The Lessons of Alan Greenspan’s Life

There are political people, and there are ideas people. Alan Greenspan was the rare person who was both. From his early days as a Juilliard-trained clarinetist and an Ayn Rand acolyte to his 18-year tenure as Federal Reserve Chair, Greenspan’s career was varied and accomplished. His life, which ended this week at age 100 in his Washington, D.C., home, has valuable lessons for anyone trying to navigate the tension between principles and politics.

It began with Rand, as idea-based careers often did in those days. In 1953, Greenspan’s then-wife introduced him to Rand. He became part of The Collective, as Rand’s closest followers called themselves. He wrote and lectured about Rand’s Objectivist philosophy and was one of few Collective members never to fall out with the prickly Rand.

Greenspan worked as a private economic consultant during this period and built an impressive list of social and political connections. These paid off when President Gerald Ford named Greenspan to chair his Council of Economic Advisers.

In 1982, Greenspan was part of a Reagan-era commission on Social Security reform. It delayed the program’s insolvency with a tepid mix of slower benefit growth, higher payroll taxes, and raising the retirement age. By ignoring Social Security’s unsustainable pay-as-you-go structure, the Greenspan commission left Social Security’s root problems intact. Congress has still not found the courage to enact substantive reform.

Greenspan’s next step was his most famous, becoming Fed Chair in 1986. While he did not live up to the nearly divine reputation the press gave him, he remains one of the most successful leaders in the Fed’s 113-year history.

Black Monday was Greenspan’s first test as Fed Chair. On October 19, 1987, the Dow Jones dropped 22 percent in one day. Greenspan responded by providing some liquidity to panicky banks. This maneuver, similar to what is now called quantitative easing, became known as the Greenspan Put. The precedent Greenspan set would later help to turn bank bailouts and massive rounds of quantitative easing into routine Fed policy.

Greenspan’s Fed tenure covers most of the Great Moderation, that period of low inflation that lasted from the mid-1980s up to the 2007–2008 financial crisis. His predecessor, Paul Volcker, ended the 1970s stagflation by resisting politicians’ demands for low interest rates and easy money. Greenspan continued Volcker’s work and made an important addition: a monetary policy rule that would let people predict what the Fed would do on interest rates.

Though he never made it formal policy, Greenspan mostly followed a Taylor rule, named for the Stanford economist John B. Taylor. During a boom, the Taylor rule’s equation recommends high interest rates in order to prevent possible inflation. During recessions, it recommends low rates to provide stimulus. The Taylor rule’s main virtues are that it is predictable, and that it can prevent impulsive Fed behavior. If the economy does X, then the Fed will automatically respond with Y. People can plan around that.

The Fed’s biggest flaw is that its officials have too much discretion. This is clearest during crises, when people tend to panic. The Fed’s panicked overreactions to the financial crisis and the pandemic would never have happened if its officials had been required to follow a policy rule. While following a rule was Greenspan’s greatest success, failing to formalize it was his biggest failure.

Greenspan abandoned his rule-based approach late in his tenure. Though he coined the term “irrational exuberance” as a cautionary note during the 1990s boom, he did foresee new technologies boosting productivity. This led him away from the Taylor rule and toward permanently lower interest rates.

Read the full article at National Review.