SYNOPSIS: Greenspan has screwed up, and now he doesn't know what to do.
Three weeks ago Alan Greenspan, in his now-famous testimony to the Senate Budget Committee, gave decisive aid and comfort to the advocates of huge, irresponsible tax cuts. Rumor has it that Mr. Greenspan himself was taken aback by the feeding frenzy unleashed by that testimony, and that he is now engaged in a backdoor campaign to limit the damage. (Damage to the nation, or to himself? Good question.) The Medley Report, a newsletter on economic affairs, says that "many Congressional Democrats have heard Mr. Greenspan — or his aides — tell them that he actually favors something like $1 trillion in total tax cuts rather than $1.6 trillion."
But if those rumors are true, Mr. Greenspan's performance yesterday, in his first official testimony since he let the genie out of the bottle, was a profile in cowardice. Again and again he was offered the opportunity to say something that would help rein in runaway tax-cutting; each time he evaded the question, often replying by reading from his own previous testimony. He declared once again that he was speaking only for himself, thus granting himself leeway to pronounce on subjects far afield of his role as Federal Reserve chairman. But when pressed on the crucial question of whether the huge tax cuts that now seem inevitable are too large, he said it was inappropriate for him to comment on particular proposals.
In short, Mr. Greenspan defined the rules of the game in a way that allows him to intervene as he likes in the political debate, but to retreat behind the veil of his office whenever anyone tries to hold him accountable for the results of those interventions.
Meanwhile, he dug himself deeper into an intellectual hole. Mr. Greenspan's argument for tax cuts goes like this: If you believe the surplus projections, within about six years the federal government will pay off all its debt to the public. Thereafter it will have to accumulate claims on the private sector — and that could lead to a politicization of the financial markets. So we must cut taxes soon to dissipate much of the projected surplus.
But does Mr. Greenspan even believe his own argument? Senator Jon Corzine asked the Fed chairman whether we ought not to take a longer view. As Mr. Corzine pointed out, just beyond that magic 10-year horizon the baby boomers will start to place immense demands on Social Security and Medicare, eventually requiring either large tax increases or large cuts in benefits. Mr. Greenspan's reply was not to worry, that by the time the boomers started reaching 65, the Social Security system would be earning lots of interest on its accumulated assets.
Mr. Corzine should have shouted, "What assets?" The direct implication of Mr. Greenspan's argument is that the U.S. government, whose domestic spending consists mainly of programs aimed at retirees, should not make the kind of provision for the future that would be legally required of any corporate pension fund. If the federal government as a whole is not supposed to own private assets, then the assets accumulated by the Social Security and Medicare trust funds must be matched by equal or larger debts on the part of the rest of the government; so the interest that Mr. Greenspan claimed would cushion the burden of supporting the baby boomers would in fact be purely fictitious, a matter of moving money between government accounts. And so the ultimate burden of dealing with an aging population would still fall on future taxpayers, who would have been shortchanged for the sake of a short-run tax cut.
As Mr. Corzine pointed out, there are ways (such as investing in index funds) that public entities can buy private assets without politicizing markets. Mr. Greenspan said, correctly, that such solutions are imperfect; but are they worse than a solution that involves requiring the government to stay deeply in debt in order to provide the trust funds with assets to buy?
Mr. Greenspan faced a test of character yesterday. He didn't have to admit to a mistake; to do the right thing, all he had to do was "clarify" his previous remarks. Yes, the headlines would have said "Greenspan Makes U-Turn." But isn't it worth accepting some brief personal embarrassment in order to head off a looming policy disaster that you yourself have helped create? Apparently not.
Originally published in The New York Times, 2.14.01