>>Eric Schmidt: So as a disclosure, I've been
somewhat involved with President Obama.
So I'll do my best to ask you the harshest
questions you've ever faced.
>>Austan Goolsbee: Oh, great.
>>Eric Schmidt: What happened, of course,
was that you were early involved with the
president in his Senate campaign and in his
first race, which, of course, ultimately became
the Council of Economic Advisors, the youngest
such person to do so.
And ultimately, you went back to academics.
Let's talk now about the state of the economy
where we actually are as opposed to what everybody
says on television.
>>Austan Goolsbee: I would say the thing that
the economics profession has been grappling
with for, really, the last couple years, is
why isn't the growth rate faster?
We have a terribly deep downturn, worse than
75 years maybe.
Normally, when you have that big of a downturn,
you come rebounding back fairly rapidly.
We haven't.
It's, you know, been modest at best.
And there are two camps sort of arguing it
out over why that is.
One camp is, this was a financial crisis.
It's deleveraging.
Essentially, we have to wait until consumer
spending is going to come back to the point
that people get their debt levels down to
some manageable level.
Tied into that heavily is the housing market.
The other viewpoint, I'd say, is what I call
the adding-up constraint that, normally, housing's
about a third of an expansion.
Normally, government grows about proportionately
with the economy.
We overbuilt houses.
There's 5 million vacant homes.
So construction has been and it's likely to
continue to be pretty modest.
The government's been shrinking at every level.
Even if the rest of the economy grows fast,
the converting of what you're doing to something
else, being more export-oriented, more investment-oriented,
and more small business manufacturing, just
takes a long time.
And so the reason we don't have a V-shaped
recovery in that view of the world is, you
can only have a V-shaped recovery if you can
go right back to doing what you were doing
before the recession started.
I'm more in that camp.
I would characterize the state of the economy
now as pretty modest, slash, measly, the U.S.
growing less than 2% a year, and the awful
realization coming from that that that's about
the fastest growth rate in the advanced world.
So if you start thinking the reason the U.S.
is growing slowly is because of some policies
in the U.S., then you've got to explain, well,
why is the same thing happening throughout
Europe, throughout Japan, and in a lot of
the advanced economies?
>>Eric Schmidt: Do you -- one of the sort
of -- there's a set of criticisms on the right
and the left of you and the administration
in the first term, big surprise to you.
And there's a whole category of criticisms
from the aggressive left, characterized by
Paul Krugman, which are that you guys mis-
-- underestimated the amount of money it would
take to stimulus.
These are pro-stimulus, spend lots of money.
And their core argument is that instead of
spending $800 million -- billion in ARA, if
you had done, like, a couple trillion, --
>>Austan Goolsbee: 2 trillion.
>>Eric Schmidt: -- those kinds of numbers,
the pain would have been less, because the
-- it would have all corrected faster.
What's your response to that?
>>Austan Goolsbee: To the -- I've known Paul
Krugman a long time.
When I was a Ph.D. student, I was his research
assistant when he was just a regular professor
at MIT.
I think it's not -- I'm an economics professor,
so I love being able to say somebody else
is being politically naive.
But I think in this, the people saying that
are politically naive.
Because this was the biggest stimulus as a
share of the economy that ever existed, bigger
than the New Deal.
And it came down to one vote.
And all five of the marginal votes -- three
Republicans and two Democrats -- all wanted
it smaller and all wanted less spending and
to be replaced -- they wanted more of the
spending to be replaced with more tax cuts.
So that's why tax cuts end up being such a
big share of the total.
So I don't think that that was at all conceivable.
Two, in -- certainly in some areas, the recovery
act spends 10X in a year what's ever been
spent.
I think there are a lot of areas that if you
wanted to spend the money in a way that would
not be wasteful, I think it would have been
hard to spend more than it was.
And there are some people who would argue
that you didn't meet that criteria in some
of the parts.
And I guess the last thing I'd say is, what
we don't know -- Stimulus, for the hard-core
Keynesians, is close to free.
Because they say -- It's almost their version
of the Laffer curve, that we'll increase the
growth rate so much that it will come back
and pay for itself.
>>Eric Schmidt: Right.
Pays for itself.
>>Austan Goolsbee: If you're less strong about
it than that, you say stimulus has got to
come from somewhere.
So should we pull from the future through
higher tax in the future, whatever, to put
it in right now?
The six months surrounding when the president
came into office is the worst six months in
the history of the GDP data that we've had
for 65 years or so.
In that six months, pull from the future to
now makes sense, because that's the worst
you've ever been.
At a moment when you're growing more like
2%, I kind of think we're in a different moment.
So if you'd have pulled more from 2010 into
2009, would we feel better?
I'm not sure.
>>Eric Schmidt: How does growth happen now?
Are we stuck now in a permanent 1 to 2% growth
independent of political party?
And here's the argument.
The combination of globalization and automation
means people are not getting hired.
And the global economy is, perhaps as you
pointed out, going to hit some future global
recession in the next year, Europe is all
screwed up because of systemic issues.
Asia is slowing.
How do we get real --
>>Austan Goolsbee: You mix a couple of things
in there.
>>Eric Schmidt: Of course.
>>Austan Goolsbee: Is it permanent?
No, definitely not.
As I say, what we've -- what we've had is
some parts of the private sector growing pretty
robustly, and housing and everything touching
on housing, at best, zero, and government
shrinking quite significantly.
And you add those things together in some
weighted average, you get, even in the best
case, something pretty modest.
The reason -- So, yes, I think there's some
inevitability of that over this three- to
five-year period.
That's definitely not permanent, because,
look, since the recession began, the population
of the U.S. is up over 10 million.
Household formation's been close to zero.
So it is the case -- I don't say this as a
joke.
Eventually, kids are going to be moving out
of their parents' basements, if the history
is any guide.
And when they do, they're going to have to
buy crappy pots and pans or whatever it is.
Historically, that process of household formation
has been a significant cyclical driver of
growth.
And it hasn't been there.
>>Eric Schmidt: But not in Japan, for example,
which has been mired for a couple of decades
in this sort of problem.
>>Austan Goolsbee: Yes.
Yes, true.
Now, they haven't had very substantial population
growth in Japan.
Household formation wasn't as big an issue.
I think the -- the nagging fear that people
have from Japan and from others is that second
world view that maybe it's just financial
crisis, and for those people, Rogarth and
Reinhart wrote this book, "This Time It's
Different," and they're the biggest advocates
of this point of view.
Carmen Reinhart, she's not sentimental about
it.
She says, "Yeah, it's going to take seven
years before people start to say the economy
is better."
>>Eric Schmidt: Let's talk about the other
side and bring it to today's political things.
You're obviously involved in the campaign.
You're obviously supporting President Obama
for his reelection.
The other side makes the following promises
as part of their campaign.
And they've got at least 47% of the electorate
on their side.
[ Laughter ]
>>Eric Schmidt: The first is to continue the
Bush tax cuts for everyone, including the
wealthiest, on the argument that it makes
no sense in a slow-growth environment to raise
taxes.
Further, an additional 20% across-the-broad
cuts for everybody; right?
Rich and poor.
And, third, an increase in military spending.
And they argue, and this is the Glenn Hubbard
and that whole school, that the sum of all
of those changes will produce more economic
growth than your boring strategy.
Talking about --
>>Austan Goolsbee: Abolish the estate tax,
abolish the alternative, a bunch of those.
>>Eric Schmidt: I forgot those.
I'm in favor of all of those, too.
>>Austan Goolsbee: All I think of this is
-- is we have a long standing history and
academic research on the subject of do high
income tax cuts lead to growth?
And the correlation is close to zero.
At a moment where you've got as big of a deficit
as what we've had, my own view is you can't
afford to do those things and there are a
lot better ways to invest in the growth rate
than just cutting high income people's taxes.
>>Eric Schmidt: But your side has already
produced three one-trillion-dollar deficits
under President Obama.
Before you added $3 trillion of deficit already
--
>>Austan Goolsbee: The point is not to increase
deficit.
If that's the thing.
What my view is, if you go take a budget like
the Ryan budget, they -- they put -- they
want to put in a cap on all government spending
at 20% of GDP or 18% or something like that.
That is usually based on historic averages.
Which means we're trying to wipe away the
aging of the population.
We're just going to assume it away, because
what's happened now is obviously the long-term
budget picture for the U.S. government is
completely rooted in the aging of the population
and the rise of health care costs.
Now, hopefully some of these technology, medical
technologies can help us long run on the rising
health care costs.
But there -- if they work, they are only going
to make the aging of the population worse.
[ Laughter ]
>>Austan Goolsbee: For the budget.
[ Laughter ]
>>Austan Goolsbee: Better for us.
The -- so the -- so the choice of not just
this election, but the choice of the next
20 years is thinking about you've got an existing
population that's going to be aging, that
if we keep all of the promises and all of
the systems the way they are now, spending
will go to 24, 25% of GDP with no changes
in policy.
So either the tax revenue is going to have
to go up to match that or we're going to have
to go renege on those promises or it's going
to be some combination.
>>Eric Schmidt: But there's a third way.
>>Austan Goolsbee: What's the third way?
>>Eric Schmidt: The third way is to have economic
growth generate enough money to afford the
increases in the aging population and still
deliver significant tax cuts to all of these
important groups.
>>Austan Goolsbee: Look, I'm 100% for a growth
strategy.
Let's get to it in a one second what should
that comprise.
But don't, don't over pat ourselves on the
back.
Even if you upped the growth rate, the way
our entitlements are set up now, they are
tied to productivity growth because they are
tied to wages, not prices.
So you would have a short period, if -- let's
say we increase the productivity growth rate
of the country by a full percentage point.
In a short -- in the short run that would
be very beneficial to the budget, but in the
long run that would just get --
>>Eric Schmidt: Because wages would go up.
>>Austan Goolsbee: Yeah, wages will start
going up by that amount.
Um ... what should the growth strategy encompass?
This is in some sense the grand debate between
at least two camps.
One camp says it's about low tax rates.
Low tax rates, especially for high income
people are the drivers of growth.
Now, I don't think the evidence backs that
up.
I don't think that's true.
I'm not saying that we should have super high
tax rates on high income people.
But I think if you think that cutting high
income tax rates leads to growth, then I kind
of think that you have the historical record,
you've got to go explain why when Bill Clinton
raises high income tax rates does that not
wreck growth, why in some periods of very
fast growth in the country the tax rate is
actually extremely high.
I think the other side's growth agenda says
it's about science, innovation, you could
say infrastructure if done properly and not
wasted, investing in the training and education
of the workforce.
You can't do that capping government spending
at a very low level, increasing defense spending
and massively cutting revenue.
If you go look at the Ryan budget, for example,
non-defense discretionary spending, which
includes all science, all clean energy research,
all education, all training, goes from the
current 10% of GDP down to 2% of GDP.
If you believe that the tax rate is the thing
driving growth, you say then fine it doesn't
matter.
We'll get rid of all of the research being
done at NIH and we'll, you know, cut the NSF
budget by 90%; it doesn't make any difference.
I kind of think it does make a difference.
The evidence is pretty strong that that stuff
does influence the growth rate.
>>Eric Schmidt: When we -- my first encounter
with real economics was when Volcker was the
secretary of the Fed and we went through the
whole restructuring on inflation, you, of
course, became an economist and a very famous
one during that period.
Why is there no inflation now?
And inflation seems to have been eliminated
by precisely the policies that in the 1980s
we didn't want to have.
>>Austan Goolsbee: I think there's some insight
to that.
Look, they -- once you have inflation, getting
rid of it is very painful, that's the Volcker
episode.
You are going to choke life out of the system.
The interest rates, 20 plus percent --
>>Eric Schmidt: 14% --
>>Austan Goolsbee: Until people get the expectations
of inflation out of their bloodstream.
We have been quite fortunate for many years,
inflation expectations have been quite modest.
Now, with what the fed has done, you have
some people arguing they are massively expanding
the monetary base and that's going to lead
to inflation.
The only thing I remind people is the formula
of what leads to inflation is the monetary
base times the velocity of money.
As much as the monetary base has gone up,
it hasn't even gone up as much as the velocity
of money has gone down.
So there's no -- the -- the overall economic
picture, if I told you 15 years ago, we will
be an environment where the unemployment rate
has been around or above 8% for years, inflation
is less than the 2% target and GDP growth
is less than 2%.
You would say, well, obviously you should
loosen monetary policy if you're in that environment.
But the interest rate is already zero percent,
so that's the origin of where they're trying
to come up with all of this -- they are trying
to figure out how do you loosen monetary policy
when the interest rate is zero percent.
Economists have a formula for everything,
as you know.
You plug in inflation, you plug in unemployment,
there's a formula that tells you what should
the interest rate be.
You plug it now, it says the interest rate
should be negative 2.5%.
So they are trying to figure out --
>>Eric Schmidt: Which is the argument in favor
of quantitative easing.
My final question has to do with your view
of -- of what happens on the assumption that
President Obama wins, what happens on the
assumption that there is a President Romney?
Take us through, if you were in the government
under Obama, what you think your first, second,
third year of his second term would look like;
and then to the degree you can, since you
imagine that you are Glenn Hubbard and President
Romney's advisor and you are inaugurated on
August 20th -- January 20th, what are you
going to do, what is the reality of what you
would do?
What is the reality?
And give an intellectually honest assessment
of what they would do.
Give us that picture.
Because that's ultimately kind of a choice
that smart people are going to make in this
election.
>>Austan Goolsbee: Okay.
I will do that, and that mainly con -- focuses
on the next six months.
I should say, beyond -- if you ask five years
from now, I'm extraordinarily optimistic,
particularly about the U.S., we have challenges
that we've got to confront, but their magnitude
compared with most of the rest of the advanced
world and even many of the emerging markets
is eminently doable and we have a lot of things
that are going in our favor.
>>Eric Schmidt: Make a comment, also, about
how long the European crisis is going to go.
>>Austan Goolsbee: The European crisis is
going to go until they realize it's not sustainable
and the Euro is blowing up.
But the answer is forever.
[ Laughter ]
>>Austan Goolsbee: I mean the --
>>Eric Schmidt: That's a really optimistic
answer, Austan.
>>Austan Goolsbee: I say for -- for medium
run I'm optimistic on the U.S. in Europe,
I don't know how to describe it any way but
this.
Economists know a great deal about how do
you hold very different economies together
in a monetary union.
And there aren't that many choices and none
of them are I see, one, you could have massive
labor mobility from poor to rich places, you
could run differential inflation, the Germans
could have 6%, Greece zero, that would solve
their devaluation competitiveness problem.
You could subsidize it to hold it together
or you can try to go to the -- to the countries
that are overvalued and have them grind down
their wages by the amount that a devaluation
would do.
All of those are horrible and basically for
various reasons can't be done.
So as I say, either the Germans are going
to implicitly -- explicitly subsidize this
to hold it together or it's going to blow
apart.
There's no other chance.
Back to Democrats versus Republicans.
>>Eric Schmidt: That was really optimistic,
Austan.
>>Austan Goolsbee: The Washington way --
[ Laughter ]
>>Austan Goolsbee:
The Washington way of -- of confronting problems
is ignore it, when you are forced to deal
with it, go back to what you did before, and
just try to recycle it, brush it off, and
make that the starting point.
So they almost had a grand bargain last year.
It came close before the insanity of the debt
ceiling.
They were probably 85% of the way.
But the extremes just prevented that from
happening.
I think if Obama is elected and Republicans
control the congress, there's likely to be
a -- one last celebrity death match over the
fiscal cliff, the raising the debt ceiling
again and I'm actually not optimistic they'll
be able to sort that out.
The same forces that blew the deal apart last
year, I kind of feel like may blow that deal
apart.
But that then makes me somewhat optimistic
that in 2013 the American people are so pissed
that their taxes have just gone up $4,000,
that they say, "Get the adults back in the
room and go sort it out."
In which case, they're going to go dust off
the thing from last year and they will probably
do a tax reform like that and it will probably
look a lot like Bowles-Simpson.
If Romney wins, I think the first thing they're
going to do it -- I'm assuming the Republicans
are in control of congress, they are likely
to extend all of the tax cuts, we won't go
off the fiscal cliff.
I think then as you go into 2013, they are
going to propose things like balanced budget
amendment caps, big cuts on Social Security,
that won't go anywhere and I basically think
our long-run fiscal -- the chance of a grand
bargain long-run is close to zero if you won't
include any tax revenue or if you want to
add big tax cuts to the spending cuts and
I kind of think that's where they are.
>>Eric Schmidt: So I think you all see -- I
should say right up front, I think we owe
Austan a tremendous debt as a country.
He went into the government knowing a little
bit about it.
And he found himself in the toughest situation
a professional economist can ever.
I would say that you and a few others really
rescued America.
It is an honor and a privilege to have you
here.
I hope you enjoy being in Chicago.
>>Austan Goolsbee: Thank you.
[ Applause ]
