Alan Greenspan retired last week after more than 18 years at the helm of the Federal Reserve. Many give him credit for presiding over the booming economy of the 1990s, but supply-side economics suggest that he should be evaluated by how well he fulfilled his core job — maintaining the value of the dollar. By that measure, Greenspan’s record was mixed.
The CRB Spot Index, an inflation index based on 22 commodities, has been prepared daily by the Commodity Research Bureau since 1981. As the chart shows, under this index chairmen Arthur Burns and G. William Miller both tried in vain to fight rampant inflation in the 1970s. It continued through both of their terms until Paul Volcker broke its back in the early 1980s.
But Greenspan’s tenure was marked by mild overreaction. He countered what he called the "irrational exuberance" of the late ’90s with several interest rate hikes in late 1999 and early 2000. This helped lead to recession. Greenspan underestimated the power of President Bush’s tax cuts, bought into doom-and-gloom about the economy and excessively decreased interest rates to stimulate the economy. This led to inflation. To counter this inflation, the Fed has hiked interest rates 14 times in the recent past, and if history is any guide, this will probably turn out to be another overreaction.