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For Greenspan, permission to speak freely

Approaching the final months of his 18-year tenure as Fed chief, Alan Greenspan has waded into politics more deeply than ever before, offering his considerable influence to bolster President Bush's ambitious second-term agenda.
Alan Greenspan testifies before the House Budget Committee - Washington
Fed chief Alan Greenspan supported private accounts but urged a go-slow approach in a House appearance last week.Chuck Kennedy / Abaca
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Approaching the final months of his 18-year tenure as Fed chief, Alan Greenspan has waded into politics more deeply than ever before, offering his considerable influence to bolster President Bush's ambitious second-term agenda.

On consecutive days last week, Greenspan appeared before a congressional panel, where he supported the central element of President Bush’s Social Security plan, and a presidential commission, where he voiced support for a consumption-based tax system that the White House favors.

Greenspan is likely to create headlines again Tuesday when he speaks to the Senate Special Committee on Aging on the "economics of retirement."

Greenspan’s recent commentary has covered areas far removed from topics of monetary policy, economic growth and inflation that are his purview as chief of the central bank. Some economists fear his advocacy could compromise the independence of Federal Reserve, a concern reinforced when Senate minority leader Harry Reid, speaking on CNN last week, called Greenspan “one of the biggest political hacks we have in Washington.”

Harsh language, but few would dispute that Greenspan is one of the most skillful political survivors operating on the Washington scene, having been appointed and reappointed by four presidents of both parties.

Many Democrats remain bitter over Greenspan’s support for President Bush’s 2001 tax cuts, which was considered an important factor in passage of the $1.35 trillion package.  Greenspan based his position largely on projections for large and growing budget surpluses, which proved illusory.

Two years later, Greenspan angered some Republicans when opposed a second major tax cut proposed by Bush, saying he did not think fiscal stimulus was needed. Congress acted anyway, passing a package worth $350 billion over 10 years, about half of what Bush had proposed.

But Greenspan’s comments on tax questions even two years ago were almost cryptic compared with the wide-ranging commentary on Social Security and taxes he has delivered over the past several weeks. Several factors are coming together to loosen the tongue of a Fed chairman who has been famously reticent and obfuscatory in his public comments over the years, say economists who have watched Greenspan closely.

With his term due to end Jan. 31, he probably feels freer to speak out, like any lame-duck politician who no longer has to worry about the next election, said Ethan Harris, a former Fed staffer and now chief U.S. economist for Lehman Bros.

“Part of that is because he is retiring, but also he has become an icon in financial markets. Congress has become deferential to him,” Harris said. A decade ago many more members of Congress were willing to challenge Greenspan on economic policy, he said.

“He has kind of changed the rules a bit — he feels free to comment on fiscal policy,” Harris said. “I think the next chairman will have a much harder time getting away with that.”

As a Republican with libertarian leanings, Greenspan certainly shares a political philosophy with many policy-makers in the current White House. But Greenspan, who turned 79 this week, also occupies a unique position in Washington due to his long service seeing the economy through recessions, crises and the longest expansion in postwar history.

“I think you have to recognize and evaluate that Greenspan has enormous stature as an economist and an individual,” said Lyle Gramley, an economic consultant who served as a Fed governor in the 1980s. “His opinions are requested on topics that Congress normally would not ask the Federal Reserve to talk about.”

He said current Fed officials do not seem worried that the central bank’s independence will be compromised.  “I think they’re cutting him a lot of slack given his position in Washington,” he said.

While Greenspan had a good relationship with President Clinton and his Treasury Secretary Robert Rubin, there is evidence to suggest he is more closely involved with the current Republican administration.

Kenneth Thomas, an economist and part-time lecturer at the Wharton School, has used the Freedom of Information Act to get access to Greenspan’s daybook, documenting the fact that the Fed chief’s White House meetings have more than tripled in frequency.

In the first three years of Bush’s presidency, Greenspan met 160 times with White House officials, compared with 48 times in the final four years of President Clinton’s term in office, according to Thomas’ analysis of the Fed chief’s daybook. And the frequency of the meetings appears to be rising. Greenspan held an average of nearly four meetings a week with White House officials in early 2004, the most recent data available. That was up from about three meetings a week in 2001 and two meetings a week in the Clinton years.

In March 2003, a particularly busy month on Greenspan’s calendar, the Fed chief logged meetings with Bush, Vice President Dick Cheney, national security adviser Condoleezza Rice and half-a-dozen sessions with Stephen Friedman, then Bush’s chief economic policy adviser.

That was the month the United States launched its invasion of Iraq, but Greenspan stayed busy the next two months, meeting frequently with Friedman as well as with Cheney, Rice and White House chief of staff Andrew Card.

In May of that year, Congress passed the $350 billion tax cut over the publicly stated objections of Greenspan.

Thomas, the Wharton economist, said Greenspan’s frequent and high-level White House meetings give at least the perception that the Fed’s independence is being compromised.

“Simply based on the quantity of the meetings and the level of people he was meeting with, something is going on here that is different than what we’ve seen historically during Clinton’s term,” said Thomas, who said he considers himself politically independent.

“I know he’s a smart guy and has an opinion on a lot of things. But somebody in his position is such a trusted voice. Why is he commenting on things unrelated to monetary policy? It does not sit right with some central banking economists such as myself.”

In his comments on a potential change in the tax system Greenspan acknowledged that it would be almost impossible politically to switch from the current income-based tax system to one based on consumption, as he would prefer.

It remains to be seen whether Greenspan’s views carry much weight in the ongoing Social Security debate.

In a recent poll from the Pew Research Center, 49 percent of those survey said they mostly trust Greenspan on Social Security and only 20 percent said they mostly distrust him.  By contrast only 42 percent said they mostly trust Bush, while 53 percent mostly distrust him.

A surprising 17 percent of those surveyed said they were not familiar with Greenspan. In any case, the poll found that support for the idea of private Social Security accounts is declining despite President Bush’s intensive campaign to promote them.