For Nightly Business Report, October 3, 2005:
Let me join in the crowds praising the monetary stewardship of the Greenspan Fed. The Greenspan Fed has done a superb job at monetary policy. It has kept inflation low and stable, and it has played a big role in keeping recessions small. It is true that circumstances were very favorable when the Greenspan Fed took over: the Volcker Fed had loaded the bases--created the preconditions. But the Greenspan Fed then hit the grand slam. On monetary policy, the Greenspan Fed deserves the highest grade: an A-plus.
But on other dimensions of policy--things that have traditionally been secondary concerns of the Fed--the Greenspan Fed has not done as well.
It is a fact that inflation can be kept low over the long term only if the government deficit remains small. Too-big deficits for too long have always produced rapid inflation in the past. They will always produce rapid inflation in the future. If the executive and the legislature won't raise the taxes to pay for government spending and keep the budget in rough balance, the market will take over and balance the budget--by levying the inflation tax.
If the Fed is going to do its job as long-term guarantor of price stability, it needs to be assisted by an executive and a legislature who understand the importance of rough budget balance. The Fed has to teach them: it has to be an advocate within the government for balanced budgets. Here, since 2000, the Greenspan Fed has fallen down.
What the Greenspan Fed has done on monetary policy deserves high praise. What it has not done on fiscal policy will make the job of its successors much more difficult.