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Greenspan Has Gone From 'Maestro' to Partisan
The Washington Post
Some Democrats Say Greenspan Has Gone From 'Maestro' to Partisan
By Dana Milbank and Nell Henderson
Washington Post Staff Writers
Saturday, March 5, 2005; Page A01

Questioning the wisdom of Alan Greenspan in political Washington is akin to challenging the integrity of the pope in Rome, so figures in both parties agreed yesterday that the top Senate Democrat's description of the Federal Reserve Board chairman as a "political hack" was a blunder.

But Democrats said the accusation by Sen. Harry M. Reid (D-Nev.) reflected a real frustration in the minority party with Greenspan. Even before Reid's attack, Democrats say, they have been changing their view of Greenspan from one of an above-politics wise man to the Republican partisan he had been in the 1960s and '70s.

Rep. Rahm Emanuel (D-Ill.): The Federal Reserve chairman "took the moat down" that isolated the Fed from political discussions.

In Democrats' view, Greenspan's endorsement of President Bush's tax cut in 2001 reduced the Fed chairman's standing from when he was hailed by both sides in the 1990s as the "maestro" of a healthy economy. Then, last week, Greenspan urged changes to Social Security "sooner rather than later," private retirement accounts and a restructured tax code -- siding with Bush in each case. The White House pointed to this as nonpartisan validation; Democrats cried foul.

Rep. Rahm Emanuel (D-Ill.), who worked with the Fed chairman as a Clinton administration official and in Congress, said Greenspan has been "unbelievably effective" at the Fed but he does not forgive Greenspan for flashing "a green light" to tax cuts that contributed to large deficits. "There's a moat around the Fed that says he doesn't get involved in political discussions," Emanuel said. "He took the moat down."

The frustration has surfaced in congressional hearings. At the Senate banking committee last month, Sen. Paul S. Sarbanes (D-Md.) said that in 2001 Greenspan had "taken the lid off the punch bowl" by endorsing Bush's tax cuts. "And now we've managed to transpose our economic outlook from this projection of over $5 trillion in surplus to almost $4 trillion in deficits."

At a hearing on the House side, Rep. Barney Frank (D-Mass.) implicitly scolded Greenspan for exceeding his role, saying "the question of private accounts is an ideological one."

Democratic strategists say Greenspan, who turns 79 on Sunday and plans to retire in January, is newly vulnerable. "It is about time Democrats stopped treating him like he was an untouchable," said Chris Lehane, a campaign adviser to Democratic presidential nominees Al Gore and John F. Kerry. And Marshall Wittmann of the Democratic Leadership Council said Greenspan has "returned to his Ayn Rand roots" in recent times, referring to his work for a publication affiliated with the libertarian philosopher in the 1960s. "The Fed chairman is the closest thing in Washington to a deity. At least with Democrats, he no longer has that deity status. He's now viewed as a partisan figure."

It was not always this way. Democrats were grateful to Greenspan in 1992, when Republicans blamed the defeat of President George H.W. Bush on the Fed's refusal to drop interest rates more quickly. Greenspan's support was critical to winning passage of President Bill Clinton's 1993 deficit-reduction budget proposal, which included tax increases, with no GOP votes.

Greenspan, who served as an economic adviser to Richard M. Nixon and Gerald R. Ford before being appointed Fed chairman by Ronald Reagan in 1987, was a frequent ally of Clinton. He worked closely with the Clinton economic team in crafting responses to financial crises. In 1998 he helped Clinton block tax cuts, and in 2000 he praised Congress and the White House for reducing debt.

But after Bush became president in 2001, Greenspan sent a different message: His support became a key influence in securing passage of Bush's tax cut. Greenspan told the Senate then that it was likely "that sufficient resources will be available to undertake both debt reduction" and tax cuts. Greenspan suggested that tax cuts could be automatically canceled if surplus projections proved wrong, but the lawmakers ignored that idea.

Democrats were further infuriated that, even after the budget went into deficit, Greenspan repeatedly supported making the temporary tax cuts permanent -- one of the Bush administration's top economic policy goals. He favored cuts in spending, including future Social Security and Medicare benefits.

And, after repeatedly invoking the bond market as a reason to reduce government borrowing in the 1990s, he rejected Democratic arguments that borrowing to create private retirement accounts would roil the bond market. Greenspan said last week that there is no way to know how interest rates would be affected by the borrowing required. Therefore, he said, Congress should try them.

Greenspan, who declined to respond to Reid, has at times been unhelpful to Bush by complaining about deficits. But the White House has gleefully pointed to Greenspan's validation in recent days. "You all heard testimony from Chairman Greenspan this morning," press secretary Scott McClellan said at Wednesday's briefing. The next day, McClellan said that "we appreciate Chairman Greenspan's comments today" on tax reform. He again cited Greenspan's view that the Social Security problem "really begins to hit in 2008" and said "that's why we need to act now."

The Republican National Committee issued a news release seeking to bolster Greenspan's standing as an above-politics figure. It included quotations from Clinton and half a dozen Democratic senators praising the chairman. "The preponderance of Senate Democrats have always supported Greenspan, unlike Senator Reid," said GOP strategist Charles R. Black Jr.

On CNBC yesterday, Bush's budget director, Joshua B. Bolten, defended Greenspan as "all substance," not politics.

But some economists say Greenspan's tendency to offer opinions on fiscal policy endangers the Fed's political independence. Mickey Levy, chief economist at Bank of America, said "there is a concern that Greenspan sets a bad precedent for the next chairman to think he or she has the liberty to delve into fiscal policy."

Even some of Greenspan's colleagues at the central bank have long complained that he should stay out of debates over federal tax and spending decisions, or fiscal policy. They say the Fed's independence from political pressure is key to its credibility in financial markets. "I believe the chairman shouldn't insert himself and the Fed into political debates over the direction of fiscal policy," former Fed board member Laurence H. Meyer, who served under Greenspan, wrote in a recent book about his time at the central bank.

Greenspan still enjoys broad respect. Last April, a Gallup poll found that the public had more confidence in Greenspan's economic advice than in that of Bush or congressional Democrats.

It may be a sign of waning influence that Greenspan's remarks about Social Security accounts have not transformed the debate the way his endorsement of tax cuts did in 2001. A GOP leadership aide said that "it was helpful to our side" but added that "it was not dynamic-changing."

Democrats are way behind the curve on this one. In 1993 and 1994 Greenspan raised interest rates and caused consumer confidence to collapse prior to the mid term elections. As confidence dropped the republican party was given all the ammo it needed to take power from the democrats. They were able to blame democrats in the House, Senate and Presidency for higher rates. Democrats quickly lost both Houses of Congress. The Clinton boom was just starting.

Then in 1999 he began another series of rate increases for no reason other than slowing the economy and making tax cuts more sellable. (Dole's tax cut didn't sell in 1996 because the economy was booming). Then as soon as Bush was elected he started cutting rates. In 1993, Greenspan opposed Clinton's deficit reduction plan which gave us four years of surpluses by the end of the decade (eight years of deficit reduction). In 2001, he supported Bush's tax cut which has given us deficits for as far as the eye can see and now he's supporting private accounts for social security which will create trillions of more debt.

It wouldn't be so bad if Greenspan had been right. But we know the Clinton tax increase was a major factor in bringing down the deficits and we know the Bush tax increase was a major factor in creating record deficits. When was the man ever right?