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Preparing for a Post-Greenspan World

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Preparing for a Post-Greenspan World

Economy

Preparing for a Post-Greenspan World

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STEVE INSKEEP, host:

This is the week that Alan Greenspan steps down. It happens tomorrow. As Chairman of the Federal Reserve Board, Greenspan presided over the two longest peacetime periods of growth in the nation's history. He also led the way through financial storms, including the stock market crash of 1987.

NPR's John Ydstie takes a look at Greenspan's legacy.

JOHN YDSTIE reporting:

When the United States economy was booming in the summer of 2000, Alan Greenspan was warmly welcomed to Capital Hill by the Chairman of the Senate Banking Committee.

Senator PHIL GRAMM (Republican, Texas): We're very glad to have you here again Mr. Chairman. You have become a national phenomenon.

YDSTIE: As he greeted Greenspan at the hearing's opening, Senator Phil Gramm marveled at what he described as the strongest economy in United States history.

Senator GRAMM: There are many who would be quick to take credit, but I think if you had to narrow it down to who deserves more credit than anybody else on the planet, that person is sitting before us today, and his name is Alan Greenspan.

YDSTIE: That kind of praise for Greenspan was common during the boom years of the late 1990s. While the tributes may not be as fawning as they once were, there's broad agreement that Alan Greenspan is among the best, if not the best, central banker ever.

Professor Allan Meltzer, of Carnegie Mellon University, is finishing a history of the Federal Reserve. He says after Greenspan took over at the Fed in 1987, he preserved his predecessor Paul Volker's hard-fought victory over inflation, and then, with a combination of mastery of data and shrewd judgments, he presided over an unprecedented period of growth.

Mr. ALLAN MELTZER (Professor of Political Economy and Public Policy at Carnegie Mellon University): So that we've had these 25 or 30 years of low inflation and stable growth punctuated by two very small recessions, and we've seen per capita income in the United States go from $25,000 to $37,000. So we've done remarkably well.

YDSTIE: Princeton University Economist Alan Blinder, an advisor to President Clinton and then vice-chairman at the Fed under Greenspan, praises the chairman too. Blinder says one of the reasons for the economy's remarkable performance under Greenspan was his willingness to challenge one piece of economic orthodoxy.

In the second half of the 1990s, Greenspan refused to raise interest rates as unemployment fell to levels that economic theory suggested would spark inflation.

Mr. ALAN BLINDER (Gordon S. Rentschler Memorial Professor of Economics at Princeton University): I don't think you could have found one economist out of one thousand that in 1996, say, would have said, You know, we can let the unemployment rate drift all the way down to 4 percent and we won't have any inflation as a consequence. Nobody believed that. I doubt that Alan Greenspan believed that in 1996, but he was willing to watch and wait as the unemployment drifted lower and lower and lower and lower, and we still had no inflation.

YDSTIE: Part of the reason Greenspan took that risk, says Blinder, was that he perceived the boom in American productivity before the evidence was in. That higher productivity helped keep inflation low, even as the unemployment rate fell below 4 percent for the first time in 30 years.

Another element of Greenspan's success, says Blinder, was his love of arcane data; from the number of cardboard boxes being produced to the output of steel ingots. As he was reappointed to the Chairman's post by Bill Clinton in January of 2000, Greenspan thanked the President and acknowledged the addiction.

Mr. ALAN GREENSPAN (Chairman of the United States Federal Reserve): I must say I've enjoyed every minute of it. It's really been an extraordinary challenged, and especially for an economist who likes to get into the nitty-gritty and every statistic you'd ever seen. As I said to the President before, it's like eating peanuts: you keep doing it, keep doing it, and you never get tired.

YDSTIE: Greenspan's reappointment by Clinton is evidence of the political skill he brought to the job of Fed Chairman. After all, he was first appointed by Ronald Reagan, then by the first President Bush, then by Clinton, and finally by George W. Bush. That's proof that he pleased other constituents as well, from Wall Street to Main Street.

One President, though, George Bush the elder, wasn't happy with Greenspan. The reason, says Blinder, is that Bush-One suffered from one of Greenspan's mistakes. During the recession of 1990 and 1991, the Chairman didn't drop interest rates fast enough. That meant the economic recovery leading up to the 1992 election was very weak.

Mr. BLINDER: The President and the President's men thought that the high interest rate policy of the Federal Reserve was going to cost their guy, President George H.W. Bush, reelection. And, they were probably right. So, yeah, it did get testy.

YDSTIE: Greenspan also lost standing more recently, especially among Democrats, when he supported the current President Bush's big tax cuts. Greenspan had previously resisted the idea of using the surpluses to cut taxes, arguing surpluses should be used to pay down the national debt. But in January of 2001, as surplus projections grew, he changed his mind.

Mr. GREENSPAN: It never entered my mind that we could get to the point where debt reduction was not the prime purpose of employing surpluses. I still hold, number one priority is reducing the debt. The problem is we're going to get that out of the way far sooner than any of us imagined.

YDSTIE: That cleared the way for the 2001 tax cuts. But as we all know, the surpluses evaporated and now deficits are back in record territory, at least in dollar terms.

Greenspan's change of heart led Senate Minority Leader Harry Reid to call him a political hack. Alan Blinder doesn't agree with Reid's characterization, but he believes Greenspan crossed the political line.

Mr. BLINDER: I think he strayed into areas pretty much disconnected from monetary policy that were intensely political, and he took a partisan position. And I don't think that's a good thing for a Federal Reserve Chairman to do.

YDSTIE: Allan Meltzer, who's a fellow at the Conservative American Enterprise Institute, agrees. And Meltzer also believes even Greenspan's support of Bill Clinton's deficit reduction program was too political.

Mr. MELTZER: I believe he went over the edge. And the next Chairman of the Federal Reserve would be well advised to pull back; that is, to talk about things which have to do with monetary policy.

YDSTIE: Some critics also fault Greenspan for not acting to burst the stock market bubble and to slow the more recent run up in housing prices. Defenders say he had no surgical way to do that without harming the rest of the economy. In any case, Allan Meltzer says, Greenspan's successor, Ben Bernanke, has a tough act to follow. On the one hand, he says, Bernanke is a respected monetary economist and has the support of lots of constituencies from academia to Wall Street.

Mr. MELTZER: What we don't know about him, and we didn't know it about Greenspan either in 1987, was, when economic theory doesn't tell you exactly what to do, you have to make a judgment. How good are you at making those judgments?

YDSTIE: Ben Bernanke will take over for Alan Greenspan at one minute past midnight on Wednesday.

Chairman Greenspan, who is 79-years-old, will reportedly set up a consulting business in Washington.

John Ydstie, NPR News.

INSKEEP: And you can read about Ben Bernanke's style of running the Federal Reserve, which is expected to be somewhat different, by going to npr.org.

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