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Infrastructure Spending to Grow

Panelists: Jeff Madrick, Director, Policy Research, Schwartz Center for Economic Policy Analysis, The New School, Ellen R. McGrattan, Monetary Advisor, Federal Reserve Bank of Minneapolis, Nick Taylor, Author, American-Made: The Enduring Legacy of the W.P.A., and Anna Schwartz, Economist, National Bureau of Economic Research
Presider: Simon Constable, Columnist, Dow Jones Newswires
March 30, 2009, New York
Council on Foreign Relations

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This session was part of the CFR Symposium on a Second Look at the Great Depression and the New Deal, cosponsored by Dean Thomas Cooley of the Leonard N. Stern School of Business, New York University, and supported by a special grant from the Ewing Marion Kauffman Foundation.

 

SIMON CONSTABLE:  Okay, great.  Can everyone take a seat, please, including those people on stage?  Thank you.

Thank you, everybody.  Welcome to today's Council on Foreign Relations meeting.  This is the infrastructure planning panel.  Thank you.

I've just got a few housekeeping items.  Please turn off your cell phones, BlackBerrys and other wireless devices, video games, whatever.  And I want to remind you that this meeting is on the record.  It's being filmed and recorded.

Let's start off by introducing the panel here.  We've got Jeff Madrick, director of Policy Research at the Schwartz Center for Economic Policy Analysis at The New School; Ellen McGrattan, monetary adviser for the Federal Reserve Bank of Minneapolis; we've got Anna Schwartz, economist at the National Bureau of Economic Research -- they're the folks who decide whether it's a recession or not -- and Nick Taylor, author of "American-Made:  The Enduring Legacy of the WPA," and it's got a lot more title than that.

Before we kick off, I'd like to read a quote from Henry Morgenthau.  He was FDR's secretary of the Treasury.  And this was said in May 1939, basically after the depression is over but close enough for some perspective.  And he said, "We are spending more than we have ever spent before, and it does not work.  We have never made good on our promises.  I say, after eight years of this administration, we have just as much unemployment as when we started and an enormous debt to boot."  So he doesn't like that.  If you want to find that quote, you can find that prominently in Burt Folsom's book "The New Deal or Raw Deal."  He's the guy that discovered this quote or rediscovered it because I guess Henry Morgenthau knew he said it.  (Laughter.)  You would think, wouldn't you?

So let's start off with Jeff.  Can you give us five minutes on what you think of that.

JEFF MADRICK:  Well, Morgenthau was exactly the problem.  (Laughter.)  I want to state this very strongly because I don't think it has been stated strongly enough.  In fact, enough wasn't spent.  I forget who it was who said, there was no net stimulus to the economy when you talk about all that spending.  Let me put that in a little bit of perspective, and I want in particular to emphasize Peter Temin's point about what a deep hole we were in.  From 1933 to 1937, you had heard some talk about how much we recovered.  The economy grew at 9 percent a year in those years.  It restored GDP, based on chain-weighted measures, GDP equaled its 1929 level by 1937, coming out of an enormous hole.  Capital investment, domestic private investment, grew very rapidly from its 1933 bottom.  There was a lot of talk about how labor costs impeded that.  It grew very rapidly from its bottom, in fact growing, I think, at least on a chain-weighted basis and other measures of GDP or about the same, from something like $11 billion in 2000 prices to $90 billion by 1937, equaling its 1929 level.

So when we talk about the depression lasting from, there are all kinds of starting dates, but let's say 1930 to 1939, we are seriously misstating it.  Now, what happened in that period?  You have heard already about unlocking the monetary system, the bank holiday, people were borrowing, leaving their money in banks and so forth.  Federal Reserve policy was loosened, and there was modest deficit spending in those years.

The budget deficit -- and remember, the word Keynesian has not been brought up so far, which suggests to me we have not broadened this discussion enough, say what you will about Keynes.  Keynes talked about a deficit, not the size of government, which is a different issue, but a deficit, how much we spend compared to how much we take in.  That came at most to something like 5 percent in those mid-1930s years.  Nothing serious enough to get us out of that very deep hole in the early '30s, which cut GDP by about 30 percent and industrial production even more.  

When we talk about labor costs, to take one example of the issues that came up, and you'll probably get a sense that I would like to talk a lot about those issues.   When we talk about labor costs impeding growth, it's hard.  I very much disagree with unicausal motions about this.  And some of those comments sounded especially unicausal to me, one cause.  When you're talking about an economy operating at an industrial production level below what it was in 1929 until the late 1930s, why the heck should business be investing that robustly?  The implication being over capacity and then laying it at the feet of high labor costs.

And I have to say one other thing about high labor costs and unionization.  A simple fact of life -- the golden age of American growth was the 1950s and 1960s.  The golden age of unionization was the 1950s and 1960s.  The golden age of wage growth in America was the 1950s and 1960s.  The golden age of capital investment was the 1950s and 1960s.  I'm getting a little bit away, as you may have noticed, from our basic subject here because I felt I had a lot of territory to make up.

I have to say one other thing.  When we're talking about trend-adjusted GDP, remember what we're talking about.  To put it simply, we're talking about getting back to what we might call full employment.  We didn't get back to full employment in the 1930s.  We had a rather serious recession in the 1930s, '37 and '38.  You know, it was a very serious recession.  I think that hasn't been totally clarified.  The reasons?  Roosevelt was not a Keynesian.  He occasionally dipped into Keynesian notions, but he was basically an orthodox.  Morgenthau -- orthodox.  Balancing the budget was in Roosevelt's mind.  He cut public spending.  He cut federal salaries in that period.  We didn't have much federal spending, and the Federal Reserve tightened policy.  Recession -- pretty straightforward.  I don't think we need all these fancy explanations, pretty darn straightforward.

Public spending in that period, infrastructure spending was very much the heart of that spending.  Roads and bridges in the 1920s was extraordinary in many ways.  And I would reject categorically labeling so-called progressives as claiming that 1920 was some kind of bad year.  It was a new decade.  It was an extraordinary decade.  And in that decade, the number of families that owned automobiles rose from something like, and I'm doing the numbers from memory, one out of five in 1919 or 1920 to three out of five in 1929, an enormous increase.  The rate of change was far greater in the 1920s than the so-called new economy of the 1990s, in my view.

What happened was we didn't have roads and bridges.  We had to build them.  And when did we build them?  In the 1930s.  And the good work of Alex Field, for example, suggests that the capital stock of roads and bridges in the 1930s increased by 70 percent, same with water.  And I know you're going to try to stop me, but I'm not going to let you because there's a lot of stuff that -- (laughter) -- and everybody else should talk, also -- there's a lot of stuff to deal with the -- (inaudible).  Just give me 90 seconds more, I promise.  That, as Peter Temin was alluding to, laid the groundwork for the expansion during World War II and the post-World War II expansion, an extraordinary increase in infrastructure.

One last major comment.  I don't know many economists who think adequate infrastructure for a modern economy since the industrial revolution in the 1700s will be created by General Electric or General Motors or big oil.  It has been created by people getting together and deciding, we've got to build roads and bridges, we've got to build turnpikes, we've got to build railroads.  People getting together is government.  Government has been the source of major infrastructure investment.  Since the beginning, major infrastructure investment -- I think even Professor Friedman wrote clearly -- neighborhood effects, believed in federal government building roads.

Last comment.  (Laughter.)  Sorry, Simon.  I know, but I'm wound up here.  The issue is not infrastructure.  The issue is, how can we do it and government?  The issue is, how do we do that efficiently?  How do we make efficient decisions about infrastructure?

Now I'm finished.  Thank you, Simon.  Thanks for the indulgence.

CONSTABLE:  Good five minutes.  Thank you.  So basically, you think we should have spent more.

Ellen, should we have spent more?  Do you like roads as much as Jeff does?

ELLEN R. MCGRATTAN:  Well, you started with a quote, I'll follow you with a quote.  Let's go to 2009, Council of Economic Adviser Christina Romer gave a speech on the lessons from the Great Depression for economic recovery in 2009.  "Fiscal policy was not the key engine of recovery in the depression.  From this, some have concluded that I, Christina, do not believe fiscal policy can work today or could have worked in the 1930s.  Nothing could be farther from the truth.  Fiscal policy failed to generate recovery, not because it did not work but because it was not tried."

So that motivates the current administration to try something big, about $1 trillion big.  Now, how are they going to -- what's the motivation?  You know, how are they going to get large effects?  Well, many of the current advisers are using estimates of spending multipliers of about 1.5.  So by that I mean you spend $1 on government spending and you get $1.50 in output.  So how do you do that math?  Well, you've got idle capital and idle labor, and the government being extremely efficient comes up with $1.50.  Now, of course, if this were right, we'd have the government basically do everything.

Where I work at the Federal Reserve, there are people doing research and also advising members of the FLMC.  And what we advise them about or what we're asked about are the kinds of questions being posed to this panel.  And the way we answer it is we use -- sorry for the jargon -- dynamic general equilibrium models.  We try to model the behavior of households and firms and how they would optimally respond to different government actions -- in this case, you know, increased infrastructure or increased government spending.  

It's kind of like what engineers do although it's a little bit more difficult because we're modeling people, not modeling particles.  People think, they react, they forecast, they have to, you know, compute things out into the future, and if you use the models that we're using at the Fed to think about policies you do not get big -- they do not imply big multipliers for spending.  You get very small effects.  So what's cool about our situation is we've got a laboratory to think about these alternative policies but the laboratories that we're currently working with don't imply big effects from stimulus packages.

CONSTABLE:  So less than 1.5 -- (inaudible)?

MCGRATTAN:  Close -- closer to zero than --

CONSTABLE:  Close to zero.

MCGRATTAN:  Closer to zero.

CONSTABLE:  Thank you.  Pretty -- pretty gloomy.

MCGRATTAN:  Well, I mean, science.

CONSTABLE:  Thank you.  Anna, what do you make of that?

ANNA J. SCHWARTZ:  Okay.  My brief today is the mystical belief in the -- in the fiscal stimulus as the solution to the current recession is unwarranted.  Fiscal stimulus did not end the great contraction from '29 to '33 and it didn't end the slump in Japan.  If you make this kind of comment to a true believer you get an anti-intellectual kind of response.  

The great contraction didn't really try -- (inaudible) -- fiscal stimulus and the Japanese didn't spend enough on fiscal stimulus.  And that's clearly incorrect about the Japanese experience.  They paid lavishly for the fiscal stimulus projects that they promoted, and as a result Japan had the biggest fiscal deficit of any advanced country during that period.  And the answer to the program for fiscal stimulus that is lacking is an economic explanation of why fiscal stimulus would work, and we do not have such an explanation.  

I have an alternative policy.  Instead of fiscal stimulus we should have monetary stimulus.  Monetary stimulus historically has ended recessions and what's more, there is a cogent economic explanation for why it works.  So if I have time now I would go on and talk about monetary stimulus.  

Monetary stimulus means that the Central Bank is increasing the supply of money.  As a result, households and firms find that their money balances have increased and that the increase in money balances means that it is not in proportion to their other wealth assets.  So there's an incentive for firms and households to do something to reduce the size of their money balances to bring it into conformity with the other wealth assets that is owned -- that they own.  And how do they go about it?  

Well, to begin with, households and firms may decide to use some of the extra money to buy Treasury securities or corporate securities, and as their demand for these assets increase they become less attractive to them so they will look for some other assets to buy where the -- where their prices are more attractive.  What might they consider?  Well, they might think it's time to buy equities.  Equity prices are low, and when they buy in the equities they confirm a longstanding regularity about fiscal -- the business cycle.  

The regularity is that the stock market begins to rise before the real economy does, and this behavior by the firms and households in which they begin to buy equities fits in with this regularity about business cycles.  Anyhow, after a while the -- they may find that the prices of equities have grown -- are too advanced and they will look for something else where the price is more attractive.  One possibility is that they will begin to buy consumer durables, and when they buy consumer durables producers of consumer durables will begin to provide supplies for the sellers of those consumer durables.  

And after a while producers of other goods and services will begin to increase their production of those items so the progress of monetary stimulus spreads from the initial increases in money to the other parts of the asset world that firms and that -- and households like to include in their wealth assets, and in this way you have a perfectly understandable way in which monetary stimulus can bring an end to a recession.  Thank you.

CONSTABLE:  Nick, was Morgenthau right?

NICK TAYLOR:  Well, I'm not prepared to argue Henry Morgenthau and whether he was right.  What I am prepared to say, first of all, as I look over the program this morning I believe I'm the first non-economist on the stage or at least among the panel -- the panelists.  So you're going to hear nothing from me about GDP or about fiscal policy or about monetary policy.  

But let me state a little bit of what I know about history from writing the first history of the WPA.  When Roosevelt took office in 1933, the Depression was already three years old as we've, I think, established.  His first efforts at relieving the Depression came in the form of relief, not jobs.  Those came along fitfully under the Federal Emergency Relief Administration headed by Harry Hopkins.  

They realized quickly that the jobs were not being recreated quickly enough so during the winter of 1933-34 the Civil Works Administration was created.  That was a program that was only five months long, and there's plenty of anecdotal evidence that the Civil Works Administration produced stimulus but it was very temporary.  There were reports of so many working men who were working -- walking around in shoes with holes in them or no shoes at all who got CWA jobs that shoe factories reopened in order to supply the demand for shoes.  

So when we look at the WPA, and then also there was the Public Works Administration which was the big ticket infrastructure program of the Roosevelt administration.  It was headed by Harold Ickes.  Harold Ickes was a stickler for crossing the t's and dotting the i's and he didn't spend money soon enough. So we get to the primary infrastructure and fiscal stimulus portion of the New Deal, which was the WPA two and a half years into Roosevelt's administration.

Now then it began in 1935, between 1935 and 1937, when there was perhaps the economy had turned the corner. Roosevelt certainly thought so, and Henry Morganthau persuaded Roosevelt that it was time for him to balance the budget, 1937. So in 1937, well as somebody mentioned earlier that the Wagner Act had taken effect, so wages were higher and employees were spending more. But at the same time, stimulus was reduced by a great deal.

The WPA budget was cut by two-thirds from what it had been initially in 1935. Social Security began to be taken out of employees' paychecks, and employers were contributing as well. The withdrawal of money from the economy produced what conservatives gleefully called the Roosevelt Recession. And employment at that point was down to 14 percent. It jumped back up to 19 percent before Roosevelt began to stimulate the economy again by increasing the WPA budget.

We're talking about infrastructure, so we also have to talk about what that infrastructure did. We had a country that had a largely 19th century infrastructure: roads, bridges, the large dam projects that were done primarily by the Public Works Adminstration in conjunction with the Corps of Army Engineers -- did things like light and water Salt Lake City, Las Vegas. It irrigated the Central Valley of California and the Imperial Valley of California that has given the nation a breadbasket ever since, the large dam projects, irrigation and flood control projects. And electrification projects in the upper west along the Columbia River did the same thing.

You have to look at the results of the infrastructure. I agree with Jeff that it has to be done efficiently; but when you look at the public versus the private economy, private interests are not going to build these kinds of things with the New Deal bill. And so I think as long as we're talking about infrastructure, we have to look at not only its effects in terms of stimulus, but in terms of what it gives to the nation's physical plant. It makes life better, business more efficient, and a number of other positive factors.

CONSTABLE:  Thank you, Nick. I was on a panel last Thursday with a number of people. We were talking about the economic decline. And we talked about infrastructure expanding and stimulus a little bit. One of the panelists, Felix Salmon who write the portfolio said, If you go to Japan you'll see infrastructure in odd places like railway stations where there aren't any people. And he said, The problem with that was that the Japanese spread out those infrastructure projects over a decade. If they'd intensified the building of those railway stations where there were no people, it would have been fine. It sort of struck me as odd.

I want to go back to Nick. This idea of fiscal spending on infrastructure by the government sort of worries me because don't we end up with railway stations where there aren't any people? And you talked about 19th century infrastructure; in the early 20th century it was good to upgrade. But we're now in the 21st century and they are still talking about roads and bridges.

TAYLOR:  Well, the rap on what the Japanese did was that they did indeed build bridges to nowhere, where there weren't people. There were no people in the communities --

CONSTABLE:  Isn't that endemic of government in general?

TAYLOR:  No, I don't think so. And I think that the argument that government is necessarily less efficient than the private sector certainly couldn't be proved by recent history.  (Laughter.)  If you looked -- with regard to Ellen's point earlier, the multiplier effect -- or, I said I wouldn't use economic terms -- spending multipliers, the spending multipliers according to Moody's analytics, the spending multipliers that result from tax cuts amount to $1.03 increase in the GDP.  Infrastructure provides a great deal more, not zero but $1.47. The greatest spending multiplier, this is a little off the question -- but the greatest spending multiplier oddly enough comes from the distribution of Food Stamps.

Now back to your point, Simon.  No. I mean, there are not, government isn't composed primarily of stupid people, and the private sector is not composed primarily of smart people. There are stupid people and smart people in every sector. And the point is to have enough smart people directing everybody else to make sure that we get the bang for the buck that we pay as taxpayers to the government as well as people who manage and run private corporations need to monitor their own behavior in the way that they want the government to be monitored.

CONSTABLE:  Sounds like Ellen -- I want to turn to you now because Nick mentioned multipliers.

MCGRATTAN:  Yes.

CONSTABLE:  And about crowding out. If I heard this correctly you said the multiplier effect was zero.

MCGRATTAN: Right.

CONSTABLE:  Is that right?

MCGRATTAN:  Right. In other words, if the government's doing one dollar more, the private guys would cut their investment and consumption the same amount. Social cost, same amount.

CONSTABLE:  So basically it does absolutely no good? It's just pushing on a string?

MCGRATTAN:  It's not no good. I mean we need, there have been really good studies at the Bureau of Economic Analysis about the impact of highways, for example. There's a recent NBER working paper out by Barbara Fraumeni who used to be at the BEA. And they do careful studies of the impact of the infrastructure on economic growth.

So I encourage people to look at these studies. They're very detailed. And with highways -- I wrote it down -- it's a small number because it's a small share, like less than one-tenth of 1 percent is the impact. If you've got a 3 percent growth rate, you're talking about something pretty small.

But there are people who are trying to assess what are the impacts of the infrastructure on the economy. And it would be good if the administration looked at some of that.

CONSTABLE:  Jeff, let me get to you in a moment.

I want to turn to Anna. Anna, you're saying fiscal policy doesn't really work or infrastructure spending doesn't work, try monetary policy.  What people would say, well you know what, it's never really been tried, the fiscal stimulus idea, you know, we just didn't spend enough. I think, Jeff, that's what you were saying. We need gobs more -- more spending.  We've just got to  --

MADRICK:  And Christina Romer.

MCGRATTAN:  And Christina Romer.  

SCHWARTZ:  Well, they never explained why fiscal spending of a certain amount is ineffective, but a massive spending program works. That's why is, say, the depreciating fee of the stimulus program is they don't give you an economic analysis of what happens when fiscal stimulus is tried.

CONSTABLE:  Let's see if you've got one.

Jeff, have you got an economic --

MADRICK:  Well, I think a lot of people who support fiscal stimulus --  including Christina Romer who's done a lot of academic research -- in fact in some ways deepening and broadening the work of Freidman Schwartz now says fiscal stimulus is required. Ben Bernacke, I don't mean to be sarcastic, but I don't think is an anti-intellectual. Also accepted and deepened and broadened the monetarist explanation. And the Great Depression, Ben Bernacke says we now need fiscal stimulus. We have been trying monetary stimulus for -- interest rates, you may have noticed are very low, and we've run out of gas on the monetary side.

Fiscal stimulus, I think there are very cogent intellectual reasons why it works. I don't think we have to go into that now. I sent in some people from right of center who believe in it. There are many, many people from left of center.

I do have to say something about what you brought up before about government making mistakes about infrastructure investment. Of course they will, but there is I think as Ellen was alluding to, now a lot of economic research trying to show whether or not infrastructure investment, infrastructure spending by government has a positive effect on economic growth. The first generation said it was very positive, and the second generation of that research said, no. The third generation is much more sophisticated, and it says, yes, there is positive reaction to that.

So what I'm trying to say is, on balance, yes, infrastructure decisions by government does affect growth positive. The top congressional budget office has come out with and tape reviewing the literature. We've done that at the new school, and I commissioned recently a paper by Franciso Rodriguez that will be on the Century Foundation website to talk about that.

I think it covers that fear you have.

CONSTABLE:  Thank you. Let me just try and sum up very briefly what everyone -- sort of their position is, and then I'll open it up to questions for everyone.  So be thinking about your tough questions.  

So Jeff's saying we should've spent a lot more in the Great Depression and a lot of fiscal stimulus will work.

Ellen is saying we've got a zero multiplier, which sort of the opposite of that.

MCGRATTAN:  Not zero.

CONSTABLE:  Close.

MCGRATTAN:  Close.

CONSTABLE:  Close to zero, okay. That's -- (inaudible, laughter) -- to get technical.  Anna's saying forget fiscal stimulus, think about monetary stimulus.  And Nick who's saying, hey, we need to upgrade the infrastructure and we need to upgrade it again.  And that would --

SCHWARTZ:  One of the reasons that I question Bernanke's chairmanship is that he is a cheerleader for fiscal stimulus before the stimulus bill was actually enacted. And I ask myself, why should a chairman of the Federal Reserve whose undisputed ability to create money, to tell the public we need fiscal stimulus.  He never explained why the Fed could not undertake monetary stimulus when historically monetary stimulus has worked. And yet a chairman of the Fed is in fact expressing doubts about his own institution's capability. I find that absolutely stunning.

CONSTABLE:  Indeed. Helicopter Ben to everyone who doesn't know. So let me open this up to Q and A. Wait for the microphone to get to you and then stand, state your name and affiliation and speak directly into the microphone. Speak clearly, all the rest of it.

This gentleman here? Oh, and please limit yourself to one question.

Q:  Thank you.  Malcolm Weiner.  I'm retired.  No one has mentioned the term "innovation" though I think it's clear from many studies that it was government-sponsored innovation particularly in the Defense Department that led to many of the great discoveries or recent times and much of the investment.

The real question I wanted to ask is: If interest rates are already near zero, so that the only way of further monetary stimulus is through quantitative easing, what's the difference between quantitative easing and fiscal stimulus?

CONSTABLE:  Who wants to take that?

SCHWARTZ:  Well, the Federal Reserve can certainly buy any kind of assets that it wants and in so doing it will create money. And zero federal funds rate does not interfere with the purchase of assets, as the Federal Reserve is currently doing, buying long-term governments, long-term governments essentially pay zero.  But as long as the Fed will purchase what's an asset in the market, it will be able to create money.  There is no obstacle to the Federal Reserve doing it. And it is doing it currently, buying commercial paper, buying long-term federal --

CONSTABLE:  But is that any different from fiscal policies? What are you trying -- that was the question, right?

SCHWARTZ:  Right.

CONSTABLE:  Is it any different? Is that something we're missing here? Is quantity actually any different to fiscal stimulus?

SCHWARTZ:  Is monetary stimulus different?

CONSTABLE:  Yeah. That was the question, right?

Q: In terms of the amount of --

SCHWARTZ:  Well, as I tried to explain before, we can follow what happens when how firms and households find that their money balances have increased and that they're out of proportion to the rest of their wealth assets, and what they will do to bring the size of their money holdings into conformity with the rest of their wealth assets.

CONSTABLE:  So it's asset allocation.

SCHWARTZ:  An old problem.

MADRICK:  Just quickly there are elaborate, as I'm sure Malcolm Weiner knows, there are elaborate here is distinguishing between getting interest rates down versus direct spending by the government. I happen to subscribe to it. I do think there's a difference between quantitative usually and direct stimulus spending by the government. It has a different multiplier effect.

CONSTABLE:  Thank you. This gentleman down here?  I'll get to everyone.

Q:  Hi. I'm Michael Bordo.  I just wanted to amplify on this question.  I think you haven't quite explained things.  Look. There's a difference between bond financed fiscal spending -- expenditure and money finance.  So if it's money financed -- in other words if the Fed buys the bonds that -- you know, in a sense, buys the securities that finance the spending -- then the two things are equivalent.  But if it's bond-financed fiscal policy, then they're different.

And I think the argument is about bond finance spending, and that's pure fiscal policy, and that's an issue of the multipliers that Ellen was talking about.  And I think we have to -- you know, to straighten out what we're trying to say.

CONSTABLE:  Ellen, do you want to jump in?

MCGRATTAN:  No.

CONSTABLE:  Anyone?  Thank you.  The chap from Reuters.  

Q:  Hi.  Pedro da Costas from Reuters.  I actually took the subway here.  For anybody who doesn't think we need infrastructure spending, I recommend the MTA -- (laughter) -- multiplier or not.  But my question was for Ms. Schwartz. And the issue -- a lot of people have blamed extremely loose monetary policy for extended periods of time for having gotten us into this mess in the first place. Could you speak to that issue?

CONSTABLE:  It's loose money. Loose money not good.  (Laughter.)

SCHWARTZ:  Well --

TAYLOR:  Relatively speaking.  

SCHWARTZ:  --  the Federal Reserve certainly has to be prudent about the way it increases the money supply.  But there is no indication at this point that it has done so excessively.  And to prove it, the gold is at an increase in the CPI to about 5 percent in the past few years.

CONSTABLE:  The gold spike would suggest differently though.  The gold price is a barometer of all things bad economically.  It's sort of a -- a worry index.  And it's four times the rate -- the price that it was a few years ago. I mean, doesn't that speak to loose money policy?

SCHWARTZ:  Well, it hasn't really reached the point where the Fed would have to tighten monetary policy.  That day will certainly come. And if it doesn't tighten, we will have a full-fledged inflation.  But that is not the immediate problem facing the Fed.  The immediate problem facing the Fed is the credit market turmoil and the fact that the real economy is so weak.  Thank you.

CONSTABLE:  Thank you.  The gentleman down here?

QUESTIONER:  Bob Lifton. Are we discussing some of the stuff in vacuole?  Doesn't the effect of what we do fiscally or monetarily affect how the Chinese will buy our Treasury paper and how we'll be able to keep raising money for the infrastructural programs?  To what extent do these programs that you're suggesting limited by outside powers and outside sources?

CONSTABLE:  Yeah.  Good question.  Are we dependent on the Chinese?  Anyone want to take that?

TAYLOR:  Yes.  

CONSTABLE:  Okay.  (Laughter.)  Does anyone want to elaborate?  

TAYLOR:  Yes.  Well, I will elaborate on that because, yes, we do depend on the Chinese, but to wrench this discussion back to infrastructure which I had thought was its subject -- (laughter) -- we will have to spend money on roads to allow people to efficiently get to Target and Wal-Mart in order to buy Chinese goods.  (Laughter.)  So --

CONSTABLE:  Maybe the Chinese could build the roads then.

TAYLOR:  Yeah, we -- the gentleman who came on the subway -- I came on the subway as well.  The subways were built privately, of course, in New York. Now they're run publicly, perhaps not as well.  But we have the Tri-Borough Bridge which carries 200,000 people a day.  In -- across San Francisco Bay is the Oakland-San Francisco Bay Bridge built by the Public Works Administration, as was the Tri-Borough Bridge, carries 270,000 cars a day.  These are just examples of the kinds of things that government sponsored infrastructure can and I believe should do.

MADRICK:  And I -- I didn't mean to -- I don't want to belittle that, I think it's by and large -- when I think about the Chinese issue, it is, to some degree the same if we -- the same issue.  If we can make the U.S. economy a strong economy, we are more likely to retain the ability to attract foreign investment into this economy.

If we take action that ultimately weakens it, we will lose those dollars.  So it may look like excessive debt now, from my point of view, might scare the Chinese from buying U.S. dollar investments.  But in the longer run, it might indeed help.  And that would be my point of view.

CONSTABLE:  The gentleman who's -- (inaudible).

QUESTIONER:  Hi, good afternoon, it's Chris Maloney.  I guess my affiliation is New York Mets fans -- (inaudible, laughter).  You mentioned earlier that Fed Reserve is --

MCGRATTAN:  You mean me?

QUESTIONER:  -- yes -- come in and they ask you for advice and you use your econometric models and you try to model human behavior.

MCGRATTAN:  Yes.

QUESTIONER:  Now you're trying to model human behavior and as people know, for the most part, we're lunatics.  Now you look at the --

MCGRATTAN:  I don't model you as lunatics.

QUESTIONER:  You look at these models --

(Cross talk.)

QUESTIONER:  -- the gentleman on the right would say, well I'll give you $1.47 worth of stimulus.  How much cynicism do you view these models with?  Because we look at what happened in the private sector what a great job they did.  We've also looked at lately what a great job these econometric models have done as well.  They got us into this as well.  How much cynicism do you guys view these models' outputs with?

TAYLOR:  Great question.

MCGRATTAN:  Well, not -- no.  Our models aren't perfect.  The question, though, is what are the alternative models, the ones where you have the people making optimal decisions that the administration -- or Christina Romer has in her mind.  I know of no alternatives that give you a 1.5.  The ones that we're using in our day-to-day work that we're teaching to the graduate students, they just don't deliver a 1.5.  I wish they did.  That would be fabulous.  That would be fabulous.

And research is built on research; it's not you know, we stop here.  We're always trying to improve our theories, we're always trying to learn more.  So, you know, I'm cynical in the sense that we can never stop and say, okay, we're done.  But, you know, we use the tools we have.

CONSTABLE:  Stay tuned for more research.

MCGRATTAN:  (Laughs.)

CONSTABLE:  The gentleman here.

QUESTIONER:  Hi, I'm Tim Kane with the Kauffman Foundation.  I just wanted to say in your defense, there are different models than the ones that were used to cause the financial crisis as well, right?  And a macro simulation model's quite a bit different than a derivatives, you know, model.  So I don't think you should take the heat for the recession --

MCGRATTAN:  Well, yeah, I don't -- I'm okay with taking heat.  Yeah.  (Scattered laughter.)

MADRICK:  Well, you know, there are a lot of different macro simulation models also.  I do not think Christina Romer is the world's most naive scholar, nor do I think the Congressional Budget Office is using what it considers outdated models.  I'm not -- to me, 1.5 sounds, actually, a little bit high also, but there're probably lots of people who can talk about this.

I want to say one quick thing about infrastructure, okay.  Infrastructure's returns -- it's very hard to find near term multiples for infrastructure because their returns go out over time.  I prefer cost benefit analysis for -- (inaudible).

CONSTABLE:  Thank you.  I want to pick Bob Lucas.

MCGRATTAN:  (Laughs.)

CONSTABLE:  Can you wait for the mic please?

QUESTIONER:  I've heard the 1.5 multiplier estimates came from Moody's.  Weren't those the guys that certified the solidness of the --

CONSTABLE:  Ah!  Good point. (Laughter.)  Good point.  AAA rated 1.5.  (Laughter.)  The lady over here on the left.

QUESTIONER:  Rickie Taggart, Health for Financial Regulation Reform International also a former fed hand not an economist -- chief international lawyer at the board.  But it does strike me that if you were at the earlier panel today where there was a discussion of the impact and timing of different FDR policies, at least two of the panelists gave some credit to the fact that FDR's announcement, his actions early on created a response in the populous, the bank holiday within a month produced inflows into -- cash inflows into banks.  There were other examples in the earlier discussion.  So I also -- having also been an ex-bank regulator as head of the FDIC, have great suspicion about the modeling that's used.  Modeling that's been used for risks in the system, modeling that's been used by both bank examiners and banks on capital levels.  And, forgive me, modeling by Fed economists.

And for that reason, one does have to ask the question in this situation is the need for leadership that suggests positive responses, leadership both at the fed where there is money flowing into the economy with those policies, the Treasury, but also in the presidency that can have a positive impact, wholly apart from the technical economic responses, to the populous' response to what's being done at the popular level.   

And how do you model that -- how do you take account of that effectively?  Is, in fact, there any model that can take account of it effectively?  And isn't there right now a problem, as much as he's very positive in the economy, that President Obama is speaking negatively as much as he's speaking positively about how to resolve the problems?

CONSTABLE:  If I can paraphrase that because there's a lot of content in that -- more than a little.  Leadership, how do we model that?  Is that fair?

QUESTIONER:  Yes.

CONSTABLE:  How do we model leadership?

TAYLOR:  Well, you do it by opinion polling is one way that you -- that's the only way to quantify it as far as I can tell.  I mean, here we have a president who's speaking to the American people as if they were adults, and his approval ratings are quite high.

MADRICK:  Can I have -- you know the Roosevelt policy -- it's not merely a matter of cheerleading or saying positive things, it has to be backed up by policies that ultimately work.  The bank holiday worked for the reasons that were discussed earlier.  That's why it led to growing confidence.  But we never know with certainty whether policies work.  So if you are president, you have to make credible positive choices based on some degree of uncertainty.  The best that can happen for Obama is that these policies work out and his credibility will grow and the confidence of the economy -- the confidence of the people will grow.  I like President Obama, but cheerleading in itself -- and I don't think you are specifically saying that -- it can't just be cheerleading, it has to be positive comments backed by policies that have a high probability or at least a reasonable probability of working.

MCGRATTAN:  But the theory says they don't and it's $1 trillion.

CONSTABLE:  One trillion (dollars), that's a lot of mullah.  I mean, we've got five minutes left and tons of people wanting to ask questions so I'll ask anyone with a Noble Laureate to jump to the front of the pew -- (laughter) -- if they want, we have more than a couple.

This gentleman down here, do you have a Noble Laureate?

QUESTIONER:  No, thanks.  (Laughter.)  I'm Gerald Pollack, I'm retired.  My question is for Mrs. Schwartz.  Mrs. Schwartz, you cited the Japanese experience and its long depression/recession and you gave that as an example of a failure of fiscal policy because there was great stimulus and little response.  But much of the literature for that period blames the length of the Japanese depression on the failure of the authorities to confront the problems of the banks and their toxic assets and would claim that it was really the failure to deal with those toxic assets in a timely fashion that caused the failure of even stimulated fiscal policy to correct the situation.

So could you comment what that lesson -- what the lesson of that experience is for today's policy --

SCHWARTZ:  I certainly agree with you that Japanese were slow in confronting the problems with non-performing loans on their banks, and they shielded these banks from --

CONSTABLE:  Did they use dodgy accounting, perhaps?

SCHWARTZ:  Yeah.

CONSTABLE:  Did they use dodgy accounting?

SCHWARTZ:  I'm sorry?

CONSTABLE:  Did they use accounting methods that really didn't recognize the bad loans as bad?

SCHWARTZ:  No, they knew what these banks were really close to bankruptcy, but they shielded them from having to face that fact.

CONSTABLE:  Sounds familiar.

SCHWARTZ:  So it was definitely a mistake on the part of the policy makers in Japan.  But that has nothing to do with the kinds of fiscal projects that they undertook as the Japanese themselves have said, they built roads to nowhere and they opened airports all over Japan that nobody uses.  And that of course is the critical difference between what a government does when it undertakes this kind of project that the private sector wasn't shunned because the private sector could not afford to lose money on the creation of things that nobody likes or nobody uses.  But the government can go ahead and keep spending on roads that lead nowhere and keep opening airports that nobody uses.  And it's done in the belief that this will promote recovery and it's just a waste of resources and there's no benefit to the economy.

CONSTABLE:  I think we've got time for two more.  The lady at the front here.

QUESTIONER:  I'd like to bring this to the main street area and I guess it's a question for you, Nick.  Talking about -

CONSTABLE:  Hold up the mic.

QUESTIONER:  -- talking about public confidence, I think picking up on some of the things that you were talking about, could you speak to the issue of what the particular and very defined programs like the WPA, like the CCC, programs for the arts, programs for workers, what, how that very concrete view of health, perhaps it was called the smoke and mirrors stimulus package, but how that helps to get the public committed to restoring the economy?

TAYLOR:  Well I think what the New Deal shows us is that to Anna Schwartz's point, governments don't necessarily build bridges to nowhere.  Perhaps governments that are not very good at planning build bridges to nowhere, but we have proven that we've built bridges to somewhere.

In terms of your question, the what the New Deal did in all of its work relief projects programs, the WPA, the Arch Projects they're under, the CCC which stands for the civilian conservation corps which worked in the national parks and forests gave that indefinable quality of confidence, along with the fireside chats that Roosevelt used to encourage people to believe again in the government -- the country.  Believe in the country again,

It was mentioned earlier about his first fireside chat about the banks that led people to put money back into the banks.  Will Rogers said that Roosevelt had given a fireside chat in which he explained the banking system so well that everybody understood it, even the bankers.  (Laughter.)  And the sight of the government trying to alleviate the distress of people without jobs is a confidence builder that can hardly be defined but can hardly be ignored.  And I think that as you look at the infrastructure work that Obama wants to do plus in terms of providing stimulus but also doing things that could be considered iconic years from now, such as spending on high-speed rail transportation, it's not small thing to insulate federal buildings, to make them more energy efficient, things like that.  These are the kinds of things I think you're asking about in terms of confidence building.

CONSTABLE:  Thank you.  We're actually out of time.  I'm going to take one more.  This gentleman there -- yeah.  Sorry, behind -- yeah.  Sorry.

(Cross talk.)

QUESTIONER:  -- because there seems to be a little difference --

CONSTABLE:  Can you say your name and --

QUESTIONER:  I'm Price Fishback from the University of Arizona.  There seems to be a little bit of disconnect.  The government has always built roads, it's always built infrastructure and things like this.  I think the point that Ellen's trying to make in this context is if you're expecting it to be a big stimulus, it's not that -- it's not going to be a huge stimulus, but if you build these roads and bridges and things along these lines on the basis of what their cost and benefits look like, that makes a lot of sense to do that.

So the big question is can you move them up or move them forward?  Does it make sense to actually build something that's not worth the money to do it?  And what she's saying, what a lot of people are saying is no, it doesn't make sense to build a bridge to nowhere.  It makes sense to build the right projects, but don't expect that you're going to get some huge extra stimulus behind it.

CONSTABLE:  Okay.  Does anyone -- very quickly, whatever the answer is.

TAYLOR:  I agree.

CONSTABLE:  Okay.  That was quick.  Anyone else?

MCGRATTAN:  I agree.

MADRICK:  Yeah, I would state that more strongly.  I mean, infrastructure projects over time have added significantly to total factory productivity over time.  They're not -- I guess that's the point you're making.  That's why I said cost benefit analysis and a lot of other people say that.

The idea that we --

(Cross talk.)

SCHWARTZ:  -- hodge-podge of projects that the stimulus act funded, you have to wonder the -- Obama's idea was that the stimulus projects would have double kinds of validity.  They were going to promote alternative energy sources, they were going to promote the development of electricity that had no carbon emissions.  So these projects became multiple kinds of ventures that the Stimulus Act provided for.  And you have to wonder was the addition of these additional goals of these stimulus projects interfering with the original purpose of stimulus to get rid of the recession?  And I've never seen any discussion of what the variety of projects that the Stimulus Act provided for actually provided for these stimulus effect that they wanted.  It was somehow stretched in directions that had nothing to do with ending the recession.

CONSTABLE:  Thank you.  That's interesting, good stuff.  Sounds like something we should discuss over lunch vigorously.  I want everyone to join me in thanking our panelists -- (applause) -- Jeff Madrick, Ellen McGrattan, Nick Taylor and Anna Schwartz.  Thank you.


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