Friday, June 20, 2008

The Age of Turbulence

The Age of Turbulence: Adventures in a New World, Alan Greenspan (New York, The Penguin Press, 2007). 505 pages. $35.00

The Age of Turbulence begins with an introduction where Greenspan tells readers he is dividing the book into halves where “the first half is my effort to retrace the arc of my learning curve, and the second half is a more objective effort to use this as the foundation on which to erect a conceptual framework for understanding the new global economy.”

The first half has eleven chapters, or 231 pages, which are a chronological memoir. It starts at his start in 1926 and progresses eighty years to his retirement in January 2006.

The second half has 14 chapters, or 257 pages, that cover the global economy, first by discussing the universals of economic growth for use in a synopsis of countries: the United States, Europe generally, followed by Great Britain, Germany, France, Italy, Japan, and Australia. Longer separate chapter discussions cover China, the Asian Tigers including India, Russia, and Latin America. Following these there are seven more chapters covering global economic issues, although the discussion here relates toward the perspective of the United States. The two halves could be read as separate books: neither half needs the other.

In the memoir readers learn Mr. Greenspan’s depression era allowance: 25 cents. There are other nostalgic, but brief, memories of Manhattan in the 1930’s and 1940’s before getting to his professional career. We learn about his education and his early work at the Conference Board. We learn about Arthur Burns and Ann Rand and his invitation to join a New York investment firm that became Townsend-Greenspan.

In a few more pages we reach 1967 and his first step into public life. He joined the Nixon campaign. He resisted a position in government until 1974 when he agreed to be the Chair of the Council of Economic Advisors. It was a Nixon appointment but he served only President Ford, leaving at the Carter inauguration.

The remaining material in the memoir amounts to an economic seminar of the era with personal analysis and reflection. Until his 1987 appointment as Federal Reserve Bank Chairman the discussion gives analysis and perspective as an outsider. As Fed Chair he describes his views and decisions as the policy maker.

Some politics and personalities are mixed in the economics seminar. Greenspan describes Richard Nixon as an extremely smart man who is sadly paranoid, misanthropic, and cynical.” For myself, I never met a sadly paranoid, misanthropic, cynical smart guy, but we can let that one go.

“Ford was a secure man, with fewer psychological hang-ups than almost anyone I’d ever met.” Bill Clinton and the Bushes get a sentence or two of Greenspan assessment.

Many economic issues introduced and discussed as part of the chronological memoir occur again as topics in the second half of the book. The virtues and benefits of free enterprise and capitalism appear frequently as Greenspan themes in the memoir but again sprinkled in the second half of the book. Country discussions compare property rights and free enterprise practices to economic performance. Repeatedly he concludes that free enterprise improves growth compared to central planning.

Readers may wonder, as I did, why there is so much attention given to free enterprise. Historians, economists, politicians consistently acknowledge that economic growth and innovation requires freedom for individuals to pursue their interests and take independent initiative. Individual initiatives need the enforceable property rights that go with free enterprise, but the matter is hardly controversial.

The attention to free enterprise contrasts with the inattention to distribution. He does mention “a large segment of society feels a growing sense of injustice about the allocation of capitalism’s rewards.” He returns to justice and injustice again at several places. On the last page of the book he writes “As awesomely productive as market capitalism has proved to be, its Achilles’ heel is a growing perception that its rewards, increasingly skewed to the skill, are not distributed justly.”

Trouble is he only mentions the problem, but never develops distribution issues. Tax policy is ignored. In 1975 personal income tax rates reached 70 percent; now it is 35 percent. Since he never mentions tax policy we don’t know if he believes the well-to-do should bear the same responsibilities to support their government now as they did in 1975.

Greenspan devotes many pages to financial investment and corporate finance. He tells readers “Abnormal returns in an essentially unregulated market generally reflect inefficiencies in the flow of the world’s saving into capital investment. Heavy purchases of those niche assets restore their pricing to “normal.” Although certainly not the objective of profit-seeking market participants, the resulting price adjustments, to paraphrase Adam Smith, benefits the world’s consumers.”

He argues that investing should be self regulating through “counterparty surveillance,” apparently a fancy term for “buyer beware.” He admits counterparty surveillants do not always do their counterparty surveillance. “A major failure of private counterparty surveillance was the near-collapse of Long Term Capital Management(LTCM), the 1998 financial train wreck … [LTCM] turned into gamblers, making large bets that had little to do with their original business plan. In 1998, LTCM lost its shirt.”

Few, if any, use the term “near-collapse” for LTCM, nor were the loss of shirts confined to LTCM. Several banks under his regulatory supervision made unsecured loans to LTCM as contributors to the above referenced gambling. He writes the episode shook the markets, but suggests the next collapse of a US hedge fund, Amaranth, caused “scarcely a tremor.” No mention of Margin Requirements; the term does not appears in the index of the book.

Finance issues are everywhere but other topics get covered in the mix. He takes up debts and deficits, long term interest rates, inflation, social security, Medicare, free trade, education and energy.

On jobs and education we get a repeat of his capital hill testimonies: “Get some training.” He admits that “income concentration has been rising since 1980.” An income inequality discussion goes on for eight pages when he announces “a very likely significant part of the explanation for recent developments appears to be the dysfunction of elementary and secondary education in the United States.”

The remaining pages in the chapter are a patronizing attack on American education to justify America’s income inequality. He refers to a skills-jobs mismatch for colleges and college students, but cites nothing of wages and jobs from the Bureau of Labor Statistics Occupational Employment Survey, nor graduation by field of study from the National Center for Education Statistics that might support his view. Unlike other parts of the book that use data, here he refers to work by others such as “ an interesting paper” written by no one in particular at the Brookings Institution for the Hamilton project, whatever that might be since there is no citation. I found this chapter tiresome and useless.

On the long term energy squeeze there is a supply and demand discussion of oil, but also natural gas, coal, nuclear, and renewable energy. Discussion covers energy in the global economy with the potential for new technologies and how they might interact with supply and demand. For policy he suggests “significantly higher gasoline prices to wean us off gasoline-powered motor vehicles.” At the end of the energy chapter he writes: “I am saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil.” I thought wow. Tell us more, but that is all about oil and war.

The book is best when discussing the workings of the Federal Reserve Bank and monetary policy. Readers get Greenspan’s thinking on nearly 20 years of policy at the Federal Reserve. We hear about the economic variables he tracked and the positions he backed.

Otherwise the book is too long. There is too much repetition, especially the campaign to sell free enterprise and justify growth over any and all distribution issues. Big market failures tend to get Greenspan excuses. There are no footnote citations. A source name for data is often mentioned in the text, but not correct citations; a major flaw for a data book. Despite all of that, it is easy to sense a man with an admirable view of his public responsibilities as Federal Reserve Chair. That we like, but I finished the last page thinking here is a better man than his book.