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Wednesday, February 12, 2003

A Greenspan For All Seasons

Alan Greenspan, the Federal Reserve chairman, yesterday appeared to rebut many of President Bush's arguments in favor of big new tax cuts, by saying that the economy probably does not need any short-term stimulus and warning that budget deficits could spiral out of control. This was at least my impression. But It seems Greenspan's speech to US senators could be interpreted as containing something for everyone, and clear ideas for none. Reading around the press I find there are as many different interpretations of his semi-annual report on the state of the US economy (presented to the Senate Banking Committee) as there are varieties of opinion. Perhaps this isn't too surprising in connection with someone often considered the master of enigma, the man to 'keep 'em guessing'. (or it could be, as Brad Delong suggests, that too many of the US commentaries were drafted before actually reading the speech!! here) Perhaps the best recommendation is to read the thing yourself ( here )

On one point, however, he does seem to have committed himself clearly, budget deficits do influence long term interest rates. In a clear reference to the controversy surrounding views recently expressed by (inter alia) Glenn Hubbard, he argued in connection with an increasing deficit that "Contrary to what some have said, it does affect long-term interest rates and it does have an impact on the economy,"

The European press in general seem to present him as being in assertive mode (with Deutsche Welle even going so far as to present him as an opponent of any stimulus package, stating bluntly under the header 'Fed Says Tax Cuts Won't Work' that "US Federal Reserve Chairman Alan Greenspan said he believes the Bush administration's plans for an economic stimulus package are ill-timed" ( here ) thus giving the impression he was waving the warning finger at the Bush administration and playing the newly re-born critic of a growing US structural deficit. Could this have anything to do with the growing anti-Bush mood here in continental Europe? The Financial Times, as ever more restrained, nevetheless has Greenspan the fiscal deficit enemy.

Alan Greenspan, chairman of the Federal Reserve, yesterday said the Bush administration's plans for tax cuts should not be paid for with damaging rises in fiscal deficits. Mr Greenspan reiterated his support for eliminating taxes on share dividends, a key part of the administration's proposals, which he said would boost economic flexibility.

But in comments to the Senate banking committee about the plans for $1,500bn in tax cuts over the next decade, he criticised the projected move into deficit. The tax plan should be paid for by spending cuts or tax rises elsewhere, he said. "I would argue that we ought to be . . . trying to move towards increased flexibility but be very careful not to allow deficits to get out of hand," Mr Greenspan said. "I do believe [the plan] should be revenue neutral." He warned that the social security and Medicare programmes would weigh heavily on the US taxpayer in coming years. Administration officials have sought to play down the importance of deficits in driving up long-term interest rates. But Mr Greenspan said: "Contrary to what some have said, it does affect long-term interest rates. It does have a negative impact on the economy." Democrats seized on the comments. "Alan Greenspan, two years ago, breathed life in the administration's proposal for tax cuts. Today, I think he gave the kiss of death," said Tom Daschle, the Senate Democratic leader. The Bush administration's budget predicts a deficit rising towards 3 per cent of gross domestic product this year and next. Mr Greenspan said acceptable ranges of deficit were 1-2 per cent in today's environment. He said it was too early to tell whether the US economy was weak enough to require emergency fiscal stimulus, given the uncertainty surrounding Iraq.
Source: Financial Times

For Business Week, on the other hand, it's the pensative and reflective view: a 'Gloomy Greenspan' who 'Weighs His Words' . According to BW 'the Fed chief is uneasy about the economic risks of war -- and reiterates the importance of fiscal discipline for the national budget.'

The man behind the memorable catch-phrase "irrational exuberance," Federal Reserve Chairman Alan Greenspan, sounded even more somber than usual in his semiannual report about the state of the economy, given to the Senate Banking Committee on Feb. 11........His prognosis on the economy was admittedly clouded by war risks with Iraq. And his gentle but familiar lecture on fiscal discipline -- with Congress expected to begin work soon on the Bush stimulus plan -- seemed intentionally vague. Overall, the Fed chairman's testimony -- and his responses to senators' questions afterward -- appeared to be more cautious than the markets anticipated, and investors were disappointed.
Greenspan appeared intentionally unclear on fiscal policy in his prepared text, though he was pressed for his views on the Bush stimulus plan by Banking Committee members. He repeatedly couched his responses in the context of maintaining fiscal discipline. While he doubted the immediate stimulative impact of the plan, he once again stated his view that elimination of double taxation on dividends was commendable. He also warned that faster growth alone would not cure growing budget gaps, with tough spending choices seen ahead. Indeed, the "sobering" budget projections likely make Greenspan long for the Budget Enforcement Act of 1990. Amid such a difficult economic and policy climate, the Fed chief also may be pining for the days when he could tweak the markets for being too exuberant. Those days seem long ago now.
Source: Business Week

Meantime, for Reuters it's the dollar impact that weighs, and Greenspan was not convincing about his support for the strong dollar policy:

The dollar backtracked from early gains in Asia on Wednesday, hindered by uncertainty over Iraq and the Federal Reserve's cautious view of the U.S. economy. By late morning, the dollar traded at 121.00/05 yen after a move up to 121.16 yen. It had slipped to 120.95 in late New York on Tuesday from as high as 121.78 yen, its best level in nearly two months. The greenback yielded to downward pressure after Federal Reserve Chairman Alan Greenspan said at the start of his twice-yearly testimony to Congress that geopolitical fears were creating "formidable barriers" to U.S. business spending. Greenspan also said it would be best for the United States to hold off on any fresh stimulus for now, given the difficulty in assessing the health of the U.S. economy because of uncertainty over a possible war with Iraq. "Greenspan's testimony shows that once the Iraq issue settles down, the U.S. deficit will be a major cause for concern for the economy and the dollar," said a trader at a Japanese bank. "There's no compelling reason to be long of dollars right now."
Source: Reuters News

Paul Krugman on Greenspan and the Deficit

Of course Greenspan isn't exactly Paul Krugman's favourite person, so he has been busy again this week driving the point home:

During the Clinton years Mr. Greenspan became an icon of fiscal probity, constantly lecturing politicians on the importance of eliminating deficits and paying off debt. Then George W. Bush took office, and Mr. Greenspan became — or was revealed as — a different man. First the Fed chairman lent decisive support to the Bush tax cut, urging Congress to reduce taxes lest the country run too large a budget surplus and pay off its debt too quickly. No, really. Then when the budget plunged into deficit, Mr. Greenspan not only refused to reconsider, he supported plans to make the tax cut permanent. The stern headmaster had become an indulgent uncle.

But now the fiscal deterioration has reached catastrophic proportions. In its first budget, the Bush administration projected a 2004 surplus of $262 billion. In its second budget, released a year ago, it projected a $14 billion deficit for the same year. Now it projects a deficit of $307 billion. That's a deterioration of $570 billion, just for next year — matched by comparable deterioration in each following year. You know, $570 billion here and $570 billion there, and pretty soon you're talking real money. Not my fault, says Mr. Bush. "A recession and a war we did not choose have led to a return of deficits," he declared. Really? Will the recession and war cost $570 billion per year, every year? Besides, Mr. Bush knew all about the recession and Osama bin Laden (remember him?) a year ago, when his projections showed a return to surpluses by 2005. Now they show deficits forever — even though they don't include the costs of an Iraq war.

The administration has used gimmicks to postpone most of the cost of these tax cuts until after 2008 — and whaddya know, the Office of Management and Budget has suddenly stopped talking about 10-year projections and now officially looks only five years ahead. But there are long-term projections tucked away in the back of the budget; they're overoptimistic, but even so they suggest a fiscal disaster once the baby boomers start collecting benefits from Social Security and Medicare. ("We will not pass along our problems to other Congresses, other presidents, other generations," declared Mr. Bush in the State of the Union. And with a straight face, too.) So where does Mr. Greenspan come in? Next week he will testify before the Senate Banking Committee. Will he, at long last, acknowledge the administration's fecklessness?
Source: New York Times

So tell us Paul, which way was it. Did he acknowledge the fecklessness, did he kick the open door, or did he hedge his bets?

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