Confusion About Greenspan
By Arnold Kling
It’s not very often that Brad DeLong and Paul Krugman find themselves epitomizing opposite sides of an issue, but DeLong seems to have become Alan Greenspan’s apologist in chief even as Krugman sticks the knife in to the Maestro today.
Let me make this even more confusing. I agree with Krugman. Concerning Greenspan’s role in supporting President Bush’s tax cuts, Krugman writes,
Suddenly, his greatest concern — the “emerging key fiscal policy need,” he told Congress — was to avert the threat that the federal government might actually pay off all its debt. To avoid this awful outcome, he advocated tax cuts.
I remember Greenspan expressing this worry, and I remember that I did not share it. First of all, anyone who follows Social Security and Medicare knows that worries about the government paying off its debt are unfounded.
More importantly, even if the government did pay off its debt, the Fed could still conduct open market operations by buying, say Fannie Mae or Freddie Mac securities. Yet the Maestro was worrying out loud about his open market operations team not having government debt to play with. It was a real intellectual low point, in my opinion.
Of course, according to reports about his new book, Greenspan also believed that invading Iraq for the sake of oil was a good idea. That is also an intellectual low point.
To me, what this shows is that you do not need a great intellect to run the Fed. In fact, I think that the Fed has a much wider margin for error than most people believe. My guess is that if you re-ran history with the Fed Funds rate 50 basis points higher (or lower) for several years, the effect on the economy would not be large. As for all you macro modelers out there, sorry, but I would not consider a model simulation as providing reliable predictions for the result of this thought experiment.
So I cannot share DeLong’s pro-Greenspan sentiments, and I think that Krugman’s anti-Greenspan argument has merit.