weathered the ensuing dot-com crash. I was gradually coming to believe
that the U.S. economy's greatest strength was its resiliency—its ability to
absorb disruptions and recover, often in ways and at a pace you'd never be
able to predict, much less dictate. Yet in this terrible circumstance, there
was no way to know what would happen.
I thought the best strategy was to observe and wait until we understood
better what the precise fallout from 9/11 would be. That is what
I told the congressional leadership in a meeting in the House Speaker's
office on the afternoon of September 19. Speaker Dennis Hastert, House
minority leader Dick Gephardt, Senate majority leader Trent Lott, and
Senate minority leader Tom Daschle, along with Bob Rubin, the former
secretary of the treasury under President Clinton, and White House economic
adviser Larry Lindsey, all met in a plain conference room attached
to Hastert's office on the House side of the Capitol. The legislators wanted
to hear assessments of the economic impact of the attacks from Lindsey,
Rubin, and me. There was great seriousness to the ensuing discussion—no
grandstanding. (I remember thinking, This is the way government should
work.)
Lindsey put forward the idea that as the terrorists had dealt a blow to
American confidence, the best way to counter it would be a tax cut. He and
others argued for pumping about $100 billion into the economy as soon as
possible. The number didn't alarm me—it was about 1 percent of the country's
total annual output. But I told them we had no way of knowing yet
whether $100 billion was too much or too little. Yes, the airlines and the
tourism industries had been severely impacted, and the newspapers were
full of stories about all sorts of layoffs. Yet on Monday, September 17, amazingly,
the New York Stock Exchange had succeeded in reopening just three
blocks from Ground Zero. It was an important step because it brought a
sense of normalcy back to the system—a bright spot in the picture we were
still piecing together at the Fed. At the same time, the check payment system
was recovering, and the stock market hadn't crashed: prices had merely
gone down and then stabilized, an indication that most companies were
not in serious trouble. I told them the prudent course was to continue to
work on options and meet back in two weeks, when we'd know more.
7
THE AGE OF TURBULENCE
I delivered the same message the next morning to a public hearing of the
Senate Banking Committee, counseling patience: "Nobody has the capacity
to fathom fully how the tragedy of September 11 will play out. But in the
weeks ahead, as the shock wears off, we should be able to better gauge how
the ongoing dynamics of these events are shaping the immediate economic
outlook." I also emphasized, "Over the past couple of decades, the American
economy has become increasingly resilient to shocks. Deregulated financial
markets, far more flexible labor markets, and, more recently, the
major advances in information technology have enhanced our ability to absorb
disruptions and recover."
In fact, I was putting a better face on the situation than I feared might
be the case. Like most people in government, I fully expected more attacks.
That feeling went mainly unspoken in public, but you could see it in the
unanimity of the Senate votes: 98-0 for authorizing the use of force against
terrorists, 100-0 for the aviation security bill. I was particularly concerned
about a weapon of mass destruction, possibly a nuclear device stolen from
the Soviet arsenal during the chaos of the collapse of the USSR. I also contemplated
the contamination of our reservoirs. Yet on the record I took a
less pessimistic stance because if I had fully expressed what I thought the
probabilities were, I'd have scared the markets half to death. I realized I
probably wasn't fooling anybody, though: people in the markets would
hear me and say, "I sure hope he's right."
In late September, the first hard data came in. Typically, the earliest
clear indicator of what's happening to the economy is the number of new
claims for unemployment benefits, a statistic compiled each week by the
Department of Labor. For the third week of the month, claims topped
450,000, about 13 percent above their level in late August. The figure confirmed
the extent and seriousness of the hardships we'd been seeing in
news reports about people who'd lost their jobs. I could imagine those
thousands of hotel and resort workers and others now in limbo, not knowing
how they would support themselves and their families. I was coming to
the view that the economy was not going to bounce back quickly. The
shock was severe enough that even a highly flexible economy would have
difficulty dealing with it.
Like many other analysts, economists at the Fed were looking at all
8
I NTRODUCTION
the proposed packages of spending and tax cuts, and the numbers associated
with them. In each case, we tried to cut through the details to gauge
the order of magnitude; interestingly, they all fell in the ballpark of $100
billion—Larry Lindsey's initial suggestion.
We reconvened in Hastert's conference room on Wednesday, October 3,
to talk again about the economy. Another week had passed, and the number
of initial jobless claims had gotten worse—an additional 517,000 people
had applied for unemployment benefits. By now, my mind was made
up. While I still expected more attacks, there was no way to know how
devastating they might be or how to protect the economy in advance. I told
the group that we should take steps to offset the damage we could measure,
and that it was indeed time for a constrained stimulus. What seemed
about right was a package of actions on the order of $100 billion—enough,
but not so much that it would overstimulate the economy and cause interest
rates to rise. The lawmakers seemed to agree.
I went home that night thinking that all I'd done was articulate and reinforce
a consensus; the $100 billion figure had first come from Larry. So I
was surprised to read the media's spin on the meeting, which made it sound
almost as though I were running the entire show.* While it was gratifying
to hear that Congress and the administration were listening to me, I found
these press reports unsettling. I've never been entirely comfortable being
cast as the person who calls the shots. From my earliest days, I had viewed
myself as an expert behind the scenes, an implementer of orders rather
than the leader. It took the stock-market crisis of 1987 to make me feel
comfortable making critical policy decisions. But to this day, I feel ill at ease
in the spotlight. Extrovert, I am not.
Of course, the irony was that in spite of my supposed persuasive power,
in the weeks after 9/11 nothing worked out as I expected. Anticipating a
second terrorist attack was probably one of the worst predictions I ever
*Time magazine, for example, opined on October 15, 2001, "Greenspan's shift provided the
green light lawmakers had been waiting for.... The White House and leaders of both parties
have agreed with Greenspan's assessment that new spending and tax cuts should total about
1% of the country's annual income, that it should make its effects felt quickly and that it should
not threaten to balloon the deficit so much down the road that it immediately raises long-term
interest rates."
9
THE AGE OF TURBULENCE
made. And the "constrained stimulus" I had supposedly green-lighted didn't
happen either. It bogged down in politics and stalled. The package that
finally emerged in March 2002 not only was months too late but also had
little to do with the general welfare—it was an embarrassing mess of pork-
barrel projects.
Yet the economy righted itself. Industrial production, after just one
more month of mild decline, bottomed out in November. By December the
economy was growing again, and jobless claims dropped back and stabilized
at their pre-9/11 level. The Fed did have a hand in that, but it was
only by stepping up what we'd been doing before 9/11, cutting interest
rates to make it easier for people to borrow and spend.
I didn't mind seeing my expectations upset, because the economy's remarkable
response to the aftermath of 9/11 was proof of an enormously
important fact: our economy had become highly resilient. What I'd said so
optimistically to the Senate Banking Committee turned out to be true. After
those first awful weeks, America's households and businesses recovered.
What had generated such an unprecedented degree of economic flexibility?
I asked myself.
Economists have been trying to answer questions like that since the
days of Adam Smith. We think we have our hands full today trying to comprehend
our globalized economy. But Smith had to invent economics almost
from scratch as a way to reckon with the development of complex
market economies in the eighteenth century. I'm hardly Adam Smith, but
I've got the same inquisitiveness about understanding the broad forces that
define our age.
This book is in part a detective story. After 9/111 knew, if I needed
further reinforcement, that we are living in a new world—the world of a
global capitalist economy that is vastly more flexible, resilient, open, self-
correcting, and fast-changing than it was even a quarter century earlier. It's a
world that presents us with enormous new possibilities but also enormous
new challenges. The Age of Turbulence is my attempt to understand the nature
of this new world: how we got here, what we're living through, and
what lies over the horizon, for good and for ill. Where possible, I convey my
understanding in the context of my own experiences. I do this out of a
sense of responsibility to the historical record, and so that readers will know
10
I NTRODUCTION
where I'm coming from. The book is therefore divided into halves: the first
half is my effort to retrace the arc of my learning curve, and the second half
is a more objective effort to use this as the foundation on which to erect a
conceptual framework for understanding the new global economy. Along
the way I explore critical elements of this emerging global environment: the
principles of governing it that arose out of the Enlightenment of the eighteenth
century; the vast energy infrastructure that powers it; the global financial
imbalances and dramatic shifts in world demographics that threaten
it; and, despite its unquestioned success, the chronic concern over the justice
of the distribution of its rewards. Finally, I bring together what we can
reasonably conjecture about the makeup of the world economy in 2030.
I don't pretend to know all the answers. But from my vantage point at
the Federal Reserve, I had privileged access to the best that had been
thought and said on a wide range of subjects. I had access to the broad
scope of academic literature that addressed many of the problems my Fed
colleagues and I had to grapple with every day. Without the Fed staff, I
could never have coped with the sheer volume of academic output, some
exceptionally trenchant and some tedious. I had the privilege of calling one
or more of the Federal Reserve Board's economic staff and asking about academic
work of current or historical interest. I would shortly receive detailed
evaluations of the pros and cons on virtually any subject, from the
latest mathematical models developed to assess risk neutrality, to the emergence
and impact of land-grant colleges in the American Midwest. So I
have not been inhibited in reaching for some fairly sweeping hypotheses.
A number of global forces have gradually, sometimes almost clandestinely,
altered the world as we know it. The most visible to most of us has
been the increasing transformation of everyday life by cell phones, personal
computers, e-mail, BlackBerries, and the Internet. The exploration after
World War II of the electronic characteristics of silicon led to the development
of the microprocessor, and when fiber optics combined with lasers
and satellites revolutionized communications capacities, people from Pekin,
Illinois, to Peking, China, saw their lives change. A large percentage of
the world's population gained access to technologies that I, in setting out
on my long career in 1948, could not have imagined, except in the context
of science fiction. These new technologies not only opened up a whole
//
THE AGE OF TURBULENCE
new vista of low-cost communications but also facilitated major advances
in finance that greatly enhanced our ability to direct scarce savings into
productive capital investments, a critical enabler of rapidly expanding globalization
and prosperity.
Tariff barriers declined in the years following World War II, a result of
a general recognition that protectionism before the war had led to a spiraling
down of trade—a reversal of the international division of labor which
contributed to the virtual collapse of world economic activity. The postwar
liberalization of trade helped open up new low-cost sources of supply;
coupled with the development of new financial institutions and products
(made possible in part by silicon-based technologies), it facilitated the forward
thrust toward global market capitalism even during the years of the
cold war. In the following quarter century, the embrace of free-market capitalism
helped bring inflation to quiescence and interest rates to single digits
globally.
The defining moment for the world's economies was the fall of the
Berlin Wall in 1989, revealing a state of economic ruin behind the iron curtain
far beyond the expectations of the most knowledgeable Western economists.
Central planning was exposed as an unredeemable failure; coupled
with and supported by the growing disillusionment over the interventionist
