Simi Valley, California, April 9 (Bloomberg) -- U.S. President Ronald Reagan allowed the Federal Reserve to fight rising prices in the 1980s, a decision that led to the ``virtual elimination'' of inflation and lowered unemployment, Fed Chairman Alan Greenspan said. Greenspan, in a lecture at the Ronald Reagan Library and Museum in Simi Valley, California, praised the economic policies of the Republican president who hired him 15 years ago to succeed Paul Volcker at the central bank. Greenspan didn't comment about the current state of the economy or interest rate policy in his prepared remarks. Reagan's removal of controls on U.S. oil markets, labor regulations, and a Cold War victory over the Soviet Union contributed to the record-long expansion of the economy in the 1990s, Greenspan said. Prices have remained stable since the Volcker-led Fed raised interest rates in the early 1980s to curb inflation, and Reagan-era deregulation has better prepared the economy to adjust to shocks. Reagan ``afforded Volcker the political support that is so essential to a central bank when its pursuit of long-term stability risks some worsening in near-term economic activity,'' Greenspan said. ``That support began the process that has led today to the virtual elimination of inflation from the U.S. economy.''
Economic Growth
The U.S. economy grew at an average annual pace of 3.5 percent during Reagan's tenure from 1981 through 1988, according to Commerce Department statistics. Inflation, as measured by the Gross Domestic Product price deflator, averaged 4.1 percent during that period. Since the Reagan years, the economy has grown at an average pace of 2.9 percent and inflation at a 2.2 percent pace. The unemployment rate averaged 7.5 percent under Reagan, and 5.5 percent since then. After Reagan, now 92, fired federal air-traffic controllers in 1981, ``the risks of hiring declined,'' Greenspan said. ``This increased flexibility contributed to the ability of the economy to operate with both low unemployment and low inflation.'' Observing the benefits of a flexible workforce, Europe is ``moving in a Reagan direction,'' Greenspan said.
Free Markets
Greenspan said Reagan's reliance on free markets shouldn't mean government gets complacent. He referred to a decline in the 1990s of ``the market value of trust'' in the U.S. economic system that recently passed laws have sought to correct. ``Corporate scandals of recent years have affirmed the view that the plethora of laws of the past century had not eliminated the less-savory side of human nature,'' Greenspan said. ``I anticipate that recent legislation holding chief executive officers more responsible for the integrity of their companies will help.'' Greenspan was Reagan's pick to chair the Commission on Social Security Reform from 1981 to 1983, and accepted Reagan's nomination to run the Fed in 1987. Reagan, who was elected president in 1980 and to a second four-year term in 1984, is afflicted with advanced Alzheimer's disease. //www.bloomberg.com