Jonathan Cohn at The New Republic, thanks for your post on my interview with David Stockman and Robert Reich. Cohn's article is entitled "What an honest economic debate looks like". And I agree, Stockman and Reich were superb on GPS yesterday. The transcript of the conversation is below and the video is above.
ZAKARIA: Joining me now to talk about the nation's jobs problem and much more, David Stockman, was Ronald Reagan's budget director; and Robert Reich was Secretary of Labor under President Clinton. They both have many more glittering credentials, but that will do for now.
Welcome back to you both.
Bob, let me start with you. The administration is now thinking about further tax cuts, payroll tax cuts and things like that. Wouldn't it be sensible, if the great problem is jobs and the large part of that problem is in the construction industry, wouldn't it be sensible for the government to simply try to employ these people directly?
I don't mean the government employing them, but do roads, bridges and highways, which puts private contractors back into the hiring business and effectively create jobs directly rather than hoping that people who get tax cuts will start spending again?
ROBERT REICH, FORMER U.S. SECRETARY OF LABOR: I think that's right, Fareed. I think that it is useful, because I think it's possible that the Republicans would agree to exempting, let's say, the first $20,000 of income from the payroll tax for a year. That would put money directly in people's pockets and they would arguably spend at least 50 or maybe 60 percent of that. That would be a direct stimulus.
But, as you point out, I think it is also very useful to extend large public projects or even a WPA, you know, as we had during the depression, works projects administration, to put the long-term unemployed directly back to work. Or a civilian conservation corps to put millions of young people who are jobless directly to work.
We have public parks, for example, that are closed. We have all kinds of needs with regard to teachers' aides, and in hospitals, many things that are – jobs that are not filled because we – nobody can afford them. The public cannot afford them.
Well, better to have people do these jobs directly than to have people sitting home, collecting unemployment insurance.
ZAKARIA: David Stockman, do you think this may – or, you know, can we afford this? Obviously, there is the cost involved. A lot of this would be long-term borrowing. But it would put people back to work and they would start paying taxes. Would that help?
DAVID STOCKMAN, FORMER DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET: No. I really disagree with that. That's just more of the same old Keynesian medicine that's failed. We may have public parks that are closed, but we also have a national balance sheet that is totally busted. The federal government and state and local governments are out of money, and so the Keynesian game is over, and there's really literally nothing that Washington can do about the job problem.
Washington has to get back to its business, which is managing the budget and beginning the pay our bills, and unfortunately that is probably going to compound the job problem rather than resolve it. But we have no choice, unless we want to end up where Europe is today and where Greece is.
We simply are rolling the dice if we think we can keep borrowing now that the Fed is out of the market, QE2 is over, and the other central banks are no longer buying the bond. It would be a grave mistake to go back to the failed stimulus policies of the last two or three years or even decade.
ZAKARIA: But David, you – you would accept that the consequence of that kind of tightening, that austerity, would be even more people would be unemployed and their forecast revenues would fall. I mean, in other words, there's a – there's – the scenario you're painting is pretty grim.
STOCKMAN: Yes. That's the dilemma that we're in. We're in a deflationary cycle. We can't afford to borrow more. We can't afford to create artificial demand and artificial employment. And so, therefore, we're likely to have unemployment in the teens for the balance of the teens, that is, for a decade or more.
That's the mess that we have created after 30 years of, you know, tax giveaways and lack of control on entitlements and running this massive $800 billion war budget that we don't need and can't afford. It sounds like very harsh medicine, but it happens to be reality. We cannot borrow our way out of this one, in my judgment. We're now facing the day of reckoning, literally.
REICH: How can David Stockman or any Republicans or even, for that matter, any deficit hawks look at what is happening now in the country, with 9.1 percent unemployment, with 13.5 million people unemployed and millions more, too discouraged even to look for work and say that's not a problem? We just have to eat our medicine. We just can't do anything. Washington can't do anything?
Well, that is Herbert Hoover economics, and that should be rejected outright.
STOCKMAN: Well, I don't know if I sound like Herbert Hoover, but I think Professor Reich sounds exactly like Art Laffer. In other words, we don't have to take fiscal medicine, austerity is never needed. What we need to do is imagine we can grow our way out of this problem.
I think it is too late for that. We can't grow our way out of this problem. The economy has failed. It's busted. We haven't created one new job in – net in the last 12 years. So, as a result of that, we have to worry about where the world bond market, the currency market and monetary conditions are going to be.
Two years ago, Greece was borrowing two-year money at 3 percent. This morning, they're borrowing at 30 percent. There reaches a point when the bond market is no longer willing to tolerate the kind of fiscal irresponsibility we have, and I think we're very close to that, and it is very foolish to run a risk of trying to find out how much longer we can go on with this before the reaction sets in.
So, yes, I agree it would be nice if we could afford to spend money to put people to work or put money in people's pockets, although I don't think that's a good public policy. But we can't afford it. Literally, we are broke. Literally, we are at the edge of a financial calamity and we have to get beyond the idea that there is always enough balance sheet left to borrow some more money until we get to economic conditions that are more to our liking. The conditions that we have are the ones that we have to cope with, and that, unfortunately, is the fact of life today.
ZAKARIA: Bob –
REICH: Fareed, if I – if I may. Look, when consumers are scared, that they have a huge debt load, they're worried about their wages, which are falling in real terms, they're worried about their jobs. They're in no position to buy. They are pulling away because their housing prices, in addition, are going down, their major nest – nest egg.
When consumers are pulling away from spending, when businesses are not going to make new investments, they're sitting on $1.9 trillion. It's not a problem of businesses not having access to capital or the money. They're not going to build new facilities or create new jobs without customers.
So you've got the private sector in a kind of paralysis right now. This is when the public sector has got to fill in the gap.
We learned this painfully in the 1930s. We learned it in the 1940s, the Second World War. The debt to GDP ratio got up to 120 percent.
Was that a – was that a terrible thing? Well, actually, it put America back to work and led the way toward an extraordinary spectacular 30 years of prosperity after the Second World War.