Alice M. Rivlin was Vice Chairman of the Federal Reserve during its absolute apex. Nominated to that position in 1996, she stayed as number two to Alan Greenspan until 1999. During those years the central bank, and its central bankers, would become greatly admired for what was widely perceived as pure technocratic skill. The extended economic boom, with low inflation and unemployment, was believed by many due to their collective brilliance.
Ms. Rivlin is much less well-known than Mr. Greenspan, though that is not unusual Chairman to Vice Chairman (quick, who was Paul Volcker’s Vice Chairman?). She was not one for being filmed to be put up on CNBC’s or CNN’s awfully worshipful news segments. That role was all Greenspan, and one in which he clearly relished. Rivlin was more the insider, having worked in DC for decades by then.
She had been the original direction of the Congressional Budget Office, holding that position through Ford, Carter, and into the Reagan administration. She was appointed Deputy Assistant Secretary at the US Department of Health, Education, and Welfare way back in 1966. Rivlin was even awarded a MacArthur Foundation Fellowship in 1983 (the so-called genius grant).
In one of the very few speeches in her Fed record, Vice Chairman Rivlin in May 1999 wondered for a Minnesota audience if the good times would last. More importantly, she actually asked how they might.
Indeed, the economic journalists’ most frequent question these days is some variant of: “How long will it last?” “Is the good news temporary or permanent?” I get this question all the time, as do all members of the Federal Open Market Committee. Hope springs eternal that we may be privy to some secret economic clues available only to readers of entrails inside the temple. Unfortunately, of course, we process the same economic information available to everyone else and face the same uncertainties.
In very strict terms, that was true. The Fed’s data was no different than what is available publicly (though they might be given view to it before the public). Yet, that is not at all how the world was being interpreted back then. Rivlin was a little uncomfortable with the hero worship, suggesting throughout her speech that a great many other factors might be providing emphasis for what was to be called a few years later the Great “Moderation.”
Some of the credit clearly goes to global forces that Americans don’t control and which can’t be counted on to continue pushing in the same direction forever.
She was not speaking about the eurodollar system (who was in those days?) but she might as well have been. The growth of international positions, economic as well as finance, were clearly a factor in the positive conditions of that time. Quite presciently, she is one of the few who can say she warned us, if more broadly in generic terms.
Rivlin has remained mostly outside of the spotlight in her retirement from the Fed, too. Though a day doesn’t go by without Alan Greenspan shaking his fist about inflation that is just around the corner, and interest rates nowhere to go but up, his former second chair finally found the spotlight earlier this year – if only because what she had to say was, the media believed, a negative comment on President Trump. It was actually a stinging rebuke to the Federal Reserve, as well as Presidents from both parties.
We haven’t seen 3% growth for a long time.
It’s the sad truth of the current “recovery.” Not only did the economy collapse during the Great “Recession” it has been as if it also forget how to grow. The change is so dramatic as to be one of those things you have a hard time believing no matter how plain in the numbers. As I wrote back in May:
The idea of 3% growth used to be so uncontroversial it was practically religion. The postwar average of real GDP was 3.2%, including recessions, so to make 3% a baseline would be so perfectly natural. The Trump budget’s use of it, by contrast, has produced an enormous backlash. Some of that is simply due to the climate of 2017 where the mere mention of his name invokes immediate emotion, but we must remember that the climate of 2017 is almost entirely a product of this very debate.
Indeed, he is President, I firmly believe, because Alice Rivlin is absolutely right. Looking back at the history of US GDP (I’ll stop here at the eighties) the vast majority of quarters were north of 3%, often well more than that demarcation. Less than 3% used to be the kind of rarity that provoked concern and even alarm. Now it is almost like a ceiling.
Just over two-thirds of the quarters in the 1980’s expansion were better than 3%, and the same during the lengthy one in the nineties. During Rivlin’s turn in the Vice Chairman seat, US GDP expanded by more than 3% for fifteen straight quarters. You might be tempted to declare her a genius after all, at least a partial one. But that is post hoc ergo propter hoc fallacy, and of the kind her 1999 speech was attempting to resist.
Growth in the 2000’s turned lower following the mild 2001 recession (dot-coms, not September 11 as many people remember it) and then fell apart late in 2007. The proportion for 3% has actually increased to three-fourths since the official end of the Great “Recession”, but in reverse. In other words growth has been flipped around entirely, where it is now a rarity to find GDP at more than 3%.
Today’s revision to Q2 GDP falls just short of that level. At an annual rate of 2.98942%, whether or not it counts for rounding doesn’t actually matter; completely beside the point. You can see the problem visually on the chart above; since 2009, the bars depicting GDP growth are visibly more sparse and thin, no solid run of continuous expansion like when Alice Rivlin was quietly and in her own way talking down the Greenspan Fed.
That’s what this stagnation or malaise is, and it is the worst case. Because growth occasionally peaks above, or at, 3%, the optimists can say things are getting better when unequivocally the opposite is really true. This lack of growth invades all corners of life, from politics to investing to social cohesion and even our health and lifespan.
It’s easy to believe the “best and brightest” had it all figured out, a comforting thought in a complex and unpredictable world. When the time came, when the “global forces” finally did “stop pushing in the same direction”, they so thoroughly failed because it was never them to begin with.
I highly doubt Alice Rivlin was ever thinking about one lost decade let alone the high probability for two, but at least she was the smallest bit uncomfortable with moderation fantasy. It would have made a good place to start twenty years ago.