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
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.
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