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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 

(II)

COMMITTEE ON THE BUDGET 

JIM NUSSLE, Iowa, Chairman 

CHRISTOPHER SHAYS, Connecticut, 

Vice Chairman 

GIL GUTKNECHT, Minnesota 

MAC THORNBERRY, Texas 

JIM RYUN, Kansas 

PAT TOOMEY, Pennsylvania 

DOC HASTINGS, Washington 

ROB PORTMAN, Ohio 

EDWARD SCHROCK, Virginia 

HENRY E. BROWN, JR., South Carolina 

ANDER CRENSHAW, Florida 

ADAM PUTNAM, Florida 

ROGER WICKER, Mississippi 

KENNY HULSHOF, Missouri 

THOMAS G. TANCREDO, Colorado 

DAVID VITTER, Louisiana 

JO BONNER, Alabama 

TRENT FRANKS, Arizona 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

THADDEUS MCCOTTER, Michigan 

MARIO DIAZ–BALART, Florida 

JEB HENSARLING, Texas 

GINNY BROWN–WAITE, Florida 

JOHN M. SPRATT, JR., South Carolina, 

Ranking Minority Member 

JAMES P. MORAN, Virginia 

DARLENE HOOLEY, Oregon 

TAMMY BALDWIN, Wisconsin 

DENNIS MOORE, Kansas 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

ROSA DELAURO, Connecticut 

CHET EDWARDS, Texas 

ROBERT C. SCOTT, Virginia 

HAROLD FORD, Tennessee 

LOIS CAPPS, California 

MIKE THOMPSON, California 

BRIAN BAIRD, Washington 

JIM COOPER, Tennessee 

RAHM EMANUEL, Illinois 

ARTUR DAVIS, Alabama 

DENISE MAJETTE, Georgia 

RON KIND, Wisconsin 

PROFESSIONAL STAFF

RICH MEADE, Chief of Staff 

THOMAS S. KAHN, Minority Staff Director and Chief Counsel 

(III)

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

(1)

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. 

2

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, 

3

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 

4

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. 

5

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 

6

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. 

7

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 

8

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 

9

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 21⁄4. 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 

10

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 

11

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 

12

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 

13

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. 

14

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 

15

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 

16

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? 

17

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. 

18

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. 

19

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 

20

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 

21

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 

22

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 

23

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. 

24

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 

25

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 someVerDate 0ct 09 2002 15:52 Jul 12, 2004 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6602 X:\HEARINGS\108TH\108-20\HBU056.000 RYAN PsN: RYAN
26

thing 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 

27

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 

28

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 specifiVerDate 0ct 09 2002 15:52 Jul 12, 2004 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6602 X:\HEARINGS\108TH\108-20\HBU056.000 RYAN PsN: RYAN
29

cally 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. 

30

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 

31

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. 

32

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? 

33

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 

34

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. 

35

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 

36

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. 

37

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 

38

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 

39

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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