As Reagan would say,
there he goes again. Alan Greenspan is at it again in a recent op-ed he further muddied the waters of monetary debate. Clearly there is no Hippocratic oath for former Fed Chairman. Maybe Greenspan will feel better as we started a mention with his favorite President who did as much
harm in fiscal matters as Greenspan has done on monetary matters.
http://krugman.blogs.nytimes.com/
http://blogs.ft.com/the-a-list/2011/10/06/europe%E2%80%99s-crisis-is-all-about-the-north-south-split/#axzz1a4njpZ49
Greenspan begins his piece, "The eurozone is confronted with a crisis of not just labour costs and prices – but culture." So right away he does two things. He blames greedy workers for demanding too much in wages and he suggests that this shortsighted greed may be cultural. Alan Greenspan therefore is not only a bad Fed ex-Chairman he's also a bad ethnologist.
The "cultural" crisis he identifies is the southern eurozone countries. They're cultural profligacy about overpaying those workers! Can't blame them too much it's just that southern culture lacks the sense of fiscal responsibility and discipline of the north. So the crisis is overpayed workers and the spendthrift southern culture that lacks the discipline to cut their pay.
"The burden is primarily on southern Europe, where sovereign bond credit spreads (relative to the German Bund) range from 370 basis points (Italy) to 1,960 basis points (Greece). The northern eurozone countries have tight spreads against Germany – a narrow 40 to 80 basis points for the Netherlands, Austria, Finland and France. There are thus two distinctly defined eurozone areas: in the north and in the south."
What is interesting is that the the wrongheaded thinking Greenspan displays in this piece represents the thinking in the eurozone by countries like Germany, Finland and the Netherlands. If you want to understand why Europe has been so hapless in really dealing with the euro crisis-rather than just a short term fix while the long term problem gets worse-read Greenspan's piece. It is a microcosm of every wrongheaded premise in the politics of austerity.
"The ranking of credit risk spreads by size across the eurozone in 2010 was almost identical to the ranking of the level of unit labour costs (relative to that of Germany), suggesting that the higher labour costs and prices have rendered “euro-south” less competitive and so more subject to credit risk."
"From 1990 through to the end of 1998, euro-south unit labour costs and prices rose faster than in the north. In the years following the onset of a single currency, that pace barely slowed. In fact, the underlying trend was stopped only by the financial crisis of 2008. Since then there have been signs of price level stabilisation in the north and the south."
Price level stabilisation! That's awesome. In other words these unreasonable workers are finally seeing their pay cut! Yet Greenspan worries that "There remains the question of whether most, or all, of the south would ever voluntarily adopt northern prudence. The future of the euro beyond a select group of northern countries with a similar culture will depend on the ability of all eurozone nations to follow suit."
The spendthrift South may never catch up to the North. The "Euro-north has historically been characterised by high saving rates and low inflation, the metrics of a culture that emphasises longer-term investments rather than immediate consumption. In contrast, negative saving rates – excess consumption – have been a common feature of Greece and Portugal since 2003."
Greenspan claims that since joining the EU the North has subsidized the South's "excess consumption", that
"between 1999 and the first quarter of 2011, there has been a continuous net transfer of goods and services shipped from the north to the south"
I appreciate that Greenspan wrote this piece. For it shows that the Oracle never got it, still doesn't get it, and never will get it. One of the favorite ideologies of his Federal Reserve is the vaunted "independent Fed." If this is ever compromised in any way the sky will fall, inflation will hit 1000% and the economy will stagnate for ever more. For all my criticism of Greenspan, however, it is less his monetary policy record than his frequent deigning to give fiscal advice that I hold against him.
For my first article on Greenspan please click here
I'll always hold against him first and foremost his Congressional testimony 10 years ago when he supported the Bush tax cuts-which as I have noted more than once is the worst piece of fiscal legislation in modern times.
Then again there is the fact that, as he showed quite clearly in his 2007 book, The Age of Turbulence, he didn't get it back in 2001 either and refers to the 2001 recession as especially short and mild. Not for those of us who were unemployed during that time. It was a very deep, earth shattering recession. I mean that, it structurally changed the entire employment market maybe forever. Even if we ever get out of this current crisis it is not clear what the "natural" unemployment rate would be. Bob Doll, the big mutual fund manager wrote an op-ed in the Wall Street Journal in the Spring that suggested that while we will come out of this, the normal rate will be 6 to 7% unemployment during times of economic expansion, fairly sobering if true. He did add that "I hope I'm wrong."
Meanwhile you have monetarists and other inflation hawks suggesting that we may be at the natural rate of unemployment now.
2001 was the first time that white collar workers were out of work for such a long time and weren't able to find jobs matching their skill set when they did finally get back to work. While the 90-91 recession is considered the "first white collar recession" when it was over most unemployed white collar workers were able to get back into jobs commensurate with their education and experience. In 2001 they never did. While the 3 million jobs lost during that recession were eventually replaced they were mostly demotions. For the first time a college degree was no longer any guarantee to a good high paying job. Many had to go to the service industry for low pay and often lower hours.
Because the standard of living for many Americans went down so markedly they increasingly needed credit to fiance their way of life. Americans who grew up knowing nothing but the American dream now needed credit to maintain any semblance of it.
That Mr. Greenspan apparently knew nothing of this during that recession that he all along saw it as mild and shallow shows how much he doesn't get it. At the time it felt to me as for many like the government under Bush didn't get it, really had no idea how tough it was out there. Mr. Greenspan has shown that this feeling was no illusion.
He has also shown us a window into why the eurozone has failed so spectacularly to do what it is obvious to the rest of the world-the U.S., Asia, etc.-needs to be done to really fix the crisis-and not just do half measures that are temporary fixes while the core problem gets worse.
The license that he takes in this piece is just breath taking. He implies that the problem is profligate Southern Eu countries; that specifically rising wages since 1990 is responsible for the current EU crisis. That is chutzpah even in the annals of conservative revisionism. But this must be what countries like Germany and Finland think-why should their good habits of prudence and savings subsidize the "bad actors' of the spendthrift South?
Of course this ignores that while Greece had large deficits that is not the case for Spain and Ireland, both of whom had surpluses before the 2008 crisis started. The morality tale falls flat yet it is driving the train.
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