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Greenspan: Tax Cuts Must Be Offset

Reserve Board Chairman Alan Greenspan, Congress
AP / CBS
Federal Reserve Chairman Alan Greenspan has again stated his opposition to President Bush's tax cut package if those reductions aren't offset by other steps to avert huge deficits.

"I haven't changed my view from where I was in February," Greenspan said in a congressional hearing in response to questions about President Bush's tax package.

Greenspan also said Wednesday he remained hopeful that the end of the Iraq war will result in stronger economic growth in the months ahead, but he cautioned that improvement may occur only gradually.

Greenspan said he still holds to the view that he expressed in February — that the so-far lackluster recovery from the 2001 recession would accelerate to faster growth once the uncertainties associated with the Iraq war are removed.

"I continue to believe the economy is positioned to expand at a noticeably better pace than it has during the past year, though the timing and the extent of that improvement remains uncertain," Greenspan said in testimony to the House Financial Services Committee.

However, he cautioned that business remains very skittish about increasing spending or hiring, and gave no hints as to what the Fed might decide about interest rates at its meeting next week, reports CBS News Capitol Hill Correspondent Bob Fuss.

He said he continued to believe that the centerpiece of Mr. Bush's plan, eliminating the double-taxation of stock dividends, would have long-term advantages for the economy.

But Greenspan, whom President Bush recently indicated would be nominated for a fifth term at the helm of the Fed, also said that in light of rising federal budget deficits, he continued to believe that any further tax cuts need to be offset either with cuts in government spending or tax increases in other areas to keep the deficit from soaring.

Greenspan's generally positive comments bolstered the view that it will be content to leave rates unchanged for the foreseeable future unless the economy unexpectedly weakens further.

The Fed last cut interest rates on Nov. 6, pushing its target for the federal funds rate to a 41-year low of 1.25 percent.

In his testimony, Greenspan held out the prospect for further interest rate reductions if necessary, especially if business investment, so far a no-show in the current recovery, continues to lag.

"Unfortunately, the future path of the economy is likely to come into sharper focus only gradually," Greenspan said. "In the interim, we need to remain mindful of the possibility that lingering business caution could be an impediment to improved economic performance."

Greenspan said that the underlying inflation rate, outside of energy and food costs, had remained at a very low level in recent months and signaled that the Fed was on guard to further stimulate the economy to prevent deflation — falling prices — should that become necessary.

"With price inflation already at a low level, substantial further disinflation would be an unwelcome development, especially to the extent it put pressure on profit margins and impeded the revival of business spending," he said.

Greenspan and other Fed officials for several months have been outlining plans the central bank would put into effect to ward off deflation, which has kept Japan, the world's second largest economy, mired in an economic slump for years.

Greenspan reminded the panel that the consensus view of private economists was that there would be a significant rebound in growth in the second half of this year and he said "certainly a number of elements should be working in that direction."

Greenspan made no mention in his prepared remarks about whether he still felt that further tax cuts as proposed by the president would not be needed to jump-start the lagging recovery.

In February, the Fed chairman drew the ire of Bush supporters when he said that he did not believe the president's new round of $726 billion in tax cuts would be necessary to ensure a sustained economic rebound.

Mr. Bush, with his eye on continued layoffs and a high unemployment rate, has continued to lobby hard for his tax package, urging Congress not to reduce it below the $550 billion level set in the House measure.

Even with this policy disagreement, Mr. Bush announced last week that he would nominate Greenspan for another four-year term on the Fed when his current term ends on June 20, 2004.

In his congressional testimony, Greenspan cited the recent rebound in stock prices and a fall in oil prices to bolster the view that conditions were becoming more favorable for both businesses and consumers.

But Greenspan cautioned that the readings on the economy continue to be mixed only six weeks after the U.S.-led invasion of Iraq began.

On the positive side, Greenspan took note of the April rebound in consumer confidence readings, but he also pointed to the sharp jump in new unemployment claims in recent weeks as a cause for concern. Many analysts believe the unemployment rate of 5.8 percent will jump to 6 percent when the April jobless report is released on Friday.

"Going forward, some further unwinding of the economic tensions that have been associated with the situation in Iraq seems likely," Greenspan said. "As that occurs, the fundamental trends shaping the economic outlook should emerge more clearly."