[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
CONDUCT OF MONETARY POLICY
Report of the Federal Reserve Board pursuant to
Section 2B of the Federal Reserve Act
and the State of the Economy
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON
FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
FEBRUARY 28, 2001
__________
Printed for the use of the Committee on Financial Services
Serial No. 107-1
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70-750 DTP WASHINGTON : 2001
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice BARNEY FRANK, Massachusetts
Chair PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska MAXINE WATERS, California
RICHARD H. BAKER, Louisiana CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma KEN BENTSEN, Texas
ROBERT W. NEY, Ohio JAMES H. MALONEY, Connecticut
BOB BARR, Georgia DARLENE HOOLEY, Oregon
SUE W. KELLY, New York JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio MAX SANDLIN, Texas
CHRISTOPHER COX, California GREGORY W. MEEKS, New York
DAVE WELDON, Florida BARBARA LEE, California
JIM RYUN, Kansas FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio JANICE D. SCHAKOWSKY, Illinois
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina CHARLES A. GONZALEZ, Texas
DOUG OSE, California STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin HAROLD E. FORD Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York JOSEPH CROWLEY, New York
GARY G. MILLER, California WILLIAM LACY CLAY, Missouri
ERIC CANTOR, Virginia STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania
SHELLEY MOORE CAPITO, West Virginia BERNARD SANDERS, Vermont
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio
C O N T E N T S
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Page
Hearing held on:
February 28, 2001............................................ 1
Appendix:
February 28, 2001............................................ 43
WITNESS
Wednesday, February 28, 2001
Greenspan, Hon. Alan, Chairman, Board of Governors, Federal
Reserve
System......................................................... 6
APPENDIX
Prepared statements:
Oxley, Hon. Michael G........................................ 44
Clay, Hon. William Lacy...................................... 46
Crowley, Hon. Joseph......................................... 47
Frank, Hon. Barney........................................... 50
Jones, Hon. Stephanie Tubbs.................................. 52
Greenspan, Hon. Alan......................................... 55
Additional Material Submitted for the Record
Greenspan, Hon. Alan:
Board of Governors of the Federal Reserve System, Monetary
Policy Report to the Congress, February 13, 2001........... 65
Written response to a question from Hon. Charles A. Gonzalez. 54
CONDUCT OF MONETARY POLICY
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WEDNESDAY, FEBRUARY 28, 2001
U.S. House of Representatives,
Committee on Financial Services,
Washington, DC.
The committee met, pursuant to call, at 9:32 a.m., in room
2128, Rayburn House Office Building, Hon. Michael G. Oxley,
[chairman of the committee], presiding.
Present: Chairman Oxley; Representatives Roukema, Bereuter,
Baker, Bachus, Castle, King, Royce, Lucas, Barr, Kelly, Paul,
Gillmor, Cox, Weldon, Ryun, Riley, Ose, Biggert, Green, Toomey,
Shays, Shadegg, Fossella, Miller, Cantor, Grucci, Capito,
Ferguson, Rogers, Tiberi, LaFalce, Frank, Kanjorski, Waters,
Sanders, C. Maloney of New York, Watt, Bentsen, J. Maloney of
Connecticut, Hooley, Carson, Sherman, Sandlin, Meeks, Lee,
Mascara, Inslee, Schakowsky, Moore, Gonzalez, Jones, Capuano,
Ford, Hinojosa, Lucas, Shows, Crowley, Israel, and Ross.
Chairman Oxley. The hearing will come to order.
The committee is meeting today to hear testimony from the
Chairman of the Federal Reserve Board of Governors, Chairman
Greenspan. Before we get started, the Chair needs to make a few
announcements.
As you know, Chairman Greenspan has a very busy schedule,
and in order to permit the maximum number of Members the
opportunity to ask questions, we must work efficiently.
Therefore, pursuant to the rules of the committee and the
Chair's prior announcement, the Chair will recognize himself
and the Ranking Minority Member of the full committee for 5
minutes for opening statements, and the Chair and Ranking
Member of the
subcommittee of jurisdiction for 3 minutes each.
After Chairman Greenspan completes his prepared remarks,
the Chair will recognize Members for questioning under the 5-
minute rule. Those Members present at the start of the hearing
will be recognized in order of their seniority, and those
Members arriving later will be recognized in order of their
appearance. In order to ensure that as many Members as possible
have an opportunity to question Chairman Greenspan, the Chair
will watch the clock very carefully. The Chair will not
entertain unanimous consent requests to extend the period
available to Members to question the
Chairman. The Chair urges Members to use their time wisely.
Finally, in order to ensure that Members have an
opportunity to ask questions which require a more detailed
response, without objection the hearing record will remain open
for 30 days to permit Members to submit written questions and
place their responses in the record; and it is so ordered.
I thank the Members for their assistance and cooperation.
The Chair now recognizes himself for 5 minutes.
Good morning, Chairman Greenspan and Members and guests.
Welcome to the first working hearing of the new Committee on
Financial Services. I can't think of a better witness for our
first hearing. Today we will receive testimony from the
``maestro'' himself, Chairman of the Federal Reserve Board of
Governors, Alan Greenspan.
Welcome, Chairman Greenspan.
This committee reflects the new financial and monetary
architecture created by Gramm-Leach-Bliley. Our jurisdiction
stretches across domestic and international monetary policy,
banking, housing, securities and insurance, among other issues.
Frankly, the jurisdiction is the economy.
Chairman Greenspan's semi-annual report to Congress on the
state of the economy and on monetary policy, especially in view
of the sluggishness that infected the economy in the latter
half of last year, is an important and fitting place to start.
Chairman Greenspan already fulfilled his legislative obligation
when he appeared before the Senate 2 weeks ago. He is here
today of his own free will and is graciously allowing us to
pepper him with questions.
Thank you for your time, Chairman Greenspan. We are anxious
to see if you are going to commit news today.
We now have two quarters of very slow growth and industrial
production has declined for each of the past 4 months. The U.S.
economy entered a period of slowdown in the middle of last
summer.
Chairman Greenspan, you noted the early signs in your last
report to Congress in July. In the fourth quarter, markets
slid, inventories grew and consumer confidence wavered. High
energy prices were aggravated by low winter temperatures. Also
we are mindful of economic woes in Japan, strife in Indonesia,
and recent economic chaos in our important strategic partner,
Turkey.
Mr. Chairman, perhaps you can shed some light on the
``alphabet'' debate: whether we can look for a slowdown and
recovery that is V-shaped, U-shaped or W-shaped. Some of us are
partial to the letter W, but we would much prefer a V-shaped
recovery. The bears are out in force, and yet we have so many
reasons for optimism.
Chairman Greenspan, in addition to your superb stewardship
of economic and monetary policy, we have a new President with a
simple but profound vision to return part of the surplus to the
people who earned it. This committee will do its part by
working to eliminate the hidden taxes that American investors
overpay in SEC fees. This represents billions of dollars that
ought to stay in pension funds, rather than going into
Government coffers.
Supported by your strong testimony before the Senate, the
overall debate now centers over how much of a tax cut to grant,
not whether one is necessary. Also you gave Congress a good
talking-to about the wise use of our hard-won surplus.
President Bush has heeded your counsel, telling Congress
just last night that he wants to pay down all of the debt
possible as it comes due. We are fortunate to have a system
where both monetary and fiscal policy tools can be used to
encourage recovery. I know that the committee is looking
forward to your assessment of the inflation risk that can
constrain the Fed. We would appreciate your insights about the
relationship between monetary policy and consumer and business
confidence, and how quickly a monetary policy action could
result in economic stimulation.
Some contend that the Fed can handle the downturn by easing
the Federal funds rate with the two recent moves and further
cuts as necessary. Others, including the President and myself,
argue that interventions are important, but that short- and
long-term tax relief will strengthen the economy and continue
growth.
As the President told us last night, we can return some of
the recent budget surplus to taxpayers while still budgeting
for responsible spending that takes care of our Nation's needs.
We must take the long view and see the silver lining in the
cloud. Part of the reason for the speed of the slowdown was the
underlying strength of our economy. Often the more sudden the
storm, the more quickly it passes.
Mr. Chairman, I look forward to your testimony. I now yield
to the gentleman from New York, the Ranking Member, Mr.
LaFalce, for an opening statement.
[The prepared statement of Hon. Michael G. Oxley can be
found on page 44 in the appendix.]
Mr. LaFalce. Thank you very much, Chairman Oxley and
Maestro Greenspan, I have got that great book by my bedside,
whenever I am having difficulty.
Last night President Bush came before us in his first
address to a joint session of Congress, Chairman Greenspan, and
he said that we have a fork in the road, and when there is a
fork in the road, take it.
Well, the question is, which road do we take, of course. As
I look back over the past several decades, we can take a path
similar to the path we took in the decade of the 1990s, or we
can take a path similar to the path we took in the decade of
the 1980s. The year 2001 could be like the beginning of the
decade of the 1980s, or the beginning of the decade of the
1990s, and I make a bit of a contrast. I remember 1981 so
vividly when we were told by the President at that time, ``be
courageous, vote for tax cuts.'' I could be courageous for tax
cuts. That is terrific if that is what courage is.
Well, a majority did. We could debate cause and effect, but
we were in, like Secretary O'Neill said, a deficit ditch for a
long, long time. I worked with many to struggle out of that
ditch. It was really not until 1990, with President Bush and a
Democratic Congress, that we began in a really meaningful way
to dig ourselves out of the ditch, adopted a policy in 1990
that you supported and you applauded, a policy agreed upon
between President Bush and the Congress; and we deepened that
course, we got further out of the ditch in 1993--a Democratic
President this time rather than a Republican President, still a
Democratic Congress--and you applauded that.
Then we took action in later years too, especially 1997,
with a Republican Congress and Democratic President.
I think the decade of the 1990s has been a very successful
one. Most Americans are doing much better. You played a major
role in that as Chairman of the Federal Reserve Board, as
Chairman of the Federal Open Market Committee. Technology
played a very major role, and fiscal discipline and cooperation
between Republican and Democratic Presidents, between
Republican and Democratic Members of Congress.
What I am concerned about is that we might embark in the
year 2001 on a course much more similar to 1981, the decade of
the 1980s, rather than the decade of the 1990s, and I am afraid
that your values might aid and abet that.
And what do I mean by that?
My values tell me that we must do something about the 45
million Americans who have no health insurance; that we must do
something about our deteriorating public infrastructure, the
fact that our bridges are crumbling, the schools in my city of
Buffalo, New York, and Niagara Falls and Rochester are
deteriorating; that there is an unbelievable gap between
affluent suburbs and people who live there and inner-city
America; that there are so many senior citizens who need
prescription drugs, because prescription drugs can now deal
with diabetes and macular degeneration and high blood pressure
and high cholesterol, you name it, virtually everything, but
these prescription drugs are unaffordable to our senior
citizens, and we must provide and pay for them.
So, fiscal policy is not your domain; monetary policy is.
That is your highest value construct. You want to pay down the
debt, but I also think you are concerned about paying it down
too much and not having any debt. Maybe that is a legitimate
concern, but nowhere near the value that I attach to the
concerns of those countless millions of Americans who are still
suffering.
So, Mr. Chairman, I look forward to what you have to say,
because it can have great influence on the opinion of Americans
and the opinions of the Members of Congress, and it might have
a great impact on so many Americans who are still suffering.
Thank you.
Chairman Oxley. I thank the gentleman.
The Chair now recognizes the Chairman of the Subcommittee
on Domestic Monetary Policy, the gentleman from New York, Mr.
King.
Mr. King. Thank you, Mr. Chairman. I appreciate this
opportunity.
Chairman Greenspan, it is a pleasure to welcome you here
this morning. I myself want to thank you for the meeting we had
in my office recently. I think it is important to note that the
greatest intensity in that meeting came when you discussed the
Wall Street Journal expose detailing how the Giants had stolen
the 1951 pennant from the Dodgers. Today I guess we are here
for much more mundane matters, the economic future of our
country and perhaps the world.
As Chairman Oxley and Ranking Member LaFalce have said, for
the past decade we have gone through a period of almost
unprecedented growth and expansion in our economy. Many of us
believe that the foundation for that expansion began in the
1980s. That can be debated. Also, I guess what can be debated
is exactly what went on during the last decade, whether or not
old economic rules and indicators were changed and put aside.
But we all agree that right now we are entering a period of
economic sluggishness. In this slowdown, the question is, how
do we reach the softest possible landing, how do we recover
from this slowdown as quickly as possible and, hopefully, enter
into a new period of solid and sustained growth.
In your testimony today, and certainly in the weeks and
months ahead, we will be looking for guidance from you in, for
instance, the impact the President's tax plan would have on the
economy, both short and long term, how that would be
coordinated with monetary policy. Also whether or not those tax
cuts should be made retroactive. Also--and Ranking Member
LaFalce touched on this--this whole issue that you have raised,
which I think is a very valid issue, as to what happens if the
debt is eliminated, what impact would that have on the economy?
Will that give too much of a role to the Government in the
private economy of this country if in fact we did eliminate the
deficit entirely?
Also with the changing of the economic rules in the past
several years, we have also had the passage of Gramm-Leach-
Bliley, which has totally changed the economic system here in
this country. We have questions, for instance, of banks getting
involved in real estate, and the impact issues such as that
would have on the future of this economy.
So I look forward to your testimony today. I know that all
of us do. These are difficult times ahead, but I think what we
have shown in the past is, when we stand up and confront
difficult circumstances, we can bring about greater
opportunities. So thank you for being here today and thank you
for the work you have done for our country.
I yield back the balance of my time.
Chairman Oxley. The Chair is now pleased to recognize the
Ranking Member, the gentlewoman from New York, Mrs. Maloney.
Mrs. Maloney. Thank you very much, Chairman Oxley.
And welcome, Mr. Greenspan. As the person in the country
whose job it is to read the direction of the economy plan years
into the future, it is particularly appropriate that you are
appearing before the committee today, the day after the
President's speech.
To justify the size of his tax cut, the President is
relying heavily on the CBO forecast of a $5.6 trillion surplus
over 10 years. As Chairman Greenspan can tell us, forecasting
the economy months into the future, let alone 10 years into the
future, is a process wrought with guesswork and error. Risking
our budget surpluses with a tax cut based on a 10-year
projection reminds me of another Bush program. Perhaps we
should call the President's approach ``faith-based budgeting.''
With all respect to Chairman Greenspan, the Fed's recent
actions have shown just how difficult it can be to forecast the
economy. The Fed may have contributed to the current economic
slowdown by raising interest rates six times from June of 1999
to May of 2000. As late as the December Federal Open Market
Committee meeting, the Fed maintained a neutral stance on the
pace of economic growth, forcing them to act dramatically with
a full-point rate cut when they changed their minds last month.
CBO's own report on the surplus states that due to
uncertainty resulting from current economic conditions--and I
quote from the CBO report--``The longer term outlook is also
unusually hard to discern at present.''
While the outlook for the next 10 years is uncertain, we
can be sure that in the next 10 years following, from 2011 to
2021--and you will probably still be our Federal Reserve
Chairman--the country faces fiscal challenges of an historic
level as we deal with entitlement pressures brought on by the
retirement of the baby-boomers.
In light of the uncertainty and our aging population, I
urge my colleagues to follow a prudent budget course that
returns money to all the American people in a tax cut, but does
so in a manner that allows us to continue to pay down the debt
while not touching any of the Social Security or Medicare
surpluses.
Thank you, Mr. Chairman. I look forward to your comments on
this and other issues.
Chairman Oxley. I thank the gentlewoman.
The panel now turns to a good friend, the Chairman of the
Federal Reserve, Chairman Greenspan. Chairman Greenspan, it is
indeed appropriate that you are our first witness for the full
committee, the new Financial Services Committee. Welcome, and
we hope to have you back many times in the future.
STATEMENT OF HON. ALAN GREENSPAN, CHAIRMAN, BOARD OF GOVERNORS,
FEDERAL RESERVE SYSTEM
Mr. Greenspan. Thank you very much, Mr. Chairman.
I certainly appreciate this opportunity to present the
Federal Reserve's Semi-annual Report on Monetary Policy.
The past decade has been extraordinary for the American
economy and monetary policy. The synergies of key technologies
markedly elevated prospective rates of return on high-tech
investments, led to a surge in business capital spending, and
significantly increased the underlying growth rate of
productivity. The capitalization of those higher than expected
returns boosted equity prices, contributing to a substantial
pickup in household spending on new homes, durable goods, and
other types of consumption generally beyond even that implied
by the enhanced rise in real incomes.
When I last reported to you in July, economic growth was
just exhibiting initial signs of slowing from what had been an
exceptionally rapid and unsustainable rate of increase that
began a year earlier.
The surge in spending had lifted the growth of the stocks
of many kinds of consumer durable goods and business capital
equipment to rates that could not be continued. The elevated
level of light vehicle sales, for example, implied a rate of
increase in the number of vehicles on the road hardly
sustainable for a mature industry. And even though demand for a
number of high-tech products was doubling or tripling annually,
in many cases new supply was coming on even faster. Overall,
capacity in high-tech manufacturing industries rose nearly 50
percent last year, well in excess of its rapid rate of increase
over the previous 3 years. Hence, a temporary glut in these
industries and falling prospective rates of return were
inevitable at some point. Clearly, some slowing in the pace of
spending was necessary and expected if the economy was to
progress along a balanced and sustainable growth path.
But the adjustment has occurred much faster than most
businesses anticipated, with the process likely intensified by
the rise in the cost of energy that has drained business and
household purchasing power. Purchases of durable goods and
investment in capital equipment declined in the fourth quarter.
Because the extent of the slowdown was not anticipated by
businesses, it induced some backup in inventories despite the
more advanced just-in-time technologies that have in recent
years enabled firms to adjust production levels more rapidly to
changes in demand. Inventory-sales ratios rose only moderately,
but relative to the levels of these ratios implied by their
downtrend over the past decade, the emerging imbalances
appeared considerably larger. Reflecting these growing
imbalances, manufacturing purchasing managers reported last
month that inventories in the hands of their customers had
risen to excessively high levels.
As a result, a round of inventory rebalancing appears to be
in progress. Accordingly, the slowdown in the economy that
began in the middle of 2000 intensified, perhaps even to the
point of growth stalling out around the turn of the year. As of
the economy slowed, equity prices fell, especially in the high-
tech sector where previous high valuations and optimistic
forecasts were being reevaluated, resulting in significant
losses for some investors. In addition, lenders turned more
cautious. This tightening of financial conditions, itself,
contributed to restraint on spending.
Against this background, the Federal Open Market Committee
undertook a series of aggressive monetary policy steps. At its
December meeting, the FOMC shifted its announced assessment of
the balance of risks to express concern about economic
weakness, which encouraged declines in market interest rates.
Then on January 3, and again on January 31, the FOMC reduced
its targeted Federal funds rate one-half percentage point, to
its current level of 5\1/2\ percent. An essential precondition
for this type of response was that underlying cost and price
pressures remained subdued, so that our front-loaded actions
were unlikely to jeopardize the stable, low inflation
environment necessary to foster investment and advances in
productivity.
With signs of softness still patently in evidence at the
time of its January meeting, the Federal Open Market Committee
retained its sense that downside risks predominate. The
exceptional degree of slowing so evident toward the end of last
year, perhaps in part the consequence of adverse weather,
seemed less evident in January and February. Nonetheless, the
economy appears to be on a track well below the productivity-
enhanced rate of growth of its potential, and, even after the
policy actions we took in January, the risks continue skewed
toward the economy's remaining on a path inconsistent with
satisfactory economic performance.
Crucial to the assessment of the outlook and the
understanding of recent policy actions is the role of
technological change and productivity in shaping near-term
cyclical forces, as well as long-term sustainable growth.
The prospects for sustaining strong advances in
productivity in the years ahead remain favorable. As one would
expect, productivity growth has slowed along with the economy.
But what is notable is that, during the second half of 2000,
output per hour advanced at a pace sufficiently impressive to
provide strong support for the view that the rate of growth of
structural productivity remains well above its pace of a decade
ago.
Moreover, although recent short-term business profits have
softened considerably, most corporate managers appear not to
have altered to any appreciable extent their long-standing
optimism about the future returns from using new technology. A
recent survey of purchasing managers suggests that the wave of
new on-line business-to-business activities is far from
cresting. Corporate managers more generally, rightly or
wrongly, appear to remain remarkably sanguine about the
potential for innovations to continue to enhance productivity
and profits. At least this is what is gleaned from the
projections of equity analysts, who, one must presume, obtain
most of their insights from corporate managers. According to
one prominent survey, the 3- to 5-year average earnings
projections of more than 1,000 analysts, though exhibiting some
signs of diminishing in recent months, have generally held at a
very high level. Such expectations, should they persist, bode
well for continued strength in capital accumulation and
sustained elevated growth of structural productivity over the
longer term.
The same forces that have been boosting growth in
structural productivity seem also to have accelerated the
process of cyclical adjustment. Extraordinary improvements in
business-to-business communication have held unit costs in
check, in part by greatly speeding up the flow of information.
New technologies for supply chain management and flexible
manufacturing imply that businesses can perceive imbalances in
inventories at a very early stage, virtually in real time, and
can cut production promptly in response to the developing signs
of unintended inventory building.
Our most recent experience with some inventory backup, of
course, suggests that surprises can still occur and that this
process is still evolving. Nonetheless, compared with the past,
much progress is evident. A couple of decades ago, inventory
data would not have been available to most firms until weeks
had elapsed, delaying a response and, hence, eventually
requiring even deeper cuts in production. In addition, the
foreshortening of lead times on the delivery of capital
equipment, a result of information and other newer
technologies, has engendered a more rapid adjustment of capital
goods production to shifts in demand that result from changes
in firms' expectations of sales and profitability. A decade
ago, extended backlogs on capital equipment meant a more
stretched-out process of production adjustments.
Even consumer spending decisions have become increasingly
responsive to changes in the perceived profitability of firms
through their effects on the value of households' holdings of
equities. Stock market wealth has risen substantially relative
to income in recent years, itself a reflection of the
extraordinary surge of innovation. As a consequence, changes in
stock market wealth have become a more important determinant of
shifts in consumer spending relative to changes in current
household income than was the case just 5 to 7 years ago.
The hastening of the adjustment to emerging imbalances is
generally beneficial. It means that those imbalances are not
allowed to build until they require very large corrections. But
the faster adjustment process does raise some warning flags.
Although the newer technologies have clearly allowed firms to
make more informed decisions, business managers throughout the
economy also are likely responding to much of the same enhanced
body of information. As a consequence, firms appear to be
acting in far closer alignment with one another than in decades
past. The result is not only a faster adjustment, but one that
is potentially more synchronized, compressing changes into an
even shorter timeframe.
This very rapidity with which the current adjustment is
proceeding raises another concern, of a different nature. While
technology has quickened production adjustments, human nature
remains unaltered. We respond to a heightened pace of change
and its associated uncertainty in the same way we always have.
We withdraw from action, postpone decisions, and generally
hunker down until a renewed, more comprehensible basis for
acting emerges. In its extreme manifestation, many economic
decisionmakers not only become risk averse, but attempt to
disengage from all risk. This precludes taking any initiative,
because risk is inherent in every action. In the fall of 1998,
for example, the desire for liquidity became so intense that
financial markets seized up. Indeed, investors even tended to
shun risk-free, previously issued Treasury securities in favor
of highly liquid, recently issued Treasury securities.
But even when decisionmakers are only somewhat more risk
averse, a process of retrenchment can occur. Thus, although
prospective long-term returns on new high-tech investment may
change little, increased uncertainty can induce a higher
discount of those returns and, hence, a reduced willingness to
commit liquid resources to illiquid fixed investments.
Such a process presumably is now under way and arguably may
take some time to run its course. It is not that underlying
demand for internet networking and communication services has
become less keen. Indeed, as I noted earlier, some suppliers
seem to have reacted late to accelerating demand, have
overcompensated in response, and then have been forced to
retrench--a not-unusual occurrence in business decisionmaking.
A pace of change outstripping the ability of people to
adjust is just as evident among consumers as among business
decisionmakers. When consumers become less secure in their jobs
and finances, they retrench as well.
It is difficult for economic policy to deal with the
abruptness of a break in confidence. There may not be a
seamless transition from high to moderate to low confidence on
the part of businesses, investors, and consumers. Looking back
at recent cyclical episodes, we see that the change in
attitudes has often been sudden. In earlier testimony, I
likened this process to water backing up against a dam that is
finally breached. The torrent carries with it most remnants of
certainty and euphoria that built up in earlier periods.
This unpredictable rending of confidence is one reason that
recessions are so difficult to forecast. They may not be just
changes in degree from a period of economic expansion, but a
different process engendered by fear. Our economic models have
never been particularly successful in capturing a process
driven in large part by non-rational behavior.
For this reason, changes in consumer confidence will
require close scrutiny in the period ahead, especially after
the steep falloff of recent months. But for now, at least, the
weakness in sales of motor vehicles and homes has been modest,
suggesting that consumers have retained enough confidence to
make longer-term commitments; and as I pointed out earlier,
expected earnings growth over the longer run continues to be
elevated. Obviously, if the forces contributing to long-term
productivity growth remain intact, the degree of retrenchment
will presumably be limited. In that event, prospects for high
productivity growth should, with time, bolster both consumption
and investment demand. Before long in this scenario, excess
inventories would be run off to desired levels. Higher demand
should also facilitate the working off of a presumed excess
capital stock, though doubtless at a more modest pace.
Still, as the Federal Open Market Committee noted in its
last announcement, for the period ahead, downside risks
predominate. In addition to the possibility of a break in
confidence, we don't know how far the adjustment of the stocks
of consumer durables and business capital equipment has come.
Also, foreign economies appear to be slowing, which could
dampen demands for exports; and continued nervousness is
evident in the behavior of participants in financial markets,
keeping risk spreads relatively elevated.
Because the advanced supply chain management and flexible
manufacturing technologies may have quickened the pace of
adjustment in production and incomes and correspondingly
increased the stress on confidence, the Federal Reserve has
seen the need to respond more aggressively than had been our
wont in earlier decades. Economic policymaking could not, and
should not, remain unaltered in the face of major changes in
the speed of economic processes. Fortunately, the very advances
in technology that have quickened economic adjustments have
also enhanced our capacity for real-time surveillance.
As I pointed out in summary then, although the sources of
long-term strength of our economy remain in place, excesses
built up in 1999 and early 2000 have engendered a retrenchment
that has yet to run its full course. This retrenchment has been
prompt, in part because new technologies have enabled
businesses to respond more rapidly to emerging excesses.
Accordingly, to foster financial conditions conducive to the
economy's realizing its long-term strengths, the Federal
Reserve has quickened the pace of adjustment of its policy.
Thank you, Mr. Chairman. I request that the remainder of my
remarks be included for the record.
[The prepared statement of Hon. Alan Greenspan can be found
on page 55 in the appendix.]
Chairman Oxley. Without objection, so ordered, Mr.
Chairman.
Let me recognize myself for 5 minutes.
Mr. Chairman, back when we had our last really full-blown
recession in 1982, the markets almost inexplicably rebounded
very quickly and the mantra at that time was first Wall Street,
and then Main Street.
Do we face a reverse of that this time? That is, are the
markets potentially reflecting a downturn overall and should we
be concerned about that?
Mr. Greenspan. Well, the history on that is mixed, Mr.
Chairman. In fact, as an old colleague of mine once said, ``the
stock market forecasted five of the last two recessions.'' So
we have to be careful about being fairly strict in analyzing
what stock prices and equity values are doing and what is
happening to demand.
Having said that, there is no question, as I indicated in
earlier testimony, that the so-called ``wealth effect'' has
been a very prominent factor in the major expansion of economic
activity, especially since 1995, and clearly with the market
reversing, that process does indeed reverse. Whether it, in and
of itself, is enough to actually induce a significant
contraction which, in retrospect, we will call a ``recession,''
is yet too early to make a judgment on.
Chairman Oxley. Do I read your statement correctly to mean
that there actually is greater consumer confidence than has
been reported?
Mr. Greenspan. There is also a distinction between our
various measures of consumer confidence and, indeed, what
people think, feel and say, and what they do. And in the last
couple of months during the period when the indexes, the
proxies for consumer confidence, have gone down extraordinarily
rapidly, it has not been matched by a concurrent decline in
consumption expenditures.
Now, to be sure, the strength, as I indicated in my
prepared remarks, in passenger cars in January and February did
reflect a bulge in so-called ``fleet sales,'' and one must
presume that that will unwind in the months ahead. But all in
all, the demand for homes, the demand for consumer durables,
while scarcely where they were a year ago, have not matched the
type of weakness that we have seen in the consumer confidence
indexes. What we do not know, however, is whether that merely
is something which has been delayed, and that ultimately the
adjustment in consumer expenditures will indeed, after the
fact, reflect the most recent patterns of consumer confidence.
We don't know yet what the answer to that is.
Chairman Oxley. Mr. Chairman, in the end of your statement,
you say ``This retrenchment has been prompt, in part because
new technology has enabled businesses to respond more rapidly
to emerging excesses. Accordingly, to foster financial
conditions conducive to the economy's realizing its long-term
strengths, the Federal Reserve has quickened the pace of
adjustment of its policy.''
Can you tell us in more detail what that means?
Mr. Greenspan. We have gone through a decade in which very
significant technological changes have occurred in the area of
information, and it has dramatically altered the process by
which business decisionmaking has been made. As a consequence,
we have observed on the upside of the economy major changes in
the way capital investment decisions are made, inventory
decisions are made, indeed, virtually all business decisions.
What we have not seen is how does that new technology
affect the decisionmaking process when the rate of growth
begins to fall? And I guess we could reasonably presume, and
indeed it was the reasonable expectation, that the just-in-time
inventory process, to take one aspect of the decisionmaking
process, would not only affect how inventories were accumulated
on the upside, but presumably accelerate the adjustment process
on the downside. And indeed, that is what we are obviously
observing.
If that is the case, then all economic policy must indeed
adjust itself for the changing timeframe in which the economy
itself is moving. We, for example, have observed phenomena
which used to take 30 months to work out, probably now take 24
months or 15 months, and those which used to take 3 or 4 weeks
now happen sometimes in 3 or 4 days.
For monetary policy very specifically to maintain the same
pace of adjustment that we had in the past clearly would not be
consonant with what has occurred in the structure of an economy
to which we must adjust. So the content of my remarks is that
we have developed, and, of necessity, will continue to develop
a far more quick response, presumably a far more front-loading
of response to reflect the changing environment in which we
find ourselves.
Chairman Oxley. Thank you.
The gentleman from New York, Mr. LaFalce.
Mr. LaFalce. Mr. Chairman, you strive to have a close
working relationship with any President, Republican or
Democrat, and the Congresses, too, that can make a meshing of
monetary and fiscal policy, that can make for a better economic
policy, of course.
Some would look back and say, ``Well, President George Bush
in 1990, 1991, 1992, might say, gee, he might have done much
better in the 1992 election had Alan Greenspan been more
cooperative with him.'' Al Gore perhaps can make the same
claim.
You run a dilemma. You have to be the intellectually honest
person and you want to cooperate. If you cooperate too much,
you could also be used, and people could tradeoff of their
association with you, can tradeoff of statements you have made,
and magnify your statements tenfold, a thousandfold, bring
about consequences that you yourself don't really like.
That is a concern of yours, too, I am sure. I will not ask
you to comment about that, but it is a reality.
I am going to ask you some questions now. Each of my
questions does have something in mind for which I will be using
your response obviously, as Presidents use your responses.
First of all, I think that horses should come before carts,
and I think, therefore, that we should pass a budget resolution
as called for by law of the United States on April 15th, before
we take up a tax cut bill; and yet I hear we might take up a
tax cut bill in committee next week. I don't think we are going
to pass a budget resolution until at least the budget is
presented to us in some detail. Now, I understand we might not
get it until April.
What do you think, which should come first, the horse or
the cart?
Mr. Greenspan. The budget resolution is something which the
Congress itself constructed. It has been a very effective tool
and I think the whole budget process coming out of the 1974 Act
has been a major factor in rationalizing the budget process. So
it is up to the Congress to make the decision. I mean, this is
a wholly political issue, and the facts----
Mr. LaFalce. But some economic consequences though,
wouldn't you say?
Mr. Greenspan. No, not necessarily.
Mr. LaFalce. Oh, you don't think the budget that we pass
has some economic consequences?
Mr. Greenspan. I think it certainly has some. The question
of how you arrive at that budget, in and of itself, need not
have economic consequences. What you are referring to----
Mr. LaFalce. Need not, but might and probably would.
Mr. Greenspan. If you are asking me, is it possible that--
--
Mr. LaFalce. That is not what I am asking you.
Mr. Greenspan. Are you asking, is it probable?
Mr. LaFalce. We usually deal with the laws of probabilities
in framing our answers.
Mr. Greenspan. Let me be very specific.
What the budget is does matter. How you get there
shouldn't, although I recognize that in the process of getting
there, certain secondary things may happen which could have
negative economic effects.
Mr. LaFalce. It could have an effect, especially on those
most in need in American society.
Let me go to a second question. If they do bring up a tax
bill, whenever they bring it up, the rule will probably permit
for an alternative. One of the alternatives I was thinking of
was something proposed by the Republicans in the 105th
Congress, in the 106th Congress voted upon, and called for in
the platform of the Texas GOP led by George Bush in the year
2000 and Dick Armey and Tom DeLay and Phil Gramm; that was to
abolish the Income Tax Code. This was only an idea, but brought
up in the past two Congresses, voted upon and passed in the
House.
Wouldn't that be better than a tax cut, just abolishing the
Income Tax Code by a date certain and then worrying about what
you do in the future? That passed the House the last Congress
and the Congress before.
Mr. Greenspan. Congressman, if you think you are going to
get me to answer a question of that nature, I suggest----
Mr. LaFalce. It has to be taken very seriously, because it
was brought to the House of Representatives in two separate
Congresses by the leadership of the House of Representatives
and passed.
Mr. Greenspan. I am not an expert on such issues.
Mr. LaFalce. OK. My third and last question--the question
is, what do we take seriously? Social Security?
Chairman Oxley. The gentleman's time has expired.
Mr. LaFalce. Can I ask one more question?
Chairman Oxley. We have to stick to the 5-minute rule.
The gentlelady from New Jersey, Mrs. Roukema.
Mrs. Roukema. Thank you, Mr. Chairman.
Chairman Greenspan, let me say, following up on really what
the Chairman asked, your last statement, as he read it to you,
``accordingly, to foster financial conditions,'' and you
answered it, but you didn't give it much specificity, I was
going to ask the question regarding that statement of yours in
conclusion, in the context of the new reports that we see by
three groups reported in today's New York Times, the Conference
Board, Bloomberg Press, new home sales from the Commerce
Department report and how they are down, as well as a Commerce
report on durable goods, indicating quite substantial evidence
of weakness in the economy.
Given that and given your summary statement here, having
listened to it, I didn't hear with specificity whether or not
you foresee action on monetary policy reducing interest rates
in the near future. It sounds as though your analysis is more
optimistic here in your report than the information that we are
getting from other sources.
Mr. Greenspan. Well, Congresswoman, let me just say in
general, as I try to outline in my prepared remarks, I think
that there is an inventory adjustment process just getting
under way, in effect, or perhaps starting at the beginning of
the year, and that there is a capital excess, meaning the
degree of physical plant capacity has got to be run off as
well. So, I am arguing, in effect, that there is a big
adjustment process which still has a way to run.
But commenting on the specific numbers which you just
alluded to, the decline in new home sales from, as I recall,
one million thirty-four seasonally adjusted annual rate in
December, down to nine hundred two thousand or thereabouts in
January, merely puts the number back to where it was late last
year. The outlier is actually the December figure.
Housing starts in January actually were up, as were
permits, so that in that area, those data cannot be used, in my
judgment, as reflecting generalized weakness. The consumer
confidence issue can, and that I alluded to in my prepared
remarks.
Mrs. Roukema. You did, and I noted that. Thank you very
much; I am glad you pointed that out.
But in any case, we have a short time period ahead where we
may be hearing more from the Fed on this subject?
Mr. Greenspan. I have no comment.
Mrs. Roukema. No comment.
May I ask you also, there have been two letters sent by
numbers of Members of Congress to you concerning the question
of the proposed regulation, financial holding companies and
financial subsidiaries with respect to real estate.
As you know, in Gramm-Leach-Bliley, I was one of the
outspoken advocates for being sure that we set up firewalls to
protect against mixing commerce and banking, and I am
concerned. What would be your response to the questions that
were raised in the letters with regard to the Fed's proposed
real estate rule? I do understand that you have postponed a
decision on that; is that correct?
Mr. Greenspan. That is correct.
Mrs. Roukema. Could you give us a little pro and con on
that and your own perspective? Because--I am deeply concerned,
because this is the first effect of Gramm-Leach-Bliley on a
regulatory basis that we are having to face, and I think we as
a committee should be focused on it.
Mr. Greenspan. Yes. We have extended the comment period
through May 1st, and indeed have had a considerable amount of
input from all the various sources.
What people, I think, fail to remember is that we take the
comment periods very seriously, meaning that there are certain
types of information that you really cannot get effectively
prior to the comment period, and we actually hope that we get
full sets of comments so we can evaluate all the various
arguments, some of which we may not be aware of. I grant you,
most of the arguments we obviously are acquainted with, but
every once in a while, and sometimes more often than not, we
get very important insights in the comment period which alter
our original views on the subject, and so this is an integral
part of the decisionmaking process. We will wait until all of
the comments are in by May the first.
Chairman Oxley. The gentlelady's time has expired.
The Chair now recognizes the gentleman from Massachusetts,
Mr. Frank.
Mr. Frank. Mr. Chairman, I want to focus on monetary
policy.
In your statement you said, the bottom of page 1, the
adjustment last year occurred much faster than most businesses
anticipated. Then you say on page 2, the slowdown intensified.
So you talk about how businesses did not anticipate a slowdown
that intensified. I think you left out, frankly, the role of
the Fed, because you didn't anticipate, but you did intensify,
and that is what I wanted to talk about.
Based on your own rules of thumb, the actions the Federal
Reserve System took between February and May of 2000 clearly
contributed to the slowdown. You have always told us it takes
between 6 and 9 months for the actions to have an impact.
Now, in 1998 you did add liquidity because of the Asian
crisis, but by the end of 1999 you had removed, at least in
amounts, that liquidity. Interest rates stood, the Federal fund
rates and the discount rate, at the end of 1999 where they had
been before the Asian crisis reaction. You then, in February,
March and May of 2000, raised interest rates by 100 basis
points. I put this in a statement that is out there.
Take your 6 to 9 months, and that increase of 100 basis
points has its maximum impact in about November of last year.
In other words, just when that slowdown was intensifying was
when we were feeling the impact of the Fed's rate increases of
the year 2000.
My questions are several. Is there, in fact, any way to not
accept that the errors the Fed made in addition to not
anticipating--you, as I said, were among the non-anticipators,
and that led you to be the intensifiers. So is there any other
explanation of your actions than that your increases over and
above what offset the Asian liquidity thing contributed to that
slowdown?
Maybe the Fed has become irrelevant when I was on vacation,
but if we follow the usual rule of the 6- to 9-month impact,
there are 100 basis points that you increased in that period in
2000 when you would expect to have them have the impact
precisely when those are slowing down.
What concerns me is not the fact you made a mistake--even
the maestro hits a couple of sour notes, and we are not going
to change the title of the book--but it is why, because we want
to prevent them.
My problem is this: In your report here on page 5, you note
core inflation remained low in 2000 in the face of sharp
increases in energy prices, so obviously that could not have
been the reason for a 100-basis-point increase.
What bothers me is this: I think you have been very good in
arguing, as you do again here today, that there have been real
productivity increases in the economy that allow us to get
unemployment lower than we used to think possible without
inflation. But you are not the only member of that Board. There
are people on the Board, some bank presidents and some Board
members, who disagree with that, who have said that they
believe that unemployment had gotten too low.
What I fear is that there was pressure coming from them,
because I must say, the one difference I would have with you
procedurally, I get the impression while you have a great fear
of inflation, you have an even greater fear of a split vote on
the board of the FOMC, lest the public think this is something
democracy ought to deal with. So what I am concerned with is,
in the absence of other reasons for those mistakes of mid-2000,
that pressure from people who disagree with you about our
ability to tolerate a low interest rate without inflation may
have had some impact.
Now, I did see an alternative explanation here, and what
you say is that you didn't get it wrong, the public did. I
mean, the public was irrational, and they got too scared, and
that is why things didn't work.
I wish I had more time. I would be interested in your
explanation of what this says for the theory of rational
expectations and whether we take back a Nobel Prize or two. But
I am concerned.
So my question, which you have time now to answer, is, one,
is there any way to deny that the Fed's interest rate increases
in mid-2000 intensified that very slowdown; and, second, what
was the basis for the mistake and how do we collectively work
to prevent its repetition, because obviously no one wants to
see that.
Mr. Greenspan. First of all, what we do not know is whether
with the new technologies and the rapid changing events, as I
indicated in answer to an earlier question, whether the 6 to 9
months is foreshortened as well. My suspicion is that it has,
but we don't have enough data to confirm.
Mr. Frank. So you brought this down earlier than I thought.
Mr. Greenspan. Possibly. The reason that we moved in 1999
was basically because long-term interest rates had started to
move up earlier in the year.
Mr. Frank. I am talking about 2000, Mr. Greenspan.
Mr. Greenspan. I am at 1999. I will get to the 2000.
Chairman Oxley. The Chair would like you to sum up. We are
past the 5 minutes.
Mr. Greenspan. Just very quickly what we did was, in
recognition of an excess of investment demand over savings,
follow the path that the long-term interest rates were leading
us to during that period, which is a normal reaction for an
economy which was running off balance, and had we not raised
interest rates, either then or through 2000, in order to hold
the rates down we would have had to engender a massive increase
in liquidity in the system which conceivably would have
exacerbated the imbalances even more.
The issue of the economy running faster than we knew was
sustainable over the longer run was fairly evident during all
of that period, and it was very important to make certain that
the elements of demand were contained, as indeed they
eventually were.
As I look back at that period, I think that the actions we
took were right at the appropriate times, and I will be glad to
discuss this with you in some much greater detail, because
obviously it is very difficult, as the Chairman wants me to sum
up very quickly, but the bottom line is I think we do have a
disagreement on this.
Chairman Oxley. Gentleman from Nebraska, Mr. Bereuter.
Mr. Bereuter. Thank you, Mr. Chairman.
Chairman Greenspan, thank you very much for your testimony.
I have two unrelated questions if I can do it: The part in your
testimony you did not read related to the impact of energy
prices on the economy, and that you pointed out there was a 12
percent increase in natural gas prices during the last quarter.
This is the number one concern on the part of many of my
constituents; indeed most of my constituents, broad stretches
of America, the heating oil, the heating fuel of choice is
natural gas; Northeast, it would be heating fuel, heating oil.
Those costs are going up even 50 to 100 percent in the course
of 2 months, some microregion to microregion basis, depending
upon the contract that delivery entity, municipal or public
utility has. So it is affecting consumer decisions, and the
uncertainty about it is affecting them. Some businesses are on
interruptible supply basis. They pay out a lot more, or they
are cut off, in effect, which shuts down businesses. Broad
stretches of America have an unusually cold winter and hydrous
ammonia costs are expected to dramatically increase for farmers
this spring. I wonder to what extent you are taking that into
account.
Second, you pointed out that business managers have this
enhanced information, they are making decisions that are
compressing reactions; and you have on the other hand a
positive sensibility to make better real-time surveillance and
you front load as a result your response. But do you have
sufficient transparency?
And do you have short enough measurement periods of
information coming to you that you can adjust to this new
quickened pace of economic change?
Mr. Greenspan. The answer is we hope so. The amount of
information that we get and the real-time acceleration of its
availability has been very helpful, and in that regard, as I
indicate in my prepared remarks, we do have significant
increased enhanced capability for surveillance.
The natural gas issue is really a relatively new one.
Remember, we have had crude oil surges in the past with impacts
on the economy which we are able to evaluate and we had some
history to be able to understand how it works. The natural gas
surge that we have seen in the last year or two is something
relatively new and it is being caused by a very dramatic
increase in the demand for natural gas. Even though the number
of drilling rigs we have put on for gas drilling has gone up
very dramatically, the technology itself has enabled us to
drain reservoirs at a very rapid pace, and so the gross
additions are just barely keeping even with the gross
subtractions. As a result, the available production levels of
natural gas have not gone up that much, which means that we
need to enhance our capabilities to bring more gas in play.
That is going to be an ongoing process as far as I am
concerned, but it clearly has macro-economic effects, because
you could see the impact of this doubling of gas bills on
consumer behavior and indeed on consumer confidence.
So it is a new element in the economic outlook on which we
have expended a considerable amount of effort to try to
understand not only what is happening, but its implications on
the overall economic outlook.
Mr. Bereuter. Thank you.
Chairman Oxley. The gentleman's time has expired.
The gentlelady from New York, Mrs. Maloney. The Chair would
indicate we were going in order of appearance before the gavel,
when the gavel came down under the committee rules.
Mrs. Maloney. Thank you, Mr. Chairman.
Mr. Greenspan, while I know you do not speak specifically
about whether or not you plan to adjust interest rates, I am
concerned about the impact that a reported rise in the zero
maturity money stock may have on some members of the FOMC. As
you know, other monetary aggregates have also recently risen at
historically high rates, and I would hope that this information
would not keep the FOMC from lowering rates.
However, I was concerned by comments I read in the February
19th issue of Barron's, where it was reported that the annual
rate of MZM increased by 16.9 percent annually from November to
January. The same short article quotes an economist at the St.
Louis Fed saying that he would be concerned about this increase
if it continues into the summer. I truly hope this data does
not discourage you from easing monetary policy.
Mr. Chairman, can you tell me whether you or members of the
FOMC are concerned about the MZM and other monetary aggregates
and whether this would discourage you from easing monetary
policy?
Mr. Greenspan. Well, Congresswoman, the cause of that rise
which is, as you point out, a significant acceleration, results
from two factors. One, the reduction in interest rates has
increased the so-called opportunity cost to hold deposits and a
lot of the increase in M2 and M3 and indeed MZM has resulted
from that. There has also been an apparent shift out of stocks
and other financial assets into deposits as stock prices have
fallen off. And so a substantial part of that rise is easily
understood. The general view that we have all had over the
years, as I have mentioned before this committee in the past,
is while money supply has been a major issue with respect to
the American economy, and money obviously is a crucial issue in
inflation, indeed it is almost by definition in the sense of
the relationship between units of money and units of goods, we
have had extraordinary difficulty in trying to find the right
proxy to measure money per se, and none of these various
measures--M2, M3, MZM--as best we can judge, seem to have the
characteristics necessary for ``moneyness'' that is at the base
of concerns a number of people have with the issue of money
expansion and inflation.
As a consequence, we no longer report to this committee on
money supply targets, and the reason we do not is that we have
not found, at least for the time being, money supply useful.
Having said that, we do obviously follow it like we follow all
financial variables, because money supply changes do signal
what is happening in the economy and, whether those signals are
telling us one thing or another are quite relevant to our
overall evaluation of what economic activity is likely to do.
Mrs. Maloney. Well, thank you for your answer; and again I
hope that increases in the aggregates would not discourage the
FOMC from easing its monetary policy.
On another note, the December 1999 issue of the Federal
Reserve's publication, ``Current Issues in Economics and
Finance,'' had an article titled, ``Explaining the Recent
Divergence in Payroll and Household Employment Growth.'' The
authors concluded that--and I quote--``The household survey
probably under-reports employment because its estimates
incorporate a census undercount of the working age population.
The higher figures in the payroll survey are more reliable,
accurately capturing the effects of the current economic
expansion on the employment status of many adults overlooked by
the census.''
Mr. Chairman, in a matter of days, the Bush Commerce
Department must decide whether the professionals at the Census
Bureau will have the ability to adjust the raw census numbers
by using modern scientific methods for the undercount if they
see it, or whether to allow politicians at the Commerce
Department, political appointees, to decide whether to adjust
the numbers.
My question is: Doesn't this Federal Reserve article
demonstrate that not using corrected data is unscientific and
does not include all Americans? And, as a user of census
statistics yourself, isn't it vitally important for all
economists to have the most accurate census data with which to
work? If your data is incorrect your conclusions are incorrect.
Chairman Oxley. The gentlelady's time has expired. The
Chairman of the Federal Reserve may respond to a Census Bureau
question if he chooses.
Mr. Greenspan. Let me just say very quickly, the reason for
the rise in upward revision that is going to be coming on
stream in household employment data is a consequence of the
upward revision in the expected level of the population,
households, and number of people in the labor force that will
show up in the census data, whether it is taken from the
existing count that now currently exists or whether it is
augmented by a sample survey. In both cases there have been
significant upward revisions from the earlier preliminary
numbers on which the household data series earlier was based.
Chairman Oxley. The gentleman from Louisiana, Mr. Baker.
Mr. Baker. Thank you, Mr. Chairman.
Good morning, Chairman Greenspan. It seems to me that the
section of your comment with regard to technology and speed and
efficiency of the market is one in which I have particular
interest. As we move in an economy from carbon paper to memory
typewriters to what was lovingly called the TRS-80 Radio Shack
computer, the ``Trash Eighty,'' today where we have gigahertz
transmission capabilities, there is an enormous transfer of
economic power in that type of movement in the economy. In
fact, the volatility that we are concerned about today may in
large measure be associated with those technological
innovations, and that if one would ever assume to take credit
for inventing the internet, you should also take responsibility
for the volatility in the marketplace today.
But aside from that point, volatility is inherent with an
economy which is transmographying itself at such a rapid rate.
And I recall your earlier comment, many appearances before, in
talking about the risk associated with banking activities; that
banking in itself is an inherently risk-taking venture, and
that we cannot escape from the fact that there will be banks
that will fail despite our best efforts and the most recent up-
to-date insight and knowledge.
It would appear, though, that in a market which acts so
quickly and takes savings and capital and moves it rapidly
based on information, that the most important thing we could
have in the market, either as a regulator or as an investor, is
transparency and disclosure of information to all participants
on a timely basis, whether it is a new patent that allows
hundreds of new jobs to be created that correspondingly
eliminates 1,000 jobs in the old technology; whether it is the
SEC in seriatim process considering a new accounting standard
which may not be open to public discussion until the
announcement is made; whether it is an LTCM-like hedge fund
activity, which we were not fully aware of the scope of their
endeavors nor the number of participants until very late in the
process. Opening the market up is something that must happen,
because we can't put the genie back in the bottle and make the
internet go away.
Are we today confident as a Fed, as an FOMC, that there
aren't additional steps that could be taken? Or are there steps
that Congress can take to help the free flow of information? I
am very concerned, for example, about the actions of the SEC
not being as transparent as the SEC would like the businesses
to be to the SEC. I don't think we can have a system where
Government is opaque and commerce is clear and transparent. I
think both sides of the system now, unfortunately, are going to
have to disclose in a timely manner to attempt to limit
volatility. It will never go away. I think it is inherent in
the type of economy we now find ourselves living in, and the
fairness is to allow all participants to have access to
whatever information may be available in a timely manner.
I remember the debate over doing away with the 15-minute
delay time on the ticker on the monitors and what a horrible
thing it would be if people had real-time information to the
markets. There are now 807,000 trades a day based on real-time
information by mom-and-pop investors who are saving for their
kids' education and buying a first home or whatever it might
be. It has been a wonderful thing. So my question to you is
what steps can we take? If I'm correct in my summation, the
flow of technology and the spread of information is a positive
thing for all involved in the market.
Mr. Greenspan. I generally agree with you. Congressman, I
think that with the technology accelerating as it has over, say
the past 5 to 7 years especially, we have seen a much more
rapid response and indeed that is the issue which I clearly was
responding to earlier.
The issue of disclosure gets down to the conflict between
the obvious necessity of transparency, as you put it, and the
question of property rights. Because one of the reasons why you
get a lot of disinclination on the part of various players not
to want to disclose is they presume that what they have is a
property right. And the question is, do they? For example, you
have markets which evolve float, and markets, as you know, with
float are essentially giving to certain players interest-free
loans. And after a while, they presume that it is their
property when indeed it is not. And consequently, when you
endeavor to move some of these financial transactions to being
cleared and settled in a much shorter period of time,
somebody's losing something and you get very significant
resistance.
What is necessary is to make the judgment, do they have the
right to that float, whether it is information or otherwise,
and in most instances I think you are going to find the answer
is no.
Chairman Oxley. The gentleman's time has expired.
The gentleman from Pennsylvania, Mr. Mascara.
Mr. Mascara. Thank you, Mr. Chairman.
Welcome, Chairman Greenspan. I read on Sunday an article in
the Pittsburgh Post Gazette, the title being ``Alan Greenspan
Can Be Wrong, Too.'' How shameful. ``The Federal Reserve
Chairman''--and I am quoting--``should take his share of the
blame for an economic downturn,'' says James Galbraith,
``especially if he's going to go along with the wrongheaded
Bush tax cut.''
When you, Mr. Chairman, testified before the Senate Budget
Committee last month, you made headlines when you seemed to
indicate that we could afford a large tax cut. However, you
seemed to backtrack somewhat from that testimony when you
subsequently testified before the Senate Banking Committee.
Given that somewhat conflicting testimony, what is your
position on President Bush's plan to cut $1.6 trillion in taxes
over 10 years?
And I just want to add an aside that I am old enough to
remember the 1981 tax cut when everybody bought into supply
side economics, when subsequently David Stockman left the
Reagan Administration. The trickle-down theory didn't work. And
I hear a lot of that now in the Bush proposal, that somehow if
we now give a preponderance of the tax cut to the wealthy in
the country, that somehow that is going to stimulate the
economy. Would you want to comment on that, sir?
Mr. Greenspan. Congressman, I think you will find that
nowhere in any of my testimony, written or oral, have I
actually addressed the question of any particular tax or
spending program in this particular context. I have argued that
those are judgments that the Congress has to make.
The issue that I raised in the Senate Budget Committee, and
indeed later in the Senate Banking Committee, was the
implications of what one should be doing with respect to fiscal
policy if you believe that these productivity gains we have
seen in the last 5 to 7 years are going to be sustained.
Because if indeed that is the case, we are going to get ever-
increasing unified budget surpluses given so-called current
services expenditures, and if that happens then the Congress
has got to make a judgment that after the debt effectively gets
to zero, any surplus of necessity must accrue in the way of
non-Federal assets, mainly private assets. And I have argued
that there are very significant problems there, and if you
agree with that, then the question is there are many different
alternate avenues in which that issue can be addressed.
My central focus was that we have to be very careful about
a number of issues which are in the process of arising in
fiscal policy as a consequence of productivity and the
presumption of getting eventually to zero debt, which I
support. And the questions that have come up, which I have
never responded to, are do I support any particular tax
program? The answer is I haven't, and I do not this morning
either.
Mr. Mascara. So you do not, then, support any particular
tax cut.
Mr. Greenspan. No. As you know, the minority of a number of
the committees have come up with alternate tax proposals. I
haven't commented on those either.
Mr. Mascara. And do you have some concern if there are some
tax cuts that perhaps we should have a trigger because these
are projections? As an accountant myself, I am very leery of
projections, because oftentimes they just don't happen, and I
think we all ought to be concerned that we don't get back into
the large deficits that we had back in the 1980s when we spent
more than we were taking in. And would you recommend that a
trigger be in place if we do implement a tax cut?
Mr. Greenspan. Congressman, in my original testimony before
the Senate Budget Committee, I raised the issue of whether we
ought to have triggers of some form for either tax cuts or
expenditure initiatives, largely because the uncertainties that
one has with respect to 10-year budget forecasts are very high,
and so the answer to your question is yes.
Chairman Oxley. The gentleman's time has expired.
The Chair now recognizes the gentleman from Delaware, Mr.
Castle.
Mr. Bachus. The gentleman from Alabama.
Chairman Oxley. We are going in order, at the order that
the Members who were here at the pounding of the gavel.
Mr. Bachus. I was here.
Chairman Oxley. I am sorry. The gentleman from Alabama.
Mr. Bachus. Thank you, Mr. Chairman.
Thank you, Mr. Greenspan. I think one of the things you
said, most significant things, this morning, is you have talked
about the major changes in the speed of economic processes. And
you have said that economic policymaking cannot or should not
remain unaltered in the face of this. That to me is a clear
indication that the Fed is going to move quicker, is going to--
it has the ability to move more accurately.
Now, if I read that right, in the past we have seen FOMC
meetings and then half--50 basis point changes in the overnight
rates. But that would not be to me an indication of a fast, you
know, hands-on quick responding economic policy. Have you
signaled today a change in that basic format to one where you
respond quicker and with maybe more accuracy?
Mr. Greenspan. Congressman, I have raised this issue with
the Senate Banking Committee and other fora. Because of the
fact that the economic adjustment processes have accelerated
and because of the fact that our surveillance capability has
commensurately increased, we both are required to act faster,
but are clearly acting on the same type of knowledge that we
had previously. I am scarcely going to argue we should merely
act faster just on the grounds of acting faster without any
information. It is because the same technologies which are
accelerating the economic process adjustments give us a much
more enhanced degree of surveillance, and enable us to act more
expeditiously.
I would scarcely, as I said, want to state that action for
action's sake is a desirable thing. If you don't know what you
are doing, and some people suggest we sometimes don't, that
would be scarcely what we would want to do.
Mr. Bachus. Because of your enhanced ability to gauge
changes, there have been changes between February 13th and
today. It wouldn't be necessary to wait until an FOMC meeting
on March 20th therefore to act, would it? That is what I think
you said here this morning.
Mr. Greenspan. Congressman, we have obviously specified
implicitly that we prefer to act within our scheduled meetings.
There are a number of technical advantages for doing that. But
we have also shown over the years that when we perceive that
actions are required between meetings, we have never hesitated
to move. So I don't think you could read one way or the other
in the comments that I have made which would alter the
statement I just made, which I could just as easily have made 6
months ago.
Mr. Bachus. Of course, in economic policymaking, you have
to adapt to these changes and you have outlined some of them
here this morning. One is that because of the technology and
the ability of competitors in the marketplace to make quicker
changes based on more accurate and real-time data, there are
more severe changes in confidence. You know I have heard that
when you spoke to the Senate and now again here in the House,
and that is a change in the marketplace that I would think it
would be appropriate for the Fed to adopt those changes in the
way it deals with responding to the various data.
Mr. Greenspan. Well, the only thing I can say, Congressman,
is that because of our enhanced technological capabilities, we
are able to monitor the economy on a far closer to real-time
basis than ever before. And I think we understand what is going
on pretty much at the level of detail that we need to make
monetary policy.
Mr. Bachus. Well I would just say to you that, from
everything you have said, I think you also have to change
economic policy quicker and to a more--I mean, and be more
flexible with it than in the past, in fact.
Mr. Greenspan. I think that is a fair statement.
Chairman Oxley. The gentleman's time has expired.
The gentleman from Massachusetts, Mr. Capuano.
Mr. Capuano. Thank you, Mr. Chairman. I like these new
rules.
Chairman Oxley. It rewards people that show up on time.
Mr. Capuano. How about getting here early? Mr. Chairman, I
have so many questions I can't get to them all, but I am
sitting here trying to piece together all the things that I am
facing this year as a Member, and obviously the first thing we
are going to hear about is the tax cut. And I recognize you are
not going to comment to that and I appreciate that, and I am
not going to push you on that. But I also presume that of
course you are familiar with the President's proposal and the
specifics of those, so I won't even ask you, but I am presuming
that and I hope that presumption is there.
Mr. Greenspan. Not quite. I haven't seen the budget yet.
Mr. Capuano. Not the budget, but the tax cut proposals.
Mr. Greenspan. I know what he said last night, certainly.
Mr. Capuano. That is right. I figured you would.
The question I have is if those tax cut proposals were
enacted within a reasonable period of time, 3, 6 months, as
currently proposed, would that change any of the predictions or
comments that you have about the foreseeable future either in
today's testimony or in the testimony contained in the report
of February 13th?
Mr. Greenspan. Well, Congressman, as I said before the
Senate Budget Committee, history has indicated that it is very
difficult to get a tax cut in place to materially alter the
probabilities of going into a recession. But if you get into an
extended one, having cut taxes you are better off than not, and
that is a general position which I think I would find the
evidence has pretty much supported.
Mr. Capuano. I understand that, but I don't see anything in
either of these two reports that indicate that you currently
believe that we are heading into a long-term recession. Have I
misread these?
Mr. Greenspan. No. What I have indicated is that, as best I
can judge, that the underlying productivity growth in this
country still is in place and that is a crucial issue with
respect to making long-term projections. We don't know how this
particular adjustment process currently underway is going to
evolve, but it doesn't alter in any material way the longer-
term outlook. And I would hesitate to say when the term or
adjustments are going to be complete, because the truth of the
matter is, we don't know.
Mr. Capuano. And I believe that to be fair. So I am reading
that to say basically that the current tax proposals on the
table, if enacted within a reasonable period of time, in the
normal course of events, with the normal impacts, will have no
impacts on your current projections over the next couple of
years with what the economy is going to do.
If that is the case, the other part of it then I have to go
to is the current projections that--you didn't mention it here
in today's testimony--but you did mention in the 13th written
testimony, and again, I want to make sure that I am reading
this correctly, and I have seen reports that--and I know a lot
of your projections are based on discussions and commentary
with business leaders. Most I have heard are all believing that
the unemployment rate is going to go up, and I believe you
predicted that as well in the February 13th--and it wasn't
mentioned today, but my presumption is that has not changed.
Mr. Greenspan. One would certainly conclude that when you
are in an adjustment process of the type we are currently in
with the rate of growth, as I indicated in my prepared remarks,
effectively at zero, that being well below what the potential
is in the economy, the unemployment rate would rise, and I
would suspect that that is an inevitable conclusion that one
would get from the type of projection that is implicit in zero
growth.
Mr. Capuano. Fair enough. Thank you.
Mr. Greenspan. In the current period.
Mr. Capuano. I am sitting here looking at a humongous tax
cut that probably will have no immediate impact on our current
projections, yet will throw more people in unemployment and do
nothing for them. It makes it even easier to take my position
that I am leaning toward anyway, that it just doesn't make
sense to do it at this point in time until things stabilize.
The other thing I wanted to ask you is to get into some of
the productivity items. It strikes me, and I guess I would like
to know and probably don't have time to pursue it, but at some
time I would like to know exactly where you base the
projections that productivity is going to continue to rise as
it has in the past. And again, it is not based on empirical
data at all, it is just based on pure observation on my part,
most every business and every small business particularly that
can and does want to do it has already computerized, has
already gotten as many robotics as they can get, has already
downsized as many employees as they can do.
And I wonder seriously whether we have significant room for
improvement in productivity, and if we do, great--and again I
want to be educated at some later time--but if we don't, then I
think the whole underpinnings of the future might be subject to
question.
Chairman Oxley. The gentleman's time has expired. The
Chairman may respond.
Mr. Greenspan. There is no question, if indeed productivity
growth falls back to the 1\1/2\ percent annual rate of growth
that existed prior to 1995 for the previous 20 years, then
clearly the outlook is quite different from anything that we
have been talking about. There are innumerable studies and
innumerable evaluations which suggest otherwise. For example, a
purchasing manager's survey asks plant managers: Of the
existing available technology which you could apply in your
plant at this particular point, what proportion have you
actually implemented. And the average answer is 50 percent or
less. And if you ask a number of different corporate executives
who are heavily involved in the area, you will get answers
which are quite similar to that.
Indeed, our new Secretary of the Treasury, the former
Chairman of Alcoa, who was heavily involved in the series of
innovations which enabled that company to make major advances,
argues that we have only gotten 20 to 30 percent of the
potential of what is out there in increased networking and
internet and various different types of technology applications
for which high rates of return are available.
Chairman Oxley. The gentleman from Delaware, Mr. Castle.
Mr. Castle. Thank you, Mr. Chairman.
Chairman Greenspan, just a quick follow-up on the trigger
issue, and I agree with your underlying premise, it is very
hard to predict what is going to happen economically in 10
years. Whoever would have thought we would be talking about
eliminating the debt and things like that 10 years ago? But
apparently Ways and Means, according to what I am reading, is
going to mark up the income tax legislation, which I don't know
how much it's going to be, but I think around $1 trillion, as
early as a couple of days from now.
I assume when you talk about a trigger mechanism, you are
not talking about it being retroactive, you are talking about
it being prospective, because I think they are going to have to
stage it in order to have the greater impact of tax cuts in
future years when there is more of a surplus than there is now.
I just wanted to make sure what your comments on trigger mean.
Mr. Greenspan. The trigger that I was discussing is a
trigger which essentially would, for example, be a level of net
debt outstanding which would be required to be breached in
order for a next tranche of an income tax cut or an expenditure
increase to occur. But all previous changes are effectively
grandfathered in that regard, so triggers never induce either
an increase in taxes or a cut in expenditures in that regard.
Mr. Castle. Thank you. I thought it would be your answer
but I wasn't sure. Let me go on to another topic, and if I
mischaracterize what you stated, correct me on that. But as I
understand it, you previously testified that ultra-low levels
of Federal debt can harm the economy, because it removes the
stable investment vehicle for pension plans, and so forth.
There might be other reasons, too. The President last night, I
think it was last night, remarked that $1.2 trillion is an area
of debt where you are starting to get into prepayment penalties
and other areas that would be economically negative from the
point of view of the United States Government. Mr. Keisler who
was formerly with the Treasury Department, commented on that
and said, no, it is actually a lot less than that one way or
another.
My question is how low is too low? I don't have a problem
with the fact that maybe some debt still needs to be there. But
what is the measuring device for that and what should we look
at if you don't want to name a particular number?
Mr. Greenspan. I don't think the issue is that we need the
debt there. Indeed, one can very readily argue that riskless
Treasury securities are a value in the marketplace and clearly
attract a huge amount of investment, but they are readily
substitutable with other types of securities, and so while
obviously it would be slightly less efficient than the riskless
securities, the great advantage of reducing the debt
effectively to zero, in my judgment, would overcome that. The
question that is being raised here is not the issue of
desirability of keeping debt, but the impossibility of reducing
it in a cost-effective manner in a rapid way. And what is
happening here is that people are making different projections,
I suspect, about whether we keep the 10-year and 30-year bond
issuance going, because obviously if you do that, you arrive at
a point where the unified budget surplus can no longer reduce
the debt, that is what that number is. In other words, that is
what you are endeavoring to find out, and that will depend to a
large extent on your judgment about the ongoing savings bond
program, the State and local non-marketable series program, the
extent to which you continue to issue 10- and 30-year bonds
which will still be outstanding at the point we reach the
effect of zero debt requirement. You run into very different
numbers depending on what type of assumptions you make.
Mr. Castle. Thank you, Mr. Chairman. Very briefly, because
the time is running out, but the President last night indicated
there should be--and we haven't seen the budget yet ourselves--
a 4 percent growth in Government spending. This is obviously a
contrast to what we have been spending in recent years. What
are the economic benefits or non-benefits of reduced Government
spending?
Mr. Greenspan. The question really gets down to the issue
of Government spending as a claim on real resources in the
economy. The basic arguments are fundamentally that to the
extent that the Government positions itself in a manner to put
claims on a substantial amount of private resources, the
argument goes that private productivity slows, standards of
living slow. This is an argument that goes back many decades,
and I wouldn't say that there is a strong consensus on either
side, but it is a major difference amongst economists. And as
you know, I come out on the side of believing that the
preemption of resources by Government is, in fact, a major
factor in slowing down economic growth, and would argue
therefore the less of it we do, the better. But I am the first
to acknowledge that the evidence is very difficult to come by
and that there are very significant differences of opinion
amongst those analysts who review the data.
Chairman Oxley. The gentleman's time has expired.
The gentleman from New York, Mr. Crowley.
Mr. Crowley. Mr. Chairman, thank you very much.
Mr. Chairman, welcome. Had this still been the Banking
Committee, I would have been a new Member from New York, and
Queens primarily, and let me welcome you here today as well. I
just want to go back to something I know was talked about
earlier and that is the concern I have about consumer
confidence. Not that your picture is entirely blooming, but it
is somewhat more rosier, I think, than the message that is
coming out of the White House today about the economy. The
course of the White House, in my opinion, would lead some or
many people to believe that the picture isn't as rosy and that
we may be heading toward a recession. I think the White House
is playing to some degree with a very sharp instrument here;
may be doing that in order to, I believe, create an atmosphere
to sell this huge tax decrease.
My question, Mr. Chairman, to you is, what, if anything,
can we be doing, aside from your testimony today, to ensure
that consumer confidence doesn't decrease--for 5 straight
months in a row, we know it has decreased. What can we do to
bolster the confidence--and the concern I have that people's
retirement accounts and the smaller people, not the big
players, but the average mom and pop who have invested in the
stock market now, but the average consumer is invested more now
than ever before--what can we do to instill confidence in them
that this economy, although maybe weakening, is not going into
a downfall that we should be overly concerned about?
Mr. Greenspan. Well, the best thing to do is to try to give
as an objective appraisal of what the economy is doing as we
can. If you do that, then in my judgment you are consonant with
reality and the facts will eventually emerge and create the
type of confidence levels that as recently as 6 months ago
pretty much were general throughout our economy at all income
levels. The one thing I know you can't do is try to spin the
economy one way or the other. It doesn't work. And I must say
to you, I know the people in the White House who are talking,
and I can tell you that is their judgment. As far as I can
judge, it is not a view that materialized when the tax cut
issue came up. But each of us, I think, has got to tell it the
way we see it, and I hope we will continue to do that, because
there is really no alternative to doing that.
Mr. Crowley. Are you concerned about the rhetoric and what
impact it may have on the economy?
Chairman Greenspan. We have an open system in which
economists all over the country in all industries are saying
what they believe and I think that is exceptionally helpful.
There is a general set of views which are basically coming from
informed people about the economy which are taken seriously. I
don't think that there is very much more credibility that is
given to say, economists in the Central Bank, economists in the
White House, or economists in the private sector. So, if you
get a broad enough group of people trying to evaluate the
economy and coming to conclusions, I think you get the best
judgment.
Mr. Crowley. I don't think I am average or maybe you agree
or disagree that the common individual in this country would
more than likely pay attention to what the White House is
saying, more so than what any institution may be saying or
economic institution may be saying.
Mr. Greenspan. I think that was true a number of years ago,
but with cable television today, I would say, and the internet,
the answer is probably no, judging from the----
Mr. Crowley. Forty percent of the country in 1935 was dying
in poverty and that caused the coming about of Social Security.
Today, Social Security is still the only means of income for 33
percent of the people in this country. So we really haven't
come that far economically. Although I have a great deal of
confidence in the ability of the media to transmit numerous
teachings of economic theory, I am not sure that trickles down
to just about everybody in the country.
Mr. Greenspan. Well you can take that up with the media. I
have a conflict of interest.
Mr. Crowley. Thank you.
Chairman Oxley. The gentleman's time has expired. Won't get
into that.
The gentleman from New York, Mr. King.
Mr. King. Chairman Greenspan, if I could just follow up on
the point that was raised by Mr. Castle regarding the triggers.
The concern that I would have with the trigger, in your
testimony both before us and before the Senate, basically you
have said that so many of the rules have changed. For instance,
in your answer to Mr. Frank's question about whether or not
there is a 6 or 9 month lead-in as to when a cut in rates would
have an impact on the economy, you said maybe those numbers
don't apply anymore. And I am just wondering, can we tie into a
statute, if we are talking about the level of net debt
outstanding, to determine whether or not there will be a tax
increase or decrease, whether or not expenditures should be
rising or falling? Should we be locking a future Government
into that at this rate when we are not certain ourselves what
these numbers mean, or we should we allow that to the free flow
of congressional debate at that time?
Mr. Greenspan. I am merely responding to the fact that,
say, 30 years ago, forecasts of the economy beyond 1 or 2 years
in budgetmaking were really not required. We didn't have the
large entitlement programs. We didn't have the large long-term
structural changes with which we have to deal today. We have no
choice but to make long-term forecasts. If you don't make them,
you are implying them. The question is, can you make the best
one you can? And the answer is, you can, but the best one you
can make, of necessity, has got a very wide range of potential
error. And the reason I raise the trigger issue is that you can
still make these long-term forecasts, but if you are turning
out to be significantly off, then the presumed damage, if one
can use that term, is very significantly minimized by requiring
various different tranches to spending and tax programs, making
them contingent on some observed statistic such as, if the
purpose is to reduce the net debt, what the net debt figure is
before the next tranche goes along.
Let me say that there is no question that the down side of
that is actually in making it more difficult for people to make
long-term commitments, because you are making the tax cut or
expenditure change contingent. But the alternative is to
essentially lock into place a significant program which turns
out to have in fact been based on assumptions which themselves
turned out to be false.
If you put together a program and you have triggers, and
the triggers are never activated, which essentially means if
your forecast worked, aside from this loss of certainty which
does inhibit certain types of forward actions, you are not very
much different from where you were if you didn't have a
trigger.
Mr. King. Couldn't the argument be made, though, that as
you are entering recession and the economy is slowing down, or
the surplus is starting to vanish, that it is precisely at that
moment that you would need a tax cut perhaps for another year
or two or whatever to get the economy going and keep the
economy from sinking further?
Mr. Greenspan. There is nothing to prevent the Congress at
that point from doing that. In other words, it may very well be
that the level of net debt is higher than the trigger and
therefore the particular tranche of a tax cut may not come into
place, but there is nothing to prevent the Congress at that
particular point from enacting one.
Mr. King. There would also be nothing to prevent the
Congress from raising taxes if they felt it was necessary if we
didn't have the trigger in there.
Mr. Greenspan. That is correct, and I think that you are
dealing with an issue of how does one rationalize making long-
term projections and long-term projects and minimize the extent
of what happens if you are wrong. That is what a trigger does,
and the Congress has got to make a judgment as to whether the
advantages from the trigger offset the negative elements with
respect to a trigger.
Mr. King. Thank you for your answer and for your
sufferance.
Chairman Oxley. The gentleman's time has expired.
The Chair recognizes the gentleman from California, Mr.
Sherman.
Mr. Sherman. Thank you, Mr. Chairman.
Chairman Greenspan, we are thrilled to have you with us
this morning. The only thing that would thrill us more is if
you had spent this morning with the FOMC in some extraordinary
meeting perhaps, and I want to assure you that if you ever need
to cancel an appearance before this committee to cut interest
rates half a point we would understand.
Chairman Oxley. Not so fast.
Mr. Sherman. Many of us would understand. There is talk in
this committee about the terrible worry that we will pay off
the entire national debt or all of it that comes due. One of my
bachelor friends is worried that Kate Moss and Julia Roberts
would arrive at his home simultaneously. We should all have
such worries. But I would point out that one of the techniques
that is used by corporations when they have debt they would
like to pay off but can be paid off only at a premium is a
trust fund, or ``defeasance'' I think is the term.
And this is my main question, but perhaps your staff could
comment in writing, whether should there be bonds, Treasury
bonds that we want to pay off, whether it would be appropriate
to simply buy AAA-rated corporate bonds of equal maturity, use
one to pay the other.
[Chairman Greenspan subsequently submitted the
following response for inclusion in the record:
[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. 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.
Although accumulating private assets would have the
advantage of allowing Federal surpluses to continue for
longer, thus helping to buoy national saving, 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.]
I want to thank you for your answer to Mrs. Roukema's
question where she brought up the idea of banks getting
involved in real estate brokerage, and you indicated that you
have extended the comment period. So I figured I would comment,
and that is to say that at least many of us on this committee,
when we voted to massively expand the activities that banks
could engage in, did not anticipate that they would get
involved in activities outside dealing with securities,
investments and intangibles, but would instead become brokers
for the quintessential opposite of intangible property, namely,
real property.
But I want to turn our attention to the trade deficit and
the current account deficit which is now running roughly a
third of a trillion dollars a year and with no end in sight.
And I would like to know how confident you are that we could
continue to run merchandise, trade deficits of over $300
billion a year, run current account deficits of roughly the
same number, because various other things, services on the one
hand, but transfer payments on the other, canceling themselves
out, the deficits are roughly equal. How confident are you that
we could sustain another decade of quarter trillion dollar
deficits in these areas without the dollar crashing within a
decade or without some other major disruption in the
international economy? Can we continue to enjoy the short-term
benefit of the world sending us a third of a trillion dollars
more stuff than we produce and send to them? Can we continue to
enjoy that for 10 or 15 years without worry of this kind of
calamity?
Mr. Greenspan. Only if the rest of the world invests a
third of a trillion dollars annually in our economy, because
clearly all current account deficits must be financed. And the
fact that the flows to a large extent from Europe have
continued and the fact that the exchange rates for the dollar
have been fairly firm in the last year or two is suggestive of
the fact that, if anything, the propensity to invest in the
United States is greater than our propensity to import net on
balance.
Now, that is unlikely to be capable of being continued,
basically because, as I indicated before, the investments in
the United States presuppose service payments to the owners of
various assets which are purchased here and the net debt, or,
more exactly, the net claims that foreigners have on us and
hence the net payments to service those claims get us into a
very awkward position where those payments themselves are added
to the current account deficit, which makes it even greater,
which makes the rate of change in the external claims
accelerate. Clearly, that cannot go on indefinitely. At some
point it must come to an end.
I said almost precisely those words 5 years ago and I have
no way of knowing how long this will continue on, but I am
acutely aware of the fact that we are running up against a
longer-term trend which must eventually reverse. When it is we
do not know. There has been no evidence, I must say, at the
moment or recently, to suggest that it is imminent, but at some
point, I agree with you, it cannot continue.
Chairman Oxley. The gentleman's time has expired.
The gentlelady from New York, Mrs. Kelly.
Mrs. Kelly. Thank you, Mr. Chairman.
Mr. Greenspan, thank you very much for your patience. We
appreciate having you before the committee today.
Next month, this committee is going to consider legislation
to allow businesses to receive interest on their checking
accounts. I would like to kind of reestablish my understanding
of your thinking on this issue as we go forward. I wonder if
you would be willing to give me some brief responses to three
questions.
Do you continue to strongly support legislation that allows
the Fed to pay interest on the Reserve banks' deposits at the
Fed?
Mr. Greenspan. We do, Congresswoman, very much so.
Mrs. Kelly. Should the legislation allowing the Fed to pay
interest be combined with legislation to allow banks to pay
interest on their business checking accounts?
Mr. Greenspan. Yes. We believe that ideally those two
issues should be joined and passed at the same time.
Mrs. Kelly. Thank you.
What is your current thinking on the language that I have
proposed which allows the Fed greater flexibility in lowering
the reserve requirements?
Mr. Greenspan. We have no intention at this particular
stage, at least as far as I can judge from speaking to my
colleagues, to change reserve requirements, but it certainly
would have certain advantages to have a degree of flexibility,
should we need to at any particular point.
Mrs. Kelly. Perhaps we can enter into a further dialogue on
that. I would appreciate that.
Mr. Greenspan. Let me put it this way. We are supportive of
your legislation.
Mrs. Kelly. You are?
Mr. Greenspan. Yes.
Ms. Kelly. I would like to talk with you just quickly about
the Federal debt.
With the recent budget surplus projections, this year, it
looks like paying it down could really be an obtainable goal.
So given that the financial markets use Government securities
as a benchmark to price all other corporate debt, does this
large and liquid Government debt market have an irreplaceable
function in the financial markets? Should we be a target size
for the debt--should there be?
Mr. Greenspan. I do not think it is irreplaceable. It has
been extraordinarily invaluable to have it as a benchmark, but
the advantages of paying down the debt, in my judgment, are far
more important than the loss of the benchmark, which could very
readily be replaced. Indeed, whether it is a swap market or
whether it is other various different types of private issues,
is not all that important.
What I am reasonably certain will happen, if indeed we
reduce the debt to negligible levels, is that the private
markets will create new benchmarks, create new securities
essentially, to replace what the Treasury market has
effectively given us. Indeed, we at the Federal Reserve,
holders of in excess of half a trillion dollars of U.S.
Treasury instruments, are going through very significant
evaluations of how we would implement open market policy
without a Treasury market. It is a little more difficult, but
clearly it is something we can do.
Mrs. Kelly. Thank you very much.
I yield back the balance of my time.
Chairman Oxley. The gentlelady yields back.
The gentleman from Kansas, Mr. Moore.
Mr. Moore. Thank you, Mr. Chairman.
Mr. Chairman, I am pleased to see you here again today. You
have previously testified, today and I think in other instances
in the past, that long-range forecasts, 5 and 10 years, are at
best speculative; is that correct?
Mr. Greenspan. That is correct.
Mr. Moore. Probably the further we go out, the more
speculative those forecasts become. Would that be correct, sir?
Mr. Greenspan. Yes, sir.
Mr. Moore. During the Senate Budget Committee testimony, I
believe you indicated that debt reduction was still a priority
for you.
Mr. Greenspan. Correct.
Mr. Moore. In terms of priorities, would it be fair to say,
that is your first priority, sir?
Mr. Greenspan. It would be.
Mr. Moore. You also acknowledged or stated during your
Senate Budget Committee testimony, that you believe now, based
upon these forecasts, that we could do or afford a tax cut; is
that correct, sir?
Mr. Greenspan. What I said is that with the size of the
presumed unified budget surpluses, when we get to, in effect,
de minimis debt, or zero debt, depending on how you want to
look at it, there is no alternative but accumulating private
assets in the Federal Government, an issue which causes me
great concern, and I believe requires a great deal of
evaluation. That, incidentally, is an issue I will be
discussing at the House Budget Committee on Friday.
Mr. Moore. OK. Then am I to understand what you just said
to mean that until such time as there is a paydown of this
national debt that we should not have tax cuts? Or am I
misunderstanding what you are saying, sir?
Mr. Greenspan. No, I am basically saying that indeed one of
the problems that I raised with the Senate Budget Committee is
that if you believe these productivity numbers will continue to
emerge and you believe, say, the Congressional Budget Office or
OMB's forecast, we end up in the year 2005 or 2006 with a $500
billion annual unified budget surplus.
If, at that point, you want to restrict the accumulation of
assets, the only private assets in Government, the only way to
do that is to very rapidly eliminate the surplus, which can be
done only by decreasing taxes or increasing expenditures, and I
raise the issue that a $500 billion very rapid fiscal stimulus,
which is exactly what would happen under those conditions, may
be wholly inappropriate for what the economy is doing at that
time; at which point I argued that we should direct both
expenditure policy and tax policy in a manner to bring that
unified budget surplus down to more credible levels prior to
2005 or 2006, which led me to conclude that in order to avoid
that potential contingency, initiatives would be best
implemented sooner rather than later.
Mr. Moore. But at this point, we are still a few years
away, wouldn't you agree, from zero public debt?
Mr. Greenspan. We are a few years away, but not that many.
In other words, both the OMB in the previous Administration and
CBO indicated in the fiscal year 2006 that we would start to
accumulate private assets, and in my judgment, not only must we
evaluate exactly what type of assets and what type of programs
you would want, but also we need to make certain that the
fiscal policies that are implicit in that are not disruptive to
the economy.
Mr. Moore. And you have stated here this morning that you
did not endorse any particular tax cut, and there are several
out there, correct?
Mr. Greenspan. That is correct.
Mr. Moore. Would you agree that if there are several
different uses we could make of this projected surplus over the
next several years, such as tax cuts, debt reduction and some
national priorities, which some may consider a political
priority--and even the President last night suggested we need
some new spending in the areas of education, national defense
and prescription drugs, you heard that, sir?
Mr. Greenspan. I did.
Mr. Moore. All right. Would it be more advisable--and I am
not asking you to tell Congress what to do here, because I
understand you want to stay out of the political arena--but
would it be advisable to take a balanced approach here and do
some debt reduction? Because I happen to agree with your first
priority, and that is paying down our national debt, as well as
some tax cuts in moderation, and then some of these political
new initiatives which are probably going to happen on a
bipartisan basis.
Chairman Oxley. The gentleman's time has expired.
Mr. Greenspan. I do believe it is the Congress which has to
make those judgments. They are, at root, ``political,'' in the
proper sense of the word, decisions that only the Congress and
the Administration can make or should make.
Chairman Oxley. The gentleman from Texas, Mr. Paul.
Mr. Paul. Thank you.
Welcome, Mr. Chairman. In the last few weeks, you have
received a fair amount of criticism and suggestions about what
to do with interest rates and the economy, and I think that is
going to continue, because I suspect that we are moving into
what you call--you do not call it a ``recession,'' but a
``retrenchment.'' I guess that may be a new word.
But anyway, there will be a lot of suggestions as to what
you should do, and I do not want to presume to make a
suggestion, what interest rates should be, but I would like to
address more the system that you have been asked to manage,
because in many ways I think it is an unmanageable system, and
yet it is key to what is happening in our economy. We have a
system that you operate where you are continuously asked to
lower interest rates.
I would like to remind my colleagues and everybody else
that when you are asked to lower interest rates, you are asked
in reality to expand the money supply, because you have to go
out and buy something. You buy debt. So every time somebody
says, ``lower the interest rates,'' they say ``inflate the
money supply.'' I think that is important.
You had a little conversation before about the money
supply, and conceded it is important, but you admit you don't
even know what a good proxy is, so it is very difficult to talk
about the money supply. I am disappointed that we don't
concentrate on that, talk about it more, even to the point now
that we are--that you no longer make projections. I think this
is admission almost of defeat.
There is no requirement for you to say, well, we are going
to expand the money supply at a precise rate, so we are past
that point of a tradition that has existed for a long time. But
I think it is an unmanageable system and it leads to bad ideas
and bad consequences, because we concentrate on prices, which
is a consequence of the inflation of the money supply.
Therefore, if a PPI is satisfactory, we neglect the fact that
the money supply is surging, and doing a lot of mischief.
Therefore we say, ``Well, maybe if we just slow up the economy.
If we slow up the economy, it is going to take care of the
inflation.''
I think we are really missing the point. You did mention a
couple of words in your testimony today that I thought were
important acknowledging that there are problems in the economy
that we have to address. You talked about ``excesses'' and
``imbalances'' and the need for ``retrenchment.''
I believe what is important is that we connect the excesses
and the imbalances to the policy that you operate, because I
think that is key. Instead of being reassured that the PPI is
OK, if we would have looked at the excesses, maybe there would
have been an indication that there was a problem in the
overspeculation in the stock market.
But here we have a monetary system that creates a
speculation where NASDAQ goes to 5,000, and then we have a lot
of analysts telling us it is a good buy, yet you now are citing
the analysts as saying there is going to be a lot of growth. I
am not sure which analyst you are quoting, but I am not sure
that would be all that reassuring. But I think we should really
talk about the money supply and what we are doing.
In 1996, you expressed a concern about ``irrational
exuberance in the stock market,'' and I think that was very
justified. But since that time, the money supply measured by M3
went up $2.25 trillion. The stock market, of course, has
soared. I see the imbalances as a consequence of excessive
credit. The system has defects in it.
You are expected to know what the proper interest rate is.
I don't think you can know it, or the Federal Reserve can know.
I think only the market can dictate the proper interest rate. I
don't think you know what the proper money supply is. You admit
you don't even have a good proxy for measuring the money
supply. Yet that is your job, and yet all we ever hear is
people coming and saying, ``Mr. Greenspan, if you want to avert
a downturn, if you want to save us, just print more money.''
That is essentially what this system is doing.
Now, the one question I have, quickly, is your plan that
you mentioned in the Senate about using other securities like
State bonds and foreign bonds, and others in order for you to
buy more debt to monetize. I think it is ironic with a $5.7
trillion national debt, we are running out of things to buy.
Mr. Greenspan. Just remember that of that $5.7 trillion, a
very large part is held in trust funds of the United States
Government, so that the net debt is really $3.5 trillion, of
which the Federal Reserve owns more than $500 billion.
Mr. Paul. Could it be an advantage to make some of that
marketable, rather than going out and buying municipal bonds,
foreign debtor-state bonds?
Mr. Greenspan. No, because--I don't want to get into the
accounting processes here, but if you are dealing with a
unified budget accounting system, all of that debt is
intragovernmental transfers and essentially is a wash. You have
to have external securities to affect the economy.
What we were discussing in the remarks with respect to what
the Federal Reserve is looking at is what type of securities we
could use for so-called ``repurchase agreements'' which are
collateralized. In other words, when we engage in an open
market operation through a repurchase agreement, what we have
now is Federal Government securities as collateral. The
question is, if we don't have them, what other kinds of
collateral would we use? We are therefore talking about, for
example, State and local securities.
But the crucial issue there is that to the extent that we
use securities which are more risky than the Federal
Government's, we basically just take more collateral to offset
that. So we can maintain the same degree of risk. And what we
are trying to evaluate is various different types of securities
which we can employ solely for the purpose of protecting the
transaction from default.
Chairman Oxley. The gentleman's time has expired.
The Chair recognizes the gentleman from Texas, Mr.
Hinojosa.
Mr. Hinojosa. Thank you, Mr. Chairman.
Mr. Chairman, thank you for sharing your knowledge with us.
I would be interested in hearing more from you on the issue of
unemployment. Despite the last few years of economic growth, my
Texas Congressional District has been unable to reduce its
unemployment rate to less than 12 percent. The current slowdown
has jumped it upward to 14 percent, and I fear it will go even
higher.
The national rate of unemployment now stands at about 4.2
percent, after having dipped as low as 3.9 percent. Just a few
years ago we heard consistently from economists that we could
not expect unemployment to fall below 5.5 or 6 percent without
igniting inflation.
You, Mr. Greenspan, and others, have acknowledged more
recently that the economy appears to be able to tolerate lower
levels of unemployment. This is certainly good news for those
of us who represent districts containing persistent
unemployment.
What weight does the Federal Reserve give to unemployment
figures when deciding monetary policy? Can monetary policy
lower unemployment and should that be one of its goals?
I personally wonder if you see any peril in rising
unemployment, given the tremendous amount of job growth during
the past decade.
Finally, can you describe any groups of workers who are
particularly at risk of being laid off in the current economic
slowdown?
Mr. Greenspan. As I have indicated on occasions in the
past, Congressman, I think the general focus in the broadest
sense of all economic policy--Federal Reserve and fiscal
policy--should be to find that particular set of policies which
maximize sustainable long-term growth in the economy, which of
necessity means maximizing real incomes and maximizing
employment.
The means that what we all are seeking is not altogether
self-evident at all times. The issue that you raise is an issue
that economists have struggled with for a good long period of
time, that is, how low can you get the unemployment rate and
still maintain a sustainable long-term maximum economic growth.
And you are quite right; the academic fraternity was largely
arguing 5 percent, and sometimes higher than that, as recently
as a decade ago or even less than that. There are still a
number of economists that argue that the equilibrium, if I may
put it that way, unemployment rate that which is consonant with
long-term maximum sustainable growth, is still 5 percent.
I personally believe it is lower, as I have testified
previously, but it is a crucial statistic which all of us deal
with, and we hope that the changes that have occurred in the
economy, the technological changes, the productivity changes
and, more importantly, the flexibility of the labor market,
have enabled us to basically maintain long-term economic growth
at a lower unemployment rate than we had in the past.
Mr. Hinojosa. Mr. Chairman, I yield back the rest of my
time.
Chairman Oxley. Thank you.
The gentleman from Alabama, Mr. Riley.
Mr. Riley. Thank you, Mr. Chairman.
Welcome, Mr. Chairman. Mr. Chairman, when I left the office
this morning, I picked up this off of my desk from Congress
Daily. ``Trade Deficit Hits New High.'' The Nation's trade
deficit with the rest of the world climbed to an all-time high
of $369 billion, up 39.5 percent higher than the previous
records of $265 billion. China now has taken over Japan as our
country with the largest imbalance of $83 billion. Japan, which
was up 22 percent last year. Japan rose another 10 percent.
But when we are having these type of numbers, when we are
having a 40 percent increase in the trade deficit, I know you
answered earlier that it is of a concern, but when does it
become alarming?
Mr. Greenspan. It doesn't become alarming in any sense. In
other words, the way I put it previously, clearly it is a
function of the extent to which there are perceived long-term
rates of return on investment in the United States, and to a
very large extent, it is the technology acceleration which I
have discussed earlier which is at the root, in certain
respects, of this trade deficit which we now have.
Mr. Riley. Excuse me, but are you talking about the
technology advances in other countries, or in ours?
Mr. Greenspan. In ours. In the sense that, as I indicated
before, if your exchange rate is rising, it is basically
suggesting that there is a greater demand for investment in
your country than in other countries. And the result of that is
that the only way to engender a very significant current
account deficit, which is the other side of a capital account
surplus of investment coming into the United States, is to have
a trade deficit. In other words--I don't want to get into the
technicalities of it--but to a large extent, our trade deficit
is being financed basically by the desire on the part of
foreigners to invest in the United States, and the reason is
quite apparently the extent of the technological advances which
we have created and the very high rates of return on investment
which we have relative to other countries.
Now, that can't go on indefinitely, and at some point it is
going to change.
Mr. Riley. Let me ask you this, sir. Could you compare
where we are today with this record imbalance to where we were
10 years ago?
Mr. Greenspan. Well, 10 years ago, you may recall, we
actually had a current account surplus--literally 10 years
ago--part of which was payments that we received as a result of
our assistance in the Gulf War. But in any event, it was quite
low, even adjusting for that. And there has been a major
increase in the current account deficit and in the trade
deficit and in the extent of investment in the United States.
Those trends, as best I can judge, cannot continue
indefinitely.
Mr. Riley. Let me ask you one final question, if I can.
What impact, if any, would a tax cut at this time, what effect
would it have on future trade deficits?
Mr. Greenspan. Well, the usual way that question is asked
is to what extent would a reduction in the unified budget
surplus, or, more exactly, Government savings, have on the
savings we borrow from abroad? The presumption is that if we
have less savings in Government, we have to borrow more from
abroad. But that is a static view of the way the world works,
and I think a more dynamic view really gets to the question of
whether or not, say, a tax cut enhances productivity in the
economy, increases the rate of return, and essentially induces
an offset to the loss of savings from Government. I don't want
to get into the complexity of this, or we will be here all
morning.
Chairman Oxley. The gentleman's time has expired.
The gentleman from Tennessee, Mr. Ford.
Mr. Ford. Mr. Chairman, if you want to finish 30 seconds,
that answer with Mr. Riley, I would be happy to yield.
Mr. Greenspan. I would just say if you would like for me to
answer you in more detail, send me a letter and I will be glad
to respond to it.
Mr. Riley. I appreciate the gentleman from Tennessee. The
only thing I would like to know, as far as incentivizing small
businesses, especially with so many people using sub S
corporations today, would a tax cut eventually help our
productivity to the point it would help offset some of the
trade imbalances?
Mr. Greenspan. It might. But there are so many other
elements involved in that equation, I would hesitate to give
you an unqualified answer.
Mr. Ford. Mr. Chairman, my name is Harold Ford, I am from
Tennessee. I thank you again, as all my colleagues thank you
for being here.
Mr. Greenspan. I know you well.
Mr. Ford. My question is a simple one. My State is
experiencing a significant sort of revenue shortfall, as are
several States throughout the South, and one of the challenges
that I am having as we, the congressional delegation, prepares
to meet with our Governor on Monday, is trying to reconcile
these enormous surplus projections that are coming from the
Congressional Budget Office with the reality of what is
happening in States all across the Nation, particularly
southern States, even the State of our current President, which
is also facing a revenue challenge.
What I can't seem to understand is, I would have to think
that these States have experienced some prosperity and growth
over the last 8 years. At least those are the numbers I saw and
the numbers that the former Administration disseminated. How do
you reconcile the two, these huge budget surplus projections
with the realities of the States trying to take care of
Medicaid programs, education challenges at the lower and higher
levels?
It is hard for me to figure out, particularly when I go
home and people are craving for the tax cuts, as all of us are.
I liken it to, I don't know, of a business in America that
would give out Christmas bonuses for 2002, 2003, 2004, 2005,
all the way to 2012, on February 28 of 2000, based on
projections of how well they think they are going to do over
the next 21 years.
That being said, I would love to hear your response to the
first one, to the extent you might be able to answer that.
Mr. Greenspan. Well, Congressman, as you know, there have
been significant improvements in State fiscal accounts over the
last 5, 6, 7 years. There has been an erosion of revenues
recently and a goodly part of that I suspect is essentially
sales tax and other types of revenues which are not exactly
matched on the Federal side. But without looking at the
individual details within each State, it is very difficult to
generalize on this.
I remember a significant amount of the income tax that
States have, which is a significant part of their revenue
obviously, are often really coming off the Federal income tax
form, and therefore almost directly relate to the same adjusted
gross incomes that people report for the Federal returns.
The difference, I suspect, is that there have been a lot of
tax cuts in numbers of the States where that has not been the
case comparably within the Federal Government. But also you
look at the individual accounts, it is very tough to make a
generalization.
Mr. Ford. I would agree. But ironically, this
Administration suggested at one point that the tax cut was an
insurance policy against a recession. In another breath, the
President said last night he was here on behalf of the American
people to ask for a refund. I know Treasury Secretary O'Neill
has taken a different position from the President at different
times.
Let's just assume the White House and the Administration is
working from the same hymnal, and they believe we will have a
combination, a refund and they ought to look at stimulating the
economy.
If many of these States are experiencing this shortfall
because of a tax cut that then-Governors of these States and
current Governors suggested would produce increases in
productivity, would help us close the trade deficit gap, all of
these wonderful things, and it is not occurring--as a 30-year-
old, I have to pay most of this debt back, my generation does,
if this stuff doesn't pan out like some of my friends in the
Congress, and even the Administration, are suggesting.
So I guess my question to you is, as much as you haven't
taken a look at some of these individual States, I hope maybe I
can write at some point and you and your staff may have a
opportunity to take a look. It would be different if it was
just one State or an anomaly in two or three States. But you
are finding States all across the Nation, particularly in my
part of the country, that are experiencing difficulties and
challenges that we here at the Federal level, our numbers don't
seem to reflect at all. Maybe they do, and I just don't
understand how losses over here produce huge projected gains on
the other side of the equation.
Chairman Oxley. The gentleman's time has expired.
Mr. Greenspan. We will be glad to respond to your question.
[Chairman Greenspan subsequently submitted the
following response for inclusion in the record:
[As I indicated at the hearing, there were significant
improvements in State budget positions throughout much
of the mid to late 1990s, though the fiscal position of
a number of States appears to have eroded in recent
months. There are two factors that have contributed to
an erosion of State revenues that have not affected the
Federal Government to the same extent. First, much of
the weakness in State revenues that has been identified
so far has come from sales and excise taxes, which make
up almost half of State revenue from taxes and fees.
So, weakness in the revenue source can create a
noticeable problem for many State governments. By
contrast, only about 5 percent of Federal Government
revenue is derived from these sorts of taxes. Also,
about 40 percent of State taxes come from individual
and corporate income taxes compared with around 60
percent of Federal tax receipts. Second, the States, as
a group, have cut taxes, on net, in every year from
1995 to 2000. While most of the reductions were fairly
small, some States reduced taxes more than once, and,
on balance, several years of reductions turned out to
be quite significant for the States. The National
Conference of State Legislatures has estimated that the
reductions sum to almost 8 percent of collections over
the 1995 to 2000 period. By comparison, the cut in
Federal Taxes in 1997 was only about 1\1/4\ percent of
revenues.]
Chairman Oxley. The Chair would observe that we have 5
votes on the floor of the House, and it would be the Chair's
obligation to recognize Mrs. Biggert as our final questioner,
and then we will proceed to adjourn, respect the Chairman's
schedule, and also the fact this will probably take about 40
minutes on the floor.
Let me recognize the gentlelady from Illinois, Mrs.
Biggert.
Mrs. Biggert. Thank you. I will be very brief, because we
do have the votes shortly.
Just how does the savings issue fit in to the issue of tax
relief? I think the last time you were here, and it was a time
when the high-tech industry equities were doing very well, and
you said at that time you had some concern, if not opposed to
tax cuts, because the Americans were not saving enough and had
no savings and didn't create then capital formation. But now
that doesn't seem to be the case. Is that true?
Mr. Greenspan. Well, as you may recall, earlier on, even
though the official savings that we report from the Department
of Commerce out of income were very low and indeed currently
are negative, the average household didn't view that as
representative of what they themselves felt they were doing,
because they had 401(k)s or the equivalent, and as far as they
were concerned, they may have been registered as a negative
saver by the Department of Commerce, but the accumulation of
assets which they had clearly suggested otherwise.
As a consequence of that, the general view that of the
United States as being a low saving country was not effectively
supported by the average person.
That is going to change with the lower values of stock
prices and as net household wealth declines, and how that has
evolved or how that affects savings out of income to offset it,
is going to be a very important issue with respect to how the
economy evolves.
Chairman Oxley. The gentlelady's time has expired.
Mr. Chairman, again thank you for your appearance before
this committee. We always appreciate your courtesy and your
excellent testimony. The hearing stands adjourned.
[Whereupon, at 12 noon, the hearing was adjourned.]
A P P E N D I X
February 28, 2001
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