The Age of Turbulence: Adventures in a New World
By Alan Greenspan. 2007. New York, NY: Penguin Press, Pp. 544, $35.00 hardcover.
In his recent memoir, The Age of Turbulence, former Federal Re-serve Chairman Alan Greenspan is conflicted about the merits of capitalism. On the one hand, he notes that “[i]f the story of the past quarter of a century has a one-line plot summary, it is the rediscovery of the power of market capitalism.” On the other hand, Dr. Greenspan identifies two reasons why market capitalism has found only qualified acceptance even after the fall of the Berlin Wall and the collapse of communism.
First, capitalism brings instability. “Capitalism creates a tug-of-war within each of us. We are alternately the aggressive entrepreneur and the couch potato, who subliminally prefers the lessened competitive stress of an economy where all participants have equal incomes.” Capitalism brings stress in the form of employment layoffs and the loss of investment capital, which are part of what Joseph A. Schumpeter has called creative destruction. At the individual level, Greenspan notes, creative destruction is often experienced merely as destruction.
The second problem, as Greenspan sees it, is that capitalism results in material inequality: “there is persistent widespread questioning of the justice of how unfettered competition distributes its rewards.”
To be sure, Greenspan is an ardent defender of capitalism. He clearly sees capitalism and competition as the main driver behind the growth in material wealth throughout history. Creative destruction is indeed creative. What is destroyed is obsolete and inefficient ways of producing and delivering goods and services. What is created is innovation and efficiency and greater abundance, which in turn makes possible many nonmaterial blessings such as longer lifespans, better education, better working conditions, and greater environmental conservation, to name but a few.
Although outright communism may have ceased to exist almost two decades ago, the other extreme, unconstrained capitalism, is also rare. In reality, there are different types of market economies, with varying limits on the extent to which they allow competition to flourish. Opinions as to which location on this continuum is preferred may vary by individual, but they tend to cluster from nation to nation depending on the culture, history, and political leadership in those nations. The United States is relatively close to the unfettered side, Greenspan believes. Western European countries—especially France—which according to Greenspan display a “collectivist bias,” tend to be located towards the fettered direction. He argues that it is exceedingly difficult for individuals to decide where on the continuum they would like to place themselves, for example in their choice of how much to work and how much leisure to enjoy, because the psychological drive to keep up with one’s neighbors is too strong.
The recent increase in inequality is predominantly a U.S. phenomenon. Its cause, according to Dr. Greenspan, is not so much the European welfare systems, which have been in place for a long time, or the decline in the power of labor unions, which has occurred worldwide, but rather “the dysfunction of elementary and secondary education in the United States.”
The problems with education, as Greenspan sees them, include the requirement of teacher certification, which one generally receives only with a degree in education rather than expertise in subject areas such as math. In addition, there are the single- pay structure for teachers and the lack of competition among public schools. Experience suggests that attempts to improve these issues often run into resistance by teachers’ unions, but somehow Greenspan does not mention those as an underlying problem.
Dr. Greenspan’s criticism of inequality is somewhat ambivalent. Nowhere does he state explicitly that he considers inequality undesirable per se. He argues that inequality is undesirable when it is excessive; but his main reason is that under excessive inequality, capitalism may eventually lose popular support, leading to populist measures (protectionism) that are harmful for all.
If he feels that inequality is undesirable only because of public perception, the book is a lost opportunity to help shape that public perception. Greenspan could have explained why inequality is not inherently bad, morally or otherwise, for example because different people achieve at different levels and so different rewards are arguably just rather than unjust. He only goes so far as to imply that there is no standard by which to judge whether income inequality is too large. “Relative compensation in our society is market determined, and reflects the value preferences of all participants in our economy. Is there a better arbiter?” But he could have gone further and fleshed out some of the positive consequences of inequality. For example, inequality may even be desirable if we accept Greenspan’s logic that our neighbor’s achievement constitutes an incentive for us to try and achieve as well.
If he feels that inequality is undesirable in and of itself, he does not attempt to convince us of that view. For example, he does not define how much inequality he considers excessive. Greenspan calls himself “a lifelong libertarian Republican.” But the libertarian view is not that gross domestic product is like a large cake that is to be distributed while government’s role is to make sure that the distribution happens equitably. Instead, the libertarian view is that there are only single slices that are created by individuals, who derive inherent ownership from the mere act of creating the slices. This view is based on ideas set forth by John Locke, the 17th century British philosopher, whom Greenspan mentions approvingly. But nowhere in the book does he attempt to resolve or clarify this apparent inconsistency in his views.
Dr. Greenspan turns out to be an engaging storyteller. He uses short, declarative sentences that are refreshingly light on his celebrated “Fedspeak.” Autobiography and economics tutorial are blended effortlessly into a single narrative. Readers are likely to find the book an informative recounting of some of the issues that marked Greenspan’s tenure at the Federal Reserve and that continue to be important to business economists.
Reviewed by Jerry H. Tempelman
Taxing Ourselves: A Citizen’s Guide to the Debate over Taxes, fourth edition
By Joel Slemrod and Jon Bakija. 2008. Cambridge, MA: MIT Press, Pp. 384, $22.95, paperback.
Taxing Ourselves is a modern classic in tax economics. The new fourth edition is an extensive revision of this excellent and popular book. It now includes recent developments related to the Bush tax cuts and the President’s Advisory Panel on Federal Tax Reform. An additional value is in its extensive coverage of recent tax proposals, including “the” Flat Tax, value-added tax (VAT), national sales tax, consumption tax, the “Fair Tax,” and the X-tax.
People familiar with the book or who remember Ed Mennis’ review of the 2000 edition will immediately recognize the importance of the topics and the clear and concise organization of the material. Those who are unfamiliar with economic analyses of taxes have been mercifully spared from the tortuous details that are needed to understand the theory, as well as the complications that are needed to develop, implement, enforce, and revise any tax system. In fact, Albert Einstein is reputed to have said, “The hardest thing in the world to understand is the income tax.” This guide is a presentation of the issues that is accurate and yet accessible to people without formal economics training or background. However, the economics is still there.
For example, in the section that outlines how taxes impact the general economy, there is a competent description of how taxes on wages have two effects. One effect is that the monetary return to work is less and makes leisure relatively more attractive. The result is to reduce work effort and consume more leisure. The second effect is that the after-tax ability to consume is less and that lower after-tax income can cause people to work more. We have the traditional economic substitution and income effects, without jargon or graphs. At the same time, the authors review academic studies that measure the relative impact of the two effects.
Several themes run through the book. One theme is the impact of tax policy on macroeconomic activity. At virtually every turn, the authors are very clear about what is known and what is not known. On balance, the authors believe there is a great deal of uncertainty as to the impact of virtually all tax policies.
A second pervasive theme is fairness and concerns equity issues of tax policy. Here the issues of vertical and horizontal equity dominate, but there are multiple discussions of generational equity. Vertical equity concerns the differential treatment of people up and down the income or consumption distribution. Horizontal equity concerns the differential treatment of individuals and families whose income or consumption are the same but whose treatment differs according to different circumstances—for example returns from labor vs. capital. These are not as simple as might be imagined. Consider a building that is purchased, improved, and sold by the taxpayer. Should it matter if the structure is a residence, a residence used by the taxpayer, or a business structure? How much of the price change is a return to labor and how much to capital?
A third pervasive theme is tax administration and is called simplicity and enforceability. In the previous example, you can see how equity issues interact with administration issues. This theme focuses on the divergence between what might be the best system and what might be the best feasible system.
The reader will receive lots of help in identifying which issues are dependent on the reader’s values and preferences. Wisely, the authors’ preferences do not dominate. It is probably as balanced as any presentation. The authors are absolutely correct (and the market confirms) that there is a continuing need for a presentation that is much less technical than the academic literature and more sophisticated and more clearly explained than the popular presentations that attempt to convince the reader of a particular position.
There is a relatively long and valuable section on the history of income tax in the United States. We learn that it began as a wartime (the Civil War) crisis intervention. Subsequent wartime activities also generated important changes to the system. The history is interwoven with the objective of explaining how the system operates and why it is as it is. The authors basically explain the magnitude and distribution of income, corporate, excise, Social Security (with Medicare), estate, and state and local taxes. In addition to the complexity of the issues, the reader learns that the complexity of our tax system is due to the complexity of economic activity itself, plus the often-interacting issues of equity, administration, uncertain economic impact, and the practical fact of competing economic and political interests.
Armed with the understanding of the important analytical issues and the historical background to understand why we are where we are, the reader is introduced to the idea of where we might go. The chapter is titled “Starting from Here,” and the authors display humor by the story of the tourist who asks how to get to Dublin. The Irishman responds, “If I was you, I would not start from here.” They use the story as a device to begin the discussion of whether it would be best to start from our existing system or start fresh. For example, if you want to change the system to a tax that does not discriminate against saving and investing, then a consumption tax would be for you. The authors explain why the income tax discriminates against saving and why a consumption tax does not. Then the consumption tax aspects of the VAT and the “Fair Tax” are discussed across several chapters from several perspectives. It is also shown that the Hall-Rabushka Flat Tax is a consumption tax and is also a variety of a VAT. That is, “the” Flat Tax is a receipts-minus-inputs VAT, but where the labor input is not assigned as a deduction to the firm. Rather, the individual is responsible for the payment of the “VAT” on labor, at the firm’s (VAT) rate. The X-tax is essentially the Hall-Rabushka Flat Tax but with progressive tax tables.
For people who believe the VAT, the Flat Tax 565 or the Fair Tax is a magic solution, this book will provide them with lots of challenges. For those who think our income tax system is good or bad, the book argues that our system is a combination of an income and a consumption tax that is a compromise based on competing economic goals as well as competing economic interests. The reader is also introduced to the fact that no other nation has magically solved the issues presented in the book. At virtually every turn, the authors essentially say, in effect, “on the other hand.” It is bound to be a surprise to those who expect the conventional sales pitch of popular presentations. It is also somewhat of a surprise that a book explaining the complexity of taxation, without the over simplification of a single solution, is a great success.
Review by Gerald L. Musgrave
Economics America, Inc.