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Obama Looks to ‘Reestablish’ Economic Security

January 25, 2010 at 12:00 AM EST
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President Obama is expected to pay particular attention to the needs of middle-class voters in Wednesday's State of the Union.
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JUDY WOODRUFF: President Obama offered a small peek today at what he will say Wednesday night in his State of the Union address. It was a new attempt to offer help to the country’s long-struggling middle class.

Today’s announcement was the president’s latest effort to shift focus back to the economy and recapture the political initiative. He addressed the Middle Class Task Force chaired by Vice President Biden.

U.S. PRESIDENT BARACK OBAMA: We’re going to keep fighting to rebuild our economy so that hard work is once again rewarded, wages and incomes are once again rising, and the middle class is once again growing.

JUDY WOODRUFF: The proposals include doubling the child care tax credit for families earning less than $85,000 a year, capping the size of student loan repayments, increasing aid for families taking care of elderly relatives, and creating automatic retirement savings accounts at the workplace.

BARACK OBAMA: The middle class has been under assault for a long time. Too many Americans have known their own painful recessions long before any economists declared that there was a recession.

JUDY WOODRUFF: Discontent with the state of the economy and 10 percent unemployment weighed heavily among voters in Massachusetts last week. And Republican Scott Brown capitalized, winning a vacant U.S. Senate seat and dealing a blow to the president’s agenda.

Mr. Obama has since tried to address rising anger against Wall Street, proposing limits on the size and scope of the biggest banks. And White House officials today called for a bipartisan task force on cutting the federal deficit, another issue that has been hurting the president.

BRIAN GARDNER, investment analyst, Keefe, Bruyette & Woods Inc.: There’s just this sense of anxiety, of frustration, of anger. The electorate is looking to take it out on somebody.

JUDY WOODRUFF: Last week, it appeared the latest target might be Federal Reserve Chairman Ben Bernanke, who has been nominated for a second term. Senate support appeared to erode over his efforts to rescue the financial system. But Senate leaders moved to tamp down the opposition over the weekend.

SEN. ROBERT MENENDEZ, D-N.J.: And I believe that his confirmation will be assured.

JOHN KING, CNN: You on the same page?

SEN. ORRIN HATCH, R-Utah: I’m going to vote for him.

JUDY WOODRUFF: Republican Leader Mitch McConnell wouldn’t foretell his own vote, but predicted Bernanke will get his second term.

SEN. MITCH MCCONNELL, R-KY, minority leader: He is going to have bipartisan support in the Senate and I would anticipate he would be confirmed.

DAVID GREGORY, moderator, “Meet The Press”: Will you vote for him?

SEN. MITCH MCCONNELL: He’s going to have bipartisan support.

DAVID GREGORY: But you won’t say how you will vote?

SEN. MITCH MCCONNELL: I will let you know in the next day or so.

JUDY WOODRUFF: As Bernanke worked to rally support today, several more senators moved in to his column.

SEN. RICHARD DURBIN, D-Ill.: I’m going to support Chairman Bernanke’s nomination.

JUDY WOODRUFF: And White House spokesman Robert Gibbs voiced optimism.

ROBERT GIBBS: It sends a signal to greater and overall stability to have his nomination approved without political games. And that is what we expect will happen later this week.

JUDY WOODRUFF: For now, Bernanke’s improving prospects appeared to help calm Wall Street. The Dow Jones industrial average gained nearly 24 points to close near 10,197. It had fallen more than 400 points last week. The Nasdaq rose five points today to close above 2,210.

For a closer look at the president’s moves and messages to both Main Street and Wall Street, we get the views of two economic thinkers. Robert Reich is professor of public policy at the University of California at Berkeley. He served as secretary of labor under President Clinton. And Martin Feldstein is professor of economics at Harvard University and president emeritus at the National Bureau of Economic Research. He was an adviser to President Reagan.

Gentlemen, thank you both for being with us.

Professor Feldstein, to you first.

If these initiatives the president announced today aimed at helping the middle-class, child care tax credits, retirement savings accounts at the workplace, and so forth, if these were enacted into law, how much difference would they make?

MARTIN FELDSTEIN, professor of economics, Harvard University: Well, they wouldn’t make much of a short-run difference at all. I like the — the workplace retirement plan, the automatic IRAs at workplaces. I think that would make a big difference in the very long run in terms of taking pressure off Social Security.

JUDY WOODRUFF: Professor — Professor Feldstein I’m going to have to interrupt you. Unfortunately, we’re having an audio problem here. We’re going to get that fixed and come right back to you.

And while we do, I am going to turn to Professor Reich.

Same question. If these initiatives were to become law, how much would they help the middle class?

ROBERT REICH, former labor secretary: Judy, I think they’re all worthwhile. They are small steps in the direction of helping the middle class. I don’t think anybody’s sense of anxiety and unhappiness and worry would be changed dramatically.

But doing such things as capping repayments that students have to make when they are deeply indebted to student loan authorities with regards to their college loans, that could make a difference. Helping with child care and with elder care, again, all of these could make a difference, but not major differences.

JUDY WOODRUFF: Now, beyond that, we know, Robert Reich, the public would love for the president to just create millions of jobs. How much can he really do in that direction?

ROBERT REICH: Not all that much at this point, Judy.

I — the only thing that really will generate more jobs is a more — a larger stimulus. Right now, the state governments — because constitutional provisions prohibit the states from running deficits, right now, the states are running what might be called an anti-stimulus package in the range of $350 billion this year and next.

They are raising taxes. They are cutting services. They are cutting jobs. And that is a huge fiscal drag on the country right now. What the federal government could do, what Obama could do, if he had the votes — and, of course, with Scott Brown there, it is not clear he has the votes — but would be to help state and local governments right away. This would immediately help the situation.

JUDY WOODRUFF: All right, Martin Feldstein, I believe we have you back. I hope so.

We are asking — I was asking about jobs. How much can the president do, and how much should he do to help goose up job creation?

MARTIN FELDSTEIN: Well, I think there are things he can do. And I would emphasize two things.

One is, we have got to fix the situation with the banks and the mortgage loans, both the residential mortgage loans and the commercial real estate. That stops the banks from lending, and that stops small- and medium-size businesses from expanding and hiring people. So, the administration should go back to that issue.

JUDY WOODRUFF: And in what way? I mean, what exactly are you saying they should do?

MARTIN FELDSTEIN: Well, I think one of the key problems is that high loan-to-value ratios, homeowners who owe more than their homes are worth, are defaulting. Those properties are being foreclosed. And there have been suggestions — and I have made suggestions in the past — about how the administration could deal with that problem, could induce the creditors to reduce their — reduce their balances for those borrowers.

But we’re not seeing any progress in that direction at all. I think the other the administration needs to do is to give people some confidence that these very large fiscal deficits that loom out there year after year are going to be brought under control, and the kind of spending programs that the administration has been doing for the last year won’t continue.

JUDY WOODRUFF: Well, let me — let me turn to Robert Reich and ask him about those two points, about moving to shore up homeowners in the way that Martin Feldstein described, and then what he — what he just was describing about the deficit.

ROBERT REICH: Judy, one simple way to help homeowners that are worried about foreclosure would be to change the law and allow them to declare bankruptcy, personal bankruptcy, and personal bankruptcy with regard to debts on their first home mortgages.

Right now, homeowners can do that, can bring their second homes into bankruptcy. They can bring commercial real estate into bankruptcy, but they cannot, under the law, bring their first primary residences into bankruptcy.

Doing that would give homeowners much more bargaining leverage with banks in terms of negotiating better deals. Wall Street doesn’t like this very much. But if the Obama administration really wants to show the public that it is standing up to Wall Street, and if Congress is willing to do that, this would be enormously helpful.

As to Professor Feldstein’s second point, I agree completely that the administration has got to do something about long-term deficits. But short-term deficits are very, very different. In fact, if anything, the administration should not worry and get Americans — kind of make Americans more confident that short-term deficits may be actually necessary in order to get people back to work and the economy growing again, so that long-term deficits can get under control.

JUDY WOODRUFF: Martin Feldstein, let me ask you to respond to that. And then I quickly want to ask you about what the president has been doing, getting tougher on the big banks in the last few days.

MARTIN FELDSTEIN: Fiscal deficits this year, 2010, and 2011 are not the problem. But 2015, 2018, those are years when we shouldn’t be looking at large deficits.

And the only way to deal with that is to bring spending under control. And, there, we are not seeing anything coming from the administration.

JUDY WOODRUFF: And what about with regard to the measures the president has been suggesting recently, basically putting restrictions on the kind of business that the biggest banks can do?

MARTIN FELDSTEIN: That is certainly not going to help. It’s not going to hurt very much either. That business will get done. It just won’t get done in the banks.

And if it moves to non-bank institutions, to hedge funds and others, they’re going to be less supervised. And that can increase the risks in the system. I see what the president is doing as an attempt to answer his critics and say that he and Secretary Geithner and Ben Bernanke have been too kind to the banks, too kind to Wall Street. And so the president is looking for ways to counter that image.

But it’s really an image creation, rather than substance, that we’re getting there.

JUDY WOODRUFF: And, Robert Reich, I think you see this bank move, these bank moves, differently.

ROBERT REICH: Yes.

There should be no entity in a capitalist system, Judy, that is too big to fail. And I think it’s necessary for the president to be very clear about resurrecting something called the Glass-Steagall Act, which was a 1930s provision designed to separate investment banking from commercial banking, so that investment banks essentially could not use commercial deposits in the great casino called the stock market.

Well, he’s moving in that direction. He’s not quite there. Paul Volcker’s suggestion is not exactly that. But it is a move in the right direction. And as to allowing regulators to basically set limits to the risk and the size of banks, that is also a step in the right direction. I think I would prefer to go a little bit further and use the antitrust laws to make sure that no large financial institutions got simply too large that they were, in effect, too big to fail.

JUDY WOODRUFF: At a time like this, Martin Feldstein, how do you describe the president’s obligation to do something for ordinary Americans, for the — for the middle class, vs., or and in addition to, making it possible for these banks and other businesses to do the kind of open business that they want to continue to do?

MARTIN FELDSTEIN: They are really quite separate issues. And, again, I would say that, whether the major banks, the investment banks, get to do proprietary trading or that moves somewhere else in the economy is really not a significant issue, in terms of what really matters, which is bringing the employment numbers back up.

There are — there are 15 million Americans who are out of work. There are nine million more who are on short time. There are a couple million more who have given up looking because they don’t think there are jobs. And none of these initiatives deal at all with that problem.

JUDY WOODRUFF: And how much — I mean, and to what extent is the president obligated to do that? You are saying that should be his chief obligation?

MARTIN FELDSTEIN: Well, I think that’s critical.

I think we see that the Fed has done everything that it can possibly do. And I think what is holding back is that small and regional banks around the country are afraid to lend, unwilling to lend, because of the problem of commercial and residential real estate. And businesses are afraid to make commitments, because they fear that these projected fiscal deficits are going to lead to higher interest rates and higher taxes on business. And the president’s anti-business rhetoric certainly doesn’t reassure them.

JUDY WOODRUFF: And, Robert Reich, how do you come down on that?

ROBERT REICH: Well, I don’t think businesses are reluctant to invest because they worry about future deficits. I think businesses are reluctant to invest, Judy, because they don’t see customers out there. And there are no customers out there for many businesses because people are so scared.

They are losing their jobs. And their wages are frozen, essentially, or many are settling for lower wages. And this gets back to, basically, whether you want a short-term stimulus or not. I think we do need a short-term stimulus. I have given you my best suggestion as to what that should be, that is, help for state and local governments. But there are other things that can be done.

The point is that John Maynard Keynes is being exhumed, his theories, and those came from the 1930s, about what we need to do when there are no real other sources of demand in the system. Consumers have pulled back. Investors have pulled back. Exports cannot be relied on. The only remaining buyer of last resort is the government.

JUDY WOODRUFF: Gentlemen — gentlemen, we thank you both, Martin Feldstein, Robert Reich.

ROBERT REICH: Thanks, Judy.

MARTIN FELDSTEIN: Thanks.