On the Road to Economic Recovery and Productivity, With Lingering Concerns Over Inequality
Economic Policymaking in the Obama Administration
With the federal budget deficit rapidly shrinking and the United States seemingly on the road to sustained economic growth, Jason Furman, chairman of the Council of Economic Advisers, discusses the economic policy priorities of the Obama administration and what lies ahead for the U.S. economy. Despite the fact that the post-financial crisis recovery has been rapid by historical standards, growing inequality and stagnant productivity growth remain as areas where there is more work to be done.
This meeting is part of the C. Peter McColough Series on International Economics, presented by the Corporate Program and the Maurice R. Greenberg Center for Geoeconomic Studies.
KEENE: This is a brave crowd. I grew up in Rochester, New York, where this is partly December. It is my great honor to be here with Jason Furman. I'll keep the introduction short so we can get every moment of value out of this, of course, C. Peter McColough Series on International Economics, "Economic Policymaking in the Obama Administration" with Jason Furman.
What I love about Jason's economics—you know his biography. Many of you know him from years in New York and with his academics. There's a lightness and a wonderful touch to how Jason Furman does economics. I want to read you one paragraph, as he confronted the American Enterprise Institute. This is a more conservative institution, I believe. This is classic Furman. To the AEI: "Thank you so much, and I'm always happy to follow anyone at AEI who talks about the wonderful contributions the Obama administration is making." Massive laughter. "I don't catch all your events, but I assume that happens here every single day," that at AEI, which is a bit of the spirit of the economics I know that Jason has done and you know his prodigious abilities.
There's a lot to talk about this evening. He will begin with comments, and then we'll chat for a bit, and we look for your important questions coming up here. Without further ado, Jason Furman.
FURMAN: Thanks, Tom, and thanks for you—the fact that you used to invite me on your show. And thanks for organizing this. Wanted to just give a few brief comments and then really get into a conversation with Tom and then with all of you and, in that context, wanted to really look at the economy and dial in on three different resolutions. One is, over the last 60 years, second, over the last six years, and then look, you know, just over the last six months. I think that those three windows into our economy tell you a lot about the challenges we have and where we're going. And I'll talk about some of that, as well.
Over the last 60 years, the two most important things that have happened—and, unfortunately, they both happened a little bit for the worse, and they both happened at the same time—is that we saw a slowdown in productivity growth, starting around 1973. Before that, total factor productivity was growing at 2.2 percent a year. Since then, total factor productivity has grown at about 0.7 percent per year. So just coming up with fewer ideas, fewer innovations, less of the things that ultimately fuel economic growth.
And then an inflection point that's harder to date precisely, but was probably a few years later, say, around 1979, we saw a large increase in inequality begin. And everyone knows the statistics, and you see it in earnings, you see it in income, you see it in wealth.
And you look at the combination of the two of these, which is the growth rate overall slowing and then less of that growth going to the middle class and to households at the bottom, and the combination of those two trends are about equally responsible for the slower growth we've seen in the typical household's income over the last several decades. And, you know, as I zoom in closer, we'll talk a little bit about where these trends are right now, but these trends are decades in the making, and they're not trends that one's going to be able to reverse overnight.
Going to the second resolution, zooming in a little bit more closely at the last six years, it was exactly six years ago that the economy went into recession. The official recession date is December 2007. And our GDP, if you measure it per working age population, peaked in the fourth quarter of 2007 and then fell dramatically, fell at the fastest rate since the end of World War II.
There were 11 countries in the world that went through systemic financial crises in 2007 and 2008, according to Reinhart and Rogoff. And if you look at the United States, it was one of the most severe of the systemic financial crises. It wiped—17 percent of U.S. wealth was erased by it. To put that in context, in the Great Depression, 3 percent of wealth was eliminated. So by that metric, it was five times more severe, the shock the economy went through in 2007, than the Great Depression.
And then what economists look to is how long it takes you to reattain your pre-crisis GDP, and I'll adjust it by working age population. Typically after a severe financial crisis, you think it would take you about a decade to get back there. The United States, we got back there by the first quarter of 2012. In four-and-one-quarter years we reattained our pre-crisis GDP. Of those 11 countries that went through systemic financial crises, only two of them by today have regained their pre-crisis GDP, Germany and the United States.
"And you look at the combination of the two of these, which is the growth rate overall slowing and then less of that growth going to the middle class and to households at the bottom, and the combination of those two trends are about equally responsible for the slower growth we've seen in the typical household's income over the last several decades."
When you look at Germany, that's mostly that they had a relatively shallow banking crisis. When you look at the United States, I think it's that we fundamentally got policy right with a massive response in terms of fiscal policy, monetary policy, financial rescue, autos, and a range of other areas.
But getting back to your per capita GDP from where you were before the crisis, or grading yourself on a curve and saying you're doing better than other countries, you know, doesn't tell you the full enormity of where we are now. And you look at per household GDP today, it's $12,000 lower than what we thought it would be at this point in time before the crisis. So that is the lingering cost that we still have today.
The last resolution I wanted to talk about was over the last six months of the economy. GDP growth in the last two quarters averaged a 3 percent annual rate. The unemployment rate has come down by 0.6 percentage points in that six-month period, 1.1 million jobs. And part of what makes that remarkable is that that was against a backdrop of a very severe fiscal contraction. We've cut our deficit by 6 percentage points in the last four years. Nearly half of that deficit reduction, 2.7 percentage points of it, was in just the last year.
And so the payroll tax cut went away. The sequester went into effect. A range of other spending cuts were triggered. There was this large fiscal impetus in a negative direction. And the economy has done pretty decently growing through that. And if you look at the private components of GDP, they've grown even faster, at a 3.7 percent annual rate.
But even with all of that, you still have unemployment that's unacceptably high at 7 percent. And that unemployment—if you look closer—is even more troubling than just what the rate would tell you, because the short-term unemployment rate is back to where it was before the financial crisis. But you look at the percentage of households who have been unemployed for 26 weeks or longer—for more than half a year—that is—currently stands at 2.6 percent, which is the highest long-term unemployment we've ever had recorded in this country prior to the financial crisis.
So the problems we have, you know, outstanding are this very high long-term unemployment, the fact that this wealth and income was erased, and these several decades' worth of trends.
What this tells to me going forward is that we have three different priority areas that we need to focus on in terms of economic policy. The first is that we need to continue to return our economy to its full potential—get that unemployment rate down from 7 percent, get the long-term unemployment rate down. The budget deal, which passed the House and which passed a key procedural vote in the Senate today, will be a very important help to that. And instead of having, you know, the type of fiscal drag we've had, we may have a little bit of even fiscal wind in our backs for the next year.
The most important piece of unfinished business in terms of returning the economy to its potential is extending unemployment insurance benefits. Those expire at the end of the year; 1.3 million people would lose their benefits. It's not just that they'd lose their benefits, but their purchasing power is supporting about 240,000 jobs a year. And then there's more we can do to return quickly to potential, whether it's infrastructure or things that are specifically targeting the long-term unemployed.
The second thing we need to do, though, is expand our economy's potential. Even when the unemployment rate comes back down, we'd like to see our potential growth rate higher and start to undo some of that several-decade-long trend I was talking about at the beginning. And there's a whole lot of things, and we can talk more in the Q&A—whether it's, you know, big things like immigration reform, smaller things like patent reform, and then everything in between, like education, tax reform, the trade agreements we're negotiating with Asia and Europe, and bringing down our deficit over the medium to long term. All of those are about expanding the economy's potential.
And then, finally, there's inequality. And, you know, no matter what we do on returning the economy to its potential, no matter what we do on increasing the economy's potential, we're not going to be able to, you know, undo the fact that the typical family's income is lower today than it was in 1997 with growth alone, if we're not doing more to make sure that that growth is shared.
And when it comes to inequality, you know, that also has a whole bunch of things under it. A lot of them are a lot of the same things that we need to do to increase growth and return our economy to its potential, so investments in infrastructure, a high-quality preschool education, all of those help our growth. They also help inequality. And then there's other measures, like—commonsense measures like raising the minimum wage and continuing, as we deal with the deficit, to do it in a balanced manner that can further affect inequality.
So all of that is where we stand right now. I'm optimistic about, you know, where we're going in the next year and where we're going in the coming years, you know, with the—without the fiscal headwinds in our face, with continued potential in areas like housing investment and consumer spending, a lot of forecasters are expecting higher growth next year, but there's a lot we can continue to do to help further that trend and to make sure that we're deepening it, lengthening it, and making sure that everyone's benefiting from that growth.
And happy to talk about any of those topics.
KEENE: I'm going to start with a question that I ask every chairman of the President's Council of Economic Advisers. How does the president practice day-to-day economics? You've had so many positions. You've moved up the food chain so rapidly, what do you observe that President Obama does day-to-day to be smarter about your world?
FURMAN: One thing is he's really smart. A second thing is he reads an awful lot.
KEENE: He reads what you write?
FURMAN: I was about to say, he reads what we write. What we do on every major data release—and we define that quite broadly, what a major data release—we send him a memo and find the next day he's often quoting a statistic from that memo. We'll send him memos on interesting topics.
And he is interested, you know, not just in my view about the economy, but he's there at night on his iPad reading all sorts of stuff, finding articles, asking us questions about them. And, you know, it's been—you know, each phase of—you know, some of the things are constant. Some of the inequalities I've talked about, those are issues he was talking about in 2008. They're still with us. Other things are, you know, the auto industry. You have to learn a lot about that when you're dealing it and then you move on.
KEENE: He has a constituency worried about inequality, about those challenges. Some would say—you and I talked about it in the green room before this—he seems reticent to take the victory lap he should, when we see the unemployment rate come down, when we see the success of coming out of three ugly years. Has he been too reticent to trumpet his victories in economics?
FURMAN: I'm not in the message department, so I can't give you a well-informed political answer to that, but I think—you know, I don't think it's that hard to have a nuanced view of the economy, which is we've made a lot of progress and there's a lot more work to be done. You know, I talked about only two countries out of 11 have regained their GDP from prior to the crisis. That's really important in terms of interpreting America's economic policy and understanding it in terms of the big picture. It's not any comfort to a family that doesn't have a job or seen its income fall, that, you know, that some other country...
KEENE: Well, you mentioned my chart of the year, which was for last year, which is median household income back to 1998, inflation-adjusted. Have you ever discussed that reality with the president? And what is the economic policy to just begin to reverse that horrific trend?
FURMAN: Yeah, no, we certainly—we certainly have discussed that, and I think the economic policy to reverse that trend is pretty much his entire economic agenda. I mean, that's his test for his economic...
KEENE: And he did OK at the last election. I mean, it was reaffirmed, essentially, by the public.
FURMAN: I think people are probably more focused—the median family is probably more focused on median income than average income.
KEENE: Uh-huh. Economic policymaking in the Obama administration, the backdrop—and I got this from a number of sources—the do-nothing Congress, 1947-1948, they had 906 bills passed. This 112th Congress, we've enjoyed 219 bills. Can you do economic policymaking, can the administration do economic policymaking with this Congress?
FURMAN: Look, first off, you look at Congress, we just had a budget agreement. It's not as big a budget agreement as we would have liked. It doesn't have some of the things that we would have liked, like revenue in it, like business tax reform, entitlement reform, but it's certainty for the next year-and-a-half. It's buying back 60 percent of the sequester. It's less of a fiscal contraction.
And then there's things that aren't in—you know, unless you read the trade publications, the newspaper. We came out with an agenda to reform the patent system in the middle of this year, and there's this out-of-control problem with what are called patent trolls, and they buy up patents, they sue everyone, they don't license these patents to anyone, and get in the way of innovation.
We came out with this agenda in June. The House just passed something very much along the lines of the president's plan on a strong bipartisan vote, and I'm confident the Senate will. And that'll help our long-run growth.
So there's areas legislatively where we're making progress. The thing the president always presses us is, what can we do not legislatively? So you look at climate change, the climate action plan. You look at—you know, we're trying to do a whole bunch of things now, as relates to skills in the long-term unemployment, just using the bully pulpit, mobilizing companies to do what they can in those areas.
KEENE: When you look at—you mentioned big things and little things in the second administration, where we are in the calendar. Is there an advantage to look at little victories versus trying to get a big victory, like immigration?
FURMAN: We are constantly working hard to get every sized victory we can.
KEENE: You've gotten very good at this. You really...
FURMAN: No, and I don't—and I don't think it's a tradeoff. I mean, you know, we were—you know, the Judiciary—that patent reform I was talking about goes through the Judiciary Committee. Immigration reform goes through the Judiciary Committee. We had both of those issues in front of the same committee at the same time. You know, the Senate passed immigration reform. We'd love to see the House act on it. And then this—you know, much smaller issue, but not insignificant, you know, happened at the same time.
KEENE: I mentioned—you mentioned, rather, the potential GDP and where we are, a 2 percent economy. I did a seminar this morning with M&A people, and they were moaning, bemoaning a 2 percent-like GDP. I was with Jeff Immelt, who runs a small company in America, the other day, and he wants to get back to 3.5 percent GDP, a better time. 1986 to 2006, I believe, was 3.1 percent average GDP.
When do we get back there? And what is the economic policy that gets us back to that real animal spirit, let alone the nominal animal spirit the nation needs?
FURMAN: Yeah, I think some of those comparisons with the past are just demography. So when you had your working-age population growing more quickly, your overall growth rate's going to be more—it's going to be faster, and our demography now, we have baby boomers retiring. That's reducing our workforce growth and reducing our growth rate.
The part that I'm most worried about is what I was talking about, which is the productivity growth, how much you're getting for given work or how much you're getting potentially for given amounts of capital. And I think we can do a lot better. I think if you had—you know, one thing that makes companies more productive is when they have a larger scale that they're operating on. The trade agreements we're working on with Asia and with Europe are all about increasing scale and increasing productivity. Business tax reform is something that is all about getting companies to invest in the type of capital that's most economically efficient, rather than the most tax efficient.
KEENE: Why can't we get business tax reform done? I think of the Hamilton Project and all the other wonderful things you've done. I don't know anybody who says we don't want to do this. What are we waiting for?
FURMAN: If you want to get granular on that, I think there's a lot of convergence on the substance of business tax reform. If you look at the Republican proposals in Congress, you look at where the president's coming from, you look at the expert community businesses, people want to bring the rate down to the mid-20s, pay for that with broadening the base and some structural reforms, recognize it has to be revenue-neutral, recognize the international system needs to be a hybrid, can't be a pure territorial system, it can make us more competitive, while dealing with base erosion.
"The part that I'm most worried about is what I was talking about, which is the productivity growth, how much you're getting for given work or how much you're getting potentially for given amounts of capital. And I think we can do a lot better."
So I think there's a lot of agreement on the substance of business tax reform. I think the problem is how it fits into the broader debate. So Republicans would like to cut the top individual rate to the mid-20s. That wouldn't work for us. It costs too much money. It's too regressive. It's too much of an increase in the deficit.
And so we'd love to see business tax reform—and you could some individual simplification, but you can't do the same rate reduction on the individual side. You don't need to, either. I think that's been one of the big obstacles, is not the business part of it, but how it fits into the broader budget debate.
KEENE: I just talked to Alan Krueger, your predecessor, at the Council on Foreign Relations in Washington about income inequality, and maybe we'll get to that in our Q&A, but on productivity—and I saw Byron Wien here scratching away furiously on productivity—when does labor get their fair share? I assume you studied under Dale Jorgenson at Harvard. What would he or you say—when does labor begin to participate again?
FURMAN: Right. Well, the declining labor share of national income is something we've seen now for a couple decades. And we've seen it not just in the United States, but in all advanced economies. And—you know, and a challenge for a place like Council on Foreign Relations or anyone that believes in a more globalized economy, that trend has coincided in time very closely to the increased globalization and integration with lower-wage countries like China.
And it also correlates very much within industries. If you look at the labor share within industries in the United States, in industries that are very exposed to trade, you've seen that labor share decline by more. So that's part of the inequality trend we have, and that's part of why you would—you'd point the finger at globalization as at least one of the causes of that trend.
KEENE: Well, I'm glad you bring this up. Ford Motor—I used this recently to great effect, I think—11,000 jobs, roughly half of them go abroad, I'm guessing Asia, and the other half stay in America. Of course, they made a big deal, Al Mulally and his team making a big deal about that. What is the new globalization? As you are in this second term, how do you address to the president the nuances of globalization now versus 10 years ago or 30 years ago?
FURMAN: I don't know that it's that different from 10 years ago, which is, number one, it's inevitable. You're going to have it, and it's a question of how best to manage it. Number two, it has enormous upsides, you know, cultural, moral, political upsides, in terms of an integrated world, but also just pure economic ones, in terms of the increased return to scale and what that can do for an economy. And—but that it also can result in a bunch of very severe tradeoffs.
It's, I believe, certainly contributed to inequality, don't guarantee that everyone shares in the benefits of it. That doesn't happen automatically. That takes some active work and active effort. So even things like the Affordable Care Act, you know, there's a lot of motivations for it, but one of it is, if you want to make sure that you have a growing economy, but everyone's sharing in the benefits and not suffering the worst downsides of it, you need things like that, as well.
KEENE: All right. One thing that I know you've read that I've read, and I want to get a little wonky here before we go to Q&A, is this mystery of what you do, economics, and where we are, and what you've learned after this crisis and how you impart that to the president towards policymaking. And there's a whole question about where our economics is going, where Olivier Blanchard at the IMF, among others, has looked at this.
In 1997, a monograph, Frank Hahn and Robert Solow, "Critical Essay on Modern Macroeconomic Theory," which was shockingly prescient, and in it, they talked about pathologies and trying to figure out a new theory. Is the Washington that you're in now working on a cohesive theory? I know you want to delicately step around Fed policy, but is this in the textbook you read at school?
FURMAN: I think if you look at economics, a lot of the microeconomics, labor, public finance questions, like what is the impact that unemployment insurance benefits have on incentives to find a job, what is the impact that preschool has on educational attainment, what is the impact a given tax incentive has on whatever it is you're trying to incentivize, I think the economics in that area has vastly improved in the last decade or two, and it's something that economists call, you know, well-identified models, something where you either have a randomized experiment or you find something out there that looks a lot like a randomized experiment and lets you much more confidently and scientifically than you could before make precise conclusions about those things.
And we—as we think about all these areas, training, you know, all the things I talked about, look at those studies and draw on them. That's one of our jobs as economic advisers is to bring those to people's attention.
I think the area we've made less progress in the profession is understanding macroeconomics and the biggest questions about, what makes economies grow? What makes them, you know, expand? What makes them contract? Part of that is that a lot of our answers in that area, you know, were common sense a couple decades ago, and that common sense was probably correct, and, you know, sticking with the basic notion that you don't want a fiscal contraction in the face of an economic contraction, you want, you know, your fiscal policy to be countercyclical, that's not—that was a deep insight a couple decades ago. It's pretty obvious now, but that doesn't make it any less true.
KEENE: When you look at the economic policymaking that needs to be done—and I don't know when president become lame-duck—let's be optimistic and say it's out some ways from this president—what's your to-do list for 2014? As your team briefs the president, is immigration front-and-center? What a disappointment that was for all parties. Is that front-and-center?
FURMAN: By the way, I mean, immigration—it passed the Senate on a strong bipartisan vote. You have a lot of members of the House that are interested. Obviously, we would have liked to have seen them pass it. But, you know, an awful lot of people wouldn't have bet the Senate was going to get close to 70 votes before immigration reform this past year.
FURMAN: You know, in terms of next year, you know, the big goals are the ones I said, returning the economy to its potential, increasing its potential, reducing inequality, and then there's a lot of things that fall under those headings. To some degree, you know, you figure out how to prioritize, and that's important. To some degree, it's just different opportunities are afforded to you over the course of the year as you see, you know, what's going to make progress and what's not. But the, you know, major priorities and goals certainly haven't changed.
KEENE: Finally, one of the most important papers I saw this year from JPMorgan, Bruce Kasman's team, was Michael Feroli on potential GDP, on the idea of where we are—he made a lot of headlines and just reaffirmed this the other day with me that he stands by a 2 percent—in a rather cautious view—on what the nation's potential GDP is. Your number's fractionally higher than that. Where can that be in three years or in seven years? Can we get to 3 percent?
FURMAN: I mean, a lot of predicting potential GDP involves understanding what inventions people are going to have next year, the year after that, and if economists could predict what those inventions would, they'd gotten out of economics and just invent the things, rather than predicting them. So I think it's hard to know what potential GDP is going to be.
But I think some of the arguments that some friends of mine have made about secular stagnation are, I think, potentially overstated to date, in that there's a lot of good explanations for where the economy is today that don't rely on secular stagnation, whether it's the financial crisis, the fiscal contraction, the eurozone, and, you know, I'd like to see a year or two more before I give up.
KEENE: And then, finally, Ned Phelps of Columbia in a speech at the Bank of International Settlements, oh, pushing four years ago now, a summer speech, talked about that next invention, that next era, trying to get to that dynamic moment of the new "new." Is that what we're really waiting for, is that next thing? Or does it percolate up, as maybe we're observing now?
FURMAN: You know, it would be great to have that next new thing...
KEENE: I was trying to make some news here. Help me.
FURMAN: ... but I—no, no, I don't—that is in—you know, there's a whole debate between Robert Gordon, who thinks we've run out of ideas...
FURMAN: ... and, you know, a number of people on the other side that think we haven't. And, you know, to some degree, we don't need to take a stance on that debate to know that we want to do everything we can to increase innovation, increase the production of those ideas, but I'm—I'd be a little bit more optimistic.
I think it's easy to say, "I can't picture what's coming next; therefore, nothing big and new is coming next; therefore, you know, we're not going to have growth in the future." It's harder to say, "Even if I can't predict it, that doesn't mean someone else isn't going to figure it out and it isn't going to happen."
KEENE: But the—and, again, on jobs, labor participation—let's get your thoughts on this. We see the vector moving in the right direction on the unemployment rate, but a lot of people go, "Yeah, but," and it wraps around the participation of our economy at work.
FURMAN: Yeah. I mean, the labor force participation rate was always predicted to start falling pretty sharply after 2008. The baby boomers, the first of them turn 62 in 2008, started retiring. That brings them out of the labor force. That reduces labor force participation. We always knew that after 2008 that was going to happen. About a half of what we've seen in labor force participation is fully explained just by that pure aging and demographic effect.
A bunch of the residual is just related to the standard business cycle. Any time the unemployment rate is higher than it normally is, some people are going to temporarily give up looking for jobs, leave the labor force, and then conversely, as the unemployment rate comes down, some of those people will, you know, get re-energized, come back into the labor force, and start looking for jobs again.
KEENE: Let's start with your smart questions. Byron, please.
QUESTION: Jason, I am amazed that you don't recognize any structural changes in the economic outlook. If you go back to the end of World War II, the United States was 47 percent of world GDP. It's probably 21 percent today. The—it's true that real GDP is at an all-time high, but the people who have benefited from that are the people in the top 10 percent. They are the primary beneficiaries of the growth of the recovery since 2008.
You know, there were 70 percent of our high school graduates—or of our high school students graduated in 1970. The number is 75 percent today. Manufacturing had declined as a percentage of the workforce, although it's been relatively stable.
I would argue that this has been one of the most productive periods in terms of invention. You know, in 1979, the year you picked, we didn't have a fax machine, a cellphone, an iPad, a BlackBerry. We didn't have any of those things. But the problem with the inventions is, they lead to an increase in productivity, although it doesn't show up in the numbers, but a decrease in the number of people employed, particularly...
KEENE: Do you agree with that?
QUESTION: ... those without education. So I think there are some serious structural problems that you're not acknowledging, and they're going to be with us for a long time.
FURMAN: I guess—I think I said about three-quarters of what you just said, and the other quarter of what you said I think was wrong. So I think I was trying to talk about a lot of those big trends over the last several decades. The productivity growth, you're very much right that it tilts itself towards people with skills who can take advantage of it. That manifests itself not in fewer jobs for people with less skills. It manifests itself in lower wages and more inequality.
So the unemployment rate is elevated now, but that's because we're coming out of a recession. The unemployment rate in the '90s and even in the 2000s was around 4 percent. It was lower than it was in the '50s, '60s and '70s. So these inventions aren't replacing labor; they're complementing labor. And they're complementing high-end labor, and thus, contributing to inequality.
So, you know—and, you know, the sort of what you need to do going forward is not to slow the growth of those types of inventions, but to make sure you have more people who can take advantage of those types of inventions, so you need to increase the skill of supplied workers.
And the other part of the story is, at the same time, that the skill biased technological change was happening, there was actually a slowdown in the increase in educational attainment, that with the G.I. Bill and after World War II, there was a huge increase in education. We're still actually increasing our educational attainment, but we're doing it at a much slower rate at a time when we need to be doing it at a faster rate.
KEENE: This—and Allan Meltzer's yelled at me about this, because he swears we should blend everything in all into one distribution, but is it—to use John Edwards' phrase—is it two Americas? Is it a bimodal distribution that you have to practice your economics in, where you've got a group that Byron talks about that's advantaged by inventions, but there's just a whole other group that's not participating in that technological progress?
FURMAN: Look, I still think if we had productivity growth since 1973 at the same rate that we had productivity growth in the decades before 1973, national aggregate incomes would be 69 percent higher today. I think middle-class incomes would be something close to 69 percent higher...
KEENE: And we'd have a run rate of 3 percent-plus on GDP.
FURMAN: Right. You could have just as much inequality, maybe you'd have a little bit more inequality, but everyone's incomes would be shifted up and we'd be less worried about it. So I think we are all ultimately in the same boat, but I can't take that fully for granted.
QUESTION: Jeff Schiffer (ph). I'm going to make a comment before I ask my question, Jason. You and I both served in the Clinton administration, and your 60-year sweep obscured the fact that both the income distribution and productivity growth improved during that period. And I think it's—it's important to flag that.
But my question is, if you look back, the two biggest drags of—keeping us from getting back to potential output faster than we—as fast as we'd like have been, one, the fiscal drag, and that's been largely, if not totally removed, and the second is, you look at business fixed investment, despite the low interest rates and the reasonable growth, are just lagging behind. What's it going to take...
KEENE: I'm so glad you...
QUESTION: ... in order to get business investment to carry the economy from 2.5 percent to 3.5 percent growth?
KEENE: Is this the mystery of 2014?
FURMAN: I actually think it is. Let me take one second on your '90s point, which is a great point and I think is relevant to your question of, "is it two Americas?" We actually—if you look at the trend of inequality, it was unchanged in the 1990s. It was the same as the 1980s and the same as the '00s, if you look at the top 1 percent or the top 0.1 percent.
But you look at middle-class incomes, they went up strongly in the '90s, which did not happen in the '00s, and the difference is you had much stronger overall growth in that decade, driven by much stronger productivity growth in that decade. And so I think that tells you that you want to worry about both halves of this, the growth half and the inequality half, and that was a decade in which the growth half let you muscle through the inequality half and have the middle doing better.
I think investment is the thing I understand least well in the economy, in that the last year it's grown 3 percent. Looking at where interest rates are, looking at where the profit share is as a share of GDP, the highest in decades, looking at stock market valuations, which continue to go up and up, you know, every theory of investment we have would—you know, whether it's sort of Q theory or interest rates or whatever it is, whatever you're taught in an economics class, would tell you investment would be a lot faster.
It's possible that part of the explanation for this is uncertainty. And to the degree that's part of the explanation, that's good news, because I think we do a lot more certainty going forward, so that will go away. Part of it may be that just, you know, it's sort of hard to—you know, economic relationships don't hold perfectly minute to minute, but they do hold in a longer period of time, and to the degree that's the case, you'd expect investment to grow faster next year and catch up to, you know, what all our models would tell us that should be growing.
KEENE: Can tax policy jump-start business investment?
FURMAN: I think it's helped. You know, we had the largest temporary investment tax incentive in this country's history. It was 100 percent expensing we had in 2011. We've had bonus depreciation since then . I think that's helped. I think more—the next phase, though, isn't some type of goosing the investment with a temporary incentive, but making sure you're permanently reforming your tax code so the investment is going into things, as I said before, you know, that aren't because they're tax-advantaged, but because they're the highest returns to our economy.
KEENE: Another question, please? In the way back, please.
QUESTION: Hi, Jason. I'm Sen (ph) from Chinese Xinhua News Agency. My question is, how do you think of the prospect and the challenges in economic cooperation between the United States and China? And do you have any suggestions to President Obama to promote the economical relations between the two countries? Thank you.
FURMAN: OK. Thanks for your question. I mean, I—you know, China is the world's second-largest economy. It's a major source of destination for exports from the United States, and, you know, it's a key partner for us economically, so a lot of mutual interests between the United States and China.
But there are important parts of that economic relationship that—you know, we're working to improve and get better. One of them is having China move towards a more flexible, market-determined exchange rate, so you don't have the same types of imbalances. And there's been progress with that, with the appreciation of the currency and a reduction in—in the trade imbalances. But you'd still like the ultimate test to be, you know, where the market would have your currency, not how much are you willing to let it move in one direction?
There's an important set of challenges, you know, around intellectual property protections. And you can only have the type of trade relation and exchange of ideas if you're also confident that both countries are protecting their intellectual property, and that's another issue we've engaged with China on.
And, you know, then just—you know, a broader set of questions that go, you know, beyond the economic and beyond my area of expertise.
KEENE: One of the interesting things here, after attending the IMF meetings in October, is a lot of smart people got right a global slowdown. How important is it to our policymaking and to the president that—many would say we're the locomotive right now, we're the ones getting things done, and there are so many questions. I see on the Bloomberg the red headline will come on, on India GDP—or I believe it was a negative statistic on Mexico recently. This is a world that is looking for growth. How does that affect your policymaking?
FURMAN: I think that's broadly a good thing. Economics is all about—essential lesson in economics in gains from trade and mutual benefits. The United States has really, you know, been buffeted by the global economy in the last couple of years. You look at the biggest sort of short contractions that we've had in the last couple of years, one of them was the debt limit brinksmanship in the summer of 2011, the other was the eurozone in the summer of 2012. Both of those had similar effects on our economy. And, you know, so we have to care about what we do here, and we have to care about what the rest of the world is doing.
KEENE: Let me attempt delicately, before we take another question, I know you don't speak about monetary policy. I believe there's a get-together in Washington today and tomorrow, as well. What a triumph of a society to have two individuals being considered with that history of jobs, those resumes and that academics that we see in Vice Chairman Yellen and in Governor Fischer. If we see such competency up top, does that give a president more economic policy leeway to have governors of the Fed who are more eclectic and more varied in job, when you potentially have two major academic talents leading the ship?
FURMAN: One of the people you just talked about has been appointed by the president, and the other...
KEENE: Yes, I understand. There's a date calendar here that...
FURMAN: And—and the one thing I will comment on monetary policy is, it looks like the Senate will confirm Janet Yellen this week, which is just terrific, because she just is, you know, as qualified as anyone, if not more so, that's ever been nominated to that post. And I think it does free you up—I wouldn't use the word eclectic, but to bring, you know, the set of things you need, whether it's knowledge of financial markets, knowledge of community banks, knowledge of the international system, you know, bring that all together, and Janet has worked on every one of those topics and can interface with all of those and integrate it forward.
KEENE: She is—I've recently gone through five of her speeches, and there's a central tendency of studying our labor dynamics, and particularly as you mentioned earlier, this distressing greater-than-26-week challenge we have. What is the economic policy short term to jump-start a 26-week headache?
FURMAN: Part of it is, when you think about long-term unemployment, it's not anything different in terms of economic policy when you think of unemployment overall, which is, you know, each month we bring our unemployment rate down by about 0.10 percent. At least lately, that's been the rate we've been at. And each month, we tend to bring down our long-term unemployment rate, as well, so anything that helps get us back to our potential, bring unemployment down, is going to help the long-term unemployed. As labor markets, you know, start to tighten in some areas and places, they're going to need to find people for those jobs, and they're going to find the long-term unemployed for those jobs.
But beyond that, I think it does challenge us to think, you know, more specifically about what it is that we can do to make sure people aren't getting disconnected from the labor force, giving up, and can really find jobs. I think unemployment insurance helps in that regard. You can't get unemployment insurance if you're not looking for a job. Some people, if they didn't have extended unemployment insurance, if it expired at the end of the year, might give up and leave the labor force. We'd much rather have that person in the labor force looking for a job. And some of it is, you know, specific things to help connect long-term unemployed to jobs.
KEENE: What I find interesting is—within the debate—and I'm not an expert on the nuances of the present debate on unemployment insurance—there's a big difference between CBO at a budget deficit where we are now and migrating to $300 billion or $400 billion, whatever the number is, versus a 10 percent to GDP deficit. We made huge fiscal headway. Why are we still having this debate if, again, the vector's in the right direction?
FURMAN: I'm not having the debate. Our deficit, as I said, came down from—by nearly 6 percent of GDP in four years. That's the fastest deficit reduction we've seen since the end of World War II. Our deficit is coming down really quickly in the short run, and it's not just the short run. If you look at the long-run outlook, we have a lot of demographic challenges, we have a lot of challenges in terms of health care, but what people don't appreciate is, we've actually done a lot to deal with those.
Whether it's spending, whether it's reducing Medicare in the Affordable Care Act, higher tax rates on high-income households in the tax deal at the beginning of this year, add all of that up, and our long-run deficit, the fiscal gap, is only 1.7 percent of GDP now, which is a lot better than we've estimated it to be for the last 10 or 15 years. So we still have a long-run deficit challenge, but even that is considerably smaller than what people...
KEENE: Can you—can you fix the website here in your free time, the health care website?
FURMAN: The website's working a whole lot better. People have been working hard on it.
KEENE: I hear it's a whole lot better.
QUESTION: Hi, Emil Henry. This is a big question, but I suspect you'll have a synthesized answer. Broadly speaking, the big regulatory overlays of this administration, Dodd-Frank, the Affordable Care Act, much of the activity out of the EPA, how do you, in your role, how do you view the impact of those overlays, not on their policy impact and your desired impact, but on growth? What's the administration's view of those policies on growth?
FURMAN: Right. You know, I would, on the financial side, get back to the impact of the types of regulations that we had in place prior to 2007 on growth, and the impact was catastrophic, in terms of the crisis we went in, and that was a crisis because of inadequate—in part because of inadequate regulations and inadequate application of those regulations. So part of what you're doing on the financial side is trying to make sure that every 20 years you're not going through something like we went through a couple of years ago.
"Our deficit, as I said, came down from—by nearly 6 percent of GDP in four years. That's the fastest deficit reduction we've seen since the end of World War II."
You know, the—you know, more broadly as economists, what we'd look at are cost-benefit tests for these regulations. And at CEA, we're very engaged in the interagency process that reviews all of the regulations, at least from the executive agencies, not the independent agencies, like the financial regulator.
And we ask a lot of hard questions of, what are the benefits? How do you quantify them? How sure are you? What are the—you know, what will it cost business to comply? Is there a more flexible way for business to deal with it? Could it be phased in over a period of time? Could it be traded in terms of these other—you know, all those types of questions, you look at it, and, you know, we publish our cost-benefit and our—you know, the benefits of what we've done well outweigh the costs.
KEENE: Do you have a single point, health care percent of GDP? Do you have a working number where we want to get to? Does your team have a working number?
FURMAN: I think you just want to be at—I mean, I think that's cost-benefit, too. You want to have your marginal health dollar having a positive return, not a zero or negative return, which it often does now.
QUESTION: Murray Stamples (ph). How do you factor in the fairly dramatic changes in energy reliance going forward, both—on all the issues you raised, balance of payment, fiscal things, employment?
FURMAN: I think it's tremendous. The United States is now the biggest producer of oil and gas in the world, larger than Russia, larger than Saudi Arabia. You look—and as of October, we're now producing more oil domestically than we are importing from abroad. And this opens—you know, this matters for national security, it matters for climate security, insofar as natural gas prices have plummeted and you see a shift in electricity energy generation towards it, and it matters for the economy, not just all the jobs in North Dakota getting the stuff out of the ground, but what it means for manufacturing.
And you read, you know, all the consulting groups and reports, and the number of manufacturers that are deciding to set up back here in the United States instead of going overseas, one of the big factors they list is things like cheap and abundant natural gas. So, you know, the EIA recently said every reason to believe that...
KEENE: That's an amazing report.
FURMAN: ... this all can continue and a lot more potential in this area.
KEENE: Did this happen in spite of Washington? Did we have an energy policymaking in spite of Republicans and Democrats in Washington?
FURMAN: I don't think so. You know, you look at, you know, fracking depends on innovations and ideas that came out of federal labs, and it comes out of innovations and ideas that come out of the private sector. And, you know, I just stress the production side on the fossil fuels. There's also renewables, where you've seen a large expansion that is directly attributable to things like the production tax credit that rewards wind and solar...
KEENE: Elon Musk loves you.
FURMAN: And—and there's been a reduction in the consumption of oil, which is related...
KEENE: That's true.
FURMAN: ... in part to conservation and things like the car rule going forward. So I think it's that all-of-the-above strategy where you have the production, but you also have the reduced consumption and you have the shift in the mix of where your energy is coming from.
KEENE: Sir? I'm just making—oh, OK, we're going to go over there. Oh, there we go. Very good.
QUESTION: Ron Shelp. Regarding productivity, from the very beginning, since we became a service economy, there was a great difficulty in measuring productivity in services. It seems we've gotten a lot better, but do you think it could be improved? Or is it still very, very difficult?
KEENE: That's the Jack Welch question.
KEENE: I was vocal about this on air. I mean, I would suggest, from where I sit, the mathematics has never been better and the effort of our agencies has never been better. Continue.
FURMAN: I think that's right. Now, it's, first of all, important to understand the nature of this problem, which is it's challenging, but less challenging to measure overall productivity. So the economy's productivity is growing at let's say 1 percent a year. What is hard is to disaggregate that and say, of that 1 percent a year, services are 0.5 percent, manufacturing is 3 percent, and it averages out to 1 percent, or maybe we're getting it wrong and services are really, you know, 1.5 percent, manufacturing is 0.8 percent, and it still averages out to 1 .
So we've always been much more confident in that—in my hypothetical example, that 1 percent number. It's hard time pricing, you know, exchanges between businesses that makes it hard to divide that overall productivity into how much is because of services, how much is because of manufacturing.
I do think our measurement in that area has gotten better. I think services make an important contribution to our productivity, also to our exports. We have a trade surplus in services.
FURMAN: So it's not just about exporting goods; it's about, you know, improving what we can do with services.
KEENE: ... are we underestimating our productivity, particularly within this new economy?
FURMAN: I think we're broadly getting it right.
KEENE: OK. Sir?
QUESTION: Andy Huszar, Rutgers Business School. I'm curious to understand how you think about leverage in the U.S., not in terms of public debt or the Fed leverage, but really in terms of the average U.S. consumer. And, you know, as we've talked about this decline in the median income of the American, and we've seen a corresponding rise in indebtedness. And the average American is about 250 percent more indebted than they were 15 years ago and only 10 percent less indebted than they were since the financial crisis. So I'm wondering how you think about this in a context of an economy in which we're 70 percent reliant on consumer spending.
FURMAN: I think the one thing missing from the statistics you just offered is the interest rate is a lot lower than what it was in the past. So if you look at the aggregate numbers—and this is not the typical family, this is on average—interest rates as a share of—interest payments, sorry, by households as a share of disposable income is actually the lowest it's been on record. And I think those numbers go back to the 1960s.
And that's because we've had a substantial amount of deleveraging in the last couple of years. Interest rates have come down. Households haven't taken out a lot of mortgage debt in the last couple of years, and some of it's been repaid, and credit card debt is more contained. So all of those together mean, if you look at the sort of ultimate test, which is what your interest payments are, they're low.
Now, that's an aggregate number. It's not for the typical household. I haven't looked at it lately for the typical household. I would not be surprised if it's not as positive a story as the aggregate, but I would be surprised if it hadn't gotten—if the typical households hadn't also benefited from the fact that, you know, millions of families refinanced their mortgages in the last couple of years.
So I—you know, so I think you always want to worry about debt, but right now, frankly, I'm more worried that people aren't getting mortgages who have good credit than I'm worried about the opposite, that people are borrowing too much and investing too much in their homes.
KEENE: Jason, one final question before we end the stormy winter night evening. What did you learn in the interest rate challenges of July and August? This was as you were stepping in as the chairman of the President's Council of Economic Advisers. And there must have been—I don't know if you were with the president in the vineyard, what you were doing, but there must have been some real sweat. I mean, all of a sudden, things were correlated, and they were moving in certain directions. What did you learn, given our unusual monetary policy, as everything linked up and prices went down and yields went higher internationally in August?
FURMAN: I think I learned that you could debate whether there was a lot of certainty or a lot of uncertainty, but you can't debate the fact that if administration officials were wandering around commenting on what they thought was going on with interest rates and monetary policy, that it would have made everything, you know, that much worse.
I mean, that's why Secretary Lew, you know, my colleagues, myself don't talk about that topic, because we've had administrations in the past where people did, and people looking at the Fed governors are looking at the treasury secretary, they're trying to figure it out and square it all together. You know, that's just that much more uncertainty...
KEENE: Well, is there too much discussion? Is there too much discussion today?
FURMAN: I don't...
KEENE: This has been on...
FURMAN: No, I don't—I don't have a view on whether there's too much or too little. You'd have to...
FURMAN: You'd have to ask the Fed about their communication strategy. I do have a very strong view that when people like me in their public capacities are talking about monetary policy, it just increases uncertainty.
KEENE: So I'm not going to get you on forward guidance this evening?
Jason Furman, thank you so much.
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