Washington, Sept. 13: Alan Greenspan, the Federal Reserve chairman, has warned that the economy would suffer if Congress failed to keep the federal budget deficit under control. But he then advised against Democratic efforts to replenish the governmentís coffers by rolling back or delaying the $ 1.3-trillion tax cut signed into law last year by President Bush.
Appearing before the House budget committee, Greenspan said little about the current condition of the economy, disappointing investors on Wall Street, who had hoped for signs of optimism. Stocks closed lower, with the Dow Jones industrial average falling more than 201 points to 8,379.41, as the market was also hurt by concern about a possible war with Iraq and new indicators of economic sluggishness.
Instead of providing clues to Fed interest rate policy, Greenspan injected himself squarely into the partisan debate over the reasons behind the rapid swing from budget surpluses to deficits.
The message of the Fed chairmanís testimony was that a breakdown of budget discipline would lead to higher interest rates and slower economic growth in the long run. Yet in the question-and-answer session, Greenspan seemed to align himself philosophically with Republicans and anger Democrats over how to address the nationís fiscal troubles.
In response to some questions, Greenspan said the specifics about how to deal with the situation were up to Congress, and he urged the House and Senate to extend budget rules, adopted a decade ago with bipartisan support, that theoretically bar tax cuts and spending increases that are not offset elsewhere in the budget.
But at other points he placed himself in the camp of small government, low-tax conservatives, suggesting that domestic spending increases should be tightly limited, that there were long-term economic justifications for additional tax cuts and that it was too late to undo last yearís tax cut, even though much of it is not scheduled to take effect for years.
Many Democrats have felt betrayed by Greenspan for having given Bushís tax cut a qualified endorsement early last year, undermining the Democratic argument that the tax cut was fiscally reckless.