JEFFREY BROWN: As the debate over tax cuts continues on Capitol Hill, we continue our own series of conversations. Earlier this week, we heard from President Bush’s former economic adviser Glenn Hubbard, who argued in favor of extending them all for everyone.
Tonight: former Federal Reserve Chairman Alan Greenspan, whose 2001 testimony backing the tax cuts was seen as key to getting them passed by Congress, but who now believes they should be allowed to lapse. We talked yesterday at his Washington office.
Alan Greenspan, welcome.
ALAN GREENSPAN, Former Federal Reserve Chairman: Thank you.
JEFFREY BROWN: You have argued recently that we should let the so-called Bush tax cuts lapse for everyone, across-the-board. Why?
ALAN GREENSPAN: The budget deficit problem, I believe, is far more dangerous than most of us contemplate on a day-by-day basis.
What we see is people cutting taxes with borrowed money, spending, new programs, new projects with borrowed money. But the debt is increasing at a rate of over a trillion dollars a year. And because interest rates are low, being in a weak economy, it is very easy for the government to sell as many bonds as it wants. And I think there’s a complacency rising at this stage.
JEFFREY BROWN: You mean it’s cheap to borrow now, but that may not be the case?
ALAN GREENSPAN: Oh, it certainly will not be the case. Interest rates are down for a number of technical reasons, which I won’t get into. But, assuredly they’re not going to stay here. And the problem is that, when you begin to get into this sort of situation, you have to make choices.
My choice, because I think that’s where the fundamental problem is, is on the spending side. Indeed, there are enumerable, very credible studies which say, in effect, when you are in this sort of situation, the only types of attacking of this type of deficit that works and stays working is by cutting spending, not by raising taxes.
Taxes is a temporary measure to solve the problem, but it will not solve it longer-term. But I’m acute acutely aware of the fact that, in this Congress or the next, that is not going to happen at the levels that is necessary.
JEFFREY BROWN: So, the argument, then, is to let the tax cuts lapse. You know the counterargument. We heard it from Glenn Hubbard on our show. You see the House Republicans today with their blueprint out, saying, this is exactly the wrong time to do that, because of the weak economy.
ALAN GREENSPAN: Well, the problem is that the markets may not be listening to them. We don’t know at this stage why or how the markets respond to this sort of — this type of event. And I think we’re taking a very high risk. I have been around in markets for a long time. In 1979, for example, everyone expected, yes, we have a little inflation, but there is not going to be a real problem.
Within a very short time, the bond markets broke. Interest rates went up sharply. Mortgage rates went up sharply. The economy went into a real serious depression. And my basic — I said depression. I meant recession.
My problem, basically, is that economists can’t make these forecasts. And the issue is, what happens if we are wrong? Well, the basic problem is that we have, over the years, been narrowing the gap between the federal debt that the public holds and the capacity to borrow.
We are now at a state where, excluding World War II, we are in the worse shape of relationship between borrowing capacity and debt, I suspect, since 1791.
JEFFREY BROWN: And your argument is that that risk vastly overrules the risk to a slower growth by letting the tax cuts lapse?
ALAN GREENSPAN: Yes. Yes.
I don’t quite agree with those who say that the tax cut lapsing will have a major impact on the economy.
JEFFREY BROWN: You don’t?
ALAN GREENSPAN: I think it will have a negative impact. I’m not — I don’t deny that. This is a tradeoff between bad and worse…
JEFFREY BROWN: Bad and worse.
ALAN GREENSPAN: … not between good and bad. In fact, I sometimes put it between terrible and catastrophic.
JEFFREY BROWN: Really, I mean, catastrophic?
ALAN GREENSPAN: Oh, indeed. I mean, we have never been in this position before. And you don’t have any evidence that we’re in control of the budget. There has been no cut that I can — that I’m aware of in any significant program in recent years, either — by any Congress.
JEFFREY BROWN: Now, looking back, you — in 2001, you testified in favor of these tax cuts. It was a time of surplus, so I know it was a very different atmosphere then. But, when you look back now, was that a mistake, in the sense that we knew that, one day, this would come? There were people at the time that warned that, one time — that the times would change, right, that we would be in a deficit, and it would be hard to roll them back.
ALAN GREENSPAN: Well, that’s what you would think. The Office of Management and Budget, Congressional Budget Office, and mainly, in my judgment, the very excellent staff at the Federal Reserve were all projecting surpluses as far as the eye could see, that there was a structural imbalance.
Indeed, we at the Fed actually had meetings, and, in fact, set up a committee which functioned and sent a report of what the Federal Reserve would do when the debt disappeared and we no longer had federal securities to do open market policy. So, it was a very serious issue.
In the summer of 2001, it disappeared. Forecasting is very fragile. Forecasting that we’re going to get through this by just, we will wait for a year or two, and then decide what to do, I think that is a very high-risk policy, very high-risk strategy.
JEFFREY BROWN: Well, here we are now. And you referred earlier to the politics of our own time, very fractured, very divisive. You would like to see more action on the spending side. You don’t think politics allows that.
Is our political situation such that we can’t act on the tax side, we can’t actually act to deal with the kind of potentially catastrophic future you fear?
ALAN GREENSPAN: Well, this is the reason why I think this is an extraordinary period, because it makes a big difference between whether, in fact, when the tax cuts will lapse under the law on December the 31st, whether they are automatic, and no congressperson or senator has to comment on it, or whether they have to act affirmatively, which they do, to reenact legislation, that there are going to be a number of people who — in the Congress, who are going to feel pressured that, essentially, cutting taxes, which is what they would have — basically have to do, will be reversed and say, you’re increasing the deficit.
And there is a political sensitivity in both parties. And I must say that the Republicans, I think, have been cutting taxes with borrowed money, and the Democrats have been spending with borrowed money. They agree only on the borrowed money.
And the system cannot take that. I think — so, the question is, on issues of policy, you often have to ask yourself, what happens if you are wrong on one side or wrong on the other?
If we are wrong by being too conservative, trying to bring the deficit down too quickly, that’s a very reparable problem. If we are wrong with the buffer between the capacity to borrow and where our debt is at the moment, we have very dangerous possibilities out there.
JEFFREY BROWN: All right, Alan Greenspan, thank you for talking to us.
ALAN GREENSPAN: My pleasure.