Federal Reserve Chairman Alan Greenspan Testifies Before Senate Banking CommitteeAired February 23, 2000 - 10:31 a.m. ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
DARYN KAGAN, CNN ANCHOR: Right now we want to go to the nation's capital, where Fed Reserve Chairman Alan Greenspan is appearing before the Senate banking committee. He's asking -- he's answering questions now being asked by Senator Phil Gramm.
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ALAN GREENSPAN, CHAIRMAN, FEDERAL RESERVE: ... of the budget outlook. And I've concluded that even though we've got these significant unified budget surpluses, and indeed the possibility that we may be underestimating them, because if indeed we are in a period where we are about to get or in the process of getting still accelerating productivity, meaning the growth in productivity is still rising, it is very likely that the forecasts that are made both by OMB and CBO are indeed underestimating the surplus.
On the other hand, if you look at the pattern of forecasts, they all include a reasonably significant continuation of what I would call the tax surprise of the 1990s, and that is that even after making adjustment for capital gains taxes, for the incomes which are not capital gains but related to the stock market, for what we call bracket creep, you still have got a very significant increase in individual tax revenues relative to taxable incomes.
And we don't know, nor does anybody else know, where that is coming from, and we will not until we get full details from the individual tax returns, probably through 1999, to get a full sense of what is involved and where it's coming from.
Pending that, we cannot be sure that this tax surprise can just as readily as it has in the past turn around, go in the other direction, in the same magnitude. So it is not very difficult with some reasonable assumptions to take the unified surplus, or most of it -- not to mention the on-budget surplus -- and chop it down very substantially.
I conclude from that, that until we have got a reasonable good sense -- a reasonable sense of where those revenues are coming from and therefore what is the most likely permanent increase in the surplus based on not guesses on revenues, but on hard numbers, until we get there, I've argued that we should allow the surpluses to run and reduce the deficit -- I'm sorry, reduce the debt outstanding. And indeed, as I point out in my prepared remarks, this is not an irrevocable commitment because you can always borrow back federal debt after you've paid it off for any programs you want. But I would submit that irrevocable or almost irrevocable programs that are put in place now strike me as risking the possibility that we may be wrong on this surplus. And all I'm saying -- all I am asking, in effect, is just to delay for awhile until we have a better grip on what the true balance in our federal government accounts is.
Now, I have not and did not get into in my prepared remarks the specifics of either the president's program or anybody else's program. I'm hopefully going to try to stay away from that, as I have over the years. As you know, my general view is that the first priority is to get the debt down, because it has very major, positive economic effects, as well as building up the ability to re-borrow, if need be. And essentially, the ability to keep those surpluses are important.
But if it turns out that it is politically infeasible for all sorts of obvious political reasons, that my choice is that for long- term fiscal stability we are far better off cutting taxes than raising spending.
SEN. PHIL GRAMM (R), TEXAS: Well, Mr. Chairman, I know it's hard for you when we're talking about congressional spending programs or administration spending programs, to speak up on it. But I think it's very important that you follow the spending pattern of the government and that you not hesitate to blow the whistle when you believe that there is a potential danger, because I think you have great credibility on this issue.
I'm always concerned about spending and I -- you talked about the wealth effect of the run up in equity values. It's a very natural thing that in Congress, when we're running the first surplus in the political career of anyone who is here, that there's a natural tendency for, in the old cliche, the money to burn a hole in your pocket. So, I think your comments are very important.
I have a couple of other questions, but let me stop since I've run over my time. And then I'll come back at the end, if we have time.
SEN. PAUL SARBANES (D), MARYLAND: Thank you, Mr. Chairman.
Chairman Greenspan, before I turn to the subject I mentioned in my opening statement, I just want to ask one quick question on the federal government's economic statistics.
Unfortunately, the budget for this fiscal year required the Bureau of Economic Analysis to impose a hiring freeze. And it didn't provide monies to examine new developments in the economy in terms of upgrading our statistical series. It's not a lot of money, but we make a lot of decisions off the basis of those economic statistics. And it seems to me, you've emphasized the changes that are taking place in the economy, in the new economy, so to speak. And it seems to me, we need some new surveys and new measures to try to address these changes in the economy.
And I wonder what your view is on the need for at least some additional resources to get these economic statistics current?
GREENSPAN: Senator, as you well know, I am extraordinarily reluctant to advocate any increase in spending. So it's got to be either a very small amount or a very formidable argument that is involved. And I find, in this case, that both conditions are met.
And as you point out, we are moving into an economy the structure of which none of us have ever seen before. And it looks as though it is emerging in a manner which will set the pace for a goodly part of the first half of the 21st century. This means that a lot of the things we are looking at, a lot of the things we examine in the economy, are very poorly represented in our current statistics; whereas some of the detail that we have got, in what we call the old economy, is awesome and unnecessary. And it would strike me that: One, we have to move resources away from some of those measures, but I agree with you, that even having done that, additional funds probably could very effectively be spent to include the quality of our statistics, both for the private sector which is crucial, and to those of us who have to be involved with governmental economic policy.
SARBANES: Well, thank you, and we'll be working on that problem here in the Congress. I might just note that if we could get some new data, particularly with respect to the dimensions of the new economy, it should bring a lot of happiness into your day because it would give you more data to work with and analyze every day, if I may say so.
Now let me turn to the other subject, and I want to preface it by a story. Earlier in the week I attended an event in the inner-city of Baltimore, marking a Department of Labor grant for a comprehensive, sort of, training program, education and training program, aimed at school dropouts.
There was a young fellow there who had been a dropout and part of a pilot program that had drawn him in, in effect, off the streets. He'd been counseled, advised then had finished his GED as part of this program, got important training and moved out into a job. And he's now holding a technical job in the private sector and doing quite well. And he was there as sort of an example of what we're trying to achieve by these programs.
A critical aspect of it has been employers have come in -- private employers -- to participate and they hold the promise of a job at the end of the course so they, in effect, stated to these young people, If you follow this program through, there will be a job out here for you. Now, of course, one of the reasons they have a job out there for them is you have a tight labor market and they're searching for qualified employees, and this program is designed to show it -- to achieve it.
Now you say in your statement, "unit labor costs actually declined in the second half of the year. Indeed, still preliminary data indicate the total unit cost increases last year remained extraordinarily low." You're projecting in the economic outlook that the rate of inflation is expected -- for total personal consumption expenditures is expected to be 1-3/4 quarters percent to 2 percent or a bit below the rate in 1999, which was elevated by rising energy prices to which my colleague made reference earlier in his statement.
Now what's the prospect for these young people? I mean, we keep struggling here and then we seem to get on a pretty good playing field, and then all of a sudden we discover the goal posts are being moved on us. You know we're told get our productivity up: We get productivity up, unit labor costs are not rising, the inflationary prediction is very good. And yet the Fed is now moving to sort of tighten monetary policy in order to slow down the economy.
SARBANES: If you slow down the economy presumably unemployment will start to rise. The opportunities for people of the sort that I'm describing will diminish.
Now we're told, Well, you know, we've got this problem. We got the wealth effect of the running up of equity values. And we're hearing this morning now, this theory that the increase in productivity, which we'd seen as all but a good, now has a dismal side to it because it's going to lead to this kind of anticipation of the profit levels, the run-up of the equity assets and then this additional spending.
Well, this young fellow says he's far removed from the wealth effect. I mean he's barely struggling to try to get into -- into a -- into a job situation.
Now what's going to happen here? There's a whole new theory being laid out here, as I sort of see it, that's going to justify raising the rates, curtailing the economy, when there's no inflation, there's no unit labor cost problem. And it's all being done on the basis of this kind of wealth effect.
Now if the stock market's a problem, and I see the New York Times yesterday said Mr. Greenspan was also blunter than normal in suggesting that one of his primary targets in raising interest rates was the stock market.
Now if, you know, if the activity and the volatility is in the stock market, we may need to think of some way to try to address that without slowing down the whole economy and affecting the opportunities for these young people that I talked about in my opening example.
I note that the Reuters said, and I quote them, "Buying on margin, the Street's version of charging stock purchases on a credit card, went up a heart-pounding pace in January, climbing to a record $243.5 billion, from $228 billion in December. A decade ago, the debt load amounted to just $35 billion."
Of course, this is something that Senator Schumer and I spoke with you about during your confirmation hearing.
But where are we going? I mean we've got an economy -- low inflation, unit labor costs are stable, in fact you anticipate they're going to drop. We're drawing -- finally drawing people into the workforce who were never there before giving them a chance to, sort of, share in an opportunity. Now all of a sudden we have this theory, Well, you know, you're getting this run-up in the equity assets, that creates a wealth effect. That's going to stimulate a demand without a supply to respond to it, so now we've got to curtail the economy.
Well, the first person that will drop off the table when you curtail the economy are these young people I'm talking about that we're trying to draw into the labor force.
GREENSPAN: Senator, implicit in your remarks is that we are endeavoring to slow the economy to a point in which you begin to get the significant lay-offs and significant inability of people to move up the ladder of success that I mentioned in my prepared remarks.
SARBANES: Well, let me just develop it on that point. The economy doesn't reach this young fellow and people like him until you really get it down into these levels of unemployment.
GREENSPAN: And our -- I agree with that. And our basic purpose is to keep that process going. The type of economy that we are looking at, one with the type that we are dealing with at this particular stage, is, I would suspect, one that none of us have ever seen before and, indeed, it may be unprecedented in our history.
It is characterized by a really phenomenal change in technologies which are inducing not only a high rate of growth and productivity but an accelerated, accelerating productivity.
What this has done is to very sensibly increase the market value of assets in this economy. It has, accordingly, created what we call the wealth effect.
It is firmly documented that when people have significant capital gains, a small part of them do induce an increase in consumption. It is in the nature of a capital gain not to increase supply correspondingly. The difference between the demand and supply has been over the last several years an equal measure, as I put it in my prepared remarks, been met by goods from abroad and goods produced by people who were previously seeking a job and not having one and are now coming into the work force. If either of those two so-called safety valves could be projected indefinitely into the future, then there is no inhibition here in growth accelerating fully with the productivity numbers without any imbalances, but the fact of the matter is we do not have an unlimited amount of labor. And we have capped our immigration, and having done so, we are delimited in our work force largely from those who are working age population, and that number continuously shrinks.
The only point that I am making is that cannot go on indefinitely nor can the other safety valve, imports from abroad, continue indefinitely because the stock of assets owned by foreigners in the United States becomes increasingly large and the debt servicing of those assets cannot go on indefinitely. So what I am saying, it's not a theory, it's merely an analysis of what in fact is happening. And the question that I raise is that if the buffers toward imbalances are shrinking, as they have, for the last number of years, and they continue to shrink, then we are like the boat heading toward the dock and instead of turning so we don't go slamming into the dock, we go straight into the dock and find out that we should have turned at least partially in order to come into, to create the triple metaphor I guess, a soft landing.
And so that the issue here is basically the issue of, one, as Senator Bunning says, there is no evidence right now of inflation. I cannot find it no matter where I look with the exception of oil prices and some commodity prices rising. But the major part of costs, unit labor costs, is, if anything, improving, going down.
The problem is that we are caught with a conceptual evaluation of this economy, which is not a theory, it's an evaluation of facts. And even though our data are not as good as we'd like them, there's enough to make this an unequivocal explanation of what's going on.
And if that is indeed the case, it is essentially saying that so long as immigration is capped, the wealth effect cannot persist indefinitely because it relies on two safety valves, both of which are limited. That is the basis of our analysis.
I grant you that we do not know exactly when we reach these triggering points, but it's been the judgment of the federal open market committee that it is far better to have buffers there adequate to ensure that this prosperity we are going through can continue at a pace somewhat below that of the second half of last year, because that cannot be sustained because the safety valves won't allow it.
But we are in no way arguing that the growth in this economy should not continue robust, that unemployment should continue very low, and that prosperity should continue as far out as we can manage to induce it to do so.
GRAMM: Senator Bunning.
SEN. JIM BUNNING (R), KENTUCKY: Thank you, Mr. Chairman.
I'd like to follow up just a bit.
Are you telling me and this committee that we can't sustain a 4 to 5 percent economic growth rate? Are you telling us that?
GREENSPAN: No, I'm not, Senator, because...
BUNNING: Well, it seems to me that's what I'm hearing.
GREENSPAN: No, let me explain to you why not.
I don't know what the potential growth rate of this economy is. It depends wholly on the trend and productivity growth. And as I pointed... BUNNING: But your monetary policy would indicate to us -- or at least to me -- that you don't think a 4 to 5 percent economic growth rate in this country is sustainable without inflation, without what you call the wealth effect to be contained. I didn't know the Federal Open Market Committee had a job of -- this is on your own testimony "how the current wealth effect is finally contained." Why do we want to contain the growth and wealth effect in this country?
GREENSPAN: The point at issue is we don't want to contain the growth. And the growth -- the proxy for growth, you can look at namely the increase in productivity. The problem that I have, and my colleagues have, is that you cannot continue to get accelerating productivity and the wealth effect that the safety valves that separate the demand excesses which are created by the wealth effect, that the safety valves limit it. What I'm saying...
BUNNING: Let me -- OK.
GREENSPAN: Senator, let me see if I can -- no, I understand where you're coming from, because I've been in the same place, and I think I've convinced myself -- let me see if I can try to indicate to you why I believe as I do on this issue.
The question of how fast this economy grows is not something the central bank ought to be involved in.
BUNNING: I'm convinced of that, yes.
GREENSPAN: And so am I. I think that the issue really relates to inflationary imbalances. What we are looking at is, basically, the indications that demand is chronically -- chronically exceeds supply for the intermediate period. And the best way to measure that is to look at what is happening to the total number of people who, one, are unemployed or are not in the labor force but want a job from which we are getting increased production.
BUNNING: But you brought up in your testimony the unbelievable increase in productivity...
KAGAN: We've been listening to Fed Chairman Alan Greenspan as he testifies and answers questions before the Senate Banking Committee. We'll continue to monitor the Fed chairman.
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