October 25, 2005
Greenspan: Master of Minimalism
-- Frequently the fate -- gratifying, yet melancholy -- of consequential
public persons is this: They so transform an ominous social landscape
that, by the time they leave the public stage, the public no longer
remembers the banished dangers, and hence cannot properly value
the banisher. So as Alan Greenspan heads to the end, in January,
of more than 18 years as head of the Federal Reserve, recall that
30 years ago the intelligentsia worried that democracies, including
this one, had become ``ungovernable."
was caused by inflation, then thought to be the systemic disease
of democracies. The theory was that democratic electorates would
reward governments that delivered the pleasure of public spending
and would punish those that inflicted the pain of taxation sufficient
to pay for that spending. Hence democracies would run chronic
deficits. These, it was assumed, both caused inflation and gave
government a powerful incentive to tolerate inflation as a means
of steadily reducing the real value of its debts -- inflation
as slow-motion repudiation.
deficit spending -- giving the public a dollar's worth of government
goods and services and charging the public only, say, 80 cents
for them -- produced big government and, by making big government
inexpensive, reduced public resistance to making it even bigger.
And because of affluent voters' low and steadily lowering pain
thresholds, democracies would not tolerate the discomforts associated
with wringing inflation out of the economy.
was slain by a fact: President Reagan and Paul Volcker, Greenspan's
predecessor, put the country through the rigors of wringing inflation
out of the economy, and in 1984 Reagan carried 49 states. Between
1945 and 1982 the economy was in recession 22.4 percent of the
time. In the 276 months since the recession ended in 1982, it
has been in recession 14 months -- just 5.1 percent of the time.
of Americans' low pain threshold, the Reagan-Volcker recession
was considered hideous. It was the worst since the Depression,
but the economy contracted less than 3 percent. In the years between
1890 and 1945, America's period of hard learning about managing
an industrial economy, three times there were contractions of
5 percent, twice contractions of 10 percent and twice contractions
of 15 percent.
and especially since 1982, we have learned the real secret of
managing the economy: Do not try to manage it. If you refrain
from trying to ``fine-tune" business cycles, the cycles will
be less frequent and less severe.
tenure has illustrated an axiom to which his successor, Ben Bernanke,
should subscribe: Minimalist missions by government produce maximum
results. He has not defined the Fed's primary purpose as achieving
this or that level of employment or economic growth. Rather, its
mission is to preserve the currency as a stable store of value
-- to control inflation. However, Greenspan's impeccable credentials
as an inflation-fighter have enabled him to keep inflation rates
low even during very low unemployment without kindling inflationary
expectations, which can be self-fulfilling.
economy is so dynamic that in any five-year period, approximately
45 percent of Americans move from one income quintile to another.
Twenty percent move up from the bottom quintile in any 12-month
period, and 40 percent to 50 percent move up over 10 to 20 years.
Because of the constant transformation of dynamic economies, the
study of economics has become a science of single instances. Its
practitioners are constantly in uncharted waters, reasoning inferentially.
Just as astronomers inferred the existence of Pluto from the behavior
of known planets, Greenspan inferred a rate of productivity growth
higher than most estimates because inflation and unemployment
were falling simultaneously.
Reserve system -- to give the devil his due, it is one of Woodrow
Wilson's unregrettable undertakings -- annoys some populists who
think every U.S. senator and representative should write on his
or her bathroom mirror, and read every morning, this thought:
``The Fed is a creature of Congress." Indeed, Congress made
it and could dictate to it -- could dictate interest rates and
the money supply. A terrifying thought.
famously, at times hilariously, circumspect rhetoric has been
prudent because some word, or inflection, or even arched eyebrow
could have caused vast sums to slosh in this or that direction
in capital markets. His rhetorical style -- or perhaps anti-style
-- is a high-stakes illustration of Voltaire's idea that men use
speech to conceal their thoughts.
wife has said he had to propose marriage three times before she
understood what he was saying. And he was being droll when he
said -- if he said it; apocrypha collect around legends -- that
``if I have made myself clear I have misspoken." His achievements
speak clearly for him.
2005, Washington Post Writers Group