Federal Reserve Chairman Alan Greenspan, differing sharply with President Bush and his economic advisers, told Congress yesterday that it would be "premature" to cut taxes to stimulate the lagging U.S. economy because the major factor hurting growth is the uncertainty posed by a possible war with Iraq.
"I am one of the few people who still are not as yet convinced that stimulus is a desirable policy at this particular point," Greenspan told the Senate Banking Committee.
His testimony was the first time he has spoken publicly about the administration's proposed 10-year, $665 billion package of tax cuts and is likely to make it more difficult to sell a plan that Bush says is needed to spur the economy. The proposal's centerpiece is cutting the taxation of corporate dividends, an idea Greenspan endorsed yesterday as a way to improve long-term economic growth -- but not short-term stimulus. It shouldn't be passed, he said, unless the revenue loss is offset by other tax increases.
Rising budget deficits already have made some members of Congress uneasy about the president's growth package.
Bush met with a group of moderate Republican senators at the White House yesterday to listen to their concerns about the scope and contents of his proposal -- and to try to shore up support.
Treasury Secretary John W. Snow said yesterday evening that enough evidence of a sluggish economy has accumulated to warrant moving forward aggressively with the president's plan, even in the face of war.
"I don't think we should wait to resolve those uncertainties," he said. "I think we have enough evidence that the economy is underperforming to justify an insurance policy."
Snow also sought to cast Greenspan's testimony as in perfect alignment with the administration's position. He emphasized that Greenspan supported the Bush plan to slash dividend taxation, and he said the chairman's comments on the deficit were meant to rein in government spending, an issue that Bush has also stressed.
"We need to have an intense focus on fiscal prudence," Snow said. "The real problem that underlies deficits is the spending."
But Snow appeared to recast the president's tax proposal as well, calling it "good tax reform" rather than a "stimulus" plan.
"I would not support a policy simply to boost the economy up," he said.
White House spokesman Ari Fleischer made it clear the administration does not expect Congress to focus on the details of a tax package until late April at the earliest.
"You're seeing the beginning of a process," Fleischer said. "And in the end, the president believes that he will get much, if not all, of what he has asked Congress to pass."
Greenspan's call for Congress to wait on tax cuts until after a resolution of the standoff with Iraq resonated immediately with some Republicans.
"That's not a bad idea," said Sen. George V. Voinovich (R-Ohio), who supported Bush's first tax cut but has been an outspoken critic of rising red ink.
Sen. John W. Warner (R-Va.), chairman of the Senate Armed Services Committee, said the government's primary focus has to be confronting Iraq and combating terrorism. If such a focus conflicts with an early push for tax cuts, he said, that should be taken into consideration.
"I think we cannot be unmindful of [Greenspan's] quiet means of sending these messages to Congress," Warner said.
In his testimony, Greenspan said any dividend tax cut -- estimated by the administration at $364 billion over 10 years -- should not add to the budget deficit. "The deficit must be maintained at minimal levels," he said. "I support the program to reduce double taxation on dividends and the necessary other actions in the federal budget to make it revenue-neutral."
The Fed chairman also warned that rising deficits pose a risk to the economy, a stance that differs from that of administration economists, including R. Glenn Hubbard, chairman of the president's Council of Economic Advisers. "Contrary to what some have said, [when deficits go up] it does affect long-term interest rates, it does have a negative impact on the economy," Greenspan said. And he urged that Congress take steps to restore "discipline" to its tax and spending decisions because it would not happen automatically.
"Faster economic growth, doubtless, would make deficits far easier to contain. But faster economic growth alone is not likely to be the full solution to currently projected long-term deficit," he said.
In particular, Greenspan said Congress should fully reinstate budget procedures that required that any tax cuts or increases in mandatory spending programs such as Social Security be offset by other measures to raise revenue or reduce mandatory spending.
In a hearing before the House Budget Committee yesterday, Treasury Secretary Snow said that the administration supports renewing the rules but that they should not apply to the Bush economic plan.
"At the present time, there seems to be a large and growing constituency for holding down the deficit, but I sense less appetite to do what is required to achieve that outcome," Greenspan told the Banking Committee.
Restoring budget discipline is particularly important, he said, because of the looming rise in spending for Social Security and Medicare benefits when the baby-boom generation begins retiring in large numbers about 10 years from now. While Social Security payroll taxes currently exceed benefit payments, more accurate accounting for the future payments that workers are accruing would show that the program is really running a deficit.
Greenspan's testimony also included his semiannual report to Congress on monetary policy, but he had little new to say about either the economic outlook or the central bank's policy on interest rates.
Business spending on new plants and equipment has been held back as companies adjusted to the overhang of unneeded production capacity created by the investment boom of the late 1990s. But the key reason the economy has not done better recently is the possibility of war with Iraq.
"The heightening of geopolitical tensions has only added to the marked uncertainties that have piled up over the past three years, creating formidable barriers to new investment and thus to a resumption of vigorous expansion of overall economic activity," Greenspan said.
If growth does not improve "despite the removal of the Iraq-related uncertainties," then "various initiatives for conventional monetary and fiscal stimulus will doubtless move higher on the policy agenda," he said. That means further interest rate cuts would be considered even though the Fed's target for overnight rates, at 1.25 percent, is already at its lowest level in four decades.