Upstaging ‘Maestro’ Greenspan

Federal Reserve Chairman Alan Greenspan ends this week a diminished figure, unsure of both the economy’s direction and his own political standing in a Washington now thoroughly dominated by President Bush.

Just a few short years ago, no praise seemed too extravagant for Greenspan. He was dubbed “Maestro” by Washington Post writer Bob Woodward; leader of “the Committee to Save the World” by Time magazine and actually received an honorary knighthood from Queen Elizabeth.

But when Greenspan cautiously criticized Bush’s new budget in congressional testimony this week, White House aides reacted with cold disdain.

“The president simply has a different view on the importance of helping those who are out of work,” a spokeswoman told reporters aboard Air Force One on Thursday -- a remark that left hanging the damaging implication that Greenspan thinks such help unimportant.

In some ways, Greenspan, who turns 77 next month, was due for a comeuppance. After being widely credited with helping to cause the boom of the 1990s, it was all but certain he would catch flak for the slump of the 2000s. And with the Fed having used almost all of its interest rate powers without delivering a robust recovery so far, the central banker was marked for criticism.

But Greenspan made the critics’ job easier this week. He uncharacteristically singled out details of the president’s plan like the dividend tax cut for comment, rather than sticking to the economic fundamentals. “That was a mistake,” said Allan Meltzer, a Carnegie Mellon University economist and author of the definitive history of the Fed.

And he let himself get caught in a series of rhetorical traps. For instance, he warned against the danger of deficits expected when the baby boomers begin retiring at the end of the decade.

But at the same time, he said that the deficits the administration expects to run up between now and then are entirely manageable.

“He acted as if the two were completely disconnected,” complained Rep. Barney Frank (D-Mass.), a member of the House Financial Services Committee, one of two panels before which the Fed chairman appeared.

“That’s like the guy who’s jumping off the Empire State Building and passing the fourth floor saying, ‘I’m not doing too bad,’ ” quipped Frank.

Greenspan might be forgiven such slips if it were not for what they mean for the economy and economic policymaking.

In essence, the Fed chairman has given Bush the opening the president apparently wanted to claim that the White House, and not the Fed, is now the nation’s premier economic policymaker.

“Here you have the first president in nearly two decades who claims fiscal policy can work and wants to reassert its preeminence,” said University of Wisconsin political scientist Donald Kettl. “Bush thinks he can make the supply-side dream come true, that if you cut taxes growth will come.”

Such claims have got to come as a painful surprise to Greenspan.

For most of his time in office and for most of his predecessor Paul A. Volcker’s, the prevailing wisdom was that fiscal policy -- the tax and spending plans under the control of the White House and Congress -- was at best a necessary evil and at worst a terrible threat.

As a result, both men were given wide latitude to manage the economy using Washington’s other major policy tools, interest rates and money supply, and they did so with impunity.

Indeed, some observers see an element of payback in some of the current president’s recent moves for Greenspan’s refusal to pump up the economy during the failed reelection bid of Bush’s father in 1992.

In a recent article in International Economy magazine, conservative commentator Fred Barnes quotes an unnamed administration official as describing the president’s December firing of Greenspan friend and former Treasury Secretary Paul H. O’Neill as “a shot across the bow” of the Fed chairman.

Barnes describes Greenspan as “hardly a friend of the Bush family after his tight money policy helped doom the reelection chances of President Bush senior.”

Barnes said in an interview that virtually every administration official with whom he has spoken can recite the date -- June 2004 -- when Greenspan’s current term as chairman ends. By then 78, he is not expected to seek another term.

But Greenspan’s problems go well beyond grudges.

After a decade of near-untrammeled influence in which he helped push former President Clinton into the unlikely role of deficit cutter, then presided over an explosion of growth, he has been forced to admit that his powers to direct growth may not have been as great as he -- and much of the public -- thought.

Since last summer, he has argued there was nothing that he or the Fed could have done about the stock market bubble before it popped of its own accord beginning in early 2000. Critics charge that his enthusiastic rhetoric about productivity and the central bank’s willingness to run low interest rates even in the face of spiraling share prices delayed the day of reckoning.

More recently, he has had his support for Bush’s 2001 tax cuts thrown back in his face. He told lawmakers two years ago that Washington was running such large surpluses that it was paying off the public debt too quickly, and should cut taxes to slow the pace.

“I remember that hearing as though it were yesterday,” Sen. Paul S. Sarbanes (D-Md.) mused this week. “The chairman said that a tax cut was needed ‘to smooth the glide path so that the government debt would not be paid off too quickly.’ ” As things turned out, surpluses turned to deficits and fear of a debt payoff vanished.

Finally, Greenspan has had to admit that the economy is not behaving as he had expected. Indeed, he told Congress this week that the threat of war with Iraq and other tensions have so clouded the picture that the Fed will have to wait until the trouble subsides before deciding whether the economy is in good shape or “still laboring under persisting strains and imbalances.”

Such an admission by an economic “maestro” suggests that the economy has slipped beyond the Fed’s control, perhaps to the president, or to Saddam Hussein, or to unknown and unmeasurable forces.

And it suggests that the Fed chairman’s greatest days are behind him.

“If you look at Alan Greenspan, there is no doubt that he’s in the twilight of his career,” said Kettl, who has written a book on Fed leadership.

“He is pretty much at the end of his policy rope,” the analyst said. “He is pretty close to the end of his term.”

And he faces a president “who believes he knows how to manage the economy and doesn’t suffer a lot of independent voices.”