February 26 , 2003
Something did not ring true concerning Federal Reserve
chairman Alan Greenspan's testimony before Congress last week.
He argued, with some justification, that war concerns had delayed economic decisions. As a result, he could not be sure how strong the underlying economy would be once those concerns were diminished.
He then stated that this uncertainty was an argument for
delaying any further economic stimulus until those trends became more
There was no question that the Chairman was becoming
increasingly concerned about budget deficits into the future.
According to the Office of Management and Budget, not only would
deficits exceed $300 billion in the current fiscal year, but they were
projected to be higher next year. And war with and occupation of Iraq was not included in those
Moreover, in place of the $5.6 trillion of budget
surpluses in the next decade, estimated just prior to the $1.3 trillion tax
cut enacted in 2001, deficits would remain above $100 billion through 2008.
In place of worries about how monetary policy could continue with no
available government bonds was concerns about how to place $9 trillion in
government debt by the end of this decade.
I share the Chairman's concerns about rising government
debt well into the future. After
all, the baby boomers will become senior citizens by the end of the next
decade and begin to draw more resources than will be paid through payroll
taxes. Currently, the government
deficit is offset by almost $170 billion of payroll tax surpluses. Excluding those social security surpluses, deficits would be
approaching $500 billion in fiscal year 2004.
However, his conclusion that uncertainty from war induced
economic indecision should be met by government policy indecision simply is
not justified. Indeed, we should
take out insurance to make sure that economic expansion occurs regardless of
what happens to war in the Middle East.
Of course, he is correct to worry about programs that
produce long term revenue loss. Those
include the permanent elimination of estate taxes and the removal of the
double taxation of dividends. These
are programs that could easily await the outcome of war uncertainties and the
blossoming of economic growth. If
the revenues can justify further erosion of the tax base, then double taxation
should be eliminated. If the
revenues are not there, this is a program that must await better deficit
control by the federal government.
(The elimination of estate taxes is an entire other issue that requires careful study. Are the productive motivated by leaving a legacy to their progeny that more than offsets the potential damage generated by putting resources in the hands of those who had not earned them?)
On the other hand, moving already enacted tax cuts from
2004 and 2006 to 2003 provides the type of insurance that overcomes adverse
effects from delayed decisions because of war concerns. Indeed, I am surprised that Greenspan did not acknowledge
that decision delays in a dynamic economic environment are themselves drags
upon economic recovery.
Moreover, I believe there are ample clues to suggest that
the underlying economic strength is not as robust as the Chairman believes.
That $130 billion reduction in tax liabilities enacted last year to
stimulate the economy has been exhausted.
About $65 billion is being used to pay higher prices for
energy materials. Eventually, a
portion of this will lead to higher energy development. However, short term price spikes do not lead to that many
newly drilled wells. And 55
percent of the higher price tag goes to international producers.
Another $50 billion is being absorbed by higher taxes and
lower spending at the state and local government levels.
Thus, virtually none of the tax stimulus remains to drive the economy
Also, the continued erosion of household wealth from
falling stock values continues to lead to higher household savings.
Combined with an exhaustion of SUV spending, consumption is more likely
to grow more slowly than more rapidly in the next year.
While housing has held up well, single family unit
expansion now is occurring at the expense of apartment occupancy.
Actual housing growth probably is near a peak for the current expansion
Furthermore, two independent surveys suggest that
corporations remain reluctant to increase capital spending.
Those surveys may be wrong, but they reflect the uncertainty that
capital appropriations committees currently feel about economic prospects.
In short, these factors suggest that underlying growth
after wartime uncertainty is resolved may not be as robust as Greenspan
believes. Certainly, his forecast
of 3 to 3.25 percent growth in the next twelve months is on the high side of
His outlook may prove to be correct. But I sure would like a little stimulus in the form of short term tax cuts to raise the odds in his favor.