Government squeezes out growth.
That’s the underlying conclusion of an academic paper by former Federal Reserve Chairman Alan Greenspan. The article, which will appear this month in International Finance, a journal edited by my Council on Foreign Relations colleague Benn Steil, reviews a technical datum called corporate long-term fixed-asset investment.
Greenspan posits that failure by companies to choose to raise levels of such investment since 2008 is evidence of their concern about an unpredictable and overly activist federal government. U.S. policy makers are still using suspect models to plan and forecast, he says.
Then Greenspan casts doubt on whether those models are of any use, given past performance: “How can the internal structure of models that have such poor forecasting records be informative on the size and sign of coefficients and impact multipliers?”
In policy land, the fact that he would be even this bold is news. Greenspan is famous for equivocating. Still, this technical paper may not be the right medium for his message. Especially for those of us who think the verb “hamper” doesn’t quite capture the way government rolls and flattens the economy.
Fortunately Greenspan’s message will soon be delivered in a more accessible medium, and another Greenspan-related production, to boot. That medium is “Atlas Shrugged: Part I,” a movie set for release in the U.S. April 15. The film adapts “Atlas Shrugged,” a steamy libertarian novel featuring the ultimate corporate long-term illiquid investment, railroads.
Greenspan With Rand
As Greenspan notes in his autobiography, the author of “Atlas Shrugged,” philosopher Ayn Rand, influenced him heavily when he was a young economist. Greenspan did serious time in the author’s inner circle when she was working on “Atlas Shrugged,” an epic about how government takes down capitalism. According to Rand’s archivist, the future Fed chief sat in on the sessions when she read aloud her drafts.
In the story, an innovative steel executive, Henry Rearden, develops an alloy for track that will lay the path for a struggling railroad, Taggart Transcontinental, to speed ahead. But cogs within government and Taggart neither see the value in the new metal nor want to. Even James Taggart, the foolish head of the railroad, doesn’t appreciate what investment can do for the company. Only his brilliant, underappreciated sister Dagny sees the potential.
So far only the trailer of the movie is available to the public. It’s been viewed more than three quarters of a million times on YouTube alone. Between this available footage and the book, everyone can get a clearer understanding of what Greenspan is getting at in his paper. Putting the document side by side with excerpts from “Atlas Shrugged” is revealing.
Greenspan: “The defining characteristic of the tepid recovery in the United States that followed the post-Lehman freefall is the degree of risk aversion to investment in illiquid fixed capital unmatched, in peacetime, since 1940.”
Executive to boss in “Atlas Shrugged”: “Jim, there isn’t going to be any new track.”
Greenspan: “Most stimulus programs seek those appropriations and tax cuts most likely to be quickly spent. But if they were all completely spent, presumably the ideal, then of necessity saving would be zero. Yet in that case no production would have been diverted to foster innovations that increase output per hour and standards of living.”
Dagny Taggart: “If the road could afford it, I would scrap every piece of rail over the whole system and replace it with Rearden Metal. All of it needs replacing. None of it will last much longer. But we can’t afford it.”
Greenspan: “Henceforth, it will be exceedingly difficult to contain the range of possible activism. Promises of future government restraint will not be believed by markets. This must significantly further raise negative tail risk.”
“Atlas Shrugged”: Train wreck.
Greenspan: “The ‘wealth effect’ could effectively substitute private ‘stimulus’ for public.”
“Atlas Shrugged”: Sex scene in tunnel, delivered via verb-free expressionistic clauses: “Then, the sparkle of her diamond clip against the trembling copper of his hair.”
Devoted Randians and those disappointed by the monetary policy of Greenspan and his successor, Ben Bernanke, point out yet another “Atlas Shrugged” scene: the famous money speech of Francisco d’Anconia: “Whenever destroyers appear among men, they start by destroying money, for money is men’s protection and the base of moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper.”
The larger relevance, however, is that a former Fed chairman and other thinkers are now highlighting the cost of government activism in new ways.
Gillian Tett, the editor of the U.S. edition of the Financial Times, calls our era the “Ad Hoc Age.” Stanford University economist John Taylor says our troubles began with a “Great Deviation” from monetary policy, which he dates to the period when Greenspan ran the Fed. Robert Higgs, a scholar at the Independent Institute, calls the problem “Regime Uncertainty” and has been writing about it for decades.
What has been missing is a popular vehicle to barrel through and make explicit what many Americans -- right, left or center -- already know intuitively or mathematically. All of which makes you wonder whether the release date for “Atlas Shrugged” will come soon enough.
(Amity Shlaes, a senior fellow in economic history at the Council on Foreign Relations and author of “The Forgotten Man: A New History of the Great Depression,” is a Bloomberg News columnist. The opinions expressed are her own.)
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