Frederick Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009).
(Reuters) – "Secretary of State Hillary Clinton on Thursday said ‘outrageous’ advice from former Federal Reserve Chairman Alan Greenspan helped create record U.S. budget deficits that put national security at risk."
-February 25, 2010
Alan Greenspan lamented U.S. budget deficits in the Wall Street Journal on June 18, 2010 ("U.S. Debt and the Greece Analogy"). For an analysis of Greenspan’s flapdoodle, Barry Ritholtz covered the turf on his blog, The Big Picture. The former Federal Reserve chairman should have withheld comment, given his personal contribution to the nation’s poverty-stricken state.
Testifying before Congress on February 25, 2010, Hillary Clinton bemoaned the advice of Alan Greenspan: "I remember as vividly as if it were yesterday when we had a hearing in which Alan Greenspan came and justified increasing spending and cutting taxes, saying that we didn’t really need to pay down the debt — outrageous in my view." Reuters continued: "Though she did not give a date, that hearing must have taken place during the presidency of George W. Bush…."
If only it were so simple. During his tenure as Fed chairman, Greenspan’s budget positions changed more often than the weather. Always the opportunist, his self-serving opinions continue to bend the truth. During the Greenspan Boom, he was awarded the Presidential Medal of Freedom, the Department of Defense Medal for Distinguished Public Service, and the Enron Prize for Distinguished Service. Now, the Secretary of State looks ready to compile a dossier on his activities. The State Department need look no further. A review of his outrageous activities follows.
In February 2000, the last year of the (William Jefferson) Clinton Administration, Greenspan appeared before the Senate Banking Committee. He recommended the government use the federal budget surplus to pay down the national debt. He amplified: "The growth potential of our economy under current circumstances is best served by allowing the unified budget surpluses…to materialize, thereby reduce Treasury debt held by the public." Meaning: we should use surplus dollars collected by the Treasury Department to reduce the federal debt. (The Treasury can use surplus tax dollars to either purchase U.S. Treasury securities or reduce the size of new debt issues.) This fit the politics of the time. President Clinton was not proposing a tax cut.
One year later, Alan Greenspan worked for new management – the Bush Administration. President Bush wanted a tax cut to kick off his presidency. Greenspan marketed the tax cut as fiscally responsible, given recent surpluses. His advice was rendered on January 25, 2001, to the U.S. Senate Committee on the Budget. This was five days after George Bush’s inauguration. The Wall Street Journal reported: "Giving a big boost to President Bush, Chairman Alan Greenspan reversed his long-held view and said he now sees room for significant tax cuts in the federal government’s financial future…. ‘[O]ver the coming decade, the latest budget-surplus numbers show not only room for reductions, but even a need.’" The New York Times reported on the same day: "Alan Greenspan, the Federal Reserve chairman, gave his blessing today to a substantial tax cut…. In a clear shift from his previous position that reducing the national debt should be the focus of fiscal policy, Mr. Greenspan said improvements in the economy’s long-term potential and the swelling surplus projections had ‘reshaped the choices and opportunities before us.’"
In his testimony, Greenspan expressed concern "that continuing to run surpluses beyond the point at which we reach zero or near-zero federal debt brings to center stage the critical longer-term fiscal policy issue of whether the federal government should accumulate large quantities of private (more technically nonfederal) assets." [Greenspan’s parenthesis.]
Here, the Fed chairman anticipated surpluses of such enormous quantity that there would not be a single U.S. Treasury security left to buy. The government could be forced to buy "nonfederal" assets, such as IBM bonds. Of the 100,000 most likely problems the government should consider, this was not one of them.
Greenspan was leaning on a bizarre computation from the Congressional Budget Office (CBO). In January 2001, the CBO had projected a federal budget surplus for the period of 2002 through 2011 of $5.6 trillion. This gem of infinite interpolation gave Greenspan the cover he needed. In 2002, the CBO reduced its surplus estimate by $5.3 billion, to $300 million.
Whether Greenspan’s audience succumbed to his flight of fancy, another statement should have awakened its curiosity. Greenspan prefaced his tale of woeful surpluses by discussing "recent projections [which]… make clear that the highly desirable goal of paying off the federal debt is in reach before the end of the decade. This is in marked contrast to the perspective of a year ago when the elimination of the debt did not appear likely until the next decade." Since "a year ago" (actually, the 10 months between March 10, 2000 and when he spoke in January 2001), the Nasdaq had fallen 43%. Tax revenue had risen from 12.5% of personal income to 15.4% during the boom years. In 2000, this 2.9% increase equaled $237 billion – precisely the same as the total 2000 budget surplus. It suited Greenspan’s purposes to express mystification during testimony: "We still do not have a full understanding of the exceptional strength in individual income tax receipts during the latter 1990s."
Greenspan could not have been blind to the source of the budget surpluses: capital gains, exercised stock options and bonuses. These tributaries had dried up. Without these flows, his fear of paying down the national debt, or even running a balanced budget, made no sense. And, while Alan Greenspan could claim that paying down the debt was a bad thing, it is a tribute to the man’s sway that his audience accepted such a silly pretense approvingly.
The Greenspan Campaign for Re-nomination to Head the Fed in 2004 had kicked off its media blitz a year earlier, on February 11, 2003. The Boston Globe reported that Greenspan viewed Bush’s (new) tax cut plan with suspicion: "Greenspan… used the opportunity to admonish the federal government for losing its ‘fiscal discipline.’" In the chairman’s words, a "return to fiscal discipline should be instituted without delay." That was the stick. The next day, on February 12, Greenspan offered Bush the carrot. The Wall Street Journal reported: "Federal Reserve Chairman Alan Greenspan muted his initially chilly reception of President Bush’s tax cut plan, offering more praise for eliminating taxes on dividends and playing down the near term consequences for the Federal deficit." [Italics added.] On February 22, President Bush announced that he would reappoint Greenspan for a fifth term.
On April 30, 2003, having accomplished his mission and with Bush now committed to reconfirm him, Greenspan scolded the president. The New York Times reported: "Alan Greenspan…told Congress today that the economy was poised to grow without further large tax cuts, and that budget deficits resulting from lower taxes without offsetting reductions in spending could be damaging to the economy. Opponents of the large tax cut favored by President Bush took Mr. Greenspan’s testimony as support of their position." [Italics added.] The dissembling was obvious; yet, no one questioned Greenspan’s motives. No one questioned his logic either, but, few in Washington or Wall Street ever had.
On April 21, 2005, the chairman’s bewildering tax and federal budget advice came full circle. At a Senate Budget Committee meeting, Democratic Senator Paul Sarbanes from Maryland pursued a ragged thread in the Greenspan tapestry. The senator contended that Greenspan’s endorsement of the president’s 2001 tax cut was the "green light" that George Bush needed. (This 2001 testimony is probably what Hillary Clinton remembered.) At this meeting, Greenspan replied that he had not "specifically" endorsed the tax cut plan. The chairman claimed: "[Y]ou will not find anywhere in the public record that I supported the [2001] tax cut."
After the New York Times published Greenspan’s "blessing today to a substantial tax" on January 26, 2001, the Federal Reserve chairman never made a speech or provided testimony that his advice had been misunderstood. There was no reason for him to do so. Reading the January 25, 2001, speech today (available for anyone to judge on the Federal Reserve Board of Governors website, under "News and Events" and "Testimony"), his support is obvious. He was rooting for a tax cut.
This civil servant had made false statements to the people’s elected representatives before. When a vote to balance the budget loomed early in Clinton’s presidency, Greenspan said a Fed study showed a balanced budget would reduce interest rates. The Fed had conducted no such study. Greenspan testified to Congress in 1993 that tapes of Federal Open Market Committee meetings were destroyed after summaries were written. Thus, no transcripts existed. He later admitted to Banking Committee Chairman Henry Gonzales that he had known for years transcripts were kept but only remembered when a "senior staff member jogged my memory in the last few days."
To Sarbanes’ complaint, Greenspan deflected criticism with a tried-and-true tactic: flattery. The Wall Street Journal reported on April 22, 2005, that Greenspan told the senator "an alternative program of tax cuts and spending increases then proposed by the Democratic Party’s leadership would have achieved the same desired reduction in surpluses." The logic of Greenspan’s prevarications seemed to mean he had not specifically endorsed the Bush tax cut. Yet, he also told Senator Sarbannes that he "like many economists" had been wrong about the surpluses he warned of in 2001. Three years later, in 2004, the federal government set a new record with its first $400 billion deficit. So why was he now saying the Democratic Party’s proposal would have "achieved the same desired reduction" since the budget surpluses had, instead, degenerated into record-setting deficits? We will never know. Greenspan had triumphed once again.
As presidential candidate in 2008, Senator Hillary Clinton fully understood her man. She proposed an "emergency group" to "deal with high-risk mortgages." Greenspan was one of those she would appoint to her brain trust. When an opponent questioned her strange selection of the former Federal Reserve chairman, Clinton offered an enigmatic endorsement. Greenspan had "a calming influence….Don’t ask me why, because I never understand what he’s saying."