I thought this was an interesting point of view from the Bank of England’s governor…
From The Guardian…
What I learned from Alan Greenspan
The career of the chairman of the US Federal Reserve is a lesson for all central bankers
Mervyn King
Monday August 29, 2005
The Guardian
I want to describe the three important lessons that I have learned from Alan Greenspan [as chairman of the US Federal Reserve] during my time at the Bank of England.
First, to be a successful central banker requires an extraordinary degree of objectivity. The key is to recognize that economics tells you how to think, not what to think. It is not a set of settled conclusions about issues. Above all, it is vital never to confuse the world with a model. The whole point of a model is to abstract from a wide range of factors in order to think clearly about one particular issue.
Let me describe an example of what I shall call "the Greenspan approach to economics". In the 1970s economists were encouraged to construct models that incorporated explicit optimizing behavior by households and firms. Unfortunately, some of them urged policy-makers to apply the lessons from their models [too] literally. The Greenspan approach would advise great caution. The likelihood that any particular model captures how the real economy would respond to a given change in policy is vanishingly small.
The second lesson from Alan’s time at the Federal Reserve is that empirical knowledge is not confined to the analysis of official statistics. There are other and often crucial pieces of information that come to us in more qualitative form. These include information from businesses about what they see happening in the economy. Perhaps the most famous example of this in recent years is the productivity acceleration in the US in the mid-1990s.
The extensively revised official US data now show that productivity began accelerating in 1995. However, that was not visible until data released in 1998. But Chairman Greenspan did not wait until 1998 to conclude that the underlying rate of productivity growth might be increasing. The key reason was that he talked with and listened to people who work in business.
In the UK, there does not seem to have been a productivity miracle. But we have had many examples of the importance of qualitative data in making judgments. For instance, there have been significant flows of migration that have expanded the potential labor force. By their nature, such flows are not accurately reflected in official data. But the Bank of England’s business contacts were able to tell us that the ability to recruit new migrant workers was a growing and significant response to a tight labor market.
The third lesson that Alan has taught us is that it is the consistency over time of a policy framework that sustains a market economy. Alan, of course, has stressed this in the context of price stability. But it applies equally well to the system of taxes, property rights and public goods provision on which prosperity in a market economy relies.
Alan famously defined price stability in the following terms: "Price stability is best thought of as an environment in which inflation is so low and stable over time that it does not materially enter into the decisions of households and firms." I would suggest that implicit in this is a prescription that Alan might write for all economic policies, namely that economic policy stability is best thought of as an environment in which the decisions of households and firms are not materially affected by the need to insure against future arbitrary or mischievous changes in government policy.
In the US, inflation has been both low and rather stable so we can with some justification say that inflation no longer "materially enters into the decisions of households and firms". In the UK inflation has, if anything, been even more stable.
But this success carries a risk for the future. Inflation expectations may be sensitive to a large but temporary shock that moved inflation outside the range within which it has remained for some years. With their belief in stability jolted, households’ inflation expectations might move by much more than was justified by the temporary nature of the shock. That would make it more difficult for the central bank to bring inflation back to target.
So those are the three lessons that I have learned from Alan: economics is not a set of doctrines but a way of thinking; the importance of using qualitative and quantitative information from a range of sources; there are a small number of fundamental objectives that are crucial and which we can judge by the Greenspan yardstick of whether we have freed businesses and households from the burden of expending resources to deal with unnecessary policy volatility.