The Daily Reckoning PRESENTS: Could America's job flight be a good sign? Alan Greenspan seems to think so...it's a sign of productivity, says the Fed Chairman. But beware: "Mr. Greenspan has come to see goodness in all manner of credit"...

One of the least absurd policy positions comes, astonishingly, from the White House, where President Bush believes that better primary education is the solution to the outsourcing menace. If Americans could spell better, and add and subtract correctly, they would be better prepared for jobs at Wal-Mart, we presume.

Alan 'Bubbles' Greenspan supported this view in recent remarks: "The capacity of workers, after being displaced, to find a new job that will eventually provide nearly comparable pay most often depends on the general knowledge of the worker and the ability of that individual to learn new skills," he said. And if they can't find work at the wages they demand, he seemed to want to add...it's their own damned fault.

The most popular view of outsourcing, among economists at least, is the Alfred E. Newman, "what, me worry?" approach. Don't fret, they say. We'll think of something...we always have. We're masters of innovation, after all.

Many economists - including Alan Greenspan himself - maintain that the lack of jobs is a sign of something good happening...like the putrid smell of a garbage pile...indicating that the little microbial recyclers are doing their job. "Productivity," they say, "accounts for most job losses, not outsourcing."

We can't seem to get a grip on the logic of it. Nor can we remember a time when productivity actually threw people out of work - except in individual industries at special moments. The invention of moveable type, the steam engine, electricity, telephones, gasoline motors, jet planes, post-it notes, screw-off caps on wine bottles - each increased productivity.

But did they cause generalized unemployment? Nope. Instead, increased productivity freed up resources for new projects...which sopped up workers almost immediately, at higher labor rates! We don't see that happening this time. Why? Greenspan does not even seem to ask the question. He finds the 'productivity' idea useful, so he sticks with it.

"Over the long sweep of American generations and waves of economic change," continued Greenspan the other day, "we simply have not experienced a net drain of jobs to advancing technology or to other nations." Could something be different this time? Could this be a kind of 'new era' in American economic history? The answer we give is 'yes'...but we will give it in a future essay. Here, our burden is must more modest...and our proof comes more readily to hand. For here, we argue only that America's leading economic policy makers are either rascals or numbskulls.

Major tops in the credit cycle seem to correspond with major bottoms in political economy, we conclude. From high offices all over the nation come the explanations, excuses, rationales, and obiter dicta; we don't know whether they are corrupt or merely stupid. But when the guardians of the public financial mores begin urging people to acts of recklessness, we cannot help but notice.

Buy more, says one Fed governor. Borrow more, says another. Don't worry about debt, interest rates or the loss of jobs, says the captain of them all. It is as though the National Council of Bishops had come out with a public statement urging wife swapping. The experience may not be unpleasant, but it is unseemly of them to say so.

"Go out and buy an SUV," urged Fed governor McTeer. We learned recently that 17 million people heeded his call, each year, for the last 4 years. Automotive News reports an estimate that nearly a third of people who walk into showrooms are now "upside down," owing more on their current vehicle than it is worth.

McTeer, Greenspan et al helped this binge and other borrowing by lowering interest rates down to Eisenhower-era levels. Even the mainstream media is beginning to catch on to the fact that E-Z credit is not always a blessing.

"Alan Greenspan is essentially lending money at a loss," began a surprising editorial in today's International Herald Tribune. "This cannot go on indefinitely, and it should not go on much longer...It increased corporate profits and prompted consumers to refinance their mortgages and to spend their way into plenty of other debt...Many homeowners, and consumers in general, are borrowing recklessly, betting that rising housing prices and easy credit are here to stay...Americans may be in for a rude shock when the real estate market levels offs, and when millions discover that the adjustable rates of their mortgages and other loans can be adjusted upward."

Directly and indirectly, many will have Greenspan to thank. The Fed chairman has an uncanny way of arriving at ideas...just at the exact moment when they can be of most benefit to his superiors - and his own career. To Greenspan the conservative economist, the stock market looked 'irrationally exuberant' in the mid-'90s, until a member of Congress pointed out to him that he would be better off keeping his mouth shut. A gold bug in the '70s...now Greenspan has become the biggest purveyor of paper money the world has ever seen. Similarly, large federal deficits seemed at odds with his creed...until it suited him to think otherwise.

And now, as the debts and deficits mount up, Greenspan undergoes another intellectual metamorphosis. An article in the NY Times explains:

"Many mainstream economists are worried about these trends, but Alan Greenspan, arguably the most powerful and influential economist in the land, is not as concerned.

"In speeches and testimony, Mr. Greenspan, chairman of the Federal Reserve Board, is piecing together a theory about debt that departs from traditional views and even from fears he has himself expressed in the past.

"In the 1990's, Mr. Greenspan implored President Bill Clinton to lower the budget deficit and tacitly condoned tax increases in doing so. Today, with the deficit heading toward a record of $500 billion, he warns more emphatically about the risks of raising taxes than about shortfalls over the next few years.

"Mr. Greenspan's thesis, which is not accepted by all traditional economists, is that increases in personal wealth and the growing sophistication of financial markets have allowed Americans - individually and as a nation - to borrow much more today than might have seemed manageable 20 years ago."

And here, dear reader, is the money paragraph:

"This view is good news for President Bush's re-election prospects. It increases the likelihood that the Federal Reserve will keep short-term interest rates low. And it could defuse Democratic criticism that the White House has added greatly to the nation's record indebtedness."

Out of convenience, rather than ideology, Mr. Greenspan has come to see goodness in all manner of credit. Lately, he has praised lending to 'subprime' borrowers...and applauded homeowners for switching to adjustable rate mortgages. Debt levels have risen from $54,000 for the average family in 1990 to $79,000 last year. Mortgage foreclosure rates, personal bankruptcies and credit card delinquencies have been rising steadily and are at record levels.

But none of this seems to bother the chief of America's central bank.

Regards,

Bill Bonner
The Daily Reckoning
www.dailyreckoning.com

Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the international bestseller: Financial Reckoning Day: Surviving The Soft Depression of The 21st Century (John Wiley & Sons). See: 'The best investment book I have ever read...' - (www.agora-inc.com/reports/RCKN/FDR/)