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Hugh Hewitt Book Club

Alan Greenspan On “Capitalism in America”

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Alan Greenspan joined me today to discuss the new book he has co-authored with Adrian Wooldridge: Capitalism in America: A History




HH: I have a treat for you. Capitalism In America: A History, is the brand new book authored by Alan Greenspan and Adrian Wooldridge. Of course, you know Alan Greenspan as the legendary chairman of the Federal Reserve from 1987 to 2006. What you may not know is he’s a brilliant writer. And this sweeping history of capitalism in America is really a book I had been waiting for, for decades. Mr. Greenspan, good to have you, great to have you on the Hugh Hewitt Show.

AG: Good morning.

HH: Good morning. I am curious as to why after such a storied and distinguished career you would undertake, this had to be a lot of work. Capitalism In America is large and long and great, but it had to be have been a lot of work.

AG: It was a lot of work, but you have to understand that for economists like myself, it’s a learning experience. And I’m always trying to get new ideas as to how the domestic and global economies work. And as a consequence, when you do that, you’re creating the basis of a book. And I’ve had several books, but they’re all not, as books per se, but basically it’s my ongoing day by day analysis.

HH: Well, I’ve got to tell you, Mr. Chairman, I’ve been teaching law students for 23 years. And I’ve always longed for a book that could explain to them the underlying economic dynamism that has birthed the Constitutional order and regulatory system we have. I finally got it. And I thank you for that. They’re going to have to read this now in every class, and they’re going to love reading it, because they’ll finally have a gasp of how we got here. I always begin, how did we get here, and we got here because of capitalism. Is that a fair statement?

AG: That’s an exactly correct statement.

HH: Okay, so I’m going to cover with you a number of subjects, because the book begins at the beginning and ends at the present day. But I want to start at the end, because it’s kind of dark – America’s Fading Dynamism, and I quote from Page 396, “Winston Churchill once said to his fellow countrymen that we have not journeyed across the centuries, across the oceans, across the mountains, across the prairies because we were made of sugar candy.” But Alan Greenspan writes, “Today, thanks to a malign combination of litigation, regulation, pedagogical fashion, sugar candy people are everywhere.” Can you expand on that, Mr. Chairman?

AG: Well, basically, inbred into the American psyche, in fact, that’s what defines us, is the entrepreneurial spirit which doesn’t exist in its form any other place in the world. And when you go back and you look at history, it is just awesome. I mean, I learned more about American history writing this book with Adrian Wooldridge, incidentally, who I don’t want to leave out of the loop, because he’s a critical factor here. And the two of us worked pretty much picking up the periods going from colonial America, Plymouth, all the way through to current days. In fact, we even have perhaps with the forecast.

HH: Well, The Triumph Of Capitalism is maybe my favorite chapter, of 1865-1914 and the repudiation of laissez faire. But at the end, your tone is not optimistic, Mr. Chairman.

AG: Well, it’s not optimistic, because of a single statistic which I find terribly worrisome, and that, I’m hoping not to get too complex, the data on gross domestic savings and government social benefits or entitlements is remarkably stable, implying that one is driving out the other.

HH: Oh.

AG: And it’s not credible that the economy as a whole is being affected, but it’s perfectly credible if you think in terms of what basically entitlements are. They’re actions and implemented under government edict, and have therefore of necessity if you’re trying to figure out who is doing what to whom, and you find out that the sum of the two as a percent of GDP has been remarkably flat since 1965. Then you conclude of necessity that as entitlements, which are driving out the savings, then I go further into the analysis and demonstrate that as savings fall, we borrow from abroad. And we’re now, I might add, have an $18 trillion dollar debt to foreigners. And the combination of that is, you basically are crowding out productive capital investment.

HH: That does come through, and indeed in your analysis along with Mr. Wooldridge of the Great Recession and the “recovery” that followed it, it really did put into stark terms that the ten years after the panic have not been eras of dynamic capitalism, nothing like the previous American recoveries. But I was curious about the current situation. There was an argument that Donald Trump’s election unleashed the animal spirits again. Now you’re a student of irrational exuberance, a student of bubbles. But this doesn’t look like a bubble to me. Does the current period of vigor in the economy look like a bubble to Alan Greenspan?

AG: Well, it would if it were done in a different manner. That is I find that the particular tax cut that this administration initiated is one which does unleash capital investment and hence productivity, and hence standards of living. The only problem is we’re not paying for it.

HH: Yes.

AG: And as a result, if you, what you’re seeing now is a dramatic rise in federal debt to the public. And nobody cares about federal debt to the public. It’s not a political issue until it ultimately engenders inflation, and always has in the past, and there’s just no question that if we continue with the excess spending that’s involved here, that it will reemerge in the future.

HH: And you do warn about stagflation at length, and about bubble returning. I have to ask you about one headline from this morning before coming back to Capitalism In America, and by the way, American, you can get it today at, and you will read it in three days. It’s that good. Fidelity says it will trade Bitcoin for hedge funds. All right, Alan Greenspan, what do you make of cryptocurrencies in our current market situation?

AG: Well, you have to understand what is a cryptocurrency. And especially if…the first cryptocurrency I know which relates to the world at large was the Continentals, which were issued in 1775 to fund the war. It’s paper money. And paper money goes on, has no backing to it. And as a result, what happened in 1775 through, when the title, when the whole structure of finance fell apart, is that fiat currencies don’t exist indefinitely unless they’re backed in some prudent, fiscal way. Bitcoin is a fiat currency, meaning that there’s one factor involved in this process, which is where the value of Bitcoin comes from. And that is when you have a fiat currency, it’s either a plus, meaning a plus addition to finance, or zero. You can never have a negative value for a fiat currency. And so the result is if it’s never going to be negative, to the extent that it is positive, since coming down from the par value to originally, as in the Continentals, to zero, there’s purchasing power implicit in that. And General Washington was able to procure a goodly part of the substance needed to finance the Revolutionary War with a depreciating currency. But until it depreciates to zero, it still has purchasing power. And if you add them all up over the years when it’s in existence, the net effect is it’s positive. And that is basically what Bitcoin is. It can never turn negative, and so long as it’s positive, it’s just a question of how positive it is. And I don’t want to get into the psychology involved in how people trade Bitcoin, but it is a fiat currency.

HH: It does seem awfully bubbly to me, Mr. Chairman. I read with interest about the Greenbacks and about how Lincoln Treasury financed the Union Civil War, and the Confederacy badly financed theirs, and what happens with these currencies. But I am, I’m alarmed by the frothiness implicit in the Bitcoin bubble. And I’m also alarmed by two things that you write about at the end of Capitalism In America. One is that American mobility is crashing. And you write about Andrew Carnegie was a penniless immigrant. John D. Rockefeller was the son of a snake oil salesman. Ray Kroc came out of nowhere. But now, it is almost impossible to imagine that kind of rise, except we just saw it in Silicon Valley. So what is it that is contributing to the lack of mobility that allowed previous titans to rise?

AG: Lack of mobility is a result of an extraordinary statistic, which is the fact that the sum of a gross domestic savings in the economy and entitlements as a percent of GDP is remarkably flat from 1965 to today.

HH: Yes, yeah.

AG: And that necessarily means that one of those two categories is crowding out the other. And it makes no sense other than to say it’s entitlements, those entitlements are built in, their own purchasing power, so to speak, is built into the process whereas the economy adjusts accordingly. And what the data do show if you go in further detail is indeed that entitlements are crowding out gross domestic savings, which is that plus the savings borrowed from abroad, which is where that $8 trillion comes from, the sum of the two is equal to gross domestic investment. So the reason we’re, there’s an overhang of concern and stagnation is we are still, we’re still retiring the Baby Boom generation.

HH: And will be for years, yeah.

AG: And will be for years. And that means entitlements, unless they are financed, will create a problem.

HH: Well, let me ask you about that. Is there something that we have not yet discovered, some way to finance? You know, California has got hundreds of billions of dollars in unfunded pension liabilities. Everybody’s got unfunded liabilities out there. Is there something that Alan Greenspan thinks might be the solution to this, some sort of massive refinancing of America’s collective debt sort of into a sinking fund in the way that young Pitt did during Napoleonic Wars? Is there some way out of this?

AG: There’s no shortcut, unless you repeal double entry bookkeeping.

HH: (laughing) All right, let me ask you about another problem. And this one, I have brought up repeatedly, even though I am a conservative. Concentration of wealth is deeply disturbing. You write on Page 399, “There are reasons for deep concern. Companies are protecting themselves from competition by building all sorts of walls and moats. This is particularly true of the tech giants. They are using network effects to dominate markets. The more people you have in your network, the more valuable those networks are.” Now I am an investor in Amazon. I always declare that. I’m very happy with Jeff Bezos. But I am aware that Amazon is creatively destroying everything that comes under their shadow, Mr. Greenspan. Is that a good or a bad thing?

AG: It’s called creative destruction, and it’s good, because remember that the reason those things are destroyed is there are better ways of doing things. And the whole process of capitalism critical to the earliest days is the same process we’re observing today, and it’s called by Schumpeter as creative disruption. And it’s no different now than it was back then. It’s a function of human nature and, I guess, engineering and physics and a few other related sciences. But it’s something that has always been going on. But the process at the end of the day is good, not bad, even though there are losers in the very definition of creative destruction. The reason that, for example, unions, labor unions arose during the 19th Century is to try to protect working groups against the forces, the gale forces, as Schumpeter called them, of creative destruction. And they succeeded in part, and not in other parts.

HH: You know, in your assessment, your account of the Great Recession, you very bluntly point out where Wall Street became hypnotized by ever more complex financial products, and that the bankers themselves did not understand what the quants were doing. I am now worried, and I wonder if you share this, Mr. Chairman, that we have very little idea of what the algorithms being developed in Silicon Valley and abroad are doing to us, to our finances, and the acceleration of risk into the system. Do you worry that black swans might begin to arrive in flocks?

AG: No, it’s a, this is exactly what creative destruction looks like. It is always the destruction part which is actually clearer, in many cases, than the creation part. It’s only in retrospect that the net effect has been positive. But it’s very obvious that, I mean, for example, we’re now confronted with a critical problem of pollution. I mean, how to finance that, how to prevent it, and do you, how do you wish to, do you want to build dikes as the Dutch did in centuries past? Or do you want to basically let the markets function? And if you’re going to stop the markets from functioning, you will eliminate the problem, but you’ll also stall the economy.

HH: Right. And there are a lot, there are tens of billions of people who want air conditioning. There are tens of billions of people who want to rise from poverty, and that requires carbon. And I, when you say let the market work, would a carbon tax interfere? Or is that actually the most efficient way to cope with it, Mr. Chairman?

AG: Well, if you’re going to have a tax, that’s the least worst type of tax. And I’ve always, in a sense, generally supported it when financing, when the alternative was to print money.

HH: Agreed. Now let me ask you about President Trump. You have served so well so may different kinds of president. This is a very different president, never held public office before. He is a real estate developer. And I used to work for them when I practiced law. They all have the same sets of characteristics. They become what they need to be in whatever room they are with whomever they are with in order to get the deal done. Is he good or bad for American capitalism?

AG: Well, both. He, initiating the tax cuts, did the very important thing by cutting marginal rates in the corporate area, which is politically incorrect, but from the point of view of creative destruction and growing output per hour as productivity, that’s exactly the way you want to do it. The problem I have with his fiscal policy is that he’s not funding it fully, and that’s the critical issue. A tough policy is one which understands the future and doesn’t cut it off. My concern, basically, about what’s going on today is it’s not only the United States, but it’s, you know, it started visually with Brexit in London when immigrants showed up on the streets of London. And that presumably is what a number of people have said is what caused a reaction against foreigners. And that led, ultimately, to Brexit. And the best way of putting it is that what causes that is that the slowdown in productivity growth because of the crowding out of private savings, what causes that is engendering a much-slower rate of GDP growth. In other words, standards of living are growing much less rapidly because productivity growth has virtually ground to a halt. It used to be 2 or 3% a year. It’s now down under 1% a year.

HH: This is why the regulatory revolution is, in my view, so important. But before we run out of time, I’m talking with former Fed Chairman Alan Greenspan about his new book, Capitalism In America co-authored with Adrian Wooldridge, and it’s really a remarkable read, I have to finish on China, because last Thursday for MSNBC, I sat down with National Security Advisor John Bolton. Previously, I had sat down with Mike Pompeo. They are both talking in terms of China, which are very resonant with your attitude, which is it has taken an unfortunate direction away from Deng Xiaoping’s approach, that President Xi is abandoning the rule of law, and they’re becoming not a good operator for the world economy or for the United States. Can you expand on that, Mr. Greenspan?

AG: Yeah, you have to remember that in the 1990s, China working off Deng Xiaoping’s general philosophy had gotten to the point where Zhu Rongji, who was the prime minister at the time coupled with his boss, Jiang Zemin, were seeking to replicate in China what the United States’ economy looks like. And they were doing it remarkably effectively. And the real surge in Chinese advance, per capita GDP and in productivity, occurred in that particular period. And as the chairman of the Fed at the time, obviously I dealt fairly closely with both the prime minister and the president of China, and it was remarkable. They knew more about American free markets than I thought most Americans had any notion of. Something happened at the end of that period in which the subsequent term, remember as we went from Deng Xiaoping forward, they became increasingly liberal and progressive.

HH: Yes, rule of law was taking root.

AG: Exactly. And something happened, and it’s not visible what it is, but the prime minister and the president in subsequent periods far stopped the improvement, so to speak, from a point of view of somebody who believes in free markets. And as a result of that, things stagnated in part, but most importantly, President Xi is really a throwback. As soon as I saw that they had eliminated the automatic ten year turnover, and he did not have a successor, I said something fundamental has happened here. And I think that remember, China is, per capita GDP, is still a third of where is envisioned the United States. But unless they can reverse themselves and go back to some of the very classical policies of free markets which the Chinese were initiating, and in many respects doing better than we, so I don’t know what happened behind closed doors in the Politburo, but something fundamental happened. And they’ve shifted back in time, not obviously back to Mao Tse-Tung, but they’ve shifted back in time. And China, remember, still has only a third of the per capita GDP of the United States. It’s far removed from where we are. We in, say, 1960, was where China is today from historical period.

HH: Wow. Let me wrap up, Mr. Chairman. You’ve been very generous with your time. Capitalism In America is a wonderful read, and I will, my law students are going to love it, and everyone who’s listening are going to love it. But I want to ask you to look backwards, if you could, and tell me after all the research that went into this with Adrian Wooldridge, which secretaries of the Treasury do you most admire for helping to build this country?

AG: Alexander Hamilton.

HH: Ah. Can you explain why?

AG: Well, basically, he set in motion what we now have in the financial system. He, remember, he was working out of an agrarian economy, and he was always debating with Thomas Jefferson who believed that the ideal society at the time in the latter part of the 18th Century was an agrarian society with very little implicit economic growth built into it. He remarkably foresaw the type of capitalistic expansion that was involved and implicit in the Constitution, the United States Constitution. And the result of that is just to be seen in the data.

HH: Yeah, it is. So my last question, can this century be another American century, Alan Greenspan? We have this amazing growth in GDP right now, but there will be bubbles. There will be recessions. There will be panics. There is China. But as you look out over the next hundred years, I don’t know whether or not you think we’re going to have another American century.

AG: Well, what we say is that if reforms are made, in other words, if we replicate what Sweden has done with respect to entitlements, since they have, they were running under worse conditions. They developed an economy which had interest rates of 500%, and inflation was out of hand. And they made a number of adjustments which we discuss in the book which brought Sweden back out of their depths. And they’re doing very well. They’re at the close to the top of the productivity growth rate now. So we suggest two major changes in policy, which if they are implemented will get us back to where we were and where we want to be.

HH: That is one of the great reasons to read Capitalism In America. Take a minute and just given them, what are those two great changes? The entitlement reform is one.

AG: Well, entitlement reform, basically, is, everybody knows what entitlements are. Entitlements are, unfortunately, have turned out to be the basic political issue of the moment, and for a goodly amount of time now. You’re running for office, and you try to cut entitlements, you lose. Now the problem is these entitlements are entitlements – Social Security, Medicare, Medicaid, etc. They wouldn’t be a problem if they were funded, but they are not. And I think the statistic which I find most worrisome is that the actuaries of the Social Security system in the most recent annual report on Page 299 or something like that, way in the back of the book, say that essentially we’re not actuarially funding entitlements we’re creating. And the problem with that is you cannot go on indefinitely by creating something out of nothing.

HH: Yeah, that’s the bottom line. Well, Mr. Greenspan, Capitalism In Ameirca is a terrific work. I appreciate you spending this much time with me. Congratulations to you and Adrian Wooldridge, and I look forward to having you back sometime.

AG: Thank you very much, and I’ll convey to Adrian your remarks.

HH: Thank you.

End of interview.


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