Greenspan Demands 'Tectonic Shift' Toward Fiscal Restraint, Says Deficit Is Top Priority, Compares U.S. Debt To Greece
In a WSJ op-ed, Greenspan turns his back on Krugman & Keynes.
---
There are 2 fair reactions to Greenspan's editorial published this morning at the WSJ:
1. You accept his voice now firmly on the side of fiscal restraint.
OR
2. You ignore him because he was an architect of the bubble.
I'm going with option #1. Anyone who takes on Krugman, Delong, Yglesias & Keynes gets my support. For the record, Keynes advocated fiscal discipline and surpluses during growth periods to be balanced by deficit spending during recessions. But fiscal discipline has never existed in Washington, being counter-intuitive to a lobbying culture built on spending and government giveaways.
Henry Blodget still thinks both sides of the deficit debate are simply shouting 'over each other.' I have pointed out that he is missing the more fundamental aspect of the debate -- our side, that of fiscal restraint, does NOT accept the basic premise of our opponents -- namely, that government spending, at least in this debt-deleveraging recession, actually creates any meaningful private sector jobs.
The stimulus just isn't working. (Economist Eric Falkenstein explains the failure.) Pardon the language but we're pissing into the wind, and it's blowing right back at us in the form of the ever-expanding national debt ($5 billion more each and every day) to be handed to your children.
We've tried and spent, and then spent some more. And nothing. It's time for the New Zealand approach (please read it). And I'll take Greenspan, despite his past sins. We can despise him all we wish, but the fact remains that the MSM still respects him and his word, and so he is a useful voice on the side of fiscal sanity.
Quotes and links inside.
---
By Alan Greenspan
WSJ Editorial
U.S. Debt and the Greek Analogy
An urgency to rein in budget deficits seems to be gaining some traction among American lawmakers. If so, it is none too soon. Perceptions of a large U.S. borrowing capacity are misleading.
Despite the surge in federal debt to the public during the past 18 months—to $8.6 trillion from $5.5 trillion—inflation and long-term interest rates, the typical symptoms of fiscal excess, have remained remarkably subdued. This is regrettable, because it is fostering a sense of complacency that can have dire consequences.
Beneath the calm, there are market signals that do not bode well for the future. For generations there had been a large buffer between the borrowing capacity of the U.S. government and the level of its debt to the public. But in the aftermath of the Lehman Brothers collapse, that gap began to narrow rapidly. Federal debt to the public rose to 59% of GDP by mid-June 2010 from 38% in September 2008. How much borrowing leeway at current interest rates remains for U.S. Treasury financing is highly uncertain.
The U.S. government can create dollars at will to meet any obligation, and it will doubtless continue to do so. U.S. Treasurys are thus free of credit risk. But they are not free of interest rate risk. If Treasury net debt issuance were to double overnight, for example, newly issued Treasury securities would continue free of credit risk, but the Treasury would have to pay much higher interest rates to market its newly issued securities.
I grant that low long-term interest rates could continue for months, or even well into next year. But just as easily, long-term rate increases can emerge with unexpected suddenness. Between early October 1979 and late February 1980, for example, the yield on the 10-year note rose almost four percentage points.
In the 1950s, as I remember them, U.S. federal budget deficits were no more politically acceptable than households spending beyond their means. Regrettably, that now quaint notion gave way over the decades, such that today it is the rare politician who doesn't run on seemingly costless spending increases or tax cuts with borrowed money. A low tax burden is essential to maintain America's global competitiveness. But tax cuts need to be funded by permanent outlay reductions.
The current federal debt explosion is being driven by an inability to stem new spending initiatives. Having appropriated hundreds of billions of dollars on new programs in the last year and a half, it is very difficult for Congress to deny an additional one or two billion dollars for programs that significant constituencies perceive as urgent. The federal government is currently saddled with commitments for the next three decades that it will be unable to meet in real terms. This is not new. For at least a quarter century analysts have been aware of the pending surge in baby boomer retirees.
We cannot grow out of these fiscal pressures. The modest-sized post-baby-boom labor force, if history is any guide, will not be able to consistently increase output per hour by more than 3% annually. The product of a slowly growing labor force and limited productivity growth will not provide the real resources necessary to meet existing commitments. (We must avoid persistent borrowing from abroad. We cannot count on foreigners to finance our current account deficit indefinitely.)
Only politically toxic cuts or rationing of medical care, a marked rise in the eligible age for health and retirement benefits, or significant inflation, can close the deficit. I rule out large tax increases that would sap economic growth (and the tax base) and accordingly achieve little added revenues.
With huge deficits currently having no evident effect on either inflation or long-term interest rates, the budget constraints of the past are missing. It is little comfort that the dollar is still the least worst of the major fiat currencies. But the inexorable rise in the price of gold indicates a large number of investors are seeking a safe haven beyond fiat currencies.
The United States, and most of the rest of the developed world, is in need of a tectonic shift in fiscal policy. Incremental change will not be adequate. In the past decade the U.S. has been unable to cut any federal spending programs of significance.
Continue reading at the WSJ >>
---
Editor's note: Any time that I link to a WSJ article that offers only a preview without a subscription, it's simple to circumvent. When you arrive at the story on the WSJ, just paste the headline into a google search. Then when you click through to the story from google, you will be able to read the entire thing.
It takes about 5 seconds and works every time.
Jun 18, 2010 at 1:32 PM
Reader Comments (6)
http://dailybail.com/home/deficit-debate-krugman-delong-vs-niall-ferguson-do-we-need-a.html
Bring out your dead...
Bring out your dead...
These two again???
http://www.businessinsider.com/krugman-greenspan-2010-6
http://therearenosunglasses.wordpress.com/2008/11/29/who-is-paul-volcker-obama-appoints-a-longtime-enemy-of-the-working-class/
“Paul Volcker hasn’t been in Washington for quite some time,” Obama said, “and that’s part of the reason he can provide a fresh perspective.”
THIS QUOTE IS WHY OBAMA IS A COMPLETE IDIOT. HE MIGHT BE ABLE TO BUILD AN ELEVATOR BUT HE WOULD NEED HELP RUNNING IT.