3. It had actually lessened between 1947 and 1968.
4. Enacted in June 1944, the GI Bill (officially titled the Servicemen’s Readjustment Act) provided a number of benefits for World War II veterans, mostly assistance with tuition and living expenses for those pursuing further high school, college, or vocational education.
5. Nonetheless, work stoppages surged in the early 1950s.
6. Only 22 percent of married women were in the labor force in 1950 to bolster household income. Today, the figure is more than 60 percent.
7. The declining cost amortized over a two- or three-year period of robot “labor” had become highly competitive in terms of hourly cost with what had heretofore (1950s, for example) been middle income jobs.
8. Compensation per hour of private industry union workers dipped below that of nonunion workers in 2012.
9. The liberal Economic Policy Institute estimates a rise in the ratio of CEO compensation to production worker wage from 35 times in 1978 to more than 250 times in 2007.
10. The pattern of rising inequality that flattens in recent years is also evident in the spread between high- and low-earning industries that widened from 1990 to 2007 and then stabilized, as did the Gini coefficient.
11. Alan Greenspan, The Age of Turbulence (New York: Penguin Press, 2007), p. 426.
12. Ibid., pp. 425–26.
13. “Special Report on America’s Competitiveness,” Economist, March 16, 2013, p.11.
14. Of course, two and a half percentage points per year over forty-seven years yields triple the level of benefits by 2012.
15. Economist, Febraury 2, 2013, p. 9.
16. However, social norms have succeeded in suppressing it for the vast majority of us.
17. Elasticity of demand thwarts monopsonies (single buyers) as well. But monopsonies are rare, especially compared with far more prevalent monopolies of all types. John D. Rockefeller was the classic monopsonist when negotiating rail freight rates for his kerosene shipments in the 1890s. Finally challenged, he responded by exercising his control of the market for transportation of kerosene by switching from railroads to his own newly constructed pipelines. Moreover the consequent flattening of both supply and demand curves vis-à-vis price reduces deadweight loss, a classic measure of market inefficiency.
18. Fixed specifications for bank vaults dictated new buildings. Alternative and admittedly less convenient means of vault operations by a private company were cheaper, as were conceivably all such alternatives requiring a trade-off between security and cost. But such an evaluation, as I recall, was ruled out, given fixed specifications for a particular vault.
19. The crisis actually began in 1971 as crude oil pricing power shifted from the Texas gulf to the Persian Gulf. (See The Age ofTurbulence, pp. 444–45, for a detailed description of the seminal shift in economic and hence political power.)
20. I exclude unexploited natural resources, such as oil reserves.
21. Peter Baker, “Lost Amid Scandal: A Workforce Bill,” Washington Post, August 12, 1998.
22. The creation of the Interstate Commerce Commission in 1887 is the classic case of one market intervention creating competitive distortions that require still other interventions. Considering the huge advantages to productivity overall from these monopolies, I am hard pressed to argue, as I did in the 1960s, that the post‒Civil War subsidized rails from the Mississippi to the West Coast were a wholly bad idea.
23. People who live in societies that do not believe in individual rights (for example, Mao’s China and the Soviet Union) are taught that free markets are exploitive.
24. Fairness, as I note in Chapter 1, is a propensity of human nature that requires people to be judgmental. Without specifying the standards by which to judge what is “fair,” each person, of necessity, sets his or her own value preferences.
25. See, for example, Peter Wallison’s “Dodd-Frank’s Liquidation Plan Is Worse Than Bankruptcy” (Bloomberg, June 11, 2012).
26. For an explanation of ex ante and ex post, see Chapter 7, note 20, page 360.
27. Kenichi Ueda and Beatrice Weder di Mauro, “Quantifying Structural Subsidy Values for Systemically Important Financial Institutions,” IMF Working Paper, May 2012.
28. Wayne Passmore, “The GSE Implicit Subsidy and the Value of Government Ambiguity,” Real Estate Economics, 33, no. 3 (2005): pp. 465–86.
29. To be sure, there was the Penn-Central bailout in 1970, but that episode gradually faded and was not considered as precedential.
30. Prior to the crisis, the yield spread between S&P ten-year BB+ industrial bonds and ten-year U.S. Treasury notes was less than 2 percentage points. In September 2011, the spread was more than 5 percentage points, though it had moved somewhat lower by early 2013.
31. On July 13, 2012, the firm revised that loss to $5.8 billion, noting that it could climb to upward of $7 billion depending on subsequent market conditions.
32. Two and a half years at the Council of Economic Advisers (1974–77) and eighteen and a half years at the Fed (1987–2006).
CHAPTER 12: MONEY AND INFLATION
1. Sovereign governments issue two types of currency granted “legal tender” status. The first is gold or silver coin, or paper money that can be redeemed for specie at a fixed conversion rate. The second is paper money not backed by specie (fiat money).
2. The prohibition of the private holding of gold and gold clauses in private contracts effectively eliminated the dollar’s historic tie to gold. The continuation of gold transactions between central banks until 1974 did not appear to engage the private marketplace or the fiat money price level.
3. In addition, if central banks ran into a surge of inflation, they were not required to restore the earlier level of prices.
4. It is true that these metals are attractive, relatively scarce, malleable, and fungible. But why this makes them more acceptable than other material with similar attributes has never been evident to me. But there can be no denying gold’s universal acceptability. During the waning years of World War II, for example, only gold was an acceptable means of payment for most German imports.
5. Lying between gold and fiat currency are currencies redeemable in gold. That promise rests on a government’s or a person’s ability to fulfill the promise. The value of gold is perceived as intrinsic and does not require any further support.
6. Governments seem unable to hold the supply of fiat money in check. The lure of seemingly costless money has always been irresistible. It started with governmental “coin clipping”* and has progressed to printing money unrelated to the financing of economic activity.
7. Richard Nixon imposed wage and price controls in 1971 because prices were rising at an apparently politically intolerable 4.5 percent annual rate.
8. Milton Friedman, “The Counter-Revolution in Monetary Theory” (First Wincott Memorial Lecture, September 16, 1970).
9. I chose capacity instead of output because a unit M2 measure using capacity as its denominator behaves statistically slightly better than one using output (GDP). Moreover, unused capacity can be brought into a market to satisfy rising demand without prices rising inexorably.
The capacity of GDP is derived by first separating gross nonfarm business GDP (76 percent of total in 2012) into industrial and all other. I obtain a first cut industrial capacity by dividing industrial GDP by Federal Reserve operating rates, and a first cut nonindustrial capacity by dividing nonindustrial business GDP by ISM nonmanufacturing operating rates. The sum of the two, moderately smoothed, yields capacity for gross nonfarm business product. I assumed the rest of GDP (24 percent in 2012) operated at 90 percent of capacity and calculated its capacity by dividing gross nonbusiness GDP by 0.9. The total capacity was the sum of the nonfarm business and nonbusiness GDP.
10. Almost any financial asset whose market value can be determined—stocks and bonds, for example—can be exchanged for any good or service, and thereby create a price per unit. I am certain I can find an automobile dealer
who would be willing to take as payment for a car listed at $29,000 a thousand shares of stock valued at $30 per share. But there is little doubt that convenience of payment is quite important to a transaction balance, especially because payments are increasingly being made electronically. Moreover, bypassing these modern electronic payment systems is becoming ever more infeasible.
11. Most foreign holdings of U.S. currency are held as a store of value and are not used to buy goods and services in the United States, and hence, one would presume, have little effect on domestic prices.
12. The choice of transaction balance should price all goods and services purchased in an economy, including imports, not just those that are produced domestically.
13. Associated Press, “Prices Rise on Greenspan’s Remarks,” October 28, 1991.
14. Cara S. Lown, Stavros Peristiani, and Kenneth J. Robinson, “What Was Behind the M2 Breakdown?” (Federal Reserve banks of New York and Dallas, July 1999).
15. The dummy variable in Exhibit 12.3 captures the extraordinary shift in U.S. financial markets (discussed earlier in this section) that, to this day, I find difficult to understand.
16. Money velocity can be seen as equal to nominal GDP divided by M2. Unit money supply is equal to M2 divided by real GDP. Given that nominal GDP is equal to real GDP times the implicit price deflator, the ratio of price to unit money supply is equivalent to money velocity. In my exhibits, the two series differ solely because (1) I use the more statistically significant “real capacity” as the denominator of unit money supply, rather than real GDP, and (2) I use the price of core personal consumption expenditures, rather than the GDP deflator, as my measure of price.
17. There are no capital charges levied on these sovereign funds. Hence, their cost to the bank amounts to little more than electronic transfer fees.
18. Whether the claims banks have on the Federal Reserve are in the form of deposits or holdings of Federal Reserve notes does not affect the size of the set-aside. It is based not on the nature of central bank money but on the risk that the recipient of a bank loan will default. This is the reason that the ratio of M2 to the monetary base (the money multiplier) implies a set-aside that parallels the ratio of capital plus loan loss reserves to total loans outstanding surprisingly well (see Exhibit 12.5). I chose to use the balance sheet ratio rather than the more relevant income statement data (allowances plus new equity capital, as a ratio to gross loan extensions) because comparable data on loan extensions are not available. That the money multiplier was an unexpectedly low 3.7 in 1948, a relatively prosperous year, reflects the very large expansion of the monetary base created to help finance the war.
19. The proceeds of most new loans are spent almost immediately.
20. This is, of course, a stylized, simplified version of a much more complex lending process.
21. For example, given a 20 percent set-aside, $100 in reserves created by the Fed would ultimately lead to an increase in bank loans of $500 ($100 + 0.8 x $100 + 0.8 x $80 + 0.8 x $64 + . . . = $500). The total increase in loans in our fractional-reserve banking system as a ratio to the Fed’s initial injection of funds is called the money multiplier. It originally referred to the expansion constrained by legal reserve requirements. However, it works in much the same way when banks determine their own capital and loan loss set-asides.
22. There are a number of other temporary measures to absorb reserves, such as reverse repos and term deposits. But these efforts will become ever more difficult to sustain over time.
23. The money multiplier fell from 2008 to 2011, but most of the decline occurred in the few months immediately following the onset of crisis.
24. For these calculations, I assume that the size of Federal Reserve assets in mid-2013, at approximately $3.5 trillion, will remain unchanged through 2017; that U.S. currency held both at home and abroad will follow their recent trends; and that business capacity will rise at 2 percent per year.
CHAPTER 13: BUFFERS
1. Alan Greenspan, “Economics of Air Power”; the Conference Board Business Record; Vol. IX, No. 4; April 1952.
2. Roadbed maintenance for private railroads, for example.
CHAPTER 14: THE BOTTOM LINE
1. General Agreement on Tariffs and Trade.
2. Wheat exports soared to more than 300 million bushels in 1948.
3. The CBO estimates the comparable share of social insurance taxes paid in 2009 by the highest quintile at 46 percent.
4. The estimates of the savings rate of the upper quintile are notoriously flawed. Our major source is the annual Consumer Expenditure Survey. Data from the 2011 survey indicate a savings rate of 19.4 percent for all households. The Bureau of Economic Analysis estimates a savings rate of 4.2 percent.
5. Businesses are offsetting that decline by increases in business savings (undistributed corporate profits and depreciation) as a percent of GDP. The sum of household and business savings has remained trendless.
6. As I noted in Chapter 11, its struggle may have lessons for the United States.
7. When deficit spending first became a serious public issue in the 1930s, I recall it always being in the context of budget balance over a business cycle. But when it became obvious to previously fiscally prudent legislators that deficits do not always immediately create politically unpopular inflation, they abandoned the policy for a more flexible guideline of keeping the ratio of debt to GDP constant. In the context of the not-fully-funded benefits boom of the past near half century, it is apparent that such a paradigm, although economically sensible, does not work well.
8. I recall that when the yield on the ten-year Treasury note rose to near 9 percent in early July 1979, conventional wisdom was that the United States was not an inflation-prone society, and hence 9 percent—the highest level possibly ever—was generally deemed the peak in rates. By late February 1980, the rate had risen to almost 14 percent as the bond market collapsed.
INDEX
The page numbers in this index refer to the printed version of this book. The link provided will take you to the beginning of that print page. You may need to scroll forward from that location to find the corresponding reference on your e-reader.
adjustable-rate mortgages (ARMs), 65
ADP, 137
Afghanistan War, 285
AFL-CIO, 133, 154, 190
Age of Turbulence, The (Greenspan), 24–25, 94, 171, 226, 243, 256, 299
aggregate demand, 4
agricultural economy, 111
agriculture, 122
AIG, 265
Alcoa, 137
Alsop, Joseph, 305
aluminum plate, 176
ambulances, 287
American Association of Retired Persons (AARP), 190
American Bankers Association, 118–19
American Iron and Steel Institute, 131, 246
American Recovery and Reinvestment Act (ARRA), 149, 157
Ameriquest, 64
Anderson, Benjamin, 126
animal spirits, 8–10, 13–36, 91, 92, 156, 164, 292, 301, 362n
Apple, 21
Argentina, 227–28, 267
Asian Tigers, 62, 250
asset price bubbles, 9, 53
assets, 27
Austen, Jane, 13–14
Australia, 37, 68, 354n
Austria, 217, 222, 229
B-52s, 284
baby boomers, 141
Baker, Howard, 306
Balladur, Édouard, 259
Bank for International Settlements (BIS), 215–16
bank letters, 126
Bank of America, 106–7, 357
Bank of England, 21
bankruptcy, 87
bankruptcy statutes, 263
banks, 95, 111
asset growth of, 40, 42
bailouts of, 101, 304
capital of, 106–9, 301–2
capital buffers for, 41–42
failures of, 39
see also specific banks
Basel I, 72
/> Basel II, 43, 47, 72
Bear Stearns, 51, 105, 116, 265
JPMorgan’s acquisition of, 1, 139
behavioral economics, 17, 45
see also animal spirits
Belgium, 217
Bennett, Robert, 303
Bentsen, Lloyd, 307
Berlin Wall, 61
Bessemer furnace, 125
Bill of Rights, 302
Black, Fischer, 43, 44
BNP Paribas, 37
Bogey of Economic Maturity, The (Terborgh), 130
bonds, 19, 270
bond spread, 220–21
borrowing, 201–2
Boston Marathon bombing, 33
Brady, Dorothy, 25, 347n
Brazil, 227, 273, 278
Bretton Woods Agreement, 218
Brokaw, Tom, 237
Brown Brothers Harriman, 116, 351–52n
Bryan, William Jennings, 258, 259
bubbles, 10, 52–53, 69, 154
bursting of, 71
Buffett, Warren, 352n
Bureau of Economic Analysis (BEA), 133–34, 142, 163, 186, 206, 283, 361n, 364n, 376n
Bureau of Labor Statistics (BLS), 163, 205, 213, 242, 269, 364n
Burns, Arthur, 127
business cycle, 118
California Institute of Technology, 96
“Call Loan, A” (O. Henry), 357n
call loans, 226
Camerer, Colin, 17
Canada, 28, 37, 68, 234
cap-ex ratio, 85–87, 144–45
capital, 47–48, 50
Capital Cities-ABC, 137
capital gains, 81, 82–83, 242
capital income, 242
capital investment, cash flow ratio with, 87
capitalism, 226–27
capital requirements, 110, 118
capital spending, stock prices and, 84
capital-to-assets ratio, 101, 107–8
Carrier, Willis, 178
Carson, Rachel, 179
cash flows, 37–38
capital investment ratio with, 87
causation, correlation vs., 58
The Map and the Territory Page 30