Greenspan queries need for economic stimulus

  • Business
  • Thursday, 13 Feb 2003

WASHINGTON: Uncertainty about a possible war with Iraq is making diagnosis of the American economy’s health so tough it would be best to hold off on fresh stimulus for now, according to US Federal Reserve chairman Alan Greenspan. 

In testimony before the Senate Banking Committee that economists and Democrats called a blow to the Bush administration’s plan for a US$695bil package of tax cuts, the Fed chief pressed for a quick return of budget discipline. 

However, in what could be used by the White House in its push for the plan’s core provision – the elimination of double taxation on dividends – Greenspan repeated his long-standing support for the idea, so long as it did not hit tax revenues. 

He stressed in his formal testimony on the state of the US economy and in later questioning that spending and deficit control was vital, and suggested that if “uncertainties” stemming from the Iraq situation were short-lived, the economy might well be poised to grow on its own without more stimulus. 

“Unless and until we can make a judgment as to whether there is underlying deterioration going on – and my own judgment is I suspect not – then stimulus is actually premature,” Greenspan said. 

He said that because the uncertainty could be resolved within the foreseeable future, it would be “more sensible” to wait before launching programmes “which may in fact, from a stimulus point of view, not be necessary”. 

Top US bond dealers took his words as applying to monetary as well as fiscal stimulus. In a Reuters poll conducted after the testimony, most Wall Street primary dealers said they expected the US central bank to keep official interest rates steady for the next few months. 

Analysts said Greenspan’s remarks appeared to further sap the Bush administration’s drive for its economic stimulus programme, which has received a lukewarm reception from many lawmakers and an openly hostile one from Democrats. 

The Bush team maintains the plan is needed to boost a sluggish expansion and create jobs. Democrats, however, fume that it offers disproportionate tax breaks to wealthy Americans, and lawmakers of all stripes are worried about the fact it will drive the US budget into record deficits. 

“There is little doubt the presidential stimulus plan, already wavering in the wind, was dealt a serious body blow,” said Anthony Chan, the chief economist at Banc One Investment Advisors. 

“Our judgment, as best we can make it, is that there seems to be a fairly significant, almost inexorable, endeavour on the part of the economy to move forward but it is being held back by these (geopolitical) forces,” Greenspan said, adding it was unlikely to be a drawn-out condition. 

“If...we are viewing it correctly, then we will find that, at least in my judgment, the discussion of stimulus will probably just go away,” he added. – Reuters  

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