January 25, 2006
Greenspan's Tarnished Legacy
By Froma
Harrop
Alan Greenspan
may be "the greatest central banker who ever lived,"
two Princeton economists asserted last year. Worship at the Church
of Greenspan had reached such a feverish pitch that when Senate
Minority Leader Harry Reid called the Federal Reserve chairman
"one of the biggest political hacks" in Washington,
even fellow Democrats shushed him.
It now appears
that Reid has lots of company. Top economic minds are saying that
Greenspan was not a great central banker -- or even a good one.
He was an enabler of the reckless Bush deficits. And their economic
policy was designed to serve the appetites of adults living for
today, and let the next generation be damned.
The cover
of The Economist magazine has a cartoon of Greenspan
handing the next Fed chairman a lit dynamite stick representing
the economy. Greenspan's legacy, the magazine says, will be "the
biggest economic imbalances in American history."
Paul Volcker,
who preceded Greenspan as Federal Reserve chairman, says there
is now a 75 percent chance that America's two monster deficits
-- the budget and trade deficits -- could "wreck the international
financial system" in the next few years.
While not
a great banker, Greenspan was definitely a great Republican. He
will be remembered for encouraging Democrats to dispense the harsh
medicine needed to deal with budget deficits, then helping Republicans
fill the punch bowl.
In 1993,
Greenspan was all for the tax increases in Clinton's deficit-reduction
budget proposal. The plan, which passed without one Republican
vote, signaled to the financial markets that America was serious
about taming deficits. Thanks to a booming economy and new tax
revenues, Clinton left the White House with a federal budget surplus
of $127 billion -- and projected surpluses of over $5 trillion.
Come 2001,
Republican George Bush is in office, and Greenspan is giving the
nod to steep tax cuts. The surpluses vanish, and deficits metastasize.
The federal budget deficit this year is expected to top $400 billion.
(The Bush people, who insisted that the projected Clinton surpluses
were never real, nonetheless used them to justify their tax cuts.)
Greenspan
started expressing concern over the mounting budget deficits,
but never fully disavowed the tax cuts. Last year, he said he'd
prefer to leave the tax cuts in place and instead reduce Medicare
and Social Security benefits.
Central
bankers are supposed to abhor market bubbles, but Greenspan blew
air into two of them -- a stock and a housing bubble -- by keeping
interest rates low. American consumers responded by borrowing
money against their paper profits. They spent the dough, which
propped up the economy. Now consumers are burdened with debt.
Part of
America's economic prosperity, The Economist notes, "is
based not on genuine gains in income, nor on high productivity
growth, but on borrowing from the future." As the Austrian
economist Ludwig von Mises once said: "It may sometimes be
expedient for a man to heat the stove with his furniture. But
he should not delude himself by believing that he has discovered
a wonderful new method of heating his premises."
It's true
that Greenspan presided over 18 years of economic expansion, broken
by only two mild recessions, but there are explanations for that
record other than the man's greatness. Economists note that the
move to a service from a manufacturing economy reduced volatility.
Globalization kept prices down. Greenspan devotees portray their
hero as an anti-inflationary Superman -- but other industrialized
nations have seen equally impressive drops in their core inflation
rates. Job growth, meanwhile, has been mediocre.
Greenspan
leaves behind an America that is the world's leading debtor nation.
The United States must now borrow $2 billion from foreigners every
working day to service its debt. Its personal-savings rate is
negative. And its current account deficit (the trade deficit,
broadly measured) is 7 percent of gross domestic product -- almost
double the previous U.S. record.
So expect
a lot of economists to be sitting on their hands as Greenspan
departs the Fed at the end of the month. Even his Enron Prize
for Distinguished Service, which Greenspan accepted a few days
after the energy company admitted to filing falsified earning
reports, doesn't impress them. But the songs of praise from Bush
and his campers will more than make up for that silence. Boy,
do they owe him.
Copyright
2006 Creators Syndicate
