- The Washington Times - Sunday, February 15, 2004

Federal Reserve Chairman Alan Greenspan traveled to Capitol Hill last week and delivered the Fed’s semi-annual Monetary Policy Report to Congress. He brought with him a particularly strong economic forecast for the presidential election year. The Fed projects that economic growth will accelerate during 2004 to 4.5-5.0 percent from last year’s 4.3 percent rate. If the actual growth rate approaches the midpoint (4.75 percent) of that forecast, the economy will have grown by its fastest rate in 20 years. Having already effectively achieved its statutory goal of price stability, the Fed expects inflation to decline slightly to one of its lowest levels in postwar history. The unemployment rate, meanwhile, is projected to be between 5.25 and 5.5 percent during the fourth quarter.

As expected, the real partisan sniping erupted over the budget deficit, which the White House recently estimated will exceed $500 billion during the 2004 fiscal year. At the Senate hearing, Democrats sought — but failed — to gain Mr. Greenspan’s support for their position against making the 2001 and 2003 tax cuts permanent. Asked point blank by Sen. Paul Sarbanes, Maryland Democrat, about making tax cuts permanent, Mr. Greenspan left no doubt where he stood, declaring: “I am in favor, as I have indicated in the past, for continuing the tax cuts that are in dispute at this particular stage.”

Mr. Greenspan, however, did not limit his fiscal advice to endorsing the Bush administration’s proposal to make its tax cuts permanent. Far from it. He renewed his plea to Congress, first made in September 2002, to restore discretionary spending caps and to renew the PAYGO (pay-as-you-go) policy, which required Congress to enact offsetting spending cuts or revenue increases to pay for new entitlement programs or tax cuts. Mr. Greenspan was equally clear about how the PAYGO policy should be applied to making the tax cuts permanent. “I would argue strenuously that it should be taken out on the expenditure side,” he told Mr. Sarbanes.

Mr. Greenspan said Congress would have to review entitlement spending outlays. He stressed that he was not calling for an absolute cut but rather a reduction in the planned rate of increase. To be sure, Mr. Greenspan offered politically tough-minded recommendations, including “indexing the age of [Social Security] eligibility to longevity” and “getting a better price index to index various different benefits.” In addressing the budget issue, he told the senators that “it is crucially important that we try to find, wherever we can, reductions in outlays before adverting to the question of revenues to fill in the gap.” Agreeing that the choices he was offering were exceedingly difficult to make, he told the senators that “the other alternative is to have legislation which repeals the laws of arithmetic.”

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