Chairman Greenspan, welcome. It is always a pleasure to have you before this Committee. Last year you may recall we had to cancel your appearance at the last minute because of a huge snow storm. You have been an outstanding Chairman of the Federal Reserve. In large part due to your stewardship, the US has experienced the longest economic expansion in our history. In the 161 months since you took office, the US has only spent 8 months in recession – a performance that would have been impossible without your commitment to long term price stability.

The economy has performed so well during the past several years, that economic growth has helped lift government revenue and contributed to the large budget surpluses we are enjoying today. What we do with these surpluses will be the key fiscal policy question of the new incoming Bush Administration, this Committee and the 107th Congress.

I would like to begin today by giving you some of my thoughts on the economy, Mr. Chairman. And I hope in the questioning period or in your statement, you will set me straight if I am off the mark.

By now it is clear to everyone that the US economy is slowing down. Growth in the third quarter last year was the weakest since 1996 – and looks to have come in even weaker in the fourth quarter. Job growth in the last half of 2000 was the worst for any half-year since 1991, but unemployment still remains at a low 4%.

We therefore have issues of the short term economy and as always we have issues of the longer term economy.

In the short term – what would be the most effective policy to restore and maintain growth – monetary policies or fiscal policies? Further interest rate reductions or tax cuts or a combination of both? I do not expect Mr. Chairman that you will answer that question directly today, but maybe you can educate us to what we should be looking for in this current economy that will help us try to answer the question.

I personally do not believe that the current slowness in the economy is a sign of structural weakness. Rather, I have concluded that it is the effect of temporary cyclical factors that should soon be behind us.

I believe that a "just in time" New Economy slow down might better respond to a "just in time" monetary policy. While I will support tax reductions, I think "just in time" fiscal policy is not likely in today’s evenly divided Congress. Although there are ample reasons for tax cuts, monetary policy is more likely to be effective than fiscal policy in countering a temporary economic slowdown.

The current slow down should not blind us to the fact that the underlying fundamentals of the US economy I believe remain incredibly strong. We still have you Mr. Chairman and a Federal Reserve commitment to long term price stability, we still have international trade that is growing freer, and I believe we are still in the midst of a technological revolution.

Remarkably, labor productivity has grown at a 3 % rate since 1995, a pace that will double the standard of living for the average American worker in just 25 years. But more importantly, this growth of productivity has taken place at a time of tight labor markets, something most economists would not have predicted.

I believe, this factor alone – continual productivity growth -- will not only make the current slowdown more shallow than previous slowdowns but will also bring us back quicker to a high and sustainable long term growth rate once the slowdown has passed.

As you have so often noted Mr. Chairman, one of the defining elements of the New Economy is a proliferation of information technology. Producers and retailers are connected like never before, making it easier for them to avoid the kinds of inventory buildups that in the past have deepened economic downturns.

Another important component of this New Economy is the high level of business investment in new equipment. Because of this investment, many businesses have had to do more worker training than in the past and therefore, compared to past slowdowns, firms will be less likely to cut jobs than in the past. More likely will be a reductions in hours to absorb the decline in sales, and less dependence on temp workers.

I guess with this first real slow down coming since the New Economy was dubbed that name, this slowdown may well answer the question of whether we really have a New Economy or just the same Old Economy dressed up with new fancy clothes and cell phones!

I believe it is a New Economy and therefore, I see a short time period for the slowdown and strong growth for the future. The strong long term economic outlook has important implications for the fiscal position of the federal government. Federal revenues continue to increase and today are at an historic high as a percentage of GDP.

In large part because of the high level of projected revenues under today’s tax laws, my staff and I expect a baseline surplus estimate of about $5.7 trillion for 2002-2011. Using a $2.5 trillion Social Security surplus to reduce debt leaves $3.2 trillion for some combination of tax relief, government spending above the baseline, and additional debt reduction.

The tax cut the size President Bush advocates is a 10-year tax cut of $1.3 trillion, a mere 1% of total GDP during the next 10 years and only 5% of total federal revenue. Given a scenario with $5.7 trillion in surplus projections over the same 10 year time period, I believe it is not only appropriate and reasonable to have a significant tax cut, but it is probably also a necessary policy to ensure continued productivity growth in the future.

Why do I think this? I have reviewed your testimony this morning. It seems to me you are rasing a subtle but very important issue for us to consider – the real risks of government asset accumulation.

One consequence of the surpluses we have run over the past three years has been a 10% or $360 billion, reduction in debt held by the public. Including the projected surplus for this year the figure is even higher – nearly $600 billion.

Both the Congressional Budget Office past year estimates and the Clinton Administration’s baseline estimates presented here last week show that the elimination of debt held by the public is within our reach. However, from this Senator’s standpoint, as appealing as a drastic reduction or elimination of the federal debt may sound, the implications of such a policy choice need to be carefully explored.

It seems to me, without tax cuts – a surplus of $5.7 trillion and a debt today of $3.2 trillion, is an open invitation to either an avalanche of new government spending or – potentially much worse – private asset accumulation by the federal government. Government asset accumulation could result in a lessening of productivity, and this would jeopardize our ability to fund real retirement and social security benefits in the future as the real economy falters.

Policy makers will need help from you and others to closely examine other serious issues associated with dramatic debt reduction. For example, is the Federal Reserve prepared for a transition to managing the money supply without Treasury securities? Here is where fiscal policy and monetary policy truly do intersect. Would rapid debt reduction or elimination undermine the special reserve currency role of the U.S. dollar?

Chairman Greenspan, your remarkable record of achievement has generated a tremendous amount of respect for your opinions and insights. I am sure your presence here today will help us tackle these issues and help us formulate a long term fiscal strategy that will maximize the prosperity of the American people.