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
