Greenspan Cites War Risks To Economy

Federal Reserve Chairman Alan Greenspan said Tuesday that uncertainties about a war with Iraq represent the biggest cloud hanging over the nation's struggling economy.

Consumers have been keeping the economy going. But businesses — worried about the war and other economic uncertainties — have been reluctant to make big commitments in capital investment and hiring, forces restraining the recovery, Greenspan said in presenting the Fed's semi-annual economic report card to Congress.

"The intensification of geopolitical risks makes discerning the economic path ahead especially difficult," Greenspan said in prepared testimony to the Senate Banking Committee.

Greenspan said that if "these uncertainties diminish considerably in the near term" then businesses may boost their investment spending and help the economy. He called that "our more probable expectation."

Underscoring the cautiously optimistic outlook, Greenspan released a Fed economic forecast that projected the overall economy would grow at a rate of 3.25 percent to 3.50 percent this year, as measured from the fourth quarter of 2002. That would mark an improvement from 2002's growth rate of 2.8 percent.

The Fed's economic forecast didn't see much change in the nation's unemployment rate at the end of this year, estimating that it would be between 5.75 percent and 6 percent. The jobless rate now stands at 5.7 percent.

In his prepared testimony, Greenspan called on Congress and the Bush administration to exercise fiscal discipline in light of swelling future federal budget deficits.

"There should be little disagreement about the need to re-establish budget discipline," he said.

The administration, in releasing its budget last week, projected record deficits of $304 billion this year and $307 billion next year. Greenspan called that "sobering," especially in light of the looming retirement of the Baby Boom generation, which will place unprecedented demands on the nation's Social Security system.

Greenspan two years ago lent critical support to Mr. Bush's effort to enact a 10-year, $1.35 trillion tax cut. Congress did so in 2001. At the time, Greenspan said the projected surplus of $5.6 trillion gave Congress room to enact the biggest tax cut since the early 1980s.

The administration is hoping that Greenspan will endorse their latest round of $1.3 trillion in tax cuts as a way to energize the economy and to reform the tax system.

However, Democrats hope that Greenspan will caution against such large cuts in light of looming record budget deficits. They have been collecting quotes in which he has said that reducing federal debt is his "first priority" and advising against tax cuts that would lead to deficits, and are likely to ask him about those positions during the question-and-answer period.

In his prepared testimony, Greenspan did not specifically discuss President Bush's new tax cuts. But he did address the argument made by the president's tax-cut supporters, who say reducing taxes would generate enough new economic growth to take care of the deficit problem.

"Short of a major increase in immigration, economic growth cannot be safely counted upon to eliminate deficits and the difficult choices that will be required to restore fiscal discipline," Greenspan said.

Greenspan said to get control of the deficit problem will require that Congress exercise restraint in spending and in tax cuts.

"At the present time, there seems to be a large and growing constituency for holding down the deficit, but I sense less appetite to do what is required to achieve that outcome," he said.

Greenspan's testimony comes as the economy — knocked down by the 2001 recession — is struggling mightily to get back on sure footing.

To help the economy, the Fed slashed short-term interest rates 12 times, starting in January 2001, with the last rate reduction coming in November 2002.

Since that November rate cut, the Fed has opted to hold rates steady at a 41-year low of 1.25 percent, with the hope that it will encourage consumers and businesses to spend and invest more, boosting economic growth.

Greenspan did not give any indication of future Fed action on interest rates. Many economists believe the Fed will probably keep rates at currently low levels through the summer or possibly part of the fall.