Tomorrow, former Fed chair Alan Greenspan will go to the Council on Foreign Relations and argue that the main obstacle to economic recovery is the expansion of bureaucratic uncertainy caused by the “activism” of the Obama administration. Clifford Marks explains his thinking at National Journal, although he clearly isn’t impressed with the argument:
In searching for an explanation of the lackluster recovery, Greenspan zeroes in on an aversion to business investments in illiquid assets, which, for non-financial firms, has reached a high not seen since the 1940s. It is no secret that businesses have been hoarding cash and holding back from supporting much-needed growth. Is this the right statistic to look at when it comes to explaining slow growth? There’s a compelling case to be made, though it’s not airtight. Assuming it is, though, Greenspan concludes that the culprit here is uncertainty — but uncertainty about what?
This is where things get dodgy. Greenspan seeks to prove a correlation between the illiquid asset investment he deemed critical to explaining our slow recovery and two variables — one intended to show the effects of fiscal deficits and another that is supposed to represent a non-government related fall in demand. The first is just a measure of how high the federal government’s deficit has soared. The non-government statistic is a measure of how much capacity is being utilized by non-farm businesses. …
His theoretical explanations are myriad: moral hazard following massive bailouts, financial regulation, government debt crowding out private investments. Direct evidence of impact, however, is lacking. He does acknowledge that the recent crisis has “cast doubt” on the presumption that markets be very lightly regulated, but even after the machinations of unregulated markets helped pitch the nation into recession, his own faith in unregulated markets doesn’t appear to have been shaken much at all.
“The presumption that intervention can substitute for market flaws, engendered by the foibles of human nature, is itself highly doubtful,” he writes. “Much intervention turns out to hobble markets rather than enhancing them.”
But Marks doesn’t believe that Greenspan provides enough evidence for his conclusions, and accuses the former Fed chair of arguing ideology over provable data:
It is not fair to say Greenspan is wrong; his numbers don’t prove that. But just as surely, they don’t prove him right. He sets aside the potential for what statisticians call omitted-variable bias, when a third but excluded variable explains some of the effect attributed to one of the pieces of data included. And Greenspan dismisses the “indeterminate degree of fading residual crisis shock” because he cannot find a good variable for it.
The rest of the paper is full of modules that explain various theories on why the unhindered free market helps the economy. These are all logical, even compelling in an anecdotal sense, but they are not the be-all and end-all — and they don’t prove Greenspan’s numerical claims.
Marks concludes with this odd retort:
It appears that he’s back to preaching the free-market gospel once again, almost as if the last few years had been a dream.
Marks says this as if the last two years had been a dream. We have had the Keynesian interventions and the regulatory imposition that Greenspan’s critics demanded, and have they worked? Not at all. The argument that the stimulus bill would keep unemployment below 8% failed even as civilian participation in the workforce fell to generational-low levels. Investors have either gone overseas or stayed on the sidelines, while businesses hoard cash and wait for more clarity in some context, at least.
Normally, we would see upticks in employment by now. The Minneapolis Federal Reserve Board offers this helpful chart of all post-WWII recessions and the recovery of employment in their aftermath:
The big orange line on the bottom tracks employment for the current “recovery.” Only the 2001 recession, which had two major shocks and lasted through 2003, and the 1980 recession which also arguably double-dipped, recovered anywhere nearly as slowly as now, and both were significantly more shallow. Marks can denigrate Greenspan all he wants, but Greenspan at least knew how to deal with a recession.
Furthermore, the mainspring of the 2008 meltdown wasn’t a lack of regulation on Wall Street, but massive government interventions in the housing market that Fannie Mae and Freddie Mac then passed along as securities. When the housing market bubble popped, the collapse turned those into impossible-to-value assets. The derivative markets on those assets certainly created their own problems, but they wouldn’t have collapsed the economy on their own had government not artificially and unsustainably inflated home values and incentivized consumers to spend beyond their means on mortgages. The basic problem of the collapse was government intervention, not a lack of regulation, although the latter contributed in part to the damage on the way down.
Now we have had a massive regulatory expansion on Wall Street, credit markets, banking, and employment (through ObamaCare) over the past two years, most of which has yet to pass beyond the ambiguities of unread Congressional acts and myriad mandates for bureaucratic judgments rather than clear and unambiguous law. Is pointing out uncertainty as a culprit in economic stagnation really that outrageous? Given the failure of pseudo-Keynesian economics over the last two years, I’d expect at least a little more open-mindedness to the man who helped engineer five years of economic growth after a tough recession.
Update: The US Chamber of Commerce echoes Greenspan, at least on energy:
- In aggregate, planning and construction of the subject projects (the “investment phase”) would generate $577 billion in direct investment, calculated in current dollars. The indirect and induced effects (what we term multiplier effects) would generate an approximate $1.1 trillion increase in U.S. Gross Domestic Product (GDP), including $352 billion in employment earnings, based on present discounted value (PDV) over an average construction period of seven years. 1 Furthermore, we estimate that as many as 1.9 million jobs would be required during each year of construction.
- The operation of the subject projects (the “operations phase”) would generate $99 billion in direct annual output, calculated in current dollars, including multiplier effects, this additional annual output would yield $145 billion in increased GDP, $35 billion in employment earnings, based on PDV, and an average 791,200 jobs per year of operation. Assuming twenty years of operations across all subject project types, we estimate the operations phase would yield a potential long term benefit of $2.3 trillion in GDP, including $1.0 trillion in employment earnings, based on PDV.
- Therefore, the total potential economic and employment benefits of the subject projects, if constructed and operated for twenty years, would be approximately $3.4 trillion in GDP, including $1.4 trillion in employment earnings, based on PDV, and an additional one million or more jobs per year.