Friday, August 6, 2010

Five Second ... Age of Declining Turbulence

I discovered a book in my mailbox a few months ago: The Age of Declining Turbulence: Are Alan Greenspan's Projections Wrong? by Douglas N. Thompson. There was no explanatory note attached, no information, just a thin, blue book. At the time, there was precious little information about it online, though now it has an Amazon page. One Amazon reviewer tells me why I find so little: "This 92-year old retired Professor of Economics from University of Utah..." aha. I just got around to it and since I can only assume I'm being asked for a review, here it is:

The main purpose of the book is to refute Alan Greenspan's prediction that we are entering an Age of Turbulence. I haven't read Mr. Greenspan's book, so I'm unable to judge whether Thompson addresses specific points from Greenspan's arguments. I came away agreeing that lower turbulence (economically and militarily) is one possible outcome, but far from convinced it must be so. It was an interesting read; I'm glad I read it; but it's not one I'm going to return to again.

An odd thing stood out to me from the close to chapter 1. He claimed to "demonstrate that Greenspan's two main worries will not likely be realized." The book is not about proving or demonstrating anything. It's an argument for an alternative version of what will happen, based largely on the optimistic assumptions that 1) the US government has learned from the recessions and macroeconomic shocks of the past how to deal with problems in the future; and 2) the lure of capitalism's abundance will continue inexorably to pull other countries into market or state-market institutions. He then follows these assumptions to show how a better long-term future is ahead of us. His arguments are plausible and his scenario holds together well. I like a good portion of what he says, but he does far more sketching out how events will eventually play out than defending why they will more probably follow his assumptions than Greenspan's.

While this is clearly a love poem to capitalism, his argument is not ideologically against governments: he argues for fiscal and monetary (mostly fiscal) response to the current recession, for some form of carbon tax, and for government programs of various levels to promote "the basic social service": full employment, with "nanny state" welfare and prison programs also having an important role to fill for those who cannot or choose not to be responsible citizens. These programs (promoting full employment on down) will be part of preventing the social tensions Greenspan foresees causing increasing strife because of economic inequality.

There is little discussion of the validity of his assumptions and he is sometimes not as careful as he claims to be. For instance, while he is usually content to say that the long-run trends are in his favor even if individuals or groups running governments sometimes make mistakes, he actually claims that "stock, credit, foreign exchange, and other markets will likely force Mr. Putin back onto the path toward capitalism and peace fairly soon." Like much of the book, it's a bald assertion (no slight to Mr. Putin's hair) with no facts brought forward to support it.

Some of his other interesting arguments (many of which I debate, but that's what makes them interesting to me. The stuff I already agree with was less interesting!) are below the fold:

He claims that we aren't in a mature capitalism yet, but only an adolescence that will not mature until we have more competition between capitalist and state capitalist institutions and between different countries' methods for achieving the same ends to figure out what works. The arguments he puts forward for this are decent, but they ignore that citizens in other countries may have different preferences. European countries have higher tax rates not because they are more fiendish or foolish than the US, but because their citizens have pressed their politicians more often for security and equality than for freedom and growth. He seems to imply that governments will eventually converge on a core set of policies while I can more readily see divergent steady states developing in different countries, particularly if labor is free to move.

"Inflation is caused by too much demand in relation to the ability of the existing intensity of competition to restrain price increases. This is a much more comprehensive and accurate statement than the mantra that has been repeated for years: Inflation is always and everywhere a monetary phenomenon." He makes a decent case for the importance of expected wage increases (unions), free trade with a strong currency (lower prices), and competition in affecting the inflation rate. But hidden behind his argument that, eventually, the dollar will weaken leading to inflationary pressures is the question of how the Fed will respond to it and we're back to monetary phenomena.

Perhaps my favorite quote: "The gold standard has been called a 'fair weather' standard. When a crisis occurred governments simply suspended gold payments and abandoned the standard. Indeed, the rigidity of the gold standard, in actual practice, prevented gradual adjustments" (emphasis original). This has been one of my critiques of those who want to return to a gold standard. It prevents market-driven smoothing of small price fluctuations without successfully preventing governments from rescinding, devaluing, or otherwise monkeying with the standard. And that's no standard.

He cheers for the WTO over other pieces of international architecture because it "has become the de facto body governing world trade without any sort of a top-down development" (emphasis added). The UN and Bretton Woods institutions, he argues, were imposed from above while the WTO emerged after a "bottom-up" series of treaties and agreements ("spontaneous action") between willing trading partners. Given that the actors are all governments creating each organization, I'm not sure in what sense there is a top-down [what aliens brought us the UN?] or bottom-up. It wasn't grassroots organizations and businesses that met to work out the GATT.

He makes an important point that while the percent of GDP the US imports has grown from 10% to 18%, the average unemployment went down from 6% in 79 to 5% in 07. He brings in seldom-noted points about economies' competitive space. He has a lot to say about health care and effective welfare systems, much of which is reasonable if not unique. I was rather disappointed at his (lack of) discussion of monetary policy. He talks about China's development and the Middle East directly, minimally about India, and breezes past any discussion of what will happen with South America or Africa. He says people worried about population growth should cheer for capitalism's spread as a primary means of reducing women's fertility rates.

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