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MR. CLEMONS: For those of you whom I don’t know, I’m Steve Clemons. I run the American Strategy Program at the New America Foundation. My partners, Sherle Schwenninger and Michael Lind, who run together the economic growth program at New America, have been working with Bernard Schwartz for a very long time in a set of forums and serious working papers titled the Bernard Schwartz Economic Symposia.
I also work closely with Leo Hindery, who’s here today, on the Smart Globalization Initiative. I want to thank Leo for – he’s had some tough back surgery and it’s great to see you back. D.C. is shaking, Leo, that you’re back. So I want to really congratulate him for making it down.
Before we move on to the program, I would very quickly like to go around before I introduce Bernard Schwartz. One of the things I really believe in is you guys trying to have a conversation. And even though you’re at very different tables, we’ve tried to strategically place various provocateurs and voices that have been part of what we’re trying to do to respond.
And I want to try to involve you, so I want to very quickly – even though this is large – quickly go through and if you’ll just say name, rank and serial number.
MR. CLEMONS: And this is Bernard. And this is a very cool room. I don’t care how hard the White House tried to steal you all away to hear what he was going to say – what Barack Obama was going to say about Stanley McChrystal. When I know, I’ll let you know.
In any case, Bernard Schwartz, a member of the board of directors of the New America Foundation, has been very focused on – like a laser – on what he thinks are policy gaps right now in our future, directed strategies for the U.S. economy. And I want to invite Bernard Schwartz to say a few words and then we’ll get on to Laura. Bernard?
MR. SCHWARTZ: This is an important event, from our point of view. Infrastructure investment is something that we have been working on for a long time. I congratulate and welcome the New America Foundation people who have so many good resources here today, but all of you – this is a handpicked audience. This was not an open lunch. You couldn’t come here just because you wanted to come here.
The idea is that the country is in sore, sore condition in terms of infrastructure. It has been building up for a long period of time. Prior to 1974 or thereabouts, the United States spent 2 percent, or 3 percent of its GDP on infrastructure investment. And enormously wealthy, important programs came out of that and kept us a progressive, growing society.
Since about 1974 or ’75, that 3 percent of GDP has been reduced, just naturally, to 2 percent. And we’ve been running at 2 percent since that period of time. And that 1 percent deficiency is seen in water projects around the world, air traffic control – around the United States – air traffic control deficiencies, deficiencies in everything that we do. You take an airplane from Beijing to New York City and you think, when you get to New York City, you’re in a third world country. Only one issue of many, many issues.
What is missing in the last several years is a national coordinator, a facilitator that puts together a program that allows infrastructure to begin to be revived in this country. Why is it necessary now? It’s necessary – when Leo Hindery’s not in the room, I say 15 million people who are unemployed. He will insist that the number is much higher.
The fact is, the unemployment in this country is getting to be a national and permanent scandal. Not only that, but the amount of available safety net, in terms of benefits, is being exhausted. Every week, people go off the rolls because they’ve been on there and can’t find a job. So the job situation in this country is a very important one.
It is a non-partisan one. The fact of the matter is that when you get to main street – out of Washington, out of Wall Street – when you get to main street, the issue is house foreclosure; the issue is not finding a job; not being able to send your kids to college; not being able to do all the things that we in America, the richest country in the world, should do, can do and, I hope, will do.
I’m hopeful everybody in this room believes it is a good idea to have an infrastructure program, a program that will immediately – and a multi-year program. The problem with the administration is it will say and it believes that it is in favor of – one of its prime objectives is infrastructure. But they won’t go beyond one year to make that happen. And that’s why this is necessary. We need a multi-year program.
We need a multi-year program that will revive and create wealth in the country, will allow people to go to work, increase our tax rolls, our rent rolls, everything. And what better time to do that wonderfully because interest rates are so low now? This is the time we should be building up things. This is the time we should be making investments. We have to recognize that every dollar spent is not equal to every other dollar, that an operating budget which has to be paid – should be paid on an annual basis – is different from a capital investment. What we’re talking about are investment dollars.
It doesn’t mean that its not – the administration is not going to look at all the other things that have been so very important. It will mean that, as it did with the health bill, it will put its very, very influential shoulder to a very important program. I’m hopeful today we’ll discuss ways of doing that. Thank you for being here. I appreciate you all.
MR. CLEMONS: Thank you very much, Bernard. I want to welcome, as we’re doing this, Congressman Brian Baird. Brian, it’s good to be with you. I’ll leave it to you to figure out who everyone else is later. Why don’t we have you join us over here? Ben will take care of getting you seated somewhere cool. But don’t put him at his own table, alone. And I also want to welcome Jake Colvin of the National Foreign Trade Council, who just snuck in.
So to get things rolling, we’ve asked for some forecasts, some provocations, some thinking about what is happening and coming in the U.S. economy. Laura Tyson has been a longtime board member of the New America Foundation, a very good friend of ours. She occasionally reads the Washington Note, which makes me very happy. And her terrific husband has also gotten into blogging as well.
Laura is, of course, the S. K. and Angela Chan Chair in Global Management at the Haas School of Business at UC Berkeley. She’s been an economic advisor to President Obama. What kind of economic advisor, you know, may morph into other possibilities, but I don’t want to address those any further than that. She was chairman of the National Economic Council under the Clinton administration.
And when I first became, sort of, addicted to Laura Tyson’s writing and work was when she was working with John Zysman, Mark Boris, many other people at the famous BRIE, the Berkeley Roundtable on International Economy, and wrote some of the most powerful things about what an economy needed to do to, sort of, reinvent itself. There was an awful lot of thinking about industrial policy and infrastructure. She many not want me reminding everyone of that, but it was terrific work.
And I think Laura – and one time, just to say one other thing that I haven’t quite written – I’ve been flirting with this piece for a long time. I’m convinced that the challenge facing the United States today exists mostly within the Democratic Party circles among economic thinkers. And I would love to see some of our friends in the Republican Party – I’m an independent – get into this, but fundamentally, there seems to be a battle that’s somehow a battle between Rubinomics and Tysonomics. And I think Tysonomics is making a comeback. But without further ado, please help welcome Laura Tyson. (Applause.)
MS. TYSON: Steve has been threatening to write such an article for years and I’m waiting for him to tell me what Tysonomics is. Here, Steve, do you – is this yours?
MR. CLEMONS: I’ve got it.
MS. TYSON: Right. So anyway, I’m really delighted to be here. I have been involved with the New America Foundation for a long time, not nearly as actively as I would like. If I lived here, I would be more actively involved. But I do follow its work and I think it’s been doing excellent work on the economy, the economic recovery. I read a very good piece recently on the pitfalls or the weaknesses of the current recovery. I’ve read some very good thinking on ways to finance infrastructure spending.
I am a member of the President’s Economic Recovery Advisory Board and one of the things we did do – it’s almost a year ago that we worked on this intensively for about three months – and actually, it was a group within the PERAB that has the name jobs subgroup task force, or something like that. And we decided as a group that one of the things we should focus on was infrastructure and infrastructure financing. So we actually came up with a proposal that was an infrastructure bank proposal.
And I think one of the things that everyone should be discussing today is, if we all agree that we need to figure out a way to have a multi-year, significant investment in infrastructure, how we would organize that and how we would finance that. And there are lots of different ideas and all of them have some things to recommend them, but that is a major issue. I mean, to go from the size of the investment needed and the potential jobs that would result to how you finance it is actually a very important, major step.
In any event, I think I was invited here today partly because of my association with New America and partly because I did lead the effort on the PERAB with the national infrastructure bank idea. And by the way, I will say in passing: that idea is up on the PERAB Web site. I wrote an op-ed piece with a couple of PERAB members about it.
What was really interesting was that was an area where the entire PERAB supported the idea, whether it was academics, people from very difficult business communities, people from very different – representing labor – different perspectives coming together. So I think it’s an idea which I will, sort of, talk about in passing, but you can find the proposal on the Web site.
So what I said to Steve today, what I might do to start off the conversation – I mean, I’m not here to make a proposal. That was the proposal that I worked on. I thought I could help the discussion by framing it in terms of what’s happening in the economy and the challenges that confront policymakers.
And I think we should really just start with the understanding that the challenges confronting policymakers right now are extremely tough. They are daunting challenges because the economy has a significant amount of unutilized capacity. There are things that are happening in the world that have, in the last few weeks, I would say, made the downside risk to a continued strong recovery in the United States greater. The downside risks have become greater. All forecasters have said that.
And at the same time, we need to focus – and the world is focusing on, us and on itself – about these long-run, out-year deficit issues. We can’t address one set of problems without thinking about the other set. And then there’s the issue of timing because the challenges actually kind of – when do you exit from or reduce the support for the economy that is stimulus support – whether it’s monetary stimulus or fiscal stimulus – and transition to a focus on longer-run deficit reduction. When do you do that? And how much do you do in any given year in an uncertain economic environment?
So I just want to start with the view that this is a very daunting set of challenges and unfortunately, economists cannot give policymakers great precision about what is going to happen to the U.S. economy. Most forecasters now agree that the U.S. economy will continue to recover. Most of them have discounted, now, the possibility of a double-dip recession.
Most of them agree that the downside risks to the recovery have gotten more serious in the past few weeks, really because of the developments in Europe. The predictions of growth for the next couple years are somewhere in the range of three to, if you are at the high end, 3.7 percent of growth. Some people call those growth rates, certainly if you’re around three, modest. If you’ve got around 3.7, you might call it a little strong.
Macroeconomic Advisers, a very good forecasting organization – really has done very well over the years – is one of the high-end forecasters. They’re saying 3.7 percent for the next couple years. They would call that robust. But even they, even they with their robust numbers, say that the unemployment rate in 2010 will basically average around 9.5 and in 2011 will fall to 8.2. Even they say, you know, with growth of 3.7 for two years we have a significant unemployment problem that doesn’t go away.
And they also say something that all the other forecasters agree with, that inflation for the foreseeable future is very subdued. Everybody uses the word subdued, subdued inflation. So regardless of where the growth forecasts are, what’s interesting about them is that they all came to relatively the same conclusion about unemployment: very gradual decline in the unemployment rate, very significant amounts over time.
Bernanke, in his recent appearance before Congress, said the unemployment rate will decline only gradually. He said inflation is likely to remain subdued. He was actually reflecting the FOMC position on this is not very different from any of the other forecasters. So that’s sort of the setting in terms of thinking about policy for the next couple years.
If you think about unemployment for a longer period of time – now, you mentioned 15 million jobs. Okay, so one estimate I saw recently, which I thought was based on a pretty good study, was an estimate of the jobs gap. The jobs gap was defined as the number of jobs it would take to return to the level of employment before the onset of the great recession and that would also absorb increases in the labor force.
So the labor force is growing somewhere between 125,000 and 144,000 a month, okay? So you’ve got to – the jobs gap is not just the employment we’ve lost, but any gap to actually absorbing the new labor supply. If you take the 11 month – the 11 million, not the 15 million. It gets obviously much worse if you do 11.
So take a jobs gap measure of 11 million. You would need net – if you had net job growth of 200,000 a month, net job growth, it would take 12 years to close, to get that 11 million. Okay, with net job growth of 350,000 a month, it’ll take four years. What’ve we got right now? Well, for the last three months of this year, private sector jobs have been growing at 140,000 a month.
Okay, so we’re not quite there yet, even for a four-year transition to eliminate the jobs gap. And that’s why if you look at these forecasts, including the one of the OMB or the one of the CBO, you have to go out to 2015 before you actually see unemployment rates that are in the 5-to-6-percent range. Okay? You have to basically go our five years to get there. So we do have a serious employment problem and everyone recognizes that, I think. The issue, of course, then, is what to do about it.
Now, in thinking about that, I think it’s important to recognize that a lot of people are saying now – and actually, the Fed’s said this as well – that the economy is in a place where we need to transition from dependence on stimulus to dependence on strong final demand of the private sector.
Now, I underscore final demand because the two things that have really kept the U.S. economy growing quickly in the first part of 2010 were stimulus and inventory cycle. And the inventory accumulation or adjustment or correction to the big decline in 2009 is temporary. It’s a temporary phenomenon.
So we’ve got to look to private final demand. If the economy is going to go, we’re trying to find a transition path to these new forms of – these new motors, these new engines. Okay, well, what is total final demand? I mean, where is it, what is it? It’s consumption, investment – private-sector investment – and exports. Leaving government aside for a minute, it’s private-sector final demand, consumption, exports and business investment.
And I think one can worry about all of these components in final demand. Now, I’ll start with consumption. Consumption, actually, in the first part of this year, has actually been growing rather rapidly. It’s been growing at about 3.5 percent. That is not consistent with household income growth. It’s now consistent with the need for households to deleverage or to increase their savings, to restore their lost wealth.
That is a very high rate relative to what one might predict consumption growth to be. And some of that growth has probably been pent-up demand and response to temporary tax credits for autos and for housing. And housing, you know, buying houses with a tax credit can also encourage you to buy things for your house. So those things are going to disappear. The pent-up demand – people may buy things that they put off, postponed at the depths of the recession, but now that’s over.
If you have a continued unemployment problem of the magnitude we’ve talked about and slow growth in household consumption – excuse me, household income – and the need to restore balance sheets, then it’s really hard to predict anything but a slowdown in consumption growth from the 3.5 percent that we saw at the beginning, in the first part of this year. Okay, so that motor is likely to slow, not speed up.
And for those people who pay attention to the famous rebalancing debate – the need for the U.S. to rebalance growth away from consumption to investment and exports – the numbers of this year are actually pretty – well, they indicate we haven’t done rebalancing as of yet because consumption actually was 71 percent of the economy’s spending in the first quarter. And a lot of that was because there was a temporary decline in the private savings rate after it increased through 2009. So there’s no sign of rebalancing there yet.
All right, let me turn to exports for a minute. This is why the downside risks to the forecast have all become more severe. The president adopted a goal of doubling exports for the U.S. economy over the next five years. He’s put in place some new policies and new organizational structures to do that. The U.S. was looking forward to the opportunity to sell into rapidly growing emerging markets, but also to sell into Europe. And it is important to keep in mind that Europe is a major part of the U.S. export market. Europe accounts for 21 percent of U.S. exports.
Well, so the slowdown in Europe is not good news for U.S. exports. The very significant decline in the value of the euro is not good news for U.S. exports – neither to Europe nor to any other place in the world because European firms compete with American firms in many of the product lines that our exports are concentrated in.
So if the export as a source of dynamism, growth for the U.S. economy – private final demand growth – it’s hard to be very optimistic about that. And the truth is, net exports in the first part of this year – exports minus imports – have made a negative contribution to growth, not a positive contribution to growth.
So that leaves capital spending. Now, here there actually is some real optimism. There’s some good news in capital spending. I think we should note that. Capital spending by business is up 19 percent in the fourth quarter of 2009, 13 percent in the first quarter of 2010. There are lots of things to feed this.
One is that the U.S. business sector, as a whole, was actually investing – the investment rate fell below the depreciation rate at the depths of the recession, so actually, the capital stock was declining. Companies want to at least rebuild their capital stock. They may not want to expand it that much, but they want to rebuild it.
Some companies want to expand it. Industrial production, manufacturing – investment in manufacturing in the United States has been growing rapidly because there’s been a big growth in emerging-market demand for U.S. manufactured goods. So you’ve got some increase in investment coming from growing demand, some increase in investment coming from replacement. Low cost of capital has already been mentioned.
You’ve got, certainly for the large companies of the United States, very healthy balance sheets – extremely healthy balance sheets. You have very strong profit performance, even for small- and medium-sized firms now. What you’d say on that is some of the capital constraints are dissipating. So overall, you’d have to say that investment has been strong and is likely to continue to be strong. And that is really what the forecasts show.
Housing, as an area of growth – well, I think that we’ve seen that applications for building permits, groundbreakings for new homes – both of those have plunged after the tax break expired. We have a 20-month supply of empty residential housing units. We have housing prices showing signs of falling again. And we have a lot of unsold vacant commercial real estate. So I think, whether you use residential real estate or commercial real estate, it is hard to see those as drivers of growth.
And that is what, now, this transition, that – the hoped-for transition from government stimulus, through monetary and fiscal policy, through stronger private final demand – that is what we face. That is what we face. It is hard to see the stronger private final demand, except in one place, and that is investment.
I saw, recently, an important measure that I don’t think we use enough in the U.S., but it’s becoming a bit more popular. Martin Wolf uses it a lot in his analysis of what’s going on. Every time one puts up deficit numbers for the government, they look very disturbing; they are very disturbing. On the other hand, one should also look at what’s happening to what is called the private-sector financial surplus, which is the difference between private-sector income – the income of the economy that’s going to the private sector and private-sector spending.
Another way you could say this is, it’s the difference between private-sector investment and private-sector saving. This measure, which is called the private financial balance, has actually swung from a negative 3.7 percent of GDP in 2006 – the private sector was spending a lot more than its income in 2006 – to a surplus of 6.8 percent in the first quarter of 2010. That’s a measure of the austerity that the private sector itself is imposing on itself. It has pulled back dramatically on spending, relative to income. The private sector wants to save more; it wants to spend less. This is absolutely what happens in other great financial crises, similar to the one we have just gone through.
As a matter of fact, if you go to the Rogoff-Reinhart study of financial crises, they say that the private-sector balance usually increases – swings – by 12 percentage points. That’s exactly what has happened in the United States. It’s almost to a number, if you sort of do the negative to the positive – 12 percent. The U.S. has, now, a private-sector financial balance which is 5 percentage points above its long-term trend.
So this is just another way of saying, how do we think that the private-sector final demand is going to grow? Where is the sign that the private sector wants to actually come forward with a lot of additional spending – spend closer to its income, which would create room for the public sector to reduce its deficit? So I sort of say, now, when I see these deficit numbers – I say you’ve got to put up the private financial surplus numbers, too, and then sort of see how they’re doing.
Because to a certain extent, what’s happened is that the government has come in, essentially, to provide the demand that the private sector is taking out – has taken out. Let me say one other thing, here, that I think is relevant to thinking about the need, therefore, for a form of investment – we call it infrastructure investment. We can think of it as public investment. We can think of it as public-private investment because there are lots of funding ideas for infrastructure which involve public-private partnerships.
So what we’re saying is, there’s a form of spending out there – infrastructure – which we actually want to really give some boost to, because right now, the private sector is in a surplus position and we have to worry about the long-term growth of the economy. But I want to underscore one other point, here, and that is about state and local governments, because state and local governments do a lot of the infrastructure spending in the United States, as you know. And they do face a major fiscal crisis, which will actually make the second half of this year and next year more difficult for the U.S. economy.
So if you’re looking for engines of growth in the U.S. economy, unfortunately, the state fiscal contraction that is likely this year, the estimates are, will cut about a percentage point off of GDP growth – makes the private sector have to go even faster, if you’re going to keep the growth rate up. One percentage point off of GDP growth means about – CEA uses and estimate, 1 percentage point off of growth, 1 million jobs.
So look to the state sector – state and local governments this year, if that prediction is correct, to actually be taking out 900,000 jobs, taking out a percentage point of GDP. Why? Because they have to, because they have budget constraints which they have to adhere to, and because 80 percent of the money in the federal stimulus package for state and local governments is estimated to be spent out by the end of June – in a couple weeks. So maybe that’s not quite right, but it’s going to be spent out in the next few weeks and we’re going to see more contraction.
Sadly, I just saw a reference to a paper – I have not read the paper, but I’m going to go read it; I’ll give it to you – NBER paper, says after adjusting for cuts in state activities, the aggregate fiscal stimulus in the U.S. economy in 2009 was close to zero. You see, the stimulus money, actually – if you just look at the federal effect – don’t think about what the states are doing – CEA estimate is that the stimulus raised 2010 Q1 output by 2.5 to 2.9 percent. That was positive.
The CEA estimate is that ARRA raised employment by 2.2 to 2.8 million in quarter one of 2010. CBO numbers show similar ranges. So the experts agree that the stimulus, at the federal level by itself, did have significant effects on output and employment. The problem is that, as the federal government was putting money in, stimulating the economy, the states were essentially having to contract. So it doesn’t say that the stimulus didn’t work – it did work. It does say that it was offset to some significant extent by the states.
So I hope what I’ve done here is kind of create a sense of both the challenges that confront policymakers, but also the concerns about moving to a path, which we must move to, of credible fiscal consolidation, using a European word. We call it deficit reduction or debt stabilization; Europeans call it fiscal consolidation. We must do that. But if we do it too rapidly or do it in the wrong way, we will actually prolong the period of excess – of unutilized capacity, prolong the period of unemployment and, really, prolong the losses to the economy because we’re not operating anywhere near our potential.
And then let me get, finally, to the issue of potential, because not only are we under our potential now, significantly, but again, the history of financial crises suggests that when economies recover, for a long time, their growth rate doesn’t recover to some long-run trend. And that may be, in part, because of investment that did not occur during the recession – the investment in human capital, investment in physical capital, investment in infrastructure just didn’t occur so the future growth rate is negatively affected.
It may be because after a financial crisis and a great recession, there’s a huge amount of regulatory uncertainty. Nobody knows what’s happening, so they choose not to do as much. There’s more risk aversion. People are risk averse. They don’t want to actually take the kind of risks they took before they learned how badly they could be burned. So for a variety of reasons, the secular growth rate tends to slow down. So here, we’ve got two negatives going on – below potential, and then the potential as we come out slower.
That’s why the administration has correctly said, again and again, that as we bring the long-run deficit down, we need to invest adequately in those parts of – those things which are investments by the government, in things such as science, higher education, education in general, and of course, infrastructure.
So certainly, the administration, in its budget, in its policy pronouncements, in its thinking, recognizes that, as we move onto this path of fiscal consolidation, not only is the timing important, but also, we have to be extremely mindful of not cutting those things which are investments, while the pressure, politically, is to just cut as much of everything as possible.
So that leads us to infrastructure, because if a group like this can coalesce around a strong proposal for a multi-year infrastructure-funding mechanism, reflecting the fact that even before the great recession – as Bernie pointed out, you didn’t have to have the great recession to know that the U.S. had a deficit in infrastructure investment. We had one. It was getting worse over time.
You know, even the Congressional Budget Office, a few years ago, under Peter Orszag’s leadership, did an analysis. And they said, you know, we’re probably, in transportation spending alone, each year, probably spending, at a minimum, 75 percent less than we should be spending, on economically justifiable terms.
So when you come up – look at all the estimates – and I know Bernie’s number is, you know, a trillion dollars over 10 years – those numbers come from a lot of thinking about what the size of the gap actually is. Because the gap, as I said, didn’t develop during the recession; it has been with us and mounting over time.
So why not take the opportunity to help the economy go through this very complicated transition to the future through a major infrastructure investment strategy? And I think that’s what we’re all here to discuss, and so I hope by the end of lunch, everybody has the right idea and we move forward with it. Thank you.
MR. CLEMONS: Great. Thank you so much, Laura. We really appreciate you scaling that out for us.
I want to just take a moment and welcome Rep. Peter Welch. It’s terrific to have you with us here today, as we mentioned. And also Ryan Lizza. Ryan has joined us as well. We all introduced ourselves earlier so you guys will just have to work on it after dessert.
Laura Tyson being here today really did change the gravity of some people’s schedules. There are people who have votes and people coming, some going. We’re going to just keep our discussion going until 2 o’clock. Laura is leaving at 1:45 but we’ve got a lot on the table.
We have now asked a few people to offer provocations, and they’re supposed to be three to five minutes, both reactions and thoughts of their own, and then we’re going to, after those, engage in a broader discussion.
This is all on the record. I want to warn people it is on the record. We are taping it. And Andrew Lebovich and Sam Sherradon are looking for the zingers that we can use to sort of share more broadly outside this room, and I think Laura just helped put an infrastructure plan on the table that we’ll share as widely as we can.
But with that, let me ask for Jamie Galbraith. Where’s Jamie? There are microphones at the table. Just grab the mike, speak loudly into it and right into it. Put it right up to your – yeah. And why doesn’t somebody brave at your table just rip these things out of their stands? The stands are stupid. So just put them down on the table. Jamie?
JAMES GALBRAITH: Okay, well, first of all I would like to thank Laura for a very clear and comprehensive presentation. Steve, in his opening remarks, made some references to the deep origins of things. He didn’t go quite deeply enough, though, because he did not mention that in the summer of 1980 I hired John Zysman and Steve Cohen – (laughter) – to do a study for the Joint Economic Committee on the role of credit institutions in Europe, and particularly in France.
And what was where the partnership that led to the Berkeley Roundtable for International Economics and in some respects to the launching of the career of Laura Tyson was forged. There was one other person whose career was launched by that particular study and that was a fellow named Richard Medley, who I believe is known to at least one person in the audience.
I’ll come back to the actual relevance of that because I think it is actually quite pertinent to our conversation, but I think it would be helpful for the audience if I introduce just one set of thoughts that Laura’s presentation in some respects danced around but that seemed to me to be quite close to the heart of the matter, and that’s the condition of the system of private credit, the condition of the banking system.
Why is it that we expect private consumption spending to be so feeble in the period ahead? One major reason is that the balance sheets of the banks still are not restored, that they are not as healthy as they appear to be, and a very closely related reason to that is that the American middle class has lost a very large part of its financial wealth through the collapse in the value of its housing and therefore its capacity to borrow.
And so, one of the great mechanisms which has kept the American economy growing through several business cycles – spending on housing and the use of home equity to support private consumption spending – just isn’t going to be there for the foreseeable future. We are going to see people reacting to the collapse of their balance sheets by attempting to save more, by attempting to pay down their debts and, to a very large extent also by not paying their debts, by repudiating them, walking away from their mortgages in order to free up cash flow.
But that then again makes it harder, as homeowners become renters, for people to imagine going back into the same kind of debt finance spending that we had for the last – basically it’s a foundation of economic growth for the last 30 years.
That has, I think, every implication – and this gets back to the public/private balance sheet argument that Laura was making. It is fundamentally the reason why public debt has grown as much as it has and why public debt is likely to remain very high no matter what happens. And I would argue that unless that and until that problem is fixed, there is no solution to the public debt issue.
Basically, there is a choice. One can have a low rate of growth and a high rate of unemployment, in which case the government will run deficits because it will not be collecting taxes and it will be paying unemployment insurance and people will be sitting at home doing nothing.
Over the entire world, the IMF has found that about half of the rise in public deficits in this crisis is due to collapse in tax revenues. It’s not because the governments have been spending more; it’s because the private economies have collapsed. And the other possibility on the public side is that the government spending will be used for something that actually contributes to the welfare of the population, the prosperity and competitiveness of the country going forward.
So, if one does not like to have this new spending directly on the public balance sheet, what’s the alternative? The answer is to create an appropriate set of institutions which are public/private in character and which finance investment activity on a large scale for desirable public services, for the infrastructure investments that need to deal with our energy security problems, to deal with our environmental questions, to deal with climate change.
In particular, it seems to me very, very useful to think about the future of the Gulf Coast, a major environmental disaster area, not just because of what’s happening there now but because of long-term deterioration and the possibility that we would want to think specifically about a modern equivalent of the Tennessee Valley Authority for the reconstruction of that entire region – in other words, institutions which can carry out this work, as Bernard has said, over a long period of time, through financing mechanisms which we just set in motion and let work.
What’s the relevance of the stuff that we’re doing in 1980 to this? Well, in fact, these institutions in Europe gave us modern Europe, gave us the post-war reconstruction of Europe. They were public institutions that channeled savings into specific development areas, whether it was agriculture, whether it was the hotel industry, whether it was transportation, whether it was industrial and engineering enterprises.
France had a whole series of these. They were largely dismantled in the 1980s but their construction in fact is what gave us the deep infrastructure richness of the modern European continent and the state of development that it was able to acquire in the post-war period.
So that’s what we should be doing. And, you know, we think about the public and private balances. This is an alternative to the very hard task and long-term task of reconstructing the balance sheets of private households.
MR. CLEMONS: Thank you, Jamie. Let’s go to Joseph Gagnon, who is a senior fellow at the Peterson Institute, and of course we knew him in his previous life at the Federal Reserve Board. Joseph, do you want to – yeah, you’ve got a mike there.
JOSEPH GAGNON: Thanks, Steve. I have some notes which are not in the little packet you have but I’ll send you an email copy so anybody can get them.
I just wanted to make one point, which is that I think we should not be giving the Federal Reserve a pass in all this. I think that they can and should contribute. And I don’t know – for those of you who might have read this – David Leonhardt had a great article today in the New York Times, which I urge you all the read.
So, as you may know, the Federal Reserve has two objectives by law, by statute, which are maximizing employment and maintaining price stability. I think the evidence is that they are actually failing on both counts and need to do more. As Laura –
MR. CLEMONS: Are you planning to stay at the Peterson Institute for a while? (Laughter.) I’m just joking.
MR. GAGNON: As Laura Tyson just said, forecasters are predicting unemployment is going to be above its long-run trend for six to seven years. The Fed’s own forecast, which only goes out three years, says it’s not going to come anywhere close to where the Fed says it will be going in the next three years.
This is just not satisfactory, not acceptable. We normally think that monetary policy – there’s obviously lags in monetary policy so they can’t fix things tomorrow but they should be aiming at their objectives over two years, not six or seven years but two years. So that would argue for further momentary ease now.
But the other part of the story, which has gotten much less attention – Laura talked about subdued inflation. Well, inflation is not subdued actually right now. We are flirting with dangerous deflation.
The Federal Reserve obviously cares about overall headline inflation, but really, for its operational guidance over the medium term it focuses on core inflation and rightly so because the volatile food and energy prices really are not much under their control and they tend to bounce back. When they go up they come down, and vice versa.
So, you look at core inflation, which is 85 percent of total inflation. That, in the past 12 months, is 1 percent. Now, the Fed has said that stable prices is an inflation rate of 2 percent, and I think that we might think of a range of 1 to 3, which would be sort of a reasonable range to aim for.
I won’t go into the reasons why it shouldn’t be zero, but it should be a small positive number and most economists agree. The Fed says two; I say fine. The range around that that’s reasonable is one to three. If you’re in that range you should probably focus more on employment. If you get outside that range, then you need to really focus on inflation because ultimately inflation is the main thing the Fed can affect.
Well, we are now at 1, but, interestingly, in the past six months we are 0.4, which means that in the next six months we don’t get a very surprising jump in inflation that no one is predicting, we are going to be below this comfort range, and this says that the Fed should be easing policy now.
So, how can they ease? They’re already at zero on the Fed funds rate. Well, as they did last year, they could renew their program of buying home mortgages. That would help further support the struggling housing market. The housing market is struggling now, again, and they could step in and help out there, although I’m not sure I would go quite a large as they did last year but something to help would be useful.
But perhaps they should focus more on bank and Treasury yields, which affect the borrowing costs for the whole economy. The three-year Treasury yield now is about one-and-a-quarter percent. I think they should target 0.25 percent. That’s a full percentage-point reduction in Treasury yields up to three years, which would also lower probably a whole broader range of Treasury yields. It would lower everyone’s borrowing costs.
This would directly reduce the federal deficit immediate, reduce the Treasury’s borrowing costs. It would reduce monthly mortgage payments, give people more money to save and spend. This would reduce private borrowing costs, the ability of businesses to borrow and spend. This would also help out on financing infrastructure.
Now, I don’t think – I would not recommend that Congress deliberately mandate that the Fed support any kind of infrastructure program. I think that would not be appropriate. The Fed needs to be flexible. But this action would help such a program, help it fund itself, help the Treasury help to fund itself.
It would also push down the dollar, which would be a good thing right now, and spur exports. So, my calculations suggest that if they did this, it would accelerate the reduction of unemployment so we would be back below 6 percent by the end of 2012, which would not be great but would be probably about as much as we could expect monetary policy to do.
MR. CLEMONS: Joe, thank you very much. Thanks so much. Now we would like to go to Leo Hindery.
LEO HINDERY: I’m going to do this much more quickly than the others and more in the way of sort of raising some issues, Steve.
It struck me, Laura, that one of the issues we have to address in this form and others is how can something that is alleged to be so unanimously believed in by this administration yet find no political will? And that disconnect needs to be explained to a lot of people.
The other thing that I must say is that I’ve never heard a bleaker private final demand scenario than the one you actually gave us that is in such incredible conflict with the public appraisals and estimates and forecasts out there. I am such a negative naysayer on where we actually are.
And I look at this infrastructure issue in so many ways, and Bernard’s foundation of this luncheon has only sort of tickled early parts of it. We need to talk a lot more about the global competitiveness issues of infrastructure. We’re incredibly mindful of this crushing trade deficit yet we ignore the implications of an infrastructure program on bringing our global competitiveness back and arguably reducing some of that deficit.
The job creation aspects of all of this just overwhelm me. If we used – I used the entire real unemployment numbers, as many of you know. If we used just half of them, for the first time since 1947 we have one woman or man being uncounted for every woman or man being officially uncounted. These numbers of 9.5 going to 8.2, or, as this gentleman suggested, 6.5 with some rosy scenario, it’s just not happening.
We have 15 million women and men in various categories of under and unemployment that are not officially counted. It’s a daunting, daunting figure. And the only way that I see out of it is to put emphasis on this infrastructure initiative. It is the clearest – short of youth programs, it’s the clearest pathway to millions of Americans who are currently unemployed being employed in every one of these four categories.
So I just can’t understand, Laura, again, why this administration can let us all believe that it believes in infrastructure and we see nothing that would suggest it actually does, or an action plan. It’s the most unanimously held un-unanimous issue I’ve ever encountered.
MR. CLEMONS: Leo, thank you very much. Now I’d like to go to Ron Blackwell from the AFL.
RON BLACKWELL: Thank you. Full disclosure requires me to say that my boss, Rich Trumka at the AFL-CIO serves with Laura on the PERAB as well as on the jobs component, and we worked with you closely on this infrastructure project.
And my history with Laura goes back to – she may not remember this – to the Mario Cuomo’s Council on Competitiveness in 1988. That’s a significant association, as I want to make clear in my remark because I think – to Leo’s question, I think it makes a world of difference whether one sees this crisis that we’re in as simply a bump in the road – particularly a very bad bump in the road that we have to somehow bridge to get over to the other side, or whether we see this as a massive collapse of asset bubbles and the collapse of a growth strategy that we’ve been riding for 15 years.
And I was very impressed by Laura’s successor at the Council of Economic Advisors who entitled the first chapter of the president’s council – report of the president that our task is not just to recover; it’s to recover, rebalance and rebuild. And I think this exactly the right formula. We’re not going back to business as usual. We don’t want to go back to business as usual.
And Jamie points out the consumer is not going to drive us out of this hole. And I don’t believe – I think Laura is a little optimistic about the private investment. I think you would agree most of that investment is in machinery and equipment, almost nothing in structures.
But you’re right to focus on final demand and the private sector is our gauge. Either that’s happening or it’s not. The question is, how is it going to happen? And here I believe there is no solution except to have public investment-led recovery, which connects our short-run goal of putting people back to work with our long-run goal of rebuilding the country’s infrastructure such that the country can pull its weight in the world.
We have some of the most competitive companies in the world but the country is not competitive. In normal times we’re borrowing 5 to 6 percent of our GDP to pay for the things we consume that we no longer produce. Unless we can produce more of the value equivalent of what we consume, we’ll be forced one way or another to consume less. And I think for most Americans that’s simply not acceptable.
So, public investment-led growth would put people to work immediately. It would build productive assets to expand growth that’s going to be challenged by the crisis itself. And, by producing productive assets, it’s helping pay for the money we’re going to have to borrow in order to be able to make this thing work.
But, finally, I want to add a point of urgency about this. The G-20 labor ministers are going to report to the G-20 heads of state this weekend. The number that – this crisis will have caused a net rise in unemployment worldwide of 34 million, and but for the efforts that governments have taken to this point, that would have been an increase of 55 million people, bringing the total level of global unemployment to 212 million.
That is the highest number recorded in history. And, as my colleague Karen Nussbaum, who leads our organizing effort and spends – her army of organizers spend their time on the doorsteps of workers all over the country. Workers are in pain. They’re losing their homes, their savings, their jobs; an enormous amount of anxiety, an enormous amount of anger, an enormous amount of confusion.
And we simply don’t have time to wait for this multiyear recovery of jobs. It’s simply unacceptable economically and socially but it’s politically extremely dangerous. We don’t have the time. And what our people are seeing is that while the governments were scrambling to save these banks and these bankers and their CEOs, who are all back in business, there’s no urgency behind creating jobs. There is no urgency about keeping people in their homes. There is urgency about the fact that people are postponing their retirement.
This is a very, very serious and dangerous situation. I’ve never seen anything like it in my life. But I think the answer in front of us is if we don’t see this as simply a bump in the road that a temporary stimulus is going to get us over but we need a multiyear recovery based on public investment to get us out of this recovery, help us rebalance our economy and rebuild our capacity to pull our weight in the world. That’s the way forward, and something like what’s being proposed in this group is exactly what we need.
MR. CLEMONS: Thanks, Ron. I’m going to go to Sherle Schwenninger now. And what we’re going to do after this – after this provocation from Sherle, I’ve invited Mike Lind to weight in whenever he wants. He’s one of our colleagues. We’re going to open this up. I promised Larry Mishel to be the first one in line after this segment. And we’ve love to hear from you and then we’ll just basically go – and Wes Clark will be next. Yes?
SHERLE SCHWENNINGER: I, too, am a veteran of the Cuomo Commission – the second report, however, not the first – and wrote several chapters. Laura was one of the commissioners during that period. And I think actually we’re on to some very important issues that got lost unfortunately.
I think Laura hit on what has been the key criteria that a lot of economic analysts have been focused on over the past several months and that is at what point is there going to be a handoff from government support to private final sector demand?
And I think she also has indicated or suggested – although I don’t think perhaps a conclusion was quite as clear – is that an immediate handoff is on the horizon and that we’re going to struggle for a number of reasons, in part because of the second housing downturn.
So I think we now need to begin to reformulate the handoff question, and I think the handoff is not from government support to private final sector demand; it is from government support for incomes and consumption to government and public/private partnerships that encourage investment in job creation more directly with a major multiyear infrastructure program at its center.
Now, why do we need this interim handoff? Well, we need this interim handoff because of the connection between wages, incomes, jobs, housing and private sector demand. And what the administration I think missed initially in terms of putting so much effort into short-term support for – and short term bursts of consumption is that if you don’t have job creation coming in that tightens labor markets, you’re not going to have the income to support private sector demand.
And so, they took a very lackadaisical approach, an indirect approach to job creation. I think that has to change now because that handoff isn’t going to take place. And I think what Jamie and Laura and Ron and others, and what Joe put out is exactly right, and I think what Bernard has stated and outlined in his paper, and which I think he has further details about, absolutely suggests the nature of the handoff.
Our framing is that there is a different kind of handoff. It’s a handoff that doesn’t formulate it, either in the way Wall Street or the administration is currently, but it’s a handoff that is needed to get us out of a multiyear period of private sector deleveraging and onto a new growth path.
MR. CLEMONS: Thank you so much, Sherle. Larry? And, just for those interested, Barack Obama had relieved Gen. McChrystal of his command.
LAWRENCE MISHEL: God bless the president. Do we all have to go back and do our historic ties to Laura anyway? (Laughter.) We don’t have to. It will make us feel older.
MS. TYSON: (Off mike.)
MR. MISHEL: Yeah. You’re looking great, Laura. (Laughter.)
MS. TYSON: So is everybody.
MR. MISHEL: You know, I agree with your analysis of the situation going forward. I want to poke at your even-handedness, though, at the beginning, saying that there is some challenge about when we shift to fiscal consolidation or not. I mean, I understand the politics of that but we’re talking about the economics.
MS. TYSON: (Off mike.)
MR. MISHEL: Okay, and I have yet to really hear – I would like to hear what the explanation is for why we should be shifting to fiscal consolidation before we have, you know, 6 percent unemployment, or why the administration has a budget next year which is essentially neutral and, you know, the Senate wants to do more deficit reduction. I think this is cruel and unusual punishment to the American workforce.
I mean, I recall in 2008 when we were starting the recession – it had not yet been called but we were at 5 percent unemployment, thinking we were headed to 6.5, and President Bush and the Congress agreed on a poorly designed stimulus but they all agreed something needed to be done.
So, why, when we are afraid of going up to 6.5 and we’re at 10 and, I don’t know, 8.2 – was that average for 2011? I mean, Goldman Sachs says it’s going to be 9.7 percent at the end of 2011. Zandi says maybe 9 at the end.
MR. MISHEL: Yeah, they’re saying it’s going to waffle between now and then; 8.2 seems other-wordly to me.
MS. TYSON. Eight-point-two (8.2) is at the end.
MR. MISHEL: At the end?
MS. TYSON: The end of 2011 in the high-growth – (inaudible, off mike). Goldman Sachs –
MR. MISHEL: So that’s the best we can expect.
MS. TYSON: That’s the best. I think that is the best.
MR. MISHEL: Yeah. So, I guess I for one have been looking for the arguments. I know it keeps on being whispered around the White House and other places that somehow the bond market can turn on a dime, that there is an actual bubble in the bond market. So, you know, we end up having an argument – economics argument.
If the interest rates are going up, then they say, oh, the bond market demands us to do deficit reduction. If the interest rates don’t go up they say, well, the market doesn’t really work; there is a bubble. So I don’t know how to argue anymore with people who just seem to be religiously devoted to, as Paul Krugman says, pain. Thank you.
MR. CLEMONS: Thank you, Larry. Wes Clark, and then we’re going to go to Brian Baird. There’s a mike at every table but be communal. Share them around. Take them off those pillars. They do no good.
GEN. CLARK: So, a lot of people have said a lot of very important things here today, and they’re all part of this dialogue, starting with your model, Laura, but I want to come at it from a slightly different direction.
So, I’ve looked at the energy situation. It turns out the United States imports about 12 million barrels of oil or refined products a day, 365 days a year – 12 million barrels a day. That’s $70 a barrel on average. If you add that up, that’s about $300 billion a year, give or take, you know, a few tens of billions. It’s a thousand dollars for every man, woman and child in America.
Now, if a foreign nation came over here and said to America, you pay us tribute; you’re destroying the economy of the world; pay us a thousand dollars per man, woman and child or suffer the consequences, we would declare it an act of war. We’re willingly paying this out year after year at the automobile pump, at the gas station when we go in there and fill up our cars.
And although we’re talking about global warming and climate change and energy policy, I don’t think we’ve actually come to grips with the incredibly destructive effect of $300 billion a year being sucked out from aggregate demand in this economy. We’re talking about final private demand. That’s $300 billion of final private demand that could rather quickly be retained in the economy.
We’re not going to get rid of petroleum anytime soon but there are alternatives. We could really push electric. We could really push ethanol. I say ethanol with some caution in this room because there are probably some people in here who have previously understood what ethanol is all about, but I’m working in the ethanol community and so – I figured the only way to learn it is to work it. It’s actually pretty promising. There’s all kinds of cellulosic companies out there just dying to be given a chance. They can produce it, they can produce it in vast quantities, and we just need to get on with it.
So I see $300 billion as an achievable near-term target in terms of redirecting the C-plus-I-plus-G-plus-X-minus-M and helping us with aggregate demand, and I would like to just start by – I’d like to say in this forum that we shouldn’t just talk about, you know, the solution; we’ve got to get something that captures the attention of the American people to move on this.
MR. CLEMONS: You would put this in as part of your infrastructure – of an infrastructure that makes sense.
GEN. CLARK: Sure. I mean, you’ve got to work on energy and so forth but you’ve got to have – people have to understand –
MR. CLEMONS: Right.
GEN. CLARK: – what you’re working for.
MR. CLEMONS: Right.
GEN. CLARK: Three-hundred-billion dollars is a lot of demand that could be largely retained in this economy in pretty short order if we focus on the right fuels and energy policy.
MR. CLEMONS: Thank you, Gen. Clark. Brian Baird?
REP. BRIAN BAIRD (D-WA): Just very briefly – first of all, Laura, brilliant analysis, but I have to say that the transportation and infrastructure piece is intriguing. As someone who advocated vigorously on the Transportation and the Budget Committee that we invest in transportation – 12 percent of the stimulus went to infrastructure. It’s created about 24 percent of the jobs.
At the time, some of us were fighting vigorously with Larry Summers, and the received wisdom of the economic community was infrastructure spending doesn’t stimulate the economy quickly enough. So, a vast portion of the stimulus went to tax cuts, and as a political person I can tell you, not a single person has ever said to me, thanks for the tax cut. They don’t know they got them.
The jobs came from the infrastructure, and not only did jobs come from infrastructure, tangible stuff came from infrastructure that will help move goods and services, educate our children in safer buildings, et cetera.
The paradox is the public, especially the right, is now saying the stimulus didn’t work. Well, part of the reason it didn’t work was we spent it on the things the right-wing likes, which is tax cuts, which didn’t create a single job or maybe indirectly created some but nobody recognizes them.
Second quick point – Wes Clark is right. If we would cut our transportation consumption of fuel, just gas and diesel for transportation, it would put $50 billion a year – 50 billion (dollars) – back into our economy, right away, with no – we don’t have to deal with – with no increase in the deficit and no increase, in fact a decrease, of dependence on foreign oil. And what that does – by the way, that’s 50 billion (dollars), not counting the elasticity that would be positive. When we cut our consumption, the prices drop.
Finally, nobody has mentioned about this – and, Laura, not to add a more gloomy position to your perspective, which I thought was accurate – we haven’t talked at all about demographics, and the other terror I have in addition to the fiscal problem is the demographic situation of the world and the extraordinary job competition we’re going to face from the developing world and what that’s going to do to our various economic challenges, especially international competitiveness, but I think the scenario you’ve laid out is excellent.
MR. CLEMONS: We’ve got a building great list. I may want to come to Roxanne, a desk unit who is with Shell Oil, who was – Shell was the only company for cap and trade of the large oil firms. It would be interesting to sort of see how –
REP. BAIRD: Steve, one other quick point –
MR. CLEMONS: Yes. Sure, Brian.
REP. BAIRD: – just to close it out. The other paradox of this is one of the first acts of the Obama administration was to say there’s going to be no highway bill this year. In fact, they said there is no highway bill this Congress. We are due for a highway bill last year. It could put as much as $500 billion over the next 10 years, maybe 800 (billion dollars) if we did it right. We’ve got nothing moving and we’re not going to get it done this Congress, and we should have done it last year.
MR. CLEMONS: Thank you, Brian. Let’s go real quick to Peter Welch, Rep. Welch, and then to Michael Lind.
REP. PETER WELCH (D-VT): Well, I’ll follow up on what Brian said but, you know, from my perspective I’m trying to figure out, how do you put together a coalition for a sensible way forward that deals with the two issues – the fiscal stabilization, as we’re calling it here, and the need for growth and investment?
And whether we like it or not, the majority of Americans think that we have spent our way and grown debt our way into the problem we’re at and we can’t just wish that away in the comfort of this room. So, how is it – how do we put together a political coalition which would, frankly, have to be on the Democratic side because we’re in lockdown mode with the other side, at this point unfortunately fighting for failure. Anything associated with spending is fodder for the argument that is going to be made against us.
And I believe that what it does require is for us to acknowledge, in fact, that we do have to deal with fiscal stabilization and with infrastructure. And if we put together an approach on fiscal stabilization that’s broader than simply looking at the appropriation line items, we have a potential to get Blue Dogs to progress us on board.
So, for instance, what are the elements of fiscal stabilization? Obviously it’s appropriations and entitlements but it’s also tax expenditures, which we have not kicked the tires on those for years and we spend more on the tax expenditure side than we do actually on the appropriations side. And then obviously the third element of that is defense.
Then the fourth element, that’s very important to deal with the unemployment, is spending on jobs. But the term “spending on jobs” or the term “stimulus” doesn’t have credibility. What has credibility is retrofitting schools in your community. What has credibility is broadband in your community. What has credibility is roads and bridges in your community. What has credibility is clean water and sewer in your community.
So, I think we should get away from the rhetoric and talk very concretely about what it is that we’re building in your local community. And I also think that what we have to do is take on a comprehensive approach to fiscal stabilization that includes the tax expenditure side and the defense side. All of those elements together are focused on trying to grow jobs and leave us something lasting behind.
MR. CLEMONS: Great. Thanks, Peter.
I do want to throw on top of all this in terms of talking to communities – and Laura is going to have to leave in nine minutes so I want to give her an opportunity to jump back in. We’ll let her do that and then we’ll go to Mike. But I do think – it’s remarkable to me, as I go around the country too, that people, when they look at Greece or Europe and look at sort of the situation disdainfully don’t realize that that subtracts from the chances of more robust employment in the United States, in more economic growth.
They don’t understand that these drags globally are taking out – what Laura said about the stimulus netting out at zero when you look at the state destimulative budget deficits and the cuts – you know, California times the rest of the country – is a remarkable statement. It means in 2009, that fundamentally while it was much better that the federal government did something to hold it up there and could have been far worse, you actually netted at zero.
And I don’t know why legislators or people in responsibility, we don’t find some way to kind of communicate that. That is why some of the numbers look so bleak, in my view, that we were collectively, at the federal and state level, despite the large number – Jon Alterman gets at this in his new book – I think underperformed. And that brings us back to what Bernard has been trying to put on the table.
Laura, and then Mike.
MS. TYSON: No, I don’t have to – I mean, I –
MR. CLEMONS: I just want to give you – can you use the mike, Laura?
MS. TYSON: Oh, sure.
MR. CLEMONS: Yeah.
MS. TYSON: I wanted to bring one thing in that really hasn’t been discussed except in sort of by reference to the bond market. I do think we have to combine our efforts. We have to do – we’re talking a lot here today about the need to have some kind of public/private partnership that is directed at investment for the long-term health of the economy, and I agree with that completely.
But I also think – first of all, I agree that most people in the country are not where we are. This is not a representative room, at least when you sort of talk about government spending, okay, so either at the state level or at the federal level. So we’re going to have to do the – if we’re going to do this, it’s going to require a very different way of talking about it.
But the second thing is I do think we have to be aware of the fact that we are now on a course for increasing the debt-to-GPP ratio without any ending point in sight, and that’s where we are right now even with a neutral fiscal policy in next year’s budget, if that’s correct. So, I think we have to take that seriously because the rest of the world – central bankers, private investors, U.S. investors – will look at that over time.
Now, the U.S. is extremely lucky at this point in time because we have broad and deep capital markets. We have flight – we are the flight-to-safety place, and there is no other flight to safety I guess except gold that some people fly to. The rest of the world is basically giving us a kind of, okay, we’ll stick with you guys. We’ll hold you government debt and we’ll hold it at very attractive rates.
But when I would listen to the presentation which – you know, back to the Fed – there is no simple relationship between that short-term rate and the long-term rate. There just isn’t. The Fed doesn’t have control over the long-term rate. Sometimes – I’ve been in government when the Fed has said, oh, we know; we’ll do X. We’ll raise the short-term rate and the long-term rate will go down. That didn’t happen. They thought it was going to happen. And then in the 2003-4 period they said, oh, we’ll raise the short-term rate and the long-term rate will go up. That didn’t happen.
So, the long-term rate is increasingly not connected to the short-term rate. This is a global capital market. That long-term rate, which is relevant to all these investment issues we’re talking about, is something where the perceptions and willingness to invest in countries matters a lot.
So, the challenge for the U.S. is to combine the two things and say, look, we understand we have this long-term issue, and it’s really around four things, the four things we all know. It’s around revenues, defense, Social Security and health. And we have to do something that is credible in out years. We have to have a plan for that. And I think – so we need to combine these two things. I wouldn’t say they’re separate.
And they don’t have to be done at once. Remember, I was sort of talking about the problem of the timing. The challenge for the policymakers is timing. You might want to do a lot of recovery-based investment right now or for the next few years. You might want to be very serious about bringing the debt under control in the out years.
And, of course, that is what – if you look at what the administration has proposed, they’ve proposed a stabilization of the debt-to-GDP ratio in 2015 by balancing the primary deficit. They have set up a commission to do that and they’re trying to – so one could debate the year. One could say, is that too early, too late, whatever, but at least they’re trying to both sort of deal with the immediate issues in the economy.
And I have no particular explanation for the administration’s position on stimulus. I wasn’t part of the administration.
MR. CLEMONS: I don’t blame you. Well, Laura, thank you. And I want to go to Mike Lind next, but before he goes – I know you’re going to have to leave in a few minutes because she’s giving testimony today in the Senate Foreign Relations Committee, in part organized by Nell Meany (ph) of the Foreign Relations Committee and also Heidi Crebo-Rediker, who is with us. But thank you very much. I want to give you a round of applause. Thank you for doing this. (Applause.)
And not that you have to and, you know, there’s every moment that’s appropriate and not, but if you see an opportunity to talk about the Bernard Schwartz plan or this big infrastructure idea and how it would shore up, feel free. (Laughter.) Mike, you’re on.
MICHAEL LIND: Steve asked me to be provocative so I’ll try to live up to that.
MR. CLEMONS: Is your mike on, Mike?
MR. LIND: Can you hear me now?
MR. CLEMONS: Yes.
MR. LIND: Yeah, so I’ll try to be provocative. It strikes me that there is a deep strain of irrationality in these budget numbers. If you look at the AARA, one of the most successful aspects of that was the Build America bonds program, which is a federally subsidized, through the tax code, state and local municipal bonds.
And that was okay. You know, the states and cities have issued $100 billion now of these bonds, incredibly successful, but that’s okay because it’s not part of the federal budget, you know, even though the federal budget is subsidizing, you know, part of the interest.
If you have GSEs, government-sponsored enterprises like Fannie Mae and Sallie Mae and some more successful ones like the farm credit system, and they have hundreds of billions or trillions of dollars in debt, subsidized effectively by the federal government, that’s okay too because it doesn’t show up according to the OMB rules, or whoever determines the exact rules of what is on the budget and what is not.
And so, you know, just the one thing I would like to suggest is, you know, if the perceptions of reality of the voters and of the bond markets are actually at odds with reality – and I recognize, you know, it’s a political world; we have to deal with crazy voters and, you know, ignorant investors, but in terms of, like, talking among ourselves or policy-makers and the educated public –
MR. CLEMONS: Are you suggesting an Enron approach to future investment? (Laughter.)
MR. LIND: I’m suggesting a hundred billion (dollars) backed by the government is a hundred billion (dollars) backed by the government. And playing these games makes sense in terms of politics but it doesn’t necessarily make sense in terms of policy.
And just one more note about that. We had this politics all the way back to the New Deal. Nineteen-thirty-eight there was a conservative coalition came to power. It lasted up until Lyndon Johnson. The way the federal government got around exactly the same perceptions was through these public development banks through the GSEs.
MR. CLEMONS: Laura has a two-finger.
MS. TYSON: So I have a two-finger on this because I think this is really important.
Number one, the Build America bonds are very interesting and important. A major thing about them is the federal government bears no credit risk on those instruments. They’re held by – the credit risk is all with the state and local governments. This is very important. So the government is not guaranteeing – the federal government has no guarantee here of the value.
So, that makes it much – and that brings it to the GSEs. I honestly would say whatever plan one comes up with here, the GSEs, in the political climate, or maybe in actuality, are so discredited as a forum that anything one sort of does in the infrastructure area I would stay away from the GSE format.
MR. CLEMONS: Provocation and response.
MS. TYSON: That’s a political assessment.
MR. CLEMONS: Great. Perfect. Thanks again, Laura. Thanks for being here.
Janet Kavinoky? Janet runs the – I think you run the infrastructure programs at the U.S. Chamber.
JANET KAVINOKY: I do, at the U.S. Chamber.
MR. CLEMONS: You’re the part of the U.S. Chamber that we really, really like, that I really like.
MS. KAVINOKY: I appreciate that. I appreciate that. And we have – I share the frustration I think especially that Leo so well articulated that we’ve heard a lot from this administration. And we frankly hear a lot from members of Congress on both sides of the aisle saying, I’m for infrastructure but I can’t deal with paying with it.
And that seems to be the major stumbling block. And those of us who are policy wonks want to spend time thinking about programs and structures and goals and what have you, but unless we do get something on the table that talks about paying for infrastructure, we won’t get anywhere.
Now, Rob Atkinson led a commission that looked at surface transportation, explored every possible option for that. It hit the floor with a thud on Capitol Hill and they decided they would ignore it got put out there. There was another commission on surface transportation that also looked at that.
The U.S. Chamber, along with the National Association of Manufacturers, the truckers and AAA all came out and said, we support a gas-tax increase as part of what you need to do. But I think an honest discussion with leaders and lawmakers at the highest levels – because certainly we’re not getting through, the construction community is not getting through – that we need to grapple with how to pay for it. And there will be benefits is very warranted, and so we’re very much supportive of this approach.
MR. CLEMONS: Thanks, Janet. You’ve been a great partner.
MR. SCHWARTZ: (Off mike.)
MR. CLEMONS: Yeah, sure, Bernard, jump in, but you can do it on the mike, though.
MR. SCHWARTZ: When you talk about a repayment program, are you isolating that to a one-year answer or a multiyear answer?
MS. KAVINOKY: No, we look at – we think you need a long-term, multiyear investment strategy for infrastructure.
MR. SCHWARTZ: That is one of the main themes of this meeting, I hope, is to get away from an annual calculus of what the deficit is into a long-term multiyear –
MS. KAVINOKY: Right, and that’s why we’re doing a series – also doing a series of discussions – our final one will be in July – on what role an infrastructure bank could play, taking off of your idea, and what it would have to look like to be part of the solution and be successful too.
MR. CLEMONS: Great, thank you. Marilyn Geewax.
MARILYN GEEWAX: I guess with Laura gone, I wonder if maybe – are there any members of Congress still here?
MR. CLEMONS: Yeah, they’re about to – they’re trying to sneak out. (Laughter.)
MS. GEEWAX: Oh, there they are.
MR. CLEMONS: They said, oh, my god, NPR – NPR.
MS. GEEWAX: Sneaking out on me?
MR. CLEMONS: But I can drag Brian up here for a quick second.
MS. GEEWAX: All right, we can –
MR. CLEMONS: Do you guys have a vote?
REP. BAIRD: No, we’re okay.
MR. CLEMONS: Okay.
MS. GEEWAX: I just have a question. I just wanted to put this all into a global context, what with the G-8, G-20 coming up in the coming days. Isn’t there going to be a lot of pressure coming out of there for deficit reduction, I mean? Won’t that be the focus, and how does that put any new political pressure on you? Will it further paint the president into a corner in terms of deficit reduction?
MR. CLEMONS: Grab the mike there, Brian.
REP. BAIRD: Well, there’s much talk right now about how – the balance, of course, between spending and deficits, right now it’s shifted back I think generally towards deficits. But you’ve got this paradox: You’ll have people at your town halls saying, increase my COLA, give me more veteran’s benefits, lower my taxes, and for god’s sakes, do something about the deficit.
And that’s a winning formula politically right now. It truly is, and any deviation from that – which, to be honest, I think the only way to lower the deficit is increase revenue – taxes – stimulate the economy maybe trough the kind of thing Bernard is talking about, and cut entitlement spending. Not a winning formula but actually the truth.
So the pressure is on us to do something that won’t work and is also a lie, and the alternative is to tell the truth but you’ll lose politically.
MR. CLEMONS: So glad we gave you that mike. (Laughter.)
MS. GEEWAX: But is the global pressure –
MR. CLEMONS: Peter wants to jump in. Peter Welch wants to jump in as well.
MS. GEEWAX: And anybody else, if you would, but do you feel it – I mean, you’re talking about from the constituents up to a member of Congress. I’m talking about from the G-8, G-20 level, does it filter down to you guys to feel the pressure to work on deficits?
MR. CLEMONS: Congressman?
REP. WELCH: Well, the pressure to work on deficit is really from the voters. I mean, they have come to a conclusion and that’s just real.
Now, I happen to think there’s some legitimate questions about some of our spending, both on the appropriations side and on the tax expenditure side. If we went around and looked at some of the things we’re doing we might say, hey, that’s not particularly good, especially on tax expenditures.
But the key for us, I think, is to be much more confident and assertive on the infrastructure spending and not use that term but to talk very concretely about what this does in a community to making schools more efficient to getting a water system. I mean, it’s unbelievable how bad our water systems are.
MR. CLEMONS: So that’s a good recommendation to break it away from – you know, talk about what’s, you know –
REP. WELCH: It’s not the lingo. And then, you know, red state/blue state, your water system is failing.
MR. CLEMONS: That’s interesting.
REP. WELCH: It is just – and we’ve got to get off the rhetoric on this and just get serious about it. And I do think what Brian said earlier – when the president, on the stimulus, gave half the tax cuts, there was two problems. One is that we’ve lightened the benefit of it. We got less bang for the buck. But, number two, we gave away the political argument, and the political argument is we’ve got to reinvest in communities. And we should be saying that confidently, directly, assertively and insistently.
MR. CLEMONS: Thank you. Sharon?
KAREN NUSSBAUM: Yes, Karen Nussbaum.
MR. CLEMONS: Karen.
MS. NUSSBAUM: I want to do the front-porch point of view on this. Our organizers talk to 25,000 suburban moderates every – (inaudible, off mike) – the economy, and they are angry, as Ron says. They are focused on jobs but they do not talk about the deficit. They don’t raise it. The deficit comes up as a creation of right-wing media. It’s in the absence of a jobs program that anybody reveals, and if we were delivering jobs, no one would talk about the deficit.
So I just want to challenge this notion that somehow – I think people out there are Tysonesque in their view around economics, that there really is a concern about investing in our communities. I mean, that is stronger than talking about jobs, but that’s what people are looking for.
MR. CLEMONS: Karen, that’s useful. I would just simply say, just as balance because I want to keep a balanced forum, where the challenge is – I think what Peter Welch has shared with us about breaking down the word “infrastructure” and other real issues is important. But I spend a lot of time in coffee shops as a blogger. I hate going to my office so I sit in coffee shops and I eavesdrop, and I just find the opposite.
I find lots of people who may not know a lot about politics so they grab the things they hear about all the time, and I can feel tectonically this obsession with deficits out in the public.
MR. CLEMONS: I’m sorry?
MR. GALBRAITH: They’re Washington coffee shops –
MR. CLEMONS: No, they’re Oklahoma coffee shops. They’re Seattle coffee shops. You know, and I – you know, obviously it’s a different thing but I think that the issue is it’s important to educate these people because we’re not – we’ve got, you know, as Leo Hindery is saying, in real unemployment, extraordinary numbers.
And when you look at what happened – I mean, I also had other points of criticism of the administration on the finance approach, on dealing with financial sector because you saw lots of small businesses not have access to capital. These small business cut deep into the bone. And I think there are a lot of these issues.
And Bernard Schwartz, other of our partners in this project, early on in the administration were trying to say, at the front end of this crisis you need to get these broader pieces of it right or you’ll find out – in a position later that when you finally come around to it, you don’t have the resources. That’s why we’re trying at this point to really emphasize and put a punctuation point around the point that you can’t ignore the jobs and infrastructure.
They’re doing a big campaign right now, the administration, called “the summer of recovery.” That is the moniker that is being used. But if you look at what is deeper in this debate, I think that there is nothing new. It’s mostly repackaged small, somewhat frivolous – I shouldn’t say frivolous because I’m sure there are some important issues in there, but largely it doesn’t equate to something that would really change the systemic realities in the U.S. economy.
I want to be cognizant that it’s nearly two but, Harold, if we can go for maybe a minute because I want to grab a couple of people real quick.
HAROLD MEYERSON: Briefly, I am speaking in my capacity as a California maven.
MR. CLEMONS: Okay, great.
MR. MEYERSON: Loathe though I am to defend the California initiative system, it is the fact that just about the only infrastructure work in California over the last 20 years have been these rather complicated initiatives that have specified quite clearly what is being built, and these initiatives often pass. In fact, in Los Angeles County, which is 10 million –
MR. CLEMONS: There are in the referenda?
MR. MEYERSON – 10 million people – yeah –
MR. CLEMONS: Yeah.
MR. MEYERSON: – 10 million people enacted, in the November ’08 election, an increase in the sales tax on themselves for the next 30 years to generate $40 billion for transportation work in which 10 subway lines and X number of light rails and freeway widenings and so forth were specified.
It’s almost as if there is no trust of the legislature, which is a reasonable position, actually, and this has been taken upon themselves. But there is an element of popular buy-in there that makes things more passable than through the legislative process.
I have no idea how to extend this to the federal level but it’s worthy of contemplation in terms of our selling of initiatives to be able to specify perhaps what kinds of – where we’re doing what to the infrastructure and what it would accomplish.
MR. CLEMONS: Thank you, Harold. Norm Ornstein.
NORM ORNSTEIN: Thanks, Steve. We’ve heard a lot about the substantive difficulties here, and obviously we have to make both a short-term and immediate commitment to keep us from falling back into the abyss – it’s 1937 all over again, as I see it – along with a larger, longer sense of focusing on investment to build the economy.
How do you do that in a thoroughly dysfunctional political system, and especially one that’s going to get more dysfunctional after November where the ability to find coalitions to do anything will reduce itself even more.
And I think if we’re going to make any progress on this, we have to think of strategies that somehow can move beyond the dysfunction to find bipartisan support. Whatever the truth is about public opinion on deficits, we’ve got, first of all, a sizable number of members of Congress, including Democratic deficit hawks, who are moving prematurely to try and close a budget gap that may send us right into the abyss. And you’ve got Republicans who are driven by primaries where tea party people are going to focus on deficits, and you’ve got no incentives that Republicans see to work with Democrats to achieve victories.
So, if we’re going to get anywhere, it’s going to have to be probably a person-to-person ground battle to find the George Voinovichs who are both deficit hawks and understand the need for investment; the Kent Conrads and convince them that this is not the right time to slam on the breaks, and a group of others to transcend some of these difficult political issues, because whether we agree or disagree substantively – and almost everybody here will agree on perhaps the timing and the direction – it goes nowhere if you can’t find some kind of a coalition of people who are willing to take some of these steps.
MR. CLEMONS: Norm, thanks for those views. We’ve got about two minutes left. Jamie, do you want a quick response? And then I want to give a minute – so about a minute, and then the final minute to Joe Kennedy.
Joe is with the Pew Charitable Trust, and Joe has an idea that’s so close to what Bernard wants to do, but he has an out-there notion that I want to give him a chance to get fired from his conservative organization, but we’re going to put it on. But after Jamie we’ll go to Joe and then –
MR. GALBRAITH: There are many arguments one can make about this long-term deficit question. I just want to make one.
MR. CLEMONS: Yeah.
MR. GALBRAITH: I think people who are talking about the possibility that the bond markets might turn against U.S. Treasuries really have not taken on board what is happening in the world economy, in the world capital markets. They haven’t been alert to the situation in Europe, which is one where the entire monetary system constructed over several decades is in danger of collapsing, where there are incipient runs on the banks going on right now, and where people are talking about the possibility, remote and difficult, that the euro system may break up – the possibility.
The effect of that is to create a very strong demand for U.S. Treasuries, to put downward pressure on U.S. Treasury bond yields. It’s just not going to go away anytime soon. It’s a constitutional problem and the only major alternative to U.S. government debt.
So, if there ever was an opportunity to safely – whatever you think about the CBO projections, which seem to me to be nonsense, but if there was ever an opportunity to safely invest in America’s future from a financial standpoint, it’s got to be right now.
MR. CLEMONS: Thank you, Jamie. Joe?
JOSEPH KENNEDY: Sure. Well, I appreciate the invitation and I just want to preface my remarks by saying Pew does not have a program in this and so these are just my own thoughts.
I think we’re in a lot of trouble because American consumers financed a lot of consumption by borrowing, and I’m not sure we get out of that trouble by having the federal government finance a lot of consumption by borrowing. I’m sure we could do it for several years but eventually we would get – we would hit the wall.
I think what we can do maybe is not minimize the pain that’s been caused by past decisions but we can make decisions now about the future and the conditions that our economy faces, and I agree investment is a major part of that.
I don’t think money is the problem. If you get a rate of return on investment of, say, 15, 20 percent, the money will be there. You could get that money by structuring the private markets, by structuring the market for transportation or airlines or schools so that private people realize the rate of return if they invested. Or you could get it by the government borrowing, and the government can borrow as much money as it wants right now at very cheap rates and finance it over 30 years.
The problem is that we shouldn’t do it if we’re going to consume the money. We should do it if we’re going to invest the money, and to invest the money you need a rate of return. And we don’t want to structure the market so that we get that rate of return. We want to spend a lot of money maybe on electric transmission but we don’t necessarily want to – we don’t want to necessarily want to build the transmission quickly.
We want the transmission to meet all sorts of environmental restrictions. We want the transmission to be built by union labor at high rates. We want every state to get their own share, whether it makes economic sense. And when you do all that, you’ll get a very high rate of return.
You can build a lot of broadband into schools. That doesn’t mean you’ve invested money. The question is, are students better educated because of that broadband? And a lot of the evidence is that’s not very promising.
MR. CLEMONS: So let’s get to the numbers.
MR. KENNEDY: Sure. I think, you know, the federal government could borrow $2 billion and invest it wisely. It could do that – the markets would take that –
MR. CLEMONS: Did you said 2 billion (dollars) or 2 trillion (dollars).
MR. KENNEDY: Two trillion (dollars), sorry.
MR. CLEMONS: Yeah.
MR. KENNEDY: The markets would take that easily, especially if we also dealt with our entitlement problem, so that we assured them that, yes, debt to GDP was going to go up very high but then growth and balanced budgets in the future would take it down the way it did roughly after World War II.
But, again, we don’t want to deal with the entitlement issue, so what we’re saying to the market is we’re going to spend a lot of money. We’re going to try and spend it more efficiently than we spend highway money. And then we’re going to borrow a lot more money for entitlements, but trust us, it will all work out. And I don’t think the markets believe us. Maybe they should but I don’t think they do.
MR. CLEMONS: So, his $2 trillion plan – we’ll come back to it another time but I want to just, in conclusion –
MR. MISHEL: (Inaudible, off mike) – Social Security cuts? Is that what I hear? We’re going to pay for –
MR. CLEMONS: Larry, we’re not on –
MR. MISHEL: – by cutting Social Security – (inaudible)?
MR. CLEMONS: Larry, I’m going to encourage you guys to have a drink. (Laughter.) The Obama approach.
I want to invite Bernard to say a few words, but let me just say, in closing, what we’re doing and what Mike Lind and Sherle Schwenninger, the team, Bernard, have been initiating and putting together is that when it comes to thinking about these choices – and I think they’re very big choices – you know, we have lots of friends in this debate and there is a serious – I wouldn’t even call it an ideological debate; it’s a question of, you know, how one pragmatically thinks about some of the realities.
We’ve been talking in this institution and at the various Bernard Schwartz symposia a long time about various factors that mattered. It occurs to me that when Jamie Galbraith spoke in the first Bernard symposium December 2007, we had Desmond Lachman, one of Norm’s colleagues up there, talking about the coming collapse of the euro.
And this is a gentleman from the American Enterprise Institute, and you could have – you know, he was subject to a lot of ridicule inside of AEI but he was absolutely right in a lot of the things that he offered in the first symposia. And now today we see a serious jobs deficit and a serious deep infrastructure deficit and not enough attention.
So part of bringing everyone together is trying to raise the quality of discussion and attention on these issues and look at various scenarios for beginning finding ways to fund some of these issues and balance some of the debate in a real way.
Bernard has put together a paper that we’re distributing to all the participants here, which we will send to you if you haven’t received it. And I think he’s also inviting comments. This is a work in process, so we will send that out to folks to share with.
But, Bernard, into the mike and we’ll close this up.
MR. SCHWARTZ: Thanks. I don’t really belong at this conference. And people like Leo and the general, while so much of your experience has been how to handle individual problems as they come up, you were directing people; I was making things in the business community, so was Leo, where we had to make decisions on almost a crisis basis when they came up.
It’s not a question of whether this is right or wrong or can we make it better or can we get the political constituencies into a position where they can support a unified program? Whether we want to believe it or not, we’re really in a crisis situation in this country, we’re in a crisis situation around the world.
The only agency in the world that can rise above the difficulties and make something happen – that’s the U.S. government – unless we can foster the necessary capability to focus them on a program that will be different from every other program, a program that will begin to do what this country needs in terms of investment in very, very needed projects – but more than that, the most important commodity we have are the unemployed people we have out there for which nobody in this room has an answer.
There isn’t anybody in this room who has talked about how to put 15 million people back to work, or half those people back to work. When the administration talks about it, they talk about a 3.5 percent growth. The Fed chairman – 3.5 percent growth this year. That should make us sing all the way to the bank. But then he said, it will not decrease our unemployment.
A jobless recovery here is no recovery at all, and we have to commit ourselves to that. Believe me, there is a difference between “Main Street” and Wall Street. There is a difference between “Main Street” and Washington. The people out there are hurting. They’re not thinking about deficits, believe me. They’re not thinking about how much ratios are important. They’re thinking about their jobs. They’re talking about what their kids are going to do when they get out of college.
We have to help this administration come to the point of resolving that issue, not in 2014 but this year. If we don’t do that, there is going to be chaos in this next election and chaos for a long period of time.
MR. CLEMONS: Thank you, Bernard. I want to thank all of our provocateurs. (Applause.) I thank Mike Lind and Sherle Schwenninger and Laura Tyson. And thank you all very much for joining us.