- The Washington Times - Thursday, February 27, 2003

WASHINGTON, Feb. 27 (UPI) — The worst is over for the economy as a balanced recovery is under way, even as the nation prepares to go to war against Iraq, the chief White House economist said Thursday. But on the eve of his final day in office, Glenn Hubbard suggested that a rift remained between the Bush administration and Federal Reserve Board Chairman Alan Greenspan on whether more tax cuts would be necessary to keep growth from faltering.

"It's important to note the long-term resilience of the U.S. economy," Hubbard, chairman of the White House's Council of Economic Advisers, told reporters the day after he publicly announced his resignation. He added that while the country has struggled with a recession, "the doomsday scenario that some people painted hasn't been proven."

The stock market has continued to languish while the jobless rate still hovers around 6 percent as prospects for the country invading Iraq rattles domestic and foreign investors. Yet Hubbard emphasized that longer-term growth prospects remain sound, with U.S. economic fundamentals still the most attractive among the world's industrialized nations.

"Expectations for the United States remains the brightest in the world," Hubbard said.

He added that even if U.S. troops invaded Iraq, which could increase terrorist threats on U.S. shores and against American targets worldwide, foreign investors would still pump money into U.S. assets.

He dismissed concerns that foreign direct investment into the United States could decrease because of near-term concerns such as war risks, and he dismissed fears that attacking Iraq could harm the current-account balance in the long run.

He did, however, say that the United States had to increase its savings rate, regardless of foreign capital flows.

The White House economist also stressed the need for continued stimulus to ensure economic growth, mainly through more tax cuts.

Earlier this month, the Bush administration sent Congress its budget proposal for the coming fiscal year, calling for hefty increases in homeland security spending as well as $1.3 trillion in tax cuts over the next 10 years.

To allow higher spending amid decreasing revenue, the administration has said that it will have to slash spending in other areas while expecting the budget deficit to balloon to a historic high of $307 billion.

Some, including Greenspan, have questioned the wisdom of this course. Indeed, Greenspan told members of the Senate banking committee on Feb. 11 that it was still premature to decide whether the economic slump was due to concerns about terrorism and a potential war on Iraq, or whether it was because of more fundamental problems in the U.S. economy.

Greenspan added that until the root cause was found, Congress shouldn't approve more tax cuts, given that government spending was at such high levels.

"There should be little disagreement about the need to reestablish budget discipline. The events of September 11 have placed demands on our budgetary resources that were unanticipated a few years ago," Greenspan said, referring to the terror attacks of Sept. 11, 2001.

Former White House economic adviser Lawrence Lindsey warned that a war on Iraq could cost taxpayers as much as $200 billion, even though the director of the Office of Management and Budget, Mitch Daniels, said earlier this month that the total cost would likely be about $50 billion.

But the White House economist rebutted Greenspan's warnings about overspending, stating that while the administration respected the Fed's independence, it did not share the central bank's assessment of the domestic economy.

The Bush budget proposal will "add 1 percentage point to the U.S. (gross domestic product growth rate) this year … and 1.4 million jobs," Hubbard said.

Turning to the international economy, Hubbard said that for now, the United States was trying to bolster growth worldwide more or less single-handedly.

"It's like trying to clap with one hand," Hubbard said, adding that Europe continued to struggle with structural reform, while Japan continued to suffer from deflation and financial challenges.

While Japan has seen little or no growth for the past 12 years, Hubbard said that the primary hurdle for growth in the world's second-largest economy was deflationary pressure, which was primarily the responsibility of the Bank of Japan.

"You can't fix one without looking at the other," the White House economist said. He noted that Japan suffered not only from continued price declines, which kept both personal and business spending in check, but also a continued backlog of non-performing loans in Japan's financial system.

Given that the BoJ's chief responsibility is to keep inflation and deflation under control, Hubbard said that the Japanese central bank had a key role to play in getting the country's economy permanently back on track.

He also said Prime Minister Junichiro Koizumi should consider cutting taxes as a key means to jump-start the economic engine.

"It's in the interest of the president … to see the second largest economy in the world strong," Hubbard added.

Hubbard's last day is Friday. The administration has already tapped Gregory Mankiw, an economics professor at Harvard University, who will need to be confirmed by Congress in a process that could take several weeks.

In December, Bush fired Lindsey, who headed the National Economic Council, as well as Treasury Secretary Paul O'Neill due to their disagreement with the White House's economic views. Since then, Hubbard has been the administration's most visible spokesman on economic policy.

But with the appointment of John Snow as O'Neill's successor and Stephen Friedman at the held of the NEC a fortnight ago, Hubbard said it was easier to leave the White House.

The economist gave no reason for his departure, except to say he wanted to spend more time with his family. They have been living in New York since he took office in Washington two years ago.

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