Addressing Fears of Recession

MS. DIANE REHM

10:06:55
Thanks for joining us. I'm Diane Rehm. President Obama says we are not headed for recession. But many Americans consider the wild fluctuations in financial markets and poor economic indicators as harbingers of a double-dip.

MS. DIANE REHM

10:07:17
Joining me in the studio to talk about ideas for creating jobs and getting the economy back on track: Jared Bernstein of the Center on Budget and Policy Priorities, Phillip Swagel of the University of Maryland School of Public Policy, Eamon Javers of CNBC, Zanny Minton Beddoes of The Economist and Russell Roberts from George Mason University. A long list of guests to answer your questions. Call us on 800-433-8850.

MS. DIANE REHM

10:08:04
Send us your email to drshow@wamu.org. Feel free to join us on Facebook, or send us a tweet. Good morning and welcome to all of you.

MR. JARED BERNSTEIN

10:08:20
Good morning.

MS. ZANNY MINTON BEDDOES

10:08:20
Thanks, Diane.

PROF. PHILLIP SWAGEL

10:08:20
Good morning.

REHM

10:08:21
Eamon Javers, tell me what -- how much of a positive response do you think that the regulatory reforms the White House announced today will get from business and from Congress?

MR. EAMON JAVERS

10:08:41
Well, I think business will like it. I mean, this is one of the things you hear from the business community over and over again, is that there's too much regulation. The government is getting in the way of job creation. But, politically, this is kind of low-hanging fruit. I don't think a whole lot of Republicans in Congress are suddenly going to become Obama fans as a result of this move.

MR. EAMON JAVERS

10:08:59
They might like it, but I think this is a low-hanging fruit and the kind of thing that is relatively easy for the Obama administration to do to try to inoculate themselves against the charge that they're too aggressive in regulating business and holding back the economic recovery.

REHM

10:09:14
Jared Bernstein, tell me exactly what the White House is doing.

BERNSTEIN

10:09:20
Sure. They're announcing a set of regulatory reforms that largely refer to the agencies, all the different agencies that the administration rules over, so we have the Department of Labor, the Department of Health and Human Services, the Small Business Administration. One thing to be very clear about -- you mentioned Congress. This stuff doesn't have to go through Congress.

BERNSTEIN

10:09:42
These are regulatory changes that the administration can make by themselves. They argue that these changes will save something like $4 billion over the next five years, things like allowing electronic applications to the Small Business Administration. Government contractors can accelerate the payments -- get their payments on their contracts more quickly, again, through more efficient means.

BERNSTEIN

10:10:06
The Department of Health and Human Services, they say they're going to remove some regulatory and reporting burdens affecting hospitals and health care providers. So it's kind of clearing out some of that sort of brush.

REHM

10:10:17
Russell Roberts, how do you see it?

PROF. RUSSELL ROBERTS

10:10:20
Well, I think it's nice to get rid of what the administration calls dumb regulations and a promise, of course. And I think it's true that they're going to keep in place regulations that they think are crucial for safety and health, et cetera. The problem is I don't think these get at where the real problems -- that government regulations are creating and holding back job creation.

PROF. RUSSELL ROBERTS

10:10:38
So making paperwork file more quickly, that's nice. The biggest problems we have, though, were in areas like the foreclosure market, where we have an enormous overhang of uncertainty. Similarly in health care reform, those regulations haven't even been written yet. So if you're an employer thinking of hiring people, you'd like to know what your costs are going to be. You're not sure what they're going to be over the next couple of years.

PROF. RUSSELL ROBERTS

10:10:59
So this is nice. It's a nice gesture. It's probably got small benefit, positive benefit to the economy. I don't think it's going to help very much.

REHM

10:11:06
Phillip Swagel, uncertainty remains.

SWAGEL

10:11:10
Absolutely. And beyond the housing market and health care regulation, there's uncertainty about the forward progress of the economy. Our firms and business -- firms and consumers are looking at each other and looking at Washington and saying, Washington really isn't working now, and we just don't have confidence in our government.

SWAGEL

10:11:29
And, thus, we don't have confidence in our economy to move forward, and that -- to me, that's the key uncertainty about the economy now.

REHM

10:11:35
Zanny Minton Beddoes, there are those who say that what we have to fear is fear itself and that if we keep talking about the prospect or possibility of a double-dip recession, that's where we'll head. How do you see it?

BEDDOES

10:12:00
Well, I certainly think there's some truth to that. You know, animal spirits, as Keynes talked about, are the key thing. And if people worry and if people lose confidence and investors lose confidence, then the economy suffers. But I think there are real reasons to worry beyond just fear itself, which are that the economy we now know slowed dramatically at the beginning of this year, where it really came very close to stall speed, if you will.

BEDDOES

10:12:23
There were plenty of short-term reasons for that, particularly at the sharp rise in gasoline prices. But that stalling didn't -- doesn't seem to have kind of ended going into the summer. Then we had this big downturn in financial markets. And you add all of that together, I think the outlook for the rest of the year is much darker than most people expected just a few months ago. And one more thing to add to that is the fiscal outlook.

BEDDOES

10:12:44
Now, we can -- I'm sure we're going to talk a lot about the fiscal problems that this country faces. But what we have right now is no agreement on how to deal with the U.S.' big medium-term fiscal problems, but quite a lot of short-term tightening coming, which will kind of hit of the economy in the short term. So I'm pretty pessimistic about the outlook for growth in the short term.

BEDDOES

10:13:03
Add to that the sense of fear that people have, and I think -- you know, I hope the president is right. But to be -- I'm not 100 percent sure that we're not headed for recession.

REHM

10:13:10
Phillip Swagel, how close are we in statistical terms to being back in recession?

SWAGEL

10:13:19
You know, it's interesting. The latest statistics are not bad at all. I mean, they're not great, but, you know, there are surveys of businesses that are hovering around the break-even, you know, between good and bad. Unemployment insurance claims are right around 400,000, which, again, is kind of a break-even between a growing labor market and not.

SWAGEL

10:13:37
The unemployment rate is still high, but we're creating jobs. Durables, orders, orders from businesses are still growing. So there's lots of evidence that the economy is growing, just very moderately. That's the polite way of putting it. The problem I see is what Zoey (sic) really -- what Zanny really pointed out, is that, you know, there's a crisis of confidence, and we could be stalling because of this crisis of confidence.

REHM

10:14:03
Russell Roberts, how do you see it?

ROBERTS

10:14:05
Well, I think the crisis of confidence is real. I think there is a lot of concern and legitimate concern about where the economy is heading. I think no good economist should predict a recession or not. I don't think we really have any idea of whether -- what's going to happen. There could be a bunch of good news that comes along, and suddenly things look rosier, job pays improves, the markets get healthier, stock market.

ROBERTS

10:14:28
So we really don't have a good idea, as economists, whether we're going to go into one or not. We do see those signs that the economy is slowing, and that's discouraging.

REHM

10:14:37
What about the general public, Eamon Javers, and what they feel in addition to what they see?

JAVERS

10:14:49
Well, a couple of key things here. In terms of average people and what they experience of the economy is usually unemployment, housing prices. And then some of them who pay attention to the stock market will see the wild, epic swings that we've seen over the past two weeks in the Dow Jones. I mean, it's been breathtaking, these 500-point moves per day.

JAVERS

10:15:09
You have every reason to be frightened of the stock market right now when it's doing this kind of thing every day. But unemployment, still very high. I mean, if your brother-in-law is still out of work, and -- you're going to feel it. And it's going to scare you that you might be out of work. And housing, I mean, this is an economic crisis that started in the housing sector.

JAVERS

10:15:28
And I think -- I'm not an economist. I hang around with some, but I'm not one. But my sense is that this began with housing, and it's probably going to end with housing, too. Until that housing overhang clears out, we're not going to see a really robust recovery in this country.

REHM

10:15:42
And, Jared Bernstein, here's an email from Rhonda, who says, "I've heard from experts several times, the government should offer low-interest refinancing to all homeowners, and yet this does not seem to gain traction. If demand is a big part of the problem, it makes absolute sense to put more money in the hands of people who will spend it.

REHM

10:16:13
"Also, it will stop the onslaught of more foreclosures and get the construction industry moving again." How do you read that?

BERNSTEIN

10:16:24
I think there is something to that. I mean, you have to remember that there's a lot of mortgages out there that are held by Fannie and Freddie -- that's the big government-backed agencies -- that now is in what's called conservatorship. The government controls 80 percent of those agencies, and they hold about 30 million-plus mortgages.

BERNSTEIN

10:16:45
And people are pushing them to do precisely what the emailer said, to provide refinancing for people, so that they can take their monthly payments down by, say, a couple of 100 bucks a month, which, over a year, amounts to real money. I think the emailer identifies a very important point that I want to bring to the conversation. It's this idea of demand.

BERNSTEIN

10:17:01
I think sometimes these ideas of competence and uncertainty are sort of fuzzy notions that are hard for people to wrap their heads around. The fact is that we have a huge contraction in what Keynes called aggregate demand. That is exactly as the emailer identified. People just don't have enough jobs, enough hours at work, enough labor income.

BERNSTEIN

10:17:22
And I'll give you a tiny anecdote from a business person I spoke to the other day. He's a small business guy, and he said, you know, I get this uncertainty. I'm really hurting from uncertainty. And I was like, aha, now, I can ask an actual business person what they're talking about.

REHM

10:17:36
What are you uncertain about?

BERNSTEIN

10:17:36
So that's what I said. And what he said is, I am uncertain about how many people are going to come into my door and buy my stuff. That is a clear kind of demand side story, saying that I -- there's just not enough people coming into businesses and not enough investors investing in the goods and services that we can produce. And the caller is right. I mean, we have a 70 percent consumption economy.

BERNSTEIN

10:18:00
If the labor market in underperforming and people just don't have enough money in their pockets, if they're looking at the debt overhang, the over-leveraging cycle that's ongoing, then, sure, we're going to have the problems we're having.

REHM

10:18:11
Jared Bernstein, he is former chief economist, economic policy adviser for Vice President Biden. We're going to take a short break. We do welcome your calls, 800-433-8850. Send us your email to drshow@wamu.org. Send us a posting on Facebook or Twitter.

REHM

10:20:03
And welcome back. We have a group of five knowledgeable individuals here in the studio as we talk about what's happening to the U.S. economy, the changes the president announced in some regulatory reforms this morning, what's to come. Ben Bernanke is to speak on Friday, and there is some question about whether a quantitative easing number three could come. We'll talk about that and take your calls.

REHM

10:20:43
Here in the studio: Russell Roberts of George Mason University, Zanny Minton Beddoes of The Economist, Avon (sic) -- Eamon Javers of CNBC, Phillip Swagel of the University of Maryland, Jared Bernstein of the Budget -- Center on Budget and Policy Priorities. We'll open the phones shortly to take your calls. I look forward to hearing from you. Eamon, you wanted to talk about how much money corporations are sitting on right now.

JAVERS

10:21:20
Yeah, just before we took a break there, Jared was talking about speaking to a small business person, who said he was uncertain about how much customers were going to come in the front door. I think you got the same problem on the big business side. You got American corporations that are hugely profitable right now, that are generating enormous amounts of cash and are letting that cash pile up and covering the debt ceiling debate.

JAVERS

10:21:42
A couple of weeks ago, you know, we got to this astonishing moment where the United States government actually had less cash on hand than Apple Corporation, which had $70-plus billion in cash sitting around. Now, in the old days, shareholders would punish a company that had that much cash sitting around and say, hey, you're not deploying that. Go out and buy a company. Go out and build some plants.

JAVERS

10:22:03
Do something with that money. We're not paying you to sit around on a pile of dollar bills. Nowadays, though, that's viewed as sort of prudent management because you don't know. You have the same uncertainty of how much demand there's going to be in the economy going forward. So they're wrestling with the same -- the very same issue.

ROBERTS

10:22:20
Oh, to live in a world where the U.S. government was as well-run as Apple Corporation. Maybe they'd have a bigger buffer of cash. I mean, that's a tribute to Apple and, of course, a partial condemnation of planning on the part of the U.S. government. I think, when we talk about demand, it's a very common term in economics. But I think it's somewhat misleading. We don't really know how to create demand.

ROBERTS

10:22:44
We just, in the last couple of years, added $800-plus billion of government spending, explicitly just to increase demand. We added additional hundreds of billions. We borrowed over a trillion a year and spent it at the federal level.

ROBERTS

10:23:01
And it doesn't seem to have solved this problem of demand because it's partially been offset by reductions in spending by the state level and by consumers who are anxious about the future and by the corporate uncertainty we've been talking about. So although it may be that Keynes was right, that a decrease in demand is our problem, we don't have an easy lever, I don't think, to fix that problem…

REHM

10:23:23
Zanny.

BEDDOES

10:23:24
I sense that we're going to have the beginnings of a debate that has been overshadowing this whole policy process here between Jared and Russ on whether demand matters and how much it matters. I would like to take the kind of center ground. And it seems to me that we do actually know how to create demand, and government spending creates demand. And if you tighten fiscal policy, you reduce demand.

BEDDOES

10:23:47
We, however, are in a world where we had a huge housing bubble that's bust. We've got very over-levered consumers. We have consumers, therefore, that are reluctant to spend more, reluctant to borrow more. That's an ongoing drag on the economy. So people who've looked at those kinds of situations in the past -- and there haven't been that many of them -- said that this recovery was always going to be a weak and feeble one.

BEDDOES

10:24:10
This was not going to be like the early 1980s where you had a big, deep recession, and then the economy roared back. So a lot of what we're now is kind of adjusting to a new reality. That said, the growth this year has been weak, even by the standards of -- or even by the expectations of people who thought there would be a weak recovery.

REHM

10:24:28
But, Zanny, I know you're just back from London. How did the new concerns about what's happening in Europe, how are they affecting what's happening here in this country?

BEDDOES

10:24:43
I think they have played a role in what's been going on in financial markets, particularly what's been going on in the kind of sense of financial turbulence in the last few weeks. People don't know what's going to happen within Europe, to the euro, to the whole future of the euro. Now, the U.S. has a lot of problems. I think they pale in comparison with the problems that the European countries face.

BEDDOES

10:25:05
They have a really, really serious big question about the future of their single currency. If they handle it badly -- and they've handled it pretty badly this far -- then you could have a chaotic kind of collapse within Europe, which would have very serious consequences for the U.S. And the sort of uncertainty about what happens to this very big economic area in Europe affects Wall Street a lot, affects financial markets.

BEDDOES

10:25:28
I don't think Jared's small business owner is particularly worried about it, but I think it is something that could affect the U.S. economy. And uncertainty about what's going on in Europe has added to the uncertainty here in recent weeks, I'm quite sure.

REHM

10:25:40
Phillip Swagel, suppose President Obama comes in after Labor Day with a huge infrastructure program, also extended payroll, tax cuts, a huge hiring subsidy. What kind of backlash is he likely to face on that?

SWAGEL

10:26:06
Right. I think there will be some people who'll say, you know, look, we tried this. We did lots of spending. It wasn't effective. You're going to get that, you know? To my mind, it really depends on what the other components of President Obama's plan are. You know, some of the uncertainty we face in the economy is slightly longer term, that everyone understands we have a big fiscal challenge.

SWAGEL

10:26:25
And that means that either spending will go down or taxes will go up in the future. We have to address that. So if President Obama comes out with a program that's credible, that addresses entitlements, Medicare especially, I think there could be much more support from moderate -- you know, moderate Republicans.

SWAGEL

10:26:40
I'm not saying the Tea Party is going to support more spending. Don't count on that. But, really, it's up to the president to be more credible on the fiscal side.

REHM

10:26:51
Jared Bernstein, a lot of people have criticized the president for not coming out more strongly against what he faced on that raising the debt ceiling limit, on not taking a stronger position pro the people, if you will.

BERNSTEIN

10:27:17
Look, the president, during the debt ceiling debate, was very much invested, along with Treasury Secretary Geithner, in avoiding default. And the other side just wasn't really there. So he kind of got boxed into a corner. I think what -- where you say, the people, I think the people are pushing the president -- and he's responding -- to stop focusing on the budget deficit and start focusing on the jobs deficit.

BERNSTEIN

10:27:43
The idea that you're talking about debt ceilings and budget baselines and deficits and debt-to-GDP ratios, that just leaves people way behind. I'm not saying they're not important. Especially the urgency of getting our budget on a sustainable path in the medium term, the long term, is essential. By the way, that has everything to do with health care reform, and that's a different discussion.

BERNSTEIN

10:28:04
A lot of the nibbling we're talking about now isn't really the main issue. But right now, what's really facing American families is this 9-plus percent unemployment rate. And you can almost double that if you start to factor in all the people who are underemployed. And that's where the president is trying to pivot, and he's got a lot of good ideas. Now, let me just add a few facts to the discussion.

BERNSTEIN

10:28:26
The analysis of, say, the Recovery Act, which Russ was, you know, disparaging as ineffective -- and I'm not talking about the White House. You can take that from off the scale. Look at the independent analysts, the Congressional Budget Office. Lots of folks in markets who are -- have research groups that are looking at this stuff found that the act actually had its intended consequences.

BERNSTEIN

10:28:49
It shaved a couple of points off the growth in the unemployment rate. It added something like between 2 or 3 million jobs. The problem is it simply didn't go far enough, and it stopped too soon. So when the president talks about -- and you mentioned it -- a payroll tax holiday, an infrastructure plan, I totally agree with Zanny's analysis that the deleveraging that's still going on in the housing market in particular is absolutely a problem for our economy.

BERNSTEIN

10:29:11
But if we focus on creating jobs and retaining jobs, trying to do something about all the layoffs going on at the state and local sector, teachers, cops, et cetera, we will be successful in helping to pull down that unemployment rate, not back to 4 or 5 percent, but keep it -- instead of nine, we could be looking at eight, something in that neighborhood.

REHM

10:29:29
Eamon.

JAVERS

10:29:29
The difference between Barack Obama of 2009 and Barack Obama of 2011, though, is that his disapproval rating is extremely high on the economy. The latest Gallup poll out this week showed a 71 percent disapproval rating for Barack Obama on his handling of the economy. That just eats away his political momentum and his ability to do anything.

JAVERS

10:29:50
And it gives Republicans the scent of blood in the water here, going in to the 2012 presidential campaign. Republicans have almost no incentive to go along with anything that Barack Obama proposes in September, in terms of the jobs program, because they know, politically, that he's going to get blamed for this problem going forward. And they want him to own that blame.

REHM

10:30:10
Russ Roberts.

ROBERTS

10:30:11
Two issues. First, on the leadership issue, the president has failed to lay out explicit plans and lead. I think that's his biggest failing. He let the stimulus plan be designed by Congress. His debt ceiling discussion was basically wondrous, and everyone get together. That's not leadership. He needs to stake out explicit positions and inspire the American people to get behind them, and then Congress will as well.

ROBERTS

10:30:34
Going back to the stimulus issue that Jared raised, the CBO estimates of the effect of the stimulus of creating 1 to 3 million jobs, those estimates were not really estimates. What they did is they took the same models that predicted how many jobs would be created, and they re-ran them with the numbers of how much spending there was. It's very difficult. They explicitly said, we cannot estimate using the data that's actually occurred.

ROBERTS

10:30:57
So our understanding of macroeconomics, unfortunately, is not good enough to even test whether an $800-plus-billion program was successful. And I think that's a lesson in humility for the state of my discipline.

REHM

10:31:11
So, from your point of view, a quantitative easing three would be, what, useless?

ROBERTS

10:31:21
Oh, well, I'm not -- that's a whole -- that's another issue. I think we're mainly talking about fiscal policy and government spending as a way to create jobs. I think it's not been successful. But on the -- as far as I can see. But in the monetary side, I think we're on the verge of a very serious risk of inflation. And that's -- well, it could have a devastating effect. We're...

REHM

10:31:41
Inflation is where right now?

ROBERTS

10:31:43
Well, we don't really know. We don't estimate it very well.

REHM

10:31:45
Sort of zero.

ROBERTS

10:31:46
It's close to zero, but there are signs that it's rising. Banks are sitting on trillions of dollars of reserves that went unleashed in the economy. It will almost certainly cause inflation that's being held back, partly, by the Federal Reserve playing interest on those reserves, which I view as a backdoor subsidy to the banks, which is a mistake.

REHM

10:32:05
Can somebody explain to me why there is such a major concern about inflation when it's been at zero?

BERNSTEIN

10:32:19
It's not -- I have to correct that because it's actually very -- you know, you're going to get a million people calling, saying inflation, certainly seems -- showing up in my life. Actually, the last rate on inflation was 3.6 percent year over year, and that's not trivial inflation. Now, that has a lot to do with energy prices and food prices, which are volatile and have been high lately.

BERNSTEIN

10:32:38
Take those out, and you have what's called core inflation, which is a much less volatile measure. And that's been rising. The last rate was around 1.8 percent, so below 2 percent. It's not zero. But it's not something that you would want to worry about in terms of -- I think in Russell's terms of it, geez, if we try to goose the economy a little bit more, we're going to have runaway prices. It's the core that matters in that case.

BERNSTEIN

10:33:01
But consumers face -- they don't face the core. They face -- they have -- actually, they have to buy food and gas, and they've actually been pinched. Their real earnings, their real incomes have been declining. Their paychecks have been squeezed by inflation lately.

REHM

10:33:13
Jared Bernstein. And you're listening to "The Diane Rehm Show." Let's open the phones now, hear what our listeners have to say. First to Springfield, Va. Good morning, Sema. (sp?) You're on the air. Sema, are you there? Okay. Let's go to Concord, N.C. Good morning, Grey. (sp?)

GREY

10:33:42
Good morning. Russell, well, "EconTalk" is my favorite podcast. I just think -- I'm in sales, and my wife and I also own a small business, a women's boutique. And I sense just a massive level of uncertainty, both as a business owner of how much to invest, uncertain about cost going forward with the implementation of health care. I see commodity prices affecting, you know, our personal business.

GREY

10:34:09
And then, also, in the business that I'm in -- I sell audio visual equipment. Commodity prices eventually are going to change direction with, you know, lower and lower prices for TVs and Blu-ray players and that kind of thing. That's going to -- that tide is changing. I've already got manufacturers who are trying the hold prices steady. And so I think it's this uncertainty.

GREY

10:34:29
And the piecemeal approach that the administration is using, I think, contributes to that, the fact that people understand that debt is a real serious thing, that normal people with average intelligence can tell that Social Security and Medicare are unsustainable, and yet we have this farce that just happened between the Republicans and the Democrats pretending that they cut something when, you know, you have to understand baseline budgeting and the like to figure out that, no, they're still going to spend more. They're just not going to spend as much as they said they were.

REHM

10:35:00
All right. Phillip Swagel, do you want to comment?

SWAGEL

10:35:03
Yeah, I mean, there's a whole variety of issues there, relating both to inflation and to fiscal policy. And, you know, people look at inflation. And (unintelligible) inflation that people feel in their lives, as Jared said, is high, and it's pinching. You know, on the other hand, the labor market is still very weak.

SWAGEL

10:35:20
And it's -- we don't see the evidence that inflationary pressures are getting built into wages, which is really how we get sustained inflation in this country. So that's the dilemma for the Fed. There's a lot of reasons to be scared about high inflation. All the reserves sitting on bank balance sheets, if those get deployed, they could spur inflation. On the other hand, the labor market is deflationary, if anything.

SWAGEL

10:35:41
So it's really a tough job for the Fed deciding whether to go more or whether to go in the opposite direction.

REHM

10:35:47
Russ Roberts.

ROBERTS

10:35:49
Well, I don't think that's the real issue. I think the real issue is whether we're on the verge of increasing rates of inflation that we can't control. As those bank reserves spill out in the economy, we risk going back to the late '70s when unemployment had no effect on inflation, labor markets. It's a monetary phenomenon.

ROBERTS

10:36:09
And we want to avoid the hyperinflations that have -- that really destroy civilization. We're playing with fire here. It's not a simple thing.

REHM

10:36:16
Phillip.

SWAGEL

10:36:17
Boy, I wish the world were so black and white. You know, that seems like a really high-class problem to have the reserves spilling out into the economy. I sure hope we do. I sure hope business demand picks up so much that banks deploy those reserves and lend out. It could happen. I don't see it happening right now.

REHM

10:36:33
Zanny.

BEDDOES

10:36:34
Yeah, I just wanted to echo Phillip's point. I mean, often, Russ, you, and people like you, suggest there seems to be some kind of sort of immaculate way in which bank reserves spill out into the economy and create inflation immediately. They spill out because banks are lending. And then that will create inflation if demand exceeds the economy's capacity to produce.

BEDDOES

10:36:56
But, right now, we are in -- we have insufficient demand as we've been talking about. And so I think that the idea that we're going to go from where we are now to hyperinflation, kind of like that, seems to me just very farfetched.

ROBERTS

10:37:07
Well, I have no -- I want banks to lend also, by the way. That's -- I'm eager to see them do that. The question is how much money they have on hand to do that, and the answer to that is they have way too much. What Bernanke has promised is that, once the economy gets going, he'll soak them back up. Politically, I think that will be almost impossible, and that's the risk that we face.

REHM

10:37:26
Russell Roberts, he is professor of economics at George Mason University. When we come back, more of your calls, your comments. Stay with us.

REHM

10:40:03
And as we talk about the economy during the break, Jared Bernstein said double-dip, double-dip. That's not really what we're worried about. What we're worried about is getting people back to work. Here is a caller in Lapeer, Mich. Joe, you're on the air. Joe?

JOE

10:40:27
Hello. How are you doing?

REHM

10:40:28
Yeah, go right ahead.

JOE

10:40:29
Hi. How are you doing?

REHM

10:40:30
Fine. Thanks. Joe, go right ahead.

JOE

10:40:33
I think we're in kind of a tough spot.

REHM

10:40:35
Pardon me?

JOE

10:40:37
I said, I think we're in kind of a tough spot. I think we need careers. And I think we could have possibly missed the chance to build on that. I think if the stimulus money had been taken, starting right with the first stimulus with George W. Bush, had been taken, all of it combined and divided amongst the mortgage holders with stipulations that they must pay off or pay down their mortgage to the, you know, fullest extent they can, and then if there's monies left over, turn around and buy a new Ford, General Motors or Chrysler vehicle and then go out and spend the rest.

JOE

10:41:25
And if, for those people that have mortgages left over after paying down -- you know, they didn't spend all their money on their mortgage -- then put pressure on the banks to refinance them so that their mortgage payments are more manageable. You would have had trucking moving because there would have been products being purchased everywhere. You would have had -- you know, it would have created all kinds of movement.

REHM

10:41:54
Eamon Javers.

JAVERS

10:41:54
You know, that's an interesting idea. This question of whether homeowners are struggling so much under their mortgages, that they can't move the economy forward. And those of us who have mortgages from the bubble era would totally sympathize with the idea of having some mortgage relief. I've heard of that more in the past three days than I've heard it in two years, and that's because this is one of the things that was kicked around very early in the recession as something to help American consumers deleverage.

JAVERS

10:42:22
We helped Wall Street deleverage with the massive bailout program. And the argument at the time was, we've got to help consumers deleverage. The argument against it, the reason it wasn't done was because it's nearly impossible to design a program that's going to be anything close to fair to those people who are not bailed out in the home market lottery.

REHM

10:42:40
This so-called moral hazard.

JAVERS

10:42:44
Right. And we didn't worry so much about moral hazard on Wall Street. But we did worry about moral hazard in the housing market. And the question is, how do you design a program in which you're going to bail out those people who have a mortgage over X percent, and the people just on the other side of the line get nothing? You're going to have really, really angry people, and millions of them no matter how you do that.

REHM

10:43:04
Russell Roberts.

ROBERTS

10:43:05
Do we really want to live in a country where irresponsibility is rewarded, where people get a do-over all the time? Now, you're right. You did it...

REHM

10:43:13
How about corporations getting a do-over?

ROBERTS

10:43:15
No. That was disgusting. This is the most despicable public policy of the -- in my lifetime. We spent -- we, taxpayers, sent hundreds of billions of dollars to the richest people in human history, and it was justified by Democrats, progressives, Republicans as unavoidable. And I think that is the most depressing political result.

ROBERTS

10:43:38
It would have been much better, much better to have bailed out individual consumers and let those people on Wall Street go out of business, which is what we should have done. But we shouldn't -- if we were to do one thing, I would very do neither. So the fact that we bailed out Wall Street was a terrible mistake. I don't want to bail out consumers as well. We don't want to live in a place where do-overs are the rule of the day.

REHM

10:43:59
Phillip Swagel.

SWAGEL

10:44:00
Yeah, I mean, I was at the Treasury during all these, and I co-wrote the alpha draft, in a sense, to the TARP, the initial memo. You know, look, it's unfair, this moral hazard. The alternative was worse, and I looked at what's going on in housing. And I see the same pros and cons, that essentially writing checks to people who are underwater, it's deeply unfair. The pro is maybe it'll help spur consumption going forward.

SWAGEL

10:44:23
I just -- I haven't seen an analysis that shows me that the benefits of that outweigh the cons. And maybe they're there. So that makes me -- it makes me skeptical to (word?).

REHM

10:44:32
Jared.

BERNSTEIN

10:44:34
I'm with Phil. I mean, I think that the -- and -- but Russ makes a great point, and I appreciate his consistency. The economy, when the housing bubble burst, was on the verge of not just recession but probably depression. And, in fact, you've seen, even with everything we've thrown at this economy, we're still slogging along. The growth in the first half of the year was below 1 percent, and it's not just us.

BERNSTEIN

10:45:01
We were talking earlier about Europe that's facing equally large problems with unsustainable debt. The problem, of course, is the run up of this debt in the first place. And if you're willing to sacrifice the system, let everything crash to make -- what I would consider to be an ideological point -- you're accepting a level of pain that would reverberate through generations that could be avoided if you do two things.

BERNSTEIN

10:45:24
One, deal with the problems we have. And, two, impose a regulatory structure, so we don't have those problems again.

REHM

10:45:30
Okay. Here's a question I have for each of you that I know our listeners want to know. What is the one thing you would do right now, Phillip Swagel, to spur growth and get this economy going again? Each of you, I want to know.

SWAGEL

10:45:52
Yeah, I think we need a Washington that works again, that deals with our economic challenges. And, specifically, I would address the medium-term fiscal challenges, not all at once, not immediately -- don't slam fiscal policy into reverse -- but something credible on Medicare forum tied to some of the infrastructure investments, the spending that you mentioned earlier.

SWAGEL

10:46:10
But it's got to be credible on the fiscal side. I don't see that coming from this administration.

REHM

10:46:15
Zanny.

BEDDOES

10:46:16
Gosh, I find myself agreeing completely with Phil. I was about to say almost exactly the same thing. I think that there is no single silver bullet, so (unintelligible). So I think that you're asking me to come up one thing...

REHM

10:46:26
Yeah.

BEDDOES

10:46:26
If I was, you know, if we could -- let's abstract from the Washington we have and assume a Washington that works. I would have a very quick agreement to reform entitlements, to do something about revenues in the medium term, to raise the retirement age and, at the same time, cushion fiscal policy of the short term, have an infrastructure spending program, extend the temporary tax cuts, probably do some of the school repair and things that Jared may talk about, the job-intensive short-term stuff.

BEDDOES

10:46:59
I would also -- finally, I would overhaul unemployment insurance. And I would revamp U.S. training because I think there is some structural problem we have here. People need to be retrained, and I would do that, too.

REHM

10:47:10
Russ.

ROBERTS

10:47:11
I don't think there's a simple solution or any one policy. We've gotten ourselves into a mess. I don't think infrastructure spending has shown any sign of being able to be rolled up quickly. It's been rolled up slowly. I don't think it is spent wisely, and it doesn't solve the problem of the 2 million construction workers who have lost jobs. That's going to require the housing market to recover. We don't evolve in arguing what...

REHM

10:47:32
What about roads and bridges and...

ROBERTS

10:47:35
We build them all the time. And I don't know whether any of those jobs have been soaped up -- have soaped up those unemployed carpenters in Nevada. I suspect not. And the money gets spent by our political friends, unfortunately -- Washington, the way it actually works.

ROBERTS

10:47:49
I do agree with Phillip and Zanny, though, that if by some miracle we could have some maturity in Washington, they could decide, act like grown-ups, live within their means and show that they could solve the entitlement problem, which means taking away goodies from people who are expecting them, which is not democracy's strong suit, it would be a glorious thing.

BERNSTEIN

10:48:09
Okay.

ROBERTS

10:48:09
But that is not the world we live in, and we're in trouble.

REHM

10:48:12
Jared.

BERNSTEIN

10:48:12
Well, if Zanny can assume a Washington that works and I can assume 5 percent unemployment, then we're done.

BERNSTEIN

10:48:18
No. Look, first of all, while I totally agree with the fiscal sustainability, that's not going to create any jobs in the short run. In fact, we're probably hurting the short run if you contract too quickly on the fiscal side. I've got one idea. You said one, so I'm going to give you one.

REHM

10:48:33
Good.

BERNSTEIN

10:48:34
I agree. There's no silver bullet. But here's an idea for you. It's called FAST, fix America's schools today. There are 100,000 schools out there, public schools. And almost every one of them is in an ill state of repair. They need insulation. Many need retrofits, new windows, new boilers. Think of the energy efficiency savings.

BERNSTEIN

10:48:51
Think of the environment we send our children into every day. Think of the messages we send them when they go to a school that's falling apart. And there are dilapidated public schools.

REHM

10:49:00
And right across the street, I hear in Northwest Washington, D.C., is the Woodrow Wilson High School, which has just been rebuilt, expanded. It looks glorious. It will be a fine place for kids to learn.

BERNSTEIN

10:49:17
So let's do that around the nation. And let me just address quickly one of Russ' points. I think he makes a good point. A lot of the roads and bridge work -- and I saw this during the Recovery Act -- is very capital intensive. We don't want to provide a lot of jobs for machines right now. We want to provide a lot of jobs for people.

BERNSTEIN

10:49:32
And we can put those construction workers back to work quickly using established formulas that Congress is comfortable with, with FAST.

JAVERS

10:49:41
You know, Diane...

REHM

10:49:41
Eamon.

JAVERS

10:49:41
...I'm kind of a skeptic on government, having covered Washington for about 15 years or more now. The one thing -- if I could wave my magic wand as everyone is doing around the table here -- would be to tell politicians and the voters to be honest with each other. I think that politicians run for office -- you saw this in President Obama's campaign.

JAVERS

10:49:59
You're seeing it from some of the Republican candidates now, making elaborate promises for what they're going to do to fix the economy. And I've become sort of skeptical that government can do all that much. They can tweak things. They can suggest things. They can have different policy prescriptions.

JAVERS

10:50:15
But I don't think they can really change the macro-direction of the economy. I think the economy is, to some sense, larger than Washington. And...

REHM

10:50:24
And what do you...

JAVERS

10:50:25
...so politicians need to stop promising, and voters need to stop expecting that they can turn it around in three months, six months, you know, short time frame.

REHM

10:50:31
What do you expect from Ben Bernanke on Friday?

JAVERS

10:50:36
I think the signals that we're getting are that we should not expect major QE3 announcement on Friday. I mean, I think the Fed has been hinting and winking and trying to temp down expectations that something dramatic is going to happen.

REHM

10:50:49
All right. Let's go now to Shirley, Mass. Good morning, Larry. You're on the air.

LARRY

10:50:56
Good morning. Can you hear me okay?

REHM

10:50:57
Sure can.

LARRY

10:50:59
Okay. I'd like to say, first of all, I appreciate all the good thinking that's going into all this. It's good to hear people calling in and hearing that. But one thing I want to contribute is the fact that there seems to be an argument about whatever idea comes up as being not valid for one reason or another. And we need to stop coming up with ideas and actually come to an agreement about how things are going to be done.

LARRY

10:51:30
I think that the housing market bubble was created because people, investors wanted to make profits. And they would go into neighborhoods, buy up 12 or 20 properties that -- in varying conditions. And then they would flip a number of them, say, eight or 10 back and forth between them over a period of time, artificially inflating the prices of the houses, creating anxiety in the market and creating a market for people who would then come in and buy the properties at an inflated price.

LARRY

10:52:09
And the investors would sell them and leave the people hung with the inflated properties. And then the investors would move on and do the same thing in other areas. Now, that's not our fault, the people's fault. That's the result of greed in our economy.

REHM

10:52:31
Zanny, would you agree with that analysis?

BEDDOES

10:52:35
You know, I very much agree with the caller's first statement, which is that is time to agree on specific things of what to do. The problem is, as I heard his explanation of what happened, I suspect you could have 10 other callers with very different explanations of what happened and why it happened.

BEDDOES

10:52:52
And I think this very robust conversation we've had here this morning, which clearly shows differences between us, is indicative of the fact that we don't actually even have a very clear agreement on what's been going on. We don't have very clear agreement on what different policy initiatives do or how much government can do. And I think that's what makes this kind of moment so difficult.

BEDDOES

10:53:11
And it seems to me that, you know, we need to try and agree on a sort of center ground that sensible Republicans, sensible Democrats can come together on. And that center ground is there, I think, but it demands the conversation going a lot further than it's going right now in Washington.

REHM

10:53:27
Zanny Minton Beddoes of The Economist. And you're listening to "The Diane Rehm Show". Here is an email from Rossanie, (sp?) who says, "Why can't the government pressure the American corporations: American Express, Delta, Walmart, et cetera, who are employing millions of jobs overseas with call centers, offshore production, et cetera, to bring back the labor force of the offshore corporations?" Eamon.

JAVERS

10:54:06
That's very much in the political debate right now. And there was a fascinating story on this very issue in The Washington Post earlier this week, pointing out that the number of offshore employees used to be a number that companies would disclose in their SEC filings in a public document that everyone could see. And the ratio between overseas employees and employees in the United States was out there.

JAVERS

10:54:26
In the early part of the 2000s, as this offshoring became a politically hot-button issue, a lot of companies simply stopped disclosing the ratio of offshore to domestic employees.

REHM

10:54:36
And there is no ruling?

JAVERS

10:54:37
And there is no recourse. And, in fact, they actually disclosed this number to the U.S. government under the condition that the government keep it a secret. And so the government does know and does have these figures of what the ratios are inside these major American corporations, which may not be quite as American as we think anymore.

REHM

10:54:54
Phillip Swagel.

SWAGEL

10:54:55
Yeah, I mean, these are interesting issues. It's, you know, the information. To me, the policy issue is, how do we make the U.S. an attractive place to do business that we don't have to force corporations to do something but that corporations want to set up here? And so the action that...

REHM

10:55:08
Did you know you've got a lot of candidates talking about patriotism, Phillip? We've got a lot of people saying, you know, I'm for the American people. I'm for the American public. And yet they are supporting these corporations that are totally doing business offshore.

SWAGEL

10:55:29
Right. I mean, we want our corporations to be successful. And if the choice is between creating a job in another country, or not creating a job at all, it seems to me that the former is better. We obviously want -- we want both. So, you know, I think I go back to where I started that -- I'm sorry -- when we started the show.

SWAGEL

10:55:47
Right, the administration this morning is saying, we want to remove obstacles to growth. That's the right approach. That's the right I approach, I think, to deal with the issue.

BERNSTEIN

10:55:55
I'd be a little bit more activist, and I -- Phil makes a good point. The government can't force folks to do what they don't want. But I'd be more activist in the following sense, on tax policy. We have tax policies that actively encourage corporations to go abroad, and that is something that we really want to do something about.

REHM

10:56:11
I want to hear what Russ says before we close.

ROBERTS

10:56:14
Well, I'm certainly against those tax policies. I'm against subsidies to exporting, which are a mistake. I think we have to keep in mind that government doesn't do always what we want. It does what powerful people want and powerful corporations.

REHM

10:56:24
It wants what moneymakers want.

ROBERTS

10:56:27
Exactly. And I don't want government using policy about outsourcing to help particular corporations or particular sectors of the economy. I would rather have competition reign and get the government out of that business. That foreign -- those imports and outsourcing help keep prices down and increase our standard of living.

REHM

10:56:45
Well, you know, I'm not so sure.

ROBERTS

10:56:49
(unintelligible) Diane.

REHM

10:56:50
Russell Roberts, he's with the George Mason University. Zanny Minton Beddoes of The Economist, Eamon Javers of CNBC. Phillip Swagel, he was assistant secretary for economic policy at Treasury Department from 2006 to January 2009. Jared Bernstein, he was economic and policy adviser for Vice President Joseph Biden. Thank you all so much.

BERNSTEIN

10:57:26
Thank you.

BEDDOES

10:57:26
Thank you.

ROBERTS

10:57:26
Thank you.

REHM

10:57:27
Thanks for listening. I'm Diane Rehm.
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