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23 IRET Congressional Advisory 1 (1993)

handle is hein.taxfoundation/iretcgadv0022 and id is 1 raw text is: August 4, 1993 No. 23 MIXED SIGNALS FROM CHAIRMAN GREENSPAN Federal Reserve Board Chairman Alan Greenspan has urged Congress to meet President Clinton's goal of reducing the deficit by $500 billion over 5 years, and to regard the budget reconciliation package as just the first step in a longer term effort that will be needed to eliminate Federal budget deficits. Failure to do How one cuts so, in the Chairman's view, important tha would drive up interest rates Cuts it. and hurt the economy. Greenspan's remarks were given on July 20th in testimony before the House Banking Committee Subcommittee on Economic Growth and Credit Formation. Administration spokesmen have pointed to the Chairman's remarks as an endorsement of their budget package. However, Greenspan clearly favors spending restraint over tax increases in achieving deficit reduction. He stated that slowing the growth of federal spending - not rearranging federal taxes - is critical to reducing the deficit, which sounds nothing like the budget package that was hammered out in conference. The emphasis the Chairman placed on reducing the growth of Federal spending as a means of controlling the deficit is welcome and valuable the n h advice. However, Greenspan confuses the issue, and weakens his own case, by focusing too much on the size of the deficit reduction and by repeating conventional platitudes about the pain of government spending cuts and a link between deficits and interest rates. Contrary to the tone of the Greenspan testimony, the economy and the financial markets would do much better with a deficit reduction package of $400 billion, all from spending restraint, than with a $500 billion package with $250-plus billion in tax increases. Doctor, doctor, will it hurt? Greenspan says that cutting spending is a hard choice because it reduces GDP, at least in the short run, but that the economy is strong enough to handle it. He says that in the long run the economy is better off with the resources shifted to more productive use in the private sector. On the latter point, Greenspan is correct. However, he makes too much leficit is more of the near term pain, for two iv much one reasons. First, spending restraint does not hurt the economy as a whole, and need not inconvenience any portion of it to any significant degree for any significant time. The massive conversion from war production to peacetime output after World War II shows how fast the private sector can shift gears. If the economy were growing rapidly and creating new jobs at a fast clip - as it might be if the tax increases were left out of the budget package, and if a modicum of tax relief were provided to labor and capital - the transition from working or producing for the government to working or producing for the private sector would be rapid and relatively painless. A smaller government sector would quickly mean a larger private sector and a larger, more useful, and more satisfying total GDP. Faster private sector growth, Institute for Research on the Economics of Taxation IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote economic growth and efficient operation of the free market economy. 1730 K Street, N.W., Suite 910, Washington, D.C. 20006 Voice 202-463-1400 * Fax 202-463-6199 0 Internet www.iret.org

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