Greenspan Comes Under Pressure as Deficit Grows
The Washington Post

Sunday 20 July 2003

July 20 -  The White House had just released its forecast of the highest U.S. budget deficit ever, but Federal Reserve Chairman Alan Greenspan was not about to be pulled into a blame game. Yes, Greenspan told a House panel on Wednesday, deficits are bad, but then again so is some government spending, and tax cuts can be quite good but only if made judiciously.

"I Would Prefer to find the situation in which spending was constrained, the economy was growing, and that tax cuts were capable of being initiated without creating fiscal problems," Greenspan said.

"I would prefer a world in which Julia Roberts was calling me," replied an exasperated Rep. Bradley J. Sherman (D-Calif.), "but that is not likely to occur."

As the government's red ink rises to historic levels, Democrats - and a few quiet Republicans - have become impatient with the man they say bears some responsibility for the burgeoning budget morass. In January 2001, as President Bush began his term after the disputed election and even allies were saying his proposed $1.6 trillion tax cut was too large, Greenspan unambiguously flashed a green light to Congress to push it through.

Now some members of Congress complain that the Fed chairman flashed no clear red lights as the country's fiscal fortunes changed. Instead, they say, he has equivocated on further tax cuts. Greenspan's stand is all the more striking, they say, because he has always loudly implored policymakers to fight deficits and prepare for the retirement of the Baby Boom generation.

"Frankly, for a guy who I basically think does a terrific job on balance, he's walked away from his own long-term commitment to the kind of fiscal credibility, sanity, responsibility that he's been one of the best advocates for," said Sen. Jon S. Corzine (D-N.J.), a former chairman of Goldman Sachs & Co. "He needs to be more forceful, not necessarily in recommending what we need to do but that something needs to be done."

No one disputes the important - some say critical - role that Greenspan played in the passage of Bush's initial tax cut, which totaled $1.35 trillion through 2011. Even before Bush was sworn in, the presidential transition team had determined that Greenspan's endorsement would be pivotal to the tax cut's chances of passing Congress. When Greenspan appeared before the Senate Budget Committee on Jan. 25, 2001, his pronouncements on the tax cut created a political sensation. At the time, the government was projected to be running a $5.6 trillion surplus over the next decade. Greenspan worried that the government would quickly pay its debt and begin accumulating a cash surplus, which it would then have to invest in private-sector stocks and bonds. To Greenspan, the government ran the risk of dangerously distorting the market.

"In today's context, where tax reduction appears required in any event over the next several years, . . . starting that process sooner rather than later likely would help smooth the transition to longer-term fiscal balance," Greenspan said.

Corzine called Greenspan's pronouncement "the cornerstone" of the Bush administration's success. Sen. Ernest F. Hollings (D-S.C.) agreed. "He just took the cover off the punch bowl," Hollings said.

Greenspan did intersperse his testimony with caveats, at one point suggesting that any tax cut be accompanied by a "trigger mechanism" that would rescind the reduction if debt reduction targets were not met. But tax-cut supporters ignored the cautionary notes.

Since 2001, the projected surpluses have evaporated because of falling tax receipts and soaring spending. Revenue is down because of the recession, the weak economic recovery, the 2001 tax cut and another, smaller, tax cut last year. Spending shot up for defense and homeland security after the 2001 terrorist attacks, and for domestic programs such as unemployment benefits and medical care.

Some members of Congress say Greenspan has failed to sufficiently adjust his public pronouncements to the changed circumstances.

Earlier this year, he had an opportunity to assert his economic leadership, they say. The president was in a precarious political situation when he proposed his $726 billion tax cut. The government was already in deficit. The administration was preparing for war with Iraq but refused to disclose cost estimates. And the details of the tax cut, including a plan to end the "double taxation" of dividends, directly benefited the wealthy.

A former senior White House official conceded that Greenspan's unambiguous opposition could well have stopped it cold.

"If he said it was absolutely a terrible idea, we would have had real problems," the official said.

But he didn't. Rather, in the run-up to the passage of Bush's third tax cut, Greenspan offered words that were seized upon by proponents and opponents alike.

Proponents were pleased that Greenspan praised the president's proposal to eliminate the double taxation of dividends and supported efforts to make expiring tax cuts permanent.

Earlier, in November, Greenspan told a Joint Economic Committee hearing that he thought it would be "unwise" to eliminate or postpone portions of the 2001 tax cut that had not yet taken effect, because businesses had already built the changes into their long-term plans.

But opponents noted that Greenspan repeatedly expressed concern about a growing deficit and said any new tax cut should be offset by spending cuts or equivalent tax increases.

The deficit must be maintained at minimal levels," he told the Senate Banking Committee in February of this year. "I support the program to reduce double taxation on dividends and the necessary other actions in the federal budget to make it revenue-neutral."

Rep. James A. Leach (R-Iowa) saw Greenspan as offering encouragement to both sides and described it as "a careful and politically crafted approach."

Greenspan knew that his statements would be politically ineffectual, Corzine charged, since neither party had any intention of raising taxes or cutting spending to offset a $350 billion hit to the Treasury.

"With this idea of saying it all needed to be revenue neutral, he was indicating a level of political naivet that he does not possess," Corzine said.

Sen. Robert F. Bennett (R-Utah) defended Greenspan. He said the chairman was merely repeating long-held positions - politically viable or not. Both parties extracted talking points in their favor, Bennett said, but "I don't think you blame Greenspan for the irresponsibility of Republican and Democratic rhetoric."

Some Democrats are quick to say that Greenspan's 2001 green light was given to curry favor with a new White House. They see his subsequent positions as unwillingness to clash with the president, especially since some Republicans blame Greenspan in part for President George H.W. Bush's defeat in 1992, saying the Fed moved too slowly to cut interest rates during the previous recession.

Rep. Barney Frank of Massachusetts, a Democrat who has jousted frequently with Greenspan, said he did not believe that the chairman's positions were motivated by politics. At this point in Greenspan's career, Frank said, the chairman does not need his job.

Instead, Frank said, "there's a war going on inside him."

On the one hand, Greenspan is a conservative Republican, a believer in small government and low taxes. His passion for those views led him to believe in the projected surpluses and see a chance to put his political beliefs into practice.

"He wanted the tax cut for ideological reasons," Frank said. "He didn't want all that money lying around for government to spend."

But since 2001, the federal government's financial health has reversed. "Unlike the Bush people, he then adjusted," Frank said. "That's when the struggle took over."

Greenspan has never said publicly that there was any struggle. This year he has always linked his support for some tax cuts, which he views as likely to enhance economic growth, to offsetting actions that would forestall any increase in the budget deficit.

Both sides used Greenspan's statements to bolster their positions. Neither gained much advantage. And the third Bush tax cut was signed into law in June, a month before the White House projected that the deficit would reach $475 billion in 2004.

On Wednesday, after the tax cuts had been enacted, Greenspan dwelled on the danger of large and rising deficits, which he said eventually would cause long-term interest rates to rise and damage economic growth.

"There is no question that if you run substantial and excessive deficits over time, you are draining savings from the private sector, and other things equal, you do clearly undercut the growth rate of the economy," he told the Senate Banking Committee.

Leach said such comments are too late. "Congress has acted," he said. "Whether or not he thinks Congress took the right step, it is not helpful for him to now say this was the wrong way to go. How does that help the economy?"

Others say it is not too late for Greenspan to push policymakers to reverse course.

"He has an opportunity to step forward and take a courageous stand," Sherman said, "and so far, that's not the role he is taking."