S. Hrg. 107-132 

FEDERAL RESERVE’S FIRST MONETARY POLICY REPORT FOR 2001 

=============================================================== 

HEARING 

before the 

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED SEVENTH CONGRESS 

FIRST SESSION 

ON 

OVERSIGHT ON THE MONETARY POLICY REPORT TO CONGRESS 

PURSUANT TO THE FULL EMPLOYMENT 

AND BALANCED GROWTH ACT OF 1978 

__________ 

WASHINGTON, DC 

__________ 

FEBRUARY 13, 2001 

__________ 

Senater Allard. I think if you have a couple of questions, I think that is acceptable. 

 Senator Carper. 

OPENING STATEMENT OF SENATOR THOMAS R. CARPER 

 Senator Carper. Thank you, Mr. Chairman. 

 Chairman Greenspan, as we come to the end of this hearing, first of all, let me just 

thank you for being here today, for your testimony again. 

 And maybe more important, thank you for your service to the people of our country. 

 One of the values for me of a hearing of this nature is to find some areas where we 

agree on some things. And I just want to kind of go back over what I have gleaned from 

your testimony today and see if I have gotten it right. 

 One of the things that I have understood you to say is that the direction of our Nation’s 

debt and turning deficits into surpluses is something that has been a real positive for 

economic growth in this country. 

 I understand you to say that economic growth in this country has slowed, but it has not 

tanked. 

 And I think, to quote you, you said that the central tendency for real gross domestic 

product growth over the four quarters of this year is 2 to 2 1⁄2 percent. 
 I can remember a time not long ago when 2 to 2 1⁄2 percent GDP growth was actually 

considered pretty darn good. 

 I have gleaned from your testimony that productivity growth continues, albeit, at a 

somewhat slower rate than it did over the last several years. 

 And that the long-term prospects for economic growth over the next decade or so are 

actually quite encouraging. 

 I have sensed from your testimony today that you believe inflation remains at bay. 

And while we always want to be cognizant of it, mindful of it, it is not now an imminent 

threat to our economy. 

 I understand from your testimony today that the surplus forecasts, while they are robust 

in the years to come, are not always written in stone. And I think you mentioned at one 

point that the difference between what was forecast for deficits in 1995 and what we 

actually realized in surpluses in 2000, I think, the swing was about $500 billion. 

 Chairman Greenspan. That is what I commented on at the Budget Committee, that is 

correct. 

 Senator Carper. Okay. And I think I have understood you to say that, given the fact 

that we have some extra money on the table, extra revenues on the table, that one of the 

good ways to make sure that we spend money prudently, which is left for spending, is to 

return some of it to the taxpayers of this country. 

 Those are very helpful things for us to know, as we in this Committee and the 

Congress and the President attempt to fashion a budget, a fiscal policy for our country, 

budget policy for our country, and adopt changes in taxes. 

 Where we don’t agree is in the following area. 

 If you could give me a little bit of further guidance on this, it would be helpful. 

 First of all, if real GDP growth for the year actually turns out to be 2 or 2 1⁄2 percent, 

the issue of whether or not we need to cut takes at this point in time in order to stimulate 

the economy, or whether or not the Fed, the Federal Open Market Committee, is perfectly 

capable of using monetary policy, interest rate cuts, to help us ease through this 

slowdown and to return to a stronger growth, that is the question before us. 

 And we are going to go from here, and the Democrats, we are going to meet over lunch 

and try to figure out which way to go. 

 There is some who say, no, that is not appropriate. Let’s let the monetary policy work 

and make tax cuts phase in a bit further down the line. 

 Any help you can give us on that point? 

 Chairman Greenspan. Well, Senator, the position I have taken, on the basis of the 

experiences I have had over the years, is that recessions, when they occur, tend more 

often than not to be over reasonably quickly, and that the timeframe for enacting tax 

legislation almost invariably is longer than that. But there are some cases in which, when 

recessions take hold, they extend themselves. They sit there for a while and are more 

prolonged than you anticipate. Under that condition, which I submit is a relatively low 

probability, a tax cut having been in place for a period of time is a good rather than bad. 

 So what it is, as I indicated before, is it is an insurance policy. It is basically doing 

something against a relatively low probability outcome- that is, the protracted nature of a 

recession. And the usefulness of that will basically depend on what is the size of the tax 

cut, where it is located, and what the economic outlook is. 
 I haven’t raised that as a crucial issue because I think that the particular point that I 

was raising as to why I believe tax cuts are important, is to address this technical problem 

with respect to the accumulation of assets in the Federal government. So my argument is 

really quite independent of the issue of economic stimulus, though I recognize that it has 

certain obvious relationships to it. 

 Senator Carper. Thank you. My only other question is this. 

 In my little State of Delaware, we cut taxes 7 years in a row during my time as 

Governor, sometimes rates at the top, sometimes rates at the bottom, sometimes in 

between. We cut taxes for businesses and individuals. 

 We had a four-part litmus test for tax cuts that we adopted. 

 One of the things that we are wrestling with within our own caucus, and I presume my 

Republican friends are as well, is a set of core principles on which tax cuts should be 

based. 

 If you will, a litmus test. 

 The four that we used in my State were the following: 

 One, the cuts should be fair; Two, they should promote or enhance economic growth; 

Three, to the extent that they can, we should simplify the Tax Code, not make it more 

complex; And the fourth is that the cuts should be consistent with the balanced budget 

and sustainable throughout the full business cycle. 

 But those four things- fairness, promoting econominc growth, simplicity, and 

sustainability throughout the full business cycle and consistent with a balanced budget. 

 Really, the litmus test that we used. 

 Can you just give us a little guidance, I know my time is expired, but just a little 

guidance on the kind of principles, whether Democrats or Republicans, that our tax cut 

policy should be based on? 

 Chairman Greenspan. Well, I think in a very interesting way, it depends on where one 

starts. 

 Going back from, say, the purview of 1995, for example, with what appeared at that 

point to be about a 1 1⁄2 percent trend growth rate in productivity, it appeared as though 

the level of taxation was essentially consistent with a balanced budget over the longer run 

at full employment. 

 And what has happened is that productivity growth has accelerated quite significantly, 

and so, the existing set of tax rates has engendered a very much more rapid rise in 

revenues. As I said at the Senate Budget Committee, that productivity over the past 5 to 

7 years has risen at about a 3-percent rate, which is twice what it had been previously, 

and revenues have gone up 2 1⁄2 times, the difference being that the rise in the 

productivity has elevated earnings, expectations, and created a permanent, higher level of 

asset values, which spilled over into tax liabilities when realized gains were involved, or 

even when they weren’t. 

 And so that what you have got at this point is, as a consequence of the acceleration in 

productivity, a much higher rate of receipts than one had anticipated. And so, I think the 

Congress is confronted with the choice of whether in fact you give back what in 

retrospect turned out to be an unintended excessive level of receipts, or whether those are 

employed for other purposes these are the key judgments which I think in this particular 

debate are critical, and these are political judgments. These are judgments which only the 

Congress can make. 
 Senator Carper. Thank you so much.