ET TU, ALAN?

SYNOPSIS: Greenspan's blatant political move is worrisome and disappointing.

Despite his legendary obscurity, what Alan Greenspan has to say is usually quite clear and intellectually coherent once translated into English. But his testimony last Thursday before the Senate Budget Committee was evasive and often inconsistent. It was hard to avoid the impression that Mr. Greenspan's intent was to give aid and comfort to the new administration, while retaining plausible deniability.

True, Mr. Greenspan explicitly rejected the administration's argument that we must immediately cut taxes to prevent a recession. While conceding that the economy may grow little if at all this quarter, he suggested that a recovery would probably be under way before tax cuts could have any impact. By the way, new evidence suggests that manufacturing, which suffered a nasty downturn in the last few months, has already started to rebound.

Nonetheless, the headlines were all about Mr. Greenspan's endorsement of tax cuts something the Fed chairman must have known would happen. And when you look at the tortured logic by which Mr. Greenspan arrived at that endorsement, you have to wonder whether those headlines weren't exactly what he wanted.

His argument went as follows: given its projected surpluses over the next decade, the federal government may not only pay off its debt, but actually find itself using surplus cash to buy private assets. This could cause problems, he suggested, because it would be "difficult to insulate the government's investment decisions from political pressures." So we should engage in "pre-emptive smoothing of the glide path," which turns out to mean cutting taxes enough so that the federal government never does pay off its debt, after all.

Now I would quarrel with those surplus projections. I would also point out that in declaring "it is far better . . . that the surpluses be lowered by tax reductions than by spending increases," Mr. Greenspan was out of bounds. Since when is it the Fed's business to say that we should have a tax cut rather than, say, a new prescription drug benefit or for that matter a missile defense system? (Neither program is factored into those surplus projections.) Mr. Greenspan himself seemed aware that he was on shaky ground, offering the very inadequate excuse that "I speak for myself and not necessarily for the Federal Reserve."

But the really strange thing about his argument was that he seemed to ignore the fact that the main reason the federal government will one day become an investor is the buildup of assets in the hands of the Social Security and Medicare systems and those funds must accumulate assets to prepare for the future demands of the baby-boom generation. Indeed, by all estimates even the huge projected surpluses of those trust funds will be inadequate to the task. "Certainly," Mr. Greenspan declared, "we should make sure that Social Security surpluses are large enough to meet our long-term needs." Well, I'm sorry, but you can't do that without allowing the federal government to become an investor.

So if that prospect was what was really worrying Mr. Greenspan, he should have focused on the problem of how to prevent the government's position as an investor from being abused. And there are many ways to do that including, by the way, realistic plans for partial privatization of Social Security, which (unlike the fantasy promises of the Bush campaign) would require the federal government to ante up trillions of dollars to pay off existing obligations, solving the "problem" of excessive surpluses quite easily.

But Mr. Greenspan seemed determined to arrive at tax cuts as an answer. After dismissing the argument that we need a tax cut to fend off a recession now, and conceding that tax cuts have historically "proved difficult to implement in the time frame in which recessions have developed and ended," he waffled: "Should current economic weakness spread beyond what now seems likely, having a tax cut in place may, in fact, do noticeable good." But by the same token, if the economy is strong again by the time a tax cut goes into effect, won't that tax cut do noticeable harm? Mr. Greenspan declined to answer questions along those lines.

When a man who is usually a clear thinker ties himself in intellectual knots in order to find a way to say exactly what the new president wants to hear, it's not hard to guess what's going on. But it's not a pretty sight.

Originally published in The New York Times, 1.28.01