The Economist asks: Can America remain the world's biggest economic power?
Hello and welcome to the economist asks, I'm mckelway. And this week we're asking, can America maintain its position as the world's greatest economic power. By many measures, the American economy east powering ahead GDP is on track to grow at around three percent. This year, and the unemployment rate isn't impressively low three point, seven percent. It's an unmissable of charity. Phuc President Trump to describe the economy as so good. Perhaps the best he said in our country's history, but for others, the same figures present economic puzzle. My guests today, the authors of new book called ambitiously capitalism in America. A history Dr. Alan Greenspan was first appointed by President. Reagan as chair, the US, Federal, Reserve, and presided in that role Philippe twenty years at the helm in an age of turbulence. Was he an optimistic believer in market officiency failing to bubbles in the late nineteen? Ninety s two thousands was he won. Biography recently put it the man who knew as chair of the Federal Reserve. He's well versed in giving God at comments. His every word could move markets like his description of irrational exuberance, which sent market south in nineteen Ninety-six while before the dot com bubble finally burst into thousand Dr. Greenspan welcome to the economist asks and we hope you feel kind of with us today. Thank you very much. I'm delighted to be here. His Co. order is very free talking journalist, Adrian Wooldridge, formerly our American bureau, chief and Lexington and Shumpert a columnist. Now, our budget push political columnist. Adrian, thank you to for joining us. You Dr Greenspan you start the book by imagining the World Economic Forum that grand gathering in devils in sixteen twenty over countries of the world, jostling for dominance America however, doesn't feature. So how did it become the world's biggest economy. Well, that's the extrordinary story which we try to present in the book that words, that's where we started. And we are where we are today for good or ill, but the whole substance of the book is a conceptual approach to what forces word play, which got us from there to here and what all the forces that you think that drives America forward. When we look at that grand sweep of history. Well, basically what is characterized the United States through most of our history is that we wrote helped by the constitution of the United States. It said, property rights, various other relationships, which created the optimum climate for economic growth. And there's no question that where we tobacco off from that, that we'd start to become an average economy. Did you read it? Similarly, -absolutely I think that the the central argument of the book is that's economic growth is driven by what Joseph's Shumpert a called in nineteen forty, two creative destruction. It's the willingness to move from old established ways of doing things to new innovative ways of doing things, and we augment the book that America has been unusual in its willingness to embrace creative destruction. What are the reasons why America's been say willing? I think partly because it's such a big country and that it could it could afford to move from the old to the new in ways in which small countries are much more more nervous is partly because it's a new country. America was founded in roughly the same year that Speth read the wealth of nations. Most countries, old countries with old established ways of doing things. America wasn't ready. It was. It was created in the world of growth in the world of business. And so it was dynamic in that sense. Had a uniquely entrepreneurial culture, a uniquely entrepreneurial approach to business lots of immigrants, lots of lots of room to move lots of economic resources. So it's it's a very dynamic culture, but it's Dr. Greenspan said it was a dynamic culture with one fixed point, and that fixed point is the constitution. The constitution defines a set of rights. It divides power. It creates a sort of framework which provides stability amongst all the dynamism. So is this unique combination of dynamism and the stability certainty provided by the constitution, which I think explains a lot of America's greatness. Doc degrees, and I'm going to choose from these very rich period. And even that is quite a long era. Adrian is covered in that sentence, what you going to choose from this beyond the sort of foundational time as the decisive maintenance, put it in blunt, make make America rich. Post civil war period which were talking about civil war was devastating period for the United States, and although it was obvious consequences with slavery and what they post civil war period was was an extraordinary period of economic growth, basically characterized by the ability to take an industrial environment and reduce the amount of input required to get the same out for Henry Bessemer. In eighteen fifties, came up with a wholly new way of producing steel which had been an a steel industry became a dominant force and the second half of the nineteenth century and the United States. And in fact, created Andrew Carnegie who ultimately put together the pieces of what became US steel. But then as the years went on and we ran into Henry Ford and development of motor vehicles for the average person, this accelerated the whole development and it's historically unprecedented and any other country in the world. United States space extraordinary capacity to bring in immigrants from abroad with extreme entrepreneurial skills, but also adapt ideas from the rest of the. And apply them at scale. And the sort of scale of something that Carnegie steel is unparalleled in Britain. Britain is the biggest producers still in the eighteen fifties. And then by nineteen hundred is absolutely dwarfed by, I think at Carnegie steel on his own is producing more than the whole of the United Kingdom. So America really takes the lead in the world from Great Britain in in in that fifty years span and seeing, as you mentioned both of you have touched Andrew Carnegie, what about the rubber barons and their reputation in massing immense wealth, oversleep building businesses, which will world-beating, but their reputation in particular time when we look at the gaps in wealth and at the super rich with perhaps more skepticism than we did the robber barons have a lot to answer for. I mean, the robber barons are amassing huge fortunes and it's often said in their defense that they may have a mass these great fortunes. But at least they gave some of the money away in philanthropy. And it's wonderful philanthropies. They create breath, much more important thing that they did was to reduce enormously. The cost of inputs into the economy, say, if you're reducing the cost of steel and your reducing the cost of oil actually ultimately making everybody much richer and what the that that reducing those costs because they're developing organizations ways of running the steel industry ways of running the oil industry, which which simply much much much more efficient and they're driving their competitors out of business, not because they're that cheating, but because they're just better at doing what they're doing. This is very interesting comparison. I think between the the robber barons of the nineteenth century and today's silica giants extraordinary comparison because the similarities between the between Silicon Valley and the robber baron world a quite a Sonics. You have huge companies being created very, very quickly. You have entrepeneurship basically masterminding the creation of these companies and you have fundamental economic inputs in. In the nineteenth century, stealing oil today, information being rented, much, much cheaper for everybody. And I think that this points to two remarkable things about America which helps to explain why America's become the great economic giants that it has. One is America's just really good at producing entrepreneurs. These people who capable of taking industries and revolutionizing them have absolutely gigantic. I'm visions and Secondly, America's incredibly good creating companies startups that can can become giants very, very quickly. Don't you Greenspan? Where do we think the sad story of slavery fits in this picture? How does it affect the engines of capitalism. Well, it's not the engine capitalism. It's the constitution. Slavery is an abomination. I mean, you can have an hiccup. Basic statement of the declaration of independence. All men are created equal. Well, that redefines who is a man who is not. And I think that. What. We've been dealing with and what. Slavery actually did was. As continued going, which essentially create an impossible situation which meant the civil war was inevitable. I've always argued that it was a cotton gin which was invented in seventeen ninety three, which took the cost of so-called up land cotton down very significantly. So when the issue arose with the cotton, gin and production increased extraordinary amount of so-called short, staple cotton. We had very high demand for slavery. So what's happening here and is that's slavery. Is it some ways becoming outmoded in hers ever moved to? It's becoming people like Jefferson and Washington, who is slave owners beginning to free that slaves. And also the present pyre, of course, abolishes slavery in eighteen thirty three. I think so slavery is beginning to look backward looking. And then something remarkable happens, which is technological innovation with the cotton. Gin makes slavery economically vital to see slavery declining in the late eighteenth and early nineteenth century. Then it begins to take off again and spread across the United States because this technological innovation makes it more economically useful profitable. Now, some of our listeners will be familiar with the kind of experience where we go and you see, all of Shakespeare plays very truncated in eight one short performance. I'm going to have to move you two gentlemen along Papp's through history, little bit faster than the might seem comfortable to skew do homework for us. Why did the great depression happen? What would you say. Goes back to World War One. One of the things that occur as a country Quance as you all know is that when the war was over Britain. All other European countries try to reset the currencies against the United States dollar which existed prewar and as a result, a huge distortion and the whole structure of economic forces. And that is often discussed is the reason why Hitler arose in the why all extrordinary things that occurred to lead us essentially to World War Two, which is really an extension of World War One because we'll one never resolve the problems that existed that caused it. Well. Hard question, but what are the things about the great depression is that there in some ways to depressions to recessions as one of the beginning of the nineteen thirties. And then America begins to get out of the the recession, partly because of the the, the new deal in the mid nineteen thirties. But then towards the end of the nineteen thirties, it goes back into into recession, unemployment starts going going back up. You've got the serious crisis of the economy yet again in the late nineteen hundred isn't anything that really pulls America out of the depression I think is this is the second World War which passively simulates demand leader. Sounds like the city's problems is, is War. I mean, it's almost kind of this. Brush view of capitalism. It's driven by war in the wool machines drive the wealth. I mean, why is that wrong? Basically because. What I did was at craft and ships people cannot have bread on the table as a consequence of improvement in aircraft ships. It's Millie, the mechanism and the awareness, for example, that went to trickle cost plus system that there's no better way to get the private sector to function than a cost plus system. But I think that's going bit too far. I don't think it's in the spirit of free market economy is us to step back perhaps and looking at that question about the depression and what we learned from it when we come to dealing with financial crash of two thousand. And what did you learn about that history. Well, I, I would say first of all. It's a bubble bursting. Bubbles are the result of human. I don't know if it's a college a what it is, but they're Florida aspect to human nature. One of which it produces bubbles because of degree of euphoria which irrationally evolves and eventually collapse. It looks for example that when the crash occurred in two thousand eight, it was actually far more virulent and in collapsing of the financial system than nineteen twenty nine. In nineteen twenty nine. You still have very a call money market still existed and twenty twenty five percent interest rates. But in two thousand eight, the market disappears there one, no bids were nobody willing to back up a number of the markets and the system imploded very significantly. And it wasn't until we had the actual evidence that happened there. Granted the nature of human beings, how they behave with uncertainty and the like, and this is your intimately which behavioral behavioral economics as Dell's very deeply. And any event you have to do two things to produce the nineteen twenty nine and two thousand. Eight crisis one. You need a toxic asset and the toxic acid and nineteen twenty nine with stocks and. Two thousand eight. It was mortgages, but you also need as a necessary condition that these toxic assets are also basically leveraged. On. The one thing that appeared in both nineteen twenty nine and two thousand eight was a high degree of leverage. So I've concluded now we now understand the way these things arise based on the two major examples that we've learned from these two examples. We actually base real theory of how to prevent future crises onto. Temples, eleven bitter that it's directly into that context. When when people say you don't degrees Monday, presided over an enormous credit bubble. What was the central flew in you thinking that you discern when you back on that. Well, I have the impression that on the ABS vacations that I had made up to that date. Was that a backers and shouldn't Sears generally would tend to look after their own self interest and the manner adequate to create a rebalancing. But it was very clear, especially at the top of the two thousand boom doesn't eight boom, that everyone was waiting for it to crash. But the chairman of city group said so long as music is playing, we have to dance when it stops, we won't. But the reason I did that as they didn't quote dance close quote, they would've lost market share. So this very interesting set of relationships which basically go back the fundamental human nature and have their either go back to South Sea bubble. They all have these various characteristics. And I think two thousand eight actually a major statistical input because we never had before seen financial markets, especially short term financial markets literally freeze the way they did in two thousand eight wants to one of the things that struck me watching this from very much from the outside was simply the power of politics during this in the sense that both the Democrats and the Republicans for different reasons wanted to increase the number of Americans who had homes. The Democrats said, let's let's have lots of poor people getting homes, and the Republicans between George W Bush has, let's have a homework owning democracy. That'll be good for of Republican that you save got huge political pressure on people to to, to borrow money to to get into the property market. Was that a big factor at this time through Fannie Mae and Freddie MAC and the the, the mortgage finance bay. Based in Washington. And did I spent a good deal of my time both as chairman of the fed and as a private citizen complaining that these two institutions upland subsidized. Producers of toxic assets. There that we could unpack about what's being done to web blame, might've late in the past, but where do you think the next bubble financial crisis is mostly likely to come from Dr Greenspan you your ghosts of irrational exuberance. You sometimes feel them around you today? Actually, I don't think this Akon is as a buoyant as the number of people do. I best writ by the rate of growth in productivity, not by the employment rate, not by inflation as such. But fundamental is output per hour up put per hour in the last eight or nine years has been at a subnormal rate of interest as indeed the whole world has been in Britain Brexit as a wonderful example of what happens to a market economy when it's rate of growth slows down beneath a certain threshold. And I think what engendered Brexit and what is in 'gendering emergence of Donald Trump and the United States on two major Connie's slowing significantly below. That potential rate of growth. And for example, in the last six months of six years, many, how you wanna look at it off productivity growth rate is been under one percent of year. So is that in the UK we both used to be three percent of their abouts, and that is a huge difference in the type the level of the economy and you get people coming in as indeed the Brazilian election is showing very much similar type of pattern where Brazil was extraordinarily potent economy and it collapsed under very dubious political control agent. He's covering Britain Brexit's in the rates, backstage. Do you entirely identify with that that you can sort of make a direct correlation. Between the lower rates, productivity growth and populism. Absolutely. I think that basically what you have is an economy where everybody's competing for a fairly fixed pie. And so that sets interest groups against each other instead of looking to to get richer and better that that looking to get a big share of fix pine. I think also is a weird thing that's going on as well, which is that we have a combination of a very high degree of economic turbulence. There's a lot of change. Churn lots of technological innovation, but there's no really serious overall productivity growth. So everybody will move happily move house on the job. If I move into a bigger house or a better job, never been a hostile move to to the same sort of house or the same sort of job, but they're getting all the churn, none of none of the benefits. And I think that's terrible mixture. What would we learned from the history? The you two written together about populism. You discuss populism and its economic environment in the late nineteenth century, what would we learn about contending with populism in Donald Trump's America who other forms in Europe today. I think we're moving towards what we call stagflation. That is it's very difficult to have this huge fiscal deficit because remember one of the real problems with respect to untitled, it's just explained entitlements in this context for us, please. She didn't study. Greenspan international arena. It's called social benefits at its various pension funds set up by government as welfare programs to take care of various aspects of the population. In the United States, we have an old agents of Ivers fund. We have Medicare Medicaid and ever variety of other things which individuals by the very nature of being a citizen of the United States and having certain other characteristics are entitled to government payments of a certain dimension. If they were fully funded, which they were in the beginning and we're supposed to be, then there would not have that negative effect on the economy, but they're not the huge deficit which is scheduled if you listen to Congressional Budget Office and the United States, the debt. Scheduled to go up to tremendously I levels and the years immediately. Miserable agency. Two things to do with populism problem. First of all, it's going to get growth back. It's push it, sprayed of productivity growth back up, and I think tackling the entitlement problem is absolutely fundamental to that because it's shifting money away from productive investments to less productive use, and we have to make sure that new future financial crises. And I think there are ways of reducing the likelihood of financial crises by forcing banks to keep more cash in reserves. Requisite cash reserves. Convinced the twin spend the we're not risking another financial crisis right now. Points out if we were to go to, for example, club, the average rate of equity capital and commercial banks or financial intermediaries. Is historically low but far more important. We would solve all of the issues of contagious default, which is a necessary condition for the two thousand eight nineteen twenty nine type of crisis. And if you have an ability to prevent contagious default and the one way to do it is to look and ask yourself where in a free market economy, is there no significant type of the fault feeding on for one another? And that is an anon- so-called nonfinancial sector of the economy where the capital stock equity to assets is forty percent. Some in many cases, much larger than that. Commercial banks have eleven to fifteen percent. And the chances of contagious series of defaults and the first case where you have very large capital buffers is very low to nonexistent where it's very high under a troublesome. And one of the things that we put in the book is to explain how we can have a system, partly reflecting the the Swedish experience and what we see in the developed world generally how to solve this problem by doing a simple thing show up -ly raising the capital requirements and what the data show is going all the way back to eighteen sixty nine is that there is no relationship between the amount of capital have relative to assets and re. Return on equity. That means that the people who argue that they will. That point to this very substantial change would induce a major problem on just mistaken that they do not show that. And the reason is that the rate of return on equity capital is a built in issue of human time forever. And that does not vary and would not very respective of how much capital we require financial intermediaries. So this is a sensual extremely optimistic book about American capitalism because there was some people say that America deceased debate, exceptional nationless. The rate of growth will slow down is because it's an advanced economy and the other people who say that it's the nature of technology that he just doesn't generate this growth that we've seen in the past. We didn't think that's the case. We think there's an extraordinary technological revolution going on. There's an extraordinary. Power in the American economy that generates really high levels of growth. But it's it's been slowing down partly because of a poorly run financial system which generated at a crisis of important promotions in two thousand eight. And partly because of very badly run entitlements, which means America's spending more entitlements ridden. It's funding so that that feels the deficit. But if you could solve to pull ac- problems, the underlying economy, the economy that you see these great companies like Google an Amazon, the rest of it is a very powerful one. So America could reclaim its its dynamism. And that's very important because dooby won't the twenty first century to be defined by an authoritarian society like China or a liberal society, the United States. So a lot depends on solving these. These policy problems agent is become too close most through to base view the question of whether they can be more than one winner really as as we look forward. Is China will get to challenge these optimistic reading that you seem to show. Warts and all about the American economy. If you go back and China's history, Deng Xiaoping. Essentially reversed Mousa domes basic comment system which existed after World War Two. And we had a whole series progressively of increasingly more liberal governments in China. And I remember very distinctly, I had to work with. Junk some in and Huron g and the nineteen nineties and their basic. Disclose view one being the president, elevating the prime minister, there's you is, how do we make Chinese of Konomi function like American. Now with she in power now, perhaps semi permanently this, this is not the vision that Deng Xiaoping had, but I would say if it weren't for this little. This major problem, China would be very successful a market economy as it was developing. I always called it the the most capitalist in action for a number of years until. Ran into the last three or four regimes, and I frankly, I wasn't in government time obviously, and I don't know what happened and you're not gonna find out what's happening with an apology unless you're sitting there. Absolutely. I think that that's right. But I do think that's I trust America to support the the values of liberal democracy around the world. It has done for the last century. So they're really if we can improve the rates of American productivity growth and ensure that the American economy is dynamic in this centers. It wasn't a law century. That's not just good for America is good for the rest of the world because ultimately Americans being the champion of liberal democracy to Alan Greenspan and Asian wooded. Thank you very much. We are on Email here, radio code dot com. Over on Twitter at accordeonist, radio. If you'd like to feed in your foods on America, economic power. What life beyond Miquel voi- in London. This is the economist.