------------ 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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