Matthew Benjamin of Bloomberg on Greenspan's Memoirs
A Historical Document: Alan Greenspan's January 25, 2001 Senate Testimony

We Can Help Karen Tumulty!

Karen Tumulty asks a question:

The Greenspan Book - Swampland - TIME: However, it is worth remembering the central role that Greenspan played in enabling the Bush economic program to happen. In the first days after the 2001 inauguration, Greenspan warned of a danger that the budget surplus (remember the surplus?) could actually become too big and drag down the economy. And thus, Greenspan gave the green light to Bush's tax cuts.

In his book, the NY Times says, Greenspan acknowledges that he was cautioned not to make such an endorsement, by none other than Robert Rubin, the head of that Clinton economic team that he regarded so highly:

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.

But Greenspan presided over the Fed for another five years. So it seems fair to ask: Why did he wait until he had an $8.5-million book deal to tell us this?

One way that Karen Tumulty could have learned earlier that Greenspan did not intend to give the "green light" to Bush's tax cuts was by listening to or reading Greenspan's testimony: 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. Only if the probability was very low that prospective tax cuts or new outlay initiatives would send the on-budget accounts into deficit, would unconditional initiatives appear prudent...

In English rather than Greenspanese, that last sentence means: If there is any chance that the tax cuts will send the budget into deficit, then the tax cuts need triggers that would then turn them off.

And Greenspan explicitly says there is a chance that the tax cuts will send the budget into deficit:

What if... the forces driving the surge in tax revenues in recent years begin to dissipate or reverse...? Indeed, we still do not have a full understanding of the exceptional strength in individual income tax receipts during the latter 1990s... we are making little more than informed guesses of certain key relationships.... [T]he risk of adverse movements in receipts is still real, and the probability of dropping back into deficit as a consequence of imprudent fiscal policies is not negligible.

In fact, Greenspan's testimony is filled with such phrases:

...the highly desirable goal of paying off the federal debt... an extraordinarily rapid and highly undesirable short-term dissipation of unified surpluses... what type of private assets [the government should] acquire and to which federal accounts they should be directed must be [decided] well before the policy is actually implemented... it would be preferable in my judgment to allocate the required private assets to the social security trust funds... a declining level of federal debt is desirable... a budgetary strategy that is consistent with a preemptive smoothing of the glide path to zero federal debt... we should make sure that social security surpluses are large enough to meet our long-term needs... explicit mechanisms that will help ensure that outcome... care must be taken not to conclude that wraps on fiscal discipline are no longer necessary.... provisions that... would limit surplus-reducing actions if specified targets for the budget surplus and federal debt were not satisfied... caution... the tentativeness of our projections... forces driving the surge in tax revenues in recent years [might] begin to dissipate or reverse... we are making little more than informed guesses of certain key relationships... the risk of adverse movements in receipts is still real... the probability of dropping back into deficit as a consequence of imprudent fiscal policies is not negligible... crucial that we develop budgetary strategies that deal with any disappointments... a cautionary note... we need to resist those policies that could readily resurrect the deficits of the past...

A second way she could have learned earlier that Greenspan had not intended to give a green light to unconditional tax cuts would have been from listening to or reading about the exchange between Sarbanes and Greenspan on April 21, 2005. As reported by Nell Henderson: Federal Reserve Chairman Alan Greenspan said today that his support for tax cuts in early 2001 unintentionally encouraged policies that helped swing the federal budget from surplus to record deficits. In addition, he said for the first time explicitly that he expected tax increases to be part of any bipartisan agreement on deficit reduction.

But Greenspan, responding to questions during a Senate Budget Committee hearing today, said it was unfair for critics to ignore the warnings in his January 2001 congressional testimony that the surplus forecasts might be wrong, and his recommendation of some "trigger" mechanism that would limit tax cuts if certain budget targets were not met.

"I think its frankly unfair" for critics to blame him for the fact that Congress chose to "read half my testimony and discard the rest," Greenspan said, venting his frustration on the issue publicly for the first time, in response to a question from Sen. Paul Sarbanes (D-Md.)

Sarbanes chided the Fed chief that he is well aware of how Congress works, and he should have known lawmakers might not heed all his cautions.

Sarbanes said he believed it was "fair" for lawmakers to see Greenspan's 2001 remarks "as a green light to the tax cuts," which were enacted without any triggers.

"I plead guilty to that," Greenspan said. "I did not intend it that way."

A third way that she could have learned of this before September 15, 2007 would have been to read Ron Suskind's The Price of Loyalty back when it was published in 2003, where Suskind writes:

May 22 [2001]... Greenspan arrived at the Treasury for breakfast with O'Neill.... Greenspan said that wasn't enough. "Without the triggers, that tax cut is irresponsible fiscal policy," he said in his deepest funereal tone. "Eventually, I think that will be the consensus view."

Now it is, of course possible that Greenspan was playing a subtle reputation-enhancing game, anxious to give testimony that the administration and its press lapdogs would spin as a green-light endorsement, but in which economists like me and financiers like Robert Rubin would be unable to find any sentence that was truly objectionable.

But let's give the mike to Alan Greenspan, p. 220 ff.:

Bob Rubin phoned.... With a big tax cut, said Bob, "the risk is, you lose the fiscal discipline."...

"Bob, where in my testimony do you disagree?"

There was silence. Finally he replied, "The issue isn't so much what you're saying. It's how it's going to be perceived."

"I cant be in charge of people's perceptions," I responded wearily. "I don't function that way. I can't function that way."

It turned out that Conrad and Rubin were right....

As the hearing ended, I was optimistic that the ideas I had set forth--the risks of excessive surpluses, the glide-path proposal [to a zero national debt], the notion of a trigger [to prevent the reemergence of deficits by shutting off the tax cut if necessary]--would in the long run get attention as the legislative process proceeded. But for the moment, I resigned myself to the idea that my testimony would be politically framed. I later told my wife, "I am shocked, shocked, that there is politics on Capitol Hill....

I'd misjudged the emotions of the moment. we had just gone through a constitutional crisis... which... is not the best time to try to put across a nuanced position based on economic analysis. Yet I'd have given the same testimony if Al Gore had been president...