Former Federal Reserve Chairman Alan Greenspan penned a paper last week with a predictable message: The economy is hindered by a lack of business investment, and the chief culprit is the strong arm of government intervention.
"I infer that a minimum of half and possibly as much as three-fourths of the [investment shortfall] can be explained by the shock of vastly greater uncertainties embedded in the competitive, regulatory and financial environments faced by businesses since the collapse of Lehman Brothers, deriving from the surge in government activism," writes Greenspan.
His story goes like this: Using simple statistical techniques, Greenspan seeks to find the correlation between why businesses aren't investing and the standard excuses for not doing so, such as excess capacity, the crowding out of money by government deficits, and shellshock from the recession.
His models show these factors explain only 45% of why businesses aren't investing. What explains the other 55%? Something else. Since there's no evidence of what that something is, he thinks it through. There was government activism during the Great Depression. Thus, continues Greenspan:
The Great Depression was far more devastating than the current crisis. Nonetheless, the parallels between the degree of business angst in those years and today's [investment] is supportive of the presumption that 'activism' is a likely explanation of the 0.55 unexplained variation in shortfalls in [investment], especially in the post-crisis years.
This is a flimsy argument at best, and is steeped in what became one of the biggest criticisms of Greenspan's legacy: Ideology suffocating evidence.
Instead of trying to calculate what's holding businesses back, the National Federation of Independent Businesses did something more clever. It asked them. Here's what its recent survey shows:
Percent Claiming Most Important Problem
|Government requirements/red tape||13%|
|Quality of labor||4%|
|Cost of labor||3%|
Having 13% of businesses claim red tape is the largest roadblock is exactly average over the past 15 years. It was over twice as high in the mid-'90s. The 19% claiming taxes are the biggest problem is below average. The biggest outlier by far is the one-third of businesses claiming poor sales are the top problem. That's nearly three times the average rate.
Other surveys show roughly the same result. In PricewaterhouseCooper's Annual Global CEO Survey, 23% said economic growth and uncertainty was the largest driver of change; 22% said it was customer demand. Just 8% said government regulation.
Forget the cute math models. Spare me the ideological presumptions. Go into the real world and ask businesses what's holding them back, and the answer is resounding: Not enough business is the problem. Government regulation might be a burden, but not any more than it always has been. As Warren Buffett said of Berkshire Hathaway's
Then there's the irony of Greenspan's grumbles. The former head of the most powerful government organization bewailing the evils of government power is hypocrisy at its finest. Two years ago, we asked you Fools who you thought was most to blame for the financial crisis. Your vote: the repealers of the Glass-Steagall Act, a Depression-era law preventing the combination of commercial and investment banks.
The repeal in 1999 of Glass-Steagall, called the Gramm-Leach-Bliley bill, ushered in the creation of "too big to fail" monstrosities like Citigroup
And don't forget Greenspan's unprecedented meddling in monetary policy. Interest rates were dropped to historic lows after 9/11 and left there for years, giving a massive artificial boost to the housing market and fueling one of the largest speculative bubbles in human history. It's a curious double standard when intervention designed to prevent bubbles is viewed as harmful, but intervention designed to fuel them is ignored.
Even Anna Schwartz, the 95-year-old economist Greenspan often heaps praise on, said "there never would have been a sub-prime mortgage crisis if the Fed had been alert. This is something Alan Greenspan must answer for."
Will he? I doubt it. This all seems like another example of what's become classic Greenspan: Take full credit for an economy's success on the way up, then point fingers at someone else after it explodes. Legacy preserving at its finest.
Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.