The U.S. economy rebounded slightly last month after “stalling out” in late 2000, Federal Reserve Chairman Alan Greenspan said yesterday in remarks suggesting that the Fed will be cautious about cutting interest rates in coming weeks.
In an appearance before the Senate Banking Committee, Mr. Greenspan continued to advocate broad tax cuts in the face of sharp criticism from Democrats and suggested that Congress also reduce large budget surpluses by allowing taxpayers to put some of their Social Security taxes into private investment accounts.
Mr. Greenspan said additional interest-rate cuts and tax cuts remained appropriate as “insurance” against recession, despite a revival of consumer spending signaled by a broad-based jump in retail sales of 0.7 percent last month.
“The exceptional weakness so evident in a number of economic indicators toward the end of last year perhaps in part the consequence of adverse weather apparently did not continue in January,” he said, alluding to the reversal last month of December’s depressed economic conditions and record cold weather.
Appearing separately on Capitol Hill, Treasury Secretary Paul O’Neill said Congress should move quickly to enact President Bush’s $1.6 trillion tax-cut plan to aid the faltering economy.
“Quicker is better, given the softness of the economy we’re experiencing,” he told the House Ways and Means Committee, suggesting that Mr. Bush’s tax-rate reductions and $500-per-child tax credit be made retroactive to speed relief to taxpayers.
The Fed slashed interest rates by one percentage point in January in an effort to prevent the sharp economic slowdown from turning into a recession.
Mr. Greenspan said a steep drop in consumer confidence, tight lending conditions and the taxing effects of high energy prices continue to pose a drag on growth, and activity will remain slow as long as businesses have to sell off overstock they accumulated late last year.
“When consumers become less secure in their jobs and finances, they retrench,” he said, suggesting a further “break” in confidence could lead to a drop in growth. “This unpredictable rending of confidence is one reason that recessions are so difficult to forecast,” he said.
Despite a big drop in confidence in the last four months, “at least for now it remains at a level that in the past was consistent with economic growth,” he said.
Mr. Greenspan is optimistic that technology has enabled businesses to quickly adjust their plans in response to consumer whims, and thus the adjustment to December’s sudden slowdown may be brief, with growth resuming early this year.
Another reason to be upbeat, he said, is the decline of oil and natural gas prices from record levels set this fall and winter easing a crunch on consumer and corporate purchasing power that depressed sales last year.
But the Fed believes that “downside risks predominate,” including the possibility that sluggish growth in the United States will spawn a worldwide slowdown that feeds back into the slower growth of U.S. exports, he said.
Mr. Greenspan last month came out in support of tax cuts, to the chagrin of Democrats. He believed the economy over the long run would grow rapidly because of technology and efficiency improvements, generating huge and growing budget surpluses of more than $200 billion a year.
By 2006, the accumulation of such surpluses will enable the government to pay off most of the $3.5 trillion public debt, leaving Congress with huge sums of cash to invest in private assets such as stocks and bonds, he said.
The Fed chairman stressed that it would be a monumental mistake to put legislators in a position where they can manipulate private markets for political reasons, and that is the main reason he supports tax-rate cuts as well as partial privatization of Social Security.
“It’s a major issue which I think the Congress has got to address,” he said, suggesting that if Social Security were structured like a 401(k) retirement program, “you could build up assets in the trust fund, private assets, without political problems.”
While lawmakers disagree on how to deal with privatization, he said, “I don’t see how the issue can be avoided. If we are effectively going towards zero debt, there is no alternative.
“If the numbers were small, obviously it’s not an issue. But we’re not talking about small numbers; we’re talking about extraordinarily large numbers multitrillion dollars of accumulation.”
Committee Democrats, who spoke out against Mr. Bush’s tax plan, sought Mr. Greenspan’s endorsement of a restraining mechanism that would suspend the tax cuts if certain targets for reducing the public debt were not met.
“We’re now talking of well in excess of $2 trillion,” if the Bush plan is expanded to include business tax cuts and tax breaks supported by various legislators, said Sen. Paul S. Sarbanes, Maryland Democrat. “They all want to grab a piece of what’s on the buffet table.”
Mr. Greenspan said he would support such an approach but stipulated that the mechanism should put equal restraints on spending, noting that Congress and the president last year soaked up more than $500 billion of the next 10 years’ surpluses with new spending programs.
Mr. Greenspan disagreed with Democrats who argued that Congress should put off a tax cut because it was not certain whether the $5.6 trillion in surpluses projected by the Congressional Budget Office would materialize. He said the issues and the surpluses are so large they demand prompt action.