AS IF PRESIDENT BUSH didn't have enough on his hands with his so-called French and German allies, he finds himself in a second war at home with his one-time domestic-policy ally, Federal Reserve Board chairman Alan Greenspan.

Greenspan, who supported the tax cuts that the president pushed through Congress a couple years ago, has laid waste to Bush's tax and stimulus package. Although he supports the elimination of the double taxation of dividends, the Fed chairman told Congress that the lost revenues should be made up by new taxes--or by spending cuts. Deficits, he testified in contradiction to administration economists, can force up interest rates if they persist during good economic times. Democrats (and Senate Republicans opposed to the tax cuts) cheered.

Glenn Hubbard, chairman of the president's Council of Economic Advisers, has been emphasizing what he calls "very prominent downside risks to the economy", a position that supports Bush's argument that a tax cut, and now, is needed to offset those risks.

But Greenspan peppered last week's testimony with phrases that can only be taken as a rebuttal to Hubbard: "business inventories . . . have stayed lean--a circumstance that should help support production this year;" "output has continued to expand;" "relatively strong spending by households;" "the favorable underlying trends in productivity have continued;" "robust advances in residential construction." And the final blow to those pushing hard for the president's stimulus package: "Our more probable expectation" is that once geopolitical risk is removed the "economy [is] poised to grow more rapidly." Greenspan's obvious conclusion: No stimulus needed.

Economic evidence is, of course, notoriously ambiguous. For example, on February 6, the New York Times headlined its jobs market report, "Hiring In Nation Hits Worst Slump In Nearly 20 Years." Two days later readers faced another headline, "Job Market Shows A Rise In January." So you pays your money and you takes your choice.

I'll take Greenspan. Data released after he testified suggest that the manufacturing sector, the hardest hit during the recent slow-down, is recovering: It grew by 0.7 percent in January. And a new forecast by a panel of the National Association of Business Economists is predicting growth at a rate of 2.7 percent this year. The weakening dollar should give exports a boost, looser fiscal policy will add a bit of what Bush calls "oomph" to the economy, and a swift conclusion of the Iraq problem will bring oil prices down to more growth-inducing levels.

Greenspan's position infuriates the supply-siders on the Bush team. To them, the deficit is more than a mere tabulation of revenues and outlays--it is a stick with which to beat free-spending Democrats. They remember how Ronald Reagan used deficits as a reason to cut back on spending on social programs. To these latter-day Reaganauts, every dollar kept out of the hands of the rapacious government, and left in citizens' pockets, is a dollar that will be better spent.

The White House team is saying that the Fed chairman has lost sight of the broader thrust of the president's tax proposals. They claim that Bush has started a major revamp of the tax system, from one that taxes investment and savings, to one that taxes consumption. Rather than make one massive effort to achieve that goal, they say, Bush is chipping away at the problem, with the abolition of the double taxation of dividends and the institution of new tax-advantaged savings plans. They say that these are the first steps on what will be a long road. As the Financial Times perceptively notes, "Little by little, [the administration] has headed towards the distant dream of some Republicans: a tax system based on consumption."

As if a war with the powerful and respected Greenspan is not enough of a distraction from the problems created by perfidious France and a Germany devoid of historical memory, Bush also has to adjudicate a dispute between the free traders in his government and the realpoliticians. Despite the fact that the European scientific community has ruled that genetically modified foods are perfectly safe, Europe's agricultural protectionists have prevented the sale of these grown-in-America foods in the European Union.

European Union negotiators admit privately that they have no chance of winning should the United States trigger a WTO review, which the administration's trade mavens are eager to do. But the State Department, striving mightily to keep as many European nations as possible in America's anti-Iraq "coalition of the willing," is forcing the administration to hold back. Freer trade in agricultural products seems to be the first casualty of war on Saddam.

The odd fact is that the President seems likely to gain a quicker victory over his foreign than his domestic enemies.

Irwin M. Stelzer is director of regulatory studies at the Hudson Institute, a columnist for the Sunday Times (London), a contributing editor to The Weekly Standard, and a contributing writer to The Daily Standard.

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