Greenspan, Still Behind the Curve Jude Wanniski January 28, 1999

In his Senate Budget testimony this morning, Fed Chairman Alan Greenspan said several smart things, but on the whole he was most unhelpful. This sounds paradoxical, but it reminds me that when Alan was at his Townsend-Greenspan consulting firm, he was enormously popular among corporate conservatives, even though his economic forecasts almost always were poor. He really does not understand “the market,” in the sense that he understands most of it, 90%, but is off on the other 10%. I do not claim to understand the 90% that Greenspan does but have devoted countless hours in the last quarter-century to the 10% that has eluded him. I never saw much point in learning stuff that was in the conventional wisdom, which I did not need to know in order to forecast. What I heard today were two errors, one serious having to do with “saving Social Security,” the other having to do with an inefficiency of pricing of the Internet stocks.

On Social Security, the soundbite that went out from his testimony is that Social Security and Medicare can be saved only by raising taxes or lowering benefits. The only thing that will reduce the need to do this is an increase in the savings rate. And the savings rate can increase if we use the budget surplus to pay down the national debt instead of using it to cut tax rates or increase spending. This plays into the hands of President Bill Clinton’s threat to block any attempt to cut taxes before “saving Social Security.” This is the Keynesian Greenspan talking. The savings “rate” has nothing to do with anything, as we easily can observe in Japan’s enormous savings rate and even larger budget deficits. All that matters in saving Social Security is national productivity, which Greenspan mentions as an aside, along with yet another plug for cutting the capital gains tax as a means of increasing productivity. The correct answer is that the government must consider each tax cut and each spending item, up or down, against the context of positive returns on investment. This was the essence of Jack Kemp’s testimony before House Ways&Means last week. If we wisely invest the looming budget surplus on the right kinds of tax cuts (and increases) and the right kinds of spending increases (and cuts) national productivity easily will grow fast enough to wipe away the actuarial deficits in Social Security and Medicare. Any Republican who seeks the presidency in 2000 on Greenspan’s advice would lose in the general election to any Democrat. Greenspan of course is correct in arguing against the government investing the trust fund in equities, and any Democrat who runs against Greenspan’s advice on that issue will have a mountain to climb in winning the White House.

Kemp’s testimony did not mention the Internet, but it clearly promises to increase living standards over the next generation by such incredible amounts that it is not hard to imagine the Social Security tax rate going down and the benefits going up. Greenspan actually was quite good in noting that some of the Internet stocks that seem overpriced may turn out to be cheap, but most will fail. There is a lottery element in all of the Internet high-fliers, but thus far the smartest people on Wall Street have lost the most money betting against Amazon and Yahoo, to name two, while ordinary folk until very recently have been the beneficiaries of these lottery bets. One of the smartest men I know continues to insist that Amazon will crash, while another of the smartest men I know is still buying it for the long term. For the moment, they have talked me into a holding position.