Greenspan Garbled

Federal Reserve Board Chair Alan Greenspan is one of the few public figures who enjoys the utmost respect from politicians on both sides of the aisle. He is known for his impeccable empirical analyses, impressive economic instincts and a tremendous influence on world markets.

So far, Greenspan has lived up to his image as the maestro of monetary policy--and his remarks last week to the Senate Budget Committee at first seemed no exception. In a well-prepared statement, he reported on the current state of the economy and presented his conclusions on how to deal with ever-increasing surplus projections. He affirmed that the federal debt could be paid off sooner than expected, raising the question of what to do with the remaining surplus. To avoid "sub-optimal performance by our capital markets," the government should "eschew private asset accumulation" which usually leads to "surplus-lowering policy initiatives"--in other words, if the government will be sitting on a pile of cash, it should increase spending or lower taxes. Keeping his tone as pragmatic as possible, Greenspan further reasoned that "if long-term fiscal stability is the criterion, it is far better, in my judgment, that the surpluses be lowered by tax reductions than by spending increases."

As soon as Greenspan finished this sentence, the American media's breaking news sensor sparked an automatic chain reaction, ultimately filling every major newspaper's headline with the words "Greenspan endorses Bush's tax-cut plans." Far from it. Greenspan further qualified his carefully worded statement by pointing out the "tentativeness of our [budgetary] projections" and that some of the conclusions on tax receipts are "little more than informed guesses." He then ended his talk with a cautionary note that "with today's euphoria surrounding the surpluses, it is not difficult to imagine the hard-earned fiscal restraint developed in recent years rapidly dissipating. We need to resist those policies that could readily resurrect the deficits of the past and the fiscal imbalances that followed in their wake."

Greenspan should have known that his single sentence praising the merits of a tax-cut would make the front pages and that the five pages of qualifiers surrounding it would not. Cynics have argued that he has known this all along and that the endorsement headlines were the results for which he hoped. Some Democrats are quick to point out that Greenspan began his career in national politics by working on former president Richard M. Nixon's campaign in 1968. After hiding his true political feelings during eight years of the Clinton Administration, the story goes, he can now return to his conservative roots.

We hope this description is untrue. Regardless, Greenspan needs to be very careful not to squander his near-mythic stature in the partisan jungle of Washington.