Would Greenspan Endorse Bush's Tax Cut?

W A S H I N G T O N, Jan. 25, 2001 -- The stock market and the fledgling Bush administration are hoping Alan Greenspan will give them what they want today — some sort of stamp of approval to the president's tax cut plan and a clue on how much the Fed will cut rates later this month.

The Fed chairman is expected to reveal — in his usualveiled language — his position on President George W. Bush'scontroversial $1.6 trillion tax cut plan in testimony on"evolving fiscal challenges" to the Senate Budget Committee.

The world's investors will also rifle through his words forhints about how he sees the U.S. economy and clues aboutforthcoming rate reductions.

But opinions vary as to how far Greenspan might go if heshifts from his long-held position that paying down governmentdebt, not tax cuts, should be the top fiscal priority.

"I think he will come out in favor of at least a mild formof the tax cut package," said Anthony Chan, chief economist atBank One Investment Advisors in Columbus, Ohio.

"I don't think he will come out and support the entirepackage but he may provide at least some hints suggesting thatthere is room for at least some of the originally proposed $1.3trillion tax cut."

Watching and Waiting

Even though Wall Street has been abuzz for weeks with talkthat Greenspan could amend his position on taxes, if he doesmake even a partial about-face, it would raise eyebrows in thenation's capital.

Greenspan, whose wisdom on economic matters is respected byRepublicans and Democrats alike, does not make a habit ofshifting with every political wind.

The expectation that the chairman will break new ground inthe heated tax debate is not the only reason Wall Street iseagerly awaiting today's hearing. In talking of the budget,he would be hard-pressed to avoid the subject of the economy.And any phrase he utters on the current situation will bescoured for clues on interest rate direction.

This is the first testimony Greenspan has given in Congresssince September 21 last year, when he addressed the HouseCommittee on Education and the Workforce about the importanceof math and science education. Prior to that, he last appearedthere for the Fed's monetary policy report in July 2000.

The Fed chairman's last speech came in early December,where he told community bankers in New York that the U.S.central bank must be alert to the risks of a sharp economicslowdown.

The Fed next meets on Jan. 30-31 amid mounting signs thebrakes are on in the domestic economy and consumer confidencehas eroded. On Jan. 3, Greenspan used his discretion to actoutside of the Fed's regularly scheduled meetings and slashedthe federal funds rate by a half point after a hastily arrangedconference call with the Board of Governors.

A Quarter or a Half?

Analysts widely believe another cut is in store on Jan. 31.However, a guessing-game is taking place over whether the cutwill be a quarter-percentage point or another half-point.

"I definitely believe there will be a rate cut," saideconomist Lynn Reaser of Banc of America Capital Management inSt. Louis. "The only question is whether it will be 25 or 50basis points."

Reaser said she thought Greenspan would be careful to keephis options open, declining to give any truly telling hintsabout the size of a potential move.

Similarly, Reaser agreed with Chan that he would hedge hisbets on the issue of tax reduction by offering a "limitedendorsement" of the cuts. "The support would probably come inthe context that there is considerable support developing onCapitol Hill for some tax reductions," she said, adding thechairman could help frame the debate.

For the past several years, whenever he has been askedabout tax cuts, Greenspan has listed the fiscal priorities inthis way: Paying down the debt first, followed by tax cuts andlastly by spending increases.

But Greenspan, a Republican with deeply held free-marketbeliefs, has always left himself wiggle room. He has said thatif it became clear that fiscal discipline was about to give wayto a spending binge, then it would be better to cut taxes.

The emphasis on paying down the debt, which was also apriority of President Clinton's administration, was seenas emblematic of how monetary policy and fiscal policy workedin perfect tandem during the Clinton years.

Ironically, that was the case even though Clinton is aDemocrat.

Mending Fences

Bush, whose father's administration irked Greenspan byapplying public pressure to cut interest rates, has already setabout trying to mend fences with the powerful Fed chairman.

The effort has not gone entirely smoothly. Bush's economicadviser Lawrence Lindsey, a former Fed governor who hasgenerally enjoyed a good rapport with Greenspan, scurried toamend his comments last summer after he publicly indicated thatGreenspan favored Bush's tax-cut plan.

The talk behind the scenes was that Greenspan did notappreciate being quoted in that manner.

But that was then. Last summer, the economy was coming offyears of red-hot growth and the last thing many economiststhought it needed was a stimulus in the form of a tax cut.

With the once-booming Internet sector falling on hard timesand rising energy prices dampening consumers' appetite to shop,the economy has suffered a sharp slowing.

The changing economic environment probably lifts obstaclesto Greenspan's willingness to support tax cuts, analysts said.

In a show of his desire to build ties with Greenspan, Bushinvited him for breakfast in his first Washington appointmentafter he emerged the victor in the presidential election.

Analysts said that by loaning a bit of political capital toBush on the tax-cut issue, Greenspan would be doing his part toestablish good terms with the new Bush administration.

"I don't think he will change his fundamental position, butMr. Greenspan is very realistic about the political climate,"said Douglas Lee, president of Economics From Washington.