Alan Greenspan, the man who would eventually lead the world’s most powerful bank, the US Federal Reserve, was eager to join Richard Nixon’s presidential campaign back in 1967. At the time, he was 41 years old and already a prosperous Wall Street consultant. But Greenspan was developing political ambitions, not least because he suspected that power and perhaps glory lay in Washington, DC. Writing in the midst of riots in cities like Detroit and Newark, he offered Nixon his thoughts on how to harden his campaign’s plank. The source of the unrest, Greenspan explained in a letter quoted by Sebastian Mallaby in his new biography, The Man Who Knew, was apparently not economic disadvantage but rather the federal government’s antipoverty programs. “They have the ultimate effect,” Greenspan wrote, “of only degrading the Negroes as individuals and have led to the current upsurge in racism and class antagonism.”
Later in the campaign after Martin Luther King Jr. was killed, Greenspan sent Nixon another missive. Robert Kennedy, then a Democratic presidential hopeful, had given an emotional speech about the challenges of racial justice and calling for compassion for those who suffer in our economy. Greenspan was furious. Kennedy, he complained to Nixon, was “attempting to cash in on the tragic events of recent days by fostering guilt among the whites and accordingly presenting himself as a moral leader.”
These two anecdotes are telling. Even as Greenspan started to move into the hard-nosed realm of politics, he never completely left behind his rigid ideological commitments to libertarianism, which he had developed as a young man. Despite Mallaby’s best efforts to show otherwise, much of Greenspan’s career as a public figure was defined by the individualistic fantasies and persistent biases against government spending and regulation that he shared with Ayn Rand and economists like Milton Friedman.
Mallaby, a right-of-center economics commentator and former contributing editor to the Financial Times, doesn’t find many problems with Greenspan’s free-market views. But his new biography does offer some useful insight into how Greenspan’s libertarian ideals often came into conflict with his persistent ambition to rise to the top of Washington’s policy-making establishment. To do so, Greenspan had to make a lot of compromises. This was the good news, at least for America, and it was almost always the good news for his career as well. Greenspan showed a talent for suppressing his idealism when necessary. His dream had been to become secretary of the Treasury. By becoming chairman of the Fed and the most powerful policy economist of his time, Greenspan exceeded his goal.
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After the crash of 2008 and the recession that followed, some may forget how exalted Greenspan’s reputation as an economist once was. In the wake of 2008, many came to believe that he’d been a principal culprit in the crash. Greenspan, in fact, publicly blamed himself, admitting in congressional testimony that many of his economic ideas—including his “model” of the economy—had failed. But until 2008, Greenspan was widely admired for as policy-maker, in particular for sharply reducing inflation while sustaining economic growth. Mallaby’s biography spends a considerable amount of energy confirming this mainstream view: that until the crash, Greenspan had successfully steered the US economy during his almost 20-year tenure at the Fed.
Starting in the early 1970s, many economists and policy-makers had come to believe that inflation was the principal danger for the American economy. Having begun to climb during the Vietnam War, inflation rates continued to rise in the early 1970s as a result of Nixon’s priming of the economy to secure his reelection in 1972. Inflation subsided a bit in the mid-1970s as a result of a major recession, but it then rose sharpy again, reaching an average of 13.5 percent in 1980. Because people begin to anticipate ever-greater increases in inflation, its increases can build on itself and it can make it difficult for economic actors to make rational decisions. In the face of increasing inflation rates, consumers and businesses begin to buy more now, putting upward pressure on prices. Workers then bargain harder for wage increases to compensate for these higher prices, which in turn puts pressure on businesses to raise prices still even higher. As a result of the sometimes spiraling nature of inflation, many economists consider it a perilous phenomenon—one that is difficult to curb and, in fact, according to many, the only serious danger the US economy faces.
Greenspan’s fame rested on the fact that he had subdued inflation further. Under Paul Volcker’s stewardship of the Fed, inflation had already fallen sharply, but under Greenspan the annual inflation rate eventually slowed to 2 to 3 percent. Greenspan did so by using one of the Fed’s main policy tools to steer the economy: adjusting interest rates. And he often used this tool to lower inflation by raising rates. But it’s hard to argue that Greenspan didn’t go overboard during his tenure: Wages basically stagnated because of his tough policies, which had a high human cost, and there was also a rapid rise of income and wealth inequality during the Greenspan era.
In a 781-page book, there is plenty of room to discuss these deleterious effects in some detail, perhaps even to defend Greenspan from his liberal critics. But Mallaby apparently feels no need to raise these objections, even if only to bat them away. For much of the book, he is often more concerned with Greenspan’s celebrity than his economics.
From time to time, the book even takes on the breathless sensibility of a movie-star biography, or just bad pulp fiction. “A powerful voice inside him whispered that he was capable of greatness,” Mallaby informs us in one particularly egregious moment. Of the accomplishments of Greenspan’s second wife, NBC News correspondent Andrea Mitchell, we hear little. But we do hear about how she was not only attractive but “beautiful,” and wore Oscar de la Renta to their wedding, and Mallaby is also careful to tell us at length about Greenspan’s relationship with Barbara Walters and other women, his many tennis getaways, and his love of playing golf in prestigious venues.
Such asides quickly become tedious, but they do tell us something of Greenspan’s character, and also why many found him so appealing, even when his often doctrinaire economic outlook and careerism led to troubling results. In contrast to his seemingly ponderous and austere exterior, Greenspan had a taste for life. Aside from golf and tennis and his affection for women, he played clarinet and saxophone in a professional dance band in his late teens and, like many children, once dreamed of being a baseball player. He was also notably good at making powerful friends. Early in his career, he was especially close to the arch right-winger and presidential aspirant Patrick Buchanan, and he later became chums with Dick Cheney, from whom he got useful information as Fed chairman about military matters that could affect the budget. He liked businessmen in general and admired the robber barons when he read American history as a younger man. On Greenspan’s office desk when he retired, he had, in addition to a picture of Mitchell, one of Gerald Ford, who appointed him to the Fed, and another of Margaret Thatcher. He was also close to many of his wife’s liberal journalist friends.
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Greenspan was born in 1926 to a Jewish family living on West 163rd Street in Manhattan’s Washington Heights. His parents divorced when he was a child, and his father’s businesses frequently failed. An intelligent, mathematically inclined young man who was both well-rounded and a highly accomplished student, Greenspan likely acquired his musical ambitions from his mother, a pianist. For a time he attended Juilliard, but then he enrolled at New York University’s School of Commerce and later at Columbia as a graduate student under the economist Arthur Burns, Nixon’s close ally.
Burns, who played an influential role in shaping Greenspan’s view of the economy, wasn’t so much interested in economic theory as he was in the empirical study of business cycles—the data beneath the economy’s ebb and flow. To Burns, inflation was the result of excess government spending. Business cycles were created by exuberant overbuying and overselling, often sponsored by the government, which created new cycles as inflated prices and interest rates fell in order to encourage renewed buying and investment.
Greenspan mostly subscribed to this view. From this perspective, economies were usually self-correcting: If consumers saved more in a period of recession, business would surely invest this newfound capital and launch an economic recovery. An economy eventually worked out its excesses on its own. Government spending and inefficiency were, in fact, often the reasons why these corrections were necessary in the first place. This was a simplified version of the pre-Depression economics that had come under assault by John Maynard Keynes, who sought to show that the market’s supposed self-correcting mechanism was flawed and unreliable. Government spending and deficits didn’t hurt an economy but were, Keynes asserted, typically helpful and often necessary to correct recessions.
Many economists since the postwar years have come to accept Keynes’s view, but while Mallaby had plenty of opportunity to explore why Greenspan, following in the footsteps of mentors like Burns and Ayn Rand, thought Keynes’s major conclusions were wrong, we hear very little about his dissent: “Greenspan was not convinced by any of this” is one of the few comments Mallaby makes on the subject. “The contention that excess savings would pile up, with nobody willing to spend or invest them, seemed just too pessimistic.”
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Mallaby’s casual treatment of major economic ideas can be frustrating. Even more so are some of the strange conclusions he makes. For example, when writing about surges in consumer spending after World War II, Mallaby argues that it proved Greenspan’s contention that the economy was self-correcting and would not stay mired in stagnation, contrary to what Keynes argued. This is, to put it mildly, a misleading reading of the period. Almost every economist and historian agrees that it was the government’s war spending, starting in 1940, that brought the US economy out of its deep recessionary funk, and in fact, the postwar boom produced by this continuing influx of war spending is often cited as the classic example of Keynesian fiscal stimulus at work.
When it comes to Greenspan’s views on conservative economic ideas like Friedman’s monetarism, Mallaby also often treads lightly. He footnotes a paper in which Greenspan asserts a key idea of Friedman’s monetarism that the control of money supply will in itself determine inflation, but he later dropped the idea. Another influential theory used to attack the liberal welfare state was that of “rational expectations”: If the federal government undertook a Keynesian stimulus, consumers wouldn’t spend, as Keynes supposed, but would save because of their expectations that taxes would soon be raised to close the deficit created by federal stimulus. These theories, so much a part of the economics of the time, and so integral to building a conservative critique of American liberalism, were apparently discarded by Greenspan with little analysis—or, at least, little analysis made available in Mallaby’s book.
Perhaps one reason that Mallaby’s book does not go deeper into economic ideas is that Greenspan’s policy decisions had little to do with them beyond his rigid commitment to the notion of a self-correcting economy. Mallaby rightly points out that Greenspan’s true talent was empirical sleuthing, and he doggedly sought out data that might tell him more about the strength or weakness of the economy at any given moment. This kind of research did contribute to his more successful decisions. In particular, it made him invaluable to Nixon’s presidential campaign, because it allowed him to compile data on opinion surveys.
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Greenspan’s two most important policy decisions, in the view of his admirers, were that he stopped future inflation cold by raising interest rates sharply in the early 1990s, and that he then did an about-face, despite his anti-inflation predilections, and refused to raise rates later in the decade.
Greenspan did the former in defiance of two presidents: George H.W. Bush, who would later accuse Greenspan of costing him reelection, and Bill Clinton, even after Clinton agreed to raise taxes to control the federal deficit. The increased rates were also a classic example of Greenspan’s tendency to follow a policy to the point of overkill, and it came with a very high human cost: Many jobs were lost in order to lower inflation.
In the later 1990s, Greenspan seemed to make a U-turn by refusing to raise rates. This decision enabled the Clinton boom to flourish and the unemployment rate to fall. The economy had been building up strength, and Greenspan deserves credit for helping create its high-water mark. But his move also proved reckless because he didn’t know when to stop. The economy may have boomed during his last years as Fed chair, but his policies also helped stoke overspeculation and the coming recession.
Mallaby spends considerable time going through these two decisions, both of which he praises. But he doesn’t fully engage with Greenspan’s most basic and simplistic conservative view: that free-market economies were self-correcting. Government interventions could tweak the economy, Greenspan believed, but mostly they were costly intrusions. The “invisible hand” proposed by Adam Smith usually set prices fairly, providing the greatest good for all. Even antitrust enforcement, allegedly to make free markets work more efficiently, was another unproductive government intrusion, in Greenspan’s view.
Greenspan had once been so inflexible in his faith in the market that he even believed in the gold standard: fixing the value of the dollar to a set price for gold and then preventing it from fluctuating. This would stanch any upturn in inflation, the argument went, because it would limit the Fed’s ability to print money, but it would also likely lead to prolonged recessions.
From the beginning of Greenspan’s reign at the Fed, the enemy of prosperity was inflation, which he thought interfered in a damaging way with free-market decisions by creating unmanageable uncertainties. Social policies like those of Lyndon Johnson’s Great Society were both an affront to individual responsibility and a source of inflation due to expanding federal deficits. Though Greenspan would eventually mellow on social spending, within such a framework, Keynesianism could have no place. Ironically, neither could Friedman’s monetarism, though Keynesianism was a common enemy to both. Greenspan accepted for a while that a rapidly growing money supply was a prime source of inflation, and he wrote one of his few scholarly papers on the subject. But Friedman’s monetarist rules for governing the Fed were of no interest to him.
Mallaby gives Greenspan much credit for adding financial variables to the forecasting programs he developed as a Wall Street analyst, but on this as well, he waxes too romantic. “Unlike both monetarists and Keynesians,” Mallaby writes, “Greenspan emphasized the key role of financial markets in driving the economy.” This is a remarkable claim. Keynes, of course, did emphasize the way in which financial speculation affected investment—in fact, one of his signature arguments was his discussion of how business investment was overdependent on the unpredictable movement of stock prices. But in his statement, Mallaby appears to ignore both Keynes and the famed Keynesian Hyman Minsky (he only later notes that Minsky highlighted financial speculation’s influence on the economy) and suggests that Greenspan was the first to introduce financial variables in his forecasting.
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In the end, and despite Mallaby’s best efforts, Greenspan comes off more as a flying-by-the-seat-of-his-pants economist than as a theoretician or strategic policy-maker. His reputation turned mostly on his two critical decisions in the ’90s relating to interest rates, and I’d argue that both of these were more gamesmanship than economics.
In the case of his 1994 decision to raise interest rates, Greenspan wanted to show the bond traders that he could surprise them and undercut expectations of inflation.
Greenspan’s choice after 1994 also had more to do with personal judgment than with hard evidence. With the economy growing strongly and wages rising, Greenspan decided not to raise interest rates because he’d become intrigued by America’s “New Economy”—and once again, his decision had as much to do with a desire to surprise bond traders as it did with any knowledge of how this surprise would turn out. Productivity was starting to grow again rapidly, he believed, even though it wasn’t showing in the data, and so Greenspan decided not to raise rates as a means of demonstrating his faith in the New Economy even before the numbers proved this faith right.
Unemployment fell as did interest rates, yet inflation was nowhere in sight. Rising wages were offset by growing productivity. His champions believed this represented Greenspan’s feel for data, others called it luck, and some called it both. But one wonders if it was simply born out of his libertarian faith in the innovative possibilities of free enterprise.
Either way, his faith in financial innovation and free enterprise led to many damaging errors. Greenspan in the late 1980s favored letting savings-and-loan institutions invest in almost anything they chose—golf resorts, junk bonds—even as the federal government guaranteed the money on deposit with them. Huge losses resulted requiring a federal bailout.
In late 1990s, Greenspan also supported Bill Clinton and Larry Summers in refusing to allow the federal government to adequately regulate derivatives, the complex, highly leveraged securities that were at the heart of the 2008 crash. Again, while financial innovation should not be discouraged, a healthy skepticism about the efficiencies of markets was discarded in the wake of New Economy thinking. As for regulations to tame the housing or stock-market bubbles, Greenspan was almost entirely silent. When warned of intense overheating in the mortgage market and even possible widespread fraud by the FBI, he elected to do next to nothing. In his view, markets worked to minimize fraud on their own.
Here again, Mallaby bends over backward to defend him, arguing that those who issued the warnings were not all that convinced of the overheating themselves and that the Fed had too little regulatory power in any event. But even if this were so, Greenspan wielded enormous informal power and had the greatest pulpit in economics to cry down excess.
I should note that Mallaby does criticize some of Greenspan’s actions, especially before he became Fed chairman, such as his endorsement of Ronald Reagan’s claim that his outlandish budget would not result in serious deficits. Mallaby has also added interesting details on Greenspan’s role in urging Arthur Burns, who became Fed chairman in 1972, to ease monetary policies—controversial because it helped Nixon win reelection.
But Mallaby ignores most of the disturbing outcomes of Greenspan’s major decisions. He claims that Greenspan made only one major analytical error in his tenure at the Fed: his failure to recognize the vulnerability of financial markets because of speculation.
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In the book’s appendix, Mallaby presents several charts to show how Greenspan tamed inflation and stabilized the economy. But if he’d provided a chart on wages, it would have shown stagnation. Similarly, a chart on income and wealth inequality would have shown a consistent rise during the Greenspan years; today, the gap in income between the top 10 percent—and especially the top 0.1 percent—and the rest of the country is much higher than in most of Europe. If Mallaby had included a chart on federal investment in infrastructure, it would have been lower as a percentage of GDP than it had been for most of the post–World War II period, even under Reagan.
As for the benefits of low inflation, we have yet to see the long-term productivity growth that was the promised result of eliminating the uncertainties of rising prices and letting free markets do their magic. Productivity now grows at a worrisomely slow rate. There are also the consequences of the 2008 crash, and how the deep recession that followed is profoundly changing the political landscape of the United States and Europe.
Such is the damage caused by Greenspan’s policies, which were designed to fight the last war—in this case, against inflation—with a free-market approach. Greenspan deserves much blame here: He focused almost solely on inflation to the detriment of workers, who now, some argue, are bitter enough to vote for Donald Trump. He refused to attempt to dampen financial speculation with the Fed’s considerable arsenal of tools, and—perhaps most damaging of all—he didn’t take the lead in developing needed regulations to stop the evident market abuses, all of which would have been reforms in accordance with the genuine principles of Adam Smith. Enjoying the profits from risk, while taking no responsibility for the losses, was the classic strategy of Wall Street traders, and a violation of the most basic tenets of Smith’s invisible hand. Mallaby observes that because of Greenspan’s fluency with numbers, he was the “man who knew,” but judged from the view of history, it is clear that there were many things Greenspan did not know.
Jeff MadrickJeff Madrick is director of the Bernard L. Schwartz Rediscovering Government Initiative at the Century Foundation and editor of Challenge magazine. His latest book is Seven Bad Ideas: How Mainstream Economists Have Damaged America and the World.