What's gotten into Alan Greenspan? Until recently, hewas in clear agreement with the Democrats about how to deal with thefederal budget surplus: Oppose tax cuts and use the surplus to pay offthe national debt. But on January 25--five days after the inaugurationof George W. Bush--Greenspan abandoned that position and endorsed Bush'smammoth tax cut. The explanation he gave for his reversal was patentlyphony: He said he had just realized that future surpluses would be evenlarger than anticipated. Without a tax cut, Greenspan now says,surpluses will add up to more than the national debt. This means thatthe government might at some point in the future have to invest thesurplus tax revenue by purchasing private assets--and this, saysGreenspan, would create an entangling conflict of interest between thegovernment and private industry.
Greenspan's rationale for his turnabout is remarkably unpersuasive.He says the situation he claims to fear would not arise for at least 10years, yet he knows as well as anyone that forecasting 10 years ahead isimpossible. After all, barely two years ago we were still talking aboutdeficits stretching indefinitely into the future. What's more, he knowsthat the "problem" of how to invest the government's surplus revenuescould be addressed when it arises--if, in fact, it ever does.
Thus the question becomes, What is Greenspan really up to? Is hemaking nice to Bush so as to maximize his own influence over theadministration and the economy? Possibly, but a more likely (and morecharitable) explanation is that he sees a significant danger of somevery bad economic weather ahead and hopes a tax cut would give a boostto the economy and minimize the effects of a recession. Greenspandelicately alluded to that possibility far down in the body of hisstatement on January 25. And in fact if the economy does suffer aserious contraction, then a temporary tax cut--although not the kindthat Bush and now Greenspan are pushing--would be good policy.
Where does Greenspan's desertion leave the Democrats? In apredicament of their own making. A vigorous Democratic Party, one whosebusiness in life was promoting the social and economic well-being of thecountry, would never have gotten into bed with Alan Greenspan on thisissue in the first place. Whatever his talents as a steward of U.S.monetary policy, he has a history of far-right libertarian views aboutthe appropriate role of government spending for social purposes. Yetever since the prospect of surpluses first appeared, many Democrats havebeen promoting a line congenial to Greenspan's point of view. Ratherthan pointing to the nation's unmet needs for health care, child care,repair of dilapidated schools, drug treatment facilities, communitymental health facilities, and myriad other social programs, manyDemocrats became as fixated as Republican-style fiscal conservatives onpaying down the debt.
How did the Democrats arrive at a position that is so grossly counterto the party's New Deal history and to the country's current needs? Isit really appropriate for the more progressive of the two major partiesto be espousing the policies of 1930s anti-New Deal Republicans? How didthe party of FDR arrive at this pass?
By 1994, after decades of right-wing demagoguery lambastinggovernment programs had helped produce the Clinton health care debacle,Democratic politicians had become ashamed and afraid to advocate openlyfor social infrastructure programs, even when the need for them wasobvious. Since then, the most a typical Democrat has dared to proposeare cautious little programs that only nibble at the edges of the hugeproblems we face. But even these nibbles would be made more difficult bytax cuts, so the Democrats' instinct is still to oppose them.
That's why, when surpluses as far as the eye could see came intoview, Bill Clinton's impulse was to fend off the inevitable Republicantax-cut proposals. But the president had a problem. Having boldlydeclared just a few years earlier that "the era of big government isover," Clinton felt he couldn't now turn to Congress and say, "Let'sspend these funds on this long list of worthy things we haven't beenable to afford up to now." So instead of calling for expenditure onprograms he knew could help the country, Clinton proposed continuing torun a surplus of tax revenues and applying these funds toward payingdown the national debt.
The president's most brilliant tactical ploy was to say that thiscourse of action would be equivalent to using the surplus to "saveSocial Security first," before the money was spent on something else orgiven back to citizens in the form of tax cuts. The connection (intruth, a very loose one) between paying down the debt and balancingfuture Social Security revenues and benefits was never explained, andthe media never asked. But the president's promise to save SocialSecurity resonated with the public, and Republican tax-cut proposalswere successfully beaten back--at the cost, however, of slipping into afiscal straitjacket that still constrains Democrats despite a surfeit oftax revenues and a deficit of social programs.
Is there any valid economic rationale for reserving most or all ofthe budget surplus for debt reduction? Not much of one. During therecent election campaign, when economists came out to argue the Clintonline in support of Al Gore, the best they could do was trot out thedubious theory of "crowding out." According to that theory, when UncleSam sells bonds to cover a deficit, every private dollar that goes tothe Treasury to pay for the bonds is a dollar no longer available forbusiness purchases of new plants and equipment. If there is a budgetsurplus rather than a deficit, the process supposedly works in reverse:When the Treasury buys back its bonds rather than selling them, themoney it pays for them is added to the funds available in the economyfor business investment. In short, paying down the debt is supposed toresult in extra investment by corporate America in productive equipment,which in turn makes the economy grow faster.
Like many economic theories, the "crowding out" theory of investmentowes more to unverified scenarios hatched in economics professors'offices than to observations of the actual behavior of businesspeople.And like many things the New Democrats have advocated, the theory has aright-wing provenance. After beginning life as a jab against FDR and theNew Deal, the "crowding out" theory flourished and ultimately grew tobecome a standard argument against Keynesian strategies of runningdeficits to prevent or counter recessions, and against governmentactivism generally.
But there's a problem with the "crowding out" theory. It assumes thatinvestment by the private sector passively adjusts to whatever funds areleft over in the capital markets after government bond sales orpurchases take place--a premise that ignores how investment reallyworks: It is motivated by the perception that there might be big profitsto be made. When investment promises big profits, money to finance itcomes pouring in from many sources, such as retained business earningsand capital from overseas. The flow of money available to financebusiness investment waxes and wanes as the prospects for profits wax andwane.
Of course, the state of the economy has a big influence on theperception of opportunities for business profits. And the businessclimate can be affected by running a surplus: Taxation that isn'tmatched by government spending is likely to reduce the demand for goodsand services. Sometimes that reduction in demand is needed to stabilizean economy that is overheating. But at other times, running a surpluscan push the economy into recession. When that happens, businessinvestment decreases rather than increases. That may well be what ishappening right now.
But even if one were to accept the "crowding out" theory ofinvestment as gospel, it does not follow that paying down the debtis necessarily a good idea. The public programs we could finance withthe surplus would produce a healthier and more productive laborforce--and would thereby do far more to improve the nation's futureeconomic condition than any increase in our capacity to produce stillmore consumer goodies for the well-off. Suppose further that we were touse the surplus not for government programs that could be classed asinvestments but for initiatives that simply made life better right nowfor some of our citizens--say, for the working poor and their children.Isn't there an argument to be made that relieving their hardship isworth more to the country than a future increase in the capacity toproduce sport utility vehicles?
Unfortunately, it now appears that Democrats who don't stick with thepay-down-the-debt line will cave in and vote for Bush's tax cut. Butthere is a better alternative: A temporary cut in the now-excessivepayroll tax, which all wage earners pay, would be far more fair thanBush's cut that heavily favors the wealthy. It would increase thepaychecks of people whose income is so low that they don't pay incometax. Moreover, low-income families are more likely than rich ones tospend the tax-cut money that accrues to them; therefore a payroll-taxcut would surely boost the economy more than an income-tax cut thatprimarily benefits the rich. A payroll-tax cut would by no meansendanger Social Security, a program whose future depends--contrary towhat most people think--not on a collection of bond certificates in thevaults of the Social Security Administration but rather on the continuedwillingness of the American public to support the elderly through apublic program. The Republicans, of course, want to send those samepayroll-tax dollars to Wall Street so that billions in fees can beskimmed off by private investment firms as part of their scheme toprivatize Social Security. A temporary cut in the payroll tax would havethe additional benefit of making it harder for Republicans to carry outthat plan.
Since at least the mid-1990s, the Democrats, through their cravenreluctance to rebut the antigovernment line Bill Clinton came toembrace, have been in the wrong camp on spending policy. Whether or notrecession is on the way (or is already here), Democrats need leaders whoare willing to buck the debt reduction canard and to champion sensiblepolicies of taxing and spending. Alice Rivlin, a founding director ofthe Congressional Budget Office and former member of the Federal ReserveBoard, has led the way by using the op-ed page of The New YorkTimes to advocate more spending on social programs. But so far, she seems to be a lone voice in the wilderness. Aren't there any other Democrats who might step to the fore on this issue?
