November 21, 2016
Proving once again that you can get just about anything into the Washington Post as long as it agrees with the party line, Robert Samuelson used his column to tell us that Alan Greenspan agrees with him about Social Security and Medicare being too generous. Before getting into the details, let’s first deal with the question as to whether Mr. Greenspan should be viewed as an expert on anything other than his shoe size.
Samuelson tells readers:
“Why should we listen to Greenspan? After all, wasn’t he the guy who brought us the 2008-2009 financial crisis? Well, no. Granted, he made huge errors, but so did many others. If Greenspan had become a professional musician, the financial crisis would still have occurred. And despite the crisis, Greenspan remains a highly original economic thinker.”
Basically Samuelson is giving us the “who could have known amnesty” story. Yes, there were a lot of people that should have seen the $8 trillion housing bubble ($12 trillion in today’s economy) whose collapse wrecked the economy, but how does that excuse the Fed chair for being completely clueless about the economy?
We saw an unprecedented nationwide run-up in house prices in the years 1996 to 2006. There was no accompanying increase in rents, which just kept pace with the rate of inflation over this period. Vacancy rates were already hitting record highs as early as 2002. You didn’t have to be a genius to see that there was a bubble here. It also should not have been hard to imagine that the U.S. economy would have bubbles since the collapse of the stock bubble (also on Greenspan’s watch) had just thrown us into a recession in 2001.
The collapse of the stock bubble also caught Greenspan flatfooted. He testified in favor of President Bush’s tax cuts in 2001 because he said he was worried that the budget surpluses of the time would lead us to pay off the national debt too quickly. If Greenspan had seen and understood the implications of the collapse of the stock bubble, he would have known that the resulting recession meant that we would not have to worry about surpluses for long. From a labor market perspective the stock crash recession was actually quite severe. We did not get back the jobs lost until January of 2005, at the time the longest period without net job growth since the Great Depression.
Even the one time where Greenspan made the right call in a big way — allowing for the continued decline in the unemployment rate in the second half of the 1990s — it was driven by confusion. He argued that the economy could grow faster than most economists believed because he thought that productivity growth was being mismeasured. His claim was that if productivity growth was being underestimated than the rate of potential GDP growth is higher than most economists recognized.
The problem with this logic is that if productivity growth was being mismeasured, then GDP growth was being mismeasured by roughly the same amount. (He wasn’t questioning that hours were measured accurately and productivity is defined as GDP growth per hour worked.) This meant that if productivity was being under-estimated, then GDP growth was also being under-estimated, which meant there was no room for more rapid growth for this reason.
While the decision to not raise interest rates was incredibly important and meant jobs for millions of workers, and pay increases for tens of millions more, it was the result of confusion, not any deep understanding of the economy. But hey, the guy wants to cut Social Security and Medicare, so Robert Samuelson wants us to listen to him.
And his story is that these programs are crowding out investment. You might have missed this one given that we have near record low real interest rates, but neither Greenspan nor Samuelson is the sort of person who lets data interfere with an argument. After noting this fact, Samuelson tells us:
“Moreover, the long stretch of low interest rates makes it hard for most people to believe investment has been crowded out, he says. (For policy wonks, Greenspan contends that the higher rates show up as an increased “spread” between rates on five-year Treasury notes and 30-year bonds.)”
Okay, let’s try to get this straight. Samuelson just told us that firms are not undertaking long-term investment because of high interest rates. He then follows Greenspan in acknowledging that long-term interest rates are actually very low (both real and nominal), but then says this doesn’t matter because the spreads between 5-year and 30-year Treasury rates are higher than normal.
Sorry folks, but this makes zero sense. Suppose I am thinking of investing in some long-term project that will require borrowing for 30-years or something close to that time. As everyone acknowledges, I can now borrow very cheaply. But what Greenspan and Samuelson are telling us is that I won’t make this otherwise profitable investment because the yield on a 5-year bond is very low.
Nope, this doesn’t come close to holding water. Like Samuelson, Greenspan wants us to cut Social Security and Medicare. They know this is not politically popular so they are trying to come up with some economic rationale for these cuts.
I’m afraid that they’re going to have to go back to work, because this story doesn’t pass the laugh test.
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