Washington, (Bloomberg) -- Federal Reserve Chairman Alan Greenspan and White House officials disagreed over the reason for slow U.S. growth and the need for additional stimulus from tax cuts such as those proposed by President George W. Bush.
Greenspan told the House Financial Services Committee the economy doesn't need help because business and consumer spending will pick up once it's clear what will happen with Iraq. White House economic adviser Glenn Hubbard said companies' reluctance to buy new equipment is a bigger restraint on growth.
``Economists don't always agree,'' Hubbard said in remarks to the U.S. Chamber of Commerce. ``Geopolitical risks are a key source of uncertainty in the economy, but I don't think they're the only ones.''
The debate underscores the difficulty Bush may face in winning approval for his $690 billion plan to speed up tax rate cuts already approved by Congress and eliminate double-taxation of corporate dividends. Opponents say the plan benefits mainly the rich, won't do much to aid the economy, or costs too much.
Greenspan's ``comments grossly complicate the president's political calculations and his ability to pass the plan,'' said Stan Collender, a budget analyst with Fleishman-Hillard Inc. ``Greenspan is the ultimate outside influence or third party voter. He gives the Democrats and moderate Republicans the cover to oppose the package on the grounds it will raise the deficit.''
Congressional Rebuke
Greenspan said the economy is likely to grow even without added stimulus. The central bankers expect the economy to grow at a 3.25 percent to 3.5 percent inflation-adjusted rate between the fourth quarter of 2002 and the final three months of this year, Greenspan reported. That's up from a 2.8 percent gain last year.
White House spokesman Ari Fleischer said the administration has a ``reasonable disagreement'' with Greenspan over the need for stimulus. ``The president will err on the side of helping those who look for work,'' he said.
Fleischer noted Greenspan doesn't oppose Bush's dividend tax changes, a position the Fed chairman repeated today. Because it will boost growth, all Americans would benefit, not just the rich, Greenspan said.
``There is no question that this whole program will be a net benefit to everyone in the economy over the long run,'' he said.
Greenspan reasserted his view that the elimination of the tax on dividends would create greater ``flexibility'' in the economy by encouraging more financing with equity versus debt.
`Kiss of Death'
The Fed chairman's comments brought a rebuke from Democratic Representative Barney Frank of Massachusetts, who accused the Fed chairman of backtracking to minimize disagreement with the administration. ``I'm disappointed,'' Frank said.
Greenspan said is concerned about the tax plan's effect on budget deficit, estimated to reach a record $307 billion in the next fiscal year. Higher deficits may mean higher interest rates, he said, crimping an ``extraordinarily important prop'' for the economy.
``If mortgage interest rates were to move up we would find that would have a marked impact on house turnover and clearly on refinancings and the cash outs that are associated with them,'' he said.
Greenspan's comments will make it more difficult to pass the stimulus package, lawmakers said. Senate Democratic Leader Tom Daschle called Greenspan's testimony the ``kiss of death'' for Bush's tax-cut plan.
Dueling Economists
A day after 10 Nobel laureates and 450 economists used a New York Times advertisement to criticize the tax plan, the Treasury released a letter signed by 250 Wall Street and academic economists backing it.
``It is fiscally responsible and it will create more employment, economic growth and opportunities,'' the letter said. Harvard University professor Martin Feldstein, Nobel laureate Vernon Smith, and Michael Boskin, a former chairman of the Council of Economic Advisers, signed it.
Greenspan told House members the risk of war ``makes discerning the economic path ahead especially difficult.'' Once the outcome in the Middle East is clear ``we should be able to tell far better whether we are dealing with a business sector and an economy poised to grow more rapidly -- our more probable expectation,'' he said.
The 17 percent rise in oil prices since the first of the year and a 12 percent jump in gold prices are ``clearly war related and not fundamental,'' he said. So far, however, the cost of the U.S. military buildup in Iraq isn't ``a strain'' on U.S. economic resources, he said.
Spending Caution
U.S. gross domestic product expanded at a 0.7 percent annual rate in the final three months of 2002, the slowest quarter since the July-September 2001. On Nov. 6, Fed policy makers lowered the benchmark overnight bank lending rate by a half percentage point to a 41-year low of 1.25 percent, a move Greenspan called ``insurance against the threat of persistent economic weakness.'' The FOMC had cut rates 11 times in 2001.
The chairman's comments are supposed to reflect views of the central bank's seven governors and 12 district bank presidents. Greenspan said he was speaking for himself and not the other members of the Fed in calling on Congress to restrain spending.
``There should be little disagreement about the need to reestablish budget discipline,'' Greenspan said.
Greenspan recommended lawmakers move to ``accrual'' accounting from the current ``cash'' accounting system, so the actual costs of existing programs and proposed changes would be clear. He called for reinstituting statutory limits on discretionary spending and ``pay-as-you-go'' budget rules that require new spending to be offset by additional taxes or spending cuts elsewhere. Triggers on spending and ``sunsets'' on programs would be ``helpful,'' he suggested.
Greenspan again highlighted that the budget process has to be conscious of the rise in claims on federal outlays as the baby boom generation retires in about a decade.