Over the past two decades, there have been two consistent themes to the financial news: the remarkable and steady expansion of the U.S. economy, and the cryptic comments of the Federal Reserve Chairman, Alan Greenspan. As the chairman retires, the themes have changed: now, it’s “what comes next,” and “what has the Greenspan era meant.”
The most convenient way to describe the Greenspan era has been “growth.” It’s accurate, and everyone understands what it means. You can find data to prove almost any point, but here’s a few recent (October 2005) details: GDP is up 3% percent or better for 10 straight quarters, the current annual GDP growth rate is 4.1%, and aggregated business profits have increased at 10% or better for nine straight quarters. And, note that this is data from the month that followed three calamitous hurricanes and a historic spike in fuel costs.
The point is that the Greenspan era has been generally very good for U.S. business, even though it’s been an era when business no longer sets the economic pace — consumers do. Greenspan’s Fed sought to keep capital moving, which is good for business, or at least most of them.
In the old days, businesses employed lots of people, borrowed and spent a lot of money, and earn a reasonable profit. The federal government used regulation to keep competition stable, and backed currency with gold so all money had a specific value that was easy to determine.
When the gold standard was retired in 1971, consumers took the role of corporations at setting the economic pace. Credit became easy to acquire and debt was no longer the barrier to success it once had been. The rise and fall of companies or even industries became less important than the actions of consumers. Now, we track individuals’ purchases, not corporate investments.
The transition was not simple. Consumer spending drove inflation and interest rates sky-high in the 1970s, before the federal government reduced both taxes and regulation in the 1980s, and retired the federal deficit in the 1990s. Eventually, businesses accepted that cost-containment had to be a permanent strategy and competition is always increasing.
The virtue of a consumer economy is that it adapts quickly, rewards innovation, and with the help of the Fed keeps prices under control. Noting the effects of inflation in the ‘70s, Greenspan’s Fed stabilized inflation by tracking various indicators and reacting quickly to adjust the money supply.
Greenspan actually preferred the gold standard because it represented an absolute value, an objective truth to govern economic excesses and deficiencies. He liked the business-driven economy because it demanded accountability of the decisionmakers, and his enigmatic statements seemed always to reveal he wanted the consumers to be as rational now as companies used to be.
The time for accountability is coming. As Greenspan’s era passes, we’re realizing how much we’ve paid — in terms of domestic capital — to have the lowest possible price for everything. And, as we venture further into a global economy, we’ll soon pass the point where the Federal Reserve can correct our problems.