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Investment Outlook Fourth Quarter 2018 - Greenspan II


By: Lynn S. Hamilton
Wednesday, February 6, 2019

It has long seemed that there are a lot of interesting books on history and a lot of interesting books on economics, but few on economic history.  I strongly recommend “Capitalism in America”, a new book published this fall by Alan Greenspan and Adrian Wooldridge. 

Co-author Allan Greenspan was Chair of the Federal Reserve from 1987 to 2006 and holds a PhD. in economics from New York University.  Adrian Wooldridge holds a PhD. from Oxford in history and has previously authored ten other books.

Chapter 3 covers “The Triumph of Capitalism” from 1866-1914.  According to Greenspan, Americans were prosperous because “new ideas fed on each other, goods circulated more quickly, and regional specialization intensified.”  Fifty-three of the firms in the 2000 Fortune 500 were founded in the 1880s, thirty-nine in the 1890’s, and fifty-two in the early 1900’s.  These businesses succeeded by using the new innovations transportation, energy, electricity and communications to bring their costs down faster than their competitors.  The result of this increased productivity was a rapid increase in the standard of living, evidenced by America’s annual per capita income reaching $346 in 1914, compared with $244 in Britain, $184 in Germany and $153 in France (before the start of WWI). 

By 1914, Americans drank Coca Cola, drove Fords (not in my family until 1920!) worked in skyscrapers, doffed their hats to “scientific management,” shaved with Gillette’s disposable razors, lit and heated their homes with electricity and gabbed on the phone.

The authors move on to discuss the 2008-2009 Great Recession, which Greenspan attributes to Fannie and Freddie and floating-rate Mortgages.  They also consider the two factors that contributed to the low growth rates of the post-recession recovery: high entitlement spending (Social Security, Medicare and Medicaid) and a huge increase in Government regulations.

“Capitalism in America” concludes with “what is to be done” The authors point to Sweden as an example of how government can correct out-of-control spending, where government spending as a share of GDP nearly doubled from 1960 to 1980 and peaked at 67% in 1993.  In 1991 Sweden “plunged” into a crisis--the banking system seized up, mortgage rates rose briefly to 500% and foreign investors lost confidence in the Swedish government.  The crisis resulted in “radical reforms.”  Public spending fell from 67% of GDP in 1993 to 49% currently.  The government committed itself to producing a surplus over the business cycle.  That is, during a recession the government could run a deficit, but that would have to be balanced by surpluses during non-recession times.  Public debt fell from 70% of GDP in 1993 to 37% in 2010.  During the same time, Sweden’s budget moved from an 11% deficit to a surplus of 0.3%.  Sweden also reformed their equivalent of Social Security to permit Swedes to put a portion of their contribution in private, defined contribution plans.  The authors note that Sweden is much smaller than the U.S.: its population is only about the size of New York City. Greenspan thinks that the best way to reform our system is to bring the full retirement age to 70 (he is 92) and then index it to life expectancy, which he believes would, over the business cycle, add 1% to real GDP.

Download the full Fourth Quarter 2018 Investment Outlook here. 

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