Greenspan: My mouth wrote checks my country can’t cash

Economic guru Alan Greenspan has suddenly discovered that slashing taxes and boosting spending can lead to unsustainable budget deficits, and is expressing some annoyance that the people he encouraged to wipe out the budget surplus aren’t taking note of his hieroglyphic mutterings.

Although Mr. Greenspan in 2001 approved the tax cuts that helped take the federal budget from a surplus to its current deficit, he has increasingly pointed to the dangers of the deficit, saying it can lead to higher interest rates as the government’s revenues fall. Congress has nonetheless expanded its spending.

“Every successive testimony, I can see him getting more and more impatient,” said David Wyss, chief economist at Standard & Poor’s. “It’s like, ‘Why don’t you idiots get this – that you can’t continue spending more than you take in?’ “

Apparently the one-time Titan of US monetary policy is numb from the waist down and hasn’t noticed that the administration chopped off his legs about four years ago. Truly, we have the best health care system in the world.

Let’s review: Greenspan didn’t think the government was responsible enough to rein in spending in the face of a budget surplus, so he encouraged the Bush tax cuts apparently on the theory that a government too irresponsible to handle a surplus would grow a responsibility gland in response to massive deficits. And now he’s shocked, shocked! that on the one hand, people whose livelihoods depend upon delivering pork to their constituents and their bankrollers have failed to construct sensible budgets by reining in spending, and on the other, people whose primary goal is the destruction of the social welfare functions of government have failed to fight the deficits that will eventually strangle every discretionary social program and amputate the non-discretionary ones at the neck.

If there’s an afterlife for Greenspan, I hope it’s populated entirely by freshman economics students.

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3 Responses to “Greenspan: My mouth wrote checks my country can’t cash”

1. 1
   PubliusToo Says:
   

   I think you oversimplify the situation, especially the complicity of Mr. Greenspan. During the better part of the Clinton Administration, the Fed greatly restrained monetary growth. In fact, M1 decreased from 1995 to 1998, and did not start growing until after the start of the Bush Administration when economists (including Mr. Greenspan) first expressed concerns about deflation. I suppose the tight fiscal policy (i.e., surpluses) produced during the Clinton Administration could have made the Fed’s job of growing M1 more difficult. However, as I recall, Mr. Greenspan cried vociferously during that period about the “irrational exuberance” of the stock market to justify the Fed’s tight monetary policy. (Please note that monetary policy is not loose merely because of low interest rates, but ultimately depends on the growth of the money supply itself. By that measure, the monetary policy during the latter part of the 1990s was extremely tight.).

   Well, in Econ. 101 we were taught that the combination of a tight fiscal policy and a tight monetary policy leads to falling prices and decreased growth or even a recession. I posted this viewpoint a year and a half ago here. I think the passage of time has confirmed the accuracy of this textbook analysis. The Bush Administration justified the tax cuts on the theory that the economy needed fiscal stimulus to mitigate the presumed recession. Assuming that decidedly Keynesian approach was correct (Milton Friedman and many other conservative economists would disagree), the Administration must now proceed to adjust its fiscal policy to restrain the economy. Inflation is around the bend (e.g., oil prices have more than doubled since 2000), and the economy is definitely picking up steam. Unfortunately, because the Administration’s fiscal policy (with the encouragement of the Fed to cut taxes) has created unmanageably large structural deficits as far as the eye can see, and thus squandered a historic opportunity to pay down the Federal debt, a tight monetary policy now may drive up interest rates high enough to cause or exacerbate a recession.

   So the moral of the story for congressional republicans is that the gravy train is coming to an end and their majority party status (possibly during the next election, but certainly by 2008) may well be threatened by these latest developments. For us mere mortals, the moral is more mundane—we should sell all our speculative real estate investments before that bubble bursts too. And to President Bush, I want to say: “So long, and thanks for all the tax refunds.”

   P.S. Please excuse me for any gaps in the logic, but I am jotting this down quickly before leaving for an appointment.

   P.P.S. Are you still visiting the Fray regularly? If so, what boards?

   April 21st, 2005 at 12:07 pm
2. 2
   wb Says:
   

   I’m not blaming Greenspan for anything other than selling his soul. He watched as the administration first touted the tax cuts as a way of returning the surplus to taxpayers, and then as the Keynesian remedy you mention–and simultaneously a supply-side policy, which was a damned neat trick–while failing to note that as a Keynesian maneuver, the cuts put money in exactly the wrong hands.

   His “irrational exuberance” comment is vastly overrated as well, since he made it in, I think, 1996, and then sat pretty much silent as the bubble expanded. I’ll give him whatever credit is due for his handling of what the Fed can handle, but he’s been worse than useless during the Bush binge other than to mitigate the worst of the fallout from it, and I’m not sure that will turn out to have been helpful in the long run.

   April 21st, 2005 at 8:03 pm
3. 3
   JackD Says:
   

   He did endorse the Bush tax cuts, did he not? Recently he’s been saying that the remedy is to cut spending, right? Anyone have the feeling that he’s a starve the beast enthusiast?

   April 23rd, 2005 at 4:11 pm

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