Washington, Feb. 21 (Bloomberg) -- Alan Greenspan last week may have signaled the end of his tenure as head of the Federal Reserve. He also may have undermined President George W. Bush's proposed $690 billion tax cut. Deficits matter, Greenspan told members of the Senate Banking and House Financial Services committees. Tax cuts weren't needed to boost the economy and would worsen the budget shortfall, he said. On both counts, he differed from the president. Bush is pushing tax cuts to spur growth and is willing to accept record budget deficits in return. The rare public rift between a Fed chairman and a president suggest Greenspan may not seek reappointment next year, analysts said.
``His statements indicate he is leaving the job,'' said William Niskanen, a former economic adviser to President Ronald Reagan and a Greenspan acquaintance for 30 years. Greenspan, who turns 77 on March 6, hasn't said publicly whether he will seek to remain chairman when his term ends in June 2004 after 17 years. The White House has said it isn't searching for a successor. Greenspan's remarks were consistent with what he has been saying for years. The difference is that he pooh-poohed the need for tax cuts and played up their impact on the deficit at the same time that Bush has made tax reductions the centerpiece of his domestic policy.
`Less Appetite'
The Fed chairman's stance ``told us that de facto he doesn't want to be reappointed,'' said Paul McCulley, who oversees about $90 billion at Pacific Investment Management Co. In his budget proposed earlier this month, which assumes passage of the tax cuts, Bush projects a record deficit of $307 billion for the fiscal year beginning Oct. 1. The government had a surplus of $236.9 billion in 2000. There is ``a large and growing constituency for holding down the deficit, but I sense less appetite to do what is required to achieve that outcome,'' Greenspan testified, without specifically citing Bush or his proposals. Greenspan's comments did little to ingratiate him with the Bush household. Bush's father, George H. W. Bush, has said he would have been re-elected in 1992 if Greenspan had cut interest rates more aggressively to pull the economy out of recession. ``I reappointed (Greenspan) and he disappointed me,'' the elder Bush said in a 1998 television interview.
Quicksand?
With his latest testimony, Greenspan also took a position contrary to his support of the current president's initial tax cuts in 2001. Greenspan endorsed those reductions as a way to limit the surging budget surpluses that were then forecast. In confronting a president publicly on an economic initiative, Greenspan is unique among Fed chairmen, said David Jones, former vice chairman and chief economist at Aubrey G. Lanston & Co. ``No one comes close to Greenspan in terms of the amount of budget advice he has given,'' said Jones, a former Fed economist and author of ``Unlocking the Secrets of the Fed,'' published last October. While Greenspan may not have been signaling his desire to step down as chairman, he may have put his reappointment at risk, Jones added. The budget debate ``is quicksand'' for Greenspan, he said. Critics of the Bush plan were quick to pounce on Greenspan's remarks. The Fed chairman delivered ``the kiss of death'' to the proposed tax cuts, said Senate Democratic leader Tom Daschle.
`Outstanding Job'
A group of 34 House Democrats known as the Blue Dog Coalition, which often votes with Republicans, said after Greenspan's testimony that they plan an alternative to the Bush proposal that would be more ``fiscally responsible.'' Republicans also indicated they will weigh the Fed chairman's words. ``The questions he's raised will be considered,'' said Senator Susan Collins, a Maine Republican. ``Greenspan's testimony strengthened the hands of those who opposed any more tax cuts at this time and probably had some effect on wavering Republicans whose instincts were to play ball with the president,'' said Brookings Institution analyst Tom Mann. Publicly at least, White House officials have said nothing to fan the flames. ``The president has a great deal of confidence in Chairman Greenspan,'' White House spokeswoman Claire Buchan said the day after Greenspan's testimony. ``He believes he's doing an outstanding job.'' That reaction was to be expected, said Greg Valliere, chief strategist at Schwab Capital Markets. ``It's inconceivable that the White House would want to get into a food fight with Greenspan,'' he said. ``The markets have been rattled by enough negative news already and don't need that.''
Snow Responds
Still, the administration took steps to reinforce its message and minimize potential damage. On a previously planned trip to Michigan the day after Greenspan's testimony, new Treasury Secretary John Snow said the Fed chairman was wrong on the need for a tax cut. On the deficit, Snow said, the White House was in agreement. ``I don't think we're at loggerheads at all,'' Snow said. ``The chairman quite properly suggested that deficits matter.'' At the same time, Senate Finance Committee Chairman Charles Grassley, an Iowa Republican, backed off of comments he made in January that suggested the main element of the Bush proposal, eliminating the tax investors pay on dividends, lacked sufficient support. ``I should have kept my mouth shut back then,'' Grassley said following a White House meeting that came after Greenspan spoke. Bush yesterday picked up the support of Georgia's Zell Miller, who became the first Senate Democrat to endorse the tax- cut plan.
Dividend Tax Cut
Greenspan did back the president by endorsing the dividend tax cut and saying he favors making permanent a series of tax rate reductions slated to take effect through 2010. He stressed, though, that the tax cuts weren't needed now and that federal spending should be cut or other taxes raised to pay for the two proposals, lest a widening deficit harm the economy's recovery. ``He's certainly irritated the White House,'' said Stephen Moore, president of The Club for Growth, a group that promotes cutting taxes. Some Republicans did lash out at Greenspan. ```He was wrong back when we were having the bubble and he is wrong now,'' said House Republican Tom DeLay, referring to criticism that Greenspan contributed to a three-year slide in stock prices and the recession that began in March 2001 by allowing stocks to surge unnecessarily in the late 1990s.
Greenspan has served four presidents, starting with Ronald Reagan, who appointed him in 1987. He helped persuade Democratic President Bill Clinton to focus on reducing the budget deficit, which had swollen to a then record $290.4 billion in 1992. Clinton had campaigned on increased government spending to help the economy recover. The uninterrupted economic growth of Clinton's eight-year presidency has been partly attributed to elimination of the deficit and reduction of total U.S. debt, earning Greenspan the cover of Time magazine and the title of ``Maestro'' from biographer Bob Woodward. Greenspan's record has been tarnished in recent years. A 32 percent decline in the Dow Jones Industrial Average from its January 2000 peak has heightened complaints that the central bank did nothing to prevent a stock bubble. In rebuttal, Greenspan at an August economic conference said raising interest rates wouldn't have avoided the decline without also harming the economy. ``No low-risk, low-cost, incremental monetary tightening exists that can reliably deflate a bubble,'' he said. //www.quote.bloomberg.com