Without a shred of evidence or theoretical justification, Greenspan said this today on Capitol Hill:
“Addressing the government’s own imbalances will require scrutiny of both spending and taxes. However, tax increases of sufficient dimension to deal with our looming fiscal problems arguably pose significant risks to economic growth and the revenue base. The exact magnitude of such risks is very difficult to estimate, but, in my judgment, they are sufficiently worrisome to warrant aiming, if at all possible, to close the fiscal gap primarily, if not wholly, from the outlay side.”
This is utter garbage. And there are at least two major reasons why this is garbage.
1. Tax increases large enough to eliminate the country’s fiscal imbalances would be on the order of magnitude of the 1993 tax increase. Recall the terrible times that the US economy went through from 1994-2000 as it struggled to recover from that tax increase. The truth is that there is no theory or evidence that shows that a medium-sized tax increase would “pose significant risks to economic growth.” Such a belief is “arguable” in the same way that it is “arguable” that a hidden civilization of mermaids lives underwater off the coast of Miami.
2. Given that non-defense discretionary spending is only about 15% of all federal spending, closing the fiscal imbalances through spending cuts is only possible by reducing defense spending, Social Security benefits, or Medicare/Medicaid benefits. Since Greenspan is well aware of the political unwillingness to cut defense spending right now, this means that he is advocating balancing the budget by cutting the most important elements of this country’s social safety net. Is there any economic theory or evidence that suggests that a country does better without a social safety net? No. In fact, there is a sizeable body of theory and evidence that suggests that economic performance is better when there is a social safety net present.
Once again, Greenspan is using his position of authority to pass off his own personal preferences as economic wisdom.