Greenspan: War Risk Harming Economic Growth

Federal Reserve Chairman Alan Greenspan said Tuesday that uncertainties over a possible war with Iraq posed "formidable barriers" to business spending and represented the biggest cloud hanging over the nation's struggling economy.

In testimony before the Senate Banking Committee, Greenspan pressed for a quick return of budget discipline, but repeated his longstanding support for the Bush administration's plan's core provision, the elimination of double taxation of dividends.

The Fed chief also said he and his Fed colleagues lean toward the notion that the economy could revive considerably if relieved of some of those war worries.

"Indeed, the heightening of geopolitical tensions has only added to the marked uncertainties that have piled up over the past three years, creating formidable barriers to new investment and thus to a resumption of vigorous expansion of overall economic activity," Greenspan said in remarks prepared for delivery to the Senate Banking Committee.

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.

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."

Greenspan's semi-annual testimony on the economy, delivered amid rancorous debate among lawmakers over Bush administration proposals for sweeping tax cuts, also included a stern warning about the urgent need to restore budget discipline.

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

"We have to be very careful not to let deficits get out of hand," Greenspan said in response to questions about whether new tax cuts are needed.

The Fed chairman urged Congress to renew budgetary rules that would place caps on spending increases and require that any future tax cuts not result in runaway budget deficits.

Greenspan said all of these restraints are critical in light of the fact that the Baby Boom generation will begin retiring early in the next decade, putting huge demands on Social Security and Medicare.

Greenspan did say Tuesday that he supports Bush's proposal to eliminate the double-taxation of investment dividends as a reform of the tax system that would boost business investment. But he agreed with suggestions made by Democrats that the measure should be made revenue neutral, possibly by eliminating corporate tax subsidies to pay the $385 billion cost over 10 years for eliminating taxes on investor dividends.

Greenspan said that currently he does not think the economy needs further economic stimulus and said Congress should spend more time focusing on actions that would bolster long-term 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.

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.

Reuters and the Associated Press contributed to this report.