I.O.U.S.A. (45 page)

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Interviews

Q:
Although you cannot resolve it, can you comment on the
government spending versus raising taxes?

Paul Volcker:
Sure. The big ideological fi ghts in this country concern the best way to deal with some of these problems. One side says, “ Reduce taxes; make governments smaller; governments are ineffi cient and ineffective. ” The other side says, “ Look, we have to be responsible and respond responsibly to some of these challenges by raising taxes. ” My view has always been we ought to make government as effi cient as we can. In some cases that may mean a smaller government, but in other areas it might mean a consensus, particularly in some programs that are maintaining the national defense. Regardless, it ’ s going to take money. And in order to satisfy people and get problems resolved relatively effi ciently and effectively, then we have to pay for it with taxes. In my opinion, we do not have a very good tax system. It ’ s confused, complicated, frustrating, et cetera. I hope that the next president reforms taxes and makes them a little more tolerable so people can support the spending we have to do.

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Dr. Alan Greenspan

Dr. Alan Greenspan served as the chairman of the United States Federal Reserve Board from 1987 to 2006. During his tenure, Dr. Greenspan steered the U.S. economy through the Black Monday stock market crash of 1987, the dot - com boom of the 1990s, and the subsequent bubbles in stocks and housing. Criticized by some, revered by others, Dr. Greenspan is still seen as a leading authority on U.S. economic and monetary policy.

Q:
In your opinion and from the data that you ’ ve seen over the
last few years, are Americans saving less than they used to and
if so, why do you think that might be?

Alan Greenspan:
Well, it depends how we defi ne savings. As far as your average American household is concerned, they would argue that they ’ re saving more than enough — or at least until recently they would have said that. The reason [for that mind - set]

is they ’ ve looked at their 401(k)s, and they ’ ve looked at the value of their homes, and they ’ ve looked at their assets generally — and while we economists may say that capital gains do not fi nance real capital investment and standards of living, the average household couldn ’ t care less.

So up until very recently, you will not fi nd any real concern on the part of American households that they ’ re not saving enough; indeed, they have been very happy with what they have. The problem, however, is that that essentially was a mixture of capital gains on homes, stocks . . . on a whole variety of other types of assets [including] their income. The result, basically, is that as those wealth effects begin to reverse, people are going to perceive that they are indeed not saving enough, and hence a signifi cant increase in the amount of savings out of income is going to give a much larger set of numbers that economists are going to feel far 169

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Interviews

more comfortable with. It hasn ’ t happened yet — savings excluding capital gains is actually very low, close to zero. Ordinarily, over the years that is 5, sometimes as much as 10 percent. I don ’ t think we ’ re getting back to 5 or 10 percent immediately, but I do think as the wealth effect as a substitute for savings begins to diminish, our savings rate will start to rise signifi cantly.

Q:
Why is a lack of savings problematic? How would you explain
that to someone who thinks, “ I ’ m living pretty well and I have
my 401(k) and everything seems fi ne ” ? What does a lack of
savings create in the long term?

Alan Greenspan:
When you think in terms of the economy as a whole, you have to realize that if the output of an economy — or in household terms, the amount of income [available] is all consumed, [then] we ’ re not accumulating the types of assets which we fi nd productive over the years. Every advanced economy invests a signifi cant amount of what it produces. It ploughs it back in the way of capital assets — meaning factories, equipment, all forms of capital — which essentially make the standard of living rise, because as technology and capital increase, an hour ’ s worth of effort on the part of a person has (over the generations) been increasing, producing more and more in the way of goods and services. So that the issue is, for the national economy overall, unless you plough back or invest a signifi cant part of your production, you will not have growing standards of living.