Byline: THE WASHINGTON TIMES
In his semi-annual testimony before the Senate Banking Committee on Tuesday, Federal Reserve Chairman Alan Greenspan offered a rather sanguine view of the economy's short-term prospects. He was so sanguine, in fact, that he poured cold water on the need for fiscal stimulus. "I am not one of those who is convinced that stimulus is desirable policy at this point," Mr. Greenspan declared, adding, "My own judgment is that fiscal stimulus is premature." In this respect, Mr. Greenspan clearly is in a rather tiny minority in Washington. And, on this issue, we disagree with him, although we think we understand his apprehensions.
The Bush administration and congressional Democrats and Republicans all agree that the economy needs a short-term fiscal boost. Democrats differ from the White House and other Republicans only on the details.
It's worth recalling that the political consensus for a fiscal stimulus package was one that Mr. Greenspan himself helped to form in November. Early that month, the Fed, in a welcome move, surprisingly chopped a hefty half-percentage point off the overnight interest rate it targets. At the time, Mr. Greenspan justified the monetary stimulus as "insurance" against what he considered to be the unlikely event of a "significant decline." If the economy became reinvigorated, he explained, the Fed would reverse the interest-rate reduction.
Since the Fed's action in November, however, the economy has experienced the worst Christmas sales season in years. The labor market remains dead in the water. Last month, the Fed reported that industrial output declined in December; for the fourth quarter, industrial production fell at a 2.4 percent annual rate. The Commerce Department reported two weeks ago that the gross domestic product expanded in the fourth quarter at a paltry annual rate of a 0.7 percent. Personal consumption, which has kept the economic from sinking, expanded at an annual rate of only 1 percent for the final three months of 2002. Since then, consumer confidence has plunged.
At the same time, the other primary engines of the world economy have stalled. The German economy likely expanded by 0.2 percent for all of last year. Its unemployment rate reached 10.3 percent in January, as growth prospects for 2003 continue to ratchet downward. On the day Mr. Greenspan offered his relatively cheerful view of the U.S. economy, the Financial Times reported that the Japanese economy probably contracted in the fourth quarter, aborting the shortest economic recovery in Japan's postwar history. …