Sunday, July 8, 2001 | Print this story
NEWS ANALYSIS
Greenspan Legacy Rides on a Wobbly
Economy
Profile: Has Fed chief lost the Midas touch? Or is it a
case of too much credit?
By PETER G. GOSSELIN, Times Staff Writer
WASHINGTON--In Alan Greenspan's case, it's hard
to say that "pride goeth before the fall." He's too
self-effacing for the charge to stick.
But how about "public adulation goeth . . . " ?
No sooner had the Federal Reserve chairman won
that Oscar for Washington power brokers--a worshipful
book published in November by Washington Post editor
Bob Woodward--than the U.S. economy, which
Greenspan is as responsible as anybody for managing,
began to unravel in earnest.
Now the 75-year-old economist is in a frantic
scramble to keep the country from slipping into
recession and to preserve his reputation, which until
recently was among the most sterling of any public
official's in the land.
His efforts are haunted by two dark possibilities. The
first is that interest rate cuts, which the Fed has been
wielding more fiercely than at any time in almost two
decades, are blunt weapons against current conditions.
The second is that the golden age of economic growth,
which Greenspan desperately wants to be remembered
as having ushered in, turns out not to have been so
golden after all.
Friday's announcement that the economy had shed
114,000 more jobs and a string of disappointing profit
announcements have only worsened the picture and sent
the stock market falling. It raises the pressure on
Greenspan for more rate cuts.
"In the public's perception, the gloss has come off
him," said Neal Soss, chief economist of Credit Suisse
First Boston Corp. and a former aide to Greenspan's
predecessor, Paul A. Volcker. "He won the accolades
when things were going well, so he's going to get the
blame when they're not.
"After all, it's not like he went out of his way to say,
'Don't praise me.' "
Still, the consensus is that Greenspan will pull off
another turnaround. The economy looks as if it will
avoid an outright contraction, although it may grow only
1% to 1.5% this year compared with an annual average
of better than 4% during the late 1990s. Many
Americans--for example, home buyers--are behaving as
if nothing is wrong. At the 4.5% rate announced Friday,
the nation's unemployment is still about a point and a
half below its five-decade average. The Dow Jones
industrial average is about 12% off its all-time high, but
it still closed Friday above 10,200. So what's the
problem?
The problem, as Greenspan knows, is that corporate
America has fallen into a deep funk from which it shows
few signs of emerging quickly. Its worries threaten to do
some serious economic harm.
Where only a few years ago companies were
stocking up on technology and workers, now they're
laying off employees and slashing everything from
capital spending to corporate expense accounts. Where
once they posted double-digit growth in profits and
spectacular share price increases, now they waste no
time to warn they won't make their own
already-reduced earnings targets.
Greenspan and the Fed got pummeled this spring for
having helped cause this corporate reversal of fortune.
Critics charged that the central bank let stocks and the
economy get out of hand by keeping interest rates too
low in 1998 and early 1999. Then it caused both to stall
by raising rates too high in the rest of 1999 and the first
half of 2000. And finally, it failed to keep the two from
tumbling by not starting to slash rates until early this
year.
Those attacks largely have abated now that the Fed
has whacked a full 2¾ points from its key signal-sending
interest rate. The latest quarter-point cut June 27 in the
fed funds rate came along with the promise of still more
if necessary. The reductions have been the swiftest and
steepest by the central bank since 1982.
But what has taken the place of the criticism seems
more frightening: a sneaking suspicion that rate cuts
can't make much difference when the problem is that
companies think they already have spent too much and
consumers feel poorer because a stock bubble has burst.
There always has been a possibility that the Fed's
rate cut weapon could lose some of its edge, and not
just because of the peculiar circumstances of the current
downturn. The Fed system was designed for a world in
which people needing money borrowed it from banks,
which are extremely sensitive to Fed action; today
two-thirds of the country's credit comes from the stock
and bond markets.
In Greenspan's defense, he has regularly reminded
congressional committees and others that the Fed's
power to manage growth is limited. And, in public, he
has deflected most of the praise that came his way with
the boom of the late 1990s.
(It is not quite as clear how he has behaved behind
the scenes. Most veteran Fed watchers believe he
contributed heavily on a background basis to
Woodward's book about him, titled "Maestro.")
But Washington is unkind to power brokers who lose
even a smidgen of their force, and Greenspan is
beginning to experience some small indignities that come
with a slip-up.
On June 29, for example, President Bush's chief
economic advisor, Lawrence B. Lindsey, went out of
his way to argue that White House-inspired tax cuts, not
Fed interest rate cuts, are responsible for propping up
the economy.
"We've stabilized things. . . . Thanks to the tax cut
and its ability to sustain consumer confidence, we have
put a floor under the economy," Lindsey declared. As
for the Fed, he added, because interest rates take a long
time to work their way through the economy, "you'll see
very little impact now."
On the day the Fed's latest cut was announced, it
played second fiddle on the NBC evening news to an
interview by Greenspan's reporter wife, Andrea
Mitchell, of 7-year-old Elian Gonzalez, the Cuban boy
who was at the center of an international custody battle
last year.
Greenspan almost certainly will weather such slights.
And if, as many analysts expect, the economy revives
late this year or early next, he probably will be credited
with having gotten the country across another rough
patch. Together with his expert handling of the 1987
stock market crash and the 1998 global financial
contagion, the current period could add to his reputation
for being one of the most effective central bankers the
country has ever had.
But it is clear that the Fed chairman wants to be
thought of as more than simply a deft manager of
interest rates and money supply. He wants to be
remembered as the man who brought the high-tech
revolution into the mainstream, the godfather of the
New Economy.
In speeches, congressional testimony and central
bank policy statements over the last five years, he has
preached about technology's capacity to transform
economic performance.
When the country was booming, he credited
innovations in computers and telecommunications for
providing faster growth at lower unemployment rates
with dwindling inflation. Even now that the economy
has stumbled, he asserts conditions are ripe not just for
the resumption of growth but also for the return of
productivity increases that marked the late '90s.
But the slowdown has revealed a disturbing fact
about the economy: that some recent growth was
achieved by building things that nobody wanted or
needed.
Telecom companies ripped up the nation's streets to
lay tens of millions of miles of fiber-optic cable. Merrill
Lynch recently estimated that it can find users for only
about 3% of what it has installed.
Other firms have built or bought billions of dollars'
worth of computers, routers and switches for which
they now can find little or no use.
Of course, tech owners eventually will figure out
how to put some of their vast new holdings to use. In
doing so, they almost certainly will follow a path of fits
and starts that Americans have traced in adopting new
technologies from railroads to television, according to
Harvard business historian Nancy F. Koehn.
But in the meantime, she added, "a lot of what once
looked like brilliant investment seems to be road kill."
That could prove to be a big problem for Greenspan.
For starters, it would mean that spending in
once-booming areas such as telecom could keep falling
for years. Cliff Higgerson, a venture capitalist with
ComVentures in Palo Alto, recently estimated that
telecom capital spending will tumble 15% this year and
another 15% next year and could take five years to
return to levels reached in 2000.
More important, if the fraction of corporate
America's tech investment that proves to have been a
waste is large, it would act as a dead weight that keeps
the economy from resuming its improvements in
productivity and the stock market from recovering its
snap.
"If productivity growth doesn't recover, there won't
be much sizzle to the economy," said Roger M.
Kubarych, a former deputy research director at the New
York Federal Reserve Bank who is now at the Council
on Foreign Relations.
Finally, if the economy's troubles turn out to be
more deeply rooted, it could take a lot longer than the
three years remaining in Greenspan's term as Fed
chairman to work them out. The delay could cost him
the legacy he wants.
"There's something almost Shakespearean about it,"
said David M. Jones, chairman and chief economist of
Aubrey G. Lanston & Co. "A great king has a long and
prosperous reign but at the end risks being undone by
forces beyond his control." |
