February 11, 2003

What Greenspan Did Say

He called for reestablishment of something like the Budget Enforcement Act--"I am concerned that, should the enforcement mechanisms governing the budget process not be restored, the resulting lack of clear direction and constructive goals would allow the inbuilt political bias in favor of growing budget deficits to again become entrenched..." He refused to support the reduction of taxes on dividends unless other taxes were raised to make the net effect budget neutral--"the Fed chairman said he continues to support elimination of double taxation on dividends... only if other revenue can be found so as not to raise the budget deficit."


NEW YORK (CNN/Money) - Federal Reserve Chairman Alan Greenspan warned Tuesday that "geopolitical tensions" have added to the uncertainties dogging the U.S. economy, making a recovery difficult, and called for more discipline to control the growing U.S. federal budget deficit.

In response to questions from senators, the Fed chairman said he continues to support elimination of double taxation on dividends, but only if other revenue can be found so as not to raise the budget deficit.

Greenspan, in prepared remarks for his testimony before the Senate Banking Committee, said uncertainties about a possible war with Iraq were "creating formidable barriers to new investment and thus to a resumption of vigorous expansion of overall economic activity."

Greenspan said that the Fed, the nation's central bank, believes that when the risk of war with Iraq is lifted, business spending and the economy will rebound, although he said that was not certain.

"If these uncertainties diminish considerably in the near term, we should be able to tell far better whether we are dealing with a business sector and an economy poised to grow more rapidly -- our more probable expectation -- or one that is still laboring under persisting strains and imbalances that have been misidentified as transitory," he said in his prepared remarks.

Last week, President Bush presented his budget to Congress that projected a record $304 billion deficit for the current fiscal year. Greenspan, calling those projections "sobering," did not directly address whether the deficit should be reduced through spending cuts or elimination of the administration's proposed tax breaks, although he said, "There should be little disagreement about the need to re-establish budget discipline."

"I am concerned that, should the enforcement mechanisms governing the budget process not be restored, the resulting lack of clear direction and constructive goals would allow the inbuilt political bias in favor of growing budget deficits to again become entrenched," he warned.

The Bush administration has argued that tax cuts will spur economic growth needed to lift the government's tax revenues and control future deficits. Greenspan seemed to challenge this assessment, saying, "Faster economic growth, doubtless, would make deficits far easier to contain. But faster economic growth alone is not likely to be the full solution to currently projected long-term deficits."

In response to a question, Greenspan said he disagrees that deficits can rise without an impact on interest rates.

"There's no question that when deficits go up, contrary to what some have said, it does affect long-term interest rates, it does affect the economy," he said.

Greenspan did call for changes to the formula used to calculate cost-of-living increases in federal benefits and changes in federal income tax brackets that he said would have reduced the federal budget deficit by $40 billion through reduced outlays and increased tax collections. He seemed pessimistic that Congress and the administration will take the necessary steps to restrain growing deficits.

"At the present time, there seems to be a large and growing constituency for holding down the deficit, but I sense less appetite to do what is required to achieve that outcome," he said. "Re-establishing budget balance will require discipline on both revenue and spending actions, but restraint on spending may prove the more difficult."...


Also worth noting. The G-7 Group said this morning that the Washington Post's reporter had been snookered--had been told that Greenspan was going to be much more favorable to the administration than was in fact the case--and that he believed it and printed it.

The G-7 Group says:


This morning's business section of the Washington Post suggests that Greenspan will throw his weight behind Bush's plan to eliminate taxation of dividends for individuals. Well... sort of.

  1. As we wrote yesterday, Greenspan will acknowledge that he opposes double taxation of any income in principle and therefore believes eliminating such policiy is good long-term tax policy.
  2. But he also has qualms about slashing federal revenue to the Treasury at a time when costs are rising and destined to rise further as the US grapples with war in Iraq and rising Medicare costs.
  3. ... Bottom Line: Greenspan will say that he favors elimination of double taxation in principle. But privately, he certainly didn't encourage moderates to back the Bush plan. And we don't expect him to change any minds today.


And, indeed, when we look at the Post reporters lead:


Greenspan Likely to Back Dividend Plan: Support Before Senate Seen as Crucial to Passing Economic Package: Tuesday, February 11, 2003; Page E01: Federal Reserve Board Chairman Alan Greenspan is expected to endorse President Bush's proposal to end the double taxation of corporate dividends today at a high-stakes Senate appearance that is important to the White House's efforts to pass Bush's economic plan, according to congressional sources and others familiar with his thinking...

he did indeed get snookered.

In many ways, the most surprising thing is the naivete of these reporters--their willingness to take easily-falsified spin for reality.

Posted by DeLong at February 11, 2003 03:34 PM | TrackBack
Comments

Alan should double check the doors before going to sleep tonight. Sully wrote a piece critical of the Bushies and came down with the Norwalk virus within hours.

Posted by: achilles on February 11, 2003 04:04 PM

Fool me once, shame on you. Fool me twice, shame on me. Fool me every day, I must be corporate press.

The reporter was not snookered. The corporate press has a story line, and the story line is that taxes must be cut even if it destroys the country. Considering that almost every sane economist has now challenged the value of eliminating the taxation of dividends, the reporter knew that he was writing a lie.

Posted by: Charles Utwater II on February 11, 2003 04:53 PM

Next "who has it right?" question -- The Washigton Post opined that Greenspan's support was essential to passage of the Bush tax plan, prir to Greenspan's testimony. Now, after Greenspan shied away from his duty on that point, Forbes says he is "shooting blanks" in the war against deficits, that the tax package will pass anyway. Interesting take from Forbes the magazine, as it sounds like Forbes the person, in the face of reports from the rest of the jounalistic world suggesting many Senate Republicans are quite worried about the budgetary implications of the Bush plan.

Posted by: K Harris on February 12, 2003 06:57 AM
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