Tax Cuts Won't Come In Time ... Weiss comments

WASHINGTON - Alan Greenspan, Federal Reserve chairman, warned on Thursday that allowing the US budget surplus to grow indefinitely could damage the nation's economic efficiency.

He appeared to lean heavily toward tax cuts and against spending increases.

In a transcript of his testimony to members of the Senate Budget Committee, he said projections of continued budget surpluses "make clear that the highly desirable goal of paying off the federal debt is in reach before the end of the decade."

The decline in the national debt had held down long-term interest rates, lowered the cost of capital and elevated productivity-raising investment. But Mr Greenspan said the government should stop collecting surpluses beyond elimination of the more than $5,000bn national debt since rising surpluses after that point would amount to the federal government accumulating "significant amounts of private assets."

Such a development would "risk sub-optimal performance in our capital markets, diminished economic efficiency and lower overall standards of living than would be achieved otherwise," he said.

He recommended shifting the surplus to the social security trust fund, to prepare for financial burdens of the aging of the baby-boomer generation.

He warned against "a highly rapid and highly undesirable dissipation" of the surplus, but later said that "if long-term fiscal stability is the criterion, it is far better, in my judgment, that the surpluses be lowered by tax reductions than by spending increases."

New spending commitments would be a "drain of resources from the private sector" and "lower the growth potential of the economy."

He encouraged tax cuts that would minimize "distortions, increases efficiency, and enhance incentives for saving, investment, and work."

But he said the short-term stimulative impact of tax cuts to thwart a recession was dubious and had historically "proved difficult to implement," and he warned policymakers to "resist those policies that could readily resurrect the deficits of the past."

In an unusual disclaimer, Mr Greenspan said that he spoke for himself and not for the Federal Reserve.

Following Greenspan's remarks, the odds of a half-point rate cut went down to 20 to 1 in Las Vegas betting pools, but Wall Street was left scratching its head. Here's a hot tip: Come next week, investors won't get the rate cut they're hoping for -- and stocks will drop like a bag of rocks.