for the economically minded...

[shamrock_uk]

In typical 'punchy' Krugman style, but many of his points must be well-taken...

The Maestro Slips Out of Tune

June 6, 2004
By PAUL KRUGMAN


The time has come, in my judgment, to consider a budgetary
strategy that is consistent with a pre-emptive smoothing of
the glide path to zero federal debt or, more realistically,
to the level of federal debt that is an effective
irreducible minimum.'' Translation: Go ahead and cut taxes.


With those words, delivered in Senate testimony on Jan. 25,
2001, Alan Greenspan -- revered during the 1990's as the
nonpartisan architect of America's prosperity -- inserted
himself decisively into politics, on the side of George W.
Bush. The chairman of the Federal Reserve didn't
specifically endorse Bush's plans, but his words were
exactly what Bush needed. Before Greenspan's testimony,
many political observers questioned whether the victor in a
disputed election could get an enormous, controversial tax
cut through Congress. After Greenspan spoke, much of the
resistance collapsed.

Yet in retrospect we know that Greenspan's ''judgment'' --
that tax cuts were needed to prevent excessive budget
surpluses -- was a misjudgment of Rumsfeldian proportions.
In fact, the United States is headed for a budget deficit
of more than $400 billion this year, more than half of it a
result of tax cuts passed since Greenspan gave Bush his
support.

Greenspan is still a figure of enormous prestige and power;
he is to economic policy what J. Edgar Hoover once was to
law enforcement. After 17 years as Fed chairman, Greenspan
has become an icon, and it's hard to imagine America
without him; indeed, last month the president nominated him
for a fifth term. Yet his reputation is not what it once
was. At the height of the boom, he was the monetary maestro
whose advice was sought on many aspects of economic policy.
Now his record as a monetary leader has been called into
question, and his judgment on fiscal policy has been proved
disastrously wrong. Worse, he seems to have abandoned the
long tradition that places the Fed above the political
fray.

The Making of a Maestro Greenspan is, without question, a
very smart man. He has also been very lucky.

He had the good fortune to follow an illustrious
predecessor. Paul Volcker assumed office at a time of
double-digit inflation. During Volcker's eight years as Fed
chairman, he tamed inflation and steered the world through
a major financial crisis, then oversaw a powerful economic
recovery. On becoming chairman in August 1987, Greenspan
inherited both a healthy economy and an office whose
prestige had never been higher.

He enhanced that prestige with his deft handling of the
stock market crash of October 1987. Still, in the early
1990's few would have considered Greenspan a great Fed
chairman. When the economy stalled in 1990, Greenspan's Fed
was caught by surprise and was too slow to react by cutting
interest rates. What resulted was a nasty if brief
recession that, among other things, ensured the first
George Bush's electoral defeat. (Some Wall Street analysts
suggest that the second George Bush delayed Greenspan's
latest reappointment to pressure him to keep interest rates
low until after the election.)

But then came the great boom.

Greenspan jump-started that
boom by cutting interest rates once he realized that the
economy was weakening, but any Fed chairman would have done
the same thing. After the recovery began, he again followed
standard operating procedure. William McChesney Martin, who
was Fed chairman from 1951 to 1970, famously said that the
Fed's job is to take away the punch bowl just when the
party really gets going -- that is, to raise interest rates
and slow down a booming economy before the boom turns into
an inflationary spiral. Greenspan dutifully raised interest
rates through 1994.

But as the boom continued and the unemployment rate dropped
to new lows, he did something unexpected: nothing.

Around 1994, some businessmen began talking about a ''new
economy,'' in which old rules no longer applied. In the
70's and 80's, an unemployment rate below 6 percent
signaled an overheating economy, on the verge of inflation.
The new-economy advocates claimed, however, that this was
no longer true -- that thanks to accelerating productivity
growth and increased competition, it was possible to run
much closer to full employment without a takeoff in
inflation.

Unlike most economists at the time, Greenspan took those
claims seriously. And sure enough, the optimists were
right. Over the next six years unemployment fell to 4
percent, a level not seen in 30 years, yet inflation
remained quiescent. Greenspan didn't create the economic
miracle of the 90's, but -- to his great credit -- he
didn't stand in its way. And his name therefore became
associated with the boom.

Bubble Trouble ''But how do we know when irrational
exuberance has unduly escalated asset values, which then
become subject to unexpected and prolonged contractions, as
they have in Japan over the past decade?'' Greenspan asked
this question in December 1996, expressing his concern that
a bubble was developing in the stock market. He had reason
to think so: traditional measures of stock valuation, like
the price-earnings ratio, were rapidly moving off the
charts, and investor psychology was already starting to
remind those who knew economic history of the 20's.

Greenspan's ''irrational exuberance'' speech was clearly
intended to caution the markets. Soon afterward, he raised
interest rates slightly, again with the clear intention of
sending a warning signal to investors. But then he backed
off. There were no more rate increases, and Greenspan began
lauding the economy's achievements. Bad call: his first
instinct was right. It was a bubble, after all.

Critics say that by letting the bubble develop unchecked,
Greenspan set the stage not just for future market losses
but also for trouble in the economy as a whole. Greenspan
counters that the Fed can't target stock prices the way it
targets inflation, because you can't know whether a bull
market is a bubble until it bursts. The Fed, he says,
should not consider asset prices part of its brief. Is he
right?

When the bubble burst, the United States' economy went into
recession, just as critics of Greenspan's inaction feared.
Still, if he had been able to lead our economy into a
quick, decisive recovery, his position would have been
clearly vindicated. But though recovery was quick -- the
recession of 2001 officially lasted only eight months -- it
wasn't decisive. On the other hand, if the economy had
fallen into a Japan-type deflationary trap, Greenspan would
have been proved clearly wrong. That didn't happen, either.
Over the last few months, the recovery has finally started
to look like the real thing. We seem to have avoided a
Japan syndrome, at least this time.

On balance, I think the critics are right and Greenspan is
wrong. We avoided becoming Japan after the bubble burst,
but it was a near miss: with interest rates down to 1
percent, the Fed had almost run out of ammunition before
the economy turned around. And even if the economy is
finally on the mend, over the last three years millions of
American workers lost their savings or suffered the
indignity and financial hardship of prolonged unemployment
-- pain that could have been avoided if Greenspan had burst
the bubble before it grew so big.

But this argument will probably go on forever. Fifty years
from now, economic historians will still be arguing over
whether Greenspan's performance as monetary manager
deserves an A or a B-. What they won't argue about is
Greenspan's culpability for America's plunge into deficit.

The Partisan Chairman In the first days of the Bush
administration, as we've seen, Greenspan gave decisive aid
and comfort to the new president, urging Congress to cut
taxes in order to prevent excessive budget surpluses. Three
years and at least $900 billion in additional debt later,
that argument seems ludicrous. And besides giving bad
advice, Greenspan was engaging in highly questionable
behavior. Since then, rather than make amends, he has
compounded the sin.

As an institution, the Federal Reserve is set up more like
the Supreme Court than like an ordinary government agency.
Members of the Federal Reserve Board serve for long terms;
chairmen typically serve across several administrations
from both parties. There's a reason for this: economists
often argue that the Fed, like the Supreme Court, must be
insulated from the political process so that it can make
necessary but unpopular decisions. The quid pro quo for
this insulation, however, is that the Fed must stand above
the political fray. Like Supreme Court justices, the
members of the Fed board undermine the rationale for their
independence if they use their power for partisan purposes.


So was that 2001 testimony partisan? Yes. Greenspan argued
on the basis of budget projections -- which he must have
known are notoriously unreliable -- that the federal
government would pay off all its debt in a few years. If
this happened, the government would be forced to invest
future surpluses in the financial markets -- which, he
argued, would be a bad thing. To avoid this outcome, he
claimed, surpluses had to be reduced with tax cuts.

It was a peculiar, tortured argument, full of holes. For
example, partial privatization of Social Security -- which
Greenspan supports -- would impose ''transition costs'' in
the trillions of dollars, easily taking care of the
supposed problem of excessive budget surpluses. As many
warned at the time, Greenspan was also completely wrong
about the budget prospect -- projections of huge surpluses
quickly gave way to projections of huge deficits.

Above all, Greenspan's fear-of-surpluses argument was at
complete odds with what he had said in the past. All
through the Clinton years, Greenspan preached the virtues
of fiscal restraint, and he did not change his views when
the budget deficits of the 80's and early 90's vanished.
Just six months before his 2001 testimony, Greenspan saw no
problem with large projected budget surpluses. ''The
Congress and the administration,'' he said in July 2000,
''have wisely avoided steps that would materially reduce
these budget surpluses. Continued fiscal discipline will
contribute to maintaining robust expansion of the American
economy in the future.'' But then a Republican entered the
White House, brandishing a tax-cut proposal -- and
Greenspan suddenly developed an elaborate theory of why it
was necessary to reduce those surpluses, after all.

Any doubts that Greenspan holds George Bush to different
standards than he held Bill Clinton were dispelled in the
years that followed. He didn't call for a reconsideration
of the 2001 tax cut when the budget surplus evaporated. He
didn't even offer strong objections to a second major round
of tax cuts in 2003, when the budget was already deep in
deficit.

Since then, Greenspan has gone back to warning against the
evils of budget deficits. But he still hasn't called for a
reconsideration of recent tax cuts; on the contrary, he has
endorsed Bush's plan to make the tax cuts permanent.
Instead he calls for spending cuts, emphasizing the need to
trim Social Security benefits. I went back to testimony
Greenspan gave in February 2001; sure enough, he assured
nervous senators that tax cuts would not threaten future
Social Security benefits.

But it's even worse than that. Before Greenspan became Fed
chairman, he headed a commission that recommended changes
in Social Security to secure its future. The most important
recommendation, adopted by Congress, was for an increase in
the payroll tax -- a regressive tax that falls much more
heavily on lower- and middle-income families than it does
on the well-off. The ostensible purpose was to generate a
surplus within the Social Security system, building up a
trust fund to pay benefits once the baby boomers retire.

That was the bait; now Greenspan has pulled the switch. The
sequence looks like this: he pushed through an increase in
taxes on working Americans, generating a Social Security
surplus. Then he used the overall surplus, mainly coming
from Social Security, to argue for tax cuts that deliver
very little relief to most people but are worth a lot to
those making more than $300,000 a year. And now that those
tax cuts have contributed to a soaring deficit, he wants to
maintain the tax cuts while cutting Social Security
benefits. He never said, ''Let's raise taxes and cut
benefits for working families so that we can give big tax
cuts to the rich!'' But that's the end result of his
advice.

Why did he do it? There are two possible interpretations.
The more generous one is that he never gave up the ideals
of his younger days. Into his 40's, Greenspan was an
acolyte of Ayn Rand, the libertarian novelist and
philosopher, and Greenspan has never repudiated his Randian
association. Nonetheless, during the Clinton years he came
to be viewed as a moderate. Maybe that was a mask, and all
those years he was just waiting for an opportunity to use
the prestige of his office to undermine the hated
institutions of the welfare state.

The less generous interpretation is that Greenspan simply
abused his position to help his friends. Kenneth Thomas, a
finance professor at the Wharton School, has calculated
that Greenspan visits the White House about once a week, as
The Christian Science Monitor reported last month, and that
is almost four times as often as he did when Clinton was
president.

Part of the genius of George Bush's political operatives is
their ability to persuade people (Colin Powell, Tony Blair)
to betray their principles, to say and do things they will
later regret, in support of a presumed shared cause. Paul
O'Neill, Bush's first treasury secretary, falls into the
same category: he was a moderate Republican who for a time
played good soldier, defending the Bush tax cuts despite
private qualms, to help the new president -- a man he
thought shared his values -- by giving him an early
political victory. And guess what: O'Neill was a close
friend of Greenspan's.

According to Ron Suskind's book ''The Price of Loyalty,''
written with O'Neill's cooperation, Greenspan told O'Neill
that a tax cut without triggers -- that is, conditions that
would cancel the cut if projected surpluses didn't
materialize -- was ''irresponsible fiscal policy.'' Yet
Greenspan never made a forceful public case against a
trigger-free tax cut, perhaps because he did not want to
make trouble for his friend O'Neill. And by the time he
realized just how irresponsible the tax cut really was, he
was trapped -- too deeply associated with the
administration's policies to change course without losing
face.

Either way, Greenspan did something remarkable. After
becoming a symbol of America's economic turnaround in the
90's, and anointing himself the nation's high priest of
fiscal probity, he lent crucial aid and comfort to the most
fiscally irresponsible administration in history. In the
end, that will be his most important legacy.




Paul Krugman is a Times columnist and a professor at
Princeton. His latest book is ''The Great Unraveling:
Losing Our Way in the New Century.''

http://www.nytimes.com/2004/06/06/ma...=1087533189&ei
=1&en=2b8b5a22918c8c02

[Timber Loftis]

Ugh... too much commingling with the Bush administration issues to get a clear analysis on Greenspan.

One thought, though. If increasing unemployment coupled with increasing inflation is "stagflations," what do we call the opposite, the decreasing unemployment and decreasing inflation of the 90's?

In the end, I think Greenspan saw and warned of the bubble, as many of us did (dare I count the Dutch tulip comparrisons to Amazon.com?), but in the end decided "F* it, it's a good wave, lets catch it," as many of us did.

As for president Bush's exuberant Barbie-esque spending, what is Greenspan to do? He controls the Fed Rate, the pressure valve for private investment -- but has no control over GWB's excessive use of the Treasury checkbook to increase the deficet and the debt.

I do note that Repug's tout the fact that the "deficet" will decrease over the next 2 vyears as a victory, when in my mind, a decrease in the "rate we get more F*ed by continued rate of debt accumulation" is no victory at all -- merely less of a loss.

And, I note that someone reading this must at least understand the difference between the deficet (which is the rate of debt increase at any given moment, meeted out by fiscal quarters) vs. the national debt (which is the total amount of accumulated debt) to even grok what I'm talking about.

[ 06-08-2004, 03:46 AM: Message edited by: Timber Loftis ]

[promethius9594]

article... too.... long... cant.... read. must... have... tylenol.

[Azred]

The Chairman of the Federal Reserve should most definitely be prevented from having too much interaction with the current political party in power. Greenspan at the White House once per week should sound some red alerts, financially speaking. The separation of duties and interests has almost gotten to the point where the Fed should become the Fourth branch of our government....

I would state that the tinkering the Fed does would cause more problems that they solve, but after having seen some of the recent goings-on in the financial world we don't dare let the market direct itself or let those involved in the market direct themselves--the lunatics would burn down the asylum. [img]graemlins/erm.gif[/img]

On the other hand, I would like to see the welfare state dismantled, within reason--if you can get yourself down to the Social Security office to fill out paperwork to get a check then you can get a job (but allowing for consideration to those who are truly disfuntionally disabled or too elderly). Given that restructuring, privatize it into the Market and let me invest my 6.2% how I see fit. [img]graemlins/petard.gif[/img]

[shamrock_uk]

Originally posted by Timber Loftis: Ugh... too much commingling with the Bush administration issues to get a clear analysis on Greenspan. One thought, though. If increasing unemployment coupled with increasing inflation is "stagflations," what do we call the opposite, the decreasing unemployment and decreasing inflation of the 90's? In the end, I think Greenspan saw and warned of the bubble, as many of us did (dare I count the Dutch tulip comparrisons to Amazon.com?), but in the end decided "F* it, it's a good wave, lets catch it," as many of us did. As for president Bush's exuberant Barbie-esque spending, what is Greenspan to do? He controls the Fed Rate, the pressure valve for private investment -- but has no control over GWB's excessive use of the Treasury checkbook to increase the deficet and the debt. I do note that Repug's tout the fact that the "deficet" will decrease over the next 2 vyears as a victory, when in my mind, a decrease in the "rate we get more F*ed by continued rate of debt accumulation" is no victory at all -- merely less of a loss.

Yes, i would probably agree with you here, the article is a bit unjustly critical.

originally posted by promethius9594 article... too.... long... cant.... read. must... have... tylenol.

Incidentally promethius, did you just post about 150 messages whilst my back was turned?! You were a drow warrior last time I saw you! [img]smile.gif[/img]

[John D Harris]

All I know is this the US economy is growing at rates that have not been seen in 20-30 years, yes that is back to the 1970's&80's not the 1990's(WAY PAST THE 90's), so much for the illusion of the greatest economy is 50 years

In my State Alabama, a little over a year ago the govenor tried to have a huge tax increase passed in a political move that at the time seemed like political suicide. The gov(r) and the state legislature(d) all said there would be MASSIVE state deficets so bad that the state would have to cut services and people, Humans, you know voters, would DIE if we the people did not pass the tax increase. Well in a true cold blooded conservative nature of the people of Alabama we voted down the tax increase by a large margin 60%+ to 40%-. Guess what the economy has turned arround and the state of Alabama is looking at a surplus. All without a single tax increase, just an increase in business done by the people and evil corporations that pay the taxes. MORE Business=MORE taxes, MORE taxes=less business.

[John D Harris]

I don't know about Krugie's intellectual powers see following example and quote:
"When the bubble burst, the United States' economy went into
recession, just as critics of Greenspan's inaction feared.
Still, if he had been able to lead our economy into a
quick, decisive recovery, his position would have been
clearly vindicated. But though recovery was quick -- the
recession of 2001 officially lasted only eight months -- it
wasn't decisive. On the other hand, if the economy had
fallen into a Japan-type deflationary trap, Greenspan would
have been proved clearly wrong. That didn't happen, either.
Over the last few months, the recovery has finally started
to look like the real thing. We seem to have avoided a
Japan syndrome, at least this time.

On balance, I think the critics are right and Greenspan is
wrong. We avoided becoming Japan after the bubble burst,
but it was a near miss: with interest rates down to 1
percent, the Fed had almost run out of ammunition before
the economy turned around. And even if the economy is
finally on the mend, over the last three years millions of
American workers lost their savings or suffered the
indignity and financial hardship of prolonged unemployment
-- pain that could have been avoided if Greenspan had burst
the bubble before it grew so big."

Please note the liberal use by Krugie of the terms "IF" & "WOULD" and the infamous phrase "atleast this time" as it could happen a differant way next time!
1) Krugie completely ignors the facts that the USA and Japan are completely differant societies with differing attitudes of their respective populations, and those differances make all the differance in the outcome of the economic problem or boom.
2)Krugie doesn't take into account the differant Government structures ie: Japan much more socialist then the USA, Higher taxes, more Gov't intrution into peoples lives.
3)Krugie tries to bolster his thoughts or lack there of on the USA avoiding becoming another Japan, by stating the "Fed had almost run out of ammunition before the economy turned around." That's 'bout the stupidest thing I've ever heard! What does Klugie want? The USA to become another Japan and have near zero growth, BUT HEY the Fed still has ALL it's Ammunition to use if the USA Economy Needs it!!! That is the job of the Fed to do what it can to protect the US economy, If the Fed has to shoot every Frapping bullet it has, then pull out it's trench knife and slit the throat, or rippout the throat of an economic problem with it's teeth the Fed had better do it! Not worry about how much ammo it has the PEOPLE of the USA will make sure it has all it needs.

[ 06-09-2004, 10:21 PM: Message edited by: John D Harris ]

[Dedzy]

Good article shamrock,
I was noticing how Greenspan changed his tune over the last couple years concerning deficit spending, but not to this amount.
To be fair, I don't think there was a lot more that Greenspan could have done about the most recent economic readjustment from the technology bubble: He warned about it, then he had to cut rates once it happened.
What bothers me the most is not that he advocated tax cuts. It's that the vast majority of the tax cuts went to the wealthy class that was just going to reinvest the returns anyway, not spend it. If the goal was to increase private spending, the tax cut should have been more bottom-loaded. But that would never have happened in this administration.