Post by unlawflcombatnt on Oct 29, 2007 2:04:48 GMT -6
From the Global Policy Forum:
This article is basically a summary of Stiglitz's 2003 book: The Roaring Nineties:A New History of the World’s Most Prosperous Decade
It's a very interesting revelation about some of the behind-the-scenes activities during the Clinton Administration. As Stiglitz himself states: "the 90's sewed the seeds of destruction of the bubble." This book review discusses some of those seeds. It is taken from a live interview with Professor Stiglitz.
November 5, 2003
"JOANNE MYERS: We welcome members and guests to our Books for Breakfast program. This morning Dr. Joseph Stiglitz will be discussing his recently published book The Roaring Nineties: A New History of the World’s Most Prosperous Decade....
If you think that economic policies administered by America during the Roaring Nineties contributed to this decade of extraordinary growth, you may be right. Yet, before we become too nostalgic for the so-called “golden age of prosperity,” the age of mega-deals and mega-growth, we should listen very carefully as our guest reexamines how one of the greatest economic expansions in history sowed the seeds of its own collapse....
As Chairman of former President Clinton’s Council of Economic Advisors, and later Vice President and Chief Economist at the World Bank, Dr. Stiglitz was deeply involved in many of the policy decisions of the decade and was uniquely positioned to watch the nineties unfold....
Please join me in welcoming Dr. Joseph Stiglitz.
Remarks
JOSEPH STIGLITZ: Thank you very much for the introduction....Let me just try to elaborate on a few...things...
What motivated me in writing this book was that the nineties were viewed as a fabulous decade. The economy was roaring. We even talked about the new economy which was to mean the end of the business cycle. We don’t want to remember that, because we have lost almost 3 million jobs in the last three years. At least at the beginning of the decade, we also had a “globalization bubble.” Everybody thought globalization American style would take over the world and bring prosperity to all.
By the end of the decade and the beginning of this current century, both of those bubbles have been broken. We realized that we were not on a never-ending, upward path, but that our economy was in a downturn. And even before that, December of 1999, with the protest movement in Seattle against the new round of trade negotiations, what was supposed to be the feather in the cap of Clinton’s international economic policy turned into riots instead.
It was clear that if globalization was bringing unprecedented prosperity to the world, an awful lot of people didn’t seem to know or appreciate it....As early as 1997-1998, a global financial crisis showed that globalization wasn’t working out quite as well as we had hoped.
If we had claimed, as we did so strongly in the Clinton Administration, that we should be given credit for the successes of the nineties, we ought to have to take some blame, because as I jokingly say, the downturn started even before Bush had a chance to do all the damage that he has done since....
In thinking about the economy, it is essential to try to get the balance between the market and the government or the state right to get good economic performance, and avoid very negative side effects on poverty. In some ways we failed to get that balance right. The central lesson of economics over the last more than 200 years has been Adam Smith’s view about the “invisible hand” -- that markets lead, as if by an invisible hand, to efficiency; or that the individual pursuit of self-interest leads, as if by an invisible hand, to economic efficiency.
*One of the main results of my work on asymmetric information -- which is just a fancy name for saying that different people know different things -- was to show that the reason the invisible hand often seems invisible is that it is not there. That means that there is an important role for government. Or to put it another way, every game needs rules and referees to avoid chaos, and that is true of the market game as well.
I will touch on four themes and then open it up to questions.
1. In the nineties we sowed some of the seeds of destruction of the bubble; the boom that we had, and some of the economic problems we have today originate in that.
2. The same can be said about the way in which we managed globalization. In our successes in the beginning, we again sowed the seeds of the problems that we had by the end of the decade and into the current one.
3. How in the first place did we get out of the recession of 1990-1991? The standard interpretation of what we did, I argue, is not only wrong but dangerous.
4. As I look at the Clinton record in economic performance and compare it to what happened before and after, I have to give it an A+.
Let me elaborate on these themes quickly.
1) What were some of these seeds of destruction? One has to do with macroeconomic policy, CEO stock options, broader accounting problems, excessive deregulation, the banking system, and taxation. One of the central problems was stock options and the way we accounted for them. The CEOs’ compensation increased enormously during the 1990s, partly because many people didn’t know about what was going on. That was only part of it. It is an example of ways in which markets are not functioning quite right.
Part of the reason that CEO compensation went up so much was that the portion of it that went into stock options increased enormously. Stock options are fantastic because the CEO knows it’s of value, and that’s why he likes it, but they seem to come out of thin air. It’s like manna from heaven or the repeal of the law of conservation of matter -- somebody receives something, but nobody has to give it.
Those of us who studied physics know about the laws of conservation of matter, and if somebody is receiving something, somebody has to be giving it. The problem is that the people who were giving it didn’t know that they were doing so. When you give a stock option you are giving something of enormous market value, which means the difference between what the market thinks is the market price and the price at which you will be able to purchase it. That capital gain is something of value. You are diluting other shareholders’ interests in a company.
It is a way of paying CEOs that may make sense in terms of incentives. It went too far. Did people know what they were giving their CEOs? Why is that important? The most important factor goes back to the economics of information. The way the market system works is that we have prices; prices guide the allocation of resources; when prices go up, that says “produce more of that, invest more in that industry.”
But if that market signal is to lead to efficiency, the prices have to reflect reality. The information embedded in the prices has to be accurate information. If the market has distorted information, those prices do not reflect reality -- they could be too high, or in some cases too low. But in these cases, because you were not reflecting what was going on, the prices in a large number of sectors, particularly the high tech and telecom, were too high. What happened? We had more investment. They were doing what the prices said they were supposed to do: they were following the market signals. So they invested more.
But they invested too much, and we wound up with overcapacity, which eventually becomes so transparent that it cannot be sustained, and the bubble breaks. And that is exactly what happened here. This is not the first time, but we could see it happening right before our eyes. In 1993-1994, when I was on the Council of Economic Advisors, we saw this coming, way before even the bubble started. We argued for reform of our accounting for these stock options....
The Financial Accounting Standards Board which is supposed to set these standards, had pointed out that there was a problem and had proposed a reform. The Council of Economic Advisors very strongly supported that reform. But the people who were making money out of this deception did not want reform. They went to Treasury, Commerce and Congress and said, “You have to stop the Financial Accounting Standards Board from making this reform.”
We had an active debate. The argument that Treasury used was quite astounding: if we had this reform, prices and the stock market would fall. If people only knew what was being given away to their executives....they would realize the prices were overvalued and they would come down. We thought that was an argument for reform. They thought it was an argument against. But there was a reason: who wants to be a party pooper? And many people were making a lot of money, and expected to make even more money, out of this form of deception.
Pressure was put on Congress and the Administration. The Administration and the Congress put pressure on the FASB, and reform was killed. Arthur Leavitt, who was Chairman at the time of the Securities and Exchange Commission, views that as the most significant mistake of his career.
There were other problems. We pursued excessive deregulation....The problem was that we followed the deregulation mantra. Rather than asking what was the right regulatory framework -- which meant we needed to strip down regulations in some areas; increase it in other areas, like accounting; change it in still others -- we followed the mantra “just get rid of the regulations.”
The result was that we exacerbated some of the problem. It is not an accident that three of the problem sectors in the economy in the last few years are the sectors of deregulation -- telecom; electricity, where there was the manipulation; and banking.
Let me give a brief story that illustrates the point....One aspect of banking reform was repeal of the Glass-Steagall Act, a bill that separates commercial from investment banking, which was passed after the problems in the twenties and thirties. The investment and commercial banks both saw new opportunities by getting together. The reason it had been passed earlier was that there were important conflicts of interest when you join them together. We argued: “If you bring them together, these conflicts of interest that we had seen before would re-emerge.” Treasury’s reply was: “Don’t worry, trust us.” ...
They repealed the Glass-Steagall Act. In what happened in Enron, you see the working out of the conflicts of interest and its contribution to the company’s problems and its demise.
There are other more important conflicts of interest...the IPOs, with the conflict of interest between the investment banks and the CEO and the companies they represent, and between the analysts who give...information to ordinary shareholders but..(make) their money from the investment banks doing the deals. The system was rife with these conflicts of interest, and repealing the Glass-Steagall Act only made it worse.
Again, the SEC recognized some of these conflicts of interest and tried to do something about it. One of them was the Fair Disclosure initiative, which stated that if a company disclosed information to the analyst, it had to disclose it to everybody. By providing inside information to the analyst it created another element of a cabal between the analyst and the company that was a source of problems.
I was on the commission organized by the SEC – Valuation in the New Economy – which included Ken Lay, the head of Enron. The representatives from many of these firms, including Enron, said: Fair Disclosure would be terrible; it will undermine; if you have to disclose it fairly, we won’t disclose anything. This is a commitment to having a well-functioning market with information. They then went on to say: “You don’t have to worry about this. You should trust us. Market forces will take care of it all.” It did eventually, but not until many people got hurt in the process.
Another example was what we did with tax policy. As the bubble was going up and getting worse, what did we do? We cut capital gains taxes, saying to the market: if you make more money out of this speculative bubble, you can keep more of it. What we did in 1993 was raise taxes on upper-middle-income Americans who worked for a living, and then in 1997 we lowered taxes for upper-income Americans who speculated for a living.
The final element to examine is macro policy as part of the seeds of destruction. Alan Greenspan recognized that there was a problem fairly early on. In 1996 he gave this famous speech about “irrational exuberance.” He wanted to let the air out of the bubble gradually because there is a long history that if you let bubbles get too high, they cause problems when they crash. But markets usually can’t be talked down. He did have an effect for about three days, and then the new data came out from the Labor Department and it started going up. The data don’t reflect any effect of the speech.
But then, in 1997, 1998, 1999, when the market soared way over what it had been in 1996 -- if you believe there was a bubble in 1996, you had to believe that there was a real bubble by 1997, 1998, 1999 -- the Fed started talking up the bubble: “We’re in a new era, new economy, profits will soar, low interest rates.” But it was worse that that. We have a more information now because of finally forcing the Fed to disclose meeting proceedings with a long lag.Not only did the Fed recognize that there was a bubble, but they also recognized that they had some means to take care of it.
Raising interest rates would have been a problem because it would have weakened the economy at the same time it took the air out of the bubble. There are other instruments which he chose not to use -- for instance, raising margin requirements, analogous to requiring a larger down payment on a house;if you require a larger down payment on a house, it can dampen a speculative real estate bubble.
2) The second theme to examine is how we mismanaged globalization....But we lacked a vision. The financial and commercial sector in the U.S. did have a vision. They might not believe in government having an active role, except when it advanced their interest. The active role...was an agenda that advanced our own interests. As a result, we got some very unbalanced trade agreements.
Mickey Kantor was carrying out the mandate that he was given. He wasn’t trying to create a fair international economic order; he was trying to conclude the best deal for the U.S....
One can trace the problems in the global financial system, the problems in Cancun more recently, the breakdown of the trade negotiations, to the unbalanced approach to globalization that we began in the nineties and made worse in the last few years
3) The third topic is how to climb out of the downturn? Here the story of the Clinton Administration is very simple, and it has been repeated so often and so forcefully that it is believed by most people. We reduced the deficit, that allowed interest rates to come down, that stimulated investment, and that got us out of the recession.
The only thing that’s wrong with that story is that it is exactly the opposite of what has been taught in virtually every course in economics for the past seventy years, that is, if you face an economic downturn, the solution is to lower taxes or increase expenditure, which in turn increases the deficit, and stimulates the economy, and that gets you out of the recession.
This is a dangerous doctrine in that it is the set of policies that were pursued in Argentina, in Thailand, in Indonesia, in Korea, and elsewhere, and in every case,reducing the deficit in an economic downturn had exactly the predictable effect that economic textbooks said: it made the downs into recessions and recessions into depressions.....
This raises some very troubling questions for our institutions. The argument has long been put that we want to have an independent, nonpartisan central bank, that looks at these issues in a technocratic way. In fact that is not the case, because the Fed has had a political agenda. The reason I feel so strongly about it is not only this particular experience, but a few years later, in the spring of 2001, the Fed and its Chairman came out in support of a tax cut that was not designed to stimulate the economy but to give benefits to upper-income Americans who would likely not spend much of the money.
The tax cut did not turn out to stimulate the economy.
But what is of more concern was the argument that he put forward, that the U.S. and the Fed faced an imminent threat, that we were about to pay off our national debt. We would have no debt, no T bills, and the Fed would have difficulty in
undertaking open market operations. This imminent threat was not to come for about 10 to 12 years, assuming that the numbers about the projection of the surpluses were real.
Greenspan had been Chairman of the Council of Economic Advisors and he knew that the numbers in those projections ten years out are nothing but mythical. You don’t spend your surpluses before they are realized. He never said, “Why do we have to spend our surpluses today, ten years before we see the debt running out? Congress is perfectly capable of spending money very quickly.”
So if it turned out that in the year 2008 we had almost gotten rid of our debt and we faced a threat of running out of T bills, it would have been very easy for Congress to have solved that problem overnight. But he wanted to look ten-twelve years ahead of time.
His real mission was the conservative mission of downsizing the government, cutting back taxes. It was a political agenda, not an economic agenda, which raises fundamental questions about our institutional design...."
This article is basically a summary of Stiglitz's 2003 book: The Roaring Nineties:A New History of the World’s Most Prosperous Decade
It's a very interesting revelation about some of the behind-the-scenes activities during the Clinton Administration. As Stiglitz himself states: "the 90's sewed the seeds of destruction of the bubble." This book review discusses some of those seeds. It is taken from a live interview with Professor Stiglitz.
November 5, 2003
"JOANNE MYERS: We welcome members and guests to our Books for Breakfast program. This morning Dr. Joseph Stiglitz will be discussing his recently published book The Roaring Nineties: A New History of the World’s Most Prosperous Decade....
If you think that economic policies administered by America during the Roaring Nineties contributed to this decade of extraordinary growth, you may be right. Yet, before we become too nostalgic for the so-called “golden age of prosperity,” the age of mega-deals and mega-growth, we should listen very carefully as our guest reexamines how one of the greatest economic expansions in history sowed the seeds of its own collapse....
As Chairman of former President Clinton’s Council of Economic Advisors, and later Vice President and Chief Economist at the World Bank, Dr. Stiglitz was deeply involved in many of the policy decisions of the decade and was uniquely positioned to watch the nineties unfold....
Please join me in welcoming Dr. Joseph Stiglitz.
Remarks
JOSEPH STIGLITZ: Thank you very much for the introduction....Let me just try to elaborate on a few...things...
What motivated me in writing this book was that the nineties were viewed as a fabulous decade. The economy was roaring. We even talked about the new economy which was to mean the end of the business cycle. We don’t want to remember that, because we have lost almost 3 million jobs in the last three years. At least at the beginning of the decade, we also had a “globalization bubble.” Everybody thought globalization American style would take over the world and bring prosperity to all.
By the end of the decade and the beginning of this current century, both of those bubbles have been broken. We realized that we were not on a never-ending, upward path, but that our economy was in a downturn. And even before that, December of 1999, with the protest movement in Seattle against the new round of trade negotiations, what was supposed to be the feather in the cap of Clinton’s international economic policy turned into riots instead.
It was clear that if globalization was bringing unprecedented prosperity to the world, an awful lot of people didn’t seem to know or appreciate it....As early as 1997-1998, a global financial crisis showed that globalization wasn’t working out quite as well as we had hoped.
If we had claimed, as we did so strongly in the Clinton Administration, that we should be given credit for the successes of the nineties, we ought to have to take some blame, because as I jokingly say, the downturn started even before Bush had a chance to do all the damage that he has done since....
In thinking about the economy, it is essential to try to get the balance between the market and the government or the state right to get good economic performance, and avoid very negative side effects on poverty. In some ways we failed to get that balance right. The central lesson of economics over the last more than 200 years has been Adam Smith’s view about the “invisible hand” -- that markets lead, as if by an invisible hand, to efficiency; or that the individual pursuit of self-interest leads, as if by an invisible hand, to economic efficiency.
*One of the main results of my work on asymmetric information -- which is just a fancy name for saying that different people know different things -- was to show that the reason the invisible hand often seems invisible is that it is not there. That means that there is an important role for government. Or to put it another way, every game needs rules and referees to avoid chaos, and that is true of the market game as well.
I will touch on four themes and then open it up to questions.
1. In the nineties we sowed some of the seeds of destruction of the bubble; the boom that we had, and some of the economic problems we have today originate in that.
2. The same can be said about the way in which we managed globalization. In our successes in the beginning, we again sowed the seeds of the problems that we had by the end of the decade and into the current one.
3. How in the first place did we get out of the recession of 1990-1991? The standard interpretation of what we did, I argue, is not only wrong but dangerous.
4. As I look at the Clinton record in economic performance and compare it to what happened before and after, I have to give it an A+.
Let me elaborate on these themes quickly.
1) What were some of these seeds of destruction? One has to do with macroeconomic policy, CEO stock options, broader accounting problems, excessive deregulation, the banking system, and taxation. One of the central problems was stock options and the way we accounted for them. The CEOs’ compensation increased enormously during the 1990s, partly because many people didn’t know about what was going on. That was only part of it. It is an example of ways in which markets are not functioning quite right.
Part of the reason that CEO compensation went up so much was that the portion of it that went into stock options increased enormously. Stock options are fantastic because the CEO knows it’s of value, and that’s why he likes it, but they seem to come out of thin air. It’s like manna from heaven or the repeal of the law of conservation of matter -- somebody receives something, but nobody has to give it.
Those of us who studied physics know about the laws of conservation of matter, and if somebody is receiving something, somebody has to be giving it. The problem is that the people who were giving it didn’t know that they were doing so. When you give a stock option you are giving something of enormous market value, which means the difference between what the market thinks is the market price and the price at which you will be able to purchase it. That capital gain is something of value. You are diluting other shareholders’ interests in a company.
It is a way of paying CEOs that may make sense in terms of incentives. It went too far. Did people know what they were giving their CEOs? Why is that important? The most important factor goes back to the economics of information. The way the market system works is that we have prices; prices guide the allocation of resources; when prices go up, that says “produce more of that, invest more in that industry.”
But if that market signal is to lead to efficiency, the prices have to reflect reality. The information embedded in the prices has to be accurate information. If the market has distorted information, those prices do not reflect reality -- they could be too high, or in some cases too low. But in these cases, because you were not reflecting what was going on, the prices in a large number of sectors, particularly the high tech and telecom, were too high. What happened? We had more investment. They were doing what the prices said they were supposed to do: they were following the market signals. So they invested more.
But they invested too much, and we wound up with overcapacity, which eventually becomes so transparent that it cannot be sustained, and the bubble breaks. And that is exactly what happened here. This is not the first time, but we could see it happening right before our eyes. In 1993-1994, when I was on the Council of Economic Advisors, we saw this coming, way before even the bubble started. We argued for reform of our accounting for these stock options....
The Financial Accounting Standards Board which is supposed to set these standards, had pointed out that there was a problem and had proposed a reform. The Council of Economic Advisors very strongly supported that reform. But the people who were making money out of this deception did not want reform. They went to Treasury, Commerce and Congress and said, “You have to stop the Financial Accounting Standards Board from making this reform.”
We had an active debate. The argument that Treasury used was quite astounding: if we had this reform, prices and the stock market would fall. If people only knew what was being given away to their executives....they would realize the prices were overvalued and they would come down. We thought that was an argument for reform. They thought it was an argument against. But there was a reason: who wants to be a party pooper? And many people were making a lot of money, and expected to make even more money, out of this form of deception.
Pressure was put on Congress and the Administration. The Administration and the Congress put pressure on the FASB, and reform was killed. Arthur Leavitt, who was Chairman at the time of the Securities and Exchange Commission, views that as the most significant mistake of his career.
There were other problems. We pursued excessive deregulation....The problem was that we followed the deregulation mantra. Rather than asking what was the right regulatory framework -- which meant we needed to strip down regulations in some areas; increase it in other areas, like accounting; change it in still others -- we followed the mantra “just get rid of the regulations.”
The result was that we exacerbated some of the problem. It is not an accident that three of the problem sectors in the economy in the last few years are the sectors of deregulation -- telecom; electricity, where there was the manipulation; and banking.
Let me give a brief story that illustrates the point....One aspect of banking reform was repeal of the Glass-Steagall Act, a bill that separates commercial from investment banking, which was passed after the problems in the twenties and thirties. The investment and commercial banks both saw new opportunities by getting together. The reason it had been passed earlier was that there were important conflicts of interest when you join them together. We argued: “If you bring them together, these conflicts of interest that we had seen before would re-emerge.” Treasury’s reply was: “Don’t worry, trust us.” ...
They repealed the Glass-Steagall Act. In what happened in Enron, you see the working out of the conflicts of interest and its contribution to the company’s problems and its demise.
There are other more important conflicts of interest...the IPOs, with the conflict of interest between the investment banks and the CEO and the companies they represent, and between the analysts who give...information to ordinary shareholders but..(make) their money from the investment banks doing the deals. The system was rife with these conflicts of interest, and repealing the Glass-Steagall Act only made it worse.
Again, the SEC recognized some of these conflicts of interest and tried to do something about it. One of them was the Fair Disclosure initiative, which stated that if a company disclosed information to the analyst, it had to disclose it to everybody. By providing inside information to the analyst it created another element of a cabal between the analyst and the company that was a source of problems.
I was on the commission organized by the SEC – Valuation in the New Economy – which included Ken Lay, the head of Enron. The representatives from many of these firms, including Enron, said: Fair Disclosure would be terrible; it will undermine; if you have to disclose it fairly, we won’t disclose anything. This is a commitment to having a well-functioning market with information. They then went on to say: “You don’t have to worry about this. You should trust us. Market forces will take care of it all.” It did eventually, but not until many people got hurt in the process.
Another example was what we did with tax policy. As the bubble was going up and getting worse, what did we do? We cut capital gains taxes, saying to the market: if you make more money out of this speculative bubble, you can keep more of it. What we did in 1993 was raise taxes on upper-middle-income Americans who worked for a living, and then in 1997 we lowered taxes for upper-income Americans who speculated for a living.
The final element to examine is macro policy as part of the seeds of destruction. Alan Greenspan recognized that there was a problem fairly early on. In 1996 he gave this famous speech about “irrational exuberance.” He wanted to let the air out of the bubble gradually because there is a long history that if you let bubbles get too high, they cause problems when they crash. But markets usually can’t be talked down. He did have an effect for about three days, and then the new data came out from the Labor Department and it started going up. The data don’t reflect any effect of the speech.
But then, in 1997, 1998, 1999, when the market soared way over what it had been in 1996 -- if you believe there was a bubble in 1996, you had to believe that there was a real bubble by 1997, 1998, 1999 -- the Fed started talking up the bubble: “We’re in a new era, new economy, profits will soar, low interest rates.” But it was worse that that. We have a more information now because of finally forcing the Fed to disclose meeting proceedings with a long lag.Not only did the Fed recognize that there was a bubble, but they also recognized that they had some means to take care of it.
Raising interest rates would have been a problem because it would have weakened the economy at the same time it took the air out of the bubble. There are other instruments which he chose not to use -- for instance, raising margin requirements, analogous to requiring a larger down payment on a house;if you require a larger down payment on a house, it can dampen a speculative real estate bubble.
2) The second theme to examine is how we mismanaged globalization....But we lacked a vision. The financial and commercial sector in the U.S. did have a vision. They might not believe in government having an active role, except when it advanced their interest. The active role...was an agenda that advanced our own interests. As a result, we got some very unbalanced trade agreements.
Mickey Kantor was carrying out the mandate that he was given. He wasn’t trying to create a fair international economic order; he was trying to conclude the best deal for the U.S....
One can trace the problems in the global financial system, the problems in Cancun more recently, the breakdown of the trade negotiations, to the unbalanced approach to globalization that we began in the nineties and made worse in the last few years
3) The third topic is how to climb out of the downturn? Here the story of the Clinton Administration is very simple, and it has been repeated so often and so forcefully that it is believed by most people. We reduced the deficit, that allowed interest rates to come down, that stimulated investment, and that got us out of the recession.
The only thing that’s wrong with that story is that it is exactly the opposite of what has been taught in virtually every course in economics for the past seventy years, that is, if you face an economic downturn, the solution is to lower taxes or increase expenditure, which in turn increases the deficit, and stimulates the economy, and that gets you out of the recession.
This is a dangerous doctrine in that it is the set of policies that were pursued in Argentina, in Thailand, in Indonesia, in Korea, and elsewhere, and in every case,reducing the deficit in an economic downturn had exactly the predictable effect that economic textbooks said: it made the downs into recessions and recessions into depressions.....
This raises some very troubling questions for our institutions. The argument has long been put that we want to have an independent, nonpartisan central bank, that looks at these issues in a technocratic way. In fact that is not the case, because the Fed has had a political agenda. The reason I feel so strongly about it is not only this particular experience, but a few years later, in the spring of 2001, the Fed and its Chairman came out in support of a tax cut that was not designed to stimulate the economy but to give benefits to upper-income Americans who would likely not spend much of the money.
The tax cut did not turn out to stimulate the economy.
But what is of more concern was the argument that he put forward, that the U.S. and the Fed faced an imminent threat, that we were about to pay off our national debt. We would have no debt, no T bills, and the Fed would have difficulty in
undertaking open market operations. This imminent threat was not to come for about 10 to 12 years, assuming that the numbers about the projection of the surpluses were real.
Greenspan had been Chairman of the Council of Economic Advisors and he knew that the numbers in those projections ten years out are nothing but mythical. You don’t spend your surpluses before they are realized. He never said, “Why do we have to spend our surpluses today, ten years before we see the debt running out? Congress is perfectly capable of spending money very quickly.”
So if it turned out that in the year 2008 we had almost gotten rid of our debt and we faced a threat of running out of T bills, it would have been very easy for Congress to have solved that problem overnight. But he wanted to look ten-twelve years ahead of time.
His real mission was the conservative mission of downsizing the government, cutting back taxes. It was a political agenda, not an economic agenda, which raises fundamental questions about our institutional design...."