Ben Bernanke was chair of the Federal Reserve during what became the worst financial crisis since the Great Depression. An inside look at the meltdown from the former Fed chair and his defense of bailing out Wall Street.
The U.S. economy has been showing some positive signs: the stock market is up. House prices in many places are higher than they’ve been for seven years. The number of new workers seeking unemployment benefits has declined, and the deficit is smaller this year compared to last. But there are still more than 12 million Americans looking for work. Current deficit numbers may delay the next political showdown over the raising the debt limit, but that battle is still coming, and there is no sign that the White House and Congress will be able to agree on plan that supports long term growth. Please join us to discuss what’s ahead for the U.S. economy.
- Greg Ip U.S. economics editor for The Economist and author of "The Little Book of Economics: How the Economy Works in the Real World."
- Damian Paletta reporter for The Wall Street Journal.
- David Leonhardt Washington bureau chief for The New York Times and author of the e-book: “Here’s the Deal: How Washington Can Solve the Deficit and Spur Growth."
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. The U.S. unemployment rate has fallen to 7.5 percent, and there are other signs the economy is improving especially for Americans at the upper end of the income scale. But there are few signals President Obama and Congress are any closer on a plan that supports long-term growth.
MS. DIANE REHMJoining me to talk about the U.S. economy and where it's headed: Damian Paletta of The Wall Street Journal, Greg Ip of The Economist and David Leonhardt, Washington bureau chief for The New York Times. I'm sure many of you will have stories to tell. Give us a call, 800-433-8850. Send us an email to firstname.lastname@example.org. Follow us on Facebook or send us tweet. Good morning, all.
MR. DAMIAN PALETTAGood morning.
MR. GREG IPGood morning.
MR. DAVID LEONHARDTGood morning, Diane.
REHMDamian, I'll start with you. Give us an overview of some of the signs that you're seeing.
PALETTASure. I mean, after several years of going from one crisis to another, now we're finally at a stage where people are cautiously exhaling. We have the housing market rebounding in many markets. Consumer confidence is at levels that we haven't seen in several years. Retail sales are jumping higher than expected we found out this morning.
PALETTAThe stock market just blasted through levels that many people thought we weren't going to see for a long time at historic highs. And the deficit is coming down more quickly than many were expecting after several years of fighting and still higher than many are comfortable with than higher than historic levels, but it's definitely come down from the financial crisis.
REHMSo, Greg Ip, you say that even though we're seeing these signs, technically, it's hard to call it a recovery.
IPYeah. I called this the tyranny of low expectations. Just to give you an example, as Damian mentioned, this morning we learned that retail sales in April were quite a bit stronger than economists had expected. So I saw one economist said, we're revising up our forecast for growth in the current quarter from 1.5 percent to 2 percent.
IPTwo percent is not an exciting number and especially not an exciting number when you still have unemployment of 7.5 percent. The hard reality is through all the ups and downs, the spring swoons, the fall recoveries, the stock market hitting new highs, the economy still continues to only grow at around two to 2.5 percent rate.
REHMAnd to you, David Leonhardt, what about Fannie Mae paying back and GM paying back, how does that affect the overall picture?
LEONHARDTYou would hope that when we have these good signs in the financial sector, in the stock market, on the corporate balance sheets that it would wash through the whole economy. It often does. It typically does. That's what we had in the late '90s. One of the most worrisome things right now is that the good news in various parts of the economy doesn't seem to be translating to really rapid job growth, as Greg was just suggesting.
LEONHARDTAnd that's worrisome because we've got huge numbers of people still who are out of work or who are underemployed. And while the economy is getting better, it's not accelerating. It's getting better at the same pace that it's been getting better at over the last year roughly, and it's not getting better at a very good pace. And so we have a really long way to go for most people.
REHMBut isn't the job market always the last to catch up, Damian?
PALETTAIt can be, but one of the things that's really frustrating for a lot of folks is this how uneven this recovery has been. Food stamps are still at levels, you know, never seen in U.S. history. And although the stock market is really high right now, I think a very small portion of people compared to, you know, prior years are in the stock market can benefit from that. So it's really uneven. If you're unemployed or underemployed or working a part-time job or you maybe had a full-time job before, you're really not enjoying a lot of this recovery right now.
REHMSo you got these huge corporate earnings, but people at the bottom aren't feeling it.
IPWell that's exactly right, Diane. I mean, the last five years had been a story where capitalists done extremely well, labor, not so much. We are getting job growth, as you mentioned. In fact, in April, we had 165,000 jobs created. And that is somewhat faster than the pace we need to get the unemployment rate down.
IPBut if you look at what the wages are, the people are earning at those jobs, they're only up around 2 percent from the year earlier. Before the recession, wage growth is typically around four or 5 percent. Very soft wages mean that a lot of the gains in productivity that we've seen had actually gone to the corporate side. So we've had earnings at a record level.
IPAll that said, even earnings growth has started to slow down. And, in fact, if you look at the stock market right now, all the companies that reported this year have told us that sales, for example, are only -- have barely changed in the last year. So a lot of the optimism you see in the stock market seems less to do with the very robust outlook for earnings and profits right now and just a lot of confidence at the low interest rates that the Federal Reserve has much to maintain or could've stay there for a while.
REHMSo how has sequestration affected all of this?
LEONHARDTIt hasn't helped. If you think of sequestration as a part of a broader American austerity program for all the hard time that we give Europe about its austerity program, ours is not of a qualitatively different size. We've had sequestration. We had the end of the temporary payroll tax cut at the end of the year. We've had various other spending cuts. We've had some other tax increases. And so the best estimates are that without the increased austerity that we've had lately, our unemployment rate would probably be about a full point lower. It will be closer to 6.5 percent instead of 7.5 percent.
REHMDo you agree with that, Greg?
IPYeah, absolutely. In fact, according to the IMF, the United States is undergoing more austerity this year than almost any other country, including all those countries in Europe that we keep complaining about having too much austerity.
LEONHARDTHere's one step that I think captured nicely over the last three years, the private sector employment has grown 6 percent. And overall government employment, federal state and local, has fallen 3 percent.
REHMSo are you saying that politics is holding down job growth?
PALETTAI think a lot of people would say that's true. And the conservatives would say it's the liberal politics, and the liberals would say it's conservative politics. The one thing that's interesting (unintelligible) been through these depth ceiling fiascos and the sequestration thing and the fiscal cliff. We're in a bit of a lull now for several months where we're not going to have any deadline pressure to get it fixed.
PALETTABut there's still fundamental disagreements, philosophical disagreements about conservative -- from conservatives and liberals about the direction that this country should go in on tax and spending policy. And, you know, that's something we're looking at another big flare up in the fall.
REHMI don't understand how we can have officials from this government going aboard and saying, your austerity is hurting your growth. And yet, here we are, in effect, holding back growth.
IPIt's interesting. But you actually would not get a fundamental disagreement between either Republicans or Democrats that, yes, we probably have too much austerity right now. You know, we need more of a long-term fix. The problem is, as it has been for a number of years, the profound differences in how to go about fixing the long term.
IPA few months ago, the Democratic-led Senate produced a budget plan, and the Republican-led House produced a budget plan, both with their own visions to get the deficit down over the next 10 years. And they were radically different pictures. The Republicans want to do it all on the spending side. The Democrats have a healthy portion of higher taxes. They are now at the point where they cannot even agree on which members of their own caucuses should get together and try and reconcile those plans, much less actually produce a single plan.
LEONHARDTPart of what explains the disconnect that you cited, Diane, is that it's the Obama administration that's going overseas and urging Europe not to do too much austerity. And the Obama administration is also uncomfortable with the amount of austerity in this country. John Boehner and other Republican leaders are not going to Europe and saying, you've got too much austerity. It's sort of the Republicans in this country are with the Germans on the austerity question they're in favor of it.
LEONHARDTAnd I think that kind of austerity has hurt the economy short term. What Republicans would respond is they would say, yes, but we don't trust the Democrats to come up with a long-term deficit solution. They keep saying, oh, we need more spending now, and we'll get the savings later. And they won't actually commit to the savings later. So we're going to force them to do the savings now. And it's true, the Democrats have not laid out a long-term vision for a deficit solution that gets things into balance.
REHMSo, Damian, what do you see is the longer term economic effects of these government cutbacks that are in place now?
PALETTAIt's really hard to tell. You might not know until it's too late. I mean, obviously, we hear a lot about the furloughs and things like that, which are going to be really hard to a lot of federal workers. But when they're having cutbacks on things like, you know, research, medical research, scientific research, those are the sorts of things that, you know, long term could have a big impact if we're not, you know, investing in those sorts of things.
PALETTABut just like David said is exactly right. It's hard because neither side has laid out a vision, a possible bipartisan vision for what we're going to do in 10 years as, you know, the baby boomers keep moving into Medicare and Social Security, how we're going to address issues with those programs. That's why they're not making any progress, and they're continuing to focus on these small discretionary cuts, which is, for some reason, the easiest thing for them to do.
REHMBut at the same time, these cutbacks have contributed to the decrease in the deficit.
IPThat's right. In fact, later this week, we're going to get a new report from the congressional budget office and the expectations are that they will show the deficit falling at an exceptionally rapid rate, maybe below 5 percent of GDP this year. It was 10 percent at the start of Obama's first term. So it's kind of like a good news, bad news story. Yes, the bad news is that the cutbacks are holding back growth.
IPThe good news is they're making the deficit come down faster than we expected, at least in the near term, at least until those age-related expenses start to hit. The other slightly positive note to sound here is that the fact that the economy is growing at a 2 percent rate in spite of the very high taxes that were imposed in January and in spite of the sequester taking effect about a month ago, it's actually rather encouraging.
IPAnd it suggests that the private sector is continuing to plough its way through all this public austerity and do rather well. Housing prices, for example, are up around 10 percent in the last year. And that's suggests that ordinary families, not just people who own all the stock market wealth, are starting to get a little bit of relief from the easing of the financial system.
LEONHARDTWe have something of a generational divide in terms of how our economy is performing. It is doing better for older people than for younger people. We think house price is going up, that helps everyone. It doesn't actually. One-third of households don't own, they rent. Many of them are younger people who want to buy. For them, household -- house prices going up has a bad news aspect to it. The job losses of this downturn and weak recovery have fallen worse on the young.
LEONHARDTThe income losses have fallen worse on the young. The wealth losses have fallen worse on the young. And now we have government policies that are not touching Social Security and Medicare but are hitting a lot of the programs that benefit lower income, younger families. And so both in the private sector and in the public sector, we have an economy that's doing better for older people than for younger people. It's not doing great for older people, but it's doing better for older people.
REHMDavid Leonhardt of The New York Times. When we come back, we're going to talk more about taxes and how they are affecting the overall economy. Stay with us.
REHMAnd welcome back. We continued to talk during the break about taxes, how much revenue is being collected, why taxes are as high as they are and how that's affecting the growth of the economy. What do you think, Greg?
IPWell, in January of this year, we got past the fiscal cliff largely because Republicans were forced to accept a budget deal that raised taxes on the very wealthy. At the same time, a payroll tax cut that had been in place for two years expired. Now, between those two things, plus higher tax as part of Obamacare, you're raising roughly $200 billion a year in more revenue. That's helping bring the deficit down.
IPBut as Damian was mentioning just -- during the break, we're seeing revenue rise but even more than you can explain just by those tax increase coming into effect. And that seems to reflect the economy also building up a bit more of a positive head of steam.
PALETTAYeah. I think it's -- we saw tax revenue in the first seven months of the fiscal year is up almost 16 percent from the same period the year before. And that's obviously helping the deficit a lot. When you have that much revenue coming in, you know, it helps to offset some of the government spending.
PALETTASo that's a positive sign, for sure, although it's going to add tension in Washington. We heard Speaker Boehner say last week that the government is probably going to bring in more revenue this year than any year in U.S. history. So that's going to make it harder for Republicans to accept more tax increases.
REHMOK. But is it all because of the end of the payroll tax?
PALETTANo. I mean, just like Greg said, economic growth -- when companies are doing better and more people are working, when people are spending more money, that raises revenue.
REHMEven though they're working in jobs they may not want or part-time jobs, they're still working. David.
LEONHARDTYeah. One thing I'd be weary of is claims like -- and I agree, he will claim that -- claims like the U.S. government is bringing in more revenue than ever. Over time, we have inflation and the population grows. So you can say at most points in U.S. history, more people are working than ever. They're making more money than ever. We've got more taxes than ever. The real way you want to look at this is adjusting a share of the economy for most things.
LEONHARDTAnd by that measure, taxes, a couple of years ago or maybe even last year -- you guys will correct me -- were at their lowest level in almost 60 years. Now, we're coming up from that, both because of tax increases and growth. But we are still not at a point where taxes are particularly high relative to our history, and we're heading into a period in which benefits are going to be very high in the form of Medicare and Social Security. We have to make some kind of decision between raising taxes or cutting benefits.
REHMOK. So how is all of this likely to affect the discussion among Democrats and Republicans on the deficit, on keeping the deficit low? Is it going to mute that discussion?
PALETTAThat's the big question right now. And I think what we've seen because of all this revenue that's coming in, you know, it's going to push back this debt ceiling fight maybe till September or October. And we see -- it sounds like Republicans are breathing a sigh of relief at that because they weren't ready -- they didn't have their strategy ready in how they wanted to, you know, go after the White House with that.
PALETTAAre they going to demand more spending cuts? Well, there's not many more spending cuts in the discretionary side to demand. Are they going to call for changes in the tax code? You know, that's not going to be the red meat that a lot of Tea Party guys want. So they need more time to come up with their strategy. You know, maybe we get a summer break from kind of, you know, deadline Washington hysteria. But it's going to come up definitely later.
REHMHere's our first email from Diane, who says, "They're saying the unemployment rate is lower, but I've heard research that shows more people are getting on disability, which lowers the unemployment rate, takes the burden off the state government, puts it on the federal government. Either way, we are paying. Also, a lot of companies are only hiring part-time because of Obamacare rules that will come into play, meaning that if you are working more than 28 hours a week, you have to be given Obamacare."
PALETTAThat's right. I mean, the disability thing is kind of an amazing phenomenon because I think there's more than 10 million Americans between the workers and maybe, you know, their spouses and children who receive Social Security disability benefits. That program is expected to exhaust all of its reserves by 2016. I mean, that's the shortest fuse of any entitlement program that's running out of money is Social Security disability. Once that money runs out, they can only get paid a portion of their benefits.
PALETTANow, it's true that a lot of people that have been applying for these benefits, we saw a surge when the economy went through a downturn, those are folks that might have been able to work with their disabilities when the economy was doing well. They can't do as well now. But there's also been a lot of people, quite frankly, that we've talked to that they can't find other jobs. Maybe they have some health problems, and they didn't have anywhere else to turn, so they had to get into the program.
LEONHARDTAnd Damian's being modest here. Let me give a nod to a competitor. He's written some of the finest stories about disability of anybody in the country, including about this judge who essentially approved every disability request that ever came before him.
REHMAnd isn't that the state's effort to move those people off their roles and onto the federal role?
PALETTASome states have active programs where they tried to take people that are on welfare and get them into these programs. And quite frankly, a lot of businesses have their disability programs require people to apply for Social Security disability, or they can have their private insurance ended as well.
IPOne quick point: The caller asked about people going on part-time because of Obamacare. We hear this a lot lately. But, in fact, if you look at the proportion of the work -- of employees who are working part-time, it's barely budged in the last three or four years. We really do not see any notable trend in part-time employment going up. It is the case, however, that the unemployment rate is falling faster than you can explain by the number of people getting jobs.
IPAnd it seems that the number of people dropping out of the workforce has gone up quite dramatically. Part of that might be disability. Part of it is the population is getting older. More people are getting early retirement, more younger people staying in college. And it's also the case that a lot of people who have not been able to find work for a year, two years, have simply given up.
REHMSo tell me about Fannie Mae, Freddie Mac and GM. Aren't the fact or isn't the fact that they're paying back what they owe the government and in huge chunks, I mean, not small change, how is that affecting the outlook for the economy?
PALETTASo the federal government, very controversially, bailed out Fannie Mae and Freddie Mac in 2008. And it was seen as one of the, you know, the fire was burning in the economy. Things were really out of control. And Fannie and Freddie are these weird kind of hybrid public-private institution that, you know, really, they were needed at the time to help stabilize the housing market 'cause the housing market was such a mess.
PALETTAAbout $200 billion the government pumped into them. Now, we're starting to see these money -- these companies are paying the government back. Fannie Mae is going to pay the government about $60 billion in June. Now, that helps that money coming in.
PALETTAAnd that helps. And so, you know, there's a long-term question about, how long is the government going to be intertwined with these companies? It seems very kind of dangerous. But, you know, that's money coming back. General Motors, that investment seems to have paid off well. We're going to be dealing with long-term issues about, you know, should the government be involved, you know, in the business of private companies? But right now, the money is going in the right direction as far as a lot of taxpayers are concerned, and that helps.
LEONHARDTTo me, it's a reminder of how successful the response to the financial crisis was in late '08 and much of '09. There were a lot of mistakes before. But starting in September of '08, the Bush administration and the Fed and then starting in November of '08 when they were incoming and particularly when they came into office in January of '09, the Obama administration responded extremely aggressively to the financial crisis.
LEONHARDTI am not sure there is another example anywhere in financial history of a government responding as well to a financial crisis as this government did. And I say credit for that goes to Ben Bernanke, Barack Obama and George W. Bush as well, although he's third on that list. Now, the problem is the government then took their attention away from it and 2010 and 2011 and 2012, for a variety of reasons, got too optimistic. Politics got in the way, people started caring too much about the deficit. And so the response since then has not been as good. But the fact...
REHMWho was caring about the deficit?
LEONHARDTThe American public first of all. I think when people in office looked at polls, they saw that they -- that anyone who wasn't worried about the deficit in office was very vulnerable to attacks from their competitors, the other parties. And so both Republicans and Democrats cared about the deficit. Republicans cared more short-term than the Democrats did, so they deserve either more credit or more blame for the immediate austerity. But it is not a simple thing that one party simply wants austerity and the other didn't. The Republicans wanted more of it immediately.
IPI think the situation with Fannie and Freddie is especially interesting because the main reason they're paying back the money they had to borrow from the Treasury is because the housing market is coming back. As home prices go up, fewer people default. Fewer default, fewer money paid up by Fannie and Freddie to people who lent the money.
IPThe irony is that a lot of people feel that Fannie and Freddie have actually been holding back the process by being very, very strict in terms of, say, who can refinance the mortgage by going after every possible lender who ever failed to cross a T or dot an I and making them pay back money. And this has actually made lenders reluctant to make new mortgages.
IPThat's held the housing market back. So you could argue that the housing market might have come back even faster if perhaps some of the people who designed the bailout program hadn't been so obsessed with getting back every penny that they invested.
REHMBut wasn't that because they were fearful of creating another housing bubble?
IPI don't think it was so much that. We're talking about a situation where the housing market had slumped to its worst situation since the Great Depression. I think, in those days, nobody was worrying too much about a housing bubble. I think it's that a lot of people in government and the public were sick of the money that they had spent bailing people out of homes that they perhaps should not have bought.
IPUnfortunately, that might have been the necessary price of having the housing market recover faster in the whole country to have improved a little bit better. But that's in the past now. The housing market is clearly on the mend, and Fannie and Freddie and therefore the United States Treasury and therefore the taxpayer are the beneficiary.
REHMAll right. Let's talk about the Fed's bond buying policy, how that has affected the direction of the recovery, Greg.
IPSo the Federal Reserve has, for some time now, been purchasing about $85 billion of bonds per month, and they pay for these bonds by creating brand-new money, something that neither you nor I can do, but a central bank can do. And when they buy bonds, they basically drive down the yields on those bonds. That pulls down long-term interest rates for everybody. That's one reason why long-term rates are very low, mortgage rates are very low, and this has had a number of benefits.
IPIt's helped the housing market, it's helped the stock market, because with Treasury bond yields so low, people are more attracted to stocks, which seem like a better investment. But you're starting to see signals from the Federal Reserve that they're a little concerned that maybe this program is going on too long and it's time to start exiting from that. There have been reports from Damian's newspaper, for example, that they're now talking about an exit strategy, about starting to taper off the amount of buying because they're a little bit -- well, first of all, they think the economy is getting better.
IPIt doesn't need all that help. And second of all, they're afraid that by holding interest rates down so deliberately, both for long-term rates and short-term rates, they might be encouraging people out in the financial market to take too much risk and, to the point we were discussing earlier, perhaps setting itself for another bubble down the road.
LEONHARDTThe thing to be concerned about is the Fed thinks about exit is -- and this gets to what I was saying before -- over the last three or four years, the Fed again and again has been too optimistic about the economy. And so the idea that they're now thinking about getting out of some of these programs might have strengthened the economy. I think the question people should ask is, uh-oh, are they once again turning too quickly away from the stimulative measures because they did it in '10, they did it in '11 and they did it in '12.
REHMBeen long time going.
PALETTAAnd I think a lot of people have -- you know, the recent memory of the -- when the Fed had its foot in the accelerator after the downturn in, you know, the dot-com bubble in Sept. 11, a lot of people would argue that Greenspan kept his foot in the accelerator too long, and that's what helped pump up this housing bubble that we're still paying the price for now.
REHMAll right. And you're listening to "The Diane Rehm Show." Time to open the phones, 800-433-8850, first to Fort Lauderdale, Fla. Hi there, Stan.
STANHi. Good morning, Ms. Rehm. Thanks for taking my call.
STANThis is kind of an overview. One of your panelists said earlier that the -- there is a debate about ideologies, and we need to figure it out, you know, nationally and everything. But my problem is I'm quite frustrated as a liberal that this debate has been settled by events on the ground. I mean, supply side failed twice and, you know, first time disappointingly under Reagan. You know, the national debt was six times higher when he left than when he came in. And under Bush, it was catastrophic. And yet it's the same people pushing the same ideologies now.
REHMWhat do you think, David?
LEONHARDTStan is certainly right that over the last generation, tax cuts have been oversold as an economic strategy. The George W. Bush tax cuts, I think, were not followed by particularly healthy growth. The Clinton tax increases were not followed by bad growth. And so I think the lesson to take is moderate changes in tax rates are not the most important thing driving the economy. Other things are.
IPI also think that the debate is perhaps a bit bigger than whether or not tax cuts drive growth or not. I think the bigger debate is about the size of the government. What the Republicans are especially passionate about is, well, let's not just keep taxes low, but let's stop this growth in government that we've seen in the last few years.
IPThey are specifically concerned about the introduction of Obamacare, the expansion of health care. And they also make legitimate points that Medicare in particular and other entitlement programs are on a path to grow at a very sharp rate that is simply out of balance with the amount of tax that we're collecting.
PALETTAOne of the things -- I think now that the deficit is coming down, this argument over an immediate response to cut spending has slowed from Republicans. And now, you know, like what we've said, it's about what kind of structural changes need to be made philosophically, how big do you want the government to be, what size government do you want to -- you want Americans to pay for.
PALETTAThat's the sort of debate, and that, quite frankly, is a much harder debate to have, especially with the politization. People are getting elected or defeated based on their, you know, check-the-box responses.
LEONHARDTAnd especially because I think much of the public doesn't actually want a deficit solution, right? They want low taxes and good benefits.
REHMAll right. And following up on that, Warren in Baltimore, Md., you're on the air.
WARRENThank you, Diane. My comments started similar to the last caller. I don't see what political philosophy has anything to do with economics. I mean, there's empirical data that shows what works and what doesn't work. He gave a few examples. Clinton's plan created 40 percent more jobs than Reagan did over the same amount of time. Clinton balanced the budget. Clinton brought down the deficit. Clinton put the country on course to eliminate the deficit like today, all right? There was a $5.6 trillion projected surplus. What happened to that?
PALETTAYou know, the issue with things like this is we're not in a vacuum. It's not like a test tube experiment where you can just recreate all -- the entire environment. I mean, everything's changing. The world economy is so much different. China's role in the world is so much different. The Internet and technology is so much different. The starting point that the president is now in his second term is so much different than what Clinton had, although we're hearing a lot of the same arguments, you know, politically about cutting spending or raising taxes that we heard back then.
REHMBut it seems to me, at its face, what Warren is saying is it worked. Why not impose it again today?
IPAs Damian said, we're -- they're different worlds. Let's not forget that Clinton started his term with austerity -- higher taxes and lower spending -- but it didn't kill the economy because the Fed was able to lower interest rates. Interest rates are now at zero. That option is not available.
REHMGreg Ip, he's U.S. economics editor for The Economist. Short break. When we come back, your email, your phone calls. I look forward to hearing from you.
REHMAnd here's our next email from Robin, who headlines it, "Stop lying. There is no recovery. A recent study says since the start of the recovery, the top 7 percent have seen their net worth increase by 23 percent while the rest of the population have seen their net worth declined by 4 percent. That is not a recovery. A jobless recovery is not a recovery." Damian.
PALETTAI'll have to disagree. I mean, it's a frustrating recovery. It's a slow recovery. It's a stubborn recovery, but if you look at, you know, the Dow Jones Industrial Average since Nov. 15, right after election, is up about 2,600 points. People who didn't look at their 401 (k) statements for years are finally peeking inside and saying, maybe we can finally, you know, afford to go on vacation.
PALETTAMaybe we, you know, need not to worry about sending our kids to college. Now, this is nowhere near where we were before the financial crisis. And we might, you know, never get back to where we were before the financial crisis, but there -- this is a recovery.
REHMBut what is going to spur job growth?
LEONHARDTNo one knows. And I know that's really frustrating, and we can raise our chances of success by doing things like investing in scientific research and investing in...
REHMHow about structural reconstruction?
LEONHARDTStructural reconstruction. Yeah, although let's remember a lot of those projects probably shouldn't be done the way that -- there's pork in infrastructure as well, right? So we want to be somewhat ruthless about what we're doing, but absolutely -- infrastructure, scientific research, education. I mean, the employment rate for college graduates is still below 4 percent.
LEONHARDTBut the fact is that if we've been sitting here in 1994 lamenting the weak pace of the recovery, I don't think any one of us would say the Internet is just around the corner. And so it is hard, almost by definition, to predict what the economy of tomorrow will look like and what the sources of future growth will be. You just want to maximize your chances of success. We're not doing that right now, but that's what you want to do.
IPI would also say that again, recovery is not just about the stock market. It is about GDP. It is about job growth. We are getting job growth, as Damian said. It's a frustratingly slow pace of job growth, but it is there. But we also have to adjust our sight somewhat because we're an older country than we were 20 years ago, and the labor market simply isn't as growing as fast as it used to.
IPSo, you know, back in the '90s, we might've said 200,000 -- 150,000 jobs a month was normal. Now, I think it's probably more like 80.000 jobs a month. So it may be the case, and we will not see the paces of job growth that we were used to in prior decades simply because we're an older, more mature country.
REHMAnd older and more mature means more training for a very, very different kind of workplace, does it not?
PALETTAAbsolutely. And, you know, it's going to be something that we're going to have to -- it's going to take several years to really tell whether a lot of these, you know, community college programs that are meant to bring people who had manufacturing jobs that no longer exist to do other things whether those are really effective.
PALETTABut I think a lot of people are sitting around the dinner table at night making decisions they've never had -- they never thought they'd have to make about, do I need to stop my career here? You know, I'm 50 years old. Do I need to stop my career here and do something completely different in able -- in order to put food on the table for my family?
REHMAnd also changes at the college level, changes in terms of deciding whether to go to college, whether that is going to be the source of higher income in the future. All that's involved.
IPI would say that one positive sign in the job market in recent years is that the proportion of high school kids who graduate then go on to college is at or near an all-time high. So they have been getting the message. They have been getting for a number of years now that if you want a good-paying job and job security, you should go to college. But you've raised an interesting question.
IPWhat about those 40- or 50-year-old men and women who can no longer find jobs in construction, in retail, in whatever and they need to retrain and think about something different? Plus, they've got all these hungry, young college grads coming up behind them competing for the same jobs, and that's where I think we as a country had to put a lot more effort into ways to get those people retrained. We're spending way too much money on stuff like disability, which de facto pays people to stay home unemployed, rather than transitioning them back to a new career.
REHMLet's go to Detroit, Mich. Good morning, Leslie.
LESLIEGood morning, Diane. Thank you so much for taking my call.
LESLIEI was -- and you have a wonderful, wonderful show.
LESLIEMy question or my comment's really two-fold. One is that while I don't disagree that, from the 30,000-foot view we have a recovery going on as frustrating and slow it might be, my husband is a small business owner and from 2008 until the present time, he has lost about 30 percent of his revenue, unable to access any lines of credit operating -- small operating line of credit. All of our credit lines, personal credit lines were cut so that it appeared on our credit report that we had maxed out credit cards.
LESLIEAs a result of all of that, we've been unable to refinance the home which we were well able to afford when we purchased it so that we cannot take advantage of the lower interest rate. I mean, all of these things are very good for somebody, but I can tell you at the ground level, there are a lot of us who are not poor, but we're not wealthy, and we're still struggling. And we have three kids and two in college and one who just finished, you know? So...
LESLIE...why didn't they spend the money? Why didn't the bank spend the money that they were so, you know, that they were given after the recovery? I just think there's a gap. And when you've got small business people, you know, employing under 50 people, it hurts.
PALETTAYou know, the recovery has been very uneven in addition to being slow, and your caller is from Detroit. I mean, I can't think how hard it's going to be to increase your revenue let alone keep it flat in an economy like this. When there's -- banks are going to be, you know, much more careful in an area like that where they think they might not -- maybe they've dealt with some customers that went bankrupt and they're being much tighter with their money now. But there are some areas in the country where some cities that, you know, the recovery, they're just not feeling it.
IPIt's an incredibly important observation the caller has made. One of the reasons why recoveries after a financial crises like we had in 2008 are so sluggish is precisely because it's hard for people to get credit. The banks don't want to lend or the people who want to borrow no long qualify for loans. And the caller made important points about small business who can't tap credit lines, credit cards being cut off.
IPIn fact, a lot of start-ups start up by using credit cards or home equity lines or credit which simply are not as available today as they were four or five years ago, partly that's because home values have collapsed so they're not worthy -- usable as collateral, probably it's we have a lot more regulation in place designed to prevent some of the abuse of lending, some of the reckless lending that got us into this mess.
IPThe positive sign is that with home prices going up, some of those constraints have started to ease. The last survey that the Fed took a few weeks ago of banks found that they are starting to ease conditions on a broad range of loans.
REHMSo are you saying to Leslie that later rather than sooner she's going to feel a little better?
IPEvery specific business person has specific issues that they're going to be struggling with, as Damian was saying. If you're in Detroit, that's going to be harder than if you're in a place like North Dakota which is booming. That said, for the country as a whole, I think these things are slowly getting better rather than worse.
LEONHARDTThis is an example of why austerity has such a terrible record in the aftermath of financial crises because banks, businesses, consumers have a hard time spending. And so it feels like, wait a second, we had too much lending, we should cut back on lending. But actually after a financial crisis, the problem is often than we just quickly switch to having too little. And when government joins that pull back, you end up with a lot of problems.
REHMLeslie, I wish you all success especially because last week, the House passed a bill that would tell Treasury to make payments to debt holders first. What was the thinking?
IPThis is one of those weird bits of congressional theatre where other -- non-Americans look at us and they shake their heads. Most countries, if you passed a budget with a deficit, that's it, you go out, and you borrow the money. Here, we make you pass the second law to actually authorize you to borrow the money. That authority will soon run out. That's called the debt ceiling. Now, in the past, there would be a little bit of a fight, and then eventually Congress would raise the debt ceiling.
IPBut we had a huge fight over it in 2011 where many Republicans did not want to raise it at all. If you're a government that's still must borrow a lot of the money that you're now spending, that puts you in a tough situation. You've got to not meet some of your bills. In the extreme, maybe you don't pay the interest on your debt and you have a default, which would be a catastrophic financial crisis. So what the House of Representatives has now said, well, we don't want that to happen.
IPSo instead, if we had this debt ceiling again, you can't borrow, we'll pass a law that says, you have to pay your bills in the following order. First, you pay interest on the debt, then you pay the Social Security, then you pay this, this and this. And it's an interesting little trick, but it doesn't change the fact that the federal government is still defaulting on some of its obligations.
REHMSo Americans are fed up, David?
LEONHARDTAmericans are fed up. I mean, we have had three wave elections just in the last seven years -- 2006, 2008 and 2010. The first two to the Democrats' benefit, the third to the Republicans' benefit. People are fed up. And I don't think we're necessarily at the end of the fed-up stage. I think that the most worrisome thing for the so-called Obama coalition politically is the slow growth of the economy. You look at how young people are voting right now. They are voting very liberal relative to elders.
LEONHARDTAnd that, despite the cliché, is not always the case. Young people voted for Reagan, they voted for Papa Bush. But young people are overwhelmingly democratic right now. But a big problem for the Democrats is if the economy remains really slow and really weak and we get to some point five years from now and people say, wait a second. We've been almost two decades without healthy economic growth. I need some other form of solution. That could be a real challenge to the so-called Obama coalition.
REHMAnd what happens when Obama health care kicks in? How is that going to affect the economy overall, individual spending?
IPIt's hard to say right now. There are so many pieces still up in the air about exactly how that's going to happen. We're already starting to see some of the signs. There were some tax increases in the Obamacare plan, which are taking effect right now, small but not -- a weight on the economy, not a huge one. There are -- as one of the caller suggested, there has been the possibility that some employers will either cut health care or -- reduce the hours of their employees to avoid those payments.
IPBut I think right now it's probably low on the list of things that will determine where the economy is going on. In the short run, it'll be, what does the Fed do? You know, do we get pass the sequester in this short-term austerity? And what's happening overseas? Let's not forget that Europe, you know, the biggest economic region in the world, is deep, deep in recession. China's economy has slow down a lot. The United States is not the only story going on there. These things will all affect what the economy looks like next year.
REHMAll right. To Dennis, Mass. Dana, you're on the air.
DANAThank you, thank you. Yeah, I have a comment. Bill -- I'd like to go back to the fact this is a so-called recovery and, you know, a frustrating one 'cause unemployment is high. And I think there's a reason for that. Bill Moyers is citing The Wall Street Journal of all media outlets, saying that maybe the big corporations are making most of their money of financial speculation and rather than, you know, manufacturing products.
DANASo if I remember correctly, I guess the name of the article he cited was, you know, "Do They Need the Rest of Us?" And he cited Harley Davidson as an example of a company that really profited one year even though their motorcycles sales declined because they were making their money through financial speculations.
PALETTAWell, I have nothing but love for Dana 'cause my first job in journalism was covering Dennis, Mass., for Cape Cod Times since I have many fond memories of the beaches there and stuff. But, you know, one of the things obviously, the businesses have done -- large businesses have done pretty well the last few years. One reason for that is because there's been incredible tax incentives and other public policy rules that have been put in place to try to get the economy going.
PALETTASo, you know, David mentioned earlier that tax -- that level of taxes to GDP the past few years has been really low, for corporate taxes, it's been extremely law. They've been paying barely anything 'cause they've -- we've been trying to get the economy going. You know, it's going to be interesting to see how that evens out especially if, you know, this consumer confidence keeps going up. They need to hire more to meet up with demand.
REHMAnd you're listening to "The Diane Rehm Show." Two emails, one from Dean: "Calling a situation, where over 90 percent of Americans are doing worse than before and continuing to fall behind, a recovery is cruel. A jobless recovery is like a foodless dinner. You can call it dinner. But if people are not eating, it's a cruel lie."
LEONHARDTI don't think that 90 percent of the public is doing worse than before. You look at things like inflation, adjusted incomes. You look at net worth numbers when -- I mean, you can cut them in certain ways but looked at in the biggest broadest way. I don't think 90 percent of the population is doing worse than before. It is a frustrating recovery. It's not good enough. A lot of people are struggling. But it's also worth remembering just how terrible things were in late 2008 and 2009 and early 2010, and we are up from where we were then.
REHMAll right. And final call from Sarasota, Fla. Howard, you're on the air. Quickly please.
HOWARDDiane, thank you. None of your speakers have talked about the $300 trillion that have been moved from the five or six major banks in the country. They've been taken off the balance sheets, transferred to the Federal Reserve every month to show that they are solvent when they're actually not solvent. Now, it's my understanding that all Enron executives went to jail for something like that.
HOWARDAnd then I've also been told by credible people that the Federal Reserve ordered the National Accounting Standards Board to allow the six big banks to transfer all this dead money off their balance sheet at the end of every month. And that's why they're getting their money for nothing.
IPI'm not actually sure what the caller is referring to. I'm not aware of this particular gambit. Three hundred trillion dollars is a lot of money. That's about 20 times GDP. It's probably show up somewhere. I will say the following: Banks have slowly climbed back from the big hole they got into, in fact, partly because of improving profits, some of which is due to trading but partly because foreclosures are going down and partly because the Obama administration forced them to go out there and sell more shares to raise equity.
IPThey actually have more capital than they've had in the very long time, so we do not really have insolvency problem with the banks. We do have an ongoing problem, which is that we still have the banking system more and more dominated by handful of very large so-called too big to fail banks -- banks like JPMorgan, banks like Citigroup and so forth. So to a certain extent, we still are struggling. We're trying to solve one of the key issues that got us into the crisis in the first place.
REHMGreg Ip, he is U.S. economics editor for The Economist, author of "The Little Book of Economics: How the Economy Works in the Real World." David Leonhardt of The New York Times, author of the ebook "Here's the Deal: How Washington Can Solve the Deficit and Spur Growth." And Damian Paletta -- he hasn't written his book yet -- he's a reporter for The Wall Street Journal. Thank you all so much for being here.
IPThank you, Diane.
LEONHARDTThanks you, Diane.
REHMAnd thanks for listening. I'm Diane Rehm.
ANNOUNCER"The Diane Rehm Show" is produced by Sandra Pinkard, Nancy Robertson, Denise Couture, Susan Casey Nabors, Rebecca Kaufman, Lisa Dunn and Danielle Knight. The engineer is Erin Stamper. Natalie Yuravlivker answers the phones.
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