Tax Cut Defended

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Byline: Patrice Hill

Federal Reserve Chairman Alan Greenspan yesterday said this year's "modest" tax cut is having only a limited effect on the economy because it is causing long-term interest rates to stay up even as it boosts consumer spending.

The Fed chairman nevertheless repeated his support for tax cuts in the face of repeated attacks by Democrats on the Senate Banking, Housing and Urban Affairs Committee. He said the government will continue to pay off the $3.75 trillion public debt at a satisfactory pace despite the loss of $1.35 trillion in revenue in the next decade.

"A tax cut was a desirable thing to do," he said, while not endorsing the specifics of the plan President Bush signed into law in May.

On another subject, Mr. Greenspan warned Congress not to be too consoled by the recent sharp drop in energy prices because it is the result of falling demand in the weak U.S. and global economies. He said the nation in particular faces a critical shortage of natural gas when demand picks up again.

Mr. Greenspan's latest, lukewarm endorsement of the tax cuts contrasts with the enthusiastic review they have received from many private economists. Most analysts say the $40 billion of rebates being mailed out this month come at an unusually good time when growth in the economy is hanging by a thread.

Mr. Greenspan rejected arguments by Democrats that the tax cuts threaten to lower productivity and savings and create an inflation problem. But he conceded in questioning that they unexpectedly caused interest rates like the ones on 30-year mortgages to level off this year despite the Fed's aggressive campaign to cut rates.

"Long-term, 30-year mortgage rates have not moved appreciably," although the rates on loans for new cars, adjustable-rate mortgages and other consumer debt have come down in line with the Fed's cuts in short-term rates, he said.

"I think it's basically due to a series of things: one, the tax cut; two, expenditure increases, which were higher than expected; and three, the economy," he said, referring to expectations in the financial markets that Congress will not pay off the debt as quickly and the economy will rebound next year.

"I think it's a marginal issue," Mr. Greenspan added, because long-term rates declined "dramatically" at the end of last year in anticipation of the Fed's rate cuts and have not gone up much since then. …