Former Federal Reserve Chairman Alan Greenspan resurfaced this week. We couldn’t recall the last time we’d heard from him. But, alas, the old fellow’s in desolate despair.
Unexpectedly rising from the crypt: Alan Greenspan Photo credit: AP
On Tuesday, for instance, he told Bloomberg he hasn’t been optimistic for “quite a while.” Obviously, this is in contrast to the perennial Goldilocks attitude he had during the 1990s. So what is it that has the Maestro playing a low dirge?
China, the dollar, Dodd-Frank, and associated unknowns are all part of his negative outlook. But the long winter of his discontent is something else. Greenspan said he “won’t be [optimistic] until we can resolve entitlement programs.”
“Nobody wants to touch [entitlements]. But it is gradually crowding out capital investment and that is crowding out productivity and that is crowding out the standards of living,” said Greenspan.
Indeed, funding entitlement programs is becoming more burdensome by the year. As a greater percentage of the economy’s GDP goes toward entitlement programs, a lesser percentage goes towards capital investment. The effect of this negative feedback loop, as Greenspan infers, is quite simple.
An enticing lure…. Cartoon by Michael Ramirez
Less capital investment leads to lower productivity. Lower productivity leads to slower GDP growth. Slower GDP growth leads to an economy that can’t keep pace with entitlement programs. Thus, an even smaller percentage of GDP is, in turn, available for capital investment…to propel future growth. And so on, and so forth.
A 2012 forecast of entitlement spending by the Heritage Foundation. This seems not exactly sustainable – click to enlarge.
What Drives Economic Growth?
Certainly, this is a basic insight. But perhaps Greenspan is on to something much larger than just the issue of entitlement programs. From what we can tell he’s getting at the question of economic growth. Namely, what drives it?
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