Thursday, September 20, 2007

Greenspan hasn't lost the touch

He's out but not down. Alan Greenspan can still spin out obscurities with the best of them.

It doesn't, however, induce us to then conclude that, if the model doesn't forecast -- which implies that it has not captured the appropriate structure -- we nonetheless tend to use the structure of the model to do analysis and draw significant conclusions about how the inner workings of relationships occur even though the coefficients which we're employing clearly don't forecast anything worthwhile.

Actually, if you have a chance to listen to him talk -- and don't drift off to sleep -- he speaks now with a lot more clarity than he allowed himself to use when he ran the Federal Reserve. Terry Gross interviewed him this week on Fresh Air and he is much more forthcoming than he has been for the last two decades. He's promoting a book, of course, but he's also tirelessly drumming away at a serious theme that continues to be ignored by practically everyone -- the looming coming catastrophe that is Medicare.

His opinions about deficits, the housing bubble and other topics are covered in the program, but when he refers to Medicare he paints a very disturbing picture, adding that no one in or out of Washington is addressing some basic problems. Oddly, he's not talking about money as much as infrastructure. He contends that the coming impact of the baby boom generation on the national health care delivery system looks like a train wreck because the infrastructure to handle it is not there and moreover is not being planned.

Medicare is not a financial issue -- it's real resources. We need to make certain that there are an adequate number of hospitals, physicians, nurses and a whole medical infrastructure, including the pharmaceutical industry, to supply the medical services which this very large retired population is going to require. And that in order to do that we have to realize that we cannot solve the problem by raising taxes because there comes a point in which you actually undercut the ability of the economy to grow and create tax revenues....Taxes are not enough...there have to be some adjustments in the underlying Medicare benefits. And if we are going to do this, we have to communicate to retirees that there will be some adjustments.

He goes on to suggest that there will have to be a means test for Medicare, concluding that "the sooner we do it, the better off we are." As one of those boomers counting down the months to retirement, I don't particularly like what I heard, but I can't come up with any arguments that he's wrong.

This interview is recommended listening for anyone who respects Alan Greenspan. And those who do not are few and far between. Anyone who held his job through as many administrations as he served, both Democrat and Republican, speaks with authority.

If the economy goes to hell in the next few years, it will not be because of anything that Alan Greenspan did wrong. Most likely it will be because he is no longer there to help avert whatever problems caused the mess.

As the interview ended he explained in very understandable language a very simple principle that governs his thinking about interest rates. He notes that through the end of the nineteenth century and until the thirties, inflation was not a global problem thanks to the gold standard. He does not advocate returning to the gold standard, but now that we have switched to "fiat money" the best way to control inflation is to regulate interest rates in a way that replicates what the gold standard might indicate as the economy rises and falls.

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