Bollettino

Keeping Alan around

Tom Paine's business commentator, Dean Baker, is a grouch. LI likes business grouches -- although you can always tell when the sap is rising to their heads from their shrivelled hearts -- they start calling themselves contrarians and mistake a keen sense of impending disaster for the divine gift of prophecy. Our favorite lefty grouch is Doug Henwood; our favorite bonds grouch is James Grant. Dean Baker is a different kind of grouch. For instance, he regularly punches holes in stories that grow hysterical about impending Social Security deficits -- and we think he is right, there.

At the moment, he is the sole mourner at the Greenspan fiesta. When Bush announced that Greenspan would be re-appointed, there was a general round of Huzzas from all the usual suspects on Wall Street. Baker, however, compared Bush's announcement to keeping the captain of the Titanic around for another cruise. The meet of his Greenspanophobia is that Greenspan, basically, committed himself to a big time moral hazard by helping blow up the late nineties bubble :


"If he had consistently berated the markets with "irrational exuberance" comments and supported his case with charts and graphs, it is unlikely the market would have reached the dizzying heights of 1999 and 2000. If talk proved insufficient, he could have raised the margin requirement (which restricts borrowing to buy stock), and if necessary, he could have raised interest rates. But he didn't do any of that -- and arguably, he even may have promoted expansion of the bubble with his "new economy" rhetoric. The economy will suffer for years to come as a result.

"The bad news is not all behind us. Greenspan continues to ignore a housing bubble, the collapse of which is likely to have even larger repercussions for the economy and the retirement security of millions of Americans. People are currently buying homes in the bubble-infected markets (mostly on the east and west coasts), which could lose 30 to 40 percent of their value in a drop. For most families, their home is their biggest investment. Tens of millions of baby boomers are counting on equity in their home to support them in retirement now that their 401(k) plans have suffered so drastically from the stock market retreat. Instead of warning of a housing bubble, Greenspan testified before Congress last summer that there is no such thing."

Baker is also pretty aghast at the malign neglect of America's current trade account deficit.

Now, we are not sure if we wholly buy the bubble argument. We don't believe, for sure, that Greenspan was responsible for it. We do think it could have been curbed, somewhat, by the timely raising of margin requirements. But we also think Baker neglects the good side of irrational exuberance. Why did income inequality dip for the first time in twenty years after 1996? We think, in part, it was just the big IE - promoting somewhat hazardous economic activity, promoting the irrational allocation of resources -- that did it. And that might be a good thing in a cyclical system over a specific short run. We fault Greenspan less on the bubble than on the aftershock. Surely giving away the surplus to the high end of the wealth scale was a huge mistake. It isn't just that it provided insufficient stimulus to the economy -- it blocked alternatives that would have been possible, and much more constructive. Foir instance, there was a window of opportunity for creating a really viable reform of health care. There was a structure for revamping the complex ways in which states and the federal government both raise and divvy up money. And given that it was rather obvious, by the end of 2001, that the stock market boom was over, there was at least the obvious alternative of doing minor corrective work, so that in 2003 we did not face an overhang of some 100 billion dollars in separate state debts. The reason the latter was never addressed has to do with a dirty little secret of our government -- it is way overweighted to represent less populous, poorer states. California's budget miseries are California's business precisely because California is an economic generator -- unlike, say, Mississippi. But Mississippi, you will notice, and Tennessee, and the rest of them are much more represented on the national level. In tax terms, more money flows into Mississippi from the Federal government than flows out of it -- as is the case with Texas. But the reverse is the case with New York and California. Whenever those two states have financial difficulties, however, the poorer states stick it to them.

There are a host of reasons for this -- the culture of bad faith vis a vis the government in the South being one of the most prominent. It is true that Bush's tax cuts, especially the dividend tax cut, will grossly and inordinately benefit certain citizens of California and New York -- ie, the rich. And the richest one percent tend to settle in the richer states. For every billionaire in Mississippi, there are five in Sillicon Valley.

But the reparative work of the tax cut is most likely to vanish into high yielding investments in such things as derivatives -- which have no home, and bring no benefit to the wealthy states themselves. So the median person in those states, in bad times, has to live with the collateral effects of wealth -- for instance, higher rents and housing prices -- and the skew against those states on the national level -- which has to be made up for by higher state taxes. In a sense, the cause of the income tax in New York State is the lack of one in Texas.

Well, we could go on. But do you really want us to?