Federal Reserve Chairman Alan Greenspan and White House officials disagreed over the reason for slow US growth and the need for additional stimulus from tax cuts such as those proposed by President George W. Bush.
Greenspan told the House Financial Services Committee the economy doesn't need help because business and consumer spending will pick up once it's clear what will happen with Iraq. White House economic adviser Glenn Hubbard said companies' reluctance to buy new equipment is a bigger restraint on growth.
"Economists don't always agree," Hubbard said in remarks to the US Chamber of Commerce. "Geopolitical risks are a key source of uncertainty in the economy, but I don't think they're the only ones."
The debate underscores the difficulty Bush may face in winning approval for his US$690 billion plan to speed up tax rate cuts already approved by Congress and eliminate double-taxation of corporate dividends. Opponents say the plan benefits mainly the rich, won't do much to aid the economy, or costs too much.
Greenspan said the economy is likely to grow even without added stimulus. The central bankers expect the economy to grow at a 3.25 percent to 3.5 percent inflation-adjusted rate between the fourth quarter of last year and the final three months of this year, Greenspan reported. That's up from a 2.8 percent gain last year.
In denial
White House spokesman Ari Fleischer said the administration has a "reasonable disagreement" with Greenspan over the need for stimulus. "The president will err on the side of helping those who look for work," he said.
Fleischer noted Greenspan doesn't oppose Bush's dividend tax changes. Because it will boost growth, all Americans would benefit, Greenspan said.
"There is no question that this whole program will be a net benefit to everyone in the economy over the long run," he said.
Greenspan reasserted his view that the elimination of the tax on dividends would create greater "flexibility" in the economy by encouraging more financing with equity versus debt.
Greenspan said the Fed is concerned about the tax plan's effect on budget deficit, estimated to reach a record US$307 billion in the next fiscal year. Higher deficits may mean higher interest rates, he said, crimping an "extraordinarily important prop" for the economy.
"If mortgage interest rates were to move up we would find that would have a marked impact on house turnover and clearly on refinancings and the cash outs that are associated with them," he said.
Greenspan's comments will make it more difficult to pass the stimulus package, lawmakers said. Senate Democratic Leader Tom Daschle called Greenspan's testimony the "kiss of death" for Bush's tax-cut plan.
A day after 10 Nobel laureates and 450 economists used a New York Times advertisement to criticize the tax plan, the Treasury released a letter signed by 250 Wall Street and academic economists backing it.
"It is fiscally responsible and it will create more employment, economic growth and opportunities," the letter said.
Harvard University professor Martin Feldstein, Nobel laureate Vernon Smith, and Michael Boskin, a former chairman of the Council of Economic Advisers, signed it.
Greenspan said he was speaking for himself and not the other members of the Fed in calling on Congress to restrain spending.
"There should be little disagreement about the need to reestablish budget discipline," Greenspan said.
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