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The Presidential Inbox: The Global Economy

Speakers: Alan S. Blinder, G.S. Rentschler Memorial Professor of Economics and Public Affairs, Princeton University, and Author of "After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead", and Peter R. Fisher, Senior Managing Director and Head of Fixed Income, BlackRock Inc.
Presider: Rana Foroohar, Assistant Managing Editor, Economics and Business, and Columnist, Time Magazine
February 26, 2013
Council on Foreign Relations

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RANA FOROOHAR: So if you all want to grab your last cup of coffee and get settled, we're going to get started. My name's Rana Foroohar. I'm the assistant managing editor for Time magazine in charge of economics and business, and I'm very, very happy to be here today moderating this Council on Foreign Relations meeting entitled "The Presidential Inbox: The Global Economy." We're going to have plenty to talk about. And I'm very pleased to be here today with Professor Alan Blinder from Princeton and Peter Fisher, managing director of BlackRock.

Just a couple of points of business: We're going to have members participating throughout the world today with Livestream and teleconference. We'll be taking questions from them and from you later on. We're going to talk for about 25 minutes and then we're going to open the floor to questions.

So we'll get started right away. I'm going to start with a frame that I'm actually stealing from Peter, which is how long can we go in this discussion without talking about the Fed? (Chuckling.) And Peter, I'm going to let you take that whole -- (chuckles) --

(Laughter.)

PETER FISHER: Of course the answer's not very long.

FOROOHAR: (Chuckles.)

FISHER: So we'll come back to that.

But I think it's worth noting there are some things going on that are beyond the Fed. And one that the Fed has very limited influence over is the low income expectations and the pathetic level of median income. Median income in America's been flat for four years. And even worse, median income expectations are flat. So for the first time in 30 years, if you ask the American people how much do they think their income's going up over the next 12 months, their answer is 0. And it's been 0 since 2008.

And it's really hard for everyone to get the economy going, an economy that's got two-thirds -- 70 percent -- consumption, when nobody thinks their income's going to grow. And the sad part is, the median family is right. Their income's not growing.

And so if you do the math on GDP, 70 percent's consumption; with 2 percent aggregate income growth, 0 median income growth -- note income inequality widening -- really hard -- and a positive savings rate -- getting 70 percent of the economy to grow faster than 2 percent is sort of mathematically impossible.

Now 19 percent of the economy's government spending -- not growing very fast, right? Whatever arguments we'll come back to about the sequester --

FOROOHAR: Yeah.

FISHER: -- hard to see that.

So we're trying to get the economy to grow 3 percent instead of 2 (percent) --

FISHER: -- and we just ruled out 90 percent of the economy to do it.

FOROOHAR: (Chuckles.)

FISHER: So housing has healed. That's really nice -- 2.6 percent of the economy. Not likely it's going to get us to the overall economy growing at 3 percent very soon, no matter how good it is.

So just mathematically, we come back to business fixed investment and exports, net exports -- a drag on the economy, minus 3.5 percent. Now, business-fixed investment's's been pretty good but we've got to get it growing faster if we're going to get the economy growing from 2 to -- going from 2 to 3 percent.

FOROOHAR: OK, we're going to come back to how to do that, but, Alan, what do you think? Median income -- is that one of your biggest worries?

BLINDER: It's been for 30 years actually, but to mention the unmentionable institution, the Fed can't do anything about that. (Laughter.) The Fed is trying, as it may, and it's trying pretty hard, as we all know, to get mean income, average, the size of the economy growing. But frankly, you know, not that I've asked Ben Bernanke about this, but if I sort of psychoanalyze him, I think in his wildest, wildest dream from -- at this point, they could add a half a point to the growth rate. And probably when he wakes up he says, no, there's nothing we can do to actually add a half a point, given what they've already done. This is not normal times.

So, you're not going to get very much out of -- out of the Fed. To the extent you get it, you're going to get it in two places. One -- we're getting it now -- housing, as we all know. And as -- by the way, the Fed gets a lot of criticism from the right for monkeying around with resource allocation but, as we all know, it's been pushing housing. Why else was it buying MBS instead of other stuff like that? And in any case, housing's the most interest-sensitive component of spending. So, where's this half a point going to come from? If you can get a half a point, it's going to come from housing and, secondly, from business-fixed investment, which, as Peter said, is the -- really, numerically, the only hope of getting to three. The paradox there, of course, is -- well, it's not paradox. The catch 22 there is if consumer spending's growing 2 percent, you can get business investment growing 20 percent for short periods of time but it's not sustainable. Those two don't meld.

FOROOHAR: Let me follow up on the housing point for just a minute and then we can go on to business investment and how to -- how to -- spur that on. What kind of a driver of consumption is housing? I mean, I've had people say to me, if we can just get housing back on track we can grow beyond the 2 percent economy. Do you agree with that?

BLINDER: Yes, but for a -- for awhile and not dramatically. I mean, the numbers are -- in normal time, so, say, the average over the last 40, 50 years, housing's about 4 percent of GDP. So, think of it this way: You're asking the 4 percent to drag the 96 percent. Because of the housing slump, housing's now down to about 2.6 or (2.)7 percent of GDP. As that goes back to, say, I think the number is 4.1 (percent). As 2.6 (percent ) becomes 4.1, you've got another -- you've got 1.5 percentage point of additional GDP growth coming out of housing. And if that happens over 3 years, you've added a half a point a year. I think that's a reasonable expectation. And, hell, I'd rather have that than not have that.

You know, at minimum, to take a -- to a point you're going to come to later, at least it will cancel out the sequester. (Laughter.) I mean, if we're going to do this stupid thing to ourselves and knock about a half or six-tenths of a percent off the GDP for no damn good reason, and so housing will give us that back. That's the kind of numbers you should think about.

Business-fixed investment numerically has a lot greater possibilities just because it's, well, on average five times the size of housing, and now much more than five times the size of housing. But as I say, the driver -- the overwhelming driver of business-fixed investment is consumer spending. I mean, it's not a mystery to anybody out here who's involved in business, which is most of the people, is that you invest when you can sell the product.

FOROOHAR: Well, and that seems to present this incredible conundrum. So, Peter, to go to your point, how do you get business investment up when you've got a consumer that's still pretty beleaguered and public budgets that are shrinking?

FISHER: Well, if I was on the White House staff, which -- (laughter) -- explain why I'm not, I'd be writing memos to the president asking -- begging him to hug a businessman -- (laughter) -- because there's not much he can do --

FOROOHAR: He tried that. (Laughter.)

FISHER: He's ignored those memos for the last three years: Go huge a businessman.

I do think, related, the health-care problem is throughout the economy. So, it's a burden to businesses, it's a burden to income expectations, it's the stealth subtracter from disposable income because your benefits go up but your disposable income doesn't. It's a burden to the Pentagon budget; it's everywhere. And so to the extent that Zeke Emanuel tells us we don't have to worry about this anymore, as Alan's recently written, that's nice but it's probably going to take the American people, the American business community longer to figure it out that it's not as big a burden and a drag on their bottom lines and on their incomes that we thought.

But that's something that the president has made a big deal of in his first term, and we could come back to bending back the cost -- health care cost curves would be something useful for the president to be doing.

FOROOHAR: Alan, what do you think -- (inaudible)?

BLINDER: Yeah. More than useful -- very important. I mean, to the -- to the Zeke Emanuel point, we don't know -- and including Emanuel didn't make any outrageous claims, I was just repeating them -- how lasting this is. Some of this is due to the recession that you don't go in and get plastic surgery when your income evaporates and things like that, but some of it must be more than that.

What would I tell him? I would tell him -- one thing he's been convinced of, actually, though it took a while, there's this sort of tax cut called the new jobs tax credit, which will give you a tax reduction only if your employment rolls go up and not if it doesn't. I think that's a pretty cost-effective way to boost employment. By the way, it does add to the deficit, not subtract. There's no Laffer curve there. You're going to lose some grounds to the deficit, not a lot.

The other thing that I would like to see is -- and you could easily make a variant of what I'm about to say -- tilts towards Peter's business fixed investment -- which is, try to get this nonrepatriated -- some of this nonrepatriated money back to America by offering the deal similar to what I just said, that you get a preferentially lower tax rate, maybe a very lower -- of course, the business community want it to be zero -- I don't want it to be zero, but substantially lower than the statutory rate proportional to job creation. Bring it back, add to your payroll, demonstrate that your payroll has gone up, and then you get a tax break.

Now, the other way this is put is invest the money so you could make that way, but not like in 2004 or (200)5 -- which year was it? --

FOROOHAR: (200)4.

BLINDER: -- where it was just, just bring it back, and we're happy to see it. Oh, here you are.

FOROOHAR: Right. Right.

BLINDER: Welcome to America.

FOROOHAR: (Laughs.)

BLINDER: And you don't have to do anything to get it. That's not the right way to do that.

FOROOHAR: Yeah.

Let's talk a little bit about the sequester because that's obviously going to continue to be in the news. How worried are you, Peter, to start with you?

FISHER: Well, I'm worried and I'm not worried. First, fourth-quarter GDP was the Fed's nightmare. Pentagon -- the Pentagon sneezed, and we got effectively zero GDP growth. So what the Fed was worried about in September was, gee, the fiscal path's really uncertain and, who knows, we could stall out here. So if you're focused on quarter-to-quarter GDP, then you should worry about it because it could knock out enough of GDP to round us down to zero again.

In the longer term, no, I wish the Fed -- and I wish we all were a little more focused on two to three years out. It's a shame fiscal policy seems to have lost its ability to look past the coming quarter. We're in this very tight game, and so I regret that we're focused quarter by quarter. It's not a big share of GDP over a five-year horizon. So if you want to be short-run focused, be worried; if you want to be five-year focused, not so worried.

FOROOHAR: Alan?

BLINDER: I'm not so worried, except for my next flight. (Laughter.) I know I don't have to fly anywhere on March 1st, and I'm grateful for that.

FOROOHAR: (Laughs.)

BLINDER: But I do have a couple coming up in March, and so --

But it's a stupid way to do it. It's going to cause a lot of nuisances. But consonant with what Peter just said, even though I'm a left-of-center in the United States -- because in Europe, I'd be way right of center -- (scattered laughter) -- in the United States, I'm left of center -- I can't believe we can't find that much money to cut out of the government budget; of course we can. But a little human intelligence applied to that task I think would go a long way.

The reason -- the main reason I'm not so worried about it is I've spent so much time worrying first about the fiscal cliff and then about defaulting on the national debt. Compared to that, this is small beer. This is a speed bump. Those two things were concrete barriers that the car was running 80 miles an hour and heading for. It was going to be very ugly. And one of them is still live, by the way, the debt ceiling crash. I think it's not going to happen, but it's still sitting there as a possibility in May. This is a speed bump along the road --

FOROOHAR: What if we --

BLINDER: -- the sequester -- maybe take a half a point or so off of GDP growth.

FOROOHAR: But cumulatively, what's the impact of all those speed bumps and if we continue to sort of go through this pattern for another two or three or however many years?

BLINDER: I think the accumulation of this is we're starting to look like Italy without the elections. (Laughter.)

FOROOHAR: We'll get to Italy.

BLINDER: I mean, we're making ourselves the laughingstock of the world. I'm serious about this. I mean, this --

FISHER: Well, it -- but the depression -- what it's doing to income expectations --

FOROOHAR: Yeah.

FISHER: -- (my number ?) -- there was this tiny little uptick in September-October in the survey data, and then it collapsed in November-December. So you can see that it weighs on everyone's confidence.

BLINDER: And so it was dramatic in the summer of '11 when these Boehner/Obama talks collapsed.

FISHER: Yes. So the tragedy on both sides of the Atlantic is we can't get the politicians to realize that profound cuts of 10-20 year spending would give them more room to keep spending up in the short run. I mean, it just is -- it's such an obvious bit of time path -- manage the time path better. So we're going to cut back on air traffic controllers and we're going to continue to promise levels of support for consumption 20 years from now which aren't credible and what will eventually be cut back on anyway.

FOROOHAR: Since we're talking about both sides of the Atlantic here, let's talk a little bit about what's going on in Europe. Is the euro zone crisis back? It seems to sort of ebb and flow. Where are we in that process now?

BLINDER: I'd like to differ to BlackRock on that.

FISHER: Let me -- Peter, not BlackRock.

BLINDER: Let me just say this is day to day. The early, acute phase of the euro zone crisis was basically obliterated by the ECB finally and reluctantly doing what so many American economists have been saying for months and months and months, which is, if you want to stop this, you have to -- the central bank has to stand behind the debts of the -- usually it's one country here, in that case the constituent countries. And the ECB declared its willingness to do that. And basically it only had to declare it. I'm not sure it's -- it hasn't bought -- if it's bought, it's peanuts. I mean, it hasn't bought much.

So the question now -- and we just had these Italian elections so we don't know the answer to that -- is, first of all, is the ECB's implicit pledge not -- sorry, explicit pledge -- now going to be tested, that it's going to have to buy a lot of Italian bonds? And lord knows, there are a lot of Italian bonds out there. And then secondly, if it is, how many bonds, and will the ECB do it and will that still the waters. So we're not going to know the answers to that for a while.

FISHER: So the good news is --

BLINDER: I mean, how many is BlackRock going to buy, you know? Don't answer.

FOROOHAR: (Laughs.)

FISHER: Last summer, they did a number of really smart things. So Mario Draghi had the courage to tie his political fortunes to the euro. No one else was going to do it. It would have been nice if Angela Merkel would have done it, but he did it. And then collectively, they said, let's have a banking union. We'll try to make it more rational. That will be different from fiscal union, which will take a really long time. And that's still going to be different from what these operations the ECB may do to support bond markets. All four of those things were promises that haven't been actually delivered on.

But clarifying what they were going to do was enough to get European equities to rally 25 percent. So taking out that risk premium really mattered, that everyone stopped thinking they were a bunch of boogs (ph). But that's all they did. And there's no growth; there's no income creation going on in Europe. It's stagnating. That's eventually going to come back to bite the banking system again, if people can't pay their debts back. So they just -- they haven't changed the income dynamic, the growth dynamic of the euro zone. They're' still suck.

FOROOHAR: So this is kind of a slow-motion wreck?

FISHER: Yes. And so they've done good things to try to organize themselves better against financial turbulence, we would say, but they haven't solved the income problem. They're still in a straitjacket.

FOROOHAR: And you see this for the next few years --

FISHER: This is going to take years to work out.

FOROOHAR: Alan, I want to give you a chance to say a few words about your book "After the Music Stopped," which is going to be for sale, by the way, outside afterwards.

BLINDER: Good.

FOROOHAR: What lessons can be -- (laughter) -- everyone buy a copy -- what lessons can we take from your book for the conversation today?

BLINDER: I think we can take a lot of lessons, first of all, that directly following what we're just talking about is, leverage can kill. We knew that. But when things are going uphill, everybody's so much enjoying the upside of leverage that they forget about the downside.

Secondly, a little less germane to Europe but somewhat germane because the banking system is a complicated and obscure mess, there is -- we ought to remember the KISS principle -- keep it simple, stupid -- which was grotesquely violated in the American financial system in the 2000s, and still is, by the way, although it's gotten a little bit -- it's gotten better mainly by the death of some of the really complicated things. It's that kind, rather than sort of active move towards simplicity.

And maybe the most important thing, in the last chapter of the book I -- and this got excerpted in The New York Times a few weeks ago -- I put in a new 10 Commandments, 10 financial commandments. And when you make the 10 Commandments -- not that many people do that -- (laughter) -- you get to put them in order, so Moses decided or whoever decided the ordering. So I put first -- my first of the Ten Commandments -- ten financial commandments is, thou shalt remember that people forget. And we sure forget. We humans have an incredible capacity for forgetting things, which I suppose is Darwinian -- that it's wired in, that it's good for -- (chuckles) -- so forget about things. Otherwise, you're just sort of staying in your cave and never going anywhere. (Laughter.) Yeah, exactly.

FISHER: Saber-toothed tiger is too frightening.

BLINDER: Exactly, exactly. So -- but, you know, countries forget; financial markets forget. And to some extent, we then re-enact the very same -- not the very same -- close variants of the stupid things that got us into the previous trouble. And I worry about that for Europe and I worry about that for the United States, especially because the first draft -- or maybe I should say, the popular draft of history didn't come out right.

I mean, Americans are sitting there thinking they were fleeced with the TARP that spent -- not lent, spent 700 billion (dollars) on banks, bankers. The right number was about 250 (billion dollars), actually, that went to bankers. And none of it was spending. It was all lending and buying equity, and all of it came back. They think that the TARP -- that the stimulus was an utter failure, because the unemployment rate went to 10 percent when -- didn't the administration say it would never top 8 percent? And so on and so forth. And so it makes me very worried that when the next financial conflagration comes -- now, I don't think it'll be as bad as 2008, but these things come and go. You get them.

We may have a paralyzed government, because the politics will make it impossible to do the things that need to be done, analogous to the reluctance of the ECB to finally do the right thing and declare that it will stand behind the debt.

FOROOHAR: Well, speaking about lessons of history and the next crisis, there's been a lot of headlines recently about currency wars. Talk to me about what's going on in Japan. Are we in a race to the bottom? What's your level of concern about that?

Peter, maybe you want to --

FISHER: Well, my -- I don't like -- I mean, I don't like the "currency war" logo -- heading. Each central bank should try to stimulate their economy as best they can, and we tend to -- floating exchange rates are better than the alternative, and then the consequence is, exchange rates move.

You know, that's -- I think -- in the case of Japan, maybe guilt overwhelms me, but I think it's all fair in love and war. We, along with the Japanese, intervened in their currency in early 1998. Their currency was weakening. We and they decided after their election that we better reverse that, and we drove them right back into a liquidity trap.

Now, other things were bad for Japan, but not letting their currency weaken when they were having a banking crisis unfold was a big booboo. And we all -- the whole world would have been better off if we'd let their currency weaken more. So we were a little too self-confident. We knew just how to intervene and keep currencies in the corridors we wanted them. So that's a lesson to me of, let's let the currencies move around and get each country doing whatever they think is the right monetary-fiscal mix for themselves.

Alan?

BLINDER: I guess I'd make two points. First of all, the world is a closed economy. We don't export to Mars or import from Mars, and therefore, the world cannot export itself out of a recession. It's impossible. It's mathematically impossible. That doesn't mean individual countries don't try -- might not try to do it, and that's, of course, where this awful currency war idea comes from.

I also hate the metaphor, but for -- well, I was going to say, for different reasons -- it's not very different from what Peter said. We're getting ourselves into the position -- we started this in the United States with QE2, of saying that any central bank that does anything to boost its economy is engaging in currency war. It's ridiculous.

FISHER: Yes.

BLINDER: I mean, the Federal -- you can read the legal mandate of the Federal Reserve, of the Bank of Japan, of the Bank of England, and go right down the list. And they have responsibility one way or another for macroeconomic management.

And when the economies are on the floor or threatening to go down or just not growing very fast, like ours is now, it is part of the job of the central bank. And by the way, it would be nice, also, of the fiscal authorities -- but that's a whole other set of questions -- to try to propel it forward. And on fundamentals -- this is important -- on fundamentals, when a central bank increases liquidity, lowers interest rates, et cetera, that should be negative for the currency. But the fundamentals are often wrong, as Peter -- Peter used to run the desk -- (chuckles) -- at New York, and now he's running lots of other things. It often works out that if it looks like that central bank policy is going to do a lot of good and spur growth, it actually turns out to be positive for the currency because the economy is going to do better, which is another reason I hate this currency wars -- I mean, it's -- and all those years managing the foreign currency desk ad the -- learning from those on the FOMC that none of us have a good model of exchange rate determination, right? Let's admit that, for openers.

And I think it was Ben Friedman who pointed out to me, in a taxi ride in Tokyo, that, now, we all have in our heads this idea that, well, you know, real growth differentials -- often the future will drive the currency. It actually is really different, though, if you have deflation going on in the country. You say -- you think it's got weak growth, weaker than the other currency, so you think its currency should weaken, but it turns out this little piece of brown paper buys you more stuff next year. And then you keep trying to weaken this currency, but it buys you more stuff domestically the following year. It's really hard to weaken that exchange rate, especially if you're running a current account surplus, right? And so there are these things that come to bear, and we were chatting earlier -- I mean, we're going to love being an energy exporter if we can get around to it, but it's going to be a big wakeup for the world if we stop running a big current account deficit, and --

FOROOHAR: OK. Well, we've got -- I've got several more questions on that front, but I want to open it up now and give folks in the audience a chance, and also members that are teleconferencing, and you can send in questions. And I think we have mics on both sides, so if you want to just raise your hand if you have a question and introduce yourself? Over here in the front, please.

QUESTIONER: Byron Wien, Blackstone. I wonder if you could give us some insight on whether we'll ever see the unemployment rate come down, really.

BLINDER (?): Ever, did you say? (Laughter.) Is that what you said.

QUESTIONER: Ever -- you know, ever. I mean, ordinarily, it goes to 5 percent in a boom and 10 percent in a recession, and then back to 5. And here we are four years into the recovery, and it's 7.9. And there's a lot of talk about how we're bringing jobs back, but with the labor cost differential that we have, I don't think that that's going to be a dramatic change. So should we have any hope when you go back to the 71 percent of the economy that's the consumer? If we can't get unemployment down, what hope do we have?

FOROOHAR: It's a great question.

BLINDER: All right, I want to give that a really simple answer: Yes. (Laughter.) I will give you now a money-back guarantee -- you know how much money we've just put on it -- (scattered laughter) -- that you will see a fleeting digit of 5 in your lifetime. Now, I wish I could say within two --

QUESTIONER: Do you know how old I am? (Laughter.)

BLINDER: Yes. That's approximately, I know. And that's why I'm offering this guarantee. (Laughter.) I would like to be able to say you're going to see that within two years.

QUESTIONER: Really?

BLINDER: No, I said I would like to be, but -- (laughter) -- can't -- I don't think so. I mean, let's remember we have come down from 10 (percent) to a bit below 8. And look, the reason that we are not -- that we have not eroded the unemployment rate more rapidly than that is that the GDP growth has been so weak. And this takes us back to what we were saying before. We need -- to make more rapid progress on the unemployment front, we need faster GDP growth, nothing more, nothing less. That's it.

And we will get there. I am old enough, as you are, to remember that after the two previous great recessions -- in our lifetime, there are now -- this is the third great recession. We first called '73, '4, '5 the Great Recession because it was so much bigger than anything since the '30s. Then we beat that in '81-'82. And now we really beat it recently. After each of those, there was a lot of educated opinion, and of course a huge amount of uneducated opinion, but including an educated opinion, said we're never going to see 5 or 6, even -- there were -- there were serious estimates from my profession, professional economists, saying that the natural rate of unemployment was then 7 percent. Nonsense.

Then as soon as the GDP started really growing fast, the unemployment rate came down. And I don't see any reason to think that it's different now. These wage differentials that you properly pointed to were larger in the '70s than they are now, larger in the poor countries compared to the United States, and we still came back to -- actually, we got below 4 percent for a while.

So I have no -- I don't have the slightest doubt in answering that question. I have huge doubts about the timing and I'm very disappointed at the pace, but I have no doubt about the answer.

FOROOHAR: Peter, what do you think?

FISHER: Let's go -- let's go next question.

FOROOHAR: OK. Another question?

FISHER: Don't need to -- don't need to rebut Alan on that one.

FOROOHAR: Over there? Well, while you all are -- oh, back here. OK.

QUESTIONER: Howard Berkowitz, BlackRock.

MR. : We got to ask --

(Cross talk.)

MR. : No, no, no, we got to ask him, Howard. (Laughter.)

QUESTIONER: I'm not asking you. (Laughs.)

MR. : OK.

QUESTIONER: No, you mentioned that Europe is stuck in stagnation and will be for years to come, and that we are basically making ourselves the laughing stock of the world. Where does -- where does an investor invest these days? Obviously, Europe is not engendering a great deal of investment interest, and certainly China -- it's hard to invest money inside China and be assured that you're going to get your money out. So where do you see the best places to invest funds at this point in time?

BLINDER: So let me get this straight. This is BlackRock asking me where to -- (laughter). Is that what I just heard, Howard? I thought that's what I just heard.

FISHER (?): Give it a shot. Come on.

BLINDER: I think for the long term, after plenty of bumps, and we're experiencing them even as we speak, the United States still looks pretty good. I think if you're a contrarian investor, this is probably not -- this is one of those timing questions -- this is probably not the time, but -- to buy into, let's just say, Europe -- Europe is, of course, a very heterodox group, as any big region is -- but sometime down he road will be the time to buy low in Europe with the hope of selling high.

I'm feeling better about Japan than I have for a while. And then, of course, you have the whole non-Japan, non-China Asia, which on average is looking pretty good. And then over in this hemisphere, there's Brazil, which sort of hit some rocks recently.

I hope we're not going back -- it looked like we were finally getting away from the old aphorism that Brazil is a country with a great future and will always have one. I hope we're not going back to that. It looked like we were getting to, Brazil is a country with a great future, period, full stop. And hopefully, we can get back -- get back to that.

FOROOHAR: Is there a question back here?

QUESTIONER: Derek Monn (ph), KKI (ph). A couple of years ago, the president, Treasury secretary, the media, certainly the markets, said our escalating national debt was unsustainable. And yet we found it difficult to face that. And I'm beginning to think no decisive action will be taken by -- in this administration, that this could stretch on for another decade, and in fact we might find we could live with debt-to-GDP of 120, 130 percent, and it would have its consequences. But I'd like to ask you if you think that's probable and whether you think it's such a bad thing, because the trade-offs -- political trade-offs in terms of entitlements or economic trade-offs in terms of current growth, we don't seem to be willing to make.

FISHER: You go first. You --

BLINDER: You want me to go first?

FISHER: You go first because of what we wrote in the paper the other day, I think, is helpful here, and then I'll add some.

BLINDER: OK. I think the U.S. going to 120, 130 percent of GDP in terms of national debt, I think -- I'm pretty sure you meant the net national debt --

QUESTIONER: (Off mic.)

BLINDER: Yeah, is very low. Not zero. I'd like it to be zero. Very low. I think you're seeing, in a very chaotic, messy way, but that's how we do it in America, the country -- the country's politics much more focused on debt reduction than had been in the past. I pointed out in the Wall Street Journal yesterday morning that if the sequester goes through, or better, if an intelligent way of cutting the budget an equal magnitude goes through, we will basically have achieved the 4 trillion (dollars) over 10 years goal that got set in this messy political way that we do things several years ago, actually done the whole 4 trillion (dollars), and stabilized the debt-to-GDP ratio in the 70s -- the Center on Budget estimated 73 percent of GDP -- for a decade.

Now, the key thing is, what happens after the decade? And the answer there is almost entirely -- and if you give me two, three decades, entirely -- health care cost containment. If we can do that -- and the recent news is very good. We're so used to having bad news on that score that a lot -- most people have ignored the fact that it was good news. That's why I want to publicize Zeke Emanuel's numbers. The recent news is very good. So if we can get health care cost growing at GDP plus just a little -- not -- you know, pick a number -- .4, .6, maybe .8 -- but not GDP plus three, which is what we had for about four decades -- we can get a grip on this. We don't have that big a long-run budget problem in that happy scenario.

But if we -- if this is just a temporary aberration and we go back to GDP plus 2 1/2, which is sort of what the long-run budget projections are based on, the CBO -- they've just come down, but the CBO was projecting that sort of a GDP plus 2 1/2 -- it just blows everything else out of the water. So what this -- you put the two together; what this means is we've got a decade -- speaking very roughly, we've got a decade to, quote, solve -- and I don't mean a complete solution, but seriously bend the health care cost curve. And we may already have done it; not sure about that, but it's possible.

FOROOHAR: Why -- just one follow-up, now; why do you think health care spending is down? And does that intersect with the income stagnation issue?

BLINDER: You know, I don't know. I'm not an expert at this. Part of it, as I said, is the recession, and that will go away as the recession goes away, so that's one of the reasons you don't want to declare victory and go home. But you've got a lot of ferment going on in the health care practice -- group practices, bundling and a whole variety of other things, comparative effectiveness research.

The "Obamacare" bill in 2010 basically did on a pilot, trial, small scale or something basis -- tried every idea anyone ever had. I exaggerate slightly, but many, many different -- not slightly, yeah -- threw them all in there. And to me, the challenge, then, is to watch what works and watch what doesn't work. And then if we're going to carry this through to a success, we have to do what is so, so hard for governments to do, what is easy for businesses to do, which is jettison the losers and rise the winners. This is what businesses do all the time. It's hard for government to do, but that will be the task.

FISHER: Yeah. Can I just add a few things?

FOROOHAR: Yeah.

FISHER: I mean, I agree completely with what Alan says about health care. And it really makes our fiscal problem very different from most nations. We're just in this weird position that we've finally provided universal health care, and we haven't figured out how to promise something other than infinity, and we got to put a cap on that somehow and muddling along and trying to figure that out.

So the good news was, in the State of the Union address, the president embraced modest reform of entitlements. I love that image of embracing a modest reform. So that's the good news. And I think we've got to hope that the American people figure out that they don't really want to measure their quality of life by how many health care services they consume, but they want to be healthy. And that's what all of those pilot projects are trying to get at one or another; can we measure that.

The two other points of optimism I want to offer -- well, (we're done ?) with health care, so I'll just mention the one. When I think about Congress and getting our fiscal outlook right, there is a case for optimism, which you can see unfolding in the messy politics. They want to spend money when they get elected, and the current arrangement won't let them. So they come there to appropriate. And when discretionary spending is squeezed down by all this stuff that's supports consumption and entitlements off in the future, they're going to figure out a way out. And it's going to be messy and it's going to be awkward, and that's what we're watching, and sort of it's not -- it's not agreeable, but the cynic in me says, that's when they'll figure it out, when they realize they're sort of cornered.

Now -- which brings to mind what I've always thought would be the --I've been worried about this as a baby boomer, but 15 years ago Larry Summers made a quip, and it's going to come true. The quip he made -- full credit to Larry -- was he explained why we don't have a federal consumption tax or VAT. And the reason was that Republicans think it's a piggy bank, and the Democrats think it's regressive. And Larry postulated, 15 years ago, when he was an undersecretary, when we have a federal consumption tax? When the Democrats figure out it's a piggy bank and the Republicans figure out it's regressive. (Laughter.)

The Republican platform said some nice things about a VAT. You could have knocked me over with a feather. (Laughter.) But it's where the money is. You know, it's like, why do you rob banks? If we're going to tax something, it's not going to be income; it's going to be consumption, for all those baby boomers who've stored it up. And eventually the politicians are going to follow that, and we'll have a better tax code. You actually can have a consumption tax that's progressive, so Larry's quip isn't quite right. (Laughter.) But I think that does take a decade to sort that out. But I'm a modest optimist on it, not withstanding they're for cynical reasons.

FOROOHAR: Question back here. Over there.

QUESTIONER: Thank you very much. My name is Ahmad Fathi, Economics Channel, Saudi Arabian TV. Back to the investment issue, Professor Blinder, you made a statement that U.S. still remains great place to invest money in the international market. But what can the U.S. president do, other than hugging a businessman, in terms of policies to encourage more investments into the U.S. economy or to attract new investments, taking into consideration that still the U.S. stocks somewhat underpriced at large? Thank you.

BLINDER: Well, I think the -- I come back to what I said before: The single biggest thing anybody can do -- and you don't want to exaggerate what the president of the United States could do any more than you want to exaggerate what the Fed could do -- is get this economy growing faster. And we should be bending every effort to do that.

Second thing that can be done -- Peter just alluded to this -- is clean up the tax code, and in the context of your question, especially the corporate tax code. They're both horrible messes. But we have gotten the corporate tax code almost to the point where it is the 180 degrees off of what -- there's an economic theory of optimal taxation. And the basic idea of optimal taxation is you raise as -- the most revenue you can with the least distortion to the economy. We have got a corporate tax code now that raises relatively little revenue with incredible distortion to the economy -- (laughter) -- so bad that I think we would probably be better off now -- this is how bad it is -- if we just zeroed the whole thing out. If you count the net benefit or the net harm of the whole thing, we should just get rid of it; it would be better. That's a -- you may find that a shocking thing for a Democrat to say. (Laughter.) And believe me, when I say that the Democratic politicians, they're shocked.

FOROOHAR: Peter, you're nodding. Do you agree with this?

FISHER: Yes, absolutely. I mean, the net -- especially because of the net benefit argument. The distortions -- (inaudible) -- revenue --

BLINDER: They're tremendous, yeah. And it was not raising very much revenue. There's a lot of squawking about it, but it doesn't raise that much revenue. Now, we could do a much better corporate tax code. If Peter and I and a lawyer and an accountant got in a room for about three hours --

FOROOHAR: Beginning of a joke. (Laughter.)

BLINDER: Yeah, yeah, exactly. Maybe I should just leave it there.

FISHER: You should have invited (a duck ?) too -- (inaudible) -- (laughter) --

BLINDER: We could write a better corporate tax code than we have. But then when we took it to the Congress, I don't know how many votes we'd get. Not many.

FOROOHAR: (Chuckles.) All right, I've got a question here from a national member. But I want to press you a little more on the growth issue because we've been talking a lot about this, and it's obviously the key issue: How do you move from the 2 percent economy to the 3 percent economy? And you know, you've mentioned energy. We've talked a little bit about job creation in manufacturing. But are those really answers? I mean, what -- how are we going to get there? Where is the growth going to come from?

BLINDER: Well, the only honest answer to that is always we don't really know. But energy is a clear winner for the United States now. There is -- I don't think there's any doubt -- I don't think anybody has any doubt we're going to have a very substantially bigger energy sector, measured by GDP, unemployment or anything else you want, 10 years from now than we have now, and a lot bigger than we thought 10 years ago, vastly, vastly bigger. So that's a sort of a lucky thing that happened to us. We were talking a moment ago about the housing sector, which will get back from 2.6 percent of GDP to 4.1 percent of GDP. We don't want it, by the way, going back to 6.3 (percent); it got as high as 6.3 (percent) during the boom, that was crazy. So we'll get there.

And then the third thing is -- which is the way I ended my Wall Street Journal piece yesterday morning -- is once we bank this 4 trillion (dollars), how about ignoring fiscal austerity for a while, and focusing on growth? We are doing on a small scale -- not as badly, but we're going on a small scale to ourselves what Europe is doing on a much bigger scale to itself. We can pledge allegiance to the austerity genie and pray for what my colleague Paul Krugman calls the confidence fairy, right? The confidence fairy was supposed to be -- you're so fiscally -- you're showing so much fiscal rectitude that the whole population rises in a wave of optimism -- (laughter) -- and that's what buoys -- you know, you're laughing, but if you read what the Europeans say, it's -- with a slightly different adjective that's just exactly what I just -- just what I said.

The confidence fairy's a no-show. And so Europe is thumbscrewing itself down. And we're doing it also half as much or a third as much. And once we've banked this 4 trillion (dollars), I think we should stop doing that. The government has been a drag on growth.

FOROOHAR: Peter, do you agree, too much austerity too early?

FISHER: Yeah, that's what I mentioned about the time path. I mean, I think that if we could make a dramatic shift in the 20, 30-year horizon on health care costs and entitlement, then the total net present value of federal debt is way down --

BLINDER (?): Way down.

FISHER: -- then we all feel better and we don't have to worry that much here and now.

BLINDER: Let me --

FISHER: And then we're not -- not running to the -- (inaudible) --

BLINDER: Let me give you a very simple, concrete example: Social Security reform. Peter and I and this mythical accountant and lawyer wouldn't even need three hours to fix the Social Security system without politics. The virtue of that is every sensible way to fix the Social Security actuarial deficit says don't do anything at all for the next 10, 15 years and it's all down the pipe. Because the natural way to think about Social Security is generational. You don't measure time in years, you measure it in generations. We could fix the Social Security system right now with no fiscal contraction at all, not a penny, in 2013, '14, '15 and so on. That's just one example.

FOROOHAR: All right, I'm going to read a question from a national member. Diane Swonk from Metro Financial in Chicago is asking, how high is the cost of uncertainty regarding fiscal policy? The Federal Reserve board is now concerned about structural shifts in unemployment and potential growth; how big are those shifts today? And that's something that we've been touching on quite a lot.

Peter, do you have anything more to say on that?

FISHER: Well, we all were quite (wound ?) -- the uncertainty that the fiscal cliff in December was costing is much greater than what we're now facing. I think Alan explained that a few minutes ago. But it still weighs on us.

I mean, I think the Federal Reserve itself is a great embodiment of what happens in households and businesses when you can't anticipate the fiscal path. So the Fed likes to -- you know, when we looked at all those forecasts, and they've got a couple of models of the fiscal path, and then monetary policy is supposed to be at the margin around that. And in December, November, the Fed wouldn't have known what to model. They had complete uncertainty, which is why they put $85 billion of foam on the runway to borrow a phrase from former Secretary Geithner.

That's way down now, and I think you can see the voices on the FOMC themselves now at least know the fiscal forecast better, so they're going back to arguing about the exit again the way they were last summer. So they're a wonderful little, you know, Rorschach test if you will of uncertainty as coming down. It's still higher than we'd like, but it's coming down as we can better implement the -- have a forecast in mind, even though the downside is we could cut this amount more sensibly.

I think -- and a lot of the rally we've seen in markets in the first month of the year, first month and a half, were just, you know, we're taking away that uncertainty.

Unfortunately, that's not improvement in topline revenue in the economy. It's not movement in the discount rate we apply to the cash flows. It's just this sentiment thing going back and forth. And that's a little discouraging.

FOROOHAR: Alan, do you have anything to add?

BLINDER: I think the answer to the first part of Diane's question is fundamentally unknowable. You hear a lot about this, and I think some of it is exaggerated, but there has to be some truth to it. And the nice thing about the conundrum, so to speak, is the sign is clear. This has to be doing harm, it can't be doing good. And the magnitude is very unclear. And, B, this is a self-inflicted wound. Some things that do you harm you can't do anything -- like, it snows. What are you going to do about that? But this is not like snow. We are doing this to ourselves and we could stop doing it.

FOROOHAR: Question -- oh, you know what? Let me take one over here. We haven't come to this side of the room.

QUESTIONER: (Inaudible) -- university. Based one some reports that I've read, I believe the housing sector has a disproportionate affect on unemployment. One unit of housing apparently uses five people. So if there is considerable improvement there, unemployment is likely to go down significantly. Would you please be a little bit more granular on that and share your numbers with us?

BLINDER: I can't, but -- I can't be more -- I don't know more specifically than that. I don't know if you do, Peter.

FISHER: No, I've seen those numbers. I don't have any of my own. But I'm worried those multiples that we're assuming off a dollar spent on housing creates X number of jobs are from when it was six percent of the economy. So the mean people think we're going to revert to is at a much higher multiple of housing dollars spent contributing to the economy than I think we're going to get to, especially given my anxiety about median income expectation.

If I don't think my income's going up over the next year, I just don't buy as much carpet and as many sofas to put in my house as I would have had I thought my income was going to rise 2 or 3 percent. So -- and I think that's part of the story of why the economy continues to underwhelm the Fed's own forecasts. We're just not getting back to those kinds of multiples that housing improvement gives us, and we may not as long as income expectations stay so low for the rest of the population.

FOROOHAR: OK. Question in the middle here.

QUESTIONER: Steven Blank (sp). It's nice to hear the optimism. And let's go back to what -- your concerns you raised at the very beginning. Assuming a more rapid growth, assuming what Alan says is true, that unemployment goes down 6 percent, 5 percent, one would bet, I think, that while there'd be some very good jobs created, some good jobs, most of the employment created will be minimum wage -- retail, you know, health services and so on -- that it really will not affect the concerns that both of you raised -- the great social concerns that you raised at the very beginning. Is that right? Is that accurate? And if so, what might be done to deal with that, in addition to more rapid macrogrowth?

FOROOHAR: Great question.

BLINDER: Yeah. I think you're probably -- well, there's always a huge hazard in forecasting the future. That's one thing you should never try to forecast. (Laughter.) But I think you're probably more right than wrong in what you said. Not minimum wage -- minimum is way, way low, but low wage jobs. What these are -- quite dispiriting phenomenon we're seeing on the labor market now is a kind of a, to exaggerate a bit, a vanishing middle -- a thinning out of the middle.

The jobs that somebody with only a high school education can now get are not as attractive in terms of income earning capacity compared to the average as they were a generation ago. And that process seems to be moving along. The very high-end is doing very nicely. And actually, the low end is doing better compared to the middle. That wasn't true for a long time, but it is true now.

What can you do about that? I think it's very difficult. There are -- if I can use -- I think I'm allowed to use this word at the Council on Foreign -- where's Richard? (Laughter.) There are redistributive policies -- (laughter)

FOROOHAR: He's out of the room, go ahead with that.

BLINDER: Oh, OK. So I'll say it. There are redistributive policies, including through the tax system and the transfer systems. More important than that, but very slow moving, are education policies. I haven't been paying much attention to this in the last few years, but prior to that I was on a one-man campaign -- maybe not just one, but very small campaign -- to urge educational reform so that the kids that are coming up through the American K-through-12 educational system were not being trained for jobs that could be done cheaper by a smart kid in India or better by a computer, but the other kinds of jobs.

I'll give you an example of what I meant. In many speeches years ago -- I haven't done this lately -- I used to ask the audience. And then I learned, the audience really got it. Who do you think will earn 25 years from now in the United States of American: a computer programmer or a carpenter? I thought they'd all say computer programmer. They're all saying carpenter. I think they're right. We need more carpenters. We need more electricians and so on. There are middle -- you don't need to go to Princeton to be a carpenter. In fact, it probably hurts you to go to Princeton if you want to be a carpenter. And there's a future there because those are not going to be outsourced.

FOROOHAR: Peter --

FISHER: Yeah, let me just add. I mean, I agree, the importance of the subject. I agree with what Alan said.

I think we've got to recognize something really horrible going on. People in the middle -- we have created a class of debt peons, taking out massive student loans to get college and advanced degrees, hundreds of thousands of dollars of burden on them in the future. And it's such an extraordinary tax on what it meant to try to achieve that, that level of education, and now being burdened with a debt they can never get out of under current statute. They can't go through bankruptcy to get rid of it.

So I think that hasn't been one of the best things we've done in the last 30 years, encourage people to lever themselves up on the assumption it would be a great trade. So that's a mistake I think we ought to stop making, making that simple assumption -- oh, sure, take out the debt, it will all be fine.

The other one I think we're making is that we keep using the metaphor of, oh, this terrible retirement problem we have; we're going to have this dependency ratio thing of these young kids going to be supporting us all in our retirement, and won't that be terrible. Well, that actually -- forgive me, I think that would be the good outcome. But we have is very high levels of young -- youth unemployment, and the rest of us stay in the workforce. And we're not seeing the dependency ratio -- you know, that's not what's really happening, because we're not all retiring at 62. And so we are going to hog our position in the labor market, but we're not developing exactly the education for bringing those kids up and giving them the jobs. It ain't happening.

FOROOHAR: Interesting, political ramifications.

FISHER: That's a -- that's a terrible problem.

FOROOHAR: We have time for maybe one or two more questions. Over here.

QUESTIONER: (Inaudible.) When shall we start worrying about consumer price inflation as opposed to bond market inflation?

BLINDER: This is going to sound like a joke, but I mean it. When we think it's about to start. Before it starts is a good -- that's, of course, what they cogitate about at the Federal Reserve. But not so -- not like years before it's about to start. I still think, and the majority, but not everybody, on the Federal Open Market Committee thinks -- and that's important -- that inflation is on the -- is drifting down now, not up.

FISHER: Yeah. Can I --

BLINDER: At some point, that stops and it starts drifting up, and that's when it really -- that's when we should start worrying about it.

FISHER: So the owners' equivalent rent component of CPI is 34 percent or -- it's a massive share, and that's going to keep rising because of this weird thing we've done to the housing market. So rent's going to keep going up. It's going to drag up CPI. You got to look really hard at the rest of CPI to see whether bad things are flowing through, bad things from housing or bad things from energy. And it just doesn't seem to be happening.

So back to my chart. I'm actually looking at it because of what it might do for inflation. If the median household thinks their income is growing zero over the next 12 months, I'm not that worried they're going to drive up the cost of goods and services by consuming too much stuff. So I think we're going to have some indicators we can look for that will tell us when that might happen, and I think it's going to happen later than you're worried about. But it will come.

FOROOHAR: So why don't we take a final question back here.

QUESTIONER: Dale Ponikvar, Milbank, Tweed. Going back to the hollowing out of the American middle class, which was rebaptized in the 1980s from the American working class, what do you see the consequences of China's policies being on the growth problem in the United States and the restitution of the American middle class?

FOROOHAR: I'm glad we got China in. Alan, do you want --

BLINDER: Well, I think one of the reasons for it is China, or as it's sometimes put, "Chindia" -- China and India. I also like to add in the former Soviet Union. So there's three -- call the former Soviet Union a country. It's not a country, but -- so there's three huge countries. What happened with various timings around 19 -- in the sort of time frame from 1980 to 1990? Those three countries joined the world economy. They were there physically; biologically they were there, but they weren't much participating in the global economy, none of them.

If you do the math, that -- when they, as they came in -- it wasn't all at once -- as they came in, they roughly doubled the supply of labor in the world economy. And then you can ask yourself, so how much capital did they bring in?

MORE
x x x in?

So -- were you ever in the Soviet Union? Probably you were, and you know the answer to that.

So these three countries came in with titanic amounts of labor, trivial amounts of capital. So what happens to the relative remuneration of labor and capital in a world when it has something like that? Labor suffers, capital gains, and that is basically the mega-economic history of the last several decades. And it's not over. These adjustments take a long time.

So China is -- of those three countries, China's the biggest, but there are these other two. And all of those countries have set back labor in general, and it does appear -- and this has to do with offshoring and things like that -- it does appear -- I'm not sure it was obvious before -- that the heaviest impact of this has sort of come in the middle. In general it's just bad for labor, but the heaviest impact looks like it has come sort of in the middle, and it's not over. And that's why, in answering the other question I had before, you really need to think about what kind of compensatory policies the government should do.

This is the market working its way, and first of all, we shouldn't try to block it. Secondly, it's such a big historical force that if we tried to block it, we'd fail miserably. It's going to happen anyway. And we have to think about what the -- how we compensate.

FOROOHAR: This is interesting. So we're basically back where we started, which is, what do we do about income, what do we do about this compression in the middle class?

Peter, do you want to have the last word on that?

FISHER: No, I'll just -- I'll note, so we can go, I agree with what Alan said, and therefore let's all pray that China makes the handoff from investment to consumption; let it grow smoothly. I'm not very optimistic. I think it may probably be bumpy. But if they float their currency, it's going down, not up, and people better get over that. So we better hope they continue to manage a crawl.

BLINDER (?): (Chuckles.)

FOROOHAR: OK. Well, this is a good place to start (sic). I wish we had more time.

But thank you both, Alan, Peter. Great session. (Applause.) Thanks, everybody.

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