Has Alan Greenspan done a good job? And will his successor be able to do at least as good a job? The questions are relevant, since come January the incumbent chairman of the Federal Reserve Board is due to be replaced.
If the primary job of the Fed is to keep inflation low and stable, Greenspan wins high marks. Although the surge in oil prices has recently distorted the overall Consumer Price Index (CPI) numbers, the core inflation rate remains stable near 2%. The year before Greenspan took over at the Fed, the core rate was 4%.
Yet most unbiased observers would argue that although controlling inflation is the primary job of the Fed, it is also important to consider what has happened to real growth. After all, the CPI fell 25% from 1929 to 1933, but no one in their right mind would say the Fed did a good job during those years.
It seems to me that Fed performance can be judged by several measures: productivity growth, frequency of recessions, the unemployment rate, and the stock market. (I am not using the overall growth rate for GDP, since that is equal to productivity growth plus labor force growth, a factor that is clearly outside the purview of the Fed.)
The economic performance of the 1970s was a disaster. President Richard Nixon's wage and price controls were the worst economic decision of the past 50 years. Thus while then-Fed Chairman Paul Volcker did the heavy lifting in terms of reducing inflation, he was also forced to preside over a severe recession and subpar growth in productivity. The late 1960s were also a period of economic malfeasance, with President Lyndon Johnson trying to fight the Vietnam War and the War on Poverty at the same time. He lost both. Economic performance during the Korean War was also distorted by wage and price controls. The period of "normalcy" for the U.S. economy was basically from 1953 through 1965, when William McChesney Martin was Fed Chairman.
From 1953 through 1965, the inflation rate averaged 1.4%, compared to 3% under Greenspan. Productivity growth averaged 2.7% under Martin, compared to 2.2% under Greenspan. There were two mild and one severe recession in the older 12-year period; under Greenspan, there have been two mild and no severe recessions. The unemployment rate under Martin averaged 5.2%; under Greenspan, 5.6%. The stock market from 1953 through 1965 rose an average of 11.1% per year, with one severe drop. It is difficult to blame Greenspan for the 1987 crash, since he had barely taken the reins of office, but there were three other severe stock market plunges. From the end of 1987 until mid-2005, the S&P 500 rose an average of 9.6% per year.
Enough figures. The point is that Greenspan has done a competent but not outstanding job. What could he have done better? By keeping monetary policy accommodative too long after the 1987 crash, he permitted the rate of inflation to rise to 6%. By remaining accommodative too long after the 1998 crash, he aided and abetted the Internet bubble. And by holding the federal funds target rate at 1% for too long, he created the conditions that led to the housing bubble, which will eventually come back to haunt the economy.
Whoever the next Fed chairman is would best serve the economy in general and the U.S. manufacturing sector in particular by taking a more vigilant attitude on balancing the federal budget; by recommending only tax cuts that boost saving, investment and productivity; and while remaining flexible in any future financial crisis, by remembering not to overstay his welcome and create conditions that lead to excessive speculation once the crisis has passed.
Michael K. Evans is chief economist for American Economics Group, Washington, D.C., and president of the Evans Group, an economics consulting firm in Boca Raton, Fla.