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Monday, October 01, 2007

Brad Delong: Alan Greenspan on the Scales of a Turbulent Age (Updated)

Brad DeLong defends Alan Greenspan against some of the more serious charges that have been brought against him:

Alan Greenspan on the scales of a turbulent age, by J. Bradford Delong, Project Syndicate: The release of Alan Greenspan’s ghostwritten memoirs, The Age of Turbulence, has elicited charges that he was not such a great central banker after all.

The indictment contains four counts: that he wrongly cheered the growth of nonstandard adjustable-rate mortgages, which fueled the housing bubble; that he wrongly endorsed Bush’s tax cuts; that he should have reined in the stock market bubble of the 1990s; and that he should have done the same with the real estate bubble of the 2000s.

To the first two counts, Greenspan now pleads guilty. He says that he did not understand how the growth of nonstandard mortgages had lured borrowers and investors into bearing dangerous risks. ...

Greenspan also pleads guilty to a mistake in early 2001. He thought that he was giving balanced testimony to congress on government budget issues. He testified that it was important to run surpluses to pay down the debt, but that surpluses must not be so large that the government winds up owning American industry. He also testified that tax cuts were better than spending increases to keep surpluses from growing too large, but that the uncertainty was enormous, so that any tax cuts should be cancelled if they threatened to bring us back to an age of deficits.

Robert Rubin and Kent Conrad warned him that the press would not interpret his testimony as being balanced, and that congress would interpret it as an excuse to abandon fiscal discipline. And they were right.

Greenspan also pleads guilty to misunderstanding the character of the Bush administration. He thought that his old reality-based friends from the Ford administration were back in power. He thought that he — and Treasury Secretary Paul O’Neill — could win the quiet “inside game” for sensible policy without resorting to an “outside game” that would make his reappointment in 2004 unlikely. He was wrong.

But how serious are these policy-political crimes to which Greenspan now pleads guilty?

In my view, they are misdemeanors. Against them you have to set what former treasury secretary Larry Summers calls Greenspan’s “golden glove” performance at avoiding and minimizing recessions during his years at the Fed.

The “felonies” of which Greenspan stands accused are the other two charges. Here, Greenspan holds his ground, and pleads not guilty.

The only way, he says, for the Fed to have kept stock prices in reasonable equilibrium ranges in the late 1990s would have been to raise interest rates so high that they ... curbed construction and other forms of investment, raised unemployment, and sent the economy into recession. To cause a significant current evil in order to avoid a possible future danger when our knowledge is limited and our judgments uncertain is, Greenspan believes, unwise.

Greenspan mounts a similar defense concerning the housing bubble. High construction employment has been good for US workers in the past half-decade. Higher interest rates to reduce the housing boom seem, even in retrospect, ill advised if the cost is mass unemployment.

But Greenspan would have served the country and the world better if he had slowed the growth of non-standard adjustable-rate mortgages and had he been less of a loyal Republican working the inside game of trying to convince Bush’s political advisers that good policy was important, and more of a nonpartisan steward of America’s long-term fiscal stability. Of course, such a Greenspan would never have been reappointed.

All in all, Greenspan served the US and the world well through his stewardship of monetary policy, especially by what he did not do: trying to stop stock and housing speculation by halting the economy in its tracks.

Update: Brad adds some clarification:

Rethinking Alan Greenspan's Role in the 2001 Bush Tax Cut, by Brad DeLong: Paul Krugman has, I think, retreated just a bit in his critique of Alan Greenspan and the 2001 Bush tax cut. If I read Paul correctly, he is focusing not on the testimony, which was obscure and technocratic, but on Greenspan's failure to clarify matters afterwards. Greenspan claims that he was giving a balanced, technocratic testimony, and that afterwards he and Paul O'Neill pursued the "inside game" of arguing within the councils of the Bush administration and the centrist congressional leadership that triggers--cancelling the tax cuts if the fiscal situation went south--were a necessary part of a good bill. Greenspan says that he made two mistakes:

  1. He did not recognize (although he was warned by Bob Rubin and Kent Conrad) how much the press would buy the White House's spin that he had endorsed their tax cut, and how incompetent the press would be at picking up his central message: that it would be good policy to pay off the national debt and then to balance the budget.
  2. He thought that his and O'Neill's inside game would be successful, because he did not understand the extent to which policies that made the nation better off were simply not a concern in the Bush White House.

Paul Krugman says that this is not enough. Even if he grants that Greenspan is accurately painting his thoughts at the time--rather than viewing his past through the rose-colored glasses we all use--once it was clear that the press was misinterpreting him, Greenspan should have hoisted the Jolly Roger and opened fire on the H.M.S. George W. Bush's Unconditional Tax Cuts.

Now this is a lot to ask of a guy who:

  • Hopes to be appointed to another term as chair of the Federal Reserve
  • Is a Randite, who believes that the country and the federal government would be better if it spent 4% rather than 22% of national product.
  • Is a Republican, and wants to be both a non-partisan technocrat and a team player.

But Paul has convinced me that Greenspan ought to have done more in 2001. And Alan Greenspan has made me think that he wished at the time that he could do more, but that something was stopping him. The problem is that Alan Greenspan never says just what that "something" was. The tone of his memoir is very much:

I'm just a Randite boy from Washington Heights who fell off the matzoh ball truck! Isn't America wonderful!

which is profoundly unhelpful when one is trying to assess people's perceptions of the room available for political maneuver.

So let me throw out a rash speculation, compelled by the logic of the situation rather than specific evidence. It takes off from three observations:

  • Everyone was expecting Ronald Reagan to reappoint Paul Volcker to be Fed chair in 1987. But he didn't: he appointed Alan Greenspan instead.
  • After 1992 all of George H.W. Bush's political people--and their journalistic courtesans like Fred Barnes and Robert Novak--HATE Alan Greenspan. They say that Greenspan elected Bill Clinton by refusing to lower interest rates in 1990 and 1991 to keep the economy at full employment, and that they cannot forgive this "betrayal."
  • There is a sense that Alan Greenspan soft-peddled his role as guardian of financial orthodoxy after January 21, 2001 in order not to pick large fights with the Bush administration.

How can we make sense of this. If I were Thucydides--reporting "history" not from what I can document but from my sense of what the occasion demands--I would write something like this and set it in early 1987: a conversation between Alan Greenspan and George H.W. Bush consigliere James Baker:

Baker: I am sorry we haven't been able to get you into this administration in a job at the rank you deserve. Perhaps the next one?

Greenspan: Well, I presume that you are thinking of appoining Paul Volcker to another term as Fed chair?

Baker: He is the obvious choice. He wants another term. He has credibility with the markets and so has an easier time than any replacement. We can always blame him if something goes wrong with the economy.

Greenspan: Paul Volcker is a very good guy, but he regards himself as a technocrat. He is not political, like you and I are. He does his technocratic job. Carter appointed him. Yet the fact that his monetary policies cost Jimmy Carter reelection was simply not something that entered Vocker's mind...

Baker: Volcker says that he had no choice, that he had to act in 1979-1980...

Greenspan: There is always a choice. It would be a shame if it came around to 1991, and somebody who did not understand the political realities like you and I do were sitting in the Fed chair. My old teacher Arthur Burns always understood political realities...

Baker: You make some interesting points. I think I understand you...

But I am not Thucydides. f

This does make sense of (i) Volcker's non-reappointment, (ii) the feeling of betrayal that George H.W. Bush's posse feels toward Alan Greenspan, and (iii) Greenspan's relative kid gloves toward Bush in a way that no other scenario I can think of does.

    Posted by on Monday, October 1, 2007 at 11:16 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (12)


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