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April 25, 2005
Smoke Signals of the Fiscal Kind
While the world focused its attention on straining to determine whether the smoke was black or white above the Sistine Chapel, Federal Reserve Chairman Alan Greenspan sent up a signal of his own on Friday, i.e. our economy is heading to the nether regions of a blistering, blazing underworld (Ok, so those weren't his words, but he did urge a great deal of caution in his testimony before the US Senate Budget Committee). For the first time, Greenspan explicitly stated he anticipates tax increases to play a part in any effort to reduce the federal budget deficit.
Greenspan also sought to clarify the administration's interpretation of his support for the tax cuts passed in early 2001, he said helped to shift the federal budget from a state of surplus to deficits.
He also defended himself from critical comments about his support of the 2001 tax cuts. Greenspan stated that government economists had predicted budget surpluses "as far as the eye can see." However, Greenspan did state he had recommended including a "trigger" mechanism to limit the approved tax cuts if prescribed budget targets were missed. He said he thinks "it's frankly unfair" to blame him now that Congress chose to "read half my testimony and discard the rest."
I agree in part with Greenspan's statement. The administration was definitely looking for any reason that could be used to support their argument for why the country needed tax cuts. However, I tend to agree with Senator Paul Sarbanes' (D-MD) statement that it was "fair to consider how your message would be taken" and could be taken, as they in fact were, as "providing a green light" for the Republican tax cuts. Greenspan replied to Sarbanes with "I plead guilty to that, if indeed that is the way it was interpreted, I missed it. In other words, I did not intend it that way."
I find it very difficult to believe that someone as knowledgeable and as experienced as Alan Greenspan would not pick up on that possible interpretation. I mean this is the person who believed the markets were acting with "irrational exuberance" and caused an overnight drop in every major world market. One simply cannot leave potential interpretations open when the world hangs on every word one utters. Plus, he has been the Fed Chairman since 1987. It seems after 18 years, one would know how an administration might try to distort what one says about the state of the economy in that length of time.
Greenspan stated this about the federal budget deficit:
The federal budget deficit is on an unsustainable path, in which large deficits result in rising interest rates and ever-growing interest payments that augment deficits in future years.
The deficit established a new record last year: $412 billion, and is set to keep setting new records as the baby boom generation starts retiring and collecting Social Security and Medicare benefits. I agree that an increasing number of retirees puts stress on the fiscal condition of Social Security, but the amount already spent on Iraq would have gone a long way to help with that. What I have a bigger fault with is that there used to be money in the infamous "lockbox," but Congress as usual got fidgety with that much money laying around doing nothing but accumulating interest and decided to spend it on some of their Congressional interests. Honestly, there are probably Congressional members on both sides that deserve some blame for that.
While Greenspan commented that the economy is "expanding at a reasonably good pace," he added the foreboding caveat:
In fiscal year 2004, federal outlays for Social Security, Medicare, and Medicaid totaled about 8 percent of GDP. The long-run projections from the Office of Management and Budget suggest that the share will rise to approximately 13 percent by 2030. So long as health-care costs continue to grow faster than the economy as a whole, the additional resources needed for these programs will exert intense pressure on the federal budget. Indeed, under existing tax rates and reasonable assumptions about other spending, these projections make clear that the federal budget is on an unsustainable path, in which large deficits result in rising interest rates and ever-growing interest payments that augment deficits in future years. But most important, deficits as a percentage of GDP in these simulations rise without limit. Unless that trend is reversed, at some point these deficits would cause the economy to stagnate or worse.
Read Federal Reserve Chairman Alan Greenspan's complete testimony before the US Senate Budget Committee.
Greenspan did not mention anything about the recent slowdown in the stock market, when the Dow suffered three straight triple-digit losses last week. Last Wednesday (April 20) the stock market flirted with dipping below the 10,000 mark, a level it was last at on October 26, 2004. He did call for "major deficit-reducing actions" and that Congress will have to take many procedural steps to curb the increasing deficit:
In my judgment, the necessary choices will be especially difficult to implement without the restoration of a set of procedural restraints on the budget-making process. For about a decade, the rules laid out in the Budget Enforcement Act of 1990 and in the later modifications and extensions of the act provided a framework that helped the Congress establish a better fiscal balance. However, the brief emergence of surpluses in the late 1990s eroded the will to adhere to these rules, which were aimed specifically at promoting deficit reduction rather than at the broader goal of setting out a commonly agreed-upon standard for determining whether the nation was living within its fiscal means. Many of the provisions that helped restrain budgetary decisionmaking in the 1990s--in particular, the limits on discretionary spending and the PAYGO requirements--were violated ever more frequently; finally, in 2002, they were allowed to expire.
While Greenspan prefers the deficit be reduced as much as possible through spending cuts, including reductions in Social Security and Medicare benefits, before raising taxes, he did state that an agreement to reduce the deficit will require compromises. "We can raise taxes, and I don't deny we probably at the end of the day will do them [tax increases] in order to get an ultimate resolution of this."
Nevertheless, Republican leaders have ruled out the possibility of increasing taxes to shrink the deficit anytime soon, and are pushing with ever-increasing vigor to extend Bush's expiring tax cut provisions and even to pass new tax breaks for energy companies. Furthermore at the behest of Bush, Congress is set to approve another $80 billion to fund the war in Iraq. The House approved to permenantly repeal the estate tax, a move that is expected to cost $290 billion over 10 years. In addition, Congress has abandoned the White House proposal to reduce farm subisidies.
Despite the Republicans' happy-go-lucky attitude of the economy, the following is what Americans are thinking, according to the Consumer Comfort Index, which fell to the lowest level since June 2004.
Consumer Comfort Index Questions and Net Response Scales for Current Week (4/17/05)Q: Would you describe the state of the nation’s economy these days as excellent, good, not so good, or poor?
Net Positive: 36%
Excellent: 2%
Good: 34%
Net Negative: 64%
Not so good: 38%
Poor: 26%Q: Would you describe the state of your own personal finances these days as excellent, good, not so good, or poor?
Net Positive: 57%
Excellent: 7%
Good: 50%
Net Negative: 43%
Not so good: 28%
Poor: 15%Q: Considering the cost of things today and your own personal finances, would you say now is an excellent time, a good time, not so good a time, or a poor time to buy the things you want and need?
Net Positive: 33%
Excellent: 3%
Good: 30%
Net Negative: 67%
Not so good: 41%
Poor: 26%
So, anyone for private accounts?
Check out these polls from ABC News.
Read Brad DeLong's Semi-Daily Journal post: "Why Oh Why Are We Ruled by These Fools? (Yet Another Bush Budget Edition)"
Posted by at April 25, 2005 10:27 PM | Permalink
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Comments
I have pasted an article below from Truthout dated March 2005 regarding Alan Greenspan and his support for Bush's tax cuts. Greenspan needs to retire now! He is nothing but a Bush lackey.
Greenspan under Fire for Support of Tax Cuts
By Brian Knowlton
The International Herald Tribune
Monday 07 March 2005
Social Security also draws Democrats' ire.
Washington - Alan Greenspan, long considered above partisan reproach as a celebrated steward of the U.S. economy, encountered criticism Sunday from Democratic lawmakers who said he had gone too far in support of Bush administration ideas on tax cuts, the notion of a consumption-based tax and Social Security reform.
Greenspan, the Federal Reserve chairman, had made a "grievous error" in endorsing President George W. Bush's tax cuts that have "driven us into the worst deficit situation we have ever seen in this country," said Senator Richard Durbin of Illinois, the assistant Democratic floor leader.
Durbin's comment on NBC television came three days after a pointed attack by the Senate Democratic leader, Harry Reid of Nevada, who called Greenspan "one of the biggest political hacks we have here in Washington."
And Representative Nancy Pelosi of California, the House Democratic leader, said Sunday on Fox television that "these statements made by the distinguished chairman of the Fed have seriously questioned the independence of the Fed."
Yet the latest criticism came after a week in which the Fed chairman, who has supported several Bush economic initiatives, had offered some of his gloomiest assessments of the government's current budget situation. Greenspan told the House Budget Committee on Wednesday that federal deficits were "unsustainable." He also suggested that the solution may lie in a combination of cuts in spending and increases in taxes.
The ever-cautious Greenspan has not replied to the Democrats' criticism, nor has the Federal Reserve. The Republican National Committee has called the criticism "unfortunate," and some Republican lawmakers have added their support.
"It's outrageous to describe Alan Greenspan as a political hack," Senator Mitch McConnell, Republican of Kentucky, said Sunday. "He has been an independent player at the Fed for a long time under both parties and made an enormous positive contribution."
McConnell told an NBC interviewer that when Greenspan, a conservative Republican, was working cooperatively to help fashion economic health during the Clinton administration, Democrats "praised him."
Democrats, following their electoral losses in November, have vigorously debated how bluntly to challenge the Bush administration on a range of issues. Some Democrats said that their new national chairman, Howard Dean, went too far in saying, "I hate Republicans." Senator John Kerry, the former presidential candidate, is said to be among those who want Democrats to challenge Bush far more aggressively.
But the recent criticism of the relatively politically insulated Greenspan has surprised some observers, particularly because the Fed chairman, who turned 79 on Sunday, is required by law to step down by early next year. That will end a tenure that began in 1987, the longest ever by a Fed leader. President Ronald Reagan appointed Greenspan as successor to Paul Volcker.
Bush's proposed revision of Social Security, which provides retirement and disability benefits, is a priority he intends to campaign for in the coming months. His plan has sharply divided Washington and the nation, flaring partisan charges and countercharges.
This has drawn Democrats' attention to Greenspan's support for a part of the Bush proposal, the creation of private investment accounts, which would allow younger workers to invest a small share of their Social Security taxes. Democrats, who have not put forth a proposal of their own, have vigorously defended the 70-year-old retirement program.
Treasury Secretary John Snow on Sunday opposed the idea voiced by some Democrats of separating the private accounts, which Vice President Dick Cheney has acknowledged could cost trillions in transition costs, from efforts to keep Social Security solvent.
While administration officials have acknowledged that the accounts will do nothing to help keep Social Security solvent, Greenspan's suggestion last week that private accounts might be a sensible new feature seemed to particularly inflame Reid.
The Nevada senator has led an unusually united Democratic caucus in opposition to the Bush proposals. Public opinion polls, too, have shown that the idea has gained little traction across the country. But Greenspan's economic pronouncements carry such clout that his blessing for private accounts, though carefully hedged, apparently angered Reid.
Greenspan had said Feb. 16 before a Senate committee that the individual accounts would be ''a good thing to do," but he also urged legislators to "start out slowly" and pay close attention to the trillions of dollars in extra federal borrowing that the accounts might require during a phase-in period.
Reid also spoke after Greenspan had lent support to another economic idea Bush has floated in his discussions of taxation reform, that of a consumption-based tax, as is common in most American states and many other countries. Snow said that this, too, was an idea that the president's tax reform commission would consider.
Posted by: Kris Graham at April 28, 2005 12:09 PM
The Bush Social Security plan is simple: take public money and public assets and funnel them into the pockets of private investors. This is identical to every other major initiative of his administration--we don't have the resources to support moms and families and kids, but we've got lots of resources for elaborate corporate welfare projects. The problem (for him) is that people have a very personal relationship with their SS benefits, and they're not about to entrust it to bankers in the private sector. Democrats need to keep the message simple and keep repeating it: Bush's Social Security plan is not privatization, it's privateering. We also need to keep reminding people that the easiest and fairest fix for Social Security is to remove the cap on payroll taxes, so that everyone has to pay a proportional amount, not just the poor, working, and middle classes.
Posted by: Seth Davidson at April 29, 2005 09:21 AM
Good post, Seth. I think Democrats should use the word "pirating", "piratization" or "plundering" when discussing the plans Republicans have for destroying Social Security.
When my dad was alive, he was forced to retire due to complications he had from Type 1 Diabetes. He survived on Social Security Disability payments. When he passed away, my mom survived on Widow's Social Security before she was even 65! My parents wouldn't have been able to survive if it weren't for Social Security. Unfortunately, my mom passed away a few years ago, but that Social Security money was her lifeline. It sickens me that Republicans are trying to say that Social Security will be bankrupt by 2041. I listened to Democracy Now this morning and heard the audio from Bush's prime time speech yesterday regarding Social Security and other issues. He is the biggest liar and sociopath on earth! The Republicans can't stand the fact that the Social Security program is probably the most successful Democratic program ever devised! Bush doesn't even have the right to utter the name of FDR! Bush, the baboon, likens Social Security to an investment program as opposed to the social insurance program it is!
The bottom line is that the Bush administration is trying to unravel the whole New Deal program. Neoconservative Republicans have been conniving and planning to do this as well as subvert democracy in this country for the last 30 to 40 years. They wish to be imperial rulers in America under a one party system of government.
Democrats must stand firm on this issue of Social Security and not give an inch! The Chimpanzee who stole money out of the Social Security trust fund should be made to pay back EVERY SINGLE PENNY WITH INTEREST! We should pull our troops out of Iraq and stop funneling the majority of our tax dollars into defense and homeland security. The government should remove the cap on payroll taxes for those people making over $95K a year and force them to pay their fair share of Social Security taxes. Also, if corporations would STOP shipping jobs overseas and create good paying jobs here at home our tax revenue base would increase. If all these things were done we'd wouldn't be having this discussion about Social Security.
I'm not holding my breath, however, that any or all of the aforementioned actions will happen. BushCo is only interested in lining its own filthy pockets and those of Wall Street while our senior citizens subsist on cat food and live in refrigerator boxes under a bridge! In the meantime, Bush and his cohorts in crime are so damned dumb they can't even see that they're bankrupting the entire country. Bush wants to talk about Social Security going "bankrupt" by 2041. Geez! These cretins just raised the debt ceiling to $8T (that's $8 trillion dollars, people) last night. I believe I understood one of our Democratic senators to say we have a $10T economy, and we are $8T in debt!!!! That's 80% of the economy!!!
Can anybody hear that gurgling, flushing sound?? That's our future, folks, going right down the toilet.
Posted by: Kris Graham at April 29, 2005 10:28 AM
Thanks for the good posts Seth and Kris.
Seth you're right about the need to remove the cap on payroll taxes. It's ridculous that someone making over a million a year pays the same amount into Social Security as someone who makes $90,000. Clearly that is an example of wealthy protectionism. However, Bush came out and adamantly stated he would not consider any adjustment in the payroll cap. Of course he neglected to mention that this is one of the only ways to ensure that Social Security remains solvent.
Kris, your example of your parents is a powerful reason for not privatizing Social Security, and one that all too many people face in America.
Bush just doesn't get it and/or completely ignores the fact that the disadvataged and underpaid Americans simply do not have enough (or any) money after paying for necessities like, food, housing, medicines, etc... to then go invest in a private account whether it's mandatory or voluntary.
Does anyone else not think that private accounts (which Bush said he would make voluntary now) aren't just another Individual Retirement Account system? Bush said that if people are afraid to put money in the stock market they could invest their whole account in Treasury bills, but isn't that what IRAs already do? I don't see how making it possible to save more money in IRA-type accounts will do anything to help the less fortunate Americans since it doesn't address the core issue of why they don't have money to invest in those accounts in the first place. Just providing more places for an individual to save doesn't mean they will be able to save more if they don't have anything to save, but it's a great deal for the rich who have plentiful ammounts of money to invest. It's like saying we have job growth because there is an increase in the number of jobs an individual must hold in order to sustain a family at a minimal level.
On a more humorous but exasperating note, did you hear Bush coin a new Bushism during his prime time address? Here's what he said, "We need to increase literacy in mathematics."
Posted by: Marc Olivier at April 29, 2005 02:06 PM