So Alan Greenspan is a political animal. What--you were expecting a philosopher-king? A lot of people who should know better were taken by surprise when Fed Chairman Greenspan made George W. Bush's inaugural week by embracing a big tax cut. But it's not as if Greenspan got this far on, say, charm. As Bob Woodward's recent biography of him makes clear, Greenspan for more than a decade outmaneuvered other members of the Fed's board of governors and made such tactical alliances as he needed to survive.
One such temporary alliance was with Bill Clinton. Once Clinton agreedto the stringent program of deficit reduction the Fed wanted, Greenspanwas willing to make Clinton look good. The Fed not only cut interestrates, but Greenspan gamely sat next to Hillary during the president'sState of the Union address and applauded the Clinton program. Clinton,not surprisingly, reappointed Greenspan.
But that was then. With a new chief executive comes a new agenda. And itwill fall to the new president to decide whether to reappoint Greenspanwhen the latter's term expires in 2004.
There has been bad blood between Greenspan and the Bushies. During theprevious Bush family administration, relations grew so frosty thatTreasury Secretary Nick Brady and Greenspan actually suspended theirweekly meetings. Jim Baker even talked of easing Greenspan out. And thefirst President Bush blamed Greenspan, not without some justice, forfailing to ease interest rates in time to rescue his presidency from thepolitical effects of the 1990-1991 recession.
It was shrewd of Greenspan to extend an olive branch to the Bushes--andsome olive branch it was. The press, which had been guardedly laudatoryof W.'s maiden voyage around Washington, turned euphoric. Suddenly,carrying the ultimate seal of approval, the Bush tax cut seemedpolitically supercharged.
Nor should we be shocked to hear that the Fed chairman prefers tax cutsto public spending. Greenspan, at heart, is a conservative Republicanwho grew up on Wall Street. His first intellectual mentor was Ayn Rand,not exactly the queen of tax-and-spend. Greenspan got into nationalpolitics advising Richard Nixon, then served as Gerald Ford's chiefeconomic adviser, and was appointed Fed chairman by Ronald Reagan. Thereal anomaly was Greenspan's temporary liaison with Clinton and theDemocrats.
It's no surprise that Alan Greenspan doesn't care much for publicoutlay. His logic in supporting a tax cut, however, was a torturedexercise in finding a basis for political alliance with Bush. The firstflaw in Greenspan's case for a tax cut is his stated worry that thegovernment, by running large surpluses, would eventually hold too largea portfolio of private assets. But the surpluses could be consumedreplenishing Social Security. And even in the unlikely eventuality thatsurpluses go on indefinitely, there is nothing wrong with the SocialSecurity system or even the U.S. Treasury owning nongovernmentsecurities, so long as they are blue-chip and safely diversified.
The other bogus argument is Greenspan's claim that a tax cut isinherently superior to public outlay as a means of depleting thesurplus. This view is an ideological preference, not a technicalimperative. As a matter of macroeconomics, the effects are identical.Moreover, advising Congress on whether to cut taxes or increase spendingis none of the Fed's business. Its charter, in case we are all sodazzled by Greenspan, is monetary policy and bank regulation.
Greenspan's sudden conversion to the tax-cut crusade blindsided centristDemocrats, who have largely abandoned the cause of public investment infavor of debt paydown. They had it coming. Moderate Democrats likeeconomists Robert Reischauer of the Urban Institute, Alice Rivlin ofBrookings, and even our estimable friend Robert Greenstein of the Centeron Budget and Policy Priorities, calculated that debt retirement was thebest strategy to soak up the surplus and thus keep Republicans fromgiving it away as a tax cut. They counted on Greenspan's innate fiscalconservatism, overlooking his deeper ideological conservatism andpersonal opportunism.
In a stream of op-eds, Reischauer, Rivlin, and others have warned thatthe surplus really isn't as big as we think, that we will need it whenthe boomers retire, that a recession may come, and so forth. But thesurplus just keeps on growing. It will soon reach more than half atrillion dollars a year and keep climbing. The fact is, with the economyon a higher long-term growth path and spending more or less capped bythe 1997 budget deal, the surplus is permanent and structural. Thatleaves plenty of money for a tax cut--or something.
What's tragically missing fromthis debate, of course, is a vigorous case for public investment. In thenew economy, private markets don't provide the social supports thatordinary people need to keep the market's vaunted "flexibility" frombuffeting their lives. Only government can provide universal healthcare, enriched child care, decent education, and modernization ofoutdated public infrastructure. And universal social programs have longbeen the glue in an otherwise fractious progressive political coalition.As Republicans know too well, once a permanent change in the tax codewipes out these surpluses, the chance for politically painless publicoutlay will be gone.
Instead of embracing a weak technical argument, we should be forginga vigorous national debate. Pay-off-the-debt was always dubious politicsas well as odd policy, and now Alan Greenspan has administered the coupde grace. He's done us a favor. Now we can revive the case for seriouspublic outlay. Drug coverage for all versus millionaire tax relief isnot a bad politics. Any takers? ¤
