The economy will rebound strongly after questions about war with Iraq are resolved and probably does not need additional stimulus from tax cuts, Federal Reserve Chairman Alan Greenspan testified yesterday.
While endorsing President Bush’s proposed dividend tax cut as a desirable long-term reform, the Fed chairman said the first priority of Congress and the president should be to regain control over budget deficits that appear headed into record territory.
“I am one of the few people who still is not as yet convinced that stimulus is a desirable policy,” Mr. Greenspan told the Senate Banking, Housing and Urban Affairs Committee, noting that the economy is “poised to grow more rapidly” as soon as the Iraq situation is cleared up.
The risks including high energy prices raised by the possibility of war with Iraq are the principal obstacle holding back strong growth, he said. They are causing businesses to hesitate about hiring new workers and spending to replenish stocks or add facilities, thus stifling those important sources of growth, he said.
“There seems to be a fairly significant, almost inexorable, endeavor on the part of the economy to move forward. But it is being held back by this set of forces,” he said.
The possibility of war “is hanging very heavily on economic decision-making and thus economic growth,” he said. “In particular, worries about the situation in Iraq contributed to an appreciable rise in oil prices.”
Crude oil hit a two-year high yesterday, rising to $35.44 a barrel on the New York Mercantile Exchange. Crude has been near two-year highs since December.
Mr. Greenspan in several hours of questioning by committee members could not find a single stimulus proposal whether tax cuts for individuals and small businesses, or emergency aid to states that he believed would do as much to boost the economy as a quick resolution of the major “geopolitical risks” overshadowing U.S. businesses and financial markets.
In remarks that put him at odds with the White House and conservative tax cutters, Mr. Greenspan, who had endorsed Mr. Bush’s first round of tax cuts in 2001, sided with fiscal moderates in Congress who want to wait and see what happens with Iraq before approving any tax cuts.
Estimates of the cost of a war range from tens of billions to hundreds of billions of dollars. It could be especially high because the United States appears headed into a war without support from several major European allies who helped foot the bill in the 1991 Persian Gulf war.
Even before the costs of war are factored in, Mr. Bush’s budget projects record deficits of more than $300 billion for the next two fiscal years if Congress approves his economic program.
Mr. Greenspan said the questions about war not only have been clouding the outlook for the budget and the economy, but also have been making it difficult to read the strength of the economy.
Yesterday provided a good example. The stock market made a fitful attempt at rallying in response to Mr. Greenspan’s remarks in the morning expressing confidence in the economy’s strength.
But like many rallies inspired by the improving economy this year, it fizzled later in the day on news of a tape recorded by Osama bin Laden, the leader of the al Qaeda terrorist network, urging Iraqis to fight any U.S. invasion with urban warfare.
“Unless and until we can make a judgment as to whether there is underlying deterioration going on [in the economy] and my own judgment is, I suspect not then stimulus is actually premature,” Mr. Greenspan said.
The Fed chairman cautioned senators that any legislation to boost growth is not likely to help until well after the current soft spot and questions about Iraq are resolved.
Mr. Greenspan strongly took issue with the apparent return to Reagan-style “supply side” economics at the White House.
“Economic growth cannot be safely counted upon to eliminate deficits and the difficult choices that will be required to restore fiscal discipline,” Mr. Greenspan said. “There is no question that as deficits go up, contrary to what some have said, it does affect long-term interest rates, it does have a negative impact on the economy.”
Mr. Bush says his tax cuts will produce the strong growth needed to increase revenues and erase the budget deficit, while Vice President Richard B. Cheney has been arguing that high budget deficits do not necessarily result in higher interest rates.
White House spokesman Ari Fleischer played down suggestions yesterday that Mr. Greenspan did not fully back the administration’s plan.
“You’re watching the very beginning of the process … and in the end, the president believes that he will get much, if not all, of what he has asked Congress to pass,” Mr. Fleischer said.
Rather than hoping that the budget will magically balance on its own, legislators should reinstate rules that expired in the fall requiring offsets for any new tax or spending programs, such as the dividend plan or a Medicare prescription drug benefit, to prevent a fiscal disaster when baby boomers start retiring in a decade, Mr. Greenspan testified.
Mr. Greenspan attributed much of the revenue windfall that produced big budget surpluses during the late 1990s to the booming stock market and the windfall of capital gains and stock option revenues it produced.
Congress, as well as many state and local governments, increased spending by double-digit rates at that time, lulled by the extraordinary growth in revenues, and now will have to cut back in light of the more subdued rate of revenue growth likely in the future, he said.
Mr. Greenspan’s remarks caused a swirl of controversy on Capitol Hill. Senate Minority Leader Tom Daschle, South Dakota Democrat, yesterday said the Fed chairman gave the “kiss of death” to Mr. Bush’s tax plans.
Some Republicans responded with fury. Sen. Jim Bunning, Kentucky Republican, called for Mr. Greenspan’s resignation.
“You are once again interjecting yourself into matters in which you have no business,” he said.