"Evidence suggests [tax cuts for high earners] have very little stimulative benefit. So yes, we are prepared to let those tax cuts expire"
No one in Washington is saying flat-out that the economy has turned a corner, but the Obama Administration is busily making the case that encouraging signs are starting to pop up. On Apr. 9, Larry Summers, director of the National Economic Council, pointed to positive indicators in a speech before the Economic Club of Washington, and five days later at Georgetown University, the President did the same. Is this more than a cheerleading exercise to boost public confidence? I talked with Summers after Obama's speech.
The President today talked about glimmers of hope in the economy, though he added that we are in for some tough news ahead when it comes to unemployment. Where has the growth been coming from most recently and where are the weak spots that remain?
Two months ago, you couldn't find anything positive. Every statistic was running negative, and you had a sense of an economy in free fall. I think today the picture is more mixed. There are obviously still problems in the financial market and weakness in housing. But production is now pretty clearly running below sales…which will be followed by an inventory cycle that can be a source of strength. You have a more mixed picture in terms of consumer spending, in part because the stimulus in the Recovery & Reinvestment Act is coming into people's paychecks. You have the fiscal policy coming online. You know, government almost never gets a positive surprise in how much things cost, but it's actually turning out that we're going to be able to do a lot of these infrastructure projects—and 2,000 have already been started—cheaper than we'd expected. That means more employment, more ability to do things.
The budget the President put forth suggests the economy will see 4% growth in 2011. Are you expecting that?
The President made the forecast several months ago in the context of the budget. It was pretty much a consensus forecast at the time. We will revisit the forecast, as governments always do, a couple times a year, and at that point, we'll be in a position to discuss a new forecast.
So if we were to see the economy not grow at 4%, would you be prepared to suggest that perhaps he should pull back his plans to raise taxes on the highest earners?
Let's just be clear here because what you said is not quite correct. The President isn't taking any action to raise taxes. Current law calls for [the Bush tax cuts for high-income earners] to expire [in 2011]. And the President does believe—and he is surely right in this conviction—that given the magnitude of the debt problems the country faces, we can no longer afford those tax cuts for a very small fraction of the population. If you look at the long-run fiscal burden imposed by those tax cuts, it's as great or greater than the entitlement programs that generate so much discussion, and the evidence suggests [the cuts have] very little stimulative benefit. So yes, we are prepared to let those tax cuts expire.
Even if we were not to see the growth expectations…
I don't want to get into speculating on every hypothetical. Right now, there is a massive program that has been put in place on the fiscal side, on the credit side, on the recapitalization side, on the housing side. And our focus is implementing that program as strongly and as effectively as we possibly can for maximum benefit to this economy.
When do you expect to see growth in the economy?
Well, you know, many forecasters are looking for growth in the latter part of this year. And as I mentioned earlier, the inventory cycle points in that direction. But no one can make forecasts with complete confidence. What's really important is making sure that we have a sound foundation for long-term growth. And that's why some of the issues the President spoke about in his speech regarding financial regulation, health care, energy, infrastructure investment, are so profoundly important, so that we can enjoy an economic expansion that, frankly, unlike its predecessors is much less based on bubbles in financial markets.
The blogosphere is full of posts about taxpayer money being used to protect Goldman Sachs (GS) because so many people involved in the bailout have ties to the firm. Do you think Goldman has gotten special treatment?
Oh, look, I'm not in a position to comment as an expert on what took place before the Obama Administration came in. But I think people have to look very carefully before making allegations of that kind. And certainly some of the most publicized allegations don't stand up to scrutiny at all. I can assure you that President Obama has insisted that Treasury Secretary [Timothy] Geithner make sure that the rules are administered without fear or favor and with tremendous transparency so the American people can see where every dollar goes and any kind of favoritism is avoided.
In his New York Times column last Sunday, Frank Rich raised the question of whether you can be a fair broker of the bailout after having been paid $5.2million by hedge fund D.E. Shaw and earning $2.7million in speaking fees from Citigroup (C) and Goldman. Do you think you have a conflict of interest?
I don't think so. But much more relevant than what I think is [the opinion of] the Office of Government Ethics, which isn't comprised of a bunch of political appointees but is made up of long-serving people who are in charge of judging integrity and to whom we all fully disclose all of our past activities. Their judgment was that for the broad range of financial issues that I'm involved in at the NEC, there was not a conflict. I would be the first to say that people can't judge their own ethics, and that's why there is a more elaborate set of rules than any Administration has ever had around conflicts of interest.