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Hearing of House Committee on the Budget - The Economic Outlook and Current Fiscal Issues

Location: Washington, DC



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.


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