The talented Mr. Greenspan

The Federal Reserve chairman has resisted slowing the economy while waiting for his reappointment, but will he put the brakes on now?

Published January 10, 2000 5:00PM (EST)

There's an old French fable about the fly who thinks he's the force making the cart move, when all he's doing is buzzing around the muzzle of the cart horse. In the case of Alan Greenspan, it is an illusion shared by all too many as he begins his fourth term as chairman of the Federal Reserve Bank.

What this particular fly does have is the ability to put a stick in the spokes of the economy. To the extent that he refrains from doing so, we can breathe a sigh of relief. Against all his stated philosophy, he has not raised interest rates to recession-rousing levels since President Clinton last reappointed him. However, it remains to be seen whether he can restrain himself.

It may be shocking to suggest that Greenspan weighed the chances of his reappointment against the recessionary consequences of a hefty hike in interest rates -- which would of course threaten Al Gore's chances of succeeding his boss in the White House. But now that Greenspan has the job in the bag, his true colors can come glooming through, and he may well give interest rates -- and the Gore campaign -- a hard time later this year. Indeed the big hike may well come when the Open Market Committee meets on Feb. 1.

After all, he has done it before. After President Bush reappointed him to a second term, he repaid his benefactor with the recession, whose tail end in 1992 practically ensured Clinton's election. (Remember, "It's the economy, Stupid!"? It should have read "It's Alan Greenspan, Stupid!"). He raised interest rates and brought about the recession because unemployment had dropped to 5.5 percent, which meant that it was hovering on the edge of the NAIR, the non-accelerating inflation rate of unemployment.

For many years, the Fed's policy has been to strive to maintain an unemployment rate around or over 6 percent, as a human sacrifice to the NAIR. The theory is that if unemployment dips below this, then workers get uppity and ask for more money, which is ipso-facto inflationary. Almost the only economic regulatory power the federal government has is the power to adjust interest rates.

Under the Humphrey-Hawkins Act, the Federal Reserve was given the power to do just that in order to control unemployment, as well as inflation. Humphrey-Hawkins said the Fed should lower its target unemployment rate to 4 percent, but that law was soon ignored in favor of the more iron laws of voodoo economics and the NAIR.

Certainly Greenspan has never seemed to believe that reducing unemployment was part of his job description, and no one in Congress is too concerned about it, either. In fact, the Fed's whole purpose in periodically raising interest rates when unemployment drops is to make businesses lay off workers, so that those who remain will not ask for more money. (Of course those who are laid off will be pilloried for being lazy and will have their welfare payments cut off.)

For some reason, Wall Street bonuses and corporate stock options are not considered inflationary, even though they have been rocketing. Meanwhile, for the rest of us, hourly earnings are just now reaching where they were in 1986, and have never regained their 1973 peak in constant dollars, according to the Bureau of Labor Statistics. That puts the economic "boom" of the last eight years in class perspective.

Greenspan is quite clear about his contempt for the interests of employees. For example, he opposes increasing the minimum wage. Last year he told the Senate: "My own preference would be to lower it and, in fact, eliminate it because I think that it does more damage than good." This is Ayn Rand speaking, not Adam Smith.

Smith, the much misunderstood father of market economics, was quite clear on the relationship between productivity and higher salaries, saying "The liberal reward of labour .. increases the industry of the common people ... Where wages are high ... we shall always find the workmen more active, diligent, and expeditious than where they are low."

In contrast to that measured and wise view, whenever earnings look like they are rising, Greenspan and the Federal Reserve throw on the brakes. But last year, the iron law of NAIR, which required a 6 percent unemployment rate, was broken, when the rate dropped to 4 percent. Yet Greenspan never admitted the Fed had been operating on fetishistic and faulty voodoo economics all along.

One time Greenspan was right was in 1996, when he attributed the rocketing Dow to the "irrational exuberance" of investors. But rather than spoil Clinton's party while his future reemployment pended, he has now decided that all those computers make exuberance more rational than he first thought.

To listen to Wall Street, you'd think that Greenspan had a long record of omniscience. As one would expect from someone brought into government by Richard Nixon and first appointed Fed chair by Ronald Reagan, he is often wrong. But the good that he does always lives on while the foul-ups are interred with the dry bones of history. For example, he is sometimes credited with the quick recovery from the 1987 crash, though it was the Fed that caused it. Within a few months of taking over that year Greenspan raised interest rates three times in two months and precipitated the collapse of the Dow by 25 percent.

He takes credit for the economic growth of the Clinton era, but avoids blame for the recession he engineered just before. Those who extol his brilliance and integrity overlook his paid employment in support of Charles Keating and S&L deregulation which led to the most massive financial rip-off in history, paid for by the taxpayers.

Only in America could so much power and prestige be given to someone who was a major fan of Ayn Rand and her cult of "Objectivism," which she summed up as "enlightened selfishness." For those who never read Rand, be warned that "Atlas Shrugged" reads like a novelization of Mein Kampf by Barbara Cartland. She depicts bodice-ripping capitalist supermen who obtain fanatical loyalty from their workers, and then leave them in the lurch in search of a capitalist paradise where everything has a price -- and it's in gold.

Rand's philosophy was based on deep burning hatred of Roosevelt's New Deal, which of course put America back to work after the Depression. It was also based on the idea that brilliant and enlightened individuals (like for example, Rand and Greenspan) did not have to worry about mere elected but corrupt elites to achieve their ends. For Objectivists like Greenspan no price (if paid by others) is too much to stop inflation.

For example, reportedly he is a staunch atheist, but that did not stop him taking an oath on the Talmud (held by his aged mum) to become chairman of Nixon's Council of Economic Advisors, while his prophetess Ayn Rand beamed away in the front row.

Apart from his quasi-cultist past, the main problem with Greenspan is that he has too much power based on his alleged powers of economic prediction. The problem with the alleged science of economics, especially the esoteric branch practiced by Greenspan, is that not only is it dismal -- in the sense of being mind-bogglingly boring -- it is also dismal as science. It pretends to be able to forecast the future, but always fails to do so. On the other hand, like a good pathologist it is very good at post-mortem explanations for what killed the patient.

Greenspan's reputation is such that he can disagree with elected officials, but no one in Washington can contradict him, in case it sends the wrong messages to Wall Street, which has irrational loyalty to the man who has actually stunted the growth of the economy throughout the last decade, with his frequent interest-rate hikes that throw workers out of jobs.

But even if he had been right more often, the power Greenspan has usurped has led to a complete distortion of the markets. Adam Smith's invisible hand assumes that lots of people making individual decisions combine -- mysteriously, maybe even inadvertently, but reliably -- to foster the common good. Greenspan's unrivalled power has led the "market" to become a sort of off-track betting operation in which investors try to second guess his intentions and predictions.

So news that the economy is doing well, earnings are rising, and unemployment falling can trigger a wave of selling, as investors assume that Grinchspan will raise interest rates to stop it. His every utterance is scrutinized for significance about his intentions.

So is it his charismatic personality? Although at 73 he has recently remarried, (NBC's Andrea Mitchell) no one has ever accused him of personal charm, nor even witty conversation. His ex-wife reported his closet contained a row of identical and uninspiring blue suits. Even his best friends describe his circumlocutions as "opaque," "soporific," or "muddled." This is not some form of verbal dyslexia but a conscious effort. As he said in 1995, "I spend a substantial amount of my time endeavoring to fend off questions, and worry terribly that I might end up being too clear."

The secret of his success is his ability to match the arcane but ultimately content-free arcane jargon of the alchemist to the gullibility of the customers. No one wants to admit that they don't know what he's talking about.

No matter: All of America's business leaders love him the way they used to hate FDR and every bit as irrationally. If he plunges the economy into recession, it will not do them much good at all. On the other hand they will be better placed than most of us to withstand it.

By Ian Williams

Ian Williams' book "Rum: A Social and Sociable History of the Real Spirit of 1776" is due in late August 2005 from Nation Books. His last book was "Deserter: Bush's War on Military Families, Veterans and His Own Past."

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Al Gore Alan Greenspan U.s. Economy