Forget About Greenspan, Too

When the Senate Banking Committee laid out a red carpet for Federal Reserve Board Chairman Alan Greenspan last week and listened enraptured to his advice on the Bush tax cut, it shouldn’t have been a shock that he questioned the plan’s wisdom.

Cutting taxes now, said Greenspan, would be “premature.” “I am one of the few people who still are not as yet convinced that stimulus is a desirable policy at this particular point,” he said.

Greenspan’s skepticism, not surprisingly, was greeted with thunderous applause from congressional Democrats and the economic ignoramuses in the media. Here was the vaunted voice of economic wisdom declaring the Bush tax cut unnecessary. Listening to the network coverage of his testimony, you might have thought he had delivered it from Sinai on a stone tablet.

But when it comes to fiscal policy he isn’t even a particularly brilliant economist. He ought to be worrying about the nation’s money supply and inflation rate, not opining about the President’s economic program. (Doesn’t this kind of testimony violate some separation of economic powers clause in the Constitution? Alas, it should, but it doesn’t. The Constitution doesn’t even authorize a Federal Reserve Board-let alone a Fed chairman.)

Now I should interject that on monetary policy itself Greenspan has been arguably the best Fed chairman in history. The Fed’s job is to create stable prices and protect against excessive inflationary and deflationary trends. That is it. No more, no less. Greenspan has largely accomplished this goal (though the Fed’s excessively tight money policy in 2000 was a principal factor behind the latest recession).

Greenspan’s meddling in other areas of economic policy has almost always ranged from questionable to catastrophic.

For 15 years he has been a fairly consistent foe of cutting taxes and an obliging advocate of higher taxes. In the late 1980s, he often urged President Reagan to raise taxes to balance the budget. The Gipper wisely wouldn’t listen.

Greenspan counseled Congress that unless Reagan raised taxes, the economy would tank and interest rates would rise. But when Reagan ignored him, long-term interest rates fell and the economic expansion roared on.

In 1990, Greenspan made an unholy alliance with the senior President Bush. Greenspan would lower interest rates if Bush would revoke his no new taxes pledge. Bush was seduced. He raised income taxes-and lost his presidency because of it.

The tax hike Greenspan urged plunged the economy into a recession. Jobs and productivity were lost. The budget deficit actually doubled after the tax hike. To this day, the elder Bush believes Greenspan welsh on the deal, failing to cut interest rates in time to juice up the economy and help his re-election. Let’s hope W. has stored this disastrous chapter of history in his permanent memory bank.

In 1993, Greenspan conspired with President Clinton to ram through the biggest tax increase in U.S. history. Without Greenspan, Clinton could not have rallied political support for this ill-advised tax hike. Greenspan assured Congress that higher taxes would lead immediately to lower interest rates. But in the two years after the Clinton tax hike-1993 and 1994-interest rates steadily rose along with taxes.

It was not until November 1994-after a Republican House majority promising to overturn the Clinton-Greenspan tax hike was elected-that interest rates started to fall and the Dow began its explosive 6,000-point rally.

Greenspan’s Three Fallacies

In 1996 and 1997, Greenspan lobbied against a GOP tax-cut proposal that included cutting the capital-gains tax, expanding the child credit, and lowering the marriage penalty tax. Fortunately, Republicans tuned Greenspan out and enacted their tax cut in full. The result: lower interest rates and a Laffer-curve surge in revenues from the capital gains cut.

Greenspan virtually always sings from the same hymnal. He almost always opposes tax cuts, pummeling them as fiscally unaffordable, and the press always trumpets his skepticism. The bucket of cold water he has thrown now on President Bush’s economic stimulus proposal was as predictable as it was unsound.

Greenspan offered three explanations for his reaction to Bush’s $670-billion economic growth plan.

First, he said, the economy doesn’t need the pick-up right now. He thinks the economy will improve on its own.

But if Greenspan, really had an accurate crystal ball, we wouldn’t be in the economic ditch we’re in now. Several months ago, he testified that he foresaw the beginnings of a robust expansion. It hasn’t happened.

Simple economic prudence suggests Congress should err on the side of providing too much tax-cut stimulus (if there is such a thing), rather than too little.

Second, Greenspan said that tax cuts will cause the deficit to worsen and long-term interest rates to rise. But he has no evidence that long-term interest rates rise when taxes are cut.

To the contrary, when Reagan dramatically cut taxes in the 1980s, interest rates fell from a high of 15% (mortgage rates were at 20%) at the time he entered office, to about 6% when he left. Now, in the aftermath of President Bush’s first tax cut, interest rates have fallen to their lowest levels in 30 years. The idea that tax cuts cause higher interest rates is superstition.

Third, Greenspan questioned whether the Bush plan would give a short-term shot of adrenaline to the economy. But he overlooked the stimulatory effect of one of the primary benefits of the tax plan. The dividend tax cut will rally the stock market immediately because after-tax returns on equities will instantly and permanently rise. This increase in equity values could be as much as 10 to 15%, according to economist Larry Kudlow. A rally in the market would help to quickly restore investor and consumer confidence.

It is significant that despite his claim that the President’s proposal was “premature,” Greenspan did concede that cutting tax rates and eliminating the double tax on dividends could provide “a strong boost to long term economic growth.”

Well, if it is good for long-term economic growth, why not enact the policy with all due speed and urgency?

Greenspan’s inept advice helped tank the presidency of the senior President Bush. Clearly, this President Bush has no intention of letting history repeat itself. Senate Republicans need to support him in that cause.