Greenspan Calls for Repeal of All the Bush Tax Cuts
It was not enough, it seems, for Alan Greenspan, the former Federal Reserve chairman and a self-described lifelong Republican libertarian, to call for stringent government regulation of giant banks, as he did a few months ago.
Now Mr. Greenspan is wading into the most fierce economic policy debate in Washington — what to do with the tax cuts adopted, in large part because of his implicit backing, under President George W. Bush — with a position not only contrary to Republican orthodoxy, but decidedly to the left of President Obama.
Rather than keeping tax rates steady for all but the wealthiest Americans, as the White House wants, Mr. Greenspan is calling for the complete repeal of the 2001 and 2003 tax cuts, brushing aside the arguments of Republicans and even a few Democrats that doing so could threaten the already shaky economic recovery.
“I’m in favor of tax cuts, but not with borrowed money,” Mr. Greenspan, 84, said Friday in a telephone interview. “Our choices right now are not between good and better; they’re between bad and worse. The problem we now face is the most extraordinary financial crisis that I have ever seen or read about.”
Mr. Greenspan, who led the Fed for 18 years until he retired in 2006, warns that without drastic action to increase federal revenue and reduce the long-term growth in health care costs, bond investors could make a run on Treasury securities, driving up the nation’s borrowing costs and leading to another global economic crisis. This is not the first time Mr. Greenspan has urged fiscal restraint; he warned in 2008 that the country could not afford the tax cuts proposed by Senator John McCain, the Republican presidential candidate. But his sweeping call for rescinding the Bush tax cuts, which he has articulated in a recent appearance on “Meet the Press” and an interview with The Financial Times, among other settings, has rankled former colleagues.
“Such a large tax increase in the middle of a period of sluggish economic growth would be a very bad idea,” said R. Glenn Hubbard, who as chairman of the White House Council of Economic Advisersfrom 2001 to 2003 was an architect of the tax cuts.
Mr. Hubbard, who teaches at Columbia Business School, said a debate over the proper size of government was needed, but would not occur until the 2010 or 2012 elections. “Calls for repealing the tax cuts are more about politics than economics,” he added.
Even liberal economists who concur with the need for higher taxes have not been eager to embrace Mr. Greenspan. “His concern about the current deficit seems to ignore the state of the economy,” said Dean Baker, co-director of the Center for Economic and Policy Research, a left-leaning organization. “It is hard not to believe that politics is playing some role in his positions.”
While Mr. Greenspan did not endorse a specific approach, his broad support for the tax cuts nearly a decade ago were pivotal in securing one of the Bush administration’s top domestic policy goals and in providing political cover for members of Congress.
Now, in response to accusations of political expediency, Mr. Greenspan says his approach has been consistent: supporting tax cuts when surpluses loomed, and endorsing revenue increases now that deficits are the leading worry. He also says his earlier endorsement of tax cuts was made with important caveats that were later ignored by policy makers and the public.
To begin with, he says he believed the tax cuts in 2001 were primarily needed to avoid the economic distortions caused by “surpluses as far as the eye could see,” as many economists at the time projected.
The dot-com boom in the late ’90s led to a surge in tax revenue, less from capital-gains taxes than from the conversions of stock-option grants. While the temporary nature of those revenue increases was perceived, Mr. Greenspan says, the combination of soaring tax receipts and long-term productivity gains led economists at the Fed, at the Office of Management and Budget and at the Congressional Budget Office to believe that the surpluses were very real.
That, in turn, caused the central bank to worry that one of its primary levers for the conduct of monetary policy — the purchase and sale of Treasury securities — would no longer be available.
“I was against deficits, but I was also equally against surpluses,” Mr. Greenspan said.
Mr. Greenspan also emphasizes that the tax cuts should have adhered to so-called pay-go rules, which require that tax cuts or new spending should not add to the federal deficit.
Pay-go rules were adopted as part of the 1990 budget deal between President George Bush and the Democratic-controlled Congress, but were scrapped in 2002, when his son, George W. Bush, was president.
“Unfortunately, the surplus disabled pay-go because pay-go implied the existence of a deficit,” Mr. Greenspan said. “When the deficit disappeared, the concept of pay-go became meaningless.”
While Mr. Greenspan’s reputation has been tarnished — given the Fed’s failures to pop the real estate bubble and to rein in subprime mortgage lending — his perspective, born of decades of data-crunching, has made him a figure revered by many in the markets. His opinion still carries considerable weight and his views on the tax cuts will reverberate in the debate next month in Congress.
“Unlike in World War II, when we knew that military spending and deficits would fall sharply, our current understanding of the future is extremely limited,” Mr. Greenspan said. “There’s an especially high level of uncertainty in forecasting Medicare.”
He said the country’s fiscal problems could not be solved by higher taxes alone. “We are going to have to confront a major surge in medical entitlement spending. Irrespective of what you say should be done on the tax side, you still have to cut some benefits on the expenditure side.”
Mr. Greenspan, who is known for his political skills and his connections in both parties, bemoaned the political gridlock in the capital.
“We have known that the tax cuts were going to expire at the end of 2010 for nearly a decade but nobody did anything to address the issue,” he said.
Asked whether higher taxes in 2011 could choke off the nascent recovery, Mr. Greenspan replied: “It is risky, but the choice of not doing it is far riskier. It is the difference between bad and worse, but in neither case do I think the evidence suggests that it would be the tipping point for the economy.”
Mr. Greenspan added that the relationship between taxation and growth was still not well understood. “I don’t think anybody can know exactly what the impact of these taxes is on G.D.P.,” he said, referring to gross domestic product, the broadest measure of output. “We put them through econometric models that have a very poor record forecasting recession. Conclusions based on such models must be suspect.”
At the Group of 20 meeting in Toronto in June, leaders of the world’s biggest economies agreed to halve their governments’ deficits by 2013. But Mr. Greenspan noted that even after debt-stricken Greece enacted emergency austerity measures, the markets remained skeptical.
“I thought that meeting was quite good, and very effective and important,” he said. “But it’s one thing to have a fiscal projection and quite another to have the markets believe it.”