Alan Greenspan and the ‘Distorted Economy’

November 23rd, 2012
in Op Ed

by Dirk Ehnts, Econblog101

I think that the above quote from Alan Greenspan at Meet the Press in 2010 should be turned into a book title. Here is the original quote from the transcript:

“Mr. Gregory:  Dr. Greenspan, the Associated Press reported on a survey this week of economists, and we’ll put a portion of it up on the screen. “A bleaker outlook for the economy into 2011.  The U.S. economic recovery will remain slow deep into next year, held back by shoppers reluctant to spend, employers hesitant to hire.

That’s according to an AP survey of leading economists.

"The latest quarterly AP Economy Survey shows economists have turned gloomier in the past three months.  They foresee weaker growth and higher unemployment than they did before.”

The current Fed chairman, Bernanke, said the outlook is “unusually uncertain.” A little bit of newer generation Fed speak there.  Does that mean–do you think that means the economy gets worse before it gets better?

Follow up:

Mr. Alan Greenspan:  Maybe, but not necessarily.  I think we’re in a pause in a recovery, a modest recovery.  But a pause in the modest recovery feels like quasi recession.  Our problem, basically, is that we have a very distorted economy in the sense that there has been a significant recovery in a limited area of the economy amongst high-income individuals who have just had $800 billion added to their 401(k)s and are spending it and are carrying what consumption there is.  Large banks, who are doing much better, and large corporations, whom you point out and the–and everyone’s pointing out, are in excellent shape.  The rest of the economy, small business, small banks, and a very significant amount of the labor force, which is in tragic unemployment, long-term unemployment, that is pulling the economy apart.  The average of those two is what we are looking at, but they are fundamentally two separate types of economy.

Actually, there is a book out that has been written in pursuit of these issues. It is named Plutocrats: The rise of the New Global Super-Rich and the Fall of Everyone Else (and not The Distorted Economy) and was written by Chrystia Freeland, who is a writer and a journalist as editor of Thomson Reuters Digital. Since she had access to the new global super-rich the book might provide some good ideas for how organizations act. This then might become the microfoundations of new models. Modelling decisions as the aggregate wishes of the population is useless if the decision is in the end made by just a tiny group of people which is not accountable for its decisions. Jan Tinbergen in his Prize Lecture in 1969 said about economic models:

In an attempt to evaluate what model building has contributed to the theory and practice of economic science I feel that at least we can say that models have had a didactic value. Often in our text books we bring simplified, not to say over-simplified, pictures of reality which nonetheless contribute to making understood some essential features of that reality. This is true already of some models inspired by Lord Keynes’ fundamental work (10). It is true also of Leontief’s input-output models (13). If I am allowed to quote a recent example I am guilty of myself, the same can be said of models introducing the difference between tradables and non-tradables (14). This model shows that if a country wants to eliminate a balance of payments deficit by living within its means, that is, by reducing its expenditure to its income, income itself is bound to fall and not so little.

Oddly enough, we are back in today’s ‘post-crisis’ crisis. Let me repeat the last sentence:

This model shows that if a country wants to eliminate a balance of payments deficit by living within its means, that is, by reducing its expenditure to its income, income itself is bound to fall and not so little.

Politicians of Greece, Portugal, Spain, etc., should listen up. The whole EMU crisis is the outcome of intellectual failure, I think. Loyalty has ruled over science, consensus over discussion. That did not only happen in the economics discipline, but also happened in politics, the press and the parties themselves. The crisis, which is according to Alan Greenspan a crisis only for non-high income individuals, poses fundamental questions that we need to answer. If business interests continues to be the only driver of political reform, the world will see more of the policies that brought us into the crisis. The following is an extract from CBC’s reporting on a new plan of the Canadian government regarding foreign policy:

The draft plan for a new foreign policy states: “The situation is stark: Canada’s trade and investment relations with new economies, leading with Asia, must deepen, and as a country we must become more relevant to our new partners.”

The document makes scant mention of Canada’s traditional roles as peacemakers in war zones like Afghanistan, foreign aid providers in disasters such as Haiti, and everywhere represented by a highly respected diplomatic corps.

It also drops any pretense of using trade deals to pressure countries such as China on human rights and other matters of democratic principle.

On the contrary: “To succeed we will need to pursue political relationships in tandem with economic interests even where political interests or values may not align.”

Any questions?

Read more by Dirk Ehnts

About the Author

Dr. Dirk Ehnts is a research assistant at the Carl-von-Ossietzky University of Oldenburg (Germany). His focus is on economic integration and economic geography, covering trade, macro and development. He is working at the chair for international economics since 2006 and has recently co-authored a book on Innovation and International Economic Relations (in German). Ehnts has written at his own blog since 2007: Econblog 101. Curriculum Vitae.

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