In honor of Alan Greenspan's last meeting as chairman of the Federal Reserve, some thoughts from Robert Reich:
TWO CHEERS FOR ALAN
Alan Greenspan’s greatest triumph was understanding that in the new high-tech global economy, unemployment could fall to 4 percent – or even below 4 percent – and the inflation genie would stay in the bottle. That’s because employees no longer had the bargaining power they once had to demand higher wages. Employers could transfer the work to Mexico or China, or install new computer software to do the job instead. And employers didn’t have the power they once had to raise prices. Consumers might switch to a cheaper product made abroad, or go to a big-box retailer like Wal-Mart.
But then something happened to Alan Greenspan. His ideology trumped his good common sense. Greenspan came out in favor of the Bush tax cuts of 2001 and 2003. His dislike of government was so intense that he backed Bush. He assumed the White House and Congress would cut spending in order to finance the tax cuts.
Greenspan was wrong, of course. By now it's clear that these cuts were the single biggest reason why the Bush budget deficit ballooned.
And because it ballooned, inflation pressures mounted. The cost of capital increased and the dollar dropped. As a result, Greenspan had to raise rates and slow the recovery, even though unemployment was considerably above 4 percent.
So two cheers for Alan Greenspan – a great pragmatic chairman of the Federal Reserve, who would have deserved three cheers if he hadn’t blown it on his last lap.