Grading the Fed chairman

Who was the best Federal Reserve Chairman ever? If there were a vote among economists, there's a pretty good chance that Alan Greenspan (1987–2006) would win, though Paul Volcker (1979–1987) would surely get plenty of votes. (Of course, if the housing bubble–fueled by all those Greenspan interest-rate cuts– bursts really badly, Greenspan's approval ratings might tank.)

But comparing the various maximum bankers is tricky business, because they all inherited economies in different states. When Volcker took over, he had to combat runaway inflation in a stagflation economy and restore the Fed's credibility as an inflation fighter. Greenspan, on the other hand, was indisputably dealt a stronger hand. He came aboard during the '80s boom, but he did have to deal with plenty of crises such as the 1987 stock market crash. "Greenspan was lucky," says Yale economist Ray Fair. "Volcker just had a much tougher economy."

To make things clearer, Fair decided to add some apolitical analytical cogency to this popular parlor room debate among econ geeks. In a recent study, Fair uses a sophisticated econometrics model of the economy to try to examine its performance during the term of each of the past five Fed chiefs relative to what the performance would have been had he behaved optimally and made all the right moves at the right times. The categories were inflation, unemployment, and interest rate.

The results: Arthur Burns (1970–1978) and William Miller (1978–1979) finished way back in the pack, while Greenspan, Volcker, and William McChesney Martin Jr. (1951–1970) posted similar performances. But in the end, Greenspan still rated the best, with Martin and Volcker as first and second runners-up. "I guess it would have been a more interesting paper if Greenspan hadn't won," Fair jokes.

During the so-called Maestro's two-decade term, inflation, for instance, was within a quarter of a percentage point of the optimal inflation rate. Under Miller, by contrast, inflation was 5 full percentage points worse than it should have been, all else being equal.

Fair is probably best known for his presidential election forecasting model, which tries to predict the race for the White House using economic data. The model had a great record until 2004 when it predicted President Bush would win 58 percent of the vote instead of the 51 percent that he actually got on Election Day. Fair says that predicting midterm elections is even trickier business, but he speculates that the economy should give the GOP a bit of tail wind heading into November 7.