As chair of the Council of Economic Advisers since August 2013, Jason Furman has been President Barack Obama’s chief economist, holding that job during a time when unemployment dropped below 5 percent.
But he was also in the trenches in the Obama administration during the depths of the recession (when unemployment hit 10 percent), working at the National Economic Council, helping to formulate and sell the Recovery Act and other stimulus bills.
In this interview with Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities, Furman talks about what he and other economists have learned about how to get a stalled economy moving again — focusing in particular on a “new view” that sees a more important role for fiscal policy than a previous generation of economists endorsed.
The president’s chief economist also discusses other hot-button economic issues, including President-elect Donald Trump’s dubious suggestion that he can double the growth rate, and whether a substantial number of working-age Americans have simply given up on the labor market.
The interview was conducted by email.
Lately, you've been writing faster than I can read. It's almost like after more than a decade of high-level government economic policy making, you feel a sense of urgency to recount what you've learned. Your recent work on fiscal policy, which I found highly resonant, seems particularly germane. Can you summarize what you call the "new view" and say why you think it’s so important?
I wrote my speech on what I called the “new view” of fiscal policy for a conference of Europeans. I was trying to summarize an interesting wave of recent research and also to continue our work of persuading Euro-area economies of the still urgent and important task of using fiscal policy, either spending increases or tax cuts, to support aggregate demand. (Their unemployment rate is stuck around 10 percent while ours is below 5 percent.) While less urgent in the case of the United States, which is in a much better cyclical position, the views I was articulating could be especially important in a future downturn.
In particular, what I call the “old view” of fiscal policy — taxing and spending —maintains that such policy is unnecessary because conventional monetary policy (interest rate changes by the Federal Reserve) can fight recessions and speed recoveries. (Fiscal policy, under the old view, is thought to be ineffective or have bad side effects. Thus, the main goal of fiscal policy should be addressing the long-run deficit.)
I think some of this old view was always wrong and some of it is dependent on circumstances. In particular, the economics of fiscal policy are very different when interest rates are at zero and the Fed is unlikely to start raising them anytime soon in response to a pickup in economic activity — conditions that match the situation in Europe today and the situation in the United States at least a few years ago.
In this situation, you have the new view: monetary policy may not be fully effective, so fiscal policy is needed. Fiscal policy may be highly effective and could even have positive side effects, like “crowding in” private investment. Countries often have more room for fiscal expansion than many think, either because stimulus will increase growth and reduce the debt-to-GDP ratio, because low interest rates make the debt more sustainable, or because stimulus can be combined with future deficit reduction.
I continue to think that some modest stimulus would benefit the US economy, if only to better balance the use of fiscal and monetary tools. But nothing in this should be interpreted as a license for wasteful spending or tax cuts on an ongoing basis. As I said, my original motivation for the talk was the situation in Europe. In the United States we are closer to full employment (reasonable people can debate how close) and, more importantly, interest rates are above zero.
In this case we have neither an urgent need for stimulus of this magnitude nor would it have all of the same positive side effects, like crowding in private investment. We also have a medium- and long-run fiscal challenge that we would not want to exacerbate. Finally, priorities matter. Building a massive castle in the desert or providing tax cuts to millionaires may increase aggregate demand, but they would also be wasteful and problematic ways to accomplish that goal.
I am a staunch adherent of the new view. But my fear is that many fewer policy makers hold that view. Do you share my concern that the new view is held by too small a minority to make a real difference in actual policy?
In international circles, opinion is shifting. It is notable that both the International Monetary Fund and the Organisation for Economic Cooperation and Development largely subscribe to the new view, at least in the abstract if not always in practice. But the shift among policymakers has not happened fast enough given the continued urgency of the situation. If our unemployment rate was still nearly 10 percent, inflation less than 1 percent, and policy interest rates negative, all of which is the case in the Euro area, we would be running around with our hair on fire to take dramatic actions, of which the most immediate and reliable is to expand aggregate demand with fiscal policy.
But you see much less in Europe than you should — in part because of a continued adherence in some capitals to the old view of fiscal policy and in part because the institutions themselves are not built to accommodate the new view approach to fiscal policy, including no real institutions to coordinate or conduct fiscal policy on a European-wide level.
In the United States, one of my biggest disappointments was how quickly people soured on fiscal stimulus. The unemployment rate was rising rapidly in 2009, much faster than anyone expected, and hit 10 percent shortly after we passed the Recovery Act. This should have been an argument to do more — and we did manage to pass another 12 fiscal bills. But too many people shifted to the mindset that the stimulus somehow caused the 10 percent unemployment rate (a little like aspirin causing a fever) and that we somehow needed to “tighten our belts” just like a family would.
This misunderstanding is not as urgent a problem for us today given where the economy is, but I really worry that we will not have the political space to do what is needed the next time our economy hits a major negative shock.
You've worked on White House econ teams in the full-employment latter 1990s and at the depth of the Great Recession. I suspect we could guess which period you liked better, but does the job of White House economist differ with respect to where we are in the business cycle?
The best time to work as an economist in the White House is when you can actually get a lot done. And while we have worked hard to do the most possible in every year I was in the White House, under both President Clinton and President Obama, there is no doubt that the most productive period was 2009 and 2010. In part that was because the economic situation was so urgent. But more importantly, it was because a Democratic president had a Democratic majority in Congress.
The Recovery Act may not have been the best political message opportunity ever, but it was a particularly important piece of economic policy in responding to the crisis and getting us back on our feet. It also embodied a decade of policymaking, encouragements for states to modernize their unemployment insurance policies, an increase and reform of tax credits for low-income households, a range of investments in research and infrastructure, and much more. Any one of these would have been a big deal on its own, but together they almost got lost from public notice. Working on these programs during the transition and then the first days of the administration has been a real high point of my career in government.
In the last few years of the Clinton administration, we did not do any major macroeconomic legislation, but we did not need to either. We did spend a lot of time staying on top of the economy, preparing for contingencies, much like we have done in the past few years as well. Plus there has been a lot more time to better understand the long-standing major trends in the economy, like the global slowdown of productivity growth, the particularly large increase in inequality in the United States, and the decline in the fraction of the population participating in the workforce — all of which we have helped address with policies in the last eight years, but all of which are so large that they require further work.
With that in mind, what do you think of the incoming administration’s predictions that their policies can essentially double real GDP growth, from around 2 to 4 percent. I’ve been very skeptical about such claims, both due to constraints like slower population growth, and to my “after the decimal point” view of the impact of presidents on long-term growth. If they’re smart, lucky, and politically skilled, they can enact policies that add basis points, not percentage points to growth. Agree or disagree?
Strongly agree. I read one person pointing out that the economy grew more than 4 percent in the years after 1982. Well, it’s a lot easier to grow when your unemployment rate is starting above 10 percent (as it was at the beginning of that period) than less than 5 percent (which is where it is now).
Moreover, in the early 1980s the prime age working population (those age 25 to 54) was growing at more than 2 percent per year, while it has been falling over the past eight years. And this is the population, which is not the result of any contemporaneous policies but instead largely the result of fertility decisions decades ago. And nothing (absent a major loosening of restrictions on immigration) will change that anytime soon. There may be some scope for sensible policies to expand the workforce, but nothing that can overcome that dramatic changes in demography.
In addition to reducing unemployment rates or an expanding population, you can also generate growth through increases in the amount of output per hour worked, i.e., productivity growth. It is true that productivity growth has been slow over the past dozen years, but this has been a worldwide phenomenon and not something that is largely attributable to specific policy choices we have made. With the right policy tools we could add a few tenths to productivity growth, and over time that would add up and be a big deal, so I am all for it. But we are fooling ourselves if we base our policies or our budgets on the belief that we can do much more than that — a point that must be true since both you and my thesis adviser (and George W. Bush adviser) Greg Mankiw believe it.
Speaking of longer term trends, as you know, there's increasing interest in what some call the "missing workforce." I found CEA's dive into this question to be one of the most authoritative. What should we be doing to help these folks?
Thanks, we really put a lot of effort into trying to figure out the really troubling decline of people in the workforce. We have looked at a range of issues focused on women, but our report on this topic focused on men because the decline there has been particularly puzzling and long standing. In the 1950s, only 2 percent of men between the ages of 25 and 54 were out of the workforce, now it is 12 percent. The decline has been larger and the participation rate lower than just about any other advanced economy.
We largely ruled out “supply side” explanations for the decline, like men not wanting to work because they could rely on a spouses’ income or money from the government. Instead we identified a demand shock — whether caused by labor-displacing technological change, globalization, or both — together with the way US institutions and policies have handled that shock.
Like most big challenges, this one does not lend itself to a simple solution. Some policies we like for different reasons, like increasing education or reforming the criminal justice system, would help alleviate this problem as well.
Part of that is remedying the weakness in demand for these types of workers, with additional investments in infrastructure being one obvious idea that could help accomplish that (others, including you, have floated more radical ideas like public employment programs). And part of it is having more “supportive” work policies, like better assistance for job search, worker training, and adjustment to shocks. Not all of the programs in these areas work, but, as we documented in a recent issue brief, many do — and we are spending much less on them than just about any other advanced economy.
What about your recent work on competition — can you tell us why you have been doing that and why you think it matters?
There is a range of evidence suggesting that the economy is becoming more concentrated. You see this both in fewer numbers of firms in many industries and also in a range of macroeconomic facts, like the increased spread between the rate of return to capital and the safe rate of return on Treasuries — an indication that companies have increased market power.
The traditional theory of monopoly and monopolistic competition says that this results in higher prices for consumers. (And when businesses can explicitly or implicitly band together without countervailing forces like unions, the result is monopsony and lower wages for employees.) But I worry that this trend is also reducing economic dynamism, the formation of new businesses, and thus contributing to slower productivity growth. And to the degree there is increased dispersion of successful and unsuccessful firms, this can play a role in increased inequality as the more successful firms are able to share more of that success with their workers while equivalent workers trapped in less successful firms would end up being paid less.
The White House does not get involved in anti-trust enforcement or any other law enforcement decisions. But there are a broader set of policies that can increase competition in the economy. This is the intellectual underpinning for the executive order the president issued this past April, building on the work we have done in the past eight years and adding new issues like competition in airlines, collusion and non-compete agreements in the labor market, and previous work like reducing occupational licensing and land use restrictions.
Can you think of a mistake you made during your tenure from which you learned something useful?
Well, if we had made the Affordable Care Act a constitutional amendment that would have saved a lot of time, effort, and worry. Seriously, the most interesting questions and the hardest questions are not what is the best policy. That can be hard, and we do not always know the answer, but in a lot of cases, like the competition point above, we really do have a pretty good idea of what we should do.
Instead, the hardest question is often how to get something close to the best policy done, whether by building a broader coalition to support it, describing it better, packaging it with other measures, or making compromises. I participate in these discussions but am not the central player in them. I have huge respect for the multidimensional chess players who are central to these discussions; without them, even the best policy ideas would fail to be implemented.
So as much as we have gotten done — and it was so much it took a record 594 page Economic Report of the President to describe it — I still regret everything that did not get done, of which immigration reform would have been the most economically important, but also universal preschool (although we made progress in funding), increased infrastructure spending (beyond the 5 percent we managed to get), raising the federal minimum wage (here too we did help 18 States, the District of Columbia and over 50 municipalities raise it), and passing the Trans Pacific Partnership (you and I may differ on that one). While those might not count as mistakes, all count as regrets — and maybe somehow even the strong opposition, in most cases from congressional Republicans, could have been overcome.
But to give you something that is a little bit closer to a mistake I would implicate myself in, I would go back to my answers to the first questions you asked. We put a huge amount into the Recovery Act. But almost all of it involved temporary spending or temporary tax cuts. In part, that reflected the belief that we could always come back and do more (and we did, in the form of a dozen additional fiscal measures).
But for the reasons underlying the new view of fiscal policy, I am very worried that we have inadequate automatic stabilizers, like unemployment insurance, to deal with future recessions. The Recovery Act would have been a great moment to make reforms to permanently improve these, basically making more policies contingent on the state of the economy. The stimulus would have lasted longer in the recovery from the last recession and would have automatically kicked back in if and when the next recession comes.
Your recent burst of work provides a trove of information for the next occupants of these policy positions. But given who they are, one must be worried that such analysis will not be used in the interest of better policy. How do you think about this problem of handing over the reins to such a different team?
The best analysis is based on honestly thinking through the theory and confronting evidence. This should not be done in partisan way. I would be doing no favors to the goals I was trying to accomplish if I ignored evidence that contradicted my priors. CEA has a long tradition of taking just such an approach to questions. My first economics course was with Martin Feldstein and my PhD thesis adviser was Greg Mankiw, both of whom had my position in the Ronald Reagan and George W. Bush administrations, respectively. I certainly don’t agree with either of them on everything (in fact, I don’t agree with anyone on everything). But we speak the same language and agree how to have a conversation and review the evidence.
My hope is that CEA will continue that tradition going forward. And I think it will do it better if it aims not just to give internal advice but also contribute to the broader public debate. And in contributing to the broader public debate, CEA will have to make its assumptions and ideas clearer—allowing all of us to better vet and debate them. I have certainly tried to do that and found my own ideas — and thus the advice I give to the president — better because of it. I hope they draw the same lesson. And I will certainly be there to help with the vetting and debating.
Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities, served as chief economist and economic adviser in the office of Vice President Joe Biden from 2009 to 2011. He blogs here. Bernstein allowed Furman to review the transcript.
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