WASHINGTON, March 7 (UPI) -- "Thank you, Mr. Chamberlain," caroled the musical British after prime minister Neville Chamberlain returned from signing the 1938 Munich Agreement. This week, as Federal Reserve Chairman Alan Greenspan told Congress that Social Security and Medicare reform required cutting, not expanding, those out-of-control programs, one is tempted to echo their song. Hopefully with more long term success.
The two cases are almost exact opposites. Munich for Chamberlain was an unexpected foreign policy disaster, the one huge blot on a career of highly successful management in the economic policy sphere that was his main capability. Conversely, Greenspan's statement to Congress this week, while a shaft of sunlight over the unremittingly gloomy prospect of endless governmental expansion, does not make up for decades of sloppy monetary policy that have hollowed out the U.S. economy and caused billions of productive, hard earned dollars to be invested in worthless dot-coms and real estate.
Greenspan began his career as a disciple of the Objectivist philosopher/novelist Ayn Rand, who believed in the minimum possible government, and regarded economist Friedrich von Hayek as a backsliding socialist. Provided he didn't change his overall belief system, he was thus always likely to be a voice for small government and sound money within the U.S. political system.
Indeed, in his early days he was just that. He acted as Chairman of President Ronald Reagan's Social Security Commission in 1982 that made the U.S. social security system very nearly actuarially sound. After his reforms the only remaining changes that needed to be made were to eliminate the pre-retirement earnings link that was used to calculate pensions (the Commission had already removed the post-retirement earnings link) and to extend the 1-month-every-year delay in the normal retirement age that operates between 2004 and 2027, raising the retirement age in stages to 67, to at least 2063, allowing the normal retirement age to rise to 70, where, given the extension of life expectancy, the system should be actuarially viable.
If this were done, the social security payments for the baby boomers' retirement would no longer be a problem. The social security trust fund would deplete from 2018 to about 2050, as the baby boomer retirement payments were made, then gradually refill. Only the dodgy accounting pursued by Congress and the administration would still be a problem -- offsetting the current social security surplus (which actuarially speaking, is not a surplus) against the federal deficit, making the 2004 deficit appear to be $412 billion instead of the more frightening $567 billion that it actually was.
On his appointment as Chairman of the Federal Reserve Board in 1987, it appeared that Greenspan would pursue a policy of maintaining sound money and advising administrations to shrink the size of government. After all, he had written in 1962, in "Capitalism, the unknown ideal" (when he was already 35, this was not some youthful folly): "The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the "hidden" confiscation of wealth. Gold stands in the way of this insidious process."
In 1987, the pure Gold Standard was probably politically impossible, apart from being hopelessly deflationary in a world where both population and economic output are growing rapidly, but an "automatic pilot" Federal Reserve, mimicking the restraints of a Gold Standard but at a somewhat higher constant rate of monetary growth, would have been perfectly feasible. Tracking monetary growth and keeping it constant was after all the policy instituted by Paul Volcker in 1979.
Had he followed such a policy, Greenspan would doubtless have been removed by President Bill Clinton in 1995, and he would have been reviled rather than lauded by the mainly leftist media, but he would today be held up, like Volcker, as an ideal of what a Fed Chairman should be.
However, after a few years of monetary restraint (which, inter alia, doomed President George H.W. Bush's chances of reelection in 1992 -- a defeat which the early Greenspan, observing with disgust Bush's profligate public spending policies and 1990 tax increase, would have heartily welcomed) that is not the policy he followed. Instead, beginning in 1993 and continuing through the remainder of the decade and, after a short pause in 2000, with renewed vigor in 2001-04, he increased money supply at a rate far more rapid than was justified by economic growth.
Rhetorically, Greenspan remained more or less true to his original beliefs, but from 1993 on he did nothing to back up the rhetoric. His hesitant denunciation of "irrational enthusiasm" in December 1996 showed an appreciation that the surge in stock prices was creating dangerous economic imbalances, but he failed to repeat the warning and by July 1997 was using shaky and as it proved false productivity statistics to justify the bubble he had failed to quell.
In September 1998, he professed to find a danger to the U.S. banking system in the collapse of an obscure hedge fund which had, in the tradition of all hedge funds, been gambling with its clients' and its lending banks' money to produce inordinate profits for its tarnished management. Not only did he organize a bailout of the fund, but he cut short term interest rates three times, at a time when any observer could see that the U.S. economy and particularly the stock market was impossibly overheated.
After 2000, his policy was in the short term more defensible. He perceived at the end of 2000 that the stock market had a long way to drop, and from early 2001 reduced interest rates to cushion the decline, in a similar way to his successful action after the stock market crash of 1987. Had this not coincided with the advent of President George W. Bush, and a program of tax cuts without spending restraint, it might well have caused a "soft landing."
In reality, the fiscal stimulus on both the revenue and expenditure side, including a wholly reckless extension of Medicare to prescription drugs without any adequate provision to fund it, combined with the monetary stimulus from Greenspan's policy to produce a prolonged period of negative real interest rates, and a blight of McMansions across the U.S. countryside that will take decades to demolish. Greenspan's modest encouragement of Bush's tax cuts was not combined with either monetary caution or effective denunciation of spending increases; instead in late 2002 first Fed Governor Ben Bernanke and then Greenspan himself professed to find an entirely spurious threat of "deflation" which justified yet further pumping up of the money supply.
Greenspan's call for contraction rather than expansion of entitlements programs is entirely actuarially correct. The troubles in social security and Medicare both stem from "drift" in social conditions since the programs were set up -- lengthening of lifespans on the one hand, and increasing availability of life-saving but expensive medial therapies on the other. To rebalance the system, without simply allowing government to expand ad infinitum, the social security retirement age and the Medicare co-payments need to be adjusted, the whole being paid for by a modest extension in the average working life of the American people. The populists in Congress and the irredeemably fiscally profligate President George W. Bush don't like to hear this, but it is an actuarial reality, the kind of thing that the Fed Chairman is paid to identify.
If the current U.S. expansion lasts another ten months, without more than a mild upsurge in inflation, Greenspan will retire next January to the almost universal plaudits of Congress, the Administration and the media. Only at 3am will he occasionally awaken to the grim realization -- that if he's lucky enough to live another 20 years, he will find in 2026 that his reputation has sadly deteriorated.
Ayn Rand could have told him!
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(The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that, in the long '90s boom, the proportion of "sell" recommendations put out by Wall Street houses declined from 9 percent of all research reports to 1 percent and has only modestly rebounded since. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)
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Martin Hutchinson is the author of "Great Conservatives" (Academica Press, 2005) -- details can be found on the Web site greatconservatives.com.
