Rantings of an Ex-Maestro: Some people have asked me for reactions to this piece by Alan Greenspan (pdf) on how Obama’s activism is preventing economic recovery. I could go through the weak reasoning, the shoddy econometrics that ignores a large literature on business investment and ignores simultaneity problems, etc., etc.. But never mind; just consider the tone. Greenspan writes in characteristic form: other people may have their models, but he’s the wise oracle.... Sorry, but he doesn’t get to do that any more. 2011 is not 2006. Greenspan is an ex-Maestro... who saw no evil, heard no evil, refused to do anything about subprime, insisted that derivatives made the financial system more stable, denied not only that there was a national housing bubble but that such a bubble was even possible.
If he wants to redeem himself through hard and serious reflection about how he got it so wrong, fine — and I’d be interested in listening. If he thinks he can still lecture us from his pedestal of wisdom, he’s wasting our time.
So let me take up the task.
What is most notable [about today]... is the unusually low level of corporate illiquid long-term fixed asset investment.... This contrasts starkly with the robust recovery in the markets for liquid corporate securities.... What, then, accounts for this exceptionally elevated level of illiquidity aversion?... I infer that... the effect can be explained by the shock of vastly greater uncertainties embedded in the competitive, regulatory, and financial environments faced by businesses... deriving from the surge in government activism...
I don't see how this hangs together in any coherent fashion at all.
If businesses are unwilling to invest in illiquid capital out of the fear that government action will impair the value of their investments, businesses must also fear that government action will impair the value of their existing illiquid investments. What is the value of their existing illiquid investments? The value of their existing illiquid investments is nothing more than the stock market value of their companies--liquid stock market value is, in the last analysis, nothing more than the cash flows proceeding from the illiquid investments that companies have made that generate the profits.
A much better and more sensible explanation for the relatively high value that the stock market places on existing illiquid corporate assets and the relatively low value that companies place on illiquid investments to expand their fixed capital is precisely that capacity utilization is low--so why spend more money now building factories when doing so would be more expensive and only add to your idle capacity?
And, indeed, if you ask people running businesses what is their single most important problem, they say that it is not (as they sometimes say it is) taxes; they say that it is not (as they said it was at the start of 2000) the cost and quality of labor; it is not (as they said it was in 2004) the availability and cost of insurance; it is not (as they briefly said it was at the start of 1993) government requirements. What do they say their biggest problem is? Poor sales.
Private investment is low because aggregate demand is low and so capacity utilization is low--and is not expected to get better anytime soon. Full stop. That is an explanation that is coherent and fits the facts in the way that Greenspan's Randite claim that it must somehow be the fault of the gummint does not.