Alan Greenspan's "The Age of Turbulence"

I was pleasantly surprised by how readable Greenspan's book was. I had expected the opaque "Fed Speak" for which he was famous (and which he admits in this book that he purposefully made opaque).

The early chapters review his life and I found them interesting. One thing you wouldn't expect is that he was a musician in a 1940s big band, the Harry Jerome Orchestra. His nerd personality shows through: he makes the comment that while others were out carousing and doing drugs he would quietly sit and read and did the tax returns for them.

Greenspan mentions his relationship with Ayn Rand but doesn't go into much detail. He puts forward the story that he found her ideas interesting and enjoyed attending the meetings of the faithful in her apartment but eventually drifted away. The basis of his affiliation with her thoughts is his own commitment to a libertarian philosophy. He shows that he is an advocate of market fundamentalism, i.e. a deep belief that free markets will magically deliver a better world. He is also a leading figure in neo-liberalism, an economic philosophy that came from the right wing push of thinkers like Milton Friedman. This puts him solidly in a camp with right wing radicals.

I did enjoy Chapter 24, "The Long-Term Energy Squeeze". I think this book gets it right. The puzzle is "why are oil prices high?" Presumably if you look at a supply/demand curve you get a jump in prices if demand goes up or supply decreases. Sure, there has been some increase in demand as developing countries get richer and want more oil, but enough to double the price in 12 months and triple it in two years? On the other hand, fanatics who advocate "Hubbert's Peak Oil" theory would claim that prices are up because we are running out of oil. But this doesn't fit the facts I see. For example, if you look at British Petroleum's "BP Statisical Review of World Energy June 2008" you will see that there is 40+ years of oil supply. (And for the last 100 years there has been 30-40 years supply of oil because there is no incentive to find oil beyond what the market can use in a relatively short time.) Some argue that the crimp in supply is not because of long term shortage but because of short term speculation. But Paul Krugman, a liberal on the left, emphasizes that there is no oil speculation because there is no way to "hold" the oil. (I personally believe that there is some and it is mainly by OPEC which is simply keeping the oil in the ground knowing it will bring higher prices in the future since they have monopoly power to force the shortage to get the higher price.) Greenspan's argument is very interesting. He points out that for 30 years there has been a 1.6% increase in oil use and a 1.6% increase in discovered reserves. A balance. But the problem is that over this same period there has been only a 0.8% investment in infrastructure to extract, transport, and process the oil. The current price runup isn't because there is not enough oil and not because of unexpected surging of demand. It is simply not enough investment. He points out that OPEC didn't invest because:

• They used revenues to support their rapidly rising populations (think of the oil subsidies and programs such as Chavez has in Venezuela to aid the poor).
• These countries are basically hostile to the consuming West and keep all their statistics on oil reserves, production, and investment as "state secrets".

Consequently, there is suddenly a squeeze. Historically there was a large buffer of excess capacity that could handle problems like hurricanes and terrorist attacks. Now there isn't. So every news story scares the market and drives the price higher. This is obviously to the benefit of OPEC because it makes their resource more valuable. He points out that starting with Rockefeller and until 1973 US companies acted a "market maker" that ensure that supply met demand. But control has now been lost. While there was a capacity buffer this wasn't a problem. Now that the buffer is gone, it is a serious problem and drives the price up.

The book has lots of thoughtful and fact-filled material to enjoy. The trick is not to get seduced into Greenspan's peculiar right wing view of the world. He shows a remarkable indifference to human suffering and an amazing belief that a "free market" is a magic solution for all problems. For example, in chapter 21, "Education and Income Inequality", he notes that "average" income is generally up over the last 30 years, i.e. the split between enterprise profits and wages is fairly stable, the problem is that the workers are getting a smaller piece of the income than the managers, e.g. in 1997 the workers got 46% of income but by 2007 this was down to 41%. (The workers comprise 80% of the population and their share of income has gone down from 46% to 41%. To appreciate this, he points out that while worker income rose by 3.4% annually, manager income rose by 5.6%.) He worries about income inequality but his solution is "better education". For most people that is not much of a salve for the guy who sees his share of the income shrinking. It might help his kids -- maybe, no guarantee -- but it sure won't help him. And to add insult to injury, Greenspan's view of education is that it needs to be "fixed" by privatizing it, i.e. moving to vouchers and shutting down the public schools because teacher unions have "too much power". In short, he is not a guy to go to for sympathy or help. He's smart, he's knowledgeable, but he doesn't show much real sympathy and not much concern for something as abstract as "social justice". The only justice he likes is "free market" solutions to all of life's problems.

So... read the book. It is informative. But read with a critical eye. He isn't a writer who wants to lay out all the viewpoints and argue their merits. He simply gives you his viewpoint because he knows that one is right. He makes a few comments to criticize other viewpoints, but he really is not interested in exploring possibilities and certainly isn't willing to search for any strength in the other side's arguments. In this regard he is as beguiling as Milton Friedman, a writer with a wonderful writing style that can lull you into buying his viewpoint while not bothering you with any arguments that might support a contrary viewpoint.

Examples of Greenspan views:

• In Chapter 2 he shows his fundamental hypocrisy. He is a libertarian who hates government, but he agreed to serve on the Council of Economic Advisors for Richard Nixon: "... I knew I would have to pledge to uphold no only the Constitution but also the laws of the land, many of which I thought were wrong."
  
• In Chapter 11 he shows himself to be amazingly blind to the building housing bubble. He notes the relevant facts "Booms, of course, beg bubbles... That concern started to surface in hot markets like San Diego and New York, where prices in 2002 jumped by 22 percent and 19 percent, respectively, and where some investors now began viewing houses and condos as the latest way to get rich quick. ... Whether a bubble or froth, the party was winding down by late 2005... The boom was over." He shows himself to be spectacularly unaware of the timebomb of NINJA loans, "liar" loans, use of unreasonable models by ratings agencies to give AAA status to "structured" investments based on tranched packages large numbers of mortagages.
  
• Chapter 22 he presents the phony argument that Social Security is "broken" and must be fixed. He doesn't distinguish between Medicare which is paid out of general revenues and is rapidly consuming a larger and larger share of the projected GDP from Social Security which is a program which is fully funded until 2047. Instead he presents the right wing's favourite bug-a-boo that Social Security will "break the bank". It will, but only because the extra taxes imposed on retirees was not kept separate. It was folded into general revenues to make budget deficits look small. The money in the Social Security fund is sufficient to cover retirement, but it has been spent because it was never invested! Greenspan himself was the author of the 1981 proposal (1983 law) that raised Social Security taxes to fund the program into the 21st century. He now conveniently forgets about the money collected. He focuses instead on the fact that, since no money was reserved, it will indeed be a "budget breaker" to meet the Social Security commitments. But this isn't a problem with Social Security. This is a problem with how the fund is administered and the fact that consecutive governments have played a sleight of hand collecting extra money as a "reserve" to cover the increased costs of Boomer retirement, but then folding that "reserve" into the general accounts so that it has long since been spent!
• In Chapter 25 he asserts his love of the gold standard and makes the claim "I have always harbored a nostalgia for the gold standard's inherent price stability..." and "We know that the average inflation rate under gold and earlier commodity standards was essentially zero." This position is nutty because it pins the monetary system to a arbitrary resource that can distort commerce. Consider a thought experiment. Assume the amount of gold is fixed (no new mines and no losses). Suppose the population doubles and the exchanged economic goods double. You don't get "price stability". You get deflation with the price of all exchanged goods now half what it was before. (Unlike Greenspan, most economist will argue for a slight bit of inflation since it stimulates the economy. Deflation is deadly because of the psychological tendency to hold onto the gold waiting for it to "buy more" which in turn suppresses economic growth.) Here is an article by Hal Varian at UC Berkeley which contradict's Greenspan's view that gold holds inflation at zero. Varian states: "The post-Civil War deflation was essentially caused by increased productivity growth. The gold standard exacerbated the downward pressure on prices: With a fixed supply of money and an ever-increasing supply of goods, prices naturally fell."