Oct 23 2013

“I have found a flaw.”

Alan Greenspan is the most thoroughly discredited economist in the world.

Humans Can Be Irrational, and Other Economic Insights


Published: October 20, 2013

Accounts of the financial crisis, in particular, have assumed the character of Mr. Potato Head kits. There is a box of standard explanations, and each writer picks the ones he finds most appealing. Mr. Greenspan’s Potato Head is made up of predictable parts: He blames the government for encouraging subprime lending but absolves the Federal Reserve’s policy of low interest rates.

In this new book, Mr. Greenspan writes that the crisis could have been entirely prevented by stricter capital standards, which would have limited the unstable reliance of financial institutions on borrowed money. But he does not explain that under his leadership, the Fed played the lead role in creating rules that let banks set their own capital levels, with predictable results.

“The marked increase in risk taking of a decade ago could have been guarded against wholly by increased capital,” he writes. “Regrettably, that did not occur, and the accompanying dangers were not fully appreciated, even in the commercial banking sector.”

The most provocative part of the book is Mr. Greenspan’s assertion that government spending on Social Security, Medicare and other entitlement programs is the reason that the American economy has grown more slowly in recent decades. He writes that taxation of upper-income households is reducing their ability to invest in new ideas and new machines and new buildings. Less investment yields less innovation, slower growth in productivity and less economic growth.

Yet it is not obvious that the American economy has been suffering from a lack of financing. While Americans saved less, the rest of the world was only too happy to shovel money into the United States. Mr. Greenspan in this same book subscribes to the view that the housing crash was caused in part by an overabundance of foreign investment in the American economy.

Furthermore, taxation cannot be the reason Americans are saving less. The New York Times reported last year that most Americans in 2010 paid a smaller share of income in taxes than households with the same inflation-adjusted incomes paid in 1980. Mr. Greenspan notes that the wealthy are paying more in taxes – but that is only true because they are making more money. Households earning more than $200,000 saw the largest decline in taxation as a share of income.

It’s also worth noting that productivity and growth have sagged most dramatically since President George W. Bush cut taxes in 2001.

1 comment

  1. ek hornbeck

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