[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
CURRENT FISCAL ISSUES
=======================================================================
HEARING
before the
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
HEARING HELD IN WASHINGTON, DC, MARCH 2, 2001
__________
Serial No. 107-4
__________
Printed for the use of the Committee on the Budget
Available on the Internet: http://www.access.gpo.gov/congress/house/
house04.html
__________
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COMMITTEE ON THE BUDGET
JIM NUSSLE, Iowa, Chairman
JOHN E. SUNUNU, New Hampshire JOHN M. SPRATT, Jr., South
Vice Chairman Carolina,
PETER HOEKSTRA, Michigan Ranking Minority Member
Vice Chairman JIM McDERMOTT, Washington
CHARLES F. BASS, New Hampshire BENNIE G. THOMPSON, Mississippi
GIL GUTKNECHT, Minnesota KEN BENTSEN, Texas
VAN HILLEARY, Tennessee JIM DAVIS, Florida
MAC THORNBERRY, Texas EVA M. CLAYTON, North Carolina
JIM RYUN, Kansas DAVID E. PRICE, North Carolina
MAC COLLINS, Georgia GERALD D. KLECZKA, Wisconsin
ERNIE FLETCHER, Kentucky BOB CLEMENT, Tennessee
GARY G. MILLER, California JAMES P. MORAN, Virginia
PAT TOOMEY, Pennsylvania DARLENE HOOLEY, Oregon
WES WATKINS, Oklahoma TAMMY BALDWIN, Wisconsin
DOC HASTINGS, Washington CAROLYN McCARTHY, New York
JOHN T. DOOLITTLE, California DENNIS MOORE, Kansas
ROB PORTMAN, Ohio MICHAEL E. CAPUANO, Massachusetts
RAY LaHOOD, Illinois MICHAEL M. HONDA, California
KAY GRANGER, Texas JOSEPH M. HOEFFEL III,
EDWARD SCHROCK, Virginia Pennsylvania
JOHN CULBERSON, Texas RUSH D. HOLT, New Jersey
HENRY E. BROWN, Jr., South Carolina JIM MATHESON, Utah
ANDER CRENSHAW, Florida
ADAM PUTNAM, Florida
MARK KIRK, Illinois
Professional Staff
Rich Meade, Chief of Staff
Thomas S. Kahn, Minority Staff Director and Chief Counsel
C O N T E N T S
Page
Hearing held in Washington, DC, March 2, 2001.................... 1
Statement of Hon. Alan Greenspan, Chairman, Board of Governors of
the Federal Reserve System..................................... 3
Prepared statement of:
Hon. Ander Crenshaw, a Representative in Congress from the
State of Florida........................................... 2
Chairman Greenspan........................................... 7
Chairman Greenspan's written response to questions posed by
Mr. Bentsen................................................ 19
CURRENT FISCAL ISSUES
----------
FRIDAY, MARCH 2, 2001
House of Representatives,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to call, at 10 a.m. in room
210, Cannon House Office Building, Hon. Jim Nussle (chairman of
the committee) presiding.
Members present: Representatives Nussle, Sununu, Bass,
Gutknecht, Collins, Hastings, Culberson, Crenshaw, Putnam,
Spratt, Bentsen, Davis, Clayton, Price, Moran, McCarthy,
Capuano, and Honda.
Chairman Nussle. Good morning. I call the hearing to order.
This is the full committee hearing on current fiscal issues.
The witness today is the Honorable Alan Greenspan, Chairman of
the Board of Governors of the Federal Reserve System. We are
honored to have the Chairman with us this morning.
I have a brief statement that I would like to make, and
then I will offer Ranking Member Spratt the opportunity as
well, and then we would enjoy hearing from our witness.
In town meetings across Iowa, I often hear and have heard
throughout my tenure in Congress many different statements from
constituents with regard to budget advice. As long as 10 years
ago they said balance the budget, pay down the debt, take
Social Security off the table, fix Medicare. Wise advice;
common sense advice that I know many of my colleagues have
heard from their constituents.
This year not only do we hear pay down the national debt,
but we also hear, you know, that surplus should not be left in
Washington; give us some tax relief.
While the President has presented a budget that does all of
those things, and does them in a way that I believe is
successful and one that we can work with as a foundation based
on the now fifth year that we will go into balanced budgets,
having paid down $625 billion of national debt, providing tax
relief already, even before we begin this budget process for
Americans, and trying to hold as best we can the line on
spending for at least 4 of those 6 years, last year, of course,
being a grave exception to that, as we go into the budget
season this year, it is an honor to have the Chairman here to
give us his advice with regard to a number of issues.
I have three questions that I would be interested in
covering with the Chairman. First, what is the state of the
economy? It is a pretty broad question, but a pretty important
question as we look at the budget not only for this year, but
as we plan and set the foundation for the next 10 years. Number
two is how will tax relief, how will the tax plan, and how will
the budget plan provide stimulus or provide assistance in
answering the concerns of our current economy? Number three is
any recommendations he has with regard to paying down the
national debt.
Yesterday we heard from Mitch Daniels, the Director of the
Office of Management and Budget, who has written a budget,
together with the President, which pays down all of the
redeemable debt within the next 10 years using $2 trillion of
surplus money over the next 10 years to pay down that national
debt. This is what they say is all that we can financially
practicably pay down during this 10-year period, and I am
interested in hearing from the Chairman his advice with regard
to that portion of the plan as well.
We are happy to have the Chairman here, and before I
recognize the Chairman for his testimony, I would like to
recognize my friend and colleague Mr. Spratt, the Ranking
Member of the Budget Committee.
Mr. Spratt. Mr. Chairman, let me express my admiration also
for your work and welcome you once again to our committee. I
know you have testified many other places before coming here,
but we are glad to have you here, and we have some important
questions to put to you today. We are grateful that you have
come.
Mr. Greenspan. Thank you.
Chairman Nussle. Chairman Greenspan, welcome, and your
entire testimony, of course, will be made part of the record,
as, without any objection, all Member statements will be made
part of the record in total.
[The prepared statement of Ander Crenshaw follows:]
PREPARED STATEMENT OF HON. ANDER CRENSHAW, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF FLORIDA
Thank you, Mr. Chairman, for holding this hearing today. And, thank
you, Chairman Greenspan for coming here to share your views on the
economy, the budget, and our prospects for significant tax relief this
year.
It is my view that the President has laid out a very sound,
fiscally responsible course of action in his budget. He uses Social
Security surplus for Social Security and Medicare money for Medicare.
He proposes continuing to pay down the debt at an historic pace until
there is no redeemable debt left to retire without paying tremendous
premiums, and then he continues to retire it as it matures. He
prioritizes his funding requests to reflect a vision for our nation's
future, including improving public education, increasing medical
research, and meeting the quality-of-life needs of America's
servicemembers.
President Bush also sets aside $1 trillion to establish a sort of
``rainy day'' fund. Never before has our nation done this--set aside
money for unexpected contingencies and long-range reforms. But, now
that it has been contemplated, it seems so obvious.
And, even after all that, President Bush makes sure that the
American taxpayers get to keep a little more of their hard-earned
money, instead of sending it to Washington. When I was President of the
Senate in Florida, we passed our first balanced budget without raising
taxes. We did it by prioritizing our spending needs and making tough
choices. Here, in Congress, with these historic surpluses, we have an
opportunity to do still more for the people we represent. Applying the
same principles--prioritizing our spending and making tough choices--we
can actually reduce the tax burden on American taxpayers and let them
use the money for their own household spending needs.
I appreciate your candor, Chairman Greenspan, and look forward to
working with you on these important issues.
1. In testimony before the Senate Budget and Banking Committees
earlier this year, you indicated your support for a substantial tax
relief package. Your statements have also implied tepid support for a
trigger mechanism that would slow down or stop the gradual
implementation of tax relief should the surpluses not appear as
projected. Senator Kent Conrad, the Ranking Member on the Senate Budget
Committee, has rejected the trigger concept out-of-hand, saying, ``You
would be raising taxes at a time of an economic slowdown. That is
exactly the wrong thing to be doing.'' Could you please settle the
record on whether you support or oppose a trigger mechanism? And, if
you do support one, how would you suggest we structure it?
2. I was wondering if you could comment on the President's proposal
for a contingency fund. There comes a point when we retire all of our
redeemable debt and to pay it down beyond that would mean paying
enormous premiums. So, we accumulate a surplus that the President would
set aside to meet unexpected needs, to tackle the kind of long-range
reforms in programs like Medicare and Social Security that Congress
typically puts off as too daunting, or to act as an economic cushion.
Do you have any thoughts on how this contingency fund might affect the
broader economy? Do you think its presence could buoy consumer
confidence?
Chairman Nussle. You may summarize or proceed as you wish.
Chairman Greenspan.
STATEMENT OF ALAN GREENSPAN, CHAIRMAN, BOARD OF GOVERNORS OF
THE FEDERAL RESERVE SYSTEM
Mr. Greenspan. Thank you very much, Mr. Chairman and
members of the committee. I am most pleased to appear here
today to discuss some of the important issues which you raise
surrounding the outlook of the Federal budget and the attendant
implications for the formulation of fiscal policy. In doing so,
I want to emphasize that I speak for myself and not necessarily
for the Federal Reserve.
The challenges we face both in shaping the budget for the
coming year and in designing a long-run strategy for fiscal
policy has been brought into sharp focus by the budget
projections that have been released in the past month and a
half. Both the Bush administration and the Congressional Budget
Office project growing on-budget surpluses under current policy
over the next decade. Indeed, growing on-budget surpluses were
projected even under the more conservative assumptions of the
Clinton administration's final budget projections.
The key factor driving the cumulative upward revisions in
the budget picture in recent years has been the extraordinary
pickup in the growth of labor productivity that appears to be
causing economists to raise their forecasts of the economy's
long-term growth rates and budget surpluses. This increased
optimism receives support from the forward-looking indicators
of technological innovation and structural productivity growth,
which have shown few signs of weakening despite the marked
curtailment in recent months of capital investment plans for
equipment and software.
To be sure, these impressive upward revisions to the growth
of structural productivity and economic potential are based on
inferences drawn from economic relationships that are different
from anything we have considered in recent decades. The
resulting budget projections, therefore, are necessarily
subject to a relatively wide range of uncertainty. CBO, for
example, expects productivity growth rates through the next
decade to average roughly 2\1/2\ percent per year, far above
the average pace from the early 1970's through the mid-1990's,
but still below that of the past 5 years.
The most recent projections from OMB and CBO indicate that
if current policies remain in place, the total unified surplus
will reach about $800 billion in fiscal year 2010, including an
on-budget surplus of almost $500 billion. Moreover, the
admittedly quite uncertain long-term budget exercises released
by CBO last October maintain an implicit on-budget surplus
under baseline assumptions well past 2030, despite the
budgetary pressures from the aging of the baby boom generation,
especially on the major health programs.
These most recent projections, granted their tentativeness,
nonetheless make clear that the highly desirable goal of paying
off the Federal debt is in reach and, indeed, would occur well
before the end of the decade under baseline assumptions. This
is in marked contrast to the perception of a year ago when the
elimination of the debt did not appear likely until the next
decade at the earliest. But continuing to run surpluses beyond
the point at which we reach zero or near-zero Federal debt
brings to center stage the critical long-term fiscal policy
issue of whether the Federal Government should accumulate large
quantities of private or, more technically, non-Federal assets.
At zero debt, the continuing unified budget surpluses now
projected under current law imply a major accumulation of
private assets by the Federal Government. Such an accumulation
would make the Federal Government a significant factor in our
Nation's capital markets and would risk significant distortion
in the allocation of capital to its most productive uses. Such
a distortion could be quite costly, as it is our
extraordinarily effective allocation process that has enabled
such impressive increases in productivity and standards of
living despite a relatively low domestic saving rate.
I doubt that it is possible to secure and sustain
institutional arrangements that would insulate Federal
investment decisions, over the longer run, from political
pressures. To be sure, the roughly $100 billion of assets in
the Federal Government's defined-contribution Thrift Savings
Plan have been well insulated from political pressures. But the
defined contribution nature of this plan means that it is
effectively self-policed by individual contributors, who would
surely object were their retirement assets to be diverted to
investments that offered less-than-market returns.
But such countervailing forces may be greatly attenuated
for Federal Government defined-benefit plans, such as Social
Security. To the extent that benefits are perceived to be
guaranteed by the government, beneficiaries may be much less
vigilant about the stewardship of trust fund assets.
Requiring the Federal Government to invest in indexed funds
arguably would largely insulate the investment decision from
political tampering. But such assets, by definition, can cover
only publicly traded securities, perhaps three-fifths of total
private capital assets. With large allocations of public funds
invested in larger enterprises, our innovative, smaller,
nonpublicly traded businesses might find themselves
competitively disadvantaged in obtaining financing. To be sure,
there is not universal agreement among economists on this
point, but it is a consideration that should be kept in mind.
More generally, the problematic experiences of some other
countries with large government accumulation of private assets
should give us pause about moving in that direction. To repeat,
over time, having the Federal Government hold significant
amounts of private assets, in my judgment, would risk
suboptimal performance by our capital markets, diminished
economic efficiency, and lower overall standards of living than
would be achieved otherwise.
Private asset accumulation, however, may be forced upon us
well short of reaching zero debt. Both CBO and OMB project an
inability of current services unified budget surpluses to be
applied wholly to repay debt by the middle of this decade.
Without policy changes, private asset accumulation is likely to
begin in just a few short years.
In summary, then, the Congress needs to make a policy
judgment regarding whether and how private assets should be
accumulated in Federal Government accounts. This judgment will
have important implications for the level of saving and, hence,
investment in our economy, as well as for the nature of
government programs. If, for example, the accumulation of
assets is avoided by eliminating unified budget surpluses
through tax and spending changes, public and presumably
national savings may well fall from already low levels. If so,
over time, capital accumulation and the productive capacity of
the economy presumably would be reduced through this channel.
Eliminating unified surpluses by transforming Social Security
into a defined-contribution system with accounts held in the
private sector would likely better maintain national savings
levels, but the nature of Social Security would at the same
time be fundamentally changed. Alternatively, unified surpluses
could be used to establish mandated individual retirement
accounts outside the Social Security System, also mitigating
the erosion in national savings.
The task before the administration and the Congress in the
years ahead is likely to prove truly testing. But, of course,
the choices confronting you are far more benign than having to
deal with deficits ``as far as the eye can see.''
Returning to the broader fiscal picture, I continue to
believe, as I have testified previously, that all else being
equal, a declining level of Federal debt is desirable because
it holds down long-term real interest rates, thereby lowering
the cost of capital and elevating private investment. The rapid
capital deepening that has occurred in the U.S. economy in
recent years is a testament to these benefits. But the sequence
of upward revisions to the budget surplus projections for
several years now has reshaped the choices and opportunities
before us.
Indeed, in almost any credible baseline scenario, short of
a major prolonged economic contraction, the full benefits of
debt reduction are now achieved well before the end of this
decade, a prospect that did not seem reasonable only a year or
even 6 months ago. Thus, the emerging key fiscal policy need is
now to address the implications of maintaining surpluses beyond
the point at which publicly held debt is effectively
eliminated.
Though special care must be taken not to conclude that
wraps on fiscal discipline are no longer necessary, at the same
time we must avoid a situation in which we come upon the level
of irreducible debt so abruptly that the only alternative to
the accumulation of private assets would be a sharp reduction
in taxes or an increase in expenditures. These actions might
occur at a time when sizable economic stimulus would be
inappropriate. Should this Congress conclude that this is a
sufficiently high probability, it is none too soon to adjust
policy to fend off such potential imbalances.
For reasons I have testified to previously, if long-term
fiscal stability is the criterion, it is far better, in my
judgment, that the surpluses be lowered by tax reductions than
by spending increases. The flurry of increases in outlays that
occurred near the conclusion of last fall's budget
deliberations is troubling because it makes the previous year's
lack of discipline less likely to have been an aberration.
As for tax policy over the longer run, most economists
believe that it should be directed at setting rates at the
levels required to meet spending commitments while doing so in
a manner that minimizes distortions, increases efficiency, and
enhances incentives for saving, investment, and work.
In recognition of the uncertainties in the economic and
budget outlook, it is important that any long-term tax plan, or
spending initiative for that matter, be phased in. Conceivably,
it could include provisions that, in some way, would limit
surplus-reducing actions if specified targets for the budget
surplus or Federal debt levels were not satisfied. Only if the
probability were very low that prospective tax cuts or new
outlay initiatives would send the on-budget accounts into
deficit, would unconditional initiatives appear prudent.
The reason for caution, of course, rests on the
tentativeness of our projections. To be sure, unless the
current economic weakness reveals a less favorable relationship
between tax receipts, income, and asset prices than has been
assumed in recent projections, receipts should be reasonably
well maintained in the near term, as the effects of earlier
gains in asset values continue to feed through with a lag into
tax liabilities. But the longer-run effects of movements in
asset values are much more difficult to assess, and those
uncertainties would intensify should equity prices remain
significantly off their peaks.
In the end, the outlook for Federal budget surpluses rests
fundamentally on expectations of longer-term trends in
productivity, fashioned by judgments about the technologies
that underline these trends. Economists have long noted that
the diffusion of technology starts slowly, accelerates, and
then slows with maturity. But knowing where we now stand in
that sequence is difficult, if not impossible, in real time.
Faced with these uncertainties, it is crucial that we develop
budgetary strategies that deal with any disappointments that
could occur.
That said, the changes in the budget outlook over the past
several years are truly remarkable. Little more than a decade
ago, the Congress established budget controls that were
considered successful because they were instrumental in
squeezing the burgeoning budget deficit to tolerable
dimensions. Nevertheless, despite the sharp curtailment of
defense expenditures under way during those years, few believed
that a surplus was anywhere on the horizon, and the notion that
the rapidly mounting Federal debt could be paid off would not
have been taken seriously.
But let me end on a cautionary note. With today's euphoria
surrounding the surpluses, it is not difficult to imagine the
hard-earned fiscal restraint developed in recent years rapidly
dissipating. We need to resist those policies that could
readily resurrect the deficits of the past and the fiscal
imbalances that followed in their wake.
Thank you very much. I look forward to your questions, Mr.
Chairman.
Chairman Nussle. Thank you, Mr. Chairman.
[The prepared statement of Alan Greenspan follows:]
PREPARED STATEMENT OF HON. ALAN GREENSPAN, CHAIRMAN, BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
I am pleased to appear here today to discuss some of the important
issues surrounding the outlook for the Federal budget and the attendant
implications for the formulation of fiscal policy. In doing so, I want
to emphasize that I speak for myself and not necessarily for the
Federal Reserve.
The challenges you face both in shaping a budget for the coming
year and in designing a longer-run strategy for fiscal policy have been
brought into sharp focus by the budget projections that have been
released in the past month and a half. Both the Bush Administration and
the Congressional Budget Office project growing on-budget surpluses
under current policy over the next decade. Indeed, growing on-budget
surpluses were projected even under the more conservative assumptions
of the Clinton Administration's final budget projections.
The key factor driving the cumulative upward revisions in the
budget picture in recent years has been the extraordinary pickup in the
growth of labor productivity experienced in this country since the mid-
1990's. Between the early 1970's and 1995, output per hour in the
nonfarm business sector rose about 1\1/2\ percent per year, on average.
Since 1995, however, productivity growth has accelerated markedly,
about doubling the earlier pace, even after one takes account of the
impetus from cyclical forces. Though hardly definitive, the apparent
sustained strength in measured productivity in the face of a pronounced
slowing in the growth of aggregate demand during the second half of
last year was an important test of the extent of the improvement in
structural productivity. These most recent indications have added to
the accumulating evidence that the apparent increases in the growth of
output per hour are more than transitory.
It is these observations that appear to be causing economists to
raise their forecasts of the economy's long-term growth rates and
budget surpluses. This increased optimism receives support from the
forward-looking indicators of technical innovation and structural
productivity growth, which have shown few signs of weakening despite
the marked curtailment in recent months of capital investment plans for
equipment and software.
To be sure, these impressive upward revisions to the growth of
structural productivity and economic potential are based on inferences
drawn from economic relationships that are different from anything we
have considered in recent decades. The resulting budget projections,
therefore, are necessarily subject to a relatively wide range of
uncertainty. CBO, for example, expects productivity growth rates
through the next decade to average roughly 2\1/2\ percent per year--far
above the average pace from the early 1970's to the mid-1990's, but
still below that of the past 5 years.
Had the innovations of recent decades, especially in information
technologies, not come to fruition, productivity growth during the past
five to 7 years, arguably, would have continued to languish at the rate
of the preceding twenty years. The sharp increase in prospective long-
term rates of return on high-tech investments would not have emerged as
it did in the early 1990's, and the associated surge in stock prices
would surely have been largely absent. The accompanying wealth effect,
so evidently critical to the growth of economic activity since the mid-
1990's, would never have materialized.
In contrast, the experience of the past 5 to 7 years has been truly
without recent precedent. The doubling of the growth rate of output per
hour has caused individuals' real taxable income to grow nearly 2\1/2\
times as fast as it did over the preceding 10 years and has resulted in
the substantial surplus of receipts over outlays that we are now
experiencing. Not only has taxable income risen with the faster growth
of GDP, but the associated large increase in asset prices and capital
gains has created additional tax liabilities not directly related to
income from current production.
The most recent projections from OMB and CBO indicate that, if
current policies remain in place, the total unified surplus will reach
about $800 billion in fiscal year 2010, including an on-budget surplus
of almost $500 billion. Moreover, the admittedly quite uncertain long-
term budget exercises released by the CBO last October maintain an
implicit on-budget surplus under baseline assumptions well past 2030
despite the budgetary pressures from the aging of the babyboom
generation, especially on the major health programs.
These most recent projections, granted their tentativeness,
nonetheless make clear that the highly desirable goal of paying off the
Federal debt is in reach and, indeed, would occur well before the end
of the decade under baseline assumptions. This is in marked contrast to
the perception of a year ago, when the elimination of the debt did not
appear likely until the next decade. But continuing to run surpluses
beyond the point at which we reach zero or near-zero Federal debt
brings to center stage the critical longer-term fiscal policy issue of
whether the Federal Government should accumulate large quantities of
private (more technically, nonfederal) assets.
At zero debt, the continuing unified budget surpluses now projected
under current law imply a major accumulation of private assets by the
Federal Government. Such an accumulation would make the Federal
Government a significant factor in our nation's capital markets and
would risk significant distortion in the allocation of capital to its
most productive uses. Such a distortion could be quite costly, as it is
our extraordinarily effective allocation process that has enabled such
impressive increases in productivity and standards of living despite a
relatively low domestic saving rate.
I doubt that it is possible to secure and sustain institutional
arrangements that would insulate Federal investment decisions, over the
long run, from political pressures. To be sure, the roughly $100
billion of assets in the Federal Government's defined-contribution
Thrift Savings Plan have been well insulated from political pressures.
But the defined-contribution nature of this plan means that it is
effectively self-policed by individual contributors, who would surely
object were their retirement assets to be diverted to investments that
offered less-than-market returns.
But such countervailing forces may be greatly attenuated for
Federal Government defined-benefit plans such as Social Security. To
the extent that benefits are perceived to be guaranteed by the
government, beneficiaries may be much less vigilant about the
stewardship of trust fund assets.
Requiring the Federal Government to invest in indexed funds
arguably would largely insulate the investment decision from political
tampering. But such assets, by definition, can cover only publicly
traded securities, perhaps three-fifths of total private capital
assets. With large allocations of public funds invested in larger
enterprises, our innovative, smaller, non-publicly traded businesses
might find themselves competitively disadvantaged in obtaining
financing. To be sure, there is not universal agreement among
economists on this point, but it is a consideration that should be kept
in mind. More generally, the problematic experiences of some other
countries with large government accumulation of private assets should
give us pause about moving in that direction. To repeat, over time,
having the Federal Government hold significant amounts of private
assets would risk suboptimal performance by our capital markets,
diminished economic efficiency, and lower overall standards of living
than would be achieved otherwise.
Private asset accumulation may be forced upon us well short of
reaching zero debt. Obviously, savings bonds and state and local
government series bonds are not readily redeemable before maturity. But
the more important issue is the potentially rising cost of retiring
long-maturity marketable Treasury debt. While shorter-term marketable
securities could be allowed to run off as they mature, longer-term
issues could only be retired before maturity through debt buybacks. The
magnitudes are large: As of January 1, for example, there was in excess
of three quarters of a trillion dollars in outstanding nonmarketable
securities, such as savings bonds and state and local series issues,
and marketable securities (excluding those held by the Federal Reserve)
that do not mature and could not be called before 2011. Some holders of
long-term Treasury securities may be reluctant to give them up,
especially those who highly value the risk-free status of those issues.
Inducing such holders, including foreign holders, to willingly offer to
sell their securities prior to maturity could require paying premiums
that far exceed any realistic value of retiring the debt before
maturity. Both CBO and OMB project an inability of current services
unified budget surpluses to be applied wholly to repay debt by the
middle of this decade. Without policy changes, private asset
accumulation is likely to begin in just a few short years.
In summary, the Congress needs to make a policy judgment regarding
whether and how private assets should be accumulated in Federal
Government accounts. This judgment will have important implications for
the level of saving and, hence, investment in our economy, as well as
for the nature of government programs. If, for example, the
accumulation of assets is avoided by eliminating unified budget
surpluses through tax and spending changes, public and presumably
national saving may well fall from already low levels. If so, over
time, capital accumulation and the productive capacity of the economy
presumably would be reduced through this channel. Eliminating unified
surpluses by transforming Social Security into a defined-contribution
system with accounts held in the private sector would likely better
maintain national saving levels. But the nature of Social Security
would at the same time be fundamentally changed. Alternatively, unified
surpluses could be used to establish mandated individual retirement
accounts outside the Social Security system, also mitigating the
erosion in national saving.
The task before the Administration and the Congress in the years
ahead is likely to prove truly testing. But, of course, the choices
confronting you are far more benign than having to deal with deficits
``as far as the eye can see.''
Returning to the broader fiscal picture, I continue to believe, as
I have testified previously, that all else being equal, a declining
level of Federal debt is desirable because it holds down long-term real
interest rates, thereby lowering the cost of capital and elevating
private investment. The rapid capital deepening that has occurred in
the U.S. economy in recent years is a testament to these benefits. But
the sequence of upward revisions to the budget surplus projections for
several years now has reshaped the choices and opportunities before us.
Indeed, in almost any credible baseline scenario, short of a major
and prolonged economic contraction, the full benefits of debt reduction
are now achieved well before the end of this decade--a prospect that
did not seem reasonable only a year or even 6 months ago. Thus, the
emerging key fiscal policy need is now to address the implications of
maintaining surpluses beyond the point at which publicly held debt is
effectively eliminated.
But, though special care must be taken not to conclude that wraps
on fiscal discipline are no longer necessary, at the same time we must
avoid a situation in which we come upon the level of irreducible debt
so abruptly that the only alternative to the accumulation of private
assets would be a sharp reduction in taxes or an increase in
expenditures. These actions might occur at a time when sizable economic
stimulus would be inappropriate. Should this Congress conclude that
this is a sufficiently high probability, it is none to soon to adjust
policy to fend off such potential imbalances.
In general, for reasons I have testified to previously, if long-
term fiscal stability is the criterion, it is far better, in my
judgment, that the surpluses be lowered by tax reductions than by
spending increases. The flurry of increases in outlays that occurred
near the conclusion of last fall's budget deliberations is troubling
because it makes the previous year's lack of discipline less likely to
have been an aberration.
As for tax policy over the longer run, most economists believe that
it should be directed at setting rates at the levels required to meet
spending commitments, while doing so in a manner that minimizes
distortions, increases efficiency, and enhances incentives for saving,
investment, and work.
In recognition of the uncertainties in the economic and budget
outlook, it is important that any long-term tax plan, or spending
initiative for that matter, be phased in. Conceivably, it could include
provisions that, in some way, would limit surplus-reducing actions if
specified targets for the budget surplus or Federal debt levels were
not satisfied. Only if the probability were very low that prospective
tax cuts or new outlay initiatives would send the on-budget accounts
into deficit, would unconditional initiatives appear prudent.
The reason for caution, of course, rests on the tentativeness of
our projections. What if, for example, the forces driving the surge in
tax revenues in recent years begin to dissipate or reverse in ways that
we do not now foresee? Indeed, we still do not have a full
understanding of the exceptional strength in individual income tax
receipts during the latter years of the 1990's. To the extent that some
of the surprise has been indirectly associated with the surge in asset
values in the 1990's, the softness in equity prices over the past year
has highlighted some of the risks going forward.
To be sure, unless the current economic weakness reveals a less
favorable relationship between tax receipts, income, and asset prices
than has been assumed in recent projections, receipts should be
reasonably well maintained in the near term, as the effects of earlier
gains in asset values continue to feed through with a lag into tax
liabilities. But the longer-run effects of movements in asset values
are much more difficult to assess, and those uncertainties would
intensify should equity prices remain significantly off their peaks. Of
course, the uncertainties in the receipts outlook do seem less
troubling in view of the cushion provided by the recent sizable upward
revisions to the 10-year surplus projections. But the risk of adverse
movements in receipts is still real, and the probability of dropping
back into deficit as a consequence of imprudent fiscal policies is not
negligible.
In the end, the outlook for Federal budget surpluses rests
fundamentally on expectations of longer-term trends in productivity,
fashioned by judgments about the technologies that underlie these
trends. Economists have long noted that the diffusion of technology
starts slowly, accelerates, and then slows with maturity. But knowing
where we now stand in that sequence is difficult--if not impossible--in
real time. Faced with these uncertainties, it is crucial that we
develop budgetary strategies that deal with any disappointments that
could occur.
That said, the changes in the budget outlook over the past several
years are truly remarkable. Little more than a decade ago, the Congress
established budget controls that were considered successful because
they were instrumental in squeezing the burgeoning budget deficit to
tolerable dimensions. Nevertheless, despite the sharp curtailment of
defense expenditures under way during those years, few believed that a
surplus was anywhere on the horizon. And the notion that the rapidly
mounting Federal debt could be paid off would not have been taken
seriously.
But let me end on a cautionary note. With today's euphoria
surrounding the surpluses, it is not difficult to imagine the hard-
earned fiscal restraint developed in recent years rapidly dissipating.
We need to resist those policies that could readily resurrect the
deficits of the past and the fiscal imbalances that followed in their
wake.
Chairman Nussle. I would like you, if you would, to
highlight from your testimony and from your opinion what you
believe the state of the economy is as we speak and in the near
future. The concern of markets, our constituents, consumers
throughout the country is something that is certainly on the
minds of all of us as we begin the job of writing the budget
for this year. And, in fact, it certainly was on the mind of
the President as he made his first proposal.
I am particularly interested in your views about what would
be the greatest assistance that we could provide from this
budget; what is the greatest assistance to the economy from our
budgetary decisions; and what would be the greatest threat to
the economy as you see it today from the decisions we are about
to make on the budget.
Mr. Greenspan. Well, Mr. Chairman, I outlined in some
detail my views of the short-term outlook at the House
Financial Services Committee recently, and I will not go into
detail on that, but just let me say that the crucial issue that
I think confronts you is the fact that the projections that we
are looking at are being driven to a very substantial extent by
longer-term considerations, in part because a large part of the
receipts that we are observing, that are coming on stream in a
manner which are well above expectations, seem to be to a
significant extent the result of the huge rise in asset values,
especially in households, and the rise in asset values that has
reflected itself in increased tax liabilities, especially in
individual tax returns.
There is a long lag in the translation of capital asset
values into their realization and taxation, whether it be
literally the capital gains tax itself or, just as importantly,
the effect of capital gains on taxable incomes. Because there
is a very long lag in that process, the actual short-term
budget outlook is not going to be as closely aligned to what
economic forces are as it always has been in the past because
of these significant differences. So the crucial issue is
really going to have to emphasize more the longer-term view.
And in response to your last question, Mr. Chairman, I
think that the most important thing that the budget should do
is to create a sense of stability and long-term coherence in
budget policy. That, in my judgment, can create the most
effective backstop for economic decisions in this country. And
I would hope that what we do is get on a path of budget policy
which we do not back and fill from too readily, because that
creates uncertainties in the marketplace. And, presumably, if
it occurs to a substantial extent, then I think it will induce
negative effects on capital investment.
But above all, as I said in my closing remarks, these are
extraordinary times. These surpluses have done extraordinarily
positive things for our economy. Let us remember that deficits
for a very protracted period of time dominated the discussions
of this committee. Hopefully we will not get back and should
not get back into those types of discussions again.
Chairman Nussle. One of the advantages that I believe we
have had in forecasting and putting our budgets together is
that we have been relatively pessimistic with regard to the
economic growth potential that we anticipate within the current
budget, let alone for the 10-year forecast that we put into
play, and that has resulted in as much as $80 billion increases
in overforecast of our revenues.
Do you have any opinion with regard to the forecasts or
with regard to the growth figures that are being contemplated
for this budget? We are using what many are suggesting are
pessimistic views, certainly below the blue-chip averages that
are being suggested right now. That, to me, appears to be not
only pessimistic, but realistic with regard to your concerns.
If that is true, then that should, to some extent, alleviate
some of the concern you have with regard to our budgeting.
Mr. Greenspan. Well, Mr. Chairman, we have looked at the
various projections of both OMB and CBO and the previous
administration's OMB. They are all very close. And they are all
close not because the outlook is so sharply in focus that it is
very difficult to deviate, but what tends to happen in periods
such as this is you try to get a sense of what the various
probabilities are out there, and while the range of
probabilities may be rather wide, there is sort of a maximum
likelihood estimate that is pretty much convergent around the
types of numbers that we have seen in these various
projections. So it is reasonable to do that.
Let me just say that being conservative for conservative's
sake is a mistake, because that, by definition, means you have
a suboptimal forecast, and you don't want to do that. You want
to get the best estimate you can and then focus on the obvious
problems of how accurate that forecast is. But one doesn't
solve that problem by taking an especially either overly
optimistic or overly pessimistic view. That doesn't help you
make projections, it just helps you make mistakes.
So the question should not be whether you are conservative
or not, but what is the most likely outcome and what is the
range, the realistic range, that one can expect when you are
dealing with 5- and 10-year forecasts.
Chairman Nussle. It seems to me what you are telling us is
that these forecasts that we are using from OMB and CBO appear
to be at least realistic within our current understanding of
where the economy is going.
Mr. Greenspan. Mr. Chairman, let me just say that the
crucial factor, as I pointed out in my prepared remarks and in
other testimony, is the increasing evidence that the underlying
structural productivity growth of this economy has picked up to
levels quite significantly above where it was, for example, in
the 20 years preceding 1995. To be sure, it's likely to be
coming down, as indeed the data do show for the third and the
fourth quarters, and certainly will show for the first quarter.
The productivity, the actual output-per-hour growth rates, are
going to come down quite significantly, but that is to be
expected and not inconsistent with the general view that the
longer-term productivity numbers are going to be running at
rates of increase above where they have been in the past.
If that assumption is made, a whole series of other
calculations fall into place. Of all the assumptions we make
about the deliberations on the budget, that is the critical
one. If that one is right, you can be wrong on a large number
of other things. If that one turns out to be wrong, then the
outlook is really quite fundamentally different from anything
we have seen in the numbers of projections that you have been
exposed to.
Chairman Nussle. Because there is a certain level of
uncertainty with regard to projections, the President has put
together a plan which suggests that we can pay down all of the
redeemable debt between now and 2011, as part of the plan, $2
trillion; that another substantial portion of that, $1.6
trillion, should be returned from that tax surplus to the
people that pay the taxes in the form of tax relief. The Ways
and Means Committee just yesterday moved the first piece of
that legislation. Finally, that there should be approaching a
$1 trillion reserve fund for a contingency. And I suppose to
some extent that contingency may be that some of those
surpluses may not be realized to their fullest extent.
Does this general matrix appear to be wise within the
counsel that you are providing us today, cautioning us about
the surpluses actually coming to fruition in years to come?
Mr. Greenspan. Mr. Chairman, I would like to respond by
repeating what I have said many times in the past. These
judgments are fundamentally political judgments in the best
sense of the term; they are based on value judgments made by
our elected representatives, and the issues that I would raise
relate to the macroeconomic effects and the broader issues. But
I hesitate to raise issues on the very details of any
particular program because they are very difficult decisions,
and there are pluses and minuses on both sides.
At the root, these are value judgments and judgments about
where the future of this country is going and what type of
budgetary processes we want. And if I may, I would like to
eschew giving personal opinions. Even though I am a voter with
one vote, it is out of a rather large voting population, and I
don't think I want to put more weight on it than I think it
deserves.
Chairman Nussle. I appreciate that.
One final question, then, to just zero in on one of the
pieces I think you might be willing to comment on, and that is
your consistent advice over the years with regard to paying
down as much of the publicly held debt as possible. That
appears to be a goal that can be accomplished. You mentioned it
as a highly desirable goal. It appears to be a goal that we can
achieve by probably the midpoint in this 10-year process, if
not $2 trillion by the end of 2011.
Do you believe that at least meets, to your satisfaction,
the goal that you believe is highly desirable?
Mr. Greenspan. When I originally raised the issue of the
first priority that we should have with respect to lowering the
debt from an economic point of view, and I emphasize, I made
that issue not as a judgment on values, but on a judgment as to
what my view was when asked with respect to the effects of a
lowering of debt on real interest rates, on the cost of capital
and, therefore, on rising productivity and standards of living.
I think that it is a very rare event--that policies which
endeavor to do something, like effectively reduce and, at the
end of the day, eliminate, for all practical purposes, the
Federal debt, are very likely to be achieved except if
something extraordinarily unforeseen occurs. And that is a
major achievement in this country, and it has had and will
continue to have as it goes forward a very positive effect.
But once we get down to the irreducible minimum, no further
benefits are possible. So in that sense, we declare victory and
go on to the next issue that is relevant to deliberations.
Chairman Nussle. Thank you, Mr. Chairman.
Mr. Spratt.
Mr. Spratt. Mr. Greenspan, when you mentioned that you had
one vote, I was reminded of George Orwell's comment that
sometimes some voters are more equal than others. I think your
vote is a very important one.
Mr. Greenspan. I believe in democracy; one vote per person.
Mr. Spratt. I do, too.
You have described the path we are trying to find as a
glidepath, the Greenspan glidepath. To establish that
glidepath, we need to know where we are and where we are going,
and that means we need to have some kind of fix on what is the
irreducible amount of debt within the foreseeable future.
I never thought we would have this dispute, but the
administration suggests that there is as much as $1.288 billion
of Treasury debt that is unredeemable, not callable; CBO
developed a figure to arrive at $818 billion; as I read your
testimony here, you have a figure close to $750 billion; and
Gary Ginsler, who used to be the Under Secretary of the
Treasury, responsible for debt management, said perhaps we
could get the debt down to $410 billion or $500 billion over
the same period without paying prohibitive penalties.
Could you give us an idea of, within the next 10 years,
what is the lowest point that we should try to achieve on this
Greenspan glidepath?
Mr. Greenspan. First of all, let me just say the reason for
the glidepath, as I hope I was able to elaborate, is basically
my concern that if we were to come up to a very large surplus
and choose to eliminate it because we were fearful of
accumulating private assets in government accounts, an abrupt
change at that point would be highly undesirable. And,
therefore, the glidepath I was talking about was a mechanism
which would reduce the probability of our coming up against
that sort of phenomenon and having to very rapidly adjust, in
an inappropriate manner, the fiscal policy of this country.
The question of what is the irreducible level has a number
of variables in it. It depends on how you calculate it and,
most importantly, at what time you are indicating the actual
level is breached. There is no ambiguity whatsoever about what
the debt is. There are certain elements in our debt which would
be very difficult, and indeed, inappropriate probably to
reduce. One, obviously, is savings bonds. Two is the State and
local government savings which facilitates the capacity of
State and local governments to take moneys they raise in debt
issuance and escrow them into a particular Federal Government
debt facility. These are valuable things that are extremely
unlikely to be reduced, or should not be reduced.
Then there is a very large component of marketable Treasury
securities, to a large extent held by foreign central banks and
foreign businesses and individuals, who hold those assets
because they perceive them to be an extraordinarily valuable,
risk-free, dollar-denominated obviously, asset which, even
though they may get, say, 5 percent on them annually, they
would be willing to hold them at 3 percent or less, meaning, to
get them to disgorge those securities prior to their maturity
would be extraordinarily expensive and obviously undesirable to
do. The level of what that number is, is a judgmental factor,
and it can vary. The first two I don't think really vary in the
slightest. That Treasury marketable securities is an issue,
what can be bought back and what cannot, is an open question.
Finally, there are obviously but not explicitly stated
different assumptions about what is going to be happening to 5-
and 10-year note issuance and 30-year bond issuance, because,
clearly, to the extent that those issues are expanded between
now and, say, 2006 or 2008 or 2010 will pretty much determine
what the level of unredeemable debt is without a very
significant amount of premium paid for outstanding debt. So
there is an issue of indeterminacy here which, in part, will
reflect to a very substantial extent the particular year in
which we run into a point when surpluses can no longer redeem
debt and, two, what Treasury policy is with respect to the
issuances of 5-, 10-, and 30-year coupon securities.
Mr. Spratt. Well, am I reading your testimony correctly to
indicate you think it might be as low as $700 billion, though?
Mr. Greenspan. Well, the number I wrote down there is
actually a different number from what others are using because
it is calculated differently. I was merely referring to what
the number was as of January 1 of this year, but that is not a
relevant number in that regard. I was using it merely as an
example of what the size and order of magnitude is, because we
will not get to a point of irredeemable debt for a number of
years, and as a consequence, the calculation must be made as of
that forward point.
Mr. Spratt. Let me ask you about the projections, which are
pretty phenomenal if you have been around here as long as I
have and grappled with the deficit and wondered if we would
ever see the budget in surplus.
You stressed in your testimony the ``tentativeness'' of
these projections because primarily of the fact that they rest
upon assumptions about productivity growth that is going on in
the economy now.
The question, I guess, is, is this systemic and sustained,
or is it something episodic, or, indeed, are we even reading
the evidence wrong?
CBO, when it did its book here, its latest forecast, to
emphasize the primacy of these factors in its forecast put it
on its cover. They show the productivity in the economy between
51 and 73, which was 2.7 percent. They show that productivity
dropped to 1.5 percent between 1974 and 1995, and now they are
assuming that it will continue at a level of about 2\1/2\
percent.
Now, they say in their report, however, on page 100, that
if this factor doesn't obtain, and if we revert to the
productivity growth rate of the previous 25-year period, and if
the cost assessment of Medicare and Medicaid is off by 1
percent, and if tax revenues don't grow faster than underlying
incomes that are taxed, then we are not on an ascending path of
higher and higher surpluses. Indeed, we will have an on-budget
deficit by as early as 2003, 2004.
Would you share that view? Have you read the budget
estimate yourself to include that particular chapter?
Mr. Greenspan. Well, I don't know about the 2003-2004
issue. Let me say this: The issue of productivity is beyond
2003 and 2004, because the period immediately ahead is far less
relevant than the more deep-seated question of what the broader
productivity patterns are going to be in, say, 2005 and
forward. If it turns out that productivity has only a 1.5
percent annual growth rate leaving out Medicare and all the
other issues, you have a fundamentally different issue.
But remember that there are two sides to this. That is,
what both CBO and OMB are trying to do is give you a middle
estimate, and they can just as easily be wrong by being too low
as being too high.
So we have to confront the possibility of both types of
problems, and I think they are problems in the sense that
having very large chronic surpluses, while obviously a far more
benign phenomenon than having large deficits, nonetheless do
create significant economic problems in the allocation of
capital. We ought to be aware that allowing either side--either
extremely large surpluses or extremely large deficits--both
have significant negatives.
So one of the real issues that confronts us is to get a
sense of where we are in all of this. That is why I think, as
CBO and indeed OMB point out very correctly, the crucial issue
here is these long-term productivity growth numbers. And we
will not get a truly effective fix on them, one that creates a
good deal of confidence, until we have been through this full
cycle, which we are now working our way through, and see where
we come out when we are back to normal.
The data to date, as I indicated in my prepared remarks,
are quite encouraging in that regard, but we are not there yet,
and there are considerable possibilities that the numbers that
are being projected can turn out to be significantly off.
Mr. Spratt. Well, in light of that, you have recommended
some caution on our part in not going too far with the policy
actions that we take that would be irreversible. And yet you
were saying today you are concerned about instability in the
marketplace. You would like to see a stability of fiscal
policy.
I infer from that, then, that you are being a little
skeptical of triggers that would turn off and turn on tax cuts
and leave the market wondering what may happen?
Mr. Greenspan. If you put on triggers, there is no question
that you do create an element of uncertainty with respect to
economic decisionmaking that is based upon presumptions of
longer-term tax cuts or, for that matter, expenditure
increases.
The trigger by itself, wholly from the point of view of
looking at the certainty issue and its effect on economic
decisions, is a negative. In my judgment, however, the ability
to have a far more calibrated pattern of unified surpluses and
a more balanced system, which triggers help to achieve to a
considerable extent, is a more important value, from my point
of view, than the question of how the tax system is affecting
economic activity.
The reason I say that, Congressman, is that we have at this
moment an extraordinary productive set of incentives in our
economy in the sense that we are clearly only part way through
this major technological revolution which has been creating
very high long-term rates of return on new facilities. The
problem is not the long-term earnings expectations, which are
currently creating problems. It is the discount factor, as best
I can judge, namely, a very high degree of uncertainty and
risk.
As I indicated in comments before the House Financial
Services Committee, it is that sharp increase in the discount
factor which has brought the present value of assets down and
curbed capital investment in the short run. But that is an
issue which relates to the short run, and I don't perceive that
what we are missing at this point are long-term incentives.
I did also say in previous testimony, and indeed I have
commented on occasion, that if you think of the Tax Code and
potential tax cuts as a stimulus to the economy, it is very
unlikely that in the short run you can really significantly
affect the evolution of what is going on in the economy now,
unless you moved extraordinarily rapidly. It would have a value
only if the adjustment process we are now undergoing stretched
out inordinately, in which case having lower taxes rather than
having higher taxes undoubtedly would be helpful.
So it is a very complex set of decisions that are involved
here, and a lot rests upon forecasts which we can make only
tentatively.
Mr. Spratt. Thank you, Mr. Chairman. Let me yield to
others. I may have some questions when we get to the end. Thank
you very much, though.
Chairman Nussle. Mr. Sununu.
Mr. Sununu. Thank you very much.
Welcome, Mr. Chairman.
If I were an economist, I would be very focused on the
issues and the statistics and assessments of productivity and
economic growth, and I would go back to my office and maybe
make adjustments on the economic model I had on my computer.
But I am not an economist, and I don't have such a model. I am
a budgeteer right now working on the Budget Committee. And
rather than focus on productivity, I am focused on revenue
growth, on projecting revenue growth, and I know the economy
plays into that.
But there are other factors, in particular the assumption
one makes about the percentage of the national economy that is
consumed or collected at the Federal level on taxes. On that
point, both the Budget Office and the OMB assume a reduction, a
declining level of tax collection as a percentage of our
Nation's economy. That confuses me a little bit. But more to
the point, it results in an assessment of revenue growth that
is significantly below historic averages.
If you go over any 10-year period, say, in the second half
of the 20th century, look at the 1950's, the 1960's, look at
the decade of the 1970's even, when productivity was low, the
decade of the 1980's or 1990's, in each of those decades
revenue growth ran between 7 and 9 percent per year. Now, we
are putting together a 10-year budget. If I was putting
together a 1- or 2-year budget, I might be more inclined to
look at the statistics you look at, inventories, productivity,
unemployment, et cetera. But over a longer period, I think that
the historic average does bear some importance.
Over the 10 years of this budget, we forecast a nominal
revenue growth of 5 percent per year, and that is markedly less
than the minimum of 7 percent per year over the decade periods
I have spoken about. You indicated it doesn't make sense to be
conservative just to be conservative, but my question is,
doesn't that strike you as too great a refutation of the
historic record or what might be different that would justify
thinking that the next 10 years would be so different than any
10-year period in the country's modern history?
Mr. Greenspan. Well, Congressman, you are quite correct
that the ratio of receipts to gross domestic product and
nominal value are projected down. And the reason they do that
relates to the issue I raised earlier; that in the most recent
period, a significant proportion of tax revenues are coming
directly or indirectly from capital gains either realized or
unrealized. And if you add that to the receipts that come
directly from taxes on earned income, you will end up with a
higher ratio relative to nominal GDP, which excludes capital
gains.
As a consequence of that, and I don't think they exactly do
it this way, but if you were able to strip out of the receipts
the parts that were not related to capital gains or changes in
asset values, and you took that as a projection, as a ratio to
the GDP, my impression is it would be pretty flat and, indeed,
would look very much like earlier periods.
So what is happening is this huge bulge in asset values is
distorting the ratio, and, implicitly or explicitly, both CBO
and OMB are taking those asset values and they are bringing
them down so that a smaller proportion of aggregate receipts
will be capital gains related. And, hence, since the GDP
doesn't include capital gains--that is the denominator--then
the ratio will fall.
And in that regard, I suspect they are correct in that it
is just a shorthand way of going through a more sophisticated
and very difficult calculation. But you are certainly correct,
there is no reason to project less than we have seen in the
past, after you adjust for a presumed capital gains bulge and
then some slowing down in that asset set of values.
Mr. Sununu. Slowing down in the asset values or declining
in the asset values?
Mr. Greenspan. I frankly don't know what their actual
estimates are. My presumption is that they probably have
adjusted for the decline in asset values in equities. Remember,
equities are only part of the issue here.
Mr. Sununu. Not that I don't have great respect for your
presumption, but you are presuming that this is the way they
have structured the model? It is not necessarily the way you
have analyzed economic growth. They do not send the model over
to you for your thumbs up, do they?
Mr. Greenspan. No. What I am trying to do is to infer why
they might have done it that way. I haven't had a chance to
look at the detail. But what I'm really saying is that if I
want to just summarize, it doesn't necessarily follow that
taking the projection as a ratio to the GDP and lowering it is
an incorrect assumption. But you are correct, I don't know that
firsthand.
Mr. Sununu. I want to address the issue that Mr. Spratt
raised, not to get into it in too much detail, but on the
irredeemable debt--the savings bond, and State issues you
talked about--is today about $360 billion. The longer-term
notes, 10 to 30 years, is roughly $790 billion. You had a
number as of January 1 this year of $750 billion.
I assume you took a portion of the 10-to 30-year
securities, roughly half, and said half of it might be held by
foreign banks, where there is a much greater reluctance to sell
without a significant premium, and that half might be purchased
in the open market at a modest or insignificant premium. Is
that a reasonable way of describing how the calculation is
made?
Mr. Greenspan. The number is calculated in a somewhat
different way from the way it should be if one is endeavoring
to get at the irredeemable debt. I calculated the number as
what basically was in the existing set of liabilities which
were not either matured or callable prior to the year 2011.
Now, the reason I did that was that no one had been discussing
this irredeemable debt previously, and I am just trying to give
an example. But I wouldn't use my numbers as being that
calculated.
Mr. Sununu. Aside from the issue of the premium that has to
be paid, as we approach that level, whatever it might be in 6
or 7 years, are there any other concerns or issues that we
should be aware of that will be raised by the capital markets;
in other words, the treasuries that are used by our banking
system and financial services system for collateral or that
play a role in other transactions?
Aside from the premium issue, are there going to be some
concerns raised by those elements of the capital markets as
these securities become more and more scarce?
Mr. Greenspan. Congressman, I think not. There is no doubt
that our Treasury issues have been an extraordinarily useful
benchmark security for not only our domestic financial markets,
but really for the rest of the world. And the question
basically is can we do without them if we have to? And the
answer is yes.
We at the Federal Reserve, for example, who hold over $500
billion in U.S. Treasury issues, are, as I have indicated
previously, undergoing a fairly extensive examination of how we
would operate an open market policy without this very
substantial amount of debt. It is obviously a little more
difficult to do it that way, but the advantages of reducing the
debt are such that this should be our first priority, and the
markets will adjust.
New benchmarks will arise. You will get the private markets
creating near riskless securities, quadruple-A securities, so
that while it clearly would be better, other things equal, to
have that Treasury debt out there, other things are not equal.
And the other things that are not equal is the value of having
very negligible amounts of U.S. Treasury debts outstanding.
Mr. Sununu. Thank you very much.
Chairman Nussle. Mr. Bentsen.
Mr. Bentsen. Mr. Chairman, always good to see you. I want
to follow up briefly on the point you were just getting on, and
I will ask a couple of questions for the record on that.
I did read your testimony from a couple of weeks ago before
the Senate Banking Committee where you talked about the study
that is going on at the Fed for its open market activities.
And, in fact, the Fed is engaging in using agency debt,
some of the GSE debt, and other types of securities, and you
are exploring, as I understand it, even going beyond State and
local debt. I am curious as to what other types of debt or
collateral you would be looking at. So I would like to hear for
the record, to the extent you could provide me where you are on
your study and the types of debt you are looking at, because
the Fed is facing the same problem that the general government
is facing--for different reasons, but nonetheless the same
problem.
I also would like for the record, because I don't think we
want to engage too much in this back and forth--and I have
asked the Chairman of the Financial Services Committee to hold
a hearing on this issue, the possibility of why--and the
efficiency or lack thereof of the Federal Government, the
Treasury Department in its debt management using unexpended
balances to decrease to maturity otherwise irreducible debt,
because I think it is interesting and we ought to discuss it.
If there is anyplace that you can earn arbitrage, legal
arbitrage, it is through the Federal Government. So I would ask
that your staff, if they could prepare a response to that,
whether or not that would be a feasible opportunity for us in
the future as a way of debt management and to get after this
trillion, 700 billion, 400 billion, whatever it is, that there
might some other market mechanisms that we might use.
[The information requested follows:]
Chairman Greenspan's Response to Questions Posed by Mr. Bentsen
As you noted, in my testimony before the Committee on Banking,
Housing, and Urban Affairs of the U.S. Senate on February 13, I stated
that, at its late January meeting, the Federal Open Market Committee
announced additional study of the possibility of moving beyond current
practice by expanding the scope of eligible assets for open market
operations or enhancing the role of the discount window. The minutes of
that meeting, which were released on March 22, provided further
elaboration of the content of the FOMC's discussion.
The FOMC decided to proceed cautiously and has asked Federal
Reserve staff to review a broad range of alternatives recognizing that
relative to investments in Treasury securities, all of the options
could entail significant drawbacks, including increases in credit risk
in the Federal Reserve's portfolio, reductions in its liquidity, and
potentially distorting effects on relative prices in financial markets.
In the near term, the FOMC asked the staff to investigate the
option of authorizing the Desk to engage in repurchase transactions
using assets that could be purchased under existing legal authority but
are not currently permitted by the FOMC--specifically, certain debt
obligations of U.S. state and local governments and of foreign
governments. Before the FOMC could decide on such an additional
diversification of the System's temporary holdings of financial assets,
a number of issues would need to be resolved that would necessitate
consultation with the Congress and market participants.
From a somewhat longer-term perspective, the FOMC also requested
the further study of certain other issues. One involved the appropriate
reliance on outright purchases versus temporary short-term transactions
that would be undertaken through intermediaries--such as repurchase
agreements with securities dealers and discount window loans to
depository institutions. The role of the discount window might be
expanded by auctioning such credit to financially sound institutions.
Another issue involved adding new assets not currently allowed by
law either to the permanent Federal Reserve portfolio or on a temporary
basis through a still wider range of underlying collateral for
repurchase agreements. Such use of private securities would have a
number of risk management and accounting implications that would need
thorough examination. The appropriate speed and extent of diversifying
the Federal Reserve's portfolio also would have to be carefully
considered. The Committee did not specify particular types of assets it
wanted to study further. Rather, it is still at the stage of looking at
broader issues of strategy relative to approaches to diversification,
liquidity, and risk should it need to utilize assets beyond those
currently authorized by the Federal Reserve Act.
You also asked about the merits of defeasing Federal debt that
cannot readily be paid down. Private borrowers typically defease debt
in order to remove it from their balance sheets, which may help them
gain access to credit on more favorable terms. The U.S. Treasury, of
course, already can borrow on very favorable terms, because the long-
term health of the U.S. economy and the strengths of its political
system provide investors with an extremely high level of assurance that
the Federal Government will have sufficient revenues to repay its debt
obligations. Thus, defeasing its debt is unlikely to improve the terms
on which the Treasury can borrow. You seem to be suggesting, however,
that the Treasury also could make an arbitrage profit by investing
funds in the liabilities of private issuers at a higher interest rate
than it pays on its debt. But the higher interest rate on such private
instruments importantly reflects higher risks that investors must bear.
Moreover, as you know, I am deeply concerned about the potential for
distorting financial markets if the Federal Government were to become a
major investor in private assets. I believe it would be virtually
impossible to shield investments by the Treasury's general fund from
political influence, and the resulting override of the market's
allocation of credit would lead to financial and economic
inefficiencies.
Mr. Bentsen. Let me go further to your testimony. I do want
to highlight for the record--some of the points you hit, and I
think it is important that we go through them again. On page 7,
you say limit surplus, reducing actions of specified targets
for the budget surplus, or Federal debt levels were not
satisfied. The reason for caution, of course, rests on the
tentativeness of our projections, but the risk of adverse
movements and receipts is still real. The probability of
dropping back into deficit as a consequence of imprudent fiscal
policies is not negligible. With today's euphoria surrounding
the surpluses, it is not difficult to imagine the hard-earned
fiscal restraint developed in recent years rapidly dissipating.
Those are notes of caution as I read it. I would further
ask, I think the laws of economics are fairly clear that a
dollar today is worth a lot more than a dollar tomorrow. Yet it
seems that we are moving in a path, with the President's
budget, of treating a dollar 10 years from now as a dollar that
we have in hand today, with no discounting at all. Except I
read your testimony to be a little different. I would like you
to comment on that.
The second thing I would like to ask you relates to the
President's budget and the treatment of the trust fund
surpluses. And I won't engage in the debate over the Medicaid
Trust Fund surplus that we had yesterday because that is an
intergovernmental function. But more to the point, and you
testified on this many times before this committee and other
committees, with respect to Social Security Trust Funds and
Medicare Trust Funds, there is a fiscal gap in both the Social
Security Trust and the Medicare Trust. In the past, I believe
you have testified that the best thing the government could do
would be to use surplus funds to pay down debt because in the
future we will have to regain debt that is held by the trust
funds and pay out the benefits. To spend that money--to take
surpluses and try and use those to paper over that fiscal gap
would not work because those funds are already obligated. And
yet it would appear from looking at the President's budget that
in some cases they are contemplating using perhaps $600 billion
from projected Social Security Trust Fund receipts for
privatization of the Social Security System. Would that not be
exacerbating the fiscal gap that is there already, or does that
mean that you have to make up that $600 billion by making
structural changes in the program as it relates to benefits in
the future?
The same would be said for the Medicare program. You have
trust fund assets that are obligated funds for future retirees,
but the administration seems to be poised to use those funds on
hand to restructure the program. Don't we have to make those
moneys up somewhere down the line? Those are not unencumbered
assets, in my reading of what I think you have said in the
past. Is that correct? And you, of course, have great expertise
in this area.
Mr. Greenspan. The problems arise because of the way we
keep the books in the unified budget system. If we try to
separate the issue of what the budget would look like on an
accrued basis as distinct from a unified cash basis, which is
what it is, we would still have a small deficit. And the reason
that would be the case is if you take Social Security by
itself, we are still increasing the net contingent liabilities
which are in the program, which now represent roughly $9
trillion or thereabouts. What that basically means is if you
are going to move part or indeed all of the Social Security
Trust Fund into the private sector, you move the obvious
receipts out of the unified budget, and you put them in the
private sector. But you also remove the obligations--the
government's obligations--and one way you can do that is by
creating what is called recognition bonds, the way the Chileans
did, in which what you pick up is the liability which each
individual worker has created for the Federal Government,
meaning the benefits that have accrued to that worker on the
basis of the existing Social Security benefit rules. And if you
even assume at this particular point that you are asking what
is the liability to that individual worker when he or she
retires, that is not on our books in the unified budget at this
time. And that is what that $9 trillion, $10 trillion number
is.
If you move part of Social Security to the private sector,
you move the receipts and you move the contingent liability,
meaning instead of a contingent liability which presumes the
Congress could change it, you hard-wire those liabilities and
make them indistinguishable from liabilities that the
government now must pay, the $3.4 trillion, for example. What
you then do is you increase the debt to the public by the
amount of recognition certificates that move into the private
sector.
So the issue here really relates to, when you make these
decisions, you have to take into consideration exactly what the
obligations of future benefits are going to be. And the
standard model that most people use, the Chilean model, which
is the one which is the cleanest one in that regard, is that
what they did is that they moved a significant part, in fact
virtually all, as I recall, of their contingent liabilities,
made it official debt of the government, created recognition
certificates, in a sense privatized Social Security.
Now, nobody is arguing to do that at this particular stage.
They are all arguing one form or another of whether you move
part of Social Security. The crucial issue here is in that
process do you move the benefit obligations to the private
sector as well, or do you increase the total benefits by adding
new benefit calculations that are coming from, say, the defined
contribution plan, which occurs as you move part of the Social
Security receipts over, or do you basically move the
requirement to pay benefits to the private account as well?
The crucial question that must be asked here: Are aggregate
Social Security benefits being increased or left the same?
Mr. Bentsen. Mr. Chairman, if I could ask for just an
English translation from the Chairman on this because I know my
time is up. On the issue of when you make that transfer, it is
not necessarily a dollar-for-dollar transfer of benefits. I
believe what you were saying, is when you transfer the benefits
from the government obligation to the private sector
obligation, the question then is, is the safety net which
existed in the government obligation, does it still exist in
the private obligation, or is the private obligation solely
contingent upon market value?
Mr. Greenspan. That is correct, Congressman. Implicit in
all of these discussions is usually some form of safety net
imposed not as part of the Social Security structure itself,
but an endeavor to catch those, who would be a small minority,
who invest poorly and as a consequence find themselves at the
point of retirement in some dire straits.
Mr. Bentsen. So that is not free.
Mr. Greenspan. Correct, it is not free.
Mr. Bentsen. Thank you, Mr. Chairman.
Chairman Nussle. Mr. Bass.
Mr. Bass. Thank you, Mr. Chairman, and thank you, Chairman
Greenspan, for being here today. I have three--peer between
these two heads here--three questions for you. First is
relevant--first two are relevant to Mr. Bentsen's comments, or
first one is at least.
Ultimately, what happens to the unredeemable surplus? You
talked in your testimony about not wanting to have private
investment. Maybe index funding is an interesting option. You
just talked about the possibility of privatization of Social
Security. I am not going to put words in your mouth. You
certainly don't support spending it, I don't think. So
ultimately from cash flow as well as a money management
standpoint, what happens to this surplus if it occurs? It is a
delightful debate, but we really don't know what to do with it.
My second question refers to the Goldilocks statement of
the President the other night. If you were economic emperor for
a day, and some might say you already are, would you agree with
the President that his tax cut is just about right?
The third question, and I will be quick here, which is a
different one, but we are going to be considering the
reintroduction of fast-track trade. It has got a new name now.
It is called trade promotion authority. Don't you believe that
this is an important economic priority for this country, and
the President, having been without fast track promotion
authority for over 7 years, needs it, and it needs to enacted
as soon as possible?
Mr. Greenspan. Congressman, let me go backwards. The
authority to enable the President to negotiate in an effective
manner on trade issues is a very crucially important
requirement if we are going to maintain open and expanding
markets. I think the evidence is highly impressive that trade
during the post-World War II period has been extraordinarily
beneficial to all parts of the world, especially the United
States. And it would be really tragic if we, who have led the
world in openness, don't continue to be the leader in opening
up markets, creating competition, and raising standards of
living everywhere.
So I think it is a very important issue, and hopefully I
will be able to expand on it. I have been invited by another
committee to discuss this issue, and I will try to be as
expansive as I can because it is a terribly important issue.
I am not going to comment on the Goldilocks issue. That is
an issue which the President and the Congress have to decide,
and I don't have anything useful to add, but would you just
give me a quick review? I have forgotten the first question.
Mr. Bass. Ultimately what happens to that unredeemable
surplus, the ultimate bottom line, after everything--we
actually have more money, Social Security, everything is paid,
is accounted for, there is still more cash coming in, what
could happen?
Mr. Greenspan. The simplest thing to do, leaving aside the
obvious issues of spending it or reducing taxes, because one of
the things you want to be careful about is not to reduce
national savings when you begin to move, is you take the
unified surplus and you try to bring it down to zero. A simple
way to do it, and it sounds a lot simpler than it probably is,
is to take individual retirement accounts, take them from the
government account, and put them in the private account. You
reduce the unified budget surplus by exact dollar for dollar of
what you take out. You put mandated individual retirement
accounts in the private sector. The presumption is that, one,
you don't have the problem which I am concerned about, namely
the issue of the Federal Government investing in private
securities, and, two, you don't have a material change in the
national savings rate. All you have done is move savings from
the government sector to the private sector, and that, frankly,
is probably highly desirable if you can do that.
So whether or not you do it through the Social Security
Trust Funds or IRAs or other mechanisms of that nature is a
matter of choice, but the ideal choice is to try to move the
unified budget surplus to the private sector with as minimum an
impact as you can get on overall national savings.
Mr. Bass. Thank you, Mr. Chairman.
Chairman Nussle. Mr. Davis.
Mr. Davis. Thank you, Mr. Chairman.
Chairman Greenspan, one of the points you have highlighted
in your testimony are the benefits of increased productivity
associated with technology. My first question is what would you
recommend that Congress do by way of tax policy or spending to
contribute to continued short-term and long-term benefits in
productivity associated with technology?
Mr. Greenspan. The first thing I would do is to try to find
a general view from those who are the innovators, or have been
the innovators in recent years, and try to ask them and get
some insight from them as to what various different tax
policies and actions by the American Government would enhance
their incentives to do the types of things they have been
doing.
It is very easy for an economist to sit here and
hypothesize on how people will respond. There is a far simpler
way of finding out: You ask them. And I don't know what they
are going to say, but I would listen closely to their
recommendations because they may tell you that taxes don't
matter all that much, or they may tell you they are very
crucial. They may tell you that the capital gains tax is a
great inhibition to what they are doing, or they may not. But
it is important to find out from the people who are on the
firing line rather than from commentators who try to make
inferences about what makes people behave.
Mr. Davis. Chairman Greenspan, this is our second day of
hearings on the budget, as you know. Yesterday, the House Ways
and Means Committee passed a tax cut that is estimated between
$950 billion and $1 trillion. You have gone out of your way to
highlight the fearful pattern that is developing in terms of
last-minute bloated spending in this Congress. I think it is
fair to say that the failure of the budget resolution process
has certainly contributed to that. We are starting back down
that road again now.
Would you offer us any caution about the process we ought
to use in terms of developing the budget resolution in relation
of taking up and passing tax cuts?
Mr. Greenspan. Congressman, I thought that the whole set of
rules that you set up following the 1974 act on endeavoring to
contain the budget, in my judgment, had very little chance of
working. I was wrong, it really did matter, much to my
surprise. The PAYGO rules, the whole issue of how various
different programs were handled, which theoretically could have
been overthrown by a majority of the Congress and wasn't, and
the reason it wasn't is there obviously was something that was
happening which the American public thought was very important.
As I indicated in my prepared remarks, I thought that the
appropriations process of the last couple of years which
essentially breached all of those various constraints has been
most unfortunate, and unless and until we can get back to some
form of budget discipline, I don't care what type of surplus
projections you have, they won't happen.
Mr. Davis. Would you care to comment in that regard on what
the appropriate sequence of events would be for us to take up
with regard to the budget resolution and tax cuts?
Mr. Greenspan. Well, I don't want to get specifically into
any individual programs because I suspect you will know the
answer to that far better than I, Congressman.
Mr. Davis. Chairman Greenspan, if we are to preserve the
opportunity to increase general revenue funding to preserve the
solvency of Social Security and Medicare as the baby boomers
are getting ready to retire, how should that factor into our
decisions about the magnitude of the tax cut to proceed with
over the next few years?
Mr. Greenspan. Again, Congressman, I can't really comment
on it. Those are the key decisions which are really
fundamentally deep and very important value judgments about the
future of our Nation, and I think the elected representatives
are the most qualified people to reflect the values of the
population as a whole. This type of debate which we are now
seeing is, I think, an extraordinarily valuable picture of
democracy in action, and it credits the Congress, and it
credits the administration, I think, very effectively.
Mr. Davis. Chairman Greenspan, there has been a proposal to
set up a contingency fund that is estimated to amount to $1
trillion. There are also a number of spending proposals by the
President that many of us support in defense and education and
others that are yet to be costed. If the cost of those
proposals were to exceed the amount of this contingency fund,
and we had to choose between reducing the rate of proposed debt
retirement and the size of the tax cut, which should we choose,
in your judgment?
Mr. Greenspan. Well, again, Congressman, I said that from
my point of view I thought that debt reduction was the highest
priority; that is, as best I can judge, through virtually every
particular evaluation of the potential uses of the unified
surplus, the debt does get paid down to an irreducible minimum.
So in that regard, I don't have a horse in this race, if I may
put it that way.
Mr. Davis. One last question, Mr. Chairman. The National
Conference of State Legislators has recently indicated that
approximately 25 States are now beginning to experience some
serious problems in their revenue streams. Does that give you
any pause as you look at how optimistic the projections are
that we are relying upon as we proceed with the surplus we have
discussed today?
Mr. Greenspan. I think not, Congressman. Each individual
State has handled its significant improvement in revenues
differently. Remember, early on, the big surge in receipts
showed up in State and local governments as well as the Federal
Government. There has been, I think, a far greater spread of
alternate uses of those funds, and a number of States have cut
taxes substantially, and a number of States have increased
expenditures substantially, far more than the Federal
Government has in either case.
And in that regard, there is very little to be learned
about the Federal Government revenue outlook from what we are
seeing in the States. In other words, it has not added anything
to our knowledge because they are all coming off the same
income base, and they are just handling it differently. So I
wouldn't say that one learns very much what the Federal budget
outlook is from what is happening to the States.
Mr. Davis. Thank you.
Thank you, Mr. Chairman.
Chairman Nussle. Mr. Gutknecht.
Mr. Gutknecht. Thank you, Mr. Chairman.
Chairman Greenspan, it is always delightful to have you
here even though you tend to speak in cryptic tones, which we
all tend to interpret depending on our own particular political
philosophy.
Let me just review, at least from my perspective, what you
have told us so far today. One of the most important things you
have said is that essentially you believe that we are moving
into an era of surpluses. And you suggested that perhaps by the
year 2010, we could see a $800 billion on-budget surplus.
Mr. Greenspan. Under current services. I don't expect that
to happen because what is going to occur are changes in policy
which will alter that path. But I think the crucial issue, as
you point out, quoting me and my quoting CBO, is that there are
very large surpluses under what we call current services
budget.
Mr. Gutknecht. And you have also told us one of the real
key factors is rising productivity, and I think that is
important. We need to watch that as we go forward. I think the
most important thing you have told us, and this is for the
benefit of all the members of the committee, is that tax
reductions will be much preferred over spending increases. And
I think that is going to be the real critical task not only for
this committee, but for the Congress in the next several years
because the temptation to dip into this growing surplus--if we
get back on an economic growth path, I think the temptations
are going to be enormous.
To that extent I strongly support what the President is
trying to do to limit the growth in the Federal budget, to
lessen the growth in the average family budget.
I want to come back to a question that is really more
directed to you as Chairman of the Federal Reserve. Benjamin
Franklin said, ``I know no lamp by which to see the future than
that of the past.'' We know now looking backwards in the last 6
months or so that the economy began to slow in the September-
October period. Do you think that perhaps the Fed waited a
little long to lower interest rates? And you have already
indicated that there won't probably be another action by the
Fed until your March meeting, but do you believe that you may
have waited a little too long to lower interest rates?
Mr. Greenspan. Well, first of all, I hope I was
sufficiently ambiguous not to have indicated the timing of when
or if we would move. I was peculiarly adept--I hope I was
adept--at what we termed Fedspeak on that issue at the House
Financial Services Committee a couple of days ago.
The answer to your first question is no, meaning that
remember when you are involved, as we were, in confronting a
period where from early 1999 through the early spring of 2000,
we had a major acceleration in underlying investment demand,
real capital asset demand, relative to underlying savings in
the economy. The effect of that was to put very significant
pressure on real long-term corporate interest rates. In other
words, their cost of capital from the debt side was rising
quite significantly.
We at the Fed in such an environment always join the
markets in endeavoring to contain those saving-investment
imbalances. Because were we not to increase interest rates as
we did from June 1999 forward, it could have been done only by
holding down the interest rates and thereby accelerating money
supply growth and liquidity. And so we would have created a
much different environment as we moved into the year 2000 than
indeed occurred. We would have had a highly buoyant economy
with rapidly increasing imbalances.
We had significant imbalances as it was, and they started
to adjust, actually, probably quite visibly by the spring of
2000. Indeed that was the peak in long-term interest rates. Had
we moved too soon, in our judgment, we would have altered the
path of adjustment and conceivably created a higher level of
economic activity than we are currently seeing, but inducing
far greater imbalances and a far greater correction of
adjustment than we are now undergoing.
So the timing of when one moves on monetary policy is a
very crucial issue with respect to trying to get to a glidepath
in economic activity, which is what we would call the maximum
sustainable economic growth. In my judgment and the judgment of
my colleagues, had we moved sooner, we would have threatened
that adjustment process. It is a very difficult judgment to
make. But in retrospect I see nothing that we did which strikes
me as inappropriate as far as policy is concerned.
Mr. Gutknecht. One final follow-up. You don't disagree, it
is more than possible--and I don't want to--yes, I do want to
put words in your mouth--but the President is really talking
about and the CBO and OMB are all talking about getting back to
an economic growth rate of roughly 3 to 3.1 percent average
over the next 10 years. You don't think that is an unreasonable
target, do you?
Mr. Greenspan. It presupposes about a 2\1/2\ percent annual
productivity increase, which, considering that we have been
running 3 percent over the last 5 years, adjusting for cyclical
change and a variety of other technical problems, no, it is not
an unreasonable estimate.
Mr. Gutknecht. Over the long term, you told us 5 years ago,
I remember when you testified before the committee, that if the
Congress was serious about balancing the budget and if we would
continue to apply a certain level of fiscal restraint, that
ultimately long-term interest rates would come down. That
pretty much has been true. Can we expect then at least long
term--and I don't want to get into March's meeting or what may
happen in the next 6 months. I do think we have to think long
term. But long term it is fair to say if we continue to pay
down debt, exercise fiscal restraint by this Congress, that
long-term interest rates will be relatively lower than they
would have been, right?
Mr. Greenspan. Absolutely.
Mr. Gutknecht. Thank you.
Chairman Nussle. Mrs. McCarthy.
Ms. McCarthy. Thank you, Mr. Chairman, and thank you,
Chairman Greenspan. It has been a pleasure listening to you. I
am new on this committee, and so I am sitting here and I am
absolutely fascinated the last 3 days of everything that I have
heard.
Here are my concerns. Since I have been in Congress, and I
am just going on my third term, in 1997 we did the balanced
budget amendment, which I thought was terrific. I voted for it.
I think the majority of people here believe in fiscal
restraint. One of the things that we did do, though, was
unfortunately hurt our health care system, hurt certainly our
hospitals, because we didn't take in the amount of money that
we were giving back to our hospitals. And we have spent the
last 2\1/2\ years now trying to correct that. So we here in
Congress sometimes make mistakes.
To be here at this point to see that we have a surplus I
think is terrific. But I am like you, I believe in paying down
the debt. When I had a mortgage, twice a year I tried to double
the payments so I could reduce it. I don't believe in having a
heck of a lot of debt. I don't like it. It is something that is
holding over me.
My concern is the class of 1946. They would be our baby
boomers. They are going to be retiring. Now we are hearing that
an awful lot of people will probably continue to work because
they are healthier. Some might. I also know that those that
have done very well economically will probably retire early so
they can enjoy their later years.
Here is what my problem is: With this development wouldn't
that suggest that we need an extra margin of safety in our
budget policy, because when we see our baby boomers starting to
retire, whether it is Social Security or whether it is
Medicare, we are going to see great outlays of money unless we
correct it between now and then, which is 7\1/2\ years away. I
don't know if the will of Congress will do what it has to do
for Social Security and Medicare, and this is why I get scared.
Medical technology is advancing rapidly, which I think is
wonderful, but that means that our constituents are obviously
going to want that medical care. What I am trying to get at, if
we pay down the debt--and by the way, all of us want tax cuts.
This side of the aisle, that side of the aisle, no one is
disputing that. It is just probably how much should a tax cut
be so that we can have a rainy day. I come from an up bringing,
I guess, where you always try to have a nest egg. You always
try to save some money for that day when my furnace breaks down
or my car breaks down. I am trying to apply that here.
So we hear both sides of the aisle saying we are going to
have the money. I don't know if I believe that. And I guess I
got to go that way. Do I want a tax cut? Yes. And I do.
Certainly would help my son, my brothers and sisters and
everybody else. But it is really--and this is my problem--there
is such a considerable measure of uncertainty in the
projections of the course of the baby boomers' retirement that
how are we going to prepare for this?
Mr. Greenspan. This is an issue which I think was very much
of a concern as recently as a year ago because the Trustees'
report for Social Security indicated significant problems as we
moved beyond 2010 or 11 and ultimate exhaustion of the fund in
2037.
Those estimates were made with relatively low productivity
growth projections. We will have another estimate next month or
late this month. It isn't clear as to whether or not they are
going to include in those estimates the type of productivity
increases which we now see in both CBO and OMB. If they did,
then the receipts for Social Security, OASDI in total, for
example, would be enough under existing benefit formulas to
essentially maintain a continued gap between receipts and
benefits even without interest accumulation. So that I should
say through a good part of the next decade what that implies is
that despite the fact that there is a very dramatic rise, as
you point out, in the number of the 1946 generation going into
retirement, the effect of this acceleration in productivity is
such that it just turns out that the receipts, especially
including interest, are more than adequate to meet that big
surge through a goodly part of a decade subsequent to 2010.
In the health care area, it is a different issue, and it is
highly indeterminate. As you pointed out very importantly, the
degree of technology that is coming on is truly awesome. There
is pharmacology on the one side and the electronic technologies
that brought us MRI and CAT scan and a whole variety of other
medical advances, just altering the path of medical care in a
dramatic way which we really cannot forecast. And so we don't
know whether a lot of this technology is going to reduce costs
or whether it is going to significantly make available so much
potential health care that the effect of rationing that goes on
today would become far more widespread. In other words, you
bring on MRI, and the number of people who want to use that
machine right at that point is far in excess of what you have
available. So a rationing process is implicit in our system,
which works remarkably well. It is the physicians who basically
do the rationing.
As a consequence of these factors, estimating the costs of
health care is a serious problem because we don't know what the
outlook is out there. Just parenthetically I was talking to the
Secretary of the Treasury, who has got some very interesting
ideas on this issue. I don't know if he raised them with you.
Ms. McCarthy. I talked to him yesterday about them.
Mr. Greenspan. Did he raise with you the issue of changing
the way we do prescriptions for drug purposes?
Ms. McCarthy. No, we actually didn't get into that.
Mr. Greenspan. He was involved with the Pittsburgh
operation, which I thought was really quite unusual.
But the bottom line here is, whereas Social Security seems
to be moving in a less concerned path than we thought a year
ago, largely because of the productivity numbers we have been
looking at, medical outlays are a whole different issue. They
are going to require some very thoughtful insights on the part
of both the Congress and the administration.
Ms. McCarthy. Thank you, Mr. Greenspan.
Chairman Nussle. Mr. Collins.
Mr. Collins. Thank you, Mr. Chairman.
Mr. Greenspan, it is always interesting to listen to your
comments. Some of them are very direct and easy to understand.
Some of them remind me of a squirrel trying to cross the road
with an oncoming high speed automobile looking down at him. He
zigzags back and forth and many times winds up laying dead in
the road.
You know, your comments about productivity, productivity
has been up, we have seen it in business, and I am a small
business person, have been for 38 years, actually a little
longer than that. We have been going through a correction
period. And we do this. I saw it early in 1974 and almost bit
the dust as a small business person then. And I saw it again in
the 1980's. Several things contribute to that correction. One
is the interest rates in which the Federal Reserve has a hand
in. Another was fuel costs, which affects all consumer
products. I am in the transportation business. Another one is
the cost of energy during the winter months. But I fully
believe, as you do the bottom line of that correction period,
it will still leave productivity higher than it was in 1995.
But in my opinion, neither the Federal Reserve nor the Congress
can micromanage the economy.
I think there are three things that play a principal role
in what happens to the economy from this day forward. One you
are very much involved with interest rates, and I appreciate
the fact that you are moving interest rates downward. And I
understand why you moved them upward; because of the
corporate--the heavy corporate capital investments. And most of
those corporations borrow on prime rate, fixed rates.
But I think you need to increase the downward movement of
interest rates because there are a lot of small business people
who borrowed money on floating rates, and as those corporates
tightened up because of the change in interest rates and those
investments that they want to continue to make, they begin to
shift their cash flows, and oftentimes it was at the expense of
a lot of their suppliers and the small business people in the
form of their payables, receivables to those small businesses,
which has put those small business people, many of them, in
kind of a tight situation. Credit is tight, interest rates are
up. They are on floating rates. They go to the banks to borrow
operating capital. It is difficult to do, and it has forced
many of them to go under. We need to take that into
consideration between now and your next meeting in March, the
later part of this month.
Another area that we must look at is tax relief and the
budget. I think the President of the United States is on the
right track. As you told us 2 years ago, January 20, 1999,
before the Ways and Means Committee, that marginal rates is an
area that we should look at and make adjustments in.
Budget discipline. This President has put forth a budget
with a 4 percent increase. What bothers me, that I am already
hearing Members of Congress, chairmen, even the chairman of our
committee here, talk about how there are certain areas that we
must have more money for. I heard them--that the Chairman of
the Senate Budget Committee says we don't need to look at 4
percent, we need to consider more like 6 percent. That is not
good budget discipline.
When it comes to the Medicare and Social Security, you have
said, too, in that same presentation to the Ways and Means
Committee if you are ever going to solve the problems of Social
Security, you have got to end the pay-as-you-go system. The
Congress has got to have the backbone to do so. The President
ran on the campaign to do so. Because once you lay it out as to
how you are going to reform and end those pay-as-you-go
systems, which is both Medicare and Social Security, then you
can tell the American people exactly what it is going to cost
them from the general funds to sustain those programs which
will make them self-sustaining after a long period of time.
It bothers me, too, that when it comes to tax relief, we
have a sizable group of people in the Congress who are not
looking at the cash flow of the individual wage earner or the
individual person, they are singling out and targeting just
certain ones to try to enhance their cash flow at the expense
of others. I call it transfer of paycheck receipts, because
when you take from one's paycheck and you enhance another's
income, that is just a transfer of paycheck money. That is
wrong.
The third area that we must look at, and I believe the
President has also campaigned on this and put forth a group to
address this problem, it is called energy policy, a domestic
energy policy, how we are going to overcome our dependency on
others and yet still provide the energy we need.
I was given a question to ask you. In a paper from the
National Bureau of Economic Research called, quote, What Ends
Recessions, end of quote, Christina and David Romer argued that
tax cuts in the past failed to deliver the economy from
recession because the cuts passed were generally too small and
too late. They found that the small cuts that did occur,
however, did provide a noticeable economy boost.
I am not going to ask you to answer whether they were right
or wrong, because, Mr. Greenspan, I think it is wise that you
tend to interest rates and you leave the tax policy up to the
Congress. Thank you.
Chairman Nussle. Mr. Capuano.
Mr. Capuano. Thank you, Mr. Chairman.
Chairman Greenspan, the other day I had the pleasure of
listening to you at the Financial Services Committee, and we
had a brief discussion about productivity. I am very glad today
that you came back with what I consider to be reassurances
about what the potential for productivity increase is, though I
still have to tell you I sit here with some reservations and
some doubt, which you have expressed, but your reassurances
overwhelm my concern, and I am glad to say that today.
I also particularly like the suggestion that you have made
in your statement today relative to a trigger. I heard your
concerns. I share them. I think that any trigger for any tax
cuts on spending proposals does bring some problems with it,
but I also share your comments that a trigger might probably be
a very good way to go. Just rereading it, it could include
provisions that in some way would limit surplus reduction
actions if specified targets for the budget surplus or Federal
debt levels were not satisfied. Only if the probability were
very low that prospective tax cuts or new outlay initiatives
would send the on-budget accounts into deficit would
unconditional initiatives appear prudent. I agree with that
statement 100 percent. I thank you for making it. I hope that
this Congress pursues the concepts. Hopefully we can draft
something--first of all draft then adopt something that would
work that would address as many of the concerns that you
mentioned as we could possibly do.
I also want to talk a little bit about the surpluses that
you have discussed. Today you seem to concentrate a lot on
government investment in private assets. I kind of wonder where
that came from, because up until just yesterday when we had the
Budget Director here, I hadn't heard anybody concerned about
that issue. It is a fair issue. We did have that discussion
last year relative to Social Security. It hasn't really been
brought up. I guess it is a very fair point to raise.
But I also--I guess I want to make sure that most people
were listening and people who were asking me have a very good
understanding that as we speak right now, right this very
minute, probably the largest investor in the private market,
the one if not the largest investor, is government. Now, that
is not the Federal Government, but it is State and local
governments through their retirement accounts and other such
trust funds, and they are huge investors in the private market.
I was vehemently opposed to privatizing the Social Security
System last year for this very reason. I agree with you, but I
don't think the Social Security System should be in the private
market. At the same time, government investment in private
accounts is not new, and, therefore, I think we are already
beyond the question, unless either you or somebody wants to
start raising the issue of whether or not the California
retirement system, the Florida retirement system, the Texas
retirement system, et cetera, et cetera, whether anybody wants
to raise that issue as to whether they shouldn't be in the
private markets. But on the presumption that no one has raised
that thus far that I am aware of, we all accept that as
reasonable and probably not capable of moving the market in and
of itself.
But on that presumption that we all take that as an
acceptable fact, that some government involvement in the
private market is not necessarily bad, and as we get to
surpluses, I hope that some people start wondering and
questioning and discussing whether we should have some
government involvement in private things, such as mortgage-
backed securities.
One of the biggest problems in my district is people can
simply not afford to buy or maintain their homes, just can't do
it. That is true in the general Washington area as well. Most
working-class people cannot afford to move into many housing
markets. I think there would be some legitimate question as to
whether some Federal money or Federal trust fund money should
be put into helping reduce mortgage rates or down payment
assistance at some point; not now, not today, I know that. But
I hope that when the time comes when we get to that position,
that those issues are at least fully discussed and not just
dismissed out of hand. I don't think I heard that from you
today, but I just hope that others don't hear it as well.
I do want to ask you a couple of questions. I want to talk
particularly on the current circumstances. I understand and I
actually respect that you prefer tax cuts to spending increases
as a general proposition. You said that before, you are
consistent on it, and I appreciate it. I don't want to get into
specifics of the tax cut because I do agree that is the
prerogative of Congress, and I accept that, but I also want to
make a statement as well that every time we do a tax proposal,
every single time we do a tax proposal, somebody wins, somebody
loses.
The current tax proposal we have in front of us has 40
percent of the tax cut going to people that only pay 20 percent
of the taxes. That is a fair judgment. You can make the
argument if you believe it, that is fair, but that is a
judgment. It is not dollar for dollar the money that you pay in
taxes that get back with a tax cut or any tax cut I have ever
seen.
I don't want to talk to you about the specifics. I also
don't want to talk to you about the specifics about many of the
spending proposals, because I agree it is not your role to
discuss social issues such as health care, such as K-through-8
education, such as whether we want to get into prescription
drugs. I understand and respect your decision that that is our
proper role, and I agree with it.
I also think it is important to get your opinion on as to
whether it should be 4 percent increases, 6 percent increases,
2 percent increases. Again, that is a fair argument. But once
we get to a decision, a political decision, that says we are
going to have X percent of increase or even a decrease in
spending, there are some Federal Government spending programs
that strike me as having a direct impact on the economy. And
there were two in particular that I want to talk to you about,
one of which I talked to you about the other day at the
Financial Services Committee, and the other one I talked to the
Budget Director about yesterday.
First one is the unemployment. You said consistently, I
assume nothing has changed since the other day, but your
expectation at the moment is unemployment is going to rise over
the foreseeable future, next year or so, regardless of any tax
proposal we currently have on the table.
Given this, I have two questions: First one on the
unemployment, isn't it reasonable, or do you think it is
reasonable, for government spending to have as a priority
retraining programs to take those newly or soon to be
unemployed American citizens to retrain them into new jobs that
they will be able to have a better market value with and help
improve the economy in the future?
The second question has to do with research and
development. You said repeatedly in the past you think it is a
fair thing for the government to have a spending priority
relative to research. If I remember correctly, and I won't put
words in your mouth, but what the heck, everybody else does, I
may as well try, that basic research is a particularly
important government priority. I agree with you, if that is an
accurate statement. I agree with that statement whether you
agree with it or not, particularly when it comes to the things
right now, some of the comments have been made as well that
energy prices are driving everything up. How are we going to
get those energy prices down? There is only so much oil in the
ground; there are only so many ways to get it out. We have to
have more efficient fuel economies. We have to do all kind of
things to heat our homes smarter and better, and that only
comes through research.
My two questions to you, sir, are relative to retraining
unemployed workers in this current situation and continuing, if
not increasing, government support for research, particularly
basic research.
Mr. Greenspan. Well, Congressman, first let me say that the
crucial question that has to be answered before you can draw a
conclusion is to make judgments of how successful the types of
training programs we have had over recent years have been. As I
am sure you know better than most, the record is rather mixed.
Mr. Capuano. I agree.
Mr. Greenspan. But what we do learn from a number of the
studies that one has seen is that the training programs that
work most effectively are those as close as you can get to a
specific job. On-the-job training is very clearly the most
effective mechanism that we have. And those types of
governmental-sponsored programs which effectively enhance on-
the-job training, as far as I understand it, have been the most
effective.
There is no question, as you point out, that you get
significant increase in the market value of a person if they
have skills which are required and usable elsewhere, and
anything that one can do with respect to transitions is a very
valuable thing to do. And I have argued this with respect
specifically to trade policy; that is, we have a number of
areas where individuals, through no fault of their own, get
laid off because they are in industries which are caught up in
very competitive prospects. And I do think, as I have said in
the past, that endeavoring to build new training capabilities
into those programs rather than go to a protectionist mode is a
very valuable policy with respect to enhancing the capability
of individuals to work and earn a living.
So I think that training programs have a role,
unquestionably. I do, however, wish to caution that merely
expanding programs that we have done in the past is a mistake.
And I hope we are willing to move as indeed periodically
governments have done, to consolidate previous programs and the
like.
On the issue of research, there is just no question that if
you are going to have technology as the base of your economy,
which we do, research is crucial. It is another issue to make a
judgment as to where that research should take place, and that,
again, is really a fundamental judgment of the Congress. And it
is a tricky question of how much applied research should
government do, how much basic research and where. As you know,
there are large discussions and debates on that. But that we
should in some way or other enhance the incentives to do
research in this economy, there is just no question. If we
don't, we are going to find that we are in position where we
may have awesome technologies, but if you don't continuously
nurture them, they won't continue to exist.
Mr. Capuano. Thank you very much.
Chairman Nussle. Mr. Chairman, we have come to the 2-hour
mark. You asked if we could try and get you out of here by
noon, and I guess what I would ask from the other Members, are
there any other Members that have a quick question in the last
couple of minutes that we have?
Mr. Hastings, you would be recognized for a quick question.
Real quick.
Mr. Hastings. Thank you very much.
Mr. Greenspan, good seeing you again. There has been a lot
of talk to questions a number of times regarding productivity,
and even in your statement you talked about productivity, but
you specifically said nonfarm productivity. I come from an
agriculture State, agriculture district, the State of
Washington. We have Boeing, Microsoft, Starbucks, but when you
put all of the total economy together in Washington State,
agricultural is the biggest portion of that economy. I am not
talking about major crops. We do have wheat, but we have
apples, and potatoes, and cherries, and asparagus, and so on.
Would you talk about, number one, the productivity of
agriculture and how that rates to the overall economy. And as a
follow-up to you--Congressman Bass' question to you regarding
trade, fast-track authority, and maybe the global economy in
general as it relates to agriculture.
Mr. Greenspan. Well, as you imply, Congressman, the
productivity rate of increase in agriculture has matched that
in the nonfarm area, and indeed in certain periods has actually
exceeded it, as you know better than anyone. Yields have gone
up extraordinarily on crops. The technical capabilities we have
in maximizing the way we move livestock to market is really
quite a different agricultural system than we had 50 years ago.
The problem that occurs as a consequence, however, is that
we produce significantly more than the American people can
consume, and, as you know, in wheat we export half of our crop.
We export huge proportions of a whole series of other crops
and, indeed, livestock. And for farm prices and farm income to
hold up in the United States, in my judgment, it is essential
that we have an enlarged export market, and one of the ways
which I think we can do that is to find ways to break down
barriers abroad where, as you well know, the restraint on
American products is increasing. And fast track, or whatever we
now want to call it, is clearly a mechanism which would give
our trade people the capabilities of initiating a broadening or
opening up of markets, which, in my judgment, is absolutely
crucial for American agriculture.
Mr. Hastings. Thank you very much.
Chairman Nussle. Mrs. Clayton, do you have a question?
Mrs. Clayton. Yes, I do, Mr. Chairman.
Mr. Chairman, I was struck by your consistency in terms of
the debt reduction, constraint, taxes versus spending. All of
those are issues that the Committee on the Budget must
consider. You have also emphasized the uncertainty both for
revenue and uncertainty in terms of unforeseen costs.
I just want you to comment on the health issue. We have
already commented on the Medicare. In the report coming from
the Federal Reserve in February, you indicated the one cost
that was causing more uncertainty was not Medicare, but the
uncertainty of Medicaid, and the substantial amount of moneys
being spent on Medicaid that have never been spent before.
If you couple that with the undercount possible in the
census projection, those people do not have eligibility that is
not accounted for, how would you advise us in the Committee on
the Budget to prepare for that uncertainty of that health cost?
Mr. Greenspan. Well, Congresswoman, the reason we know or
suspect there are certain undercounts is we do certain types of
samples. And when you are dealing with trying to make judgments
as to what type of costs there will be in various different
types of populations, all of these data are subject to error.
And, indeed, the sampling materials which the Census has
employed and which are usable have ranges of error in them as
well.
But what I think is necessary to do is to get the best
estimates that you can of various different types of
populations in various different areas and try to make
judgments as to what the underlying costs of those various
programs are.
We have not been successful, as you know better than
anyone, in really projecting Medicaid data effectively.
Forecasts have been awful, if I may put it that way, and we
have to improve them. And any additional data that can come on
to help that be done, I think, is an extraordinarily important
thing for this committee and for the Congress in general to
engage in.
Mrs. Clayton. Thank you.
Chairman Nussle. Mr. Culberson.
Mr. Culberson. Thank you, Chairman Nussle.
Chairman Greenspan, in the interest of time, I want to
reduce all my questions to one. I am John Culberson; I was
elected to succeed Mr. Archer from west Houston, and I am
particularly interested in identifying some procedural
institutional changes that we can implement in Congress to
restrain our institutional instinct to increase spending in the
years ahead. As you have correctly identified, that is a real
problem.
I want to ask you, sir, if you could tell us, recommend to
us, any specific institutional and procedural changes that this
Committee on the Budget should consider implementing for the
years ahead to restrain spending that in your opinion have
worked effectively either in State constitutions or in previous
sessions of Congress. What do you recommend to us that we
should adopt?
Mr. Greenspan. Well, Congressman, as I indicated before, I
was quite surprised at how well some of the various measures
that have been implemented by the Congress have essentially
constrained discretionary spending over a number of years,
until the last couple. And merely moving back to some version
of those earlier very specific vehicles strikes me as the type
of thing that ought to be done. And my impression is that if
you succeed, it will be very helpful.
Mr. Culberson. I am a freshman Member. Can you tell me
specifically which reforms are you referring to?
Mr. Greenspan. The PAYGO, for example, has always been very
useful. There are a whole series that come out of the 1974
Budget Impoundment Act and that have been developed over the
years. Some have been changed, some have been altered, but what
is clearly quite remarkable is a very large number of them have
worked.
And I think you will find the staff of this committee is
very well versed on which of the particular ones the committee
has found most useful over the years.
Mr. Culberson. One quick follow-up on that.
Chairman Nussle. I apologize, but I am going to have to
move on.
Mr. Moran, do you have a question to finish up the hearing?
Mr. Moran. Thank you, Mr. Chairman. There is so much
context and so many questions I have to ask, but out of
consideration of all the time you have spent, let me focus on
one.
The equity markets have pretty well factored in what Wayne
Angell has suggested; that there may be as much as a 90 percent
chance that you are going to make a dramatic reduction in
interest rates in the short term. But I remember back in 1988,
you were under similar pressure, and have been any number of
times since, to reduce interest rates and stimulate the
economy, and your response at that time was that you wanted to
keep focused on the law; that the law says that the Federal
Reserve's role is to maintain stable prices, or low inflation,
and economic growth that could be sustainable year after year.
What I would like to know, because we don't hear so much of
what the other side of the picture is, what do we need to fear
on the other side of the equation in terms of inflation, energy
and food prices? Some of the latest economic statistics show
that inflation may be increasing again. We don't know whether
this is long term or just a blip. But, also, if we make this
substantial tax cut and make it retroactive so that it is
immediately available, that is a significant stimulus to the
economy. The President has said that is one of the principal
motivating factors for it.
What other considerations are in your mind in terms of
maintaining that stable rate of noninflationary economic
growth, Mr. Chairman?
Mr. Greenspan. Well, Congressman, let me address the issue
of where we view the inflation problem is. As I indicated in my
remarks to the Financial Services Committee, we think inflation
at the moment is very well contained. The specific blip that we
saw in the Producer Price Index and the CPI don't appear
anywhere else on our radar screens, which suggests that unless
something is happening which we have not yet captured, pricing
restraint is really quite broad and deep, so that the problem
that we see at this particular point is not an immediate
emergence of inflationary pressures.
What we are concerned about generally is to maintain a
stable, long-term environment. And, indeed, as you put it, the
term we actually use is maximum long-term sustainable economic
growth. And while we obviously are aware of what various
different fiscal policies do to the economy, we don't respond
to fiscal policy per se. What we do respond to is how various
different budgetary policies impact on the economy, and it is
the economy to which we respond.
And so I can't say in any specific detail what we will or
will not do, but there are a whole series of forces, both in
government and out of government and in the marketplace and
internationally, which have fairly dramatic impacts on what our
economy is doing, and it is that to which we generally respond.
Mr. Moran. Thank you very much, Mr. Chairman. We are all
very interested to know whether you think the irrational
exuberance of the stock market has been pretty much squeezed
out. But unless you want to volunteer an answer, we thank you
very much.
Chairman Nussle. Mr. Putnam, do you have a question?
Mr. Putnam. Thank you, Mr. Chairman, very briefly.
And thank you, Chairman Greenspan, for your patience.
Much has been made and discussed of the impacts that will
occur in this country and on this Congress arising from the
opportunities to rapidly reduce our debt. But considering the
high volume of debt that is held by foreign nations and foreign
businesses, what are our friends and neighborhoods around the
world doing to prepare for the change that will be coming
sooner than is expected? Where will those resources flow, and
what type of destabilizing impact would our economic prowess
have on their decisions?
Mr. Greenspan. My impression is that foreigners are
investing in U.S. Treasury securities for two reasons: One is
the riskless nature of those securities, and, two, it is the
dollar.
Now, to be sure, you cannot replicate the degree of
risklessness in U.S. Treasury securities fully in the private
market. You can get very close, and, indeed, a number of
foreign accounts of which I am aware, when U.S. Treasury
interest rates began to fall in part because the size of the
outstanding debt was declining, shifted from U.S. Treasuries
into other dollar-denominated securities in order to enhance
their rate of return, and I think that process will continue.
I do think that the overall propensity to hold U.S. dollars
will continue, and, hence, to the extent that the available
Treasury issues decline, the switch will be substantially into
other dollar-denominated private or State and local-type
assets. It is a shift that should not have any material effect
of which I am aware.
Mr. Putnam. Thank you, Mr. Chairman.
Chairman Nussle. Thank you, Mr. Greenspan, for indulging us
an extra 10 minutes there. We appreciate your attendance today.
I ask unanimous consent that all Members have 7 legislative
days to submit statements and questions for the record.
Without objection, that is so ordered.
And with that, we are adjourned.
[Whereupon, at 12:15 p.m., the committee was adjourned.]