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A Memo to Alan Greenspan

Why the former Fed chairman should keep quiet

John Stossel
August 12, 2010

I'm getting tired of Alan Greenspan. First, the former Federal Reserve chairman blamed an allegedly unregulated free market for the housing and financial debacle. Now he favors repealing the Bush-era tax cuts.

This has a certain sad irony. Recall that Greenspan once was an associate of Ayn Rand, the philosophical novelist who provided a moral defense of the free market, or as she put it, the separation of state and economy. Greenspan even contributed three essays to Rand's book Capitalism: The Unknown Ideal—one for the gold standard, one against antitrust laws, and one against government consumer protection.

It was slightly bizarre when Greenspan accepted President Reagan's appointment to run the Fed—maybe he thought that as long as the Fed exists, better someone like him run it rather than one who really believes government should centrally plan money and banking. Be that as it may, Greenspan went on to pursue an easy-money policy in the early 2000s that is widely credited, along with the government's easy-mortgage policy, for the boom and bust that followed.

During a congressional hearing two years ago, Greenspan shocked me by blaming the free market—not Fed and housing policies—for the financial collapse. As The New York Times gleefully reported, "(A) humbled Mr. Greenspan admitted that he had put too much faith in the self-correcting power of free markets."

He said he favored regulation of big banks, as if the banking industry weren't already a heavily regulated cartel run for the benefit of bankers. Bush-era deregulation is a myth perpetrated by those who would have government control the economy.

We libertarians were distressed by Greenspan's apparent abandonment of his free-market philosophy and his neglect of the government's decisive role in the crisis.

But at least he took a shot at the new controls Congress coveted: "Whatever regulatory changes are made, they will pale in comparison to the change already evident. ... (M)arkets for an indefinite future will be far more restrained than would any currently contemplated new regulatory regime."

But now Greenspan, going beyond what even President Obama favors, calls on Congress to let the 2001 and 2003 Bush tax cuts expire—not just for upper-income people but for everyone. "I'm in favor of tax cuts, but not with borrowed money. Our choices right now are not between good and better; they're between bad and worse. The problem we now face is the most extraordinary financial crisis that I have ever seen or read about," he told the Times.

He says he supported the 2001 cuts because of pending budget surpluses, but now that huge deficits loom, new revenues are needed.

Why? Brian Riedl of the Heritage Foundation says that since the cuts, "The rich are now shouldering even more of the income tax burden." The deficit has grown not because we are undertaxed but because government overspends. "Tax revenues are above the historical average, even after the tax cuts," Riedl writes.

Given the stagnant economy, this is the worst possible time for tax increases. (Is there ever a good time?) Taking money out of the economy will stifle investment and recovery, and it's unlikely to raise substantial revenue, even if that were a good thing.

Finally, the stupidest thing said about tax cuts is the often-repeated claim that "they ought to be paid for." How absurd! Tax cuts merely let people keep money they rightfully own. It's government programs, not tax cuts, that must be paid for. The tax-hungry politicians' demand that cuts be "paid for" implies the federal budget isn't $3 trillion, but $15 trillion—the whole GDP—with anything mercifully left in our pockets being some form of government spending. How monstrous!

If cutting taxes leaves less money for government programs, the answer is simple: Ax the programs!

John Stossel is host of Stossel on the Fox Business Network. He's the author of Give Me a Break and of Myth, Lies, and Downright Stupidity. To find out more about John Stossel, visit his site at johnstossel.com. This column first appeared at Reason.com.

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