By Nell Henderson
Washington Post Staff Writer
Friday, January 27, 2006
Government leaders, Wall Street analysts and academics have heaped accolades on Alan Greenspan as he prepares to step down as Federal Reserve chairman Tuesday, leaving behind a strong economic expansion, tame inflation and low unemployment after more than 18 years of adjusting the nation's interest rates.
But Greenspan, 79, also leaves a remarkable political legacy, say Republican and Democratic policymakers who have worked with him in Washington over nearly four decades.
From his days working on Richard Nixon's 1968 presidential campaign to his congressional testimonies last year, Greenspan has helped candidates, presidents and lawmakers devise and sell policies on countless social and economic issues. An avowed "free-enterpriser," Greenspan consistently pushed for less government regulation, smaller federal budget deficits and freer trade, these observers said. Early on, he helped move the federal government to play a smaller role in the U.S. economy than was commonly accepted in the 1960s and 1970s.
However, as Greenspan has indicated in public and private comments, his years in political life also taught him that compromise is necessary to preserve both capitalism and democracy. Over time, Greenspan helped forge several deals that strengthened the government's hand or extended its reach.
"Alan has had, mostly behind the scenes, a tremendous impact on government policy" over the last 40 years, said former president Gerald R. Ford in a December interview. Ford appointed Greenspan chairman of the Council of Economic Advisers in 1974.
Long before becoming Fed chairman in 1987, Greenspan played key roles in ending the nation's military draft, rescuing New York City from near-bankruptcy and temporarily saving Social Security from insolvency. Since taking the helm of the central bank, he helped persuade Congress to approve President Bill Clinton's 1993 budget and President George W. Bush's 2001 tax cut. He urged Congress last year to create private Social Security accounts, reduce the deficit and resist calls to erect new trade barriers.
"Alan Greenspan has probably been a key player in more Republican presidential campaigns and Republican party platforms and Republican administrations than any other economist in the country," said Martin Anderson, a senior fellow at the Hoover Institution who worked in the Nixon and Reagan administrations. "He's a wonderful politician."
Greenspan thrived in the Republican Party because it housed so many like-minded individuals. But Democrats, including President Jimmy Carter, also embraced deregulation in the 1970s; Clinton, in the 1990s, supported free trade and deficit reduction, declaring the era of big government over.
In the process, "the political impact of [Greenspan's influence] has probably been to push the Democrats more to the center on fiscal policy," said investment banker Felix G. Rohatyn, a Democrat who served as Clinton's ambassador to France.
The Fed chairman declined to comment for this article.
Greenspan took his first steps into politics in 1968 when Anderson asked him to join Nixon's presidential campaign. Greenspan helped coordinate domestic policy research and analyze poll data, writing computer programs to project the electoral vote count.
Greenspan had met Anderson years earlier when both formed part of the intellectual circle of novelist Ayn Rand, a Russian emigre whose writings celebrated laissez-faire capitalism. Three of the essays in Rand's 1967 book "Capitalism: The Unknown Ideal" were authored by Greenspan, then the 41-year-old president of an economic consulting firm in New York City.
"Chronic deficit spending [is] the hallmark of the welfare state," the future Fed chairman wrote. "The welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes."
For Greenspan, the Nixon campaign offered a chance to influence the candidate's policies. Early on, though, Greenspan could be politically naive as he promoted his libertarian ideals: Nixon ignored his advice to end farm subsidies, for example. But he also scored some successes: Candidate Nixon called for the end of the military draft, as Anderson and Greenspan had recommended.
After Nixon was elected in 1968, Greenspan served on the president's Gates Commission, convened to study the possibility of creating all-volunteer armed forces. Greenspan considered the draft a form of involuntary servitude and voted along with the rest of the panel to end it, contributing to its demise in 1973.
By the summer of 1974, when the Watergate scandal was at full boil, the president needed a new chairman of the Council of Economic Advisers. Greenspan accepted the nomination but had not been confirmed by the Senate when Nixon resigned in August. But President Ford quickly resubmitted the nomination, and Greenspan moved full time to Washington for three years.
From the start, Ford recalled, "Alan was at the forefront" of his administration's efforts to free the economy from government interference by deregulating the airline, trucking and railroad industries and dismantling wage and price controls imposed during the Nixon administration.
Ford said he valued Greenspan's technical expertise but also his "feeling for the country as a human being," which the former president credited to the economist's experience touring the country in his youth as a musician in a swing band.
"That background was invaluable in his judgment on the economy," Ford said. "It wasn't all just academic theory. He understood the practicality of the economy."
When New York City verged on bankruptcy in 1975, Ford's cabinet was divided over the city's request for financial assistance, the former president remembered: Some officials wanted to give the city money and others opposed any government bailout. Ford said Greenspan and Fed Chairman Arthur F. Burns solved the impasse by proposing a compromise -- a package of federal loans that would be fully repaid over time -- that helped stabilize the city's finances.
Greenspan could be politically tone-deaf on occasion when speaking to the public. At a conference in September 1974, the new CEA chairman was jeered when he said Wall Street brokers were being hurt the most by high inflation, in terms of the percentage of income eroded. He later apologized.
But his advice was well received by presidents and other policymakers because they valued his cool analysis, discretion and refusal to candy-coat bad news, said Justin Martin, the author of a Greenspan biography. "He has a gravitas about him . . . that has made people in power very comfortable with him."
Greenspan served as an economic adviser to Ronald Reagan's 1980 presidential campaign. After his election, Reagan asked Greenspan to co-chair a commission to develop proposals for rescuing Social Security. Greenspan's panel hammered out a bipartisan deal to raise payroll taxes and gradually lift the retirement age.
On the commission, Greenspan displayed his instincts for compromise and a canny grasp of politics. In congressional testimony last year, he recalled how closely he worked with Robert M. Ball, a Social Security expert appointed to the commission by the Democratic House Speaker Thomas P. "Tip" O'Neill Jr. As the panel worked on each issue involved, Greenspan would run the various options by Reagan and his Chief of Staff James A. Baker III, while Ball would float them through his own back-channel to O'Neill. In that way, the panel knew, step-by-step, which proposals would be acceptable to both sides.
"What came out was essentially the commission report pre-agreed to by the speaker of the house and . . . President Reagan," Greenspan said during his testimony.
He and Ball also crafted a pact on how to handle the House Ways and Means Committee's hearing on the report. "I said to Ball, 'When the Republicans ask you a question, I will answer it, and I hope you will answer the questions that the Democrats ask me.' And it worked remarkably well."
It was during the Nixon, Ford and Reagan years that Greenspan worked with the officials who later would elevate him to become Fed chairman in 1987, replacing Paul A. Volcker.
The Fed's main job is to keep inflation and unemployment low by adjusting interest rates -- acting independently of the White House or Congress.
During the administration of President George H.W. Bush, from 1989 through 1992, Greenspan resisted White House pressure to keep interest rates lower than he thought necessary. Bush later blamed Greenspan for his electoral loss to Clinton in 1992.
Greenspan had smoother relations with Bush's Democratic successor. In early 1993, the Fed chairman lent critical support to Clinton's deficit-reduction plan -- even though it included tax increases -- describing it on Capitol Hill as "a very positive force for the American economy." The package passed with no Republican votes, but Greenspan's public backing helped win some dearly needed Democratic ones, recalled Rep. Barney Frank (D-Mass.).
During the mid-1990s, Greenspan worked closely with Clinton's economic team in crafting responses to financial crises in Mexico, Asia, Russia and elsewhere -- even when those efforts occasionally required government influence on the markets -- and drumming up support for them on Capitol Hill and elsewhere.
By early 1995, Greenspan's political influence was so great that House Majority Leader Newt Gingrich asked him to call conservative talk show host Rush Limbaugh to explain the Clinton administration's plan to rescue Mexico, which was close to defaulting on its debts. Gingrich supported the plan, which the Fed chairman had helped design, but congressional Republicans were balking.
"I was looking for ways to get the conservative community to understand. . . . Rush is a leading communicator to 14 to 15 million conservatives," Gingrich recalled in an interview. Greenspan "is the leading economic policy analyst in the U.S. and arguably the world."
The Fed chief reluctantly made the call. Even so, Congress refused to back the plan, forcing the administration to take a different approach that didn't require lawmakers' approval.
Meanwhile, as the economy boomed in the late 1990s, unemployment fell, stock prices soared and the federal budget deficits turned into surpluses.
"The Clinton administration had huge successes carrying out the economic policies essentially fathered by Alan Greenspan and [Clinton Treasury Secretary Robert E.] Rubin, and they see that as an enormous feather in their hat," Rohatyn said.
Greenspan then argued for several years that the White House and Congress should "let the surpluses run" to pay down the government's debt rather than cut taxes or raise spending.
So many Democrats were outraged in January 2001, when Greenspan urged Congress to cut taxes, lending a key political boost to President George W. Bush's tax cut proposal. Critics charged that Greenspan had become too partisan for a Fed chief; others saw him simply reverting to his anti-government ideology.
But Greenspan believed the surpluses would continue and suggested that policymakers design "triggers" to scale back the tax cuts if deficits reemerged. Congress later passed a reduced form of Bush's tax cut without such provisions.
After the budget swung back into deficit in 2001 and more tax cuts followed, Greenspan repeatedly supported making the temporary tax cuts permanent -- one of the Bush administration's top policy goals -- while cutting spending.
Greenspan's influence on Capitol Hill has waned since 2001, as the political parties have grown bitterly divided over economic policy, leaving them less open to compromise. Lawmakers did not follow his advice last year to create Social Security private accounts, or to cut Social Security and Medicare commitments to future retirees -- positions that Democrats adamantly oppose. Nor did they heed him and adopt stricter budget controls -- which the White House and congressional Republicans reject.
But lawmakers of both parties continue to quote his ideas and arguments and seek his support for their positions. And he plans to offer his opinions after he leaves the Fed by giving speeches, writing a book and creating a new Washington-based consulting firm, Greenspan Associates, friends say.
And as Greenspan said in a speech earlier this year, "In the broad sweep of history, it is ideas that matter. Indeed the world is ruled by little else."