Greenspan Backs Tax Cuts as Way to Trim Surplus

Federal Reserve Chairman Alan Greenspan on Thursday cautiously endorsed the kind of substantial tax cuts advocated by President Bush, saying federal budget surpluses have grown so large that the government must begin shrinking the amount of money it requires Americans to send to Washington.

In surprisingly forthright remarks, Greenspan also said the economy, which has roared along at better than 4% annual growth rates since the mid-1990s, is probably not growing at all anymore and may be tottering on the edge of recession.

Lawmakers on both sides of the tax issue said Greenspan’s comments greatly enhance Bush’s chances of winning a substantial tax cut this year.

“You’re going to start a stampede here, I can tell you right now,” said Sen. Ernest F. Hollings (D-S.C.), an opponent of large cuts.

Separately, analysts said the Fed chairman’s remarks about the economy made it very likely that the central bank’s policymaking body would approve a second big interest rate reduction in less than a month when it meets here next week. In a rare, between-meeting move Jan. 3, the Fed cut a key short-term rate half a percentage point.

“We have seen a very dramatic slowing down” of the economy, Greenspan told the Senate Budget Committee. “Indeed, we are probably very close to zero at this particular moment.”

“The critical issue is . . . whether that degree of contraction is enough to breach the fabric of consumer confidence,” he said later. “At the moment, it has not. . . . But we won’t know how this all works out for a while.”

White House and congressional tax-cut advocates leaped at Greenspan’s comments as a flat-out endorsement of Bush’s 10-year, $1.6-trillion tax-cut package. But Democrats pasted the president’s plan as overly large even as they signaled a readiness to accept $850 billion, or more than half again the roughly $500 billion they’d previously embraced.

Bush said at a Cabinet Room photo opportunity that he was “pleased to hear Mr. Greenspan’s words,” although he added that he did not consider them an outright endorsement. His aides were less restrained.

“We’re very heartened to see that Chairman Greenspan has weighed in on the importance of cutting taxes to protect the economy,” White House spokesman Ari Fleischer said after the central banker’s Capitol Hill appearance.

“We hope that the Congress will join President Bush and Chairman Greenspan in . . . passing the Bush tax cut,” Fleischer said.

In fact, Greenspan did appear to shift on tax cuts. Previously, he favored using Washington’s surpluses to pay down the government’s $3-trillion-plus debt. In Thursday’s testimony, he said mounting surplus estimates now made it possible to do both.

“The most recent data significantly raise the probability that sufficient resources will be available to undertake both debt reduction and surplus-lowering policy initiatives,” he said.

Government budget experts recently revised Washington’s 10-year surplus estimate upward by almost $1 trillion to $5.7 trillion.

Even as he shifted his stance, Greenspan went to considerable--if only partially successful--lengths to distinguish his position from Bush’s. He repeatedly declined to suggest what size he thought the cuts should be. And he appeared to reject the administration’s central argument for cuts: namely, that they could help keep the economy from recession.

Tax cuts “have proved difficult to implement in the time frame in which recessions have developed and ended,” he said.

The Fed chairman said what convinced him to endorse tax cuts was that, without them, Washington will soon accumulate such large surpluses that it will run out of public debt to buy back and would be forced to begin snapping up private stocks and bonds, an outcome he described as politically and economically dangerous.

He argued that as long as the government was going to have to cut taxes anyway, it should start when the economy was slowing. “In today’s context, where tax reduction appears required in any event . . . to assist in forestalling the accumulation of private assets, starting that process sooner rather than later likely would help smooth that transition,” he said.

“And should current economic weakness spread,” Greenspan added, “having a tax cut in place may, in fact, do noticeable good.”

The economy served up further evidence Thursday to support Greenspan’s worries about weakness.

One report showed that labor expenses posted a smaller-than-expected increase last quarter as economic slowdown triggered job cuts, although wage and benefit costs for the year rose by their fastest rate in almost a decade.

The employment cost index rose 0.8% in the three months ended Dec. 31 after rising slightly faster in the previous quarter, the Labor Department said. For the year, the index was up 4.1%, its largest gain since 1991.

Sales of previously owned homes fell in December to their slowest pace in five months as bad weather and weakening growth dampened consumer confidence. Resale of single-family homes dropped 7.4% last month to an annualized pace of 4.87 million homes, according to the National Assn. of Realtors.

The new statistics did little to convince tax-cut opponents of the need for substantial cuts or to protect Greenspan from their anger. Only moments after the Fed chairman finished his testimony, Sen. Robert C. Byrd (D-W.Va.) charged the Fed chairman with “wavering.”

“Here we are talking about this gargantuan tax cut,” Byrd thundered. “My people are not saying to me, ‘Give us a tax cut.’ ”

Nevertheless, Democratic leaders have appeared to give ground on tax cuts in recent days. Senate Democratic Leader Tom Daschle of South Dakota said Wednesday that he would accept a tax cut of $850 billion over 10 years.

House Democratic Leader Richard A. Gephardt of Missouri also is willing to accept a cut in that range, his spokeswoman said.

Still, Daschle and other Democrats are determined to make the size of the tax cut the central issue of the debate on the overall budget. He says the impact of Bush’s tax cut has been understated: Changes in interest costs and other technical tax changes expected as part of the package, Daschle estimates, would push the true cost to $2.2 trillion.

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Staff writers Janet Hook and James Gerstenzang contributed to this story.

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Employment Cost Index

Percent change in the employment cost index for total compensation, wages and salaries, and benefit costs; seasonally adjusted:

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Fourth quarter 2000: +0.8%

Source: Bureau of Labor Statistics

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Existing-Home Sales

Seasonally adjusted annual rate, in millions of units:

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December: 4.87 million

Source: National Assn. of Realtors