The Post--John Berry: "Greenspan Stops Short of Endorsing Bush Tax Plan"
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>>>Greenspan Stops Short of Endorsing Bush Tax Plan
By John M. Berry
Washington Post Staff Writer
Thursday, January 25, 2001
Federal Reserve Chairman Alan Greenspan endorsed the idea of long-term federal tax cuts today, but declined to specifically back President Bush's plan for a $1.6 trillion cut over 10 years.
Greenspan, appearing before the Senate Budget Committee, also said that U.S. economic growth is "probably close to zero at the moment" as a result of a sharp decline in the manufacturing portion of the economy.
His remarks about the economic slowdown indicated he will urge Fed policymakers to opt for a HALF-percentage point CUT in the Fed's target for overnight interest rates when they meet next week. The Fed cut rates unexpectedly by that amount on Jan. 3.
Comments by committee members, both Republicans and Democrats, made it clear there is a universal expectation of federal tax cuts as well, and Greenspan agreed some are needed.
In fact, he said that prospective federal government budget surpluses are so large that tax cuts are needed to reduce them. Otherwise, financial and economic problems could develop if large surpluses continued after most of the government's debt has been repaid, probably in less than a decade.
Asked whether he supports President Bush's proposal for a $1.6 trillion tax cut over the next 10 years, Greenspan said that it would "not be appropriate for me to comment" because that is "fundamentally a political decision."
However, he added that he has "always been in favor of reducing marginal [income tax] rates," a major portion of Bush's plan, because lowering marginal rates will "maximize" economic efficiency and the allocation of resources within the economy.
More positive remarks about the economy recently by other Fed officials had left financial analysts divided over whether to expect a half-point cut or only a quarter-point reduction in short term rates by the Fed next week, but there is a universal expectation of a cut.
Greenspan said factory production has gone down as firms have tried to reduce their stocks of unsold goods which accumulated when spending by consumers and businesses turned flat or fell a few months ago. "An inventory liquidation process is going on," Greenspan said.
"The crucial issue is whether that marked decline [in production] breaches consumer confidence. . . . To date, it has not," he said.
If that were to occur, the economy would begin to contract, putting the nation into a recession, and he warned that that could happen with little warning. "It is not a continuum from slow growth to recession," he said. "That could languish for a while. It is important that we avoid that."
Which way the economy will go, he added, "is going to be resolved one way or the other in three months or so."
Greenspan was far less skeptical than he has been in the past that large surpluses will, in fact, occur. On several occasions last year he said it would keep interest rates lower and foster more business investment if Congress would "let the surpluses run."
He has changed his mind in large part, he said, because the large gains in labor productivity growth of recent years has continued even as overall U.S. economic growth has slowed. With more rapid gains in economic efficiency, the economy will be able to grow on a sustained basis faster than previously had been thought possible, generating more rapid growth of federal budget revenues.
But if budget surpluses were to continue after most of the federal debt had been repaid, the government would have no choice but to buy large amounts of private assets, which Greenspan said would be unwise "because it would be exceptionally difficult to insulate the government's investment decisions from political pressures."
"Decisions about what type of private assets to acquire and to which federal accounts they should be directed must be made well before the policy is actually implemented, which could occur in as little as five to seven years from now," he warned.
The administration's Office of Management and Budget has revised upward its estimate of future revenues and surpluses, and the Congressional Budget Office will do so soon, because both agencies have raised their assumptions about that long-term economic growth rate.
However, Greenspan told the Budget Committee that Congress should approach cutting taxes very cautiously because the sources of the flood of federal revenue that underlie the surplus projections is still not well understood and might change unexpectedly in coming years. He said any cuts should be phased in over several years and perhaps even made conditional on realizing the projected revenues.
"With today's euphoria surrounding the surpluses, it is not difficult to imagine the hard-earned fiscal restraint developed in recent years rapidly dissipating" through a combination of excessively large spending increases and tax cuts, he warned. "We need to resist those policies that could readily resurrect the deficits of the past and the fiscal imbalances that followed in their wake."
Both in his prepared testimony and in response to questions, Greenspan questioned the use of tax cuts to stimulate a lagging economy – one reason Bush has stressed recently in arguing why his proposal should be adopted.
Tax initiatives intended to give the economy a short-term stimulus "historically have proved difficult to implement in the time frame in which recessions have developed and ended. For example, although President [Gerald R.] Ford proposed in January of 1975 that withholding rates be reduced, this easiest of tax changes was not implemented until May, when the recession was officially over and the recovery was gaining force."
But he added a caveat, given that he thinks that tax cuts are needed for longer-term reasons.
"In today's context, where tax reduction appears required in any event over the next several years . . . starting that process sooner rather than later likely would help smooth the transition to longer-term fiscal balance. And should current economic weakness spread beyond what now appears likely, having a tax cut in place may, in fact, do noticeable good," Greenspan said.
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