Dave: How are you today, Dr. Batra?
Dr. Batra: I am fine Thank you
Dave: I want to start out by talking about the history of Allen Greenspan, prior to him becoming the chairman of the Federal Reserve. How did Greenspan obtain this powerful position?
Dr. Batra: Greenspan had a great friendship with some people that were at the White House, people that were highly placed. He himself did not have great credentials in Economics, but he was a good friend with Arthur Burns, who was Fed Chairman in the 1970s. Burns wanted Greenspan to become the Chairman of Economic Advisors. He recommended his name to President Ford in1974, and as a result he was appointed to the CEA as Chairman. At that time Greenspan did not even have a PhD in Economics. He has his Masters in Economics, but not his PhD. Nor had he written any path breaking articles in Economics, which was read by his peers or sited by his peers or so on. He did not have much in the form of economical credentials when it came down to it, but he became one of the top economists of the world. Being the CEA chairman got him recognition. Also, this is a position that is normally held by prominent and star economics.
Dave: Interesting. How did he meet Arthur Burns who was instrumental to his success?
Dr. Batra: Arthur Burns was once a professor at Columbia University in the early 1950s. Greenspan attended Columbia to do his PhD, and met Burns there. He spent two years trying to finish his PhD in Columbia , but then he dropped out of school for financial reasons. He never finished his PhD there, but he did have commonality of interest with Arthur Burns. Greenspan was against Keynesian Economics, and so was Arthur Burns, so the two had common views and they became great friends. In fact, Greenspan even loaned money to Burns to buy a home in Washington DC . They were very close to each other, but that was all Greenspan had in terms of credentials. Those credentials were efficient enough for him to become the CEA chairman. Once he became the CEA chairman in 1974, he became friends with many other people at the White House which eventually helped him become the Fed Chairman in 1987.
Dave: In your book, Greenspan’s Fraud, you go into the underpinnings of Greenspan’s economic philosophy. Two names stood out to me: the first one being Jeremy Bentham, and the second one being Ayn Rand. Let’s talk a little bit about Jeremy Bentham and who he is.
Dr.Batra: Jeremy Bentham is a philosopher from the 18th century. His philosophy is that people are highly calculating in their motives and actions. They calculate the profit and loss, utility and disutility of everything they do. Based on those calculations, their actions occur. He did not pay much attention to emotions or trying to do good to others. These kinds of motives are not important in human action. What is most important is the calculating nature. Bentham had a great influence on Greenspan. I sited him extensively in the book to show that Greenspan also developed a calculating nature. It shows when he became a businessman, to becoming an economic advisor to President Reagan, and then when he became the Fed Chairman, and so on.
Dave: OK, Bentham promotes a concept called hedonic calculus, what exactly is this?
Dr.Batra: That is exactly what it is. That human beings have a calculating nature, they make sure to calculate the profit and loss from the facts of every action. It is done in a totally rational way, with no emotion involved. In Bentham’s hedonic calculus, there is no scope for love of any sort. These are all calculations that motivate people in their actions.
Dave: Moving on to Ayn Rand. Rand ’s philosophy seems similar to Bentham’s. How specifically did Rand influence Greenspan?
Dr.Batra: Yes, she taught the same philosophy also. Her philosophy has commonalities to Bentham. Bentham use to say that people are selfish. Rand taught that people should be selfish to make sure social welfare is maximized resulting in a society with high living standard. Bentham said that people are by nature selfish, and Rand said that people should be selfish, so you can see they have a lot in common that is why Greenspan was much attracted to Ayn Rand as well.
Dave: I know there are some difference between the two, where Ayn Rand taught something called Ethical Egoism, and Bentham promoted Psychological Egoism. Can you explain the difference between the two?
Dr.Batra: Well with that said, Bentham is looking at human psychology. The psychology to him is that everyone is selfish and wants to follow action based fully on calculations from profit and loss. Where as Ayn Rand is saying that capitalism has a higher moral effect which is better for society, which is why everyone should be selfish. If everyone acted in his or her self interest, then we will meet our highest productivity in the economy. So Rand is talking from the ethical viewpoint in saying capitalism is moral and ethical, because acting selfishly will lead to moral good.
Dave: I know that Greenspan became part of Rand ’s inner circle, is that correct?
Dr.Batra: Yes, he taught something to Ayn Rand, and Rand taught things to him. Some of the things are shocking to me. Rand at one time denounced President John F Kennedy for being a facist dictator. She compared Kennedy to Hitler and Mussolini. Some of those things were extremely shocking to me, but I am not surprised.
Dave: Wow, that’s radical. Was there a romantic component to Greenspan’s relationship with Rand ?
Dr.Batra: No, not to my knowledge, but they did share ideas because they had a lot of common ideas. Greenspan helped her write a novel called “Atlas Shrugged.” In that novel, someone robs the poor and rewards the rich, and Greenspan thought that that was a great example of social justice. He called it unrelenting justice and I pointed out that this is the kind of concept that he later applied to our tax system.
Dave: That’s unusual to say the least. I know you mentioned in the book, two types of fraud that you believe Greenspan committed; financial fraud, and intellectual fraud. Can we talk about the financial fraud that you believe Greenspan is guilty of?
Dr.Batra: The financial fraud is actually very serious fraud. It has resulted in almost $2 trillion worth of wastage as far as the average taxpayer is concerned. What happened was that in 1981, the income tax was sharply reduced, and as a result the government deficit went up sharply. At that time, high budget deficits created very high interest rates. As a result, America had the worst recession since the 1930s. So the problem was this huge budget deficit that it had to come down. Meanwhile, Greenspan had been appointed to bring some reform to the social security system which itself did not have much of a deficit. Greenspan came up with a theory that the system would run out of money in 50 to 60 years and so we should raise sales taxes even more than they had been raised before, we should raise payroll taxes sharply, create a surplus to the trust fund, so that would guaranty future benefits. This is the promise Greenspan gave to the public and then he was able to persuade Congress to adopt this scheme but since there was no money since the government was already in a deficit, there was no way the surplus would survive in the trust fund. And Greenspan knew that in fact his intent was not to create a surplus in the trust fund but to raise money for the government, that is exactly what happened in 1984 when the surplus began to arrive all that money had been used up by the government in its own expenses, that is in massive social security fraud because the very intent of that legislation was not to create a surplus for the people, but to raise money for the government and it’s own operating expense.
Dave: OK, let’s move onto what intellectual fraud you believe Greenspan is guilty of committing.
Dr. Batra: In addition to financial fraud, Greenspan also has committed an intellectual fraud, which occurs when a person changes his or her theory in their self interest. I think Greenspan has done that constantly so that he can remain as the Chairman of the Federal Reserve and be appointed again and again. A very simple example is when Jimmy Carter was president, Greenspan opposed a cut in the income tax. Under Reagan, Greenspan supported an income tax. Then Clinton came along, and Greenspan opposed a cut in the income tax, then bush came along and Greenspan supported the cut in income taxes. So he has been changing his theories with the changing of the guard at the White House. There were times where he did not go along with the White House. For instance, in the case of Bush Sr. he was not friendly with him as he was Wall Street. He followed policies that made Wall Street more happy and comfortable, because then Wall Street became a key to his reappointment. So he has been changing his theories and ideas constantly to be reappointed as the Federal Reserve, and why not, his position is one of the most powerful in the world.
Dave: Perhaps these changes in philosophy are based on new information. There is nothing wrong with changing your viewpoint when provided with new information.
Dr.Batra: He may believe this, and there is nothing wrong it. There is nothing wrong with changing your theories when you do come across new information. But look at what Greenspan did in the late 70s. He said we must oppose a cut in income taxes, because it would create a budge deficit and raise inflation. Then Reagan came along and he said we must cut the income tax to fight inflation. How could the same policy achieve two opposite results? Reagan wanted a cut in income tax and Greenspan wanted to be cozy with Reagan so that he could get a higher government position late on. He provided the rational for Reagan’s position. Then when the budget deficit came up sharply, he came up with the scheme that raising social securities tax was to bring down the deficit and reduce interest rates and so on. That is his intellectual fraud.
Dave: Moving on, here is something I found very interesting in your book. The theory that having a minimum wage does not create unemployment but actually a minimum wage helps employment. . This seems counter-intuitive to me. Please explain your position on this issue.
Dr.Batra: Sure, there are a lot of problems with the idea that not having a minimum wage creates employment. I know it is an accepted idea but it is not supported by history, and I can also show that it is not supported by logic. Every producer has to sell their product. If wages are kept very low, there has to be a connection between wages and productivity because productivity is the source of supply for the producer. If productivity is high, supply will be very high. But wages are the source of demand. So if there is a big difference between wages and productivity, demand will not be enough to absorb the entire supply, and if demand is not enough, then the producer does not make any profit. The goods have to be sold before the company can recognize any profits.
Dave: Let me see if I follow your logic. Your concept is that if a worker is not being paid enough, he would not be able to purchase the product created by the producer?
Dr.Batra: Exactly, it is the working class that buys the products of the producer. The producer is not making goods for their own consumption, but instead for workers. If workers are paid very low wages, then products will, not be sold and the producer can not realize any profit. The idea of minimum wage is that it brings the wage level close to productivity. If the minimum wage is above productivity, then it would certainly hurt the economy. It should be fairly blow productivity, the average product of the worker. History will find that the minimum wage slightly raised the wage rate closer to productivity. As a result, demand went up. When demand went up the producers sold more goods, in fact their products were realized. So rising minimum wage increased output, production went up, and employment went up also.
Dave: That does make some sense, but, myself being trained in classical liberal economic theory, this immediately comes to mind: are you not leaving out the other forms of income, such as investment income used to purchase products?
Dr.Batra: There are other forms of income, but they are a fraction of the wage income. The main form of income in America and other advances economies are wages. Like 65-70% of income comes from wages. Investment income and rental income assets or even farm income make up the rest of the 30%. Wages have to be sufficiently higher. I am not saying that they have to be so high that they exceed productivity. They should always be below productivity, but the minimum wage in the United States has never been that high where that has happened. That is the theory, let’s explore some of history as well. In history, we find that the highest minimum wage in terms of the purchasing power occurred at the end of the 60s. At that time, the purchasing power in terms of today’s prices was about $8 per hour. Today the minimum wage is $5.15 per hour, and back then it was $8 per hour. Take a look at the unemployment rate at that time, it was just 3.5%. So we had the lowest post World War II employment rate in 1968 and 1969, when we had the highest minimum wage. Also, another historical data I show in the book is that the minimum wage went up about 17 times from 1950 to 1997. Each time it went up to catch up to rising prices, so between that time, every time minimum wage went up employment would go up within one year, and it never went down. Again, the theory is that rising minimum wage creates increased consumer demand, so with the higher consumer demand, the producer sells more, and when they are selling more they hire new people. The theory and history both support the idea.
Dave: Let’s move on to some of the global crisis’s that Greenspan was involved with, starting with the Mexico ’s crisis of 1994 when the peso collapsed and also the NAFTA situation there. Can you fill our readers in on how Greenspan was involved?
Dr.Batra: Greenspan followed a type of methodology that he learned from the stock market crash of 1987. He was faced with the situation, which he was not expecting at all. What he did was sharply lower the interest rate to expand the money supply quickly, and told banks around the world to lend money to brokers and stock markets. The result was that the crisis was stopped in its tracks and it did not spread. So Greenspan learned at that time that whenever there is a crash, or a crisis, the best thing to do is bring interest rates down and create liquidity to promote more lending in the economy. Soon after the crisis passed away, Greenspan realized that rates ere too low, so he raised them back in 1988. That is exactly why he came into a sort of clash between himself and George Bush. The next crisis after the 1987 crash was the Mexican peso crisis starting in late 1994 lasting until 1995. In this case a foreign country was involved, so increasing loans and lending to borrowers in the US was of no help. He persuaded the IMF to loan money to Mexico . Clinton ’s presidency was on the line at that time because both Clinton and Greenspan had supported NAFTA, which had gone into effect at the start of 1994. NAFTA, which stands for North American Free Trade Agreement, was passed in 1993 so Mexico , America , and Canada could reduce tariffs on each other’s products and ease regulations on capital flows. In late 1994, the peso went down sharply and people associated that decrease to NAFTA, so both Clinton’s and Greenspan’s credibility was on the line. They both swung into action by bringing IMF into the situation and loaned a lot of money to Mexico to avert the crisis. Interest rates had also come down, but later Greenspan raised them, following his old method he learned in 1987.
Dave: How about the Asian Crisis when the Bhat collapsed in 1997. Did Greenspan apply these same ideas?
Dr. Batra: Yes, again, the same type of currency crisis was occurring which started because Greenspan insisted on financial deregulation around the world. To Greenspan free trade not only means removal of tariffs but also the removal of capital control around the world. Once capital controls were lifted people started taking a lot of risks in the Asian markets and markets of Africa and so on. Once you speculate a lot, the speculation can backfire and there is a crisis. So the Asian crisis of 1997 started from excess speculation of currencies. Greenspan himself was partly responsible for this crisis, and he needed to do something to protect the system from the effect. So he followed the same learned policy of the Mexican crisis. He persuaded the IMF to lend money to a lot of countries this time. It wasn’t just Thailand . Money was loaned to the Philippines , Indonesia , South Korea , and even Brazil later on. The crisis spread and it was worse than the Mexican crisis, but he followed the same methodology by cutting interest rates and lending money to the countries in this case and then bringing back the rate after the crisis.
Dave: Obviously his techniques worked. This is a good thing, what’s wrong with how Greenspan handled these situations?
Dr.Batra: It did seem to have worked. But it created a lot of problems for the future. Investors around the world realize that anytime there is a stock market crisis, Greenspan is going to come back and intervene, so they become fearless and are not afraid to take the risks anymore, thinking whenever there is a problem, Greenspan will come to bail them out. So there is an increasing amount of risk which perpetuated the stock market bubble from 1997 to 2000. This bubble was so powerful that it continued to expand for three years. It was so powerful that NASDAQ stocks continued to gain 9% per month. The stock index in 1999 went up 9% per month. Greenspan’s policies created this reckless investing policy around the world. Greenspan had cut interest rates sharply in 1988 to avoid the aftereffects of the Russian default. If you recall Russia had defaulted on its foreign debt. What I am trying to say is that these crisis’s are brought upon by Greenspan’s inspired policy of global financial deregulation, and not free trade.
Dave: Global deregulation and free trade? Are they not the same thing? Please explain the difference.
Dr.Batra: Well, free trade historically meant the removal of tariffs of imported goods. That is how Adam Smith argued, that is how economists looked at it. There was a small fringe of economics that argued in favor of lifting controls of capital movement from one country to another. However, was very small and not much attention was paid to this idea. Greenspan made another idea popular, which was to not only remove tariffs, but also lifting controls of capital from one country to another. His idea of globalization is far reaching. It was his policy of financial regulation that encouraged speculation and then created these currency problems. To solve these crisis’s he would need to hop from one to another, bring interest rates down, encourage IMF lending, then raise interest rates back to their old levels. In 1999, Greenspan started to do what he hand done in the past. First he had brought interest rates down, and now it is time to move it back to the former level. He forgot, that by 1999, we were in the middle of a horrendous bubble. He began to continue to follow his old habits since he thought the crisis had passed. If he had just looked at Japan ’s history in 1989- 90 they had a bubble as well. If he has looked at their history he would not have raised rates in 1999. But he started to do that and kept raising rates until the middle of 2000.
Dave: Well, let’s assume he did not raise rates. What would have happened with the Dot Com bubble and what else could have he done?
Dr.Batra: He had created the problem, so he could have followed other methods to control the speculation. Things like controlling margin requirements and so on were options. But when you raise interest rates it not only has an effect on the stock market but it also has an effect on the rest of the economy. So as he rose rates consumer demand did not grow as fast as was expected by these dot com companies, high tech companies, and telecommunication companies. Demand growth slowed down, and as a result supply began to exceed demand and profits began to fall. As profits fell, everyone was so shocked since it was unexpected, that soon later the stock market crashed.
Dave: Lets move on to another idea in your book. You have a theory that high income taxes are synonymous with high growth. This seems bizarre and nonsensical. I would think the exact opposite is the case.
Dr.Batra: That’s right, you think it is opposite because you pay attention to only supply. The economies are run by two forces, demand and supply and if the economy is to grow year after year at a high pace without creating a bubble, then both demand and supply need to rise proportionally to each other. We had high growth when income tax was high, but other taxes were low. This is actually very important because you can’t have high taxes all around. If you have high taxes all around that will cripple growth. What we had in the 50s and 60s was a high income tax rate but the social security tax, sales tax, and gasoline tax were extremely low, being around just 2-3%. But the income tax rate was between 70-90%, yet we had the highest growth rates after the second war. The reason why growth rates were so high was because of the low taxation of the middle to lower class, demand growth was very high. Consumer demand comes from low taxation of the middle class, and when demand growth is high investments stay high even though taxes are high on top incomes. Remember the producers want to sell their goods, and when sales are brisk and strong they automatically expand their business to take advantage of those sales. After all, we all in economics believe that every producer wants to maximize profits. Profits are maximized only when sales are brisk. When sales are brisk, automatically sales advance without any tax incentives even when sales tax is high. The moral of history and logical economic theory is that taxes should be low on the middle class and the destitute, and taxes on the upper class doesn’t really matter. But since somebody has to pay for government services, then taxes should be as I stated. Taxes on the wealthy should be depending on how much the government wants to spend. It so happens that the government has been trying to spend a lot of money, so there should be a very high income tax rate, but low taxes on the lower class, which is what worked very nicely in the 50s and 60s. But from 1981 on we have been decreasing income taxes sharply but increasing social security to make up for lost revenue, gasoline taxes have also risen sharply, and the result is that economic growth has been falling ever since 1981.
Dave: Well, that is debatable. Let’s move on to what you see as solutions to the policies Greenspan has put into effect.
Dr.Batra: The short term solution we see right now has resulted from Greenspan’s policy of financial deregulation which made it easy for the rest of the world to invest money into the United States . But as a result of that ease we now have a huge trade deficit, even a rising trade deficit. Greenspan and some others think that the trade deficits no longer matter anymore because the rest of the world in their self-interest is going to finance it, and that perhaps is true. But even then the rising deficit hurts our economy sharply because it kills our manufacturing business and employment. Service jobs pay high wages to doctors, attorneys, engineers, and highly educated people, but for the vast majority of workers who only have high school diplomas, wages only come from manufacturing. So if manufacturing goes down, then the vast majority of people lose wages.
Dave: Reviving manufacturing? Isn’t that taking a big step backwards? We are in an information economy at this time, shouldn't be educating our former manufacturing workers to function in the new economy?
Dr. Batra: We need to revive our manufacturing business to revive our living standard, which is the real wage of the vast majority of Americans which is about 75% of Americans. So if we revive manufacturing, then we will improve the living standard in the United States otherwise it will continue to go down as it has, and it will continue to go down in the future. So how do we cut the trade deficit? Some people have talked about forcing China or Japan to revalue its currency, and that is partly right. There are two causes: the cheap currency that comes from Asian countries, and the other is that our manufacturing business is totally demolished. If you do not produce much at home, what are you going to export in the end? So this problem is a serious problem and complicated, but there is a simple solution even at this time. Looking at these Asian countries, we see there are two advantages they have over us. They have cheap labor and they also have a cheap currency. There is nothing we can or should do about cheap labor, but we can certainly neutralize their advantage in terms of the cheap currency. They are keeping their currency value artificially low, but exchange rates are two way streets. If they can set an exchange rate on us, then we can set an exchange rate on them unilaterally without depending on what they do without respect to their currency. This is permitted because of the free trade rules, and the entire world is doing it except us. China , for instance, sets its Yuan to, I believe 8.281 to the dollar. We can turn around and simply set our dollar to 5 Yuan to the dollar. We will apply this to only our exports and to no other international transaction. What does this do? A Chinese importer right now has to pay 8 Yuan to get 1 dollar. He will instead come to the Fed and pay 5 Yuan to get 1 dollar and he will import a lot of American goods because prices drop by almost 40-45%. A small fall in our prices to the Chinese or a small rise in the prices of Chinese goods is not going to help our trade deficit at all because we barely make anything in this country, and Chinese prices are very low already. So if we follow these policies and reduce our export prices by 40-45% the Chinese will buy a lot more from us but we will not buy less from them. Because Wal-Mart can still go to the Central Bank of China , give them 1 dollar, and get 8 Yuan. So the Chinese prices will not rise to us, our prices will sharply fall to the Chinese, so this process is not even inflationary. This can be done unilaterally, and even China would be happy to see it because they would then no longer be under pressure to revalue their currency and raise their export prices.
Dave: You mention something called mass capitalism in the book. What is it and is it a long term solution to Greenspan’s policies?
Dr.Batra: Yes, the problems in the rest of the world arise because wages are not keeping up with rising productivity. Productivity is rising because of the Internet revolution, and computer revolution but wages simply are not keeping up. As I said earlier, productivity is the main source of supply, and wages are the main source of demand. The result of this is that the government keeps following expansionary policies by borrowing money to keep up demand, and lowering interest rates so people can borrow money to keep up demand. All this demand creation is done by the creation of debt. Debt creation is necessary only because wages are lagging the productivity. So the long term solution is that we should have this mass capitalism in which the majority shares of big companies are owned by workers themselves. The workers then elect governing boards for each company. The governing board then regulates things like making sure the CEO’s salary does not rise so much, and worker salary does not lag productivity. When we create this mass capitalism, or economic democracy if you will, then wages will keep up with productivity. When that happens, we will not need expansionary or fiscal policy to solve the problem of insufficient demand.
Dave: Whoa, Doctor! Power to the Proletariat? This sounds like a new age form of socialism. Are you advocating socialism as a solution?!
Dr.Batra: Not at all. In socialism, the means of production are owned by the government. Where as in mass capitalism, means are owned by the vast majority of people. It is the ideal form of capitalism and far from socialism. In this kind of system you will have the minimum economic problem, and you will not have inflations, recessions and stock market bubbles because wages keep up with productivity, demand keeps up with supply, and when demand and supply are in balance, there are no economic troubles.
Dave: Let’s step back to Greenspan. Is Fed Chairman a lifetime appointment?
Dr.Batra: No, Greenspan has to retire by 2008. Some people say that he will retire in 2006, and perhaps under some rules he should do so. But there is a catch, if President Bush does not nominate anyone else to replace Greenspan, then he can stay on until 2008. However after that he does have to leave.
Dave: Do you foresee any particular person taking his place?
Dr.Batra: I think some names surfacing are Glen Hubbard, Ben Bernanke who is currently the chairman of the CEA, Martin Fairstein is another name that comes up. I think these people are all just Greenspan’s clones so it really will not make a difference. Likely, they will not be able to do as much damage as Greenspan has done in the past, because the damage is already done. What we have to do is undo his policies, and none of these three whose names are mentioned frequently would do that.
Dave: Unfortunately, we are out of time. Is there anything you would like to leave our readers with today?
Dr.Batra: Yes, what I am trying to say in Greenspan’s fraud is that the problems are complicated, and society is polarized now, and the living standard is going down. There is one solution that we can follow right away without hurting anybody else, and that is to follow the policy of dual exchange rate where we set lower exchange rates for our exports into Asia . This very simple mean can solve a lot of problems.
Dave: Thank you for joining me today, Dr. Batra.
Dr.Batra: I appreciate the time, Dave.