right: you can't tell when a market is overvalued, and you can't fight market
forces.
As the boom went on—for three more years, it turned out, greatly increasing
the nation's paper wealth—we continued to wrestle with big questions
of productivity and price stability and other aspects of what people
had come to call the New Economy. We looked for other ways to deal with
the risk of a bubble. But we did not raise rates any further, and we never
tried to rein in stock prices again.
A
A
ndrea and I expressed some exuberance of our own by finally getting
married that spring. She always jokes that it took me three tries to
propose to her, because I kept popping the question in Fedspeak, but that
is not true. Actually I proposed five times—she missed a couple. On Christ
mas Day 1996, though, the message finally got through and she said yes. In
April 1997 Supreme Court justice Ruth Bader Ginsburg married us in a
simple, beautiful ceremony at one of our favorite places, the Inn at Little
Washington in the Virginia countryside.
Typically, we put off having a honeymoon: too much was happening in
Andrea's professional world and mine. But friends kept urging us to go, and
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recommended Venice. Finally I studied my calendar and suggested adding
a honeymoon to the tail end of an international monetary conference meeting
in Interlaken, Switzerland, in June, two months after our wedding.
At the monetary conference, German chancellor Helmut Kohl gave a
predictably dry luncheon speech. Central-bank independence and the revaluation
of Germany's gold reserves were the topics. Afterward Andrea
and I avoided flocks of reporters who wanted comments about the U.S.
economic outlook and the prospects for the continuation of the Internet
boom on the stock market. Even though they knew it was my policy not to
give interviews, some asked Andrea to serve as a go-between, figuring that
as a fellow journalist she might be willing to help. All Andrea wanted to do
was go to the spa. By the time we left Interlaken she had jokingly declared
our trip so far "the least romantic honeymoon in history."
And then we arrived in Venice. As necessary as creative destruction is
for material standards of living to improve, it's no coincidence that some of
the world's most cherished places are those that have changed the least
over the centuries. I'd never visited the city, and like so many travelers before
me, I was enchanted. Our notion had been to wander and do things
completely spontaneously. And while that doesn't really happen when you
are traveling with a security detail, we came close. We ate at open-air cafes,
went shopping, and toured churches and the old Jewish ghetto.
For centuries, the Venetian city-state was the center of world trade,
linking Western Europe with the Byzantine Empire and the rest of the
known world. After the Renaissance, trade routes shifted to the Atlantic,
and Venice declined as a sea power. Yet throughout the 1700s, it remained
Europe's most graceful city, a center of literature, architecture, and art.
"What news on the Rialto?" the famous line from The Merchant of Venice
referring to the commercial heart of the city, still strikes a vibrant cosmopolitan
note.
Today the Rialto district looks much as it did when traders unloaded
silks and spices from the Orient. The same is true of the city's splendidly
painted Renaissance palaces, St. Mark's Square, and dozens of other sights.
Except for the motorized launches—the vaporetti—you could just as readily
be in the seventeenth or eighteenth century.
As we strolled along one of the canals, my inner economist finally got
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the better of me. I asked Andrea, "What is the value-added produced in
this city?"
"You're asking the wrong question/' she replied, and burst out laughing.
"But this entire city is a museum. Just think of what goes into keeping
it up."
Andrea stopped and looked at me. "You should be looking at how
beautiful it is."
Of course my wife was right. But the conversation helped crystallize
something that had been in the back of my mind for months.
Venice, I realized, is the antithesis of creative destruction. It exists to
conserve and appreciate a past, not create a future. But that, I realized, is
exactly the point. The city caters to a deep human need for stability and
permanence as well as beauty and romance. Venice's popularity represents
one pole of a conflict in human nature: the struggle between the desire to
increase material well-being and the desire to ward off change and its attendant
stress.
America's material standard of living continues to improve, yet the
dynamism of that same economy puts hundreds of thousands of people per
week involuntarily out of work. It's no surprise that demands for protection
against the forces of market competition are on the rise—as well as
nostalgia for a slower and simpler time. Nothing is more stressful for people
than the perennial gale of creative destruction. Silicon Valley is without
question an exciting place to work, but its allure as a honeymoon destination
has, I would guess, thus far gone largely unrecognized.
The following evening in Venice, Andrea and I went to hear a Vivaldi
cello concerto, played on baroque instruments. His melodies filled the air
around us, a thrilling complement to the somber majesty of the ancient
church with its shadows and curves and thick stones that seemed to breathe
the damp of the canals. I've heard Vivaldi played better, but never have I
enjoyed it so much.
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tween 1993 and 2000, the typical American family had a real gain in annual
income of $8,000.
This economic growth boosted the national psyche, changing the way
we saw ourselves in the world. Throughout the 1980s and well into the
early 1990s, Americans had gone through a period of being fearful and
depressed. People worried we were losing ground to Germany, the newly
unifying Europe, and Japan. As Larry Summers later described it, these
economic rivals "were more investment oriented, more manufacturing oriented,
had fewer lawyers, more scientists, more discipline than we."
In the eighties, Japan's giant zaibatsu, or conglomerates, had seemed to
pose a particular threat: they had usurped America in steel and in factory
equipment, put our automakers on the defensive, and so completely overwhelmed
us in consumer electronics that even the TVs we depended on for
news bore Sony, Panasonic, and Hitachi brands. Not since Sputnik had
America felt itself to be at such a scary disadvantage. Even the end of the
cold war didn't lift the gloom—our vast military power suddenly felt irrelevant,
and international status was now defined by economic prowess.
Then the technology boom came along and changed everything. It
made America's freewheeling, entrepreneurial, so-what-if-you-fail business
culture the envy of the world. U.S. information technology swept the
global market, as did innovations ranging from Starbucks lattes to credit
derivatives. Students gravitated from other countries to American universities.
The changes the United States had undertaken to modernize its economy—
two decades of often painful deregulation and downsizing and the
lowering of barriers to trade—all now paid off. While both Europe and Japan
slid into economic doldrums, America was on the rise.
The federal budget surplus was an amazing development. "We all need
to go back to the drawing board on forecasting taxes," a senior official of the
New York Fed told the FOMC in May 1997, after a report that the Treasury's
receipts for the year were running $50 billion ahead of projections.
Economists at the Office of Management and Budget, the Congressional
Budget Office, and the Fed were all at sea. Even though the economy was
on a roll, it wasn't enough to account for this big a surge in tax receipts. We
suspected we might be seeing a stock-market effect, and I encouraged the
Fed staff to accelerate its work estimating the boost to household taxable
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THE AGE OF TURBULENCE
income from the exercise of stock-option grants and realized capital gains.
Stock options, of course, had become the primary lure used by tech companies
to attract and keep employees—they were even being handed out to
secretaries and clerks. It was very difficult to measure accurately this new
source of wealth. Years later, this hypothesis was proved correct, but at the
time all our economists could do was to confirm that it might be the case.
The federal deficit for 1997 shrank to just $22 billion—statistically insignificant
in the context of a $1.6 trillion federal budget and a $10 trillion GDP.
Almost overnight, the administration found itself facing a budget surplus
that was expanding as fast as the deficit had dwindled. President Clinton
had no sooner started talking about the possibility of actually being
able to balance the federal budget in 1998 than his policymakers had to
scramble to plan what to do with the surplus. And while this was a happy
problem to have, success, like everything else in budgetary matters, must
be managed. This is particularly so in Washington, where if politicians
discover $1 billion they will instantly come up with at least $20 billion
worth of ways to spend it. And the surplus looked to be truly epic: the
Congressional Budget Office projection in 1998 was for it to total $660
billion over ten years.*
As soon as the news was announced, both parties claimed credit. "Republican
fiscal policy emphasizing controlled spending, less government,
and tax relief, has moved the nation from deficit to surplus in just three
years," declared a GOP leader, Congressman John Boehner of Ohio. President
Clinton, for his part, formally announced the surplus at a special White
House ceremony where Democratic leaders were present but Republicans
were banned. Not a single Republican had voted for his milestone deficit-
reduction budget in 1993, the president reminded the audience, adding
that if they had, "they would have been eligible to be here today."
Predictably, dissension about what to do with the extra revenue was
intense. Liberal Democrats wanted to devote the money to social programs
*The $660 billion figure from the Congressional Budget Office was the sum of projections
from 1999 to 2008. Meanwhile, the White House envisioned surpluses in the next decade to
total $1.1 trillion. The discrepancy reflected in part the fact that CBO projections are based on
current law, while administration projections assume that the administration's policies will be
enacted.
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M I LLE N N I UM FEVER
they said had been shortchanged for years; conservative Republicans proposed
to "give back" the surplus in the form of tax cuts. Bill Archer, a Republican
from Texas and a good friend who was chairman of the House
Ways and Means Committee, won the prize for the most amusing statement
of the debate. "Because of record-high taxation/' he declared, tongue
in cheek, "the surplus is raging out of control."
Fiscal conservatives like Bob Rubin and me, meanwhile, believed that
neither tax cuts nor new spending was the right way to go. We thought
the surplus should be used to pay down the national debt to the public. It
now totaled $3.7 trillion, the accumulated consequence of a quarter century
of deficit spending (the last year the budget had been in surplus was
1969).
My longtime involvement in Social Security reform had made me all
too aware that, in the not-too-far-off future, Social Security and Medicare
would face demands in the trillions of dollars as the baby-boom generation
aged. There was no practical way to pay those obligations in advance. The
most effective policy would be to pay down the debt, creating in the process
additional savings, which in turn could increase the nation's productive
capacity and federal revenues at existing tax rates by the time the
boomers hit retirement age.
Debt repayment had one other advantage: it was the simplest option.
So long as Congress does not pass legislation appropriating the money for
some other use, any surplus revenues that flow into government coffers automatically
pay down the debt. If only Congress could keep its hands out
of the cash box. Or, as I suggested more diplomatically to the Senate Budget
Committee, the accumulated national debt was so massive that the
government could happily whittle away at it for years. "It will not harm the
economy in any way of which I am aware to allow the surpluses to run for
quite a long period of time before you touch them," I said. "If the surpluses
are evolving, let's not look at them as though they are a threat to the economy.
They are surely not."* Yet, compared with tax cuts or spending in
*It had not yet entered my mind that surpluses could become so large as to reduce the debt
level to zero and eventually could require the federal government to accumulate private assets.
That prospect would confront me in 2001.
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creases, debt repayment was admittedly an ugly-duckling policy. I wondered
whether Clinton would be able to stick with the fiscal conservatism that
had marked his first term, even if he wanted to.
I played no role in finding the answer, but I had to admire the one
Clinton and his policymakers came up with. They lit on a politically irrefutable
argument to take the money off the table: tying the budget surplus
to Social Security. He delivered his pitch as part of the 1998 State of the
Union address:
What should we do with this projected surplus? I have a simple
four-word answer: Save Social Security first. Tonight, I propose
