------------ EH.NET BOOK REVIEW --------------
Published by EH.NET (December 2007)
Alan Greenspan, _The Age of Turbulence: Adventures in a New World_.
New York: Penguin, 2007. 531 pp. $35 (cloth), ISBN: 978-1594201318.
Reviewed for EH.NET by Alexander J. Field, Department of Economics,
Santa Clara University.
Alan Greenspan's new book is really two: the first, of most interest
to a popular audience, describes his career in the private sector and
subsequently as a government economist who served in one capacity or
another as an advisor to six presidents. His up front observations of
political leaders (he got along best with Gerald Ford and Bill
Clinton) are of considerable interest, and his autobiography provides
an interesting and valuable overview of U.S. economic growth from a
macro perspective since the Second World War. The second part of the
book is a broader discussion of recent world economic history and
prospects, with detailed discussions of China, Russia, India, and
Latin America (but virtually nothing on Africa), along with chapters
offering his perspective on major policy questions facing the United
States.
Political memoirs are not usually good grist for the economic
historian's mill, but Greenspan is sui generis, and the book is well
worth reading. Economists will have the advantage over the general
reader of being able to follow without difficulty the discussion of
policy issues, such as those surrounding the causes and challenges
created by current account deficits, and identify areas of possible
weakness in the analysis. You are also sure to learn several arcane
economic details about which you were previously innocent, such as
the role of the Henry Hub in natural gas pricing, and you will get
fresh perspectives on many aspects of economic policy and recent
macroeconomic history.
Although central bankers have no direct responsibility for fiscal
policy, the greatest blight on Greenspan's record is surely his
political support for tax cuts in the early 1980s and early 2000s,
and the large peacetime deficits they created. Under President
Reagan, when David Stockman and Don Regan expressed doubts about the
wisdom of pushing forward with tax reductions in advance of
commitments for spending restraint, Greenspan joined in the advice of
the economics advisory board chaired by George Schultz, telling the
President that "under no circumstances should you delay the tax cut"
(92). As an influential chairman of the Fed under our current
President he bears even more responsibility for greenlighting the
2001 cuts. Counseled by former Treasury Secretary Robert Rubin and
Senator Kent Conrad that his testimony would be perceived as
providing cover for expanded deficits, Greenspan went ahead anyway,
claiming he couldn't control how his testimony would be perceived
(220). He now admits that Rubin and Conrad were right.
Philosophically, Greenspan can claim consistency in being against
peacetime budget blowouts but it is clear in retrospect that he
facilitated massive deficit spending under Reagan and George W. Bush,
while preaching fiscal conservatism to Clinton. While Greenspan
rightly bemoans the lack of spending restraint, he does not fully
accept responsibility for his role in facilitating these outcomes.
Greenspan also, in my view, is far too sanguine about the current
account deficit and our increased international indebtedness. Chapter
18, which treats these matters, will be impenetrable to the general
reader and tough going even for some economists. His command of the
issues and history here is weaker than in chapters that focus on
purely domestic analysis.
Throughout most of the twentieth century (and in contrast with the
nineteenth), the United States ran current account surpluses. This
has been the standard pattern for an advanced developed country. As
did Britain in the nineteenth century, the U.S. exported capital,
using part of its domestic saving to fuel development outside of the
country and in the process building up a large stock of net overseas
international assets. This apple cart was overturned in the first
half of the 1980s by President Reagan's unprecedented peacetime
federal government deficits, the result of a collision between supply
side tax cuts that implausibly promised to pay for themselves, the
commitment to a rise in defense spending including Star Wars and a
six hundred ship Navy, and an unwillingness to reduce entitlement
spending or corporate welfare. These deficits pushed up real U.S.
interest rates (nominal rates were falling but inflation was falling
faster in part as the result of Chairman Volcker's monetary
stringency). Within the context of a flexible exchange rate regime,
the high real interest rates led to an inflow of funds from outside
of the country, generating a capital account surplus and an
appreciated dollar that in turn produced the deterioration of the
current account, reflecting the real transfer of resources from the
rest of the world to the U.S.
Greenspan, however, inexplicably begins his current account narrative
in 1991. It is true that the deficit had again become quite low in
that year, but this was principally due to the U.S. recession.
Starting the narrative in that year conveniently or inadvertently
ignores the role of fiscal policies in the 1980s, which by the middle
of the decade had already resulted in the effective liquidation (on
net) of the U.S. overseas economic empire. It is true of course that
the current account deficit persisted and widened, even in 1998-2001,
when the federal budget was in surplus, so there were and are other
forces involved, particularly capital flight associated with the
transfer of Hong Kong to Communist China, and political instability
elsewhere in the world.
Thus, it is clearly not just international crowding out that led to
the rise in U.S. international indebtedness over the past quarter
century. That mechanism -- dominant in the 1980s -- "pulled" funds
into the U.S. by generating attractive risk adjusted returns. But it
is also clearly the case that a rise in global saving has,
particularly in the last decade, "pushed" funds into U.S. asset
markets. The consequence is that current account deficits were
associated with high real interest rates in the 1980s but relatively
low ones in the 2000s. Greenspan is at his strongest in articulating
the underpinnings of the global saving glut hypothesis that both he
and Ben Bernanke have championed.
The argument is that globalization has brought rapid economic growth
to parts of the developing world, and that these countries lack
either well developed social safety nets or an entrenched consumer
culture, so that their saving flows have risen. In the presence of
rising incomes and strong motives for precautionary saving, and in
the absence of an established consumer culture or attractive and
accessible domestic financial assets or direct investment
opportunities, these flows have ultimately been absorbed by sales of
U.S. assets. There is of course considerable merit to this analysis,
but it is still remarkable that although Greenspan discusses at
length the role of household dissaving in the U.S., he avoids
discussing the role of government dissaving, which reemerged with
renewed force under our current president.
In a humorous vein Greenspan recalls that he can think of many times
he was criticized for raising interest rates but never once for
lowering them: "During my eighteen-and-a -half year tenure I cannot
remember many calls from presidents or Capitol Hill to raise interest
rates. In fact I believe there was none" (478). But in terms of
post-mortems on his conduct of monetary policy, he seems to have this
exactly backwards. The persistent criticism one hears today is that
his policy was too easy, first in the 1990s, and then again in the
2000s. Greenspan is faulted, at least in retrospect, for enabling,
with cheap credit, first a stock market and subsequently a real
estate boom. The force of the indictment here is less
straightforward, however. It is, as Greenspan suggests, and as
Bernanke has reaffirmed, not obvious that the central bank should
view control of asset prices as part of its mandate. It is in any
event not an easy matter to deflate an asset price bubble without
significantly damaging the real economy. Others, however, believe
these issues can and should be addressed by central banks, if not
through interest rate policy then through bank regulation and
supervision.
Greenspan was conflicted over the issue. He spends considerable time
discussing his "irrational exuberance" remarks, and how he
subsequently got religion about the delayed role of IT investment in
advancing productivity growth and possibly justifying high stock
market valuations. In contrast, there is surprisingly little
discussion of the recent real estate boom and crash, and little
attempt to justify his apparent lack of concern about declining
lending standards, or the degree to which easy money may have fueled
the boom. It remains to be seen how well the U.S. economy will
weather the collapse of housing investment, the drop in housing
prices, the rise in foreclosure rates, and the threat to financial
institutions and possible systemic risk this has generated.
Another tension in his analysis involves the treatment of the
challenges posed to Social Security by the impending retirement of
baby boomers. Much of the decline in the ratio of those paying into
and those drawing from the system (it currently stands at about 3:2)
has already taken place, but a further decline to rough parity is
still ahead. So the challenge is how to support a growing nonworking
population without levying payroll taxes so high that the living
standards of those remaining in the labor force fall. The solution,
all agree, is to raise national saving (private sector saving plus
the government surplus) and thus facilitate private sector capital
deepening that will leave the working population with a higher per
capita stock of capital (and higher output per hour) in the future,
so that even taxed heavily to support baby boom retirees, their
incomes can still rise. The point of the Greenspan commission reforms
(1983) was to achieve this, principally by raising payroll taxes.
But the boost to national saving that might otherwise have ensued was
undone by the Reagan and subsequent Bush tax cuts, so the net effect,
since these cuts were skewed toward the wealthy, has been simply to
shift the overall tax burden toward lower paid workers. If the
government bonds in the Social Security trust fund are backed by the
full faith and credit of the United States (and if they are not, all
holders of U.S. paper ought to be concerned, because we will be
undoing what Hamilton worked so hard to achieve in the early national
period), then we will in the future still need to cut into the living
standards of those working by raising enough general tax revenues to
service the debt.
Although, over the past quarter century, and ignoring the last few
years of the twentieth century, there has been little long term boost
to national saving from fiscal policy, there is also little evidence
that budget deficits adversely affected the accumulation of domestic
physical capital. That is because we tapped into massive flows of
foreign saving, which enabled us to finance both government deficits
and increases in gross private domestic investment.
Our systemic needs in this area, particularly its nonresidential
component, have, nevertheless, grown remarkably slowly. Investment in
such capital increased hardly at all between 2000 and 2005. This was
not due to credit stringency, since both long and short term interest
rates were at historically low levels. Given the choice, private
sector decision makers flowed credit instead to housing, investment
in which increased 70 percent (nominal) over the same period.
What accounts for the low increase in the manifested demand for
nonresidential fixed capital? Greenspan suggests that part of the
explanation lies in capital saving technical change: "Thin fiber
optic cable, for example, has replaced huge tonnages of copper wire.
New architectural, engineering and materials technologies have
enabled the construction of buildings enclosing the same space with
far less physical material than was required fifty or one hundred
years ago " (492). A related manifestation of these trends, he notes,
is that the physical weight (in kilograms) of U.S. GDP is currently
about what it was after the Second World War, although its value is
much higher.
These trends mean that even if in the future we are successful in
raising national saving, the typical pattern of capital deepening --
rises in the ratio of the nonresidential fixed capital stock to labor
input-- may not be as operative as in the past. Rising saving flows
may, as they have recently, augment living standards by raising the
housing stock, which increases the flow of real housing services. If
that option is no longer attractive, they will by default finance
accumulation (or reduced decumulation) of foreign assets or, if we
take a somewhat broader definition of saving, investment in
government infrastructure or R&D which is complementary to private
sector capital.
Given the record since 2000, the challenge for the U.S. standard of
living looking ahead is evidently not that we have accumulated too
little private sector physical capital. It might be that we have
invested inadequately in government infrastructure and R&D, although
the current political dynamics of earmarks and pork barrel spending
do not suggest such funds are being well allocated from the
standpoint of economic growth. It's possible that we have left money
on the table by not adequately resourcing education (human capital
formation). What is certain, however, is that we have liquidated (on
net) our overseas economic empire and instead of receiving net
payments from the rest of the world we can now count on making them.
It is true that absent the government deficits, we would most likely
still have had capital account surpluses, particularly in the last
fifteen years, but they would not have been as large, and U.S.
indebtedness to the rest of the world would not have grown as rapidly.
If our net international investment income has become only modestly
negative it is only because the gross U.S. holdings of overseas
assets are heavily skewed toward direct rather than portfolio
investment (and we earn a relatively high rate of return on the
former), whereas foreign holdings of U.S. assets are heavily weighted
toward portfolio investments, particularly safe but low yielding
Treasuries. Still, with U.S. net international indebtedness in the
range of $2.5 trillion, and with current account deficits of 6
percent of GDP a year adding to this, the mathematics are inexorable:
the burden of servicing this debt will adversely affect the U.S.
standard of living in the future just as much as would have a slower
rate of accumulation of domestic fixed capital, although through a
different mechanism.
Greenspan's neglect of the contribution of government dissaving to
this outcome is a weakness of this book, just as his role in
facilitating such dissaving is a weakness in his policy making
record. His calls to solve the entitlement problem by increasing
national saving sound somewhat hollow in light of his record over the
quarter century (with the exception of the Clinton years) in
contributing as a political actor to its reduction.
One of the most interesting aspects of the book from the standpoint
of an economic historian or a macroeconomist is his treatment of
globalization as a positive supply shock that facilitated the world
wide disinflation that began in the 1980s. Perhaps surprisingly, he
does not credit central bank monetary policy for this, or at least
does not credit it very much (391). He suggests that growth with low
inflation has been too easy to achieve. This perhaps takes too much
from the accomplishments of his predecessor, Paul Volcker, who helped
pave the way for the single digit inflation of the last quarter
century by slowing the growth of U.S. monetary aggregates, in the
process producing the most serious recession in the country since the
Great Depression (Greenspan didn't take over until 1987). Greenspan
notes that aside from Venezuela, Iran, Argentina, and Zimbabwe, the
world today is remarkably free of inflation. But how much of this is
due to central bank learning and how much to the positive supply
shock of globalization, which has brought hundreds of millions of
people into contact with the world economy, remains to be sorted out.
Greenspan is not a card carrying economic historian, but he has a
serious interest in it, and this is evident throughout the book. The
acknowledgments indicate that along with Bill Clinton, Steven Breyer,
and Bob Rubin, Greenspan interviewed Paul David, who is credited,
through his work on the diffusion of electric power, with helping
Greenspan buy in to the idea that IT investments might impact
productivity growth with a substantial delay. Thus, if the speed
limit for the U.S. economy had as a consequence gone up, one could
have faster monetary growth without necessarily risking inflation.
Still, in terms of supply shocks that might have facilitated low
inflation growth, there is less discussion of the impact of IT on
total factor productivity growth than there was in Greenspan's
speeches in the late 1990s, and more emphasis on the role of
globalization as a world wide positive supply shock. He sees this
ultimately as a one time transition, and in his forecast for the
future, Greenspan anticipates some upswing in inflationary pressures,
which will raise nominal interest rates from their current levels.
Much of his policy discussion is sensible and relatively
nonideological. For example, he appears to endorse, with some
reluctance, a $3 a gallon tax on gasoline (461) and he supported the
requirement that stock options be expensed, in spite of the
entreaties of people like Intel's Craig Barrett. He repeatedly
emphasizes his concern for worsening economic inequality and the
threat this may pose to the market systems that generate economic
growth. He favors some form of private accounts for Social Security,
but spends little time trying to justify the position or support the
President's failed initiative in this area. He correctly notes that
the problems of Social Security are relatively small and manageable
in comparison with those associated with Medicare and Medicaid. And,
though a libertarian and a onetime acolyte of Ayn Rand, he
acknowledges that there can be a positive role for some government
regulation and infrastructure, describing, for example, his
realization that the Fedwire system has advantages over what a
private sector payment system could provide (374).
Greenspan has clearly been a creature of politics as well as
economics. That said, what emerges in this book is a picture of the
author as a man of great intellectual curiosity about how the economy
works, a curiosity he has sustained for over half a century.
Alex Field is the Michel and Mary Orradre Professor of Economics at
Santa Clara University and Executive Director, Economic History
Association, [log in to unmask] His most recent publications are "Beyond
Foraging: Behavioral Science and the Future of Institutional
Economics" _Journal of Institutional Economics_ 3 (December 2007):
265-91 and "The Impact of the Second World War on U.S. Productivity
Growth." _Economic History Review_ 61 (February 2008).
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Published by EH.Net (December 2007). All EH.Net reviews are archived
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