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BUDGET AND ECONOMIC OUTLOOK

THURSDAY, JANUARY 24, 2002

U.S. SENATE,

COMMITTEE ON THE BUDGET,
Washington, DC.

The committee met, pursuant to notice, at 10:05 a.m., in room SD-608, Dirksen Senate Office Building, Hon. Kent Conrad (chairman of the committee) presiding.

Present: Senators Conrad, Hollings, Sarbanes, Murray, Wyden, Feingold, Johnson, Byrd, Nelson, Stabenow, Clinton, Corzine, Domenici, Grassley, Bond, Gregg, Snowe, Smith, Allard, and Hagel. Staff present: Mary Ann Naylor, staff director; and Chad Stone, chief economist.

For the minority: G. William Hoagland, staff director; and Cheri Reidy, senior analyst.

OPENING STATEMENT OF CHAIRMAN CONRAD Chairman CONRAD. The hearing will come to order.

I want to welcome Chairman Greenspan this morning. It is good to have you here to testify before the committee. As many of us commented yesterday, what a difference a year makes.

Last year, the Congressional Budget Office projected that we would be able to expect $5.6 trillion of surpluses over the next decade. Yesterday, the Director of the Congressional Budget Office sat in that chair, Chairman Greenspan, and told us that the $5.6 trillion of projected surpluses were reduced to $1.6 trillion, and that is before any additional defense buildup the President is apparently about to propose or any additional funding for homeland defense or any stimulus package or a farm bill or any other new spending initiatives.

Last year, Chairman Greenspan, you testified that we were in danger of paying off the debt too quickly. And while you sounded cautionary notes, and sent many signals in your testimony that we have got to be careful not to return to deficits and debt, unfortunately very few in this town paid much attention to your cautionary notes.

Many people heard what they wanted to hear, and they claimed that we could have it all: that we could have a massive tax cut, that we could have a major defense buildup, that we could protect every penny of the Social Security and Medicare Trust Funds, and that we could have a maximum paydown of our national debt. Unfortunately, we now know that was not true.

As we heard yesterday in Director Crippen's statement, there would be no surplus over the next decade without the trust funds

of Social Security and Medicare. In fact, instead of a $2.7 trillion non-trust fund surplus, we would have a $1.1 trillion deficit.

And last year, we were told that we would be debt free by 2008, or effectively debt free. Yesterday, Director Crippen made clear that we will have $2.8 trillion in national debt instead of being debt free. The reasons for the change? Well, in Director Crippen's testimony, it was clear that over the 10 years the biggest reason for the decline in the surpluses is the tax cut, accounting for 42 percent of the reduction. The other factors are on this chart. Economic changes account for 23 percent; other legislation, largely spending as a result of the attack on this country, 18 percent; and technical changes. 17 percent.

So the question before this committee is: What do we do? In order to answer that question, we first have to analyze the current status of the economy. That is one reason you were invited here today, and we welcome your testimony.

We see that unemployment is still rising. We are now at 8.3 million people unemployed in the country. But at the same time, there are some hopeful signs. We see consumer confidence starting to rise. It is now ticking up. And so the fundamental question before us: What should the budget policy of the United States be in order to foster stronger economic growth and put this country in a position to meet its long-term obligations?

I believe that fiscal discipline matters to the markets. That is something that you have made clear. In your remarks earlier this month in San Francisco, you said-and I just want to quote"Some of this stimulus has been likely offset by increases in longterm market interest rates, including those on home mortgages. The recent rise in these rates largely reflects the perception of improved prospects for the United States economy. But over the past year, some of the firmness of long-term interest rates probably is the consequence of the fall of projected budget surpluses and the implied less rapid paydown of the Federal debt."

And, indeed, when we look to specific indicators and interest rates, what we see is that while you and your colleagues at the Federal Reserve have aggressively reduced short-term rates, longterm rates have stayed stubbornly where they were. We can see in 30-year conventional mortgages virtually no reduction over this period in which you and your colleagues have so aggressively used monetary policy to attempt to give lift to this economy.

Mr. Chairman, in the past you have argued strongly about the desirability of paying down debt to help keep long-term interest rates down. Again, I turn to your words of just last year at about this time: "All else being equal, a declining level of Federal debt is desirable because it holds down long-term real interest rates, thereby lowering the cost of capital and elevating private investment. The rapid capital deepening that has occurred in the United States economy in recent years is a testimony to those benefits."

Now, I believe you were right then and you are right now to make that point.

But there is another key reason for fiscal discipline and for attempting to rebuild surpluses, and that is the demographic time bomb that we face as we approach the time the baby-boomers will start to retire. This circumstance is fundamentally different than

the budget crisis we faced in the 1980's because then we had time to recover. Now there is no time to recover. The first baby-boomers start to retire in just 6 years.

As Director Crippen said yesterday, acting sooner rather tan later to address these long-term fiscal imbalances will make a real difference.

Finally, Mr. Chairman, in your testimony last year, you warned us that budget projections are highly uncertain, and you urged us to have a plan to protect surpluses and debt reduction. You suggested something like a trigger. We did not follow that advice, regrettably. Some of us were strong advocates, including members on both sides of the dais here, certainly Senator Stabenow on our side and Senator Snowe on the Republican side warned us that we should take your advice and put in place such a mechanism.

I think now the evidence is clear that that should have been pursued, and perhaps you can give us counsel on how we best do that

now.

Again, Chairman Greenspan, I welcome your presence here today and look forward to your testimony. I turn now to my very able colleague, the ranking member, the Senator from New Mexico.

OPENING STATEMENT OF SENATOR DOMENICI

Senator DOMENICI. Thank you very much, Mr. Chairman, and welcome, Dr. Greenspan. It is always good for us to have you here. I am told that this is your 18th appearance before the Senate Budget Committee, as the Chairman of the Council of Economic Advisers, as a private citizen, and as Chairman of the Federal Reserve. That is quite a record, although I am not sure whether to congratulate you or to pity you. In either event, you seem to like coming back, and we like to have you come back. So we are going to call it something to be congratulatory about.

As the committee discussed yesterday, Dr. Greenspan, with the CBO Director Dan Crippen, things are clearly different than a year ago. The last time you testified before our committee was a year ago. At that time the Congressional Budget Office was saying that the 10-year baseline surplus was $5.6 trillion compared to a publicly held debt of $3.4 trillion. A year ago, you were concerned that the budget surplus might grow so large and be so persistent that there was a good, real possibility and threat of the Federal Government accumulating private assets, which you said would undermine long-term productivity growth.

You were also concerned then that the Federal Government could end up paying large premiums to bond holders by trying to retire long-term debt before it matured. You recommended that we adopt a budget strategy that smoothed the glide path toward the minimum level of publicly held debt.

You cautioned against coming upon the minimum debt level in an abrupt way in which the Government could only avoid accumulating assets by suddenly reducing taxes or increasing spending regardless of where the United States was in the business cycle.

It seems to me that the combination of President Bush's tax cut, the war on terror, and the economic downturn have accomplished your goal of smoothing the glide path toward the minimum debt

Last year, the baseline showed us

[Laughter.]

Senator DOMENICI. You want to laugh first?
Chairman CONRAD. Was it a joke?

Senator DOMENICI. No, it wasn't a joke, but if you would like to laugh, it would be fine. Then I could complete it. Everything all right? [Laughter.]

Senator DOMENICI. I didn't bring many of my people along today because I didn't get a chance to show them that, and I didn't know what their reaction would be. So I left them somewhere. They will be along shortly.

So let me repeat. It seems to me that the combination of President Bush's tax cut, the war on terror, and the economic downturn have accomplished your goal of smoothing the glide path toward the minimum debt level. Last year, the CBO baseline showed us reaching a net debt of zero in 2009. Now the net debt is on a schedule to reach zero at 2014. For all the rhetoric about the end of fiscal discipline, the new CBO baseline shows publicly held debt dropping to about 7 percent in 2012, the lowest debt-to-GDP ratio since 1917.

Some of my colleagues may try to get you to apologize or issue some sort of mea culpa for your testimony last year. But the way I see it, we are now in exactly the fiscal situation you suggested we should be in: a smoother glide path toward a minimum debt. It is true that in the near term we will experience deficits, and as you look back at your testimony, that is what was expected last year. But we have had a recession and a war, at least the beginnings of a war in between. If there is any time when a deficit is not just acceptable but probably preferable, it is when the country is at war and the economy is contracting.

At this time we have to be focused on domestic programs to secure our citizens from terrorist attacks, securing their economic future, and providing our military with whatever it needs to fight this war and win it. It is our responsibility to produce a budget that preserves the security of our citizens on all these fronts: their national security, their personal security, and their economic security. Nothing much less can matter at this time.

I hope we can work together on a budget plan that focuses on these three security issues. I look forward to the Chairman's testimony this morning, and in the oncoming days and weeks that we can work together here as a committee in a real way to do what I have just described would be done on your part and the executive branch.

Thank you, Mr. Chairman. It is a pleasure to be here this morning.

Chairman CONRAD, Chairman Greenspan, we again welcome you to the committee and look forward to your testimony.

STATEMENT OF ALAN GREENSPAN, CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

Dr. GREENSPAN. Thank you very much, Mr. Chairman and members of the committee.

Mr. Chairman, I am going to excerpt from my prepared remarks and request that the full text be included in the record.

Chairman CONRAD, Without objection.

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