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Hullabaloo


Sunday, November 18, 2012

 
The Oracle speaks: Alan Greenspan talks utter nonsense

by digby

Alan Greenspan was at some Peterson Deficit Scold event and Ali Velshi caught up with the great man to ask him for his sage wisdom on the fiscal cliff:

VELSHI: Alan Greenspan had a front row seat to some of the biggest economic events of the last 25 years. When he was appointed chairman of the U.S. Federal Reserve, it was 1987. Ronald Reagan was in the White House.

Over 18 years Greenspan led the central bank of the world's largest economy through good times and bad. Now six years after he's left the job, his successor Ben Bernanke is warning of the danger of plunging over the fiscal cliff.

I've been warning you about the catastrophic effects that could have on America's already fragile recovery. But some say that it's fear mongering.

I spoke with Alan Greenspan who was in Washington at a Peterson Foundation event to discuss the fiscal cliff and I asked him point blank, do you believe the U.S. can go in a recession as a result of the fiscal cliff?

(BEGIN VIDEOTAPE)

GREENSPAN: Most certainly. But remember, all the forecasts come off econometric models, which didn't catch the 2008 crisis. And so you have to be very careful about using them to evaluate this type of problem.

VELSHI: The last time Washington faced the expiration of the Bush era tax cuts back in 2010, you said in interviews they should follow the law and let them expire for everyone. Now putting aside the other parts of the fiscal cliff, do you still feel that all Americans should see their income tax rates rise?

GREENSPAN: I say that this crisis is going to be extraordinarily difficult to resolve. In other words, the crisis I'm referring to is not the fiscal cliff crisis but the broad crisis with respect to debt. We have had an inexorable rise in the rate of spending on "so-called social benefits." And as I mentioned before, this is both Republican and Democrat and neither one of them get a hold on this.

But what the data very clearly shows is that as social benefits rise, the savings, the domestic savings of the American economy declines. And that is basically the root source of funding for capital investment and capital investment is where productivity comes from and productivity is where economic growth comes from.

So unless and until we recognize that we got to slow the pace and in fact reduce the level of benefits to allow savings to come through, that will create the type of economic growth, which will enable us to fund these social benefits. We're running into a stonewall here in which the more social benefits we have which we don't contain, the lower the rate of savings, lower the rate of growth, and a lesser quantity of real resources to fund the benefits.

This is obviously an unsustainable situation. And the sooner we come to grips with it the better. And I raised the issue of allowing the Bush tax cuts to rescind on schedule was not that I want taxes to go up. I think it's a terrible idea. Relative to what? I mean if we don't close this deficit fairly quickly, we are in real trouble.

Remember, it's always easier to cut taxes politically than it is to cut spending. So if you have to allow a significant rise in taxes to essentially cut a deal on a major benefit cut, that's a good deal for me because it's always easier in the future to cut -- politically to cut taxes than it is to cut spending.

VELSHI: So let me ask you this. If we can get to that 3 percent growth to 4 percent and beyond, then you've got -- you're seeing it becomes a virtuous cycle. Can that happen? Is there -- would the immediate spending cuts that we are looking at now help get us there?

GREENSPAN: Look, IMF studies show definitively that if you cut spending in a situation like this, it does lower the GDP but nowhere near the amount and increase in taxes lowers the rate of increase in GDP. So that I think if we have to have a moderate recession to solve this huge fiscal problem that's if front of us, I think there is a very small price to pay. Because we're not going to get out of this thing without paying it.

There is a presumption here that we have a whole schedule of economic policies, which can just basically solve the problems compared to a normal situation. It is not. This is an extraordinarily unprecedented situation and unless and until we reign in the spending growth, this economy can't function.


(END VIDEOTAPE)

VELSHI: The economy can't function. So he's saying a little recession is better than the idea of raising taxes on everyone. A fascinating conversation with the former Fed chairman.

What bullshit. I'm not sure what you have to do to lose credibility but obviously the crashing of the economy isn't one of them. His self-serving "nobody could have seen it coming" historical inaccuracy aside, the circular logic is fairly amazing.

First, let's take a look at the language Greenspan uses: "so-called social programs." I'm not sure why he didn't just refer to them as "gifts" but he might as well have done so. He's a little bit less aggressive than he used to be when he openly called people parasites, but his disdain is still obvious.

But beyond that, what he's saying is that the "so-called social programs" are draining the economy of the capital necessary for growth. That's nonsense. There is a ton of capital out there that's not being put to work because there's no demand. Making old and sick people poorer is not going to help that. I find it fairly amazing that the oracle is being this dishonest in public, but there you have it.

But he was very honest about one thing --- and it's something I've been saying since the last debt negotiations:

[I]t's always easier to cut taxes politically than it is to cut spending. So if you have to allow a significant rise in taxes to essentially cut a deal on a major benefit cut, that's a good deal for me because it's always easier in the future to cut -- politically to cut taxes than it is to cut spending.

Yep. Uncle Alan is signaling openly for the Republicans to take yes for an answer. They will never have a better chance to have the Democrats help them achieve their most cherished goal: slashing the "so-called social programs." They foolishly walked away before and now they are being given a second chance. All anyone wants in return is for "the rich to pay a little bit more" and as Uncle Alan wisely points out, cutting taxes is always popular. (Restoring loopholes is a breeze.)

As for the IMF study saying that cutting taxes is worse than cutting spending, I don't understand the point. After all, this is the guy who just said we should raise taxes (temporarily) in order to get those "so-called social programs" slashed. Moreover, the reason some have interpreted the data to suggest that tax hikes bring worse results than spending cuts is because central banks are assumed to take a dim view of such "revenue" increases and adjust accordingly. (One can only wonder how much the looting, burning, protesting, suffering and lost output spending cuts will bring. That data tends not to come in right away, but it does come in.)

Regardless of where it comes from, austerity has made things substantially worse wherever they implemented it. The US managed to escape the worst of it (although not entirely because of the contraction in state spending and federal hiring) but only by a small margin. Our growth is anemic and unemployment is still at very painful levels. Even discussing further austerity now, particularly in light of the IMF and OECD reports, is simply political malpractice by both parties.

When you look at Greenspan's contradictory, nearly nonsensical attempt to rationalize it you can see just what a pile of tripe it really is. To suggest that it's a good idea to go back into recession in order to deal with our debt when the IMF study he cites for his own purposes clearly demonstrated that countries that did that increased their debt, makes it clear that there are other agendas at work.

Read the rest of the transcript with a variety of people from Bob Reich to Stephen Moore and you'll find that we've gone all the way down the rabbit hole. This issue is no longer moored to reality.

They've gone nuts. Again. (We can't let the smoking deficit come in the form of a magic mushroom ...)


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