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Hearing of the House Committee on Financial Services - Federal Reserve Monetary Policy Report - Part 2

Location: Washington, DC

REP. EDWARD ROYCE (R-CA): Thank you, Mr. Chairman.

Chairman Greenspan, you said you're very optimistic about the economic outlook for the country, but at the same time you said business caution remains a feature of the economic landscape. And I wonder what you think the sources of that caution are. And what would end that caution? Is that caution merely a protracted convalescence from the bursting of the bubble and the aftermath of that? Or has the regulatory environment inadvertently inspired hesitancy on the part of business of investment?

And perhaps are there some other factors? You know, we hear from executives and from economists warning about the litigation risk in America today. Whether it's from some state attorney general or from an ambitious plaintiff lawyer, there's that factor.

But whatever it is, we know one thing. To my knowledge, there's only one European firm that has listed its stock in the United States this year. So whether it's litigation costs and fear of that, or concern about the costs of Section 404 audits, the regulatory costs, for some reason, capital that once flooded into our capital markets is hesitant-from overseas. And at the same time, you cite this business caution here domestically.

And I was wondering if you would give us, in your view, the sources that generate that.

MR. GREENSPAN: Congressman, I think we know that the caution exists because we can measure the extent of how they behave. What causes that obviously has got to be conjecture because we're trying to delve into the psyche of individual decision-makers. I think that there's no question that the aftermath of the bursting of the bubble and the corporate scandals still linger and induce a sense of unwillingness to take the types of risks that businesses had invariably taken in the past. And that was reflected in the fact that, as I indicated earlier, capital expenditures tended generally to significantly exceed cash flow in the recovery stage of the business cycle, with a very substantial implicit rise in corporate debt, which of course we're not having at this particular stage.

To the extent that there is fear of making mistakes, it gets down to some degree of being unsettled, as indeed I suspect they should be, at seeing the type of corporate behavior which nobody believed was consummate with the American capitalist system. And that has undoubtedly had an effect, and its aftermath.

I think that the issue of potential terrorism is latent, it's there. I have no way of making a judgment as to how significant it is. It is very difficult to find any evidence outside of the long- term futures markets in crude oil, which presumably reflect some degree of world instability in supply. But if you look at the United States' financial system, with all of its various spreads and relationships, trying to measure this type of risk, it's very hard to find.

So it's something which we don't really know all that much about. We observe it. We get the same sort of response when we speak to corporate executives that you do. There is an issue of litigation risk in here, but there's always been litigation risk. But when it's tied up in the question of corporate behavior and responsibilities, it clearly is inducing a higher level of caution than probably existed in the past.

REP. ROYCE: Mr. Chairman, if I have time for one other question.

Chairman Greenspan, in preparing for your visit here I read an economic research note from a very respected economist, in which he called-the Federal Reserve, in his view, is the world's biggest hedge fund. And his rationale for making that claim is that the Fed has encouraged the financial markets to participate, in his view, in the carry trade, where one can borrow cheaply on the short end of the yield curve and invest those borrowings in a longer-dated security.

So, according to this economist, the Fed encouraged the carry trade in 1993 when they took the Fed funds rate down to where it equaled the rate of inflation. And the current period is cited as another era, in his view, of the carry trade, since the Fed funds rate is negative or below the rate of inflation. The risk cited in this paper of his is that these Fed-encouraged carry trades can encourage artificial bubbles in asset prices. This claim is applied to the housing bubble today, but could-you know, the equity bubble in the 1990s could also be explained from that perspective.

And I just wanted to get your thoughts on this critique of Fed policy.

MR. GREENSPAN: Well, Congressman, so long as the normal tendency is for long-term rates to be higher than short-term rates, there'll always be some carry trade. And indeed, one can even argue that commercial banks are largely carry trade organizations.

But, as I point out in my prepared remarks, the awareness currently of the risks in taking extended positions in the carry trade markets is clearly being unwound, and our judgment is that while there is some, and there always will be some, it's not been a problem. Certainly, if you have an extended period and you lock-in these differences, you can create great distortions.

But when we move rates down, as we have on several different occasions, we are acutely aware that in that process we will increase the carry trade. The more important question is, what the significance is if we do that? And if we perceived that that was creating bubbles or distortions, obviously we wouldn't do that. And I must say that our history of dealing with that problem-and it is a problem, as indeed there are huge numbers of related sorts of problems-we're aware of what happens when we move, but we try to adjust our policies in a manner as to significantly minimize any secondary consequences of such actions, and indeed, I think the recent history suggests that so far, at least, we've been successful in doing that.

REP. ROYCE: Thank you, Chairman Greenspan.

REP. OXLEY: The gentleman's time has expired.

The gentleman from North Carolina, Mr. Miller.

REP. BRAD MILLER (D-NC): Thank you.

Good morning, Mr. Chairman. In your testimony earlier today, you said the increases in average hourly earnings of non-supervisory workers have been subdued in recent months and barely budged in June.

I have had some difficulty actually finding some job-to-job comparisons. I've seen industry-to-industry comparisons that the industries that are gaining jobs pay 20 percent less than the industries that are losing jobs; the manufacturing sector has been losing, the service sector has been gaining. They're also less likely to pay health care benefits and have retirement benefits. And, of course, you know that we've had significant manufacturing job loss throughout the country, and in my own state of North Carolina, more than-almost 160,000 manufacturing jobs lost in the last four years.

The figures I have show that the jobs created in North Carolina have paid about $4,000 less than the jobs that we have lost, and were about 10 percent less likely to provide health care.

MR. GREENSPAN: I'm sorry. That's in your state, not in the country as a whole?

REP. B. MILLER: That's-and my state is-in my state.

What are the job comparisons? How much of the jobs that we're losing in the last four years, how much have they paid? How much have the jobs we've gained paid? And what's the, also, total compensation, including health care and retirement benefits?

MR. GREENSPAN: Well, we've tried to address that question and tried to analyze the aggregate structure of employment relative to the question as to whether the job increases over the last year, for example, have been in industries which have below-average wages.

REP. B. MILLER: Right.

MR. GREENSPAN: And what we have found is that that is true, but in a very small extent. Conversely, when we've done the same type of calculation not by industry, but by occupation, we get the other result; namely that there seems to have been an upgrading in the types of jobs when looked at from an occupational point of view.

Now both of these data are-changes-are very small. But even if you want to look at them as though they are meaningful, it's not inconsistent and it may in fact be the case that within industries you're getting a shift towards lower-slightly-slight shift towards industries with lower average earnings, but at the same time an upgrading within the industries with respect to occupations.

But I think the bottom line of all of this is that we've not been able to find a significantly meaningful change in the quality of the jobs being produced relative to the quality of jobs being lost for the nation as a whole over the past year. It is conceivable that, if we had far greater detailed data, we might unearth something significant. But so far our statisticians, using the full detail that the Bureau of Labor Statistics publishes both with respect to occupation and with respect to industry-there's very little evidence of a particular bias one way or the other.

REP. B. MILLER: It sounds like that fairly long answer said the reason I can't find job-to-job comparisons is they really aren't there. But you would agree with me, if North Carolina jobs-new jobs are paying $4,000 less than the manufacturing jobs that we've lost, that's pretty subdued?

MR. GREENSPAN: Well, I'm just saying that, when you look at it from the economy as a whole, it balances out from-they are good and bad. Remember, there's a more interesting question which surely is what this issue is about, which we cannot make a judgment on. Most of the data that everybody quotes are the net change in jobs from one period to the next. The type of question about-that you should really be interested in, and I think we all are, is if we had gross figures; in other words, the total number of not net jobs, but gross additions to jobs and what they pay relative to the jobs that were lost and what they pay.

We don't have-or, I should say, more exactly, the Bureau of Labor Statistic does not have-data at that level of detail. And until we did have data of that sort, we really can't answer this question in any meaningful sense.

REP. B. MILLER: Right.

REP. OXLEY: The gentleman's time has expired.

REP. B. MILLER: Well, not quite.

REP. OXLEY: The gentleman from Texas, Mr. Paul.

REP. RON PAUL (R-TX): Thank you, Mr. Chairman.

Morning, Chairman Greenspan.

Yesterday's testimony was received in the press as you painting a pretty rosy picture of the economy. You have already remarked on this a second time on one statement you made that I would like to comment on again, because I think our-my colleagues should pay close attention to it. And that is your statement about "corporate investment in fixed capital and inventories apparently continues to fall short.

"The protracted nature of this shortfall is unprecedented over the past three decades.

"The proportion of temporary hires relative to total employment continues to rise."

I think that is very, very significant and probably should be taken into context of the rosy picture of the economy.

Also, at the end of your statement, you make a comment about inflation in the long run, which I entirely agree with, and that is, "it's important to remind ourselves," you say, that inflation, in the long run, "is a monetary phenomenon."

However, you sort of duck the issue on the short run. Various factors affect inflation on the short run. And yet I think monetary policy is pretty important in the short run.

And our temptation here and too often, with central banks, is to measure inflation only by a government measurement of CPI, where the free market economists, from Ricardo up to Mises to the current free market economists, argue the case that once a central bank interferes with interest rates and lower them before the-lower them below the real rate, that investors and others do-make mistakes, such as overinvestment and malinvestment, overcapacity, excessive debt and speculation.

And therefore, I think that we should concentrate more on the short run on what monetary policy does.

Over the last several months, you have been hit by two groups. One half are saying that you're raising rates too fast, and the other half say you're raising-you were way too slow. And of course the-it begs the question whether or not you're really right on target. But from a free market perspective, one would have to argue that you can't know and you don't know, and only the market can decide the proper money supply, and only the market can decide the right interest rates. Otherwise, we invite these many problems that we face.

As the economy slowed in 2000, 2001, of course there was an aggressive approach by inflating and lowering the interest rates to an unprecedented level of 1 percent.

But lo and behold, when we look back at this, we find out that manufacturing really hasn't recovered. Savings hasn't recovered. The housing bubble continues. The current account deficit is way out of whack, continuing to grow, as our foreign debt is. And consumer debt is rising, as well as government debt.

So it looks like this 1 percent really hasn't done much good other than prevent the deflating of the bubble, which means that, yes, we've had a temporary victory, but we've delayed the inevitable, the pain and suffering that must always come after the distortion occurs from a period of time of inflating.

So my question to you is, how unique do you think this period of time is that we live in and the job that you have? To me it's not surprising that half the people think you're too early and the other half think you're too late on raising rates. But since fiat money has never survived for long periods of time in all of history, is it possible that the (formidable ?) task that you face today is an historic event, possibly the beginning of the end of the fiat system that replaced Bretton Woods 33 years ago? And since there's no evidence that fiat money works on the long run, is there any possibility that you would entertain that we may have to address the subject of overall monetary policy not only domestically but internationally in order to restore real growth?

MR. GREENSPAN: Well, Congressman, you're raising the more fundamental question as to the issue of being on a commodity standard or on fiat money standard. And this issue has been debated, as you know as well as I, extensively for a very significant period of time. Once you decide that a commodity standard, such as the gold standard, is for whatever reasons not acceptable in a society and you go to a fiat currency, then the question is automatically, unless you have government endeavoring to determine what the supply of the currency is, it is very difficult to create what effectively the goal standard did. I think you will find, as I've indicated to you before, that most effective central banks in this fiat money period tend to be successful largely because we tend to replicate what would probably have occurred under a commodity standard in general.

I've stated in the past that I've always thought that fiat currencies by their nature are inflationary. I was taken back by observing the fact that from the early 1990s forward, Japan demonstrated that fact not to be a broad universal principal. And what I've begun to realize is that because we tend to replicate a good deal of what a commodity standard would do, we are not getting the long-time inflationary consequences of fiat money. I will tell you I'm surprised by that fact. But it is, as best I can judge, a fact.

REP. OXLEY: the gentleman's time has expired.

The gentleman from Alabama, Mr. Davis.

REP. ARTUR DAVIS (D-AL): Good morning, Mr. Chairman.

One of the challenges that I think we deal with as lawmakers and policymakers is that, frankly, a lot of the public and the constituency that we serve doesn't necessarily understand a lot of the economic policymakig process in this country, that they don't have a good understanding of the facts beyond a lot of the political rhetoric; and I think that that's a bipartisan concern that we have that there's this kind of nebular fog that exists around making sound economic decisions as policymakers.

And another related concern that we have is sometimes some of our own officials contribute to that confusion by the way they talk about these issues.

So, with that as the backdrop, Mr. Chairman, let me ask you about some very specific observations that President Bush has made, and let me ask you to comment on their accuracy. And these are taken from one particular speech the president gave on April 24, 2003, but I'll represent to you that they are a pretty consistent rendition of other comments he's made on the issue of deficits.

Quoting the president: "Now, you hear talk about deficits, and I'm concerned about deficits. But this nation has got a deficit because we have been through a war, and I told the American people we would spend what is necessary to win the war." Close quote.

I'm going to ask you to comment on the accuracy of that assertion, which as I read it, from the president, is that the proximate cause of the deficit was the spending on the war, by which he presumably means Afghanistan and Iraq.

Then I want you to comment on this observation by the president: "And the best way to deal with the deficit is to address the two things that affect the deficit. First, increase revenues to the Treasury through economic growth and vitality."

That observation, as I understand it, is the president's comment that the best strategy for getting the deficit down is to raise revenues through growth and vitality, presumably the kind of growth that he would argue comes from his tax cuts. I want you to comment on the accuracy of that statement that the best glide path to bringing the deficit down is through increased revenues.

The third observation from the president-remember, he mentioned two things that affect the deficit. He said, "And second, make sure Congress does not overspend your money; make sure it focuses on the things that we need and doesn't spend beyond the things that we need."

I take that to be the president's observation that discretionary spending by Congress is the next most significant factor in the rising deficit, and I'm presuming that he means to distinguish discretionary spending from entitlement-based spending, such as Medicare and Social Security. That also strikes me as a controversial proposition.

So, to make sure you understand my question, can you comment on the accuracy of all three of those observations by the president: First of all, the primary cause of the deficit-or the cause of the deficit, spending on the war; second of all, that the best glide path for reducing the deficit is raising revenues through tax cuts; and third of all, that it's discretionary spending and not entitlement- based spending. And if you believe that the president is inaccurate in all of those observations, does that concern you that the chief executive has gotten it so fundamentally wrong when it comes to describing the state of our economy?

MR. GREENSPAN: Well, Congressman, I'm not going to comment on the specific views. I happen to agree with --

REP. A. DAVIS: Can you comment on the accuracy of the observations?

MR. GREENSPAN: Well, the point at issue is that it's-the question of the extent to which military spending is part of the increase in spending and, therefore, the deficit, is a numerical issue. And I-I mean, there's no question that the deficit would be smaller if we did not having military spending.

REP. A. DAVIS: Do you agree that that's the primary reason that we have a deficit?

MR. GREENSPAN: Well, I, frankly, don't know. I think that, clearly, part of the deficit-well, it depends on where you start. If you start, say, several years ago and come from here, a goodly part has been the loss of the very high revenues we were getting from the-from capital gains taxes and from the exercise of stock options. And the elimination of those revenues were a significant factor in the rise of the deficit, as well as declining revenues as a consequence of the economy going down.

REP. A. DAVIS: Would the tax reductions also be a factor in those declining revenues?

MR. GREENSPAN: Yes. But I don't have the numbers directly in front of me. There are all sorts of reasons.

But over the broader term, the general notion, which is one of the major issues in the debates on fiscal policy, is the question of the extent to which certain tax policies, by increasing the efficiency and the growth of the economy, will increase the revenue base, and I've always been one of those who believed that that is a very important issue in policy. There are others who believe that the mechanisms work in different ways. There is not, as best I can judge, complete agreement about a number of these issues, and when you say in certain senses there are facts, certain of the statements you've raised are questions of fact; others are a question of interpretation of the way the economy functions.

And I would say I would agree with a goodly part of the general thrust of what the president has been saying with respect to that, but not necessarily with the specific numbers, because I have not actually done the arithmetic that would be required to make that judgment.

REP. OXLEY: Gentleman's time is expired.

The gentlelady from Pennsylvania, Ms. Hart.

REP. MELISSA A. HART (R-PA): Thank you, Mr. Chairman.

Thank you for spending some time with us today, Chairman Greenspan. I want to go back to some comments you made briefly and alluded to a little about the skills of American workers-many of the workers who are currently unemployed not matching the needs of our growing technological base-and that further you said that, analyzed by occupation, job growth has actually been higher in some of the higher wage areas, which I'm assuming means the ones that require more skill.

And you've talked about improving our educational system in the past. The president has a plan to move forward and improve elementary and secondary schools as we've been working on, but recently announced an initiative to also improve community colleges' ability to train workers and retrain them as technology improves.

Do you believe that community colleges should be involved in this process? Is that the level of training that you're talking about, number one? And is it possible that a large number of the workers who are currently unemployed are just not employable in the new jobs of the new economy, that we need to take those workers-those are the ones that are causing some of the more stubborn unemployment?

MR. GREENSPAN: Well, Congresswoman, I've observed in the past that one of the major growth industries in this country is community colleges, and the reason for that is that they have recognized that this rapidly changing structure of skill requirements in the labor force requires that education not end at some point in one's life, but it's an ongoing issue, because with the skill level requirements changing so continuously, unless you are continuously updating your capabilities, you're going to fall behind the curve, as indeed has been a major problem.

The community colleges have seen this particular niche requirement in our society and they have obviously addressed it successfully. If they hadn't, the enrollments would not be surging to the extent to which they are. And in that regard, I would find it difficult to believe that we could address the educational issues with respect to the question of maintaining the skills of the American workforce without recognizing that there are several different types of levels of knowledge that we need.

First, obviously, is basic primary education because if you don't have that-if you don't-can't read well or can't do arithmetic well, you're stymied in moving forward. But then there's the very broad abstraction of being able to learn, which is what our school systems are trying to do. And beyond that is the application to specific types of skills and jobs, which is what the curricula of the community colleges tend to be. And people find, I gather, that what they gain from those community colleges is very significantly worth the cost.

REP. HART: Okay. That having been said, do you see, in an analysis of those people who are unemployed, though, a lot of them being the folks who could benefit the most from that skill updating?

MR. GREENSPAN: Well, as we know from the data, that when people get laid off it is-they usually have difficulty regaining the wage level that they had before they were laid off. And this leads to the question as to whether they could do better by shifting the profession they're in. And lots of them have decided, because of the type of jobs that they had, that they would do better doing something different. And here's where community colleges I think really do a good job because we have-the nature of the turnover in our labor force is really extraordinarily large and rising.

And it implies that not only do you not have lifetime employment as they used to have in Japan, but you-we're finding more and more that many people, maybe even most, have more than one profession during their working lives. And this is the reason why we see that there's been such a remarkable pickup, say, during the period when recession occurs, that the labor force shrinks. Jul 21, 2004 12:02 ET .EOF

And when you trace down what's happened, they're all going back to school. And when, in effect, the economy picks up, they come back into the labor force. And this, I might add, is one of the reasons why, despite the surge in employment, the unemployment rate has not gone down commensurately.

REP. OXLEY: The gentlelady's time has expired.

The gentleman from Georgia, Mr. Scott.

REP. DAVID SCOTT (D-GA): Thank you very much, Mr. Chairman.

Chairman Greenspan, in your report you mentioned that there is-conditions in the labor market are improving. You also mentioned they're improving at a rate of 200,000 jobs per month, new jobs per month.

This is not the case in the African-American community. The unemployment level among African-Americans in the same period has risen from 9.7 percent to 10 percent, while the unemployment rate among white Americans is 5 percent. That's double.

And the situation is very drastic and most drastic among African- American males between 20 and 45 years of age-nearly 700,000 unemployed; African-American women, nearly 700,000 -- in that very critical, most productive earning years between the ages of 20 and 45.

As our foremost economist, as our authority on these matters, I would be interested and I think the nation would be interested to know why is this. Can you pull the covers off of this racial imbalance and explain to this nation why this imbalance among African-Americans? This growing economy that is moving, and yet the African-American unemployment rate is increasing. If in fact the nation's unemployment rate was 10 percent, it would be catastrophic. And it is a catastrophic situation in the African-American community. Why is it? And what must we do in Congress to correct this imbalance?

MR. GREENSPAN: Well, Congressman, I think you're addressing one of the issues which has been one of the failures of our society. I think that having such large groups of potentially productive workers not operating at their most potential-at the highest potential level is a vast misuse of resources.

I think no matter-any way we cut it, part of it is discrimination. We try to hide that fact, but I don't think it's been eliminated. I think it's improved somewhat, but it's clearly a major factor.

We've got to find a way to enhance the educational skills all abroad, all of our workforce. And where there are significant problems, as there are in the African-American workforce, which you point out, I think we have to make certain that we double up on our efforts.

But aside from education, I'm not sure that there is an answer.

I'm reasonably sure that, if we can get sufficient education and skill levels up, the pressure of the marketplace, even though there is significant residual discrimination, will have a major-will create a major improvement. But without starting at the education level, I would be discouraged at the capability of success. With education, I think we've got a reasonably strong case to resolve this issue once and for all.

REP. SCOTT: Well, how do you account for the fact, Mr. Chairman, that there are African Americans with MBAs, there are African Americans with this education-that I think you hit it on the head in your first comment: discrimination. Wouldn't it be appropriate that there be called at the highest levels of government and industry a summit to address this critical issue? It's not going to go away.

And if, in fact, it is, as you say-and I think you speak the truth, that it is rank discrimination, it is rank racism in the employment marketplace-that we should hold accountable chief executive officers of our major companies, the movers and the shakers, the decision-makers; and that, as our chief spokesman for the economy, that you could provide that leadership to say, once and for all, let us deal with this issue? I assure you that if the nation's unemployment level overall was 10 percent unemployment, there would be a summit. There would be action taken. Don't you think that that would be a critical movement on the part of the leadership of us in public policy-in the Congress and the White House and the executive branch-and in industry?

REP. OXLEY: The gentleman's time has expired. The chairman may respond.

MR. GREENSPAN: I just want to just say, I mean, anything that can be done in this area is clearly important to move forward on.

REP. OXLEY: The gentleman from Alabama.

REP. SPENCER BACHUS (R-AL): Thank you, Mr. Chairman.

Mr. Chairman, let me start with a given, and that's that our economy depends on an efficient transportation network. I believe you would agree with that, would you not? And you're saying that you do?

MR. GREENSPAN: I do, yes.

REP. BACHUS: You have predicted sustained economic growth, increase in output, orders. My question to you: In making your calculations, in making your forecast, in deliberating, did you calculate the present inefficiencies in our transportation network, the limitations in our transportation network?

I mean, I could give you some examples. For instance, our transcontinental railroads are jammed. Our velocity in train speed is actually decreasing. And our interstate highways are heavily congested; transit times there are-in the last 10 years have decreased significantly. Does this threaten-particularly a global economy, when we're predicting border crossings to double in the next 10 years-are you concerned over the limitations in our transportation infrastructure?

MR. GREENSPAN: I think the deregulation of trucking, railroads and airlines and air transport unwound what was, I thought, a really serious set of problems which very significantly reduced the flexibility of our system. So while I don't deny-indeed, the chairman was mentioning the shortages of skilled drivers for trucking-I don't deny that there are bottlenecks here and problems there, but I would not indicate that I thought that transportation inefficiencies were a serious problem, certainly nowhere near what they were 30 years ago. I think we've got problems, obviously, with the rail transport, specifically the endeavor to subsidize the-an Amtrak system and related sorts of rail transport, but we are, remember, a very heavily passenger-car, light-truck, SUV society.

REP. BACHUS: You know, you mentioned 30 years ago. Are you aware that-just take the year 1970 -- that since 1970, we've actually had a tripling of mileage driven by Americans; during the same period of time, we have twice as many registered drivers, we have something like three times as many tractor trailers on the road, yet our roads, our network of roads has only grown by 6 percent?

So I do agree with you that the competition and the deregulation helped tremendously and brought some efficiencies into the market, but I would urge you to pay close attention to that transportation grid in the, you know, "just in time" economy that we're in, because I believe that it is seriously restraining our economy now.

I think some reason why you have a backlog on orders and you have unfilled orders is you have many places where it takes 30 to 60 days to get a rail car, where five years ago it took three to six days. And in your calculations, begin to take a look a that.

We're projecting that it will take $375 billion over the next six years just to maintain our interstate highway system, our national network of roads and rail and maritime, and yet the projections are to spend $300 billion. So we're going to actually spend an amount that's less than the amount to simply maintain it. And if these projections which you're making-and I don't doubt that the demand is there, the productivity is there, that we look at that as perhaps a weak link in our system and become aware of that.

And with that, I will yield back the balance of my time.HFSC-GREENSPAN-POLICY PAGE 60 07/21/2002 .STX

But if you'd like to respond to that --

MR. GREENSPAN: You are raising an issue of priorities in funding for both state finance and federal finance. And I think that while I don't deny the numbers you are positioning, there is the question of if you lined up all of the priorities that one can assert with respect to all claims on the federal budget, they would be unfinanceable. And so we, of necessity, have to make choices, and these are choices which are very difficult to make. And I think where economists can be helpful, we are; where we don't know as much as we need to know-and I don't know myself as much as I think I would need to know to make judgments-we're not very helpful.

REP. BACHUS: And I agree. And I was just saying --

REP. OXLEY: The gentleman's time has expired.

REP. BACHUS: -- that in making these calculations, I wish you would pay attention-you know, pay close attention-I'm not-to what we have. We have a lot of congestion out there and a lot of inefficiencies.

REP. OXLEY: The gentleman's time has expired.

The gentlelady from New York, Ms. Velazquez.

REP. NYDIA VELAZQUEZ (D-NY): Thank you, Mr. Chairman.

Chairman Greenspan, the trade deficit grew to approximately $145 billion in the first quarter of this year, escalating from the $127 billion deficit reached in the final quarter of 2003. To finance this trade deficit, the U.S. must borrow from foreigners at a rate of approximately $1.6 billion a day.

Do you believe that our substantial budget deficit, which is adding considerably to our outstanding public debt, will undermine foreigners' confidence that the U.S. will be able to pay back this constantly growing debt?

MR. GREENSPAN: So far, as best we can judge, foreign willingness to hold long-term obligations of the U.S. government is not diminished. Clearly, I can't say to you that there is no level at which they will start to respond negatively. And indeed, as I was indicating in conversations at the Senate yesterday, that with respect to financing our current account deficit, I think our concern is that unless we bring it down in some form or another, we will begin to build up a level of dollar claims against American residents which will eventually place our foreign trading partners in a position where even though they may say the rate of return here is very good, that they have to diversify out of the heavy accumulation of U.S. dollar obligations. There is, as I said yesterday, no evidence that we're anywhere near a problem of that nature. But if you project down the road, I can't see how we can avoid it one way or another.

REP. VELAZQUEZ: But, Mr. Chairman, many economists believe that if foreigners lose interest in loaning of money or buying up our assets, interests rates could soar, making it impossible to pay down our debt.

With no buyers to be found stock prices and real estate values will plummet and America could find itself in a long-term depression. Do you agree with this assessment?

MR. GREENSPAN: No, I do not. I do not largely because I cannot believe that we will allow ourselves to get in a position where, in order to finance our federal government deficit, we'd have to be reaching out both domestically and abroad to borrow money at very high interest rates.

REP. VELAZQUEZ: And how we will not allow ourselves-to find ourselves in that proposition-by reducing the deficit and I guess rolling back taxes?

MR. GREENSPAN: As I indicated earlier, I think that what we are missing at this particular stage is a process for approaching fiscal policy in the sense that, as I indicated earlier, we're confronted with something new, namely that our commitments are now very long term and our ability to forecast the way it's going to come out is rather limited.

This suggests to me that we have got to find ways in which we not only project short-term budgets, but we project long-term budgets and simultaneously find means by which, if our forecasts are turning out to be wrong, there's an automatic adjustment process-triggers, for example-which alter either tax rates or expenditure programs. So in effect, the deficit does not get to the point of extraordinary imbalance where we would be forced into a position where we'd be-could not get money to finance our deficits except at exceptionally high interest rates.

REP. VELAZQUEZ: Mr. Chairman, with the final approval of the J.P. Morgan-Bank One merger coming on the heels of the Bank of America-Fleet merger, the rise of a super-tier of U.S. banks is evident. These banks will each control $1 trillion in assets, together controlling more than 40 percent of the industry's total assets.

First, does such concentration pose risks to the banking system and, as a result, to the U.S. economy? And second, do you believe that our current system of regulation is sufficient to oversee such large and diverse corporations that pose such great risk to the financial system?

MR. GREENSPAN: Well, first of all, we obviously are observing the phenomenon and the trends to which you allude, and were it our judgment that we were in a potentially serious supervisory regulatory state, with respect to these large institutions, I would indeed be most concerned. These institutions are very large, but the crucial issue of concern is the degree of concentration in specific types of businesses or products.

And in many instances, although these are very large institutions, they are quite diversified, and hence they don't have the type of-they don't create the type of threat of systemic problems, which could readily be the case where there is significant concentration.

Nonetheless we do continuously monitor this issue, and I trust that the combining of both federal and, where applicable, state supervision, and the private sector's counterparty supervision, will remain sufficiently adequate to sustain what is, in effect, a reasonably good balance at this stage in our financial structure.

REP. OXLEY: The gentlelady's time has expired.

REP. VELAZQUEZ: Thank you, Mr. Chairman.

REP. OXLEY: The gentleman from Minnesota.

REP. MARK KENNEDY (R-MN): (Off mike) -- thank you, Chairman, for your service and for spending time with us today.

I'd like to continue on the discussion on trade deficits and move from problem focus to solution focus. You know, we had a good export growth, and we were growing exports, largely, in some cases, because of a weaker dollar. But with our growing economy, our imports are growing, and we find the rest of the world not growing at quite the same pace, with Europe still behind us; with China having some concern as to whether their growth is too fast, and they need to move towards, you know, a lower level of growth, the soft landing.

We also have to make sure we're keeping American exports competitive. And you've talked at great length today how part of that is making sure we have a low-tax, low-spending, you know, low-deficit environment. You've talked at great length about the need for us to improve our education system so that all members of our society are qualified for the work of the future.

You've talked that we need to keep trade open, that we need to continue to expand trade-yes, enforce our agreements, but expand trade. And of course we need to keep the regulatory burden that you've also talked about moving, so it's a less heavy hand in our environment.

But I'd like to ask you about three things. Number one, when we're talking about keeping America competitive to get this trade deficit down, how impactful is the significant differences in the weight on the economy from excessive lawsuits in this country versus others?

Secondly, international taxes. We got an international tax bill that we're trying to work through this Congress and get to the president's desk. But even with that passing, with European countries being able to rebate their VAT taxes at the border, how significant is that international tax differences on our ability to be competitive and our ability to reduce this trade deficit?

And then thirdly, is there any things that we ought to be pushing our foreign trade partners, whether in Europe or in China, to do to help us have them take more of the burden of carrying the economy, rather than us always be the growth engine of the world?

MR. GREENSPAN: Well, Congressman, we have a long-standing problem in our trade accounts, and that is, the propensity of Americans to import relative to our incomes is much larger than our trading partners' willingness to import relative to their incomes, at any given structure of prices or exchange rates.

What that means is that, other things equal, with everybody growing at the same rate hypothetically, we would be incurring an ever-larger trade, and therefore current account, deficit. And this has been a fundamental problem which we have been-it was identified, I might add, 40 years ago, and it hasn't changed except at the edges. So we are essentially in a position where, in order to keep our trade deficit down, we have to work, in a sense, far more effectively than our trading partners.

Clearly, the price and exchange rate structure has not fully adjusted to this differential because had it done so, it would have readjusted our trade accounts accordingly. This means that our trade problems are essentially becoming our finance problems in how we finance the debt that is implicit here.

With respect to very specifically our competitive export capabilities, we obviously are at the cutting edge of the world's technologies, and American products do have very significant competitive capabilities, and I think we do a reasonably good job. But as you point out, to the extent to which our exporters are burdened by various different types of regulations or litigation relative to our trading partners, we are at some disadvantages in certain bilateral relationships.

But I'm not sure how one carries the tax issue forward. There is a great deal of literature on the issue of the value-added tax and the rebate issues with respect to the United States, which doesn't have one, and what the impact is. I'm not sure I know enough about how those academic studies have come out to give you any useful insight.

REP. OXLEY: (Sounds gavel.) The gentleman's time has expired.

The gentleman from Kansas, Mr. Moore.

REP. DENNIS MOORE (D-KS): Thank you, Mr. Chairman.

REP. OXLEY: If the gentleman would yield. We're trying to meet this vote and dismiss the chairman, so we will go for about six, seven minutes.

REP. MOORE: I'll be as quick as I can.

Mr. Chairman, thank you for being with us today. You note several promising trends in our economy, and I hope that our economic recovery is strong enough to withstand potential threats, such as a slowly rising inflation rate.

In you written statement, you emphasized the importance of allowing households and businesses to make decisions that best promote the longer-term growth of our economy, and with it our nation's continuing prosperity. Unfortunately, Mr. Chairman, many people in my district and throughout our country are finding it, I think, difficult to make the decisions that are best for themselves and their families. Many people are struggling to pay for the basics, such as food, shelter, education and health care. Inflation in health care, I believe, is one of the greatest problems facing our country, and as our population continues to age I think it's only going to get worse.

I hear about this virtually every weekend from individuals and small businesses when I go back to Kansas.

According to the Department of Health and Human Services, health care spending was up 9.3 percent for 2002, which followed an 8.5 percent increase in '01. The Urban Institute estimates that American households will spend an average of $15,000 on health care costs in '04. Health care now accounts for nearly 20 percent of household personal income, and this situation is causing some families and some individuals to choose between basic health care and other priorities or to go without necessary health care altogether.

Mr. Chairman, in your testimony you mention that our country's, quote, "continued sizable increases in health insurance costs"-you talk about our health insurance costs. Since 2000, annual health insurance premiums for Americans have risen 37 percent for individuals and 41 percent for families, and the rising cost of health care is also putting a substantial burden and pressure, I think, on small businesses in our country.

Would you agree that sizable increases in health care and health insurance costs presents our economy and families and small businesses with a potentially serious problem now and in the coming years?

MR. GREENSPAN: I do, Congressman. In the context in which you quoted me, I was referring to the issue of the fact that a stable price level or non-inflationary environment, history has indicated to us, is conducive to maximum sustainable long-term economic growth. That does not mean that there are not innumerable problems would exist as a consequence of that. And I regret that I agree with you on your analysis of the health cost problems, because they will be, as best I can judge, the really major issue that fiscal policy is going to have to address in the years ahead.

REP. D. MOORE: Secretary Thompson of Health and Human Services was quoted in a newspaper-national newspaper yesterday that the cost of records and recordkeeping in health care is almost $140 billion a year, could be saved if they converted from paper basically to high-technology computers. Would you agree that that might be a good move for the health care industry?

MR. GREENSPAN: I don't know about the size of the estimate. Those numbers tend usually to be a little larger than actually is achieved.

REP. D. MOORE: Oh, really?

MR. GREENSPAN: But they're still writing prescriptions on pieces of paper.


MR. GREENSPAN: And how they understand what's on that piece of paper has never been clear to me. And digitalizing a very significant part of the system is undoubtedly a major priority for addressing the cost issue.

REP. D. MOORE: And last very quick question. I got here a little bit late, but I heard you talking about PAYGO rules and budget enforcement rules that expired, I think you said, in '02? Is that correct, Mr. Chairman?

MR. GREENSPAN: September '02.

REP. D. MOORE: And I believe you said that it would be worthwhile for Congress to reimplement those PAYGO budget enforcement rules that apply not only to new spending but also to tax cuts, as well. Is that correct, sir?

MR. GREENSPAN: That is correct.

REP. D. MOORE: Thank you very much.

REP. OXLEY: The gentleman from Texas for a couple minutes.

REP. CHRIS BELL (D-TX): I'll roll everything into one question, Mr. Chairman. And thank you for recognizing me.

And thank you, Chairman Greenspan.

I wanted to return to the topic of wages that came up earlier today. In your statement you say, "To be sure, the increases in average hourly earnings of non-supervisory workers have been subdued in recent months and barely budged in June." I think that's reflective of a pattern that's occurred over several years now. You go on to say, "But other compensation has accelerated this year," which would suggest that the money's there, it's just not going to the non-supervisory workers.

As you're aware, the minimum wage-the federal minimum wage has not been increased since 1997. Those who are forced to live based solely on the minimum wage live at or very close to the poverty line. And I'm just curious as do you feel-if you feel as if this wage situation in America is cause for alarm. And if so, have we reached the point that it's time to look at increasing the minimum wage? And in your opinion, what impact on the overall economy would an increase in the minimum wage have at this time?

MR. GREENSPAN: As I've testified in the past, my concern with the minimum wage is that it increases unemployment, and indeed, prevents people who are at the early stages of their careers, prevents them from getting a foothold in the ladder of promotions. And the evidence does suggest that it tends to be more counterproductive than not. And as a consequence, I think raising the minimum wage is not, in my judgment, an effective way to address what is a significant problem of a distribution of income issue, which is what I discussed in my earlier remarks.

REP. OXLEY: The gentleman's time has expired.

We're going to have to break now. And again, apologies to the gentleman from Texas.

Mr. Chairman, again, as always, it's good to have you here, and we look forward to --

REP. FRANK: Could I just say, Mr. Chairman, I thank the chairman for coming. But I would say on the topic the gentleman raised, I'm still waiting for the Fed analysis of the economic impact on employment of the last minimum wage increase. It's a little overdue. I think, frankly, there was an absence of bad news that's led us not to get the analysis.

REP. OXLEY: The chair would indicate that members may submit written questions for the chairman. And with that, the committee stands adjourned.

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