The Chairman Sees The Future and Says Social Services Spending is The Looming Problem

Testimony of Chairman Alan Greenspan
Economic outlook and current fiscal issues
Before the Committee on the Budget, U.S. House of Representatives
February 25, 2004

Mr. Chairman and members of the committee, I am pleased to be here today and to offer my views on the outlook for the economy and current fiscal issues. I want to emphasize that I speak for myself and not necessarily for the Federal Reserve.

...just like Pres. Bush could appear anywhere and "speak for 'himself', and not necessarily as President of the United States

As you know, the U.S. economy appears to have made the transition from a period of subpar growth to one of more vigorous expansion. Real gross domestic product (GDP) rose briskly in the second half of last year, fueled by a sizable increase in household spending, a notable strengthening in business investment, and a sharp rebound in exports. Moreover, productivity surged, prices remained stable, and financial conditions improved further. Overall, the economy has lately made impressive gains in output and real incomes, although progress in creating jobs has been limited.

In macroeconomic terms, the US Economy appears to be expanding favorably; however in microeconomics terms the average family has increased their debt substantially, had more difficulty finding good jobs that pay a living wage, still had not recovered their losses from the steep declines in equity they held in stocks and mutual funds, paid more for health care per person than any other country in the world, and seen their share of the countries wealth decline with the addition of several million more families living in poverty, but being far out-weighed by the assention of several dozen multi-millionaires who obtained their wealth by virtue of their positions within public companies that had filed for bankruptcy.

...At the same time, increases in efficiency and a significant level of underutilized resources both onshore and offshore should help keep a lid on inflation.

This favorable short-term outlook for the U.S. economy, however, is playing out against a backdrop of growing concern about the prospects for the federal budget. As you are well aware, after having run surpluses for a brief period around the turn of the decade, the federal budget has reverted to deficit. The unified deficit swelled to $375 billion in fiscal 2003 and appears to be continuing to widen in the current fiscal year. According to the latest projections from the Administration and the Congressional Budget Office (CBO), if current policies remain in place, the budget will stay in deficit for some time.

In part, the recent deficits have resulted from the economic downturn in 2001 and the period of slow growth that followed, as well as the sharp declines in equity prices. The deficits also reflect a significant step-up in spending on defense and higher outlays for homeland security and many other nondefense discretionary programs. Tax reductions--some of which were intended specifically to provide stimulus to the economy--also contributed to the deterioration of the fiscal balance.

Yes, there's the rub...which of the above was MOST responsible for the deficits? The several billion dollars erased from the Treasury in tax cuts? The immoral, criminal, corporate blowups that removed hundreds of billions of dollars from the economy, the $100+ Billion spent in Iraq, or the several hundred million dollars spent on homeland security?
...
In recent years, budget debates have turned to choices offered by those advocating tax cuts and those advocating increased spending. To date, actions that would lower forthcoming deficits have received only narrow support, and many analysts are becoming increasingly concerned that, without a restoration of the budget enforcement mechanisms and the fundamental political will they signal, the inbuilt political bias in favor of red ink will once again become entrenched.

The only Administration of the past dozen to actually decrease Federal spending for "discretionary spending" expenses as a percent of GDP has been ... ah... President Clinton's.

The budget scenarios considered by the CBO in its December assessment of the long-term budget outlook offer a vivid--and sobering--illustration of the challenges we face as we prepare for the retirement of the baby-boom generation. These scenarios suggest that, under a range of reasonably plausible assumptions about spending and taxes, we could be in a situation in the decades ahead in which rapid increases in the unified budget deficit set in motion a dynamic in which large deficits result in ever-growing interest payments that augment deficits in future years. The resulting rise in the federal debt could drain funds away from private capital formation and thus over time slow the growth of living standards.

In other words, financing the budgetary deficits slows the growth of living standards.

...Moreover, although productivity has no direct link to Medicare spending, historical experience suggests that the demand for medical services increases with real income, which over time rises in line with productivity.

Well we have witnessed the measured increase in productivity, the demand for medical services has increased several fold; but US individual personal income has been flat or declined for most of the past twenty years.

Today, federal outlays under Social Security and Medicare amount to less than 7 percent of GDP. In December, the CBO projected that these outlays would increase to 12 percent of GDP by 2030 under current law, using assumptions about the growth of health-care costs similar to the intermediate assumptions of the Medicare trustees; when spending on Medicaid is added in, the rise in the ratio is even steeper. To be sure, the rise in these outlays relative to GDP could be financed by tax increases, but the CBO results suggest that, even if other non-interest spending is constrained fairly tightly, ensuring fiscal stability would require an overall federal tax burden well above its long-term average.

Even if it rose to 20% of GDP it would still be considerably less than is currently being spent by any of the other eight major world democracies for Healthcare & Social Services spending similar in intent to these US programs.

Most experts believe that the best baseline for planning purposes is to assume that the demographic shift associated with the retirement of the baby-boom generation will be permanent--that is, it will not reverse when that cohort passes away. Indeed, so long as longevity continues to increase--and assuming no significant changes in immigration or fertility rates--the proportion of elderly in the population will only rise. If this fundamental change in the age distribution materializes, we will eventually have no choice but to make significant structural adjustments in the major retirement programs.

One change the Congress could consider as it moves forward on this critical issue is to replace the current measure of the "cost of living" that is used for many purposes with respect to both revenues and outlays with a more appropriate price index.

Another possible adjustment relates to the age at which Social Security and Medicare benefits will be provided.

The degree of uncertainty about whether future resources will be adequate to meet our current statutory obligations to the coming generations of retirees is daunting. The concern is not so much about Social Security, where benefits are tied in a mechanical fashion to retirees' wage histories and we have some useful tools for forecasting future outlays.

Ah, so current Social Security provisioning is effectively working and supportable. Glad to hear it from you Mr. Chairman.

In view of this upward ratchet in government programs and the enormous uncertainty about the upper bounds of future demands for medical care, I believe that a thorough review of our spending commitments--and at least some adjustment in those commitments--is necessary for prudent policy. I also believe that we have an obligation to those in and near retirement to honor what has been promised to them. If changes need to be made, they should be made soon enough so that future retirees have time to adjust their plans for retirement spending and to make sure that their personal resources, along with what they expect to receive from the government, will be sufficient to meet their retirement needs.

Yup...no disagreement there, and well said financial advise.

I certainly agree that the same scrutiny needs to be applied to taxes. However, tax rate increases of sufficient dimension to deal with our looming fiscal problems arguably pose significant risks to economic growth and the revenue base. The exact magnitude of such risks is very difficult to estimate, but they are of enough concern, in my judgment, to warrant aiming to close the fiscal gap primarily, if not wholly, from the outlay side.

Oops...like Ted Kazinski's document...the discourse sounds fine, rational, ok, then all of a sudden it's the Twilight Zone !! Why not consider both income and outgo as part of a sound economic plan. Certainly not wholly from the income side; but it should be part of the plan. If wage earners can be taxed with the Alternative Minimum Tax why not corporations, businesses, trusts, high income individuals, off-shore subsidaries of US Companies with measureable deficits in their human resources portfolios, and passive investments by tax exempt entities.

The dimension of the challenge is enormous. The one certainty is that the resolution of this situation will require difficult choices and that the future performance of the economy will depend on those choices. No changes will be easy, as they all will involve lowering claims on resources or raising financial obligations. It falls on the Congress to determine how best to address the competing claims. In doing so, you will need to consider not only the distributional effects of policy change but also the broader economic effects on labor supply, retirement behavior, and private saving.

History has shown that, when faced with major challenges, elected officials have risen to the occasion. In particular, over the past twenty years or so, the prospect of large deficits has generally led to actions to narrow them. I trust that the recent deterioration in the budget outlook and the fast-approaching retirement of the baby-boom generation will be met with similar determination and effectiveness.

The Chairman was being unduly gracious with these last lines, as there has been little effective, efficient, timely, appropriate response in the past several years to this looming problem, else we would not be in this position we have been discussing the past few minutes.
(Italics added by Editor: rp)