Greenspan and the Democrats’ spin

Over the 2003-2005 fiscal period, the federal government will have generated average budget deficits exceeding $400 billion per year. Those massive deficits will have been generated during a period when economic growth averaged about 3.75 percent per year. Worse, there is little evidence that the Bush administration and Congress have any viable plans to meet the president’s commitment to slice the deficit in half over any reasonable period of time. It was in this atmosphere that Federal Reserve Chairman Alan Greenspan testified before the Senate Budget Committee Thursday, declaring, “The federal budget deficit is on an unsustainable path.” Mr. Greenspan emphatically warned: “Unless that trend is reversed, at some point these deficits would cause the economy to stagnate or worse.”

As he has done repeatedly in past congressional testimony, Mr. Greenspan implored the senators to re-adopt budget procedures from the 1990s that provided a modicum of discipline to fiscal policy. Those procedures included discretionary spending caps and so-called PAYGO requirements, which forced the Senate to gather 60 votes if it increased entitlement spending or reduced taxes without enacting offsetting spending cuts and tax increases. Interestingly, PAYGO requirements were ill-advisedly allowed to expire at the end of fiscal 2002, just as the average annual budget-deficit trend soared through the $400 billion barrier for 2003, 2004 and 2005. “Reinstating a structure like the one provided by the [1990] Budget Enforcement Act would signal a renewed commitment to fiscal restraint and help restore discipline to the annual budgeting process,” the Fed chairman told the senators.

In an obvious reference to the cumulative $5.6 trillion in budget surpluses projected over 10 years in 2001, Mr. Greenspan noted that “budget outcomes in the past have deviated from projections.” Accordingly, he recommended “a well-designed set of mechanisms that facilitate midcourse corrections” in order to “ease the task of bringing the budget back into line when it goes off track.” In other words, Mr. Greenspan was recommending the use of “triggers” — and not for the first time.

Beginning with Senate Minority Leader Harry Reid’s slandering Mr. Greenspan as “one of the biggest political hacks” in Washington, Democratic senators have pursued a revisionist strategy that attempts to place much of the blame for the burgeoning budget deficits on the Fed chairman. Maryland Democratic Sen. Paul Sarbanes followed that theme Thursday by repeating the charge, which he first leveled at a January 25, 2001, budget hearing, that Mr. Greenspan’s testimony that day effectively “takes the lid off of [the] punch bowl.” Mr. Greenspan told Mr. Sarbanes that the charge was “frankly unfair” because it neglected the Fed chairman’s unambiguous endorsement of “trigger” mechanisms during the same testimony. “I advocated tax cuts” in 2001, Mr. Greenspan acknowledged Thursday, “but I also advocated triggers in the same testimony.”

Indeed he had. “In recognition of the uncertainties in the economic and budget outlook,” Mr. Greenspan said in his prepared remarks in January 2001, “it is important that any long-term tax plan, or spending initiative for that matter, be phased in. Conceivably, it could include provisions that, in some way, would limit surplus-reducing actions if specified targets for the budget surplus and federal debt were not satisfied.” Then Mr. Greenspan, in a clairvoyant observation, explained why triggers were important: “What if,” he asked more than four years ago, “the forces driving the surge in tax revenues in recent years begin to dissipate or reverse in ways that we do not now foresee?” That is precisely what happened. But as Mr. Greenspan had recalled Thursday in an answer to a question from Democratic Sen. Debbie Stabenow, the triggers he advocated “never passed, never got any real interest, and as you point out, that’s unfortunate, because we would have found that a number of things would have occurred differently. One of the real problems we had was allowing PAYGO to lapse in September 2002, and were we to still be under a PAYGO regime, which I thought worked very well, I think we’d have fewer problems now.”