A Washington Post editorial this morning criticizes Alan Greenspan for attempting to deny his previous support for President Bush's 2001 tax cut. In discussing Greenspan's rationale for supporting the tax cut at the time, the editorial comments that Greenspan wanted to preclude the possibility that large goverment surpluses would lead to the purchase of large amounts of private assets, after the government debt had been paid off. It comments that this possibility was "implausible, in hindsight." Actually, it was possible to recognize that scenario was implausible at the time also. The economy was experiencing a stock bubble which was already unwinding by the time the tax cut was approved. The unwinding of the bubble meant that the projections of capital gains tax revenue were hugely exaggerated. The collapse of the bubble also virtually guaranteed a recession, which meant that the budget would take a sharp turn towards deficits. Some economists recognized this situation at the time, although the Post (and others) chose to ignore their views.
--Dean Baker
