Senator Chides Head of Federal Reserve

Alan Greenspan and Sen. Hillary Rodham Clinton clashed Tuesday over rosy surplus forecasts the Federal Reserve chairman relied on to support President Bush’s 2001 tax cuts, estimates that turned out to be considerably off the mark.

“It turns out that we were all wrong,” Greenspan conceded at a Senate hearing.

“Just for the record, we were not all wrong, but many people were wrong,” Clinton (D-N.Y.), shot back.

Greenspan lent critical support for Bush’s first-term tax cuts, saying they would stimulate the then-ailing economy. Clinton and many Democrats voted against the tax cuts, arguing that they would mainly benefit the wealthy and that federal deficits would balloon.

In early 2001, “we were confronted at that time with an almost universal expectation amongst the experts that we were dealing with a very large surplus for which there seemed to be no end,” Greenspan said.

The federal government did produce a budget surplus in 2001. But after that, it has been racking up record amounts of red ink.

Greenspan, however, didn’t take back his support for the 2001 tax cut.

“If confronted with the same evidence we had back then, I would recommend exactly what I recommended then,” he said.

The hearing before the Senate Special Committee on Aging mostly dwelt on revamping Social Security.

On that front, Greenspan issued a fresh call to Congress to move promptly to put Social Security on firm financial footing, warning that doing nothing would lead to massive budget deficits and have a major impact on the economy.

The upcoming retirement of 78 million baby boomers will put a huge strain on the Depression-era retirement program and aggravate the country’s already bloated budget deficits, he said.

“Unless the trend is reversed, at some point these deficits would cause the economy to stagnate or worse,” Greenspan said.

The Fed chief again endorsed a key part of Bush’s proposed Social Security overhaul -- to create private investment accounts -- and said officials must proceed slowly in setting them up. But Greenspan also said that Congress must move ahead quickly to do other things to fix the retirement program’s financing problems.

Congress will need to consider possible benefit cuts and higher tax rates before the baby boomers begin retiring, Greenspan said.

But he cautioned that “closing the gap solely with rising tax rates would be problematic” because the high level of taxation that would be required could by itself “severely inhibit economic growth.”

Because “benefit cuts will almost surely be at least part of the solution,” Greenspan said it is imperative for Congress to let future retirees know as soon as possible that all currently promised benefits won’t be forthcoming when they retire.