```

[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]

                       CONDUCT OF MONETARY POLICY

            Report of the Federal Reserve Board pursuant to

                 Section 2B of the Federal Reserve Act

                     and the State of the Economy

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

                                HEARING

                               BEFORE THE

                              COMMITTEE ON
                           FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                           FEBRUARY 28, 2001

                               __________

       Printed for the use of the Committee on Financial Services

                            Serial No. 107-1

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70-750 DTP                  WASHINGTON :  2001
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice      BARNEY FRANK, Massachusetts
    Chair                            PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska              MAXINE WATERS, California
RICHARD H. BAKER, Louisiana          CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama              LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware          NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California          GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma             KEN BENTSEN, Texas
ROBERT W. NEY, Ohio                  JAMES H. MALONEY, Connecticut
BOB BARR, Georgia                    DARLENE HOOLEY, Oregon
SUE W. KELLY, New York               JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                MAX SANDLIN, Texas
CHRISTOPHER COX, California          GREGORY W. MEEKS, New York
DAVE WELDON, Florida                 BARBARA LEE, California
JIM RYUN, Kansas                     FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama                   JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio           JANICE D. SCHAKOWSKY, Illinois
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina      CHARLES A. GONZALEZ, Texas
DOUG OSE, California                 STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois               MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin                HAROLD E. FORD Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania      RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut       KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona             RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York              JOSEPH CROWLEY, New York
GARY G. MILLER, California           WILLIAM LACY CLAY, Missouri
ERIC CANTOR, Virginia                STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York       MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania         
SHELLEY MOORE CAPITO, West Virginia  BERNARD SANDERS, Vermont
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    February 28, 2001............................................     1
Appendix:
    February 28, 2001............................................    43

                                WITNESS
                      Wednesday, February 28, 2001

Greenspan, Hon. Alan, Chairman, Board of Governors, Federal 
  Reserve 
  System.........................................................     6

                                APPENDIX

Prepared statements:
    Oxley, Hon. Michael G........................................    44
    Clay, Hon. William Lacy......................................    46
    Crowley, Hon. Joseph.........................................    47
    Frank, Hon. Barney...........................................    50
    Jones, Hon. Stephanie Tubbs..................................    52
    Greenspan, Hon. Alan.........................................    55

              Additional Material Submitted for the Record

Greenspan, Hon. Alan:
    Board of Governors of the Federal Reserve System, Monetary 
      Policy Report to the Congress, February 13, 2001...........    65
    Written response to a question from Hon. Charles A. Gonzalez.    54

 
                       CONDUCT OF MONETARY POLICY

                              ----------                              

                      WEDNESDAY, FEBRUARY 28, 2001

             U.S. House of Representatives,
                           Committee on Financial Services,
                                                    Washington, DC.
    The committee met, pursuant to call, at 9:32 a.m., in room 
2128, Rayburn House Office Building, Hon. Michael G. Oxley, 
[chairman of the committee], presiding.
    Present: Chairman Oxley; Representatives Roukema, Bereuter, 
Baker, Bachus, Castle, King, Royce, Lucas, Barr, Kelly, Paul, 
Gillmor, Cox, Weldon, Ryun, Riley, Ose, Biggert, Green, Toomey, 
Shays, Shadegg, Fossella, Miller, Cantor, Grucci, Capito, 
Ferguson, Rogers, Tiberi, LaFalce, Frank, Kanjorski, Waters, 
Sanders, C. Maloney of New York, Watt, Bentsen, J. Maloney of 
Connecticut, Hooley, Carson, Sherman, Sandlin, Meeks, Lee, 
Mascara, Inslee, Schakowsky, Moore, Gonzalez, Jones, Capuano, 
Ford, Hinojosa, Lucas, Shows, Crowley, Israel, and Ross.
    Chairman Oxley. The hearing will come to order.
    The committee is meeting today to hear testimony from the 
Chairman of the Federal Reserve Board of Governors, Chairman 
Greenspan. Before we get started, the Chair needs to make a few 
announcements.
    As you know, Chairman Greenspan has a very busy schedule, 
and in order to permit the maximum number of Members the 
opportunity to ask questions, we must work efficiently. 
Therefore, pursuant to the rules of the committee and the 
Chair's prior announcement, the Chair will recognize himself 
and the Ranking Minority Member of the full committee for 5 
minutes for opening statements, and the Chair and Ranking 
Member of the 
subcommittee of jurisdiction for 3 minutes each.
    After Chairman Greenspan completes his prepared remarks, 
the Chair will recognize Members for questioning under the 5-
minute rule. Those Members present at the start of the hearing 
will be recognized in order of their seniority, and those 
Members arriving later will be recognized in order of their 
appearance. In order to ensure that as many Members as possible 
have an opportunity to question Chairman Greenspan, the Chair 
will watch the clock very carefully. The Chair will not 
entertain unanimous consent requests to extend the period 
available to Members to question the 
Chairman. The Chair urges Members to use their time wisely.
    Finally, in order to ensure that Members have an 
opportunity to ask questions which require a more detailed 
response, without objection the hearing record will remain open 
for 30 days to permit Members to submit written questions and 
place their responses in the record; and it is so ordered.
    I thank the Members for their assistance and cooperation. 
The Chair now recognizes himself for 5 minutes.
    Good morning, Chairman Greenspan and Members and guests. 
Welcome to the first working hearing of the new Committee on 
Financial Services. I can't think of a better witness for our 
first hearing. Today we will receive testimony from the 
``maestro'' himself, Chairman of the Federal Reserve Board of 
Governors, Alan Greenspan.
    Welcome, Chairman Greenspan.
    This committee reflects the new financial and monetary 
architecture created by Gramm-Leach-Bliley. Our jurisdiction 
stretches across domestic and international monetary policy, 
banking, housing, securities and insurance, among other issues. 
Frankly, the jurisdiction is the economy.
    Chairman Greenspan's semi-annual report to Congress on the 
state of the economy and on monetary policy, especially in view 
of the sluggishness that infected the economy in the latter 
half of last year, is an important and fitting place to start. 
Chairman Greenspan already fulfilled his legislative obligation 
when he appeared before the Senate 2 weeks ago. He is here 
today of his own free will and is graciously allowing us to 
pepper him with questions.
    Thank you for your time, Chairman Greenspan. We are anxious 
to see if you are going to commit news today.
    We now have two quarters of very slow growth and industrial 
production has declined for each of the past 4 months. The U.S. 
economy entered a period of slowdown in the middle of last 
summer.
    Chairman Greenspan, you noted the early signs in your last 
report to Congress in July. In the fourth quarter, markets 
slid, inventories grew and consumer confidence wavered. High 
energy prices were aggravated by low winter temperatures. Also 
we are mindful of economic woes in Japan, strife in Indonesia, 
and recent economic chaos in our important strategic partner, 
Turkey.
    Mr. Chairman, perhaps you can shed some light on the 
``alphabet'' debate: whether we can look for a slowdown and 
recovery that is V-shaped, U-shaped or W-shaped. Some of us are 
partial to the letter W, but we would much prefer a V-shaped 
recovery. The bears are out in force, and yet we have so many 
reasons for optimism.
    Chairman Greenspan, in addition to your superb stewardship 
of economic and monetary policy, we have a new President with a 
simple but profound vision to return part of the surplus to the 
people who earned it. This committee will do its part by 
working to eliminate the hidden taxes that American investors 
overpay in SEC fees. This represents billions of dollars that 
ought to stay in pension funds, rather than going into 
Government coffers.
    Supported by your strong testimony before the Senate, the 
overall debate now centers over how much of a tax cut to grant, 
not whether one is necessary. Also you gave Congress a good 
talking-to about the wise use of our hard-won surplus.
    President Bush has heeded your counsel, telling Congress 
just last night that he wants to pay down all of the debt 
possible as it comes due. We are fortunate to have a system 
where both monetary and fiscal policy tools can be used to 
encourage recovery. I know that the committee is looking 
forward to your assessment of the inflation risk that can 
constrain the Fed. We would appreciate your insights about the 
relationship between monetary policy and consumer and business 
confidence, and how quickly a monetary policy action could 
result in economic stimulation.
    Some contend that the Fed can handle the downturn by easing 
the Federal funds rate with the two recent moves and further 
cuts as necessary. Others, including the President and myself, 
argue that interventions are important, but that short- and 
long-term tax relief will strengthen the economy and continue 
growth.
    As the President told us last night, we can return some of 
the recent budget surplus to taxpayers while still budgeting 
for responsible spending that takes care of our Nation's needs. 
We must take the long view and see the silver lining in the 
cloud. Part of the reason for the speed of the slowdown was the 
underlying strength of our economy. Often the more sudden the 
storm, the more quickly it passes.
    Mr. Chairman, I look forward to your testimony. I now yield 
to the gentleman from New York, the Ranking Member, Mr. 
LaFalce, for an opening statement.
    [The prepared statement of Hon. Michael G. Oxley can be 
found on page 44 in the appendix.]
    Mr. LaFalce. Thank you very much, Chairman Oxley and 
Maestro Greenspan, I have got that great book by my bedside, 
whenever I am having difficulty.
    Last night President Bush came before us in his first 
address to a joint session of Congress, Chairman Greenspan, and 
he said that we have a fork in the road, and when there is a 
fork in the road, take it.
    Well, the question is, which road do we take, of course. As 
I look back over the past several decades, we can take a path 
similar to the path we took in the decade of the 1990s, or we 
can take a path similar to the path we took in the decade of 
the 1980s. The year 2001 could be like the beginning of the 
decade of the 1980s, or the beginning of the decade of the 
1990s, and I make a bit of a contrast. I remember 1981 so 
vividly when we were told by the President at that time, ``be 
courageous, vote for tax cuts.'' I could be courageous for tax 
cuts. That is terrific if that is what courage is.
    Well, a majority did. We could debate cause and effect, but 
we were in, like Secretary O'Neill said, a deficit ditch for a 
long, long time. I worked with many to struggle out of that 
ditch. It was really not until 1990, with President Bush and a 
Democratic Congress, that we began in a really meaningful way 
to dig ourselves out of the ditch, adopted a policy in 1990 
that you supported and you applauded, a policy agreed upon 
between President Bush and the Congress; and we deepened that 
course, we got further out of the ditch in 1993--a Democratic 
President this time rather than a Republican President, still a 
Democratic Congress--and you applauded that.
    Then we took action in later years too, especially 1997, 
with a Republican Congress and Democratic President.
    I think the decade of the 1990s has been a very successful 
one. Most Americans are doing much better. You played a major 
role in that as Chairman of the Federal Reserve Board, as 
Chairman of the Federal Open Market Committee. Technology 
played a very major role, and fiscal discipline and cooperation 
between Republican and Democratic Presidents, between 
Republican and Democratic Members of Congress.
    What I am concerned about is that we might embark in the 
year 2001 on a course much more similar to 1981, the decade of 
the 1980s, rather than the decade of the 1990s, and I am afraid 
that your values might aid and abet that.
    And what do I mean by that?
    My values tell me that we must do something about the 45 
million Americans who have no health insurance; that we must do 
something about our deteriorating public infrastructure, the 
fact that our bridges are crumbling, the schools in my city of 
Buffalo, New York, and Niagara Falls and Rochester are 
deteriorating; that there is an unbelievable gap between 
affluent suburbs and people who live there and inner-city 
America; that there are so many senior citizens who need 
prescription drugs, because prescription drugs can now deal 
with diabetes and macular degeneration and high blood pressure 
and high cholesterol, you name it, virtually everything, but 
these prescription drugs are unaffordable to our senior 
citizens, and we must provide and pay for them.
    So, fiscal policy is not your domain; monetary policy is. 
That is your highest value construct. You want to pay down the 
debt, but I also think you are concerned about paying it down 
too much and not having any debt. Maybe that is a legitimate 
concern, but nowhere near the value that I attach to the 
concerns of those countless millions of Americans who are still 
suffering.
    So, Mr. Chairman, I look forward to what you have to say, 
because it can have great influence on the opinion of Americans 
and the opinions of the Members of Congress, and it might have 
a great impact on so many Americans who are still suffering.
    Thank you.
    Chairman Oxley. I thank the gentleman.
    The Chair now recognizes the Chairman of the Subcommittee 
on Domestic Monetary Policy, the gentleman from New York, Mr. 
King.
    Mr. King. Thank you, Mr. Chairman. I appreciate this 
opportunity.
    Chairman Greenspan, it is a pleasure to welcome you here 
this morning. I myself want to thank you for the meeting we had 
in my office recently. I think it is important to note that the 
greatest intensity in that meeting came when you discussed the 
Wall Street Journal expose detailing how the Giants had stolen 
the 1951 pennant from the Dodgers. Today I guess we are here 
for much more mundane matters, the economic future of our 
country and perhaps the world.
    As Chairman Oxley and Ranking Member LaFalce have said, for 
the past decade we have gone through a period of almost 
unprecedented growth and expansion in our economy. Many of us 
believe that the foundation for that expansion began in the 
1980s. That can be debated. Also, I guess what can be debated 
is exactly what went on during the last decade, whether or not 
old economic rules and indicators were changed and put aside. 
But we all agree that right now we are entering a period of 
economic sluggishness. In this slowdown, the question is, how 
do we reach the softest possible landing, how do we recover 
from this slowdown as quickly as possible and, hopefully, enter 
into a new period of solid and sustained growth.
    In your testimony today, and certainly in the weeks and 
months ahead, we will be looking for guidance from you in, for 
instance, the impact the President's tax plan would have on the 
economy, both short and long term, how that would be 
coordinated with monetary policy. Also whether or not those tax 
cuts should be made retroactive. Also--and Ranking Member 
LaFalce touched on this--this whole issue that you have raised, 
which I think is a very valid issue, as to what happens if the 
debt is eliminated, what impact would that have on the economy? 
Will that give too much of a role to the Government in the 
private economy of this country if in fact we did eliminate the 
deficit entirely?
    Also with the changing of the economic rules in the past 
several years, we have also had the passage of Gramm-Leach-
Bliley, which has totally changed the economic system here in 
this country. We have questions, for instance, of banks getting 
involved in real estate, and the impact issues such as that 
would have on the future of this economy.
    So I look forward to your testimony today. I know that all 
of us do. These are difficult times ahead, but I think what we 
have shown in the past is, when we stand up and confront 
difficult circumstances, we can bring about greater 
opportunities. So thank you for being here today and thank you 
for the work you have done for our country.
    I yield back the balance of my time.
    Chairman Oxley. The Chair is now pleased to recognize the 
Ranking Member, the gentlewoman from New York, Mrs. Maloney.
    Mrs. Maloney. Thank you very much, Chairman Oxley.
    And welcome, Mr. Greenspan. As the person in the country 
whose job it is to read the direction of the economy plan years 
into the future, it is particularly appropriate that you are 
appearing before the committee today, the day after the 
President's speech.
    To justify the size of his tax cut, the President is 
relying heavily on the CBO forecast of a $5.6 trillion surplus 
over 10 years. As Chairman Greenspan can tell us, forecasting 
the economy months into the future, let alone 10 years into the 
future, is a process wrought with guesswork and error. Risking 
our budget surpluses with a tax cut based on a 10-year 
projection reminds me of another Bush program. Perhaps we 
should call the President's approach ``faith-based budgeting.''
    With all respect to Chairman Greenspan, the Fed's recent 
actions have shown just how difficult it can be to forecast the 
economy. The Fed may have contributed to the current economic 
slowdown by raising interest rates six times from June of 1999 
to May of 2000. As late as the December Federal Open Market 
Committee meeting, the Fed maintained a neutral stance on the 
pace of economic growth, forcing them to act dramatically with 
a full-point rate cut when they changed their minds last month.
    CBO's own report on the surplus states that due to 
uncertainty resulting from current economic conditions--and I 
quote from the CBO report--``The longer term outlook is also 
unusually hard to discern at present.''
    While the outlook for the next 10 years is uncertain, we 
can be sure that in the next 10 years following, from 2011 to 
2021--and you will probably still be our Federal Reserve 
Chairman--the country faces fiscal challenges of an historic 
level as we deal with entitlement pressures brought on by the 
retirement of the baby-boomers.
    In light of the uncertainty and our aging population, I 
urge my colleagues to follow a prudent budget course that 
returns money to all the American people in a tax cut, but does 
so in a manner that allows us to continue to pay down the debt 
while not touching any of the Social Security or Medicare 
surpluses.
    Thank you, Mr. Chairman. I look forward to your comments on 
this and other issues.
    Chairman Oxley. I thank the gentlewoman.
    The panel now turns to a good friend, the Chairman of the 
Federal Reserve, Chairman Greenspan. Chairman Greenspan, it is 
indeed appropriate that you are our first witness for the full 
committee, the new Financial Services Committee. Welcome, and 
we hope to have you back many times in the future.

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

    Mr. Greenspan. Thank you very much, Mr. Chairman.
    I certainly appreciate this opportunity to present the 
Federal Reserve's Semi-annual Report on Monetary Policy.
    The past decade has been extraordinary for the American 
economy and monetary policy. The synergies of key technologies 
markedly elevated prospective rates of return on high-tech 
investments, led to a surge in business capital spending, and 
significantly increased the underlying growth rate of 
productivity. The capitalization of those higher than expected 
returns boosted equity prices, contributing to a substantial 
pickup in household spending on new homes, durable goods, and 
other types of consumption generally beyond even that implied 
by the enhanced rise in real incomes.
    When I last reported to you in July, economic growth was 
just exhibiting initial signs of slowing from what had been an 
exceptionally rapid and unsustainable rate of increase that 
began a year earlier.
    The surge in spending had lifted the growth of the stocks 
of many kinds of consumer durable goods and business capital 
equipment to rates that could not be continued. The elevated 
level of light vehicle sales, for example, implied a rate of 
increase in the number of vehicles on the road hardly 
sustainable for a mature industry. And even though demand for a 
number of high-tech products was doubling or tripling annually, 
in many cases new supply was coming on even faster. Overall, 
capacity in high-tech manufacturing industries rose nearly 50 
percent last year, well in excess of its rapid rate of increase 
over the previous 3 years. Hence, a temporary glut in these 
industries and falling prospective rates of return were 
inevitable at some point. Clearly, some slowing in the pace of 
spending was necessary and expected if the economy was to 
progress along a balanced and sustainable growth path.
    But the adjustment has occurred much faster than most 
businesses anticipated, with the process likely intensified by 
the rise in the cost of energy that has drained business and 
household purchasing power. Purchases of durable goods and 
investment in capital equipment declined in the fourth quarter. 
Because the extent of the slowdown was not anticipated by 
businesses, it induced some backup in inventories despite the 
more advanced just-in-time technologies that have in recent 
years enabled firms to adjust production levels more rapidly to 
changes in demand. Inventory-sales ratios rose only moderately, 
but relative to the levels of these ratios implied by their 
downtrend over the past decade, the emerging imbalances 
appeared considerably larger. Reflecting these growing 
imbalances, manufacturing purchasing managers reported last 
month that inventories in the hands of their customers had 
risen to excessively high levels.
    As a result, a round of inventory rebalancing appears to be 
in progress. Accordingly, the slowdown in the economy that 
began in the middle of 2000 intensified, perhaps even to the 
point of growth stalling out around the turn of the year. As of 
the economy slowed, equity prices fell, especially in the high-
tech sector where previous high valuations and optimistic 
forecasts were being reevaluated, resulting in significant 
losses for some investors. In addition, lenders turned more 
cautious. This tightening of financial conditions, itself, 
contributed to restraint on spending.
    Against this background, the Federal Open Market Committee 
undertook a series of aggressive monetary policy steps. At its 
December meeting, the FOMC shifted its announced assessment of 
the balance of risks to express concern about economic 
weakness, which encouraged declines in market interest rates. 
Then on January 3, and again on January 31, the FOMC reduced 
its targeted Federal funds rate one-half percentage point, to 
its current level of 5\1/2\ percent. An essential precondition 
for this type of response was that underlying cost and price 
pressures remained subdued, so that our front-loaded actions 
were unlikely to jeopardize the stable, low inflation 
environment necessary to foster investment and advances in 
productivity.
    With signs of softness still patently in evidence at the 
time of its January meeting, the Federal Open Market Committee 
retained its sense that downside risks predominate. The 
exceptional degree of slowing so evident toward the end of last 
year, perhaps in part the consequence of adverse weather, 
seemed less evident in January and February. Nonetheless, the 
economy appears to be on a track well below the productivity-
enhanced rate of growth of its potential, and, even after the 
policy actions we took in January, the risks continue skewed 
toward the economy's remaining on a path inconsistent with 
satisfactory economic performance.
    Crucial to the assessment of the outlook and the 
understanding of recent policy actions is the role of 
technological change and productivity in shaping near-term 
cyclical forces, as well as long-term sustainable growth.
    The prospects for sustaining strong advances in 
productivity in the years ahead remain favorable. As one would 
expect, productivity growth has slowed along with the economy. 
But what is notable is that, during the second half of 2000, 
output per hour advanced at a pace sufficiently impressive to 
provide strong support for the view that the rate of growth of 
structural productivity remains well above its pace of a decade 
ago.
    Moreover, although recent short-term business profits have 
softened considerably, most corporate managers appear not to 
have altered to any appreciable extent their long-standing 
optimism about the future returns from using new technology. A 
recent survey of purchasing managers suggests that the wave of 
new on-line business-to-business activities is far from 
cresting. Corporate managers more generally, rightly or 
wrongly, appear to remain remarkably sanguine about the 
potential for innovations to continue to enhance productivity 
and profits. At least this is what is gleaned from the 
projections of equity analysts, who, one must presume, obtain 
most of their insights from corporate managers. According to 
one prominent survey, the 3- to 5-year average earnings 
projections of more than 1,000 analysts, though exhibiting some 
signs of diminishing in recent months, have generally held at a 
very high level. Such expectations, should they persist, bode 
well for continued strength in capital accumulation and 
sustained elevated growth of structural productivity over the 
longer term.
    The same forces that have been boosting growth in 
structural productivity seem also to have accelerated the 
process of cyclical adjustment. Extraordinary improvements in 
business-to-business communication have held unit costs in 
check, in part by greatly speeding up the flow of information. 
New technologies for supply chain management and flexible 
manufacturing imply that businesses can perceive imbalances in 
inventories at a very early stage, virtually in real time, and 
can cut production promptly in response to the developing signs 
of unintended inventory building.
    Our most recent experience with some inventory backup, of 
course, suggests that surprises can still occur and that this 
process is still evolving. Nonetheless, compared with the past, 
much progress is evident. A couple of decades ago, inventory 
data would not have been available to most firms until weeks 
had elapsed, delaying a response and, hence, eventually 
requiring even deeper cuts in production. In addition, the 
foreshortening of lead times on the delivery of capital 
equipment, a result of information and other newer 
technologies, has engendered a more rapid adjustment of capital 
goods production to shifts in demand that result from changes 
in firms' expectations of sales and profitability. A decade 
ago, extended backlogs on capital equipment meant a more 
stretched-out process of production adjustments.
    Even consumer spending decisions have become increasingly 
responsive to changes in the perceived profitability of firms 
through their effects on the value of households' holdings of 
equities. Stock market wealth has risen substantially relative 
to income in recent years, itself a reflection of the 
extraordinary surge of innovation. As a consequence, changes in 
stock market wealth have become a more important determinant of 
shifts in consumer spending relative to changes in current 
household income than was the case just 5 to 7 years ago.
    The hastening of the adjustment to emerging imbalances is 
generally beneficial. It means that those imbalances are not 
allowed to build until they require very large corrections. But 
the faster adjustment process does raise some warning flags. 
Although the newer technologies have clearly allowed firms to 
make more informed decisions, business managers throughout the 
economy also are likely responding to much of the same enhanced 
body of information. As a consequence, firms appear to be 
acting in far closer alignment with one another than in decades 
past. The result is not only a faster adjustment, but one that 
is potentially more synchronized, compressing changes into an 
even shorter timeframe.
    This very rapidity with which the current adjustment is 
proceeding raises another concern, of a different nature. While 
technology has quickened production adjustments, human nature 
remains unaltered. We respond to a heightened pace of change 
and its associated uncertainty in the same way we always have. 
We withdraw from action, postpone decisions, and generally 
hunker down until a renewed, more comprehensible basis for 
acting emerges. In its extreme manifestation, many economic 
decisionmakers not only become risk averse, but attempt to 
disengage from all risk. This precludes taking any initiative, 
because risk is inherent in every action. In the fall of 1998, 
for example, the desire for liquidity became so intense that 
financial markets seized up. Indeed, investors even tended to 
shun risk-free, previously issued Treasury securities in favor 
of highly liquid, recently issued Treasury securities.
    But even when decisionmakers are only somewhat more risk 
averse, a process of retrenchment can occur. Thus, although 
prospective long-term returns on new high-tech investment may 
change little, increased uncertainty can induce a higher 
discount of those returns and, hence, a reduced willingness to 
commit liquid resources to illiquid fixed investments.
    Such a process presumably is now under way and arguably may 
take some time to run its course. It is not that underlying 
demand for internet networking and communication services has 
become less keen. Indeed, as I noted earlier, some suppliers 
seem to have reacted late to accelerating demand, have 
overcompensated in response, and then have been forced to 
retrench--a not-unusual occurrence in business decisionmaking.
    A pace of change outstripping the ability of people to 
adjust is just as evident among consumers as among business 
decisionmakers. When consumers become less secure in their jobs 
and finances, they retrench as well.
    It is difficult for economic policy to deal with the 
abruptness of a break in confidence. There may not be a 
seamless transition from high to moderate to low confidence on 
the part of businesses, investors, and consumers. Looking back 
at recent cyclical episodes, we see that the change in 
attitudes has often been sudden. In earlier testimony, I 
likened this process to water backing up against a dam that is 
finally breached. The torrent carries with it most remnants of 
certainty and euphoria that built up in earlier periods.
    This unpredictable rending of confidence is one reason that 
recessions are so difficult to forecast. They may not be just 
changes in degree from a period of economic expansion, but a 
different process engendered by fear. Our economic models have 
never been particularly successful in capturing a process 
driven in large part by non-rational behavior.
    For this reason, changes in consumer confidence will 
require close scrutiny in the period ahead, especially after 
the steep falloff of recent months. But for now, at least, the 
weakness in sales of motor vehicles and homes has been modest, 
suggesting that consumers have retained enough confidence to 
make longer-term commitments; and as I pointed out earlier, 
expected earnings growth over the longer run continues to be 
elevated. Obviously, if the forces contributing to long-term 
productivity growth remain intact, the degree of retrenchment 
will presumably be limited. In that event, prospects for high 
productivity growth should, with time, bolster both consumption 
and investment demand. Before long in this scenario, excess 
inventories would be run off to desired levels. Higher demand 
should also facilitate the working off of a presumed excess 
capital stock, though doubtless at a more modest pace.
    Still, as the Federal Open Market Committee noted in its 
last announcement, for the period ahead, downside risks 
predominate. In addition to the possibility of a break in 
confidence, we don't know how far the adjustment of the stocks 
of consumer durables and business capital equipment has come. 
Also, foreign economies appear to be slowing, which could 
dampen demands for exports; and continued nervousness is 
evident in the behavior of participants in financial markets, 
keeping risk spreads relatively elevated.
    Because the advanced supply chain management and flexible 
manufacturing technologies may have quickened the pace of 
adjustment in production and incomes and correspondingly 
increased the stress on confidence, the Federal Reserve has 
seen the need to respond more aggressively than had been our 
wont in earlier decades. Economic policymaking could not, and 
should not, remain unaltered in the face of major changes in 
the speed of economic processes. Fortunately, the very advances 
in technology that have quickened economic adjustments have 
also enhanced our capacity for real-time surveillance.
    As I pointed out in summary then, although the sources of 
long-term strength of our economy remain in place, excesses 
built up in 1999 and early 2000 have engendered a retrenchment 
that has yet to run its full course. This retrenchment has been 
prompt, in part because new technologies have enabled 
businesses to respond more rapidly to emerging excesses. 
Accordingly, to foster financial conditions conducive to the 
economy's realizing its long-term strengths, the Federal 
Reserve has quickened the pace of adjustment of its policy.
    Thank you, Mr. Chairman. I request that the remainder of my 
remarks be included for the record.
    [The prepared statement of Hon. Alan Greenspan can be found 
on page 55 in the appendix.]
    Chairman Oxley. Without objection, so ordered, Mr. 
Chairman.
    Let me recognize myself for 5 minutes.
    Mr. Chairman, back when we had our last really full-blown 
recession in 1982, the markets almost inexplicably rebounded 
very quickly and the mantra at that time was first Wall Street, 
and then Main Street.
    Do we face a reverse of that this time? That is, are the 
markets potentially reflecting a downturn overall and should we 
be concerned about that?
    Mr. Greenspan. Well, the history on that is mixed, Mr. 
Chairman. In fact, as an old colleague of mine once said, ``the 
stock market forecasted five of the last two recessions.'' So 
we have to be careful about being fairly strict in analyzing 
what stock prices and equity values are doing and what is 
happening to demand.
    Having said that, there is no question, as I indicated in 
earlier testimony, that the so-called ``wealth effect'' has 
been a very prominent factor in the major expansion of economic 
activity, especially since 1995, and clearly with the market 
reversing, that process does indeed reverse. Whether it, in and 
of itself, is enough to actually induce a significant 
contraction which, in retrospect, we will call a ``recession,'' 
is yet too early to make a judgment on.
    Chairman Oxley. Do I read your statement correctly to mean 
that there actually is greater consumer confidence than has 
been reported?
    Mr. Greenspan. There is also a distinction between our 
various measures of consumer confidence and, indeed, what 
people think, feel and say, and what they do. And in the last 
couple of months during the period when the indexes, the 
proxies for consumer confidence, have gone down extraordinarily 
rapidly, it has not been matched by a concurrent decline in 
consumption expenditures.
    Now, to be sure, the strength, as I indicated in my 
prepared remarks, in passenger cars in January and February did 
reflect a bulge in so-called ``fleet sales,'' and one must 
presume that that will unwind in the months ahead. But all in 
all, the demand for homes, the demand for consumer durables, 
while scarcely where they were a year ago, have not matched the 
type of weakness that we have seen in the consumer confidence 
indexes. What we do not know, however, is whether that merely 
is something which has been delayed, and that ultimately the 
adjustment in consumer expenditures will indeed, after the 
fact, reflect the most recent patterns of consumer confidence. 
We don't know yet what the answer to that is.
    Chairman Oxley. Mr. Chairman, in the end of your statement, 
you say ``This retrenchment has been prompt, in part because 
new technology has enabled businesses to respond more rapidly 
to emerging excesses. Accordingly, to foster financial 
conditions conducive to the economy's realizing its long-term 
strengths, the Federal Reserve has quickened the pace of 
adjustment of its policy.''
    Can you tell us in more detail what that means?
    Mr. Greenspan. We have gone through a decade in which very 
significant technological changes have occurred in the area of 
information, and it has dramatically altered the process by 
which business decisionmaking has been made. As a consequence, 
we have observed on the upside of the economy major changes in 
the way capital investment decisions are made, inventory 
decisions are made, indeed, virtually all business decisions.
    What we have not seen is how does that new technology 
affect the decisionmaking process when the rate of growth 
begins to fall? And I guess we could reasonably presume, and 
indeed it was the reasonable expectation, that the just-in-time 
inventory process, to take one aspect of the decisionmaking 
process, would not only affect how inventories were accumulated 
on the upside, but presumably accelerate the adjustment process 
on the downside. And indeed, that is what we are obviously 
observing.
    If that is the case, then all economic policy must indeed 
adjust itself for the changing timeframe in which the economy 
itself is moving. We, for example, have observed phenomena 
which used to take 30 months to work out, probably now take 24 
months or 15 months, and those which used to take 3 or 4 weeks 
now happen sometimes in 3 or 4 days.
    For monetary policy very specifically to maintain the same 
pace of adjustment that we had in the past clearly would not be 
consonant with what has occurred in the structure of an economy 
to which we must adjust. So the content of my remarks is that 
we have developed, and, of necessity, will continue to develop 
a far more quick response, presumably a far more front-loading 
of response to reflect the changing environment in which we 
find ourselves.
    Chairman Oxley. Thank you.
    The gentleman from New York, Mr. LaFalce.
    Mr. LaFalce. Mr. Chairman, you strive to have a close 
working relationship with any President, Republican or 
Democrat, and the Congresses, too, that can make a meshing of 
monetary and fiscal policy, that can make for a better economic 
policy, of course.
    Some would look back and say, ``Well, President George Bush 
in 1990, 1991, 1992, might say, gee, he might have done much 
better in the 1992 election had Alan Greenspan been more 
cooperative with him.'' Al Gore perhaps can make the same 
claim.
    You run a dilemma. You have to be the intellectually honest 
person and you want to cooperate. If you cooperate too much, 
you could also be used, and people could tradeoff of their 
association with you, can tradeoff of statements you have made, 
and magnify your statements tenfold, a thousandfold, bring 
about consequences that you yourself don't really like.
    That is a concern of yours, too, I am sure. I will not ask 
you to comment about that, but it is a reality.
    I am going to ask you some questions now. Each of my 
questions does have something in mind for which I will be using 
your response obviously, as Presidents use your responses.
    First of all, I think that horses should come before carts, 
and I think, therefore, that we should pass a budget resolution 
as called for by law of the United States on April 15th, before 
we take up a tax cut bill; and yet I hear we might take up a 
tax cut bill in committee next week. I don't think we are going 
to pass a budget resolution until at least the budget is 
presented to us in some detail. Now, I understand we might not 
get it until April.
    What do you think, which should come first, the horse or 
the cart?
    Mr. Greenspan. The budget resolution is something which the 
Congress itself constructed. It has been a very effective tool 
and I think the whole budget process coming out of the 1974 Act 
has been a major factor in rationalizing the budget process. So 
it is up to the Congress to make the decision. I mean, this is 
a wholly political issue, and the facts----
    Mr. LaFalce. But some economic consequences though, 
wouldn't you say?
    Mr. Greenspan. No, not necessarily.
    Mr. LaFalce. Oh, you don't think the budget that we pass 
has some economic consequences?
    Mr. Greenspan. I think it certainly has some. The question 
of how you arrive at that budget, in and of itself, need not 
have economic consequences. What you are referring to----
    Mr. LaFalce. Need not, but might and probably would.
    Mr. Greenspan. If you are asking me, is it possible that--
--
    Mr. LaFalce. That is not what I am asking you.
    Mr. Greenspan. Are you asking, is it probable?
    Mr. LaFalce. We usually deal with the laws of probabilities 
in framing our answers.
    Mr. Greenspan. Let me be very specific.
    What the budget is does matter. How you get there 
shouldn't, although I recognize that in the process of getting 
there, certain secondary things may happen which could have 
negative economic effects.
    Mr. LaFalce. It could have an effect, especially on those 
most in need in American society.
    Let me go to a second question. If they do bring up a tax 
bill, whenever they bring it up, the rule will probably permit 
for an alternative. One of the alternatives I was thinking of 
was something proposed by the Republicans in the 105th 
Congress, in the 106th Congress voted upon, and called for in 
the platform of the Texas GOP led by George Bush in the year 
2000 and Dick Armey and Tom DeLay and Phil Gramm; that was to 
abolish the Income Tax Code. This was only an idea, but brought 
up in the past two Congresses, voted upon and passed in the 
House.
    Wouldn't that be better than a tax cut, just abolishing the 
Income Tax Code by a date certain and then worrying about what 
you do in the future? That passed the House the last Congress 
and the Congress before.
    Mr. Greenspan. Congressman, if you think you are going to 
get me to answer a question of that nature, I suggest----
    Mr. LaFalce. It has to be taken very seriously, because it 
was brought to the House of Representatives in two separate 
Congresses by the leadership of the House of Representatives 
and passed.
    Mr. Greenspan. I am not an expert on such issues.
    Mr. LaFalce. OK. My third and last question--the question 
is, what do we take seriously? Social Security?
    Chairman Oxley. The gentleman's time has expired.
    Mr. LaFalce. Can I ask one more question?
    Chairman Oxley. We have to stick to the 5-minute rule.
    The gentlelady from New Jersey, Mrs. Roukema.
    Mrs. Roukema. Thank you, Mr. Chairman.
    Chairman Greenspan, let me say, following up on really what 
the Chairman asked, your last statement, as he read it to you, 
``accordingly, to foster financial conditions,'' and you 
answered it, but you didn't give it much specificity, I was 
going to ask the question regarding that statement of yours in 
conclusion, in the context of the new reports that we see by 
three groups reported in today's New York Times, the Conference 
Board, Bloomberg Press, new home sales from the Commerce 
Department report and how they are down, as well as a Commerce 
report on durable goods, indicating quite substantial evidence 
of weakness in the economy.
    Given that and given your summary statement here, having 
listened to it, I didn't hear with specificity whether or not 
you foresee action on monetary policy reducing interest rates 
in the near future. It sounds as though your analysis is more 
optimistic here in your report than the information that we are 
getting from other sources.
    Mr. Greenspan. Well, Congresswoman, let me just say in 
general, as I try to outline in my prepared remarks, I think 
that there is an inventory adjustment process just getting 
under way, in effect, or perhaps starting at the beginning of 
the year, and that there is a capital excess, meaning the 
degree of physical plant capacity has got to be run off as 
well. So, I am arguing, in effect, that there is a big 
adjustment process which still has a way to run.
    But commenting on the specific numbers which you just 
alluded to, the decline in new home sales from, as I recall, 
one million thirty-four seasonally adjusted annual rate in 
December, down to nine hundred two thousand or thereabouts in 
January, merely puts the number back to where it was late last 
year. The outlier is actually the December figure.
    Housing starts in January actually were up, as were 
permits, so that in that area, those data cannot be used, in my 
judgment, as reflecting generalized weakness. The consumer 
confidence issue can, and that I alluded to in my prepared 
remarks.
    Mrs. Roukema. You did, and I noted that. Thank you very 
much; I am glad you pointed that out.
    But in any case, we have a short time period ahead where we 
may be hearing more from the Fed on this subject?
    Mr. Greenspan. I have no comment.
    Mrs. Roukema. No comment.
    May I ask you also, there have been two letters sent by 
numbers of Members of Congress to you concerning the question 
of the proposed regulation, financial holding companies and 
financial subsidiaries with respect to real estate.
    As you know, in Gramm-Leach-Bliley, I was one of the 
outspoken advocates for being sure that we set up firewalls to 
protect against mixing commerce and banking, and I am 
concerned. What would be your response to the questions that 
were raised in the letters with regard to the Fed's proposed 
real estate rule? I do understand that you have postponed a 
decision on that; is that correct?
    Mr. Greenspan. That is correct.
    Mrs. Roukema. Could you give us a little pro and con on 
that and your own perspective? Because--I am deeply concerned, 
because this is the first effect of Gramm-Leach-Bliley on a 
regulatory basis that we are having to face, and I think we as 
a committee should be focused on it.
    Mr. Greenspan. Yes. We have extended the comment period 
through May 1st, and indeed have had a considerable amount of 
input from all the various sources.
    What people, I think, fail to remember is that we take the 
comment periods very seriously, meaning that there are certain 
types of information that you really cannot get effectively 
prior to the comment period, and we actually hope that we get 
full sets of comments so we can evaluate all the various 
arguments, some of which we may not be aware of. I grant you, 
most of the arguments we obviously are acquainted with, but 
every once in a while, and sometimes more often than not, we 
get very important insights in the comment period which alter 
our original views on the subject, and so this is an integral 
part of the decisionmaking process. We will wait until all of 
the comments are in by May the first.
    Chairman Oxley. The gentlelady's time has expired.
    The Chair now recognizes the gentleman from Massachusetts, 
Mr. Frank.
    Mr. Frank. Mr. Chairman, I want to focus on monetary 
policy.
    In your statement you said, the bottom of page 1, the 
adjustment last year occurred much faster than most businesses 
anticipated. Then you say on page 2, the slowdown intensified. 
So you talk about how businesses did not anticipate a slowdown 
that intensified. I think you left out, frankly, the role of 
the Fed, because you didn't anticipate, but you did intensify, 
and that is what I wanted to talk about.
    Based on your own rules of thumb, the actions the Federal 
Reserve System took between February and May of 2000 clearly 
contributed to the slowdown. You have always told us it takes 
between 6 and 9 months for the actions to have an impact.
    Now, in 1998 you did add liquidity because of the Asian 
crisis, but by the end of 1999 you had removed, at least in 
amounts, that liquidity. Interest rates stood, the Federal fund 
rates and the discount rate, at the end of 1999 where they had 
been before the Asian crisis reaction. You then, in February, 
March and May of 2000, raised interest rates by 100 basis 
points. I put this in a statement that is out there.
    Take your 6 to 9 months, and that increase of 100 basis 
points has its maximum impact in about November of last year. 
In other words, just when that slowdown was intensifying was 
when we were feeling the impact of the Fed's rate increases of 
the year 2000.
    My questions are several. Is there, in fact, any way to not 
accept that the errors the Fed made in addition to not 
anticipating--you, as I said, were among the non-anticipators, 
and that led you to be the intensifiers. So is there any other 
explanation of your actions than that your increases over and 
above what offset the Asian liquidity thing contributed to that 
slowdown?
    Maybe the Fed has become irrelevant when I was on vacation, 
but if we follow the usual rule of the 6- to 9-month impact, 
there are 100 basis points that you increased in that period in 
2000 when you would expect to have them have the impact 
precisely when those are slowing down.
    What concerns me is not the fact you made a mistake--even 
the maestro hits a couple of sour notes, and we are not going 
to change the title of the book--but it is why, because we want 
to prevent them.
    My problem is this: In your report here on page 5, you note 
core inflation remained low in 2000 in the face of sharp 
increases in energy prices, so obviously that could not have 
been the reason for a 100-basis-point increase.
    What bothers me is this: I think you have been very good in 
arguing, as you do again here today, that there have been real 
productivity increases in the economy that allow us to get 
unemployment lower than we used to think possible without 
inflation. But you are not the only member of that Board. There 
are people on the Board, some bank presidents and some Board 
members, who disagree with that, who have said that they 
believe that unemployment had gotten too low.
    What I fear is that there was pressure coming from them, 
because I must say, the one difference I would have with you 
procedurally, I get the impression while you have a great fear 
of inflation, you have an even greater fear of a split vote on 
the board of the FOMC, lest the public think this is something 
democracy ought to deal with. So what I am concerned with is, 
in the absence of other reasons for those mistakes of mid-2000, 
that pressure from people who disagree with you about our 
ability to tolerate a low interest rate without inflation may 
have had some impact.
    Now, I did see an alternative explanation here, and what 
you say is that you didn't get it wrong, the public did. I 
mean, the public was irrational, and they got too scared, and 
that is why things didn't work.
    I wish I had more time. I would be interested in your 
explanation of what this says for the theory of rational 
expectations and whether we take back a Nobel Prize or two. But 
I am concerned.
    So my question, which you have time now to answer, is, one, 
is there any way to deny that the Fed's interest rate increases 
in mid-2000 intensified that very slowdown; and, second, what 
was the basis for the mistake and how do we collectively work 
to prevent its repetition, because obviously no one wants to 
see that.
    Mr. Greenspan. First of all, what we do not know is whether 
with the new technologies and the rapid changing events, as I 
indicated in answer to an earlier question, whether the 6 to 9 
months is foreshortened as well. My suspicion is that it has, 
but we don't have enough data to confirm.
    Mr. Frank. So you brought this down earlier than I thought.
    Mr. Greenspan. Possibly. The reason that we moved in 1999 
was basically because long-term interest rates had started to 
move up earlier in the year.
    Mr. Frank. I am talking about 2000, Mr. Greenspan.
    Mr. Greenspan. I am at 1999. I will get to the 2000.
    Chairman Oxley. The Chair would like you to sum up. We are 
past the 5 minutes.
    Mr. Greenspan. Just very quickly what we did was, in 
recognition of an excess of investment demand over savings, 
follow the path that the long-term interest rates were leading 
us to during that period, which is a normal reaction for an 
economy which was running off balance, and had we not raised 
interest rates, either then or through 2000, in order to hold 
the rates down we would have had to engender a massive increase 
in liquidity in the system which conceivably would have 
exacerbated the imbalances even more.
    The issue of the economy running faster than we knew was 
sustainable over the longer run was fairly evident during all 
of that period, and it was very important to make certain that 
the elements of demand were contained, as indeed they 
eventually were.
    As I look back at that period, I think that the actions we 
took were right at the appropriate times, and I will be glad to 
discuss this with you in some much greater detail, because 
obviously it is very difficult, as the Chairman wants me to sum 
up very quickly, but the bottom line is I think we do have a 
disagreement on this.
    Chairman Oxley. Gentleman from Nebraska, Mr. Bereuter.
    Mr. Bereuter. Thank you, Mr. Chairman.
    Chairman Greenspan, thank you very much for your testimony. 
I have two unrelated questions if I can do it: The part in your 
testimony you did not read related to the impact of energy 
prices on the economy, and that you pointed out there was a 12 
percent increase in natural gas prices during the last quarter.
    This is the number one concern on the part of many of my 
constituents; indeed most of my constituents, broad stretches 
of America, the heating oil, the heating fuel of choice is 
natural gas; Northeast, it would be heating fuel, heating oil. 
Those costs are going up even 50 to 100 percent in the course 
of 2 months, some microregion to microregion basis, depending 
upon the contract that delivery entity, municipal or public 
utility has. So it is affecting consumer decisions, and the 
uncertainty about it is affecting them. Some businesses are on 
interruptible supply basis. They pay out a lot more, or they 
are cut off, in effect, which shuts down businesses. Broad 
stretches of America have an unusually cold winter and hydrous 
ammonia costs are expected to dramatically increase for farmers 
this spring. I wonder to what extent you are taking that into 
account.
    Second, you pointed out that business managers have this 
enhanced information, they are making decisions that are 
compressing reactions; and you have on the other hand a 
positive sensibility to make better real-time surveillance and 
you front load as a result your response. But do you have 
sufficient transparency?
    And do you have short enough measurement periods of 
information coming to you that you can adjust to this new 
quickened pace of economic change?
    Mr. Greenspan. The answer is we hope so. The amount of 
information that we get and the real-time acceleration of its 
availability has been very helpful, and in that regard, as I 
indicate in my prepared remarks, we do have significant 
increased enhanced capability for surveillance.
    The natural gas issue is really a relatively new one. 
Remember, we have had crude oil surges in the past with impacts 
on the economy which we are able to evaluate and we had some 
history to be able to understand how it works. The natural gas 
surge that we have seen in the last year or two is something 
relatively new and it is being caused by a very dramatic 
increase in the demand for natural gas. Even though the number 
of drilling rigs we have put on for gas drilling has gone up 
very dramatically, the technology itself has enabled us to 
drain reservoirs at a very rapid pace, and so the gross 
additions are just barely keeping even with the gross 
subtractions. As a result, the available production levels of 
natural gas have not gone up that much, which means that we 
need to enhance our capabilities to bring more gas in play. 
That is going to be an ongoing process as far as I am 
concerned, but it clearly has macro-economic effects, because 
you could see the impact of this doubling of gas bills on 
consumer behavior and indeed on consumer confidence.
    So it is a new element in the economic outlook on which we 
have expended a considerable amount of effort to try to 
understand not only what is happening, but its implications on 
the overall economic outlook.
    Mr. Bereuter. Thank you.
    Chairman Oxley. The gentleman's time has expired.
    The gentlelady from New York, Mrs. Maloney. The Chair would 
indicate we were going in order of appearance before the gavel, 
when the gavel came down under the committee rules.
    Mrs. Maloney. Thank you, Mr. Chairman.
    Mr. Greenspan, while I know you do not speak specifically 
about whether or not you plan to adjust interest rates, I am 
concerned about the impact that a reported rise in the zero 
maturity money stock may have on some members of the FOMC. As 
you know, other monetary aggregates have also recently risen at 
historically high rates, and I would hope that this information 
would not keep the FOMC from lowering rates.
    However, I was concerned by comments I read in the February 
19th issue of Barron's, where it was reported that the annual 
rate of MZM increased by 16.9 percent annually from November to 
January. The same short article quotes an economist at the St. 
Louis Fed saying that he would be concerned about this increase 
if it continues into the summer. I truly hope this data does 
not discourage you from easing monetary policy.
    Mr. Chairman, can you tell me whether you or members of the 
FOMC are concerned about the MZM and other monetary aggregates 
and whether this would discourage you from easing monetary 
policy?
    Mr. Greenspan. Well, Congresswoman, the cause of that rise 
which is, as you point out, a significant acceleration, results 
from two factors. One, the reduction in interest rates has 
increased the so-called opportunity cost to hold deposits and a 
lot of the increase in M2 and M3 and indeed MZM has resulted 
from that. There has also been an apparent shift out of stocks 
and other financial assets into deposits as stock prices have 
fallen off. And so a substantial part of that rise is easily 
understood. The general view that we have all had over the 
years, as I have mentioned before this committee in the past, 
is while money supply has been a major issue with respect to 
the American economy, and money obviously is a crucial issue in 
inflation, indeed it is almost by definition in the sense of 
the relationship between units of money and units of goods, we 
have had extraordinary difficulty in trying to find the right 
proxy to measure money per se, and none of these various 
measures--M2, M3, MZM--as best we can judge, seem to have the 
characteristics necessary for ``moneyness'' that is at the base 
of concerns a number of people have with the issue of money 
expansion and inflation.
    As a consequence, we no longer report to this committee on 
money supply targets, and the reason we do not is that we have 
not found, at least for the time being, money supply useful. 
Having said that, we do obviously follow it like we follow all 
financial variables, because money supply changes do signal 
what is happening in the economy and, whether those signals are 
telling us one thing or another are quite relevant to our 
overall evaluation of what economic activity is likely to do.
    Mrs. Maloney. Well, thank you for your answer; and again I 
hope that increases in the aggregates would not discourage the 
FOMC from easing its monetary policy.
    On another note, the December 1999 issue of the Federal 
Reserve's publication, ``Current Issues in Economics and 
Finance,'' had an article titled, ``Explaining the Recent 
Divergence in Payroll and Household Employment Growth.'' The 
authors concluded that--and I quote--``The household survey 
probably under-reports employment because its estimates 
incorporate a census undercount of the working age population. 
The higher figures in the payroll survey are more reliable, 
accurately capturing the effects of the current economic 
expansion on the employment status of many adults overlooked by 
the census.''
    Mr. Chairman, in a matter of days, the Bush Commerce 
Department must decide whether the professionals at the Census 
Bureau will have the ability to adjust the raw census numbers 
by using modern scientific methods for the undercount if they 
see it, or whether to allow politicians at the Commerce 
Department, political appointees, to decide whether to adjust 
the numbers.
    My question is: Doesn't this Federal Reserve article 
demonstrate that not using corrected data is unscientific and 
does not include all Americans? And, as a user of census 
statistics yourself, isn't it vitally important for all 
economists to have the most accurate census data with which to 
work? If your data is incorrect your conclusions are incorrect.
    Chairman Oxley. The gentlelady's time has expired. The 
Chairman of the Federal Reserve may respond to a Census Bureau 
question if he chooses.
    Mr. Greenspan. Let me just say very quickly, the reason for 
the rise in upward revision that is going to be coming on 
stream in household employment data is a consequence of the 
upward revision in the expected level of the population, 
households, and number of people in the labor force that will 
show up in the census data, whether it is taken from the 
existing count that now currently exists or whether it is 
augmented by a sample survey. In both cases there have been 
significant upward revisions from the earlier preliminary 
numbers on which the household data series earlier was based.
    Chairman Oxley. The gentleman from Louisiana, Mr. Baker.
    Mr. Baker. Thank you, Mr. Chairman.
    Good morning, Chairman Greenspan. It seems to me that the 
section of your comment with regard to technology and speed and 
efficiency of the market is one in which I have particular 
interest. As we move in an economy from carbon paper to memory 
typewriters to what was lovingly called the TRS-80 Radio Shack 
computer, the ``Trash Eighty,'' today where we have gigahertz 
transmission capabilities, there is an enormous transfer of 
economic power in that type of movement in the economy. In 
fact, the volatility that we are concerned about today may in 
large measure be associated with those technological 
innovations, and that if one would ever assume to take credit 
for inventing the internet, you should also take responsibility 
for the volatility in the marketplace today.
    But aside from that point, volatility is inherent with an 
economy which is transmographying itself at such a rapid rate. 
And I recall your earlier comment, many appearances before, in 
talking about the risk associated with banking activities; that 
banking in itself is an inherently risk-taking venture, and 
that we cannot escape from the fact that there will be banks 
that will fail despite our best efforts and the most recent up-
to-date insight and knowledge.
    It would appear, though, that in a market which acts so 
quickly and takes savings and capital and moves it rapidly 
based on information, that the most important thing we could 
have in the market, either as a regulator or as an investor, is 
transparency and disclosure of information to all participants 
on a timely basis, whether it is a new patent that allows 
hundreds of new jobs to be created that correspondingly 
eliminates 1,000 jobs in the old technology; whether it is the 
SEC in seriatim process considering a new accounting standard 
which may not be open to public discussion until the 
announcement is made; whether it is an LTCM-like hedge fund 
activity, which we were not fully aware of the scope of their 
endeavors nor the number of participants until very late in the 
process. Opening the market up is something that must happen, 
because we can't put the genie back in the bottle and make the 
internet go away.
    Are we today confident as a Fed, as an FOMC, that there 
aren't additional steps that could be taken? Or are there steps 
that Congress can take to help the free flow of information? I 
am very concerned, for example, about the actions of the SEC 
not being as transparent as the SEC would like the businesses 
to be to the SEC. I don't think we can have a system where 
Government is opaque and commerce is clear and transparent. I 
think both sides of the system now, unfortunately, are going to 
have to disclose in a timely manner to attempt to limit 
volatility. It will never go away. I think it is inherent in 
the type of economy we now find ourselves living in, and the 
fairness is to allow all participants to have access to 
whatever information may be available in a timely manner.
    I remember the debate over doing away with the 15-minute 
delay time on the ticker on the monitors and what a horrible 
thing it would be if people had real-time information to the 
markets. There are now 807,000 trades a day based on real-time 
information by mom-and-pop investors who are saving for their 
kids' education and buying a first home or whatever it might 
be. It has been a wonderful thing. So my question to you is 
what steps can we take? If I'm correct in my summation, the 
flow of technology and the spread of information is a positive 
thing for all involved in the market.
    Mr. Greenspan. I generally agree with you. Congressman, I 
think that with the technology accelerating as it has over, say 
the past 5 to 7 years especially, we have seen a much more 
rapid response and indeed that is the issue which I clearly was 
responding to earlier.
    The issue of disclosure gets down to the conflict between 
the obvious necessity of transparency, as you put it, and the 
question of property rights. Because one of the reasons why you 
get a lot of disinclination on the part of various players not 
to want to disclose is they presume that what they have is a 
property right. And the question is, do they? For example, you 
have markets which evolve float, and markets, as you know, with 
float are essentially giving to certain players interest-free 
loans. And after a while, they presume that it is their 
property when indeed it is not. And consequently, when you 
endeavor to move some of these financial transactions to being 
cleared and settled in a much shorter period of time, 
somebody's losing something and you get very significant 
resistance.
    What is necessary is to make the judgment, do they have the 
right to that float, whether it is information or otherwise, 
and in most instances I think you are going to find the answer 
is no.
    Chairman Oxley. The gentleman's time has expired.
    The gentleman from Pennsylvania, Mr. Mascara.
    Mr. Mascara. Thank you, Mr. Chairman.
    Welcome, Chairman Greenspan. I read on Sunday an article in 
the Pittsburgh Post Gazette, the title being ``Alan Greenspan 
Can Be Wrong, Too.'' How shameful. ``The Federal Reserve 
Chairman''--and I am quoting--``should take his share of the 
blame for an economic downturn,'' says James Galbraith, 
``especially if he's going to go along with the wrongheaded 
Bush tax cut.''
    When you, Mr. Chairman, testified before the Senate Budget 
Committee last month, you made headlines when you seemed to 
indicate that we could afford a large tax cut. However, you 
seemed to backtrack somewhat from that testimony when you 
subsequently testified before the Senate Banking Committee. 
Given that somewhat conflicting testimony, what is your 
position on President Bush's plan to cut $1.6 trillion in taxes 
over 10 years?
    And I just want to add an aside that I am old enough to 
remember the 1981 tax cut when everybody bought into supply 
side economics, when subsequently David Stockman left the 
Reagan Administration. The trickle-down theory didn't work. And 
I hear a lot of that now in the Bush proposal, that somehow if 
we now give a preponderance of the tax cut to the wealthy in 
the country, that somehow that is going to stimulate the 
economy. Would you want to comment on that, sir?
    Mr. Greenspan. Congressman, I think you will find that 
nowhere in any of my testimony, written or oral, have I 
actually addressed the question of any particular tax or 
spending program in this particular context. I have argued that 
those are judgments that the Congress has to make.
    The issue that I raised in the Senate Budget Committee, and 
indeed later in the Senate Banking Committee, was the 
implications of what one should be doing with respect to fiscal 
policy if you believe that these productivity gains we have 
seen in the last 5 to 7 years are going to be sustained. 
Because if indeed that is the case, we are going to get ever-
increasing unified budget surpluses given so-called current 
services expenditures, and if that happens then the Congress 
has got to make a judgment that after the debt effectively gets 
to zero, any surplus of necessity must accrue in the way of 
non-Federal assets, mainly private assets. And I have argued 
that there are very significant problems there, and if you 
agree with that, then the question is there are many different 
alternate avenues in which that issue can be addressed.
    My central focus was that we have to be very careful about 
a number of issues which are in the process of arising in 
fiscal policy as a consequence of productivity and the 
presumption of getting eventually to zero debt, which I 
support. And the questions that have come up, which I have 
never responded to, are do I support any particular tax 
program? The answer is I haven't, and I do not this morning 
either.
    Mr. Mascara. So you do not, then, support any particular 
tax cut.
    Mr. Greenspan. No. As you know, the minority of a number of 
the committees have come up with alternate tax proposals. I 
haven't commented on those either.
    Mr. Mascara. And do you have some concern if there are some 
tax cuts that perhaps we should have a trigger because these 
are projections? As an accountant myself, I am very leery of 
projections, because oftentimes they just don't happen, and I 
think we all ought to be concerned that we don't get back into 
the large deficits that we had back in the 1980s when we spent 
more than we were taking in. And would you recommend that a 
trigger be in place if we do implement a tax cut?
    Mr. Greenspan. Congressman, in my original testimony before 
the Senate Budget Committee, I raised the issue of whether we 
ought to have triggers of some form for either tax cuts or 
expenditure initiatives, largely because the uncertainties that 
one has with respect to 10-year budget forecasts are very high, 
and so the answer to your question is yes.
    Chairman Oxley. The gentleman's time has expired.
    The Chair now recognizes the gentleman from Delaware, Mr. 
Castle.
    Mr. Bachus. The gentleman from Alabama.
    Chairman Oxley. We are going in order, at the order that 
the Members who were here at the pounding of the gavel.
    Mr. Bachus. I was here.
    Chairman Oxley. I am sorry. The gentleman from Alabama.
    Mr. Bachus. Thank you, Mr. Chairman.
    Thank you, Mr. Greenspan. I think one of the things you 
said, most significant things, this morning, is you have talked 
about the major changes in the speed of economic processes. And 
you have said that economic policymaking cannot or should not 
remain unaltered in the face of this. That to me is a clear 
indication that the Fed is going to move quicker, is going to--
it has the ability to move more accurately.
    Now, if I read that right, in the past we have seen FOMC 
meetings and then half--50 basis point changes in the overnight 
rates. But that would not be to me an indication of a fast, you 
know, hands-on quick responding economic policy. Have you 
signaled today a change in that basic format to one where you 
respond quicker and with maybe more accuracy?
    Mr. Greenspan. Congressman, I have raised this issue with 
the Senate Banking Committee and other fora. Because of the 
fact that the economic adjustment processes have accelerated 
and because of the fact that our surveillance capability has 
commensurately increased, we both are required to act faster, 
but are clearly acting on the same type of knowledge that we 
had previously. I am scarcely going to argue we should merely 
act faster just on the grounds of acting faster without any 
information. It is because the same technologies which are 
accelerating the economic process adjustments give us a much 
more enhanced degree of surveillance, and enable us to act more 
expeditiously.
    I would scarcely, as I said, want to state that action for 
action's sake is a desirable thing. If you don't know what you 
are doing, and some people suggest we sometimes don't, that 
would be scarcely what we would want to do.
    Mr. Bachus. Because of your enhanced ability to gauge 
changes, there have been changes between February 13th and 
today. It wouldn't be necessary to wait until an FOMC meeting 
on March 20th therefore to act, would it? That is what I think 
you said here this morning.
    Mr. Greenspan. Congressman, we have obviously specified 
implicitly that we prefer to act within our scheduled meetings. 
There are a number of technical advantages for doing that. But 
we have also shown over the years that when we perceive that 
actions are required between meetings, we have never hesitated 
to move. So I don't think you could read one way or the other 
in the comments that I have made which would alter the 
statement I just made, which I could just as easily have made 6 
months ago.
    Mr. Bachus. Of course, in economic policymaking, you have 
to adapt to these changes and you have outlined some of them 
here this morning. One is that because of the technology and 
the ability of competitors in the marketplace to make quicker 
changes based on more accurate and real-time data, there are 
more severe changes in confidence. You know I have heard that 
when you spoke to the Senate and now again here in the House, 
and that is a change in the marketplace that I would think it 
would be appropriate for the Fed to adopt those changes in the 
way it deals with responding to the various data.
    Mr. Greenspan. Well, the only thing I can say, Congressman, 
is that because of our enhanced technological capabilities, we 
are able to monitor the economy on a far closer to real-time 
basis than ever before. And I think we understand what is going 
on pretty much at the level of detail that we need to make 
monetary policy.
    Mr. Bachus. Well I would just say to you that, from 
everything you have said, I think you also have to change 
economic policy quicker and to a more--I mean, and be more 
flexible with it than in the past, in fact.
    Mr. Greenspan. I think that is a fair statement.
    Chairman Oxley. The gentleman's time has expired.
    The gentleman from Massachusetts, Mr. Capuano.
    Mr. Capuano. Thank you, Mr. Chairman. I like these new 
rules.
    Chairman Oxley. It rewards people that show up on time.
    Mr. Capuano. How about getting here early? Mr. Chairman, I 
have so many questions I can't get to them all, but I am 
sitting here trying to piece together all the things that I am 
facing this year as a Member, and obviously the first thing we 
are going to hear about is the tax cut. And I recognize you are 
not going to comment to that and I appreciate that, and I am 
not going to push you on that. But I also presume that of 
course you are familiar with the President's proposal and the 
specifics of those, so I won't even ask you, but I am presuming 
that and I hope that presumption is there.
    Mr. Greenspan. Not quite. I haven't seen the budget yet.
    Mr. Capuano. Not the budget, but the tax cut proposals.
    Mr. Greenspan. I know what he said last night, certainly.
    Mr. Capuano. That is right. I figured you would.
    The question I have is if those tax cut proposals were 
enacted within a reasonable period of time, 3, 6 months, as 
currently proposed, would that change any of the predictions or 
comments that you have about the foreseeable future either in 
today's testimony or in the testimony contained in the report 
of February 13th?
    Mr. Greenspan. Well, Congressman, as I said before the 
Senate Budget Committee, history has indicated that it is very 
difficult to get a tax cut in place to materially alter the 
probabilities of going into a recession. But if you get into an 
extended one, having cut taxes you are better off than not, and 
that is a general position which I think I would find the 
evidence has pretty much supported.
    Mr. Capuano. I understand that, but I don't see anything in 
either of these two reports that indicate that you currently 
believe that we are heading into a long-term recession. Have I 
misread these?
    Mr. Greenspan. No. What I have indicated is that, as best I 
can judge, that the underlying productivity growth in this 
country still is in place and that is a crucial issue with 
respect to making long-term projections. We don't know how this 
particular adjustment process currently underway is going to 
evolve, but it doesn't alter in any material way the longer-
term outlook. And I would hesitate to say when the term or 
adjustments are going to be complete, because the truth of the 
matter is, we don't know.
    Mr. Capuano. And I believe that to be fair. So I am reading 
that to say basically that the current tax proposals on the 
table, if enacted within a reasonable period of time, in the 
normal course of events, with the normal impacts, will have no 
impacts on your current projections over the next couple of 
years with what the economy is going to do.
    If that is the case, the other part of it then I have to go 
to is the current projections that--you didn't mention it here 
in today's testimony--but you did mention in the 13th written 
testimony, and again, I want to make sure that I am reading 
this correctly, and I have seen reports that--and I know a lot 
of your projections are based on discussions and commentary 
with business leaders. Most I have heard are all believing that 
the unemployment rate is going to go up, and I believe you 
predicted that as well in the February 13th--and it wasn't 
mentioned today, but my presumption is that has not changed.
    Mr. Greenspan. One would certainly conclude that when you 
are in an adjustment process of the type we are currently in 
with the rate of growth, as I indicated in my prepared remarks, 
effectively at zero, that being well below what the potential 
is in the economy, the unemployment rate would rise, and I 
would suspect that that is an inevitable conclusion that one 
would get from the type of projection that is implicit in zero 
growth.
    Mr. Capuano. Fair enough. Thank you.
    Mr. Greenspan. In the current period.
    Mr. Capuano. I am sitting here looking at a humongous tax 
cut that probably will have no immediate impact on our current 
projections, yet will throw more people in unemployment and do 
nothing for them. It makes it even easier to take my position 
that I am leaning toward anyway, that it just doesn't make 
sense to do it at this point in time until things stabilize.
    The other thing I wanted to ask you is to get into some of 
the productivity items. It strikes me, and I guess I would like 
to know and probably don't have time to pursue it, but at some 
time I would like to know exactly where you base the 
projections that productivity is going to continue to rise as 
it has in the past. And again, it is not based on empirical 
data at all, it is just based on pure observation on my part, 
most every business and every small business particularly that 
can and does want to do it has already computerized, has 
already gotten as many robotics as they can get, has already 
downsized as many employees as they can do.
    And I wonder seriously whether we have significant room for 
improvement in productivity, and if we do, great--and again I 
want to be educated at some later time--but if we don't, then I 
think the whole underpinnings of the future might be subject to 
question.
    Chairman Oxley. The gentleman's time has expired. The 
Chairman may respond.
    Mr. Greenspan. There is no question, if indeed productivity 
growth falls back to the 1\1/2\ percent annual rate of growth 
that existed prior to 1995 for the previous 20 years, then 
clearly the outlook is quite different from anything that we 
have been talking about. There are innumerable studies and 
innumerable evaluations which suggest otherwise. For example, a 
purchasing manager's survey asks plant managers: Of the 
existing available technology which you could apply in your 
plant at this particular point, what proportion have you 
actually implemented. And the average answer is 50 percent or 
less. And if you ask a number of different corporate executives 
who are heavily involved in the area, you will get answers 
which are quite similar to that.
    Indeed, our new Secretary of the Treasury, the former 
Chairman of Alcoa, who was heavily involved in the series of 
innovations which enabled that company to make major advances, 
argues that we have only gotten 20 to 30 percent of the 
potential of what is out there in increased networking and 
internet and various different types of technology applications 
for which high rates of return are available.
    Chairman Oxley. The gentleman from Delaware, Mr. Castle.
    Mr. Castle. Thank you, Mr. Chairman.
    Chairman Greenspan, just a quick follow-up on the trigger 
issue, and I agree with your underlying premise, it is very 
hard to predict what is going to happen economically in 10 
years. Whoever would have thought we would be talking about 
eliminating the debt and things like that 10 years ago? But 
apparently Ways and Means, according to what I am reading, is 
going to mark up the income tax legislation, which I don't know 
how much it's going to be, but I think around $1 trillion, as 
early as a couple of days from now.
    I assume when you talk about a trigger mechanism, you are 
not talking about it being retroactive, you are talking about 
it being prospective, because I think they are going to have to 
stage it in order to have the greater impact of tax cuts in 
future years when there is more of a surplus than there is now. 
I just wanted to make sure what your comments on trigger mean.
    Mr. Greenspan. The trigger that I was discussing is a 
trigger which essentially would, for example, be a level of net 
debt outstanding which would be required to be breached in 
order for a next tranche of an income tax cut or an expenditure 
increase to occur. But all previous changes are effectively 
grandfathered in that regard, so triggers never induce either 
an increase in taxes or a cut in expenditures in that regard.
    Mr. Castle. Thank you. I thought it would be your answer 
but I wasn't sure. Let me go on to another topic, and if I 
mischaracterize what you stated, correct me on that. But as I 
understand it, you previously testified that ultra-low levels 
of Federal debt can harm the economy, because it removes the 
stable investment vehicle for pension plans, and so forth. 
There might be other reasons, too. The President last night, I 
think it was last night, remarked that $1.2 trillion is an area 
of debt where you are starting to get into prepayment penalties 
and other areas that would be economically negative from the 
point of view of the United States Government. Mr. Keisler who 
was formerly with the Treasury Department, commented on that 
and said, no, it is actually a lot less than that one way or 
another.
    My question is how low is too low? I don't have a problem 
with the fact that maybe some debt still needs to be there. But 
what is the measuring device for that and what should we look 
at if you don't want to name a particular number?
    Mr. Greenspan. I don't think the issue is that we need the 
debt there. Indeed, one can very readily argue that riskless 
Treasury securities are a value in the marketplace and clearly 
attract a huge amount of investment, but they are readily 
substitutable with other types of securities, and so while 
obviously it would be slightly less efficient than the riskless 
securities, the great advantage of reducing the debt 
effectively to zero, in my judgment, would overcome that. The 
question that is being raised here is not the issue of 
desirability of keeping debt, but the impossibility of reducing 
it in a cost-effective manner in a rapid way. And what is 
happening here is that people are making different projections, 
I suspect, about whether we keep the 10-year and 30-year bond 
issuance going, because obviously if you do that, you arrive at 
a point where the unified budget surplus can no longer reduce 
the debt, that is what that number is. In other words, that is 
what you are endeavoring to find out, and that will depend to a 
large extent on your judgment about the ongoing savings bond 
program, the State and local non-marketable series program, the 
extent to which you continue to issue 10- and 30-year bonds 
which will still be outstanding at the point we reach the 
effect of zero debt requirement. You run into very different 
numbers depending on what type of assumptions you make.
    Mr. Castle. Thank you, Mr. Chairman. Very briefly, because 
the time is running out, but the President last night indicated 
there should be--and we haven't seen the budget yet ourselves--
a 4 percent growth in Government spending. This is obviously a 
contrast to what we have been spending in recent years. What 
are the economic benefits or non-benefits of reduced Government 
spending?
    Mr. Greenspan. The question really gets down to the issue 
of Government spending as a claim on real resources in the 
economy. The basic arguments are fundamentally that to the 
extent that the Government positions itself in a manner to put 
claims on a substantial amount of private resources, the 
argument goes that private productivity slows, standards of 
living slow. This is an argument that goes back many decades, 
and I wouldn't say that there is a strong consensus on either 
side, but it is a major difference amongst economists. And as 
you know, I come out on the side of believing that the 
preemption of resources by Government is, in fact, a major 
factor in slowing down economic growth, and would argue 
therefore the less of it we do, the better. But I am the first 
to acknowledge that the evidence is very difficult to come by 
and that there are very significant differences of opinion 
amongst those analysts who review the data.
    Chairman Oxley. The gentleman's time has expired.
    The gentleman from New York, Mr. Crowley.
    Mr. Crowley. Mr. Chairman, thank you very much.
    Mr. Chairman, welcome. Had this still been the Banking 
Committee, I would have been a new Member from New York, and 
Queens primarily, and let me welcome you here today as well. I 
just want to go back to something I know was talked about 
earlier and that is the concern I have about consumer 
confidence. Not that your picture is entirely blooming, but it 
is somewhat more rosier, I think, than the message that is 
coming out of the White House today about the economy. The 
course of the White House, in my opinion, would lead some or 
many people to believe that the picture isn't as rosy and that 
we may be heading toward a recession. I think the White House 
is playing to some degree with a very sharp instrument here; 
may be doing that in order to, I believe, create an atmosphere 
to sell this huge tax decrease.
    My question, Mr. Chairman, to you is, what, if anything, 
can we be doing, aside from your testimony today, to ensure 
that consumer confidence doesn't decrease--for 5 straight 
months in a row, we know it has decreased. What can we do to 
bolster the confidence--and the concern I have that people's 
retirement accounts and the smaller people, not the big 
players, but the average mom and pop who have invested in the 
stock market now, but the average consumer is invested more now 
than ever before--what can we do to instill confidence in them 
that this economy, although maybe weakening, is not going into 
a downfall that we should be overly concerned about?
    Mr. Greenspan. Well, the best thing to do is to try to give 
as an objective appraisal of what the economy is doing as we 
can. If you do that, then in my judgment you are consonant with 
reality and the facts will eventually emerge and create the 
type of confidence levels that as recently as 6 months ago 
pretty much were general throughout our economy at all income 
levels. The one thing I know you can't do is try to spin the 
economy one way or the other. It doesn't work. And I must say 
to you, I know the people in the White House who are talking, 
and I can tell you that is their judgment. As far as I can 
judge, it is not a view that materialized when the tax cut 
issue came up. But each of us, I think, has got to tell it the 
way we see it, and I hope we will continue to do that, because 
there is really no alternative to doing that.
    Mr. Crowley. Are you concerned about the rhetoric and what 
impact it may have on the economy?
    Chairman Greenspan. We have an open system in which 
economists all over the country in all industries are saying 
what they believe and I think that is exceptionally helpful. 
There is a general set of views which are basically coming from 
informed people about the economy which are taken seriously. I 
don't think that there is very much more credibility that is 
given to say, economists in the Central Bank, economists in the 
White House, or economists in the private sector. So, if you 
get a broad enough group of people trying to evaluate the 
economy and coming to conclusions, I think you get the best 
judgment.
    Mr. Crowley. I don't think I am average or maybe you agree 
or disagree that the common individual in this country would 
more than likely pay attention to what the White House is 
saying, more so than what any institution may be saying or 
economic institution may be saying.
    Mr. Greenspan. I think that was true a number of years ago, 
but with cable television today, I would say, and the internet, 
the answer is probably no, judging from the----
    Mr. Crowley. Forty percent of the country in 1935 was dying 
in poverty and that caused the coming about of Social Security. 
Today, Social Security is still the only means of income for 33 
percent of the people in this country. So we really haven't 
come that far economically. Although I have a great deal of 
confidence in the ability of the media to transmit numerous 
teachings of economic theory, I am not sure that trickles down 
to just about everybody in the country.
    Mr. Greenspan. Well you can take that up with the media. I 
have a conflict of interest.
    Mr. Crowley. Thank you.
    Chairman Oxley. The gentleman's time has expired. Won't get 
into that.
    The gentleman from New York, Mr. King.
    Mr. King. Chairman Greenspan, if I could just follow up on 
the point that was raised by Mr. Castle regarding the triggers. 
The concern that I would have with the trigger, in your 
testimony both before us and before the Senate, basically you 
have said that so many of the rules have changed. For instance, 
in your answer to Mr. Frank's question about whether or not 
there is a 6 or 9 month lead-in as to when a cut in rates would 
have an impact on the economy, you said maybe those numbers 
don't apply anymore. And I am just wondering, can we tie into a 
statute, if we are talking about the level of net debt 
outstanding, to determine whether or not there will be a tax 
increase or decrease, whether or not expenditures should be 
rising or falling? Should we be locking a future Government 
into that at this rate when we are not certain ourselves what 
these numbers mean, or we should we allow that to the free flow 
of congressional debate at that time?
    Mr. Greenspan. I am merely responding to the fact that, 
say, 30 years ago, forecasts of the economy beyond 1 or 2 years 
in budgetmaking were really not required. We didn't have the 
large entitlement programs. We didn't have the large long-term 
structural changes with which we have to deal today. We have no 
choice but to make long-term forecasts. If you don't make them, 
you are implying them. The question is, can you make the best 
one you can? And the answer is, you can, but the best one you 
can make, of necessity, has got a very wide range of potential 
error. And the reason I raise the trigger issue is that you can 
still make these long-term forecasts, but if you are turning 
out to be significantly off, then the presumed damage, if one 
can use that term, is very significantly minimized by requiring 
various different tranches to spending and tax programs, making 
them contingent on some observed statistic such as, if the 
purpose is to reduce the net debt, what the net debt figure is 
before the next tranche goes along.
    Let me say that there is no question that the down side of 
that is actually in making it more difficult for people to make 
long-term commitments, because you are making the tax cut or 
expenditure change contingent. But the alternative is to 
essentially lock into place a significant program which turns 
out to have in fact been based on assumptions which themselves 
turned out to be false.
    If you put together a program and you have triggers, and 
the triggers are never activated, which essentially means if 
your forecast worked, aside from this loss of certainty which 
does inhibit certain types of forward actions, you are not very 
much different from where you were if you didn't have a 
trigger.
    Mr. King. Couldn't the argument be made, though, that as 
you are entering recession and the economy is slowing down, or 
the surplus is starting to vanish, that it is precisely at that 
moment that you would need a tax cut perhaps for another year 
or two or whatever to get the economy going and keep the 
economy from sinking further?
    Mr. Greenspan. There is nothing to prevent the Congress at 
that point from doing that. In other words, it may very well be 
that the level of net debt is higher than the trigger and 
therefore the particular tranche of a tax cut may not come into 
place, but there is nothing to prevent the Congress at that 
particular point from enacting one.
    Mr. King. There would also be nothing to prevent the 
Congress from raising taxes if they felt it was necessary if we 
didn't have the trigger in there.
    Mr. Greenspan. That is correct, and I think that you are 
dealing with an issue of how does one rationalize making long-
term projections and long-term projects and minimize the extent 
of what happens if you are wrong. That is what a trigger does, 
and the Congress has got to make a judgment as to whether the 
advantages from the trigger offset the negative elements with 
respect to a trigger.
    Mr. King. Thank you for your answer and for your 
sufferance.
    Chairman Oxley. The gentleman's time has expired.
    The Chair recognizes the gentleman from California, Mr. 
Sherman.
    Mr. Sherman. Thank you, Mr. Chairman.
    Chairman Greenspan, we are thrilled to have you with us 
this morning. The only thing that would thrill us more is if 
you had spent this morning with the FOMC in some extraordinary 
meeting perhaps, and I want to assure you that if you ever need 
to cancel an appearance before this committee to cut interest 
rates half a point we would understand.
    Chairman Oxley. Not so fast.
    Mr. Sherman. Many of us would understand. There is talk in 
this committee about the terrible worry that we will pay off 
the entire national debt or all of it that comes due. One of my 
bachelor friends is worried that Kate Moss and Julia Roberts 
would arrive at his home simultaneously. We should all have 
such worries. But I would point out that one of the techniques 
that is used by corporations when they have debt they would 
like to pay off but can be paid off only at a premium is a 
trust fund, or ``defeasance'' I think is the term.
    And this is my main question, but perhaps your staff could 
comment in writing, whether should there be bonds, Treasury 
bonds that we want to pay off, whether it would be appropriate 
to simply buy AAA-rated corporate bonds of equal maturity, use 
one to pay the other.

         [Chairman Greenspan subsequently submitted the 
        following response for inclusion in the record:

         [Private borrowers typically defease debt in order to 
        remove it from their balance sheets, which may help 
        them gain access to credit on more favorable terms. The 
        U.S. Treasury, of course, already can borrow on very 
        favorable terms, because the long-term health of the 
        U.S. economy and the strengths of its political system 
        provide investors with an extremely high level of 
        assurance that the Federal Government will have 
        sufficient revenues to repay its debt obligations. 
        Thus, defeasing its debt is unlikely to improve the 
        terms on which the Treasury can borrow. Moreover, as 
        you know, I am deeply concerned about the potential for 
        distorting financial markets if the Federal Government 
        were to become a major investor in private assets. 
        Although accumulating private assets would have the 
        advantage of allowing Federal surpluses to continue for 
        longer, thus helping to buoy national saving, I believe 
        it would be virtually impossible to shield investments 
        by the Treasury's general fund from political 
        influence, and the resulting override of the market's 
        allocation of credit would lead to financial and 
        economic inefficiencies.]

    I want to thank you for your answer to Mrs. Roukema's 
question where she brought up the idea of banks getting 
involved in real estate brokerage, and you indicated that you 
have extended the comment period. So I figured I would comment, 
and that is to say that at least many of us on this committee, 
when we voted to massively expand the activities that banks 
could engage in, did not anticipate that they would get 
involved in activities outside dealing with securities, 
investments and intangibles, but would instead become brokers 
for the quintessential opposite of intangible property, namely, 
real property.
    But I want to turn our attention to the trade deficit and 
the current account deficit which is now running roughly a 
third of a trillion dollars a year and with no end in sight. 
And I would like to know how confident you are that we could 
continue to run merchandise, trade deficits of over $300 
billion a year, run current account deficits of roughly the 
same number, because various other things, services on the one 
hand, but transfer payments on the other, canceling themselves 
out, the deficits are roughly equal. How confident are you that 
we could sustain another decade of quarter trillion dollar 
deficits in these areas without the dollar crashing within a 
decade or without some other major disruption in the 
international economy? Can we continue to enjoy the short-term 
benefit of the world sending us a third of a trillion dollars 
more stuff than we produce and send to them? Can we continue to 
enjoy that for 10 or 15 years without worry of this kind of 
calamity?
    Mr. Greenspan. Only if the rest of the world invests a 
third of a trillion dollars annually in our economy, because 
clearly all current account deficits must be financed. And the 
fact that the flows to a large extent from Europe have 
continued and the fact that the exchange rates for the dollar 
have been fairly firm in the last year or two is suggestive of 
the fact that, if anything, the propensity to invest in the 
United States is greater than our propensity to import net on 
balance.
    Now, that is unlikely to be capable of being continued, 
basically because, as I indicated before, the investments in 
the United States presuppose service payments to the owners of 
various assets which are purchased here and the net debt, or, 
more exactly, the net claims that foreigners have on us and 
hence the net payments to service those claims get us into a 
very awkward position where those payments themselves are added 
to the current account deficit, which makes it even greater, 
which makes the rate of change in the external claims 
accelerate. Clearly, that cannot go on indefinitely. At some 
point it must come to an end.
    I said almost precisely those words 5 years ago and I have 
no way of knowing how long this will continue on, but I am 
acutely aware of the fact that we are running up against a 
longer-term trend which must eventually reverse. When it is we 
do not know. There has been no evidence, I must say, at the 
moment or recently, to suggest that it is imminent, but at some 
point, I agree with you, it cannot continue.
    Chairman Oxley. The gentleman's time has expired.
    The gentlelady from New York, Mrs. Kelly.
    Mrs. Kelly. Thank you, Mr. Chairman.
    Mr. Greenspan, thank you very much for your patience. We 
appreciate having you before the committee today.
    Next month, this committee is going to consider legislation 
to allow businesses to receive interest on their checking 
accounts. I would like to kind of reestablish my understanding 
of your thinking on this issue as we go forward. I wonder if 
you would be willing to give me some brief responses to three 
questions.
    Do you continue to strongly support legislation that allows 
the Fed to pay interest on the Reserve banks' deposits at the 
Fed?
    Mr. Greenspan. We do, Congresswoman, very much so.
    Mrs. Kelly. Should the legislation allowing the Fed to pay 
interest be combined with legislation to allow banks to pay 
interest on their business checking accounts?
    Mr. Greenspan. Yes. We believe that ideally those two 
issues should be joined and passed at the same time.
    Mrs. Kelly. Thank you.
    What is your current thinking on the language that I have 
proposed which allows the Fed greater flexibility in lowering 
the reserve requirements?
    Mr. Greenspan. We have no intention at this particular 
stage, at least as far as I can judge from speaking to my 
colleagues, to change reserve requirements, but it certainly 
would have certain advantages to have a degree of flexibility, 
should we need to at any particular point.
    Mrs. Kelly. Perhaps we can enter into a further dialogue on 
that. I would appreciate that.
    Mr. Greenspan. Let me put it this way. We are supportive of 
your legislation.
    Mrs. Kelly. You are?
    Mr. Greenspan. Yes.
    Ms. Kelly. I would like to talk with you just quickly about 
the Federal debt.
    With the recent budget surplus projections, this year, it 
looks like paying it down could really be an obtainable goal. 
So given that the financial markets use Government securities 
as a benchmark to price all other corporate debt, does this 
large and liquid Government debt market have an irreplaceable 
function in the financial markets? Should we be a target size 
for the debt--should there be?
    Mr. Greenspan. I do not think it is irreplaceable. It has 
been extraordinarily invaluable to have it as a benchmark, but 
the advantages of paying down the debt, in my judgment, are far 
more important than the loss of the benchmark, which could very 
readily be replaced. Indeed, whether it is a swap market or 
whether it is other various different types of private issues, 
is not all that important.
    What I am reasonably certain will happen, if indeed we 
reduce the debt to negligible levels, is that the private 
markets will create new benchmarks, create new securities 
essentially, to replace what the Treasury market has 
effectively given us. Indeed, we at the Federal Reserve, 
holders of in excess of half a trillion dollars of U.S. 
Treasury instruments, are going through very significant 
evaluations of how we would implement open market policy 
without a Treasury market. It is a little more difficult, but 
clearly it is something we can do.
    Mrs. Kelly. Thank you very much.
    I yield back the balance of my time.
    Chairman Oxley. The gentlelady yields back.
    The gentleman from Kansas, Mr. Moore.
    Mr. Moore. Thank you, Mr. Chairman.
    Mr. Chairman, I am pleased to see you here again today. You 
have previously testified, today and I think in other instances 
in the past, that long-range forecasts, 5 and 10 years, are at 
best speculative; is that correct?
    Mr. Greenspan. That is correct.
    Mr. Moore. Probably the further we go out, the more 
speculative those forecasts become. Would that be correct, sir?
    Mr. Greenspan. Yes, sir.
    Mr. Moore. During the Senate Budget Committee testimony, I 
believe you indicated that debt reduction was still a priority 
for you.
    Mr. Greenspan. Correct.
    Mr. Moore. In terms of priorities, would it be fair to say, 
that is your first priority, sir?
    Mr. Greenspan. It would be.
    Mr. Moore. You also acknowledged or stated during your 
Senate Budget Committee testimony, that you believe now, based 
upon these forecasts, that we could do or afford a tax cut; is 
that correct, sir?
    Mr. Greenspan. What I said is that with the size of the 
presumed unified budget surpluses, when we get to, in effect, 
de minimis debt, or zero debt, depending on how you want to 
look at it, there is no alternative but accumulating private 
assets in the Federal Government, an issue which causes me 
great concern, and I believe requires a great deal of 
evaluation. That, incidentally, is an issue I will be 
discussing at the House Budget Committee on Friday.
    Mr. Moore. OK. Then am I to understand what you just said 
to mean that until such time as there is a paydown of this 
national debt that we should not have tax cuts? Or am I 
misunderstanding what you are saying, sir?
    Mr. Greenspan. No, I am basically saying that indeed one of 
the problems that I raised with the Senate Budget Committee is 
that if you believe these productivity numbers will continue to 
emerge and you believe, say, the Congressional Budget Office or 
OMB's forecast, we end up in the year 2005 or 2006 with a $500 
billion annual unified budget surplus.
    If, at that point, you want to restrict the accumulation of 
assets, the only private assets in Government, the only way to 
do that is to very rapidly eliminate the surplus, which can be 
done only by decreasing taxes or increasing expenditures, and I 
raise the issue that a $500 billion very rapid fiscal stimulus, 
which is exactly what would happen under those conditions, may 
be wholly inappropriate for what the economy is doing at that 
time; at which point I argued that we should direct both 
expenditure policy and tax policy in a manner to bring that 
unified budget surplus down to more credible levels prior to 
2005 or 2006, which led me to conclude that in order to avoid 
that potential contingency, initiatives would be best 
implemented sooner rather than later.
    Mr. Moore. But at this point, we are still a few years 
away, wouldn't you agree, from zero public debt?
    Mr. Greenspan. We are a few years away, but not that many. 
In other words, both the OMB in the previous Administration and 
CBO indicated in the fiscal year 2006 that we would start to 
accumulate private assets, and in my judgment, not only must we 
evaluate exactly what type of assets and what type of programs 
you would want, but also we need to make certain that the 
fiscal policies that are implicit in that are not disruptive to 
the economy.
    Mr. Moore. And you have stated here this morning that you 
did not endorse any particular tax cut, and there are several 
out there, correct?
    Mr. Greenspan. That is correct.
    Mr. Moore. Would you agree that if there are several 
different uses we could make of this projected surplus over the 
next several years, such as tax cuts, debt reduction and some 
national priorities, which some may consider a political 
priority--and even the President last night suggested we need 
some new spending in the areas of education, national defense 
and prescription drugs, you heard that, sir?
    Mr. Greenspan. I did.
    Mr. Moore. All right. Would it be more advisable--and I am 
not asking you to tell Congress what to do here, because I 
understand you want to stay out of the political arena--but 
would it be advisable to take a balanced approach here and do 
some debt reduction? Because I happen to agree with your first 
priority, and that is paying down our national debt, as well as 
some tax cuts in moderation, and then some of these political 
new initiatives which are probably going to happen on a 
bipartisan basis.
    Chairman Oxley. The gentleman's time has expired.
    Mr. Greenspan. I do believe it is the Congress which has to 
make those judgments. They are, at root, ``political,'' in the 
proper sense of the word, decisions that only the Congress and 
the Administration can make or should make.
    Chairman Oxley. The gentleman from Texas, Mr. Paul.
    Mr. Paul. Thank you.
    Welcome, Mr. Chairman. In the last few weeks, you have 
received a fair amount of criticism and suggestions about what 
to do with interest rates and the economy, and I think that is 
going to continue, because I suspect that we are moving into 
what you call--you do not call it a ``recession,'' but a 
``retrenchment.'' I guess that may be a new word.
    But anyway, there will be a lot of suggestions as to what 
you should do, and I do not want to presume to make a 
suggestion, what interest rates should be, but I would like to 
address more the system that you have been asked to manage, 
because in many ways I think it is an unmanageable system, and 
yet it is key to what is happening in our economy. We have a 
system that you operate where you are continuously asked to 
lower interest rates.
    I would like to remind my colleagues and everybody else 
that when you are asked to lower interest rates, you are asked 
in reality to expand the money supply, because you have to go 
out and buy something. You buy debt. So every time somebody 
says, ``lower the interest rates,'' they say ``inflate the 
money supply.'' I think that is important.
    You had a little conversation before about the money 
supply, and conceded it is important, but you admit you don't 
even know what a good proxy is, so it is very difficult to talk 
about the money supply. I am disappointed that we don't 
concentrate on that, talk about it more, even to the point now 
that we are--that you no longer make projections. I think this 
is admission almost of defeat.
    There is no requirement for you to say, well, we are going 
to expand the money supply at a precise rate, so we are past 
that point of a tradition that has existed for a long time. But 
I think it is an unmanageable system and it leads to bad ideas 
and bad consequences, because we concentrate on prices, which 
is a consequence of the inflation of the money supply. 
Therefore, if a PPI is satisfactory, we neglect the fact that 
the money supply is surging, and doing a lot of mischief. 
Therefore we say, ``Well, maybe if we just slow up the economy. 
If we slow up the economy, it is going to take care of the 
inflation.''
    I think we are really missing the point. You did mention a 
couple of words in your testimony today that I thought were 
important acknowledging that there are problems in the economy 
that we have to address. You talked about ``excesses'' and 
``imbalances'' and the need for ``retrenchment.''
    I believe what is important is that we connect the excesses 
and the imbalances to the policy that you operate, because I 
think that is key. Instead of being reassured that the PPI is 
OK, if we would have looked at the excesses, maybe there would 
have been an indication that there was a problem in the 
overspeculation in the stock market.
    But here we have a monetary system that creates a 
speculation where NASDAQ goes to 5,000, and then we have a lot 
of analysts telling us it is a good buy, yet you now are citing 
the analysts as saying there is going to be a lot of growth. I 
am not sure which analyst you are quoting, but I am not sure 
that would be all that reassuring. But I think we should really 
talk about the money supply and what we are doing.
    In 1996, you expressed a concern about ``irrational 
exuberance in the stock market,'' and I think that was very 
justified. But since that time, the money supply measured by M3 
went up $2.25 trillion. The stock market, of course, has 
soared. I see the imbalances as a consequence of excessive 
credit. The system has defects in it.
    You are expected to know what the proper interest rate is. 
I don't think you can know it, or the Federal Reserve can know. 
I think only the market can dictate the proper interest rate. I 
don't think you know what the proper money supply is. You admit 
you don't even have a good proxy for measuring the money 
supply. Yet that is your job, and yet all we ever hear is 
people coming and saying, ``Mr. Greenspan, if you want to avert 
a downturn, if you want to save us, just print more money.'' 
That is essentially what this system is doing.
    Now, the one question I have, quickly, is your plan that 
you mentioned in the Senate about using other securities like 
State bonds and foreign bonds, and others in order for you to 
buy more debt to monetize. I think it is ironic with a $5.7 
trillion national debt, we are running out of things to buy.
    Mr. Greenspan. Just remember that of that $5.7 trillion, a 
very large part is held in trust funds of the United States 
Government, so that the net debt is really $3.5 trillion, of 
which the Federal Reserve owns more than $500 billion.
    Mr. Paul. Could it be an advantage to make some of that 
marketable, rather than going out and buying municipal bonds, 
foreign debtor-state bonds?
    Mr. Greenspan. No, because--I don't want to get into the 
accounting processes here, but if you are dealing with a 
unified budget accounting system, all of that debt is 
intragovernmental transfers and essentially is a wash. You have 
to have external securities to affect the economy.
    What we were discussing in the remarks with respect to what 
the Federal Reserve is looking at is what type of securities we 
could use for so-called ``repurchase agreements'' which are 
collateralized. In other words, when we engage in an open 
market operation through a repurchase agreement, what we have 
now is Federal Government securities as collateral. The 
question is, if we don't have them, what other kinds of 
collateral would we use? We are therefore talking about, for 
example, State and local securities.
    But the crucial issue there is that to the extent that we 
use securities which are more risky than the Federal 
Government's, we basically just take more collateral to offset 
that. So we can maintain the same degree of risk. And what we 
are trying to evaluate is various different types of securities 
which we can employ solely for the purpose of protecting the 
transaction from default.
    Chairman Oxley. The gentleman's time has expired.
    The Chair recognizes the gentleman from Texas, Mr. 
Hinojosa.
    Mr. Hinojosa. Thank you, Mr. Chairman.
    Mr. Chairman, thank you for sharing your knowledge with us. 
I would be interested in hearing more from you on the issue of 
unemployment. Despite the last few years of economic growth, my 
Texas Congressional District has been unable to reduce its 
unemployment rate to less than 12 percent. The current slowdown 
has jumped it upward to 14 percent, and I fear it will go even 
higher.
    The national rate of unemployment now stands at about 4.2 
percent, after having dipped as low as 3.9 percent. Just a few 
years ago we heard consistently from economists that we could 
not expect unemployment to fall below 5.5 or 6 percent without 
igniting inflation.
    You, Mr. Greenspan, and others, have acknowledged more 
recently that the economy appears to be able to tolerate lower 
levels of unemployment. This is certainly good news for those 
of us who represent districts containing persistent 
unemployment.
    What weight does the Federal Reserve give to unemployment 
figures when deciding monetary policy? Can monetary policy 
lower unemployment and should that be one of its goals?
    I personally wonder if you see any peril in rising 
unemployment, given the tremendous amount of job growth during 
the past decade.
    Finally, can you describe any groups of workers who are 
particularly at risk of being laid off in the current economic 
slowdown?
    Mr. Greenspan. As I have indicated on occasions in the 
past, Congressman, I think the general focus in the broadest 
sense of all economic policy--Federal Reserve and fiscal 
policy--should be to find that particular set of policies which 
maximize sustainable long-term growth in the economy, which of 
necessity means maximizing real incomes and maximizing 
employment.
    The means that what we all are seeking is not altogether 
self-evident at all times. The issue that you raise is an issue 
that economists have struggled with for a good long period of 
time, that is, how low can you get the unemployment rate and 
still maintain a sustainable long-term maximum economic growth. 
And you are quite right; the academic fraternity was largely 
arguing 5 percent, and sometimes higher than that, as recently 
as a decade ago or even less than that. There are still a 
number of economists that argue that the equilibrium, if I may 
put it that way, unemployment rate that which is consonant with 
long-term maximum sustainable growth, is still 5 percent.
    I personally believe it is lower, as I have testified 
previously, but it is a crucial statistic which all of us deal 
with, and we hope that the changes that have occurred in the 
economy, the technological changes, the productivity changes 
and, more importantly, the flexibility of the labor market, 
have enabled us to basically maintain long-term economic growth 
at a lower unemployment rate than we had in the past.
    Mr. Hinojosa. Mr. Chairman, I yield back the rest of my 
time.
    Chairman Oxley. Thank you.
    The gentleman from Alabama, Mr. Riley.
    Mr. Riley. Thank you, Mr. Chairman.
    Welcome, Mr. Chairman. Mr. Chairman, when I left the office 
this morning, I picked up this off of my desk from Congress 
Daily. ``Trade Deficit Hits New High.'' The Nation's trade 
deficit with the rest of the world climbed to an all-time high 
of $369 billion, up 39.5 percent higher than the previous 
records of $265 billion. China now has taken over Japan as our 
country with the largest imbalance of $83 billion. Japan, which 
was up 22 percent last year. Japan rose another 10 percent.
    But when we are having these type of numbers, when we are 
having a 40 percent increase in the trade deficit, I know you 
answered earlier that it is of a concern, but when does it 
become alarming?
    Mr. Greenspan. It doesn't become alarming in any sense. In 
other words, the way I put it previously, clearly it is a 
function of the extent to which there are perceived long-term 
rates of return on investment in the United States, and to a 
very large extent, it is the technology acceleration which I 
have discussed earlier which is at the root, in certain 
respects, of this trade deficit which we now have.
    Mr. Riley. Excuse me, but are you talking about the 
technology advances in other countries, or in ours?
    Mr. Greenspan. In ours. In the sense that, as I indicated 
before, if your exchange rate is rising, it is basically 
suggesting that there is a greater demand for investment in 
your country than in other countries. And the result of that is 
that the only way to engender a very significant current 
account deficit, which is the other side of a capital account 
surplus of investment coming into the United States, is to have 
a trade deficit. In other words--I don't want to get into the 
technicalities of it--but to a large extent, our trade deficit 
is being financed basically by the desire on the part of 
foreigners to invest in the United States, and the reason is 
quite apparently the extent of the technological advances which 
we have created and the very high rates of return on investment 
which we have relative to other countries.
    Now, that can't go on indefinitely, and at some point it is 
going to change.
    Mr. Riley. Let me ask you this, sir. Could you compare 
where we are today with this record imbalance to where we were 
10 years ago?
    Mr. Greenspan. Well, 10 years ago, you may recall, we 
actually had a current account surplus--literally 10 years 
ago--part of which was payments that we received as a result of 
our assistance in the Gulf War. But in any event, it was quite 
low, even adjusting for that. And there has been a major 
increase in the current account deficit and in the trade 
deficit and in the extent of investment in the United States.
    Those trends, as best I can judge, cannot continue 
indefinitely.
    Mr. Riley. Let me ask you one final question, if I can. 
What impact, if any, would a tax cut at this time, what effect 
would it have on future trade deficits?
    Mr. Greenspan. Well, the usual way that question is asked 
is to what extent would a reduction in the unified budget 
surplus, or, more exactly, Government savings, have on the 
savings we borrow from abroad? The presumption is that if we 
have less savings in Government, we have to borrow more from 
abroad. But that is a static view of the way the world works, 
and I think a more dynamic view really gets to the question of 
whether or not, say, a tax cut enhances productivity in the 
economy, increases the rate of return, and essentially induces 
an offset to the loss of savings from Government. I don't want 
to get into the complexity of this, or we will be here all 
morning.
    Chairman Oxley. The gentleman's time has expired.
    The gentleman from Tennessee, Mr. Ford.
    Mr. Ford. Mr. Chairman, if you want to finish 30 seconds, 
that answer with Mr. Riley, I would be happy to yield.
    Mr. Greenspan. I would just say if you would like for me to 
answer you in more detail, send me a letter and I will be glad 
to respond to it.
    Mr. Riley. I appreciate the gentleman from Tennessee. The 
only thing I would like to know, as far as incentivizing small 
businesses, especially with so many people using sub S 
corporations today, would a tax cut eventually help our 
productivity to the point it would help offset some of the 
trade imbalances?
    Mr. Greenspan. It might. But there are so many other 
elements involved in that equation, I would hesitate to give 
you an unqualified answer.
    Mr. Ford. Mr. Chairman, my name is Harold Ford, I am from 
Tennessee. I thank you again, as all my colleagues thank you 
for being here.
    Mr. Greenspan. I know you well.
    Mr. Ford. My question is a simple one. My State is 
experiencing a significant sort of revenue shortfall, as are 
several States throughout the South, and one of the challenges 
that I am having as we, the congressional delegation, prepares 
to meet with our Governor on Monday, is trying to reconcile 
these enormous surplus projections that are coming from the 
Congressional Budget Office with the reality of what is 
happening in States all across the Nation, particularly 
southern States, even the State of our current President, which 
is also facing a revenue challenge.
    What I can't seem to understand is, I would have to think 
that these States have experienced some prosperity and growth 
over the last 8 years. At least those are the numbers I saw and 
the numbers that the former Administration disseminated. How do 
you reconcile the two, these huge budget surplus projections 
with the realities of the States trying to take care of 
Medicaid programs, education challenges at the lower and higher 
levels?
    It is hard for me to figure out, particularly when I go 
home and people are craving for the tax cuts, as all of us are. 
I liken it to, I don't know, of a business in America that 
would give out Christmas bonuses for 2002, 2003, 2004, 2005, 
all the way to 2012, on February 28 of 2000, based on 
projections of how well they think they are going to do over 
the next 21 years.
    That being said, I would love to hear your response to the 
first one, to the extent you might be able to answer that.
    Mr. Greenspan. Well, Congressman, as you know, there have 
been significant improvements in State fiscal accounts over the 
last 5, 6, 7 years. There has been an erosion of revenues 
recently and a goodly part of that I suspect is essentially 
sales tax and other types of revenues which are not exactly 
matched on the Federal side. But without looking at the 
individual details within each State, it is very difficult to 
generalize on this.
    I remember a significant amount of the income tax that 
States have, which is a significant part of their revenue 
obviously, are often really coming off the Federal income tax 
form, and therefore almost directly relate to the same adjusted 
gross incomes that people report for the Federal returns.
    The difference, I suspect, is that there have been a lot of 
tax cuts in numbers of the States where that has not been the 
case comparably within the Federal Government. But also you 
look at the individual accounts, it is very tough to make a 
generalization.
    Mr. Ford. I would agree. But ironically, this 
Administration suggested at one point that the tax cut was an 
insurance policy against a recession. In another breath, the 
President said last night he was here on behalf of the American 
people to ask for a refund. I know Treasury Secretary O'Neill 
has taken a different position from the President at different 
times.
    Let's just assume the White House and the Administration is 
working from the same hymnal, and they believe we will have a 
combination, a refund and they ought to look at stimulating the 
economy.
    If many of these States are experiencing this shortfall 
because of a tax cut that then-Governors of these States and 
current Governors suggested would produce increases in 
productivity, would help us close the trade deficit gap, all of 
these wonderful things, and it is not occurring--as a 30-year-
old, I have to pay most of this debt back, my generation does, 
if this stuff doesn't pan out like some of my friends in the 
Congress, and even the Administration, are suggesting.
    So I guess my question to you is, as much as you haven't 
taken a look at some of these individual States, I hope maybe I 
can write at some point and you and your staff may have a 
opportunity to take a look. It would be different if it was 
just one State or an anomaly in two or three States. But you 
are finding States all across the Nation, particularly in my 
part of the country, that are experiencing difficulties and 
challenges that we here at the Federal level, our numbers don't 
seem to reflect at all. Maybe they do, and I just don't 
understand how losses over here produce huge projected gains on 
the other side of the equation.
    Chairman Oxley. The gentleman's time has expired.
    Mr. Greenspan. We will be glad to respond to your question.

         [Chairman Greenspan subsequently submitted the 
        following response for inclusion in the record:

         [As I indicated at the hearing, there were significant 
        improvements in State budget positions throughout much 
        of the mid to late 1990s, though the fiscal position of 
        a number of States appears to have eroded in recent 
        months. There are two factors that have contributed to 
        an erosion of State revenues that have not affected the 
        Federal Government to the same extent. First, much of 
        the weakness in State revenues that has been identified 
        so far has come from sales and excise taxes, which make 
        up almost half of State revenue from taxes and fees. 
        So, weakness in the revenue source can create a 
        noticeable problem for many State governments. By 
        contrast, only about 5 percent of Federal Government 
        revenue is derived from these sorts of taxes. Also, 
        about 40 percent of State taxes come from individual 
        and corporate income taxes compared with around 60 
        percent of Federal tax receipts. Second, the States, as 
        a group, have cut taxes, on net, in every year from 
        1995 to 2000. While most of the reductions were fairly 
        small, some States reduced taxes more than once, and, 
        on balance, several years of reductions turned out to 
        be quite significant for the States. The National 
        Conference of State Legislatures has estimated that the 
        reductions sum to almost 8 percent of collections over 
        the 1995 to 2000 period. By comparison, the cut in 
        Federal Taxes in 1997 was only about 1\1/4\ percent of 
        revenues.]

    Chairman Oxley. The Chair would observe that we have 5 
votes on the floor of the House, and it would be the Chair's 
obligation to recognize Mrs. Biggert as our final questioner, 
and then we will proceed to adjourn, respect the Chairman's 
schedule, and also the fact this will probably take about 40 
minutes on the floor.
    Let me recognize the gentlelady from Illinois, Mrs. 
Biggert.
    Mrs. Biggert. Thank you. I will be very brief, because we 
do have the votes shortly.
    Just how does the savings issue fit in to the issue of tax 
relief? I think the last time you were here, and it was a time 
when the high-tech industry equities were doing very well, and 
you said at that time you had some concern, if not opposed to 
tax cuts, because the Americans were not saving enough and had 
no savings and didn't create then capital formation. But now 
that doesn't seem to be the case. Is that true?
    Mr. Greenspan. Well, as you may recall, earlier on, even 
though the official savings that we report from the Department 
of Commerce out of income were very low and indeed currently 
are negative, the average household didn't view that as 
representative of what they themselves felt they were doing, 
because they had 401(k)s or the equivalent, and as far as they 
were concerned, they may have been registered as a negative 
saver by the Department of Commerce, but the accumulation of 
assets which they had clearly suggested otherwise.
    As a consequence of that, the general view that of the 
United States as being a low saving country was not effectively 
supported by the average person.
    That is going to change with the lower values of stock 
prices and as net household wealth declines, and how that has 
evolved or how that affects savings out of income to offset it, 
is going to be a very important issue with respect to how the 
economy evolves.
    Chairman Oxley. The gentlelady's time has expired.
    Mr. Chairman, again thank you for your appearance before 
this committee. We always appreciate your courtesy and your 
excellent testimony. The hearing stands adjourned.
    [Whereupon, at 12 noon, the hearing was adjourned.]

                            A P P E N D I X

                           February 28, 2001
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