In testimony before the House Budget Committee on February 25, Fed chairman Alan Greenspan fretted over the enormous budget deficits that are now projected for the next decade and beyond – the very same deficits that have largely been created by the Bush administration’s tax cuts over the past few years. But his proposed solutions to this problem are deep cuts in federal spending and in future outlays for Social Security and Medicare – while making the Bush tax cuts permanent.

Greenspan’s recommendations not only reflect some very questionable economic analysis. They also ignore the policy choices that the country has made on Social Security for the past two decades– policies that he himself largely formulated.

Let’s refresh our memories. In 1982, Greenspan co-chaired (along with the late Senator Daniel Patrick Moynihan of New York) a bipartisan commission to improve the future solvency of Social Security. The commission called for stiff increases in the nation’s payroll tax, along with increases in the retirement age and some reductions in the rate of benefits growth over time. The commission’s recommendations were largely implemented, passed by Congress and signed by President Reagan into law. They remain in effect today.

The payroll tax increases imposed a sizable burden on lower-to-middle income workers. But their purpose was to fund a surplus in the Social Security Trust Fund that would be used to help pay for the enormous costs that the retirement system will incur when "baby boomers", those born between 1946 and 1964, begin retiring in a few years from now.

Now fast forward to 2001. When the Bush Administration proposed its huge income tax cuts, they were supported by Alan Greenspan – largely, he said, because he believed that fiscal surpluses had grown too large. Thus the Social Security surplus – financed by payroll tax increases on the lower and middle classes – has been used to fund income tax cuts that overwhelmingly benefit high-income people. Greenspan also spoke favorably of the tax cuts on capital gains and dividends that were proposed and implemented by the Bush administration in 2003, and that similarly are targeted to higher-income groups.

Greenspan is correct that the budget deficits that have resulted threaten the nation’s financial health and stability. He is also correct that further reforms to Social Security and Medicare will likely be in order.

But he is simply wrong to suggest that the Bush tax cuts should be made permanent, while all adjustments should occur on the spending side of the federal ledger. Greenspan argues that tax cuts improve the economy’s productivity, and that spending is a drag on output. But the truth is more complicated. Carefully targeted spending on health care, education, scientific R&D, job training, and infrastructure can improve the nation’s output over time; spending on health insurance, preschool programs and child care for the disadvantaged are especially needed to improve future worker productivity, while also reducing the enormous inequities that our economy now generates. Indeed, slashing all nondefense discretionary spending to pay for tax cuts for the rich does not ensure a more productive economy, but guarantees that the one we have will be much less fair.

And the fiscal holes that would be generated by making the Bush tax cuts permanent are simply enormous. In fact, economists at the Urban-Brookings Tax Policy Center have calculated that the budget gaps generated by these tax cuts are as large as the ones currently projected for Social Security and Medicare over the next 75 years– the very gaps that make Alan Greenspan so nervous. It is hard to imagine that the spending cuts needed to fill these gaps would ever be implemented, even if we considered them beneficial.

Thus, we need to restore fiscal sanity to the federal government before we take on the issue of Social Security and Medicare reforms. In 2000, President Bush pledged to preserve the Social Security surplus (by using it to pay down the national debt), but quickly violated that pledge.

And Alan Greenspan needs to be reminded of his own role in raising payroll taxes, and of the burdens they impose on most working Americans, when he recommends a continued squandering of these revenues on tax benefits for the wealthy.

Harry J. Holzer is professor in the Georgetown Public Policy Institute at Georgetown University, and a senior affiliate of the Northwestern University-University of Chicago Joint Center for Poverty Research, a national fellow of the Program on Inequality and Social Policy at Harvard University, and a research affiliate of the Institute for Research on Poverty at the University of Wisconsin at Madison. He served as chief economist in the Department of Labor prior to joining Georgetown University in 2000.

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