Time to stop blaming Greenspan over taxes

The Bush administration must not use the Federal Reserve chairman as an excuse for failing to cut taxpayers' burden.

Alan Greenspan has stood for many things in his career - inflation-taming, the marvellous 1990s economic expansion. But these days he represents nothing so much as an excuse. The chairman of the Federal Reserve is being cited as the reason why George W. Bush will be unable to cut taxes.

The Greenspan excuse that is generally put forward as an economic - ergo, respectable - argument, runs as follows. Mr Greenspan is an anti-deficit fiend. Given a choice between tax cuts and deficit-cutting, he always favours the latter. Sure, the Grand Old Party may have campaigned on a platform of rolling back the "emergency" tax rises put through to reduce the deficit in the early 1990s.

But Mr Bush can forget about delivering on his promise. Chairman Greenspan thinks such steps are a dangerous gift to the rich, jeopardising national prosperity. He will not sanction them and without him, the president-elect cannot succeed. For all its high tone, this argument has an anti-Republican component.

That is natural. These days the Democratic team departing Washington is happy to acknowledge Mr Greenspan's role in the astounding successes of the 1990s economy. But Democratic leaders were not always so enthusiastic about the Fed's policies. Activists of the first Clinton administration such as Robert Reich, the former Labour secretary, recall that Mr Greenspan spoilt their spending plans in 1993 by persuading Mr Clinton to focus on the deficit. These Democrats feel it is now the Bush administration's turn to see its dreams dashed.

Republicans have done their part to sustain the Greenspan excuse by failing to reject it robustly. Some are afraid that they cannot deliver their cuts, or, as Dennis Hastert, the House speaker, has been warning, at least not all at once. Failure to deliver can be obscured by the Greenspan excuse.

Not everyone subscribes to this iron-clad interpretation of Greenspanism. Not even the venerable chairman himself. Mr Greenspan may have an unparalleled reputation for obfuscation. But he has been remarkably straightforward on deficits and taxes. As he has said in speeches and in testimony, he views both as tools that are appropriate at different times. Deficit-cutting is important - particularly at times of big federal deficits. Tax-cutting is important, too, particularly in times of surplus. It spurs growth directly and prevents growth-slowing government expansion.

It is clear that Mr Greenspan abhors widening deficits and their concomitant, inflation. He thinks it is the job of government to contain them when necessary. In 1993, a year of wide deficit and a steep yield curve (indicating market expectations of strong future inflation), he sounded the alarm: "The hope that we can possibly inflate or grow our way out of the structural deficit is fanciful." Although you do not hear about it much, the chairman has also said that deficits are bad because they necessarily increase the obligations, including tax burdens, of future taxpayers.

But what if deficits are less of a problem, such as now? And what if the yield curve is inverted - an "upside-down humpback" experts sometimes call it - indicating little expectation of inflation?

In these situations, the chairman has not been hostile towards - and has even supported - tax cuts. In 1998, late in a decade that had seen two tax rises, he voiced his concern over the damage of higher taxes. "I generally believe that over the longer run, if you raise marginal rates you will get a lower extension of long-term growth than you would otherwise," he said.

Last spring, Mr Greenspan laid out his position in more detail. "I recognise that growing budget surpluses may be politically infeasible to defend. If this proves to be the case, as I have also testified previously, the likelihood of maintaining a still satisfactory overall budget position over the longer run is greater, I believe, if surpluses are used to lower tax rates rather than to embark on new spending programmes," he told Congress.

In other words, Mr Greenspan sees fresh challenges in the surplus. These challenges come more from the world of Friedrich Hayek, the philosopher, who warned against creeping government expansion, than they do from that of John Maynard Keynes, the economist who also inspired Mr Greenspan. What is more, the chairman's "big government" fears are being borne out. This autumn, surplus-happy lawmakers once again bust their budgets by billions, handing out thousands of pork barrel items varying from $157,000 to the Reindeer Herders Association, to an additional $50m for local transport projects.

So why is it, in this new era, that we never hear about the anti-big- government Greenspan, only about the deficit hawk? The Democratic reasoning is obvious. Some have become convinced that an exclusive focus on deficit cutting is the responsible path. Others believe in the power of tax cuts - perhaps more than some Republicans.

They are wagering that if they can spook the Republicans out of making growth-stimulating cuts, the chances of a prolonged downturn and of Mr Bush looking like a failure will increase. Both these would help Democrats capture Congress in 2002.

And the hesitant Republicans? Mr Greenspan would certainly bolster their quavering spirits if he explicitly endorsed the Bush plan. This blessing however may not be forthcoming - Mr Greenspan has said he will not advocate specific fiscal legislation.

But a Republican president, a Republican House, a split Senate and a weakening and inflation-free economy are all the blessings lawmakers need to make good their promise to voters. Members of Mr Bush's team will spend two days in Austin this week mulling tax-cut strategy. Then they should go to Washington and make it law - having given up the Greenspan excuse.

© Copyright 2001 Financial Times

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