- The Washington Times - Sunday, February 29, 2004

Federal Reserve Chairman Alan Greenspan traveled to Capitol Hill last week to implore legislators once again to resurrect two 1990 budget-enforcement mechanisms that Congress permitted to expire at the end of fiscal 2002. Those measures are discretionary spending caps and pay-as-you-go (PAYGO) provisions applicable to tax cuts and increases in entitlement spending. If discretionary spending, which is subject to annual appropriations, exceeded the caps, or if Congress increased entitlement spending or reduced taxes in ways that were not fully offset by entitlement cuts or tax increases, both enforcement mechanisms would trigger a sequester — automatic, across-the-board cuts in non-exempt programs.

Emphasizing that baby boomers would begin qualifying for Social Security in 2008 and for Medicare in 2011, Mr. Greenspan expressed a “growing concern” over the nation’s long-term fiscal balance as it prepares for a veritable demographic tsunami.

The reinstatement of tough budget-enforcement mechanisms presents policy-makers with two tradeoffs. One is substantive: growth-generating tax cuts vs. unreformed entitlements. Mr. Greenspan said he favored making permanent the tax cuts enacted in 2001 and 2003. He also offered two recommendations for reducing the long-term unfunded liabilities of major entitlement programs. The Fed chairman once again promoted the use of a more accurate measure of consumer price inflation, which would reduce the annual increases in Social Security benefits. And he recommended increasing the age at which non-near-term retirees would become eligible for Social Security and Medicare.

The other policy tradeoff is procedural: Should we prescribe automatic rules to enforce probity when it may not make sense to do so? For example, as the economy entered recession in late 2000 or early 2001, potentially debilitating deflationary forces were gathering momentum. The well-timed tax cuts of 2001 — and the obvious need for additional tax relief in 2002 and 2003 — were the right policy responses, irrespective of their short-term impact on the fiscal balance.

In the face of a sizable structural deficit that will remain even after projected economic growth reduces the current $500 billion budget deficit, Mr. Greenspan is pointing out reality. So far, no other policy-makers — Democratic or Republican — have come up with a formula for reality.

Clearly, there is a need to have some enforcement mechanism in tax and budget policy. Mr. Greenspan’s embrace of discretionary spending caps and PAYGO, coupled with his stated support for making the recent tax cuts permanent, tells Congress and the White House that he would condition the growth-enhancing permanence of tax relief upon the enactment of entitlement reform that would alleviate the trillions of dollars of unfunded liabilities. That’s the Greenspan formula. However, in these uncertain times, when the United States is waging its long-term war against terrorism, a usable escape hatch would be necessary.

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