Chairman Greenspan’s Legacy

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…

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