Master of Minimalism
Frequently the fate -- gratifying, yet melancholy -- of consequential public persons is this: They so transform an ominous social landscape that by the time they leave the public stage, the public no longer remembers the banished dangers and hence cannot properly value the banisher. So, as Alan Greenspan heads to the end, in January, of more than 18 years as head of the Federal Reserve Board, recall that 30 years ago the intelligentsia worried that democracies, including this one, had become "ungovernable."
The worrying was caused by inflation, then thought to be the systemic disease of democracies. The theory was that democratic electorates would reward governments that delivered the pleasure of public spending and would punish those that inflicted the pain of taxation sufficient to pay for that spending. Hence democracies would run chronic deficits. These, it was assumed, both caused inflation and gave government a powerful incentive to tolerate inflation as a means of steadily reducing the real value of its debts -- inflation as slow-motion repudiation.
Furthermore, deficit spending -- giving the public a dollar's worth of government goods and services and charging the public only, say, 80 cents for them -- produced big government and, by making big government inexpensive, reduced public resistance to making it even bigger. And because of affluent voters' low and steadily lowering pain thresholds, democracies would not tolerate the discomforts associated with wringing inflation out of the economy.
That supposition was slain by a fact: President Ronald Reagan and Paul Volcker, Greenspan's predecessor, put the country through the rigors of wringing inflation out of the economy, and in 1984 Reagan carried 49 states. Between 1945 and 1982 the economy was in recession 22.4 percent of the time. In the 276 months since the recession ended in 1982, it has been in recession 14 months -- just 5.1 percent of the time.
Because of Americans' low pain threshold, the Reagan-Volcker recession was considered hideous. It was the worst since the Depression, but the economy contracted less than 3 percent. In the years between 1890 and 1945 -- America's period of hard learning about managing an industrial economy -- three times there were contractions of 5 percent, twice contractions of 10 percent and twice contractions of 15 percent.
Since 1945, and especially since 1982, we have learned the real secret of managing the economy: Do not try to manage it. If you refrain from trying to "fine-tune" business cycles, the cycles will be less frequent and less severe.
Greenspan's tenure has illustrated an axiom to which his successor, Ben Bernanke, should subscribe: Minimalist missions by government produce maximum results. He has not defined the Fed's primary purpose as achieving this or that level of employment or economic growth. Rather, its mission is to preserve the currency as a stable store of value -- to control inflation. However, Greenspan's impeccable credentials as an inflation-fighter have enabled him to keep inflation rates low even during very low unemployment without kindling inflationary expectations, which can be self-fulfilling.
America's economy is so dynamic that in any five-year period, approximately 45 percent of Americans move from one income quintile to another. Twenty percent move up from the bottom quintile in any 12-month period, and 40 to 50 percent move up over 10 to 20 years. Because of the constant transformation of dynamic economies, the study of economics has become a science of single instances. Its practitioners are constantly in uncharted waters, reasoning inferentially. Just as astronomers inferred the existence of Pluto from the behavior of known planets, Greenspan inferred a rate of productivity growth higher than most estimates because inflation and unemployment were falling simultaneously.
The Federal Reserve system annoys some populists who think every U.S. senator and representative should write on his or her bathroom mirror, and read every morning, this sentence: "The Fed is a creature of Congress." Indeed, Congress made it and could dictate to it -- could dictate interest rates and the money supply. A terrifying thought.
Greenspan's famously, at times hilariously, circumspect rhetoric has been prudent because some word, inflection or even arched eyebrow could have caused vast sums to slosh in this or that direction in capital markets. His rhetorical style -- or perhaps anti-style -- is a high-stakes illustration of Voltaire's idea that men use speech to conceal their thoughts.
Greenspan's wife has said he had to propose marriage three times before she understood what he was saying. And he was being droll when he said -- if he said it; apocrypha collect around legends -- that "if I have made myself clear I have misspoken." His achievements speak clearly for him.