Federal Reserve documents 2 page

My family fit uneasily into the social fabric of Dillon, in a limbo somewhere between Christian

whites and blacks. When I was very young, I didn’t think much about racism and segregation. They were just part of my environment, seemingly normal, not something to be questioned. As I grew older, I became more aware of the inequities. I was exposed to what passed for progressive thinking at a few meetings of a Jewish youth group in Florence, where we heard presentations on race, prejudice, and anti-Semitism. So I took note that, when black teens began driving to the park near my house to play basketball, the city removed the hoops, making it impossible for anyone to use the court. And I was shocked when a high school friend, someone I thought of as a “nice kid,” expressed satisfaction at the assassination of Martin Luther King in April 1968.

My parents never sat me down and explained the evil of racism in so many words. But I saw how they behaved. Jay Bee Drugs welcomed everyone in Dillon, white and black. (Even my overbearing grandfather Jonas, who seemed to hold everyone in equal contempt, served both blacks and whites at the soda fountain—unusual in the 1940s and 1950s.) My father and uncle offered advice, and credit, to everybody regardless of color, and they hired and promoted employees on the same basis. They believed that anyone who worked hard to feed his or her family, no matter how humble the work, deserved respect. Doctor Phil and Doctor Mort would sometimes have quiet talks with customers who had run up large bills, but they did not press those who clearly could not afford to repay.

On my visits back to Dillon as Fed chairman, it seemed to me that racial attitudes had improved immensely. The town leaders I met were both white and black. I sensed a spirit of mutual trust and cooperation. They shared the common goal of making Dillon a better place to live. Of course, people (and society) change slowly, and I am sure the attitudes of the past have not been washed away. But the direction of change was unmistakable.

THE GOOD RELATIONSHIPS my father developed with several generations of black families in Dillon benefited me in an unexpected way. Ken Manning, the accomplished son of a prominent black family whose members included an attorney and a local basketball star, took an interest in me. Ken had attended high school in Connecticut as part of a special program and had gone to Harvard for undergraduate studies. He was a graduate student at Harvard when I was finishing high school and would ultimately earn a doctoral degree there and go on to a long and distinguished career as a professor of the history of science at the Massachusetts Institute of Technology (MIT). Awakened to the opportunities afforded by education, Ken took it upon himself to convince me—and my parents—that I, too, should leave Dillon to go to Harvard.

Today one would expect middle-class parents to be eager to send their child to an elite college, but going to Harvard, or even leaving the Carolinas, was outside my parents’ concept of what was feasible. The assumption was that I would go to a college nearer home. But during his visits to Dillon, Ken visited our home and talked earnestly to me and then to my parents. He stressed the importance of making the most of my academic talents and being exposed to the wider world. Ultimately, his boundless self-

confidence and infectious laugh were hard to resist. I applied to Harvard, and several other Ivy League schools for good measure, while my parents nervously reviewed their savings in light of the $4,600 it would cost to attend Harvard my freshman year. One day after school the phone rang. The caller said he was from the Harvard admissions office. I had been admitted. Some of my classmates knew I had applied, so I assumed it was a practical joke and asked who it really was. It took a while for the caller to convince me the offer was genuine.

After I graduated from Dillon High, my parents strongly suggested I get a job to help pay Harvard’s tuition. I walked the six blocks from our home to St. Eugene Hospital (now McLeod Medical Center), where construction was under way on a new building, and applied for work as a manual laborer. They hired me at $1.75 an hour even though I was five foot eight and weighed about 140 pounds. I came home after the first day covered in cement dust, too tired to eat. All I could do was sip water. I fell asleep in my chair. I remember helping to carry Sheetrock and, at first, sometimes having difficulty keeping up my end. Once I lost control of a wheelbarrow of fresh cement and dumped it in the wrong place. But over the summer I became much stronger and better able to pull my weight.

As a seventeen-year-old middle-class, Ivy League–bound son of a pharmacist, I didn’t have a lot in common with my co-workers at the construction site. Most were older and either black or rural white. They called me Abercrombie. I got along with them pretty well, though, despite some initial hazing. When I was standing on the roof of the two-story building, near the edge, a daredevil co-worker with an unsubtle sense of humor unexpectedly grabbed me from behind, pushing but then holding on as I lost my balance. After a while, I was entrusted with jobs that took a bit more skill, including applying a layer of concrete to the walls underneath the eaves. Two of the crew members engaged in that task, African American brothers, had plans to start their own construction business. They tried to persuade me to join them as an apprentice. It was good money, they said, and in a few years I could be running my own crew.

THE SUMMER ENDED. My parents drove me to Florence. There I boarded a twin-propeller puddle jumper to Charlotte, where I would change planes for Boston. I arrived at the historic center of campus, Harvard Yard, not long before midnight, a suitcase in each hand. I took it all in. The Yard was filled with students —horsing around, calling to each other—and music. I put my suitcases down and, looking around at the looming facades, considered how unprepared I was for the changes I was about to face.

After a while I made my way to my dormitory suite on the fifth floor of Weld Hall, John F. Kennedy’s dormitory a generation before me. I threw my suitcases on the lower level of the bunk bed I would be sharing, then sat down heavily on the floor, exhausted and overwhelmed. Students I didn’t know were wandering in and out of the suite, calling to their friends. There were speakers in the window, blaring Jimi Hendrix into the Yard, and a couple of nickel bags of marijuana on the floor. “Don’t you want to lock the door or something?” I asked my new roommates. “Don’t worry,” they said. Moments later, a uniformed police officer stood at the open door and looked down at me. I thought, “I have only been at

Harvard for twenty minutes and now I am about to be expelled, probably arrested.”

“Is that your stereo?” the officer asked. I noticed that he was a Harvard University policeman, not a member of the Cambridge police department. “Turn it down and take the speakers out of the window,” he said. I said I would. Then he left.

I was a long way from Dillon.

* Her plea succeeded. President Barack Obama invited her to sit with First Lady Michelle Obama during his February 2009 address to Congress requesting economic stimulus funding. A new school, financed mostly by federal loans to be repaid by a county sales tax increase, opened in September 2012. However, a few months later, Ty’Sheoma had to leave Dillon temporarily when her mother lost her welding job at a local factory and moved to suburban Atlanta.

† As the next generation moved away, however, the synagogue could not be sustained. The seven remaining members of Ohav Shalom, including Uncle Mort, agreed to close and sell it in 1993. Most of the proceeds went to Florence’s Temple Beth Israel.

CHAPTER 2

In the Groves of Academe

I felt more at home in Cambridge than I ever had in Dillon. Here, nothing seemed more important than ideas. I couldn’t believe the range of topics listed in Harvard’s thick course guide, from Sanskrit to biochemistry to medieval art. For the first semester, I picked math, physics, a creative writing seminar, Japanese history and culture, and a graduate course on Jewish history. I was curious about Asia, of which

I knew little, and hoped the Jewish history course would offer me a new perspective on my heritage.

My suitemates on the top floor of Weld Hall included a football player, a Vietnam vet (whom we called “Sarge”), and a math prodigy. We were all a little nervous about how we would do in classes and whether we would fit in. A couple of my new friends and I enjoyed paging through a student “facebook,” hoping to identify pretty freshman girls.* I got to know Cambridge, spent hours browsing in bookstores, went to cafйs featuring folksingers and movie theaters showing Bogart and Bacall, and stayed up late playing bridge.

I was excited when classes began, but I did not at first appreciate how academically disadvantaged I was—especially compared with classmates from elite prep schools like Andover and Exeter and top-flight public schools like Bronx Science. I didn’t have the background that my classmates had, especially in math and physics, and I didn’t know how to study. My wake-up call came when the grades were handed out for my first midterm exam in physics. The exam had started at 9:00 a.m. I had attended classes conscientiously but hadn’t done much work outside of class. Not a problem, I thought. I got up early, around 7:30 a.m., so I could hit the books for forty-five minutes before taking the test—more study time than I had ever allotted for an exam in high school. Naturally, I flunked. The grades in my other courses were better but I did not distinguish myself.

I was saved by Harvard’s quirky academic calendar. Fall classes ended before Christmas, but final exams were not given until mid-January. Between the holidays and exams was a stretch of several weeks, called the reading period, during which students were expected to complete term papers and study for finals. So when the holidays came, I packed up my textbooks and boarded a bus toward Dillon, worried and depressed. Once home, I slept, ate, and studied, and then, back at Harvard, studied more. As a result, I did well on the physics final, earning a B for the course, with grade inflation probably the moral equivalent of about a D-plus. I also received a B in Japanese history but As in the other courses. I was determined to improve.

Ken Manning, the person most responsible for my arrival in Cambridge, looked in on me from time to time, taking me to dinner to find out how I was doing. He was close to a Jewish family in suburban Brookline and invited me to High Holiday services—but he was more interested in the services at that point than I was. I would always be proud of my heritage but I would never return to being traditionally observant.

Harvard during my first year was still a center of protest against the Vietnam War. Two years before I arrived, in 1969, members of the Students for a Democratic Society took over University Hall, one of the oldest buildings on campus. Police with billy clubs and Mace ended the occupation. The protests were still going on when I arrived in 1971. One protest included days of round-the-clock drumming in Harvard Yard. At seventeen, with a small-town background, I was not political and more than a little naпve. I viewed the war protests with sociological detachment, as part of my education. Still, I was relieved when, in February 1972, toward the end of my freshman year, I drew a lottery number (335) that made it unlikely I would be drafted. As it turned out, it didn’t matter. By 1973 the war was winding down and the draft had ended.

When school ended for the summer, I returned home to Dillon and waited tables at South of the Border. Alan Schafer, a member of one of Dillon County’s few Jewish families, had established South of the Border as a beer stand in 1949. He took advantage of the fact that the neighboring North Carolina county restricted sales of alcohol. Over the decades, it grew into a square-mile complex with a motel and campground, a sombrero-shaped restaurant, an amusement park, a reptile lagoon, and shops selling fireworks, beach supplies, and souvenirs that were Yiddish-themed, mildly risquй, or both. Its billboards, once stretching as far north as Philadelphia and as far south as Daytona Beach, Florida, made use of politically incorrect images of South of the Border mascot Pedro and corny humor (“Don’t Miss Pedro’s Wedding Suite; It’s Heir-Conditioned”) to lure snowbirds from the Northeast.

While the entire enterprise seemed out of place in rural South Carolina, the Border provided hundreds of jobs to area residents. Few locals ate there; it was too expensive. Waiting tables was hard work, though far less grueling than construction. With tips, I made a lot more than I ever could have earned hauling Sheetrock. The job drew me out of my shyness. You had to talk to people if you wanted good tips. I discovered that southerners are friendlier than northerners (Yankees, we called them) but northerners tip

better. I would work two summers there, driving my grandfather Herschel’s 1964 Plymouth Valiant to and from the complex, and wearing a serape while on duty. My co-workers were a mix of fellow students, a few local teachers picking up extra money during the summer, and South of the Border veterans, mostly middle-aged women who waited tables year-round.

Race relations were still tense in Dillon in the early 1970s, but restaurants had been desegregated, and South of the Border had long served all races. Near the end of one ten-hour shift, the hostess seated a black couple in a section next to mine. The hostess apparently did not realize that the waitress covering that section had clocked out. I should have waited on them, but it was late and I, too, wanted to go home. So I ignored them. They sat about twenty minutes. Finally, the man slapped his menu on the table and the couple got up and left. During their lifetimes they doubtless had been refused service elsewhere because of their race; in all likelihood they assumed this time that it had happened again. Their race had nothing to do with it, but they didn’t know that. I still think about that moment with great regret. I wish I could apologize to them.

I returned to school for my sophomore year and to a new dorm—Winthrop House, my home for the rest of my stay at Harvard. Despite my summer earnings, money was tight. A roommate and I made extra cash by running a small grill in Winthrop’s basement. We tossed burgers and made milkshakes. The grill had a black-and-white TV, usually tuned to a Bruins or Celtics game. Boston, then as now, was a great sports town. Bobby Orr played for the Bruins, Dave Cowens and John Havlicek for the Celtics, and Carl Yastrzemski for the Red Sox. We went to games as often as we could, and for many years I would be a die-hard Sox fan.

When I entered college, I had thought about majoring in math, but it quickly became clear that I had neither the talent nor the preparation to compete with Harvard’s best math students. In truth, my problem was that I was interested in everything. In my mind, I cycled from math to physics to history as possible majors. I had enjoyed the creative writing course I had taken freshman year, as well as a Shakespeare course I took as a sophomore, so I briefly considered becoming an English major.

In the fall of my sophomore year, I made a last-minute decision to take Ec 10, introductory economics, taught by the prominent conservative economist Martin Feldstein. Feldstein lectured to hundreds of students in a huge auditorium, and much of the real teaching took place in small sections led by graduate students or junior faculty. My section leader was Lee Jones, now a professor at Boston University. Jones was interested in the economies of developing countries, and he helped me see economics as an intellectually challenging subject that also might improve the lives of millions of people. I also liked that economics offered a way for me to combine my interests in both math and history. That spring I declared economics as my major.

After two years at Harvard, I had only taken the introductory course in economics. To catch up, I registered for four economics courses in the fall of my junior year. One of them, econometrics and statistical analysis, was taught by a senior professor, Dale Jorgenson, who would become my mentor. He

was brilliant, with a cool temperament paired with a clipped way of speaking. And he was very good to me. He employed me as a research assistant for the next two summers, and he liberally dispensed career advice. Under his tutelage, I learned how to program a computer with punch cards and to build mathematical models of the economy.

At the time, the focus of much of Jorgenson’s work was the economics of energy—an especially important topic during the 1970s, when sharp increases in the price of oil were inflicting both inflation and recession on the U.S. economy. My work with him was the basis of my senior thesis, in which I explored how government energy policies affected the performance of the overall economy. My undergraduate research also led to my first professional publication, written jointly with Jorgenson. We analyzed the effects of government-imposed natural gas price ceilings, concluding that they inhibited the development of new supplies of gas and thus were counterproductive. Jorgenson was invited to testify to Congress on the subject and he took me along.

My senior thesis was named 1975’s best undergraduate economics thesis at Harvard and, despite the rough start my first semester, I graduated summa cum laude and Phi Beta Kappa. I also won a National Science Foundation fellowship, which meant that the NSF would pay my tuition and expenses for the first three years of graduate school, wherever I chose to go. I set my sights on the Massachusetts Institute of Technology, whose PhD program in economics was widely viewed as the best in the world. I worried that Jorgenson would be upset if I chose MIT over Harvard but he said, “You need to go to the best place.”

MIT, THOUGH NOT much more than a mile and a subway stop away, was very different from Harvard. Harvard reveled in its long history and its traditions. As far as I could see, MIT happily dispensed with such sentiments. Science and engineering dominated the culture and the curriculum, and students had little time for softer subjects. (Later, as a graduate teaching assistant, I taught a highly mathematical economics course to MIT undergraduates. When I asked a few students what led them to take the course, they informed me that it satisfied MIT’s undergraduate humanities requirement.) As the joke about the MIT-Harvard divide went: A popular grocery store is situated about halfway between the two schools. A sign in front of the store advertised, “5 Cans of Soup for $1.” A student walks in and asks, “How much for 10 cans?” The clerk replies, “Are you from Harvard and can’t count or from MIT and can’t read?”

MIT’s economics program was housed in the Sloan School of Management, at the far eastern end of the campus, between Kendall Square and the Charles River. Today Kendall Square is filled with tech firms, upscale condos, and gourmet restaurants, but then it was a collection of rundown warehouses and other unimpressive structures. The gustatory scene was a greasy diner.

The existence of a top-notch economics program at an engineering school was a bit of an accident. The critical moment came in 1940, when a young Paul Samuelson—not yet having completed his doctorate—agreed to move to MIT from Harvard. Samuelson, who would go on to win the Nobel Prize

and write the most influential economics textbook in history, had done foundational work as a graduate student in the application of sophisticated mathematical methods to economics. Samuelson’s mathematical approach did not sit well with the old guard at Harvard—some residual anti-Semitism may also have been at play—and he left for MIT. He was followed by another future Nobelist, the growth theorist Robert Solow, in 1949. It was a time when mathematical and statistical methods were gaining greater prominence in economics, and MIT was the perfect place for a blossoming of quantitative approaches. When I arrived there in 1975, mathematical methods were well entrenched, but economics was in ferment over a new set of controversies, between Keynesian and New Classical economics.

Keynesianism, which Samuelson and Solow espoused, is based on the ideas of the famed British economist John Maynard Keynes. Keynes, in his search for a cure for the Great Depression, sought to develop a general explanation of economic booms and busts. His writings were often obscure, and historians of economic thought continue to debate “what Keynes really meant.” But, at least as interpreted by his most influential followers, Keynesian analysis depends importantly on the notion that wages and at least some prices are “sticky”—that is, they do not adjust rapidly enough to always ensure full employment and full utilization of the capital stock (factories and equipment). In Keynesian theory, an unexpected decline in demand—say, a fall in business investment in new equipment or a reduction in government spending—can lead to increased unemployment, as companies, facing lower sales, reduce production and lay off workers.

Keynesians see stretches of unusually high unemployment, like the Great Depression, as a waste of resources that timely government action can ameliorate. In particular, Keynesians see fiscal stimulus (tax cuts or spending increases) and monetary stimulus (lower interest rates) as ways of restoring normal demand for goods and services and, consequently, ensuring full employment of labor and full utilization of the capital stock. They argue that fiscal and monetary policy should be used actively to fight recessions and unemployment.

Spurred by the advocacy of Samuelson, Solow, and other prominent economists, Keynesian ideas gained many adherents in the 1950s and 1960s. President Kennedy gave a Keynesian rationale when he proposed a major tax cut, ultimately passed in 1964 under Lyndon Johnson, that was widely credited with kicking off the economic boom of the 1960s. In 1971, President Nixon declared, “I am now a Keynesian in economics.” However, at the time I entered graduate school, Keynesianism had fallen into some disrepute, at least among academics. In part, the decline in Keynesianism’s popularity in academia reflected the economy’s poor performance in the 1970s, especially the sharp increase in inflation, which was blamed on excessive government spending—for the Vietnam War and for President Johnson’s Great Society programs—and monetary policy that was too easy (interest rates kept too low for too long). Many economists also questioned Keynesianism’s theoretical foundations. Why, for example, are wages and prices sticky, as Keynesian models require, rather than freely adjusting in response to supply and demand pressures? Keynesian models of the time did not have good explanations.

In response to the dissatisfaction, a group of economists led by Robert Lucas of the University of Chicago, Thomas Sargent at the University of Minnesota, and Edward Prescott, also of Minnesota, all also future Nobelists, developed New Classical macroeconomics. Essentially, Lucas and his colleagues revived, in modernized and mathematical forms, Adam Smith’s classical “invisible hand” view of self-adjusting markets—the idea that free markets produce socially desirable outcomes even though each buyer and seller acts purely out of selfish motives. They dropped the Keynesian notion of sticky wages and prices, assuming instead that markets are always in supply-demand balance, except perhaps in the very short run. If that’s the case, then recessions do not reflect a significant waste of resources, as Keynesians believe. Rather, they are periods when the economy is adjusting in a more or less optimal fashion to changes such as a slowdown in productivity growth.

In contrast to Keynesianism, New Classical economics took a dim view of both the need for and the effectiveness of government intervention in the economy. In particular, if wages and prices adjust rapidly to balance supply and demand, then monetary policy has at best only short-lived effects on output and employment.

New Classical economics was highly influential when I was in graduate school, in part because of its methodological innovations. However, many economists, while agreeing that traditional Keynesianism had shortcomings, were uncomfortable with the conclusions of New Classical economics, particularly the implication that monetary policy could have only fleeting effects on employment or output. This implication looked even less plausible during the early 1980s, when the Fed under Chairman Paul Volcker raised interest rates to very high levels in an effort to cool the economy and thus bring down inflation. Although Volcker’s policies conquered inflation, they also produced a deep and sustained recession—a direct contradiction of New Classical economics, which says that should not happen.

Some researchers worked to incorporate the insights and technical advances of the New Classical school into a modernized Keynesianism. At MIT, they included Stanley Fischer, a young professor originally from Northern Rhodesia. Their work in melding New Classical and Keynesian ideas would lead to the so-called New Keynesian synthesis that undergirds the thinking of most mainstream economists today. Critically, New Keynesians, using new models and approaches, rehabilitated the view that sticky wages and prices can result in markets being out of supply-demand balance for a sustained period. They accordingly returned to the original Keynesian characterization of recessions as wasteful and restored roles for fiscal and monetary policies to help keep the economy close to full employment.

As a graduate student and a newcomer to these controversies, I was neither devotedly pro- nor anti-Keynesian. I wanted to see where my own intellectual journey would take me. Over time, I have become convinced that New Keynesian ideas, leavened with insights from other schools of thought, including elements of the New Classical approaches, provide the best framework for practical policymaking.

It was Stan Fischer who, near the end of my first year at MIT, most influenced the course of my studies. After taking his first-year class in macroeconomics and monetary policy, I went to talk to him

about the possibility of focusing on those areas. Stan suggested some books, including A Monetary History of the United States, 1867–1960, by Milton Friedman and Anna Schwartz, published in 1963. Hetold me that the 860-page tome would either excite me or put me to sleep, and that I should draw the correct inference from my reaction.

I found the book fascinating. After having spent my first year in graduate school mostly absorbing mathematical methods, I particularly liked Friedman and Schwartz’s largely historical approach. They looked at U.S. history over almost a century to try to understand how monetary policy affects the economy. In particular, they documented how three episodes of money-supply contraction by the Federal Reserve—one before the 1929 stock market crash and two in the early years of the Depression—had helped make the Depression as terrible as it was. After reading Friedman and Schwartz, I knew what I wanted to do. Throughout my academic career I would focus on macroeconomic and monetary issues.

MY LIFE CHANGED in another big way during those years. I met Anna Friedmann in October 1977, at the start of my third year at MIT, just as I was beginning work on my thesis. She was a senior, majoring in chemistry and minoring in Spanish at Wellesley College, fourteen miles west of MIT. We were set up on a blind date by Mike Smith, a roommate at Harvard and later my best man. Mike got the idea to introduce us from the young woman he was dating at the time, Nicole Ahronee, who lived on Anna’s dorm floor. Nicole and Anna cooked a spaghetti dinner for Mike and me at Wellesley’s center for international students. Dinner was followed by a game of Ping-Pong. As Anna would recall later, “Nicole thought I was very nerdy and she thought Ben was really nerdy, so she thought we should meet.” And, it helped that Anna was as warm and outgoing as I was shy and inward looking.

Anna and I had similar family backgrounds—we were both of Eastern European Jewish descent—but grew up under very different circumstances. Her parents, Otto and Lenka Friedmann, were Holocaust survivors. In 1943, recently married, they were living in Split, Yugoslavia, on the Adriatic Coast of what is now Croatia. Following the German occupation of Yugoslavia and the creation of a pro-Nazi Croatian puppet state, they had been making plans to leave, along with Otto’s parents, his brother, and Lenka’s mother. Someone banged on their front door in the middle of the night. Germans and their Croatian allies were rounding up Jews. They ran out the back door with nothing but the clothes on their back. With the assistance of Serbian partisans, they made their way north, walking over the Alps and into Italy. Otto’s parents, his brother, and Lenka’s mother didn’t make it. They died in the Jasenovac concentration camp, run by the fascist Croatian regime.

Date: 2016-04-22; view: 693