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  Transcripts

Special Event

Federal Reserve Chairman Alan Greenspan Testifies Before Senate Banking Committee

Aired February 23, 2000 - 11:00 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: We continue our coverage now of Fed Chairman Alan Greenspan speaking before the Senate Banking Committee. He's answering questions. Observers are listening for clues as to whether the Fed might raise interest rates more than the quarter of a percent that's expected next month.

Let's continue listening in:

(JOINED IN PROGRESS)

ALAN GREENSPAN, FEDERAL RESERVE CHAIRMAN: ... about close to eight percent nominal rates.

SEN. PHIL GRAMM (R), TEXAS: My time has expired. I will come back in late. I've got some more questions. Thank you.

GREENSPAN: Just let me say very quick statement. When the U.S. Treasury 30-year bond went down very sharply, corporate bonds did not.

GRAMM: Did not. No.

Senator Allard.

SEN. WAYNE ALLARD (R), COLORADO: Mr. Chairman, I was heartened in your testimony when you noted that there was some difficulty with fiscal discipline last year because I felt like I had made the same observation. And I'm just wondering if perhaps maybe you have some suggestions on how we can shore up our fiscal discipline so we don't fall over the cliff with some of our spending patterns, and if you have any suggestions for it.

I've thought at times about a biennial budget -- gives -- may bring forth a little more fiscal discipline. I'd like to have you comment on that idea, too.

GREENSPAN: Senator, the most important fiscal action that has been taken in the last couple of years, or maybe the last year, is the really quite remarkable agreement between the administration and the Congress that the Social Security surplus is off-budget and out-of- bounds for being employed to finance any government expenditure.

That is an exceptionally wise decision. And it's gotten very little publicity, largely because it occurred with remarkably little contention. And that, in and of itself, is a crucial issue.

The issue of creating a biennial budget, I've always -- I agree with you. I think it's probably a good idea, considering the process that has been evident in the complexity of the budgets that we go through. So I think that in itself is useful.

I do think that even though the caps that have been so effective for so many years -- surprisingly because as you know it can be challenged very easily by a majority -- and the notion of fiscal discipline so captured the Congress that it became very difficult to break the caps, except very recently when the pressures became exceptional and the problems that we were aware of, in the last year or so, became evident.

I'm not arguing for sustaining the old caps, although I would like to see them there if it were possible. I recognize that it is not.

What I think would be important would basically be to reestablish caps because they do turn out to be effective, or at least have in the past, and there's no reason to believe they would not be in the future. But to be sure that they are set at realistic levels and that they are adhered to. That, in my judgment, in would be crucial.

I also argue in my prepared remarks that moving towards the on- budget balance as the crucial determinant of budget policy is moving us towards accrual accounting, which is the private sector norm. And that of course is a change were we to go in that direction; I don't perceive it as feasible in the immediate short run. But were we to go in the short run, it would be a very important move towards having government focus on its longer-term commitment as well as shorter-term commitments.

ALLARD: OK. We also have had some debate about extension of the research and experimentation tax credit on a permanent basis. Do you think this would help prolong -- increase productivity, prolong it?

GREENSPAN: Senator, I have no real judgment on that because it depends on very specific cases. I think that...

ALLARD: Well, let's take the high-tech side of the -- let's take the high-tech side of the economy, maybe apply that, because there the ones that seem most concerned about it.

GREENSPAN: Yes. I think what has been really quite remarkable in this country is our ability to create a level of technology which is the envy of the rest of the world. And we have done it basically not so much from tax subsidies or subsidies from government but essentially from having an entrepreneurial-based system in which people could see very large rewards from successful endeavors.

And I can't say I know very much about the impact of a credit on what is going on in Silicon Valley as such, but I'm reasonably well- certain that the vast, vast proportion of the success that our high- tech industry has created has got nothing to do with government.

ALLARD: Mr. Chairman, with your indulgence, I would like to ask one more question. It has to do with a natural resource area.

In our economy, even though unprecedented sustained growth over the years, the one area that has been particularly down has been farm prices, and that's been unusual. And not only has it been grain prices but also livestock prices. Usually they are sort of counter- cyclical.

And then in addition to that, a lot of our other natural resources -- oil and gas, for example, and minerals. Would you comment on what you see the impact of what's happening with energy prices right now? In my part of the country, it's a welcome sign, because of the oil and gas prices have been unprecedentedly low and a lot of people have been suffering, no jobs. And now we have some parts of the country complaining about the high price of energy. I wonder if you would comment about that, please.

GREENSPAN: Well, it's no big secret why crude oil prices are up. The inventories at refineries in the United States, and indeed pretty much throughout the rest of the world, have been drawn down very significantly. Indeed, we are running -- in some areas of our petroleum industry, we're running almost on fumes.

And the crucial importance of this, as in all commodities, is when you get inventories to exceptionally low levels, there is no buffer. And if you get an unexpected surge in demand, you don't get an incremental price increase, you get a huge surge.

And one of the things we have seen in the United States, even as we have experienced a very dramatic reduction in the importance of oil in our economic production, it's still a large enough and pervasive enough force within our economy that should we get one of these very severe spikes, it would have a major negative impact on economic growth.

And as consequence of that I think that an endeavor to set prices, as indeed the cartel endeavors to do -- and cartels are not my favorite type of institution -- but even from their point of view, for the longer run viability of the crude oil reserves -- numbers significantly under $30 a barrel for West Texas intermediate -- is clearly to their interest, and needless to say, for consumers as well.

In the agriculture area, the problem that we have had clearly is two-fold.

One, an extraordinary rise in productivity: We talk about the awesome increases in productivity in a non-farm area, and in the agriculture area they are even more impressive. And since we in the United States consume a good deal less than half of a number of the products we produce, we depend on export markets to keep production up. And clearly the Asian crisis in 1998 was a major -- had a major negative effect on agricultural supplies, and it's had an obvious, very major impact on crop prices, essentially.

The longer-term outlook for agriculture, in my judgment, is export markets. And the more we can open up markets abroad -- and there's a lot of room to do that, and a lot of different continents. It strikes me as the most important thing that we can do to keep a viable, very productive agriculture, which we've experienced for so many generations.

ALLARD: Thank you.

GRAMM: Senator Bayh.

SEN. EVAN BAYH (D), INDIANA: Thank you, Mr. Chairman.

Chairman Greenspan, you have a difficult job and you do it well. And I thank you for that and your appearance today.

I sensed in your opening remarks a greater sense of urgency about the waning of some of the buffers that ameliorate the adverse consequences of the imbalances between supply and demand that you outlined. You mentioned, specifically, immigration; you mentioned the need for continued fiscal restraint here on the Hill in terms of government spending. We haven't mentioned yet today free trade, but I know you believe strongly that that is another buffer.

My first two questions to you are: It seems to me implicit in your remarks that reasonable immigration policies, policies promoting free trade and fiscal discipline, will allow our economy to grow faster with lower inflation, perhaps maintaining some of the buffers that put pressure on monetary policy.

First, is that correct?

Secondly, are there other buffers that I didn't mentioned here that we should be aware of that have also deteriorated recently?

GREENSPAN: As best we can judge, there are real -- the two fundamental buffers, meaning the two safety values which have met the excess of demand over supply -- in other words, "fill the gap" is basically imports and the declining -- and people coming out of the pool of workers seeking jobs into the work force and producing goods. Those are the two major elements which have absorbed the gap between supply and demand.

To reiterate, the gap has been engendered by a very major wealth effect. It was not a problem three or four years ago, basically because the size of the safety valves were, I should the buffers in the safety valves -- I'm not sure that that's a correct way to phrase it -- were quite large. And year after year, they continued to shrink. Even so, we have seen no evidence of inflation accelerating as that happened.

The question that we have to confront is, is it remotely conceivable that both of those buffers can continue on down to zero without pressures on the general price level. I know of no way that that can happen, unless we get into a centrally planned economy, price controls, or a variety of other things. I mean, it would be wholly alien to human nature, which is -- even at the root, it's below the law of supply and demand.

The problem that we have is that having not experienced this type of phenomenon previously, we are not able to judge how big these buffers are, relative to the ultimate pressure valve. What we do know is that if we misjudge this particular period, and inadvertently -- as I used the analogy before, instead of turning before we hit the dock, we go straight into the dock, then I think we do very severe damage to this economy.

And the basic purpose of what we are trying to do is to sustain this extraordinary recovery, this extraordinary acceleration in growth, and a vibrant labor market, in a manner which continues to absorb the new people coming on the work force and seeking and getting jobs and training on the job.

BAYH: Mr. Chairman, let me follow up on that and ask you about our efforts to sustain this remarkable economic growth we've been experiencing and the human nature you mention. Specifically, I'd like to ask about the wealth effect and human psychology. There was an interesting piece in the Wall Street Journal yesterday, pointing out that the psychology of markets can move in both directions.

Excepting for the sake of argument that the wealth effect does have some potential problems at this point in the economic cycle that we have to deal with, how do we deal with that, without running the risk of, I guess in a nut shell, irrational exuberance might be followed by irrational pessimism. How we deal with the potential harmful effects without perhaps tipping over in the other direction?

GREENSPAN: Senator, let me emphasis that I'm not making judgments as to whether in fact the wealth effect is overdone, the values are overdone or not. It's not relevant to the argument that I'm making very specifically. It has secondary effects.

I'm essentially saying that if you're getting accelerating productivity in an economy, the value of your capital assets should be going up. They are really worth more. The prospective earnings they can generate are indeed greater.

I'm not commenting on the secondary question as to whether the rise that has occurred is more than it should have. As I've argued previously, it is very difficult to make a judgment on whether we have a bubble, which is really what that would be, except after the fact.

So, I'm not raising the issue in this context of there being an irrational surge in stock prices or speculated imbalance which is threatening the economy. That's a different type of argument. It's not the one I am making.

BAYH: Thank you very much.

GRAMM: Senator Mack.

SEN. CONNIE MACK (R), FLORIDA: Thank you, Mr. Chairman.

I want to continue on in this line of discussion. I think one of the -- if there's a sense of frustration on the part of some of the members of the committee, I think it's that for the first time that we're hearing about possibly another gauge of evaluating or controlling money supply.

I guess I was really surprised when I read your comments of last week about -- as I recall it, anyway -- tying asset values to household income, or income levels.

And that -- my first reaction to that was that that there's a new -- I mean, 15 or 20 years ago, we used to talk a lot about M-1 and M-2 and try to observe a range in which this M-1 and M-2 grew.

And it almost seems like that with your discussion you've added in a new component now, saying that one of the things you're now looking at is the growth in asset values, and it needs to be within a certain range. Am I wrong to draw that conclusion?

GREENSPAN: Yes and no, Senator.

First of all, let me emphasize that the issue of the relationship between household net worth and household income is only a measure of the extent of the wealth effect. It has nothing -- household income has got nothing to do with the determination of what the proper values of stocks are or the general wealth. That's determined by earnings expectations and so-called discount factors.

MACK: Yes, but didn't you tie this to...

GREENSPAN: I did, but in a different context. It's a statistical way of evaluating whether you have a wealth effect. It's not an issue of what is causing the wealth effect. It is merely a diagnostic tool to make a judgment as to whether a wealth effect is indeed functioning in the economy.

MACK: Can I ask you one other question, in the middle of your thought there? We went back and took a look at the compared asset growth to income growths and tried to see if you had a situation where asset growth was growing rather significantly compared to income growth, whether there was any relationship to inflation, and we couldn't find any. And so...

GREENSPAN: There is none.

MACK: So this raises the question: If the objective, which I have said for years that the Fed should be engaged in, is price stability, why then would there be this focus on asset growth?

GREENSPAN: First of all, let me go back and indicate the role of wealth or net -- say, net assets in the household sector, very specifically, on the economy.

If you take the ratio of net worth to household income back as far as we can get it reasonably well -- which is to the early 1920s -- that the ratio is reasonably low and did not materially break out of the range that it had until well until the 1990s.

In short, the wealth effect to the extent that it worked -- and it did on the margin -- was a relatively minor factor in the economy, and therefore in any inflation expectations. What has happened in the last several years is a very major acceleration in the ratio of household net assets to income. And all of the evaluation we have made of that huge increase in wealth is that even though its relationship to consumption expenditures is about what it's been in years past, because wealth was so low and its changes were so small, it never had any real relevance to what was happening in either investment or in consumption.

It is a new world we are dealing with. The characteristic of this dramatic acceleration in productivity and the extraordinary behavior of our economy in the last five years is wholly novel, in my experience. And one of the key characteristics of this type of economy is the wealth effect.

And the wealth effect is engendered not -- it has no -- the only reason I tie it to household income is it is a measure of trying to relate it to consumption, because consumption comes out of income and wealth.

MACK: Right. But let me say, you have -- you have indicated that asset values may not be out of line as a result of the increased productivity. And you...

GREENSPAN: That is correct.

MACK: But it also then sounds like what you're saying though, is you want -- you want to restrain asset growth because of, at least, your interpretation now that the wealth effect has a greater impact on our economy than it has in the past.

GREENSPAN: I think that would be a view that is generally held by the economics profession. Let me give you an example of when the wealth effect would not have an impact.

If it were -- looking at -- I was looking for a chart which had the ratio of wealth to income and what that chart shows, very dramatically, is that from 19 -- from 1922 which is the earliest data we have it's relatively flat and then, all of a sudden, spikes.

Let me treatise -- on how this system, new system, appears to work. The reason I raise the immigration question is basically because it -- it gives an insight into where the safety valves are or are not. This type of economy, which is creating a huge surge in wealth, could create a huge surge in consumption and growth if there were the people to produce the goods to meet the demand. And the point at issue is we do not.

It is even credible to argue that as large as our current account deficit is, as large as our net debt to foreigners has become, that the rates of return off the new technologies are high enough to create an inflow of capital into the United States, in both direct investment and portfolio investment, to finance these net imports or current account deficits indefinitely in the future.

So that there's nothing implicit in the issue of wealth, per se, creating a problem. There is a problem if you have the safety valves, meaning those sources of goods and services which supply the excess of demand over supply -- the excess, being caused by the wealth effect.

If, in fact, the wealth effect had no impact on consumption, if all that happened when stock prices went up is that the market value of assets and households went up and the market value of the assets on the books of corporations went up, but it had no affect on consumption, if all consumption was related to income and not wealth, then the wealth affect would not exist, the problem of imbalances would not exist. And they wouldn't exist if we had the ability to expand output indefinitely.

The argument that I'm making is we don't have that capability, and we are blocked essentially because we have limits on what the wealth affect can -- how the demand created by the wealth affect can be supplied. And I'm arguing that as a consequence of this the market forces, not the Federal Reserve, are driving up interest rates to close the gap between the supply and demand for funds which is a counter party -- or, I should say, is a counterpart to goods and services.

We at the Federal Reserve are acting in conjunction with the market and responding to it. So the best that I can say to you is that it is certainly true that we have a new economy, it is different, it is behaving different, and it requires a different type of monetary policy to maintain it's stability and growth then we had in the past. And that is the essential issue that we are confronted with as best we can see it.

GRAMM: Senator Grams.

SEN. ROD GRAMS (R), MINNESOTA: Thank you very much, Mr. Chairman.

Chairman Greenspan thank you for being here.

I'd like to ask you to focus a little bit on another area. I think Senator Allard touched on it slightly, but that is the impact of the current monetary and fiscal policies on our agricultural sector of the economy.

Now, as you know, the sector is very important not only in Minnesota, but nationwide. Agriculture commodities are very important. And there is a growing concern, I think, in the ag sector that the very robust national economy that so many have enjoyed has, in fact, been bypassing rural parts of our country. And while we all support efforts in monetary policy which would squeeze out the inflationary expectations from the current expansion, I think there are many of us that are also concerned that these anti-inflationary efforts may, in fact, exacerbate what is already a difficult economic scenario for our nation's farmers.

As we know, the ag sector is very capital-intensive, the need to replace and maintain some very expensive machinery is an important aspect of farm management. The acquisition of additional land is also very expensive, and should borrowing cost increase by even 25 to 50 basis points, I think the impact on the average farmer would be significant. On the sell-side of the economic equation, there is little evidence of improving market conditions or any inflationary premiums in the future markets. And the current increase in fuel cost, I think, only add to an already bleak picture for many of our farmers.

I have a couple of questions relating to that, but earlier you mentioned something about cartels are not your favorite words, or...

GREENSPAN: Favorite institutions.

GRAMS: Institutions.

What I'm looking at agriculture and dairy, would you say that the dairy cartel, known as the Northeast Dairy Compact, would that be one of your supportive institutions.

GREENSPAN: Senator, I've been in government long enough to know that's the type of question you don't answer.

(LAUGHTER)

GRAMS: OK. I appreciate that.

But first, Mr. Chairman, in your analysis, how is the nation's agriculture sector faring relative to other segments of the economy. And, in sum, is agriculture sharing in the current boom economy that we're having?

GREENSPAN: Yes and no. Some parts are, most are not.

The problem, as I indicated to your colleague, was that productivity has become, really, quite extraordinary. Yields on crops are just moving up in an awesome manner and the ability to produce is multiple of what it was 30, 40 years ago.

Let's take spring wheat, which you have a great interest in, I hope. My recollection is only about a third of hard spring wheat is consumed in the United States, and that it is, essentially, inelastic. In other words, the demand for bread and bread products, which essentially is what the hard wheat goes to, is really not sensitive to what is going on in the economy, so that what you've got is a third of your markets which doesn't really get impacted by the huge increase in incomes in the United States.

So we're left, essentially, with the rest of the world market -- and the weakening of export demand, especially as a consequence of the Asian crisis, has clearly created subnormal incomes for agriculture generally, and for wheat farmers particularly, as the prices went down. And you know, it wasn't that many months ago that wheat, soybeans, corn, were all flat on the bottom of any chart that you could imagine.

So, indeed, I agree with you that the agricultural area is lagging. The only beneficent part of it is the productivity has really been impressive. And if we can get the huge part of demand opened up, that is the export markets, I think that we will find that extraordinary productivity will finally flow down to the bottom line in a much more impressive way than we have seen to date.

GRAMS: I think part of the problem is, too, a lot of the research that we've done and technologies we've improved, we've shared with the rest of the world. So we're not the only country seeing, you know, a much larger harvest from the same, so the competition is even heavier out there.

Just quickly and finally do monetary policy adjustments, such as the changes in the discount or the Fed fund rates themselves, reflect the economic realities for the agricultural communities knowing the pressures that they're up against? And to follow up on that will monetary policy adjustments, aimed at assuring that our current expansion not over-heat, would that have unintended consequences on the agricultural community?

GREENSPAN: First of all, we have problems in the United States in that there are many different segments of industry and areas, but we have a central financial system unlike what existed 40, 50, 60 years ago when you had different financial systems in different parts of the country and different interest rates. And early on in the Fed's history, we had different discount rates at different reserves banks. But we now have a very effective central monetary system in which interest rates are the same everywhere in the economy.

The consequences of that is there is only one interest rate and it has to be, in a sense, the average of all aspects of our economy, so there can't be a special interest rate for agricultural loans in the sense that it is not affected by the supply and demand for money since money is basically -- will basically flow to wherever the demand is. So, in that regard, it's very difficult to envisage how monetary policy can adjust to the facts of agriculture which are, indeed, as you portray them, Senator.

GRAMS: Thank you, Mr. Chairman.

GRAMM: Senator Reed?

SEN. JACK REED (D), RHODE ISLAND: Thank you, Mr. Chairman.

Chairman Greenspan, the Treasury Department is embarking on a very aggressive policy of reducing the publicly held debt, which is causing some -- I don't know -- concerns, at least, in the debt markets. Does this, in any way, complicate your ability to implement monetary policies through the raising and lowering of interest rates?

GREENSPAN: Not really. I mean, there's been a lot of commentary that the gradual elimination of the Treasury debt, to the extent that that happens, would create major problems for the Federal Reserve.

The reason it would not is that our policy is essentially based on accumulating assets on the balance sheet of the Federal Reserve banks or reducing them, and, accordingly, create reserves for the banks.

At the moment, we are restricted essentially to relatively few government-related issues, but there's no reason that should the decline in available U.S. Treasury securities get so substantial that it affects our ability to have adequate securities, government securities, in our portfolios. Should that happen, we could very readily find many other ways to implement policy either by certain types of other assets we could hold...

The crucial issue is, is that, if you are going to reduce the debt outstanding -- which we believe is very important to this country -- then you either have got to take the excess of receipts over outlays and cumulate assets for the government or use the funds to pay down debt. I much prefer the second.

And in so doing, you create avenues for the private sector to create new instruments, which substitute themselves as so-called benchmarks for the Treasury securities. And you will find that if these riskless instruments become extremely scarce, there will be strong incentives in the marketplace to create AAA-plus private credits to substitute for these types of instruments.

And so I think that the complexity and flexibility of a private financial system as such, that the particular elements of particular benchmark securities that are created through government issues are very readily, in my judgment, replaced by comparable private sector issues.

REED: Many proponents of this policy, Mr. Chairman, have suggested that by retiring publicly held debt, you will effectively pull down interest rates because there will be less government intrusion into the private debt markets. If your policy, as it is now and for the foreseeable future, is to raise interest rates, will you be -- have to, in effect, overcompensate for this other effect?

GREENSPAN: Well, first of all, remember that to the extent that government debt goes down over the long run, long-term interest rate also be lower than they otherwise would be. We're not talking about huge changes, and we're certainly not talking about the notion of cyclical or counter-cyclical monetary policy because we're talking about a broad trend. If you're asking me in a strictly technical sense, are there a few basis points which probably have to be overcome because of this, probably. But they're very few and really of no real relevance to the development of what's going on in the economy.

REED: And finally, Mr. Chairman, you point out we're in a new economy. I wonder if there is any, to your mind, other historical periods in which a new economy emerged that you can draw lessons from or you looked to for insights into what's happening now. Or is this so new, so novel, that's it's...

GREENSPAN: Senator, a lot of people look back to the major technological changes at the later part of the 19th century as a clue to the type of things that are going on. I used to think that that could fully explain what's happening today. In the last year or so, I've concluded that we appear to be moving beyond that.

I know of nothing that even remotely looks like what we are experiencing today. The relationships are different. And the fundamental root of the problem -- or not a problem -- the fundamental root of this extraordinary successful economy that we have is, one, the synergies of a number of new technologies that have come together, coupled with a financial system and an economic system which has enabled those particular new technologies to be developed in a manner to very markedly enhance the standards of living of the American people.

This is -- the type of policy that we have to devise has to reflect the nature of how the new economy is working. A number of the old tools, which we relied upon, don't have relevance to this.

It may be that we're going through a short-term period, and it will be back to where we were in a few years. In which case, this will be a novel period. It will be a period in which monetary policy is novel, and we go back to the old techniques in a few years. That may very well be the case. All I know at the moment is the endeavor to apply the usual policies that we've employed over the years to what is going on today is misunderstanding the nature of the forces that are at play here.

GRAMS: Thank you, Chairman.

GRAMM: Senator Bennett.

SEN. ROBERT BENNETT (R), UTAH: Thank you, Mr. Chairman.

Chairman Greenspan, I apologize for being late. I was presiding over a hearing of the Joint Economic Committee on the issue of critical infrastructure protection. And out of that hearing came a line that I want to apply here.

One of the witnesses likened the Internet to a neighborhood where all of the houses are in a circle, and all of the back yards are the same backyard. And he said if any one of the householders doesn't lock his front door, everyone of the householders is at risk, because the individual can go through that one house, and then through the back yard, be available to every house simultaneously. And this is the line he used -- he said, "A national solution is no solution. It must be an international solution to the question of Internet vulnerability and security."

I think that same thing is applying -- I think I'm hearing you say that it is applying to the economy, not to the exact same extent here because you don't have the technological connection that you have on the Internet. But we are at an interdependent economy and a purely national solution ultimately becomes no solution. I associate with my friend from Florida on thinking that the primary function of the Fed should be to maintain price stability.

But you've raised this issue of inadequate labor to provide us with the kind of productivity increases that we need to meet the demand that we're getting.

And that raise the whole question of H1(b) visas, for example. And in this room we had the testimony, Chairman Mack was presiding, of a witness who said this work will get done, speaking of particular high-tech work. He said this work will be done, and it will be done by these people because they're the only people available to do it.

The question is will it be done in the United States or will it be done in their countries of origin. And if you don't give us H1(b) visas to bring these people to the United States, the work will be done by these people overseas.

And America will be the loser in terms of not having those people live here, not having them pay taxes here, not having them raise their families here and provide the kind of work force that you refer to.

It's not just immigration at the lower level. It's immigration, generally, in terms of an internationally mobile labor force.

Now, could you comment on what you see in that general area, about labor, labor availability, labor availability across national lines?

GREENSPAN: Well, it's not an accident that I present these safety valves as being goods from abroad or people from abroad. And what that is suggestive of is exactly the point you're making, Senator, namely that there is an internationalization going on here.

It's a very, very difficult problem because while I can hold forth on the economic benefits of immigration or visas or what are implicit in an economic argument, that's not the only relevance that immigration raises. There are many, many issues -- cultural questions, issues that have bedeviled the United States for a hundred years in this area.

But, speaking as an economist, and evaluating the type of economy which we are currently experiencing, the benefits of bringing in those people to do the work here, rather than doing the work elsewhere, to me should be pretty much self-evident.

BENNETT: We're talking about a form of protectionist mentality. I find the same people that do not like international trade, at least to the degree that I do, people who have opposed NAFTA, have opposed GATT, who oppose fast track, are the same people who are opposing the H1(b) visas and other forms of immigration reform to allow the transfer not only of individuals but goods and services across international lines.

Could this wave of protectionism mentality, wherever it is applied, ultimately bring down the economy or at least significantly slow the kind of growth we're all luxuriating in right now?

GREENSPAN: Senator, I have always worried about that. And I've become increasingly concerned about it as the rate of growth and productivity rises.

It seems like an unrelated issue, but as we are creating an ever more complex, sophisticated, accelerating economy, the necessity to have ability to bring in resources and people from abroad to keep it functioning in the most effective manner increasingly strikes me as relevant elements and policy.

BENNETT: So the mentality we saw in Seattle could, in fact, in a variety of areas, ultimately kill this current golden goose?

GREENSPAN: It's a -- there's a certain sadness involved in this, because one of the characteristics of very rapidly changing technology is it creates a real deep-seated fear of job skill obsolescence. People no longer have the sense that once they graduate from high school or college, that they have the tools for the rest of their working lives. And there is a general rising sense of uncertainty -- which is manifested, incidentally, in the very dramatic increase in community college enrollment, people going back essentially for refurbishing skills that they had not gotten in their original first slot of education.

So, my own judgment, as indeed I suspect is yours, is that they are mistaken. But I do understand where it is coming from and I think it would be a mistake for us not to recognize what that is, where it's coming from, and to try to find a way to remove the uncertainty and the fear which is deep in many people. And that's why the whole educational issue interfaces with economic outlook. And unless we can resolve this issue, I do think the forces against globalization can significantly undercut this remarkable surge in prosperity that we are observing.

BENNETT: Thank you.

GRAMM: Senator Edwards.

SEN. JOHN EDWARDS (D), NORTH CAROLINA: Thank you, Mr. Chairman.

Good morning, Chairman Greenspan.

Can you tell us on a scale from one to 10, with one being no concern at all to 10 being a great deal of concern, how concerned the American people should be about the possibility that this year, inflation could rise to six or seven percent.

GREENSPAN: Can I go below one?

(LAUGHTER)

My own judgment is that inflation at this stage is very well contained and if the markets function properly and the central bank functions properly it should stay that way.

EDWARDS: Good, that's very encouraging.

Senator Bennett in the beginning of his questioning talked about the Internet and Internet security, and with all this hacking we've seen recently reported in the news, particularly on major web sites. I just wondered -- I'm curious whether you have any feelings about the potential impact, if that's not gotten under control by law enforcement, the potential impact that could have on the economy.

GREENSPAN: You mean encryption, generally?

EDWARDS: Yes. Yes. GREENSPAN: One of the most fascinating problems that mathematicians have these days is whether somebody can create an encryption which another mathematician cannot break. And the result of this is that we are getting ever more complex mechanisms to secure various different transactions and transmissions. And with the major acceleration in capacity that we are getting in our systems for data crunching, one would think that you could create an encryption which just cannot be broken in a finite period of time.

And my impression basically is that the technology, hopefully, should be able to resolve this, but I cannot say to you that I know enough about it to feel comfortable as to how that will work out. I do know that if we struggle a great deal and try to find governmental mechanisms, such as restricting exports of encrypted types of materials and the like, I'm not sure it's going to work.

I think what we have to do is look to the private sector to find the most effective means of encryption, recognizing that the life expectancy of any particular complex encryption is limited and ultimately it will be overwhelmed by the capacity to unwind the code. And so it's a continuous process where you never get the ultimate solution but you're constantly trying to keep ahead of those who want to pirate the systems.

EDWARDS: Let me change gears with you. You -- I know you're aware of the fact that a House committee passed out last week legislation that would eliminate the Social Security earnings test. I'm curious what effect, if that legislation actually became law, what effect do you think that would have, if any, on the labor markets.

GREENSPAN: Well, you know, it has two effects. One, clearly it has an effect on the Social Security trust funds and the whole Social Security system. But one would presume that on the -- the effects there, I might add, are to create a reduction in the receipts of Social Security or to -- I should say really to increase benefits actually.

The presumption, of course, is that you'll get an increase in the number of retired people coming back into the work force. I don't know what the orders of magnitude are, but clearly to the extent that that happens that is a positive issue, positive effect.

How one balances it -- the increased issue of benefits and strain on the Social Security system on the one hand and increased labor force availability on the other -- is something I can't make a judgment on, but it does strike me that the general notion of looking at the average age of retirement and the average age at which one attains full benefits has always been one that I thought is appropriate in any discussion on Social Security.

EDWARDS: Let me ask you one more two-part question. In this period of extraordinary prosperity that we're enjoying, can you define for us as clearly as you can your view of what demographic group is benefiting most from this prosperity? And secondly, I noticed you commented last week in your testimony about raising the minimum wage, and I wondered if you had any views about what, if anything, we could do to address the income disparity that we're facing in this country today.

GREENSPAN: As best I can judge, Senator, everybody is benefiting to a greater or lesser extent from this extraordinary prosperity. In a relative sense, I mean compared to recent history, it's clearly those at the lower income levels which are benefiting most.

But let me characterize that in a somewhat different sense. The lower 20 percent of household, characterized by income, had for a while a flat real average household income for about 15 years, from 1980 to 1995, whereas most of the rest of the households were showing significant gains.

Starting in the last four or five years, that group has all of a sudden taken off. It's growing about the same as everybody else so that it is not as though it is improving faster. But...

EDWARDS: Why is that happening?

GREENSPAN: It's happening because the labor markets are getting ever tighter and the demand for every type of skill, low skill to high skill, has gone up very dramatically. There are -- the demand for labor has gone up to a point where the spectrum across income groups has now been pretty much obliterated. That is, the so-called college premium, that is the extent to which people with college educations have been able to increase their income relative to high school graduates, that is the gap has been opening up, mainly because of the technological nature of the economy we have.

That increase has stopped; that is, the prosperity seems spread evenly everywhere and the distribution of income, which had become increasingly skewed to the upper-income groups through most of the 1980s and '90s, stopped in the middle of the decade and everyone has been growing roughly about the same amount, meaning that the concentration of income hasn't changed much in the last five years.

So, it's not that the lower income groups have improved, is that they've stopped losing ground. And when you look at the distribution of wealth, clearly, with the heavy concentration of stock holdings in upper income groups, in the last four or five years, it has been materially shifting upwards towards upper income groups.

KAGAN: We've been listening to Federal Reserve Chairman Alan Greenspan as he testifies before the Senate Banking Committee. The reason to listen in to this question and answer period, to see if there's any sign for investors as to whether the Fed intends to raise interest rates more than they are already expected to rise.

Our coverage of Alan Greenspan's testimony will continue at the top of the hour on CNN and CNNfn in just a moment.

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