As I was preparing to teach a macroeconomics course recently, I scanned the Web for late economic news, and reviewed the chapter I’d assigned. A bold-text assertion in the textbook jumped out at me. “Belief in fine-tuning the economy died out in the 1970s,” it said.
If such beliefs did die three decades ago, they have risen from the dead.
The reports I’d read on the Web stressed the contradictory nature of recent economic indicators. One quoted seven different gurus about how one miscellaneous number or another should sway the Fed’s Open Market Committee Tuesday.
The nation’s brightest business economists obviously assume the FOMC must consider every little twitch in the CPI, housing starts, consumer confidence or the Dow. Obviously, “fine tuning” is alive and well on the FOMC. The fault is largely that of one apostate — Alan Greenspan.
Why an apostate? Because Greenspan has abandoned what seemed to be his long-held belief in monetarism and limited government. He drank the Kool-Aid of Keynesian gas-and-brake-pedal stomping. We are returning to the 1970s, when his predecessor Arthur Burns also abandoned the faith of conservative economic orthodoxy.
Greenspan is a business economist, not an academic monetarist like Milton Friedman and Allan Meltzer. He never published scholarly papers expounding monetarist theories.
Like his predecessor Paul Volcker, however, Greenspan in his pre-Fed days clearly believed inflation’s only cause was excessive money growth and that manipulating the money supply to regulate the economy was a vain effort. This is core monetarism.
Long an acolyte of Ayn Rand, who espoused a philosophy of individualism and self-interest, Greenspan shared Libertarian fears of big government. Activist central banks are the essence of big government.
Named to head the Fed in 1987 when the Reagan administration edged Volcker out, Greenspan was expected to follow his predecessor’s aversion to jockeying the money supply in response to economic twitches.
Perhaps he did for a while. But cautious monetarism did not last long. By the 1990s, his foot alternated between the monetary gas and brake pedals like any Keynesian. Economy growing after 1991 recession? Double the Fed Funds target to 6 percent. A little slowing in late 1995? Back to 4.75 percent. Stock market bubble still bubbling? Back up to 6.5. Too much? Down all the way to 1 percent.
The point is not that any specific Fed move over the last 10 years was harmful. Rather, Greenspan and the FOMC apparently have forgotten key lessons from 1967 to 1979. Monetary micromanagement doesn’t work. Try to bind up all economic wounds with the money supply and one will not only fail, but will also infect the patient with the septicemia of inflation and cause inflationary flare-ups at the worst possible times. The long-run outcome will be worse than if one had exercised realistic caution from the outset.
© 2005 Edward Lotterman
Chanarambie Consulting, Inc.