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I asked. Klaus cut
me short. "In your country you can afford such luxuries/' he said. "To succeed
we need a clean break with the past. The competitive market is the
way to produce wealth, and that's where we're going to focus." He and I
became good friends, but this was the first time in my life that I had ever
been rebuked for not sufficiently appreciating the power of free markets. It
was a singular experience for an admirer of Ayn Rand.
A
A
s the Eastern European countries raced ahead with reform, the instability
in Moscow only seemed to worsen. It was hard from the West
even to determine what was going on. Just a week after being elected president
of the Russian Republic in June 1991, Boris Yeltsin visited New York
and spoke at the New York Fed. Yeltsin had gotten his start as a construction
industry boss and had been Moscow's mayor in the 1980s; then he'd
quit the Communist Party to take up the cause of radical reform. His election
with a nationwide majority of 60 percent was a crushing defeat for Communism.
Though he was subordinate to Gorbachev, his popularity coupled
with his impetuousness made him a magnet for attention鈥攍ike Khrushchev
in an earlier era, he seemed to personify his country's unnerving contradictions.
His first trip to the United States in 1989 had been a disaster鈥攑eople
remembered mostly the news reports of his behaving erratically and getting
drunk on Jack Daniel's.
Gerald Corrigan, the president of the New York Fed, had taken the
lead in encouraging Wall Street to connect with the Soviet reformers, something
the Bush administration wanted to see happen. So when Yeltsin came
to town, the New York Fed invited him to speak at a dinner of some fifty
bankers, financiers, and corporate chiefs. Yeltsin arrived with a large entourage,
and Corrigan and I talked with him briefly before he was introduced to
the assembled dinner guests. The Yeltsin we met that night was no drunken
buffoon; he seemed smart and determined. At the podium, he spoke co
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TH E FALL OF TH E WALL
gently on reform for twenty minutes without notes and then answered detailed,
specific questions from the audience without calling on his advisers
for help.
It was increasingly unclear whether Gorbachev, or anyone, could end
the Communist regime without causing a complete collapse into violence.
After Gorbachev dissolved the Warsaw Pact in June and launched his plan
to reconstitute the USSR as a voluntary confederation of democratic states,
the resistance facing him became brutally apparent. In August a coup attempt
by Stalinist hard-liners almost brought him down鈥攖o many it was
only the inspired theatrics of Yeltsin, who climbed on a tank outside the
Soviet parliament, that enabled Gorbachev to survive.
The West started looking for ways to help. That was the reason Treasury
Secretary Nick Brady and I led a team to Moscow in September to
meet with Gorbachev and confer with his economic advisers. Our ostensible
mission was to assess what reforms were needed for the Soviet Union
to join the International Monetary Fund, but mainly we wanted to see for
ourselves what was going on.
From the perspective of the Fed and the Western world, in purely economic
terms the Soviet Union was not much of a concern. Its economy
wasn't that large; of course there were no reliable statistics, but experts estimated
its GDP to be about the same size as the United Kingdom's, or
about one-sixth the size of all Europe's. The iron curtain had kept it so isolated
that its share of world trade was small. So was the amount of debt it
owed Western nations, which might be subject to default if the government
collapsed. But none of this took into account nuclear warheads. We were all
acutely aware of the danger a Soviet collapse could pose to the world's stability
and safety.
For that reason alone, we were horrified by the picture that emerged
during our stay.
It was clear that the government was falling apart. The institutions of
central planning were all beginning to fail, and the well-being of the population
was threatened. Eduard Shevardnadze, who was then foreign minister,
told us of unrest in the Soviet republics along Russia's border鈥攈e said the
lives of the twenty-five million ethnic Russians living in those regions could
135
THE AGE OF TURBULENCE
be in jeopardy. Worse, he said, was the risk that Russia and Ukraine, which
both held weapons from the Soviet nuclear arsenal, might end up at odds.
The economic data, which were fragmentary at best, were equally
alarming. Inflation was out of control, with prices going up by anywhere
from 3 percent to 7 percent a week. This was because all of the central
mechanisms of production and distribution were breaking down, and more
and more money was chasing fewer and fewer goods. In an effort to keep
things moving at all, the government was flooding the economy with cash.
A Gorbachev aide told me, "The printing presses can't keep up. We are
printing rubles twenty-four hours a day."
Over all this hung the shadow of not being able to put food on the
shelves. There had been times in the past when the output of Ukraine had
made it famous as the breadbasket of the world. But while harvests were
still relatively bountiful, some of the crops had rotted in the fields because
there was no way to collect and distribute the produce and grain. Soviet
grain purchases from abroad were up to forty million tons a year. Bread
shortages were a sore point in the national memory鈥攊t was the Bread Riots
of 1917, when the old women of St. Petersburg rose up in rebellion, that
helped bring about the fall of the czar.
A separate conversation gave me a glimpse of how brittle this economy
was and how difficult it would be to change. Boris Nemtsov, a reformist
economist, confided, "Let me tell you about military cities," and rattled off
names I'd never heard of. Across the nation, Nemtsov explained, were at
least twenty cities, each of two million people or more, that had been built
around military plants. They were isolated and specialized and had no reason
to exist other than to serve the Soviet military. His point was clear:
ending the cold war, and shifting to a market economy, would leave entire
cities and millions of workers with little to do and no ready way to adapt.
The rigidity built into the Soviet economic system was far more extreme
than any we'd ever encountered in the West. Among the many worries was
that, in order to survive, these military workers, who included world-class
scientists and engineers and technicians, would eventually have to sell their
skills to rogue states.
There were more briefings, but the message was the same. When we
met with President Gorbachev, and he repeated his goal of making the
136
TH E FALL OF TH E WALL
nation "a major trading force in the world/' I admired his courage. But in
the margin of my notepad I jotted down, "USSR is a Greek tragedy waiting
to happen."
G
G
rigory Yavlinsky chief economist for Gorbachev's Council of Minis
ters, led a delegation in October 1991 to Thailand, where the World
Bank and International Monetary Fund were holding their annual meeting.
This was a truly historic moment: the first time Soviet officials had ever sat
down with the key economic policymakers of the capitalist world.
The Soviet Union had already been granted provisional status鈥攆ormally
giving it access to IMF and World Bank advice, but not to loans. Yavlinsky
and his team came to argue that the confederation of remaining Soviet re
publics ought to be accorded full membership. The question of massive
Western loans was not immediately on the table鈥攖he Soviets insisted they
could manage the transition to a market economy themselves, and none of
the G7 nations was offering.
The discussions lasted two full days, and if I had to pick a word to describe
what the Western central bankers and finance ministers felt, it would
be "impotence." We knew that what was left of the Soviet Union was crumbling;
we knew the armed forces hadn't been paid and that a collapse of the
military could pose a serious threat to world peace. We had grave concerns
about what would happen to the nuclear weapons. The deterioration was
internal and political. All the IMF could do was talk about money, and
money wasn't the problem. We ended up doing what organizations usually
do under such circumstances: we delegated a committee for further study
and discussion (in this instance, the deputy finance ministers of the G7
were to go to Moscow in a few weeks for consultations). So it was up to the
Soviet reformers. The challenges they faced were more difficult than those
that had confronted their counterparts in Eastern Europe. The Polish and
Czech leaders had been able to draw on the goodwill of the population鈥攁s
trying as the economic circumstances may have been, their nations were
being liberated from Moscow's grasp. But many Soviet citizens had prided
themselves on their country's superpower status and had sacrificed much
to help achieve it. For them, the upheavals meant nothing but sorrow鈥攁
137
THE AGE OF TURBULENCE
great loss of national prestige. Humiliation made the reformers' tasks much
harder.
What's more, too many years had gone by in the Soviet Union since
1917鈥攕carcely anyone alive even remembered private property or had
firsthand business experience or training. There were no accountants, auditors,
financial analysts, marketers, or commercial lawyers, even among retirees.
In Eastern Europe, where Communism had reigned for forty years
instead of eighty, free markets could be restored; in the Soviet Union, they
had to be resurrected from the dead.
Gorbachev did not stay in power long enough to oversee the market
reforms; he resigned in December 1991 as the Soviet Union formally broke
up and was replaced by a loose economic confederation of former Soviet
republics. "End of the Soviet Union; Gorbachev, Last Soviet Leader, Resigns;
U.S. Recognizes Republics' Independence" read the headline of the
New York Times on December 26鈥擨 looked at it and felt regret that Ayn
Rand hadn't lived to see it. She and Ronald Reagan had been among the
few who had predicted decades before that the USSR would ultimately
collapse from within.
The man Boris Yeltsin chose to launch economic reforms in Russia was
Yegor Gaidar. In the 1980s when he and other young economists had
dreamed of creating a market economy in the Soviet Union, they'd imagined
an organized, methodical transition. But now, amid growing chaos,
there was no time for that鈥攗nless the government could jump-start the
markets, people might starve. So in January 1992, Gaidar, as Russia's acting
prime minister, turned to the scheme that had worked in Poland: abruptly
ending price controls.
Shock therapy jolted the Russians much more than it had the Poles.
The size of the country, the system's rigidity, the fact that the state had dictated
prices for people's entire lives鈥攊t all worked against them now. Inflation
rose so fast that people's wages, when they could collect them, became
worthless, and their meager savings were wiped out. The ruble lost three
quarters of its value in four months. Goods remained in scarce supply in
the stores, and the black market flourished.
Then, in October, Yeltsin and his economists unleashed the second
massive reform: they issued vouchers to 144 million citizens and started
138
TH E FALL OF TH E WALL
privatizing state-owned enterprises and real estate on a massive scale. This
reform, too; was far less effective than in Eastern Europe. Millions of people
ended up with stock in businesses or owning their apartments, which was
the goal, but millions more were bilked out of their vouchers. Entire industries
ended up in the hands of a small number of opportunists who came to
be known as the oligarchs. Like Jay Gould and some of the railroad tycoons
in nineteenth-century America who built vast fortunes in part by manipulating
government land grants, the oligarchs constituted an entirely new
wealthy class and compounded the political chaos.
I
I
was fascinated to see these events unfold. Economists have had considerable
experience observing how market economies convert to centrally
planned ones鈥攊ndeed, the shift toward Communism in the East and socialism
in the West was the dominant economic trend of the twentieth
century. Yet until recent years we have had little exposure to movement in
the opposite direction. Until the wall fell and the need to develop market
economies out of the rubble of Eastern Europe's central-planning regimes
became apparent, few economists had been thinking about the institutional
foundations that free markets need. Now, unintentionally, the Soviets were
performing an experiment for us. And some of the lessons were startling.
The collapse of central planning did not automatically establish capitalism,
contrary to the rosy predictions of many conservative-leaning politicians.
Western markets have a vast underpinning of culture and infrastructure
that has evolved over generations: laws, conventions, behaviors, and business
professions and practices for which there was no need in a centrally
planned state.
Forced to make the shift overnight, the Soviets achieved not a free-
market system but a black-market one. Black markets, with their unregulated
prices and open competition, seemingly replicate what goes on in a
market economy. But only in part. They are not supported by the rule of
law. There is no right to own and dispose of property backed up by the enforcement
power of the state. There are no laws of contract or bankruptcy,
and no opportunity to take disputes to court for resolution. The linchpin of
a free-market economy, property rights, is missing.
139
THE AGE OF TURBULENCE
The result is that black markets bring few of the benefits to society of
legally sanctioned trade. Knowing that the government will protect one's
property encourages citizens to take business risks, a prerequisite of wealth
creation and economic growth. Few will risk their capital if the rewards are
going to be subject to arbitrary seizure by the government or mobsters.
By the mid-1990s, that was the picture across much of Russia. For generations
of people who had been brought up on the Marxist notion that
private property is theft, the shift to a market economy already challenged
their sense of right and wrong.* The rise of the oligarchs further undermined
popular support. From the start, law enforcement in defense of private
ownership was extremely uneven. Private security forces to a large
extent took over the job, sometimes warring with each other and further
aggravating the sense of chaos.
It wasn't at all clear that the Yeltsin government itself understood how
a market economy's legal system must work. In 1998, for instance, an influential
Russian academic told the Washington Post: "The state thinks .. . private
capital should be defended by those who have it.... It's a completely
conscious policy of the law enforcement authorities to remove themselves
from defending private capital." To me this suggested a basic ignorance of
the need to embody property rights in the judicial system. The use of rival
private police forces is not the rule of law; it is the rule of fear and force.
Trust in the word of others, especially strangers, was another element
conspicuously lacking in the new Russia. We hardly ever think about this
facet of market capitalism, yet it is crucial. Despite each person's right in
the West to file a lawsuit to address a perceived grievance, if more than a
small fraction of contracts were adjudicated, our courts would be swamped
to the point of paralysis. In a free society, the vast majority of transactions
are thus, of necessity, voluntary. Voluntary exchange, in turn, presupposes
*Marx was hardly the first to condemn private ownership; the notion that private property is
sinful, along with profit making and lending at interest, has deep roots in Christianity, Islam,
and other religions. Only with the Enlightenment did countervailing principles emerge to provide
a moral basis for ownership and profit. John Locke, the great seventeenth-century British
philosopher, wrote of the "natural right" of every individual to "life, liberty and estate." Such
thinking profoundly influenced America's Founding Fathers and helped foster free-market
capitalism in the United States.
140
TH E FALL OF TH E WALL
trust. I have always been impressed that in Western financial markets, transactions
involving hundreds of millions of dollars often are simply oral
agreements that get confirmed in writing only at a later date, and at times
after much price movement. But trust has to be earned; reputation is often
the most valuable asset a business has.
T
T
he fall of the Soviet Union concluded a vast experiment: the long
standing debate about the virtues of economies organized around free
markets and those governed by centrally planned socialism is essentially at
an end. To be sure, there are still a few who support old-fashioned social
ism. But what the vast majority of the remaining socialists now advocate is
a highly diluted form, often called market socialism.
I am not alleging that the world is about to embrace market capitalism
as the only relevant form of economic and social organization. Vast num
bers of people still consider capitalism with its emphasis on materialism
degrading. And one can seek material well-being and yet view competitive
markets as subject to excessive manipulation by advertisers and marketers
who trivialize life by promoting superficial and ephemeral values. Some
governments, such as that of China, even now attempt to override the evi
dent preferences of their citizens by limiting their access to foreign media,
which they fear will undermine their culture. Finally, there remains a latent
protectionism, in the United States and elsewhere, which could emerge as
a potent force against international trade and finance and the free-market
capitalism they support, particularly if today's high-tech world economy
should falter. Nonetheless, the verdict on central planning has been ren
dered, and it is unequivocally negative.
141
SEVEN
A DEMOCRAT'S
AGENDA
O
O
n the evening of February 17,1993,1 found myself in the uncomfortable
glare of the TV lights at a joint session of Congress,
sitting between Hillary Clinton and Tipper Gore. The front row
of the gallery was not exactly where I'd expected to be for President Clin
ton's first major congressional address. I had assumed that my invitation to
sit with the First Lady was a matter of courtesy and that I'd be at the back
of the box with White House aides. I guess it was nice to know that the
Federal Reserve was considered a valuable national asset after the some
what less than favorable embrace we'd gotten from President Bush, but
obviously I'd been positioned up front for a political purpose. Mrs. Clinton
was wearing a bright red suit, and as the president spoke, the cameras fo
cused on us again and again.
Afterward it turned out that not everyone had been pleased to see me
there, on the grounds that it might compromise the independence of the
Fed. I had no intention of doing that, of course. But I was intent on building
a working relationship with this president, who seemed seriously fiscally
responsible.
A DEMOCRAT'S AGENDA
I'd met Clinton in early December, when he was president-elect. He
hadn't moved to Washington yet, so seeing him meant flying out to Little
Rock, Arkansas. He and his transition team had set up shop there in the
governor's mansion, which turned out to be a big redbrick building with
white pillars set on acres of flat lawn and gardens near the center of town.
As I was ushered into an anteroom, I wasn't sure what to expect. One
thing I'd heard, though, was that he always ran late, so I'd brought along
some economic reports to read and busied myself for twenty minutes or so
until he appeared. "Mr. Chairman," he said, striding toward me smiling and
reaching to shake hands. I could see why he was reputed to be a great retail
politician. He made me believe he really had been looking forward to seeing
me.
Clinton had outlined a broad, ambitious economic agenda during his
campaign. He wanted to cut taxes on the middle class, halve the federal
deficit, stimulate job growth, increase U.S. competitiveness through new
education and training programs, invest in the nation's infrastructure, and
more. I had seen, and been part of, too many presidential campaigns. Candidates
promised something for everybody. But I wondered what Clinton's
real priorities were. He must have been reading my mind; one of the first
things he said was: "We need to set our economic priorities, and I'm interested
in your outlook on the economy."
From the Fed's perspective, if he wanted to address the economy's
long-term health, the deficit was by far the most pressing concern. I'd made
that argument at the start of Bush's term, and now the problem was four
years worse. The national debt held by the public had risen to $3 trillion,
causing interest payments to become the third-largest federal expense after
Social Security and defense. So when Clinton asked for my economic assessment,
I was ready with a pitch.
Short-term interest rates were rock-bottom low鈥攚e'd cut them to 3
percent鈥攁nd the economy was gradually shaking off the effects of the
credit crunch and growing at a fairly reasonable pace, I told him. More than
a million net new jobs had been created since the beginning of 1991. But
long-term interest rates were still stubbornly high. They were acting as a
brake on economic activity by driving up the costs of home mortgages and
143
THE AGE OF TURBULENCE
bond issuance. They reflected an expectation of ongoing inflation for which
investors had come to require an extra margin of interest to offset the
added uncertainty and risk.
Improve investors' expectations, I told Clinton, and long-term rates
could fall, galvanizing the demand for new homes and the appliances, furnishings,
and the gamut of consumer items associated with home ownership.
Stock values, too, would rise, as bonds became less attractive and
investors shifted into equities. Businesses would expand, creating jobs. All
told, the latter part of the 1990s could look awfully good. I was not oblivious
of the fact that 1996 would be a presidential election year. The path to
a beneficent future, I told the president-elect, was lowering the long-term
trajectory of federal budget deficits.
To my delight, Clinton seemed fully engaged. He seemed to pick up on
my sense of urgency about the deficit, and asked a lot of smart questions
that politicians usually don't ask. Our meeting, which had been scheduled
for an hour, turned into a lively discussion that went on for almost three.
We touched on a whole range of topics beyond economics鈥擲omalia and
Bosnia and Russian history, job-training programs, education鈥攁nd he asked
for my assessment of world leaders whom he hadn't yet had a chance to
meet. After a while, aides brought in lunch.
So saxophone wasn't the only thing we had in common. Here was a
fellow information hound, and like me, Clinton clearly enjoyed exploring
ideas. I walked away impressed, yet not entirely sure what I thought. Clearly,
for sheer intelligence, Bill Clinton was on a par with Richard Nixon, who,
despite his obvious flaws, was the smartest president I'd met to that point.
And either Clinton shared many of my views on the way the economic system
was evolving and on what should be done, or he was the cleverest chameleon
I'd ever encountered. I mulled all this on the airplane on my way
home. After I got back to Washington, I told a friend, "I don't know that I'd
have changed my vote, but I'm reassured."
That feeling was reinforced a week later when Clinton announced as
his senior economic team a number of familiar faces. As treasury secretary
he'd picked Lloyd Bentsen, the chairman of the Senate Finance Committee,
with Roger Altman, a very smart Wall Street investment banker, as his
deputy. As budget director he chose Leon Panetta, a California congressman
144
A DEMOCRAT'S AGENDA
who chaired the House Budget Committee, with economist Alice Rivlin as
his deputy. She was the only economist on the team, and her credentials
were impressive: she'd been the founding director of the Congressional
Budget Office and had been an early recipient of one of the MacArthur
Foundation's genius grants. Just as interesting was Clinton's choice of Robert
Rubin, the cochairman of Goldman Sachs, to run a new White House
council on economic policy. As the New York Times explained it, Rubin was
to act as the economic equivalent of a national security adviser: his job
would be to elicit economic ideas from Treasury, State, the budget office,
the CEA, and other departments, and weave them into policy options for
the president. What jumped out at me was that Clinton was taking a page
from John F. Kennedy's book. All of Clinton's economic-policy appointees
were fiscally conservative centrists like Doug Dillon, the Republican banker
whom Kennedy picked as treasury secretary. Choosing them made Bill
Clinton seem about as far from the classic tax-and-spend liberal as you
could get and still be a Democrat.
L
L
ike every new administration, the Clinton White House had to scramble
to pull together its first budget, due for submission to Congress by
early February. The president by all accounts did not have an easy time
dealing with the recommendations of his economic team. The full extent
of the fiscal problems confronting them was only now becoming clear: in
December the Office of Management and Budget offered a revised analysis
projecting that the government was headed toward a $360 billion deficit
in 1997鈥攕ome $50 billion higher than its previous estimate. This made
it clear that to come anywhere near his goal of halving the deficit, Clinton
would have to abandon or postpone other cherished plans, such as the
middle-class tax cut and the "investments" in training and jobs.
I kept tabs on the budget-making process mainly through Lloyd Bentsen.
The new treasury secretary had first caught my attention in the 1976
primaries鈥擩immy Carter ultimately beat him for the Democratic nomination,
but I thought Bentsen had looked like a president and acted like one.
Courtly, gray-haired, and sophisticated, he was a former World War II B-24
bomber pilot who'd served four terms in the Senate, where he had a well
145
THE AGE OF TURBULENCE
earned reputation for good judgment and for quietly getting things done.
Andrea and I had known Bentsen and his impressive wife, B.A., socially for
some time. I was not surprised to find him a pleasure to work with, even
when we disagreed.
Bentsen and the others on the economic team were careful to acknowledge
the Fed's boundaries. In fact, their decision not to comment publicly
on monetary policy was a big break from the past, and helped us and them
by bolstering our independence. When he and Panetta came to brief me in
mid-January on the evolving budget plan, they avoided asking for an endorsement
or even an opinion. I simply indicated that I understood, and we
left it at that. In fact, I thought the plan noninflationary and testified to that
effect in Congress in late January.
Bentsen asked me to weigh in with the president just once鈥攖he day
after I'd first testified in favor of their overall approach. (I had steered clear
of commenting on the details of Clinton's program.) As the team crunched
the numbers and the budget took shape, Clinton found himself faced with
a choice that was increasingly stark. Either he could opt for a package of
spending programs that would fulfill some of his campaign promises, or he
could opt for a deficit-cutting plan, whose success would depend on impressing
the financial markets and that would pay off chiefly in the longer
term. There was no in-between鈥攚e couldn't afford both. This dilemma
had opened a rift in the White House staff, some of whom privately ridiculed
the deficit-cutting approach as a sellout to Wall Street. That's why
Bentsen asked me to the White House鈥攖o reemphasize the urgency of
budget reform.
We met the president in the Oval Office on the morning of January 28;
Bob Rubin joined us. Clinton was all business, so I got straight to the point.
I focused on the danger of not confronting the deficit right away, playing
out for him how, in that instance, the decade was apt to unfold. Because
of the end of the cold war, I told him, "defense spending will come down
over the next few years and that will mask a lot of problems. But by 1996
or 1997, the deficits will be hard for the public to ignore. You can see it in
the data." And I outlined for him how the mandated outlays for Social Security
and other social benefits were scheduled to increase, which would
146
A DEMOCRAT'S AGENDA
cause deficit gaps to open further. "So the debt rises markedly into the
twenty-first century, and the interest on the debt rises, threatening a spiral
of rising deficits. Unless it's aborted, that could lead to a financial crisis," I
said. As we finished, Clinton, unsurprisingly, looked grim.
Though I hadn't put it in so many words, the hard truth was that Reagan
had borrowed from Clinton, and Clinton was having to pay it back.
There was no reason to feel sorry for Clinton鈥攖hese very problems were
what had enabled him to defeat George Bush. But I was impressed that he
did not seem to be trying to fudge reality to the extent politicians ordinarily
do. He was forcing himself to live in the real world on the economic
outlook and monetary policy. His subsequent decision to go ahead and
fight for the deficit cuts was an act of political courage. It would have been
very easy to go the other way. Not many people would have been the wiser
for a year or two or even three.
I took one other step to help the deficit hawks鈥擨 advised Bentsen on
how deeply I thought the deficit would have to be cut in order to convince
Wall Street and thereby bring down long-term interest rates. "Not less than
$130 billion a year by 1997" was his shorthand description of what I said.
Actually the advice I gave him was more complex. I sketched out a range
of possibilities, with a probability attached to each鈥攁ll the while carefully
emphasizing that the substance and credibility of the program would be
more important than the numbers. But I understood when he finally said,
"You know I can't work with something this complicated." The figure he
extracted made its way to the president and had a powerful effect. Within
the White House, $130 billion became known as the "magic number" that
the deficit cuts had to hit.
The budget was major news when it finally appeared. "Clinton Plan to
Remake the Economy Seeks to Tax Energy and Big Incomes" was the banner
headline of the New York Times the morning after Clinton's speech.
"Ambitious Program Aims at a 4-Year Deficit Cut of $500 Billion." USA Today
declared "A Battle Launched" and described Clinton's proposals as "a
five-year package of pain." The media coverage focused mainly on whom
the cuts would hit (every constituency except poor households鈥攖he plan
put burdens on the rich, the middle class, retirees, and business). Interest
147
THE AGE OF TURBULENCE
ingly, the public reaction was initially favorable: polls showed Americans
unexpectedly receptive to the idea of making a sacrifice to put the nation's
house in order.
Most new presidents get a honeymoon from Congress, but Clinton got
a trench war. Despite the budget plan's initial popularity a majority of
congresspeople hated it鈥攏ot surprisingly, since it aimed at abstract, distant
goals and offered no new highway projects, weapons programs, or other lucrative
goodies to bring home to constituents. I think Clinton was jolted by
the degree of resistance. Republicans rejected the budget outright and
many Democrats rebelled, and the debates dragged on well into the spring.
Even though Democrats held a 258-177 majority in the House, there was
serious question whether the budget would pass鈥攁nd its prospects in the
Senate looked even worse. The conflict extended to within the White
House, where key people were still pushing for an agenda less compatible
with Wall Street. One was Clinton adviser James Carville, who famously
wisecracked, "I used to think if there was reincarnation, I wanted to come
back as the president or the pope or a .400 baseball hitter. But now I want
to come back as the bond market. You can intimidate everybody." The discord,
which was widely reported in the media, made Clinton look weak,
and his initial popularity melted away. By late spring his approval rating
sank to an abysmal 28 percent.
The president was in a funk when I saw him again on June 9. The
House had finally passed his budget two weeks earlier鈥攂y a single vote.
And the fight had only begun in the Senate. I'd gotten a call from David
Gergen, Clinton's counselor. "He's distressed," he said, and asked if I could
come buck the president up. I'd known Gergen for twenty years, as an adviser
to Nixon, Ford, and Reagan. Clinton had recruited him partly because
he was a balanced, nonneurotic Washington pro, and partly because he was
Republican鈥攖he president was hoping to solidify his image as a centrist.
When I went to the Oval Office that morning, you could see that people
were under strain. Word had it that they'd been working pretty much
around the clock, even Bentsen, who was seventy-two. (Andrea confirmed
this; she was now NBC's chief White House correspondent.) They'd been
going back and forth with Congress, trying to get the numbers to work, and
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A DEMOCRAT'S AGENDA
doubtless felt as if they were up against an impossible problem. The president
himself seemed subdued. It wasn't hard to imagine why. He was
spending his political capital, yet the budget for which he'd sacrificed so
much was in peril.
I encouraged him as best I could. I told him that his plan was our best
chance in forty years to get stable long-term growth. I tried to get him to
see that the strategy was on track, was working鈥攍ong-term rates were already
trending down, I showed him. The very fact that he'd come out and
recognized that the deficit had to be addressed was a very important plus.
But I also warned that it wouldn't be easy. Indeed, Clinton had to fight,
arm-twist, and horse-trade for another two months to push his budget
through the Senate. As in the House, it passed by a single vote鈥攖his time a
tiebreaker by Vice President Gore.
Clinton impressed me again that fall by fighting for the ratification of
NAFTA. The treaty, negotiated under President Bush, was designed primarily
to phase out tariffs and other trade barriers between Mexico and the
United States, though it also included Canada. Labor unions hated it, and
so did most Democrats, as well as some conservatives; few Congress watchers
thought it had a prayer. But Clinton argued, in effect, that you cannot
stop the world from turning; like it or not, America was increasingly part of
the international economy, and NAFTA embodied the belief that trade and
competition create prosperity, and you need free markets to do that. He
and the White House staff went all out, and after a two-month struggle
they got the treaty approved.
All this convinced me that our new president was a risk taker who was
not content with the status quo. Again he'd shown a preference for dealing
in facts. And on free trade, the fact was this: The distinction between domestic
competition and cross-border competition has no economic meaning.
If you're in a Dubuque, Iowa, plant, it makes no difference whether
you're competing with someone in Santa Fe or across the border. With the
geopolitical pressure of the cold war now removed, the United States had
a historic opportunity to knit the international economy more closely together.
Clinton was often criticized for inconsistency and for a tendency to
take all sides in a debate, but that was never true about his economic policy.
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THE AGE OF TURBULENCE
A consistent, disciplined focus on long-term economic growth became a
hallmark of his presidency.
T
T
he Fed was having its own difficulties with Congress that year, and for
some of the same reasons. Our fiercest critic was Congressman Henry B.
Gonzalez of Texas, the chairman of the House Banking Committee. A hot-
tempered populist from San Antonio, Gonzalez was famous for socking in
the eye a constituent at a restaurant who called him a Communist. At vari
ous times in Congress, Gonzalez had called for the impeachment of Rea
gan, Bush, and Paul Volcker. He was deeply distrustful of what he labeled
"the tremendous power of the Fed"鈥擨 think he simply assumed that the
Board was a cabal of Republican appointees who were running monetary
policy more for the benefit of Wall Street than the workingman. In the fall
of 1993, Gonzalez really turned up the heat.
The Fed has always rubbed Congress the wrong way, and it probably
always will, even though Congress created it. There's inherent conflict be
tween the Fed's statutory long-term focus and the short-term needs of
most politicians with constituents to please.
This friction often surfaced in oversight hearings. The Fed was obli
gated to render a biannual report on its monetary-policy decisions and the
economic outlook. At times these hearings sparked substantive discussions
of major issues. But just as often they were a theater in which I was a
prop鈥攖he audience was the voters back home. During the Bush adminis
tration, Senate Banking Committee chairman Alfonse D'Amato of New
York rarely missed a chance to bash the Fed. "People are going to starve out
there, and you are going to be worried about inflation," he'd tell me. That
sort of remark I always let slide. But when he or anyone would assert that
interest rates were too high, I would answer and explain why we'd done
what we'd done. (I took care, naturally, to couch any discussion of possible
future moves in Fedspeak to keep from roiling the markets.)
Gonzalez went on a crusade to make the Fed more accountable, zeroing
in on what he saw as our excessive secrecy. He wanted the Federal
Open Market Committee, in particular, to conduct its affairs in public, and
even open its deliberations to live TV coverage. At one point he dragged
150
A DEMOCRAT'S AGENDA
eighteen members of the FOMC to Capitol Hill to testify under oath and
denounced the long-standing FOMC practice of never publicly announcing
policy moves or rate changes. The only public record of each meeting was
a brief set of minutes published six weeks after the fact鈥攆or the financial
markets, a virtual eternity. As a consequence, any signals coming from the
Fed's open-market operations, or public statements by Fed officials, were
subject to avid scrutiny by Wall Street.
For its part, the Federal Reserve, in the interest of economic stability, had
long sought to foster highly liquid debt markets through the use of what we
called constructive ambiguity. The idea was that markets uncertain as to the
direction of interest rates would create a desired large buffer of both bids and
offers. By the early 1990s, however, markets were becoming sufficiently
broad and liquid without this support from the Fed. Moreover, the advantage
of market participants being able to anticipate the Federal Reserve's future
moves was seen as stabilizing the debt markets. We had begun a path toward
greater transparency in our deliberations and operations, but far short of the
policy Henry Gonzalez would have liked us to pursue.
I was opposed to the idea of throwing these meetings open. The FOMC
was our primary decision-making body. If its discussions were made public,
with the details of who said what to whom, the meetings would become a
series of bland, written presentations. The advantages to policy formulation
of unfettered debate would be lost.
My effort to convey this argument in the hearings, however, did not go
well. As Gonzalez bored in on the question of what records we kept, I
found myself in an extremely awkward position. In 1976, during the Ford
administration, Arthur Burns had directed the staff to audiotape FOMC
meetings to assist in the writing of the minutes. This practice continued,
and I knew about it, but I'd always assumed the tapes were erased once the
minutes were done. In preparing for the Banking Committee testimony, I
learned that this wasn't exactly the case: although the tapes indeed were
routinely erased, the staff kept copies of the complete unedited transcripts
in a locked file cabinet down the hall from my office. When I revealed the
transcripts' existence, Gonzalez pounced. Now more convinced than ever
that we were conspiring to hide embarrassing secrets, he threatened to
subpoena the records.
151
THE AGE OF TURBULENCE
Gonzalez was especially suspicious of two conference calls the FOMC
had conducted in preparing for the hearings. We did not want to release
these tapes, for fear of creating a precedent. After a bit of negotiation,
we agreed to let lawyers for the committee鈥攐ne Democrat and one
Republican鈥攃ome to the Fed and listen.
The Watergate tapes had been a lot more exciting, they quickly discovered.
After listening patiently for the better part of two hours to the
FOMC's deliberations, the Democrat left without a word, and the Republican
remarked that the tape ought to be used to teach students in high
school civics classes how government meetings should work.*
All the same, my colleagues were upset鈥攎ainly with Gonzalez, but
they probably weren't too happy with me either. For one thing, most of them
hadn't even known our meetings were being taped. And the thought that
any remarks they now made might be published immediately if Gonzalez
got his way put a chill in the air. The next time the FOMC met, on November
16, people were clearly less willing to kick around ideas. "You could notice
a difference, and not for the better," a governor told a Washington Post
reporter.
After thorough discussion, the Board decided to resist, in court if
necessary, any subpoena or demand that might hamper the effectiveness of
the institution. But the controversy also accelerated our recent deliberations
about transparency. Eventually we decided that the FOMC would
announce its moves immediately after each meeting and that the complete
transcript would be published after a five-year lag. (People joked that this
was the Fed equivalent of glasnost.) We did these things knowing that
published transcripts made our meetings longer and a little less creative. In
the event, the sky did not fall. Not only did the changes make the process
more transparent but they also gave us new ways to communicate with the
markets.
I was grateful that President Clinton kept his distance from this whole
*Congressman Gonzalez was quoted in the New York Times (November 16, 1993) complaining
that the tapes included "disparaging remarks about one distinguished member of the House
Banking Committee and Banking Committee members in general."
152
A DEMOCRAT'S AGENDA
teapot tempest. "Does anybody in his right mind think we would do anything
to change the independence of the Fed?"