unfortunately, Mr. Chairman, many people in my district and
throughout our country are finding it, I think, difficult to
make the decisions that are best for themselves and their
families. Many people are struggling to pay for the basics such
as food, shelter, education and health care.
Inflation, and health care. Inflation and health care, I
believe, are the greatest problems facing our country, and as
our population continues to age, I think it is only going to
get worse. I hear about this virtually every week and from
individuals and small businesses when I go back to Kansas.
According to the Department of Health and Human Services,
health care spending was up 9.3 percent for 2002, which
followed an 8.5 percent increase in 2001. The Urban Institute
estimates that American households will spend an average of
$15,000 on health care costs in 2004. Health care now accounts
for nearly 20 percent of household personal income, and this
situation is causing some families and individuals to choose
between basic health care and other priorities or to go without
necessary health care altogether.
Mr. Chairman, in your testimony you mentioned that our
country's continued sizeable increases in health insurance--you
talk about our health insurance costs. Since 2000, annual
health insurance premiums for Americans have risen 37 percent
for individuals and 41 percent for families, and the rising
cost of health care is also putting a substantial burden and
pressure, I think, on small businesses in our country.
Would you agree that sizeable increases in health care and
health insurance costs presents our economy and families and
small businesses with a potentially serious problem now and in
the coming years?
Mr. Greenspan. I do, Congressman. In the context in which
you quoted me, I was referring to the fact that a stable price
level or noninflationary environment, history has indicated to
us, is conducive to maximum sustainable long-term economic
growth. That does not mean that there are not innumerable
problems that would exist as a consequence of that, and I
regret that I agree with you in your analysis of health care
cost problems, because they will be, as best I can judge, the
really major issue that fiscal policy is going to have to
address in the years ahead.
Mr. Moore. Secretary Thompson of Health and Human Services
was quoted in a national newspaper yesterday that the cost of
records and recordkeeping in health care is almost $140 billion
a year and could be saved if they converted from paper,
basically, to high-tech computers. Would you agree that that
might be a good move for the health care industry?
Mr. Greenspan. I don't know about the size of the estimate.
Those numbers tend usually to be a little larger than actually
is achieved.
Mr. Moore. Oh, really.
Mr. Greenspan. But they are still writing prescriptions on
pieces of paper.
Mr. Moore. Yes.
Mr. Greenspan. And how they understand what is on that
piece of paper has never been clear to me. And digitalizing, a
very significant part of the system, is undoubtedly a major
priority for addressing the cost issue.
Mr. Moore. And the last very quick question, I got here a
little bit late, but I heard you talking about pay-go rules and
budget enforcement rules that I think you said expired in 2002;
is that correct, Mr. Chairman?
Mr. Greenspan. September 2002.
Mr. Moore. And I believe you said it would be worthwhile
for Congress to implement that budget pay-go enforcement rules
that apply not only to new spending, but also to tax cuts as
well. Is that correct, sir?
Mr. Greenspan. That is correct.
Mr. Moore. Thank you very much. I yield back.
The Chairman. The gentleman from Texas for a couple of
minutes.
Mr. Bell. I will roll everything into one question, Mr.
Chairman. Thank you for recognizing me, and thank you, Chairman
Greenspan.
I wanted to refer to the topic of wages that came up
earlier today. In your statement you say, to be sure, the
increases in average hourly earnings of nonsupervisory workers
have been subdued in recent months and barely budged in June. I
think that is reflective of a pattern that has occurred over
several years now. You go on to say, other compensation has
accelerated this year, which suggests that the money is there,
it is just not going to the nonsupervisory workers.
As you are aware, the minimum wage, the Federal minimum
wage, has not been increased since 1997. Those who are forced
to live based solely on the minimum wage live at or very close
to the poverty line, and I am just curious if you feel as if
this wage situation in America is cause for alarm, and, if so,
have we reached the point that it is time to look at increasing
the minimum wage? In your opinion, what impact on the overall
economy would an increase in the minimum wage have at this
time?
Mr. Greenspan. As I have testified in the past, my concern
with the minimum wage is that it increases unemployment and,
indeed, prevents people who are at the early stages of their
careers from getting a foothold in the ladder of promotions.
And the evidence does suggest that it tends to be more
counterproductive than not. As a consequence, raising the
minimum wage is not, in my judgment, an effective way to
address what is a significant problem in the distribution of
income, which is what I discussed in my earlier remarks.
The Chairman. The gentleman's time has expired. We are
going to have to break now.
Again, our thanks to the gentleman from Texas.
Mr. Chairman, it is always good to have you here, and we
look forward to----
Mr. Frank. Let me say, just add to it, I would thank the
Chairman, but I would say on the topic the gentleman raised, I
am still waiting for the Fed analysis of the economic impact on
employment of the last minimum wage increase. It has been
overdue. I think, frankly, there was an absence of bad news
that led us not to get the analysis.
The Chairman. The Chair would indicate that Members may
submit written questions for the Chairman.
[The following information can be found on pages 76 and 80
in the appendix.]
The Chairman. With that, the committee stands adjourned.
[Whereupon, at 12:06 p.m., the committee was adjourned.]
A P P E N D I X
July 21, 2004
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