The Politically Talented Mr. Greenspan

A few short days after Bill Clinton vacated the White House this January, Federal Reserve Board head Alan Greenspan publicly endorsed the new tenant’s $1.6 trillion tax cut. Democrats who had been convinced by both Clinton and Greenspan to give paying off the debt priority over education, health, and other social investments were “shocked” and “stunned” to hear the chairman brush aside concerns that the government would have to borrow money in order to finance George W’s largesse, 40 percent of which would go to the richest 1 percent of Americans. The New York Times announced that we had entered the “Greenspan-Bush” era, following the “Greenspan-Clinton” era, in which the president of the United States came to be the junior partner in the management of the U.S. economy.

The story of the Greenspan-Clinton relationship has been embellished into a charming tale of an “odd-couple” policy-wonk romance in which the brilliant, shy economist teaches the economic facts of life to the brilliant, party-going president. The typecasting doesn’t quite fit reality. Not only is Greenspan a well-known Georgetown partygoer, his reputation as a scholarly economist is not as heavy among his peers as the business press would have us believe. In his recent generally worshipful biography of Greenspan, Bob Woodward reports that “the Chairman’s language was highly idiosyncratic, often not fully grounded in the data.”*Maestro: Greenspan’s Fed and the American Dream (Simon and Schuster, 2000) At the meetings of the Federal Open Market Committee, the Ph.D.s in the room “would be nearly rolling their eyes as the chairman voiced his view about how the economy might be changing.”

A closer look at the Greenspan-Clinton era suggests that the chair’s genius stems more from his political talents than his economic insights. Thus, on the basis of dubious economics and weak history, he convinced Bill Clinton to give top priority to the elimination of the deficit, as opposed to the public investments in education, health, and infrastructure that Clinton had promised the Democratic faithful in his campaign. In effect, Clinton spent much of his presidency shortchanging the Democratic Party’s constituency so he could pay down the debts run up by his two Republican predecessors. As a result, George Bush II is the lucky recipient of a massive fiscal surplus, which he fully intends to use for military spending and tax cuts to promote the interests of the Republicans’ higher-income clientele.

As Woodward reports, Greenspan argued that federal deficits would ignite inflation, frightening Democrats with the memory of the late 1970s, when double-digit increases in consumer prices enabled Ronald Reagan to drive Jimmy Carter out of the White House. What Woodward doesn’t tell us is that Greenspan’s dire warnings were not supported by economic evidence. Other than in wartime, there is no clear relationship between federa...