HEADLINE: HEARING OF THE HOUSE BUDGET COMMITTEE
SUBJECT: ECONOMIC OUTLOOK AND CURRENT FISCAL ISSUES
CHAIRED BY: REPRESENTATIVE JIM NUSSLE (R-IA)
WITNESS: CHAIRMAN OF THE FEDERAL RESERVE ALAN GREENSPAN
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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
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
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,
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.
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