My chat with White House economic adviser Jared Bernstein
I recently had the opportunity to sit down and chat with Jared Bernstein, the chief economic policy adviser for Vice President Joe Biden. Here are some major excerpts of what Bernstein had to say about healthcare reform, the Obama stimulus, the deficit and the future of the American economy.
You have strong ties to liberals. Is it a public healthcare option or nothing for them?
I think it’s a mistake to think that the progressive community writ large is coming from a position of public option or nothing. People who have been following this for decades recognize the historic opportunity at hand and are much more interested, just like the president, in a mechanism to induce competition and lower cost than one specific option.
The recession is worse than the administration predicted. So shouldn’t the stimulus be bigger?
I think the stimulus had to be big enough to offset what has turned out to be the deepest recession since the Great Depression yet not too big such that it would have fiscal effects that were more than we or the Congress were willing to sign off on. We wanted to craft the largest, most diverse package that the market, both political and …
Are you talking more about voter reaction to big deficits or financial market reaction?
The latter. Our goal, in the context of fiscal rectitude, you want a stimulus that gets into the system, ramps up quickly, gets the job done and gets out. We have a massive job to get done here given the depth of the recession, and therefore we passed the largest stimulus in the history of the country. But that doesn’t give you carte blanche to disregard the deficit impacts. And so getting the recovery act up into the system, ramped up, helping to offset the losses, generate GDP growth, create and save jobs — we are very pleased to see that in action, though we’re not out of the woods yet.
One thing to consider is that at this point we have obligated about 35 percent of the stimulus, so you’ve got two-thirds left to do. And that is really important because this unemployment rate is going to go up before it starts coming down.
There was no conceivable stimulus package that would have filled up the hole we were in. I think the best package any government would have implemented would have offset some of that pain and set up for a robust recovery moving forward. And I think that’s where we are.
So were you seeing the boundaries where any gain from a bigger stimulus would be offset by higher interest rates?
I would say it this way: We went into this with a two year program in mind. We didn’t want this to have long tails such that it would dribble out into years three and four. We wanted to cut significantly the deficit that greeted us at the door in our first term. Given those constraints, a stimulus package of almost $800 billion was as far as we thought we could legitimately push it. So was $787 billion exactly the right amount? Of course no one could say. But from where I am sitting right now, it appears to have been the right size to pull the economy back from the brink, ramp up and then leave the system in such a way as to help bring the deficit down by the end of our first term.
By itself, the stimulus isn’t a huge addition to our overall liabilities.
If you look at the fifty-year budget shortfall, the recovery act explains three percent. Clearly that is being driven by something else and that something else is healthcare.
Do you think the economy is suffering from what economists call hysteresis, such that the economy has snapped and we’ll get long-term, high unemployment? After all, it’s not like people can go back to being mortgage lenders or working for the Big Three in vast numbers.
I don’t think so. Some of what you are describing is a speculative bubble, and that is something we don’t want to get back to. But there is nothing that’s changed in the basic underlying productivity and strength of the American workforce and the American economy. [Productivity] remains in that kind of post –’95, elevated, 2 ½ percent range and has been a real important boost for the economy.
The president has said that this next expansion can’t be one built on froth and bubbles and excessive speculation and has to built on innovation. And one of the areas he touts in that regard is energy. That is a critical insight, and historically government has played a role in precisely moments like this in helping to incentivize and stimulate innovation, whether it’s railroads or transistors or the Internet or, now, green technologies.
We want to make sure the right incentives are in place for the market to move in that direction. But this president is not at all engaged in five-year plans. This is incentives, say, through the tax code like the investment tax credit. This is training programs and education programs to give people the skills they need to enter this sector. This is not the government creating these sectors by any means. This is the government incentivizing private capital.
When should people begin to really worry about the federal budget deficit, if not now?
There are times to worry deeply about the deficit and times to worry deeply about the economy. But if the economy is not moving strongly in the right direction, the deficit will suffer as a result. If there is something out there that is potentially creating a huge kink in the hose so that the economy just can’t reach its natural potential, you better deal with that kink — and that’s healthcare One of the great visions of this president is that he’s not waiting until healthcare is absorbing 30 percent of our economy. He’s trying to get a jump on this. It is an absolutely critical piece in unleashing the potential of the economy.There is no way you are going to rationalize your debt in the long run if your economy is in the kind of shape it would have been in if we hadn’t taken these steps to get from where we were, barreling toward the cliff, to a point where the private sector kicks in, takes over and we fade out.
But will government have to spend a lot more money on transforming the economy?
We spend about $8 billion on high-speed rail and a similar amount on the grid. You don’t build a a high-speed rail system or a smart grid in the United States of America for that amount of money. What you do make is a downpayment and create some first move advantage — you sink some of the sunk costs, you incentivize private-sector capital sitting on the sidelines that may be waiting to see where this is going. That is the role of government, not to build this stuff by ourselves.
What about a second stimulus?
We envision a public sector that kicks in when the private sector is on the mat, and then we get out of the way. But our work is nowhere near done until we have robust monthly job growth. I was asked if we were happy about that 200,000 monthly job loss. We’ll be happy when we’re adding 200,000 jobs. It’s natural to ask if we are going to need a second stimulus. It is simply too early to say. None of us have a crystal ball and none of this inconceivable. But I get the sense that when the stimulus fades, we should get the private sector kicking in and picking up the slack as the public intervention unwinds. If that is the case, we won’t need a second stimulus. And if it’s not, that is something we’ll have to look at.
How would you divvy up credit for avoiding an outright depression between the Federal Reserve, the stimulus and the economy naturally bouncing back?
The way to think about the interventions is that they attack different parts of the problem. The financial interventions have really helped to begin to thaw the credit markets. But supply without demand is like being dressed up with nowhere to go. So the recovery act created more money for consumers through tax cuts and other payments and the direct infrastructure spending. So I think it’s the combination of helping to loosen the log jam of credit while at the same giving a real solid Keynesian boost on the demand side. They both played a considerable role.
Despite the economy stabilizing, unemployment is still high and home values are still way down. Plenty of folks are pretty worried about the future. What should they know?
The president and vice president understand what folks like that need, which is a vibrant private sector economy where credit flows freely, responsibly, transparently — but an economy where growth is not about asset bubbles that serve the precious few but much more broadly-shared prosperity. This administration is devoted to boosting human capital — the education and training people need — but at the same time incentivizing investment in areas where this economy has to grow — green technologies, healthcare , the smart use of energy, advanced batteries. These are the growth sectors of the future. The government can’t and has no desire to run these sectors. But we can certainly play a role. Hopefully that gives people hope that their leaders get it. But I don’t expect people to feel better about this economy until a) it is growing and b) they are share in the growth.