Alan Greenspan certainly would not lie to Congress and the American people, though he is known to be intentionally disingenuous on occasion. He might dissemble or equivocate, perhaps even prevaricate. But no, the chairman wouldn’t lie.
Keep that in mind when considering Greenspan’s recent assertion to a Senate committee that “we were all wrong” about expected budget surpluses in 2001 when he spoke in favor of Bush’s proposed tax cuts.
Specifically, he asserted “we were confronted at that time with an almost universal expectation amongst the experts that we were dealing with a very large surplus for which there seemed to be no end.”
Speak for yourself, Alan.
I’m no expert, but I did tell every class I taught in 2000 and 2001 that then-current budget surpluses would not last indefinitely. Moreover, assertions that the entire U.S. national debt would be paid off in a decade were ludicrous.
I certainly was not alone in my skepticism. The issue came up repeatedly in conversations with other economists at the University of St. Thomas, the College of St. Catherine, Metropolitan State University, Hamline University, Augsburg College, Macalester College and the University of Minnesota. Whenever I raised the question of whether we were in a new era of unending surpluses, I got a collection of derisive snorts, wry grimaces and rolled eyes.
I didn’t meet a single local economist who believed in a new era of permanent budget surpluses. Nor were such local nonfamous, nonexperts an exception to some national consensus that “there seemed to be no end” to future surpluses.
Economists across the nation cautioned that while Office of Management and Budget projections did show surpluses running into the future and even projected liquidation of the national debt, these projections depended on assumptions that high tax revenues resulting from an expanding stock market bubble and a booming economy would survive an inevitable downturn.
Princeton economist Paul Krugman, for one, said that in his New York Times columns. The Center on Budget and Policy Priorities was one of several think tanks warning the surpluses were likely to be ephemeral.
Thus, for Chairman Greenspan now to assert that “we were all wrong” may not be a lie, but it is a gross misstatement of the facts.
Greenspan’s long-term reputation is at risk. If he had retired in 2000, he would have gone down in history as one of the Fed’s most successful chairs. Yes, the equities bubble still would have burst. Yes, some critics still would second-guess Fed policies in the 1990s. But such carping would have attracted few listeners.
Instead, he remained and rode the economy down and up. Now he faces criticism for monetary policy in more problematic times and for his overt support of a highly partisan and controversial tax cut. If ongoing federal budget and current account deficits land us in an economic pickle, historians will treat Greenspan’s last half-decade at the Fed harshly.
He has gotten himself into the same position as Arthur Burns, Fed chairman from 1970-1978. Burns was the most academically distinguished economist ever to head the Fed, but prices increased 67 percent during his term. Moreover, he let the money supply grow by nearly 10 percent in the nine months between the 1972 New Hampshire primary and the November general election.
Critics quickly charged that allowing the money supply to balloon while Nixon administration wage and price controls suppressed visible inflation was a cynical move to help re-elect a Republican president.
Burns denied the charge to his dying day, but he had gotten himself into a bind. If he was not dishonest, then he had been terribly inept as a central banker. If not inept, then he was dishonest. There was no other credible explanation.
Greenspan is on the verge of a similar dilemma. If he truly believes what he asserted last week — that his 2001 support of a highly partisan tax cut was based on “an almost universal expectation amongst the experts” — then his reputation as a master of economic statistics and forecasts lies in a shambles.
If, on the other hand, he really knew that many competent economists doubted that “there seemed to be no end” to federal surpluses, then his support of the Bush tax cuts was a partisan act that demeaned the office of the chairman of the Federal Reserve Board. As with Burns, the historical debate about Greenspan may be about whether he was incompetent or dishonest.
William McChesney Martin and Paul Volcker, the two finest Fed chairs ever, both observed an important rule: If the Fed wants autonomy from congressional interference in monetary policy, Fed officials must stay out of issues for which Congress is responsible. Alan Greenspan observed the same rule early in his tenure, but as time passed, he increasingly opined on subjects from natural gas pricing to specific tax bills. That mistake will harm his long-run reputation.
© 2005 Edward Lotterman
Chanarambie Consulting, Inc.