"The deficit must be maintained at minimal levels."

-- Federal Reserve Chairman

Alan Greenspan, Feb. 11, 2003,

before the Senate Banking Committee

THE CHAIRMAN of the Federal Reserve is taking some thumping from his Republican friends, but he deserves applause for his testimony before Congress this week. Speaking about as plainly as he ever does, Mr. Greenspan said that long-term deficits are bad; that deficits lead to higher interest rates, which in turn crimp economic growth; and that Congress ought not buy into President Bush's proposal to eliminate the double taxation of dividends without figuring out a way to pay for it. All of which would seem rather obvious were it not for the Bush administration's minimizing or outright disputing of all three propositions.

It's not that Mr. Greenspan adopted the Democratic Party line in his testimony before the House Financial Services Committee yesterday and the Senate Banking Committee on Tuesday. He restated his long-standing support for eliminating the double taxation of dividends. But contrary to what Mr. Bush has been arguing and repeated yesterday, Mr. Greenspan said he does not believe this would give the economy a quick boost. Most important, Mr. Greenspan said that any change in the dividend tax should not add to the deficit, a critical point, because the cost of Mr. Bush's proposal would be $385 billion over 10 years. "I do believe it should be revenue neutral," Mr. Greenspan said.

In addition, Mr. Greenspan questioned what seems to have become the operating assumption of both political parties: that a stimulus measure is needed to kick the economy into action, with the only debate being over the mechanism (tax cuts? more spending?) and the price. Mr. Greenspan said he is "not as yet convinced that stimulus is a desirable policy at this particular point." The best medicine, Mr. Greenspan said, would be ending what he delicately termed "the Iraq-related uncertainties."

Rep. Barney Frank (D-Mass.) noted yesterday that one of Washington's favorite games is playing "capture the Fed," and all politicians will find their favorite quotes to pull from Mr. Greenspan's testimony. But to read his statements in their totality is to underscore the foolhardiness of the administration's proposals.