Commentary: Greenspan Lets Fly at Washington Math
By Rich Miller
When Federal Reserve Chairman Alan Greenspan trooped to Capitol Hill on Feb. 11 to deliver his semiannual economic report to Congress, he confessed there was a lot that economists don't know about fiscal policy. That's why there's so much controversy over such basic questions as whether budget deficits push up interest rates and whether government spending actually stimulates the economy.
But according to the chairman, there's one thing that's certain when it comes to government finances: The march of baby boomers into retirement will put a tremendous strain on the budget. It's a demographic time bomb that Washington can ill afford to ignore.
Greenspan's warning was an indirect swipe at the Bush Administration. He is clearly concerned about the breezy dismissals of the damage done by mounting budget deficits as Administration officials have promoted the President's tax-cut plan. And he is worried that the politically driven Bushies won't have the guts to rein in runaway spending to make sure the budget math all adds up.
Contrary to the claims of supply-siders inside and outside the Administration, this is not a problem that the U.S. can simply grow its way out of, the Fed chief made clear. Even the New Economy--in which Greenspan remains a fervent believer--isn't capable of generating the huge increase in productivity required to pay the bill for supporting the retiring boomers.
As a start, the Fed chief told the Senate Banking Committee, Washington must get a better handle on the size of the nation's fiscal crisis. Unfortunately, the way the government manages its books obscures the problems on the horizon. Yes, a budget deficit of 2% to 3% of gross domestic product may well be manageable, as the Bush Administration maintains. But the annual toting up of what the government takes in and puts out doesn't account for the trillions of dollars in IOUs that Washington is running up.
What's needed, according to Greenspan, is a different type of accounting that takes a longer-term view of government finances. On the plus side of the government ledger: the taxes that retiring baby boomers will have to pay when they cash in their individual retirement accounts and 401(k) pension plans. On the minus side: Social Security checks and Medicare benefits.
In the budget released on Feb. 3, the White House took a stab at coming up with an estimate of what Washington will owe in the future. According to the calculation, Social Security is in the hole to the tune of almost $5 trillion, while Medicare is in the red by more than $13 trillion.
What does Greenspan think should be done? First of all, he is saying: Do no harm. That means finding a way to offset any tax cuts or spending increases elsewhere in the budget so there's no increase in the deficit. Even tax cuts that Greenspan thinks will be good for the economy--such as the Administration's $385 billion dividend plan--need to be "revenue neutral."
The White House says it's ready to go down that road--only just not yet. It has proposed that Congress reinstate pay-as-you-go budget rules, but not until its $1.46 trillion tax-cut plan passes. That attitude clearly worries Greenspan. "At the present time, there seems to be a large and growing constituency for holding down the deficit," he said. "But I sense less of an appetite to do what is required to achieve that outcome."
There's even less appetite for taking the necessary steps to address America's long-term fiscal problem by reforming Social Security and Medicare. In an effort to control escalating medical spending, the White House floated a plan that would have required retirees to sign up with cost-conscious health maintenance organizations in return for government help with their drug bills. But the Bushies backtracked after the idea ran into a storm in Congress.
Such problems can't be swept aside much longer. There may not be much certainty in life, but the demographics driving the budget are as inevitable as death and taxes.
Miller writes about the Federal Reserve from Washington.