-Caveat Lector- Go To Original http://truthout.org/docs_02/021403E.htm Greenspan Throws Cold Water on Bush Arguments for Tax Cut By Edmund L. Andrews New York Times
Wednesday 12 February 2003 WASHINGTON, Feb. 11 -- Alan Greenspan, the Federal Reserve chairman, today rebutted many of President Bush's arguments in favor of big new tax cuts, saying that the economy probably does not need any short-term stimulus and warning that budget deficits could spiral out of control. Mr. Greenspan did not attack the specifics of Mr. Bush's $674 billion tax- cutting package, but he cast doubt on the need for a stimulus proposal in the first place. He also disagreed with the Bush argument that rising budget deficits have little link to higher interest rates. And he pointedly took issue with the administration's argument that the best way to balance the budget is by promoting faster growth. "I am not one of those who is convinced that stimulus is desirable policy at this point," he told lawmakers at a hearing of the Senate Committee on Banking, Housing and Urban Affairs. "My own judgment is that fiscal stimulus is premature." Because of Mr. Greenspan's enormous stature as a spokesman on economic issues, his comments today were a serious blow to the Bush administration. At the same time, the president met with some lawmakers at the White House to press his proposal. In a cautious assessment of the economy, Mr. Greenspan said the biggest obstacle to faster growth was uncertainty about a likely war with Iraq. Though expressing optimism that the economy would strengthen once those uncertainties disappeared, he suggested that the Fed would not raise interest rates any time soon. Two years ago, Mr. Greenspan provided crucial support for Mr. Bush's first round of tax cuts. That support helped Republicans win over wavering Democrats and push through the tax cuts even though Democrats had a slim majority in the Senate at that time. Administration officials and most Republican lawmakers tried to put the best face possible on Mr. Greenspan's testimony, emphasizing that he had reiterated his support for eliminating the so- called double taxation of dividends. But one Republican senator angrily accused Mr. Greenspan of surreptitiously trying to sink the Bush plan and suggested that he resign. "You have been in this position for a long time, some would say too long," said Senator Jim Bunning, Republican of Kentucky and a longtime critic of Mr. Greenspan. "No president should try to set monetary policy. But the Fed chairman should not try to make fiscal policy. That's not your job." Democrats immediately pounced on Mr. Greenspan's remarks to step up their attack on Mr. Bush's tax plan. "I think Alan Greenspan two years ago breathed life into the administration's proposal for tax cuts," said Senator Thomas A. Daschle of South Dakota, the Democratic leader. "Today, I think he gave the kiss of death to the plan that was offered this year." Investors showed little reaction to Mr. Greenspan's comments on the economy. The real impact of his comments was political. Mr. Greenspan bluntly challenged the administration's contention that big budget deficits pose little danger or that the government can largely offset them through faster economic growth. "We are all too aware that government spending programs and tax preferences can be easy to initiate or expand but extraordinarily difficult to trim or shut down," Mr. Greenspan told the Senate panel. "Faster economic growth, doubtless, would make deficits easier to contain," he added. "But faster economic growth alone is not likely to be the full solution to the currently projected long- term deficits." Mr. Greenspan also took issue with the Bush administration's arguments that budget deficits have little effect on interest rates. "Contrary to what some have said, it does affect long-term interest rates and it does have an impact on the economy," he said. And while he endorsed Mr. Bush's basic idea of eliminating the taxes paid by individuals on corporate dividends, he also said that any such change should be offset by other tax increases or spending cuts. That is quite different from Mr. Bush's approach. The administration has estimated that the dividend plan will cost the government $385 billion over 10 years. John W. Snow, who took over as Treasury secretary this week, told reporters today that there was no need to offset the costs of the dividend plan with either tax increases or spending cuts. "I think a large part of the cost of the dividend plan will be recovered in the future," Mr. Snow said. Mr. Greenspan's opinions today will probably not be enough on their own to block Mr. Bush's general plan for a new round of tax cuts. But many analysts said crucial elements of the tax plan were already in trouble with moderate Republicans, and they predicted that the Fed chairman's testimony would add to the resistance. "Even if his remarks influence only two or three votes, that would be the difference between success and failure," said Rudolph Penner, a former director of the Congressional Budget Office. As in the past, Mr. Greenspan sprinkled his testimony with a mix of remarks that offered something to Republicans and Democrats alike. He did not criticize the specifics of Mr. Bush's tax proposals, saying there were "pluses and minuses," and he repeated his longstanding support for eliminating the double taxation of corporate dividends. But his focus on deficits clearly put him at odds with the administration, and his endorsement of the dividend tax cut was at best tepid in light of his recommendation that any such cut be "revenue neutral." "We think this makes Mr. Greenspan more of a problem for Mr. Bush than his opponents," wrote Ian Shepherdson, chief United States economist for High Frequency Economics, an economic consulting firm in Valhalla, N.Y. Assessing the broader economic outlook, Mr. Greenspan repeatedly expressed the hope that economic growth would accelerate as soon as the uncertainty about a possible war had been dispelled. In its monetary policy report to Congress today, the Fed predicted that economic growth could reach an annual rate of about 3 percent by the end of this year. Mr. Greenspan expressed little worry that consumers, who have provided the main source of economic growth over the last year, were in danger of becoming too bogged down in debt. Though Mr. Greenspan conceded that household debt had increased, largely as a result of home-refinancings brought on by low interest rates, he said consumers' debt-financing burdens were still about normal. Mr. Greenspan did rattle one sector of the economy today: government- sponsored companies like Fannie Mae and Freddie Mac that bundle mortgages and resell them to investors. Mr. Greenspan implicitly supported stricter oversight of such companies, which have come under growing pressure from lawmakers to provide more disclosure about their liabilities. "These are legally private corporations and should be handled the way private corporations are handled," Mr. Greenspan said. The shares of Fannie Mae dropped $1.21, to $63, and Freddie Mac fell 67 cents, to $54.47, after Mr. Greenspan testified. (In accordance with Title 17 U.S.C. 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