Greenspan Says “Deficit Reduction A Priority” — Hence, You Know its Not
Former Fed Chair Alan Greenspan discussed the Federal deficit in a WSJ OpEd yesterday. In it, he argued that the budding “urgency to rein in budget deficits” is occurring “none too soon.”
Like most of the former Fed Chair’s analyses, forecasts, and economic beliefs, this one is pure, unmitigated nonsense. A brief look at the Greenspan legacy, along with his track record of forecasts, leads to the obvious conclusion: Greenspan is an economist to blithely ignore, as his commentary contains almost nothing of value other than its status as a contrary indicator.
Before we get into the details of his deficit commentary, I must highlight this sentence: “The financial crisis, triggered by the unexpected default of Lehman Brothers in September 2008, created a collapse in global demand that engendered a high degree of deflationary slack in our economy.”
No, Alan, the financial crisis was not triggered by Lehman’s collapse. You are getting the causation exactly backwards: The crisis is what triggered LEH’s collapse. Further, the fall of Lehman was hardly “unexpected.” Whether you want to look at stock price before the collapse, spreads on its debt, David Einhorn’s forensic accounting (he was short LEH) or our own quantitative analysis (we were short LEH), there were plenty of warnings about Lehman’s collapse. It was only unexpected by those whose ideological beliefs blinded them to reality. (Remind you of anyone?)
Moving onto his discussion about the deficit, the hypocrisy leaps out in nearly every paragraph. Any Greenspan related discussion of current deficits must begin with his specific role in helping to create them.
Not, understand one thing: I pay my share of taxes, and they are not insubstantial. Thus, I am in favor of properly funded tax cuts – meaning, reductions in taxes that are paid for with a matching reduction in spending. But Not Greenie . . . When the Bush White House proposed a trillion dollars in unfunded tax cuts in 2001, and again in 2003, Greenspan publicly endorsed them. (Why a sitting FOMC chair got involved in the politics of tax legislation, as his support of privatizing Social Security, is best saved for another day).
Regardless, Greenspan’s lent the considerable prestige of the FOMC Chair to the debate, and arguably helped tip the scales in favors of these huge, unfunded, deficit creating tax cuts. His present argument now rails against the net results of his prior arguments. Perhaps some sense of guilt is driving him.
Regardless, history has proven him wrong about the costs of the tax cuts in 2001/03, History — namely, the post depression 1937/38 recession — shows how misplaced his current focus on deficit reduction is today.
More Greenspan foolishness:
“Despite the surge in federal debt to the public during the past 18 months—to $8.6 trillion from $5.5 trillion—inflation and long-term interest rates, the typical symptoms of fiscal excess, have remained remarkably subdued. This is regrettable, because it is fostering a sense of complacency that can have dire consequences.”
This is classic Greenspan, demonstrating a lack of knowledge, inconsistency, and disconnected belief system:
1) To say that “remarkably subdued” inflation and long-term interest rates is regrettable reflects 1) a lack of understanding of the current deflationary environment;
2) If inflation and higher interest rates are the “typical symptoms of fiscal excess,” then perhaps the message of the markets is that deficits during the immediate aftermath of a huge recession are not a problem? For a guy who supposedly placed incredible trust in the markets, he sure does cherry pick what he wants, and disregards the rest.
3) The surge was caused by the enormous shortfall in tax revenue due to the recession, and the massive costs of bailing out the banking sector. Treating these costs as if they are ordinary budget items is ridiculous.
I can go on and on, but its the weekend. Before I give it a rest, I must point out that Greenspan’s forecasting inability. After Greenspan announced his retirement in 2005, I discussed some of his greatest hits in Myths of the Greenspan Era:
July 20, 2004: Greenspan testified before Congress saying that rising energy prices “should prove short-lived.” Crude prices tripled form there. Summer 2004: Greenspan’s advice to would-be homeowners: Consider adjustable-rate mortgages. Surprising advice, considering that fixed-rate loans were near half-century lows. He then started raising rates, contributing to the huge foreclosure surge. May 2003: Greenspan made an amazingly bad call on natural gas when he warned of potential shortages; natural gas prices tumbled shortly thereafter. Summer 2003: Fed concern about deflation led Greenspan to suggest the Fed stood ready to make open-market purchases of Treasuries to ensure rates stayed low. He even convinced the Treasury market into believing that rates would stay low for a long, long time. Bond buyers discovered (to the detriment of their holdings) that this statement was false. October 1999: The Fed erroneously anticipates a Y2K-induced run on the banks, and it infuses liquidity. That surge in money supply effectively doubled the Nasdaq Composite from October 1999 to March 2000; I presume you recall how that ended. 1996: “How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions?” Markets proceeded to rally strongly for another four years.
Greenspan is arguably the most incompetent economist of his generation, yet still retains some credibility amongst the uninformed. OpEds such as this one serve as reminders of that . . .
>
Sources:
U.S. Debt and the Greece Analogy
ALAN GREENSPAN
WSJ, JUNE 18, 2010
http://online.wsj.com/article/SB10001424052748704198004575310962247772540.html
Myths of the Greenspan Era
Barry Ritholtz
The Street.com, 01/31/06 – 11:08 AM EST
http://www.thestreet.com/story/10265345/myths-of-the-greenspan-era.html
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June 19th, 2010 at 9:13 am
Amen.
June 19th, 2010 at 9:16 am
I think John Mauldin aptly describes the consequences of deficit reduction in the current global economic environment.
Be Careful What You Wish For
June 19th, 2010 at 9:29 am
I agree. Hard to believe the guy could be so blind. He still can’t admit his mistakes. I’m with you on every point, Barry.
June 19th, 2010 at 9:36 am
Greenspan makes as much sense as Kudlow.
June 19th, 2010 at 9:36 am
I think this is a brilliant commentary on this bamboozling ideologue. I vividly recall how blithely unconcerned he was about deficits when he came out and supported the George W tax cuts. He had the unmitigated audacity to say to Congress, when he was told that his statement would tip the scales in favor of the tax cut, that he couldn’t help it if his words were misinterpreted!!! (I think this is in Ron Suskind’s book about Treas Sec Paul O’Neill, “The Price of Loyalty”.) This from a man who had spent his whole career developing Greenspeak so he could hide his meanings in public statements! This guy is such a huge hypocrite that I don’t see how he can fail to go down in history as one of the worst Fed Chairs ever. If you would like to see a remarkable contrast to Easy Al read “Chairman of the Fed: William McChesney Martin Jr., and the Creation of the Modern American Financial System” by Robert P. Bremner.
June 19th, 2010 at 9:51 am
Seems to me he is appeasing the very same ideologues that flip flop on deficits for political reasons. The king dollar crowd is now wondering if a strong dollar (relative to other fiats) is hurting. Last year they were berating a weak dollar and praising the merits of a strong dollar. It is all about winning some seats in the upcoming election. Go team go!
June 19th, 2010 at 10:19 am
Right wing neo-con total idiot is about the nicest thing you can say about that old fool. The truth is probably worse. They want to slam the economy into a 1937-38 style dip in order to be able to blame Obama and the democrats, and gain back control.
June 19th, 2010 at 10:22 am
this is a beautiful paragraph, BR:
“No, Alan, the financial crisis was not triggered by Lehman’s collapse. You are getting the causation exactly backwards: The crisis is what triggered LEH’s collapse. Further, the fall of Lehman was hardly “unexpected.” Whether you want to look at stock price before the collapse, spreads on its debt, David Einhorn’s forensic accounting (he was short LEH) or our own quantitative analysis (we were short LEH), there were plenty of warnings about Lehman’s collapse. It was only unexpected by those whose ideological beliefs blinded them to reality. (Remind you of anyone?)”
June 19th, 2010 at 10:23 am
Do you think Alan Greenspan & Ben Stein are in some sort of idiocy contest?
June 19th, 2010 at 10:27 am
>> “The financial crisis, triggered by the unexpected default of Lehman Brothers…”
Un-believable. Greenspan can’t even articulate *that* causality correctly? C’mon… Yes, ACS is right: Greenspan must be competing for this year’s Ben Steinery Award.
June 19th, 2010 at 10:46 am
“…yet still retains some credibility amongst the uninformed.” And to think of all the Maria Bartiromo ‘exclusives’ CNBC has trumpted since his departure from the Fed…
June 19th, 2010 at 10:53 am
I doubt Greenspan is a fool or an idiot.
He is a self serving, social climbing, power mad, evil man.
He knew full well he was wrecking the economy as much as Clinton and Bush I- Bush II did, and as much as Angelo Mozillo et al, and the GS/JPM/wrecking crew did.
As long as they control wealth and power, they do not care who suffers as a result, or if they bring their own country to ruin.
Take Hitler, Goering, and Goebbels out of their uniforms, and dress them in Brooks Brothers suits.
Then imagine they decide to use stealth, the financial markets, and the political process instead of the Wehrmacht and Luftwaffe to destroy the world.
No War Crimes trials and you get to enjoy your loot in an (for you) intact society.
That sums it up for me.
June 19th, 2010 at 11:08 am
Thanks for the great piece today!
To quote Charlie Munger: “I have nothing to add”
June 19th, 2010 at 11:11 am
Keynes is dead!
June 19th, 2010 at 11:45 am
Is it better now with Bernanke? Maybe Obama should make Brooksley Born head of the Fed.
June 19th, 2010 at 12:31 pm
[...] “But the trouble is that he had been an Ayn Rander. You can take the boy out of the cult but you can’t take the cult out of the boy.” Or, how Alan Greenspan reaffirms his position as the most incompetent economist of his generation: The Big Picture [...]
June 19th, 2010 at 12:42 pm
I know no Greanspeak, but in plain English want to say : Please, Greenspan DIE now and leave us alone.
June 19th, 2010 at 1:15 pm
Great post, Barry.
I’m a retired community college political science instructor.
My biggest regret as a teacher? Drum roll, please…
Telling students in the early years that Greenie was a great fed chairman.
June 19th, 2010 at 1:20 pm
I worry more about Bernanke, who has the gall to discuss the deficit, knowing full well that it is not the primary concern of the country.
Republicans are united by a pathological fear of being deemed weak. The war mongers of the bunch like to invade countries and kill people to prove their mettle; the economists on the other hand gravitate to Ayn Rand, and get off on a perfect world populated only by super men. Currently the litmus test for whose got the biggest sack is, who can shout the loudest for fiscal austerity. Given this criterion, Paul Ryan apparently has balls the size of grapefruits (and a brain the size of a pea). Is it any wonder David Brooks has such a crush on him? Brooks has always loved boys who have brains and brawns that are inversely proportional. Just look at Brooks’ recent foray into economics if you want to see evidence of pathology invading a person’s perspective.
I am deadly serious when I say that I think many Republicans are literally out of their minds, driven entirely by feelings of inferiority. The sad truth is that the war mongers stir up chaos thousands of miles away. The economists, however, wreak havoc at home.
June 19th, 2010 at 1:40 pm
Yeah, Greenspan was/is bad. Bernanke is worse. But just as when Greenie held the reigns, we wish so much to still believe that economic wizardry can lead us to the promised land. For Americans, that means world hegemony so soccer moms can drive hulking SUV’s with one kid in them and Dad can watch the US Open on his gigantic TV after mowing with a John Deere tractor the few tufts of grass left over after construction of his five bedroom McMansion.
Greenspan (and now Bernanke) get to be so ridiculously stupid because they reinforce our delusions about things we don’t wish to understand or acknowledge. They are the modern equivalent of Medieval priests.
June 19th, 2010 at 1:43 pm
Greenspan was wrong about a lot of things.
But the question remains as to whether we are better off with more federal spending (and higher taxes), or less.
And those who argue that deficits don’t matter have an obligation (IMO) to identify the point at which the debt-to-GDP ratio is sufficiently high to “matter”.
~~~
BR: Problem is, we’ve had LOWER taxes and HIGHER spending — we want everything, but we seem unwilling to actually pay for it!
June 19th, 2010 at 1:47 pm
When you say you want a reduction in government spending, you are saying that what government does is bad, and reduces your future prosperity. But proper investment is a good, not a bad, and you should want it. Did the investment in the interstate highway system reduce or increase future prosperity? It is the infrastructure that enables your own prosperity, and that infrastructure has not been maintained, let alone modernized, since the Reagan tax cuts.
Even welfare helps keep the economy going.
Military spending might be a different story, now that we spend more than the rest of the world combined. The Soviet Unio n collapsed in 1991 and someone should tell Washington.
June 19th, 2010 at 2:03 pm
davecjohnson @ 1:47
“…what government does is bad, and reduces your future prosperity”
Most assuredly, Obama (and to some extent Bush as well) is reducing the future prosperity of the U.S.
June 19th, 2010 at 2:38 pm
I’m surprised no one else noticed this part of his commentary (capitalization mine)
““Despite the surge in federal debt TO the public during the past 18 months—to $8.6 trillion from $5.5 trillion—inflation and long-term interest rates, the typical symptoms of fiscal excess, have remained remarkably subdued. This is regrettable, because it is fostering a sense of complacency that can have dire consequences.”
Here, he’s admitting, as no one else who ever discusses these matters does, that our federal debt is TO the public. Its not FROM us. It doesnt come out of our taxes, its a payment TO US from, essentially, a savings account at the fed. Even if you want to argue (wrongly) that we need to collect taxes to pay it it is still being paid to OURSELVES!! Now there certainly are intergenerational transfers or more specificallly inter social class transfers (the majority of people that the federal “debt” is paid to are well to do bondtraders or retirement funds) but this old fart has totally destroyed the meme so many of his cronies like to peddle, that this debt will break us. How can it break us if the money is in fact going TO US ???!!
This is not insignificant and I’ll bet many of his acolytes hope no one takes this little comment and runs with it, because its the only factual thing he said in his whole op ed piece and its the one that will destroy the debt-a-phobes whole case.
June 19th, 2010 at 3:04 pm
Curmudgeon, no Deere here, where I live all the McMansions are mowed by the nice people who keep Western Union in business.
June 19th, 2010 at 3:44 pm
gbgasser @ 2:38
“It’s not FROM us. It doesn’t come out of our taxes, its a payment TO US…”
When we finally get a European-style, 20% VAT tax, you may see it differently.
June 19th, 2010 at 3:49 pm
The only thing to fear is truth it’s selflll I don’ Like the numbers no matter how they slice and dice them. In fact when comparing them o the m0del……kidd your ass good by
June 19th, 2010 at 4:18 pm
DL
It makes no difference. The money to pay the bonds (govt debt) does not COME from taxes. If taxation was zero we could still pay off the bonds. Thats the point.
June 19th, 2010 at 5:10 pm
Tell me how you really feel, Barry!
~~~
BR: One day, I will.
For now, you will just have to learn to read between the lines of these diplomatic missives!
June 19th, 2010 at 5:10 pm
God I love Greenspan.
How can a economy/society/country survive his kind. I truly love his book, AGE OF TURBULENCE (published in 2007 before the current financial crisis hit full bore). In his book he makes it very clear, that debts don’t matter. His point was that growing debt was necessary for economic progress and that so many other countries had higher debt to GDP ratios than the US. Not to worry.
A true contrary indicator if there ever was one.
In 2008, a small local bank President was extolling the virtues of Greenspan and wished that he was back running the ship aka FED. I thought maybe reading Greenspan’s book would help him see that many of Greenspan’s actions were a direct cause of the mess. I loaned him Greenspan’s book, two weeks later he gave the book back saying it was too hard for him to understand. So the guy continues to be a Greenspan supporter, even though he has no idea what Greenspan was all about. Why cloud beliefs with facts. It makes life so much simpler.
June 19th, 2010 at 5:48 pm
What will it take for this clown to simply go away? How much does someone have to get wrong before we stop paying attention to what he says?
June 19th, 2010 at 6:01 pm
Some great digs in your post, Barry, but weren’t we in a recession in 2001 following the bust of the internet bubble years? You seem to agree that fiscal stimulus is required for recessions but skewer the Chairman for his previous tax cut support in the 2001 recession again with the economy attempting a double-dip recession in 2003.
P.S. The great Federal surplus of 2000 was driven by capital gains receipts which had climbed from $25 billion per annum in the mid-nineties to a peak of $120 billion per annum in 2000. When the phantom riches of the internet boom evaporated, the hangover was recession which necessitated fiscal stimulus or tax cuts.
The Chairman does seem to miss the nature of our deflationary times as he focuses on deficits when there is no inflation in the near-term future.
~~~
BR:
1) I do not believe having the Fed/Treasury try to micromanage every single contraction/expansion is a good idea.
2) Greenspan’s ultra-low rates plus a massive tax cut seems like overkill.
3) The surplus was created thru spending cuts. PAYGO, and a tax increase. Capital gains didn’t hurt, but that is only part opf the story.
June 19th, 2010 at 6:45 pm
jjay said:
“I doubt Greenspan is a fool or an idiot.
He is a self serving, social climbing, power mad, evil man.”
….
The author of this book, “Greenspan’s Fraud” (who is an econ prof at SMU, Southern Methodist Uni for those who are not from Texas)
(http://www.amazon.com/Greenspans-Fraud-Decades-Policies-Undermined/dp/1403968594)
seems to agree.
June 19th, 2010 at 6:57 pm
Mr. Greenspan, your ice floe is waiting.
June 19th, 2010 at 8:27 pm
I guess Greenspan is worth a listen to…for those who worship Milton Friedman and Supply Side Economics. (Which to many seems a failure of Economic Failure)
Still it seems odd that he Pipes Up with his obscure Gibbering right Now… Just like Cheney did after Obama was elected to keep the “New Kid” in line in case he strayed from the Iraq/Afghanistan Strategy that Cheney and the folks who ran Bush MADE our American Foreign Policy.
I guess folks could look at all of this …the way their politics form them.
Still….it’s always a prudent think to keep an “open mind” and watch your back in these times …on both sides of the political equation….
June 19th, 2010 at 8:53 pm
Barry suffers from a major case of bias when it comes to any Right-Leaning economists. [BR: Only the ones suffering from hallucinations]
Look, everyone knows Greenspan/Rubin/etc are all a bunch of fools. There is no reason to continue listening to them.
But why isn’t the deficit a problem? Barry always blows it off but it is clearly a long term problem. Like the other day he stated that our politicians will just make adjustments when the time comes. Yeah, like what adjustments? Higher taxes? Reduced benefits? THAT’S WHY IT’S A PROBLEM!!!
I’m as sick of the Deficit Hawkes acting like the world is ending as I am sick of people just blowing off the deficit as an issue. Can someone just admit the Fiscal Deficits are Financially Irresponsible and then start addressing how we will fix them before I am paying 50% federal taxes and retiring at 85? Thanks.
~~~
BR: I have a problem with ALL ideologues. The idiots on the right AND the left.
But when it comes to economics, the right wing has dominated most economic thought. But their theories have proven to be shite, and they are still spewing the same vapid supply side, & EMH nonsense.
As i have repeatedly argue, deficits do matter — but the time to worry about deficits is during expansions, not contractions.
June 20th, 2010 at 1:45 am
BR you forgot The Maestro’s call in 2000 that our big future problem was that we would run out of Treasury debt because the projected surpluses would cut the debt outstanding to zero.
Then how about all of those pronouncements in his Congressional hearings that there was good news on inflation because wages weren’t going up. Even the Democrats let this stupidity stand that it was good for the economy if workers weren’t getting their share of the pie as corporate profits were soaring.
And remember the ‘brilliant’ raising of the Fed Funds rate by 1/4 point every six weeks? How did this formula ever get put into place without serious monetary study? So when rates actually needed to get raised more the Fed couldn’t do it because of their dumb theory.
I don’t think we’ve ever had a dumber Chairman not anyone else that I can think of. And the guy is still being quoted like he knows something.
June 20th, 2010 at 1:48 am
And Mish Shedlock, in his enthusiasm to curb deficits for the hell of it, sided with Greenspan!
http://globaleconomicanalysis.blogspot.com/2010/06/krugman-vs-greenspan-on-that-30s.htm
Ideology makes for very bad economics.
June 20th, 2010 at 5:04 am
Mish seems to have lost his mind some time ago. I had to stop reading him when he went Union crazy. Its an irrelevant issue that he cannot get past . . .
June 20th, 2010 at 6:05 am
[...] Barry dismantles Greenspan's nonsensical op-ed on deficits. (TBP) [...]
June 20th, 2010 at 9:24 am
I’ll say it again…Greenspan should be Madoff’s cellmate.
June 20th, 2010 at 9:37 am
jonathanb says * – “I am deadly serious when I say that I think many Republicans are literally out of their minds, driven entirely by feelings of inferiority.”
Jon that caught my attention but your statement comes off so heavy – so its not true at that level .. I would attempt an explaination by using “The Breakfest Club” movie as a foundation .. imo the GOPers are the Jocks and the Queens .. old high school habbits die a slow baby step transformation IF .. “Ya Gotta Win” and “You Look Up to Us” … the Nerds, Criminals and Basketcases .. well – some go for the ride – some play along because they have to – some just turn the other cheek … and ALL maybe because they have to – its just the way things are in this system invented 6 to 8000 years ago
* coda – was gonna blow this post off but decided since I’m gonna linky it to Ariannas post at HuffPo I’d bother
June 20th, 2010 at 11:01 am
[...] Why does anyone still listen to Alan Greenspan? (Big Picture) [...]
June 20th, 2010 at 5:55 pm
“Summer 2004: Greenspan’s advice to would-be homeowners: Consider adjustable-rate mortgages. Surprising advice, considering that fixed-rate loans were near half-century lows. He then started raising rates, contributing to the huge foreclosure surge.”
IIRC, this advice was based on his belief that home prices will not decline. This is what most economists believed at the time. Similarly, those who now say that U.S. debt doesn’t matter believe that U.S. creditworthiness will never decline.
June 21st, 2010 at 8:54 am
“History — namely, the post depression 1937/38 recession — shows how misplaced his current focus on deficit reduction is today.”
This is a very amateurish analysis. Total govt spending didn’t even go down in 1937. State and local spending went up virtually the same amount that federal govt spending went down. Plus, federal spending went down from high levels because the fed govt handed out a huge sum in soldiers bonus payments in 1936, which was pretty much the same thing as W and Obama handing out stimulus checks but on a larger scale. No reputable economist should think that an economy built on a pyramid scheme of the govt handing out an ever greater sum in stimulus checks year after year builds a solid foundation for an economy, particularly considering it’s all debt that must be paid back. Last, the economy didn’t collapse because of a lack of stimulus checks in 1937. The economy went into another depression because of a lack of investment. Most companies didn’t invest much at all in the 1933-1936 period, even when consumer spending increased dramatically in 1936 from the soldiers bonus checks. And companies invested much less even in 1937 as a result of the huge new social security tax (based on headcountes, and a tax which not long after was scaled back on a percentage basis) and new union rules (Wagner Act) which caused strikes to break out at factories across America. FDR tried to counter the lack of investment by attacking corporations and initiating an undistributed profits tax. The result was that corporations invested even less.
~~~
BR: You apparently are not familiar with history of the great depression:
Please keep your factually unsupported drivel off this blog
June 21st, 2010 at 9:05 am
Well, spending like drunken saliors (keynsian BS) on mal-investment that cannot possibly be paid back (ponzi) and contributes nothing to the recovery is as stupid as it gets.
June 21st, 2010 at 9:10 am
BR barked at the moon:
Greenspan is arguably the most incompetent economist of his generation, yet still retains some credibility amongst the uninformed. OpEds such as this one serve as reminders of that . . .
reply:
———–
Sorry but reading and analyzing what Greenspan says looks to me as satisfying as pulling the sheets over one’s head while in bed while farting to excess. Nobody in their right mind would do that so why do you put yourself through the misery?
June 21st, 2010 at 9:14 am
Greenspan has proven time and time again he is in league w/ financial institutions that do their very best to fleece the American Public. Chance the Gardener would be a more honest economist.
June 21st, 2010 at 9:46 am
OT, from the Onion:
STOCKWATCH
»JPMJPMorgan Chase $2.99 $34.72 (down 7.9%)
Financial stocks plunged today on reports the House and Senate were nearing agreement on wide-scale banking reforms that, if enacted, would have the devastating potential to foster long-term stability in the national economy.
June 21st, 2010 at 11:21 am
BR – politics aside, to the extent that you believe the time to worry about deficits is durning expansions only, you ignore the absolute level of the debt, interest payments relative to gdp and the very real possibility of a loss of confidence in US assets when debt levels become too high relative to what the market believes can be realistically paid back.
Just look at the situation in Europe now – if we continue with the lack of spending restraint, there will ultimately be a tipping point here, hopefully not, but it is more than a possibility now and there are recent examples for us to understand.
Hate Greenspan and the right wing economist conspiracy if you must (his encouragement of interest only loans at the top was shocking and to be loathed). It is possible, however, if debt continues to accumulate and there is an increase in short rates, the portion of the budget dedicated to interest payments alone may be significant enough to cause a lack of confidence.
Why go there? Why push things to that extent? Why not impose spending restraint now and attempt to stimulate growth by simplifying the tax code and taking other measures? Is that not unreasonable?
“As i have repeatedly argue, deficits do matter — but the time to worry about deficits is during expansions, not contractions.”
June 21st, 2010 at 11:33 am
Great article, but you left one out: in 2007 Greenspan said we should import way more skilled white collar workers from other countries. Why? Because we had a talent deficit? No. Why then? In order to lower the salaries offered for skilled white collar work. http://www.boston.com/news/nation/washington/articles/2007/03/14/greenspan_let_more_skilled_immigrants_in/
June 21st, 2010 at 4:07 pm
I found myself deeply annoyed to be in agreement with the Green Goblin on this one … in fact I’ve been agreeing with a distressingly high percentage of stuff he’s said/written since he left the Fed.
Couple of points to ponder:
- Regarding the late-30s recession, I don’t buy the simple Keynesian narrative espoused by e.g. Krugman and Romer that this was due to “the bad decision to reduce government stimulus too soon”. After all, you’d had a full half-decade of massive govt outlays … not exactly a short time period. There was also the far-from-trivial matter of the huge strikes and labor unrest fomented by the increasingly-powerful labor unions (whose increased power and influence were a direct result of New Deal policies) led by the AFL and CIO. One can make the case that both the labor unrest and the slipping-back-into-recession were symptoms of an economy grown addicted to government largesse.
- The Keynesians will at this point jump up and cry “but look! It was only the massive stimulus of WW2 spending which finally brought the economy back to health” … another false (or at least grossly incomplete) narrative. WW2 amounted to much more than “the biggest economic stimulus of all time” … there was – due to the sheer urgency of doing all one could to win the war – a massive retooling of American industry, which brought formerly-inefficient production plants up to state of the art, and also inculcated an entire generation of industrial workers with “how to do things as efficiently as possible using the latest equipment”. The effects of that persisted long after the war ended and e.g. Detroit factories switched back from making tanks to making cars. The war also left the U.S. with its now-mighty industrial capacity intact, and much of the rest of the world with theirs in shambles – that meant several decades of export advantage for us, while folks in e.g. Europe and Japan had to work their butts off to rebuild. In other words, WW2 was a one-off,and cannot be used as a general prescription for recovery from deep recession. I would argue that the more-apt analogy with what happens when governments try perma-stimulating their way out of a balance-sheet recession and misallocate most of the borrowed funds into dubious “bridges to nowhere” capital projects and banking-sector bailouts is post-real-estate-bubble-and-bust Japan. 2 decades of stimulus and they what have they got to show for it? 200% debt-to-GDP and a sovereign-debt funding crisis staring them in the face.
June 21st, 2010 at 5:06 pm
ewmayer. I think there is no color coating of WW2 spending. it was government spending, required or not. and it was required. but that doesn’t change it from government to private sector spending. and if we had to depend on the private sector for defense, we would be speaking German now
June 21st, 2010 at 7:29 pm
and we can’t forget that great economist and conservative lead who pronounced that deficits don’t matter.
who was it??
Dick Chaney!
June 21st, 2010 at 8:05 pm
willid3, your argument seems to boil down to “all government spending is created equal”, which echoes Paul Krugman’s worldview of “the only bad stimulus is one which is too small”. [And given our current debt-to-GDP and its rate of increase,one shudders shudders to think what Krugman would consider to be "too large"]. Based on that moire-is-better reasoning, Japan should be roaring along like the U.S. in the 50s, only doubly so.
My point is that WW2 and its economic impacts were about much more than than the amount of government spending. There are interesting comparisons with WW2 U.S. and post-RE-bust Japan, though. Like Japan, most government debt issuance was in terms of low-coupon bonds bought by its own citizens. Unlike Japan, though, we weren’t using most of the debt-financed wartime spending to paper over the insolvency of our banking sector, bankroll record Wall Street bonuses, prop up failed business models and encourage people to go even deeper into already-too-great debt.
June 22nd, 2010 at 5:13 pm
The drop in federal spending in 1937 and 1938 didn’t have that much to do with the depression.
Here’s federal spending, state& local spending, and total govt spending for the mid to late 1930s:
1935: $7.6b, $8.2b, $14.8b total
1936 $9.2b (increase mostly from huge soldiers bonus checks), $8.5b, $16.8b total
1937 $8.8b, $9.3b state&local, $17.2b total govt spending
1938 $8.4b, $10.0b, $17.7b total
http://www.usgovernmentspending.com/year1929_0.html#usgs302
It’s clear from the data that total govt spending increased substantially every year thru the period 1935 to 1938. A huge drop in output occurred despite that fact. One big reason was the construction and auto industries remained in the doldrums all decade. The increase in GDP in 1936 and early 1937 was mostly from consumer spending of non-durable consumer goods, mostly due to the govt handed out cash to citizens in the form of soldiers bonus checks (like processed food for example). All the growth was gained by taking on off additional debt. It was completely unsustainable. I can’t believe that Barry R thinks this would be a good idea now. How on earth could the fundamentals of the economy improve when it’s all based on this cycle: adding debt, handing proceeds of debt sales to citizens, citizens spending it, and GDP goes up. The current administration has to address the fundamental weaknesses of the economy, which is lack of production, too much debt, trade deficit, reliance on oil imports (cap and trade doesn’t address that), and unsustainable entitlements. The only way the govt can even continue selling bonds at this level is by printing more money down the road. There is just not enough money in the system to soak up all that issuance for long. If the govt continues to follow of strategy of selling bonds and having citizens spend the proceeds, without addressing the fundamental problems of the economy, then the capitalist system will fail.
July 13th, 2010 at 7:18 am
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