Federal Reserve Chairman Alan Greenspan delivered his semi-annual congressional testimony yesterday, saying the uncertainties created by a potential war with Iraq have kept businesses from spending, and emphasizing the importance of fiscal budget discipline.
The Bush administration maintains that a war to disarm Iraq may be necessary, and Greenspan said this is one of the factors that blurs the future of the economy.
“The intensification of geopolitical risks makes discerning the economic path ahead especially difficult,” Greenspan said in his prepared remarks.
He added that if the uncertainties over the war with Iraq are cleared, businesses would no longer eschew spending and the economy will be energized.
Business Prof. Richard Sloan agreed with Greenspan’s view and said the unpredictable outcomes of a possible war dent business investment incentives and create a negative force on the economy.
“The longer (tensions with Iraq) go on unresolved, the greater the uncertainty,” Sloan said. “It’s quite possible that we’ll just stick in a stalemate, when the U.N. won’t support the war and the U.S. is reluctant to go in alone.”
Sloan added that although consumer spending has the largest impact on the economy and consumers have recently been steady in spending, the significant role of business investment should not be ignored.
Last week, President Bush presented Congress with a new budget, which forecasts a record high $304 billion deficit this year. Greenspan said the government must be cautious in allowing such large deficits to accumulate.
While Greenspan said he supports Bush’s plan to cut dividend taxes, he criticized the president’s overall $1.3 trillion tax cut by questioning whether the economy needs more stimulus.
But while criticizing the Bush policy, Greenspan said he is more concerned with the government’s spending than its income.
“Re-establishing budget balance will require discipline on both revenue and spending actions, but restraint on spending may prove the more difficult,” Greenspan said in his speech.
Sloan said the proposed tax cut is aimed at luring consumers to spend with the extra money and thus stimulating the sluggish economy, but he added the benefits to the economy would not be seen in the short run.
“There’s no quick fix … things like the dividend tax cuts could have long term beneficial effects,” he said, adding that the idea of pumping money into households will fix up the economy is “a little bit na