Maestro: Greenspan’s Fed and the American Boom
Greenspan: The Man Behind Money
When George W. Bush signed the $1.35 trillion federal tax cut in June, it marked the culmination of one of the more unlikely legislative victories of our time. Bush’s original tax reduction proposal was generally regarded as a political error when it was made during last year’s presidential primaries. Designed to check the advance of Steve Forbes, Bush’s conservative rival for the Republican nomination, it seemed likely to prove a political liability in the presidential campaign. Surveys suggested Americans did not regard tax cuts as having high priority, and many if not most Americans believed that balanced federal budgets had been important in providing the economic boom of the mid-1990s. Despite forecasts of fiscal surpluses to come, a large tax cut would, if anything went wrong, undermine such fiscal responsibility. The outsize benefits of the tax cut to the nation’s richest people were an easy target for criticism. As the centerpiece of Bush’s election campaign, it was not able to bring him a majority of the popular vote.
But in January, Alan Greenspan, chairman of the the nation’s central bank, publicly supported the tax cut. Such was the prestige of the man at this point that, in my view, his comments were decisive. Greenspan seemed to embody the spirit of the 1990s. He was not only the leading exponent of fiscal probity, his measured, even lugubrious public demeanor also visibly projected it. He raised interest rates to controversial heights early in the 1990s out of fear that inflation would be rekindled. But by the mid-1990s, he was willing to cut interest rates to support economic growth at a time when many of his like-minded colleagues would have done otherwise. Inflation did not return, as many feared, and this longstanding Republican economist, first appointed by President Reagan and reappointed by President Bush as well as President Clinton, became the hero of both worker and investor alike. The unemployment rate plunged and stock prices soared.
Had Greenspan opposed or even expressed skepticism about Bush’s tax cut, it would have no doubt had a much rougher passage. The weakening economy, whose rate of growth slowed markedly in late 2000, increasingly justified at least a short-term fiscal stimulus, and President Bush won support for his plan by exploiting the economy’s slowdown. But without Greenspan’s public support, any tax cut would have surely been substantially smaller and open to more restrictive amendments. It might not have passed at all.
Greenspan’s stand, however, may have also marked the beginning of his decline as public icon and infallible hero. If he were consistent with his past comments, his first concern should have been to use any fiscal surpluses to pay down the national debt, not cut taxes. Instead, he put forward a peculiar justification for his support of Bush’s plan, claiming that these surpluses would accumulate so rapidly that the federal government would be forced to acquire private assets, such as stocks and corporate bonds. This, Greenspan said, the nation could not abide. A former Clinton aide, Gene Sperling, correctly called the argument “painfully strained.”
Greenspan was sensitive to the subsequent criticism that his decision was a political one and he went on something of a public relations campaign to assert that he had long favored tax cuts, so long as the national debt was also paid down.1 But the economy was now visibly slipping and the Nasdaq stock average, dominated by high-technology stocks, had plunged to a level 60 percent below its high in 2000. Greenspan had been among the most ardent champions of a “New Economy” sustained by information technology, but such optimistic pronouncements were looking feeble. Greenspan’s strategy for managing interest rates was increasingly criticized: he should not have raised them in the spring of 2000, many argued, and he waited too long to cut them, even as the economy was weakening rapidly. When the Federal Reserve did finally start to cut them, they acted without warning, and so boldly that some criticized the move as “panic monetary policy” which only served to frighten the nation all the more.
But if Greenspan’s infallibility as economic manager was always to some degree myth, his part in the tax-cut debate was disturbing. How did an unelected official acquire so much power over the nation’s most important legislation? Why did he seem so insensitive about intervening in public debate? The tax cut signed this June by President Bush does not simply reflect America’s fiscal policies. It will in large part define the kind of nation we will have. If it is not changed significantly it could severely limit the uses of government over the next ten years.
More than almost anyone else, Greenspan knows that the future budget surpluses projected by the Congressional Budget Office are tentative. They depend on sustained economic growth at a fairly robust pace. Greenspan has since suggested that the tax cuts should be put into effect only if the projected budget surpluses do in fact materialize. But the tax cut is now law, and no such conditions are specified in the legislation. If the economy does not grow as expected, the nation will have to go through the grueling process of raising taxes again. Greenspan knows how hard that could be. He lavishly praised Bill Clinton in 1993 for having the courage to do it.
Greenspan also conveniently said he would not comment on how the new tax cut affects different income groups. By the most comprehensive independent reckoning available, nearly 38 percent of the tax benefits will go to the top 1 percent of earners in America. More than 70 percent of the benefits will go to the top 20 percent of earners.2 Greenspan’s defense was that he did not endorse the specific Bush bill, only a substantial tax cut. Such disclaimers sounded contrived.
Neither Bob Woodward’s Maestro nor Justin Martin’s Greenspan gives a convincing account of how Alan Greenspan has acquired such authority. Both books lack the sense of irony that writing about successful public officials requires. They do not separate luck from skill or idealized retrospective claims about how decisions were made from the exigencies of the moment. Justin Martin provides much useful information about Greenspan’s private life, however, and Woodward, as usual, has gotten people to talk interestingly about his subject, though it is difficult to assess how reliable his quoted memories of decisive meetings are.
Both authors treat Greenspan’s pronouncements with the sort of seriousness they would not grant similar statements from a foreign policy official, or a president, for that matter. They ascribe to monetary policy itself, which was largely under Greenspan’s control, more influence over the economy than it has, and they have little understanding of economic theory or empirical analysis.
Greenspan deserves more informed, more critical examination that would deal with him on his own level. His record, after all, can withstand close scrutiny. But it is by no means clear what his legacy will be. He has not built either a private or a public institution or substantially changed the one he has been running for fourteen years (though he did introduce a new rule that makes its proceedings available in five years). He leaves no books or even considerable articles about economics. If anything, his central thoughts on the subject are highly derivative. A disciple of Ayn Rand and an intimate of her inner circle, his ideology is essentially laissez-faire capitalism, to which he has added no important refinements. He helped to rid America of inflation, but it was Paul Volcker, his immediate predecessor, who took on and defeated the truly dangerous inflation of the early 1980s. Greenspan’s pronouncements in the 1990s about the importance of new technologies, which did so much to stimulate stock market enthusiasm and excessive speculation, were informed neither by serious theory nor by historical analysis.
Greenspan’s passion is for minute detail and, at his best, he is a cool-headed problem solver. He is more a man of action than of thought, despite his professorial image and considerable intelligence. His greatest talent may well be for dealing with people in power. He has been a fixture either in Washington or Wall Street for thirty-five years and he presided over the nation’s central bank during an extraordinary turnaround in the nation’s economy. No doubt he believes his true legacy is to leave America rid of inflation and benefiting from great advances in productivity. But his policies and pronouncements also helped to create imbalances in the economy, including excessively high stock prices, high levels of consumer debt, and the forbiddingly high value of the US dollar, for which the US may yet pay a serious price.
Alan Greenspan was born to Rose and Herbert Greenspan in 1926 in upper Manhattan’s Washington Heights. His parents were divorced when he was five, and Greenspan’s father became a distant presence. Greenspan and his mother moved into a one-bedroom apartment with his grandparents. He and his mother slept in the dining room, and she worked in a local retail store to supplement the family income.
But judging by the accounts in the books under review, his childhood was not unhappy. He spent a lot of time with the family of an uncle in the insurance business, who continued to do well in the Depression and had a beach house in the Rockaways. He played summer baseball for a local team. His parents were themselves cultured and educated. Rose played the piano and her father was a cantor in a local synagogue; an uncle wrote a play about Robert Schumann that made it to Broadway. Greenspan himself became an accomplished clarinetist who eventually attended Juilliard for a year and played in a professional jazz band.
If his later public demeanor was decidedly straight arrow, as Martin writes, he was in fact a highly social person. He loved music, sports, and eventually the company of women. Even in high school, he was president of his homeroom. Later, in college at New York University, he sang in the glee club and became president of the Economics Society. His sociability would someday become an asset, helping him make easy friends of CEOs and government officials alike.
Both books make one wonder if Greenspan acquired his interest in business and economics from his distant father, though he took the opposite point of view. Herbert Greenspan, a businessman, stockbroker, and economic analyst in the 1930s, became an advocate of Franklin D. Roosevelt’s New Deal policies. He published a book called Recovery Ahead!, which claimed FDR’s interventionist pub-lic programs would soon restore the economy to health. After touring with a jazz band, Greenspan entered NYU at the end of World War II to study economics. He graduated summa cum laude in 1948 and went to Columbia University for graduate studies in economics, where he studied with Arthur Burns, a well-known expert on business cycles. Burns later became an adviser to Richard Nixon and chairman of the Federal Reserve in the 1970s.
See, for example, Gerard Baker, "The Conversion of the Fed's Oracle May Not Be All It Seems," Financial Times, February 8, 2001.↩
This is based on the model of the Citizens for Tax Justice. See www.CTJ .org.↩