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.
You left out the best part of the debate. Stockman admitted that we need to increase taxes on the rich and change the capital gains tax to the same as the income tax. He is the first Republican I have heard admit that we have to increase taxes on the rich to get out of the deficit. Why is this not headline news?
Actually Stockman is on record as advocating a one time tax on the super rich that would wipe out the deficit.
"The administration is now thinking about further tax cuts, payroll tax cuts and things like that".
It would be a mistake to cut tax further. President Herbert Hoover made the mistake that he didn't have wages cut during the depression years as he feared it would have a negative impact on consumers spending. As manufacturing slowed down and employment rose, wages had to be cut. Here I see the parallel, if the administration cuts tax further for fear of hurting the tax payers, then the government would have less revenues. I don't believe that tax payers would help spark the economy by spending, if they had more money in the pocket. To raise tax is unpopular but inevitable.
The administration should avoid making the same mistake as Herbert Hoover by blaming the international community for the economic crisis in America and that the outsiders should help to finance it.
I would love to see both of these men posted their views to a Venn Diagram. What do they believe that cannot be reconciled and what (if anything) is the common ground where the circles intersect? I continue to try and see through the murky waters and have trouble seeing clearly the propositions and evidence that supports them.
From a layman's point of view they are virtually on the same page.
The only real disagreement they have is that Reich thinks we can afford to borrow a little more and that may put us in a little better situation before reality sets in. Stockman believes that reality has already set in, that we literally cannot borrow any more, and that the situation is not going to get any better until it's resolved entirely (a decade or so from now).
Fundamentally, every economist understands that we are basically near the end of our rope, and they all understand that there is no pixie dust that's going to solve our problems. Politicians and those who are always looking to squeeze out one last penny are the ones who are still pushing the idea that there's a pain free solution.
On my desk I have Robert Reich'scomments in Trendevents re: women taking jobs, all wanting longer hours, and drawing down savings and borrowing to the hilt. He is right. Roosevelt spent like crazy, not letting people know he would inflate to reduce the debt and also get a war to hire people to produce what war would destroy. Thos options are not available... and machines (computers) have sharply cut the need for labor.
TEAFS (available at amazon.com) can solve our problem by modifying how we figure Wages. Neither party now has a workable answer, and so many people are destitute and without hope. TEAFS must be adopted by the accalim of the people.
Stockman is the only man I have heard tell the truth in decades. We are broken and our economy is ruined. Our jobs left for Mexico & China and we let them. We have shot our country in the arse. We can't just keep spending. We have to reach bottom before we get well and we have to go back to being financially responsible. Of course no one wants to hear that and no one intends to suffer, so we will continue to get worse, till all hell breaks loose and we fall completely apart. We as a nation and as a people should never have lived on credit. If we had not we would have less overall, but it would be paid for. We should close our borders and we should be charging import taxes to every thing coming in, to the point that an import is more than the cost to make it here. That is what we have to do, but we won't, because no one has the guts to stand up to the huge corporations. We are heading for something worse than a simple depression. We are heading for total chaos and death for more than half our people when the war here starts.
Massive public spending in the 30's did not rescue the economy. The over $13 billion spent then on largely underproductive part-time workers never achieved anything near full employment, but boy, did it rack up the national debt.
What saved us? The war. In particular, the destruction of the European and Asian capital stock, which left us a monopoly supplier to the world. (Latin America and Africa were largely suppliers of raw commodities, not manufactures.) Since everyone had to buy from us, our firms ramped up to full employment toward the end of the war and during the Marshall years.
We don't have that luxury. Our markets have tremendous leakage to China, among others.
So, if you want to repeat history, .. please go out and kill 60 million people again.
Otherwise, it's time for a contraction. That's what happens in economies. Expand, contract. Expand, contract, just like breathing.
Dr. Reich would have us inhale forever. Don't try it; it doesn't end well.
@dave – I'm rooting for Reich here, but your response is compelling. Well said. I hope you're wrong.
But you are ignoring the most important thing. It gave people a sense of self worth. It put food on the table. It revived their faith in the future.
I hate connecting economy with wars in 21st century. Time to rise over bankrupt thinking.
ww2 was the reason for the good economy? isn't that in and of itself government spending? and if war spending was the answer to a good economy, wouldn't bush be a hero and not the one that has been blamed for the economy, two wars, tax cuts and massive spending? or did obama adopt all that too?
While it may be true that the 2nd. World War saved the U.S. economy and was the prelude to the greatest period of growth in our hisory, we have just fought and continue in some limited degree to fight two ofthe most unproductive and costly "Wars" again in our history and have reaped not properity but decline, so another war is out. That said, we do need as Reich has said a"Marshal Plan" of domestic borrowing and as Stockman has suggested a limted deficit reduction directed tax increase on those who've prospered as a result of the decline. Oh yeah, that 1.9 Trillion referenced here are not sitting on the sideline, but is on strike awaiting the defeat of Barack.....
When ever we loose sight of the basics, we get lost in the weeds and miss the simple answers. What is money? Really, what is money? In its simples form it is a promise to do something. When you hold money you hold a promise from someone else that they will work for you. What is the value of money? Again let’s take the simplest definition. It is the amount of goods and services that is being produce per dollar. Now let’s put those two together. There is a lot of money sitting on the sidelines, ie. Some people are sitting on promises to work and they for what ever reason don’t want to call in those promises. This means that less things are being built so for every dollar out there less and less stuff built so the money is worth less and less. It is time to reverse that trend, and if those with the promises refuse to use them or can think of creative ways to use them, then we should take some of it back via taxes and use it as the public needs it. It is time to build stuff that we need and use, like energy, schools, roads and health. The more we build the more value we put into our money, the more we can get people to do per dollar. Don’t make it more complex than that because it really isn’t. History shows that it isn’t. When we are building stuff for what ever reason we prosper, when we don’t we don’t. Too bad our only recent examples are war machinery build up. Let’s build up something else, like our energy sector. It works!!!
Stockman calls Reich Dr. Art Laffer, the Father of Supply Side Ecoomics, in jest – in that Stockman under Reagan is falsely accused of using to the properity of those years – why is this not making headlines when current avocates of tax decreases point exactly to this to create jobs now when it doubly shows it added jobs in the Bush yearr? They bring up the problems like China, robotics, a need for a Manhattan Project on infrastructure and energy – and a need to stop our wars (with re-instituting the war time draft) and in conjunction an alternative war time draft and investment in our facilities w/transfer from the MIC! Stop importing lead and asbdstos from China, stop nation-building, encourahe universal democratizatiom, re-visit the electoral college and pure public federal election financing and alternating term limits, close down redundant national military bases and re-open some a donkey's day apart along the Mexican border, re-think NAFTA and accept the heartbeat as the marker pre-human conscious so bo
XXX Stockman calls Reich Dr. Art Laffer, the Father of Supply Side Ecoomics, in jest – in that Stockman under Reagan is falsely accused of using to the properity of those years – why is this not making headlines when current avocates of tax decreases point exactly to this to create jobs now when it doubly shows it added jobs in the Bush yearr? They bring up the problems like China, robotics, a need for a Manhattan Project on infrastructure and energy – and a need to stop our wars (with re-instituting the war time draft) and in conjunction an alternative war time draft and investment in our facilities w/transfer from the MIC! Stop importing lead and asbdstos from China, stop nation-building, encourahe universal democratizatiom, re-visit the electoral college and pure public federal election financing and alternating term limits, close down redundant national military bases and re-open some a donkey's day apart along the Mexican border, re-think NAFTA and accept the heartbeat as the marker pre-human conscious so both sides compromise...and stop conducting Israel's foreign policy for it as surrogate and to our bankruptcy.
Look this is just silly, they're both right. Stockman is right that we've inherited 30 years of deficit spending and Reich is right because some 10 – 15 million people are unemployed. Well great what do we do? Here's a scenario: Gov. has to decrease spending and increase employment. You can't hire more people, can't bribe companies with tax cuts to hire people, or spend money on infrastructure. PRIVATIZE!!! Create a National Investment Bank bonded out to the private sector for highways, speed rail, and renewable infrastructure. Privatize whatever government services you can (getting them off the balance sheet and creating jobs). Sell off excess government land for use in the private sector. Make the all to obvious and painful decision to cut defense spending by 10% this year and 1% less each year after, privatize what you can with entitlements and fix what you can with government. Get rid of the Bush Tax cuts and open up bigger and broader trade agreements. Its really not very hard if you can just come up with 10 or so points everyone can debate and agree upon.
If you put Reich and Stockman into an office in Washington and ordered them to fix the economy, I would bet everything I have that they would do it. And probably brilliantly.
the probably is not having smart people figure things out. it's having congress and the president agree and sign off on it. the debt commission has allot of good ideas. but no one wants to move on it. they'd rather create their own ideas and say look what i did, and look what he's not doing.
No we don't need to change our constitution. If you like what Iceland is doing so much why did you immigrate here? I am tired of your constant anti American sentiment and overtones that we need to drastically change our constitution to enable social justice. It's getting quite old.
Listen, I actually go to the Natural History Museum quite frequently. It is a block from where I live. I have to assume you are still spinning records on a turntable, or is it an 8-track machine ? The Constitution was supposed to be a work in progress, not a scripture.
It seems everyone, incl. Stockman & Reich want in on the discussion.All seem to have a handle on the problem, but can't agree on the solution. Perhaps, like the problem the solution can be multifaceted & we should try various methods to get the job done. One thing is, bring back jobs from overseas. Short term cheaper manufacuring, is hurting our economy for the long haul. Obviously we must disengage from the wars, even Libya, asap.! Frankly we can't afford to be engaged. Entitlement programs need better monitoring so the slackers are cut off. No more tax breaks for the rich, no more subsidies for corporate giants. If those who have little or nothing must tighten our belts to save the economy, it's only fair that those who have alot do too. This is our country, we are ailing & only we can fix it.I do want to point out, the fact that the world economy is in trouble doesn't help matters, but ultimately each nation has to take responsibility for their own!
One thing Dr. Reich neglects to mention: long term growth has been much studied. One result is undisputed in the postwar era: the most competitive (fastest-growing) economies are dominated by capital intensive production. Investment dominates technical change as an explanatory variable. Labor intensive production has been increasingly outsourced by advanced economies.
The objective he espouses of creating phony jobs for those he would otherwise pay to sit unemployed may serve his distributional preferences, but it clearly drives the economy in the wrong direction, relative to international competitiveness and growth in the long run.
Just logic; if you force purchasing power into the labor intensive sector, you suck it out of the capital intensive sector. Now, when that purchasing power is derived from borrowing which must be paid back through income taxation, it diminishes both the return on and value of investment.
The deflationary spiral after 1929 was followed by a double dip in gross private investment after the WPA began in 1935 and FDR signed the Revenue Act of 1936.
A jobs-creating stimulus can goose consumers into circulating money in the short run, but at the cost of running the train onto a deadend siding in the long run. Also, understand that enhanced consumer spending cannot be kept out of the hands of our trading partners under existing trade agreements. So, Obama's energy tax credits went to solar panel manufacturers in China and wind turbine manufacturers in Denmark, not U.S. firms. If you DO restrict trade to stimulate domestic hiring, you will increase the pressure for low-wage workers to immigrate here (legally or otherwise) and take American jobs, driving down market wages further. (Trade Theory 101)
You end up with low wage, capital-poor industries employing low-skill personnel.
NOT a formula for competing globally.
Neo-Keynesian solutions backfire in the presence of extensive international free trade.
No govt has right to tax minimum sustainance amount required by an individual. The proposal of exempting US$20000/- is just and fair beyond economic reasons.
However USA is ill placed today and whatever exemption it gives woudl fly away from USA. Therefore exemption should be kept abeyance for a while.
Much to dislike of many USA has to opt for levying 5% import duties and receipt of which should be used to subsidise domestic production for domestic sales. This will encourage new domestic production and yeild some relief on employment froant.
USA has to opt for MINIMUM ALTERNATE TAX connected to capital. This would force idle capital to investment. Also this would make US earn some revenue on capital employed outside USA. Capital employed outside USA is now counter productive for USA and it has to be converted to revenue yeilding capital.
Shape of US politics will not allow such things to happen but US has no option, as I think. If they do not take bold steps they will move away from superpower to Bruteforce Power only.
I happened to be working in the Executive Branch in Washington DC in 1983-84. David Stockman was heading the OMB. President Reagan wanted substantive tax reform and David worked on how this might be accomplished. President Reagan favored a simple flat tax with no deductions of any time – he disliked the "social engineering" mess that decades of special interests had done to the tax code. Coming from state government, simple and easy to understand was better and easier to predict. David worked up a number of scenarios but what eventually came together was a flat tax of about 12%, no deductions of any kind and poverty level income exempted entirely (about $16,000 at the time if I remember correctly). David will be better able to go through the nuances but I believe this level of taxation would have balanced the federal budget in 1984. Looking at this proposal from the perspective of members of Congress and special interests of all kinds, a simple flat tax was a power grab – how can you sell influence without the power to approve special deductions and tax breaks for just about anyone willing to contribute to your campaign? Things have just gotten worse over the past thirty years. Nevertheless, I believe President Reagan would have been able to get a version of the flat tax through during his 2nd term if Oliver North had not tragically sapped the power of his Presidency. I have no current estimate for what kind of flat tax would be needed to balance the current budget or even one with significant cuts but President Reagan and David Stockman were on the right track. Time to dust off the Gipper's play book.
I missed the show, so I'm glad this video is up. Great discussion, and I agree both.
David Stockman is a hero to me because he criticizes Reaganism as it is being practiced today, but when he says there's no money to rescue those without jobs, I would have liked to hear him answer the question: What are those without jobs supposed to so. Simply starve?
Get rid of the unions and you would be better off. You Americans think you have it rough come to Canada. We pay anywhere between 25-42% taxes and Canada is far better off ECONOMICALY STABLE then our friends to the south. What you need to do is reopen the steel mills get back into manufacturing and be self sufficient instead of relying on the cheaply made products from a third world country. What ever happened to MADE IN THE U.S.A? The unions should be abolished and the lazy union workers would have to actually work for a living. I am not unionized but as a buisness owner I see how much wasted time and money the unions spend. I work in Fort McMurray Canada and my job is located right beside a Industrial job site and the jobs are pretty close in size. I started my jobsite 1.5 months after the other one and our job is going to be done on time and thiers is not. 1Hr for lunch and 2 30 minute coffee breaks are what makes a union job go over budget and behind schedule. UNIONS are a license to STEAL and who picks up the tab the taxpayer. That is why we are paying $1.20/LITRE for gas. That works out to be $5.45 per gallon.
Stockman's answer to the job problem:
".. there's really literally nothing that Washington can do about the job problem."
Is this really the conservative response? If they are OK with another decade of decline, let them tell that to the voters.
I have yet to listen to the video, but these are my 2 favorite economists who seem to know what they are talking about. I've been watching Stockman's warning about the end of QE2, and I am interested to see what happens today as Bernacke discusses this at his press conference. Can't wait to watch this video when I leave work.
Govt can create artificial jobs paying artificial wages, but these ultimately get paid out of real taxes, which cost real jobs. Sometimes you really cannot force your way into a better economy. Sometimes you simply have to wait for market forces to adjust at a micro level and over time at a macro level, which can take years in the presence of demand externalities. It's what we call Real Business Cycle Theory.
Fareed, please don't let them get away with it. The last two weeks you had Coulter and Stockman. Both showed a worship of "small government" and hence the "taxpayer", and to hell with the economy (jobs and the market and business). Those of us who believe that ours should be a government of, by, and For the People don't accept that. When Coulter refers to the "failed" Social Security, she means that some day it will not be able to support itself. She does not consider that it has helped people and the economy for well over 70 years. She also will not consider taxing those who profited the most from the improved economy and could most easily afford it, especially in today's miserable economy. Ask them to consider it.
stockman is exactly correct.
reichman is a theroist and has never have been "seasoned" in real life. they are always shouting from afar about what the know...from books, and not getting kicked to the curb trying to make a real go of things.
they can't run anything let alone a business. if they had they would know what they espouse is so full of holes they would never have food on their home tables. they don't even know where their paychecks emanate from. they just receive their care package and keep blabbing,.
go to work ...for real and flip burgers, wait on a customer in a hardware store get someone's attention by helping find a product or return something.
DO SOMETHING don't just cut everyting down without the benefit of real life experiences other than reading.
The injection of trillions into the hands of irresponsible speculators, funds that should have been used to make sustainable infrastructure like roads, bridges, schools, hospitals .. etc was wasted on enriching a small group of investors who made bubbles, and drove out US manufacturing base to maximize short term profits. This change in the tax code shifted the tax burden towards labor, and away from unearned income and profits. Restoration of sustainable market conditions necessitates putting money back into the hands of people who spend it on long term sustainable goods and services, not luxury items and the wasteful spending on military 'adventures'.
Amazing issues here. I am very satisfied to look your article. Thank you a lot and I'm looking forward to contact you. Will you please drop me a e-mail?
The Global Public Square is where you can make sense of the world every day with insights and explanations from CNN's Fareed Zakaria, leading journalists at CNN, and other international thinkers. Join GPS editor Jason Miks and get informed about global issues, exposed to unique stories, and engaged with diverse and original perspectives.
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