Greenspan’s Warning on Deficit Ignores His Role in Its Growth
Is he kidding?
That’s the only possible reaction to Federal Reserve Board Chairman Alan Greenspan’s conclusion last week that the massive federal budget deficit accumulated under President Bush was “unsustainable.” Declared Greenspan: “The principle that I think is involved here ... [is] that you cannot continuously introduce legislation which tends to expand the budget deficit.”
That would be an entirely reasonable -- even urgent -- warning from someone who didn’t bear so much responsibility for the problem he’s describing. Greenspan lamenting higher deficits is like New York Yankees owner George Steinbrenner complaining about inflated baseball salaries.
Let’s recap. When Bush was elected, the nation had enjoyed three consecutive years of federal budget surpluses under President Clinton. The Congressional Budget Office projected that the government was on track to amass surpluses large enough to pay off the publicly held national debt by 2008. That would make the nation debt free for the first time since the presidency of Andrew Jackson.
Greenspan had reliably supported this fiscal discipline under Clinton. But after Bush’s election, Greenspan bent to the prevailing wind. Within days of Bush’s inauguration, he gave his seigniorial blessing to tax cuts in testimony before the Senate Budget Committee.
As Bruce Bartlett, a leading conservative economist, wrote at the time: “With Greenspan’s support ... the last substantive barrier to tax reduction has evaporated.” And Congress, with Greenspan’s critical reassurance, passed the largest of Bush’s massive tax cuts that year.
Greenspan built his argument for tax cuts in 2001 largely on his concern that the projected surpluses would be too large, allowing the government not only to extinguish the debt but also to accumulate financial assets, such as stocks and bonds.
That always seemed a dubious notion. But if that concern was legitimate, it seemed to be pretty well resolved by the time Bush came back for another tax reduction in 2003. The federal budget had already fallen back deeply into deficit under the weight of Bush’s 2001 tax cuts, the economic slowdown and the cost of responding to the Sept. 11 terrorist attacks. Rather than falling, much less falling too fast, the national debt was rising again.
Against that backdrop, surely the great voice of fiscal restraint would counsel caution about burdening future generations with more debt through more tax cuts.
Well, sort of. Greenspan, to his credit, said the second round of tax cuts shouldn’t be passed without offsetting spending reductions. But he never seriously pushed Congress to reconsider the initial tax cuts passed on the obsolete assumption of vast surpluses.
Even today, Greenspan endorses even more borrowing for Bush’s Social Security private investment accounts (if not quite as much as Bush wants), and points at spending cuts as the principal answer to the debt trap that he helped to create. Taken together, Greenspan’s advice paints him more as an activist committed to shrinking government than a dispassionate banker counseling fiscal prudence.
Tax cuts, of course, aren’t the only reason Washington is drowning in debt again. But no one should minimize their impact.
One recent study by the Center on Budget and Policy Priorities, a nonpartisan research group, found that of all the federal policy changes since 2001 that had enlarged the deficit, tax cuts contributed 48%, followed by increases in defense and homeland security at 37%, and domestic spending at 15%.
The best estimate is that over the next 75 years, Bush’s tax cuts will cost $11 trillion -- about triple the projected Social Security shortfall over the same period that Bush has labeled a crisis.
Greenspan really earned a place in the annals of chutzpah when he raised the impending costs of baby boom retirements as a principal reason why Washington should tackle its deficits. It isn’t exactly a news bulletin that large numbers of baby boomers will be retiring at the end of this decade, or that this will swell the costs of Medicare and Social Security.
These trends were well known when Greenspan endorsed tax cuts in 2001. And yet by doing so, he helped sabotage America’s best chance to reduce the burden of those costs for future generations.
Let’s recap again. Clinton’s plan was to use the projected federal surpluses to pay down the national debt. That would have significantly reduced, and eventually eliminated, federal interest payments on that debt (now running just under $180 billion annually). Then he proposed to use those savings to help fund Social Security.
That wouldn’t have solved the problem of an aging society entirely: the exploding costs of Medicare would almost certainly have demanded tougher efforts to control medical costs, as well as reduced services and more taxes. But Clinton’s fiscal strategy represented a good-faith effort by today’s taxpayers to lighten the load on their children.
Instead we increased their burden. After voting ourselves lower taxes and more services (such as the Medicare prescription drug benefit), we have virtually guaranteed that future generations will need to raise their taxes.
As Greenspan noted last week, today’s young people face the prospect of exploding interest costs (projected to exceed $300 billion by 2010) to fund our rising debt -- even as our retirement and the unrelenting rise in healthcare costs saddle them with soaring bills for Medicare, Medicaid and Social Security.
Sure, the kid doesn’t make the bed, but doesn’t that seem a little severe?
Greenspan last week described this slow-motion crisis as if he were some concerned bystander. But in the federal government’s financial crackup, Greenspan’s more like the guy at the party who handed the car keys to a drunk. Now, after the wreckage, he’s sad. But we’d all be better off if he had spoken up when it could have done some good.
Ronald Brownstein’s column appears every Monday. See current and past columns on The Times’ website at www.latimes.com/brownstein.