What Greenspan Really Told Congress

By George P. Brockway, originally published July 17, 1995

1995-7-17 What Greenspan Really Told Congress titleTODAY’S LESSON will be in two parts. The first will be an exhibition of a complaint; the second an exhibition of a gleam of hope for better times in this nation and this world and even this dismal science.

The complaint concerns the press, particularly the business press, which is so busy collecting meaningless quotes from pseudo-prominent bankers and brokers that it fails to notice the story it is presumably covering. For example, on July 19 Chairman Alan Greenspan of the Federal Reserve Board, who is as entitled as his predecessor to be called “the second most powerful man in America,” appeared before a subcommittee of the House of Representatives in accordance with the provisions of the Full Employment Act of 1978, otherwise known as Humphrey-Hawkins.

Now, Humphrey-Hawkins has not had a good press. In his excellently useful Presidential Economics, Herbert Stein says that its “goals are so unrealistic and inconsistent that they are not taken seriously by anyone.” Still, it is the law of the land, so Greenspan duly appeared on the Hill, surrounded by advisers and armed with a prepared statement plus supporting documents. At least some of the Washington press corps came to pick up the handouts and perhaps lend an ear to part of the subsequent testimony. It was a routine assignment.

The shape of a Greenspan news story is now well established. The question always is, will-he-won’t-he raise (or lower) the interest rate? The Chairman always answers it, to the delight of his audience, in his personal version of Casey-Stengelese. Thereupon the reporter interviews a clutch of brokers’ economists for their differing interpretations of what he said, and offers the thoughts of a smaller clutch of Congress people or government officials.1995-7-17 What Greenspan Really Told Congress Joseph Kennedy

And so it was with the New York Times account of the latest Humphrey-Hawkins affair. Three brokers’ economists were interviewed – one from Minneapolis (thus showing that the Times is a national newspaper), one from New York, and Allen Sinai. Sinai is from New York, too, but he is quoted in almost every story and I assume must be considered universal. Of the Congress people, the Times made do with a mildly querulous comment by subcommittee member Joseph Kennedy II (D.-Mass.) and a reverential tribute to the Reserve and its leader

By House Banking Committee Chairman Jim Leach (R.-Iowa). All in all, the 28-inch Times story (counting picture and headlines) did not do much more than, as the saying goes, keep the advertising columns separated (a problem we rarely have at THE NEW LEADER).

As it happened, however, Chairman Greenspan interspersed among his answers to questions from the Congressional panel several profound, profoundly astonishing and profoundly hopeful observations. The Times missed them all, and so did the Wall Street Journal. That’s the complaint I promised.

But fortunately for you and posterity, I was channel-surfing[1] the next day and came upon CNBC, which was using clips of the Humphrey-Hawkins hearings to keep sections of its Money Wheel separated. The first clip I heard stopped me short.

“I don’t believe,” Greenspan was saying, “that any particular unemployment rate – that 5 per cent or 5.5 per cent or whatever numbers we’re dealing with is something desirable in and of itself. I don’t believe that.”

Well, you may be sure that I stopped surfing and anchored myself to CNBC. At considerable trouble and expense I also now have the whole thing on videotape. If you want a good journeyman definition of the barbarous notion of a natural rate of unemployment, you can do worse than settle on “a particular unemployment rate that is something desirable in and of itself.” In his December 29, 1967 speech that named the cruel notion, Milton Friedman put it as follows: “At any moment of time, there is some level of unemployment which has the property that it is consistent with equilibrium in the structure of real wage rates.”

During the 28 years since Friedman made his speech, one or another of several theories of a natural rate of unemployment has swept through the economics profession. Some of the theories depend on productivity rankings; some on a distinction between nominal wages and real wages; some on both; some on neither. But all agree that the rate of unemployment is so linked to the price level that as one goes up, the other goes down. The linkage is not explained; it goes without saying. Everyone presumes that a fall in unemployment will “force” the Federal Reserve Board to damp the “inevitable” inflation by raising the interest rate. In fact, this presumption explains most of the gyrations of the interest rate during Greenspan’s tenure. (For a detailed refutation of the linkage, see the September issue of the Journal of Economic Issues self-advt.)

Now we have heard Chairman Greenspan repudiate the natural rate nonsense. If the second most powerful man in America can do that, there is hope for the rest of us.

From December 29, 1967, to date, economic thought in the United States has been stopped dead because the fundamental economic problem was solved. To be sure, it was solved the way Ko-ko explained the solution of his problem to the Mikado: “Your Majesty says, ‘Kill a gentleman,’ and a gentleman is told off to be killed. Consequently that gentleman is as good as dead-practically, he is dead and if he is dead, why not say so?”

In the same way, Paul Krugman, self-proclaimed spokesman for mainstream economics, writes: “Most of the 5 million or so unemployed are either unskilled or part of the inevitable ‘frictional’ unemployment.” In other words, there are no employable unemployed; hence there is no unemployment problem. Furthermore, says Krugman, “adding 2 million jobs, if we could do it, would drive the U.S. unemployment rate down to about 3 per cent. But that isn’t possible, or at any rate not for very long. At that low unemployment rate, inflation would begin to accelerate rapidly.”

Having grossly underestimated the number of unemployed and having arrogantly dismissed as useless their fellow human beings who make up that number, mainstream economists have embraced the theory of the natural rate of unemployment and simply declared joblessness a non-problem. This has left them free to spend the past quarter century pondering such weighty concerns as “Games with Incomplete Information” (the lead article in the current American Economic Review). Perhaps Greenspan can guide us to a fairer land.

INDEED, the Chairman took another step in that direction as the Humphrey-Hawkins hearings wore on. He was asked if it would be possible to lower interest rates and still have our bonds attractive to German and Japanese investors. Greenspan’s reply was short and to the point: “I’m not aware that we have had very many difficulties selling the debt – the Federal debt – at low interest rates.”

It was very brave of Greenspan to make that statement. Not only does it give the lie to his six-foot- four predecessor – who claimed the budget deficit forced high interest rates that crowded entrepreneurs out of the credit market – it undercuts his own words regarding the deficit. He is for balancing the budget (but no constitutional amendment) because, he said, “there is no doubt, in my judgment, that the net result of moving to budget balance will be a more efficient and more productive U.S. economy.” In forming that judgment he can scarcely have considered what is going on in Washington today or what will happen throughout the nation thanks to these “revolutionary” goings-on.

Nor can he have considered his own power over the deficit. The interest bill on the national debt is at present roughly equal to the budget deficit. A fraction of the debt is rolled over every year. If the new loans were issued in accordance with the “patterns of rates” followed by the Reserve and Treasury during World War II, the reduction in the interest bill alone would practically eliminate the deficit by the mystic year 2002 -and not a single welfare family would have to camp on the public sidewalk while the mother begged for a nonexistent job.

I don’t suppose you are willing to bet anything like that will happen. (It would be a good “derivative” to have the other side of.) You’re right, but it is not some esoteric economic law or some superhuman market that will prevent the happening. The reason, rather, is that we the people of the United States of America care more about money, and individuals with money, than we do about our fellow citizens and ourselves.  We should at least recognize that we are in the deficit mess (if it is a mess) not because too few people are unemployed, but because for the past 40-odd years relatively high interest rates have transferred money from the many who do the work of the world (including the government) to a comparatively few bankers,  rentiers and speculators.

The transfer has not escaped Greenspan’s attention. In response to a question from Congressman Kennedy he said, “Evidence suggests in recent years that income is being dispersed rather than concentrated [that is, the rich are becoming richer, the poor poorer, etc.]. … There has been a regrettable dispersion of incomes that goes back to the later ‘60s…. What’s the major threat to our society? I’d list this as a crucial issue. If it divides the society, I do not think that is good for any democracy of which I am aware.”

Unfortunately, Greenspan did not see that there was anything the Federal Reserve Board could do to change the situation. He did not mention anything anyone else could do either, beyond the new obligatory red herring of higher education for competing in the coming world economy.

Nevertheless Greenspan had a vital three-part message: First and most important, there is no such thing as a natural rate of unemployment, therefore there is work aplenty for economists eager to grapple with real problems of the real world. Second, Federal Reserve policies based on the alleged crowding-out concept can now be forgotten. Third, we should embrace policies that unite us, because policies that divide us may well prove ruinous.

Greenspan’s message permits the gleam I mentioned at the beginning. Put into practice, it would make a better nation, a better world and a better economics. It’s a pity the Times, the Wall Street Journal and the rest missed it.

The New Leader

[1] Ed. – many who knew the author well are reeling, shocked, that he knew how to spell “channel-surfing” much less had a concept of what it was… God forbid he did it!  Oh!  How delicate the façade!

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