Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (24 page)

John Williams, calculates that if the 1980 methodology for measuring inflation were still used in March 2009, the reported CPI would have been 7.3 percent. The Bureau of Labor Statistics releases six measurements of CPI. In March 2009, the highest of these was 1.8 percent; the measurement that the media generally discusses fell 0.4 percent.
²¹

¹⁹
Steven Gjerstad and Vernon L. Smith, “From Bubble to Depression?”
Wall Street Journal
, April 6, 2009, A15. The authors used the Case-Shiller 20-city composite index for house price appreciation.

²⁰
Ben S. Bernanke, “The Economic Outlook and Monetary Policy,” speech at the World Economy Laboratory Spring Conference, Washington, D.C., April 22, 2004.

The economy functions exactly the same way, whatever the BLS’s methodology. (That is, leaving aside how a higher reported inflation rate changes consumption and market behavior.) This and other changes (productivity, gross domestic product, and so on) are not of the real world, but exist in an abstract, mathematician’s universe.

Greenspan Endorses Boskin Commission

Recommendations

Alan Greenspan debriefed the Senate Finance Committee on January 30, 1997. He approved of the changes recommended by the Boskin Commission, then threw his weight behind an effort to allot new resources, particularly to quality adjustments: “[M]ost of the needed developments will require time, effort, and quite possibly additional resources. It is important that the Congress provide the Bureau with sufficient resources to pursue the agenda vigorously.”
²²

The Federal Reserve chairman seemed to be in a hurry.

Productivity

“Productivity,” as defined by the Bureau of Labor Statistics, is measured by comparing the amount of goods and services produced to the inputs that were used in production.”
²³
The BLS goes onto explain the calculation: “Labor productivity is the ratio of the output of goods and services to the labor hours devoted to the production of that output.”
²⁴

²¹
Shadow Government Statistics
, April 20, 2009, p. 18; http://www.shadowstats.com/
article/33, under the heading “Alternate Realities.”
²²
Testimony of Chairman Alan Greenspan before the Committee on Finance, United
States Senate, “The Consumer Price Index,” January 30, 1997; http://www.federalreserve.
gov/boarddocs/testimony/1997/19970130.htm.
²³
Bureau of Labor Statistics, “People Are Asking … : How is Productivity Measured by
BLS?” last modified November 9, 2004; http://www.bls.gov/lpc/peoplebox.htm. For a
more formal explanation of the government process for calculating productivity, see Lucy P. Eldridge, Marilyn E. Manser, and Phyllis Flohr Otto, “Alternative Measures of Supervisory Employee Hours and Productivity Growth,”
Monthly Labor Review
, April 2004, p. 10. For a more formal explanation of what productivity is, see Eldridge et al., “Alternative Measures,” pp. 9–10.

The numerator (the number on top of the ratio) is “real” goods produced. (“Real” subtracts inflation. If the goods produced and sold increased by 10 percent but inflation also rose 10 percent, there would be no increase in “real” production. If inflation rose by 1 percent, the real increase would be 9 percent.)

The most notorious maneuvering during Greenspan’s productivity obsession was with computers. In 1998, sales of computers to businesses were calculated at $95.1 billion. This was the money actually spent. However, when the Bureau of Economic Analysis relayed the output to the Bureau of Labor Statistics, it stated that sales (“real” sales) were $351.8 billion. What the BEA called “real” was unreal because the real expenditures—dollars spent—were $95 billion. The $256 billion boost to the numerator ($351 $95) not only increased the productivity number, but also artificially lifted the gross domestic product by $256 billion of unreal dollars. This permitted Greenspan—and practically every other government official, CEO, and sell-side analyst—to make inflated claims for the enormous amount of capital investment that was gunning the Miracle Economy. Yet, this investment never existed. For what it’s worth, the Bureau of Economic Analysis stopped hedonically adjusting computer prices in 2003.

The denominator (the number on the bottom) is the measurement of hours worked. The methodology for calculating how many hours all Americans worked is a parody of how government bureaucracies operates.
²⁵
Since the denominator includes extrapolations from estimates made in 1978, the productivity figure is worthless.

²⁴
Bureau of Labor Statistics, “People Are Asking … : How is Productivity Measured by
BLS?” last modified November 9, 2004; http://www.bls.gov/lpc/peoplebox.htm.
²⁵
The substantive part of the denominator is derived from a BLS survey. The BLS asks businesses how many hours their employees worked in the previous week. The BLS does not collect hours for nonproduction and supervisory workers. It assumes that the “average weekly hours for supervisory workers are the same as those for nonsupervisory workers.” It would be quite a coincidence if this were true. That still leaves nonproduction workers at manufacturing companies. These are extrapolations “from an estimate for 1978.” And so on.

Even Alan Greenspan did not seem to believe the new calculations. On March 31, 1998, Greenspan told the FOMC: “The productivity numbers are very rough estimates because we are measuring a whole set of product outputs from one set of data and a whole set of labor inputs from a different set. That they come out even remotely measuring actual labor productivity is open to question in my view.”
²⁶

Greenspan seemed to be thinking along the same lines on August 22, 1995: “We are all acutely aware that there has been a shift toward increasingly conceptual and impalpable value added and that actual GDP in constant dollars is becoming progressively less visible.”
²⁷

Speaking before the Charlotte, North Carolina, Chamber of Commerce on July 10, 1998, he discussed “an ever increasing conceptualization of our Gross Domestic Product—the substitution, in effect, of ideas for physical matter in the creation of economic value.”
²⁸
Most economists consider productivity to be a measurement of economic value.

Alan Greenspan was more reticent about government social security calculations when he was abroad. In his autobiography, Greenspan recalls telling a Soviet Union government official that a Soviet “inflation-fighting program that revolved around indexation” was likely to be unsuccessful. Greenspan discussed the U.S. problem with having indexed social security and advised the minister that indexing inflation “is likely to cause even more serious problems.”
²⁹

The Soviet official understood Soviet indexation for what it was: bureaucratic central planning.
³⁰
Greenspan then reveals his inner self: “Years before becoming Fed chairman, I’d actually tried picturing myself in the central planner’s job.”
³¹
Since he now fixed the world’s interest rate, he was living rather than picturing it.

²⁶
FOMC meeting transcript, March 31, 1998, pp. 76–77.
²⁷
FOMC meeting transcript, August 22, 1995, p. 6.
²⁸
Alan Greenspan, “The Implications of Technological Change,” speech at the Charlotte,
North Carolina, Chamber of Commerce, July 10, 1998; http://www.federalreserve.gov/
boarddocs/speeches/1998/19980710.htm.
²⁹
Alan Greenspan,
The Age of Turbulence
:
Adventures in a New World
(New York: Penguin, 2007) p. 125.
³⁰
Ibid.
³¹
Ibid., p. 129.

It would be difficult to overstate the influence of the quarterly productivity announcement in the great bull market in the late 1990s. During the technology boom, anticipation of this news release emptied pharmacies of antacid tablets. Yet, it was a hoax.

The geometric averaging and quality adjustments inspired by the Boskin Commission were—and still are today—only a few of the false adjustments to inflation. The mathematical hijinks increased the “real” gross domestic product calculation, but GDP itself is not real. It overstates growth by adding “real” adjustments, as is true with the “productivity” calculations.

Entering the second half of the nineties, the stage was set: the Federal Reserve chairman, who had been wrong on almost every prediction he had ever made, would lift markets to heights never before achieved, largely because of his predictions. These were not even of the stock market itself, but of a supposed link between the government’s rising productivity measurement and the correct price for the stock market. The measurement was false and was probably not believed by the Federal Reserve chairman. Nevertheless, the productivity calculation and its link to the stock market dominated headlines once the Federal Reserve chairman emphasized its importance. There was little rebuttal. Those who rebutted (and there were vocal dissenters) were shouting into a gale.

This page intentionally left blank

1995–1998

Federal Reserve Board Chairman Greenspan isn’t talking about the stock market these days. In fact, the word among Fed officials is: don’t use the word “stock” and “market” in the same sentence. No one wants the blame for the crash.
¹

—Wall Street Journal,
November 25, 1996

In tandem with his recommendations to Congress that government inflation calculations be changed, Greenspan used the FOMC as a sounding board for his productivity claim. At the August 1995 FOMC meeting, Greenspan alerted committee members to “a major statistical problem.” He also offered a solution: “[W]e are getting increasing evidence that we probably are expensing items that really should be capitalized. This is the issue with software.”
²

Software was the perfect boost to the productivity measurements. Just before Greenspan spoke, a Fed staffer said: “At present, when software is not bundled with the computer, it is counted as an intermediate product.”
³

¹
“The Outlook: Worried Fed Watches Markets Climb,”
Wall Street Journal
, November 25, 1996, p. A1.
²
FOMC meeting transcript, August 22, 1995, p. 6.
³
Ibid.

157

Intermediate products are not included in the national product—the GDP. The staffer had explained that reclassifying software as final output would increase productivity. (More accurately, it would boost the government’s
measurement
of productivity. The government’s accounting categories do not affect the productivity of the economy.) The staffer tutored the FOMC novices. He explained the relationship between higher GDP and productivity: “If output of software has been growing faster than other output, that would push up ‘true’ output growth. . . . [I]t may well be that productivity is growing faster and that we just are not measuring output properly.”
⁴

Greenspan explained the relationship between his inference and the stock market: “We have all seen, as I think you are aware, a number of industries in which the ratio of the stock market value to book value is much higher than one. . . . The stock market is basically telling us that there has indeed been an acceleration of productivity if one properly incorporates in output that which the markets value as output.”
⁵

It is a brave man who declares “what the stock market is . . . telling us.” Another interpretation would consider the Netscape initial public offering two weeks before this meeting, calculate the Nasdaq’s 36 percent year-to-date rise, reflect on the Fed’s July decision to loosen money, and postulate that the stock market had decided the Fed was throwing fuel on the fire and it was time to make fast money.

Greenspan’s interpretation was bound by an airtight equation: the stock market price is always correct. It is the known quantity. The economy is a menagerie of variables. In the years to come, Greenspan would introduce, interpret, reinterpret, reconstruct, and abandon particular variables. Here, at the unveiling, it is an understated book value that must be reconstructed by turning an expense into a capital investment.

The infallibility of the stock market was most important to Greenspan, since he was retreating from responsibility, or even a discussion of asset bubbles. The entire miracle economy consisted of a series of abstractions: stock market prices; software output; productivity; a “conceptual economy.”

⁴
Ibid.
⁵
Ibid.

In November, two meetings later, Michael Prell, the director of research at the Fed, tried to enlighten the chairman: “On the trend of potential output growth . . . recent evidence of surprises in productivity growth disappears. We seem to be running on a trend that has been in place for well over a decade. . . . It doesn’t suggest that there has been a radical revolution over this decade relative to where we were running before.”
⁶
At the same meeting, Alan Blinder, vice chairman of the Federal Reserve, warned the FOMC not to “get excited about something that is not there.”
⁷
Daniel Sichel, an economist on the Fed staff, who resigned and wrote a book.
The Computer Revolution
, published in 1997, rebutted the acceleration of productivity: it was a myth.
⁸

Greenspan was not to be deterred. Years later, the
Wall Street Journal
reviewed the chairman’s campaign:

Alan Greenspan began to push a reluctant Federal Reserve to embrace his New Economy vision of rapid productivity growth and rising living standards. . . . In October 1995, a group of supply managers from various industries visited the Fed to discuss the latest in high-efficiency “just-in-time” inventory management. . . . [One of the] executives described routing goods to drugstores: “They would load up a truck and without having orders send the truck out. The drugstore computer system would call the supplier, which would call the truck on the road and say, ‘Go to suchand-such store and deliver the following items’” . . . To [Edward] Kelley, the retiring Fed governor . . . who referred to himself as “an old inventory manager” . . . this was like “going to Mars.”
⁹