Paul Krugman Thinks Alan Greenspan Should Have Acted Differentially

From Paul Krugman this morning. I disagree with Paul's claim that tax cuts looked unlikely at the start of 2001. Presidents who propose tax cuts almost invariably get them. When was the last time congress refused to approve a president's tax cut? I cannot think of one:

Sad Alan’s Laments: When President Bush first took office, it seemed unlikely that he would succeed in getting his proposed tax cuts enacted. The questionable nature of his installation in the White House seemed to leave him in a weak political position, while the Senate was evenly balanced between the parties. It was hard to see how a huge, controversial tax cut, which delivered most of its benefits to a wealthy elite, could get through Congress.

Then Alan Greenspan, the chairman of the Federal Reserve, testified before the Senate Budget Committee. Until then Mr. Greenspan had presented himself as the voice of fiscal responsibility.... Suddenly, his greatest concern — the “emerging key fiscal policy need,” he told Congress — was to avert the threat that the federal government might actually pay off all its debt. To avoid this awful outcome, he advocated tax cuts. And the floodgates were opened....

Mr. Greenspan has just published a book in which he castigates the Bush administration for its fiscal irresponsibility. Well, I’m sorry, but that criticism comes six years late and a trillion dollars short. Mr. Greenspan now says that he didn’t mean to give the Bush tax cuts a green light, and that he was surprised at the political reaction to his remarks. There were, indeed, rumors at the time — which Mr. Greenspan now says were true — that the Fed chairman was upset about the response to his initial statement.

But the fact is that if Mr. Greenspan wasn’t intending to lend crucial support to the Bush tax cuts, he had ample opportunity to set the record straight when it could have made a difference. His first big chance to clarify himself came a few weeks after that initial testimony, when he appeared before the Senate Committee on Banking, Housing and Urban Affairs.

Here’s what I wrote following that appearance:

Mr. Greenspan’s performance yesterday, in his first official testimony since he let the genie out of the bottle, was a profile in cowardice. Again and again he was offered the opportunity to say something that would help rein in runaway tax-cutting; each time he evaded the question, often replying by reading from his own previous testimony. He declared once again that he was speaking only for himself, thus granting himself leeway to pronounce on subjects far afield of his role as Federal Reserve chairman. But when pressed on the crucial question of whether the huge tax cuts that now seem inevitable are too large, he said it was inappropriate for him to comment on particular proposals...

I received an irate phone call from Mr. Greenspan after that article, in which he demanded to know what he had said that was wrong.... Mr. Greenspan’s argument for tax cuts was contorted and in places self-contradictory, not to mention based on budget projections that everyone knew, even then, were wildly overoptimistic.

If anyone had doubts about Mr. Greenspan’s determination not to inconvenience the Bush administration, those doubts were resolved two years later, when the administration proposed another round of tax cuts, even though the budget was now deep in deficit. And guess what? The former high priest of fiscal responsibility did not object. And in 2004 he expressed support for making the Bush tax cuts permanent — remember, these are the tax cuts he now says he didn’t endorse — and argued that the budget should be balanced with cuts in entitlement spending, including Social Security benefits, instead. Of course, back in 2001 he specifically assured Congress that cutting taxes would not threaten Social Security.

In retrospect, Mr. Greenspan’s moral collapse in 2001 was a portent...

Comments

[Jim Bales]

Prof. DeLong,

Perhaps Prof. Krugman was wrong, and tax cuts were indeed likely in 2001, as you believe.

How does this in any way mitigate Krugman's observation that:

"Mr. Greenspan has just published a book in which he castigates the Bush administration for its fiscal irresponsibility. Well, I’m sorry, but that criticism comes six years late and a trillion dollars short. Mr. Greenspan now says that he didn’t mean to give the Bush tax cuts a green light, and that he was surprised at the political reaction to his remarks. There were, indeed, rumors at the time — which Mr. Greenspan now says were true — that the Fed chairman was upset about the response to his initial statement."

"But the fact is that if Mr. Greenspan wasn’t intending to lend crucial support to the Bush tax cuts, he had ample opportunity to set the record straight when it could have made a difference."

Even if the tax cuts were likely in 2001, if Mr. Greenspan had made a clear, unmistakable assertion that Mr. Bush's tax cuts as proposed were bad for the US, the political dynamic would have shifted to be less favorable to Mr. Bush's imprudent tax cuts. What happened, of course, was that Greenspan's perceived support of those tax cuts shifted the political dynamic strongly in favor of those unwise tax cuts.

Greenspan had many, many opportunities to oppose Mr. Bush’s rash tax policies. Sadly, as Prof. Krugman notes, Mr. Greenspan was “determination not to inconvenience the Bush administration.” Do you consider it appropriate for Mr. Greenspan to have placed placating the Bush administration above the well-being of our nation?

[baileyman]

Once again, what they do, not what they say. The objective is revealed by their actions, not by their words.

[sglover]

"Once again, what they do, not what they say. The objective is revealed by their actions, not by their words."

Yeah, but it's the baldness of the lies that's getting scarier.

Why DeLong should be taken in by them is a puzzle.

[howard]

prof, of course a tax cut was inevitable in 2001: gore as well as bush ran on a tax cut.

the question was whether we were going to get the "bush," "gore," or "other" tax cut in terms of size and distribution.

i believe that brother paul is, therefore, reviewing the prospects for the "bush" tax cut in the phrase "his proposed tax cuts," and not reviewing the prospects for a "gore" or "other" tax cut....

[Matt]

Tax cuts!

Look at the yield curve in 2000, Feb it turns far to the asset side. Assets abd liabilities are going to rebalance, assets going lower and bingo, the Republicans reprice government down by 30%, right at the peak of the cycle. 180 degrees out of phase, accelerating the out-of-cycle momentum.

Meanhile the fed should be ready to drop interest rates by Mar 2000, as the curve flattened.

The fed cut rates a little late, and when they did the pent up demand for cheap conservative government hit like a firesale!

In this cycle, Brad called it right, the Fed should have started cutting near Aug 2006.

By the way, try this experiment. In instead of plotting the yield curve in terms of period (30,20,15,..) plot in terms of frequency (1/30,1/20,..) and look at the frequency of the three month bond, 4, vs the 30 year bond, 1/30.

You will see that the yield curve is, in fact, very much steeper and more "min-energy" then is commonly potrayed (half of if, the asset side?, missing). A steep yield curve means that rents (frequency zero) will have a very rapid change for small "tilts" of the yield curve peak.

Way over to one side is the fed, hands on one trail end of this thing, at about a frequency of 4, trying to tilt this curve back and forth. When this curve spends more time leaning toward assets then liabilities, the imbalance is inflation.

The fed seems generally 30 degrees to late in its changes. which is how I would expect a monopoly supplier of a service to use its pricing power.

http://stockcharts.com/charts/YieldCurve.html

[nemo]

"Mr. Greenspan now says that he didn’t mean to give the Bush tax cuts a green light, and that he was surprised at the political reaction to his remarks."

Liar liar pants on fire.

[andres]

Brad isn't looking clearly at the context of early 2001. For the past six years at least, Congress had followed the lead of Bentsen, Rubin, and Summers in its belief that budget surpluses would not only reduce the government's debt burden, which is self-evident, but also lead to lower bond market interest rates and a more healthy economy. Even with Bush in the White House, this was a consensus which would probably have led to Congress passing a much smaller tax cut, if Greenspan had not stepped in.

There are two ways to explain this:

(a) Greenspan generally believes in fiscal prudence, but in 2001 and again in 2003 he allowed himself to be intimidated by a narrow interest group whose self-interest outweighed the previous general welfare outlook from the US Treasury.

(b) Greenspan was intimidated not in 2001-2003, but in 1994-2000 when he declined to challenge Treasury's focus on budget balance, and what he in fact really believes in is fiscal irresponsibility as a way of starving the beast and eventually forcing the elimination of social security, medicare, etc. From a former disciple of Ayn Rand, I'm betting that this possibility is actually the case.

[RKKA]

Andres, I suspect your reading of political motivations in that political hack Greenspan's policies is correct. Look no further than 2000, an election year, where he repeatedly and sharply raised interest rates, despite the pace at which the Cinton Administration was paying down debt. Not only did this hinder economic activity, it raised short term borrowing costs for the government.

Fast forward to Inauguration Day 2001. Greenspan can't cut rates fast enough for the new President! The stimulus to economic activity is huge, and, once the tax cuts hack Greenspan testified in support of gives away the surplus, the Federal Government gets to borrow hundreds of billions at a low interest rate!

Harry Reid had Greenspan pegged. He's a rethuglican political hack who cares more about electing rethuglicans than the well-being of America.

[nemo]

From Brad DeLong's review: "[Greenspan] adds that he did not understand how institutionally corrupt and thus unconcerned about good budget policy his Republican Party had become by early 2001."

Oh, come on! For that to be true, Greenspan must have picked up a newspaper even less often than George W. Bush.

"[Greenspan] says he did not properly understand in the early 2000s the large effect low teaser interest rates and prepayment penalties would have in leading new and financially strapped homeowners into deals that were not in their best interest."

Ditto. Total BS. The average sentient Joe in the street who was even moderately knowledgeable about how mortgages work understood this at that time.

Greenspan finds himself with the choice of appearing to be either a fool or a charlatan, and he's decided to go with appearing to be a fool. In reality he appears to be both.

[david]

Advantage Andres!

[jamzo]

the "w" era might set a record in the number of political actors (such as greenspan" who publish memoirs seeking to influence history and the lenghts they go to "to paint a pretty picture" of themselves

[deficit]

Greenspan's domestic goals are not very different from Bush's goals: tax cuts and reduction of social services, using the deficits as a leverage. But nobody would bother to read his book if he just wrote that. So he engages in little misdirections, trying to show that he bears no responsibility for the biggest bloopers. The purpose of the book (separate from making good money) is not to accuse but to establish an alibi.

[Junius Brutus]

Brad said, "I disagree with Paul's claim that tax cuts looked unlikely at the start of 2001."

Brad: Krugman isn't saying tax cuts seemed unlikely, he is saying that tax cuts on Bush's grandiose scale seemed unlikely. Thus Krugman says, "It was hard to see how a huge, controversial tax cut, which delivered most of its benefits to a wealthy elite, could get through Congress."

In early 2001, most pundits were still under the illusion that Bush was going to be a weak president because of the way he stole the White House. Democrats in Comgress were pretty sure they were going to gain some concessions from Bush on the amount or the distribution of the cuts.

[c.l. ball]

First, Greenspan in 2001 did not endorse tax cuts to promote economic growth. In Feb. 2001 he told the Senate Banking committee:
"Senator, my focus on tax cuts as such
in the Budget Committee discussion was related to the issue of returning monies to taxpayers because the alternative was to
employ them as private assets held in Federal Government accounts.
I was not addressing the issue of the economic effectiveness of tax cuts in promoting productivity and the like. There is a long discussion which one can have with
respect to that, but I was not raising that as a reason for cutting taxes. I was basically indicating that the alternative
of collecting the revenues and then employing them as claims against the private sector struck me as not something which is
desirable if economic efficiency in this country is our goal."

Greenspan also told the Senate Budget committee several weeks before: " In recognition of the uncertainties in the economic and budget outlook, it is important that any long-term tax plan or spending initiative for that matter, be phased in. Conceivably, it could include provisions that in some way would limit surplus-reducing actions if specified targets for the budget
surplus and Federal debt were not satisfied."

He repeated this to the Banking committee and added "If there were a trigger which were built into both tax and spending programs, to the extent that they were phased, it
ensures that we achieve what I think should be the first priority--namely, to eliminate the debt."

In short, Greenspan argued that tax cuts should be phased in and stopped if budget projections changed. That is a far cry from what Krugman has him saying.

[anne]

Thinking about Alan Greenspan running unbidden through Washington shilling for war in Iraq to protect against the thoroughly insane idea of Iraq taking control of our oil, I really have to wonder about the intellect of the guy. The more I think, the more disgusted and disillusioned I am. Am I supposed to respect such a person for any reason, after knowing this?

[Doctor Jay]

You know, this fits well with a standard tactic of this administration. One which I named long ago, in a different context, "weasel wording".

I define "weasel wording" to be the utterance of a phrase that while technically truthful, gives the wrong impression to the speaker.

You know, things like, "We can't let the smoking gun be a mushroom cloud." Or, "Sadaam Hussein almost certainly has a nuclear weapons program." when referring to two guys in a basement doing internet searches or something.

This is why the defense, to both Krugman and Rubin (in an earlier post) "what part do you disagree with?"

I think, that to some extent, Greenspan got played. I'm not sure whether even now, he realizes it. But often, those who do get played aren't really willing to fess up to it. Instead of saying, "I made a mistake", he engages in rationalizations such as, "Nothing I said was inaccurate, and I would have said it if Al Gore was elected, too."

Probably, he said what he said, but the administration was running around behind the scenes telling everyone that "Greenspan endorses our cuts, don't worry about the triggers." Naive of him to not realize that, but then, he can be forgiven if, during the first month of the administration, he thought that they would be fiscally responsible, and, you know, pay attention to Paul O'Neill.