President George W. Bush couldn't have asked for more from Federal Reserve Chairman Alan Greenspan.
When the influential head of the nation's central bank testified before a Senate committee yesterday, he didn't just endorse the idea of a substantial tax cut. He offered a potent new thesis for why one is necessary.
Without a tax cut, the chairman said, the federal government would not only pay down the entire $3 trillion of national debt before the end of this decade. It might have enough left over to invest in the private sector in such things as stocks and corporate bonds. That, in his eyes, would risk involving the government too much in the "efficient" functioning of the economy.
Greenspan's endorsement of a tax cut probably assures passage of one through Congress this year. While he was careful not to back the $1.6 trillion Bush plan in particular, the Fed chairman said that rising budget surpluses make room for a substantial reduction. The admission marks something of a reversal for the Fed chairman, who has long argued that the best use for the rising federal surplus is to pay down the national debt. "It's a remarkable turnaround," says Paul Kasriel of Northern Trust Co. in Chicago. "It's a real epiphany. This pretty much guarantees tax cuts."
Even so, important details will need to be negotiated both with the White House and between the two parties before any tax cut is passed. These include its size and how much of the benefits go to the rich and how much to the middle class. Greenspan pointedly did not suggest any tax cut number himself.
"Bush is still not likely to get the full $1.6 trillion [over 10 years]," says Richard DeKaser, chief economist for National City Corp. in Cleveland. "This is a political question, not an economic one. There is enough resistance to pare it down some."
Because of the time usually involved in reaching a tax deal in Congress, Greenspan cautioned against counting on fiscal policy - a reduction in levies - to revive the economy from its current downturn. "Such tax initiatives ... historically have proved difficult to implement in the time frame in which recessions have developed and ended," he told a packed and attentive audience.
In his prepared testimony, Greenspan gave little clue whether Fed policymakers would trim interest rates further when they meet next Tuesday and Wednesday. Fed watchers, though, are expecting another half a percentage point cut in interest rates. A similar reduction was made Jan. 3.
Greenspan walked a fine political line in talking of how to keep Social Security solvent over the next 30 years.
Some of the huge budget surplus - now reckoned at $5.7 trillion in the next 10 years - could be used to buy private assets that would be put in privatized individual Social Security accounts, he suggested. That would avoid the undesirable accumulation of private assets (such as stocks and bonds) in government hands.
That would fit nicely into Bush's proposed plan for Social Security. Also, though, Greenspan spoke of the possibility of putting those private assets into the Social Security Trust Fund. That would suit Democratic Party plans.
The question of how big a tax cut should be arose when Sen. Kent Conrad (D) of North Dakota helped introduce Greenspan at the hearing. He listed a host of set-asides or outlays that would limit the tax cut - $2.7 trillion in the Social Security "lockbox," $400 billion for Medicare, prescription-drug legislation $300 billion, plus extending tax breaks, higher defense costs, extra interest costs, and trimming back the "alternative minimum tax" that hits primarily the well-to-do.
In other words, Senator Conrad was making the case for a smaller cut than Bush seeks. The flavor of Greenspan's remarks, though, tended to suggest something fairly big would be in order.
Greenspan has long indicated a distaste for more government spending and he did so again Thursday. "The probability of dropping back into deficit as a consequence of imprudent fiscal policies is not negligible," he said.
Nonetheless, the central banker did argue that current budget surplus projections are probably accurate, partially because the jump in productivity during the past five years should continue.
The budget projections by the Office of Management and Budget put productivity gains at 2-1/4 to 2-1/2 percent per year over the next decade - a decided improvement over productivity levels from 1970 to 1995.
Because of technology gains, "the experience of the past five to seven years has been truly without recent precedent," Greenspan said.
As for monetary policy, Greenspan did note that "Inflation pressures are well contained." Though refusing to answer a direct question on interest rates, this comment and his concern about the sharp slowdown in the economy hinted to Wall Street that further rate cuts are forthcoming.
Staff writer Ron Scherer contributed to this report.
(c) Copyright 2001. The Christian Science Publishing Society