U.S. GOVERNMENT PRINTING OFFICE

70–750 DTP WASHINGTON : 2001

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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HOUSE COMMITTEE ON FINANCIAL SERVICES

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa

MARGE ROUKEMA, New Jersey, Vice Chair

DOUG BEREUTER, Nebraska

RICHARD H. BAKER, Louisiana

SPENCER BACHUS, Alabama

MICHAEL N. CASTLE, Delaware

PETER T. KING, New York

EDWARD R. ROYCE, California

FRANK D. LUCAS, Oklahoma

ROBERT W. NEY, Ohio

BOB BARR, Georgia

SUE W. KELLY, New York

RON PAUL, Texas

PAUL E. GILLMOR, Ohio

CHRISTOPHER COX, California

DAVE WELDON, Florida

JIM RYUN, Kansas

BOB RILEY, Alabama

STEVEN C. LATOURETTE, Ohio

DONALD A. MANZULLO, Illinois

WALTER B. JONES, North Carolina

DOUG OSE, California

JUDY BIGGERT, Illinois

MARK GREEN, Wisconsin

PATRICK J. TOOMEY, Pennsylvania

CHRISTOPHER SHAYS, Connecticut

JOHN B. SHADEGG, Arizona

VITO FOSSELLA, New York

GARY G. MILLER, California

ERIC CANTOR, Virginia

FELIX J. GRUCCI, JR., New York

MELISSA A. HART, Pennsylvania

SHELLEY MOORE CAPITO, West Virginia

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

PATRICK J. TIBERI, Ohio

JOHN J. LAFALCE, New York

BARNEY FRANK, Massachusetts

PAUL E. KANJORSKI, Pennsylvania

MAXINE WATERS, California

CAROLYN B. MALONEY, New York

LUIS V. GUTIERREZ, Illinois

NYDIA M. VELA ́ ZQUEZ, New York

MELVIN L. WATT, North Carolina

GARY L. ACKERMAN, New York

KEN BENTSEN, Texas

JAMES H. MALONEY, Connecticut

DARLENE HOOLEY, Oregon

JULIA CARSON, Indiana

BRAD SHERMAN, California

MAX SANDLIN, Texas

GREGORY W. MEEKS, New York

BARBARA LEE, California

FRANK MASCARA, Pennsylvania

JAY INSLEE, Washington

JANICE D. SCHAKOWSKY, Illinois

DENNIS MOORE, Kansas

CHARLES A. GONZALEZ, Texas

STEPHANIE TUBBS JONES, Ohio

MICHAEL E. CAPUANO, Massachusetts

HAROLD E. FORD JR., Tennessee

RUBE ́ N HINOJOSA, Texas

KEN LUCAS, Kentucky

RONNIE SHOWS, Mississippi

JOSEPH CROWLEY, New York

WILLIAM LACY CLAY, Missouri

STEVE ISRAEL, New York

MIKE ROSS, Arizona

BERNARD SANDERS, Vermont
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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

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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
2

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 talkingto 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 mone-
3

tary 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
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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
5

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
6

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 babyboomers.

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.
7

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

51⁄2 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 ad-
8

vanced 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 ad-
9

justment 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 nonrational behavior.
10

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 longterm 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.
11

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
12

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——
13

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
14

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
15

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.
16

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 mid2000 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
17

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
18

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
19

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
20

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.
21

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
22

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
23

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
24

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 longterm 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
25

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 11⁄2 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
26

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.
27

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
28

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 our-
29

selves 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.
30

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 secu-
31

rities, 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.
32

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.
33

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 accu-
34

mulate 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
35

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.
36

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.
37

The means that what we all are seeking is not altogether selfevident 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
38

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
39

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
40

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 11⁄4 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?
41

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.]

(43)

A P P E N D I X

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