Transition 2021 Series: U.S. Economic Recovery

Friday, January 29, 2021

President, American Action Forum; Former Director, Congressional Budget Office; Former Chief Economist, Council of Economic Advisers, White House 

President, Economic Policy Institute; CFR member

Chief Executive Officer, Financial Advisory, Lazard; Former Director, Office of Management and Budget; CFR Member


Cofounder and Co–executive Chairman, The Carlyle Group; Chairman, Board of Directors, Council on Foreign Relations

Transition 2021 and Transition 2021 Series

Panel discuss the policy paths President Biden can take to aid in the U.S. economic recovery amid the pandemic, and the political pressures his administration faces from both sides of the political divide.

The Transition 2021 series examines the major issues confronting the administration in the foreign policy arena.

RUBENSTEIN: Thank you very much. And thank you for joining us. I am the chairman of the Council on Foreign Relations and honored to be in that position. And this is part of our series on transitions. We've had a number already; we have a number of additional ones scheduled to talk about the new issues that are facing the Biden-Harris administration. Today, we want to talk about economic issues and things particularly related to the recovery of the economy. And in that regard, we have three outstanding economists. I will introduce them very briefly because their bios are attached in the materials and if I read their entire biographies, we wouldn't get through the program. But I just want to remind you that after I give their bio and we begin the discussion—I will do that for about thirty minutes—following that, you will have an opportunity, all the members will have an opportunity, to ask questions and just, you know, designate yourself and you'll be called on by the operator and then we will go through for another thirty minutes and again, this is all on the record.

So let me just do this in alphabetical order. First, I would like to introduce Doug Holtz-Eakin. Thank you very much, Doug, for participating. Doug is a former head of the Congressional Budget Office, former chief economist at the Council of Economic Advisers. He is a PhD in economics from Princeton, undergraduate at Denison, and he is currently the president of the American Action Forum. So thank you, Doug, for participating. Thea Lee is a person who also is well-trained in economics—undergraduate degree from Smith and a graduate degree from the University of Michigan in Ann Arbor. She is currently the president of the Economic Policy Institute, has a wide array of experience in economic matters, particularly relating to economic equality related issues, and she previously, before she went to the Economic Policy Institute as president, was working for many years at the AFL-CIO. So thank you very much, Thea, for joining us. And then Peter Orszag—Peter Orszag is somebody who has a lot of government experience and private-sector experience. He is currently the CEO of the financial advisory business at Lazard Frères, a financial advisory firm. Peter has worked in the government in many different areas. He has served as the head of the Office of Management and Budget under President Obama and previously served as the head of the Congressional Budget Office as well. He has his undergraduate degree from Princeton, and he has a graduate degree and PhD from the London School of Economics where he studied as a Marshall Scholar.

Very impressive academics, so let's go right into the questions. First question I have is for all of you. Why have the financial markets been relatively tolerant of the enormous amount of debt we have? When I was in the government in the Carter administration, we once proposed a budget deficit in the last year that was, I thought, about $60 billion and people thought that was too big and we had to pull the budget back and redo it. Now we have $27 trillion of debt. We're going to add another $1.9 trillion or something like that to what we already have and we had a lot of debt last year. Now roughly half our budget is debt. Why are the financial markets saying, okay, just, you know, we'll let you borrow whatever you want? Peter, you know the financial markets pretty well. Why are the markets not upset with all this debt?

ORSZAG: Well, I think a couple things. First, David, thanks for having me. I think the model that a lot of people have in their heads is that somehow if debt reaches some critical threshold, there's a catastrophe that happens. And so as we approach that threshold or exceed that threshold, where's the catastrophe? And I think instead we need to rethink that whole concept. It's not at all clear that there is a single precipice or a single anchor, a threshold, that beyond what you cannot go. It depends on a whole variety of different factors, one of which I'll get to in a second. And so in a recent paper, Bob Rubin and Joe Stiglitz—and I would just note it's unusual to bring Bob Rubin and Joe Stiglitz together on something like this—basically said we should just throw out the concept of having an anchor for fiscal policy that, you know, 60 percent of the economy in debt is too high or 100 percent of the economy in debt is too high, that it's very difficult to define what that threshold is ahead of time. And even if you knew what it was, it's very hard to predict when you're going to hit it. So one of the other things that has been going on over the past 15–20 years is a very ongoing and steady decline in interest rates, and that's partly both the answer and the cause of, David, you know, behind your question. Rates are materially lower than they were twenty years ago despite the increase in debt as a share of GDP since then. That suggests either that debt doesn't affect interest rates, I'm not sure that's the case, or that there are other things that are much more powerful that have been going on. But either way, we're in an era of much lower interest rates and we can turn later maybe to how long that's likely to continue but that materially affects the response to deficits in debt. If the interest rate is much lower, you're in a different environment than if interest rates were, you know, the way they were back in the Carter years.

RUBENSTEIN: Right. Okay. Thea, what is your view? Is there too much debt? Or do you think the debt we're now putting on is actually doing good for social purposes so you're not that worried about it?

LEE: I'm not that worried about it and I would agree with Peter that when we look at the issue, it's not just that financial markets are tolerant of debt, in some ways they seem to welcome it and that, I think, is, you know, looking at the super-low interest rates over a fair amount of time. I would go a little bit further and say that one of the reasons—Peter talked about sort of what's the big, major underlying reason—is that there has been a shortage of aggregate demand for a couple of decades now and we've had to ratchet down interest rates lower and lower to hit any given unemployment target even when there have been big asset bubbles. And I guess I would say one more thing, which is one of the reasons demand has fallen, has been so weak, has been inadequate, is the growing inequality in the economy that there has been a massive transfer of income from people who spend most of their income—that's low and middle-income folks—to people who save most of their income, that is wealthier people. And so, you know, some of those structural changes that are happening in the economy, we don't seem to be approaching a chokehold. We don't see rising interest rates. We don't see rising inflation and therefore this shouldn't be a cause for concern right now.

RUBENSTEIN: Doug, I don't want to put you in the posture of having to defend the Republican Party, though I think you are a registered Republican, maybe I'm right on that, I guess, but you've been involved in a number of Republican administrations. Under President Trump the debt went up a fair bit and the Republicans didn't seem to say much about it. Now that President Biden is proposing a very big debt package as part of a stimulus, the Republicans are concerned about it. So what is the Republican position on debt? Are they worried about it or they have the view of Peter and Thea, which is it's not that big a problem relatively speaking?

HOLTZ-EAKIN: Well, as you may have noticed, we live in an era when there is no single Republican position on anything where we are greatly divided. I don't think Republicans have any credibility on fiscal policy right now for precisely the reasons you just laid out. They really abandoned those principles over the course of the Trump administration and now it really feels like a weak opposition to, sort of, point to the debt. The thing I'd add to the discussion we've had so far is that the markets been tolerant to the fact that the U.S. budget is out of alignment as far as the eye can see for a long time. I mean, the federal budget has been unsustainable for years. We know that. Revenues and spending diverge as far as the eye can see. In this moment we're adding a lot of debt, but remarkably it's all due to very temporary policies. And if you just roll the clock forward three years, we're back to the baseline levels of spending and revenues that you had before the pandemic hit. The market accepted them. Since we're going back to them, there's no reason to the markets to get upset. That's really, I think, all that's going on.

RUBENSTEIN: Okay, let's talk about the economic team that President Biden has assembled. It seems to me that the foreign policy team has worked together in the previous Democratic administration. They know each other quite well. The economic team doesn't seem to be quite a team of friends the way that maybe the foreign policy team is, maybe that's right, maybe wrong, but another point I wanted to ask you about, Peter, is there seems to be nobody in the administration to make economic policy who has actually been an entrepreneur, a CEO, a capitalist. Does that strike you as now, somebody who's in the financial service world, as a problem? And do you think the team is a really good team and a team that is going to be able to do everything even though they don't have any entrepreneurs or capitalists in the senior ranks of the team? Peter?

ORSZAG: So yes, sure. First, I actually think this team is remarkably a group of friends and professional colleagues who go back decades. So if you look at Brian Deese, Janet Yellen, Neera Tanden, these are people who have worked together in a relatively small group of, kind of, thought for a long time now. So I don't think the problem is that they're not friends. I don't think the problem is that they haven't been professional colleagues. I don't think the problem is that they won't get along. I do think that there is always the risk, and I'd say this is something that you could critique the Obama team for also, of having people who are disproportionately from think tanks and academia having a relatively similar worldview. And it's, on the one hand, a practicality that if you look for deep policy expertise, you're much more likely to wind up in the think tank and academic world. Also, from the confirmation perspective in today's world, I can understand concerns about people coming from different backgrounds. But I do think that you lose something in terms of the diversity of perspectives. The team is diverse, among other dimensions, including gender, and some background, but you don't have a wide array of professional backgrounds there. I think that's just the moment we're in, which is the political moment is such that I think it would be hard to have someone from a different background get confirmed and be part of this team right now.

RUBENSTEIN: Okay. Thea, I think it might be fair to say you are a progressive. I think that's fair. And the progressives would seem to be very happy with this economic team or am I wrong? Are you very happy with the economic team that President Biden has assembled? And I assume you're not as worried that they're no private equity founders in the economic team, right?

LEE: Well, just like, I don't think we heard a lot of people worrying that there weren't enough union leaders in previous administrations. I'm not so concerned. I think that this team is tremendously talented. And actually there is, I think, plenty of diversity of views. Even among think tanks in Washington is, as you all know, think tanks don't think alike. And a lot of these folks do have some experience in government as well. So I think it's a strong team coming together. It's not perfect, nothing's ever perfect from my point of view. But I think this is a really solid group of people for the moment that we're in right now where we have these multiple crises of the pandemic, climate change, racial justice, and the economy all coming together, that this team is focused on the things that are important. Janet Yellen and Wally Adeyemo over at Treasury. The Council of Economic Advisers is a tremendous trio of folks—Cecilia Rouse and two of my former colleagues, Jared Bernstein and Heather Boushey. So, and you mentioned Brian Deese, this is a really strong group of people and they are focused on what President Biden and Vice President Harris have laid out during the campaign, which is absolutely putting number one, dealing with the pandemic and the economic crisis but keeping a strong focus on racial justice and climate change. And I think that those are the right focal points.

RUBENSTEIN: Okay. Well, Doug, I assume you'll be willing to take a different position. Do you think there should be some of the highest calling of mankind—private equity or hedge funds—in this administration or are you happy with the economic team?

HOLTZ-EAKIN: It's a very talented team, but I think your concern is a fair one. I guess my critique of the Obama years in retrospect is that there was too much of a belief that pro-growth policy was a piece of legislation and that that's what you did. Once you did that you are good. In my view, pro-growth policy is when you are faced with inevitable trade-offs between an environmental issue, a labor issue or a social issue, and economic growth, you pick on the side of growth. And there's no one there who's going to pick on the side of growth because they haven't been on the ground creating growth, building businesses, hiring people, knowing what it's like to have to operate in the environment that the federal government creates. And I think that's a concern. But it's early, it is far too soon to judge and I hope they do very, very well.

RUBENSTEIN: So, Peter, everybody likes to talk about the weather but can't do anything about it. Everybody also likes to talk about income inequality and doesn't seem to be able to do anything about it. So realistically, COVID-19 has shown greater income inequality in our country. It has produced greater income inequality than we had even before, which was already considerable. Is there anything realistically that this new administration could do to reduce income inequality, if say, in a four-year period of time?

ORSZAG: I think the answer to that is yes. There's the traditional tools. So strengthening some of the means-tested benefit programs and making the tax system more progressive. But I actually think the bigger thing here, beyond those traditional tools, is that the bulk of economic policymaking has adopted what I would call an Econ 101 approach to issues like income inequality. So we're all sort of individuals and the only thing that matters is our education, the tax rate, and it's almost place agnostic and community agnostic. And the place-based approach in which, instead of comparing David Rubenstein with a tax rate of 25 percent or a tax rate of 50 percent, compares David Rubenstein living in Austin, Texas, to David Rubenstein living in western Pennsylvania and emphasizing the difference is across communities and the role that businesses have to play. So what is shocking about the last decade or two is that the bulk of the rise in wage inequality has occurred across firms not within firms. That is the average wage at each firm has grown more unequal. I think there's a whole agenda here that involves a more institutional approach to how do we build more places like Austin, Texas, and how do we build more companies where everyone succeeds at them? That goes beyond just the traditional perspective of, yes, we should have a more progressive tax system, and yes, we should have stronger means-tested benefit programs.

RUBENSTEIN: Okay. Thea, are you happy or not that happy that the president hasn't emphasized his campaign's stated desire to increase taxes on wealthy people and reduce capital gains affected for wealthy people. Do you think the president should be talking more about that now or it's better to get the stimulus package through without worrying about taxes as much?

LEE: That's a good question and I think I would focus first on the stimulus, the Relief and Recovery Act, and get to progressive taxation down the road. As I said, you know, there's no real pressure on interest rates right now and because the, you know, raising revenues is always more difficult. But I think there are other things that can and should be done around inequality. And so, you know, in addition to the things that Peter talked about, obviously, progressive taxation needs to be on the agenda at some point, I would say, but also, if you look at the growth in inequality over the last couple of decades, I would say it was created and exacerbated by policy decisions and therefore it can be reversed that way. And if you think about it as basically a massive shift in bargaining power between labor and capital, that the erosion of unions, the rise of what I would call "corporate globalization" and changes in labor protections, especially the minimum wage, have eroded the bargaining power of working people. And I think we saw that very dramatically during COVID that people not only couldn't even bargain for better wages in the middle of a crisis where they were putting their life at risk every time they walk through the door of their workplace. So on that front there are luckily a couple of things. There's a national minimum wage bill and there is a labor law reform bill that are on the docket that will be considered by the Congress and I know that President Biden has been very supportive. And on top of that, I do think that the big package of major investments and job programs that the president has talked about—investment, climate change, renewable energy jobs, and the care economy and public health—those kinds of major investments are exactly what's needed at a moment of crisis where there's been such sectoral shifts and so much loss of jobs and it has been so unequal in impact.

RUBENSTEIN: Doug, it is said that economists are great at predicting the last recession, but not so great at predicting the next recession. But why don't you help us and predict the next recession? When do you think a recession is likely to happen? Do you think the stimulus bill could produce a recession? And are you worried about a recession in the near term?

HOLTZ-EAKIN: So I'm not deeply concerned about a recession in the near term. Certainly, we have had an enormous and, I think, highly effective response to this downswing. This is a recession unlike any other. Twentieth-century recessions where income events. Twenty-first-century recessions came from the fallout of financial markets, dot-com bubble, financial crisis. This really was a virus-created recession where people were afraid to go out and spend. Period. If you look at what happened when the pandemic hit in March, we saw a decline in services spending by U.S. households. It was astonishing. In the last two weeks of March, things shut down enough that first-quarter GDP fell by 5 percent. Two percentage points were people not going to get health services, they stopped going to the doctor. Anything that involves exposure they didn't do and that was especially true of affluent households. And the piece that we have not replaced, and will not replace until we conquer the virus, is the spending of affluent households on personal services—travel, hotels, concerts, plays, those things. That's just the hole in the demand side of the economy right now we just haven't replaced. So we've had a big response. The peak-to-trough decline in GDP was 9 percent. The CARES Act was 9 percent of GDP. We've done a couple of small things after that, another 1 or 2 percent. We just did $900 billion, that's 4 percent of GDP. They're proposing another 9 percent of GDP. That's a 23 percent of GDP response to a 9 percent event. That has to be enough to take care of any residual demand problems. I'm not worried about that at all quite frankly. Number one issue is to defeat the virus as quickly as possible and the rest will take care of itself.

RUBENSTEIN: Okay, Peter, you deal with CEOs all the time now. Are they more worried about interest rates going up, the dollar going down? And what are you most worried about right now in terms of the economy that you see in the next two years or so?

ORSZAG: I think it's a horse race between the factors that Doug was identifying, which are sort of on the upside. We have more than a trillion and a half dollars in pent-up savings that if it's unleashed would be a massive boon to the economy. And against that, I think we've got this image in many of our heads that somehow all we have to do is kind of hang in there until, you know, May or June and then we'll be frolicking in the sun and everything will be good again. I think the progression of the virus itself is going to be much more complicated than that and that it's not going to be an on-off switch, that the virus is clearly mutating, that it's not just vaccine distribution that's an issue but perhaps vaccine willingness to be vaccinated. I don't think we've got any idea yet how we will handle a situation in which if the vaccine effectiveness is reduced to—I'm making this up—80 percent, 70 percent against some of the new variants. Do we still wear masks? Do we travel? How do we handle interactions with other countries with lower vaccination rates? I think you're going to see throughout basically for 2021 as a whole, a very messy, confusing, on-off type of situation instead of the clarity that many people believe we're going to have by the summer. So I think those are the key things. And then one other factor I'll just mentioned quickly, which is it still remains unclear whether we're in a little bit of the Wile Coyote kind of moment for a lot of sectors or whether we're going to have some big structural shifts. Maybe the best example is the cruise ship industry where they're able today to—that bookings are back up. They're able to raise not only debt but equity. If there were industries that you would think would be affected post-pandemic presumably the cruise ship industry would be among them. So I think there's an open question of how much structural adjustment there will be in 2022 and 2023 across sectors. In other words, how much does behavior permanently change because we've lived through the pandemic? That's unclear. Those are the things that are top of my mind at least as we look forward.

RUBENSTEIN: Thea, two questions for you quickly. One, are you surprised that for 230 years we didn't have a woman who was qualified to be secretary of the Treasury? Was that a surprise to you?

LEE: Well, I'm really happy to see Janet Yellen in that position and I think she's going to do a tremendous job. So it took too long. Of course, it did. It was it's hard to imagine what the delay was, but I'm really happy to see her there and I have a lot of faith in her ability and willingness and experience right now.

RUBENSTEIN: If the president of the United States called you today and said, "Thea, I've outlined kind of what my economic package is, are you happy with it or what should I do beyond what I've already done?" What would you tell the president of the United States?

LEE: Well, I would definitely say you're on the right track. I think the $1.9 trillion is on the right track. And I agree with some of the points that both Doug and Peter made in terms of there's been a lot of government support so far. The one part that's missing is the state and local aid. And that's, I think, still a dangerous spot for the economy in the sense that the state and local governments cannot deficit spend the way the federal government can. And yet they are on the frontline of providing a lot of essential services, both health services and others. And so I would want to make sure that that doesn't drag down the economy just as we begin to get the vaccines in place and move out of it. But I think that the plan is outlined, I think the big challenge is going to be will Congress go along with it? Will Congress be supportive at this moment of crisis and support that bold, bold action?

RUBENSTEIN: So Doug, while you can't speak for the Republican Party completely, what do you think the Republican Party in Congress most important economic desires are in terms of policymaking? Is it to keep the deficit down, keep the debt down, income inequality? What is it that they are going to say we want to do different than what President Biden is trying to do in economic policy?

HOLTZ-EAKIN: Well, certainly the big difference in the recovery strategies has been the issue of protections for businesses against lawsuits related to the virus. So that business liability issue, you know, that's one of the things that stalled negotiations in the past. I think that remains unchanged at this moment. Looking forward, I think their agenda would be one that would be to complete the work of the 2017 tax reform. It's incomplete in two ways. Number one, something sunset. They would rather make all permanent. Number two, they didn't quite get all the reforms done that they should have and they know that. The law itself is a bit messy and needs to be cleaned up. That will be their preferred way to go instead of reversing course, which is what Biden is supposed to do.

RUBENSTEIN: Okay. Peter, if Jay Powell called you up and said, "I'm not sure if I should really keep interest rates as low as I've said, maybe I changed my mind a bit. Do you think I should increase interest rates a little bit to show that we, you know, can't have free money forever?” Or would you tell him keep free money forever for at least another two years or so. What would you tell Jay Powell?

ORSZAG: I think exactly what he's doing, which is to wait until there's actual evidence of pricing pressure and inflationary pressure before raising rates and to tilt given—let me back up. There is beyond the sectoral adjustment point that we discussed a moment ago, there is significant risk that the four million Americans who have been out of work for at least a half a year could suffer permanent harm because if you think about being out of work, being unemployed for six months or more, your work skills atrophy, your attachment to the workforce really deteriorates. And running a higher pressure economy is the best way of working off that long-term unemployed problem. So he's, I think, going to tilt towards a high-pressure labor market—the sooner that arrives, the better. And we can deal with any risk of a rise in interest rates or a rise in inflation if it starts to manifest itself, which it hasn't today.

RUBENSTEIN: Let me ask you all the same question before we take questions from our members. Peter, if Janet Yellen called you and said, "I really want to role model as a secretary of the Treasury." Who would you say, in the last fifty, sixty, seventy years has been the greatest secretary of Treasury or at least a role model that she might consider emulating? Anybody you would want to mention?

ORSZAG: Well, she obviously is in a unique position because, to your earlier question, she doesn't have any female predecessors to point to. I think just like young boys or young children, boys or girls, are disproportionately affected in terms of their professional sports affiliations later in life by who's successful when they're eight or nine years old. My own impression of Treasury secretaries is disproportionally affected by the people who were in office when I was about twenty years old or so. So the Reagan-era folks loom large in my mind, but I think there are lessons from every Treasury secretary. They've approached it in different ways and certainly the ones that were my colleagues in the Clinton administration and the Obama administration, I think, are people that Janet knows well, and she can pick and choose from the various predecessors that have preceded her.

RUBENSTEIN: All right, that's a skillful answer. You didn't mention anybody by name. Okay. Therefore, you did not mention anybody by name. So Thea, is there anybody you would say to the secretary of Treasury that's a good role model that knows how to do the job of secretary very well.

LEE: You know, it's a tough question for me because Treasury secretaries tend to be very focused on finance, and I'm more interested in labor markets. So maybe I would say to Janet, look at Francis Perkins, who was the first woman labor secretary maybe a hundred years ago, not quite that many but a lot longer ago, and somebody who really was focused as we emerged from the Great Depression on making sure that working people had the tools and the support that they needed to really be a part of a robust recovery.

RUBENSTEIN: Okay, and Doug, who would you recommend as a role model?

HOLTZ-EAKIN: There are two that stand out in my view—James Baker and Robert Rubin. And those are the best of the Treasury secretaries over the past fifty years. She'd be well served to look carefully at how they did their jobs.

RUBENSTEIN: Okay, Doug, as you look at the next two years, are you optimistic or pessimistic about the economy?

HOLTZ-EAKIN: I'm always an eternal optimist. I'm optimistic in the recovery from this. And I am more concerned about some of the long-term trends—more productivity growth, the lack of business startups, and the fiscal situation. Those are [inaudible].

RUBENSTEIN: Peter, are you optimistic or pessimistic about the next two years in terms of the economy?

ORSZAG: I am optimistic and I think layered on top of the pent-up savings that we talked about, we still have ongoing innovation and technological change, a lot of which was deployed during the pandemic to allow many of us to continue to do our jobs effectively. And I think that holds great promise for the future.

RUBENSTEIN: Thea, are you optimistic or pessimistic?

LEE: I'm also an optimist by nature and I do think that not only do we have a good team taking shape in terms of the new administration and the new Congress, but I think this is a situation where we actually do know what needs to be done. And it's just a question whether we have the political will to get it done. And that is to really give the economy the juice, I think, as Peter said, run the economy hot, run the labor market hot for a couple of years so that we can really rebuild and make sure that everybody shares in the growth.

RUBENSTEIN: Okay, I don't think I was able to get any of you to say anything that would be controversial, get you in trouble. So let's see if our members can do a better job than I can or did. So why don't we have our questions from our members?

STAFF: Our first question will be from Glen Fukushima. As a reminder, please state your affiliation.

Q: Sorry, there must have been a mistake. I didn't have a question. Please go to the next question, thanks.

STAFF: No worries, we will take our next question from Fred Hochberg.

Q: This is a great conversation. Thank you, David, and everybody else on the panel, I know all three of you. Doug said something early on and I wanted to sort of make sure I understood it properly and have the others respond to it. I think he said, one difference between Republicans and Democrats is balancing growth initiatives, policies with the environment, economic equality, social justice, and that I think I sense that a Republican view would tilt a little bit towards growth and perhaps a Democrat in this administration might tilt a little stronger towards taking into account environmental concerns, social justice, economic equality. So, A, do I have that correct? And, B, does that mean maybe we do need a little less growth but a more balanced growth going forward? Is that what we might expect in the Biden administration?

HOLTZ-EAKIN: So that is what I said. Inevitably in policymaking, you're faced with trade-offs, you don't get to do everything. And so the question is, when the trade-off comes between growth and some other legitimate competing policy objective, how do you pick? And if you always pick against growth, you're not going to get growth and you shouldn't be surprised.

ORSZAG: So the only thing I'd say is, I think, two things. One, in the current environment I don't think there's that trade-off, that more growth we have today, coming back to the point about the high-pressure labor market, there is not a trade-off between growth and inequality over the near term. In fact, if anything, the opposite. And then secondly, I think it's a question of, what do you do to promote the growth? The Republican approach has traditionally been that all you have to do is cut taxes and kind of unleash the private sector and the rest will take care of itself. I personally think even if growth is your objective, that doesn't always work. And so it's not that the objective is different, it's that the mechanism for achieving the objective is different.


LEE: Yes, I want to agree with that and pile on a little bit just to say that I think it's a false choice, Doug, between growth and equality that, in fact, the growth of inequality in the economy is emblematic both of weak demand but also wasted resources to the extent that we have problems in terms of racial inequality. That is preventing the economy from meeting its full potential. And I would say that this has not been the most robust or resilient economy partly because we made the wrong choices with respect to growth inequality. And in terms of the environment, I think there's no question that for business success, for economic growth, we need to pay attention much sooner to some of these questions about renewable resources and climate change than we have done in the past. So I challenge your frame.


STAFF: Our next question is from Esther Dyson.

Q: Okay. Esther Dyson—Wellville. And I have to confess when I was twenty years old, I wasn't really paying attention to who was secretary of the Treasury. But I'd like you to talk about investment versus spending because we can spend a lot of money and see a lot of growth in money but a kind of disintegrating economy. The impact of coronavirus isn't just the people who died but it's a lot of people who are now permanently disabled. It's a lot of people who are emotionally disabled, people who, as somebody mentioned, you know, have been out of the labor force for too long. And, you know, after a war or something, you repair buildings and infrastructure. But I think we have a huge human capital infrastructure problem. And the potential to invest in training people, caregiving jobs, the health-care sector, for better or worse, and unfortunately it's kind of a repair sector, is going to be huge in terms of caring for people who are damaged. But at the same time, I'd love to see us invest in increasing resilience of the next generation. And I'd love to hear your thoughts on that and Peter, in particular, you talked about Austin versus, I don't know, Silicon Valley and equity across companies just a little more about exactly how we apply the spending.

ORSZAG: So let me just start on the first part. I think before we even get to how do we repair damage that's done, the biggest thing is to stop the accumulation of damage and I would on a human capital front just focus immediately on what I think is a completely unacceptable approach to opening up schools for kids. The evidence is pretty strong that with regular testing, with mask wearing for kids, that we can safely conduct in-person instruction. And in way too many places across the United States, we are not doing that except in private schools disproportionately. And so for too many public school students, they are missing out. And I'm sorry, but for a five year old or six year old, Zoom is just not an acceptable replacement to in-person instruction. So I think you're right that there's a whole bunch of stuff that we'll need to do after the fact. But right now, as of today, the biggest damage that we're doing to future human capital is basically losing most of a school year because the virtual instruction is vastly inferior to what could be safe in-person instruction.

RUBENSTEIN: Peter, you sound like a father of a young child.

ORSZAG: I have an about-to-be nine year old, about-to-be five year old, they are lucky enough to be in school, in person. But I know plenty of our friends and families whose kids are not. And it's not only—President Biden has correctly pointed this out—it's not only an issue with regard to their learning, but it's also a major problem for people who are trying to balance their own work that the kids are at home, too. I would put this absolutely at the top of the agenda in terms of the pathway forward to minimize the damage that is being done today as we speak, unnecessarily.

LEE: Can I jump in on that? And, actually, Esther, thank you so much for the question and I totally agree with you in thinking also about investment versus consumption. I think that goes back to some of the questions we were talking about earlier, about, you know, how much debt is too much. I think if we are investing in the future, and part of that is the future of our children, then running up the deficit is less of a problem than if we are simply doing consumption of giving tax cuts to the wealthy that are not going to necessarily create that change. But to Peter's point, my daughter actually is a middle school teacher in a public school in Brooklyn. And she was in-person for most of the fall semester until the schools closed down. And, you know, she had a very small class and safe and everything went fine and she's now been vaccinated. So that's moving us in the right direction. But I think this also goes to the question of resources. You know, private schools can afford to do exactly what they need to do. But even in the public schools when they opened, there wasn't always the additional staffing that was needed. There wasn't the additional cleaning that was promised. So there were a lot issues and most of them require a pretty significant amount of resources. And that goes back to the state and local aid that I was talking about, also, that if we want to reopen schools safely, first of all, we should have managed the virus better and differently in the earlier stages. And second of all, we need to make sure we're not cheapskating this work, that public schools need resources, just like private schools do, in order to be able to do this and so I think that's an issue. But I also think that the kinds of things where the Biden administration is talking about with investing in the care economy and in professionalizing the staffing of the care economy is exactly what needs to happen. You think about nursing homes, you think about daycare, you think about schools, these are jobs that should pay more, that should be more respected, more professional, better training. And I think those are really important investments and essential investments that we should be thinking about making as we watch the economy recover.

RUBENSTEIN: Doug, did you have a comment?

HOLTZ-EAKIN: I would just echo the importance of this. This is a place where a source of inequality has been exacerbated by the pandemic. And if we were to restore to the levels of proficiency in education that we had prior to the pandemic, we would still have a failing system where when you look at the Assessment of Educational Progress in the United States, fourth and eighth graders, about 25 to 32 percent of them, cannot read and do arithmetic at grade. They are seriously deficient and they are behind forever. It's a huge problem and merely getting back to where we were before is not good enough.

RUBENSTEIN: Okay. Other questions?

STAFF: Our next question is from Gilbert Metcalf.

Q: Hi, Gib Metcalf from Tufts University. This is a great discussion. So enacting sensible economic policy depends on the ability of our political system to function. And we've seen how platforms like Twitter and Facebook affect our political system. So I guess my question to you is, as economists how do you think about these concentrated centers of power? Do we need regulation of Big Tech and what sort? What would you recommend as a regulatory approach to the Biden administration. Thanks.

RUBENSTEIN: Who wants to jump into that one. That's easy. Peter?

ORSZAG: I guess I'll go. So, two comments. The first is I think what we are witnessing is two phenomenon layered on top of one another—the polarization between the parties, which has been going on for decades and I think we had kind of gotten used to, and then in a fractal-like experience, polarization within the parties on both sides. And they have evidence on the degree to which social media has exacerbated that phenomenon, I'd say is a is a bit mixed, but there's enough there to raise a concern. What you do about it is the much harder question because clearly, for example, I think anyone who is on Twitter can feel a difference from former President Trump's being no longer present on that social media platform. Should that be up to Twitter? Should that be up to the government? Should that be decided in various different ways? I think these are really complicated questions. I wish I had a clear answer for Gib and David, for you, but I don't in part because I don't think the answer is clear. I think it's clear that there is an effect. I think it's clear that this is something that we should be focused on, but I don't think there's the same clarity about exactly what to do that exists in other domains.


LEE: Yes, I'll jump in. Yes, I do think that the tremendous power and political power that these huge tech companies have is something that is unusual and needs to be addressed and maybe regulated. I think we shouldn't give up on antitrust enforcement in this sector. That, you know, we've seen a lot of mergers and consolidation and growth to the point where, you know, we have lost control over some of our own personal data. And that these, I think, big companies do function a little bit as utilities and we should maybe start to think about them that way, that data is a valuable commodity. And a lot of it's been given away that individuals have lost control over their own personal data, and these big companies are merging and merging and merging and wielding so much power that is unseemly. I don't want to have to rely on the goodwill of, you know, Jack Dorsey to address something where there's, you know, violent conspiracies brewing online and the government is powerless to deal with it.

RUBENSTEIN: Okay. Peter, let me ask you a quick question. When you were at OMB, you had to make decisions on foreign policy and economic policy. In which cases is the information presented to you more reliable—the people that present foreign policy and defense information about what's likely to happen or the economic people that come to you and say this is what's going to happen? Where's the information better? Where's it worse?

ORSZAG: I don't think it's better or worse generically in either camp. I do think that there's a lot that we can learn about, sort of, the super forecasting trend that has been in, you know, that has been developed over the past decade. What makes good forecasts, what doesn't? And bad forecasts are not specific to foreign policy or economic policy. They exist in both places. But there is, I think, hard and fast approaches to forecasting that, again, there's a group of super forecasters that kind of demonstrates the way for better informed decision making and in both camps, both economic and foreign policy, we can do better. We can always do better, but we can do better in a kind of systematic way.

RUBENSTEIN: Okay, next question.

STAFF: Our next question is from Afsaneh Beschloss.

Q: Thank you, David, for a great session. We've been talking mainly about, obviously, the domestic economy. But I was curious as to what you all think about, for example, China growing at least double the rate of the U.S. potentially this year. How's that going to impact us? And, you know, it looks by all accounts, you know, where we are on our debt side versus them are very different places. So are we going to get left behind as it were?

ORSZAG: I'll take a crack at that. I mean, I think the Chinese have responded, obviously, very well to after the initial period of the pandemic. But I also think that they've got some underlying structural challenges themselves that we tend to kind of neglect—rapidly aging population. Most importantly, a very important transition from the source of growth over the past several decades, which has been fundamentally moving people from agriculture into manufacturing to a new situation where they've largely, not entirely, but largely tapped that out and reached what economists call the Lewis turning point, it becomes much harder going forward from that point than before. So on initial crisis response, probably a failing grade on crisis response. After that initial period a very strong grade but tons of challenges going forward. And I think we often neglect to recognize that it's not just us that have downsides that we need to be playing through, but the path forward for the Chinese is also complicated.

RUBENSTEIN: Doug, did you want to comment on that?

HOLTZ-EAKIN: I think the short version is very close to what Peter says, which is, they started earlier on their fiscal response to the downturn and they're dealing with the public health issue and they have a positive number this year, but the U.S. is going to do better than every other major economy in responding to this, it already has. Last year [inaudible], we've [inaudible] three and a half, which is the worst since the '40s, but well above every forecast that was made in May and June. So we're recovering quickly. And over the longer term, I would bet on the U.S. model way ahead the Chinese model. They have lots of problems.

RUBENSTEIN: Okay. All right. Thea, go ahead.

LEE: Yes, I don't think it's so much a question of, you know, which model is better because they both have strengths and weaknesses, they're very different. But I do think that the U.S. needs to rebalance its relationship with China. We have a tremendously imbalanced trade relationship where we import many times what we export to China. And part of that is based on, you know, certain unfair trade actions that the Chinese government has taken that the U.S. hasn't done a good job of addressing, and I would put at the top of it currency misalignment, worker rights, and the industrial subsidies. So we, you know, the Trump administration had a very combative bellicose approach to China, but it wasn't a very effective approach. And so I would like to see the U.S., first of all, you know, clean up its own house and do the kind of investment in infrastructure and in skills that we need to do at home, fix our tax structure so we don't have adverse incentives, but then also, really, in a surgical way go after some of the unfair trade practices that the Chinese government has to try to get that relationship more reciprocal, more balanced. And I think that would be important going forward for both countries.

RUBENSTEIN: All right, our next question.

STAFF: Our next question is from Meena Bose.

Q: Thank you. Picking up on the last two questions, I wanted to ask if the speakers could discuss the political process for enacting some of these proposals. There have been several large-scale plans that have been suggested either with tax reform, investment in the economy, getting people who have income to spend that money again, helping people who've been out of work. This all requires a tremendous amount of planning and, you know, we're less than two weeks into the Biden administration but the midterms are less than two years away. So the window for policymaking is traditionally fairly small after a presidential election. Polarization was mentioned, the party divisions in Congress, how do you see the White House and Congress—what is the plan, what is the path forward to enact some of these plans and make the policy? Thank you

RUBENSTEIN: And in answering that, could you all address the issue of in the last couple years, economic policymaking on Capitol Hill has been made by the leadership completely. The committees are more or less sidelined. Is that what you think is the future as well and looking at the Biden packages do you think it's basically the majority leader and minority leader in both houses, in effect, and the speaker, making decisions? Are the committee chairs relevant any longer in addition to answer the question that was just asked, okay? Peter?

ORSZAG: I'll take a crack. Sure, I think, first, in answer to your question, David, I think the leadership will continue to play a very dominant role in most of this, the pathway forward. I personally would like to be wrong, but I don't think I will be that the patina of sixty-vote approaches in the Senate is a mirage, that the only way you're really going to get legislation done is by using the so-called reconciliation process, which allows you to enact things on fifty-vote majorities. I think the polarization across the parties for anything significant is just too large and that it's a bridge too far to get to sixty votes. So I suspect we will be quickly pivoting to reconciliation process both for the immediate relief bill and for whatever the infrastructure climate bill is separately that comes later in the year. Now on that, though, fifty votes is not an easy thing, because the swing votes in the House are at basically the other end of the spectrum for the Democratic Party than the swing votes in the Senate. So the same people, Senator Manchin and others, who objected to eliminating the filibuster in the Senate are not going to be signing up for the packages both on short-term relief and on, sort of, structural infrastructure climate bills that the liberal wing of the Democratic Party, that are the swing votes in the House, will be signing up for. So I think this is a very complex legislative environment. My one prediction is that, I think, in those kinds of complex environments, things tend to move slower than you would otherwise think. And so the thought that we're going to kind of do a relief bill, move on to the infrastructure climate bill, and then by the summer we'll have bandwidth to do something else I don't think is realistic. I think you're going see those two things dominate all of 2021.

RUBENSTEIN: Okay, Doug or Thea?

HOLTZ-EAKIN: I'm going disagree greatly with this assessment of the political landscape and the [inaudible]. I think the only exception, and the one that I can't say is going to happen but I would like to see happen, is that I think you could get sixty votes and pass in regular order a smaller bill that was focused on the one thing that has to happen when none of the rest matters. That is the $400 billion for vaccines, testing, contact tracing, some food assistance and extension UI. That will be important, that can get done. It's the rest that you end up going for these reconciliation procedures.


LEE: Yes, I agree with the thrust of that. That is the political reality, which is that it's going to be pretty hard to get to sixty votes unless there is filibuster reform, which also is pretty unlikely at this point. It might be interesting, and maybe this is just the optimist in me, just to say that, you know, is it possible that there will be some breakdown of the rigid party roles that we've had in the past? And, you know, we've all been through, I would say, a pretty traumatic year, the last ten months of lockdown and there was some shared experience there. And, you know, and the Republican Party is a little bit fractured, as Doug has said earlier. I think we can all see. Does everything just come back together? Does Humpty Dumpty put the eggs back together again and then everybody just proceeds as though nothing happened? Because I think, you know, I would say that the Biden administration has a short window. I would agree with Meena's question. It's a short window to get a lot done. And in some of these things, I think, will be very popular. So at what point do people in either party start to think about reelection in their constituents and the good of the country? And maybe do we find some unusual alliances? Other than that, it's going to be reconciliation for a lot of things that we think are important.

RUBENSTEIN: Peter, let me ask you a question. When you were the head of OMB, you dealt with Vice President Biden. He was the chairman of the Senate Foreign Relations Committee, chairman of the Senate Judiciary Committee, but never chairman of the budget committee and the finance committee. So what is his interest level or familiarity with economic matters and finance matters relative to, you know, his foreign policy expertise, let's say?

ORSZAG: I think he comes at economic issues from the perspective of his background. So, you know, he was a constant force for focusing on middle-class workers in particular. And so maybe he doesn't come from a sort of, quote, "fancy background," but he approaches all of these economic questions consistently from two things. One was a focus on, kind of, regular people. And secondly, on not making things so convoluted and confusing that no one would understand what you're trying to do. So I found him consistently to be engaged in these questions and to have those two kind of operating principles at heart whenever a question came up.

RUBENSTEIN: How can you survive in Washington without making things convoluted? I guess it worked out for him. Okay.

ORSZAG: It worked out for him.

RUBENSTEIN: We have time for one more question I think.

STAFF: Our last question will be from E. Whitney Debevoise.

RUBENSTEIN: E. Whitney Debevoise.

Q: Yes, this is Whitney Debevoise, partner at Arnold and Porter. Former U.S. executive director at the World Bank. Peter Orszag said in the beginning that Bob Rubin and Joe Stiglitz had written something recently to say that the GDP ratio should be thrown out as an anchor for fiscal policy. There are an awful lot of countries that go to the IMF and told that their debt-to-GDP ratio is too high. And that is the anchor for all kinds of programs. Are we suggesting that there's a rich country rule and a poor country rule? Or is there no rule or is it worthless? What do you think?

ORSZAG: So just really quickly, I think countries that lack market access to debt financing are in a different position. The financial markets may impose an anchor on them and that's a different situation. But in general, the efforts whether it was—I mean, don't forget the 3 percent of GDP deficit target in the Maastricht Treaty, completely made up. Like literally made up by two junior staffers. The 60 percent target, arbitrary and made up. The attempts to define a limited 90 or 100 percent are plagued by methodological problems. There may well be a limit, but it's going to vary across countries and across different institutional settings, different financial market conditions. And so it's folly to be too precise on that front except when you lack market access and there's something that you need to do to reestablish that market access.

RUBENSTEIN: Okay, when I worked on Capitol Hill, when we passed legislation, we sometimes said, "Well, we don't have all the details in the facts. We'll send it downtown, and they'll figure it out when they're administering it." When I worked in the White House, we said, "We don't really know all the facts; we'll send it up the Congress because they have all the experts." Peter, where are the experts on economic policy? Are they on Capitol Hill or the administration? Where are the experts?

ORSZAG: They're in both places? And let me just close by highlighting an institution that I think is remarkable that both Doug and I had the honor of leading, which is the Congressional Budget Office. Somehow in a setting that, you know, you would think had no institutional power because the director could be dismissed by a majority vote in either house, the budget set by the Congress, you wouldn't think that the Congressional Budget Office has much institutional standing. It does and the professional staff there is just phenomenal, but there are very qualified experts in the executive branch also.

RUBENSTEIN: All right, very diplomatic statement. And I want to thank all of you for participating and I thank Doug, Peter, and Thea for a very interesting conversation. Thanks to the members for participating. Remember this was on the record and please tune in for our next transition series that will be advertised on our website. Thank you all very much.


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