Alan Greenspan Forecasts Extremely Low Economic Growth for Germany, Finland, Norway, Denmark, Sweden, Holland and Canada
Alan Greenspan, the former chairman of the Federal Reserve, weighed in last week on one of the pressing issues facing the incoming Trump administration and the country — slow economic growth. Greenspan’s explanation is novel and bound to be controversial. To preview: He blames the welfare state and overall uncertainty for the slowdown. …
By scouring economic statistics, Greenspan thinks he’s discovered heretofore hidden relationships that explain weak productivity growth.
What’s happening, he said recently at the conservative American Enterprise Institute, is that spending on “entitlements” (Social Security, Medicare, food stamps and the like) is crowding out gross national saving. Since 1965, saving has dropped from 25 percent of the economy (gross domestic product) to about 18 percent of GDP. Meanwhile, entitlement costs went from 5 percent of GDP to 15 percent.
“Entitlements” are what others call the welfare state. If we save less, we’re likely to invest less — so goes the argument — because domestic savings are the largest source of funds for business capital spending. Less investment then reduces productivity growth, because new investments typically embody the most efficient technologies.
That’s the Greenspan thesis in a nutshell: Entitlements are draining funds from productivity-enhancing investments.
To be sure, there are caveats. Greenspan concedes that foreign investment in the United States offsets some of the drop in U.S. savings. But he thinks this is waning. What also depresses investment, he argues, is a lack of confidence in the future — pessimism he blames on costly government regulations (he mentions Dodd-Frank) and large unknowns (say, global warming).
So twin pressures curb new investment: higher interest rates caused by borrowing to pay for entitlements; and cautious companies that exhibit “a remarkably weak interest in investing in the longer run.” They’ll invest in new software but not in long-lasting projects. Think factories, hospitals and hotels.
— Greenspan’s grim forecast for growth, Robert J. Samuelson, Washington Post, today
Ooookay. I have never been accused of being an economist. Trust me on this. Nor have I ever been alleged to be competent at such things as addition, subtraction, or understanding graphs and charts. Trust me on this, also. (Okay, my elementary school teachers alleged that I could add and subtract, but no one since then has.)
But AB is mainly an economics blog (or was until this election cycle hypnotized everyone). And so although my own role here does not include faking knowing something about economics beyond what I read in Krugman’s column and in posts here at AB, I’ll go out on a limb here and point a few things out. One is that since interest rates are not high, and have not been high in a really long time—and instead are really low (and have been for a really long time)–whatever pressures there are to curb new investment, higher interest rates caused by borrowing to pay for entitlements (or caused by anything else) is not among them. (Wow. I just checked Krugman’s Twitter feed, and I think I beat Krugman to the punch on pointing this out.)
There’s also that thing about spending on “entitlements” (Social Security, Medicare, food stamps and the like) crowding out gross national saving. But only in this country. Which is odd, because in northern European countries—Germany, Finland, Norway, Denmark, Sweden, Holland, for example, and also in Canada and maybe Australia (which has a national healthcare-insurance system, as do the other countries I’ve mentioned)—entitlements, which I assume are more than the 15 percent of GDP that they are here, aren’t doing that, right?
I’m not sure how spending on “entitlements” (Social Security, Medicare, food stamps and the like) is crowding out gross national saving, at least if, as I assume, gross national saving includes both private saving and the federal government’s negative saving, a.k.a., budget deficits. The latter which of course would be significantly lower were it not for the Bush tax cuts, and which will be significantly higher once Paul Ryan, Mitch McConnell and Donald Trump, et al, make quick work of the Better Way budget plan by enacting it.
But Mr. Greenspan is a former Federal Reserve chairman and I am not, so I’ll assume spending on “entitlements” (Social Security, Medicare, food stamps and the like) is crowding out gross national saving.
But that leaves remaining the question of how all those other countries’ higher spending on “entitlements” isn’t crowding out their gross national saving. And although I’m not an economist, I’ll take a crack at that puzzle and suggest that it has something to do with no privately owed medical bills, higher wages for non-executive-suite and non-hedge-fund employees, low college tuition, and low-cost child care.
And then there’s that part about less investment reducing productivity growth, because new investments typically embody the most efficient technologies. Which these days typically replaces people to do the producing. Which means more food stamps and the like. But which also could mean less Social Security and Medicare, if more people starve to death after the Better Way budget is enacted and therefore those robots that replaced employees don’t lead to more food stamps and the like.
Ah, I get it now. Even though I’m not an economist.
I definitely get it.
____
UPDATE: Wow. I’m still not an economist, but it looks like I faked it really well in this post. I figured everything out all by myself, except for that spreads-between-5-yr-and-30-yr-Treasury-rates-are-higher-than-normal thing, which Samuelson didn’t mention that Greenspan had said in his speech, but which Dean Baker, in the article I’m linking to, explains is that the yield on a 5-year bond is very low.
But if Samuelson had included that in his column, I would have included this in my post: Why the hell would anyone decide not to borrow money when interest rates are very low because sometime in the distant future but during the life of the lengthy fixed-rate loan they will be high?
Baker says this, more politely than I just did. Barely.
(H/T Mike B, in this post’s Comments thread.)
Greenspan ignores Einstein. Waits for this time to be different.
As well as for the earth to finally be proven flat.
Is that Mr. Greenspan “I didn’t know” about the housing bubble pontificating about the economy? The guy who was cheering innovative financial developments (aka ninja mortgages and mortgage backed securities) during the housing bubble? The guy at the head of the Fed who somehow missed seeing the problem which others were warning about? The grain of salt I’d have to take with his advice would be the size of the moon, but I’m on a low-sodium diet, so I’ll take neither.
It is indeed that very same Mr. Greenspan. But not to worry. Mr. Samuelson says nobody else saw it either. ‘Course Mr. Samuelson doesn’t explain what it is exactly that does make Greenspan someone we should listen to in a speech that is replete with falsehoods and illogic. Those of us whose main goal ISN’T to kill the social safety net, that is.
Dean Baker is an economist, and he thinks Greenspan is wrong:
http://cepr.net/blogs/beat-the-press/news-flash-robert-samuelson-tells-us-that-alan-greenspan-also-doesn-t-like-social-security-and-medicare
Be nice if Greenspan could spare some of his financial wizardry to work out why American health care costs almost twice what everybody else pays for the same or less effectiveness.
Be nice if somebody — anybody — worked that out in detail.
He did. It’s cuz of Medicare.
http://www.usatoday.com/story/news/world/2016/11/21/report-trumps-grandfather-pleaded-stay-germany/94210464/
Irony truly is dead.
Yeah. If only.
I remember when Greenspan warned of irrational exuberance and nobody listened. Wall St. was laughing all the way to the bank as derivatives and swaps were all rated triple A by the ratings agencies. What we didn’t see was the fact that Wall St controlled the NY fed and the SEC and still does. The crash was orchestrated, controlled and then bailed out all by the same banks and people. Now zoom 8 years ahead of the crash and we still see no Glass-Steigel reenacted and entitlements an ever increasing part of GDP. Now Trump is the man behind the curtain pulling the levers but as with any large complex problem solving one should first break down the problem into many smaller parts to solve them. Will Trump do this ? We shall see.
This particular kitchen table is becoming tiresome.
Run,
Any chance of an ignore button?
the former head of the Bank of England (“The End of Alchemy” Mervyn King) says the weak economic growth is due to a GLUT of savings.
Greenspan is merely repeating the “lessons” he learned as a child at the knee of Ayn Rand.
let me try to point out that Social Security takes out of the “savings for investment” pool exactly the amount that “investors” would take out in order to pay for their basic retirement expenses. That means the net investment pool is exactly the same with SS as it would be without it.
i would also suspect that since Medicare pays the bills of people who would have to pay those bills anyway (or just die) it seems unlikely that Medicare subtracts from available savings.
what Greenspan may be talking about is the desperate need of ordinary workers, absent entitlements, to try to save for their future needs, thus allowing “investors” to acquire money cheaply, while the workers accept lower wages because they are scared and desperate…
acquiring money cheaply means “lower interest rates.” interest rates in this country have been essentially zero for ten years.
how low can you get?
the uncertainty that Samuelson/Greenspan point at (i can’t say “talk about” because they don’t seem to know anything about it) has more to do with the big bank failure of 2008 than anything the government has done… except, of course, give the banks the power to make the rules and fail to hold them accountable for outright fraud.
but, hey, Samuelson/Greenspan don’t have to say anything that is true. they just have to give the imprimatur of authority to the nonsense the establishment economists have been fooling the people with for years.
those people can repeat it to their friends. and their friends will vote for Trump because of his “business acumen.”
back when “capital” was scarce the Greenspan argument made a sort of sense. Then all the money that “capital” could squeeze or steal from labor or save by polluting the ground and water, could be “invested” by the people that matter and result ultimately in maybe a higher standard of living even for the poor.
but we have long passed the “scarce capital” era. we are awash in “savings” that have no productive investments to go to. it is time that some of that higher standard of living showed up as reasonable pay, decent health care, decent retirement, and a decent environment.
“capitalism” (note the “ism”) cannot deliver these things, by the nature of competition shifting costs to those who suffer. there is no guarantee that “socialism” will do any better. but a democracy where the people are not fooled by the propaganda of the “elite” does offer a chance.
there is plenty of room for “free enterprise” to compete and thrive in an economy where the people protect themselves from harmful activity, or lack of activity, that happens when the predators make the rules.
i am sorry to say it’s a chance that we are missing.
Except Alan, there is not ‘slow economic growth’…………..Greenspan fails again.
We really need a browser plug in that turns “Alan Greenspan says” into “It is false that”. Maybe Google Translate could do this for us. The guy is a certified idiot and clearly delusional.
https://chrome.google.com/webstore/detail/xkcd-substitutions/jkgogmboalmaijfgfhfepckdgjeopfhk
Why wait? This substitution plugin allows free form custom substitutions.