the United States is sufficiently culturally stable to expect little change
over the next generation or two. I say this even though ongoing immigra
2 79
THE AGE OF TURBULENCE
tion from Latin America will alter the cultural composition of our society.
But these are people who have chosen to leave their home countries, a
seeming rejection of much of the populist culture that has so inhibited
Latin American economic growth. That was also the case with the open
immigration at the turn of the last century. Those immigrants were successfully
absorbed in our nation's "melting pot."
In the less pressing period after World War II, but before globalization
took hold, governments were able to construct social safety nets and engage
in other policies to shelter citizens from the gale of creative destruction. In
the United States, major expansions of Social Security, unemployment
insurance, worker-safety legislation, and, of course, Medicare headed a
much longer list. Most industrialized nations did likewise. The share of
U.S. GDP accounted for by government social benefits rose from 3.4 percent
in 1947 to 8.1 percent in 1975 (and has since drifted higher). Even
though such safety-net initiatives were often recognized as adding substantial
costs to labor and product markets, thereby reducing their flexibility,
policymakers did not judge them as meaningful impediments to economic
growth. Pent-up demand from the Depression and World War II drove
world GDP forward.
In economies not broadly subject to international trade, competition
was not as punishing to the less efficient as it is today, and there is clearly a
significant segment of society that looks back at such circumstances with
nostalgia. In today's global competitive markets, maintaining the kind of
safety net that evolved in an earlier day is proving increasingly problematic,
notably in most continental European countries, where high unemployment
appears chronic. Governments of all persuasions may still choose to
help people acquire the skills they need to utilize new technologies. And
they generally try to support the incomes of those who have been less able
to adapt. But technology and international competition are extracting a
high price for the more intrusive forms of intervention that impair market
incentives to work, save, invest, and innovate. In India, for example, direct
foreign investment inflows are clearly being inhibited by a still oppressive
degree of regulation.
The European governments that emerged out of World War II, reflecting
their collectivist bias, legislated far larger safety nets than did the U.S.
280
PHOTOGRAPHIC INSERT 2
I was sandwiched between Hillary Clinton and Tipper Gore as President Bill Clinton
presented his deficit-cutting package to a joint session of Congress on February 17,
1993. While the political theater of the seating made me slightly uncomfortable,
I enjoyed the company, and more important, I applauded the president's focus on
deficit reduction. Luke Frazza/AFP/Getty Images
I found President Clinton refreshingly
engaged in economic issues.
ABOVE: Ron Sachs/CNP/Corbis; BELOW: Official White House Photograph
Andrea and I got married at the Inn at
Little Washington in Virginia on April 6, 1997
Courtesy of Denis Reggie
Across the net from Treasury Secretary Lloyd Bentsen at the Senate tennis court,
1994. Lloyd, a good friend, played an underappreciated role in launching Clinton's
successful economic policies. Courtesy of the U.S. Department of the Treasury
As America's economy became
more and more integrated with the
world's during my tenure as Fed
chairman, I became increasingly
involved in aid for other countries
in economic crisis. Magazine cover
hyperbole aside, Treasury Secretary
Robert Rubin, Deputy Treasury
Secretary Lawrence Summers, and I
had an unusually fruitful and
harmonious working relationship;
I greatly respect them both.
Time Magazine/Time Life Pictures/
Getty Images
At the height of the dot-com boom,
CNBC invented a gimmick called the
briefcase indicator, in which cameras
would follow me on the mornings of
FOMC meetings as I arrived at the
Fed. If my briefcase was thin, one
theory went, then my mind was
untroubled and the economy was
well. But if it was stuffed full, a rate
hike loomed. Courtesy of CNBC
Andrea and I checked in on the Fed's Y2K crisis management team on our way home from the
Clinton White House's "Millennium Dinner" on New Year's Eve, December 31, 1999.
Courtesy of Howard Amer
I estifying on the U.S. economy before the Joint Economic Committee of
Congress, April 21, 2004. The admonition "First, do no harm" applies
to Fed chairmen speaking in public as well as to physicians.
Photograph by David Burnett/Contact Press Images
President-elect George W.
Bush and I faced the media
after our first meeting, on
December 18, 2000, at
Washington's Madison Hotel.
Cynthia Johnson/Time Life
Pictures/Getty Images
I was sworn in as Fed chairman for the fifth and final time on June 19, 2004, by Vice
President Cheney at Gerald Ford's Colorado home.
Official White House Photo/David Bohrer
I he world's top finance ministers (back row) and central bankers (front row) gathered in
Washington, D.C., for a G7 meeting of economic policymakers. Among the finance ministers are
France's now-president Nicolas Sarkozy (second from left) and Great Britain's now-prime minister
Gordon Brown (back row, far right). Courtesy ofBanca d'ltalia
A band of protesters hoped to disrupt the World Bank/IMF annual meeting in
Washington on April 17, 2000. Ironically, the intensity of such public protests has
increased almost in lockstep with the diminution of the power of nation-states,
separately or in coordination, to bend global market forces to their will.
AP Images/Khue Bui
During an engaging trip to Great Britain in September 2002, I had the honor of
being knighted by Queen Elizabeth II and dedicating the new Treasury Building. In
2005, I received an honorary degree from the University of Edinburgh in the presence
of my friend, then-chancellor of the exchequer Gordon Brown.
ABOVE: A? Images/David Cheskin; BELOW: Christopher Furlong/Getty Images
I was struck by how quickly the Chinese leadership acquired a relatively sophisticated understanding
of the workings of market economies, given the distance it had to traveL Here I am meeting
with Chinese president Jiang Zemin in the Great Hall of the People in Beijing. Chinese finance
minister Jin Renqing is to the right. The collection of Alan Greenspan
Ohinese premier Zhu Rongji ranks with Mikhail Gorbachev in his impact on
world economic events. In the course of meetings over many years, he and I
became good friends. Bob Rubin and I saw him during his visit to Washington,
D.C., in 1999, when he urged President Clinton and Congress to back China's
accession to the World Trade Organization. Epix/Getty Images
I aking in Tiananmen Square from a balcony near the spot where Mao declared the
creation of the People's Republic of China. The collection of Alan Greenspan
I talked to middle-school students in Washington, D.C., about the importance of
staying in school, as part of a financial education program in June 2003. The solution
to some of our gravest problems lies in reforming the way we educate our children.
AP Images/Susan Walsh
Attending funeral services for President Ford in the Rotunda of the U.S. Capitol,
December 30, 2006. To my left in front are Henry Kissinger, Brent Scowcroft,
and Bob Dole. I was struck by the public outpouring of grief at Ford's death and
couldn't help but perceive it as in part also a lament for a less bitterly partisan time
in American political life. Mark Wilson/Getty Images
At Ben Bernanke's swearing-in as the fourteenth chairman of the Federal Reserve
on February 6, 2006.1 was very comfortable leaving the post in the hands of such
an experienced successor. Jim Young/Reuters/Corbis
With Roger Ferguson, my close associate and the vice chairman of the Fed for
eight and a half critical years, from 1997 to 2006. Photograph by Diana Walker
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"Andplease let Alan Greenspan accept the things he
cannot change, give him the courage to change the things
he can ana the wisdom to know the difference.n
Oaricature comes with the territory.
TOP: . Tribune Media Services, Inc. All rights reserved; BOTTOM: . The New Yorker Collection 1997',
Warren Miller from cartoonbank.com. All rights reserved; TOP RIGHT: . The New Yorker Collection
2000, Lee Lorenz from cartoonbank.com. All rights reserved; BOTTOM RIGHT: By permission
of Mike Luckovich and Creators Syndicate, Inc.
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hiM GREEHSPAH 1H RETIREMENT
Sweet harmony.
Photograph by Harry Benson
THE MODES OF CAPITALISM
government, and as a consequence, European economies are structurally
more rigid even today. As I noted in an earlier chapter, when I started as an
economist just after World War II, confidence in capitalism was at its lowest
ebb since its beginnings in the eighteenth century. In academia, capitalism
was considered passe. Most of Europe was enthralled with one or more of
the various forms of socialism. Socialists and Communists had a significant
presence in European parliaments. In 1945, Communists garnered a fourth
of the French vote. Britain moved dramatically toward a planned economy
under its postwar Labour government, and it was hardly alone. West
Germany under Allied occupation was heavily regulated at first. Largely
because of a misreading of Soviet economic strength, central planning, even
in a somewhat diluted form, had a wide hold on European economic
thinking.
After the war, Europe and Japan were in ruins, of course, and even in
America few people were confidently predicting economic growth. In fact,
the memories of the 1930s were so vivid that people feared the Depression
would pick up where it had left off. In Britain, the birthplace of capitalism,
the fears for the postwar economic world were so deep that their revered
wartime leader, Winston Churchill, was judged not sufficiently focused on
domestic economic needs and was unceremoniously voted out of office as
he was meeting at Potsdam with Truman and Stalin. The newly installed
Labour government nationalized a significant segment of British industry.
In Germany, the social welfare system initiated under Bismarck in the
1880s was expanded.
Conventional wisdom credits the Marshall Plan for Europe's recovery.
I do not doubt that the Marshall Plan helped, but it was too small to account
for the remarkable dynamics of the postwar recovery. I would regard
the freeing of product and financial markets in 1948 by West German economics
director Ludwig Erhard as by far the more important spur to the
postwar recovery of Western Europe. West Germany, of course, was to become
the region's dominant economic power.
As the years went by, a growing disillusionment with the rigidity and
the results of government economic planning set in, and all European economies
moved toward market capitalism, if on different time frames and to
different degrees. For the most part, while acknowledging the downside of
281
THE AGE OF TURBULENCE
creative destruction, advocates of markets convinced their populations of
capitalism's benefits, thereby gaining electoral dominance. Because of
deeply different cultures, however, each nation practiced its own nuanced
version.
Britain was driven off its socialist track in part by periodic foreign-
exchange crises that forced fallbacks to more competitive markets. Margaret
Thatcher jolted Britain toward a capitalist paradigm. I first encountered
Thatcher at a September 1975 British Embassy function in Washington,
shortly after she became the Conservative Party's leader. And an encounter
it was. Seated next to her at dinner, I was prepared for a dull evening with
a politician. "Tell me, Chairman Greenspan," she asked, "why is it that we
in Britain cannot calculate M3?" I awoke. M3 is an arcane measure of money
supply embraced by followers of Milton Friedman. We spent the evening
discussing market economics and the problems confronting the British
economy. I repeated a concern I had expressed to President Ford the previous
April: "The British economy appears to be at the point where they
must accelerate the amount of governmental fiscal stimulus just to stand
still. This is clearly a very dangerous situation."
My favorable initial impressions of Thatcher were reinforced after she
became prime minister. Elected to that office in 1979, she confronted Britain's
sclerotic economy head-on. Her seminal battle was with the miners
who struck in March 1984 following Thatcher's announcement of the closing
of some unprofitable government-owned coal mines. A strike by the
mine workers' union in 1973 had been instrumental in bringing down Edward
Heath's government. But Thatcher's strategy of building up large
stockpiles of coal in advance of her closure announcement insulated the
country from the power outages that had given the union its bargaining
strength in the past. Outmaneuvered, the militant workers capitulated after
a year and returned to work.
Thatcher's embrace of market capitalism gained the grudging acceptance
of the British electorate. She was reelected in 1983 and 1987, and
became the longest continuously serving prime minister since 1827. Her
spectacular run was finally undermined not by the general British electorate
