Panel One of a Hearing of the House Education and the Workforce Committee

HEADLINE: PANEL ONE OF A HEARING OF THE HOUSE EDUCATION AND THE WORKFORCE COMMITTEE

SUBJECT: THE ROLE OF EDUCATION IN CREATING JOBS

CHAIRED BY: REPRESENTATIVE JOHN BOEHNER (R-OH)

LOCATION: 2175 RAYBURN HOUSE OFFICE BUILDING, WASHINGTON, D.C.

WITNESSES: ALAN GREENSPAN, CHAIRMAN, FEDERAL RESERVE BOARD

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REP. BOEHNER: The chair recognizes the gentleman from Oklahoma, Mr. Cole.

REP. TOM COLE (R-OK): Thank you very much, Mr. Chairman.

And Mr. Chairman, it's an enormous pleasure to have you here to, frankly, educate us a little bit and then, hopefully, through us the American public.

Let me ask you, if I may: In the short time I've been here, I've seen very few public purposes for which we spend money that are not good public purposes. We may not spend the money as efficiently as we should, we may have some certainly some waste, fraud and abuse, but the reality is it's a good thing to defend the country, it's a good thing to educate your people, it's a good thing to fund some sort of social safety net so people have a decent living standard.

We get very few bad public purposes. Most of our choices are difficult choices because the purposes are good.

Is there some sort of standard that you would have as to the proportion of national income that should go for public purposes as opposed to private investment and private consumption that's commensurate with good economic growth, sound policy?

MR. GREENSPAN: Congressman, this is an issue which economists have been debating for a very long period of time, and the reason that debate has become so vigorous is it's very difficult to prove any particular level of income going to public purposes is optimum. And the reason is that, while-one can make the theoretical case, and I would, that the more that you get to public purposes, the lower the standard of living because at the end of the day central planning is the ultimate public purpose allocation. Central planning has been an utter disaster as an economic policy, as the Soviet Union demonstrated. And indeed, when the Berlin Wall came down the massive changes around the world away from that were dramatic. So at the extreme we know that there is an upper limit.

We also observe that there are certain countries, relatively smaller countries, which have managed to have very high proportions of their national income going to public purposes and still maintain fairly high standards of living. Others have not been able to do that. My own impression is that it's always best to try to get that number as low as you possibly can because I do think history does, in large measure, support that maximum economic growth will come from maximum private participation-private competition-which is the real issue. But there are always exceptions to this, and as a consequence saying that a specific number is correct is very difficult to support.

REP. COLE: And I appreciate the broad perspective.

Let me ask you this just as a follow-up. I agree very much with the point that you've made that we have overpromised, overcommitted in a variety of ways. We'll have the debate in Congress over which ways and how much. But looking forward to where we're at now, if we have to, as we do, come to grips with this, would you come down in favor of adjusting the obligations, the commitments, as difficult as that is, downward in some cases or at least in some sort of different fashion, or changing the tax rates and taking a larger proportion of the total income of the country and directing them toward sustaining the public purposes, as we've defined them so far?

MR. GREENSPAN: Well, Congressman, as I've testified elsewhere, the evidence, even though we can't get an optimum rate of where we put taxation, is that if you continuously rate the tax rate, at some point you run into very significant diminishing returns. And you will find that solving a problem of shortage of resources by increasing taxes, at the end of day, has high risks associated with it.

So I've argued that we ought to first focus on the excess of commitment over available long-term resources by seeing what we can do on the expenditure side first, before we advert to looking at using resources through increased taxation.

I don't deny that the size of the gap on what we have committed largely to retirees and the baby boom generation is quite significant, and that it is unlikely to be fully closed from the spending side, because the commitments are so large. But I do think that if we start by first raising taxes and then starting to look to what we have to do on the expenditure side, I think it's going at it in the wrong direction.