Greenspan's Deficits

After being treated like royalty for presiding over the longest economic boom in the nation's history, Alan Greenspan, 79, might well have expected his final year as Chairman of the Federal Reserve to be one triumphant victory lap. Instead, the man known as Maestro may not even get a standing ovation. The economy is showing signs of slowing growth and oil-fueled inflation, a potentially dire duality. The Dow Jones industrial average, a daily vote on prospects, is filled with undecideds. The volatile Dow plunged early last week and then rallied for its biggest one-day gain in two years, only to retreat again at week's end. Far more certain are the critics who have begun maligning Greenspan's once unimpeachable record of low inflation, low unemployment and strong growth. In the view of that small but increasingly vocal group, the U.S.'s high consumer debt, low personal-savings rates, declining dollar and potential real estate bubble can all be laid at the feet of the Fed Chairman. And those ballooning budget deficits? They are partly the product of George W. Bush's 2001 tax cuts, which Greenspan all but endorsed.

It doesn't help that Greenspan is now caught in the partisan warfare over Social Security privatization and the budget deficit. His credibility is being challenged by the likes of Senate minority leader Harry Reid, who in March called him "one of the biggest political hacks we have here in Washington." Just last week, during a Senate Budget Committee hearing, Greenspan essentially apologized for providing what Senator Paul Sarbanes called "a green light" for the 2001 tax cuts. "If that is the way it was interpreted, I missed it," Greenspan said of his support. "I did not intend it that way."

Even for Greenspan, whose sense of the pulse of the economy is legendary, the current financial environment has to be a source of concern, if not confusion. Although a key index of leading economic indicators fell in March, unemployment claims also dropped, by the biggest number in more than three years. The core index of consumer prices suffered its largest jump in nearly three years, yet the wages of most workers are not keeping pace.

The conflicting signals all come at a time when the U.S. is depending more than ever on foreign money to sustain growth. For Greenspan and his colleagues at the Fed, which has been gradually raising interest rates over the past year, the quandary is whether to quicken the pace or take a break. "You don't know exactly when to stop," says economist Mark Zandi of Economy.com "If history is any guide, they can go too far."