Federal News Service - Hearing of the House Budget Committe - Transcript

Federal News Service

HEADLINE: HEARING OF THE HOUSE BUDGET COMMITTEE

SUBJECT: ECONOMIC OUTLOOK AND CURRENT FISCAL ISSUES

CHAIRED BY: REP. JIM NUSSLE (R-IA)

WITNESS: FEDERAL RESERVE CHAIRMAN ALAN GREENSPAN

LOCATION: 210 CANNON HOUSE OFFICE BUILDING, WASHINGTON, D.C.

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REP. JOHN SPRATT (D-SC): Thank you, Mr. Chairman.

And, Chairman Greenspan, welcome once again.

Mr. Greenspan, you come at a good time. Yesterday the Congressional Budget Office told us that the federal government this year will run the largest deficit in our history, at least in nominal terms: $422 billion -- $574 billion when the Social Security surplus is excluded. This surpasses last year's deficit by $47 billion.

Although the economy seems to be getting better, the bottom line of the budget is clearly getting worse, and it's not supposed to work that way, at least-except when you have a structural deficit. CBO assumes four-and-a-half percent growth this year, 4.1 percent growth next year, 3 percent thereafter. But it also shows, based upon those assumptions, that between now and 2010 deficits hover in the range of $300 billion. They barely go down and they never go away. That's the definition of a structural deficit.

CBO's forecast also shows that deficits will drop dramatically after 2010 for one salient reason: at the end of calendar year 2010, the tax cuts sought by the Bush administration, enacted by Congress mostly with the votes of our Republican colleagues, will expire. This event alone, the expiration of the Bush tax cuts, according to CBO will move the deficit from $298 billion in 2010 to $70 billion in 2012. That to me speaks volumes about the source of the problem, the source of today's deficit.

CBO's forecast is what we call a baseline, a current services forecast. And as you know better than we, by law CBO is required to assume that appropriations this year, including defense supplementals, will be repeated next year; that tax cuts that are written to expire on their own terms on a date certain do, in fact, expire. They have to assume that by law.

On our side we've gone back and factored some political reality into these forecasts. We've adjusted the baseline. We've adjusted it for a slightly lower and we think more realistic level of defense spending. Let's hope, at least, that we don't have a recurring cost of $115 billion a year for the Iraqi and Afghan deployments. We've extended all the tax cuts except for bonus depreciation, and we've added to the tax cuts an alternative minimum tax because we think that's politically inevitable and realistic. We've simply indexed the key variables.

When you hold the tax cuts constant parameter and don't assume their expiration or repeal, and let defense spending grow at CBO projects, here's what happens to the bottom line. Those numbers are a little small, but you can see that we go from 422 (billion dollars) down to 361 (billion dollars), and thereafter the deficit never drops below $320 billion.

By the end of our forecasting period, 2014, the deficit is $504 billion. That means that the unified deficit-the deficit after deducting Social Security surpluses-the unified deficit between 2005 and 2014 adds to $3,911,000,000,000. Deficits in the basic budget, without Social Security's offsetting surplus, come to $6.3 trillion -- $6.3 trillion. Debt held by the public will be $4.3 trillion at the end of this fiscal year; it will be $8.4 trillion by the end of 2014 -- would more than double. Total statutory debt, including debt held by government trust funds, today is $7.4 trillion. By 2014, according to our calculations when you make the adjustments we have made to the CBO forecast, total statutory debt will be $14.9 trillion. It will double, more than double, between now and 2014 if we follow this course.

And basically that's our question to you today, Mr. Greenspan. These are all numbers on paper, simple arithmetically. We'd like your candid assessment of what could happen if we actually take this fiscal path into the future. Is this course even sustainable? What are the consequences of running budget deficits and accumulating debt in this magnitude over a 10-year period of time?

Secondly, we'd like to hear you testify again what you have told us several times before. It's been within the last year I think that you've pronounced yourself a convert, a believer-that you were skeptical of-have scoffed-a little cynical of the efficacy of budget process reforms in the early '90s, but you believe that the reforms that we adopted in the Budget Enforcement Act actually contributed significantly to our successes in the 1990s. We have allowed those to expire. Congress has allowed those to expire. And we'd like to hear again your reaffirmation that those are part of the solution to this problem that confronts us right now.

Thirdly, of course, is the overarching question of the state of our economy. A lot of forecasters are beginning to talk about an economy that's been running on tax cut stimuli and mortgage refinancing cash, and now that those forces are pretty basically spent, we're wondering if the shock of the spike in oil prices is going to affect the recovery and make this a precarious economy.

And finally, with respect to jobs, we hope you'll touch upon this topic too, because there are today 1,650,000 fewer jobs in the private sector than there were in January, 2001 -- 1,650,000 fewer jobs. Why is this recovery so laggard despite huge fiscal stimulus in creating jobs in the private sector? In addition, you have often spoke, Mr. Chairman, in support of the establishment survey as being the more definitive estimate of the jobs situation in the country as opposed to the household survey, and since this topic comes up every time the jobs picture is discussed, we would appreciate your opinions on that.

That's enough for me to lay in front of you. I hope you will be able to address either in your direct testimony or in the questions you give us to the-answers you give us to the questions we have those particular topics, because I think those are the ones of preeminent concern. Thank you again for being here. We look forward to your testimony.

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REP. SPRATT: Mr. Greenspan, let me go back to the simple chart that I put up and explain that what we have done here is adjust the CBO baseline. Number one, I don't think and don't hope certainly that we'll have a $115 billion a year recurring defense cost to add on top of the already-enormous defense budget. We've tapered that off a bit in the out years. We've assumed as a parameter that the tax cuts will not expire, despite their written terms. And we have assumed with respect to discretionary spending that it will be current services.

The results are pretty dramatic, at least they are to me: $422 billion is the confirmed number this year; 361 (billion dollars) doesn't take into account what we are likely to spend through FEMA for Florida next year. You can add easily another 10 (billion dollars) to $20 billion on top of that. The deficit never drops below $320 billion. It rises to $504 billion in 2014.

My question to you is, are these numbers consequential? Can we take this fiscal path without some adverse effects that disrupt the economy, disrupt the growth of our economy, jobs, interest rates, and affect other things that are important to us?

MR. GREENSPAN: I think not, Congressman. Were it not for the extraordinary problems we have in medical care, and basically the fairly dramatic rise in the average expenditure per Medicare enrollee, we probably could live with the type of numbers you're projecting because the growth in the debt would not be all that large.

But having said that, it's very difficult to get around the issue that when you look out into the period, especially in the years immediately following the end of your projection, you begin to get some very severe fiscal pressures coming because of the very sharp increase in retirement benefits from an ever-larger increase in retirees. The consequence of that, unless we address it, is a highly unstable long-term fiscal situation. And if that is the outlook-and indeed, the one thing we can say with a degree of certainty is that the very large Baby Boom generation, which is currently working, will not be in large measure in those years-and if you project that in any reasonable-with any reasonable set of numbers, you get into a situation which suggests that current fiscal policy should try to keep the debt level down as low as we can because we're going to be running into very severe pressures in the later years.

And the better we are prepared in moving into that period, the more likely it is that we will address it in a rational and sensible way.

REP. SPRATT: What form will the consequences take? Is higher, much higher interest rates likely if we sustain this kind of debt?

MR. GREENSPAN: That's correct, Congressman. Federal Reserve studies have indicated over the years, and more recently in some fairly sophisticated analyses, that if you get to a point of fairly significant long-term structural budget deficits, it begins to impact on the level of long-term interest rates, which in turn, of course, creates higher levels of interest payments, and therefore, higher deficits. And if you take the arithmetic progression, you can demonstrate that under certain scenarios, that is an unstable situation. And obviously we must tread far-we must not even get close to those types of scenarios, because if you get into that sort of debt maelstrom, it is a very difficult issue to get out of.

REP. SPRATT: You mentioned in your testimony that we have not yet seen the financial imprint of these deficits in the financial markets. Is that because Asians, foreigners are buying most of our deficit today, holding most of our debt today, and it's not been a draw-down as yet on the domestic pool of capital and savings?

MR. GREENSPAN: I think not, because were that the case, we would find that in corporate debt we would be getting significant increases in long-term rates, and of course, we are not. I think that what the issue is is there is a general presumption out there that the longer- run problems in the deficit will get resolved one way or the other and that-and the markets at this stage are not focusing on that as a materially difficult problem. I'd like to add quickly, however, that I can't say how long into the future that would exist if we continue to fail to address what strikes me as a problem of potential instability.

REP. SPRATT: What you're telling us is there is a connection between high deficits and high interest rates that sooner or later comes to bear.

MR. GREENSPAN: Yes, sir.

REP. SPRATT: Let me ask you, with respect to the job market. Our indications-our numbers indicate that we are still 1,650,000 jobs short of the number of private sector jobs that were in existence on January, 1, 2001. This makes this recovery unlike any of the other nine recoveries in the post-war recessions. How do you account for the laggard, slow, sluggish growth in jobs, given the amount of a fiscal stimulus that the federal budget has been applying to the economy?

MR. GREENSPAN: Congressman, the answer lies in two areas. The first, and by far the most important, is that we have had an extraordinary rise in productivity. Indeed, the rate of productivity growth itself has been rising over the last decade. This is unprecedented in the data that we have access to. This suggests that as demand picked up in the post-2001 period in a modest manner, the increases in efficiency, which in the longer run are, obviously, very beneficial to standards of living, were sufficient to enable businesses to meet their increased orders without hiring significant numbers of people, and in many cases, even actually paring employment as their orders and sales and shipments rose.

Secondly, the recession that we had been through was the shallowest in the post-World War II period, and consequently, you don't get a rebound out of a shallow recession.

And so the combination of those factors-the very major increase in efficiencies and the shallowness of the recession-statistically account for the major decline in employment.

As the rate of productivity growth slows down, as it has been recently, we are beginning to see the labor markets begin to pick up. And indeed, the report this morning by the Bureau of Labor Statistics on job openings-this is a new series-show a marked increase in private-job openings. And indeed, the series itself, which is also reflective of hires and separations, is consistent with a moderate rise in the establishment employment data.

REP. SPRATT: Mr. Chairman, one last question, so that others will have an opportunity. You have testified before that the budget process rules we adopted in 1990, 1991, and carried forward in '93 and '97 -- the pay-go rules, the discretionary spending caps, the sequestration enforcement mechanism-all had a significant role to play in our budget successes of the 1990s.

Do you still support and favor the reenactment of those rules in their original form, and particularly the pay-go rule, which applied both to tax cuts as well as to entitlement increases?

MR. GREENSPAN: I do, Congressman.

REP. SPRATT: Thank you very much, sir.