Think Again: Alan Greenspan

U.S. Federal Reserve Board Chairman Alan Greenspan is credited with simultaneously achieving record-low inflation, spawning the largest economic boom in U.S. history, and saving the world from financial collapse. But, when Greenspan steps down next year, he will leave behind a record foreign deficit and a generation of Americans with little savings and mountains of debt. Has the world's most revered central banker unwittingly set up the global economy for disaster?

BY STEPHEN S. ROACH | JANUARY 5, 2005

"Greenspan Is Responsible for the U.S. Economic Boom of the 1990s"

Only in part. The United States experienced an extraordinary period of prosperity in the 1990s. Between 1993 and 2000, 21 million new jobs were created in the United States, and in 2000 the country's unemployment rate briefly dipped below 4 percent for the first time in 30 years. During this boom, the U.S. economy grew at nearly 4 percent a year, adding more than $2 trillion to real U.S. gross domestic product (GDP) -- more than the annual output of France.

But many stars aligned to produce that outcome, not just good monetary policy on the part of Greenspan's Fed. For starters, a judicious focus on fiscal discipline by former President Bill Clinton's administration brought the budget deficit under control. The Clinton administration managed to lower the deficit every year between 1993 and 1997. By 1998, there was a surplus that lasted until 2001. The 1990s also saw a powerful wave of corporate restructuring and technological change. Together, these two forces set the stage for sustained low inflation and a powerful acceleration of productivity and employment growth.

Greenspan's leadership in monetary policy undoubtedly played an important role in fostering the conditions that allowed the U.S. economy to surge in the 1990s. The chairman helped achieve the economy's high-performance potential during that time period. But no one should believe that the economic boom of the 1990s was the work of just one man or just one monetary policy.

"Greenspan Defeated Inflation in the United States"

No. Credit for breaking the back of double-digit inflation goes to Paul Volcker, Greenspan's tough and courageous predecessor. In the summer of 1979, when Volcker assumed the reins at the Federal Reserve, inflation was raging at 12 percent a year. Eight years later, when Alan Greenspan took over, the inflation rate stood at around 4 percent. During Greenspan's 17-year era, inflation slowed further to 2.5 percent per year. But 80 percent of the drop in inflation occurred under Volcker's stewardship at the Fed.

True, Volcker put the United States through its worst recession in modern times. It was the only way to unwind the destructive interplay between wages and prices that drove U.S. inflation. Greenspan's major challenge was to finish the job Volcker started. That was no easy task, and Greenspan's successes should not be minimized. In only one of Greenspan's 17 years at the Fed (1990) did inflation move above 5 percent; in 11 of those years, inflation was 3 percent or lower.

But there were serious complications along the way, not least of all a dangerous flirtation with outright deflation, or an overall decline in the price level, in early 2003. This problem resulted from Greenspan's biggest gamble -- a willingness to push U.S. interest rates to extremely low levels during a period of rapid economic growth. The move gave rise to the destabilizing stock market bubble of the late 1990s, a speculative excess unseen in the United States since the roaring 1920s. The bursting of that bubble in early 2000 transformed an orderly disinflation (i.e., when inflation merely decelerates) into a close call with actual deflation.

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Stephen S. Roach is chief economist at Morgan Stanley.