Greenspan Tells Agents of New Economic Order

WHITE SULPHUR SPRINGS, W.VA.–Traditional indicators are no longer predicting the course of the world's economy, which is being impacted by advances in technology and labor allocation shifts, former Federal Reserve Chairman Alan Greenspan told an insurance conference here.

His remarks came today during the 93rd annual Insurance Leadership Forum of the Council of Insurance Agents & Brokers held here.

Mr. Greenspan, who headed the Federal Reserve System from 1987 to 2006, was joined by Ron Insana, a senior economic analyst with CNBC and contributor to MSNBC and NBC news, who posed questions to Mr. Greenspan.

On the general direction of the economy, Mr. Greenspan said within the past 50 years, “something interesting and different has happened” to shift the old economic order.

The cost of producing goods has been lowered as manufacturing is being disbursed to places where wages are lower and production more efficient. Keeping the prices down has meant inflation is kept in check, and because the rate of inflation remains low, interest rates have in turn remained at low levels.

The end of the Cold War, he noted, also meant dramatic changes, as the world learned that centralized planning was a failure. China, which spent decades under that system, began moving to a market economy in the 1970s. This change opened the doors to the current boom in economic activity the world is experiencing.

Even the indicators of an oncoming recession are not working as they have in the past, he noted. Classically, when short-term interest rates were higher than long-term, it led to a recession. However, today, that relationship is not producing the same consequences.

Two issues he sees as major U.S. economic concerns are proposed protectionist policies and a financial crisis for the Medicare system.

On the protectionist issue, Mr. Greenspan said those who would contemplate such a move “have no idea how much damage it would do to this economy.”

Medicare is a looming burden because it is difficult to predict future spending since future costs cannot be predicted, he said.

Nationally, Mr. Greenspan noted a disparity in the delivery of health care. He said the nation will have to move to a best practices system where pricing is relatively the same nationally.

What further troubles him is the prospect of aging baby boomers outgrowing a smaller population of younger people. This will strain resources and make delivery of a promise to an older generation impossible.

“This is the only problem that really rankles me,” he said.

On the issue of tax cuts and deficit spending, he said no one fully read his comments on the issue during Congressional testimony where some said he supported President George Bush's tax cut proposals.

At the time, he pointed out, projections indicated surpluses would virtually wipe out the national debt. Continued surpluses, at some point, would have to be dealt with either through increased entitlement spending or lower taxes. Increased entitlement program spending would be difficult to cut or eliminate when the economy turned south. Tax cuts were a better remedy.

However, he added, should the debt begin to climb, the tax cut issue should be re-examined. He complained that part of his testimony was not read or embraced by tax cut advocates.

He said he also worries about the concentration of too much capital in too few hands. It would, said Mr. Greenspan, lead to a breakdown in the bonds of a democratic society, and “we need to do more to bring up the rest of the working population.”