Alan Greenspan Gives Measured Support To Tax Cuts

Mike Godfrey, Tax-News.com, Washington

26 January 2001

Giving testimony to the Senate Budget Committee yesterday, Alan Greenspan gave endorsement to the idea of a tax cut - but only to the extent that it didn't threaten to push the Federal budget back into deficit.

The Federal Reserve Chairman said that the economy had all but stopped growing (possibly a signal that another rate cut may be imminent). "As far as we can judge, we have had a very dramatic slowing down, and indeed we are probably very close to zero at this particular moment," said Mr. Greenspan.

However, Mr Greenspan, who emphasised that he was speaking on his own account, and not as Chairman of the Federal Reserve, said that the US economy appeared to be in the midst of a temporary "inventory correction." "The critical issue we need to address is whether that degree of contraction is enough to breach the fabric of consumer confidence," he said. "At the moment, it has not. Indeed, we do not yet see the actual immediate implications of what recessions look like, but we won't know how this all works out for a while." He thought that a recession was a "low-probability" event that involved more profound changes in confidence, and that the situation would resolve itself over the next three months.

Mr Greenspan said projections of continued budget surpluses "make clear that the highly desirable goal of paying off the [$5,728bn] federal debt is in reach before the end of the decade." He said that reductions in the national debt had already helped to lower the cost of capital and were partly responsible for increased productivity, but pointed out that the opposite effect could result if the government went too far and accumulated private sector assets instead of debt.

The world's favourite economic prophet also said that he didn't think "a highly rapid" reduction of the surplus was a good idea, and spoke strongly against increased government expenditure as a means of reducing the surplus: "if long-term fiscal stability is the criterion, it is far better, in my judgment, that the surpluses be lowered by tax reductions than by spending increases."

Alan Greenspan's comments were music to the ears of the new administration. Mr. Bush told reporters at the White House last night that Mr. Greenspan's statements were "measured and just right," and that the Fed chairman recognized "that we need good monetary policy and sound fiscal policy to make sure the economy grows."

Democrat legislators weren't so happy. Senator Robert C. Byrd (D, West Virginia), said he had always viewed Mr. Greenspan as the anchor of efforts for fiscal responsibility: "I believe that you were right then, and I am somewhat stunned by the fact that the anchor seems to be wavering today."

But there was some comfort for the opposition to tax cuts: "With today's euphoria surrounding the surpluses, it is not difficult to imagine the hard-earned fiscal restraint developed in recent years rapidly dissipating," Mr. Greenspan said. "We need to resist those policies that could readily resurrect the deficits of the past and the fiscal imbalances that followed in their wake."

In effect, Mr Greenspan proposed that tax-cutting should be linked hand-in-hand to debt reductions, in order to avoid loss of balance if the forecast surpluses didn't eventuate. Such an idea hasn't formed part of deliberations in Congress over tax cuts, and it may be too late to introduce it now.

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