• Entitlement spending set to crowd out investment, he argues
  • Ex-Fed chair is `terribly concerned' and `a lot frustrated'

It was supposed to be a celebration: The U.S. Bureau of Labor Statistics was trumpeting 100 years of the Current Employment Statistics survey, the backbone of its monthly jobs report. Then the maestro rose to deliver bad news.

Alan Greenspan, the former Federal Reserve chairman, damped the mood at the Oct. 19 festivities by pointing out that, while the department has a respected history of data collection, its numbers show the economy will struggle.

Alan Greenspan
Alan Greenspan
Photographer: Andrew Harrer/Bloomberg

Using 50 years of government figures, Greenspan found an inverse relationship between entitlement outlays and gross domestic savings, implying that as the government spends more on retiring baby boomers, fewer dollars will be available for investment. That, he argued, suggests economic growth will be limited for years to come.

“If savings are not being created, therefore investment is not occurring, therefore productivity is not growing, therefore the rate of growth in the economy” is held back, Greenspan said in an Oct. 27 interview in Washington. He said his calculation is “reassuring as a mathematician and an economist, which is what I am. It is dreadfully frustrating as a public official, which I was for 20 years.”

Speaking after Labor Secretary Tom Perez hailed 67 consecutive months of private-sector job growth, Greenspan, 89, also dashed optimism about the rate of hiring since the last recession ended more than six years ago. While employers last year added staff at the best pace since 1999, worker output has barely increased. Productivity grew at an annual rate of just 0.6 percent on average in the five years ended June compared with 3 percent in the decade through 2005.

‘Terribly Concerned’

“I’m terribly concerned that we’re getting more and more people producing less and less,” he said at the Labor Department event.

Greenspan’s conclusion has its skeptics. 

While weak productivity and declining labor-force participation are the two economic issues that keep him up at night, entitlement spending isn’t crowding out investment, in part because there is plenty of capital available, Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities and former chief economist for Vice President Joe Biden, said in an interview.

He agreed that there are “definitely funding challenges” for the government that need political solutions through tax increases, spending cuts or a combination of the two. “But, there are lots of other important moving parts, including global capital markets and the actions of central banks,” Bernstein, who also spoke at the BLS event, said by phone Oct. 28. “I wouldn’t go so far as to say crowd-out never happened, but it’s extremely hard to find it in the data, particularly in recent years.”

Recent Data

The past five years have shown something of a departure from the trend Greenspan highlighted. The sum of savings and entitlements as a share of gross domestic product is a relatively flat line in data back to 1965, supporting his calculations that show the relationship between the two is highly statistically significant.  

Since 2010, however, the sum of savings and entitlements as a share of GDP has been rising steadily, and peaked at a record high last year. This would suggest a breakdown in the long-term relationship between the two -- savings increased even as entitlement spending was flat rather than in decline. Greenspan sees this interpretation as missing the bigger point, particularly as the data in the latest quarters appear to be reverting to the historical trend.

“It’s well within the range of where it’s been the last 50 years,” he said. “The relationship is still there. I see nothing in the data to suggest otherwise.”

For Greenspan, the trend is particularly worrying in light of what he sees as a decades-old lack of political will to fix the problems. As the head of the National Commission on Social Security Reform in the early 1980s, he led the group tasked with drafting solutions to the short-term financing crisis for entitlements. He remembers fighting a losing battle to address a gap everyone knew would widen around 2010, with “a very major retirement from the most productive people in the labor force, which are those with the most skills.”

Those arguing that the issue wasn’t urgent enough in 1983 prevailed.

The latest budget deal suffers from similar procrastination, with no plan on how to mitigate the inevitable bloating of entitlement spending, Greenspan said. “All they’re doing is kicking the can down the road.”

“If I sound a little bit frustrated to you, it is because I am a little frustrated,” he said. “No, I am a lot frustrated.”

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