Federal News Service Transcript - Monetary Report of the Federal Reserve

Federal News Service

July 16, 2003 Wednesday

SECTION: CAPITOL HILL HEARING

LENGTH: 23472 words

HEADLINE: HEARING OF THE SENATE BANKING, HOUSING AND URBAN AFFAIRS COMMITTEE
 
SUBJECT: MONETARY REPORT OF THE FEDERAL RESERVE
 
CHAIRED BY: SENATOR RICHARD SHELBY (R-AL)
 
LOCATION: 538 DIRKSEN SENATE OFFICE BUILDING, WASHINGTON, D.C.

SEN. JACK REED (D-RI): Thank you very much, Mr. Chairman.

Welcome, Chairman Greenspan. You're certainly a respected voice on these matters not only here in Washington, but internationally.

We are in the midst of some of the worst economic news we've had in a long time, particularly unemployment numbers. And the administration seems to suggest more tax cuts and it will get better. And the Congress has passed more tax cuts, and it's getting worse. So, I don't think that's the approach that we should take.

It's most particularly worse when it comes to the increase in unemployment. And I think Senator Sarbanes' comments are very precise and detailed about what is happening and the fact that it seems, in most cases, to be a lag variable, so even when the GDP starts improving, we'll likely see further increases in unemployment. We're reaching a critical juncture. This is the real lives of our constituents.

And of course, right over the horizon is Social Security and Medicare. And rather than taking prudent steps today to strengthen those programs or at least to reserve resources to do that, we have effectively funded the tax cuts with Social Security and monies and other monies—debt.

And I know it's incumbent upon all of us to restrain spending, but frankly, in 2003, about 94 percent of the spending above the baseline was devoted to defense, homeland security and other items as a response to 9/11, plus Iraq and Afghanistan. It's very difficult to hold down spending when we are spending $4 billion a month in Iraq and $1 billion a month in Afghanistan.

Today we will consider and this week we'll vote on a Defense bill that is significantly increased in spending, and ironically, none of that—those funds will include the cost of Iraq. That will come later, probably in a supplemental.

So we have a policy that is difficult, I think, to rationalize in terms of our fiscal policy here: uncontrollable expenses or at least very difficult-to-predict expenses, resulting from our operations in Iraq, Afghanistan and homeland security, and continued tax cuts, which leave us, I think, not only with a poorly performing economy, but in no position to deal with the issues of Medicare and Social Security.

I look forward to your comments, Mr. Chairman.

BREAK IN TRANSCRIPT
SEN. REED: Thank you very much, Mr. Chairman.

Thank you, Chairman Greenspan.

In the monetary report to the Congress this July, Page 12, I quote: "With little change on balance and non-federal domestic savings over this period, the downswing in federal saving"—which I think roughly is the surplus—"showed through into net national saving, which was equal to less than 1 percent of GDP in the first quarter, compared with the recent high of 6-1/2 percent of GDP in 1998. If not reversed over the longer haul, such low levels of national saving could eventually impinge on a formation of private capital that contributed to the improved productivity performance of the past half-decade."

Today's headline from the Washington Post: "White House foresees five-year debt increase of $1.9 trillion." The federal government will pile up $1.9 trillion in new debt over the next five years, and we'll still be running an annual deficit of $226 billion by 2008, long after White House economists assume current workforce will have subsided and the economy will have recovered. Those are pretty rosy predictions. But nevertheless, even the White House assumes we'll be running deficits and not surpluses by 2008.

The question is, where's the long haul? Is it 2005, '06, '07, '08, '09? When are we going to start seeing this adverse impact requiring us to do something more than just sort of talk about it?

MR. GREENSPAN: Well, remember that the statement in that report is a statement of accounting and arithmetic. That is, the account's savings and investment must balance. And obviously, if you get an absorption of savings from the private sector by increased federal deficits, that will reduce the private savings available to finance investment.

But as I said yesterday in response to a related question, that leaves open the question of financing domestic capital investment by essentially borrowing savings from abroad, is one possibility—which we've done, obviously, quite extensively.

And then, there's a quite important question which gets to the issue of only roughly half of our productivity increases are directly attributable to the amount of capital investment that is employed in the economy. The rest are technological changes, organizational changes, things which economists call multifactor productivity.

And so, there is no question that if you run substantial and excessive deficits over time, you are draining savings from the private sector, and other things equal, you do clearly undercut the growth rate of the economy. And that's one of the reasons I've argued for years about getting the deficit down.

So, I have no question that if we do not come to grips with these deficit issues, it will make it more difficult for us to maintain the type of growth rates which, to respond to Senator Sarbanes' concerns, will bring total employment up and bring the unemployment rate down.

SEN. REED: As I understand the numbers out of the White House, though, they're assuming a full-employment economy by 2008 and still deficits. Is that accurate?

SEN. SARBANES: Yeah, large deficits.

MR. GREENSPAN: Well, I mean, that is certainly economically consistent. It depends on the nature of the individual assumptions that are made with respect to a lot of different variables.

SEN. REED: I still haven't heard the long haul, where I'm looking over the horizon. Where should I put my stake down for the long haul? Certainly that's something that you must think about. I mean, it's one thing if you—because your models and your presumptions all have a time base as well as other parameters.

MR. GREENSPAN: That's exactly right, Senator. Even though, as I indicated earlier, we can move on 15 minutes notice, nonetheless unless we have a broad overview of the forces that are driving the economy, not only in the short run but in the long run, it's difficult to make judgments as to what the appropriate posture of monetary policy is unless you've got the full context of both the short term and the long term.

SEN. SARBANES: Jack, would you yield for a second?

SEN. REED: I would yield to Chairman Sarbanes.

SEN. SARBANES: Would you run large deficits at full employment levels? If the economy is at full employment levels, what is your view with respect to running large deficits in the federal budget?

MR. GREENSPAN: I would be against it.

SEN. REED: May I ask one more question? And that is, the consumer has been one of the stalwarts in the economy, and getting back to the taxes, there's at least two issues with the tax cuts. One is the size, and the other issue is who are the beneficiaries. And it seems to me in my—the one phrase I remember from college economics is that the marginal propensity to consume is inversely proportional to income. And so that if we target these tax cuts—I've exhausted all my economic knowledge; I'll admit it -- (laughter) -- if we target these tax cuts to the wealthiest, which it seems to be the case, we won't get the proportional benefit from consumption that we would if we had targeted these tax cuts to lower-income Americans.

MR. GREENSPAN: Well, Senator, I was exposed to the same economic education that you were as an undergraduate.

SEN. REED: I think it took in your case. (Laughter.)

MR. GREENSPAN: I would just merely qualify the conclusion. What we have found recently is that while indeed the marginal propensity to consume does fall as incomes rise, that the extent of the decline is much less than has been our previous expectations and what I also would presume to be conventional wisdom. So, yes, it is true that marginal propensity to spend falls, but it is not enough to really make a very substantial difference when you apply it to various different income distributions.

SEN. REED: Thank you, Mr. Chairman.