What Did Greenspan Say and When Did He Say It?

[Originally posted April 26, 2005] Yesterday, in this post, I discussed a Washington Times editorial attempting to absolve Alan Greenspan of responsibility for playing a role in promoting tax cuts that led to the current budget deficit. Quoting from the editorial:

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 iaf 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. So, as far as it goes, the Washington Times editorial is correct.  He did talk about mechanisms to restrain spending and warned about the return of deficits.

However, it is also my view that this does not absolve him of responsibility. ... He knew that a zero budget target ... would create deficit problems in the future, but he did not protest. ... From the time of Greenspan’s testimony on January 25, 2001 until now, the press has missed what Greenspan was really talking about. He was afraid of a large surplus building up and the effect that would have on the private market when the government invested the large surplus in the private sector. To avoid this problem, his solution was to accumulate the Trust Fund surplus in private accounts so that individuals rather than the government would participate in the private market, and to cut taxes. At the time, Krugman stated in a column in the NY Times:

Some people — including, alas, Alan Greenspan — have made it seem as if any purchase of private-sector assets by the trust funds would instantly politicize the financial markets and undermine the foundations of the free-enterprise system. But that's ideology, not analysis; people who have looked seriously at the issue think that these concerns are vastly overblown. There are well-established techniques for protecting government investment accounts from political meddling, such as legal requirements that the funds buy a broad index. Are these techniques imperfect? Maybe — but who would argue that rather than running some slight risks of politicizing the markets, we should squander the money that was supposed to pay for our retirement?

Only a politician with an irresponsible tax cut to sell.

However, when the economy began slipping into deficit and the Trust Fund assets were evaporating, Greenspan did not protest, and importantly, neither did the press.

Here are the headlines from the time. Note that only CBS News talks about trigger mechanisms and very few of the stories mention any caution regarding deficits. None talk about the Trust Fund assets and Greenspan’s remarks in that regard. Here are the headlines:      

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...      

… At that point the government could literally buy back all the outstanding publicly held debt and still have several billion dollars left over. It is this situation Mr. Greenspan is anxious to avoid, since the government will then in effect be holding net private assets…    

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 ...

Greenspan did warn about large deficits. But he didn’t warn about the bigger problem, congress allowing the Trust Fund assets to vanish. Because he failed to protest as the Trust Fund assets were used to fund deficit spending in other parts of government, he is not absolved of all responsibility for our current predicament.

Comments

[lonesome moderate]

There appears to be bad blood between Greenspan and Sarbanes. In the excerpts that I've read from his new book, he singles Sarbanes out for publicly pressuring him (in 1991) to reduce interest rates.

[david]

"He was afraid of a large surplus building up and the effect that would have on the private market when the government invested the large surplus in the private sector."

He believed this because he was a kook. All the hedging and worry and wise man act can't cover up the fact that the above worry is, as Krugman too kindly pointed out, ideological gibberish straight out of the worst excesses of the youngest, know-nothingist Economist staff writer.

Also relevant to this story is his 2005 testimony to Congress that Americablog posted on: http://www.washingtonpost.com/wp-dyn/articles/A36514-2005Mar15.html

That's a very different kind of hedging in 2005, but all to the same end -- Greenspan is always as right as right could be, and nobody gets to say out loud that weird flip comments about housing spikes from the fall of communism are anything but thoughtful analysis.

[david]

Oops, missed the tag, didn't see it was originally 2005.

[donna]

Greenspan was too "libertarian" to realize Clinton was right.

Of course if he was a real libertarian, he wouldn't have been at the Fed at all. Libertarians don't believe in the Fed. ;^)

[save_the_rustbelt]

This could be the smallest of Greenspan's sins.

Suddenly he announces he knew the Iraq war was largely (my word) about oil.

When he was on the public payroll he didn't have the courage to say that.

When he retired he didn't have the courage to say that.

Now that he can profit from a book, he is a profile in courage.

He is disgusting.

[Chris]

Of course, as Mearsheimer and Walt show, the Iraq war was NOT about oil, but Greenspan doesn't want to admit that. I don't think he had any opinion about the reason for the Iraq war when it started. He probably wanted to be as mystified as most Washington insiders or else he just passively accepted the Bush administration lies about it all.

[Chris]

Here is what Mearsheimer and Walt say about the Iraq war and oil:

Probably the most popular argument made about a countervailing force is Herf and Markovits’s claim that the centrepiece of US Middle East policy is oil, not Israel. There is no question that access to that region’s oil is a vital US strategic interest. Washington is also deeply committed to supporting Israel. Thus, the relevant question is, how does each of those interests affect US policy? We maintain that US policy in the Middle East is driven primarily by the commitment to Israel, not oil interests. If the oil companies or the oil-producing countries were driving policy, Washington would be tempted to favour the Palestinians instead of Israel. Moreover, the United States would almost certainly not have gone to war against Iraq in March 2003, and the Bush administration would not be threatening to use military force against Iran. Although many claim that the Iraq war was all about oil, there is hardly any evidence to support that supposition, and much evidence of the lobby’s influence.

[bullbust]

http://www.ft.com/cms/s/0/31207860-647f-11dc-90ea-0000779fd2ac.html

Greenspan alert on US house prices

By Krishna Guha in Washington

Published: September 16 2007 19:40 | Last updated: September 16 2007 21:09

US house prices are likely to fall significantly from their present levels, Alan Greenspan has told the Financial Times, admitting that there was a bubble in the US housing market.

In an interview ahead of the release on Monday of his widely-anticipated memoirs, the former chairman of the Federal Reserve said the decline in house prices “is going to be larger than most people expect”.

But Mr Greenspan said that his successors at the Fed – who meet on Tuesday to set interest rates – would have to be careful not to ease rates too aggressively, because the risk of an “inflationary resurgence” was greater now than when he was Fed chief.

Mr Greenspan said he would expect “as a minimum, large single-digit” percentage declines in US house prices from peak to trough and added that he would not be surprised if the fall was “in double digits”....

...As Fed chairman, Mr Greenspan had talked about “froth” in the housing sector, but never said there was a bubble in the market as a whole. His successor Ben Bernanke has also avoided the word “bubble”.

But Mr Greenspan told the FT that froth “was a euphemism for a bubble”. ...

[ken melvin]

Maestro or the Oracle of Delphi?

[ken melvin]

The 'test' are unreadable.

[calmo]

I wonder how many faithful Greenspan and GWB stalwarts are now facing a difficult choice? w's base must be getting pretty thin, no?
The real tough skin appears to be the media who are likely to jump on AG for the reasons rusty mentions above...but this is another voice like O'Neill's claiming that this administration has no policies, only politicizations.
This is another opening for impeachment proceedings, that could be led by the media drawing attention to "The Maestro" and his criticisms.
But it looks like it's time to ditch this obsequious tag for something like "ex-Fed Chairman".

[Bernard Yomtov]

"It is far better, in my judgment, that the surpluses be lowered by tax reductions than by spending increases," the Fed chairman said.

Who asked him?

This purely political statement has nothing to do with his responsibilities as Fed chairman, and he should not have made it.