By Beverly Mann
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.)