 ederal
Reserve Board Chairman Alan Greenspan has a well-deserved reputation
for inscrutability. I remember him once telling a congressional committee
that if they thought they understood what he just said, then they
didn't understand what he said. In other words, his comments were
intentionally ambiguous — not intended to be understood by anyone.
There was
one occasion, however, when Greenspan was too well understood. In
late 1974, he had just taken office as chairman of the Council of
Economic Advisers under President Gerald Ford. For many years previously,
Greenspan had been a well-respected Wall Street economist, and this
was his initial term of government service.
One of Greenspan's
first jobs as CEA chairman was to address a Sept. 19 conference
on inflation. Then, as now, the economy was mired in recession —
indeed, the steepest downturn of the postwar era. Theoretically,
slow growth should have caused inflation to disappear. According
to the dominant economic theory of the time, inflation and recession
could not coexist simultaneously.
The purpose
of the summit was to discuss this apparent contradiction and develop
new government policies to respond to it. During a panel chaired
by Secretary of Health, Education, and Welfare Caspar Weinberger,
Greenspan committed the biggest gaffe of his career.
Labor leader
Jerry Wurf complained that Ford's policies favored the rich over
the poor. Greenspan replied that, actually, the rich suffered more
from stagflation than did the poor. "If you really wanted to examine
who, percentage-wise, is hurt the most in their incomes, it is Wall
Street brokers," he argued. "I mean, their incomes have gone down
the most. So, if you want to get statistical, let's look at what
the facts are."
The press,
Congress, and just about the entire Washington establishment came
down on Greenspan like a ton of bricks, and he was quickly forced
to recant. "Obviously, the poor are suffering more," he abjured.
With support from Ford and a swift apology, Greenspan survived the
flap. Ever afterward, he has been much more circumspect in his public,
and even private, comments.
What was never
considered, however, was the actual substance of Greenspan's statement.
The fact is that he was exactly correct. As Slate.com editor Michael
Kinsley once noted, major gaffes only occur in Washington when someone
speaks an impolitic truth. This is a classic case.
I recall this
history because it is relevant to current circumstances. Once again,
we are in the midst of an economic recession. And, as in 1974, the
question of who is suffering most has important political implications.
Senate Majority Leader Tom Daschle (D., S.D.), for example, has
blocked passage of an economic stimulus package for months just
to stop corporations and well-to-do individuals from getting even
the tiniest bit of tax relief.
Yet, as Alan
Greenspan correctly observed in 1974, it is the wealthy who have
actually lost most in monetary terms from the recession. That is
simply because they have more to lose when the stock market collapses,
because they own most of the stock. According to a Census Bureau
study released earlier this year, those in the top 20% (quintile)
of households, ranked by income, own 58.6% of all stock and mutual
funds in terms of value.
This means
that those in the top quintile have lost the vast bulk of the money
resulting from the steep fall in the stock market since last year.
The combined value of all stocks on the New York Stock Exchange
and the NASDAQ market peaked in August 2000 at $18.9 trillion. As
of the end of October 2001, this fell to $13.4 trillion, a decline
of $5.5 trillion.
Using the
Census Bureau data, this suggests that those in the top quintile
have suffered a loss in wealth of more than $3 trillion in just
over a year. Of course, I don't mean to imply that we should feel
too terribly sorry for them. After all, they still own the bulk
of the stock. But it would be nice if the class-warfare crowd would
at least acknowledge that the poor aren't the only ones who are
suffering.
The Left always
glorifies equality of income and wealth as an enormous benefit to
society. Over the past year, they have gotten their wish: Wealth
is far more equally distributed now than before the stock market
crash.
But who has
gained? Is there a single poor person in America who is better off
because people like Warren Buffett and Bill Gates are billions of
dollars poorer? I think not.
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