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Volume CXXXII, Number 15 |
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Green isn't always go
TIMOTHY J. RIEMER
COLUMNIST
This past Tuesday and Wednesday Federal Reserve Chairman Alan Greenspan testified to the Senate Banking Committee and the House Financial Policies Committee for his semi-annual report on monetary policy. Interestingly enough though, his remarks that have garnered the most attention center on fiscal policy. In his testimony, Greenspan spoke in great detail about President Bush's proposed tax plan, specifically noting the danger of incurring such large budget deficits over long periods of time. Greenspan said that taking on such large deficits over a large period on the cusp of the baby boomer generation reaching retirement could be risky.
Chairman Greenspan is in favor, however, of President Bush's plan to cut the dividend tax. Greenspan believes that the elimination of the dividend tax would have enormous positive long-term effects and some short-term effects. In contrast to the Bush plan, though, Greenspan did say that money lost from the elimination of the dividend tax should be taken from some other part of the budget rather than just simply eliminating the tax.
The most important comment that Chairman Greenspan made in two days of testimony, in my opinion, was that there should be no fiscal stimulus at this point. Greenspan feels that the economy showed positive signs in January. More importantly though, Greenspan felt that nothing should be done until the situation in Iraq is resolved. Greenspan feels that the threat of war is clouding the economic outlook and that the true status of the economy at this point is unclear. Greenspan specifically said that "the heightening of geopolitical tensions has only added to the marked uncertainties that have piled up over the past three years, creating formidable barriers to new investment and thus to a resumption of vigorous expansion of overall economic activity."
In case it has not become clear yet, the situation in Iraq is dictating everything. The stock market is going down every day because of concerns surrounding Iraq. Since the Dow peaked on January 14, the stock market has been falling amid worries over Iraq and has lost roughly 12.3 percent. In stark contrast to this, though, the unemployment rate for January dropped to 5.7 percent, well below expectations. Taking these two opposing indicators it is very hard to tell exactly what is going on in the economy, and this uncertainty is due to the fog that the situation in Iraq has created.
Chairman Greenspan feels that although parts of the Bush tax plan would be good for the economy, the time for a fiscal stimulus is not now. Worries over Iraq are holding investors back and therefore the rest of the economy. The status of the economy is holding policy makers in limbo right now because they are unsure of the how well or poorly the economy is actually doing. President Bush has proposed a very drastic fiscal policy, yet, as Greenspan asserts, with the concerns over Iraq it is impossible to tell how much help the economy actually needs. Chairman Greenspan is considered the authority on the economy, and if you ask me, we should listen to him.
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