As Kevin Warsh campaigned to be President Trump’s choice to chair the Federal Reserve, he repeatedly invoked a specific moment in Fed history. In September 1996, Alan Greenspan, then the Fed’s chair, resisted raising interest rates despite some signs that the economy was on the verge of overheating. Mr. Greenspan’s decision proved prescient, and his sagacity produced several good years for the U.S. economy.
That decision, among others, is why Mr. Greenspan, who died earlier this week at 100, is rightfully viewed as one of the most successful of his ilk. However, I worry that Mr. Warsh, who now has the job, has been too quick to draw lessons from Mr. Greenspan’s 1996 call — lessons that may not apply three decades later.
Mr. Greenspan made his 1996 decision because he had concluded that the computer revolution was producing significant changes to the economy, an observation that may have parallels to today’s rise of A.I. Those parallels explain why Mr. Warsh, in his effort to win Mr. Trump’s backing for the post, sounded as if he had already made up his mind. He could mimic Mr. Greenspan and rely on the impact of a novel technology to avoid raising interest rates.
But back in the mid-1990s, Mr. Greenspan did not rush to conclusions — or to interest-rate decisions. With an idiosyncratic approach that drew from long years as a business consultant, he did deep dives into the data, searched for the right historical parallels and tested his hypotheses with Ph.D. economists at the Fed and seasoned business executives.
It was Mr. Greenspan who introduced me and many others to the work of the Stanford University economic historian Paul David. David showed that it took a generation for factories to replace steam engines with electric motors because it took a long time to reorganize production to exploit the new technology, which then unleashed a productivity boom in the 1920s. Increased growth in productivity, the amount of stuff produced for every hour of work, is the magic elixir of rising living standards; it’s the reason we have more goods and services than our grandparents even though we work fewer hours.
Mr. Greenspan argued that Mr. David’s observation about the electric-motor era was relevant in the 1990s, a time that reflected the Nobel laureate Robert Solow’s quip: “You can see the computer age everywhere but in the productivity statistics.” In his memoir, Mr. Greenspan said he saw companies investing heavily in high-tech equipment for years, which meant they must have found the technology to be profitable. Profits were indeed up. Wages were rising. But companies weren’t raising prices. He concluded that computers were producing an acceleration in productivity growth that wasn’t yet captured by the official measures.
At that pivotal September 1996 meeting, Mr. Greenspan resisted pressure from his Fed colleagues to raise interest rates (then at 5.25 percent). Those colleagues argued that the unemployment rate was falling, the economy was booming, and inflation was above its (at that time not public) 2 percent inflation target. So why not raise rates? But Mr. Greenspan convinced them that the computer revolution had changed the economy so fundamentally that the U.S. could grow faster than was generally believed without generating inflation. He was correct. Inflation fell, and the official productivity measures rose.
Mr. Greenspan was, indeed, prescient. But he was also prudent. Three years later, he saw that demand was increasing so much that it threatened to push prices up. So even though the productivity boom hadn’t fizzled, the Fed began raising interest rates sharply.
Reflections on Mr. Greenspan’s tenure raise a critical question. Is 2026 a repeat of 1996, this time with artificial intelligence powering a productivity boom that will restrain inflation, as Mr. Warsh suggested before taking the Fed job? Or is it more like 1999, with investment in A.I. — the building of enormous data centers and the hiring of whiz kids at high wages — threatening to push inflation higher before the productivity boost kicks in? Mr. Warsh’s reply at his first news conference: “We have a task force for that.” That reflects how circumspect he has become since winning Mr. Trump’s nomination. Perhaps the recent stubbornness of inflation has changed his mind.
The lesson Mr. Warsh should take from Mr. Greenspan is not that the arrival of a powerful new technology justifies lower interest rates. It’s that a Fed chair should come to conclusions only after consulting history, scrutinizing the data and weighing alternative hypotheses — not because of what he said when he was campaigning for the job.
Source photographs: Stephen Crowley/The New York Times; Anna Rose Layden for The New York Times
David Wessel is the director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. He is a former economics correspondent and the author of “In Fed We Trust,” a book about the central bank’s response to the 2008 financial crisis.
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