C. Peter McColough Series on International Economics: Fiscal Irresponsibility Clouds the Future of the United States

Wednesday, November 4, 2009

TIM W. FERGUSON: I'm Tim Ferguson. I'm here to welcome you to today's meeting of the Council on Foreign Relations.

This meeting is the -- is part of the C. Peter McColough Series on International Economics. And the next meeting of which, I should hasten to add, is November 23rd -- that's the Monday of Thanksgiving week, and it will feature Dominique Strauss-Khan, the managing director of the International Monetary Fund. So I think fiscal and monetary matters will be on the agenda at that time as well.

Most of you know the housekeeping drill here, but please turn off your cell phones, BlackBerrys and other PDAs as they do interference with the sound system here. And I should also say that we're fully wired and on the record for today's discussion.

Most of you know that my boss, Steve Forbes, is an incurable optimist about the U.S. economy, so perhaps that's why I'm here to lend some modest counterweight to our guest today -- (laughter) -- in what may be his dire assessment of our picture. But I'm cautious about predicting anything about Richard Posner, because he is a -- he is a mix.

Most people know that he was among Ronald Reagan's earliest appointees to the federal bench. But before that, in his pre-professor days, he served Democrats in Washington in the 1960(s). He's a University of Chicago man, but an avowed Keynesian on fiscal policy; yet he has been a pronounced critic of much of the Obama administration's responses to the fiscal -- or the financial crisis.

The most unusual thing about Richard Posner, though, is that he has remained a vocal public intellectual while serving on the federal bench -- vocal, I think, not in the television "shout shows," I think I'm right about that, but in the quaint precincts of newspaper op-eds; on the blog that he does for The Atlantic, at which, of course, he exchanges barbs with other economic bloggers; and, of course, in his books, the most recent of which is, "The Failure of Capitalism, the Crisis of '08, and the Descent into Depression."

Dick Posner, I have to ask you first, are you sticking by the word "depression?"

JUDGE RICHARD A. POSNER: Yeah, because the political consequences and the long-range fiscal consequences of this economic downturn are really profound.

And you don't -- I mean, the way in which economists talk about depressions, recessions, it's actually preposterous. So before the '30s, the term for a depression, recession was "panic." And Hoover -- President Hoover decided that was too scary, so we -- instead we'd call it a "depression." That was supposed to make people relax. And then after we recovered from the depression of the '30s, the word was, sort of, retired, right -- 'there'd never be another depression,' and now we talk about recessions.

But, in fact, there are severe depressions, mild depressions. This one is moderately severe. It's not like the '30s, but it's very consequential. It's got enormous political and economic ramifications. It's shifted the, it's shifted the line between business and government, what I think is (in an) extremely unhealthy way -- government much more intrusive to business, and not clear this will change.

And the long-range economic consequences are ominous. I don't make predictions, forecasts. I'm not a pessimist or an optimist. There is a danger of extremely negative consequences for the economy as a result of the deficits that we're running, and the deficits, they preexist the depression, but they've been greatly magnified by it.

FERGUSON: Many people do draw a link between the fiscal policies, the deficits, and the precarious -- still precarious state of international finance. Fred Bergsten's cover article in the current Foreign Affairs does this. Do you also marry those two predicaments?

POSNER: The two predicaments are --

FERGUSON: Meaning the enormous U.S. fiscal deficit and the precarious state of international finance, and the imbalances that underlie that.

POSNER: We can live with a large deficit. The problem is, if the deficits continue to grow, that's the serious problem. If the deficits grow faster than the economy grows, then you have a very serious problem. And that's a -- that's a serious danger.

The reason it's a serious danger is that -- we used to have two political parties, we now have one, which I call "the party of profligacy." And what I mean by that is that in the olden days you had a Republican Party which believed government should be small, government spending small -- government spending limited, and therefore taxes could be low, because you didn't have to finance a lot of government. And the Democrats is the opposite -- big spending, high taxes to pay for the big spending.

And then Reagan discovered that, well, people like low taxes, but they also like the big spending. So we'll have the big spending and the low taxes. And that was politically brilliant. And you know, he buried poor old Mondale in 1984, and ran up very large deficits.

And then the Democrats eventually discovered, well, yes, people like big spending -- which we like, which we love, but they also -- but they don't like high taxes. So we'll drop the high taxes. We'll favor big spending, low taxes.

And so we now have two parties (who) believe (in) big spending, low taxes, huge deficits. The recently-departed -- (laughs) -- President Bush, he, sort of ratified the Reagan approach, where combining a very high spending with very steep tax cuts, so huge deficits.

So coming into this very serious economic collapse of September, 2008, we have very large deficits. We have a kind of structural deficit, about $500 billion a year, which no politician proposes to cover. And if the economy grows at 3 percent a year, that more or less will cover the -- almost cover the $500 billion, so that, as a percentage of the total economy, it won't grow, although it will grow in absolute terms.

The problem is this $500 billion structural deficit -- annual deficit is likely to grow. And then the question is, if it grows faster than the economy, what do you do? If you can't raise taxes significantly, because of the politics of the economy, if you can't cut spending, well, you borrow more from foreigners, from Americans, (laughs) wherever you can borrow. And (then), of course, you have higher interest expense and more dependence on your lenders, whoever they are, and eventually maybe pushed into devaluation, inflation, loss of the -- the dollar's loss of its status as the international reserve currency, which will be a big blow to the American economy.

I mean, it's great to be able to provide dollars for foreigners to trade with each other, right. That's an export -- dollars are an export item for the United States because the dollar is the major international reserve currency, and it's an export item which costs us nothing to produce. So it's a very nice -- nice thing for a country to have.

So what's pushing up this structural deficit are several things: Number one, interestingly, of the $787 billion stimulus package that was enacted in February, the administration wants to make programs, accounting for $140 billion of the $787 billion, permanent. So the plan is that -- I don't know how much per year is envisaged there, $40 (billion), $ 50 billion, so that's going to be permanent. No plans for funding it. So that's one item.

Another is the continued aging of the population and the continued advances in medical technology. So the Medicare budget grows by about 8 or 9 percent a year; and Social Security grows as people -- as the over-65 population grows. So there's a built-in pressure for increased government spending for these entitlement programs, which operate automatically, they don't require annual appropriations.

And then there's the health program and the climate-control program that is being pushed by the administration. And the health program is particularly serious from a fiscal standpoint. The reason for that is that it's, you know, it's a trillion-dollar program, minimum, and there are really no credible proposals for funding it. But, if you believe what the -- the official line, it's going to be funded by a combination of higher taxes on wealthy people and reductions in Medicare spending.

Now suppose that is true, suppose that works, and suppose, therefore, that the trillion-dollar program is funded -- I think that's unlikely, but suppose it works. The problem is that those tax increases to pay for the health-care program and the Medicare cuts to help pay for the health-care program, they are the two extremely important sources for dealing with the overall deficit problem. That is, if the deficit grows faster than the economy, we have to think about ways of funding it.

One way would be higher taxes; another way would be cutting Medicare. Well, but if we're going to raise taxes to pay health and cut Medicare to pay for health, what are we going to -- these sources of possible, you know, fiscal relief for the rest, for other deficit -- for the general deficit disappear. And so that's the problem.

Of course, it's combined with the fact that, because of the economic downturn, federal tax collections have fallen a great deal -- and they're the expenditures, not limited to the $787 billion stimulus, but the bailouts, and so on, some of which will be, much of it will be recovered, their loans, and so on, but a lot of it is going down the drain. No one really expects General Motors to ever pay back the $50 billion that it's getting from the government.

So this fiscal year, which ended September 30th, the annual deficit, instead of being $500 billion, was $1.4 trillion, and probably be over a trillion (dollars) for a couple of years to come, even without new spending. So we have our public debt, the part of the national debt that is really owed to people, as opposed to accounting reserves for entitlement programs. But that $7.5 trillion public debt is going to be growing rapidly for several years, and about 45 percent of it is owned by foreign governments and foreign investors.

So the great deal of interest is pouring out of the country into those foreign coffers. And, of course, it gives us -- it makes us dependent, to a certain degree, on the foreign financiers of the U.S. deficits, particularly China. So, as I say, as the deficit -- if the deficit continues to grow, if it grows faster than the economy, we will be faced with increasingly severe, adverse consequences of being a heavy debtor nation.

And if our political process makes it extraordinarily difficult to raise taxes or curtail spending, then we're going to be, you know, flirting with inflation; or devaluation or loss of status of the dollar (as) international reserve currency; or increased interest expense, as we borrow more and more from foreigners, and increased dependence on the goodwill of foreign countries that are our creditors.

So that's the -- that's the danger. Whether it'll come to pass, no one knows. If the economy grows very rapidly in the years ahead and it can overcome the deficit, or if there's some break in this political logjam and a political party is able to say, we have to have higher taxes -- it'd be really easy to raise taxes. There's so many attractive (laughs) tax opportunities, right. Tax on financial transactions, that would actually be quite popular nowadays; tax on on-line sales, right, that that'd be -- (inaudible) --

FERGUSON: Well, that's a -- that's --

POSNER: You know, there are all sorts of ways in which we could raise taxes. But the politics seem extremely difficult. Any tax is met with extraordinary opposition.

One of the underlying problems is, you know, we have -- we have an 18th century Constitution; created an extremely decentralized government, and we have the, sort of, the perfection of interest-group politics, marketing, campaign donations, which makes it very difficult, actually, to achieve anything. And we have, of course, a long tradition of demagoguery and populism.

My favorite example of really bad -- (laughs) -- politicking, I don't know what happened to it, but the Republicans in Congress proposed as part of this health reform business a "senior citizens bill of health rights." You can't image anything worse than trying to remind elderly people -- (laughs) -- that there is no end to the expense that can be spent on keeping people alive another few months.

So if you remind old people of that, and you tell them, you know, you have an entitlement to indefinite drain on the public fisc, to extend your life another week or so, then you build in another -- a strong opposition to any kind of economizing. You can't actually have any reduction in medical costs without limiting treatment

So if you take the position that limiting treatment is a terrible thing, that nobody, no matter how -- you know, 100 years old, 105, who knows what, wants to spend $300,000 on a cornea transplant, retain his vision until he's 115, if you establish that as a right of everybody then you're never going to get control over medical expenses.

So, fine, if you want to devote -- (laughs) -- most of our income to keeping people -- old people alive, that's fine, but it should be financed by heavy taxes. Not willing to finance it with heavy taxes, you have to, you have to cut the spending, or else, you know -- (inaudible) -- we'll face a very severe, long-term fiscal imbalance.

FERGUSON: On this path back to virtue -- if we're going to find it, to fiscal responsibility, the Obama folks argue that they can, indeed, bend the curve on health costs.

POSNER: No, that's ridiculous. How do you do that? How do you do that?

Look, the reason, the reason that we have these -- the principal remediable cause of our health -- of the expense of our health-care system is the deductibility of employer-provided health benefits, because that creates an incentive for employers and their employees to, instead of providing higher wages to people, provide them with health benefits, because those are wages in tax-exempt form.

So, (as a result ?), you have too much health insurance -- too generous. And that seems to be politically irremediable, that tax exemption. So that's -- but, given that, that interacts with the fact that Americans have a culture, which has been a good thing for Americans in the past, (laughs) maybe not a good thing anymore, but it's the rejection of fatalism. It's optimism. It's the belief that nothing that -- nothing bad that happens is not preventable.

So you can't tell -- you can't tell people, you know, if you're in your 80s or 90s, you're not going anywhere (laughs). You're going to die. Die a year young -- a year earlier or later, it doesn't really make a big difference. You've run out of time. Happens to everybody. Can't say that to Americans. A person dies at 95 and the kids will say, "It was a medical -- it was a medical error, why couldn't you save this person?" "Well, you try -- should have tried harder." "What about this procedure, that procedure?"

People get some terrible disease, the first thing they do is go to the Internet, and look it up, and they find out all sorts of expensive treatments. May not work. Then they go to the doctor and say, you know, I want this. The doctor says, no, it doesn't work. Like, you know -- or a person has a cold and he goes to the doctors and he says, you know, I read about this antibiotic, I'd really like you to prescribe it. And the doctor says, well, colds are viral, antibiotics don't do any good. And the person will say, (well ?) but I saw it on the Internet; I want it. So the doctor says, fine, I don't want to lose a patient, so he writes the prescription.

So with these (as I say ?), these cultural attitudes, this insistence on, you know, fighting aging, and disease, and anything, with all weapons, paid for (laughs) by other people if necessary, when that interacts with this -- with the tax deductibility of health insurance to create a situation, which is just extraordinarily difficult to control medical costs.

They talk about it -- they talk about waste. Well, waste is a constant. There's waste everywhere. There's no human activity that doesn't involve a lot of waste. They used to talk about try(ing) to eliminate waste in the Defense Department. They finally stopped talking about that (laughs) because they realized: We have a good military; it's extremely expensive; there's undoubtedly a lot of waste, but you can't do anything about it, it's just -- it just comes with the, with the turf. So I don't have any optimism about reducing the medical expenses.

FERGUSON: Despite some of those peculiarities of the American system, we're not alone in being fiscally irresponsible. Many of the Europeans are doing a pretty good job of it -- Japan as well. Is this, sort of, a symptom of the age?

POSNER: Well, the European are fiscally irresponsible in a different way, because their medical expenses are much lower than American, even though their longevity is actually usually greater than the United States. I think the United States is 23rd country -- from, you know, the 193 countries, I think the United States is 23rd in longevity. And there are other measures, obviously, of health besides longevity.

But the Swiss, for example, have the most expensive medical -- health system in the world, after the United States, but it's only about 60 percent as costly as American medical care, and even though they have a higher ratio of doctors to patients. And so they don't have the tax deduction for employer-provided health benefits, and as a result, most Swiss -- there's some employer-provided health insurance, but mainly it's just -- you know, it's like automobile insurance, or life insurance, you deal directly with the insurance company. You get the insurance yourself; it doesn't have anything to do with the employer. So you don't worry about losing insurance if you lose your job.

And the Swiss are generally happy with their health-care system, and they don't have the long queues, because, as I say, they have a higher ratio of doctors to patients than we do. Nevertheless, my guess is that the Swiss people, like most Europeans, are more fatalistic about medical stuff, and they don't -- they don't do a lot of self-diagnosis, and Internet search, and they don't put the same emphasis on screening, which is extremely expensive.

Americans want to be screened. The notion that preventive health care -- the emphasis on preventive health care reduces medical expenses, is wrong. It increases it (laughs), because with preventive health care you're treating the whole healthy population, not just the sick population -- with scans, and this, and that, and which are very expensive, often very expensive.

So what is true is if you could get, if you could deal with the obesity problem in the United States, you could actually (laughs) reduce medical expenses -- the most obese country in the world. But all the pressures, you know -- if you said to people, well, you're, if you're obese, you're going to have to pay a much higher health insurance premium -- (laughs) -- than other, than thin people -- I favor that, I'm thin, right, but that's intolerable because the whole pressure is to mandate additional health insurance protection, to prevent exclusions of people who have preexisting conditions, even if they're responsible for their preexisting condition the way obese people are.

So I just don't see where, in our -- either our political culture or the broader American, you know, personal culture of optimism is -- so I don't see where the opportunities are for real economies.

FERGUSON: We'll go to questions in a moment, but I think you headed-off my suggestion that if Americans could be induced to take better care of themselves, that there could be significant fiscal effects from that.

What about working harder, longer, smarter, extending the retirement age? Is that not a way to dig ourselves out of this hole?

POSNER: When you say -- when you say "extend the retirement age,' you mean extend the Social Security entitlement age, right? You can't really extend retirement age, because people want to retire early -- retire early.

FERGUSON: But isn't that part of the problem, actually?


FERGUSON: The drifting lower of the essential working life of many Americans.

POSNER: Yes. The retirement age, I'm -- it's changed, I think, in the last year, but the retirement age generally has been falling. If people want to retire -- if people finance their own early retirement, that's fine.

But I don't think raising the retirement age would do anything for Medicare. It's very hard to imagine eligibility for Medicare being raised, because even though people are living longer, by the time they're in their late 60s they're going to have medical problem -- or 70s, going to have some medical problems.

So I don't -- I don't, I don't see where, in the system, there's the give that enables substantial economies. I mean, look how that Congress can't even cut the agricultural subsidies. It don't make any sense at all. And how you get really stupid programs that are absolutely entrenched, like the ethanol program. So the only effect of the ethanol program is to raise the price of corn, and actually to increase the amount of carbon dioxide in the atmosphere, because the manufacture of ethanol from corn is extremely energy intensive.

FERGUSON: Well, Judge Posner promised to be provocative. He has been. I'm sure there are some questions from the floor. We have microphones ready. Please speak into the mike and state your name and affiliation.

QUESTIONER: Thank you. Herbert Levin, America-China Forum.

You referred to Switzerland, and my friends who have Swiss relatives say that the reason -- or a reason for the better Swiss performance is that all of the Swiss health insurance companies are nonprofits -- the way Blue Cross started here. And if you knock off -- pick your own number, the 25 or 30 percent that we are paying for the salaries and the advertising of the health insurance companies, we would get down to a much more manageable situation, which is what the Swiss have, and they're quite satisfied with their system.

I wonder if you could comment on getting rid of the health insurance companies and going back to nonprofits?

POSNER: Well, actually, all health insurance in Switzerland is private. What is true is that a third of the Swiss population receives some subsidy from the government for their health care, but they are all dealing with private companies. There are a number of private companies. Now, they're tightly regulated. I don't know whether the regulation goes as far as their marketing expenses, and I don't -- or whether there's actual profit limitation, but they are highly regulated.

But if you're Swiss, you know, you get to choose between packages. There's a minimum, but if you want to have fancier, fuller coverage, you pay more. And, as is say, if you're poor -- and you don't have to be really poor, I mean, obviously a third of the Swiss population is not poor, but the bottom third is getting subsidized.

So I could -- I can imagine a more highly-regulated American health care -- health insurance system that might be more economical and more efficient. The problem is that, you know, the regulation is at the state level -- so have 50 different systems of health insurance regulation.

And that's part -- as I say, one of our problems is we have this 18th century Constitution. It created (an) extremely decentralized system, and part of the decentralization is the sharing of power between the federal government and the states. So you could have a federalization of health insurance but, of course, that would be bitterly resisted.

FERGUSON: The so-called public option in the health bill, a plus or minus?

POSNER: I think probably minus in the following sense: That if you have a government operation -- a government service competing with a private company, there's a concern that the government entity will receive, you know, the protection of government, and assistance in various ways that will give it an inefficient competitive advantage.

Now, probably it's not true in the following sense: Look at the Post Office competing with Federal Express, right. The Post Office gets creamed because the inefficiencies of government -- the government unions, and so on, probably outweigh the subsidies that the government entity would obtain.

But I don't really see what the benefits are. You know, it really goes back to Tennessee Valley Authority. It was supposed to be -- it was supposed to provide a yardstick for measuring, evaluating the profits of private utilities. And I don't think that ever -- that theory ever proved out. So I don't -- I don't, I don't think it adds anything.

And I don't see -- the people on the left, who are, you know, really enthusiastic about health reform, what they want -- it's not an ignoble goal, I don't, could even have certain advantages -- would be to have something like the British national health system, which is actually pretty successful. And what you'd have, the medical profession would be salaried civil servants. It's not a bad idea, actually. It has -- (inaudible).

The plus of it is that if you have doctors on salary, they don't have an incentive to perform unnecessary procedures -- they have no financial incentive. So that's, you get a -- so, for to have actually a national health service-type system would permit enormous economies. (There's ?) a lot of problem that would come with it, but it would be a way of economizing.

But no one actually is thinking that we would go there, and, therefore, I don't know why you'd want to have this public option, this government program --unless the idea is this is to be the first step toward extending Medicare to everybody. But, I mean, just imagine the expense of trying to have the entire medical expenses, or 80 percent of all medical expenses of all people, not just elderly people, paid for by the government. That would be an extraordinary fiscal burden to add.

FERGUSON: We have a question right here.

QUESTIONER: Jim Ziron (sp), Judge.

I wonder whether you wouldn't favor repealing the McCarran exemption from the antitrust laws, which applies to insurance companies, so that they would be able to compete with one another -- and particularly in states where there's only one insurance company, or there are two, and for that reason you have soaring health-care premium costs? And, if you did repeal McCarran, then you wouldn't need to have the discussion about the public option because there would be vigorous competition among insurers.

POSNER: Yeah, I think that's an excellent exception -- excellent point. I don't know why we have (laughs) that exemption. I don't know what the rationale for it is. And you're right. Yes, if you forbid collusion among health insurance companies -- there certainly are a lot of them.

I suppose the most important thing would be to allow what's like with lawyers. You'd like, you'd like to have a system where a health insurance company can operate anywhere in the United States without getting some special license from each state. So a lot could be done along those lines. But, again, it seems that, you know, very powerful political interests prevent that kind of reform.

I don't think any of the proposed reforms would have really dramatic effects on health care -- the health budget. And the reason for that is, I think the demand for health care, and the demand to have it -- (laughs) -- paid for by the government, or by somebody else, or your insurance pool, or what have you, I think that's so powerful in our culture that all of the reforms that are actually discussed, (or) proposed in a serious way, including repeal of McCarran-Farret-(sic)-Ferguson, would only, you know, make marginal -- have marginal consequences.

I mean, think of the enormous effects of drug advertising. It makes people extremely conscious of all the treatment options that they have, and they're not -- they're not going to give that up.

FERGUSON: Is it not possible that pharmacological science will come up with magic bullets that will actually reduce the total burden?

POSNER: Yes. And, of course, that's a reason why I don't describe myself -- I don't think of myself as being optimistic or pessimistic, and I don't make forecasts, because we don't know what the future holds.

And, yes, there could be medical breakthroughs that -- I mean, look what's happened with dentistry, right. So the dental profession -- and I assume the expenses of dentistry, although I don't really know, have shrunk because of fluoridation. So you can -- there's an example of an inexpensive, really effective preventive medical measure that greatly reduces the need for subsequent treatment.

So you might have the same thing with medical. But you don't want to be too optimistic. The reason is -- there are estimates that if cancer were cured completely, or completely eliminated, the addition to longevity would be maybe, you know, five years, something like that -- the reason is that, you know, diseases compete with each other, and if you die of cancer, say, when you're 70, it means you're not going to die of renal failure -- (laughs) -- when you're 75. But the longer you live, the larger the range of diseases to which you become subject, and, as I say, if one is cured, the other -- it gives an opportunity to the other.

We have these very ugly, you know, neuromuscular diseases -- amyotrophic lateral sclerosis, and multiple sclerosis, and Parkinson's, and all that, and these things have increased because, as people grow older, they survive what would have killed them, like an infectious disease, a pneumonia would kill them earlier. So they live longer, and they get into -- and they become vulnerable to these other, these degenerative diseases.

So you can keep pushing back the age of death, but you don't necessarily reduce the medical expenses, it's just that, you know, maybe you gain a temporary advantage of a few years. But then you have the people (laughs) -- live a couple of years longer, and you have this huge, aged population demanding medical care for further extensions in their lives.

FERGUSON: We have a question, I think, here. And then we'll come back here, and over there.

QUESTIONER: (Off mike.) (Inaudible.) Bob Belfa (sp), Belfa (sp) Management.

I didn't hear you make any reference to tort reform. And I know it's a long, tough political battle, but do you see any hope in that way?

POSNER: Yeah, for malpractice -- yeah, I think there's a good argument for regulating malpractice liability.

So the problem -- it's not so much that, it's not so much the costs -- the costs of malpractice insurance are very high in some medical specialties -- obstetrics, orthopedic surgery, neurosurgery, brain surgery, and so on, but the aggregate cost of malpractice insurance is not tremendously high.

But there's an interesting literature which argues persuasively that a lot of the procedures that doctors perform on people are designed not to help the patient but to reduce the chance of being sued for malpractice, and that those -- the aggregate costs of those excess procedures are great. So I think malpractice reform is indicated.

Now, a number of states have done that. Indiana, for example, in my circuit, if you have a malpractice claim, it has to be submitted additional -- initially to a panel of doctors; and their opinions -- they're not binding on a court, but they, you know, will have a significant influence. I don't know what the actual experience has been in Indiana, but a number of states have these reforms.

So this is something -- a lot can be done at the state level -- is being done. It could be speeded and, you know, nationalized by a federal reform of malpractice. And that's been proposed by the Republicans, but of course the trial lawyers are bitterly opposed. They're strong supporters of the Democratic Party. So it's another example of where politics impedes reform efforts which would be probably quite uncontroversial if it weren't for the political stakes.

FERGUSON: Had a hand -- here.

QUESTIONER: I'm Eugene Staples (sp).

You seem to be quite critical of the way the government handled the -- what I, what I think we used to call, a year or so ago, "the crash," which is really a very scary thing to go through. What would you have done differently?

POSNER: About -- I'm sorry, I missed a key word that --


QUESTIONER: About the crash --

POSNER: Oh, the crash.

QUESTIONER: -- of a year ago, when things were spiraling down --


QUESTIONER: -- day by day. What would you have done?

POSNER: No, I think what the government did, between September 16th, say, after Lehman Brothers (laughs) was allowed to collapse -- that was a terrible mistake, I believe, but after that the government got its act together; and I think the bank bailouts, the easy-money policy of the Federal Reserve -- you know, reducing the federal funds rate, I think those were good measures. I think the December, 2008 bailouts of General Motors and Chrysler were sensible measures. And I think the idea of a Keynesian, deficit-spending fiscal stimulus was a good idea.

Although, the actual $787 billion program was not well designed -- I'm not criticizing the amount, it wasn't well designed. The politics, of course, got into it, and it's not great. So I think, but I say through February -- I think February 22nd, whenever it was that the stimulus plan was enacted, I think the government did fine, I think -- or did as well as could be reasonably expected of any government. So that's fine. And I think it's important to recognize it was both administrations that did well in that period -- successive administrations.

But I think since then there have been a lot of stumbles -- the stimulus program not forcefully executed. So the president, I think, should have appointed an expediter -- (laughs) -- not the vice president. He has other things -- he's not, you know, the vice president is nominally in charge of the stimulus program. No, you have to appoint an expediter who would cut the red tape that enmeshes all government programs, and really make an effort to get the money out and get it into areas of high unemployment. So that was a stumble.

All the fuss about compensation, I think, is a distraction and irrelevance (sic). The notion of trying to do an ambitious health-care reform or climate change reform when you're fighting a depression, I think, is a serious mistake, because what it does is, what you have -- this is an insight of Keynes, but not limited to him, you have a confidence problem. That's the economic problem.

There was a panic -- a rational panic last fall, because it did look as if the entire financial system of the world would freeze. And when you have a -- you have a confidence problem, everybody pulls in. The banks are afraid to lend. Business is afraid to invest. Business lays off people. Consumers are afraid to spend.

You know, the personal savings rate has soared. Excess bank reserves have soared. There was article a couple of days ago about how non-financial businesses are holding much more cash than they were a year ago. So there's the hoarding, the freezing.

Well, the last thing you want to do is to introduce a further uncertainty into the economic environment. And, of course, we've done -- the administration is doing that with this health program. A small business doesn't know where it's going to be -- (laughs) -- after this, when these reforms are finished, and big businesses don't know either.

So, the more that's going on in the way of government activity that's not directly supportive of economic recovery, but is directed at other aims, the slower the recovery will be. And, of course, the more you add to the deficit with all these new programs, again, the more, you know, business begins to wonder, what, you know, what is, what are my -- if I invest now, for some project that won't yield any revenue for several years, is that prudent; do I know what our nation's economic situation will be in several years?

And there are all these proposals for reforming the financial regulation. It's all so goofy, because here Congress creates a financial enquiry -- I don't have it right, crisis, "financial crisis enquiry commission" is created in order to get to the bottom of why we had this crash. And the idea is, well, if we understand the causes well, we can adopt measures to prevent a repetition.

So they have this commission, you know, it was created in May. It's moving very, very slowly. I was talking to a member of the commission last night, they've hired exactly one person -- their staff director. And he's now going through resumes -- (laughs) -- to hire people, and is supposed to report to Congress at the end of 2010.

Well, meanwhile, without waiting for this study of the cause of the crisis, the administration has these very ambitious plans for financial regulatory reform, and creating new agencies, consolidating agencies, assigning new responsibilities to the Federal Reserve. So how do you -- what's the sense of adopting your reforms while you're waiting to learn what the, what you're trying to reform? (Laughs.) What's the problem you're trying to solve?

So you have the solution; then, the end of 2010, this commission, if it ever gets going, will come back and say, oh, by the way, you misunderstood the causes; your solutions are not adapted to the problems. (Laughs.) But by then it's all in law.

And the other thing is, we accept that effective financial regulatory reform has to be international, because the financial industry is thoroughly global, and any little country -- you know, like Iceland, can become a world financial center, so you need to have -- and bring down, you know, the economies of other countries. So you need to have international -- (inaudible) --

Well, but if we go ahead and adopt our own reforms, before there has been any international consensus formed on how the global financial system should be, then achieving international cooperation is impeded -- because, we have a discussion with the French or the British in a year about an international solution, we'll have to say, well, you know, it sounds like a good idea, but actually we've already adopted legislation -- (laughs) -- doing X, Y and Z, so I'm afraid we can't, unless you want us, somehow, to go back to Congress. So I just don't understand -- it's putting, the cart is being put before the horse in this reform business.

And also I think it's terrible -- it's one thing -- there's an argument for the continued bailout of General Motors and Chrysler. I think it's a pretty good argument. As I say, in December, where there was real panic in the American economy, to have allowed, in December -- if General Motors and Chrysler had not been given substantial loans by the federal government, there's a significant probability they would have liquidated. And that would have thrown hundreds of thousands of people out of work. That would have been a real blow to economic confidence. So I think that was a good bailout.

Now, in May, when General Motors and Chrysler declared bankruptcy, they had already, in fact, partially liquidated over a five-month period, and was gradual, was okay. And the economy was a little better, and the panic was much less, and the financial system was somewhat restored. So probably -- yet still General Motors and Chrysler might well have had to liquidate. If Chrysler liquidated, no one would actually -- (laughs) -- notice, but General Motors would be serious.

So there was an argument for saving them -- even an argument, you know, for giving General Motors $50 billion without really bright prospects for ever getting it back. But for the United States to become the owner of General Motors, that's very bad. (Laughs.) And there was an article just the other day in the Wall Street Journal about, of course, now that the government owns General Motors, everyone who wants a dealership, wants this, wants that, calls up his Congressman, and the executives are besieged by special pleading from Congress, to which they often accede.

So we have the corruption of business by government ownership, by Congressional control. So that was very bad, because you can obviously lend a company money, as we did with the banks, without taking them over. Of course, we took over some -- AIG, Fannie Mae and Freddie Mac, and that's not a great idea either.

FERGUSON: I promised a question over here. Elizabeth?

QUESTIONER: (Off mike.) Elizabeth Brammo (sp), Brammo (sp) Capital.

I wonder if you would comment on corporate tax rates around the world, and how competitive they can be? You know, there may be limits on how much we can raise, say, corporate taxes, because other countries actually have much lower tax rates, particularly in the emerging countries. And I think the other might be that, you know, there are limits on the kind of transfer payments we can make, from a competitive point of view, and it's probably one reason manufacturing is moving off-shore.

POSNER: Well, I don't think -- I don't think corporate income taxes are a good idea at all. You know, it's -- it leads to double taxation of the corporation and the shareholders. And economists do not favor corporate income taxes, and I think they're -- I think they're right not to.

It's a popular tax because it seems (laughs) not to fall on people, although eventually people pay. So I don't think it's a good idea. I do think, however, that taxes on transactions -- like on-line sales, and financial transactions, and also the VAT, you know, it's just a vast sales tax -- I think they have, would have less, fewer problems, in terms of American competitiveness with foreign countries which also rely heavily on VAT.

But there are no taxes which are harmless in their effects. They always cause distortions. But we can't -- we can't have everything, right. We can't simply allow our deficit, especially to the extent it's owned by foreigners, to expand indefinitely. Indeed, they won't let us -- (wouldn't let us ?) expand it. There's a point at which a lender stops lending to you because you're not -- you're not creditworthy anymore.

So any adjustments, any tax increases, any spending cuts -- they'll be painful. And whether they're efficient or inefficient, they will provoke a lot of political opposition.

FERGUSON: What about a forced savings plan, on top of Social Security? We've almost got that now with the check-off on 401(k).

POSNER: Well, the problem is that -- the plus of forced saving, or policies to encourage saving is that it is better to have people save for their retirement, or other expenses than to have the government do it. So that's the plus.

The negative is that if you force people to save, you do actually reduce economic activity, because economic activity is driven by consumption, by spending, and not by saving. So what happens is, if you have a lot of consumption, businesses see bit opportunities, and they will borrow what savings are available in order to finance the activities. So, you know, interest rates will rise as businesses borrow more, and that will cause people to save more because there's a demand for investment. But if there's too much saving, if spending falls, then businesses don't see good opportunities. So savings, as such, is not necessarily a great thing.

What would be a very nice thing, if somehow you could get people to save during booms and spend during busts. So it's backwards, right, because in a boom you have plenty of spending; you worry about its leading to a bust -- as it did, of course, with the housing bubble. So you'd like people to be more fiscally prudent during the boom and save; and then when there is a bust, since they will have saved during the boom, they can spend during the bust, and that will reduce the gravity of the bust. So that's what you'd like.

But, of course, people behave the opposite: When things are going well, they spend; and then when things go badly, then they get frightened and they save. And that magnifies the business cycle. So you'd like to reverse it somehow.

But you can't -- forced saving doesn't do that well, because forced saving would be equally forceful during the bust, right. You don't want to, you don't want to make -- you make people -- make people save during a bust, then there's that that much less spending. And so businesses produce less, layoff more people; you have more unemployed; their incomes are lower -- they're scared; they buy less. And that's how you get into a -- you can get into a very serious downward spiral.

FERGUSON: Well, that's spoken like a Chicago Keynesian.

POSNER: (Laughs.)

FERGUSON: Judge, we always adjourn this court on time here at the Council, so I want to thank you, and the audience here, for a good exchange this morning. (Applause.)

POSNER: Thank you for having me. Thank you.








Top Stories on CFR



The consequences of the COVID-19 pandemic and the rise of China have prompted renewed debate about the U.S. government’s role in shaping the economy.

United States

Progress on President Biden’s climate agenda will slow with a split Congress. But with federal efforts dulled, state-level action could supply added momentum.