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August 30, 2005

Fiscal Policy: the Clinton and Greenspan Legacies (Why Oh Why Can't We Have a Better Press Corps? Department)

Ah. Nell Henderson in the Washington Post:

Rubin Praises Stance Of Greenspan on Deficits: Greenspan "stands for the principle of fiscal discipline," Rubin said in an interview before he delivered a speech at the symposium here on Greenspan's legacy at the central bank.Bush administration officials dispute Rubin's explanation for the current budget deficits.

"The greatest single cause of the fiscal surplus of the 1990s was the stock market bubble, which led to an unsustainably high level of economic activity and tax revenues," said Ben S. Bernanke, the chairman of Bush's Council of Economic Advisers.

Together with the 2001 terrorist attacks and the war on terror, the collapse of the bubble was the major cause of the shift toward deficits after 2000, said Bernanke, who is attending the conference.

The Fed is supposed to craft monetary policy independent of political pressures from the White House or Congress, something economists agree it has done under Greenspan.... Rubin, in his prepared remarks... [said:] "I believe the Fed should not only pursue sound and disciplined monetary policy, but should also stand for the principle of sound and disciplined fiscal policy." Bernanke declined to respond to Rubin's suggestion that the Fed should oppose budget deficits. Rubin praised Greenspan for advocating deficit reduction in 1993, both in discussions with Clinton and in his public comments. And he said Greenspan "never engaged, correctly in my view," in the political debate about Clinton's proposals to reduce the deficit through specific tax increases....

[Greenspan] warned [in 2001] that the forecasts could be wrong and suggested the [tax] cuts be structured with "triggers" that would alter them automatically if deficits reappeared. Greenspan never endorsed Bush's tax cut proposal specifically, but his general support for tax cuts helped win passage of the president's package, which was enacted without such triggers. Greenspan has said since that it is unfair for critics to blame him for the deficits, since his advice on triggers was ignored. Rubin described Greenspan's 2001 testimony as offering "a truly complex framework for making the decision" and added, "The framework, on balance, was right."

The strange thing--the very strange thing--is Ben Bernanke's comment. Of the swing in the federal budget from a deficit of 4.7% in 1992 to a surplus of 2.4% in 2000--a swing of 7.1 percentage points--approximately 2.0% is due to a booming economy, an extra 1.0% to the high value of capital gains taxes paid in 2000 because of the high value of the stock market, 3.0% to the effects of the Clinton 1993 deficit-reduction package, and 1.0% to the effects of the 1990 Bush-Mitchell-Foley deficit reduction package. At most 1/3 of the extra revenues from a booming economy can be attributed to the bubble. Some of the fact that the economy was booming--that we had a high investment recovery--was due to the fact that, because of the deficit-reduction packages, the federal government was no longer draining the financing away from American business.

How Ben Bernanke converts a maximum of 1.7 percentage points of deficit reduction into "the greatest single cause of the fiscal surplus" is a mystery to me. Why Nell Henderson doesn't remember enough about the 1990s to even question Bernanke's assertion is a riddle. And why Nell Henderson couldn't be bothered to take the two minutes that would be necessary to find one of the many people in Jackson Hole--me or Gene Sperling or Alan Blinder or Larry Summers or a host of others--who have these numbers near their fingerprints and could de-bamboozle her... that's an enigma.

Posted by DeLong at August 30, 2005 03:39 PM