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Mix-Ansicht- Gerard Baker in der FT über US deficit spending - kingsolomon, 06.03.2003, 15:24
Gerard Baker in der FT über US deficit spending
-->COMMENT & ANALYSIS: COMMENT & ANALYSIS: Questioning the emperor's new economics
By Gerard Baker
Financial Times; Mar 06, 2003
Avery Washington joke is doing the rounds of the imperial city these days. George W. Bush may not have made up his mind on much of the detail of postwar nation-building in Iraq. But he has decided on one thing. The first governor of the new Iraqi central bank is going to be Alan Greenspan.
The president, it is reported, is displeased with the chairman of the Federal Reserve. The cause of his displeasure is not Mr Greenspan's handling of monetary policy, or some disagreement over the weight to give asset prices in setting interest rates. It is, apparently, remarks that Mr Greenspan made last month before the Senate banking committee.
At his half-yearly testimony before Congress on the economic outlook, the Fed chairman was asked to comment on the fiscal outlook. This was politically loaded material, of course, a few weeks after the president had submitted his budget to Congress, with its proposals for more tax cuts.
If he had said something to the effect of,"In my view the president has gone completely mad. His budget proposals will do nothing for the economy in the short run and simply lead us to fiscal armageddon in the long run", you could understand the problem.
But he did not. He praised the president's plan to eliminate taxes on corporate dividends but had some gentle words of caution about the long-term dangers of a rising budget deficit, already over 3 per cent of gross domestic product this year."We ought to be... trying to move towards increased flexibility but be very careful not to allow deficits to get out of hand," he said. And why is it desirable to avoid a massive deficit?"Contrary to what some have said, it does affect long-term interest rates. It does have a negative impact on the economy."
There was a brief hush as the remarks sank in. Then the cries went up from angry Republicans. Shame! Treachery! Lese majesté! (well, not the last one; there's a ban on French idioms these days in American political debate). How could Mr Greenspan possibly utter such calumnies?
Within days there were reports that White House officials wanted blood. Mr Greenspan had blown any chance he might have had of being reappointed to the Fed chairmanship when his fourth term expires next year. Names of alternative candidates were leaked to certain newspapers.
A few weeks have passed since the initial furore, and I am happy to report that accounts of Mr Greenspan's impending execution have been considerably overdone. It is true that the political operatives in the White House, eyes fixed permanently on the shifting demands of polls and the Republican base, were steaming. But the grown-ups, who understand difficult things like what markets and central banks do, have been busy pouring $35-per-barrel oil on the troubled waters.
The indications continue to be that Mr Greenspan will get another term if he wants it. He will be 76 when his term expires in June 2004. No one expects him to serve another four years, but there is increasing interest in having him remain chairman until the expiry of his term as a Fed governor in 2006. There has always been much to be said for giving him a shortened final term to desynchronise the Fed chairman's reappointment from the electoral cycle, and that is still where I would place my money.
But there are, all the same, some troubling lessons from the brief Greenspan spat. It is, for one thing, a sign of how acrid political debate has become in Washington in the past few years, that every remark by the central bank chief is seized on for political advantage. Mr Greenspan is partly to blame for this. Two years ago, days after Mr Bush had proposed his first budget-busting $1,700bn tax cut, the Fed chairman made remarks that have, to put it charitably, not stood the test of time very well. He warned of the grave danger of ever-rising budget surpluses and called for hefty tax cuts to address the problem.
Now that those surpluses have been converted in record time to deficits, the Fed chairman was right to offer a cautionary corrective. But the more important lesson of all this is how utterly out of touch with economic reality those on the ideological Republican right have become. They now regard the most obvious and widely accepted nostrums of fiscal economics as tantamount to treason.
For the past two years, they have been engaged in one of those psychological exercises where if you say something patently false enough times you eventually start to believe it. Deficits do not matter. They do not matter because, if you cut taxes, you will raise economic activity by enough to raise the total tax take.
Furthermore, just in case this may turn out to be nonsense, deficits actually do not matter because they have no effect on interest rates. That is to say, the price of a security (in this case government debt) is completely unrelated to its supply. And if you deny that, you automatically disqualify yourself from consideration to be the head of the central bank.
Some day, at great cost to the American taxpayer and the economy, someone will have to deal with the consequences of this lunacy. It will make running Iraq's central bank look like a breeze by comparison.
This column appears on Thursdays gerard.baker@ft.com
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