Greenspan's two cents
BECAUSE HE so rarely disagrees with administration policies except in the most guarded language, Alan Greenspans criticism of the federal budget deficit should sound a clarion call through Washington.
The Federal Reserve Bank chairman told Congress on Wednesday that increasing deficits risk economic stagnation. He said tax revenues as well as spending cuts need to be considered to stanch the flow of red ink. You cannot continuously introduce legislation which tends to expand the budget deficit, he told the House Budget Committee.
Greenspans words deserve to be heard and acted on not because he has a long record as a courageous visionary on economic policy but because his moments of courage are so rare. Indeed, Greenspan went out of his way Wednesday, and again yesterday, to lend support, albeit tepid, to two of President Bushs most dubious economic initiatives.
On Wednesday, even as he was highlighting the deficit threat, Greenspan repeated his support for diverting part of the Social Security system into private accounts. This proposal is wrongheaded because it risks individuals retirement investments, it does not guarantee a benefit to people who live to old age, and it would require an enormous amount of borrowing more red ink to get started. In addition, it does nothing to solve the Social Security solvency problem that Greenspan pointed to as needing a funding fix along with Medicare. Still, it is Bushs domestic priority. He is embarking on a two-month magical mystery tour to sell it to a nation that has already indicated it is too smart to buy. But Greenspan supported Bushs initiative if done gradually and cautiously.
Yesterday, Greenspan supported another Bush proposal, shifting the national tax system toward one that would put more taxation on consumption, such as a national sales tax, and less on income. The idea is that consumption taxes promote savings. But there is a question as to whether increased capital investment would outweigh the decline in consumer spending. In any event, most versions of a consumption tax are enormously regressive, penalizing low-income people who can afford to save little. Still, Greenspan supported the idea, if done cautiously.
Even when he focused on the budget deficit, Greenspan said he favors spending cuts over taxes, as Bush does. But he emphasized that the overriding principle must be to tame the deficit. Even most Republicans in Congress know that domestic spending has already been cut to the bone.
Bushs proposals to make current tax cuts permanent and to add new ones need to be stopped in their tracks. Congress then needs to find a way to add new revenues. Alan Greenspan, in a moment of courage, gave Congress cover to do the right thing.