[House Hearing, 109 Congress]
[From the U.S. Government Printing Office]



             THE ECONOMIC OUTLOOK AND CURRENT FISCAL ISSUES

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

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

             HEARING HELD IN WASHINGTON, DC, MARCH 2, 2005

                               __________

                            Serial No. 109-5

                               __________

           Printed for the use of the Committee on the Budget


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


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                        COMMITTEE ON THE BUDGET

                       JIM NUSSLE, Iowa, Chairman
ROB PORTMAN, Ohio,                   JOHN M. SPRATT, Jr., South 
  Vice Chairman                          Carolina,
JIM RYUN, Kansas                       Ranking Minority Member
ANDER CRENSHAW, Florida              DENNIS MOORE, Kansas
ADAM H. PUTNAM, Florida              RICHARD E. NEAL, Massachusetts
ROGER F. WICKER, Mississippi         ROSA L. DeLAURO, Connecticut
KENNY C. HULSHOF, Missouri           CHET EDWARDS, Texas
JO BONNER, Alabama                   HAROLD E. FORD, Jr., Tennessee
SCOTT GARRETT, New Jersey            LOIS CAPPS, California
J. GRESHAM BARRETT, South Carolina   BRIAN BAIRD, Washington
THADDEUS G. McCOTTER, Michigan       JIM COOPER, Tennessee
MARIO DIAZ-BALART, Florida           ARTUR DAVIS, Alabama
JEB HENSARLING, Texas                WILLIAM J. JEFFERSON, Louisiana
ILEANA ROS-LEHTINEN, Florida         THOMAS H. ALLEN, Maine
DANIEL E. LUNGREN, California        ED CASE, Hawaii
PETE SESSIONS, Texas                 CYNTHIA McKINNEY, Georgia
PAUL RYAN, Wisconsin                 HENRY CUELLAR, Texas
MICHAEL K. SIMPSON, Idaho            ALLYSON Y. SCHWARTZ, Pennsylvania
JEB BRADLEY, New Hampshire           RON KIND, Wisconsin
PATRICK T. McHENRY, North Carolina
CONNIE MACK, Florida
K. MICHAEL CONAWAY, Texas

                           Professional Staff

                     James T. Bates, Chief of Staff
       Thomas S. Kahn, Minority Staff Director and Chief Counsel


                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, March 2, 2005....................     1
Statement of Alan Greenspan, Chairman, Board of Directors of the 
  Federal Reserve System.........................................     7
Prepared statement of:
    Hon. Adam H. Putnam, a Representative in Congress from the 
      State of Florida...........................................     6
    Chairman Greenspan...........................................    10

 
             THE ECONOMIC OUTLOOK AND CURRENT FISCAL ISSUES

                              ----------                              


                        WEDNESDAY, MARCH 2, 2005

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10 a.m., in room 
210, Cannon House Office Building, Hon. Jim Nussle (chairman of 
the committee), presiding.
    Members present: Representatives Nussle, Ryun of Kansas, 
Crenshaw, Putnam, Wicker, Barrett of South Carolina, Lungren, 
Bradley, Ryan of Wisconsin, Hensarling, Bonner, Portman, 
Spratt, Moore, Edwards, Capps, Cooper, Davis, Case, Jefferson, 
Kind, Allen, Cuellar, McKinney, and DeLauro.
    Chairman Nussle. Good morning, and welcome to today's 
Budget Committee hearing. Today we welcome back to the 
committee and we are pleased to have with us the Chairman of 
the Federal Reserve Alan Greenspan to discuss the economic 
outlook and the Federal budget. I will note to members that 
Chairman Greenspan will be available here in the committee 
until 1 p.m., so I will stick to the 5-minute rule, and I ask 
all members to do so so we can give an opportunity to all 
members to ask questions today to as many as possible.
    Chairman Greenspan, welcome back to the Budget Committee. 
We are ever so pleased that you take time to come and visit 
with our committee on a regular basis. It is something that we 
look forward to, and we really do appreciate the advice and 
counsel that you provide us.
    Each time that you appear before the committee, the economy 
continues to look better and better. Particularly in the last 
few years, we have seen steady improvement, and it is not only 
a testament to the resilience and flexibility of our great 
American economy, but also to what I would suggest are policy 
successes of the past several years, everything from tax relief 
to your guidance on monetary policy.
    Last year you appeared before this committee on two 
occasions, in February and then again in September. When you 
were with us in February, we were just beginning to see 
stronger real growth as our economy was rebounding from the 
recession and other adverse factors that we had faced, 
including the bursting of the stock market bubble, corporate 
scandals, the terrorist attacks of September 11, the ensuing 
global war on terrorism. Yet at that time, just last year, we 
were still waiting to see solid evidence of stronger job growth 
and success.
    When you appeared before us 6 months later, last September, 
we had seen continued strong real growth in the economy; in 
fact, the best in 20 years. We were finally seeing solid 
evidence of improvements in the labor markets with falling 
unemployment and increases in payroll jobs. But still there 
were many critics who were claiming that it was a jobless 
recovery, and it was the worst economy since the Great 
Depression. I would certainly hope that we are all thankful 
that those critics were wrong.
    Today the general consensus of both the public and private 
forecasters is that the U.S. economy is now in sustained 
expansion with solid growth, real gross domestic product (GDP) 
and payroll jobs, and with low unemployment and low inflation. 
Today real GDP has increased for 13 consecutive quarters, and 
real growth rates in 2004 was 4.4 percent, the strongest growth 
in 5 years, and one of the strongest rates of growth in the 
past 20 years.
    Private forecasters expect solid growth to continue, and 
even the Federal Reserve published forecasts expects real GDP 
to grow at 3\1/2\ to 4 percent this year and 3\1/4\ to 3\3/4\ 
next year. Real business equipment investment has increased at 
a 15 percent annual rate over the past year and a half, the 
best performance in 7 years. The investment tax relief we 
passed, I believe, helped to make that happen. We see the best 
performance of the housing markets in decades with housing 
construction its best in 20 years; and home ownership, record 
high for our country.
    Perhaps the most important, our labor markets are in much 
better shape. Unemployment rate is down to 5.2 percent and is 
now lower than the decade averages for the 1970s, 1980s, and 
1990s. Payroll employment has increased by 2.7 million jobs 
over the past 20 months, and forecasters are expecting ongoing 
significant gains of about 190,000 jobs per month, or 2\1/4\ 
million more jobs by the end of the year. Significant 
improvement in jobs and labor markets has occurred and is 
expected to continue as new claims for unemployment insurance 
are at their lowest levels in over 4 years.
    How did we get to this point? Well, certainly, again, we 
remember back to what many would suggest was a much better 
time. On September 10 of 2001, we were running a surplus. We 
all remember those days, and everyone is well aware this Nation 
has been through an incredibly difficult number of years 
personally, for individuals, for families, for men and women 
serving in our military, for our men and women on the front 
lines protecting our country, people in our economy who are job 
creators, and people who have lost jobs and have gotten 
retraining and have gained jobs back, as well as the 
uncertainties of our global war on terrorism.
    In response, Congress and the President acted together. We 
took quick, deliberate action to correct not only the economic 
growth deficits that we faced, but also the challenges and 
deficits that we faced in our homeland security and military 
defense. As a result of this response to those challenges and 
the necessary spending associated with that response, we have 
seen a return to budget deficits.
    Chairman Greenspan, when you were with us last year at this 
time, the administration had projected a deficit of $512 
billion for fiscal year 2004, and you told us that if we wanted 
to reduce that deficit, not only had we better keep the economy 
growing in creating jobs, but we had to do a better job of 
getting control of Federal spending.
    Last year we worked to ensure continuation of critical tax 
relief that we had passed, which I believe played a significant 
role in boosting the economy out of the recession through 
recovery and into a sustained expansion. We also, for the first 
time in really a long time, started to get our hands around the 
out-of-control discretionary spending that we provide here in 
Congress, and lo and behold, the deficit actually started to go 
down. We ended last year with a deficit of $412 billion, still 
way too high by anyone's count, but $109 billion less than what 
we anticipated at the start of the year, 20 percent off the top 
of the deficit in 1 year.
    That is a good start and one that we have to continue, but 
I know, and I think we all know, that strong, sustained 
economic growth and tight funding on our discretionary 
programs, even level funding for that matter, will not get us 
back to balance. Don't get me wrong, we need to do both, and we 
have done both, but they are just not enough.
    This year President Bush has taken what I believe are some 
tough but necessary next steps in his budget for slowing our 
currently unsustained rate of spending growth. They are the 
same kinds of ideas that we have floated in this committee many 
times, but we have the President's commitment and leadership, 
and not only does his proposal hold all nonsecurity spending 
below inflation, but it begins a process of looking for savings 
in the largest part of the Federal budget. Fifty-five percent, 
colleagues; 55 percent of our budget is on automatic pilot. It 
simply operates as a mandatory expenditure without any 
controls. That is that mandatory side of the budget we talked 
about, the automatic pilot, the entitlements.
    I commend the President for these new efforts, and it is 
pretty clear that Congress may not--maybe not in the exact way 
that the President has proposed, but in whatever way we decide, 
must begin to propose slowing the rate of growth in the 
largest, most rapidly growing part of our budget if we even 
want to think about reducing the deficit, let alone getting us 
back to balance.
    I understand the criticism and the complaints and a little 
bit of whining has already occurred, because you go into these 
mandatory accounts, and all sorts of people come out of the 
woodwork to begin their criticism. We have heard from Governors 
who say, not yet, not this year, let us do it next year. Trust 
us; we will come forward with a reform proposal. And I believe 
what we have been able to accomplish in the last week to 10 
days a recognition that we can't wait until next year to begin 
the discussion of reform proposals.
    Take Medicaid as an example. The Governors have told us 
seemingly in unison that they don't want an arbitrary number to 
drive the policy, but a number will drive the schedule. We have 
their attention, and we have them at the table. We have begun 
the discussion of reform, and it is an important discussion 
that has to be sustained.
    So while I understand people will say, well, not in my 
backyard, not in this particular area, please don't do it this 
year, please don't pick an arbitrary number, the good news is 
we are beginning a discussion on the mandatory entitlement side 
of the budget, particularly in the health care accounts which 
are unsustainable, have been growing out of control, and 
without significant reforms through a reconciliation process 
that we will go through this year--without that kind of 
discipline, they will grow out of control and envelope the 
entire budget.
    It doesn't mean reconciliation has to begin in May, as is 
typically the challenge. We can work with the Governors to 
bring forward a reform proposal on Medicaid, invite them to the 
table, invite Secretary Leavitt to the table, former Governor, 
who is an honest broker who can talk through Medicaid, and we 
can have their ideas, their proposals, their reforms considered 
the exact same way we did welfare reform back in 1996.
    Is this hard work? Yes. Don't let anybody think it isn't 
going to be hard work. But we have the right people talking 
about it. We have the right people invited to the table. They 
are beginning serious discussions about reform proposals, and 
it is all because the President brought up his budget, and we 
have been discussing reconciliation.
    So I understand there will continue to be complaints and 
criticism that somehow this is going to be difficult, and 
somehow it shouldn't happen this year, and wait until next year 
to do reform, which, as my father always said, tomorrow never 
comes. Well, tomorrow never comes in the budget process either. 
We have to begin that work today, but we can put us on a 
schedule on something that is predictable and invite the right 
people in for reforms.
    So we have asked Chairman Greenspan back with us today to 
first review the current economic picture and also to hear what 
he believes is the best course for keeping our momentum going 
with regard to spending restraint and budget deficit reduction. 
I anticipate we will hear more of your views on a very 
challenging issue of Social Security reform. I am looking 
forward to receiving your testimony on a number of topics that 
I know members are interested in inquiring about. We appreciate 
your willingness to come before our committee today.
    And with that, I will turn it over to my friend and 
colleague to Mr. Spratt for any comments he wishes to make.
    Mr. Spratt. Thank you very much, Mr. Chairman. And thank 
you, Chairman Greenspan, and welcome back to the Budget 
Committee. We appreciate you coming.
    Picking up on where the chairman left off, we are all 
pleased to see the economy back on its feet, but I have to note 
that Chairman Greenspan is only one sentence into his statement 
before he warns, in Fedspeak, the positive short-term economic 
outlook is playing out against a background of concern about 
the prospects for the Federal budget, especially over the 
longer run.
    It is daunting, Mr. Chairman, to compare where we were 5 
years ago, sitting on a surplus of $236 billion, to where the 
Government is today, $2.2 trillion deeper in debt and only 
going deeper. It is demoralizing to see President Bush's budget 
with big national security increases, and yet no sense of 
shared sacrifice, no effort to pay for the national security, 
which we don't dispute the need for; indeed, even more tax cuts 
to come, more tax cuts proposed. And so there is no wonder that 
we see no end to the deficits in this budget.
    The President's budget claims a budget of $390 billion for 
the year 2006. Mr. Chairman, you know and I know this is a 
piece of budget artifice because it omits the cost of deploying 
troops in Iraq and Afghanistan, running at least $5 billion a 
month. The President's budget also calls for more tax cuts, but 
omits any mention of the alternative minimum tax, which will 
cost, by the estimate of the Congressional Budget Office (CBO), 
$640 million to correct so we don't see it applied to middle-
income taxpayers for whom it was never intended.
    And most incredibly of all, the President calls for Social 
Security reform that allows 4 percentage points to be peeled 
off FICA taxes and diverted into private accounts beginning in 
2009, but his budget breathes barely a word about fiscal 
consequences. There is hardly more than a footnote and nothing 
in the tables dealing with the $754 billion that the 
administration acknowledges that it has to borrow between 2009 
and 2015 to pay for the transition. There is nothing close to 
full disclosure, by which I mean an honest acknowledgment that 
$1.4 trillion must be borrowed the first 10 years this plan is 
in effect, and $3.5 trillion must be borrowed during the next 
10 years.
    If we can put up chart No. 2, this is the consequence of 
that kind of borrowing, $4.9 trillion over the next 20 years. 
And yet you are only halfway up the mountain when you get to 
that level. We have only parts and pieces of the plan the 
President is proposing, but using data that the actuaries at 
Social Security have supplied, this graph shows how we plot the 
rising mountain of debt. Indeed, it is Himalayan, a Mount 
Everest of debt under the President's plan, debt increasing, by 
our calculation, every year for the next 50 years as a 
percentage of GDP. No household and no individual and no 
government can run on the basis where every year it accumulates 
more debt, its debt grows faster than its income does. When the 
President's budget is adjusted just for these several big 
realities, the unified deficit goes up, not down, and never 
goes away as this graph, graph No. 3, shows. Indeed, it is hard 
to figure how we will ever again in our lifetimes see the 
budget balanced.
    Here are the questions we hope you will address today, Mr. 
Greenspan. Is this budget on a sustainable path? Basically is 
this budget something that you can put on paper, you can 
project these numbers, but can we take this path without 
expecting to see some severe consequences down the road? Can 
the Government run such deficits and hold harmless our economy 
and the value of the dollar? Are deficits of this magnitude 
consequential? What risks do we run in the world of financial 
markets if financial markets see the deficits as endless and 
enormous?
    Chart No. 4, for example, shows what we plot to be the 
President's budget over the next 10 years. It gets worse, not 
better. Deficits cannot go down. They don't go away. And at 
that point on the horizon, there is no near-term prospect for 
the resolution of the deficits.
    There is an old adage attributed to Hippocrates that we 
should first do know harm when you find yourself faced with 
problems like this. I want to ask you about two particular 
applications of that time-honored rule.
    First of all, the tax cut passed in 2001 and 2003 were 
predicated on surpluses that were acknowledged to be 
substantially overestimated. They have gone. They have been 
replaced by unending deficits. Recognizing that the projected 
surpluses were paper projections and might not obtain, these 
tax cuts were written to expire on December 31, 2010, for the 
most part.
    You have called for the renewal of the Budget Enforcement 
Act of 1991 and its strictures, particularly the PAYGO rule and 
discretionary spending caps. Do you still hold to the view that 
the PAYGO rule should be reinstated, and they should apply to 
these expiring tax cuts so they have to be fully offset if they 
are renewed?
    Secondly, you decry in your testimony the looming deficits. 
You have been an advocate of this position for a long time, but 
you also support the concept at least of private accounts for 
Social Security, partial privatization, which you acknowledge 
will add to the deficit in the near term and for a long time to 
come.
    I know the argument, we have heard it made here before. 
What you will be doing in that case is detracting or 
subtracting from public saving and adding to private saving. 
And maybe it is more than a wash if you put the money in 
private accounts beyond the reach of the Government, but 
nevertheless, this requires the Government to borrow 
substantial sums to bridge transition and borrow these sums at 
a time when we were already scheduled to go into the open 
markets and convert trust fund debt into publicly funded debt, 
because I suppose if we are going to meet our obligations in 
the 2020s, 2030s, and onto the 2040s, we are going have to 
liquidate our debt from trust fund debt to publicly held debt.
    When you put these two together, aren't we tempting fate? 
Aren't we straining the economy and taking risks that we should 
be wary of taking? What are the consequences of the policy, 
what are the risks, the pitfalls, the downside of the proposals 
we have before us.
    We have a plateful of problems, Mr. Chairman. And we 
appreciate your thoughtful testimony and the time you have 
taken to come here. We look forward to hearing your testimony 
and to ask you questions about it. Thank you for coming.
    Chairman Nussle. Thank you Mr. Spratt.
    With that, Chairman Greenspan, welcome back to the House 
Budget Committee. We are pleased to receive your testimony. I 
will ask, before you begin, unanimous consent that all members 
have the opportunity to place a statement, an opening 
statement, in the record at this point. Without objection, so 
ordered.
    [The prepared statement of Mr. Putnam follows:]

Prepared Statement of Hon. Adam H. Putnam, a Representative in Congress 
                       From the State of Florida

    Mr. Chairman, I am pleased to join with you today to continue our 
review and discussion concerning the Fiscal Year 2006 budget, and I 
would once again like to welcome Chairman Greenspan.
    While our Nation is clearly facing and unsustainable budget 
deficit, it is important to acknowledge the remarkable economic 
recovery that we are experiencing, the increase in paid jobs that are 
being produced, as well as the startling growth in the rate of 
homeownership. The final quarter of 2004 was the 13th consecutive 
quarter of economic growth for our Nation, with GDP increasing at 3.8 
percent, an incredible recovery following the 2000-2001 recession. 
Overall, in 2004 the GDP grew 4.4 percent, the strongest annual 
performance in the last 5 years. Also in 2004, payroll employment 
positions increased by 2.2 million. Unemployment is at 5.2 percent, 
lower than the decade average for the three previous decades. 
Homeownership is at a record high. Our goal must be to continue on this 
path of strong recovery while simultaneously curtailing the rate of 
spending that we have seen over the last decade. The economy is strong, 
and reigning in spending is a reasonable policy to keep it so.
    An issue that we have the responsibility to address sooner, rather 
than later, is Social Security. Social Security is safe for today's 
seniors--but it is in serious danger for future retirees. Each year, 
there are more retirees taking money out of the system, with not enough 
additional workers to support them. Currently, Social Security has a 
total unfunded obligation under current law of more than $10 trillion. 
Personal accounts provide Americans who choose to participate with an 
opportunity to share in the benefits of economic growth by 
participating in markets through sound investments. Any delay by 
Congress in addressing the issue limits options for reform and 
increases costs of all options. Addressing Social Security now is 
fiscally responsible, and we owe that to our younger workers.
    In addition to Social Security, we much address other mandatory 
spending programs that have been running on ``automatic pilot'' for 
decades. Our current budget is comprised of too high a percentage of 
mandatory spending programs. Our role here must be to reevaluate the 
justification for their place in the entitlement side of the ledger.
    Congress has worked in recent years to ensure that America has the 
resources it needs for its security. We are the taxpayer's last line of 
defense against excessive or wasteful Federal spending. I believe that 
Congress must establish priorities in these difficult times, 
recognizing, not ignoring the fact that we are at war, and that defense 
needs cannot grow at current rates without concurrent trade-offs in 
other parts of the budget.
    This year's budget must offer long-term solutions to generational 
issues facing us. Social Security, Medicare and Medicaid all find 
themselves on unsustainable glide paths into deficit oblivion. War and 
the threats to our homeland continue to draw resources our of the 
treasury without compounding economic benefit and trade deficits 
reflect an unhealthy imbalance. The historic early decisions are behind 
us, Mr. Chairman. It is time to earn our keep.
    Thank you, Mr. Chairman.

    Chairman Nussle. Chairman Greenspan, welcome back to the 
committee, and we are pleased to receive your testimony.

 STATEMENT OF ALAN GREENSPAN, CHAIRMAN, BOARD OF GOVERNORS OF 
                   THE FEDERAL RESERVE SYSTEM

    Mr. Greenspan. Thank you very much, Mr. Chairman, Ranking 
Member Spratt, and members of the committee. Let me just first 
say that I will be excerpting from my full text and request 
that it be included in the record.
    Chairman Nussle. It will be.
    Mr. Greenspan. I want to emphasize that I will be speaking 
on the Federal budget and related issues, but I am speaking for 
myself and not necessarily for other members of the Federal 
Reserve Board.
    The U.S. economy delivered a solid performance in 2004, and 
thus far this year activity appears to be expanding at a 
reasonably good pace. However, the positive short-term economic 
outlook is playing out against the backdrop of concern about 
the prospects for the Federal budget, especially over the 
longer run. As the latest projections from the administration 
and the Congressional Budget Office suggest, our budget 
position is unlikely to improve substantially in the coming 
years unless major deficit-reducing actions are taken.
    In my judgment, the necessary choices will be especially 
difficult to implement without the restoration of a set of 
procedural restraints on the budget-making process. Reinstating 
a structure like the one provided by the Budget Enforcement Act 
would signal a renewed commitment to fiscal restraint and help 
restore discipline to the annual budgeting process. Such a step 
would be even more meaningful if it were coupled with the 
adoption of a set of provisions for dealing with unanticipated 
budgetary outcomes over time.
    The original design of the Budget Enforcement Act could 
also be enhanced by addressing how the strictures might evolve 
if and when reasonable fiscal balance came into view. I do not 
mean to suggest that the Nation's budget problems will be 
solved simply by adopting a new set of rules. The fundamental 
fiscal issue is the need to make difficult choices among budget 
priorities, and this need is becoming ever more pressing in 
light of the unprecedented number of individuals approaching 
retirement age.
    Because the baby boomers have not yet started to retire in 
force, we have been in a demographic lull, but this state of 
relative stability will end soon. In 2008, just 3 years from 
now, the leading edge of the baby-boom generation will reach 
62, the earliest age at which Social Security retirement 
benefits can be drawn, and the age at which about half of those 
eligible to claim benefits have been doing so in recent years. 
Just 3 years after that, in 2011, the oldest baby boomers will 
reach 65 and thus be eligible for Medicare.
    Currently 3\1/4\ workers contribute to the Social Security 
System for each beneficiary. Under the intermediate assumptions 
of the program's trustees, the number of beneficiaries will 
have roughly doubled by 2030, and the ratio of covered workers 
to beneficiaries will be down to about two. The pressures on 
the budget from this dramatic demographic change will be 
exacerbated by those stemming from the anticipated steep upward 
trend in spending per Medicare beneficiary.
    A combination of an aging population and the soaring costs 
of its medical care is certain to place enormous demands on our 
Nation's resources and to exert pressure on the budget that 
economic growth alone is unlikely to eliminate. To be sure, 
favorable productivity developments will help to alleviate the 
budgetary strains, but unless productivity growth far outstrips 
that embodied in current budget forecasts, it is unlikely to 
represent more than part of the answer. Higher productivity 
does, of course, buoy revenues, but because initial Social 
Security benefits are influenced heavily by economywide wages, 
faster productivity growth, with a lag, also raises benefits 
under current law. Moreover, because the long-range budget 
assumptions already make reasonable allowances for future 
productivity growth, one cannot rule out the possibility that 
productivity growth will fall short of projected future 
averages.
    In fiscal year 2004, Federal outlays for Social Security, 
Medicare and Medicaid totaled about 8 percent of gross domestic 
product. The long-run projections from the Office of Management 
and Budget (OMB) suggest that the share will rise to 9\1/2\ 
percent by 2015 and will be in the neighborhood of 13 percent 
by 2030. So long as health-care costs continue to grow faster 
than the economy as a whole, the additional resources needed 
for such programs will exert pressure on the Federal budget 
that seems increasingly likely to make current fiscal policy 
unsustainable. The likelihood of escalating unified budget 
deficits is of great concern because they would drain an 
inexorably growing volume of real resources away from private 
capital formation over time and cast an ever larger shadow over 
the growth of living standards.
    The broad contours of the challenges ahead are clear, but 
considerable uncertainty remains about the precise dimensions 
of the problem and about the extent to which future resources 
will fall short of our current statutory obligations to the 
coming generations of retirees.
    The uncertainty about future medical spending is daunting. 
We know very little about how rapidly medical technology will 
continue to advance and how those innovations will translate 
into future spending. Technological innovations can greatly 
improve the quality of medical care and can in some instances 
reduce the costs of existing treatments. But because technology 
expands the set of treatment possibilities, it also has the 
potential to add to overall spending, in some cases by a great 
deal. As a result, the actuaries' projections of Medicare costs 
are highly provisional.
    These uncertainties, especially our inability to identify 
the upper bound of future demands for medical care, counsel 
significant prudence in policymaking. The critical reason to 
proceed cautiously is that new programs quickly develop 
constituencies willing to fiercely resist any curtailment of 
spending or tax benefits. As a consequence, our ability to rein 
in deficit-expanding initiatives, should they later prove to 
have been excessive or misguided, is quite limited.
    I fear we may have already committed more physical 
resources to the baby-boom generation in its retirement years 
than our economy has the capacity to deliver. If existing 
promises need to be changed, those changes should be made 
sooner rather than later. We owe future retirees as much time 
as possible to adjust their plans for work, saving and 
retirement spending.
    Addressing the Government's own imbalances will require 
scrutiny of both spending and taxes. However, tax increases of 
sufficient dimension to deal with our looming fiscal problems 
arguably pose significant risks to economic growth and the 
revenue base. The exact magnitude of such risks is difficult to 
estimate, but in my judgment they are sufficiently worrisome to 
warrant aiming if at all possible to close the fiscal gap 
primarily, if not wholly, from the outlay side. In the end, I 
suspect that unless we attain unprecedented increases in 
productivity, we will have to make significant structural 
adjustments in the Nation's major retirement and health 
programs.
    Our current largely pay-as-you-go social insurance system 
worked well given the demographics of the second half of the 
20th century, but as I have argued previously, the system is 
ill-suited to address the unprecedented shift of population 
from the workforce to retirement that will start in 2008. Much 
attention has been focused on the forecasted exhaustion of the 
Social Security Trust Fund in 2042, but solving that problem 
will do little in itself to meet the imperative to boost our 
national saving. Raising national saving is an essential step 
if we are to build a capital stock that, by, say, 2030 will be 
sufficiently large to produce goods and services adequate to 
meet the needs of retirees without unduly curbing the standards 
of living of our working-age population.
    Unfortunately, the current Social Security System has not 
proven a reliable vehicle for such saving. Indeed, although the 
trust funds have been running annual surpluses since the mid-
1980s, one can credibly argue that they have served primarily 
to facilitate larger deficits in the rest of the budget and 
therefore have added little or nothing to national saving.
    In my view, a retirement system with a significant personal 
accounts component would provide a more credible means of 
ensuring that the program actually adds to overall saving and 
in turn boosts the Nation's capital stock. The reason is that 
money allocated to the personal accounts would no longer be 
able to fund other government activities and, barring an 
offsetting reduction in private saving outside the new 
accounts, would, in effect, be reserved for future consumption 
needs.
    The challenge of Medicare is far more problematic than that 
associated with Social Security. A major reason is the large 
variance of possible outcomes mentioned earlier coupled with 
the inadequacy of the current medical information base. Some 
important efforts are under way to use the capabilities of 
information technology to improve the health care system. If 
supported and promoted, these efforts could provide key 
insights into clinical best practices and substantially reduce 
administrative costs. And with time we should also gain 
valuable knowledge about the best approaches to restraining the 
growth of overall health-care spending.
    Crafting a budget strategy that meets the Nation's longer-
run needs will become ever more difficult the more we delay. 
The one certainty is that the resolution of the Nation's 
unprecedented demographic challenge will require hard choices, 
and that the future performance of the economy will depend on 
those choices.
    Thank you very much, Mr. Chairman. I look forward to your 
questions.
    Chairman Nussle. I thank you, Mr. Chairman, for your 
testimony.
    [The prepared statement of Alan Greenspan follows:]

 Prepared Statement of Alan Greenspan, Chairman, Board of Governors of 
                       the Federal Reserve System

    Mr. Chairman, Ranking Member Spratt, and members of the Committee, 
I am pleased to be here today to offer my views on the Federal budget 
and related issues. I want to emphasize that I speak for myself and not 
necessarily for the Federal Reserve.
    The U.S. economy delivered a solid performance in 2004, and thus 
far this year, activity appears to be expanding at a reasonably good 
pace. However, the positive short-term economic outlook is playing out 
against a backdrop of concern about the prospects for the Federal 
budget, especially over the longer run. Indeed, the unified budget is 
running deficits equal to about 3\1/2\ percent of gross domestic 
product, and Federal debt held by the public as a percent of GDP has 
risen noticeably since it bottomed out in 2001. To be sure, the 
cyclical component of the deficit should narrow as the economic 
expansion proceeds and incomes rise. And the current pace of the ramp-
up in spending on defense and homeland security is not expected to 
continue indefinitely. But, as the latest projections from the 
Administration and the Congressional Budget Office suggest, our budget 
position is unlikely to improve substantially in the coming years 
unless major deficit-reducing actions are taken.
    In my judgment, the necessary choices will be especially difficult 
to implement without the restoration of a set of procedural restraints 
on the budget-making process. For about a decade, the rules laid out in 
the Budget Enforcement Act of 1990 and in the later modifications and 
extensions of the act provided a framework that helped the Congress 
establish a better fiscal balance. However, the brief emergence of 
surpluses in the late 1990s eroded the will to adhere to these rules, 
which were aimed specifically at promoting deficit reduction rather 
than at the broader goal of setting out a commonly agreed-upon standard 
for determining whether the Nation was living within its fiscal means. 
Many of the provisions that helped restrain budgetary decisionmaking in 
the 1990s--in particular, the limits on discretionary spending and the 
PAYGO requirements--were violated ever more frequently; finally, in 
2002, they were allowed to expire.
    Reinstating a structure like the one provided by the Budget 
Enforcement Act would signal a renewed commitment to fiscal restraint 
and help restore discipline to the annual budgeting process. Such a 
step would be even more meaningful if it were coupled with the adoption 
of a set of provisions for dealing with unanticipated budgetary 
outcomes over time. As you are well aware, budget outcomes in the past 
have deviated from projections--in some cases, significantly--and they 
will continue to do so. Accordingly, a well-designed set of mechanisms 
that facilitate midcourse corrections would ease the task of bringing 
the budget back into line when it goes off track. In particular, you 
might want to require that existing programs be assessed regularly to 
verify that they continue to meet their stated purposes and cost 
projections. Measures that automatically take effect when costs for a 
particular spending program or tax provision exceed a specified 
threshold may prove useful as well. The original design of the Budget 
Enforcement Act could also be enhanced by addressing how the strictures 
might evolve if and when reasonable fiscal balance came into view.
    I do not mean to suggest that the Nation's budget problems will be 
solved simply by adopting a new set of rules. The fundamental fiscal 
issue is the need to make difficult choices among budget priorities, 
and this need is becoming ever more pressing in light of the 
unprecedented number of individuals approaching retirement age. For 
example, future Congresses and Presidents will, over time, have to 
weigh the benefits of continued access, on current terms, to advances 
in medical technology against other spending priorities as well as 
against tax initiatives that foster increases in economic growth and 
the revenue base.
    Because the baby boomers have not yet started to retire in force, 
we have been in a demographic lull. But this state of relative 
stability will soon end. In 2008--just 3 years from now--the leading 
edge of the baby-boom generation will reach 62, the earliest age at 
which Social Security retirement benefits can be drawn and the age at 
which about half of those eligible to claim benefits have been doing so 
in recent years. Just 3 years after that, in 2011, the oldest baby 
boomers will reach 65 and will thus be eligible for Medicare. 
Currently, 3\1/4\ workers contribute to the Social Security system for 
each beneficiary. Under the intermediate assumptions of the program's 
trustees, the number of beneficiaries will have roughly doubled by 
2030, and the ratio of covered workers to beneficiaries will be down to 
about 2. The pressures on the budget from this dramatic demographic 
change will be exacerbated by those stemming from the anticipated steep 
upward trend in spending per Medicare beneficiary.
    The combination of an aging population and the soaring costs of its 
medical care is certain to place enormous demands on our Nation's 
resources and to exert pressure on the budget that economic growth 
alone is unlikely to eliminate. To be sure, favorable productivity 
developments would help to alleviate the impending budgetary strains. 
But unless productivity growth far outstrips that embodied in current 
budget forecasts, it is unlikely to represent more than part of the 
answer. Higher productivity does, of course, buoy revenues. But because 
initial Social Security benefits are influenced heavily by economywide 
wages, faster productivity growth, with a lag, also raises benefits 
under current law. Moreover, because the long-range budget assumptions 
already make reasonable allowance for future productivity growth, one 
cannot rule out the possibility that productivity growth will fall 
short of projected future averages.
    In fiscal year 2004, Federal outlays for Social Security, Medicare, 
and Medicaid totaled about 8 percent of GDP. The long-run projections 
from the Office of Management and Budget suggest that the share will 
rise to 9\1/2\ percent by 2015 and will be in the neighborhood of 13 
percent by 2030. So long as health-care costs continue to grow faster 
than the economy as a whole, the additional resources needed for such 
programs will exert pressure on the Federal budget that seems 
increasingly likely to make current fiscal policy unsustainable. The 
likelihood of escalating unified budget deficits is of especially great 
concern because they would drain an inexorably growing volume of real 
resources away from private capital formation over time and cast an 
ever-larger shadow over the growth of living standards.
    The broad contours of the challenges ahead are clear. But 
considerable uncertainty remains about the precise dimensions of the 
problem and about the extent to which future resources will fall short 
of our current statutory obligations to the coming generations of 
retirees. We already know a good deal about the size of the adult 
population in, say, 2030. Almost all have already been born. Thus, 
forecasting the number of Social Security and Medicare beneficiaries is 
fairly straightforward. So too is projecting future Social Security 
benefits, which are tied to the wage histories of retirees. However, 
the uncertainty about future medical spending is daunting. We know very 
little about how rapidly medical technology will continue to advance 
and how those innovations will translate into future spending. 
Consequently, the range of possible outcomes for spending per Medicare 
beneficiary expands dramatically as we move into the next decade and 
beyond. Technological innovations can greatly improve the quality of 
medical care and can, in some instances, reduce the costs of existing 
treatments. But because technology expands the set of treatment 
possibilities, it also has the potential to add to overall spending--in 
some cases, by a great deal. Other sources of uncertainty--for example, 
the extent to which longer life expectancies among the elderly will 
affect medical spending--may also turn out to be important. As a 
result, the range of future possible outlays per recipient is extremely 
wide. The actuaries' projections of Medicare costs are, perforce, 
highly provisional.
    These uncertainties--especially our inability to identify the upper 
bound of future demands for medical care--counsel significant prudence 
in policymaking. The critical reason to proceed cautiously is that new 
programs quickly develop constituencies willing to fiercely resist any 
curtailment of spending or tax benefits. As a consequence, our ability 
to rein in deficit-expanding initiatives, should they later prove to 
have been excessive or misguided, is quite limited. Thus, policymakers 
need to err on the side of prudence when considering new budget 
initiatives. Programs can always be expanded in the future should the 
resources for them become available, but they cannot be easily 
curtailed if resources later fall short of commitments.
    I fear that we may have already committed more physical resources 
to the baby-boom generation in its retirement years than our economy 
has the capacity to deliver. If existing promises need to be changed, 
those changes should be made sooner rather than later. We owe future 
retirees as much time as possible to adjust their plans for work, 
saving, and retirement spending. They need to ensure that their 
personal resources, along with what they expect to receive from the 
government, will be sufficient to meet their retirement goals.
    Addressing the government's own imbalances will require scrutiny of 
both spending and taxes. However, tax increases of sufficient dimension 
to deal with our looming fiscal problems arguably pose significant 
risks to economic growth and the revenue base. The exact magnitude of 
such risks is very difficult to estimate, but, in my judgment, they are 
sufficiently worrisome to warrant aiming, if at all possible, to close 
the fiscal gap primarily, if not wholly, from the outlay side. In the 
end, I suspect that, unless we attain unprecedented increases in 
productivity, we will have to make significant structural adjustments 
in the Nation's major retirement and health programs.
    Our current, largely pay-as-you go social insurance system worked 
well given the demographics of the second half of the twentieth 
century. But as I have argued previously, the system is ill-suited to 
address the unprecedented shift of population from the workforce to 
retirement that will start in 2008. Much attention has been focused on 
the forecasted exhaustion of the Social Security trust fund in 2042. 
But solving that problem will do little in itself to meet the 
imperative to boost our national saving. Raising national saving is an 
essential step if we are to build a capital stock that by, say, 2030 
will be sufficiently large to produce goods and services adequate to 
meet the needs of retirees without unduly curbing the standard of 
living of our working-age population.
    Unfortunately, the current Social Security system has not proven a 
reliable vehicle for such saving. Indeed, although the trust funds have 
been running annual surpluses since the mid-1980s, one can credibly 
argue that they have served primarily to facilitate larger deficits in 
the rest of the budget and therefore have added little or nothing to 
national saving.
    In my view, a retirement system with a significant personal 
accounts component would provide a more credible means of ensuring that 
the program actually adds to overall saving and, in turn, boosts the 
Nation's capital stock. The reason is that money allocated to the 
personal accounts would no longer be available to fund other government 
activities and--barring an offsetting reduction in private saving 
outside the new accounts--would, in effect, be reserved for future 
consumption needs.
    The challenge of Medicare is far more problematic than that 
associated with Social Security. A major reason is the large variance 
of possible outcomes mentioned earlier coupled with the inadequacy of 
the current medical information base. Some important efforts are under 
way to use the capabilities of information technology to improve the 
health-care system. If supported and promoted, these efforts could 
provide key insights into clinical best practices and substantially 
reduce administrative costs. And, with time, we should also gain 
valuable knowledge about the best approaches to restraining the growth 
of overall health-care spending.
    Crafting a budget strategy that meets the Nation's longer-run needs 
will become ever more difficult the more we delay. The one certainty is 
that the resolution of the Nation's unprecedented demographic challenge 
will require hard choices and that the future performance of the 
economy will depend on those choices. No changes will be easy, as they 
all will involve setting priorities and, in the main, lowering claims 
on resources. It falls to the Congress to determine how best to address 
the competing claims on our limited resources. In doing so, you will 
need to consider not only the distributional effects of policy changes 
but also the broader economic effects on labor supply, retirement 
behavior, and private saving. In the end, the consequences for the U.S. 
economy of doing nothing could be severe. But the benefits of taking 
sound, timely action could extend many decades into the future.

    Chairman Nussle. Let me barely scratch the surface on a 
number of items in my 5 minutes. First, it appears that you 
agree that the economy appears to be in some definition of 
sustained expansion, that we have had solid GDP growth, jobs, 
and low inflation. Even though this should be good news for the 
budget outlook in the short run, your testimony indicates that 
you don't think we can grow our way out of our budget problems. 
Would you expand on your feeling in that regard?
    Mr. Greenspan. Yes, Mr. Chairman. The reason basically is 
the huge potential expenditure in Medicare concerning which we 
have very little understanding and essentially, at this stage, 
very little control. Implicit in both the Social Security 
System and in Medicare are mechanisms, direct and indirect, 
that indicate that in the event of either a rise in inflation 
or a rise in real growth in the economy, the benefits in both 
of those programs go up over the long run reasonably 
proportionately. So in a sense the more we grow, the more the 
benefits rise, and as a consequence, we can't work our way out 
directly.
    Now it is the case that especially in Social Security there 
is a substantial lag between the acceleration of productivity 
and when it ultimately feeds into benefits through the link 
which occurs as a consequence of the fact that initial benefits 
are linked to wages, which pick up the productivity changes. So 
over the long run, you are effectively, under current law, 
guaranteeing real benefits. And while that is not actually the 
case on the Medicare system, as a practical matter it is 
turning out to be that way. So it does not appear as though we 
can look to the mere acceleration in productivity--which, of 
course, is the only way we can grow increasingly--as a 
resolution to our fiscal problem in this respect.
    Chairman Nussle. And yet our economy is growing. We have 
seen some great news in the last number of quarters in 
particular, so there is growth. And what would you suggest--let 
us focus on taxes. There are a number of reasons why we have 
seen growth, but if you could focus on tax policy for a moment 
and suggest to us which tax policy changes you felt during the 
last 3 or 4 years were the most significant in getting us back 
on track and accelerating that growth.
    Mr. Greenspan. There was a particular part in the recent 
changes in tax policy which I thought and continue to believe 
was highly desirable, and that is the partial elimination of 
the double taxation of dividends. There is a major efficiency 
question here with respect to how the economy functions, and it 
has always been my view, and it is the view of a number of 
economists, that integrating the individual and corporate tax 
would improve the efficiency of the economy, increase its 
growth rate and in the end increase revenues. And the action 
taken with respect to reducing specifically taxation on 
dividends received I thought was a very useful and major 
structural change in the budget. It is the case that other 
elements of the tax cut were effective and instrumental in 
reducing the weakness that occurred in the economy in 2001, but 
they are no longer playing a role of any significance today.
    Chairman Nussle. Taking that tax policy for a moment and 
remembering back, as I am sure you can as well as I can, to the 
debate at that time, it was one of the more controversial and 
partisan tax policy changes that were made. There was not a lot 
of broad support for that tax policy change. And as a result, 
it was controversial, and as a result of not having arbitrary 
rules, such as paying for tax cuts, quote/unquote, as many 
people like to use in the parlance of budgetspeak around 
Washington--as a result of not having that arbitrary rule, we 
were able to pass an elimination, partial elimination, of the 
double taxation for dividends.
    I would hate to see an arbitrary rule because of--for 
partisan purposes only, which appears to be one of the reasons 
why they are often put in to prevent us from making a very 
important emergency change to our economy and to our Tax Code 
in order to elicit a very positive change in our economy, which 
you are suggesting occurred and many others are suggesting 
occurred. To me, it is important for us to have pay-as-you-go 
for spending. But do you really see tax relief as Government 
spending--other than obviously earned income tax credits where 
we are handing out money--but actual changes in tax policy as 
really spending on the part of Government? That to me is not 
spending. Why do you stick to this position as you have very 
forcefully over the years, when, in fact, something as 
important as the double taxation of dividends most likely would 
not have been done as a result of an arbitrary budget rule?
    Mr. Greenspan. I do so, Mr. Chairman, because I grant you 
that if everyone believed as I do, and I realize you do, that 
the solution to the budget problem is far more sensibly 
addressed on the outlay side, then it wouldn't make very much 
difference. But it is an arguable issue, and this is a 
democracy, and we do have differing views and people holding 
differing views, and compromise is essential in getting a 
functional legislature to work its will. And in full 
recognition of that, and in recognition of the fact that there 
are people who don't agree with either you or me on this issue, 
I think we require that to be symmetrical, because it is the 
principle that I think is involved here; namely, that you 
cannot continuously introduce legislation which tends to expand 
the budget deficit, because down the road, the impact of an 
ever-rising deficit, especially as a percent of the GDP, 
creates some significant weakness in the structure of the 
economy. So it is not an issue of economics. It is an issue, if 
you want to put it that way, of political economy.
    Chairman Nussle. And I won't put words in your mouth. You 
are able to do that very well yourself. But let me tell you 
what I believe I heard and what that means to me, and that is 
there was a time where pay-as-you-go applied to both sides of 
the ledger for political compromise. One of the challenges that 
we have is that because you stick to that position, there are 
those who say that we are not doing proper budgeting out here 
because we don't pay for taxes, quote/unquote.
    I agree with you. It was part of the political compromise 
that was reached a numbers of years ago. It had its impact. It 
worked for a time, but it has been used as a political hammer, 
an anvil, against good tax policy at a time when our economy 
needed that kind of a shot in the arm. I agree with you on the 
issue that it needs to be there to pay for spending. That is 
what Government pays for is its spending. But taxes are paid by 
people, not by Government, and while I understand your point of 
view that there may be a political necessity or compromise in 
order to reach new budget rules, I happen to also agree with 
you that the more important way to address budget discipline is 
on the spending side.
    With that, I will yield to Mr. Spratt.
    Mr. Spratt. Mr. Chairman, let me pick up where you left off 
and say that there are few big variables out in the future that 
will determine the course of the deficit, and one is what 
happens to the tax cuts that were enacted in 2001 and 2003 when 
they expire in 2010, at the end of 2010? The chairman has said, 
sitting right there in that chair twice before, we should 
reenact, renew the Budget Enforcement Act of 1991. You declared 
yourself a skeptic, if not a cynic, at one time as to whether 
or not those rules would work and came here, and Mr. Copeland 
said, I was only too pleased to say that I was wrong. They have 
had a more salutary effect than I ever suspected they might 
have. And you called twice that I recall, Mr. Chairman, for a 
double-edged PAYGO rule. Political compromise or not, it would 
apply both to entitlement increases and to tax cuts.
    Is it still your position that if we renew the PAYGO rule, 
it should apply to both; if we have tax cuts, including the 
renewal of the expiring tax cuts in 2010, that these should be 
fully offset?
    Mr. Greenspan. It is still my position. The principle of 
containing budget expansion is the overriding principle here. 
And while, as I just indicated before, I could prefer to 
structure PAYGO in a different way, that we have some form of 
PAYGO system which is agreed upon by the Congress, in my 
judgment, is the overriding consideration here, because as you 
point out, it was quite effective in actually stemming budget 
inefficiencies and expansion during the period when it was in 
law.
    I argued strenuously before this committee, I think, days 
before its expiration in September 2002, that the act should be 
renewed. I still do that. And even though I still believe that 
partial elimination of the double taxation of dividends 
deserves to be extended, because I think it is a fundamentally 
important issue, nonetheless, the principle which is important 
comes first. If I were voting, which, of course, I don't, I 
would vote for continuing the partial elimination of the double 
taxation of dividends, but I would also offer PAYGO offsets in 
order to implement that.
    Mr. Spratt. Let me ask you something about a different 
line. You have also been an outspoken opponent for some time 
that the Social Security trustees would use the common public 
trust fund and invest some portion of it in--invest some 
portion of it in equities and the stock market, which is what 
private pension plans and public pension plans. The Federal 
Reserve pension plan, I believe, is two-thirds invested in 
equities. But you have been an opponent of Social Security 
doing the same thing.
    The administration is now proposing that the set-aside of 
these private accounts would be invested in a limited range of 
accounts, modeled after the Thrift Savings Plan (TSP); 
therefore, it would be created by the Government. The 
investment manager would likely be chosen by the Government. 
They would operate under statutory provisions that would 
structure the program, and from time to time the managers will 
be chosen, the thing would be bid and rebid.
    Isn't this getting very close to having the trust fund, the 
Social Security Trust Fund, invested? The Government is really 
the player here calling the shots, which would be the same case 
if you had a trustee appointed for the investment of the common 
trust fund.
    Mr. Greenspan. It is, Congressman. It is the one part that 
is as yet an unannounced program, about which I have a certain 
pause for exactly the reasons you indicate.
    Mr. Spratt. Let me ask you one final question. That is 
today's debt is different from a debt when we were taking 
economics's 101. And reading Samuelson as college students, we 
were all told that the debts--its importance is not that great, 
but today's debt is different because increasingly it is held 
by foreigners. I have a chart here, I think No. 3, which shows 
you the percentage of debt that is increasingly held by foreign 
entities, central banks, Government treasuries and foreign 
individuals. Is this a qualitatively different kind of debt 
from a debt we have incurred and held in past years?
    Mr. Greenspan. No, it is not. It is caused, as you know, by 
the fact that, one, we have fallen far short in domestic 
savings, so-called national savings, and as a consequence, to 
maintain our domestic investment, we have had to increase our 
borrowing of savings from abroad to a very significant extent. 
And to the extent that the evidence of that debt is U.S. 
Treasury instruments, it is reflected in the chart that you 
have there.
    The second issue, remember, is the fact that they choose to 
invest here and----
    Mr. Spratt. They could choose not to invest here, probably 
more readily than domestic citizens.
    Mr. Greenspan. They could, but the fact they choose to 
invest here suggests they believe that the rates of return in 
this country and the nature of the assets which they can hold 
under U.S. law are exceptionally attractive. The question 
basically is should we not be concerned in the sense that this 
is a reflection of the fact that we save too little, and that 
if we are concerned about these figures, the answer is not to 
prohibit foreigners from purchasing our securities, but rather 
to create a situation in which we have enough domestic savings 
that the need to borrow foreign savings is reduced 
dramatically.
    Mr. Spratt. I wasn't going to suggest that we prohibit it. 
Far from it. We would be in a terrible crisis if we restricted 
foreign acquisition of our debt. But it would seem to me there 
comes a time, particularly when we have woefully deficient 
domestic savings--there could be a time when foreigners become 
satisfied that they have enough and, for portfolio 
diversification purposes, they decide to move into other debt.
    Mr. Greenspan. Indeed. It is exactly the point I have been 
making over the last year or two. It is not an issue only of 
the rates of return or the quality of the assets which we 
offer, which are world class, but there does come a time when 
it is conceivable you are holding too much of your existing 
assets in one set of countries. And merely for diversification 
purposes, one would evidently start to move.
    There is, I must tell you, however, very little evidence 
that that is even going on, even though there have been some 
rumors in the press and the like that there has been a 
significant move out of U.S. dollars. That may occur somewhere 
down the line years ahead. Nobody really knows for sure, but 
there is very little evidence that what is occurring recently 
is more than technical moves backwards and forwards.
    Mr. Spratt. Thank you, sir.
    Chairman Nussle. Mr. Portman.
    Mr. Portman. Thank you, Mr. Chairman.
    And, Chairman Greenspan, thank you for being with us today 
and for your optimistic assessment of our economy, your good 
news about 2004, and also looking forward to 2005, which you 
see as sustained growth.
    My first question to you would be on the tax side, and if 
you could give us an assessment of what you think the role was 
of the tax relief in 2001, 2002, and indeed 2003. You talked 
about the dividend tax relief. Capital gains relief was also 
enacted that year. What role do you think it played in having 
us have the relatively strong economic growth we have seen and 
the job growth we have seen, over 2 million new jobs in the 
last year, 2004? What role will it be going forward in 2005?
    Mr. Greenspan. The main effect of tax cuts is on the GDP. 
Its effect on employment is indirect in the sense that 
sometimes the GDP is created by accelerated output per hour, 
which increases standard of living, but doesn't increase 
employment, so that an analysis of tax cuts should always focus 
on the issue of what they do to economic growth.
    It is fairly apparent that tax cuts were a significant 
factor in stemming the weakness that was occurring in the 
American economy subsequent to the bursting of the bubble in 
2000. And while you don't know exactly how and by what amounts, 
it is evident from the very shallow recession that occurred as 
a consequence of the number of imbalances that were occurring 
in the latter 1990s, that a goodly part of the support did come 
from tax cuts.
    It is less important now in the sense that the economy is 
now developing its own momentum. Capital investment is picking 
up. The orders are coming in reasonably well. An increasing 
number of business executives are indicating that their 
business is good and getting better.
    Mr. Portman. We have had a discussion of PAYGO, but as a 
general rule do you believe as these tax relief provisions that 
were put in place in 2001, 2002, and 2003 begin to expire, that 
they should be extended, or should we have tax increases, and 
what effect would that have on the economy?
    Mr. Greenspan. I have only commented on the one which has 
always been important to me, which is reducing part of the 
double taxation of dividends. All I am saying is that my 
general view is I would like to see the tax burden as low as 
possible. And in that context, I would like to see tax cuts 
continued. But as I indicated earlier, that has got to be, in 
my judgment, in the context of a PAYGO resolution.
    Mr. Portman. Talking about national savings, my second 
question is about that, and I think you rightly pointed out the 
challenge is the retirement of the baby boomers, and the fact 
between Medicare and Social Security we have an unfunded 
challenge.
    With regard to national savings, you supported national 
personal savings accounts and Social Security. I do believe 
there is a big distinction, as Mr. Spratt mentioned, between 
the Government investing directly and individuals directing 
that investment, even if it is within Social Security, which is 
very much what the President's personal account proposal 
includes. But with regard to adding to savings, do you also 
believe that we should in addition to having personal accounts, 
which I support, also encourage savings among employers, among 
individuals through 401(k)s? 401(k)s is now almost $2 trillion 
in savings, and IRAs over $3 trillion now, and we could do a 
lot more. Do you think we should also be as a Congress focusing 
on the private savings side and providing more inducements for 
that?
    Mr. Greenspan. I do, Congressman. There is a dispute 
amongst economists about how much, say, the 401(k)s and IRAs 
have contributed net to domestic savings. There is an argument 
that part, and some argue all, is merely a reshuffling of 
existing savings and doesn't add anything net. I suspect that 
there is a net increase. It is hard to prove, and I haven't 
found any of the analyses both pro and con fully conclusive, 
but the issue is of such an overriding consideration that 
anything we can do to enhance incentives to save I think we are 
obligated to do.
    Mr. Portman. I would make one obvious point that this is 
about long-term retirement savings. Even if there is some 
displacement of other savings, looking at the savings habits of 
American households and even businesses, certainly by 
encouraging long-term savings, you have net long-term savings, 
I believe.
    And second, just to warn us all on PAYGO, the PAYGO rules 
as applied to that kind of savings doesn't work well when we 
are talking about a 10-year budget projection. So much of that 
comes back in terms of taxation at the end that cannot be 
accounted for in the 10 years.
    Chairman Nussle. Mr. Moore.
    Mr. Moore. Mr. Chairman, thank you for your service to our 
country over the years. I want to follow up on a couple of 
questions that Mr. Spratt asked you about, investment by 
foreign nations in our debt. You said they made a choice to do 
that. What if they decided to disinvest and not hold that debt 
anymore? What practical effects would that have on our markets 
here for our economy?
    Mr. Greenspan. We have examined that in some detail because 
the size of both our current account deficit and the extent to 
which that impacts on our domestic economy are relevant issues 
for policy.
    What we have judged is that the fairly significant 
purchases of U.S. securities or claims in general on American 
citizens have lowered long-term interest rates modestly, but 
not to a really considerable extent. And one would presume that 
the response is symmetrical. In other words, if it does not 
have a more than a moderate effect moving rates down, slowing 
the accumulation to zero or even doing some divestiture is 
likely to have an impact of equal size in the other case. In 
neither event in our judgment does it appear to be a dominant 
force.
    Now, I have to point out that these are judgments which 
always have to be reevaluated at all times, and we continue to 
do so. Obviously, we rethink our positions to make sure they 
are still sound. And these numbers vary from time to time, but 
our general conclusion at this stage is we do not perceive that 
as a really significant problem for our domestic economy.
    Mr. Moore. Thank you. Chairman Greenspan, as you know, the 
payroll and income tax revenue that is credited to the Social 
Security Trust Funds is actually deposited into the general 
Treasury and effectively becomes part of the Government's 
operating account. Many Americans I think are not really aware 
of how this takes place, and I think they really believe that 
Social Security money that is paid in by American taxpayers is 
actually in a Social Security ``trust fund'' instead of used 
for current operating expenses of the Government.
    As you know, the Social Security trustees have named 2042 
as a date that people should be concerned about us when this 
account becomes ``insolvent.'' the Congressional Budget Office 
says 2052, and the date that you say we should have a great 
concern about is 2008, which is a lot closer. Whatever the 
date, whatever the date, whether it is 2042, 2052, or 2008, I 
think all of us would agree that the threat to the Social 
Security Trust Fund is real and needs to be dealt with in a 
bipartisan manner.
    On February 8, I introduced legislation that would take the 
Social Security Trust Fund off budget and say to Congress and 
say to the President that money paid for Social Security taxes 
cannot be used for any purpose but for Social Security 
purposes, and I am talking about partial retirement benefits, 
disability, and survivors benefits.
    I guess my question to you is, and I want to add also, the 
administration's fiscal year 2006 budget, which was released 
last month, would spend $2.6 trillion of the projected Social 
Security surplus over the next 10 years. If Congress protected 
the Social Security surpluses and really credited them to a 
Social Security Trust Fund, would that go any step in the right 
direction toward trying to preserve and protect Social Security 
and extending the solvency and the life of Social Security in 
the future?
    Mr. Greenspan. I believe it would, Congressman. First of 
all, of course, as you know, the previous statutes have 
required the bookkeeping to change and, indeed, you will find 
on the monthly Treasury statements that the deficit is split 
between on budget and off budget, and the off budget is 
essentially the Social Security Trust Funds.
    The difficulty that we have is that, one, as you pointed 
out, that even though there is a trust fund, the question is 
not what it is invested in, it is what the funds are used to 
finance. And there was back in 2001 sort of a mythical lockbox, 
but the trouble with the mythical lockbox is that it should 
have been real, because it did convey the notion that these are 
funds that should be accumulated to invest directly or 
indirectly into the capital assets which are built up so that 
when the retirees who are putting the funds into the trust fund 
retire, the physical goods that they need for retirement are 
being produced, and that the claims which are the benefits that 
the Social Security trustee pays out to the beneficiaries can 
be used to purchase those real assets.
    On a strictly pay-as-you-go system, which worked very well 
for a long period of time because the demographics were working 
very well, you didn't need a trust fund, it didn't matter, and 
indeed the trust fund was there mainly for some semblance that 
monies were being accumulated. But the truth of the matter is, 
as you point out, that they weren't.
    So the issue is if you can separate, you will create 
additional savings that are required. But remember what is 
implied here. If we are talking, say, roughly a unified budget 
deficit of $400 billion and, as I recall, the Social Security 
Trust Fund grows in recent years, including interest at $150 
billion a year, if you move the Social Security Trust Fund or 
just, say, move the whole office to San Francisco into a 
special system which is unrelated to Washington, and require 
that all budgetary activities of this committee and your 
counterparts in the Senate and the rest of the budgetary 
processes are required to deal with what would we now call on 
budget----
    Mr. Moore. Yes, sir.
    Mr. Greenspan. We would be dealing with not $400 billion, 
but $550 billion.
    Mr. Moore. But that is a radical notion, to tell the truth 
to the American people, isn't it?
    Mr. Greenspan. The presumption is that in doing that, you 
will get the Congress to scale that back and every dollar they 
scale back from the $550 billion is true net savings to the 
economy, which is essentially what a retirement program needs. 
The reason I am in favor of private accounts, or one of the 
major reasons is, I believe it is easier to move the private 
system to California than it is to move the Social Security 
Administration.
    Mr. Moore. Thank you, Mr. Chairman.
    Chairman Nussle. I have a feeling it will move back from 
San Francisco in about 2016 when we have to start putting 
general funds into Social Security.
    Mr. Ryun.
    Mr. Ryun of Kansas. Mr. Chairman, thank you. Chairman 
Greenspan, I want to thank you for your time today and for 
testifying, but also being willing to answer our questions.
    Social Security is on the minds of I think all of us, as 
well as many back home in our districts, and it has become a 
major forefront here in Washington. Some have characterized it 
as being a financial crisis; others have said it is doing just 
fine, there aren't any real problems with it.
    With your insights, how would you characterize and assess 
the financial well-being, if you will, of the Social Security 
system?
    Mr. Greenspan. Well, as I tried to outline in my prepared 
remarks, a retirement plan is essentially a plan which enables 
you to forego consumption now. As I once put it to a committee, 
it is as though you went to the supermarket every week and when 
you came home, you put 10 percent of what you bought in your 
basement and you then used it when you retired. Effectively, 
that is really what a retirement system is.
    In a more sophisticated sense, instead of putting the 
groceries in the basement, you invest in real productive 
capital assets which produce even more physical goods and 
services that you need.
    The sole purpose of a financial system--which is associated 
with the physical volume process--is to facilitate the physical 
movement of goods and services, and what the pay-as-you-go 
system does not do is have a mechanism which creates a buildup 
of savings to create the real resources. And, I must say, your 
colleague on the other side of the aisle's notion would help in 
that regard, but it is still not fully funded, and one thing 
about private accounts is they have at least the capability of 
doing that.
    Mr. Ryun of Kansas. So if you wouldn't characterize it as 
being fine or in crisis, how would you characterize it? If it 
is not in crisis, how long do you think it will be before we 
actually head toward that?
    Mr. Greenspan. This is one's definition of a crisis. If you 
are in the financial business, as I am and have been all my 
life, a crisis is something that is about to happen, and in 
this case, nothing is about to fall off the cliff in the next 2 
or 3 years. Indeed, the first sign of a really serious issue is 
when the leading edge of the older part of the baby boom starts 
to retire 3 years from now. Is it a serious problem? It is an 
exceptionally serious problem. How one likes to use terminology 
is less relevant than describing what reality is, and reality 
is daunting.
    Mr. Ryun of Kansas. Thank you very much, Mr. Chairman.
    Mr. Portman [presiding]. Mr. Edwards for 5 minutes.
    Mr. Edwards. Thank you, Mr. Chairman.
    Chairman Greenspan, thank you for what I interpret as your 
serious and sober warning to Members of Congress that we better 
get our fiscal house in order or the future economy, economic 
growth, our children's future will pay a very heavy price, 
along with promised benefits to seniors in that generation.
    If I could make an observation after 3 years of watching 
you testify before this committee, it would be this: that you 
honestly come before this committee and say in effect that 
trillion-dollar tax cuts, if matched with equal spending cuts, 
can increase our savings rate, increase economic growth, and 
help the future of our economy. The practical result is, my 
Republican colleagues hear your comments about the tax cuts, 
implement those, but do not support equal trillion-dollar 
spending cuts. It might cut a billion here or a billion there, 
although the truth is, even the Bush administration that wants 
to sound like a hawk on spending cuts, is increasing three of 
the five largest Federal programs of the thousands of programs 
we fund, and those five programs represent two-thirds of every 
dollar we spend.
    So as a consequence, what I have seen after the 3 years of 
your testimony here, which has been honest, straightforward, 
good advice, is that deficits continue to get larger and we are 
at an impasse. I see no way out of this impasse right now, 
quite frankly. My Republican colleagues will continue to listen 
to your comments about the tax cuts, but be unwilling to even 
support some of the cuts proposed in spending in this year's 
budget proposed by President Bush.
    We Democrats, some of us who would be willing to make some 
tough spending cuts to get back to balanced budgets, will not 
do so if, in our value system, we think we are going to ask 
veterans to make sacrifices on health care, seniors to lose 
access to nursing homes, and students to lose access to college 
student loans simply to fund tax cuts for Americans making over 
$300,000 or $400,000 a year.
    So year after year, we are at this impasse. You have 
observed this impasse. My question is, first, if we do not 
change this impasse, if we do not break this impasse, what will 
be the consequences on interest rates and the economy over the 
next 10 years, in your judgment?
    Secondly, would you care to comment about whether it might 
be appropriate to do what former President Bush did in 1990 
when he said that a campaign promise of ``Read my lips, no new 
taxes,'' isn't as important as the future fiscal soundness of 
our economy and brought Democrats and Republicans together, 
asking both sides to make compromises; the Republicans to 
compromise on tax cuts and Democrats to agree to compromise on 
spending increases, once assured those compromises on spending 
were not going to just fund tax cuts for the wealthiest.
    So, in summary, again, how serious will be the consequences 
of this impasse that you have witnessed over the last 3 or 4 
years, and is it time for us to do something dramatically 
different, perhaps with a bipartisan budget summit led by 
President Bush?
    Mr. Greenspan. Well, Congressman, if you merely project how 
the actuaries interpret current law into future spending and 
tax obligations, you have an extraordinary rise in the unified 
budget deficit. If that is literally the path on which we find 
ourselves, we will find sooner rather than later that long-term 
interest rates begin to rise, and that when you begin to do the 
arithmetic of what the rising debt level implied by the 
deficits tells you and add interest costs to that ever-rising 
debt at ever-higher interest rates, the system becomes fiscally 
destabilizing, and what you end up with is probably a stagnant 
economic system quite conceivably, not only a slowdown in the 
rate of growth, which is what I have indicated is the normal 
expected outcome of events such as this, but unless we do 
something to ameliorate it in a very significant manner, we 
will be in a state of stagnation.
    And the reason why I seriously raise the question about 
trying to solve the problem on the tax side is that what 
history does tell us is that when taxes get increased above 
certain levels, you begin to get significant slowdown in 
economic growth and, therefore, in the revenue base. So you 
don't get all of the taxes or, I should say, tax receipts that 
you expect to get in raising rates, and I think you have to be 
very careful in doing that.
    And how one comes together to resolve this overall issue 
and what compromises both sides make is obviously up to the 
committee to do. But if you ask me what the consequences of 
doing nothing are from this stage forward, I would just as soon 
not have to contemplate that.
    Mr. Edwards. Thank you, Mr. Chairman.
    Chairman Nussle. Mr. Putnam.
    Mr. Putnam. Thank you, Mr. Chairman, and welcome to you, 
Dr. Greenspan.
    A number of the reform proposals for Social Security, both 
those that involve allowing persons to divert a portion of 
their Social Security taxes and those that create personal 
accounts above that involve significant transition costs. Could 
you please comment on the microeconomic effects of how we 
reform the system that, as you very eloquently put in your 
written statement, desperately needs it, and possibly personal 
accounts provide, in your words, a more credible means of 
insuring the program, adds to overall savings and boosts the 
Nation's capital stock?
    How will the markets react to those intermediate 
transitions?
    Mr. Greenspan. Congressman, this is the one very difficult 
problem of evaluation that we have. In the program, as I read 
it in the newspapers, the program would essentially take U.S. 
Treasury bonds and sell them, take the proceeds and put them 
into a forced savings account. And in terms of the impact on 
the supply and demand for securities, because the recipients of 
the account can't sell the securities that they get, it should 
be a wash, because the amount of money that is moved from 
Government savings to household savings is the same. You 
increase the unified budget deficit, you increase household 
savings, and it is a wash with respect to total domestic or 
national savings.
    In principle, one would assume that the impact would have 
zero effect on interest rates. But we don't know that, and it 
is an interesting question that is involved here, and that is 
the reason why I have argued in earlier testimony that moving 
in this direction should be cautious and gradual, because you 
don't want to find that you have a fairly extensive program and 
learn that the theoretical change in interest rates, which 
seems to make a great deal of sense to economists, is not the 
way the markets look at it.
    So in this respect, I think it is important to move 
gradually and see what the response is. And remember, in the 
spirit of taking Social Security off the unified budget, 
remember the unified budget was originally constructed for the 
purpose of evaluating how Government financial activity impacts 
the economy, meaning impacts interest rates. And for the vast 
proportion of transactions, the actual unified budget deficit, 
plus whether it is increasing or decreasing, is a fairly good 
measure of what the impact on the economy is.
    In this particular case, where you are setting up forced 
savings for a very protracted period of time, the principal 
purpose of the unified budget accounting system is being 
violated and, in that regard, using the unified budget to 
evaluate this process requires an asterisk; but how important 
that asterisk is, is something we really don't know and will 
not be able to tell until we move forward with this program and 
see the extent to which modest changes in private accounts 
affect interest rates.
    Mr. Putnam. Thank you, sir. Let me also ask, in your 
testimony you refer to provisions for mid-course corrections to 
deal with unanticipated budgetary outcomes. It appears to 
describe triggers, which I believe in the past you, in previous 
discussions about tax policy, frowned upon. Could you please 
elaborate on that and if you do, in fact, call for some type of 
trigger?
    Mr. Greenspan. No. In fact, I have testified before this 
committee in the past indicating that various initiatives, both 
on the tax and on the expenditure side, which have long-term 
consequences, require some mechanism for the committee to 
reevaluate them after a specific period of time to be assured 
that the actual purpose of the program and its financings are 
what you voted for. And if it turns out that that is not the 
case, then there should be a mechanism, either automatically in 
which it happens by some formula, or requiring a reevaluation 
and maybe even a revote by the Congress on a particular piece 
of legislation, because too often what we find is that we put 
in front of the Congress a particular program and with it is an 
associated long-term forecast. And the extent to which those 
forecasts have not been realized, as you know far better than 
I, are too numerous to mention.
    We are no longer in the period 50 years ago when the vast 
proportion of the budget was what we now call ``discretionary'' 
and subject to annual evaluation by the Congress. We now have a 
very significant part of both the expenditure side and the tax 
side, which is an automatic system. And sometimes these things 
veer off track and there is no mechanism to address them. And 
if we actually had such a mechanism, I think the budget policy 
process would be far improved, significantly improved.
    Mr. Putnam. Thank you very much.
    Chairman Nussle. Mrs. Capps.
    Mrs. Capps. Thank you, Chairman Nussle. Chairman Greenspan, 
thank you for meeting with us today.
    In your opening statement, you made the following comment: 
Unless we obtain unprecedented increases in productivity, we 
will have to make significant structural adjustments to the 
Nation's major retirement and health programs.
    I would like to focus on the first half of that statement 
and relate it to something you said at the Banking Committee 
hearing recently. This is a quote: ``The failure of our society 
to enhance the skills of a significant segment of our workforce 
has left a disproportionate share with lesser skills. The 
effect, of course, is to widen the wage gap between the skilled 
and lesser skilled.''
    Now, given your concern about the lesser skilled, I would 
like to have your comment on the deep cuts in the Department of 
Education included in the President's current budget. In 
particular, aren't cuts in programs like vocational and 
technical education and student loans likely to work against 
the creation of a higher-skilled work force; and if we shift 
the burden more completely to the States, many of which are in 
deficit as well, can we expect them to take over these 
responsibilities? More broadly, shouldn't we as a society and 
as a Federal Government be investing more in developing our 
workforce if we want to see higher rates of productivity and 
economic growth?
    I have asked this chart be put up, because I know you have 
expressed concern in the past about income inequity, and I 
would hope that you would tie your comments, if you can, to our 
investment in education.
    Mr. Greenspan. Well, Congresswoman, I think you are 
exposing what the real dilemma of this committee is.
    Mrs. Capps. Yes.
    Mr. Greenspan. On the one hand, you have issues of trying 
to make the economy and the revenue base expand, and on the 
other hand you want to increase expenditure, both of which are 
valuable choices and valuable programs. But if you put them 
together, you get an increasing deficit which causes the 
economy to short circuit.
    So the question that you have to resolve is how does one 
balance these particular choices. And the problem that is 
invariably the case under such circumstances is that you are 
choosing between things of value. In other words, no program 
appears before this committee which is of no value. And if you 
have things which increase expenditures and you have things 
which reduce revenues, unless you can find a way to repeal the 
laws of arithmetic, you are in very serious trouble. And I 
think that this is something which is merely a restatement of 
what the nature of the problem is.
    And I could answer your question, but my answer is 
irrelevant because it essentially merely just gets to the issue 
which must be resolved by the representatives of the American 
people, and it is a very tough choice. If I were a Member of 
the Congress, I would have to struggle with it and I would come 
up with my own particular choices, but I would recognize that I 
would be one of 435 people in this House. And you are far more 
adept at political issues than I, judging that I am sitting 
here and you are sitting there.
    Mrs. Capps. I guess I just have in front of me the vision 
of the superintendents of a particular county in California 
that I met with on Monday, the day before yesterday, looking at 
this proposed budget and what it will do to the very real young 
people and retrained workforce people in my communities. And I 
am sure this is reflected across the country. We are talking 
about an investment in our economy when we invest in education; 
is that not true?
    Mr. Greenspan. Well, I am not going to repeat what I have 
said, but I think it is an issue which you have to debate with 
your colleagues, and I trust that in a reasonable period of 
time, you will come up with some resolution of what is a very 
serious set of choices. And what is causing the set of choices, 
to a very large extent, is an unprecedented demographic shift 
which we are not going to be able to alter. It is going to be 
with us because with the inexorable turn of the calendar, we 
are going to get a very large acceleration in the number of 
people moving from the labor force into retirement, and that 
has very significant fiscal implications, and there is no way 
to get around it. You either choose to do something in advance 
which will ameliorate the problem but not completely eliminate 
it, or wait until the problem is right on you, in which the 
solutions are going to be very painful.
    Mrs. Capps. Well, I guess I am not getting any comfort from 
your response. Thank you very much.
    Chairman Nussle. Mr. Wicker.
    Mr. Wicker. Thank you, Mr. Chairman, and thank you, 
Chairman Greenspan, for your testimony.
    You know, for the benefit of people watching on C-SPAN, I 
just want to remind our audience what a lengthy and 
distinguished record our witness has today: appointed, 
designated as Chairman of the Federal Reserve by President 
Reagan, by the first President Bush, by President Clinton, and 
by our current President. So I think it is fair to say that 
everyone realizes, Mr. Chairman, that you do not come here with 
a political agenda, and I appreciate that.
    Your testimony is not surprising, but in my view, it is 
nonetheless profound. You say that there are imbalances, 
significant problematic imbalances between our resources as a 
Government and the commitments that we have taken on; that 
these imbalances very much need to be addressed. Yet you say 
that to address these with tax increases would be very 
worrisome, and I agree with that.
    You also mention the fact that because of the demographics, 
this turning of the calendar that you mentioned to Mrs. Capps, 
Social Security needs to be fixed, and the sooner the better. 
But you also point out that it needs to be repaired in two 
respects. One, that we need to solve the problem of having 
enough money in the system to make the payments, but also it 
should be changed in a way that encourages national savings.
    I appreciate you clearing up this sort of alarmist talk 
that has been going on around the city about the amount of 
American debt that is held by foreigners. Clearly, it is a 
concern, but as you pointed out, it is an indication that 
people all over the world view investing in the United States 
as a very sound investment. And to suggest rather 
simplistically that if the Chinese or Koreans decide that they 
no longer want our bonds, that somehow they could call them in 
and that would create a crisis, I think it is good that that 
has been debunked today. If they want to sell our debt, they 
could sell it to a willing buyer on the open market, or if they 
do not want our debt, they can refuse to purchase any more of 
our bonds. But I appreciate your testimony on the record in 
that regard.
    And then I understand that you said, with regard to the 
national debt owned by foreigners, the greatest problem is that 
we are not buying it ourselves, that it is not Americans who 
are saving money and buying U.S. Treasury instruments, because 
we need to increase our national savings. So you say that must 
be part of our Social Security fix, and I appreciate that.
    There are folks that say going to these individual 
investment accounts, even though it would increase investment, 
that it dismantles this great program of Social Security, this 
social contract that we have had for half a century or more, 
that we take care of the needy elderly, that it is too risky. I 
find it hard to believe that you would recommend a scheme that 
would be too risky for Americans, that you would recommend a 
scheme that would somehow violate the Social Security safety 
net.
    So I would ask you to comment on that. Do you have a 
comfort level that we can move to individual accounts, 
gradually and cautiously, as you say, without harming this 
compact that we have had between the workers and the elderly 
and that we will not return to the elderly poor?
    Mr. Greenspan. There are numbers of different ways of 
essentially guaranteeing a level of benefits in any of these 
programs, whether it is under Social Security, whether it is 
partial privatization, whether it is any particular form of 
retirement structure. As best I can judge, in every case where 
people have come up with very different alternatives to some 
mix of private and public accounts, there is always some 
component in there which is a guarantee against any extreme 
problem. And I think there should be.
    So that is not where the issue lies. The issue has got to 
lie in two areas. One is a critical issue. We cannot have a 
pay-as-you-go system when the demographics that confront us 
lead us eventually to a position where there will be fewer than 
two workers per retiree. It just will not work. In 1935 and for 
the next 50 years, it worked exceptionally well because you had 
population growing at a sufficiently rapid pace so that there 
was always a large number of younger people coming up, as you 
increased the population, relative to the number of people who 
were retired. But when you get the population growth slowing 
down, and especially the extraordinary improvement in life 
expectancy after age 65, the arithmetic no longer works for 
pay-as-you-go, and what you need is a system which creates the 
savings that are invested in real assets to produce the real 
consumption in retirement. That is the first issue.
    The second issue is that private accounts have one 
important element in them, in that instead of a guaranteed 
annuity for retirement, which is what Social Security is, you 
actually have a claim to wealth; even though that wealth is 
immobile until you retire, it is, nonetheless, yours. And the 
question of being able, after retirement, to have various 
alternatives, including bequeathing it to your children, is a 
value which I think is worthwhile developing in this country, 
because there is just too little wealth below the median-income 
level. And what private accounts will do is to create the 
building up of actual individual wealth, which I think is a 
value in and of itself.
    Mr. Wicker. Thank you, Mr. Chairman. Let me just observe 
that I believe in our witness today we have truly a national 
treasure, and sometimes I have had to listen to him when I 
didn't particularly like the answer. I hope that the American 
people and American policymakers are listening to his testimony 
today. Thank you for your indulgence.
    Chairman Nussle. Mr. Cooper.
    Mr. Cooper. Thank you, Mr. Chairman.
    Thank you, Chairman Greenspan. I would like to add your 
distinguished predecessor to the list of great chairmen, 
because Paul Volcker did an outstanding job as well. I know it 
is premature, but I already feel sorry for your successors, 
because they have tough acts to follow.
    Last week, the Blue Dog Coalition, a group of Democrats who 
are fiscal and defense hawks, introduced a reform package and 
we borrowed proudly from some of our friends across the aisle, 
the Republican Study Committee, to come up with bipartisan 
reforms that will help us address the deficits we face; such 
reforms as discretionary spending caps--and our caps are 
actually tougher than the President's in this budget--reforms 
such as a cost estimate on every bill so that we know what we 
are spending around here; a roll call vote on every bill that 
costs $50 million or more, instead of just voicing it through 
this Congress; things like identifying earmarks and explaining 
them, so that we cannot have willy-nilly pork-barrel spending 
around here; commonsense measures including the Balanced Budget 
Amendment of the Constitution, which was part of the Republican 
Contract With America. But we also included real PAYGO, pay-as-
you-go, and I remember in prior testimony, you could even 
recall the day in 2002 when Congress let that provision expire, 
that provision that was so helpful to us in curbing our 
borrowing and spending appetite. So the Blue Dog program was 
introduced last week, we call it a 12-step program, 12 steps to 
get our Nation off its borrowing and spending drunken binge 
that we are on right now. I would like to invite our colleagues 
across the aisle to cosponsor that measure as well as our 
Democratic friends, because it includes what you highlight in 
your testimony: real PAYGO.
    If the gentleman--I am sorry he has left now, our friend 
from Mississippi--if he truly values your leadership as he 
describes, he will also endorse your call for genuine PAYGO to 
curb our spending habits here. So that is a step.
    Another step is we started a bipartisan savings caucus last 
week, Senator Rick Santorum, Senator Kent Conrad on the Senate 
side, joining together in a bipartisan fashion on the House 
side to promote voluntary savings and to again implement parts 
of your testimony, which we read and admired, to try to boost 
our national savings rate.
    Let me ask you this, Mr. Chairman. In your testimony you 
mentioned the need for mid-course correction, getting us back 
on track when we discover we have made a mistake in a spending 
or a tax program. Well, in 2003, this Congress voted for a 
giant new entitlement program in the Medicare drug benefit. We 
know now--and we were only allowed 26 hours to read that bill, 
not the usual 3-day period, so very few Members knew what was 
in it. We know now that that one piece of legislation will add 
$8.1 trillion to the unfunded obligation of our Nation over the 
next 75 years. That one bill alone is twice as large as the 
total Social Security problem we face. That one bill alone was 
passed by this Congress in the dark of night, a vote starting 
at 3 o'clock in the morning, that became the longest vote in 
American history.
    So if we were going to have a mid-course correction, 
wouldn't it make sense to trim or perhaps even repeal that 
legislation that sunk our Nation deeper into debt than any of 
us could possibly have imagined, and a bill that had a cost 
estimate that was deliberately hidden from this Congress under 
threat of firing of a Federal employee, so we were deprived 
even of that knowledge of the true cost of that bill at the 
time?
    So if we are going to implement your good advice, whether 
it be with PAYGO, real PAYGO, as is in the Blue Dog proposal, 
or to have a real mid-course correction, wouldn't it make sense 
to adopt some of these measures?
    Mr. Greenspan. Well, Congressman, all I will say is that 
all of the items I indicated in my prepared remarks refer to 
the total budget of the United States.
    Mr. Cooper. Well, there are very few single votes that we 
could cast that would do more to reduce unfunded liabilities of 
this Nation, of $8.1 trillion, than what we passed just a year 
or two ago.
    Mr. Greenspan. I cannot dispute your arithmetic.
    Mr. Cooper. Thank you, Mr. Chairman.
    Chairman Nussle. Mr. Crenshaw.
    Mr. Crenshaw. Thank you, Mr. Chairman.
    I would like to ask just a question or two about the 
economy and where you think it is headed. You mentioned that 
you feel good about the direction of the economy, that it is 
fairly healthy, but this issue about the yield curve as it 
flattens, it seems to me as you raise short-term rates, you 
would expect long-term rates to go up, and that is not 
happening. I read somewhere that you describe that as a 
conundrum.
    The conventional wisdom would say that if long rates don't 
go up when short rates go up, that there is some sort of 
indication of a slowing of the economy. On the other hand, 
people could argue that inflation is under control and the 
economy is healthy. I would like you to comment on that. I 
mean, what is your view as the yield curve narrows--I guess it 
was back at the end of 2001 when it actually inverted and that 
kind of foretold some problems in the economy. But if you could 
maybe expand on what you mean when you say it is a conundrum; 
is it a short-term aberration, or are you concerned at all? 
Could you talk a little bit about that?
    Mr. Greenspan. Yes, Congressman. The history of most of the 
programs of raising short-term rates by the Federal Reserve is 
that they have, in the early stages, been matched by rising 
long-term rates; and I must add in part that is merely almost 
an arithmetically required relationship, because you can view, 
say, a 10-year U.S. Treasury note as an average of all interest 
rates from 1 or 2 days, 5 years, 7 years, out to 10 years. And 
to the extent that the overnight rate or the very short-term 
rates have risen, it affects the average and is actually 
embodied in the yield of the 10-year note. So the normal 
expectation is that when you move, you will move the long-term 
rate if for no other reason than you are moving the average in 
the very beginning.
    Historically, toward the end of a tightening period when it 
becomes clear that the impact is to restrain inflation--you 
will find that increasing short-term rates does move long-term 
rates down, and that is largely because reducing the inflation 
premium embodied in long-term rates will bring the yield down.
    What we have had in the most recent episode, as you point 
out, is we moved up and long-term rates went down far sooner 
than is typically the case. And we examined the possibility 
that you suggested, namely, this may be an indication that the 
economy is about to soften. But if that were the case, we 
wouldn't be finding a number of other indicators such as stock 
prices going up. And we essentially put that aside as an 
explanation, because it was very evident, as I indicated 
earlier in my testimony, that this economy is not in the 
process of moving into a significant slowdown.
    The result of that is we began to look in different areas 
as the potential cause, and none of them was without a 
qualification, which is the reason I said it is indeed a 
conundrum. Now, I must say since then, long-term rates have 
moved up, and it is less of a conundrum in that respect. But it 
is an unusual change in the way markets behave.
    Mr. Crenshaw. Would you distinguish it from 2001 when it 
was really more--it was short-term rates were pretty stable and 
the long-term rates were coming down, and that created--is that 
more of a scary scenario when you are not really moving short 
rates up and find that long rates don't follow; but you had 
fairly short rates which, for some reason, foretold a softening 
of the economy, the long rates actually went below.
    Mr. Greenspan. You remember at that time the Federal funds 
rate was actually quite high, and we at that particular point, 
observing the bubble beginning to unwind, wanted to make 
certain that we did not lower the Federal funds rate too much, 
too soon, and allow a partially deflated bubble to reinflate 
with greater potential problems down the road. So that we held 
the short-term rate longer than would ordinarily be the case 
until we were reasonably confident that the deflating of the 
bubble was well underway. So we had the very unusual pattern 
that you alluded to.
    The reason that long-term rates went down, obviously, is 
that the economy was clearly moving down, or the rate of 
increase was slowing fairly dramatically. So that was a very 
special case which very rarely happens. And indeed, it wouldn't 
be comparable at all to the type of market performance that we 
have been observing in the last year or so.
    Mr. Crenshaw. Thank you very much.
    Chairman Nussle. Mr. Davis.
    Mr. Davis. Thank you, Mr. Chairman.
    Chairman Greenspan, good morning, good afternoon to you. If 
I understand your testimony from listening to it in my office 
most of the morning, I certainly understand that you are 
concerned about Congress' ability to address the Social 
Security shortfall. But I want to draw in my questions a 
distinction between addressing the Social Security shortfall, 
if you will, and the specific government program the President 
wants to institute, and that is adding retirement accounts.
    Let me begin by asking about something that Josh Bolten, 
the OMB director, said when he came here a few weeks ago. With 
respect to the transition costs that we would expect if we move 
toward private accounts and the impact it would have on the 
current financing of the system, he said, ``The transition 
financing does not represent new debt. These are obligations 
that the Government already owes in the form of future 
benefits.''
    Do you agree that the transition costs and the borrowing 
that would occur does not represent new debt, Mr. Chairman?
    Mr. Greenspan. Well, what he is referring to is how we 
would be regarding the Social Security system, were we like the 
private sector on accrual accounting, instead of measuring the 
impact on Social Security of taxes when they are paid in and 
benefits when they are paid out, but not addressing the issue 
that the working-age population is accruing under law ever-
increasing benefits, which are obligations of the U.S. 
Government. If we had accrual accounting, we would be required 
to be including them as expenditures at the time earned and not 
at the time paid. If we were under that system, I might point 
out parenthetically, our current debt to the public, which is 
now roughly $4 trillion, would probably be $10 trillion more 
than that, because that is the present value of the obligations 
that we owe to people currently in the workforce who will 
retire. So that the issue that I believe Josh Bolten was 
raising was in the context of a gap accounting system with 
accruals, that if you then moved accounts from the public 
sector to the private sector, it literally has no effect.
    Mr. Davis. Let me ask you a series of follow-ups on that, 
Mr. Greenspan. From the standpoint of foreign investors and 
domestic investors in the stock market, which would pose the 
greater threat to investor confidence, in your opinion, large-
scale borrowing costs to pay for the retirement plan, or a 
failure of this Congress to enact the President's plan in the 
109th Congress? Which would pose the greater threat to investor 
confidence?
    Mr. Greenspan. Well, first of all, there is no distinction 
between what impacts on foreign versus domestic.
    Mr. Davis. I understand that. I understand that.
    Mr. Greenspan. I know how I think the markets ought to 
behave under various different sets of circumstances. But I 
must tell you that I have found, much to my chagrin, that they 
do not always work that way, and I only find out why 6 months 
or 6 years after the fact.
    Mr. Davis. Would you agree that, really, it is only a guess 
and there is no particular reason to think that the markets 
would be somehow disturbed or investors would be disturbed if 
in the 109th Congress we failed to pass retirement accounts?
    Mr. Greenspan. Well, the issue is that the market may be 
unaffected whether you pass it or you don't pass it.
    Mr. Davis. Then let me ask another follow-up question along 
those lines. What do you think would produce the more 
enthusiastic response from the market if we could somehow snap 
our finger and we could choose between reinstituting PAYGO 
rules today or passing private retirement accounts? Which of 
those two do you think would invoke a greater enthusiasm from 
the market?
    Mr. Greenspan. I really can't answer that question. It is a 
very interesting question, but I really don't know the answer.
    Mr. Davis. What about from Alan Greenspan; which would 
produce a more enthusiastic response, PAYGO rules or retirement 
accounts?
    Mr. Greenspan. I would like both, and you put me in the 
same situation as I just put your colleague in over there.
    Mr. Davis. Before my time runs out, let me put one last 
question to you.
    Mr. Wicker [presiding]. It seems to have run out.
    Mr. Davis. If you will give me 30 seconds, Mr. Chairman. 
Let me give you four issues, well, four issues, one question. I 
will be extremely brief.
    Enacting private accounts for Social Security, that is one 
possibility; dealing with what Mrs. Capps asked you about, that 
is the gap between skilled and unskilled workers; regulatory 
reform for the GSEs, and dealing with the gap; and in the math 
and science performance between American high school students 
and students in other industrialized nations. If you had to 
take those four issues, would you put--again, looking at the 
109th Congress, what we will be doing over the next 2 years, 
would you put the enactment of private accounts at the top of 
that list of four issues for us?
    Mr. Greenspan. You were actually listing what I consider to 
be probably the four most important issues that will confront 
the long term of this economy. I would just hopefully not have 
to choose amongst them. I would like to see you move on all of 
them.
    Mr. Davis. But you wouldn't put private accounts at the top 
of that list of four priorities, would you?
    Mr. Greenspan. No. They are all very important.
    Mr. Wicker. Thank you. Mr. Barrett.
    Mr. Barrett of South Carolina. Thank you, Mr. Chairman.
    Mr. Chairman, I was looking at the President's 2006 budget. 
One of the things that a group of us have been talking about--
us being some fiscal conservatives--what we are talking about 
is a projected savings in the President's budget of about $38.7 
billion over the next 5 years, and I think over 10 years that 
is a little over $70 billion. When we are talking about a $2 
trillion-plus budget, a $10 trillion-plus economy, some of the 
things that I think that I have seen come from the White House 
in the big scheme of things don't seem to add up to a whole lot 
of money. And there is a group of us, again, that seem to think 
maybe we need to go a little further. Maybe we need to show not 
only our constituents, the taxpayers, but the world, that we 
are serious about this looming problem.
    Is this figure, this $40 billion figure, Mr. Chairman, over 
5 years, is that a drop in the bucket; or, in your opinion, do 
we need to get some serious numbers, some serious money on the 
table?
    Mr. Greenspan. Well, Congressman, I have observed this 
process for a very long period of time, and I think that what 
Presidents tend to do is to try to avoid budgets which--as you 
elect to call it--are dead on arrival; and they tend to craft 
budgets which they perceive will not be dead on arrival. And it 
may very well be that the ones we need to actually consider are 
ones which most people think would be dead on arrival but, in 
the end, turn out not to be.
    The size of our problem is very large. I regret to say that 
the word ``billion'' does not encompass the nature of the 
problem.
    Mr. Bonner [presiding]. The gentleman from Hawaii, Mr. 
Case.
    Mr. Case. Thank you. Mr. Greenspan, I share with my 
colleague, Mr. Cooper, membership on the House Blue Dog Caucus, 
and I think you can put my question and comments in that 
perspective.
    Budgets, of course, are ultimately statements of policy 
expressing priorities, and that is what our job is, as you have 
definitely and accurately reflected.
    I don't believe, as we look at the big picture of our 
Federal budget, that the basic facts are at serious issue. We 
have increasing expenses. Clearly you have talked to that. We 
have leveling revenues, attributable primarily to temporary tax 
cuts. The gap has led to chronic deficits and exploding debt.
    The policy choices and priorities that are our job to make 
are for the most part, unfortunately, portrayed in Congress 
from a polar extreme perspective. And I think you can say there 
have been two directly different contrasting views expressed in 
this debate.
    One would be basically that all of the temporary tax 
reductions are sacrosanct. We are not going to touch them. We 
want to go on with further tax reductions. And we will balance 
the budget, if at all, by--in the medium and short term--
accumulating deficits and debt. And in the long term, whether 
we balance the budget or not, we will have radical reductions 
in Federal spending.
    The other view is that we have needs that are growing and 
we have got to meet these needs. That is the number one 
priority with continued increases in funding, and we can't 
really afford to continue all of the tax cuts that we want. And 
if we are going to balance the budget, there are consequences 
there.
    I think I have to say honestly, that personally and frankly 
I find both of these formulations not the right formulations. I 
cannot accept either one of those formulations as either wise 
or palatable or good overall public policy. I think they both, 
if carried to their extreme, have serious consequences on the 
economic and social fabric of our country.
    I am always trying to look for a better formulation. And I 
have to confess that my biggest frustration in my service in 
Congress is the lack of commitment on a bipartisan basis--Mr. 
Edwards spoke to this--to find a better overall formulation, 
one which takes the best elements of both of those formulations 
but avoids the negatives of both of those formulations. Finding 
something that will actually work.
    I have been listening to your testimony, and I want to ask 
you this straight out. You must have, in your thinking, some 
personal PAYGO calculation, some overall balancing of the best 
of these formulations and the worst of these formulations, that 
works from your perspective, that you believe over the long run 
will deal with what you have said and what you must believe is 
a chronic problem for our country, which is high deficits and 
exploding debt. You have testified to elements of support. For 
example, twice this morning you talked about your support of 
the continued elimination for the double taxation on dividends. 
You have testified on the expense side--and I think it is on 
the expense side, at least in the short term, to your support 
for some elements of private accounts.
    Do you have some overall formulation or set of priorities, 
some overall calculus, that is somewhere in the middle of these 
two extremes?
    Mr. Greenspan. Congressman, yes, I do.
    Mr. Case. What is it?
    Mr. Greenspan. I am not about to say for just a moment. The 
reason why I hope that is true is that there is no way for me 
to actually think through what I think is necessary in how the 
economy will evolve, given what is currently on the books with 
respect to both taxes and outlays. The arithmetic is fairly 
obvious when you begin to project it out. And with the 
inevitable issue of we are all going to get a year older every 
year and, therefore, a very large number of us who are not 
retired will, creates a very sharp issue of alternatives. And I 
have been thinking of all the various things of what I would do 
if I were a Congressman, because unless I did that, I couldn't 
be sure that I had all the pieces put together and I would be 
making generalizations.
    Mr. Case. On the spending side, would you say given your 
calculus, the calculus you are talking about, that on the 
expense side of things, you are certainly concerned about the 
entitlement growth? Would that be correct?
    Mr. Greenspan. I think what we have done is we have 
promised more to people who are not quite retired, but who will 
be retired over the next 20 years, than I actually think we 
have the material capability of supplying. I think this is 
utterly inappropriate. I think this is unfair. I think we owe 
it to those people to only promise to them what we have a 
reasonable chance of delivering. Public policy should not be 
structured in a manner in which when we promise something to 
somebody who really has to depend on it, that we come up late 
in the game and say, sorry, we made an arithmetical mistake.
    Mr. Case. I am going to conclude with a rhetorical question 
because I'm out of time, on the calculus on the revenue side. 
At some point, there must be a sense of priorities that you 
have in terms of what tax reductions we can afford to extend in 
this calculus that will have a benefit to the economy on an 
ongoing sustainable basis and what we can't. And I will leave 
it at that.
    Mr. Greenspan. I obviously do.
    Mr. Bonner [presiding]. The gentleman from California, Mr. 
Lungren.
    Mr. Lungren. Thank you very much, Mr. Chairman.
    And thank you, Mr. Chairman, for being here. I observed you 
at a distance since I left this place 16 years ago, and it is 
fun to be here and hear you directly. I would ask you to revise 
your remarks, however. You said that you would like to move 
that trust fund from Washington to San Francisco. I wish you 
would be 100 miles short of that and just deposit it in 
Sacramento.
    Mr. Greenspan. So moved.
    Mr. Lungren. You talk about the mythical lockbox versus the 
real lockbox and you wish we kept the concept of a real 
lockbox. Is there any merit to the suggestion that personal 
accounts actually amount to a real lockbox? That is, the way I 
explained it to my constituents last week when I was home at a 
town hall meeting, the only way you can keep my grubby hands 
off of it is to make sure it is a personal lockbox. No matter 
how we construct it, there is always a temptation of a future 
Congress to use that money to fund something else, as we have 
been doing for years.
    Mr. Greenspan. I agree with that.
    Mr. Lungren. There is something I would like to mention to 
you. When I had a town hall meeting last week, two-thirds of 
the questions at least were on Social Security. And 175 people 
were there as a result of MoveOn.org. Some of them were there 
as a result of AARP. Some of them were there as a result of 
unions getting them there, and some of them that were there 
were because they were my constituents who had no other 
prompting.
    One of the problems we had in discussing it was reference 
to testimony you had given either last week or the week before 
in which you started to talk about a crisis, and you backed 
away from crisis and used other language. I know today you said 
it is an extremely serious problem and the reality is daunting.
    I would ask you to address the folks that were at my town 
hall who used your words to say it was not a crisis as a reason 
to say we ought not to do anything about Social Security any 
time in the near future. And that is the reaction I got. I know 
that was a misunderstanding of what you said. If someone said 
that to you in response to you saying it is not a crisis 
because you have chosen your words very carefully, how would 
you respond to that?
    Mr. Greenspan. The term ``crisis'' is in the dictionary 
without specification of what the time frame is. I choose to 
use it for relatively short-term issues. In that regard, it is 
not a crisis, but that doesn't mean that even though the 
problem is longer term, that we shouldn't be addressing it 
starting now; indeed, we are probably overdue with respect to 
when this issue should have been addressed. Indeed, I am 
arguing that we historically have made commitments which in 
retrospect we probably should not have made. And the reason is 
we did not have the ability to actually provide the resources 
that those promises required. So in that respect, we are 
overdue.
    Mr. Lungren. I sit here before you as an example of the 
problem you have indicated in demographics. I am 58 and I will 
turn 59 later this year. So in 3 years, I will turn 62, part of 
that baby boom generation you are talking about. Baby boom 
generation, a lot of people forget, it is defined as those 
people who came back from World War II and started conceiving 
the rest of us, and a tremendous explosion of population. We 
have seen a tremendous decrease in population rates since that 
time.
    I want to throw one question at you, at least to get a 
little bit of reaction from you. We are dealing also with 
another important public policy question on immigration and 
that is unrestrained illegal immigration. I have been dealing 
with that for 25 years. One of the concerns I have is an 
overreaction to that. People would believe we need to clamp 
down on all immigration. If we clamp down on all immigration, 
literally closing the doors to immigration, wouldn't that have 
a further negative impact on our ability to continue paying for 
those promises we have talked about in the future?
    Mr. Greenspan. Unquestionably, that is true. However, I 
wouldn't argue that our immigration policy should be determined 
by the ability to fund the Social Security Trust Funds. I 
happen to believe that this country has benefited greatly from 
immigration, and indeed it is critical that we keep our doors 
open for talented people or anybody who wants to effectively 
pick themselves up from where they are and is going to the 
trouble of finding something in the United States, which 
historically has been what has made this country great.
    But, nonetheless, the arithmetic you apply is relevant. And 
indeed a considerable amount of Social Security taxes occurs as 
a consequence of the fact that a fairly significant part of our 
population increase are indeed immigrants.
    Mr. Lungren. Thank you very much.
    Mr. Bonner. Chairman Greenspan, with your indulgence, let 
me inform the committee that the next two members on the 
majority side to be recognized in order are Mr. Bradley of New 
Hampshire and Mr. Hensarling, and on the minority side, Mr. 
Jefferson and Mr. Allen. The gentleman from Louisiana.
    Mr. Jefferson. Thank you, Mr. Chairman. I appreciate the 
opportunity to ask a question or two.
    Mr. Chairman, you have testified in response to a question 
I think Chairman Nussle asked this morning about the effects of 
the tax cuts on the rebound in the economy, if you will, and 
the growth in economic growth. And you are careful not to 
pinpoint all of those tax cuts as having an effect on that, but 
accepting the one on the elimination or the reduction of taxes 
on dividends as having a salutary effect, in your opinion, on 
growth. I think you also expressed that whatever effect those 
other taxes or any of them might have had, except for that one, 
have probably run their course or at least jump-started the 
economy.
    With that in mind, does it make sense to talk about further 
tax reductions in the context of this overall desire on the 
part of all of us to reduce the deficit?
    Mr. Greenspan. This is the reason why I would like to see 
PAYGO and discretionary caps so that the process that is 
involved, when bills are brought up either on the tax side as 
tax cuts or as new programs of expenditure, it is perfectly 
conceivable that in the period where deficit reduction is the 
major priority that you would still want to have certain new 
spending programs and certain new tax cut programs because you 
don't want to freeze the system. It requires adjustment as 
years go on, even if you are on a long-term policy of reducing 
the deficit. But if you are going to be able to do that, you 
need a mechanism which prevents either tax cuts or spending 
increases veering you off the long-term track of deficit 
reduction.
    Unless the Congress reinstitutes a process to handle these 
very difficult problems, it is an extraordinarily difficult 
thing to do. And were I, as I said before, a Member of the 
House, I would have certain views on both taxes and spending, 
but I would wish to be constrained in my recommendations in a 
manner which requires me to offset as the law requires.
    Mr. Jefferson. I think most of us agree that as you set the 
paradigm, further tax increases--I don't think there is an 
argument here for tax increases nor for thinning reductions. We 
recognize there is something to be done there. The dilemma we 
find ourselves in is talk about the effectiveness of further 
tax reductions in the sense of those that, as you have pointed 
out, may have already made that contribution, such as it might 
have been, say the dividend aspect of it, without having this 
thought of analysis you are talking about when we simply say, 
we have them now and let us extend them further.
    The trouble--the conversation goes every time you talk 
about, well, we might not want to extend that, the other side 
says that is a tax increase. That doesn't seem to make any more 
sense than saying that when they first enacted it with a 
sunset, that it amounted to them voting for a tax increase in 
2011. So this is simply a play on words to box in discussion 
about that.
    And I am wondering if you can help us to get out of this 
business by not extending these tax cuts that were designed to 
jump-start the economy and argue that these now amount to tax 
increases on the part of those who would say, well, they served 
their purpose at best and let them fall at the sunset.
    Mr. Greenspan. I agree that terminology should not be 
policy issue. I mean, the argument that you can make is that if 
the markets believe that the tax cuts will be extended and are 
taking actions such that capital investment is going forward, 
or something like that, then you can argue on the policy 
grounds that they should be extended. But I would certainly 
agree with you that the mere choice of words as a response to 
the question is not an adequate response.
    Mr. Jefferson. Thank you, Mr. Chairman.
    Mr. Bonner. The gentleman from New Hampshire, Mr. Bradley.
    Mr. Bradley. Thank you very much, Mr. Chairman.
    And, Mr. Chairman, thank you for your long and 
distinguished service to our Nation. I would like to follow up 
on my colleague's question from California, Mr. Lungren. When 
asked the questions about the looming funding problems, your 
answer is that we need to have reform of entitlement spending, 
Social Security and Medicare, starting now.
    Would you care to discuss with us what happens if that 
reform is not in place, what kind of problems will our Nation 
face, the impact on short-term and long-term interest rates and 
the impact on our economy if we delay?
    Mr. Greenspan. Congressman, let me start off by saying that 
there are certain things that we know with a reasonable degree 
of accuracy and others which we know only very generally. We do 
know the number of Social Security and Medicare retirees over 
the next 20 years with a reasonably tight degree of numerical 
tolerance, and we do know with some degree of accuracy what 
under existing law the stream of benefits out of the Social 
Security Trust Funds will be. What we know only very 
imprecisely is what Medicare per beneficiary is going to be 
over the next 20 years, and that is largely because the number 
of issues which will determine that are very large and the 
variance of each one of those determinants is itself large. And 
so it is remarkable how variant it could be, basically because 
of the fact that, once committed and once enacted, we have 
exhibited considerable difficulty in reversing policies. I 
think it is essential that we be quite prudent before extending 
policies, because we don't have very much leeway of unwinding 
them once they are enacted.
    Since I believe that the range of probabilities are such 
that we can have exceptionally large Medicare bills, we must 
assure ourselves that we are sufficiently prudent to enact laws 
which essentially do not get us into a position that does grave 
damage to the economy. If we do and we effectively create very 
large unified budget deficits, and we are unable to bring them 
in in a reasonable period of time, we will find that we will 
very significantly destabilize the system, because, as I 
mentioned earlier, interest rates would rise as a consequence 
and we would have very grave difficulties in restoring balance 
to the American economy. And this is an issue which focuses on, 
say, 2015 to 2025, or something of that nature, but something 
which needs to be addressed sooner rather than later to avoid 
that happening.
    Mr. Bradley. Thank you for that answer. I believe that when 
you testified in front of the Senate a couple of weeks ago, you 
indicated that moving to personal retirement accounts alone was 
not sufficient to help restore the solvency of Social Security. 
Would you care to expand upon that?
    Mr. Greenspan. I think there are two ways of coming at 
this; namely, what is happening to the full funding and saving 
of accounts that are required to create the real resources, and 
what happens in strictly the financial system itself.
    On the financial system itself, what, as I understand it, 
the President's accounts will do is to trade off claims to 
benefits in the far distant future for essentially funds now, 
the interest on which will create those benefits later on, and 
that in essence is a wash. It does not effectively close the 
$3.7 trillion, 75-year gap or the $10 trillion gap in 
perpetuity. In that regard, I was merely stipulating that from 
an accounting point of view, it does not address the particular 
gap. But what it does do, in my judgment, is create the 
possibility of building real savings in a manner better than 
the pay-as-you-go system does. But that is the real resource 
side, not the financing side. I was addressing the financing 
side.
    Mr. Bradley. Thank you.
    Mr. Bonner. Time of the gentleman has expired. In an 
attempt to inform the members of their next order, the Chair 
inadvertently overlooked Mr. Kind. Mr. Kind.
    Mr. Kind. Thank you Mr. Chairman.
    Chairman Greenspan, you have always been very gracious to 
this committee for your time and indulgence and you have shown 
that today.
    One of the frustrating aspects, getting back to the whole 
Social Security issue, is the inability of the Congress and 
perhaps mostly the American people to at least agree on the 
facts, and that has been frustrating especially in light of 
some of the rhetoric that is being used now in terms of 
bankruptcy, bust, no money, driving off the cliff. I mean, if 
we can't at least agree on the facts in regards to the long-
term challenges we are facing, it is going to be hard to find 
the common ground that is going to be needed to lock arms to 
address this very important issue. And I think a person in your 
position, it would be extremely helpful as far as laying out 
the facts, and I think you tried doing that in your most recent 
testimony before the Congress and I commend you.
    But another challenge that we are facing that is even more 
daunting--and you have been very eloquent on this--is the 
annual growing structural budget deficits that is going to make 
it harder to make these types of decisions. There was a period 
of time in the 1990s--and either people are overlooking or 
forgetting it--when the Clinton administration was putting 
forth some pretty bold proposals on how to save Social Security 
first that didn't advance very far, and perhaps it didn't fit 
into a certain philosophy of certain people, like calling for 
the privatization of the program, and therefore they weren't 
interested in working to solve the problem right now.
    We are back into an era of annual structural budget 
deficits. And I appreciate your honesty and consistency in your 
testimony in regards to the need to reinstate the budgetary 
tools that worked so well in the 1990s, the pay-as-you-go, 
having it apply to both the revenue and spending scheme of the 
budget, which you have been very consistent on. And most of us 
on this side of the aisle at least did not want to see those 
tools expire in 2002 when they did. And we have been calling 
for reinstituting them, just to instill a little bit of fiscal 
discipline in this equation.
    But what is scary to me--and perhaps you can shed some 
light given your expertise--what is different with these 
deficits today that we didn't experience during the eighties 
when they were being accumulated until we were able reverse 
things in the 1990s is really two things: One is the increased 
foreign ownership of our debt. In fact, 44 percent of the debt 
today is being bought up by foreign entities, Japan being the 
number one purchaser, soon to be surpassed by China as the 
number one purchaser of our Government debt. And I don't 
believe it is going to be in our best long-term economic 
interest to be so dependent on a country like China to be 
floating this money to finance our deficits. And it is 
troubling, and I think it is troubling to people back home when 
they start hearing this more and more, that there is a new 
dynamic in regards to these deficit spendings.
    And the second feature is the fact that not since the pound 
sterling has the U.S. dollar really faced a rival currency in 
the international market. And perhaps we are getting close to 
seeing that more and more with the advancement of the euro and 
the European Union and the increased value of the euro and the 
decline of the dollar we have seen over the last couple of 
years.
    What type of risk are we facing or what would start raising 
your alarm bells in regards to the financial markets and the 
financing of these deficits and perhaps the flight of foreign 
capital into other areas rather than seeing that invested here 
and keeping us afloat at least in the short term?
    Mr. Greenspan. Congressman, I think we have to recognize we 
have very limited choices. We are now borrowing the equivalent 
of almost 6 percent of our GDP annually. And we use that 
essentially to finance domestic investment. In order to curtail 
that, meaning in order to curtail at least in part the amount 
of investment that is being made in the United States, we would 
have to either curtail domestic investment in this country--
which I obviously hope we will not be trying to do--or increase 
domestic savings. There are no other possibilities. And 
granted, we don't want to alter the amount of housing we 
construct in this country or the amount of plant and equipment 
that enhances our productivity; but the question is how do we 
finance it? And there is only one alternative, and the 
alternative is basically to increase domestic savings. And that 
means either savings as evidenced by the unified budget 
balance, or household savings, or savings by corporation and 
depreciation reserves or in undistributed profits. That is it. 
And so that there are just a limited number of things that we 
can do.
    And it reminds me of the time in 1983 when I was chairman 
of the Social Security Commission. Our first meeting we sat 
down and said well, the trust fund is about to run out. We can 
either raise taxes, lower benefits, or rely on general 
revenues. And there was a remarkable judgment made by Claude 
Pepper, who was a member of the committee, that we would not 
rely on general revenues. So you had to do one thing or the 
other. And I will tell you, for the several meetings 
thereafter, the resistance to acknowledging that 2 plus 2 
equals 4 was the most dominant aspect of the conversation of 
the commission until we finally exhausted ourselves and said, 
there is no alternative, we have to act. I trust that that is 
eventually what is going to happen in this case.
    Mr. Kind. Thank you.
    Mr. Bonner. The gentleman from Texas, Mr. Hensarling
    Mr. Hensarling. Chairman Greenspan, let me add my voice to 
those appreciating your patience and your service to your 
country.
    CBO says over the next decade, Medicaid is going to grow, 
on average, 9 percent a year--Medicaid, almost 8, Social 
Security about 5\1/2\, I suppose, in the outlying decades. It 
gets only worse.
    If I could have slide No. 5, please.
    Mandatory spending today is almost 55 percent of our 
budget. We have had a lot of discussion on the benefits of a 
PAYGO system applied to mandatory. But isn't it true that as 
presently conceived this applies to new programs? In other 
words, if these present, the big three, Medicare, Medicaid and 
Social Security, are growing at these rates and in roughly 20 
years we are going from a little less than 50 percent of our 
budget to approaching two-thirds of our budget, PAYGO would 
have no impact on the growth rate of those; is that correct?
    Mr. Greenspan. That is correct.
    Mr. Hensarling. In your testimony you say that, in my 
judgment, the necessary choices will be especially difficult to 
implement without the restoration of the set of procedural 
restraints on the budget-making process. Believing that the 
world tends to work off of incentives, if we wanted to further 
incent Members of Congress to go in and reform some of these 
entitlement programs, wouldn't a superior mechanism or process 
mechanism be to negotiate some type of cap on the growth of 
mandatory programs, thus hopefully giving further impetus to 
Congress to make reforms?
    Mr. Greenspan. Indeed. And that is what I was hoping I was 
expounding on in my prepared remarks when I refer to glide 
paths of various programs, because unless you do that, there is 
no way to confront any of these issues.
    As I indicated before, 50 years ago we had programs which 
were mandatory in very narrow areas--we had agriculture, we had 
Social Security, but they were very small. And the vast 
proportion of the budget was what we now call discretionary, 
and none of these things were required back then.
    But the world has changed dramatically. Unless you have a 
new type of process to regularize your system, it is 
extraordinarily difficult to do. So if the type of program you 
had in mind is what was implemented, I think that would be a 
very major benefit to this country.
    Mr. Hensarling. I have seen--if these growth rate trends 
are indeed accurate, and have you looked at models, say, over 
the next two to three decades of what it would take if we went 
the tax increase route in order to keep pace with these 
unreformed programs and to balance to our budget, what the tax 
rates would have to be on the American people?
    Mr. Greenspan. We have run models of that nature.
    Mr. Hensarling. What magnitude would the tax increases be?
    Mr. Greenspan. They vary significantly, but it is very 
difficult to judge because you have to compare experiences at 
various different levels of tax regime in various countries 
around the world and see how they behave and see if you can 
draw general principles from them. It is a very large part of 
the economic analysis, and a very good part of what we call 
development economics is in this area. And at least as I read 
the data, there is no question that the more stable the economy 
the slower the growth--in other words, there is a fundamental 
tradeoff here between sense of security and a standard of 
living. And this country, of course, has gone to both extremes. 
In the 1830s, we had rampant laissez faire, caveat emptor, and 
an economy which was beginning to develop surprisingly in a 
very vigorous way.
    We had, during World War II, a centrally planned economy, 
which was a wholly different sort of structure. So we have been 
in various different areas. And this is one of the very crucial 
basic decisions which the Congress has got to make. You know, 
what type of society do we want? What part of it should be 
guaranteed by Government, what part should be allowed to be 
free, competitive, and what are the effects thereof? And this 
is where the Congress' choice comes in, because the Congress 
essentially is the only vehicle we have which reflects the 
value tradeoffs of the American people.
    Mr. Bradley [presiding]. The Chair would recognize the 
gentleman from Maine, Mr. Allen.
    Mr. Allen. Thank you, Mr. Chairman, for being here. I also 
like others appreciate the time that you devote to this 
committee. I was particularly grateful for the caution and 
balance. And in some of your testimony, it was a striking 
contrast to the head of OMB and the Treasury Secretary of the 
United States who sat in that chair a few weeks ago. And what I 
am talking about is that you made it clear that though you 
believe in principle, there should be no effect on interest 
rates with borrowing for private accounts, you are not willing 
to make a $5 trillion bet in 20 years to that effect.
    Both Mr. Bolten and Mr. Snow said they talked to Wall 
Street analysts and Treasury analysts and that we shouldn't 
worry; that there would be no impact on interest rates.
    I appreciate the more cautious approach. I also appreciated 
the point you made about the tax cuts of 2001 and 2003, that 
they did help, you know, bring us out of a down period in the 
American economy, but they have no significant impact at the 
moment in stimulating the economy.
    My question really has to do with your preference--and I 
know these preferences, we all have these preferences--just 
what balance of expenditure and taxation that we prefer. Back 
home in Maine, people tend to think there ought to be a balance 
between money coming in and money going out in their personal 
lives, in their businesses, and in their government. And I 
agree with that. But I am struck by one thing that today, my 
understanding is that tax revenues to the Federal Government 
are at the lowest level since 1959 as a percentage of our gross 
domestic product. That is before Medicaid was created, before 
Medicare was created, and clearly the 01 and 03 tax cuts have 
had a significant effect, according to CBO, in dropping 
revenues to the level they are today. I don't believe, as I am 
sure you don't, that the problems with Medicare and the 
problems with Social Security can be solved by tax increases. 
That is not what we want.
    But is there room--you have made it clear that any tax 
reduction should be dealt with through a PAYGO process--is 
there room for some enhanced revenue to deal with the 
challenges we face, knowing that it won't deal with the entire 
problem over the next few years by not extending, by not making 
permanent the President's upper-income tax cuts to help deal 
with the general fund deficit that we have today?
    Mr. Greenspan. Well, Congressman, these are the decisions, 
as I just indicated to your colleague, that the Congress has to 
make, because these are where the critical tradeoffs are. If 
you ask me, if we were to move taxes up by X, whatever X is, 
does it mean the economy will collapse? If X is very large, 
yes. But if it is very small, unlikely. It is an incremental 
issue and it is something we have to be careful of because the 
real strength of the American economy at this stage is its 
exceptional flexibility. We have got the ability to absorb 
shocks of all sorts and seemingly rebound.
    As recent as 30, 40 years ago, 9/11 would have had major 
negative consequences to this economy. The GDP went down 
significantly for 6 weeks after 9/11 and then it stabilized. 
And that flexibility in part reflects the fact that the size of 
government is not all that large in this economy, and that as 
you increase the size of government, the flexibility goes down. 
You improve the guarantees, but at a cost. And it is that 
fundamental view of what type of society you want, which is 
what I think is of the most important role of the American 
Congress.
    Mr. Allen. I take your point about the importance of 
balance.
    Just one question on trends. It would be normal, would it 
not, for a society that is aging as ours is, and as Japan's is, 
as the Europeans are, to spend a somewhat larger percentage of 
our gross domestic product on retirement and health care as 
that population ages, so that that trend line, you would expect 
some additional expenditure from the Federal Government?
    Mr. Greenspan. Of course.
    Mr. Bradley. The Chair now recognizes Mr. Ryan.
    Mr. Ryan of Wisconsin. I thank the Chairman.
    Mr. Greenspan, thank you for spending time with us today 
and I appreciate your indulgence. I wanted to go on to Social 
Security and ask you a few questions. We have a few options 
ahead of us restoring solvency to Social Security. We can raise 
payroll tax rates, we can reduce the benefit formula for future 
retirees, or do personal retirement accounts, or a combination 
of all of those. I wanted to get your read and your opinion on 
the economic benefit in general and the particular benefit to 
future retirees on a plan to restore solvency to Social 
Security by having a combination of personal retirement 
accounts with their typical benefit offset that accompanies 
that idea, and possibly a benefit formula change for future 
retirees, those under 55, compared to a traditional fix to the 
system of a combination of benefit changes and tax increases.
    What do you think would be the impact to the economy by 
having personal retirement accounts as a component of the plan 
that restores solvency in general for the economy and for our 
future retirees in particular?
    Mr. Greenspan. Congressman, I testified that I think the 
existing essentially pay-as-you-go system has become ill-suited 
to the demographics of the future. Keeping aside the issue of 
private accounts for the moment, a system which is constructed 
to work under certain demographic conditions, and indeed did so 
for 50 years, is not going to work in my judgment anywhere the 
way it is supposed to, or had in the past, with the 
demographics that we perceive going forward. So something has 
got to give. We can patch the pay-as-you-go system as much as 
we want. We could do so if we had to by extending the age of 
initial benefits. We could do so by altering the bend points. 
We could do so by changing the inflation formula. We could do a 
lot of things.
    But I think we are touching a system which is fundamentally 
inappropriate for the future of this country because of the 
nature of the demographics, and the demographics have very 
profoundly changed since Social Security was initiated in 1935.
    The question therefore arises: What are the alternatives? I 
happen to think that going to private accounts is a way in 
which we can create the full funding that is essential, and it 
is a system by which we can ensure the retirement benefits of 
those who will retire in very large numbers in the years ahead.
    In the interim, trying to do combinations of both is a 
perfectly sensible approach. But as I view it, we have to find 
a better model than exists today.
    Mr. Ryan of Wisconsin. Having personal retirement accounts 
is another way of making a future retiree's benefits more 
secure for their retirement.
    And also, do you believe personal retirement accounts as a 
component to a system of solvency does help improve solvency, 
because when you have a personal retirement account policy, if 
it is a company with a benefit offset, with that feature in 
place do you believe that personal retirement accounts can help 
us achieve solvency for the system and make those future 
retiree benefits more secure?
    Mr. Greenspan. I wouldn't say the pay-as-you-go benefits 
are insecure in the sense that there is nothing to prevent the 
Federal Government from creating as much money as it wants and 
paying it to somebody. The question is, how do you set up a 
system which assures that the real assets are created which 
those benefits are employed to purchase? So it is not a 
question of security. It is a question of the structure of a 
financial system which assures that the real resources are 
created for retirement as distinct from the cash. The cash 
itself is nice to have, but it has got to be in the context of 
the real resources being created at the time those benefits are 
paid and so that you can purchase real resources with the 
benefits, which of course are cash.
    Mr. Bradley. The Chair would now recognize the gentleman 
from Alabama, Mr. Bonner.
    Mr. Bonner. Chairman Greenspan, in Washington, DC, we use 
words like ``rescind'' and ``allow tax cuts to expire'' and 
things like that, but most communities and most towns in 
America really don't use those words. And yet that will be a 
discussion that we will have in the coming months in terms of 
what we do with the tax cuts that have already been enacted 
that do have an expiration date on them if no further action 
occurs.
    In your view, if Congress--if this Congress or future 
Congresses do not find it prudent to make those tax cuts 
permanent, and those tax cuts therefore do go away, would you 
consider that a tax increase on the American taxpayer given 
that we are about 6 weeks away from April 15?
    Mr. Greenspan. I would assume that the issue is not 
relevant to where we are with reference to April 16. As I was 
saying, I would much prefer to raise the question with respect 
to policy and not get involved with definitions in the 
dictionary. And the reason is, the key question here is to what 
extent would extending the tax cuts, which may or may not have 
already been discounted in the financial markets, help the 
economy or not help the economy, and not get involved in 
debates on language because that doesn't produce policy.
    And I would just as soon argue the merits of the particular 
program. Since I am on the side of extending them, I am 
perfectly willing to argue the merits. And I think we ought to 
do that. And I hope we could sort of talk policy rather than 
language, which is a tendency which we seem to get involved in, 
and I can't complain too much because I get involved in it, 
too. And I must admit that I am often accused, probably 
justifiably, of terminologies that don't exactly enhance 
understanding.
    Mr. Bonner. I will accept that. But let me ask you to shift 
gears for a moment. I would like to follow up to a question 
that Mr. Crenshaw started with regard to interest rates, 
because taxes and interest rates are two issues that the 
American people have to deal with on a daily basis. Interest 
rates, back in our communities and around family tables, are an 
important factor with regard to whether or not Americans can 
buy a new home or buy a new car or make some other purchase 
that they would have to borrow the money in hopes of 
refinancing or hopes of paying back. And here in Congress, 
interest rates are important, obviously, because they are 
partially used to determine the budget that we set aside for 
debt service. And in a few days, we will be called upon to 
produce that budget.
    That being the case, I certainly would be interested in 
knowing where you could foresee interest rates heading in the 
next 5 years. That could be useful information as we go about 
our work in the next few days.
    Mr. Greenspan. Congressman, if you could tell me where the 
inflation rate is going to be in 5 years, I can tell you what 
the interest rate will be in a fairly narrow range. So I think 
it is appropriate to rethink the question of where interest 
rates will be largely in consequence of the inflation 
implications of budget deficits and the extent to which that, 
because they are perceived that way, impacts interest rates in 
advance. Because what we have found is that the history of 
interest rates has largely been the history of inflation. When 
it is high, interest rates are high. When it is low, interest 
rates are low. And yes, they are movements in what we call real 
interest rates which is sort of the interest rate excluding the 
inflation premium, but those fluctuations are really quite 
minor.
    So I would just say that I would just track whatever you 
perceive the budget deficit projection is likely to be over the 
years and translate that into inflation and add it to a fairly 
small number, which is the real interest rate. I don't know any 
other way to get a forecast to that.
    Mr. Bonner. Thank you.
    Mr. Bradley. Thank you. The Chair recognizes Mr. Cuellar.
    Mr. Cuellar. Thank you, Mr. Chairman. Chairman Greenspan, I 
appreciate the work you have done as Chairman of the Board of 
Governors for the Federal Reserve Board and, of course, your 
staff for so many years. We really appreciate your work.
    Let me direct your attention to the trade deficit. The 
United States back in 2004 ran a trade deficit on goods and 
services in an amount of about $618 million. That was up $121 
billion--sorry, billion dollars from the 2003 trade deficit, 
which was at $497 billion.
    What does that mean when you talk about this large trade 
deficit that we have? That is, the net importation of goods and 
services, instead of having more exportation--as you know, more 
exportation means more jobs for the American people--but when 
you look at this large trade deficit that we have, what does 
that mean in simple terms to the American economy and what does 
that mean in simple terms to the ordinary American?
    Mr. Greenspan. Well, first let me just say that all of the 
analysis that economists have been involved with over the years 
has found little relationship between the trade deficit and 
jobs. We have had low unemployment rates with large deficits. 
We have had low unemployment rates with large surpluses. The 
issue is largely the extent to which we interrelate with the 
rest of the world. And it turns out that the net imports of 
goods and services moves very closely, with the so-called 
current account deficit, which is a measure of how much money 
we have to borrow to effectively finance the net trade deficit. 
And what we do in that process is open up our economy to a 
significant amount of foreign investment, and, at the same 
time, open up our economy to very considerable access to goods 
from abroad, which we obviously purchased because they are 
either cheaper or better than what we produce at home.
    And the way things stand at this stage is that the 
combination of the desire on the part of the American people to 
purchase foreign goods as distinct from American goods and the 
willingness of foreigners to finance imports by the amount of 
money they are willing to invest here, that combination is what 
is creating these numbers.
    We would not have a trade deficit, if there was not an 
interest on the part of Americans to buy foreign goods. 
Remember, there wasn't 50 years ago--I mean we basically had a 
large trade surplus and imports were not all that large. But 
that has changed, and it has changed because Americans have 
perceived that the quality and the price of foreign-made goods 
is to our satisfaction. If our views change, that figure is 
going to go down. Or if foreigners are increasingly less 
willing to invest at the rate, the $600 billion rate they are 
investing, we won't be able to finance that. It is basically an 
issue of choice on the part of the American people of what we 
want to do with our purchasing power.
    Mr. Cuellar. You are saying that the trade deficit, when 
you look at this chart up there, has no effect on the 
employment level in the United States? Is there any concern to 
have a trade deficit besides saying Americans want to buy more 
foreign goods? Are there any concerns we ought to look at?
    Mr. Greenspan. Yes. The concerns really in large part 
reflect the fact that the current account deficit, meaning the 
borrowing that is done to finance those, accumulates over the 
years and that debt to foreigners requires us to pay interest 
on the debt, and that hence gets to an even larger amount.
    What we have to be sure of is that everything is in 
balance. To the extent that we don't want to create too large a 
net debt to foreigners who may not wish to finance it at some 
point, we obviously should constrain our appetite for imported 
goods.
    But the one thing that works very well for us is that we 
have prices and exchange rates and differential wage rates in 
various countries. And markets create a balance of these 
things. And it is one of the reasons why globalization has 
effectively improved the standard of living in the United 
States, very materially in my judgment, and as best I can judge 
has improved the standards of living of all of those who have 
chosen to engage in open free trade.
    It is a very complex set of institutions that are involved 
in this and there are a lot of people who are disadvantaged by 
severe competition, whether it is domestic competition or 
foreign competition. And what we have learned is that as 
difficult as competition is for a lot of us, and very few of us 
like our competitors, it is tough, we have to acknowledge the 
fact that competition has actually enhanced standards of living 
and has made us all work harder, better, and created I think a 
better society.
    Mr. Cuellar. Thank you, Mr. Chairman.
    Mr. Bradley. The Chair would recognize Ms. McKinney.
    Ms. McKinney. Thank you, Mr. Chairman. And thank you, 
Chairman Greenspan, for your indulgence.
    Earlier, Chairman Nussle noted that the economy is growing. 
And, Chairman Greenspan, you say in your written testimony that 
the economy delivered, quote, ``solid performance in 2004.'' 
but I would suggest that the solid performance, sadly, has been 
solid for just a few. I and my constituents would like to take 
America's growth personally, but only a few Americans can. For 
far too many, especially African Americans and Latinos, health 
care, housing, college education are hard to afford. And, 
sadly, too many Americans have been left behind.
    Of white families, three quarters own their own homes, 
while the majority of Asian Americans, Native Americans, 
Latinos, and African Americans are renters. In just 6 years, 
from 1995 to 2001, wealth for families of color grew for 
families--for white families grew by 37 percent, but for 
families of color, wealth fell by 7 percent.
    Chairman Greenspan, we can grow together or we can grow 
apart. And it is clear from these statistics compiled by United 
for a Fair Economy, that too many of us are growing apart. When 
our country invested in its citizens with the GI bill, Social 
Security, civil-rights laws, and affirmative action, we grew 
together. But somehow the policies beginning in the 1980s have 
resulted in today, that the wealthiest 10 percent own 70 
percent of our country's wealth. It is clear that we are 
growing apart. And I don't think that is sustainable.
    Chairman Greenspan, what policies do you suggest to halt 
the trends that are now being created that are creating two 
Americas?
    Mr. Greenspan. Well, Congresswoman, I agree with almost 
everything you said, and I have addressed that in testimony 
before various committees of this Congress. As has been 
indicated, actually quoting my own testimony, I have been very 
much concerned about the fact that we are finding the 
distribution of income in this country for the last 20 years, 
25 years, has been growing apart. This is essentially, as best 
I can judge, tracing back the causes, due to the fact that we 
are not educating our children to significantly move through 
the 4th to the 12th grade and a goodly number of them into 
college and beyond to have the skills that we need to staff an 
increasing capital stock, which is getting ever more 
sophisticated.
    It strikes me the issue really is fundamentally at an 
education level. And we have got to find the means by which we 
educate our students so that we don't find, as we now find, 
that our fourth-grade students are somewhat above average in 
world standards, but by the time they reach the 12th grade, 
they are in the bottom quarter. The rest of the world somehow 
seems to educate their children better than we do ours.
    We have got to find out why that is true and remedy it, 
because, as I said in testimony on innumerable occasions, a 
democratic society does not function in an effective manner 
unless everybody in that society has a commitment to the 
society's health and advance. And the only way you do that is 
to create a level of commitment to the society which ends up 
with incomes which may be scattered but don't get continuously 
and increasingly concentrated the way they have in the last 20 
years.
    Ms. McKinney. Thank you, Mr. Chairman, and thank you, 
Chairman Greenspan.
    Mr. Bradley. The Chair would now recognize Ms. DeLauro.
    Ms. DeLauro. Thank you, Mr. Chairman, and thank you, 
Chairman Greenspan. I am the last person, so I am between you 
and lunch and anything else. So I promise to be brief and I 
will ask both of my questions at the same time and they both 
have to do with jobs and the economy.
    First, even though we have seen GDP growth relatively 
strong in the past several quarters, we haven't seen the type 
of job growth that was typical in last economic recoveries. I 
want to know why you think that is the case. Do you think we 
will need higher levels of GDP growth in the future in order to 
be able to reach full employment?
    Secondly, we have now seen the number of people with 
incomes below the poverty line increase by more than 4 million 
since 2000. In fact, this administration has seen the highest 
average annual increases in poverty levels of any 
administration, except the first Bush administration, since the 
official poverty statistics were calculated in the 1960s. The 
increases occurred in spite of the relatively low unemployment 
rates. It appears that low-wage workers are either already 
working or have become discouraged and dropped out of the labor 
force. But either way, they can't achieve more than a poverty-
level standard of living. Should this be a concern for the 
future?
    Mr. Greenspan. This is an extension directly of my answer 
to Congresswoman McKinney. The basic problem that we have in 
this country is that the children from the fourth grade are not 
moving forward in their educational progress sufficiently 
quickly, and the consequence of that is that you end up with 
too few highly skilled people coming out of schools relative to 
the demand that the increase in technology is requiring, which 
has induced a very rapid increase in the wage rates for the 
highly skilled people.
    Concurrently, because people have not moved up enough in 
the higher skills, and they are left back in the lesser skills 
areas where the demand is actually falling--you find that their 
wages become stagnant, and you get the inevitable consequence 
of an increasing concentration of income. And what this says to 
me is that we have got to address this issue, find ways of 
improving the skills and moving children up through our 
educational system, so that when they come out into the labor 
market, we find that there are more than adequate numbers of 
skilled workers and that therefore their wages don't go up all 
that much and that the balance in the lesser skilled is such 
that their wages go up the same as the skilled.
    And indeed, as Congresswoman McKinney mentioned, after 
World War II the GI bill and all the education that a lot of 
men got during the Armed Forces, created degrees of skills for 
decades, which essentially kept the spread between skilled and 
nonskilled workers relatively constant, and therefore the 
concentration of income didn't change. If anything, it actually 
went down.
    Ms. DeLauro. Let me pursue that for a second. And I suspect 
you don't agree with me on this issue, but we are also watching 
a very large number, though we don't have a mechanism for 
tracking, where there is a range of jobs which require some 
skill, or maybe some of the information technology jobs which 
awhile ago we thought that that was a real future--and it can 
be a real future--but we are watching those jobs at $40, $50, 
$60, $75,000-a-year jobs that are going overseas. They were 
once blue-collar jobs and we thought, my God, there is no way 
they are going to make up that difference.
    But we are watching white-collar jobs move overseas, 
leaving less of an opportunity and a lower standard of living 
for people in this country with nowhere to go, and watching the 
Federal Government cut back on education and training programs 
and once again, curtailing opportunity.
    The question is, where do these people go when--jobs that 
require skill and training are now also a portion of what is 
happening; those jobs are leaving the country.
    Mr. Greenspan. Congresswoman, the most rapidly increasing 
aspect of our educational system are the community colleges.
    Ms. DeLauro. And vocational education, except we are 
cutting vocational education.
    Mr. Greenspan. The big issue is the community college. When 
I was in high school, we used to call it vocational education, 
and I did electrical wiring, and there were significant jobs, 
once you got out of high school, high-paying manufacturing 
jobs.
    The economies change because value preferences of people 
change. And what is critical here is that the demand for a 
community college is such because they are essentially trying 
to address precisely the type of skill gap that you are 
mentioning. Will they succeed in doing it fully? I don't know. 
I am chagrined by the fact that we have, as I said before, a 
significant shortfall in the educational advances of our 
children by the time they get to the 12th grade. And I find 
that unacceptable, and we have to find out what is it that they 
do abroad that we don't.
    Ms. DeLauro. Thank you, Mr. Chairman.
    Mr. Bradley. Mr. Chairman, thank you for your patience 
today. And on behalf of the entire committee, we thank you for 
your testimony. And I now declare the hearing adjourned.
    Mr. Greenspan. Thank you, Mr. Chairman.
    [Whereupon, at 1:07 p.m., the committee was adjourned.]