Bravo for the Maestro
Greenspanís greatest achievement was
resisting political pressure and keeping money supply stable,
fueling investment in the United States.
By Donald J. Boudreaux, Ph.D.
Special to the Free Market Project
Feb. 1, 2006
How much credit does Alan Greenspan deserve for Americaís economic
success over the past 18 years? Answer: a lot, but nowhere near all.
¬†¬†¬†¬† I mean no slight to Mr. Greenspan. Indeed, ďthe
maestroĒ 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 Ė
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 Ė 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 Ė and to have the fruits of their enterprise grow into
a foundation for others to build on. Fortunately, despite its
imperfections, Americaís institutional environment is pro-growth and
¬†¬†¬†¬† Most of these sound institutions have nothing to do
with the Federal Reserve Ė 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, itís 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 decadeís 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 Ė making for
better and more sustainable production and consumption decisions.
¬†¬†¬†¬† Itís important to understand just why this achievement
is difficult. The difficulty doesnít lie in the technique for
preventing inflation. Thatís childís play. The recipe is a simple as
hitting the ďOffĒ 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 Ė it has
monopoly power to issue legal tender Ė and it is run by political
¬†¬†¬†¬† Imagine that youíre 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 wonít come due until after the
¬†¬†¬†¬† 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 Iís plea for
inflationary monetary policy, even though doing so made Democrat
Bill Clintonís victory more likely.
¬†¬†¬†¬† Greenspanís steadfastness earned him a reputation as an
ďinflation hawk.Ē 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 ďdeficitĒ is evidence of
economic vigor. When the dollar is stable and the U.S. investment
climate attractive, foreigners more willingly invest here. Such
investments create the so-called ďtrade deficit.Ē 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 Ė attractive to Americans and foreigners alike.
Donald J. Boudreaux, a guest columnist for the Media Research
Centerís Free Market Project, is chairman of the Department of
Economics at George Mason University in Fairfax, Va. He can be
reached at email@example.com.