Robert Rubin Praises Greenspan’s Opposition to Deficits

I have a feeling some of you are going to disagree with this:

Rubin Praises Stance Of Greenspan on Deficits, by Nell Henderson, Washington Post:  Former Treasury secretary Robert E. Rubin, wading into a debate about the proper role of the Federal Reserve in national budget policy, Friday praised Alan Greenspan for actively opposing large federal budget deficits during his 18 years as Federal Reserve chairman. Rubin, who served under President Clinton… blamed President Bush's 2001 tax cuts for helping swing the budget from surplus that year to deficits since. … Bush administration officials dispute Rubin's explanation for the current budget deficits. "The greatest single cause of the fiscal surplus of the 1990s was the stock market bubble, which led to an unsustainably high level of economic activity and tax revenues," said Ben S. Bernanke, the chairman of Bush's Council of Economic Advisers. Together with the 2001 terrorist attacks and the war on terror, the collapse of the bubble was the major cause of the shift toward deficits after 2000, said Bernanke, …

Some economists … have criticized Greenspan for venturing beyond monetary policy to offer his personal opinions on fiscal policy  … how to manage deficits or surpluses, and whether and how to alter Social Security. "We question the wisdom of a central bank head taking public positions on political issues unrelated to monetary policy," former Fed vice chairman Alan S. Blinder and Ricardo Reis, both Princeton University economists, wrote in the first paper presented here Friday. But Rubin … took aim at such thinking. "I believe the Fed should not only pursue sound and disciplined monetary policy, but should also stand for the principle of sound and disciplined fiscal policy." … Rubin also countered charges by many Democrats … that Greenspan bears responsibility for current budget deficits because of his public call for tax cuts in January 2001, just days after Bush was inaugurated. When the federal government was facing huge projected budget surpluses in 2001, Greenspan urged Congress to reduce them by cutting taxes. But he also warned that the forecasts could be wrong and suggested the cuts be structured with "triggers" that would alter them automatically if deficits reappeared. … Rubin described Greenspan's 2001 testimony as offering "a truly complex framework for making the decision" and added, "The framework, on balance, was right."

On why the Fed should discuss the deficit, but not politics, see here.   Also, see here for evidence supporting Rubin’s claim about triggers.  Let me be clear.  The tax cuts contributed mightily to the deficit despite Bernanke's protestations otherwise, and Greenspan supported those tax cuts.  Most of us agree so far I think.  The point of departure is on how strongly Greenspan warned about deficits in his 2001 testimony and in subsequent statements.  He did warn about deficits in his testimony, he did talk about triggers (but not in his testimony as noted in the link above), but unlike Blinder and Reis I fault him for saying too little about the deficit, not for saying too much, after his 2001 testimony (to be fair, they are saying he should speak out on matters affecting monetary policy and that is what I am saying too).  Monetary and fiscal policy are directly connected through the government budget constraint and with interest rate targets, questions of debt monetization are important for the Fed to consider as it conducts policy.  I believe we should have heard much more than we did from Greenspan about the implications of budget deficits for monetary policy and hence for the economy more generally.  I'm not talking about his philosophical views on the size of government, privatization, and so on, but rather the implications of deficits for monetary policy and the economy.  I think it is a big mistake for the Fed chair to engage in political dialogue.  However, saying nothing when there is a deficit problem that affects monetary policy is just as political as speaking out.  We should have heard more.

[Update:  Brad DeLong, and others, are also mystified by Bernanke's claims regarding the surplus.]