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March 06, 2005

The Three Faces of Alan Greenspan

Kash of Angry Bear is pleased to see various denunciations of Alan Greenspan:

Angry Bear: This story by Rex Nutting of MarketWatch warmed the cockles of my heart, for two reasons. First, because at least one member of the regular business press seems to be catching on to Greenspan:

Greenspan did President Bush two big favors this past week, endorsing the president's calls for fundamental reforms in Social Security and tax policy. Greenspan said the U.S. economy could 'stagnate' if Congress raised taxes or borrowed more money to pay for all the promises Washington has made to the elderly and those soon to be. Like it or not, Greenspan said, government spending must be slashed. Reid, the combative Nevada Democrat, said Greenspan was acting like a partisan 'hack.'

The Federal Reserve may consider itself above politics, but its chairman definitely isn't.

...What really got Reid's hackles up was Greenspan's denial of his own role in fostering the fiscal problems he was decrying. Greenspan endorsed the Bush tax cut of 2001 because, without them he said, the surplus could become dangerously large.

How wrong that forecast was! Instead, the projected surplus is now become an endless deficit, and Greenspan's logic has undergone a similar U-turn. Now, he says, it would be folly to roll back the tax cuts that led to the deficits, because higher taxes would cripple the economy. And yet the U.S. economy enjoyed one of its greatest growth periods ever under those higher tax rates.

The second reason I enjoyed reading this story was because it notes that Reid's reaction was vigorous, entirely appropriate, and out of character for Democrats in Washington:

Reid's rude assessment of Greenspan was a bit of a shock, mostly because Washington is used to having Greenspan walk all over Congress, especially the Democrats. A Democratic leader with a spine is something we'll have to get used to.

By calling Greenspan on his partisan testimony this week, Reid also sent a message to Bush that the Democrats won't roll over if he nominates a full-time partisan hack as Fed chairman when Greenspan's term is up next January.

It's refreshing to see the Democratic leadership in Washington treat Greenspan the way he deserves... and to see that at least some of the press agrees.

Let me agree that since 2000, Alan Greenspan's public interventions in U.S. fiscal policy have been, from my point of view, destructive as measured by headlines, lead paragraphs, and summaries of his positions. (Speeches and testimonies themselves are more nuanced in the details, but the press pay no attention to details.) But let me point out that within Republican councils Greenspan has been one of the few relatively grownup voices: pointing out dangers, and asking for Plan Bs--his support for triggers to reverse the 2001 tax cuts back when they were proposed, and his recent call for caution in changes to Social Security which may have destructive effects on national savings, to give two examples.

But let me say that I am not terribly surprised that Greenspan has not been helpful--according to my lights of helpful--on fiscal policy. For Alan Greenspan is three-faced. He is:

  1. The superb monetary policy technocrat
  2. The Randite--the long-time disciple of Ayn Rand--who believes that in a good society government spending would be less than 5% of GDP.
  3. The Republican team player.

The Greenspan we saw for the most part in the 1990s was the superb monetary technocrat--the person who maintained low inflation and yet nudged the U.S. economy closer to full employment than I would ever have believed possible, and the person who was desperate for a balanced budget because persistent unbalanced budgets generate enormous pressure on central banks to allow inflation.

But there's also the Greenspan who believes that the social insurance state is fundamentally illegimate: an offense to human dignity and a long-run policy disaster. He wants a balanced budget, but he wants spending cuts much more than tax increases. In 1993--with a Democratic president and a Democratic congress--he would settle for tax hikes as a means to balanced budgets. But that was never his preference.

And there's also the guy who is fundamentally on the Republican team.

Don't expect him to be just the non-partisan monetary policy technocrat. That's not who he is. That never was who he was.

Posted by DeLong at March 6, 2005 04:17 PM