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What’s Greenspan’s Gripe?
Posted by: McQ on Monday, September 17, 2007

James Pethokoukis of US News & World Report asks that very question.

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.
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.
I think we've discussed this fairly recently and somewhat extensively.
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.
Interesting but not particularly damning. Politics have driven policy. And while Pethokoukis' point is valid, it is the difference between broad economic policy and its effect and a particular program (albeit a huge one). One doesn't excuse the other.
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.
Ummm, bust, turmoil in the market, etc. I agree that Greenspan has a few problems of his own. I also agree with Pethokoukis that Greenspan gets a lot of credit where little is due. But again, all of that has what to do with George Bush's economic policy?
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?
Ah, the nut of the problem and probably all Pethokoukis had to say, but hey, columnists don't get paid by the thought, but instead by the word.

Now my question is, given that Greenspan gets little credit for his 8 terms at the helm of the Fed for economic expansion, why should George Bush? The fact that we're just now seeing the deficit being reduced significantly and happen to have low unemployment and low inflation seems to have happened despite George Bush's fiscal policy instead of because of it.

And if I were to guess, Greenspan's gripe is it all could have been so much better had Bush resisted the spending.
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Previous Comments to this Post 

I wonder is it is even possible now to have a long or severe economic downturn (barring some worldwide catastrophe or war)?

My reasoning is that as long as long as the majority of nations maintain free trade policies, and capital and information can move quickly and freely, then we have with the Internet entered into (or close to) the idea of perfect markets.

This means that shortages or surpluses in anything, labor, capital, credit, widgits etc. cannot last for long because there will always be a demand somewhere in the world.
Written By: kyleN
What is this cr*p that keeps being repeated in these articles about a surplus under Clinton? There was no surplus (absent Enron style accounting). The last time there was a surplus was an Eisenhower budget.
Written By: Anonymous
URL: http://
Yes we can have a long downturn. Consumer spending has been boosted by increased home equity loan spending, and that’s drying up. The dollar has lost significant value, and the US has an unsustainable current accounts deficit. Oil is increasing in price, as demand goes up and production levels seem unable to rise (and could fall in coming years). I don’t see us close to anything like a perfect free market when I look out on to the world economy; I’m not sure why Kyle is so optimistic.

Also, there was a surplus in Clinton’s budget; before Clinton the last balanced budget was at the end of the Johnson administration.
Written By: Scott Erb
I would hedge your bets somewhat. I work in retail. Our customers are spending (or more accurately, not spending) in the same way that they were spending/not spending in 2000/2001)—at the very least suggestive that the growth of the last six years is over. (In fact, were it not for the fact that we are in a resort area with heavy traffic from foreign tourists, it would be worse than it was at that time.) And I know my food bill has gone up perceptibly over the last two years, so inflation may be heating up again.

Those are my first hand observations. I know that I’ve read a lot of things which agree with what Erb claims, but unlike Erb I readily admit to a limited knowledge of economics, and will refrain accordingly from parroting what others have said.
Written By: kishnevi
URL: http://
"The dollar has lost significant value"

That’s a good thing, frankly.
Written By: Harun
URL: http://
09/30/2001 5,807,463,412,200.06
09/30/2000 5,674,178,209,886.86
09/30/1999 5,656,270,901,615.43
09/30/1998 5,526,193,008,897.62
09/30/1997 5,413,146,011,397.34
09/30/1996 5,224,810,939,135.73
09/29/1995 4,973,982,900,709.39
09/30/1994 4,692,749,910,013.32

And again, the total debt went up every year, just like it has every year since FY 1957.

The so called surplus (or balance) under Clinton is a result of borrowing Trust Fund monies and not accounting for it in the total debt (Enron accounting).

If there is a surplus, the debt actually goes down. This is a simple concept, though beyond the ken of some.
Written By: Anonymous
URL: http://
If there is a surplus, the debt actually goes down. This is a simple concept, though beyond the ken of some.
I think most folks get it, but also get caught up in the government’s own nomenclatura.

I see people talking about the surpluses that Bush will run this year or next, and of course those surpluses, should they occur, will be just like Clinton’s, the kind of surpluses that don’t actually pay down anything and actually see the debt rising. It’s that goofy lockbox that allows for these financial shenanigans.

Written By: Captin Sarcastic
URL: http://
Boris Erb:
Yes we can have a long downturn.
Is it time to make your annual prediction about a "crisis of capitalism," Boris?

Or have you already got enough points this year to keep your Party card current?
Written By: Martin McPhillips
More Boris:
Oil is increasing in price, as demand goes up and production levels seem unable to rise (and could fall in coming years).
When the price of oil increases, the incentives for more expensive recovery are in place, and there is plenty of oil (in Canada’s tar sands, for instance) to be recovered.

The problem is that oil prices are cyclical and always have been, and producers who are enjoying very high profits on their extremely low recovery costs can face a sustained price collapse, and contribute to it, by pumping more oil.

That makes consumers happy, but the production of the more expensive to recover oil can become unprofitable very quickly, and the price will cycle back up again.

But thanks again, Boris, for demonstrating how little you understand about, well, anything.
Written By: Martin McPhillips

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