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Policy priorities for the Obama administration

Romesh Vaitilingam interviews Jeff Madrick for Vox

January 2009

Transcription of an VoxEU audio interview [http://www.voxeu.org/index.php?q=node/2819]

Romesh Vaitilingam: Welcome to Vox Talks, a series of audio interviews with leading economists from around the world. My name is Romesh Vaitilingam. And today's interview is with Jeff Madrick, editor of Challenge Magazine and Director of Policy Research at the Schwartz Center for Economic Policy Analysis, at the New School in New York. Jeff and I met at the American Economic Association's annual meetings in San Francisco in 2009, where we spoke about his new book, "The Case for Big Government", published by Princeton University Press. I began by putting it to Jeff that from a European perspective, a book published with this title, in the United States, seemed like seditious literature.

Jeff Madrick: Well nine months ago now, when it was put to bed, it was still a seditious idea. The credit crisis, the recession has made it clear to people that government is needed. But I've always been disturbed by this. I've thought we've been living in America, in a kind of 'dark age', consumed by an anti government ideology that was not based in fact or evidence, but in faith   and I think in anger.
The anger grew out of the difficult economic times of the 1970s, and also, a bit of anger with the errors, the errant ways of government: Watergate, the excesses of the Vietnam War, and so forth. But it got carried very far and government became the problem in America   not business, not the American people, not the education system   although all of those will blend at some point or other. Government became the problem. I think that ideology has hurt the American economy very badly, and I wanted to bring the case upfront and forward.
The point is government has always been essential for America, for its prosperity, for its equity   and maybe least recognized, but equally important, as an agent of change. Because societies change, economies change, needs change, our knowledge changes, and government is essential in helping us adapt to that: creating institutions, new laws, new ways of helping us cope with these kinds of changes.

Romesh: Jeff, do you think the whole anti government rhetoric that so dominated American society, for so long, has really come out of a serious misreading of American history?
Jeff: Serious misreading of American history. Government was always integral to the economy, to our prosperity, to our social equity, and so forth. We never really had a 'laissez faire' America, a 'laissez faire' government. Now in modern times, we measure government spending as a proportion of the whole economy, but that's a modern construction. In the old days though, when government was relatively small, in terms of how much it spent, there was a lot of regulation: regulation over land, regulation over products, and so forth.
But government also built the canals, subsidized the railroad through land donations, built free primary schools, then high schools, then the land grant universities in the second half of the 1800s, again, built on land donations. That was a form of government spending. It was integral to our lives then, and in later years, clearly, integral to our lives: building roads, highways, high schools, as I say, colleges and health systems: sanitation, sewage, making the cities possible, and more. Regulation. Keeping the markets working.

Romesh: Now the standard arguments against government, particularly powerful in this country, are things about the problem of high taxation creating disincentives for people to work and invest; things about regulations driving people to behave in undesirable ways. And all the issues about government crowding out private sector innovation and entrepreneurship. How do you respond to those arguments?

Jeff: Well the book is an empirical book, in many ways. It's not a book of theory. There's good economic theory that leaves a place for government   public goods, market failures, information economics, and so forth - but they're ambiguous. How much government is a wide open question. But the fact is that if we compare countries with big governments and high taxes to ourselves, there is no serious, consistent basis for saying they grew more slowly than we, or that they're less productive than we are   none whatsoever.
That doesn't mean that big government leads to more growth, but it does mean that big government doesn't prevent growth. That means that big government, if done well, must provide social goods and public goods and regulations that help some other countries grow.
And then look at our history, as I've described before. Government has been there all the way, and there is one other empirical fact. When this anti-government attitude ascended in America in the 1970s, how well has the American economy done since then?
Not very well at all, except for the Clinton 'boom' of the late 1990s. Take that out, we've had a fairly miserable performance, especially measured in terms of wages for typical people.

Romesh: So do you think that we are now at a turning point? Is the case that you would like to make coming back because of this crisis, because of this serious recession that we seem to be entering?

Jeff: Well we're clearly at some kind of turning point, but I'm not convinced it will be long lasting, necessarily. The harsh reality is it depends on the depth of the crisis. The deeper the crisis, the more there will be reforms, and ironically, the better off we'll be in the long run. That doesn't mean we won't make some useful changes: But will we do all that's necessary? Because of this ideology, we have an enormously long to-do list in America, the most important part of which is health care. It's extraordinarily inefficient in America, but there are many other issues: poor infrastructure, lack of Internet penetration, lack of green technologies, and no pre-K system. College is very expensive even when you subtract college aid from it, and so forth.
We have an awful lot to contend with. Are we? Can I really be optimistic that we are? I am only optimistic we're going to begin to move in that direction.
And it's up to the President-elect, President-to-be Obama, to adopt programs that work and demonstrate to the American people that government can be useful. Government's not the problem. It can make us all better in a fair way, and then maybe we can build from there.

Romesh: You say it's a long list of things to do, but we do really need to have some kind of prioritization here, don't we?

Jeff: You know, my sense of Obama is that because of the crisis, he's going to try to attack a lot of issues at one time. Before the crisis, I think there would have been a priority, maybe on health care, maybe one or two other things. I think he's going to try to attack a lot of things separately. But I would like to see a priority on health care and pre-K education, and also, attitudes about wages. Wages in America are in a crisis. For men, they just haven't gone up for many, many years. The typical male makes less now than the typical male did after inflation 30 or 40 years ago.

Romesh: How significant do you think the issue of inequality is in the United States? It seems to be very high compared with most comparative countries in Europe and Asia. Is that one of the real central problems with the society and with this economy?

Jeff: Well I'll sound a little bit contrary on this issue. I don't think inequality is exactly the issue, because incomes can grow unequally, but the middle and the bottom can still rise; it's just the top rises more quickly. In America, we've had the top rise very quickly, and the middle and the bottom have grown almost not at all; it's stagnated. We've got wage stagnation.
Now inequality is part of it. But you know, in a certain sense, in an arithmetic sense, we've just solved the inequality problem   the upper end has collapsed. When you start looking at the statistics, you're going to say, 'Whoa, we're o  to the early 1970s, here in income distribution'.
That won't solve the problem. The problem is getting wages up for the large majority of people, from say, the 60th percentile down.

Romesh: What kind of transition do you think you could see? Presumably, you would never see a United States that was like Sweden, where 50% of the GDP is in taxation and public spending. But where would you see America progressing to in an ideal world?

Jeff: We could easily have 3 to 5% of GDP devoted to government programs, like the ones we're discussing, without undermining our productivity; as demonstrated by the fact that Sweden has 15% more and Norway has 15% more, and they do quite well. Norway, in particular, but Sweden does quite well, and so do other countries in continental Europe. 3 to % more of GDP is a heck of a lot of money. $450-750 billion dollars more a year, with which we can deal with health care, we deal with infrastructure, and we've got to. It's not an outrageous amount of money. We've got to start thinking in those terms. We should raise taxes to do it.

Romesh: And that's the hardest thing to do though, isn't it?

Jeff: Really hard right now.

Romesh: For a politician to say, I'm going to raise taxes in this country is out of the question.

Jeff: I don't know when this is coming out, but there's a good chance the Obama stimulus plan will be very heavy on tax cuts to try to win over the Republicans and some of the conservative Democrats to push this thing through. We need tax cuts like a whole in the head. I'm not saying raise taxes now, needless to say, because we've got a very serious recession. We shouldn't be raising taxes; maybe not even on the upper-income people. But down the road, we've got to raise taxes, and not a lot: 3 to 4% per person, 5% per person. We're not talking about a lot of money here. We can make our lives so much better if we do that.

Romesh: Final question, Jeff: How much do you think is in the power of the President? It seems a lot of the issue with the United States is it's such a decentralized country, relative to the kind of European 'welfare' states that you're talking about. There's so much more power in the local level, city level and state level. What can President Obama, when he takes office, do?

Jeff: Well he's in a great position now because he's popular. We have a crisis and the nation is behind him, so he has more power than usual. I think presidents have great powers of persuasion. They have access to the press. They are not like prime ministers because of Congress. Right now, President Elect Obama, as we speak, is having trouble with the Democrats in Congress, not just the Republicans. So we do move more slowly.
But this is a point in time, where this man can move rapidly, and is intellectually and emotionally capable of it. That's not to say I love all his appointees by any means. And I'm worried about them, both in foreign policy and economic policy; but he is a special person.
Having said that there are inhibitions in the American political system, restrictions, that make it hard to move too rapidly, too far. But you know, we've done great things in America before. We haven't done everything we needed to do. We haven't done them in time, all the time, but we have done great things.

Romesh: Jeff Madrick, thank you very much.