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Tuesday, April 26, 2005

Alan Greenspin

Thank you again, Brad DeLong, for continuing to direct me to other great blogs. Via Professor DeLong, today I found Mark Thoma's tidy breakdown of more misdirecting statements from our Federal Reserve Chairman. Chairman Greenspan is always willing to accept the Oscar for Great Economic Performance, but wants us to believe that popcorn-crunching rendered us unable to understand his rôle when the economy goes Waterworld on us. Thoma (and DeLong) slow down the spin so we can get a little closer to the truth.

Blogging at Economist's View, Thoma writes:



What Did Greenspan Say and When Did He Say It?


Yesterday, in this post, I discussed a Washington Times editorial attempting to absolve Alan Greenspan of responsibility for playing a role in promoting tax cuts that led to the current budget deficit. Quoting from the editorial:


Mr. Greenspan told Mr. Sarbanes that the charge was "frankly unfair" because it neglected the Fed chairman's unambiguous endorsement of "trigger" mechanisms during the same testimony. "I advocated tax cuts" in 2001, Mr. Greenspan acknowledged Thursday, "but I also advocated triggers in the same testimony."

Did he advocate triggers? While that term is not used directly in his testimony, it is used in a CBS report noted below, the only report I could find explicitly discussing spending restraint mechanisms, and Greenspan does say:


… In recognition of the uncertainties in the economic and budget outlook, it is important that any long-term tax plan, or spending initiative for that matter, be phased in. Conceivably, it could include provisions that, in some way, would limit surplus-reducing actions if specified targets for the budget surplus and federal debt were not satisfied. Only if the probability was very low that prospective tax cuts or new outlay initiatives would send the on-budget accounts into deficit, would unconditional initiatives appear prudent. … Indeed, the current economic weakness may reveal a less favorable relationship between tax receipts, income, and asset prices than has been assumed in recent projections. … But the risk of adverse movements in receipts is still real, and the probability of dropping back into deficit as a consequence of imprudent fiscal policies is not negligible.

But let me end on a cautionary note. With today's euphoria surrounding the surpluses, it is not difficult to imagine the hard-earned fiscal restraint developed in recent years rapidly dissipating. We need to resist those policies that could readily resurrect the deficits of the past and the fiscal imbalances that followed in their wake.


In my view, he does add quite a bit of caution regarding slipping back into large deficits, cautions that, as noted below, were not reported widely in the press. So, as far as it goes, the Washington Times editorial is correct. He did talk about mechanisms to restrain spending and warned about the return of deficits.

However, it is also my view that this does not absolve him of responsibility. Consider the following quote:


…But continuing to run surpluses beyond the point at which we reach zero or near-zero federal debt brings to center stage the critical longer-term fiscal policy issue of whether the federal government should accumulate large quantities of private (more technically nonfederal) assets. … I believe, as I have noted in the past, that the federal government should eschew private asset accumulation because it would be exceptionally difficult to insulate the government's investment decisions from political pressures. Thus, over time, having the federal government hold significant amounts of private assets would risk sub-optimal performance by our capital markets, diminished economic efficiency, and lower overall standards of living than would be achieved otherwise.


Based upon this reasoning that the government should not accumulate large sums of private sector assets (held as loans to the public made through financial intermediaries), the Social Security Trust Fund was allowed to lapse.

Thoma first notes that the press generally let Greenspan off the hook for the growing deficit, and then nails their shared lack of accountability by quoting press pieces contemporaneously reporting the Chairman's 25 January 2001 speech. Thoma concludes:


Greenspan did warn about large deficits. But he didn’t warn about the bigger problem, congress allowing the Trust Fund assets to vanish. Because he failed to protest as the Trust Fund assets were used to fund deficit spending in other parts of government, he is not absolved of all responsibility for our current predicament.

Borrowing from Busy, Busy, Busy, the Shorter Greenspan:

"This forest has too much wood, and we can safely burn it in a campfire as long as we keep a large bucket of liquid nearby to douse the flames should the fire get too large. Gasoline? Yes, that's a liquid."