Now He Tells Us

The Washington Post's Bob Woodward managed to get his hands on Alan Greenspan's memoir ahead of its release on Monday (maybe someone gave it to him in a parking garage!). He reports:

Alan Greenspan, who served as Federal Reserve chairman for 18 years and was the leading Republican economist for the past three decades, levels unusually harsh criticism at President Bush and the Republican Party in his new book, arguing that Bush abandoned the central conservative principle of fiscal restraint.

While condemning Democrats, too, for rampant federal spending, he offers Bill Clinton an exemption. The former president emerges as the political hero of "The Age of Turbulence: Adventures in a New World," Greenspan's 531-page memoir, which is being published Monday.

Greenspan, who had an eight-year alliance with Clinton and Democratic Treasury secretaries in the 1990s, praises Clinton's mind and his tough anti-deficit policies, calling the former president's 1993 economic plan "an act of political courage."

But he expresses deep disappointment with Bush. "My biggest frustration remained the president's unwillingness to wield his veto against out-of-control spending," Greenspan writes. "Not exercising the veto power became a hallmark of the Bush presidency. . . . To my mind, Bush's collaborate-don't-confront approach was a major mistake."

Greenspan accuses the Republicans who presided over the party's majority in the House until last year of being too eager to tolerate excessive federal spending in exchange for political opportunity. The Republicans, he says, deserved to lose control of the Senate and House in last year's elections. "The Republicans in Congress lost their way," Greenspan writes. "They swapped principle for power. They ended up with neither."

Of course, Greenspan played a key role in the shift from Federal budget surpluses in the late 1990's to deficits today. His January 2001 testimony to the Senate Budget Committee helped get President Bush's tax cuts - which led to the deficits - passed. His stated reason was concern that the budget surpluses would eventually lead to the government becoming a large owner of private assets - i.e., after repaying the existing Federal debt, the government would invest the surpluses in stock and bond markets. The key sentence from his testimony:

In general, as I have testified previously, if long-term fiscal stability is the criterion, it is far better, in my judgment, that the surpluses be lowered by tax reductions than by spending increases.

That is a reflection of Greenspan's political preferences (he calls himself a "libertarian Republican"), and completely unrelated monetary policy, which is the Fed's purview. In a NY Times column titled "Et Tu, Alan" Paul Krugman wrote:

...The headlines were all about Mr. Greenspan's endorsement of tax cuts -- something the Fed chairman must have known would happen. And when you look at the tortured logic by which Mr. Greenspan arrived at that endorsement, you have to wonder whether those headlines weren't exactly what he wanted...

...Mr. Greenspan was out of bounds. Since when is it the Fed's business to say that we should have a tax cut rather than, say, a new prescription drug benefit -- or for that matter a missile defense system?...

But the really strange thing about his argument was that he seemed to ignore the fact that the main reason the federal government will one day become an investor is the buildup of assets in the hands of the Social Security and Medicare systems -- and those funds must accumulate assets to prepare for the future demands of the baby-boom generation. Indeed, by all estimates even the huge projected surpluses of those trust funds will be inadequate to the task. ''Certainly,'' Mr. Greenspan declared, ''we should make sure that Social Security surpluses are large enough to meet our long-term needs.'' Well, I'm sorry, but you can't do that without allowing the federal government to become an investor.

So if that prospect was what was really worrying Mr. Greenspan, he should have focused on the problem of how to prevent the government's position as an investor from being abused. And there are many ways to do that -- including, by the way, realistic plans for partial privatization of Social Security, which (unlike the fantasy promises of the Bush campaign) would require the federal government to ante up trillions of dollars to pay off existing obligations, solving the ''problem'' of excessive surpluses quite easily.

But Mr. Greenspan seemed determined to arrive at tax cuts as an answer...

When a man who is usually a clear thinker ties himself in intellectual knots in order to find a way to say exactly what the new president wants to hear, it's not hard to guess what's going on. But it's not a pretty sight.

The criticisms Greenspan makes in his book of Republican policies might have made a difference if he'd offered them earlier - in 2004, perhaps. Would he have been overstepping the bounds of his role as chairman of the Federal Reserve to do so? Possibly. However, it is legitimate for the Fed chairperson to weigh in on the fiscal position of the government, but only insofar as it affects monetary policy. For example, the Reagan tax cuts and associated deficits in the early 1980's forced the Fed to raise interest rates even further. If the economy is a "car with two drivers" - monetary and fiscal - Reagan's stepping on the fiscal "gas" forced the Fed to hit the monetary "brakes" ferociously, resulting in the worst recession since the depression. In such a situation, it would have been appropriate for the Fed to point out that tax cuts caused interest rates to be higher than otherwise.

At the time of his testimony, the US was coming to the end of the longest economic expansion in its history. Stock tickers were ubiquitous. Greenspan was a celebrity and viewed as somewhat of an economic oracle - "Maestro," Woodward's book about him, was on the bestseller list. What he did in 2001 was to use his prestige to push his own - Ayn Rand-influenced (yikes!) - view of the role of government in society. Now that its too late, he tells us he regrets the consequences.

Update (9/18): Brad deLong has a favorable (and amusing) take on Greenspan and his book. Krugman is not amused. Current Bush admin. official and former House Budget chair Jim Nussle sees Monday morning quarterbacking.