A few points about Mr. Greenspan:

One is, it's often pointed out that he was a disciple of Ayn Rand and Frank O'Connor. He knew them and had conversations with them, but I suspect he probably was aware of the O'Connor's* foibles. I hate ad hominem arguments, and I want to disavow any that might be made here: but I don't think Ms. Rand would have opened up to a true believer. His social connection to the O'Connors is very odd: she had an affair with Nathaniel Brandon (she was 45, he was 19); Greenspan was a friend of Brandon's wife, Barbara. [*]

Clearly Greenspan can change his mind; however he is the most canny political actor I can think of in the US. Non-American political figures are usually very clear that their public statements are part of a craft; one says what one requires to be heard at such-and-such a time, and nothing else. Americans (including non-US Americans, like Mexicans) seem to be prisoners of their opinions. So, for example, Greenspan sounds like a very normal, if reticent and scholastic, Usonian patrician (VNIR&SUP). Unlike the other VNIR&SUPs, Greenspan never looses sight of his ultimate goal: to fortify the financial sector against state authority of any kind.

In The Agenda, Bob Woodward explains how Greenspan intervened with Bill Clinton to achieve an agreement: prioritize reducing the deficit, and Greenspan would allow monetary stimulus. Both delivered on their side of the bargain. At the time I read the book, it was 1999 and I thought the reduction of the deficit had been the mitzvah of mitzvahim. In retrospect, I am inclined to agree with the conclusions of my beloved mentor in economics, Prof. Betty Blecha: the "agenda" was a huge setback in the progressive movement. The Democratic Party establishment saddled itself with the thankless job of reducing the deficit, while the GOP reaped political capital in bulk. The GOP leadership recognized it could rely on the Democrats to carry out politically painful tasks while condemning the Democrats for the pain (high taxes). The impending surplus was suddenly referred to as theft--the government is overcharging for services rendered!

In The Agenda, Greenspan evidentally deceived Mr. Woodward into thinking he, Greenspan, had a guiding vision of saving social security for future generations. Greenspan, however, shifted directions after the CBO began returning projections of huge surpluses for a decade. He then began to suggest that tax cuts were needed (2001). In 2001, Greenspan insisted these surpluses would lead to the government intervening to distort markets.

I, James R MacLean, hereby admit this would be a reasonable concern under different circumstances. States interferring in markets can be awful. BUT: in 2001, those circumstances did not obtain.

Greenspan (2005) testified that his remarks to Congress in 2001 in favor of tax cuts were prudent, given available information. There's simply no way Greenspan could have been so stupid as to cite the CBO estimates as the last word. For him to do so is as misleading as calling Ayn Rand a Communist. (For the record, I have read these projections as a blogger and as a grad student. Even the CBO doesn't "believe" their own projections, and clearly indicate that these projections are STYLIZED FACTS.)

____________________________________
* Ayn Rand took Frank O'Connor's last name when the two married in 1929.

Now, I am not calling Mr. Greenspan a liar, and I certainly am not calling him stupid. OK, I am calling him a liar. Sorry.

This is pure mendacity:

His solution is better education today to create a flexible workforce for tomorrow - not confiscation of plutocrats' yachts.

Greenspan's strategy of lying is predictibly more sophisticated than a 9-year old's, but not by much. Not lately. First, he's lying by pretending not to know things, like the limited impact of education on an individual's economic prospects. Prof. Van Doren's son lost his chair for less than that (see Quizshow). There is no economic model that coexists with his suggestions in the speech.

Another technique is the strategic change of position: get someone to irrevocably commit to an action based on your advice, then finetune the advice ex post facto to get totally different results. Greenspan got the Democrats to take the unpopular position of austerity and fiscal conservativism, destroying their base of support, so he could advice the GOP to slash taxes and increase spending--a surefire vote-winner. This is how Darius took Babylon.

Greenspan was a faithful partisan of the view that the new economy was allowing for a fundamental increase in productivity growth, and the main methods of assimilating informtion for workers was not through formal education at all. Indeed, maybe I'm reading way too much into this speech and others, but it seems to me like AG was arguing that the major leap away from the old economy into the new was reflected in the decline of the government to do anything effective at all. The skill set was changing too fast. Frictional unemployment was the school of the future, a permanent vocational training system that would utterly transform the traditional relationship of productivity to a viable government sector.

I've cheated on this test, and looked at the answers in the back of the test. AG was chosen FRB Chair because he was an early adopter of RE/RBC theory. Unlike others like Ed Prescott or Paul Barro, however, Greenspan has more subtlety than Grover Norquist. A lot more. When he needs to head off populism, he does it by saying, "more education, not higher taxes"; when it's time to address education, he's in favor of vouchers, not reform; when it's time to issue the vouchers, he's going to say nothing as the face value of the vouchers is insufficient to educate a child in the same time zone as the South Bronx.

Shorter JRM: Greenspan is not worried about income inequality at all; he's worried about what voters might do to redress income inequality.
________________________
Slightly OT: Dear P6--

You posted a quote about the matter of economic policy being linked to foreign policy, and whether this was good, bad, untrue, or inevitable.

Link:

It was an awesome topic, and I don't think it's over the top to say that that thread is something I would love to assign students in philosophy to read. CNulan's posts totally blew me away. If I lived alone I'd get butcher paper on a roll, copy some of the comments onto it with a marker, and tape them to the walls of my flat to meditate on. It took me three or four readings just to wrap my mind around the syntax. It's ten times better than Castiglione's Courtier.

However, that thread pretty much bypassed the topic, and the referenced text actually said something totally different from the extracted passage. So, we need to have a thread devoted to this proposition:

Our foreign and economic policies are one and the same.

Is this something that a moral person can get with, or, is it a moral and cultural abomination that we should oppose?

But please--not here. I don't want to hijack the thread.

Unless I'm misunderstanding your title, I have to strongly disagree.  The key is to START being BOTH democratic AND capitalist.  The excesses of the current economy are largely a result of the scaling back of any institutions a democratic government could use to regulate the flow of capital - by limiting monopolies through regulation or raising the standard of living with a viable minimum wage.  Instead, we shift the tax burden from wealth to work, the penultimate UNdemocratic move.  If you think I'm wrong, show me any valid poll that says taxing the rich is an unpopular proposal.

I think I just misunderstood the context of the title.  We probably agree on this one.

Before really discussing this topic, we have to agree on a definition for "the poor".  The rich we know well.

If the poor means the really poor, a collection of people who for various reasons are unable or unwilling to produce anything anyone wants to pay for, then we end up with a welfare discussion, and you know, how rich the rich are doesn't seem very relevant.

If the poor means people working for minimum wage, we're mostly talking about people with limited job skills, a temporary condition for most.

If there's an appealing definition for poor in this context, it's people working for relatively low wages without much opportunity.  People making $8-$12 per hour, a bit more in high priced areas.  There are a lot of such people in America, and they seem more important in this context than people who don't work at all or people who are just starting out in the job market.

These are the same people who over American history have occasionally been socially disruptive. They often feel they're pulling their weight, and deserve more.

Above them, we find the middle classes..not poor, not disruptive, not the problem. 

Greenspan is correct of course that it would be a good thing for these people to move upward, that we as a society should have a goal to minimize the percentage of people in this space.  If that's what "minimizing the gap between the rich and the poor" means, then we can all be behind it. If it means something else to others, then they can explain the something else.

Now would education help such people?

As I suspect we all do, I know more than a couple such people.  It's perilous to generalize too much, but here's my observations.

1. The ultimate potential for people in this range overlaps the space they're in: that is, some of them are indeed fully employed while making $10/hr. But not most.

2. Lack of pursuit of opportunity is the dominant reason why people are willing to stay in this state for their whole lives.  This breaks down into four important reasons, usually intertwined:

1. lack of confidence (some would say this is #1, #2, and #3)
2. lack of motivation
3. unwilling to leave current context
4. preference of intoxicants over money

Lack of eduction is not on that list, not directly anyway. Some people gain confidence via education, but many do not.  Education does make sense for adults completing high school, but such programs are already readily available and reasonably designed to provide basic life skills.

So I don't see where Greenspan has said anything "actionable". 

Before really discussing this topic, we have to agree on a definition for "the poor".  The rich we know well.

I hate it when you say you need definitions for things everyone recognizes. 

I hate it when you say you need definitions for things everyone recognizes.

It's pointless to discuss the wealth gap between the rich and the homeless. What can you say which would be consequential?

It may be interesting to discuss the wealth gap between the rich and families on welfare, but that's basically a welfare discussion, how generous should we be, how much can we afford, what's the goal of welfare anyway, not a gap discussion.

Without a somewhat limiting definition of "the poor", we can't really have a discussion. 

The wealth gap is like the gap between Master Sergeant and Second Lieutenant.

Can a non-command culture survive with such a wall in privilege running down the middle (more like the 20% point) of its people? 

James, I don't see how the thread you linked is worthy of study. The twin "make up your mind" thread,maybe...

But I take requests from respected folk, even if I have to extract the request from context (i.e.: the linked thread). I don't mind restarting the the topic. 

Thanks.

In regard to DWShelf: I agree with nearly everything you said. I would make the terms of the discussion different, though. Economists often like to start out with stable classes of "poor" and "not-poor," and then kick round definitions until everyone forgets what the original issue was. However, I'm not really fond of thinking in terms of stable "classes."

Here's a posting where I outlined what I believe is the best way of thinking about income inequality. In that post I focused on income inequality as a dynamic that spanned the entire continuum of wealth. If I am wearing a hat as a moral activist, then I might rail about the extremes of wealth and poverty, but what we're dealing with here is the stress imposed with the slope of the continuum (including between the haut-bourgeoisie and the middle class). The idea is to focus on the stresses everywhere caused by economic dysfunction, rather than turning it into an ideologically polarized discussion about who is responsible for the very poor.

Also, by "actionable": I think Greenspan is putting up "detour signs" that lead to a cul-de-sac. He can't be sued or taken to court for doing so; I don't think I could ever prove (for example) that he understood--despite the CBO projections he claimed as validation--that the USA was out of the deficit woods in 2001; but it would be like Richard Dawkins telling a Senate subcommittee that he thought such-and-such a thing because the Bible told him so.

However, I'm not really fond of thinking in terms of stable "classes."

Good.  It would seem downright un-American. 

Thanks for that "Gini Coefficient", which I suspect codifies something like what P6 suggests should be obvious.  My initial conclusion, offered to see if I got it right:

1. This number is most interesting in comparing economies which are otherwise somewhat similar.
2. It's not a measure of goodness, although it might be a measure of badness when very high, or very low.

For a particular economy,  it states the average difference compared to "random" in mean wealth all the way up the curve, although it seems dominated by the midrange, around the 50th percentile. If you're in the 50th percentile of income, how much better off are people in the 75th percentile than you?  By random chance, they'd be 1.5x better off.  In real life, they're likely 2-3x better off, and we compare that 1.5 to the 2-3.  As such, it's not focused on the super-rich, but rather the entire spectrum.

The idea is to focus on the stresses everywhere caused by economic dysfunction, rather than turning it into an ideologically polarized discussion about who is responsible for the very poor.

Agreed, although I don't observe much stress between the middle class and those above, even those way above.  If other people are doing better, good for them, maybe someone else might pick up the dinner tab once in a while.

Back to C-sub-G.

As your article points out, diminshed economic activity tends to reduce C-G, so whatever it measures, we need to be careful to not take minimizing it as a goal unto itself.  

Would you agree that, other things being equal, that a good economy, with lots of money around for everyone, results in an increase  in C-G, while recessions and depressions decrease it?  Intuitively, it follows that when there is a lot of money around, people who are good at collecting money will collect more than their share of it, while when there is little money around, such people will have to make do with ordinary incomes.

One could go one step further, and suggest that the reason why the US has a relatively high C-sub-G is that we have far more money floating around than say Europe. 

This number is most interesting in comparing economies which are otherwise somewhat similar.

Yes.

As your article points out, diminshed economic activity tends to reduce C_G, so whatever it measures, we need to be careful to not take minimizing it as a goal unto itself.

Actually, I triple checked my article to see if I had accidently said that, and I can't see how I left that conclusion.

Adam Smith noted in Wealth of Nations (B.I, Ch.8, "Of the Wages of Labour" in paragraph I.8.42) that the opposite is true:

It deserves to be remarked, perhaps, that it is in the progressive state, while the society is advancing to the further acquisition, rather than when it has acquired its full complement of riches, that the condition of the labouring poor, of the great body of the people, seems to be the happiest and the most comfortable. It is hard in the stationary, and miserable in the declining state. The progressive state is in reality the cheerful and the hearty state to all the different orders of the society. The stationary is dull; the declining melancholy.

And this is absolutely true: in countries that are growing fast, like Finland now, Japan in the 1970's or the RoK in the late 1980's, Gini Coefficients are the lowest in the world. Income inequalities are higher in stagnant economies like that of Uruguay, but highest of all in societies that are sharply polarized between the two, like Brazil, the USA, Russia, and the PRC.

It's pretty uncontroversial that low Ginis are really nice to have. Unfortunately, statistics on them are highly unreliable for some countries. For example, Bulgaria's is alleged to be very low, which is impossible: most of the economy is informal. (Informal wealth not being measured, the agency gathering statistics for that country ignores the incomes of the rich)

Would you agree that, other things being equal, that a good economy, with lots of money around for everyone, results in an increase in C_G, while recessions and depressions decrease it? Intuitively, it follows that when there is a lot of money around, people who are good at collecting money will collect more than their share of it, while when there is little money around, such people will have to make do with ordinary incomes.

Sorry, if the economy is booming, inequality will shrink because more capital is being utilized, and therefore the marginal product of labor is higher, so wages increase. Unemployment shrinks and labor force participation increases too. At the opposite end, bottlenecks to wealth creation are diminished so large fortunes tend to shrink.

In fact, falling C_G means either a bubble has burst, the economy is expanding, or the statisticians are overlooking the informal economy.

Think of the overall economy as a system of production and distribution: if the system is flowing smoothly, then inventories are small and there are no bottlenecks. All the workstations have what they need, when they need it. So, there are few arbitrage opportunities and entrepreneurs have to compete with each other over every business opportunity. That leds to efficient utilization, since the only rent-making opportunities are in the entrepreneurs' intellectual abilities.

In contrast, suppose you've got a horribly inefficient factory floor. It's so bad that whole sections are constantly being shut down for lack of inputs. Individual work groups have taken up bribing line managers in other parts of the plant to sneak them a stash of semi-finished materials so they can do something. Since they, too, are producing stuff for which there is a severe shortage, it's worth it to bribe to get resources.

Now, in the inventory sections of this factory there will be materials that are costly and in short supply on the other side of the plant, but distribution has broken down so the person who controls the inventory can give it away in exchange for a huge bribe.

Interestingly, that describes a Soviet factory. It also describes the US economy during the 1870's, and that's where we're going now.

You don't have to be leftist to wind up with a Sovietized economy.

Prometheus6:
James, I don't see how the thread you linked is worthy of study. The twin "make up your mind" thread,maybe...

The link was to a similar proposition (for Black partisans; I'm interested in it for morally-engaged people generally).

The thread that was so good was, indeed, "Make up your mind." I see it's still active (I can't be certain how I mixed them up). It should be a sort of Wiki.

I triple checked my article to see if I had accidently said that, and I can't see how I left that conclusion.

Sorry. I'd explain how I came to that conclusion, but I'm much more interested in understanding what you did say than what you didn't. Be assured that I had no intent to twist what you did say.

if the economy is booming, inequality will shrink because more capital is being utilized, and therefore the marginal product of labor is higher, so wages increase. Unemployment shrinks and labor force participation increases too. At the opposite end, bottlenecks to wealth creation are diminished so large fortunes tend to shrink.

So clearly I'm missing something here.

Would you agree the median American is significantly more wealthy than the median Dane?

[efficient factories vs inefficient factories]

There's one more story to add to these two.  New technology.

The production of new technology can start out both wildly efficient, because the technology itself does something way better than the old technology, but also wildy inefficient, because those supply paths haven't been much been developed or made reliable.  Arbitrage oppotunities abound.  Jobs are done by Americans which will eventually be done first by the Chinese and then by machine. Lots of money is made by all, with those dependent on the old technology having to move on to something else.

It's this story which describes much of what has been successful in America during the past 25 years.

There is some doubt as to whether we can continue it, because continued success depends on Americans dominating the creation of new technology as we have.  One might suppose that Sovietization is one of a few possible dreadful outcomes if we fail.

I do believe that we should maximize our chance for technological success. This implies continuing to attract the best immigrants from all over the world. 

C_G

So how do you do that?

C_G

Got it. Disable rich text. Enter: 

C_G

Would you agree the median American is significantly more wealthy than the median Dane?

That's a very interesting question. Because the two are in a DEAD HEAT! The reason is, the C_G for the USA is 0.39 or so, that translates to a ratio of median:mean of about 1:1.33. Conversely, the ratio for Denmark is far smaller. I asserted at my site that the USA has the highest PPP median income in the world (PPP means the actual purchasing power, not the exchange rate) of any major country, where I arbitrarily set major as >8 million people.

Countries that are smaller than that can be unusually wealthy because of regional bottlenecks; I've seen a million polemicists ignore this to explain that ultra-rich Singapore, Luxembourg, and Hong Kong have really pure capitalism, when in fact they're just rich neighboods.

Anyway, because Denmark has such a low C_G (I'm a show-off, aren't I?), the ratio of median:mean is far lower, and it's median is slightly greater than that of the USA.

At this point, controversy arises.

IMO, high taxes are not necessarily bad if you get a lot back; if the bureacracy is well-governed, if the state is highly responsive, if the taxes don't significantly interfere with the market (I realize that sounds weird, but look what I just found; check out Denmark on the chart), and IF the state allocates resources towards benefitting the population, then income will tend to have higher long-term growth and there are substantial spillovers.

Many have observed that some highly-interventionist economies have maxed out growthwise; this is true, because of the monopolies that states typically use to implement industrial policy. Also, often high tax regimes have severe governance issues.

Other people, however, regard all taxation as a deadweight blow to income. For such people, it makes no difference if taxes are spend on nuclear missiles or on museums and parks. In fact, they'd prefer to spend the money on the former because the latter distorts incentives. This, I think, is based on the assumption that the only legitimate choice a person can make is for a private good; if she wants a public good (or wants the good delivered publicly) then, that's not a legitimate choice.

There is some doubt as to whether we can continue it, because continued success depends on Americans dominating the creation of new technology as we have. One might suppose that Sovietization is one of a few possible dreadful outcomes if we fail.

You're pulling my leg. Americans dominate the creation of new technology? In the last 25 years? Outside of pharmaceuticals, military aviation, and software (i.e., about 8% GDP), American enterprise is famously horrible at implementing new technology. How many people buy American-made cars for reliability? General Motors products go head to head with the USSR's finest. Some Fords are OK, but I'd as soon have a Yugo as a Chrysler. The US industrial economy has been Sovietized during my lifetime. If it weren't for Korean subassemblies, I think our economy would grind to a halt.

For the record, I drive a Ford for patriotic reasons. I lucked out. The car is perfect. It was made in Mexico and has a Mazda engine. Otherwise, it is essentially a German-Korean design with Mexican body panels.

The only thing that keeps us afloat is the service economy, cheap real estate, and the financial sector. The US economy is a brick wall of utterly restrictive monopolies, totally fictitious competition (sort of like the dozens of political parties that voters in Zimbabwe get to chose from, actually), and class identity politics. I mean, the difference in professionalism between European managers and US ones is humiliating (the European ones are ten thousand times more professional and output-oriented). American managers just pine away for indentured servants.

I could write a book of easy and straightforward experiments to demonstrate what an utter hopeless clusterfuck American corporate management is, but a rather obvious one is--where are nearly 100% of American manuufactured products sold? Why, in countries or sectors politically controlled by the USA. Exports? Arms. There's a competitive market-driven sector for you. Semiconductors and aviation are two American sectors that have avoided being completely destroyed by competition in overseas markets, largely because changing away from a propietary format is so expensive and Boeing is comparatively well-managed.

In my opinion, it's really ironic that the USA is associated with free trade and market liberalization considering that our own industries are hopeless outside of command economies. Sweden and Finland, two hugely successful worldbeating industrial powers, are incredibly competitive. They have to export and import everything. They're supposedly "socialist." Taiwan is totally focused on competing in markets in which domestic consumption is neglible; it has a highly centralized, planned economy in which R&D is carried out by state-owned institutes, and production is farmed out to lots of little companies. This is how the Soviet defense sector remained an island of excellence in a sea of command incompetence.

American firms, in contrast, survive as well as they do because they can introduce innovations to consumers long after these have become commonplace in other industrialized economies. Think of an automotive feature that was pioneered on an American car (since the Korean War, I mean). Aside from large stuffed dice dangling from the rearview mirror, I can't think of anything. Turbocharging? British. Fuel injection? German. Side-impact protection? Swedish. Space frames? German. 4 valves/cylinder? German. Tubular construction? French or British.

This is not because Americans are morons. A huge number of these innovations were developed by American engineers. Frank Kettering and Thomas Edison were Americans and we're right to be proud of them. But American enterprise doesn't innovate because it insists on low-risk strategies for survival, rather than high-risk strategies for growth. Our economy is Soviet, with Latin American characteristics.

OBVIOUS QUESTION: Hey, uh, James, if the American economy is Sovietized,why are we so rich?

ME: The USA has a lot of very strong advantages. Americans, in my opinion, are underrated as workers and innovators. Japanese firms often discover that their American operations are the most productive. Also, Americans assimilate a lot more technical information than is commonly thought. Very large cohorts of technically proficient Americans, like our host P6 here, can outwit and out-innovate the command sector. The surveys that periodically reveal woeful American igorance tend to overlook, in my opinion, the fact that so many Americans are well-informed and technically astute.

You could say the strength of (Western) Europe is excellent averages; the strength of America is excellent (and numerous) exceptions.

Ironically, decades after all of us are dead, anthropologists will probably regard intense social critics like P6 as exemplifying the best that America had to offer, indeed, a cultural asset that gave the USA its admirable traits.

I also have noticed that the USA's adversarial system of conflict resolution, while largely responsible for perpetuating racial conflict and resentment, has also prevented poor institutions from causing the system to break down.

Compare that to a European country like France, where one bad part causes total pandemonium. The parts are mostly very good, but conflict resolution is through the strike; conflicts are regarded as deeply wrong. In the USA, they are regarded as providing the necessary tension.

One point I want to concede:

I think in an ideal market economy, bottlenecks don't exist (by definition) so there are no opportunities for arbitrage. Under such a system, firms exist to sustain efficient processes and impose a system of incentives on workers. Economic rents (monopoly profits) exist, because of innovations and patents, but these are of very short duration; patents of excessive duration make innovations too expensive for too long, so they are implemented too slowly.

Under a regime of efficient markets, people would have the chance to substitute income for leisure, take risks (like go back to school--substituting present income for future income), and so on. All these things, combined with the incentive systems of hierarchical firms, would lead to disparities in income. The problem with socialism is that all the incentives favor slacking; the slackers are the elites, the "rich."

However, these disparities would not lead so often to corner solutions, in which a person no longer can make any choices whatsoever. In our systme, it's not just the poor--even upper-middle class households find themselves in situations where they cannot sustain their way of life. They make a mistake, and there's no shot at redemption. Suddenly they are on a downward trajectory and it's impossible to reverse. That, too, is a perverse incentive.

(I'm a show-off, aren't I?)

You are, here's the proof!

OBVIOUS QUESTION: Hey, uh, James, if the American economy is Sovietized,why are we so rich?

Whether I'm on your team or the opposition, that's a play worthy of standing applause. A behind the back, no-look, on-target pass.