January 13, 2004

Alan Greenspan Says That the 2001 Tax Cut Was a Mistake

People like me who have enormous respect for the intelligence and judgment of Alan Greenspan have long been puzzled at his approval of the Bush administration's 2001 tax cut. It never fit our picture of who the man was and what he thought. Now, thanks to Paul O'Neill's reports of his discussions with Greenspan, we have a satisfactory answer:

Alan Greenspan said at the time that the 2001 tax cut was a mistake:

p. 162: May 22 [2001]... Greenspan arrived at the Treasury for breakfast with O'Neill. Their secret trigger pact had come up one vote short.... "We did what we could on conditionality," O'Neill said with momentary resignation.... "The first big battle is over, really. I think we fought well, we made our points vigorously." Greenspan said that wasn't enough. "Without the triggers, that tax cut is irreponsible fiscal policy," he said in his deepest funereal tone. "Eventually, I think that will be the consensus view."


*Ron Suskind (2003), The Price of Loyalty: George W. Bush, the White House, and the Education of Paul O'Neill (New York: Simon and Schuster: 0743255453).

Posted by DeLong at January 13, 2004 06:50 PM | TrackBack

Comments

The amazon.com link to the book you're providing returns "sorry... an error occurred... we are workin on ...".. I guess it is only coincidence?

Posted by: Bulent Sayin on January 13, 2004 03:58 PM

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I was amazed at O'Neill's reasoning that the 2003 tax cut was a mistake. He seemed to think: a) that the economy was heading back to full employment without any need demand stimulus, and b) that the 2003 tax cut would provide a lot of stimulus. Having read what economists were saying at the beginning of the year when this was debated, I find both premises lacking in real support.

Posted by: Harold McClure on January 13, 2004 04:41 PM

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One neednly look at Robert Novak columns from the fall of 2000 to see that there was great pressure on Greenspan's job (most likely from Rove). It was out in the open that Bush was willing to appoint board members that would be beholden to him and undermind Greenspan to try to force a Greenspan resignation or capitulation. So Greenspan weighed the risks and went with a tax cut he probably thought was the end of it. He also probably believed that the Repubulican party may actually have tried to reduce spending.

Posted by: Rob on January 13, 2004 06:51 PM

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Sorry, I am a lot less than impressed by Greenspan's seeking cover. "Bush made me do it" is not very impressive. Given the "esteem" in which he is held, Greenspan could have had his way simply by making it clear that he was going to speak up strongly.

Posted by: Josh Halpern on January 13, 2004 07:40 PM

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That may be true Josh but, that reasoned analysis of Mr. Greenspan would mean giving up an opportunity to bash Bush. That ain't gonna happen here.

Posted by: Lee on January 13, 2004 08:27 PM

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Dear Professor Delong:

Since you posted a really interesting comment on the topic of the failure of free capital flows to spark broad-based economic growth, but rather resulting in the flow of capital back from developing countries into the U.S.A. and no comments developed, inspite of the large question raised, I take it because of the spam problem you posted a while latter, would you please consider re-posting your comment on the matter, as I, for one, would be really interested not only in any further comments you could add to the matter, but also the comments of some of your regular sharpies.

Posted by: john c. halasz on January 13, 2004 09:16 PM

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Man, imagine this leaked stuff was actually live on TV every night -- the real West Wing if you will.

Now THAT would be transparent government.

'course, the bastards would just have their real discussions somewhere else.

Posted by: Troy on January 14, 2004 12:29 AM

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I second John H's comment. The capital flow issue is a very large concern, for a number of reasons.

Seems that, even with the spam problem solved (?), there are still troubles. The Drezner piece has a pop-up for comments, but the mechanics for posting are missing....

...and on the very point, what are the odds that President Clinton and Sandy Berger will come out (at the appropriate time) and say what's what? If Bush is mischaracterizing Clinton's policies, Clinton has every right to set the record straight. Berger has already let it be known that he couldn't get the Bush people to pay attention when he warned that al Qaeda might attack the US again. I think there is plenty of room to campaign against Bush on national security issues. Clinton has reason both to defend his own record and to poke holes in Bush's.

Posted by: K Harris on January 14, 2004 04:33 AM

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I doubt that "pressure on Greenspan's job" would be that effective, though maybe I misread the man (just as he misread the tax cuts)

by the by, I happened to catch some morning TV yesterday (which I only do when traveling), and found the tiresome Katie Couric interviewing O'Neill. O'Neill was recounting the "Cheney said 'Reagan proved that deficits don't matter, and besides, it's our due'" stuff and Couric interjected "But isn't there an economic theory -- Keynesianism -- that says that government deficits don't matter?" O'Neill just went on with his train of thought, but I was stopped cold.

Posted by: David on January 14, 2004 07:27 AM

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why would anyone have "...enormous respect for the intelligence and judgment of Alan Greenspan..."? In the last 4 years, starting with the unjustified run-up of interest rates prior to the 2000 election in a blatant partisan effort to try to tarnish the Clinton/Gore economy, he has repeatedly proven himself to be nothing more than a partisan hack.

Posted by: nofan on January 14, 2004 07:34 AM

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Greenspan said we need deficits so bond traders would have something to trade -- glad he was so
worried about bond traders job security.

Cheney comments on deficit reinforce my point I have argued for years that deficit in 1980s created crowing out, but it worked through the dollar to hit intl sector not through interest rates to hit interest sensitive areas.

I believe deficits work different in an open economy that depends on foreign capital inflows
to finance the deficit but mainstream economics
continues to build models assuming that US
economy is essentially a closed system.

In 1980s we were bailed out by Japancese savings surplus, now there is nothing like that to bail us out this time. US deficit now so large it is generating significant pressure on world supply-demand of savings.

Posted by: spencer on January 14, 2004 07:39 AM

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re David's post:
"...I happened to catch some morning TV yesterday ... and found the tiresome Katie Couric interviewing O'Neill... and Couric interjected "But isn't there an economic theory -- Keynesianism -- that says that government deficits don't matter?" O'Neill just went on with his train of thought, but I was stopped cold."

Here's an idea. These TV people make a lot of money and I'm sure that they have various types of personal trainers. Some of the sharp regular macro commenters here should apply to be their personal macroeconomics/finance trainers. Make a nice training video, laptop demos, with jazzy music and such, and make the pitch, see what happens. I have no idea how one gets in contact with Couric "people" but I guess there is a way.

I would also like to see the comment on international capital flows reposted, and would look forward to some comments from the regular macro/finance posters. I won't make any comments on it, I promise!

Posted by: jml on January 14, 2004 07:59 AM

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one problem with jml's couric suggestion: it might entail spending time with Katie Couric or those who manage her -- they're not the types to be content with help at virtual arm's length. Thanks anyway, but life's too short!

Posted by: David on January 14, 2004 08:08 AM

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Another note: I think that the big threat to Bush here is not so much O'Neill's version of the decision making process, and who said what in what meeting, and what that implies about real intentions or who was really making the decisions. That will be argued and hashed out into the ground long before the election, and the result will be so doubtful that I don't think it will change many minds. However I have seen some Bush quotes reported by O'Neill that could be quite damaging, whether they are accurate or not. One I saw was to effect that Bush wondered why the second tax cut was going to the top, and shouldn't the middle get something since the top got most of the first.

Unless the issues raised by those kinds of quotes can completely be settled, Bush will eventually be asked about them by reporters, or the Democratic candidate. It will be interesting to see what he has to say. Bush probably will have to answer these *himself*. That will be interesting.

Posted by: jml on January 14, 2004 08:09 AM

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does this make ANDREA MITCHELL "fair game"?

Posted by: n69n on January 14, 2004 08:12 AM

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Some more Bush quotes that are promising for interesting questions to ask him:

On Middle East Policy:
Bush shrugged. "Maybe that's the best way to get things back in balance." Powell looked startled. "Sometimes a show of strength by one side can really clarify things," Bush said...

--that will be easy to explain to Palestinians and those from the Middle East who sympathize with them. My Palestinian acquaintances, both Muslim and Christian, will now understand and quit spitting nails. It's all quite simple, the best thing for the US to do is let some one open a can of whoop-ass, do some whomping, and see how things looked after the dust settled.

On Iraq:
Bush's quote to is people to figure out a way to get "it" done
--that will also be easy to explain. Now that it's all over, there will be no reason not explain exactly what plans were hatched, other than invading under false pretenses.

Some one should make a list of interesting Bush quotes in O'Neill's book, formulate likely questions, and keep track of the responses to any that are asked.


Posted by: jml on January 14, 2004 08:37 AM

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Thank you, n69n! I was wondering when someone was going to bring up Mrs. Greenspan.

The big question for NBC -- why isn't Katie Couric married to a Republican Senator or Congressman? Shouldn't she be encouraged to "get with the program" like Mrs. Greenspan and Mrs. Schwarzenegger?

Posted by: David Ehrenstein on January 14, 2004 08:38 AM

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Re: criticism of O'Neill. This administration understands politics the way that Microsoft understands market share: 95% is not enough. If you've got 96%, whine that you're about to get slaughtered by the guys with 4%, rig the game so that you can get even more, and don't even bother playing by the rigged rules, just do everything you can to go for 100%.

O'Neill had the misfortune of being a Menshevik in a nest of Bolsheviks.

Posted by: Doug on January 14, 2004 08:45 AM

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> However I have seen some Bush quotes reported by O'Neill that could be quite damaging, whether they are accurate or not. One I saw was to effect that Bush wondered why the second tax cut was going to the top, and shouldn't the middle get something since the top got most of the first.

Does this mean that Wage Slave Comics actually knew the real story as early as 1/1/2001? :)

http://www.wage-slave.org/comics/009.html

Posted by: Paul Callahan on January 14, 2004 09:14 AM

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Greenspan said we need deficits so bond traders would have something to trade -- glad he was so
worried about bond traders job security.

Cheney comments on deficit reinforce my point I have argued for years that deficit in 1980s created crowing out, but it worked through the dollar to hit intl sector not through interest rates to hit interest sensitive areas.

I believe deficits work different in an open economy that depends on foreign capital inflows
to finance the deficit but mainstream economics
continues to build models assuming that US
economy is essentially a closed system.

In 1980s we were bailed out by Japancese savings surplus, now there is nothing like that to bail us out this time. US deficit now so large it is generating significant pressure on world supply-demand of savings.

Posted by spencer at January 14, 2004 07:39 AM

spencer, though this doesn't absolve Greenspan of his implicit endorsement of Bush's tax cut, we do need a market for U.S. securities. I disagree that economists are modeling the U.S. in a closed system. I think most reputable economists (and even those at Treasury :) are looking at international capital flows very closely. Those at the IMF certainly aren't missing the impact on international flows...

Posted by: Stan on January 14, 2004 12:03 PM

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Greenspan was right about the 2001 Tax Cut, and commentaries about the 2003 Tax Cut. The current financial situation is going to work out exactly as did the Bank Crisis and S&L Bailout of the mid-1980s.

I have long held the proposition that Keynesianism is only a Special Case effect, effective for economic growth only when Resource Recovery operations are at significant underproduction. Keynes himself may have been in agreement with such an assessment, if alive today. I do not think any tax cut has fueled the Economy, including the famed 1963 Kennedy Cuts. The Tax Cuts all created financial disturbance and Inflation, while the perceived economic growth was bound to occur anyway, due to technological and labor skill advances. lgl

Posted by: Lawrance George Lux on January 15, 2004 02:06 PM

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