Outing Alan Greenspan

BY JOHN MILLER

I'm not a big Alan Greenspan fan.… I think he's one of the biggest political hacks we have in Washington.
--Senate Minority Leader Harry M. Reid (D-Nev.) on CNN's "Inside Politics," March 2005

Federal Reserve chairman Alan Greenspan a "political hack"? Political thug is more like it. Greenspan's policies have robbed retirees, poor people, and working people--while bestowing riches on the best off in our society.

Let's start with Greenspan's betrayal of the elderly on Social Security. That's what got Harry Reid, a former boxer, so angry that he took the gloves off.

In 1983, Greenspan chaired the commission that convinced Congress to raise the payroll tax that funds Social Security. He said the tax hike would ensure the Social Security system's solvency for the baby boomer generation and beyond.

The higher tax fell heavily on low- and middle-income taxpayers, nearly all of whom pay more in payroll taxes than income taxes. As promised, the tax hike built up a surplus in the Social Security trust fund. With the surplus in place, Greenspan turned around in 2001 and endorsed the Bush administration's tax cuts, whose benefits went overwhelmingly to the richest 1% of taxpayers, those who make more than $373,000 a year. Now that those tax cuts have contributed to soaring budget deficits, Greenspan insists we need to cut Social Security benefits in order to restore "fiscal discipline." Put simply, Greenspan jacked up taxes on working people, adding to the budget surplus, and then endorsed squandering that surplus on giant tax cuts for the top 1%.

It was a masterful bait-and-switch. As New York Times columnist Paul Krugman points out, if Greenspan "had tried to sell this package honestly--‘Let's raise taxes and cut benefits for working families so we can give big tax cuts to the rich!'--voters would have been outraged."

Future retirees weren't the only ones to fall prey to Greenspan's maneuvers --the poor have taken a drubbing as well. Much of the deficit reduction that Greenspan urged the Clinton administration to carry out came at the cost of low-income families. Robert Pollin, co-director of the Political Economy Research Institute, reports that a majority of the federal budget's swing from deficits to surpluses during the second half of the 1990s came from reducing government spending relative to the size of the economy. Relative to GDP, funding for education was slashed by nearly a quarter, while deep cuts to food stamps, nutrition, and other supports for poor families carved away one-sixth of funding for income security programs.

That Greenspan's true aims were to shrink government and reward the wealthy--and not to enforce fiscal responsibility--became abundantly clear when George W. Bush took office. Despite indications in the administration's early days that he favored "triggers" capping the size of the Bush tax cuts should the budget surplus disappear, Greenspan never made such triggers a precondition for his endorsement of Bush's tax giveaways to the rich. Instead, he assured the Senate in 2001 that "sufficient resources will be available" to undertake both debt reduction and tax cuts. Given the ballooning federal budget deficit, this was either a shockingly poor analysis or pure ideological excess.

Today's monstrous deficits rival those Greenspan insisted must be closed in the early Clinton years, but Greenspan still favors making Bush's tax cuts permanent--even in the face of overwhelming evidence that doing so will force massive cutbacks in social spending and core entitlement programs. (Making the 2001 and 2003 tax cuts permanent would cost the U.S. government more than five times the amount that would be necessary to close the projected shortfall in Social Security over the next 75 years, according to the Center on Budget and Policy Priorities, a liberal think tank.)

In other words, Greenspan is the chief enabler of the Republican "starve the beast" strategy for slashing government spending--first enacting tax cuts and then insisting that spending cuts (not tax increases) are necessary to restore budget balance.

When Congress asked him what happened to his concern for fiscal responsibility, Greenspan responded that he had always favored lower taxes, but that he favored lower spending and smaller government as well. And the strategy, at least the government slashing part, is working. In 2004, federal government revenues relative to the size of the economy reached their lowest level since the 1950s.

For all these reasons, the liberal commentator Jonathan Chait has offered up a modification of Reid's insult, calling Greenspan "a Fiscal Policy Hack." His careful choice of words underlines Greenspan's failures in the sphere of fiscal policy, or government spending and taxes. "For the last four years," Chait points out, "Alan Greenspan has cast himself as a champion of fiscal responsibility while lending crucial support to policies that undermine it." Chait insists nonetheless that "Greenspan's views on monetary policy--specifically, his setting of interest rates--"ought to count for a lot." Sadly, this common liberal position turns a blind eye to the role Greenspan's monetary policy plays in perpetuating the searing inequality of today's economy. Greenspan makes monetary policy on behalf those who hold financial assets, not job seekers or workers. And Greenspan's insistence that inflation must be kept low to protect the value of stocks and bonds even if it means keeping a cap on employment growth might count for a lot in the minds of some--but it shouldn't.

Think back to the second half of the 1990s boom. Early on, Greenspan warned that an "irrational exuberance" was igniting a dangerous stock market bubble. In a 1996 Federal Reserve Board meeting, he acknowledged that raising the margin requirement would "get rid of the bubble." The margin requirement is the percent of the purchase price of financial investments, like stocks and bonds, that the buyer must pay for in cash rather than credit. (Since 1974, investors have been required to pay for at least 50% of their stock purchases with cash.) The Fed chair could have raised margins on borrowing to purchase stocks then, cooling off the stock market without sacrificing the whole economy. But, unwilling to confront the monied classes, or uninterested in doing so, Greenspan instead endorsed a huge capital gains tax cut in 1997 that only inflated the bubble more.

Then, in late 1999 and early 2000, with the bubble apparent to everyone, he slammed on the economic brakes, repeatedly hiking interest rates and helping to bring on an economic slowdown just as working people were beginning to see some healthy gains in their paychecks. The recession and the job-barren economic recovery that followed have wiped out much of those gains. Last year, workers' real wages, their purchasing power, actually declined for the first time in 14 years. And today, even Wall Street Journal reporter David Wessel warns that "the risk to workers now is that the Federal Reserve, anxious about indications that inflation is returning, [once again] will raise interest rates to slow the economy before the labor market gets strong enough to push wages up."

Outing Greenspan's political thuggery is the first step in the battle for a Federal Reserve Board that serves all of us, not just the rich. No longer the man behind the curtain glorified in Forbes magazine billboards, or the Maestro, as establishment journalist Bob Woodward dubbed him, Greenspan might finally be seen for what he is: public enemy number one when it comes to building a more just economy. And once they're accurately translated, "Greenspan-speak," the Fed chair's notoriously obscure mutterings that tighten the screws of class privilege at every turn, will no longer pass for a truthful and disinterested take on the state of the U.S. economy.

John Miller is a professor of economics at Wheaton College and a member of the Dollars & Sense collective.