Austan Gooslbee is the former Chairman of the Council of Economic Advisors under President Obama. He is currently the Robert P. Gwinn Professor of Economics at The University of Chicago’s Booth School of Business. His earlier email interview with the Observer can be found here.
The responses below have been edited for length and clarity.
SW: So I have heard a story that on Chief of Staff Rahm Emmanuel’s last day in office, you presented him with a dead fish, and I would love to hear the story.
AG: Not just any dead fish. So Rahm was a congressman from Chicago, and he was always kind of obsessed with the Asian Carp, which is this invasive species which has come up – some idiot somewhere released them into the water to clean up something, and they’re voracious filter feeders so they devour the ecosystem everywhere they go. So they came up the Mississippi, they came up the Illinois river, and the great fear was that they would get into the Great Lakes and wipe out the fish and the ecosystem there. If they do, where it would take place is where the Chicago River meets Lake Michigan, so that’s why he was always obsessed with this. He himself once sent a dead fish to a pollster, rather famously, someone he was upset with…
SW: Was it an Asian Carp?
AG: No, but it was like Luca Brasi, you know, “you will sleep with the fishes.” So when he announced he was leaving to come back to the city I called all around to find a seafood distributor to send me a dead Asian Carp.
And it was a nasty, nasty fish. They’re big – it was too big to fit in the freezer, and if you’ve never seen these you should go on Youtube and look them up. Look up flying Asian Carp, because they don’t have defenses other than when they get scared they leap in the air, and so, it’ll be like thousands of fish; it’s raining fish. A woman got hit in the head and broke her neck, I mean it’s like crazy, crazy images.
So I bring this thing in, and getting this thing through the White House security was kind of a nightmare in itself. I wrapped it in a nice box, and on the final day I said: “You know Rahm, all the policy people got together because we wanted you to know how we felt about you.” He said, “Oh wow,” you know, so he opens up the box, and Rahm being Rahm, he goes, “This is a fucking dead fish!” And I said no, this is not just any fish: this is an Asian Carp – this is a dead carp. And so he’s kind of upset, and goes out and people laugh, and then later, his people call, and they tell my chief of staff: Rahm told us what Austan did, he said that was the most thoughtful gift anyone’s ever given him. He said it almost brought a tear to his eye. I said what does that mean? What kind of a town is this?
So it’s true, and there’s even a picture of me – after the fact, there was no photography there – but after the fact we came back and took a picture of the fish in newspaper in the box, and I was happy to see there was somewhere… it was either a profile of Rahm in The New Republic or somewhere, and there was a photo of Rahm in his office as the Mayor, and down in the corner, you could see the picture of him with the fish.
SW: In Douglas Holtz-Eakin’s keynote address at this conference he about the importance of economic growth. This past year, on a Bloomberg panel that you were in called “The Year Ahead: 2014,” you said: “I don’t think 2014 is going to be that great, and will be about like 2013, which is modest growth…We had a bubble that popped and we can’t go back to doing what the economy was doing before.” I assume there you’re referring to the housing market?
AG: Mostly housing, but also, tied to it, consumer spending. Consumer spending has always been the lion share of the US economy, but it rose even higher than the normal – about two thirds, and got as high as three quarters of the economy. And consumer spending was growing faster than income was growing. That was the other half of the non-sustainability.
SW: That might be just what I’m getting at then, which is that if we can’t go back to doing what we were doing before, where do you think the focus needs to be?
AG: I think its obvious the focus needs to be more export led, more investment led, more innovation led – relatively, and relatively less residential investment and relatively less consumer spending driven growth. I think that’s obvious. The part that’s hard about that is that 95% of that has nothing to do with the government. It has to take place on its own, its going to take place because of the incentives in the private sector. The global economic system was through the 2000s filled with these massive unsustainable imbalances. And not just in the US but around the world too, there’s this uncomfortable tension that a bunch of people, in their mind, have – well what we’re observing is a huge change from what we’re used to, and from what many consider to be normal, and they don’t want it to happen. That’s definitely true if you look at emerging markets. Their view is well wait a minute, you know, currencies are moving around, and the advanced economies are changing things, and this is unprecedented. But in some sense the question is, what did you think was going to happen? We couldn’t sustain what was going on in the 2000s so of course this is going to happen. I find that transformation that is taking place, but is slow – that’s not surprising. I don’t think de-leveraging is the main reason why we’ve had a long slow recovery. I think the main reason is because it takes significant time to shift to doing other things. The only recession that this one looks a lot like but was bigger is 2001, in which there was no debt at all, it was an equity bubble that popped. But you had that same feature that the economy’s got to shift away from what its main focus was.
SW: The other thing I was struck by in Mr. Holtz-Eakin’s speech was that he mentioned that as much as anything else we have a message problem – that perception of things like the wage gap, of general inequality, the rhetoric of the 99% versus the 1% is, at least, important in some way. Do you think that there’s a specific aspect of the inequality problem that is either misrepresented or not being talked about enough in the media discourse about the problem.
AG: That’s an interesting question. I am of the view – there is a group that views that somehow they’re going to probe enough into the data and the rise inequality is going to go away. They think, you know, if you measure prices correctly, then real wages haven’t been falling at the bottom they’ve actually been rising, because the price of stuff has gone down more for low-income people. There’s another group that says go look at inequality in consumption, that is, in spending not in income, like total spending in the economist’s formulation. The argument behind this being – take lifetime inequality: economists tend to think how much you spend this year is based more on what you perceive your lifetime income to be, averaging your income over your whole life, so if some people made little money when they were young and a lot of money when they’re in their 50s, and then make little when they’re retired, at any given moment its going to look like there’s inequality but averaged over a person’s life, taking into account you’re in a different stage, there might be less. This isn’t a fools errand but I don’t think it’s going to work. I think the data’s pretty strong that any apples-to-apples comparison has shown a big increase. I don’t think that’s been wrong – I think to the extent that (let’s call it the Right) has been trying to fight the evidence of inequality, I don’t think that’s going to amount to anything, because I think that critique is fundamentally wrong. From what I read of Doug Holtz-Eakin’s talk – I didn’t make it in in time – he started making an argument kind of in that direction. He says, oh, but if you count tax payments, if you count this stuff inequality’s smaller, if you look at it this way it’s smaller. Yes, but my read of the evidence is you can do things to make it smaller but the trend is always the same, however you want to measure it, it’s getting more unequal over time. I think the problem on the left has been the tendency to what I would call lie in the realm of documenting. So they’ll just say, look, look how much this inequality has gone up. To just assume that therefore, if you can document that inequality exists, that doesn’t on its own have a direct policy implication, and if it does well then what is that implication? I would say that part has received relatively less attention. The second part that I would say has received relatively less attention is that most of the inequality discussion has been about basically the income distribution among labor. There’s a lot of inequality that’s been of the form, that the returns on capital have for the first time on record shifted dramatically upward. For the longest time, the labor share and the capital share were basically constant for 70 years, and now, the returns to capital are way up and the returns to labor are way down. That’s partly tied to income distribution, because a lot of the rich people are owners of capital, but partly its not; partly its just a different kind of inequality, and I do think its worth thinking about that too.
SW: Ok. You mentioned the Right, and the way they’re handling it, and I wanted to ask you if you have any thoughts about the Democrats campaign against the Koch Brothers. With the recent Supreme Court decision on McCutcheon versus the FEC, with no more concrete limits against campaign financing, do the Koch Brothers in your opinion represent a unique threat to democracy? Are they similar to what George Soros did with the Democrats?
AG: Look, I’ve always been of the view that vesting policy in some families, or they don’t like these guys, to me is kind of goofy and nuts. But, I personally think that Citizen’s United, McCutcheon, all of these deeply undermine the system, because the greatest fear would be to follow. We know that there are underlying trends that play heavily towards economic inequality. Those trends aren’t brand new, they didn’t start in the Bush Administration, its nothing like that. They go back some time, at least to the late 70s. The question is, as that happens, is there anything that naturally brings about equilibrium or is it unstable? And one sobering lesson dates in my view from the late 90s when Clinton was the President. There’s a huge run up in the stock market. There’s a massive accumulation of wealth within a small group of people. You would’ve thought, ok, now this will be great because actually this newfound increase in stock market wealth will eventually filter down into more tax revenue that can be used for investment in education because they’ll pay capital gains tax. They lobby and they get the rates cut, so there’s nothing equilibrating its actually going the opposite way. You have trends that are making a small group of super rich, and then the super rich can change the policy to make themselves even more super rich. I think that is a problem. But I think seizing on the Koch Brothers is not productive in my view, and actually – I went to MIT for my PHD – and philanthropically, these guys have donated a lot to education. It does seem like they feel besieged, so they’re like we’re going to invest more, and then the other guys say look how much they’re investing we’re going to go after them! I don’t know how you get out of that.
SW: It’s basically an arms race?
AG: Yeah it seems like an arms race. I understand the parallels when people say, but how’s what they’re doing different from what some other rich guy on the left has done? It’s probably not different – that does seem similar – but I don’t like a system where one guy can give fifty million or a hundred million dollars to the system, I do think that seems problematic.
SW: Sure. The other thing I wanted to touch on, specifically when it comes to education which is something that came up last night, I got a chance to ask Mr. Holtz-Eakin about the student loan system in the US. I think a pretty large consensus says that it’s becoming unsustainable – that kids are more and more unable to pay back their loans after getting out of college, and that’s a problem for US debt and getting that money back. I’ve heard of a lot more states and communities experimenting with new ways of going about it, like in Oklahoma they’re trying a system of free tuition.
AG: In public universities?
SW: In Oklahoma State, specifically. Michigan has also been discussion a pay-it-forward plan, where students are able to pay back their tuition based on a percentage of their income after they graduate. But when it comes to student loans I’m wondering: do you think having debt plays a significant role in success in the job market, and in the prospects for upward mobility?
AG: I think it has some, and I think the data you’re describing definitely suggests that its one of the big two reasons that the college dropout rate is by far the highest in the US of anywhere in the world. We have by far the highest college entry – if you just say ok what share of 25 year olds started college, ours is the highest in the world. But our dropout rate is by far the highest too, so that the share of 25 year olds that have completed a college degree, in which the US always used to be number one, is now not that impressive among rich countries. The two big reasons are K-through-12 preparation and the cost. I think we should explore and be open to any models that can make college especially but all education more affordable. I’m not tremendously optimistic that we’ll be able to find that because as time goes by, the thing is, human beings are expensive, and ultimately, education is based on human beings. I think as our productivity and our incomes go up that’s going to get more and more expensive just like every significant professional service gets more expensive. Now that said, the thing that’s weird about this is the payoffs of going to college have never been bigger. So, yes there’s a lot of student debt, but it’s also never been more important to actually go to school. I think that there is one mentality that says, whenever you get in a crisis: cut those things that are not immediately useful, and you see it when they get in the budget negotiations with the Sequester. They say lets go cut financial aid, and there’s a tendency to say oh, well student debt is really high and there’s increasing defaults, we should reduce the program. I think it’s the opposite. It’s deeply undermining – I don’t think it even saves money long-run, because some people are going to earn less for the rest of their lives. And, the worst form of student debt is debt for people who don’t end up getting a degree, because then they have all the debt but they don’t get all the skills. If you’re a college graduate, the wage premium is very high – the unemployment premium, that is the lower unemployment rate, is very dramatic. If you go for a year or two, get a whole bunch of debt, and then you drop out of college, you don’t get the same wage premium, you don’t get the same unemployment premium. We should look at those models but a model of free tuition is very attractive to the student, and then the question is how do you sustain that? Somebody’s got to pay for it.
SW: There’s no such thing as a free lunch.
AG: Yeah, there’s no free lunch, and to pay for that – it’s kind of my argument about taxes. One worldview holds that it is the lack of taxation and the lack of regulation that leads to growth. And that if you just cut taxes, especially at the top, it’ll give people incentive and they’ll go work. The other view says, that stuff, yes it matters but its importance is small compared to a high-quality workforce, economic infrastructure, and things like that. And, if you have to raise taxes to pay for college tuition you should do it because that’s the thing that’s going to make you grow in the future.
SW: You bring up the importance of a quality workforce. When it comes to the education issue overall, I think arguments about whether or not a college degree is actually worth the cost are becoming more and more popular. Do you think there’s a specific part of education we need to focus on? Is it college, is it pre-K, or is it somewhere in between?
AG: For sure its early education. The evidence is overwhelmingly strong that that has the highest bang for the buck. It’s not that expensive and the social return is 8 or 10 times higher than what you put in, so to me that’s a totally, totally clear one. But precisely because its so far down the road, nobody wants to make those investments now. Secondly, I would say either its in our high schools, or our community colleges, something around the workforce training for the half of people who are not going to have anything ever to do with a four year college, I think that’s important too and is relatively unsung. Make no doubt about it, I think college and university is super, super important but in a way we have the strongest and most vibrant such sector anywhere in the world. All our universities are where, from around the world, people are trying to get in, so we should be mindful of all of it but I especially think those two are pretty important.
SW: I want to go back to your position on taxes, and ask you about Grover Norquist and his pledge against raising taxes. Do you think that’s a reasonable policy?
AG: I don’t. I think has been influential on some politicians, but I don’t think it’s reasonable.
SW: Why do you think that is? That it’s been so influential?
AG: Well, as I say, I think there’s a difference of worldviews, even among experts on policy. There’s one worldview that holds that the absence of taxation is the most important economic variable there is, and I think there are people who subscribe to that view. They say, yes, pledge that because there could never be any conceivable reason why you would want to raise taxes. I more subscribe to the other view; if the alternative was let your education system deteriorate so that you could maintain a low tax rate, I think that’s self-defeating. If I look at countries, at states, at cities, or at individuals who embody that, it doesn’t work. I’ve been friendly with Grover Norquist for some time – the year I won DC’s funniest celebrity, he was the runner up – so we’re friendly and we have fun debates about that. Reasonable people differ.
SW: Yes they do. Lastly, have you had a chance to take a look at the Paul Ryan budget? Any thoughts on it?
AG: I don’t support the Paul Ryan Budget; I think on the kinds of things that I care most about like the education, training, science and innovation, it really quite savagely cuts those. Though I will say, I think if you take a step back and take an academic look, it illustrates what the root of our fiscal imbalance issues are. That is: the population is aging, healthcare costs are rising, and to maintain the existing system with the promises that people will think they have gotten on social security and Medicare, will entail tax rates that will go well above what they have ever been before. In the Ryan budget it starts from the premise of let’s hold the tax rates no higher than what they have been on average for the last 50 years, something like 20% of GDP. To do that, you will have to cut something a lot to keep the spending from going up, and this doesn’t want to cut entitlements because that’s unpopular, and it doesn’t want to try and cut a lot of money out of defense. The Ryan budget shows you, if you want to try to do significant cutting of government spending, without going after entitlements and without defense cuts, you basically have to abolish most of the government. I mean this thing is pretty savagely cutting in a whole bunch of areas somewhat because it has to. If you just sit down and look at the numbers, there are only a few ways you could do it: you could raise taxes, you could cut entitlements, you could cut discretionary spending, or you could cut defense. That’s what it is. The last three years have given us hope of some third way, which is, if we could maintain low healthcare cost inflation, that would solve tons of our problems, but nobody’s really confident. My read is that none of the experts can really tell us why that has happened. Counting on that going for 25 years seems a little unusual.