Why you should care
Because we got it straight from the horse’s mouth: What happened to the American economy over the last six years, and where’s it headed next?
President Obama’s former chief economic adviser Austan Goolsbee may tell you it’s an accident that he ended up in politics. But this son of a trucking executive has been making and breaking politicos since his college days, when he beat Ted Cruz out for the title of national champion debater. Today, you can find him in the economics department of the University of Chicago. Goolsbee — who first knew the president as “Sasha’s dad” — was the chair of the Council of Economic Advisers from 2010 to 2011 and the president’s economic adviser since his days in the Senate. Born in Texas, raised in California, schooled in Connecticut (Yale) and PhD’d at MIT (who actually does that?), the amateur comedian sat down with OZY to talk about what he saw during his time advising the president, and what he makes of the economic state of the U.S. today. Heads up: He has plenty to say about the what, why and how of growth.
This interview has been edited and condensed for clarity.
Goolsbee on the state of the greenbacks
First things first: You’re an economist, so tell us what you think of the state of the American — and global — economy right now.
The [current] growth rate of 2 to 2.5 percent is not enough to make the job markets feel much better on any kind of rapid basis.… We definitely made progress, but it is only growing fast enough to get modest improvements in the standard of living and is not enough to make it feel like a strong recovery. The economy’s improving a bit … but it’s no great shakes.
I think there are two explanations.
- It was a big financial crisis, and you have a lot of debt. Which requires people to de-leverage and get out from under their debt — whether mortgages, credit cards or student loans, all of this kind of stuff. Even companies are still trying to get out from under their debt. The evidence suggests that recesses like that take a long time.
- The bigger thing, in my view, is that the 2000s were a bubble-driven expansion, meaning we can’t go back to the same businesses and the same stuff that was driving growth before the recession. And that transformation is slow and painful. There are people who have experience in sectors that are shrinking and disappearing, but they don’t have the skills for the sectors that are growing. And add to all of that the shift to more exports, the shift to more investments.
That’s why there have been no great shifts — because it’s a slow, painful transition.
Good news, America: Shopping’s still good for the nation
You often hear the stat that two-thirds of our economy is driven by consumer spending. Is that changing?
Consumers are and will continue to be the lion’s share of the U.S. economy. In the 2000s, consumers went from being something like 64 percent of the economy up to 71 percent of the economy. That extra “oomph” came from people taking money out of their houses, and from consumption and consumer spending growing faster than people’s income was growing — which was therefore not sustainable.
We’re not going to go back to that. I think there’s a group of people implicitly saying, “We want to go back — for the consumer to come roaring back, for housing construction to come roaring back.” And I think that’s a bit of a fantasy. You know there’s the old joke Onion headline, ”Angry Nation Demands New Bubble to Invest in to Restore Prosperity.”
What the Fed is forecasting for the economy is that housing is about to have a massive rebound, and consumer spending is about to have a massive rebound, and that’s where the growth will come from. Consumer spending’s going to remain something like two-thirds of our economy.… But I don’t think all of that growth needs to come from consumers going back to spending at the reckless rate they were spending at the height of the bubble. I think a lot of that demand can come from investment — we could get the investment rate back up in the country by way of the buying of machinery, building of factories, stuff like that, which has been abnormally low in recent years.
So I’ve gotten a little more optimistic that the growth rate might kick up above the 2 percent level [because] there’s so much money sitting on the sidelines. That kind of investment will be a nice addition to normal consumption growth, normal recovery of the housing market. And, if you look at the private sector, [it] has been growing over 3 percent a year, which is pretty healthy — it’s not super guns — but it’s pretty good.
Bad news … if you’re over 55
What does all of that mean for everyday people — young and old alike — who are trying to understand how they fit into this economy, making daily decisions about what and where and how to spend, or about how to build their careers or plan for retirement?
First, for young people, I think it should be overwhelmingly obvious: Whoever has more skills and more education has done better. They have higher incomes. They have way lower unemployment rates, and they were able to weather the recession far more comfortably than people who did not. Make sure you get a degree or get as much skill as you can, as much training as you can. We’ve seen the growth gap between the haves and the have-nots, or you might call it the skilled and unskilled. Whatever it is, that gap is getting bigger and bigger, and has been for a long time.
What about somebody who’s 55 or 60? Unfortunately, there you’ve hit on the weakest part of the job market: this massive amount of long-term unemployment. And the options have been very limited. Especially if the economy’s not growing faster than 2 percent, it’s hard to see how there are going to be a lot of good options unless and until we get the growth rate up.
The worst of times: A breath away from a depression
Let’s step away from the future and a little bit into the past. What don’t people know about economic policy during the last six years or so?
What was most surprising on a practical, tangible level was that we had the beginning of what easily, easily could have turned into another Great Depression. And that colors the whole first year and a half or two years of the administration: We were desperately trying to get ahead of this monster threatening to take over.
The start of the Great Depression involved a shock to the stock market in 1929, and a big hit on consumers’ net worth in 1929. People don’t realize that what happened in 2008 was actually bigger and worse than what happened in 1929. It was a bigger hit on household net worth than anything that happened at the start of the Depression, and the financial system’s a bigger and more important share in the economy now than it was in 1929. So if things had fallen apart, which it very much sounded like they could, at that time, it would’ve probably been worse than the Depression.
That was a pretty scary time.
Can you say more about the difference between what did happen and what could have happened?
The thing that’s different about a depression is that recessions kind of heal themselves. There are natural forces such that as the recession goes on, the pent-up demand builds up, and then it kind of comes back. When you destroy the financial system, it doesn’t come back. You go down and you stay down. And that’s basically what happened in the Great Depression.
So, what does it mean practically when you hear that in 2008, we were on the edge of a depression?
You saw we had terrible unemployment. You saw how we lost seven, eight, nine hundred thousand jobs a month. So the month of January 2009, the decline of GDP and the job losses from just that one 31-day period — that was as big as a normal recession. To lose 850,000 jobs in a recession — that’s about a medium-size recession. But that was just a 30-day recession.
Could high taxes be a boon for big business?
So you’ve been talking a lot about growth, and it’s safe to say you see that as one of the most important things to focus on in the coming years, in terms of improving the economy. What are the major schools of political and economic thought out there right now about how to drive growth?
There’s a pretty active debate, about, essentially the question, where does growth come from? There’s the libertarian or a conservative line that is, basically, the government screws everything up: It’s low taxes, low regulation that promote economic welfare.
The other side’s response is that many of the most innovative, growing places in the United States or in the world are high-tax, high-regulation environments – and they always have been. Look at Silicon Valley. California was never the low-tax, low-regulation capital of the U.S. And, so, then you should ask the questions “How did Silicon Valley end up there? How did New York City become as rich as it is?” You know, it doesn’t compute in the other worldview. This other worldview says “human capital.” And also important, though somewhat less [so]: physical infrastructure, economic infrastructure — all these kinds of things are critically important to growth. Higher taxes or regulations, if they’re being used to get more human capital to pay for universities, well, not only is it not bad, but it’s the prerequisite.
Look at the island of Vanuatu. They have perhaps the lowest taxation in the entire world. There’s no regulation. You can do whatever you want, and yet there’s no Silicon Valley on the Island of Vanuatu. Though [it’s] an extreme example, I kind of think that this idea of trying to figure out what are those common goods, public goods that are conducive to growth, is going to be a big thing, or at least I hope it will be. Because from both sides of the aisle, there’s a recognition that the growth rate’s the most important thing we’ve got. So let’s figure out how to get it up.
Now what we are seeing is that neither labor nor capital is going to be the richest thing there is. It is going to be something like human capital, skills and education, and the question of who best represents, promotes growth through and relates to this human gap. I kind of think [whichever party] is best capable of a coherent policy for that is going to be the winner … maybe in 2016, or maybe sometime later.