WASHINGTON, Feb. 11 (UPI) -- A potential war against Iraq is the single biggest threat to economic health, Federal Reserve Board Chairman Alan Greenspan cautioned members of the Senate Banking Committee on Tuesday.
In presenting his half-yearly economic assessment, he warned that geopolitical risks will increase government spending while curbing private spending -- which keeps the economy from growing.
"The intensification of geopolitical risks makes discerning the economic path ahead especially difficult," he said. He added that once those risks were eliminated, it would make a "considerable difference" to growth prospects.
"If these uncertainties diminish considerably in the near term, we should be able to tell far better whether we are dealing with a business sector and an economy poised to grow more rapidly -- our more probable expectation -- or one that is still laboring under persisting strains and imbalances that have been misidentified as transitory," he added.
Indeed, Jon Corzine, D-N.J., noted that the issues of foreign, monetary and fiscal policies were closely intertwined, especially as a war against Iraq could ultimately lead to many years of U.S. occupation of the country -- at heavy cost to taxpayers.
Still, the Fed expects the immediate uncertainties over Iraq to dissipate soon and is fairly upbeat about 2003 growth prospects. Specifically, the Fed projects real gross domestic product growth this year at 3.25 percent to 3.5 percent vs. 2.8 percent in 2002.
It expects the unemployment rate to remain near current levels, 5.75 percent to 6 percent, vs. 5.9 percent in 2002.
Greenspan warned that it was still too early to say whether the cause of the continued economic slump was internal -- structural reasons that monetary and fiscal policy could potentially solve -- or war fears that were beyond the influence of the central bank.
Specifically, he said, it was "premature" to press for sweeping tax cuts and other stimulative measures, given that the cause of economic weakness remained uncertain. He also emphasized the need to keep a lid on spending and seek a balanced budget.
"There should be little disagreement about the need to reestablish budget discipline. The events of Sept. 11 have placed demands on our budgetary resources that were unanticipated a few years ago," he noted.
Indeed, the director of the Office of Management and Budget, Mitch Daniels, has estimated that a war against Iraq could cost up to $50 billion. Former White House economic adviser Lawrence Lindsey, who was forced to resign late last year, said a war in the Middle East could cost taxpayers up to $200 billion.
The cost, of course, would rise considerably depending on how the United States decided to deal with post-war Iraq.
A war would come at a time when the budget deficit is expected to reach record levels of $304 billion this fiscal year and $307 billion the following year, as the Bush administration continues to press for tax cuts to bolster the fledgling economy.
"At the present time, there seems to be a large and growing constituency for holding down the deficit, but I sense less appetite to do what is required to achieve that outcome.
"Reestablishing budget balance will require discipline on both revenue and spending actions, but restraint on spending may prove the more difficult," Greenspan said.
"Faster economic growth, doubtless, would make the deficit far easier to contain. But faster economic growth alone is not likely to be the full solution to currently projected long-term deficits."
Still, Greenspan supported the elimination of the dividend tax, which President George W. Bush has put forward as a key measure to bolster the economy by boosting demand in financial markets. The Fed chairman said that eliminating double taxation would be more for longer-term gains and part of a restructuring of the tax system, rather than a short-term means to buoy the economy. Yet Greenspan emphasized that eliminating the dividend tax would be more effective at the corporate level, rather than the individual level, as it currently is, and would be much more effective as a stimulus measure.
While most senators welcomed his comments on fiscal policy, some questioned whether it was wise for him to make any public comments on it at all -- given that he is solely responsible for monetary policy.
Given that the Fed guards its independence, it "should not undermine the president on fiscal policy," said Jim Bunning, R-Ky.
