RIP, Alan Greenspan

Greenspan wooed his future wife, Andrea Mitchell, by taking her to his apartment to examine an essay he wrote on monopolies and antitrust.

Buy it.

Alan Greenspan died today. He was 100 years old. His story was an American story of a humble beginning and a stratospheric rise. He published his book right before the 2008 financial crisis, and was assigned some of the blame for the economic carnage. The Wall Street Journal published a solid obituary of the man some deemed the “Maestro.”

I reviewed his autobiography shortly after it came out, which is re-published below.

The Age of Turbulence: Adventures in a New World
Alan Greenspan
Penguin, 2007, 544 pp.

The Age of Turbulence is, as many reviewers have said, two books in one. The first half of the book is an autobiography; the second half contains Alan Greenspan’s ruminations on a grab bag of topics, such as capitalism, economic populism in Latin America, energy supplies, and the economies of China and Russia. The autobiography is an easy read; the second half may prove to be somewhat challenging for readers who do not understand basic macroeconomic ideas and nomenclature.

The autobiography is well written, though not very revealing. It reads like a gentleman’s reminiscences from an earlier day. The highlights of Greenspan’s life are unfurled chronologically. Greenspan does, in classic Washington style, settle a few scores with old nemeses. Generally, though, his tone is genial and aloof, with just a little wit sprinkled in. Greenspan drops an impressive number of names, but he says little about the famous people he has met. Throughout he portrays himself as a shy, nerdy guy who has been obsessed with numbers and statistics since he was a boy. Thus, when Greenspan tells of joining a jazz band as a young man, the reader gets no yarns about wild nights of wine, women, and song. Rather, he recounts that he did the band members’ income taxes.

This shtick can be amusing, as when we read that Greenspan wooed his future wife, Andrea Mitchell, by taking her to his apartment to examine an essay he wrote on monopolies and antitrust. But it is not convincing. Really, if Greenspan is as geeky and introverted as he claims to be, then how did he acquire so many non-economist pals over the years? Are we to imagine that Barbara Walters and Quincy Jones hung out with Greenspan to discuss the latest statistics on manufacturers’ shipments of durable goods?

Greenspan’s refusal to say much about anyone gives his autobiography a remote and solipsistic feel. His mother, Rose Goldsmith, who raised him after his father left the family, clearly was important to Greenspan. Yet he tells the reader little about her, not even mentioning her death. Love, loss, divorce, death — Greenspan has experienced them all, yet he barely touches on these subjects. If Greenspan has ever cried a tear or whooped with joy, he does not say so here.

The second half of the book looks like a jumble, but it is an intriguing composition. As a proprietor of an economic research firm, confidante to presidents, and chairman of the Federal Reserve from 1987 to 2006, Greenspan has a remarkable wealth of information and experience to draw on. How many other economists, for example, have met with Chinese premiers and can call the United Kingdom’s Gordon Brown an old chum?

Commentators have pointed to the book’s invocation of Ayn Rand and suggested that she was Greenspan’s intellectual mother. Clearly, Rand was important to Greenspan, but arguably more important was Joseph Schumpeter, whose spirit looms large in these pages. In explaining the ebbs and flows of economies, Greenspan frequently refers to business cycles, a topic dear to Schumpeter but little spoken of by today’s academic economists. Like Schumpeter, Greenspan embeds his explanations of economics in politics, culture, and human psychology. For example, Greenspan posits a natural human drive to seek one’s self-interest but notes that a counterdrive, the desire for stability, often provokes man to ask government for protection from the tumults of the market. Greenspan also uses Schumpeter’s famed phrase “creative destruction” dozens of times, and he writes again and again of the power of innovation.

“Creative destruction” is an idea that was articulated by the Harvard economist Joseph Schumpeter in 1942. Like many powerful ideas, his is simple: A market economy will incessantly revitalize itself from within by scrapping old and failing businesses and then reallocating resources to newer, more productive one. I read Schumpeter in my twenties and always thought he had it right, and I’ve watched the process at work through my entire career.

While the topics covered are variegated, Greenspan’s coverage of them hangs together coherently. Like the jazz musician he used to be, Greenspan has a few melodies that he keeps coming back to as he ranges far and wide — the importance of the rule of law, the level of respect nation-states give to property, the globalization of product and service production, and the creative destruction wrought by innovators and new technologies. At times, Greenspan’s coverage of subjects is a bit thin, not much more than one could get from skimming financial newspapers. In spots, odd assertions appear without substantiation. For example, he writes that the “challenge of accumulating physical goods in an ever more crowded geographical environment has clearly resulted in pressures to economize on size and space. Well, perhaps in rapidly developing cities this is true; how, though, to explain the leap in the average home size in the United States since 1970 ? And what of the proliferation of hulking sport utility vehicles ?

So, what does The Age of Turbulence have to offer the observer of governance?

First, the book provides interesting insights into the interplay between the ideology of an individual and his duties as a public servant. Greenspan is a libertarian; he believes in the sanctity of property and the preservation of its value through stability of currency. Government, for whatever its virtues, is a persistent peril to individual liberty.

These views have consequences. When Greenspan went to the Fed, he faced a dilemma. He was a libertarian, yet the Fed regulates banks, and its chairman is, in Greenspan’s words, “responsible for the Fed’s vast regulatory apparatus”. His solution? “Since I was an outlier in my libertarian opposition to most regulation, I planned to be largely passive in such matters and allow other Federal Reserve governors to take the lead”. In discussing the eruption of the subprime mortgage crisis after he left the chairmanship, Greenspan acknowledges that he had a role in its making.

I was aware that the loosening of mortgage credit terms for subprime borrowers increased financial risk, and that subsidized home ownership initiatives distort market outcomes. But I believed then, as now, that the benefits of broadened home ownership are worth the risk. Protection of property rights, so critical to a market economy, requires a critical mass of owners to sustain political support.

That property rights were under threat likely is news to most of us. Home ownership has been climbing for decades. It must be bitter irony for Greenspan that the recent subprime fallout is reducing recent gains in home ownership and rattling the whole economy.

Also of interest to the public administration student is the book’s depiction of both the merits and demerits of political appointees freed from direct political influence. The Fed receives no appropriations, and its chairman has a lengthy term. This meant that Greenspan was free to do what he thought was best for the economy over the long run, not what was politically attractive in the short term. Thus, when inflationary pressures loomed in the early 1990s, Greenspan tightened the money supply, which annoyed President George H. W. Bush, who feared that voters would blame him for the slow economy and pitch him from the Oval Office. When his successor, Bill Clinton, rode in on a raft of promises for new government domestic aid programs, Greenspan persuaded him that deficit reduction was critical to the economy’s well-being. Many in the Clinton administration were peeved, but the president bit the bullet and held off many of the spending initiatives he craved. On the downside, Greenspan’s independence also meant that he was accountable to nobody in government. Presidents feared being seen as meddlers, and few congressmen understood his disquisitions.

Finally, the book illustrates an interesting governance phenomenon — public servants whose powers and influence grossly exceed those provided by law. Chapter 3 of Title 12 of the U.S. Code established the Federal Reserve System. It assigns the chairman little power. He cannot set the discount rate; the Board of Governors does that. He cannot choose any of his fellow board members. Furthermore, the chairman of the Fed is not, by default, chairman of the Federal Open Market Committee, which alters the money supply through the purchase and sale of government securities. He must be chosen as such by the members. By statute, the chairman’s sole authority is to preside over meetings of the Federal Reserve Board of Governors.

Yet for at least the past few decades, those who have served as chairman of the Fed have been political titans. Greenspan, arguably, is the apotheosis of this development. In The Age of Turbulence, we see Greenspan exerting unbelievable influence. He persuades presidents and Congress, moves the stock market with his words, devises plans to help save other nation-states’ economies from doom, and trots the globe to promote open markets. The media chase him and report and parse his every word.

What were the sources of his power? Was it the result of knowledge asymmetries? Maybe, although like many appointees, the Fed chairman comes to his position largely clueless. As Greenspan candidly admits, the professional staff at the Fed “taught” him his job. Did his power come from his leadership of a potent government bureaucracy? Seemingly not, as Greenspan explains that the chairman does not run the operations of the 2,000 employees of the Fed. That duty is delegated to another member of the Fed’s board and a staff director. Whence the chairman’s powers and influence, then? This is a ripe question, one that would make an excellent subject of a study of position, power, and politics.

Kevin R. Kosar (@kevinrkosar) is a senior fellow at the American Enterprise Institute. He hosts the Understanding Congress podcast and recently wrote new prefaces for new editions of two classic books by Edward C. Banfield, Government Project and The Unheavenly City Revisited.