The Age of Turbulence
by Alan Greenspan
A 500 page book by the former Federal Reserve Chairman. What was I thinking?
My dad recommended this book. He and my mom read it during a road trip. I admit that I might have gotten more out of it if I had listened to the audio book. There were parts where I simply turned the page because I was bored out of my mind, and I didn't have the background knowledge to understand what he was talking about.
However, there were parts of the book that exposed me to new ideas. Or there were answers to questions that I have often had about economics. Overall, there are three main points that Greenspan stresses:
1. Capitalism good. Human progress is most efficiently achieved with capitalism. In order for capitalism to work you have to let people own property, and there has to be a system where property rights are strongly enforced.
2. Big government bad. Government regulation interferes with capitalism. It creates imbalances that distort or alter the market’s invisible hand.
3. Capitalism is stressful. Efficient markets create competition and change. This is great because it brings about progress; however, the flipside is that competition and change bring about stress. This is the Catch 22 of human nature.
I think most of Greenspan’s beliefs and viewpoints are correct. Markets, for the most part, are better when left alone. However, like Keynes, I do believe that markets freak out over time, and it is the role of government to analyze those anomalies and create regulation that prevents disasters. For example, I believe that there should be a limit on the size of corporations. Corporations should be given regulations that prevent them from becoming “too big to fail.” I think our current recession will last longer than it should because the government is now having to intervene with companies like AIG because it really is too big to fail. If it failed, it would cause more global harm than if the U.S. kept propping it up.
I enjoyed reading this book - well, at least the parts that I understand. Also, I never knew that Greenspan was a jazz musician. And he used to hang out with Ayn Rand! How cool is that?
Here are a few of the best parts:
….On Human Nature:
All people appear motivated by an inbred striving for self-esteem that is in large part fostered by the approval of others. That striving determines much of what households spend their money on…. The need for values is inbred. Their content is not…. A major aspect of human nature – the level of human intelligence – has a great deal with how successful we are in gaining the sustenance needed for survival… pg. 16-17
In economies with cutting-edge technologies, people, on average, seem unable to increase their output per hour at better than 3 percent a year over a protracted period. That is apparently the maximum rate at which human innovation can move standards of living forward. We are apparently not smart enough to do better. pg. 17
Yet why hasn’t productivity growth been even faster? Couldn’t what we knew in 2005 have been figured out by, say, 1980, thereby doubling the rate of productivity gains (and increases in standard of living) between 1955 and 1980? The simple answer is that human beings are not smart enough. Our history suggests that the ceiling on the productivity growth of an economy over the long term at the cutting edge of technology is at the most 3 percent per year. It takes time to apply new ideas and often decades before those ideas show up in productivity levels. –pg. 474
Venice, I realized, is the antithesis of creative destruction. It exists to conserve and appreciate a past, not create a future. But that, I realized, is exactly the point. The city caters to a deep human need for stability and permanence as well as beauty and romance. Venice’s popularity represents one pole of a conflict in human nature: the struggle between the desire to increase material well-being and the desire to ward off change and is attendant stress. –pg. 181
Capitalism creates a tug-of-war within each of us. We are alternately the aggressive entrepreneur and the couch potato, who subliminally prefers the lessened competitive stress of an economy where all participants have equal incomes. While competition is essential to economic progress, I can’t say I always personally enjoy the process. I never thought kindly of rival firms seeking to lure clients from Townsend-Greenspan. But to compete, I had to improve. I had to offer a better service. I had to become more productive. In the end, of course, I was better off for it. So were my clients, and I suspect so were my competitors as well. Down deep that is probably the message f capitalism: “creative destruction” – the scrapping of old technologies and the old ways of doing things for the new – is the only way to increase productivity and therefore the only way to raise average living standards on a sustained basis. Finding gold or oil or natural wealth, history tells us, does not do that. –pg. 268
Regrettably, economic growth cannot produce lasting contentment or happiness. Were that the case, the tenfold increase in world real per capita GDP over the past two centuries would have fostered a euphoric rise in human contentment. The evidence suggests that rising incomes do raise happiness, but only up to a point and only for a time. Beyond the point at which basic needs are met, happiness is a relative state that, over the long run, is largely detached from economic growth. The evidence shows it is determined mainly by how we view our lives and accomplishments relative to those of our peers. As prosperity spreads, or perhaps even as a result of its spread, many people fear competition and change that threaten their sense of status, which is critical to their self-esteem. –pg. 269
People’s conflicted reactions to capitalism have spawned a variety of modes of capitalist practice… While each individual has an opinion, there is a visible tendency for much of a society to coalesce around a common point of view, which often differs measurably from the choices of other societies. This I sense, results from the need of people to belong to groups defined by region, culture, and history, which, in turn, is fostered by an innate need of people for leaders: of the family, the tribe, the village, the nation. It is a universal trait that probably reflects the imperative for people to make choices to govern their day-by-day behavior. Most people, much of the time, feel inadequate to the task and seek guidance from religious direction, the recommendations of family members, and the pronouncements of presidents. Almost all human organizations reflect this need for hierarchy. The shared views of any society, in practice, are views embraced by its leadership. –pg. 271
In life, unless we take action, we perish. But action risks unforeseen consequences. The extents to which people are wiling to rake risks depends on the rewards they thinkg they may gain. Effective property and indiviusla rights in general decrease uncertainty and open a wider scope for risk taking and the action that can produce material well-being. Inaction produces nothing… Rational risk taking is indispensable to material progress. When it is impaired or nonexistent, only the most necessary actions are taken… The evidence of human history strongly suggests that positive incentives are fare more effective than fear and force. The alternative to individual property rights is collective ownership, which has failed time and time again to produce a civil and prosperous society. It did not work for Robert Owen’s optimistically named New Harmony in 1826, or for Lenin and Stalin’s communism, or for Mao’s Cultural Revolution. It is not working today in North Korea or Cuba. –pg. 504
…On Presidents:
He didn’t raise his voice, but his speech was so intense and so laced with profanity that it would have made Tony Soprano blush. I was stunned: this was not the man I’d been dealing with… Nixon’s profane side became public five years later with the release of the Watergate tapes… He was anti-Semitic, anti-Italian, anti-Greek, anti-Slovak. I don’t know anybody he was pro. He hated everybody. He would say awful things about Henry Kissinger, yet he appointed him secretary of state… When Nixon left office, I was relieved. You didn’t know what he might do, and the president of the United States has so much power that it’s scary – it’s very hard for a military officer sworn to uphold the Constitution to say, “Mr. President, I’m not going to do that.” – pg. 59
Ford was a secure man, with fewer psychological hang-ups than almost anyone I’d ever met. You never got strange vibes from him, never any sense of hidden motives. If he was angry, he’d be angry for an objective reason. But that was rare – he was exceptionally even tempered. pg. 65
To my delight, Clinton seemed fully engaged. He seemed to pick up on my sense of urgency about the deficit, and asked a lot of smart questions that politicians usually don’t ask. Our meeting, which had been scheduled for an hour, turned into a lively discussion that went on for almost three. We touched on a whole range of topics beyond economics... So saxophone wasn’t the only thing we had in common. Here was a fellow information hound, and like me, Clinton clearly enjoyed exploring ideas. I walked away impressed, yet not entirely sure what I thought. Clearly, for sheer intelligence, Bill Clinton was on a par with Richard Nixon, who despite his obvious flaws, was the smartest president I’d met to that point. And either Clinton shared many of my views on the way the economic system was evolving and on what should be done, or he was the cleverest chameleon I’d ever encountered…. After I got back to Washington, I told a friend, “I don’t know that I’d have changed my vote, but I’m reassured.” –pg. 144
...On Economic Theory:
…Keynes created the discipline we now know as macroeconomics. He argued that free markets, left to themselves, do not always deliver the optimal good to society, and that when employment stagnated, as it did disastrously in the Great Depression, government has to step in…. Though Bob and most of my classmates were ardent Keynesians, I wasn’t. I’d read the General Theory twice – it is an extraordinary book. But Keynes’s mathematical innovations and structural analyses were what fascinated me, not his ideas on economic policy… Economic policy didn’t interest me. (This was when Greenspan was in his twenties.) –pg. 30
…Deregulation’s economic rationale came primarily from Milton Friedman and the other mavericks of the so-called Chicago school. These economists had built a large, impressive body of work around the theory that markets and prices, not central planners, were the best allocators of society’s resources… the Chicago economists argued that government should intervene less, not more, because scientific regulation was a myth. – pg. 72
My experience leads me to consider state-enforced property rights as the key growth-enhancing institution. For if those rights were not enforced, open trade and the huge benefits of competition and comparative advantage would be seriously and dramatically impeded… People generally do not exert the effort to accumulate the capital necessary for economic growth unless they can own it… -pg. 251
Historically, societies that seek high levels of instant gratification and are willing to borrow against future incomes to achieve it have more often than not suffered inflation and stagnation. The economies of such societies tend to run larger government budget deficits financed with fiat money from a printing press. Eventually, the ensuring inflation leads to recession, or worse, often because central banks are forced to compal down. Then the process starts all over again. Many countries in Latin America have particularly prone to this “populist” malady… I regret that the United States may not be wholly immune to it. –pg. 255
In modern economies, whose chronic headache is inflation, deflation is a rare disease. –pg. 228
The greater the economic freedom, the greater the scope for business risk and its reward, profit, and thus the greater the inclination to take risk. –pg. 276
We probably came as close as we will ever come to pure capitalism in the decades before our Civil War. Following a largely, but not wholly, laissez-fire policy toward business and business practice, the federal government provided little or no safety net for aspiring capitalists in the race for wealth creation. If you failed, as many did, you were expected to pick yourself up and start from scratch, often in the rapidly growing settlements of America’s frontier. –pg. 278
I know I can’t generalize on the basis of a few years of observations, but I nonetheless found myself during my tenure at the Fed looking to Australia as a leading indicator of many aspects of U.S. economic performance. For example, the recent housing boom developed and ended in Australia a year or two ahead of the United States. –pg. 292
Capitalism, the engine of material well-being, thrives best with competitive politics. Authoritarian rule does not offer the necessary safety valve that in a capitalist society makes it possible to resolve disputes peacefully. The global economy – which must move forward if the world’s standards of living are to continue to rise and poverty to retreat –requires capitalism’s safety valve: democracy. –pg. 332
Today… the ratio of household debt to income is still rising… Such fears ignore a fundamental fact of modern life: in a market economy, rising debt goes hand in hand with progress. To put it more formally, debt will at almost always rise relative to incomes so long as we have an ever-increasing division of labor and specialization of tasks, increasing productivity, and a consequent rise in both assets and liabilities as a percentage of income. –pg. 347
In many respects, the apparent stability of our global trade and financial system is a reaffirmation of the simple, time-tested principle promulgated by Adam Smith in 1776: Individuals trading freely with one another following their own self-interest leads to a growing, stable economy. –pg. 368
It is thus not surprising that competition is often seen as a threat to job security. It is not perceived as a creator of higher wages either, although in the end it always has been and inevitably will be now as well. –pg. 393
The evidence, as best I can read it, suggests that for any given culture and level of education, the greater the freedom to compete and the stronger the rule of law, the greater the material wealth produced. But, regrettably, the greater the degree of competition… the greater the degree of stress and anxiety experienced by market participants. Many successful companies in Silicon Valley, arguable the poster child of induced obsolescence, have had to reinvent large segments of their businesses every couple of years… Confronted with the angst of the baneful side of creative destruction, virtually all of the developed world and an ever-increasing part of the developing world have elected to accept a lesser degree of material well-being in exchange for a reduction of competitive stress. –pg. 504
…On Future Trends:
Manufacturing jobs can no longer be highly paid, since it is consumers who at the end of the day pay the wages of factory workers… The rule of law under which capitalist economic institution function must be perceived as “fair” if these institutions are to continue to receive broad support. The only way to temper the bias against an economy that entrails the timely repositioning of labor is to continue to support market incentives that create jobs and to find productive ways to ease the pain of job losers. That problem is not new. The growing inequality of income, however, is new, and it requires analysis as to its roots, and policy action where appropriate. –pg. 395
It is becoming less physically strenuous and more demanding intellectually, continuing a century-long trend toward a more conceptual and less physical economic output. –pg. 411
There is a great deal of work to be done to set Medicare right. It should be apparent that to cover future Social Security and Medicare funding shortfalls wholly by raising taxes is economically infeasible. Doing so would imply unprecedented peacetime tax rates. At some point, tax rate increases become self-defeating: by absorbing purchasing power and reducing work and investment incentives, they reduce the economy’s growth rate. Hence, the growth of the tax base slows and the projected additional tax revenues fail to materialize fully. We are left with a most daunting reality: resolving the funding shortfall for federal social insurance is going to require benefit cuts. Government has a moral obligation to make these cuts sooner rather than later, to afford future retirees as much time as possible to adjust their plans for work, saving, and retirement spending... In the end, I expect the Medicare funding imbalance to be resolved by rescinding the benefits of the more affluent. –pg. 417-417 (In other words, we can’t fund Medicare and Social Security by raising taxes. People can’t spend as much or invest as much when they pay more taxes and then that causes the economy to slow down. The only way out of the mess, as Greenspan sees it, is to cut back on the benefits that Medicare and S.S. provide. How will that work? Well, if you make lots of money, you won’t get benefits that others get.)
To be sure, the “invisible hand” presupposes that market participants act in their self-interest, and there are occasions when they do take demonstrably stupid risks. For example, I was shaken by the recent revelation that dealers in credit default swaps were being dangerously lax in keeping detailed records of the legal commitments that stemmed from their over-the-counter transactions. In the event of a significant price change, disputes over contract language could produce a real but unnecessary crisis. This episode was a problem not of market price risk but of operational risk –that is, the risks associated with a breakdown in the infrastructure that enables markets to function. –pg. 490 (Hmm… good foresight with this one. But it’s a contract – there are all kinds of crappy contracts that are written because there are crappy lawyers. Credit Default Swaps might cause a problem, and they did, because they weren’t regulated enough. That’s my understanding of this latest crisis.)
….On Government Intervention:
After Nixon imposed wage and price controls, I’d fly down to meet with Don Rumsfeld, who was head of the Economic Stabilization program… They asked for my advice because I knew a great deal about how particular industries worked. But all I could do for them was indicate what type of problem would be created by each type of price freeze. What they were running into was the problem of central planning in a market economy – the market will always undermine any attempt at control… Situations like this came up week after week, and after a couple of years the whole system fell apart. Much later Nixon said wage and price controls had been his worst policy. –pg. 62
Are we fools to trust such stability when we see it in the markets? Or, as a newly anointed finance minister once asked, “How can we control the inherent chaos of unregulated international trade and finance without significant governmental intervention?” Given the trillions of dollars of daily cross-border transaction, few of which are publicly recorded, indeed how can anyone be sure that an unregulated global system will work? Yet it does, day in and day out. Systemic breakdowns occur, of course, but they are surprisingly rare. Confidence that the global economy works the way it is supposed to work requires insight in the role of balancing forces. –pg. 367
Regrettably, every time a hedge fund’s problems make the news, political pressure to regulate the industry mounts. Hedge funds are both risk takers and very large, the thinking goes –doesn’t that prove they are dangerous? Shouldn’t the government rein them in? Leaving aside the undermining of market liquidity that such actions could induce, the benefit of more government regulation eludes me. Hedge funds change their holding so rapidly that last night’s balance sheet is probably of little use by 11 a.m. – so regulators would have to scrutinize the funds practically minute by minute. Any governmental restriction on fund investment behavior (that’s what regulation does) would curtail the risk taking that is integral to the contributions of hedge funds to the global economy, and especially to the economy of the United States. Why do we wish to inhibit the pollinating bees of Wall Street? – pg. 372
…during my stint as chairman of President Ford’s Council of Economic Advisors. Although the primary job of the CEA was to shoot down harebrained fiscal policy schemes, I did on occasion accept increased regulation – when it appeared to be the least bad of the options politically available to the administration. –pg. 373
Over the years I learned a great deal about what kind of regulation produces the least interference. Three rules of thumb: 1. Regulation approved in a crises must subsequently be fine-tuned… 2. Sometimes several regulators are better than one. The solitary regulator becomes risk averse; he or she tries to guard against all imaginable negative outcomes… 3. Regulations outlive their usefulness and should be renewed periodically.
Markets have become too huge, complex, and fast-moving to be subject to twentieth-century supervision and regulation. No wonder this globalized financial behemoth stretches beyond the full comprehension of even the most sophisticated market participants. Financial regulators are required to oversee as system far more complex than what existed when the regulations still governing financial markets were originally written. Today, oversight of these transactions is essentially by means of individual-market-participant counterparty surveillance. Each lender, to protect its shareholders, keeps a tab on its customer’s investment positions. Regulators can still pretend to provide oversight, but their capabilities are much diminished and declining… Since markets have become too complex for effective human intervention, the most promising anticrisis policies are those that maintain maximum market flexibility… The elimination of financial market inefficiencies enables liquid free markets to address imbalances. The purpose of hedge funds and others is to make money, but their actions extirpate inefficiencies and imbalances, and thereby reduce the waste of scarce savings. These institutions thereby contribute to higher levels of productivity and overall standards of living. –pg. 489
Regulation, by its nature, inhibits freedom of market action, and that freedom to act expeditiously is what rebalances markets… In today’s world, I fail to see how adding more governmental regulation can help. Collecting data on hedge fund balance sheets, for example, would be futile, since the data would probably be obsolete before the ink dried.-pg. 489-490
…On Explaining Various Economic Topics
The Federal Reserve is in charge of the electronic payment systems that transfer more than $4 trillion a day in money and securities between banks all over the world… The Federal Reserve System consists of twelve bands strategically situated around the country. Each one lends money to and regulates the banks in the region. The Federal Reserve banks also serve as a window on the American economy – officers and staff stay constantly in touch with bankers and businesspeople in their districts, and the information they glean about orders and sales beats official published data by as much as a month. –pg 3, 5
I had enrolled in a Ph. D. program at Columbia University… My faculty adviser was Arthur Burns, who in addition to being a full professor was also a senior researcher at the National Bureau of Economic Research… The NBER is also the authority on the ups and downs of the business cycle; its analysts to this day determine the official beginning and ending dates of recessions. –pg. 35
But the Keynesian economic models failed to account for the possibility that unemployment and inflation could climb together. This phenomenon, which came to be called stagflation, put policymakers at a loss… The political pressure on the Nixon administration to address these problems became intense. Arthur Okun… invented a “discomfort index” to describe the dilemma. It was simply the sum of the unemployment rate and the inflation rate… The discomfort index was later renamed the misery index… – pg. 60 - 61
The Council of Economic Advisors is essentially a small consulting firm with a single client: the president of the United States. – pg. 64
One of the most important achievements of Congress and the last two administrations had been to make budget balancing the law of the land. The government now operated under so-called pay-go rules, whereby if you added a program you had to come up with a source of funds for it, either by raising taxes or cutting other spending…. –pg. 216
How is it possible that a superabundance of natural resources – oil, gas, copper, iron ore –would not significantly add to a nation’s production and wealth? Paradoxically, most analysts conclude that, particularly in developing countries, natural-resource bonanzas tend to reduce rather than enhance living standards… The danger takes the form of an economic affliction nicknamed “Dutch disease.” (The Economist coined the term in the 1970s to describe the travails of manufactures in the Netherlands after the discovery there of natural gas.) Dutch disease strikes when foreign demand for an export drives up the exchange valued of the exporting country’s currency. This increase in the currency’s value makes the nation’s other export products less competitive. Analysts often cite this pattern as a reason why relatively resource-poor Hong Kong, Japan, and Western Europe have thrived while oil-rich Nigeria and others have not. –pg. 258
…Latin America had not been able to wean itself from the economic populism that had figuratively disarmed a whole continent in its competition with the rest of the world… The dictionary defines “populism” as a political philosophy that supports the rights and power of the people, usually in opposition to a privileged elite. I see economic populism as a response by an impoverished populace to a failing society, one characterized by an economic elite who are perceived as oppressors. Under economic populism, the government accedes to the demands of the people, with little regard for either individual rights or the economic realities of how the wealth of a nation is increased or even sustained. In other words, the adverse economic consequences of the policies are ignored, willfully or inadvertently… Economic populism imagines a more straightforward world, in which a conceptual framework seems a distraction from evident and pressing need. Its principles are simple. If there is unemployment, then the government should hire the unemployed. If money is tight and interest rates as a consequence are high, the government should put a cap on rates or print more money. If imported goods are threatening jobs, stop the imports… The answer is that in economies where millions of people work and trade every day, individual markets are so intertwined that if you cap an imbalance, you inadvertently trigger a series of other imbalances. –pg. 335
A recent financial innovation of major importance has been the credit default swap. The CDS, as it is called, is a derivative that transfers the credit risk, usually of a debt instrument, to a third party, at a price. Being able to profit from the loan transaction but transfer credit risk is a boon to banks and other financial intermediaries, which, in order to make an adequate rate of return on equity, have to heavily leverage(borrow) their balance sheets by accepting deposit obligations and/or incurring debt. –pg. 371
…On Ayn Rand:
Rand wrote the Fountainhead to illustrate a philosophy she had come to, one that emphasized reason, individualism, and enlightened self-interest. Later she named it objectivism; today she would be called a libertarian. pg. 40
Rand came away from that evening with a nickname for me. She dubbed me “the Undertaker,” partly because my manner was so serious and partly because I wore a dark suit and tie. Over the next few weeks, I later learned, she would ask people, “Well, has the Undertaker decided he exists yet?” pg. 41
Ayn Rand became a stabilizing force in my life. It hadn’t taken long for us to have a meeting of the minds – mostly my mind meeting hers – in the fifties and sixties I became a regular at the weekly gatherings at her apartment… She was a devoted Aristotelian – the central idea being that there exists an objective reality that is separate from consciousness and capable of being known…. Exploring ideas with her was a remarkable course in logic and epistemology. I was able to keep up with her most of the time. –pg. 51
…On Communism:
While I’ studied free-market economics for much of my life, encountereing the alternative and seeing it in crisis forced me to think more deeply than I ever had before about the fundamentals of capitalism and how it differed from a centrally planned system. My first inkling of this difference had come during the drive into Moscow from the airport. In a field beside the roadway, I’d spotted a 1920s steam tractor, a clattering, unwieldy machine with great metal wheels. “Why do you suppose they still use that?” I asked the security man who was with me in the car. “I don’t know,” he said. “Because it still works?” Like the 1957 Chevrolets on the streets of Havana, it embodied a key difference between a centrally planned society and a capitalist one: here there was no creative destruction, no impetus to build better tools. – pg. 127
Controlled experiments almost never happen in economics. But you could not have created a better one than East and West Germany, even if you’d done it in a lab. Both countries started with the same culture, the same language, the same history, and the same value systems. Then for forty years they competed on opposite sides of a line, with very little commerce between them. The major difference subject to test was their political and economic systems: market capitalism versus central planning. –pg. 131
…[China’s] march to the market began in 1978, when, because of a severe drought, authorities were forced to ease tight administrative controls that had long governed individual farmer’s plots. Under new rules, the farmers were allowed to keep a significant part of their produce to consume or sell. The results were startling. Agricultural output rose dramatically encouraging further deregulation and the development of farm markets. After decades of stagnation, agricultural productivity blossomed… Success on the farm encouraged the spread of reform to industry…. No advocates dared call the model “capitalism.” They used euphemisms like “market socialism” or, in the famous phrase of Deng, “socialism with Chinese characteristics…” In a land not far removed in time from the collective farm, loosely articulated urban property rights appear to be enforced… But the right to own property still falls far short of the status of property rights in developed countries. –pg. 295-296
The [Chinese] Communist Party came to power through revolution, and has from its beginning sought political legitimacy as the purveyor of a philosophy that was just and that offered material well-being for the whole of the population. Material well-being, however, is only part of what human beings strive for, and it alone cannot sustain an authoritarian regime. The cheer of new affluence rapidly fades and, with time, becomes the base from which additional, even higher, expectations evolve. – pg. 299 (This also makes me think of the Rule of 100 that Malcolm Gladwell speaks of in The Tipping Point)
…Karl Marx was wrong in his analysis of the way people can organize to successfully create value. To Marx, state ownership of the means of production was the essential fixture in a society’s ability to produce wealth and justice. The right to virtually all property in Marx’s society was thus to rest with the state, in trust for the people. Property rights granted to individuals were instruments of exploitation and could come only at the expense of the “collective,” that is, society as a whole. He argued for the collectivization of the division of labor. All working together for a single goal would be far more productive than markets collating the disparate choices of individuals. Do human beings optimize their potential in a collectivized society? The ultimate arbiter of all such paradigms is reality. Does it work as proposed? Marx’s economic model in practice – in the USSR and elsewhere – could not produce wealth or justice, as is not generally recognized. The rationale for collective ownership failed. –pg. 300
…On Socialism and India:
India is impressively the world’s largest democracy. Democracy elects people who represent the population, and in India’s case it, as it should, has continued to favor significantly those who believe in the collective principles of socialism. The notion that government intellectuals, driven by the good of society overall, can far better determine the appropriate allocation of resources than can “erratic” free-market forces dies hard in India… In June 1991… the economy was teetering on the edge of collapse, reflecting more than four decades of de facto central planning… Singh was appointed finance minister… Singe introduced much reform, but in many critical areas he was contained by the enduring socialist inclinations of his governmental coalition. Even today, firms with more than one hundred employees with few exceptions cannot fire anyone without government permission. –pg. 318
Manufacturing in India… has been hobbled for decades by job destroying labor laws, a decrepit infrastructure that cannot provide reliable electric power, and roads and rails that inhibit movement of manufactures parts and finished products between plants and markets. Owing to costly labor laws that apply to establishments of ten or more employees, more than 40 percent of employment in all manufacturing takes place in firms employing five to nine workers… the small firms evidently can’t create the economies of scale available to the larger firms… Martin Feldstein, the eminent Harvard economist, stated, “Cell phone service is widely available in India at low cost because it was regarded as a luxury and therefore left to the market, while electricity is hard to obtain because it has been regarded as a necessity and therefore managed by the government.” –pg. 320-321
On Russia’s Transition to a Free Market and Black Markets:
The man Boris Yeltsin chose to launch economic reforms in Russia was Yegor Gaidar. In the 1980s when he and other young economists had dreamed of creating a market economy in the Soviet Union, they’d imagined an organized, methodical transition. But now, amid growing chaos, there was not time for that – unless the government could jump-start the markets, people might starve. So in January 1992, Gaidar, as Russia’s acting prime minister, turned to the scheme that had worked in Poland: abruptly ending price controls.
Shock therapy jolted the Russians much more than it had the Poles. The size of the country, the system’s rigidity, the fact that the state had dictated prices for people’s entire lives – it all worked against them now. Inflation rose so fast that people’s wages, when they could collect them, became worthless, and their meager savings were wiped out. The ruble lost three quarters of its value in four months. Goods remained in scarce supply in the stores, and the black market flourished.
Then, in October, Yeltsin and his economists unleashed the second massive reform; they issued vouchers to 144 million citizens and started privatizing state-owned enterprises and real estate on a massive scale. This reform, too, was far less effective than in Eastern Europe. Millions of people ended up with stock in businesses or owning their apartments, which was the goal, but millions more were bilked out of their vouchers. Entire industries ended up in the hands of a small number of opportunists who came to be known as the oligarchs. Like Jay Gould and some of the railroad tycoons in nineteenth-century America who built vast fortunes in part by manipulating government land grants, the oligarch constituted and entirely new wealthy class and compounded the political chaos.
…Forced to make the shift overnight, the Soviets achieved not a free market system but a black-market one. Black markets, with their unregulated prices and open competition, seemingly replicate what goes on in a market economy. But only in part. They are not supported by the rule of law. There is no right to own and dispose of property backed up by the enforcement power of the state… The linchpin of a free-market economy, property rights, is missing. –pg. 138-139
…On Surpluses and Deficits:
The CBO statisticians now envisioned the surpluses under current policy at $281 billion in 2001, $313 billion in 2002, $359 billion in 3003, and so on… As I contemplated this prospect I felt a bit stunned: $50 billion is an almost unimaginable accumulation, roughly equivalent to the combined assets of America’s five larges pension funds, piling up each year. What would the Treasure do with all that money? Where would it invest?
The only private markets large enough to absorb such sums are in stocks, bond, and real estate, in the United States and abroad. I found myself picturing American government officials becoming the world’s largest investors. I’d encountered this prospect before and found the idea truly scary… I could readily envision the abuses that might occur under a Richard Nixon or a Lyndon Johnson…
Taking all this into account, I came to a stark realization: chronic surpluses could be almost as destabilizing as chronic deficits. Paying off the debt was not enough. I decided to propose a way for Uncle Sam to pay off his debts while leaving little or no additional surplus to invest once the debt reached zero. Spending would have to be raised or taxes cut, and to me the preferable course seemed clear. I have always worried that once spending is notched up, it is difficult to rein in…
I could not shake a conviction of many decades that the biases in our political system favor deficits. So I made sure to end the statement on a strong note of caution… –pg. 218-219
…On Education:
One of the skills too many high school graduates lack is proficiency in math. It is that skill more than any other that is required to achieve skilled-job status… [People] complain that the math teachers of my childhood have been replaced with teachers with degrees in education but much too often with no math or science degree or competence in the subject matter… Different pay scales for high school teachers in different disciplines may go against the ethos of teaching. Perhaps money should not be an incentive. But it is. There are doubtless math teachers in our high schools who are sufficiently dedicated to forgo the much higher incomes they could earn in other jobs. But they must be few… It is becoming increasingly clear that a flat pay scale when demand is far from flat is a form of price fixing that undermines the ability to attract qualified math teachers…. Teaching math is likely being left to those who are unable to claim the more lucrative jobs. That is far less true of English literature or History teacher. – pg. 404-405 (Yes, math teachers should be offered more – but the drastic decline in Math skills in my opinion isn’t on the shoulders of teachers. It’s because we have: one, lazy kids who have grown up in an era of instant gratification and refuse to do homework; and two, ineffective parents who don’t enforce consequences when schoolwork is not done. You can’t treat education as a marketplace – kids are forced to go to school; in turn, the entire dynamic of a school is vastly different from a business marketplace.)
A dysfunctional U.S. elementary and secondary education system ahs failed to prepare our students sufficiently rapidly to prevent a shortage of skilled workers and a surfeit of lesser-skilled ones, expanding the pay gap between the two groups. Unless America’s education system can raise skill levels as quickly as technology requires, skilled workers will continue to ear greater wage increases, leading to ever more disturbing extremes of income concentration. –pg. 505(So… why don’t we have Computer classes as a requirement for EVERY school? I’m biased since I’m a compute teacher.)
…On Energy:
Long-term shortages of gas and oil have inevitably stimulated renewed interest in the expansion of coal, nuclear power, and renewable energy sources, the most prominent of which are hydroelectric power from dams and the energy generated through the recycling of waste and by-products from industry and agriculture. Solar and wind power have proved economical in small-scale and specialized uses, but together account for only a tiny fraction of energy use. –pg. 453 (That’s it? In your entire book – in your entire chapter on energy, you only mention solar and wind power once? You go on and on about gas and oil – we are running out! How can we have a stable economy if our fuel sources are gone? We will be FORCED to use solar and wind eventually. I was surprised to see the absence of any extra foresight regarding renewables and future energy policy.)
Over the horizon are plug-in electric vehicles, now in an exploratory stage. I recently had an occasion to drive one. My only complaint was that stepping on the accelerator produced a surge forward accompanied by an eerie and disturbing silence. I predict that the bestselling models will have an audio system that simulates the sound of a gasoline engine revving up. People want the comfort of the expected. –pg. 458 (You’re kidding right? I seriously assume you are joking on this one. Just to play devil’s advocate, do you think people missed horse dung when they moved from buggies to cars?)
…eventual consumption must decline outright. The big opportunity for displacement is on America’s highways, where one out of every seven barrels of petroleum consumed worldwide is burned: 9.5 million barrels per day in gasoline and 2.5 million barrels per day in highway diesel in 2005. The latter is consumed by the nation’s eight million heavy trucks, which average less than seven miles to the gallon. By themselves, those heavy trucks consume as much petroleum as all of Germany. Only China and Japan, and of course the United States, consume substantially more. –pg. 460
I am saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil. –pg. 463
