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Special Event

Fed Chairman Greenspan Testifies Before House Budget Committee

Aired March 2, 2001 - 10:01 a.m. ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

LEON HARRIS, CNN ANCHOR: Let's begin this morning with Alan Greenspan's testimony before the House Budget Committee and the frenzied efforts to decipher and decode his comments.

And for that, we turn to a seasoned ear. Donald Ratajczak is recognized as one of the nation's top economic forecasters. He's the director of the Economic Forecasting Center at Georgia State University. He's here with us in the studio today.

Good to see you again, as always.

DONALD RATAJCZAK, ECONOMIST: Good.

HARRIS: All right, what do you expect to hear today?

RATAJCZAK: I think he's not going to change what he said two days ago, which is basically that he's still more concerned about recession than inflation, which means that he will be thinking about dropping rates, but that the immediacy, the urgency that hit because of the drop in December is not there now. It looks as if the economy has flattened out, but it is not plunging.

HARRIS: What's happened, though, because -- what's happen between, say, last quarter of last year and first quarter this year? because what he said, though, was that two sectors did still look pretty strong: housing and cars.

RATAJCZAK: Yes, well, and he's using that to indicate that although he's concerned about consumer confidence, the big dropoff in it, the confidence is not yet being registered in consumers quitting long-term spending patterns like automobiles. You can delay that for six months and you can delay a house for a year. And so -- yet consumers are still responding there.

So as a result, he's saying he's nervous about that drop in consumer confidence. But until it shows up in some evidence that the consumer is quitting the market, he feels there's no more urgency. There's no more need to break patterns and call an immediate conference. However, he's still going to be talking about declining interest rates when they meet on March 20.

HARRIS: All right, as we try to get more familiar with this Greenspan lexicon, he mentioned the word retrenchment maybe 10, 15, 20 times in the span that we listened to yesterday. In his own mind, how close is that to a recession?

RATAJCZAK: Well, I think he recognizes that this economy is now on basically a no-growth basis. And when you're at that teetering point, it could either be clearing out problems, such as the excess inventory that we've clearly built up, or it could be about the plunge as people say, all right, it's time for me to stop investing, it's time for me to stop spending.

But we're right at that point right now that we can go either way. And he's watching to see -- well, he obviously doesn't want to go down, but he doesn't want to put too much liquidity into the system if it's about to turn and go up.

HARRIS: Would it be unreasonable to expect him to say anything about tax cuts?

RATAJCZAK: I would be surprised, although obviously he has to respond to what the members of Congress are going to ask him.

HARRIS: I'm sure they would ask him about that.

RATAJCZAK: So they may very well ask him, what do you think about the 1.6 trillion program? And if he's true to form, he'll duck any specific statement but give a general statement that some reduction in taxes at this time probably can be justified.

HARRIS: All right, so the committee meets on the 20th of this month. Right now, as things stand, what kind of change are we -- well, actually, let's go right now to the floor of that House Budget Committee. I believe that Alan Greenspan is preparing to speak. Let's listen in.

(JOINED IN PROGRESS)

ALAN GREENSPAN, FEDERAL RESERVE CHAIRMAN: ... the federal budget and the attendant implications for the formulation of fiscal policy. In doing so, I want to emphasize that I speak for myself and not necessarily for the Federal Reserve.

The challenges you face, both in shaping a budget for the coming year and in designing a longer-run strategy for fiscal policy, has been brought into sharp focus by the budget projections that have been released in the past month and a half. Both the Bush administration and the Congressional Budget Office project growing on-budget surpluses under current policy over the next decade. Indeed, growing on-budget surpluses were projected even under the more conservative assumptions of the Clinton administration's final budget projections.

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 that appears to be causing economists to raise their forecast of the economy's long-term growth rates and budget surpluses. This increased optimism received support from the forward-looking indicators of technological 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 uncertainty. CBO, for example, expects productivity growth rates through the next decade to average roughly 2-1/2 percent per year -- far above the average pace from the early 1970s through the mid-1990s, but still below that of the past five years.

The most recent projects from OMB and CBO indicate that, if current policies remain in place, the total unified surplus will reach about $800 billion in fiscal year 2010, including an on-budget surplus of almost $500 billion. Moreover, the admittedly quite uncertain long-term budget exercises released by 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, especially on the major health programs.

These most recent projections, granted their tentativeness, nonetheless make clear that the highly desirable goal of paying off the federal debt is in reach and, indeed, would occur well before the end of the decade under baseline assumptions. This is in marked contrast to the perception of a year ago, when the elimination of the debt did not appear likely until the next decade, at the earliest. 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, or more technically, nonfederal assets.

At zero debt, the continuing unified budget surpluses now projected under current law imply a major accumulation of private assets by the federal government. Such an accumulation would make the federal government a significant factor in our nation's capital markets and would risk significant distortion in the allocation of capital to its most productive uses. Such a distortion could be quite costly, as it is our extraordinarily effective allocation process that has enabled such impressive increases in productivity and standards of living, despite a relatively low domestic saving rate.

I doubt that it is possible to secure and sustain institutional arrangements that would insulate federal investment decisions, over the longer run, from political pressures. To be sure, the roughly $100 billion of assets in the federal government's defined- contribution Thrift Savings Plan have been well-insulated from political pressures. But the defined-contribution nature of this plan means that it is effectively self-policed by individual contributors, who would surely object were their retirement assets to be diverted to investments that offered less-than-market returns.

But such countervailing forces may be greatly attenuated for federal government defined-benefit plans such as Social Security. To the extent that benefits are perceived to be guaranteed by the government, beneficiaries may be much less vigilant about the stewardship of trust fund assets.

Requiring the federal government to invest in indexed funds arguably would largely insulate the investment decision from political tampering. But such assets, by definition, can cover only publicly traded securities, perhaps three-fifths of total private capital assets.

With large allocations of public funds invested in larger enterprises, our innovative, smaller, nonpublicly traded businesses might find themselves competitively disadvantaged in obtaining financing. To be sure, there is not universal agreement among economists on this point, but it is a consideration that should be kept in mind.

More generally, the problematic experiences of some other countries with large government accumulation of private assets should give us pause about moving in that direction. To repeat, over time, having the federal government hold significant amounts of private assets, in my judgment, would risk suboptimal performance by our capital markets, diminished economic efficiency and lower overall standards of living than would be achieved otherwise.

Private asset accumulation, however, may be forced upon us well short of reaching zero debt. Both CBO and OMB project an inability of current services unified budget surpluses to be applied wholly to repay debt by the middle of this decade. Without policy changes, private asset accumulation is likely to begin in a just a few short years.

In summary, then, the Congress needs to make a policy judgment regarding whether and how private assets should be accumulated in federal government accounts. This judgment will have important implications for the level of saving and, hence, investment in our economy as well as for the nature of government programs.

If, for example, the accumulation of assets is avoided by eliminating unified budget surpluses through tax and spending changes, public and, presumably, national savings may well fall from already low levels. If so, over time, capital accumulation and the productive capacity of the economy presumably would be reduced through this channel.

Eliminating unified surpluses by transforming Social Security into a defined contribution system with accounts held in the private sector would likely better maintain national saving levels. But the nature of Social Security would, at the same time, be fundamentally changed.

Alternatively, unified surpluses could be used to establish mandated, individual retirement accounts outside the Social Security system, also mitigating the erosion in national savings.

The task before the administration and the Congress in the years ahead is likely to prove truly testing, but of course, the choices confronting you are far more benign than having to deal with deficits as far as the eye can see.

Returning to the broader fiscal picture, I continue to believe, as I have testified previously, that all else being equal, a declining level of federal debt is desirable because it holds down long-term real interest rates, thereby lowering the cost of capital and elevating private investment. The rapid capital deepening that has occurred in the U.S. economy in recent years is a testament to these benefits.

But the sequence of upward revisions through the budget surplus projections for several years now have reshaped the choices and opportunities before us. Indeed, on almost any credible baseline scenario, short of a major prolonged economic contraction, the full benefits of debt reduction are now achieved well before the end of this decade, a prospect that did not seem reasonable only a year or even six months ago.

Thus, the emerging key fiscal policy need is now to address the implications of maintaining surpluses beyond the point at which publicly held debt is effectively eliminated.

But, though special care must be taken not to conclude that wraps on fiscal discipline are no longer necessary, at the same time we must avoid a situation in which we come upon the level of irreducible debt so abruptly that the only alternative to the accumulation of private assets would be a sharp reduction in taxes or an increase in expenditures. These actions might occur at a time when sizable economic stimulus would be inappropriate. Should this Congress conclude that this is a sufficiently high probability, it is none to soon to adjust to policy to fend off such potential imbalances.

In general, for reasons I have testified to previously, if long- term fiscal stability is the criterion, it is far better, in my judgment, that the surpluses be lowered by tax reductions than by spending increases. The flurry of increases in outlays that occurred near the conclusion of last fall's budget deliberations is troubling, because it makes the previous year's lack of discipline less likely to have been an aberration.

As for tax policy over the longer run, most economists believe that it should be directed at setting rates at the levels required to meet spending commitments, while doing so in a manner that minimizes distortions, increases efficiency, and enhances incentives for saving, investment and work.

In recognition of the uncertainties in the economic and budget outlook, it is important that any long-term tax plan, or spending initiative for that matter, be phased in. Conceivably, it could include provisions that in some way would limit surplus-reducing actions if specified targets for the budget surplus or federal debt levels were not satisfied.

Only if the probability were very low that prospective tax cuts or new outlay initiatives

DARYN KAGAN, CNN ANCHOR: We are going to break away from Mr. Greenspan's testimony for just a moment.

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