In the end, are you disappointed at all about what you all were able to do with that period of time, in the period of time that you were there?
Well, of course you'd have to be. The unemployment rate is still terrible. And as much as I can try to say, well, it would have been much worse had we not taken the actions that we did, and I believe that deeply, I wish we could have done more, because it's terrible for people who are suffering.
So you can take a little bit of solace from the things that you did accomplish. And I think when the history is written about what this president accomplished in terms of health care and financial regulatory reform, and stopping what so could easily have been another Great Depression, I think history will be kind to him.
But for the American people, absolutely I wish we had done much more so that today the unemployment rate was down to a normal level and we were growing like gangbusters.
You were fighting for more stimulus.
You were on the losing end of that.
Well, not really, in the sense that I was certainly fighting for this. Larry Summers was actually on my side as well. And actually, even though the president was -- we got some moderately or certainly better news that fall, the president was behind that. I remember he gave a speech at the Brookings Institution there in December that was basically calling for more aid to state and local governments, more extended unemployment insurance, some more infrastructure spending, a job credit for firms that actually hire people.
So a lot of the things that I had been pushing for he endorsed. They then kind of -- most of them did not come to fruition. Or they came to fruition in a much more watered-down form.
But I do think that that was -- the president -- nobody was sitting on their laurels. We were delighted to see things starting to turn the corner, but you have to remember, the unemployment rate was still 10 percent or above there in the fall of 2009, so we were in no sense saying, "Oh, problem's over, right?" The problem was still front and center in trying to think about how do we make more progress in bringing that down.
The president is out there now campaigning, and he's a got big problem to some extent because of course the economy and the handling of the crisis is what everybody is focused on. There's a lot of anger, and there's a lot of frustration out there. Part of the anger and part of the frustration is this feeling that the banks got taken care of, but Main Street did not, that individuals did not get a plan that is designed to help them. Why are we at that point, and how difficult does it make the president's role in the re-election?
So I think the first thing -- and I'm sure the president will tell voters this time and again -- everything he did was about the average person; it's not about the banks. Even when we were doing things for the banks, it was about the collateral damage, all of the people that would be hurt if the banks went down.
And if you think about the things that he's done, from the Recovery Act to the various extensions of unemployment insurance and the extensions of the payroll tax cut to health care reform to financial regulatory reform, all of those things are designed to help this economy be stronger, more stable, and to create jobs.
So I think the thing that people can rightly say is, "I wish you'd done even more." But [if they] say that what you did was not aimed at job creation and aimed at dealing with the fundamental problem, I think that's deeply wrong. That was always the focus. That was always the thing that he cared most about.
Let's jump up to the end of 2009. So you're getting some numbers back that look halfway decent.
Better end-of-December-than-November numbers, you report to the president in December.
[President Obama] then goes out on his Main Street tour, and he's sort of talking about the fact that maybe the green shoots are showing up. He's in Allentown, [Pa.] It's a short-lived optimism. Explain what you thought at that point and sort of why it didn't turn out that way.
I think the important thing, again, if you think about the turnaround in the American economy -- so think about the end of 2008, beginning of 2009, real GDP [gross domestic product] is falling at just an amazing rate. In the fourth quarter of 2008, it fell at almost a 9 percent annual rate. That's just a huge decline. And by the third quarter, the fall of 2009, it's actually growing again. So that's just an amazing turnaround, and I think policy played a huge part in that. Things like the Recovery Act really were a big part of why we turned the corner.
Even so, one of the big debates in the fall of 2009 is, don't we need to do more fiscal stimulus; that we'd done the Recovery Act, it was sensible at the time, but then things turned out worse than we had anticipated, and even with the fact that we were starting to grow again, the unemployment rate was still terribly high. So we were having a very active discussion of other job-creation measures.
The idea at that point, with that enormous amount of money that was going to be spent on the stimulus, was, okay, this is going to bring back employment. You and [Council of Economic Advisers Chair Christina] Romer got in a little bit of trouble when you put out that report, which said that the stimulus would bring [unemployment below] 8 percent. …
The research that Christie Romer and I did early on was very much targeted at how many jobs we thought this amount of stimulus would generate, and how many points it would shave off of the increase in unemployment. We felt the stimulus would generate something in the neighborhood of 3 million jobs -- that is, either jobs that otherwise would have been laid off or create new ones. And we thought that it would subtract a couple of points from the increase in unemployment.
Now, it's not that we thought unemployment wouldn't go up; we knew it was going up. We thought it would go up maybe a couple of points less if the stimulus of the magnitude that we ultimately passed was successfully implemented.
What we clearly got wrong was the level of the unemployment rate. We used the consensus estimate among economists at the time, and that was too low, because few people really saw just how deep this downturn was going to be.
But what we actually got right is confirmed by, say, the nonpartisan Congressional Budget Office, was what economists call the delta, the difference between where things would have been and where things actually ended up. …
There's been a lot of criticism, to this day, that the president and the economic team was naïve, because we thought we'd be able to come back to the well for more stimulus measures if things were worse than we thought. …
I don't think anybody saw the extent of partisan rancor that exists now, even four years ago. A lot of this criticism is 20/20 hindsight. It never occurred to me that the minority leader in the Senate, Mitch McConnell, would say, "Our number one goal is to defeat the president," as opposed to, "Our number one goal is to bring down the unemployment rate," or something.
And you can say it's naive to think that after an $800 billion stimulus we wouldn't be able to come back for more. But I think that there's a lot of 20/20 hindsight on that particular kind of critique.
You were always worried about a jobless recovery, it seems.
You had a briefing in June '09 with the president about this issue. What was that briefing like? What were you trying to tell the president about and sort of what it tells us about the way he would view a subject as important as this?
Certainly, the subtext was, "Sir, you can see that GDP is starting to recover, and that's obviously a good thing. But don't think that that's necessarily going to lead to the kind of job growth we need, to bring the unemployment rate down, to give people the opportunities we all agree that they need."
Of course, the subtext there is, we're going to need to do more. We're going to need to build on some of the momentum that the Recovery Act is having. It's working on the GDP side, but it's going to take more to translate that into real job growth.
And did he worry about that?
Did he talk about the political realities?
Yes. … He gets this, but he also has to get the constraints, the reality, the budget deficit argument that's out there, the difficult politics. I mean, he's got people who claim that their main goal in life is to make sure he doesn't get re-elected. He faces some pretty steep constraints.
... There's a big meeting in December , before he goes to the inauguration, where they decide on the stimulus number. ... How do they come to the numbers that they come to? Do they know that they maybe will only have one chance to do it? And do they get it right?
The issue of the size of the stimulus had been discussed with members of Congress very widely in the months even before the election. The basic issue was how weak was the economy? How large would the multipliers be? That is to say, for every dollar of stimulus, how much extra GDP would you get? How long was the downturn likely to be?
There were different views on all these questions. Those in the financial side, those who saw the problem as Lehman Brothers and thought that there was a little tremor to the economy, [said] you fix the banks, the economy goes back. They believe in free markets. Markets work well. We had a little bit of an accident. Let's not talk about too much in detail, but once we fix the banks, we're back and running.
From that perspective, all you needed is some short-term stimulus to tide you over until the banking system gets back to health. So you need a short-term, 18 months, 24 months, moderate in size. The normal restorative forces are pretty strong.
The other side saw the economy really facing a very severe problem. I was on the side of those who saw the economy facing a very severe problem, partly because I looked back at what the economy was before 2008. I thought the economy had been sick. I thought the economy had been on artificial respiration for several years, that the housing bubble had been keeping the economy going. You take away that artificial respiration and you have a problem. ...
What did you advise them as far as the stimulus?
... You would probably need 2 to 4 percent of GDP per year, ... [which] would be in the magnitude of $300 billion to $600 billion per year until it comes back. But that might not be enough given the severity of the problem.
We're filling a hole of consumption going down by 5 percent. We're filling a hole of investment in real estate going down. Who knows what's going to happen to the global economy? Trade figures had gone down more seriously than even in the Great Depression.
So the side here was on caution and that you needed to have a very, very big stimulus.
There's another side to this. The political side is saying, "What are you, nuts?" Why did they decide what they decide?
There was one more aspect to this, which was the design of the stimulus. Some kinds of [spending] have higher multipliers than others.
Unemployment insurance is a very good stimulus for two reasons: When you give people who are unemployed money, they spend it. Secondly, if there's no unemployment, you don't have to spend the money. You only spend it in tandem with the severity of the economic downturn. We call those automatic stabilizers. So that's a good way of stimulating the economy.
Tax cuts for rich people are very bad ways to stimulate the economy. They save a lot of it, and what they spend they often spend on vacations in Europe or someplace that doesn't stimulate the American economy.
Paying money to, say, Nepalese contractors working in Iraq doesn't stimulate the American economy. So the war spending was not very good for stimulating the economy today or obviously long-term economic growth.
What I saw as inevitable was the following: Unemployment was going to go up. States and localities are going to have tax revenues go down especially [because] many of them depend on property taxes. Property values had gone way down; they're not going to be able to raise taxes.
And they have a balanced budget framework, which means when the revenues go down, they cut back. That means you're going to be firing teachers, you're going to be firing healthcare workers, just at a time when we're going to need them even more.
So I said let's give a lot of money to the states and localities to make up for their shortfall caused by our bad macroeconomic performance in Washington. It's not their fault that the economy's going down; it's the fault of mismanagement in Washington, the Fed and the administration. So that was the second thing.
If we're going to give a tax cut, let's target to investment. Let's tell American corporations, if you invest in America, you'll get a tax cut. If you don't, your taxes are going to go up. So we provide incentives for more investment.
We didn't want to stimulate more consumption, because we've been overconsuming in America. That wasn't where we want to go.
If you had taken that kind of a program, it would have provided more stimulus per dollar spent and put us on a better course for the future. But that wasn't the direction that they took. What they did instead is basically say $800 billion over two years, Congress figure out where it goes.
What was the problem with telling Congress to do it?
They start compromising, and a third of it went to tax cuts, which didn't stimulate the economy very much. Some of it went to what they call shovel-ready investments that discredited the spending. It still stimulated the economy, but it discredited the program. ...
Just this morning, I think it was [Mitt] Romney who once again brought forth that report that you and [Chief Economist and Economic Policy Adviser to Vice President Biden, 2009-2011, Jared] Bernstein put out early on about what the unemployment figures would be. Tell me about why the optimism of that moment went awry and how it has come to haunt the president now. What's your thoughts on that?
You know, that's a sad period in my professional career. What that report was was sort of an honest attempt to show the world what we were thinking. We were doing a Recovery Act; it was bigger than anything that had been done in history. We were trying to talk about what we thought it could accomplish, about how it would raise employment relative to what otherwise would have happened, and what it would mean for the unemployment rate.
And the frustrating thing, from my point of view, is our estimates about what it would contribute have turned out, I think, to be quite accurate. When others have looked at how many jobs were saved or created by the Recovery Act, we said it would be 3 million; most of the estimates are saying, yeah, it probably was about 3 million.
I think the trouble was the trajectory that we were headed on without the stimulus. And that's where we, like almost every other forecaster, didn't recognize, didn't get how severe this recession was going to be. We thought it was going to be bad, but it turned out to be even worse.
So it was -- we made a mistake in the baseline forecast, but our estimates of what policy has accomplished has actually turned out to be pretty accurate. It's just we in fact needed to do more.
I think what I find frustrating about people like Gov. Romney is that they have to understand that it wasn't that the Recovery Act didn't work, and it wasn't that it wasn't a useful program. It's that the economy, it turned out, was much sicker than we'd thought. And yet they still use that as sort of a cheap talking point.
And the analogy I like to use is, if you have an infection and you go to the doctor and he gives you an antibiotic, and that night your fever goes up, you don't say, "See, I knew that antibiotic didn't work." You'd probably say, "I was sicker than I realized, and it's a good thing I'm on that antibiotic." And that's exactly what happened with the Recovery Act. We were taking the right medicine. It turned out we were sicker than we thought.
And I think that's why I tend to focus on when we realized that, when the data started coming in that, "Whoa, this thing is worse than we thought; it turns out it's happening all around the world, not just here in the United States," that's the time to say: "You know what, Congress? We need another big chunk of money, because this thing was worse than we thought. We need to fight it even more than we're doing."
That, I think, that's the thing I'm sorry that we weren't able to then take that next step.
One of the things that has come out is [Obama senior adviser Pete] Rouse's memo in which he said that there was a problem in the economic team, that [National Economic Council Director Larry] Summers was heavy-handed, that talks of constant relitigation. Relitigation kept on coming up over and over again, causing delay in making decisive decisions. Did Rouse get it right?
I think Pete has a point, definitely, but it's been misunderstood as if Larry was somehow feet-dragging or delaying the process.
What was happening at that time was the economic team was largely thinking about the importance of another round of stimulus. And the political team was starting to wonder, is that something we can do at a time when this stuff isn't as beloved as you economists might want it to be among our public.
So what could have happened? What should have happened?
As an economist, I think we should have built on some of the momentum that was coming out of the Recovery Act. I suspect the unemployment rate would be considerably lower now if we had.
But there were very clear political constraints, particularly as we're moving up towards the midterm and after that, which was very much seen as a vote against government spending.
But then you've got the other side of it, which is the fact that Obama's being blamed now for the unemployment figures.
So did the political team get it wrong? Because the reality is maybe this is going to come back to bite them, and Obama could lose his job, specifically because of this point.
It's not up to the political team to say, "Here is what the unemployment rate will look like a few years from now, sir, if you take the economists' advice." It's up to them to tell the president how these policies are playing out in the minds of the electorate.
I think what was going on at that period where members of the team are being accused of argumentation and feet-dragging is more like we recognized that we needed another dose of stimulus to build on some of the momentum of the Recovery Act, which was already beginning to fade, while the politics were pushing in a very different direction.
Healthcare comes up very quickly on the front burner, as far as the Democrats, as far as the Administration. What’s your overview of this turn by the Administration towards healthcare at that point? Was it a political mistake? Was it a mistake to take the focus off the economy at that point?
I believe that we needed to be focusing all of our energy and our time on the economy, on jobs. We were facing, you know, we had had this tremendous meltdown on Wall Street. It was a very difficult time for the country and the ramifications had been deep all across the country. And people were losing their homes. Companies were laying off at record paces. It was a very difficult time. And if I had been advising the Administration, I would have advised them to continue to focus on the economy, on jobs. What is it going to take to get people back to work?
And it seemed like the Administration had an agenda, having won the majority in the House and the Senate, won the presidency, that it was more important to get the landmark legislation through the Congress -- It became more important to get the healthcare bill at all cost. And ultimately one of the biggest mistake[s] they made with that healthcare bill is the fact that they didn’t, again, include the Republicans. Not a single Republican in the House of the Senate voted for the healthcare bill. It’s a huge piece of legislation. And it is extremely unusual. You look at when any of the other major programs were passed, signed into law. They were ultimately done with both Democrat and Republican votes. And it’s very telling that not a single Republican in the House or the Senate ultimately voted for the healthcare bill.
And again, the Democrats, many of the members would say, well, the reason they wouldn’t vote is because they had politically decided there was no way that they were going to vote for anything that was this important to the Administration.
The Democrats had large majority in the House. They had a 60-vote majority in the Senate. I don't know if that had ever happened before where you had those kind of numbers. And the Democrats’ approach was that, “We don’t need the Republicans. We’re doing this alone.”
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