Greenspan, a Fiscal Policy Hack

For the last four years, Alan Greenspan has cast himself as a champion of fiscal responsibility while lending crucial support to policies that undermine it.

Finally this week, while testifying before the Senate, he was asked about his ludicrously bad advice in 2001 that played no small part in our current budgetary morass. He explained, “It turns out we were all wrong.”

Uh, “we”? Not quite.

Certainly Greenspan was wrong when he predicted huge, endless surpluses four years ago. Moderates and liberals, on the other hand, consistently warned that the projected surpluses were unlikely to materialize. We pointed out that the inflated stock market was probably making tax revenues appear too high, that President Bush’s budget assumed that spending would drop far lower than was realistic, that it left no room for emergencies such as war, and that it deliberately underestimated the cost of the Bush tax cut.

The Center on Budget and Policy Priorities, a hugely influential (among liberals, anyway) research group, warned in 2001 that the cost of Bush’s tax cut “exceeds the surplus that is likely to be available under realistic assumptions.” The New Republic published a cover story by New York Times columnist Paul Krugman arguing that “the fiscal predictions that enable Bush to pay for his tax cut and contingency fund are not mere errors but deliberate efforts to deceive the public.” Democrats repeated this theme constantly. “We have said all along these [budget forecasts] are nothing more than projections that could change almost immediately,” insisted Senate Minority Leader Tom Daschle (D-S.D.).

Even more fantastic than the budget projections Greenspan endorsed was the logic he used to justify permanent tax cuts. Greenspan argued that if Congress did not cut taxes, it would either spend the surplus (which he thought would be bad) or use it to pay down the national debt. If it paid down the debt, eventually all the Treasury bills held by the public would disappear. The government would then either have to enact a huge tax cut, causing the economy to grow so fast that inflation would accelerate, or else start buying up stocks, which would amount to socialism. So we had to cut taxes right away in order to prevent the government from one day buying up private industry. This scenario sounds convoluted literally to the point of insanity, but I swear that’s what he said.

Was Greenspan crazy enough to believe that gibberish? Of course not. The truth is that he’s a libertarian at heart who wants to shrink the size of government. He was concocting a macroeconomic rationale to justify policies he found ideologically appealing.

Greenspan’s allies offer three unconvincing defenses to the charge of hackery. First, they defend his nonpartisanship by pointing out that he endorsed Bill Clinton’s 1993 deficit reduction package. That happened, though, when Democrats controlled the White House. Slashing taxes was off the table, so Greenspan did the next best thing by trying to keep a lid on spending. Later, when Republicans took control of the government, he suddenly took less interest in fiscal responsibility.

Second, they point out that he also advocated a “trigger” in 2001 that would cancel out tax cuts if the surplus disappeared. But that recommendation would have made a difference only if Greenspan had said it was a precondition for tax cuts, which he didn’t. And when the surplus did disappear, far from advocating a repeal of long-term tax cuts, Greenspan gave the green light to even more.

Finally, Greenspan apologists say he merely answers the questions he’s asked, so why is it his fault if members of Congress seek his opinion? The answer is, they shouldn’t ask about fiscal policy, and they certainly shouldn’t treat his opinions as received wisdom. Greenspan’s views on monetary policy (setting interest rates) ought to count for a lot. His views on fiscal policy (taxes and spending) should count no more than those of a random senator. The trouble is, if a senator challenges Greenspan, he’s likely to get slapped down. When Harry Reid (D-Nev.) tried to do it, NBC’s Tim Russert thundered, “Should the chairman of the Federal Reserve be described as a political hack?” If Greenspan wants to act like a political hack, he doesn’t deserve lofty treatment.