And your greatest worry at this point?
My greatest worry at this point is the debt that we've accumulated as a country. And right now, there's a lot of focus on the European Union and bailing out these countries in the European Union, the IMF [International Monetary Fund], our role at the IMF. And so America is borrowing from China so that we can help bail out the European Union. The debt that we've taken on, the debt that the European Union has taken on, the debt that so many countries around the world has taken on is not sustainable. And there is a day of reckoning coming.
And we've been through the tech bubble. We've been through the housing bubble. And my greatest fear right now is that government bubble, when the government cannot pay its debt and cover the debt, the obligations that we've committed and the impact that that's going to have on America, every American, as well as this entire world. And the sooner that we are honest about the debt that faces America and start making some of the tough decisions, it's going to be best for all of us.
... Did the administration get taken off on a route that they would have preferred not to go on? Did they have to deal with issues like the deficit in ways that were not the directions they wanted them to do? Were they prevented from going down routes, like a second stimulus to some extent, to try to work on this issue of jobs? ...
... There are always so many moving parts in these decisions. There are lots of policies which are being balanced and weighed, and everything is viewed through the prism of what is going to get more people to work and what's going to strengthen the economy.
There was certainly this notion that we did have to address the deficit question, not because Republicans were saying you've got to look at the deficit, or anybody was saying you have to look at the deficit.
Fact of the matter is, confidence is important, and the government has to demonstrate some credibility with respect to deficits. Doesn't mean you have to make cuts today that have a negative impact on today's economy, but you need to put in place a credible, viable plan to address those deficits.
And not because you care about deficit specifically, but it's because it's the end result you're trying to have an impact on. If the world loses confidence in our ability to deal with these deficits, then we will have greater employment problems and a weaker economy.
In terms of a second stimulus, ... I don't know what the drivers were that were impacting that decision. A second stimulus isn't necessarily inconsistent with a credible plan to deal with the long-term deficits. I think finding that balance is the challenge. I don't know why they decided they couldn't pursue it; I wasn't part of those discussions. ...
You're being torn asunder at this point also because the deficit is the thing the Republicans have been pushing. …
Well, that's a good point. I kind of left that out and you're fair to remind me.
So there are really about three dynamics going on here. One very much supported by some members of the economics team is we need to build on some of the momentum from the stimulus. The economy is in worse shape than we thought. And some of these stimulus measures are starting to take hold; we're seeing some good stuff happen, but we really need to build on it.
There's another political view, then, that sweeps in and says no more spending. The electorate is fed up with it, they don't believe this stuff works. We may be fine Keynesians, but we've got to pay attention to that.
And then there's a third view, again coming from partly economists and partly the political guys saying, we've got to start worrying about the deficit.
So there are these headwaters here all colliding.
… [New York Times columnist Paul] Krugman early on in 2008 is writing about [how] if you want to stay out of a depression, you've got to spend the money when you need to spend the money. In this period of time, when all of a sudden the deficit is becoming the third part of the memo that comes through, is the economic team sort of saying, wait a minute, and throwing their hands up and saying–
First of all, Paul Krugman has been 100 percent right about this, particularly on the issue of deficits and debt. What we were talking about at the time is, even the most deficit-hawkish among us was saying, sure, we need to do accelerator now and break later. … But somehow the break later stuff, especially in the context of the political belief that the electorate was really beginning to sour on anything that smelled like government spending or stimulus, it seemed like the deficit began to be a winning political issue.
To this day, I view it as exactly the wrong economic issue at a time like that. But sometimes politics and policy collide in a good way, and sometimes in a bad way. And this was more in a bad way.
And what problems does it cause then? What did everybody have to do?
It causes two problems. First of all, it's actually much harder than you think to explain to the public we have to spend more now and spend less later. …
I also think it causes a policy problem, because the minute you start talking about deficits and debt, you're worried about the bond market –-- even with no evidence, by the way, that the bond market was or is at all where the deficit hawks say it is or should be -- it just begins to infect the conversation.
And it's very hard to move the kinds of stimulus that we needed at the time when you've got a bunch of people biting their fingernails over invisible bond vigilantes.
And in the end, it was impossible, therefore, to push forth the new stimulus.
It's an interesting question. I think demonstrably, it's been impossible to legislate new stimulus. However, at some level, the Keynesians won in the sense that the president proposed a $450 billion American Jobs Act. And the politicos, well, they kind of won, too, because they would have said that no way is that going to clear legislative hurdles and they were right. …
And in the election it will become a potent political tool?
The president's not going to run on Keynesian stimulus, but he certainly is, and I think he signaled this in his last State of the Union, is very much running on the notion that there is a very recognizable, and I'd say fairly aggressive role for government to play in job creation, in dealing with these problems of income inequality and wealth distribution and immobility, manufacturing employment. The president's been leaning hard into those and that's going to be part of his election year message, I believe.
You're an economist, but you're also someone who understands Washington quite well right now, because you've been there; you've experienced it. Do you think you look at it politically? Do you wonder maybe if we had done -- maybe if we had just done Citigroup, maybe if we had come down hard on one bank, maybe this anger would have been stopped and politically it would have been a better decision to make?
No. You say I understand Washington. Even having spent some time there, I will never say I understand Washington. I understand the economy much better than that.
The playing the what-if is I think very hard. I think the thing I have found the most frustrating, and frankly a little disillusioning, is the degree to which partisanship has just taken over. And I don't understand why members of Congress don't worry more about their constituents who are so clearly suffering.
And it seems to me the American people desperately want their policy-makers to deal with jobs and to deal with the long-run budget deficit. And those are two things we could deal with in a coherent manner. The president has tried. He tried last spring with "Here's a grand bargain; I'm willing to put some really hard things on the table if we can get a plan for long-term deficit reduction." He tried valiantly all fall to say, "Here's a good jobs proposal; it does serious help for the economy." And he is just fighting what seems like a battle that nobody could win, because there is such partisan opposition in Washington.
You'll not be surprised to hear that there's a different opinion about that meeting from the other side, so let me ask you your reaction to it. The story has been reported -- and Democrats will talk about it -- is that before that meeting on the same day, before the president arrives, the speaker [John Boehner, R-Ohio] gives a little speech to everyone and says, "Hey, I'm not voting for this thing, and I'm hoping that in fact the rest of you are pretty much onboard here," and that in fact the Republicans, this was the beginning of what the Democrats feel was a refusal to approve anything that came from the administration. What's your memory of that event? Did that event happen in that way?
That's interesting. I was around the leadership table; I was in the room, and I don't ever remember the speaker making that comment.
What did the speaker talk about before the president arrived?
I remember it being, you know, we're going to -- we were going to be welcoming, respectful. "The president is coming to talk with the House Republicans at our request. It's an opportunity for us to ask him some questions. Let's have a dialogue about the stimulus. Let's hear what he has to say."
So there was no talk of the fact that there are not going to be any votes coming from the Republican caucus for this.
No, that all -- as I remember it, that all came after that meeting.
Why did it happen? What happened after the meeting, and why? Why the coming to heads about decision making on any -- because, I mean, all of the big policies that were pushed through, there were very few, if any, on most of them, Republican votes.
Right. Well, it was disappointing that the administration was not willing to work with the Republicans on this, on this proposal. We went into it believing that there might be an opportunity to find some common ground. And then it just -- it seemed like it fell apart, that it was more: "This is what I'm proposing. Take it or leave it." And our biggest concern was the debt that we were adding, the amount of spending that would be in that bill, and this approach of just continuing the record borrowing, the record spending, another bailout, rather than really looking at pro-growth policies that we believe would help the free market and the entrepreneurs and encourage that entrepreneurial spirit in America, which is also important to economic growth.
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