- The Washington Times - Thursday, February 13, 2003

In his semi-annual testimony before the Senate Banking Committee on Tuesday, Federal Reserve Chairman Alan Greenspan offered a rather sanguine view of the economy's short-term prospects. He was so sanguine, in fact, that he poured cold water on the need for fiscal stimulus. "I am not one of those who is convinced that stimulus is desirable policy at this point," Mr. Greenspan declared, adding, "My own judgment is that fiscal stimulus is premature." In this respect, Mr. Greenspan clearly is in a rather tiny minority in Washington. And, on this issue, we disagree with him, although we think we understand his apprehensions.
The Bush administration and congressional Democrats and Republicans all agree that the economy needs a short-term fiscal boost. Democrats differ from the White House and other Republicans only on the details.
It's worth recalling that the political consensus for a fiscal stimulus package was one that Mr. Greenspan himself helped to form in November. Early that month, the Fed, in a welcome move, surprisingly chopped a hefty half-percentage point off the overnight interest rate it targets. At the time, Mr. Greenspan justified the monetary stimulus as "insurance" against what he considered to be the unlikely event of a "significant decline." If the economy became reinvigorated, he explained, the Fed would reverse the interest-rate reduction.
Since the Fed's action in November, however, the economy has experienced the worst Christmas sales season in years. The labor market remains dead in the water. Last month, the Fed reported that industrial output declined in December; for the fourth quarter, industrial production fell at a 2.4 percent annual rate. The Commerce Department reported two weeks ago that the gross domestic product expanded in the fourth quarter at a paltry annual rate of a 0.7 percent. Personal consumption, which has kept the economic from sinking, expanded at an annual rate of only 1 percent for the final three months of 2002. Since then, consumer confidence has plunged.
At the same time, the other primary engines of the world economy have stalled. The German economy likely expanded by 0.2 percent for all of last year. Its unemployment rate reached 10.3 percent in January, as growth prospects for 2003 continue to ratchet downward. On the day Mr. Greenspan offered his relatively cheerful view of the U.S. economy, the Financial Times reported that the Japanese economy probably contracted in the fourth quarter, aborting the shortest economic recovery in Japan's postwar history. Too many economies in Latin America either remain on the brink or are approaching it. Meanwhile, the specter of deflation hangs menacingly over the global economy.
This sounds like the ideal time for the world's largest economy to take out some fiscal-policy "insurance." And the president's short-term stimulus package is especially attractive in this regard. The plan advertised itself as implementing in 2003 several important items of the 2001 tax cut that were scheduled to occur later. These included the introduction of the 10-percent personal tax rate; the increase in the child tax credit to $1,000; relief from the marriage penalty; and implementation of personal income-tax-rate reductions scheduled for 2004 and 2006.
Mr. Greenspan strongly supported the 2001 tax cut and has endorsed making it permanent. He has also frequently noted, however, that countercyclical fiscal stimulus needs to be timely. Too often in the past, fiscal stimulus has arrived after the economy has already recovered. Now, the president's 2004 budget has raised some questions about timeliness. When the president unveiled his stimulus package on Jan. 7, the Treasury Department declared that $98 billion of tax relief would occur in 2003. But the president's budget, released on Feb. 4, projected only $31 billion for fiscal 2003, which ends Sept. 30, and $111 billion in fiscal 2004. Clearly, too little countercyclical stimulus would be forthcoming when the economy needs it most.
If fiscal "insurance," unlike monetary "insurance," cannot arrive on time, Mr. Greenspan may question its role. The administration needs to frontload more of its stimulus. Relying on his keen knowledge of the past, the Fed chairman also may fear that there is growing momentum in Washington to "let it rip" on both sides of the fiscal ledger.
Since budget surpluses arrived in the late 1990s, domestic spending has admittedly gone out of control. And the Bush administration and Congress have not exerted sufficient discipline in curtailing the growth of non-defense outlays. This problem needs to be addressed. But it does not obviate the clear need for a well-timed fiscal stimulus package based on tax relief that will encourage the expansion of long-term economic growth.

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