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The Mixed Legacy of Alan Greenspan

Alan Greenspan testifies before the House Financial Services Committee in 2005. Public Domain.

I was not an Alan Greenspan fan, but I will give him some serious credit on his passing. I’ll also give him serious blame for missing two huge bubbles, the collapse of which gave us serious recessions. I’ll also add a comment about the opaque way he ran the Fed, to which I fear our new Fed chair is returning.

Starting with the positive: Greenspan allowed the unemployment rate to fall to 4.0 percent as a year-round average in 2000. This was huge. The prevailing view in the economics profession had been that the unemployment rate could not fall much below 6.0 percent without triggering spiraling inflation.

Greenspan was not a mainstream economist and therefore did not accept this view. In 1995, when the unemployment rate was already under 6.0 percent, he famously argued with two ostensibly more liberal Fed governors, Janet Yellen and Lawrence Meyer, over this point. They both wanted Greenspan to raise rates to head off inflation. Greenspan insisted that he didn’t see evidence of inflation and was not going to raise rates just because the unemployment rate was low.

Greenspan stood pat as the unemployment rate fell to 5.0 percent and then 4.5 percent, and finally in 2000 to 4.0 percent as a year-round average. We actually had several months of 3.9 percent and 3.8 percent unemployment. This allowed millions of workers to get jobs who would have otherwise remain unemployed if Yellen and Meyer had gotten their way.

Even more importantly, the low unemployment of the late 1990s gave tens of millions of workers the bargaining power to secure real wage gains. This was the first period of sustained real wage growth for low- and middle-wage earners since the early 1970s. The low unemployment of this period also set a benchmark for the future where economists recognized that 6.0 percent unemployment was not a floor. (Yes, we can do better with a federal jobs policy, but that is not Alan Greenspan’s domain.)

Greenspan and the Bubbles

Greenspan decided to ignore the two huge bubbles that grew under his watch. He famously commented about the irrational exuberance in the stock market in 1996, which quickly sent stocks tumbling. Greenspan then mumbled some nonsense about growth possibly justifying market prices, and stocks recovered and continued to rise for another three and a half years.

The bubble began to deflate in March of 2000, and the market eventually lost close to half its value. The NASDAQ, where the major tech stocks were listed, lost almost 80 percent. The........

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