Greenspan on the Deficit, Part II

Greenspan’s testimony this morning to Congress indicated no regret about the Bush tax cuts. I was totally wrong when I implied in my morning lead-in post to his testimony that I thought he might come out against the Bush tax cuts.

I have to say that I’m a little surprised and disappointed. I think it was downright irresponsible of Greenspan not to recognize the responsibility that tax cuts must bear for the budget deficit. In fact, he seemed to go out of his way to avoid blaming the tax cuts for the deficit, in spite of the overwhelming evidence to the contrary.

From today’s testimony:

In part, these deficits are a result of the economic downturn and the period of slower growth that we recently experienced, as well as the earlier decline in equity prices. The deficits also reflect fiscal actions specifically intended to provide stimulus to the economy, a significant step-up in spending for national security, and a tendency toward diminished restraint on discretionary spending.

In plain English, this means that he thinks the deficit is the result of the economic downturn, higher spending, and other unspecified “actions” (i.e. tax cuts) that were nobly and exclusively intended to help the economy. His prescription is therefore not surprising: he thinks Congress should cut spending.

I do give Greenspan a tiny bit of credit for trying to dispel the notion among some on Capitol Hill that the crowding out effect is just ‘Rubinomics’ He did indeed emphasize that long-run deficits can be bad:

The fiscal issues that we face pose long-term challenges, but federal budget deficits could cause difficulties even in the relatively near term… [S]hould investors become significantly more doubtful that the Congress will take the necessary fiscal measures, an appreciable backup in long-term interest rates is possible as prospects for outsized federal demands on national saving become more apparent. Such a development could constrain investment and other interest-sensitive spending and thus undermine the private capital formation that is a key element in our economy’s growth prospects.

Nevertheless, his incredible failure to discuss the tax cuts causes me to believe Greenspan when he said that he never called the tax cut “irresponsible,” as Paul O’Neill had claimed in Suskind’s book. He is apparently a Bush tax cut supporter, through and through.