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[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]

             THE ECONOMIC OUTLOOK AND CURRENT FISCAL ISSUES

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

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

           HEARING HELD IN WASHINGTON, DC, SEPTEMBER 8, 2004

                               __________

                           Serial No. 108-24

                               __________

           Printed for the use of the Committee on the Budget

  Available on the Internet: http://www.access.gpo.gov/congress/house/
                              house04.html

                                 ______

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                        COMMITTEE ON THE BUDGET

                       JIM NUSSLE, Iowa, Chairman
CHRISTOPHER SHAYS, Connecticut,      JOHN M. SPRATT, Jr., South 
  Vice Chairman                          Carolina,
GIL GUTKNECHT, Minnesota               Ranking Minority Member
MAC THORNBERRY, Texas                JAMES P. MORAN, Virginia
JIM RYUN, Kansas                     DARLENE HOOLEY, Oregon
PAT TOOMEY, Pennsylvania             TAMMY BALDWIN, Wisconsin
DOC HASTINGS, Washington             DENNIS MOORE, Kansas
ROB PORTMAN, Ohio                    JOHN LEWIS, Georgia
EDWARD SCHROCK, Virginia             RICHARD E. NEAL, Massachusetts
HENRY E. BROWN, Jr., South Carolina  ROSA DeLAURO, Connecticut
ANDER CRENSHAW, Florida              CHET EDWARDS, Texas
ADAM PUTNAM, Florida                 ROBERT C. SCOTT, Virginia
ROGER WICKER, Mississippi            HAROLD FORD, Tennessee
KENNY HULSHOF, Missouri              LOIS CAPPS, California
THOMAS G. TANCREDO, Colorado         MIKE THOMPSON, California
DAVID VITTER, Louisiana              BRIAN BAIRD, Washington
JO BONNER, Alabama                   JIM COOPER, Tennessee
TRENT FRANKS, Arizona                RAHM EMANUEL, Illinois
SCOTT GARRETT, New Jersey            ARTUR DAVIS, Alabama
J. GRESHAM BARRETT, South Carolina   DENISE MAJETTE, Georgia
THADDEUS McCOTTER, Michigan          RON KIND, Wisconsin
MARIO DIAZ-BALART, Florida
JEB HENSARLING, Texas
GINNY BROWN-WAITE, Florida

                           Professional Staff

                       Rich Meade, Chief of Staff
       Thomas S. Kahn, Minority Staff Director and Chief Counsel

                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, September 8, 2004................     1
Statement of:
    Hon. Alan Greenspan, Chairman, Board of Governors of the 
      Federal Reserve System.....................................     6
Prepared statement:
    Mr. Greenspan................................................     8

 
                       THE ECONOMIC OUTLOOK AND 
                         CURRENT FISCAL ISSUES

                              ----------                              

                      WEDNESDAY, SEPTEMBER 8, 2004

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:35 a.m., in room 
210, Cannon House Office Building, Hon. Jim Nussle (chairman of 
the committee) presiding.
    Members present: Representatives Nussle, Gutknecht, 
Thornberry, Ryun, Toomey, Hastings, Brown, Wicker, Bonner, 
Barrett, Hensarling, Brown-Waite, Shays, Garrett, Crenshaw, 
Portman, McCotter, Franks, Spratt, Moran, Moore, Neal, Edwards, 
Ford, Capps, Baird, Cooper, Emanuel, Kind, Thompson, Lewis, 
Hooley, DeLauro, Scott, and Davis.
    Chairman Nussle. Good morning and welcome back--members of 
the Budget Committee and colleagues--to our hopefully brief 
September session, getting our work done and going home as 
quickly as possible. We have two hearings. This will be the 
first of two hearings on the economy and the budget that the 
committee will hold today.
    This morning we have back with us the chairman of the 
Federal Reserve, Alan Greenspan, to discuss the economic 
outlook and the Federal budget. Let me note for members that 
the chairman is available to be with us today until about 
12:30, which is about 2 hours, so I will ask everyone to keep 
their questions to the allotted time, including myself, and we 
will get in as many questions as possible.
    Mr. Chairman, welcome back to the Budget Committee. You 
were always very generous and gracious with your time coming 
before all of our committees, but particularly the Budget 
Committee, and we welcome you back. It has been about 6 months 
since you last testified before this committee. And at this 
time--I should say at that time, we were already seeing some 
stronger, real GDP growth. In fact, at that time, it was the 
largest growth, the strongest growth we have seen in about 20 
years. But we are still waiting for evidence of stronger jobs 
growth. We have seen good jobs growth. It could be better. We 
are all obviously very interested in much more sustained growth 
in jobs for all sectors.
    Since you last came before us, the U.S. economy has created 
about 1.2 million new jobs. Total employment has risen to a 
record high of nearly 140 million. Just last week, we saw an 
employment report showing 144,000 new jobs in August and the 
unemployment rate falling to 5.4 percent.
    Alone, these numbers may be impressive, but we really can't 
appreciate or understand the significance of these numbers 
without putting them in some context to the last few years. We 
all know the circumstances well: the economic downturn and 
recession that began in 2000; the September 11 attacks and the 
resulting international war against terrorism. There was a 
perfect storm, if you will--as it has been called by many--of 
extraordinary circumstances converging on our country and on 
our economy, one on top of the other. Thankfully Congress came 
together, together with the President, and did what it had to 
do. We took quick, aggressive action to correct some of the 
deficits in the past, the homeland security deficit, the 
military defense deficits; we had to protect our country and, 
for that matter, the growth in our economy, the deficit 
economic growth which will be part of our discussion today. We 
needed to boost the economy and to help get Americans back to 
work, so we passed tax relief in the year 2001. Passed it again 
in the year 2002. And passed tax relief again in 2003. We now 
know without question that those economic policies are working 
and beginning to show sustained growth.
    Let me show you a chart of the strong, real GDP growth and 
expected growth that we believe will continue. The Blue Chip 
forecast, as you can see since the end of 2001, but 
particularly since the end of 2002, we have seen good, strong 
growth. The economy first went negative in the third quarter of 
2000, before President Bush took office. And after that, the 
biggest quarterly decline happened in the third quarter of 
2001, coinciding with the September 11 attacks. But today our 
economy is in a much different and certainly much better 
position than we were 4 years ago, when the stock market bubble 
was bursting, when manufacturing activity and jobs were 
falling, and when the economy was entering a recession.
    Over the past year the U.S. economy has grown at a 4.7 
percent rate, one of the strongest growth performances in 20, 
years and the Blue Chip private economists expect real GDP 
growth to be strong and continue at a 4 percent rate in the 
second half of this year.
    Let's turn to manufacturing activity. Manufacturing 
activity and the industrial production are growing strongly. 
Manufacturing activity recently has been at its strongest pace 
in 20 years. The home ownership rate is at a record high, and 
housing markets have recently been running at their highest 
levels in 20 years.
    Next on unemployment, perhaps most important, labor markets 
are improving. The unemployment rate is down to 5.4 percent 
from 6.3 percent in June of last year. That is a lower 
unemployment rate than the averages for any of the last three 
decades, the 1970s, the 1980s and the 1990s. There is good news 
on jobs. Payroll employment has increased by over 1.7 million 
jobs in the past year. Manufacturing employment has increased 
by 100,000 over the past 6 months.
    Let me repeat that because it is important to show what 
kind of growth we are creating: 100,000 jobs have been created 
in manufacturing along in the past 6 months. More Americans are 
working today than at any time in our Nation's history, as 
total employment is at a record high of 140 million people.
    So, again, let us be clear. The tax relief that we passed 
happened at the right time to help get this economy and jobs 
growing again, and we are finally getting back to work. Without 
the tax relief, today real GDP would be lower, unemployment 
would be higher, and there would be fewer jobs that had been 
created.
    Even with this good news that we have seen, there still is 
work that needs to be done, as every one of us in this room and 
every member of this committee who has returned from their 
district knows. There are still too many Americans who want to 
work but still can't find a job, so our work is clearly not 
done. We need an economy that continues to produce steadily 
expanding job opportunities so that everyone who wants to work 
can work.
    So we have asked Chairman Greenspan back with us today not 
only to review the current economic picture, but also to hear 
what he believes is our best course for keeping this momentum 
going.
    This discussion certainly wouldn't be complete without a 
review of our deficit situation. Just yesterday morning, we 
heard from the Congressional Budget Office that the deficit is 
coming in lower than expected, because tax receipts are growing 
faster than expected. That proves what we have been saying, 
that one of the best ways to reduce the deficit is to have 
strong economic growth. But we are still clearly not where we 
want to be. We have seen budget deficits now for the last 
couple of years, and I am sure we will take some time today to 
do the usual round of finger pointing of how we got here.
    So let us review, just in case there are any questions. We 
incurred these deficits because of an economic slowdown and a 
recession that began in 2000 and continued into 2001 that 
President Bush inherited when he took office and because of the 
spending policies that were adopted after September 11. The 
response to September 11 required an increase in spending that 
was intentional. In fact, most of us in this room voted for 
those spending increases. They were very necessary spending 
increases to rebuild and shore up our homeland security and our 
defense and to fight the ongoing war against international 
terrorism.
    Even though we have seen a return to deficits, I believe 
that we have adopted the right policies at the right time to 
protect America and to get our Nation's economy moving again. 
But now we have got to work just as hard and just as 
passionately to get ourselves back on the path to balance. And 
I know full well what I believe we need to do to get that done. 
As I know Chairman Greenspan has said time and time again, not 
only do we have to keep the economy growing and creating jobs, 
but we have to control Federal spending. It is really a pretty 
simple concept. Deficits are a result of overspending, so to 
reduce our deficits we need to restrain our spending.
    I am proud to say this committee has been at the forefront 
of the efforts in this Congress to do just that. We wrote a 
tight budget and fully funded our priorities, but that also 
compelled us to restrain lower priority items. We passed a 
budget in this committee and from the House that froze spending 
except for our national security issues. Did we hear people 
scream and yell not only for every program, but for every 
policy which was somebody's pet project? Yes, we did. It has 
not been an easy process, but we are doing it and sticking to 
the budget, in the House of Representatives in particular, and 
it is making a difference.
    Chairman Greenspan, you have urged this Congress and this 
committee to restore statutory budgetary controls, known as 
discretionary spending caps and pay-as-you-go requirements. I 
want you to know your desire for return to budgetary controls 
in this law has been shared by many of us in Congress. You 
cannot manufacture a consensus for statutory controls when the 
consensus for budgetary discipline is not strong enough. While 
there are many Representatives and Senators who are deeply 
concerned about excessive spending and budget deficits, I don't 
believe, unfortunately, there is yet enough consensus to enact 
budgetary controls into law. I have now tried twice to push 
legislation through Congress to extend budgetary controls, a 
more comprehensive reform in 2000 and a much more modest 
proposal this year. And while I was able to obtain a majority 
vote in this committee, we were unable to obtain a majority in 
the House for either the comprehensive proposal or a more 
limited package. Just because there is not a consensus does not 
mean that there aren't those of us who aren't deeply concerned 
about excessive spending and budget deficits, and we will not 
stop advocating for those budgetary controls.
    Additionally, we must keep the same vigilance for adhering 
to our budget resolution, once passed, and I intend to do that 
for the remainder of this year and the remainder of my term as 
chairman of the committee.
    I will turn it over to Mr. Spratt for any comments he 
wishes to make at this time. Mr. Spratt.
    Mr. Spratt. Thank you, Mr. Chairman. And Chairman 
Greenspan, welcome once again. You come at a good time. 
Yesterday, the Congressional Budget Office told us that the 
Federal Government this year will run the largest deficit in 
our history, at least in normal terms, $422 billion; $574 
billion when the Social Security surplus is excluded. This 
surpasses last year's deficit by $47 billion. Although the 
economy seems to be getting better, the bottom line of the 
budget is it is clearly getting worse and it is not supposed to 
work that way, at least--except when you have a structural 
deficit.
    CBO assumes 4\1/2\ percent growth this year, 4.1 percent 
growth next year, 3 percent thereafter. But it also shows, 
based upon those assumptions, that between now and 2010 
deficits hover in the range of $300 billion. They barely go 
down and they never go away. That is a definition of a 
structural deficit.
    CBO's forecast also shows that deficits will drop 
dramatically after 2010, for one salient reason. At the end of 
calendar year 2010, the tax cuts sought by the Bush 
administration, enacted by Congress mostly with the votes of 
our Republican colleagues, will expire. This event alone, the 
expiration of the Bush tax cuts, will move the deficit from 
$298 billion in 2010 to $70 billion in 2012. That to me speaks 
volumes about the source of the problem, the source of today's 
deficits.
    CBO's forecast is what we call a baseline of current 
services forecast. And as you know better than we, by law CBO 
is required to assume that appropriations this year, including 
defense supplementals, will be repeated next year; that tax 
cuts that are written to expire on their own term on a date 
certain do, in fact, expire. They have to assume that by law.
    On our side, we have gone back and factored some political 
reality into these forecasts. We have adjusted the baseline and 
adjusted it slightly lower, and we think a more realistic level 
of defense spending. Let us hope we don't have a recurring cost 
of $115 billion a year for the Iraqi and Afghan deployments.
    We have extended all the tax cuts except for bonus 
depreciation. And we have added to the tax cuts an alternative 
minimum tax, because we think that is politically inevitable 
and realistic. We simply indexed the key variables. When you 
hold the tax cuts constant and don't assume their expiration or 
appeal and let defense spending grow as CBO projects, here is 
what happens to the bottom line. Those numbers are a little 
small, but you can see that we go from $422 [billion] down to 
$361 [billion] and thereafter, the deficit never dropped below 
$320 billion. By the end of our forecasting period, 2014, the 
deficit is $504 billion. That means the unified deficit, the 
deficit after deducting Social Security surpluses between 2005 
and 2014, adds to $3 trillion, $911 billion. Deficits in the 
basic budget without Social Security's offsetting surplus comes 
to $6.3 trillion. Debt held by the public will be $4.3 trillion 
at the end of this fiscal year. It will be $8.4 trillion by the 
end of 2014, a little more than double. Total statutory debt, 
including debt held by government trust funds today is $7.4 
trillion. By 2014, according to our calculations, when you make 
the adjustments we have made to the CBO forecast, total 
statutory debt will be $14.9 trillion. It will double, more 
than double between now and 2014 if we follow this course.
    Basically, that is our question to you today, Mr. 
Greenspan. These are numbers on paper. We would like your 
candid assessment of what could happen if we take this fiscal 
path into the future. Is this course even sustainable? What are 
the consequences of running budget deficits and accumulating 
debt of this magnitude over a 10-year period of time?
    Secondly, we would like to hear you testify again what you 
have told us several times before. It has been within the last 
year that I think you pronounced yourself a convert, a 
believer; that you were skeptical of the efficacy of budget 
process reforms in the early 1990s, but you believe that those 
reforms we adopted in the Budget Enforcement Act actually 
contributed significantly to our successes in the 1990s. We 
have allowed those to expire. Congress has allowed those to 
expire, and we would like to hear again your reaffirmation that 
those are part of the solution to this problem that confronts 
us right now.
    Thirdly, of course, is the overarching question of the 
state of our economy. A lot of forecasters are beginning to 
talk about an economy that has been running on tax cut stimuli 
and mortgage refinancing cash. And now that those forces are 
pretty basically spent, we are wondering if the shock of the 
spike in oil prices is going to affect the recovery and make 
this a precarious economy.
    And, finally, with respect to jobs, we hope you will touch 
upon this topic, too, because there are today 1.650 million 
fewer jobs in the private sector than there were in January, 
2001; 1.650 million fewer jobs. Why is this recovery so laggard 
despite huge fiscal stimulus in creating jobs in the private 
sector?
    In addition, you have often spoken, Mr. Chairman, in 
support of the establishment survey as being the more 
definitive estimate of the job situation in the country as 
opposed to the household survey. And since this topic comes up 
every time the jobs picture is discussed, we would appreciate 
your opinions on that.
    That is enough for me to lay in front of you. I hope you 
will be able to address in your direct testimony, or the 
answers you give us to the questions we have, those particular 
topics because I think those are the ones of preeminent 
concern.
    Thank you. We look forward to your testimony.
    Chairman Nussle. Mr. Greenspan, your entire testimony will 
be made part of the record and you may proceed and summarize as 
you wish. Welcome back again to the Budget Committee.

STATEMENT OF HON. ALAN GREENSPAN, CHAIRMAN, BOARD OF GOVERNORS 
                 OF THE FEDERAL RESERVE SYSTEM

    Mr. Greenspan. Thank you very much, Mr. Chairman, and 
members of the committee. I will excerpt from my rather 
extended prepared remarks.
    I am pleased to be here today to offer views generally on 
the economy and on current fiscal issues, but I want to 
emphasize I speak for myself in a number of these areas and not 
necessarily for the Federal Reserve, as I do on numerous other 
occasions officially before the Congress.
    As you know, economic activity hit a soft spot in late 
spring after having grown briskly in the second half of 2003 
and the first part of 2004. Consumer spending slowed materially 
and employment gains moderated notably after the marked step-up 
in early spring. That softness in activity no doubt is related 
in large measure to this year's steep increase in energy 
prices.
    The most recent data suggests that, on the whole, the 
expansion has regained some traction. Consumer spending and 
housing starts bounced back in July after weak performances in 
June, although early readings on retail sales in August have 
been mixed. In addition, business investment remains on a solid 
upward trend.
    In the manufacturing sector, output has continued to move 
up in recent months, though part of that rise likely reflected 
an increase in inventory investment. In the labor market, 
though job gains were smaller than those of last spring, non-
foreign payroll employment growth picked back up in August.
    Despite the rise in oil prices through mid-August, 
inflation and inflation expectations have eased in recent 
months. To be sure, unit labor costs rose in the second quarter 
as productivity growth slowed from its extraordinary pace of 
the past 2 years and employee compensation per hour remained on 
an upward trend. As best we can judge, the growth in profit 
margins of nonenergy, nonfinancial corporations which, at least 
from an accounting perspective, had contributed significantly 
to price pressures earlier, has recently slowed. Moreover, 
increases in non-oil import prices have lessened, a development 
that, coupled with the slowing of profit margin growth, has 
helped to lower core consumer price inflation in recent months. 
Crude oil prices have come off their highs of mid-August and 
gasoline prices, which rose rapidly last spring, have fallen.
    Nevertheless, the outlook for oil prices remains uncertain. 
Higher prices have damped the consumption of oil, but the 
growing concerns about long-term supply along with large 
prospective increases in demand from the rapidly growing 
economies of China and India have propelled prices of distant 
futures to levels well above their ranges of recent years. 
Meanwhile, despite the paucity of new discoveries of major oil 
fields, improving technology has significantly increased the 
ultimate recovery of oil from our already existing fields. 
Future balances between supply and demand will remain 
precarious and incentives for oil consumers in developed 
economies to decrease the oil intensity of their economies will 
doubtless continue. Presumably, similar developments will 
emerge in the large oil-consuming, developing economies.
    The prospects for the Federal budget over the longer term 
remain troubling. With the baby boomers starting to retire in a 
few years and health spending continuing to soar, our budget 
position will almost surely deteriorate substantially in coming 
years if current policies remain in place. The enormous 
improvement of the Federal budget balance in the second half of 
the 1990s and early in the current decade was due importantly 
to the rapid growth in labor productivity during that period, 
which led to a vast but, in retrospect, temporary increase in 
revenues.
    The Budget Enforcement Act of 1990 and the later 
modifications and extensions of the act almost surely 
contributed to the better budget outcomes as well, before the 
brief emergence of surpluses eroded the will to adhere to its 
deficit containment rules. The key provisions of the BEA 
expired in 2002 and no replacement has been adopted.
    Reinstatement of a structure like the BEA would signal a 
renewed commitment to fiscal restraint and would help restore 
the discipline to the budgeting process, but it would only be a 
part of any meaningful endeavor to establish a framework for 
fiscal policy choices. The BEA was designed to constrain 
legislative actions on new initiatives. It contained no 
provisions for dealing with unanticipated budgetary outcomes 
over time. It was also not designed to be the centerpiece for 
longer-run budget policy. Importantly, the BEA did not set a 
clear objective toward which fiscal policy should aim.
    Budget outcomes over the next decade will deviate as they 
always have from projections, perhaps significantly. 
Accordingly, it would be quite helpful to have mechanisms in 
place that assist the Congress in making midcourse corrections 
as needed. A well-designed set of such mechanisms would likely 
include measures that force a midcourse correction when 
estimated future costs for a program or tax provision exceed a 
specified threshold.
    I do not mean to suggest that our budget problems will be 
solved simply by adopting a set of budget rules that restrain 
new legislation, even if those rules are augmented by effective 
mechanisms for making midcourse corrections. The fundamental 
challenge that we face is to come to grips with the adverse 
budgetary implications of an aging population and current 
health entitlements and with the limits on our ability to 
project the likely path of medical outlays.
    The rapid increase in revenues during the 1990s 
significantly muted the necessity for making choices between 
high-priority tax and spending initiatives. In the context of 
an unprecedented increase in retirees, the need to make stark 
choices among budget priorities will again become pressing. 
Federal funding of access to advances in medical technology, 
for example, likely will have to be weighed against other 
spending programs as well as tax initiatives that foster 
increases in economic growth and the revenue base.
    In 2008, just 4 years from now, the leading edge of the 
baby boom generation will reach 62, the earliest age at which 
Social Security retirement benefits may be claimed and the age 
at which about half of prospective beneficiaries have retired 
in recent years. In 2011, these individuals will reach 65 and 
will thus be eligible for Medicare. The pressures on the 
Federal budget from these demographic changes will come on top 
of those stemming from the relentless upward trend in 
expenditures in medical care. Moreover, projections of health 
spending are subject to extraordinary uncertainty. The reason 
is that we know very little about how rapidly medical 
technology will continue to advance and how those innovations 
will translate into future spending. Technological innovations 
can greatly improve the quality of medical care and can, in 
some instances, reduce the costs of existing treatments. But 
because technology expands the set of treatment possibilities, 
it also has the potential to add to overall spending, in some 
cases by a great deal.
    Developing ways to deal with these uncertainties will be a 
major part of an effective budget strategy for the longer run. 
Critical to that evaluation is the possibility that as a Nation 
we may have already made promises to coming generations of 
retirees that we will be unable to fulfill. If on further study 
that possibility turns out to be the case, it is imperative 
that we make clear what real resources will be available so 
that our citizens can properly plan their retirements.
    This problem raises a more general principle of public 
policy prudence. If, as history strongly suggests, entitlement 
benefits and tax credits once bestowed are difficult to repeal, 
consideration should be given to developing a framework that 
recognizes that potential asymmetry. A significant improvement 
in the budget in the 1990s reflects persistent efforts on the 
part of this committee and others. If similar efforts are made 
now, they should assist in preparing our economy for the fiscal 
challenges that we will face in the years ahead.
    Thank you very much. I look forward to your questions.
    [The prepared statement of Mr. Greenspan follows:]

 Prepared Statement of Alan Greenspan, Chairman, Board of Governors of 
                       the Federal Reserve System

    Mr. Chairman and members of the committee, I am pleased to be here 
today to offer my views on the state of the U.S. economy and current 
fiscal issues. I speak for myself and not necessarily for the Federal 
Reserve.
    As you know, economic activity hit a soft patch in late spring 
after having grown briskly in the second half of 2003 and the first 
part of 2004. Consumer spending slowed materially, and employment gains 
moderated notably after the marked step-up in early spring. That 
softness in activity no doubt is related, in large measure, to this 
year's steep increase in energy prices.
    The most recent data suggest that, on the whole, the expansion has 
regained some traction. Consumer spending and housing starts bounced 
back in July after weak performances in June, although early readings 
on retail sales in August have been mixed. In addition, business 
investment remains on a solid upward trend. In the manufacturing 
sector, output has continued to move up in recent months, though part 
of that rise likely reflected an increase in inventory investment. In 
the labor market, though job gains were smaller than those of last 
spring, nonfarm payroll employment growth picked back up in August.
    Despite the rise in oil prices through mid-August, inflation and 
inflation expectations have eased in recent months. To be sure, unit 
labor costs rose in the second quarter as productivity growth slowed 
from its extraordinary pace of the past 2 years and employee 
compensation per hour remained on an upward trend. But, as best we can 
judge, the growth in profit margins of non-energy, nonfinancial, 
corporations, which, at least from an accounting perspective, had 
contributed significantly to price pressures earlier, has recently 
slowed. Moreover, increases in non-oil import prices have lessened--a 
development that, coupled with the slowing of profit-margin growth, has 
helped to lower core consumer price inflation in recent months.
    Movements in energy prices have been a major influence on overall 
inflation this year. In the second quarter, gasoline prices rose 
rapidly as a marked pickup in gasoline demand strained refinery 
capacity and resulted in sharply higher profit margins. In May and 
June, refinery and marketing margins rose to levels that were 25 cents 
to 30 cents per gallon over typical spreads going into the summer 
driving season.
    As a consequence of the steep run-up in prices, demand for gasoline 
eased, and an accompanying increase in inventories helped to reverse 
the bulge that had occurred in refinery and marketing margins. That 
reduction in margins resulted in a decline in the price of regular 
gasoline of about 20 cents per gallon despite the concurrent sharp rise 
in the price of crude oil. With margins having returned to more typical 
levels, prices of both gasoline and home heating oil are likely to 
reflect changes in crude oil prices more directly.
    Evaluating the impact of rising oil prices on economic activity in 
the United States has long been a subject of dispute among economists. 
Most macroeconomic models treat an increase in oil prices as a tax on 
U.S. residents that saps the purchasing power of households and raises 
costs for businesses. But economists disagree about the size of the 
effects, in part because of differences in the key assumptions employed 
in the statistical models that underlie the analyses. Moreover, the 
models are typically based on average historical experience, which is 
dominated by periods of only moderate fluctuations in oil prices and 
thus may not adequately capture the adverse effects on the economy of 
oil price spikes. In addition to the difficulties of measuring the 
impact of oil prices on economic growth, the oil price outlook itself 
is uncertain.
    Growing concerns about the long-term security of oil production in 
the Middle East, along with heightened worries about the reliability of 
supply from other oil-producing regions, led to a pronounced increase 
in the demand to hold inventory at a time when the level of world 
commercial oil stocks was rising only modestly. Some of that increased 
demand came from investors and speculators who took on larger net long 
positions in crude oil futures, especially in distantly dated 
contracts. Crude oil prices accordingly rose sharply, which, in turn, 
brought forth increased production from OPEC and induced some investors 
to take profits on long inventory positions. The resulting reduction in 
the speculative demand for inventories has, at least temporarily, 
reduced pressures in these markets, and crude prices have come off from 
their highs of mid-August.
    Nevertheless, the outlook for oil prices remains uncertain. Higher 
prices have damped the consumption of oil--for example, U.S. gasoline 
consumption, seasonally adjusted, fell about 200,000 barrels a day 
between April and July. But the growing concerns about long-term 
supply, along with large prospective increases in demand from the 
rapidly growing economies of China and India, both of which are 
expanding in ways that are relatively energy intensive, have propelled 
prices of distant futures to levels well above their ranges of recent 
years.
    Meanwhile, despite the paucity of new discoveries of major oil 
fields, improving technology has significantly increased the ultimate 
recovery of oil from already existing fields. During the past decade, 
despite more than 250 billion barrels of oil extracted worldwide, net 
proved reserves rose well in excess of 100 billion barrels. That is, 
gross additions to reserves have significantly exceeded the extraction 
of oil the reserves replaced. Indeed, in fields where, two decades ago, 
roughly one-third of the oil in place ultimately could be extracted, 
almost half appears to be recoverable today. Gains in proved reserves 
have been concentrated among OPEC members, though proved reserves in 
the United States, essentially offshore, rose 3-1/2 percent during the 
past 5 years. The uptrend in proved reserves is likely to continue at 
least for awhile. Oil service firms continue to report significant 
involvement in reservoir extension and enhancement.
    Nevertheless, future balances between supply and demand will remain 
precarious, and incentives for oil consumers in developed economies to 
decrease the oil intensity of their economies will doubtless continue. 
Presumably similar developments will emerge in the large oil-consuming 
developing economies.
    The remainder of my remarks will address the Federal budget, for 
which the incoming data suggest that the unified deficit has recently 
leveled out. With the economy continuing to improve, the deficit is 
more likely to decline than to increase in the year ahead.
    Nonetheless, the prospects for the Federal budget over the longer 
term remain troubling. As yet, concerns about the budget do not appear 
to have left a noticeable imprint on the financial markets. In recent 
years, even as fiscal discipline has eroded, implied 1-year forward 
Treasury rates at long horizons, which history suggests are sensitive 
to changes in the fiscal outlook, have held fairly steady. Various 
measures of long-term real interest rates have also remained at 
moderate levels over this period.
    These developments, however, do not warrant complacency about the 
fiscal outlook. With the baby boomers starting to retire in a few years 
and health spending continuing to soar, our budget position will almost 
surely deteriorate substantially in coming years if current policies 
remain in place.
    The enormous improvement of the Federal budget balance in the 
second half of the 1990s and early in the current decade was due 
importantly to the rapid growth in labor productivity during that 
period, which led, both directly and indirectly, to a vast but, in 
retrospect, temporary increase in revenues. The Budget Enforcement Act 
(BEA) of 1990, and the later modifications and extensions of the act, 
almost surely contributed to the better budget outcomes as well, before 
the brief emergence of surpluses eroded the will to adhere to its 
deficit-containment rules. The key provisions of the BEA expired in 
2002, and no replacement has been adopted.
    Reinstatement of a structure like the BEA would signal a renewed 
commitment to fiscal restraint and would help restore discipline to the 
annual budgeting process. But it would be only a part of any meaningful 
endeavor to establish a framework for fiscal policy choices. The BEA 
was designed to constrain legislative actions on new initiatives. It 
contained no provisions for dealing with unanticipated budgetary 
outcomes over time. It was also not designed to be the centerpiece for 
longer-run budget policy; importantly, the BEA did not set a clear 
objective toward which fiscal policy should aim.
    Budget outcomes over the next decade will deviate, as they always 
have from projections--perhaps, significantly. Accordingly, it would be 
quite helpful to have mechanisms in place that assist the Congress in 
making mid-course corrections as needed. Four or five decades ago, such 
mechanisms were unnecessary, in part because much of the budget was 
determined on an annual basis. Indeed, in the 1960s, discretionary 
spending, which is subject to the annual appropriations process and 
thus comes under regular review by the Congress, accounted for about 
two-thirds of total outlays. That share dropped markedly in the 1970s 
and 1980s as spending on retirement, medical, and other entitlement 
programs rose sharply. In the early 1990s, it fell below 40 percent, 
where it has remained over the past decade.
    The rise in the share of expenditures that is not subject to annual 
review complicates the task of making fiscal policy by effectively 
necessitating an extension of the budget planning horizon. In the 1960s 
and early 1970s, the President's budgets provided information mainly 
for the upcoming fiscal year. The 1974 legislation that established a 
new budget process and created the Congressional Budget Office required 
that CBO provide 5-year budget projections. By the mid-1990s, CBO's 
projection horizon had been pushed out to 10 years.
    Given the changing composition of outlays, these longer planning 
horizons and the associated budget projections were essential steps 
toward allowing the Congress to balance budget priorities sensibly. 
Among other things, this change has made the budget process more 
reliant on forecasting. To be sure, forecasting has become more 
sophisticated as statistical techniques and economic models have 
evolved. But because of the increasing complexity of our markets, the 
inaccuracy of forecasts--especially those that go beyond the near 
term--is a large problem.
    A well-designed set of measures for mid-course corrections would 
likely include regular assessments of existing programs to verify that 
they continue to meet their stated purposes and cost projections. 
Although the vast majority of existing programs would doubtless be 
extended routinely, some that face appreciable opposition and offer 
limited societal benefit might not clear hurdles set by the Congress 
unamended, if at all. More generally, mechanisms, such as triggers, to 
bring the budget back into line if it goes off track should be 
considered, particularly measures that force a mid-course correction 
when estimated future costs for a program or tax provision exceed a 
specified threshold.
    I do not mean to suggest that our budget problems will be solved 
simply by adopting a set of budget rules that restrain new 
legislation--even if those rules are augmented by effective mechanisms 
for making mid-course corrections. The fundamental challenge that we 
face is to come to grips with the adverse budgetary implications of an 
aging population and current health entitlements and with the limits on 
our ability to project the likely path of medical outlays. The rapid 
increase in revenues during the 1990s significantly muted the necessity 
of making choices between high-priority tax and spending initiatives. 
In the context of an unprecedented increase in retirees, the need to 
make stark choices among budget priorities will again become pressing. 
Federally funding access to advances in medical technology, for 
example, likely will have to be weighed against other spending programs 
as well as tax initiatives that foster increases in economic growth and 
the revenue base.
    Because the baby boomers have not yet started to retire in force 
and accordingly the ratio of retirees to workers remains relatively 
low, we are in a demographic lull. But short of an outsized 
acceleration of structural productivity or a major expansion of 
immigration, this state of relative tranquility will soon end.
    In 2008--just 4 years from now--the leading edge of the baby boom 
generation will reach 62, the earliest age at which Social Security 
retirement benefits may be claimed and the age at which about half of 
prospective beneficiaries have retired in recent years. In 2011, these 
individuals will reach 65 and will thus be eligible for Medicare.
    The pressures on the Federal budget from these demographic changes 
will come on top of those stemming from the relentless upward trend in 
expenditures on medical care. Indeed, outlays for Medicare and Medicaid 
have grown much faster than has nominal GDP in recent years, and no 
significant slowing seems to be in the offing.
    In 2003, outlays for Social Security and Medicare amounted to about 
7 percent of GDP; according to the programs' trustees, by 2030 that 
ratio will nearly double. Moreover, such projections are subject to 
considerable uncertainty, especially those for Medicare. Unlike Social 
Security, where benefits are tied in a mechanical fashion to retirees' 
wage histories and we have some useful tools for forecasting future 
benefits, the possible variance in medical spending rises dramatically 
as we move into the next decade and beyond. As with Social Security, 
forecasting the number of Medicare beneficiaries is reasonably 
straightforward. But we know very little about how rapidly medical 
technology will continue to advance and how those innovations will 
translate into future spending. Technological innovations can greatly 
improve the quality of medical care and can, in some instances, reduce 
the costs of existing treatments. But because technology expands the 
set of treatment possibilities, it also has the potential to add to 
overall spending--in some cases, by a great deal. Other sources of 
uncertainty--for example, about how longer life expectancies among the 
elderly will affect medical spending--may also turn out to be 
important. As a result, the range of future possible outlays per 
recipient is extremely wide.
    Developing ways to deal with these uncertainties will be a major 
part of an effective budget strategy for the longer run. Critical to 
that evaluation is the possibility that, as a nation, we may have 
already made promises to coming generations of retirees that we will be 
unable to fulfill. If, on further study, that possibility turns out to 
be the case, it is imperative that we make clear what real resources 
will be available so that our citizens can properly plan their 
retirements. This problem raises a more-general principle of public 
policy prudence. If, as history strongly suggests, entitlement benefits 
and tax credits, once bestowed, are difficult to repeal, consideration 
should be given to developing a framework that recognizes that 
potential asymmetry.
    Re-establishing an effective procedural framework for budgetary 
decisionmaking should be a high priority. But it is only a start. As we 
prepare for the retirement of the baby boom generation and confront the 
implications of soaring expenditures for medical care, a major effort 
by policymakers to set priorities for tax and spending programs and to 
start making tradeoffs is long overdue.
    The significant improvement in the budget in the 1990s reflected 
persistent efforts on the part of this committee and others. If similar 
efforts are made now, they should assist in preparing our economy for 
the fiscal challenges that we will face in the years ahead.

    Chairman Nussle. Thank you, Chairman Greenspan. A number of 
things in your testimony hit a chord with me and particularly 
with regard to the fiscal management issues. I agree with a 
number of the points you made and we will continue to work with 
you and with those in Congress that want to try and work on 
these issues. The excuses are over with regard to the fiscal 
situation that we find ourselves in post-9/11. Those are all 
very important reasons why we find ourselves in the situations 
that we do right now. We needed to spend money in order to deal 
with homeland security and national defense and intelligence. I 
don't think anyone, or at least there are very few who voted 
against those proposals and very few in the country, who would 
have suggested that we should hesitate for a moment to fulfill 
those important priorities at the time they were made. But now 
is also the time to get back to that business of fiscal 
prudence, as you have said, and we will start that from this 
committee, as we did this last year with a freeze budget.
    If I could, let me put up the first chart, which is with 
regard to the budget, talking about the surplus and deficits as 
a share of GDP. I am amazed to continue to hear and, for that 
matter, see the headlines of record deficits when it is 
comparing it with thin air, its nominal terms. Those are big 
numbers, but you have to compare them to something. My Visa 
card bill is--well, I know my wife may be listening, but 
something my wife and I have to manage and we usually can on a 
month-to-month basis, but for Donald Trump, it is probably not 
much of a heavy lift to manage our Visa bill. You have to 
compare the debt to something. And the deficit we have is 
compared to the gross domestic product. And if you compare it 
to that, you will see that not only is it not the worst, but if 
managed, as you said, it can be dealt with.
    In fact, we did an analysis of where this deficit ranks in 
comparison to other post-World War II deficits, and it is not 
even in the top 10 of the years of deficits since World War II. 
That is not to mean that there is some excuse that we don't 
have to worry about it. I don't mean to suggest that at all. 
This committee has led on that issue. But it needs to be 
compared with the economy; and with that comparison, as a 
percentage of GDP, 2004 is only 3.6 percent as compared with 
1983, which was 6 percent. So we have a long way to go before 
we are unable to manage it or before it is structural.
    Second, let me say, one of the things that you didn't touch 
on, and I will touch, and that is managing for emergencies. We 
just saw our second hurricane. We have the possibility of yet 
another hurricane, and FEMA is underfunded. We will rush to the 
floor today an emergency supplemental because, yet again, 
Congress does not manage and does not prepare for emergencies 
that we know are coming and that we should begin to plan for. 
And I will continue to advocate for that. I know there are many 
in Congress who will continue to work to fund for these natural 
disasters that we hope and pray will not occur, but are always 
wrong in our hopes and our prayers.
    Thirdly, let me turn to the economy. Let me read you some 
of these. I hear people talking down the economy and I want to 
read these. Real GDP grew at 4.7 percent over the past year. 
Payroll jobs have increased by 1.7 million. Jobs over the last 
12 months, manufacturing employment rose by 22,000 in August 
alone and increased by 100,000 jobs in the past 6 months. 
Unemployment, as measured by the household survey, we have now 
grown the amount of people working in this country to 140 
million in August. That is the most ever. Unemployment rate is 
down to 5.4 percent from last year in August of 6.3 percent. 
Manufacturing activities soared from the end of 2003 to the 
first half of 2004. It is the highest pace of manufacturing 
activity in 20 years.
    Industrial production, the output of our Nation's 
factories, mines, and utilities is up 4.8 percent over the past 
year. Real business equipment investment rose up 13.7 percent. 
People are investing in the equipment, which production creates 
jobs. Housing starts and building permits have been running at 
their highest level in 20 years. And the home ownership rate is 
at a record high of 69.2 percent.
    Chairman Greenspan, you said the economy has regained 
traction. I keep hearing people talk down the economy. Where is 
the bad news? Is there a number I am missing? I just read a 
number of numbers. But where are the numbers that say that the 
economy is heading in the wrong direction?
    Mr. Greenspan. Well, Mr. Chairman, I think in any period of 
excellent or even moderate economic growth, you will find 
innumerable areas of our very complex economy which are doing 
poorly. And I think we will hear that this morning and I think 
that is important to recognize. But it is important, as you 
point out, to look at the overall scope of where the economy is 
going. And while as I pointed out earlier, we have moved into a 
soft patch, after very strong growth, subsequent to our meeting 
I think 6 months ago, despite that fact, the underlying 
structure of the recovery is still there. In my judgment, were 
it not for the very sharp rise in oil prices, we would be 
seeing some fairly strong growth, the strong growth typical of 
that earlier period. So we still have problems and there are 
innumerable problems, and I think I will address these problems 
later, but I think the economy is doing reasonably well.
    Chairman Nussle. If the recipe is an energy strategy and, 
as you said, medical care costs and having some kind of 
predictability there, certainly we believe liability controls 
from frivolous lawsuits is an important issue. This committee 
has held hearings on not only tax cuts--reducing taxes is 
certainly a favorite pastime for many--but tax reform to 
unleash this burdensome and complicated tax system. These are 
areas I believe we can work on. But as far as the economy 
heading in a positive direction, I think it is very clear that 
from an overall standpoint, that is the case. We are not going 
to rest until people have jobs. That is part of the reason we 
are having this hearing today. But for political purposes, 
talking down the economy at this point in time does nothing to 
help our markets or our economy. And I would hope that people 
will start being specific in their proposals to fix this as 
opposed to just suggesting that we need tax increases.
    With that, I will turn to Mr. Spratt and recognize him for 
any questions.
    Mr. Spratt. Mr. Greenspan, let me go back to the simple 
chart that I put up and explain what we have done here is 
adjust the CBO baseline. No. 1, I don't hope certainly we will 
have $115 billion a year recurring defense cost to add on top 
of the already enormous defense budget. We have assumed as a 
parameter that the tax cuts will not expire despite their 
written terms. And we have assumed with respect to 
discretionary spending that it will be current services.
    The results are pretty dramatic, at least they are to me, 
$422 billion is the confirmed number this year; 361 doesn't 
take into account what we are likely to spend through FEMA for 
Florida next year. You could add easily another $10 [billion] 
to $20 billion on top of that. The deficit never dropped below 
$320 billion. It rises to $504 billion in 2014.
    My question to you is are these numbers consequential? Can 
we take this fiscal path without some adverse effects that 
disrupt the economy, disrupt the growth of our economy, jobs, 
interest rates, and affect other things that are important to 
us?
    Mr. Greenspan. I think not, Congressman. Were it not for 
the extraordinary problems we have in medical care and 
basically the fairly dramatic rise in the average expenditure 
per Medicare enrollee, we probably could live with the type of 
numbers you are projecting because the growth in the debt would 
not be all that large.
    Having said that, it is very difficult to get around the 
issue, that when you look out into the period, especially in 
the years immediately following the end of your projection, you 
begin to get some very severe fiscal pressures coming because 
of the very sharp increase in retirement benefits from an ever-
larger increase in retirees. The consequence of that, unless we 
address it, is a highly unstable, long-term fiscal situation. 
The one thing we can say with a degree of certainty is that the 
very large baby boom generation, which is currently working, 
will not be working in large measure in those years. And if you 
project that with any reasonable set of numbers, you get into a 
situation which suggests that current fiscal policy should try 
to keep the debt level down as low as we can, because we are 
going to be running into very severe pressures in the later 
years. And the better we are prepared in moving into that 
period, the more likely it is that we will address it in a 
rational and sensible way.
    Mr. Spratt. What form would the consequences take? Are much 
higher interest rates likely if we sustain this kind of debt?
    Mr. Greenspan. That is correct. Federal Reserve studies 
have indicated over the years, and more recently in some fairly 
sophisticated analyses, that if you get to a point of fairly 
significant long-term structural budget deficits, it begins to 
impact on the level of long-term interest rates, which, in 
turn, of course, creates higher levels of interest payments and 
therefore higher deficits. And if you take the arithmetic 
progression, you can demonstrate that under certain scenarios 
that is an unstable situation. Obviously, we must not even get 
close to those types of scenarios, because if you get into that 
sort of debt maelstrom, it is a very difficult situation to get 
out of.
    Mr. Spratt. You mention in your testimony that we have not 
yet seen the financial imprint of these deficits in the 
financial markets. Is that because agents, foreigners, are 
buying most of our deficit today, holding most of our debt 
today, and it has not been a drawdown as yet on the domestic 
pool of capital and savings?
    Mr. Greenspan. I think not, because were that the case, we 
would find that in corporate debt, we would be getting 
significant increases in long-term rates. And of course, we are 
not. I think that there is a general presumption out there that 
the longer-run problems in the deficit will get resolved one 
way or the other and the markets at this stage are not focusing 
on that as a materially difficult problem. I would like to add 
quickly, however, that I can't say how long into the future 
that would exist if we continue to fail to address what strikes 
me as a problem of potential instability.
    Mr. Spratt. You are telling us that there is a connection 
between high deficits and high interest rates that sooner or 
later comes to bear?
    Mr. Greenspan. Yes.
    Mr. Spratt. Let me ask you with respect to the job market, 
our numbers indicate we are still 1.65 million jobs short of 
the number of private sector jobs that were in existence on 
January 1, 2001. This makes this recovery unlike any of the 
other nine recoveries in the postwar recessions. How do you 
account for the slow, sluggish growth in jobs given the amount 
of the fiscal stimulus that the Federal budget has been 
applying to the economy?
    Mr. Greenspan. Congressman, the answer lies in two areas. 
We have had an extraordinary rise in productivity. Indeed, the 
rate of productivity growth itself has been rising over the 
last decade. This is unprecedented in the data that we have 
access to. This suggests that as demand picked up in the post-
2001 period in a modest manner, the increases in efficiency, 
which in the longer run are obviously very beneficial to 
standards of living, was sufficient to enable businesses to 
meet their increased orders without hiring significant numbers 
of people and in many cases, even actually paring employment as 
their orders and sales and shipments rose.
    Secondly, the recession that we had been through was the 
shallowest in the post-World War II period and consequently, 
you don't get a rebound out of the shallow recession.
    So the combination of those two factors, the very major 
increase in efficiencies and the shallowness of the recession, 
statistically account for the major decline in employment. As 
the rate of productivity growth slows down, as it has recently, 
we are beginning to see the labor markets begin to pick up. And 
indeed, the report this morning by the Bureau of Labor 
Statistics on job openings--this is a new series--show a marked 
increase in private job openings indeed the series itself, 
which is also reflective of hires and separations, is 
consistent with a moderate rise in the establishment employment 
data.
    Mr. Spratt. Mr. Chairman, one last question so others will 
have an opportunity. You have testified before that the budget 
process rules we adopted in 1990 and 1991 and carried forward 
in 93 and 97, the PAYGO rules, the discretionary spending caps, 
the sequestration enforcement mechanism, all had a significant 
role to play in our budget successes of the 1990s. Do you still 
support and favor the reenactment of those rules in the 
original form and particularly the PAYGO rule which applied 
both the tax cuts as well as entitlement increases?
    Mr. Greenspan. I do.
    Chairman Nussle. Mr. Shays.
    Mr. Shays. Thank you, Mr. Greenspan, for being here. You 
have made two points that we could add to the list that the 
chairman made. And one is he didn't cite the extraordinary rise 
in productivity. You also made the point that this is one of 
the shallowest recessions in recent history, which to me 
suggests that economic policy is headed in the right direction. 
I would like you to tell me, it is my understanding that 
productivity gains are one of the significant ways you increase 
wealth. Is that accurate or not?
    Mr. Greenspan. In one sense, Congressman, it is the major 
way in which we increase real wealth. I am not talking about 
stock market values or anything, but about real assets and 
assets which enable the economy to produce ever increasing 
amounts of real goods for people to consume and to increase 
their standard of living.
    Mr. Shays. How many months or years have we seen 
productivity growth in the United States?
    Mr. Greenspan. The best way of evaluating it, we started 
with an annual rate of growth about 1, 1\1/2\ percent in the 
early 1990s, and the rate of growth has continued to accelerate 
to, most recently, in the 4 percent annual growth rate area.
    Mr. Shays. I am talking about productivity. You are saying 
a 4 percent growth of productivity?
    Mr. Greenspan. In the last number of quarters, with the 
exception of the last two. In other words, productivity growth 
has come off in the last couple of quarters, but it is growing. 
But the growth rate has been quite extraordinary for a number 
of years.
    Mr. Shays. It strikes me as quite significant, particularly 
given September 11. I would love for you to talk about 
September 11, because it is my understanding we have lost over 
a million jobs. And I have met constituents of mine who have 
never recuperated from those job losses. So could you put some 
kind of perspective in terms of 9/11 and jobs?
    Mr. Greenspan. Immediately after 9/11, we had expected a 
very significant contraction in economic activity, which seemed 
likely to be prolonged. Within a matter of weeks or a few 
months at the longest, it became quite evident that the economy 
had achieved a degree of resiliency which we had not suspected 
it had, and it stabilized reasonably quickly and started to 
grow again at a fairly modest but eventually accelerating pace. 
But also, remember we were in the tail end of a very protracted 
increase in the growth rate in productivity, which means 
obviously that productivity itself is accelerating. As a 
consequence of the increased efficiencies which tended to focus 
on how does one reduce costs and improve the value added of the 
economy, it turned out that the significant part of cost 
reduction, two-thirds of it, is invariably labor costs and 
therefore there was considerable pressure on labor costs. And 
indeed one of the reasons why the labor markets were so poor is 
that efficiency was so high.
    It is an odd combination of events. Something which is 
extraordinarily important and good for the economy over the 
longer run was creating very significant problems for a number 
of Americans who were losing their jobs.
    Mr. Shays. But we heard after 9/11 there were over a 
million jobs lost and a number of those didn't come back. It 
would be fair to say--and I don't mean 9/11, I call it 
September 11. The tragedies of September 11, had they not 
occurred, we could make a significant assumption that there 
would be significant or greater employment today; is that not 
true?
    Mr. Greenspan. I don't know the answer to that. It is 
fairly apparent that the job losses, for example, in 
manufacturing, which are still not recovered, were the 
consequence of extraordinary increases in efficiency. So I have 
to assume, obviously, with the general weakness in the economy, 
that part of the job loss was there. But as the chairman 
pointed out in the GDP data, there was one quarter of decline 
and it wasn't a very large decline at that.
    Mr. Shays. Thank you.
    Chairman Nussle. Let me announce to my colleagues, I 
believe the floor is anticipating one vote on the previous 
question to a rule and then the rule we anticipate going on 
voice. So we will continue this hearing through the vote and 
members will be asked to come back as quickly as possible.
    Mr. Moran.
    Mr. Moran. Thank you, Mr. Chairman.
    Mr. Chairman of the Federal Reserve, I thank you for 
testifying. I ran for office in 1990, so I served 14 years and 
I have listened to you very carefully because you are a 
brilliant economist. But I have to say you leave me a bit 
confused as to where you really stand. In 1990, when I was 
running for office, there was an historic economic summit, and 
Bush senior made a tough decision. He decided to put in some 
real spending limits into the budget and to develop a course of 
the budgetary decision that would lead to it being balanced, 
and it started to work. I think it may have been his political 
downfall, but it was successful in terms of its objective.
    President Clinton came in, an economic plan in 1993, not 
one Republican vote. It became a very partisan vote, but that 
led to a chart that I want the chairman to put back up. It is 
the chairman's own chart that I want to look at these dramatic 
increases during the Clinton administration and even more 
dramatic fall-off in economic growth in the first 3\1/2\ years 
of the Bush administration. The results were telling. But it 
seems to me it shows a dramatic difference in economic policy. 
That is what I am getting at.
    On the one hand, President Clinton not only reformed the 
welfare program and did restrain spending, but he did increase 
taxes so he would at least get a balanced budget, a surplus, 
and then work his way toward a combination of investment and 
tax reduction. This administration's sole objective appears to 
be to cut taxes, and I don't see much else, because the PAYGO 
provision, which you had supported very strongly--I have a 
number of quotes of how much you felt that that played an 
instrumental role in budget balancing--has been thrown out. The 
PAYGO provision now only applies to spending. It doesn't apply 
to tax cuts. And while our ranking member asked you that, I 
want to find--I want to know from you which is the most 
responsible approach, because we have two vastly different 
approaches to economic policy. They have two vastly different 
results.
    We debate on the floor of the House constantly between 
these two different approaches. It seems to me that results are 
quite telling, but I want you to tell us which you think is the 
most responsible. How important do you think it is not to have 
a balance between tax cuts, the PAYGO policy that applies to 
tax cuts, as well as spending.
    Mr. Greenspan. Well, Congressman, if you are going to want 
a long-term strategy which seeks to have stability, a sense in 
which the whole budget balance process is sustainable over the 
long run, a necessary condition in my judgment is that you need 
a structure for making policy choices, a mechanism which 
enables you to choose between policy X and policy Y, but you 
cannot have both. The only way I can think of which has any 
practical possibility of working, which it has, and it has 
worked in the past, is a balanced PAYGO. I personally would 
much prefer to have lower taxes and lower spending but, of 
necessity, a balanced budget.
    Others may choose higher taxes and higher spending. I think 
that that would make the level of economic activity less, but 
that is a debatable point. But choices have got to be made, and 
unless you have a structure which enables people in the House 
and the Senate to make those choices, I don't see how you come 
up with a credible budget
    Mr. Moran. So the structure, you are saying, is imperative. 
I am glad to have that clarified. The fact is that controlling 
the White House, the House of Representatives, the Senate, 
still the party in power has had an 8 percent annual spending 
increase, $30 billion of it attributable to homeland security.
    Mr. Shays [presiding]. The gentleman's time has expired.
    Mr. Moran. OK.
    Mr. Shays. Mr. Gutknecht.
    Mr. Gutknecht. Thank you, Mr. Chairman. And, Dr. Greenspan, 
we are always delighted to have you up here. I appreciate the 
roadmap that you have outlined.
    I would share with you one of my favorite people from 
history. Winston Churchill once observed that Americans always 
do the right thing once we have exhausted every other 
possibility. And my sense is that when you talk about some of 
the real reforms that you mention, I really do think that this 
Congress will begin to take those more seriously as we go 
forward; among those, PAYGO and spending caps. And frankly, I 
am one who believes they ought to apply to both sides, and 
perhaps by next year we can reach a more bipartisan agreement 
on that.
    Secondly, as a baby boomer, I was born in 1951. I think the 
demographics prove that there were more babies born in 1951 
than any other year, and so we have a really strong vested 
interest in reforming Social Security and Medicare and making 
those systems look more like the market for health care and the 
way everybody else deals with retirement.
    So there are a number of things we can and I think will do, 
but I would like to call up chart No. 13 and just because I 
think sometimes we need to put this in a bit of historical 
perspective. Can we call up No. 13? Because those who weren't 
here back in 2000 and 2001, in case we forget, just a little 
over 3 years ago, the Congressional Budget Office was 
projecting a projected surplus over the next 10 years of $5.6 
trillion. OK? And as late as September 5, 2001, testifying 
before this very committee, the Congressional Budget Office 
projected that--this was after we had passed some of the tax 
cuts--that we would still have surpluses over the next 10 years 
of $3.4 trillion.
    Now, I think history will record that they were wrong. No 
one could have predicted what happened just 6 days after they 
were here on September 5th. No one could have predicted those 
unanticipated expenditures. No one could have anticipated what 
would happen to the economy. I don't think anyone back then 
would have guessed we would say $47 a barrel oil.
    I say all that just because I do think we have to put it in 
perspective, and if there is anything that has surprised me in 
the past 3 years it is how incredibly resilient the American 
economy really is. And I wonder if you would comment, because 
you touched on it briefly, have you or any of the economists 
that you have worked with put any kind of numbers to how much 
of a dampening effect $47-a-barrel oil has had? In other words, 
how much stronger would the economy be right now if oil were 
still down around $30 a barrel?
    Mr. Greenspan. Congressman, it is difficult to tell, for 
reasons which I explore in my prepared remarks. Economists have 
been focusing on the consequences of oil price spikes for many 
years and have been puzzled by the fact that the average 
evaluation of what oil prices do to GDP, when you look at the 
full spectrum of price change, most of which is at lower levels 
and small changes, if you extrapolate that, you don't get 
anything which resembles the type of economic weakness that we 
tend to see. So that we suspect that there are elements 
involved when oil spikes occur that, say, impact confidence in 
one form or another, which have impacts on the economy which 
are difficult to evaluate.
    I don't think anybody has a number which I would feel 
comfortable with. In other words, I know it has an effect. I 
know it is there, and I am almost certain that at $30 for oil, 
we would be doing better than we are today, but by how much I 
think is extraordinarily difficult to judge.
    Mr. Gutknecht. Well, Mr. Chairman, I would hope that if you 
get a chance to talk to our friends over in the Senate, we are 
a few votes short of passing a comprehensive energy bill over 
there, and I think if there is one thing we can do before we go 
home in October, if we could pass comprehensive energy 
legislation and give confidence to the markets that we are 
serious about a long-term strategy to deal with energy prices, 
it strikes me that that would have a very positive 
psychological effect, if nothing else, on the American consumer 
as well as American business. Would you like to comment on 
that?
    Mr. Greenspan. Well, I think there are a lot of elements 
within that energy bill which are very important, good, and 
should be enacted, and others which I would suggest are 
otherwise.
    Mr. Gutknecht. Well, I think we can compromise on those 
things; and, frankly, the bill that passed the House was 
probably a little larger than it needed to be, but I think 
there is room for that.
    Again, I want to thank you, and I hope you will continue to 
speak out on budgetary reform, on Social Security reform, on 
Medicare reform. I think these are all very, very important 
issues whose time is clearly coming. Thank you very much.
    Chairman Nussle [presiding]. Ms. Hooley.
    Ms. Hooley. Thank you. Thank you for being here. I 
appreciate your comments.
    We have talked a lot about PAYGO, whether or not it should 
cover just tax cuts--rather, should it just cover spending, or 
should it cover both tax cuts and spending. You look at what 
the numbers show where we are going to be in debt in 2014. I am 
incredibly worried about what our economy is going to be like 
in the future. Right now in Oregon, the average wage is down 
$3,000, cost of living up. Poverty is up. We have less people 
on health insurance. So I am very worried about what our 
economy is in the future.
    In 2010, all the tax cuts will expire. Other than the PAYGO 
rule that would cover both tax cuts and spending, what do you 
see as a framework for our economy in the future? And knowing 
Congress as well as I do, I can't imagine that we are going to 
let those tax cuts expire, which is going to add to our 
deficit. What do you suggest we do in regards to tax cuts that 
are expiring in 2010? We haven't dealt at all with the 
alternative minimum tax, which is impacting more and more 
people every year. What is your suggestion on PAYGO?
    Mr. Greenspan. Well, Congresswoman, the reason I think it 
is important to get a policy structure in place before you try 
to get at the substance of trade-offs is that you have to have 
rules which require you to choose between high-priority items. 
In other words, largely as a consequence of the acceleration of 
productivity and increasing revenues, we have lost the ability 
to realize that we have to make choices, and the choices are 
between two things, both of which have exceptional value to the 
economy, to the society or to particular constituents. The 
trouble is we cannot continue to just go on without saying we 
can have this but not this, and PAYGO embodies that mechanism. 
But that is only for new initiatives, as I point out.
    What we need in addition, so far as I am concerned, is some 
form of ongoing structure such as triggers, for example, which 
would be applied to specific programs which would require that 
in the event that they veer off projected courses of cost, that 
they get automatically readjusted, or at least there is a 
mechanism which restructures those particular programs.
    Unless you have got the decisionmaking structure in place, 
I don't see how you can take the huge budget that we have and 
try to make the determination of what is important and what is 
not, unless you break it down into specific decisions. Once you 
do that, I do think you have the capability. But in answer 
specifically to your question, I would say PAYGO is a 
sufficient mechanism to make the types of decisions you are 
asking.
    Ms. Hooley. Thank you, Mr. Chairman.
    Chairman Nussle. Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman.
    Chairman Greenspan, we have heard a lot today about the 
deficit, and obviously most of us believe it is too large, 
although obviously in terms of the size of the economy, 
historically it ranks about 12th or 13th.
    There is a big debate that is ensuing today about whether 
tax relief is part of the deficit problem. As I look at the 
numbers, I see in the fiscal year 2005 budget that the House 
passed, we passed $153 billion of tax relief compared to $13.1 
trillion of spending, and if I do the math correctly, the tax 
relief is approximately 1 percent--1.2 percent to be exact--of 
the spending, which would lead me to conclude that it is very 
difficult to make the case that somehow the deficits that we 
have today are tax-relief driven.
    I also believe that for some reason the tax relief was a 
line item in our budget. Say, for example, if it was a line 
item for the widget production reformation administration, that 
many in this committee would instead propose increased funding 
for that line item; but somehow when we let taxpayers keep more 
of what they earn, it somehow is a major driver of the deficit.
    Another observation I have--and I am curious whether you 
have seen the same figures--but under a static analysis, I 
guess it would suggest that the tax relief would cost us 
roughly 1 percent of the Federal budget; but instead, the 
latest reports I see from Treasury indicate that revenue is 
actually up since we passed the latest round of tax relief. 
Reports I have seen have shown that the Treasury has collected 
$70 billion more for the first three quarters of fiscal year 
2004, over the first three quarters of fiscal year 2003, a 6.3-
percent increase, seemingly suggesting that at least in this 
particular case, that maybe tax relief did help ignite an 
economic recovery that has added revenues to the Treasury and 
actually helped become part of the deficit solution as opposed 
to part of the deficit problem.
    So my first question is, have you seen these reports from 
Treasury, and do you concur that revenues are up now over what 
they were a year ago?
    Mr. Greenspan. Well, Congressman, I think the general 
conclusion about the fact that revenues are lower than they 
would otherwise be without the tax cut, but higher because of 
the tax cut, is best described by saying that a tax cut will 
immediately lose revenue, and then to the extent that it 
increases economic activity and generates a larger revenue base 
will gain some of it back. It is very rare, and very few 
economists believe that you can cut taxes and you will get the 
same amount of revenues. But it is also the case that if you 
cut taxes, you will not lose all the revenue that is implicit 
in the so-called static analysis.
    Mr. Hensarling. Let's examine the spending side of the 
equation. I believe in our lost budget, the Federal--the 
Federal budget rose by over 3 percent, roughly twice over 
inflation, which, compared to recent trends, is actually an 
improvement. Many have argued again that these are tax relief 
driven deficits; yet I know that the Democrat substitute budget 
that was offered contains $135 billion more spending. There 
were at least 31 amendments offered in budget markup to 
increase spending, and I am curious about the role of spending 
in the deficit equation. And as our chairman pointed out 
recently, the House had an opportunity to vote on a number of 
budget enforcement mechanisms, including spending caps, rainy 
day fund, a version of enhanced rescission or a legalized 
version of the line-item veto.
    To what extent does spending play a role in the deficit, 
and how much have we been set back by voting down these various 
spending restraints?
    Mr. Greenspan. I don't know, but I have testified before 
that I think there is a fairly significant constituency for tax 
reduction and a fairly significant constituency for spending 
increases, but none that I can find which is in favor of 
reducing the deficit. And the only way you can reconcile this 
process, in my judgment, is to bring PAYGO and a number of 
other structural elements back in the decisionmaking process, 
so that you can actually debate between two programs rather 
than try to introduce both.
    Mr. Hensarling. Thank you, Mr. Chairman. My time is up.
    Chairman Nussle. Mr. Moore.
    Mr. Moore. Thank you, Mr. Chairman.
    Mr. Chairman Greenspan, thank you for being with us. We 
have in this country a $7.3 trillion national debt, a deficit 
for 2004 of $422 billion. Interest for 2004 is projected to be 
about $322 million, not quite, but almost, a billion dollars a 
day; and by 2006, it is well more than a billion dollars a day 
interest on our national debt. Is that basically correct so 
far?
    Mr. Greenspan. It sounds fairly accurate, yes.
    Mr. Moore. I speak on a fairly regular basis to high school 
and college students, and last week I spoke to a group of high 
school students in a government class. And I told them what I 
just told you about our deficit and our debt, and I said to 
this class, why should you even care about the $47.3 debt? A 
senior girl raised her hand and said, ``Because we are going to 
have to pay it off.''
    Well, good luck. And I tell students when I talk to them 
about this, ``You should be angry at Congress for what Congress 
is doing to you and future generations in this country.''
    You have already testified, Mr. Chairman, that in 2008 the 
first wave of the baby boomers begins to retire. Is that 
correct?
    Mr. Greenspan. That is correct.
    Mr. Moore. Alright. You have heard the term ``Social 
Security Trust Fund.'' is there in fact a Social Security Trust 
Fund where money is segregated for Social Security, not used 
for any other purpose?
    Mr. Greenspan. Well, the answer is no, and this gets to the 
question of the difference between the $7.3 billion that you 
point out which is----
    Mr. Moore. Trillion.
    Mr. Greenspan. Trillion--which is the public debt and a 
figure of roughly $4 trillion which is the debt to the public.
    Mr. Moore. I understand.
    Mr. Greenspan. And the counsel for the unified deficit 
essentially assume in effect that there is no separate trust 
fund in which there are segregated revenues, because obviously 
we use general revenues to pay for Social Security and 
everything else.
    Mr. Moore. Yes, sir. In fact, right now Social Security 
revenues are being used for other purposes as well. Isn't that 
correct?
    Mr. Greenspan. Well, the difference between Social Security 
tax receipts and benefit payments are obviously going to 
finance other aspects of the Federal budget.
    Mr. Moore. Yes, sir. And I believe by your testimony--but I 
want to ask you the question--do you have concerns about my 
children--I am a baby boomer, I am going to retire in the not-
too-distant future--about the rest of America's children 
providing for the baby boomers' retirement, servicing the debt, 
paying down the debt, if that is at all possible? Are we 
putting America's children in a financially or economically 
unsustainable position in the future with all of those burdens?
    Mr. Greenspan. Congressman, I don't know the answer to that 
question, but the fact that I don't disturbs me.
    Mr. Moore. Me too.
    Mr. Greenspan. In other words, I cannot say with any degree 
of confidence that we have not made commitments which we cannot 
deliver. And unless and until we are in a position where we can 
say we have not made these commitments, we do not know the 
resources will be available to meet the needs of retirees but 
also the needs of workers who will be presumably requiring, as 
their parents and grandparents had, a rising standard of 
living.
    Mr. Moore. I practiced law for 28 years before I came to 
Congress, and under Kansas law attorneys were required to have 
what is called a trust fund to segregate their own funds from 
their clients' funds. And you have heard about that, I am sure. 
And it is an absolute no-no for an attorney to violate that and 
to use a--to commingle the clients' funds with his or her own 
funds. That is what a trust fund is about. Correct?
    Mr. Greenspan. That is what it is in the private sector.
    Mr. Moore. That is not the way it is in Congress, is it?
    Mr. Greenspan. It is not.
    Mr. Moore. And in fact, there is no Social Security Trust 
Fund, as we discussed, because those funds are commingled for 
general revenues and used for whatever purpose Congress deems 
necessary. Is that correct?
    Mr. Greenspan. Well, that is what happens in the budgeting 
process, yes, sir.
    Mr. Moore. Would there be any advantage to actually 
establishing a Social Security Trust Fund? You remember a few 
years ago we talked about a lockbox, and the lock seems to have 
gotten picked. And we talked about the possibility 3 or 4 years 
ago about maybe starting to pay down debt. And there was even 
concern about paying down the debt too soon. Well, we sure took 
care of that problem, didn't we?
    Mr. Greenspan. Yes, sir.
    Mr. Moore. Thank you, Mr. Chairman.
    Chairman Nussle. Mr. Thornberry.
    Mr. Thornberry. Thank you, Mr. Chairman.
    Chairman Greenspan, as I listen to your testimony, I am 
struck, among other things, about the role of uncertainty and 
the possibility of external events and how they can impact our 
economy. You talked about energy. It doesn't take a great 
imagination to think of some event in the Middle East or in 
South America that could aggravate energy prices substantially 
and have enormous consequences for our economy.
    Certainly the attacks of September 11, had enormous 
consequences for our economy. Part of what we have been trying 
to do is pursue those defense and homeland security policies 
that prevent future attacks or limit them as much as possible. 
But I want to ask you, because I am sure you have thought a lot 
about how best to insulate our economy from the consequences of 
some future terrorist attack. We know that the terrorists are 
targeting in on our economy. They have said so, and it is clear 
that they see that as a way to hurt us. You said earlier that 
after September 11, our economy seemed more resilient than you 
thought it would be in bouncing back, which is encouraging, of 
course; but have we taken the steps you think are needed to 
help minimize, I guess, the economic consequences of some 
future attack, should that occur?
    Mr. Greenspan. Well, Congressman, extending our experiences 
of 9/11, it is fairly apparent that what helped us during that 
period and immediately thereafter was the extraordinary amount 
of flexibility in both our financial and product and labor 
markets. We had the ability to absorb shocks and rebound. I 
have argued in many forums in recent years that a great part of 
that flexibility has come from increasing globalization and 
very specifically our part involved in it from a bipartisan 
deregulation of our economy generally, which started in the 
1970s and has essentially preceded more or less to this day, 
and, of course, the extraordinary advances in technology which 
have many causes but have been a major factor in the American 
economy.
    The difficulty is that an economy such as ours is based on 
voluntary actions of people acting largely on bilateral trust. 
People have created wealth by interacting, and what terrorism 
does is to induce fear and withdrawal. And if you withdraw from 
the specialization of labor, as economists like to put it, the 
GDP comes down. And so the question essentially is how do we 
create a sufficiently flexible system so that, short of 
remarkably large terrorist attacks, we can recover?
    I think we did that inadvertently. We didn't do it as a 
part of an antiterrorism economic policy. We lowered our 
tariffs. We increased globalization. We deregulated the 
airlines. We did transportation deregulation in general. We did 
a large number of things, especially in the financial area. All 
of those things, while not directed at the issue of terrorism, 
per se, have been the reason why I think we do have a degree of 
flexibility, which means that short of very large impacts, our 
economy will recover.
    Mr. Thornberry. And as that applies to us, steps that we 
might take that would go back on regulation or diminish the 
globalization or the contacts or diminish the flexibility in 
our economy, it would make it more difficult to recover?
    Mr. Greenspan. That is what concerns me most. I am most 
concerned about protectionism, largely because if we start to 
remove the international flexibility that has developed in 
recent decades, I think the rigidity, the calcification of our 
economy would get to a point where it could be quite vulnerable 
to terrorist attacks.
    Mr. Thornberry. Thank you.
    Chairman Nussle. Mr. Neal.
    Mr. Neal. Thank you, Mr. Chairman.
    Nice to see you again, Chairman Greenspan. Considering that 
we all take such great satisfaction in what it is that you have 
to say, and I follow it closely every single day, and certainly 
you are without peer as it relates to reflecting on the state 
of markets across not only America but the entire world, I am 
just going to refer to you from now on as, ``Your Excellency'' 
with your commentary.
    Now, let me ask you a couple of questions based on 
observations. I think you would agree that we are fighting two 
wars with three tax cuts.
    Mr. Greenspan. I can count, but I don't know what I am 
counting necessarily.
    Mr. Neal. Would you acknowledge, based upon your suggestion 
back in February, that the Budget Committee considered cutting 
Social Security because of the budget situation and demographic 
pressures caused by the imminent retiring of baby boom 
generations? Would you acknowledge that the Social Security 
Trust Fund, or the financial status of Social Security has been 
weakened by a decision to yank $2.3 trillion out of the budget 
over the next 10 years?
    Mr. Greenspan. Congressman, as I indicated in my prepared 
remarks, Social Security is out of balance and will require 
certain adjustments, either on the tax side or on the benefit 
side or in a number of other related areas.
    The problem that I have is that everyone acknowledges that 
there is a gap, but no one agrees that anything that will close 
the gap is acceptable.
    Mr. Neal. Except, Mr. Chairman, we did take $2.3 trillion 
out of the budget over the next decade. Has that strengthened 
or weakened the Social Security program?
    Mr. Greenspan. I don't know how to answer that, largely 
because I think that the Social Security program should stand 
on its own. And if you have a system in which there are and 
should be trust funds, those revenues, as it was indicated by 
one of your colleagues, in my judgment, ought to be segregated.
    Mr. Neal. Mr. Chairman, let me follow up on that. We are in 
the midst of a war in Iraq, as we would all acknowledge, and 
Lawrence Lindsey, the President's chief economic adviser at the 
time, said it might cost up to $300 billion. That looks now as 
though it is going to be a low figure. He lost his job for 
saying that.
    My point is that we have a natural disaster occurring in 
Florida as we speak where there is going to be up to $40 
billion or more required to help those folks out, deservedly 
so. We are in the midst of an international crisis fighting a 
war in Iraq and fighting a war in Afghanistan, with troops 
stationed in Bosnia and Haiti. We have increased defense 
spending by significant numbers, as an overwhelming majority of 
this Congress voted for, myself included, and we have all 
acknowledged that there have been downturns in this economy, 
bumps along the road. And then we hear that Social Security has 
problems, that Medicare has problems, and we fail to connect 
the dots between the problems that we have and the obligations 
we are going to have. And the $2.3 trillion that has been 
yanked from the economy over 10 years strikes me as being 
irresponsible.
    Now, there were a number of things that we did in the 1990s 
that took some courage, Bush I, Clinton twice, a majority of 
Congress, including the Republican leadership for the most 
part, that voted for those positions; certainly the Republican 
leadership in the Senate voted for those positions. And now we 
find ourselves back in a situation with a mounting deficit, 
international obligations that are going to incur huge costs 
for the American people, Social Security position that has been 
jeopardized, money for Florida, and we hear about a trip to 
Mars. Can you do all of this with the tax cuts that we have 
embraced?
    Mr. Greenspan. Well, Congressman, I think you have made the 
case for restoring PAYGO. Those types of problems that you 
assert would exist, if the Congress agreed with your 
priorities, would not exist if we had a mechanism in which the 
Congress was forced to choose between A and B rather than just 
go along, doing both A and B.
    Mr. Neal. I will go back and reread your comments to seek 
that clarity. I want to say this, lastly. There is a clever 
game that is played here, as you know very well, and that is 
Members who preach fiscal responsibility run to the 
appropriators faithfully asking that their favorite program be 
funded. The easiest way, as Mr. Nussle and I have discussed in 
the past, to perhaps speak to the issue you have raised is to 
publish the letters of those who ask for spending. Put it out 
there. They go back to the appropriators. They ask for money, 
and then they go back home and preach fiscal discipline, at the 
same time Mr. Nussle and I discussed, they attend 
groundbreakings and ribbon cuttings.
    Thank you, Your Excellency.
    Chairman Nussle. The gentleman's time has expired.
    I am going to try this. Please listen to my unanimous 
consent request that the chairman has to leave at 12:30 as I 
have stated. I will ask unanimous consent that all members be 
allowed to question the witness for 3 minutes so that we have 
more members that are allowed to question. I ask unanimous 
consent that we be allowed to do that. I know that is 
unfortunate, but I want to get in as many as possible.
    Without objection, so ordered.
    The gentleman from Pennsylvania is recognized. 
Unfortunately, only for 3 minutes.
    Mr. Toomey. Thank you, Mr. Chairman. And let me commend my 
colleague Mr. Neal for a very constructive suggestion he made 
at the end of his questioning.
    Chairman Greenspan, thanks for being back. My question goes 
to what I sometimes think of as some of the self-inflicted 
wounds that we have with respect to our economic challenges, 
and one that comes to my mind is the ongoing problem of 
excessive litigation. I say self-inflicted, because of course 
the political establishment currently tolerates a system--a 
legal system that I think in some ways has actually run amok. 
The Rand Institute for Civil Justice estimates that litigation 
and settlement expenses cost as much as $60 billion since 1982. 
Two Council of Economic Advisers estimated in April of 2002 
that the U.S. tort system consumes 1.8 percent of GDP, double 
the average cost of other industrialized nations.
    Another way of looking at is they estimate that excessive 
tort claims are equivalent to a 3 percent tax on wages or a 5 
percent tax on capital income.
    My question for you, Mr. Chairman, No. 1, do you believe 
that tort claims are excessive, and to the extent that tort 
claims are economically excessive, do you believe that they are 
equivalent in some ways to a tax on individuals or business?
    Mr. Greenspan. Well, Congressman, a judgment as to whether 
they are excessive or not depends essentially on what you are 
trying to do with your tort system. Clearly, a capitalist 
market economy cannot function unless there is a rule of law, 
and that contracts need to be protected, and we need a 
structure of law which enables individuals to address wrongs 
both from the business sector and from business reasons and 
otherwise.
    It is also clear that if everybody who has a legal right to 
move into adjudication were to do so, the court system, our 
legal system, would be swamped into immobility. And so it is 
clearly a system which implicitly requires voluntary restraint 
on expansion of it. Where that line is, I don't have a 
judgment.
    Mr. Toomey. I understand that. Let's for a moment assume 
that to the extent that there were to be an excess beyond what 
is appropriate and necessary, could it be described fairly as 
equivalent to a tax?
    Mr. Greenspan. It would have the same effect.
    Mr. Toomey. It would have the same net economic effect as a 
tax, which is, of course, to curb economic growth?
    Mr. Greenspan. Well, I just want to speak in general terms, 
because there are differences in the incidence of those 
particular types of actions, but it has an economic impact 
which is similar to a tax.
    Mr. Toomey. Thank you, Mr. Chairman.
    Chairman Nussle. Mr. Edwards.
    Mr. Edwards. Mr. Chairman, following up on your testimony 
over the past year, it seems to me once again Congress has made 
the mistake of listening to your goal of lower taxes in the 
long run, but totally ignoring your strong recommendations to 
have pay-as-you-go rules for new tax cuts and for new spending 
increases. Consequently, we are facing $422 billion deficit 
over the fiscal year 2004, and my concern is that Congress is 
going to, once again, do this year what it did last year. It is 
going to listen to your advice about overall it would be nice 
to have lower taxes, but I wouldn't bet a dime of my family's 
net worth that Congress is going to put strict limits on 
Medicare and Social Security expenditures. If anything, this 
Congress, through its leadership, just invested another $550 
billion of taxes for those purposes.
    My question to you is in your testimony you talked about if 
we don't make major policy changes and we continue down this 
road of increasing deficits that ultimately it could lead to--
and I believe you used the word instability.
    My question to you is would you define instability in the 
worst case scenario as you define it, and also how you would 
define a more moderate level of instability if we keep going 
down this path of ever-increasing national deficits?
    Mr. Greenspan. Congressman, I think you make a good point 
in making certain that these definitions are exact and not 
general. The ultimate instability is the case I described 
earlier where you get to a point where the budget deficit is 
large enough and therefore adding to the national debt, which 
in conjunction with rising interest rates because of that 
creates an unstable statistical or arithmetical system which 
leads to a major breakdown of the fiscal system.
    Now, that has happened in the past, not obviously in the 
United States, but we have cases in other countries over the 
generations where that has happened. We are nowhere near 
anything resembling that, as evidenced by the fact that there 
is no inflation premium of any significance in our monetary 
system, but it is certainly conceivable that if we wholly 
disregard fiscal restraint and merely go on our way of, as I 
said before, advocating ever-increasing deficits, which is the 
implication of a lot of the actions that we take, then I think 
we start to risk problems.
    The situation that probably most in a practical sense we 
need to avoid is not an unstable breakdown of the system but 
significantly higher rates of inflation and of inflation 
premiums embodied in long-term interest rates, and what we used 
to call--I guess we still would--stagflation. And that is what 
lies in front of us if we don't restore balance to our fiscal 
processes.
    Mr. Edwards. Thank you.
    Chairman Nussle. Mr. Brown.
    Mr. Brown. Thank you, Mr. Chairman.
    Chairman Greenspan, we are glad to have you here today. My 
question is, I notice when you mentioned in trying to control 
the expansion of government, one would be using PAYGO, and you 
mentioned that by using it to increase appropriations, you 
ought to find some other way to cut. But you used the same 
example for tax cuts, and I was just curious as to the money 
coming in from the people is certainly their money already, and 
just to take less, we need to make an offset. Tell me how you 
would do that.
    Mr. Greenspan. Well, Congressman, I, as I indicated 
earlier, would prefer both lower taxes and lower spending. What 
I would not think is desirable is spending with borrowed money, 
which is what the issue is. If you are going to lower taxes, 
you shouldn't be borrowing essentially the tax cut; that over 
the long run is not a stable fiscal situation.
    Longer-term growth, in my judgment, is probably maximized 
by keeping the level of expenditures low and therefore having 
the capacity to keep taxes low, which, as far as I can judge, 
would probably, from a fiscal policy point of view, create 
maximum economic growth and sustainability.
    Mr. Brown. If I could follow up, then, the multiplied 
effect of the tax cuts should be sufficient enough, I think, to 
absorb any deficit because of the spending in the private 
sector?
    Mr. Greenspan. That may be the consequence, but all of the 
evidence is that does not happen to be the case. That is, as I 
mentioned before, it is true that when you cut taxes you gain 
some revenue back--we don't know exactly how much it is, it is 
not small, but it is also not 70 percent or anything like that; 
so that we do know that if you cut taxes, you will increase the 
deficit, but by not as much as the tax cut.
    Chairman Nussle. Mr. Ford.
    Mr. Ford. Thank you, Chairman Greenspan and Mr. Nussle.
    Real quick, Mr. Chairman Greenspan, I know my time is 
short, there seems to be a big disconnect. I heard Chairman 
Nussle and others talk about these numbers and this growth, and 
I heard all this talk about tax cuts and not adding to the 
deficit. But I think we forget there are more people living in 
poverty today than there were 3 years ago. We can put all the 
numbers and talk about growth here and growth there. People 
have seen increases in property and in State and local taxes. 
People are seeing their light and power bills go up because of, 
as you talked about, the uncertainty of oil prices. And I think 
at some level we have to be willing to take some responsibility 
for tuition increases at the University of Alabama and 
University of Tennessee. We have seen a 60 percent increase 
over the last 3\1/2\ years at our State schools across the 
State.
    Mr. Nussle mentioned that more people are working today. 
Sure there are, but there are more people living today in 
America than there were 3 years ago, so one would expect that 
number to increase.
    I have heard you talk about the entitlement challenge and 
how that crushing blow to my generation, other younger 
Americans will face here in the coming years, and you have 
talked about how we have got to get our arms around it. Do you 
believe we should raise the eligibility age, No. 1? And should 
we means test entitlement programs before we, perhaps, rush 
down the path that some have suggested in terms of a new 
ownership society and privatizing parts of Social Security?
    I have only got 3 minutes, Mr. Chairman. I hate to be rude 
to you, but I wanted to ask one more to you as well.
    Mr. Greenspan. Well, Congressman, I would basically say 
that there are choices of how one confronts this problem, and 
that is the purpose of having a process such as PAYGO or other 
structural additions to the budget process.
    Mr. Ford. What do we say--and we are Democrat and 
Republican up here who have got this problem. The people we 
point to, jobs being created, we all know the data shows that 
people are making less money than they were before. What do we 
say to those who say, you guys are cutting taxes and middle-
class people now pay more, if I am not mistaken, a higher 
percentage of their income in taxes than those of us in the top 
1 percent, what do we say to those people?
    We have said now for 2 years--I was here when the 
President's tax plan passed and he promised this and he 
promised that, and those things just have not happened. So what 
do we say? Just keep waiting, and those at the top 1 percent 
will enjoy a bigger tax cut and bigger benefits, and those of 
you who are struggling to send your kids to college and pay 
gasoline prices and pay higher property taxes, you guys hang in 
there, because we are turning the corner and better days are 
coming? Should we just continue to say those things?
    I would even ask my friends on the other side, because I 
know we are not alone in here in these things--Mr. Gutknecht, 
you talked about some of these things in your questioning. You 
have to be hearing the same things. You promised and others 
promised that this tax cut would produce all these wonderful 
things. I wish I could sit here today and say I was wrong, but 
unfortunately the numbers, as much as we try to put a spin on 
these things, we have got a $422 deficit, and we are here 
bragging about it. We have got more people living in poverty 
today. Health care premiums are going up for people, and we are 
sitting here acting as if we have done something good for 
folks.
    So I am just curious. Do we keep telling them that we are 
turning a corner and that good times are coming, or is there 
something else that we should be saying? Now, I understand all 
these numbers and all, but I am just curious, what else should 
we be saying to everyday folks?
    Mr. Greenspan. Well, I don't think it is what we should be 
saying. It is what we should be doing. And I think the problem 
is a broader question. One issue on which I have testified 
previously, relates to the fact that we have had a very 
significant increase in skill differentials. People who have 
gone through college and graduate school have a significant and 
increasing wage premium compared to those who have gone to high 
school or less. We have got a problem in this country in which 
the distribution of wealth and income is getting increasingly 
concentrated. This is largely because our educational system 
has not, in my judgment, been up to the task to sufficiently 
bring up our younger children through primary and secondary 
education and through high school and college so that the 
supply of skilled workers increases relative to demand, so that 
those wage premiums go down and the increasing concentration of 
income slows down. I have argued that we have to confront this 
issue, and unless and until we do, we have some very serious 
problems. It is not what we say to people, it is what we do to 
resolve these types of problems.
    Chairman Nussle. Thank you, Mr. Ford. That may be one of 
the most important statements you have made all day. I 
appreciate it.
    Mr. Bonner.
    Mr. Bonner. Thank you, Mr. Chairman. And before I address 
the chairman, I would just like to say to my friend from 
Tennessee, if the people of Tennessee are paying 60 percent 
more to attend the University of Tennessee today than they were 
3 years ago, they ought to come to the University of Alabama. 
They can get more for their money.
    Mr. Ford. Mr. Chairman, I will let that one slide till late 
September, Bonner.
    Mr. Bonner. Mr. Chairman, we have talked a lot about 
manufacturing job loss and higher productivity in this country. 
If I am not mistaken, other countries have seen job losses as 
well. Japan, China, Brazil and other countries have seen 
increasingly alarming job losses and many have also seen 
increasing productivity levels as well, although not to the 
extent of the United States.
    I have contended since I first came to Congress 20 years 
ago as a staffer, and certainly feel so today as a Member, that 
as a Nation we do a very poor job of trying to grow the economy 
or grow jobs when we place burden after burden after burden on 
business and industry, from the rules that come out of the 
various agencies and departments, to our very tax system. And 
so my question to you is related to one of the discussions I 
think we will be having during this election season and that is 
not necessarily tax cuts but tax reform.
    Have you ever taken a public position about whether we 
could simplify our tax system to make it less burdensome on 
business and industry so they can go out and create more new 
jobs as opposed to what has happened in the last few years?
    Mr. Greenspan. I must say I thought the 1986 Tax Act was 
what most economists would consider an ideal system in our 
political context. We initiated that, and then observed year 
after year as it began to deteriorate and return to what it 
eventually looked like prior to the 1986 act.
    It strikes me that as with all programs that deteriorate, 
we have to go back and refix them, and probably we continually 
do that every 20 years or so. I think what we need is what we 
had. I thought that was an extraordinarily sensible balance of 
priorities in the country, and as I recall, it was reasonably 
well accepted by our society. Let's try it again.
    Mr. Bonner. Thank you very much.
    Chairman Nussle. Mrs. Capps.
    Mrs. Capps. Mr. Greenspan, to continue Mr. Ford's line of 
thinking, you are dead on, dead right with respect to the 
importance of education to our economic future, I believe, and 
particularly to the future of our now underachieving youth. 
Would that mean, perhaps, that we have to make resources 
available at the Federal level, and would that might mean we 
might have to reconsider other priorities, including tax cuts?
    Mr. Greenspan. Well, this is the reason why I am so 
strongly in favor of getting a structure in which the Congress 
can debate these choices and decide where our limited resources 
go. And I can't tell you what this committee ought to come up 
with, but it is essentially the charter of this committee to 
make these very broad judgments and to try to reflect the value 
systems of the American people and what their trade-offs are.
    Mrs. Capps. Let me try that from another angle, and I agree 
with you we ought to be tackling this.
    You made it clear, for example, on numerous occasions that 
you think cutting taxes in tandem with spending cuts does 
increase economic growth, but this is kind of a King Solomon 
tack on it. Which is preferable, unfunded tax cuts and large 
deficits or no tax cuts and balanced budgets?
    And maybe to illustrate, President Reagan in 1982 realized 
that the full scope of his tax program would have dire 
consequences for the fiscal health of the Federal Government, 
and so he signed into law a bill which scaled back some of his 
tax cuts. Was this a good idea or not? That is the question.
    The Bush administration has shown some flexibilities by 
having sunset dates. That might be what we might call a trigger 
effect, and given that the majority--now the Republican 
leadership has not dealt with this, as you have just 
indicated--would it be better to let some tax provisions lapse 
rather than to make them permanent at the cost of continuing 
such large deficits which make it hard to pay for education?
    Mr. Greenspan. Well, I have always said before you start 
any fiscal policy, it has got to be balanced in some form or 
another, and that is the reason why I think structure is 
important. I personally, were I a member of this committee, 
would probably be consistently voting for lower taxes and lower 
spending, but there are many more members in this committee 
than any individual, and fortunately what this committee tends 
to reflect, and indeed the House of Representatives more 
generally, is where the American people are, where their trade-
offs are and where their choices are.
    I can tell you that if we cut taxes, we will, other things 
equal, increase economic growth and ultimately the revenue base 
in a way which, without getting into the numbers, general 
growth would be very substantial.
    I think that is a very important thing to do, but I fully 
recognize that there are others who would prefer alternatives, 
where longer-term growth, which is a function in my judgment of 
tax policy, is longer term, and other people would prefer, say, 
shorter-term programs because they have very specific issues to 
deal with. I don't know how you trade that off, except by a 
PAYGO type of discussion.
    Mrs. Capps. You keep coming back to that. Thank you very 
much.
    Chairman Nussle. Mr. Portman.
    Mr. Portman. Thank you, Mr. Chairman.
    I thank you, Chairman Greenspan, for being here. As you 
know, our Federal education funding through this committee has 
actually increased dramatically during Ms. Capps' tenure, 
partly because of her, I suppose; a 49-percent increase over 
the last 3\1/2\ years. So it is not for lack of funding, but it 
is obviously a balance, as you said.
    The deficits that we have heard as record deficits, I tell 
you when I was elected and ran 12 years ago, our deficit was 
4.7 percent of the GDP. This year we hope it will be about 3.6 
percent, maybe a little less, and it is projected to go down. 
The economy you talked about, Chairman Greenspan, we have added 
1.7 new jobs in the last--1.7 million new jobs in the last 
year, as you know. I am looking at your August 10, Federal Open 
Markets committee release where you decided to raise the target 
for Federal funds by 25 basis points. In that, the committee 
said the economy appears poised to resume a stronger pace of 
expansion going forward. That was a few weeks ago. Do you still 
believe that is true?
    Mr. Greenspan. Well, that statement was made at a time when 
the data that we had were for the month of June in a broad 
sense, which were quite weak, and we had early data for July. 
And as a consequence of that, the soft patch which we 
identified appeared to be converting into some pickup in 
economic activity. We had a big increase in automobile sales in 
July. Housing starts came up, as I indicated in my prepared 
remarks. If it weren't for the oil price spike, I would be very 
optimistic about where the economy is going.
    Mr. Portman. Do you still believe, though, that the economy 
is poised for growth?
    Mr. Greenspan. Yes, as I said in my prepared remarks today.
    Mr. Portman. You talk about the BLS data you had, it is 
hopeful. Those of us who don't have access to that information 
I think should in part defer to the Fed, and by your decision a 
few weeks ago and by your statement today, I am encouraged by 
our economic growth.
    Tax cuts, we have heard today that this is a burden on our 
economy, that we need to stop the tax relief. I know you feel 
differently about it, but I guess I would ask you specifically, 
were the tax cuts a good idea and was the timing appropriate?
    Mr. Greenspan. Well, I have suggested that they were a good 
idea. In fact, I particularly thought that making a structural 
change in gradually reducing the double taxation on dividends 
was a very important structural advance, which I think in the 
long run has very important positive aspects for economic 
growth.
    So I couldn't at the time suggest that the timing was going 
to be appropriate for short-term economic change. It turned 
out, I think more by chance than anything else, to be in fact 
very proper timing, but I don't think that economists can 
forecast that closely to use fiscal policy for short-term 
economic stimulus.
    Mr. Portman. We will hear proof of that this afternoon from 
CBO, where they are going to adjust the deficit down $60 
billion for this year because revenues have actually increased 
this year despite the tax relief.
    Thank you, Mr. Chairman.
    Chairman Nussle. Mr. Baird.
    Mr. Baird. Mr. Chairman, I thank the chairman for being 
here.
    Mr. Chairman, we read today in the paper that the GAO has 
apparently indicated that Tom Scully, the former head of CMS, 
should not be receiving his salary, because at the time, he 
instructed a Medicare actuary to not give actuarial information 
to the United States Congress. Specifically, he apparently told 
the actuary that if he told the Congress that the Medicare drug 
bill would cost $530 billion instead of $400 billion, he would 
be fired.
    I put that in the context of the President of the United 
States, who when he was running for office told the American 
people he would put Social Security in a lockbox, the trust 
funds; and, yet, when he talks about cutting the deficit in 
half, we would see, according to CBO numbers, that we would 
borrow not $150 billion from Social Security, as we do now, but 
$256 billion in 2010.
    Secretary Wolfowitz was here right before the Iraq war and 
said to this committee that the notion that the war in Iraq 
would cost $100 billion and would require 100,000 troops was 
nonsense.
    Now, I add those three up, and as we try to plan our 
financial future, if we are borrowing a quarter trillion 
dollars from Social Security when we said we would borrow 
nothing, if Medicare costs $130 billion, as we have been told, 
if the costs of the war are at least double what Secretary 
Wolfowitz said, it seems to me it makes it rather difficult for 
this Congress to pass appropriate policy.
    Do you have any thoughts on that?
    Mr. Greenspan. Not on what you have said, no.
    Mr. Baird. Let me ask you a different question, then.
    We have heard today that the economy went up, and we are 
glad that it did, and it is because of tax cuts. Have you given 
any examination to what would happen or might have happened to 
jobs, growth, et cetera, if instead of tax cuts to the top 1 
percent of income, individuals in this country, we had invested 
in transportation infrastructure? There were legislation 
proposed to put, for example, $40 billion into infrastructure, 
roads, highways, bridges, et cetera. Any thoughts about the 
relative merit in terms of growth stimulation, job creation, et 
cetera, of infrastructure investment vis-a-vis tax cuts?
    Mr. Greenspan. Congressman, those turn out to be very 
difficult judgments to make. You will find that you can get an 
array of economists up here, and you will find you have gotten 
four economists with seven answers. And the reason is that we 
have an exceptionally complex economy, and it is exceptionally 
difficult to trace the effects of a number of these various and 
different initiatives.
    Mr. Baird. Given that, would it be fair to say that we 
cannot merely look at, yes, taxes were cut and the economy 
improved, and say that was the only thing that could have been 
done?
    Mr. Greenspan. That is a fair statement.
    Mr. Baird. That there are other things that could have been 
done that might have stimulated the economy more?
    Mr. Greenspan. I can't deny that.
    Mr. Baird. Thank you, sir. Thank you, chairman.
    Chairman Nussle. Mr. Garrett.
    Mr. Garrett. I will yield.
    Chairman Nussle. Then Mr. McCotter.
    Mr. McCotter. Thank you, Mr. Chairman.
    I want to touch on a couple of points. When we talk about 
the PAYGO system, that would be a statutory remedy to Federal 
spending, would it not?
    Mr. Greenspan. It would.
    Mr. McCotter. And the more stringent it would be for 
Congress to break through it, the happier, you think, the 
markets would be?
    Mr. Greenspan. I would assume so.
    Mr. McCotter. So then would not a constitutional balanced 
budget amendment, which would be even more stringent and more 
difficult for Congress to break through, be better?
    Mr. Greenspan. It depends on a broad question here of what 
one perceives the Constitution should cover, as distinct from 
statutes. I have been on both sides of this issue, and I think 
it has nothing to do with economics. It has more to do with how 
one views our constitutional system.
    Mr. McCotter. I would think it would be more stringent.
    Mr. Greenspan. It certainly would be more stringent. The 
question is, do you want the Constitution to create economic 
policy in that context.
    Mr. McCotter. I think that the Constitution is required 
because you need something greater than the power of Congress 
to break through the statutes that can or cannot pass, to bind 
our hands, to protect us, which would make it more stringent.
    Mr. Greenspan. If you believe that, then I think the answer 
is yes.
    Mr. McCotter. The question then for me is something that 
Representative Thornberry touched on, and I think it is kind of 
lost. It seems to me from every family board room to a 
corporate board room, family living room, when they make 
economic decisions, they try to make them on a rational basis. 
And what we have seen on September 11, and even sooner for 
some, was, we now have to factor in the inherently irrational 
act of terrorism in economic decisions. You said since 
September 11, the country has been resilient, but there is no 
way for anyone to understand when the American public as a 
whole, as an aggregate of these individual decisions, will feel 
comfortable enough factoring that decision into their long-term 
economic projections.
    I ask that because my concern is, we are going to continue 
to see despite ourselves and despite fiscal policy in general, 
there are spits and sputters in the American economy as 
external events and the threat of terrorists continue to 
intercede. It might be one more reason for a company not to 
make a hire, for a family not to make an investment or a 
purchase, and we may see continued sputtering in this economy 
because of that.
    Mr. Greenspan. I wouldn't disagree with what you said. To 
the extent you have these external events occurring in a 
voluntary economy, we are subject to that. And the only thing 
we can do is, one, try to find a way to eliminate the 
initiation of the terrorism, or two, structure an economy which 
is sufficiently flexible to absorb the shocks that those 
terrorist acts create.
    Mr. McCotter. Or both, which is what we are trying to do 
now.
    Chairman Nussle. Mr. Cooper.
    Mr. Cooper. Thank you, Mr. Chairman.
    To simplify this hearing, it seems you have come to us 
today and asked for a reinstatement of the budget rules that we 
lived under quite successfully for some 12 years after 1990. 
And those budget rules expired in 2002, and this Congress let 
them expire.
    The key rule is PAYGO, which you offset by either spending 
increases or tax cuts. And I think essentially what you are 
hearing from this committee today is that even though you are 
in your forceful way asking us for those, this committee is 
letting you walk away empty-handed because the majority of this 
committee has been offered the vote on real PAYGO several times 
and the majority of this committee has refused to endorse it.
    Even though those budget rules worked quite successfully, 
according to your view, for 12 years, we let them lapse in 
2002, and all we need to do is reinstate them. And yet this 
committee is refusing to do so even though you say quite 
clearly in your testimony, it would help our economy to do 
that.
    One of our gentleman friends on the other side is 
suggesting, well, we can't do PAYGO, let's do a constitutional 
amendment, which takes years to pass and implement, when we can 
do PAYGO this month if we wanted to.
    So it is important to highlight in clear, simple terms, you 
are coming asking for PAYGO. The majority of this committee, 
the Republican majority of this committee, is making you walk 
away empty-handed; and I think that is tragic for our economy, 
because we know what to do, we know how to do it, and you are 
recommending it to us, and it has worked well for 12 years. And 
yet, we are not allowing that good policy to be reinstated.
    That is a sad day for this country, when the solution is so 
close to our grasp, but yet the majority of this committee is 
refusing to grasp it.
    You, in very gentle terms, told Mr. Brown that the supply 
side doesn't work. Assuming my colleagues on the other side 
want to continue to believe that tax cuts always pay for 
themselves, there is some offsetting revenue effect, but you 
stated to Mr. Brown that he was mistaken in his view, that they 
always pay for themselves.
    We appreciate the economic reality you bring to this 
committee, but I wish a majority of this committee would give 
you what you came here asking for, which is PAYGO--PAYGO now to 
reinstate those rules that we lived with so successfully from 
1990-2002. Would you care to comment?
    Mr. Greenspan. I prefer not.
    Mr. Cooper. Thank you.
    Chairman Nussle. Mr. Franks.
    Mr. Franks. Thank you, Mr. Chairman.
    Chairman Greenspan, thank you for being here. The last time 
you were here, you made some similar statements related to some 
of the entitlements. We have been on an unsustainable 
trajectory. And those are things that a lot of us have been 
saying for a long time, suggesting that the best way to affect 
that is in the market reforms on the finance side.
    Having said that, I think your erudite voice has been more 
compelling than just some conservative Congressman saying that. 
And I just hope that you continue to say that, because I think 
it may prevent this country from facing a mathematical paradox 
that could be addressed only by nothing short of a political 
cataclysm.
    I would suggest to you that you said something else today 
that is equal in nature, and that is, you said--not to put 
words in your mouth--that this premium that skilled workers had 
over nonskilled workers was largely responsible for the 
differences in living standards in our society. And I believe 
that what you are saying is correct.
    I believe that we economically segregate children at a very 
early age. I used to be the director of the governor's office 
for children in our State, and I am more convinced of that as 
we go along. And if you believe that, and I am convinced that 
you do, do you think that market forces and parental choice are 
reasonable elements to employ to try to correct that economical 
segregation? And if so, do you have other thoughts as well?
    Mr. Greenspan. I think it is essential. First of all, let 
us remember that the real concern that we should have is that 
recent studies about the status of our schoolchildren relative 
to their counterparts in the rest of the world are not very 
favorable.
    We start, for example, with studies showing that fourth 
graders in math and science do reasonably well relative to the 
rest of the world. By the 12th grade, they are all the way 
close to the bottom. Obviously, it can't be the children, the 
same children who existed in the fourth grade; we are doing 
something to them in the process, which other countries are not 
doing. And we ought to find out what it is that we are doing 
wrong and they are doing right.
    Because unless we bring a significant proportion of those 
who are now ending up as lesser skilled in our society and, 
hence, creating a surplus of the lesser skilled relative to the 
demand in a highly technologically based economy, unless we 
reduce that level of surplus by moving them up to the skilled 
level and thereby raise the wage rates at the lesser-skilled 
level and lower them at the upper-skilled level, we are going 
to be confronted with what I think in a democratic society is a 
very difficult problem.
    Mr. Franks. Thank you, Mr. Chairman.
    Chairman Nussle. Mr. Emanuel.
    Mr. Emanuel. Thank you Mr. Chairman. I also have a question 
on skill sets, but two things I want to say beforehand.
    One is, a number of colleagues have cited economic 
statistics. What they left out is, we have 44 million Americans 
without health insurance, which--33 million Americans work 
without health care; 4 million more Americans live in poverty 
today than did in 2001; wages and median income for families 
have been frozen or declined in the last 2 years; and health 
care costs and college costs, at the same time, have gone up by 
a third in the very year that the Congress is supposed to 
reauthorize the Higher Education Act.
    All the economic statistics cited by the other side pointed 
to the board room, and none of the economic statistics they 
cited ever pointed to anybody's pay stub. If you went down to 
somebody's pay stub, income is flat and costs are up and that 
has been the impact of the economy.
    In 1994, on January 31, you said the actions taken last 
year to reduce the Federal budget deficit have been 
instrumental in creating the basis for declining inflation 
expectations and easing pressures on long-term interest rates. 
On February 20, 1996, you said the deficit reduction in 
President Clinton's 1993 economic plan was an unquestioned 
factor in contributing to the improvement in economic activity 
that occurred thereafter. On January 4, 2000, you said, my 
colleagues and I have been very appreciative of your--President 
Clinton's--support of the Fed over the years. Your commitment 
to fiscal discipline which, as you know and indeed have 
indicated, has been instrumental in achieving, one, of the past 
few weeks, as you point out, will be the longest economic 
expansion in the Nation's history.
    If fiscal discipline was good then, and you cited it over 9 
years as good, I would assume it is good now. And if fiscal 
discipline was good for economic growth and economic activity, 
and if the chemistry in which we used to create that condition 
was good then, then the opposite of what we have today, which 
are higher deficits, in fact are not good for long-term 
interest rates and long-term economic growth.
    I don't want to give you another question, but if the basis 
of your points over 6 years about deficit reduction being good 
for the economy was good then, it would be good now.
    You and I at another point discussed the skill gap as 
really underscoring the income gap that we have here, and it is 
really the gap that exists in our society in that we can't 
sustain as a society that kind of gap. Have you looked at maybe 
making the first 2 years of college universal and free, like we 
made 4 years universal and free at the beginning of the 
Industrial Revolution; that we would do something different 
about higher education for the new economy and the new stage we 
are in, in the same way we did for high school education at the 
early stages of the Industrial Revolution? Has the Fed ever 
looked at that from a policy analysis?
    Mr. Greenspan. We haven't, and the reason is, you are 
getting into the details of our educational system, which I--
and I presume most of my colleagues--don't have the expertise 
to make judgments about.
    But clearly community colleges, one can judge, have been 
growing very rapidly. In fact, they are the most rapidly 
growing aspect of our educational system. And that is saying 
that the markets are working because they are in the forefront 
of what I would call lifetime education. People are 
continuously going back to community colleges. I think the 
average age of full-time students is in the high 20s, and what 
that tells me is that there is a huge demand out there for 
these new types of educational skills.
    And it is that type of focus that is needed in a system 
such as ours in which the job requirements are continuously 
churning and in which the turnover of jobs is extraordinary. 
Remember, we hire a million people a week in our economy and 
separate roughly the same number. And this particular process 
means that unless you move the people on the wrong side of that 
million, the ones who are losing their jobs, and find ways to 
move up their skill levels, we are not going to address this 
problem in an appropriate way, in my judgment.
    Mr. Emanuel. Thank you, Mr. Chairman.
    Chairman Nussle. I have three members and if we do this in 
3 minutes, we will get you out of here. Mr. Lewis.
    Mr. Lewis. Thank you, Mr. Chairman. I will be very brief.
    Thank you, Mr. Chairman, for being here today. You have 
been very patient. I want to know, do you favor this proposal 
that we should be allowed to privatize part of Social Security? 
I know there were others in the administration--where do you 
come down?
    Mr. Greenspan. I have been in favor of finding some way to 
get away from a defined benefit type of program, which is 
essentially what Social Security is. But it is a very complex 
issue, Congressman, and I don't know if I can do it justice in 
this very short period of time. But it is a major issue which 
the Congress needs to address.
    Mr. Lewis. Do you think or have any feeling where we engage 
in these unbelievable tax cuts that we are taking from the 
well-being of Social Security and maybe Medicare?
    Mr. Greenspan. I didn't get the question.
    Mr. Lewis. I don't want to use the word ``stealing,'' but 
do you think we are taking from the strength, the welfare of 
Social Security and Medicare?
    Mr. Greenspan. The purpose of the tax cuts is essentially 
to increase the growth rate of the economy and the overall 
depth of the economy, which over the longer run would mean that 
if it is working properly that it would be easier to finance 
Social Security benefits. So I don't think that you can call it 
``stealing.''
    I think what you can say is, it is a different point of 
view as to the way our society and economy will function. And 
consequently, I think everybody is in favor of higher benefits 
for retirees and higher medical expenditures as is feasible. 
And the only question, I think, that is involved here is what 
is the most feasible way to address that question.
    And there are disputes and there will be dispute amongst 
economists on these issues as there will be in the Congress. 
And there is no shortcut to concluding other than debating the 
issues and each Member of the Congress coming to a conclusion.
    Mr. Lewis. In your statement, you imply that we don't have 
much time and time is not on our side in dealing with the 
question of health care and also retirement.
    Mr. Greenspan. We do have several years. It is not 
something that needs to be addressed tomorrow or the day after. 
But unless we start the process fairly soon, the inexorable 
turn of the clock is going to find us up against a very 
significant problem without having prepared our budgetary 
system for it.
    Chairman Nussle. Mr. Scott.
    Mr. Scott. Thank you, Mr. Chairman.
    And, Mr. Greenspan, I appreciate your patience. I had a 
couple of charts I wanted to--on this one. This is a time 
period going back to Herbert Hoover, the number of--the job 
growth since Herbert Hoover, a time period that includes Pearl 
Harbor, World War II, the Korean War, Vietnam, the cold war, 
hostages in Iran, Persian Gulf War--does that reflect the 
number of jobs created by each administration showing that this 
administration is the worst since Herbert Hoover?
    Mr. Greenspan. Yes. I would also think that if you put up a 
productivity chart of a similar nature, you would find that 
this has been the period amongst all of those different, 
varying Presidential regimes that has the highest rate of 
growth in productivity; and yet the trouble, unfortunately, is 
that one is causing the other. And that is what I mentioned 
earlier with respect to the productivity issue and the 
shallowness of the recession, which has been the major 
contributor to job loss.
    Mr. Scott. Without the explanation, this does show the job 
loss?
    Mr. Greenspan. That is an accurate chart.
    Mr. Scott. You are familiar with this chart that shows the 
deficit. The green in the middle is the Clinton administration 
when we had PAYGO. Does this chart represent a $650 billion 
deterioration in the budget? Is that chart accurate, to the 
best of your knowledge?
    Mr. Greenspan. As far as I can judge.
    Mr. Scott. Next is the present value of the Social Security 
and Medicare deficits and the present value of this 
administration's tax cuts. It shows that the administration's 
tax cuts, the present value of those is significantly more than 
the Social Security shortfall and the Medicare shortfall 
combined. Does that reflect the choice we had? We can cut taxes 
and take care of Medicare and Social Security?
    Mr. Greenspan. I can't confirm those numbers. I don't know 
if they are accurate or not, but just reiterate my of earlier 
statements, what has been missing in this budgetary process for 
a number of years since September of 2002 is the necessity to 
make choices.
    Mr. Scott. And the final chart shows that we have in the 
last few years increased new debt by $638 billion, the foreign 
portion purchased by foreigners, approximately $729 billion. 
Can you say what the foreign policy and national security 
implications are of a substantial portion of our debt being 
owned by foreigners?
    Mr. Greenspan. It is an interesting question, which we at 
the Federal Reserve have given considerable thought to, because 
clearly we, at the end of the day, are responsible for the 
American financial system. We are the lender of last resort in 
that sense.
    It turns out that a very large part of the foreign 
purchases--is that the Federal debt numbers you have up there?
    Mr. Scott. Yes.
    Mr. Greenspan. Federal debt. It is very substantially--I 
just can't see some of the numbers up there--it is very 
substantially very short-term instruments, and these 
instruments compete in a very huge market in the private 
sector. So that in response to the implication that you are 
trying to raise, namely that were foreigners, either for 
purposes malicious or otherwise, withdrawing from purchasing 
substantial amounts, would that have a major impact on our 
interest rates and on our economy and the financial structure 
generally, our conclusion is ``no.'' And the reason for the 
``no'' is that such a substantial part of the debt competes 
with vast amounts of private instruments.
    Does it have some effect? Yes, it does have some effect, 
but it is not the type of effect which raises significant 
problems with respect to our foreign posture.
    Mr. Scott. Thank you, Mr. Chairman.
    Chairman Nussle. Mr. Davis.
    Mr. Davis. Thank you for letting all the members--and, 
Chairman Greenspan, thank you for your indulgence. You talked a 
fair amount in this hearing about the impact on the psychology 
of the market if some of the tax cuts were suspended and how 
that could impact investor confidence and a number of other 
things. Let me focus on a slightly different problem.
    Let us say that the institutional moment arrived when 
Congress decided to make draconian cuts in entitlement 
programs--Social Security, Medicare, for example. If that 
institutional moment arrived, a concern of mine is that that 
would also have a profound impact on the psychology of the 
economy in this country. Significant numbers of seniors would 
feel that their investments, or what they perceive as their 
investments, were imperiled, or that programs that could 
provide a lifeline to them were somehow imperiled.
    Can you comment on that for a moment? And then I have one 
last question I want to ask you.
    Mr. Greenspan. It is hard to know what the psychological 
effect is, but I agree there could be some response, which is 
the reason why I think you have to address these problems in a 
gradualist way and not find yourself up against a crisis which 
requires an immediate and draconian fiscal policy.
    We are talking about 2015 as sort of a critical year when 
these things begin to mushroom. I should think that if we can 
anticipate out that far, which I believe we can, we can 
certainly reorder our priorities in a manner with people who, 
instead of finding at the last minute that all of a sudden they 
had programmed into their retirement incomes and expenditures 
funds which they will not get--that that, I think, is 
extraordinarily unfair, and we have to act well in advance.
    Mr. Davis. I agree with you. And let me slip in another 
observation as my time and your time run out.
    You made the point accurately before in other hearings that 
there is a fundamental problem, or the risk of a fundamental 
problem, when it comes to inequity in our society; and you have 
made the accurate observation that the perception of inequity 
can sometimes be devastating in its own right.
    I would end with this observation: If Congress at some 
point makes draconian cuts to entitlement programs, when you 
combine that with the tax burden in this country rising on 
middle-income people as it proportionately falls on upper-
income people, and when you combine one other factor, the 
impact on income assistance programs, if we cut those, my 
concern--if I could close out--my concern is that we could put 
ourselves in very much the bind that you have described to this 
committee and others, that we could make choices that don't 
appear to be equitable to the American people, and we could 
make choices that are inequitable on their face.
    And if you could react to that, I would appreciate it.
    Mr. Greenspan. I think a democratic society functions only 
if people believe that it is a fair and equitable society. 
Those which have had problems occur to a large extent because 
there is a deep-seated belief that there is an underlying lack 
of fairness.
    I think the success of our society over the generations has 
been, there is a sense of opportunity and freedom, which has 
been crucial to the development of a sense of values which are 
held virtually by every American. Indeed, the Bill of Rights, 
for example, is essentially, I would say agreed to possibly by 
not 100 percent, but close to 100 percent of our population.
    Mr. Davis. You said it better than Senator Kerry says it 
some days.
    Chairman Nussle. It is tempting.
    Mr. Chairman, we congratulate you for re-upping for another 
term. We look forward to working with you and for your 
generosity of time to come before this committee.
    Unless you have anything else to say before this 
committee--if you do, I would be happy to hear it. Otherwise, 
we would stand adjourned.
    Mr. Greenspan. Thank you very much.
    [Whereupon, at 12:55 p.m., the committee was adjourned.]

                                  
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