Greenspan Hit the Mark: Key Insights from His Economic Policy

Welcome to Dispatch Markets! In today’s memory, the name Alan Greenspan tends to conjure either the fierce devotion to free-market orthodoxy that characterized the early 2000s or theFinancial crisis that abruptly ended that era. I can accept that. There’s considerable truth in that simplified portrayal. Still, it’s worth recalling that he earned the nickname “the Maestro” for a reason.

We are currently engaged in a race for technological primacy with China that could determine the fate of the liberal world. If we want to preserve the United States’ leadership, we must remember how that lead was originally established, because that memory will be essential to keeping it. And that will demand a measured reevaluation of Greenspan and the boom he helped bring about.

Greenspan, who chaired the Federal Reserve from 1987 to 2006, did many things right. Most notably, he understood that macroeconomic indicators are, at best, rearward‑looking, and that capable central bankers should trust their own observations as much as they trust trend lines. That insight guided Greenspan to back the budding productivity surge of the 1990s and set America on a course toward the technological dominance we enjoy today.

At the dawn of the 1990s, American technological leadership existed in reality, but the United States had not yet become the indisputable tech titan it would later become. Japan led in advanced electronics, swiftly expanding its competitive edge across consumer gadgets. Europe boasted its own champions in telecommunications, among them Ericsson and Nokia, who appeared poised to control the emerging mobile phone market.

To think of the 1990s as a period of unalloyed exuberance would be misleading. By 1992, the United States was emerging from the gulf of Desert Storm and the mild recession that followed. The national mood was anxious, haunted by deficits—both fiscal and trade. Corporate overhauls were everywhere. Only about 10 percent of Americans rated the economy as good or excellent, while roughly 53 percent judged it poor. Those were among the poorest consumer sentiment readings outside of actual recessions.

Back then, most economists treated the Federal Reserve’s mission as straightforward: manage the economy. The Fed’s official mandate from Congress is to “promote the goals of maximum employment, stable prices, and moderate long‑term interest rates effectively.” In practice, that means cutting rates when unemployment is high and inflation is low, and raising rates when unemployment is low and inflation is rising.

In theory, lowering interest rates should raise the incentive for businesses to invest and households to purchase big-ticket items like cars and homes. That heightened spending tends to heat up the economy—in economist speak, it lowers unemployment and increases inflation pressures. Conversely, raising rates should cool things down, curbing investment, encouraging debt repayment, and tamping down inflation while unemployment stabilizes or rises.

There are two flaws in that narrative. First, inflation and joblessness do not always move in perfect opposition. Second, you’ll notice the theory is full of hedges like “pressures” and “stabilize.” Those issues underscore the imperfect science of monetary policy. Yet economists did at least piece together a workaround for the first problem. That workaround went by the name of the Taylor Rule.

The Taylor Rule is a formula that takes unemployment and inflation readings and outputs an ideal policy rate. It sounds neat, but it runs into the second problem: a single equation cannot capture all the subtleties of “heating” and “cooling,” or the pressures economists insist on modeling. The Taylor Rule includes inflation as a variable, but it cannot quantify the exact squeeze a business owner feels when input costs rise yet prices remain sticky until competitors act.

The only way to account for those nuances is the Fed’s own judgment. Officially, decisions to raise or cut rates are taken by the twelve members of the Federal Open Market Committee. In practice, for many years the chair guided the course, with other members typically offering at most one or two dissenting votes. In 1992, the chair was Alan Greenspan, and the Taylor Rule suggested that rates were “just right.” Yet Greenspan was a strong believer in what economist Robert Barro called “casual empiricism”—the practice of looking out the window and taking what you see at face value. What Greenspan perceived was an economy far from fine.

The Taylor Rule implied that unemployment had dropped enough and that further rate cuts would risk fanning inflationary pressures. Greenspan observed a so-called “jobless recovery,” where businesses hesitated to invest and households remained dour about the economy.

More importantly, Greenspan admired economist Bob Solow’s quip that, “You can see the computer age everywhere but in the productivity statistics.” He cited it often, and rumors say he sometimes peppered his remarks with a few expletives to stress the point.

Greenspan’s argument was that, since the mid-1980s, computers had become increasingly central to the economy. Yet productivity statistics from that era were weak at best and negative at worst. At the same time, inflation figures suggested prices were rising about 3 to 4 percent annually, while electronics prices were falling steadily. The numbers and the real-world experience in Greenspan’s view did not align, and he concluded that the data were misstating the true picture.

Thus the Greenspan-fed Fed continued cutting rates through 1992 and kept them low through 1993. Unemployment began to decline in March 1992 and kept falling. By late 1993, it was approaching levels economists deemed sustainable. The prevailing view among economists was that roughly 6 percent unemployment represented the economy’s natural rate and the Fed’s target of “maximum employment.”

Reluctantly, Greenspan started lifting rates in 1994. Unemployment fell further, eventually slipping below 6 percent, and the conventional story warned that inflation would accelerate unless rates rose decisively. Greenspan, however, increased rates only gradually, even as unemployment dropped further. In early 1995, a rise in unemployment from 5.4 to 5.8 percent prompted him to reverse course and ease again. For the next four years, rates stayed within a tight band of roughly 4.75 to 5.5 percent. Asset prices surged, and the S&P 500 more than tripled from 1994 to 2000.

Greenspan himself worried about the rapid escalation of stock prices and warned of “irrational exuberance” as early as 1996. Nevertheless, he refused to hike rates enough to derail the ongoing improvement in unemployment. By 2000, unemployment had fallen to 3.9 percent.

Part of the reason the economy could sustain such low interest rates was the surge in productivity Greenspan had anticipated. From 1990 to 1995, productivity growth hovered around 1.5 percent annually. In 1996, it exceeded 2 percent and then continued to climb throughout the decade, reaching 4.2 percent in 1999.

Now, as the story goes, someone inevitably mentions Pets.com—the online pet-supply retailer once valued at about $400 million, famous for a Super Bowl ad featuring a sock-puppet mascot, with a business plan built around offering free shipping on 40‑pound bags of dog food so shoppers could grab the same items more quickly at a neighborhood grocer. (The company went bankrupt nine months after its IPO.) So, to be fair, the era’s eagerness to finance anything internet-related produced more than a few unwise ventures. Yet the ecosystem that investment unleashed also yielded enormous productivity gains.

First, despite the dot-com crash and the post‑9/11 recession, labor productivity kept rising by more than 2 percent through 2003. The average annual gain from 1996 to 2003 stood at 3.31 percent. Overall, the U.S. economy was roughly 15 percent larger by 2003 than it would have been without that productivity surge.

Second, the Magnificent Seven—Alphabet (Google), Apple, Meta, Nvidia, Amazon, Microsoft, and Tesla—now account for about a third of the S&P 500’s total market value. More striking still is that these seven alone surpass the total market capitalization of both the European Union and Japan combined. Five of them originated in Silicon Valley, with the remaining two in Seattle.

America’s current lead in artificial intelligence can be traced back to the investment boom that Greenspan’s skepticism about official statistics helped catalyze during a pivotal moment in the economy. Today, we face a parallel situation. Rather than unemployment hitting record lows, we confront persistently high inflation near the Fed’s 2 percent target, and the Fed appears inclined to tighten further.
But if you look out the window, you’ll see an economy where AI is pervasive even though productivity statistics haven’t caught up yet. The software‑development sector, home to many of our most dynamic companies, has undergone a dramatic transformation overnight. It stands to reason that this surge in productivity could extend to nearly half of all jobs in the United States.

Additionally, the cost of achieving AI capability is dropping at rates that are nearly impossible to quantify. The best estimates suggest that, depending on the metric used, the price for a given level of AI performance has fallen by a factor of 9 to as much as 900 over a year. It strains credulity to think today’s statistics fully capture these rapid shifts.

The speed of growth, however, will be shaped by borrowing costs. The AI economy will require trillions of dollars in data-center investment. Up to this point, Silicon Valley has largely funded the AI expansion on its own. That era is likely to end later this year. Companies will increasingly turn to capital markets to finance future expansion, and the cost of that financing will depend on where the Federal Reserve sets policy rates. It would be wise for the new Chair to apply Greenspan’s approach.

Texas is moving toward overtaking California in battery-storage capacity. This leap forward is not the result of mandates or subsidies, but the power of market dynamics at work. When barriers fall and entrepreneurs can act, progress follows.

Texas is a land of oil fields, natural-gas liquefaction facilities, and a political culture that has often scorned climate‑minded rhetoric. The state runs its own grid largely to safeguard the oil industry’s interests. Yet that single-state grid—paired with an appetite for growth—means easier permitting, shorter interconnection queues, and a capacity expansion pace that outstrips what is possible in more highly regulated environments, even those with climate aims.

Liberal teens are becoming less inclined toward marriage, and no one quite knows why. The usual suspect for youth-related unease is the smartphone, with more time online reducing the appetite for in-person ties. But do conservative teens actually spend less time on their devices? Perhaps this is an instance of ideological sorting, where teens predisposed to marriage identify as conservatives. Even so, that doesn’t fully explain the current magnitude of the liberal decline.