Economic prognosticators often tend to extrapolate the recent past far into the future. But when they do, they often forget to take account of any unusual factors that might have made the recent past unique. The publication of Alan Greenspan’s new book may provide an antidote to this tendency.

The Age of Turbulence (Penguin Press) has been widely, and mostly favorably, reviewed. Affable and forthcoming in interviews, Greenspan seems pleased by the reaction to his memoir. He seems to be human and understandable, in contrast to the sphinxlike mien he projected during his Fed days. But as I surveyed the media coverage, I was struck by the relatively cursory attention that’s been given to Greenspan’s views of the future, as well as to some of the analysis that’s been served up of his Fed stewardship. I’ve also been reminded of some Greenspan anecdotes that spring from my own long but relatively distant relationship with him. The book and Greenspan’s attendant comments highlight his insights into the growing role of globalization and productivity gains. Those two forces have been key to providing the disinflation that helped Fed facilitate the extraordinary growth and profitability of the economy as well as the widespread appreciation of asset prices. But Greenspan’s warnings of the weakening of those beneficial forces are central to his long-range forecast of slower and more inflationary growth, and a probable rise in interest rates that could contribute to an inhibition of equity valuations.

His Background

Many facets of Greenspan’s life are fairly well-known, including his early contemplation of a career as a saxophonist. When instead he immersed himself in economics, he developed an almost insatiable appetite for statistics and data. Greenspan revealed early on an enormous drive to excel and keep growing personally. A personal anecdote here is instructive. I was associated with a Wall Street firm that hired Greenspan and his firm, Townsend-Greenspan, as economic consultants in the 1970s. During a meeting after Greenspan’s return from serving as President Ford’s Chairman of the Council of Economic Advisors, I asked him what had been the single biggest surprise during his time in Washington. He replied that at the outset, he’d been eager to be in a top position because, like professionals do in many occupations, he’s assumed there must be a body of knowledge or information just beyond his grasp; if only he could get access to it, he could close the loop and become the consummate professional and decision-maker he aspired to be. He imagined that the federal government, with all its departments and activities, would hold the treasure trove of information that has always eluded him. His surprise was to find that, once he opened the imaginary door, there was nothing there. An economist on the outside had as much information available as did top government economists--and might be less encumbered and biased in analyzing and applying it.

We of course were to learn that, when he later became chairman of the Fed, Greenspan set as a major priority the goal of building and improving the generation and collection of economic statistics, and the sharpening of the available analytical tools. Observers half-facetiously surmised that Greenspan regularly reviewed about 15,000 different sets of data in his study of the national and world economy. My guess is that he retained his skepticism of the adequacy of statistics.

Partly because of the mix of his client base in his private-sector work, Greenspan had important exposure to the American steel industry and to Wall Street. He became a keen observer of productivity trends and of human behavior. Despite his research intensity and serious work ethic, Greenspan listened to the inputs of others. He sounded more like a nerd than he actually was, and demonstrated great people and political skills during his 18-year tenure chairing the Fed.

He admits to often using deliberately convoluted language in his public statements in order to confuse or put off politicians, the media, and other questioners. I remember a particular meeting in the early 1990s when the Wall Street firm I was associated with co-hosted an annual three-day Washington conference for some 700 or so international clients. As usual, the scheduled talk by the Fed chairman was eagerly anticipated. The attendees were anxious to hear first-hand his take on interest rates and the dollar. The disappointment in the room (and at my table) was palpable when, instead, Chairman Greenspan chose to give an erudite lecture on why socialist systems were bound to fail and to languish in comparison to capitalist economics. His exit from the room took him right by my table and, seeing a familiar face while passing by, he gave me an exaggerated wink. My interpretation at the time was that he enormously enjoyed not giving the audience what it had so wanted to hear, his predictions on rates and currencies.

Greenspan was a prodigiously hard worker, and primarily self-driven. Few probably know that for years, his only annual vacation was a one-week visit toJohn Gardiner’s tennis ranch in Carmel Valley, California following the Kansas City Fed’s annual August conference in Jackson Hole, Wyoming. Early one week at Gardiners, Greenspan’s wife Andrea Mitchell phoned Monique Gardiner with a desperate crisis. The bathtub in the Greenspans’ room was not holding water, and the Maestro, who did much of his reading and writing soaking in a hot bath, had planned to use a long soak in the tub to write a speech scheduled for Stanford that Saturday. A hurried drive to the local hardware store by John Gardiner brought rescue, in the form of three new bathtub plugs. One was used to fix the chairman’s tub, and the other two were packed away in the in the resort’s safe for future emergencies. Greenspan, incidentally, was (and probably still is) an avid but not terribly skilled tennis player.

Book Highlights

The many reviews of the book have naturally tended to emphasize whatever interests each individual reviewer the most. Thus, some writers have highlighted Greenspan’s disappointment with Bush’s fiscal policy. Greenspan had been an apparent supporter of the Bush tax cuts, and was accordingly criticized by many. But he clearly expected the president and the Republican leadership to restrain spending while cutting taxes. They didn’t. The president didn’t veto a single spending bill. Greenspan criticizes Republicans for caring more about extending their political power than exercising fiscal restraint. Greenspan indicated disappointment with Cheney’s broad statement that federal deficits don’t matter. Other book reviews highlighted Greenspan’s assertions that, of the presidents he served under, the one most openly critical of Fed policy was the elder Bush. He considers the brightest to have been Bill Clinton and Richard Nixon. They stood apart from the others, although Nixon’s personality and character flaws were startling and disappointing.

He is genuinely complimentary of Bill Clinton’s capabilities, and goes out of his way to praise the decency and emotional balance of Gerald Ford.

Other reviewers highlight Greenspan’s belief that the Iraq war was really about oil, a justifiable issue in Greenspan’s opinion because the denial of the Middle Eastern oil to the West, through Saddam Hussein’s despotism, could have been catastrophic to the West.

Bubbles

Greenspan’s first severe challenge after taking over at the Fed was dealing with the 1987 market meltdown twenty years ago. He faced another speculative bubble in 1996. Two days after a meeting with economist Robert Shiller of Yale, Greenspan famously asked in a December speech before the American Enterprise Institute, “How do we know when irrational exuberance has unduly escalated asset values which then become subject to unexpected and prolonged contractions?… The inbred human propensity to swing from euphoria to fear and back again seems permanent.” The market reaction to Greenspan’s reference to “irrational exuberance” was widespread and immediate. I was struck at the time by the anger and irritation that so many institutional money managers expressed over Greenspan’s words.

A few moths later, at a seminar at the Hoover Institution, Milton Friedman commented in response to my question that he didn’t think that the stock market should be the public purview of a Federal Reserve chairman. This had been the third time the Fed had used words to try to dampen financial speculation (the other two were in 1929 and 1966), but I was struck by the breadth of disagreement with Greenspan’s comment. Notably, a number of critics have blamed Greenspan for the recent real estate bubble. In his book and elsewhere, Greenspan had defended his somewhat passive position in regard to soaring asset prices by arguing that the Fed can’t know when markets are unsustainably high. He writes, “You can’t tell when a market is over-valued and you can’t fight market forces.” He adds later, “We never had the capacity to defuse a bubble and we never tried to rein in stock prices again (after the spring of 1997).”

The Long Boom

During much of the 1990s, the Federal Reserve was broadly accommodative. Greenspan was less fearful of rising inflation than most others because he recognized early on that productivity gains were accelerating. Bolstered by research at the Federal Reserve banks, especially the Philadelphia Fed, he recognized that the boom in technology generally, especially the impact of the broadened use of computers and information technology, was facilitating the implementation of just-in-time inventory policies and the growth of the service sector. This was helping to mute cyclical swings in the economy and to counter inflation pressure. He recognized another disinflationary force in the flow of the world’s workers to competitive markets as globalization increased in momentum. That momentum gained power with the fall of the Berlin Wall, as previously planned economies became more capitalist, and with the growth of emerging nations.

A Peek at the Future

Most reviews I’ve seen haven’t placed much stress on Greenspan’s view of the future, but it’s of great interest. To a large degree, Greenspan’s views are based on some long-standing beliefs. As a young man, he joined the Ayn Rand’s circle; that association strengthened his libertarian tendencies, which he remains guided by. He credits Paul Volcker with changing the Fed’s one-time practice of trying to fine-tune the economy. Short-run predictions of the economy are difficult, but long-run ones are markedly easier because long-term trends tend to be stable and influenced primarily by two factors: demographics and productivity gains.

Looking out to 2030, Greenspan sees real annual GDP growth of less than 2.5%, a slower rate than recently, slower growth of the work force, and slowing productivity gains. The disinflationary benefits of globalization will diminish, and be apparent in a rising trend of China’s export prices. More pressure will be on the Fed to manage this shift and be willing to exercise more monetary restraint from time to time. This won’t be easy, since the natural bias in our political environment is toward inflation. The propensity of Congress is to create benefits without specifying the means of funding them. Politicians don’t ask the Federal Reserve to raise rates; Greenspan is well aware that the Fed’s independence is not set in stone. He believes that a normal inflation rate for any given country is largely a function of its culture and its history, and he notes that, for the U.S. that rate has been around 4.5% annually over the 50 years following the abandonment of the gold standard.

Greenspan predicts the U.S. will remain the world’s leading economy, but will experience a number of problems. Everything won’t be pretty. Our somewhat dysfunctional political system is unlikely to act decisively until it’s forced to. Medicare constitutes a huge future problem, and will be complicated by our aging population mix. Financial markets have been revolutionizing the spreading of risk; Greenspan expects that the distinction among different types of financial institutions will continue to blur. Some observers will call for heavier regulations, but he and his colleagues have come to recognize that markets became too big to be regulated the 20th century way. He writes that “the financial system has gone beyond the full comprehension of the most sophisticated and daunting assertion.” But he continues to strongly believe that regulation by its nature inhibits the freedom of the market’s action and that liquid free markets should address the imbalances on their own. We should “rely on the invisible hand.” Campaign rhetoric at this stage of the election campaign doesn’t indicate many contenders share his degree of faith in free markets.

The Outlook

In 2030, the U.S. economy is likely to be three-quarters larger than now. The major loser of GDP share is likely to be manufacturing. The most important decision our lawmakers and courts will face will be clarification of the rules on intellectual property. Greenspan observes that almost all of the increase in the real value of our economy has been in the embodiment of ideas. Another important issue is whether the Fed is prevented from constraining increased inflation pressure. If so, the core inflation rate could move significantly higher than its recent 2.2%. The yield on the 10-year Treasury note might then flirt with a double-digit yield, widening risk spreads, and raising yields on stocks.

Since 1981, asset prices have mostly risen faster than nominal world GDP; a continuation of that for any length of time is very unlikely in the U.S. or Europe. Inflation at 4.5% or higher, higher bond yields, and slower earnings growth don’t make for a big or long bull market in stocks. Greenspan actually ends his book on an optimistic note, as he says that adaptation is our nature, and that this is central to his own deep optimism. But in my judgment, Greenspan’s outlook implies that the virtuous circle and prolonged sweet spot that our markets have enjoyed in recent years will be subject to more frequent interruptions.