Last week, a member of Congress asked Federal Reserve Chairman Alan Greenspan to assess investors' views about the administration's long-term fiscal plan. His answer: "That there isn't one."
Greenspan, an alarmist about deficits in the '90s, didn't seem particularly troubled by this concession. Indeed, his blasé attitude toward the Bush red ink marks a sharp reversal from a decade ago, when he was an aggressive voice for fiscal restraint. It also signals a shift in Greenspan's role from goo-goo noodge to partisan hack.
The Fed has traditionally distanced itself from fiscal policy, leaving questions about taxing and spending to the authorities in the executive and legislative branches. But in the early '90s, as deficits mounted and a Democrat took control of the White House, Greenspan injected himself directly into fiscal policy-making.
In December 1992, he told President-elect Clinton that reducing the massive deficit inherited from President Bush would lower interest rates and revive the economy. Indeed, as Bob Woodward writes in Maestro—and, actually, in The Agenda,too—Greenspan even provided a specific figure. The administration should reduce the 1997 budget deficit by at least $140 billion. When such a plan was introduced, Greenspan naturally endorsed it. In 1993, when not a single Republican voted for Clinton's budget, "the only real Republican support had come from Greenspan."
Fast-forward to 2002. As deficits—short- and long-term alike—re-emerged, and as proposals surface weekly to make them larger, Greenspan no longer finds it necessary to act as a counterweight on fiscal policy. And I can't help but think it has something to do with who is in charge.
In the spring of 2001, Greenspan—along with many Democrats—supported President Bush's proposed tax cuts, which were designed to expire in 2011. At the time, when the 10-year surplus was still projected to be more than $6 trillion, it didn't seem entirely reckless.
But as the projected surplus swiftly evaporated, and as the economy sputtered, the White House and Congress either enacted or advocated a series of measures that would exacerbate rather than improve the long-term fiscal situation—the farm bill, a prescription drug plan, fixing the alternative minimum tax, etc. Bizarrely, the Democrats, clinging to their slim majority in the Senate, emerged as the only serious force in Washington for fiscal discipline.
Now they're gone. And the new regime simultaneously wants to slash taxes and lard up national security bills with pork, pass a new entitlement program for prescription drugs, and embark on an expensive overhaul of Social Security. In sum, as I've argued recently, the Republican regime could swiftly launch us back into an era of seemingly permanent structural deficits, just when the baby boomers are set to retire.
This should be the moment Greenspan starts hectoring the free-spenders. But in the recent debates over spending and tax cuts, Greenspan has emerged more as a cheerleader than a foil. On Wednesday, he mouthed President Bush's argument for making the slow-motion Bush tax cut permanent—even though he admitted the economic rationale underlying it was wrong.
Time was—back when a Democrat was in the White House—Greenspan was obsessed with the potential danger of running up large deficits. Now the former tenor saxophonist is playing a different tune. Yes, Greenspan said, long-term deficits should be avoided. But he hasn't seen fit to lecture the White House on what to do about it. And he certainly isn't suggesting any concrete deficit reduction figures. Rather, he said, Congress should craft spending limits and build automatic "sunset" provisions for spending programs, which would make them expire after several years.