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U.S. Economy: Standing Still or Standing Up?

Ben Johnson, CFA

Ben Johnson: Our speaker today during lunch is someone who really had a front seat to some of the worst of the financial crisis. Austan Goolsbee was the chair of President Obama's Council of Economic Advisers.

Having, I think, paid his dues, no one can blame him for taking a new tack and coming back to Chicago, where he is now a professor of economics down the road at the University of Chicago.

So, with that, I'd like to introduce and cede the stage to Austan.

Austan Goolsbee: Thank you. There is always a tension when you come to the conference, and they feed you lunch, and then they bring the economist in to speak and see if they can get you to throw up your food before the lunch is even over, because economists are not usually the most optimistic people in the world, I would characterize.

I am going to discuss the state of the economy in the U.S., the state of the markets, what's coming out of D.C., and what's ahead beyond the short run. I am going to end on what I think you will agree that, at least for an economist, is a fairly optimistic note, but not before really depressing the crap out of you.

If you are at heart a pessimistic person, many of the things that I am going to go through in the first two points today you are going to say, "I knew it. I knew the world was going to hell in a handbasket and that just confirmed it."

So, the first thing that I wanted to talk about is, what is the economic outlook for the next 12 to 18 months? What is the market outlook? Where should we expect to see growth or where are we not seeing growth?

I think this is still basically the same question as, "What happened to the V-shaped recovery?" So, in the past, it always was the case that the deeper was the downturn, the faster was the rebound, and so it was supposed to be a V-shaped recovery. In the time I was in Washington, they evolved. First they were talking about a V-shaped recovery, then they moved to U-shaped recovery, onto L-shaped recovery, which is not even the shape of a recovery. They have since moved into the Arabic script and Greek letters describing the shape of the recovery.

The fundamental question of why didn't growth come back faster is quite important for us to think about if you want to consider, what are the prospects in the near term. Conventional wisdom holds that it was a financial crisis-based recession. There had to be a lot of deleveraging, and if you look around the world, wherever there are big deleveraging recessions, they are long, slow, painful, and extended. I think that is true. But I think that's been overblown.

I think the recession that most resembles this one and the recovery, is the 2000 recession. It was on a much smaller scale, but in 2000, there was virtually no leverage at all. But the common component was that it followed a bubble. The transformation required after a bubble popping is also a slow painful process, is different than deleveraging, and I think is the overwhelming most painful thing making this recovery slow.

The two drivers of economic expansion in the 2000s, as you know, were consumer spending growing faster than income and residential housing construction. Consumer spending growing faster than income brought the national savings rate of the United States at two points in the 2000s to negative numbers. So, if you added up all the personal savings of everyone in America combined, it was less than nothing at two points in the 2000s. Now, you do not need to go to an advanced session at this conference to understand that's not a sustainable way to drive an expansion. And all of the V-shaped recoveries that we've had in the U.S.-- in 1982 to '84, 1975,--they all had the feature that the economy could go right back to doing what it was doing before the recession began. And this time fundamentally we could not do that.

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So, it will be the case--it has already been the case--that there will be a relative shift toward exports, toward investment, toward a number of sectors that were relatively punching under their weight in the 2000s and will be more sustainable drivers of growth as we look forward.

But it means … you've got consumer spending still in the tail ends of this deleveraging. You've got the government sector shrinking at the state, federal, and local level. You've got housing … we got way overbuilt, had almost 6 million vacant homes. So, of course, construction is going to drop dramatically. As long as you've got zeroes and negatives for these big chunks of the economy, even if the rest of the private sector is growing at a healthy clip, the combined average is not going to be that impressive.

Now, that brings us to what I consider a dangerous moment, in which there is still a sizable group--they're not a majority, but a sizable group--that is saying, give us back our V-shaped recovery. And they look at the housing market and they say, housing's turned the corner, that will lead us out. That will give us our V-shaped recovery.

And I fear that the people who are rooting for that or counting on that are attempting to live out The Onion headline. You know there is a joke newspaper called The Onion. It's a fake paper, but this was the headline of The Onion: "Furious Nation Demands New Bubble to Invest In to Restore Prosperity."

The danger is, yes, it's true, we had a housing collapse, and in most markets of the country, you've seen prices start to turn around. And in fact, the Case-Shiller Index says that last year prices were up in double-digits. And so the people say, "Fine. Why do we have to do this transformation and get more exports and business investment and all of that? Housing's back! Let's just go back to building the houses we were building before."

If you go get the data, we have about 105 or so years of house price data in the U.S. The first 90 years of the data, houses grew around 40 basis points a year in real terms. It was a slow, steady asset. That basically characterized what housing was for 90 years.

We then go through an eight-year period starting in 1998, where house prices grow 13.5% a year, and then collapse. And now, they have started to turn the corner and grow again.

So now you have to ask yourself, "Are house prices going to go back to growing 90 years at 40 basis points a year, or do you think they are going to grow 13.5% a year?" I think overwhelmingly likely, it goes back to being a slow steady asset. If it does, it will be a positive contribution to GDP growth, just as it always was for 90 years, but it will not drive a V-shaped recovery. And I think that if you're in the view that that's what's going to lead us out, I think that's … relatively mistaken.

So, housing is not going to save the day, but don't think that the transformation for those others is going to be so easy, either. We need more exports to lead our growth. Our normal export markets are totally in the dumps. They are dancing a jig in Europe because they've upgraded the growth forecast for the Eurozone to--I'm not making this up--0.2% growth for next year. That's the forecast. They're cheering: "Yes! We beat zero for the first time in six years!"

OK, 0.2% per year growth is not going to facilitate massive net export increases from the U.S. If you look in Asia and other parts of the emerging-market theaters, there has definitely been some slowdown from the most booming days. And in China, it is oftentimes hard to tell what's happening in the official statistics, but at the least, they've had some slowdown. It may be coming back, but it is definitely not the 9% type of growth that they had for a long time.

As a side note: In the U.S., the GDP data comes out one month after the quarter ends and then is revised for two years as they get the actual statistics. And those revisions are sometime not that small. So, at the end of 2008, when I took the front-row seat for the financial crisis--which is, as I have described it, more like the "Shamu seat," the guy who sits in the seat and water is just dumping on him--at that time, they said the first estimate of GDP growth was negative 3.5%, which seemed epically bad. It's been revised to minus 8.9%. So, in the U.S., there is a lot of revision, and getting good statistics is not that easy. In China, the data comes out the day the quarter ends, and it has never been revised. My colleague has said, the only real question is, why did they bother to wait to the last day of the quarter to announce what the GDP growth rate is? So, they've modified that somewhat. Subject to criticism, they now wait nine days to release it, but they still have never revised the series.

Oftentimes, you can tell more about what's going on in China or in other parts of the emerging-markets theaters by calling Fred Smith at FedEx and saying, how many packages were shipped out of China? Or these guys who have got the satellites can see how many light bulbs were turned on at night in various cities. Sometimes those real factors tell you more about growth in the places than the official statics. And the number of light bulbs, the number of packages suggest there's been a significant slowdown.

And … if you were waiting for the Fed to save the day, you can forget that, too, because that's not going to work. Housing is not going to do it. Exports are going to be slow, and it's going to be difficult. The Fed can't save the day. All of our trading partners are scrambling for their own lifejackets.

You would be forgiven for agreeing with my grandma's old saying. You would complain about whatever: I don't like oatmeal. She would say, you know what, 80% of the world really does not care about your problems, and the other 20% are glad. We've got a bunch of problems; nobody has any sympathy for our problems. They've got their own problems.

So, you say, OK, the short-run economic outlook is a little dicey; it doesn't look like we're going to have rapid growth, so surely Washington, D.C., is taking that into account and thinking what can they do to improve matters in the private sector, right?

Yeah, right. The government has been shut down for three days so far. To understand what's happening in Washington, D.C., which is the opposite of helping. If they came forward and said to everyone in this room, look, the reality is gridlock. Washington is not going to be able to do anything for the next three years, and that's the reality of what's going to happen. That would be the best news you could get. Instead, they are saying, probably that's true, but there is a small chance that they do something really, really horrible like default on the debt or dramatically raise your taxes or this, that, or the other. But we're not going to tell you until the very last minute whether we're actually going to do that or not.

That's not very conducive to improving the growth rate of the country. To understand what's happening, I have to tell you a story from the Goolsbee family lore, in which there is a disagreement over whether it was my aunt's lasagna or my aunt's pot roast. My aunt was not the greatest cook, and one of those two things was not edible and was stuffed down the sink of their apartment in Lubbock, Texas, where it proceeded to clog the drain.

So, my uncle went and got a product, which has since been banned from the market. If you are of a certain age, you will remember. It was called The Bomb, and it was a combination of a plunger and a firearm that had a CO2 cartridge in it, and you stuck it into the drain and you blew the thing out of there. And it said right on the outside of The Bomb, if you do remember it, "Use only one charge."

Now, my uncle is not the type to use only one charge. So, he put that in there. He unloaded all 10 charges into the drain, and he blew it out of there. But they lived in what, in Chicago, we call a converted. It was a small house that had a wall down the middle, and there were two identical apartments. So, their kitchen drain formed a little Y with the other one, with their [neighbor's] drain, and it went down to the sewer, and the clog was not in the sewer part, it was on their side. So, when he blew that thing out of there, it doesn't shoot it over and down into the sewer. He just blows it right over into the other guy's [apartment].

So those guys wake up in the morning, they ring the doorbell. They say, "Bob, did you have some kind of plumbing problem?"

"Yes," he said. "We had a plumbing problem, too. You had a plumbing problem? I went and I got The Bomb and I cleared it out."

He said, "Bob, why don't you come over here and look at our kitchen?" And all on the ceiling and walls of their kitchen is lasagna blown everywhere, because all my uncle Bob is thinking is, I've got to get this clog out of my drain.

OK, that story I tell you, because that's exactly what's happening in Washington. Everybody is just trying to get the clog out of their drain, and they say, look, if I don't do this, I'm going to be challenged by my own party. I've just got to get this out of here. And if that means it's going to land on your business or it's going to land on the other guys, that never crossed their mind.

So, as you ask what will happen with the shutdown and what will happen with the debt ceiling, the root of the problem here is everybody's got their own little board of directors that they're trying to satisfy, and compromise is totally forbidden. Anybody who is willing to compromise looks bad.

Now that said, I will make fun for all of my days of the crazy pathologies and idiocies of Washington, of the bureaucracy, etc. But there is one point that I will say, if you ask me, whose fault is it that we're having a government shutdown, and that they're going to threaten default on the debt ceiling? Is it the Tea Party's fault for being extremist? Is it the president's fault for not leading? Is it Harry Reid at fault? Is John Boehner at fault?

The answer is, it's our fault, 100%, we the voters fault, because all they are doing is they just want to keep their jobs, and they say to us, you tell me exactly what you want me to do, and I'll do it if that'll keep me in my job. And we are telling them in big majorities, 75%-plus of people say they think government spending is out of control and needs to be cut. And 85% of people say, entitlements are not spending and anybody who says they're going to cut them, we're going to throw them out of office. The deficit is the number one most important issue. Nobody wants revenues to be raised on anyone except billionaires.

So, the dysfunction is in our own minds. We are telling them a whole bunch of contradictory things. So every side thinks that they have the wind of America at their back. So if there is an upside to this shutdown, the only upside is, this is going to force us to decide in our minds what is it that you exactly want to happen?

People say they don't like Obamacare, but they don't want the government shutdown. And as we go back and forth, we're going to sort out whose side is America on, what do they want to happen. And when that happens, the other side is going to cave rapidly. You've seen that in the past. But until that happens, we're in a weird dynamic where people say, I don't want to pay attention because this is so insane. It's like my wife thinks about the basketball game. She says, "Why do you want to watch the basketball game? It always comes down to the last three minutes, and then they just foul each other, and it takes half an hour to play the last three minutes!"

That's people's view of Washington. They say, it's just going to come down to midnight anyway. Why pay attention now?

But by not paying attention, that's exactly what's making this happen. Because [politicians are] saying, well, somebody tell us what you want us to do. And everybody says, I am not even watching. Come tell me when it's over.

So, I fear that this is still going to go for a week or two more. We're probably going to be pushing up against the debt ceiling. That's just going to get more and more unpopular as it starts becoming clear, either they are going to default on U.S. Treasuries--the first default ever caused purely by just stupidity of a country. Most countries of the world spend their time doing everything in the world, please, please, don't default. This would be the first case ever where the market is saying to a nation, we're happy to lend you all the money you want, and they say, no, no--you know what--we're going to just default anyway. We don't need it.

So, I think we will push up to the edge of that. They will say, default will be horrible. The alternative to default is we're going to stop making payments to nursing homes and Social Security, and the military won't be paid. Eventually, it would be so obvious that one side or the other is winning, that the other side will give up, and they will have some small agreement. But probably the agreement will just put it off, and then we'll do this again in six months. That's the Washington path, because everybody is just trying to blow the lasagna out of their own side. OK, so that's point two.

Now, why did I tell you I was going to have an optimistic message? Oh, look at the time. Lunch is over. We've got to go.

No, no. OK. Look, if you were to make the case for optimism, I think it's not over the next 12 months. The next 12 months, I think, are just still going to be slow, painful, not fast enough to get the unemployment rate down very fast, where growth is barely above productivity growth per worker, so you don't really need to hire anybody to grow that fast.

But looking out beyond this 12- to 18-month timeframe, the first thing I'd say is that all of those things that normally lead to a V-shaped recovery, the pent-up demand, are lingering there. They are lurking under the surface. If you could clear off the transformation layer, the deleveraging, population has increased in the United States by 10 million from when the recession started. Household formation has been close to zero.

So people will often say, how will we know when a real recovery has begun? And I don't say this facetiously. You will know real recovery will begin when 25 year olds pack up all of their stuff, move out of their parents basement into their own place, which they probably will rent this time instead of buying. And when they move out, they will have to buy some crappy pots and pans and a cable subscription and a futon and a bunch of stuff that is normally very cyclical and accounts for about a third of a normal expansion. So, there is a pent-up demand still there. People have put off buying cars, businesses have put off buying investment goods. Anything that was an investment, a capital-type outlay, they put off as long as possible, and eventually that stuff builds up, so you get a rebound in demand.

Second, the corporate sector has returned to profitability, and not just returned to profitability, record levels of profitability. The U.S. workforce remains the most productive of all major economies in the world. My [Council of Economic Advisers] people, being who they are, they [would say], "You keep telling the president that we have the most productive workforce in the world. … You have to stop saying that, because technically, Luxembourg has higher productivity than the U.S." So, I could either say, except for 250,000 workers in Luxembourg, we still have the highest productivity, but I'll just add, "of all of major economies."

If you read the paper, you would think that our problem is that our quality keeps slipping, but that's not actually true. U.S. productivity and quality have always been the highest. The problem facing U.S. industry was places that had half our productivity had one-tenth our wage, and that was the dynamic that led a lot of industry to leave the U.S. That dynamic has actually shifted back a little bit in the U.S.'s favor as partly some of the countries where labor was cheap have had dramatic wage growth. It's not actually that cheap to manufacture in China as it was in the past. And productivity in the U.S. has been quite astounding. It went up dramatically in the recession, which is the first recession really ever where that happened.

We always have to make the caveat that we are in Chicago. In most of the United States, we have very strong rule of law. We have intellectual property protection. The cost of capital is very low. You don't have to worry about opening a factory, and then you come in on Monday to find that everybody who was working there has opened up a competing factory across the street, making the same thing that you were just making.

So, the fundamentals there, coupled with major energy discoveries and a number of things that are improving the competitive position of companies in the U.S. All of those are positive signs that most of the benefits of that would be kicking in not in the next 12 months, but over a period of a few years.

Third, I would say, for whatever you think of our demographic issues and our long-run fiscal problems, which have virtually nothing to do with why the deficit went up in the recession, or why it's coming down faster than it ever has before--that's from the business cycle. The long-run fiscal problem is about the aging of the population and the rise of health-care costs, and we all know that. That's not a big secret. The baby boom has been known about since 1946, when it began.

The magnitude of that problem is serious, but totally manageable for the United States in a way that is quite different than almost any other advanced country of the world. Our population is aging slower than any other advanced country, or China. Our population is still projected to grow to 400 million. Population in most of the advanced countries of Europe, in Japan, and even in China is actually projected to fall. So their aging is much more dramatic.

Our starting debt levels, tax levels, spending levels as a share of the economy, are, if not the lowest in the advanced world, among the lowest, in the bottom third.

So, if we make up our mind, do we want to do revenue, do we want cuts, do we want to do some combination--fine, there are many choices. But when you hear people ask the question, is the U.S. Greece, or is the U.S. Spain, Italy, whatever--I think they dramatically misunderstand what the nature of the problem is in our two areas.

If you look at Greece or Spain or Italy or any such country, they've already got debt-to-GDP ratios of over 100%. They already have tax rates above the U.S. rates. They already have 20% VATs. They are already paying out massive amounts of government spending, and their population is aging way more rapidly than it is in U.S. So the market looks at them and says, what is step two? How do you get out of this problem? And that's why they are tethering on the edge of financial crisis over and over again.

The U.S. is not in that situation; it's a very different circumstance. We've got to overcome the insanity of D.C., but there are many choices. We face a fork in the road, and we get to choose, rather than we're just heading to smash into the wall.

The last thing that I would leave you with, I hesitate to even call an argument, because economists say, if it doesn't have a number attached to it, then it doesn't count. This is largely a cultural argument, which is to say, the U.S. became the richest country in the world based on its innovative capacity, commitment to entrepreneurship, new businesses within large firms and start-ups, and none of that has changed.

You may have seen, in addition to the other things in the news about Russia, Russia has announced that they intend to build the world's next Silicon Valley from scratch. They're going to build it in a town called Skolkovo which is--my Russian geography isn't great--it's either in eastern Siberia or western Russia. They're going to build this town. They're going to order tens of thousands of engineers to move to this town, and they are ordering them to start companies that will have spillover benefits on the rest of the technology sector in Russia, and that will be Silicon Valley.

That's not going to work. Steve Jobs did not go to Silicon Valley the first time because a dictator said, here's your choice, Steve: the gulag or else you're going to go start a social media company, a search engine or something that's going to have spillovers on the rest of society. It has to bubble up from the economy itself. That's not a top-down thing. And the U.S. remains a very entrepreneurial and very committed to innovation place.

So, I got to know Warren Buffett a little bit in the campaign, and when I was in the government. And he would come in, and he would show me this list. I'm not the only person he would show the list to. He would start with either data to his birth year or to 1900. "What do you think the Dow was in 1900?" he would say. … I don't know. 50. The answer was 50. The Dow was at 50.

Now, make yourself a list of everything that would go wrong in the intervening 113 years. You got a hell of a list. You've got two World Wars, the Holocaust, flu pandemics, bank runs--one thing after another. And he says, "OK. Go show a person in 1900 this list, and ask him, "What is the Dow going to be in 2013?" And they're going to say, I don't know, maybe 60. Or maybe 40! That is a very bad list. It might be at 40. I'm going to conserve my capital!

OK, depending how long the shutdown goes, the Dow is teetering around 15,000. How did that happen? The answer is because the innovative capacity of the American economy is, and was, unbounded. And nothing happened. They didn't blow up the universities. They haven't changed the fact that young people are out trying to start new companies, or that big companies in the U.S. are committed to coming up with new technologies. All of that stuff remains, and that is how we're going to get out of this. And the next 12 to 18 months may be kind of bumpy and unpleasant, and you're going to see a lot of craziness come out of Washington.

But fundamentally, if you say five years from now, or 10 years from now, where we would be? You know the answer is, we're going to back on that same old trajectory that we've been on for 180 years, where we're growing about 3%-3.5% a year, remaining the richest country in the world.

And if you ask, who would you rather trade places with? The answer better , no one. Because there's not a single economy in this world that they would not happily trade all of our problems for their problems. They'd be like, "Those are your problems? You take our problems. We'll take those problems. That would be the greatest thing that ever happened to us!"

Even in China. Last year, China passed $5,000 a year of median income for the first time ever. China has a very fast growth rate, but it's starting from a low base. The share of height growth in my household accounted for by our three kids is 100%, but that does not make my 7-year-old taller than me, and it's worth remembering that when you look at the growth coming out of China. The level of income there is between Albania and Ecuador. That's about the level of income. They are growing very fast. It's a very exciting market to invest in. There will be a lot of a productive activity. But that doesn't make them richer than the United States, and it doesn't mean that the U.S. prospects are bad.

So, I wanted to leave some time for questions, which I have, and I'll leave you with this sentence. I teach down at the University of Chicago, where they've won more Nobel Prizes than any university in the world, and one was a guy, George Stigler, who some of you might have known. He passed away just before I joined the faculty in the mid-'90s. And they used to say of George that he was a crusty, mean old guy, and he was the type of person who would wake up every morning and look at himself in the mirror and grade himself a D. And that would make him smile because he gave everyone else in the world an F.

Just pick up the newspaper. Look at Washington. Look at whatever you want. There are many things in the world, and in the United States, that you would not give any higher than a D. But then just take a look, look around broader than just that, and I think you will agree that it could be a lot worse.

So, with that, they told me there are some microphones, and I can answer some questions. If you don't have questions, I am a professor, so I could filibuster all day, if need be. Or I can tell you stories about how crazy Rahm Emanuel was in the White House.

We've got a question right here in the front.


The question was, can you talk about the Affordable Care Act? Can I ever?

What to say about the Affordable Care Act? I'd say two or three things. In the short run, I think it is definitely adding to uncertainty. If you talk to people in business, there's a lot of fear and a lot of misunderstanding or confusion of what is it? Is it going to apply to me? How is it going to apply? Is it going to increase cost?

There are actually big subsidies in it. So, there are a lot of people who are actually going find out it's actually cheaper than it was before. I don't want to get into a religious debate about the question of how important is it or was it to cover the 40-something million people who didn't have insurance. How important was it to cover those people? I was a bit on the fringes of health-care debate.

I will say the following: … the important thing by far is, what will affect the growth rate of health-care costs, both for individual budgets, for business, and for the government's budget. That is the most fundamentally important factor.

There are at least five different camps--schools of thought, let's say--of what is the answer to that question, how would you slowdown the growth rate of health-care costs. Unlike Social Security, where any group of informed people if you sat down with the facts and they told you, you have one hour to come up with a plan that will solve this problem, we could do it. We'd have some debate of, should it be revenue, should we raise the retirement age, whatever.

In health care, that's not true. Even among experts, people don't really know how they would do it. There are at least five camps, and it turns out the five camps hate each other, and they spend all their time saying, "Don't listen to them! That's a stupidest thing in the world!"

One of the camp says, it's about preventive care and chronic disease management, and if you did more preventive care, it would save all his money. One group says, it's about nobody pays their own money. So they don't pay any attention to prices. So if you made people pay their own money out of pocket, the inflation rate would go down because there would be all these pressures.

Those two groups hate each other the most. The preventive care people say, if you have to pay $150 every time you get your blood pressure checked, nobody is going to do it, and so you're going to have raging blood pressure problems, and everybody is going to get sick and die. And then the out-of-pocket people say, preventive care doesn't even save money, because everybody gets sick and dies anyway. They just don't die cheaply and quickly; they instead die in some long, painful, expensive way.

There is an information technology group. There is a comparative effectiveness group, which got described as the "death panels" group, where they'd say, you can't do that, that's too expensive; what they do in Minnesota costs less and has better outcomes. There is a tort-reform camp. So, you've got all these camps.

There is one type of problem that Washington can't solve, and that's why I am relatively optimistic ultimately about what will happen with the budget, and that is: Washington is able, ultimately, to solve a problem where the correct answer is, everybody gets a quarter of what they wanted and we make a big deal. That's the Washington way. And for the budget, that's sort of the right answer.

What Washington is totally incapable of solving, what really only the private sector has ever proved capable of solving, is a problem which is of the form: Here are five world views; only one of them is correct. We have to decide as an organization which one is right, and then we have to orient the organization to fulfilling that.

So, [for instance,] we decide that the future is mobile. Everything has got to be geared around converting to mobile. Washington cannot do that. And fundamentally that's, I think, what the health-care thing is about. Why are health-care costs growing faster than inflation for 25 to 35 straight years? And some people say the Affordable Care Act did nothing to address costs. That's not actually true. What it did is, it did 20% of five different things. … It set up pilot project that would allow you to figure out how important is each of these categories.

If we were in an environment where compromise was easier, and people were willing to go back and revisit things and say, "We passed the Affordable Care Act. We've done this for two or three years. Here's what's working, and here's what's not working. So now let's do more of that. If preventive care has been a huge benefit, let's do more preventive care." Then I'd be feeling great.

Unfortunately, that's not the world we live in, and they can't reopen anything. [Consider] Dodd-Frank. As you know, there are some things that are very good; there are some things that make no sense. They can't reopen Dodd-Frank. They can't fix even … There is some spot where, in the Consumer Financial Protection Bureau--it's been made moot--but there literally was a thing where they put a reference to section blah instead of sub-section blah, and there was a comma where there shouldn't be a comma, and therefore it's cast in doubt everything that the acting director did as head of the Consumer Financial Protection Bureau, because it said something like, this person has the right to do whatever is in Section 7, and it should have said in sub-section 7, comma, and without the comma, then it referred to the wrong thing.

So, in a world where you can't go put a comma back in that you left out, this is crazy. Even my 10-year-old cannot abide by that standard. In his social studies class that would be quite catastrophic if he had to get the commas in the right place on every sentence, but I kind of think that's where we are.

That was a long answer. The Morningstar people are giving me the body language of, hey, you've got to shorten that up. OK, I can do that, that's fine.

There is a question over here.

There is a little auditorium in the White House, and it's got a setup like this, but it's steep. But it's got a setup where the lights are in your face. So if you are speaking, you really can't see. And so what I would always say is, "I can't see you, so if you have the microphone, just assume you have the floor and ask your question, because I can at least hear you.

So there was this guy right in the front row. He… raises his hand. I say, "Give him the microphone." So he stands up, his back is to the audience. And I didn't realize there were actually two microphones. So he stands up and somebody else with the other microphone starts making the most offensive pronouncement about how the following groups are all lazy, and … women should have never gone back to work, and there is a gasp of people in the audience. And everybody assumes it's this guy, because his back is to them. And he just panics and throws the microphone and yells, "It's not me!"

Here there is no microphone and everybody can see you. So just keep that in mind when you ask the question.


So, the question, if you couldn't hear it, was, your case for optimism really depressed me. That was basically his statement. Your optimism was, we're not aging as fast as the other guys, and compared to them, we're not so bad. So, why is that optimistic?

Now, partly that's true, but everybody knows we have a long-run fiscal challenge facing the country. I think everybody does not understand that the magnitude of that challenge is a totally manageable size.

The things beyond those that I think are quite positive were: we remain massively productive workforce. There's been a return to record levels of corporate profitability that can fund an investment boom once we get past this period of uncertainty, which normally there isn't.

Two, we've had these substantial energy discoveries that are improving costs within manufacturing, but a lot of [other] sectors in the U.S. will benefit.

… I also mentioned everybody moving out and buying a futon, but that's more of a medium-run one.

But the most important one is this innovative capacity and entrepreneurial capacity of the country. If that is broken, then we're doomed. But it's not actually broken. And if you look at productivity growth, scientific innovation, and the entrepreneurial willingness of major companies--not just start-ups; it's not just Silicon Valley... The data show that large, medium, and small companies in the U.S. are more open to new technologies, new ways of doing business than they are in any other economy in the world. Those are all legitimate and objective positives for the economy, and those are the things that I actually think most anybody would like to trade with us and have [as their own].


Austan Goolsbee: The question was about the prospects for default--of avoiding default. What does it mean if we're going to go right up to the edge of the debt ceiling?

One, I wish I could say it more vehemently. I'm pretty sure we're not going to default. I wish I could say, obviously we're not going to default.

There is a dispute. We have a crazy system, as you probably have gathered by now. We fight over the budget. If they can't agree on a stand-alone budget, they pass a continuing budget that just says, whatever anybody was getting before will just continue with that same budget. That's the "continuing resolution" that they are fighting about, and if they can't agree on that, everything that's not mandatory spending, or essential, shuts down.

Interestingly, the culture of the government is, they are all going to be paid anyway, but everybody wants to be declared essential. So, the chair of the [Council of Economic Advisers] is in the Cabinet, so you're automatically essential and you have to come to work. Everybody who works at the CEA wants to make an appointment to come see me.

"Do you think that we will be declared essential?"

No, absolutely not. By the definition of essential, the CEA is not essential. Much of our job is reporting the numbers to the president. The data is shutdown. There is not even going to be a jobs number announcement on Friday. What is it that we would do? But they want to be declared essential.

Separate from the dispute over the budget, we have a debt ceiling. It used to be that Congress it had to raise the debt ceiling with every bill they passed. They got too lazy to do that. So they said, let's just raise the debt ceiling for a whole bunch of bills. Then we can pass these bills and we'll periodically raise this, and match up to it. And somewhere along the way they passed it. So now they've passed the bills, and they have to retroactively do the debt ceiling.

There is a dispute. One group says there's never going to be a default because Congress could just prioritize the payments. And they can say, we're going to pay the bondholders. So there won't be like a CDS-type event.

Treasury's position has been that they're not allowed to prioritize, that as the bills come in, they just have to pay them. If push actually came to shove, probably Treasury would find some way not to generate the mother of all CDS events and blow up the world. But I do think that the popularity of what they would have to do, what prioritization would imply, is so unbelievably unpopular, that I just don't think that's going to happen.

What I envision occurring is--and it could go either way--but thus far, the polling suggests that people are getting madder at the Republicans than they are at the Democrats. And they're by 75% or so saying, we don't think you should shut down the government just to dispute the Affordable Care Act.

As that gets more , and they start asking, well, do you think they should stop paying Social Security in this dispute? Do you think they should default on Treasuries? I think the pressure will grow intensely on whatever people remain in the middle, and you've already seen what I think of as the traditional conservative wing of the Republicans, and those Republicans that are in New York City, going down and saying, "Wait a minute! This is not good for us! You've got to sort it out!"

So I think that we are having the fight about this shutdown is healthier than saving it to the debt ceiling. And I think this is just setting up …they'll come to some compromise that puts it off for six months to revisit this again. But it's my feeling, we're not going to get that close to the debt ceiling. The market will still probably freak out a couple of times before the whole thing is done. But I think that it's going to start getting so unpopular that people will start caving basically.


Austan Goolsbee: The question was, I said [politicians are] just representing their constituencies; would term limits solve? On one hand, there are people who say term limits won't solve it because there is no term limits for the voters, and the voters are the ones who are sending them the signals to do this.

Though if you ask my grandpa … he was a simple guy from Waco, Texas. They'd say, "Hey, who are you going to vote for? Are you going to vote for this Congressman?"

He'd say, "Has that guy been there for five years?" And if you said, yes, he'd say, "Well, I'm not voting for him." I'd say, why not? He'd say, "Because it takes them five years to learn how to rob."

So, his thing was, inherently, he wanted term limits because his view was incumbency kind of generates its own thing.

If you are in that Harold Goolsbee view of the world, then term limits do help, because it says, keep knocking them on their heels; the new guy doesn't know what's going on. He's got to learn how to rob. So, we'll throw him out before that happens.

In reality, when you have lots of turnover at the politician level, it vests massive amounts of power in the staff. There are no term limits on the staff. So the guy who is at the finance committee, he has been there for 25 years, what he thinks should be in the tax bill starts becoming massively important, because the new guy comes in and says, what should I do? And he says, here is what you do. So, I am of two minds about it. I don't know the answer.

OK, looks like we've got time for one more [question]. Right here. All the pressure is on you.


[The question is about the] next Fed chair and what will happen to monetary policy? I have thought for a long time that it would be Janet Yellen--for a year, year and a half. And I think that she, both by personal temperament, intellectual temperament, and institutional function is largely a candidate of continuity. So, she is going to follow the program that has been basically announced--which is to say, aiming to go easy on how fast the exit is going to be, tied to economic conditions. In my opinion, economic conditions have not been that great. So, by their stated criteria, they shouldn't be engaging in some massive amount of tapering in the near future.

That said, I'm as confused as anybody [about] what happened at the September meeting, where they seemed to be saying … I didn't want them to taper because I thought conditions weren't great, but they kept saying, what sounded like, "We're about to start tapering," and then they announced, "Why would you think we were going to taper? Conditions aren't great." So, that just seemed weird to me.

But I think Janet Yellen, who's an old friend, is very good at communication and explaining, and I think that will be a very important task of the next Fed chair. And she is pretty diplomatic, and I think the diplomatic lift, the difficulty, is going to be, we know that over time as the financial system heals, the Fed has got to exit the position that it's in. When it starts that, how fast it goes, and getting everybody onboard with that is going to be a pretty significant and momentous thing to do. And I do think she's probably be up to the task. I think mostly conventional wisdom feels like it is right for me on that.

Guys, thank you for taking the time.