Alan Greenspan's support of the president's tax cuts baffled some economic observers. Now it seems the Fed chairman may be starting to come around.
Published May 12, 2004
Alan Greenspan warned the other day that the growing federal deficit is a "significant obstacle" to economic stability. Not only that, but the idea that the nation can continue to borrow and spend without consequences is flawed, the Federal Reserve chairman said in a speech to the banking industry. "The free lunch has still to be invented," Greenspan deadpanned.
So Greenspan has discovered that there is no free lunch. What took him so long?
When President Bush pushed his ill-conceived 2001 tax cut through Congress, Greenspan was there covering the president's back, saying the slowing economy needed a boost. Never mind that the tax cuts mainly for the wealthiest Americans weren't designed to spark immediate spending.
At the time, Bush had been handed a $200-billion surplus, prompting Greenspan to speculate that there was enough money available to cut taxes and reduce the national debt. That's not how it has turned out. Under the Bush administration's economic policies, the surplus was quickly consumed and replaced with $500-billion of debt.
In 2003, when the president pushed a second massive tax cut through Congress, Greenspan was far too constrained in expressing his doubts. In fact, Greenspan said he could support some further tax reduction as long as Congress reduced spending by an equal amount. Apparently, Congress heard only the first part of that equation.
Greenspan has supported making the tax cuts permanent, even though that would rob the federal government of the revenue necessary to bring fiscal responsibility back to budgeting. And the Fed chairman's pronouncements on spending cuts have focused primarily on Social Security, which is in relatively good shape compared to other government programs. Earlier this year, Greenspan even offset his deficit warnings with a cheery message that productivity had kept the economy healthy.
No one knows for sure what motivated Greenspan to look the other way as the deficit threat cast a longer shadow on the economy. But his speech last week indicated that he might be waking up. "Our fiscal prospects are, in my judgment, a significant obstacle to long-term stability because the budget deficit is not readily subject to correction by market forces that stabilize other imbalances," he said. In other words less cryptic: It's not clear how we're going to get out of this deficit mess.
Many economic observers could see this coming for the past three years, and wondered why Greenspan was enabling the Bush administration's irresponsible behavior. It would be better late than never that Greenspan is coming around, except that the harm could take decades to fix.
