On what the Federal Reserve did wrong:
My main criticism is that they took their eye off the ball in late 2009 and 2010. They started to think more about exit than about the fact that the economy was still operating far below capacity. The second round of quantitative easing, which started last November has been helpful, but it came about a year too late.
On the administration’s internal fights over the stimulus:
Like the Federal Reserve, the Administration and Congress should have done more in the fall of 2009 and early 2010 to aid the recovery. I remember that fall of 2009 as a very frustrating one. It was very clear to me that the economy was still struggling, but the will to do more to help it had died.
There was a definite split among the economics team about whether we should push for more fiscal stimulus, or switch our focus to the deficit. A number of us tried to make the case that more action was desperately needed and would be effective. Normally, meetings with the President were very friendly and free-wheeling. He likes to hear both sides of an issue argued passionately. But, about the fourth time we had the same argument over more stimulus in front of him, he had clearly had enough. As luck would have it, the next day, a reporter asked him if he ever lost his temper. He replied, “Yes, I let my economics team have it just yesterday.”
In the fall of 2009, those of us at the Council of Economic Advisers, together with a number of other economists in the administration, got very excited about a new jobs tax credit. ... In the end, the President endorsed this measure. In early December 2009, he announced a package of additional stimulus actions to aid the economy. I remember that day as the happiest of my entire time in the White House. (Even better than a briefing in the Rose Garden.) We were finally taking more actions to strengthen the recovery.
Unfortunately, only a few of the additional measures were adopted. We got a version of our new jobs tax credit in the HIRE act. But, it was much smaller than what we had proposed, and had some of the complexities that plagued the 1970s version.Most of the other proposed measures died on the floor of the U.S. Senate.
On what should be done:
The answer to low overall demand is to try to get it up. The best solution would obviously be for private sector demand to come bounding back on its own. So far that has not happened and doesn’t look like it is about to. ... My particular favorite additional short-run stimulus would be a cut in the employer side of the payroll tax. Congress cut the payroll tax for employees in the budget compromise last December. A similar cut in what firms have to contribute for payroll taxes would make hiring workers cheaper and would therefore likely be particularly helpful for employment growth. This is just a broader and simpler version of the new jobs tax credit that I thought would be a very good idea back in 2009. And, it has the virtue of being something that I suspect policymakers on both sides of the aisle could support.
I frankly do not understand why policymakers are not feeling more urgency to get unemployment down. People are clearly suffering greatly. Moreover, continued high unemployment is potentially very destructive. Even though I don’t think our normal rate of unemployment has risen much so far, it certainly could. Evidence from a number of European countries in the 1980s suggests that a prolonged period of high unemployment can permanently damage workers prospects and raise normal unemployment. We are seeing today that some firms are putting up ads saying “Only employed people will be considered.” This suggests that there is starting to be a stigma associated with being out of work for a long period.
A rise in the normal rate of unemployment would not only be a disaster for the people affected, but for the government budget. Fewer people working means permanently lower tax revenues. The surest way to prevent such an outcome is to get the unemployment rate down more quickly. We should be using every tool we have to accomplish this.
On Larry Summers and health-care reform:
I will tell you one Larry Summers story, because it is exactly on this topic. It shows how he could, indeed, be slightly annoying, but also ultimately a good guy.
In the summer of 2009 we were beginning to worry about the deficit and the 2011 budget. Since we were in the middle of health reform, I argued that the right way to make progress on the deficit was to push harder on cost control. Larry kept coming back with, “I am sure our legislative folks are pushing as hard as they can.” About the fifth time I said we should do more, he got quite exasperated and said, “Fine, what do you propose we do that we aren’t currently doing?” I answered, “How about capping the tax exclusion?”... Larry was just about to brush me off again when he paused and said, “That’s a good idea.” The economists came out strongly for a version of capping the exclusion, the excise tax on high-priced insurance plans, and the President and Vice President were convinced to go along. It was an incredibly tough decision and not popular, but very good policy.
Revenues are going to be another huge issue. Additional revenues are going to be needed if we do not make draconian changes to popular entitlement programs.
Right now, neither the President nor Representative Ryan is in a very likely place. The Ryan plan actually cuts taxes substantially, especially at the top of the income distribution. It achieves deficit reduction by the extreme cuts I described in health and other spending. The President has supported raising taxes on those earning more than $250,000 in a variety of ways. I certainly support that. But it is unlikely to be enough. There just aren’t that many high-income households. So even large tax increases do not generate enough additional revenue. Therefore, some tax increase on middle-class families is likely to be necessary.
The recommendations of the bipartisan commission are perhaps the answer. It would cut a large number of tax expenditures. Tax expenditures are the various deductions, credits, and loopholes in the tax code. ... This is a change that is popular with just about every economist I know.