Our Own Nero
How did our budget come so undone in a scant 18 months? Where on earth could our legislators have gotten the idea that we should get rid of those nasty surplusses? Read now the gospel of Greenspan as told Januray 25, 2001 before the Committee on the Budget, U.S. Senate.

In doing so, I want to emphasize that I speak for myself and not necessarily for the Federal Reserve.

Not necessarily for the Fed, but this will still be filed under "Testimony of the Chairman."

To be sure, these impressive upward revisions to the growth of structural productivity and economic potential are based on inferences drawn from economic relationships that are different from anything we have considered in recent decades. The resulting budget projections, therefore, are necessarily subject to a relatively wide range of error.

We have these new projections which might be very far off since they are, as I said, projections.

The most recent projections from the OMB indicate that, if current policies remain in place, the total unified surplus will reach $800 billion in fiscal year 2011, including an on-budget surplus of $500 billion.

"Current policies." That means taxes. See, in Greenspan's personal view, the government had too much money. By 2011, under those tax rates, we'd have a budget surplus of $800 billion. That's too much, especially since:

Moreover, the admittedly quite uncertain long-term budget exercises released by the CBO last October maintain an implicit on-budget surplus under baseline assumptions well past 2030 despite the budgetary pressures from the aging of the baby-boom generation, especially on the major health programs.

All projections are volatile and uncertain, but if we keep taxing the way we are, by 2030 we're going to keep having these damned surpluses.

The most recent projections, granted their tentativeness, nonetheless make clear that the highly desirable goal of paying off the federal debt is in reach before the end of the decade.

Read that carefully because it's truly a masterpiece of deception. The most recent projections (which are, "necessarily subject to a relatively wide range of error") "make clear" (wait a minute, how can they be clear if they're subject to a "wide range of error?") that we'll pay off the debt before the end of the decade. Greenspan feels this is bad because he doesn't think the government should buy private assets. Here's a man saying that in 2001 we should cut taxes, because if we don't do it now, we'll never do it, and then we'll have this huge surplus that we can't get rid of (we can only get rid of it now) and the government will have to buy private assets.

Short of an extraordinarily rapid and highly undesirable short-term dissipation of unified surpluses or a transferring of assets to individual privatized accounts, it appears difficult to avoid at least some accumulation of private assets by the government.

One side note, it has been declared that the recession we currently find ourselves in started in March of 2001. Keep in mind Greenspan made the above comment 60 days prior to the beginning of this recession. With the above statement, Alan comes around again on the budget issue. Here the Chairman lays it on the line for the Senators. Unless something totally unprecedented (like a recession) comes along and eats up these surplusses or [shameless political plug coming] you privatize some assets of Social Security, the government is doomed to buy private assets. When? 2011. 10 years hence. How long is the current tax package supposed to last? 10 years. HOLD ON TO YOUR HATS:

Indeed, in almost any credible baseline scenario, short of a major and prolonged economic contraction, the full benefits of debt reduction are now achieved before the end of this decade--a prospect that did not seem likely only a year or even six months ago.

Six months earlier no one could have predicted this. Indeed, predictions are, "necessarily subject to a relatively wide range of error," but don't let that stop you, we have to cut taxes NOW or in ten years we'll be up a creek! We won't be able to cut them then, because the government will be powerless then. This is the kind of bald-faced twaddle that set our budgetary policy for the next ten years.

[W]e must avoid a situation in which we come upon the level of irreducible debt so abruptly that the only alternative to the accumulation of private assets would be a sharp reduction in taxes and/or an increase in expenditures, because these actions might occur at a time when sizable economic stimulus would be inappropriate.

You know how time flies. 2011 will be upon us like that and since our current projections (which could not have been anticipated 6 months ago) show us that in 2011 we'll have waaaayyy too much money, we'd better plan to get rid of it now. Were we to cut taxes in the future to get those terrible surplusses down, we might overstimulate the economy, and that might lead to some kind of irrational exuberance. That would be bad.

Lately there has been much discussion of cutting taxes to confront the evident pronounced weakening in recent economic performance.

The economy is going down the toilet, but I've got these projections that show we'll be on easy street for the next decade.

In today's context, where tax reduction appears required in any event over the next several years to assist in forestalling the accumulation of private assets, starting that process sooner rather than later likely would help smooth the transition to longer-term fiscal balance.

Cut 'em now, or else you're screwed and I won't be here to help you.

Greenspan then ties himself in knots both warning against cutting taxes and adovcating the same cuts. To me, the best illustration of this comes in the 5th paragraph from the end:

To be sure, unless later sources do reveal major changes in tax liability determination, receipts should be reasonably well-maintained in the near term, as the effects of earlier gains in asset values continue to feed through with a lag into tax liabilities. But the longer-run effects of movements in asset values are much more difficult to assess, and those uncertainties would intensify should equity prices remain significantly off their peaks. Of course, the uncertainties in the receipts outlook do seem less troubling in view of the cushion provided by the recent sizable upward revisions to the ten-year surplus projections. But the risk of adverse movements in receipts is still real, and the probability of dropping back into deficit as a consequence of imprudent fiscal policies is not negligible.

Stick and move, stick and move. Stocks are down and that could mean bad things for these surplusses, but we'll be okay thanks to our handy-dandy projections. Greenspan then leaves us with this comment:

We need to resist those policies that could readily resurrect the deficits of the past and the fiscal imbalances that followed in their wake.

Well Chairman, what are those policies? You just advocated setting a tax cut package for the next ten years because we have these great projections, which you say are worthless but we should follow them anyway. What to make of this last statement? Perhaps, ass covering? In case he's wrong, he can say he told us to be more prudent. Never mind the long dissertations about cutting taxes now to avoid needlessly stimulating the economy in ten years time, or the oration concerning privatizing social security accounts, cut taxes, but not too much, and make sure you cautiously determine what to do for the next ten years of budgets right now.

A virtuoso performance from the Maestro. Today he reminds us to strap our discipline back on. Thanks buddy. A final note. My outrage is not over our current predicament. We've got some budget issues now due to an economic implosion. Our deficit is not so outsized that it cannot be reigned in and lead to surplusses when the economy sorts itself out. The problem is that the 10-year tax cut passed last year takes the advice of the Chairman and phases in over ten years. That means that even if we tighten our belts now to deal with the recession, we're going to be taking in less and less money as the years go by. All this based on one set of projections that are proving to be a startling anomoly. The deceptive testimony of the Chairman should be a guiding lesson to legislators.
- posted by levinson @ 9/12/2002 09:05:00 AM