Dangerous Misconceptions

Words. They can hurt. They can purvey pernicious thoughts behind attractive or clever sounding draperies. They can, as with orthodox economics, do substantial damage to ordinary people who are completely unaware of the meaning of those words, or the dire consequences that those distant and stuffy sounding thoughts can bring raining down on the innocent. This is, of course not a novel thought. But I reflect on it now and again when confronted by comments designed to lead the unaware to an extreme conclusion.

Alan Greenspan is particularly adept at tossing out seemingly clever ideas. He pontificates well. He tries to hide his agenda. Like a lot of orthodox economists, he speaks as if he is being objective or scientific rather than pressing an ideological perspective. This is the worst kind of dangerous misconception: when a person poses as an expert in order to press the world into a preferred shape, rather than to act as a dispassionate advisor. The untrained ear hears sagacity, the knowing mind abhors the trickery.

Thus when Greenspan writes that:“The welfare state has run up against a brick wall of economic reality and fiscal book-keeping.” He is making a political statement not an economic one. There is no brick wall. The economic reality is only in the minds of right wing economists. And the notion of fiscal book-keeping as a form of discipline that we all must bend to as a matter of inevitability is simply a tricky way of misleading readers, and distracting them from the alternative choices available. Yes, books must balance. But the content of those books, the totals we target, and the composition of the assets and liabilities are a very rich and diverse array. Pretending that there are hard limits beyond which we cannot, nay: should not, go is illusion. It is an attempt to guide the naive towards an agenda that they may not choose were they aware of the true choice.

It gets worse.

He goes on to suggest, as if it is a hard and fast fact, that trying to overcome the brick wall he mentions via increasing taxes “has fostered decline.” He disarms objectors by adding, somewhat professorially, “Contractions have also occurred where spending was cut as well, but to a far smaller extent”.

Really?

Far smaller extent? Austerity – which is the current favorite description for cuts in spending – can cause declines in economies, but, he says, to a far smaller extent. So when picking your poison, dear readers, he subliminally alerts us, always choose the spending cuts. It will hurt less. And since those book-keeping realities have emerged to doom the welfare state, choosing the least painful option is the sensible way forward. And we all know that being sensible is so, well, sensible.

Really?

Tell that to the Spanish. They have tried this austerity stuff. So much so that their unemployment rate is now 23%. The austerity measures that produced this appalling level of unemployment have failed to rein in the government’s deficit which is now set to break the 8% ceiling the Spanish government was targeting. So. Guess what? The Spanish are increasing the pain. They are piling on more austerity to squeeze their economy into an ever decreasing space.

And this, if we hear Greenspan correctly, is less painful. 23% unemployment and the prospect of cycles of ever more cutting in order to reduce a deficit that is less that that of the US or the UK, is less painful. Than what? The bubonic plague? The Spanish must have been fiscally stupid with unfunded entitlements a-go-go to be willing to choose depression as the lesser poison.

Please note that Greenspan invokes accounting asymmetrically. He avoids pointing out that cutting spending necessarily implies reducing an economy. Less spending is, inevitably, – how do I say this delicately? – less spending. Duh. This is lesser poison only in the feverish minds of market magic true believers who add an addendum: the lessened economy is reduced that admit, but like a plant after a good pruning, it will come roaring back refreshed and renewed. Why? Market magic. The loss of that deadweight, the refreshing admission that entitlements needed to be cut, the freeing up of resources for better allocation – think mortgage backed securities as an example of the allocation Greenspan encouraged – will open up the spigots of confidence. That upswelling will magically translate into investment and spending sufficient bro offset the austerity cuts. And – cue the happy music – the economy will turn out, not to have decreased, but increased in size.

It’s magic I tell you. All we need is an injection of confidence. And that requires the very sensible elimination or curtailment of entitlements. A little pain as precursor to this magic is a small price to pay.

But Greenspan goes on. Never fear. Even this preferred pain can be avoided, or lessened. All we have to do is tinker with the entitlement programs at the heart of the fiscal mess. We can shift them from being defined benefit programs and make them into defined contribution programs. This sleight of hand relieves the squeeze. It blasts us through the brick wall. It upends the limits set by sensible book-keeping. It is an all-purpose solution to our problems. The private sector has already going through this transition. Only 37% of all US based pension assets are now tied tip in those old, and in Greenspan’s eyes unaffordable, defined benefit plans. So all we need to do is copy they ever more efficient private sector and make the switch.

This is a Republican party favorite. So: buyer beware! Look for the trickery.

Which is not hard to find.

The point being that the private sector made the switch in order to generate profits at the expense of benefits. The mantra of shareholder value, so beloved of MBA’s everywhere, impels business to shift the retirement risk off their own books and onto the shoulders of their employees. The shareholders now pose as offering a retirement benefit – they contribute cash towards a savings plan – but the benefits that those savings generate are no longer guaranteed. It is whatever it is. The shareholders remove the burden of making a promise, in the guise of being generous, while the employee is now exposed to the vicissitudes of long term investing that most, if not all, of them have no skills or hope of mastering. Good luck loyal workers, you’re on your own. Oh, and by the way, that extra risk shifted onto the innocent shoulders of workers everywhere is uncompensated. Wages are not increased to offset the risk. Workers are supposed to build their own retirement funds from the same cash flow they had before.

Nowhere in a finance text book would the decoupling of risk and return be thus tolerated. Extra risk, we are taught, requires extra return. That is an iron law of finance.

Except when it involves undermining entitlements flowing to workers. Then the iron law evaporates, and, hey presto, we can vault over all sorts of brick walls, and elide the constriction imposed by the need for sensible book-keeping.

How convenient.

Note the contradiction: we build confidence by replacing the certainty of defined benefits with the uncertainty of defined contributions. This builds confidence? For shareholders perhaps. Not, I would argue, for households already struggling with the consequences of corporate cost cutting, layoffs, and wage stagnation. That’s a big ask of the market magic fairy.

To correct the facts: the Spanish government was a picture of fiscal rectitude before the crisis. So-called entitlements were not its problem. Not at all. No. It ran afoul of a balance of payments crisis without having recourse to adjustment via currency devaluation. It had to plunge itself into near depression in order to sort out a mess that was not at all due to hitting a brick wall or due to the mythical impact of sensible book-keeping.

Here in the US we had a different problem. It was not a reckless promise of unfunded entitlement that ran up the debt, it was reckless fiscal policy in the form of debt financed defense spending under Reagan and debt financed tax cuts under Bush. Our debt issue, such as it exists, does not require a shift to defined contribution style government programs, nor does it require us to bend to the will of accounting. It requires us to restore the fiscal policy that served us well in the 1990’s. Nothing more. Nothing less. My recollection is that Greenspan both connived in and openly supported both the Reagan and Bush excesses. He more than anyone flouted the constraints of sensible book-keeping. He has no credibility. None.

He is peddling snake oil dressed as sage observation. He is neither sage nor an objective observer. He is an ardent advocate of right wing ideology and should be declared as such. His views are not an expression of economic realities, they are simply the opinion of a man whose major contribution to our economy was to facilitate and encourage the causes of the crisis that he now dares claim imposes limits on the very programs that have protected vast numbers of Americans from the damage he helped create.

Why the Financial Times wastes ink on him I have no idea.

His dangerous misconceptions have been proven to be especially dangerous. We need to move on without him.