As Fed Prepares to Meet, All Eyes on... Greenspan?
Perhaps you've been hearing a bit about Alan Greenspan's new book lately? The former Fed Chairman has been out flogging his memoir, "The Age of Turbulence: Adventures in a New World," and from the media reaction we think sales should be alright. Greenspan was on 60 Minutes last night and a Google news search returns 868 articles for today alone examing everything from Greenspan's culpability in the current meltdown in the mortgage market, to the former Fed chairman's comments on the presidents he served under. (Clinton, it seems, comes off a lot better than Bush, which is surprising coming from a Republican. Nixon, Greenspan confirms, swore like a sailor and hated everybody.) There's even a bit of a controversy over whether Greenspan said the Iraq War was all about oil.
All of which is interesting to the politically or historically inclined, but the Business Week NussbaumOnDesign blog uses the occasion of the book's publication to ask a fundamental question about Greenspan as an economist: was he a great innovator? The answer seems to be yes. Nussbaum explains:
Greenspan was one of the first economists--and certain the most powerful policy-maker in Washington--to understood the power of rising productivity. He got the fact that the internet boom of the 90's kicked US productivity growth up to a much higher rate--2%-3%--from the low 1% of the 70s and 80s. And, more importantly, Greenspan understand that higher productivity meant that the economy could grow faster without generating more inflation.Which is especially interesting as today the rate at which productivity is rising is slowing. This has serious consequences for Ben Bernanke, the current Fed Chairman who is expected to announce some degree of rate cut tomorrow. A separate Business Week article lays out the situation:
For Bernanke and the Fed, there are also disquieting signs that the productivity boom of the past 10 years could be coming to an end.... Nonfarm business productivity, averaged over the past four quarters, is up only 0.5% compared with the previous year, the slowest pace since the mid-1990s. Such small gains in productivity, if they persist, will make it extremely hard for Bernanke to embark on a sustained program of rate cuts.Greenspan's great innovation was seeing that if productivity remains high, the economy can grow faster and produce more without raising inflation. It was a great discovery that allowed Greenspan to keep rates low, but the slowdown in productivity may limit the ability of his successor to do likewise.
(Image of Greenspan in wizard's hat by Comandante Agi, CC 2.0)