The Rittenhouse Review

A Philadelphia Journal of Politics, Finance, Ethics, and Culture

Tuesday, July 16, 2002  

Wise Remarks That Nobody Noticed

Federal Reserve Board Chairman Alan Greenspan went to Capitol Hill today to present his semi-annual report on monetary policy. His testimony before the Senate Banking Committee, which will be repeated in front of the House Financial Services Committee tomorrow, was quite impressive and covered considerable ground. Greenspan clearly knows more -- or at least can say more -- about the state of the economy and the decline in corporate ethics and responsibility than anyone else in Washington.

Nonetheless, we would have preferred stronger and more specific language with respect to punishing those responsible for the recent spate of corporate malfeasance that has undermined investor and, more recently, consumer confidence. And a few comments on corporate tax evasion -- Bermuda, among the many offshore tax havens, comes to mind -- would have been appreciated.

Our point at the moment, however, deals with Greenspan’s remarks about the federal budget deficit. CNBC and CNN have been running virtually all day here -- that’s how our editor makes his living: by watching TV -- and we were struck by how little attention this subject received from among the many commentators appearing on those networks.

Granted, Greenspan didn’t spend a great deal of time discussing fiscal policy, but the comments he did make are worthy of serious consideration. We provide them below, noting that all emphases are our own and that we added several paragraphs to facilitate on screen reading.

“Our ability to attract foreign capital in coming years will help facilitate the increases in investment that will promote continued gains in productivity and standards of living. But policymakers should also recognize the important role that prudent fiscal policy can play in promoting national saving and maintaining conditions conducive to investment and continued strong growth of productivity.

Beginning in the late 1980s, impressive progress was made in reining in federal expenditures and restoring a better balance between spending and revenues. The lower federal deficits and, for a time, the realization of surpluses contributed significantly to improved national saving and thereby put downward pressure on real interest rates. This, in turn, enhanced the incentives of businesses to invest in productive plant and equipment.

Recently, however, some of those gains have been given up. To a degree, the return to budget deficits has been a result of temporary factors, especially the falloff in revenues and the increase in outlays associated with the economic downturn.

“Those influences should tend to reverse over the next year or two, other things equal, although the decline in revenues reflecting the drop in capital gains realizations, including those on options, is unlikely to be fully reversed. And the necessary rise in expenditures related to the war on terrorism and enhanced homeland security has also played a role, as have the tax reductions legislated last year.

Unfortunately, there are also signs that the underlying disciplinary mechanisms that formed the framework for federal budget decisions over most of the past fifteen years have eroded. The Administration and the Congress can make a valuable contribution to the prospects for the growth of the economy by taking measures to restore this discipline and return the federal budget over time to a posture that is supportive of long-term economic growth.”

As is always the case when lawmakers are involved, there is plenty of blame to go around. An intelligent person would not blame exclusively Republicans or Democrats for the current disastrous state of federal fiscal policy, but that doesn’t mean that nobody is responsible.

It has become painfully clear that the promised benefits of the 2001 tax cuts have not materialized and, indeed, cannot materialize because they were based on misinformation, myths, and, in some cases, lies.

For decades Republicans have chastised the long-since-buried former President Lyndon B. Johnson for his failure to raise taxes to support the Great Society programs and the Vietnam War. Actually, they usually criticize Johnson for failing to fund the Great Society specifically, ignoring the war (apparently a self-funding endeavor) and forgetting, at least for a moment, that money is a fungible asset.

And now, facing an expensive war on terrorism of indefinite, perhaps permanent, duration, not only will no one raise the verboten issue of tax increases, no one will consider the idea of rolling back even the most reckless elements of the tax cuts enacted last year -- namely the eventual repeal of the estate tax. (Surely the 10,000 families benefitting from the repeal could be asked to sacrifice just a little.)

Last week’s rosy projections from the Office of Management and Budget were a joke. We have only begun to see the decimation these tax cuts will cause in the years to come. With Washington now becoming a little more serious about corporate fraud, perhaps a more sober approach to fiscal policy, one that doesn’t reflect the drunken abandon of corporate board rooms and executive offices at the turn of the century, will move up on the agenda.

(Hey, we said perhaps.)

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