How much credit does Alan Greenspan deserve for America’s economic success over the past 18 years? Answer: a lot, but nowhere near all.
I mean no slight to Mr. Greenspan. Indeed, “the maestro” himself likely agrees that the success of the economy during his tenure as chairman of the Federal Reserve board is largely the product of millions of creative, energetic producers -- each one experimenting with ways to produce more and better output at lower costs.
Microchip designers at Apple and Intel, retailing entrepreneurs at Target and Barnes & Noble, vintners in California and Oregon, venture capitalists in New York and Los Angeles, coffee importers at Starbucks, artists at Pixar, manicurists at your local mall – these and uncountable numbers of other working people are the engine driving American economic might.
Of course, entrepreneurs and workers need the right institutional environment to give them incentives to take risks and exert effort – and to have the fruits of their enterprise grow into a foundation for others to build on. Fortunately, despite its imperfections, America’s institutional environment is pro-growth and pro-opportunity.
Most of these sound institutions have nothing to do with the Federal Reserve -- for example, the fact that Congress is unlikely to nationalize industries or to raise tax rates to 1970s levels. But one important institution is directly in the hands of the Fed: stable money.
Because stable money works its beneficial ways silently, it’s easy to discount its importance. But those of us who remember the 1970s recall the anxiety created by double-digit annual rates of inflation. We also recall that decade’s sluggish pace of economic growth. It was no wonder that the economy was in the doldrums: Who wants to invest in an economy in which prices are distorted by inflation?
Fortunately, Alan Greenspan kept the lid on money growth. Like Paul Volcker before him, Greenspan followed a tighter monetary policy than had become the norm in post-WWII America. The result was low inflation. And when inflation is low, people can better plan for the future. Lenders need not worry that inflation will reduce the value of the outstanding debt owed to them. Workers need not worry that wage rates agreed to today will have less buying power tomorrow. Producers and merchants can trust that prices convey accurate information about the value of goods that consumers want to buy and of inputs used to produce these goods.
In short, by keeping inflation in check, Greenspan helped keep the economy honest. Prices told the truth about the relative values of goods, services, and resources -- making for better and more sustainable production and consumption decisions.
It’s important to understand just why this achievement is difficult. The difficulty doesn’t lie in the technique for preventing inflation. That’s child’s play. The recipe is as simple as hitting the “Off” switch on the printing presses.
The difficulty is exclusively political. It stems from the nature of the Fed. Despite being formally independent of the White House and Congress, in the end the Fed is part of government. It enjoys privileges that only government can grant -- it has monopoly power to issue legal tender -- and it is run by political appointees.
Imagine that you’re the president or a member of Congress facing a tough re-election bid. You know that higher money-supply growth will create a false sense of prosperity. You also know that the price to be paid for this false impression will be higher inflation, but that bill won’t come due until after the election.
So like the first President Bush, you plead with the Fed Chairman to kick the printing presses into high gear. The political pressures for the Fed Chairman to cooperate are intense. In the past, most Fed Chairmen have succumbed to such pressures. But not Alan Greenspan. He famously resisted Bush 1’s plea for inflationary monetary policy, even though doing so made Democrat Bill Clinton’s victory more likely.
Greenspan’s steadfastness earned him a reputation as an “inflation hawk.” People came to trust that, under him, the money supply was no partisan political device. With the threat of inflation no longer looming, investors looked more favorably upon the United States.
One consequence is a higher U.S. trade deficit. But contrary to conventional wisdom, this “deficit” is evidence of economic vigor. When the dollar is stable and the U.S. investment climate attractive, foreigners are more willingly invest here. Such investments create the so-called “trade deficit.” But unless and until someone convinces me that more R&D, more factories and more venture capital in America are undesirable, I will thank Mr. Greenspan for his singular contribution to our dynamic investment climate -- attractive to Americans and foreigners alike.
Donald J. Boudreaux, a guest columnist for the Media Research Center’s Free Market Project, is chairman of the Department of Economics at George Mason University in Fairfax, Va. He can be reached at firstname.lastname@example.org .