From time to time, a great man arises among us, teaching wisdom and virtue. Awed by his authority, the political leaders of his day embrace his legacy, distort his words, and persecute their enemies in his name. Such is the fate of Washington’s reigning prophet, Federal Reserve Chairman Alan Greenspan. Last week, he testified before Congress in the midst of a partisan fight over a Republican plan to cut $800 billion in taxes over 10 years. While Democrats solicited his denunciation of the plan, Republicans sought his condemnation of the Democratic alternative. Greenspan tried to preach higher principles, but both sides twisted his answers to suit their purposes. Their fight for his favor revolves around four questions.
1. What’s the comparison? Greenspan testified that debt payment is the best use of the surplus, tax cuts are the next best, and spending hikes are the worst. While opposing a big tax cut, he stipulated, “If I became concerned that the surplus is going to be employed for increased spending programs, [then] I would be strongly in favor of tax cuts now. I think it’s the second best alternative.” In short, whether Greenspan supports a tax cut depends on which alternative it’s compared to.
To make the tax cut look bad, Democrats compare it to debt payment. At the hearing, Rep. John LaFalce, D-N.Y., asked Greenspan whether he opposed the Republican plan. “My first priority, if I were given such a priority, is to let the surpluses run,” Greenspan replied. LaFalce tried to quit while he was ahead, but Greenspan insisted on adding, “My second priority is, if you find that as a consequence of those surpluses, they tend to be spent, then I would be far more in the camp of cutting taxes, because the least desirable [outcome] is using those surpluses for expanding outlays.” In their post-hearing spin, Democrats ignored this caveat. Rep. Brad Sherman, D-Calif., asserted that Greenspan had “attacked the Republican Party.” Sen. Dick Durbin, D-Ill., suggested that Greenspan’s analysis made clear that a $500 billion tax cut was just as “dangerous” as an $800 billion tax cut.
Conversely, to make the tax cut look good, Republicans compare it to spending hikes. “My understanding from all you’ve said here today,” Rep. Michael Castle, R-Del., told Greenspan at the hearing, “is that you believe that debt retirement is probably the best thing we could do. And if not that, perhaps some sort of a tax cut. But probably the thing that could really get us in trouble in an economic sense from your perspective is to spend it all.” In post-hearing TV appearances, House Majority Leader Dick Armey, R-Texas, and Senate Budget Committee Chairman Pete Domenici, R-N.M., argued that Greenspan’s essential message was to “be sure you do not increase government spending.”
2. Is Clinton’s plan debt payment or spending? President Clinton’s alternative plan would reserve about 45 percent of future surpluses for Social Security and Medicare while setting aside nearly 20 percent for education, defense, veterans, agriculture, medical research, and other programs. Armey and Domenici call this “spending.” “The president is going to spend every nickel” of the surplus, Domenici protested, “so Alan Greenspan would agree with us” that taxes should be cut instead. “The White House is buying down less debt, and increasing spending, and increasing taxes,” added Armey. “I’m sure Alan Greenspan will applaud our effort relative to the president’s effort to buy down less debt and increase government programs.” Conversely, Durbin spun Clinton’s plan as debt payment. He claimed that when Greenspan was asked whether he supported the tax cut, he said no. “The best thing to do is the Democratic plan: spend down [the] national debt, invest the money in Social Security and Medicare.”
3. Which excess would be harder to reverse? Since tax cuts and spending erode the surplus, Greenspan is wary of both. Democrats, seeking to direct his ire against the Republican plan, emphasize the difficulty of reining in tax cuts once they’ve been promised. At the hearing, Rep. Ken Bentsen, D-Texas, asked Greenspan about the “risks” of “having locked in a tax cut that we then have to borrow more to pay for.” Afterward, Durbin suggested that Greenspan didn’t want Congress to “get committed” to tax cuts. Republicans, on the other hand, emphasize the difficulty of reining in spending. “If you create all those new programs, you’ll never get that money back,” Sen. Phil Gramm, R-Texas, argued, whereas if the money goes to tax cuts, “[y]ou could get it back by raising taxes.”
4. Whose promise is less trustworthy? Democrats promise to preserve the surplus for debt reduction by not spending it. Republicans promise to preserve the surplus for debt reduction by cutting spending to keep pace with their tax cuts. The Republican interpretation of Greenspan’s remarks–that taxes should be cut because the Democrats can’t be trusted to refrain from spending the surplus–obscures the contrary possibility, i.e., that the tax cut should be avoided because the GOP can’t be trusted to make the necessary spending cuts. Democrats neglected to ask Greenspan about this possibility at the hearing, but on Face the Nation, Bob Schieffer of CBS put the argument to Domenici: “Some people would come back at you and say, ‘Look, for this surplus to be this large, you have to have a 20 percent reduction in programs, [which is] totally unrealistic.’ “
So far, the Democrats’ spin has prevailed, mostly because, as the Wall Street Journal noted Tuesday, the media have ignored Greenspan’s caveat that tax cuts are preferable to more spending. Most reports say only that he opposed the Republican plan. None of the New York Times’ political stories or editorials about Greenspan’s testimony mentioned his qualified endorsement of the tax cut. Instead, the Times fed its readers the Democrats’ comparison, noting that Greenspan said, “it is more important to pay down the national debt than cut taxes.” The Times’ only mention of Greenspan’s caveat was in the 15th paragraph of a story in the business section, which dismissed the caveat and concluded that “effectively, Mr. Greenspan was siding with the White House” and other foes of the Republican plan. A Times editorial chided Republicans for “seeking Greenspanian ambiguity where it did not exist.”
This shallow reporting doesn’t just bury the Republican spin. It conceals a deeper question about Washington’s Greenspan worship. The Fed chairman made clear that his recommendation against cutting taxes depends on a calculation that Congress won’t spend the surplus. If that calculation is wrong, he would favor the tax cut. And on what basis did Greenspan make this calculation? His only answer was that he “hoped” he wasn’t mistaken.
Not only is Greenspan’s answer scientifically baseless; his characterization of the problem (whether the surpluses will “be spent”) is superficial. The salient questions, outlined above, are more relative and dynamic: whether Democratic promises to refrain from spending the surplus are less trustworthy than Republican promises to match tax cuts with spending cuts, and which hypothetical error–excessive spending or excessive tax cuts–would be harder to reverse. How could an economist of Greenspan’s sophistication fumble such important questions in such an unsophisticated manner? Because, like most questions about how much money the government will raise and spend, they’re not economic. They’re political. And instead of throwing these questions at Alan Greenspan, Congress should be answering them itself.
Photograph of Alan Greenspan on the Slate Table of Contents by Kevin Lamarque/Reuters.
