In the past few days, opposing views of Alan Greenspan have emerged from two economists of some considerable renown. Writing in the Financial Times, here, Larry Summers reviews Greenspan’s new book. Summers’ review is balanced; in it, he notes his disappointment that, “the events of the past few years had not led Greenspan to any revision of his anti-Keynesian views on macroeconomic policy.” Nevertheless, his overall assessment of Greenspan and his legacy is positive, referring to the former central banker, Summers argues: “No other American economic policy maker in the past half-century could have written so thoughtfully about the implications of the Enlightenment for economic policy or have attempted, as Greenspan did while in office and does again here, to compute the physical weight of all the goods that comprise American gross domestic product.”
In contrast, Paul Krugman in his New York Times blog is, well, somewhat less generous. His title sums it up: The Worst Ex-Central Banker in the World. Referring to a review of Greenspan’s book by Steven Pearlstein, Krugman observes: “What Pearstein doesn’t mention, but I think is important, is Greenspan’s amazing track record of being wrong since leaving office — a record of being wrong about everything, and learning nothing therefrom.”
Whose assessment is right? And how could two such brilliant economists form such divergent views? The answer isn’t differences in political ideology or economic paradigms. While their views may differ on the pragmatics of policy making, for example, the size, feasibility and political sustainability of fiscal stimulus, Summers and Krugman pretty much share the same political and economic orientation.
Thinking about these questions over my morning coffee, I wondered if both could be right. Recall that Summers worked closely with Greenspan for many years as Treasury Secretary during the so-called “Great Moderation.” During that time, he saw first-hand Greenspan’s ability to discern the economic significance of the slightest changes in the most obscure time series and to assess their impact on broader trends in the economy. While the shine of the Greenspan Great Moderation is tarnished in the wake of the global financial crisis, favourable views formed through direct personal contact over many years are less likely to fade. Moreover, in some respects, Krugman implicitly, perhaps unconsciously, recognizes Greenspan’s successful pre-crisis run — note the “Ex” in his title.
Krugman’s negative assessment of Greenspan focuses less on the day-to-day conduct of monetary policy in pre-crisis years, during which U.S. unemployment was reduced significantly thanks to Greenspan’s willingness to “probe” where the full employment rate might lie, and more on the former chairman’s views of broader policy frameworks in which monetary policy operates. Think: financial regulation. On this, and Greenspan’s attempts to preserve the patina on his legacy after the crisis, Krugman is unforgiving. At the same time, it is clear that Summers is uneasy with Greenspan’s views on these critical issues.
So, on reflection, perhaps the two views aren’t as diametrically opposed as it first appears.
Economics is sometimes discussed metaphorically as plumbing. This was certainly the case 70 or 80 years ago and is being revived almost single-handedly (hat tip: JA). Perhaps a more fitting analogy for the 21st century, however, is nuclear energy. In these terms, Summers may view Alan Greenspan as an extraordinarily-gifted technician, who monitored each and every gauge and ably managed the reactor. His view is tempered by personal relationship and loyalty. Krugman, on the other hand, surveying the fallout of the past five years, declares that that same technician should never have been allowed to design the plant in the first place.