Greenspan's media blitz

by Rob Horning

23 September 2007


Former Fed chairman Alan Greenspan has been doing a lot of press for his memoir, The Age of Turbulence, which was released on Monday, and he seems determined to say a lot of things that will get him attention. In practice, that apparently means distancing himself from the Republican establishment that built him and making many comments that clash with their accepted talking points. Just as he made him self serviceable when Bush first came into office, speaking out in favor of his unnecessary tax cuts (as Paul Krugman details here), perhaps Greenspan, sensing the coming change in the political wind, now wants to preserve his reputation for being relevant by throwing some sops to Democrats, who are likely to dominate the Washington establishment in coming years. If he has their approval, and he continues to be frequently cited in public discourse and continues to show the power to affect markets with his utterances, he can keep on procuring the lucrative speaking fees he’s apparently earning on the lecture and conference circuit. Hence, Greenspan has basically suggested lately in his memoir and in interviews that the Iraq war is about oil, not democracy or terrorism; deficits do matter; Bush’s fiscal policy is responsible; the Republican led 2004 Congress deserved to lose for its fiscal irresponsibility, which bordered on corruption in its abuse of power; and Clinton was a good custodian of the federal purse, nothing like the tax-and-spend stereotype that Democrats are tarred with. And consistent with a goal of remaining relevant, Greenspan doesn’t admit to having done anything wrong in holding rates low and inflating asset bubbles—the excess liquidity, he argues, was not a matter of central bank policy but instead a consequence of globalization and the spread of capitalism throughout the world, introducing newly productive workers who work for cheap and contributing to what Benanke, his successor, would call a savings glut. For good measure, in a FT interview he adds that bubbles are just an inevitable and unfortunate consequence of human nature: “I am coming to the conclusion that bubbles are inevitable,” he says. “Human beings cannot avoid them . . . They cannot learn.”

But of all his repositioning moves recently, this one, from the same FT piece, where he questions the current profit/wage split, was the most striking:

The world he is describing looks like a global market nirvana – with one very odd feature: profits are much higher than they should be in a world of ever-intensifying global competition.
He says: “We know in an accounting sense what is causing it” – the share of worker compensation in national income in the US and some other developed countries is unusually low by historical standards – “but we don’t know in an economic sense what the processes are.”
In the long run, he says “real compensation tends to parallel real productivity, and we have seen that for generations, but not now. It has veered off course for reasons I am not clear about.”
It is striking that he does not, as many do, blame China. He agrees that companies should not be able to price above their marginal cost, as many apparently can today. “They should not be able to,” he says. “And the issue here is that there are restrictions that they are not identifying that enable them.” He adds: “The competition should be moving in.”
Mr Greenspan says “I did and still do” expect some normalisation of profit and wage shares. But asked whether the high profit share remains a puzzle to him, he says: “Yes, it does.” In his book, he worries that if wages for the average US worker do not start to rise more quickly political support for free markets may be undermined.

It’s pretty startling to see the friend of investment bankers, the namesake of the notorious Greenspan put that protects big financial risk takers from facing consequences, wondering why wage earners aren’t getting more of their share. That last comment verges on an endorsement of a populist uprising, a return to union power, and the kind of labor-friendly economics John Edwards seems to be campaigning on. You can interpret that last comment to suggest what left-leaning economists tend to say all the time: The whole capitalist system is threatened by income inequality, because the injustice of inequality reveals the imbalances between labor and capital that undermine the economy’s supposed rational fundamentals. The power distortions lead to externalities, rent-seeking, perverse incentives and other phenomena that make a market economy veer from its ideal, textbook elegance, where ever party gets what they wants and what they deserve at a price that can be nothing other than fair. Eventually, there is no redress to the imbalances other than political intervention, and if Greenspan is right—and if his anti-Republican pronouncements are further evidence of his sense of shifting political winds—than we can expect that intervention to come soon. When the redistribution of profits fails to happen naturally—as it inevitably does—the political cycle (from right to left) must kick in to correct the business cycle (from capital to labor). This preserves the sanctity of both and forestalls the kind of revolution that would put an end to all such cycles (and most of what we recognize as economic freedom as well).

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