any definition, it was in the tens of billions of dollars. Admittedly, such
sums are a very small percentage of the $2 trillion-plus federal budget, but
that is not the point. Earmarks are the canaries in the coal mine when it
comes to the collapse of fiscal discipline. And the canaries looked sick.
After the Republicans lost control of Congress in the November 2006
election, former House Republican majority leader Dick Armey published
a perceptive op-ed piece in the Wall Street Journal. Its headline was "End of
the Revolution," and it harked back to the 1994 Republican takeover of
Congress:
Our primary question in those early years was: How do we reform
government and return money and power back to the American people?
Eventually, the policy innovators and the "Spirit of '94" were
largely replaced by political bureaucrats driven by a narrow vision.
Their question became: How do we hold on to political power? The
aberrant behavior and scandals that ended up defining the Republican
majority in 2006 were a direct consequence of this shift.
Armey had it exactly right. The Republicans in Congress lost their way.
They swapped principle for power. They ended up with neither. They deserved
to lose.
244
THE NATION CHALLENGED
T
T
ears welled in my eyes as I observed the throngs of Americans stand
ing in silent tribute to Gerald R. Ford in the waning days of 2006.
They lined the streets as a motorcade delivered the body of the thirty-
eighth president of the United States from Andrews Air Force Base to
the Capitol, where it would lie in state. At ninety-three, he had been
our longest-living president. It was remarkable to see Washington, D.C.,
so torn with partisan strife and harboring a dysfunctional government, uni
versally embrace this symbol of bipartisan camaraderie of a distant era.
It was a tribute to this genial soul, but also evidence of Americans' thirst
for the civility in politics that Ford represented and that had long since
departed.
Ford was beaten by Jimmy Carter in the presidential election of 1976,
and it was symbolic that Carter delivered one of the eulogies as Ford was
put to rest in Grand Rapids, Michigan, mourned by the people whom he
had represented in the Congress for a quarter century. What cost Ford the
1976 election was the presidential pardon he had granted Richard Nixon.
That decision had created a firestorm among the Democrats, who wanted
Nixon held accountable for his malfeasance in office. Yet as the years
passed, many prominent Democrats came to believe that Ford's pardon
had been essential to getting the trauma of Watergate behind us. Senator
Ted Kennedy called it "an extraordinary act of courage."*
As I looked out the window of my car in the procession on that sunny
day, only yards from the hearse carrying Ford's casket (I was an honorary
pallbearer), I couldn't help but wonder what had happened to American
politics since Jerry Ford would battle Tip O'Neill, then Speaker of a Demo
cratic Congress, from 9 a.m. to 5 p.m., but still invite his longtime friend for
evening cocktails at the White House.
I joined the Ford administration in August 1974, with the trauma of
Watergate still gripping Washington. Yet partisan fervor was largely set
aside as the sun went down. The dinners I attended (a Washington political
*Senator Kennedy made this statement on May 21, 2001, as Ford was awarded the John F.
Kennedy Profile in Courage Award by the Kennedy Library in Boston.
245
THE AGE OF TURBULENCE
ritual) were invariably bipartisan. Senators and representatives from both
parties would mix with administration stalwarts, the media, and the city's
social power brokers. During 2005, my last full year in government, the ritual
dinners were still there, but they had become intensely partisan. On
many occasions, I was the only Republican present. And at "Republican
dinners" I attended, there were few, if any, Democrats. The annual black-tie
events sponsored mainly by the media—the Gridiron and other correspondents'
dinners—were as bipartisan as they'd been in my Ford years. But the
camaraderie at those events was forced and synthetic.
There is considerable academic analysis but little agreement about the
causes of partisan frictions. There is even an intriguing thesis that the halcyon
days of bipartisan camaraderie in the 1950s and 1960s were the historical
aberration, and today's frictions are not much out of line with
history. From my narrower perch, where I watched Nixon's "Southern
strategy" successfully evolve in his 1968 campaign, it seemed that the roots
of our political dysfunction trace back to a shift in southern conservative
congressional representation from Democratic to Republican control following
the Civil Rights Act of 1964. Democrats greatly outnumbered Republicans
in the 1960s, and for almost all of the years since the New Deal
they had controlled the Congress and the White House. With a lock on the
South, southern Democrats built up important seniority in the Congress
and had been dominant as committee chairmen since the presidency of
Franklin D. Roosevelt. The uneasy coalition of northern liberals and southern
conservatives had yet to fragment over civil rights and fiscal policy.
Legend has it that Lyndon Johnson declared of the Democratic Party
when signing the Civil Rights Act, "We have lost the South for a generation."
If he said it, he was prophetic. Southern Democratic senators led by
Richard B. Russell of Georgia felt betrayed by their leader from Texas. The
Democrats' senatorial representation from the states of the Deep South
declined from seventeen of eighteen in 1964 to four of eighteen in the
Congress elected in 2004. The Democrats' share in the House declined
commensurately. With the movement of northern industry to the South, a
trend that began after World War II, the lock the Democrats had on southern
politics was bound to change. There is little doubt, however, that the
246
THE NATION CHALLENGED
Civil Rights Act accelerated the process. I am saddened that from a Republican
perspective, a good outcome was achieved for the wrong reasons.
The four congressional caucuses, two in each body, have shifted dramatically
over the years. Each caucus, two Republican, two Democratic,
used to comprise liberals, moderates, and conservatives. To be sure, the proportions
differed by party, but there was rarely enough cohesion to produce
overwhelming majorities for any piece of legislation in any of the four
caucuses. Votes on legislation typically would be Democrats 60 percent for,
40 percent against, and Republicans 40 percent for, 60 percent against, or
vice versa.
Today's congressional caucuses, reflecting the reorientation of party
affiliations in the South, have become either predominantly liberal (the
Democrats) or conservative (the Republicans). Accordingly, legislation that
used to split party votes 60 percent to 40 percent is now more likely to
be 95 percent to 5 percent. Legislation has consequently become highly
partisan.
One could argue that over our long history there's never been any love
lost between liberals and conservatives. But people did not run under the
banner of a "Conservative Party" or a "Liberal Party." The mechanisms of
governing—committee assignments and leadership posts—were Democratic
or Republican, and party power held sway. The eventual dominance
of Republicans in southern state politics brought the two major parties to
numerical parity but, in the process, induced an ideological divide between
conservative Republicans and liberal Democrats. It has left a vast untended
center from which a viable, well-financed independent presidential candidate
could conceivably emerge in 2008 or, if not then, in 2012.
The political chasm has gone beyond the titillation of political pundits.
Governance has become dangerously dysfunctional. The media and the
large crowds paying extraordinary tribute to Gerald Ford were also mourning
the demise of collegial politics. Americans had voted the Republicans
out of congressional leadership less than two months earlier. I don't think
the Democrats won. It was the Republicans who lost. The Democrats came
to power in the Congress because they were the only party left standing.
I often wonder if a ticket of a Republican for president and a Democrat
247
THE AGE OF TURBULENCE
for vice president, or the reverse, would attract the vast untended center.
Perhaps this issue wouldn't matter if the world were at peace. With the increasing
prominence of the "invisible hand" of globalization effectively
overseeing the billions of daily economic decisions, who the leaders are
would be less important. But that has not been the case since 9/11. Who
holds the reins of government matters.
248
TWELVE
THE UNIVERSALS OF
ECONOMIC GROWTH
A
A
s chairman of the Fed; I often found that dealing with the urgent
issues confronting U.S. economic policy required exploring the
many ways human nature and market forces interact. I've told the
story in the preceding chapters of how I came to understand the workings
of the economic world—a sixty-year learning process. In the chapters that
follow, I will set forth some of the conclusions I've reached; I'll try to con
vey my understanding of the forces that bind together the world economy
and drive its evolution, as well as the forces that threaten to pull it apart.
I identified early in my professional career competition as the primary
driver of economic growth and standards of living in the United States.
In moving to a global context decades later, I was required to alter my
perspective very little. When I was nominated in 1987 by President Reagan
to chair the Federal Reserve Board, numerous commentators expressed
concern about my lack of international economic experience. For good reason.
In running the domestically oriented Townsend-Greenspan, I had little
exposure to the international economy aside from the economics of international
oil. My stint at the Council of Economic Advisors in the mid
THE AGE OF TURBULENCE
1970s did expose me to the successes and travails of Europe, and to some
extent those of emerging Asia. But it was not until I arrived at the Federal
Reserve in August 1987 that I immersed myself in the details of the rest of
the world and the forces that drove it. Latin America's periodic crises during
the 1980s and 1990s, the collapse of the Soviet Union and its economy,
Mexico's near default in 1995, and the scary financial crises that spread
across emerging markets, culminating in Russia's default in 1998, dramatically
rearranged my priorities and focus. My first tutor at the Federal Reserve
was the head of its Division of International Finance, Ted Truman. A
distant relative of President Harry Truman, he had earned a Ph.D. from
Yale, where he taught for several years before joining the Fed's staff. I absorbed
a great deal from Ted, but after a long, distinguished Federal Reserve
career, in 1998 Truman was appointed assistant secretary of the treasury
for international affairs. His replacement, Karen Johnson, with a doctorate
from MIT, continued my education.
During my Fed years, I interacted with experts on virtually every international
economic issue imaginable, from the opaque budget accounting
rules governing our financial contributions to the IMF to the economics of
China's Pearl River delta. I also had to continually recalibrate my views of
how the U.S. economy worked in the context of ever-expanding globalization.
Overseeing my schooling on the U.S. economy in addition to Don
Kohn was David Stockton, the Fed's chief economist since 2000 and a Fed
staffer since 1981. He never sought nor received the press that Fed governors
get, but when the governors gave speeches, it was his forecast of the
U.S. economy that Fed watchers were getting. We governors learned to see
him as the indispensable, behind-the-scenes staffer.*
Long before Adam Smith wrote his 1776 masterpiece, An Inquiry into
the Nature and Causes of the Wealth of Nations, people were arguing over
the shortest, straightest path to prosperity. Truly it is an argument without
end. But even so, the data point to three important characteristics influencing
global growth: (1) the extent of competition domestically, and,
*David is so low-key that it wasn't until after we'd worked together closely for years that I
learned that his distant forebear, Richard Stockton, was a signer of the Declaration of
Independence.
250
THE UNIVERSALS OF ECONOMIC GROWTH
especially for developing nations, the extent of a country's openness to
trade and its integration with the rest of the world; (2) the quality of a
country's institutions that make an economy work; and (3) the success of
its policymakers in implementing the measures necessary for macroeconomic
stability
But while there appears to be a general consensus that these three conditions
are essential to prosperity I suspect that if economic-development
experts were polled, many would offer them in different orders of importance
and probably also highlight different aspects of each one. My experience
leads me to consider state-enforced property rights as the key
growth-enhancing institution. For if those rights were not enforced, open
trade and the huge benefits of competition and comparative advantage
would be seriously and dramatically impeded.
People generally do not exert the effort to accumulate the capital necessary
for economic growth unless they can own it. Ownership, of course,
can be quite conditional. Do I own a parcel of land outright, or are there so
many easements that it is of very little value to me? Or, most important, if
