Arnold Kling  

Confusion About Greenspan

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Felix Salmon writes,


It's not very often that Brad DeLong and Paul Krugman find themselves epitomizing opposite sides of an issue, but DeLong seems to have become Alan Greenspan's apologist in chief even as Krugman sticks the knife in to the Maestro today.

Let me make this even more confusing. I agree with Krugman. Concerning Greenspan's role in supporting President Bush's tax cuts, Krugman writes,

Suddenly, his greatest concern — the “emerging key fiscal policy need,” he told Congress — was to avert the threat that the federal government might actually pay off all its debt. To avoid this awful outcome, he advocated tax cuts.

I remember Greenspan expressing this worry, and I remember that I did not share it. First of all, anyone who follows Social Security and Medicare knows that worries about the government paying off its debt are unfounded.

More importantly, even if the government did pay off its debt, the Fed could still conduct open market operations by buying, say Fannie Mae or Freddie Mac securities. Yet the Maestro was worrying out loud about his open market operations team not having government debt to play with. It was a real intellectual low point, in my opinion.

Of course, according to reports about his new book, Greenspan also believed that invading Iraq for the sake of oil was a good idea. That is also an intellectual low point.

To me, what this shows is that you do not need a great intellect to run the Fed. In fact, I think that the Fed has a much wider margin for error than most people believe. My guess is that if you re-ran history with the Fed Funds rate 50 basis points higher (or lower) for several years, the effect on the economy would not be large. As for all you macro modelers out there, sorry, but I would not consider a model simulation as providing reliable predictions for the result of this thought experiment.

So I cannot share DeLong's pro-Greenspan sentiments, and I think that Krugman's anti-Greenspan argument has merit.


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CATEGORIES: Political Economy



COMMENTS (10 to date)
KaySha writes:

One can only hope those two low intellectual points make into the Greenspan biographies that will surely flood the market soon enough. The last point concerning a 50 bp margin overlooks the impact of the language behind the fed target that some would argue is even more important and does require intellect.

Amicus writes:

Greenspan consistently advocated the lowest tax structure possible, nothing more. He usually justified this based upon 'sound theory' and 'incentives', even when folks like Rep Frank pressed him to show proof that the Clinton tax changes had hurt economic growth.

If he dipped into the bin of suggesting that surpluses could "pay for" lower taxes could create more surpluses could "pay for" lower taxes, and so forth, then he surely missed the boat, as Rubin warned. Andrew Mellon did this in the 20s, feeding the boom then, but the old-fashioned Conservatives "paid for" tax cuts out of surplus (which was the same back then as the accrual-based surplus/deficit), rather than the trickle-me-down-some-votes Conservatives of the 2001 with the ditch-the-pay-go rules, we're-in-charge-now, attitude. In retrospect, Greenspan should have been just as cautious with them, all the signs of profligacy were visible early on, too, but he wasn't.

If he warned about paying off the debt (I don't recall that), then it would have been another masterful case of his shading the facts to suit his purposes of managing expectations (and supporting the Republicans?)

Indeed, it is widely recognized that a deep, liquid debt market is integral for a large, politically stable nation like the USA who aspires maintains the world's reserve currency.

However, to turn that consideration into even an "emphasis" on tax cuts is ... politics, charitably put.

Aaron writes:

Greenspan has really been making the media rounds, and it seems to me he is just saying things that will get him some PR, whether he believes it or not. I guess the joke is on us since its working. I wonder if sooner or later he will let Ben do his job though..

El Presidente writes:

I heard him remarking about debt repayment and tax cuts in an interview. His explanation tied it to his libertarian and anti-government biases. I thought that was remarkable and showed a distinct lack of imagination. Perhaps it's just well earned cynicism from a career in the mix. I still think he's Yoda, but nobody's perfect.

aaron writes:

So long as interest is low enough, any tax cut will result in an increase in GDP growth. Until the point that interest on debt is higher than the resulting increase in GDP growth, it makes sense to use debt instead of selling off productive assets.

aaron writes:

(selling off productive assests to pay taxes/pay down debt)

aaron writes:

I agree with you on the rest. I wouldn't be suprised if having higher interest rates after 2002 would have benefitted us.

Iraq was much more than oil, it has provided us with a logistic capabitlity in the mideast, provided young workers with jobs and experience when the economy was stagnent, has given hundreds of thousands exposure to many cultures that will help us economically as well as in fighting terrorism, gave us a means to use practically free debt in the short-term rather than spending on permanent domestic programs, removed a threat that would have made most all military action in Iran and Syria impractical, trained thousands (millions?) in the tactics of our enemy...

Amicus writes:

My guess is that if you re-ran history with the Fed Funds rate 50 basis points higher (or lower) for several years, the effect on the economy would not be large. As for all you macro modelers out there, sorry, but I would not consider a model simulation as providing reliable predictions for the result of this thought experiment.

Can we re-write that sentence, substituting "marginal tax rate" for "fed funds rate" and 500 for 50?

I still think he's Yoda, but nobody's perfect.

Me too.

Even Board Chairmen would like to get re-appointed...

Buzzcut writes:

Greenspan's comment that Iraq was "about oil" was really pretty nuanced.

He said that Sadaam, who started two wars in the region, was after the Straights of Hormuz, and would have threatened oil from the entire Gulf. As a result, he had to go.

The one thing that the war has ensured is the flow of oil from the region. Yet a barrel of light sweet crude still goes for record amounts. What's up with that, Maestro?

General Specific writes:

Greenspans's recommendation of ARMs in 2004 seemed like poor advice, since all those ARMs are a source of the problem right now.

Since Saddam was fully contained and inspectors were in the country, the Iraq war was not about concerns that Saddam would be a regional problem. He was largely a nuisance. The war was about a desire to impose friendly regimes in countries located in a region that is a critical source of oil at a time that world production is peaking. That's why oil prices are higher. The markets are speaking. Peak oil is upon us.

Saying the war is about oil isn't that far off base. And since Kling recently commented that seizing oil may be a good idea, I would have thought he would be supportive of that idea. So I'm confused on that reaction to Greenspan.

To the comments above: There are many lessons from Iraq. The most important: incompetence and arrogance and hubris in the white house leads to many failures.

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