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Tuesday, September 25, 2007

John Berry: Greenspan Sticks to His Guns, as Well He Should

John Berry says Greenspan shouldn't back down in the face of criticism:

Greenspan Sticks to His Guns, as Well He Should, by John M. Berry, Bloomberg: ...Greenspan's just-published book, ''The Age of Turbulence,'' ...[is an] exposition, with the help of former Fortune writer Peter Petre, of his background, his unusual bottom-up approach to analyzing the U.S. economy and his observations of and role in public policy over an eventful half century, including his 18 years at the Fed.

Greenspan admits to some mistakes and explains how he made them.

In other instances, he doesn't even begin to satisfy most of his critics because he still thinks his position is correct. The prime example is his view that it is impossible to know when a large increase in asset prices -- whether it's in equities or housing -- is a bubble. He argues that the Fed generally can't deflate a bubble without crunching the economy. On bubbles, Greenspan is right. ...

Robert Shiller ... noted that Greenspan has said that ''the world's monetary authorities cannot control bubbles. He is mostly right: the best thing that monetary authorities could have done, given their other priorities and concerns, is to lean against the real estate bubble, not stop it from inflating.'' ...

One mistake Greenspan acknowledges -- with very harsh words -- is his expectation that President George W. Bush would pursue a conservative fiscal course once his 2001 tax cut was in place.

Greenspan defends his support of a tax cut in his January 2001 Congressional testimony because he feared that, if very large projected budget surpluses materialized, they could eventually destabilize the economy. Even as he supported a tax cut, he urged that it be phased in and that if the revenue weren't there, that portions of the cut be rescinded.

Greenspan says he was warned the day before by former Treasury Secretary Robert Rubin that with a big tax cut, ''the risk is, you lose the political mind-set of fiscal discipline.'' He didn't change his testimony, and he agrees in the book that Rubin's prediction came true.

However, it is wrong for Greenspan's critics to claim that if he had opposed a tax cut one wouldn't have passed. There was going to be one no matter what Greenspan said. ...

And Greenspan's monetary policy?

In a review of the book ..., J. Bradford DeLong ... wrote, ''Greenspan is world famous because he was very good and very lucky'' as Fed chairman.

''During his tenure at the Federal Reserve, he made roughly 36 substantive decisions about the direction interest rates should go. Six times I disagreed with him. Five of those six times, I was wrong,'' DeLong said. The one exception: He should have cut interest rates in the summer of 2000 after the stock market bubble burst, he said.

One can argue, as several Fed officials have, that the 50 basis-point increases in February 1995 and May 2000 were mistakes too.

Overall, Greenspan's record remains a sterling one.

Since we're quibbling, I have a couple. John Berry says that Greenspan argued for tax cuts because they "could eventually destabilize the economy." But that's not the full reason. He was afraid of the effect the government would have on the financial markets when the government invested the large surplus in the private sector. It isn't instability that he's worried about, it's inefficiency. He is ideologically opposed to government intervention (a strange position for someone in charge of the Fed to hold), and did not want to see free markets undermined. To avoid this problem, his solution was to accumulate the projected Social Security Trust Fund surplus in private accounts so that individuals rather than the government would participate in the private market, and to cut taxes to give any remaining surplus back to individuals (where it would be free from government control).

Another quibble. John Berry says "it is wrong for Greenspan's critics to claim that if he had opposed a tax cut one wouldn't have passed." That may be true, but that's not the main criticism. The criticism is that Greenspan did not speak out after his 2001 Senate testimony once it became clear that the surplus would not materialize.

    Posted by on Tuesday, September 25, 2007 at 12:24 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (29)


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