House of Paine

green scene

 how boston doth  whither away

the  new york 
 mother ship has krugman
 our globe.....
 chuck stein




================================


Wise hunches 
and a bit of luck 
shined on Greenspan's reign

By Charles Stein  |  October 23, 2005

" 'Give me lucky generals'
 Napoleon once said. 
The French emperor had that one right. 
It helps to be smart,
 but it never hurts to be lucky.

Which brings me to the subject 
of today's column: 
the legacy of Alan Greenspan.
 By January, 
President Bush will have to name 
a replacement for the man 
who has managed monetary policy since 1987

 The Greenspan era was an impressive one
 Over the course of 18 years
 the economy grew steadily
 interrupted only by two short recessions
 while inflation moved progressively lower

So here's the question: 
Was Greenspan successful 
because he was skillful 
or 
 because he was lucky?

My answer: Both.

Greenspan came to the Fed job 
with a lot going for him:
 He was smart
 he had a storehouse of knowledge 
about the American economy
 and he had a long list of contacts
 in business and politics 
who supplied him with information

 But Greenspan's greatest strength
 turned out to be something different

''He is an agnostic," said Allen Sinai
 chief economist
 at Decision Economics in New York.

Sinai is referring to Greenspan's 
practice of monetary policy
 not religion.
 Greenspan was willing to disregard 
Federal Reserve orthodoxy 
when the evidence
 and his instincts
 told him that it made sense 
to strike out in a new direction

''He let events shape his views
 rather than let doctrinaire 
views shape policy " said Sinai.

The best example of that
 was Greenspan's willingness
 to keep interest rates low 
in the mid- to late-1990s

 The economy was growing robustly
 and by 1997 the jobless rate 
was below 5 percent

 The expected Fed response was clear: 
Interest rates needed
 to move higher
 to head off a possible outbreak 
of inflation
 Greenspan disagreed
 He sensed that American companies
 were boosting their productivity
 -- their output per worker -- 
which meant the economy 
could grow faster than usual 
without putting pressure on prices



Greenspan was right about productivity
 By holding off on rate increases
 he allowed the nation to enjoy 
a brief golden period
 ''His willingness to change 
is important in a world 
that changes rapidly," 
said Nariman Behravesh
 chief economist at Global Insight 
in Waltham

As a central banker
 Greenspan's chief task
 was to keep inflation in check
 On that score
 he had the good fortune 
to be in the right place
 at the right time

 A series of forces 
-- all outside the control
 of the government -- 
have conspired
 to hold down prices
 over the past two decades

Within the United States
 deregulation of airlines
 telecommunications
 and energy 
brought competition and price-cutting
 to new industries

 Globally
 the rise of China and India
 and their integration
 into the world economy
 dramatically expanded
 the pool of low-cost labor
 available to American companies

 When it filed for bankruptcy protection recently
 Delphi Corp.
 let its American employees know 
that the company's Chinese workers 
earn $3 an hour
 a figure that includes 
health and pension benefits

Better computers and the Internet 
have made American businesses 
more productive 
and empowered shoppers 
to search for bargains 
in places far from home
 If that were not enough
 from 1987 to 2000
 energy prices were consistently low
 Greenspan was no more responsible 
for cheap gasoline 
than Bush is responsible 
for today's high prices at the pump

he hardly ever had to be the bad guy

Neither did his counterparts around the globe
 The truth is
 inflation rates began coming down
 around the world about 15 years ago
 In Mexico the inflation rate 
fell from 26 percent in 1990
 to less than 5 percent in 2004

 Over that same time 
the worldwide inflation rate
 as calculated by the International Monetary Fund
 fell from 25 percent to 3 percent

 The world's central bankers 
may have been good sailors
 but it is clear
 they had a powerful wind 
at their backs.

So here is my advice 
to President Bush: 
Find yourself a lucky Federal Reserve chairman
 It will make life easier for everyone.