Man Without Qualities

Wednesday, February 12, 2003

Mr. Greenspan Reports

The Chairman of the Federal Reserve Board is not hired or employed to be the head of anyone's sale's department. And he is not, and no sensible person has accused him of being, a partisan hack. His advice and opinions have their own policy considerations and agendas, which are only related - but not identical - to those of Congress or any Administration. At least that is the way things are supposed to work. Yesterday, they did.

Just what did Mr. Greenspan say before Congress yesterday? The New York Times reports that his comments ... were a serious blow to the Bush administration, and the Times opinion is reflected in much of the media. Is that correct?


Mr. Greenspan's comments were a serious blow to the Bush administration's economic plans only if one thinks the Administration was counting on Mr. Greenspan to be the head of its sales department - a partisan hack. But Mr. Greenspan did no real harm, and, properly construed, provided considerable cover for the Administration's efforts.

Perhaps the major attack - especially from the Democratic side - on the Bush proposals has been that they do not provide much short-term stimulus. Mr. Greenspan agreed with this. For that matter, Milton Friedman, who is a big supporter of the Bush plan, agrees with this. No sensible person could seriously disagree with this. The Times sees Mr. Greenspan's statement as bad for the Administration. But anyone who thought that Mr. Greenspan was likely to come before Congress and argue that the Bush tax proposals would give the economy a big short term jolt, notwithstanding all the evidence and theory to the contrary, and also notwithstanding that to say such a thing would have eviscerated his credibility, was just being silly. The sillies apparently included one or two Republican Senators. Too bad.

But Mr. Greenspan went two steps further:

First, he argued that the economy doesn't need short term stimulus now. In fact, such stimulus might be counterproductive:

"I am not one of those who is convinced that stimulus is desirable policy at this point. ... My own judgment is that fiscal stimulus is premature."

If Mr. Greenspan is right, and the economy doesn't need short term stimulus, it's not much of a criticism of the Bush plan that it doesn't deliver such stimulus in big doses. So Mr. Greenspan really pulled the rug out from under one of the major arguments being made against the Bush plan. Moreover, the Bush tax plan doesn't exist in a vacuum. The Democrats have proposed their own plan, which they say has much more short term simulative punch than the President's does. That's just the punch Mr. Greenspan says we need to avoid. So is Senator Daschle happy with Mr. Greenspan? I don't think so.

Second, Mr. Greenspan clearly accepts that the elimination of "double taxation" of dividends will foster growth, which will help every American. This undercuts a second major argument against the Bush tax cuts: that they will not foster growth, but merely benefit a few well-positioned rich people.

It's true that Mr. Greenspan focused more on the potentially adverse effects of deficits (including on long term interest rates) than does the administration, and that his endorsement of the dividend tax cut was coupled with his recommendation that it be "revenue neutral." His position here is probably overly conservative. Given a set level of government spending, until actual solvency risks are encountered, how can it not be better for the government to obtain funding through fully voluntary borrowings than through only taxation, whose voluntariness is limited to the effectiveness of organs of representative democracy not particularly designed for economic efficiency?

But Mr. Greenspan heads the Federal Reserve Bank - and in that capacity he has as one of his main constituencies current long term holders of long term debt. Even if it would be better for the economy as a whole for the government to borrow more at the cost of increasing interest rates, such an increase in long term interest rates would likely disproportionately hurt this constituency, which in large but silent measure counts on Mr. Greenspan to watch out for them. This is one point where the Fed's own agenda and policies are relevant in understanding its representative's positions before Congress. Similarly, the testimony of, say, the undersecretary of veteran affairs before Congress must be construed in light of the fact that he or she in some ways represents veterans.

Further, as support for its assertion that Mr. Greenspan bluntly challenged the administration's contention that big budget deficits pose little danger or that the government can largely offset them through faster economic growth, the Times cites to these remarks:

"We are all too aware that government spending programs and tax preferences can be easy to initiate or expand but extraordinarily difficult to trim or shut down."


"Faster economic growth, doubtless, would make deficits easier to contain. But faster economic growth alone is not likely to be the full solution to the currently projected long-term deficits."

But these comments seem best construed as expressing first, that more growth is needed and that eliminating "double taxation" of dividends will deliver some growth, and, second, an imperative to get federal spending under control - no matter how it is financed (including "tax preferences" - which the Times seems to mistakenly believe is a reference to Mr. Bush's tax cut proposals). That's a message very hostile to the traditional Democratic approach. So, again, is Senator Daschle happy with Mr. Greenspan? Again, I don't think so.

In sum, if I were Mr. Bush, I wouldn't be crossing Mr. Greenspan off my Valentine chocolates list just yet.


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