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Fed Chairman Greenspan Testifies Before Senate Budget Committee

Aired January 25, 2001 - 10:22 a.m. ET


LEON HARRIS, CNN ANCHOR: Back to a discussion under way in Washington. We've been waiting for Alan Greenspan, Fed Reserve chairman, to begin his comments this morning before the Senate Budget Committee, and he's just begun.


ALAN GREENSPAN, FEDERAL RESERVE CHAIRMAN: ... not necessarily for the Federal Reserve.

The challenges you face both in shaping a budget for the coming year and in designing a longer term strategy for fiscal policy were brought into sharp focus by the release last week of the Clinton administration's final budget projections, which showed further upward revisions of on-budget surpluses for the next decade.

The Congressional Budget Office also is expected to again raise its projections when it issues its report next week.

The key factor driving the cumulative upward revisions in the budget picture in recent years has been the extraordinary pickup in the growth of labor productivity experienced in this country since the mid-1990s. Between the early 1970s and 1995, output per hour in the nonfarm business sector rose about 1-1/2 percent per year, on average.

Since 1995, however, productivity growth has accelerated markedly, about doubling the earlier pace, even after taking account of the impetus from cyclical forces. Though hardly definitive, the apparent sustained strength in measured productivity in the face of a pronounced slowing in the growth of aggregate demand during the second half of last year was an important test of the extent of the improvement in structural productivity. These most recent indications have added to the accumulating evidence that the apparent increases in the growth of output per hour are more than transitory.

It is these observations that appear to be causing economists, including those who contributed to the OMB and the CBO budget projections, to raise their forecasts of the economy's long-term growth rates and budget surpluses. This increased optimism receives support from the forward-looking indicators of technical innovation and structural productivity growth, which have shown few signs of weakening despite the marked curtailment in recent months of capital investment plans for equipment and software. To be sure, these impressive upward revisions to the growth of structural productivity and economic potential are based on inferences drawn from economic relationships that are different from anything we have considered in recent decades. The resulting budget projections, therefore, are necessarily subject to a relatively wide range of error. Reflecting the uncertainties of forecasting well into the future, neither the OMB nor the CBO projects productivity to continue to improve at the stepped-up pace of the past few years. Both expect productivity growth rates through the next decade to average roughly 2-1/4 to 2-1/2 percent per year, far above the average pace from the early 1970s to the mid-1990s, but still below that of the past five years.

Had the innovations of recent decades, especially in information technologies, not come to fruition, productivity growth during the past five to seven years, arguably, would have continued to languish at the rate of the preceding 20 years. The sharp increase in prospective long-term rates of return on high-tech investments would not have emerged as they did in the early 1990s, and the associated surge in stock prices would surely have been largely absent. The accompanying wealth effect, so evidently critical to the growth of economic activity since the mid 1990s, would never have materialized.

In contrast, the experience of the past five to seven years has been truly without recent precedent. The doubling of the growth rate of output per hour has caused individuals' real taxable income to grow nearly 2-1/2 times as fast as it did over the preceding 10 years and resulted in the substantial surplus of receipts over outlays that we are now experiencing. Not only did taxable income rise with the faster growth of GDP, but the associated large increase in asset prices and capital gains created additional tax liabilities not directly related to income from current production.

The most recent projections from the OMB indicate that if current policies remain in place, the total unified surplus will reach $800 billion in fiscal year 2011, including an on-budget surplus of approximately $500 billion. The CBO reportedly will be showing even larger surpluses.

Moreover, the admittedly quite uncertain long-term budget exercises released by the CBO last October maintain an implicit on- budget surplus under baseline assumptions well past 2030 despite the budgetary pressures from the aging of the baby boom generation, especially on the major health programs. The most recent projections, granted their tentativeness, nonetheless make clear that the highly desirable goal of paying off the federal debt is in reach before the end of the decade. This is in marked contrast to the perspective of a year ago when the elimination of the debt did not appear likely until the next decade.

But continuing to run surpluses beyond the point at which we reach zero or near-zero federal debt brings to center stage the critical longer term fiscal policy issue of whether the federal government should accumulate large quantities of private -- more technically, nonfederal assets. At zero debt, the continuing unified budget surpluses currently projected imply a major accumulation of private assets by the federal government, as you pointed out earlier, Mr. Chairman. This development should factor materially into the policies you and the administration choose to pursue.

I believe, as I have noted in the past, that the federal government should eschew private asset accumulation because it would be exceptionally difficult to insulate the government's investment decisions from political pressures. Thus, over time, having the federal government hold significant amounts of private assets would risk suboptimal performance by our capital markets, diminished economic efficiency, and lower overall standards of living than would be achieved otherwise.

Short of an extraordinarily rapid and highly undesirable short- term dissipation of unified surpluses or a transferring of assets to individual privatized accounts, it appears difficult to avoid at least some accumulation of private assets by the government.

Private asset accumulation may be forced upon us well short of reaching zero debt. Obviously, savings bonds and state and local government series bonds are not readily redeemable before maturity. But the more important issue is the potentially rising cost of retiring marketable Treasury debt.

While shorter term marketable securities could be allowed to run off as they mature, longer term issues would have to be retired before maturity through debt buybacks. The magnitudes are large: As of January 1, for example, there was in excess of three quarters of a trillion dollars in outstanding non marketable securities, such as savings bonds and state and local series issues, and marketable securities -- excluding those held by the Federal Reserve -- that do not mature and could not be called before 2011.

Some holders of long-term Treasury securities may be reluctant to give them up, especially those who highly value the risk-free status

HARRIS: We've been listening to Fed Reserve Chairman Alan Greenspan, who's testifying for the Senate Budget Committee, as you can see there.

We've been listening for some sort of hint as to where he may be leading -- leaning on -- in terms of a tax cut, as -- such as one proposed by President Bush.

Let's go now to our Peter Viles, who's also been listening.

Peter, you're much better at this than I am. Can you -- did you pick up anything in there that might indicate which direction he may be leaning?

PETER VILES, CNN CORRESPONDENT: He -- well, yes, and we have the prepared text, which is released, so we can tell you what he's going to say in about 15 minutes, which is: the budget is in great shape. There is enough money to both pay down the debt and cut taxes -- and we should cut taxes -- the United States should cut taxes before it pays off all of the debt, because otherwise you'll have the government running a surplus with nothing to do with the money. So he says tax cuts are basically required at some point. When? He says sooner rather than later, and they should be phased in. Doesn't speak specifically about the president's tax cut, but does endorse the idea of a tax cut.

Also says, in prepared remarks that he'll deliver in about five or ten minutes as he goes through his speech, that this probably won't help the economy right now. History shows you can't get these things on the books in time to stop a recession. But if the economy's worse than we think it is, it's good to have a tax cut there to help out.

HARRIS: Well, OK, with that being the case, then he does give his affirmative to a tax cut -- a tax cut. But does he say -- or is there anything in the text that you find out about the size of any tax cut that he may think would be wise? The size is really the big hangup right that we have right now in Congress.

VILES: Sure; he does not speak to how much to cut taxes. He does talk about doing it cautiously; maybe even writing in that if the surplus situation takes a turn for the worse, you have to adjust accordingly. You can't commit to the whole amount because you don't know what the economy is going to do.

But the broad headline in here is an endorsement of a tax cut; not a specific kind of a tax cut, not any one tax cut by any one politician. But he says the government has enough money -- ought to do this before it gets to a point where it has so much money that it has to start investing it, which is a bad thing -- where the government is running around, trying to do -- figure out what to do with extra money.

So political pressures come into play -- and then you could disturb the capital markets, with the government dumping large amounts of money into, say, the stock market or the bond market.

HARRIS: And the weight of his voice does begin to build a lot of momentum for a tax cut. We'll see that, no doubt, in the coming days.

Peter Viles, thanks much. Appreciate it.



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