Mar 11, 2010
had a dream, or rather a nightmare. Greenspan seems to have woken up in
a cold sweat one morning in fear that the period of "disinflationary
pressures" that had kept inflation low since the 1990s was about to end. This was 2007, when he published his autobiographical economic treatise, The Age of Turbulence.
Despite his well-known love for economic data, and poring over the
latest reports from every statistical agency, he did not realise that
he was sitting on a housing bubble of epic proportions.
Not seeing the bubble (he also missed the prior stock market bubble
that accumulated and burst on his watch, causing the 2001 downturn), he
could not know that it would soon collapse and cause a very ugly
recession, in which inflation would be irrelevant.
This by itself
should be enough to question the wisdom of central bankers, since the
evidence for both of these world-historic asset bubbles was blindingly
obvious once they had reached a certain size. But Greenspan's nightmare
is scary for other reasons, some of which will become increasingly
relevant as the world economy recovers.
As Greenspan details in
his book, the reason for his nightmare is that the world was depleting
its stock of hundreds of millions of unemployed people, including those
of the former Soviet Union and also in rural China.
In other words, "too many" of them had become employed, and this was
allowing for wages of factory workers in China to rise. So long as
China had a huge mass of unemployed, wages were held in check, and -
according to Greenspan - competition from low-wage production there
held down wages in the rest of the world, including even rich countries
like the United States. All good! Until the nightmare started.
there something wrong with this picture, that one of the world's most
powerful economic decision makers (at the time), dreads the decline of
mass unemployment and rising wages among people making 80 cents an
hour? What, then, is the purpose of economic development, if not to
raise living standards for poor people? Some may dismiss Greenspan's
values as unrepresentative - he was, after all, a devotee of the extreme libertarian writer Ayn Rand.
And his autobiographical narrative is rather unusual: although we learn
about his love of baseball, music (he attended the Julliard School),
and how he became interested in economics, there is something missing.
Most public figures of his stature, and even most economists, would
have offered at least a perfunctory paragraph about how his economic
thinking was aimed at helping those at the bottom of the social ladder
- whether true or not. Greenspan didn't bother.
Greenspan is not an outlier but a moderate among central bankers. What
is worse, their perverse world view has a hugely disproportionate
influence on reporting and discussion of economic issues. As the press
has recently reported, wages in China are again rising, due to the
additive effect of the global economic recovery and the world's most
effective economic stimulus programme, which enabled China to plough
right through the world recession with 8.7% growth in 2009. The reports
are somewhat less negative than they were a few years ago, but
Greenspan's nightmare is everywhere: a dreaded "labour shortage" is
forcing Chinese wages up and this will add to inflation. It is not
clear what is wrong with a "labour shortage" being resolved in the way
that markets resolve other shortages: ie the price of labour goes up
until quantity supplied matches quantity demanded.
drained its once vast reserves of unemployed workers in rural areas and
is running out of fresh labourers for its factories," reports the New York Times.
"Personnel managers here say they are also abandoning the informal
tradition of not hiring anyone over 35 - they say they are now hiring
workers up to 40 years old, and sometimes older, despite concerns about
whether they can keep up week after week with the rapid pace of Chinese
"Managers can no longer simply provide eight-to-a-room dorms and expect labourers to toil 12 hours a day, seven days a week," says Business Week.
There is more, but we wouldn't want to give Alan Greenspan a heart attack.
its credit, the Times recognises the positive aspect of rising wages
for Chinese workers and also notes that the Obama administration, which
has complained about the Chinese yuan being undervalued, should welcome
this development. An increase in Chinese wages, to the extent that it
raises the price of the country's exports, has the same impact as an
appreciation of the yuan.
But the reality is that the Obama
administration, as well as Congressional leaders, are not really
serious about a more competitive dollar. If they were, they could push
down the value of the dollar worldwide, rather than trying to blame the
Chinese for our overvalued currency. But they don't do that because the
Greenspan/Wall Street view prevails: anything that lowers inflation is
good, whether it's an overvalued dollar, cheap imports from repressed
overseas labour, or US workers' wages stagnating, as they have, for
All this despite the fact that the non-partisan
Congressional Budget Office projects inflation over the next 10 years
averaging less than 1.7% annually - lower than any decade for more than
half a century. Imaginary threats of inflation could turn out to be one
of the more real threats to the United States' economic recovery.
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