No, Greenspan Doesn’t Get To Rehabilitate His Reputation
So Alan Greenspan has a new book coming out on Monday. And it says nasty things about the Bush administration. Welcome to the club Alan – the club of Bush enablers who write books once they aren’t in power, in a pathetic attempt to pretend they weren’t culpable in Bush’s mess. But back when it mattered, back when you were in charge of the Fed, when you were lionized as the Maestro… oh, back then, when you could have actually, I don’t know, oh, done something concrete to oppose Bush’s policies, did you? No, no you didn’t.
Though Mr. Greenspan does not admit he made a mistake, he shows remorse about how Republicans jumped on his endorsement of the 2001 tax cuts to push through unconditional cuts without any safeguards against surprises. He recounts how Mr. Rubin and Senator Kent Conrad, Democrat of North Dakota, begged him to hold off on an endorsement because of how it would be perceived.
“It turned out that Conrad and Rubin were right,” he acknowledges glumly. He says Republican leaders in Congress made a grievous error in spending whatever it took to ensure a permanent Republican majority…
…Today, Mr. Greenspan is indignant and chagrined about his role in the Bush tax cuts. “I’d have given the same testimony if Al Gore had been president,” he writes, complaining that his words had been distorted by supporters and opponents of the cuts.
How precious is that. Take a look at the top chart – has the government ever reduced spending in recent history? Greenspan can’t claim economic illiteracy. He knew that. Yet he shilled for tax cuts anyway.
In fact, according to a 2001 story he made the endorsement after he knew what the details of the cut were and the amounts of it. We are supposed to believe the Maestro couldn’t do the math?
In testimony to the Senate Budget Committee, Greenspan declined to comment on President Bush’s $1.6 trillion, 10-year tax cut plan, saying a decision on the size of a cut was best left up to Congress and the political process. But the Fed chairman’s backing of tax cuts as economically sound likely will provide a boost to the new administration’s proposals.
And the tax cuts made a difference. As Krugman noted:
Why, then, do we face the prospect of huge deficits as far as the eye can see? Part of the answer is the surge in defense and homeland security spending. The main reason for deficits, however, is that revenues have plunged. Federal tax receipts as a share of national income are now at their lowest level since 1950.
Of course, most people don’t feel that their taxes have fallen sharply. And they’re right: taxes that fall mainly on middle-income Americans, like the payroll tax, are still near historic highs. The decline in revenue has come almost entirely from taxes that are mostly paid by the richest 5 percent of families: the personal income tax and the corporate profits tax. These taxes combined now take a smaller share of national income than in any year since World War II.
The economist Kash, likewise did the numbers a couple years back (chart below):
The following chart shows what this means for the budget deficit. The blue bars show the Bush administration’s most recent budget deficit forecast – the one that they were crowing about today. The orange bars show the budget forecast if the Bush tax cuts had never happened, according to the estimates by the Congressional Budget Office, calculated by simply summing the CBO’s estimates of the revenue effects of each of the Bush tax cuts. The purple bars show what the budget deficit would have been without the Bush tax cuts, even if you believe the supply-siders and use the JCT’s “dynamic scoring”, which assumes that without the tax cuts the economy would have grown more slowly.
Are you surprised by this? Of course you aren’t. So why was Greenspan surprised? The answer comes back to the standard answer when dealing with the Bush administration – either he was a fool, or he was an ideological hack, or he was stupid. I don’t think Greenspan’s stupid, but his argument is essentially that he was a fool. Personally I don’t think he was a fool, or stupid, I think the tax cuts are exactly what the Randian disciple Greenspan wanted. As the NY Times notes:
Shortly after “Atlas Shrugged” was published in 1957, Mr. Greenspan wrote a letter to The New York Times to counter a critic’s comment that “the book was written out of hate.” Mr. Greenspan wrote: “ ‘Atlas Shrugged’ is a celebration of life and happiness. Justice is unrelenting. Creative individuals and undeviating purpose and rationality achieve joy and fulfillment. Parasites who persistently avoid either purpose or reason perish as they should.”
Randians generally figure that any money you got, you got all on your own, and you therefore deserve all of it. The government is a leech for taking it away to give to less productive people, because rich people are generally the most productive contributors and should not be disincentivised from working hard. Tax cuts on the rich are a very Randian thing to do. And so Greenspan backed them.
Greenspan also was in charge of the “Greenspan Commission” whose recommendations formed the basis for the 1983 changes to Social Security meant to save SS and make it build up a reserve of cash to deal with the baby boomer retirement. And, in fact, Greenspan did a good job, and the bill did what it was advertised to. SS, if left alone, will not run out of money before most of the Boomers are dead a good 30 or more years from now. Of course, being Greenspan how he did it was to raise the amount the poor and middle class donate and to not hit the rich hard (in fact the taxation is capped above a certain level and applies only to wage income) . The tax was immensely regressive, and because the money was leant to the federal government, it also allowed immense amounts of pork.
As Dean Baker notes, this is important because in 2004 Greenspan wanted to cut Social Security…
Two weeks ago Federal Reserve Board Chairman Alan Greenspan testified before the Senate Budget Committee about the state of the economy. He expressed concern about the budget deficit and suggested that cutting Social Security might be a good way to reduce the size of the deficit.
It is worth noting that Social Security is currently running a large surplus and is projected to continue to run annual surpluses for more than two decades into the future. The Social Security trustees projections show that the fund’s trust will be able to support all scheduled benefit payments for nearly forty years into the future. If Social Security benefits are cut, without any corresponding reduction in the tax rate (which is exactly Mr. Greenspan’s recommendation), then this would mean that Social Security taxes are being used to finance the general budget, not Social Security.
So, let’s do the arithmetic. If SS taxes became used not for SS, but for the general budget, that would mean the tax cuts that Greenspan shilled for in 2001 and were in large part responsible for the deficit – tax cuts that benefited the rich mostly – would be made up mostly by a highly regressive tax that hits the working and middle classes much harder than the affluent – let alone the rich. Again, the pattern is clear – soak the poor, spare the rich. They’re more productive, doncha know. Middle class and working class people are leeches.
But we aren’t finished with Greenspan’s ideological support for the worst sort of Bush administration economic policies. Oh no. Let’s talk about the housing bubble and the sub-prime crisis…
Mr. Greenspan writes briefly about what may become a more troubling legacy, the housing bubble, and now the bust, that was fueled by low interest rates and risky mortgages in the last six years.
Some economists argue that Mr. Greenspan deserves considerable blame, because the Fed slashed interest rates to rock-bottom lows and kept them there for three years after the stock market collapse and the recession in 2001.
The Fed was “a prime culprit in creating the crisis,” wrote Steve Forbes, publisher of Forbes magazine, in a just-published commentary. But other economists, including critics of Mr. Greenspan, say the housing bubble resulted from much broader forces, including a dramatic drop of interest rates around the world and an explosion of mortgages that required no money down, no income verification and deceptively low initial teaser rates.
Mr. Greenspan generically defends the Fed’s action, writing: “I believed then, as now, that the benefits of broadened home ownership are worth the risk. Protection of property rights, so critical to a market economy, requires a critical mass of owners to sustain political support.”
Now, it’s definitely true that the sub-prime mess and the housing bubble weren’t just caused by Fed policy. But it’s also true that those 3 years at generational lows certainly kick-started it, gestated and got it growing at a ferocious rate. I was writing about the coming housing bubble back in 2002 (on the old Atlantic Monthly forums) – it was clear what the policies would do. And Greenspan knew too – he implicitly admits it above with his talk about how wonderful more home ownership would be because it would help increase property rights by altering politics. Property rights, of course, are another Randian bugaboo. Not that they aren’t important, but there’s a reason why they aren’t in the Constitution, why governments are allowed to seize property, and so on. Greenspan kept rates low longer than made sense due to ideological reasons. And he pushed it hard.
Speaking personally, what respect I had for Greenspan turned to contempt when he pushed variable rate mortgages in early 2004, with these words:
Calculations by market analysts of the “option-adjusted spread” on mortgages suggest that the cost of these benefits conferred by fixed-rate mortgages can range from 0.5 percent to 1.2 percent, raising homeowners’ annual after-tax mortgage payments by several thousand dollars. Indeed, recent research within the Federal Reserve suggests that many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade, though this would not have been the case, of course, had interest rates trended sharply upward.
Uh huh. Except, of course, that “when” you do things matters. In early 2004 interest rates were at, ummm, generational, let alone decade long, lows. They weren’t going to get lower. Suggesting that variable rate mortgages would be a better idea, even with caveats, was immensely irresponsible and even cruel. Greenspan’s public repuation was still sky high, and one can imagine that ordinary Americans would have thought that Uncle Alan knew what he was talking about and wouldn’t steer them wrong.
Uncle Alan, Greenspan, the Maestro, was an ideologically driven central banker. Working with Clinton and Rubin he had generally good results, but as soon as the lead sled dogs were gone, the Maestro lost his way. His mistakes – keeping interest rates low too long, encouraging tax cuts, ignoring the growing housing bubble and indeed encouraging it were symptoms of his strong ideological bias, which was also demonstrated in his suggestion to slash Social Security when it was not in significant difficulty (bankruptcy 40 years out is not a “crisis”, especially given how economic forecasting works).
Greenspan was never “the Maestro”. He was certainly a technically competent Fed Chairman, and no one can take that away from him. But presented with the opportunity to shill for his ideology, he chose ideology over economic sense and ignored the numbers time and time and time again in order to aid the Bush administration’s policy goals.
For him, now, to say that he somehow didn’t mean it, or that he was, behind the scenes, urging caution, or that he was hoodwinked, is sophistry of the most pathetic kind. He was not economically naive. He had the skills not to be taken in. If he was taken in, he was taken in because he wanted to be taken in. And right up to 2004 he can be seen, having not learned his lesson, even as Bush had vetoed no spending bills at all, still using his reputation to try and help push through Bush administration policies.
There have been a lot of people writing books and articles of late, in which they throw Bush over the bus in an attempt to save their reputation. (Colin Powell, are you listening?) In almost every case, they did nothing when they had the power; had the influence; had the opportunity to actually made a difference.
Greenspan is nothing but another rat fleeing the sinking S.S. Bush in an attempt to save his reputation for posterity. He doesn’t deserve space on the life raft. Men like Treasury Secretary O’Neill, who wrote their books while it still mattered, when it still took guts, when it might have made a difference; they deserve a hand up. Greenspan deserves to go down with the ship.