So how did Greenspan do?
In one respect, superbly. Before Greenspan, the conventional economic wisdom was that unemployment couldn't go below 6 percent without igniting inflation. The labor market would be so tight that employers would have to hike wages in order to get and keep employees. They'd have to raise prices to cover the wage increases. That would lead employees to demand higher wages to cover the price increases.
In other words, the inflation genie would be out of the bottle. So before Greenspan, whenever unemployment looked like it might sink to below 6 percent, central bankers – intent on keeping the genie inside – would raise interest rates to slow the economy.
Alan Greenspan's greatest triumph was understanding that in the new high-tech global economy, unemployment could fall to 4 percent – or even below 4 percent – and the inflation genie would stay in the bottle. That's because employees no longer had the bargaining power they once had to demand higher wages. Employers could transfer the work to Mexico or China, or install new computer software to do the job instead. And employers didn't have the power they once had to raise prices. Consumers might switch to a cheaper product made abroad, or go to a big-box retailer like Wal-Mart.
So Greenspan kept interest rates low between 1994 and 2000, even as unemployment dropped to 4 percent. The result? Twenty-two million Americans got new jobs. In fact, the economy grew so fast that many people at or near the bottom of the economic ladder got raises -- and the inflation genie still remained in the bottle.
But then something happened to Alan Greenspan. His ideology trumped his good common sense. Greenspan came out in favor of the Bush tax cuts of 2001 and 2003. His dislike of government was so intense that he backed Bush. He assumed the White House and Congress would cut spending in order to finance the tax cuts.
Greenspan was wrong, of course. By now it's clear that these cuts were the single biggest reason why the Bush budget deficit ballooned. And because it ballooned, inflation pressures mounted. The cost of capital increased and the dollar dropped. As a result, Greenspan had to raise rates and slow the recovery, even though unemployment was considerably above 4 percent.
So two cheers for Alan Greenspan – a great pragmatic chairman of the Federal Reserve, who would have deserved three cheers if he hadn't blown it on his last lap.
Robert B. Reich is co-founder of The American Prospect. A version of this column originally appeared on Marketplace.
