Greenspan on Bush tax cuts: let them expire

Former Fed Chief Alan Greenspan said yesterday that Congress and the president should let the Bush tax cuts expire at the end of the year, surprising many who see Greenspan as a champion of free markets and limited government.

Noting that this is the first time in his memory that he has favored raising taxes (though he did favor tax hikes in the early 1980s to save social security), his seemingly reluctant admission stems from his fear that the country does not have much time to implement a credible deficit reduction plan and send a signal to the financial markets and global purchasers of Treasurys that the U.S. is serious about tackling its fiscal imbalances (see Greenspan warns on deficit spending, calls for immediate action).

A broad tax increase at this juncture in the business cycles would be extremely risky and could easily tip the economy back into a recession since a reduction in disposable income may be remedied by reduced spending.

One has to wonder if Greenspan, whose tenure at Fed has been tarnished by the implosion in housing, has come to the conclusion that deep spending cuts, including reductions in popular entitlement programs, will not be forthcoming no matter who controls Congress in 2011.

Despite inefficiencies in the public sector, Washington has done little to rein in spending over the past 50 years.  And when it has occurred, brief bursts of fiscal sanity were followed by a renewed spate in outlays. 

Hence, as he put it, the choice to raise or not raise taxes is not a choice "between good and bad; it’s between terrible and worse."