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April 27, 2005

The Reaction to Greenspan's 2001 Testimony

Mark Thoma has done some digging and takes a look at press reaction to Greenspan's 2001 tax cut testimony:

Economist's View: "hat Did Greenspan Say and When Did He Say It?...

Mr. Greenspan told Mr. Sarbanes that the charge was 'frankly unfair' because it neglected the Fed chairman's unambiguous endorsement of 'trigger' mechanisms during the same testimony. 'I advocated tax cuts' in 2001, Mr. Greenspan acknowledged Thursday, 'but I also advocated triggers in the same testimony.' Did he advocate triggers?

While that term is not used directly in his testimony, it is used in a CBS report noted below, the only report I could find explicitly discussing spending restraint mechanisms, and Greenspan does say:

In recognition of the uncertainties in the economic and budget outlook, it is important that any long-term tax plan, or spending initiative for that matter, be phased in. Conceivably, it could include provisions that, in some way, would limit surplus-reducing actions if specified targets for the budget surplus and federal debt were not satisfied. Only if the probability was very low that prospective tax cuts or new outlay initiatives would send the on-budget accounts into deficit, would unconditional initiatives appear prudent.... Indeed, the current economic weakness may reveal a less favorable relationship between tax receipts, income, and asset prices than has been assumed in recent projections.... But the risk of adverse movements in receipts is still real, and the probability of dropping back into deficit as a consequence of imprudent fiscal policies is not negligible. But let me end on a cautionary note. With today's euphoria surrounding the surpluses, it is not difficult to imagine the hard-earned fiscal restraint developed in recent years rapidly dissipating. We need to resist those policies that could readily resurrect the deficits of the past and the fiscal imbalances that followed in their wake.

In my view, he does add quite a bit of caution regarding slipping back into large deficits, cautions that, as noted below, were not reported widely in the press.... However.... Consider the following quote:

But continuing to run surpluses beyond the point at which we reach zero or near-zero federal debt brings to center stage the critical longer-term fiscal policy issue of whether the federal government should accumulate large quantities of private (more technically nonfederal) assets.... I believe, as I have noted in the past, that the federal government should eschew private asset accumulation because it would be exceptionally difficult to insulate the government's investment decisions from political pressures. Thus, over time, having the federal government hold significant amounts of private assets would risk sub-optimal performance by our capital markets, diminished economic efficiency, and lower overall standards of living than would be achieved otherwise....

[W]hen the economy began slipping into deficit and the Trust Fund assets were evaporating, Greenspan did not protest....

Here are the headlines [from January 2001]:

Greenspan Endorses Tax Cuts WASHINGTON, Jan 25, 2001 (AP Online via COMTEX) -- Federal Reserve Chairman Alan Greenspan gave a major boost Thursday to President Bush's plan for across-the-board cuts in taxes...
GOP Raves at Greenspan's Tax Views January 26th WASHINGTON (AP) - President Bush, in office less than a week, has scored an early triumph in his campaign for a $1.6 trillion tax cut, winning Federal Reserve Chairman Alan Greenspan's support for tax relief...
In Policy Change, Greenspan Backs A Broad Tax Cut RICHARD W. STEVENSON (NYT) January 27, 2001... it should not be so big that it would plunge government back into deficit if federal budget surplus fails to materialize as projected...
Greenspan eyes tax cuts January 25, 2001: 2:09 p.m. ET WASHINGTON (CNNfn) - Federal Reserve Chairman Alan Greenspan gave his broadest endorsement of tax cuts to date Thursday... Greenspan said that if it became clear that politicians might be tempted to use the money for major spending initiatives, it would be better to cut taxes. 'It is far better, in my judgment, that the surpluses be lowered by tax reductions than by spending increases,' the Fed chairman said...
Greenspan supports tax cut plan By Gerard Baker in Washington FT.com site; Jan 25, 2001 Alan Greenspan, chairman of the US Federal Reserve, on Thursday threw his weight behind proposals for a large tax cut, giving a powerful boost to the centerpiece of President George W. Bush's economic policy.... That created the real risk that, if budget surpluses continued, the US government would begin to acquire a growing portion of the nation's private financial assets - which would create serious inefficiencies...
Greenspan quick to move with times By Gerard Baker in Washington FT.com site; Jan 26, 2001 Alan Greenspan... found himself repeatedly echoing Keynes's defence...as he explained his remarkable U-turn...
LEX COLUMN Financial Times; Jan 26, 2001 Alan Greenspan's sudden endorsement of President George W. Bush's tax cutting plans looks like smart politics rather than sound economics.... Mr Greenspan worries that in six to seven years this debt will have been repaid and the government will be forced either to acquire private assets or go on a spending spree...
Greenspan Gets Mixed Reviews CBS News, WASHINGTON, Jan. 26, 2001 ...Greenspan urged caution, suggesting that Congress consider some type of trigger to trim government spending or tax cuts if the budget surpluses aren't as large as currently estimated...
Greenspan on tax-cut bandwagon Chicago Tribune - US FT Abstracts; Jan 26, 2001 Federal Reserve chairman Alan Greenspan told the senate budget committee yesterday that... he is ready to support reduced tax rates. Greenspan backs tax cuts as way to trim surplus...
Los Angeles Times - US FT Abstracts; Jan 26, 2001 Federal Reserve Chairman Alan Greenspan gave his endorsement for President Bush's ambitious tax cut program yesterday, citing the expanding budget surplus as reason for lower taxes...
Editorial: Interpreting Mr. Greenspan The New York Times - US FT Abstracts; Jan 26, 2001 Alan Greenspan's approval of tax cuts in his Congressional testimony yesterday should not be misconstrued by Bush as an endorsement of his $1.6 trillion tax cut offer.... Congress should therefore move carefully toward tax cuts...
In policy change, Greenspan backs a broad tax cut The New York Times - US FT Abstracts; Jan 26, 2001 Federal Reserve Chairman Alan Greenspan has given his blessing for a substantial tax cut... but he did warn that any cut should not be so big that it plunged the government into deficit should the federal budget fail to materialize as projected...
Greenspan, in about-face, backs tax cuts The Wall Street Journal - US FT Abstracts; Jan 26, 2001 In a dramatic departure from a long-held view, Federal Reserve Chairman Alan Greenspan yesterday lent his support to the federal government's tax cut package...
Zeal and doubt follow tax-cut blessing The Boston Globe - US FT Abstracts; Jan 26, 2001 The Federal Reserve's Alan Greenspan lent his support to the Republican's plan for a tax-cutting initiative yesterday...
Economic Realities Drove Greenspan The Washington Post. Washington, D.C.: Jan 26, 2001. pg. A.4 [FROM ABSTRACT] Alas, said [Alan Greenspan], it's not that simple. The moment the target is reached and the government stops using its annual surpluses to pay down the national debt, it faces a problem... What to do with the extra cash piling up at the Treasury?...
Bush's Hand Greatly Strengthened Glenn Kessler. The Washington Post. Washington, D.C.: Jan 26, 2001 [FROM ABSTRACT] [Alan Greenspan] dispelled the notion that [Bush]'s plan to cut taxes might be reckless, dangerous or even massive, as former vice president Al Gore charged...

Posted by DeLong at April 27, 2005 07:23 PM