September 1, 2005

IF ONLY HE'D GRASPED THAT INFLATION WAS WHIPPED:

The One-Eyed King (WILLIAM GREIDER, September 19, 2005, The Nation)

The ideological shift executed by the Greenspan Fed is more extreme than generally recognized. There has been nothing like it since the New Deal years, when Marriner Eccles was Fed chairman and collaborated closely with FDR to reform the central bank and convert it to the economic understandings grounded in Keynesian liberalism. Eccles and Greenspan are like historic bookends on the long, gradual transition in economic thinking from left to right, from active government intervention to the current faith in laissez-faire markets.

Eccles was a Republican Mormon banker from Utah who became a leading architect of New Deal reforms (including issues beyond monetary policy). In the crisis of the Great Depression such odd political convergences occurred. The self-taught Eccles (he never went to college) personally intuited what John Maynard Keynes developed as a formal theory: The national government, including the Fed, must become the intervening balance wheel in a modern industrial economy--the stabilizing force that, when necessary, stimulates the economy to encourage faster growth and full employment, while at other times it puts the brakes on economic activity to avoid inflation. Eccles essentially invented the modern Federal Reserve, liberating the central bank from the 1920s hard-money orthodoxy of banking and finance, an inflexible doctrine that gravely worsened the Depression.

Greenspan, one might say, devoted his tenure to eliminating vestiges of Eccles and FDR. He resurrected the financier's lost religion, now dignified by conservative economists as the new theory of "efficient markets." Keynesian demand-side stimulus, they contended, produces no lasting effects for the economy, so nothing will be gained by worrying about wage incomes and the consuming power of workers. Wages should be determined by the marketplace and are none of the government's business, except when it wants to squelch price inflation.

The best government can do for the economy, conservatives argued, is to boost the "supply side"--that is, favor wealth holders so they will have more capital to invest in new factories and production. This logic led to huge tax cuts for high-end citizens and for business. It meant liberating and protecting financial markets to do their thing: distributing capital for productive uses in the most efficient (and often ruthless) manner. It convinced Greenspan's Federal Reserve, though a principal regulator of banking and finance, to no longer believe in regulation.

In that sense, Greenspan was the perfect chairman for this era.


Post-War presidents faced only two significant tasks -- one domestic and one foreign -- undoing the New Deal and getting rid of the Soviet Union. Ronald Reagan took care of the latter very nearly signle-handed, but he had help on the former from Paul Volcker and Alan Greenspan who played key roles in at least laying the groundwork for the legislative reforms to come.

Posted by Orrin Judd at September 1, 2005 8:22 PM
Comments

Oj, I don't get it. Do you want big government or not?

Posted by: Perry at September 1, 2005 10:20 PM

Not, but even our smaller government is going to be pretty big.

Posted by: oj at September 1, 2005 10:35 PM

That should be "Not* ", since Orrin favors proposals that would require big gov't in most areas where big gov't currently exists.

Examples include fighting some wars that didn't get fought, with weapons and equipment that only existed because big gov't was created, expanding mass transit to every pop. 400 village in the land, keeping gov't mandated pensions and health care, which would require gov't oversight, and of course Orrin just LOVES the $ 800 billion, ZERO NET EFFECT boondoggle & justice system full employment act that is the "war on minorities".

Whoops, meant to say "war on drugs", no doubt, no doubt.

Posted by: Michael Herdegen [TypeKey Profile Page] at September 1, 2005 10:49 PM

Michael:

Yes, even the smallest government exists to provide security and law enforcement. However, those weapons systems should be junked and we should just keep and more frequently use nuclear cruise missiles.

We should just stop funding highways and move the money back to trains--the initial switch is what created the mess.

And we should transition the big government Welfare State to an Ownership Society.

All of those save money but don't shrink government much.

Posted by: oj at September 2, 2005 7:11 AM

Michael:

Yes, even the smallest government exists to provide security and law enforcement. However, those weapons systems should be junked and we should just keep and more frequently use nuclear cruise missiles.

We should just stop funding highways and move the money back to trains--the initial switch is what created the mess.

And we should transition the big government Welfare State to an Ownership Society.

All of those save money but don't shrink government much.

Posted by: oj at September 2, 2005 7:13 AM

Michael:

Suppressing the narcotics trade isn't a war on minorities. Whose neighborhoods do you think are made unlivable by druggies and the pathologies they produce? And don't give me legalization; that just makes the problems worse. Legalization is a ploy by white boomer cokeheads to get out of jail time.

Posted by: Mike Morley at September 2, 2005 11:41 AM
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