There was a time, less than 20 years ago, when a major concern for the US government was how it would deal with the problems of paying off all government debt, which was projected to happen by about 2010. Alan Greenspan, then chairman of the Federal Reserve, made it a major point in his “Outlook for the federal budget and implications for fiscal policy” when he testified before the US Senate Budget Committee on January 25, 2001.
Tim tells the story as if this was a cognitive failure. Look at how hard it is to forecast! In hindsight, it looks like Greenspan’s crystal ball was cracked. Haha!
That is not the right story. It was a moral failure. I feel very strongly about this. Although I still consider Tim a great blogger, he muffed this one.
The context for Greenspan’s testimony was that newly elected President George W. Bush wanted to enact a big tax cut. One of the potential arguments against it was that it would cause the deficit to worsen. The responsible thing for Greenspan to do would have been to keep out of this issue, maintaining the political independence of the Fed. Instead, he waded in, with his ridiculous forecast, going so far as to say that it would cause dire problems for the Fed in the long run, because it would run out of government securities to buy. I hated that testimony from the moment it appeared. It was so craven (obviously, he was currying favor with the new President), so wrong on the economics, and so evil in its deception that I marked Greenspan as an irredeemable villain right then and there. I have not budged from that opinion.
The financial system banks on the willingness of a middle lass to pay interest charges on federal debt, the middle class thus a force of motion for the debt slinging industry.
We haven’t actually paid any of the interest on the federal debt in a long time. The latest numbers I can find say that interest on the federal debt is about 1.8 percent of GDP and the deficit was about 3.9 percent. We’re not paying the debt down, or even paying off any interest – we’re borrowing more.
Yes, remember those days — the people at Fannie Mae were slathering at the prospect of their debt becoming the “reference security” in US dollars because the Treasury debt would disappear!
Here is “Down Into the Fray”> Richard Stevenson’s NYT coverage of Greenspan’s testimony. I believe the headline captures the conspicuously partisan nature of the claims he made. To really curry favor and signal affiliation, the more obviously absurd and exaggerated the claim, the better. It should be evident that one is willing to risk one’s reputation and spend down one’s ‘legitimacy capital’ for the sake of the cause.
Most of the coverage did not include attempts at reality checks on the claim, or, at the very least, the set of assumptions which would have to continue being true in order for such a claim to hold.
Also, the timing turned out to be pretty bad. The US economy went into recession right afterwards, and rates dropped from 6.5% in Dec 2000 to 1.75% just a year later.
Reading the wikipedia entry on “Bush Tax Cuts” makes clear that nobody, but nobody, was covered in glory at that time or at any time since. All of the numerous analyses cited in the article are pathetic. And nothing has changed. No brakes on spending. No brakes on debt. Taxes still rediculously high for what they pay for.
The bit that irritated me the most in the Taylor article though is towards the end:
“There’s no magic policy dial to turn up productivity growth. It’s a matter of making the needed investments in human capital, physical capital and technology, in a context where there are incentives and rewards for those who seek out efficency and innovation.”
“Needed investments” sounds an awful lot like “magic policy dial.” I challenge anyone to meaningfully distinguish the two.
And who exactly is going to do this making of “needed investments in human capital” white man? Talk about hubris. Talk about terribly trite platitudinous twaddle.
I agree, that statement seems difficult to parse. That being said, we should assume that Taylor had a coherent thought in his own mind, whether or not he expressed it clearly.
Here is my guess as to what he was getting at: while investment into X by $Y could increase productivity by Z%, we don’t have any concrete knowledge of those variables, so in effect we don’t have access to a dial by which we could tune productivity higher. It is ultimately up to individual economic actors to parse what investments make the most sense for themselves or their businesses.
Also, all of the variables are subject to unpredictable change. In the years immediately before Greenspan’s statement, economic growth was furious because a new opportunity had arisen – building the internet. It was pretty obviously a bubble, but predicting how long it would last and what opportunities would remain after was basically impossible. It turned out that the answers were “not long” and “not many”.
Greenspan as an irredeemable villain!
Well… On the other hand Greenspan oversaw protracted economic growth and moderating inflation. The 1990s were pretty good.
For 40 years I have agonized over the mounting federal debt. Now, we see that Bank of Japan buy back half of that nation’s huge pile of Japanese government bonds. They have very low inflation and very low unemployment.
Perhaps I have been genuflecting to the wrong totems in the Museum of Macroeconomics.
Mr. Cole, I also oversaw protracted economic growth and moderating inflation in the years in which Mr. Greenspan and many other people were overseeing them. At that time I felt I had the same control of growth and inflation as Mr. Greenspan’s.
For the past 30 years, the Fed and other central banks have been acting like an “old commodity board” both to control the price and yields of some bonds (a small part of all markets for bonds) and to intermediate funds according to government objectives. Forget about independence. Japan’s central bank is the funding agency of the Japanese government and they do that by borrowing from many sources, not by printing money. Forget the Macro you learned.