Greenspan and the Tax Bill
Jude Wanniski
May 21, 2003


In the almost 40 years since I joined the Washington press corps in 1965, I`ve never seen as much confusion as there has been in the last few days on the tax bill before Congress. Yesterday afternoon, I reported to you that President Bush had opted for the House version over the Senate version, and this morning was shocked to read in the New York Times that he had opted for the Senate version over the House version -- "House GOP Leaders Agree to Eliminate Dividend Tax." There is a big difference, with the House version being much more favorable to capital formation and the equity markets. I then checked this morning's Washington Post and found "President Supports House Tax Bill." 

As it turns out, the Times relied completely on a source in the Senate while the Post relied on White House (and perhaps Treasury) sources. Because the financial markets do not key off the Washington Post, but look first to the New York Times, the market opened way down this morning and only came back as it became clearer the House version was the preferred route. Investors Business Daily, by the way, also got it right, while the Wall Street Journal fudged. Confusion is the order of the day, as Ohio Sen. George Voinovich, who had indicated he would vote for a package higher than $350 billion over ten years if it included "offsets." He now objects to counting a $20 billion handout to state governments to deal with their budget deficits as a "spending" item, when he thinks it should be a tax item charged against the $350 billion! I`m told there may have to be more negotiations before it is possible to meet the President`s request for a bill on his desk by Saturday. 

Meanwhile, Fed Chairman Alan Greenspan spent the morning at the Joint Economic Committee fielding questions about the economy, deflation, the tax cuts, the Iraqi currency, Japanese cultural preferences for saving over spending, etc. I sat through the whole thing on CNBC, mostly marveling at the shallowness of members of the committee in trying to pin him down. Here are some of my notes:

1. Greenspan says Japanese have lower interest rates because Japanese have a different culture that encourages saving over spending. This is baloney, a convenient way for Greenspan to explain away economic inconsistencies in his own theories. 

2. Greenspan says there should be no tax on capital and reminded JEC that he has for years favored elimination of the capital gains tax. The Democrats on the committee did not want to hear this and did not quiz him on it, as it was clearly in support of the capital tax cuts now pending in Congress. When financial reporters summed up Greenspan`s testimony, they also left out these comments. Let`s see if any of this is reported tomorrow in the major newspapers. It won`t be reported on the TV news tonight. 

3. JEC Chairman Bennett of Utah told Greenspan he had seen a statement of Nobel Laureate Robert Lucas that elimination of the capgains tax would raise the capital stock by 35% and be the greatest free lunch ever. Greenspan said he did not know about 35%, but agreed Lucas had the direction right. 

4. Rep. Paul Ryan would like to dollarize Iraq. Greenspan deflected the idea of sharing seignorage with Baghdad, saying it is hard to figure.

5. Greenspan said there is very little experience with deflation, so it is not understood. The Fed is studying it. He said there is no chance that Fed can run out of ammunition on monetary policy because it can always go up the yield curve. Nobody asked him if this means he would abandon the fed funds target, or that the Fed would simply be buying longer maturities to expand the monetary base while still selling shorter maturities to maintain the funds rate. Nobody on the committee is capable of engaging him in a dialog on this point, so they went no further. We are left with gobbledygook from Greenspan. 

6. Greenspan not asked about rising gold price and how it could equate with deflation. Amazing that Greenspan could continue to say he is more concerned with deflation than inflation as he has since April 30, even as dollar/gold price continues to climb -- and no member of the JEC asks him about the inconsistency.

7. Asked about 9-11 and terrorist tax, Greenspan said even though there has been no repeat, there remains a residual risk that reduces economic activity. Well, okay. Sen. Lamar Alexander, GOP of Tennessee, seemed to think if it were not for 9-11 the US economy would now be booming. Greenspan hemmed and hawed. 

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As all this is going on, Wall Street is being hammered with reports from Al-Jazeera that we can expect more 9-11 type fireworks from Al-Qaeda any day now. Code yellow goes to code orange and the price of gold jumps another $5. It is hard to keep up, to tell you the truth.