Federal Reserve Chairman Alan Greenspan told Congress yesterday that a year after the terrorist attacks, the US economy appears to have done a good job of withstanding a series of severe blows, "although the depressing effects still linger."
Greenspan cautioned that such problems as the terrorist attacks and the huge drop in stock prices were still having a lingering impact on growth as the country tries to mount a sustained recovery from last year's recession.
"The US economy has confronted very significant challenges over the past year -- major declines in equity markets, a sharp retrenchment in investment spending and the tragic terrorist attacks of last September," Greenspan told the House Budget Committee.
"To date, the economy appears to have withstood this set of blows well, although the depressing effects still linger," Greenspan said.
The Fed chairman said one area of major impact was on the federal budget, which has seen projections of a decade of surpluses of more than US$5 trillion replaced with the return of huge deficits.
The Congress Budget Office is now predicting that the deficit for this budget year, which ends on Sept. 30, will hit US$157 billion after four straight years of surpluses, the longest such stretch that the budget has been in the black in seven decades.
Greenspan said the sharp fall in stock prices, which have been tumbling since the spring of 2000, was a major reason that government revenues have declined and he said this impact ``will likely damp tax revenues relatives to earlier expectations for some time.''
Greenspan said the success Congress had been able to achieve in attacking an entrenched deficit problem was in danger of being lost unless lawmakers retained tough rules that require increases in permanent benefit programs or reductions in taxes to be offset by spending cuts or tax increases in other areas.
"If we don't preserve the budget rules and reaffirm our commitment to fiscal responsibility, years of hard work could be squandered," Greenspan told the budget panel. "Failure to preserve them would be a grave mistake."
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