Watching Greenspan Grow

Greenspan: The Man Behind Money, Justin Martin. Perseus Publishing, 284 pages, $28.00.

Maestro: Greenspan's Fed and the American Boom, Bob Woodward. Simon and Schuster, 270 pages, $25.00.

For those seeking a personal portrait of America's maximum economic-policy maker, Justin Martin's biography of Alan Greenspan will serve nicely. Informed and sympathetic, Martin traces Greenspan's personal and professional lives: his early days in jazz and objectivism, his roots as an economist in the Conference Board, his participation in the old-style business-cycle studies of Arthur Burns, his ties to five presidents, and his liaisons and enduring friendships with interesting, intelligent, attractive, and loyal women.

Greenspan emerges here as observers usually find him: reserved, dispassionate, thoughtful, not very pretentious--an even-tempered professional with a stable inner self, oddly at home in the outsize trappings of the chairman of the Board of Governors of the Federal Reserve. As my mother reported after he attended the annual Galbraith Harvard commencement party in 1999: "After all the harsh things you've written about him, I was quite prepared to dislike him, but he was very nice. And his wife is nice, too."

Another good thing about Martin's book: It is short. How much of this sort of stuff does one need to know? If there were some thread of intellectual or moral drama running through Greenspan's life--an important book or even a cache of letters, a scientific contribution, a bit of hardship or of sacrifice, a touch of scandal, of lust, betrayal, unusual venality, or crime--he would doubtless merit a longer treatment. But there appears to be nothing of this sort. Even Greenspan's connections to the darker aspects of his associates' lives--to the inbred sex of the Randians, to the Nixon of Watergate, to Charles Keating (for whom he consulted)--all seem marked by the detachment for which he is more generally known. The result may be admirable, in its way, but it does not make for a gripping read.

And what is the relationship between Alan Greenspan and the American boom? Now there (to an economist) is a gripping topic. Bob Woodward thinks he knows: The one is the author of the other. And so, while the word "objectivism" oddly does not appear in his index, Woodward gives us Greenspan as an Ayn Rand hero, an all-seeing, all-knowing, all-wise figure: The Man Who Made Capitalism Work.

Shaman would be, on the whole, a better title for Maestro. Woodward sets the tone on the opening page.

Not only is [Greenspan] a major figure in the world's economic past, he is central to its future. He has been frank enough to stand before the new and amazing economic circumstances that he helped to create and in the end to declare them a mystery. It is impossible to account fully for the continuing high growth, record employment, low inflation and high stock market.

Impossible to account for? It might have been useful to try a few numbers. These would have shown that while the expansion of the 1990s was quite long, it was never a time of record-high rates of growth. The 1960s, for instance, had better growth; it led to unemployment below 4 percent for three full years beginning in 1966. And low inflation is the norm, not the exception, in postwar America--apart from the nasty period from 1969 to 1980, which was marked by war (Vietnam), war again (Arab-Israel), and revolution (Iran). Woodward might also have asked whether history suggested it was likely that stock prices would stay up forever. The later 1990s were a good time, certainly, while they lasted. Amazing and unprecedented they were not.

But Woodward does not review any numbers. Instead, to set up the "amazing" character of events, he repeats the apologetics offered over the years by certain economists concerning the supposed inflationary dangers of low unemployment and then echoes their surprise that full employment did not, in fact, produce inflation. Woodward swallows his apologetics without salt. Regarding 1994, for instance, he writes:

All the economic models built on years of history showed there was a limit to how high growth could go without triggering inflation. To complicate matters, the economists believed--and recent American history showed ... [that] there was a limit on how low the unemployment rate could go without triggering inflation, and it was thought the range was 6 to 7 percent.

This was, of course, completely in error, as later events were to prove. But the habitual morbidity of the economists, which Alan Greenspan shared, was complicated in his particular case by a propensity to see the shadows of inflation itself in every dark statistical corner. Thus, as far back as 1987, Woodward recounts, Greenspan read the entrails.

The economy in August of 1987 was going too strong. There were no measurable signs of inflation yet, but the seeds were there. Greenspan was sure of it. He saw from economic data reports that the lead times on deliveries of goods from manufacturers to suppliers or stores were increasing, just starting to go straight up... . He had seen this happen too many times in past decades, so he felt he knew exactly what he was looking at. The pattern in economic history was almost invariably that you got a bang as prices headed up, resulting in 8 or 9 percent annual inflation--a disaster that would destroy the purchasing power of the dollar. The question now, for Greenspan, was how hard the Federal Reserve could lean against the economy to slow it down.

When, exactly, did inflation in Alan Greenspan's professional lifetime exceed 8 percent? The answer is, twice: in 1973 through 1974 and in 1978 through 1981. Those two episodes were related to oil prices, and they presaged recession, not runaway boom. Did Greenspan really think this way, imagining hyperinflation on the basis of misremembered history and one stray indicator? It is hard to believe. To paraphrase John Maynard Keynes on Stanley Baldwin, when Mr. Woodward talks about the ideas of Mr. Greenspan, it not only is nonsense that he is speaking, but it sounds like nonsense to any ordinary uninstructed person who takes the trouble to consider the question with a fresh and open mind. The only question is, whose nonsense? Woodward's or Greenspan's?

Inflation in 1987 did not reach even 5 percent. But the rise in interest rates in September helped trigger the stock crash in October and a near collapse of the financial system. Woodward's day-to-day account of these events is pretty gripping. But he never suggests that Fed policy might have been different from what it was--still less that the Fed ought to have known better than to do what it did.

For Woodward, Greenspan is essentially infallible, "obviously the best numbers man around." Time and again, though, the great one is bedeviled by critics. Under Ronald Reagan, there were Richard Darman and Manuel Johnson. Under George Bush the first, there were David Mullins and Nicholas Brady. Under Bill Clinton, there were Alan Blinder and, on at least one occasion, Al Gore. All pressed for lower interest rates or against increases, for stronger growth, for less unemployment. Greenspan in each instance resisted. In 1988 "Greenspan feared an outburst of inflation." But there was none. In 1992 Greenspan stalled on interest-rate cuts for months; recovery did not come. In 1994 "high inflation could not be detected, but he suspected it was around the corner." It was not.

History, in each case, shows that the critics were right. On a close reading, Greenspan appears to be pathologically skittish: Always doubt the bad news, always fear the good news. That appears to be the fundamental psychology of the man.

And that, in turn, raises the real mystery. How exactly was it that Alan Greenspan, the world's most excessively cautious person, became the first chairman of the Federal Reserve ever to achieve the 1978 Humphrey-Hawkins mandate of "full employment, balanced growth, and reasonable price stability"?

Part of the answer appears to be: He met a good woman. Or more precisely, two of them. They were Clinton appointees Janet Yellen and, especially, Alice Rivlin, who came to the Federal Reserve Board in early 1996. Together, Yellen and Rivlin seem to have softened Greenspan--one might even say to have relaxed him--and without threatening him as previous monetary doves had done. Having read Justin Martin on Greenspan's intellectual openness to women (in his Ayn Rand days and also later on), one is tempted to see in these postings an ultimate expression of Bill Clinton's psychopolitical genius. Or perhaps the president just got lucky.

And the world did change. The Fed adopted a do-nothing policy that held for nearly four years. Checkpoint Greenspan, the tollbooth on the road to full employment, opened its gates. Employment rose continuously. Credit expanded to companies and to households; home ownership reached 70 percent of families. Unemployment fell. Inflation did not rise. The nonaccelerating inflation rate of unemployment (NAIRU) died an unmourned intellectual death. Greenspan himself became an icon--the visible architect of the most liberal and humane aspect of the time: a prosperous and inclusive economy in which jobs really did become available to all.

And yet, did he learn from this? There is little evidence that he did. Although Greenspan dropped the NAIRU and flirted with "new economy" mumbo jumbo--the idea that computers, or the Internet, were driving up physical productivity in some way unseen by government statisticians--he never drew the two fundamental conclusions that the situation demanded.

The first is that full employment is benign, something not to be feared but to be proud of, something to value and to defend. With full employment, social problems of all kinds--crime, stress, ill health, family breakup, welfare dependency--recede dramatically. Moreover, as we learned in 1999, full employment accelerates productivity growth, so that high rates of growth tend to pay for themselves, for a while. Full employment is, therefore, worth running risks for. Yet it remains, for Greenspan and his colleagues, a risky condition--one that justifies "pre-emptive" increases in interest rates in order to slow the economy down. Such increases (six of them) began in 1999, culminated in May 2000, and are being felt painfully today. They also did untold damage to Al Gore in the recent presidential election.

The second lesson is that the big dangers lie not in inflation but in speculation--speculation in stock markets, in foreign-exchange markets, and in external debt. It is not the misbehavior of workers we should fear, but that of capitalists. The destabilizing effect of financial speculation can be tamed only by powerful regulation. Greenspan and his colleagues had that power; in particular, they could have raised margin requirements on their own. Greenspan also could have lent his authority to stronger efforts by the Clinton administration and Congress to control banking excesses and to stabilize the international financial system.

Instead he did nothing. After 1998, with capital fleeing Asia for American shores, the old objectivist let the tech boom develop into a huge financial bubble. Margin lending exploded. There followed the enormous enrichment of a tiny Internet elite and the much larger financial one. And after the bubble came the crash.

For all Woodward's narrative talents, he misses this story. In technical matters, critical capacity and distance are needed; Woodward brings neither to bear here. Indeed, he closes on a note of anticipatory apologetics, one that seeks to excuse our hero from responsibility for the economic slowdown now taking hold. Woodward asks of Greenspan, "When would he goof? What was the hidden factor or brewing crisis that no one was anticipating?" The possibility that Greenspan had already goofed--with entirely predictable consequences that are now unfolding--does not enter his mind. ¤

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