Is Greenspan unique? No, central Banking Itself Has Been Elevated
By Greg Ip
19 September 2005
The Wall Street Journal
(Copyright (c) 2005, Dow Jones & Company, Inc.)
LAST MONTH, an Australian newspaper proposed a novel candidate to succeed Alan Greenspan as Federal Reserve chairman: Ian Macfarlane. Though an unknown in the U.S., Mr. Macfarlane has something no other candidate can boast: a track record that rivals Mr. Greenspan’s.
Since Mr. Macfarlane became governor of the Reserve Bank of Australia nine years ago, that country’s inflation rate has fallen a percentage point and its unemployment rate by three percentage points, to U.S. levels. Though buffeted by the Asian financial crisis in 1997 and a housing bubble, Australia has experienced just one quarter of negative growth.
As Mr. Greenspan’s retirement approaches in January, anxious investors wonder: Can anyone reproduce his record? A glance at Australia and elsewhere suggests that the answer is yes. While the U.S.’s economic performance has been superb during the Greenspan era, it isn’t unique. “Very similar results have been attained elsewhere,” says Stanley Fischer, a former Citigroup executive who runs Israel’s central bank.
A review of nine major countries’ economic performance, based on data compiled by Global Insight Inc., an economic-consulting firm in Lexington, Mass., shows that Australia, Canada, the United Kingdom and Spain have done as well or better than the U.S. in reducing inflation and unemployment since 1987. However, only Australia and Spain have grown faster overall, and the U.S. has enjoyed the most stability — just five quarters of negative economic growth during that period.
Whatever qualities have made the Greenspan Fed successful, many other central banks appear to share them. This means that President Bush probably doesn’t have to find a Fed chairman with Mr. Greenspan’s eclectic mix of smarts, intuition and rigor, to continue his success. It does mean that choosing someone outside the mold of a modern central banker is risky.
What explains central banks’ widespread success? In the past two decades, central banking has become a “much more professional, technical job,” says Alan Budd, who served in the British Treasury and the Bank of England during the 1990s and is provost at Oxford University’s Queen’s College. “It’s not just a question of taking the politics out, but of putting the economics in.” The Bank of England adopted inflation targets, regular policy meetings and inflation reports in 1992, which Mr. Budd says were important precursors to the bank’s formal independence in 1997.
Australia, Britain and Canada adopted numerical inflation targets in the early 1990s, a step the Fed has declined to take. Debate rages among academics about their value. Rory Robertson, an economist at Macquarie Bank in Sydney, Australia, says even with a target, Mr. Macfarlane has done more or less the same things Mr. Greenspan would: “put up rates when the economy is running strongly and the labor market is tightening, and cut rates when the economy is threatened.”
While Mr. Greenspan is both praised and criticized for preferring judgment to rules, “It would be hard to write down precisely what any central banker has done through this period,” Mr. Budd says. So while Mr. Greenspan responded quickly to the 1987 stock-market crash and the 2001 meltdown in technology stocks, his foreign peers have been flexible in the face of the unexpected. Shortly after Mr. Macfarlane, who had been at the RBA since 1979, became governor in 1996, the Asian financial crisis pummeled Australia’s export markets and its dollar. He resisted the orthodox prescription of raising interest rates to counter the dollar’s drop, and Australia’s economy barely skipped a beat. Similarly, in 2003 the Bank of Canada reversed a string of rate increases when outbreaks of severe acute respiratory syndrome and mad-cow disease suddenly undercut growth prospects.
LUCK HAS ALSO BEEN important. While oil prices are rising, there has been no repeat of the massive shocks of 1973 and 1979 that hurt growth and elevated inflation. China’s integration into the global market has put downward pressure on goods prices everywhere. In the U.S., Mr. Greenspan has benefited from a tech-fueled surge in productivity. Conversely, Germany owes its poor performance in part to the difficulties of reunification, and Japan to the aftershocks of a massive property bubble, and both suffer from stagnant population growth.
The four English-speaking countries have done particularly well. That’s because their financial and labor markets are less regulated, so they are more “resilient and spontaneously self-correcting,” says Jean-Philippe Cotis, chief economist at the Organization for Economic Cooperation and Development. If a worker loses his job in one industry, he is more likely to take one at a lower wage in another. Firms are more likely to cut prices and shrink capacity in the face of falling demand. This, Mr. Cotis says, makes it easier for a central bank to cut interest rates, and for those cuts to flow through to home buyers and businesses.
Other countries’ good performance doesn’t diminish Mr. Greenspan’s achievements. Because of the U.S.’s overwhelming influence on world growth and financial markets, it is unlikely other countries could have done so well had the U.S. performed badly. As Mr. Macfarlane said earlier this year, “The major macroeconomic events that have affected Australia have to a large extent been imported rather than homegrown.” And Alan Blinder, a former Fed vice chairman, says other central bankers have learned from Mr. Greenspan.
Because of the Fed’s importance to their own economic stability, other countries are watching the Greenspan succession closely. Mr. Robertson says foreigners don’t generally like Mr. Bush’s foreign or fiscal policies but have taken comfort that “someone smart and sensible is running the Fed.” Foreign investors want the next chairman to be a “straight up-and-down central banker type.” The candidate who most closely fits that description, he says, is Ben Bernanke, a former Fed governor and monetary scholar who is Mr. Bush’s economic adviser. Investors, he says, “know how he thinks.”
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Success All Around
In the Greenspan era, many economies have performed as well as the U.S.
NO. OF QUARTERS
— 1986-2005 CHANGE IN — OF NEGATIVE
INFLATION* UNEMPLOYMENT GROWTH
Australia -6.4% -2.8% 7
Canada -3.8 -2.8 8
France -3.1 -0.1 8
Germany*** n.a.** +3.2 20
Italy -5.2 -1.0 17
Japan n.a.** +1.7 20
Spain -7.8 -7.6 7
U.K. -1.6 -6.6 6
U.S. -1.8% -1.7% 5
* Excluding food and energy, except Australia: All prices
** Germany and Japan began and ended the period with low inflation
*** West Germany before 1991
Sources: Global Insight; WSJ Research