Greenspan’s Confused View On Fiscal Policy

Alan “No Housing Bubble” Greenspan is back, spreading a whole bunch of nonsense. Here’s what he had to say regarding fiscal policy:

“I think the markets are getting very shaky. And they are getting shaky because I think fiscal policy is out of control.”

Yes, fiscal policy is so out of control that the government’s interest burden as a share of GDP is near a post-war low.

Also, what markets are shaky? The Treasury bond market, where the yield on the 10-year is near an all-time low? Admittedly, stock markets have been shaky; but that’s because continental Europe has been unnecessarily pushed back into recession by fiscal hawks like Greenspan.

At one point, Greenspan also pulled the usual trick of lumping Social Security together with Medicare in citing an “extraordinary rise in spending on social benefits.” Any fiscal-policy wonk knows that this is complete nonsense. According to the CBO’s most recent projections, Social Security will be fully funded from its dedicated stream of tax revenues through 2038, with no changes whatsoever. Medicare’s finances are expected to rapidly deteriorate, but that’s because the underlying growth trend of health-care costs is unsustainable – it is, however, worth pointing out that healthcare costs have actually slowed dramatically in recent years. In fact, Medicare handles costs better than most forms of private insurance. The way to ensure long-term fiscal solvency involves fixing our broken healthcare system. Period.

Greenspan also referred to the “Simpson-Bowles plan” as if the plan were some sort of bipartisan compromise that both parties should embrace. It isn’t. In fact, the president’s deficit-reduction commission, for which Simpson and Bowles served as co-chairs, failed to put forth a plan. (There was never a report that received the required approval of 14 of the 18 commission members.) The plan that was put forth was simply a plan from the co-chairs, having little to do with the commission on which they served.

Finally, Greenspan noted that markets will “crater” in another year or so if the US doesn’t get its fiscal house in order. Presumably, this is meant to imply that the US is on the same path that Greece and Portugal were on just a few years ago. The problem with this story is that the US both issues debt in and prints dollars. The same dynamic is not true for the problem countries in Europe. Countries that issue all of their debt in the currency for which they own a printing press have a high degree of flexibility. This is why Denmark, which has higher public spending levels than each of Greece, Ireland, Portugal, Italy, and Spain, has not seen its borrowing costs soar. (The Danes never surrendered their monetary sovereignty, even though the Danish krone is effectively pegged to the euro.) Or another example is Japan, which runs a debt-to-GDP ratio above 200 percent but which can still borrow very cheaply.

In short, Greenspan should have retired after his epic missed call on the housing market. He’s still failing to see things that are right in front of his eyes.

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