Greenspan Doesn't Always Get It Right

0 Comments | Insight on the News, Feb 26, 2001 | by Jamie Dettmer

When Alan Greenspan set his face against tax cuts during the 1990s, deficit hawks and big-spending liberals couldn't get enough of the Federal Reserve chairman. They lauded him and never tired of invoking his name and quoting his remarks to whomever argued that the tax burden was too great and should be eased.

Then came Greenspan's tax-cut-endorsing testimony on Jan. 25 before the Senate Budget Committee -- and all of a sudden the Fed chairman wasn't so wise after all.

Both the Washington Post and New York Times devoted space to knocking him -- the latter turned to pop economist Paul Krugman to question why the Fed chairman felt empowered to stray from pure monetary policy. How dare the chairman enter the fiscal field and hazard an opinion about tax cuts!

That, of course, wasn't the line when Greenspan could be counted on to provide useful arguments against cutting taxes. His every word was pure gold then, and even the chairman, who is not known to hide his light under a bushel, got a little tetchy being asked to opine on every economic subject known to man, according to transcripts of 1995 Fed meetings released on Jan. 26.

During one meeting called to discuss financial assistance to Mexico, Greenspan noted with a touch of exasperation that he had "just been invited to speak, for example, to the Democratic Senate Caucus, not on Mexico but more or less on the world at large." And in a moment of humility the chairman noted that the Fed in recent years had amassed such credibility that every word and action of the agency was treated as gospel. "The markets truly believe that we know what is going on in the economy to a degree that no one else really does -- I worry about that basically because we could be our own worst enemies in this regard."

Greenspan doesn't have to be anxious about that now; the Post in its testimony coverage even dredged up the "R" word, noting that Greenspan is -- horror of horrors -- a Republican.

And in handy notes the Post explained: "Greenspan is an economist and a Republican. And one thing both economists and Republicans tend to believe is that, if there's an extra dollar lying around, individuals will tend to spend it more wisely than government."

Actually, economists would tend not to use the rather subjective word "wisely" -- they would employ the word "efficiently" and argue from data that economies with limited government spending do better than economies with free-spending governments. Oh well, obviously Greenspans little lectures during the last few years haven't quite sunk in at the Post yet.

Of course, Republicans, who were nervous that Greenspan wouldn't back George W. Bush's tax-cut proposal, also have changed their tune about the Fed chairman. Prior to his January Senate remarks, they fired warning shots across Greenspan's bow, with behind-the-scenes, off-the-record comments rehashing the charge that the Fed chairman lost the 1992 election for the elder Bush by failing to ease interest rates rapidly enough.

They also charged that Greenspan's economic forecasting frequently has been off and that both in the private sector and as Fed chairman he consistently has overemphasized the dangers of inflation. That claim has virtue, and the Fed, as the chairman appeared to imply to his fellow Reserve governors, doesn't always know more about the economy.

That is certainly the view now. Many Wall Street analysts believe the Fed is wrong about the state of the U.S. economy and that a recession already is under way. Some argue that a recession started in October -- a mere four months after the Fed's last interest-rate hike of 2000. The Fed back then thought it knew better than most economists, who couldn't see inflationary pressure requiring a rate hike. When the economic history books are written, it is likely the increase in May will be explored closely and lead to Greenspan and the Fed being apportioned some of the blame for the problems now.

The governors may realize that, judging by their eagerness to downplay the poor performance of the U.S. economy in the last quarter of 2000 and the rising signs of trouble at the turn of the new year. Greenspan was careful in his Senate testimony not to imply there was a recession. Does he really believe that? And, just seven days earlier, another member of the Federal Reserve, Alfred Broaddus, said there were few signs "of a sharp across-the-board decline in economic activity."

European economic commentators have been less respectful than the U.S. media in response to such remarks. Their conclusion is that the Fed remains determined to downplay the problems. Not that the Fed members are alone -- European central bankers, too, have been playing fast and loose with facts and figures. They have been maintaining that the U.S. slowdown will not have any impact on Europe's economy.

The signs are that their optimism is misplaced. United Kingdom figures released on Jan. 26 show the lowest growth rate since 1998. The British economy grew by just 0.3 percent in the fourth quarter last year, a sign of a very real and serious downturn.