How to Fix the Economy: An Expert Panel

Tom Keene talks with Bob Shiller, Peter Orszag, and other leading economists on how to “get out of this mess”

On September 7, Bloomberg Businessweek brought together four top economists and one eminent money manager and gave them the following tough assignment: fix the American economy. Eleven days before, at an annual gathering of central bankers in Jackson Hole, Wyo., the influential University of Maryland economist Carmen M.


Reinhart had presented a paper forecasting high unemployment, low housing prices, and very low growth through 2017. That grim forecast was on the minds of our roundtable, which included Yale University professor Robert J. Shiller, author of Irrational Exuberance; Peter R. Orszag, who recently stepped down as director of President Obama’s Office of Management & Budget; financial consultant and former Salomon Brothers Managing Director Henry Kaufman; and Professor Charles W. Calomiris, who is the Henry Kaufman Professor of Financial Institutions at Columbia University.


Pimco Managing Director William H. Gross, who runs the world’s biggest bond fund, joined the group by telephone. The discussion was moderated by Tom Keene, co-host of Bloomberg Surveillance. What follows is a condensed, edited transcript.


How do we get out of this mess?


Bill Gross: You have to ask how we got into it—and what Carmen Reinhart presented at the Jackson Hole conference was probably the best explanation: An expansion in credit, debt, and deregulating over the past 10 or 20 years got us here. It was a 10- to 20-year process moving in, and it will probably take a long time moving out. Some have suggested the Biblical seven years fat and seven years lean.


Peter Orszag, now that you are out in the real world, give us a time continuum.


Peter Orszag: I would agree with Bill that this is going to take a while. We are in the mode of years rather than quarters.


Henry Kaufman: I believe it will take time, but it need not take time. What can we do about the debt position of households, businesses, and the American government? We are unwilling to do drastic things that will improve the situation of households. You can do that by raising their income so they can meet their debt burdens. Or you can do something about the size of that debt. We don’t have the capacity or the willingness to do that.


Charles Calomiris: What typically happens in these kinds of financial crises is that the problem switches from being a private-sector leveraging problem to a public-sector leveraging problem. That is the major handoff—and we are in the middle of that handoff right now. So you could look at the private sector and find some room for optimism if the growth rate of the economy could get going.


The problem is that the public-sector debt is a terrible drain on the growth rate of the economy. And what we know from history is that when you get to the point where it starts looking like you are in an unsustainable fiscal path, the tax increases and high interest rates that come from that are a threat to long-term growth. So you get into a bad equilibrium driven by the public debt problem. Without drastic reforms to entitlement programs in the United States, we are really talking about something that will feel like the 1970s—but last for 20 to 25 years.


Robert Shiller, tell us how housing links into this mess.


Robert Shiller: Housing is, for most people, the biggest part of their wealth. We went through a bubble-and-burst cycle—that was the single biggest cause of this crisis. Now we have so many underwater, and so many unemployed, that it is creating a lack of confidence. One question is, should we reinstate the Home Buyer Tax Credit in an effort to push home prices up? That did succeed, but it seems to be unraveling at the other end, and I am afraid home prices may go down [further]. We should be thinking about modernizing our housing sector, improving the kind of mortgages we offer, and encouraging innovation.



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