Greenspan Legacy Rides on a Wobbly Economy


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 2 3/4 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."


Economy Under Greenspan

GDP during Alan Greenspan's tenure in trillions of current dollars.



October 1987: Wins rave reviews for handling stock market crash months after taking job.


July 1990-March 1991: Criticized for not spotting Gulf War-induced recession soon enough to avert it.


February 1994-February 1995: Raises rates to keep economy from overheating, but is criticized for doing so.


Mid-1995-September 1998: Much lauded during golden period of growth.

September 1998-January 1999: Praised for handling global financial woes by cutting rates. But critics now say he cut too much.


June 1999-May 2000: Raised rates and kept them high to offset effects of 1998 cuts. Later was criticized for this.


January-present: Cut rates more quickly than at any time in almost 20 years to avert recession. Results still in doubt.

Sources: Federal Reserve, Times staff



Bad-news bears: Some analysts see much worse for economy. C1

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