JEFF GREENFIELD [narration]: On this edition…The economy is growing again – but slowly. Is there any consensus about how we sustain a fragile recovery and move the economy forward?
RANA FOROOHAR: I think income inequality is actually the greatest economic problem of our era. And I think that it’s a major contributor to slow growth.
JOHN MAKIN: Congress tries to deal with the debt by saying, “Oh, it’s awful. If we don’t do something about it tomorrow, the world’s gonna come to an end.” Well, you know, we’ve been saying that for five years. That world has just kept on turning.
JARED BERNSTEIN: We talk about taxes as if taxes are a pure cost and have nothing to do with what we use them for.
JEFF GREENFIELD [narration]: Searching for common ground among economic experts left, right, and center. Next on Need to Know.
JEFF GREENFIELD: Welcome to Need To Know. Thanks for joining us. Economics is often called the dismal science. But the word science implies a set of facts that have been tested and confirmed as true. And as we live through an economic recovery that is still clearly a work in progress, there seems to be very little common ground when it comes to the best economic path forward. In fact, when politicians from each side of the aisle talk about the best way to grow the economy, they can sound like they’re living on wholly different planets.
PATTY MURRAY: One approach, introduced by Congressman Ryan and House Republicans yesterday would take us back to the failed economic and fiscal policies that led to the great recession.
PAUL RYAN: And so the one theme we’ve seen from the Democratic budgets here is a trillion dollars in taxes or higher, only outdone by even higher spending then if we did nothing.
JEFF GREENFIELD: Now when I first got into political reporting, one attraction was that I was told there would be no math. So as a public service to me, and to you liberal arts majors everywhere, we’ve invited three highly-respected economic thinkers from different perspectives, to see if there is some common economic ground, and whether that common ground tells us anything about how we can improve our economic health. Joining me is Jared Bernstein, former chief economist and economic advisor to Vice President Joe Biden, now a Senior Fellow at the Center for Budget and Policies Priorities. Rana Faroohar is Assistant Managing Editor for Time Magazine. Also author of Time’s Curious Capitalist column. And economist John Makin, a former consultant to the Treasury Department and the Congressional Budget Office. He is a resident scholar at the American Enterprise Institute. Welcome to you all and thank you so much for help be part of this long-awaited therapy.
So to begin right away, debt. Total federal debt stands at well over $16 trillion. The CBO projects that number to grow to over $26 trillion over the next decade. As a factual question, if it can be answered, is our large and growing total debt a hindrance to economic growth. Start with you, Jared.
JARED BERNSTEIN: Not necessarily. People should recall that– at the– peak of World War II– our debt– as a shared GDP, which is how you– I know we said we weren’t gonna do math, but this part we gotta do. Debt as a shared of the economy was– over 100%. Ten years later it was down around 50%. So– it– it’s never correct to say, “Because you’re debt is at a certain level– you’ve got big problems.” You have to understand why it’s there and you have to look at its trajectory. So the– the– that’s– so it’s– it’s more nuanced than just citing a number.
JEFF GREENFIELD: I’m gonna skip over our– our honest broker from Time and go– and– and go right, not to a dishonest broker, but– but to someone– might have a difference of– is that kind of debt a hindrance to economic growth?
JOHN MAKIN: I– it isn’t. It– the debt to GDP ratio is the important me– metric. And it’s around 70%, 74%. It– it’s a hindrance if it is– leading people to expect higher taxes. And they may reasonably do so if we’re gonna try to bring it down. But the– the– there’s so many– you know, Congress tries to deal with the debt by saying, “Oh, it’s awful. If we don’t do something about it tomorrow, the world’s gonna come to an end.” Well, you know, we’ve been saying that for five years. That world has just kept on turning. And it– it– it hasn’t– created the kind of crisis people are looking for.
JEFF GREENFIELD: Okay, Rana?
RANA FOROOHAR: So, you know, I would agree with– with what’s been said so far. There are certain debt levels beyond which you tend to have– slower growth. So a kind of common rule of thumb is a 90% debt to GDP ratio. If you go above that people start to get a little worried.
JEFF GREENFIELD: I’m just gonna put one more thing on the table about this. It’s what you raised, Jared. We came out of World War II with full employment. We went on a 20-year boom. Why shouldn’t we just pile on the debt now?
JOHN MAKIN: Well, because, it could be a problem. We came out of the war with a lot of debt because we borrowed a lot of money to build a lot of weapons, to demonstrate that the United States was the superior economy and to contain some very dangerous forces in Asia and Europe. So it– to put it kind of bluntly, we made a good investment– by accumulating that debt. And we were in a position to pay it down after the war.
JARED BERNSTEIN: Let me– let me echo one very important point that John just made, ’cause it’s real– to me it’s central to this whole discussion. And it’s– it’s not talked about enough. He talked about what you’re borrowing for, what your debt is being used for. If you’re borrowing in order to defeat an existential enemy, or to — or to push back against a massive recession like the one we just had– there are very good rationales for building up that kind of debt. If you’re borrowing to make good investments, in your productivity in the future, for– for example, and your publics goods. If you’re borrowing for wasteful reasons that’s different. So too often the– discussion becomes debt bad or debt good. No, it’s the content, the composition that matters a lot–
RANA FOROOHAR: I– I would jump in and just say to that, too, if it’s debt that is gonna foster growth–
JARED BERNSTEIN: Exactly.
RANA FOROOHAR: –than that’s a good thing. And growth– it’s even more important than–
JEFF GREENFIELD: Well–
RANA FOROOHAR: –this.
JEFF GREENFIELD: –the sort of anticipate a form of the next question I’m gonna pose to you folks, which is about entitlements. You got mandatory spending for social security, Medicare, Medicaid that totals about $1.5 trillion in 2012. That’s about half of all federal spending. And that total, including new spending for the Affordable Care Act, is projected to more than double over the next decade. So the question, if it can be answered on a factual basis, are entitlements, particularly given the demographic realities of the—retiring baby boomers, going to drive us toward unsustainable debt? Take us through that.
RANA FOROOHAR: I think we definitely need entitlement cuts in order to make the math work in the long term. If you look at some of the cuts that have been made and some of the additional revenue that’s been added over the last couple of years, between the Budget Control Act and the tax hikes that President Obama got at the end of the last term– we’re actually– a good ways along the road to getting our $4 trillion in cuts that are part of the grand bargain that we’ve heard so much about. But longer term, we still have these ballooning healthcare costs. And so what we really need is a healthcare solution. But that’s a separate conversation than the one we’ve been having about debt.
JEFF GREENFIELD: Are we now at a point where even folks on the– on the progressive side of the legislature are saying, “You know what? We really do have to not just take a look at entitlements, but trim them in some way or trim the growth to avoid unsustainable debt.” Are you–
JARED BERNSTEIN: I think the short answer is yes. But I think there are important nuances. For example, I don’t really think it makes a lot of sense to talk about the entitlements, because social security and Medicare, Medicaid, are different. Social security– could be fixed, that is, to achieve what they call actuarial balance, with a relatively few tweaks that we– we know and understand. Now, I’m not saying they’d be easy politically, but nothing’s– it’s hard to keep the lights on politically these days. But– Medicare is the real challenge. And, by the way, it’s not just the public sector thing. And in the private sector it’s even worse because Medicare actually does a better job of controlling costs, but not good enough. So the path to sustainability in the budget– has to go through lowering the growth of healthcare costs, both in the public and private side.
JEFF GREENFIELD: Is it a reasonable notion to say that people of means, even if they’re over 65 and entitled to Medicare, should just pay more– of a share of the health costs?
JOHN MAKIN: Look, I mean, this– there’s a limit to how much more people of means can pay. I mean, the– the idea is, like, they should pay higher tax rates and–
JEFF GREENFIELD: We’re gonna get to that in a minute–
JOHN MAKIN: –pay more for healthcare. Yeah, probably so. Probably so. And– and indeed they probably already do. But– you’re not gonna solve the problem that way. It’s very– if you say people of means, people say, “Great. You know, I’m not one of those. I’ll– well, let’s do that.” I think you really do have to– rationalize healthcare delivery. We have to say there are limits.
JARED BERNSTEIN: John is talking about– rationing there. Yeah, I mean, it’s– it’s– it’s an impolite word, but that– that– that’s the word. And– and I think there’s something to it. You mentioned the same thing. And I think the– I think–
JOHN MAKIN: But I’m not rationing– rationing with price, not by saying you can’t have it–
JARED BERNSTEIN: Yeah, we’re already– we’re already rationing by price–
JARED BERNSTEIN: –all over the place. So– so my– my point is this: When we’re talking about this kind of Medicare or Social Security reform, we have to be mindful of the following. The typical recipient of Medicare or Social Security has an income of $25,000. So, you know, this gets to John’s point. There’s not that much money there that you can claw back without violating, I think, the basic premise of social insurance. And–
JEFF GREENFIELD: That’s an important point. So now to inequality. The past 30 years the top 1% of households saw a dramatic growth in their income. Same time, the middle class basically saw the smallest uptick in– in– wages. So the question: Is income inequality a permanent feature of our economy? And if it is, can or should public policy address it?
RANA FOROOHAR: I think income inequality is actually the greatest economic problem of our era. And I think that it’s a major contributor to slow growth. Now how long it lasts depends on a lot of different factors. Even the smartest people– economic thinkers in the world don’t have all the answers to this. But two things. Income inequality has increased precipitously– over the 30 years. But also, since the Great Recession, 90% of the income gains since then have gone to the top 3% of Americans. So when we talk about things like healthcare and how much the rich can pay, well, the rich have taken almost all the gains in the last few years. I’m fundamentally very concerned about what kind of– a robust recovery you can have with that level of inequality. Because if you– if you consider the fact that our economy is 70% consumer spending, when most of the people haven’t gotten a raise in quite a long while, how do you really– raise growth? How do you really get the economy growing again?
JEFF GREENFIELD: Now this is a point that I have heard. And I’m– I only– I’m pointing to you because..
JOHN MAKIN: Don’t worry, I’m gonna disagree.
JEFF GREENFIELD: But I’ve heard increasing number of conservative folks say, “You know, this is an issue.” Do you agree that– that the– the– this rise in income inequality poses a public policy problem, or not?
JOHN MAKIN: Well, in order to address it with public policy, you have to tell me what is the optimal distribution of income? In other words, what– what should be the income distribution–
JEFF GREENFIELD: Couldn’t I tell you better than it is now?
JOHN MAKIN: Better– more for me. You could– or better than it is now. I– you know, I don’t know. I mean– I think that attempting to redress the problem can be detrimental to growth. That is, if you are going to– put on high marginal tax rates and try to transfer income to the middle class, which is what we’re doing– there’s some evidence that suggests that that’s gonna slow growth. So the– the real hard-nose conservative economist– solution to this is, “Let the system grind out whatever income inequality or equality it does. Don’t interfere with it. You’ll get maximum growth that way.” And then you decide how much to you– what’s the minimum you want everybody to have.
JEFF GREENFIELD: I have a feeling you may wanna weigh in–
JARED BERNSTEIN: Yeah. I disagree with– with John– on– on a couple of points. Although he raises a good question, which is, “Well, how would you even calibrate this, you know, even if you wanted to?” And– and I have– an answer. At this point, income inequality is so high, there’s growth concerns that Rana mentioned, but there’s also opportunity concerns. It is robbing large swaths of society — and I’m thinking particular of—kids — of the kind of opportunities that they’ve had in the past to achieve what I think many of us think is, if not the American Dream, at least the American Chance, the ability to– to– achieve your intellectual potential, to achieve upward economic mobility– as your– inherent talents– would provide for you. That’s actually now under threat because of the extent of income inequality. Point one. Point two. I actually think the evidence goes pretty strongly– in– in the other way that– that John said. If you look across countries, if you look acr– across our history, there really is very little correlation between where we set taxes and the underlying macroeconomic growth. We’ve had periods of very high tax rates where we grew very robustly and quite equally, by the way. We’ve had periods of very low tax rates and we’ve had very unequal and slow growth. So the correlation in my view– du– goes the other way.
RANA FOROOHAR: Yeah, I– I think that these– whether– whether or not inequality is domestically driven by policy or tax or externally driven, I tend to think it’s– it’s largely down to globalization, which over the last several decades has driven down incomes, but also technology. There’s been a lot of technological related job destruction in the blue collar– sphere, which we all know about, factory closures, et cetera. But we’re not quite so aware that that pressure has been going up the food chain into white collar jobs. And it’s gonna continue to– to dampen job growth there. And when unemployment is high, wages can’t grow. And that leads to– you know, this sort of bifurcated economy.
JOHN MAKIN: Okay, if you– let’s say we grant that there’s income inequality. Would you– reduce the incentives to accumulate wealth, by taxing wealth? I mean, what– what if you are– in the lower end of the economic spectrum, and you really wanna work hard and build up a fortune, as many people– have done in this town, who live right in this neighborhood. Do you wanna say, “Well, when it’s all done, we’ll take it away from you?” We already do, to some extent, with the inheritance tax.
JARED BERNSTEIN: You know, we are so far away from taxing it all the way. In fact– a Democratic president, President Obama, just presided over– make– making the inheritance tax– extremely what I would call regressive. That is, extremely favorable to wealthy people, such that a wealthy couple gets to deduct $10 million before they start paying a wealth tax. So, you know– if anything, it seems to me we’re going in the opposite direction of– of what John is describing.
JOHN MAKIN: We still are engaged in far too much social engineering with the tax system. I would be perfectly happy if we were totally neutral on it. And we just said, “How much– how much does the government need to raise? Let’s try to raise it in the least costly way.” And the– the principle there is you tax the broadest base at the lowest possible rate.
JEFF GREENFIELD: Now I wanna turn to an assertion that folks on– on the more conservative side– have raised. And these are what I understand the facts to be, that, okay, we all know that nearly s– 47% of taxpayers have no federal income tax liability. That 47% became a fairly visible thing last November. That low burden means the overall burden falls heavily on the wealthy. So do you all agree that the rich are paying at least their fair share, if not more than their fair share? Thought you might like to take a crack at that.
JOHN MAKIN: Yes. Well, first it– it’s important to point out that most people– everybody pays the payroll tax. And so it’s regressive. And that is the poor– the lower income pay a higher portion. The income tax is certainly disproportionately paid by high-income individuals. I would like to see high-income individuals pay the same amount of tax. But I’d like to see them have lower marginal tax rates, financed by a closure of loopholes, including deductibility of state and local taxes, all these things that have people doing things they wouldn’t otherwise do. And you shouldn’t have to spend a lot of time with a tax accountant. People in this income bracket do. And it– it’s wasteful. And it has people doing silly things. I’m not ha– unhappy about the burden. I’m– unhappy about the costly way it’s levied.
JEFF GREENFIELD: I mean, this notion– you know, the president that you worked for, at least, the team, we always hear about millionaires and billionaires and they have to pay their fair share. The– the statistics that I just quoted suggests that they may be paying at least their fair share.
JARED BERNSTEIN: No, I don’t think some of them are in the following sense. I– I don’t even really like to talk about it. You know, are rich people paying their fair share, ’cause many of them are. The problem is that many aren’t in the following sense. And this came out, I thought, pretty vividly during the election. There are many with very high incomes who are paying a lower effective tax rate, meaning the taxes as a share of their income, than people of much more modest means. You know, the idea that someone who’s in the middle class or, say, upper middle class is paying– an effective tax rate of 25% and someone who’s hugely wealthy is paying one of 14%. Sometimes like that. That’s–
JEFF GREENFIELD: Take a hypothetical example–
JARED BERNSTEIN: That happens. And– and that’s unfair.
RANA FOROOHAR: You know, what is a fair rate for rich people to pay? I don’t know. But I know some people are and some people aren’t. I thought that Warren Buffet made it very clear with his–
JEFF GREENFIELD: Wait, wait, wait–
RANA FOROOHAR: –various pieces about– no, no, no, let me finish, with various pieces about how folks that have certain kinds of investment income are getting unfair breaks. And you talk about closing loopholes? And that would be a great one to close, investment incomes, carried interest, et cetera. Lots of smart, rich people feel that way.
JOHN MAKIN: Let me say a word about Warren Buffet–
JOHN MAKIN: –because I ca–
JARED BERNSTEIN: Feel the energy–
JOHN MAKIN: –Warren Buffet is a very smart man. And he– he hardly pays any taxes because he works with the tax code. If you buy a company and its value goes up and you don’t sell it, you don’t pay any tax, which is fine. He’s helping allocate capital. He’s doing good work. He’s looking at companies. He buys ‘em. He holds ‘em. He’s the ideal investor. But he doesn’t pay a lot of tax. So should we say, “Oh, Warren, you know, we– you’re rich. You should pay more taxes”–
RANA FOROOHAR: He’s–
JARED BERNSTEIN: Yeah. Yeah, we should say that.
RANA FOROOHAR: –he’s an unusual– it– we– you can make the argument. You can also say he’s an usual investor, because 30 years ago a lot more folks were buying and holding the way he did. Now you’ve got 80%–
JOHN MAKIN: Well–
RANA FOROOHAR: –yearly turnover–
JARED BERNSTEIN: –that’s neither here nor there–
JARED BERNSTEIN: –look, my humble opinion is someone who makes those kinds of billions ought to contribute more. You know, too often this tax discussion is very divorced–
JOHN MAKIN: So even the guy who’s–
JARED BERNSTEIN: –let me finish. Too–
JOHN MAKIN: –successfully investing, so let’s have him contribute–
JARED BERNSTEIN: No, I– I–
JOHN MAKIN: –contribute? Can– I mean, well, let’s tax him.
JARED BERNSTEIN: Let’s tax him at a rate that I would argue is– fair in the sense that it’s a higher share of his income than someone–
JOHN MAKIN: I would–
JARED BERNSTEIN: –whose income is much lower.
JOHN MAKIN: How would you do that–
JARED BERNSTEIN: But let me finish. I– well, I would close a bunch of the loopholes that you yourself mentioned. But let me make this–
JOHN MAKIN: That he uses.
JARED BERNSTEIN: That he uses, yes.
JARED BERNSTEIN: John– Here’s the thing. We talk about taxes as if taxes are a pure cost and have nothing to do with what we use them for. But if we are taking in revenue and we are educated people and doing a good job of it, if we are investing in public goods in ways that are highly productive, it doesn’t end there. It’s– it’s a growth cycle. Here we are, starting the conversation, “What can we do about growth? What can we do to get this economy growing again, the way it ought to be?” And we’re into what I consider this very cramped Washington discussion about deficits and debt and taxes. And I have to tell you that in my view none of that has all that much to do with growth.
JEFF GREENFIELD: Well, I think that–
JOHN MAKIN: I think that’s a good point—
JARED BERNSTEIN: Okay—
RANA FOROOHAR: It is a good point you know, ultimately you have to grow your way out of these problems. You cannot tax your way out of them. You have to create an economy that people want to invest in. And how do you do that? I mean, there’s plenty of things that we could invest in right now. We know a lot of them: education, infrastructure projects. And rates are very low
JOHN MAKIN: But–
JEFF GREENFIELD: Let me just make a point about this conversation be– because what it– it is accomplishing– I mean, I didn’t expect we would all hold hands and– and sing from the same theme book. But it seems to me you– what you’re all doing is doing something that almost never happens in Washington, which you’re actually focusing on, “Okay, what’s the– what are the facts on the ground from which we can determine what we oughta do?” You might have different solutions but, that seems to me pretty significant. And it’s why I wanna turn on to this next and possibly the last question that we’ll have time for. That this is supposed to a very upwardly mobile society. It’s the American Dream. With enough hard work anybody can rise on the economic ladder. You know, your grandkids will be better than you were. But research now suggests that the United States actually lags behind other wealthy countries when it comes to mobility, behind Nordic countries, Canada, Germany, even France. About 4% born in the bottom fifth will make it to the top fifth. If we lose that doesn’t that have a rather profound effect on the fundamental American belief?
JOHN MAKIN: It does, yeah.
RANA FOROOHAR: I think–
JARED BERNSTEIN: Absolutely.
RANA FOROOHAR: –I think it– I think it’s incredibly important. If you look at who some of the major entrepreneurs in this country are, they’re immigrants. They’re people who came up the ladder. They’re– you know, it– that’s a huge part of our success. And I think that, you know, when the rungs on the ladder get wider, it gets hard to climb up them. And that goes to this point about– inequality that we raised earlier. And that inequality, as it grows, reduces opportunity. And I do think that reduces growth.
JEFF GREENFIELD: But if social mobility is lessening in part because of structural reasons, the– the need for bu– more educated– workforce, let’s say– are there– does it tell us much about pub– what public policy oughta–
JOHN MAKIN: Sure.
JEFF GREENFIELD: –be doing.
JARED BERNSTEIN: I mean, public policy plays a huge role in what economists call “public goods.” And education is a key part of that. And in fact, if you actually look at the numbers and recent budget trends, our– investments in– the public school system and the public university system, systems that I think have been crucial to providing the kind of upward ladders of mobility that we are sorely– in danger of losing– we are disinvesting in those kinds of public goods. And frankly, I think that’s the way forward, in terms of growth and in terms of inequality and opportunity, is to think much more about an investment model and the kinds of things that will generate a product– a productive economy moving forward, and to obsess far less about tweaks in the marginal tax code, and is the level of debt– obsessing over the kind of root canal economics that I hear so much about these days.
JEFF GREENFIELD: The other argument that may– may be– (OVERTALK)
JEFF GREENFIELD: –appropriate to give you the last word is, you know what, this is an area where economic policy has its limits. That social mobility is affected so much by cultural forces which may be t– relatively immune–
JOHN MAKIN: I don’t think–
JEFF GREENFIELD: -I understand. But there is another side to this.
JOHN MAKIN: Right. Sorry.
JEFF GREENFIELD: Where do you come out on this? Are you– as– do you think that that– that economic policy can play a significant role in so– in increasing social mobility?
JOHN MAKIN: I think that– making sure that economic policy doesn’t get in the way– plays a big role. In terms of the loss of mobility here, I was– I’m an educator. That was my first career. You know, I think the way we are treating access to education now is creating some major barriers. Anybody has children who are getting ready to go to college knows that the competition is immense. It’s a filter. If you can get into a good college, you know, it’s wonderful. You know, if you don’t, you don’t. So I think we need to invest more in education– at– at– let’s say, the community college level, in order to give more people–
JEFF GREENFIELD: I saw–
MALE VOICE #2 –more access.
JEFF GREENFIELD: –three heads nodding, which strikes me that at least on that last point we have some common ground. And you have made me– a much less confused person. At least– or you raised the confusion to a higher level of. So Mr. Bernstein, Miss Foroohar, Mr. Makin, thanks for joinin’ us.
VOICES: Thank you. Thank you.
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JEFF GREENFIELD: That’s it for this edition of Need to Know. On our next broadcast…a program that is getting people on the right economic track…and helping them hold onto their jobs.
SOT: You’re giving people the skills and the ability to go access credit and they’re able to go to an institution and borrow money. And it’s all facilitated for them. It happens very fast. It happens easily. And that is really the difference here.
JEFF GREENFIELD: Maria Hinojosa will be with you then. I’m Jeff Greenfield. Thanks for watching.