```

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

               ECONOMIC OUTLOOK AND CURRENT FISCAL ISSUES

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

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

           HEARING HELD IN WASHINGTON, DC, FEBRUARY 25, 2004

                               __________

                           Serial No. 108-20

                               __________

           Printed for the use of the Committee on the Budget

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

                                 ______

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                        COMMITTEE ON THE BUDGET

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

                           Professional Staff

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

                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, February 25, 2004................     1
Statement of:
    Hon. Alan Greenspan, Chairman, Board of Governors of the 
      Federal Reserve System.....................................     5
Prepared statement:
    Mr. Greenspan................................................     8

 
               ECONOMIC OUTLOOK AND CURRENT FISCAL ISSUES

                              ----------                              

                      WEDNESDAY, FEBRUARY 25, 2004

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:05 a.m., in room 
210, Cannon House Office Building, Hon. Jim Nussle (chairman of 
the committee) presiding.
    Members present: Representatives Nussle, Shays, Gutknecht, 
Toomey, Hastings, Portman, Brown, Crenshaw, Putnam, Tancredo, 
Franks, Garrett, Hensarling, Brown-Waite, Spratt, Moran, Moore, 
Neal, Edwards, Scott, Ford, Capps, Thompson, Baird, Cooper, 
Emanuel, Davis, Majette, and Kind.
    Chairman Nussle. Good morning and welcome to this hearing 
of the House Budget Committee. Today, we have with us the very 
distinguished Chairman of the Federal Reserve, Alan Greenspan, 
to discuss with our committee the economic outlook and the 
Federal budget.
    Chairman Greenspan, welcome again to the Budget Committee. 
We appreciate the time that you are always willing to spend 
with this committee, discussing the economy and discussing the 
budget over the years. We appreciate the opportunity for that 
discourse and discussion again today.
    It has been about a year since you last testified before 
the committee--actually, almost a year and a half now--and at 
that time, our Nation was really still in the early stages of 
recovering from the terrorist attack of September 11, 2001, and 
its aftermath. We were facing uncertainties at that time about 
the war in Iraq, and we still had an economy that at least 
appeared to me and to many of my constituents in Iowa was 
having a difficult time getting back on track. I think it is 
true for many within the country.
    No one should underestimate that the challenges that we 
have had to overcome these last 3 years have been difficult, 
and in fact, we have been, I think, as successful as we have is 
really something that we need to discuss today with you: Why is 
it that we have seen some of the successes that we are on the 
threshold of being able to really take advantage of at this 
point in time?
    Today, we are really in a much different position--and 
certainly a much better--position than last time you came 
before the committee. I have got a couple of charts just to 
illustrate this point, the economy, in showing robust growth; 
and strong growth is expected really to continue. In the third 
quarter of 2003, we saw an amazing GDP growth of 8.2 percent, 
the highest surge in 20 years. And that was the followed by a 
strong growth rate of 4 percent in the fourth quarter--still 
strong, certainly, by historic standards.
    Housing--starts in chart 2--were running at their highest 
level in 20 years, as you can see there.
    In chart 3, mortgage interest rates continue to run at 
their lowest levels in three decades, and the bank prime rate 
is at its lowest level in 45 years. Certainly you have quite a 
bit to do with that, Mr. Chairman. We appreciate that.
    Inflation, in chart 4, has been running at its lowest rate 
in four decades, and I know this is a chart that you are 
intimately familiar with. This is probably one of the first 
charts, as I understand it, that you pay attention to, as 
inflation is one of your concerns.
    The U.S. real exports of goods and services rose in the 
fourth quarter at a rate of 19 percent, which was the fastest 
pace in 7 years, which is a good indicator, particularly for 
those of us who have States where we are concerned about 
exports, where we are so export dependent.
    We have seen a significant increase in the stock market, 
and the Dow Jones industrial average up 40 percent since March 
of last year.
    Chart 5, in addition--and the most important, I think, 
which is labor--the markets, the labor markets appear to be 
improving. For the past 20-straight weeks, unemployment 
insurance claims have remained low and below the benchmark 
regarded by economists as a sign of an improving labor market.
    In chart 6, we have got an unemployment rate down to 5.6 
percent from the 6.3 percent last June. I am not sure anyone 
predicted that we would be that low, particularly this early in 
2004.
    And the last chart, chart 7, really at this point in time, 
as you can see, the payroll--employment is growing again. We 
need an economy that steadily expands job opportunities for our 
citizens, so that everyone who wants to work can work and so 
that every working person knows that they can actually get 
ahead and balance their own family budget, which really is the 
most important budget that I think we should be concerning 
ourselves with here, because if their budget is not working, 
really none of the budgets of our country are working.
    We have asked Chairman Greenspan here today not only to 
review the current and clearly improved economic picture, but 
also how we got to this point, and what he believes is the best 
course of keeping the momentum going. Certainly a large part of 
that discussion will focus on the impact of tax relief packages 
passed in 2001, 2002, and 2003. I am eager to hear the 
chairman's thoughts on what roles those policies continue to 
play and how we must now build a foundation of sustained 
economic growth.
    As I know you have said before, Chairman Greenspan, and I 
have certainly said time and time again, in addition to getting 
and keeping our economy going, we have got to get our hands 
around the other piece of the puzzle, that is controlling 
Federal spending. It really does matter. It matters to this 
committee, maybe more so than it matters to any other 
committee.
    We are going to continue to believe in this committee that 
the deficits do matter. They are not the be-all and end-all, 
certainly, but they are indicative of some of the challenges 
that we have to deal with.
    All spending must be paid for, either through taxes, 
borrowing, or growth in the economy, and those are burdens--
certainly, taxes and borrowing are burdens on the economy. And 
for that simple reason alone, controlling spending itself is a 
policy, I believe, for continuing economic growth.
    You have testified before, and you strongly urged this 
committee and the Congress to renew expiring discretionary 
caps, PAYGO spending controls; and as you know, those laws have 
been allowed to lapse. I strongly support reviving those 
statutory controls. I would like to discuss that with you today 
and would be interested in your thoughts on that.
    I am sure that it wouldn't hurt at all if you would 
encourage us in your way to continue to fight for budget 
enforcement tools. It is one thing to have a budget plan; it is 
yet another to enforce it and give predictability not only to 
the Federal Government, but also to the markets, that we are 
going to plan our work, own our plan and stick to it and 
enforce it over time. I think that gives predictability that is 
important stability for the economic markets.
    So we welcome you back.
    Chairman Greenspan will be with us for 2 hours today, until 
noon. He has agreed to testify until that point. So what we 
would like to do today is, as much as possible, ask questions. 
If you have a speech you would like to put into the record, we 
would ask unanimous consent that it be allowed to put in at the 
opening, at this point in time. And with that, I would turn to 
Mr. Spratt for any comments he would like to make.
    Mr. Spratt. Mr. Chairman, welcome back. We appreciate your 
coming here to testify. We know that you are called upon many 
times to do it, and we appreciate the fact that you would come 
and appear before our committee.
    Mr. Chairman, you may recall it, but 4 or 5 years ago as we 
were basking in the glory of budget surpluses, you were good 
enough to come over to the Library of Congress, to the Member's 
Room, and meet with the Democratic members of this committee 
and talk about the budget and the economy and the best thing 
that we could do with the impending surpluses, which were 
substantial.
    At that time there was a proposal developing that instead 
of borrowing and spending Social Security surplus, as we had 
for years in the past, we would instead take the surplus 
building and accumulating in the Social Security trust fund and 
use it to buy back or buy up outstanding Treasury bonds, 
thereby reducing the debt held by the public and increasing net 
national saving.
    As I recall, you told us then you approved of the idea, and 
you told us this was the probably the single most efficient way 
we could restore some of the deficiency, the woeful deficiency 
in saving in our domestic economy.
    A year or so later, President Bush came to office. I think 
it is partly because he was not here during the 15 years we 
struggled to subdue and get our hands around the deficit, he 
bought into a ``blue sky'' forecast that indicated that we had 
surpluses of $5.6 trillion between 2002-11. And in effect he 
bet the budget on this forecast, even though we warned at the 
time that there were storm clouds gathering over the economy, 
and that those numbers weren't so rosy. They might not be 
obtained. There ought to be a margin for error and a margin for 
unexpected contingencies.
    Well, we have had three things happen now, Mr. Chairman. 
First of all, the OMB now comes to us and tells us we were 
wrong, that surplus was overstated by at least 55 percent. That 
is their acknowledgement today. That means there wasn't a $5.6 
trillion surplus at all; it was an economist's construct. And 
the economists now tell us that they have got to reconstruct 
it, and it looks like more in the range of $2.6 trillion.
    If that is a correct estimation of the cumulative surplus 
between 2002-11, that means all of it comes from Social 
Security. And if we therefore have tax cuts, knowing that we 
only have a surplus of $2.6 trillion and all of it comes from 
Social Security, then our plan for using the Social Security 
surplus to buy back debt, increase net national savings, and 
drive down the cost of capital is out the window. It is not 
doable anymore.
    Secondly, we have had contingencies come up, national 
defense, terrorism. We are spending, by our calculation, a 
trillion dollars in the Bush years under the Bush defense plan, 
more than was anticipated to be spent alone in 2001-02.
    Then, of course, we have had a recession intervene, and it 
required some stimulative steps on the part of the government, 
which also have taken a toll on the budget.
    But the question we want to put to you today is, where do 
we go from here? How do we get back on that track?
    I think you would still agree that we have a deficiency of 
net national saving in the country, when the government ``dis-
saves''--that is what a deficit is--we are only contributing to 
the problem; and we are skating on pretty thin ice, given the 
fact that most of our debt issued today is being bought by 
foreigners. We are cutting taxes, largely for upper-bracket 
taxpayers, then going out into the world capital markets and 
borrowing the money to make up for the lost revenues. A lot of 
it is coming from China. Certainly debt means dependency, for 
governments and for individuals; surely this practice cannot go 
on forever.
    And secondly, we have got a reconstruction of the deficits, 
as we see when we make realistic adjustments to the spending 
line and to the revenue line when we factor in, for example, 
the expiring tax cuts and when we consider what the likely cost 
of our deployment in Iraq and Afghanistan are going to be; and 
instead of taking the middle course between those two lines, it 
takes the lower course. And 10 years from now we are about 
where we are now. We tread water. There is a little bump for a 
good economy right now.
    We want to ask you when you testify, do you think this is a 
course that is sustainable? Do you think these numbers are 
consequential? If so, what are the consequences for our Nation 
and for our economy?
    Thank you for coming. We look forward to your testimony 
today.
    Chairman Nussle. Mr. Chairman, your entire statement will 
be made part of the record, and you may proceed as you wish. 
Again, welcome to the Budget Committee.

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

    Mr. Greenspan. Thank you very much. Mr. Chairman and 
members of the committee, as always, I am pleased to be here 
today and to offer my views on the outlook for the economy and 
current fiscal issues. I want to emphasize that I speak for 
myself and not necessarily for the Federal Reserve.
    As you know, the U.S. economy appears to have made the 
transition from a period of subpar growth to one of more 
vigorous expansion, and prospects for sustaining the expansion 
in the period ahead are good. This favorable short-term outlook 
of the U.S. economy, however, is playing out against a backdrop 
of growing concern about the prospects for the Federal budget.
    As you are well aware, after having run surpluses for a 
brief period around the turn of the decade, the Federal budget 
has reverted to deficit. The unified deficits welled to $375 
billion in fiscal year 2003, and appears to be continuing to 
widen in the current fiscal year. According to the latest 
projections from the administration and the Congressional 
Budget Office, if current policies remain in place, the budget 
will stay in deficit for some time.
    For a time, the fiscal stimulus associated with the larger 
deficits was helpful in shoring up a weak economy. During the 
next few years, these deficits will tend to narrow somewhat as 
the economic expansion proceeds and rising incomes generate 
increases in revenues.
    Moreover, the current ramp-up in defense spending will not 
continue indefinitely. Merely maintaining a given military 
commitment, rather than adding to it, will remove an important 
factor driving the deficit higher. But the ratio of Federal 
debt held by the public to GDP has already stopped falling and 
has even edged up in the past couple of years, implying a 
worsening of the starting point from which policymakers will 
have to address the adverse budgetary implications of an aging 
population and rising health care costs.
    For about a decade, the rules laid out in the Budget 
Enforcement Act of 1990 and the later modifications and 
extensions of the act provided a procedural framework that 
helped the Congress make the difficult decisions that were 
required to forge a better fiscal balance. However, the brief 
emergence of surpluses eroded the will to adhere to those 
rules, and many of the provisions that helped to restrain the 
budgetary decisionmaking in the 1990s, in particular the limits 
on discretionary spending and the PAYGO requirements, were 
violated more and more frequently and, eventually, allowed to 
expire.
    In recent years, budget debates have turned to choices 
offered by those advocating tax cuts and those advocating 
increased spending. To date, actions that would lower 
forthcoming deficits have received only narrow support, and 
many analysts are becoming increasingly concerned that without 
a restoration of the budget enforcement mechanisms and the 
fundamental political will that they signal, the in-built 
political bias in favor of red ink will once again become 
entrenched.
    In 2008, just 4 years from now, the first cohort of the 
baby boom generation will reach 62, the earliest age at which 
Social Security retirement benefits may be claimed, and the age 
at which about half of prospective beneficiaries choose to 
retire.
    In 2011, these individuals will reach 65 and will, thus, be 
eligible for Medicare. At that time, under the intermediate 
assumptions of the OASDI trustees, there will still be more 
than three covered workers for each OASDI beneficiary. By 2025, 
this ratio is projected to be down to two and a quarter. This 
dramatic demographic change is certain to place enormous 
demands on our Nation's resources, demands we almost surely 
will be unable to meet unless action is taken. For a variety of 
reasons, that action is better taken as soon as possible.
    The budget scenarios considered by the CBO in its December 
assessment of the long-term budget outlook offer a vivid and 
sobering illustration of the challenges we face as we prepare 
for the retirement of the baby boom generation. These scenarios 
suggest that under a range of reasonably plausible assumptions 
about spending and taxes, we could be in a situation in the 
decades ahead in which rapid increases in the unified budget 
deficit set in motion a dynamic in which large deficits result 
in ever-growing interest payments that augment deficits in 
future years. The resulting rise in the Federal debt could 
drain funds away from private capital formation and, thus, over 
time, slow the growth of living standards.
    Favorable productivity developments, of course, can help to 
alleviate the impending budgetary strains, but no one should 
expect productivity growth to be sufficient to bail us out. 
Indeed, productivity would have to grow at a rate far above its 
historical average to fully resolve the long-term financing 
problems of Social Security and Medicare. Higher productivity, 
of course, buoys expected revenues to the system, but it also 
raises Social Security obligations.
    Moreover, although productivity has no direct link to 
Medicare spending, historical experience suggests that the 
demand for medical services increases with real income which, 
over time, rises in line with productivity.
    Today, Federal outlays under Social Security and Medicare 
amount to less than 7 percent of the GDP. In December, CBO 
projected that these outlays would increase to 12 percent of 
GDP by 2030 under current law, using assumptions about the 
growth of health care costs similar to the intermediate 
assumptions of the Medicare trustees.
    When spending on Medicaid is added in, the rise in the 
ratio is even steeper. To be sure, the rise in these outlays 
relative to GDP could be financed by tax increases, but the CBO 
results suggest that even if other noninterest spending is 
constrained fairly tightly, ensuring fiscal stability would 
require an overall Federal tax burden well above its long-term 
average.
    Most experts believe that the best baseline for planning 
purposes is to assume that the demographic shift associated 
with retirement of the baby boom generation will be permanent; 
that is, it will not reverse when that cohort passes away. 
Indeed, so long as longevity continues to increase and assuming 
no significant changes in immigration or fertility rates, the 
proportion of elderly in the population will only rise. If this 
fundamental change in age distribution materializes, we will 
eventually have no choice but to make significant structural 
adjustments in the major retirement programs.
    One change that the Congress can consider, as it moves 
forward on this critical issue, is to replace the current 
measure of the cost of living that is used for many purposes 
with respect to both revenues and outlays with a more 
appropriate price index. As you may be aware, in 2002, the 
Bureau of Labor Statistics introduced a new price index that 
chained the Consumer Price Index. The new index is based on the 
same underlying individual prices as in the official CPI, but 
it combines those prices so as to remove some of the 
inadvertent bias in the official price index, and thus, it 
better measures changes in the cost of living, the statutory 
intent of the indexing.
    Shifting to the chain-weighted measure would not address, 
perhaps, more fundamental shortcomings in the CPI, most notably 
the question of whether quality improvement is adequately 
captured, but it would be an important step toward better 
implementation of the intention of the Congress.
    Another possible adjustment relates to the age at which 
Social Security and Medicare benefits will be provided. Under 
current law and even with the so-called ``normal retirement 
age'' for Social Security slated to move up to 67 over the next 
two decades, the ratio of the number of years that a typical 
worker will spend in retirement to the number of years he or 
she works will rise in the long term. A critical step forward 
would be to adjust the system so that this ratio stabilizes.
    A number of specific approaches have been proposed for 
implementing this indexation, but the principle behind all of 
them is to insulate the finances of the system, at least to a 
degree, from further changes in life expectancy. Sound private 
and public decisionmaking will be aided by determining ahead of 
the fact how one source of risk, namely demographic 
developments, will be dealt with.
    The degree of uncertainty about whether future resources 
will be adequate to meet our current statutory obligations to 
the coming generations of retirees is truly daunting. The 
uncertainty is especially great for Medicare, because we know 
very little about how rapidly medical technology will continue 
to advance and how those innovations will translate into future 
spending. As a result, the range of possible outlays per 
recipient is extremely wide.
    This uncertainty is an important reason to be cautious, 
especially given that government programs, whether for spending 
or for tax preferences, are easy to initiate, but can be 
extraordinarily difficult to shut down once constituencies for 
them develop.
    In view of these considerations, I believe that a thorough 
review of our spending commitments and at least some 
adjustments in those commitments is necessary for prudent 
policy.
    I also believe that we have an obligation to those in or 
near retirement to honor what has been promised to them. If 
changes need to be made, they should be made soon enough so 
that future retirees have time to adjust their plans for 
retirement spending, and to make sure that their personal 
resources, along with what they expect to receive from the 
government will be sufficient to meet their retirement needs.
    I certainly agree that the same scrutiny needs to be 
applied to taxes. However, tax rate increases of sufficient 
dimension to deal with our looming fiscal problems arguably 
pose significant risks to economic growth and the revenue base. 
The exact magnitude of such risks is very difficult to 
estimate, but they are of enough concern, in my judgment, to 
warrant aiming to close the fiscal gap primarily, if not 
wholly, from the outlay side.
    The dimension of the challenge is enormous, but history has 
shown that when faced with major challenges, elected officials 
have risen to the occasion. In particular, over the past 20 
years or so, the prospect of large deficits has generally led 
to actions to narrow them. I trust that the recent 
deterioration in the budget outlook and the fast-approaching 
retirement of the baby boom generation will be met with similar 
determination and effectiveness.
    Thank you very much, Mr. Chairman. I look forward to your 
questions.
    [The prepared statement of Mr. Greenspan follows:]

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

    Mr. Chairman and members of the committee, I am pleased to be here 
today and to offer my views on the outlook for the economy and current 
fiscal issues. I want to emphasize that I speak for myself and not 
necessarily for the Federal Reserve.
    As you know, the U.S. economy appears to have made the transition 
from a period of subpar growth to one of more vigorous expansion. Real 
gross domestic product (GDP) rose briskly in the second half of last 
year, fueled by a sizable increase in household spending, a notable 
strengthening in business investment, and a sharp rebound in exports. 
Moreover, productivity surged, prices remained stable, and financial 
conditions improved further. Overall, the economy has lately made 
impressive gains in output and real incomes, although progress in 
creating jobs has been limited.
    The most recent indicators suggest that the economy is off to a 
strong start in 2004, and prospects for sustaining the expansion in the 
period ahead are good. The marked improvement in the financial 
situations of many households and businesses in recent years should 
bolster aggregate demand. And with short-term real interest rates close 
to zero, monetary policy remains highly accommodative. Also, the 
impetus from fiscal policy appears likely to stay expansionary through 
this year. At the same time, increases in efficiency and a significant 
level of underutilized resources should help keep a lid on inflation.
    This favorable short-term outlook for the U.S. economy, however, is 
playing out against a backdrop of growing concern about the prospects 
for the Federal budget. As you are well aware, after having run 
surpluses for a brief period around the turn of the decade, the Federal 
budget has reverted to deficit. The unified deficit swelled to $375 
billion in fiscal year 2003 and appears to be continuing to widen in 
the current fiscal year. According to the latest projections from the 
administration and the Congressional Budget Office (CBO), if current 
policies remain in place, the budget will stay in deficit for some 
time.
    In part, the recent deficits have resulted from the economic 
downturn in 2001 and the period of slow growth that followed, as well 
as the sharp declines in equity prices. The deficits also reflect a 
significant step-up in spending on defense and higher outlays for 
homeland security and many other nondefense discretionary programs. Tax 
reductions--some of which were intended specifically to provide 
stimulus to the economy--also contributed to the deterioration of the 
fiscal balance.
    For a time, the fiscal stimulus associated with the larger deficits 
was helpful in shoring up a weak economy. During the next few years, 
these deficits will tend to narrow somewhat as the economic expansion 
proceeds and rising incomes generate increases in revenues. Moreover, 
the current ramp-up in defense spending will not continue indefinitely. 
Merely maintaining a given military commitment, rather than adding to 
it, will remove an important factor driving the deficit higher. But the 
ratio of Federal debt held by the public to GDP has already stopped 
falling and has even edged up in the past couple of years--implying a 
worsening of the starting point from which policymakers will have to 
address the adverse budgetary implications of an aging population and 
rising health care costs.
    For about a decade, the rules laid out in the Budget Enforcement 
Act of 1990, and the later modifications and extensions of the act, 
provided a procedural framework that helped the Congress make the 
difficult decisions that were required to forge a better fiscal 
balance. However, the brief emergence of surpluses eroded the will to 
adhere to those rules, and many of the provisions that helped to 
restrain budgetary decisionmaking in the 1990s--in particular, the 
limits on discretionary spending and the PAYGO requirements--were 
violated more and more frequently and eventually allowed to expire. In 
recent years, budget debates have turned to choices offered by those 
advocating tax cuts and those advocating increased spending. To date, 
actions that would lower forthcoming deficits have received only narrow 
support, and many analysts are becoming increasingly concerned that, 
without a restoration of the budget enforcement mechanisms and the 
fundamental political will they signal, the inbuilt political bias in 
favor of red ink will once again become entrenched.
    In 2008--just 4 years from now--the first cohort of the baby boom 
generation will reach 62, the earliest age at which Social Security 
retirement benefits may be claimed and the age at which about half of 
prospective beneficiaries choose to retire; in 2011, these individuals 
will reach 65 and will thus be eligible for Medicare. At that time, 
under the intermediate assumptions of the OASDI trustees, there will 
still be more than three covered workers for each OASDI beneficiary; by 
2025, this ratio is projected to be down to 2\1/4\. This dramatic 
demographic change is certain to place enormous demands on our nation's 
resources--demands we almost surely will be unable to meet unless 
action is taken. For a variety of reasons, that action is better taken 
as soon as possible.
    The budget scenarios considered by the CBO in its December 
assessment of the long-term budget outlook offer a vivid--and 
sobering--illustration of the challenges we face as we prepare for the 
retirement of the baby boom generation. These scenarios suggest that, 
under a range of reasonably plausible assumptions about spending and 
taxes, we could be in a situation in the decades ahead in which rapid 
increases in the unified budget deficit set in motion a dynamic in 
which large deficits result in ever-growing interest payments that 
augment deficits in future years. The resulting rise in the Federal 
debt could drain funds away from private capital formation and thus 
over time slow the growth of living standards.
    Favorable productivity developments, of course, can help to 
alleviate the impending budgetary strains, but no one should expect 
productivity growth to be sufficient to bail us out. Indeed, 
productivity would have to grow at a rate far above its historical 
average to fully resolve the long-term financing problems of Social 
Security and Medicare. Higher productivity, of course, buoys expected 
revenues to the system, but it also raises Social Security obligations. 
Moreover, although productivity has no direct link to Medicare 
spending, historical experience suggests that the demand for medical 
services increases with real income, which over time rises in line with 
productivity.
    Today, Federal outlays under Social Security and Medicare amount to 
less than 7 percent of GDP. In December, the CBO projected that these 
outlays would increase to 12 percent of GDP by 2030 under current law, 
using assumptions about the growth of healthcare costs similar to the 
intermediate assumptions of the Medicare trustees; when spending on 
Medicaid is added in, the rise in the ratio is even steeper. To be 
sure, the rise in these outlays relative to GDP could be financed by 
tax increases, but the CBO results suggest that, even if other 
noninterest spending is constrained fairly tightly, ensuring fiscal 
stability would require an overall Federal tax burden well above its 
long-term average.
    Most experts believe that the best baseline for planning purposes 
is to assume that the demographic shift associated with the retirement 
of the baby boom generation will be permanent--that is, it will not 
reverse when that cohort passes away. Indeed, so long as longevity 
continues to increase--and assuming no significant changes in 
immigration or fertility rates--the proportion of elderly in the 
population will only rise. If this fundamental change in the age 
distribution materializes, we will eventually have no choice but to 
make significant structural adjustments in the major retirement 
programs.
    One change the Congress could consider as it moves forward on this 
critical issue is to replace the current measure of the ``cost of 
living'' that is used for many purposes with respect to both revenues 
and outlays with a more appropriate price index. As you may be aware, 
in 2002, the Bureau of Labor Statistics introduced a new price index--
the chained consumer price index (CPI). The new index is based on the 
same underlying individual prices as is the official CPI. But it 
combines those prices so as to remove some of the inadvertent bias in 
the official price index, and thus it better measures changes in the 
cost of living, the statutory intent of the indexing. All else being 
equal, had a chained CPI been used for indexing over the past decade, 
the cumulative unified budget deficit and thus the level of the Federal 
debt would have been reduced about $200 billion; higher receipts and 
the reduction in debt service associated with those higher receipts 
account for roughly 60 percent of the saving, with the remainder 
attributable to lower outlays. Shifting to the chain-weighted measure 
would not address perhaps more fundamental shortcomings in the CPI--
most notably the question of whether quality improvement is adequately 
captured--but it would be an important step toward better 
implementation of the intention of the Congress.
    Another possible adjustment relates to the age at which Social 
Security and Medicare benefits will be provided. Under current law, and 
even with the so-called normal retirement age for Social Security 
slated to move up to 67 over the next two decades, the ratio of the 
number of years that the typical worker will spend in retirement to the 
number of years he or she works will rise in the long term. A critical 
step forward would be to adjust the system so that this ratio 
stabilizes. A number of specific approaches have been proposed for 
implementing this indexation, but the principle behind all of them is 
to insulate the finances of the system, at least to a degree, from 
further changes in life expectancy. Sound private and public 
decisionmaking will be aided by determining ahead of the fact how one 
source of risk, namely demographic developments, will be dealt with.
    The degree of uncertainty about whether future resources will be 
adequate to meet our current statutory obligations to the coming 
generations of retirees is daunting. The concern is not so much about 
Social Security, where benefits are tied in a mechanical fashion to 
retirees' wage histories and we have some useful tools for forecasting 
future outlays. The outlook for Medicare, however, is much more 
difficult to assess. Although forecasting the number of program 
beneficiaries is reasonably straightforward, we know very little about 
how rapidly medical technology will continue to advance and how those 
innovations will translate into future spending. To be sure, 
technological innovations can greatly improve the quality of medical 
care and can, in theory, reduce the costs of existing treatments. But 
because medical technology expands the range of treatment options, it 
also has the potential of adding to overall spending--in some cases, 
significantly. As a result, the range of possible outlays per recipient 
is extremely wide. This uncertainty is an important reason to be 
cautious--especially given that government programs, whether for 
spending or for tax preferences, are easy to initiate but can be 
extraordinarily difficult to shut down once constituencies for them 
develop.
    In view of this upward ratchet in government programs and the 
enormous uncertainty about the upper bounds of future demands for 
medical care, I believe that a thorough review of our spending 
commitments--and at least some adjustment in those commitments--is 
necessary for prudent policy. I also believe that we have an obligation 
to those in and near retirement to honor what has been promised to 
them. If changes need to be made, they should be made soon enough so 
that future retirees have time to adjust their plans for retirement 
spending and to make sure that their personal resources, along with 
what they expect to receive from the government, will be sufficient to 
meet their retirement needs.
    I certainly agree that the same scrutiny needs to be applied to 
taxes. However, tax rate increases of sufficient dimension to deal with 
our looming fiscal problems arguably pose significant risks to economic 
growth and the revenue base. The exact magnitude of such risks is very 
difficult to estimate, but they are of enough concern, in my judgment, 
to warrant aiming to close the fiscal gap primarily, if not wholly, 
from the outlay side.
    The dimension of the challenge is enormous. The one certainty is 
that the resolution of this situation will require difficult choices 
and that the future performance of the economy will depend on those 
choices. No changes will be easy, as they all will involve lowering 
claims on resources or raising financial obligations. It falls on the 
Congress to determine how best to address the competing claims. In 
doing so, you will need to consider not only the distributional effects 
of policy change but also the broader economic effects on labor supply, 
retirement behavior, and private saving.
    History has shown that, when faced with major challenges, elected 
officials have risen to the occasion. In particular, over the past 
twenty years or so, the prospect of large deficits has generally led to 
actions to narrow them. I trust that the recent deterioration in the 
budget outlook and the fast-approaching retirement of the baby boom 
generation will be met with similar determination and effectiveness.

    Chairman Nussle. Thank you, Mr. Chairman. And again, for 
Member's purposes, Chairman Greenspan has to leave at noon. So 
I would ask Members not only to stay within their 5 minutes, 
but to use that time as efficiently as possible.
    Please turn on the clock for me, too.
    Mr. Chairman, as you say in your statement, during the next 
few years, these deficits will tend to narrow somewhat as the 
economic expansion proceeds and rise in income generates 
increases in revenue. Moreover, the current ramp-up in defense 
spending will not continue indefinitely, and that obviously 
will remove, as you say, an important factor for driving 
deficits higher.
    I want to make sure, in saying that, are you suggesting 
that we have time to begin the process to control spending and 
to get the deficits under control? Or are you suggesting that 
we should take the time now, combined with what you say, 
naturally, will be occurring in the economy and with personal 
incomes and with some of the needs for that spending to be 
naturally decreased, that we should take that time now?
    So how much time, in your judgment, do we have to 
demonstrate not only to you, but also to the American people 
and the marketplace that we are serious about controlling the 
deficits and the budget?
    Mr. Greenspan. Mr. Chairman, I think the time is reasonably 
short largely because it is going to take a long time in and of 
itself to institute and create a different line of projection 
and trajectory for both revenues and spending to work their way 
into the process. The particular point where I think we have to 
be very careful is that point at which the expectation of 
looming deficits in the next decade begins to impact on long-
term interest rates.
    Currently, I don't know where that is. I don't believe it 
is in the immediate future. It is out there somewhere. It is 
out there in this decade by all of the analysis that we can 
make. And I would suggest that it is essential, if our purpose 
is to find a way of gliding into what is probably one of the 
most difficult fiscal situations we have ever faced, because of 
the sharp rise in the baby boom generation retirement coupled 
with fairly extensive entitlement programs for all of those 
people as they move from working, productive people into a 
long-sought retirement.
    My judgment is that it is going to take several years at a 
minimum to construct programs which are credible to the 
markets. And I think it is very important that what we do, as 
far as fiscal policy is concerned, is to fend off what will 
invariably be the case if no action is taken at all.
    In other words, if we are looking strictly at a current 
services budget, we are going to be confronted within a few 
years with a marked upward ratcheting of long-term interest 
rates, which is very debilitating to long-term economic growth.
    Chairman Nussle. Well, then let's take the short term for a 
moment.
    Is a tax increase at this moment in time for our economy 
the right recipe if, in fact, we can begin to demonstrate 
within a fiscal blueprint the ability to control spending, both 
on the discretionary and at least begin to control spending on 
the mandatory side of the ledger?
    Mr. Greenspan. Mr. Chairman, I think that the outlook on 
the whole fiscal issue is so daunting that it is important that 
we maintain the revenue base, meaning that we maintain economic 
growth, such that we are able to get the types of revenues that 
we need and will need in the future to meet our obligations.
    The crucial issue out here is the rate of growth of 
productivity and the rate of growth of the economy. What 
history does tell us is that keeping tax rates down will tend 
to maximize that. And while I fully recognize that it is an 
easy solution to a problem, when you have a deficit, to 
increase taxes, it is not evident to me that over the long run 
that actually works.
    So it is crucially important as step No. 1 to make sure 
that we have the same sort of viable, expanding economy which 
we have been observing for a number of years; and that 
requires, in my judgment, significant restrain the tax side.
    As I say in my prepared remarks, I am fully aware of the 
fact that it may not be possible to keep the tax rate down and 
still maintain some semblance of deficit control. Because of 
this concern that I would have, I would strongly recommend that 
the priority of evaluation start with the expenditure side--
focussing on what can be constrained, what can be reduced--and 
only after you have run out of all of those options, would I 
advert to the revenue side, recognizing that you have long-term 
potential stability if the adjustments are made primarily on 
spending, and if there are significant increases in taxation, 
risks are there to the long-term economic outlook and, 
therefore, the revenue base itself.
    Chairman Nussle. Let me suggest to you in my final--and I 
apologize for going over. Let me just suggest to you, as a 
final question, a scenario and ask for your comment on whether 
or not you believe this would be at least a serious, short-term 
beginning toward solving this problem:
    No. 1, we have a transportation bill that fits within the 
tax revenue base that has been segregated for its use, the Road 
Use Trust Fund. The President has suggested a 21-percent 
increase in transportation spending remaining within the trust 
fund balances. Congress passing the bill that actually 
accomplishes that, and not deficit spending for transportation, 
but allowing that 21-percent increase for job creation, that is 
No. 1.
    No. 2, a budget plan that does limit spending growth below 
what the President has suggested, bringing the deficit down 
below $500 billion for this first year, as an example, as 
opposed to the $521 billion deficit that the President 
proposed, and that we at least begin the process of looking at 
some of the mandatory side. Certainly all of it would be 
difficult, as you suggested, but beginning that look.
    No. 3, that we do pass a cap extension and a PAYGO 
extension. If you saw those three items work their way through 
this committee and through the Congress, would that give you a 
positive reflection on what we are doing and a serious 
attention toward deficit reduction, or are there other steps 
that you would suggest in order to demonstrate seriousness?
    Mr. Greenspan. I would first, Mr. Chairman, restore PAYGO 
and discretionary caps. Without a process for evaluating 
various tradeoffs, I see no way that any group such as a 
Congress can come to a set of priorities which will effectively 
reflect the will of the American people.
    So doing things without the PAYGO and discretionary caps is 
a good start, but urge you to make certain that you are getting 
the process in place, because a lot of very seriously difficult 
decisions are going to have to be made by this committee and 
your counterparts in the Senate; and unless you have a 
mechanism for arraying priorities, I think it is going to be an 
almost impossible job. And I would say, the first priority is 
process, and then anything you can do subsequent to that I 
think is very helpful.
    Chairman Nussle. Thank you.
    Mr. Spratt.
    Mr. Spratt. Mr. Chairman, to follow up on your last 
comment, in saying that you would favor an extension of the 
PAYGO rule, do you mean the PAYGO rule in its original form 
that would apply both to entitlement increases and to tax cuts 
so that both would have to be offset and be deficit neutral?
    Mr. Greenspan. Yes. I am talking about the particular rule 
that was in place before its expiration on the September 30, 
2002.
    Mr. Spratt. Let me show you again the chart that I had in 
my opening statement, because what we have tried to do in this 
particular chart is assume realistically what happens if all of 
the tax cuts that are slated to expire are, in fact, renewed.
    Across the bottom line there, we have tried to make what we 
regard as politically realistic corrections, including the 
major assumption that all of the expiring tax cuts will be 
renewed. As a consequence, there is a bit of an uptick in the 
bottom line of the budget, and then for the next 10 years, it 
ranges from nearly $400 billion to $500 billion.
    No. 1, do you think this is a sustainable course, and if 
not, what are the consequences likely to be if we take this 
course? No. 2, will it affect long-term interest rates, as you 
warned?
    Mr. Greenspan. Well, actually that particular pattern 
probably is already embodied in the marketplace.
    Mr. Spratt. You think the markets are assuming that we will 
be $500 billion in deficit still 10 years from now?
    Mr. Greenspan. But remember, $500 billion in 2014 as a 
percent of a GDP will be significantly less than today. It is 
still a problem.
    I am worried about larger budget deficits than that.
    Mr. Spratt. As a result of Social Security and Medicare?
    Mr. Greenspan. I think, Congressman, that there is a wide 
range of error. Not on Social Security--Social Security we know 
within certain limits what can happen; it is a defined benefit 
program.
    We really do not have a clue about the outlook for Medicare 
and never have. It has been a remarkably difficult forecasting 
process, largely because the technology has been awesome and 
unforecastable, as indeed all innovation is. And with the 
advances currently in place and the type of things that are 
developing, I am not saying the most probable outcome is 
something significantly different from the intermediate report 
of the Medicare trustees, but the range for error is quite 
large. I think this committee has to take into consideration 
the possibility that there may be a problem there. And if there 
is, then we have a more unstable set of numbers than that.
    That looks like a very smooth curve to me. And the one 
thing we know about the real world is it never looks like the 
smooth projections we put down on paper.
    Mr. Spratt. Let me ask you this. You said that you were for 
an extension of the original PAYGO rule, which would apply to 
tax cuts as well as to entitlement increases.
    Does that mean you would advise us that as we approach 
these sunsets and expirations and existing tax cuts, that they 
be offset before the renewal be passed?
    Mr. Greenspan. Yes, sir.
    Mr. Spratt. Thank you very much, sir.
    Let me ask you also about the jobless recovery we find 
ourselves in. It is unlike most of the 10 recessions that we 
have experienced since the end of the Second World War. Here we 
are years after the official recovery and we still have a loss 
of 2.2 million jobs in the private sector--2.9 million in the 
private sector, 2.2 million overall.
    There is some controversy about which is the best source 
for estimating the job losses in the economy. The so-called 
Business Establishment Survey, which goes to business 
establishments and looks at their payrolls, a large sample of, 
I think, 400,000 firms; or the Household Survey, which has a 
large sample, but still a much smaller sample and interviews 
and extrapolates from individual households.
    Has the Fed done work in this area to see which is a better 
index indicator of unemployment?
    Mr. Greenspan. Not of unemployment, but of job growth, yes, 
Congressman. It turns out that, as best we can judge without 
getting into the details, the Household Survey, which is 
constructed by getting the average relationship in a 60,000 
sample between the proportion of people working and the 
proportion of people in those households and then applying that 
ratio to an estimate of population is less reliable. As best we 
can judge, looking at it from a variety of different sources, 
the immigration numbers that are implicit in the population 
projections extended from the year 2000 when the Census was 
taken, are much too high, and indeed, they seem to have 
flattened out significantly from September 2001, thereafter.
    I say this, as what would be implied in population numbers 
if we took not the 400,000 sample that you referred to in the 
so-called ``payroll sample,'' but the full, insured 
unemployment count, so it is almost a Census count, and convert 
that into the implied level of population. What we find is, the 
Census Bureau's projection of the population just goes straight 
up, and this revised, synthetic population goes up through 
September 2001, then flattens out quite significantly.
    The implication here is that immigration is probably 
grossly overestimated, and if that is the case and the 
population is actually going on a slower path than the official 
data, if you take the household ratios--that is, of employment 
to population ratios--and multiply them by the lower population 
trajectory, you will get a lower growth rate in household 
employment.
    So we have concluded that the data on the so-called 
``payroll survey'' is assuredly the more accurate of the two 
and that our suspicion is that at the end of the day there will 
be revisions in the household data.
    Now, with one caveat, let me just make a point here which 
is that it is true that self-employed people are not in the 
payroll series. And those numbers have behaved far more 
strongly than the underlying payroll data, so if you add both 
of them together, you probably have got the best estimate of 
what true employment is. That shows less of a decline than you 
were quoting, Congressman, but still shows something far more 
closely related to the payroll, rather than the household 
series.
    Mr. Spratt. Well, one final question. You lean strongly in 
favor of spending cuts as opposed to tax increases in order to 
resolve this problem. But, let me read you what a fine young 
economist named Peter Orzag has developed as to what we would 
have to do on the spending side to erase this deficit.
    It would take a 48-percent cut in Social Security benefits, 
a 57-percent cut in Medicare, elimination of the Federal 
contribution to Medicaid, or a 53-percent cut in all spending 
other than defense, homeland security, Social Security, 
Medicaid and Medicare, or an 80-percent cut in all domestic 
discretionary spending.
    Don't those indicate to you that--that slight suggestion in 
your testimony today, that tax increases might have to be part 
of the solution?
    Mr. Greenspan. You are merely describing the size of the 
problem that you are confronted with.
    Mr. Spratt. I am, indeed. But you have been around the town 
much longer than most of the people in this room. Do you think 
that cuts of that magnitude are politically realistic?
    Mr. Greenspan. I don't think that they are. But I still 
think you have to start with the presumption that you are going 
to get as much as you can on that side, because what I think 
has happened in this country is, we have constructed by statute 
a series of entitlements which, when multiplied per capita, per 
person, per retiree, by the number of retirees, that we know 
with an almost marginal error, we have a level of commitment of 
real resources to fund those requirements which is very large 
relative to the potential GDP.
    We are dealing with real resources. Finance is merely an 
intermediate way of trying to measure what we are doing. And I 
am basically saying that we are overcommitted at this stage.
    To the extent that we try to resolve the overcommitment on 
the government side by raising taxes, we are risking lowering 
the rate of economic growth and the revenue base. And I am 
merely suggesting, how I would go about it.
    Let me be very specific.
    If you are able, which I don't believe you will be, to 
resolve this issue wholly on the spending side, that will 
create a fiscal trajectory which is sustainable over the longer 
term with fairly strong economic growth associated with it.
    If you try to do it all on the tax side, my suspicion is 
you will find that you don't succeed because the tax base will 
begin to erode.
    Somewhere in the middle--probably, in my judgment, far 
closer to the spending side than the tax side--is the necessary 
outcome.
    But our problem essentially is, we have been making 
commitments without focusing on our capability of meeting them, 
and I think it is terribly important to make certain that we 
communicate to the people who are about to retire, what it is 
that they are going to have to live with. And if we promise 
more than we can actually physically deliver, I think it will 
be a major blot on our whole fiscal process.
    So I am saying that this is a much larger problem than we 
can handle, and the only thing that will bail us out, as far as 
I can see, is if Medicare for reasons I don't understand, comes 
in at the lower end of all of the projections that are 
currently being made.
    Mr. Spratt. Sounds like divine intervention to me. Thank 
you, Mr. Chairman, very much for your testimony.
    Chairman Nussle. Mr. Gutknecht.
    Mr. Gutknecht. Thank you.
    Dr. Greenspan, it is always great to have you up here. Just 
for the record, I agree with virtually everything that you have 
said. And to put it in short what you said about the retirement 
entitlements, we are writing checks that our children may not 
be able to cash. Isn't that true?
    Mr. Greenspan. Yes, sir.
    Mr. Gutknecht. I want to come back to one of the things 
that is most disturbing to us here, something that was alluded 
to by Mr. Spratt, and that is what OMB told us just 3 years 
ago, that we could be looking forward to surpluses of $5.5 
trillion. They have now revised that and said at that point in 
time they should have only said it was $2.2 trillion.
    How do we square those rather enormous differences between 
economic projections?
    Mr. Greenspan. It is inherent in what we are trying to do. 
Remember, we have got two very large numbers. And over these 
years, it has been $1 [trillion] to $2 trillion on receipts and 
$1 [trillion] to $2 trillion on expenditure. What we are trying 
to do is to measure the difference between those two; and very 
small differences, even in the current period, create very 
large differences. Any small differences in either of the 
totals create very large differences in the difference. And 
when you start to project that problem out into the future, the 
range of error is awesomely large.
    In fact, I remember CBO used to have a spread of 
probabilities, and it ranged, at first glance, extraordinarily 
wide. And it turned out, 2 years later they were outside of 
even that huge spread.
    The reason I raise this question in my prepared remarks 
about the error issue here is that you can't create budget 
policy strictly on the basis of trying to focus on a specific 
forecast. You have got to take into consideration what will 
happen if you are wrong. What are the consequences of being 
wrong?
    And what I am saying is that the consequences of being 
wrong on the tax side, that is, raising too much in tax 
revenues for the purpose of solving this particular problem, 
create potential downsides which are far greater, in my 
judgment, than mistakes on the other side.
    Mr. Gutknecht. Can I come back to a question that we have 
here--that I have, because I do think the economy is improving, 
and I appreciate the fact that you believe the economy is 
improving and will continue to improve.
    But that leaves us with a question that I can't explain, 
that is, if the economy--when we are seeing the kind of growth 
that we are seeing is as strong as it is, why do receipts to 
the Federal Government continue to lag so badly?
    Mr. Greenspan. Well, I think that is an issue which always 
confounds OMB and CBO.
    It is these so-called ``technical adjustments,'' which they 
try to figure out currently, when all they can see are tax 
receipts and their estimates of income from the gross domestic 
product. Until they get statistics on income a couple of years 
later, they really have no way of knowing exactly why these 
relationships changed.
    I don't know the answer to that. I do know that, of course, 
they have been adjusted down. There is a general expectation 
that in the short run they will be revised back up.
    We had an unexpected dip the last couple of years. Most 
budget projectors are presuming that it is going to come back. 
I frankly don't have a clue.
    Mr. Gutknecht. Well, I appreciate your candor.
    One last point: I do hope you will continue to speak out on 
the issue of returning to PAYGO and spending caps or some 
version thereof, because it is clear if you look at the charts 
where this Congress began to lose its way, is when those were 
allowed to expire; and I think the time has come for us to have 
something with teeth in it relative to the way we budget and 
the way we spend the people's money.
    Thank you very much.
    Mr. Shays [presiding]. I thank the gentleman.
    We have on our list Mr. Neal and Mr. Edwards and Ms. Capps 
on this side, and Mr. Franks and Mr. Garrett on our side. We 
now go first to Mr. Neal.
    Mr. Neal. Thank you.
    Mr. Chairman, let me raise a question with you about 
amnesia. The Republican majority leader here suggested in the 
late 1990s--and I say this as one who has been around for this 
debate for 16 years----
    Mr. Greenspan. I have been engaged with you for 16 years.
    Mr. Neal. You have, Mr. Chairman, first on the Banking 
Committee, then on the Ways and Means Committee and on the 
Budget Committee. We have engaged well.
    But I want to ask you a couple of questions here.
    The Republican majority leader in the late 1990s said that 
those votes that we were to take were taking us down the road 
to a depression. And the chairman of this committee at the 
time, my friend, Mr. Kasich, and a good guy, he said we were 
headed toward fiscal Armageddon with the budget votes that we 
took with Bush I and twice with Clinton.
    Is it your position that there was a pretty strong economic 
performance in the mid-to-late 1990s?
    Mr. Greenspan. There was, indeed.
    Mr. Neal. Would you suggest that that investment boom, the 
maturation of productivity as we witnessed it, now is 
continuing?
    Mr. Greenspan. The productivity boom is certainly 
continuing.
    Mr. Neal. The productivity boom. So if the economic 
performance, Mr. Chairman, of the 1990s was so outstanding, 
what was so bad about the tax system that we had in the mid-to-
late 1990s?
    Mr. Greenspan. I never said there was something wrong about 
the tax system in the 1990s.
    Mr. Neal. We appreciate that. That helps my point.
    Mr. Chairman, let me ask you this: My friends on the other 
side repeatedly say that we received and achieved a great 
victory in the tax cut on capital gains, for example, in 1997.
    They claim that this was a very important source of 
economic growth. Well, what was so bad about that system in 
1997 that we had to change it with these tax cuts that we have 
today?
    Mr. Greenspan. Well, first of all, remember that the 
revenues that were coming in during that period and subsequent 
to that period were very heavily influenced by the stock 
market, first, in realized capital gains; secondly, in 
surprisingly large amount, the taxes on the exercise of stock 
options.
    That disappeared virtually overnight, as the people in 
California have been observing with some chagrin, so that the 
illusion of a high revenue input of the system was an illusion 
which carried on for quite a period thereafter.
    If you are asking my judgment, over the longer run, if you 
do not continuously cut tax rates, you will end up with ever 
higher taxation, because there is so-called, as you know, drift 
in tax brackets, called ``bracket creep.'' So, in my view, we 
should be continuously cutting taxes to keep the burden 
contained. That is my general position. That has always been my 
position.
    Mr. Neal. You were party to those conversations, 
apparently, with Secretary O'Neill in terms of discussions as 
to this PAYGO issue. We have been through this, again over this 
decade and a half.
    Did you support the O'Neill position in those discussions 
with the President as to how we should proceed with tax cuts?
    Mr. Greenspan. I was not in the meeting with the President. 
Is that what you mean?
    Mr. Neal. Well, I think Mr. O'Neill suggests that there 
were meetings that took place, I think--I believe he suggested 
in the Price of Loyalty, his book, that the tax cuts should be 
reduced if the deficits become problematic.
    Was that a position that you shared? Did you have any 
discussions?
    I assume that----
    Mr. Greenspan. In fact, I think I may have testified before 
this committee on that issue.
    Mr. Neal. So you would agree with that position?
    Mr. Greenspan. I suggested that triggers ought to be part 
of the package.
    Mr. Neal. OK.
    Mr. Greenspan. That is what we had been discussing. I 
presume that is what you are referring to, the O'Neill 
situation.
    Mr. Neal. Yes, it is.
    Mr. Greenspan. I recommended it publicly before this 
committee.
    Mr. Neal. We appreciate your comments.
    I would once again, Mr. Chairman--just as I close, I am 
still troubled by the argument that when we all herald the mid-
to-late 1990s in terms of great economic achievement, why we 
had to radically alter the tax structure as we proceeded to 
this period of time.
    Thanks for your testimony.
    Mr. Shays. Thank the gentleman.
    We are going to go to Mr. Franks, then Mr. Edwards, then to 
Mr. Garrett.
    Mr. Franks.
    Mr. Franks. Thank you, Mr. Chairman.
    Mr. Greenspan, we appreciate so much your testimony here 
today, your candor and just your erudite understanding of some 
of the things that really make it difficult for a lot of us to 
clearly grasp. Economics is something that the nomenclature, 
the complexity of it is something that I think overcomes most 
of the general public, including the one that is talking to 
you.
    Having said that, you have put forth some general ideas 
that I think reflect those of us of a conservative Republican 
persuasion very clearly.
    Might I ask you a fairly direct question? Do you believe, 
as was articulated as far back as in the Kennedy 
administration, that carefully crafted tax cuts ultimately 
increase the revenue to government?
    Mr. Greenspan. I believe that economic growth obviously is 
the key to revenue for government, and carefully crafted tax 
cuts are one factor involved in encouraging such growth.
    Mr. Franks. Well, that essentially brings me to the next 
question. In terms of the greatest factors in your mind to 
incent productivity and economic growth, what would those 
factors be in the public policy area that we can control in 
this body?
    Mr. Greenspan. It depends on how broad you wish to get. 
That part of our economy which has been most important in 
expanding economic growth is the ever increasing flexibility 
that has occurred in this economy over the last 25 years. I 
have discussed this at length in many different venues. The 
result is the flexibility is reflected in the fact that we have 
indeed come through a period since mid-2000 characterized by a 
very sharp decline of the stock market, by a collapse in 
investment, by 9/11, by corporate scandals and then of course 
the wars in Afghanistan and Iraq, and the economy barely moved. 
It absorbed all of these shocks which in my judgment would have 
created a severe economic contraction 30 or 40 years earlier. 
That is basically coming about because of the flexibility that 
is implicit in those events. Our ability to get through those 
events is the result of a bipartisan 25-year move toward 
deregulation in a lot of different areas, of the remarkable 
increase in technological advance which has made the economy 
far more efficient and far more capable of responding to 
adversity.
    Information technology, as we are all aware, has made 
everybody capable of making decisions in real time instead of 
waiting for your accountant to give you what is happening to 
your inventories 3 weeks later when you have already produced 
more than you need. You have obviously very considerable 
improved flexibility from that, coupled with a very major set 
of deregulations in the financial markets which has created a 
degree of capability of this system functioning, which is where 
I believe our economic growth is largely coming from. And my 
judgment is that the most important thing that can happen is to 
maintain that degree of flexibility. And it is the reason why I 
find protectionism as a possibility very disturbing, because I 
do not think we are aware of how much of our prosperity 
reflects the extra ordinary expansion of the global economy in 
the last 30 or 40 years.
    Mr. Franks. Sir, I am pretty much out of time but I 
appreciate you articulating what some of us have talked about 
for a long time, that perfect storm on the horizon relating to 
the aging baby boomer population.
    Mr. Shays. Thank you. We will go to Mr. Edwards, Mr. Brown, 
and then Mrs. Capps.
    Mr. Edwards. Chairman Greenspan, thank you for being here 
today. You have been consistent in saying that tax cuts, 
whether in 2001 or today, being made permanent should be 
matched with significant spending restraints and cuts as well. 
You have been consistent, but my concern is that many of my 
colleagues in Congress and leaders in the administration 
conveniently hear the first part of your speech and ignore the 
second part. They accept ``let us vote for tax cuts.'' It is 
great, Chairman Greenspan now says they should be made 
permanent, but they fail to heed your other advice that you 
have to match that with spending cuts.
    I will make a prediction today. Not one member of this 
Budget Committee--and there are a lot of good responsible 
members on both sides of the aisle--will officially embrace 
major cuts in present services for Medicare or Social Security, 
some of the issues that you raised in your testimony. So once 
again, as we did in 2001, we are starting down the path where 
people are using your comments about make these tax cut 
permanent and digging a massive hole for our children and 
grandchildren, and I have two small children and care deeply 
about the deficit burden we are putting on their backs, as do 
you.
    My question is this, unless I find an outpouring of support 
from our Republican colleagues today to say that they will vote 
for reductions in Medicare present services, having just voted 
to increase Medicare expenditures by $534 billion, unless they 
come out for that or Social Security services cuts I want to 
ask you how much spending do you think should be reduced in the 
President's 5-year budget projections to do two things: One, 
reduce the already massive deficit and; two, to help pay for 
the cost of making President Bush's temporary cuts permanent?
    My second question is if Congress does what I believe you 
and I think we will do, as we will be deficit hawks, spending 
hawks in our speeches and spending doves in passing budgets, 
and all of recent history proves that is what is going to 
happen, how serious a problem do you think it is if the end 
result is in the next 5 to 10 years we have an average of $300 
billion a year or more in deficits?
    Mr. Greenspan. I think the crucial issue here is first to 
get the budget process up and back to where it was before it 
was allowed to expire, because I must say I was quite surprised 
at how effective the Budget Act of 1990 was. I figured that the 
Congress with 51 percent, just a majority, could overrule 
everything and would, and you did not. And I think there are 
reasons why you do not. I think there is a deep seated 
understanding that there is something terribly wrong in 
creating deficits of this size. It is very tough for anybody in 
the Congress, as we have all known over the years, to do other 
than create a benefit for somebody. That is easy and it is done 
all the time but we have also learned it is a ratchet. Once you 
grant it you cannot take it back or it is very difficult to do 
so.
    I can personally go through the budget and say I would do 
this, this and this if I were Budget Director, but I do not 
think that is the point. I think the point is if you put a 
process in place and this committee and your counterpart over 
in the Senate fixes in aggregate where you are going, you are 
actually going to be forced to make choices.
    Mr. Edwards. I agree with you and can I ask this though. 
Given that I believe the administration and the Republican 
leaders, the majority party in the House and Senate, have 
opposed those PAYGO rules vis-a-vis tax cuts, given that 
process is not going to most likely be put in place that you 
are proposing, I am not asking you to give me specific programs 
you would cut by specific amounts, but overall how much do we 
have to cut spending to pay for making those tax cuts permanent 
and how much additional spending cuts must there be to pay for 
the already structural deficits we had before you make the tax 
cuts? Give us a ball park figure if you could.
    Mr. Greenspan. I cannot because I have not looked at the 
figures. I am acutely aware of the numbers that Mr. Spratt was 
quoting, and obviously you cannot get from here to there wholly 
on those numbers. I fully recognize that. That is the point. 
The question is that you have got to essentially look to see 
what can be done and you cannot just give a number, you have 
got to look within the programs. I used to be heavily involved 
in budget processing and knew item by item and in very great 
detail and I know that to make a generalized judgment without 
knowing what is in those programs is foolish.
    Mr. Shays. Mr. Greenspan, if you could in order to get all 
the Democratic members, and there are more of them, we are 
doing pretty well but we need to stay with that 5-minute rule 
if I could. We will go to Mr. Brown, Mrs. Capps and then I am 
next in line.
    Mr. Brown. Chairman Greenspan, I would like to continue 
along with the same line of questioning. It has been estimated 
there would have been 2-million fewer jobs in America today if 
we had not adopted a Tax Relief Act during the last 3 years. 
What is your opinion of that?
    Mr. Greenspan. I do not know where that number comes from 
and I could not comment on it because it requires a whole 
series of assumptions, but clearly I think that the tax cut has 
had an effect on the economy, a positive effect, and I have 
commented accordingly. But translating that effect into jobs, 
given how variable the productivity numbers are, is in my 
judgment very tough to do.
    Mr. Brown. If you could give me an estimate of how you feel 
the economy might sustain if we allowed the tax cuts to expire.
    Mr. Greenspan. Well, I have said on many occasions in my 
judgment that they should be continued because I think over the 
long run they will benefit this economy. I am not thinking in 
terms of the short run. I do not think that is an issue. I am 
thinking strictly in terms of the long-term viability of this 
economy.
    Mr. Brown. I know we have been trying to track numbers, the 
$5.6 trillion surplus, and trying to track it over a 10-year 
period, and it seems to me that it is difficult to try to 
project what is going to happen next year much less trying to 
project what is going on 10 years down the road. In light of 
that, in light of the way our budget is structured, do you feel 
that we would be better served if we had a different level of 
accounting, say asset accounting rather than expense 
accounting, on a year-to-year basis?
    Mr. Greenspan. It is possible that we could improve a good 
deal of what we are doing and that our accounting is not 
covering all of the areas of contingent liability which we 
have. I am not sure, however, that that creates the political 
will that is involved in the process unless you have a budget 
process structure which automatically requires trade-offs, not 
only on outlays and taxes but guarantee programs and other ways 
by which the Federal Government preempts real resources. I was 
involved with the Social Security Commission in 1983, and we 
were going nowhere until all of the sudden we locked ourselves 
into a specific ultimate goal which meant we either have to 
change the receipt side or the benefit side. Everybody agreed 
to what that difference had to be. And once you got to that 
point the trade-offs gradually ground to a point where there 
was virtual unanimity, not quite unanimity, but a very large 
majority for a single set of proposals. That is why I emphasize 
process because if you take any single program and put it on 
the table and try to argue whether or not it is desirable or 
not, it will always end up being desirable. It is only when it 
is matched against another one you have a choice, either this 
one or this one. You cannot have both; that is, actually make 
the true choices.
    Mr. Brown. Let me shift gears a bit. We keep hearing all 
the time about spending Social Security proceeds. If we did not 
spend the Social Security proceeds then what could we do with 
the proceeds?
    Mr. Greenspan. Are you referring to the trust funds 
proceeds?
    Mr. Brown. Yes, sir.
    Mr. Greenspan. I must say that from a point of view of 
budget control I think the unified budget is the appropriate 
balance against which this committee ought to be functioning. I 
think the various trust funds we set up are intra-governmental, 
and they do not really create anything with respect to decision 
making. And if frankly they were all eliminated, I would find 
that nothing would be lost. So I am not a fan of trust funds 
except when they are used to constrain expenditures, which they 
do on occasion but that is only because people take them more 
seriously than I think they really should.
    Mr. Brown. I thank you very much.
    Mr. Shays. I thank the gentleman. Mrs. Capps, then Mr. 
Toomey and then Mr. Thompson.
    Mrs. Capps. Mr. Greenspan, welcome to our hearing today. 
Thank you for being here. In a recent speech you gave to the 
Greater Omaha Chamber of Commerce, you highlighted the 
importance of good education to the long-term health of the 
economy. I read this speech with great interest and I agree 
with your assessment that general access to our quality 
education has been critical to our economic growth to date and 
is perhaps even more critical to the future of our Nation's 
success. And it is one of the reasons I am very disappointed 
with this administration's failure to meet its commitments on 
education funding. I also believe that similar arguments, and 
this is the reason for bringing up education, can be made about 
the importance of health care to our economy. And I would like 
to ask you about this subject in the time allotted to me.
    As a school nurse I can tell you that healthy students are 
better students. Illness and injury are a distraction from 
studies. I believe they are also a distraction from our 
economy. When large portions of the work force lack health care 
their ability to be productive is reduced and our economy 
suffers. The Kaiser Commission on Medicaid and the Uninsured 
reports that 40 percent of nonelderly uninsured adults have no 
regular source of health care and forego needed care; that over 
a third of the uninsured had trouble paying medical bills in 
2003, a quarter were contacted by collection agencies; and that 
the uninsured are more likely to be hospitalized for avoidable 
reasons.
    For these reasons it is my belief that making sure our 
population has good access to quality health care is also a 
critical element in sustained economic growth. And in the 
context of this hearing today and of what you have told us 
about the baby boom generation, I would like to focus on the 
younger subset and ask you your assessment about the importance 
of access to health care for our economy today.
    Mr. Greenspan. If I were to list all of the various things, 
programs, commitments, ideas that would be helpful for this 
economy and this society, I think I would prove that we find 
that the indispensable number of programs which have to be 
funded represent a percent of the GDP which is not capable of 
being reached. So I emphasize again the question of process, 
that we have got to line up what our various priorities are, 
and the only vehicle this country has got to do this is the 
Congress of the United States. And you are the representatives 
of the people and we all cannot, near 300 million of us, cannot 
get in the middle of the street and make these decisions. They 
have to be made and in the process of being made a number of 
highly desirable programs do not get funded, and there is no 
choice about that. In other words, it would be very nice if the 
GDP were twice what it is and we can do all of this. But it is 
not and it will not be, and so we are confronted with the issue 
of choice and choice presupposes process. And I do not know any 
other way to do it.
    I cannot disagree with anything you just said. I am sure 
that if I were to look at the evidence I would find what you 
are saying is correct. And yet if you line up all of the 
potential programs, all of which are highly desirable, indeed 
in one sense almost obligatory, we do not have the resources to 
do them all.
    Mrs. Capps. If you say that health care is one of a number 
of many programs, we are not getting to the fact of how basic 
it is to survival and to productivity. There are a number of 
ways we can deal with health care. That is what we are faced 
with here. Professor Gruber of MIT says this administration's 
tax credit proposal will only help 1.9 million of the 40 
million uninsured despite its $70 billion price tag. So I am 
asking if there is a way that we can structure the programs, 
any programs to more adequately address this need.
    Mr. Greenspan. Mrs. Capps, I am not sufficiently familiar 
with the programs to give you any sensible judgment on that. I 
do know, however, that every program that you get involved in 
is extraordinarily complex and initial views are often wrong, 
especially when you begin to look at the details, and I would 
hesitate to try to get involved in something which I know would 
take me 5 hours to answer.
    Mr. Shays. I thank the gentlewoman. We will go to Mr. 
Toomey, then Mr. Thompson and then Mr. Crenshaw.
    Mr. Toomey. Thank you, Mr. Chairman. Thank you, Mr. 
Greenspan, for your testimony here today.
    My question is on a topic we really have not dealt with too 
much thus far today. I want to preface it by observing that we 
certainly seem to have a remarkable period of achieving virtual 
price stability and the inflation in recent years has been 
remarkably innocuous and at this point seems to continue to be 
so. But I cannot help but observe that we have had in recent 
years an extremely accommodative monetary policy. We have 
commodity prices very broadly, if not across the board, 
significantly higher in recent months and quarters. Gold is 
over $400 an ounce. The dollar has had a very significant 
decline in recent months. When I look at that combination of 
events it strikes me that historically this kind of combination 
of events would suggest that inflation if it is not with us now 
is not terribly far away. The question is, one, how have we 
managed to have these kind of events occur without yet seeing 
an inflationary problem? Is it productivity? Is it more the 
huge increase in global productive capacity, the increase in 
the global labor force as a practical matter integrated into 
the economy? Is there something systemic that means that these 
kinds of historical indicators are no longer useful or in fact 
is it just that we have got a little bit more time before this 
does in fact catch up with us?
    Mr. Greenspan. I think it is basically what you suggest. It 
is productivity. It is the extraordinary rise in competition 
coming from globalization. And there are structural changes, 
but that does not mean that inflation is permanently subdued. 
It merely means that the trade-off pattern is different from 
what it was. But remember that most of the items which you have 
discussed, mainly the commodity prices, are far smaller in 
today's economy than they were 20, 30 years ago. In fact, an 
ever increasing part of our economy is becoming conceptual 
rather than physical. And all of the items which are in the 
standard commodity index, including gold, are essentially 
physical rather than intellectual. That is not to say they are 
not important. They tell you various important things about how 
this economy is behaving, but what we observe is this 
extraordinary degree of globalization and increased competition 
and a monetary policy which has generally been constraining in 
the early period of inflation. So what we were doing was 
continuously leaning against the inflation to assist it coming 
down. But with productivity where it is, it overwhelms any 
inclusionary forces that are coming from a number of the issues 
that you raised.
    Having said that, we watch this whole process exceptionally 
closely, and as I have said in recent speeches, central banks' 
formal fundamental mandate is price stability because it is 
that which we believe will induce maximum sustainable economic 
growth. So it has been a remarkably important decline in the 
rate of inflation. We expect it to continue this way for a 
while, but we are not by any means convinced that inflation has 
somehow disappeared from the scene. We are certain it has not.
    Mr. Toomey. Right. And if productivity increase has been 
one of the main contributing factors to holding down inflation, 
I think you have testified in the past that you do not believe 
that productivity can continue to increase at the pace it has 
in recent quarters, which makes sense given historical levels 
of productivity growth. Does a decline in productivity growth 
become, therefore, an indirect sort of indication of future 
inflation?
    Mr. Greenspan. What it tends to do obviously is move unit 
labor costs from what has been a deep negative, meaning that 
they have been going down for quite a considerable period of 
time, first to stability and then, depending on what 
productivity is, they would start to rise. Under those 
conditions, obviously, the pressures will switch. We have not 
seen that yet. We have not seen any real evidence of pressure 
but we are watching very closely.
    Mr. Shays. I thank the gentleman. We go to Mr. Thompson 
then Mr. Crenshaw and then to Mr. Baird.
    Mr. Thompson. Chairman Greenspan, thank you for being here. 
Thank you also for your very honest explanation of the PAYGO 
system. The idea that we can bifurcate that somehow I do not 
think helps us fix the problems that we are in and I think it 
really lacks the credibility. I believe we need to address what 
I believe are very, very serious fiscal problems. As far as 
putting a process together, as you so eloquently explained, I 
think the one thing we have to be mindful of here is that there 
is a strong element of honesty in that discussion as well. The 
idea that we can continue to see increases in services, 
decreases in tax cuts, it is just not real, or tax revenues, it 
is just not real. We need to be honest, as you point out, when 
we manage our expectations. I believe that will be a very 
important part of us on both sides of this dais to fix the 
problems that we face.
    I am particularly concerned about foreign debt and the 
amount that foreign individuals and foreign countries hold of 
our debt. I have some numbers that I find to be frightening. 
The idea that 70 percent of the last year's record $373 billion 
deficit were financed by foreign investors concerns me, a 33-
percent increase in the past 2 years. Japan holds almost $600 
billion of our debt, China holds almost $150 billion of our 
debt, and I am concerned that this leaves us a possible victim 
to economic problems that are outside of our control. And add 
to that the fact that the billions of dollars that we are 
paying in interest on this debt is not even being paid or part 
of it is not even being paid to folks right here, but instead 
this becomes the biggest foreign aid program that we have in 
this country. I am worried about what may transpire because of 
this. I would like to hear your thoughts on it.
    Mr. Greenspan. I presume, Congressman, you are concerned 
about the issue of what would happen if they started to sell 
these securities.
    Mr. Thompson. To sell them, to threaten to sell them or to 
somehow decide that we are not such a good investment and do 
something else with the money. I think it has got some interest 
rate ramifications.
    Mr. Greenspan. We have looked at that in some detail. First 
of all, let us take the issue, assuming the selling of the 
securities, and see what happens. We are dealing not only with 
the size of the Treasury debt owed to the public but we are 
dealing with a whole big block of securities in the United 
States and all securities compete with each other. So there is 
no question that if there is a sale of foreign assets which are 
largely held by the central banks or the ministries of finance, 
that it has an effect but it is very small. Not only are the 
amounts of money, as large as they are, as you are noting, 
relatively modest against the aggregate markets in this 
country, but they also tend to be disproportionately short-term 
instruments. And short-term instruments are huge in the United 
States. The liquidity is such that their effects are relatively 
modest. And remember that short-term rates are to a large 
extent controlled by the Federal Reserve's basic policies. Now, 
obviously, we cannot suppress rates without expanding our 
balance sheet, creating huge increases in the money supply and 
creating the problem that our colleague had mentioned. But 
within a fairly broad area we can and do. Granted, the numbers 
look very large.
    Mr. Thompson. It is fast approaching $2 trillion on our $7 
trillion debt.
    Mr. Greenspan. I will venture that they will become a 
number that at some point will disturb me, but at the moment 
and in the foreseeable future it is still a problem for the 
future, not for the current period.
    Mr. Shays. I thank the gentleman very much. We will go to 
Mr. Crenshaw, then Mr. Baird, then to Mr. Putnam. Then we will 
go down the Democratic list and if there is time I would like 
to finish up with questions.
    Mr. Crenshaw.
    Mr. Crenshaw. Thank you, Mr. Chairman, for being here 
today. I have a couple of questions, one related to this change 
in projections from surpluses to deficits. And everything that 
I read, to a certain extent they are changed because of the tax 
cuts, but only maybe some in Congress have said that might be 
responsible for 25 percent of the change in direction. Part of 
that is due to the war, the increase in spending, but a great 
deal, probably the majority of the change in those projections 
is due to this historical phenomenon which we have talked 
about, that revenues have declined for the last 3 years, that I 
think you said you are not really sure why. But does it not 
make sense that, and maybe comment on the fact that we have 
kind of made the point, other people have made the point that 
it is hard to kind of cut enough spending to ultimately solve 
the problem. If the President's budget increases nondefense 
discretionary spending to one-half of 1 percent and we froze 
it, that one-half of 1 percent I think lowers the deficit by $3 
billion, the point being that we certainly have to control 
spending but that may not be enough. Other people would say we 
just need to raise taxes and solve it.
    I guess the question becomes, in this phenomenon of 
declining revenues, does it not make sense somewhere, somehow 
that they will turn around? Maybe you can comment on that 
because to a certain extent I do not know that we just grow our 
way out of the deficit, but to a certain extent as the economy 
grows and as projections change I have to believe that makes a 
huge impact on the projection of deficits. Could you kind of 
comment on that?
    Mr. Greenspan. Most of those longer term projections of 
revenue growth are already built into the current services 
budget. It is possible that productivity will grow faster, for 
example, than CBO is estimating. The problem is that we are at 
the cutting edge of technology in this country. We cannot 
borrow technology to increase our productivity growth. We have 
to invent it, largely. That means that we are limited to how 
fast productivity can grow, and historically, even in our best 
periods for protracted growth, we very rarely get above a 3-
percent annual rate. The reason for that is it takes time to 
invent things, to reorganize, to improve the way we produce 
things. And as a consequence we do not know how to move fast 
enough. If we were borrowing technology from somebody else, we 
could do that pretty quickly. And indeed a number of the 
developing countries borrowed our technology and increased 
their GDP growth rate very rapidly. We do not have that 
capability. So I doubt very much if we can find a scenario 
which would say we cannot grow our way out of the deficit. More 
exactly, we can grow our way out of the commitments which look 
to be out there, essentially for Medicare. Medicare is really 
the significant fiscal problem because we do not have a grip on 
how big a number that could be. And as a consequence, I would 
say to plan to grow our way out of this problem is probably 
unwise. I do not think we can do it.
    Mr. Crenshaw. Thank you. The last question has to do, we 
have touched on this, in terms of short-term interest rates. A 
lot of people feel like we are not saving enough and we are 
kind of stoking consumer demand by these low rates. We are 
exporting our net worth to other countries. In a broader sense, 
could you comment on your view of the dollar? We have certainly 
seen a dramatic increase in exports based on that. Are you 
concerned at all? Is that an urgent issue with you in terms of 
the dollar, in terms of that?
    Mr. Greenspan. I am not allowed to talk about exchange rate 
fluctuations in the sense that we have an agreement with the 
Treasury Department that I can talk about the exchange rate but 
not in a policy sense. And your question unfortunately is right 
at the edge and I would just as soon let the Secretary of the 
Treasury answer your question at some point.
    Mr. Shays. I thank the gentleman. We are going to Mr. 
Baird, then to Mr. Putnam and then Mr. Emanuel, go down the 
Democratic list. I would like to fit myself in too as well. Mr. 
Baird.
    Mr. Baird. Mr. Chairman, I am glad you are here today. We 
periodically in the Congress get letters calling for the 
abolition of the Federal Reserve. Sometimes as of late I have 
wondered if it has actually happened and I am glad you are here 
to show it has not. The reason I have wondered that is because 
both in this committee and in some cases in public statements 
by the administration and others, we hear the administration 
taking a great deal of credit for the low interest rates, and 
it seems to me that the Federal Reserve deserves most of the 
credit for that. I have a two-part question. The first is to 
what extent would you say that the currently low interest rates 
are the result of the Federal Reserve policy versus actions of 
the Congress or the executive branch? That is the first part. 
The second question, to what extent do you belive the low 
interest rates deserve the credit for much of the economic 
recovery that we are seeing today?
    Mr. Greenspan. Congressman, let me say first that I think a 
substantial factor in the low interest rates is the low 
inflation rate. And the low inflation rate, as I indicated 
before, is the consequence of a number of things, largely 
globalization and the competition that has come from 
globalization and a whole series of structural changes, 
including, as I mentioned before, the bipartisan deregulation 
that has been going on for a quarter of a century.
    Part of the interest rates being where they are, is the 
consequence of the Federal Reserve; to an extent that we 
maintained a policy of constraint at times when inflation was 
moving, we have assisted in bringing the rate structure down. 
But I do think there are far broader forces which impact on 
inflation and therefore on interest rates. And to answer your 
last question, have interest rates being this low been a 
positive factor, certainly.
    Mr. Baird. Do you have an estimate to what extent that 
applies? I will give you an example. When I am at town hall 
meetings and I ask people how many have refinanced their homes 
it is a tremendous number. And that must be putting a lot of 
disposable income back into our economy, relative, for example, 
to say the so-called middle class tax cut. Do you have a sense 
of how much business investment or additional spending by 
average American citizens has happened because of refinancing 
or low interest rates for business investment?
    Mr. Greenspan. Yes, we do. We estimate what the actual has 
happened to debt service costs of the home owning households, 
as a result of the very substantial refinancing which occurred 
last year. It is, not a large number but it is enough in the 
way to have really made a difference for those who have 
refinanced. That is they brought their rates down and it has 
impacted on their monthly commitments. I do not know how to 
match it at this particular point against the tax cuts. The 
data are available, but I do not have it at hand at the moment.
    Mr. Baird. I thank the chairman.
    Mr. Shays. Mr. Putnam, then Mr. Emanuel and Ms. Majette.
    Mr. Putnam. Good morning, Mr. Chairman. A year ago in 
testimony both before this committee and to the Joint Economic 
Committee, there was a great deal of talk about deflation and 
we have touched on inflation this morning. Is deflation no 
longer a problem despite the falling dollar and continued low 
interest rates? I would be interested in hearing about that as 
well as some talk perhaps behind the scenes at the Federal 
Reserve on setting inflationary targets.
    Mr. Greenspan. The issue of deflation has never been a high 
probability. But our concern is that were it to happen, the 
consequences would be extraordinarily negative. And therefore 
we have been keeping a very close eye on the possibilities of 
deflation emerging. As I have commented previously in various 
statements, speeches and testimonies, the probability of 
deflation which a year ago was very low is now much lower. It 
is not zero but we are fortunate in the sense that looking at 
the way prices of goods specifically are behaving and looking 
at the structure of demand and supply in various different 
markets, the probability of deflation has gotten to a point 
where it is not the size of the threat that it was a year ago.
    Mr. Putnam. And are there discussions about setting 
inflationary targets?
    Mr. Greenspan. Well, there is a very significant discussion 
going on in the economics profession of inflation targeting as 
such. Obviously, we talk about it and implicit in most of our 
actions are targets in the sense that my formal target is price 
stability. I think it is very difficult to get a specific price 
index in which you say this is exactly where price stability 
is. But as I have said many times, I think we are there. CPI, 
core CPI, for example, is 1 percent. We know there are 
significant biases remaining in the price indexes we use so 
that true price stability would be reflected in price indexes 
which were increasing slowly, probably somewhere between a half 
a percent and something a little under a full percentage point. 
So in that regard I think we are at price stability.
    I cannot speak for the rest of my colleagues, but we all 
have a general view of where we would like to be and we vote 
accordingly. Do we have an explicit number, an explicit price 
index? We do not, and I am not sure that that would actually 
enhance the capability of our doing a better job. There are 
those I must tell you who do believe that and we are in 
continual discussion. I do not think it is a big issue because 
the practical implications are not very large. We all agree 
where we want to be, and we largely interpret the numbers the 
same way. So I am not sure if we actually had a published 
explicit target whether it would make all that much difference.
    Mr. Putnam. Thank you. With regard to mandatory spending, 
both sides of the aisle speak of this a great deal, the 
explosion of health care costs combined with the demographics 
of this country is of great concern. If Congress were to act to 
shift the ratio of mandatory versus discretionary spending, if 
we were able to move that mark away from the two-thirds 
mandatory, one-third discretionary figure where it roughly is 
now, and move the transportation projects, the farm programs, 
the student loan programs, let us say all programs in mandatory 
other than Social Security and Medicare and perhaps some 
veterans programs, would there be some credit given by the 
markets? Would that have an appreciable beneficial effect or 
would it create uncertainty over the level of funding and 
particularly destabilize economy prices?
    Mr. Shays. If we could have a short answer.
    Mr. Greenspan. I think it will depend, if you were to do 
that, what impact it had on the decision making process with 
respect to outlays. It is what you do, not what you say or how 
you categorize it, which matters in my judgment.
    Mr. Putnam. Thank you.
    Mr. Shays. Let me say, Mr. Chairman, we have basically six 
members, including myself. We could get you out at 10 after. 
Would that meet your need?
    Mr. Greenspan. Certainly, I appreciate that.
    Mr. Shays. Mr. Emanuel, Ms. Majette, then Mr. Scott.
    Mr. Emanuel. Mr. Chairman, I will try to be quick. Mr. 
Chairman, as I read your testimony and listen to you today, my 
sense is that your analysis is that we are getting very close 
to having a structural deficit which the markets will perceive 
as dangerous versus a cyclical deficit and that your 
recommendation is that we need to deal with that problem, and 
between the IMF's view and Goldman Sach's view of deficits 
being dangerous and CBO and OMB's which are manageable, you 
have tipped the scale that we are getting very close, not there 
yet, to a structural deficit which will be dangerous for the 
market's inception.
    My own view is I do not believe we should be cutting 
entitlements to pay for these tax cuts if we make them 
permanent, which is also one of the things that has been said 
here. My own view is we have tried to finance, which is proving 
history wrong, three wars with three tax cuts, and you cannot 
do it. That is what has resulted in deficits, not the 
entitlement spending.
    In that sense and I raise with Mr. Thompson my own concern 
about foreign countries owning our securities, and I think we 
are getting close to a Suez moment with China owning so much of 
our securities. I know you have said you analyzed it over at 
the Fed, but have you analyzed China owning so many of these 
securities and then have a situation like we did 2 years ago 
where a plane went down in China with a political context 
associated with it if they decide to dump our securities? Was 
that part of the analysis of the Fed, not just the financial 
short term of dumping securities but the political context that 
would ignite such a move?
    Mr. Greenspan. I do not want to say what we have or have 
not analyzed, but I can assure you that we have looked at all 
potential contingencies.
    Mr. Emanuel. Thank you, Mr. Chairman. I will leave that 
there.
    The second point is we look at the issue of employment and 
the lag I think in where the economy is going at this point in 
the employment sector. Has the Fed looked at the benefit 
structure, that is health care, retirement, as one who is a 
hindrance toward hiring, that in fact at this point in the 
economy there should be more employment and in fact health care 
costs, retirement costs, legacy costs, you are going to decide 
to keep somebody and have them work longer hours rather than 
hire a new employee? Have you guys looked at that at the Fed?
    Mr. Greenspan. What we have looked at is the evidence of 
what is causing the slowdown in employment growth. We have 
broken it down into a problem whereby we look at new hires and 
separations whether voluntary or involuntary. The separations 
are reasonably close to what you would expect to be happening 
given the growth that this economy has exhibited in recent 
quarters. It is pretty much on schedule. What is missing is the 
new hires are far below where they ordinarily would have been 
historically given this rate of growth. We attribute that 
wholly to the issue of productivity growth. That is, business 
people confronted with an increase in orders are finding that 
they are able to meet those orders, expand production for 
customers, without increasing hiring. They can do that largely 
because there are unexploited inefficiencies in their 
particular establishments which are a carryover from the very 
large expansions that occurred in the latter part of the 1990s. 
And it is that which is creating the difficulty.
    Mr. Emanuel. Lastly, this may be more of a statement than a 
question. As you said, between the two entitlements you see 
Medicare as a bigger kind of dagger given the unexplained 
improvements in technology, longevity. There has been a 
bipartisan effort to deal with the recent prescription drug 
benefit on how to control costs. One of the ways was using 
market mechanisms. Obviously you will not endorse any 
principle, but whether you are using reimportation or allowing 
the Secretary of HHS to negotiate, if you are going to have the 
benefit of that, there is a place here where Congress is trying 
to get the government to act like a business and we have been 
prevented from doing that. I am glad to hear that you see that 
costs like this are dangerous to the long term health. Some of 
us believe we have to control it or pay for it or be more 
efficient in the way we do that. I am not going to ask you or 
put you in a position to answer that.
    Mr. Shays. I thank the gentleman. We will take the 
Democratic side of the aisle and then go to Mr. Portman. Ms. 
Majette and then Mr. Scott and then Mr. Portman.
    Ms. Majette. Thank you, Mr. Chairman. Thank you, Dr. 
Greenspan, for being here today. If I understood your testimony 
earlier, you said that carefully crafted tax cuts would help in 
terms of our strengthening our economic situation. I was 
wondering if you could elaborate on what particular types of 
tax cuts would stimulate the economy perhaps more so than the 
ones that were passed in 2001 and 2003, and are there 
particular types of tax cuts that have a more stimulative 
effect on the economy or less so and particularly with respect 
to small businesses and the benefits of reducing the burdens, 
the tax burdens, on small businesses.
    Mr. Greenspan. Well, I have testified before this committee 
and others that I thought that eliminating or, as is in fact 
was done, reducing the double taxation on dividends has been an 
important factor in creating incentives for capital investment. 
And I would certainly put the continued low tax rate, hopefully 
zero tax rate, on dividends as a high priority. The major 
problem, however, is the fact that we have what we call bracket 
creep, in the sense that we do index tax brackets for consumer 
price changes, but because productivity is not captured in that 
calculation the actual effect is that you do not fully index 
the brackets in that respect and more and more incomes move 
into ever higher brackets and so the overall tax load continues 
to grow. I think that is detrimental to growth and my general 
focus on long-term tax cuts is largely focused on eliminating 
bracket creep.
    Ms. Majette. Thank you. With respect to the debt to GDP 
ratio, and you mentioned that a little bit earlier, is there a 
point at which that ratio gets to be too large and what do you 
think about how we should address that issue?
    Mr. Greenspan. That is one of the toughest questions we 
have. We know that as it gets up to numbers well above where we 
are today that other countries have run into trouble. But it is 
a very good question in that we do not know exactly where 
higher is not good.
    Can we take some debt increase? Yes, we can. Would it be 
destabilizing? I can conceive of a scenario in which it would 
not be. But that is where the dangers begin to arise. When the 
ratio of debt to GDP begins to rise, the debt servicing burden 
obviously increases because the interest payments have got to 
be paid out of the GDP or out of the income which is generated 
by the GDP. So there is a whole series of economic evaluations 
as to exactly what determines that degree of stability, but we 
do not know a specific number in a practical sense until we 
actually begin to construct various scenarios.
    And all I could say about the current outlook is the 
implicit growth rate, when we consider the lower probability, 
but still reasonable probability, trajectories of receipts and 
outlays, creates debt to GDP levels which I would find of great 
concern.
    Ms. Majette. Thank you.
    Mr. Shays. Mr. Scott. We are getting more members coming. I 
am getting concerned that I will be able to have everybody 
speak.
    Mr. Scott. Thank you, Mr. Chairman, for your testimony. 
This chart shows what happens when you are willing to make the 
tough choices. As you will remember, the tough choices in 1993 
resulted in some politically unpopular results. Although we 
eliminated the deficit and went into surplus, it had political 
consequences on those of us who voted in favor of the green.
    You have indicated that you need to make the tough choices 
and I appreciate that and also that you need to make the 
choices on both sides, both on taxes and on spending, you just 
cannot make tough choices on one. You have talked about the 
debt and deficit in terms of the GDP. It seems to me that the 
GDP would be a measure of capacity to deal with the deficit and 
the debt, but a more accurate figure for fiscal responsibility 
ought to be how much of our budget is paid for with borrowed 
money. We are right now spending a higher portion of our budget 
with borrowed money than any time since World War II. Does that 
speak to fiscal responsibility?
    Mr. Greenspan. Well, it is a measure of lack of fiscal 
responsibility.
    Mr. Scott. Thank you. Your testimony outlines things we can 
do to reduce Social Security. We have a Social Security surplus 
for a purpose. Several years ago somebody noticed that we will 
be running into the red and we are overtaxing Social Security 
so that we can deal with the upcoming deficit. This is not like 
a road tax trust fund where you decide not to build roads this 
year. You deal with it. You continue taking the money. These 
are liabilities that are real.
    Now, we have been told that what the top 1 percent got as a 
2001 tax cut would have been sufficient if put into the Social 
Security Trust Fund to build up the trust funds enough so that 
we could have paid Social Security benefits for 75 percent 
without reducing benefits. Your testimony suggests that if we 
give them a tax cut, as we did, we have to deal with it by 
increasing the age, adjusting COLAs, possibly privatizing for 
those younger retirees as if our choice was we got to cut taxes 
and then we will scramble the best we can to try to deal with 
Social Security in the future. Could we have made a different 
choice?
    Mr. Greenspan. Well, my recommendations are recommendations 
I have been making for 20 years that are technical in the 
following sense: The intent of the Congress is to hold Social 
Security benefits to the cost of living. The problem is that 
the indexes we have been using to adjust for the cost of living 
are technically deficient. They are being improved upon by the 
Bureau of Labor Statistics to try to eliminate these biases and 
I was merely suggesting that if the intent of the Congress is 
to be met that a far better index is available to do that.
    With respect to the issue of indexing longevity, that is 
merely the question of addressing the fact that the average age 
that, let us see, the proportion of the population over 65 is 
going to continue to increase indefinitely.
    Mr. Scott. But that is the choice we make. What you are 
suggesting is rather than maintaining Social Security, the 
President means we are actually improving it and we have a 
choice. We could improve Social Security essentially through 
the back door, increasing benefits, or we could give a tax cut 
to the top 1 percent. We have a choice. I do not know what 
choice you would have made but Congress made the choice that we 
are going to have to deal with the COLAs, increase age and 
everything else.
    Let me see if I can get in another quick question.
    Mr. Shays. It needs to be quick.
    Mr. Scott. Tax cuts with borrowed money. What effect does 
the fact that we are borrowing money to fund the tax cuts have 
on their ability to create jobs?
    Mr. Greenspan. I do not think there is a relationship 
there. The deficit does what it does and the tax cuts do what 
they do. And I think that to relate them in my judgment is not 
necessarily appropriate. I do think that, deficits are 
something we should endeavor to avoid.
    But if we allow the tax burden to rise, we are going to 
have problems with our revenue base. So the choices are, 
basically, how do you run fiscal affairs? And I think that 
requires that you look at both receipts and expenditures in the 
context of deficits. And I don't know, other than just to look 
at the budget process, how one makes those judgments.
    Mr. Shays. Thank the gentleman.
    If we can go to Mr. Portman.
    Mr. Portman. Thank you for your thoughtful testimony 
today--I was here earlier--and your thoughtful analysis of what 
our choices are.
    I would disagree with my friend from Virginia that our 
choices were the top 1 percent tax breaks versus Social 
Security. Our choices were, are we going to have economic 
growth that enables us to then have the revenue to be able to 
get out of our deficit situation and to see jobs come back to 
this country? And it is starting to happen, so I agree with 
your structuring our choices.
    And, Mr. Spratt, I appreciate your opening statement, which 
I thought was very constructive. I think you analyze some of 
our challenges very accurately. At the end you said, how do we 
get back on track?
    As you know, Mr. Chairman, one way people talk about being 
back on track is to allow the tax relief that Mr. Scott talked 
about to expire--the 2001 tax relief, 2002, and 2003. You have 
talked a little bit about the overall tax burden growing 
because of the way in which productivity has grown, and, 
therefore, the indexing is imperfect.
    Do you agree that we ought to allow the tax relief to 
expire?
    Mr. Greenspan. I have testified previously that my 
preference is that it does not.
    Mr. Portman. The second question I have relates to your 
testimony.
    You talked about the aging population. You talked about 
investment and savings. And I don't want to put you on the spot 
this morning--although you have probably been put on the spot 
for the last couple of hours and you have handled it so well--
but it seems to me there are two big issues out there. One is 
savings overall. And now, as you know, we have a 2.3 national 
savings rate, we are told, which is anemic and far lower than 
it has been even in the recent past, and much lower than our 
trading partners or other developed economies.
    Second, we have this crunch you talked about of the 
demographics and the retirement crunch. You talked about health 
care costs, but--obviously, an overall problem with an aging 
population living longer. And my question to you is, would you 
support this Congress encouraging savings on a long-term basis 
that would affect retirement?
    Right now we have a 401(k) program, we also have the IRA 
programs, the Roth IRA. We also have a defined benefit program. 
The question is, somewhat along the lines of what the President 
talked about, would you be supportive of Congress encouraging 
the incentives for long-term savings and perhaps also 
encouraging those folks of modest income, who are not saving, 
to be able to save by providing some kind of a match, much as 
you would have in a 401(k) program, but now have the Federal 
Government play some role there?
    Do you think that would be constructive with regard to our 
economy and with regard to the second issue, which is the 
retirement crunch?
    Mr. GREENSPAN. Well, Congressman, I think that anything 
that would enhance national savings in and of itself is good. 
The crucial question that we always confront in this regard is 
whether particular programs actually do that. And I think it is 
important in proposing any particular program to make sure that 
it, indeed, does increase savings. And I think over the past we 
have had some mixed results on that.
    We are fortunate, I might say, in the one respect, that 
despite the fact that we have a very low savings rate, we are 
forced, in order to maintain our level of investment, to 
essentially borrow foreigners' savings, which is our current 
account balance. We seem to use those savings in a very 
effective way, in that our rates of return on investment, as 
reflected in the dramatic increases in productivity, say that 
we are very efficiently using what we have.
    But what we have is not large enough, because in a sense we 
are required to borrow too much from our trading partners 
abroad.
    Mr. Portman. Thank you, Mr. Chairman.
    Mr. Shays. Mr. Moore, you are next.
    Mr. Moore. Thank you.
    Thank you, Mr. Chairman. Ms. Majette, in her question, 
asked you if--she didn't say it in these words--but if all tax 
cuts are created equal; that is, do they have the same stimulus 
and effect on our economy in terms of productivity.
    I guess my question to you is, to try to follow up on that 
for just a minute, you indicated, Mr. Chairman, that lower tax 
rates on dividends is a very positive thing in your estimation. 
Isn't that correct?
    Mr. Greenspan. That is correct, yes.
    Mr. Moore. If we are looking at different kinds of tax 
cuts, such as AMT, marriage penalty, things of that nature, my 
question, I guess, is about the estate tax and permanent repeal 
of the estate tax.
    There is--sometimes everything is not black and white, and 
you don't need to go to one extreme or the other. And some 
people right now are proposing permanent repeal of the estate 
tax.Others are proposing increasing the credit to $3 million 
per person, so for a husband and wife it would be about a $6-
million increase.
    Do you have any thoughts about what might be--what might be 
worthwhile there in terms of--and I guess my question, too, is, 
what kind of effect would that have on the economy, a repeal of 
the estate tax?
    Mr. Greenspan. I have struggled with that issue. I don't 
know where I come out. I think there are obvious questions of 
its impact in certain areas of the economy, but it is hard to 
pin down exactly what the impact is. And not having hard 
evidence, I really can't have an opinion on that.
    Mr. Moore. OK.
    Mr. Edwards asked you earlier, I think, and Mr. Emanuel, I 
think--anyway, somebody asked you about foreign holdings of our 
securities and our debt in this country. And I think Japan has 
over $500 billion, and China, over $150 billion. And you said 
at one point--this is not an exact quote, but close, I think--
there would come a number which would disturb me.
    I am not going to ask you for a precise number, but can you 
give us a range of when we ought to start being disturbed about 
how much foreign governments own of our debt?
    Mr. Greenspan. Let me first make a general statement.
    What history has shown is that because we have ever more 
open markets and greater globalization and larger trade 
throughout the world, the ratio of assets and liabilities of 
each country--external assets, external liabilities--has been 
rising much faster than trade. And so aggregate holding of 
claims of foreigners against United States residents has been 
rising at a very significant pace and will continue to do so, 
so long as international intermediation continues to expand. 
That is good, not bad.
    It is only when the liabilities, net of assets, become a 
huge burden to finance, then we begin to have a problem. But I 
don't think that you can look at this issue in terms of U.S. 
Treasury securities or corporate debt or something of that 
nature. The total is what is relevant here.
    The only way in which you can come up with a number which 
says that we are in trouble in financing is when the aggregate 
of liabilities, less the assets as a ratio to the GDP, become 
sufficiently large as to make financing that net difference 
between liabilities and assets exceptionally difficult.
    We are nowhere near that point at this stage. But 
obviously, the current account deficit is 5 percent of the GDP, 
which effectively means that that ratio is increasing by 5 
percentage points of the GDP each year, so long as we stay at 
this level.
    Mr. Moore. So in and of itself----
    Mr. Shays. We have two more. And I need to get them out. Is 
that alright, sir?
    Mr. Moore. Yes, sir.
    Mr. Shays. Mr. Hensarling is going to question for 2 to 3 
minutes. Then we will go to you, Mr. Ford.
    Mr. Hensarling. Thank you, Mr. Chairman.
    Chairman Greenspan, due to the fact that I was at a markup 
earlier, I missed some of the questioning. My assumption, 
though, is that you heard a lot of the debate between whether 
or not tax increases or spending restraint would be the best 
method by which to address our Federal budget deficit.
    I, for one, have concluded that given that we passed $350 
billion of tax relief versus $28.3 trillion in spending in the 
last budget, that roughly 99 percent of the challenge lies on 
the spending side, especially since we are now spending over 
$21,000 per household for only the fourth time in the history 
of the Republic.
    In previous testimony, I believe that you have spoken about 
the need for budget process reforms, specifically about 
reauthorizing PAYGO and discretionary spending. Is that correct 
on my part?
    Mr. Greenspan. That is correct.
    Mr. Hensarling. My question, Mr. Chairman, is, there are 
many other positive ideas in the budget process reform category 
that have been discussed in Congress, such as the sunsetting 
process, setting up a BRAC-like commission for different 
government programs, setting up a rainy day fund so that we can 
start planning for emergencies.
    My question is, have you specifically looked at other 
budget process reform ideas, and if so, what conclusions have 
you come to?
    Mr. Greenspan. Well, Congressman, I, for a number of years, 
have argued that we ought to sunset virtually everything. And 
indeed, at one point, I said ``everything,'' and a Senator said 
to me, ``Including the Federal Reserve Act,'' and I said, 
``Yes.''
    Any institution which is essentially functioning 
appropriately, should be able to pass very readily in a sunset 
process. I am aware that there are technical problems involved 
in sunsetting certain types of ongoing legislation, especially 
relating to expenditure and taxation, but I think the principle 
of sunsetting is a very useful concept.
    Mr. Shays. Thank you.
    Mr. Ford, you have the floor.
    Mr. Ford. Thank you. I will be real quick.
    Thank you, Mr. Chairman for being here. Good to see you 
again. Tell your wife I said, ``hello.''
    You talked about the choices, and Rob Portman asked some 
good questions. But I just want to be straight and make sure 
that we are consistent here.
    If I am not mistaken, when Mr. Portman asked about 
continuing these tax cuts you said, ``yes.'' When it comes to 
defense spending you say, ``yes,'' but you are against the 
rising deficits.
    My friend, Mr. Hensarling, meant--not $28.2 trillion in 
spending; I think you might have gotten your decimal points 
mixed up, because we didn't have $350 billion in tax cuts and 
$28.2 trillion in spending. If we did, we all be very happy 
around here if we spent that kind of money on all the programs 
we want it spent on. So I think you might have had your decimal 
points mixed up.
    Where do you say, ``no?'' Because I like tax cuts like 
everybody else. And I ask that in the context of the AMT. More 
than half of the families in America earning $100,000 or less 
are to be hit by this thing in the few years. Where do we say, 
``no?'' Because we are all trying to set priorities, but we 
disagree over things here, obviously.
    But, I mean, it is easy--if Rob Portman asked me if I want 
tax cuts, I am going to say, ``yes.'' If he asks me if I want 
more spending in schools, if I ask him if he wants more 
spending in Cincinnati schools, he is going to say, ``yes,'' I 
hope. If he asks me if I want more spending on defense, I am 
going to say, ``yes.''
    Where do we--I mean, expiring taxes, where do you cut them 
off.
    Mr. Greenspan. I would give you a long, long list. I don't 
have a vote.
    What I am trying to say is--individually, specific programs 
are useful. But overall, we are still caught with the budget 
process. And not all of the particular items that I, you, or 
anybody else would like can be fundamentally fit into any 
budget process. I recognize that.
    I can give you my individual views as to where the budget 
of the United States ought to be, and it will balance.
    Mr. Ford. I would agree with anybody. If you put $350 
billion back into the economy, that is going to stimulate 
something. I think the question that Dennis Moore and others 
have had about ``all tax cuts are not created equal'' is a fair 
one to ask; and perhaps it calls for longer than 2 minutes and 
45 seconds.
    I know we want to close out.
    Do you see any harm in the administration's not including 
in its budget costs for the war this go-around, and should they 
include that? Should they make some ball park guesstimate, Mr. 
Chairman, based on our experience, with the war in Iraq and the 
war in Afghanistan?
    Mr. Greenspan. I remember the 1967 budget in which it was 
not included, as you may recall.
    Mr. Ford. I was not born yet, but I will take your word.
    Mr. Greenspan. I think that the President has said that 
those numbers are not included. We all know roughly what they 
are. I would like to see some rough estimates in, and 
endeavoring to understand where the budgets are, I do make that 
adjustment.
    Mr. Ford. So you think they should.
    Mr. Greenspan. I would like to see it in.
    Mr. Ford. Last question, Mr. Chairman.
    I know we are all hesitant to say which programs we would 
cut and what initiatives would be cut. Everybody--we talk about 
the spending; we are only talking about--not only, but when you 
look at the tax cuts versus the spending, we are talking about 
$400 or $500 billion in terms of nondefense discretionary 
spending.
    How much would you cut from spending? I mean, we--if the 
debate here is spending restraints versus tax cuts, I will 
accept that.
    Perhaps this is a conversation that we need to have on the 
committee here as well, Mr. Chairman. But how much would you 
cut in terms of discretionary spending to help us lower this 
deficit?
    Mr. Greenspan. I would cut as much as feasible, largely 
because the longer-term fiscal outlook is assured if we resolve 
most, if not all, of the problem from the outlay side. But to 
the extent we try to adjust it from the tax side, we are 
increasingly creating difficulties with respect to economic 
growth and the tax base. The more taxes, the more tax rates are 
raised; that is the principle I would go by.
    Mr. Ford. If we cut the entire discretionary spending, I 
don't know if we would cover the projected deficit for next 
year. So, I mean, we can zero the whole doggone thing out and 
still not, according to what the projections are for the 
deficit for this year, be able to cover.
    And I yield back.
    Mr. Shays. Mr. Greenspan, I would like to finish up. I 
won't take my full 5 minutes. But what I think that Mr. 
Hensarling was referring to $28 trillion of future spending 
over 10 years and a $300 billion tax cut over that frame.
    But let me ask you this. Should we have in this committee a 
10-year budget or a 5-year budget?
    Mr. Greenspan. Implicitly, you have got 10- and 20-year 
budgets, but you can't really detail them in a useful way 
because you have no way of making estimates.
    Mr. Shays. This committee is trying to decide whether we go 
out with a 5-year budget or 10-year budget.
    Mr. Greenspan. I understand that. All I am saying to you 
is, I can't answer that question.
    But I would say, irrespective of the particular length, you 
should have a judgment as to where that is taking you beyond 
the end of the particular period which you have chosen.
    Mr. Shays. OK. Let me also say that I sometimes say you 
speak in tongues. I don't think that anyone could claim that 
today. Usually we both leave feeling you agreed with us--not 
that that is always intended. But I would say that I think your 
message was stronger to my side of the aisle than it was down 
the middle.
    I think that we really should ponder what you say about 
PAYGO, both as it relates to spending and taxes, and that it be 
incorporated now rather than later. And having been on the 
Budget Committee for 10 years in the 1990s, I know the impact 
it had. And I think your message is loud and clear.
    I also would love to know your answer to Mr. Emanuel's 
question about structural debt versus cyclical, whether--do you 
think that we are playing close to having this become a 
structural debt?
    Mr. Greenspan. I do, Mr. Chairman.
    Mr. Shays. And finally, sometimes when you say something 
that may not seem controversial in the committee, it has been 
reported in the wire services that, quote, unquote, you want to 
cut Social Security. And I just want to give you the 
opportunity to make sure we are--the article in AP was very 
clear. The headline was, ``Greenspan urges Social Security 
cuts,'' and I just want to give you an opportunity to be pretty 
precise as to what you are suggesting.
    Mr. Greenspan. I am not urging Social Security cuts. Over 
the last 20 years, I have argued for an improvement in the 
cost-of-living adjustment, which is statutorily what is 
required.
    I am saying we have better technical means of doing what 
the intent of the Congress is. And I am merely repeating the 
same proposals I have been making ever since I was chairman of 
the Social Security Commission. I have not changed in the 
slightest.
    Mr. Shays. I just wanted to make sure that we dealt with 
that.
    So, anything you would like to put on the record before we 
adjourn?
    Mr. Greenspan. Thank you. I appreciate it.
    Mr. Shays. Thank you very much. I ask unanimous consent 
that members be allowed 7 days to submit statements for the 
record and that the record remain open for that period.
    Thank you. We are adjourned.
    [Whereupon, at 12:20 p.m., the committee was adjourned.]

                                  
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