- The Washington Times - Wednesday, July 25, 2001

Federal Reserve Chairman Alan Greenspan yesterday said this year's "modest" tax cut is having only a limited effect on the economy because it is causing long-term interest rates to stay up even as it boosts consumer spending.
The Fed chairman nevertheless repeated his support for tax cuts in the face of repeated attacks by Democrats on the Senate Banking, Housing and Urban Affairs Committee. He said the government will continue to pay off the $3.75 trillion public debt at a satisfactory pace despite the loss of $1.35 trillion in revenue in the next decade.
"A tax cut was a desirable thing to do," he said, while not endorsing the specifics of the plan President Bush signed into law in May.
On another subject, Mr. Greenspan warned Congress not to be too consoled by the recent sharp drop in energy prices because it is the result of falling demand in the weak U.S. and global economies. He said the nation in particular faces a critical shortage of natural gas when demand picks up again.
Mr. Greenspan's latest, lukewarm endorsement of the tax cuts contrasts with the enthusiastic review they have received from many private economists. Most analysts say the $40 billion of rebates being mailed out this month come at an unusually good time when growth in the economy is hanging by a thread.
Mr. Greenspan rejected arguments by Democrats that the tax cuts threaten to lower productivity and savings and create an inflation problem. But he conceded in questioning that they unexpectedly caused interest rates like the ones on 30-year mortgages to level off this year despite the Fed's aggressive campaign to cut rates.
"Long-term, 30-year mortgage rates have not moved appreciably," although the rates on loans for new cars, adjustable-rate mortgages and other consumer debt have come down in line with the Fed's cuts in short-term rates, he said.
"I think it's basically due to a series of things: one, the tax cut; two, expenditure increases, which were higher than expected; and three, the economy," he said, referring to expectations in the financial markets that Congress will not pay off the debt as quickly and the economy will rebound next year.
"I think it's a marginal issue," Mr. Greenspan added, because long-term rates declined "dramatically" at the end of last year in anticipation of the Fed's rate cuts and have not gone up much since then. He also noted that home sales have been a strong point in the economy despite elevated rates.
Mr. Greenspan said recent sharp drops in oil, gasoline, natural gas and power prices are a welcome tonic for the ailing economy. But he cautioned that they also are a sign of the waning demand for energy worldwide.
"We have to remember that the reason why energy demand has come off as much as it has is, the economy is slowing," he said. "It has given us a sense of, well, there's no particular problem out there."
Congress must not be lulled into thinking there's no need to increase supplies of oil and gas, he said. The nation is growing increasingly dependent on natural gas, in particular, to fuel power plants, as well as to heat homes, and is not producing enough to meet future demand, he said.
"Natural gas is a critical issue in this country," he said. "We're being sort of tranquilized by the lower price of natural gas."
Various panels of Congress in recent weeks have moved to cut off drilling offshore in the Gulf of Mexico, the Pacific and Atlantic coasts, the Great Lakes and parts of the Rocky Mountains.
But all the gas used in this country must be produced either here or in Canada, Mr. Greenspan said, because it cannot easily be liquefied and imported like oil. Canada currently provides one-sixth of the gas Americans use, "but they are eventually going to run into some problems," he said.
Drilling activity in the United States has jumped recently, but supplies have increased only marginally because of the decreasing productivity of existing wells, he said. "You have to get a continuously increasing amount of growing just to stay where you are… . We're running into a long-term problem."
Mr. Greenspan criticized the "Sudan Peace Act," a bill that has passed both houses of Congress and would prohibit oil companies that invest in Sudan from raising capital on U.S. securities markets.
"The effect … would be essentially to move a considerable amount of financing out of the United States to London, Frankfurt, Tokyo," he said, despite the bill's "commendable" objectives. "We are undermining the potential long-term growth of the American economy."

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