Atlantic council decided to give to a single commander, general eisenhower, sufficient authority to organize, equip, and train an integrated nato force for the defense of europe. The task before him was unprecedented. Though each of the nato countries would see to the supply and support of its own National Forces the Supreme Commander would be responsible for the coordination into a Single International force. And at 8 00 the changing of mary l discussion todd lincoln and why some of her critics labeled her crazy. For our complete schedule go to span. Org. Earlier today former Federal Reserve chair Alan Greenspan said extending the visa program may help increase productivity numbers. His comments came as he spoke at the council on Foreign Relations in new york city. This is an hour. Welcome, folks. Thanks. Welcome to you. Yes. A little work to do. Thanks for asking me to be in this great spot here moderating a panel with dr. Greenspan historic decision yesterday. Alan greenspan needs no introduction, was the Federal Reserve chair from 19872006. He served under four president s, was on the 1983 panel that reformed Social Security. I think well talk a little bit about entitlements this morning. Also was the economic adviser to president ford and made a very, very important decision sometime in the early 1960s i think not to be a professional jazz musician. Was that the 1950s, alan . I hate to tell you when that was. 1945. I was giving you the benefit of the doubt there, young man. You also were factually inaccurate. [laughter] alan, i want to turn immediately to the news from yesterday. I know you have some reluctance to talk about the fed comment on the current policy but if , give me your reaction to the Market Reaction. The market seemed to rally on this news. Why do you think that was . Well, remember that this particular move was targeted way in advance, and the market had adjusted to it. The only question that was out there was what was going to happen subsequently that, not make u could actually certain happen but with what the policy was. As it became apparent the fed was going to just raise the rates and then not do a whole basically ates, then the markets said uncertainty is gone. Herefore income earning assets go straight up. This is just a classic case. I ran into it many times in the sense that choices that we had were always, do you want the market to know exactly what the plans of the Federal Reserve are or not . It depended on a very, very technically difficult problem. How much risk do you want in the system . If there is too little risk, youre bubble creating. If theres too much risk, youre suppressing growth eyond what it should be. Part of Federal Reserve policy at any particular point in time is trying to make a judgment of what type of level of risk you want in the system, and so what e often did, as you know, is change, change, change, and the markets did not respond in any of those. Of course, it knew exactly what we were doing and why we were doing it. Other times, we would go up 50, 75 basis point and shock the market. Why . Because wanted to change. That 2004 to 2006 period is actually criticized now as being one that created potential bubbles in that it was too regular a rate increase and something the current Federal Reserve has said were not following this. Was that a mistake you think to have gone in that regular fashion . It depends on how you examine it, the conclusion you come to as to why the crisis occurred. Have er, bubbles, per se, not been toxic. We went into the 2000 bubble, the market crashed. The people who were essentially hurt were those who were on the way up. But what was critical about the sort of dot com boom is that types of various financial intermediaries, which held the particular toxic assets, had very little leverage. And unless youve had debt, you cannot by definition default. If you cannot default or cannot create defaults, which is the basis of the problems that we ran into in 2008, so, for example, in 1987, we had no impact from the collapse in stock prices. In 2000 we had no impact. 1929, we had very significant impacts. Those two had in common, which were not in common with the other two, were the degree of leverage that the particular institutions broker loans for example were highly leveraged and subprime mortgages especially when they got into securities were highly leveraged. So its more the leverage issue than it is the issue of bubbles. Bubbles, per se, is not a pejorative term if i may put it that way. I want to ask just one more question about the current policy and Market Reaction and then move on to some of these other areas that we were going to talk about. Notice this morning the long end of the curve, 2. 25, basically unchanged, maybe even a little lower in yield on the 10year. It reminded me of the conundrum that you talked about. How much influence would you say now the fed has on the long end of the curve, which obviously matters, because those are the ones that are going to determine borrowing rates out of the real economy. Could you foresee a situation here where the fed raises rates on the shortened but the long end of the curve remains stable . Well, thats basically what happened to us in the period when i said were raising rates and the 10year note ought to go up. Why . Because it always did. But why the federal funds rate, which is the overnight rate should affect longterm rates was always the great mystery to me and still is. What is not a mystery to me is that longterm rates now in an International Market are essentially arbitraged. That the effect of longterm rates amongst many other countries tend to converge, and the reason is theyre arbitraged. But the impact between short and longterm rates is a whole different ball game. And so i think that the presumption youll get in the situation where interest on excess reserves or the federal funds rate or even the reverse repos, is going to significantly affect the longterm rate is not indicated by any Historical Data that im aware of. Do you care to share with us your forecast for the funds rate over the next couple years . I dont follow you. Would you care to share with us your forecast for the federal funds rate over the next couple years . What do you expect to happen . No, no. [laughter] alan, you know, i get paid to ask questions people say no to, so thats okay. Im good on that. Let me turn now to a broader question, which is none of this would matter a whole lot if we had strong growth out there. And yet growth has been, at best you could say anemic. Were lucky to eek out 2 growth. Whats holding back this economy . First of all, not only this economy, the globe. If you look at output per hour for example, which is the ical determine determinate of growth you will find the vast proportion of countries have under 1 in productivity growth over the ast five years on average. This includes virtually all of the basically all of the euro area, United States, canada. With very few exceptions all below 1 and averaging in many cases below 0. 5 and in some cases, which i think more for statistical reasons than economic reasons theyre showing fiveyear negative productivity. The question you have to ask, well why is this . If you go deeper into the data what do you take a look at the United States is perfectly typical as everybody else. What we have in this country is a very unusual and, fortunately, very unstable fiscal system. R fiscal system is driven by entitlements on the expenditure side and tax rate as always on he funds raising side. The entitlements are not affected by the level of Economic Activity. Its elderly, which has got nothing to do with what the economy is, how many people could become eligible for Social Security. And a whole series of other factors, which determine essentially what the entitlements are, i mean, for example, health costs have very little to do with what the economy is doing. So if you have a situation in which the entitlements are rising at 8 to 9 a year, and i might add parenthetically that it is in both republican and democratic administrations and, in fact, if you want to be exact with the numbers, the average rate of rise in republican administrations has been greater than the democrats. But this is very critical because at this rate of growth, entitlements could be funded only if the g. D. P. Growth rate is probably 3. 5 to 4 . Remember, these are not related issues. In other words, basically the economy does its thing. Entitlements does its thing. If they meet, all well and good. But if they dont, then you have a real problem. D what the issue is now is that the surge in entitlements gross, private savings, and the result of that is because gross domestic savings in total, which includes negative government, usually, and entitlements, have tended over the last 65 50 years as a percent of g. D. P. Have been remarkably stable. They go like this, which essentially comes down to the fact that a dollar increase in entitlements redeuces gross domestic savings by a dollar. But gross domestic savings is the major determinate of Capital Investment. Incidentally gross domestic savings plus the current account balance is equal to the borrowing from abroad is equal to gross domestic investment with a little statistical discrepancy in there. Gross domestic investment is a key factor in determining productivity growth. So let me recap, alan, just for a second. Youre saying if we save a lot, we invest a lot, if we invest a lot, were more productive. Correct. But since were not saving as much because were putting more stuff into entitlements, were investing less and our productivity is less. Perfect. Awesome. [laughter] and ive come back and i say weve got all this stuff around like this. People have a sense of Massive TechnologyTechnological Advancement out there. How can you say we are not more productive right now . Basically, because this is a ifferent type of effect. Remember when youre talking about lets say per capita income it depends basically on the number of hours worked or the number of hours its a per person thing. The issue of productivity is. Re output per hour more ial media stuff is direct consumption it does not improve productivity but it does create other values. Remember, when were in a market economy, we measure it only in terms of market values and market prices. Output. Output. Basically i can go out the door without my iphone. Youre getting so dependent on it. But that actually only marginally reduces the amount of hours and it doesnt get picked up in the statistics and there is a big dispute among people who are productivity experts. How to count this, this is a different type of value. Social media obviously have value and people pay money for it, but how should one measure that . That was always your metric, i remember. 19961997 you introduced me to this notion of the earnings forecast for ted companies suggested the need was out there for these things. Therefore, they must be productivity enhancing because we see the demand for it in the economy. Well, remember, at that time, it was information technology. Right, right. This was not social media. I mean, what you are looking at are very significant changes in values which do show up in output per hour. This is not. Part of that is, clearly, to the extent that that it cuts down the work day and, for example, i get more work done than e new technologies i could conceivably have gotten done with the 10 times as many people 20 years ago. Just for a measure in productivity a bit well, it is a definitional question. You have got to distinguish between what the economy is for. If youre going to measure as material well being food, clothing, standards of living, the old conventional stuff then all of the technical analyses that were done up through the year 2000 were unchanged over generations. This has created a very difficult measurement problem. There is no question social media obviously could create something. You have bob gordon whom you know from northwestern who points out, this is not a train. This is not equal to the innovation of electricity. Its not equal to the innovation of the car. It doesnt register. It just one of the really important ones was the telegraph. Right. I mean, it hugely altered. Broadly about lk the u. S. Economy and Global Economy and perhaps get more into fixing entitlements with the q a of the audience. Overall are you pessimistic about the outlook for u. S. Economic growth . Do you see it as a 2 economy over the next decade . Unless and until we rein in the rate of growth in entitlements, yes. Because the logic which you just went through has got to be broken and the only way you break it is, remember, we added 10 Percentage Points we moved 10 Percentage Points in of. From financing financing productive Capital Equipment to funding benefits. You cannot do that without a very significant impact. And were seeing it now. This is the reason everyone is looking at the data and saying we have to come to grips with entitlements, but entitlements are basically the third rail of american politics. You touch it and youre running for office, and you lose. I have to go there. Because this is why people hate economists, right . Ultimately in the utopian world you would have more of the entitlements geared toward productivity growth, right . That would solve some of the problems . Well, wait a second. No. It doesnt improve productivity growth. It is basically what we have to go back. Im sorry. What i meant was the growth of entitlements would be tied to the growth of productivity. Oh, yes, yes. That would solve it would well, you can be close just balance the budget. For example the reason a budget gets balanced back in the arlier years is 3, 4, 5 g. D. P. , but remember when Social Security began in 1935 , when Franklin Roosevelt signed on, it was a defined benefit program in which there were cash receipts scheduled to actuarially fits the same as in the private sector. We have now abandoned all pretense. You talk about the 1983 commission. We couldnt even get something as significant as lowering the retirement raising the because age longevity has gone so extraordinarily far since 1935. The only thing we could manage in 1983 is to get it in the next century. Now, politically, you got to see that thats what that was. Are this essures here system is so governed by getting these entitlements, once you get them, look at the word. Entitlements used to be something which the Founding Fathers talked about with respect to individual rights, liberty, freed osm the press. These are fiscal growth entitlements produced by whom . You cant answer that question very readily. Unless and until we get out of this cycle get out of the cycle and get back to 4 g. D. P. Growth, which implies significant rise in output per hour. Its the only way you can get there given the structure of our working age population and the very Large Population of beneficiaries. Thats the other thing we can talk about which is the other side of the growth equation is growth in hours worked. Could we enhance that by a smarter immigration policy and a smarter education policy . Well, yeah. I mean, my favorite problem before all of the immigration came up politically is i thought the h1b program is much too small. That is the program which enables peesm with special skills to come enables people with special skills to come into the United States and get a green card and the like. Every other major country looks to the quality of whom theyre inviting in, and were not doing that. Were restricting that very significantly. So the answer to your question is, yes. An increase in productivity would really if we want an increase in productivity would be to open that program up. Anyone with a ph. D in the physical sciences in the United States should be aloud to stay. Instead we kick them out. Why we do this is bizarre and beyond me. Tell me how Alan Greenspan listens to the current debate in the president ial arena on conomics and what do you hear . What makes you think i listen to it . Sorry for making a bad assumption. What you read about the president ial debate, which im sure you do, is there an intelligence debate going on . Is there a debate that is going to lead to i dont get paid to ask stupid questions which im sure i suppose this is right now. Im still looking. Yeah. Do you hear anything that gives you any sense of optimism on some of these issues youre talking about that theyre going to be addressed, or do you hear the opposite . I dont know look. Just on the basis of the type of facts which ive laid out, either i am wrong in my economic analysis, which i conceivably could be not easily but the point being that theoretically im either wrong in my implicit structure of how the economy functions, or im wrong in the implications. I have not seen anything i wrote a book three years ago, discussing exactly these issues. It is not something that all of a sudden has come out. I think that we need a fundamental change in culture and we did have i mean, Franklin Roosevelt created a major change in culture. Margaret thatcher did in britain. In fact, what is very interesting about it, is that culture is still there. The labor party when it came in ter thatcher did not change, what she changed, and obviously Ronald Reagan made a major impact. Both thatcher and reagan failed in the end because they couldnt control the budget. I mean, both ran up against very difficult problems. I shouldnt say they failed. But they didnt reach the goals that they were trying to reach. Were going to open it up in just one minute. I have one more question here, which is the markets got very excited and concerned this summer when it looked as if chinese growth was weakening. Or it finally realized chinese growth was weakening. How big a concern does china repres