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Morning News

Greenspan Believes Tax Cuts Could Help Economy

Aired January 25, 2001 - 11:30 a.m. ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

DARYN KAGAN, CNN ANCHOR: Federal Reserve Chairman Alan Greenspan appears today before the Senate Budget Committee, and he's doing that as we speak. As anticipated, he endorsed the notion of a tax cut.

GREENSPAN: In today's context, where tax reduction appears required in any event over the next several years to assist in forestalling the accumulation of private assets, starting that process sooner rather than later likely would help smooth the transition to longer-term fiscal balance.

And should current economic weakness spread beyond what now appears likely, having a tax cut in place may, in fact, do noticeable good.

KAGAN: But was it as big of a tax cut as President Bush is looking for?

Peter Viles -- Peter, can you hear us?

PETER VILES, CNN CORRESPONDENT: Yes, I can hear you, Daryn.

KAGAN: Just wondering -- that was not an endorsement, but was that as big of an endorsement that President Bush was looking for in terms of the size of the tax cut that Alan Greenspan would think would be a good idea?

VILES: Well, Greenspan didn't get into any numbers about what thinks is appropriate; and he was asked specifically after his testimony: Does -- what does he think of President Bush's tax-cut plan? Which we should add has not been proposed, so we don't really know what that Bush tax-cut plan is.

The chairman said , in any event, it would be inappropriate for him to comment; that's a political decision. But he did give a new argument to a tax cut that we haven't heard before -- a significant new argument because it comes from the most influential economist in the country -- which is that paying off all the federal debt as fast as you can is not the best policy because you end up -- six or eight or 10 years from now in a position where the government has a huge surplus and nothing to do with it; which is a bad situation, he says, economically.

So the smart thing to do is start cutting taxes before that happens. He said sooner rather than later; he said you should phase in a tax cut. But he said we have enough money to do it -- the United States has enough money to do it -- which is a significant change from what he said in the past, which is, the first thing you should do with a surplus is pay down debt.

So this is a significant shift from the Fed chairman. Didn't explicitly endorse the president's tax cut, but I don't think anyone expected an explicit endorsement for a tax cut that really doesn't even exist yet.

KAGAN: So, really, the chairman's saying something that kind of goes against our basic instincts when it comes to economics that debt -- at least some -- is not necessarily that bad of a thing?

VILES: Sure -- well, it's not bad. He said a year ago, we ought to pay down this debt as fast as we can because he said it never occurred to him that, realistically speaking, we would get to a point where we're going to pay off all the debt.

When you get to that point, you have to start thinking, what's the government going do with a surplus when it doesn't have any debt? It has to put the money somewhere; there's great pressure on the government -- oh, you ought to invest in this, you ought to invest in that.

That's a bad situation that the federal government should not be in -- with money to put into private investments. And Greenspan is saying we shouldn't get anywhere near that situation -- we should be on a glide path, where the deficit -- the debt goes away and the surplus goes away at the same time.

KAGAN: Meanwhile, the Fed meets next week and they plan to talk interest rates and, perhaps, a cut -- there was that surprise at the beginning of the month.

Did the chairman give any clues as to -- will there be anything to follow that with -- at the end of the month?

VILES: No clues here today on the size of that interest rate cut, but Wall Street and the bond markets are banking on an interest rate cut -- probably another half a percentage point, although some feel it will be a quarter of a percentage point.

Didn't give any real insight into what that number will be. And the best determinate there will be what the numbers show us in the next week of the health of the economy. There have been some signs that maybe the economy's not all that slow. Other signs -- more layoffs today -- Sara Lee, for example.

So the numbers probably will dictate that, but he didn't give any hint of what the size of the interest cut next week might be.

KAGAN: Peter Viles, thank you very much.

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