Thursday January 25, 12:42 pm Eastern Time
Greenspan: Economy Has Stalled
By Caren Bohan
WASHINGTON (Reuters) - Federal Reserve Chairman Alan Greenspan on Thursday said U.S. economic growth may have ground to a halt as he threw his considerable weight behind tax cuts.
The endorsement from the powerful Fed chairman for lower taxes, delivered before Senate lawmakers, should give a boost to President George W. Bush's proposal for $1.6 trillion in tax cuts, even though Greenspan qualified his comments by warning Congress not to completely abandon fiscal discipline.
At the same time, his suggestion that the economy may not be growing at all after a nearly decade-long expansion instantly spurred talk the Fed might do its own part to give growth a shot in the arm by possibly cutting interest rates by an aggressive half-percentage point next week. Bond prices jumped but stock prices were mixed at midday.
``As far as we can judge, we have had a very dramatic slowing down and indeed we are probably very close to zero (growth) at this particular moment,'' Greenspan told the Senate Budget Committee when asked if the economy is in a recession.
Further, Greenspan said inflation pressures were ''exceptionally well contained.'' Some economists think that tame inflation may give the Fed a green light to take strong action on interest rates in coming months.
Zero growth is perilously close to a recession, which many economists define as two consecutive quarters of contraction in gross domestic product. Greenspan himself noted that this could be considered only a ``rough'' definition of a recession.
NO R-WORD
The Fed chief, who carefully measures everything he says, avoided using the loaded word ``recession'' to describe the current economic situation.
His discussion of the potential benefits of tax cuts marked a shift from Greenspan's long-held belief that paying down the national debt should be the top fiscal policy goal.
``Should current economic weakness spread beyond what now appears likely, having a tax cut in place may, in fact, do noticeable good,'' he said.
He declined to discuss the Bush tax plan specifically, saying it was not appropriate to do so, but he gave a general endorsement to reducing taxes in a climate of weaker economic growth. Still, he sounded a cautionary note, saying that the cuts would not be a cure-all for the economy.
The Fed next meets on Jan. 30-31. Investors had been divided as to whether an interest rate cut of a quarter-point of half-point was in store but his comments on Thursday suggested to many that he might favor the more forceful course of a half-point.
Wall Street had been abuzz for weeks with speculation that Greenspan might shift his view and back the tax cuts, but his doing still raised eyebrows, especially among Democrats. But Democratic Senators nonetheless took heart from his emphasis on the need to maintain fiscal discipline.
FLIP FLOP
``I have to view it as a flip flop. Last year he said his first preference was to pay down the debt and a tax cut is the second option,'' Paul Kasriel, chief economist at Northern Trust in Chicago, said of Greenspan's tax cut endorsement.
Greenspan said that with sustained productivity gains fueling growing surplus projections, the trade-off between debt and tax reduction no longer existed.
``The most recent data significantly raise the probability that sufficient resources will be available to undertake both debt reduction and surplus-lowering policy initiatives,'' he said. ''Accordingly, the trade-off faced earlier appears no longer an issue.''
Greenspan had always left himself some wiggle room when he had hammered home the importance of debt reduction in the past. He had said that if it became clear that politicians might be tempted to use the money for major spending initiatives, it would be better to cut taxes.
``It is far better, in my judgement, that the surpluses be lowered by tax reductions than by spending increases,'' Greenspan said in an echo of earlier comments that indicated he was not making a complete about-face.
``The flurry of increases in outlays that occurred near the conclusion of last fall's budget deliberations is troubling,'' he said referring to the budget process last year which resulted in fairly big spending increases. |
