Is the economy finally on the mend?
It’s not really trending upward. There are two big gaps in our economy relative to, say, 2007. One is real estate. Real estate was the big sector. The bubble broke, and now real estate investment is half of what it was. No way that that’s going to recover soon. The only good news is that the houses were shoddily constructed—and in maybe 5 or 10 years we’ll have to reconstruct them. The second problem: consumption. Before the crisis, we were saving close to zero out of our disposable income. That wasn’t sustainable. Now, savings is between 4 and 5 percent. Hopefully, it won’t go lower. But with consumption weak and investment and real estate weak, it’s very hard to get a really robust economy.
You’ve written a book about rising inequality. Tell me why it pinpoints deregulation under Reagan as the turning point?
The Reagan administration did more than just deregulation. They lowered the taxes on the top. After World War II came decades in which the country grew much faster than it did after 1980. And the country grew together. Every group grew. After 1980, we grew apart. One of the things is, we lowered the tax rates on the top. That increased the divide. And the other one is, we deregulated, particularly in the financial sector, which continued under Clinton, under Bush.
You ran Clinton’s Council of Economic Advisers.
I opposed those deregulation movements. … Deregulation allowed the banks more scope for moving money from the bottom, all those kinds of predatory lending we saw. Move the money from the bottom to the top. And if you look, a disproportionately large number of people at the top, in that 1 percent, are from the financial sector.
How big has America’s financial-sector economy become?
One way of looking at it is, 40 percent of all corporate profits went to the financial sector. So that shows you, in a sense, that a set of institutions that are supposed to be servants … You don’t enjoy financial services directly. They’re supposed to facilitate. They’re supposed to enable the rest of the economy to do what it’s supposed to do. And yet this servant became the master.
How do you correct the income imbalance? With a Buffett Rule tax?
I think what Warren Buffett has argued is absolutely necessary. The consequence of that is that those at the top who are taking advantage of capital-gains rates would pay at least as much as those whose income is much lower.
What impact would that have on investing?
Negligible. Even if you were concerned about investment you could structure our tax code to encourage investment a lot better. Let me give you an example. Land speculation: If you get capital gains from land speculation, does it create more land? The banks that were speculating on credit-default swaps, when they won, they got the capital-gains rate. Does that make our economy grow? No. It makes our economy, in some sense, even more risky. Remember that AIG got a $180 billion bailout out of that speculation. So if you wanted to encourage investment, I could see an argument saying corporations that invest in America will get tax preferences. Entrepreneurs that expand their investment and create new jobs will get a tax benefit. But it has to be linked to doing things that make our economy stronger, not to gambling, not to speculation, not to just being wealthy.
With the fiscal cliff ahead, what budget reforms would you focus on?
It turns out that Social Security is not a big problem. Change the age a little bit, change the contribution a little bit. That’s something we can solve fairly easily. The health-care programs are a significant concern. If we had a health-care system that was as efficient as some of the European systems, we’d have no deficit.
How do we put America back to work and make our economy grow?
Invest. The U.S. government can borrow at a negative real interest rate right now. And we have an ample supply of investment opportunities in infrastructure, technology, education.
So you think the deficit obsession is killing our economy?
That’s right. Over the long run we have to have fiscal responsibility. That’s why, during the Clinton administration, in good years, we had a surplus. But we opposed a balanced-budget amendment on the grounds that in good times you want to run surpluses. In bad times you want to run deficits. These are bad times.
Is the economy finally on the mend?