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Generational Dynamics Web Log for 4-Dec-05
Alan Greenspan gives another harsh doom and gloom speech

Web Log - December, 2005

Alan Greenspan gives another harsh doom and gloom speech

Saying that "the consequences for the U.S. economy of doing nothing could be severe," Fed Chairman Alan Greenspan spoke to the Federal Reserve Bank of Philadelphia Policy Forum on Friday.

He expressed the fear that "we may have already committed more physical resources to the baby-boom generation in its retirement years than our economy has the capacity to deliver. If existing promises need to be changed, those changes should be made sooner rather than later."

Greenspan specified a first step to changing things:

"[The] necessary choices will be especially difficult to implement without the restoration of procedural restraints on the budget-making process. For about a decade, the rules laid out in the Budget Enforcement Act of 1990 and in the later modifications and extensions of the act helped the Congress establish a better fiscal balance. However, the brief emergence of surpluses in the late 1990s eroded the will to adhere to these rules of restraint. ... By the end of the decade, many of the rules that helped constrain budgetary decisionmaking earlier in the 1990s--in particular, the limits on discretionary spending and the PAYGO requirements--were being violated with increasing frequency; finally, in 2002, they were allowed to expire.

Reinstating a structure like the one formerly provided by the Budget Enforcement Act of 1990 would signal a renewed commitment to fiscal restraint and help restore discipline to the annual budgeting process."

What Greenspan is describing here is a typical "generational unraveling." Congress passed the Budget Enforcement Act when it was being led by people from the generation that had grown up during the Great Depression, who understood its horrors, and who were willing to put politics aside to accomplish something important. But as the people in that generation disappeared (retired or died) during the 1990s, the Budget Enforcement Act "unraveled" -- its provisions were increasingly violated and it was allowed to expire. That's the kind of thing that ALWAYS happens during generational unraveling periods.

To put this in context, I've written about this Budget Enforcement Act a couple of times without naming it. Here's what I wrote in conjunction with the plan for the Federal Government to pay two million dollars per family in aid for hurricane Katrina victims:

"When I was growing up in the 1950s, my school teachers talked about the Great Depression all the time, because they had suffered through it. Those teachers must be spinning in their graves over the appalling things that are happening now, as a matter of course.

In the 1980s, the Republicans and the Democrats cooperated with each other to change the Social Security system to make it a sounder system. After that, they cooperated again to specify new rules to control the budget deficit. And in 1996, Democratic President Bill Clinton cooperated with the Republican congress to eliminate the welfare entitlement.

Today, cooperation is impossible, except to spend money and more money and more money. Controlling anything is impossible."

The point I was making then, and am making again now, is that budget control is IMPOSSIBLE. Reinstatement of the Budget Enforcement Act is IMPOSSIBLE.

People sometimes write to me to complain when I use words like "IMPOSSIBLE." One person wrote, "Politics is the art of the possible. How could passing a law be impossible?"

The answer is that you need the right people to do anything. You can't build a bridge unless you have people with the skills to build a bridge. You can't pass a budget enforcement act unless you have the people with the skills to put politics aside to make difficult budget decisions. And the people with those skills are gone; the Baby Boomer generation born after WW II is in charge now, and they don't have the skills to put politics aside for anything, as anyone can see by watching any newscast.

So when Greenspan tells us to reinstate the Budget Enforcement Act, he's asking for what is literally impossible. The Budget Enforcement Act will NOT be reinstated.

Greenspan adds:

"I do not mean to suggest that the nation's budget problems will be solved simply by adopting a new set of budgeting rules. The fundamental fiscal issue is the need to make difficult choices among budget priorities, and this need is becoming ever more pressing in light of the unprecedented number of individuals approaching retirement age. For example, future Congresses and Presidents will have to weigh the benefits of continued access, on current terms, to advances in medical technology against other fiscal initiatives."

Once again, Greenspan is asking the impossible. Today's leaders are unable to "make difficult choices among budget priorities." History tells us that once a generational unraveling has occurred, difficult choices will not be made -- until a new huge financial and war crisis occurs.

Greenspan also spoke of the danger to the Social Security system from the retiring Baby Boomer generation. As we mentioned above, Republicans and Democrats put politics aside in the 1980s to make the Social Security system sounder, but look what happened, according to Greenspan:

"Unfortunately, the current Social Security system has not proven a reliable vehicle for such saving. Indeed, although the trust funds have been running annual surpluses since the mid-1980s, one can credibly argue that they have served primarily to facilitate larger deficits in the rest of the budget and therefore have added little or nothing to national saving."

In other words, by making Social Security sounder, the 1980s leaders only permitted 2000s leaders to raid the Social Security system for more money to spend. So the Social Security changes of the 1980s have also unraveled.

Greenspan's speech makes for very gloomy reading. Ben S. Bernanke, Greenspan's youthful replacement as Fed Chairman, is a man without agony, as we've written before. But Greenspan, born in 1926, is more and more able to see what's coming, and he feels a great deal of agony.

Greenspan concludes:

"Crafting a budget strategy that meets the nation's longer-run needs will become more difficult the more we delay. The one certainty is that the resolution of the nation's unprecedented demographic challenge will require hard choices that will determine the future performance of the economy. No changes will be easy, as they all will involve setting priorities and, in the main, lowering claims on resources.

"It falls to our elected representatives to determine how best to address the competing claims on our limited resources. In doing so, they will need to consider not only the distributional effects of policy changes but also the broader economic effects on labor supply, retirement behavior, and private saving. In the end, the consequences for the U.S. economy of doing nothing could be severe. But the benefits of taking sound, timely action could extend many decades into the future."

Once again, Greenspan makes IMPOSSIBLE demands: making "hard choies," "setting priorities," and "lowering claims on resources."

It's a good time to recall the wisdom of Sherlock Holmes:

"When you have eliminated all which is impossible, then whatever remains, however improbable, must be the truth."

The Adventure of The Blanched Soldier

So now that we've eliminated the impossible, things like "setting priorities," what's left? Greenspan says that "the consequences for the U.S. economy of doing nothing could be severe," and there's only one thing that Greenspan can mean: A replay of the 1930s Great Depression that Greenspan himself spent his childhood enduring. (4-Dec-05) Permanent Link
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Generational Dynamics Web Log for 4-Dec-05 Alan Greenspan gives another harsh doom and gloom speech

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Generational Dynamics Web Log for 4-Dec-05
Alan Greenspan gives another harsh doom and gloom speech