SPEAKER: ALICE RIVLIN, FORMER VICE CHAIRMAN, FEDERAL RESERVE BOARD, FORMER DIRECTOR,
OFFICE OF MANAGEMENT AND BUDGET, SENIOR FELLOW, BROOKINGS INSTITUTION
MODERATOR: Good afternoon. Welcome to the Foreign Press Center.
This is a special privilege for me today to bring Dr. Alice Rivlin to
you as one of our greatest experts here, an economist and someone
who's been in the key institutions of our government, the
Congressional Budget Office, the Office of Management and Budget under
the Clinton administration, the Federal Reserve and we were just now
talking about the New York Stock Exchange. She's also a member of the
board.
She will be glad to take your questions. At the end we would ask
you to please wait for the microphone and to identify yourself and
your media. Thank you.
Dr. Rivlin?
RIVLIN: Thank you very much. I'm really pleased to be here and
get a chance to interact with journalists from all around the world.
It's a very interesting time to be an economist in the United States,
as all of you know. And everybody here and abroad is asking questions
that economists find very difficult to answer, namely how bad is this
recession going to be, when are things going to turn around, how long
is it going to last and those kinds of things.
I wish I had answers. I think nobody does. We are inherently
living in a very uncertain world. The standard forecast for the U.S.
economy don't look all that bad in the sense that much of what you
would read if you look at model forecasts right now says that the
economy will continue to get worse, the GDP will be falling through
the end of this year, but it's already April, and bottom out early in
2010 and begin growing again.
People vary on how fast, but I think most people think the growth
when it resumes is not going to be all that rapid.
But that's the standard forecast, coupled with what people have
observed over a very long period, namely that unemployment is a
lagging indicator, that it continues to rise even after the GDP has
begun to grow again. And people are predicting that unemployment now
in the middle eights will go up as high as 10 or 11 percent perhaps
before it begins to fall again.
Now, that's pretty bad, but I think there's a significant chance
it could be worse, and that's the thing that gives us all so much
uncertainty. A couple of reasons, first, we haven't seen this kind of
thing before in the United States in the period in which we've been
doing serious modeling of recession. So to the extent that the
forecast depend on model, pulling together the statistics of the last
several decades, they may be misleadingly optimistic because of what a
model of that sort is telling you is if things proceed on the
average as they have in the recessions since World War II, how bad do
we expect this to be?
And that's an interesting question, but it's not the right
question because in that period we have not had a recession which
began with a serious, full-scale financial collapse. Now, there have
been recessions around the world, quite a lot of them, that have
started with banking crises and financial collapse, and what we know
about those recessions compared to the ones that didn't start that
way, is that those who start with financial collapse are worse and
longer.
So that doesn't give you a very precise estimate, but it gives you
some reason for being a little worried that the standard model
forecast may not be right.
Another reason is nobody wants to go back to the economy that we
have had in the United States for several decades, but especially most
recently in this one, namely an economy of over consumption and over
borrowing by households and by government and by corporation, over
borrowing at all levels.
We want to go back to an economy which is growing, but in which
household saving and other domestic saving is higher, and we are able
to finance more of our domestic investments through domestic saving,
rather than borrowing so much of the savings of the rest of the world.
And that would give us a much more solidly-based economy, but if
you think about what it means for the recovery, it's not good. And
for retail sales and services, consumer services, and so forth, they
will come back slower if we are transitioning to an economy with a
higher savings rate. Now, we already have a higher savings rate.
People living through this catastrophic decline in the markets and the
banking crisis are very uncertain and what people do when they're
uncertain is they don't spend.
So we've had a saving rate, a household saving rate which was
approximately zero go up now to in the range of 5 percent, which is in
many ways good, but will certainly, if it stays there and it may not
stay there but will stay higher than zero, will slow the recovery.
Now, what is in the response of the authorities? Everything they
could think of. This has been the most aggressive response to a
recession and a financial crisis probably in the history of the world,
partly because of the lessons drawn from the Great Depression, where
countries -- it was a different economy then, but we had central banks
and we had government and they did not act very rapidly and in many
ways did the wrong thing, raised taxes, raised interest rates, tried
to get back on the gold standard, doing things that were restrictive
rather than stimulative.
This time we have seen the opposite. We have seen first the
central banks around the world cooperating in a way that perhaps
central banks have never cooperated before, in reducing interest rates
and pumping liquidity into the financial system, a very inter-linked
global financial system, in an effort to preserve as much stability as
the financial institutions as possible.
Rescues of financial institutions by the central banks and here
the Federal Reserve, on a scale that we have not seen before. I'm
always a little bemused when I think about what I would have thought
when I was the vice chair of the Federal Reserve, if somebody had come
into my office and said, "Hey, you know, I think we ought to buy a
failing insurance company." That was not on the list of things that
most of us at the Fed at the time, but could possibly be done even in
extremist.
But the other piece, two other pieces, one is Treasury action to try
to stabilize the banking system, a very unpopular thing to do.
And we will see how this turns out, but the Treasury together
with the Fed, as you know, launched into a very aggressive program to
stabilize the banks with so-called TARP, Troubled Asset Recovery
Program, which didn't do that at the beginning. They thought they
were going to buy the troubled assets; they couldn't figure out a good
way to price them so they went at it directly first, with direct
capital injections, quite large ones.
It's not clear whether that worked or not, because we don't know
what would have happened. People say, "Well, it didn't get the banks
back to normal; they aren't lending as much as we'd like to think they
should" But that doesn't mean that the original TARP didn't work,
because we don't know what would have happened and certainly the
authorities thought that they were, in facing a domino effect of
collapsing financial institutions around the world, and that at least
did not happen.
Now the question is what to do next. The Treasury and the
Federal Reserve in various complex ways has been both aiding the banks
and getting into the credit markets directly, buying securities and
buying packages of consumer loans, auto loans, small business loans,
whatever, to try to get credit out there directly.
And the other response has been the direct government spending
and taxation response, the stimulus program, which again is on an
unprecedented scale, pushing money out to try to keep the economy from
getting into an even more serious downward spiral and cajoling other
governments around the world to join us with considerable success in
stimulating their economies because we're all tied into this thing
together.
And again, we won't ever know exactly how much good the stimulus
package has done, because we won't know what would have happened if we
hadn't done it. I think one can say confidently things would be a
good deal worse if we hadn't gotten money out there quickly.
So what happens next? I'm not quite sure. I'm happy to answer
questions, but it's not quite clear how long we will have to be dealing
with this and how successful the government actions will be. I'm
reasonably optimistic, but not about the short run, and I think we
also have to be very concerned about the long-run future of U.S.
fiscal policy.
The budget deficit has gone to unprecedented levels. I teach and
I had my students look at the past statistics and the highest in terms
of the budget deficit as a percent of GDP. It's wandered around. The
thing that some of us who were in the Clinton administration take
pride in is that we had a considerable budget surplus at the end of
the '90s, but that went away quickly.
The highest deficit as a percent of GDP was in 1983, about 6
percent, and we were very worried about that at the time, and we
should have been, but the more recent years we still had a deficit but
it was considerably smaller in relation to the economy. This year's
going to be 12 or 13 percent; that's twice the previous record or the
post-World War II record.
That in itself I think is not very worrisome. Those deficits are
largely caused by the financial rescue and the stimulus itself, and
they will be temporary in this huge magnitude. But even as the
economy recovers, we will be left with significant deficits, the
Congressional Budget Office estimates in the range of 4 percent of
GDP. And -- and this is the point I keep referring to and have been
for some years -- we are headed into a period in which all the
pressures on the Federal Deficit are in the upper direction.
We, like many of the countries you come from, have an aging
population. We have made promises to older people in terms of
pensions, but most particularly in terms of medical care, that are
going to be very expensive. And our medical care system is expensive
and the rate of growth of per capita spending on medical care is
high. So there is enormous upward pressure on spending in the Federal
government irrespective of what's going on now. There's nothing to do
with the current increases; that would have been there even if we
hadn't had a recession and the financial collapse.
And so we are adding to the debt and we are adding to the problem
that would have been there anyway, of very, very unsustainably large
deficits looming at us in the future, which can only be coped with if
we reduce the rate of growth of the spending under the programs for
older people and/or, I think it has to be and raise revenues in some
way.
So that's that fiscal picture, and it's not unlike many other
countries are facing. It's not that there's something unique about an
aging population in the United States or about the difficulty of
balancing a budget. But we're a very big economy and we have very big
deficits at the moment, and we'll see whether our political system can
cope with that.
Let me stop there and answer your questions. Questions? Don't be
shy.
MODERATOR: New York, go ahead.
Indira Kannan, from CNBC TV 18, India. I actually have
two questions. One is, I think Obama said a few days ago that
the U.S. was increasing its contribution to the international monetary
fund, and one of the reasons he cited specifically with that for
countries like India and China to participate and this could persuade
them to (inaudible). What exactly would be the U.S. administration's
expectations from India in this regard, and why? And I have another
question after that.
RIVLIN: I think the basic idea is in part imbalances in
intelligence payments got us into this problem and we want a better
mechanism, better-funded mechanism to try to help countries through
adjustments and India and China are very big economies right now and
we need to help enlist them along with a bigger contribution from the
United States in putting the IMF really back in the role it started
out in that.
There was quite a long period when we weren't having difficulties
with the major developed countries balances or we thought we weren't,
and the IMF sort became a little bit more marginal and was worrying
mostly about very poor countries, but I think it's obvious that that
was a mistake. That's not the world of the future and so we need to
get the IMF back in condition where it can cope with major imbalances.
KANNAN: Do you think it's likely that the U.S. may make a direct
appeal to the Indian government, for instance, to entreat its own
contributions beyond that?
RIVLIN: I don't know. I don't know why not. I would think
that's the next thing to do.
MODERATOR: We can't hear you, New York?
Yes, Treasury Secretary Tim Geithner, said that mostly
major U.S. banks could be considered well-capitalized.
And some of the prominent U.S. economists have actually argued
that a lot of U.S. banks are effectively insolvent. In your opinion,
what is the real status of the U.S. banks and how could this affect
other economies, especially developing economies in the years to come?
RIVLIN: I don't think we know. At least I certainly don't know
enough about the condition of individual banks to answer that question
intelligently. Secretary Geithner's stress test is supposed to tell
us that when we get the results, which have been promised very soon.
They have examined very carefully the books of the major banks to see
not only how solvent they are now but do they have sufficient capital to
withstand a worsening of the economy. We don't know the answer to
that.
What I think we do know is that banks don't have a lot of
confidence in their own ability to weather further storms. If they
did they would be lending more. The other thing we know is that what
happened in the last decade was excessive growth in the financial
sector. It became a sector that was out of proportion in the United
States and other places, out of proportion to the real economy. Forty
percent of the profits of U.S. corporations were in the financial
sector in the last few years. That doesn't make sense.
And too many people, too many smart, bright, young people were going
into financial services. We are going to have to downsize the banks,
hopefully without too many crashing, but over time our objective has
got to be to get the financial services sector back in better
proportion with the rest of the economy.
MODERATOR: Another question? In the back, please?
Yes, Dr. Rivlin, my name is Xingfu Zhu from Chinese media.
So my question will be how much did it account for the Medicare,
Medicare expenses last year? How much percentage of GDP did it
account? This is one thing, one question.
Follow-up question is for the budgetary deficit, when you reached
to certain levels that's regarded as risky and dangerous, by now it's
about 12 or 13 percent of GDP. Which percentage is which to the what
do you call red or light or dangerous level? Thank you.
RIVLIN: Medicare as a percent of GDP, 4 percent or 5 percent. If
you're talking about the Federal government's Medicare program. If
you're talking about medical care as a whole, everything that
Americans spend on medical care as a percent of GDP, it's incredibly
high. It's 16 point something percent, almost 17. And that is a
very, very high number with respect to anything.
The European countries, with good medical care systems are in the
range of 11, 12, 13 percent of GDP and they cover everybody, which we
don't, and with quite good care. The U.K. is less, although I think
moving up, and so one question is why do we spend so much on medical
care in the United States? There are some reasons for it. We
pay our doctors a lot; we use a lot of specialists, more than the
developed countries of Europe where you're more likely to see a
general practitioner and only get to a specialist in very specialized
cases.
And specialists earn more; that's one of the reasons. We have
pretty high administrative costs because our system is so fragmented
and complex and there may be some other reasons, but it's not a very
efficient system and that's the thing that President Obama and his
team are worrying about right now, how can we reform the American
medical care system so that it covers more people and doesn't cost as
much?
I don't think we will be able to lower the cost, the per-capita-
cost of medical care, significantly if at all. What we can aspire to
do is lower the rate of growth, because if it's rising as rapidly as
it has been in the last few years, the numbers in the Federal budget
or in any budget devoted to medical care are simply unsustainable.
Remind me of the second question?
Red light on the budget.
RIVLIN: Oh, red light on the budget, yes. Depends what's
happening and how temporary it is. The reason I'm not worried about
the 12 or 13 percent this year or next is that I think it's really
temporary and it will get back down to a range of say 4 percent, which
is not as worrisome. But it also depends on how you're financing it.
And the thing which amazes me, actually, is that the Treasury
bond, the U.S. Treasury bond, is seen around the world as the safest
asset and therefore people buy them even if they don't get a very good
rate of return. And the interest rate on Treasury bonds since this
crisis has actually fallen dramatically because so many people want to
buy them.
That's counterintuitive because a country whose finances are in
bad shape and have a rising budget deficit should not logically be
able to finance this budget deficit so easily.
So the question is how long will this last? And I think we don't
know. It depends partly on how quickly we are able to get our
financial house in order and our economy growing again, and it depends
partly on the rest of the world, including China, whether the Chinese
continue to invest a large part of their surplus in U.S. Treasury, and
what else can I do with it?
In my own opinion, eventually China is going to have to invest
more in its own economy in growing consumption in China. The
imbalance between our two countries was in part that Americans didn't save
enough and in part the Chinese save too much and going to have to
raise the consumption level out of their own income.
MODERATOR: We'll take the next question from New York.
My name is Olli Herrala. I come from Helsinki, Finland.
(inaudible) Finnish Business Daily. I have a question
about raising the revenue. How soon are we going to see incomes tax
hikes? Thank you.
RIVLIN: How soon are we going to see income tax hikes? Well, if
the Obama budget goes through, the proposals that President Obama has
put forward. We will not see income tax increases on most people, but
we will see the tax rates on the top 5 percent, reasonably wealthy
people, go back to the levels of the 1990s. And that's the
president's proposal. It's controversial but I think it's likely to
happen.
Over the longer run, in my opinion we are going to need more revenue
but not necessarily from the income tax.
We are the only country that does not have a national broad-based
consumption tax, such as a VAT. Almost all developed countries, well,
almost all countries, I think, rely on consumer taxation fairly
heavily. All European countries have value-added tax. Canada calls
it something else, but it's the same idea. And I think we will get to
that eventually, but no president or no Congress is going to propose
that in a recession.
MODERATOR: Go ahead, yes.
I'm Yusuke Yoneyama with Japanese Nikkei newspaper.
Let me be clear about the part you mentioned. So do you think is
there any possibility the U.S. administration will propose a PAT, or a
consumption tax in the long run?
RIVLIN: Some administration will; not necessarily this one, I
think. Because I don't think we will have the political will nor
should we to reduce the medical care spending and the pension benefits
as much as we would have to stay within our current revenue system.
And the income tax is our largest source of revenue, but if you're
looking ahead, I think that we are unlikely to want to go back to much
higher income tax rates, and the only alternative that I see is a
broad-based consumption tax.
Now, there is one other alternative, and that is much heavier
taxation of energy. And that could be done in a number of different
ways. We have historically, because we produced some oil and because
we like to drive cars, had very low taxation on gasoline compared to
Europe or Japan or almost any place you can think of except the major
oil producers. And if we are serious, and I believe we must be, about
conserving oil and mitigating the pollution problems and the
greenhouse gas problems, then we have to raise the price of energy.
Now, there are lots of ways of doing that. In the Clinton
administration, we first talked about having a carbon tax. It got
called the BTU tax after British thermal unit; that was not a big
advantage. And eventually it got converted from a carbon tax, which
was a better idea, to a gas tax and a very small one, which was the
last time the gas tax was raised. It's still very low.
The Obama administration has taken a different tact, perhaps
remembering that experience where we didn't get very far with our
efforts to tax carbon. They're going at it with a cap-and-trade
system to auction permits to emit greenhouse gases and that would have
roughly the same effect if it was implemented in a sensible way. It
probably can work, but it would certainly -- it's not a tax exactly,
but it is revenue for the government and it would raise the price of
energy. So it gets you to the same place.
MODERATOR: OK, New York. You have the next question.
Yes, my name is Louise With from Berlingske Tidende
newspaper in Denmark. One of the fears of the people that are
skeptical about the Obama budget is that the Fed and the Treasury,
once the economy turns around, they're not going to be able to pull
back fast enough. What's the Fed going to do with all the assets that
it's holding? Is Treasury and the government going to be able to cut
back soon enough so that will create inflationary pressures and
essentially a really bad inflation. So I wonder how seriously do you
think are these fears and what's your view on that this year?
RIVLIN: Well, I think it's an important concern. The Federal
Reserve has been essentially printing money in creating reserves on
the books of the banks, buying assets, all kinds of different assets,
including Treasury bonds, and what all of us learned in school when we
took Economics was if you print a lot of money the result is
inflation. But not always. What we really should have learned is
inflation is too much money chasing too few goods, and at the moment
there's no chasing going on.
The demand for goods is very limited. The reserves are really
not being pumped out into the economy very fast, and the problem right
now is not inflation, it's deflation with the concern that we are
seeing some price drops and might be in the situation that the
Japanese got themselves into in the '90s where their big worry was
that prices kept going down and the Bank of Japan tried everything
they could to turn that around and were not terribly successful.
We don't want to be in that situation, but we're nearer there at
the moment than we are to the inflationary situation. But your
question is really suppose things turn around fast, the economy begins
growing again, then can the Fed pull back fast enough? I think so. I
think that the Fed is much better at controlling inflation than at
controlling deflation. It isn't just the Fed, it's central banks
generally find it easier by raising interest rates to control
inflation than deflation. And I have considerable confidence that
they will be able to do that.
Moreover, I think people think if inflation gets started it will
take off rapidly. I doubt that that's true. Our economy and the
world economy is much less inflation-prone than it used to be, because
of globalization, because of intense competition around the world.
Here, now if you're a company and you can't produce fast enough and
you don't have another, we don't have enough workers so you have
upward wage pressure, a few decades ago you would have raised the
wages and tried to produce more here. Now you don't. The option is
produce it somewhere else and sell it here. So that's one of the
reasons why I'm not as worried about inflation as I think people
remembering previous inflation episodes tend to be.
MODERATOR: One last question? Anyone? OK, thank you.
RIVLIN: Thank you, good questions.
END
Prof .William Were got a gong from Her Majesty for her services to Health in the commonwealth
