A Crash Course in Greenspan's Record
Houston Chronicle, January 7, 2000
Sacramento Bee, January 7, 2000
President Clinton's decision to nominate Alan Greenspan for another four-year term as chairman of the Federal Reserve has been greeted by almost unanimous approval from the press, major presidential candidates and politicians generally.
With unemployment at a 30-year low and the American economy still riding its longest peacetime business cycle expansion ever, it is understandable that Greenspan's reappointment would be easy. But the blind celebration that has accompanied the president's decision, and the uncritical evaluation of Greenspan's record, do the public a disservice.
Most of the lavish praise in which Greenspan has bathed this week, even as the stock market plummeted, has been based upon his last four and one-half years. But he has been at the helm for more than 12 years. There are undoubtedly millions of students who would like to be evaluated that way: Take the best, ignore the rest. Why not look at his entire performance?
Our last recession had Greenspan's fingerprints all over it. The Federal Reserve, under his leadership, jacked up short-term interest rates to 10 percent in 1989. Although the Fed began to lower them again as the economy started to slow, it was too little and too late. The economy lapsed into a recession in July 1990.
This is a major screw-up for a central banker. If we are to borrow the most common analogy in the business press, of bringing the economy in for a "soft landing," this is like a pilot crashing a 747. Even if the crew and the first-class passengers manage to survive, it seems strange to just erase the event from the pilot's record.
Greenspan came perilously close to another crash in 1995. Beginning in February 1994, the Fed doubled short-term interest rates. This series of seven rate increases was especially unnecessary, with inflation running at a low 2.7 percent annual rate. The U.S. economy slowed to a crawl - 0.6 percent for the first half of 1995 - before taking off again. (The Mexicans were not so lucky - the sharp increase in U.S. interest rates drew an enormous amount of capital out of their country, precipitating the peso crisis and the deep recession that followed.)
It is only for the last four and one-half years of his tenure that Greenspan could reasonably expect to earn a good grade. It was about then that the Fed decided to abandon the belief that unemployment could not go below 6 percent without setting off a spiral of inflation. This is probably the most important economic policy change that the country has seen in decades. Compared to the economy that we would have had, if the Fed had continued along its previous path, we have about 4 million more jobs and more than a trillion dollars of additional income.
But it seems overly generous to credit Greenspan with brilliance for this decision, without even mentioning the years of unnecessary unemployment and slow growth that the Fed had caused previously. It is true that the majority of economists also held to the belief that 6 percent unemployment was as good as it could get. But Greenspan has his own Ph.D. in economics, and by his own admission, loves to immerse himself in the data. He could have evaluated the evidence presented by a minority of economists, who for years had demonstrated that there was no evidence to support the Fed's operating theory.
Even in the last few years, Greenspan's record has been spotted with some unpleasant reminders of his past. In March 1997 the Fed raised interest rates unnecessarily, and it appears that public criticism prevented him following up with more rate hikes. And in the last year, with inflation at low levels and showing no obvious signs of accelerating, he has already raised interest rates three times. And therein lies the real danger of glossing over the record.
The blind praise and adulation, the one-sided portrayal of Greenspan's career as a string of unmitigated successes, will only encourage more reckless and unnecessary rate increases. It is of no great consequence if Greenspan is more admired than he should be: And by all means, praise him to the heavens when he does something right. But he is currently in the midst of another attempt to slow down the economy, when - with inflation running at 2.6 percent - there are no signs that it is necessary to do so.
If the Fed's rate hikes end up killing this expansion, we will all be sorry that our politicians and pundits didn't give us a more balanced view of Greenspan's record.