Alan Greenspan says the expected, the reasonable thing about the prospective return of the deficit and the long-run fiscal policy dilemmas of the American government.
The truly surprising, the bizarre thing that I do not understand is why the Bush Administration PR flacks and their tame dogs in the press ever expected him to say anything else...
Posted by DeLong at February 12, 2003 04:09 PM | TrackBackFed chief Greenspan undercuts GOP arguments for tax cuts - Feb. 12, 2003: The 'kiss of death': Warning of growing budget deficits, Greenspan again undercuts Bush, GOP arguments for tax cuts.
February 12, 2003: 2:18 PM EST NEW YORK (CNN/Money) - Alan Greenspan stepped up his warnings about budget deficits Wednesday, forcing the White House to admit the Federal Reserve chief was at odds with President Bush's push for quick moves to stimulate the economy.
In his second day on Capitol Hill, Greenspan told the House Financial Services Committee it was crucial that policy-makers ensure that "growing budget deficits [do not] again become entrenched.''
Bush's $695 billion stimulus plans forecasts record budget deficits this year and next -- drawing criticism from opposition Democrats. Administration officials contend the deficits are modest given the size of the $10 trillion U.S. economy and are needed to spur job creation and ultimately, more tax revenues.
But Greenspan warned that a "state of relative budget tranquility'' will end abruptly as Baby Boomers start retiring in a decade. He said now was the time to prepare so that Social Security and other government programs can bear the strain.
The central bank chairman made similar points in his testimony to a Senate panel Tuesday in what was widely seen as a blow to the Bush plan. Under questioning, he amplified that concern by saying he considered stimulus "premature'' because it was hard to gauge the economy's underlying health amid Iraqi war fears.
Though Greenspan supported Bush's plan to eliminate the taxation of some dividends, he said such a measure should only be passed if other revenue could be found to replace the lost tax revenue.
"There should be little disagreement about the need to re-establish budget discipline," Greenspan said in his prepared remarks, especially considering the Baby Boomers' retirement, which will put a strain on Social Security and Medicare programs.
In response to legislators' questions on both days, he also warned against Congress making spending and tax plans -- including Bush's plan to make 2001's $1.35 trillion tax cut permanent and immediately effective -- without safeguards to keep them from wrecking the budget...
Well, Alan for one seems to think that the surplus lead to the "abandoning" of fiscal discipline...
"...the statutory limits on discretionary spending and the so-called PAYGO rules, which were promulgated in the Budget Enforcement Act of 1990 and were backed by a sixty-vote point of order in the Senate, served as useful tools for controlling deficits through much of the 1990s...
"In 1990, the possibility that surpluses might emerge within the decade seemed remote indeed. When they unexpectedly arrived, the problem that the budget control measures were designed to address seemed to have been solved. Fiscal discipline became a less pressing priority and was increasingly abandoned. "
... and also that the greater long-run threat to fiscal soundness is too much spending, not tax cuts...
"Reestablishing budget balance will require discipline on both revenue and spending actions, but restraint on spending may prove the more difficult.
"Tax cuts are limited by the need for the federal government to fund a basic level of services -- for example, national defense. No such binding limits constrain spending.
"If spending growth were to outpace nominal GDP, maintaining budget balance would necessitate progressively higher tax rates that would eventually inhibit the growth in the revenue base on which those rates are imposed. Deficits, possibly ever widening, would be the inevitable outcome...."
"Tax cuts are limited by the need for the federal government to fund a basic level of services -- for example, national defense."
I think Alan is describing the limits on tax cuts imposed on a RESPONSIBLE fiscal policy maker.
The current administration doesn't seem to worrry too much about whether they have tax revenues sufficient to fund the basic level of government services, at the very least they seem to believe that tax revenues should fund about $300 billion less than government services, smoothing out the business cycle.
Posted by: achilles on February 12, 2003 09:27 PM... and also that the greater long-run threat to fiscal soundness is too much spending, not tax cuts...
From that good old BLS data file again, total non-defense discretionary spending as a percentage of GDP:
1995: 3.7%
1996: 3.5%
1997: 3.4%
1998: 3.3%
1999: 3.2%
2000: 3.3%
2001: 3.4%
2002: 3.8%
Where is this haywire spending growth located? And the biggest gains are under Bush control.....
Posted by: Jason McCullough on February 13, 2003 04:08 AM"Well, Alan for one seems to think that the surplus lead to the "abandoning" of fiscal discipline..."
Funny. Alan was completely wrong about this during the Clinton Administration, whose policies produced the surpluses. The Bush Administration however seems to be happily abandoning fiscal discipline in the face of the deficit Alan has been helping to foster.
Posted by: dahl on February 13, 2003 01:21 PMYeah, but you forgot about the part where Greenspan pushed to cut the tax on stock dividends.
Is that where Daschle said it was “The kiss of death”?
hmmmm.
pushed is an odd verb. Creates the erroneus impression that Greenspan advocated pushing the dividend tax cut through right now.
1) he's worried about the long term deficit
2) he makes a point of saying that the revenue from dividend taxation should come from somewhere
3) As far as I can tell he doesn't explicitly say that under the Bush plan the revenue does not come from somewhere, though that is true of it.
4) he spends a lot of time and energy demolishing a lot of Republican pan-gloss (tax cuts cure their own deficits, that deficits don't affect interest rates)
5) then he beats up on the microeconomics of implementing the dividend tax cut, that it should be directed more at corporations.
Put that all together and it certainly isn't a ringing endorsement. Sure, he says that it would be a good long term tax policy ( I bet most lefty economists such as Professor DeLong here would pay it that compliment) but that doesn't mean he thinks it should go through as proposed right now.
Posted by: ~o on February 14, 2003 12:37 AMI think they didn't expect him to say what he said because they are under illusion that they, and not Mr. Greenspan, are wearing the pants in that relationship. As someone once said "Give me control of a countries money supply and I care not who makes it's laws" :-)
Posted by: David Mercer on February 18, 2003 04:44 AM