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Monday, August 15, 2005

Putting Greenspan in His Proper Place

Greenspan’s place in history, his successes, his failures, is starting to be determined.  A general comment is that like presidents, he probably gets both too much credit and too much blame for events in the economy.  I want to endorse what Robert Barro and Allan Meltzer say in the article linked below and say I believe Greenspan’s comments on political matters unrelated to monetary policy were a mistake.  But the way this is stated in the article is not my objection.  The chair of the Fed should comment on the consequences of budget deficits as they relate to monetary policy.  After all, monetary and fiscal policy are connected through the government budget constraint.  My problem arises when Greenspan brings political and philosophical views into the discussion without making clear that his policy recommendations are guided by his personal opinions on these matters rather than on economic principles.  His comments on Social Security are a case in point, and the next Fed chair can learn from this:

Greenspan's legacy: plenty to praise, less to lambaste, By David R. Francis, Christian Science Monitor:  Greenomics. Embodiment of Prosperity. Maestro. Sacred cow. Fraud. Political hack. All these terms have been used to refer to Federal Reserve Chairman Alan Greenspan. He's the world's most powerful economic official. … That makes him a target for both virulent attacks and worshipful praise - especially now since Mr. Greenspan's 18-year Fed tenure is ending. … Already, economists are evaluating the central bank chairman's role in financial history. His legacy will be examined later this month at a high-powered conference in Jackson Hole, Wyo., sponsored by the Kansas City Fed branch. … Economist Allan Meltzer … places Greenspan in "the front rank" of the 12 chairmen that have led the Fed in its modern era - since reforms of 1935-36. Like many others, …[he]… praises Greenspan for his success during much of his tenure in achieving the Fed's top two objectives: low inflation and low unemployment. Robert Barro, a Harvard University economist, praises Greenspan for an "extremely good job" at keeping inflation close to 2 percent a year by one measure. Another achievement is the Fed's increased transparency. It quickly advises the public of its monetary policy, even hinting at future moves. …

… Greenspan … doesn't escape criticism. Mr. Meyer, author of a new book, "A Term at the Fed: An Insider's View," holds that Greenspan was wrong to state his views on issues outside the purview of the Fed. "The chairman should not become a party in partisan debates about economic policies," he says. For example, in 2001, Democrats accused Greenspan of breathing life into President Bush's proposal for massive tax cuts that soon swelled a budget deficit. In 2003, Greenspan cast doubts on the Bush plan for a second round of tax cuts. The economy needed no new stimulus, and the lost revenue would expand the deficit, Greenspan testified. "The Fed chairman should not try to make fiscal policy," responded a Republican senator at the time. Greenspan has also supported generally Republican views that the minimum wage should not be raised and that Social Security badly needs trimming. Professor Barro calls Greenspan's verbal interventions in nonmonetary policies "a bit of a mistake." …

What Meltzer, Barro, and Meyer see as praiseworthy - Greenspan's steady, disciplined hand on the monetary steering wheel, and his aggressive preemptive moves to alleviate crises … economist Ravi Batra regards as having had "devastating" effects on ordinary Americans. The Southern Methodist University economist and author of a another new book on the Fed ("Greenpsan's Fraud") argues that by pumping up America's money supply in crises and tightening monetary policy afterward, the Fed hasn't let booms last long enough for workers' wages to catch up with growing productivity. "CEOs have gained ... and workers have suffered sharply," he says. Real wages have fallen. More Americans have slipped into poverty. And so goes the debate over Greenspan's performance. …

    Posted by on Monday, August 15, 2005 at 12:33 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (1)


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