Former Federal Reserve Chairman Alan Greenspan, armed with charts and data, says he has fingered the primary culprit for the sluggish recovery: government activism.
It's not that the financial system came within a hair of destroying itself, or that this recession was the worst since the Great Depression, or that American households suffered a huge hit to their wealth just as a huge share of Americans were approaching retirement.
No, Greenspan says in a paper that he will defend on Tuesday at the Council on Foreign Relations. Corporations have been cowed into submission by the the fear of financial regulation and other government intrusion.
“I conclude that government activism is hampering what should be a broad-based economic recovery," he wrote in a paper earlier this month.
Greenspan presents this finding as the unavoidable conclusion of objective empirical analysis, but his argument is surprisingly sloppy and grounded more in ideology than in statistics. Put simply, it goes like this: The normal reasons for a refusal to invest -- excess capacity, lack of demand, soaring government deficits -- explain less than half of the current sluggishness. Since there aren’t any better explanations, what else could it be except “government activism”?
His theoretical explanations are myriad: moral hazard following massive bailouts, financial regulation, government debt crowding out private investments. Direct evidence of impact, however, is lacking. He does acknowledge that the recent crisis has "cast doubt" on the presumption that markets be very lightly regulated, but even after the machinations of unregulated markets helped pitch the nation into recession, his own faith in unregulated markets doesn’t appear to have been shaken much at all.
"The presumption that intervention can substitute for market flaws, engendered by the foibles of human nature, is itself highly doubtful," he writes. "Much intervention turns out to hobble markets rather than enhancing them."
Pointing to an analysis of data, though, he effectively claims that government spending and regulation explain at least half and as much as three-quarters of the disappointing slowness of growth. It's an assertion that might make even the Cato Institute blush.
So how does he get there? In searching for an explanation of the lackluster recovery, Greenspan zeroes in on an aversion to business investments in illiquid assets, which, for non-financial firms, has reached a high not seen since the 1940s. It is no secret that businesses have been hoarding cash and holding back from supporting much-needed growth. Is this the right statistic to look at when it comes to explaining slow growth? There's a compelling case to be made, though it's not airtight. Assuming it is, though, Greenspan concludes that the culprit here is uncertainty -- but uncertainty about what?
This is where things get dodgy. Greenspan seeks to prove a correlation between the illiquid asset investment he deemed critical to explaining our slow recovery and two variables -- one intended to show the effects of fiscal deficits and another that is supposed to represent a non-government related fall in demand. The first is just a measure of how high the federal government's deficit has soared. The non-government statistic is a measure of how much capacity is being utilized by non-farm businesses.
This is the math that underpins Greenspan's numerical assertion, and it leaves a great deal unexplained. Together, these two measures explain just 45 percent of the variation in investment in illiquid assets over a 40-year period. The capacity measures explains about a quarter of the variation. The deficit measure explains roughly a fifth. A reasonable interpretation of this regression is that it does not show what is causing the slow recovery.
This isn't Greenspan's tack. Instead, he takes the 55 percent his model doesn't explain and declares "activism" a "likely explanation." Without much evidence, he also decides that government intervention is such a strong contender for explaining this admittedly "indeterminate" variation that he is willing to declare that a full half of the variation results from the ill effects of the state.
It is not fair to say Greenspan is wrong; his numbers don't prove that. But just as surely, they don't prove him right. He sets aside the potential for what statisticians call omitted-variable bias, when a third but excluded variable explains some of the effect attributed to one of the pieces of data included. And Greenspan dismisses the "indeterminate degree of fading residual crisis shock" because he cannot find a good variable for it.
The rest of the paper is full of modules that explain various theories on why the unhindered free market helps the economy. These are all logical, even compelling in an anecdotal sense, but they are not the be-all and end-all -- and they don't prove Greenspan's numerical claims. They are the same theories that led Greenspan, back in his days at the top of the Fed pyramid, to push with unrelenting zeal for deregulation. And they are the theories that the chastened former chairman appeared to part with, if only slightly, when he admitted before Congress that the financial crisis revealed more regulation was necessary.
It appears that he's back to preaching the free-market gospel once again, almost as if the last few years had been a dream.