Alan Reynolds

The president surprised us all by casually announcing that he intended to reappoint Alan Greenspan as chairman of the Federal Reserve. A few Bush loyalists had wanted to replace Greenspan simply because he was unsupportive of the president's efforts to speed-up tax cuts scheduled for 2004-2006.

But why should we expect any official in charge of monetary policy to give sound advice about tax policy? We don't expect the secretary of the treasury to dictate what the Fed should do with interest rates, and we should not expect the Fed chairman to dictate what the Treasury should do about taxes. Those tasks are prudently separated, partly to avoid conflict of interest.

Central bankers have always and everywhere tried to blame every conceivable economic problem on insufficient tax revenue, thereby attributing no problems to monetary mismanagement. Greenspan, for example, somehow imagines that budget deficits cause current account deficits ("twin deficits") and these terribly high interest rates we are suffering from today.

In the early '30s, other Fed officials blamed the Great Depression on the budget deficit. From the late '60s to the early '80s, Fed officials blamed inflation on the budget deficit. In the Fed's spin book, fiscal policy naturally gets the blame when things go badly and monetary policy gets the credit when things go well. This fine art of fiscal scapegoating is a job prerequisite for any central banker.

Perhaps that explains why confusion invariably arises whenever Congress asks the Fed chairman for fiscal policy advice. Tax policy is not Greenspan's job, after all, and he is not good at it. In particular, he always wants to postpone tax cuts as long as possible. And that advice contributed to two episodes of notoriously bad timing.

In early 1981, supply-siders on the transition team (myself, Larry Kudlow, Craig Roberts and John Rutledge) wanted to cut marginal tax rates right away, taking the top rate down to 35-40 percent. But Greenspan successfully advised postponing nearly all of the tax reduction until 1983-84, and he also recommended keeping the top tax rate at 50 percent.

In 2001, supply-siders again urged that the planned reduction of marginal rates take place right away, retroactive to the start of that year. But Greenspan once again successfully advised taking six years to reduce tax rates by about 3 percentage points. He even recommended a "trigger" that would automatically repeal tax cuts if Congress spent too much, which would have provided an irresistible incentive for pro-tax legislators to do just that.

Alan Reynolds

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