NCPA - National Center for Policy Analysis

Greenspan Supports Tax Cuts To Reduce Surplus

January 29, 2001

Opponents of tax cuts are dismayed that Federal Reserve Board Chairman Alan Greenspan supports reductions in the federal tax burden. His reasoning implies that paying off the national debt is not a good idea.

According to projections by the Office of Management and Budget and Congressional Budget Office, within a decade the public debt will disappear, and the federal government will accumulate close to $2 trillion in net financial assets -- private financial assets, such as stocks and bonds.

"The federal government should eschew private asset accumulation," says Greenspan, "because it would be exceptionally difficult to insulate the government's investment decisions from political pressures."

Greenspan must also be concerned about how the Federal Reserve will function in the absence of any Treasury securities. The Fed has always conducted monetary policy by buying and selling Treasury bonds, notes and bills. Thus the Fed owns more than $500 billion of the public debt.

The Fed could use corporate bonds. The corporate debt market as a whole is quite large -- about $5 trillion -- but unlike Treasury debt it is not homogeneous.

Greenspan says the orgy of spending that accompanied the close of the last two sessions of Congress was ample proof that failure to cut taxes will inevitably lead to unproductive spending increases.

Indeed, some forecasters believe OMB and CBO are greatly overestimating future surpluses precisely because they have underestimated the likely outpouring of new spending. Economist Brian Nottage of, for example, notes that discretionary outlays were higher last year than any year since 1991. If such outlays were to continue growing at the same rate, projected surpluses will be almost $1 trillion lower over the next decade, he estimates.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, January 29, 2001.


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