Since Alan Greenspan became chairman of the Federal Reserve Board, the value of the dollar has declined by more than one-third. A dollar in 1985 is worth only 64 cents today. That is a record of colossal failure by the Fed to maintain a constant value of our currency.

Curiously, despite having presided over the failure to maintain a stable unit of account, Greenspan remains a revered figure in Washington. His advice and counsel are sought after by politicians on both sides of the aisle, not only on monetary policy, where the Fed has failed to maintain price stability, but also on tax and fiscal policy for which he has no legal or legislative responsibility.

That’s why Greenspan could be so indelicate in telling Congress that either it must raise taxes or reduce spending because future deficits would threaten to slow the economy, which the Fed itself is going to make a self-fulfilling prophecy if it’s not careful raising interest rates. The deficit ended up $100 billion smaller than the Congressional Budget Office projected it would be at the beginning of the year. That’s five times more savings than the congressional Joint Committee on Taxation says it would “cost” to maintain dividends and capital gains tax rates at their current levels for the next five years, even using JCT’s crackpot static revenue estimating model. The fact is, the cost of hiking these tax rates would be far greater than leaving them at current levels.

Greenspan said he’d like to see the Bush tax cuts extended but only if they are paid for. The fact is, they’ve already been paid for by higher investment, increased economic growth and higher revenues. The Treasury Department just reported that total revenues were up $275 billion last year, a 14.6 percent increase over the previous year. Of that revenue increase, $207 billion was accounted for by higher income taxes, 21 percent more than was collected in 2004.

If Congress does nothing and allows the tax rates on dividends, capital gains and investment in plant and equipment to revert to their pre-2003 levels, that’s a tax increase. Only in the Alice-in-Wonderland world of Washington can maintaining tax rates at current levels be considered a tax cut. The most costly thing Congress could do is raise tax rates on dividends, capital gains and capital investment today because the deficit might explode tomorrow. Congress should not allow the Fed chairman’s economic night terrors about future deficits to guide the nation’s current tax policy.

The federal budget deficit is projected to soar during the next two decades, not because federal revenues are projected to decline but rather because federal spending is projected to explode to more than a third of gross domestic product. Even if all the Bush tax cuts are kept on the books and if additionally the alternative minimum tax is permanently indexed for inflation, federal revenues are projected by CBO to return to and remain right at their historic level of about 18.5 percent of GDP through midcentury. It’s spending that will bring on a crisis of big government, and it is the three big entitlements – Medicare, Medicaid and Social Security – that are driving spending through the roof.

Why didn’t Greenspan admonish Congress to eliminate the unfunded Social Security liability by allowing workers to place their payroll tax contributions into personal retirement accounts, thereby transforming the program into a real worker-investment plan? The proper fix for Social Security is not to raise taxes but to incur some additional short-term debt to finance personal accounts to relieve unbearable longterm debt. Why didn’t he demand that Congress reconsider and repeal or delay the preposterous Medicare Prescription Drugs Benefit that is slated to go into effect next year, which alone will add a bigger unfunded liability to the federal government’s balance sheet than the unfunded Social Security liability that already exists? Why didn’t he suggest block-granting Medicaid to the states to get it under control?

The conduct of monetary policy by central bankers today is reminiscent of the practice of medicine by 19th-century frontier doctors: 90 percent art, nostrums and bedside manner, 10 percent science-based treatment seldom affecting a cure and frequently making matters worse yet usually comforting to the patient. It’s time to bring the Fed into the 21st century and to give up the nostrum of interest-rate targeting. It’s time for the Fed to let markets set interest rates while the central bank calibrates the amount of liquidity in the economy by paying attention to price-sensitive commodities, not imposing an artificial speed limit on economic growth.

Mr. Kemp is founder and chairman of Kemp Partners and honorary co-chairman of the Free Enterprise Fund.