Pearlstein: Stimulus 2.0 acknowledges government's limitations

Steven Pearlstein
Washington Post Columnist
Wednesday, December 9, 2009; 11:00 AM

Washington Post business columnist Steven Pearlstein was online Wednesday, December 9 at 11:00 a.m. ET to discuss the jobs bill that is taking shape in Congress.

Pearlstein won a Pulitzer Prize in 2008 and is co-moderator of the On Leadership discussion site.

A transcript follows.


McLean, Va.: What's your position on Geithner? Is his job safe? Should it be?

Steven Pearlstein: Job is safe. I was a big fan early on, been a little disappointed lately with his somewhat dogmatic and stubborn defense of Wall Street and the Fed, but happily there are people in the White House that have different perspectives. The test will come in shepherding this financial reform bill through Congress.


Atlanta, Ga.: Isn't the reason the government is in a pickle that during the good times they couldn't stop spending? And now in the bad times, our debt is out of control - so they need to stop spending? isn't our government supposed to spend in bad times, and reign it in in good times? But our government can't do that, and in recessions we get deeper in a hole? I think sometimes the government needs to do nothing. We are certainly feeling pain, but not in the right places (and I'm not one of those people who blames Wall Street for everything, but I don't know that they've felt a lot of pain this time).

Seriously - it's our government's meddling that typically gets us places like where we are, so why do we think more government meddling is the answer?

Steven Pearlstein: Actually, I think it's not true that government meddling causes most of the trouble. In this case, it was the absence of more government meddling, as you call it, that let the markets get to the point that they brought us all down with them. That's not to say government shouldn't have a light hand when it comes to most markets, but the financial markets are different and need a lot more oversight.

As to your first point, I say amen. When we are not running big surpluses in boom times, that should be a real red flag. The tendency to spend everything you take in during a boom, and then some, is a bad one. We need to develop a "rainy day" fund mentality during those periods, as many states have done.


Gainesville, Va.: Mr. Pearlstein: I enjoy your articles. They are always well thought out and factual. My question is what do you think the role of government should be in helping with recovery from the current economic problems? It seems there are a lot of critics, but then many are saying, "why isn't the government doing something?" Have we become so polarized that we can't accept a partnership between government and the private sector? Does it have to be all or none?

Steven Pearlstein: No its doesn't have to be all or nothing, and partnerships are a good thing. In stimulating the economy during a recession like this, however, it's not clear what that would mean. I guess the entire bank rescue effort was such a partnership, if you think about it. But right now what has to go on is that a lot of industries have to right size and reprice, a lot of debt has to be paid down or written off, the government has to learn to live more within its means, currencies have to be adjusted to reflect huge macroeconomic imabalances. And these are not the things amenable to public-private partnerships. Jobs will be created when there is demand for goods and services, but for a while, during those various adjustments, the demand will be weak. What government can do, and should do, is demand a bit more in terms of services, invest in good long-term infrastructure (which is a form of demand) and let the private sector respond to that, all the while putting a financial safety net under people who can't find jobs.


Great Falls, Va.: In recent weeks, one theme in the media has been that Democrats, particularly those facing 2010 elections, were getting increasingly antsy about the unemployment rate and were pushing for a second stimulus program. Supposedly, they wanted it sooner rather than later, both because it would need some lead time to work before the elections and because additional spending might be untenable after health care and/or cap-and-trade get passed. Against that backdrop, isn't it kind of suspicious that the administration suddenly finds this magical $200 billion from TARP?

Steven Pearlstein: No, it's not suspicious. The financial sector at least appears to be healing faster than thought, money is being paid back faster and so the money is there. Budgetwise, $200 billion in unused TARP money is not the same as a $200 billion appropriation, but that's a detail.


Mesquite, Tex.: Steven, How can they even entertain the idea of another stimulus package or even using leftover TARP funds for jobs when so much of the first stimulus package is left unspent? Didn't the TARP bill have stipulations that leftovers/paybacks be used to pay down debt?

Steven Pearlstein: The first stimulus package is not fully spent, you are right, but it is pretty much committed -- it just takes time to get projects up and running and the money out the door. So your first point is that there is still stimulus to take effect in the pipeline and people should understand that. Unfortunately, most people don't, which is why the Dems feel the need to be seen doing something additional. But if you look at what the president is talking about, another $170 billion, its a relatively small additional increment. Both stimulus packages together would add up to less than $1 trillion, which was pretty much the administration's original target anyway. The amount was reduced in Stimulus 1.0 for political optics reasons.


Washington, D.C.: Thanks for your calm voice on the economy, it does worry me when Dr. Doom Paul Krugman recommends additional stimulus. How does he know that's needed? Things seem fine now.

Steven Pearlstein: Well, he's a good Keynesian economist, so his ideas should be considered seriously. But in this case I think he hasn't adjusted his generalized view to the specifics of the situation, which is a country that is heavily in debt following the bursting of a credit bubble. What you do in that instance isn't the same as what you do in a more typical recession, and yet I don't think Paul has fully accounted for that.


Arlington, Va.: You recently wrote a column about the Fed's outmoded thinking on loose money and said that money was being used to reinflate many bubbles. Nouriel Roubini recently said that many of the bubbles have yet to burst and that they will be bigger and worse than the bubbles that burst to trigger the recent crisis. Do you think this is true? If it is true, what is going to be the result of the new bubbles bursting when we just narrowly avoided a new depression?

Steven Pearlstein: There are those bubbles and they will burst and they will set up back again, I fear. But in no way are they worse than the bubble that caused the recent crisis.


Washington, D.C.: Steven,

Enjoyed the column, as usual. But would like you to expand on your point re: infrastructure spending. You say this would help create jobs, but how? I agree the US needs to spend more on infrastructure (bi-partisan earmark antics have thwarted a lot of necessary repairs), but I don't see it as a job creator (certainly not in the short term). If I owned a small business, I wouldn't expand it in this FY just because I had a better highway to use, or a new airport terminal, especially not when I'm not sure what new taxes/health-care obligations/new regulations are going to come out of the current administration (nothing more frightening then 'bold, persistent experimentation'). Why does CBO apply such a high multiplier to infrastructure spending? Just standard Keynesianism?

Steven Pearlstein: Infrastructure spending has a long lag, I agree, so if all you cared about was creating jobs now, it isn't the best approach -- public service jobs would do that. But in terms of overall economic welfare on the medium to long term, it is the best spending because it more than pays for itself over time. In other words, if I told you I had a use of money that had a 15 percent return, long term, you'd borrow money at 3 percent to fund that project, wouldn't you? We've done too little such public investment in the last 20 years, so we have a lot of catching up to do, and with money cheap right now, it's certainly reasonable to do a bit more of it now and maybe less of it later, particularly since there is a short-term stimulative effect -- less of an effect than we might like, but an effect nonetheless. Even just doing the drawings for a project, having bidders submit proposals, doing the initial land clearning, etc. involves man and woman hours of work.


Washington, D.C.: Question about today's column: How does sending federal stimulus dollars to the states create jobs? Many states are deep in the hole. They can certainly use the money--to make up their own budget shortfalls, meet employee retirement and health-care benefits that they historically underfunded, etc. Does this do anything other than keep the state in the same manner that it's been in for the past year? Is it conceivable that states will do something to create jobs in the private sector (which is good for the long term, but doesn't help them with their immediate crisis of not being able to pay employees), especially if they're facing desperate shortfalls (like California)?

Steven Pearlstein: Most of the money that goes to states has the indirect effect of allowing them to avoid layoffs, since most of the money states spend is for people or purchased services. Government is very labor intensive.


New York: "I'd feel a whole lot better, however, if I knew the money weren't being used to fund pay raises or pension-benefit increases."

Come on, Steve. Public employee unions have a stranglehold on state capitols and city halls. Our states are in such severe fiscal distress---much worse than the federal government, primarily because salaries AND benefits for well-connected public employees are choking the budgets of practically every state and city in the country. And this was even before the recession hit.

I find it morally reprehensible that here in NYC, we are cutting the school budget, social services, education, transit, you name it---all so that public employees can retire at relatively young ages and receive free lifetime health care and pensions equal to 60-80% of their salaries. And we haven't even hit the iceberg of municipalities beginning to show post-retirement health-care benefits on the balance sheet, as soon to be required. This is such a severe crisis of monumental proportions that will make the credit crisis look like a pothole.

Steven Pearlstein: I absolutely share your outrage about that, and there is no better places to look than California and New York, where the public employee stranglehold, as you call it, is now choking the whole economy. Pension benefits and retirement policies are the first place to look in this regard.


As a small business owner with a B-to-B clientele: I disagree with your remedy to boost small-business lending. Banks aren't refusing to lend to small businesses because of capital requirements, they're refusing because they aren't in position to take risks.

Yes, loose RESIDENTIAL lending caused--in part--the current unpleasantness, but since the only job growth we're going to see next year is in new self-employment, the best way to get dollars moving through the economy is to back startup and operating loans.

Steven Pearlstein: I think maybe there is a semantic misunderstanding here. The reason they aren't in a position to take risks that they think are credit-worthy risks is that they've lost so much money in real estate that their regulatory capital is depleted, and so they have to reduce the size of their loan book to reflect that diminution in capital. Atlernatively, they could raise more equity capital, but that is very expensive right now and would dilute the current shareholders. So they are shrinking their loan books. If you require less regulatory capital against each small business loan, at least temporarily, that will allow the same bank with the same capital to make more loans. Their problem isn't that they don't have access to the cash to lend (either from depositors or borrowing it at no interst rate from the Fed). Their problem is the lack of regulatory capital, or equity capital, that they have to maintain as a cushion against possible losses.


Arlington, Va.: One idea that seems strangely absent from discussion about what to do with the leftover TARP funds is using the money to do something about troubled assets, or at least to get banks lending again, which they remain reluctant to do. The banks may not be overly stressed, but that's because they're not taking on any new responsibilities. It seems to me that until the mortgage/real estate gets truly sorted out, recovery will be difficult. Homebuyer tax credit are not by themselves going to fix this problem.

Steven Pearlstein: I agree that the Fed and Treasury have a lot more work to do in terms of troubled assets and getting them accurately priced and in some instances off the books of banks. This is particularly true as it relates to commercial mortgages and securities based on them. That market is still largely shut down and it will require a more effective effort to get it started again through a series of government-financed purchases. This is in the works, its complicated, it's going slower than anyone would like. But it is very crucial.


Richmond, Va.: "Steven Pearlstein: Actually, I think its not true that government meddling causes most of the trouble. In this case, it was the absence of more government meddling, as you call it, that let the markets get to the point that they brought us all down with them. That's not to say government shouldn't have a light hand when it comes to most markets, but the financial markets are different and need a lot more oversight. "

I suppose this depends on whether or not you consider the Fed's lowering of the interest rates in 2002-2003 to stimulate the economy as "government meddling."

Steven Pearlstein: It was overdone, but it's not meddling. That's what the Fed does -- its sets the Federal funds rate. Every day. All the time. It can make mistakes, of course, but that isn't what most people think of when they think meddling, unless, of course, you think we should do away with the whole Federal Reserve structure entirely.


New York: Good morning, Mr. Pearlstein. Sorry, off-topic here. I read with great interest your Nov. 13 column on the new bubble in the making. Fortunately, I followed your counsel and got out of stocks last year before the market plunged. (Thanks very much for your prescient advice). Since the crash, I have bought a small amount of stock and thus have profited a little off the rally. I haven't yet cashed out. But as you point out, it's only a matter of time before the bubble bursts again. Given that the Fed has repeatedly said it intends to leave interest rates near zero for a long time, where do you stand on stocks these days? Should someone like me get out of stocks now or stay in longer? Secondly, if you think it best to cash out of stocks, do you have any suggestions on where to put money? And thirdly, at this point, when do you think a sustainable stock rally might begin? Thank you very much.

Steven Pearlstein: Look, if you listened to me in 2007, you saved yourself a lot of losses. If you listened to me since March, you missed a 70 percent runup in stocks. So my first advice is make your own judgment. I have said I think stocks have got ahead of themselves and that they are ripe for at least a 15 percent correction from current levels. After that, I'd be looking to make long-term investments again. The big cliff will come when the Fed finally announces that "extended period" doesn't mean forever and actually starts to raise rates a bit again. That will be a bad couple of weeks on the market, whenever it happens, because right now the value of lots of financial assets are premised on cheap bank funding.


Frederick, Md.: Thank you, Mr. Pearlstein! You are a voice of consistent sanity in the media wilderness. I especially appreciate how you ignore the partisan implications of your questioners, yet manage to refute their 'logic' at the same time.

Is there any good way to evaluate which arcane financial practices create value, and which are just spinning pretty wheels?

Steven Pearlstein: I appreciate your very kind comments. I'm not sure I can answer your question in a quick and simple manner, however. You have to look at whether any particular financial activity has a direct and beneficial impact on real businesses creating real value for customers, but while that may sound simple, its not always an easy analysis.


Arlington, Va.: I'm not thrilled with the wide array of proposals included in the outline of a second stimulus. I'm a fan of keeping it simple, especially when you consider the heavy ornamentation that occurs when revenue and spending bills make their way through the legislative process. I think a modest payroll tax (or some other modest tax cut) and some infrastructure spending are the two important things the government can do for the economy at the moment. I think the infrastructure is particularly important since the construction industry has been so hard hit and the last thing we need is developers building more houses. Will Congress go for more infrastructure spending this time?

Steven Pearlstein: I almost had a line in there about KISS -- Keep it Simple, Stupid. Its a good rule of thumb, and I agree Obama had too many elements to his plan, particularly for the limited amount of money he seems to be talking about. Payroll tax holiday is very expensive because it applies to the 90 percent of us that still have jobs, and there is no indication that the first thing businesses would do with the extra money is hire new employees. To have new employees, you need new customers and new orders, which is the real problem here. The problem is not, for the most part, that businesses are cash constrained and can't hire to meet increased demand.


A very frosty spot in NH: I totally agree with the "public employee stranglehold". Our governor recently held true to a promise to lay off many public sector employees because the SEA couldn't come to a reasonable negotiation on their contract with the state. It shouldn't surprise anyone that a group that enforces bumping rights and continues to pretend that their health insurance is sub-par and expensive can't reason at the bargaining table.

The back and forth between private & public employees became quite ugly, usually acted out in the comments sections of our local newspapers. Once that entitlement becomes entrenched, it is extraordinarily difficult to uproot, due to the power of the public employee unions.

Steven Pearlstein: Its funny how public employees, in the middle of the worst recession anyone can remember, demand their previously negotiated pay raises from taxpayers who aren't getting any pay raises at all. And then when times are good and private sector employees are getting raises, they demand that their pay keeps up. So its a one-way ratchet.


Re: government spending: Steven, I'd love your take on this tidbit from Kathleen Parker's column today on Rick Santorum: "Both pro-life and pro-traditional family, Santorum is an irritant to many. But he insists that such labels oversimplify. Being pro-life and pro-family ultimately mean being pro- limited government.

When you have strong families and respect for life, he says, 'the requirements of government are less. You can have lower taxes and limited government.'"

This is, to put it mildly, total BS. Examples: the Great Depression, the status of blacks following the Civil War through the 1960's, immigrant populations arriving in our country throughout its history.

They all had strong families and were producing plenty of kids. So why would they possibly need help from the government to overcome poverty and discrimination? What more did they need?

Steven Pearlstein: This is the worst kind of self-righteous moralizing.


Austin, Tex.: Regarding fiscal policy during a boom, it seems to me (over my admittedly shorter life span of paying attention to such things) that when there are surpluses, politicians want to reap the benefits by giving tax cuts that they can headline for their re-election.

When was the last time taxes were kept relatively high during a boom? That seems to me like the only way the debt will ever get reduced.

Steven Pearlstein: It doesn't happen very often, but that doesn't mean we shouldn't try.


D.C.: At the risk of being insensitive, if the states have severe budget shortfalls, then shouldn't they lay some people off? I fear that sending stimulus money to the states prevents the states from structuring their budgets in the way that they should.

Steven Pearlstein: Indeed, many states expanded too much during the boom times, thinking that was the new normal rather than the result of a credit bubble, and now they should cut back. They should cut back in size, they should cut back in some of the pay and benefits. But at this point, the cuts necessary to balance budgets would probably go too far, so some federal help is important. I'd say if the "hole" for next years is $140 billion, as the states claim, the feds might try to fill half of that.


related to Atlant's Question: Atlanta said something along the lines of "Government should spend in bad times and reign its spending in during good times." I agree, and that makes it all the more astounding to me that the states and municipalities are in such bad shape. Their tax revenues were flooding in as a result of the boom times -- especially real estate taxes, which surely far exceeded any reasonable projections. How could that additional revenue not get put aside in a rainy day fund? Did it all go to building diamond crusted governmental offices (like in one or two local counties that I could name)?

Steven Pearlstein: Good question.


"Budgetwise, $200 billion in unused TARP money is not the same as a $200 billion appropriation, but that's a detail. ": But it's not a mere detail that the TARP legislation doesn't allow for that money to be spent on stimulus. It's supposed to be for loans to prop up the financial sector. Even loaning it to GM was specious. To now spend it would be, well, illegal.

Steven Pearlstein: I agree. If TARP money isn't used for TARP's narrow purposes, it should be returned to the Treasury. Separately, Congress should decide how much additional stimulus money it wants to spend. You can't think of the TARP money as "spendable" for other things since, in budgetspeak, TARP was really never appropriated. It was an off-budget sort of thing that was treated as much like a loan, with reserves set against likely losses. Only the reserve was counted against the budget deficit calculation.

But that is probably more than you want to know.


Woodbridge, Va.: Slightly off topic but.... Have you read Bruce Bartlett's new book? He makes several arguments including that while supply side economics was appropriate for the early 1980s, it quickly achieved all its goals and was an inappropriate tool for the early 2000s for a wide variety of reasons. He also argues the Bush tax cuts did not NOT reflect supply side thinking (too many credits, not enough marginal cuts and phased in). Essentially, he maintains that Keysianism, neo-Keynsianism, and supply side were each useful in very specific circumstances, each retained beyond their period of usefulness and each ultimately abused by policy makers who didn't really understand them. Bartlett now argues that economists need a new paradigm to understand the current situation and the nation needs a VAT to climb out of the debt hole. I tend to agree with the first point and could maybe possibly be be reluctantly dragged into supporting the second (if there is no other alternative). What do you think? Are you familiar with his work?

Steven Pearlstein: I am familiar with Bruce's work and he is really an amazing breath of fresh air in term of conservative economic thinking because he is so intellectually honest and true to his values. I want to write a column about him soon, but I have some more reading to do, and talking with Bruce to do, before I can do it intelligently.

The particular point you make is a good one,about the value of these various ideas and how they were the right response to a particular set of circumstances. It's the same point I was making as it relates to Krugman, whose solution to the current problem is somewhat formulaic, based on macroeconomic models that he has in his mind. He even has calculated how much of a stimulus is now needed, based on these models, just as he uses a model to calculate that the proper federal funds rate now "should" be negative six percent. I think that stuff is mostly not useful, because it ignores the context.


Floris, Va.: Am a little older than you, but you're the financial expert so here goes. It seems to me that there are vogues in finance. For instance I remember in the 1970s investors used to wait with a cupped ear for the weekly M-1 money supply figures. Then for a while the emphasis was always on the monthly inventory numbers. Now it's the unemployment rate and not just the ten percent official rate but the "real" number which I don't recall being bandied about during the Bush years. Care to explain?

Steven Pearlstein: Vogue? Fashion? Are you kidding. Wall Street is more a slave to fashion and herd behavior than Seventh Avenue has ever been. It's actually quite comical to listen to these financial gurus peddle their conventional wisdom on CNBC -- comical if it weren't so dangerous. At least with hem lines, the damage is limited.


Richmond, Va.: One of the items you mention today is the proposal to lower the capital gains rate to zero for new businesses and it's potential for abuse.

As an alternative to adding another layer complication to the tax code, how about a revenue neutral simplification of the Federal tax code with the goal of making the taxation rates for regular earned income, capital gains, dividends, carried interest (or however else the hedge funds pay their managers) and anything else that is taxed consistent so there is less incentive to game the system through accounting devices to maximize after tax income?

Steven Pearlstein: In theory I'm with you -- all income should be taxed the same. In practice, because we double tax capital income (once at the corporate level, once at the individual level), I think there is a case to be made for having a lower capital gains tax rate, particularly for long term investments. Short term I would tax as ordinary income.


Bursting bubbles: How much should we worry about the new bubbles that will burst? Will the stock market take another huge hit? Will housing prices go down further?

Steven Pearlstein: It will be stocks and bonds and commodities mostly.


Infrastructure jobs: Spending on infrastructure creates jobs in the construction industry (and infrastructure-related government departments). Construction workers buy stuff. Stuff-sellers hire clerks and buy from stuff-makers. Stuff-makers hire... Etc. And people can often be trained for construction jobs rather quickly, especially if they're already accustomed to being around heavy equipment, so the spending could do the most good by being focused on areas with high industrial unemployment.

Steven Pearlstein: Yes, if it is paving roads that you are talking about. But if it is building a new bridge across the Mississippi, well, it requires lots of high priced engineers and designers and very sophisticated welders and lots of steel from -- where? But obviously as the money goes out the door, it is cycled through the economy with the kind of multipliers you suggest.


Government Meddling: Steven,

Re: your statement on there not being enough government meddling. Did you read Arnold Kling's paper "Not What They Had in Mind?" It's an examination of the causes of the housing bubble, some of which were lack of regulation in some areas (esp credit rating), but others were the result of government regulation (like securitization, created by the federal government, as a response to the previous S&L crisis). I think the current bubble was a perfect storm of bad regulation in some areas, not enough oversight in others. Doesn't seem to fit neatly along partisan lines.

Steven Pearlstein: Agreed, in general, although the government did not invent securitization, not even securitization of home loans. That was Lou Ranieri when he was at Solomon Brothers.


Great Falls, Va.: You advocated for the first stimulus, in part on the basis that a significant portion of the money would go to much-needed infrastructure spending. Instead, the vast majority has gone straight to the states and local governments. It might be good to keep a teacher from getting laid off, but I'd rather see a shaky bridge get rebuilt. How can we ensure more productivity out of the new stimulus? And how can we ensure that the "infrastructure" spending that does get included is not like the infamous Florida underpass built for turtles?

Steven Pearlstein: The short, smart-ass answer to your question is you have to do things right and smartly. The first stimulus was reasonably effective at what it aimed to do, except for those tax cuts.


Steven Pearlstein: We're out of time and I've got a squash court with my name on it. "See" you all next week, I hope.


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