Alan Greenspan's Speech

Anyone watch today's Power Lunch on CNBC? I was browsing the 24 hour news channels at home during lunch and came across a speech on economic flexibility from Federal Reserve Chairman Alan Greenspan. His remarks were for something called the HM Treasure Enterprise Conference in London, England. Via satellite, he laid out a wonderfully broad historical case for free trade and free markets.

The overall theme was the great desirability of free market flexibility and how attempts to do otherwise in the past had conclusively failed. Sounding a specific interest in labor markets, Mr. Greenspan took aim at protectionism, noting how as market forces asserted themselves to present Japanese low-cost laborers as the Foreign Threat of the 80's those very same forces shifted economic focus to Mexico in the '90s and then subsequently to China, rendering hollow the idea that the American workforce must be protected from low-cost labor from abroad.

Some key quotes:

As the Great Depression of the 1930s deepened, John Maynard Keynes offered an explanation for the then-bewildering series of events that was to engage economists for generations to come. Market systems, he argued, contrary to the conventional wisdom, did not at all times converge to full employment. They often, in economists' jargon, found equilibrium with significant segments of the workforce unable to find jobs. His insight rested largely on certain perceived rigidities in labor and product markets. The notion prevalent in the 1920s and earlier--that economies, when confronted with unanticipated shocks, would quickly return to full employment--fell into disrepute as the depression festered. In its place arose the view that government action was required to restore full employment.

More broadly, government intervention was increasingly seen as necessary to correct the failures and deficiencies viewed as inherent in market economies. Laissez-faire was rapidly abandoned and a tidal wave of regulation swept over much of the world's business community. In the United States, labor practices, securities issuance, banking, agricultural pricing, and many other segments of the American economy, fell under the oversight of government. With the onset of World War II, both the U.S. and the U.K. economies went on a regimented war footing. Military production ramped up rapidly and output reached impressive levels. Central planning, in one sense, had its finest hour.

[...]

However, cracks in the facade of government economic management emerged early in the postwar years, and those cracks were to continue widening as time passed. Britain's heavily controlled economy was under persistent stress as it vaulted from one crisis to another in the early postwar decades. In the United States, unbalanced macroeconomic policies led to a gradual uptrend in the rate of inflation in the 1960s. The imposition of wage and price controls in the 1970s to deal with the problem of inflation proved unworkable and ineffective. The notion that the centrally planned Soviet economy was catching up with the West was, by the early 1980s, increasingly viewed as dubious, though it was not fully discarded until the collapse of the Berlin Wall in 1989 exposing the economic ruin behind the iron curtain.

The East-West divisions following World War II engendered an unintended four-decades-long experiment in comparative economic systems, which led, in the end, to a judgment by the vast majority of policymakers that market economies were unequivocally superior to those managed by central planning. Many developing nations abandoned their Soviet-type economic systems for more market-based regimes.

[...]

As a consequence [of deregulating large swaths of the American economy], the United States, then widely seen as a once great economic power that had lost its way, gradually moved back to the forefront of what Joseph Schumpeter, the renowned Harvard professor, called "creative destruction," the continuous scrapping of old technologies to make way for the innovative. In that paradigm, standards of living rise because depreciation and other cash flows of industries employing older, increasingly obsolescent, technologies are marshaled, along with new savings, to finance the production of capital assets that almost always embody cutting-edge technologies. Workers, of necessity, migrate with the capital.

Through this process, wealth is created, incremental step by incremental step, as high levels of productivity associated with innovative technologies displace lesser productive capabilities. The model presupposes the continuous churning of a flexible competitive economy in which the new displaces the old.

The success of that strategy in the United States confirmed, by the 1980s, the earlier views that a loosening of regulatory restraint on business would improve the flexibility of our economy. Flexibility implies a faster response to shocks and a correspondingly greater ability to absorb their downside consequences and to recover from their aftermath. No specific program encompassed and coordinated initiatives to enhance flexibility, but there was a growing recognition, both in the United States and among many of our trading partners, that a market economy could best withstand and recover from shocks when provided maximum flexibility.

[...]

The most significant lesson to be learned from recent economic history is arguably the importance of structural flexibility and the resilience to economic shocks that it imparts. The more flexible an economy, the greater its ability to self-correct in response to inevitable, often unanticipated, disturbances and thus to contain the size and consequences of cyclical imbalances. Enhanced flexibility has the advantage of being able to adjust automatically and not having to rest on policymakers' initiatives, which often come too late or are misguided.

I do not claim to be able to judge the relative importance of conventional stimulus and increased economic flexibility to our ability to weather the shocks of the past few years. But it is difficult to dismiss improved flexibility as having played a key role in the U.S. economy's recent relative stability. In fact, the past two recessions in the United States were the mildest in the postwar period. The experience of Britain and many others during this period of time have been similar.

He spoke with a calm and assurance that seemed so out of place in the context of today's political battles. All of this is sound, rational thinking. And yet, Howard Dean want's him out because he feels Mr. Greenspan is too political. Another nail in his coffin, as far as I'm concerned.

I do not doubt that the vast majority of us would prefer to work in an environment that was less stressful and less competitive than the one with which we currently engage. The cries of distress amply demonstrate that flexibility and its consequence, rigorous competition, are not universally embraced. Flexibility in labor policies, for example, appears in some contexts to be the antithesis of job security. Yet, in our roles as consumers, we seem to insist on the low product prices and high quality that are the most prominent features of our current frenetic economic structure. If a producer can offer quality at a lower price than the competition, retailers are pressed to respond because the consumer will otherwise choose a shopkeeper who does. Retailers are afforded little leeway in product sourcing and will seek out low-cost producers, whether they are located in Guangdong province in China or northern England.

If consumers are stern taskmasters of their marketplace, business purchasers of capital equipment and production materials inputs have taken the competitive paradigm a step further and applied it on a global scale.

And time for the reality check:

Yet globalization is by no means universally admired. The frenetic pace of the competition that has characterized markets' extended global reach has engendered major churnings in labor and product markets.

The sensitivity of the U.S. economy and many of our trading partners to foreign competition appears to have intensified recently as technological obsolescence has continued to foreshorten the expected profitable life of each nation's capital stock. The more rapid turnover of our equipment and plant, as one might expect, is mirrored in an increased turnover of jobs. A million American workers, for example, currently leave their jobs every week, two-fifths involuntarily, often in association with facilities that have been displaced or abandoned. A million, more or less, are also newly hired or returned from layoffs every week, in part as new facilities come on stream.

Related to this process, jobs in the United States have been perceived as migrating abroad over the years, to low-wage Japan in the 1950s and 1960s, to low-wage Mexico in the 1990s, and most recently to low-wage China. Japan, of course, is no longer characterized by a low-wage workforce, and many in Mexico are now complaining of job losses to low-wage China.

Near his conclusion he sums up:

The onset of far greater flexibility in recent years in the labor and product markets of the United States and the United Kingdom, to name just two economies, raises the possibility of the resurrection of confidence in the automatic rebalancing ability of markets, so prevalent in the period before Keynes. In its modern incarnation, the reliance on markets acknowledges limited roles for both countercyclical macroeconomic policies and market-sensitive regulatory frameworks. The central burden of adjustment, however, is left to economic agents operating freely and in their own self-interest in dynamic and interrelated markets. The benefits of having moved in this direction over the past couple of decades are increasingly apparent.

He finishes off with a direct warning against returning to the policies of the past, where government had greater involvement in the economy.

Good stuff and one of the better policy statements from an actual American policymaker I've heard in some time. Mr. Greenspan may have turned in his staunch capitalist roots some time ago, but he's still a damn sight more correct than most people of his position and above.

Posted by Drizzten at January 26, 2004 12:41 PM