WASHINGTON, May 17, 2015 − At any given time, economists often find it difficult to reach a complete consensus on the proper economic policy to implement. Most of this lack of agreement is based on differences about key assumptions, such as what the role of government should be in influencing economic activity.
As a general practice, economists usually debate such issues in a healthy manner. But sometimes, economists like Paul Krugman shamefully attack a colleague instead.
Alan Greenspan served as Chairman of the Federal Reserve from 1987 to 2006. During those years, he successfully guided U.S. monetary policy, which, during his term, was able to minimize the effects of the 1991 and 2001 recessions.
During his tenure, Greenspan managed to keep inflation under 3 percent, while maintaining relatively low unemployment levels, even during the recession years. Today, most Americans think he did a good job. Except Paul Krugman, who strongly disagrees.
Not long after Greenspan left his position as Fed Chair, the housing bubble burst, eventually leading to the 2008-2009 financial crisis. Called the “Great Recession” today by many, this was a rather steep recession in historical terms − one from which we are still trying to fully recover.
While Krugman does not directly blame Greenspan for the housing bubble he does say, “Greenspan denied the bubble’s existence and even its possibility as it was inflating, while actively blocking efforts to tighten financial regulation.”
Krugman concludes that Greenspan’s failure to see the bubble along with his efforts to keep markets free of growth-stifling regulation, makes him the worst Fed Chair ever. Further, in the years after Greenspan left his position, Krugman claims that his reputation has continued to falter badly as he became known as “an inflation and debt fear monger.” This, according to Krugman, made successor Ben Bernanke’s job much tougher.
Krugman admits in his “Conscience of a Liberal” blog that he favors more government spending, more more public taxation, more government regulation in markets and more regulation as well in the already over-regulated finance industry. Greenspan favors exactly the opposite.
It soon becomes clear that from the start, there will be a difference of opinion between the two. But most of their economic policy differences stem from differing assumptions as to the role of government.
Regarding Greenspan’s alleged responsibility for the housing bubble, there really is not much he could have done to prevent it. It could be argued that raising interest rates to cool things off in real estate would have been one possibility. But that could very well have dragged down the rest of the economy in short order.
Alternatively, Greenspan could have put some controls on the mortgage banking industry. This might have slowed the production of what ultimately turned out to be a significant number of extraordinarily bad mortgages. But Congress and the Clinton and Bush administrations were trying to increase America’s home ownership rate to 70% of households from the traditional 62 to 64 percent, so Greenspan really couldn’t do anything to solve that problem, either.
In fact, aside from issuing warnings against then-current looaw mortgage lending standards, there really was not much else he could do.
Concerning his ongoing predictions about the problems of excessive debt and the resulting potential for high inflation due to the rapid growth in the money supply, Greenspan’s timing may be all that was off.
Economists know that a rapid increase in money supply leads to inflation only so long as money is “turning over” in the economy, known as the “velocity” of money. As Congress developed corrective legislation to reign in the banking excesses that led to the Great Recession, Greenspan also apparently didn’t fully realize the disastrous effects upon lending that the Dodd-Frank bill would ultimately exert. When banks aren’t lending, money isn’t turning over and the threat of inflation is reduced in the short term, but not necessarily in the longer term.
While the burden of today’s extraordinarily high levels of debt on the commercial and Federal levels apparently hasn’t caused problems thus far, the reason for this phenomenon is that interest rates have held near zero now for a good seven years. Apparently, Greenspan never thought this would happen and certainly never realized that even if it did, that rates would remain near zero for so long a period of time.
Once the economy finally starts to grow at a healthier clip, those near-zero interest rates inevitably will rise. To get some perspective, if the government is borrowing money at 1 percent today, then if interest rates rise to 4 percent, the cost of carrying government debt will rise four-fold, 4 times 1 percent. Eventually, continuing to carry excess Federal debt at higher and higher interest rates will become a heavy burden that future generations will be forced to carry.
Whether Krugman agrees with Greenspan’s positions or not, he should be seeking a healthy debate rather than indulging in personal attacks. it is our once-strong tradition of healthy debate that made our Democracy strong and it can do so again.
Instead of trying to seek a solution to our current monetary and debt issues that benefits the majority of American citizens, Krugman is trying to sell a position that only benefits those who share his high tax, high spending and high regulatory goals for the Federal government.
Yet all three have, in fact, been the policy of the current Administration. So where has that policy gotten us in the last six years?