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ECONOMIC OUTLOOK AND THE

FEDERAL BUDGET

HEARING

BEFORE THE

COMMITTEE ON THE BUDGET 

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

HEARING HELD IN WASHINGTON, DC, SEPTEMBER 12, 2002

Serial No. 107–34

Printed for the use of the Committee on the Budget

(

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

(II)

COMMITTEE ON THE BUDGET 

JIM NUSSLE, Iowa, Chairman 

JOHN E. SUNUNU, New Hampshire 

Vice Chairman 

PETER HOEKSTRA, Michigan 

Vice Chairman 

CHARLES F. BASS, New Hampshire 

GIL GUTKNECHT, Minnesota 

VAN HILLEARY, Tennessee 

MAC THORNBERRY, Texas 

JIM RYUN, Kansas 

MAC COLLINS, Georgia 

GARY G. MILLER, California 

PAT TOOMEY, Pennsylvania 

WES WATKINS, Oklahoma 

DOC HASTINGS, Washington 

JOHN T. DOOLITTLE, California 

ROB PORTMAN, Ohio 

RAY LAHOOD, Illinois 

KAY GRANGER, Texas 

EDWARD SCHROCK, Virginia 

JOHN CULBERSON, Texas 

HENRY E. BROWN, Jr., South Carolina 

ANDER CRENSHAW, Florida 

ADAM PUTNAM, Florida 

MARK KIRK, Illinois 

[Vacancy] 

JOHN M. SPRATT, Jr., South Carolina, 

Ranking Minority Member 

JIM MCDERMOTT, Washington 

BENNIE G. THOMPSON, Mississippi 

KEN BENTSEN, Texas 

JIM DAVIS, Florida 

EVA M. CLAYTON, North Carolina 

DAVID E. PRICE, North Carolina 

GERALD D. KLECZKA, Wisconsin 

BOB CLEMENT, Tennessee 

JAMES P. MORAN, Virginia 

DARLENE HOOLEY, Oregon 

TAMMY BALDWIN, Wisconsin 

CAROLYN MCCARTHY, New York 

DENNIS MOORE, Kansas 

MICHAEL M. HONDA, California 

JOSEPH M. HOEFFEL III, Pennsylvania 

RUSH D. HOLT, New Jersey 

JIM MATHESON, Utah 

[Vacancy] 

PROFESSIONAL STAFF

RICH MEADE, Chief of Staff 

THOMAS S. KAHN, Minority Staff Director and Chief Counsel 

(III)

C O N T E N T S

Page 

Hearing held in Washington, DC, September 12, 2002 ........................................ 1

Statement of Hon. Alan Greenspan, Chairman, Board of Governors, Federal 

Reserve System .................................................................................................... 5

Prepared statement and additional submission of: 

Hon. Jim Nussle, a Representative in Congress from the State of Iowa ..... 2

Hon. Mark Kirk, a Representative in Congress from the State of Illinois, 

question regarding year-to-year ‘‘backcasting’’ ........................................... 4

Chairman Greenspan ....................................................................................... 7

(1)

ECONOMIC OUTLOOK AND THE FEDERAL 

BUDGET 

THURSDAY, SEPTEMBER 12, 2002

HOUSE OF REPRESENTATIVES, COMMITTEE ON THE BUDGET, Washington, DC. 

The committee met, pursuant to call, at 10 a.m. in room 210, 

Cannon House Office Building, Hon. Jim Nussle (chairman of the 

committee) presiding. 

Members present: Representatives Nussle, Bass, Gutknecht, 

Thornberry, Collins, Toomey, Watkins, Brown, Crenshaw, Putnam, 

Spratt, McDermott, Bentsen, Davis, Price, Moran, Baldwin, McCarthy, Moore, Honda, and Matheson. 

Chairman NUSSLE. The House Budget Committee will come to 

order. This is a full committee hearing on the economic outlook and 

the Federal budget. We are very honored to have returning to our 

committee the very distinguished chairman of the Federal Reserve 

Board, Alan Greenspan. Chairman Greenspan has a 12:30 commitment that is one that he cannot break. And so, what I would suggest to all members is that we move as quickly as we can to his 

testimony. 

Let me lay out that on behalf of all the members of the Budget 

Committee, we welcome you here today. It has always been true 

that everyone is interested in what you have to say, but given the 

economic and budgetary developments of the past 2 years, we have 

a particular interest in your views on the outlook of the economy 

and monetary and fiscal policies. 

When this Congress took office, the economic and budgetary outlook were quite different than they are today. As we look back on 

the economic slowdown and the recession of the years 2000 and 

2001, with the benefit of hindsight and a new government and new 

government data, we realize just how slow the economy was in the 

second half of 2000, even before the 107th Congress got started. 

And then a year ago—a year ago yesterday—we were hit with the 

shock of September 11 and its obvious economic and budgetary consequences. 

So we have had to deal unexpectedly with a triple threat: a national emergency in the form of a continuing threat to our homeland; the war against international terrorism; and a slowdown and 

recession in our economy. We have done our best to work with the 

President to promote and adopt the policies that would help our 

economy. Last year’s tax cuts have been roundly credited as being 

the right policy at the right time to help promote consumption and 

to boost the economy. Last fall, and this summer as well, in a biVerDate Feb 1 2002 18:01 Oct 07, 2002 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 H:\DOCS\HEARINGS\107-34\HBU255.000 HBUDGET1 PsN: DICK
2

partisan way we adopted emergency provisions to help with the rebuilding and the war efforts. Earlier this spring, again in a bipartisan way, we passed the stimulus package with investment tax incentives and unemployment benefits. 

Although these policies have helped, ultimately it is the people 

of this country who have continued to press on and to make things 

work and to get the economy moving again. The one word I keep 

hearing again and again back home as well as around the country, 

and certainly from economists, is that our economy is ‘‘resilient.’’

Our Nation and its economy have been tough, yet flexible enough 

to adapt, and they cannot break our spirit and they cannot break 

our economy. 

Even so, we have an unemployment rate that is too high, news 

today that continues to be concerning and that is not acceptable. 

We need to do our best to promote jobs and high real wages. It is 

true in my home state of Iowa and it is true around the country. 

Getting the economy growing at a healthy pace again is the best 

way to promote income growth and a predictable Federal budget 

revenue stream. 

Ultimately we need to control what we can control. And this 

means Federal spending, particularly in the time we have remaining for this 107th Congress. Spending has already increased to accommodate necessary emergency spending and to stimulate the 

economy. Now we hear that the other body, the Senate, is considering appropriations spending for the next fiscal year that is well 

above the House budget that has been passed, and is the only 

budget that has been passed in this Congress, as well as the President’s requested levels. These bills that they are considering have 

costs that are significantly higher than they have even advertised 

and that they even have at self-imposed internal levels. If adopted 

as proposed, these measures would result in a discretionary spending increase of about $15-billion larger than proposed by the President and the House. And that is even before you mentioned the 

close to $6 billion in agriculture emergencies. Over the next 10 

years, this increase would raise the baseline spending by $225 billion. Faced with such spending demands, I am obviously very interested today in your views on the need for budgetary and spending 

restraint. 

I welcome you here today, Mr. Chairman, and I am glad to hear 

your views on the economy. 

[The prepared statement of Mr. Nussle follows:]

PREPARED STATEMENT OF HON. JIM NUSSLE, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF IOWA

On behalf of all the members of the Budget Committee, let me welcome you here 

today. We are pleased that you agreed to come before us today to discuss the economic outlook and the Federal budget. 

It is always true that everyone is interested in what you have to say. But given 

the economic and budgetary developments of the past 2 years, we have a particular 

interest in your views on the outlook for the economy and fiscal policies. 

When this 107th Congress took office, the economic and budget outlook were quite 

different from what they are today. As we look back at the economic slowdown and 

recession of 2000–01, with the benefit of hindsight and new government data, we 

realize just how slow the economy was in the second half of 2000, before the 107th 

Congress even started. And then, a year ago, we were hit with the shock from September 11 and its budget consequences. 

3

So, we have had to unexpectedly face a triple threat: a National emergency in the 

form of a continuing threat to our homeland; a war against international terrorism; 

and a slowdown and recession in our economy. 

We’ve done our best to work with President Bush to promote and adopt policies 

that would help the economy: last year’s tax cuts have been roundly credited as 

being the right policy at the right time to help promote consumption and boost the 

economy; last fall and this summer as well, we adopted emergency provisions to 

help with rebuilding and war efforts; earlier this spring we passed the stimulus 

package with investment tax incentives and unemployment benefits. 

Although these policies have helped, ultimately it is the people of this country 

who have continued to press on and make things work to get the U.S. economy moving again. The one word I keep hearing again and again in reference to the economy’s performance is ‘‘resilience.’’ Our Nation and its economy have been tough, yet 

flexible enough to adapt. And they can’t break our Spirit. 

Even so, we still have an unemployment rate that is too high, and that is not acceptable. We need to do our best to promote jobs and high real wages. Getting the 

economy growing at a healthy pace again is the best way to promote income growth 

and increases in Federal budget revenues. 

Ultimately, we need to control what we can control. That means Federal spending. Spending has already increased to accommodate necessary, emergency spending 

and stimulate the economy. And now, the Senate is considering appropriations 

spending for next fiscal year well above the President’s request. The bills they’re 

considering have costs that are significantly higher than advertised. If adopted as 

proposed, the measures would result in a discretionary spending increase about $15 

billion larger than proposed by the President. Over the next 10 years, this increase 

would raise baseline spending by $225 billion. Faced with such spending demands, 

I’m very interested in hearing your views on the need for spending restraint. 

I welcome you here today and I will be glad to hear of your views on the economy, 

Federal budget issues, and the policies that will bring us back to full employment.

Chairman NUSSLE. And now I would like to recognize my friend 

Mr. Spratt for any comments he wishes to make. 

Mr. SPRATT. Mr. Chairman, I join Chairman Nussle and welcome 

you to our committee, the Budget Committee. We are grateful to 

have you and we look forward to your testimony. 

Obviously we hope that you will bring us good news about the 

budget today, about the economy today, but we also hope that you 

can help us reconnect to what is happening in the economy and 

what ought to be happening in our budget. This is the role of the 

Budget Committee. 

In the maelstrom of other matters—terrorism, recession, corporate fraud, decline in the stock market, equity markets, and 5- 

to $7-trillion loss in net worth—we have lost sight of the budget’s 

bottom line. And while we weren’t paying close attention to the 

black bottom line that we had just 2 years ago, the surplus estimated at $5.6 trillion is all but disappeared. 

Just a few weeks ago, the Congressional Budget Office did its annual update and came to the conclusion that assuming current policies, we had a surplus of $336 billion over the next 10 years versus 

$5.6 trillion just 2 years ago, down $1.3 trillion since March alone 

in their estimation. 

Obviously, that is not a course that is sustainable. It may be understandable that we have had our focus diverted. Terrorism is a 

huge problem, and some of these things truly do override the budget. But I don’t think it is excusable—or in the long run sustainable—that we just forget the budget altogether and go off in attention to these other priorities. 

Right now, we are back into the kind of phase where if you back 

out Social Security, as I think you should, we have got deficits for 

as far as the eye can see, for as far as we cast our forecast. 

4

Two years ago we were in earnest, both sides, talking about 

lockboxes, about not spending ever again the surpluses in Social 

Security and, for that matter, Medicare too. Now, we have virtually 

fully consumed the surplus in Medicare for the next 10 years and 

we have spent most of the surplus in Social Security also for the 

next 10 years. 

Two years ago we were talking seriously about being able to retire most of the debt held by the public over the next 10 to 12 

years. Now if we continue on the course we are on, we not only will 

not retire that debt, we will actually add to that debt. We will add 

to the net national debt held by the public. 

You told us 3 years ago, when we were sitting around wondering 

what should be the fiscal policy in light of these surpluses that we 

seemed to see rising on the horizon; that if we could muster the 

will to have a fiscal policy in which the public had confidence, we 

could drive down long rates; that you at the Fed could control short 

rates, but that your control over long rates was not nearly what it 

is over short rates; and that the markets would look to us, and 

their confidence in fiscal policy would determine whether or not we 

would be able to drive long rates down to the level they were in, 

say, the 1950s. I think you mentioned one of the rewards you 

might attain if you can genuinely achieve this kind of confidence 

equal to what we have achieved at the Fed in terms of monetary 

policy, you may see long rates down at 41⁄2 percent. And if you can 

drive long rates down to that, drive the cost of capital down like 

that, you will see stable growth for years to come. And growth, of 

course, is what makes possible many of the promises, keeping the 

promises that we have made. 

I hope, therefore, you can help us, as I said, reconnect the budget 

to the economy, reemphasize the primacy of the budget. After all, 

20 percent of our GDP in effect flows through the Federal budget. 

It has a profound effect. And we saw in the 1990s what happens 

when you have a complementary of monetary and fiscal policy. As 

we were reducing and improving the bottom line of the budget 

every year for nearly 8 straight years, the economy got better and 

better as well. There had to be some kind of connection between 

the two, and we have lost sight of that. And we hope in your testimony today, in addition to talking about the economy, you can talk 

about the primacy of the budget, about our need to get back on 

course to where we were just 2 years ago—saving instead of spending—and moving, keeping the economy in surplus, if not avoiding 

the deficits we have accumulated. 

Once again, thank you for coming and we look forward to your 

testimony. 

Chairman NUSSLE. All members will have 7 days to submit 

statements at this time. Mr. Chairman, we welcome you to the 

committee and we are pleased to receive your testimony. 

[Question submitted for the record by Mr. Kirk follows:]

QUESTION POSED TO CHAIRMAN GREENSPAN BY CONGRESSMAN KIRK

Question: Establishing a Federal budget is always challenging, but it gets harder 

when the forecasts we depend on shift by a hundred billion dollars in just 6 months. 

Do you believe that year-to-year ‘‘backcasting,’’ which would compare annual budget 

projections to actual performance, could improve these forecasts? 

5

Answer: I believe that the budget forecasts at CBO and OMB are well aware that 

large forecast revisions related to surplus developments, such as this spring’s lower 

than expected tax collections, greatly complicate the process of developing sound 

budget policies. Therefore, they strive to minimize such revisions by taking account 

of all the useful information that is available at the time they make their projections. As you suggest, an analysis of the differences between past budget projections 

and actual outcomes can be a useful input to this forecast process, and indeed CBO 

is thinking very much along the same lines (see, for example, CBO, ‘‘Budget Resolution Targets and Actual Outcomes,’’ Appendix C, The Budget and Economic Outlook: 

Fiscal Years 2003–2012).

STATEMENT OF ALAN GREENSPAN, CHAIRMAN, BOARD OF 

GOVERNORS, FEDERAL RESERVE SYSTEM 

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

microphone on? Thank you, Mr. Chairman. I am not used to your 

new structure here, but it is a very interesting improvement. Technology spills everywhere; let me put it that way. 

I am especially pleased to appear here today to discuss some of 

the important issues related to the outlook for the economy and the 

attendant implications for the formulation of fiscal policy. The 

views I will be expressing are my own and not necessarily those 

of the Federal Reserve Board. 

The U.S. economy has confronted very significant challenges over 

the past year: major declines in equity prices, sharp retrenchment 

in investment spending, and the tragic terrorist attacks of last September, a year ago. To date, the economy appears to have withstood this set of blows well, although the depressing effects still linger and continue to influence, in particular, the Federal budget 

outlook. 

A year ago, the Congressional Budget Office expected the unified 

budget to post large and mounting surpluses over the coming decade. As you know, CBO is currently forecasting that if today’s policies remain in place, the unified budget will post deficits through 

fiscal year 2005. For the fiscal year just ending, CBO now projects 

a budget balance that is more than $300-billion below the level it 

had projected a year ago. 

To a degree, the return to budget deficits resulted from temporary factors, especially the fall-off in revenues and the increase 

in outlays associated with the economy’s downturn. But some of the 

factors accounting for the weaker budget outlook will have longerlasting effects. A large portion of this year’s decline in individual 

income tax revenues is clearly related to the retrenchment in equity markets. The sharp decline in stock prices appears to have 

markedly reduced final settlements for the 2001 tax year, as well 

as receipts on 2002 income. This effect works directly through less 

tax revenue from capital gains realizations, and indirectly through 

less revenue collected from the exercise of stock options, from 

stock-price-related bonuses, and from withdrawals from IRAs and 

401(k) plans that have been augmented by capital gains. 

Although official projections had been based on the assumption 

that tax collections related to the stock market would eventually 

decline from the elevated levels of the late 1990s, the sharp drop 

in equity markets was not expected, and the fallout from it will 

dampen tax revenues relative to earlier expectations for some time. 

Furthermore, the precipitous fall in tax receipts may have resulted 

from other factors as well—for example, a shift in the distribution 

6

of income from higher to lower tax brackets and a change in the 

timing of tax collections. The recent surge in discretionary spending, necessitated only in part by the war on terrorism and the need 

for enhanced homeland security, has also made the budget picture 

less sanguine. 

Nonetheless, despite the budget erosion over the past year, our 

underlying fiscal situation today remains significantly stronger 

than that of a decade ago when policymakers were struggling to 

rein in chronic large deficits and the ratio of Federal debt to GDP 

was approaching 50 percent and climbing. This turnaround was a 

result of several factors. To an extent, the fiscal improvement can 

be traced to the emergence of forces largely external to the fiscal 

process. The end of the cold war yielded a substantial peace dividend, and the pickup in productivity growth and surging stock 

market substantially boosted tax collections. 

But such forces alone cannot wholly account for the improvement 

in the fiscal situation. Prudent policy also played an important 

role. After years of budgetary profligacy, a political consensus to 

move toward a balanced budget slowly emerged. Beginning in the 

late 1980s, impressive progress was made in restraining Federal 

expenditures and restoring a better balance between spending and 

revenues. Even with the consensus to balance the budget, such 

progress might have been evasive were it not for the procedural 

mechanisms that were developed to enforce that political consensus. The Budget Enforcement Act of 1990, building on earlier 

initiatives, provided such mechanisms. The statutory limits on discretionary spending and the so-called PAYGO rules requiring 

changes in mandatory spending and revenue policies to be budgetneutral, backed by a 60-vote point of order in the Senate, served 

as useful tools to control the deficits. In essence, the rules provided 

a means for advancing the broader good of sound fiscal policy over 

narrower interests. 

The budget rules worked far better than many skeptics, myself 

included, had expected. Between 1990 and 1998, discretionary 

spending fell from more than 10 percent of GDP to less than 61⁄2

percent. The end of the cold war was clearly a critical factor behind 

this decline, but the statutory caps helped to hold nondefense discretionary expenditure in check, and allowed the benefits of the decline in defense needs to go toward reducing deficits rather than 

toward facilitating increases in other spending. The PAYGO rules 

changed the way policymakers analyzed fiscal policy proposals; 

rather than focusing solely on the benefits of a proposal, policymakers were required to recognize the costs as well. 

The Budget Enforcement Act was intended to address the problem of huge deficits. In 1990, the possibility that surpluses might 

emerge within the decade seemed remote indeed. When they unexpectedly arrived, the budget control measures appeared to be addressing a problem that had been solved. Fiscal discipline seemed 

to be a less pressing priority and was increasingly abandoned. 

Though the 1990 act was not amended, policymakers found ways 

to circumvent the discretionary caps and the PAYGO rules. They 

did not anticipate and, indeed, there were few indications that deficits were about to reemerge. Given the recent change in the budget 

7

outlook, the commitment to fiscal responsibility that served us so 

well must now be reestablished. 

The budget enforcement rules are set to expire on September 30. 

Failing to preserve them would be a grave mistake in my judgment. For without clear direction and constructive goals, the inbuilt political bias in favor of budget deficits likely will again become entrenched. We are all too aware that government spending 

programs and special tax benefits can be easy to initiate or expand, 

but extraordinarily difficult to trim or shut down once constituencies develop that have a stake in maintaining the status quo. 

The bottom line, Mr. Chairman, is that if we do not preserve the 

budget rules and reaffirm our commitment to fiscal responsibility, 

years of hard effort could be squandered. 

Besides the near-term budgetary shortfalls that we currently 

face, the aging of the population presents a daunting long-term fiscal challenge. With the baby boomer generation beginning to retire 

in just six short years, we need to begin deciding exactly how to 

reform our retirement programs to close the gap between unified 

budget outlays and revenues. In essence, we will have to decide 

how to allocate available resources. All possible policy solutions 

should be on the table. 

Recently, the Bureau of Labor Statistics introduced a new index 

that could provide a more accurate measure of the cost of living for 

the indexation of both the retirement benefits and tax brackets. 

More fundamentally, the way to prepare for the challenges ahead 

is to increase the real resources that will be available to meet those 

looming needs. The greater the resources available, the easier it 

will be to provide real benefits to retirees without unduly restraining the consumption of workers and without imposing large tax increases that would dampen incentives and reduce economic growth. 

To summarize, then, now is not the time to abandon the discipline and structure that worked so well for so long. The framework enacted in the Budget Enforcement Act of 1990, and extended 

several times, must be preserved. Current budget projections remain relatively favorable, but those projections will be realized only 

under a disciplined approach to fiscal policy. Though undeniably 

difficult, following such a strategy will best prepare us for the fiscal 

pressures that will almost surely arise as the baby boomer generation begins to retire. 

Mr. Chairman, I have a rather longer official statement, and request that it be included for the record. 

Chairman NUSSLE. Without objection, your entire statement will 

be made part of the record, and we appreciate you summarizing 

your statement for us. 

[The prepared statement of Dr. Greenspan follows:]

PREPARED STATEMENT OF ALAN GREENSPAN, CHAIRMAN, BOARD OF GOVERNORS, 

FEDERAL RESERVE SYSTEM

I am pleased to appear here today to discuss some of the important issues related 

to the outlook for the economy and the attendant implications for the formulation 

of fiscal policy. The views I will be expressing are my own and not necessarily those 

of the Federal Reserve Board. 

The U.S. economy has confronted very significant challenges over the past year—

major declines in equity markets, a sharp retrenchment in investment spending, 

and the tragic terrorist attacks of last September. To date, the economy appears to 

have withstood this set of blows well, although the depressing effects still linger and 

8

continue to influence, in particular, the Federal budget outlook. A year ago, the Congressional Budget Office expected the unified budget to post large and mounting 

surpluses over the coming decade. As you know, CBO is currently forecasting that, 

if today’s policies remain in place, the unified budget will post deficits through fiscal 

year 2005. For the fiscal year just ending, CBO now projects a budget balance that 

is more than $300 billion below the level it had projected a year ago. 

To a degree, the return to budget deficits resulted from temporary factors, especially the fall-off in revenues and the increase in outlays associated with the economic downturn. But some of the factors accounting for the weaker budget outlook 

will have longer-lasting effects. A large portion of this year’s decline in individual 

income tax revenues is clearly related to the retrenchment in equity markets. The 

sharp decline in stock prices appears to have markedly reduced final settlements for 

the 2001 tax year, as well as receipts on 2002 income. This effect works directly 

through less tax revenue from capital gains realizations, and indirectly through less 

revenue collected from the exercise of stock options, from stock-price-related bonuses, and from withdrawals from IRAs and 401(k) plans that have been augmented 

by capital gains. 

Although official projections had been based on the assumption that tax collections related to the stock market would eventually decline from the elevated levels 

of the late 1990s, the sharp drop in equity markets was not expected, and the fallout from it will likely dampen tax revenues relative to earlier expectations for some 

time. Furthermore, the precipitous fall in tax receipts may have resulted from other 

factors as well—for example, a shift in the distribution of income from higher to 

lower tax brackets and a change in the timing of tax collections. The recent surge 

in discretionary spending, necessitated only in part by the war on terrorism and the 

need for enhanced homeland security, has also made the budget picture less sanguine. 

Nonetheless, despite the budget erosion over the past year, our underlying fiscal 

situation today remains significantly stronger than that of a decade ago, when policymakers were struggling to rein in chronic large deficits and the ratio of Federal 

debt to gross domestic product was approaching 50 percent and climbing. This turnaround was the result of several factors. To an extent, the fiscal improvement can 

be traced to the emergence of forces largely external to the fiscal process. The end 

of the cold war yielded a substantial peace dividend, and the pickup in productivity 

growth and surging stock market substantially boosted tax collections. 

But such forces alone cannot wholly account for the improvement in the fiscal situation. Prudent policy also played an important role. After years of budgetary profligacy, a political consensus to move toward a balanced budget slowly emerged. Beginning in the late 1980s, impressive progress was made in restraining Federal expenditures and restoring a better balance between spending and revenues. 

Even with a consensus to balance the budget, such progress might have been elusive were it not for the procedural mechanisms that were developed to enforce that 

political consensus. The Budget Enforcement Act of 1990, building on earlier initiatives, provided such mechanisms. The statutory limits on discretionary spending 

and the so-called PAYGO rules requiring changes in mandatory spending and revenue policies to be budget-neutral, backed by a 60-vote point of order in the Senate, 

served as useful tools to control deficits. In essence, the rules provided a means for 

advancing the broader good of sound fiscal policy over narrower interests. 

The budget rules worked far better than many skeptics, myself included, had expected. Between 1990 and 1998, discretionary spending fell from more than 10 percent of GDP to less than 61⁄2 percent. The end of the cold war was clearly a critical 

factor behind this decline, but the statutory caps helped to hold nondefense discretionary expenditures in check, and allowed the benefits of the decline in defense 

needs to go toward reducing deficits rather than toward facilitating increases in 

other spending. The PAYGO rules changed the way policymakers analyzed fiscal 

policy proposals: Rather than focusing solely on the benefits of a proposal, policymakers were required to recognize the costs as well. 

The Budget Enforcement Act was intended to address the problem of huge deficits. In 1990, the possibility that surpluses might emerge within the decade seemed 

remote indeed. When they unexpectedly arrived, the budget control measures appeared to be addressing a problem that had been solved. Fiscal discipline seemed 

a less pressing priority and was increasingly abandoned. Though the 1990 act was 

not amended, policymakers found ways to circumvent the discretionary caps and the 

PAYGO rules. They did not anticipate—and, indeed, there were few indications—

that deficits were about to reemerge. Given the recent change in budget outlook, the 

commitment to fiscal responsibility that served us so well must now be reestablished. 

9

The budget enforcement rules are set to expire on September 30. Failing to preserve them would be a grave mistake. For without clear direction and constructive 

goals, the in-built political bias in favor of budget deficits likely will again become 

entrenched. We are all too aware that government spending programs and special 

tax benefits can be easy to initiate or expand but extraordinarily difficult to trim 

or shut down once constituencies develop that have a stake in maintaining the status quo. However, spending and tax-cutting restraint are not symmetrical. While 

there is no upside limit to spending, taxes cannot go below zero. In any case, the 

bottom line is that if we do not preserve the budget rules and reaffirm our commitment to fiscal responsibility, years of hard effort could be squandered. 

In considering the extension of the Budget Enforcement Act, some have suggested 

amending the budget rules to limit the scope for circumventing the spending caps 

through the use of an ‘‘emergency’’ spending designation. Others have suggested 

rules that would be more flexible in the event of budget surpluses. These are 

thoughtful initiatives, but they are secondary to ensuring that the basic framework 

not be abandoned. Restoring fiscal discipline must be a high priority. 

Besides the near-term budgetary shortfalls that we currently face, the aging of 

the population presents a daunting long-term fiscal challenge. Indeed, the extent of 

that challenge is not adequately reflected in conventional measures of the Federal 

budget. 

Scoring the budget on an accrual basis—the private sector norm and, I believe, 

a sensible direction for Federal budget accounting—would better underscore the 

tradeoffs we face. Under accrual accounting, benefits would be counted as they are 

earned by workers rather than when they are paid out by the government. This 

method allows us to keep better track of the future obligations that the government 

has incurred. Under full accrual accounting, the Social Security program would have 

shown a substantial deficit last year, rather than the surplus measured under our 

current cash-accounting regimen. 

Such accruals take account of still-growing contingent liabilities, which currently, 

under most reasonable sets of actuarial assumptions, amount to many trillions of 

dollars for Social Security benefits alone. The contingent liabilities implicit in the 

Medicare program are much more difficult to calculate—but they are also likely in 

the trillions of dollars. These liabilities are fast approaching their due date. With 

the baby boom generation beginning to retire in just six short years, cash benefits 

will soon begin to rise rapidly, exerting pressure on the unified budget. 

Given the imminence of these demographic pressures, we need to begin deciding 

exactly how to reform our retirement programs to close the gap between unified 

budget outlays and revenues. In essence, we will have to decide how to allocate 

available resources. All possible policy should be on the table. Recently, the Bureau 

of Labor Statistics introduced a new index that could provide a more accurate measure of the cost of living for the indexation of both retirement benefits and tax brackets. 

More fundamentally, the way to prepare for the challenges ahead is to increase 

the real resources that will be available to meet those looming needs. The greater 

the resources available, that is, the greater the output of goods and services produced by our economy, the easier it will be to provide real benefits to retirees without unduly restraining the consumption of workers and without imposing large tax 

increases that would damp incentives and reduce economic growth. 

Although other elements are involved in long-run productivity growth, clearly, the 

more capital that is available per worker, the greater productivity will be, all other 

things being equal. The level of national savings, the primary source of capital investment financing, is significantly affected by the level of government saving (surpluses) or dissaving (deficits). Between 1992 and 2001, decreasing Federal budget 

deficits followed by surpluses were important in maintaining national saving in the 

face of declining private saving, a factor likely contributing to the marked step-up 

in productivity growth. 

Returning to a fiscal climate of continuous large deficits would risk returning to 

an era of high interest rates, low levels of investment, and slower growth of productivity. To be sure, at the moment, Treasury rates are at the lowest level in more 

than forty years, and I can scarcely argue that deficits are pressuring interest rates. 

And, indeed, our current fiscal situation remains more favorable than it has over 

much of the past few decades. But history suggests that an abandonment of fiscal 

discipline will eventually push up interest rates, crowd out capital spending, lower 

productivity growth, and force harder choices upon us in the future. 

To summarize, now is not the time to abandon the discipline and structure that 

worked so well for so long. The framework enacted in the Budget Enforcement Act 

of 1990, and extended several times, must be preserved. Current budget projections 

remain relatively favorable, but those projections will be realized only under a disVerDate Feb 1 2002 18:01 Oct 07, 2002 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6621 H:\DOCS\HEARINGS\107-34\HBU255.000 HBUDGET1 PsN: DICK
10

ciplined approach to fiscal policy. Though undeniably difficult, following such a 

strategy will best prepare us for the fiscal pressures that will almost surely arise 

as the baby boom generation begins to retire.

Chairman NUSSLE. Let me begin with the statement that you 

make as the bottom line. You say the bottom line is that if we do 

not preserve the budget rules and reaffirm our commitment to fiscal responsibility, years of hard effort could be squandered. What 

would the market reaction be as well? Years of hard effort looks 

behind us. What will be the years that we look ahead to and the 

reaction of our economy to market if we fail to continue budget discipline and fiscal responsibility? 

Mr. GREENSPAN. Mr. Chairman, it took many years for the markets to take seriously the efforts of the budget committees to construct mechanisms to hold spending and budget deficits in check. 

As they did, as they began to take it seriously, really realizing that 

in fact it was a very potentially productive effort, you could see 

markets adjust. Long-term interest rates did come down. You could 

see expectations of inflation fall. You could see a whole series of 

positive elements emerging in the financial markets, which had 

been for years beset by the crowding out of American savings for 

the need to finance the unified budget deficit. 

As that began to change, there was far more credibility given to 

the government budget process. And even now as deficits begin to 

emerge, that credibility is still intact; and the way we can tell is 

that, indeed, we have interest rates which reflect low inflation expectations and essentially a control of fiscal policy. If that process 

breaks down, I think the whole process will reverse. 

Chairman NUSSLE. Mr. Chairman, 8 months ago the President, 

in reaction to the emergencies of September 11, 2001, in reaction 

to and planning for the war on terrorism, and with an eye toward 

stimulating an economy that had been in a downturn for, at that 

point, apparently over a year, produced a budget in February to 

meet those challenges. This committee passed a budget to meet 

those challenges in February, and in March the full House passed 

that budget, that budget plan. 

That budget plan has been deemed to be the budget. The President has indicated his support for that budget plan. Yet we are 

now 8 months into this process, and still there is no proposal on 

the table that is anywhere near the majority support that is required in the Senate in order to adopt any kind of budget discipline. And what my friend Mr. Spratt calls budget primacy, in 

order to have the primacy of the budget, you need a budget. 

It is kind of hard to have the primary focus of the Federal Government as far as architectural design, fiscal responsibility, to be 

the budget if you don’t have a budget. The President has a budget. 

The House has a budget. We intend in the House of Representatives to enforce that budget. 

Let me, if I can, go to a chart that indicates what happens if we 

don’t enforce that budget, and move to what we are hearing the 

Senate may do as a result of not having any amount of fiscal discipline or spending restraint. 

If you look at this chart, if you follow our budget, by CBO’s projections, which seems to be the most pessimistic and that is fine—

let’s use the most pessimistic data that is on the table. We do go 

11

back to a unified surplus, balanced budget by the year 2006, 2005; 

but as you can see by the red line, that is where the Senate currently is setting its discretionary spending, based on the numbers 

that the Senate Appropriations Committee is using in order to report their legislation. As you can see from that line, according to 

CBO, you never get back to anybody’s definition of budget discipline or balanced budget in any time during the next 10 years. 

The concern I have is that in order for us to enforce discipline, 

as you said, the first thing you need is you need to have a budget. 

It is our intention to enforce the House-passed levels. 

My question for you is, if we do not, and if we, in fact, meet 

somewhere halfway, which, by the way, halfway means below balanced budget as well, how will that effect the markets? How will 

you react to that level of spending discipline, given your testimony 

here today? 

Mr. GREENSPAN. Well, Mr. Chairman, it is difficult for me to 

make explicit projections of what the economy will look like 4 or 

5, 6 years out. I think our ability to do that is clearly limited. 

My discussions with a number of your colleagues in the Senate 

suggest that they, too, have a sense of frustration about not being 

able to put a budget together. I can’t go much beyond what I said 

in my prepared statements. I think that we are clearly eroding the 

underlying structure of budget constraint that had characterized 

the Congress for quite a significant number of years. Fortunately, 

it has not yet gotten to the point where it has had significant negative market consequences. I can’t obviously comment on what we 

at the Federal Reserve would do, because we respond not to fiscal 

policy per se, as I have said many times in the past, but to what 

the impact on the economy is, and we respond effectively to the 

economy. 

Chairman NUSSLE. Well, then let me just wrap up and keep us 

moving here so that other members can ask questions. But let me 

report to you in conclusion that this committee is on record supporting the extension of those measures of fiscal discipline and 

PAYGO and the caps. We have passed a budget here in the House. 

If we are going to have budget discipline, if we are going to have 

spending discipline, if we are going to have fiscal restraint and responsibility, if we are going to have budget primacy, you need a 

budget. And the President has demonstrated an ability to present 

a budget, the House has demonstrated its ability to present a budget, and as of yet no one else has either presented a budget or 

passed a budget that meets those tests at any time during the last 

8 months. We hope that will change here in the time that we have 

left in this fiscal year and in this 107th Congress. 

With that, I return to my friend, Mr. Spratt. 

Mr. SPRATT. Mr. Chairman, I believe the Senate Democrats did 

report a budget; the problem they have is getting it off the Senate 

floor if they would bring it to the Senate floor. 

Let me share with you a chart just to join the debate, which is 

our projection of what happens under the President’s proposals in 

July of this year in the Mid-Session Review sent us by OMB. Based 

upon this simple table, you start out with $5.6 trillion. By August 

it was down to 3.4. By March it was down to $1.7 trillion. By August, per CBO, it was down to $336 billion, from $5.6 trillion, to 

12

$336 billion. And if you factor into that baseline forecast by CBO— which was a current policy forecast, assuming no new policies—if 

you factor in just the policies proposed by President Bush as recently as July in the mid-session review, the surplus becomes a net 

deficit of $480 billion, and there is only a black bottom line, because all of that is a Social Security surplus. 

We don’t have a budget now, and one of the problems with the 

budget process rules, Mr. Chairman, that you mentioned is that 

they were always passed and coupled with a plan. We had the 

budget summit in 1990 which we made with the first President 

Bush. We had President Clinton’s budget in 1993, and we had the 

Balanced Budget Agreement of 1997. Every time we renewed those 

budget process rules, they worked, because they were coupled with 

a specific plan. Now, we fudged on the plan. We did not fully comply with the plan, but by and large it was a template which kept 

us in balance and helped us move the budget from $290 billion in 

deficit in 1992 to a surplus in the year 2000; phenomenal progress 

with the budget. 

Let me ask you about budget process rules, and one in particular 

which you mentioned. A year or two ago, as we were debating 

whether or not to have a tax cut of $1.35 trillion, you suggested 

that we might have to trigger surplus-affecting policies, either 

spending or tax policies, that might be kept in balance if they were 

phased in, No. 1; and No. 2, if the forecast didn’t fulfill itself, if it 

didn’t obtain and the budget went deeper in deficit and surpluses 

disappeared, we might want to trigger off those surplus-affecting 

policies. 

Do you still support some sort of mechanism like that as well as 

the other two you mentioned? 

Mr. GREENSPAN. I do, Congressman, and the reason I do is that 

it has become evident over the years that the commitments that we 

make within the budget are increasingly longer-term and have long 

lives to them. Because as we very clearly demonstrated in the last 

year or so, long-term forecasts are difficult to make, and yet we 

note with reasonable certainty that we are going to have a very 

large increase in retirees as the so-called baby boomers begin to retire in large numbers. So we know that we have a fiscal problem 

of significant dimensions out there. 

So I have argued, and I would continue to argue, that it is very 

important not only to have short-term budget plans, but to have 

plans which phase us into a very dramatic change that occurs in 

the fiscal outlook as we get into the next decade. 

Mr. SPRATT. And phase us out if the underlying forecast does not 

obtain. 

Mr. GREENSPAN. Therefore, because it is so difficult to forecast, 

I think it is essential that we have triggering mechanisms of one 

form or other on both taxes and spending initiatives. 

Mr. SPRATT. We have a pie chart that shows our apportionment 

of the causes for the deterioration in the surplus over the next 10 

years, and our pie chart shows that tax cuts account for about 40 

percent, but the economy and technical factors account for 33 percent. In other words, there was a misestimation of the aggregate 

surplus over 10 years to the extent of about 43 percent, 10 percent 

for not correctly calculating the growth of the economy, but a large 

13

33 percent for technical factors. Even though the economy is growing as anticipated in the outyears, the economy is still not generating the tax revenues that were anticipated in 2001. We got a 

sharp reminder of that in the CBO report that came up here on 

August 27. That report showed that even though they are assuming that the economy will grow this year at 2.3 percent, recover to 

3 percent next year, and then bottom out at about 3.2 percent for 

the last of the forecast period—even though they are assuming reasonable growth, we still have a technical shortfall in tax revenues 

expected over that period of time of $668 billion over the 10-year 

period, 2003 to 2012. 

Do you share the opinion that we missed it a couple of years ago? 

That we grossly over-calculated what the surplus was, and therefore do we need to reconsider in light of the fact that the premises 

no longer apply? 

Mr. GREENSPAN. Well, there were very considerable technical difficulties in budget estimates which confronted both OMB and CBO. 

We all knew that the rise in individual income tax receipts were 

far in excess of anything that could be determined by what we 

would call the tax base. We knew that a very substantial part of 

that rise in revenues relative to income was a consequence of stock 

price effects one way or the other. What we did not anticipate, or— I will put it this way: in the long-term projections, as I indicated 

in my prepared remarks, the CBO and indeed OMB projected that 

the market would come back to some average level and that the 

very significant amount of tax revenues which were raised because 

of stock option grant realizations would come down to normal, or 

to what they had been in the previous period. 

Even though we do not yet have the full details and will not until 

we have the statistics of income for 2001, the decline in capital 

gains taxes, plus the stock option realizations apparently fell far 

faster than we expected, because you could see it in the final settlements, the receipts that occurred in April, and you could see it in 

the estimated tax receipts. 

What that essentially means is that the expectations of the relationship between the stock market, capital gains, stock options, bonuses, withdrawals from 401(k)s and IRAs all were overestimated. 

That is what that technical 33 percent largely picks up. 

We still don’t know whether the forecasts are right. They may be 

too low for all I know going forward. But CBO and OMB do the 

best that they can. They are the only real players in the game, because they are the only ones who have the really very detailed 

budget and tax revenue data systems. 

So I guess the best thing to do is to wish them well in making 

better estimates, but it is tough. 

Mr. SPRATT. But in addition to that, being honest, looking back, 

saying ‘‘hey, what we expected has not happened,’’ therefore we do 

have to change the plans that we based upon those expectations? 

Mr. GREENSPAN. Oh, absolutely. Not only did it not happen, but 

things that we never even thought about happened. 

Mr. SPRATT. One thing you popped out of your box on us in this 

testimony that is different from PAYGO rules, and discretionary 

spending caps is accrual accounting. It has been talked about for 

a long time. It is not easy to apply accrual accounting to governVerDate Feb 1 2002 18:01 Oct 07, 2002 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6602 H:\DOCS\HEARINGS\107-34\HBU255.000 HBUDGET1 PsN: DICK
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ment accounts, but if we had accrual accounting, we would have a 

deficit, would we not, for as far as the eye sees, irrespective of 

these underlying numbers, because the accrual for Medicare and 

Social Security future liabilities alone would drive the bottom line 

down? 

Mr. GREENSPAN. Yes, that is right, Congressman. If you take a 

look at any reasonable estimates of what the accruals are, and remember they require fairly sophisticated judgments with respect to 

the future, you end up with accruals being significantly above actual cash benefits on both OASDI, and on the Medicare programs. 

So that we are still accumulating contingent liabilities which obviously reflect both the difference between accruals and benefits, and 

the interest earned on those contingent liabilities, if you look at the 

aggregate contingent liabilities that are involved we are now somewhere in the area of $10 trillion for Social Security alone. 

So the numbers are quite significantly different, and it is certainly the case were we to go to accrual accounting, which in principle we ought to; that is what the private sector does. 

Mr. SPRATT. If we had it on an accrual accounting Federal budget, and also a strictly observed PAYGO rule, we could not have any 

entitlement increases or spending cuts or tax cuts for a long time 

to come, could we? 

Mr. GREENSPAN. I think it would be a very sobering budgetary 

experience. 

Mr. SPRATT. One final question, because others want to ask you 

questions. 

Right now we sort of are lulled into complacency, I think, because we have been able to run large deficits and have budgets 

that forecast large deficits, but we have not yet seen or felt the effects apparently in the long-term interest rate markets. 

Mr. GREENSPAN. That is certainly correct. Indeed, it is hard to 

find any evidence of the move from surplus to deficits in long-term 

riskless Treasury instruments. One of the reasons, as I indicated 

before, is not only obviously that the economy has slowed down 

through the last year or two, but also there is still a degree of expectation that the fiscal policy process is under control. 

Mr. SPRATT. Nevertheless, you still think there is a connection. 

You made a landmark speech at Jackson Hole recently and there 

were some economists there from Georgetown who I understand 

presented papers saying that even CBO’s projection of long-term 

deficits had an effect on long-term interest rates. Do you think that 

there is still a serious connection there and that could hamper the 

long-term growth of the economy? 

Mr. GREENSPAN. There is a large dispute within the economics 

profession of the impact of government debt and deficits on longterm interest rates. I am in the camp which believes there is a very 

close connection over the long run. To be sure, there are many 

other factors which affect long-term interest rates, but if you watch 

the way markets behave, and indeed the economics of it very 

strongly suggest that long-term interest rates, both real and nominal, are affected in a significant manner by the long-term fiscal 

outlook, and when you change the long-term fiscal outlook or, more 

exactly, when the markets perceive a change in the long-term fiscal 

outlook, interest rates react immediately. 

15

Mr. SPRATT. And long-term rates are critically important in determining investments in plant and equipment, fixed long-term investments? 

Mr. GREENSPAN. Long-term interest rates have been extraordinarily important, not only, as you point out, in the corporate sector, but they have been a major factor in inducing the extraction 

of equity from homes which been a very large contributor to the 

support the economy has had through this period of very severe equity market contraction. 

Mr. SPRATT. Thank you very much, sir. 

Chairman NUSSLE. Given the time constraints, I am going to ask 

members to hold very closely to the 5 minutes, and I will try to enforce that respectfully. 

Mr. Gutknecht. 

Mr. GUTKNECHT. Thank you, Mr. Chairman. Thank you, Dr. 

Greenspan. It is always good to have you here. 

Mr. GREENSPAN. Thank you. 

Mr. GUTKNECHT. I am reminded sort of in listening to some of 

your presentation of something my old German grandmother says. 

‘‘So soon old and so late smart.’’ It seems that we sort of have to 

relearn things so many times. In terms of predicting what the economy is going to do in the future, it is a very difficult business. 

I want to first of all talk about something that our friends on the 

other side continue to talk about, and that is the tax cuts. Given 

the fact that the economy has been much more sluggish than we 

originally predicted, do you think we did the right thing in reducing taxes last year? 

Mr. GREENSPAN. Oh, I do, Congressman. 

Mr. GUTKNECHT. Let me go to the other side of the equation. 

Since we found out it is much more difficult to predict how much 

money is going to be coming into the Federal Government than we 

used to think, let’s talk about the spending side. In the past you 

have said, I don’t know if it is a direct quote, in the past you have 

said that the credibility of fiscal discipline such as discretionary 

spending caps promoted market confidence and thereby helped support economic growth. Do you still believe that? And perhaps you 

can expand upon that. 

Mr. GREENSPAN. I do, Congressman. I don’t think it is necessary 

to expand. It is well phrased. 

Mr. GUTKNECHT. Yes, it is. 

Well, that is the dilemma we are going to face here on this committee as we finish up the appropriation process for this year and 

look down the path. And we would certainly hope that you would 

continue to voice that opinion, because sometimes we are at a big 

minority here in Congress, because the demand for spending is 

enormous, and it comes from all quarters. Those of us who believe 

we have to continue to apply fiscal discipline are many times outnumbered. 

I want to ask sort of an unrelated question, because there are 

really two, I think, important powers that the Federal Reserve has. 

One relates to the Fed funds rate, and I think you folks have responded appropriately there. 

The other is with relation to margins. Maybe you could talk a little bit about what you do, and was there a way that you could have 

16

used that power in retrospect looking at what you have described 

as the bubble in the market? 

Mr. GREENSPAN. Congressman, we looked at that very carefully 

and concluded that by every analysis we were able to make our 

margin authority have virtually no effect on any speculative activity. And the reason, basically, is that margin debt is just a little 

over 1 percent of the value of the stock market, and the vast, vast 

proportion of traders in the market have access to borrowing to finance their purchases from a variety of sources. We concluded that 

the only thing that an increase in margin requirements would have 

done would be to restrain the very small investor whose access to 

lending was nowhere near that available to everybody else. It clearly would have had no effect on the speculation that was going on, 

and we concluded that as a consequence of that, rather than do 

something which seemed to be a major factor and was not, action 

on margins would only undermine the credibility of the whole monetary process itself. 

Mr. GUTKNECHT. One last question. Some on Wall Street have 

been saying that Congress has been maybe too aggressive in beating up on corporate America relative to the corporate scandals. In 

your opinion, have we been too tough, not too tough, or just about 

right? 

Mr. GREENSPAN. Well, I trust that we have learned everything 

that is going to come out, and I think it depends to a large extent 

on what that is. I do think that there were numbers of egregious 

acts that took place in the name of corporate governance over these 

years. My own impression is that the Sarbanes-Oxley Act has appropriately addressed everything of which I am aware should be 

addressed. Indeed, the major problem that I perceived and stated 

on several occasions, both in testimony and in speeches, was that 

the problem essentially rested with the chief executive officer and 

that those chief executive officers who wanted to spin the accounting system in order to give an impression of success where success 

did not exist, those would be duly restrained under the existing 

statute. 

We see a lot of activities out in the corporate governance area 

which are essentially a reflection of the fact that companies tend 

to themselves reflect what CEOs try to put forth as the goal of the 

company. Those companies, or I should say those CEOs who called 

in their outside auditors early on and said, ‘‘Do not do me any favors about giving me numbers which look good. I have a corporate 

strategy out there. I need to know whether or not that strategy is 

working or not working, and if you give me numbers which fuzz up 

whether it is working or not, it doesn’t allow me to correct mistakes, which I need to do.’’

I submit that very, very many corporate CEOs who did that 

turned out to have no problems whatever. There are a few—a larger number than I would like to have seen—who did get caught up 

in the short-term earnings game and its impact on stock prices, 

and that will very readily be addressed and, I think, fairly completely, by Sarbanes-Oxley. 

Mr. GUTKNECHT. Thank you. 

Chairman NUSSLE. Thank you. 

Mr. Bentsen. 

17

Mr. BENTSEN. Thank you, Mr. Chairman. Mr. Chairman, Chairman Greenspan, good to see you again. I have a couple of questions 

that I would like to get in if I could. The first one, I want to go 

back to your testimony that you gave before the Financial Services 

Committee in July. During that time you said the Fed’s tendency 

for growth in 2002 would be between 31⁄2 and 33⁄4 percent in real 

GDP growth, and then later, 31⁄2 to 4 percent. Is that still the general tendency of the Fed? 

Mr. GREENSPAN. I don’t know that, and the reason is that, as you 

know, Congressman, those numbers are the projections of all of the 

members of the Federal Open Market Committee that we compile 

before the FOMC meeting. I would presume that, like the whole coterie of other forecasters out there, that were we to reestimate 

those numbers they would be somewhat lower. But that is not the 

forecast, I might say, of the staff, that is the forecast of the range 

of all of the 19 members on the Federal Open Market Committee. 

Mr. BENTSEN. Thank you. The other question, I want to go back 

to what Mr. Spratt was asking and a little bit of Mr. Gutknecht 

as well. 

In your testimony, you give a strong defense, and I think an appropriate defense, of the 1990 Budget Act and the PAYGO rules 

and caps that were put in place that expire at the end of this year 

and the caps arguably expired long before 2002. You also mentioned that discretionary spending during that time, at least between 1990 and 1998, fell by about 35 percent as a percentage of 

GDP. I know Mr. Gutknecht brought up concerns about rising discretionary spending and earlier this year I think we raised discretionary spending, the bulk of which went into defense and homeland security accounts, which I think most Members—this Member 

feels is appropriate spending. 

But you also said that you still agree with your comments last 

January, or January of 2001, in which you believed there should 

be some sort of triggering mechanism in tax reductions in conjunction with some sort of triggering mechanisms with spending assumptions. 

Given the fact that you believe that we ought to extend PAYGO, 

and I think you are correct in that assumption, do you think it is 

appropriate that the Congress consider at this point in time—given 

that we have lost $5 trillion in surplus value in the last year—that 

we should very seriously consider freezing the further reductions 

assumed in the 2001 tax cut? Secondarily, do you assume that a 

freezing of a future reduction is in itself a tax increase, or is it just 

forestalling future reductions? Because that is really what we are 

coming down to. I think we are going to have to have spending 

cuts, we are going to have to have caps again, we are going to have 

to have PAYGO offsets. But it seems to me that we cannot say we 

are for triggers, but then not exercise them as it relates to the 2001 

tax cuts. So do you think we need to go back and look at the 2001 

tax cut in conjunction with PAYGO and caps? 

Mr. GREENSPAN. Well, I think it is important to remember that of the tax cut of $1.5 trillion plus, including debt service, there is 

only $500 billion left to be initiated, and I might say that part rescinding of that you will find would run into resistance from a significant majority of the Congress, so that there is not all that much 

18

to change. My own view is that I would prefer not. And one of the 

reasons I would prefer not is that there is a significant segment of 

the business community, largely small businesses, who have presumably made capital investment commitments in the context of 

expecting that the long-term tax structure would remain in place. 

They presumably would think that if you rescinded it they would 

consider it a tax increase. 

What constitutes a tax increase or not is clearly an issue of definition. Some would say yes, some would say no. 

Mr. BENTSEN. Well, if I might in my remaining few seconds ask, 

given the fact that in your own testimony you say with the looming 

liabilities of Social Security and Medicare that need to be addressed, the long-term prognosis is not very positive for fiscal policy 

and your belief that there is a coordination between deficits and 

long-term interest rates, would not we be putting on those same 

small business people the rising cost of capital, particularly in the 

short-term markets where they participate the most that would offset any reduction that they might be getting through the tax cut? 

Mr. GREENSPAN. Well, rather than focus on any individual part 

of the budget, I think I can just merely stipulate that what is required here is to look at the total. The particular political decisions 

of whether spending is cut or taxes are raised or vice versa I think 

is very properly in this committee and amongst your colleagues in 

the various appropriations committees, so I don’t particularly wish 

to focus on any specific part of the budget. As I said, my own personal view would be, I trust that you do not rescind the tax cut, 

but that is a much broader question and I think it should not be 

answered without looking at the whole context of where you want 

this budget to be and in what form in, say, the year 2012. 

Mr. BENTSEN. Thank you. 

Thank you, Mr. Chairman. 

Chairman NUSSLE. Thank you. 

Mr. Thornberry. 

Mr. THORNBERRY. Thank you, Mr. Chairman. 

Chairman Greenspan, one of the reasons, it seems to me, that economics is as much an art as it is a science is that in some way 

you judge the reaction of the economy to various policy decisions 

which are made in Washington, reactions of markets and investors, 

consumers, businesses and so forth. I want to ask you about several policy options that are before us in the short term and your 

judgment as to whether it would be beneficial to the economy and 

attitudes about the economy. 

One you have already, I guess, addressed somewhat. If we are 

able to finish our business this year with relatively restrained discretionary growth in spending, is that a positive thing for the economy? What sort of effects would that have? 

Mr. GREENSPAN. It would be positive. The reason I say that is 

I know there are a lot of people out there who are arguing that 

what we need very significantly is fiscal stimulus, but the amount 

of stimulus already in the pipeline is really quite large. And, remember that we are looking at a CBO budget which is a current 

services budget. It does not have in it fairly substantial potential 

additional initiatives which are evidently important to the Congress, but they are not in the budget. I should think that the probVerDate Feb 1 2002 18:01 Oct 07, 2002 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6602 H:\DOCS\HEARINGS\107-34\HBU255.000 HBUDGET1 PsN: DICK
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lems that are going to occur in the period immediately ahead are 

going to be more an issue of restraint than the need for any additional fiscal stimulus. 

Mr. THORNBERRY. Let me ask about a second area. We have before us in Congress several things related to homeland security, reorganizing the government, terrorism insurance. If we are able to 

achieve those things before we leave this year, does that help the 

economy by giving some greater confidence that the government is 

actively protecting us? 

Mr. GREENSPAN. Congressman, anything that reduces uncertainty is almost universally favorable to markets and to the economy, so to the extent that there are uncertainties hanging out 

there as to which way, for example, the terrorism issue is going to 

be handled, anything that can be done to remove that uncertainty 

would be helpful. 

Mr. THORNBERRY. That answer may apply to this question, too. 

Before us is an energy bill. If we are able to take some action that 

will reduce our dependence upon foreign energy, for example, what 

is the reaction in the economy to that? Some speculation is that 

people are reluctant to invest because depending on events in the 

Middle East, that could have consequences to energy markets and 

the economy as a whole. 

Mr. GREENSPAN. I would say anything we can do to increase our 

energy security is clearly to the advantage of the long-term outlook. 

Mr. THORNBERRY. Let me ask you about one other area that is 

kind of on our plate in the short term. 

There are those who suggest that we should take some action in 

the Tax Code to boost investor confidence. Some suggest further reductions in capital gains; others argue that making dividends deductible would be a good thing for investors, but would also help 

provide some stability dealing with some of the issues you and Mr. 

Gutknecht talked about. What is your judgment as to the advisability of some sort of a tax bill this year in the short-term dealing 

with these investor-type issues? 

Mr. GREENSPAN. Well, I am not certain you can do it this year 

obviously, because you are going to be running out of time, but over 

the future, it is clearly for economic reasons desirable in some way, 

in some manner, to lower or hopefully basically eliminate the socalled double taxation on dividends. That is not very helpful for 

long-term capital investment or the allocation of capital, and, as I 

have said on other occasions, I am also in favor of reducing capital 

gains taxes and indeed eliminating them completely on the grounds 

that it is a very poor way of raising revenue. 

But having said that, in the context of the requirement that we 

maintain an appropriately fiscally disciplined system, we cannot 

make and should not be making decisions without fitting them into 

the context of the long-term fiscal situation. There is no doubt in 

my mind that it would be desirable, for example, to increase the 

availability of subchapter S corporations which effectively eliminates the double taxation of dividends. There are a number of other 

things which I think would be quite helpful and to which we ought 

to aspire, but in the context of an overall budgetary fiscal posture. 

Mr. THORNBERRY [presiding]. The Chair recognizes the gentleman from Virginia, Mr. Moran. 

20

Mr. MORAN. Thank you, Mr. Chairman. 

Mr. Greenspan, we are all aware that you are the most credible 

economic analyst in the country today, and so in many ways our 

country’s fiscal solvency in the years ahead rests on your able 

shoulders. But your intellectual ability, of course, is only as constructive as your political independence. I have a little concern and 

I am feeling some frustration in that regard. 

The current CBO Director has had the intellectual integrity, 

though a Republican, to tell his own party what they needed to 

know instead of what they wanted to hear. In his latest report he 

shows that the single greatest component to the erosion of the $5.6 

trillion budget surplus, and this projection of deficits in excess of 

$200 billion a year, is primarily attributable to the tax cuts. 

Mr. GREENSPAN. That is factually accurate. 

Mr. MORAN. Well, I know that. And as a result, I suspect he is 

going to be removed. But in your testimony, you seem to studiously 

avoid what I think is a very important consideration. You knew 

that that $5.6 trillion budget surplus was not sustainable. You 

knew and warned us that the equities markets were hyper-inflated 

and any number of contributing factors made you more aware than 

most people that the money was not there, and if we used the $5.6 

trillion figure to justify a substantial tax cut, that money was eventually going to have to be borrowed from the Social Security and 

Medicare Trust Funds, and that is exactly what has happened. 

Mr. GREENSPAN. I testified a year ago, in which I took the CBO 

numbers as they stood, and if you look at what they were doing 

and the way they handled it, those estimates were professionally 

as good as you could do. We all—what I testified to is that these 

are variable estimates, but I didn’t necessarily know that they were 

too high or too low. 

Mr. MORAN. You were telling us that the equity market was not 

sustainable. 

Mr. GREENSPAN. But remember, the $5.6 trillion was based on 

the presumption that the equity market would be coming down 

over the long run. 

Mr. MORAN. Well, I don’t want to be too argumentative here with 

you, but you do acknowledge that the principal cause of the deficit 

today is the tax cut; it is anywhere from 35 to 40 percent, and the 

excess spending, additional spending is maybe 12 to 15, depending 

upon who you believe, and the sluggish economy maybe 15 percent 

of the deficit. That is where the emphasis, though, is being placed. 

In your statement, if you read your statement without any larger 

context, you would think that the domestic discretionary spending 

is primarily attributable to the deficit, and that is where we need 

to focus almost exclusively our energies. But you also know that we 

reduced domestic discretionary spending from about 10 percent 

down to 6.5, 7 percent. So you know that there is just not that 

much more——

Mr. GREENSPAN. That includes defense. 

Mr. MORAN. Well, I don’t feel that you have indicated that you 

think the defense budget should be cut. I would be interested to 

know that if you think that it should be. 

Mr. GREENSPAN. No. 

21

Mr. MORAN. It seems to me that the only discretion we have is 

in domestic spending. That is where the argument over appropriations bills is going to be. That is why we are going to get stuck 

with a continuing resolution, because we can’t come up with the 

money for the Labor, Health and Human Services bill. So we are 

not arguing over defense. But in your statement, if we do what you 

are implying we should do, we would further cut domestic discretionary spending. It just seems to me there is very little wiggle 

room left there. 

Mr. GREENSPAN. No, I think that my statement was essentially 

an effort to indicate that we ought to have a long-term fiscal policy 

and adhere to it. I, hopefully, studiously avoided endeavoring to get 

involved in any specific way in which that should be achieved because that is the Congress’ prerogative. 

Mr. MORAN. Well, Mr. Chairman, the President has proposed ad- ditional tax cuts of about $260 billion over the next 10 years. Do 

you think those should be implemented now, given the fact that 

they would have to be paid for out of Social Security and Medicare? 

Would you support delaying those until we can pay for them? 

Mr. GREENSPAN. As I said to your colleague across the aisle, my 

own view is that all initiatives, both on the tax and the spending 

side, have to be made, in my judgment, in the context of what the 

long-term fiscal policy outlook is and what the goals of the Congress, hopefully in this committee and your colleagues in the Senate, decide is the appropriate stance. 

Mr. GUTKNECHT [presiding]. The gentleman’s time has expired, 

and Chairman Nussle would like to keep the committee meeting 

going during this vote, so I will recognize the gentleman from Georgia, Mr. Collins, for 5 minutes, and I understand Dr. Greenspan 

can only stay until about 12:30. If you need to go and vote, we are 

going to try and keep this going. The Chair will come back, and the 

Chair recognizes the gentleman from Georgia. 

Mr. COLLINS. Thank you, Chairman Gutknecht. 

I really appreciate the fact that you adhered to my advice with 

your most recent comment there, and that is you will leave the 

spending and the taxing to Congress and you will handle the interest rate based on Federal funding. 

You know, when you testified here, I believe it was last year, the 

question was asked about interest rates; did you feel like you had 

raised interest rates too quick and too high, and of course you said 

no, that the purpose of raising those rates was to slow down corporate investments. 

Mr. GREENSPAN. Did I say that? 

Mr. COLLINS. You said that, sir, and I believe you achieved your 

goal. In fact, I think it kind of dried up. That might be about the 

time you spoke about the bubble, about when the bubble bursts. 

Also at that same time is when we began to see a decline in revenues as far as the Federal Government, State governments and 

local governments. Also we began to see an erosion in consumer 

confidence, and consumer confidence, as you well know, is the marketplace and the economy, the cash flow of individuals. 

A lot of that consumer confidence began to erode because of job 

loss. Job loss has required digging into many savings accounts and, 

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22

ing in and IRAs and such to pull those funds out to meet the needs 

of the family budget. Retirement funds have declined, based on the 

fact that the market is way down, and that too has sent some 

shock waves throughout the consumer environment. Spending has 

not declined as such by the Federal Government. Even though we 

have seen a shortfall in revenues, we have been unable to tend to 

our own business and adjust our own cash flow accordingly. 

My concern is, too, that there has been a lot said about the previous budgets, based on 1992 through the year 2000 and how we 

had a tremendous growth in revenue. I am reminded in 1993 that 

the party in charge then, their approach to budget deficit was to 

increase taxation. In January 1995, deficits were $200 billion a 

year as far as you could even estimate. Also, in January 1995, the 

stock market was at 3,800 points, and in 2000 it rose to 11,000 

points. A lot of that came, as you said in your statement, from the 

fact that there was some budget discipline that was beginning to 

take place within the Congress. I am sorry to say that budget discipline itself has eroded. 

But my question to you, sir, is where do revenues for the government, where are they actually derived? Where do they come from? 

Mr. GREENSPAN. They come from the taxable incomes of the 

American people. 

Mr. COLLINS. From the American people, as far as the individual. 

And the corporate income tax, where does it come from? 

Mr. GREENSPAN. It comes from the same people. 

Mr. COLLINS. It comes from the fact that there is an earnings, 

a positive earnings within the corporate community. 

Mr. GREENSPAN. True. 

Mr. COLLINS. Those positive earnings in the corporate community are also responsible for the fact that it is the cash flow of the 

individual which puts them in a taxable situation, is that not true? 

Mr. GREENSPAN. That is correct, Congressman. 

Mr. COLLINS. We have a situation in this country, and I believe 

you referred to it, too, that we have imports that far exceed exports. We are in a global marketplace, is that not true? 

Mr. GREENSPAN. It is. 

Mr. COLLINS. Do you know, or are you aware of, a considerable 

number of differences between the tax provisions that we impose, 

which is cost to business in this country, which directly affects payrolls, which has led to the decline in the number of jobs, how our 

provisions relate and compare to provisions of other nations? 

Mr. GREENSPAN. Well, there is very clearly an increasing amount 

of competition amongst nations to attract companies and, as a consequence of that, there is an ever-increasing convergence of tax 

structures amongst nations because of the competition. 

Mr. COLLINS. Well, let’s get a little bit more specific with some 

of the differences. We tend to have a higher capital gains rate than 

most industrialized nations, is that not true? 

Mr. GREENSPAN. I believe that is still correct. 

Mr. COLLINS. We have a higher rate than some nations, not all. 

We also have the corporate and the personal alternative minimum 

tax. Do you know of another nation that imposes such a tax? 

Mr. GREENSPAN. I am not familiar with it, but that is only because of——

23

Mr. COLLINS. As compared to the Europeans, we double tax stock 

dividends which are directly related to portfolios and retirement of 

the individuals who work for businesses. In fact, the individuals 

make up the business; the business is only the name. Are you 

aware that the Europeans do not double tax? 

Mr. GREENSPAN. Remember, the Europeans get a significant 

amount of their revenue from the value added tax, which essentially eliminates——

Mr. COLLINS. That is true, and a lot of our revenue in this country for our local and our State governments come from consumption 

taxes, too. 

We also treat depreciation much different. We have oftentimes a 

double depreciation length of time versus an amortization of a capital investment. In your comments, you say the more capital that 

is available per worker—you are taking it right back down to the 

per worker basis—is very important. And so if we are not competitive in the world market, should we—well, no that is our question; 

that is the decision we have to make. But my statement is we 

should address the differences between our tax provisions in this 

country versus our competition in other parts of the world. If we 

have a team that weighs 150 pounds and we are up against 300-

pound gorillas, we need to do something about our team, and our 

team is now the lesser on the field because of the competition and 

the lack of the provisions that we need to be competitive and the 

costs that we impose on businesses and on individuals in this country, because business only collects from its customers, it does not 

generate. 

Thank you, Mr. Greenspan. 

Chairman NUSSLE [presiding]. Mr. Chairman, I have a couple of 

follow-up questions. I know there are members who are trying to 

get to the floor to vote and then I know there is at least one, maybe 

two, who may come back and have final wrap-up questions. But before they come back, let me just ask you, you had mentioned in response to Mr. Spratt and others—and I share the frustration that 

so many have about the inaccuracies of the forecasts and the inaccuracies that appear to be either within the models that are used 

or the judgments that are provided—there is a tendency to shoot 

the forecasters, and that is, I suppose, I have done my fair share 

of shooting the messengers or shooting the forecasters. 

Was there any way to predict this? I mean one thing that I recall 

as far as the downturn in revenue, one thing I recall in the opening 

predictions of the Congressional Budget Office, this would have 

been back in, oh, I want to say it was all the way back a year ago 

in February, so now a year-and-a-half ago, is they had built into 

their forecast of the $5.6 trillion ‘‘surplus’’ a recession. In fact, they 

cheerfully testified to that fact, OMB testified to that fact, that was 

part of the advertisement, and yet even with this ‘‘built into the 

forecasts,’’ whatever happened, happened much larger than previously forecasted or explained. 

Could this have been foreseen? Obviously hindsight is always 20/

20, but should we be trying to figure out as we look forward into 

the nut a better way to forecast these kinds of things, either short 

term or long term? 

24

Mr. GREENSPAN. Well, a very large part of the error occurs not 

as a consequence of misforecasting the economy—in other words, 

misforecasting the GDP and the wage and salary income and dividends and all of the standard means that we use to calculate taxable incomes. It occurs to a very substantial extent in relating the 

changes in, say, stock prices to capital gains taxes on the realizations of stock sales. 

Remember, merely looking at a stock price pattern doesn’t tell 

you what the actual realizations are. It gives you a rough cut, but 

you will find that it is not a simple issue to translate rising stock 

prices or rising values of real estate into taxes, because you don’t 

know when these particular assets are going to be sold. So there 

has been a great deal of effort to try to get a better handle on that, 

and I hope we will continue to improve the techniques that we now 

have. 

We had a reasonable shot, I think, at picking up the potential 

decline in income taxes paid on stock option exercises, and I think 

to a certain extent probably were able to get some judgments about 

the other areas which were affected by stock prices; but we did not 

get by any means the whole thing, because even making all of 

those adjustments, the final settlements numbers which showed up 

in the April tax collections implicitly came in far short of what we 

would have expected, and my belief is that I expect that the implied estimated taxes that show up in the non-withheld components 

for certain months also were coming in below those expectations. 

We won’t know what the nature of the mistake was until we get 

the full detailed statistics of income for calendar year 2001 and are 

able to see what actually did happen. 

Do we need to improve the techniques? I think we do. Do we 

have the capacity to do it? I am not sure at this particular stage, 

but we have no alternative but to continue to try. 

Chairman NUSSLE. Thank you. I indicated that it was Mr. 

Toomey, and I apologize; it was Mr. Moore first. The gentleman is 

recognized. 

Mr. MOORE. Thank you, Mr. Chairman. And Chairman Greenspan, thank you for being here. 

You did testify, and this is not an exact quote, but I think it is 

close, the amount of stimulus in the pipeline already is really quite 

large, is that correct, sir? 

Mr. GREENSPAN. That is correct. 

Mr. MOORE. You talked some in answer to various questions here 

about additional tax cuts, and you said I think, and correct me if 

I am wrong, that there may be some need or a desire to further 

stimulate the economy in the future? 

Mr. GREENSPAN. Well, tax cuts in the context that I was discussing them work to improve the underlying structure of the economy, not as short-term economic stimulus. 

Mr. MOORE. There was a tax cut that was voted on, presented 

in the House of Representatives and voted on and passed, the 

House at least, and that was what was called permanent repeal of 

the estate tax, and I voted for the $1.35 trillion tax—I am sorry, 

the $1 trillion tax cut proposed by the President last year. Would 

this permanent repeal stimulate the economy? 

25

Mr. GREENSPAN. Well, I think over the long run, it clearly would 

be removing a tax on capital which tends over the long run to improve the capital efficiency of the system. 

Mr. MOORE. What would it do, though, what would it do to our 

financial condition as a Nation? 

Mr. GREENSPAN. Well, as I responded to another one of your colleagues earlier, the application of any form of spending initiatives 

and tax cuts, even though they are in and of themselves clearly of 

value and would be perceived as having value to a majority of both 

Houses, there is still the question that you have a budget which 

must at some point balance or, if it is not balanced, be unbalanced 

for very conscious reasons. So there is a two-stage question here: 

One, other things being equal, is a particular tax cut or a spending 

initiative of value; and does it fit into the overall budget program, 

long term, in the context of the various priorities which presumably 

are passed by both this committee and your counterparts in the 

Senate? 

Mr. MOORE. I believe you also said, and this is not a direct quote, 

but it is difficult to make projections 4 or 5 or 6 years out. Is that 

correct? 

Mr. GREENSPAN. It is easy to make projections of certain things 

such as population, age distribution, and a number of things which 

essentially are currently almost inexorably evolving. 

Mr. MOORE. Sure. 

Mr. GREENSPAN. But the broader aspects of economic forecasting 

create fairly large uncertainties when you get beyond the immediate short-term period. 

Mr. MOORE. Last year, shortly after the vote on the tax cut, in 

fact, a couple of months after the vote on the tax cut, I was at a 

high school government class talking to high school seniors about 

Chairman Greenspan on the economy and the wisdom of fiscal restraint and responsibility. And I told them last year, last February, 

we as a Nation had a $5.6 trillion projected surplus over the next 

10 years. And then this was this year, I guess, because I said now, 

the projected surplus a year later was $1.6 trillion, and somebody 

said to me what did you guys in Congress do with that surplus, the 

$4 trillion? I said it was projected. I asked this high school class, 

how would you define projected surplus. This one girl raised her 

hand and she said, ‘‘maybe yes, maybe no.’’ Is that a good definition? 

Mr. GREENSPAN. I fear it might be better than most. 

Mr. MOORE. I said to her, I would like you to teach some of my 

colleagues in Congress about projected surpluses and the wisdom 

of spending projected surpluses. 

I guess my question is, what do we do? What do we do now to 

get back? I don’t want to play politics here. I want to talk about 

would it be advisable for the President and Congress to get to the 

leadership at least and say, here is what we need to do to get back 

to a balanced budget. 

Mr. GREENSPAN. It is the fundamentals of our political process 

or a democratic process to resolve these issues and, indeed, we 

have done it in the past. We have to do it in some way, in some 

manner. How specifically it is done is a political judgment. 

26

Mr. MOORE. OK. Well, you always say that when you don’t want 

to comment on it, and I think you are probably one of the most 

skilled politicians I have ever seen, and that is intended as a compliment, not as something bad. 

Mr. GREENSPAN. Thank you. 

Mr. MOORE. I have also heard you talk about keeping the triggers, or getting a trigger, keeping PAYGO and discretionary spending caps. 

Now, the last question I guess—I am out of time here—is in view 

of our conversation about the problems with projecting what is 

going to happen in the future beyond just a few years, would it be 

advisable for us to stop these 10-year projections in terms of budgets and start going to maybe 3 years? Would that make more 

sense? 

Mr. GREENSPAN. No, it doesn’t, largely because the commitments 

we are making, especially now in the context of the fact that we 

have this major demographic shift, really require us to look deep, 

as deep into the future as we can. We are doing that implicitly by 

every passage of a bill that comes to the floor of this House. It is 

far better to at least focus on it. We may not know any more or 

learn any more by focusing on it, but it has to be an improvement 

over just making believe there is no problem. 

Mr. MOORE. Thank you, sir. 

Chairman NUSSLE. Mr. Toomey. 

Mr. TOOMEY. Thank you, Mr. Chairman. 

Chairman Greenspan, thanks for being here, once again. 

I would like to really focus on the issue, maximizing economic 

growth. The first point though I think I would like to just develop 

briefly is something I think you alluded to. The biggest budgetary 

problems and challenges that we face seem to me by far to come 

from the inexorable demographics that are catching up to our Social Security and Medicare programs. Those strike me as far larger 

than the annual cash flow shortage and surplus that we have had 

in recent years. It seems to me that we are not going to be able 

to tax our way to a solution long term for those programs, we are 

not going to be able to cut spending as a way to achieve the solution; the only way we are going to solve that problem is profound, 

systemic reforms of those programs. Do you share that view? 

Mr. GREENSPAN. I would tend to be in that direction, Congressman, yes. 

Mr. TOOMEY. Then I think—and I fully believe we need to do 

that, and that should be a very high priority because every day 

that passes it becomes a more difficult challenge, certainly economically; politically it may or may not be. But with respect to the 

other issues, aside from those programs, and of course it is all related; but I wonder sometimes if the tail isn’t wagging the dog a 

little bit. When we focus so much on the Federal budget per se and 

whether it is exactly how big the deficit is in a given year versus 

the next year, whether it is Social Security or outside Social Security. On page 5 you make a point which I think goes to the heart 

of what we in Congress ought to be focusing on, which is to increase the real resources that are available, and if the economy is 

growing in a robust fashion, then almost every single problem we 

address is much easier to solve. So I look at programs, I look at 

27

ideas, such as some that we have discussed briefly earlier, ideas 

that we know, or at least we have a very high degree of confidence 

would improve the capital structure and the savings rate for America, lowering the taxes on capital, such as capital gains, lowering 

the taxes on dividends which are at minimum doubly taxed. Since 

we know that that does long-term economic good for our economy, 

isn’t it worth going ahead and doing that and accepting that maybe 

next year we may see a negative Federal revenue impact from that, 

but it is going to in the long run do more good than harm? 

Mr. GREENSPAN. In principle, you can make that statement. The 

question is, it is very difficult to make a judgment as to when, by 

increasing deficits and hence an incursion of the government debt 

on private savings begins to actually act as a negative force, you 

would be overriding the positive forces which you are very clearly 

enunciating. 

So it is a really very tricky balance, but the process as you describe it I think is an accurate one. 

Mr. TOOMEY. Well, to get to where we are in that balance—because I agree at a certain point a certain level of debt would be 

doing more harm to the national economy than good—but in recent 

decades it seems to me it is hard to show a correlation between the 

annual budget deficits or surpluses and the level of real or nominal 

interest rates. And if you look where we are right now obviously, 

in the last couple of years we have had this huge swing from big 

surpluses to deficits; and we have had a huge reduction in most interest rates across the yield curve. 

Mr. GREENSPAN. But, as I pointed out before, I think that you 

have to be very careful in drawing conclusions like that because all 

the evidence that we have is that, at the end of the day, very large 

Federal debt does have an impact on interest rates and interest 

rates affect a very large part of the capital structure of our economy which we are trying to make more efficient. 

Mr. TOOMEY. I understand. I am very limited on time, so if I 

could just go onto my last point which is, is it not possible or credible or plausible or what are your views on the possibility that it 

is really the total magnitude of Federal spending that has a bigger 

impact than whether or not we have a marginal deficit or surplus? 

And are we at a point in terms of Federal spending now as a percentage of GDP where we are, by virtue of the magnitude of spending, impeding the economic growth? We could have greater economic growth, in other words, if we diminish that level of spending. 

Mr. GREENSPAN. That is my own personal impression, but I must 

tell you that the economic evidence is very mixed on this issue. 

Very clearly if you get to very substantial parts of the GDP being 

absorbed by government, you could very readily demonstrate that 

has a significant negative effect. But in areas where we currently 

exist, it is very difficult to find the data to demonstrate that. My 

own impression is that it is the difficulty of analysis in finding that 

relationship, rather than the true relationship that is involved. 

But, ultimately, you have to, in a democratic society, demonstrate 

that certain things are important. 

Mr. TOOMEY. Thank you very much. 

Chairman NUSSLE. Thank you. 

Dr. McDermott. 

28

Mr. MCDERMOTT. Thank you, Mr. Chairman. 

I am sorry, Mr. Greenspan. I was over on the floor fighting another tax giveaway, and I was unable to hear all your testimony. 

So I have got a question or two, and it may be redundant. 

Do you believe that from this point forward we ought to apply 

PAYGO rules to any tax bill, whether it is an extension or any new 

one? 

Mr. GREENSPAN. My view is that the simplest thing to do is 

merely extend the existing statute. But if you find ways to improve 

upon it and make it far more effective, I think that would be most 

helpful. 

Mr. MCDERMOTT. So what you are saying is that all these things 

that were put in temporarily last year, they can be extended with 

no problem and we don’t have to worry about how much they cost 

or anything else. 

Mr. GREENSPAN. No, no. I am basically saying that I am worried 

that as of October 1, the whole process will disappear, and so I am 

saying, as a start, let’s make certain that that is extended. If you 

can do other things on top of that, by all means. 

Mr. MCDERMOTT. All new tax cuts PAYGO should apply to, in 

your opinion? I mean, you would encourage us to put that in process? 

Mr. GREENSPAN. Well, yes, certainly. In other words, if you have 

PAYGO, it applies, and it applies to new tax cuts, it applies to new 

spending initiatives. 

Mr. MCDERMOTT. And that is also for the President’s plan to extend these taxes that we have put in temporarily. 

Mr. GREENSPAN. That is up to the Congress to make a decision 

of what it is you mean by the particular structure of the law. 

Mr. MCDERMOTT. I know that. But I would like to know what 

you think. 

Mr. GREENSPAN. What I think? 

Mr. MCDERMOTT. I know the task. 

Mr. GREENSPAN. OK. Let me put it to you this way. I am not 

going to comment on individual items, which really I know far less 

about in the process sense than members of this committee. I will 

try to state what I believe on things I think I know something 

about. 

But if you are asking me, do I think that we ought to maintain 

as strict a fiscal discipline as we can manage, the answer is yes. 

If, in your judgment, that requires that you put PAYGO on various 

different items already in process, that is a judgment which I think 

legitimately needs to be made. 

Mr. MCDERMOTT. OK. Can we do dynamic scoring? I mean, do 

you believe in that concept? 

Mr. GREENSPAN. Well, dynamic scoring is the ideal in endeavoring to evaluate any spending or tax program. The reason we tend 

not to do it and go to what we call static scoring is that it is very 

difficult to get general agreement on what the feedback effects of 

various different programs are, whereas there seems to be a general agreement on getting the gross impact of a program that is 

through static scoring, so that we have a general consensus. If we 

could find a way in which there was a general consensus as to how 

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ondary and tertiary ways, that would be an improvement on our 

techniques to determine the impact of various programs. We have 

not been able to do that. 

Mr. MCDERMOTT. Is the Fed trying to find a way to do that, or 

do you think? 

Mr. GREENSPAN. Well, I think all the academic community is endeavoring. We are. Most everybody is. We have not yet come to an 

agreement, and the reason basically is that none of us have a 

model of how the economy works which has been wholly successful. 

Until we get there, we really don’t know the answer to these questions. 

Mr. MCDERMOTT. I have one last question. I would like to hear 

your estimate of what you expect that going to war in Iraq would 

do to oil prices. Would you expect them to go up? I notice you talk 

about it being—the price of oil being a real drag on the economy. 

Would the price go up? Would the price go down? What would be 

your thinking, if you were talking to the President about whether 

or not he ought to go and the impact it would have on the economy 

if oil prices went up to $350? 

Mr. GREENSPAN. Well, my general view is that issues of foreign 

diplomacy and military strategy really ought not to take into consideration what the impact on the American economy is, but we do 

obviously need to know that as we go on. In other words, when we 

look at the oil market, we recognize certain things. First of all, the 

amount of oil per dollar of GDP has been coming down quite significantly over the years so that the impact now of a spike in oil 

prices presumably would be less than it has been in the past. 

Having said that, it is factually the case that spikes in oil prices 

have preceded recent recessions. We think that is accidental because when we work through as much as we know of what the impact of an oil price spike is, it shouldn’t have as large an effect as 

it did in the past. 

But how military action, if it occurs, impacts on the price of oil 

is obviously a function of how long it takes, and the only example 

that we have which is really usable in this context is the experience of the Gulf war. As you may recall, big surges in prices occurred, and as soon as it became apparent that the war was going 

to be over quickly the markets came down very dramatically. 

Mr. MCDERMOTT. If I can interpret that, you are saying that if 

we were to go to war, it would not surprise you if there were a 

spike in oil prices and a recession followed that or depression followed that. 

Mr. GREENSPAN. It would surprise me. 

Mr. MCDERMOTT. It would. 

Mr. GREENSPAN. It would. Because I don’t think that the effect 

of oil as it stands at this particular stage is large enough to impact 

the economy, unless the hostilities are prolonged. If that is the 

case, then we could run into difficulty. 

Mr. MCDERMOTT. The Gulf war was less than a month, or it was 

a month. 

Mr. GREENSPAN. The Gulf war—if we go through a timeframe 

such as the Gulf war, it is unlikely to have a significant impact on 

us. 

Mr. MCDERMOTT. Thank you. 

30

Thank you, Mr. Chairman. 

Chairman NUSSLE. Thank you. 

Mr. Greenspan, I have kept my promise to you with 5 minutes 

to spare. We appreciate your testimony today, and we look forward 

to the next opportunity to visit. 

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

Chairman NUSSLE. Thank you. 

This hearing is adjourned. 

[Whereupon, at 12:26 p.m., the committee was adjourned.]

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