Why I Want To Shake Alan Greenspan

By George P. Brockway, originally published May 5, 1997

1997-5-5 Why I Want to Shake Alan Greenspan titleIN CONGRESSIONAL testimony, Chairman Alan P. Greenspan of the Federal Reserve Board has talked, in his gnomic way, about the rich getting richer and the poor getting poorer. Responding to a Congressman’s question, he testified: “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.”

Sometimes you want to shake the man. He has done a bit to open up the Federal Reserve Board to public scrutiny, but often it seems he can’t make a straightforward declarative statement. There is no “if” about this proposition. Of course the “dispersion of incomes” divides the society. It does so by definition. We’ve known that since Aristotle. Whether or not there may be some democracies of which he is not aware, the dispersion is certainly not good for a democracy that was conceived in liberty and dedicated to the proposition that all men are created equal.

Later in his testimony Mr. Greenspan expressed regret that the Federal Reserve Board lacked the power to contribute to the solution of the problem. Whether it truly lacks that power is surely debatable.

What is beyond debate is that the Federal Reserve Board can make the problem worse. For they in fact did so as recently as March 25, 1997.

By raising the interest rate, the Reserve slowed the economy down-deliberately. A slowdown means that fewer goods and services will be sold than would have been sold otherwise-not necessarily fewer than are sold today, but certainly fewer than might have been sold tomorrow.

Since fewer goods and services will be sold, fewer will be supplied, and fewer people will be employed in supplying them. Since fewer people will be employed, fewer people will have money with which to “demand” goods and services. And since fewer people will be employed, those lucky enough to have jobs will hesitate to ask for raises and so also will have less money with which to demand goods and services. The expectation is that inflation will be contained or pre-emptively struck, depending on the metaphor you’re using this week, and that the rest of us will be free to choose among moderately priced commodities.

Now, it is obvious to everyone except (perhaps) the Federal Reserve Board that if raising the interest rate does in fact contain or pre-empt inflation, it does so at the expense of the workers and the would be workers of America. In other words, most of the poor will be poorer.

And will anyone be richer? That, too, should be obvious. When the interest rate is raised, someone benefits. Who else can that be but people with money to lend, that is, people with more money than they need for daily expenses of living? We may call these people rich. And most of them will be richer.

Nor will the middle class escape unscathed. For convenience, let’s say the middle class consists of all people who are constantly making mortgage payments or payments on their automobile or payments on educational loans or payments on their furniture or on their credit cards. They’re like the government: They pay their bills, and their credit is good, but they don’t balance their budgets.

These people will be hurt, some more than others, by the increase in interest rates, and the rich will be made richer at their expense. Since March 25, 1997, everyone with an outstanding variable rate loan and anyone taking out a new loan to buy a house, a car, a refrigerator, a loveseat, or a college education has been paying more-in some cases thousands of dollars more-than would have been required before March 25. Anyone lending after that date is correspondingly enriched. (Yes, most of the lending is done by banks and such, but these institutions are owned by people who are not poor.)

The rich will be distanced farther from everyone, from the middle class as well as from the poor. The rich have done nothing to deserve their increased incomes. They have not denied themselves more pleasures to finance the activities of the rest of us, and they will not be required, or even requested, to do anything. Their increased interest income is an outright gift from their fellow citizens, from the nation’s businesses, and from the Federal, state and local governments and school districts.

Nor has the middle class done anything to deserve having part of their wealth and income taken away from them. However large or small the part may be, it is, as the politicians say, their money-and it’s being given, not to the government for the presumed good of all, nor to some charity of their choice, but to the rich merely because they are rich.

As for the poor, they have done nothing to deserve the refusal of raises they might have had, or the denial of jobs that might have been created, or the downsizing from jobs they once had. Bernard Shaw’s Undeserving Poor are surely still with us, and some of them are doubtless unemployable, but the malign consequences- the intended malign consequences- of the increase in the interest rate will be visited on the poor whether they are otherwise deserving or not.

Some say that a quarter-point increase in the interest rate can’t hurt anyone very much. If that is so, why do it? The intention is to hurt. The alleged need is to hurt enough to force people to buy less, to consume less, to enjoy less.

Anyhow, the question before us is not whether it hurts, but whether it increases what Mr. Greenspan calls the dispersion of incomes. The answer to that question is clear. Because of the quarter-point increase in the interest rate, the total annual incomes of the richest 5 per cent of the population will be increased by several billion dollars, and the total annual incomes of the other 95 per cent will be decreased by several billion dollars. Moreover, since the rich are so few, they will, on average, grow richer almost 20 times as fast as their average fellow citizen becomes poorer. The income gap will continue to widen as long as the new rate is in effect, and it will widen even further if, as expected, the Reserve increases the rate again and again during the coming months.

The Federal Reserve Board has singlehandedly effected all these increased dispersions in income. Why did they do it? Surely they are not altogether oblivious of what happens to real people and real societies in the real world.

Well, we know why they did it. They’ve told us plenty of times. They were fighting inflation. They were fighting inflation when they caused recessions in 1954, 1958, 1961, 1970, 1975, 1980, 1982, and 1991. They’ve been fighting inflation, although they now say inflation never was as high as reported. They’ve been fighting inflation, although they’ve never made clear exactly what inflation is.

EVIDENTLY inflation is not all prices going up together, because they never have all gone up together; and since ordinary business requires making contracts at fixed prices, they never could all go up together. Evidently inflation is not an increase in the price of energy (a.k.a. oil) or an increase in the price of food, because economists have now concluded that these prices are controlled by foreigners or the weather or both. Evidently inflation is not an increase in the multimillion-dollar salaries of executives, entertainers and professional athletes, because such incentives are said to be needed to bring out the best in lethargic souls.

Evidently inflation is not an increase in profits, because profits are what it’s all about. Evidently inflation is not an increase in the cost of borrowing money, because raising the interest rate is the sole weapon the central bank uses in its perennial fight against inflation.

So what is left? Judging from press reports, it would appear that the chief signs of inflation are a fall in the unemployment rate, a fall in the number of new applications for unemployment insurance benefits, faint signs that some wages may be rising almost as fast as productivity, and improvement in the sales of discount stores.

As Pogo might have said, conventional economics has met the enemy and they is us. Inflation is some prices going up faster than others. In the conventional lexicon, the only really bad prices are the incomes of the middle class and the poor.

There is little doubt that an increase in these prices would eventually result in increases in some manufactured products, in some of what used to be called dry goods, and in some services. After all, the middle class and the poor do most of the work of the world, and wages are certainly a cost of doing business and thus a factor in prices.

But interest is also a cost of doing business and a factor in prices.  Increases in the interest rate thus push up prices. If Mr. Greenspan only grappled on to that simple and obvious fact, and if he took seriously his concerns about a divided society, he might launch a policy of slowly reducing the interest rate, striving to use his great power to achieve a new soft landing for all of us in a larger, more generous, more inclusive, more united, and more rewarding economy.

Conventional economists would of course scream that high interest rates are necessary to enforce a “natural rate of unemployment,” and that the Treasury couldn’t sell its bonds if the rate were reduced to what was common only 40 or 50 years ago (before the dispersion of incomes began). But everyone who is active in the economy wants lower interest rates-the automobile business and its ancillaries, the building industry and its suppliers from producers of carpet tacks to manufacturers of major appliances, all sorts of retail concerns and their customers, managers of mutual funds and their investors, most bankers, and governmental entities at all levels as they struggle to balance their budgets.

Did I say “most bankers”? Of course I did. The usurious rates of the ’70s and ’80s taught them a lesson. To attract and hold deposits they had to compete with Treasury bills paying as much as 16.3 per cent, while the Federal Reserve set a rate of up to 19.1 per cent on interbank loans. Borrowers resisted the rates that banks had to charge and cut their borrowing to the bone. Hundreds of S&Ls were wiped out (see “Who Killed the Savings and Loans?” NL, September 3, 1990), and many regular banks failed.

Mr. Greenspan himself, in answer to a question once posed about the natural rate of unemployment, said, “I don’t believe 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.” Responding to a suggestion that interest rates had to be high to attract foreign bond buyers, he has also said, “I’m not aware that we’ve had very many difficulties selling the debt-the Federal debt at low interest rates.”

Conventional economists may sneer at Mr. Greenspan for voicing such unconventional ideas. A more valid complaint is that he doesn’t act on them.

The New Leader


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