Federal Reserve Chairman Alan Greenspan yesterday said the economy is improving on its own and may no longer need additional tax cuts and spending increases to achieve recovery.
In testimony before the Senate Budget Committee, the Fed chairman offered a more upbeat outlook than he did just two weeks ago, when he said “significant risks” threaten to keep the economy in recession.
His optimism yesterday had increased to the point where he backed off his advice to Congress three months ago to enact a stimulus package of about $50 billion as a kind of “insurance” against a prolonged downturn.
“I do not think it is critically important” at this point, he said. “I think the economy will recover in any event.”
Mr. Greenspan added that he feels somewhat “conflicted” because it is not yet clear whether an uptick in economic output expected early this year as businesses restock depleted inventories will produce a one-time growth spurt or be the beginning of a sustained expansion.
“There are pluses and minuses,” he said, especially because consumer spending the main pillar for the economy will remain pressured by continuing job losses. “It is conceivable that we may need some additional stimulus, which would be helpful, coming into effect in the spring or summer.”
Mr. Greenspan’s remarks throw a bit of a curveball at the White House, which has been pushing hard to enact a $100 billion stimulus bill approved by the House last year but stalled in the Senate.
The Senate yesterday began debate on a slimmed-down package of $69 billion in tax rebates for low-income households, extended unemployment benefits, aid for revenue-strapped state and local governments, and one-time tax breaks for business investment.
Senate Majority Leader Tom Daschle said the package includes only areas of common agreement between Democrats and Republicans. The South Dakota Democrat brought the package up during Congress’ first week back from recess in answer to charges from the White House that he was an “obstructionist” for letting it die last year.
White House press secretary Ari Fleischer yesterday took a somewhat darker view of the economy than Mr. Greenspan. “The evidence is coming in now indicating there are healthy signs of a recovery,” he said, but “there are still clouds on the horizon.”
“The president would prefer to err on the side of helping to create jobs and helping the unemployed,” he said. “If the year goes along and the Senate continues to fail to take action and there are increasing signs that the economy is coming back to sufficient levels, then that could change events.”
Many legislators welcomed Mr. Greenspan’s change of tune, as the federal budget surplus has been exhausted in the last year by the recession and President Bush’s first round of tax cuts, as well as vastly increased spending for defense, homeland security, education and other areas.
According to the Congressional Budget Office’s latest estimates, the government is on the verge of running a deficit, although surpluses should re-emerge in several years after the recession is over. In the next 10 years, the CBO is expecting accumulated surpluses of $1.6 trillion, down from $5.6 trillion estimated a year ago.
“I’m looking at the fact we do have a budget which is very close to balanced, and any stimulus program will clearly put us into deficit and go in the wrong direction,” Mr. Greenspan said.
The Fed chairman refused to withdraw his support for last year’s tax cuts at the urging of committee Democrats, however, noting that they helped to cushion the economy from a more severe downturn. Mr. Greenspan’s endorsement a year ago was considered critical in thawing opposition to the tax cuts in Congress.
Last year he had urged Congress to enact “trigger” mechanisms that would prevent the phase-in of some tax cuts and spending increases in future years if projected surpluses do not materialize. He repeated that would be a good idea yesterday, since forecasts for the economy and surpluses 10 years hence can be unreliable.
“It’s very important that we have a mechanism which allows the trend of receipts and outlays to match the goal of Congress over a period of years,” he said.
Mr. Greenspan said his optimism about the economy in recent weeks has been stoked by signs that the long downturn in manufacturing and technology may finally have reached bottom and be at a “turning point.” Economic output, after plunging last year, may now be “close to zero” and headed up again, he said.
Mr. Greenspan also pointed to a string of declines in weekly claims for unemployment compensation reported by the Labor Department. Yesterday, the department reported that new jobless claims fell by 15,000 to a six-month low of 376,000 last week, after adjusting for seasonal fluctuations in the labor market.
Some economists question whether the department’s seasonal adjustments distort the picture, however. Before adjustment, the number of unemployment claims had been rising and hit a 10-year high of 582,909 earlier this month.
Layoff announcements from major corporations have emerged steadily since the beginning of the year, and more are expected due to major bankruptcies such as Kmart’s and continuing efforts by thousands of businesses to restore profitability by cutting labor costs. California and North Carolina, for example, both lost more than 30,000 jobs in one week this month because of corporate downsizing. The department factors out many of the claims resulting from those job cuts in its weekly report at this time of year, however, under the theory that downsizings always increase at the beginning of the year.