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Wednesday, Feb. 12, 2003

Presenting February 11 his semiannual monetary policy report to Congress, Greenspan gave cautiously optimistic assessment of the potential of the U.S. economy to expand but said worries over the Iraq situation dampens corporate willingness to spend.

"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," the chief of the U.S. central bank said before the Senate Banking Committee.

If the uncertainties diminish, "our more probable expectation," financial conditions should eventually facilitate more vigorous business investment, which is essential for faster economic growth, he said. Business investment also depends on market conditions and the prospects for profits and cash flow, he added.

However, "various initiatives for conventional monetary and fiscal stimulus will doubtless move higher on the policy agenda" if constraints to expansion remain despite easing of risks related to the Iraqi crisis, he said.

Greenspan suggested that Congress should construct the budget using an accounting system that would "lay out more clearly the true costs and benefits of changes to various taxes and outlay programs and facilitate the development of broad budget strategy."

'Without Delay'

But no matter what accounting system is used, he said, budget discipline needs to be reestablished "without delay," especially considering the pending retirements of the baby boom generation, which he said will put a huge burden on public pension and health care systems.

Absent budgetary rules placing caps on spending increases and restricting any tax cuts that create budget deficits, the political bias in favor of increasing deficits is likely to become entrenched, Greenspan said.

"We are all too aware that government spending programs and tax preferences can be easy to initiate or expand but extraordinarily difficult to trim or shut down once constituencies develop that have a stake in maintaining the status quo," he said.

Greenspan cautioned that restoring budget balance will require discipline on both revenue and spending decisions but said the latter "may prove the more difficult."

He said faster economic growth would help containing budget gaps but would not likely provide the full solution to currently projected long-term deficits.

"So, short of a major increase in immigration, economic growth cannot be safely counted upon to eliminate deficits and the difficult choices that will be required to restore fiscal discipline," Greenspan said.

In response to a question, he said he is not convinced that the economy currently needs more economic stimulus.

President Bush has recently proposed sizeable tax cuts to accelerate economic growth now and create favorable economic conditions in the future. The plan was criticized by Democrats who said it would lead to huge budget deficits in the future.

(U.S. Dept. of State Information Line)

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