As President-elect Obama’s team raced to salvage the economy in the winter of 2009, Vice President Joe Biden’s chief economist and economic adviser Jared Bernstein was one of the experts frantically trying to craft a solution.
Bernstein left the administration last year and joined the Center on Budget and Policy Priorities in Washington as a senior fellow. He spoke with WPRI.com on Thursday about the economy, how Rhode Island can position itself for the recovery and whether the White House is like “The West Wing.” The transcript has been lightly edited for clarity.
Let’s start with a parochial question. Have you ever been to Rhode Island?
Oh, yeah! Lots of times. I’ve been there in my professional career as an economist, but I was also there once as a musician on the QE2 – the QE2 once went up to Providence. I played the string bass.
You’re a man of many talents. I wanted to start with the news of the day. The economic recovery has been looking surprisingly solid lately, with new jobless claims down this week and other hopeful data. What’s your current take on how the economy is doing?
Things are definitely improving, but we’re not out of the woods. The job market is finally getting better in a way that could develop into a self-sustaining recovery, but we really haven’t seen that yet.
A self-sustaining recovery is one where virtuous cycles are under way, where there’s enough employment and enough income in people’s paychecks to support businesses – they begin to experience increased consumer demand. That sets off a bunch of multipliers that leads them to restock their shelves, that sends orders back to factories, and so on. That’s what a self-sustaining recovery looks like. We haven’t had that ever since the bust in 2007. We’ve approached it, but we haven’t quite been there.
One reason was because key parts of the economy were still weighed down, the housing market most obviously – that, at this point, seems to be bumping along the bottom rather than falling. There used to be a time when the housing market was bringing the economy down, now it’s probably that the economy is bringing down the housing market. But that, quote, correction is largely behind us.
We’re getting back on track. Not quite there yet. When I talk about the weakness in the job market, you’ve got to remember there’s still 5.5 million people who’ve been unemployed for at least six months. That’s more than 40% of the unemployed; that’s an extremely high level of long-term unemployment. It’s going to be hard to really bring the unemployment rate down if we have that many people stuck in long-term unemployment.
Rhode Island gave President Obama his third-biggest vote share in 2008, yet it feels like his recovery is sort of leaving us behind. We’re still at 10.8% unemployment.
I always thought that pretty much every aspect of what went wrong was well-represented in Rhode Island. You had the housing bust. Manufacturing took a hit. Financial institutions. Governance issues. Every national economic challenge seemed to be amplified in Rhode Island, so I know what a hard slog it’s been there.
It’s been five years now since employment peaked here, and people are starting to feel a bit hopeless about the economy. What should be done? Are there ways to maximize growth locally, or do we just have to wait to get dragged along by the national economy, because we’re so small?
I definitely think that this is a time for state activism. In a way, in a place like Rhode Island you have to try to turn your disadvantages into opportunities. Rhode Island has a lot of aging infrastructure, and a lot of people who could be put to work fixing it, improving it. Rhode Island used to have a lot of factories. You really had a manufacturing footprint there – well, somebody is going to be making turbines, somebody’s going to be making advanced batteries, somebody’s going to be building the components of the smart grid. There’s no reason why it shouldn’t be in Rhode Island. It’s an aging infrastructure, but you have a manufacturing base in your history. You have good universities and a smart labor force.
I think what’s missing is the investment. There needs to be a program – and I would argue it has to be a public-private partnership, where Rhode Island partners with the private sector, with the federal government, and state representatives to make a play for these potentially expanding sectors: clean energy, the smart grid, repairing the damaged infrastructure. I’ve been a big advocate of fixing the public schools. A statewide energy-efficiency program for the public schools would be a neat idea. So I think what it’s going to take is public-private partnerships to generate investments in those kinds of ideas.
There’s been a lot of talk that the federal government should borrow more money right now while interest rates are low to put people to work doing infrastructure projects, for example. Do you think that holds on the state level?
I do. I know what the U.S. Treasury faces; I don’t know what bond yields look like for state markets – muni markets are less liquid than national by a long shot, and so it’s not going to be the case that the Rhode Island government can borrow at the same favorable rates as the Treasury. But this is actually a smart time – and again, especially a small state like Rhode Island, it makes sense to try to get some federal help.
Just this morning, I was testifying to the Senate Budget Committee and Senator [Sheldon] Whitehouse was there – President Obama’s also been supportive of this, as well; we did this in the Recovery Act – I could very much see a Whitehouse and a [Jack] Reed working on programs where the federal government could backstop some of the borrowing.
But of course we’d need Congress to act, then.
And that’s the problem.
It seems like it might be harder to be a liberal on economic policy on the state and local level because of balanced budget requirements. Just at the time you might want to spend more – during a recession – you have to cut back. I know that frustrates some of the progressives in our state legislature. What’s your advice for how folks should approach thinking about government spending on the local level, where you can’t do deficit spending?
I think it’s a great question. I think the first thing is to simply understand the facts behind countercyclical and pro cyclical spending. One of the reasons why austerity is such a terrible idea at times like this is because of exactly the dynamic you’re explaining. When you’re in a recession, or even in a slow-growth recovery like this one – particularly in Rhode Island – it’s like all the states are in a leaky boat with the federal government, and the only guy who’s got a bucket is the federal government. And when you go austere, you take their bucket away, too.
The key here is to stop being so knee-jerk anti-Keynesian, especially from the perspective of states. The American Jobs Act, which the president proposed as a follow-on to the Recovery Act, had $35 billion in state aid. I mean, Senator Jack Reed knows this very well, and he’s tried to do a lot to help states with fiscal relief. By definition, they have to balance their budgets.
That means they have only a few choices. They can look to rainy-day funds, but that’s tough and I doubt there’s much there; they can raise taxes; they can cut services. The latter two are pro-cyclical – they don’t counter the cycle, they make it deeper. And so you need the feds at a time like this. When you advocate austerity and anti-Keynesian measures, you’re taking the only guy in the leaky boat who can do something about the holes.
We’re having a debate right now here in Rhode Island about taxes. Many people feel they’re already too high in the state. Our governor, Lincoln Chafee, leans toward raising the sales tax and not the income tax because he’s afraid of driving people out to Massachusetts or Connecticut – I know the Center on Budget thinks that’s a myth. What are your thoughts about that, remembering too that we’re a small state? What’s the best way to do taxation in a pro-growth way, from your perspective?
Here’s an issue where I don’t know that size matters that much. You can tell me if I’m wrong.
Well, I’m not going to correct the guy who was the vice president’s economist.
Oh, no [laughs] – I’m just thinking out loud.
I think the thing to recognize here is that it’s very important not to whack your consumer base at a time like this. I described a few minutes ago the virtuous cycle that you need to get going here, where workers have a little bit more in their paychecks, so consumers are a bit more active, businesses begin to do a little better and regain some confidence, investors start to see this happening and, you know, you’re off and running. That’s the way recoveries evolve. If you go after your consumption base right now, you could jam that system.
The reason why high-end tax increases make more sense is because those folks are less liquidity-constrained. It’s not that they won’t object or they won’t feel it – I don’t want to argue that it just kinds of disappears into the vapor – but it is true that the marginal dollar to a middle-class person is more likely to enter that virtuous cycle than the marginal dollar of someone at the very high end of the scale.
So if you were looking for a way to raise tax revenue that was least injurious to growth you’d go to the high end for those reasons.
There’s no bigger strain on Rhode Island’s state budget right now than Medicaid. The costs are growing so much faster than tax revenue. It’s crowding out spending on higher ed and other areas even as we pare back benefits. Our federal match is back down to 52% or so after going way up under the stimulus law. Does Washington understand that problem? And what do you think should be done to make it more sustainable?
It’s impossible to say what “Washington” knows, because some people know it and some people don’t. I can tell you that the president knows it because I’ve discussed it with him. The president is well aware of that.
We talked about that in the context of the pressure on higher tutitions for public universities. This is precisely the time, when the job market is weak, that lots of people are returning to higher ed and that institution – public higher education – has always been, in my view, one of the key mobility ladders in this economy for middle- and lower-income kids, the fact that you have access to quality education like that. And to the extent that Medicaid is crowding that out – and the research is quite clear that it is – it’s a huge problem.
From Washington’s perspective, if you’re one of these legislators who believes the only way you can achieve a sustainable budget is by cutting spending or shifting costs to states, then no, you don’t get this at all. And there are lots of people who, unfortunately, don’t get it. Medicaid is itself on the table for spending cuts; in fact, if you saw the president’s budget in September, there were non-trivial cuts to Medicaid. I happen to believe that there’s really no fat in Medicaid to cut anyway. You can find ways to cut in Medicare that don’t hurt beneficiaries; I’m not sure you can do that in Medicaid. I don’t see how you cut Medicaid and still provide health services to disadvantaged Americans and their families.
The only way to crack that nut, especially in a downturn, is to do what we did in the Recovery Act, which is to kick up the federal contribution through FMAP when states are faced with the kind of pro-cyclical conundrum we talked about a second ago. That’s a very different kind of mindset than is operating right now.
What can the states do themselves? It’s a question that doesn’t have a good answer. The arithmetic here is simple. If I thought that Rhode Island’s Medicaid system had a lot of fat in it, I’d tell you to trim the fat. I don’t. So I think the solution here has got to be a federal one.
One other economic question I had for you is one we think about a lot in Rhode Island. Where are we going to get middle-skill jobs in the years to come – good-paying jobs for people who don’t go to college, the ones who maybe used to work in our factories? Does that concern you, nationally and for places like Rhode Island particularly?
It concerns me but I think there’s a way out, and I think it can work in Rhode Island, too. Health care is a sector where demand is booming – we just talked about Medicaid – based on demographics, in part, and this is a sector that’s created jobs every single month; even in the depths of the recession when the economy was hemorrhaging hundreds of thousands of jobs, health care was adding them.
You look at a city like Pittsburgh. There’s a city that largely lost its industrial base and ultimately shifted much more to one that is focused more on health care and related services. And by the way, that didn’t happen seamlessly – it took them about a decade. I’m not saying this is easy. But again, you can’t be passive about this. You have to identify the sectors where there’s either actual growth, like health care, or potential growth, like, say, clean-energy manufacturing.
There are, in fact, considerable middle-skill jobs in both those examples. When we think of health care, we should think of home health aides at the low end, we should think of medical technicians at the middle and, obviously, highly skilled physicians at the top end. There’s opportunity there.
Last question. It’s sort of a silly one, but everyone will want to know – is working at the White House like it looks on “The West Wing”?
[Laughs] Well, you know, I’ll tell you a secret – I never saw “The West Wing.” Never saw it. My wife watched it – I never watched it. I kind of get enough of that day to day.
I can only tell you that, once we were waiting for about an hour to go in to meet with the president, we were just sitting there, and finally someone said, “Geez, we could have seen a whole episode of ‘The West Wing’ by now.” I don’t think you have that kind of thing on “The West Wing.”
My sense from “The West Wing,” just from seeking clips, you get the sense that there’s a lot of pressure and energy all the time – that part’s true. That part’s true. Lots of intense pressure and energy. I mean, you’re sitting there in the Oval or the vice president’s office, and you’re talking about the same issues that I remember talking about at the water cooler at the Economic Policy Institute, but obviously the stakes were so much higher. That was different.
Any other thoughts on state fiscal issues?
I guess the only other thing I’d say is – this is the logic we were talking about earlier – because of the logic of state balanced-budget rules, the role of the federal government in preventing the kind of austerity measures that just make the downturn worse at the state level becomes more and more obvious to me every month when we get these jobs reports that show states continuing to cut.
It takes me back to the Recovery Act. A lot of people were very critical about how that worked out –
You can say that again.
Yeah, a lot of people were very critical of it, but one of the things that worked really quite seamlessly, and I’ve never seen any evidence to the contrary, was state fiscal relief.
Rhode Island balanced our budget on it. I watched the percentage go up.
The logic here is just extremely simple. You’ve got a glass that is barely a quarter full and the only source of relief there is the feds. This wasn’t about whether infrastructure was shovel ready, this wasn’t about whether people would spend their tax cuts – this was fungible money that went right to work, to preserve jobs and state services. So I actually think one of the more pronounced lessons I learned from the Recovery Act was the efficacy of state fiscal relief. And if you don’t believe it, just look at what’s happened since that’s ended. •
(photo: Center on Budget and Policy Priorities)