Alan Greenspan’s Legacy at 100
Alan Greenspan passed away on Monday at the age of 100, having overseen a remarkable two-decade period in which the U.S. experienced significant economic growth—a time often referred to, perhaps somewhat misleadingly, as the “Great Moderation.”
His lengthy time as the chair of the Federal Reserve offers important insights for the current Fed.
Appointed by President Ronald Reagan in 1987, Greenspan led the Fed until 2006, a term that also included a reappointment by President Bill Clinton and most of George W. Bush’s presidency.
His leadership followed a chaotic era characterized by shortsighted monetary policy at the Fed. The 1970s, particularly, saw attempts to stimulate a sluggish economy that inadvertently drove inflation to 11% just before Reagan took office.
As inflation eroded real incomes, Americans faced a significant decline in their purchasing power.
In recent years, the U.S. economy has struggled more than it has since the Great Depression, with the stock market enduring a long downturn.
Greenspan’s predecessor, Paul Volcker, is justifiably credited with eliminating the excesses of easy money and tackling the serious issue of high inflation.
This set the stage for a vibrant 40-year bull market and substantial GDP growth in the U.S.
However, it was under Greenspan’s stewardship that inflation was kept under control, averaging just 2% to 3% during his time.
He effectively utilized the Volcker Rule, examining commodity prices to gauge future inflation, and this approach proved successful.
The economic expansion that began in the 1980s faced a mini-crash in 1987, but recovery came swiftly, leading to a thriving economy throughout the 1990s and early 2000s.
Investment in the stock market was fruitful; a $100 investment in an S&P 500 stock at the start of Greenspan’s term would have grown to over $900 by the end of his tenure.
Job creation was impressive, with the economy adding about 2 million jobs annually during his leadership.
Yet, even amidst this growth, Greenspan remained cautious about stock market bubbles.
His warning in 1996 about “irrational exuberance” resonated widely, cautions that turned out to be prescient as stock prices continued to surge during the internet boom.
Once an enthusiastic follower of Ayn Rand, Greenspan was not just an advocate against inflation; he also encouraged Congress to rein in deficit spending.
Interestingly, the balanced budget achieved during his time at the Fed marked a rare feat in the last 50 years.
What his era illustrates is that a combination of stable prices, low taxes, minimal regulation, and restrained government spending can foster a prosperous nation.
Throughout the 1990s, the dollar emerged as the dominant world reserve currency, prompting other countries to adopt it in a bid to escape rampant inflation.
China, for instance, smartly strengthened the value of its dollar while transitioning from a strictly communist economy to one centered on market principles.
It wasn’t until 2022 when inflation rates began to rise significantly again, a shift attributed in part to actions taken under the Biden administration.
There’s a degree of irony in the fact that many economic historians label Greenspan’s era as the “Great Era of Moderation,” considering that the only truly moderate aspect was inflation.
Indeed, the era is more aptly described as the “Great American Boom,” a phase that President Trump seems eager to reinvigorate.
With new Fed Chairman Kevin Warsh—recognized as an adherent of Volcker and Greenspan at the helm—there’s hope that a focus on dollar stability could lead to further prosperity.
