Fed Chief Urges Lawmakers Not To Splurge

The best thing Congress can do for the economy is to put the federal budget on a path of “significant surplus” for the coming years, Federal Reserve Chairman Alan Greenspan said.

He urged members of the House Budget Committee on Wednesday to resist the lure to increase spending, cut taxes or pursue a new idea such as devoting surpluses to the creation of millions of Individual Retirement Accounts - at least until the surpluses are much more assured.

The IRA suggestion, being pushed by House Budget Committee Chairman John Kasich, R-Ohio, is the latest proposal to be thrown onto the table as government policy-makers face a challenge they haven’t seen in three decades - what to do with a budget surplus.

President Clinton last month proposed a budget for the 1999 fiscal year that projected the first federal surplus since 1969 and urged Congress to “save Social Security first” by reserving the projected excess to deal with the shortfalls coming in the next century when the Baby Boomers begin retiring.

The Congressional Budget Office this week said the economy’s continued good performance will push the budget into surplus one year earlier than Clinton envisioned. It projected surpluses of $8 billion for the current fiscal year and $9 billion next year.

While some Republicans in Congress want to use the surpluses to provide bigger tax cuts, Kasich this week suggested devoting the surpluses to creating a new form of Individual Retirement Accounts for everyone paying into Social Security, putting the investments in private stocks and bonds.

Greenspan agreed that the idea had merit, saying he believed some form of “privatization” of Social Security would ultimately be part of the solution to the Social Security problem.

But he said he still believed the best use of the surpluses in the beginning is to reserve them to pay down the national debt. He said in this way policy-makers would be beginning a “virtuous cycle” in which a declining national debt - now at $5.4 trillion - would mean the government would have to make lower interest payments each year, and that would translate into even bigger surpluses.

All these developments help the overall economy by reducing interest rates that consumers and businesses have to pay, something that is already happening, Greenspan said.

“I think an extraordinary, important amount of confidence in the budget process has been gained in recent years,” he told the committee, adding that this new market confidence “has contributed massively to the extent of prosperity” the country now enjoys.

“Putting the unified budget into significant surplus would be the surest and most direct way of increasing national saving,” Greenspan said.