Greenspan at the Adam Smith Memorial Lecture, February 6, Kirkaldy, Scotland

Alan Greenspan followed his dollar-supporting London speech on February 4 with an important, though lower key lecture on Superbowl Sunday. (http://www.federalreserve.gov/board/Docs/speeches/2005/20050206/default.htm)

The following wry remarks show Greenspan's respect and affinity for Gordon Brown, Chancellor of the Exchequer:

Kirkaldy--the birthplace, in 1723, of Adam Smith and, by extension, of modern economics--is also, of course, where your Chancellor of the Exchequer was reared. I am led to ponder to what extent the Chancellor's renowned economic and financial skills are the result of exposure to the subliminal intellect-enhancing emanations of this area. . .

Starting in the 1970s, American Presidents, supported by bipartisan majorities it the Congress, deregulated large segments of America's transportation, communications, energy, and financial services industries. Similar initiatives were advanced in Britain and elsewhere. The stated purpose was to enhance competition, which following Adam Smith was increasingly seen as a significant spur to the growth of productivity and standards of living. The slow, but persistent, lowering of barriers to cross-border trade and finance assisted in the dismantling of economic rigidities.

By the 1980s, the success of that strategy in the United States confirmed the earlier views that a loosening of regulatory restraint on business would improve the flexibility of our economies. Flexibility implies a faster response to shocks, a correspondingly greater ability to absorb the downside consequences, and a quicker recovery in their aftermath. Enhanced flexibility has the advantage of enabling market economies to adjust automatically and not having to rest on policymakers' initiatives, which often come too late or are misguided. Such views, which echo Jean Baptiste Say in some ways, clearly have been paramount in a renewed twenty-first century appreciation of Adam Smith's contributions.

My Analysis

The first remark is praise. Simple enough.

The second is less obvious, but the word "flexibility" is nuanced. Chancellor Brown is encouraging the UK to join the European Union, an "irreversible" decision, provided the economics are right. Since 1997, the government has set 5 tests that must be met to show the economic case for joining is clear and unambiguous. One of these tests (the second) is "flexibility."

Greenspan points out that "flexibility" has been brought about in America by deregulation and by "slow, but persistent, lowering of barriers to cross-border trade and finance." He also mentions that such views echo Jean Baptiste Say--a Frenchman. I don't know if I'm reading too much into it, but it seems to me that he hints that too much government regulation in the UK has been the problem and that a French economist from the early 19th century who in effect disagreed with Lord Keynes got it right after all. A gentle and humorous chiding, perhaps?

For more on the 5 tests, see the following link:

http://www.hm-treasury.gov.uk/documents/the_euro/assessment/report/euro_assess03_repindex.cfm