The Long Road: Austan Goolsbee on the Economic Recovery

Austan D. Goolsbee is the former Chairman of the Council of Economic Advisers and member of the cabinet for President Barack Obama. He also served as the Chief Economist for the President’s Economic Recovery Advisory Board. He has since returned to the University of Chicago Booth School of Business, where he is the Robert P. Gwinn Professor of Economics.

We’ve recently passed through a recession that, although officially over, continues to be felt by millions of unemployed and underemployed Americans. What is the state of the economic recovery? What are both the potential threats to its continuation and the potential factors that could increase its speed and strength?

Pretty clearly we are seeing that it’s a slow business trying to get out of a recession when you can’t just go back to doing what you were doing before. Investment and exports are up a lot but with five million vacant homes there won’t be much housing-driven recovery—which is normally about a third of a usual expansion.

The government sector at the state and federal level are also big negatives so it has to come from more investment and export growth. And that takes time to grow.

The biggest threat, by far, remains the dark times ahead in Europe and the pall that casts over the world economy. Gas prices are the second major threat.

Having done quite a bit of research looking into the effects of changes in tax policy on the behavior of individuals and firms, how do you propose policymakers balance these seemly competing priorities of short-run growth and long-run deficit reduction?

I mainly think about the question of the longer-run impacts of tax policy on the economy rather than the short-run stuff. I do think having so many things expiring all at once at the end of this year might be fairly hair-raising in the political environment we are in, but that’s a different issue.

My read of the large body of research on tax policy is that going back to rates on high-income people like the ones we had in the 1990s would have very little negative impact on economic growth and would help reduce the deficit. I don’t think people saying otherwise have looked at the evidence.

A recent report by the Federal Reserve Bank of Chicago shows a historically weak recovery in personal consumption levels. What can be done to restore consumer confidence and increase personal consumption?

Well, it’s been that low because it was the worst economic downturn of our lifetimes in the middle of that time. I hope we shift away from just personal consumption as the driver of economic growth. We need to have consumption grow proportional to income growth. That is, let’s keep the savings rate at 5% rather than letting it get back down to 0% as in the 2000s.

Out-of-work Americans are facing durations of unemployment that are nearly twice as long as any other post-war recession. Some observers view this as evidence of structural unemployment. Do you find evidence of structural unemployment convincing?

Not yet. I think that will become more of an issue as the economy recovers and the most skilled workers come out of the unemployment pool.

It is worth our getting in front of that issue by getting our workforce the skills they will need when the economy improves. In normal good times, there are about 1.2 unemployed workers for every job vacancy, and in a normal recession that ratio rises to 2.  In this recession the unemployed workers for every job vacancy ratio rose to 7. And it is still around 5.

I think that indicates that the overwhelming issue facing the economy at this moment remains low demand.

Much has been made of the diminishing effectiveness of monetary policy as interest rates approach the zero level. At the same time, economists often lament the politicized nature of fiscal policy. Do you think that the high reliance on government spending in the recent recession has presented lessons for future policymakers about how to construct effective expansionary spending programs in the future?

So much depends on how long-lived you think a recession is going to be and what priorities should come first that lessons might not be as applicable to other circumstances. Hopefully we won’t see a situation like this again for the rest of our lives or longer.

The country turned to direct stimulus at a moment when the private sector was in complete free-fall and there didn’t seem to be much of an alternative. In more ordinary downturns, I hope we will be able to rely more on the private sector to lead us out.

Presidential Candidate Mitt Romney recently argued that “Freedom is becoming the victim of unbounded government appetite…As the government takes more and more, there is less and less of an incentive to take risk, to invest, to innovate, to hire.” Are we getting the balance between excessive risk and excessive regulation right in this country? 

Clearly, the old status quo was disastrously too lenient in not enforcing sound rules of the road. I don’t think there is anything anti-market about wanting tougher rules of the road. Not having them caused a massive loss of public trust, and without that trust the financial market simply cannot function.

I just do not understand the people arguing that, after the crisis we just had, things would be better if we abolished the new regulations and went back to the old status quo. That, to me, is crazy.

In a hypothetical world, a stagnant and divided U.S. Congress passes only one bill over the next six months which deals with the economy. You are put in charge of drafting the legislation. No amendments and no pork-barrel projects are attached; Congress passes your bill exactly as written. What key components are included in the legislation?

It has to address long-term issues extending well beyond the next 6 months. I would go for the grand bargain setting up a long-run path of fiscal balance. We’ve known about the fiscal problem for 40 years. It has nothing to do with the short-run increase in the deficit—which is overwhelmingly due to the business cycle.

But it is so seldom that we confront those long-term issues; it would be great if we could. Even more important would be improving and investing in our education system for long term prosperity.

Feature photo:  cc/potyike