Statement by Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System, before a Joint Hearing of the Senate and House Committees on the Budget, January 10, 1995

Federal Reserve Bulletin, March 1995 | Go to article overview

Statement by Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System, before a Joint Hearing of the Senate and House Committees on the Budget, January 10, 1995


Statement by Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System, before a Joint Hearing of the Senate and House Committees on the Budget, January 10, 1995

I am pleased to appear here today to address some of the most important issues involved in producing the budget of the U.S. government. The views I will be expressing are my own and not necessarily those of the Federal Reserve Board.

The budget process has improved significantly in recent years. The caps on discretionary spending and the pay-as-you-go rules have restrained deficit-expanding programs far better than many had anticipated. Budget scoring is crucial to this process. Unless estimates of the outlays and revenues from budget initiatives are credible, the current system cannot work effectively. This joint hearing of the Congress's budget committees, unprecedented in my experience, attests to the importance of budget scoring.

Accurate estimates of the effects of tax and spending policies on the budget are difficult to make, some more than others. In particular, concern has been raised that current methods are too "static." As other witnesses have indicated, current scoring procedures already allow for some response in the spending, saving, and investment behavior of individuals and firms. Indeed, although it is difficult to measure, the budget-scoring process has become increasingly dynamic over the years, and estimating techniques have improved. What is still generally not taken into account, however, is the effect of fiscal initiatives on macroeconomic variables like gross domestic product, total labor compensation, and aggregate investment. Concerns that current estimating procedures do not fully track the effects of changes in behavior on aggregate economic activity, and hence on overall budget receipts and outlays, are justified. The current method is admittedly incomplete, especially for policy initiatives with broad economic impacts.

One central issue with respect to a more dynamic scoring is whether cyclical, aggregate demand affects of fiscal changes should be taken into account--or only permanent effects on aggregate supply. There are a number of ways of looking at this, but I would suggest that including aggregate demand effects would be confusing, if not misleading, in many contexts. Among other things, the scope for realizing such demand effects on economic activity would be a function of the particular phase of the business cycle and could be viewed in a sense as transitory. Particularly when we are addressing the problem of the long-run structural deficit, the focus should be on how fiscal actions affect the potential of the economy to produce greater output and taxable income on a sustained, ongoing basis. Thus, if a more dynamic scoring were to be adopted, I would recommend limiting the analysis to appropriate supply-side effects.

Apart from that consideration, full dynamic estimates of individual budget initiatives should be our goal. Unfortunately, the analytical tools required to achieve it are deficient. In fact, the goal ultimately may be unreachable. The estimation of full dynamic effects requires a model that both captures microeconomic and macroeconomic processes and produces reliable long-run forecasts of economic outcomes. Unfortunately, no such model exists. Indeed, no model currently in use can predict macroeconomic developments without substantial ad hoc adjustments that effectively override the internal structure of the model. We should not assume that models can capture the long-run dynamic effects of specific tax and outlay changes any better than they can forecast the economy.

Even current procedures require relatively sophisticated techniques to determine the budget consequences of particular tax and outlay programs. Changes in the tax structure alter economic incentives in ways that may be extraordinarily complex. For entitlement programs, one has to assess, for example, how greater public awareness of the existence of such a program will affect participation and how behavior will change to take advantage of the entitlement.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Statement by Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System, before a Joint Hearing of the Senate and House Committees on the Budget, January 10, 1995
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.