Bait and Switch:

There is a moment in every
successful con game when the victim thinks that he or she
has gotten the better of the deal. Thus, going into the 2000
elections, Democrats congratulated themselves on having
become the party of fiscal responsibility. Urged on by
Federal Reserve Chairman Alan Greenspan, Bill Clinton had
made eliminating the national debt more important than
expanding investment in health, education, and other social
programs. It was a sharp contrast to the preceding
Reagan-Bush years of irresponsible tax cuts and profligate
military spending. With the surplus predicted to rise for a
decade, the Clinton White House had become, as Washington
Post
columnist David Ignatius recently observed, "one of
the most ardently pro-Wall Street administrations in the
nation's history."

The delusion continued throughout the 2000 presidential
campaign. George W. Bush promised to balance the budget
except during a time of war or recession. Al Gore, however,
happily positioned himself to the right of Herbert Hoover by
proould cut government spending in an economic downturn, "just
as a corporation has to cut expenses when revenues fall
off."

Then there is the moment when the swindle is revealed to
those who have been duped. In this case, it occurred shortly
after Bush's inauguration: Greenspan announced that he
approved of Bush's proposal for a $1.6-trillion tax cut (it
was later scaled back to $1.3 trillion). The media reported
that the Democrats were "shocked." How could Greenspan
support a proposal that would not just eliminate the surplus
but actually push the federal government back into a
deficit? How could Greenspan, who had lectured the
Democrats for eight years that deficits were the root cause
of runaway inflation and would destroy the Social Security
system, so cavalierly dismiss his own concerns?

On the evidence, the answer is that Greenspan and his
Wall Street clientele were never that interested in
balancing the budget; nor were they especially worried about
inflation or the fate of Social Security. Rather,
Greenspan's real concern seems to have Democrats from expanding domestic government after they
won the election. Like all good con artists, Greenspan knew
where his "mark" was vulnerable: The Democrats feared
reliving the late 1970s, when double-digit increases in
consumer prices drove Jimmy Carter out of the White House.
But the economic evidence for Greenspan's doomsday
scenario--in which an overheated peacetime domestic economy
triggers a politically unacceptable wageprice spiral--is
strikingly thin: Greenspan certainly knew that the cause of
the 1970s inflation was the global energy crisis, and that
spending on war, not domestic programs, triggered every
other major inflationary episode of the last century.

Greenspan's primary concern with profits on Wall Street
rather than prices on Main Street explains his attitude
toward the stock-market boom of the last half of the 1990s.
After publicly suggesting in 1996 that "irrational
exuberance" had overvalued the market, Greenspan became a
cheerleader for the "Enron Economy"--the speculative frenzy
that wildly inflated asset prices on W-market hucksters hyped worthless paper in fly-by-night
boiler rooms, on national television, and in thousands of
newsletters distributed to gullible customers, who were able
to leverage their gambling with easy credit supplied by the
Federal Reserve.

By 1999, market speculation was clearly out of hand.
Greenspan could have deflated the bubble by restricting
speculators from buying securities on credit. Instead, he
tried to resuscitate profit expectations with a series of
short-term interest-rate hikes aimed at dampening wage
demands across the economy. Indeed, Greenspan stated
publicly that the rising profit expectations had largely
resulted from worker insecurity, which had kept wages low.
His fear was that with tighter labor markets, workers might
start demanding their share. The higher rates were a major
contributor to the recession that started in March 2001.

At that point, Democrats were left holding the empty bag.
Reluctant to part with their green-eyeshade image, they
allowed George W. Bush to take credit for the short-term
fiscal stimuck to all income-tax payers--which gave him cover for
spending the long-term surplus on the giveaway to his
upper-income constituency.

Now the Democrats are heading into the fall election with
a thoroughly confused message. With an unemployment rate
expected to be somewhere around 6 to 7 percent, Democrats
are still dragging around Alan Greenspan's argument about
balanced budgets--a concern the nimble Greenspan has
abandoned. At the same time, for fear of being seen as the
party of "tax and spend," their congressional leaders have
been unwilling to demand that Bush's tax cut be rescinded.
Meanwhile, George Bush masquerades as a compassionate
Keynesian concerned with getting people back to work.

Even after all this, too many Democrats remain in awe of
Alan Greenspan. So do the media, which report his obscure
pronouncements as the utterances of a financial wizard who
is in touch with the inscrutable forces that make and break
markets. They still have not grasped the economics lesson he
has taught them: As W.C. Fields put it, "Never give a sucker

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