Alan Greenspan, who lived a full and consequential century, is best known for his nearly 19 years as chairman of the Board of Governors of the Federal Reserve Board. Appointed as Fed chair by four presidents — Republican and Democrat — he skillfully shaped monetary policy, enhanced the independence of the Fed as an institution and expanded its transparency.
Few economic policymakers have shaped policy as successfully for as long and as widely. Few officials have been as consistent in their convictions, as steadfast in resisting present-mindedness, and as focused on the long term.
At a time of much partisanship, his example of how to craft policy with support from both sides of the political aisle is instructive. His skill in navigating debate and discussion toward common ground began well before his years at the Federal Reserve. His success came in no small part from the trust he earned during turbulent times.
The beginnings of Alan Greenspan
Raised by a single mother in the Washington Heights part of New York City, supported by her parents, he early developed a love of numbers, a fascination that remained with him throughout his life.
Interestingly, he did not turn his attention to shaping public policy until he was 48. After pausing his graduate studies in economics at Columbia University under Arthur Burns, he launched an economic consulting firm — Townsend-Greenspan & Company — in 1953. For the next two decades, he provided economic intelligence, forecasting and industry-specific analysis to major corporations, buttressing his market-oriented inclinations with a detailed knowledge of data and trends in a wide variety of sectors of the economy.
Chairing the Council of Economic Advisers
Greenspan’s first foray into full-time public service was as chairman of the Council of Economic Advisers. Nominated by President Richard Nixon in mid-July 1974, his confirmation hearing occurred on Aug. 8. That evening, Nixon announced his resignation to the nation.
Vice President Gerald Ford was sworn in as president the following day and asked his economic assistant, William Seidman, for his assessment of Greenspan. Seidman interviewed Greenspan, liked him, and was convinced they could work together successfully. They did.
Seidman ran the President’s Economic Policy Board, the equivalent of today’s National Economic Council. Greenspan chaired the Council of Economic Advisers (CEA), first created in 1946.
The CEA has wisely eschewed operational responsibilities and serves as a reservoir of advice. Its influence depends heavily on the credibility of its members, the relevance of its analysis and the relationships that it establishes. As Charles Schultze, Greenspan’s successor as chairman, observed: “It is an advocate for efficiency.”
Greenspan surrounded himself with talent, recommending the appointment of Burton Malkiel of Princeton and Paul MacAvoy of Yale as members of the CEA to join him on the three-member council. He worked closely and productively with the administration’s other key economic officials in the White House, the Treasury and the Office of Management and Budget. Most significantly, he earned the confidence of Ford, the first U.S. president to have majored in economics as an undergraduate at the University of Michigan.
How Greenspan battled stagflation
Greenspan’s arrival at the CEA coincided with the advent of stagflation — rising unemployment and the highest outburst of inflation in U.S. history. His advice to relentlessly bring double-digit inflation under control rested heavily on two convictions. The first was that sustained economic growth required a stable price level that would encourage businesses to invest with confidence. The second was that those harmed the most by inflation were those at the bottom of the economic ladder who were least able to protect themselves.
His approach and that of William Seidman, the assistant to the president for economic affairs, was to accomplish as much as possible on a bipartisan basis. The president convened a summit conference on inflation, which included the bipartisan leadership in Congress. One of the sessions sought the advice of 30 leading economists — 15 who had worked with or identified themselves as Republican and 15 who were Democrats.
Their assessments of the economy differed, and their favored prescriptions varied. They did, however, find common ground including a conviction that much economic regulation was contributing to the outburst of inflation. This shared view helped to launch an effort pursued by Republican and Democratic administrations over the next three decades, to deregulate transportation (airlines, trucking and buses), energy (oil and natural gas), financial services and telecommunications, among others.
Greenspan consistently argued that protectionist trade policies contributed to inflation and were a tax on consumption, disproportionately borne by the poor. His commitment to reducing the rate of growth of federal spending, reducing the rate of growth of taxes, and reducing deficits were constant themes.
The pattern of a bipartisan approach to policy included a quarterly meeting of mostly former economic officials — roughly half Republican and half Democrat — who met with the administration’s senior economic officials to provide their assessment of the economy and their preferred policy prescriptions.
Greenspan also developed solid relationships with members of both bodies and both parties in Congress. His focus invariably included his assessments of trends and patterns. Drawing from his experience as a forecaster and adviser to corporations, his presentations revealed the extent to which he spent time talking with business leaders and drawing from their firsthand experience.
He loved drenching himself with data, persistently digging into statistics; insisting on seasonally adjusted numbers, including at the state level; and examining inventories across a wide variety of sectors of the economy. He knew a large number of Bureau of Economic Analysis, Bureau of Labor Statistics and U.S. Census Bureau staff on a first-name basis.
A budget process with integrity
A month before leaving office, Nixon signed the Budget and Impoundment Control Act of 1974 establishing the Congressional Budget Office and creating a new budget process that required the president to include five-year projections for outlays and revenues based on a set of assumptions regarding inflation, unemployment, real growth and interest rates.
In a lengthy meeting that fall his economic advisers debated before the president what assumptions should be used in the budget for the key economic indicators over the five-year period. The temptation to embrace a “rosy scenario” suggesting that the president’s policies would quickly work to successfully increase growth, reduce interest rates and generate additional revenue was strong. Greenspan told the president that he would have to defend the numbers in congressional testimony.
Forecasting the economy — he reminded his colleagues — was what he did for a living, and it was not easy. He observed: “Anyone who claims that they can forecast with confidence more than six months to a year in advance is fooling themselves and others.”
The president asked for his recommendation. Greenspan answered: “Produce the most honest forecast we can develop for the first year and straight-line the next four years. I will explain in my testimony the wisdom of not pretending to know more than we do.”
Rescuing Social Security
Returning to economic consulting at the conclusion of the Ford administration, he maintained a broad array of contacts. When Ronald Reagan came into office, the Social Security Trust Fund was facing exhaustion. Ignoring the problem was no longer an acceptable response.
Reagan and Democratic Speaker of the House Tip O’Neill agreed that a bipartisan commission including members of the House and Senate — Republican and Democrat — representatives from organized business and labor and Social Security experts was the most promising approach to developing a policy that would “save Social Security.” The 15-member commission needed a chair, skilled in producing consensus, respected by all parties, and credible to an attentive public. They agreed that Greenspan reflected those qualities.
The Greenspan Commission on Social Security’s report issued in January 1983 was passed overwhelmingly on a bipartisan basis in both House and Senate in March and signed into law in April 1983.
Greenspan’s success in guiding the Federal Reserve with excellence owes much to his preparation in a series of earlier challenging assignments. Deep convictions, drenched in data that can persuade, and an ability to transcend political boundaries and work across institutions is a legacy worth remembering and worthy of emulation.