Understanding Greenspan

Some harmless partisan tweaking aside, the four members of Maine’s congressional delegation deserve praise for their sensible views of the House Republican’s absurd $792 billion tax cut. Just as commendable is their ability to recognize plain English, even when spoken by Alan Greenspan.

The Federal Reserve chairman has a well-deserved and apparently cherished reputation as a international man of fiscal mystery, as a cryptic seer whose every statement is an onion that be peeled, layer after layer, to reveal the hidden core of economic truth. In other words, he hedges a lot.

Greenspan didn’t hedge, however, when asked about the House GOP’s tax plan. He flat out said it wasn’t a good idea, at least now right now, because: The surplus it’s based upon is largely theoretical; the economy already is close to overheating; the longest peacetime expansion in American history has not rendered extinct inflation and high interest rates.

Most directly to the point, Greenspan said there is no urgent need for a large tax cut in this ongoing boom, but there is a need to pay down the national debt and to build up a surplus reserve for the inevitable downturn. That’s what the good times are for — to clean up old obligations from the last bad times and to prepare for the next.

Eventually, the economy will slow and a stimulating tax cut will be needed. The House GOP would postpone the individual income tax cuts if the interest expense of the federal debt rises. That component of federal debt is what rises when the economy slides — tax revenues drop and welfare costs go up. That’s when a little extra spending by middle-income Americans would help jumpstart things and that’s precisely when the GOP bill makes a tax cut for them impossible.

Maine’s delegation sees the flaw. Democrat Reps. John Baldacci and Tom Allen say a $250 billion tax cut, aimed specificallly at low- and middle-income earners is more appropriate and affordable. Republican Sen. Susan Collins says something in the range of $500 billion, as proposed by a bipartisan group of senators, balances the reality of today with the uncertainties of tomorrow. Republican Sen. Olympia Snowe is still mulling, but says protecting Social Security and reducing the debt should be the highest priorities.

In taking these prudent positions, all four risk being stuck with the anti-family, big-spender label. That accusation will come from the same special interests who saw to it that very generous tax breaks in the House bill on capital gains, corporate taxes and large estates will not be delayed by the minor annoyance of a recession.

Congress, the financial markets, the media and the public always seek hidden meaning when the fed chairman speaks. This time, Mr. Greenspan was clear and unequivocal: a tax cut now must be within reason and must recognize the obligations from the past and the uncertainties of the future. If the members of Maine’s delegation reached the same conclusion independently, they’re pretty fair economists. If not, they’ve at least proven themselves good listeners.