Politics & Policy

What Greenspan Says Isn’t What Say Said

Our nostalgic former Fed chair needs to revisit the fundamentals of supply and demand.

Since the release of The Age of Turbulence, former Federal Reserve chairman Alan Greenspan has been variously praised and criticized for the views he has expressed on taxes, interest rates, and the presidents he served. Commented on less are his thoughts on what impacted inflationary pressures while he ran the central bank. His views on this subject are notable since they violate the main teachings of Jean-Baptiste Say, the godfather of what we now refer to as supply-side economics.

To Say, demand was an afterthought. Economic actors ultimately trade products for products, and as such, there could never be too many or too few goods in an economy such that a generalized rise or fall in the price level could occur. Supply in his model was demand. So, if new labor entered the workforce with new supply, commensurate demand for other goods would keep the general price level from falling.

In his memoir, Greenspan suggests that the collapse of communism made his job of containing inflation easier due to the influx of newly freed workers to the competitive marketplace. The added workers exported voluminous goods and services, and in pushing up the overall supply, they essentially were the unsung heroes in the battle to keep the price level down.

At first glance, this makes a lot of sense. The U.S. has certainly been the happy destination of lower-priced goods from formerly communist countries, and our standard of living has surely risen as a result. What’s forgotten is that if the prices of certain consumer products are falling, consumers have more money to purchase other items formerly out of reach. Cheap goods merely expand the range of products we’re able to buy, so the generalized impact on prices absent monetary factors has been zero.

Looked at from Say’s perspective, the aforementioned entrance of new labor into the workforce created new supply that became new demand. Proof positive of this phenomenon is China, where U.S. exports there have risen 367 percent since 1995. As China’s production has ramped up, so has its demand for products that its citizens do not make.

Some might point to China’s high rate of savings to show that increased supply from that country didn’t lead to increased acquisitiveness. But as Say made plain, no act of saving detracts from consumption. Money saved hardly lies dormant. Instead, savings merely fund new labor-force entrants who themselves will be in the market for products previously unattainable.

Looking to the future, Greenspan worries that absent another boom of labor-force entry, prices of products will head higher as Americans bid for goods against the increasingly flush middle classes from around the world.

But this thinking doesn’t consider that if worldwide demand drives up the prices of certain items, there will be a similar fall in the prices of other products deemed less necessary. The generalized price impact will be zero, but more importantly, everywhere in the world a worker’s supply is his demand. If individually we don’t have some form of output, we can’t bid for the output of others. Demand is balanced by supply, or better yet, there can never be a “glut” or “dearth” of goods in any economy such that the broad price level will rise or fall.

As the late Milton Friedman stated regularly, inflation is always and everywhere a monetary phenomenon. By that measure, Alan Greenspan served the U.S. ably as Federal Reserve chairman. However, while the growth in worldwide labor participation is a wonderful good in and of itself, it did not aid Greenspan’s mostly good works with the dollar. Current and future Fed chairs should take note: A looming slowdown in labor-force participation is not a reason for inflationary problems down the line.


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