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Thursday, October 31, 2013

Transcript: Alan Greenspan and why it was not my fault, plus Martin Wolf


Heaven forbid that Robert Shiller, Nouriel Roubini, Steve Keen, Dean Baker and others should be thought of as worthy of note. To be worthy, of course, you had to adhere to the economics that was wrong. Heaven forbid we should ask those who got it right what they saw. A detective story? How will Alan Greenspan resurrect his career.
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John Maynard Keynes knew uncertainty. Maybe he is not of note either. But by rational long-term self-interest, Greenspan means perfect foresight, or at least an image of the future that corresponds to his view.


Some have said Alan Greenspan is a bad man, and that may be true. But we blame him too much. Yes, his understanding of the economy is based primarily on the fantasy world of Ayn Rand. Today they are primarily concerned with why it was not his fault. But he was chosen for who he was, feted for his sponsorship of bankers can do no wrong, and it is entirely understandable that he clings to his views. Without them, he has no personal capital. But he was chosen.

Greenspan began as a political schmoozer. He schmoozed his way to the top, with his Ayn Rand-ism and telling people what they wanted to hear. Ford's chief economist. Likely author of the Whip Inflation Now button. Reagan saw somebody who would not regulate. Instant replacement for Paul Volcker. Once at the top he operated with little understanding of how things worked and a big understanding of lots of liquidity making markets happy. The Greenspan put.

He communicated, if you can call it that, in obfuscational double-speak and kept his finger on the interest rate button. Higher for inflation -- or what he feared would be inflation -- lower for sluggish growth. Didn't matter where the inflation came from, didn't matter where the sluggishness came from. The dot.com boom busted open the New Economy, so back down went the interest rates. It is worth noting that the economy did best during his tenure when he did the least. Also worth noting that although he makes much of increases in productivity and productivity in general, citing the run-up from the mid-1990's, he understands it as poorly as others. The low unemployment of that period produced the higher productivity, as we've shown, not the other way around.

But our listeners likely can fill in their own commentary.

Botched plays? Many of them. Raising rates into the spike in oil prices triggered the bust of 2000, the bursting of the dot.com bubble that rose on margin speculators.


Oops, not his fault.

His staff's.

Greenspan's long-term view at the time of the Bush tax cuts was that the US was in danger of running out of Treasury debt, and tax reductions rather than spending increases ought to be the way to avoid the danger of zero debt growth. (see excerpt, January 2001 Senate testimony online)

Indeed, in almost any credible baseline scenario, short of a major and prolonged economic contraction, the full benefits of debt reduction are now achieved before the end of this decade--a prospect that did not seem likely only a year or even six months ago.

The most recent data significantly raise the probability that sufficient resources will be available to undertake both debt reduction and surplus-lowering policy initiatives. Accordingly, the tradeoff faced earlier appears no longer an issue. The emerging key fiscal policy need is to address the implications of maintaining surpluses beyond the point at which publicly held debt is effectively eliminated.

The time has come, in my judgement, to consider a budgetary strategy that is consistent with a preemptive smoothing of the glide path to zero federal debt or, more realistically, to the level of federal debt that is an effective irreducible minimum. Certainly, we should make sure that social security surpluses are large enough to meet our long-term needs and seriously consider explicit mechanisms that will help ensure that outcome. Special care must be taken not to conclude that wraps on fiscal discipline are no longer necessary. At the same time, we must avoid a situation in which we come upon the level of irreducible debt so abruptly that the only alternative to the accumulation of private assets would be a sharp reduction in taxes and/or an increase in expenditures, because these actions might occur at a time when sizable economic stimulus would be inappropriate. In other words, budget policy should strive to limit potential disruptions by making the on-budget surplus economically inconsequential when the debt is effectively paid off.

In general, as I have testified previously, if long-term fiscal stability is the criterion, it is far better, in my judgment, that the surpluses be lowered by tax reductions than by spending increases. The flurry of increases in outlays that occurred near the conclusion of last fall's budget deliberations is troubling because it makes the previous year's lack of discipline less likely to have been an aberration.

So. Greenspan is an easy target. The lesson to be learned is not that there are bad economists who rise to the pinnacle of power, but that they are the front men for a financial elite that still calls the tune and that tune is not a good one for the real economy. Ben Bernanke is another person chosen for his preference to protect banks, as evidenced in his academic work. Didn't work. Not going to work. Can't work.

Martin Wolf is not so easy a target. Wolf has been a severe critic of austerity, has slammed the Tea Party and other government minimalists, and we've quoted him favorably more than once.


Five to seven years to get through a deleveraging. Well, maybe. We'll artue more another time. At a minimum, this is more serious than the previous experiences.

"The plight of the middle class and rising inequality" and "long-term growth stuck at a low level" are mentioned consecutively, but not connected, as they should be.

Wolf wants us to accept the return of the privileged class as a natural, if not particularly welcome, byproduct of the flow of things.

The "reduction in household debt" is a statistic skewed by aggregation. Never mind that the equity associated with that debt was completely wiped out. That is, debt may be lower, but middle class household wealth is in the subbasement.

"The housing market has corrected." Meaning stabilized at a much lower level. Though once again a housing recovery is known more by rumor than fact. The Fed's enormous efforts under Bernanke to revive housing, including its purchase of mortgage backed securities in the billions every month, has met with some modest success. Demand Side sees further down to go.

"The energy boom as an economic plus" is a long-term disaster to the environment. We are stealing from the future and calling it growth.

"Innovation." Yes. The US has innovation. It's too bad the economic incentives are not aligned to make that innovation meet the real and emergent needs. They are enormous.

"Survived a fiscal tightening?" Some have prospered. Many have not survived. The average is still breathing the fresh air, but that average is four big guys standing on the rest of us. Infrastructure and education are crumbling. That is the present. The future cannot be built on that.

The sequester is met with remarkable resilience. Big new growth on the horizon. Not real growth without much more radical changes in policies.

We'll see.

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