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Greenspan throws damper on permanent tax-cut plan

W By Jonathan Weisman

wASHINGTON – Federal Reserve Chairman Alan Greenspan Wednesday splashed cold water on President Bush’s argument for a quick vote to make last year’s tax cut permanent, telling the congressional Joint Economic Committee that voting now to extend the tax cuts in 2011 would have no short-term positive effect on the economy.

In testimony that will be closely watched by the incoming Republican-controlled Congress, Greenspan characterized the current economic slump as a “soft patch” that does not presage a broader downturn. And he cautioned lawmakers against passing any fiscal stimulus legislation that could exacerbate long-term budget deficits before they approve new controls on the federal budget.

Greenspan’s statements echoed remarks in the 1990s when he was a leading hawk on the federal deficit. The comments will likely inform the debate early next year over whether Congress should vote to extend last year’s 10-year, $1.35 trillion tax cut beyond its 2010 expiration date and whether to pass additional tax cuts that the White House is considering to stimulate the economy.

Bush and congressional Republicans have argued that making the tax cut permanent would help the economy by giving individual taxpayers and businesses certainty that the tax code would not revert to its higher 2001 rates in 2011. The White House showed no sign of retreating from that position Wednesday. Bush pushed again for a permanent extension, saying last year’s tax cut not only helped the economy but helped shrink the deficit, which reached $159 billion last year.

Greenspan did not expressly say whether he supported or opposed an eventual extension of the tax cut.

“I know there’s a presumption that if you make those tax cuts permanent it will add stimulus to the economy. I doubt it,” Greenspan said. “I think only that the market’s already presumed that they are permanent and that the only thing that probably could have a negative effect later on is that when the markets find out they may be wrong. But that’s not a short-term issue.”

A White House official said Greenspan’s statement appeared to be narrowly aimed at the near-term economic response of financial markets. And the president is concerned about the broader economy, including families planning for retirement and businesses planning investment, the official said.

Greenspan offered ammunition to Republicans as well, saying tax cuts already enacted should not be frozen or rolled back, as many Democrats have suggested.

But Democrats say Greenspan has bolstered their arguments against an extension. Greenspan’s comments “were totally contradictory to what the president has claimed,” said Senate Budget Committee Chairman Kent Conrad, D-N.D.

Greenspan offered general praise for legislative mechanisms – such as “sunset” provisions and triggers – that force Congress to periodically reassess tax cuts and spending legislation in light of changing economic and budgetary realities.

To comply with Senate budget rules, last year’s tax cut contained such a “sunset” provision, but Bush has disparaged that rule with a stock phrase, “The Senate giveth, the Senate taketh away.” A White House official called a sudden sunset just bad policy.

Greenspan offered a different view, suggesting that Congress could attach sunset provisions and trigger rules to spending and tax-cut legislation, governing their implementation as far out as 15 years.

“It is essential to get a sense of where the long-term (budget picture) is going,” he said, “and as a consequence of that … we ought to have much more in the way of sunsetting of legislation, merely automatically reviewing legislation to see whether it is fitting into the various priorities which the Congress and the administration have set over the longer term.”

Greenspan’s assessment of the economy was generally optimistic. Contrary to some economists’ fears of a “double dip” recession, he said there is “no evidence, at least up to the moment,” that the economy is “accelerating on the downside.” The Fed’s decision last week to cut the interest rate that the board offers banks by a larger-than-expected half a percentage point was an insurance policy against that unlikely event, he said.

He warned Congress against any quick moves of its own to stimulate the economy, saying the Fed could quickly reverse its decision if inflation creeps back into the economy. Congress probably could not. The coming retirements of the baby-boom generation represent a huge, unavoidable cost to the Treasury that must be paramount in Congress’s mind as it confronts the current budget deficit, he said.

The primary drags on the economy right now are uncertainties about a war with Iraq and lingering concerns over corporate governance. But, he said, the economy will likely resume steadier growth next year, even with a war.

“The economy’s most likely projection is to come out of this soft spot and to start accelerating,” Greenspan said.

Asked about the economic impact of a war with Iraq, he replied: “I would be very doubtful if the impact on the economy is more than modest.”

Bush agreed with Greenspan’s economic assessment. “He uses the word `soft spot.’ I use the words `bumping along.’ Both of us understand that our economy is not nearly as strong as it’s going to be.”

But it appeared the president disagreed with the Fed chairman’s economic prescription. “I sent a signal to Congress that I believe that we need to have further discussions how to best stimulate the economy,” Bush said. “And I’m very serious about that.”

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