- The Washington Times - Tuesday, July 15, 2003

The economy is on the verge of faster growth, Federal Reserve Chairman Alan Greenspan testified yesterday, as a report showed that retail spending spurted last month even before getting an expected boost from tax rebates.

The 0.5 percent jump in retail sales was reported by the Commerce Department minutes before Mr. Greenspan’s appearance before the House Financial Services Committee, bolstering his increasingly upbeat economic outlook.

“We believe we are at a turning point. Our best judgment is that things will be improving” after a year of sluggish growth and fitful recovery from recession, he said, emphasizing that the central bank is prepared to do whatever it takes to ensure that the improvement occurs without backsliding.

The Fed “stands prepared to maintain a highly accommodative stance of policy for as long as needed to promote satisfactory economic performance,” he said, cautioning committee members and financial markets against assuming that interest rates will rise as soon as the economy picks up.

Mr. Greenspan credited in part the $35 billion in tax rebates this summer and the extraordinarily low interest rates engineered by the central bank for the improved Fed forecast of economic growth of 3 percent to 4 percent for the rest of year.

But he also rued the government’s fall into record budget deficits exceeding $450 billion this year and next, and again urged Congress to return to the spending disciplines that helped tame deficits in the 1990s.

After an unprecedented wave of refinancings made possible by the lowest interest rates in a half-century, consumers and businesses are in a healthy position to spend again in a way that supports an extended economic recovery, he said.

On top of that, “the recently passed tax legislation will provide a considerable lift to disposable personal incomes of households in the second half of the year, even accounting for some state and local offsets,” he said.

“Most mainstream models predict that such tax-induced increases in disposable income should produce a prompt and appreciable pickup in consumer spending,” and give businesses the excuse they need to increase spending as well, he said.

Banks and other lenders remain in good shape despite increased loan delinquencies and bankruptcies, and recent sharp gains in the stock market have boosted consumer and business confidence and sparked acquisition activity that points to better times ahead, he said.

Mr. Greenspan noted that dampened business spirits continue to hold back the economy, attributing that partly to lingering fears in executive suites after a wave of corporate scandals toppled chief executives and wiped out entire companies in the past year.

“Corporate executives and boards of directors are seemingly unclear, in the wake of recent intense focus on corporate behavior, about how an increase in risk-taking on their part would be viewed by shareholders and regulators,” he said.

In a fiery exchange with committee members, Mr. Greenspan offered no apology for the major losses in manufacturing jobs and industries during his 13-year tenure at the Fed, insisting that the economy can continue to perform well without them.

About 2.4 million manufacturing jobs have disappeared since the recession began in March 2001, and steel, textile and many other industries have been imperiled by years of import penetration facilitated by a strengthening dollar.

Rep. Donald A. Manzullo, Illinois Republican, said that the manufacturing job losses have raised unemployment in his district to 11 percent, well above the national average of 6.4 percent. He questioned whether the economy can afford to lose any more such jobs.

But Mr. Greenspan said the gradual decline in manufacturing began a half-century ago and is likely to — and even should — continue as a result of increased global trade that has benefited U.S. consumers.

“Jobs do get created,” but “they do not get created in manufacturing,” he said, adding that it would be “distressing” only if the job losses continued for much longer. He said the nation should endeavor to preserve industries only if national security is at stake.

“It is in the nature of a dynamic economy” to shed jobs in mature and dying industries while gaining jobs in growth areas, such as technology and various new services, he said.

“It’s a dynamic economy that’s gone down the tube,” Mr. Manzullo said. “It’s a recovery with no jobs, especially if you lived in my district.”

Mr. Greenspan did concede an argument frequently used by manufacturers — that China has made incursions into U.S. markets by keeping its currency artificially low against the dollar.

While not calling directly for a revaluation of the Chinese yuan, the Fed chief argued that it would be in China’s interest to do so to keep from having to accumulate a huge store of Treasury securities with the dollars it earns on exports to the United States.

“If the exchange rate is significantly undervalued … the accumulation of dollar assets will expand their money supply to the point that it will create problems in monetary policy, and it will be to their interest to change,” he said.

Rep. Bernard Sanders, Vermont Independent, raised eyebrows and prompted apologies from other committee members after he accused Mr. Greenspan of being out of touch with common folk.

“You talk about an improving economy while we have lost 3 million private-sector jobs in the last two years,” Mr. Sanders said. “I think you just don’t know what’s going on in the real world. I would urge you, come with me to Vermont; meet real people. The country clubs and the cocktail parties are not real America.”

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