October 29, 2013

October 29, 2013

Dean Baker
Truthout, October 28, 2013

Dean Baker / October 28, 2013

With the specter of Alan Greenspan again haunting the world, it’s a good time to tabulate the damage that he and his fellow central bankers inflicted. The International Monetary Fund (IMF) gives a simple way to construct a scorecard. The IMF routinely estimates potential GDP for most of its members. The estimates of potential are supposed to reflect the economy’s level of output if it was at full employment.

The IMF also makes projections of levels of GDP for the mid-term future, typically a five-year time-frame. These projections are in effect projections of potential GDP since they do not assume that countries will enter recessions in this five year period or alternatively, if they are currently in a recession that they will have recovered.

There are two major schools in economics, those who know accounting identities and those who don't. Alan Greenspan and Robert Samuelson are both members of the latter group, as Samuelson proudly proclaims in his column.

Samuelson wants to give the blame for the economy's collapse on the complacency that followed a quarter century of relatively stable growth with low inflation. He tells readers:

"But there was an unrecognized downside: With a less-risky economy, people — homeowners, bankers, investment managers — concluded they could do things once considered more risky. Consumers could borrow more because economic stability enhanced their ability to repay. “Subprime” home mortgages granted to weaker borrowers became safer because housing prices would constantly rise. Banks and investment banks could assume more debt because financial markets were calmer. Hence, the Greenspan Paradox: The belief in less risk created more risk."

Of course this is not quite right. Those of us who believe in accounting identities did recognize the downside. We saw a huge trade deficit which was draining hundreds of billions of demand from the U.S. economy. The demand drain from the trade deficit (which was the direct result of the mismanagement of the East Asian financial crisis by Greenspan, Summers and Rubin) was being offset by the demand created by the housing bubble.

The bubble was easy to recognize for anyone looking at the economy with open eyes. House prices had sharply diverged from a 100-year long trend in which they had just tracked the overall rate of inflation. It was clear this run-up had no basis in the fundamentals of the market. Income growth was weak and population growth had slowed. Furthermore, rents were still just keeping pace with inflation. And, the extraordinary levels of construction had created record vacancy rates as early as 2003.

There seemed little doubt that prices would collapse and bring an end to the building and consumption boom that were driving the economy at the time. The only question was when. The proliferation of fraudulent mortgages allowed the bubble to grow much larger and more dangerous over the years 2002-2007. Apparently Greenspan missed this tidal wave of bad mortgages because he wasn't paying attention to the housing market. Or at least that's what he wants us to believe now.

Anyhow, there are no mysteries in this story for people who understood accounting identities, except perhaps that people still take Alan Greenspan's views on the economy seriously.

By the way, since Samuelson does a little bit of "what they said then and what they say now" in reference to Greenspan, I'll give my two cents. Here's what I wrote on the eve of the Federal
Reserve Board's Greenspan retrospective in the summer of 2005:

The following labor market policy research reports were recently released: 

In his most recent column, Thomas Edsall says that New York mayoral candidate Bill de Blasio "... supports programs to ensure that every New Yorker eligible for food stamps, health care, income security and social services gets on the rolls, effectively r

In early October, the Center for Law and Social Policy (CLASP) released a report entitled “Feel the Heat!” that details the economic status of black men in the United States.  Author Linda Harris discusses this group’s high unemployment rates, which she attributes to high incarceration rates, low graduation rates, and a lack of support systems to help black men out of this low-income trap.

Black men have significantly lower employment rates than other demographic groups, but this wasn't always the case.  In 1969, the employment rates for men between the ages of 20 and 24 were about 77 percent for blacks and 79 percent for whites.  By 2012, the employment rate for young black men dropped to less than 50 percent, while young white men were about 18 percentage points higher at almost 68 percent. 

Source: Feel the Heat!

October 2013, Dean Baker and Nicole Woo