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"...public opinion deserves to be respected as well as despised" G.W.F. Hegel, 'Philosophy of Right'

partisan economics « Previous | |Next »
October 23, 2004

This is an old article by Paul Krugman on Alan Greenspan the Chairman of the Federal Reserve in the US. It makes for interesting reading, even if Krugman's New York Times' articles are increasingly seen as partisan by the US economic profession.

I had always assumed that the Federal Reserve was above politics. Krugman confirms this interpretation:

"As an institution, the Federal Reserve is set up more like the Supreme Court than like an ordinary government agency. Members of the Federal Reserve Board serve for long terms; chairmen typically serve across several administrations from both parties. There's a reason for this: economists often argue that the Fed, like the Supreme Court, must be insulated from the political process so that it can make necessary but unpopular decisions. The quid pro quo for this insulation, however, is that the Fed must stand above the political fray. Like Supreme Court justices, the members of the Fed board undermine the rationale for their independence if they use their power for partisan purposes."

Do they?

Krugman argues yes. He says that Greenspan transgressed this tradition of standing above the political fray, when he supported President George Bush's tax cuts in 2001 in the name of reducing budget surpluses. Krugman notes that Greenspan:

"...didn't call for a reconsideration of the 2001 tax cut when the budget surplus evaporated. He didn't even offer strong objections to a second major round of tax cuts in 2003, when the budget was already deep in deficit."

Krugman says that since then, Greenspan has gone back to warning against the evils of budget deficits. But he failed to call for a reconsideration of recent tax cuts; on the contrary, he has endorsed Bush's plan to make the tax cuts permanent.

Krugman then advances another argument for his partisanship claim. He says that instead of calling for a reconsideration of recent tax cuts Greenspan calls for spending cuts, emphasizing the need to trim Social Security benefits:

"The sequence looks like this: he pushed through an increase in taxes on working Americans, generating a Social Security surplus. Then he used the overall surplus, mainly coming from Social Security, to argue for tax cuts that deliver very little relief to most people but are worth a lot to those making more than $300,000 a year. And now that those tax cuts have contributed to a soaring deficit, he wants to maintain the tax cuts while cutting Social Security benefits. He never said, ''Let's raise taxes and cut benefits for working families so that we can give big tax cuts to the rich!'' But that's the end result of his advice. "

Krugman considers a couple of possiblities for why Greenspan took this path. He ends by saying that the overall consequence is that after becoming "a symbol of America's economic turnaround in the 90's, and anointing himself the nation's high priest of fiscal probity, [Greenspan] lent crucial aid and comfort to the most fiscally irresponsible administration in history."

I interpret that to mean that the Republicans have made economic policy a direct extension of their political strategy. Is saying that the Republcians are trashing the Fed's independence too strong?

What does the lack of independent economic governance mean, given the possibility that the US's twin deficits can only be resolved by some sort of crisis?

Oct. 24
John Quiggin has two good accounts about the US's looming trade crisis here and here. He argues that it is unlikely the current account deficit will be stabilised at a sustainable level, (the balance of trade on goods and services returning to surplus in a decade) though the soft option of a smooth market-driven adjustment. Where does that leave the US?

Quiggin links to a bleak US account. This is Guy's interpretation of Lawrence Summer's speech. The possibility is that "Asian governments could decide that the low rates of return on US treasuries aren't particularly appealling and start selling them. This could lead to a balance of payments crisis in the US, since it could no longer finance the current account deficit by borrowing abroad. This could lead to a collapse in the dollar, significant interest rate hikes, and protectionism."

The US does look to be in a bad way.

The options are either tax hikes or cuts to government (social security) spending to address the yawning budget deficits. And we know that the Republicans will take the latter option.

More on the US deficit here.

| Posted by Gary Sauer-Thompson at 5:20 PM | | Comments (0) | TrackBacks (1)

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In the US the Bush/Kerry camps bitterly battle it out in the last weeks of the American presidential elections. Meanwhile, there has been a quiet unease and concern within Australia over the implications of the twin US trade and budget deficits. I wan... [Read More]