Dean Baker on the Crisis
Jan 9 2012

Dean Baker of the Center for Economic Policy and Research talks with EconTalk host Russ Roberts about the financial crisis. Baker sees the crisis as part of a broader set of phenomena--rising inequality and declining unionization. Baker is highly critical on both economic and political grounds of the policy attempts to stimulate the economy as well as the governance structure of the Federal Reserve. The conversation closes with a discussion of potential innovations to lower the budgetary cost of health care.

Anat Admati on the Financial Crisis of 2008
Anat Admati of Stanford's Graduate School of Business talks with EconTalk host Russ Roberts about the financial crisis of 2008, the lessons she has learned, and how it has changed her view of economics, finance, and her career.
Daron Acemoglu on Inequality and the Financial Crisis
Daron Acemoglu of MIT talks with EconTalk host Russ Roberts about the role income inequality may have played in creating the financial crisis. Raghuram Rajan in his book, Fault Lines, argues that growing income inequality in the last part of...
Explore audio transcript, further reading that will help you delve deeper into this week’s episode, and vigorous conversations in the form of our comments section below.


Jan 9 2012 at 7:15pm

Great podcast. I was impressed on how much you guys agreed on much like I suspected. I’m surprised he didn’t get into his other solution for health care costs (allowing foreign doctors to practice more freely etc.) which would have been less radical and get more support.

Jan 9 2012 at 9:23pm

It doesn’t matter how much you stimulate if trades are unprofitable.

If trades are unprofitable, jobs disappear because there’s no business model that makes the work profitable.

Most businesses run on the edge of profitability, hence a recession takes a lot out, and that’s why there’s job losses.

Normally this creative destruction reconfigures the jobs so that new ones are profitable, and you have a recovery.

This time the government has piled regulation on regulation and added health care costs, which makes the unprofitability permanent.

No stimulation will work in that conditon.

Macro overlooks the whole point: both sides have to profit on every voluntary transaction; that mutual profit adds that much to the nation’s standard of living; add it up over all transactions and the nation thrives.

A government wedge drives huge numbers of formerly possible transactions into unprofitability, and they’re permanently gone as a result. Forcing them to happen with a stimulus decreases the nation’s standard of living by the amount of the mutual loss on each trade.

No argument about multipliers is necessary. That’s a dead weight.

Glenn Carleton
Jan 9 2012 at 10:57pm

Recent podcasts including this one scare the hell out of me, questioning what will happen if we have another financial crisis, asset bubble break, EU collapse, etc. whether the powers in charge of the Fed Reserve are equipped, and independent, to make the right decisions. Outstanding education, especially when part of listening to the podcasts as a sort of series. It is hard to imagine what criteria and understanding our politicians use in making their policy decisions, equal or more scary than the Federal Reserve. I would like to see a podcast on the impact of politicians who are not only ignorant of economic issues, but even if they were not would dummy it down to poor policies to get voted into power.

Jan 10 2012 at 9:36am

Why did you let him off the hook on rising productivity in the 50s through 70s? Productivity *declined* during that time! By 1979 real productivity growth was zero and unit labor costs were rising at 10% / year. Inflation was making investment in new plant and equipment unprofitable. Only by breaking inflation was that cycle reverse.

The ’70s were not a golden age for labor. Remember Reagan’s ad: “If Democrats are so good for working people, how come so many people aren’t working?”

There’s a reason why that worked and why I remember it: it resonated. The failed policies of Keynesian management let us into an inflationary spiral. As those memories have faded, Keynes has been resurrected. And now we have to get back to the garden of ’70s delights? C’mon!

Jan 10 2012 at 10:23am

On the stimulus, I am willing to accept Dean’s numbers that $300 billion/year saved/created 3 million jobs. That is $300 billion / 3 million jobs = $100,000 per job! Most of those jobs paying below $30,000/year! Why anyone would think that was a good policy based on those numbers I do not know!

I would think that it would be much better to try a combination of monetary expansion and replacing the minimum wage, some welfare and unemployment insurance with a wage subsidy.

Jan 10 2012 at 10:37am

These podcasts keep getting better. The problem now is labor productivity because the union movement has faltered and that the prices of health care continue to outpace inflation.

I have worked in a factory with a unionized workforce, and have observed many factories with and without unions. It is amazing that a factory with an active union can get anything done. The only thing a union does is to add needless bureaucracy to a situation where competition is fierce. So companies facing this added bureaucracy have two choices: 1. Replace labor with machines, or 2. Move out of the reach of the union. And there are three major reasons for the loss of union employment over time: 1. Technology gives people the ability to more with less and nowhere has that produced greater productivity than in manufacturing. 2. Competition from foreigners who did not have the blessings of union bureaucracy. 3. Government regulation that forces production off shore.

And all of the healthcare problems in the USA are from government preventing economic calculation by mucking up the price system through licensing, the FDA, patents, research grants, liability, but most of all from the price fixing schemes called Medicare and Medicaid. Any solution that does not address some of all of these and allow the price system to work will not help slow the rise in health care costs.

Jan 10 2012 at 1:32pm

I will correct myself in saying that not addressing the core issue in the distribution of health care (Allowing the price system to function) is the only act that will help slow the rise in health care costs. Clearly the use of violence or the threat thereof can force suppliers of health care to take less compensation for their services. Clearly in this case consumers will be much worse off but violent rationing can always stave off an increase in price by causing a shortage.

a banana
Jan 10 2012 at 1:59pm

[Comment removed for supplying false email address and for rudeness. Email the to request restoring your comment privileges. A valid email address is required to post comments on EconLog and EconTalk.–Econlib Ed.]

Artful Monk
Jan 10 2012 at 6:33pm

Interesting podcast, although I don’t think Europeans would want to absorb the risk of unhealthy Americans into their socialized system. Since their models are cheaper than the private sector we might as well adopt it in the US. Some may call it forced payments but others in the private sector call it bargaining purchase power. I recall a Don Boudreaux podcast arguing that monopolies were good & maybe the govt should use that monopoly model to negotiate lower prices.

To Floccina’s point, a more appropriate way to look at the $30K per job is a function of Net Present Value of hiring 3 Million workers for project duration & not a period cost. In that context, seems like the govt is helping the private sector by providing certainty.

Removing min wage laws would make the problem worse as it would cause a downward pressure on wages & make paying back debt even more difficult. The free market is working in that we are purchasing services from India/China at 20 cents on the dollar at the expense of US workers. It will only be fixed when their wages are at par with US workers. The Fed could help by the increasing monetary base to reduce relative value of the dollar to those currencies & expedite inflationary pressures on wages in India/China

William B
Jan 10 2012 at 7:48pm

Its amazing to me that people put the European health care systems on a pedestal, while completely overlooking the fact that it is our semi-free system that is coming up with nearly all of the innovations in equipment and pharmaceuticals that Europeans enjoy. Without us, their whole medical system would still be in the stone age. The one thing they do better is getting drugs to market quicker. The FDA here in the US is a disaster.

It is amazing to me that nobody has done a study on how much health care systems throughout the world get to enjoy the benefits our system enables.

@Bogart – Great points, I completely agree.

Mort Dubois
Jan 11 2012 at 12:31pm

@ William B: they freeride off us because we let them. “Without us their whole medical system would be in the stone age”. I think not. Without us supporting them they’d figure it out themselves, including how to pay for it. In my pickup soccer game, more than 20% of the players are foreigners who are here to work in the pharmaceutical industry. If we change our healthcare system, they won’t suddenly get stupider. They’ll go home and invent stuff there.

Russ: regarding turning health care into a tradable sector. The idea is completely impractical and stupid, and I’m surprised you didn’t call him on it. Just think about it: when you are really sick, do you want to get on a plane to Europe for treatment? Do you want to share that plane with other ill people? Do other countries have a bunch of doctors lying around who can handle all of our health care? Do they have the infrastructure (airports, hospitals) to handle the traffic? And if the incentive at our end is to give the consumer the cash difference between our costs and the foreign costs, then why bother? No money is saved. Not to mention the difficulty of figuring out what our costs might have been – are you suggesting that we retain our current administrative structure so that we can create an alternate bill for every transaction?

I love listening to the podcast, but it scares me when a guest suddenly jumps the shark and Russ follows right along without any push back. Makes me wonder about the rest of the analysis.

That said, Econtalk is the best thing around. Don’t stop!


Jan 11 2012 at 2:34pm

I’ve been listening for three years, and this is the first EconTalk I couldn’t finish.

First the guest opens that we lost productivity with decreased unionization – we only need to look to Hostess in today’s paper to know that.

Later he says we will return to economic efficiency when Obama gets re-elected and his health care law goes into full force. I had to stop listening.

I guess the pertinent questions are:
1. how gracious does a host need to be to a guest?
2. how do we convince the 10% in the middle who will decide the election that these statements are canards?


Jan 11 2012 at 3:17pm

Artful Monk:
Government does not negotiate, it uses force or the threat thereof to get the other party to agree to its terms. And when force is used the costs of that force are thrust on the other party in unseen ways. For example the other party may not have the capital available to build a new factory or develop a new product. Or the other party may leave the business.

Government can not make the uncertain more certain. It can only steal resources from one person and give them to another. And it is horribly wasteful to take the savings of some for to be handed out to others.

Wages paid in China, India, Pakistan, Central America, etc for outsourced products are not hurting US workers. Only government is stupid enough through idiotic productivity reducing volumes of regulations hurts workers. And then to make matters worse the government forces workers to absorb transfer payments to wealthy older folks. All of this means that a worker in the USA costs must have their productivity cover a lot more than a worker outside the USA.

And to make matters worse, using government to protect workers from outsourced labor only hurts workers engaged in insourced labor. And I have been engaged as an insourced laborer for 12 of my 16 years at my current job.

Brad Hutchings
Jan 11 2012 at 4:35pm

Here’s what I’ve learned about the housing crisis through all of these interesting podcasts. It took about a decade and a half to build up into an explosive problem. There are no quick fiscal or monetary fixes. There is a broad loss of confidence, with blame targeted at all participants, from lenders to real estate agents to underwriters to regulators to GSAs to legislators, with focus of rage strongly corresponding to political outlook. It is very possible that any attempt to meddle could further diminish confidence or just make the problem worse. Put in this category anything that has a goal of “supporting housing prices” but also put in this category anything that has a means of “socializing losses”.

The dynamic of available fiscal and monetary responses strikes me as similar to “The Gauntlet” skit in the movie Jack*ss 2. There is an indoor skateboard ramp, and tethered from the ceiling at various points along the ramp are medicine balls. The skaters, starting with Johnny Knoxville, attempt to skate blindfolded from one end of the ramp to the other. The other crew regulars fling medicine balls to try to derail them. Hilarity ensues.

Think of the blindfolded skater as “the economy” trying to get to a more stable state at the other end of the ramp. Think of the medicine balls as “decisive” fiscal or monetary interference that so many hope could quickly solve the problem, and the crew itching to do something with those medicine balls.

To tie up this metaphor, let me just misquote the great John Maynard Keynes… In the long run, all my friends are dead.

Jan 11 2012 at 5:41pm

Great Podcast. You should invite more often people with a different opinion than yours. It is not a bad thing to look at a matter from another point of view.
And it was nice to hear two US-citizens with different opinions not shouting at each other for a change.

Krzysztof Ostaszewski
Jan 11 2012 at 7:16pm

If you include the cost of benefits and proprietors in the labor share of national income, then the share of labor in national income has not changed till 2009. So the whole premise of the arguments based is biased and flawed. Furthermore, productivity growth in the 1950s, 1960s, 1970s was attacked continuously by continuously increasing government imposed burden. Eventually, the camel’s back gave in.

It is at least refreshing to see a left-winger oppose bailouts. This is probably why he has no influence in DC.

Krzysztof Ostaszewski
Jan 11 2012 at 8:19pm

Russ Roberts: All of your complaints about “financial sector” are complaints about banks. When did banks become “financial sector”? Mutual funds and insurance companies are nowhere near politically powerful, and nowhere near as demanding of taxpayers.

Jan 12 2012 at 12:50am

I’ve listened to most episodes since finding EconTalk early Summer 2008 via Taleb’s site. The worst ones are Russ and a compadre patting each other on the back with the listener reduced to participating in a Kremlinology of said back-patting.

Was pleasantly surprised to find Dean Baker as an ET guest. Dean is a strong sensible voice, along with David Frum (getting our health care costs to OECD average means DOD for free) and Bruce Bartlett (tax expenditures matter).

While I’m dropping names I’ll drop a link to Michael Pettis, who talks sense about the most important relationship in the world (and much else). Russ seems to be losing his fresh-water naivety WRT geo-macro and there are plenty of sharks in those waters. Check this guy.
& a podcast

Jan 12 2012 at 10:10am

I thought this was a great podcast. I like that Russ has a different opinion than the guest and that they are quite civil to each other. Disagreements are beneficial – caustic attitudes and strident behavior are not.

To those that think that we can get cheaper healthcare by having more insurance companies in the game – you need to do some homework. The way prices are negotiated in the healthcare markets are that the larger the insurance company and the more market share it has the more leverage it has to get hospitals and doctors to reduce prices passing the savings on to you – the insured. If you flood the market with more and more small players you dilute the buying power that comes with the monopoly (or near monopoly) of the large insurance company and the price will INCREASE.

While this seems counter-intuitive it is because the price of healthcare is not driven by how many people want to go to a particular doctor or hospital – it is purely a negotiation between the hospital/doctor and the intermediary (insurance company). That is why many hospitals and doctors have no real idea what to charge someone without insurance and why that cost is so staggeringly high.

I will mention a few other pertinent items:

1. Private sector unions used to be more highly compensated than public sector unions – however, the demise of the manned factory in this country in combination with changing social mores have almost eliminated the private sector unions. The public sector unions were able to maintain their roles and so have reaped the benefits of a slow but steady upward climb – the same climb most Americans would have had if they had kept unions in place instead of letting them decline. Now private sector workers are not adequately compensated and look to public sector workers as parasites. This can only end in more and more Americans being paid less and less for their work and our country ultimately declining.

2. Look at trade agreements. NAFTA and other agreements were supposed to shift low-paying jobs to emerging markets and we were supposed to use those “savings” to put Americans to work at higher paying jobs which require more education. We didn’t. Instead these emerging markets have made it cheaper for owners and shareholders to make more money while the American worker has seen their wages stagnate. We haven’t been sending more people to college, we haven’t been increasing engineering and science jobs – we’ve simply been competing with cheaper countries and losing.

If we don’t start to gear policy towards growing and protecting the middle class in this country we are going to squander the considerable gains we made as a country from the 1950’s forward.
I hope people can put aside ideology and try ANYTHING that might work to get our country back on track again – to the benefit of ALL.

Russ Roberts
Jan 12 2012 at 11:15am


If I say banks, most people think of Bank of America or Wells Fargo. They are part of the problem. But it is the investment bank part of those banks along with traditional investment banks such as Goldman Sachs, JP Morgan Chase, and so on that are the bigger problem. So when I say financial sector, that’s my way of including the investment banks. Then there’s Fannie and Freddie–they’re not banks either so I want to include them, too. As for insurance companies, AIG is definitely part of the problem.

On the issue of compensation and productivity, go here:

The analysis there shows that until recently (post-2000), the gap between compensation and productivity is due to differences in price indices used in the two measures.

Artful Monk
Jan 14 2012 at 4:58pm

These past few podcasts have been very informative and as an earlier poster indicated we should follow the model of economic growth under Reagan. There were three legs to the stool which included Reagan’s fiscal policies of doubling the annual government spending & tripling annual deficits. From a monetary view we had an accommodating Fed who doubled the monetary base while reducing interest rates from 19% to 7%. Finally, we had smart regulations that increased CAFÉ standards for fuel efficiency which led to the decline in impact of the costs push inflation of the 70’s. Are those policies Keynesian, who cares? In aggregate, these policies led to tremendous growth and maybe we should follow a similar course commensurate to the scale of the economic crisis we face.

Jan 14 2012 at 9:17pm

“Why did you let him off the hook on rising productivity in the 50s through 70s? Productivity *declined* during that time!”

Well this is way, way off. TFP was much higher at the end of the 1970s than 1950, though the growth rate in productivity did start to decline in 1973 and stayed at that lower rate through the 1980s and (more or less) into the present.

Here’s a graph:

Jan 14 2012 at 9:45pm


“Just think about it: when you are really sick, do you want to get on a plane to Europe for treatment? Do you want to share that plane with other ill people?”

It’s funny that you don’t realize people already go overseas for cheaper medical treatments. They just have to pay for it mostly out of pocket. Most sick people don’t have communicable diseases. They need surgeries or chemo or some regular visits/drugs/labs that could be done with online appointments and inexpensive doc in a boxes.

“Do other countries have a bunch of doctors lying around who can handle all of our health care?”

Demand creates supply. As more people bought into the systems of other countries, the countries would have more resources (and desire) to train more doctors and build more facilities. Initially, it would be a relatively small number of Americans spread out over many countries.

“Do they have the infrastructure (airports, hospitals) to handle the traffic?”

Really, you don’t know that the rest of the world has airports?

“And if the incentive at our end is to give the consumer the cash difference between our costs and the foreign costs, then why bother? No money is saved.”

The gov’t is splitting the cost with the beneficiary. So both the gov’t and the individual get half the money saved.

“Not to mention the difficulty of figuring out what our costs might have been – are you suggesting that we retain our current administrative structure so that we can create an alternate bill for every transaction?”

This is not an issue. The beneficiary would be buying into the other countries health care plan. All we need to know is the price the other country requires, it’s up to them to pay care health care suppliers.

It’s basically just a voucher to use your medicare money for something else. I think there are potential problems with the program, but your comment didn’t identify any of them.

Jan 15 2012 at 12:53pm

About 52 minutes:

I mean look at Japan, with a debt-to-GDP ratio of over 200%. We are nowhere in that ballpark. And they are still borrowing at 1% interest.

-Dean Baker

Yes. Let’s aspire to be Japan. What is it now, are we coming up on two decades of stagnation?

Mort Dubois
Jan 16 2012 at 4:53pm


Number of doctor visits in 2010: 956 million

Number of enplanements in 2010, all airports: 713,776,556

What percentage of doctor visits have to be outsourced in order to make a dent in our health spending? Can you pass that number of people through our airports? What do you think will happen to the first politician who suggests that we do this?

Russ Wood
Jan 30 2012 at 6:36pm

I never heard Mr. Baker explain what is the significance of the fact (if true) that workers are getting a lower share of productivity gains than they got in the 1950s and 1960s. What rule says that the division of productivity gains from those decades was “correct” and that more recent shares are “wrong”?

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Podcast Episode Highlights
0:36Intro. [Recording date: December 21, 2011.] Mess the economy is in, how we got here, and how we might get out of it. How did we get here? What went wrong? I see our economy as having been seriously unbalanced in some ways dating back to the 1980s, that you could tell a story of a virtuous pattern of growth, 1950s, 1960s, into the 1970s, where you had productivity growth, very good in fact, that was passed on in wage growth pretty much up and down the income ladder, that led to increased consumption, increased demand; therefore increased investment, more productivity growth, etc., etc. That really broke down in the 1980s, you could trace that to a number of factors, I think a big part of that is the fall in unions. We saw a big fall in unionization rates in the 1980s. It had begun earlier but it accelerated. Also the power of unions was weakened substantially because following the Professional Air Traffic Controllers Organization (PATCO) strike there was a willingness to fire striking workers, hire replacement workers, so that meant that there was much less effective tool. I'd say that globalization played a big role, the way we structured it certainly, in the 1980s in particular; you got a big run-up in the dollar which had a big negative impact on manufacturing workers in the United States which had been really the center of the unionized workforce. Anyway, long and short, you had a situation where following the beginning of the decade, the beginning of the 1980s, wages for most workers no longer moved in step with productivity growth. This, in effect, created some of the demand gap that had some impact in the 1980s, much more so in the 1990s. And the demand gap was in effect filled by the bubbles. So, in the 1990s, we had the stock bubble that ended up pushing the economy to, you know, in many high levels of employment now put, but of course that couldn't last; the bubble eventually burst; we got the recession 2001; and the recession proved hard to get out of. It's always hard to get out of a recession caused by the collapse of an asset bubble. And when we did finally get out of that we started to see healthy growth and job creation--that wasn't till 2003, by the way, the fall of 2003. It was on the back of the housing bubble. And of course that bubble was even bigger than the stock bubble, at least in its effect on the economy. When the housing bubble collapsed in 2006-2007, that led to the economic collapse for two reasons. One hand, it was directly driving construction; we lost 4 percentage points of GDP in annual demand because of falloff in construction, about $600 billion a year. Then on top of that you had the consumption demand being driven by the housing-wealth effect, we had around $8 trillion in housing bubble wealth had been at peak of the bubble; pretty much all that disappeared. The result of that has been a big rise in the savings rate; it had been over 5%, it's down a little bit over the last quarter or two but it had been over 5% compared to pretty much zero at the peak of the bubble. That translates into a loss of about an annual $500 billion in demand. So, you saw a big falloff in demand in residential construction; there was also a bubble in non-residential that burst as well a little bit later, a falloff in consumption demand; we are looking at a shortfall in annual demand of a little bit over $2 trillion. And we simply don't have the ability to fill that at the moment. We could do that with government spending, but the private sector is not going to step up and fill it simply because there is no dynamic that would cause the private sector to step up and fill that gap. So basically we are recovering from a collapsed housing bubble and we aren't at least prepared at this point to do the measures with the government that we could; and the private sector is not going to do it on its own or at least not any time soon.
4:48First, I want to talk about the union productivity issue. Data on this is pretty good. It's not great. But I think it's hard to sustain the argument that the 1980s were somehow a watershed. The PATCO strike is one aspect. But hasn't unionization been declining in the private sector pretty steadily from 1950 on? Mainly--partly because of the change in the composition of jobs, right? Maybe for other reasons as well. Yes, no. Unionization rates peaked about 1955-1956--I'd have to double check exactly and of course our data from that period is not that great in any case. But they definitely peaked in the 1950s. They declined in the 1960s. I would say that they definitely did decline more rapidly in the 1980s, and we could look through the data; again, it's not perfect data. But I think there are two things there. One is that you had a continuation of the rate of decline that certainly had begun earlier; but the other part of this story was, even being in a union, you suddenly had much less ability to bargain effectively in a context where going on strike could cost you your job. That really wasn't true in the 1950s, 1960s, and 1970s. So, when you had, following the PATCO strike you had several major private sector employers--Greyhound, Eastern come to mind, but there were others--that did the exact same thing: they fired striking workers, hired replacement workers. That wasn't done in the 1950s-1960s-1970s. I'm sure there were smaller places here and there that did it, but it was considered really, you know, unusual practice. Basically the story was: You shut down your operation or maybe you operated it with a skeletal workforce until you reached a settlement with your workers; and the question was who would go longer: the unions without a paycheck or the company without being able to produce anything. Once companies availed themselves of the option of actually firing workers, you really did change bargaining power significantly, and there were certainly fewer strikes in the 1980s. Workers were very cognizant of the fact that if they went on strike they did risk losing their jobs; and even in cases where they did have strikes, it was often the case that the company would say: If you are not back by x day, we are going to start hiring replacement workers. Didn't real wages grow, real income grow dramatically in the 1980s, despite that lack of bargaining power? No, they didn't. You have to be careful how you look at this. If you take average real wages --I should say average compensation--they more or less kept in step with productivity. But if you look at median or wages of production workers, which tend to track roughly the bottom 70-80% of the workforce, those fell quite a bit behind productivity over that period. Depends how you measure inflation, of course--the Consumer Price Index (CPI) measures. It doesn't matter how you measure inflation because the point is it's shares. So, I'm talking about shares, so it doesn't matter what your denominator is. Explain that? Shares of what? Shares of output. So, typically to measure productivity we use the GDP deflator, standard measure. Right. Whereas if we are looking at real wages, most often we use the CPI. But you could use the GDP deflator as the denominator to measure real wages for the purposes of this comparison. You'd still find, for the typical worker, or the median worker, production workers, their wages did not keep pace with productivity growth. That's interesting. Measurement issue in productivity and compensation--the business sector--the impact of falling computer prices has led to much bigger increases in productivity than it has led to decreases on CPI, which I think is part of that. Right. But if you use the same denominator. Right, that's what I'm saying. I'm agreeing with you. I think that solves that problem. Of course, the other problem you have is when you have the median, you are going to have problems with composition in the workforce as it changes over time, not holding the population constant. So, I've pointed out that in the late 1970s, as the divorce rate starts to rise, the household income, for example, and to some extent median wages of workers, is going to be distorted by just in the change in the number of households. You could have the median fall even though every person is still doing better. And I think we haven't fully disentangled those. Yes, you could beat up the data. I think you'd be hard-pressed to find a story, though, where most workers are doing as well in terms of productivity growth in the 1980s and 1990s--a little different story in the late 1990s, which we can get to. But you'd be pretty hard pressed that they are doing as well as in the 1950s -1960s. If you control for education, you find that workers with high school degrees, workers who have finished high school, workers with say two years of college, a B.A. degree--pretty much anyone who didn't have a college degree you find that their wages are not--you can control by age, you know, break it down men/women--you find that pretty much across the board. So you'd have to beat up the data pretty bad to make that result go away, that wages are not keeping pace with productivity over that period. Yes, it's an interesting question. I think most of the comparisons are looking at a cross section at points in time. If you follow the same people over time, you get a very different picture. Yes, that's right. And part of that story is--life cycle effects. Yes, so again. If you control for age, a 40-year old in 1990, how did they do relative to a 40-year old in 1975? There again, I think you'd be hard-pressed to make a case that their compensation increased with productivity over that 15-year period.
10:53Now, one of the stories you are telling is the role of bubbles. Where in your narrative do those bubbles come from? So, you mention the stock market bubble and the housing bubble. Why did those happen? Are they natural events? Are they monetary events? Where do you put the causal change? Well, I think that you are always going to have some erratic movements in financial markets. And the question is: Do they become self-perpetuating and build to the point where they really move the economy? And certainly both of those did. I think I lay the problem here a lot at the foot of the Federal Reserve (Fed). Part of the story, if we look to the 1990s, what you would have seen if we'd gone back, say, 20 years earlier, you would have had more concern about inflation. And of course Alan Greenspan was concerned about inflation. He did raise interest rates in 1994, 3 percentage points from early 1994 to 1995. But then he backed away from that--because he rightly said he didn't see any inflationary pressures to the economy. No reason not to let the economy grow more and let the unemployment rate fall. Which is in fact what he did, over the objections of many mainstream economists, including Clinton appointees to the Fed. And he was right that we didn't have to worry about inflation. But it did create an open door for the bubble to keep growing. And there's no doubt about it. While low interest rates don't necessarily mean you'll have bubbles--we had low interest rates in the 1950s and early 1960s, certainly--we didn't have any notable bubbles. And they were low and steady, rather than low and falling. Well, how much falling. Well, they weren't actually falling. They did fall from the peaks of 1995 to the late 1990s, but they weren't lower than they were in the early 1990s, so if you look at the Federal Funds rate, that was 3% in 1992, I think that was where Greenspan first lowered it to 3%, and then he raised it to 6% in 1994, 1994-1995 raised it to 6%; and then he knocked it down a little bit, but it was still somewhat higher than the 3% it had been in the early 1990s. The long term rates fell some in the mid and late 1990s. I won't say they plummeted, but again that was part of the story. Active policy there, hoping those would fall. But I won't say that every time in long-term rates, or short-term, whatever you want to put the causal element there, I won't say that leads to a bubble. I will say that it can lead to a bubble. In the 1950s and 1960s it did not. We had very good growth, good investment growth, and that's kind of what you want to see. Low interest rates should mean that's conducive to economic growth, and it certainly was in that period. In the 1990s, we had a very different economy, and it was much more conducive to bubbles. And to my mind it was the Fed's responsibility to prevent it, and Greenspan just looked the other way. As a matter of policy. I mean, we know this now. We have the minutes, the transcripts. They saw the bubble and just said: Well, we'll let it run its course. And then after the bubble burst you began to see--actually the run-up in house prices began in the 1990s. 1995. Yes, that was when you first started to see a divergence between I mean the rate of growth in house prices and inflation. And when the stock bubble burst in 2000, 2001, unlike Japan where you had the two bubbles growing side by side and they both collapsed side by side, what happened was that actually fed the growth of the housing bubble I'd say was for two reasons. One was that in the wake of the collapse of the stock bubble, of course we had very low interest rates. Greenspan lowered the Federal Funds rate to 1%. Sure. So, one was you had low interest rates, and that was conducive for growing the housing bubble. And the other was just that the psychology of many people was just that they felt really burned in the stock market, so they thought housing was safe. Go back to that time and there were a lot of people saying: Well, you can always live in your house. I never quite understood the logic of that. It's a true statement. Why it implies you should use your house as a vehicle for--it's like buying a really expensive car because you can always buy your car. Yes; people would say this like they had said something very profound, and I'd just be scratching my head, and: What does this have to do with anything? And it's tax deducti ble. That was the other bizarre--the interest is tax deductible.
15:29So, you fault Fed policy in that period, and I do as well. And I think there are other things you fault the Fed for, and we'll get to that in a little bit, in the 2008 crisis. But just in general: What's your take on Fed policy and where you think it ought to be in terms of governance and structure? You know, there are people--I think it's a very mainstream view--that we need to learn more. We had Scott Sumner on last week. Scott Sumner says: We've learned some, we've made progress; yes, we've made a lot of mistakes; Scott's very critical of the past three years of monetary policy. So, what do you think? Are we going to get better at it? Have we gotten better at it? Are we going to get something radically done to how we treat money in the United States? Well, I think we've been horrible at it. Again, I think the Fed hit all it needed to prevent this disaster. Whether, how much we've learned--I guess I see two different stories here. One is: Are they doing the right things to get us out of this? And then the other one is: Is there any reason to believe that we won't be here again? That they have things under control, so that if we start to see another housing bubble or whatever bubbles, that they will take steps. Dealing with the first one: I mean, I think Bernanke has been better than, say, the European Central Bank. The Fed's been better. I think what basically the Fed should be trying to do is everything it can do to boost the economy. And Scott Sumner's idea, targeting nominal GDP, I think that's a reasonable thing. Paul Krugman has a different version, saying we should target inflation, a higher rate of inflation, a 3-4% rate of inflation, which of course Bernanke himself wrote about when he was a Professor at Princeton University. Those end up to my view being largely the same thing, at least for the time being. I'm not saying that under all circumstances they'd be the same thing. But where we sit now I think they would end up looking pretty much the same. Better. Probably. So, I absolutely would love to see the Fed adopt either of those. There are other ways you could frame it, but I think either of those would be better than where we are now. Whether for political reasons, I'm just thinking the policy of the Fed--could Bernanke get that through, probably not. Because he's already had resistance from the Fed. Three of the Fed Governors complaining about concerns on inflation. Which I guess we are changing who is voting as of January 1st, so maybe--I haven't looked closely enough to see who is coming on--but maybe there will be a little more room there. But I'd certainly like to see more aggressive action; and you know, again, by comparison with the European Central Bank, he's doing good; by comparison with what I think the Fed should be doing, I think he's not doing particularly good. They could certainly be more aggressive. But structurally, would you support some radical change in how the Fed is run? Because no one views it as: We just need to learn more. I could take a more Public Choice oriented view which is that the Fed is not particularly designed to help you and me. It is designed to help people with more political power than we have. Its independence is a bit of a sham. And I don't expect much of it. Plus, there's the general problem that it's hard to do. Yes. Well, in terms of its structure, I think it's an abomination. How do you justify having a regulatory agency where 12 of the 19 members of its main body are depending on--how do you put it--5 of the 12 voting members here, I'm talking about the Open Market Committee--are actually appointed by the industry being regulated. Yes, it makes capture really not so difficult to do. And then you have the New York Fed, which is, to me, even more bizarre and abominable: the people sitting on the Board of that coming from the banking industry directly, so the people you have dinner with, chat with, you call when you don't know what to do. This is a bad idea. I agree completely. I understand the history, how it was set up. I don't understand how unjustified that. I've often said it's as though we had the Food and Drug Administration (FDA) where we had Pfizer and Merck appointing two of the five commissioners. I think everyone would agree that's not right. Even where you don't have that, we are always going to have enormous problems with regulatory capture, but the way the industry puts the people on, that I cannot see justification for that. What might we do differently? At the very least I would like to see basically that the people who are running the Fed, whether you keep the current governor structure, any which way you shape it, that those people are actually appointed by the President, approved by Congress, and answerable to Congress. I don't have illusions that it suddenly makes all the problems of industry capture go away, but at least there is a clear understanding that this is an agency of the government and it's answerable to democratically elected officials. Though I think that would be a part of the story, we do have more openness and I think we have made some progress in that. That was one of the things in the Dodd-Frank Bill that wasn't originally part of it, but through this kind of left-right coalition, you had Alan Grayson, one of the most left-wing people in the House joining up with Ron Paul, one of the more conservative people in the House; and they managed to get through a bill or amendment to Dodd-Frank that requires a lot more openness in what the Fed is doing; and on top of that the suit by Bloomberg, so they have to disclose now who gets lending through the discount window. I forget what the time lag was. But I think you need more openness, we need more accountability. Again, none of that is going to solve all the problems, because we can look at the other regulatory agencies, the FDA, the Federal Communications Commission, whatever you want to look to--all of those has serious problems with industry capture. But certainly you are better off with not having the industry actually appointing people, and also having things more out in the open than has been the case historically with the Fed.
21:49Let's move to 2008, because you've written about that, and although you and I don't agree on everything, we're going to agree on this, which is: What do you think the Fed did wrong and policymakers did wrong in 2008 dealing with the financial crisis, spanning from, say, March, with the rescue of Bear Stearns through October of 2008, Lehman, and the Troubled Asset Relief Program (TARP)? What's your take on that period and what kind of grades do you give the Fed and others? I'd say I'd give them a D. I mean, we didn't want a financial collapse; I think it was good they prevented a financial collapse. But they basically left everything in place. So all the banks that got us here--obviously with the exception of Lehman--the same people are running the banks. They were left at the helm. And yet it was a situation where much if not most of the banking system had driven themselves into insolvency. We had an interest in preventing a complete meltdown, a continuation of a chain reaction following Lehman that I think you would have seen had we not done anything to keep AIG alive; I think there was an interest in doing that. But it should have been accompanied by a total overhaul of the banking system. Basically, these banks would not continue operating as they are doing; that we would be looking to downsize them, replace their executives, those being the main points. Instead we just kept them alive and gave them enough money to keep them on life support until they are more or less--because who knows, the Bank of America still might be insolvent. I find it very strange that a Democratic Administration with that opportunity pushed through a reform bill that's really disappointing on the welfare subsidy side of the equation. And this again, I think is a place where left and right are coming together: that the banks are, it's disgusting. Yes, it was completely unjustifiable. This was a mess they had gotten into by their own folly, mistakes, whatever term you want to use. And the fact that you would have the government just step in with basically unlimited amounts of money and say: Ok, we are going to keep you in business and essentially hold you harmless. Certainly the country wasn't held harmless. To my mind it's really unconscionable. There's been a continuous effort now to sort of cover this up and say we've made money on this. We gave these banks money at a time when liquidity carried enormous premiums, the idea that somehow--the analogy I make is I gave you a 30-year mortgage at 1% interest and you paid it off and then I walked away and said, Hey, I made money on it. That's not the way we would ordinarily do accounting. The part I find strange, and I'd love to get your reaction, and maybe it's not true, but the impression I have that there's a consensus among many, many economists that's very different from your assessment and mine of the role of the Fed and public policy generally. There is, I think, a common view, that they saved the country. As you said, you can save the country in different ways. But most of our colleagues don't seem to give a D. They give more like a B, B-, B+. Yes, there are people who say we should have put some strings. But I find the lack of outrage among academic economists and policy [?] economists rather strange. Do you think I'm overstating it? No, I see the same thing. I don't know that these people are all dishonest, but I think at the very least there's some disingenuousness in the sense that they are willing to sort of look the other way. And in other circumstances they wouldn't be. I'll give you a very concrete example. There was a study done by Alan Blinder, Mark Zandi, both very smart guys, good economists, where they did a counterfactual and they said: What would have happened if we didn't have the bailout? Their study shows the unemployment rate goes down 15-16% and stays there for a number of years. What just struck me as absurd about this is their implicit counterfactual. Not just that we don't have the bailouts, but that we don't do anything. So, this isn't the way we would ordinarily talk. That's not typically the way we think about policy, that by not doing this we are somehow committing ourselves to not doing anything, even after--so you get the bad case, you get the collapse; I agree we want to avoid that; but even after the collapse, 6 months later we don't do anything, a year later we don't do anything. That's really not a serious counterfactual. And these are both very smart guys. I think they know better that for a policy they didn't like, if someone modeled it that way, I think they would say that's just being silly. Because that's not the alternative. Yes. I think it's easy to invoke political constraints. Certainly there are limits to what strings could have been attached to the money or the way the money could have been handed over. It's easy to talk about that. But the fact is that we have a system in place for dealing with this: the Federal Deposit Insurance Corporation Improvement Act, FDICIA. Which was passed in I think 1991, early 1990s, on the grounds that we had created a moral hazard with past rescues, and we needed to have a way to force large financial institutions and their decision-makers to pay a price. And when it came time to invoke that statute, it was I think invoked once. I forget whether it was WAMU or Wachovia--it's creditors did take a haircut. But every other creditor, with the exception of Lehman, and I have political reasons for being skeptical about this one--every other creditor, Bear, AIG--got 100 cents on the dollar and was told by the government, Tim Geithner in particular: No, no, no, no negotiation, everybody gets 100 cents on the dollar. I understand why there is outrage by the general public. I just don't understand why there isn't more outrage by our colleagues. Embarrassing. And part of it is looking the other way; part of it is this claim I make that there's over 100 economists in the United States that think they are in the top 10 of economists, right? So they think they are in the running for Chair of the Fed or the Council of Economic Advisers or the National Economic Council, and so they hold their fire. I think we are a little bit captured. I think there is a lot of truth to that. People are always looking to move up, and obviously if you make big criticisms of Ben Bernanke, you go through a list of people here, going after a lot of the big names, and I think you are exactly right--people are going to be reluctant to do that for the most part. Certainly the people that think they are next in line. Most of them. But they all think they are, I think. I'm spared that. I'm not next in line, so I can be honest. But on the other hand, it's easy for me to sit here in Fairfax, VA without any historical legacy on the line as someone like Alan Greenspan or Bernanke has and take potshots in hindsight. So that's the flip side of this. It's really easy after the fact to tell a different narrative, explain all their mistakes. We're not sitting there; we weren't in the office, on the chair. It's a very hard job. But I don't think they did it very well. Certainly I'm inclined to agree. For better or worse, these were things I was saying at the time. Now maybe had I been sitting there, had access to information I don't have; so I do have to recognize that. It would be nice for them to share it with us. I like what you wrote, and I said the same thing. One of the most irresponsible aspects of this--and John Taylor's written this as well, and a sprinkling of people across the political spectrum. When the TARP bailout was put on the table, at first blush we were told the world is going to come to an end--tomorrow. Not: it's going to be dangerous. It was: This is it. It's going to be an apocalypse. It's irresponsible, because in and of itself that can be harmful. But to say that without any evidence, and again with Bear Stearns, to say we had no choice but to sell Bear Stearns off for $2--later it became $10--to a single suitor over the weekend who was guaranteed $29, later $32 billion worth of assets because "they were too hard to figure out"--what kind of a democracy is that? It's not right. These are huge, huge deals; and here you have Congress in big fights over something that might be a tenth that large. This was just done over a weekend with no public input at all.
31:02Let's move on to the 2009 period, the stimulus. In the aftermath of the 2008 financial crisis, and various policies we've just been talking about, we passed, in February 2009, a $787 billion--later became measured to be at $825 billion--Stimulus Package. What's your assessment of how that worked, whether it worked, and whether we should have done something differently. I think it did work for what it was designed to do, which was create on the order of 2-3 million jobs. They originally said 3-4 million jobs, but we ended up getting, if you looked at what was stimulus in there, it was closer to $700 billion spread some of it over those first two years, some of it spent 2012 and later years. My reason for saying that is just to pin down what actually got spent as stimulus in 2009-2010; it came down to $300 billion a year. And again, based on--this is in hindsight, you can go back and read their documents, the Obama Administration's documents from the time--they were predicting that had they gotten fully what they asked for, they would have gotten 3-4 million jobs out of it, and they'd get considerably less, say 2-3 million. There have been some efforts, and I tend to like this study by two professors at Dartmouth, James Feyrer and Bruce Sacerdote, that finds the stimulus finds pretty much along the lines of what was projected. I'm inclined to think it worked, it did what it was assigned to do; the problem was it was no where near large enough. That we created 2-3 million jobs; we probably needed on the order of 10, 11, 12 million jobs. It simply wasn't large enough or long enough. So, it didn't deal with the immediate problem. Now, there's also as you, was it the best way to spend the money; could it have been better targeted? One of the issues that they were very concerned with, they here being the Obama Administration, was that things be shovel-ready, get money out the door quickly. There's a logic to that of course that you want to create jobs quickly. On the other hand, given that we are looking at a downturn that was going to last a long time or did last a long time--I think it was reasonable to expect it to last a long time because it was a big gap in demand that we needed to fill--I think it would have made more sense to have some longer-term projects, to focus on some long-term infrastructure. And what they put in by way of long-term infrastructure was fairly limited. So, I think that's unfortunate. We should have had a more directed stimulus, much, much more. But I think we are better off for having it. I am glad we created 2-3 million jobs, whatever the exact number might be. I'm very glad we did that. But it simply was not big enough to get us out of the downturn. And again with most of the stimulus ending in 2010, it created a situation where we actually had a drag on the economy in the last year associated with the end of the stimulus, basically withdrawing the stimulus. The same thing as cutting the budget, cutting spending, raising taxes. That's contractionary for the economy. But, we haven't done very much of that. Well, we certainly cut back the spending. Not the total. The spending that was cut back was the aid to stimulus to state and local governments, and the result of that is we've seen a sharp falloff in spending at the state and local level. The total of Federal spending has done anything close to go down over this period, right? As a share of GDP, total Federal spending has fallen somewhat--I'd have to double-check that. Not in absolute terms. No, not in absolute terms. Share of GDP is up.
34:53Let's look at this job creation thing, because I'm a skeptic of it and you are a supporter of these arguments. I'm interested to try to dig down a little bit and see where we disagree. That Dartmouth study you mentioned, is that the one that goes state-by-state? Yes. The problem with that, it's a strange study. Wouldn't you expect government spending in states, even if you were skeptical about stimulus, wouldn't you expect the states that get the money to create the most jobs? The question is what happens in the states that don't get the money, and the hidden, unseen, and complicated effects of expectations and uncertainty and tax burden. You can't really look at those by themselves, can you? Well, it's hard for me at least to see those as being big negatives. So, the simple story is it would raise interest rates and therefore crowd out other investment. I think you'd be hard-pressed to make that story. I mean, obviously the Fed was being accommodating as well, which is of course appropriate. Had they not been, how much would interest rates have risen? My guess is not a lot since we have something on the order of $1.6 trillion in reserves sitting around. But again, we don't know the exact counterfactual. Did it create uncertainty? If you look at private sector investment, it's largely recovered. I'm focusing here on equipment and software. I had a little back and forth with someone a little while ago on that and they were bringing in structures; and my reason for excluding structures is, well two things. Residential--it's a problem. But same thing in non-residential. There was a big surge in non-residential construction, 2005-2008; and if you look at commercial real estate, hotels, office space--there has been considerable overbuilding in most of those areas. So, if you pull those out, look at equipment and software, we are almost back to the pre-recession level. I think we are at 7.5% as a share of GDP, pre-recession, with 7.8, 7.9% in 2007. So, I'm hard-pressed to see that there is a big role for uncertainty there, given that we still have huge amounts of excess capacity in large sectors of the economy, certainly manufacturing. I actually think investment is fairly strong right now. So I just don't see much of a case here that uncertainty is really holding it back. As a classical-oriented economist, I don't see the interest rate mechanism isn't really the right look. I'm more interested in the fact that resources are not in excess supply uniformly. So, to take an example out of my neighborhood, I live in suburban Maryland, and there's at least two brand-new elementary schools getting built in my neighborhood within ten miles of my house. Gorgeous, beautiful. This is in Montgomery County, MD, which is an incredibly wealthy county despite the recession. Sort of insulated to some extent by government spending generally and employment. So, things are coming along, dirt being shoveled. Big shovel activity; and the Beltway has got tons of work going on. There's all this earth-moving equipment. And by the way--it didn't all take place in 2009; it's still going on. So, you look at that and you ask: Is that going to really put back to work the Nevada carpenter? Yes, some construction workers are finding work in these different kinds of construction projects, but a lot of this is just not going to get to them. Now, in the Keynesian view, I guess the extreme view, it doesn't matter. It's all just purchasing power. But I look at the resources that aren't scarce, which I suspect are some of those higher skilled machinery folks, and so you increase the demand for them, you increase their wages, and you crowd out people who would have done other things with those skills elsewhere in the private sector. Does that affect your assessment of the measurement at all? Do you think those effects are small, not important? Well, I'm inclined to think those effects are pretty small. There are two reasons for that. One is if you try to look at occupations, you are really hard pressed to find any occupation where there is any evidence of real wage growth. Well, economists. We are doing great. It's a banner year for us. Are you saying that seriously? I'm saying that seriously. It's a good time to be an economist. There is an increased demand for our services. I don't know literally whether wage growth is positive or not. That's interesting. Don't you get more phone calls than you used to? Yes, that's for sure. I don't know if my income is keeping up. Well, I hope it is. But, yes, I'm getting phone calls. But anyhow, I don't think you find a lot of occupations where real wages are rising. The evidence on that doesn't really show that we are crowding out, of that sort. There was a study done, and I'm forgetting who the authors were. One was at Ohio State. Anyhow, they were trying to look at the impact of this sort of crowding out, and what they were trying to show was that in states where you had the most spending, you had a decline in private sector employment. They really weren't able to show that. That had a narrow category of jobs. I'm not saying they were cherry-picking. I'm just saying how they had done it. They had a category of employment where they could have a negative relationship; even that was only marginally significant. And if you just did private sector employment--and I did ask; we had some back-and-forth on this--it came up altogether insignificant. So, if we are looking at Montgomery County as an area where you had a lot of spending, there was no significant decline in private sector employment associated with the stimulus there. Now, again, there's no simple way to do the test. It's hard to do. A lot of the public sector employment, or public-paid-for employment, is going to be private contractors. So, there's not a simple story there. But I just don't see the evidence for it. Not to say you couldn't find it.
41:32What I'm suggesting--let's put the crowding out aside for the moment. Even if you don't have that factor, it's not obvious that paying folks that are already employed to do more stuff than they used to--if that's really what's going on--you have to argue that there is this Keynesian multiplier effect that is working through just their spending levels. They are spending money and that's going to put other people to work. And I'm a skeptic on that. What evidence do you think we have that that mechanism actually works, as opposed to might work? Wait--there are two separate issues here. One is that we are employing some number of people. Now some of those are people that would not otherwise have been employed. But the point is how many? I'm suggesting that in many cases it may not be very large. Certainly, for example, the stimulus as we've talked about along the way, a lot of it didn't go to shovel-ready stuff. It went to, a third of it roughly went to a one-time temporary tax rebate that put purchasing power into people's hands; they may have spent it; there's not a lot of evidence that they did. So I wouldn't expect that to have a big bang for the buck. We gave a third of it to state and local governments to keep their employees employed, and a lot of cutback on other things they were doing. I don't know if that had much bang for the buck. And another third of it, we actually spent more money; but some of that stuff that I know of--and of course, I'm cherry-picking here; I'm telling you right now--I looked at the stuff that went to education, and I'm thinking it's nice that they are funding more research on Parkinson's Disease at Washington University in St. Louis, a wonderful medical center that I used to be associated with in economics in the business school. But is that really going to put people back to work? And the answer is: I don't think so. I think it just gives some grants to some nice people who are doing some important work, and that's fine. But I wouldn't expect that to create a lot of employment. And I don't think we have much of an idea of how much of the stimulus was that kind, versus stuff that really put people back to work who were unemployed before. Well, I think all of these are mixed bags. The tax cut story, you know that's not my first choice; we did some beating up on that. It's a little hard to try to get an assessment because you have a story where there's basically a collapse of consumption, 2008-2009, associated with the plunge in house prices, the wealth effect. You know, so you are trying to control for that. We put in various controls, our estimates, I'm not going to say it's viable, somewhere between $.50 and $.70 on the dollar was spent. I know there are other estimates out there. I feel reasonably comfortable with that, primarily because we did beat it up. In other words, we were trying to control for that in ways that we felt were reasonable, and I didn't approach that with strong priors because, you know, tax cuts aren't my preferred way of doing it. I didn't have an axe in it, a stake in this one. So, I feel $.50-$.70 on the dollar was spent; to me that's very good, better than not doing it. Is money given to state and local governments? State and local governments are operating under tight budget constraints. They have to balance their budgets. When they have a shortfall, they lay people off. They've been doing that. Did it one-for-one translate into increased employment? Probably not. But I think it certainly kept a lot of people from losing their jobs. I agree with that. So, I'd say positive; could it have been more positive? Sure. But it was the right way. The third one, when you get to more projects, again, it was a mixed bag. Money spent on health care research might be, as you say, it might be good research. Not an area of high unemployment. Construction work at the time, 20% nationwide unemployment among construction workers, and that's pretty much everywhere. I'm not saying it was 20%, but you know, you had high unemployment among construction workers even in Montgomery County. There had been a lot of building in this area; it went to zero. I just don't think they are operating a larger piece of earth-moving equipment to rebuild the Beltway--I still think they are waiting for that housing sector to come back. But maybe I'm wrong about that. Well, it's mixed. There are different types of skills. So, some of those workers, the skills in residential construction are not yet--there's some overlap, some differences. So, it's not as though we re-employed everyone that lost their jobs when the residential construction sector collapsed. So, most of these cases that say it's somewhere between 0 and 1; and I'm inclined to think closer to 1 in the sense that we are employing someone what would not have otherwise been employed. It's not 1. I don't mean to say it's even 0.9. I understand. But I think in a lot of cases we are employing people that would not otherwise have been employed.
46:21So, you mentioned that the stimulus wasn't big enough. Back in February 2009, the Obama Administration, I think it was probably the first serious piece of policy action that he took. I think it was passed in February. And he had a Democratic House, a Democratic Senate. There was a reasonable amount of love for the man among the general populace, the general public. Why do you think he couldn't have gotten more? What do you think were the politics of that? And I agree with you that certainly today, although there are many people who are advocating large increases in government spending financed by deficits now, that's dead on arrival, both because there is a Republican House, but also because the American people are not so excited about it. Why do you think it failed then, and why is it hard to make the case now? What are some of the political issues? Well, at the time of course remember the big issue is you have to get 60 votes in the Senate. And they had 59 Democrats. I forget--you had the Al Franken election in Minnesota was contested and I forget exactly when he took his seat, but it wasn't at the beginning of the session. It was some time in February, if not March. I think he was there in February. But anyhow, you had to get to 60. And he [Obama?] had to pull on at least one Republican, and he had at least one Democrat--I believe it was Nelson from Nebraska--who was holding out. Smart man. I'm sure he got something good for it. In any case, that made it difficult for him to get a bigger stimulus through, and he had to whittle it down. To my mind it's really unfortunate--the things that got whittled down most in negotiation was the aid to state and local governments, which I thought was a good thing because part of the story here is that you want money to be spent quickly and there's no quicker way to spend it than to give it to give it to state and local governments who otherwise would be cutting back, cutting off workers, cutting back spending in various areas. So, he had to make those compromises to get what he got through. Here's what I think was a big mistake: People argue over whether he could have gotten more had he asked for more; so instead of asking for his original $787 billion, he should have asked for $1.2 trillion, which is what Christina Romer, his chief adviser, had recommended. I don't have the answer to that; I don't know. I don't know if the concern was that you'd have people in Congress who would have just flipped and said that's crazy; and walk away with nothing, or maybe less. But what to my mind is indisputable is that once it was passed, he knew it wasn't enough. He knew that wasn't going to get the economy back anywhere near to full employment, certainly not any time soon. But instead of saying that, he turned around on deficit reduction. We solved that. And that just totally undermined the case. He couldn't say now we are going to focus on deficit reduction and then come back a year or two years later and say: Hey, that wasn't big enough. Of course, he was touting the stimulus. He was talking about green shoots of recovery. That was March, certainly no later than April. Summer. He did this horrible overselling. And it was a combination of really bad economics and certainly in retrospect--I'm not the finance person, the political adviser--it looks to have been really awful politics as well. It looks like he is going to pay a double price for it as well. Although there is some sign of green shoots of recovery right now. Maybe that will be enough to give him something to sell that's more attractive in November of 2012. Hard to say.
50:05Do you have any worries about the long run fiscal health of the United States that would discourage you from advocating a larger stimulus now? Let's forget 2009. Let's say right now you had some direct say in this. Would you be pushing for a spending increase right now? Absolutely. When I look to the long-term problem, I see it overwhelmingly as a health care story. We have a broken health care system and the projections just show health care costs--and this is coming from the private sector--are going to keep going through the roof. So, currently we spend more than twice as much per person as the average for other wealthy countries--Germany, Canada, England--and that gap is just projected to rise in the decades ahead. If that were to really happen, it's going to be devastating on our economy and of course have a devastating impact on the budget, because more than half our health care is paid for through the public sector and through programs like Medicare and Medicaid. So, to my mind we have a health care problem that we have to address. And that's independent of the budget. Of course, as you say, it affects the budget hugely over the long term because we have those programs. But I don't see that as a reason not to do stimulus now. I think the main thing, get people back to work, is--the argument that I get from people on the other side: We are going to have to tough this out. Well, we have jobs. It's easy to say. The people that don't have jobs, they are not going to get these years back, they are raising kids, the kids are 4, 5, 6 and we are talking about them being unemployed 2-3 years--they are not getting the time back, if they don't feel they can raise their kids properly, give them the education, make sure they have decent housing. That's loss. Definitely an enormous price. So, I don't, to my mind I don't think it's a close call. The fiscal issues--are we going to be in a situation we can't pay our debt? I mean look at Japan, with a debt-to-GDP ratio of over 200%. We are nowhere in that ballpark. And they are still borrowing at 1% interest. I know there are a lot of differences between the United States and Japan, but still. Some of them work toward not being worried. Having the world's dominant currency makes it easier to run large deficits, at least for a while. You always run the risk that you are going to find out that that period is over, and I think we are running in that direction. My feeling is just that I'm not sure it works to spend real resources on things--I'm talking about infrastructure, bullet train in California, other large projects that may not have much of a payoff--seems to be punishing our children as well. Toughing it out is a horrible piece of advice. I have a job, I have better than a job--I have tenure, which makes it even easier for me to be the other way, you could argue. But I worry about my kids, they are getting adolescent age; I have one in college, one getting ready to go to college. I worry they are going to have trouble finding jobs. So, the real problem to me is efficacy. I don't think we know as much about what works as we like.
53:18What's your view on the longer run fiscal challenge that we do face with health care? I've argued, many people have argued, that attempts to fix that in the short run in the middle of a recession did add to the uncertainty we were talking about earlier. Especially when it was done in a way where the legislation--it's not even set now, we don't really know how a lot of it is going to work, seems like an unwise policy. Do you think that was a good strategy? Do you think we should be doing something different? Well, I think it was a step forward in the sense that if it actually goes into effect, and that's independent of the outcome of the 2012 election, you have extended health care coverage in a significant way. And actually I think the most important part of that story is something that a lot of people don't fully appreciate and the Obama Administration doesn't push it--and that is that it will mean that people have health care insurance, in many cases for the first time, genuine health care insurance, who think they have it today. And what I mean by that is: I, and you are probably in the same situation, we get our health care insurance through our job. And my situation is that if I were to get seriously ill, I would at some point have to give up my job. And at that point I give up my health care insurance as well. What that means is that I'm sort of insured for the day-to-day things, normal things I have to go see a doctor for, even some things that could be fairly expensive; but if I were to get some chronic, debilitating illness, at the end of the day I'd find myself uninsured. I'd have to depend on Medicaid or whatever sort of care I could get other than through insurance. So, I think that's a huge step forward. Now, the uncertainty it created--again, this is one of these things where you look at the data, you have a hard time seeing a case that that's cost jobs. Because there are a few things you should expect to see. You should expect to see a rise in the average hours worked. You don't see that. The hours weekly hours is still below what it was prior to the recession. You expect to see more temporary employment. Temp employment is still way down. People don't have to get insurance for temporary workers. And the general fixed costs of turnover there are much smaller. That's right. I just don't see the evidence for that. Now, long term, we have to fix the system. I don't think this does it. What I support, and I'd be interested in getting your reaction--I actually support a more market solution, in the sense that I'd like to see more trade in health care. There are a few different ways you could do that. One is you could let people who are on Medicare, who by definition almost--they aren't all retired but most of them are--let them buy into the health care systems in countries that have lower costs. So, let them buy into England's or Germany's and pocket half the difference. So, if the difference, and you look at the projections, 10-20 years out, differences are making cases over 10, 15, or 20 years depending on which country you look at. Suppose you said: Let people pocket the difference. How would we do that? How would that work? Well, we'd have to negotiate a deal with these countries. They are subsidizing their own people; they are not going to want to subsidize us. No, no, no they are full cost. Oh, because they are cheaper. They are full cost to cure. Or even higher--110%. Yes, give them a premium, absolutely; you'd make it worth their while. So, let's just throw some numbers out. Let's say it cost $6000 a year to give a person over 65 care in the United Kingdom, and let's say it cost $15,000 here. So, we'll give them $7000. A thousand to pocket. $8000 left. So, someone goes to the United Kingdom to get their care, they get $4000 and the U.S. taxpayers save $4000. That's going to be hard to implement, obviously, because most people don't want to go to the United Kingdom for their health care--for a bunch of reasons. Understood, but a lot would. Because you'd let them pocket the difference. That's clever, interesting. I would certainly want to encourage people to spend their own money. When you say things as you did earlier--and it's a common argument that health care spending keeps rising and will continue to rise--that's not a natural process. Part of it is. Part of it is innovation, people find new stuff. But part of it is the fact that we are spending other people's money, and as long as we do that, and certainly through our employer--which is a crazy way to do it and I'm sure we agree on that--we keep subsidizing them. It's going to get more expensive that way. Again, I have a hard time saying that. Obviously insurance is your money, too. But the problem you get into is are people in a situation to distinguish between care that they really need and care that might be speculative. I've had my own experiences. Fortunately I've never had a major illness, but I have had my own experience dealing with doctors, and I've had to argue the opposite. I do the same thing. And we're not experts. We are both relatively well-educated in the scheme of things, but you have your doctor saying: Oh, you need x, y, and z. And how many people are going to challenge this? It's true. Fascinating thing. I'll say: I'll pass. And they look at you like you are crazy. But sometimes there is a reason to pass just because there are these side effects they don't worry about. They are more worried about the side effects of not doing something and being legally vulnerable, I suspect. But part of it is it's someone expert. They have a hammer and they are always looking for a nail. Let's remove that. I'm saying: Let's see how it goes for a while.
58:47You and I look at the world differently, but there are a bunch of things we have in common. I want to just let you talk about what you'd do differently in terms of the solution. One of the things we both agree on is that the regulatory process is often captured by special interests, and seems increasingly so for one particular sector of the economy--the financial sector. If you go back to 1984 and the rescue of Continental Illinois and its creditors, you see a long steady pattern. You get lots of free market rhetoric, but the fact is, in terms of practice, there's a lot of socializing of losses and privatizing of gains. That sector has gotten a lot bigger; it's gotten a lot more politically powerful; and the wages and profits that go to that sector seem way out of line. And to me seem to be related to its political power and what its contribution to our way of life. So, I think we pretty much agree on that. The way I want to fix that is to make government less powerful. How would you fix it? I think you take a different approach. So, what would you advocate, given the political realities? Well, I would love to see breaking up of the large banks; that we would bring them down; we could quibble over what the exact size might be, but require that J.P. Morgan and Citigroup and Bank of America get down to a size where they aren't too big to fail, where they are component parts. So, presumably we are talking about breaking a J.P. Morgan into maybe 5, 6, 8 banks. The component parts are not too big to fail; we can let any of them go under without serious repercussions to the economy. I'd also like to see them downsized by having a modest tax on the industry. I think part of the story here is that because of computerization, you've seen a huge increase in trading volumes, because the cost has just fallen through the floor. So, you could both trade the same assets more frequently; and it's possible that more complex financial instruments than would have been conceivable if you go back with the technology we had 30 or 40 years ago. So, in effect I see a financial transactions tax making up some of those losses. Also, just in terms of if we think of that being unfair to the industry, this is an under-taxed industry. Most of the taxes that apply for getting a car, getting clothes--sales taxes; if we were to look to Europe, value added taxes--those don't apply for the most part to finance. And I can't see a rationale for that. So, this is my way of sort of equalizing. They are special. That's why. Well, that is what they say. A little perplexed: why is it you are special? So, I think there are a lot of ways to make them less powerful, less politically powerful, less economically powerful. Glass-Steagall, again I'd like to see that sort of separation. And of course the rationale to my mind is you have a sector, the financial industry, that is insured by the government. You are taking government-insured deposits. And the quid-pro-quo is, well, you aren't going to take big risks with my money. I agree with that to a point. I'm not sure Glass-Steagall is as important as people say it is. But the fact is, as you say, we have explicit insurance and then we have implicit insurance, and they both allow them to take risks with my money. Where we have the explicit insurance, there have to be clear conditions that here are the risks you can take; and we don't want implicit insurance. The irony of this, for me, is that the justification for Glass-Steagall being removed, or any of these other maneuvers, Triple-A changes, allowing things to be leveraged that look safe but aren't--the argument is: Well, it's more efficient. Which is something I'm very sympathetic to. But the fact is, it makes it more efficient at using my money. And that's not good. As long as that's there hanging over it, I don't care how efficient it is. I want something different. Yes, I agree with you. And the argument of Glass-Steagall making it more efficient--it's almost contradictory by its nature because they always said they would maintain a strict separation between commercial banks and the insured deposits, and then the investment bank components. Strict separation--where's the efficiency?