Greenspan's New Deal

Save the poor! No breaks for the rich! Has the Fed chairman become a tax-and-spend Democrat?

By Damien Cave

Sept. 28, 2001 | When Federal Reserve chairman Alan Greenspan testified before the Senate Finance Committee Tuesday he raised some seriously surprised eyebrows. First, he appeared with Robert Rubin, President Clinton's treasury secretary, and not with the current holder of that office, his close friend Paul O'Neill. Then, he agreed with Rubin and stated his opposition to the current Republican tax cut agenda.

Neither the capital gains tax cut favored by congressional Republicans, nor the reduction in corporate income taxes -- a proposal floated by the White House -- would do much to revive the economy, he said. If a fiscal stimulus should be pursued at all, he and Rubin concluded, it must be large -- up to around $100 billion, including what has already been authorized by Congress -- and it should be targeted as broadly as possible, not just at corporations and the wealthy.

Buddying up with a Democrat, spouting Keynesian fiscal policy -- has chairman Greenspan, the Ayn Rand acolyte and registered Republican, switched parties? Isn't this the same man who so strongly supported President Bush's massive tax cut? Is the supreme architect of so-called monetary policy fiscal management -- the belief that the best way to run the economy is by making discreet adjustments in interest rates -- veering to the left?

Not quite. Federal Reserve watchers stress that Alan Greenspan isn't really "cozying up" to Robert Rubin. While his actions could be considered "a bit of a snub" to Paul O'Neill, says Justin Martin, author of "Greenspan: The Man Behind the Money," in Tuesday's case Greenspan didn't personally choose to appear with Rubin. Senate Finance Committee chairman Max Baucus, D-Mont., asked both to testify. In the words of Robert Reich, former secretary of labor under President Clinton. "[Greenspan] happens to agree with Bob Rubin," Reich says. "And Bob Rubin, with him."

But Greenspan's decision to oppose both a capital gains tax cut and a corporate break slashes against the grain of recent economic history. The warm relationship between the Fed and Bush Republicans seems to have ended, or at least cooled. By rejecting the Republican agenda, say observers, Greenspan has reestablished his well-earned reputation for political independence -- a reputation that was tarnished in January when he boldly supported Bush's massive tax cut.

True, Greenspan has long favored monetary policy to combat recessions; cutting interest rates, he's argued, can help freeze or ignite the economy far faster than fiscal policies that move through Congress before reaching consumers. But his recent pronouncements suggest that he's been slowly changing his mind about whether there is also a role for more active fiscal policy -- for direct government intervention to goose the economy. His call for a broad-based stimulus confirms that Greenspan no longer favors only a monetary approach to business cycles, say Fed watchers.

"He's in favor of a double-barreled approach," says Martin. "He's saying that the country needs fiscal and monetary policy that are complementary, that are aimed at a stimulus for the economy. He's looking for the Bush administration to do something that doesn't just help out a few people."

Next page: From Ayn Rand to Keynes and back again -- the Greenspan tango