The US financial markets are suffering their rockiest period since the nation’s savings and loan industry collapsed at the end of the 1980s. The economy either is on the verge of the first business recession since 2001 or is already in it. The Federal Reserve System is taking dramatic actions that reflect urgency at best and perhaps even a whiff of panic. In these circumstances, it is worth recalling that US monetary policy—broadly defined as the management of interest rates in order to control inflation and to maintain stable growth—has had a strikingly good run during the last two decades.
The United States experienced only two recessions during that time, in 1990–1991 and in 2001 (there were four during the prior twenty years, and four during the twenty years before that), with neither lasting longer than eight months and in neither case involving a decline in total production as great as 1 percent. Unemployment averaged just 5.2 percent of the labor force (4.9 percent during the most recent ten years). Already by the mid-1980s price inflation had abated to 4 percent per year, down from near-double digits at the beginning of the decade, but since then it has been lower still and also far more stable. During the last ten years the average annual price increase, apart from food and energy, has been 1.75 percent, with no year’s rise either below 1.25 percent or more than 2.25 percent.
Alan Greenspan, who became chairman of the Board of Governors of the Federal Reserve System in August 1987, bore the principal responsibility for US monetary policymaking during most of this period. His predecessor in that post, Paul Volcker, had reversed the decades-long trend toward higher and more volatile inflation—albeit at the cost of two recessions, including one in 1981–1982 that was both lengthy (a year and a half) and severe (nearly a 3 percent drop in production). But inflation was still nearly 4 percent during Volcker’s last year in office; it remained for Greenspan to restore approximate price stability.
Moreover, no one then predicted the unusual economic stability that was to prevail through the end of Greenspan’s service in January 2006. Neither the stock market crash in October 1987, nor the collapse of the thrift industry in the late 1980s, nor the protracted stock market decline of 2000–2003, nor the quadrupling of world oil prices following the 2003 invasion of Iraq had much visible impact either on aggregate US economic activity, apart from financial markets, or on inflation.
Greenspan’s tenure as head of the Federal Reserve lasted for eighteen and a half years, second only to that of William McChesney Martin, whose time in office, from 1951 to 1970, lasted barely a few months longer. None of the nation’s other leading economic policymakers has ever served for so long, whether as head of the Federal Reserve or in any other public office. Evaluating Greenspan’s performance is therefore valuable for understanding a sizable period of American economic history. More important, analyzing what he did to achieve the success of monetary policy during those years provides useful lessons for the conduct of policy in the future. So too does assessing the significantly more volatile economic and financial situation America faces today, and what responsibility the Federal Reserve, and Greenspan as its chairman until two years ago, bear in bringing it about.
Greenspan’s recently published memoir, The Age of Turbulence, also recounts his earlier life before he went to the Federal Reserve, from his childhood in New York’s Washington Heights through his professional career as consultant to large industrial firms and then chairman of President Nixon’s Council of Economic Advisers. Acknowledging his intellectual debt to Ayn Rand’s radically laissez-faire conception of capitalism, he gives his current views on a wide variety of topics ranging from Adam Smith and the history of capitalism to the economic challenges and opportunities now confronting China, India, and Russia. But the book’s main value lies in his account of his leadership of the nation’s central bank between 1987 and 2006.
In contrast to the many memoirs by government officials about their experience in foreign and military affairs, there are relatively few retrospective accounts by makers of domestic economic policy. Greenspan’s book is certainly welcome in this respect. Notwithstanding his well-earned reputation for convoluted, even incomprehensible sentences while he was in office, The Age of Turbulence is clearly written and easy to read and understand. Throughout, there are concise explanations of how families and firms tend to respond to various economic situations, and what those responses imply for the behavior of the economy as a whole, often illustrated with concrete examples. By way of explaining the idea that “a market economy will incessantly revitalize itself from within by scrapping old and failing businesses,” for example, he describes the “demise of the tin can” for beer and soda of the 1950s. The cans were in fact made of tin-plated steel and were eventually replaced by smaller aluminum cans with pop-tops, a sequence that was, he writes, part of the “harrowing long-term decline” of the American steel industry. The explanations of how key aspects of economic policy work are likewise concise and readily understandable. (Peter Petre, the “collaborator” whom Greenspan thanks in the acknowledgments at the end of the book, probably deserves a good part of the credit for this accomplishment.)
For the most part, Greenspan is also forthright in sharing his views on not only policy issues but also the personalities of many of the people with whom he worked during his time in office. His opinions frequently run counter to his well-known Republican political loyalties, which he also makes no effort to hide. For example, despite the respect and affection he consistently displays for Gerald Ford, whom he served as chief White House economist, he calls Ford’s WIN campaign (Whip Inflation Now) in the midst of the severe 1973– 1975 recession “unbelievable stupidity.” By contrast, although he makes it clear that he and Jimmy Carter did not get along personally, and that Carter as president did not seek his advice, he writes that “many of the moves that the [Carter] administration and Congress made were the very ones I’d have pushed for, had I been there”—among them deregulation of industries, including the airlines, a measure prominently “promoted by Teddy Kennedy.”
On the continuing struggle of successive administrations to achieve fiscal balance, one of his book’s major themes, he is blunt: “the hard truth was that Reagan had borrowed from Clinton [i.e., by running budget deficits so large as to be unsustainable, and therefore to require corrective measures by later presidents and Congresses], and Clinton was having to pay it back.” And on the war that began in 2003 and has already outlasted his time in office by two years, “I am saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil.”
Greenspan is also scathing about both the Republican Congress and the Republican president with whom he had to work during his last years in office. “Most troubling to me,” he writes, “was the readiness of both Congress and the administration to abandon fiscal discipline.” He expresses no regret that his party lost its congressional majorities in the 2006 election: “The Republicans in Congress lost their way. They swapped principle for power. They ended up with neither. They deserved to lose.” He likewise has few kind words for George W. Bush or his economic advisers. Referring to the Bush White House generally, he observes that “little value was placed on rigorous economic policy debate or weighing of long-term consequences.” On fiscal issues in particular, he writes acerbically, “There is a remedy for legislative excess: it’s called a presidential veto…. Not exercising veto power became a hallmark of the Bush presidency.”
In the light of Greenspan’s widely publicized and perhaps politically decisive support for Mr. Bush’s 2001 tax cut, this particular criticism may seem to protest too much. Greenspan discusses his support for the tax cut at some length, claiming that he proceeded on the assumption that spending restraint would follow. But in view of the frequent failure of previous attempts to cut spending, of which he was well aware—and examples of which he recounts in detail here—this disclaimer is not credible. The spectacle of the head of America’s central bank joining the race to undermine the historic and hard-earned turn toward fiscal responsibility of just a few years before is a sorry episode in Greenspan’s otherwise laudable public service; it is also a significant blemish on the record of the Federal Reserve System.
Greenspan reports bluntly that he and the first President Bush had “a terrible relationship.” By contrast, he clearly enjoyed working with Bill Clinton, whom he found “fully engaged” and “seriously fiscally responsible.” “A consistent, disciplined focus on long-term economic growth became a hallmark of [Clinton’s] presidency,” he writes, and Clinton’s deficit-reduction program—“our best chance in forty years to get stable long-term growth”—was “an act of political courage.” He regards Clinton and Richard Nixon as “by far the smartest presidents I’ve worked with.” But after seeing Nixon up close, Greenspan found it “scary” for a man who “hated everybody” to have the power of the presidency, and he writes that he felt relieved when Nixon left office. At the conclusion of his interview with chief of staff Al Haig at Nixon’s winter retreat at Key Biscayne in 1974, during which Greenspan agreed to join the White House as chairman of the Council of Economic Advisers, Haig asked if he wanted to talk with Nixon; Greenspan declined.
Greenspan’s assessments are not always so clear-eyed, however. Despite his remarks about the irresponsible turn in fiscal policy during the Reagan years, he writes as if none of that had anything to do with President Reagan himself, whom he says he admired for “the clarity of his conservatism.” He similarly reports working with David Stockman, Reagan’s budget director, to produce “a budget that was tough as nails.” He has apparently forgotten the “magic asterisk” (representing “future savings to be identified”) with which the Reagan budget famously hid a significant part of the deficit it would eventually produce.
Greenspan also cannot bring himself to criticize Arthur Burns, his economics professor and mentor at Columbia and one of his predecessors as Federal Reserve chairman. Burns led the Federal Reserve during the years when America’s inflation problem became both chronic and dangerous (1970–1978). Greenspan reports, without comment, an episode from years earlier when he was a graduate student in Burns’s course:
One day, in a class about inflation’s corrosive effect on national wealth, he went around the room asking, “What causes inflation?” None of us could give him an answer. Professor Burns puffed on his pipe, then took it out of his mouth and declared, “Excess government spending causes inflation!”