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MONETARY POLICY AND THE

STATE OF THE ECONOMY

HEARING

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

JULY 21, 2004

Printed for the use of the Committee on Financial Services

Serial No. 108–104

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

DOUG BEREUTER, Nebraska 

RICHARD H. BAKER, Louisiana 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

DOUG OSE, California 

JUDY BIGGERT, Illinois 

MARK GREEN, Wisconsin 

PATRICK J. TOOMEY, Pennsylvania 

CHRISTOPHER SHAYS, Connecticut 

JOHN B. SHADEGG, Arizona 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

MELISSA A. HART, Pennsylvania 

SHELLEY MOORE CAPITO, West Virginia 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

TIM MURPHY, Pennsylvania 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

BARNEY FRANK, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

JAY INSLEE, Washington 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

KEN LUCAS, Kentucky 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

MIKE ROSS, Arkansas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

RAHM EMANUEL, Illinois 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

CHRIS BELL, Texas 

BERNARD SANDERS, Vermont

ROBERT U. FOSTER, III, Staff Director 

(III)

C O N T E N T S 

Page 

Hearing held on: 

July 21, 2004 ..................................................................................................... 1

Appendix: 

July 21, 2004 ..................................................................................................... 35

WITNESSES 

WEDNESDAY, JULY 21, 2004

Greenspan, Hon. Alan, Chairman, Board of Governors of the Federal Reserve 

System ................................................................................................................... 4

APPENDIX 

Prepared statements: 

Oxley, Hon. Michael G. .................................................................................... 36

Gillmor, Hon. Paul E. ....................................................................................... 37

King, Hon. Peter T. .......................................................................................... 38

Greenspan, Hon. Alan ...................................................................................... 40

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Greenspan, Hon. Alan: 

Monetary Policy Report to the Congress ........................................................ 50

Written response to questions from Hon. Sue W. Kelly ................................ 76

Written response to questions from Hon. Doug Ose ...................................... 80

(1)

MONETARY POLICY AND THE 

STATE OF THE ECONOMY 

Wednesday, July 21, 2004

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The committee met, pursuant to call, at 10:06 a.m., in Room 

2128, Rayburn House Office Building, Hon. Michael G. Oxley 

[chairman of the committee] Presiding. 

Present: Representatives Leach, Baker, Bachus, Castle, Royce, 

Lucas of Oklahoma, Kelly, Paul, Gillmor, Miller of California, Hart, 

Capito, Tiberi, Kennedy, Hensarling, Murphy, Brown-Waite, Barrett, Harris, Frank, Waters, Sanders, Maloney, Velazquez, Ackerman, Sherman, Meeks, Lee, Moore, Capuano, Ford, Lucas of Kentucky, Crowley, Clay, Israel, McCarthy, Matheson, Miller of North 

Carolina, Emanuel, Scott, Davis and Bell. 

The CHAIRMAN. The committee will come to order. 

This morning we are pleased to welcome back the chairman of 

the Federal Reserve, the Honorable Alan Greenspan. 

Good morning, Mr. Chairman. We welcome you once again to the 

Financial Services Committee. Thank you for taking the time to 

discuss monetary policy and the economy and topics of interest to 

every Member of this committee and certainly to all Americans. 

Chairman Greenspan, I first want to congratulate you on your 

reappointment and reconfirmation. I know I speak for most Americans and Members of this committee when I say we are happy to 

have your steady hand on the monetary policy tiller. I know you 

would probably like to spend a little more time on your golf game, 

and it definitely needs it, but we appreciate your dedication and 

service to the Fed. 

Mr. Chairman, when the uptick in energy prices this spring 

brought with it a spike in inflation, many imagined that your welladvertised fist tightening of monetary policy would be more aggressive than the quarter-point move that the Open Market Committee 

made at the end of June. 

All spring you said the tightening would be as swift and strong 

as necessary, and the second half of your statement was that the 

tightening would be gradual. As usual, you were correct on both 

counts. 

More important, Mr. Chairman, is an issue you raised at your 

last appearance before this committee, and that is how we prepare 

our workers for the jobs of the 21st Century. You made the point 

that the best way to push up wages over time was to make sure 

that our workers are educated and ready to fill the new higher-skill 

2

jobs this vibrant economy creates as lower-skill, lower-wage jobs 

cycle offshore. 

I know that that continues to be a strong interest for you, and 

rightly so. Creating jobs is a goal we all share. We all like to see 

lower unemployment than the current 5.6 percent rate and know 

that lower unemployment also means higher wages. The economy 

has averaged creating 250,000 jobs a month for this year, and I 

think the new jobs figure for June of 112,000 was an aberration. 

I think that job creation will pick up, and that the average employment level for this year will be at or higher than the average 

for 2000 of 131.8 million. It is already at 131.4 million, even with 

that June low. 

Mr. Chairman, we look forward to your testimony and to the discussion today. 

With that, I yield to the distinguished ranking Member, the gentleman from Massachusetts. 

[The prepared statement of Hon. Michael G. Oxley can be found 

on page 36 in the appendix.] 

Mr. FRANK. Thank you, Mr. Chairman. 

Mr. Chairman, on April 21st, you gave very powerful testimony 

to the Joint Economic Committee in which you noted that the good 

news was great increases in productivity, which were continuing, 

and you have been proven right against some of the skeptics who 

thought that the productivity increases in the late 1990s were transitory and that we would slip back to the normal, what had been 

the lower normal average. 

But you also noted, and I was pleased that you did that, that virtually all of the gains from increased productivity had gone to 

pretax profits of nonfinancial corporate entities. And I would just 

say as an aside, if they are doing well pretax corporate, pretax 

profits these days, they are doing even better with after-tax profits. 

You noted that virtually none of the increase has gone to people 

who are getting paid wages. And as a result, the ratio in the economy, wages paid, compensation paid and wages to pretax corporate 

profits was really quite low by normal standards. 

In the report today, you note that there has been some increase 

in employment costs as we measure it. But I also note—and I appreciate your being careful to point this out in the statement of the 

report—that what we have seen is an increase in employer contributions to health plans and an increase in employer contributions to pensions. But wage payments to workers, nonsupervisory 

workers, have, in fact, lagged inflation, and that is a serious social 

and economic problem. 

I appreciate the fact that, unlike many others, you have noted 

that inequality is in and of itself a problem, and I thank you for 

doing that. There are some who try to ignore it. There are people 

who probably argue that, as long as the absolute level is fine, then 

inequality is not a problem. But we know in economics that the absolute level that is acceptable is in fact engined by what is available and what others have and what that does to prices, et cetera. 

So this is the dilemma that we have. We have a situation in 

which we have begun to grow, although there has been some slowing down. We hope it is temporary, and we hope that the next 

months will be better. But it has not been as fairly distributed as 

3

we would like it to be, and even by historical standards, it has 

lagged. 

That seems to me to have two problems. First of all is a political 

problem. You note in your statement, in the report, that protectionist sentiment is increasing. It will continue to increase. We are 

not India, but there is a lesson in India, when a government that 

had done very well in the macroeconomics area through its freemarket policies unexpectedly lost an election, in part because they 

boasted with their slogan of India Shining about their success. And 

a lot of Indian people said, ‘‘Shine this, because, in effect, where 

is my piece of it?′′ There was an article in the New York Times a while ago on the 

front page about how democracy in Latin America is no longer as 

universally or widely supported as we would like it to be because 

people there have seen no connection between democracy—that 

they have been told—and some improvement in their lives. 

In America, you run the risk that there are people who increasingly believe people who work hard for a living, that they have no 

real skin in the game of economic advance. Now, you and I don’t 

agree with that, but it is a factor that you have to take into account. And, indeed, to the extent that we continue to have great 

progress in the macro economy but real wages don’t go up—and I 

suppose, workers should be grateful that the boss is now paying 

more for health care—but the worker is not any better off. The boss 

is paying more for the same health care and real wages are lagging, and so he and she understandably feel worse off. 

There is also an economic problem. At some point, insecurity, instability, lack of liquidity is going to cause some problems for people, and so that is something that I think we need to address. 

Last point is this: I want to say that I know you have gotten 

some pressure to increase interest rates more quickly through the 

Federal Reserve Open Market Committee. I hope you will continue 

to resist it. I would just remind people, we had this argument to 

some extent in the late 1990s. I admired the fact then that you 

were willing to defy what had sort of been conventional wisdom 

that, if unemployment got below 5.5 percent, it would be highly inflationary, you would get a lot of pressure from a lot of places, editorial pages and elsewhere, to raise interest rates simply because 

a lower unemployment rate would be inherently inflationary. It got 

to 3.9 percent without inflation. You argued, I think correctly, that 

productivity was making this possible. 

You are again under some pressure from people to raise rates 

more quickly. I would just urge people to think about the implications that unemployment is still 5.6 percent. We had gotten it down 

to 3.9. But your report says that, at the end of 2005, you expect 

unemployment to be between 5 and 5.25 percent. As much as 1.3 

percent higher, 20 percent higher in terms of where they are, 25 

percent than it was, this is not a time to slow down the macro 

economy. 

The people in the business community and elsewhere who focus 

on the fact that, well, maybe macro growth is too high and we 

begin to see a little bit of inflation, for them to urge on you measures that would slow things down at a time when unemployment 

is still much higher than it should be at 5.6 percent, when the perVerDate 0ct 09 2002 11:23 Dec 01, 2004 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 G:\DOCS\96942.TXT FIN1 PsN: MICAH
4

centage of Americans working is low, because part of what we have 

seen is a lower percentage of adult Americans working, when real 

wages have lagged, when real wages have been eroded, to argue at 

this point that you should slow down the macro economy is to exacerbate a situation that I think is already socially and potentially 

economically dangerous for the U.S. 

So I urge you not to accept those kinds of pressures, but also, I 

hope you will join with us in thinking of ways—you have documented the problem. You have documented the problem of increasing inequality very well. It does not appear to me to be getting significantly better on its own, and I would hope you would join with 

us in figuring out ways to deal with it. 

Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman’s time has expired. 

We now turn to the distinguished chairman of the Federal Reserve, Dr. Alan Greenspan. 

Again, we welcome you, Mr. Chairman, and good to have you 

back. 

STATEMENT OF HON. ALAN GREENSPAN, CHAIRMAN OF THE 

FEDERAL RESERVE BOARD OF GOVERNORS 

Mr. GREENSPAN. Thank you very much, Mr. Chairman. Thank 

you very much. I will excerpt from my prepared remarks and request that the full text be included for the record. 

The CHAIRMAN. Without objection. 

Mr. GREENSPAN. Thank you. 

Mr. Chairman and Members of the committee, I am pleased as 

always to be here today to present the Federal Reserve’s monetary 

report to the Congress. Economic developments in the United 

States have generally been quite favorable in 2004, lending increasing support to the view that the expansion is self-sustaining. 

Not only is economic activity quickened, but the expansion has become more broadbased and has produced notable gains in employment. 

The evidenced strength in demand that underlies this improved 

performance doubtless has been a fact contributing to the rise in 

inflation this year. But inflation also seems to have been boosted 

by transitory factors such as the surge in energy prices. Those 

higher prices, by eroding households’ disposable income, have accounted for at least some of the observed softness in consumer 

spending of late, a softness which should prove short-lived. 

When I testified before this committee in February, many of the 

signs of the step-up in economic activity were already evident. Capital spending had increased markedly in the second half of last 

year, no doubt spurred by significantly improved profits, a low cost 

of capital and the investment tax incentives enacted in 2002 and 

enhanced in 2003. 

Renewed strength in capital spending carried over into the first 

half of 2004. Orders in shipments of nondefense capital goods have 

been on the rise, and the backlogs of unfilled orders for new equipment continue to build. 

A key element of the expansion that was still lacking in February, however, was evidence that businesses were willing to ramp 

up hiring to meet the stepped-up pace of sales and production. 

5

Businesses’ ability to boost output without adding appreciably to 

their workforces likely resulted from a backlog of unexploited capabilities for enhanced productivity with minimal capital investment, 

which was an apparent outgrowth of the capital goods boom of the 

1990s. 

Indeed, over much of the previous 3 years, managers had seemed 

to pursue every avenue to avoid new hiring, despite rising business 

sales. Their hesitancy to assume risks and expand unemployment 

was accentuated and extended by the corporate accounting and 

governance scandals that surfaced in the aftermath of the decline 

in stock prices and also, of course, by the environment of heightened geopolitical tensions. 

Even now, following the pattern of recent quarters, corporate investment in fixed capital and inventories apparently continues to 

fall short of cash flow. The protracted nature of this shortfall is unprecedented over the past 3 decades. Moreover, the proportion of 

temporary hires relative to total employment continues to rise, underscoring that business caution remains a feature of the economic 

landscape. 

That said, there have been much clearer indications over recent 

months that conditions in the labor market are improving. Most 

notably, gains in private non-formed payroll unemployment have 

averaged about $200,000 per month over the past 6 months, up 

sharply from the pace of roughly $60,000 per month registered over 

the fourth quarter of 2003. 

The improvement in labor market conditions will doubtless have 

important follow-on effects for household spending. Expanding employment should provide a lift to disposable personal income, adding to the support stemming from cuts in personal income taxes 

over the past year. In addition, the low interest rates of recent 

years have allowed many households to lower the burdens of their 

financial obligations. 

Although mortgage rates are up from recent lows, they remain 

quite attractive from a long-term perspective and are providing 

solid support to home sales. Despite the softness of recent retail 

sales, the combination of higher current and anticipated future income, strength in balance sheets and still-low interest rates bodes 

well for consumer spending. 

Consumer prices, excluding food and energy, so-called core prices, 

have been rising more rapidly this year than in 2003. For example, 

a 12-month change in the core personal consumption expenditures 

price index stood at.8 percent in December of last year and climbed 

to 1.6 percent by May of this year. 

Core inflation, of course, has been elevated by the higher index 

of energy prices and business costs and by increases in non-oil import prices that reflect past dollar depreciation and the surge in 

global prices for primary commodities. 

But the acceleration of core prices has been augmented by a 

marked rise in profit margins, even excluding domestic energy corporations. Businesses are limited in the degree to which they can 

raise margins by raising prices. An increase in margins should affect, mainly, the level of prices, associated with any given level of 

unit costs but, by itself, should not prompt a sustained pickup in 

the rate of inflation going forward. 

6

Indeed, some leveling or downward pressure on profit margins 

may already be in train, owing to a pickup in unit labor costs. Although advances in productivity are continuing at a rate above the 

long-term average, they have slowed from the extraordinary pace 

of last summer and are now running below increases in hourly 

compensation. 

The available information suggests that hourly compensation has 

been increasing at an annual rate of about 4.5 percent in the first 

half of this year. To be sure, the increases in average hourly earnings of nonsupervisory workers have been subdued in recent 

months and barely budged in June. But other compensation has accelerated this year, reflecting continued sizeable increases in health 

insurance costs, a sharp increase in business contributions to pension funds and an apparently more robust rate of growth of hourly 

earnings of supervisory workers. 

The larger wage gains for supervisory workers together with anecdotal reports of growing skill shortages are consistent with earlier evidence of rising wage premiums for skilled workers, relative 

to less-skilled workers. 

As always, considerable uncertainties remain about the pace of 

the expansion and the path of inflation. Some of those uncertainties, especially ones associated with potential terrorism, both here 

and abroad, are difficult to quantify. Such possibilities have threatened the balance of world supply and demand in oil markets in recent months, especially as demand has risen with the pace of world 

economic growth. Yet aside from energy, markets exhibit little evidence of heightened perceptions of risk. Credit spreads remain low, 

and market-based indicators of inflation expectations, after rising 

earlier this year, have receded. 

With growth of aggregate demand looking more sustainable and 

with employment expanding broadly, the considerable monetary accommodation put in place starting in 2001 is becoming increasingly 

unnecessary. If economic developments are such that monetary policy neutrality can be restored at a measured pace, as the FOMC, 

expects a relatively smooth adjustment of businesses and households to a more typical level of interest rates seems likely. 

Even if economic developments dictate that the stance of policy 

must be adjusted in a less gradual manner to ensure price stability, our economy appears to have prepared itself for a more dynamic adjustment of interest rates. Of course, considerably more 

uncertainty and, hence, risk surrounds the behavior of the economy 

with a more rapid tightening of monetary policy than is the case 

when tightening is more measured. In either scenario, individual 

instances of financial strain cannot be ruled out. 

In sum, financial markets, along with households and businesses 

seem to be reasonably well prepared to cope with a transition to 

a more neutral stance of monetary policy. Some risks necessarily 

attend this transition, but they are outweighed, in our judgment, 

by those that would be associated with maintaining the existing degree of monetary policy accommodation in the current environment. 

Although many factors may affect inflation in the short run, inflation in the long run, it is important to remind ourselves, is a 

monetary phenomenon. As we attempt to assess and manage these 

7

risks, we need, as always, to be prepared for the unexpected and 

to respond promptly and flexibly as situations warrant. 

But although our actions need to be flexible, our objectives are 

not. For 25 years, the Federal Reserve has worked to reestablish 

price stability on a sustained basis. An environment of price stability allows households and businesses to make decisions that best 

promote the longer-term growth of our economy and, with it, our 

Nation’s continuing prosperity. 

Thank you very much, Mr. Chairman, and I look forward to your 

questions. 

[The prepared statement of Hon. Alan Greenspan can be found 

on page 40 in the appendix.] 

The CHAIRMAN. Thank you, Chairman Greenspan for appearing 

before this committee. 

We have had this discussion before, and it is one I would like to 

return to, and that is the resilience of our American economy. Considering the fact that we have gone through some remarkable, 

markedly difficult times over the past 3 years, with the recession, 

the tragedy of 9/11, the following need to fight the war on terror 

with increased defense spending and the like, the business scandals that you referred to in your statement, I have said before, I 

would doubt there is any country or any economy in the world that 

could have sustained those kinds of body blows and yet, 3 years 

later, be in as strong a position as we are economically. 

Were we just lucky? Or what is it about our system, monetary 

fiscal policy, our overall system, meaning the private sector and the 

Government and the like, what is it about the American economy 

and the American attitude that would allow us to make that kind 

of recovery in a relatively short period of time? 

Mr. GREENSPAN. Mr. Chairman, you are raising what probably is 

the most important issue that has been on the policy agenda for 

the last number of years. 

We were quite startled and, I must say, pleased, obviously, that 

this economy was able to absorb the very significant shocks to 

which you allude without contracting as, in most everybody’s judgment, it almost surely would have, say, had they happened 20 or 

30 years ago. 

It is quite apparent that the most important element in this very 

evident increasing resiliency of our system is the associated flexibility in both financial markets and in the economy generally. I 

tried to address this issue in a number of presentations a few years 

ago, and it looked to me at the time as though the causes were several. 

First and quite important was the bipartisan trend towards deregulation which started in the 1970s and has indeed gotten to the 

point where the notion of economic reform as a concept in the 

world is usually related to the questions of increasing deregulation 

and privatization. In a sense, the process that we have been going 

through is now increasingly being replicated elsewhere in the 

world. 

In addition, obviously, there has been a significant increase in 

technological capabilities, especially information technologies, 

which enable businesses to respond in a far more expeditious way 

and respond to imbalances in demand and supply, and that has 

8

prevented significant problems from emerging before they were addressed. 

And the broad areas of increasing globalization, as we have lowered our tariff barriers and broadened our interface with the rest 

of the world, have also been a major factor here in creating flexibility, because we can interact with our trading partners in the 

way in which shocks are absorbed by all of us and contained rather 

readily. 

So the general proposition that I think we have learned from 

this, and, indeed, we have learned because it was not something 

that one would have put high on the agenda 3 or 4 decades ago, 

is that flexibility, anything that improves flexibility in the financial 

system or the economic system, is in and of itself a very important 

advance to enable the economy to grow and prosper. 

The CHAIRMAN. Would you, in terms of fiscal policy—I know that 

you mentioned in your remarks at least twice the tax cuts and 

their affect on rejuvenating the economy. Was that, the fiscal aspect and the monetary aspect working together, was that a major 

factor also in getting us where we are today? 

Mr. GREENSPAN. I think the tax cuts were effective in stemming 

the extent of the weakness of the economy several years ago. And, 

indeed, I have mentioned it, in fact, in my prepared remarks. There 

is no question in my mind that, somewhat to my surprise, the timing of the tax cuts came at a point when increasing effective demand to absorb the adjustments coming from the sharp stock market and capital goods decline of 2000 were necessary. So, in that 

regard, I would say yes. 

Clearly, there was significant improvement in tax policy over the 

years, but I think we may have reached the peak in that regard 

in the 1986 act, and I cannot argue strenuously that we have made 

all that much improvement since then. Indeed, I think we have had 

a certain backup in a number of things that we have done. But, 

overall, I would say that looking forward, fiscal policy is going to 

become a very critical issue on the agenda for macroeconomic policy. 

The CHAIRMAN. If I might add, I know that you have said that 

you enjoyed these sessions partly from the feedback that you get 

from Members all over the country, anecdotal instances and so 

forth. 

For instance, I had a discussion with a trucking industry executive in my hometown a couple years ago, and he was last year’s 

chairman of the American Trucking Association. He was all over 

the country, and I asked him how the transportation industry in 

general was doing, particularly the trucking industry. And he said 

they were doing very, very well, which is usually a pretty good harbinger of things to come, and I asked him specifically about his 

own company. He said he could hire 20 drivers without any problem. He could expand that much. 

His problem, in his case, was finding qualified drivers, and I 

think it does point out perhaps the conundrum we have of trying 

to fit job skills and background and education with those jobs. I 

don’t want to get a discussion going now. I just thought I would 

pass that on in that regard. 

I am over my time and recognize Mr. Frank. 

9

Mr. FRANK. Thank you. 

Mr. Chairman, I was actually fascinated by your response on the 

tax question because, I must say, it sounded to me like you were 

giving a pretty good demand-side justification for the tax cuts, but 

you were ambivalent at best about the supply-side justification. 

And I would say, to the extent that you have said we have reached 

good tax policy in 1986, I am inclined to agree. I just hope we are 

not about to make that even worse. 

So I think there is general agreement in the country that demand-side stimulus works, and we did, as you say, manage to get 

the timing right. I think there were other ways to provide that demand stimulus, but I am struck by your being more enthusiastic 

about the demand-side aspect than the other. 

But there is another aspect of the tax cuts that you address in 

the monetary report. Let me read to you page 9: ‘‘The deficit in the 

Federal unified budget has continued to widen. In large part, the 

rise in the deficit is attributable to further rapid increase in spending on defense and other programs and the loss of revenues resulting from the tax legislation enacted in recent years.’’

You go on to say on the next page: ‘‘As of the first quarter of 

2004, national saving measured net of estimated depreciation was 

still equal to just about 2 and a half percent of GDP compared with 

a recent high of 6 and a half percent in 1998. If not reversed over 

the longer haul, such low levels of national saving could eventually 

impinge on private capital formation and thus slow the rise of living standards.’’

You do say in here that the major reason for this drop, substantial drop, in national saving from 6.5 percent in 1998 to 2.5 percent 

today is the swing in the Federal budget from surplus to deficit. 

So, what you are saying is that, the tax cuts had some positive 

near-term demand-side impact. We also have to deal with the fact 

they contributed substantially, according to the report—not alone, 

but substantially—to an increasing deficit which has, in fact, been 

a major reason for a substantial drop in the savings rate. 

You note that, if this is not reversed over the longer haul, it 

could impinge on private capital formation and slow the rise of living standards. I agree with you. What do we do about it? 

Mr. GREENSPAN. Well, first of all, let me just say that, as I have 

indicated before this committee before, I do think that the partial 

elimination of the double taxation of dividends was an important 

long-term structural supply-side change, so I would like to amend 

your remarks in that context. 

The issue in the short run, with respect to the fiscal policy, is unlikely to be a problem, largely because increasing revenues——

Mr. FRANK. That is why I asked about the long run. Let me ask 

the next question—I only have 5 minutes, Mr. Chairman. You have 

sketched this out as a long-range problem, that the tax cuts had 

a short-term stimulative effect with a little bit of supply-side capital gains, and they are having a longer-term potentially negative 

effect. 

What I am asking, is there some way we can deal with these 

negative effects without doing the long term, so I am interested in 

the long haul. 

10

Mr. GREENSPAN. Well, I think there is a much broader question, 

which comes down to fiscal policy at this stage, and it relates to 

the fact that, in budgets put together 30, 40 years ago, we had very 

few programs which extended beyond a few years. True, we would 

have, for example, an aircraft program which would be a 3- or 4-

year program. We would have some agricultural programs. But 

long-term commitments, either on the tax side or on the expenditure side, were rare. 

This has turned around 180 degrees, and what we are missing 

is a process which essentially can address a long-term outlook 

where the ability to forecast, either revenues or mostly expenditures on key programs, is clearly quite poor. 

This means, in my judgment, that you need a mechanism which 

adjusts programs as you move forward. Therefore, I would say not 

only do we need PAYGO, which is an important, in my judgment, 

critical issue in budget programming, as well as discretionary 

spending caps, but I think we also have to begin to think of how 

we nudge programs back to where we thought we were pushing 

them in legislation, either through triggers or sunset legislation or 

other——

Mr. FRANK. But you ignore the tax side, and that disappoints me, 

Mr. Chairman——

Mr. GREENSPAN. Well, I——

Mr. FRANK. Let me, just to summarize, you thought from the tax 

policy, with the exception of the capital gains, we were better off 

in 1986 than we have been since in terms of the structure of the 

tax policy. You also said that the tax cuts that we had, while they 

had a demand-side impact when we were in trouble, but we don’t 

need that now, that they have a long-term—they have been a significant contributor to the deficit, the swing from negative—from 

positive to negative in the reduction in the savings rate. 

What about the question of tax policy going forward? We are 

about to talk about another major tax cut, beginning with the 

world trade decision but going much beyond that. Have you nothing to say about tax policy? 

Mr. GREENSPAN. Well, I will say this, as I have said it to you before, I think it was a mistake not to extend PAYGO both for tax 

and expenditure programs and let it expire in September 2002 and 

that I, myself, as you know, prefer a lower tax burden in general 

because I think it assists economic growth and increases the revenue base. But, ultimately, that determination is the Congress’s. 

The question that I think is necessary to focus on is to put a 

structure out of where the Congress can make those decisions, 

where I don’t think you can at this point. 

Mr. FRANK. Well, I will call the gentleman, I thank you. 

Mr. Chairman, I appreciate this rare burst of deference to us on 

the tax issues. You haven’t been reticent about making recommendations that are within our constitutional jurisdiction, and 

you shouldn’t be. So, when you somehow decide it would be inappropriate for you to recommend tax levels, I am a little bit puzzled. 

Mr. GREENSPAN. I am just essentially saying, I have stated before, and I haven’t changed my view, I prefer lower taxes. 

Mr. FRANK. Even if it makes the deficit worse——

Mr. GREENSPAN. I am sorry. 

11

Mr. FRANK. But even if it makes the deficit worse and has this 

long-term negative effect on national savings——

Mr. GREENSPAN. Well, then you get a trade-off. I would prefer 

lower spending, lower taxes and lower deficits. 

Mr. FRANK. Thank you. 

I yield to the Chair. 

The CHAIRMAN. The gentleman from Iowa, Mr. Leach. 

Mr. LEACH. Thank you, Mr. Chairman. 

In your statement today and the last month, you have dwelled 

on a macroeconomics discussion I have never heard discussed by 

the Fed, and that is that there is greater cash flow in the economy, 

at least on the business side of the economy, than on investment. 

You described this as a risk-averse corporate America today. 

Could you meat that out a bit, and then you have indicated in 

prior speeches that one aspect of this is that it looks like the economy coming through this year looks like it is going to be pretty 

steady growth. But the fact that there is less investment than 

might be the case probably implies that, coming into next year, we 

are going to have a sustained economic growth, and that is probably pretty good for whatever administration takes place, whether 

it be the lower-tax administration of today or perhaps a higher-tax 

administration of tomorrow, but that the basic underpinning of the 

economy looks pretty good going into next year. 

Is that a valid observation or a valid conjecture on your part? 

Mr. GREENSPAN. Well, Congressman, you raise an interesting aspect to the issue with respect to the obvious reluctance on the part 

of the business community to be aggressively expansionary at this 

stage of the business cycle, as they have typically been in the past. 

It has usually been advance hiring, advance capital investment, 

and notions of restructuring companies, to be prepared for increasing market shares, in other words, all in anticipation of significant 

improvement. 

The fact that, for the first time in 3 decades, we are getting in 

an expansion period, a very significant shortfall in the level of capital investment plus inventory accumulation relative to cash availability says that we are far from behaving the way we typically did. 

As you point out, the reasons that I presume are the cause of it 

are a number of caution-creating factors. 

But to the extent that these are capable of being assuaged, what 

it probably will be doing is, rather than creating a large surge in 

economic activity, to gradually stretch out economic activity if, indeed, a degree of confidence gradually returns. And that would be 

one of the reasons why a gradual expansion, which we now seem 

to be experiencing, does bode well for next year. 

Mr. LEACH. Let me raise one final question, and it is an issue 

of priorities and advice to Congress. For three or four Congresses 

now this committee has passed a bill on the orderly unwinding of 

contracts, a netting bill. And it has been tied up with another committee, the Committee on Judiciary, and bankruptcy provisions, 

which are quite controversial. 

Would you advise the Congress to go ahead with the netting provision unrelated to the bankruptcy bill in order to get this underpinning of financial stability out of the way in a legal sense? 

12

Mr. GREENSPAN. I most certainly would, Congressman. We have 

been concerned for quite a while that the failure to include a number of these newer instruments into netting legality, if I may put 

it that way, puts us at risk in the event of some untoward event 

which would create significant financial problems. 

I know of no resistance in the Congress to netting per se, and, 

of course, as you point out, the reason why the bill has not been 

moved forward is it has been tied to the bankruptcy bill, with its 

other problems. It strikes me that we are taking undue risk and 

really unnecessary risk in allowing that tie to exist rather than 

breaking the bill out from the bankruptcy bill and I would presume 

passing it very readily in both Houses of the Congress. 

Mr. LEACH. Thank you very much, Mr. Chairman. 

The CHAIRMAN. I would just say, ‘‘hear, hear,’’ to that, Mr. Chairman. That is a great idea. 

The gentlewoman from New York, Mrs. Maloney. 

Mrs. MALONEY. Welcome here today, Mr. Greenspan. 

Your arguments today provide support for the argument that the 

economy is recovering from the recession of the last few years, but 

that may not be the picture from the point of view of the American 

worker. 

The latest figures for job growth show only a small increase, 

much less than would be expected if, as you suggest, the economy 

is growing significantly. There are 1.2 million fewer jobs now than 

there were at the official start of the recession in March of 2001. 

This is the worst job deficit since the Great Depression. The unemployment rate is 5.6 percent nationally. This is a 1.3 percent higher 

than when the recession officially began. In New York, in my 

hometown, it is now at 7.4 percent, up almost half of 1 percent 

from last month. 

If we look at jobs as most persons do, as a measure of our economy, things have been getting generally worse over the span of the 

last 3.5 years. We still have not made up for the jobs lost in this 

Administration. If you include workers who are working part-time 

because they cannot find a full-time job and workers who want to 

work but are not in the labor force, the unemployment rate is 

roughly 9.6 percent. This is perhaps the worst figure of all, is the 

number of long-term unemployed, 22 percent of unemployed workers, 1.8 million people, have been jobless over half a year. This is 

a record setter, the longest period of such high long-term unemployment since this statistic was first collected over 50 years ago. 

I would like to hear about who has benefitted from the improved 

figures that you cite. It is certainly not the workers. Real weekly 

earnings have fallen by 1.4 percent over the past year. Wages are 

not keeping up with inflation. We are setting records on low wages, 

too. The share of aggregate wages and salaries and national income 

is the lowest it has been in over 50 years, and the data shows that 

private—profits in businesses have soared while average wages 

have not. Aggregate wages and benefits of workers have grown 

only 8 percent while business profits have increased 62 percent and 

after-tax profits 83 percent. 

This might be very good news for shareholders, but for workers, 

it is pretty depressing. 

13

My question is, why has recent economic growth not translated 

into robust job growth and wages keeping pace with profits? 

Mr. GREENSPAN. There are basically two reasons why the level 

of total employment has lagged in this recovery relative to previous 

recoveries. 

The first is that we have had a historic rise in productivity, 

which means that even though the economy was rising, that most 

of the rise was supplied by increasing efficiencies rather than new 

employees. 

Secondly, the extent of the recession in 2001 was the shallowest 

in post-World War II history. As a consequence of that, you didn’t 

get the rebound that we historically have had. 

As I point out in my remarks and, indeed, as I think I said in 

February as Congressman Frank had indicated, that all of the increase in productivity, which has been a factor in the last year or 

so in the acceleration in economic growth, has been reflected in increasing profit margins rather than an acceleration of real wages. 

Nonetheless, real wages have been rising, but, as I pointed out 

in, my prepared remarks, that there has been a disproportionate 

rise in the 20 percent of payrolls, which were supervisory workers, 

relative to nonsupervisory. 

Indeed, as I point out, this is consistent with other evidence that 

suggests that the difference in skill training for skilled workers 

versus lesser-skilled, continues to widen. It is showing up in a distribution of income which is reflected in the long-term rise in average hourly pay of supervisory workers relative to the average hourly earnings numbers to which you were alluding. 

This, as I have argued in the past, I think is a major problem 

of matching skills of workers to the technological base of the economy, which I believe is an education issue and requires that we address that as quickly and broadly as we can. 

Mrs. MALONEY. Thanks, Mr. Chairman. 

The CHAIRMAN. The gentlewoman’s time has expired. 

The gentleman from Louisiana, Mr. Baker. 

Mr. BAKER. Thank you, Mr. Chairman. 

Chairman Greenspan, I have noted that historians often critique 

the general’s battle plan after the hostilities have ceased, but historians notably remain awfully quiet during the heat of the battle. 

With that observation having been made, when you testified before the committee in February, many signs of the stepup in the 

economy were already evident. Renewed strength in capital spending apparent in 2003 carried over into the first half of 2004. 

Going on with your testimony, there have been much clearer indications over recent months that conditions in the labor market 

are improving. Most important, most notably gains in private nonfarm payroll employment averaged about $200,000 per month over 

the past 6 months, up sharply from the pace of the fourth quarter 

of 2003. 

You go on, the combination of higher current and anticipated future income, strength in balance sheets and still-low interest rates 

bode well for consumer spending. Profits of nonfinancial corporations rebounded to 12 percent in the first quarter of 2004, a pace 

of advance not experienced since 1983, as consolidated unit costs 

14

for nonfinancial corporate business sector actually declined during 

the same period. 

In general, financial intermediaries are profitable, well capitalized and appear to be well positioned to manage in a rising wage 

environment. In short, financial markets along with households 

and businesses seem to be reasonably well prepared to cope with 

the transition to a more neutral stance of monetary policy. 

I consider this to be not just good news but excellent news. I 

think the generals at the Federal Reserve have conducted a battle 

plan that has shown to be highly successful moving us in a stable 

and methodical direction. For that, I just want to publicly commend 

you and those at the Fed for your leadership in this manner. 

I wish to, however, move to an era—or area of examination pursuant to the adoption of Sarbanes-Oxley, which was generated in 

an environment where many of us shared great disappointment in 

our free enterprise professionalism, where it was apparent that 

there were those in positions of responsibility that did not meet either their professional or fiduciary responsibilities. 

To that end, after the implementation of a higher disclosure 

standard, higher accountability, independence of audit committees, 

there still remains one area not addressed by the Congress, which 

I am reluctant to bring up but which I would welcome your 

thoughts, and that is the tone at the top. 

I recently reviewed a report of diversified financial institutions 

where, on average, the CEO was compensated at a basis of $12 

million a year, and the average value of stock held in the institution they managed, not net worth, was reported to be $800 million. 

Now, that in itself is not troubling to me, because I believe, as a 

free enterpriser, innovative people should be awarded in accord 

with their success. 

What was troubling about this report is these average levels of 

compensation appeared to have no profitability or losses of the corporation being governed. Compensation in itself does not indicate 

a problem, but it does indicate what the tone of management is 

with regard to their fiduciary obligations to shareholders. 

In his appearance before the committee just last month, Chairman McDonough, chairman of the Public Company Accounting 

Oversight Board, indicated that compensation committees should 

act, if not boards should act and shareholders should act, but if, 

failing that, the Congress may at some time find it appropriate to 

act in this arena, not necessary to regulate or establish some formula by which one is compensated, but at least to provide additional notice, earlier awareness by shareholders of plans to be 

taken by boards. 

In fact, the gentleman from Alabama, Congressman Terry Everett has recently submitted legislation to me which he is contemplating introducing relative to prior notice with regard to pension 

plan adjustments which may be adopted by a board in a public operating company. I think this is just a first step in a very long discussion about how we incent CEOs, CFOs and managers at the 

very highest levels to invest for the long term, to not be so concerned about beating the street every 90 days, to in fact bill value 

for shareholders and not be so concerned about the value of shares 

15

they own but the value of the corporation they are charged with 

leading. 

I don’t have a specific question to pose this morning, but merely 

wanted to have on the record my concerns about these matters in 

the context of our overall long-term economic fortunes and would 

ask and request the Fed’s counsel and advice as we move forward 

in this very difficult area as to whether any action might be justifiable, whether examination over the course of the coming months is 

warranted or any direction which you or the Board may choose to 

advance in this arena. And I yield back the balance of my time. 

Mr. GREENSPAN. To the extent that we have expertise in that 

area and, in some areas, we do and, some, we do not, we will be 

glad to make available to you what it is we have. 

But fundamentally, these are value judgments as to how you 

want corporate governance to behave, and the shareholders still 

own the corporation, and it is their money that is being employed 

for purposes of CEO and general executive compensation. And if 

the Government gets too heavily involved in that transaction, I am 

fearful that, in an endeavor to improve corporate governance, we 

may in fact go in the wrong direction. 

Mr. BAKER. Often, mere examination is very helpful. 

Thank you. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentleman from New York, Mr. Meeks. 

Mr. MEEKS. Thank you, Mr. Chairman. 

Let me do this first, just follow up on Mr. Frank, when he talked 

about tax policy. For example, some people are born on the top side 

of the mountain, and some people are born on the rough side of the 

mountain. I happened to grow up on the rough side of the mountain, and I had to climb up. 

When you look at the tax policies that we are talking about, 

sometimes, it benefits just 2 percent of America and doesn’t consider individuals who have grown up on the rough side of the 

mountain, You know, without hope and opportunity. I would not be 

here if it were not for public education, public housing and public—

and some sort of health care that my parents had. 

When you talk about the tax policies we put forth, I never hear 

the considerations taking place in regards to that, so we don’t have 

to worry about countries, as the report indicated, in South America 

who no longer want to be part of a democracy. 

That being said, I would like some time, not today, you know, 

when we talk about the tax policy, the effect that it may have on 

individuals who are on the rough side of the mountain and may 

need a hand up. 

Let me ask these questions, I will just try to ask three questions, 

different subject matters, real quick because I know that time expires real fast, just so we can get some answers to them. 

The first question is whether or not a comparative advantage 

still holds true for the American economy. Because, you know, one 

of the biggest issues that we are talking about now is outsourcing 

and traditional economic daily reports, free trade based upon the 

concept of comparative advantage. 

We thought that the service jobs, the technological jobs would 

stay here in America. We are now finding that they are going overVerDate 0ct 09 2002 11:23 Dec 01, 2004 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 G:\DOCS\96942.TXT FIN1 PsN: MICAH
16

sees or to individual countries where there are highly educated but 

less-expensive workers. 

So my first question is, do you believe that we need to rethink 

our ideas about free trade in light of what might be diminishing 

comparative advantage and technology and education in the United 

States? That is number one. 

Then, I want to switch to just the question, in regard to what is 

taking place in the Senate Committee, with Richard Shelby, who 

is planning to introduce legislation that would create a stand-alone 

regulator for the GSEs that would be completely separate from 

Treasury and HUD and that the new regulator would have the authority over mission, goals, products and risk-based capital. 

I want to get your thoughts on such a proposal, particularly in 

light of the fact that the Federal Reserve has moved to strip 

Fannie Mae and Freddie Mac and other government-sponsored enterprises of their ability to obtain daily interest-free loans from the 

Fed. 

Lastly, if we get a chance to, on another topic that has been very 

much before this committee. I know that you are a bank regulator, 

but I wanted to ask you a question about the securities industries, 

because both John Reed, as interim chairman of the New York 

Stock Exchange, and now John Thane, as CEO, are making various 

changes to their structure, particularly in separation of regulatory 

structure, from running the securities auction. 

Nevertheless, there are some who will say that the era of selfregulation is over. I want to know whether or not you believe that 

self-regulation should end and be replaced by direct regulation, and 

what do you think about the trade-through rule? Should it end or 

be expanded? 

Mr. GREENSPAN. Well, I will try to answer those fairly quickly. 

Each one is a 20-minute lecture, as you well know. 

I would merely repeat on the first question of free trade, I think 

the United States has immeasurably gained from the opening up 

of markets in the post-World War II period. And we, more than 

anybody, have gained by the tremendous rise in trade throughout 

the last half century. 

I think were we to start pulling our horns in any way, because 

we are fearful of competition, which we seem to be handling rather 

well, I think we will find at the end of the day that it will diminish 

our growth and standards of living, and we will likely find that a 

number of consequences which we hadn’t expected would create a 

far more negative view of the way the world is working than we 

would like. 

So I would emphasize, as I did to the Chairman, that the advantages of globalization have been profound for the United States, 

and I hope we carry them forward. We do have problems with the 

distribution of income, which I have addressed with you previously. 

But that is a different issue and does not relate to the question of 

whether we have free trade or not. 

With respect to the GSE regulator issue, I have not commented, 

you know, nor have any of my colleagues on the specific structure 

or the form of the regulator. In our testimony, I have argued the 

necessity of increasing the share of home mortgages purchased by 

the GSEs which are securitized rather than kept in portfolios at—

17

we at the Fed perceive—a significant subsidized rate. But we 

haven’t thought through any of the issues with respect to where 

the regulator is located and what he does. With respect to the socalled overdrafts that the Federal Reserve essentially has been 

changing, what happened was that initiallly we perceived that, as 

a matter of convenience, it was quite helpful to treat GSEs differently from other private corporations in various different things, 

specifically the payment principal and interest to the banks. 

What occurred as a consequence of our varying from how we 

handle other private corporations, was a huge increase in what we 

call daylight overdrafts, which are very large, intraday lending. 

And what we chose is that, as these drafts got very large and these 

institutions got very large and the amounts got very large, was to 

effectively handle these issues of payments exactly the way all private organizations do; we would be working in that direction, and 

I think it is very much to the advantage of the financial system as 

a whole. But that in and of itself has got nothing to do with the 

regulator question in any sense. 

And with regard to your final question, I think self-regulation is 

an extraordinarily important issue—I would be more general. Private-sector generation, essentially counter-party regulation or selfregulation, is a very important element in the regulatory structure 

generally. And I trust that we, in our endeavor to get the proper 

balance between Federal, State, and private regulation, keep in 

mind our purpose is to get the optimum functioning of our particular financial and, business organizations as well. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentleman from California, Mr. Royce. 

Mr. ROYCE. Thank you, Mr. Chairman. 

Chairman Greenspan, you said you are very optimistic about the 

economic outlook for the country. But at the same time, you said 

business caution remains a feature of the economic landscape. And 

I wonder what you think the sources of that caution are and what 

would end that caution? Is that caution merely a protracted convalescence from the bursting of the bubble and the aftermath of 

that? Or has the regulatory environment inadvertently inspired 

hesitancy on the part of business investment? And, perhaps, are 

there some other factors? 

You know, we hear from executives and from economists warning 

about the litigation risk in America today. Whether it is from some 

State Attorney General or from an ambitious plaintiff lawyer, there 

is that factor. But whatever it is, we know one thing: To my knowledge, there is only one European firm that has listed its stock in 

the United States this year. So whether it is litigation costs and 

fear of that or concern about the cost of Section 404 audits or the 

regulatory costs, for some reason, capital that once flooded into our 

capital markets is hesitant from overseas. And at the same time, 

you cite this business caution here domestically. And I was wondering if you would give us, in your view, the sources that generate 

that. 

Mr. GREENSPAN. Congressman, I think we know that the caution 

exists because we can measure it, the extent of how they behave. 

What causes that obviously has got to be conjecture, because we 

are trying to delve into the psyche of individual decision-makers. 

18

I think that there is no question that the aftermath of the bursting 

of the bubble and the corporate scandals still linger and induce a 

sense of unwillingness to take the types of risk that businesses had 

invariably taken in the past. And that was reflected in the fact 

that, as I indicated earlier, capital expenditures tend to generate 

to significantly exceed cash flow in the recovering stage of the business cycle with a very substantial implicit rise in corporate debt, 

which, of course, we are not having at this particular stage. 

To the extent that there is a fear of making the mistakes, it gets 

down to some degree of being unsettled, as indeed I suspect they 

should be, at seeing the type of corporate behavior which nobody 

believed was consonant with an American capitalist system. And 

that has undoubtedly had an effect on its aftermath. 

I think that the issue of potential terrorism is latent. It is there. 

I have no way of making a judgment as to how significant it is. It 

is very difficult to find any evidence outside of the long-term futures markets in crude oil, which presumably reflect some degree 

of world instability in supply. But if you look at the United States’ 

financial system with all of its various spreads and relationships, 

trying to measure this type of risk, it is very hard to find. 

So it is something which we don’t really know all that much 

about. We observe it. We get the same sort of response when we 

speak to corporate executives that you do. There is an issue of litigation risk in here, but there has always been litigation risk. But 

when it is tied up in the question of corporate behavior and responsibilities, it clearly is inducing a higher level of caution than probably existed in the past. 

Mr. ROYCE. Mr. Chairman, if I have time for one other question. 

Chairman Greenspan, in preparing for your visit here, I read an 

economic research note from a very respected economist in which 

he called the Federal Reserve, in his view, the world’s biggest 

hedge fund. And his rationale for making that claim is that the Fed 

has encouraged the financial markets to participate, in his view, in 

the carry trade where one can borrow cheaply on the short end of 

the yield curve and invest those borrowings in a longer-dated security. So, according to this economist, the Fed encouraged the carry 

trade in 1993 when they took the Fed funds down to where it 

equaled the rate of inflation. And the current period is cited as another era, in his view, of the carry trade, since the Fed funds rate 

is negative or below the rate of inflation. 

The risk cited in this paper of his is that these Fed-encouraged 

carry trades can encourage artificial bubbles in asset prices. This 

claim is applied to the housing bubble today. But, you know, the 

equity bubble in the 1990s could also be explained from that perspective. And I just wanted to get your thoughts on this critique 

of Fed policy. 

Mr. GREENSPAN. Well, Congressman, so long as the normal tendency is for long-term rates to be higher than short-term rates, 

there will always be some carry trade. And, indeed, one can even 

argue that commercial banks are largely carry trade organizations. 

But as I point out in my prepared remarks, the awareness currently of the risks in taking extended positions in the carry trade 

markets is clearly being unwound. And our judgment is that, while 

19

there is some and there will always be some, it has not been a 

problem. 

Certainly, if you have an extended period and you lock in these 

differences, you can create great distortions. But when we move 

rates down, as we have on several different occasions, we are 

acutely aware that, in that process, we will increase the carry 

trade. 

The more important question is, what is the significance if we do 

that? And if we perceive that that was creating bubbles or distortions, obviously, we wouldn’t do that. We are well aware of what 

happens when we move, but we try to adjust our policies in such 

a manner as to significantly minimize any secondary consequences 

of such actions. And, indeed, I think the recent history suggests 

that, so far at least, we are successful in doing that. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentleman from North Carolina, Mr. Miller. 

Mr. MILLER OF NORTH CAROLINA. Thank you. 

Good morning, Mr. Chairman. In your testimony earlier today, 

you said the increases in average hourly earnings of nonsupervisory workers had been subdued in recent months and barely 

budged in June. 

I have had some difficulty actually finding some job-to-job comparisons. I have seen industry-to-industry comparisons, that the industries that are gaining jobs pay 21 percent less than the industries that are losing jobs. The manufacturing sector has been losing. The service sector has been gaining. They are also less likely 

to pay health care benefits and have retirement benefits. And, of 

course, you know that we have had significant manufacturing job 

loss throughout the country and, in my own State of North Carolina, more than almost 160,000 manufacturing jobs lost in the last 

four years. 

The figures I have show that the jobs created in North Carolina 

have paid about $4,000 less than the jobs that we have lost and 

were about 10 percent less likely to have health care. 

Mr. GREENSPAN. That is in your State, not in the country, you 

are saying? 

Mr. MILLER OF NORTH CAROLINA. In my State. 

What are the job comparisons? How much are the jobs that we 

are losing in the last 4 years? How much have they paid? How 

much of the jobs have we gained paid? And what is also the total 

compensation, including health care and retirement benefits? 

Mr. GREENSPAN. Well, we have tried to address that question 

and tried to analyze the aggregate structure of employment relative to the question as to whether the job increases over the last 

year, for example, have been in industries which have below-average wages. 

Mr. MILLER OF NORTH CAROLINA. Right. 

Mr. GREENSPAN. And what we have found is that that is true but 

to a very small extent. 

Conversely, when we have done the same type of calculation, not 

by industry but by occupation, we get the other result. Namely, 

that there seems to be an upgrading in the types of jobs when 

looked at from an occupational point of view. 

20

Now, both of these data of changes are very small. But even if 

you want to look at them as though they are meaningful, it is not 

inconsistent and it may, in fact, be the case that, within industries, 

you are getting a slight shift towards industries with lower average 

earnings but, at the same time, an upgrading within the industries 

with respect to occupations. 

But I think the bottom line of all of this is that we have not been 

able to find a significantly meaningful change in the quality of the 

jobs being produced relative to the quality of jobs being lost for the 

Nation as a whole over the past year. It is conceivable that, if we 

had far greater detailed data, we might unearth something significant. But, so far, our statisticians using the full details that the 

Bureau of Labor Statistics publishes both with respect to occupation and with respect to industry, there is very little evidence of a 

particular bias one way or the other. 

Mr. MILLER OF NORTH CAROLINA. It sounds like that fairly long 

answer said, the reason I can’t find jobs or job comparisons is that 

they really aren’t there but that you would agree with me, that, if 

North Carolina jobs—new jobs—are paying $4,000 less than the 

manufacturing jobs that we have lost, that is pretty subdued. 

Mr. GREENSPAN. Well, I am saying that, when you look at it from 

the point of view of the economy as a whole, it balances out from, 

there are good and bad. 

Remember, there is a more interesting question which surely is 

what this issue is about which we cannot make a judgment on. 

Most of the data that everybody quotes are the net change in jobs 

from one period to the next. The type of question that you should 

really be interested in, and I think we all are, is if we had gross 

figures. In other words, the total number of not net jobs but gross 

additional additions to jobs and what they pay relative to the jobs 

that were lost and what they pay. The Bureau of Labor Statistics 

does not have data at that level of detail. And until we did have 

data of that sort, we really can’t answer this question in any meaningful sense. 

The CHAIRMAN. The gentleman’s time has expired. 

Mr. MILLER OF NORTH CAROLINA. Well, not quite. 

The CHAIRMAN. The gentleman from Texas, Mr. Paul. 

Mr. PAUL. Thank you, Mr. Chairman. 

Good morning, Chairman Greenspan. Yesterday’s testimony was 

received in the press as you painting a pretty rosy picture of the 

economy. You have already remarked a second time on one statement you made that I would like to comment on again, because I 

think my colleagues should pay close attention to it: And that is 

your statement that corporate investment in fixed capital and inventory has apparently continued to fall short. The protracted nature of this shortfall is unprecedented over the past 3 decades. The 

proportion of temporary hires relative to total employment continues to rise. 

I think that is very, very significant and probably should be 

taken in the context of the rosy picture of the economy. 

Also, at the end of your statement, you make a comment about 

inflation in the long run, which I entirely agree with. And that is, 

it is important to remind ourselves, you say, that inflation in the 

long run is a monetary phenomenon. However, you sort of duck the 

21

issue on the short run, that various factors affect inflation in the 

short run, and yet I think monetary policy is pretty important in 

the short run. And our temptation here and too often with central 

banks is to measure inflation only by Government measurement of 

CPI, where the free-market economists, from Ricardo to Mises to 

the current free-market economists, argue the case that, once a 

central bank interferes with interest rates and lowers them below 

the real rate, that investors and others do make mistakes, such as 

overinvestment and now investment over-capacity, excessive debt, 

and speculation. And, therefore, I think that we should concentrate 

more on the short run effects of monetary policy 

Over the last several months, you had been hit by two groups. 

One half is saying that you are raising rates too fast, and the other 

half says you are way too slow. And of course it begs the question 

of whether or not you are really right on target. But from a freemarket perspective, one would have to argue that you can’t know 

and you don’t know, and only the market can decide the proper 

money supply and only the market can decide the right interest 

rates. Otherwise, we invite these many problems that we face. 

As the economy slowed in 2000, 2001, of course, there was an aggressive approach by inflating and lowering the interest rates to an 

unprecedented level of 1 percent. But lo and behold, when we look 

back at this, we find out that manufacturing really hasn’t recovered, savings hasn’t recovered, the housing bubble continues, the 

current account deficit is way out of whack, continuing to grow as 

our foreign debt grew, and consumer debt is rising as well as Government debt. 

So it looks like this 1 percent really hasn’t done much good other 

than prevent the deflating of the bubble, which means that, yes, we 

have had a temporary victory, but we have delayed the inevitable, 

the pain and suffering that must always come after the distortion 

occurs from a period of time of inflating. 

So my question to you is, how unique do you think this period 

of time is that we live in and the job that you have? To me, it is 

not surprising that half the people think you are too early and the 

other half think you are too late on raising rates. But since fiat 

money has never survived for long periods of time in all of history, 

is it possible that the funnel of tasks that you face today is a historic event, possibly the beginning of the end of the fiat system 

that replaced Brenton Woods 33 years ago? And since there is no 

evidence that fiat money works on the long run, is there any possibility that you would entertain that, quote, ‘‘We may have to address the subject of overall monetary policy not only domestically 

but internationally in order to restore real growth’’? 

Mr. GREENSPAN. Well, Congressman, you are raising the more 

fundamental question as to being on a commodity standard or another standard. And this issue has been debated, as you know as 

well as I, extensively for a significant period of time. 

Once you decide that a commodity standard such as the gold 

standard is, for whatever reasons, not acceptable in a society and 

you go to a fiat currency, then the question is automatically, unless 

you have Government endeavoring to determine the supply of the 

currency, it is very difficult to create what effectively the gold 

standard did. 

22

I think you will find, as I have indicated to you before, that most 

effective central banks in this fiat money period tend to be successful largely because we tend to replicate which would probably have 

occurred under a commodity standard in general. 

I have stated in the past that I have always thought that fiat 

currencies by their nature are inflationary. I was taken back by observing the fact that, from the early 1990s forward, Japan demonstrated that fact not to be a broad universal principle. And what 

I have begun to realize is that, because we tend to replicate a good 

deal of what a commodity standard would do, we are not getting 

the long-term inflationary consequences of fiat money. I will tell 

you, I am surprised by that fact. But it is, as best I can judge, a 

fact. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentleman from Alabama, Mr. Davis. 

Mr. DAVIS. Good morning, Mr. Chairman. 

One of the challenges that I think we deal with as lawmakers 

and policymakers is that, frankly, a lot of the public and the constituency that we serve doesn’t necessarily understand a lot of the 

economic policymaking process in this Country, that they don’t 

have a good understanding of the facts beyond a lot of the political 

rhetoric. And I think that that is a bipartisan concern that we 

have, that there is this kind of nebular fog that exists around making sound economic decisions as policymakers. 

And another related concern that we have is, sometimes, some 

of our own officials contribute to that confusion by the way they 

talk about these issues. 

So with that as the backdrop, Mr. Chairman, let me ask you 

about some very specific observations that President Bush has 

made, and let me ask you to comment on their accuracy. And these 

are taken from one particular speech the President gave on April 

24, 2003, but I will represent to you that they are a pretty consistent rendition of other comments he has made on the issue of 

deficits. 

Quoting the President, ‘‘now you hear talk about deficits. And I 

am concerned about deficits. But this Nation has got a deficit because we have been through a war, and I told the American people, 

we would spend what is necessary to win the war,’’ close quote. 

I am going to ask you to comment on the accuracy of that assertion which, as I read it from the President, is that the proximate 

cause of the deficit was the spending on the war, by which he presumably means Afghanistan and Iraq. 

And then I want you to comment on this observation by the 

President: ‘‘And the best way to deal with the deficit is to address 

the two things that affect the deficit. First, increase revenues to 

the Treasury through economic growth and vitality.’’

That observation, as I understand it, is the President’s comment 

that the best strategy for getting the deficit down is to raise revenues through growth and vitality, presumably the kind of growth 

that he would argue comes from his tax cuts. 

I want you to comment on the accuracy of that statement, that 

the best glide path to bringing the deficit down is to increase revenues. 

23

Third observation from the President, remember, he mentioned 

two things that affect the deficit. And he said: ‘‘And, second, make 

sure Congress does not overspend your money. Make sure it focuses on the things that we need and doesn’t spend beyond the 

things that we need.’’

I take that to be the President’s observation that discretionary 

spending by Congress is the next most significant factor in the rising deficit. And I am presuming that he means to distinguish discretionary spending from an entitlement-based spending such as 

Medicare and Social Security. That also strikes me as a controversial proposition. 

So to make sure you understand my question, can you comment 

on the accuracy of all three of those observations by the President, 

first of all, the primary cause of the deficit—or the cause of the deficit, spending on the war. Second of all, that the best glide path for 

reducing the deficit is raising revenues through tax. And, third of 

all, that it is discretionary spending and not entitlement base 

spending. And if you believe that the President is inaccurate in all 

of those observations, does that concern you that the chief executive has gotten it so fundamentally wrong when it comes to describing the state of our economy? 

Mr. GREENSPAN. Well, Congressman, I am not going to comment 

on the specific views of the President. I happen to agree with him. 

Mr. DAVIS. Can you comment on the accuracy? 

Mr. GREENSPAN. Well, the point of the issue is the question of 

the extent to which military spending is part of the increase in 

spending and therefore the deficit is a numerical issue. And, I 

mean, there is no question that the deficit would be smaller if we 

did not have military spending. 

Mr. DAVIS. Do you agree that that is the primary reason that we 

have the debt? 

Mr. GREENSPAN. I frankly don’t know. I think that clearly part 

of the deficit—well, it depends on where you start. If you start say 

several years ago and come from here, a goodly part has been the 

loss of the very high revenues we were getting from the capital 

gains taxes and from the exercise of stock options. And the elimination of those revenues were a significant factor in the rise in the 

deficit, as well as declining revenues as a consequence of the economy going down. 

Mr. DAVIS. Would the tax reductions also be a factor on those declining revenues? 

Mr. GREENSPAN. Yes. But I don’t have the numbers directly in 

front of me. There are all sorts of reasons. But over the broader 

term, of the major issues in the debates on fiscal policy is the question of the extent to which certain tax policies, by increasing the 

efficiency and the growth of the economy, will increase the revenue 

base. 

And I have always been one of those who believe that that is a 

very important issue and policy. There are others who believe that 

the mechanisms work in different ways. There is not, as best I can 

judge, complete agreement about a number of these issues. And 

when you say, in certain senses, there is fact. Certain of the statements you raised are questioning of fact. Others are a question of 

interpretation of the way the economy functions. 

24

And I would say I would agree with a goodly part of the general 

thrust of what the President has been saying with respect to that, 

but not necessarily with the specific numbers, because I had not actually done the arithmetic that would be required to make that 

judgment. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentlelady from Pennsylvania, Ms. Hart. 

Ms. HART. Thank you, Mr. Chairman. 

And thank you for spending some time with us today, Chairman 

Greenspan. 

I want to go back to some comments you made briefly and alluded to a little bit about the skills of the American workers, many 

of the workers who are currently unemployed, not matching the 

needs of our growing technological base and that, further, you stated, that, analyzed by occupation, job growth has been kind of higher in some of the higher-wage areas, which I am assuming means 

the ones that require more skill. And you have talked about improving our education system in the past. 

The President has a plan to move forward and improve elementary and secondary schools as we have been working on but, recently, announced an initiative to also improve community colleges’ 

ability to train workers and retrain them as technology improves. 

Do you believe that community colleges should be involved in this 

process? Is that the level of training that you are talking about, 

number one, and is it possible that a large number of the workers 

who are currently unemployed are just not employable in the new 

jobs or the new economy, that we need to take those workers and 

that those are the ones that are causing some of the more stubborn 

unemployment? 

Mr. GREENSPAN. Well, Congresswoman, I have observed in the 

past that one of the major growth industries in this Country is 

community colleges. And the reason for that is that they have recognized that this rapidly changing structure of skill requirements 

in the labor force requires that education not end at some point in 

one’s life, but it is an ongoing issue. Because, with the skill level 

requirements changing so continuously, unless you are continuously updating your capabilities, you are going to fall behind the 

curve, and indeed that has been a major problem. 

The community colleges have seen this particular niche requirement in our society, and they have obviously addressed it successfully. If they hadn’t, the enrollments would not be surging to the 

extent to which they are. And in that regard, I find it difficult to 

believe that we could address the educational issues with respect 

to the question of maintaining the skills of the American workforce 

without recognizing that there are several different types of levels 

of knowledge that we need. First, obviously, is basic primary education, because if you don’t have that, if you can’t read well or can’t 

do arithmetic well, you are stymied in moving forward. But, then, 

there is the very broad abstraction of being able to learn, which is 

what our school systems are trying to do. And beyond that is the 

application to specific types of skills and jobs, which is what the 

curricula of the community colleges tend to be. And people find, I 

gather, that what they gain from those community colleges is very 

significantly worth the cost. 

25

Ms. HART. Okay. That having been said, do you see, in an analysis of those people who are unemployed, though, a lot of them 

being the folks who could benefit the most from that skill updating? 

Mr. GREENSPAN. Well, as we know from the data, that when people get laid off, they usually have difficulty regaining the wage 

level that they had before they were laid off. And this leads to the 

question as to whether they could do better by shifting the profession they are in. And lots of them have decided, because of the type 

of jobs that they had, that they would do better doing something 

different. And here is where community colleges, I think, really do 

a good job. 

Because we have—the nature of the turnover in our labor force 

is really extraordinarily large and rising. And it implies that not 

only do you not have lifetime employment, as they used to have in 

Japan, but we are finding more and more that many people, maybe 

even most, have more than one profession during their working 

lives. And this is the reason why we see that there has been such 

a remarkable pickup in enrollments, say, during the period when 

recession occurs, that the labor shrinks. And when they trace down 

what happens, they are all going back to school. And when, in effect, the economy picks up, they come back into the labor force. 

And this, I might add, is one of the reasons why, despite the surge 

in employment, the unemployment rate has not gone down commensurately. 

Ms. HART. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentlelady’s time has expired. 

The gentleman from Georgia, Mr. Scott. 

Mr. SCOTT. Thank you very much, Mr. Chairman. 

Chairman Greenspan, in your report, you mention that there is 

the—conditions in the labor market are improving. You also mentioned they are improving at a rate of 200,000 jobs per month, new 

jobs per month. 

This is not the case in the African-American community. The unemployment level among African-Americans at the same period has 

risen from 9.7 percent to 10 percent, while the unemployment rate 

among white Americans is 5 percent. That is double. And the situation is very drastic, and most drastic among African-American 

males between 20 and 45 years of age, nearly 700,000 unemployed, 

African-American women, nearly 700,000, in those very critical, 

most-productive earning years between the ages of 20 and 45. 

As our foremost economist, as our authority on these matters, I 

would be interested and I think the Nation would be interested to 

know, why is this? Can you pull the covers off of this racial imbalance and explain to this Nation why this imbalance among AfricanAmericans, this growing economy that is moving and yet the African-American unemployment rate is increasing? 

If, in fact, the Nation’s unemployment rate was 10 percent, it 

would be catastrophic. And it is a catastrophic situation in the African-American community. Why is it, and what must we do in Congress to correct this imbalance? 

Mr. GREENSPAN. Well, Congressman, I think you are addressing 

one of the failures of our society. And I think that having such 

26

large groups of potentially productive workers not operating at 

their highest potential level is a vast misuse of resources. 

I think the matter, any way we cut it, part of it is discrimination. 

We try to hide that fact, but I don’t think it has been eliminated. 

I think it has improved somewhat, but it is clearly a major factor. 

We have got to find a way to enhance the educational skills of 

all of our workforce. And where there are significant problems, as 

there are in the African-American workforce, which you point out, 

I think we have to make certain that we double up on our efforts. 

But aside from education, I am not sure that there is an answer. 

I am reasonably sure that, if we can get sufficient education and 

get skill levels up, the pressure of the marketplace, even though 

there is significant residual discrimination, will create a major improvement. But without starting at the education level, I would be 

discouraged with the capability of success. 

With education, I think we have got a reasonably strong case to 

resolve this issue once and for all. 

Mr. SCOTT. How do you account for the fact, Mr. Chairman, that 

there are African-Americans with MBAs, there are African-Americans with this education? That, I think you hit it on the head in 

your first comment, discrimination. 

Wouldn’t it be appropriate that there be called, at the highest 

levels of Government and industry, a summit to address this critical issue? It is not going to go away. And if, in fact, it is, as you 

say—and I think you speak the truth, that it is rank discrimination—it is rank racism in the employment marketplace, that we 

should hold accountable chief executive officers of our major companies, the movers and the shakers, the decision-makers, and that, 

as our chief spokesman for the economy, that you could provide 

that leadership to say, once and for all, let us deal with this issue? 

I assure you that, if the Nation’s unemployment level overall was 

10 percent unemployment, there would be a summit. There would 

be action taken. Don’t you think that that would be a critical movement on the part of the leadership of us in public policy and the 

Congress and the White House and the Executive Branch and in 

industry? 

The CHAIRMAN. The gentleman’s time has expired. The Chairman may respond. 

Mr. GREENSPAN. I was just going to say, anything that can be 

done in this area is clearly important to move forward on. 

The CHAIRMAN. The gentleman from Alabama. 

Mr. BACHUS. Thank you, Mr. Chairman. 

Mr. Chairman, let me start with a given. And that is that our 

economy depends on an efficient transportation network. I believe 

you would agree with that. Would you not? 

You are saying that you do? 

Mr. GREENSPAN. I do. Yes. 

Mr. BACHUS. You have predicted sustained economic growth, increase in output orders. 

My question to you, in making your calculations, in making your 

forecast, in deliberating, did you calculate the present inefficiencies 

in our transportation network, the limitations in our transportation 

network? I mean, I could give you some examples. For instance, 

our transcontinental railroads are jammed. Our velocity and train 

27

speed is actually decreasing. You know, our interstate highways 

are heavily congested. Our transit times, in the last 10 years, have 

decreased significantly. Does this threaten—particularly in a global 

economy where we are predicting border crossings to double in the 

next 10 years, are you concerned over the limitations in our transportation infrastructure? 

Mr. GREENSPAN. I think the deregulation of trucking, railroads, 

and airlines, and air transport unwound what was, I thought, the 

really serious set of problems which very significantly reduced the 

flexibility of our system. 

So while I don’t deny—and, indeed, the Chairman was mentioning the shortages of skilled drivers for trucking—I don’t deny 

that there are bottlenecks here and problems there, but I would not 

indicate that I thought that transportation inefficiencies were a serious problem, certainly nowhere near what they were 30 years 

ago. 

I think we have got problems, obviously, with rail transport, specifically endeavoring to subsidize the Amtrak system and related 

sorts of rail transport. But we are, remember, a very heavily passenger-car, light-truck, SUV society. 

Mr. BACHUS. I agree. 

You mentioned 30 years ago. Are you aware that—just take the 

year 1970—that, since 1970, we have actually had a tripling of 

mileage driven by Americans. During the same period of time, we 

have twice as many registered drivers. We have something like 

three times as many tractor trailers on the road. Yet, our roads, 

our network of roads, has only grown by 6 percent. 

So I do agree with you that the competition and the deregulation 

helped tremendously and brought some efficiencies into the market. But I would urge you to pay close attention to that transportation grid and the just-in-time economy that we are in. Because 

I believe that it is seriously restraining our economy now. I think 

some reason why you have a backlog on orders and you have unfilled orders is you have many places where it takes 30 to 60 days 

to get a rail car, where, 5 years ago, it took 3 to 6 days. 

And, in your calculations, begin to take a look at that. We are 

projecting that it will cost—that it will take $375 billion over the 

next 6 years just to maintain our interstate highway system, our 

national network of roads and rail and maritime, and yet the projections are to spend $300 billion. So we are going to actually spend 

an amount that is less than the amount to simply maintain it. 

And if these projections which you are making—and I don’t 

doubt the demand is there, the productivity is there—that we look 

at that as perhaps a weak link in our system and become aware 

of that. 

And with that, I will yield back the balance of my time. But if 

you would like to respond to that. 

Mr. GREENSPAN. You are raising an issue of priorities in funding 

for both State finance and Federal finance. And I think that, while 

I don’t deny the numbers you are positioning, there is the question 

of, if you lined up all of the priorities that one can assert with respect to all claims on the Federal budget, they would be 

unfinanceable. 

28

And so we, of necessity, have to make choices, and these are 

choices which are very difficult to make. And I think where economists can be helpful, we are. Where we don’t know as much as we 

need to know—and I don’t know myself as much as I think I would 

need to know—to make judgments, we are not very helpful. 

Mr. BACHUS. And I know——

The CHAIRMAN. The gentleman’s time has expired. 

Mr. BACHUS. In making these calculations, I wish you would pay 

close attention—I am not—to what we have. There has been a lot 

of congestion out there and a lot of inefficiencies. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentlelady from New York, Ms. Velasquez. 

Ms. VELASQUEZ. Thank you, Mr. Chairman. 

Mr. Greenspan, the trade deficit grew to approximately $145 billion in the first quarter of this year, escalating from a $127 billion 

deficit in the final quota quarter of 2003. To finance this trade deficit, the U.S. must borrow from foreigners at a rate of approximately $1.6 billion a day. Do you believe that our substantial budget deficit, which is adding considerably to our outstanding public 

debt, will undermine foreigners’ confidence that the U.S. will be 

able to pay back this constantly growing debt? 

Mr. GREENSPAN. So far, as best we can judge, the foreign willingness to hold long-term obligations of the U.S. Government has not 

diminished. 

Clearly, I can’t say to you that there is no level at which they 

will start to respond negatively. And, indeed, as I was indicating 

in conversations at the Senate yesterday, that, with respect to financing our current account deficit, I think our concern is that unless we bring it down in some form or another we will begin to 

build up a level of dollar claims against American residents, which 

will eventually place our foreign trading partners in a position 

where, even though they may say the rate of return here is very 

good, that they have to diversify out of the heavy accumulation of 

U.S. dollar obligations. There is, as I said yesterday, no evidence 

that we are anywhere near a problem of that nature. But if you 

project down the road, I can’t see how we can avoid it one way or 

another. 

Ms. VELASQUEZ. But, Mr. Chairman, many economists believe 

that if foreigners lose interest in loaning us money or in buying up 

our assets, interest rates could soar, making it impossible to pay 

down our debt. With no buyers to be found, stock prices and real 

estate values could plummet and America could find itself in a 

long-term depression. 

Do you agree with this assessment? 

Mr. GREENSPAN. No, I do not. I do not, largely because I cannot 

believe that we will allow ourselves to get in a position where, in 

order to finance our Federal Government deficit, we would have to 

be reaching out both domestically and abroad to borrow money at 

very high interest rates. 

Ms. VELASQUEZ. And how we will not allow ourselves to find ourselves in that position? By reducing the deficit and I guess rolling 

back taxes? 

Mr. GREENSPAN. As I indicated earlier, what we are missing at 

this particular stage is a process for approaching fiscal policy in the 

29

sense that we are confronted with something new, namely that our 

commitments are now very long term and our ability to forecast the 

way it is going to come out is rather limited. This suggests to me 

that we have got to find ways in which we not only project shortterm budgets but we project long-term budgets and simultaneously 

find means by which, if our forecasts are turning out to be wrong, 

there are automatic adjustment process triggers, for example, 

which alter either tax rates or expenditure programs. That would 

ensure that the deficit does not get to the point of extraordinary 

imbalance where we would be forced into a position where we could 

not get money to finance our deficits except at exceptionally high 

interest rates. 

Ms. VELASQUEZ. Mr. Chairman, with the final approval of the JP 

Morgan Bank One merger coming on the heels of the Bank of 

America Fleet merger, the rise of a super tier of U.S. banks is evident. These banks will each control $1 trillion in assets, together 

controlling more than 40 percent of the industry’s total assets. 

First, does such concentration pose risks to the banking system 

and, as a result, to the U.S. economy? And, second, do you believe 

that our current system of regulation is sufficient to oversee such 

large and diverse corporations that pose such great risk to the financial system? 

Mr. GREENSPAN. Well, first of all, we obviously are observing the 

phenomenon and the trends to which you allude. And were, in our 

judgment, that we were in a potentially serious supervisory regulatory State with respect to these large institutions, I would indeed 

be most concerned. These institutions are very large, but the crucial issue of concern is the degree of concentration in specific types 

of businesses or products. And in many instances, although these 

are very large institutions, they are quite diversified and, hence, 

they don’t have the type of—they don’t create the type of threat of 

systemic problems, which could readily be the case were there a 

significant concentration. Nonetheless, we do continuously monitor 

this issue; and I trust that the combining of both Federal and, 

where applicable, State supervision and the private sector’s 

counterparty’s supervision will remain sufficiently adequate to sustain what is in effect a reasonably good balance at this stage in our 

financial structure. 

The CHAIRMAN. The gentlelady’s time has expired. 

The gentleman from Minnesota. 

Mr. KENNEDY. Thank you, Chairman, for your service and for 

spending time with us today. I would like to continue on the discussion on trade deficits and move from problem focus to solution 

focus. 

You know, we had a good export growth, and we were growing 

exports largely in some cases because of a weaker dollar. But with 

our growing economy, our imports are growing; and we find the 

rest of the world not growing at quite the same pace, with Europe 

still behind us, with China having some concern as to whether the 

growth is too fast and they need to move towards a lower level of 

growth, a soft landing. 

We also have to make sure we are keeping American exports 

competitive. And you have talked at great length today how part 

of that is making sure we have a low tax, low spending, you know, 

30

low deficit environment. You have talked at great length about the 

need for us to improve our education system so that all members 

of our society are qualified for the work of the future. You have 

talked about how we need to keep trade open, that we need to continue to expand trade—yes, enforce our agreements, but expand 

trade. And of course, we need to keep the regulatory burden that 

you have also talked about moving so it is a less heavy hand in our 

environment. 

But I would like to ask you about three things. Number one, 

when we are talking about keeping America competitive to get this 

trade deficit down, how impactful is the significant differences and 

the weight on the economy from excessive lawsuits in this country 

versus others? 

Secondly, international taxes. We have got an international tax 

bill that we are trying to work through this Congress and get to 

the President’s desk. But even with that passing, with European 

countries being able to rebate their back taxes at the border, how 

significant is that international tax difference in our ability to be 

competitive and our ability to reduce this trade deficit? 

And then, thirdly, is there anything that we ought to be pushing 

our foreign trade partners, whether in Europe or in China, to do 

to help us, have them take more of the burden of carrying the economy rather than us always being the growth engine of the world? 

Mr. GREENSPAN. Well, Congressman, we have a longstanding 

problem in our trade accounts. And that is, the propensity of Americans to import relative to our incomes is much larger than our 

trading partners’ willingness to import relative to their incomes at 

any given structure of prices or exchange rates. 

What that means is that, other things equal, with everybody 

growing at the same rate, hypothetically, we would be incurring an 

ever-larger trade and therefore current account deficit. And this 

has been a fundamental problem which we have confronted—it was 

identified, I might add, 40 years ago, and it hasn’t changed except 

at the edges. So we are essentially in a position where, in order to 

keep our trade deficit down, we have to work in a sense far more 

effectively than our trading partners. 

Clearly, the price and exchange rate structure has not fully adjusted to this differential, because, had it done so, it would have 

readjusted our trade accounts accordingly. This means that our 

trade problems are essentially becoming our finance problems and 

how we finance the debt that is implicit here. 

With respect to, very specifically, our competitive export capabilities, we obviously are at the cutting edge of the world’s technologies, and American products do have very significant competitive capabilities. And I think we do a reasonably good job. But as 

you would point out, to the extent to which our exporters are burdened by various different types of regulations or litigation relative 

to our trading partners, we are at some disadvantages in certain 

bilateral relationships. 

But I am not sure how one carries the tax issue forward. There 

is a great deal of literature on the issue of the valuate added tax 

and rebates with respect to the United States, which doesn’t have 

such a system, and what the impact is. I am not sure I know 

31

enough about how those have come out to give you any useful insight. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentleman from Kansas, Mr. Moore. 

Mr. MOORE. Thank you, Mr. Chairman. 

The CHAIRMAN. If the gentleman would yield. We are trying to 

meet this vote and dismiss the Chairman, so we will go for about 

six, seven minutes. 

Mr. MOORE. I will be as quick as I can. 

Mr. MOORE. Mr. Chairman, thank you for being with us today. 

You know several promising trends in our economy. And I hope 

that our economy recovery is strong enough to withstand potential 

threats such as a slowly rising inflation state. In your written 

statement, you emphasize the importance of allowing households 

and businesses to make decisions that best promote the longerterm growth of our economy and with it our Nation’s continuing 

prosperity. 

Unfortunately, Mr. Chairman, many people in my district and 

throughout our country are finding it, I think, difficult to make the 

decisions that are best for themselves and their families. Many people are struggling to pay for the basics such as food, shelter, education and health care. 

Inflation, and health care. Inflation and health care, I believe, 

are the greatest problems facing our country, and as our population 

continues to age, I think it is only going to get worse. I hear about 

this virtually every week and from individuals and small businesses when I go back to Kansas. According to the Department of 

Health and Human Services, health care spending was up 9.3 percent for 2002, which followed an 8.5 percent increase in 2001. The 

Urban Institute estimates that American households will spend an 

average of $15,000 on health care costs in 2004. Health care now 

accounts for nearly 20 percent of household personal income, and 

this situation is causing some families and individuals to choose between basic health care and other priorities or to go without necessary health care altogether. 

Mr. Chairman, in your testimony you mentioned that our country’s continued sizeable increases in health insurance—you talk 

about our health insurance costs. Since 2000, annual health insurance premiums for Americans have risen 37 percent for individuals 

and 41 percent for families, and the rising cost of health care is 

also putting a substantial burden and pressure, I think, on small 

businesses in our country. 

Would you agree that sizeable increases in health care and 

health insurance costs presents our economy and families and 

small businesses with a potentially serious problem now and in the 

coming years? 

Mr. GREENSPAN. I do, Congressman. In the context in which you 

quoted me, I was referring to the fact that a stable price level or 

noninflationary environment, history has indicated to us, is conducive to maximum sustainable long-term economic growth. That 

does not mean that there are not innumerable problems that would 

exist as a consequence of that, and I regret that I agree with you 

in your analysis of health care cost problems, because they will be, 

32

as best I can judge, the really major issue that fiscal policy is going 

to have to address in the years ahead. 

Mr. MOORE. Secretary Thompson of Health and Human Services 

was quoted in a national newspaper yesterday that the cost of 

records and recordkeeping in health care is almost $140 billion a 

year and could be saved if they converted from paper, basically, to 

high-tech computers. Would you agree that that might be a good 

move for the health care industry? 

Mr. GREENSPAN. I don’t know about the size of the estimate. 

Those numbers tend usually to be a little larger than actually is 

achieved. 

Mr. MOORE. Oh, really. 

Mr. GREENSPAN. But they are still writing prescriptions on pieces 

of paper. 

Mr. MOORE. Yes. 

Mr. GREENSPAN. And how they understand what is on that piece 

of paper has never been clear to me. And digitalizing, a very significant part of the system, is undoubtedly a major priority for addressing the cost issue. 

Mr. MOORE. And the last very quick question, I got here a little 

bit late, but I heard you talking about pay-go rules and budget enforcement rules that I think you said expired in 2002; is that correct, Mr. Chairman? 

Mr. GREENSPAN. September 2002. 

Mr. MOORE. And I believe you said it would be worthwhile for 

Congress to implement that budget pay-go enforcement rules that 

apply not only to new spending, but also to tax cuts as well. Is that 

correct, sir? 

Mr. GREENSPAN. That is correct. 

Mr. MOORE. Thank you very much. I yield back. 

The CHAIRMAN. The gentleman from Texas for a couple of minutes. 

Mr. BELL. I will roll everything into one question, Mr. Chairman. 

Thank you for recognizing me, and thank you, Chairman Greenspan. 

I wanted to refer to the topic of wages that came up earlier 

today. In your statement you say, to be sure, the increases in average hourly earnings of nonsupervisory workers have been subdued 

in recent months and barely budged in June. I think that is reflective of a pattern that has occurred over several years now. You go 

on to say, other compensation has accelerated this year, which suggests that the money is there, it is just not going to the nonsupervisory workers. 

As you are aware, the minimum wage, the Federal minimum 

wage, has not been increased since 1997. Those who are forced to 

live based solely on the minimum wage live at or very close to the 

poverty line, and I am just curious if you feel as if this wage situation in America is cause for alarm, and, if so, have we reached the 

point that it is time to look at increasing the minimum wage? In 

your opinion, what impact on the overall economy would an increase in the minimum wage have at this time? 

Mr. GREENSPAN. As I have testified in the past, my concern with 

the minimum wage is that it increases unemployment and, indeed, 

prevents people who are at the early stages of their careers from 

33

getting a foothold in the ladder of promotions. And the evidence 

does suggest that it tends to be more counterproductive than not. 

As a consequence, raising the minimum wage is not, in my judgment, an effective way to address what is a significant problem in 

the distribution of income, which is what I discussed in my earlier 

remarks. 

The CHAIRMAN. The gentleman’s time has expired. We are going 

to have to break now. 

Again, our thanks to the gentleman from Texas. 

Mr. Chairman, it is always good to have you here, and we look 

forward to——

Mr. FRANK. Let me say, just add to it, I would thank the Chairman, but I would say on the topic the gentleman raised, I am still 

waiting for the Fed analysis of the economic impact on employment 

of the last minimum wage increase. It has been overdue. I think, 

frankly, there was an absence of bad news that led us not to get 

the analysis. 

The CHAIRMAN. The Chair would indicate that Members may 

submit written questions for the Chairman. 

[The following information can be found on pages 76 and 80 in 

the appendix.] 

The CHAIRMAN. With that, the committee stands adjourned. 

[Whereupon, at 12:06 p.m., the committee was adjourned.] 

(35)

A P P E N D I X

July 21, 2004

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