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

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Federal News Service

HEADLINE: HEARING OF THE HOUSE BUDGET COMMITTEE

SUBJECT: ECONOMIC OUTLOOK AND CURRENT FISCAL ISSUES

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

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

WITNESSES: FEDERAL RESERVE CHAIRMAN ALAN GREENSPAN

BODY:
REP. NUSSLE: Good morning and welcome to this hearing of the House Budget Committee. Today we have with us the very distinguished chairman of the Federal Reserve, Alan Greenspan, to discuss again with our committee the economic outlook and the federal budget.

Chairman Greenspan, welcome again to the Budget Committee. We appreciate the time that you are always willing to spend with this committee, discussing the economy and discussing the budget over the years. And we appreciate the opportunity for that discourse and discussion again today.

It's been about a year since you last testified before the committee-actually, almost a year and a half now. And at that time our nation was really still in the early stages of recovering from the terrorist attack of September 11th of 2001, their aftermath. We were facing uncertainties at that time about the war in Iraq and we still had an economy that at least appeared to me and to many of my constituents in Iowa, having a difficult time getting back on track, and I think it's true for many within the country.

No one should underestimate that the challenges that we've had to overcome these last three years have been difficult. And the fact we've been I think as successful as we have is really something that we need to discuss today with you. Why is it that we've seen some of the successes that we're on the threshold of being able to really take advantage of at this point in time? Today, we're really in a much different position and certainly a much better position than the last time you came before the committee.

I've got a couple of charts to just illustrate this point. The economy is showing robust growth, and strong growth is expected really to continue. In the third quarter of 2003 we saw an amazing GDP growth of 8.2 percent, the highest surge in 20 years, and that was followed by a strong growth rate of 4 percent in the fourth quarter-still strong, certainly, by historic standards.

Housing starts in chart two were running at their highest level in 20 years, as you can see there.

In chart three mortgage interest rates continue to run at their lowest levels in three decades and the bank prime rate is at its lowest level in 45 years. Certainly, you have quite a bit to do with that, Mr. Chairman. We appreciate that.

Inflation in chart four has been running at its lowest rate in four decades, and I know this is a chart you are intimately familiar with as this is probably one of the first charts, as I understand it, that you pay attention to, as inflation is one of your concerns. U.S. real exports of goods and services rose in the fourth quarter at a rate of 19 percent, which was the fastest pace in seven years-which is a pretty good indicator, particularly from those of us who have states where we're concerned about exports, where we're so export dependent.

We've seen a significant increase in the stock market. Dow Jones Industrial Average up 40 percent since March of last year.

Chart four. In addition to the most important, I think, which is labor, the markets-the labor markets appear to be improving. For the past 20 straight weeks, unemployment insurance claims have remained low and below the benchmark regarded by economists as a sign of improving labor market.

In chart six we've got an unemployment rate down to 5.6 percent from the 6.3 percent last June. I'm not sure anyone predicted that we would be that low, particularly this early in 2004.

And the last chart, chart seven, really at this point in time, as you can see, the payroll employment is growing again. We need an economy that steadily expands job opportunities for our citizens, and so everyone who wants to work can work, and so that every working person knows that they can actually get ahead and balance their own family budget, which really is the most important budget that I think we should be concerning ourselves with here, because if their budget is not working, really none of the budgets of our country are working.

We've asked Chairman Greenspan here today not only to review the current and clearly improved economic picture, but also how we got to this point and what he believes the best course of keeping the momentum going. Certainly a large part of that discussion will focus on the impact of tax relief packages passed in '01, '02 and '03. I'm eager to hear the chairman's thoughts on what role these policies continue to play and how we must now build a foundation of sustained economic growth.

As I know you've said before, Chairman Greenspan, and I've certainly said time and time again, in addition to getting and keeping our economy going, we've got to get our hands around the other piece of-certainly another piece of the puzzle, and that's controlling federal spending. It really does matter. It matters to this committee maybe more so than it matters to any other committee. We're going to continue to believe in this committee that the deficits do matter. They are not the be all and end all, certainly, but they are indicative of some of the challenges that we have to deal with. All spending must be paid for, either through taxes or borrowing, growth in the economy. And those are burdens certainly; taxes and borrowing are burdens on the economy. And for that simple reason alone, controlling spending itself is a policy I believe for continuing economic growth.

You have before testified that you strongly urge this committee and the Congress to renew expiring discretionary caps, PAYGO spending controls, and as you know, those laws have been allowed to lapse. I strongly support reviving those statutory controls. I would like to discuss that with you today and would be interested in your thoughts on that.

I'm sure that it wouldn't hurt at all if you would encourage us, in your way, to continue to fight for budget enforcement tools. It's one thing to have a budget plan; it's yet another to enforce it and give predictability not only to the federal government but also to the markets that we're going to plan our work, work our plan, and stick to it and enforce it over time. I think that gives predictability that is important stability for the economic markets.

So we welcome you back.

Chairman Greenspan will be with us for two hours today, until noon. He has agreed to testify until that point. And so what we'd like to do today is, as much as possible, ask questions. If you have a speech you'd like to put into the record, we will ask unanimous consent that it be allowed to be put in at the opening, at this point in time.

And with that, I would turn to Mr. Spratt for any comments he would like to make.

-BREAK OF TRANSCRIPT-

We go to Mr. Thompson; then we're going to go to Mr. Crenshaw and then to Mr. Baird.

REP. MIKE THOMPSON (D-CA): Thank you. Chairman Greenspan, thank you very much for being here. And thank you also for your very honest explanation of the PAYGO system. The idea that we can bifurcate that somehow I don't think helps us fix the problems that we're in, and I think it really lacks the credibility that we need to address what I believe are very, very serious fiscal problems.

And as far as putting a process together, as you so eloquently explained, I think the one thing we have to be mindful of here is that there is a strong element of honesty in that discussion as well. The idea that we can continue to see increases in services, decreases in tax cuts is just not real-or tax revenues. It's just not real. And we need to be honest, as you point out, when we manage our expectations. I think that's going to be a very important part of us on both sides of this dais to fix the problems that we face.

I'm particularly concerned about foreign debt and the amount that foreign individuals and foreign countries hold of our debt. I have some numbers that I find to be frightening. The idea that 70 percent of last year's record $373 billion deficit were financed by foreign investors concerns me-a 33 percent increase in the past two years. Japan holds almost $600 billion of our debt; China holds almost $150 billion of our debt. And I'm concerned that this leaves us a possible victim to economic problems that are outside of our control. And add to that the fact that the billions of dollars that we're paying on interest on this debt is not even being paid-or part of it is not even being paid to folks right here; but instead, this becomes the biggest foreign aid program that we have in this country. And I'm worried about what may transpire because of this. And I'd like to hear your thoughts on it.

MR. GREENSPAN: Well, I presume, Congressman, you're concerned about the issue of what would happen if they started to sell these securities.

REP. THOMPSON: Well, to sell them, to threaten to sell them, or to somehow decide that we're not such a good -- (chuckles) -- investment and do something else with the money. I think it's got some interest rate ramifications.

MR. GREENSPAN: Yeah, we've looked at that in some detail.

First of all, remember when you're talking about the issue-let's take the issue actually of selling securities and see what happens. We're dealing not only with the size of the treasury debt owed to the public, but we're dealing with a whole big block of securities in the United States which is in several multiples. And they-all securities compete with each other.

So there's no question that if there is a sale of foreign assets, which largely are held by the central banks or the ministries of finance, that has-it has an effect, but it's very small. And one of the reasons is not only is the amounts of money, as large as they are, as you're quoting, relatively modest against the aggregate markets in this country, but they also tend to be disproportionately short-term instruments. And short-term instruments are huge in the United States, and since the liquidity is such that their effects are relatively modest. And remember that short-term rates are to a large extent controlled by the Federal Reserve's basic policies. Now, obviously, we cannot suppress rates without expanding our balance sheet inordinately, creating huge increases in the money supply and creating the problem that your colleague had mentioned previously, but within a fairly broad area, we can and do.

So granted, the numbers look very large, but --

REP. M. THOMPSON: Well, it's near-it's fast approaching $2 trillion on our $7 trillion debt. So --

MR. GREENSPAN: Well, I mean, I will grant you there will come a number at some point which will disturb me. But at the moment, and in the foreseeable future, it is still a problem for the future not for the current period.

REP. M. THOMPSON: Thank you.

REP. SHAYS: Thank the gentleman very much.