Ex-Fed chairman Alan Greenspan is on 60 Minutes, the cover of Newsweek and in practically every newspaper this week, flogging his new book The Age of Turbulence, and castigating Republicans for their profligate government spending. In reaction, Alan Greenspan is being castigated for his loose money policies when he ran the Federal Reserve which, critics say, have caused a housing bubble—and bust.
I’m not going to take sides on this controversy but raise another—was Greenspan one of Great Innovators who deserves to be in the ranks of Jobs, Brins, Gates (you know what I mean here) and others who’ve created our modern, high-tech economy? My answer is Yes.
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.
This is why Greenspan belongs in the Pantheon of Innovation Greats. Before him, the Federal Reserve always raised interest rates and “took away the cookie jar” just when economic growth was going fast enough to lower unemployment and raise real incomes. It raised rates because higher growth tightened up the supply of goods and labor and raised their prices. Hence inflation.
But Greenspan understand that this formula worked with productivity growing at 1%. Double that productivity growth rate and you can have faster economic growth without inflation. Or much less.
Did Greenspan cause the internet and housing bubbles? I don’t know. I’ll let the usual mainstream pundits—and politicos since this is an election season—fight it out. But Greenspan was certainly a Great Innovator.