Federal Reserve Chairman Alan Greenspan strongly urged Congress yesterday to use burgeoning federal budget surpluses to pay down the national debt rather than using the money to finance large new spending programs or big tax cuts.
In response to repeated questions on the issue from both Democrats and Republicans on the Senate Banking Committee, Greenspan said his "first priority would be to allow as much of the surplus to flow through into a reduction in debt to the public."
"In my judgment, that would be, from an economic point of view . . . that would be by far the best means of employing it," he said.
The chairman appeared before the committee for a hearing on his nomination by President Clinton to a fourth four-year term as head of the nation's central bank.
With U.S. unemployment and inflation close to their lowest levels in three decades, both committee Republican and Democrats praised Greenspan and the Fed's monetary policies. Even though financial analysts and investors widely expect the central bank's policymakers to raise their target for overnight interest rates by a quarter-percentage point on Feb. 2 and possibly by more later, no one asked the Fed chairman about that possibility.
The committee chairman, Sen. Phil Gramm (R-Tex.), said: "I believe that by virtual consensus . . . no one has ever had a more distinguished record as chairman of the board of governors of the Federal Reserve Bank.
"Millions of people who don't know that there is a Federal Reserve bank, much less that you're chairman of it, owe you a deep debt of gratitude for your leadership in probably doing more than anyone else on the planet to help produce the strong economy we have today."
Gramm said the committee will formally act to approve the nomination Tuesday morning and take the matter to the Senate floor that afternoon. There is little urgency on the confirmation, as Greenspan's current term doesn't expire until mid-June.
Asked by Gramm to rank the possible uses of the surpluses in descending order, Greenspan said reducing the debt clearly was best, followed by cutting taxes and, finally, boosting spending.
"A central bank is interested in as much fiscal restraint" as possible, the Fed chairman said, because "that usually makes it easier for us" to keep the economy growing in a sustainable way with lower interest rates than otherwise. On the other hand, he added, "the Fed does not respond to fiscal policy," but rather to changes in economic conditions that might be caused by changes in spending and tax policies.
Greenspan stressed that even though the Congressional Budget Office this week revised its projections of future surpluses up significantly, there is a "wide range" of uncertainty about such estimates. For instance, no one fully understands why individual income tax revenue is as high as it is. If the relationship between personal income and tax liabilities went back to where it was a few years ago, the surplus could be eliminated in a few years, he cautioned.
On the other hand, if the acceleration in productivity growth of recent years continues--and he said he sees no sign the acceleration is diminishing--the growth of the economy and incomes could generate much larger surpluses than are currently projected.
"Does that counsel some moderation" in using the surpluses, asked Sen. John Edwards (D-N.C.).
"I think it does," Greenspan replied. There is a portion of the surpluses "that we will not know the permanence of" for several years. If they turn out to be larger than expected, then spending can go up or taxes cut, he said.
In the meantime, reducing the debt lowers real interest rates, he said, which will encourage more investment. Besides, Greenspan said, "surpluses are not gone if you use them to reduce debt, because you can always increase debt again."
Sen. Charles E. Schumer (D-N.Y.) asked if the recent rapid rise in so-called margin debt--money borrowed to buy stock shares and secured by the shares--worries Greenspan.
"Obviously," the Fed chairman replied, adding that he and regulatory officials have been having "considerable conversations" about what if anything should be done. A key concern, he said, is that wealthy investors can easily avoid the margin limit--now set at 50 percent of a share's value--by borrowing against other assets.
"We have been quite reluctant to see restraints on some individuals and not on others," he said.
During his testimony, the Fed chairman also urged the Banking Committee to act quickly on the president's nomination of Fed Vice Chairman Roger C. Ferguson Jr. to a new 14-year term on the central bank's board. Last fall the committee approved his separate nomination to a four-year term as vice chairman but took no action on the new term even though his current one expires next Monday. But board members whose terms have expired are allowed to remain in office until a successor is confirmed.
Sen. Paul S. Sarbanes (D-Md.), the committee's ranking minority member, also brought up the issue of Ferguson's new term and two other vacancies on the board. Clinton has nominated Carol Parry, a banker, to one of the seats, but no action has been taken on that nomination either.
CAPTION: Alan Greenspan testifies during the confirmation hearing yesterday.