Transcript
BILL GALE: Policy makers will face difficult choices. It’s hard to impose physical discipline under normal circumstances. It’s going to be even trickier now for several reasons. One is if you impose discipline too soon, you risk the economy tanking again. That’s what Christina Romer wrote about in the 1930’s; that’s what happened in the 1930’s. If you hold off too long, markets may react very badly as investor fears grow. And the interestingly Greg Mancue, Bob Rubin, and Peter Orszag have all written about this at various times; Rubin and Orszag during Republican Administrations and Mancue during Democratic Administrations. But it’s still the case that there’s this concern about the market tanking on the basis of investor fears.
There’s a couple of other reasons why fiscal discipline is going to be particularly hard right now. One is the states are going to come back in a year or two and ask for a lot more money. They are in dire fiscal situation; it’s going to be very difficult for the Feds to say no. Second, nobody wants to do tax increases. But at the same time, you can’t really cut spending much in the short run. 75% of spending is on five things; Medicare, Medicaid, and Social Security, which when we talk about cuts we’re talking about longer term cuts; net interest where when we’re talking about cuts we’re talking about defaulting. All right; and defense spending. So either you have massive cuts in the rest of budget or you just can’t cut spending very much over a five year horizon. Then there’s one other issue here which I think is going to be important but hasn’t really gotten a lot of talk, which is financial markets tend to recover first. They are leading indicators of the economy. The stock market predicts booms, recessions, et cetera. Labor markets take a long time to recover.
So imagine we’re in a situation a year from now where Wall Street’s doing fine, they’re pulling in big money, the market’s going up, but unemployment is still 9%, wage growth is still --, hours are still falling. That’s going to create a very ugly, politically, populist situation where it’s going to be very difficult to enact constructive long term policy. So what does this mean? Well it means the future is now. We’re basically running out of time. The problems could happen gradually in terms of the short term -- the gradual eating away of capital. They could happen suddenly if markets collapse or get scared. And what we really need is political leadership.
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