Greenspan Notes
Jude Wanniski
July 16, 2003


Fed Chairman Alan Greenspan had a lot to say this morning in his appearance before Senate Banking, after not saying very much yesterday at House Financial Services. Here are some notes I made:

1. Because Greenspan will never acknowledge that he presided over a monetary deflation that wrecked the U.S. and world economy, he can`t really satisfy members of Congress who are trying to figure out what the heck happened. He ascribes the problems, including the huge federal deficits now showing up, to the "bubble," which of course means the market was not working at the time. 

2. For example, Senator John Corzine [D-NJ] pointed out that Fed had cut interest rates 14 times since Jan. 2001 and had cut taxes to an estimated $1.3 trillion or $1.9 trillion, depending on who does the estimating. How come with all this demand stimulus the economy is still fragile? All Greenspan could do was talk about his surprise on why GDP had not been responding, while also saying that he thought the economy in the rest of the year and into 2004 will be creeping up little by little. He did say the statistics now coming in at the Fed are in almost all instances looking marginally better than the Fed staff had expected.

3. Greenspan was at his very worst when asked about the revenue effect of lowering the capital gains tax. He said in the short run, revenues would rise, but in the long run they would be lower. Of course this is true on the capgains ACCOUNT. If the capgains tax were cut to zero, of course there would be no capgains revenues, but the effect on economic growth more cause federal revenues to go up on all other tax accounts. No GOP Senator was sharp enough to pick this up, and of course Democratic Senators were happy to hear him dump on capgains cuts. 

4. He was at his best in discussing the budget problems the government will face when the baby boomers begin retiring, noting that real resources will have to come out of the incomes of the younger workers in order to support the retirees. At this point he did say "everyone now agrees" that if you raise taxes to high, revenues actually decline, so that is no solution to this problem. This is a nod to the Laffer Curve. He did not say what the solution would be and the Senators did not really push him on that point. He always says spending should be contained and the budget balanced, so that is no help to them.

5. Sen. Chuck Schumer [D-NY] made a big fuss about how China is stealing jobs from the U.S. by "manipulating" its currency, the yuan. Huh? Schumer says it is undervalued, so that by pegging the yuan to the dollar as it has been doing since 1994, it is ripping off our economy. If Greenspan could confess to the monetary deflation, he could have pointed out that China was dragged down by pegging to the deflated dollar when the dollar/gold price was sinking from $385 to $250 a few years back. But he couldn`t, nor was he eager to explain that it is none of our business if Beijing wishes to keep its currency pegged to the dollar, as Schumer believes Treasury Secretary John Snow should demand that they "float the yuan." Greenspan would only say China will eventually stop pegging, but his reasoning made no sense to me.

6. Greenspan knows much more than he will say in these hearings, but he won`t unless there are members of Congress who know what questions to ask.

The Fed is irrelevant these days, sitting on its hands. Congress looks to him at least for wisdom as they grapple with the anxieties coming from their constituents, but the "Maestro" has boxed himself in, and can`t do much more than dance around the questions and express guarded optimism that things may get better. 

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