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UNITED STATES MONETARY AND ECONOMIC POLICY HEARING BEFORE THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED EIGHTH CONGRESS FIRST SESSION APRIL 30, 2003 Printed for the use of the Committee on Financial Services Serial No. 108–24 ( U.S. GOVERNMENT PRINTING OFFICE 87–237 PDF WASHINGTON : 2003 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001 VerDate 11-MAY-2000 12:48 Aug 18, 2003 Jkt 000000 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 C:\DOCS\87237.TXT HBANK1 PsN: HBANK1 HOUSE COMMITTEE ON FINANCIAL SERVICES MICHAEL G. OXLEY, Ohio, Chairman JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts DOUG BEREUTER, Nebraska PAUL E. KANJORSKI, Pennsylvania RICHARD H. BAKER, Louisiana MAXINE WATERS, California SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois PETER T. KING, New York NYDIA M. VELA´ ZQUEZ, New York EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina FRANK D. LUCAS, Oklahoma GARY L. ACKERMAN, New York ROBERT W. NEY, Ohio DARLENE HOOLEY, Oregon SUE W. KELLY, New York, Vice Chairman JULIA CARSON, Indiana RON PAUL, Texas BRAD SHERMAN, California PAUL E. GILLMOR, Ohio GREGORY W. MEEKS, New York JIM RYUN, Kansas BARBARA LEE, California STEVEN C. LATOURETTE, Ohio JAY INSLEE, Washington DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas WALTER B. JONES, JR., North Carolina CHARLES A. GONZALEZ, Texas DOUG OSE, California MICHAEL E. CAPUANO, Massachusetts JUDY BIGGERT, Illinois HAROLD E. FORD, JR., Tennessee MARK GREEN, Wisconsin RUBE´ N HINOJOSA, Texas PATRICK J. TOOMEY, Pennsylvania KEN LUCAS, Kentucky CHRISTOPHER SHAYS, Connecticut JOSEPH CROWLEY, New York JOHN B. SHADEGG, Arizona WM. LACY CLAY, Missouri VITO FOSELLA, New York STEVE ISRAEL, New York GARY G. MILLER, California MIKE ROSS, Arkansas MELISSA A. HART, Pennsylvania CAROLYN MCCARTHY, New York SHELLEY MOORE CAPITO, West Virginia JOE BACA, California PATRICK J. TIBERI, Ohio JIM MATHESON, Utah MARK R. KENNEDY, Minnesota STEPHEN F. LYNCH, Massachusetts TOM FEENEY, Florida BRAD MILLER, North Carolina JEB HENSARLING, Texas RAHM EMANUEL, Illinois SCOTT GARRETT, New Jersey DAVID SCOTT, Georgia TIM MURPHY, Pennsylvania ARTUR DAVIS, Alabama GINNY BROWN-WAITE, Florida J. GRESHAM BARRETT, South Carolina BERNARD SANDERS, Vermont KATHERINE HARRIS, Florida RICK RENZI, Arizona Robert U. Foster, III, Staff Director (II) VerDate 11-MAY-2000 12:48 Aug 18, 2003 Jkt 000000 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 C:\DOCS\87237.TXT HBANK1 PsN: HBANK1 C O N T E N T S Page Hearing held on: April 30, 2003 ................................................................................................... 1 Appendix April 30, 2003 ................................................................................................... 59 WITNESSES WEDNESDAY, APRIL 30, 2003 Aaron, Henry, Senior Fellow, The Brookings Institution ..................................... 34 Greenspan, Hon. Alan, Chairman, Board of Governors of the Federal Reserve System ................................................................................................................... 6 Hassett, Kevin A. Director of Economic Policy Studies, American Enterprise Institute ................................................................................................................ 41 Malpass, David, Chief Global Economist, Bear Stearns ...................................... 36 Peterson, Peter G., President, The Concord Coalition .......................................... 38 APPENDIX Prepared statements: Oxley, Hon. Michael G. .................................................................................... 60 Emanuel, Hon. Rahm ....................................................................................... 62 Ford, Hon. Harold E. Jr., ................................................................................. 64 Gillmor, Hon. Paul E. ....................................................................................... 65 Aaron, Henry .................................................................................................... 66 Greenspan, Hon. Alan ...................................................................................... 71 Hassett, Kevin A. .............................................................................................. 76 Malpass, David ................................................................................................. 83 Peterson, Peter G. ............................................................................................ 95 ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD Frank, Hon. Barney: New Evidence on the Interest Rate Effects of Budget Deficits and Debts, March 2003 .................................................................................................... 115 Greenspan, Hon. Alan: Written response to questions from Hon. Luis Gutierrez ............................. 136 The Concord Coalition, ‘‘Are we really cutting taxes or just raising them on our kids?’’ article, The New York Times, February 2, 2003 ......................... 138 (III) VerDate 11-MAY-2000 12:48 Aug 18, 2003 Jkt 000000 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 C:\DOCS\87237.TXT HBANK1 PsN: HBANK1 VerDate 11-MAY-2000 12:48 Aug 18, 2003 Jkt 000000 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 C:\DOCS\87237.TXT HBANK1 PsN: HBANK1 UNITED STATES MONETARY AND ECONOMIC POLICY Wednesday, April 30, 2003 U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. The committee met, pursuant to call, at 10:00 a.m., in Room 2128, Rayburn House Office Building, Hon. Michael G. Oxley [chairman of the committee] presiding. Present: Representatives Leach, King, Lucas of Oklahoma, Paul, Gillmor, Ryun, Manzullo, Ose, Biggert, Miller of California, Hart, Capito, Tiberi, Feeney, Hensarling, Murphy, Brown-Waite, Barrett, Harris, Frank, Waters, Maloney, Gutierrez, Velazquez, Watt, Hooley, Carson, Sherman, Meeks, Lee, Inslee, Gonzalez, Capuano, Ford, Hinojosa, Lucas of Kentucky, Crowley, Israel, McCarthy, Baca, Matheson, Miller of North Carolina, Emanuel, Scott, and Davis. The CHAIRMAN. The committee will come to order. Today’s hear- ing is on U.S. economic and monetary policy, and we are honored to be joined again by the Honorable Alan Greenspan, Chairman of the Federal Reserve Board of Governors. Before we get started the Chair has a few housekeeping announcements. First, pursuant to the Chair’s prior announcement in the rules of the committee, opening statements will be limited to the Chair and ranking minority member of the full committee and the Chair and ranking member of the Subcommittee on Domestic and Inter- national Monetary Policy, Trade and Technology for a total of 16 minutes evenly divided between majority and minority. All mem- bers’ opening statements will be made part of the record. Secondly, in an effort to permit all members an opportunity to question Chairman Greenspan, for purposes of questioning the wit- ness under the 5-minute rule, the Chair will first recognize major- ity members who did not get an opportunity to question Chairman Greenspan at his last appearance before recognizing other mem- bers. The Chair will recognize minority members based on the list submitted by the ranking minority member. The Chair recognizes himself for a brief opening statement. Good morning, Mr. Chairman, and welcome back. First of all, I would like to thank you for your generosity in agreeing to come back to the committee and continue the round of questions for members who weren’t able to speak with you in February. Second, let me offer my congratulations on the President’s comments last week that he would reappoint you to another term as Chairman when your term expires next summer. I am sure I speak for the (1) VerDate 11-MAY-2000 12:48 Aug 18, 2003 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 C:\DOCS\87237.TXT HBANK1 PsN: HBANK1 2 entire committee when I say we appreciate the strong and steady hand you have exerted in the control of monetary policy. A great deal has happened in the 10 short weeks since you testi- fied before this committee. On February 12, when you were last here, the war on Iraq seemed certain but its length and outcome were certainly less so. Today we know that the war was quick, the dictator was ousted and a free Iraqi people are on their way to a new and more democratic government. Back in February, the economy’s fundamentals looked good, but uncertainties about the war and energy prices made it difficult to predict an economic turn- around. Now with those issues out of the way, the consensus is for gradual but steady recovery. Of course, Mr. Chairman, as you know, there are plenty of things that can throw the recovery off track; namely, the continued weak- ness of the global economy and, as yet unknown, the facts of the SARS epidemic. That is why I believe it is so important to enact the President’s jobs in growth program. It is important to note that the President isn’t seeking a short-term stimulus. Instead, Mr. Chairman, the President is seeking long-term restructuring of the Tax Code of the sort that you have tended to favor over time and that you embraced in your February appearance. I am particularly interested in the dividend tax cut and its benefits to investors for the capital markets and for corporate governance. As to the other parts of the President’s jobs in growth package, you have
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