Analysis: Greenspan Calls for Tax Cuts Rather Than New Spending

By Jim Burns | July 7, 2008 | 8:25 PM EDT

( - The Chairman of the Federal Reserve Board Alan Greenspan said on Wednesday if political pressures on lawmakers to spend the federal budget surpluses are too great Congress would be better to cut taxes instead of instituting new government spending programs.

Testifying before the Senate Banking Committee Greenspan said until budget surplus projections are more certain Congress should choose to "Allow the surpluses to run and reduce the debt outstanding." But, Greenspan said, if political pressures are too great he would prefer to see Congress cut taxes instead of creating new spending programs.

Daniel Mitchell, a Heritage Foundation economist, called Greenspan's comments "good" but not surprising.

"I'm not surprised. Alan Greenspan is an economist, and a good economist, and any good economist understands that private markets are more efficient and yield better results than government policies," Mitchell told

Mitchell said he also believes Greenspan has been reading the "tea leaves" when it comes to the federal budget surplus.

"I fully believe that if Greenspan was offered a choice, 'should we use the surplus to privatize Social Security or should we pay down the debt' he would say privatize Social Security. Because after all not only is that a very important economic reform but it also reduces the huge long term debt of Social Security, which, although, is not counted as part of the national debt is actually much bigger," Mitchell said.

Mitchell said Greenspan may also have in mind the current "divided government" as a factor in not calling for more government spending programs.

"I think what he's saying is 'okay we have divided government right now, the kinds of changes that might be good ways to use the surplus aren't going to happen.' If we had tax cuts they would be so I think what he's really saying is in the current environment just pay down the debt. Otherwise, you'll just do damage," said Mitchell.

In his testimony Greenspan also cautioned lawmakers against spending projected federal budget surpluses that he said might not occur.

"I would submit that irrevocable, or almost irrevocable programs put in place now, are going to be a risky possibility. And all I say, all I'm asking in effect, is just to delay the rise (in overall government spending) until we have a better grip on what the true balance in the federal government accounts is," Greenspan said.

Scott Hodge, economist for the Citizens for a Sound Economy (CSE) said Greenspan is right in preferring a tax cut over new government spending programs.

"The Chairman is obviously right because he recognizes that if you leave the money in Washington, politicians will find a way of spending it and this has happened year in and year out. He's voicing reality, both political reality and just the reality of Washington," Hodge told

However, Hodge disagrees with Greenspan's assertion that the reasons behind recent "tax surprises" that have filled government coffers during the economic boom in recent years are not entirely understood by economists yet. According to Greenspan it is difficult to predict whether the excess money will persist and he believes using surpluses to pay down the national debt is the best choice for lawmakers.

"I think, number one, it presumes that politicians won't spend it before it's used for debt reduction. You have to leave the money in the Treasury in order to buy down debt and so far that's only happened by accident. I think, it actually speaks to the need for tax cuts because we'll never really got on a program of debt reduction as long as that money stays in Washington," Hodge said.

Hodge is optimistic that Congress will enact a tax cut this year.

"We've already seen movement toward repealing or at least fixing the marriage penalty. We're going to see other movement perhaps on death tax [inheritance] repeal. We're going to see other movement on various other tax cuts and the question really remains will President Clinton play politics or will he recognize that Americans need a tax cut," said Hodge.