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MONETARY POLICY AND THE STATE OF THE ECONOMY HEARING BEFORE THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED NINTH CONGRESS FIRST SESSION FEBRUARY 17, 2005 Printed for the use of the Committee on Financial Services Serial No. 109–4 ( U.S. GOVERNMENT PRINTING OFFICE WASHINGTON 22–160 PDF : 2005 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001 VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 G:\DOCS\22160.TXT FIN1 PsN: MICAH HOUSE COMMITTEE ON FINANCIAL SERVICES MICHAEL G. OXLEY, Ohio, Chairman JAMES A. LEACH, Iowa RICHARD H. BAKER, Louisiana DEBORAH PRYCE, Ohio SPENCER BACHUS, Alabama MICHAEL N. CASTLE, Delaware PETER T. KING, New York EDWARD R. ROYCE, California FRANK D. LUCAS, Oklahoma ROBERT W. NEY, Ohio SUE W. KELLY, New York, Vice Chair RON PAUL, Texas PAUL E. GILLMOR, Ohio JIM RYUN, Kansas STEVEN C. LATOURETTE, Ohio DONALD A. MANZULLO, Illinois WALTER B. JONES, JR., North Carolina JUDY BIGGERT, Illinois CHRISTOPHER SHAYS, Connecticut VITO FOSSELLA, New York GARY G. MILLER, California PATRICK J. TIBERI, Ohio MARK R. KENNEDY, Minnesota TOM FEENEY, Florida JEB HENSARLING, Texas SCOTT GARRETT, New Jersey GINNY BROWN-WAITE, Florida J. GRESHAM BARRETT, South Carolina KATHERINE HARRIS, Florida RICK RENZI, Arizona JIM GERLACH, Pennsylvania STEVAN PEARCE, New Mexico RANDY NEUGEBAUER, Texas TOM PRICE, Georgia MICHAEL G. FITZPATRICK, Pennsylvania GEOFF DAVIS, Kentucky PATRICK T. MCHENRY, North Carolina BARNEY FRANK, Massachusetts PAUL E. KANJORSKI, Pennsylvania MAXINE WATERS, California CAROLYN B. MALONEY, New York LUIS V. GUTIERREZ, Illinois NYDIA M. VELÁZQUEZ, New York MELVIN L. WATT, North Carolina GARY L. ACKERMAN, New York DARLENE HOOLEY, Oregon JULIA CARSON, Indiana BRAD SHERMAN, California GREGORY W. MEEKS, New York BARBARA LEE, California DENNIS MOORE, Kansas MICHAEL E. CAPUANO, Massachusetts HAROLD E. FORD, JR., Tennessee RUBÉN HINOJOSA, Texas JOSEPH CROWLEY, New York WM. LACY CLAY, Missouri STEVE ISRAEL, New York CAROLYN MCCARTHY, New York JOE BACA, California JIM MATHESON, Utah STEPHEN F. LYNCH, Massachusetts BRAD MILLER, North Carolina DAVID SCOTT, Georgia ARTUR DAVIS, Alabama AL GREEN, Texas EMANUEL CLEAVER, Missouri MELISSA L. BEAN, Illinois DEBBIE WASSERMAN SCHULTZ, Florida GWEN MOORE, Wisconsin, BERNARD SANDERS, Vermont ROBERT U. FOSTER, III, Staff Director (II) VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 G:\DOCS\22160.TXT FIN1 PsN: MICAH CONTENTS Page Hearing held on: February 17, 2005 ............................................................................................ Appendix: February 17, 2005 ............................................................................................ 1 51 WITNESS THURSDAY, FEBRUARY 17, 2005 Greenspan, Hon. Alan, Chairman, Board of Governors of The Federal Reserve System ................................................................................................................... 7 APPENDIX Prepared statements: Oxley, Hon. Michael G. .................................................................................... Baca, Hon. Joe .................................................................................................. Gillmor, Hon. Paul E. ....................................................................................... King, Hon. Peter T. .......................................................................................... Greenspan, Hon. Alan ...................................................................................... ADDITIONAL MATERIAL SUBMITTED FOR THE 52 54 57 58 59 RECORD Oxley, Hon. Michael G.: Written letter to Hon. Alan Greenspan, March 1, 2005 ................................ Greenspan, Hon. Alan: Monetary Policy Report to the Congress ........................................................ Written response to questions from Hon. Michael G. Oxley ................................ Written response to questions from Hon. Wm. Lacy Clay ................................... Written response to questions from Hon. Luis V. Gutierrez ................................ Written response to questions from Hon. Barbara Lee ........................................ Written response to questions from Hon. Deborah Pryce .................................... 71 72 101 102 106 108 111 (III) VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 G:\DOCS\22160.TXT FIN1 PsN: MICAH VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 G:\DOCS\22160.TXT FIN1 PsN: MICAH MONETARY POLICY AND THE STATE OF THE ECONOMY Thursday, February 17, 2005 U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. The committee met, pursuant to call, at 10:04 a.m., in Room 2128, Rayburn House Office Building, Hon. Michael Oxley [chairman of the committee] presiding. Present: Representatives Oxley, Leach, Baker, Pryce, Castle, King, Lucas, Ney, Kelly, Paul, Gillmor, Ryun, Manzullo, Jones, Biggert, Shays, Miller of California, Tiberi, Kennedy, Feeney, Hensarling, Garrett, Barrett, Harris, Gerlach, Pearce, Neugebauer, Price, Fitzpatrick, Davis of Kentucky, McHenry, Frank, Kanjorski, Waters, Sanders, Maloney, Gutierrez, Velazquez, Watt, Ackerman, Carson, Sherman, Meeks, Lee, Moore of Kansas, Capuano, Ford, Hinojosa, Crowley, Clay, Israel, McCarthy, Baca, Matheson, Lynch, Miller of North Carolina, Scott, Davis of Alabama, Green, Cleaver, Bean, Wasserman Schultz, and Moore of Wisconsin. The CHAIRMAN. [Presiding.] The committee will come to order. We are indeed honored again to have Chairman Greenspan, Chairman of the Fed, testify before the committee. And I thank, Mr. Chairman, you in advance for your testimony and the time that you are going to spend with us today. Mr. Chairman, we all know that the economy is nearly completely recovered. We have had four strong quarters of GDP growth, and the total number of jobs, a little more than 130 million, is back to its peak from the winter of 2000-2001. Productivity remains impressive, and the market is strong, with the Dow looking as if it might touch the 11,000 mark again. Job creation remains robust, and the unemployment rate, at 5.2 percent, is at the same level it stood at in 1997, before the unprecedented period in which it briefly went below 4 percent, a rate few imagine we will ever see again. So, Mr. Chairman, thanks to the twin injections of liquidity, the President’s tax cuts, and the Fed’s lowering of short-term interest rates, our American economy has once again shown itself to be resilient enough to withstand multiple shocks. Aside from our strong current position, there are continued challenges ahead that we will discuss today. Among them are the trade deficit, the budget deficit, and Social Security. Mr. Chairman, you are perhaps America’s most famous budget hawk. You favor lower taxes as long as they are offset by spending cuts. I am sure you welcome the President’s initiatives outlined in (1) VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 2 his budget and in the State of the Union speech. The President has laid out a cost-cutting program, and he has faced the Social Security problem head on. President Bush knows that the numbers don’t lie, and they are clearly on the side of a need to reform the system. Mr. Chairman, you led the commission that assisted in significant reform of Social Security under President Reagan in 1983, and I am certain all committee members await your views on this matter. We all know the facts, that in less than 15 years the system starts paying more out than it is paying in, and that if we don’t do something quickly the options will be higher taxes, benefit cuts, or some blend of the two. Chairman Greenspan, I stand in complete agreement with the President, and in important part the answer is personal accounts. From its creation, Social Security was never envisioned as the sole answer to an individual’s retirement needs, but as a supplement. However, now, two-thirds of its recipients rely on Social Security for at least half or more of their retirement income. That isn’t good for them, and it isn’t good for the country, in my view. Mr. Chairman, I believe President Roosevelt, who created the Social Security system, felt the same way. As the Wall Street Journal has pointed out, in a speech to Congress in 1935 FDR anticipated the need to move beyond the pay-as-you-go financing method. Chairman Greenspan, that is two presidents—the Democrat founder of Social Security and the Republican to whom it falls to save the Social Security system—in agreement on the issue of personal accounts. There will be some heavy lifting to get the system right, of course, and this committee will be in support. We have an obligation to America and to future generations to address this problem. So, Mr. Chairman, in the week that baseball reports for spring training, I think we should view this effort as the start of a new season as well, a season in which Congress will step up to the plate with intelligent, long-term reform of Social Security. We seek to extend the ownership society to all Americans, and let us broaden that concept of ownership to retirement. With that, I am pleased to yield to the Ranking Member, the gentleman from Massachusetts, Mr. Frank. Mr. FRANK. Thank you, Mr. Chairman. I am in somewhat less agreement with the President than you are, although I don’t wish to be totally in opposition. And I must say I look forward to supporting the President in his attack on bloated and inefficient and wasteful farm subsidies, and I am sure I will have strong support from these free market conservatives on the other side as we attempt to bring the free market principles to the largest sector of the American economy from which they have long been absent. With regard to Social Security, I do appreciate the Chairman making it very clear, as others have, that the question of private accounts and the question of the solvency of the system are, in fact, quite separate; that the President himself has acknowledged this. So, yes, there are questions about solvency. They are separate from private accounts. And I will return to them. VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 3 But I want to talk about what I think is the overarching problem in the American economy today. And I want to congratulate the Chairman—there are some advantages to going second when the Chairman testifies, and one is that we don’t have to worry about poaching on his right to be the presenter of his own ideas. He testified yesterday in the Senate. So I am not reluctant to call attention to page five of his testimony today in the last couple of paragraphs. And I think what we have is a serious problem in America. The economy has begun again to grow, but it is growing in a way that is exacerbating inequality. We are getting, as the Chairman has noted—although there are some hopes this may improve in the future—fewer jobs for each additional unit of GDP. We have a failure of wages on the whole to rise proportionate to the economy. We have—although it isn’t commented on here, we have discussed it—the lack of health care and the falling away of health care for many people. Some have said, ‘‘Well, don’t worry about inequality; that is just a sign of pettiness. As long as everything is getting better, why do you worry about inequality?’’ And I want to call attention to the quite profound remarks of Chairman Greenspan on this subject when he talks about the problem that we now have where skilled workers’ wages, skilled in terms of this economy, are increasing and we have got a greater differential between people who are skilled and people who aren’t. As he says, ‘‘If the skill composition of our work force meshed fully with the needs of our increasingly complex capital stock, wage-skill differentials would be stable—for the past 20 years, the supply of skilled, particularly highly skilled workers has failed to keep up with the persistent rise in demand for such skills. Conversely, the demand for lesser skilled workers has declined.’’ And this is quite profound. ‘‘In a democratic society,’’ you say, Mr. Chairman, ‘‘such a stark bifurcation of wealth and income trends among large segments of the population can fuel resentment and political polarization.’’ And I think you have pointed to a central problem, and you repudiate those who say don’t worry about it. And I think you are right to worry about it, but here is my concern. You then go on to say that one of the most important tasks for the social stability of this country, as well as our economic future— because as you note, a badly polarized society is going to be one in which efforts to move forward toward economic rationality will be resisted sometimes when they shouldn’t be; a new rationality may creep in, an anger, a resistance to economic rationalization. And what you say is we need to increase the skills of lesser skilled people, reduce the excess of lesser skilled workers, expedite the acquisition of skills by all students both through formal education, by on-the-job training. I would add that it is also important, since we know this isn’t going to happen instantly, that we alleviate the negative effects of this while it happens. You are quite right to note that resentment will build up. VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 4 With all the success we could expect in education and on-the-job training, years will ensue before we make a substantial dent in this. We have a couple of problems now. Public policy, particularly recently, has cut back in precisely those areas that alleviate the impact of inequality. We are doing less for those who get less. We are cutting back there. Similarly, our ability to go forward, the private sector will play a major role in on-the-job training and elsewhere. But no one expects people trying to make a profit to fund all of that. Some significant part of that is going to have to be funded publicly through education, through community colleges, through payment through on-the-job training. The problem we have is this. The Chairman said you are a very famous deficit hawk. You may be one of the few consistent deficit hawks left here in the capital because people’s deficit hawkishness does appear to ebb and flow according to the programs. If, however, we maintain the current situation in which we have a high priority on reducing the deficit and we continue in existence all of the tax cuts, then the inevitable consequence is very substantial reductions in public spending. With defense out of this loop, with homeland security out of this loop, all of the programs that either alleviate the consequences of inequality or help us reduce this skill disparity in the future are under the gun. And so I fear—this is a question I would address to you—how do we alleviate the effects of this inequality so that you reduce the negative feelings that you correctly point out are a result? And how do we increase our ability to get these skills to people; how do we improve education; how do we improve on-the-job training? Money is not the only answer. But no one, I think, would say that you can do something of that magnitude in this society without additional resources. And the dilemma is, if you are going to deal with deficit reduction entirely through reductions in domestic public spending, at the state and local level and at the federal level, I think you have a situation in which the situation which you quite eloquently decry will get worse rather than better. And that is a subject I hope to pursue. The CHAIRMAN. Gentleman’s time has expired. Now, recognize the chairwoman of the Domestic and International Monetary committee, the gentlelady from Ohio, Mrs. Pryce. Ms. PRYCE. Thanks, Chairman Oxley. Welcome, Chairman Greenspan, and thank you for taking the time to discuss with us your insights on monetary policy and many other things I am sure we will hear from you. I am especially happy to be returning to the committee for these very special opportunities. This will be an exciting and very busy year for us. As you know, the President has outlined an aggressive second-term agenda, which includes Social Security, tax and legal reform. VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 5 Social Security is an issue that, if addressed today, could safeguard the future of millions of young people, and, if ignored, could become the biggest shortcoming of a generation. As you noted yesterday, the existing structure isn’t working, and I am sure that this committee will have plenty of questions on this issue, and I look forward to hearing your answers later in the morning. Last month, the Bureau of Labor Statistics released revised data showing gains of 2.7 million jobs for 20 straight months, with those gains beginning of June of 2003, which was 3 months earlier than previously estimated. My home state of Ohio, which has been hit hard by manufacturing job loss over the last 2 years, has recently seen an increase in workers returning to the job market, and Ohio is not alone in that recovery. The national unemployment rate ticked down 0.2 percentage points in January, the lowest rate since September of 2001. Mr. Chairman, reflection on the measured rise in inflation taken by FOMC and the role you had in it, I am particularly interested in hearing you address the role raising rates will have on manufacturing states like Ohio, where the manufacturing sector is a large part of the economy. Also, I would like to hear how you feel it will affect the housing market, which has been such a stable influence in the economy over the last several years. I appreciate, Mr. Chairman, your support and encouragement of deregulation and technological innovation. You have said before that continued movement on these fronts, along with maintenance of a rigorous and evolving education system, will drive our economy into the future. I am particularly interested to hear you speak in more length on the demands put on our education system. You have voiced concern in the past that while our fourth graders outperform their peers around the world in math and science, our eighth graders are about average, and our 12th graders rank near the bottom. How can this happen? I hope to discuss with you now and in the future possible reasons for this failure and how best we resolve our education system to graduate more skilled workers and how that will affect our economy. I am also concerned about the state of financial literacy among all Americans. I am concerned over the state of our nation’s savings rate, something I was glad to hear you address in yesterday’s hearing and I hope you discuss further today. We must grow our economy and not our government, and we must change the current system of Social Security to ensure its solvency for our children. Through fiscal discipline and by implementing policies that increase the rate of personal savings and retirement security, we can provide financial freedom to all Americans and allow them to take ownership over their families’ future and prosperity. I thank you, Mr. Chairman, for your appearance today. I look forward to your testimony. VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 6 And with that, I yield back, Mr. Chairman. The CHAIRMAN. Thank the gentlelady. Before I recognize the Ranking Member of the subcommittee, I want to first recognize a good friend, former Ranking Member from the committee, John LaFalce. Good to have you back, John. And probably looks a little different on that side of the dais. The gentlelady from New York, Ms. Maloney. Mrs. MALONEY. Thank you. It is always a pleasure to welcome Chairman Greenspan. I look very much forward to your testimony on the economy and monetary policy, but I would also like to get your views on some broader issues regarding the sharp turn in economy policy from the late 1990s, when we eliminated the deficit and started to pay down the debt, to now, when once again we see deficits as far as the eye can see and mounting debt. The state of the economy at present deeply disturbs me. This administration has repeatedly set records for debts and deficits. In the 1990s, we were looking toward a budget surplus of $5.6 trillion over 10 years. Now we have a budget deficit of over $400 billion, with no end in sight. We have raised the debt limit three times in this administration, and our debt now stands at well over $7 trillion, an unfortunate record. That means that $26,000 is owed by every man, woman and child in America, the highest it has ever been. Their newest record is an all-time high trade deficit for last year: nearly $618 billion. The debt and deficit policies of this administration place a severe burden on our economy because we are borrowing huge sums from foreign countries. Some of our allies are warning us that they are approaching the limit of their willingness to buy our debt. It has gotten to the point where some European bankers who were in Washington, D.C., last week were asking if the dollar will continue to be the reserve currency of the world. So I want to know, Mr. Greenspan, are you really comfortable with the policies of what I can only call the debt-and-deficit Republicans who are now running our economic policy? Chairman Greenspan, your testimony explains why the Federal Reserve is likely to continue what it calls its measured policy of interest rate increases, but I would hope that you would take a second look at this policy. I am concerned that we are not seeing the kind of robust job growth we would normally see in a strong economy. The Bush administration is proud of its job creation over the past 20 months, but when you break it down, we are only gaining 140,000 jobs per month, barely enough to keep pace with normal growth in the labor force. Most indicators of workers’ wages show that they are barely keeping up with inflation, and wages may actually be falling at the lower end of wage distribution. That hardly sounds like an economy that needs to be slowed by interest rate hikes. On the question of debt, I am sure you cannot be happy with what has happened to the federal budget deficit since 2001. And frankly, Mr. Chairman, you had something to do with that, when VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 7 you gave the green light to the administration’s tax policies in 2001. But you have repeatedly said that persistent budget deficits are toxic to the economy and that deficit reduction is one of the best strategies to have for raising national savings and boosting future standards of living. And I completely agree with you on that. That brings me to the administration’s proposal for phasing out Social Security by privatizing it. I know you share the President’s philosophy about privatized accounts, but you cannot share his budget arithmetic. Experts estimate that the creation of privatized accounts would add upwards of $4 trillion to $5 trillion to our national debt in the first 20 years alone. I believe that you told the Senate yesterday that the privatized accounts proposal would do absolutely nothing to address the solvency of Social Security and would do nothing to boost national savings, yet it adds new problems to our debt. I believe you also said that no one knows how financial markets would respond to all of that debt coming on the market. So I ask mainly what possible benefit could there be to plunging ahead with such a reckless policy when we already have a deficit and debt problem that is out of control? As always, I look forward to your testimony. The CHAIRMAN. The gentlelady’s time has expired. We now turn to the distinguished Chairman of the Federal Reserve. Chairman Greenspan, welcome back to the committee. And we appreciate your spending some time with us. And take as much time as you would like. STATEMENT OF HON. ALAN GREENSPAN, CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Mr. GREENSPAN. Thank you very much, Mr. Chairman. I request that the full text of my remarks be included for the record. The CHAIRMAN. Without objection. Mr. GREENSPAN. Mr. Chairman and members of the committee, in the seven months since I last testified before this committee, the U.S. economic expansion has firmed; overall inflation has subsided and core inflation has remained low. Over the first half of 2004, the available information increasingly suggested that the economic expansion was becoming less fragile and that the risk of an undesirable decline in inflation had greatly diminished. Toward midyear, the Federal Reserve came to the judgment that the extraordinary degree of policy accommodation that had been in place since the middle of 2003 was no longer warranted and in the announcement released at the conclusion of our May meeting signaled that a firming of policy was likely. The Federal Open Market Committee began to raise the federal funds rate at its June meeting, and the announcement following that meeting indicated the need for further, albeit gradual, withdrawal of monetary policy stimulus. Around the same time, incoming data suggested a lull in activity as the economy absorbed the impact of higher energy prices. Much as had been expected, this soft patch proved to be short-lived. Accordingly, the Federal Reserve has followed the June policy move with similar actions at each meeting since then, including our most VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 8 recent meeting earlier this month. The cumulative removal of policy accommodation to date has significantly raised measures of the real federal funds rate, but by most measures it remains fairly low. The evidence broadly supports the view that economic fundamentals have steadied. Consumer spending has been well maintained over recent months, buoyed by continued growth in disposable personal income, gains in net worth, and accommodative conditions in credit markets. Households have recorded a modest improvement in their financial position over this period, to the betterment of many indicators of credit quality. For their part, business executives apparently have become somewhat more optimistic in recent months. Capital spending and corporate borrowing have firmed noticeably, but some of the latter may have been directed to finance the recent backup in inventories. Mergers and acquisitions, though, have clearly perked up. Even in the current, much improved environment, however, some caution among business executives remains. Although capital investment has been advancing at a reasonably good pace, it has nonetheless lagged the exceptional rise in profits and internal cash flow. As opposed to the lingering hesitancy among business executives, participants in financial markets seem very confident about the future and, judging by the exceptionally low level of risk spreads in credit markets, quite willing to bear risk. This apparent disparity in sentiment between business people and market participants could reflect the heightened additional concerns of business executives about potential legal liabilities, rather than a fundamentally different assessment of macroeconomic risks. Turning to the outlook for costs and prices, productivity developments will likely play a key role. The growth of output per hour slowed over the past half year, giving a boost to unit labor costs after 2 years of declines. Going forward, the implications for inflation will be influenced by the extent and persistence of any slowdown in productivity. To date, with profit margins already high, competitive pressures have tended to limit the extent to which cost pressures have been reflected in higher prices. The inflation outlook will also be shaped by developments affecting the exchange rate of the dollar and oil prices. Although the dollar has been declining since early 2002, exporters to the United States apparently have held dollar prices relatively steady to preserve their market share, effectively choosing to absorb the decline in the dollar by accepting a reduction in their profit margins. However, the recent somewhat quickened pace of increases in U.S. import prices suggests that profit margins of exporters to the United States have contracted to the point where foreign shippers may exhibit only limited tolerance for additional reductions in margins should the dollar decline further. The sharp rise in oil prices over the past year has no doubt boosted firms’ costs and may have weighed on production, particularly given the sizable permanent component of oil price increases suggested by distant-horizon oil futures contracts. VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 9 However, the share of total business expenses attributable to energy costs has declined appreciably over the past 30 years, which has helped to buffer profits and the economy more generally from the adverse effect of high oil and natural gas prices. All told, the economy seems to have entered 2005 expanding at a reasonably good pace, with inflation and inflation expectations well anchored. On the whole, financial markets appear to share this view. In particular, a broad array of financial indicators convey a pervasive sense of confidence among investors. Over the past two decades, the industrial world has fended off two severe stock market corrections, a major financial crisis in developing nations, corporate scandals, and of course, the tragedy of September 11, 2001. Yet overall economic activity experienced only modest difficulties. Thus, it is not altogether unexpected or irrational that participants in the world marketplace would project more of the same going forward. Yet history cautions that people experiencing long periods of relative stability are prone to excess. We must thus remain vigilant against complacency, especially since several important economic challenges confront policy-makers in the years ahead. Prominent among these challenges in the United States is the pressing need to maintain the flexibility of our economic and financial system. This will be essential if we are to address our current account deficit without significant disruption. Central to that adjustment must be an increase in net national saving. This serves to underscore the imperative to restore fiscal discipline. Beyond the near term, benefits promised to a burgeoning retirement-age population under mandatory entitlement programs, most notably Social Security and Medicare, threaten to strain the resources of the working-age population in the years ahead. Real progress on these issues will unavoidably entail many difficult choices. But the demographics are inexorable and call for action before the leading edge of baby boomer retirement becomes evident in 2008. Another critical long-term economic challenge facing the United States is the need to ensure that our workforce is equipped with the requisite skills to compete effectively in an environment of rapid technological progress and global competition. But technology and, more recently, competition from abroad have grown to a point at which the demand for the least-skilled workers in the United States and other developed countries is diminishing, placing downward pressure on their wages. These workers will need to acquire the skills required to compete effectively for the new jobs that our economy will create. Although the long-term challenges confronting the United States economy are significant, I fully anticipate that they will ultimately be met and resolved. In recent decades, our nation has demonstrated remarkable resilience and flexibility when tested by events, and we have every reason to be confident that it will weather future challenges as well. VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 10 For our part, the Federal Reserve will pursue its statutory objectives of price stability and maximum sustainable employment, the latter of which we have learned can best be achieved in the long run by maintaining price stability. This is the surest contribution that the Federal Reserve can make in fostering the economic prosperity and well being of our nation and its people. Mr. Chairman, thank you very much and I look forward to your questions. [The prepared statement of Hon. Alan Greenspan can be found on page 59 in the appendix.] The CHAIRMAN. Thank you, Mr. Chairman. Let me begin with some questions, as you might guess, the issue du jour, Social Security and Social Security reform, and I think correctly put forward by the President. You have mentioned, for example, that the baby boomers really start drawing down on Social Security as early as 2008. So it does, I think, hopefully focus our attention on that very real fact and how we deal with it. This committee, of course, has been very interested in issues like capital formation, savings rates, interest rates, and the like, and you have been very helpful over the time that I have chaired this committee in leading us through some very difficult issues. One of the issues that I wanted to talk to you about today is the individual accounts and how they—not only how they would be structured, because I think our committee will have a serious interest in how that is accomplished—and secondly, what those individual accounts can do for the economy, and I would be interested in your comments. It seems to me that given an opportunity to create millions of worker capitalists in this country—to introduce a large segment of the population to issues like compound interest, dollar cost, averaging, building up ownership in one’s retirement—is a pretty exciting proposition. What kind of increase would we have, for example, in the pool of capital available to American companies to expand and modernize and be competitive in a global economy? I saw a study the other day that said if the average worker were to invest half of his account in a stock fund, index fund, and half in a bond index fund, that the creation of those bond index funds and those savings would double the amount of money in the current bond market, which I would assume based on what you have said in the past would have a significant positive impact on interest rates going forward. I just throw those out to you because too many times I think we get lost in the issue of Social Security, and it is an important issue, but also what the overall effect could be on our country, that is individual citizens, as well as the economy. And I will just turn you loose on that. Mr. GREENSPAN. Well, Mr. Chairman, I think the first thing that we have to focus upon is this extraordinary shift that is about to occur, starting in 2008, in which roughly 30 million people are going to leave the labor force over the next 25 years and enter into retirement. VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 11 This creates a very significant slowing in the rate of economic growth. When the rate of growth of the working-age population relative to the total goes down—and even with productivity increasing at a reasonably good clip the rate of growth in GDP per capita must slow down. This is going to cause a confrontation in the marketplace between the desire on the part of retirees to maintain essentially what we call their replacement rate—namely, that a standard of living relative to the standard of living they enjoyed just prior to retirement will be maintained. If that is done, it will put significant pressure on the workingage-population economic growth, and so we have to find a way to get a larger pie to solve both sides of this. The advantage of having individual accounts is over a fairly broad spectrum, but the one that I think is most important actually relates to the issue which your Ranking Member mentioned before. These accounts, properly constructed and managed, will create, as you also point out, a sense of increased wealth on the part of the middle-and lower-income classes of this society, who have had to struggle with very little capital. And while they do have a claim against Social Security system in the future, as best as I can judge, they don’t feel as though it is personal wealth they way they would with personal accounts. And I think that is a quite important issue with respect to this. The major issue of personal accounts is essentially economic, in the sense that, confronted with the very large baby boom retirement and the economic difficulties associated with it, the structure of essentially a pay-as-you-go system, which is what our Social Security system is, which worked exceptionally well for almost 50, 60 years, that system is not well suited to a period in which you do not any longer have significant overall population growth, and therefore a very high ratio of workers to retirees. And it is no longer the case, as existed in the earlier years, that life expectancy after age 65 was significant. We have been fortunate in that, for a number of reasons, our longevity has increased measurably. But it does suggest that if we are going to create the type of standard of living that we need in the future for everybody, we are going to need to build the capital stock, plant and equipment, because that is the only way we are going to significantly increase the rate of productivity growth which will be necessary to supply the real goods and services that the individuals who are retired at that point and the individuals who are activity working would sense their right in this economy. And if we are going to do that, we have to have a significant increase in national savings, because even though it doesn’t exactly tie one to one because there are other ways in which productivity rises, the central core of productivity increase is capital investment. And to have capital investment you need to have savings. Now, we in the United States have had a very low national or domestic savings rate and have been borrowing a good part of it from abroad to finance our existing capital investment. We are obviously not going to be able to do that indefinitely, which puts even more pressure on building up our domestic savings. VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 12 And what this means is that whatever type of structure we have for retirement, it has to be fully funded. The OASI has $1.5 trillion in the trust fund at this stage. The required full funding is over $10 trillion. In short, we do not have the mechanisms built into our procedures for retirement and retirement income and pensions which are creating a degree of savings necessary to create the capital assets which are a precondition to get a rate of growth in productivity, given the slow growth in the labor force which we project going forward in order to create enough GDP for everybody. So my major concern is that the current model, which served us so well for so many decades, is not the type of model we would certainly construct from scratch, and we have to move in a different direction. And one of the reasons that I think we have to move toward a private individual account system is they, by their nature, tend to be significantly fully funded, even if they are defined contribution plans, because individuals know what they need for the future and they tend to put monies away adequately to create the incomes they will need in retirement. So I think this is an extraordinarily important problem that exists. And I won’t even go on to mention the fact that the Medicare shortfall, so far as the issue of where full funding lies, is several multiples in addition to what we confront in Social Security. The CHAIRMAN. Thank you, Mr. Chairman. I think the clocks are not working right. We will have to get a—— Mr. FRANK. Don’t fix them that quickly. Wait a few minutes. The CHAIRMAN. Gentleman from Massachusetts. Mr. FRANK. I am struck by your last point, Mr. Chairman, because the President has been talking, I think, in exaggerated terms about a crisis in Social Security, and I haven’t heard him talk about Medicare. And I welcome your assertion that the Medicare problem is, if I heard you correctly, several magnitudes greater. And it seems to me we are talking about an ideological agenda. When you put the Social Security issue up front and ignore the Medicare issue, I do not think you are simply following what economic necessity would dictate. On the question of capital formation, it is a question I would like to ask. We have this problem with the deficit. We have a problem of money being used up. One of the areas of federal spending growth that is obviously, perhaps, the fastest is in the military budget. Now, some of that is necessary, brought on us by outside enemies. I voted for the war in Afghanistan—not for the war in Iraq. But we have some problems here. On the other hand—and I cited my eagerness to support conservatives as we defend the administration’s effort to dismantle the bloated agricultural system—I also look forward to working alongside intellectually honest fiscal conservatives in supporting proposals to de-fund Cold War weapons that no longer have a major justification. The administration is going to be proposing, I am told, the reduction. VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 13 Now, I don’t ask you to opine about whether or not the weapons are necessary, but I do solicit your opinion on the economic impact. To the extent that the Defense Department can identify expensive weapon systems that it believes are no longer of a high priority because they were originally designed with a different enemy in mind, a thermonuclear enemy, to the extent that we could reduce the spending there, what is the effect economically for the country? Mr. GREENSPAN. Well, it is obvious that hardware expenditures, especially the type that was fairly substantial over the post-World War II period, are a drain on the real resources of the economy. And clearly, to the extent that we can cut back in any part of the budget, dollar for dollar it reduces the deficit, increases national savings, and does, obviously, contribute to private capital investment—the very critical need which I think we have going forward. Mr. FRANK. Well, I appreciate that because when it comes to reductions in some of these weapons that the Pentagon will say are unnecessary, I anticipate that some who are in other contexts quite critical of government spending are going to sound like Harry Hopkins and Harold Ickes put together as they talk about the stimulative effect for the economy. Mr. GREENSPAN. I assume you mean Ickes Sr. Mr. FRANK. Harold Ickes Sr., yes. The Harold Ickes of your era, Mr. Chairman. [Laughter.] While I am on the subject, as I get into Social Security, one question of great interest to me, Mr. Chairman, and you are a distinguished economic authority. Had you been in the Congress in 1935, would you have voted for Social Security? Mr. GREENSPAN. I was pretty young at that time. Mr. FRANK. I understand, Mr. Chairman, but—— [Laughter.] I said, if you had been there, would you have? Mr. GREENSPAN. I cannot answer that question. Mr. FRANK. I didn’t think you would be able to, but I do think, frankly, look, we have an economic aspect here and an ideological one. And as we have acknowledged, the need to get to solvency has an economic impact. The question of private accounts has an ideological one. And many of us, frankly, would have no question: We would have voted for that. And I think that is relevant. Let me go to the question of, leaving aside the ideological questions, I do say, and I appreciate what you said about inequality. I do have to express skepticism that telling workers who are now losing their jobs because of various factors in the economy or whose real wages are not keeping up, telling them, ‘‘Do not despair, private accounts are coming, 15 or 20 years from now,’’ will be of less of a morale booster than I think you implied. But leaving aside the desirability, we do have the question of how you get there. You say in the monetary policy report, on page 12, the entire governors say, ‘‘The recent sizable deficits in the unified budget mean the federal government, which had been contributing to the pool of national saving from 1997 through 2000 has been drawing on that pool since 2001,’’ and you have identified sav- VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 14 ings, the low savings rate, as a big problem. The single biggest factor in this appears to be the federal government. Net federal savings dropped from positive 2 percent of GDP in 2000 to a level below negative 3 percent in 2003 and 2004. There has been a swing of 5 percent with regard to national savings, entirely attributable to the federal government. Here is the problem: clearly we are going to have to borrow to set up private accounts. The administration says it will cost $700 billion or $800 billion in the next 9 years, but obviously that is not the end of it. The estimates from the Democrats on the Budget Committee is $4 trillion. The administration won’t say. Generally, when people won’t say it is because they don’t like what they would have to say. You told Senator Sarbanes yesterday I believe that if we had to borrow more than a trillion, that could be problematic. You said over a trillion is large. Mr. GREENSPAN. I was referring to the 10-year time frame. Mr. FRANK. Okay. Mr. GREENSPAN. That was the context. Mr. FRANK. Let me ask, has the Fed done any kind of costing out of what the cost of the borrowing will be in the period after the 10 years? Mr. GREENSPAN. No, we haven’t. But remember that the critical issue here is how it affects national savings. Mr. FRANK. The market. Mr. GREENSPAN. If you move marketable securities from the U.S. government and thereby create a deficit into a private account, but you require that that account not be subject to withdrawal prior to retirement, you effectively insulate the issue of a change. Mr. FRANK. But as you said yesterday, that depends on the market’s perception. And I must say yesterday, as I read your questions—— Mr. GREENSPAN. That is correct. Mr. FRANK.——you were less assured yesterday. Did something happen overnight? Mr. GREENSPAN. No. I was about to get to that. Mr. FRANK. Okay. I don’t want the time to run out before you did. The clock seems miraculously to have got fixed after he got through. [Laughter.] Mr. GREENSPAN. As I said yesterday, we are not sure to what extent and how much the markets respond. I think that basically the question of moving to private accounts, personal accounts, individual accounts, whatever you want to call them, is necessary largely because I think the existing system—— Mr. FRANK. But you are off my point, Mr. Chairman. I understand that. You have said that. But I am asking you about the impact of the borrowing and the market. And yesterday—— Mr. GREENSPAN. To the extent—to the extent—that that affects national savings, and as I say—— Mr. FRANK. But it is a separate question. You, at least yesterday, said market perception was a problem, and you seemed to indicate that the—— VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 15 Mr. GREENSPAN. Let me tell you why I am responding in the way I am: The unified budget is a mechanism which only partly reflects the impact of government activity on the economy. It is an exceptionally good one, and covers most issues. But when you are dealing with forced savings of any type, the evaluation is somewhat different. But to answer your question very specifically, to the extent that actual government borrowing tends to impact on interest rates and on the economy, which generally budget deficits do, then I do think we have to constrain them. Mr. FRANK. Thank you. The CHAIRMAN. The gentleman’s time has expired. The gentlelady from Ohio, Ms. Pryce. Ms. PRYCE. Thank you, Mr. Chairman. Social Security is the subject du jour, obviously. I will ask you a question on a different matter, but I also would like to allow you to complete your answer, if you had more to say, about the perception. I was very intrigued. In your testimony you talked about the perception of wealth, personal perception, then you just made reference to market perception. Is there more you would like to say in response to Mr. Frank? Mr. GREENSPAN. No. It is just that, as I indicated and the congressman quoted me, for the last 25 years we have had a consistent, ever-increasing concentration of income and wealth in this country. And as I said, that is not conducive to the democratic process or democratic society. It is crucial to our stability that people all have a stake in this system. And I don’t perceive that Social Security is conceived that way. It is very important for people to have a sense of ownership. In other countries, where shifts have been made, there is a lot of anecdotal indications that it made a difference in a lot of places. Now, I am not saying that the United States is like Chile, for example. It is not. But I think that it is an issue that goes beyond the sheer economics of it. But because we need to find a better vehicle for providing retirement benefits, and therefore have to move away from the pay-asyou-go structure, and I think essentially into certain private accounts or defined benefit programs or something, because we need the full funding, that it is far more likely that we will get the type of savings, and therefore the type of capital investment that we are going to need in order to meet the promises we have already made to the next generation of retirees going forward. Ms. PRYCE. All right. Thank you, Chairman. Now let me shift gears away from Social Security, because I am sure that that will be dominating the day. But I would like to ask your insights into the matter of the interchange and how that is going to be affecting control of monetary policy. I know that the Fed has an ongoing study and retail payments research project to estimate the number of transactions and the value to the retail system. But it is a very intriguing concept to me, and I would really like to hear your comments on it, how it affects your control of monetary policy, how it affects consumer prices and the economy, and VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 16 if you believe that there is a privacy or identity theft peripheral issue to it. So I know that this is kind of off the subject du jour, but I would like to hear your insights. Mr. GREENSPAN. Well, one of the things which has been quite impressive is how the financial system has adjusted to the major increase in information technology and computer technology. And the payment system has gotten extraordinarily complex in all the various different areas. To be sure, we have had privacy questions emerge, and there has been a significant battle, I may say, between those who create new encryption programs and those who are trying to break them. I think at the end of the day that the mathematics of encryption are such and the technology is such that we ought to be able to create systems which will be exceptionally difficult to break. If we are going to get the benefits of the payment system or, as I commented yesterday, the extraordinary potential benefits of information technology in the health care area, we have to create security for privacy. And the only way to do that and still have the availability and use of these technologies is to find adequate encryption. I think that is something which continues to improve. In my judgment, at the end of the day, it is going to become very difficult as the technology gets more and more complex, actually to break some of these newer, very clever encryption systems. Ms. PRYCE. Would you like to comment at all on—— The CHAIRMAN. Gentlelady’s time has expired. We are going to try to stay as close to the 5-minute rule—— Ms. PRYCE. Thank you, sir. The CHAIRMAN.——because we have got so many members to ask questions. The gentlelady from New York? Mrs. MALONEY. Thank you, Mr. Chairman. Mr. Greenspan, the President is drumming up support for his plan by saying that by 2042, ‘‘the entire system will be bankrupt.’’ To the average person, bankrupt would mean that you would be totally out of money, that there would be no benefits at all. Yet, experts say that we will not touch the trust fund until 2018, and even though the trust fund will be used up by 2042, as the law envisioned, there will be plenty of money coming in from payroll taxes, enough to pay for three-quarters of the benefits. So to say that the entire system is bankrupt in 2042 is not true. It is misleading. Would you agree, yes or no, Mr. Greenspan? Mr. GREENSPAN. It is certainly true that the amounts of money, cash, that are available would, assuming that the 2042 is the more accurate than the 2052 which CBO is raising, but the point I think that is crucial here is that this is mainly the monies that the Congress is making available. And I must say, parenthetically, I think the probability were we in fact to run into zero trust fund at that point, that benefits would be cut, approaches zero, as indeed it did in 1983, the last time that happened. VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 17 But that is not what the issue is. The issue is not whether or not we have the ability to make payments, but whether we have built up a sufficient trust fund—— Mrs. MALONEY. My question is not that. I question the statement that by 2042 the entire system will be bankrupt. It will not be bankrupt. I agree the trust fund will be gone, but there will still be the money coming in from the payroll taxes, enough to pay, by all accounts, three quarters of the benefits. Is that true or not? Mr. GREENSPAN. It is true in dollar terms, but I suspect it may not be true in real terms. And the reason I am saying that, if we cannot get full funding and the savings required to build up the capital stock in time for 2042’s production of goods and services, yes, the individuals may have the cash, but the cash will not buy as much as they think it would be. The real problem has got to be real resources, and this issue of whether or not the OASI goes bankrupt or not bankrupt is an interesting legal and political question, but it really doesn’t get at the economics of the retirement of 30 million additional individuals. Mrs. MALONEY. That is true, but the point is in 2042, the entire system is not bankrupt. But I would like to get back to your statements in the Senate yesterday where you pointed out that the President’s plan does nothing to solve the solvency challenge of Social Security and it does nothing to improve national savings and it creates new debt that will have trouble being absorbed by the markets. So, in other words, the President’s plan doesn’t address the real problems and it creates new ones. The cost for transition has been estimated to be $4 trillion to $5 trillion over 20 years, and this is on top of the deficit and debt that we now have and do not seem to be able to control. We have the highest debt ever, over $7 trillion; the highest deficit ever, over $400 billion; the highest trade debt ever, over $600 billion. And my question is, wouldn’t you say that for the immediate future, the deficit is more of a problem with our economy than Social Security is, particularly since we do not even have to touch it, the trust fund, or the principal until 2018? Mr. GREENSPAN. No, I think that the problem starts in 2008. And I don’t disagree with you about the size of some of the numbers, but remember a goodly part of that—— Mrs. MALONEY. Especially, Mr. Greenspan, when you said yesterday in the Senate that the increased debt of over $1 trillion in a 10-year period would be too much for the markets to absorb. And so, when we have independent analysis and economists saying that it will be $4 trillion to $5 trillion over 20 years, doesn’t that cause a tremendous problem on top of the debt and deficits that we already have, yes or no? The CHAIRMAN. The gentlelady’s time has expired. The Chairman may answer yes or no or expand on that. Mr. GREENSPAN. All I would say is that when you are getting out that far, there will be lots of adjustments. VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 18 It is important in the process of the adjustment that we be very careful not to increase the degree of excess inflationary liquidity in the economy, and adjustments will need to be made. Mrs. MALONEY. Thank you. The CHAIRMAN. The gentleman from Louisiana, Mr. Baker? Mr. BAKER. I thank the Chairman. And welcome the Chairman back again. It is certainly always a pleasure to hear your thoughts. I just want to speak briefly as to the concerns about the division that apparently will exist in our country going forward with those accumulating wealth and those without hopeful opportunity. I believe we have learned a great deal from some of our metropolitan woes across the country. As local governments look for ways to deal with infrastructure problems and meeting social need, they have raised taxes to confiscatory levels, and those with the ability have moved to the suburbs, taking their capital and assets with them, and the spiral downward is only escalated. I worry that in our rush to solve this problem that with additional federal government regulatory encroachment, with confiscatory tax rates being discussed, that those who have the ability simply will move offshore, taking their investments, their manufacturing, and their jobs elsewhere. And so, we have, indeed, to have a system where everyone has a stake and a potential to share in the potential outcomes if we are going to work our way through this very difficult financial thicket. I want to turn, however, to a subject which you and I have talked about over time, and it is not a new concern but one which has taken on significance in light of recent developments. Two years ago, in the fourth quarter of that year, Fannie Mae disclosed it had a significant problem with what it called its negative duration gap measurement in ceding their own internal risk measurement controls. The resulting action of the GSE in that instance was simply to go out and acquire additional mortgages to rebalance the portfolio. I likened it to being the owner of the Hindenburg and deciding to add on a new room. I have come to the conclusion in view of the GSE’s portfolio growth over the last several years that the rate of growth is indeed a concern, and I believe you have in past occasions expressed the possible view that maybe some balance between MBS held and overall portfolio structure might be something that the Congress should examine. I am wondering if you have, one, the concern about rate of growth. Two, is there a remedy in your mind that would be advisable for us to consider; would you go as far perhaps as establishing a cap? And four, whatever response you give will be very informative and helpful. As you know, we are in the midst now of constructing legislation on GSE reform, and I frankly would like to include a provision on growth constraints, but I want to make sure that from a financial policy perspective you believe it to be advisable. Mr. GREENSPAN. Congressman, I have been thinking, as you have, about the nature of this problem for the last several years. VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 19 What concerns me is not what Fannie and Freddie have been doing in the securitization area, which they have been exceptionally effective as indeed their competitors as well, have created a very important element within the total financial system. And so, let me just stipulate that securitization is important and has to be maintained and expanded, if at all possible. But we have examined the purposes of the so-called huge build up in the portfolios that Fannie and Freddie are holding—and remember that it was very small 10 years ago. This is not something which is implicit in the whole securitization operation; it is an addon which occurs as best we can judge—and we have tried to think of all other possible purposes—very largely to create increased profits for these organizations. And the reason that occurs is they have, granted by the marketplace, a significant subsidy which enables them to sell their debentures significantly—at a significantly lower interest rate than their competition. And therefore, no matter what market-based types of issues they use that money to invest in, whether it is their own MBS, other MBS, or other assets, they get an extraordinarily large profit and they have been using that for a major expansion in earnings of those corporations. We have found no reasonable basis for that portfolio above very minimal needs. And what I would suggest is that for liquidity purposes they are able to hold U.S. treasury bills in whatever quantity they would choose, that they can’t exploit the subsidy with treasury bills, because there is no spread which gives them a rate of return. In turn, they should be limited to $100 billion, $200 billion—whatever the number might turn out to be in the size of their aggregate portfolios. And the reason I say that is there are certain purposes which I can see in the holding of mortgages which might be helpful in a number of different areas. But $900 billion for Fannie and somewhat less, obviously, for Freddie, I don’t see the purpose of it. And over time—I don’t believe that we should have legislation which essentially requires immediate divestiture, but over time, several years, that should be done because these institutions, if they continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest rate risk aversion, they potentially create ever growing potential systemic risks down the road. There is no risk now at the moment. It is the time, therefore, to act, to do something to fend off problems, which in my judgment seem almost inevitable as we look forward into the remainder of this decade. The CHAIRMAN. The gentleman’s time has expired. The gentleman from Pennsylvania, Mr. Kanjorski? Mr. KANJORSKI. Mr. Chairman, over a number of years now, I have been looking forward to your addressing the committee. And I must say that I have always thought that you took a fiscally conservative position of responsibility for the government. And I have a few questions that I would like you to answer in terms of whether I was mistaken or not in that conclusion. VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 20 One, am I not correct that 1983 you chaired the Social Security commission? Mr. GREENSPAN. I did. Mr. KANJORSKI. At that time, did you prepare and submit to the Congress your recommendations as to how to solve the problem that we are now facing, in the President’s word, as a crisis? Mr. GREENSPAN. The commission did, yes. Mr. KANJORSKI. And did you see the crisis coming, or did you see the problem, or your fix not solving this problem? Mr. GREENSPAN. No, we did. We recognized that starting in the year roughly 2010, which you must have realized was a quartercentury later, we perceived that there would be a significant buildup and indeed our mandate was to create over a 75-year period, through 2058, a set of receipts and potential benefits, a tax rate, which is now the 12.25 percent rate, which according to the actuaries of that time would have been enough to carry us through 2058. We are still on track for that forecast. Mr. KANJORSKI. So you would conclude that—then why is the crisis today? What happened? Mr. GREENSPAN. The crisis today is largely—— Mr. KANJORSKI. You agree with the President, it is a crisis today. Mr. GREENSPAN. The word crisis depends on in what terms. We have a very serious problem with the existing structure is what I would stipulate. The terms of how you describe it are far less important than defining what it is. Mr. KANJORSKI. Okay. You also mentioned in your response, either to the Chairman or the Ranking Member, that as bad a problem as we have with Social Security, it pales in comparison to the immediate problem within the next 10 years of Medicare and Medicaid. Mr. GREENSPAN. It does. Mr. KANJORSKI. And I seem to remember that you came before the committee and I asked you a question of fiscal responsibility in July of 2003, because I was starting to get extremely worried about the administration’s policies, in every year asking for a tax cut. Now, am I mistaken in some way to misconstrue that the revenues received by the United States government overwhelmingly come from tax revenues? Mr. GREENSPAN. They do. Mr. KANJORSKI. And did you realize that when you were supporting the tax cuts of 2001, 2002 and 2003, that you were substantially reducing the revenues of the United States government in spite of the fact that you knew a major problem or crisis in Social Security exists, that a major problem or crisis in Medicare exists, and that a major problem in Medicaid exists, and you were supporting a policy to reduce the revenues of the United States. Is that correct? Mr. GREENSPAN. Not quite, because from September 2002 going forward, I strongly supported, and still do, the continuation of PAYGO. Remember, it was in September—— Mr. KANJORSKI. I understand PAYGO is a great concept on budgets, but it doesn’t have a hell of a lot to do with revenue. Taxes have to deal with revenue. Do you support—— VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 21 Mr. GREENSPAN. But, Congressman, you are asking me—let me finish my sentence. I supported the tax cuts that I felt was a very important—and I still do—element in expanding the revenue base of this economy for growth. I stipulated that my support was in the context of a PAYGO rule, which I supported, which had been allowed to lapse at that point. So if I were voting, but I don’t vote, I would have voted to take other actions to offset that because I thought that that type of tax cut was important. Mr. KANJORSKI. Mr. Chairman, it is also this President’s policy to ask this Congress to make permanent the three previous tax cuts of his first 3 years in office, which will continue to reduce revenues of the United States ad infinitum. Do you support making permanent all the taxes that have been cut thus far, and make those permanent in nature? Mr. GREENSPAN. I can’t say all of them. I still support the partial elimination of the double taxation of dividends, but in the context of a full PAYGO system, which I trust the Congress will initiate. The CHAIRMAN. The gentleman’s time has expired. The gentleman from the first state? Mr. CASTLE. Thank you, Mr. Chairman. Chairman Greenspan, actually I have enjoyed the Social Security discussion a great deal. And I want to change subjects here a little bit and talk about one of the other two great problems, Medicare being one. But the other is Medicaid. I did a little research. And there are 50 million people on Medicaid, in some way or other, versus 47 million who are receiving Social Security right now. And their total cost, and as we all know it is part state, part federal, more federal than state, today is about $300 billion. I think we pay out about $471 billion in Social Security. So you are talking about a program which isn’t that much less in terms of its overall economic aspects and individual aspects than Social Security. But I have also learned that about two-thirds, actually more than two-thirds, about 69 percent of Medicaid doesn’t pay for the medical bills of the poor, but it pays for long-term care of the disabled and the seniors, the disabled being even more than the seniors. You indicated earlier in your testimony that I think it was 30 million people over the next 25 years are going to retire. We know that a percentage of those people at some point become impoverished, either intentionally or unintentionally, and they go into the long-term Medicaid program, which costs upwards of $25,000-plus per year. I don’t have the growth rate this year; I didn’t have a chance to get that. But the growth rate of Medicaid expenditures is tremendous. The President and Secretary Leavitt have indicated that they would like to have flexibility, and maybe there is an assumption because they proposed it before that the President has at least some sort of cap on how much would go into Medicaid if the governors would accept flexibility. VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 22 The governors rejected that 2 years ago, out of hand. They don’t seem to be much more receptive to it this year. They have a meeting in a couple weeks and I suppose they will take it up again. But to me, this is just a tremendous economic problem in terms of the issues that you worry about in this country and in terms of where we are going with effect to economic security and balancing our budgets. And it is something that frankly I don’t think is discussed enough. If you could, I would love to have you allay my concerns. If you can’t, any suggestions you have along these lines or even disagreement with what I just indicated of how great a problem it is, I would encourage speaking about as well. Mr. GREENSPAN. Well, Congressman, I would say it is part of the broad medical cost problem that is burgeoning in this country. As I said in the Senate yesterday, I think an important initiative is now under way which is an endeavor to try to get the total medical system fairly quickly into the full information system, meaning that we not only digitalize the whole administrative structure of medical practice, which would have, undoubtedly, a significant cost improvement, but also to, assuming we can get the technology involved in broad information on all patients’ history and the various different problems each individual has being made accessible to the appropriate parties with encryption. What we know at this stage is that there are very diverse procedures involved across the country for various ailments, and the outcomes are quite different. And if you get a fully computerized and knowledgeable system, we will have the capability, and the medical profession will—— Mr. CASTLE. I don’t mean to interrupt you, but my concern is in the long-term care and the care for the disabled as much as it is in just medical—because I agree with you completely in terms of what you are saying, but I have a little trouble understanding exactly how that is going to make a great difference in the costs. Mr. GREENSPAN. I was about to get to that. The issue is we are going to eventually get to a clinical best practice, and it involves the whole sets of procedures that are involved, which is going to be quite different, in my judgment, from what is done today. And I think we are going to have to build up, as quickly as we can, the technology because I don’t see how we can make major long-term structural decisions on Medicare of which the issue that you are raising, Congressman, is a critical one because I am fearful if we freeze in a ‘‘solution,’’ in quotes, to all of these problems, and we find that this clinical practice is changing fairly dramatically, we are going to find as we have frozen in the system which won’t work. So I can’t answer your question specifically, but I will tell you that there is not only that problem, but a long series of other problems, which is manifested in a huge potential expenditure outlook going forward with not only Medicare, but Medicaid, and I must say with medical expenditures generally. The CHAIRMAN. The gentleman’s time has expired. The gentlelady from California, Ms. Waters? Ms. WATERS. Thank you very much. Thank you very much for being here today, Chairman Greenspan. I have wanted to center all of my questions on Social Secu- VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 23 rity, and I do have one. But I cannot help but raise another question, based on some of the answers you have given already. As I have sat here, and we have all been reminded of the deficit that we have, the debt that this country is involved with, the trade deficit, the problems Medicaid and Medicare. I would think that you as a fiscal conservative would be sounding the alarm. But you just really shook me up when you stuck to your support for tax cuts. Now, given that you are defending your position on tax cuts in light of all of these problems, what evidence is there that the revenue base of the country has expanded because of these tax cuts? Mr. GREENSPAN. Let me just say that the evidence does indicate that the economy was significantly supported by the tax cuts in their initial form. But that, of course, has nothing to do with tax cuts going forward in any material way. Ms. WATERS. What is the evidence? Mr. GREENSPAN. The evidence is that the economy has stabilized fairly significantly, and the size of the so-called recession of 2001 was the mildest in the post-World War II period. And there is no question that tax cuts had a role in that. Ms. WATERS. Did those tax cuts have anything to do with job creation? Or do we have an expanding economy without job creation? Mr. GREENSPAN. The point at issue is that you don’t have jobs unless the economy is expanding. Ms. WATERS. I understand there is a contradiction in the economy now, and that the jobs have not been created because of these tax cuts. Mr. GREENSPAN. I find no evidence that that is the case. Let me just respond to the substance of your question. Ms. WATERS. Yes. Mr. GREENSPAN. I am not in favor of tax cuts without the issue of a PAYGO. In other words, I argued a year ago that my support for the tax cuts is in the context of a PAYGO rule. And looking out beyond, say, 2008, the problems we have with the budget deficit are huge. And therefore we need very significant changes to come to grips with those issues. So I am not saying that we have no problems. Our problems, in my judgment—— Ms. WATERS. No, I understand that, Mr. Greenspan. But if you are saying that tax cuts are okay as long as you understand PAYGO—you got to pay as you go—then that certainly has not happened with this administration. As a matter of fact, the debt has increased, the borrowing has increased since the tax cuts. So you must be very unhappy. Mr. GREENSPAN. I am telling you that I have always supported PAYGO. I think it has been a mistake to allow PAYGO to lapse. I support PAYGO for both the tax side and the spending side. And I trust that the Congress will reinstitute it—— Ms. WATERS. Okay. Mr. GREENSPAN.—as expeditiously as possible. Ms. WATERS. Well, good. And let me just go to my Social Security question. This administration is redefining Social Security as we know it. They say it is a crisis, and they have got young people all riled up VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 24 in this country about the fact that it won’t be there for them. And the President has rolled out with the personal accounts aspect of this Social Security redefinition. What does personal accounts have to do with the solvency of the Social Security system? Could you please explain that to us in very simple, factual language, excluding any speculation, and help us to understand how privatization is going to make the system solvent? Mr. GREENSPAN. The issue is one not of the President’s actual program affecting the long-term shortfall in the OASI trust fund. It does not. I have said that before, I said it yesterday. Ms. WATERS. I am sorry, I can’t hear you. Mr. GREENSPAN. I said it does not. Ms. WATERS. The private accounts do not? Mr. GREENSPAN. Not in and of themselves. What I am saying is that what we need to do is create a system which the existing system is unable to do; namely, build up a sufficient full funding in a reserve system. That can only apparently be done by moving to the private sector, because we have been utterly unable in the pay-as-you-go system to create the necessary savings to finance the capital investment that we are going to need for the future to create the goods and services that retirees are going to need. The CHAIRMAN. Gentlelady’s time has expired. The gentleman from Texas, Mr. Paul? Dr. PAUL. Thank you, Mr. Chairman. Mr. Greenspan, yesterday you were quoted as saying it was imperative that the Congress restore fiscal discipline. And of course you have made that point, I think, very often over the years. I have tried my best to vote accordingly, but sometimes I find myself in a lonely category. I have found that we have a group here that is quite willing to vote for deficits for domestic programs. Then we have another group that is quite willing to spend for militarism abroad. Then we have another group that likes both. So if you look around for people who are willing to cut in both areas, it is pretty hard to come by. But you in the past, in answer to some of my questions, have answered that you believe that central bankers have come around to getting paper money to act, in many ways, just like gold, and therefore there was less of an imperative for a gold standard. I haven’t yet been convinced of that. Take, for instance, the current account deficit. You know, under the gold standard there are a lot of self-adjustments, and we certainly wouldn’t have the exchange rate distortions between the renminbi and the dollar under a gold standard. So I think there are a lot of shortcomings under the paper standard with the current account deficit. Also, although the argument is made that CPI reflects that there is little or no inflation, if you look at the price of bonds or if you look at the cost of medicine, if you look at the cost of energy, there is a lot of price inflation out there. And also, if you look at the cost of houses, which are skyrocketing, which then is reflected in tax increases, the consumer is VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 25 still suffering from a lot of price inflation that we in many ways in Washington try to deny. But I think in an effort to discipline the Congress, that the Federal Reserve would have a role to play as well because in many ways the Federal Reserve accommodates the spending because you are capable of buying bonds. And when you buy our debt that we create, you do it with credit out of thin air. So it is that facility of the monetary system that literally encourages or actually tells the Congress they don’t need to be disciplined because there is always this fallback that we don’t have to worry, the money is out there, money which would not be available, obviously, under a gold standard. I would like to quote from a famous economist that sort of defends my position. He says, regarding almost the hysterical antagonism toward the gold standard, ‘‘It is one issue which unites statists of all persuasions. Government deficit spending under a gold standard is severely limited. ‘‘The abandonment of the gold standard made it possible for the welcome statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds.’’ Further stating, ‘‘In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.’’ And, of course, I am sure you recognize those words because this is your argument. Mr. GREENSPAN. I do. Dr. PAUL. And I would say that isn’t it time that, if we ever get concern about our deficit spending and we consider it a real imperative, why shouldn’t we talk about serious monetary reform? Do you think that the gold standard would limit spending here in the Congress? Mr. GREENSPAN. First of all, that was written 40 years ago, and I was mistaken in part. I expected things that didn’t happen. And, nonetheless, my general view toward the type of gold standard effect remains to this day. My forecast of what was going to happen subsequent to that period has proved, fortunately, wrong. And as I have said to you in the past, we have tried to manage the Federal Reserve over the years, really since October 1979—because, remember, up to that point we were in some very serious inflationary trouble. Since then I think we have been remarkably successful, in my judgment. The CHAIRMAN. Gentleman’s time has expired. Mr. GREENSPAN. And while I still think that the gold standard served us very considerably during the 19th century, and mimicking much of what the gold standard does is what we do today, I think in that context so far we have maintained a stable monetary system. And I do not think that you could claim that the central bank is facilitating the expansion of expenditures in this country. The CHAIRMAN. Gentleman from Vermont, Mr. Sanders? VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 26 Mr. SANDERS. Thank you, Mr. Chairman. And nice to see you again, Mr. Greenspan. I am not going to waste a whole lot of time talking about the socalled crisis in Social Security because there is not a crisis. Depending on the studies that you look at, Social Security is solvent for either 37 years or 47 years. With minor modifications like doing away with the cap for wealthy people so they could contribute more into the system, it will be good for 50 or 60 years. So I don’t think we have to waste a lot of time on that particular crisis. Let us talk about some real crises facing the American people today. The health care system is clearly disintegrating. We are the only country in the industrialized world without a national health care program. We pay the highest prices in the world for prescription drugs. We have children sleeping out on the streets of America today. We don’t give our veterans the benefits that we promise them. Our middle class in general is in a state of collapse, with millions of workers working longer hours for lower wages. There has been an increase in poverty. The gap between the rich and the poor is growing wider, and the richest 1 percent own more wealth than the bottom 90 percent. Now, Mr. Greenspan, representing the CEOs of America and the wealthiest people of America, you consistently come in here every year and you tell us how great the economy is doing, and you tell us how great unfettered free trade is. So that is the crisis I want to talk about. Talk about unfettered free trade that you have been supporting for years. We now have a record-breaking trade deficit of $618 billion. We have a trade deficit with China alone of $160 billion, which has gone up by 30 percent in the last year. There are economists who tell us that trade deficit is going to go up and up and up. People who go Christmas shopping understand that when they walk into a store virtually everything on their shelves is made in China now. You have the heads of large information technology companies in America who basically are telling us, ‘‘Hey, we ain’t going to have information technology in America, no long white collar jobs, because in 10 or 20 years China is going to be the information technology center of the world.’’ Economists tell us we have lost millions of decent-paying jobs. We have lost 16 percent of our manufacturing sector in the last 4 years alone, and we are going to lose more and more white collar jobs to China. And yet year after year people like you come here, ‘‘Oh, unfettered free trade, it is just great.’’ Question, Mr. Greenspan: After record-breaking trade deficits, the loss of blue collar jobs, the beginning hemorrhaging of white collar information technology jobs, the understanding that if we don’t change things China is going to be the economic superpower of this world in the next 15 or so years, have you rethought your views on unfettered free trade? Mr. GREENSPAN. All I can say to you, Congressman, is that in spite of the forecasts of the economists that you are citing, of which I can find a whole slew who will report exactly the opposite, we have nonetheless created the highest standard of living of the major industrial economy in this world. VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 27 Mr. SANDERS. Really? Mr. GREENSPAN. We have. Mr. SANDERS. Really? Mr. GREENSPAN. That is what the facts are. The question of increasing globalization, for which the trade deficit is a symptom, is something we should be pleased about, not concerned about, because a considerable amount of our real wealth creation, our real income creation for a broad spectrum of our society, even including the problem which I happen to agree with on the issue of undesirable increase in wealth concentration, we still have the most prosperous nation in the world. Mr. SANDERS. Mr. Greenspan, are you telling us that we should see as a positive thing a record-breaking $618 billion trade deficit and the loss of 3 million manufacturing jobs in the last 4 years? That is a positive thing? Mr. GREENSPAN. Our unemployment rate is 5.2 percent. Mr. SANDERS. But the new jobs that are being created are lowwage jobs with minimal benefits, and we are losing our good-paying jobs. Mr. GREENSPAN. That is not factually correct, Congressman. Mr. SANDERS. Really? Mr. GREENSPAN. I am sorry. That is not what the facts are. Mr. SANDERS. Well, you tell—you know, maybe, Mr. Greenspan, one of the problems we have is you talk to CEOs, I talk to working people. And what working people tell me is they are losing goodpaying jobs, parents are worried about the fact they are sending their kids to college now for information technology jobs; those jobs are going to China. You are telling me we are creating good-paying jobs with good benefits? Mr. GREENSPAN. I am telling you—— Mr. SANDERS. I don’t believe that. Mr. GREENSPAN.——that I don’t listen to the anecdotal stuff by itself; I look at the statistics. And the statistics tell us that we are getting job expansion fairly much across the board—— Mr. SANDERS. You are not worried about the loss of 3 million manufacturing jobs—— The CHAIRMAN. The gentleman’s time has expired. The gentlelady from Illinios, Ms. Biggert? Mrs. BIGGERT. Thank you, Mr. Chairman. Welcome, Mr. Chairman. I wanted to switch gears and go to a subject that hasn’t been talked about, and that is Basel II. I know that the Federal Reserve has been closely involved in the process of crafting the new Basel accord, and that the final agreement was issued last summer. However, the implementation has not taken place in this country. And there is still some outstanding concerns about the accord and its impact on the competitiveness of banks that are not required or not capable of complying with the agreement. What is the Federal Reserve doing to ensure that the banks that are not required to comply with the accord are not put at a disadvantage via the banks that are required to comply? Mr. GREENSPAN. Well, Congresswoman, remember that there is still a long way to go before we get actual implementation of Basel II. We are doing a considerable amount of research to determine VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 28 various areas where certain parts of our banking system may turn out to be competitively disadvantaged, inappropriately. And as a consequence of that, where it is desirable and purposeful and studies show that, after a considerable amount of forward analysis on the competitive position, we will make adjustments as we proceed, as necessary. Mrs. BIGGERT. Well, I know that there hasn’t been any significant change to the operational risk. Mr. GREENSPAN. Well, the operational risk issue is one in which we are stipulating that individual banks make their own judgments about what the risks are. That operational risks exist is a critical issue. They do exist. Mrs. BIGGERT. What about the liability? I think that our U.S. tort law or liability laws are significantly more onerous than those in the E.U. or in Asia. Mr. GREENSPAN. You are quite right. To the extent that our tort laws are more onerous than others, it is an objective increased risk. In other words, our purpose is to appropriately manage risk. And if in our society we choose to construct a certain type of tort system which has positive values, or we wouldn’t have it. It also has negative values. And the negative values is that it does increase certain types of bank risk. And I think we have to recognize that fact. It is a fact. We can’t believe it doesn’t exist; we can’t do it. Mrs. BIGGERT. In order to assess the regulatory capital for a global bank, regulators in multiple countries will need to agree on the methodology and assumptions for the models that are going to be used to calculate the capital cover in subsidiaries. What is the Federal Reserve’s position on the relative roles of the home and the host supervisors in implementing the new capital framework? Mr. GREENSPAN. There is actually a committee in Basel, a subcommittee of the Basel Committee on Supervision and Regulation, which is trying to coordinate this very critical issue. From our point of view, for example, because of the extraordinary complexity of a lot of stuff, we are going to have to depend, in many cases, on the supervisory actions on the part of home regulators. That doesn’t mean that we don’t operate in it. But what we are trying to do is to make the transition as smooth as possible, so that who has authority, the host regulator or the home regulator, is clearly defined and that it is done so in a way which implements the particular Basel II regulations most effectively. Mrs. BIGGERT. And then let me just thank you for the work that you have done on financial literacy. I know that you have appeared before the commission and the Federal Reserve is working on that. We formed a caucus in the House to really address financial literacy and to get out the word on that, too. Representative Hinojosa and I have just started this. And I think we all need to work together to make sure that our young people and adults are going to be able to live a successful life, without financial ruin. Mr. GREENSPAN. That is a very important endeavor. Mrs. BIGGERT. Thank you. The CHAIRMAN. The gentlelady’s time has expired. And let me commend the gentlelady from Illinois and the gentleman from Texas on their work toward that caucus. It is ex- VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 29 tremely important, in financial literacy, and I know the Chairman appreciates that as well. The gentlemen from Illinois, Mr. Gutierrez? Mr. GUTIERREZ. Thank you very much. Welcome, Chairman Greenspan. Tuesday’s New York Times indicated that one of the most important factors in maintaining the solvency of the Social Security system is the number of immigrants who are allowed to enter the country legally. An immigration report authored by a former INS official under President Bush and based on an analysis of data provided by the Social Security Administration concludes that if legal immigration rises by one-third over the next 75 years, the result will be a 10 percent reduction in the Social Security deficit. However if the number of immigrants declines by one-third, the retirement system shortfall will worsen by the same 10 percent. The immigration report found that at the present pace new workers entering the United States, that is the pace of new immigrants legally entering our workforce, will contribute $611 billion in 2005 dollars over the next 75 years. Chairman Greenspan, according to these data, doesn’t it make sense that we should reform our immigration system to allow for a regulated, legal flow of workers to come here, build jobs, improve our economy, and strengthen Social Security, so that we can keep the promise we make to our seniors? And I say that also, but I would like you to think about it in terms of the George Bush Department of Labor says that we will create over the next decade 6 million new low-wage, low-skill, very little training needed for jobs. Over the next 10 years we are going to create these jobs according to that. And given the fact we have eight, nine, 10, depending on who you want to listen to, undocumented workers—workers, I mean people who are actually working in our economy, do you not think it would be appropriate that we take a look at our immigration policy vis-a-vis our economy and specifically our Social Security issue that we presently are addressing? Mr. GREENSPAN. Congressman, as I have said before, I am always supportive of expanding our immigration policies. I think that immigration has been very important to the success of this country, and I fully support it. I am not sure I would want to give the reason that we are creating immigration to support our Social Security system. I think we ought to do it on the grounds that it is good for the country, but not because it helps the Social Security fund, because that then suggests that we find other means to solve the Social Security problem, that we shouldn’t be expanding immigration. And I would not support that. So I would say I support the general issue of increased immigration, but I hope we don’t do it for that particular reason. Mr. GUTIERREZ. And that isn’t why. And so I share that with you, Chairman. Unfortunately, the Congress is not made up of such enlightened 435 people such as yourself. Would it be, I would not have to ask VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 30 this question, we could just look at. The fact is that we have a Social Security problem. We know that they enter. And I guess my question to you is I want to reach that goal that you and I share, that is that immigrants are good for this country. They are good economically, they are good for the United States, and all of the other reasons. I want to reach that goal. Therefore, I have to change the immigration policy of this nation. In order to change the immigration policy of this nation, because not everyone shares our perspective on immigrants, I have to find new reasons. So I guess my question to you is, just so that I can say that even the Chairman Greenspan indicates, is it not true that we would add money to our Social Security, given their young age, and would that not help the solvency of Social Security, understanding that that should not be our principal reason for doing it? Mr. GREENSPAN. You are asking a statistical question. Your numbers, as best I can judge, are accurate. Mr. GUTIERREZ. Thank you. Secondly, Congresswoman Kelly and I passed legislation designed to prevent bank examiners from taking a job with a bank they oversaw immediately following that supervision. We did that in the last session. During our consideration of that legislation, the Office of Government Ethics brought to our attention that most of the criminal conflict of interest statutes, 18 USC Sections 203, 205, 207 and 209, that cover all federal employees, do not in fact apply to employees of the Federal Reserve Banks. For example, 207 prohibits senior employees from representing a foreign government for 1 year after leaving the U.S. government or representing any party on whose matter they substantially and personally participated in while at their government post. Violation of the statute carries criminal penalties for every federal government employee, including employees of the Federal Reserve Board, but not employees of the Federal Reserve Banks. I think this is a loophole that should be closed and bring the employees of the FRB Banks under the same laws that apply to every other government employee. Would you agree? The CHAIRMAN. The gentleman’s time has expired. Mr. GUTIERREZ. He can answer the question. Mr. GREENSPAN. I will have to—remember that the supervisory authority of the Federal Reserve Banks comes from the Federal Reserve Board. In other words, we at the board have authority under law. But let me respond to your question a little bit more fully in writing, because I have to go back and look at the statute to be sure I can respond appropriately. Mr. GUTIERREZ. That is fair. Thank you very much, Mr. Chairman. The CHAIRMAN. The gentleman from New Jersey, Mr. Garrett? Mr. GARRETT. Good morning, or almost afternoon. And I appreciate the opportunity to address some questions to you. And the issue of Social Security obviously has been pretty well exhausted, I would assume. And I tried to think before I came out VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 31 here, is there any other question on Social Security that you have not been asked today or previously while you were on the Hill. Maybe I should put it that way: Is there any question that no one has asked you yet with regard to Social Security that I can go back and say I got the last question on Social Security? Mr. GREENSPAN. Congressman, I am sure there is, but I can’t think of it. Mr. GARRETT. Then I feel good, that we are on the same—at least on that aspect we are on the same level. The question with regard to GSEs was brought a little earlier ago by the Chairman. And just three quick areas that if you could touch on. You began to touch on the aspect, as far as the problems, as far as the almost trillion dollars in outstanding debt, and you basically focused your talk at that point as far as the regulatory aspect and the need for caps and the regulation aspect of it. Could you, first of all, maybe just elaborate a little bit on the aspect of if we do nothing on that area what the impact is on the overall market and the economy? Mr. GREENSPAN. You mean if we do nothing in the GSE areas? Mr. GARRETT. Yes, right. Mr. GREENSPAN. The GSEs have a subsidy granted, not by law, but by the marketplace, which therefore gives them unlimited access to capital below the normal competitive rates. And that therefore, given no limits on what they can put in their portfolios, they can, by merely their initiative, create an ever larger increasing portfolio, which given the low levels of capital, means they have to engage in very significant dynamic hedging to hedge interest rate risks. If you get large enough in that type of context and something goes wrong, then we have a very serious problem because the existing conservatorship does not create the funds which would be needed to keep the institutions growing in the event of default, which is what the conservatorship is supposed to be and we have no obvious stabilizing force within the marketplace. So I think that going forward, enabling these institutions to increase in size, and they will once the crisis in their judgment passes. They stopped increasing temporarily. We are placing the total financial system of the future at a substantial risk. Fortunately, at this stage, the risk is, the best I can judge, virtually negligible. I don’t believe that will be the case if we continue to expand in this system. Mr. GARRETT. That raises the side question then, as you allude to, that, I guess the way I am thinking about it is potentially in the area for the housing market maybe we are—that proverbial bubble that is out there, that they say could someday be down the road that eventually collapses. Could you just touch on that as far as how that would impact on it and where we are going as far as the slight increases that we see in interest rates? Are we getting to that proverbial bubble then, that is potentially out there in the housing market? Mr. GREENSPAN. I think we are running into certain problems in certain localized areas. We do have characteristics of bubbles in certain areas but not, as best I can judge, nationwide. VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 32 And I don’t expect that we will run into anything resembling a collapsing bubble. I do believe that it is conceivable that we will get some reduction in overall prices, as we have had in the past, but that is not a particular problem. Remember that there is a very significant buffer in home equity at this stage because with most of mortgages being of conforming type with a 20 percent down payment, and even when it is less, prices since the homes were bought have gone up on average very considerably, so we have a fairly large buffer against price declines and therefore difficulties which would emerge with homeowners. Mr. GARRETT. The bubble is about to burst as soon as I buy my house down here in the Washington, D.C., area. I assume it is going to—that is when the market price will start going down again. But going back to the GSEs. Assuming we take some action with regard to the regulatory nature of them, along the lines that have been suggested, is there some other method that we could also be looking into, a more efficient way to finance mortgages back into the private sector, to open up the private sector to allow them to have a more, if you will, competitive on a same playing field, that they can compete with the GSEs and open up that market so that they—if we are not just purely through the regulatory climate, we are actually allowing them to bring down that effect as well. Mr. GREENSPAN. I think part of the issue is that the GSEs, as I understand it, essentially define what the issue constitutes conforming loans is. And indeed with their subsidy, they had very significant capability of competitive advantage. It ought to, in my judgment at least, be made clear within a regulatory structure, which you are about to set up, I trust, that some definition of what constitutes conforming and non-conforming is made fairly clear and an awareness of the fact that we have a viable, a burgeoning market in securitization in non-conforming loans, so that there is a lot of potential competition out there, all of which would be very helpful, in my judgment, to maintain what is really quite a world-class mortgage market in this country. Mr. GARRETT. Thank you very much. The CHAIRMAN. The gentleman’s time has expired. The gentleman from New York, Mr. Ackerman? Mr. ACKERMAN. Thank you very much, Mr. Chairman. Mr. Chairman, I think I learned today that you are basically unflappable. I would like to learn a little bit about what you are advising us on the tax cuts. You said that you were in favor of making the tax cuts permanent as long as the Congress invokes the pay-as-you-go or PAYGO rule. Is that—— Mr. GREENSPAN. That is correct, Congressman. Mr. ACKERMAN. That means, as I understand it, that we have to have spending cuts in the amount of the tax cuts. Isn’t that what means? Mr. GREENSPAN. Spending cuts or increases in other taxes. Mr. ACKERMAN. So you would make the tax cuts permanent only if we have increases in taxes or spending cuts. VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 33 Mr. GREENSPAN. I am basically saying that all such measures in my judgment should pass through the prism of PAYGO. In other words, we have very serious—— Mr. ACKERMAN. But we have to have cuts to make up for the loss in revenue. Mr. GREENSPAN. I think so. If we look forward into the post-2008 era, we have to make some very major changes to constrain uncontrollable increases in the unified budget deficit. So I think that there are going to have to be extraordinary actions on the part of this Congress. Mr. ACKERMAN. I am sorry. That is a pretty big test. So you are saying that if we the Congress don’t make the offsetting expenditure cuts, that you would not be in favor of making the tax cuts permanent? Mr. GREENSPAN. Well, I am not in the position to make that judgment. I am just merely stipulating that I think that specifically the tax cuts in reference to the elimination of the partial double taxation of dividends is important to economic growth, and I am basically saying that that is something we should do. But the overriding consideration is to make certain that our deficits don’t run away because that will destabilize the whole system. Mr. ACKERMAN. So things have to balance is what you are saying. Mr. GREENSPAN. Correct. Mr. FRANK. Will the gentleman yield? Mr. ACKERMAN. If I can just finish my thought, Mr. Chairman. So if things have to balance, that means in order to make the tax cuts permanent, we have to cut things such as agriculture and CDBG and other things, and then find other taxes to increase in order to offset the tax cuts that we made permanent otherwise things wouldn’t balance. I don’t know where else you would come up with balances. You have to increase other things and decrease other things and come up—— Mr. GREENSPAN. That is correct. No, that is what PAYGO is supposed to do. Mr. ACKERMAN. So, Chairman Greenspan, it is safe for me to say, opposes making the President’s proposed tax cuts permanent unless they go along with increases in other taxes and cutting expenditures that we now have in other programs. Mr. GREENSPAN. I am not in the position to say yes or no to anybody’s proposal. I merely just—— Mr. ACKERMAN. Okay. I will take out the specifics in agriculture and CDBG. Mr. GREENSPAN. I am basically stipulating that I think that, one, those tax cuts should go forward, and that we should make the changes similar to the changes you are suggesting. Mr. ACKERMAN. Okay. I just want to understand this clearly. Chairman Greenspan is saying that he opposes making the President’s proposed tax cuts permanent—— Mr. GREENSPAN. Congressman, I think I have spoken for myself in this regard. Your choice of words—— Mr. ACKERMAN. Yes, but I am trying to—I am speaking for myself, and I don’t—I am trying to understand this. VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 34 Mr. GREENSPAN. No, I am trying to say that I am making two propositions here. Mr. ACKERMAN. I understand you don’t want to say you are opposed to anything the President has said. So maybe I should phrase it differently so you don’t have to say it that way. Mr. GREENSPAN. No, I don’t want to say I am opposed, because I am not. I want very much for both the tax cuts—that tax cut to be in place and the PAYGO changes to be made. I don’t know how else to say it. Mr. ACKERMAN. In order for that tax cut to comply with PAYGO, the changes to be made have to be one or the other or a combination of other taxes or reducing expenditures. Otherwise that doesn’t comply with PAYGO, and Chairman Greenspan would not support unless it complies with PAYGO, which is what you said at the beginning. Mr. GREENSPAN. That is what I said, yes. The CHAIRMAN. Gentleman’s time has expired. Mr. ACKERMAN. Thank you very much. The CHAIRMAN. Gentlelady from New York, Ms. Kelly? Mrs. KELLY. Thank you, Mr. Chairman. Chairman Greenspan, after 9/11 this committee passed the Terrorism Risk Insurance Act to backstop our insurance industry and allow business development to move forward in this country. For an administrative cost of only $31 million a year, TRIA has provided hundreds of billions of dollars worth of new jobs and investment in our country. Unfortunately, real estate investment in this country could eventually come to a halt if TRIA is not reauthorized. This Congress must act or TRIA will expire, forcing millions of Americans to choose between not doing business or losing insurance coverage against terrorism. Either way, our economy would suffer and terrorism would win a big psychological battle without even firing a shot. Some members of this House say that TRIA is unnecessary and believe that, without evidence, that private reinsurance is available to cover policies against terrorism. I asked you a question about that, and in my response to that question I have a letter that you wrote to me on September 16th, 2004, and I quote from that letter: ‘‘Even with TRIA, reinsurance appears to be virtually nonexistent for catastrophic damages from nuclear, biological, chemical and radiologic attacks. These examples suggest that while there would be likely some coverage available in the absence of TRIA, the private market for terrorism insurance would still be quite limited.’’ And I am quoting from your letter. Do you have conclusive evidence that a robust private market for terrorism reinsurance exists in this country separated from TRIA at this time? Mr. GREENSPAN. Not to my knowledge, Congresswoman. This is a very difficult issue, because remember that private markets work exceptionally efficiently in a civilized society in which domestic violence or violence coming from abroad is not a central factor. VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 35 You cannot have a voluntary market system and the creation of markets, especially insurance markets, in a society subject to unanticipated violence. And as a consequence, there are certain types of costs, which is what we have the Defense Department protecting us from, which we essentially choose to socialize. The less of that we have, the better off our society is. There are, nonetheless, regrettable instances in which markets do not work. And while I think you can get some semblance of terrorism insurance, I have not been persuaded that this market works terribly well. Although I will tell you, numbers of economists and people whom I respect highly, don’t agree with what I just told you. They think the markets can be made to work. I have yet to be convinced. Mrs. KELLY. The GAO also released a report last year indicating that a functioning market for terrorism insurance would not exist if TRIA were allowed to expire. You further stated to me in this letter that if an efficient pricing mechanism for terrorism risk did not exist—and I am quoting you here—‘‘some level of federal involvement in terrorism insurance may continue to be warranted.’’ Without a functioning private market for terrorism insurance in the absence of TRIA, do you think government can replace market signals as an arbiter of terrorism insurance prices? Mr. GREENSPAN. I don’t think so. Mrs. KELLY. Thank you, sir. Yield back. Ms. PRYCE. [Presiding.] Recognize Mel Watt. Mr. WATT. Thank you, Madam Chair. Secretary Greenspan, I am over here, in case you are looking for me. Mr. GREENSPAN. I was. Good to see you, Congressman. Mr. WATT. Good to see you. I am going to try to understate this because if I said it as aggressively as I feel it, I suspect I would insult you and some other people. So I am just going to make a one-sentence statement about it, and then I am going to move on and ask you a question about something else, not designed to evoke a response. I would have to say that when I hear you, when I hear the President use as a major justification for this Social Security reform plan that he is trying to look out for black folk, and when I hear you use as a major justification for private accounts that you are somehow trying to look out for poor people, it makes me nauseous. I am going to leave that alone and move on. If I said it—if I dwelled on that, I would probably throw up. I am moving on, Secretary Greenspan, because I don’t—I mean, I have no interest in getting into a public dispute. I won’t be able to restrain myself on that issue. So the best thing I can do on it is move on. Let me ask a question. You made reference to full funding of Social Security requiring $10 trillion. And I believe you said that there is $1.5 trillion or will be at some point in the trust account. Mr. GREENSPAN. There is as of now, as best I—roughly that. Mr. WATT. Okay. Am I clear that the reason there is only $1.5 trillion in the trust account is that substantial amounts have been VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 36 borrowed from the trust account and that, in addition to the $1.5 trillion that is there a substantial amount of notes that are due? Mr. GREENSPAN. No, actually the $1.5 trillion is actually a cumulative difference between receipts, namely, the Social Security taxes, plus interest, minus the cumulative dividend. So it is actually real savings. Mr. WATT. I am asking you whether there are substantial amounts due from bonds, government-backed securities, into the Social Security trust fund in addition to the $1.5 trillion. That is the question I am asking. Mr. GREENSPAN. There are no additional assets. Is that what you are referring to? Mr. WATT. Well, does the federal government owe the trust fund any money? Mr. GREENSPAN. Not to my knowledge. Mr. WATT. So that is just a myth. Has the federal government borrowed money out of the Social Security trust fund? Mr. GREENSPAN. Well, remember that what is involved here is that the—— Mr. WATT. I think that would require either a yes or no answer. Has the federal government borrowed money from the Social Security trust fund or hasn’t it? Mr. GREENSPAN. No. Mr. WATT. Okay. All right. Then explain why that is not the case. Mr. GREENSPAN. Basically, what the Social Security trust fund does is it invests in U.S. treasury issues. I think the question you are raising is a different issue as to whether in fact that particular fund is segregated and allowed to actually increase national savings. Mr. WATT. No, I am not asking that question at all, Mr. Greenspan. I am asking, does the $1.5 trillion include the amount that the trust has invested in government-backed securities? Mr. GREENSPAN. That is it. It is $1.5 trillion in U.S. treasury special notes. Mr. WATT. Okay. All right. Well, that was the only question I was trying to get to. What—— Ms. PRYCE. The gentleman’s time has just expired. Mr. WATT. Thank you. Ms. PRYCE. The gentleman from Kentucky, Mr. Davis? Mr. DAVIS OF KENTUCKY. Thank you, Madam Chair. Chairman Greenspan, I appreciated very much your remarks this morning on the importance of greatly increasing our national productivity over the long term. I spent my professional life in the manufacturing sector. Many of the members on the committee, in fact, represent districts that depend on competitive manufacturing and a global economy to sustain our communities. I was wondering if you could make a comment, from a strategic perspective. You have seen in your distinguished career a great ebb and flow in our international competitiveness, changes in adaptation that we have had to make in various regions of the country to compete, especially with Asia. VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 37 I was wondering if you would share with us the points that you feel are most important from a strategic policy standpoint to assure that we have strong, competitive, and adaptive manufacturing in the future. Mr. GREENSPAN. Congressman, I think that one of the key aspects of the American economy is its increasing integration into a global system. Barriers to cross-border trade are coming down all over the place. The issue of communications has shrunk the distance that is involved. I should say communication plus transportation has shrunk the distance between peoples around the globe. And what we are finding is, in the same context that say 150 years ago, we gradually in this country developed—went from local markets to national markets—is that we are going from national markets now to global markets. And we are exceptionally competitive in that regard in the sense that of all the industrial nations in the world, few have gained from globalization as much as we. The reason for that is we have an exceptionally flexible economic system. We have had bipartisan deregulation since the 1970s of a whole series of different industries. The information technology has created an incredible capability to develop new financial instruments and to develop basically the types of things which enable a system to adjust around the world. And I think the major focus that we have to maintain is, one, to keep that degree of resilience and flexibility, which means eschew issues of protectionism, regulation, and anything which rigidifies the market’s adjustments process which has served us so well in the last decade or so. Mr. DAVIS OF KENTUCKY. Just as a follow-on, how would you adjust current trade policy to continue to strengthen international exports in manufacturing? Mr. GREENSPAN. I think that we do that by essentially being competitive, in that we develop skills that create goods and services which customers and the rest of the world want. And we have tended to do that. The issue of the very large trade and current account deficits we have developed or created is largely because globalization has increased. We used to have, and indeed still have, very significant balance of payments deficits between states in this country. In and of itself, it is not a problem in that if it is done in a market system they self adjust, as ours do all the time. We don’t know what our current account balances are between say, New Mexico and Arizona, or any of the states. There have been occasions when there have probably been severe imbalances. But they correct, and they correct basically because we have a flexible system which enables markets to adjust. Mr. DAVIS OF KENTUCKY. Thank you, Chairman Greenspan. I yield back my time. Ms. PRYCE. All right. The Chair would like to put members on notice that there is going to be a series of votes at about 12:30 that should last about an hour. So anyone who cares to keep their questioning short so more of us can have at the Chairman, that would be great. But be- VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 38 cause the votes will last about an hour, we will adjourn the hearing at the time the votes are called. And the chair now recognizes Mr. Meeks. Mr. MEEKS. Thank you. Thank you, Mr. Chair. I am really somewhat puzzled from some of the answers that I have heard today. Let me just see if I can clear up my own mind. The first question that I have is, I know the President has described it as a crisis, et cetera, but I don’t think I have ever heard what your opinion is. The question on Social Security is it or is it not, in your opinion, a crisis? Mr. GREENSPAN. It depends on the—— Mr. MEEKS. Yes or no. Is it a crisis or is it not? Mr. GREENSPAN. Let me be very specific. You have not heard me use that word this morning. Mr. MEEKS. That is correct, and that is what I am trying to find out from you whether in your opinion—— Mr. GREENSPAN. I did not use it—— Mr. MEEKS.——it is or is not a crisis. Mr. GREENSPAN. I did not use it yesterday in the Senate. I consider the problem a very serious one, one that has to be addressed, in my judgment, quite soon, and certainly to be in place well before the 2008 leading edge of the baby boom generation retiring. Mr. MEEKS. So I take that to say, as we sit here today, not 2008, but as we sit here in 2005, that it is not a crisis. It could be a crisis. It may sometime in the future, but as we sit here today, it is not a crisis in your humble opinion? Mr. GREENSPAN. Well, I don’t use the word ‘‘crisis’’ because I think the same—defining what it is very specifically describes what it is. I think it is a very serious issue. It depends on the way you use the word crisis. I have not chosen to use that word. Others might. Mr. MEEKS. What about Medicare? Is that a crisis? Mr. GREENSPAN. It is a very serious problem. I mean, again, it has got the same characteristics. And I would not use the word crisis because I don’t think that that properly identifies what the nature of the problem is. Crisis to me usually refers to something which is going to happen tomorrow or is on the edge of going into a very serious change. That is not going to happen in either Social Security or Medicare over the next several years. Mr. MEEKS. I don’t want to get into this privatization stuff either, but let me—Social Security. But let me ask another question then. You know, it seems as though that some say, and I have heard you say, and I believe I heard you say it today, that you believe in these private accounts, that that is a good thing, the private accounts. Mr. GREENSPAN. I do. Mr. MEEKS. Okay. And I have also—I think I heard you say, in reference to Mr. Watt’s, one of his questions, that the $1.5 trillion, et cetera, we have not taken it out; the feds haven’t borrowed the money. Is that correct? Mr. GREENSPAN. That is correct. VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 39 Mr. MEEKS. All right. Now, so therefore, when you talk about this solvency problem, it is talking about, in the end, the money that is coming in is not going to be sufficient, but the privacy accounts, allegedly, you are supposed to get a better return on your money as a result, so that is supposed to help. Is that correct, when you have these privacy accounts? Mr. GREENSPAN. I have not stipulated that increased rates of return are a significant issue in this debate. What I think, it is a question of what type of facility more easily facilitates the type of full funding of these types of programs that we need if we are going to get the savings to create the investment which is going to create the goods and services. This is not a financial question. This has got to do with, how do we create an adequate amount of real resources for the retirees and the working-age population in 25 years. Mr. MEEKS. My question then, and then I will just try to yield so more of my colleagues have a chance to ask a question, if the securities market—and I guess people are making it up to be so great—why don’t we then, would you recommend, why don’t we invest a portion of the trust fund in the market itself and eliminate the individual risk? Why do you have to put the individual at risk? Why don’t we just put the money in the trust fund in and eliminate the individual risk? Mr. GREENSPAN. I am sorry, you mean have the Social Security trust fund invest in—— Mr. MEEKS. In securities. Mr. GREENSPAN. You could do that, but that still doesn’t give it— you still need $10 trillion, not $1.5 trillion. That doesn’t solve the funding problem. Mr. MEEKS. So basically the proposal that I am hearing from the President then, I think we all agree, has nothing to do with the solvency problem, because if you invest the money in these private accounts on an individual basis, it is the same as if you were to have done it within the trust fund, and you don’t resolve the solvency problem. So the crises that claims, or the problem that you claim will not go away based upon these private accounts. Is that correct? Mr. GREENSPAN. The issue is not a solvency question, it is getting adequate amount of savings in the trust fund to finance investment. It is a full funding problem, not a solvency problem. Ms. PRYCE. The gentleman’s time has expired. The gentleman from Georgia, Mr. Price, is recognized for 5 minutes. Mr. PRICE. Thank you, Madam Chair. I appreciate that. It is an honor to be a part of this committee, and it is indeed a privilege to personally witness your wisdom. And I commend you for your dexterity and your persistence in your answers to many of the questions that have come to you today. I have a comment and then a couple of questions. I am so pleased to hear you in your written testimony and in your spoken testimony identify 2008 as the pivotal date as it relates to the Social Security issue, for two ones. One, as you appropriately identified, that is when the baby boomers begin to retire. VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 40 The second reason that I believe that needs to be pointed out, and that is that on the wonderful graph of the incoming money as it relates to FICA and when we begin to dip, that is the top of that crest. And then we begin to go down where there is money going out than coming in. So I commend you for that. And I don’t care whether you call it a crisis or a near crisis or a looming crisis, as President Clinton called it in 1998, a rose is a rose is a rose. I think the important issue is that you said clearly, ‘‘There is a call for action before the leading edge of the baby boomer retirement becomes evident in 2008,’’ and that is within 3 years. My question relates to our savings rate as a nation. And it is my understanding that the household savings rate is low as it relates to our history as a nation, and also as it relates to other industrialized nations. And so I would ask you what your thoughts are on anything that we might do in terms of policy that would positively and significantly affect our savings rate as a nation. Mr. GREENSPAN. It is one of the most difficult problems government has had, Congressman, in trying to address this particular question. And the reason is that it is not just a question, as we tend to do, create vehicles to save, such as 401(k)s or IRAs or the like, because what we really have to do is to get people to consume less of their income, because that is what savings is. If you don’t consume less of your income and you are building up a 401(k), it is essentially saying that you just drew the funds from other forms of savings and you did not increase your aggregate amount of savings. So the issue really gets down to the question of how do you increase income relative to consumption. And that is not very easy for government to address per se. What we can do is find measures which will augment the growth rate in the economy, create incentives for growth and the like. But unless you impose some things such as a consumption tax, which economists have argued for, which I suspect has very little support in the Congress, it is difficult to see how you come to grips directly with that issue. I might add that the consumption tax issue arose essentially because there does not seem to be any other way to directly get at this issue. My suspicion is that the 1 percent savings rate, which is what it has been for the last year, is probably going to be the low point, and we will start to rise from here. But that has been my expectation for a number of years, and I can’t honestly wish to guarantee it, because it is a very tricky issue to forecast. The bottom line, Congressman, is I really can’t suggest anything which is significant, practical and usable to address this subject and just hope it cures itself, sooner rather than later. Mr. PRICE. I appreciate your response, and I am so pleased to hear you talk about the consumption tax, because, as you identified, you have got to have increased income in order—relative to consumption. If the money never gets to your back pocket, it isn’t income. So if I heard you correctly, I understood you to say that, if we were to be able to move to a consumption tax, to a national retail sales tax, that that would in fact have a byproduct of increasing VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 41 national savings as you increase the amount of money in individual’s pocket. Mr. GREENSPAN. I would certainly think so, because what you are doing is you are taxing consumption, not income, and as a consequence, as people like to say, if you tax it, you will get less of it. And I think that is probably right. Mr. PRICE. Thank you, Mr. Chairman. I yield back. Ms. PRYCE. Mr. Moore of Kansas? Mr. MOORE OF KANSAS. Thank you, Madam Chair. Mr. Chairman, when you talked about the $1.5 trillion in the socalled Social Security trust fund, I think you used the words, ‘‘special security notes,’’ or words to that effect. So the fact is, we don’t have $1.5 trillion in the fund itself, we have special security notes, correct? Mr. GREENSPAN. That is correct. The point I am making is, you do have $1.5 trillion of cumulative savings in the national—in other words, it is contributed cumulative, $1.5 trillion, to savings which is part of national savings. Mr. MOORE OF KANSAS. All right. Is this a marketable special note or fund? Mr. GREENSPAN. No, it is not. It is not marketable. And it gets converted to a marketable security when Treasury needs to raise funds to pay benefits. Mr. MOORE OF KANSAS. So at some point this is an obligation, and the full faith and credit of the United States government’s behind this, and at some point in the future funds will have to be raised to redeem that, correct? Mr. GREENSPAN. That is correct. Mr. MOORE OF KANSAS. Okay. I think there is a lot of maybe misinformation or lack of information in the general public about what actually Social Security is. It is a partial retirement fund, as well as a survivors benefit and a disability benefit. Is that correct, sir? Mr. GREENSPAN. OASI is separate from the disability fund, but the answer is, you are quite correct. Mr. MOORE OF KANSAS. But I think there is misinformation and again lack of information about the fact that about a third, or 30 percent of funds that are paid out to Social Security recipients go for survivors and disability and not just retirement or old age. Is that also your understanding? Mr. GREENSPAN. That is correct. There are disability payments implicit in the OASI fund which relate to disabled children or survivors—— Mr. MOORE OF KANSAS. Right. Mr. GREENSPAN. But there is also, of course, an additional fund, which is the disability insurance fund, which is for disability solely. Mr. MOORE OF KANSAS. And I have heard your statements, Mr. Chairman, about the President’s proposal for partial private accounts, and you have said generally you support those. And I am a little confused, because I heard you say that—I think, correct me if I am wrong, I think that I read that you said that if we had to borrow $2 trillion you wouldn’t be supportive of something like VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 42 that; if we had to borrow $1 trillion, you might support that. Is that correct, sir? Mr. GREENSPAN. I said that because of the difficulty of making judgments as to how markets would behave when you are moving funds out of the U.S. treasury into a private account, even though it is forced savings—meaning, you can’t do anything with it—and from a technical point you have not changed the national savings rate, have not changed the balance of supply and demand of securities, and have not therefore presumably affected the price level of bonds, there is still the issue of how that is perceived by the marketplace, which is not all that easy to make a judgment on. My general concern is that if we knew for sure that the contingent liabilities that now exist are viewed in the private marketplace as similar to the real debt of the federal government, then technically moving funds in a carve-out of the way that the President is talking about would have no effect on interest rates, no effect, indeed, which would then be an accounting system which would be based on accrued receipts. The problem is caused by the fact that we are running unified budget—— Mr. MOORE OF KANSAS. Moving aside from the interest rates concern right now, which I understand is a huge concern, if we were to borrow $2 trillion or $1 trillion right now—and I am saying right now, over the next several years—to finance these partially private accounts and divert money out of present retirement benefits being paid to Social Security recipients, wouldn’t that just pass a debt along to our children and grandchildren? And is that fair? Mr. GREENSPAN. Well, the question is, remember that, at least as I understand the President’s program, which has not been produced sufficiently as yet, that is offset by potential benefits to be paid or scheduled to be paid at a later time. So taking the full context of a particular individual’s period, then the debt in that regard does not change over the long run. Mr. MOORE OF KANSAS. I understand. But we can have the best intentions in the world, and when the President talked to Congress about the Medicare program it was $400 billion, now it is $754 billion. Ms. PRYCE. Gentleman’s time has expired. Mr. MOORE OF KANSAS. Projections don’t always work. Isn’t that correct, sir? Mr. GREENSPAN. That is, of course, correct. Mr. MOORE OF KANSAS. Thank you. Ms. PRYCE. Mr. Barrett is recognized for 5 minutes. Mr. BARRETT. Thank you, Madam Chairman. Mr. Chairman, I was concerned about your testimony on the differences in wages from skilled and non-skilled workers. And I have seen the result in my rural district in South Carolina. I know that education is an important tool when we are talking about trying to lessen the differences between the skilled and the unskilled. But is there anything else we can do, other than education, to help balance the two? Mr. GREENSPAN. The issue of education is so critical to this that it overwhelms, in my judgment, all alternate policies to address VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 43 this issue. Now, you have to include in education, obviously, on-thejob training, even education which is not even formal. And the essential reason is that what makes our country competitive is in my judgment two things. One, it is our Constitution, which creates a rule of law which people want to invest in. And two, it is what is in the heads of our children, because they are the future of the people who will staff our increasingly complex capital stock. I am not sure what else there is to do, because the job is very large in the issue of education and I would not divert resources to anything other than that, if the purpose is to address and resolve this particular issue. Mr. BARRETT. Thank you, Mr. Chairman. Thank you, Madam Chairman. Ms. PRYCE. Mr. Capuano is recognized for 5 minutes. Mr. CAPUANO. Thank you, Madam Chair. Thank you, Mr. Chairman. Mr. Chairman, I just want to just point out a couple little facts. You have repeatedly stated how strongly you support the PAYGO rules. And just as a point of information, the last vote this Congress had on those was November of 2002, as they were expiring, and only 19 members of the House voted to continue those rules. Of those 19 members, three of them are on this panel today. They include myself, Congresswoman Waters and Congresswoman Lee. Now, my guess is that, if you don’t know the rollcalls, most people wouldn’t have expected the three of us to have voted to continue the PAYGO rules. But I guess the reason I say that is, I agree with you. I think it is fair to have the PAYGO rules in the context of you get what you pay for, period. Be honest. Without the PAYGO rules, we run a dishonest accounting system. As far as I am concerned, for all intents and purposes this government is bankrupt. Fair enough. We lost. I think we have to get over it. I don’t think they are going to come back. With only 19 votes on the floor, I don’t think they are going to come back. So for me, though I agree with you 100 percent that the PAYGO rules were good and we should readopt them, they are not going to get readopted. And therefore, we have to look, how else to we do it? How else do we get back some fiscal sanity; in my opinion, it is fiscal honesty. Every time you have come before this committee since I have been on it, you state your support for tax cuts for the wealthiest amongst us. I respectfully disagree. I understand your position. I am not going to challenge you on it. I don’t think you are about to change. But clearly your opinion is that the tax cuts for the wealthiest amongst us are more important than programs. Because if you have it on a system, you only have revenues and expenditures, we haven’t cut back our expenditures as much as you would need to balance our budget, and especially when we cut our revenues, so therefore we have an imbalance. We have a deficit. And if we are not going to change our expenditures, which we haven’t, we shouldn’t change our revenues, I would argue. And I understand that we disagree. VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 44 So I just wanted to make that clear: The PAYGO rules—maybe I am wrong, but they were killed in 2002. There is no real serious talk that I have heard of to bring them back, though if you can generate that talk, I will support you. But what I do want to talk about is, okay, here we are. We haven’t got PAYGO rules. We have deficits for as long as we can see, climbing deficits, dangerous deficits. I know you don’t use the word ‘‘crisis,’’ but I would, relative to deficits. Now we have a proposal in front of us for whatever the program might be, it happens to be Social Security today, but whatever it might be, that might require this government to borrow trillions of dollars. I am not going to try to get you on any of these, because you are too good at avoiding answers you don’t want to answer. You didn’t answer it yesterday, I don’t expect you are going to answer it today as to what the impact of that $2 trillion borrowing might be on today’s market. But I do want to ask you, based on your own testimony, not your testimony, but the report that is in front of us, the table on page 13 clearly indicates something that is a fact, but the table is not new to me, but it is interesting. Since the year 2000, the percentage of treasury securities held by foreign investors as a share of the total treasuries held has gone up above 45 percent, has increased by 45 percent in just 4 years. Regardless of additional borrowing, do you find that troubling? Do you think that is good, bad or indifferent? Mr. GREENSPAN. I find it difficult to make a judgment for the following reason: The reason that they are investing in the United States is they find our U.S. treasury instruments the safest instruments in the world. And in one sense, I am pleased by the fact that that is the view of the rest of the world. As we are becoming increasingly global, there is going to be a great deal of cross-border investment, and everybody’s portfolio is going to have a very big chunk of foreign something. Mr. CAPUANO. So then these foreign investors think that we are a good investment. So therefore there is no reason to believe that the market today would think that the payments coming due to the Social Security trust fund wouldn’t be paid. Mr. GREENSPAN. There is no response in the market at this particular stage that I am aware of. Mr. CAPUANO. Good. And would it be unreasonable or reasonable to presume, to add these two things together, that if we were to go out for an additional $2 trillion worth of borrowing, that, based on statistics today, is it reasonable to presume that 45 percent of that or 50 percent of that would be bought by foreign investors? Mr. GREENSPAN. It is conceivable that it might be more than that. Mr. CAPUANO. So, therefore, if we are going to mortgage our children’s future in Social Security—— Ms. PRYCE. The gentleman’s time has expired. Mr. CAPUANO.——we would be doing it to the Chinese, the Japanese, the Saudis and everybody else around the world except ourselves. Thank you, Mr. Chairman. VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 45 Ms. PRYCE. Mr. Jones is recognized for 5 minutes. Mr. JONES. Madam Chairman, thank you. Mr. Greenspan, I would like to pick up on what my friend from Massachusetts was speaking to. And you are a very learned man. We all have great respect for you, whether we agree or disagree. But I just have to believe with this debt of this nation, the deficit of this nation, that there is going to come a time—and maybe we won’t be here—but there is going to come a time, if we don’t get a handle on this, we are going to be in deep, deep trouble. This is my question: If Japan owns over $700 billion of the U.S. debt, mainland China and Hong Kong together hold over $250 billion of U.S. debt, Mr. Chairman, the question is, if this deficit continues to rise, and it looks like we are not going to do what needs to be done to hold it from rising, what would be the impact on U.S. financial markets if Japan or China were to stop buying U.S. treasury bonds? This might be a hypothetical, but I would appreciate if you would give us your opinion. Mr. GREENSPAN. Yes. We have looked into that question, and I think that we have concluded that the effect of foreign borrowing of U.S. treasury instruments has lowered long-term interest rates a modest amount. And therefore, if they were to choose to stop buying or to sell, it would raise interest rates, but, again, by a modest amount. And the reason for this is that U.S. treasury securities, as big as they are, and as important as they are, are only a fraction of the competing securities around the world, which is what this market is. It is a worldwide market. And in a sense, it is a market in which interest rates in various different localities and for various different instruments are all arbitraged. And so if there is a significant purchase or sale of U.S. treasury security, it is sort of dispersed on the other parts of the market at the same time, so that the adjustment is not particularly great. But the issue you raise is a much deeper one. If we run into serious trouble with respect to our deficit, it is not a question of whether foreigners will buy or not buy our securities, it is whether Americans will buy or not buy our securities. And that to me is where the critical issues lies. We are looking at a gulf in our unified budget for all sorts of reasons, of which Medicare is the largest one, in the period as we get into the next decade. And unless we address that issue now, well in advance of its occurring, I am not sure that we are going to be able to get an appropriate handle on it before it creates serious problems down the road. Mr. JONES. Mr. Chairman, I agree with you totally about the deficit. And thank you so much for being here today. I had a second question, but I want my colleagues to have equal time as I have. So I yield back my time. Thank you. Ms. PRYCE. Thank you, Mr. Jones. Mr. Crowley is recognized. Mr. CROWLEY. Thank you, Madam Chair. And thank you, Mr. Chairman, for being here once again before our committee. VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 46 Mr. Chairman, I want to bring the issue back again to Social Security. In your view, is it possible to create private accounts, that my Republican colleagues would like to do, as the President would like to do as well, without substantially borrowing for the transition that would have to take place? And if so, how would you do that? Mr. GREENSPAN. The only way to do it is to essentially either borrow, raise taxes or cut other spending. Mr. CROWLEY. So the President’s options are—and I will just repeat them—would either be a massive tax increase on the American public—we are talking about massive, anywhere between $1 trillion and $2 trillion, or twice what the IRS took in tax revenues last year. And I believe you stated yesterday that anything over $1 trillion is considered—$1 trillion is large, a large tax increase on the American public. That was A. B, there would be a huge, potentially huge cut to benefits to both current and future, I am assuming, retirees, including the disabled, as well as the dependent children, which is a real possibility. But those benefit cuts would have to come to today’s retirees, as I mentioned before, almost immediately in order to pay the $1 trillion to $2 trillion in borrowing that is needed for the Social Security privatization plan. Or—and this, I think, is the most egregious—massive new deficits. And in essence my colleagues on the other side, I think very effectively, use the issue of the death tax politically incredibly well, and I think cornered us in many respects. What I think is even more immoral and more egregious is the fact—I have two children, 4 and 5, and, quite frankly, I am expecting a third child, although I don’t think my wife expected me to say that on national television. But if you take the fact that my children today owe $26,000, theoretically, in national debt, each, as we all do, my unborn child to be, once it comes out of the womb, will have a price tag of $30,000 that he or she will have to pay—you know, we are all going to die some day, and maybe we are going to need the death tax benefit to pay for our birth tax. And I think that is the most egregious thing about what we are doing to ourselves with this mess of deficit that we are putting our children and our children’s children into fiscal disability in the future. Can you comment on that? Mr. GREENSPAN. Congressman, the problem we have is that there is this yawning, unfunded future liability. This issue is going to emerge, no matter what solution you are talking about, because we are short of funds. The $1.5 trillion in the OASI fund is just not adequate. And the problem that we are going to confront is somewhere along the line, you are going to have to increase taxes or reduce spending somewhere, if we are going to keep the deficit under control. Mr. CROWLEY. Mr. Chairman, I appreciate—I am going to yield back in just a moment. Let me just say, I believe in personal responsibility. That is not just a Republican adage, Democrats believe that as well. I do believe that we have to contribute, ourselves, to our own personal retirement. VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 47 And building up ownership in the retirement, as I think the Chairman mentioned earlier in his opening statement or in his opening question to you, I believe in that. I think we all have to contribute in some way toward that. But Social Security was one leg of the stool, or the chair or the table, in that vein. I am 42 years of age. I still don’t think about Social Security. I am not even thinking about retiring. But I also know that I have to do other things in order to retire, to save for my retirement. And that includes making sound fiscal choices. And I think part of that is investing in the stock market, is in 401(k) plans, is in other pensions, et cetera, et cetera. I think that you are right that we will have to do something, this is a problem that will have to be addressed. It certainly is not a crisis. And I don’t think that it has really borne well for the President or my colleagues on this side to present it as a crisis. It is a problem we all should try to, and I think will work to solve. But I think it goes beyond just Social Security. It is about retirement and what we have to do to the American public to understand that it is about personal responsibility, they need to be engaged in this, and it is not just a problem of Social Security. And I yield back the balance of my time. Ms. PRYCE. Thank you. The gentleman from Pennsylvania, Mr. Fitzpatrick, is recognized. Mr. FITZPATRICK. Thank you, Madam Chair. Mr. Chairman, I want to go back to the issue of workforce investment, following up on Mr. Barrett’s question earlier. Even though the unemployment rate has dropped to 5.2 percent, there are many men and women in my district in Pennsylvania who are still looking for jobs and whose job skills miss the skill requirements of the jobs that are actually available in Pennsylvania and across the nation. And I am a new member of Congress, and find out now, I have been visited already by the community colleges from my district. I have heard from my technical high schools. There are a number of federal programs out there investing in education and workforce investment. I was wondering, Mr. Chairman, if you have any thoughts, or even recommendations on better coordination of education funding to better meet the needs of the next generation of Americans, so that they will be prepared to take the jobs that are actually available? Mr. GREENSPAN. Congressman, I think we have two problems in the area of education. One is to solve the dilemma that one of your colleagues mentioned earlier, namely that in the fourth grade our students seem to rank average or somewhat above average in math and science relative to the rest of the world, but by the twelfth grade, we are down quite low, in the lowest quartile, as I recall. In other words, we are not doing something that the rest of the world does to bring forward the skills of fourth graders through the end of high school. And we have got to address that, because it is a really crucial problem. Secondly, within the types of institutions generally where we seem to be getting the most leverage is the community college, in VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 48 the sense that people are going back to school, and as you probably, I am sure, are aware, a significant proportion of enrollees in community colleges are in their 30s. It is not just the young kids, just coming out of high school. And they are going back to pick up the skills which they need to compete in the world. And I think the dramatic growth that we have seen in community colleges suggests that the demand is there for exactly the type of education, which is an education usually very specific to a specific profession, it is not a generic education, which is what the 4year college tends to do. And that seems to have been quite effective. We do have the problem, as I have indicated before, that we have not solved this question of matching skills with the requirements of our capital stock, but it is clear that where we are making progress apparently, or at least doing the right thing, is in advancing our community colleges. Mr. FITZPATRICK. Thank you, sir, for your thoughts and for your service to our nation. I appreciate it. I yield back my time. Ms. PRYCE. Thank you. Mr. Clay is recognized. And let me just say, there has been a vote called, and this will be the last question of the day. And you may proceed. Mr. CLAY. Thank you, Madam Chairman. Chairman Greenspan, I am concerned about the deficit, and you have voiced concerns numerous times about deficit spending also. There are those who champion tax cuts without regard for future budget consequences. Those who championed the tax cuts of 2001 repeatedly cited the benefits to the economy of that tax cut. Of course, there were those of us who said that most of the cuts were unfunded mandates of a sort and would result in deficits. The CBO has released new data that show that the changes enacted since January 2001 have increased the deficit by $539 billion. They also say that in 2005, the cost of tax cuts enacted over the past 4 years will be over three times the cost of increases in domestic spending. Mr. Chairman, what are your concerns about this huge deficit? And do you still view the tax cuts as being beneficial to the economy? Where do you suggest we go from here? And if you could, elaborate. Mr. GREENSPAN. Well, Congressman, I want to emphasize that our critical first priority is to get the long-term deficits under control. In that context, you do have room—or should have room, as we will indeed have room—to, one, increase spending on certain programs, and reduce taxes on others. You can’t go, with the huge budget that we have, you can’t think in terms that everything goes in the same direction. That is not the way the Congress should or does adjust the priorities of the nation. So I think that I would say the first priority is to assure that deficits are under control. After that, I think the resources that we use and in what form we use them are judgments that the Congress has to make. VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00052 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH 49 I personally think that we would be well served by having significant elimination of the double taxation on dividends because I think that is a crucial aspect of economic growth, which obviously has an effect on the revenue base. But others can disagree others can have different ideas, but that is where I come from. Mr. CLAY. But on that point, do we then go through the budget and slice programs that are wasteful, or do we not make the 2001 tax cuts permanent, or do we target middle-income Americans and give them some financial help? Mr. GREENSPAN. That is the choice of the Congress. I mean, the point is, the wonderful thing about our system is we have elected representatives who have to make these judgments. And if they don’t reach you, somebody else made them, and they are easy decisions. You only get the tough ones. Mr. CLAY. Thank you for your response. I appreciate it, Madam Chair. Ms. PRYCE. Thank you, Mr. Clay. And thank you, Chairman Greenspan, for your service to our country and for your time that you spent with this committee today. It is very much appreciated, and we will welcome you back in about 6 months. With that being said, the chair notes that some members may have additional questions for this panel or this witness which they may wish to submit in writing. Without objection, the hearing record will remain open for 30 days for members to submit written questions to this witness and to place their response in the record. Hearing nothing further, this hearing is adjourned. [Whereupon, at 12:52 p.m., the committee was adjourned.] VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH APPENDIX February 17, 2005 (51) VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00055 Fmt 6601 Sfmt 6601 G:\DOCS\22160.TXT FIN1 PsN: MICAH VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00056 Fmt 6601 Sfmt 6601 G:\DOCS\22160.TXT FIN1 PsN: MICAH 22160.001 52 VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00057 Fmt 6601 Sfmt 6601 G:\DOCS\22160.TXT FIN1 PsN: MICAH 22160.002 53 VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00058 Fmt 6601 Sfmt 6601 G:\DOCS\22160.TXT FIN1 PsN: MICAH 22160.003 54 VerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00059 Fmt 6601 Sfmt 6601 G:\DOCS\22160.TXT FIN1 PsN: MICAH 22160.004 55 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