Grumpy Greenspan: New Book Hits a Bum Note

The former Fed chief blasts Bush for squandering budget surpluses of the Clinton years.


It's an old inside-the-beltway joke that every Washington memoir should really be subtitled: "If Only They Had Listened to Me." And it certainly looks as if former Federal Reserve Chairman Alan Greenspan's new book, The Age of Turbulence: Adventures in a New World, is yet another magnum opus in that grand literary tradition. One of the 81-year-old Greenspan's big gripes is that President Bush and the Republican Congress—by not cutting spending to match the 2001 and 2003 tax cuts—dragged the federal budget back into the red. Team Bush thus squandered the balanced-budget legacy of the so-called Committee to Save the World: Greenspan and two Clinton administration treasury secretaries, Bob Rubin and Larry Summers.

With George Bush came the tax cuts, unmatched by decreased spending, and, in the wake of September 11, still more open-handed spending.... Deficits don't matter, to my chagrin, became part of the Republicans' rhetoric.... The Republicans in Congress lost their way. They swapped principle for power. They ended up with neither. They deserved to lose.

Oh, Martha. If that quote reflects the sort of policy advice Greenspan is giving to British Prime Minister Gordon Brown, someone please remind me to short London's FTSE index at my earliest possible convenience. It's clear that Greenspan views himself as some sort of Randian hero who, in his role as the planet's maximum banker, was able to shape the world in the image of his highest values, perhaps wondering, as did a character in Ayn Rand's Atlas Shrugged, "whether some mysterious omnipotence had favored me with some unknowable talent to achieve the things I wanted."

And yet, all his great work was wasted by the lesser men of the Bush White House and their refusal to follow and further the economic trail (tax rebates, "Whip Inflation Now") blazed by the Ford administration, when Greenspan headed up the Council of Economic Advisers. No wonder he's cranky—though probably not as cranky as all the homeowners who took out adjustable-rate mortgages and home-equity lines of credit and then got sucker-punched by Greenspan's 17 straight interest-rate hikes. Or any stock investor who jumped out of the market at the end of 1996, years before its peak, after Greenspan's "irrational exuberance" crack.

But consider the following when evaluating the wisdom of Greenspanomics:

1) Greenspan is right that both the White House and the GOP-led Congress have cared little for cutting spending and shrinking government. And much scorn deserves to be heaped upon fiscal follies like the new prescription drug benefit. Indeed, 90 percent of the swing from the surplus of the Clinton years to deficit resulted from higher-than-projected spending. That leaves just 10 percent from lower-than-projected revenues.

Yet Greenspan's analysis reinforces the mistaken belief that every dollar cut in taxes is a dollar lost in revenue, a belief that assumes—in this case—that the economy since 2002 would have done every bit as well without the 2001 and 2003 tax cuts. (Though it probably would have done better had the 2003 cuts come first.) Indeed, a breathtaking new study by two University of California-Berkeley (!) economists finds that "although a tax cut leads to a sharp fall in revenues in the short run, it does not have any clear impact on revenues at horizons beyond about two years." The same economists also find "that a tax cut of 1 percent of GDP increases real output by approximately 3 percent over the next three years. Since revenues are a function of income, this growth undoubtedly raises revenues." In other words, tax cuts are good for growth and government finances.

2) Greenspan criticizes the Bush administration for letting politics rather than sound economics drive policy. Yet the same charge could accurately be leveled at the 1983 Greenspan commission that was supposed to "save" Social Security. Not only (obviously) was Social Security not saved, but the commission's proposed fixes were extremely political, such as raising the retirement age—but waiting two decades to do so. Nor were simple and effective solutions, such as indexing benefits to inflation rather than wages, recommended because of potential political fallout.

3) Greenspan's role in the 1990s economic boom is vastly overstated. Yes, Greenspan nudged the Clinton White House to chuck its "Putting People First" campaign platform in favor of a "Putting Bond Traders First" economic agenda of higher taxes and lower budget deficits with the expectation that long-term interest rates would fall. (Interestingly, a recent econometric study of the impact of U.S. budget deficits from 1976 to 2002 by two University of Southern California professors found "no evidence of any positive effects of either current or expected future budget deficits on . . . real interest rates." )

Yet interest rates rose steadily from 5.78 percent in October 1993 until they peaked at 8.16 percent the day of the midterm election when Republicans surprisingly took the U.S. House and Senate. That's when rates began the long descent that Clinton and Greenspan had predicted. One explanation: The post-1994 drop was more indicative of market expectations that the new GOP Congress would get tough on spending, meaning not only lower budget deficits but also a lower chance of spending-induced inflation. And recall that the really fat economic years of the 1990s happened after the 1997 capital-gains tax cut. Then there were the huge productivity gains caused by the rise of Wal-Mart and the chip war between Intel and AMD. Greenspan may have recognized the emergence of the "new economy," but he did not cause it.

Anyway, we're sitting here with a six-year economic expansion—already the fourth-longest since World War II—with low unemployment and low inflation. Oh, and the deficit is collapsing, and it's now less than 2 percent of GDP despite all that new spending. What's Greenspan's gripe again?