or, Deconstructing Alan, Another take on the Greenspan testimony.
Interesting in his recent testimony, Greenspan combined Medicare and Social Security and together they were the biggest crisis. Everyone knows that the healthcare issue will swamp the social security issue in the short term. Greenspan, by combining the two could tell the truth, that there was a crisis, and still appear to toe the Bush Administration line. He also reminded Congress that the continued budget deficits cannot continue.
Greenspan may have made a deal with the devil at some point, in throwing his support behind the tax cuts even as is became clear that his reason for them no longer existed. But Greenspan has at least expressed some internal consistency on these subjects. Remember in the January 01 testimony, he is complaining about the government running surpluses and the drag that could have (Oliphant pointed out on Franken today that that was why JFK chose the tax cut he chose, but JFK's was more targetted and progressive). In that testimony the surpluses that Greenspan is describing are the surpluses that only existed because Social Security surpluses more than offset the continued deficit and almost balanced spending levels. If Social Security had been in a "lock box", either in the Gore envisioning of it or in private accounts, there would have been no large surplus on which to base Bush's tax cut. Pay as you go rules would have still been in place at the time, and there would have been no huge tax cut. The NYT
today points out that Greenspan's belief that deficits are unsustainable and that pay as you go rules need to be put in place, which would threaten Bush's ability to make permanent the 2001 tax cuts.
Greenspan knows very well the fact that most politicians do not like to remind anyone. Domestic discretionary spending (where politicians like to brag about cutting back) is approximately $450 Billion. The 2004 debt is going to be $425 Billion. You could cut every domestic program, road program, school program, etc. and still barely balance the FY05 Budget. Greenspan may say that spending cuts are the preferred method of achieving balance, but that means that there are two solutions. One is cutting entitlement programs back, and the other is raising taxes, or letting the tax cuts expire in 2010. In the 1980's Greenspan helped craft legislation that both raised taxes and cut benefits to fix Social Security. That seems to be what he is pointing to again.
A final thought. In 2010, if looming deficit problems persist, and there has not been a solution to the health care crisis in America, there is going to be no way that any President will be able to make the Bush tax cuts permanent. The United States economy may soon remind everyone of Ford Motor Company. We gave everyone a big rebate and lost money to move product and make it seem like we were in high gear again. You cannot give bigger rebates than your gross profit for ever, however, and Ford soon found that, rather than create new demand, it had simply accelerated some of the future demand into the rebate period.
In the same way, by making an unsustainable tax cut that was more than our budget surplus, the United States may have falsely produced a "Stock Market recovery from the 2001 Bush Recession that may not be sustainable. Investments may have been accelerated to take advantage of the tax cuts in anticipation of their not being made permanent. In that scenario, sometime after 2010 we could see an echo effect from 9 years of accelerated capital appreciation. In other words, in 2010, or maybe sooner, we may discover that inflows into the capital markets may have been accelerated to take advantage of the temporary conditions, and therefore may suddenly and sharply drop off, leading to a stock ma
Update [2005-3-3 8:23:53 by sydopus]:I think the use of "defense" in my title was distracting the main points of this diary. I therefore changed it. I think that Greenspan has to be cloudy because what he says does move the markets, but my overall point is that he is essentially laying out a course of action that leads to the expiration of the tax cuts. No other action fits all of his previous statements with internal consistency.