Hearing of the Joint Economic Committee on the Economic Outlook

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Federal News Service

HEADLINE: HEARING OF THE JOINT ECONOMIC COMMITTEE

SUBJECT: ECONOMIC OUTLOOK

CHAIRED BY: SENATOR ROBERT BENNETT (R-UT)

WITNESS: ALAN GREENSPAN, CHAIRMAN, FEDERAL RESERVE BOARD

BODY:

SEN. BENNETT: The Committee will come to order. We meet this morning in fulfillment of one of our statutory requirements, which is to hear from the Chairman of the Federal Reserve on an annual basis. Because of the interest in Chairman Greenspan's testimony, we expect a large attendance at this particular hearing. And in an effort to accommodate Chairman Greenspan, who has his own schedule, I will lay down the ground rules.

We will have opening statements from the chairman, the ranking member and the vice chairman. We ask other members not to give an opening statement but to hold their comments until we go to the question period. And I will recognize people on the order in which they come, and I ask the staff to keep track of that order so that I don't have to write everybody down as they come in. But we'll observe the early-bird rule and say those who come first get to question first, regardless of their seniority on the committee.

I've asked Vice Chairman Saxton and Ranking Member Stark to hold their opening statement to four minutes, and I intend to set the example and do that myself so that we can have maximum time for members in the question period. And we will try to hold each member to a five-minute period in an effort to give everyone the opportunity to question Chairman Greenspan and at the same time conclude the hearing in a timely enough manner that he can meet his other scheduled requirements.

So, with that, Mr. Chairman, we're pleased to have you here today. We always appreciate your views on the economic situation, as well as your broad perspective on the economic and fiscal issues facing Congress.

One of the things that has impressed itself upon me since I've been a member of the Senate is that very few people in public life have any kind of perspective beyond today's headline or this afternoon's deadline. And you are an outstanding exception to that rule, as you can see things in a perspective that goes across not only quarters and years, but decades. And I think that kind of perspective is very important to us. We're grateful that you're willing to come share it with us this morning.

You visit us at a time of good economic news. The economy is growing rapidly and adding new jobs, thanks to well-timed tax relief and aggressive Fed policy over which you've presided, and most importantly, the amazing resilience of the American economy itself.

I can't help but notice what a difference a year makes. When we were having this hearing a year ago, we talked a great deal about deflation. But today we meet amid speculation about inflation.

Now, last week we learned that consumer prices have been rising faster than expected and commodity prices are much higher than they were a year ago due to the strengthening world economy and the lower dollar. Higher commodity prices may eventually lead to higher consumer and producer prices. We've already seen that with gasoline.

But the real question is whether they signal broader price increases ahead. In the sometimes topsy-turvy world of economics, the bond market has treated recent gains in employment as bad news, driving bond prices down and interest rates up.

Employment growth is, of course, an unmitigated good for the economy, but it does sharpen the question of how long the Fed will be able to maintain the current low interest rates and how and when the Fed may move to a more neutral policy stance. And we, of course, will welcome your insight on this issue.

I'd also like to indicate we'd be interested in your thoughts on the housing market. Housing has been remarkably strong in recent years. It's boosted the recovery, built wealth for millions of American families, and low mortgage interest rates have been the key to housing strength.

But the concomitant result has been that home prices have been lifted in much of the nation, raising the cost of living for new home buyers, even as it creates a sense of wealth for existing home buyers. We need to understand how rising home prices might contribute to inflation. And looking ahead, we also need to understand how rising interest rates might affect the housing market.

So those are the issues that are on my mind, Mr. Chairman. We welcome you again and look forward to your testimony.

I now yield to the vice chairman, Mr. Saxton.

REP. JIM SAXTON (R-NJ): Thank you, Mr. Chairman. It gives me great pleasure to join with you in welcoming Chairman Greenspan once again before the Joint Economic Committee.

Let me just say, the evidence shows that the U.S. economy has displayed amazing resilience in recent years and has now emerged from a painful adjustment process. The bursting of the stock market and technology bubbles began in 2000. The subsequent economic slowdown and recession, terrorist attacks and wars harmed the economy but did not prevent the current economic expansion, which began in November of 2001.

The economic data released in recent quarters indicate that the U.S. economy continues to grow at a healthy rate. Over the last half of 2003, economic growth adjusted for inflation was 6 percent. This recent pickup in the economy was expected for some time but had been delayed by weakness in business investment.

However, the long-awaited rebound in business investment is now underway and has boosted the economy and has led to a more balanced pattern of economic expansion. For example, in the last two quarters of 2003, investment in equipment and software increased at rates in excess of 15 percent. The increases in investment have contributed to a strong recovery in manufacturing activity.

Meanwhile, consumption and housing activity continue to hold up well. Productivity is very strong and inflation is under control. Recent data indicate that payroll employment growth has resumed. Independent economists have noted that tax relief and accommodative monetary policy have made important contributions to the recent strength in the economy.

Finally, the blue-chip consensus forecast is that the U.S. economy will grow at an inflation-adjusted rate of nearly 5 percent this year. The return to sustained and healthy economic growth is a tribute to the flexibility and resilience of the American people and our free-market economy.

Mr. Chairman, thank you. And I'll be delighted to hear from Chairman Greenspan when you are ready.

SEN. BENNETT: Very good. Mr. Stark.

REP. PETE STARK (D-CA): Thank you, Mr. Chairman. And welcome, Chairman Greenspan. And I know we all have questions, the same questions that are on everyone's mind today: When, which way, how much. We're all waiting to see. Chairman Bennett and I will become very wealthy if you'd whisper those things in our ear and give us a head's up. But I don't think that perhaps we'll have that all provided for us today.

Consumer prices went up. Some are fearing inflation. The Fed has committed itself to be patient. My concerns still are job growth; we haven't seen persistent job losses since the '30s, and it wasn't much fun in the '30s. I remember that. But we have, since then, talked about extension of unemployment benefits.

And I know that you testified a month or so ago that you would support extending unemployment benefits. I think it would help. I think it would help the economy. And it would certainly help 3 million unemployed workers avoiding financial ruin. We have-our counties and states are less able than ever to provide public assistance to these people who are out of work.

I don't think training is the answer because I don't know whether you take an unemployed electrician and train him or her to be a chiropractor. They're out of work because there aren't jobs and not because they are unemployable.

So we have - in the House it's become a partisan battle. We've passed a couple of times or asked to pass extensions. The leadership in the House has dug in and not doing anything. The president and the Republican-controlled Congress could.

So I look forward to your statements today, Mr. Chairman, about what you see, what kind of good news you may see ahead of us for the spring and summer. Thank you. Thank you, Mr. Chairman.

-BREAK OF TRANSCRIPT-

SEN. BENNETT: Thank you very much. Mr. Stark.

REP. FORTNEY STARK (D-CA): Thank you, Mr. Chairman.

I have three questions, Mr. Chairman. I'll just run through them, and you may whack away at them in any manner you see fit. But I would like to have your comment as to whether you still believe, as you testified earlier, that it would be sensible policy to extend unemployment benefits.

My other question deals with the recent proposals of FASB, the Financial Accounting Standards Board, requiring recognizing the cost of employee stock options. Some of my colleagues would like to block that proposal, and I wonder whether you have any position on whether we should in fact follow the FASB rules, or at least stay out of their turf.

My third question deals with a topic that we're discussing a good bit, and that is whether we should fix our tax codes so that it does not encourage U.S. firms to move capital and jobs to foreign tax havens. And I don't necessarily refer just to outsourcing, which may go on where labor markets are attractive, but whether we should in fact add to that by creating a tax incentive that might make it encourage companies to move.

Those would be my three areas. If you have time to deal with them, I'd appreciate it.

MR. GREENSPAN: Mr. Stark, I indicated in my prepared remarks that 85,000 a week are, of the unemployed, are losing their unemployment insurance. It's an exceptionally high number. And I'm of the belief that our unemployment insurance system has been crafted and has evolved in a way which seems to me as close to optimum as you can make such a system. It does not encourage undue unemployment by creating excess benefits, which means that people don't seek jobs when they could, and yet its replacement rate on existing wages is, of course, it's never adequate, but it's at a reasonable level.

We have extended, of course, unemployment insurance on previous occasions when it was fairly clear that the large numbers of unemployed were there through no fault of their own. And as I indicated a month ago, which you are reporting on, my view is that if we make the extension short, because it's not going to be required for very long, I do think it's a good idea. And I think it's a good idea largely because of the size of the degree of exhaustion, which is, in a sense, almost a special case.

With respect to stock options, I think it would be a bad mistake for the Congress to impede FASB in this regard. First of all, this is an accounting question. I've always argued that accounting is for the purpose of determining whether particular strategies of companies are profitable or not profitable. The whole point of accounting is to tell somebody whether a specific strategy is working or not. The cost of worker input, labor cost, irrespective of the form in which it's paid, is a critical determinant of the production process and the determination of whether or not a strategy is profitable.

In other words, in simple terms, if your output values are greater than your input values, within certain limits, it's a profitable strategy. If you take one of the significant elements of input of costs and take it off the table, meaning you don't expense stock options, then you're getting a distorted view as to what the profitability of a particular operation is, and you will get a distortion in the allocation of capital. Now, it may very well make individual fringe look more profitable than they are, and people don't like to change that, but the point at issue is not whether it is more or less profitable but are the figures right.

And in this regard, as best I can judge, the FASB changes in, or recommendations with respect to accounting procedures, strike me as correct. And it's not clear to me what the purpose of Congress in this particular procedure.

With respect to the tax code question, that's a very complex issue because the tax code, as it affects the allocation of capital within a multinational firm, is never simple. And every time you change one element, you change something else. And the presumption that you could essentially calibrate taxes to somehow make major change, major incentives within a multinational corporation to move employment from overseas to domestic, I'm not sure it works.

I do not deny that you can set up taxes which would prevent employment going abroad, but that doesn't mean it's coming back home. It just disappears.

REP. STARK: No, I-my question, Mr. Chairman, was relative, not to labor, which I-which I don't think we can control with the tax code. That will always be attractive to people who choose to outsource. But, when you can retain profits overseas and not pay taxes on them, that encourages a capital investment in addition to what the normal labor market --

MR. GREENSPAN: Well, are you referring to the issue of bringing back capital and therefore it would be investment in the United States? The evidence on that, Congressman, is that capital investment in the United States is largely determined the potential rate of return in the United States relative to the domestic cost of capital. Our financial markets are sufficiently liquid, and our corporations in large measure are not limited for cash flow. So, it's quite conceivable that if you change the tax code in a manner in which induces a much larger flow of undistributed earnings abroad to domestic-to domestic affiliates, it's going to have very little affect on capital investment. It probably will increase the payment of dividends to shareholders. In other words, what will happen is that money will come through the United States and go out to domestic or shareholders in general. There's very little evidence that I've seen, even though I know there's a lot of-some of my friends have made calculations of this regard, I frankly find them most unpersuasive.

REP. STARK: Thank you very much. Thank you, Mr. Chairman.