By
The Associated Press
WASHINGTON - Federal Reserve Chairman Alan Greenspan told Congress Thursday that rising estimates of budget surpluses make room for a tax cut. He said the U.S. economy has slowed dramatically, signaling that further Federal Reserve interest rate reductions are on the way.
Greenspan's endorsement of tax cuts provided a significant boost for President Bush's effort to reduce taxes. However, Greenspan would not be drawn into a discussion of whether the 10-year, $1.6 trillion package being put forward by Bush is an appropriate size.
Discussing the current economy, Greenspan said, "As far as we can judge, we have had a very dramatic slowing down. We are probably very close to zero at this particular moment."
Wall Street took Greenspan's statements in stride. Two hours into his testimony, the Dow Jones industrials were up about 80 points - just where the index stood when he began speaking. Nasdaq was down 50 points at midday.
Greenspan's comments on economic conditions were the first he has made since the Federal Reserve announced a surprise one-half-point cut in interest rates Jan. 3. The remarks revealed the seriousness with which the central bank views the economy's weakening, which began in the last two months of 2000.
Greenspan said "inflation pressures are well contained."
While he refused to answer a direct question over whether the Fed will cut rates again at its meeting next week, his comments about the sharp slowdown and the absence of inflation pressures sent a strong signal that further rate cuts will be forthcoming.
Greenspan, who previously had expressed a preference for using the projected surpluses to pay down the national debt, said he still believes debt reduction is the best use for the added revenue.
But he said government estimates project more than enough surplus funds to pay off the debt and still cut taxes.
"The sequence of upward revisions to the budget surplus projections for several years now has reshaped the choices and opportunities before us,"Greenspan said.
"The most recent data significantly raise the probability that sufficient resources will be available to undertake both debt reduction and surplus-lowering policy initiatives,"Greenspan said. "Accordingly, the trade-off (between paying down the debt and other possibilities) faced earlier appears no longer an issue."
Greenspan refused in the question period to be drawn into endorsing a specific size for the tax cuts, saying that judgment was best left to Congress and the administration through the political process. Bush is recommending a $1.6 trillion cut over 10 years, a level that Democrats in Congress contend is too large.
Nevertheless, Greenspan's endorsement of the economic soundness of cutting taxes represented a significant victory for the new administration.
Bush and his advisers have said that because of the steep slowdown in economic growth he may accelerate his tax program in an effort to provide insurance that the country does not slip into a recession.
Greenspan endorsed accelerating the tax cuts, saying that would be needed in any event to smooth out the economic impact of the government's goal of eliminating this decade the more than $3 trillion in national debt held by the public.
"And should current economic weakness spread beyond what appears likely, having a tax cut in place may, in fact, do noticeable good,"Greenspan said.
Greenspan, however, noted the hurdles supporters face in such an approach, given the time it will take Congress to approve any tax reductions.
"Such tax initiatives, however, historically have proved difficult to implement in the time frame in which recessions have developed and ended,"Greenspan said, referring to an effort made by then-President Ford in 1975 to lower individual taxpayer withholding rates.
He said even this "easiest of tax changes"was not implemented until four months after Ford proposed it in May 1975, "when the recession was officially over and the recovery was gathering force."
Greenspan was chairman of Ford's Council of Economic Advisers and a number of officials in Bush's administration, including Vice-President Dick Cheney and Secretary of the Treasury Paul O'Neill, held tops posts in the Ford administration.
Greenspan repeated his warnings that Congress should be cautious in devoting the budget surpluses to increased government spending because of the difficulty in trimming established programs if the current budget forecasts turn out to be too optimistic.
He also suggested that Congress should consider some type of trigger that would trim government spending or tax cuts if the budget surpluses aren't as large as currently estimated. He also suggested any tax cuts or spending increases be phased in.
"The reason for caution, of course, rests on the tentativeness of our projections,"Greenspan said, noting that the drop in the stock market over the past year highlighted the fact that economic conditions can change quickly.
He noted the Clinton administration's final budget outlook, just last week, projected the total surplus over the next 10 years at $5 trillion.
Members of Congress said the Congressional Budget Office is likely to project an even higher $5.7 trillion in its new estimate due out next week. That total includes $2.5 trillion in surpluses in the Social Security program, which both Democrats and Republicans have promised to reserve for bolstering that program to prepare for the retirement of the baby boom generation.
