UNTIL RECENTLY, ATTACKING ALAN Greenspan was regarded in Washington as the political equivalent of mugging Mother Teresa: not only wrong, but distinctly unwise. The Federal Reserve chairman was universally revered as a monetary policy wizard, having orchestrated the best U.S. economic performance in a generation or more. He was actively courted by both political parties, his approval seen as a kind of saintly imprimatur on their economic policies and objectives.
This bipartisan endorsement of the central bank chairman was a distinct blessing for the U.S. economy. Markets don’t much like the idea of politicians second-guessing monetary policymakers, and they get nervous when the Fed becomes a political football. Though the Fed’s independence is established practice, its constitutional freedom of maneuver is more ambiguous. More than once in its nearly 100-year history has the central bank come in for a political battering, and the experience has never been a happy one, least of all for the American public.
So it’s rather unfortunate that the Democrats have decided, with a year or so to go in Greenspan’s tenure, to abandon this sensible point of bipartisanship and try to sully his reputation with false accusations of political bias. On March 3, Harry Reid, the leader of the Senate Democrats, spectacularly broke the Greenspan taboo when he angrily denounced the Fed chairman in a television interview. Steamed at some positive remarks Greenspan had made about President Bush’s plans for Social Security reform during a congressional hearing, Reid launched a scathing attack, telling CNN: “I’m not a big Alan Greenspan fan. . . . I think he’s one of the biggest political hacks we have in Washington.”
The Reid refrain was quickly taken up by other Democrats. Richard Durbin, senator from Illinois, told Meet The Press he was “troubled” by Greenspan and doubted his “credibility.” Democrats seemed to be taking their cue from liberal flamethrower Paul Krugman, once a serious economist, now the New York Times‘s hair-on-fire columnist of the far left, who for months has been accusing the Fed chairman of being a Bush apologist.
But the charge that Greenspan is letting his supposed political affiliations get in the way of his policy judgment does not stand up to scrutiny. It rests on two main objections–that he irresponsibly gave his backing to the Bush tax cuts in 2001, and that he has become a cheerleader for the president’s Social Security reform effort in the last three months.
The principal allegation is that in January 2001, shortly after President Bush took office, the Fed chairman cynically changed his mind about the wisdom of fiscal restraint and eagerly endorsed the new administration’s tax cut proposals. Having been a powerful voice for fiscal conservatism during the Clinton administration, Democrats say, he flipped when President Bush was sworn in. He gave the okay, they claim, to a massive tax cut that wiped out the surpluses from the late 1990s and produced the current hefty deficit.
As Democratic senator Paul Sarbanes of Maryland said during hearings last month: Greenspan took “the lid off the punch bowl” by endorsing Bush’s tax cuts. “And now we’ve managed to transpose our economic outlook,” the senator continued, from a “projection of over $5 trillion in surplus to almost $4 trillion in deficits.” This seriously distorts not only the actual economic record–the Bush tax cuts were not the main reason for the fiscal deterioration over the last four years–but also what the Fed chairman said back when the cuts were becoming law and afterwards.
In Senate testimony a few days after the president’s first inauguration, Greenspan did argue that some tax reduction was necessary, given the size of the projected surplus, saying the government should not accumulate too large a share of the national income. History, true, has not been kind to this warning; deficits returned quickly after 2001. But Greenspan never “endorsed” the Bush tax cuts. The president proposed $1.6 trillion in reductions, a figure the Fed chairman pointedly declined to back specifically. Indeed, there were reports that Greenspan had privately told members of Congress that he thought the figure was too high. In any case a number of Democrats supported some tax reduction at the time.
More important, Greenspan’s “support” for tax cuts was highly conditional. If deficits reemerged, he said, then Congress should rein them in. In addition, he had long argued for the restoration of the so-called PAYGO rules that kept taxes and spending aligned, which expired in 1992. If tax cuts threatened to result in deficits, he said, then Congress should cut spending. Furthermore, he has always argued, not only should spending be cut to balance the budget but, if necessary, taxes should be raised.
Earlier this month, Greenspan clashed with Jim Nussle, a Republican House member from Iowa, during a committee hearing on this very point. The Fed chairman insisted that the PAYGO rules should be symmetrical: Both tax increases and spending reductions should be enacted if necessary to keep deficits under control. Nussle actually accused him of helping the Democrats push for higher taxes.
None of this suggests Greenspan has become a shill for the Bush administration’s fiscal policy. As for the second objection–that the Fed chairman is, for political reasons, actively endorsing Social Security privatization–there’s no evidence for that either.
Greenspan certainly favors the introduction of private accounts. But this is not new. When President Bill Clinton raised the issue of Social Security reform in 1997–noting, by the way, the serious threat the system faced and which Democrats now deny–Greenspan outlined a position to which he has hewed ever since. It was that shifting from the current system of financing benefits entirely through payroll taxes to one that is, in part, individually funded would help achieve a much needed increase in the U.S. savings rate.
“Perhaps the strongest argument for privatization is that replacing the current underfunded system with a fully funded one could boost domestic savings,” he told a congressional hearing in 1997.
And Greenspan has actually gone out of his way to avoid endorsing an abrupt shift to private accounts. In testimony to the Senate banking committee last month, the Fed chairman urged caution because of the risk of large government deficits in the next decade as contributions to Social Security decrease while retirees continue to draw their full benefits.
“If you’re going to move to private accounts, which I approve of, I think you have to do it in a cautious, gradual way. . . . I do say, as I said previously, that I would be very careful about very large increases in the [government’s] debt.”
A political hack? Not a very bold one, judging by this measured approach. Nor particularly partisan: Greenspan worked well for eight years with President Clinton, who often referred to the chairman in glowing terms. Indeed, when Republicans were arguing vehemently against Clinton’s tax increase to close the federal deficit in 1993, Greenspan cautiously approved of the tax hike. He praised Clinton as well as the Congress: “The restrained fiscal policy of the administration and the Congress has engendered the welcome advent of a unified budget surplus, freeing up funds for capital investment,” he said in July 2000.
A more serious criticism of Greenspan is not that he is trying to tilt the table in one direction for political reasons, but that he shouldn’t really be talking about this stuff at all. Interest rates are his game–the level of taxes and spending are decisions properly left to elected officials. But even this is unfair.
The Fed inevitably has an interest in fiscal policy. The size of deficits or surpluses has a direct effect on monetary conditions in the economy. And the Fed chairman’s views on taxes and spending are actively sought out by Congress.
Greenspan has never made a secret of the roots of his political philosophy. He was a disciple of Ayn Rand, after all, and was first appointed to the Fed by President Ronald Reagan. But there’s simply no evidence that he twists his economic policies or his advice to further a particular political viewpoint. The worst that can be said is that the evidence–from his five years under Reagan and Bush I, eight years under Clinton, and four years under Bush II–is that he endeavors not to lean too heavily against the elected administration in the sphere of its competence. But his independence is not seriously debatable.
More important than any of the current political bickering or the Fed chairman’s policy history is the contribution Greenspan has made to the U.S. economy’s performance over the last 18 years. His stewardship of U.S. monetary policy has been exemplary. He has steered the economy past perils of inflation, stock market crashes, recession, terrorism, and war and, in the process, helped to produce the longest period of uninterrupted growth the U.S. economy has enjoyed in a century.
As he enters his last year, this legacy should be acknowledged by all Americans, Democrats and Republicans. But Democrats instead seem intent on tarnishing it with shrill and unsubstantiated allegations.
Gerard Baker, U.S. editor of the Times of London, is a contributing editor to The Weekly Standard.
