Greenspan Memories

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JONATHAN CHAIT MAY 19, 2010

Greenspan Memories

Matthew Yglesias harkens back to Alan Greenspan's 2001 testimony endorsing huge tax cuts, on the grounds that, without tax cuts, the national debt will soon disappear, and then the federal government will start buying up stocks, leading to socialism. In fact, Yglesias understates the full loopiness of Greenspan's argument. Suppose you grant Greenspan's premise:

1) huge surpluses were likely to continue indefinitely

2) there were no pressing needs to spend the surplus on (such as covering the uninsured, which conservatives now say they fully support if only it could be done in a fiscally responsible manner)

3) Government purchase of equities would lead to economic disaster

You still might wonder, okay, if that happens, why not just cut taxes or raise spending then? Why not keep tax rates as they stand now, and deal with this future emergency where the national debt has been completely paid off if and when it actually occurs?

Here Greenspan brought in a final turn to his argument:

At the same time, we must avoid a situation in which we come upon the level of irreducible debt so abruptly that the only alternative to the accumulation of private assets would be a sharp reduction in taxes and/or an increase in expenditures, because these actions might occur at a time when sizable economic stimulus would be inappropriate. In other words, budget policy should strive to limit potential disruptions by making the on-budget surplus economically inconsequential when the debt is effectively paid off.

In other words, we'd be coming to the end of the national debt, with huge surpluses still chugging along. To avoid having the government start buying up stock with its surplus tax dollars, we'd have to cut taxes all at once. But this would provide a big Keynesian jolt to the economy at a potentially non-optimal time. Therefore, Greenspan wanted to enact a smaller tax cut in advance, to avoid the contingency of having to enact a huge tax cut somewhere down the line, right before the national debt was completely paid off.

I've seen theories this convoluted and loopy before. But they've usually been scrawled in long-hand by random cranks who mail letters to magazines. It's just astonishing such a nutty theory was advanced by the most prestigious economic policymaker in the country.

It's also worth recalling that Greenspan's bizarre, convoluted justification for Bush's tax cuts came just a few weeks after five Supreme Court justices gave their bizarre, convoluted justification for the Bush presidency, stomping all over their putative principles of principles and judicial restraint and even openly admitting they were crafting a one-time-only ruling whose precedent they could not and would not apply elsewhere. These were very similar phenomenon: Prestigious institutions controlled by Republicans but trusted to make neutral technocratic decisions blatantly abandoned their responsibilities in order to advance the Republican agenda. It was a jarring and disillusioning time.

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posted in: jonathan chait, alan greenspan, matthew yglesias

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