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Thursday, January 25, 2001

SPEAKERS:
Sen. Pete V. Domenici (R-N.M.), Chairman
Sen. Charles E. Grassley (R-Iowa)
Sen. Don Nickles (R-Okla.)
Sen. Phil Gramm (R-Texas)
Sen. Christopher S. Bond (R-Mo.)
Sen. Slade Gorton (R-Wash.)
Sen. Judd Gregg (R-N.H.)
Sen. Olympia J. Snowe (R-Maine)
Sen. Spencer Abraham (R-Mich.)
Sen. William Frist (R-Tenn.)
Sen. Rod Grams (R-Minn.)
Sen. Gordon Smith (R-Ore.)
Sen. Frank R. Lautenberg (D-N.J.), Ranking Member
Sen. Ernest F. Hollings (D-S.C.)
Sen. Kent Conrad (D-N.D.)
Sen. Paul S. Sarbanes (D-Md.)
Sen. Barbara Boxer (D-Calif.)
Sen. Patty Murray (D-Wash.)
Sen. Ron Wyden (D-Ore.)
Sen. Russell D. Feingold (D-Wis.)
Sen. Tim Johnson (D-S.D.)
Sen. Richard J. Durbin (D-Ill.)
Sen. Hillary Rodham Clinton (D-N.Y.)
WITNESSES:
Alan Greenspan, Chairman, Federal Reserve Board

DOMENICI: The hearing will please come to order.

Would the staff please note the arrival of senators so that we can follow a pattern of allowing senators their turn based upon their time of arrival?

Could I suggest for the senators in our committee, from that standpoint, that we follow a rule that we used last year a substantial portion of the time, and it'd be something like this:

The chairman will give opening remarks, the ranking member will give opening remarks. We're both going to try to be discreet, so we're not going to set a time limit on that. It's in the neighborhood of 10 minutes or less.

GRAMM: Could you talk a little louder, I can't hear you.

DOMENICI: OK, sorry, Senator Gramm. I was just saying we would start--we'll run the hearings the way we did most of our meetings last year. The chairman and ranking member will give opening remarks, hopefully under 10 minutes. We will then proceed to the witness. From what I understand and we surely ought to accommodate, he needs between 20 and 25 minutes, is what he's telling us. When he is finished, we will then move back to the senators and we'll proceed in the following manner:

Questions and/or statements will be in order by any member, and we will first start with questions from the chairman and ranking member, if they so desire. If they want to yield, they can yield. And then we will call on senators in the order of their arrival, both Republican and Democrat. In the first round, there will be 8 minutes for each senator so that they can include opening remarks, if they like, or the whole 8 can be opening, and they ought to have time for a question or two in that first round. If we have time for a second round, we will return to the 5-minute rounds, following the same procedure with reference to time of arrival as it will apply to time of questioning and/or speaking.

Is that satisfactory with the ranking member?

LAUTENBERG: Yes, sir. And we appreciate your courtesy as always, and the courtesy of your staff, as well, as we have prepared for these hearings.

DOMENICI: Thank you very much.

Now, senators, let me say that I was trying to make the point in the way we allocated time that we are very privileged to have a witness here with us that we want to hear from. And, frankly, we all know a lot about the subject but, frankly, we will have many meetings and many opportunities to express our views. This is a meeting when we intend to ask the Federal Reserve Board chairman to give us his views about a most interesting phenomenon that is occurring in the United States and seek his help and advice.

First of all, Mr. Chairman,--I'm speaking now to the U.S. Federal Reserve Board chairman--we want to spread on this record unequivocally the highest compliments of this committee for the way you have handled your role as the chairman of the Federal Reserve Board of the United States. We have had a rather fantastic, unparalleled era of growth with low inflation. We know what you think about this, and keeping inflation under control has been very important to you. And, at the same time, we have had an uncurrent that we never expected, where productivity increases have been phenomenal. In fact, in some instances, we're only finding out how phenomenal they are by looking backwards and trying to measure them in hindsight.

While that was occurring, clearly unemployment was coming down; those who work for a living were making more than they were before; and this pervasive notion of productivity--phenomenal productivity--just permeated things and has had such a phenomenal impact on what we're talking about.

And I believe it's true, somebody is paying too much in taxes. And I think maybe when we're finished with our debate, we will find that the top 1 percent of the American taxpayers are the ones paying most of this surplus into the federal government. That may not mean anything, but I think it's a fact, or close to a fact.

I believe there is sufficient money so we won't have to have any real arguments today. There is sufficient money to take care of all of the priorities anybody has spoken of. And I think the 5.7--so that everybody will know what I consider to be the surplus, Senator Byrd, already takes into account that the government will grow from its current level of appropriation, it won't go backwards. And it will grow with inflation or, shall we say, current policy for the next decade.

I did not do that in last year's budget. But this year, I have asked that everybody preparing for us do two of them, do one at a freeze and one where government is increasing, at the regular, normal rate on top of a very high baseline that we established in appropriations.

Now having said that, I want to summarize what I think we can do. I think we can take care of the priority items, including such things as Medicare off-budget, and Medicare prescription drugs, Social Security--make sure we don't spend it--defense and all the other things we're looking for increases. And believe it or not, I believe you will have sufficient money left over to give President Bush his $1.3 trillion tax cut. And you will still have some more money left over.

That's over a decade, and that's spreading it out. It's not loading it up front. And I hope before we're finished that we will have both Congressional Budget Office and OMB come up here--one is ours, one is the president's--and let them tell us what they think about these numbers. I have done my best to put them forward in the manner I think the Congressional Budget Office will concur with, but I'm not sure.

Now, let me close by saying, I think today we're going to try to find out from Alan Greenspan what the risk is of letting these surpluses continue to accumulate, paying the debt down at an extraordinarily rapid pace and still having surpluses accumulating after that. I think those will become, Senator Gramm, those will become cash reserves of the federal government, and they will be huge. And frankly, I don' know what the government is going to do with them other than to acquire assets. And I'm kind of frightened about that. I believe we will have the government, just by numbers, owning huge proportions of the assets in our country, because they will have to invest it in something.

I favor giving some of it back to the taxpayers over a 10-year period in a rational and reasonable way, putting the money on our priorities and let's decide what our priorities are. But I think this is the most significant change that has occurred in modern American economic activities and facts; that is the rather enormous accumulation that is occurring in the surplus, which will permit us to easily pay down debt in a reasonable time.

And, Senator Gramm, I will leave for you--although, I've done an explanation of how much time difference there is between paying it off--let's apply every bit of the surplus to the debt--versus giving a $1.3 trillion back to the taxpayer.

My closing remarks, it will be one statement regarding taxes. While $1.3 trillion sounds enormous to some people and it's called large and it's called unnecessarily big by some, I think we can establish in due course that over the course of the last 20 years the percentage of gross domestic product that is going to this tax cut, if we achieve it, is not high compared to other tax cuts that we have built into the American budgetary process.

Thanks for the time. I would say, it seems to be rather exciting when you can talk about surpluses and money that we have to spend, as compared to just six or seven years ago, when we would take a budget resolution to the floor and it would have but $400 trillion--$400 billion surplus projected.

Senator Conrad, I yield to you.

CONRAD: Thank you, Mr. Chairman. And thank you, Chairman Greenspan, for being here. I enjoyed our visit last evening, as well.

I think we can all say that we have made very important progress. We look back to 1992 when we had a $290 billion budget deficit. This year we have a $256 billion budget surplus. What a dramatic change. And we've had the longest economic expansion in our nation's history, the lowest interest rates in 30 years, the lowest rate of inflation in 30 years, the creation of more than 22 million new jobs in this economy.

And at the end of this year, over the last four years, we will have been able to pay down $600 billion of our national debt. What a sea change from what we had eight years ago.

And we did by fiscal discipline. We did it by holding down spending. We did it by keeping revenues ahead of expenditures. And that is a policy, Mr. Chairman, that you have endorsed, and, I think, importantly, you have contributed to this climate that has lead to this economic expansion.

Now we have new circumstances. We have projections of surpluses of some $5.7 trillion over the next 10 years. And so the question is, what do we do? I would argue that we should not abandon fiscal discipline; that we should continue the commitment to keeping on this fiscal track; that we should continue to pay down debt; that we should save the surpluses of Social Security and Medicare for the purposes intended; that we should provide for the high priority domestic needs in this country of additional funds for education and health care, including a prescription drug benefit and defense.

The new president has proposed additional expenditures in all of those areas.

And, yes, we can have a significant tax cut as well. But I also believe it would be wise for us to establish a strategic reserve to provide funds to deal with the long-term fiscal imbalances we still know will occur.

We're sort of in the sweet spot right now of enjoying surpluses. But we know in the years ahead that we're going to face very substantial deficits as the baby boomers start to retire, and twice as many people as are now eligible will be eligible for those important programs.

Maybe I could just turn quickly to a chart, because we may have some difference with respect to the affordability of what President Bush has proposed. If we start with a $5.7 trillion surplus, we've got to remember that $2.7 trillion of that is from Medicare or from Social Security--a Social Security trust fund surplus. $400 billion is from the Medicare trust fund surplus. I don't think we should invade those surpluses.

And then there are a number of items that are special items that I think have broad bipartisan support: Prescription drug benefit, the extenders--the tax extenders--including the research and development tax credit, and defense. President Bush, himself, has proposed about $600 billion of initiatives. If we take those, we're down to a surplus of about $2 trillion over the next 10 years.

Then if we look at the next chart and look at what President Bush has proposed, his tax cut over the next 10 years is $1.6 trillion. But in addition to that, there is an interest cost associated with it of another $400 billion.

In addition of that, I think there is a growing recognition that, because of his tax cut and because of other factors, we're going to have to deal with the alternative minimum tax. Otherwise, 20 percent of the American taxpayers are going to be pushed into the alternative minimum tax, which no one intends.

That's a total of $2.2 trillion. And according to my calculations, we only $2 trillion available. That means there is no money available to strengthen Social Security. There is no money available for additional pay down of debt. There is no money available as a hedge against these projections perhaps being wrong. There is no money for agriculture. There is no money for a series of these other needs that have been identified, I think, on a bipartisan basis.

So with that, I think we may have a difference over how much the tax cut should be, but I don't there's any difference that a tax cut is an appropriate part of a balanced mix that also addresses these long-term, high-priority domestic needs and the really long-term need to address our entitlement programs, which over time, as we all know, will push us toward deficits.

I thank the chairman...

DOMENICI: Thank you.

CONRAD: ... and look forward to the testimony of the chairman.

DOMENICI: Thank you very much.

I think before we proceed I would say, which I failed to say, a hearty welcome to some new members. On our side, we have two new members. I'm very glad to have them. They're both dynamite senators, hard workers and thank you so much for selecting the committee, Senator Allard.

ALLARD: Thank you.

DOMENICI: And thank you Senator Hagel.

And on the democrat side, you have added how many new members?

LAUTENBERG: Mr. Chairman, we have added for new members and we certainly want to greet them. Senator Byrd, of course, is the ranking member on the Appropriations Committee, and we think he is going to provide special insight here. Senator Nelson from Florida, who has long experience in budget matters from his tenure in the House, and we welcome him. Senator Stabenow from Michigan, who has had a long interest in financial matters, going back to her days of service in the Michigan legislature. And, of course, Senator Clinton, who has a long history of being involved in family and children's issues, and we look forward to her participation and contribution here as well.

DOMENICI: Senator Byrd, I was just going to say that you don't have a chance to do this right now because of our process, but essentially you and I know we also have to look at the appropriations' needs eventually, in terms of the gross numbers here in this committee. And, frankly, what I said a while ago about how much I think is available, I really have looked at that very carefully, and I do believe this is a rate opportunity to do some things in appropriations that we've been unable to do, that you know about, that I know about, that we've just been putting off.

And I'm glad to have all four of you. I'm very pleased to chair this committee. And now, with that, it's my pleasure, again, to welcome you, Chairman Greenspan. Thanks for coming.

GREENSPAN: Thank you very much, Mr. Chairman, and members of the committee.

I'm especially pleased to appear here today to discuss some of the important issues surrounding the outlook for the federal budget and the attendant implications for the formulation of fiscal policy. In doing so, I want to emphasize that I speak for myself and not necessarily for the Federal Reserve.

The challenges you face both in shaping a budget for the coming year and in designing a longer term strategy for fiscal policy were brought into sharp focus by the release last week of the Clinton administration's final budget projections, which showed further upward revisions of on-budget surpluses for the next decade.

The Congressional Budget Office also is expected to again raise its projections when it issues its report next week.

The key factor driving the cumulative upward revisions in the budget picture in recent years has been the extraordinary pickup in the growth of labor productivity experienced in this country since the mid-1990s. Between the early 1970s and 1995, output per hour in the nonfarm business sector rose about 1-1/2 percent per year, on average.

Since 1995, however, productivity growth has accelerated markedly, about doubling the earlier pace, even after taking account of the impetus from cyclical forces. Though hardly definitive, the apparent sustained strength in measured productivity in the face of a pronounced slowing in the growth of aggregate demand during the second half of last year was an important test of the extent of the improvement in structural productivity. These most recent indications have added to the accumulating evidence that the apparent increases in the growth of output per hour are more than transitory.

It is these observations that appear to be causing economists, including those who contributed to the OMB and the CBO budget projections, to raise their forecasts of the economy's long-term growth rates and budget surpluses. This increased optimism receives support from the forward-looking indicators of technical innovation and structural productivity growth, which have shown few signs of weakening despite the marked curtailment in recent months of capital investment plans for equipment and software.

To be sure, these impressive upward revisions to the growth of structural productivity and economic potential are based on inferences drawn from economic relationships that are different from anything we have considered in recent decades. The resulting budget projections, therefore, are necessarily subject to a relatively wide range of error. Reflecting the uncertainties of forecasting well into the future, neither the OMB nor the CBO projects productivity to continue to improve at the stepped-up pace of the past few years. Both expect productivity growth rates through the next decade to average roughly 2-1/4 to 2-1/2 percent per year, far above the average pace from the early 1970s to the mid-1990s, but still below that of the past five years.

Had the innovations of recent decades, especially in information technologies, not come to fruition, productivity growth during the past five to seven years, arguably, would have continued to languish at the rate of the preceding 20 years. The sharp increase in prospective long-term rates of return on high-tech investments would not have emerged as they did in the early 1990s, and the associated surge in stock prices would surely have been largely absent. The accompanying wealth effect, so evidently critical to the growth of economic activity since the mid 1990s, would never have materialized.

In contrast, the experience of the past five to seven years has been truly without recent precedent. The doubling of the growth rate of output per hour has caused individuals' real taxable income to grow nearly 2-1/2 times as fast as it did over the preceding 10 years and resulted in the substantial surplus of receipts over outlays that we are now experiencing. Not only did taxable income rise with the faster growth of GDP, but the associated large increase in asset prices and capital gains created additional tax liabilities not directly related to income from current production.

The most recent projections from the OMB indicate that if current policies remain in place, the total unified surplus will reach $800 billion in fiscal year 2011, including an on-budget surplus of approximately $500 billion. The CBO reportedly will be showing even larger surpluses.

Moreover, the admittedly quite uncertain long-term budget exercises released by the CBO last October maintain an implicit on-budget surplus under baseline assumptions well past 2030 despite the budgetary pressures from the aging of the baby boom generation, especially on the major health programs. The most recent projections, granted their tentativeness, nonetheless make clear that the highly desirable goal of paying off the federal debt is in reach before the end of the decade. This is in marked contrast to the perspective of a year ago when the elimination of the debt did not appear likely until the next decade.

But continuing to run surpluses beyond the point at which we reach zero or near-zero federal debt brings to center stage the critical longer term fiscal policy issue of whether the federal government should accumulate large quantities of private--more technically, nonfederal assets. At zero debt, the continuing unified budget surpluses currently projected imply a major accumulation of private assets by the federal government, as you pointed out earlier, Mr. Chairman. This development should factor materially into the policies you and the administration choose to pursue.

I believe, as I have noted in the past, that the federal government should eschew private asset accumulation because it would be exceptionally difficult to insulate the government's investment decisions from political pressures. Thus, over time, having the federal government hold significant amounts of private assets would risk suboptimal performance by our capital markets, diminished economic efficiency, and lower overall standards of living than would be achieved otherwise.

Short of an extraordinarily rapid and highly undesirable short-term dissipation of unified surpluses or a transferring of assets to individual privatized accounts, it appears difficult to avoid at least some accumulation of private assets by the government.

Private asset accumulation may be forced upon us well short of reaching zero debt. Obviously, savings bonds and state and local government series bonds are not readily redeemable before maturity. But the more important issue is the potentially rising cost of retiring marketable Treasury debt.

While shorter term marketable securities could be allowed to run off as they mature, longer term issues would have to be retired before maturity through debt buybacks. The magnitudes are large: As of January 1, for example, there was in excess of three quarters of a trillion dollars in outstanding non marketable securities, such as savings bonds and state and local series issues, and marketable securities--excluding those held by the Federal Reserve--that do not mature and could not be called before 2011.

Some holders of long-term Treasury securities may be reluctant to give them up, especially those who highly value the risk-free status of those issues. Inducing such holders, including foreign holders, to willingly offer to sell their securities prior to maturity could require paying premiums that far exceed any realistic value of retiring the debt before maturity.

Decisions about what type of private assets to acquire and to which federal accounts they should be directed must be made well before the policy is actually implemented, which could occur in as little as five to seven years from now. These choices have important implications for the balance of saving and, hence, investment in our economy.

For example, transferring government saving to individual private accounts as a means of avoiding the accumulation of private assets in the government accounts could significantly affect how Social Security will be funded in the future.

Short of some privatization, it would be preferable, in my judgment, to allocate the required private assets to the Social Security trust funds rather than to on-budget accounts.

To be sure, such trust fund investments are subject to the same concerns about political pressures as on-budget investments would be. The expectation that the retirement of the baby boom generation will eventually require a drawdown of these fund balances does, however, provide some mitigation of these concerns.

Returning to the broader picture, I continue to believe, as I have testified previously, that all else being equal, a declining level of federal debt is desirable because it holds down long-term real interest rates, thereby lowering the cost of capital and elevating private investment. The rapid capital deepening that has occurred in the United States economy in recent years is testament to these benefits.

But the sequence of upward revisions to the budget surplus projections for several years now has reshaped the choices and opportunities before us. Indeed, in almost any creditable baseline scenario, short of a major and prolonged economic contraction, the full benefits of debt reduction are now achieved before the end of this decade--a prospect that did not seem likely only a year or even six months ago.

The most recent data significantly raise the probability that sufficient resources will be available to undertake both debt reduction and surplus-lowering policy initiatives. Accordingly, the tradeoff faced earlier appears no longer an issue. The emerging key fiscal policy need is to address the implications of maintaining surpluses beyond the point at which publicly held debt is effectively eliminated.

The time has come, in my judgment, to consider a budgetary strategy that is consistent with a preemptive smoothing of the glide path to zero federal debt or, more realistically, to a level of federal debt that is an effective irreducible minimum. Certainly, we should make sure that Social Security surpluses are large enough to meet our long-term needs and seriously consider explicit mechanisms that will help ensure that outcome. Special care must be taken not to conclude that wraps on fiscal discipline are no longer necessary.

At the same time, we must avoid a situation in which we come upon a level of irreducible debt so abruptly that the only alternative to the accumulation of private assets would be a sharp reduction in taxes and/or an increase in expenditures, because these actions might occur at a time when sizable economic stimulus would be inappropriate. In other words, budget policy should strive to limit potential disruptions by making the on-budget surplus economically inconsequential when the debt is effectively paid off.

In general, as I have testified previously, if long-term fiscal stability is the criterion, it is far better, in my judgment, that the surpluses be lowered by tax reductions than by spending increases. The flurry of increases in outlays that occurred near the conclusion of last fall's budget deliberations is troubling, because it makes the previous year's lack of discipline less likely to have been an aberration.

To be sure, with the burgeoning federal surpluses, fiscal policy has not yet been unduly compromised by such actions. But history illustrates the difficulty of keeping spending in check, especially in programs that are open-ended commitments, which too often have led to much larger outlays than initially envisaged.

It is important to recognize that government expenditures are claims against real resources. And while those claims may be unlimited, our capacity to meet them is ultimately constrained by the growth in productivity. Moreover, the greater the drain of resources from the private sector, arguably, the lower the growth potential of the economy. In contrast to most spending programs, tax reductions have downside limits. They cannot be open-ended.

Lately there has been much discussion of cutting taxes to confront the evident pronounced weakening in recent economic performance. Such tax initiatives, however, historically have proved difficult to implement in the timeframe in which recessions have developed and ended.

For example, although President Ford proposed in January of 1975 that withholding rates be reduced, this easiest of tax changes was not implemented until May, when the recession was officially over and the recovery was gathering force. Of course, had that recession lingered through the rest of 1975 and beyond, the tax cuts would certainly have been helpful.

In today's context, where tax reduction appears required in any event over the next several years to assist in forestalling the accumulation of private assets, starting that process sooner rather than later likely would help smooth the transition to longer term fiscal balance. And should current economic weakness spread beyond what now appears likely, having a tax cut in place may, in fact, do noticeable good.

As for tax policy over the longer run, most economists believe that it should be directed at setting rates at the levels required to meet spending commitments, while doing so in a manner that minimizes distortions, increases efficiency, and enhances incentives for saving, investment and work.

In recognition of the uncertainties in the economic and budget outlook, it is important that any long-term tax plan, or spending initiative for that matter, be phased in. Conceivably, it could include provisions that, in some way, would limit surplus-reducing actions if specified targets for the budget surplus and federal debt were not satisfied. Only if the probability was very low that prospective tax cuts or new outlay initiatives would send the on-budget accounts into deficit, would unconditional initiatives appear prudent.

The reason for caution, of course, rests on the tentativeness of our projections.

What if, for example, the forces driving the surge in tax revenues in recent years begin to dissipate or reverse in ways that we do not now foresee? Indeed, we still do not have a full understanding of the exceptional strength in individual income tax receipts during the latter 1990s. To the extent that some of the surprise has been indirectly associated with the surge in asset values in the 1990s, the softness in equity prices over the past year has highlighted some of the risks going forward.

Indeed, the current economic weakness may reveal a less favorable relationship between tax receipts, income and asset prices than has been assumed in recent projections. Until we receive full detail on the distribution by income of individual tax liabilities for 1999, 2000, and perhaps 2001, we are making little more than informed guesses of certain key relationships between income and tax receipts.

To be sure, unless later sources do reveal major changes in tax liability determination, receipts should be reasonably well-maintained in the near term, as the effects of earlier gains in asset values continue to feed through with a lag into tax liabilities. But the longer run effects of movements in asset values are much more difficult to assess, and those uncertainties would intensify should equity prices remain significantly off their peaks. Of course, the uncertainties in the receipts' outlook do seem less troubling in view of the cushion provided by the recent sizable upward revisions to the 10-year surplus projections. But the risk of adverse movements in receipts is still real, and the probability of dropping back into deficit as a consequence of imprudent fiscal policies is not negligible.

In the end, the outlook for federal budget surpluses rests fundamentally on expectations of longer term trends in productivity, fashioned by judgments about the technologies that underlie these trends.

Economists have long noted that the diffusion of technology starts slowly, accelerates, and then slows with maturity. But knowing where we now stand in that sequence is difficult, if not impossible, in real time.

As the CBO and the OMB acknowledge, they have been cautious in their interpretation of recent productivity developments and in their assumptions going forward. That seems appropriate, given the uncertainties that surround even these relatively moderate estimates for productivity growth. Faced with these uncertainties, it is crucial that we develop budgetary strategies that deal with any disappointments that could occur.

That said, as I have argued for some time, there is a distinct possibility that much of the development and diffusion of new technologies in the current wave of innovation still lies ahead, and we cannot rule out productivity growth rates greater than is assumed in the official budget projections. Obviously, if that turns out to be the case, the existing level of tax rates would have to be reduced to remain consistent with currently projected budget outlays.

The changes in the budget outlook over the past several years are truly remarkable. Little more than a decade ago, the Congress established budget controls that were considered successful because they were instrumental in squeezing the burgeoning budget deficit to tolerable dimensions. Nevertheless, despite the sharp curtailment of defense expenditures under way during those years, few believed that a surplus was anywhere on the horizon. And the notion that the rapidly mounting federal debt could be paid off would not have been taken seriously.

But let me end on a cautionary note. With today's euphoria surrounding the surpluses, it is not difficult to imagine the hard-earned fiscal restraint developed in recent years rapidly dissipating. We need to resist those policies that could readily resurrect the deficits of the past and the fiscal imbalances that followed in their wake.

Thank you very much, Mr. Chairman. I look forward to your questions.

DOMENICI: Thank you very much.

We have the senators listed here in, both yours and ours, Senator, in terms of arrival time. We will proceed on that basis, very shortly.

(CROSSTALK)

DOMENICI: We have senators listed in time of arrival and we will call on senators based on that, in very short order.

Senator Conrad, would you desire to proceed with some questions, at this point?

CONRAD: I would, Mr. Chairman. I want to thank Chairman Greenspan, again, for his very balanced testimony, and I think very important testimony.

Maybe we can first try to hone in, so it's important for people to understand what you are saying and what you're not saying.

(LAUGHTER)

(CROSSTALK)

CONRAD: You're not giving an endorsement here of irrational exuberance. And, as I hear you testifying, you're proposing that we don't abandon fiscal discipline, which I think is incredibly important message that goes from this hearing. That is, if I can summarize it and then as you to respond, we're not saying here, ``Open the flood gates, we can just cut taxes willy-nilly and we can engage in whole new spending initiatives.'' That we have to maintain a fiscal discipline. That there is room for significant tax relief here, but that we also have to be mindful of these long-term fiscal demands of an aging population and the baby boom generation. Am I correct in taking from what you've said here that we do need to maintain fiscal discipline?

GREENSPAN: Absolutely, Senator. The danger that confronts us is that, coming from a period which, granted, it was far less of a desirable budgetary problem than we confront now, where we had to go was perfectly clear, unambiguous and the ability to overdo it approaches zero. I used to say, in the stages of significant endeavors toward budget reduction, that I didn't stay awake at night worrying about that we would overdo it.

There is a considerable danger, however, in this side that we might. And the point that I think is crucial is that we have a far more difficult fiscal problem to calibrate here than we had in earlier years. It's obviously a far more benign and pleasant task to deal with this type of problem than very large, chronic and rising deficits. But it's a far more difficult technical problem to address because bringing into an evaluation process a federal debt to the public that is at zero very significantly contains the types of actions that the Congress and the administration can employ in its budgetary process.

And I would repeat many times, if I could, my closing sentence about the caution that we need to exercise here. And if we succeed and get the appropriate glide path, as I chose to use the term, I think we can make an extraordinary contribution to the viability of the American economy over the long run.

CONRAD: Well thank you very much for that balanced approach.

If I could just put up a chart which shows kind of this longer term outlook, this is CBO's analysis of the long term. It shows, in the red line, if we save none of the surplus, we enjoy this period of budget surpluses. But then, the trend turns against us as the baby boomers start to retire. We can see, in the magenta line, what happens if we save just the Social Security surplus. And the blue line, what happens if we save all of the surpluses. We go through this period of very substantial budget surpluses, but then it turns against us as the baby boomers start to retire.

I think what I hear you saying this morning is that we've got a real opportunity here to get it right--a real opportunity, if we continue fiscal discipline, we continue to pay down debt, we also provide for these high priority domestic needs that have been identified, but that we also have the opportunity here to provide some help for the Social Security trust fund, which over time is challenged. You've indicated one way to do that would be individual accounts. Another way, perhaps, would be some form of what federal employees have in federal retirement accounts where it is not the federal government making the investment decision. Because, I gather from your testimony, one of the things that is important to us is that we not be in a situation where the federal government is making investment decisions.

GREENSPAN: Yes.

CONRAD: So this would be a way of having individuals be able to guide their investment decisions.

I thank you very much. This is, I think, a wonderful day. Because we're talking about here an opportunity to address our long-term fiscal imbalances and our short-term needs, and on top of that be able to have substantial tax relief for the American people.

DOMENICI: Mr. Chairman, I will just ask two or three questions. I'm so pleased to have so many senators. I really want to give them a chance to participate and not have to stay here until 1:00 to do it.

But could I depart for a moment and then get right back to your testimony? Could I ask you, when you speak of one of the extraordinary problems that might occur that we haven't planned for, would that be something like not being able to solve the energy crisis for a prolonged period of time, as it is currently exhibiting itself in America?

GREENSPAN: In my judgment, Mr. Chairman, the problems that we're now seeing in the energy area--specifically, obviously natural gas around the country and very obviously, California's electric power production--are not aberrations, but in my judgment a significant problem that this country is going to have to address and I think address rather quickly and I think coherently and cogently.

Obviously, if the energy structure of this country is inadequate or in some way excessively costly, it will undermine economic growth in this country, and therefore is a major issue which must be addressed.

DOMENICI: Mr. Chairman, I want to see if I understand your testimony, and I thank you for the visit yesterday, but I think until this testimony, we have been kind of rocking along, assuming that the sooner we could pay off the national debt, the better. No glide path, just get it done and get it done as fast as you can. I understand you to be saying, if that was anyone's philosophy about doing the best thing for the economy, you don't agree with it.

GREENSPAN: A year ago, it was very clearly, in my judgment, the primary priority. As I testified before you, I said that we'd be far better off to put all of our resources available into reducing the federal debt. The projections that we had available at that time, which were credible, in the sense that they had the right numbers in them and they were properly conservative, indicated the chances of overdoing debt reduction were really quite small and the presumption that we would arrive at zero debt in some credible period was just essentially not anything anybody took terribly seriously.

It has been an extraordinary year in which the fundamental thing that has happened is the credibility of the underlying acceleration in productivity has risen to a point where it is now appropriate to start making forecasts of the future which embodies in it a marked change from the average 1-1/2 percent annual productivity growth rate which we experienced for approximately a quarter century prior to 1995. That fact has altered a whole series of relationships as far as fiscal policy is concerned and brings us to where we are this morning.

DOMENICI: Which means that a mix of ways of using this surplus and addressing the tax problems of our country, we can take a more balanced approach in gliding to the debt reduction point of zero than you had indicated in your previous testimony?

GREENSPAN: The issue never arose in the previous testimony because the presumption of thinking of how we would glide-path into the year 2013, for example, seemed sort of rather...

DOMENICI: Got it.

GREENSPAN: ... out of place in testimony a year ago.

DOMENICI: Now, do you believe that projected surpluses, with all of the cautionary attributes you want to associate to it, is as real as the deficits we were projecting heretofore?

GREENSPAN: I hope it's a little more solid, because some of the deficits we projected before, very fortunately, didn't materialize.

I think it's important to recognize, we have a huge near $2 trillion expenditures and outlays, and very small changes in either of those magnitudes open up or close deficits and surpluses very rapidly. That very markedly reduces our capability to forecast into the future with any realistic sense. We do the best that we can and it is better that we do the best that we can than merely throw up our hands and say, ``We will do nothing.''

But I want to emphasize--I mean, take the fiscal year 2000, which just closed. The estimate for the budget balance in fiscal year 2000 was off by more than $500 billion from the projection of 1995. That is an awesome number...

DOMENICI: But on the high side.

GREENSPAN: Indeed, fortunately.

DOMENICI: This glide path you refer to, which is, at least, something new for me--I'm listening to it and trying to work on it. I think I understand what it means. So let me just ask you: We have proposals around dealing with glide path of a surplus, including one by the president of the United States that said as part of that glide path, we ought to reduce taxes, and he speaks of marginal rate reductions. The total amount, as one might argue, is $1.6, $1.3. I'm just going to ask, you're aware of what he's talking about, what has been proposed?

GREENSPAN: I am, Mr. Chairman.

DOMENICI: In your way of thinking, considering the size of the surplus and the other claims that you're aware of on this surplus, would it be reasonable for us to seriously consider the president's proposals in terms of tax reduction here in the United States Congress?

GREENSPAN: Mr. Chairman, I haven't actually done the calculations. And actually if I did, I don't think it would be appropriate for me to comment because these are fundamentally political decisions. And, I mean, as a citizen, I have my own views, but I don't think they're appropriate to be voiced in the context where we're talking about the economics of...

DOMENICI: All right.

GREENSPAN: ... fiscal policy and I'd prefer to eschew such questions.

DOMENICI: Then let me just ask, is it not true, and you're still consistent, that if you are going to, in reducing the surplus--if you are going to consider spending paths for that money--because you're going to spend a lot of it--would it not also be appropriate to consider tax relief of the type the president is talking about with this marginal rate reduction?

GREENSPAN: Well, I have always been in favor of reducing marginal rates as a means of employing taxes in a manner which was consistent with maximum efficiency of resources and their allocation in our economy. So as a general rule, I've always testified to that over the years and haven't changed my view at all.

DOMENICI: Thank you very much.

Senator Grassley?

GRASSLEY: Thank you, Mr. Chairman. Thank you for your testimony.

I want to get back to the point about fiscal discipline that Senator Conrad brought up and your answer that it's very necessary to have fiscal disciple. But it seems to me, in a very general way, you're setting out a benchmark for fiscal discipline.

In your last sentence on page 6: ``The flurry of increases in outlays that occurred near the conclusion of last fall's budget deliberations is troubling because it makes the previous year's lack of discipline less likely to have been an aberration.''

The answer you gave to Senator Conrad didn't refer to this, but it seems to me that you are begging Congress to have more fiscal discipline than has been exercised in the last two or three years.

Am I right?

GREENSPAN: I'm certainly raising the issue that the type of discipline, which was so obviously in place in earlier years, and worked in a really quite remarkable and unexpected way, has not been in evidence in the last couple of fiscal years. And I think that's a mistake.

GRASSLEY: And that's bad for the health of the economy?

GREENSPAN: I certainly would agree with those words, Senator.

GRASSLEY: And I'm sure you don't mean to be saying that Congress, it finds it easier to manage a budget deficit than it does a budget surplus. But that discipline that you're talking about came more in the a period of debt than in a period of surplus. It seems to me like, it's a license of Congress to be more fiscally irresponsible in recent years, when we've had this sort of budget surplus than when we had the budget deficit. That's my view. But at least with this surplus the way it is, it's very important for us to be much more careful than we have in the past.

On another point, thank God you didn't bring up about a possible recession or a soft-landing or anything like that. Your testimony is probably quite in the other direction.

But, you know, there has been some talk about that among political leaders and among economists. And I've been hearing a lot of economist, most recently Dr. Tyson, argue that we should leave the soft-landing to people like you that manage monetary policy, and we should not have any consideration on the part of Congress, if there's going to be a tax cut, having that impact. Now, you did speak to that, that sometimes it takes hold at about the time you're coming out of the recession.

But I need to have you lay out, as best you can, in broad economic principles, the role of your monetary policy in regard to that and the role of tax policy. And is there an inconsistency, at the time you reduce interest rates, with our cutting taxes.

GREENSPAN: I think the history of the interaction of monetary and fiscal policy in the post-World War II period pretty much concludes that fiscal policy is too blunt a tool to work as an anti-cyclical device. I cannot imagine moving faster than we did in the first two months of 1975 when we saw the recession mushrooming, instituted fairly quick bill to the Congress. It passed in late March. We got it into place in early May. And at that point, the recession was already over.

Earlier endeavors to do the same thing came up very much in the same manner. So I would not perceive of employing tax cuts to, in a sense, get in front of weakening forces, which could eventually lead to a recession, because history tells us it doesn't work.

What I pointed out, however, in my testimony is that if you're going to do it in any event, the risks of making the wrong calculations with taxes are there. In other words, I don't wish to say that when you are reducing surpluses, it is without risk in a macroeconomic sense. So that the question really gets down to: Is there additional risk that occurs if you move up the scheduled tax cuts by a modest amount? And the answer is: Probably not.

But then again, I just want to emphasize that you cannot expect tax cuts to do all that much, because cycles in this country have usually been characterized by fairly long expansions and then sharp contractions. Contractions, which I might add, which are very difficult to forecast. And it is, consequently, extraordinarily difficult to use fiscal policy, which has this long timeframe to work, whereas obviously monetary policy can work almost instantaneously.

GRASSLEY: We can reduce taxes even if you're in the process of, as you did three weeks ago or in the future sometime, reducing interest rates? There is no incompatibility to that?

GREENSPAN: None that I am aware of, Senator.

GRASSLEY: We have seen the level taxation rise to the record level of 20.6 percent of the gross product. And that's, I guess, a level that we haven't seen since World War II. Traditionally, it's been between 17 and 19 percent of gross domestic product.

I'd ask you views on what impact this level of taxation would have if continued on our nation's economy over the long haul.

GREENSPAN: It's very difficult to read because it depends on so many other factors.

GRASSLEY: Well, then, let me put it in this context. We have had a level of taxation between--maybe I should say more like 18 to 19.5 percent over a 30 or 40 year period of time. The economy has adjusted to that. The taxpayers have adjusted to that being a level of taxation that they consider fair. We're way above that now. So is there bad consequence being higher, since we've been at the level for a long period of time?

GREENSPAN: Senator, first of all, one of the difficulties in the comparison is that the gross domestic product essentially reflects taxable incomes from current production, and by definition, not tax liabilities which occur as a consequence of capital gains either realized or stock options or, say, premature withdrawals of funds from 401(k)s. In short, there is a fairly significant amount of tax liabilities that are showing up in our system today which are not related to the gross domestic product. They are related to the sharp rise in asset values.

And so, in order to get the proper measure, you have to get underneath it. And we get--you know, if you look at the individual income tax rates, it's pretty clear that there has been a gradual what we call ``bracket creep'' in individual income taxes which goes beyond the fact. We actually, technically adjust with the Consumer Price Index for the nominal drift of incomes in top of brackets. But we don't adjust for the fact that real productivity gains are also there, which means that the proportion of taxable income is ever-increasingly moving up into higher tax brackets. And that indeed exhibits a gradual up-drift of the tax rate, though I must say, much less than is implied by taking the aggregate tax take and dividing it by the gross domestic product.

GRASSLEY: Thank you.

DOMENICI: Thank you, sir.

Senator Hollings?

HOLLINGS: Mr. Chairman, I'm your friend. I voted for you four times. And there is no question in my mind that you deserve the good government award for the past eight years for your custody there of the economy at the Federal Reserve.

But in all candor, you shock me with this statement where you find on page 3 ``substantial surpluses of receipts over outlays,'' and then on page 6 call for a tax cut, and then in answer to Chairman Domenici, endorse marginal tax cut, the rates of tax cuts, across the board.

You're going to start a stampede here this morning, I can tell you right now. We all are going to get with the marriage penalty, and we all are going to get with the estate tax cut, but now you've gotten into marginal and everything else.

Where, Mr. Chairman, do you find a surplus? I find a deficit. I'm looking at the record here, but you correct me.

GREENSPAN: Yes. Senator, we have discussed this before. Let me see if I can summarize where I agree with you and where I don't.

The particular notion of what constitutes a surplus or a deficit in the federal accounts depends on the particular purpose of the calculation. We used to have a fairly well agreed upon operating deficit--I mean operating in the sense that everyone was using the same set of numbers--in which we took total receipts and subtracted total outlays and we got what we called the unified deficit. And I remember...

HOLLINGS: Let me ask this, because you're jumping off into the unified. I've got the Treasury report for the end of the fiscal year. You referred to it just a little while ago. You said, we just ended the fiscal year. And Treasury's statement on page 6 of it that the actual deficit, not a surplus, for last year was $23 billion. Do you differ with that?

GREENSPAN: I do, Senator. The numbers you're referring to are the increase in the gross debt issued by the federal government.

HOLLINGS: Well, that's the gross debt. The only reason I'm hastening along is they limit me in time, but I got the public debt to the penny. And since that time, October, November, December now and part of January, we not only ended last fiscal year with a $23 billion deficit, but--this is by Treasury itself--they calculated and that's the way we have to calculate it up here on the Budget Committee, it shows an increase in the debt of $58 billion already this year.

GREENSPAN: I understand what you're saying. If you look at the...

HOLLINGS: What the record shows, not what I'm saying. I'm asking...

GREENSPAN: Looking at the same table, look at the line immediately below that...

HOLLINGS: Yes, sir.

GREENSPAN: Which is the debt held in government accounts. In other words, these are intra-governmental transfers.

HOLLINGS: Well, wait a minute and I'll do that with you. And I show exactly that, that--who holds the public debt, and it shows, as you indicate, that one has gone down...

GREENSPAN: No, it's gone up.

HOLLINGS: ... owed to the public, it's gone down $37 billion.

But the government debt has gone up $95. You see, we're using--and I can show you--I ask consent that we include these in the record...

DOMENICI: Without objection.

HOLLINGS: ... we've used these trust funds, Mr. Chairman, that's what we've been doing. Now you say you're not going to use Social Security and Medicare, but they're $50-some billion--and the civil service retirement and the military retirees and all of these other accounts, unemployment, we've had high employment and therefore the unemployment fund has grown.

So I'm just using the facts, my debt's going up, my interest costs are going up, and I'm going to have to pay the bill. In 2013 on Social Security, I'm going to run out of money, because you already owe it a trillion dollars.

GREENSPAN: No, as I said, we're looking at, effectively, if we had a corporation at this particular stage, whether the debt owed amongst subsidiaries wholly owned by the corporation is the appropriate measure of the aggregate debt outstanding. What I'm arguing for is to reduce the intra-governmental debt, which is how we get to debt to the public.

Where I do agree with you, Senator, is another issue of another way of measuring the actual debt of the United States in the sense that--I think what the real problem is, if you want to talk about the accounting, is that the contingent liabilities that we are engendering are not included in this number...

HOLLINGS: Exactly.

GREENSPAN: ... and if we were to substitute the accrued liabilities for Social Security as distinct from what we pay then--I haven't seen the most recent data, but we do have a small deficit currently in the accounts in which we are using, instead of the cash flow accounts of the federal government, federal government on an accrued-gap accounting basis is indeed in a small deficit.

But the reason I'm using the data that I am using is that the obligations that are held by the public are the issues that relate to the question of which deficit, when it goes to zero, engenders claims that the government holds on the private sector if it is in surplus. That turns about to the unified...

HOLLINGS: I've got that chart in front of me, but that's just like I'm taking my Visa card and paying off my Master Charge card and saying, ``Whoppie, I don't owe any more money now.'' But the debt has been transferred back to me.

Now, what you're doing is you're taking all of these trust funds, where it's grown by $95 billion since the beginning of the fiscal year--yes, the debt owed the public has gone down $37, but the other one has gone up, so I'm just swapping money around and misleading--because I'm looking at the bottom line, the interest cost. When I was here and we balanced the budget back in '68-'69, the interest cost was only $16 billion; that's 200 years of history and the cost of all the wars.

Now, since that time, in 30 years, without the cost of a war, it's gone up to a billion a day; $362 billion is the CBO figure. And I'm just wasting all of that money for nothing by using this unified thing and on-budget and off-budget and everything else. You economists have a big ball up there on Wall Street, but we down here have got to pay the bill.

GREENSPAN: Well, Senator, I'll be very glad to debate you, but I think that it's going to take a good deal longer. I'll be more than pleased to come up and visit with you and discuss it in some detail.

HOLLINGS: I'd appreciate it very much. Thank you.

Thank you, Mr. Chairman.

DOMENICI: Thank you, Senator.

Senator Gramm?

GRAMM: Mr. Chairman, first of all, Alan, I don't have any authority to speak on behalf of all Americans, but let me say on behalf of the 20 million people who hired me on as their senator, I want to thank you for the great job you've done. There are many people in my state who, my guess is, will never know your name that have been great beneficiaries of your service. And I do want to begin by thanking you.

Now, I've got a bunch of issues I want to try to run through and I speak slowly, so let me try to zip through them and then try to get a short answer, if I can.

It seems to me that since Election Day that three things have happened and they would all, other things being the same, argue for a larger tax cut: One, the economy is weaker than it was on Election Day. Two, the surplus, by any measure by anybody in authority being objective, is larger than it was on Election Day. And the third item, which you mentioned, and I want to thank you for mentioning it, is that we have had another year of spending totals come in and, basically, despite all this talk about abandoning fiscal discipline and something we shouldn't do, it is something we have already done.

In fact, if you take spending growth in the last three years, even though the big entitlement programs have had very modest growth, if you take the spending growth triggered by new spending in the last three years and project it out 10 years, which is the time period under which we measure the tax cut, we've already bought into, if you continue the pattern, $1.8 trillion of new spending. So with all this talk about, ``We don't want to abandon fiscal disciple,'' we've already abandoned fiscal disciple.

So it seems to me that when you look at each of those things, that other things being the same, the money is being spent anyway. Something you've emphasized over and over--if you're going to spend it, give it back. It seems to me that all three of those things that have occurred since the election would strengthen the argument for a tax cut. Do you agree with that?

GREENSPAN: The argument I've made for a tax cut is sufficient. It's you know, when you've sold the vacuum cleaner to the housewife, the old saw is...

GRAMM: Stop.

GREENSPAN: ... stop.

GRAMM: Well, I have to tell you, though...

GREENSPAN: Please, don't...

GRAMM: ... there are people here that have not bought the vacuum cleaner.

GREENSPAN: I see.

GRAMM: The choir may be saved, but all the people in the church are not. So let me ask you again--obviously, you agree those three things have happened.

GREENSPAN: I certainly do.

GRAMM: And you, would you say...

GREENSPAN: However, the only thing I would not necessarily agree with is that you can extrapolate the discretionary expenditure initiatives of the last couple of years indefinitely in the future, because if that were to happen, then I think we are in serious trouble.

GRAMM: Well, you are concerned that it's happened three years in a row?

GREENSPAN: Well, I am concerned that it has happened. And I'm not necessarily projecting it to move forward into the future. But I certainly agree with you, if indeed that is actually the case, then I think we have serious budgetary problems in this country.

GRAMM: Would you agree with the thesis that the presence of the surplus has eroded, at least if you look at new spending programs, has eroded fiscal restraint in government in the last couple of years or it appears to have?

GREENSPAN: It has.

GRAMM: A lot of people are talking about how big a $1.3 or a $1.6 trillion tax cut is. And, certainly, trillion dollars--I have one constituent who probably knows what a billion dollars; nobody knows what a trillion dollars. But if you look at GDP over the next 10 years and add it up, assuming a modest growth in GDP in real terms, we're looking at about $140 trillion. So $1.6 trillion tax cut is 1.1 percent of GDP over that period. If you look at projected revenues, it's 5.8 percent over that decade. And if you look at the unified budget surplus, it's less than 30 percent.

Would you call that, by historical perspective, a big tax cut?

GREENSPAN: I think that all of the data that we have over the post-World War II period--if you take the actual tax cuts when they were supposed to be at their maximum, with the exception of ERDER (ph) in 1982, were something under 1 percent per annum of the GDP at that time, including, actually, the cuts that are being discussed today, on both sides of the aisle.

GRAMM: So that by historical perspective, they're fairly modest?

GREENSPAN: They are. Let me just say they are average.

GRAMM: OK.

Now, as you know, we constantly have these debates about targeted tax cuts, where we pick and choose or across-the-board tax cuts, in terms of the efficiency of the economy and future job creation and economic growth, which kind of tax cuts do you think are most justifiable economically?

GREENSPAN: From an economic point of view, the marginal tax rate cuts clearly far exceed the possibilities of all other forms of tax cuts. But I do recognize that there are noneconomic reasons to cut taxes and that there are other purposes for altering the tax code to achieve things that are not income-maximizing for the economy as a whole.

GRAMM: From any kind of equity point of view, if you got a surplus coming from people paying too much taxes, do you know of an argument that would say that people paying the least taxes ought to get the tax cut and the people paying greater taxes should get no tax cut?

GREENSPAN: Senator, as you know far better than I, the tax system has been used for a redistribution of income since 1913, in one form or another, and those are political judgments.

My only concern would be that they be made by the Congress explicitly and not indirectly through bracket creep or other types of technical means by which the distribution of taxes changes without really an explicit authorization by the Congress.

GRAMM: But if you want more jobs, you want more growth and you're cutting taxes, across-the-board rate cuts would be preferable?

GREENSPAN: That would be my judgment and the think the judgment of most economist.

GRAMM: Let me ask you about the surplus. As you're probably aware, an old teacher of mine named Richard Timberlake wrote extensively about the greenback, about the whole monetary history of the country. And one of the areas he looked at was the specie (ph) resumption period from 1867 to 1879. And to just give you a burst transmission, for those who are not aware of it, what happened in that period, we had come out of the Civil War. The price of gold had gone up dramatically because of inflation. We made an incredible decision to go back on the gold standard at pre-war level. And from '67 to '79, we ran big surpluses, and we burned greenbacks and we called in--we paid off government notes and that reduced national bank notes, which were currency.

Not a perfect analogy to this period, but the only analogy we really have in American history. The money supply was falling. Prices fell by roughly 1.5 percent a year. We did go back on the gold standard.

But here's my question: It seems to me that some people have the idea that the bigger the surplus is, the better. It seems to me last year and the year before when you had this huge wealth effect from equities inducing people to dis-save--minus 2 percent savings rate year before last, a I remember--that then running a big surplus was helpful because it allowed the economy to grow faster. But with investment spending off, with economy getting weaker, is there not a point at which the surplus itself becomes an anchor that the economy is dragging?

GREENSPAN: Economists have called that fiscal drag, over the years. And it is certainly possible to have a chronic level of surpluses, which by draining purchasing power from the private sector probably reduces the rate of growth over the long term.

GRAMM: Well, Mr. Chairman, thank you.

I'd just like to say I think we pretty well know where we're going. I think the sooner we write a budget the better and get on with it.

DOMENICI: Senator Sarbanes?

SARBANES: Thank you very much, Chairman Domenici.

Mr. Chairman, first I want to add a cautionary note to your cautionary note at the end of your statement, because I think it's clear that what has happened here today is that you've put us on the glide path to dissipate this hard-earned fiscal restraint to which you made reference, even though you state, ``With today's euphoria surrounding the surpluses, it is not difficult to imagine the hard earned fiscal restraint developed in recent years rapidly dissipating.'' And I think you've made a significant contribution this morning to that dissipation.

In fact, it wouldn't be far off the mark for the press to carry the story, ``Greenspan Takes Lid Off Of Punchbowl,'' at this morning's hearings.

Your position in the past has consistently been that the surpluses should be devoted to reducing the debt. When drawn into well, ``Should we do tax cuts or spending increases,'' you have sort of remained out of that debate, although you've indicated a preference for tax cuts ahead of spending increases. But it wasn't really relevant because your first line was ``reduce the surpluses.''

Now, if you put us into the other debate, as you have done, of course, we're going to have some interesting questions: Do you think that a tax cut should be given to very wealthy people instead of investing in education in order to develop the scientific and technological capacities of our people in order to develop the economy of the future? And those are obviously very sharp questions that we have to face, and presumably are the kind of questions that, if put to you, you would refrain from answering on the basis that they are political judgment. I take it that's the case. Otherwise, I'm quite happy to draw you into that debate.

GREENSPAN: I appreciate your not doing so.

SARBANES: All right.

Now, I want to clear up a couple of things. First of all, there is all this talk about the economy being in a recession. My understanding is that the definition of a recession is two successive quarters of negative economic growth. Is that correct?

GREENSPAN: That's a rough notion. The actual, generally agreed upon definition of what constitutes a recession is a change in the structure of the economy which causes the people at the National Bureau of Economic Research, who are sort of the people who are supposed to determine where the peak and the trough of a recession is, it's where they view that the economy has gone into a declining phase and when it has ended.

The two quarters of GDP is a sort of a rough, general view, but everyone recognizes that's a fairly crude, simplistic...

SARBANES: Well, we've had a slowdown in the economy, but we haven't had a recession? Is that correct at this point?

GREENSPAN: As far as we can judge, we have had a very slowing down, and, indeed, we are probably very close to zero at this particular moment. You know, we're only into a third of the first quarter. We know that the fourth quarter was a very small positive, but there is an inventory liquidation process going on, in part the result of the same forces which--the technology changes, which has created a super just-in-time inventory system, which is having a very dramatic effect on reducing production in the manufacturing sector.

SARBANES: Yes, but presumably once that works its way through the system, it will no longer be a contractionary factor.

GREENSPAN: Yes, the crucial issue, Senator, is whether that marked decline breaches consumer confidence, because there is something different about a recession from other times in the economy. It is not a continuum from slow growth into negative growth. Something happens.

SARBANES: Now beginning in June of 1999 and carrying through almost until June of 2000, the Fed raised interest rates six times.

GREENSPAN: That is correct, Senator.

SARBANES: Why did the Fed do that?

GREENSPAN: Largely, Senator, because it was becoming very evident that the excess of investment demand over savings was beginning to drive the economy in a manner which was unsustainable over the longer term.

SARBANES: So you were fearful, I take it then, that we would begin to develop an inflationary problem?

GREENSPAN: Let me go very specifically further, as I in fact believe I testified before you at an earlier time.

SARBANES: My time's limited. Let me just try to take you through this line of reasoning, because--you say in your statement on page 7, ``It's important to recognize that government expenditures are claims against real resources and that while those claims may be unlimited, our capacity to meet them is ultimately constrained by the growth and productivity.''

Now if I were to strike the word ``government'' expenditures and just say ``private'' expenditures, which would be one consequence of a tax cut, the same statement would be true, would it not? Our capacity to meet those claims against real resources could be constrained, is that not the case?

GREENSPAN: It's technically the case, but read the rest of the paragraph because in there I point out that the issue of the movement of resources from the private sector into the public sector from all the evidence we have historically, suggests that one diminishes the underlying potential rate of growth...

SARBANES: And I see you use the word ``arguably'' when you make that assertion. And that of course brings me back to the science and technology priority that I mentioned earlier.

The thing that's left out of your statement that I want to pursue with you is, if we shift fiscal policy in an expansionary direction at 4 percent unemployment--we're not at a 4 percent unemployment rate. We've constantly been told about the concern about not starting off an inflationary spiral. Now if fiscal policy moves in an expansionary direction, which use of the surpluses for other than paying down the debt would entail, what kind of monetary policy are we going to have to go with that fiscal policy?

Is monetary policy going to be accommodating and expansionary or will monetary policy contract? We went through a period where we had an expansionary fiscal policy and a contractionary monetary policy, and it wasn't a happy economic situation.

GREENSPAN: Senator, you can't determine what a monetary policy will be in the future without putting on the table all of the various forces that are affecting the economy.

At the moment, what we are observing, and the most recent data affirm, is that inflationary pressures are exceptionally well-contained at this particular stage. We are seeing that economic growth has slipped very dramatically.

And you're quite correct, the December unemployment rate was 4.0 percent. And the evidence at this particular stage of an effect on the work force is mainly in areas where average hours worked has gone down, not the level of employment going down. So that in that regard, what one must look at is the degree and extent of resources that are being employed, and by any measure that we have, there's increased slack that has developed in this economy as a consequence in the sharp decline in the rate of growth.

SARBANES: So I take it, interest rates will be reduced further next week?

GREENSPAN: The Federal Open Market Committee is meeting next week, and I am looking forward to seeing what my colleagues are thinking about.

SARBANES: Mr. Chairman, I see the red light is on. I thank the chairman for his indulgence.

DOMENICI: You almost got it; came that close.

Senator Bond?

BOND: Thank you, Mr. Chairman. I'm delighted to welcome our new members of the Budget Committee and to see my good friend, the ranking member. When we first came here, he and I were two leaders in something called the Deficit Reduction Caucus. Now, in light of the chairman's testimony today, Senator Conrad, I hope you will join me in a revenue reduction caucus, because it appears that this is what is called for.

Mr. Chairman, I had the pleasure of reading ``Maestro'' that Mr. Woodward wrote about your activities on a long plane flight. And for those who find monetary policy stimulating, it was a thrilling read. But in that...

(LAUGHTER)

And I guess there's got to be several of us here.

In that book, it talked frequently about your working on and worrying about the change in productivity. And apparently from your statement today, you pretty much conclude that the development of information technology, which has enabled so many companies to be far more efficient--everything from just-in-time inventory to cutting administrative costs--has been the increase in information technology has been one of the factors in increasing productivity. Is that a fair assessment?

GREENSPAN: Most certainly, Senator.

BOND: And one of the things, it struck me when you talk on page 8 of your statement about the--excuse me, on another page--when you talk about the increase in revenues from capital gains, we cut capital gains a couple of years ago, and over the objections of some people. But is it fair to say that those capital gains reductions may actually have stimulated investment in the information technology which has contributed to the growth in productivity and the increase in asset values, which not only increased our productivity, but which also led to increase in revenue from the capital gains tax?

GREENSPAN: Senator, as I've testified before this and other committees at length over the years, both since I've been chairman of the Federal Reserve and when I was in private practice, I consider raising revenues from capital gains a less-than-desirable means of taxation because it hits capital accumulation very directly. And I would hope that we maintain as low a rate as is feasible, because in a period when you're dealing with start-ups and entrepreneurship, which is sort of characterizing the new technologies, capital gains tax is a very relevant consideration and I think that--while I recognize that nobody is proposing it, I just want to merely say for the record that I haven't changed my view over the years in this regard.

BOND: Thank you, sir.

Now, one of the questions that is raised, and I believe some colleagues here may raise it, has to do with the economics of rate cuts and particularly marginal rate cuts. And I know you've said that, from an economic standpoint, you get the maximum efficiency from marginal rate cuts. Since there are some around this Capitol who still believe in targeted rate cuts, could you explain what are the economic benefits of a marginal rate cut?

GREENSPAN: Business decision-making essentially reflects taxes at the margin, because when you make a new investment, your determination is what type of tax payment is relevant without my investment or with my investment. And as a consequence of that, you are looking at what the marginal rate is, not what the average rate is.

And if the purpose in the corporate area, for example, or noncorporate business area is to engender activity or capital asset accumulation, marginal rates really do matter. They also matter in the individual area if the basic underlying purpose is to enhance the degree of work activity and even consumption. So that from a strictly efficiency point of view--and I emphasize that I recognize that there are many other reasons to change the tax code, but if you're asking strictly on the question of what is likely to contribute to maximum economic growth on average, then clearly tax reductions, which reflect lower marginal rates will in the view of most economists be the appropriate direction in which we ought to go.

BOND: I appreciate that, and I realize the other arguments. I happen to believe that marginal rate cuts are called for. I notice you referred to your statement on page 7 that draining resources from the private sector lowers the growth potential of the economy. And that is, may I assume, by taking away money that could be invested in productivity, could be invested in science and technology?

GREENSPAN: That is correct, Senator.

BOND: There is a question about whether having some marginal, some economically efficient tax rates would be expansionary. It would seem to me--and am I correct in assuming?--that when you are continuing to run a surplus, in other words, the government will continue to take in more than it is spending, reducing the level of government revenue, i.e., from some kind of tax rate reduction, really should best be described as less deflationary. When you're still running a surplus, you're taking more money out of the private sector than the government is spending. Can you fairly call that expansionary?

GREENSPAN: Well, it's strictly a semantic question. And Senator Sarbanes is correct. Technically, economists will say that if you reduce a unified budget surplus, that that is stimulative. And they look at it not in terms of the absolute number, whether it is a plus or a minus, but which direction in which it is going.

But the way you phrase it is algebraically equivalent, if I may put it that way, to what Senator Sarbanes was saying a short while ago.

BOND: Well, thank you, now that it's perfectly clear to all of us.

(LAUGHTER)

I wondered if you had an economic analysis from an economist's standpoint: What is the energy problem that we're seeing in California that threatens to have a tremendous impact on the economy as a whole? From an economist's standpoint, what's happened out there? What's going wrong?

GREENSPAN: I think, Senator, you have to go back a few years and ask where the whole so-called deregulation process came from.

My recollection is, in years past when we had the standard regulatory electric power systems, you usually had a buffer of about 15 percent over peak load, largely because you couldn't forecast the peak loads and you couldn't tell what shortfalls might conceivably occur within your operating system. The result was that you had a fairly substantial amount of excess capital on which the rate of return was guaranteed. And when you do that you obviously create a higher cost level per kilowatt hour because you're paying in part for the excess capital, the excess capacity, which you don't really use. And there was a general view that if you deregulated and then split apart the system and forced the purchase in the spot market, you would have to buy at the marginal rate, and that meant excluding the cost of facilities, and in that sense, the so-called stranded costs would be eliminated.

The problem was that because you then eliminated the guarantee of capital investment, it started to disappear. And coupled with the environmental and site problems in California, which a number of economists have indicated are important, capital investment essentially came to a halt. Concurrently, you had a very dramatic increase in Silicon Valley-related power demand for air-conditioning and a number of other related energy uses which were associated with that, and the 15 percent disappeared, and you ended up with the 1-1/2 percent which induces their crisis management beginning.

The only way to resolve the issue is to get more capacity in place. And within a couple of years, presuming that all of these projects are currently viable and will ultimately be put in place, a rebalancing will occur in electric power use within California.

But pending that, you either import more energy from outside of the state or you find a means of reducing demand. I mean, at the end of the day, you ration through brownouts or through blackouts and that's highly undesirable and one which everyone I think realizes should be avoided as best we can.

I do believe that the emphasis on all of the infrastructure that surrounds this whole question of the wholesale market, the retail markets, the problems of finance within the utilities there, are important issues. But unless you lose the gap between supply and demand of power, all of that is beside the point. If you had a centrally planned economy, it may be inefficient, but it would produce power, as indeed we've noticed that they did in years past. If you have a free market system, it will produce power. But if you try to mix the two of them, I'm not terribly certain what you come up with, but it is clearly, as evidence demonstrates, not the desirable way to go.

BOND: Thank you, Mr. Chairman.

DOMENICI: Senator Wyden?

WYDEN: Thank you, Mr. Chairman.

Chairman Greenspan, I'm going to mail you my bouquets so I can get some extra time for questions this morning.

The first one that I wanted to ask is, what are the economic implications, in your view, of making the tax cut retroactive? As you know, there is considerable discussion up here about that concept. I would be interested in your thoughts.

GREENSPAN: I don't have a view on that, Senator. I frankly don't believe that we're that far into the year that retroactive cuts matter all that much, unless, obviously, you endeavor to put through a tax cut this calendar year and it stretches out so that you don't pass it until late in the year; then it does matter. But then the question essentially is, is the economic situation the same at the end of the year as you were looking at, at the beginning of the year. And that does raise obvious questions of the usefulness of that particular device.

WYDEN: At each of these sessions, I asked you to give your assessment of what's going on the high-technology sector right now. And this year, I'd like to ask your assessment around a very specific issue that the Congress will be dealing with very shortly. The moratorium on discriminatory taxes on electronic commerce is going to expire in a few months. Given the recent developments in the information technology sector, what are the economic prospects, or the economic implications, if we have thousands of local jurisdictions putting in place a crazy quilt of new taxes targeting the information sector?

GREENSPAN: Senator, I hesitate to think about it. It's a very difficult...

WYDEN: That's what will happen beginning in October.

GREENSPAN: I understand that, and I wish I could give you some simple solution to the problem. All I know about the issue is all of the pros and the cons to the issue, and they are all formidable.

I think that our whole notion of how we tax and where we tax and the incidence of taxation is going to be stressed in this particular area. The obvious issue of intellectual property rights is related in a significant way to the question of who owns what and how you tax, as well.

And I think that this is going to be one of the most difficult problems that the Congress is going to have to face.

WYDEN: Would it be fair to say that special care, given what's going on in technology today, should be applied before you allow all these jurisdictions to put in place their new taxes. I mean, I heard you say earlier that you believe, and I share the view, about the great potential for productivity gains. But we know the sector is very fragile right now. And I would hope that at least we could hear from you, if not today, over the next few weeks, that you think great care should be applied in this area. Because I think that we're faced with the prospect that thousands of jurisdictions will go out and...

GREENSPAN: Senator, I didn't mean to be ambiguous on that. I thought I answered that I thought that it would create some really serious difficulties and problems, and that the issue has to be addressed.

But there is the question of sales tax problems and a variety of related issues which do get heavily involved in municipal finance. And I think that it is important to recognize that there are two sides of problems which must be addressed. And I'm certainly not arguing for very heavy taxation on all of the high-tech areas. On the contrary, the answer is no. But I do think in the process of recognizing the gradual drift of a number of retail transactions going from brick and mortar into the high-tech area does have implications.

The one issue which I think is important is that the expectation that it was going to happen very rapidly and create some really serious problems, that has not occurred. In other words, it's not as urgent an issue as I thought it might have been, looking at it from the point of...

WYDEN: I appreciate that. And I think you know sales tax revenue, for example, is up in those jurisdictions where Internet usage is highest. So this notion that somehow the small retailer was going to, you know, leave Western civilization certainly hasn't been the case.

Let me ask you a question about the California energy situation. And you probably know, because of your experience in Northwest, that Senator Murray's constituents and mine are very upset about this. You know, we see sort of business as usual in California. And the Department of Energy just says, ``Ship 'em more energy.''

At what point will the economic consequences of California's energy problems ripple across the country, if left unchecked?

GREENSPAN: Well, I don't think it's going to ripple across country, from an energy point of view. But to be sure, the western energy infrastructure, which is integrated into a relatively single unit clearly cannot disassociate from the supply and demand problems within California. So I do think that there is a significant energy relationship and set of problems that affects the west.

The more important question is whether in fact the economic effects beyond the energy questions has an impact on the rest of the economy. I mean, clearly, California is a very important part of the American economy. It's roughly a 1/6. And it's scarcely credible that you can have a major economic problem in California which does not feed to the rest of the 49 states.

I think that the presumption that we can merely look at this as a issue which is going to get relatively easily resolved, and that we don't have to be concerned about its implications, is clearly mistaken.

I think fortunately what we do find is that the energy efficiency of the American economy has been really quite dramatic. The amount of energy input per unit of real gross domestic product has been going down very appreciably, in large part because of high-tech and the obvious changes in the nature of the output which the American economy is involved in.

But, having said that, you still are dealing with a rising capacity requirement for the energy sector. And that necessarily implies that we put on new capacity, that we make certain that we increase the buffers in the electric utility area and that we get a far better balance in how we evaluate what areas are appropriate to drill for natural gas, because natural gas is becoming very critical problem, as you well know, in the whole electric power energy area. And while electric power is a problem, we also have the natural gas problem, as well.

WYDEN: One last question, if I might. Senator Moynihan and I recently wrote a report calling for the Fed to make available the full transcripts of the FMOC, you know, meetings after a reasonable period of time, so that investors and consumers could have this information. Do you believe that it would be appropriate to make a change in Fed policy so that at some point, after a reasonable period of time, the Fed would act in concert with the recommendation that Senator Moynihan and I called for?

GREENSPAN: Well, Senator, we think we have done that. I mean, we do release the full transcripts of our meetings after five years.

The one issue which I think is important is that the expectation that it was going to happen very rapidly and create some really serious problems, that has not occurred. In other words, it's not as urgent an issue as I thought it might have been, looking at it from the point of...

WYDEN: I appreciate that. And I think you know sales tax revenue, for example, is up in those jurisdictions where Internet usage is highest. So this notion that somehow the small retailer was going to, you know, leave Western civilization certainly hasn't been the case.

Let me ask you a question about the California energy situation. And you probably know, because of your experience in Northwest, that Senator Murray's constituents and mine are very upset about this. You know, we see sort of business as usual in California. And the Department of Energy just says, ``Ship 'em more energy.''

At what point will the economic consequences of California's energy problems ripple across the country, if left unchecked?

GREENSPAN: Well, I don't think it's going to ripple across country, from an energy point of view. But to be sure, the western energy infrastructure, which is integrated into a relatively single unit clearly cannot disassociate from the supply and demand problems within California. So I do think that there is a significant energy intrarelationship and set of problems that affects the West.

The more important question is whether in fact the economic effects beyond the energy questions has an impact on the rest of the economy. I mean, clearly, California is a very important part of the American economy. It's roughly a 1/6. And it's scarcely credible that you can have a major economic problem in California which does not feed to the rest of the 49 states.

I think that the presumption that we can merely look at this as a issue which is going to get relatively easily resolved, and that we don't have to be concerned about its implications, is clearly mistaken.

I think fortunately what we do find is that the energy efficiency of the American economy has been really quite dramatic. The amount of energy input per unit of real gross domestic product has been going down very appreciably, in large part because of high-tech and the obvious changes in the nature of the output which the American economy is involved in.

But, having said that, you still are dealing with a rising capacity requirement for the energy sector. And that necessarily implies that we put on new capacity, that we make certain that we increase the buffers in the electric utility area and that we get a far better balance in how we evaluate what areas are appropriate to drill for natural gas, because natural gas is becoming very critical problem, as you well know, in the whole electric power energy area. And while electric power is a problem, we also have the natural gas problem, as well.

WYDEN: One last question, if I might. Senator Moynihan and I recently wrote a report calling for the Fed to make available the full transcripts of the FMOC, you know, meetings after a reasonable period of time, so that investors and consumers could have this information. Do you believe that it would be appropriate to make a change in Fed policy so that at some point, after a reasonable period of time, the Fed would act in concert with the recommendation that Senator Moynihan and I called for?

GREENSPAN: Well, Senator, we think we have done that. I mean, we do release the full transcripts of our meetings after five years.

In the interim, we have fairly detailed minutes which come out six weeks after meeting, and we do announce concurrently when we change rates or when we don't change rates.

The problem that you have, if you essentially move up the timeframe in which full use--if you move up the timeframe on when you will release the full details of what people are saying, it's been my experience that you're going to affect what they say and how they say it. And it's very important that the extraordinarily, I think very sophisticated and useful deliberative processes that go on within the Federal Open Market Committee continue as effectively as they are. If, for example, going to the extreme, you were to put us in real-time in television, I would suggest to you that the effectiveness of what we could do would dramatically decline. It's a very difficult tradeoff...

WYDEN: Mr. Chairman, my time is up. I would just like to work with you to find a middle ground here that can get the information to the public without harming markets, and I look forward to discussions.

And I thank you, Mr. Chairman.

DOMENICI: Senator Gregg?

GREGG: Thank you, Mr. Chairman. It's great to have you here today. I appreciate your statement, which I found to be one of the most fascinating and I think important statements that I've heard recently on economic policy and where we're going as a country, especially with our surpluses, and the warning which you raise as to how we manage these surpluses is I think critical for us to take seriously.

And in that context, I'd like to go through three ideas that I've been dealing with in this area of fiscal discipline and get your thoughts on them as ways to try to address some of the concerns that you've raised.

The first is you've raised the problem of the federal government accumulating a huge amount of assets and controlling assets. One way to abate that and to also prefund the liability of the Social Security system is to set up personal accounts where individuals will actually have ownership over their tax dollars that are being paid into the Social Security system, with the management of those accounts being under the Social Security trustees, much in the fashion that we do the president Thrift Plan for the federal government where you basically as an individual have a right to choose a number of different options for how your personal funds are invested.

I think I heard in your statement that you support that type of individual ownership of the assets in the Social Security fund to some degree. Is that correct?

GREENSPAN: Senator, yes and no. I do agree that it's a very important and rather formidable switch, if you go from defined benefit Social Security payments, where the recipient has no concern, view or worry about what assets are being held to fund their retirement, to a defined contribution plan, which essentially is what the federal Thrift Program is.

GREGG: Well, we're not suggesting an entire shift, of course.

GREENSPAN: No, I understand that.

GREGG: We're suggesting a minimum defined benefit.

GREENSPAN: The question that I have--I do agree. I think that, frankly, solves a great number of problems, and I think it's a desirable thing to do, but I do think that the notion of moving some funds into private accounts is the appropriate thing to do. And I think we're going to be moving in that direction inexorably because of the way the economy is developing; that is, more out of defined benefit into defined contribution, with, presumably, some form of safety net for individuals who turn out to have not had the best of experiences.

But if you're going to do that, why not just go into the private sector? In other words, with mandated requirements that these monies be handled in a certain manner, with maybe requirements for certain annuities or the like.

Once you go from defined benefit to defined contribution, continuing it in the Social Security trust fund system doesn't strike me as having any particular value.

GREGG: I happen to agree with that from a logic standpoint; it's a political issue, I think, at that point. I appreciate you, however, taking that...

GREENSPAN: I don't deny the politics either, Senator.

GREGG: ... position, because it makes it easy for us to go down that road.

The second discipline I'm thinking about is that, as you know, the caps aren't working because of the emergency spending which we have pursued and the adjustments which we've made. And I'm wondering if we shouldn't be looking at some sort of new regime here as we move into a period of significant surplus. And one of the regimes I've been thinking about pursuing would be something that would limit the rate of growth of our spending side of the ledger on the discretionary side--and unfortunately, we can't do it on the mandatory side or I would do it there, too--to some percentage of the rate of growth of the economy, say 60 percent. We have some enforcing mechanisms which would basically be look-back enforcement mechanisms.

But I'm wondering if you think some sort of new regime would be appropriate for us to put in place to try to discipline fiscal policy here?

GREENSPAN: I do, Senator. I think that I was surprised, and I must say delighted, at how successful some of the earlier endeavors were, despite the fact that a majority vote of either House could have overthrown an awful lot of what was accomplished at that period. And it wasn't done, basically because there was a general view within the Congress that appropriate fiscal policy infrastructure on the spending and on the tax side was working. And indeed, it seemed to be doing an exceptionally effective job.

I think that when you go into a period in which you are essentially dealing with zero debt, it changes the structure of fiscal policy in a very formidable manner. And what is required is to find the equivalent set of rules which worked so well when the deficits were large and the outstanding debt was very large, to a period which is quite different. But the goal is basically the same, to maintain a fiscal policy which is most contributive to the long-term, stable economic growth of the economy.

GREGG: If we develop such a regime--and I do intend to develop such a proposal--if I were to send it to you, would you be willing to comment on it or is that inappropriate? Do you deem that to be an overlap of your responsibility, an inappropriate...

GREENSPAN: What I will be glad to do, Senator, is try to respond as is appropriate. I mean, you know, there are certain general principles that I think we've given a little thought to, and we'll be glad to give you a view as to what we think the pros and cons are of various proposals. But ultimately, it's a political decision. And I think that with all of the very complexity of the previous caps, pay-go systems and the like, at the end of the day, they actually were quite effective. And I think it's unquestionably a worthwhile endeavor.

GREGG: So what I'm hearing you saying is we should do something.

GREENSPAN: Yes, sir.

GREGG: Another effort that I think needs to be addressed goes to your issue of how tax cuts and spending can get out of control and thus mitigate our ability to get to a zero debt situation or as close to it as we can get in the context of the fact that we don't want to accelerate payment of debt, to a point where we're increasing significantly additional costs or affecting the markets, I presume. But should we have some sort of system that essentially says that, as we pass a tax cut and we pass our spending bills over the next 10 years, we have a procedure where these tax cuts and spending increases look at the ultimate goal of debt reduction, so that they're all woven together, with the goal being to get to the appropriate debt reduction level and having adjustments in tax cut and spending increases that are relatively automatic, should we find that the estimates which are in place today which allow us to do all three--under today's estimates, you can cut the taxes the way the president suggests; you can increase spending rather significantly, certainly at the inflation rate, even nominal inflation rate; and get to full elimination of the debt within the context of what you'd want to be able to do within the next 10 years.

But should those estimates adjust, should we have a system which allows us to adjust to all the three major mechanisms, spending, tax cuts and--to get us to the debt.

GREENSPAN: Senator, let me answer by saying what I think, in my judgment at least, is the more general principle. If the purpose is basically to foster maximum economic growth in the private sector, which is to remove the effects--negative effects on economic growth from governmental actions to the extent that we can, my major concern with very large deficits was that they produced claims on the private sector, on real resources from the private sector, and, thereby, created a diminishment of what would be an optimum private system.

But I have precisely the same concerns on excess accumulation of assets, claims against the private sector, by the federal government in that regard, for the same reasons. That is, it would also reduce the efficacy of the private sector. And so that what happens is, that the principles are the same, it's just that we're looking at them from a different point of view.

And so, I conclude that what you want to do is to try to find a mechanism where you come reasonably close to so-called on-budget balance. Now, there may be a sophistication to that or various changes, but large deficits are bad, large surpluses are bad. And the trick is to find a mechanism which enables you to maintain a fiscal policy which doesn't go jumping up and down inadvertently and tends to focus at some degree of long-term stability.

I don't pretend to suggest to you that I know the actual mechanism to do that, but I do know that excess deficits and excess surpluses have something in common, in that they distort the structure of private economic growth. And I think that's bad for policy and it's bad for the country.

GREGG: So you're not going to give us a mechanism?

GREENSPAN: If I knew one, Senator, I'd be delighted at this particular stage to convey it, but I must say to you, I just haven't given it sufficient thought. And I'm not terribly certain that if I did, I could come up with what would be of credible use.

DOMENICI: Senator, your time has expired.

GREGG: Thank you.

DOMENICI: Senator Byrd?

BYRD: Mr. Chairman, Solon was one of the seven wise men in Greece. I'm not sure there are seven wise men in this room right now. But I've counted you as one of the seven, if there are seven, one of the wise.

Now, I'm a Baptist, we have a hymnal. There's a song in our hymnal, ``The Anchor Holds.'' And I've looked at you through this economic expansion period and I've considered you to be a great portion of the anchor. I think you and your wisdom, your policies have contributed immeasurably to the economic expansion that we've seen in these past nine years.

Today, I'm a little disconcerted. The anchor seems to be saying not, as I've listened to you over the past several years, that we need to pay down the debt. That is the basic need. And I believe that you were right then. And I am somewhat stunned by the fact that the anchor seems to be wavering today.

I'm a new member on this committee. I've been an appropriator now for 43 years in this body. I've also been a politician for 54 years, going on 55.

I know that the easiest vote that I ever cast was a vote to cut taxes. One of the most difficult votes, is the vote to increase taxes. It's easy to cut taxes, it's very hard when it comes to restoring them, to reinstituting them, or to raise taxes.

Putting aside my political hat for the moment, putting on my appropriations hat, and looking at the proposed tax cut, I'm concerned at the assumptions and the projections that lead us to this $1.6 trillion tax cut and the projected revenues and surpluses in the overall federal system. I've seen the assumptions and the projections so markedly in error over these several years. The errors in revenue, they go up and they go down, and they go up and they go down. The assumptions and projections in out-go, expenditures, and consequently, the changes. The errors into which we've been led by depending on assumptions and projections in respect to our deficits and now our surpluses.

Here we are talking about 10 years. We can't even project accurately from month-to-month, certainly not for a year. And it seems to me that we're going out very far on a limb when we talk about a $1.6 trillion tax cut. Somebody asked, how much is $1.6 trillion? But perhaps we can understand it, if I say that $1 billion is $1 per minute since Jesus Christ was born. Therefore, $1 trillion would be $1,000 per minute since Jesus Christ was born. I hope the old math is accurate that I'm spouting out here.

So if that be the case, then $1.6 trillion must be $1,600 per minute, every 60 seconds, since Jesus Christ was born. That's a long time, 2,000 years. We're just beginning, by the way, the new century. We didn't begin it a year ago in January, we're beginning it this year in the new millennium. But here we are talking about this gargantuan tax cut. Now I come from West Virginia. If there is ever a state that has suffered from poverty, it is my state. And if there ever was someone who knows what poverty is, and Mr. Chairman, you're looking right straight at that person. But my people are not saying to me, ``Give us a tax cut.''

And I look at my little great granddaughter, and I say, ``What is she going to think of me, if I join in this stampede to cut taxes to the tune of $1,600 per minute?'' And one day, I have to leave this Senate. When I do, I'm going to look in the mirror, and I'm going to ask myself on this matter of the tax cut, ``Did you join the stampede? Were you thinking of that little granddaughter? Were you thinking of your grandchildren? Were you thinking of your children or were you thinking of yourself and your generation, your time?''

Now I know I'm not learning much by talking. But I just want to say in my first meeting on this committee, and I am the individual who probably more than any other person in the Congress of the United States authored this legislation that created the Budget Committee, the Budget Reform Act of 1974.

I was here, and I helped to put that together. I took a whole break in which to do it.

So this is my first time. But I look at this through the appropriation hat. I know the magnifying and growing needs in this country. I'm not saying we shouldn't do a little bit of tax cutting--the marriage penalty, as one who's been married 63 years, I believe that we ought to do something about the marriage penalty. I believe there may be some other targets.

But I know about the growing needs in this country. We don't know when we project we're going to have this huge amount of money in 10 years, we don't know even that we can project how much we'll have a year from today. We don't know what Saddam Hussein will do to upset the apple cart. I'd say he's the most dangerous man, the most dangerous single person in the universe, to our budget surpluses. We don't know.

And the devastations that are created by floods, the threat of global warming, these things are going to cost money. I don't know how true the scientists are, but I'm having a growing feeling that they're right. I do know, from 83 years of living, that the floods are worse, the fires are worse, the droughts are worse, the earthquakes are more often. And all of these things can happen, any of them, overnight.

And so for us to take action now to cut taxes, write it on the statute books, it's there, the money's going to go out, and the only way we can stop it is by passing another law, the money goes out immediately, but the projected surpluses have not been realized, they're not in hand, I think we're taking a tremendous chance.

And aside from these many things, we have tremendous needs when it comes to clean water in this country and waste water treatment facilities, needs in our national parks, the needs in our forests, the need for clean coal technology, the need to develop energies that will help us to balance the economy with environmental needs, health needs, education needs. As John Stuart Mill said, on all great subjects, much more can be said. So I could continue, one after the other, to lay out these immediate needs and growing needs that face the appropriators.

Now, we hear some talk that we ought to institute some kinds of regime that will renew the cuts in all those things. But we, ourselves, are the worst in this regard, we senators in this body. Four years ago, we did away with rule 28, Senate rule 28, which said that nothing can be put into a conference report that has not been acted upon by either House, or both Houses, it has to have been acted upon by one or the other of the two Houses or both.

And lo and behold, in the Senate we wiped out that rule by overriding the chair about four years ago, and we've paid for it ever since. And we've seen not only a loosening of the chain of restraint upon spending, we've seen a breaking entirely of the chain, with no restraint. And we've all been guilty of that.

I'm not one of the 39 who voted to overrule the chair. But I'm only mentioning this by virtue of the fact that much of our runaway spending has been through our having negated that rule, so that we--the Democrats, the Republicans, the Senate, the House and the administration downtown--have all rushed to take part in the increasing burden on the taxpayer by doing away with this constraint. And so, we've all got a job to do here.

Let me close. I'd like to say much more of this. I only want to say that this is one senator who is not going to join the stampede. I'm going to stick with my anchor as it was holding before today. I'm for lowering that--cutting that debt. I may vote for one or two tax cuts, the marriage penalty. But I think we ought to put that money on reducing that debt so that the--that will be the real tax cut for the taxpayers of this country. And that will be where I can look in that mirror and say to my little granddaughter, ``Yes, your granddaddy still held on to that anchor,'' and I praise you for that.

Now, I have one question. I'm not scared; that's not why my hands are shaking.

The Commerce Department recently released its trade deficit statistics for November 2000. We showed that the U.S. trade deficits shrank by $558 million to $32.99 billion in November 2000. The annual trade deficit for 2001 is expected to reach a record high of about $400 billion, which is about $300 billion higher than was recorded in 1991, 10 years ago. At what point, Mr. Chairman, does the trade deficit grow so large that it can no longer be sustained? And at what point--what dangers does it pose to the U.S. economy?

You may not feel that you want to wander out into this area, but having that question in mind, let me go into the next question, in which I think is one that you might help us with: Could you provide us with your thoughts on how significant the trade deficit should be in formulating monetary and fiscal policy?

GREENSPAN: Well, Senator, I think that we do have a problem with either the chronically rising trade deficit or its broader measure of the current account deficit, because it's fairly obvious that the deficit itself adds to the net claims against American residents and its accumulatively rising net debt, so to speak, from which we must pay interest. And, obviously, if we continue to increase the net external debt, that there comes a point when we do have financing problems for that.

Over the years we've looked at this problem and try to understand exactly where the point, as you put it, sir, is critical, and we've not been able to find a very clear point where problems arise. What we do observe, however, is that the offshoot of this extraordinary increase in productivity has created rates of return on new, especially high-tech, capital, which has been far above rates achieved on the same sort of technologies in other countries, especially in Europe.

The consequence has been a very dramatic flow of capital from Europe, especially to the United States, which has actually been at least adequate to finance the current account deficit, because were it not the case, the exchange rate for the American dollar would have declined quite appreciably and it has not.

Therefore, we are dealing with a question which we don't know the answer to, one which is a question you raised, and I think it was a very important question: Is there a special point at which either our ability to continuously expand the net debt on American residents or the gap in rates of return for American investment vis-a-vis the rest of the world closes? In other words, whether either of those occur, we're going to have a problem.

We've expected that this problem could emerge at any particular time, but over the years we've examined it, looked at it, worried about it, and at least to date it has not yet emerged. But I do say to you that it cannot go on indefinitely, something must give at some time. I hope that when it happens, it happens in a phased manner so that there's no discontinuities impacting the American economy as a consequence. But it is an issue which I think will be with us for the next several years, at a minimum.

BYRD: Mr. Chairman, I thank you. My time is up.

And I thank you, Mr. Chairman, and my colleagues for your patience.

DOMENICI: You're welcome, Senator.

Now we are going to move to our side, and I believe Senator Frist is next.

FRIST: Thank you, Mr. Chairman.

Mr. Chairman, I also want to join others in praising your leadership of the Federal Reserve and your successful management of much of the monetary policy we've seen over the past decade.

I do want to shift to the focus of an arena we haven't talked at all about today, and that is health care and the implications of what you have said for health care. Your final statement today, ``With today's euphoria surrounding the surpluses, it is not difficult to imagine the hard-earned fiscal restraint developed in recent years rapidly dissipating.''

It strikes home to me because of the real challenges that we have in health care with the new technology; the challenge of incorporating prescription drugs into a federal program which almost has to have some sort of restraint, internal mechanism, to keep it from growing out of control because of the high expectations we have, the science that we can produce in this country; and our demand for the very best for ourselves and for our loved ones when it comes to health care and medicines and procedures.

I appreciate you really encourage us to look beyond the next 10 years in the implications of what we do today in terms of both monetary and fiscal policy as we look ahead, that once we have debt cancellation there likely will be some accumulation of private assets by the government. And the implication--it's going to force us to think what the implications of that actually are: How good is that? How much should it be? Where it should go?

You mention in your testimony major health programs, the budgetary pressures from the aging of the baby boom generation, especially on the major health care programs. But for the most part elsewhere you focus on the issues of Social Security, the potential for maybe an element of privatization there.

And I guess the question that I'd like for you to address in a few minutes is what the implication is for this accumulation of assets. Can it be used in any way to answer what can be an insatiable demand, but in many ways an appropriate demand, for what we are delivering in health care or have the potential to deliver, as we have advances in technology and productivity and the advances in science?

The unique challenge that we have to face today--and again, it's, to me, why it is so important to look beyond the 10 years. We have the solvency issue of Medicare for 25 years from now, and it shifts over time, but we know it's going to be an issue; we have the definition of what solvency in Medicare means, the Part A where we have funds, incoming and outcoming funds match, mainly the hospital but then Part B which is sort of a drain on the Treasury, so we have to go back to that definition of solvency. Now is not the real time to address that. It is time for us to address it, but not right this very minute.

The issue of what's happening in prescription drugs today--it's outside of Medicare today, yet if we look at prescription drugs overall, as we all know, overall national spending has tripled in the last 10 years and is likely to double over the next six years--that's national spending for prescription drugs.

And our challenge, and something I think most of us are committed to, how in a responsible way that 10 years from now or 15 years from now, or when we're talking to our grandchildren, we won't regret the way in which we incorporated such a rapidly and probably appropriately expanding expenditure in health care today.

Pharmaceutical sales each year are growing at about 15 percent a year. If you look at just in the Medicare population, prescription drug spending has risen from about $30 billion five years ago to an estimated $55 or $60 billion today. The politics, the policy, ultimately, because this is eschewed to only a certain subset of the senior population is something that we need to address.

But what interests me and what you and I have discussed is this idea of when you talk--let me see, in your testimony--when you talk about the accumulation of assets, is there any way--in Social Security, you can have private savings accounts or personalized savings accounts, that will capture and grow over time. Is there any parallel in terms of this assets, after a surplus has generated enough to pay down this debt, to capture that in the field of Medicare?

GREENSPAN: Senator, I think the issue of how we approach the medical issues that you raise is going to be the most difficult problem in long-term budgeting in the country. I think in the context of that, it is important whenever dealing with an issue such as this, is to dispense initially with the financial aspects of what is going on and try to understand what is happening in real resources and what is happening in the technologies, as you point out, and the structure of medical markets which we have devised and what they all imply.

As you are far more aware than any of us, with the third party transfer system and the fact that medical care is a very unusual type of economic good--in the sense that when you need it the so-called demand elasticity is extraordinary. And that if you have a system in which you have fairly dramatic increases in technology, which we have had, and an inability at the point that the technologies come into place to make them universally available for everybody at that particular point, you end up with essentially a rationing system. I mean, MRIs, when they came on the scene, were really quite a major advance. And everyone who would know about them would want to use them in some form or another, but we weren't able to do that.

I remember years ago when dialysis basically emerged, there was a limit to how many machines were available and that it was a very difficult process of determining who uses what and the like. But the principle is very much more general, that we effectively, implicitly ration medical care, no matter what we do, basically because we have a third party payment system and a mechanism which finances effectively what people's needs are. And I would submit to you that what probably is required in this period where there is a massive acceleration in pharmacological advance, which is close to awesome--I mean, what they are able to do--I hesitate to say this to you, Doctor, but having been a good user, I know what they can do, and it really is something to behold.

The problem that I think we have to look at is to think through what proportion of our physical resources do we wish to devote to medical services. Because remember, when we talk, let's say total medical outlays are 14 percent or 15 percent of GDP, we're talking about people, we're talking about physical resources, we're talking about essentially a very significant part of the economy devoted to medical services and medical care.

GREENSPAN: And if you look at the potential technologies and the advances, I can see that we could double that without too much difficulty. But you're taking those resources away from other aspects which make life worthwhile. It's not as though there's a single priority that medical services have an unlimited potential demand on resources. Everybody trades off in some form or another. I guess if...

FRIST: I think that's my question, as we make certain decisions. And now you've pushed us into the future where we are forced to think, not just surpluses, but life after debt reduction. Along the way, the decisions are going to have to be made that may affect that glide path, as to whether or not an increase--prescription drugs are not a part of Medicare, the second largest government program in the United States of America--we're going to add that on and factor that in, in a way that clearly we're going to all benefit. I think it's going to be a continued struggle for us how to do that in a way that manages some element of control as we go forward.

GREENSPAN: Yes, I do think that the analogies with the Social Security system may not be altogether inappropriate, that I, frankly, haven't given terribly much thought about the mechanisms of how one funds and delivers Medicare in the context of zero debt.

I think you're going to find that if, as now seems quite likely, we're going to eventually arrive at a point within a very few years of having eliminated the debt with all of its great benefits, we're then going to find that some very unusual things happen as a consequence of that. And I think you're raising a very important point, which I can't off the top of my head be very thoughtful about with respect to financing, but I do think that it has to be thought through in the context of a new regime, a different type of regime, and what type of funding and what type of trust funds you set up.

I don't know at this point how to confront the particular question, but I do know the question you are asking is one that has to be answered.

FRIST: And it's one that I would love to continue discussion on as we go forward.

Thank you, Mr. Chairman.

DOMENICI: Senator Nelson?

Were you here first, Senator Stabenow? Please proceed, I'm sorry.

STABENOW: Thank you, Mr. Chairman, I appreciate very much. And it's a great pleasure to be a member of this committee. And I want to first indicate that I'm looking forward to working with Senator Frist on this important issue of prescription care, certainly medicine access and cost are critical and directly affect each of the people that we represent. So I'm looking forward to working with you on that.

And, Chairman Greenspan, it's a pleasure to be here with you. And I want to first thank you for your leadership on monetary policy. Frankly, the actions you've recently taken in lowering interest rates have done more to put money in the pockets of the people I represent than I think anything else at the moment we could do. Interest rates, I consider to be a tax cut going directly into people's pockets.

And one of the issues for me is that as we look long term, if we are not prudent, as you have suggested in terms of tax cuts, making sure that we do not go back into deficit, I worry that we might find ourselves in a long-term situation with the tax cuts being given in a way that most of the people I represent would not receive much back in their pocket. And yet, you would--the Federal Reserve would feel compelled to raise interest rates, which, in fact, would affect every person that I represent, taking money out of their pockets. So I think how we put that together and the balance there is critical so that we are not having one action causing a reaction that certainly will affect people in the cost of their mortgages and car payments. And coming from Michigan, we want those car payments as low as possible.

Let me indicate that I think it's so important to stress what you have stressed in your comments repeatedly, and I appreciate that.

STABENOW: You refer to the fact that--you admit that there's quite uncertain long-term budget exercises that we are involved in now, and the fact that we are making little more than informed guesses of certain key relationships between income and tax receipts, and I appreciate that because it's clear that every year, in the short four years I have been in the Congress coming from the House, we have changed those projections every year. And while we continue to hope that they change in the upward fashion, they may, in fact, continue to go in the other--start to go in the other direction, and we are looking at projections and informed guesses for all of us.

I wanted to ask you to respond to what I believe you have said, and I will go cautiously out and ask you to respond to what it appears to me you are saying to us. In addition to the fact that we are involved in informed projections, guesses, as to where we go and, granted, there's a lot of excellent information, expertise, that goes into that, but we certainly are still in the mode of paying down the debt. I didn't hear you saying we should not pay down the debt. It's a question of whether we go to zero at some point but that we--I heard you saying we should continue to pay down the debt.

I also appreciate your comments saying that we should make sure that Social Security surpluses are large enough to meet long-term needs. To me that would also address issues of reserves, as has been said earlier, in terms of whether we call it a strategic reserve or just investing and putting dollars into Social Security long term, that that's a critical issue for us. I also heard you talk in terms of tax cuts, in terms of a balance of paying down the debt, looking at tax cuts long term, and that it should be connected to the constant vigilant eye of not going back into debt, that there should be mechanisms rather than long-term tax cuts that are open-ended.

Is that fair to say that you, in your comments, were talking about the relationship rather than doing a tax cut that might, in fact, put us back into debt? Is that a fair assessment?

GREENSPAN: Senator, I do think it would be extraordinarily unfortunate if we fell back into deficit. The general point that I am making is the fact that we have no choice but to forecast out a number of years, because the actions that we take project out that far. But Senator Byrd is absolutely correct; the errors that have been made in these long-term projections are really quite extraordinary. As I mentioned before in answer to a previous question, my recollection is that the estimate that was made for the government balance in early 1995 for the fiscal year 2000 was off by $500 billion. Now, I grant you that is not the normal error, but even that being possible suggests that you have to be quite tentative in projecting out into the future.

If we had a budgetary process in which what we were dealing with were one-year bills, one-year taxes, and no implicit commitments beyond that point, then forecasting would not be a readily important issue. But with all of our entitlement programs, with all of the various projections that are implicit in any long-term forecast, we have no choice but to make the best estimate we can, recognizing that even the best is going to be wrong to a substantial extent. And what that obviously requires is that we improve our techniques of forecasting, which we try, and recognize where the ranges of error are.

I mean, I haven't changed my view about paying down the debt. I think we should pay it down as quickly as we can. And the phase-in that I'm talking about is only, you know, a year or so different, really, to prevent our being caught and, in an appropriate time, getting down to zero debt at the time when a unified surplus is several hundred billion dollars, say $400 or $500 billion, and find at that time that if we don't wish to accumulate assets, we have to incur a very massive stimulation into the economy, which is bad policy. So that there are very significant tradeoffs here and none of them are easy, and we're in a field where we have never been before.

STABENOW: And I appreciate that very much.

And also, in indicating that we--I think all of us change year to year as we see the projections and the circumstances change, and that it follows that, as we have had the tremendous growth in the economy and projected surpluses, that you would look at the next step--what happens if we pay down the debt and how much--and that makes perfect sense to me.

I did want to ask, though, if you would comment on one other thing, that you actually said--it was the first thing that you talked about, which I think is so important. And that is the fact that, as you've indicated, the key factor driving the cumulative upward revisions in the budget picture in recent years has been the extraordinary pickup in the growth of labor productivity. Because I would hope that we would not overlook what has happened in that, and I would welcome your comments regarding that, because that certainly affects what we do in terms of work force development, skill development, investments in education, tax policy that may be different than a rate reduction because of a purpose of wanting to have, whether it's R&D tax credit or other technology advances, or whether it's tax credits that allow people to be able to go back to college to further their skills, those with the intended purpose of helping to keep the productivity going. It seems to me there's an important piece there that we shouldn't overlook as we formulate our policies, both for investments and tax cuts and the other issues that will comer before us. And I'm wondering if you could speak to the elements of continuing that productivity.

GREENSPAN: Senator, I recognize that there's far more to the issue of productivity in the American economy than the capital assets or the technology that we put into the system because there are human beings on the other side of this who, out of necessity, are required to make it function. And therefore, to merely look at the physical capital or the technologies itself without recognizing that the human capital that's employed in the production of standards of living--if you fail to recognize that that is a significant element, you're going to miss part of the equation.

I don't deny that there are programs which will enhance the educational capability of individuals, their ability to understand the newer technologies, how to function and how to deal with it, and I think that those are the issues that involve national priorities, which is what the basic purpose of this committee is all about in that sense.

I recognize, and I think that the values that are involved in making these judgments are not something which the Central Bank ought to be involved with. I think we have a tough enough job as it is.

STABENOW: Again, thank you for your leadership.

DOMENICI: Thank you very much. Thank you, Senator.

Senator Allard?

ALLARD: Thank you, Chairman Domenici.

And, Chairman Greenspan, I apologize I had to step out. I had to preside for a while. And I may have a question or two that was repeated earlier, and if that happens, again, my apologies. But I do want to make a brief statement before I ask you a couple or three questions.

In my view, one of the greatest perils to the future of my grandson is too high a tax burden. Now, I come from a family of entrepreneurs, small-business people. In fact, six generations of my family have had the opportunity to start businesses from scratch, including myself, and including my daughter and my dad. And in the last three generations of us, I think we've come to one conclusion, that when you're starting your own business, you're looking at least two great challenges out there that impede you from getting that business started. And that is a tax burden that's very difficult to bear as you're starting out that business. And the other one is the rules and regulations that get applied to that business, and I think most small-business men in America would agree with that comment.

I come to this committee and I come to the Congress wanting to have a future for my four grandsons. I'm very proud of those four grandsons. And I'd like to have them to have the opportunity to start a business from scratch like their previous generations. And, in fact, I'm encouraging to do that. And so that's why I think it's important that we work to cut tax burden, so that people can have that opportunity to get started in life, particularly the younger generations.

I look back in the last decade or so, and I see that the tax cut right now that's being proposed by President Bush is less than the tax increase that was implemented by a Democrat Congress and a Democrat president in 1993. So I don't think that that was the greatest tax increase in the history of America, and so I don't view that this tax cut is particularly threatening to the future of my grandkids.

Now, if I may get to a question related to your testimony.

I want to thank you for your testimony because, as always, I learn something from your testimony.

You talked about the excesses fees--rates that we're having to pay on Treasury securities that have not retired yet.

ALLARD: In other words, we have to pay more than market rate. Are you suggesting that in some way we ought to tie paying down the debt to the maturation dates of those Treasury securities?

GREENSPAN: Yes, Senator. And let me be a little more specific. If we had nothing but Treasury bills which, say, matured in 90 days, then we could translate the unified budget surplus directly into a dollar-for-dollar reduction in the amount of Treasury bills outstanding merely by allowing them to run off. And we could get to zero debt at exactly the same time that the cumulative surplus said we should. In other words, we'd been able to use every dollar of the surplus to pay down the debt.

It turns out, of course, that there is a significant amount of debt that is outstanding in this country which either, one, is--say savings bonds, which are very difficult to get retired prior to maturity, and a number of other nonmarketable issues, and a large chunk especially of U.S. Treasury notes and bonds held on foreign accounts, by foreigners, both central banks and private citizens.

The U.S. Treasury issues are unique in the sense that they offer to foreigners an extraordinary vehicle of a risk-free, stable currency liquid instrument. They are now receiving say 5, 5.5, 4.5 percent, depending whatever issues they are owning. It's my impression that the value of the risk-free nature of the debt and its other characteristics is such that they would be willing to hold those instruments at interest rates significantly below what they get today, Which means that if you had a buyback program, in which effectively you were offering people to buy back at a modest premium, their view is, ``I don't want to sell. I value this far more than the price that you are willing to give me to buy back, to in a sense get me to cash in my bonds before maturity.''

And there is very likely a fairly large block of such securities out there which we would have to pay horrendous premiums to induce the people to give up their instruments. And unless we can do that, you can't reduce the debt. And so the point that I am making is that we have to realize that the point at which we can't reduce the debt, and therefore cannot apply all of the surplus to the reduction of the debt, means that part of that surplus will now begin to accumulate as financial assets generally of the private sector by the federal government.

And so the problem of the emergence of private asset holdings by the federal government will occur before we go to literal zero debt.

That's the issue that I'm raising. That's the issue which I think is going to be beginning to confront us. It's an issue we gave very little thought to a year ago. We knew about it in principle, but nobody really took all that seriously that we were really going to get to zero debt in some credible period of time. The evidence of the last 12 months has changed that to a substantial extent, and realistic efforts are now moving forward.

For example, even we at the Federal Reserve, who have of course been aware of the debt reduction, and consequently the removal of Treasury assets from the Federal Reserve asset side of the balance sheet, were a year ago just gradually thinking about it. But as the year went on, it became ever more credible that this was a realistic possibility. We have accelerated our efforts and the various ultimate means that the Federal Reserve would employ to implement monetary policy, what assets would be use, if we could no longer buy Treasury instruments, or could not buy them in the volumes that we currently could buy them.

So I think this change that is going on, the increasing credibility of getting to zero debt is having very significant effects throughout our financial system. And I think increasingly throughout government and especially in the budgetary process which you're confronted with.

ALLARD: I thank you for that response. I see my time in the process is running out. But I do recall, last time I had an opportunity I was on the Banking Committee, you testified before me, you were much more enthusiastic about getting the debt paid down than you are in this discussion here today.

GREENSPAN: Senator, I'm still enthusiastic. It's just going to happen far sooner than I ever expected. And it never entered my mind that we were going to get to the point--as I mentioned to one of your colleagues, before you had come back--that the notion that we could get to the point where debt reduction was not the prime purpose of employing surpluses.

A year ago, the presumption that we had to even think about anything else was really quite marginal. It's turning out that I still hold the number one priority is reducing the debt. The problem is is we're going to get that out of the way far sooner than any of us imagined, if the numbers we are looking at are even remotely creditable.

ALLARD: Thank you.

Thank you, Mr. Chairman.

DOMENICI: Senator Allard, thank you. Thank you very much.

Senator Nelson?

NELSON: It's a nice problem to have, given the last 32 years, isn't it, Mr. Chairman?

GREENSPAN: It certainly is, Senator.

NELSON: I want to associate my thoughts with the senator from West Virginia and his articulated policy. And I admit, Mr. Chairman, that I come to this discussion a little bit gun shy because I voted for the big, huge tax cut in 1981 and then we had to undo it, not once, but three times--in '83, '86 and '90.

And as the Democratic leader of the committee has shown you in his chart, Senator Conrad earlier, my concern is that: OK, here's a projected surplus. It's the best we have to date. It may change. It may go up, it may go down. But it's a reasonable projection. And when you take out the Social Security surplus and the Medicare trust fund surplus, you have something around $2.6 trillion over the next 10 years left.

And then the question is, if we enact a tax cut in the range of $1.6 trillion, that has the additional consequences of additional interest of $400 billion over that same decade of time, and other alternative minimum tax reforms, you've wiped out that on-budget surplus, not considering any additional spending.

And, obviously, you don't want to get into the politics of this, and you shouldn't, but the politics confronting us is, do we use what was said earlier, in your words, when you were talking about fiscal policy, the words you used were ``on-budget balance,'' end of quote. And as someone who went through this in the decade of the '80s and had to correct a tax cut that was way too big, I approach this wanting more balance.

You're not going to enter the politics discussion here, but you're sending signals out to both sides here today about what the size of this tax cut ought to be, and I would like you to give whatever you feel like that you can enter in here, particularly with regard to your three words, ``on-budget balance.''

GREENSPAN: Senator, I'm not making judgments about any of the items that, for example, appear in Senator Conrad's various listing. I'm not even making assertions that I think that either OMB or CBO numbers are chiseled in stone. Having done those types of calculations myself over the decades, I know how precarious some of those numbers are.

We have no choice, however, but to make judgments, as I mentioned previously, of what these numbers look like, and the arithmetic is very straightforward. I mean, we now have the capacity to make judgments as to what various appropriations will spill out as outlays. We know what implicit interest costs they are in various different associated programs. And everyone can make calculations and the great, really the extraordinary political structure that we have in this country comes out at the end of the day demonstrating that democracy works in an extraordinarily effective manner. And what it is, it's the value preferences of our society as manifested through the representatives, both in the Senate and the House, who ultimately try to reflect these values in the context of a number structure which is limited.

And you're quite correct, my view, looking at all of these various relationships, is that I would prefer to see the on-budget system in balance, neither in deficit nor in surplus chronically, because I believe that both tend to represent a distortion in the system.

Now, a number of academics are doubtlessly going to argue, ``Why on-budget and not the unified budget,'' and there are arguments on both sides. But I think at the end of the day, the nature of the types of policies that you implement don't really get to those narrow questions. It'll work either way. It'll work basically with any type of structure that we choose to use, provided it's a disciplined structure and we just it consistently.

So I would merely say, on the basis of what I know, I would try, over the longer run, to focus towards an on-budget balance in the context of zero debt. At zero debt, by definition, you cannot use any monies to reduce the debt further. And, consequently, I have, over the decades, not certainly as long as Senator Byrd, but been an advocate of reducing the debt, worrying about deficits, worrying about the claims on real resources that are involved--and I must say, I never expected to see the day where I would be talking about anything other than reducing the debt. I'm running into the tyranny of zero, which is where you can't reduce it anymore.

GREENSPAN: And so, have my views changed? Yes, they've changed. They have to change. I see no alternative to that.

NELSON: Mr. Chairman, bottom line is, I don't want to enact a tax cut that is so big it's going to wreck our economy and send us back into deficits.

Thank you.

GREENSPAN: Thank you very much.

DOMENICI: Sorry you had to wait so long, Senator.

SNOWE: Not at all, Mr. Chairman, thank you.

Welcome, Chairman Greenspan. And I too want to applaud your leadership at the Federal Reserve for contributing to this longest economic expansion in the history of our country by one year now. So clearly, it is indisputable, in terms of the impact that it's had on the quality of life for all Americans.

You mentioned early on in your testimony that we are having a very dramatic slowing down in the economy. In fact, we're close to zero. I would like to have you address the issue of what the impact of this tax cut would be in the foreseeable future, obviously, assuming that we have a tax cut within the confines of the budget resolution, as to whether or not this could help to bolster economic growth. I know that you stated in your statement that, ``Should current economic weakness spread beyond what appears likely, having a tax cut in place may, in fact, do noticeable good.''

Similarly, Secretary O'Neill, in response to a question that I asked last week in the Finance Committee, he indicated that it is very possible a tax cut could help to avert a recession, that we could face one of two possibilities, in around August or September. One is that we find that we are just in an inventory correction, or, in fact, we have a more serious economic condition, in which case a tax cut would help.

What would be the impact of a tax cut in that respect? I'd like to have you comment on that and whether or not a tax cut would help sooner rather than later under that scenario, in the event that we do have a serious economic downturn.

GREENSPAN: Senator, at the moment, we're in a period where we are observing the beginnings of what is probably a major inventory correction, in the sense that the level of demand has come down, basically because we were building assets much too fast and much too rapidly, so that an adjustment process, in what economists call the capital stock, was virtually inevitable.

And what you expect is a consequence of that is when, for example, you're selling passenger cars far faster than you can sustain the growth in cars on the road that's implicit in that level of sales, you know at some point it's going to turn down. And the same is true in what we've observed, for example, in many of the high-tech capital investment areas in the last six months. You get temporary gluts, which work their way through into lower sales, induce a backing up of inventories, which in turn brings production down.

And as I mentioned before the critical issue that we need to address is whether that degree of contraction is enough to breach the fabric of consumer confidence. At the moment, it has not. Indeed, we do not yet see the actual immediate implications of what recessions look like, but we won't know how this all works out for a while.

And the possibilities are really basically twofold. One, it could be as sharp as what economists call a V-shaped recovery, which is essentially what happens as you come out of an inventory recession. That is, you liquidate until inventories are at the appropriate level; you stop liquidating and automatically production rises up to the consumption level and sometimes beyond. That's been a classic recession or even adjustment in the United States. It doesn't have to be a recession, because sometimes it happens in a very short period of time.

The other is that you breach the fabric of confidence, in which case, it's a different type of economy, and it could languish for a while. It's important that we avoid that.

A tax cut, as such, is very unlikely to be effective in trying to avoid that process, because the timing is almost invariably far too long before it gets implemented to impact on the crucial period when that decision in the economy is effectively made. And I will just say to you, for the record, that I don't know any economist who has been successful over the years of being able to make the judgment as to when you go from just a weakening state into a recession, which is a different type of environment. If we do end up in that type of environment, while a tax cut may not have been useful for purposes of fending off that state, it clearly would be useful in bringing us out of it far more quickly. It's insurance, in that regard.

If we did not have the issue of having to reduce taxes to move toward an on-budget balance, then there are risks in taking taxes down in a context such as we have today, because more often than not, it tends to be misfocused and is moving into place--it's catching hold at precisely the time you don't want it any longer. But because we have to reduce taxes, in my judgment, to bring down the on-budget balance, to reachieve an on-budget balance, then you're taking that risk anyway. And, clearly, if it turns out we are unfortunate to find ourselves in some form of recessionary environment, that clearly would be helpful, the tax would be helpful.

SNOWE: So what you're saying is, is that it wouldn't, at this point, make a difference in terms of when we implement it this year? Or would it be helpful to implement a tax cut immediately rather than postponing it to August or September?

GREENSPAN: I don't think it matters all that much, because I don't think we could implement it sufficiently quickly to make a difference in a pattern of adjustment, which is going to get resolved in about three months one way or the other. So where you have the tax cut taking place is not going to matter all that much, but it could very well matter if, in the relatively low probability event--and it is a low probability; recessions are low probabilities. They are rare, and they happen for numbers of different reasons. But, clearly, if they do, it's better to have taxes lower rather than higher to confront it and to turn it around as quickly as possible.

SNOWE: Would these tax cuts play a key role in easing consumer debt?

GREENSPAN: They don't actually ease consumer debt but, obviously, to the extent that you lower taxes on, say, individuals, they have more cash to pay their debt service. So, in that regard, I guess you could say that it makes it easier to pay off the debt. In that sense, the potential difficulty of a debt burden is less.

SNOWE: OK. Just may I ask one final question, Mr. Chairman?

DOMENICI: Certainly.

SNOWE: On the projection by CBO, and we'll obviously get revised estimates next week, they estimate 2.7 percent economic growth, essentially, on average, over the next 10 years. Do you think that's sustainable?

GREENSPAN: The crucial question gets down to, what is the sustainable long-term productivity growth rate, because you can figure that we have an increase in the lower force of about 1 percent a year. And in order to determine what the sustainable long-term rate of growth is, it's useful just to add the annual productivity increase plus 1 percent. And the alternative is that you can subtract 1 percent off the GDP growth to get a rough estimate of what the productivity growth rates are. I haven't seen the details fully or--I've seen the full details, obviously, for the OMB, but, you know, I've seen some sketchy stuff on CBO, but I haven't seen the full CBO stuff as yet.

SNOWE: OK. Thank you.

Thank you, Mr. Chairman.

DOMENICI: Thank you, Senator.

Senator Clinton, we're going to go right to you.

But could I ask the ranking member and Senator Byrd, well--and our witness--we've been at this a long time. Would you all like to sit it out here for 15 more minutes? Or would somebody like a break? You're alright? OK, let's proceed. We won't be here much longer because it's just not fair to the witness, and we're going to have you in the normal process, and then if the three senators remaining--or four--would like further comments, we'll try to get back to them.

Senator, nice to have you on the committee.

CLINTON: Thank you very much, Mr. Chairman.

And, Mr. Chairman, your testimony today, it strikes me, has struck cautionary notes that should be taken into account by everyone on all sides of the upcoming political debate.

Certainly, the issue as to whether or not the economy will retain its level of productivity is one that we have some evidence on, but I don't think anyone would call it conclusive. The six months' worth of assessment that you base your testimony on, with respect to the slowdown being accompanied by continuing productivity gains is, I think, heartening but, in my view, not conclusive.

The balanced approach that I hear your testimony again and again returning to is obviously the one that all of us on the Budget Committee are looking for. How we strike that balance--and certainly the balance between affordable tax cuts, necessary spending and a reserve in the event of unforeseen circumstances that could damage the economy--is what our political job is. And I understand that's not your task here today.

But you referred to how the value preferences our society will govern that political debate. And one of the issues confronting the Budget Committee is looking at all those value preferences of the new administration, of the people whom we represent, and certainly there is, at least according to the press, a number of significant spending increases that the new administration may wish to come to the Congress and request, having to do with defense or the missile defense shield or whatever other matters they may include in their budget.

So I think that, from my perspective, as a new member on this committee, I take to heart your constant refrain about a disciplined structure, because I don't believe I've heard you veer from that discipline and balance. What I believe I've heard today is that, in your considered opinion, we may be moving into a different terrain where the challenge of managing the surplus may be greater than any of us ever could have anticipated in the past. Is that a correct statement, Mr. Chairman?

GREENSPAN: It is, Senator. Let me just say, the answer is yes, I do absolutely agree with that. It is certainly the case, and I'd say parenthetically, that part of the solidity of shoring up our belief about growth and structural productivity has been the performance of the last six months, but most of it is not. Most of it is really a very detailed analysis of what the underlying forces of labor productivity growth has been over the last five years.

I emphasize the issue of the last six months because through the five years that we were observing a very important increase in the continuous increase in the growth rate of productivity, we knew that we were in a cycle that was only going in one direction, and that the ultimate test of whether you've changed the long-term trend can only occur after the full cycle.

And while I would scarcely argue that we have come to full cycle as yet, the last six months, at least preliminarily, indicate that the level of productivity growth has held up far more than one would have contemplated if we were back in the pre-1995 era.

So to be sure, I think you are correct in pointing out that that is an issue that I've pointed to and I think is important. But I want to emphasize that it is only a part, perhaps only a modest part, of the underlying analysis that we, at the Federal Reserve Board, and indeed many other economists around the country have been involved in to conclude that something really quite important has happened in this country. And its implications, I don't think, have yet been fully thought through.

CLINTON: In fact, Mr. Chairman, I think I've heard you use the word ``unprecedented,'' with respect to the economic environment in which we find ourselves.

GREENSPAN: It is unprecedented, perhaps with the exception of the turn of the 20th century, where the quite remarkable set of technologies that emerged in that period dramatically altered the way Americans lived in the, say, first 30 years of the 20th century.

But you have to back that far to find analogies which square with either the nature of the technologies that were changing or the numbers on productivity which we're currently now observing.

CLINTON: But with respect to our challenge here on the Budget Committee, I think both Senator Byrd and Senator Nelson rightly pointed out that we don't have to go back very far to see the impact of fiscal policy with respect to the economy.

And the note of caution as we craft this budget, to me, is that we have to try to strike a balanced approach. And what that balanced approach is, taking into account the evidence that we do have, despite the unprecedented nature or at least the 100-year unprecedented nature of the economic productivity trends we find in this economy, coupled with the value preferences that will be expressed through the legislative process here, at least in my view, calls for caution.

You know, we don't have to make decisions this year that could conceivably have unintended consequences in the outyears that would be very difficult to recover from. You know, I respect the comment about the tax burden on our children, but we also are imposing other burdens on our children if we return to deficits, or if we do not adequately prepare for the retirement of the baby boom generation so that entitlement programs, in whatever way we can provide, will be available so that the burden doesn't shift to our children.

So I hear what your saying in this new challenge. Increases surpluses is certainly a high-class problem to have, as opposed to what we faced in the 80s and the hard decisions that were made in this body in 1993. But I do believe that you are still counseling us to stay on the course of fiscal discipline, but to now take into account the achieving of that balance despite the increasing surpluses and what that mean for the management of the economy down the road.

GREENSPAN: I certainly agree with that, Senator.

DOMENICI: Thank you very much, Senator.

We have been here a long time, and we have lost a lot of senators. But I think it's fairly noteworthy, Senator, that a lot of United States senators have been heard from this morning. I think that's a very good sign.

And, Dr. Greenspan, it means that people are interested in what you have to say, and I count myself in that group.

BYRD: Mr. Chairman, but would you yield to me just very briefly?

DOMENICI: Of course.

BYRD: In my remarks, I referred to Senate Rule 28 and the fact that we had negated that about four years ago. That has been rectified now in two of the last appropriation bills were passed last year.

Senator Stevens and I included language reinstituting Senate Rule 28. And we were supported in that by Senator Lott and by Senator Daschle, so we've cleaned that up. I hope we don't get careless again.

DOMENICI: For what it's worth, you had my support, too.

BYRD: Absolutely, we had your support.

DOMENICI: Let me just say, Senator Byrd, I wanted to make a couple of comments to you about the past and a couple about your statement. And then I wanted to thank Alan Greenspan for doing what he did here today, because, Senator, first of all, I don't believe that you have to worry about the anchor.

The anchor is there. What the anchor has done is found that the water that the anchor was in was changing. And he put up the anchor and set it down another place for us.

But that anchor has constantly said, ``We surely ought to watch out for deficits. We ought to be sure we're not overspending.'' It said that all along.

But I think people who are wondering whether he has changed in philosophy or the like, I think they ought to just listen to what he said. He said the facts are that when you plan to get to no debt, that because the surpluses are so big, you can't get the debt down that quickly.

And you're going to have at the end of this a huge dresser drawer full of American government cash, literally. And it's going to have to be invested. And his concern is, it's going to be invested all over the place. I mean, maybe there won't be any private sector mortgages left in three or four years because government might buy them all.

And it's not because he has told us something last year and he's changed it this year. The facts are now coming out that when you get down to that point, on a straight line, put everything on the debt so that you're getting rid of it by '06, he's probably saying take a look and maybe it should be '08; that's my guess. It's '06, maybe it's '08 and a half, and you'll be through it. But even if you say '06, you can't get there because you can't buy up the debt that quickly and a few other technical things that he has commented on.

So I wish I could have said this with more senators present, but I think, before we are finished, we will find out that he is not changing; he's telling us there is a new set of facts as estimators estimate facts. And inherent in all this is the risk that we will continue to maintain a high level of productivity.

I think you're right, Senator, if we don't do that, then all of this is not going to come out right. But I think he's telling us optimistically this is due to technology changes, and he sees no abrupt end to technology changes that are going to impact on productivity, if I understand what you're saying. Is that correct, Mr. Chairman?

GREENSPAN: It is correct, Senator.

DOMENICI: Now, having said that, let me say, Senator Byrd, we all acknowledge that you helped craft the Budget Act. And we acknowledge that it was a hard job for Senator Robert Byrd to draft this law and concede to a reconciliation bill the power that we have taken from the bill, because it eliminates the two most coveted characteristics about the U.S. Senate on a reconciliation bill; no debate, and amendments are limited--precipitous, dramatic.

Now that means, in this act, we made a special exception to try to get at this problem of the debt and fiscal policy by changing the actual rules of the Senate dramatically. And I know you are probably privately frowning on whether we ought to ever do it again. It expires in a couple of years, and we all have to be thinking about that, and I'm sure that the distinguished senator is.

But I do thank you for letting us experiment with these new ideas for all these years. We have stretched them and you probably sometimes wondered if we should do the things with our budget resolution. We hope this year we can once again do multi-year budgeting, and I think everybody nodded when the chairman said, ``Well, you've got to do multi-year estimates on Social Security, on Medicare.'' So you know, we don't rely on those as if they are gospel, but we've got to do them, and so we've got to do something on all the rest of our budget matters.

I would say in closing, for my remarks, and then yield to all of you, I believe when we are finished looking at this, there will be money--that we will have to be concerned about spending too much money, because it's going to be a lot of money around, a lot of money around.

And even if we put in a $1.2, $1.3 trillion tax cut, spread over a decade, there will be a lot of money around. In fact, more than we've ever seen. All of it is based on estimates, I say to my friend. But it will be, as estimating goes, what I've just described will be the case. Because the surplus is truly growing at a huge rate, and it's probably because the productivity is staying high and inflation is staying low, and here it comes.

The higher bracket of taxpayers are paying very, very large amounts of taxes because of all of this. And that's a fact too, which will come out in further hearings.

In addition to tax rates, I mean, there's a lot of other things. You're paying on capital investments, you're paying on a lot of things out there that have occurred.

I thank you for your time. And I'm sorry that I had to use time instead of asking you a question, but I thought I would at least what I thought this day was about.

Senator Conrad?

CONRAD: Thank you, Mr. Chairman. And, again, thank you Chairman Greenspan.

And one of the things I'd like to conclude on is, in reading the press reports that have been coming out of here, I find almost none of the cautionary language that you used.

And I'd like to caution the press: I would hope that they would share with the American public the cautionary language that you included, because I think it was responsible to do so.

And I'd relate to your last couple of sentences, and you said, ``With today's euphoria surrounding the surpluses, it's not difficult to image a hard-earned fiscal restraint developed in recent years rapidly dissipating.'' You went on to say, ``We need to resist those policies that could readily resurrect the deficits of the past and the fiscal imbalances that followed in their wake.'' And I assume by that you're talking both on the spending side and the tax side.

GREENSPAN: I am, Senator.

CONRAD: So I hope that message goes out clearly, that it is very important that we maintain fiscal discipline here.

You also said to us here in the Budget Committee a couple of years ago that the large surpluses projected over the next 15 years, if they actually materialize, can significantly reduce the fiscal pressure crated by our changing demographics, which was another, I think, part of your message here today, that we have an opportunity here, not only to deal with what is a happy circumstance of the surpluses, but to deal with the longer term fiscal imbalances that we confront. Am I correct in interpreting your remarks in that way, sir?

GREENSPAN: Yes, sir.

CONRAD: Well, again, I thank you very much for what you've done. And I hope the message is clear to people that it's not ``Open Sesame'' here. This isn't the time to open the floodgates and have massive new spending and tax cuts that go too far, but that in all of these things, we have to be balanced. That really will be the test for this committee and this Congress and this administration.

And, again, I thank the chairman.

DOMENICI: Anything further?

First, let us thank you again, not only for today, but for all you do for our country and the help you're giving this committee, which has a big job this year.

We stand at recess.