Fed Chief Tells Panel Need to Cut Deficit Is Urgent

Federal Reserve Chairman Alan Greenspan, in his first public remarks since the presidential election, warned Wednesday that it is more urgent than ever before that the federal deficit be cut to avoid an outbreak of negative economic developments.

Greenspan told members of the bipartisan National Economic Commission that the adverse impact of the deficit has been “muted” in the last several years because of unique circumstances but said that failure to take action soon would mean that the “effects of the deficit will be increasingly felt and with some immediacy.”

The Fed chairman’s testimony was the high point of the first post-election session by the 12-member advisory group, which was charged by Congress with recommending a deficit reduction package that might break the long-standing political stalemate over the issue.

But members of the NEC, displaying the sharp differences that have prevented further progress on narrowing the budget gap in the past, openly disagreed with each other over the need to raise taxes.

Dividing along partisan lines, Sen. Pete V. Domenici (R-N.M.), American Farm Bureau Federation chief Dean R. Kleckner, and former Defense Secretary Donald H. Rumsfeld objected to any effort to boost taxes as part of a deficit reduction plan, while House Budget Committee Chairman William H. Gray III (D-Pa.), AFL-CIO head Lane Kirkland, and Wall Street investment banker Felix G. Rohatyn said that any agreement would be impossible to achieve without a tax hike.

The commission is co-chaired by Democrat Robert S. Strauss, a Washington lawyer, and Republican Drew Lewis, chairman of Union Pacific Corp.

President-elect George Bush has the right to appoint two additional members to the group if he chooses. During his campaign, Bush repeatedly said that he would oppose any tax increase aimed at deficit reduction because he is convinced that Congress would use extra revenues simply to increase spending.

Greenspan, while agreeing with Bush that it would be more effective to reduce the deficit by cutting federal spending rather than raising taxes, said: “How it is done is less relevant than that it be done.”

Greenspan, who has been leading the Fed for a little more than a year, is a life-long Republican who has been gathering increasing respect on Wall Street and among Establishment figures in both parties because of his successful monetary policy moves immediately following last October’s stock market crash.

He is expected to play a key role as an informal adviser to President-elect Bush in urging him to reach an accommodation with Congress aimed at eliminating the deficit by the end of Bush’s first term.

“It is beguiling to contemplate the strong economy of recent years . . . and to conclude that the concerns about the adverse effects of the deficit on the economy have been misplaced,” Greenspan said. “But this argument is fanciful. The deficit already has begun to eat away at the foundations of our economic strength. And the need to deal with it is becoming ever more urgent.”

Reassuring Investors

This week, both Bush and Treasury Secretary Nicholas F. Brady have tried to reassure jittery investors about the incoming Administration’s economic policies by promising to seek stability in the U.S. dollar and to open deficit negotiations quickly with Congress soon after Bush is inaugurated Jan. 20.