WASHINGTON – Federal Reserve Chairman Alan Greenspan told Congress Thursday that the U.S. economy has done a good job of withstanding a series of severe blows in the aftermath of the Sept. 11 attacks, but warned a swift return to government spending discipline was vital for economic health.
"To date, the economy appears to have withstood this set of blows well, although the depressing effects still linger and continue to influence, in particular, the federal budget outlook," Greenspan told the House Budget Committee.
The Fed chief told lawmakers he still thought last year's tax cut package -- held by some to be partly to blame for the eroding budget outlook -- had been the right move. But he cautioned that a return to large and extended deficit spending risked driving long-term interest rates up and could imperil economic fundamentals.
The key thrust of Greenspan's testimony appeared to be to try to persuade lawmakers to refocus their efforts on keeping spending under strict control. He said this would be more helpful to the economy than adding more fiscal stimulus through spending or other measures.
"I know there are a lot of people out there arguing that we need very significant fiscal stimulus but the amount of stimulus already in the pipeline already is really quite large," he said.
Greenspan made only a fleeting reference to the current economic situation and offered no clues to policymakers' thinking ahead of the Sept. 24 scheduled meeting of the rate-setting Federal Open Market Committee.
Portions of his testimony echoed his remarks to Congress in July when he similarly said that it will take time for the economy to work through the shocks it has suffered.
He did say during questioning that forecasts made by the Fed in July for real gross domestic product growth of 3-1/2 to 3-3/4 percent in 2002 and a higher 3-1/2 to 4 percent in 2003 "would be somewhat lower" if they were made today.
Financial market participants, intently awaiting Greenspan's comments for hints of his assessment of economic prospects, expressed disappointment at the narrow focus of the testimony.
"It's a bit of a wet firecracker," said economist Richard Yamarone of Argus Research in New York. "We were expecting some insight on the economy and we didn't get that."
Stock prices wilted, with the Down Jones industrial average off about 130 points at midday, as investors apparently decided Greenspan was lukewarm on the economy's prospects but not concerned enough that an interest-rate cut was likely soon. Bond prices rose on the woes of equities.
The economy has been in a halting and uneven recovery from the 2001 recession, prompting some fears it could again tip into a slump.
While his take on the economy's current prospects seemed similar to that offered in July, Greenspan warned that if the United States returned to continuous large spending deficits, there would be serious consequences for the long-term outlook.
"History suggests that an abandonment of fiscal discipline will eventually push up interest rates, crowd out capital spending, lower productivity growth and force harder choices upon us in the future," the Fed chairman said.
In response to questions, Greenspan said low interest rates the United States now enjoys reflect the credibility established during the 1990s when the government ran up hefty surpluses. He said "years of hard effort could be squandered" unless control is kept over spending.
At the beginning of 2001, the Congressional Budget Office was forecasting surpluses of $5.6 trillion over the next 10 years but has steadily ratcheted that estimate down. Last month, CBO said said cumulative surpluses between 2002 and 2011 now would likely total no more than $336 billion.
The U.S. government is expected to post its first full-year budget deficit since 1997 for the fiscal year ending this month. The disappearance of government surpluses has been in part pinned on President Bush's $1.35-trillion tax cut package passed last year -- the idea of which Greenspan supported in congressional testimony at the beginning of 2001.
Last year's tax cuts, as well as additional ones the Bush administration is considering, have become a hot political issue ahead of November's congressional elections.
Democrats maintain they grease the slope for a return to big deficits while Republicans insist they helped soften the economic impact of last year's shocks and that still more reductions are needed to get the economy through a current soft patch and onto a sustained growth path.
Greenspan noted that some budget restraints known as pay-as-you-go rules were set to expire on Sept. 30.
"Failing to preserve them would be a grave mistake," he said, "for without clear direction and constructive goals, the in-built political bias in favor of budget deficits likely will again become entrenched."
The Fed chief's testimony fell one day after the anniversary of the Sept. 11 attacks and was somewhat overshadowed in financial markets by the nearly simultaneous address by Bush to the United Nations on Iraq.
Bush warned the U.N. General Assembly that "action will be unavoidable" against Iraq unless the United Nations forced Baghdad to disarm.
When asked by lawmakers about the potential for such an action, Greenspan said he would not expect a U.S. war with Iraq to lead to recession but that the economy could run into difficulties such a war lasted a long time.
"It (a recession) would surprise me because I don't think that the effect of oil as it stands at this particular stage is large enough to impact the economy unless hostilities were prolonged," he said.
Greenspan also said he believes that foreign diplomacy and military strategy ought not to take into consideration the impact on the American economy.