Thursday, March 04, 2004

Greenspan the Politician

So in Money and Banking we just finished talking about the theory of bureaucratic behavior, and its ability to explain some of the actions of the Federal Reserve. Well it looks as though Greenspan continues to obfuscate some of his earlier thinking, in an attempt to avoid affecting the election, or raising the ire of Bush and Rove. Read this:

March 2 (Bloomberg) -- Federal Reserve Chairman Alan Greenspan said last week that big federal budget deficits eventually would lead to increases in long-term interest rates large enough to undermine U.S. economic growth.

However, Greenspan skipped over the possibility that ``eventually'' could arrive as soon as next year, leaving Fed policy makers with a potentially serious problem on their hands.

Perhaps the chairman didn't want to spook the markets. Perhaps he didn't want to go nose-to-nose with President George W. Bush over tax cuts, though Greenspan himself wants taxes to be as low as possible.

Thanks to Brad Delong for the pointer.

Of course this is another piece of evidence in a mounting pile which suggests Greenspan is not being intellectually consistent. His recent comments on Social Security indicate he has either changed his mind, or he is making a political calculation. Delong points to this Washington Post article:

Does Alan Greenspan have amnesia ["Fed Chief Urges Cut in Social Security," front page, Feb. 26]? More than 20 years ago he co-chaired a commission to ensure the solvency of Social Security. That commission recommended stiff increases in the payroll tax to create a surplus that would help fund the retirement of baby boomers down the road. The higher payroll taxes, which put a heavy burden on lower-to-middle income taxpayers, were signed into law and remain in effect to this day.

But in 2001 Mr. Greenspan endorsed a fiscally irresponsible income tax cut that effectively gives away the Social Security surplus he created primarily to high-income taxpayers. Now he suggests that those tax cuts be made permanent, while we reduce the enormous deficits that they've created only through cuts in spending, especially on Social Security.

Of course, Mr. Greenspan is right that we have tough choices to make on Social Security and Medicare. But he seems oblivious to the inconsistencies in his own position and to the huge inequities that these tax policies have created.

Keywords: ECO301, Federal Reserve

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