Alan Shrugged

Alan Shrugged is a lively and accessible biography of Alan Greenspan by Jerome Tuccille, author of books on Rupert Murdoch, Donald Trump, and the Gallo wine family. It paints a picture of a man considerably more engaging and complex than the jowly sphinx who made so many delphic pronouncements as chairman of the Federal Reserve. Tuccille discusses his childhood in New York City (Harry Belafonte was a year behind him in high school), his early career as a jazz clarinetist and tenor sax player, and his close but wary association with Ayn Rand and her circle of Objectivists.

Despite his hard-shell economic beliefs (he favored a return to the gold standard and opposed the progressive income tax and antitrust regulations), Greenspan proved to have extraordinary political instincts that enabled him to retain his integrity as chairman of the Fed while giving (or seeming to give) the current administration what it wanted. A lifelong Republican, he even found it easier to deal with the Clinton White House than that of George H.W. Bush.

Toward the end of the book, the author quotes a banker as saying, “The Fed does not follow a ... rule that can be written down as an equation or formula.” The author says that “it is critical that someone of Alan’s stature and intellect remain at the helm of the nation’s most important financial institution.”

Yet much earlier in the book, Tuccille discusses a formula that, even if Greenspan didn’t follow it, predicted his behavior almost as well as if he had. Is it really possible that all the number crunching and political maneuvering that goes into the proper regulation of interest rates could be done this simply? The rule was proposed by economist John B. Taylor, once a colleague of Greenspan’s at the economic forecasting firm Townsend-Greenspan.

Forget the money supply, the relative strength of the dollar, and the latest consumer confidence readings.... Replace them instead with Taylor’s simple rule: If inflation is one percentage point above the Fed’s goal, short-term rates should be lifted 1.5 percentage points to keep inflation from accelerating. Conversely, if the economy’s total output is one percentage point below full capacity during a recession, short-term rates should be lowered by half a percentage point. That’s all that economists, and Federal Reserve chairmen, needed to know about keeping the economy on track with steady growth and low inflation, according to Taylor....

Decades later, when the economic history of the final decades of the twentieth century was written, Taylor would enjoy the last word. A graph of where a key short-term rate, the federal funds rate, would have been had the Federal Reserve followed the Taylor Rule showed it to be almost exactly where it actually was before and during Alan Greenspan’s tenure at the helm of the Federal Reserve. Alan has always maintained that his digestion of thousands upon thousands of arcane economic numbers drove his forecasts and policy recommendations—which, of course, was a lot better for business. However, he behaved as though he were following Taylor’s simple rule to the letter.