Alan Greenspan was the Chairman of the Federal Reserve from 1987 and 2006, and this book, The Age of Turbulence: Adventures in a New World is a combination of a personal memoir and a series of essays pertaining to the US and world economy. The first eleven chapters of this book are an autobiographical chronology of his life from his earliest memories up till 2006. This section allows readers a look in to his personal life and the people and circumstances which influenced and guided him. Then, in the last fourteen chapters, he writes about his experiences in government and as an economist, discusses capitalism and other economic systems of the world, and presents his analysis and history of current issues in the global economy, and issues that the global economy is set to go through in the future.
Greenspan has a lot of credibility to his name as he has worked with every president since 1969, excluding Jimmy Carter. And this book contains an assessment of the styles and policies of each. In his opinion, Gerald Ford who knew when to listen to his advisors and when to trust his own knowledge, had a very positive impact on the US as well as world economy because of the deregulation he helped bring about and the priority status he gave to reducing inflation. Ford became president at a time when the economy was crippled with high inflation rates, OPEC oil embargo and the removal of wage/price controls which the Nixon government before him had implemented. I do agree with Greenspan’s appreciation for the measures Ford took to reduce the inflation rate, as he took a number of initiatives such as the Whip Inflation Now Campaign, to fight inflation at the individual and household level. In addition, he sought to cut taxes, reduce expenditure and “decontrol” energy prices. Even though inflation was actually curtailed in the 1980s, after Ford had left office, his attempts at restoring the ravaged economy handed to him by Nixon warrant praise.
I also agree with Greenspan’s views about Clinton, who he ranks second to Ford with his “consistent, disciplined focus on long-term economic growth”. Clinton was the president for the longest period of economic expansion in US history, in a time of peace, and left with the budget balanced and a huge federal surplus at the end of his presidency. While no one administration can be awarded all the credit for all the growth and advancement that takes place in the decades that follow, but a closer review of Clinton’s policies makes it apparent that his decisions at that time, some crucial compromises, to reduce the federal deficit have a big role to play in the high-investment, growth and productivity that resulted in later years.
Greenspan, however, is extremely harsh in his criticism of the current President Bush and his Vice President Dick Cheney who did not adhere to their own party’s principles on spending and deficits, by paying very little attention to fiscal discipline. He dealt with the Congress in a way which spelled out “conflict avoidance”, never calling them out on excessive spending or veto bills which caused the country to run into deeper deficits. His “collaborate-don’t-confront approach” led to the Congress ignoring rules requiring that tax cuts be balanced by savings. To quote him, “The Republicans in Congress lost their way… They swapped principle for power. They ended up with neither. They deserved to lose” in the 2006 election.
The current president’s economic policies in my opinion do deserve their fair share of criticism. And there are many reasons for this: a staggering amount of national debt, a biased tax code, mortgage defaults like this country has never witnessed before, a historic trade deficit of almost $850 billion, sky rocketing oil prices and the continuously weakening American dollar. The housing bubble bust, caused by low interest rates and risky mortgages in the previous years, has spent the entire economy in a troubling recession that is affecting the global economy.
Greenspan’s view about the Fed needing to be more concerned with inflation now more than ever is correct because the growing inflation will need to be arrested by higher interest rates is correct because of the impact the US economy has on the rest of the world. The overall slowdown of the U.S. economy does have grave consequences for the global economy but today the emerging economies of the world are witnessing huge increases in domestic demand and investment. Therefore, the impact of the US on the global economy has lessened as compared to previous times, when shakeups in the US economy would lead to a global breakdown. Regardless, the subprime mortgage crisis, stock market downturn and the trade deficit have all led the economy into a recession, and it remains to be seen what steps the government-to-be-elected takes for economic recovery.
Globalization and its impact on the rest of the world is also a topic Greenspan discusses in his book. He supports Adam Smith’s “invisible hand”, which is people’s motivational self-interest, stating that as the reason for a successful, booming economy. He is a great advocate of free market capitalism and his chapters on the economic successes and challenges of recent decades in Japan, China, India, Russia, and Latin America are interesting to read, particularly his view of Latin America’s “economic populism”: “Economic populism makes large promises without considering how to finance them”.
I do acknowledge the significant advantages globalization has led to in integrating the world economy and, above all, in reducing the isolation of developing countries from the world economy and trade liberalization has definitely brought tangible benefits. But, it has also caused economic havoc, due largely to the absence of a safety net for the poor. There is a hypocritical attitude prevalent in rich countries when they force the developing countries to liberalize trade, but keep intact their own formidable barriers and subsidies, particularly on agricultural trade.
Institutions such as the West-dominated IMF have openly sponsored capital market liberalization when it should have been clear that much of the developing world did not possess the required preconditions for such large-scale liberalization. Latin America has seen hardly any growth, investment and employment creation post-globalization. China is also facing challenges due to globalization, because there has definitely been creation of great wealth, but there have also been increases in inequality, injustice and absolute poverty (not pertaining to GDP but to affordability of basic services and amenities such as education and health care). The attempt to globalize Russia through “shock therapy” did not work out because there should have been proper sequencing of policies and a more gradual, consensus-based approach should have been follows. Today, Russia aims to regain its old power but struggles due to a weak economy and has not found its place within the global system, with the coming year being pivotal in determining its future path after Putin’s term expires in May 2008.
Another problem which Greenspan points out in the US economy, which is definitely a source of great concern, is the retirement of the baby boomers and the impending fiscal problems attributed to the draws on Social Security and Medicare. Defined pension plans, Medicare and social security will be funded by federal government borrowing, leading to a severe risk to the nation’s economy. To counter this looming crisis, action needs to be taken soon when baby boomers are still working and contributing payroll taxes, and large premium increases have already made news.
The outlook for the world economy is quite uncertain because of the current situation in the U.S., the impact of which can go either way. The only way this recession might not turn into a global economic downturn is if the emerging economies, act as “rescuers” and this might be a possibility because of the surge in domestic demand which is now driving these economies. Also the dynamism of emerging economies spells out bad news for America as it prevents oil prices from falling and weakens an already-weak dollar, and might cause the world to question its need for this currency. The emerging markets have been outperforming the U.S. in recent times, but whether they can continue to do so when the U.S. is going through rough times, remains to be seen. Regardless, the growth of emerging economies such as China and India, part of the BRIC group also including Russia and Brazil, makes them a force to be reckoned with. The global economy in the next 50 years will not be centered around the US but will be led by emerging markets, which will occupy an increasingly large share of world GDP.
References
Greenspan, Alan. The Age of Turbulence: Adventures in a New World. New York: The Penguin Press, 2007.