JUDY WOODRUFF: Today’s plunge marked the fourth time in just over a week where the Dow Jones industrials have dropped by triple digits. Market volatility is at again near record levels.
We look at this and the larger picture with two people who have worked closely on economic policy. Christina Romer was the chair of the Council of Economic Advisers for President Obama until September 2010. She’s a professor of economics at the University of California at Berkeley. And Matthew Slaughter served on President George W. Bush’s Council of Economic Advisers from 2005 to 2007. He’s now associate dean of the Tuck School of Business at Dartmouth College. And we thank you both for being with us.
Christina Romer, to you first.
The scary roller-coaster ride on the stock market continued again today. How do you explain it?
CHRISTINA ROMER, University of California at Berkley: Well, I think, obviously, one of the things about the stock market is it’s very hard to explain the ups and downs.
I think, in truth, some of — the biggest mystery about the stock market was why it was going up as much as it was earlier in the year, when we were starting to get some distressing economic statistics. I think part of what we have been seeing in the last couple of days is people really waking up to just how grim the economic numbers have been coming in, in the last several months.
JUDY WOODRUFF: Matthew Slaughter, what would you add to that?
MATTHEW SLAUGHTER, Dartmouth College: I would add I agree with Christina that there’s a lot of grim statistics out there, but the volatility we have seen in the past couple of days — the other issue is, I think the markets, like a lot of business and a lot of workers, are uncertain.
They’re uncertain about the looming fiscal crisis in Europe. They’re uncertain about the possible fiscal crisis in the United States. And more generally, they’re uncertain about where economic growth is going to come from both in the United States and the broader global economy.
And so part of the news that came yesterday was when the Federal Reserve acknowledged that they themselves are much less certain about the outlook for the U.S. economy. That puts a lot more fear and concern into the minds of markets and into related businesses and workers.
JUDY WOODRUFF: Well, staying with you, Matthew Slaughter, what about that Federal Reserve pronouncement, a weak economy for at least the next two years? Did you agree with that assessment?
MATTHEW SLAUGHTER: Well, as talented and intelligent as Chairman Bernanke and his colleagues are at the Fed, they don’t have a magic crystal ball that allows them to foresee the future.
And one of the real big news items yesterday was them acknowledging that the forecast that they had even a few months ago was a bit too optimistic, that the U.S. labor market is much weaker than they had anticipated and that broader sources of demand growth in the U.S. economy are also coming in much weaker than they expected.
The Fed announced to the markets and to the world they will try to support business activity in America and a strong labor market by maintaining low interest rates. That will help, but that isn’t a magic wand that’s going to address the jobs crisis we have in America, where today we have 25 million under or unemployed Americans. That’s a challenge that is going to require a lot more.
JUDY WOODRUFF: I want to ask you both about that in just a moment.
But, Christina Romer, what about the Fed’s pronouncement yesterday that this weakness is here to stay for a while?
CHRISTINA ROMER: Well, I do think it’s important that the Fed downgraded their forecast, because it does, I think, reflect what a lot of the numbers have been showing.
I also think it’s important to realize that what the Fed said is that they thought economic conditions would be severe enough that it would warrant long interest rates for another two years. That’s not them saying that we think things will necessarily be terrible for the next two years, but that whatever recovery we’re going to get is not going to be enough to put a lot of upward pressure on inflation.
So I think we wouldn’t want to read too much into the Fed being grim going forward. I do think the Fed’s decision was very important…
JUDY WOODRUFF: Go ahead. Go ahead.
CHRISTINA ROMER: … because I actually — I actually read the fact that there were three dissents as — as in some ways important, because right — for the last several months, the way the Fed has dealt with its internal conflict is to, frankly, not do very much.
And I think fact that Chairman Bernanke was willing to taken an action that brought forth three dissents was a sign that he and the majority are willing to fight for more expansionary policies, willing to have that very public fight. And I think that’s important, because I think the facts are very much on the chairman’s side.
JUDY WOODRUFF: And, Matthew Slaughter, do you think it’s good as well and do you think it’s good for the economy?
MATTHEW SLAUGHTER: It will help, but, again, the Fed can’t magically address all the dimensions of the American job crisis.
The real challenge facing America is where demand growth is going to come from and the related job growth. The Fed can indirectly support business borrowing and hiring by maintaining low interest rates, but a bigger challenge that both large and small business leaders talk about is, where am I going to get business from?
I think a big challenge is how we can try to grow millions of jobs in the United States that are linked to the global economy through exports and related capital investment. To date, there’s still much stronger growth in countries like China and India.
And what we need are some real policy changes in America to try to allow a lot of American companies and their workers to link up with that dynamism and demand growth that’s much stronger in the rest of the world, at least for the near term, than it is in the United States.
JUDY WOODRUFF: And what are just some of those policy changes, the most important ones, you want to see?
MATTHEW SLAUGHTER: Yes. So, that’s a great question.
I would start with the three pending free trade agreements that the United States has yet to ratify with Korea, with Panama and Colombia. Ratifying those as soon as possible is really important, hopefully closing a broader Doha development round would also be important through the World Trade Organization.
We could be doing more very soon to try to encourage foreign-based multinationals to be doing hiring and capital investment here in America. They’re traditionally very strong companies. And immigration reforms come into the picture as well. High-skilled immigrants tend to start new businesses much more in America than native-born Americans do. And they bring financial and personal links to the global economy that can help pull exports out of America as well.
Those are all things we could be doing today despite the fiscal and broader policy challenges in America.
JUDY WOODRUFF: Christina Romer, are the things you think should be done, and do you believe those would make a difference?
CHRISTINA ROMER: The president has certainly supported very strongly passing those three free trade agreements because he, too, has stressed the importance of exports as a source of demand.
But I don’t think those are policies that are big enough to deal with what Matthew has described as a very fundamental lack of demand in the economy. And I think the truth is that we still actually need government support. It looks like we may be getting more of that from the Federal Reserve. But we also need it on the fiscal side.
And, certainly, were I still advising President Obama, I would be urging him to come forward with a very bold two-pronged fiscal plan. I think it absolutely needs more fiscal help for the economy in the short run, something like a very big tax cut for firms that hire unemployed workers. And then the way you make that fiscally responsible or get some of that additional certainty that Professor Slaughter was talking about is to actually to more deficit reduction over the longer run.
So tell that super committee you don’t want them come up with $1.5 trillion of deficit reduction. Make it $3 trillion. And I think that would be a good two-pronged strategy that would really help to deal with the problem.
JUDY WOODRUFF: And just quickly, Dr. Romer, on that stimulus, given the fact that the first stimulus back in 2009 didn’t have spectacular results, how do you persuade people another one would?
CHRISTINA ROMER: I would first disagree you strongly. I think it did have spectacular results.
I think what we now know is not that stimulus didn’t work, but that the problem was much bigger than — than almost anyone anticipated and than our original numbers or statistics actually told us. So, I actually think the studies as they come out about the Recovery Act are very conclusively saying that it was helpful.
And I think we just need to actually explain those numbers, those studies to people and say that it absolutely did work and that we can come up with another proposal. I think something like a new jobs tax credit, something that rewards firms for doing what we want them to do, which is actually hiring people, I think there’s a lot of evidence that that would work, and I think we could make the case for it.
JUDY WOODRUFF: Finally, Matthew Slaughter, what about that prescription that another stimulus, a bigger stimulus, as Dr. Romer just said, and a larger deficit reduction package proposal to come out of the super committee in Congress?
MATTHEW SLAUGHTER: Well, I think one important issue to keep in mind is the S&P downgrade of last week and the broader sovereign debt crises that are playing out in Europe makes clear that the United States may not control how much fiscal stimulus Washington, D.C., might want to put into place.
So I think, thoughts on fiscal stimulus, the one I would add that is important might be more infrastructure investment. That inhibits job creation for big and small companies in America. But, beyond that, efforts to link companies and workers to the global economy through trade, through immigration, through comprehensive tax reform, those are issues that should be seen as complements to whatever might happen on the fiscal front, because the scope of the jobs crisis is so large, we need a lot of solutions to deliver results.
JUDY WOODRUFF: We hear you both, tough problems, tough solutions.
Matthew Slaughter, Dr. Christina Romer, we thank you both.