Recently, former Federal Reserve Chairman Alan Greenspan made an unexpected appearance, voicing his gloomy outlook on the current state of the economy. This marks a stark contrast to his optimistic views during the 1990s, leaving many to wonder what has led to his current despair.
On Tuesday, Greenspan shared with Bloomberg that he has not felt optimistic “for quite a while.” This stands in stark contrast to the buoyant demeanor he maintained during the 1990s. So, what accounts for this sudden shift in his perspective?
Greenspan identifies several factors—China’s influence, the status of the dollar, Dodd-Frank regulations, and a raft of uncertainties—as contributors to his pessimistic viewpoint. He explicitly stated that he will not regain optimism until the nation confronts the pressing issue of entitlement programs.
“Nobody wants to tackle [entitlements]. Yet they are gradually crowding out capital investment, which subsequently diminishes productivity and, in turn, lowers living standards,” Greenspan pointed out.
Indeed, the funding of entitlement programs is becoming increasingly burdensome. As a larger portion of GDP is allocated to these programs, lesser funds are available for capital investment. This adverse cycle, as Greenspan indicates, has straightforward implications.
Reduced capital investment results in diminished productivity. Diminished productivity leads to slower GDP growth. Slower GDP growth, in turn, creates a scenario where the economy cannot sustain entitlement demands. Consequently, an even smaller fraction of GDP becomes available for capital investment aimed at fostering future growth, perpetuating the cycle.
What Drives Economic Growth?
This line of reasoning is fundamental, yet Greenspan’s insights may delve deeper into the broader question of economic expansion. What truly fuels economic growth?
From his analysis of entitlement programs and their choking impact on capital investment, productivity, and living standards, it seems Greenspan argues that savings and production are the real engines of growth. This perspective contrasts sharply with the prevailing Keynesian view, which posits that spending and consumption drive economic progress.
Consequently, contemporary economic policies have prioritized increased spending and consumption at the expense of saving and production. It’s worth noting that this was also the strategy Greenspan employed as Fed Chairman. From 1987 to 2006, while at the helm of the nation’s monetary policy, Greenspan championed consumption-driven policies.
Moreover, the fingerprints of Greenspan’s policies are evident in today’s global economic dilemmas. The approach he endorsed expedited globalization and led to significant trade imbalances with nations like China. Most of the financial turmoil currently gripping the world can be traced back to decisions made under his tenure.
It’s doubtful that Greenspan will acknowledge his role in these outcomes. However, it’s clear that he recognizes the impact of his decisions. Unlike his successors, Bernanke and Yellen, who seem committed to their beliefs, Greenspan understands that central banking has inherent flaws. Notably, before he became the esteemed Maestro, he openly criticized government intervention.
Alan Greenspan’s Pickled Economy
Interestingly, Greenspan once staunchly supported the gold standard and articulated its merits in his essay, Gold and Economic Freedom, published in 1966. In this essay, he articulated a crucial point:
“Without the gold standard, there is no way to safeguard savings from being eroded by inflation. There is no reliable store of value. If a significant number of people decided to convert their bank deposits to other assets, bank deposits would lose purchasing power, rendering government-issued bank credit worthless. The welfare state relies on the inability of wealth owners to protect their resources.”
“This is the unspoken truth behind the welfare statists’ attacks on gold. Deficit spending is merely a method for wealth confiscation. Gold serves as a barrier against this insidious process, protecting property rights. Understanding this concept clarifies why statists oppose the gold standard.”
However, in later years, Greenspan compromised his principles for personal gain. During his nearly two-decade tenure as Fed chairman, he facilitated an elastic currency that allowed the national debt to escalate from $2.3 trillion to $8.5 trillion—a staggering 269 percent increase. Such unchecked growth would have been impossible under a gold standard.
The flexible currency he endorsed also enabled the nation’s ever-expanding entitlement programs, which are financed through budget deficits. Perhaps his current pessimism is rooted in the realization that the consequences of his actions are now manifesting. Indeed, as Greenspan himself noted, “deficit spending is a scheme for wealth confiscation.”
Just ask David Stockman, who insists that Greenspan expertly perpetuated this wealth confiscation scheme. Any regret he may now feel is, unfortunately, too late. Like a pickled cucumber, the ramifications of his and his predecessors’ actions are irreversible.
As we navigate today’s economic landscape, it’s clear that the aftermath of Alan Greenspan’s policies lingers on. The situation remains challenging, to say the least.
Sincerely,
MN Gordon
for Economic Prism
Return from Alan Greenspan’s Pickled Economy to Economic Prism
