Alan Greenspan is being remembered as the Federal Reserve chairman who presided, in the 1990s, over the longest stretch of uninterrupted economic growth then on record. Much of the credit for that stemmed from his recognition of the role of information technology that permitted the economy to grow without generating inflation, which allowed the Fed to forgo interest-rate increases.
For this and other reasons, Kevin Warsh, at his swearing in as the new Fed chairman last month, singled out Greenspan among his predecessors for praise in delivering prosperity without inflation. Now he sees the productivity boost from artificial intelligence producing a similar ideal outcome.
What wasn't mentioned in the encomiums showered on Greenspan after his passing at age 100 this past week, was the very different backdrop during his tenure, especially compared with what Warsh faces today.
The starkest contrast between then and now is the fiscal policy situation. During the 1990s, the budget moved from a steep deficit to a turn-of-the-century surplus, which importantly relieved inflationary pressures that the Fed would otherwise have had to counter. This increased "fiscal space" allowed for a decline in long-term interest rates. The capital that would have gone to fund the budget deficit was freed up for investment in the internet and telecommunications boom.
Now, by contrast, federal deficits are running at nearly 6% of gross domestic product, levels of red ink that historically have been associated with wars or steep recessions. Moreover, the interest cost on the nation's accumulated debt -- now equal in size to the entire U.S. economy -- has surged past $1 trillion, making it the most intractable expense in the federal budget.
Economic policy operates in the context of other factors, says John Silvia, former chief economist at Wells Fargo who now runs Dynamic Economic Strategy. Chief among them is the size of the public debt relative to GDP, which he finds is the main driver of inflation and economic growth.
Greenspan, while officially in charge of monetary policy, actually played a key role in shaping fiscal policy. After Bill Clinton's election in 1992, he convinced the new president to adopt a deficit-reduction package, which the Fed chief argued would allow bond yields to decline and thus stimulate the economy. Long-term interest rates were around 7% then, far above the Fed's key federal-funds policy rate of 3%, which reflected the bond market's lingering concerns about inflation and deficits.
The Republican takeover of both houses of Congress in 1994 further put the deficit on a downward trajectory. Moreover, global geopolitics played a massive role in containing federal spending.
The end of the Cold War and the resulting peace dividend helped slow the share of federal spending to 18% of GDP by the decade's end from over 21% at the beginning. Inflation was further contained by the opening of emerging economies in the 1990s, especially China, which resulted in a positive supply shock of inexpensive goods and labor. After retiring from the Fed in 2006, Greenspan looked back and gave credit to these nonmonetary events in supporting the noninflationary growth during his long tenure, which began in 1987.
By contrast, the Trump administration is looking to sharply boost military spending, to $1.5 trillion in fiscal 2027, over the incremental cost of the war with Iran. The Congressional Budget Office projects deficits to rise from $1.9 trillion (5.8% of GDP) in fiscal 2026 to $3.1 trillion (6.7% of GDP) by 2036. Tariffs and the push toward onshoring further put upward pressure on domestic prices, another reversal from the 1990s.
Greenspan's monetary actions during the early years of the Clinton administration also played a key role in keeping inflation under control, according to Komal S. Sri-Kumar, head of Sri-Kumar Global Strategies. He recalls being shocked in 1994 when the Fed doubled the fed-funds rate, to 6%, without warning the market, and in quick steps. That was successful in nipping any incipient inflation in the bud, albeit with financial repercussions, among them roiling the Treasury and mortgage-backed securities market and contributing to the bankruptcy of Orange County, Calif., and the Mexican peso crisis.
Notwithstanding Warsh's citing of Greenspan as a mentor and role model in his swearing in last month, Sri-Kumar doubts whether the new Fed chief will be able to raise interest rates repeatedly to meet the Fed's 2% inflation goal, which it has missed for five years. Neither does he think President Donald Trump will stick to his pledge to let Warsh "do his own thing" in guiding the Fed.
Finally, the disinflationary trends of the 1990s gave the Fed leeway to provide support to financial markets, which was dubbed "the Greenspan put." The Fed cut rates in 1998 to counter the impact of the collapse of the Long-Term Capital Management hedge fund in the wake of the emerging market crisis and the Russian default -- even though the real economy was robust. "Markets will not believe that there can be an effective Warsh put because of the already elevated pace of inflation accompanied by the large deficit," Sri-Kumar asserted in an email.
On a fundamental level, Silvia points to the strong correlation between the size of the public debt as a percentage of GDP and inflation and the economy's growth path (real final sales, which is GDP stripped of inventory swings). In theory, the Fed has a choice whether to expand the money supply to accommodate higher inflation and aggregate spending. "Good luck with that!" he says in an interview. Central banks historically have ended up providing the money to help fund deficits, with inflationary consequences.
Inflation is a choice, Warsh asserted ahead of his nomination as Fed chairman. When Greenspan faced a falling deficit in the 1990s, the choice was easier. The current Fed has to contend with a much more difficult backdrop of high and seemingly intractable deficits, made worse by interest rates and demographics; rising geopolitical tensions necessitating increased military spending, both in the U.S. and abroad; and less-free trade. Whether the promise of AI can deliver for Warsh & Co. what IT did for Greenspan in the 1990s remains to be seen.
Write to Randall W. Forsyth at randall.forsyth@barrons.com
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(END) Dow Jones Newswires
June 26, 2026 11:15 ET (15:15 GMT)
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