Here's the transcript of my interview with U.S. Treasury Secretary Timothy Geithner (video above). We talked about the U.S. economy, regulations, unemployment, tax reform, austerity, China, and Geithner's future plans. Let me know what you think!
The U.S. Economy
Fareed Zakaria: Let me start with an easy question. What is the United States economy going to grow at this year?
Timothy Geithner: You know, there are no oracles in economics, and it's still a pretty uncertain world, but I think that conventional view of the U.S. now is that we're growing between two and three percent. And I think that's a realistic outcome for the United States economy as long as we see a little more progress in Europe and as long as we don't see a lot of risk come from Iran on the oil front.
Fareed Zakaria: That scenario of two to three percent growth seems a little different from what Ben Bernanke thinks growth is going to look like. If you read the statement the Fed put out, and it was a very bearish statement. I mean, to be willing to almost guarantee that rates will be kept where they are until the end of 2014 suggests they don't see any growth of any – any robust growth for a long time. Are they wrong at the Fed?
Timothy Geithner: Well, you know, I'm not a forecaster, so my view is not worth much, but I think actually if you look at the – both the Fed's forecast and the consensus of private forecasters in the business community among economists, people are pretty close to being clustered in that area. But it's still very dependent on how the world unfolds.
Again, I think it's worth recognizing that, you know, we still face tremendous challenges as a country. We're still repairing the damage caused by a devastating financial crisis. That still has huge lasting impacts on the basic fortunes of most Americans. Unemployment is still very high; housing is still very, very weak; construction is very weak; people still have too much debt, they're bringing that down, and that's still going to take a while to repair.
Fareed Zakaria: You know, there is a very well established narrative now among the business community in the United States that there would be much more robust recover, the U.S. economy would be growing much more vigorously if there were greater certainty and businesses could invest and the reason they are not is a kind of tsunami of regulations, uncertainty about tax policy, uncertainty about the deficit. But, perhaps above all, the sense that the economy is being thrown this huge new wave of regulations in health care and finance and energy and that that's what's keeping the economy back.
Timothy Geithner: I don't think there's much basis for that view, although it is true that we are putting in place very tough reforms in the financial sector. We're trying to improve how the U.S. health care system works, and we're trying to change how Americans use energy. And those are necessary, desirable, very important long-term reforms for the United States, but I think if you look at the evidence we have about how the economy is doing and how the business community is doing in particular, the reality does not justify that sense.
So just look at the things you can use to measure basic health, business health. You know, profitability across the American economy is very, very high. Profits are higher than the pre-crisis peak. If you look at investment as a measure of confidence, private investment and equipment of software is up more than 30 percent since the trough in the first half of '09, exports are up 22 percent, there's broad- based strength in energy, in agriculture, in manufacturing. Not just high tech manufacturing, but even heavy manufacturing.
I was at a Siemens plant, a new plant in the United States, in North Carolina this week, which is building steam and gas turbines and generators, and for export. And they're doing that because they see in the basic fundamentals the productivity of the United States, even with all our challenges, pretty compelling, competitive vantage relative to where else they produce.
So I think if you look at the basic health of the American business sector, it's much stronger than I think anybody would have thought at the peak of our crisis and stronger than many of us hoped.
Fareed Zakaria: While business profitability is up, productivity is up, unemployment still remains a huge challenge and many businesses have become more productive because they've taken costs out of the system, they've managed very efficiently. How do you get the American jobs machine going again?
Timothy Geithner: Well, the biggest driver of how fast the unemployment rate comes down is how fast we grow. And the biggest determinant of how fast we grow now is really going to depend on these two fundamental factors. One is what happens in the world, meaning in Europe and in the Gulf because of oil, and frankly, just to be direct about it, whether Republicans in Congress decide they want to legislate things that are good for growth in the short-term.
So that what we think the right economic agenda for the country is, is for us to legislate a set of investment incentives, investments in things that matter for long-term growth, rebuilding America's infrastructure, more education, more spending on innovation, basic science and research, better skills for Americans tied to long-term fiscal reforms that restore sustainability. And if we were able to legislate progress in those things in the short-term, that would make a big difference for confidence. It would make a difference for this rate of growth of the American economy in the short – in the short run.
But, to be realistic, it's going to take a long time still for us to fully repair the damage, particularly unemployment that came as a cause of the crisis. But the private sector has created 3.2 million jobs since job growth resumed. That's actually pretty strong job growth in the private sector compared to the last two recoveries, and it's pretty strong given the aftershocks of the crisis. We all want it to be stronger, though.
Fareed Zakaria: Most people who look at the American tax code, which is with regulations and rules, 10,000 pages, one of the most complicated in the world, believe that the key to reforming the tax code is broaden the base, eliminate deductions and loopholes, lower rates. Isn't the president's proposal in the State of the Union taking us in exactly the opposite direction?
Timothy Geithner: Not at all. The president's proposals, which are focused on a set of investment favorable reforms in the corporate tax system, manufacturing and investment, and on a modest but necessary increase in the effect of tax rate paid by the richest Americans. Those two things are only going to come, I think, realistically in the context of broad reform.
And what we're trying to do is lay the foundation for tax reform so that we can produce a more simple system, lower rates, broader base, more simple, less distortions.
Fareed Zakaria: Not why just propose tax reform?
Timothy Geithner: Well, and – because I think – I think you have to start with principles for a framework, and what we're trying to do is to be specific - we think should dominate the debate.
So, again, I wish it were different for us, but the basic, crude fiscal realities of the United States now – and we have to recognize we have to govern within those limits – means that when we do tax reform, we're going to have to be helping contribute to deficit reduction.
We don't have the ability of offering the American people or the American business people community a net tax cut. That is beyond the capacity of anybody realistic about our constraints. But, again, just to put in perspective, our fiscal problems are daunting for us in the long run, but they are much more manageable problems than faced by almost any major economy around the world.
And it's important not to lose sight of the fact that given – given the high level of unemployment, given the very bad outcomes for median income in the United States over the last 30 years, 20 years, 10 years, given the just appallingly high rates of poverty in the United States, given the competitive challenges we face, that's going to require pretty significant investments in infrastructure and education innovation, you have to take a much broader approach. And we're not going to solve our problems in the country by thinking they're centrally about how we restore fiscal sustainability.
That's part of it but it's not the dominant challenge we face as a country.
Fareed Zakaria: When you look at your, Mr. Secretary, you look at the growth projections that are coming out, and they're all lower than projected, which means that the deficits are larger, which means that the debt to GDP is larger. The debt to GDP is larger in almost every case, not because the debt has gone up, but because the GDP has gone down. That is the – not that the numerator has gone up but the denominator has shrunk.
Does that suggest that austerity is not a path to growth?
Timothy Geithner: I think the debate about austerity and stimulus is mostly divorced from a much more practical reality. The proponents of stimulus I think today now realistic – are – probably exaggerated its power and its reach now. And if you think of the people who talk about economic problems is mostly problems you can solve with austerity get the big things wrong.
It is true, however, though, for parts of Europe for a long period of time there's going to be no alternative to very substantial adjustment in budget deficits in the size that the - governments made. There's no alternative to that. For those to work, however, they need some support and some financing, and they need to be complemented by reforms that are also helpful for growth and competitiveness over time.
But they will not work if there's not a stronger commitment of financial resources standing behind the European endeavor, and without that those reforms will never work, and you're right, countries will face the risk that every disappointment in growth will be met with a austerity that will feed the decline. And that's a cycle you have to arrest if you saw a financial crisis.
Fareed Zakaria: When you were in China, did you talk about U.S.-China trade in a way that you think you will see results? Because the president in his State of the Union was pretty tough on China. Do you think that there is a path here, a constructive path, forward?
Timothy Geithner: Well, again, we'll have to see. You know, we measure people by their actions and, you know, China does present a pretty – a really unique and formidable challenge to the global trading system because the structure of its economy, even though it has more of a market economy now, is still overwhelmingly dominated by the state, by state enterprises. And China systematically subsidizes the costs of key imports – energy, access to credit capital, price of land, and it's kept its exchange rate below fundamentals for some time, although it's appreciating gradually.
So what that means is China, even though in many ways it's starting to have a world class manufacturing sector, is supporting that ambition with a set of policies that are very damaging to not just the commercial and economic interests of its trading partners, but to the political support around the world for sustaining a more open trading system. And they are moving on some fronts, we'd just like them to do more and we'll – you know, we'll just have to see.
I do think China believes that it's in its interest to try to make this broader system work. Of course, it depends a lot on its access to our market and other markets around the world, and we hope that provides enough of an incentive for them to make more progress in these reforms.
Fareed Zakaria: Let me ask you a final question. You were surprised that you made news a couple of days ago when you made clear that you were not going to serve in a second term of the Obama administration. Is that his choice or yours?
Timothy Geithner: That's an excellent way to pose that question.
You know, generally anybody who takes these jobs serve at the pleasure of the president, and, you know, at a time when we face so much challenge, so much pressure, you know, if the president asks you to do these things, you have to – you have to do them. And when – when he asks me to stay, when I thought it was the right time to leave, I agreed I would stay, and I agreed I would stay through the balance of his term, and he accepted that aspiration of mine. And that's where it's going to come out, I think.
Fareed Zakaria: What are you going to do next?
Timothy Geithner: That feels like a long way away.
You know, again, you know, we're in Europe. I know the eyes are all (ph) in Europe, but, you know, we are living with a terribly challenging and hugely consequential economic policy choices. We have a lot of unfinished business even on the financial reform side, and a lot of foundation laying for better policy outcomes on the things that are good for growth, investment, production in the United States, not just for the long-term fiscal.
So I feel like we got a – we got a long year of hard work, and I know it's a political moment in the United States, and people are skeptical about whether we can do anything, but our judgment is that we still have a chance in some of these areas to make some progress, and I'm going to – I'm going to focus on that as long as I can.