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Oh, how the icons of the '90s have fallen. Star telecom analyst Jack Grubman is a poster child for alleged conflict-of-interest excesses on Wall Street. Bernie Ebbers' WorldCom empire is in bankruptcy. Federal prosecutors appear to be circling Enron's senior management. A parody of Martha Stewart's magazine is making the rounds on the Net with fake stories about "jailhouse chili" recipes and "prison parties." It has even become popular among the economic and policymaking fraternity to "diss" Federal Reserve Board Chairman Alan Greenspan.
No, Greenspan didn't commit a crime. His personal morality is unquestioned in Washington, D.C., a city where shading the truth is business as usual among the power elite. But critics charge that Greenspan, the New Economy's cheerleader-in-chief, was seduced by a vision of enormous efficiency gains from the Information Age and failed to burst the stock market bubble in a timely manner.
Instead, the critics complain, he blindly watched as the largest asset bubble in history formed in the late '90s. They even accuse the Fed chief of feeding the speculative frenzy with Delphic pronouncements about revolutionary technologies and economic vitality.
MASTER MANIPULATOR. Talk about "irrational exuberance." The bubble burst and, nearly three years later, the danger exists that the U.S. might "double dip" into Japanese-style deflationary stagnation -- or even a 1930s-style deflationary depression. The criticism became harsh enough going into the end of summer that Greenspan felt obliged to defend his actions during the bubble economy at a recent gathering of the central-banking elite in Jackson Hole, Wyo. (see BW Online, 9/3/02, "The View from the Economists' Olympus").
This column has delighted over the years in taking the Fed to task, but in this instance, it begs to differ with Greenspan's critics. Yes, a recession, feeble recovery, and three-year bear market have tarnished his image among the investing public. But to be fair, Greenspan's mystique as the economy's master manipulator was the creation of the Wall Street stock-selling machine, which needed a reassuring father figure to lure investors into the market.
On the eve of the first anniversary of the September 11 horror, it's important to remember that the Greenspan Fed performed impeccably in shoring up the global financial system and the U.S. economy in the days and weeks following the terrorist attacks. The jury is still out, but a majority of economists are betting that the rapid-fire rate cuts engineered by the Fed at that time limited the downturn to one of the mildest on record.
DOOM AND GLOOMERS. Most important, Greenspan was right not to derail a rising economy by hiking interest rates. The risk was well worth the reward. What's forgotten in much of the current commentary is how depressed the economic fraternity was about growth prospects in the late '80s and early '90s. This was the era of economist Paul Krugman's Age of Diminished Expectations and historian Paul Kennedy's The Rise and Fall of the Great Powers.
Productivity -- technically, the hourly output of workers and, in reality, the fundamental building block of higher living standards -- expanded at a mere 1.4% annual rate in the '70s, '80s, and early '90s. Sure, business was spending billions on computers during those years, but as economist Robert Solow famously remarked, "You can see the Computer Age everywhere but in the productivity statistics."
The Fed's job was to squash any signs of falling unemployment and rapid growth to keep inflation at bay, the experts said. After all, the U.S. was a mature industrial economy that couldn't grow faster than a 2% to 2.5% annual pace without generating inflation.
CALCULATED RISK. That conventional wisdom greatly underestimated Corporate America's potential for huge productivity gains, the upheaval from a historic wave of technological innovation, the impact of a better-educated workforce, and the spread of competition throughout the world. Greenspan wisely took those factors into account, and he adroitly convinced his fellow governors at the Fed to take a calculated risk and allow the animal spirits of capitalism to flourish.
What happened? The unemployment rate fell. The inflation rate dropped. Workers pocketed their best inflation-adjusted wage gains in decades. And productivity growth picked up. Since the middle of the last decade through the present, including the dampening effect of a recession, productivity growth has averaged some 2.2% a year.
The economy's "speed limit" -- the annual rate at which the economy can expand without generating inflation -- turns out to be somewhere between 3% and 4%. The U.S. is hardly a mature behemoth on the global economic stage. Thanks to the potent combination of technology, education, and competition, it remains the world's leading emerging-growth economy.
BUBBLE MORALIZERS. True, stock prices got out of whack with the fundamentals. Trillions of dollars in equity-market wealth has vaporized since the dot-com bubble burst. A large part of the economy is dealing with deflation. The concern that the U.S. could follow Japan down a deflationary spiral, while remote, is legitimate. And central bankers are puzzled by the monetary-policy implications of major changes in asset prices in an economy where more than half of all households own equities and two-thirds own their home.
Still, the nation is more productive and more competitive than at any point since the early 1960s -- thanks in no small part to Greenspan's far-reaching vision. Going forward, the biggest threat to the wellsprings of faster growth comes from the bubble moralizers and Greenspan detractors, who seem willing to squander the economy's potential strength -- and all the jobs and wealth it would produce -- to avoid risking another bubble.
Farrell is contributing economics editor for BusinessWeek. His Sound Money radio commentaries are broadcast over Minnesota Public Radio on Saturdays in nearly 200 markets nationwide. Follow his weekly Sound Money column, only on BusinessWeek Online Edited by Beth Belton
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