Conversation with Dr. Alan Greenspan at MTLC
This article was originally posted on September 26, 2006.
On the question of the single best measure for how the economy is doing: Dr. Greenspan said that per-capita GDP (Gross Domestic Product) is the single best measure, although it does a poor job of measuring “welfare” or a “happiness index.” He is also interested in the “specific gravity” of GDP: What does it weigh? (“heavy” industries are low growth — “light” industries, idea-intensive, are high growth and high value).
On the current state of the economy: slowing slightly, inventory building and housing bubble creating some challenges (he mentioned Boston seeing the largest drop in prices), but with some underlying good news in the forms of lower energy costs, labor increasing as a share of GDP, and relative strength in other economies around the world (Europe and East Asia). Overall, the types of underlying weakness that would bode ill for the economy in the longer term are still hard to find. Also, a disproportionate portion of the productivity gain in the most recent US recovery went toward profits instead of wages. As downward price pressure builds, this trend reverses, and indicators are showing that this is beginning to happen.
On future challenges to the economy: increased conceptualization will result in intellectual property rights challenges, as most law was written in consideration of the old, more tangible economy. Interestingly, with mature information-age products and services and resulting high fixed/low variable cost models, natural monopolies are the most efficient way to function (a nod to Microsoft here). The cost of switching is so high (e.g., unlearning MS-Windows), that a wholly new way of doing things has to emerge to be worthwhile.
On the US economy’s role in the broader world economy: more integrated than ever, with China as single largest external influence. When Dr. Greenspan began his career in the Fed, everything happened here in the US, but it is currently impossible to track the US economy without having an eye on overseas economies.
On China: amazing changes in political and economic landscape. A dramatic movement toward market structures is occurring without the government ever using the words “market” or “capitalism,” despite things like professional golf tournaments (the ultimate capitalist pastime?) taking place there. The combination of huge foreign investment and very low wage labor from a workforce of 750 million people has had a dramatic effect on the world economy, moving worldwide marginal wages and prices lower.
On principal worries about China: Three categories of concern: military, economic, and both together (as they are highly integrated). If China’s military ambition results in a confrontation with the U.S. in the South China Sea, the outcome would be a collapse of the Chinese economy. Interestingly, Dr. Greenspan notes that the people running the important things in China (key companies and government ministries) are liberal technical people who understand the importance of the balance between China’s military and economic power. The communist ideology is largely gone, and the Communist leaders understand that the key to their staying in power is to increase the standard of living (via production of goods and services).
On offshoring: Dr. Greenspan espoused Adam Smith’s theory about division of labor being the most efficient use of resources, and the best way of increasing standards of living. Economies are putting a large premium on “conceptual value add,” reflecting the change to a knowledge economy from a traditional manufacturing economy. The “creative destruction” that results in resources moving from low-productivity activities to high-productivity activities would be stunted by protectionism. There continues to be a global advantage derived from open markets, an open and efficient financial system, etc. Principal thing that needs to change to sustain US competitiveness in global markets is to fix education of math and science between grades 4–12, where US students move from the top of the developed world to the bottom. Dr. Greenspan favors more “hard” education in the foundation of math (drills, tables, problems) and reflected that the results indicate that we have become too sloppy in how we teach math at these levels.
On Sarbanes-Oxley: Some causes: “amazing” accounting that wouldn’t stand up to an Accounting 101 class at places like Enron. This galvanized Congress into action. <joking: no bill that passes both houses so emphatically cannot be good law. “404 is a nightmare”> Some results: a shift in IPO’s from New York to London, a shift toward private equity, stories of CEOs spending 1/2 their time on their business and 1/2 with their lawyers. Some expectations for the future: the law will be changed, but not until after Sarbanes and Oxley both retire (hard to change a law whose two namesakes are in the process of retiring!). Dr. Greenspan likes very much, however, the requirement for a CEO to certify the financials — considers this a positive.
On alternative energy: Dr. Greenspan related a view of corn-based ethanol as a “political” product, but fuels made from other agricultural products such as switchgrass could be very valuable without disrupting other elements of the food supply (e.g., putting corn into ethanol takes it out of the feed supply for pigs, etc.). The most efficient way to get gas consumption down is to tax it, but the political will is lacking since no one has been able to effectively frame it as a national security issue.
On healthcare: Dr. Greenspan noted that we do a lousy job of efficiently providing healthcare with our current system in the US, but all others are worse. We are still learning best practices for efficiency with e-med records, and need to spread this efficiency. US is making promise to boomers that it can’t deliver. Cost of Medicare in 2020 is being calculated based on what the country can afford rather than what we can expect to pay.
Biggest scare in career: Biggest scare and proudest moment was October 19. 1987, a stock market crash that consumed 22% of the market value of the Dow Jones Industrials in one day. Dr. Greenspan has been on the job barely two weeks, and he told us of the steps needed to prevent panic and stabilize the markets (flooding market with liquidity, keeping the NYSE open). Interestingly, Dr. Greenspan, after hearing from several people different variations of “It’s all up to you” or “We’re all counting on you” remains proud that he got 5 hours’ sleep that night.
Originally published at https://mikegil.typepad.com.
