maes·tro
    n., pl. maes·tros or maes·tri (-tr).
    A master in an art, especially a composer, conductor, or music teacher.
            -Dictionary.com

If I was right in my review of Agenda, and Bob Woodward really is embarked on a clandestine conservative project to demonstrate that government and human affairs are fundamentally unmanageable, then this book is the capstone on that project, which he has now successfully completed.  If you were to poll the American public, New York's financial movers and shakers, Washington's pols and pundits, and Silicon Valley's technocrats, and ask them all who is the single most successful government official of all time, perhaps as many as half of the respondents would name Alan Greenspan.  Unless this current economic slowdown turns into a fairly sharp and retracted recession, which is extraordinarily unlikely, Greenspan's tenure as Chairman of the Federal Reserve will have coincided with the greatest period of economic expansion in the history of humankind.  If this economy has even managed to insulate Bill Clinton from the consequences of all of his criminal behavior for eight years, even though no one thinks he had anything to do with the economy's performance, just imagine what it has done for the reputation of Greenspan, a figure of some moral rectitude, who actually gets credit for it.  Yet what is the secret that this extremely flattering portrait gradually reveals ? : Greenspan neither has any idea what is truly going on with even the most fundamental trends in the economy, nor does he pretend to.

That is the most important message conveyed by this book, that Greenspan, almost universally perceived as the ubergenius who has guided the current economic expansion, has been more or less flailing for his entire term, and no one is more aware of it than he.  Like all of Woodward's books, this one excels at giving the reader a rare inside look at the making of policy.  what will come as a shock to most people, particularly to readers of William Greider's book Secrets of the Temple, is how fundamentally chaotic that process really is.  Greider and most Fed critics contend that the Federal Reserve is an all powerful, unaccountable institution which manipulates the economy in order to serve the interests of banks and bond holders (i.e., the rich) at the expense of borrowers (i.e. , the middle class).  Greenspan and his fellow Fed members do certainly emerge as zealous guardians against inflation--particularly the Chairman himself who is from the generation of leaders who quite helplessly fought against the explosive post-Vietnam inflation of the 1970s--but throughout the book they are fighting a monster who stubbornly refuses to rear his ugly head.

Much of modern economics is based around the near religious belief in the concept of the non-accelerating inflation rate of unemployment (NAIRU), which essentially holds that there is a limit below which unemployment can not fall without triggering inflation rises.  The reasons for this are fairly self-evident; at some point the competition between employers for new workers must put pressure on wages.  However, during this prolonged expansion unemployment has been driven far below the accepted NAIRU, once thought to be over 6%, and has stayed low without setting off the predicted inflationary effects.  Of course, it might be possible to temporarily hide increases in labor costs, if companies ate into their own profit margins, but profits have grown during this period also.  This is theoretically impossible and neither Greenspan, nor any of his peers, could figure out what was happening.  Finally, and I mean finally, after a period of years, Greenspan determined that their statistics were undermeasuring enormous productivity increases, driven by technology, which were alleviating inflation pressure.

Meanwhile, there were several other phenomena which they either never comprehended or Woodward didn't, but which seem readily amenable to at least partial explanation.  Three of the tasks that Greenspan and the Fed pursued over this period were to return the Federal government to balanced budgets, to tamp down the skyrocketing stock market, and to slow the rapid growth of the US economy.  They failed utterly at all three : why ?

The Budget

Many would protest that they succeeded here, but a government that is running an $800 billion surplus, as ours is projected to do soon, is being mismanaged just as badly as one which is running enormous deficits.  What happened here ?

The simple fact is that Greenspan and the rest of the green eyeshade crew got so caught up in the microeconomics of budget numbers that they failed to look at the changing global landscape.  It is obviously the case that America ended the Cold War running large deficits and they were exacerbated by the inevitable industrial restructuring as the economy changed from a wartime to a peacetime posture.  But the other obvious fact, obvious at the time had anyone cared to think about it, was that there was about to be a titanic peace dividend.  First, defense spending has plunged, to the point where
we now budget roughly the same percentage of money for defense as we did prior to Pearl Harbor.  By itself, this savings would probably have resulted in balanced budgets.  Second, America had basically been pursuing a "guns & butter" policy since the time of JFK. In exchange for the public's acquiescence in Cold War adventurism, the government had vastly expanded domestic spending,  Additionally, wartime imperatives had given labor a whiphand, allowing them to push for ever higher wages as a cost of producing the weaponry with which to confront the Soviets.  The end of the Cold War made it possible to confront the public and labor, with the result that domestic spending and industrial wages both stopped increasing at their prior rates.  Finally, the defeat of the Soviets freed something like a quarter of the world's population from communism and turned them into consumers, hungry for our goods.  The $500 billion deficit package that Bill Clinton and the Democrats passed in 1993, and George Bush's earlier package, pale in comparison to these enormous structural changes in the US and world economies.  If anything, it is likely that the deficit plans acted as an unnecessary brake on US postwar economic growth and delayed the point at which the budget went into balance.

The Market Boom

This is still just a theory and I suppose it will eventually be put to the test (perhaps in the NASDAQ over the coming year), but I wonder whether 401k'shaven't made it nearly impossible to drive down stock prices for an extended period.  Over 70 million Americans now own stocks in some form, presumably mostly through 401k plans.  Total investment in 401k's is over $1 Trillion and more goes in every two weeks.  Every paycheck Americans pump money into the market.  Sure, at times, like this past January, they tend to sit on the sidelines by putting it mostly in money markets, but they (we) are just waiting for an opportune moment to pump it into stocks.  The latest slide in the NASDAQ happens to have coincided with a slowdown in overall economic growth, but let the tax cuts pass or the Fed start cutting rates, and the transfer of money from those funds into the market will get those prices headed back up again.   And even during this stretch of relatively bad news, the Dow has stayed well over 10,000.  It appears at least a possibility that 401k's, with the thirty or forty year perspective that they necessarily force upon investors, have created a broadbased multitude of stockholders and buyers who are less susceptible to normal fluctuations in the market and who will not be easily influenced by the Fed's attempts to dampen enthusiasm.

Rapid Growth

This is actually a hidden, but unnecessary, victory for the Fed.  The combination of artificially high interest rates and the aforementioned debt reduction packages have created an environment where the American people are extremely overtaxed and borrowing costs are much too high.  This has slowed the economy, but the countervailing factors are so overwhelming positive that it has still experienced robust growth.

Overtaxation is readily apparent from the surpluses we are running and which will skyrocket in coming years.  Interest rates are a little more subtle, but not much.  What is the one thing that we were always told about why we had to reduce the deficit ?  That reducing government competition for loan money would free up more for private borrowers and result in lower rates.  What has happened over the period that the US government went from deficits in the hundreds of billions to surpluses in the hundreds of billions ?  Rates have gone up.

In fact, remarkable as it may seem to we older folks who experienced rates up to and over 20% in the late 70's and early 80's, today's rates may be the highest interest rates in our history.  That is, they are the highest real interest rates (Interest rate minus inflation = real interest rate).  Inflation after all has completely nonexistent for the past several years.  Since 1991 we've been measuring inflation at or under 3%.  That's low enough, but then add in the fact that Greenspan himself has testified before Congress that the inflation measure we use is hopelessly antiquated and overestimates inflation by at least 1%.  For instance, the number for January 2001 was shockingly high (averaging out to a 6% yearly rate), but the rise was mostly the result of a large tax increase on tobacco products and further hikes in energy costs.  The energy component is troublesome, though likely temporary, but the cigarette costs are insane.  In the first place, why not measure the price of crack and arsenic while we're at it ?  There is simply nothing about cigarettes that makes them the kind of vital item that should be in the market basket used to measure inflation.  Secondly, the price rise reflects nothing more than an arbitrary government action.  There is no intrinsic sign that prices for goods may be increasing generally.  So let's ignore that number and take a look at the 3% number that's been more common for the past decade.  Then we'll lop off the 1% that Greenspan identified.  So we're at about 2%.  Meanwhile, interest rates have been about 6%.  So real interest rates are roughly 4%, or at least 3%.  This may not qualify as usury, but it is outrageous in historical terms.

The real strength of the global economy is even more apparent when you consider that the Fed probably has interest rates about two full points too high now.  The end of Communism and decline of socialism, the move towards international free trade, the technology revolution, and the transformation of the American retirement system into a private (401k) investment-based system have combined to create a momentum which even unwise Fed policy hasn't been able to derail.  These massive trends also make it especially amusing to read Woodward's descriptions of internecine struggles in the Fed over whether to raise or drop rates by quarters of percentage points.  Ultimately you really have to conclude that the Fed's effect is mostly felt in the psychological realm.  It is a real effect, but it is hardly the type of technocratic fine tuning that so many imagine them to be involved in.

With all of that, it appears that Greenspan understands, better than anyone, how little even he knows.  In fact, the most common refrain from him over the course of the book is : we just don't know.  The Fed meetings where rates are set are especially entertaining because the hawks and doves flip flop from one to the next, folks go in planning to push for one action and end up voting for another, half the time no one but Greenspan knows what they decided, and he (by long-standing Fed tradition) has to be on the winning side, so, except on the rare occasion when he really pressures his colleagues, he goes along with the consensus.  The title of the book, Maestro, is surely intended to be just as tongue-in-cheek as were the titles of Woodward's past few books--The Agenda, The Choice, The Commanders--because Greenspan, far from resembling a conductor or composer in complete control of an orchestra, more closely resembles a jazz musician in the midst of a freestyle jam, technically skilled and able to please the audience, but essentially functioning without a score.  His role, and he fills it brilliantly, is to bring some semblance of harmony out of chaos.

At one point, in testimony before Congress, Greenspan was asked about the possibility of creating an international bank regulator; his reply speaks volumes :

    I would be very concerned if we were looking at some major superregulator.  Superregulators tend
    to overregulate and make unbelievable mistakes.

    I would suspect that I would know most of the people who would be in charge of making the types
    of judgments that would be required for that, and I would tell you that they don't have a clue as to
    what to do.  I would much prefer to allow very complex market forces to tell us.

This is, of course, a self description; who else has the gravitas and reputation that would be required of such a global regulator ?  In it he reveals the depth of humility which makes him a singular figure and demonstrates that he is deserving of all the accolades he receives, though for a very different reason than he receives them.  Where people are mesmerized by his track record of success, his intellect and the micromanaging they believe he has engaged in, Greenspan understands that the markets know more than he can ever hope to understand, and his role is to interfere with markets as little as possible and be naught but a cautious steward.

(Reviewed:28-Feb-01)

Grade: (B+) Orrin C. Judd

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