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Tuesday, April 26, 2005

What Did Greenspan Say and When Did He Say It?

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. 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.

Based upon this reasoning that the government should not accumulate large sums of private sector assets (held as loans to the public made through financial intermediaries), the Social Security Trust Fund was allowed to lapse.

Greenspan talks throughout his testimony of a zero debt target. He does realize that the Trust Fund assets will need to be present, but he does not believe the government should hold them. Instead, he advocates private accounts. However, if privatization is not in place, he states:

… Short of some privatization, it would be preferable in my judgment to allocate the required private assets to the social security trust funds, rather than to on-budget accounts. To be sure, such trust fund investments are subject to the same concerns about political pressures as on-budget investments would be. The expectation that the retirement of the baby-boom generation will eventually require a drawdown of these fund balances does, however, provide some mitigation of these concerns…

The question I have is why he allowed the Trust Fund to vanish without public comment. Why didn't we hear more from him as this was happening? He knew that a zero budget target without Trust Fund assets in place elsewhere would create deficit problems in the future, but he did not protest. That is hard to understand unless it was part of a broader strategy to force privatization.

The press bears responsibility in this as well. 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    


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…    


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.

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