by Robert Rubin
AS THIS DEBATE WAS evolving, my role in it evolved as well. I was still in touch with a number of Democrat senators and House members and, just as important, their staffs. In Washington, businesspeople tend to congregate around the elected official. But very often, if you want to be effective—either in knowing what’s going on or in actually getting something done—you’re well advised to develop a relationship with the right staff people as well. A good example is Mark Patterson, at that time staff director for Tom Daschle’s Democratic Leadership Committee, whom I got to know when he worked for Pat Moynihan. Mark is the kind of staff member who understands substantive issues, can read the politics of the Senate, and has a lot of good-humored insight into what’s likely to happen on the floor and in the various committees. It was through Mark and other congressional staff members that I started to get a sense of how I might be useful again in the debate over Bush’s 2001 tax cut proposal. When the Democrats controlled the White House, the administration had a series of policy positions that were a regular part of the public debate. Democrats in Congress could decide where they wanted to be on economic issues in relation to where the administration was. Most often, the Democrats on Capitol Hill, whether accepting or critical of our positions, used us as a resource for both policy and politics.
Now, all of a sudden, the Democrats didn’t have any of the support structure of a Democratic administration—the fixed star from which to navigate, if they chose, along with the resources, data, and expertise of the cabinet departments and the White House. For example, on tax issues, legislators from the party that controls the White House have at their disposal both the substantive analysis of professional economists at Treasury and the talking points that communications people at Treasury and the White House tailor to different constituencies and different states. They have people they can call on who are deeply involved in economic issues and are thinking about them from the same general perspective. If you’re a U.S. senator, there are always plenty of professional economists at your disposal. What you may lack are people who not only understand economic issues but have also lived in your world and have faced the same kinds of policy choices and political realities you have to face every day.
Once the Republicans retook the White House, the Democrats on Capitol Hill began to realize that the Clinton people had been a useful resource, and they seemed to miss having us. Alan Greenspan was seen by most as supporting Republicans on the tax cut issue when he testified before the Senate Budget Committee on January 25, 2001—though in that same testimony, he stated his concerns about not encroaching upon the Social Security surpluses and warned that a tax cut should not be so large as to plunge the government back into deficit. The Democrats needed people with significant economic policy-making credentials and political experience to support them in developing their positions and to validate those positions.
I remember one Democratic congressman saying to me, “Our members are ready to go out and fight on the tax cut. But many of them don’t fully understand this substantively. They want to have a comfort level with the issues.” It’s an important point: if you’re a member, you’re constantly being asked what you think about a vast range of complicated subjects. Even legislators who are very diligent and dedicated can’t be experts on more than a few issues. The leadership and other members who are deeply involved may give you material to help you understand an issue or answer questions from the press. But legislators don’t want to take a position and realize six weeks or six months later that they were wrong. The bipartisan Concord Coalition played an important role in meeting these needs on fiscal matters, providing analysis of fiscal conditions and the dangers of large long-term deficits, as well as the reassurance that comes from the support of well-respected figures. Among those associated with the organization who opposed fiscally unsound tax cuts were former Senators Bob Kerrey, Sam Nunn, and Warren Rudman, former Federal Reserve chairman Paul Volcker, and former Commerce Secretary Pete Peterson. They held press conferences and their work was widely circulated on the Hill during hotly contested struggles over tax cuts.
In early February 2001, at Tom Daschle’s invitation, I went, along with Laura Tyson, to an issues conference at the Library of Congress that the Senate Democrats were holding to prepare for the budget process. The following day I joined Leon Panetta at the House Democratic Caucus retreat in Farmington, Pennsylvania. I went to the House caucus meeting thinking that I would say what I thought and the members would be pleased that I agreed with them in opposing the size and distribution of the Bush tax cut—more or less what had happened at the Senate discussion. Instead, I was actually attacked. Members responded to my comments by castigating me for not speaking out and providing more of a public voice on their side of the issue. I remember Barney Frank saying, “What you’re doing is terrible.” He was really angry about it.
“First of all, you’re the politicians—I’m not,” I responded. That was true. It seemed appropriate to comment about policy issues I cared about, but I didn’t think I should have to be a public spokesman. Nevertheless, the complaint bothered me, and in the days afterward I thought about what more I could do. Traveling to a Ford board meeting in Detroit, I sketched out a long op-ed article laying out my reasons for opposing the administration’s tax cut. I began by saying that I had not intended to get involved in the public debate on fiscal policy at that point, but I felt strongly that a tax cut of the magnitude Bush had proposed was a serious error in economic policy. The piece appeared in the Sunday New York Times on February 11, 2001. Afterward, there was about a two-week stretch during which eight or ten senators called me. I had never had a period at the Treasury Department when that many senators had called on their own initiative to discuss a policy issue.
Of course, the majority of Democrats who opposed the tax cut didn’t win their fight. The tax cut was highly inefficient as a short-term stimulus—too much went to high-income groups who would spend less of what they received, and most of the cut occurred in later years, which helps little if at all in the short term and damages our long-term fiscal position. The tax cut also undermined our cushion for the unexpected. Within a year, the tragedy of 9/11, the enormous drop in the stock market, and the generally deteriorating economic conditions showed how dramatically unexpected events can affect the country’s fiscal condition.
The debate about what policies would have most effectively dealt with the slowdown will persist for years. The remarkable economic conditions of the 1990s inevitably led to excesses and imbalances—including high levels of consumer and corporate debt, a large current account deficit, and a stock market that was high by any conventional standard—that pointed toward a more difficult period in both financial markets and the economy. However, great strengths—such as low unemployment, high productivity growth, low inflation, and, initially, a strong fiscal position—also persisted. During the slowdown, monetary policy as well as tax cuts and increased spending on both military and homeland security provided strong stimulus to the weak economy. (These tax cuts in 2001 and 2003 could have provided this stimulus in a much less expensive, more effective way—and without long-term damage—had they been better targeted and temporary.) All of that stimulus was likely to lead to a cyclical upsurge. But the overriding questions remain: How well suited were the policy choices made in that period to minimizing the severity and duration of the downturn? And how did those choices affect our economy’s position for the long term? My own view is that on both scores the policy decisions during this time were far from optimal, and that on the second question they have created a serious threat to our future.
I WAS IN my office at Citigroup on the morning of September 11, 2001, when Sandy Weill came into my office and told me a plane had hit the World Trade Center. My first thought was that it must have been a small propeller plane and some kind of freak accident. Then, twenty minutes later, Sandy came in again to say that another plane had hit—and that they were big planes. At that point, it became clear what had happe
ned.
Our first thought was for the several thousand Citigroup employees who worked in the complex, though not in the twin towers themselves. We leased twenty-five floors in 7 World Trade Center, which fell about eight hours later, though thankfully without killing anyone. We also occupied two large buildings several blocks north of the World Trade Center on Greenwich Street, which housed the trading rooms of Salomon Smith Barney, and owned or leased three smaller buildings in the Wall Street area. All of them had to be evacuated. Tragically, we later learned that six Citigroup people who were in the towers on sales calls were killed, and that brought home to all of us in a more personal way the horror of what had occurred.
Sandy quickly organized what turned into a running meeting in one of the conference rooms to manage our crisis response. Our primary focus, after accounting for all of our people, was to continue functioning. As the nation’s largest financial institution, that mattered not just to us but to the entire financial system. We weren’t able to use our Salomon trading rooms on Greenwich Street or any of our other downtown offices. Moving to a backup facility in East Rutherford, New Jersey, kept us operational, but parts of our business still weren’t functioning on September 12. The New York Stock Exchange was closed, initially for an undefined period. The clearing systems at the Bank of New York, an important clearing bank, went down. We were able to make payments, but it wasn’t clear that other financial institutions would be able to make payments to us. We were concerned about the possibility of cascading defaults.
In this instance, the fundamental payment systems and financial systems on which our economy depends continued to function. The Federal Reserve Board acted promptly to make liquidity available to banks until payments could start to flow again. But the warning about how little it would take to create immense financial and economic disruption in this country was clear. Measures have since been taken to reduce this vulnerability, but a complex, modern society is inherently at risk.
IN THE IMMEDIATE aftermath of September 11, there was a great deal of fear about what the attacks might do to the national economy and a great deal of uncertainty on the part of most people about how they should respond. The stock market was closed for several days after the attacks, and no one had any idea how dramatically stocks might fall when it reopened. Many people I spoke to were worried that the shock might have major consequences for asset prices and liquidity.
My own initial reaction was that the attacks could have an immense impact on economic confidence. Consumers, investors, and businesses make their decisions in the context of some framework, whether conscious or unconscious. People go to excesses within that framework, then conditions revert to the mean, and so forth. But the attacks injected new variables that were far outside almost everybody’s previous experience. People needed to develop new parameters—and hadn’t yet. A fundamental change of that kind is very rare and can temporarily stifle economic activity by putting everybody on hold until they can figure out how to relate to the new realities. And given that I had thought the economy—both here and internationally—was in more difficulty before the attacks than most people had, my personal view was that conditions could be even worse than many feared.
In those initial days, I received many calls to go on television and discuss the economic implications. For a week, I declined all invitations. In the first place, I wasn’t sure how to think about this, and I didn’t want to say anything publicly until I was clearer about my views. I also didn’t think that articulating my initial impressions would be helpful. People were looking for some kind of reassurance about the economy. And I didn’t have much that was reassuring to say. However I phrased my views, they could have had the effect of unsettling people further.
But day by day, I kept working through the question of how to think and talk about the economic consequences of September 11, making notes on a legal pad as usual. Given my concerns, the basic problem was how to speak publicly in a way that was truthful but also calming and reassuring. This was an issue I’d faced before. After speaking several times with Gene Sperling, I arrived at the framework of “competing considerations.” On the one hand, the attacks were likely to harm confidence, as well as having a negative impact on various economic sectors, including airlines, hotels, and tourism. The ease and cost of trade would also suffer due to security requirements—and security costs throughout the economy would increase. On the other hand, government spending on the military and security would increase, providing an economic stimulus. The net effect of September 11 on an already troubled economy would be the balance of all such positives and negatives. My notion was to combine that approach for the short term with some kind of affirmative statement about the long-term economic potential of the country—but always noting that realizing this potential would require meeting many challenges. This enabled me to focus again on such issues as long-term fiscal conditions, trade liberalization, education, and the inner cities.
Ad-libbing at a speech I’d been scheduled to give at the Japan Society in New York, I suggested two scenarios. The positive scenario was that even if the United States continued to face a significant terrorist threat in the months and years ahead, any attacks would be of a magnitude that our society could adapt to. Over the course of the following year, the imbalances that had existed prior to 9/11 would work themselves out and the impact of the attack on economic confidence would abate. At the same time, we would have a powerful dose of economic stimulus coming through the system. The result of all this would be that by the third quarter of 2002, confidence would return and the country would be back to a healthy rate of growth. The negative scenario was that terrorist events might continue in some significant way, unsettling economic confidence for a lengthier period of time, and that, combined with the problems that had already existed prior to September 11, would bring about a much more extended period of difficulty.
I had no idea what probability to put on those scenarios. And despite the many predictions people were making about the prospects for the economy, no one else, no matter how well informed, had any real ability to judge the relative probabilities. What I avoided saying that evening was that my private instinct was to give more weight to the negative scenario than the positive one.
Toward the end of that first week, I got a call from Jack Welch, the former CEO of General Electric, who said that Lesley Stahl at CBS had asked him to be on 60 Minutes. The program wanted to have a discussion that would air on Sunday night, before the New York Stock Exchange and other financial markets reopened the next morning. Warren Buffett had agreed to go on, and Jack said he would, too, if I would appear on the program as well.
At first I was inclined not to, because what I had to say, even in the competing-considerations formulation, just didn’t seem constructive. But I did think that the three of us calmly discussing the economy on television might conceivably provide some reassurance, even with my mixed views of the outlook. So I told Jack I’d do it. Then I had a conference call with Ron Klain, Gene Sperling, and David Dreyer. The three of them tried to help me anticipate the kinds of questions I might be asked. Would you buy stock when the market opens, or would you sell? What do you think the market is going to do tomorrow? What do you think people should do with their investments?
My view, as always, was that investments should be made with a long-term view. But that didn’t get me out of answering the questions I was likely to face about my short-term view of economic conditions and of the stock market. I spent a fair bit of time thinking about how to talk about all this. By the time the interview was taped that weekend, I had decided to express my analysis in two conclusions. I thought the odds of a substantial period of difficulty had increased because of the attacks. But I also continued to believe that the long-term potential of the American economy was strong. This seemed both nonalarmist and true to my views.
We had a preparatory conference call before the taping, and Lesley Stahl said, “One question I might ask is, ‘What do you think the marke
t’s going to do on Monday? Would you buy or sell?’ ” Warren gave his answer—he wouldn’t be selling anything when the market opened and might even buy some stocks if they got cheap enough. Then Jack answered, saying that he’d probably hold his stocks, because the United States remained the best place in the world to invest.
Then Lesley said, “What about you, Bob?”
“Well, I don’t want to talk about the market,” I said. I felt that a former Treasury Secretary, whose voice some people might listen to, should exercise care in what he said—especially about stock market levels and the Fed—even after leaving office.
“You’ve got to talk about the market,” she said.
“No, I’m not going to talk about the market.”
“Okay, then I’ll ask you about the Fed and whether they should lower rates,” she said.
“You can do that,” I said. “But I’m not going to talk about the Fed, either.”
“Aren’t you going to talk about anything?” she asked. She was getting very worried. “I want you to be part of the show.”
“Don’t worry, I’ll find things to say.”
So we did the taping, and I did find things to say, though most of what I said was lost in the editing.
THERE WAS BROAD-BASED support across the political spectrum for the President’s military response to terrorism, but the issue of how to deal with the economic impact was much more complicated both substantively and politically. A variety of issues arose. Should the government support the airline industry, the insurance industry, or others affected by September 11? Should the government act to stimulate the economy in some way? If so, with what kind of stimulus—emergency spending, tax cuts, or both? And if tax cuts, what kind of tax cuts? I quickly began getting calls from members of Congress who were grappling with all this.