The Reaction to Greenspan's 2001 Testimony

Mark Thoma has done some digging and takes a look at press reaction to Greenspan's 2001 tax cut testimony:

Economist's View: "hat Did Greenspan Say and When Did He Say It?...

Mr. Greenspan told Mr. Sarbanes that the charge was 'frankly unfair' because it neglected the Fed chairman's unambiguous endorsement of 'trigger' mechanisms during the same testimony. 'I advocated tax cuts' in 2001, Mr. Greenspan acknowledged Thursday, 'but I also advocated triggers in the same testimony.' Did he advocate triggers?

While that term is not used directly in his testimony, it is used in a CBS report noted below, the only report I could find explicitly discussing spending restraint mechanisms, and Greenspan does say:

In recognition of the uncertainties in the economic and budget outlook, it is important that any long-term tax plan, or spending initiative for that matter, be phased in. Conceivably, it could include provisions that, in some way, would limit surplus-reducing actions if specified targets for the budget surplus and federal debt were not satisfied. Only if the probability was very low that prospective tax cuts or new outlay initiatives would send the on-budget accounts into deficit, would unconditional initiatives appear prudent.... Indeed, the current economic weakness may reveal a less favorable relationship between tax receipts, income, and asset prices than has been assumed in recent projections.... But the risk of adverse movements in receipts is still real, and the probability of dropping back into deficit as a consequence of imprudent fiscal policies is not negligible. But let me end on a cautionary note. With today's euphoria surrounding the surpluses, it is not difficult to imagine the hard-earned fiscal restraint developed in recent years rapidly dissipating. We need to resist those policies that could readily resurrect the deficits of the past and the fiscal imbalances that followed in their wake.

In my view, he does add quite a bit of caution regarding slipping back into large deficits, cautions that, as noted below, were not reported widely in the press.... However.... Consider the following quote:

But continuing to run surpluses beyond the point at which we reach zero or near-zero federal debt brings to center stage the critical longer-term fiscal policy issue of whether the federal government should accumulate large quantities of private (more technically nonfederal) assets.... I believe, as I have noted in the past, that the federal government should eschew private asset accumulation because it would be exceptionally difficult to insulate the government's investment decisions from political pressures. Thus, over time, having the federal government hold significant amounts of private assets would risk sub-optimal performance by our capital markets, diminished economic efficiency, and lower overall standards of living than would be achieved otherwise....

[W]hen the economy began slipping into deficit and the Trust Fund assets were evaporating, Greenspan did not protest....

Here are the headlines [from January 2001]:

Greenspan Endorses Tax Cuts WASHINGTON, Jan 25, 2001 (AP Online via COMTEX) -- Federal Reserve Chairman Alan Greenspan gave a major boost Thursday to President Bush's plan for across-the-board cuts in taxes...
GOP Raves at Greenspan's Tax Views January 26th WASHINGTON (AP) - President Bush, in office less than a week, has scored an early triumph in his campaign for a $1.6 trillion tax cut, winning Federal Reserve Chairman Alan Greenspan's support for tax relief...
In Policy Change, Greenspan Backs A Broad Tax Cut RICHARD W. STEVENSON (NYT) January 27, 2001... it should not be so big that it would plunge government back into deficit if federal budget surplus fails to materialize as projected...
Greenspan eyes tax cuts January 25, 2001: 2:09 p.m. ET WASHINGTON (CNNfn) - Federal Reserve Chairman Alan Greenspan gave his broadest endorsement of tax cuts to date Thursday... Greenspan said that if it became clear that politicians might be tempted to use the money for major spending initiatives, it would be better to cut taxes. 'It is far better, in my judgment, that the surpluses be lowered by tax reductions than by spending increases,' the Fed chairman said...
Greenspan supports tax cut plan By Gerard Baker in Washington FT.com site; Jan 25, 2001 Alan Greenspan, chairman of the US Federal Reserve, on Thursday threw his weight behind proposals for a large tax cut, giving a powerful boost to the centerpiece of President George W. Bush's economic policy.... That created the real risk that, if budget surpluses continued, the US government would begin to acquire a growing portion of the nation's private financial assets - which would create serious inefficiencies...
Greenspan quick to move with times By Gerard Baker in Washington FT.com site; Jan 26, 2001 Alan Greenspan... found himself repeatedly echoing Keynes's defence...as he explained his remarkable U-turn...
LEX COLUMN Financial Times; Jan 26, 2001 Alan Greenspan's sudden endorsement of President George W. Bush's tax cutting plans looks like smart politics rather than sound economics.... Mr Greenspan worries that in six to seven years this debt will have been repaid and the government will be forced either to acquire private assets or go on a spending spree...
Greenspan Gets Mixed Reviews CBS News, WASHINGTON, Jan. 26, 2001 ...Greenspan urged caution, suggesting that Congress consider some type of trigger to trim government spending or tax cuts if the budget surpluses aren't as large as currently estimated...
Greenspan on tax-cut bandwagon Chicago Tribune - US FT Abstracts; Jan 26, 2001 Federal Reserve chairman Alan Greenspan told the senate budget committee yesterday that... he is ready to support reduced tax rates. Greenspan backs tax cuts as way to trim surplus...
Los Angeles Times - US FT Abstracts; Jan 26, 2001 Federal Reserve Chairman Alan Greenspan gave his endorsement for President Bush's ambitious tax cut program yesterday, citing the expanding budget surplus as reason for lower taxes...
Editorial: Interpreting Mr. Greenspan The New York Times - US FT Abstracts; Jan 26, 2001 Alan Greenspan's approval of tax cuts in his Congressional testimony yesterday should not be misconstrued by Bush as an endorsement of his $1.6 trillion tax cut offer.... Congress should therefore move carefully toward tax cuts...
In policy change, Greenspan backs a broad tax cut The New York Times - US FT Abstracts; Jan 26, 2001 Federal Reserve Chairman Alan Greenspan has given his blessing for a substantial tax cut... but he did warn that any cut should not be so big that it plunged the government into deficit should the federal budget fail to materialize as projected...
Greenspan, in about-face, backs tax cuts The Wall Street Journal - US FT Abstracts; Jan 26, 2001 In a dramatic departure from a long-held view, Federal Reserve Chairman Alan Greenspan yesterday lent his support to the federal government's tax cut package...
Zeal and doubt follow tax-cut blessing The Boston Globe - US FT Abstracts; Jan 26, 2001 The Federal Reserve's Alan Greenspan lent his support to the Republican's plan for a tax-cutting initiative yesterday...
Economic Realities Drove Greenspan The Washington Post. Washington, D.C.: Jan 26, 2001. pg. A.4 [FROM ABSTRACT] Alas, said [Alan Greenspan], it's not that simple. The moment the target is reached and the government stops using its annual surpluses to pay down the national debt, it faces a problem... What to do with the extra cash piling up at the Treasury?...
Bush's Hand Greatly Strengthened Glenn Kessler. The Washington Post. Washington, D.C.: Jan 26, 2001 [FROM ABSTRACT] [Alan Greenspan] dispelled the notion that [Bush]'s plan to cut taxes might be reckless, dangerous or even massive, as former vice president Al Gore charged...

Comments

[Mike]

Any caution Greenspan may have expressed was negated by his muddled doubletalk. Politicians hear what they want to hear. The news media publishes simple headlines to attract readers. He had to know that what he said would be interpreted as a "go ahead signal" to the Republicans to push hard for the tax cuts, but he failed to step forward to clarify the record. Now he cries foul. You have to be born yesterday to buy into Greenspan's nonsense.

[lfs]

Stephen Roach (Tokyo)

In all my years in this business, never before have I seen a central bank attempt to spin the debate as America’s Federal Reserve has over the past six or seven years. From the New Paradigm mantra of the late 1990s to today’s new theories of the current-account adjustment, the US central bank has led the charge in attempting to rewrite conventional macroeconomics and in making an effort to convince market participants of the wisdom of its revisionist theories. The problem is that this recasting of macro is very self-serving. It is a concentrated effort on the part of the Fed to exonerate itself from the Original Sin of failing to address asset bubbles. The result is an ever-deepening moral hazard dilemma that poses grave threats to financial markets.

I am not a believer in conspiracy theories. But the Fed’s behavior since the late 1990s is starting to change my mind. It all began with Alan Greenspan’s worries over “irrational exuberance” on December 5, 1996, when a surging Dow Jones Industrial Average closed at 6437. The subsequent Fed tightening in March 1997 was aimed not only at the asset bubble itself, but at the impacts such excessive appreciation in equity markets were having on the real economy -- consumers and businesses alike. It was a classic example of the Fed playing the role of the tough guy -- the central bank that, to paraphrase the words of former Chairman William McChesney Martin, “takes away the punchbowl just when the party is getting good.” Unfortunately, the tough guys weren’t so tough after all. Predictably, there was a huge outcry on Capitol Hill as the Fed took aim on the US stock market. But rather than stay the course as an independent central bank should, the Fed ran for cover in the face of political criticism. Not only were its initial bubble-containment efforts put aside, but Alan Greenspan went on to champion the notion of a sea-change in the macro climate -- a once-in-a-century productivity miracle that would justify the stock market’s exuberance as rational. That was the Original Sin that has since been compounded in the years that have followed.

Out of that pivotal moment in the late 1990s, a New Economy actually did come into being. But it was not the new economy of ever-accelerating productivity growth that infatuated the New Paradigm Crowd and legions of equity-market speculators. Instead, it was the Asset Economy that enabled consumers and businesses to draw on the pixie dust of a new source of purchasing power -- asset appreciation -- as a means to augment what has since turned into a stunning shortfall of organic domestic income generation.

Unfortunately, the asset-based spending model has given rise to many of the distortions and imbalances evident in the US today. That’s especially true of low saving rates, the housing bubble, high debt loads, and a runaway current account deficit. When the equity bubble burst, asset-dependent American consumers barely skipped a beat. Courtesy of an extraordinary shift to monetary accommodation, the pendulum of asset depreciation quickly swung into property markets; US house-price inflation has since surged to a 25-year high. To the extent that equity extraction from ever-rising property appreciation was viewed as a substitute for organic sources of labor income generation, hard-pressed consumers went deeply into debt to monetize the windfall. As a result, household sector indebtedness surged to nearly 90% of US GDP -- an all-time record and up over 20 percentage points from levels in the mid-1990s when the Asset Economy was born. Secure in the asset-driven spending posture that resulted, consumers saw no need to save the old-fashioned way out of earned labor income. That’s why the personal saving rate has collapsed and currently stands near zero. Asset-based consumption is also at the core of America’s current-account problem. In an income-based accounting framework, the “missing saving” has to come from somewhere. In this case, that “somewhere” is the foreign saver -- giving rise to the current-account and trade deficits required to attract the foreign capital. As a result, the US current-account gap probably exceeded 6.5% of GDP in the first quarter of 2005 -- easily another record and well in excess of the 4% deficit prevailing in the mid-1990s.

This whole story, in my view, remains balanced on the head of a pin of absurdly low real interest rates. And the Fed has certainly been pivotal in nurturing this low-interest-rate regime. In an extraordinary display of policy accommodation, the real federal funds rate is only now moving above the zero threshold after having spent three years in negative territory. Of course, a central bank has little choice to do otherwise if it has made a conscious decision to underwrite the Asset Economy. After all, it takes low interest rates to provide valuation support to most financial assets -- initially stocks, then bonds, and now property. Furthermore, it takes low rates to make refi debt -- and the equity extraction it sponsors -- look attractive from a carrying cost perspective. Low rates also discourage income-based saving by underscoring the paltry returns available to savers in traditional asset classes. A migration to riskier assets -- such as property and “spread” products (i.e., high-yield and emerging market debt) -- is encouraged as a result. And low real rates make it easier to finance an ever-widening current-account deficit -- especially if the incremental flows come from foreign central banks, where there is reason to tolerate subpar returns in exchange for currency competitiveness. In short, without low real interest rates, the Asset Economy -- and all of its inherent imbalances and excesses -- is nothing.

The Fed is not only hard at work in the engine room in keeping the magic alive with a super-accommodative monetary policy but is has also become the intellectual architect of the New Macro. Time and again, since Alan Greenspan rolled out his New Paradigm theory in the late 1990s, senior Federal Reserve policy makers have taken the lead role as proselytizers of a new macro spin that condones the saving, debt, property bubble, and current-account excesses of the Asset Economy. The examples are far too numerous to mention, but consider the following highlights:

* Chairman Greenspan has made light of traditional measures of household indebtedness -- even going so far as to urge consumers to move from fixed to floating rate obligations (see his February 23, 2004, speech, Understanding Household Debt Obligations. Note: All references are to speeches available on the Fed’s website at www.federalreserve.gov).

* Fed governors have also borrowed a page from the Roaring 1990s in denying the possibility of a housing bubble (see Chairman Greenspan’s October 19, 2004, speech, The Mortgage Market and Consumer Debt, and Governor Kohn’s April 1, 2004, speech, Monetary Policy and Imbalances).

* More recently, an army of senior Fed officials -- namely, Chairman Greenspan, Vice Chairman Ferguson, and Governors Bernanke and Kohn -- have unleashed a veritable broadside against the time-honored notion of the current-account adjustment (see their various 2005 speeches, especially Governor Kohn’s April 22 speech, Imbalances and the US Economy, Vice Chairman Ferguson’s April 20 speech, U.S. Current Account Deficit: Causes and Consequences, and Chairman Greenspan’s February 4 speech, Current Account).

* Governor Bernanke has also led the charge in coming up with a new theory of national saving -- that the United States is actually doing the world a favor by absorbing a so-called glut of global saving (see his April 14, 2005, speech, The Global Saving Glut and the U.S. Current Account Deficit); Vice Chairman Ferguson has been on a similar wavelength in dismissing concerns over subpar personal saving (see his October 6, 2004, speech, Questions and Reflections on the Personal Saving Rate).

Is this is an appropriate role for a central bank? In my view, absolutely not. The problem with an activist central bank is that decision makers in the real economy -- consumers and businesspeople alike -- mistake the Fed’s point of view for strategic advice. And so do financial market participants. After hearing the Fed pound the table, consumers feel left out if they don’t spend their housing equity. Business managers felt equally deprived in the late 1990s if their companies didn’t achieve the dotcom-type valuations in the stock market that Chairman Greenspan insisted in the late 1990s and even early 2000 were well grounded in a once-in-a-century productivity miracle. The resulting overhang of excess IT spending was a direct outgrowth of this perceived deprivation. Needless to say, when investors and financial speculators saw the equity train leave the station and the Fed condone the high growth of a productivity-led economy by leaving interest rates low, they saw no reason to believe that a bubble was about to burst. When consumers hear from a Fed chairman that it makes little sense to take on fixed rate debt, they rush to floating rate instruments; not by coincidence, the adjustable rate portion of newly originated mortgage debt shot up in the immediate aftermath of Chairman Greenspan’s comments on consumer indebtedness. And should asset-dependent, saving-short, overly indebted American consumers feel at risk if the Fed assures them that there is no housing bubble -- that the asset-based underpinnings of their decision making are well grounded? A record consumption share in the US economy -- 71% of GDP since 2002 versus a 67% norm over the 1975 to 2000 period -- speaks for itself.

The rhetorical flourishes of America’s central bankers have dug the US economy -- and by definition, a US-centric global economy -- into a deep hole. To this very day, the Fed has never confessed to the Original Sin of condoning the equity bubble. On the contrary, Greenspan & Company have been on the defensive ever since by dismissing the increasingly dangerous repercussions of the original post-bubble shakeout. Far from playing the role of the tough guy that is required of independent central bankers, the Fed has become an advocate of the easy money of a powerful liquidity cycle. One bubble has since begotten another -- from equities to bonds to fixed income spread products (i.e., emerging market and high-yield debt) to property. And financial markets have gone along for the ride -- not just in the US but also around the world as global investors and foreign central banks have rushed with reckless abandon to finance America’s record current-account deficit.

The day is close at hand when US monetary policy must get real. At a minimum, that will require a normalization of real interest rates. Given the excesses that now exist, it may even require a federal funds rate that needs to move into the restrictive zone -- possibly as high as 5.5%. Yes, this would cause an outcry -- perhaps similar to that which occurred in the spring of 1997 on the occasion of the Original Sin. But in the end, there may be no other choice. Fedspeak has taken us into the greatest moral hazard dilemma of all -- how to wean an asset-dependent system from unsustainably low real interest rates without bringing the entire House of Cards down. The longer the Fed waits, the more perilous the exit strategy.

Important Disclosure Information at the end of this Forum

[dogfacegeorgedog]

Greenspan's support for tax cuts has ensured that we will never again have to worry about the possible adverse consequences of a debt-free government. Nor will our children have this worry. Nor will our grandchildren.

[Bernard Yomtov]

As a commenter at Thoma's site points out, if Greenspan was serious about triggers if deficits got big again, shouldn't he be calling for reversal of the Bush cuts? After all, surely the hypothetical triggers he wanted would have fired by now.

[Retief]

Wait a minute. Wasn't that second quote about the dangers of federal accumulation of private assets a huge slam on the idea of private accounts for social security? What makes it significantly less difficult to insulate the government's investment decisions from political pressures in government administered personal accounts than in direct government ownership? Sure its not quite the same, but you're not going to get the politics out of it.

[Cal]

Forgive my memory if it is incorrect, but didn't Paul O'Neill say we needed triggers and that Greenspan supported triggers in their discussions. But when O'Neill reported this after he was s*** canned by Rove, Greenspan publicly denied this and said that his friend's memory and his own memory are at odds. I think Prof. DeLong did a whole thread on this.

Greenspan is a hack. Krugman called him a hack 5 years ago for enabling and dissembling on the Bush tax cut fraud. It is time for the Democrats to expose him as a hack.

[theCoach]

This would seem to open up a political legislative strategy for the Democrats.
Write some triggers into the tax code. This is what is so infuriating about Jeffords late switch, and some of the Dems that voted for Bush's tax cuts.
They should have easily been able to force triggers into the deal.
Personally, I am mostly against triggers, but not as against them as I am the Bush administration, and anything that restrains their idiocy is better than what we have now.
Also, triggers seem like just the sort of thing that the pain brigade, like Russert would be ridiculously enthusiastic about.
I know Brad defends the job he has done at the Fed, but on balance, when including his damaging hackiness, the world would be a better place if no one knew who he was.

[P O'Neill]

For added laughs, go and look at what the White House was saying about debt policy and Greenspan back in January 2001:

http://www.whitehouse.gov/news/usbudget/blueprint/bud01.html

[dogfacegeorgedog]

P O'Neill is right. One snippet:

"Absent policy changes, the Government is projected to accumulate $3.5 trillion in excess cash balances by 2011. If this were all invested in equities, the Government could own 10 percent of the total stock market by that time."

That's why Greenspan wanted tax cuts - to prevent the government from buying a substantial amount of corporate stock with all the surplus cash it would have had otherwise.

Greenspan saved us from creeping socialism.

[dogfacegeorgedog]

Continuing from above:

Greenspan "went on to recommend that the U.S. Government should consider cutting taxes and setting up a system of personal savings accounts within Social Security to pre-empt [governmental involvement in 'private financial markets']."

So tax cuts and private accounts are the two means set out in 2001 to exhaust the surplus so that we the people, through our government, would never own corporate stocks, bonds, and other assets.

Better, I guess, that we the people, through our government, own debt so immense that the mind reels when considering it.

[Robert Waldmann]

Let me do a little snipping here

"Mr. Greenspan told Mr. Sarbanes that the charge was 'frankly unfair' because it neglected the Fed chairman's *unambiguous* endorsement of 'trigger' mechanisms during the same testimony." [snip]

Greenspan : [snip]"Conceivably, it could include provisions that, in some way, would limit surplus-reducing actions if specified targets for the budget surplus and federal debt were not satisfied."

The word "unambiguous" is not in quotation marks. However, "conceivably, it could" doesn't seem to me to even amount to "advocated" let alone an "unambiguous endorsement" (don't know who I'm quoting on the second).

The assertion that there should be triggers unless "the probability is very low" the budget would go into deficit, amounted to little at the time, since Greenspan knew his audience was sure that the probability was very low.

[Hedley Lamarr]

Decades ago, Herblock of the WaPo had a cartoon of Wm McChesney Martin riding a broomstick down a D.C. street,yelling something like "The sky is falling, the sky is falling!"

He needed another one in 2001 with Greenspan yelling, "The surplus will cause deflation, the surplus will cause deflation!"

How many weeks did that fear of AG's turn out to be valid?

[michael ryan]

The guy's a hack.

[dogfacegeorge]

"The President's plan will accelerate this trend to record rates by retiring an historic $2 trillion in debt over the next 10 years."

Who would buy a used car from this guy?

[fred c. dobbs]

Greenspan always includes lots of disclaimers in his testimonies and speeches, so he can easily go back and say: 'Look at what I REALLY said! Those damn reporters and traders are too simple-minded to understand the true depth of my wisdom.'

But he's too clever. He knew what kind of impact his endorsement would have, even if he and others argued half-heartedly for triggers on tax cuts.

It's easy to blame Greenspan for the tax cuts, but he didn't have a vote in the Senate in 2001, and plenty of Democrats did. Why they didn't fight harder for fiscally responsible (temporary) tax cuts?

[piotr]

Waldman: "The assertion that there should be triggers unless "the probability is very low" the budget would go into deficit, amounted to little at the time, since Greenspan knew his audience was sure that the probability was very low."

I would add that Greenspan could feel uncertain about beliefs of his audience, so just in case he dwelled on the horrors that can visit thic country after the federal debt will be paid down. [Mind you, those calamities could be easily averted by tax cut or spending increases ANY TIME during the next 10 years, however robust the growth of tax revenues would be. Averting paying out the debt in 10 years was a rather outlandish priority, and planning for it in the absence of very high confidence that it would happen, bizarre.]

Once the audience was sufficiently terrified of calamities associated with the total retirement of the federal debt, deficts seemed neither probably nor particularly scary.

[kharris]

The rules in Washington change over time. Greenspan wants one rule to be that when a he says something vague, he can turn around years later and call it unambiguous, because he's smart and if Members of Congress can't tell that he was unambiguously endorsing triggers, well they aren't smart and they aren't being fair.

That is not a rule we want. Whatever you think of Greenspan, government exists for our general benefit, not for his specific benefit. If grinding Greenspan into the dirt makes his sort of self-serving blather less attractive to other Washington denizens, then we should do it, because it would be good for the country. It would make sure the rules in Washington don't get worse.

OMB said that last year was a "neutral" year, on a cyclical basis, for the budget. Same this year. That means the entire deficit last year and this year are structural. So yes, Bernard's point is exactly right. If Greenspan unambiguously called for automatic reversal of tax cuts, should they lead to structural deficits, then he should have been calling for tax hikes for well over a year. He has not. Anybody know Barney Frank well enough to plant a question for Greenspan's final monetary policy testimony? For the good of the country?

[Glenn Kessler]

as one of the writers of the articles cited above, I remember that day well. I mentioned Greenspan's notion of triggers but also the fact that it was quickly dismissed by the Bush administration. His testimony quickly changed the political dynamic in favor of Bush's tax cut, and that's how history will remmember it.

I attach my full article:

HEADLINE: Bush's Hand Greatly Strengthened

BYLINE: Glenn Kessler, Washington Post Staff Writer

BODY:

Federal Reserve Chairman Alan Greenspan's endorsement of tax cuts yesterday, after years of preaching the virtues of debt reduction, dramatically strengthened President Bush's negotiating position in the coming tax-cut battle, lawmakers and administration officials said.

Greenspan dispelled the notion that Bush's plan to cut taxes might be reckless, dangerous or even massive, as former vice president Al Gore charged. He embraced the central principle of Bush's $ 1.6 trillion, 10-year tax cut -- cutting individual tax rates -- and seemed to dismiss assertions by Democrats that additional government spending on certain programs has economic merit. And for the first time he explicitly endorsed individual Social Security accounts, a key part of the Bush agenda.

Greenspan's remarks were couched in qualifiers and warnings, and to a large extent represents less of a turnabout than a midcourse correction by the respected economic policy maker. But such nuances were lost amid Greenspan's clear support for broad-based tax reduction.

You could almost hear the ice cracking across the Capitol.

For three years, as Republicans pushed big tax cuts, most Democrats have been resistant and skeptical -- and politically aided by Greenspan's previous emphasis on debt reduction. Democrats scrambled yesterday to emphasize the caveats posed by Greenspan -- while at the same time agreeing that a large tax cut was in order. Already, the votes are there to eliminate the estate tax and reduce the marriage penalty, and now Democrats are warming to the idea of cutting tax rates.

Sen. Max Baucus of Montana, the senior Democrat on the Finance Committee, said Congress will pass a significant tax cut, largely along the lines proposed by Bush, though not quite as large. "I think we will cut marginal rates," Baucus said, referring to the broad tax rates paid by individuals. "A large number of senators are in agreement with what I just said, a working majority on both sides of the aisle."

Stephen Moore, president of the Club for Growth, an influential tax-cut advocacy group, declared: "We supply-siders welcome Alan Greenspan to the movement."

"For four or five years, Greenspan has been an obstacle for Republicans who want to cut taxes," Moore said. "Now that he is an ally, it is a huge advance for Republicans."

Though Greenspan threw cold water on the idea that a tax cut could be implemented quickly enough to head off any possible recession, Bush aides are hopeful that Greenspan's testimony will speed up the timetable for consideration of a tax cut. Many lawmakers have assumed the final dealmaking on a tax cut won't be completed until around October, much too late from the perspective of the White House.

"This may be an opportunity when the political process will be able to meet the economic need," said one White House official.

Greenspan's support for individual Social Security accounts, which were bitterly attacked by Democrats during the campaign, is also politically significant. "I do think that the notion of moving some funds into private accounts is the appropriate thing to do," said Greenspan, who then described his preferred plan by using legislative code words that largely described the approach advocated by Bush.

Greenspan's embrace of Bush's position appears less of a tactical move -- such as when Greenspan specifically endorsed President Clinton's deficit-reduction plan as "credible" in 1993 -- than a product of circumstance. Indeed, Greenspan made it clear he was not endorsing any specific tax plan.

Surplus estimates have surged in the past six months and will increase again next week when the Congressional Budget Office releases its new forecast. This means that just the Social Security surpluses will pay down a large share of debt very quickly, leaving about $ 3 trillion in additional surpluses in the next 10 years.

While legislative gridlock in recent years has blocked tax cuts and allowed for significant debt reduction, Greenspan focused attention on a new concern -- at some point, it becomes uneconomical to buy up every last bond, potentially leaving the government holding billions of dollars in cash or assets.

In the meantime, the economy has slowed dramatically -- nearly to zero growth -- and thus any fear by Greenspan that the economy will overheat from a tax cut has largely evaporated. Moreover, Congress and the Clinton administration went on such a spending binge in the final weeks of last year that Greenspan was increasingly concerned that fiscal discipline had been lost.

It appears likely that Greenspan would have given largely the same testimony if Gore had won Florida and thus the closely divided election. But that would have been Gore's problem, and now it is Bush's gift.

Greenspan has always made clear his preference for across-the-board cuts in marginal rates, in contrast to the targeted tax cuts favored by Democrats. But, in today's political context, it gives Bush a negotiating edge.

Greenspan, in response to questions posed by Sen. Phil Gramm (R-Tex.), also said Bush's tax-cut plan, when measured against the size of the economy, is merely an average-size tax cut. Bush aides have tried to make much the same argument, but without much success in the public perception.

As it became apparent yesterday that news accounts were emphasizing Greenspan's backing of a tax cut, Democratic leaders worked hard to draw attention to Greenspan's warnings that long-term budget projections are highly tentative and that budget policies must recognize that.

"The chairman pointed out that we must approach the surplus with caution," said House Minority Leader Richard A. Gephardt (D-Mo.). "Democrats agree."

Greenspan also suggested some sort of "trigger" that might slow down or halt tax cuts if surplus estimates were not met, an idea last floated by the Clinton administration during the 1994-95 budget battles. But Bush and congressional officials quickly rejected that idea.