- The Washington Times - Thursday, November 14, 2002

Federal Reserve Chairman Alan Greenspan yesterday urged Congress to re-establish controls over deficit spending before considering further tax cuts to stimulate the economy.
While he endorsed extending the current tax cuts and unemployment benefits enacted last year, Mr. Greenspan said more stimulus legislation probably is not needed because the Fed's big interest-rate cuts should suffice to pull the economy out of its current "soft patch."
The budget went from a surplus of $127 billion last year to a deficit of $157 billion this year as the economy fell into recession and Congress splurged on tax cuts and higher spending on everything from defense and homeland security to education and farm aid.
Many of the budget controls Congress enacted during the 1990s, including discretionary-spending caps and pay-as-you-go rules governing tax cuts and new benefit programs, expired this fall with little talk of reviving them.
Mr. Greenspan repeatedly has credited those controls with helping to hold down long-term interest rates by assuaging concerns about deficit spending in the financial markets.
"We need to get the process back to where it was," to ensure any further steps by Congress do not backfire, he said in testimony before the Joint Economic Committee.
A budgetary structure is needed, he said, in part because Congress cannot easily repeal any spending increases or tax cuts it passes should they prove to be unnecessary to aid the economy.
The Fed, by contrast, can quickly withdraw the large, half-point rate cut it ordered last week if it decides it wasn't needed as "insurance" against an economic reversal, he said.
The Fed chairman, seeking to dispel confusion in the financial markets about last week's surprisingly aggressive rate cut, said such a move was justified because inflation is not currently a threat, while there is a small chance the economy could fall back into recession.
He expressed confidence that growth has only temporarily stalled and will accelerate in response to the rate cuts.
The stock market rallied moderately yesterday, but appeared to be more inspired by Iraqi President Saddam Hussein's acceptance of U.N. weapons inspectors than by Mr. Greenspan's comments.
The Fed chairman said consumers and businesses are hesitating to spend out of uncertainty bred by the slow-motion collapse of the stock market in the last two years, fallout from corporate scandals and talk of war with Iraq.
While consumers have been hit hard by the loss of $7 trillion in wealth in the stock market since March 2000, those losses have been partially offset by gains in home values that consumers have tapped and turned into cash for spending through home sales and refinancings, he said.
A more serious obstacle for the economy is the paralysis of business executives, who continue to hold back hiring and investment spending needed to sustain the recovery, he said.
"Investment is being inhibited by very large uncertainties," but it should resume once those uncertainties are dispelled, he said. Still, there may be little Congress or the Fed can do to hasten that process, he said.
"I'm not sure what one does in this regard except to try to maintain the economy as best we can until these uncertainties are lifted, as they will be."
Treasury Secretary Paul H. O'Neill on Tuesday was also cautious about the need for additional legislation to aid the economy, though White House economic adviser Lawrence Lindsey told the U.S. Chamber of Commerce yesterday the administration is reviewing possibilities.
President Bush said yesterday that he is open to suggestions from members of Congress. Many lawmakers and business groups have been calling for additional tax breaks, such as a revival of the business investment tax credit and accelerated depreciation for business purchases of plants and equipment.
Rep. H. James Saxton, chairman of the joint committee, yesterday called for additional action by Congress.
"Relaxation of monetary policy alone may not be sufficient to ensure sustained economic expansion," the New Jersey Republican said. "Given the persistent weakness in investment, it would be prudent to consider further changes in tax policy to offset economic uncertainty and improve the prospects for investment growth."
Frederick Smith, chief executive of FedEx Corp., told the Chamber that enhanced depreciation rules would be helpful, as would enactment of Mr. Bush's proposed terrorism-insurance legislation.
"Why are we not investing more robustly? In my opinion, the issue can be summed up in two words: increased risk," he said.

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