Outside the Beltway

Greenspan on Extending the Bush Tax Cuts

Former Fed Chairman Alan Greenspan shared his views on extending the Bush tax cuts today on MTP.

Steven L. Taylor
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On today’s MTP Greenspan stated, again, his belief that the Bush tax cuts ought to be allowed to expire:

MR. GREGORY:  All right.  Well, Dr. Greenspan, it’s not often that you hear Democrats and liberals quoting you.  But, in this case, they did when it come to–came to tax cuts because of an interview you gave recently with Judy Woodruff on Bloomberg television.  Here was the question:  “Tax cuts [that] are due to expire at the end of this year.  Should they be extended?  What should Congress do?” You said, “I should say they should follow the law and then let them lapse.” Question:  “So to those interests who say but wait a minute, if you let these taxes go my taxes go up, it’s going to depress growth?” You said, “Yes, it probably will, but I think we have no choice in doing that, because we have to recognize there are no solutions which are optimum.  These are choices between bad and worse.” You’re saying let them all go, let them all lapse?

MR. GREENSPAN:  Look, I’m very much in favor of tax cuts, but not with borrowed money.  And the problem that we’ve gotten into in recent years is spending programs with borrowed money, tax cuts with borrowed money, and at the end of the day, that proves disastrous.  And my view is I don’t think we can play subtle policy here on it.

And on what has become an article of faith in many sectors of the conservative movement:

MR. GREGORY:  You don’t agree with Republican leaders who say tax cuts pay for themselves?

MR. GREENSPAN:  They do not.

I am with Greenspan:  I like tax cuts, but this belief that they are free is mightily helping to lead us down a path of fiscal peril.  I have gotten to the point where it is impossible to take politicians seriously who continue to espouse simplistic supply-side rhetoric.

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27 responses to “Greenspan on Extending the Bush Tax Cuts”

  1. Dave Schuler Avatar
    Dave Schuler

    By my back-of-the-envelope calculation (and a little help from information from JPMorgan Chase) allowing the tax cuts to lapse would realize about $230 billion in 2011.  That wouldn’t be enough to balance the budget by a long shot and would probably cause a minor reduction in 2011 GDP, between .15% and .5%.

     

    I’m in favor of phasing in the lapsing according to some formula of economic benchmarks to minimize any additional shocks to our already shocked system.  While I thought that a tax cut was appropriate in 2001, I thought that particular tax cut was the wrong one.  We still have most of the economic problems we had in 2001 with a few more piled on top.  To my mind that means there’s still a fair case for economic stimulus via tax cuts but they should be targeted to facilitate the adaptation of our economy to the circumstances we’re in rather than trying to return us to the status quo ante.

  2. Steven L. Taylor Avatar
    Steven L. Taylor

    I am amenable to the notion of a partial and temporary expansion in the name of stimulus.

    What I am specifically not buying, however, is that a permanent set of cuts will automatically lead to more revenue (which seems to be the current GOP line of thinking).

  3. Dave Schuler Avatar
    Dave Schuler

    What I am specifically not buying, however, is that a permanent set of cuts will automatically lead to more revenue (which seems to be the current GOP line of thinking).

    The empirical studies certainly don’t support the notion that further cuts in U. S. taxes will pay for themselves.

  4. legion Avatar
    legion

    Tax cuts can be beneficial, but only if they go to segments that will actually use the extra money to stimulate the economy – the people benefiting from the Bush cuts have proven conclusively over the past decade that they are actually dragging the economy by hoarding and/or investing in overseas development vice US development.
     
    Of course, many conservatives will counter with the idea that it costs too much to invest in the US and hire American workers, thus leaving them with no actual policy proposals beyond paying middle-class workers (at least, the ones who still have jobs) EVEN LESS, thus protecting the wealth of our elite…

  5. Gerry W. Avatar
    Gerry W.

    Can’t add much more to the good answers. I think the tax cuts, along with lower interest rates by the fed, is a good stimulus if used for two or three years to get out of a recession. What Bush did was believe in an ideology of trickle down (tax cuts) as the only solution and it backfired.
    I am afraid that we overused the tax cuts and the low interest rates and believe that they have lost their stimulative effect. We have also sent our jobs overseas and there is nothing to stimulate. What a mess this one is.

  6. William Teach Avatar
    William Teach

    Letting the tax cuts expire would simply mean that people have less of their own money, and, at least for the short term, would spend less, and all Congress would do would be to spend even more because they would think they have more.

    I really fail to understand why so many, including so-called Conservatives, are against the people who work for the money keeping more of it. It is NOT the government’s money. It is the gov’t which needs to trim its expenses and spending down, not take it from the people who actually put in the work for the $$$$.

    But, hey, all you folks who seem to be for higher taxes, no-one is stopping you from sending extra to the IRS. Put your talking points where your $$$ is. Walk the talk.

  7. legion Avatar
    legion

    William:
    Wrong. And intellectually dishonest. When you say “people have less of their own money”, you attempt to scare _everyone_ into thinking they’re going to have higher taxes if these cuts expire, and that’s simply a lie. Only the wealthiest (I believe) 5-10% or so will have higher taxes, and a) the percentage is small enough that it won’t really affect their spending habits, b) their current spending habits don’t benefit the US economy anyway, and c) the additional income _would_ be noticeable (albeit slightly) to the federal budget.
    Also, you fall on the old saw of “it’s our money, not the government’s” – while basically correct, you fail to note that it is _our_ government, and the things it spends that money on _do_ benefit the country, even if every single penny spent doesn’t benefit you personally. You want to walk the walk? Stop using all publicly-funded goods and services. I dare you.

  8. Zelsdorf Ragshaft III Avatar
    Zelsdorf Ragshaft III

    Steve, you did not allow comments on your post about the Electorial College.  I found it arrogant to speak as though you know what the intentions of the founder was.  Further, if you want to use some other method to elect our President than the one we use now.  The process is simple.  Amend the Constitution.  That is the only legal way to make that change.

  9. Steven L. Taylor Avatar
    Steven L. Taylor

    @ZRIII:

     

    Thanks for letting me know that the comments were turned off–it was a software glitch that has been happening intermittently.

    In terms of your assessment:  it is unclear to me how  a discussion of clear historical record constitutes “arrogance.”

    Beyond that, yes:  the only way to do away with the EC completely is via amendment.  I made no argument about doing away with it, but am, rather, critiquing it.

  10. Steven L. Taylor Avatar
    Steven L. Taylor

    Also, if the following is true “I found it arrogant to speak as though you know what the intentions of the founder was. ” doesn’t that totally vitiate anyone who claims to adhere to the doctrine of original intent?

  11. William Teach Avatar
    William Teach

    Legion, perhaps you should step away from the left wing talking points, and actually do some research on what the expiration of the tax cuts means. EVERYONE will see an increase. I know that is difficult to understand, so, here are two links (http://www.fivecentnickel.com/2010/02/15/2011-federal-income-tax-brackets-irs-income-tax-rates/ and http://www.moneychimp.com/features/tax_brackets.htm (sorry, the embeded link thing is not working for me)) Compare. That is what is called a “fact.”
    And, yes, it is our money. The government spends it unwisely. Both parties. Though, Dems are PhD level, while Republicans are freshman in college.
    Not quite sure how it is “scaring everyone” to want them to keep the money they work for. No one, including me, is saying that we shouldn’t pay some taxes for needed government projects. We are saying it needs to be responsible and in-line with the Constitution.
    I also notice that you have failed to address the point that you and others who despise tax cuts can send more money to the IRS each year. If you hate the cuts so much, certainly you sent them more, right?

  12. legion Avatar
    legion

    William:
    Really? Because the Wall Street Journal seems to disagree (Via Bob Cesca: http://www.bobcesca.com/blog-archives/2010/07/circulate_this_1.html )

  13. john personna Avatar
    john personna

    William, I don’t think those links you gave are too clear on what a “lapse” of the cuts would mean.
     
    But then it can’t really be calculated now, when the “lapse” would likely be partial, with some boundary income and etc.

  14. john personna Avatar
    john personna

    BTW, for a dose of reality … the “temporary tax cut” (as it was called at the time!) was supposed to prove itself, by increasing revenue and/or restraining spending.  It clearly failed at that.  People who want to extend it to “permanent” don’t care that it’s a failure.  They just want it anyway.

  15. Max Lybbert Avatar
    Max Lybbert

    Given that the “Bush Tax Cuts” were across the board, if they are all allowed to expire, then yes, everybody would see an increase.  I don’t expect the Democrats to allow all the cuts to expire.  But you never know.
    I have to go with Greenspan on this.  I’ve always trusted his understanding of economics.  Not everybody has, including many politicians now trotting him out in support of their new programs.
    What I’m understanding, however, (partly based on Age of Turbulence) is that he would prefer less spending, but since that’s not going to happen we at least ought to be honest about how much we are spending and raise the money through taxes today.  In Age of Turbulence, for instance, he praised Reagan for cutting taxes, but lamented the fact that Congress at the time did not cut spending as well.  He also praised Clinton for embracing pay as you go rules, and actually making sure they were followed.  Revenue fell more than expected with the Bush Tax Cuts, and in the book Greenspan didn’t know where to point fingers; I assume there was either a colossal mistake at the government accounting office that made the estimates or there was a large increase in tax fraud after the cuts.
    I would take issue with the blanket statement that tax cuts don’t pay for themselves.  They don’t necessarily pay for themselves, but there have been cases where a tax cut was followed by a revenue increase.  For instance, in the ’90s, Congress reduced the capital gains tax.  Under the new tax structure a lot of stock trades made sense that didn’t make sense before, and the end result was not only more stock trades but a large increase in the amount of capital gains tax collected.

  16. Gerry W. Avatar
    Gerry W.

    I would take issue with the blanket statement that tax cuts don’t pay for themselves.

    I do agree with that. Everything has a place. It is unfortunate that republicans use it as an ideology or a blanket statement and ignore other issues.
    I went through teaming and six sigma and you can use anything if it works. Think outside the box and make it happen.

  17. steve Avatar
    steve

    “For instance, in the ’90s, Congress reduced the capital gains tax.  Under the new tax structure a lot of stock trades made sense that didn’t make sense before, and the end result was not only more stock trades but a large increase in the amount of capital gains tax collected.’

    Changes in capital gains taxes always cause changes for a short while. After a year or two, things go back to baseline. Go look at the numbers for the next couple of years.

    Steve

  18. sam Avatar
    sam

    @Max
     
    “I have to go with Greenspan on this. I’ve always trusted his understanding of economics.”
     
    Except that, well, you know, he seemed genuinely surprised that overweening greed played a major role in the financial meltdown. I’m not sure I could trust anyone’s understanding of economics who was surprised at that.
     

  19. Max Lybbert Avatar
    Max Lybbert

    Except that, well, you know, he seemed genuinely surprised that overweening greed played a major role in the financial meltdown.

    Actually, he was surprised that greed did not pay enough of a role in preventing the meltdown.  It’s a different but related issue.  I’m having a hard time finding an official transcript of the October 2008 hearing, but the last paragraph at http://www.washingtonpost.com/wp-dyn/content/article/2008/10/23/AR2008102300193_2.html illustrates the point:

    “I made a mistake,” Greenspan said, “in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms.”

  20. sam Avatar
    sam

    Well, I’m not going to get into the weeds here, but I think that interpretation of Greenspan’s remark is wildly off-base. google “greenspan I found a flaw” for accounts of his appearance before the Congress. What do you think the flaw was that he was shocked to find?

  21. Max Lybbert Avatar
    Max Lybbert

    His prepared remarks made the flaw clear ( http://blogs.wsj.com/economics/2008/10/23/greenspan-testimony-on-sources-of-financial-crisis/ ):  he had expected “counterparty surveillance” to do a better job regulating the markets than government regulators, because the market parties have more information, better information, and more up to date information than government regulators.  Counterparty surveillance is an economist term for the due dilligence companies go through before signing contracts, and when periodically reviewing contracts (and it is motivated by self interest, i.e., greed and a fear of losing money):
    As I wrote last March: those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity (myself especially) are in a state of shocked disbelief. Such counterparty surveillance is a central pillar of our financial markets’ state of balance. If it fails, as occurred this year, market stability is undermined.
    What went wrong with global economic policies that had worked so effectively for nearly four decades? The breakdown has been most apparent in the securitization of home mortgages. The evidence strongly suggests that without the excess demand from securitizers, subprime mortgage originations (undeniably the original source of crisis) would have been far smaller and defaults accordingly far fewer. But subprime mortgages pooled and sold as securities became subject to explosive demand from investors around the world. …

    It was the failure to properly price such risky assets that precipitated the crisis. In recent decades, a vast risk management and pricing system has evolved, combining the best insights of mathematicians and finance experts supported by major advances in computer and communications technology. A Nobel Prize was awarded for the discovery of the pricing model that underpins much of the advance in derivatives markets. This modern risk management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year because the data inputted into the risk management models generally covered only the past two decades, a period of euphoria. Had instead the models been fitted more appropriately to historic periods of stress, capital requirements would have been much higher and the financial world would be in far better shape today, in my judgment.

    Economists expected greed, self interest, and a fear of losing money to encourage people to include economic recessions in their models about how risky mortgage-backed were.  However, that data did not get into the models at the banks selling the mortgage-backed securities, at the insurance companies covering them, or at the hedge funds, pension funds, and other investors buying them.  It’s unusual for that many people to get blindsided.  Unfortunately, this massive blind spot reverberated through the economy.

  22. Max Lybbert Avatar
    Max Lybbert

    Aargh!  Blockquoting went haywire.

  23. sam Avatar
    sam

    OK. I was flat wrong, he didn’t. Though it seems almost everybody else did. I’ll tell you what I find lacking in the bit you excerpted. Nowhere does he asked the questions most people would ask, “Why did these failures occur; what drove these folks to violate the most basic canons of their business?”  Those are really the important questions, right? I mean, those are the important questions if the motivations of the actors are at all important. To say economists expected greed, self-interest, and so forth to encourage risk-takers to take the prudent steps to attenuate the risk, but the risk-takers didn’t, demands an account of why they didn’t. And that account must, necessarily, involve another set of motivations, ones that trumped the assumed motivations. You couldn’t explain it by talking about how this or that model failed because of failure to input the necessary data, as that would be question-begging (in the petitio principii sense): Why didn’t they input the data? Why did they not engage in the due diligence the canons demand? The explanation of this will not be one of economics, but perhaps of psychology. You say, or say for Greenspan, that they were not greedy enough. I think we need an argument for that. But I ask you to assume, arguendo, that it was greed, overweening and engendered by the players being bewitched by mathematics (Li Formula), that led to these failures of due diligence, how would more greed (that’s really clumsy, but…) have led to the contrary?
     

  24. ratufa Avatar
    ratufa

    Why shouldn’t employees of a company engage in money-making activities that put their company at risk? Well, one answer is that if the company goes under, those employees will be much worse off than if they hadn’t engaged in those activities. What if the amount of money they’re making in bonuses and commissions is great enough that the perceived net expectation is positive, no matter what happens to their employer? What if their boss is clueless about the risks and pressuring people to produce? Greed cuts both ways, and a corporation’s interests may not match those of its workers. When people feel this way, there’s little incentive to pay attention to how accurate the models are, and those who do worry about the company’s future are ignored because no one wants to be the person who made the money stop.

  25. Max Lybbert Avatar
    Max Lybbert

    I’ll tell you what I find lacking in the bit you excerpted. Nowhere does he asked the questions most people would ask, “Why did these failures occur; what drove these folks to violate the most basic canons of their business?”  Those are really the important questions, right?

    Those are the important question, and you are right that the part I excerpted does not ask or answer them.  His testimony from April does, though ( http://www.fcic.gov/hearings/pdfs/2010-0407-Greenspan.pdf pages 8-13):

    For almost a half century, we have depended on our highly sophisticated system of financial risk management to contain such market breakdowns. That paradigm was so thoroughly embraced by academia, central banks, and regulators that by 2006 it became the core of global regulatory standards (Basel II).
    The risk management paradigm nonetheless harbored a fatal flaw. … [M]anagers at financial institutions, along with regulators … failed to fully comprehend the underlying size, length, and potential impact of the so-called negative tail of the distribution of risk outcomes that was about to be revealed as the post-Lehman Brothers crisis played out. …
    The financial firms counted on being able to anticipate the onset of crisis in time to retrench. They were mistaken. They believed the then seemingly insatiable demand for their array of exotic financial products would enable them to sell large parts of their portfolios without loss. …
    Bubble emergence is easy to identify in narrowing credit spreads. But the trigger point of crisis is not. … If the imbalances that precipitate a crisis are visible, they tend to be arbitraged away. For the crisis to occur, it must be unanticipated by almost all market participants and regulators. …
    Regulators who are required to forecast have had a woeful record of chronic failure. History tells us they cannot identify the timing of a crisis, or anticipate exactly where it will be located or how large the losses and spillovers will be. …
    What supervision and examination can do is promulgate rules that are preventative and that make the financial system more resilient in the face of inherently unforeseeable shocks. Such rules would kick in automatically, without relying on the ability of a fallible human regulator to predict a coming crisis. Concretely, I argue that the primary imperatives going forward have to be (1) increased risk-based capital and liquidity requirements on banks and (2) significant increases in collateral requirements for globally traded financial products, irrespective of the financial institutions making the trades. … A firm that has adequate
    capital, by definition, will not default on its debt obligations and hence contagion does not arise. …  I believe that during the past 18 months, there were very few instances of serial default and contagion that could have not been contained by adequate risk-based capital and liquidity. …
    In addition to the broad issues of capital and liquidity, I also argue that the doctrine of ‘too big to fail’ … can not be allowed to stand. … I agree with Gary Stern, the former President of the Federal Reserve Bank of Minneapolis, who has long held the position that ‘… creditors will continue to underprice the risk-taking of these financial institutions, overfund them, and fail to provide effective market discipline.  Facing prices that are too low, systemically important firms will take on too much risk.’ … One highly disturbing consequence of the taxpayer bailouts that have emerged with this crisis is that market players have come to believe that every significant financial institution, should the occasion arise, would be subject to being bailed out with taxpayer funds. …
    The existence of systemically threatening institutions is among the major
    regulatory problems for which there are no good solutions. … [T]he notion that risks can be identified in a sufficiently timely manner to enable the liquidation of a large failing bank with minimum loss has proved untenable during this crisis and I suspect in future crises as well. The solution, in my judgment, that has at least a reasonable chance of reversing the extraordinarily large ‘moral hazard’ that has arisen over the past year is to require banks and possibly all financial intermediaries to hold contingent capital bonds—that is, debt which is automatically converted to equity when equity capital falls below a certain threshold. …
    However, should contingent capital bonds prove insufficient, we should allow large institutions to fail, and if assessed by regulators as too interconnected to liquidate quickly, be taken into a special bankruptcy facility. That would grant the regulator access to taxpayer funds for ‘debtor-in-possession financing.’ A new statute would create a panel of judges who specialize in finance. The statute would require creditors (when
    equity is wholly wiped out) to be subject to statutorily defined principles of discounts from par (‘haircuts’) before the financial intermediary was restructured. The firm would then be required to split up into separate units, none of which should be of a size that is too big to fail.
    I assume that some of the newly created firms would survive, while others would fail. If, after a fixed and limited period of time, no viable exit from bankruptcy appears available, the financial intermediary should be liquidated as expeditiously as feasible.

  26. sam Avatar
    sam

    Ok, Max, I don’t think you and I are going to agree on this, in the end. That last piece you quoted doesn’t address the question of motivation that I raised. He appears attributes the failure of the model to a lack of comprehension, to some kind of simple error in cognition. I take it you’re simpatico with that. That’s fine, but I don’t think he got it. It was something more primordial than them simply making a mistake. My belief is that that there was a failure in comprehension, alright, but it arose out of them be in thrall to the Li formula and being blinded by the amount of money that was being made — magical thinking led to initial success and lots of money, this begat a level of greed that trumped prudence, and we went over the edge. The real flaw in the model is a fundamental misunderstanding of human nature.

  27. Max Lybbert Avatar
    Max Lybbert

    I did elide a reference to “euphoric times” because (1) it reminded me of “irrational exhuberance,” (2) the quote was far too long and I was hoping to pare it down some, and (3) we have a case where large numbers of financially savvy people were wrong and triggered a financial crisis; you apparently are more interested in why they were wrong where I am more interested in Greenspan’s proposals to change the system so that if large numbers of financially savvy people are wrong tomorrow for an entirely different reason than they were wrong yesterday we can still avoid a financial crisis.
    Or, as Greenspan said, “What supervision and examination can do is promulgate rules that are preventative and that make the financial system more resilient in the face of inherently unforeseeable shocks. Such rules would kick in automatically, without relying on the ability of a fallible human regulator to predict a coming crisis.”

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