An Interview with Austan Goolsbee, former Chairman of the Council of Economic Advisors
Austan Goolsbee is an economist at the University of Chicago who served as the Chairman of the Council of Economic Advisors during the first Obama Administration. He graduated from Yale College in 1991 with a degree in Economics.
The Politic: At what point in your life did you know you wanted to pursue economics through the lens of policy?
Austan Goolsbee: Actually since high school. I was a big speech and debate guy, so I liked current events and politics. I also did a lot of science and math. And I spent some time figuring out how you could combine that, and basically economics somewhat served that purpose. A teacher at my high school whose husband became a dear family friend was an economist named Chip Case who’s a real estate economist in Massachusetts. So, I was kind of primed to do that by the time I got to Yale.
The Politic: How would you compare your time working in academia to your time working in government with the Council of Economic Advisors?
Austan Goolsbee: Very, very different. There were some professional differences and some subject-matter differences. Professionally, the thing about academics is it’s fairly solitary in that you’re mostly doing research, writing your papers either alone or with a co-author. The politics small tea is not that important. There is not a lot of coalition building. There is not a lot of persuading people who are in your field to go along with things. There was a lot of that in Washington. The standard of evidence in academics is ten out of ten, and the time pressure is one out of ten. And in Washington, it’s kind of the reverse. The standard of evidence is much lower than in an academic setting, but you have to have it by Friday. So that makes the nature of what you’re doing very different. Now, on subject matter, academics is all about novelty and finding what is new, and most of the policy is not that sophisticated. You’re fundamentally having to persuade people on pretty straightforward things that people care about…like prices. It’s a lot of Intermediate Micro and Intermediate Macro subject matter.
The Politic: How would you characterize the process of getting from government economic research to legislative policymaking?
Austan Goolsbee: By the time I got to Washington, everything was colored, meaning it was the middle of the deepest recession of our lifetime. So, I’m prepared to believe it might have been more intense in that moment than it might have been in some generic time you went to work in Washington. But I guess I would liken it to backpacking in the desert, where you’re not going to be picking up food on your own. You’re packing in and packing out everything that you’re bringing. So you’re not going to really be able to do research in Washington or come up with new economic discoveries. You’re coming in and you better know the subject matter because it’s just going to be one important decision after another at a very rapid pace. You don’t have the time to go figure anything out. If they want to know what will be the impact of a massive mortgage refinancing program for the United States, you’re not going to have the time to go find the data, you can only rely on what literature already exists. So you kind of need to know it. So that said, I found that it was a wonderful background to have. I don’t think you should only have economists in the government, even only economists making economic policy. But I think having some economists proves very useful, in that on many subjects, there are numbers of really good economists who have done really good economic research that bears on the subject. So when we’re deciding on the rescue of the auto industry, it turns out that there’s a great deal of research informing on that question. Like, if one of the three major U.S. automakers were to go under, what kind of cars people buy if they could not buy say…Chrysler. Or in housing, if people are underwater on their mortgages by some percent, what share of people walk away from their mortgages? All of those are questions for which there is research. And being able to tap into that based on our profession has proved quite valuable.
The Politic: So, as an economist working for the government, how did your work relate to the legislators in the House and the Senate?
Austan Goolsbee: If you’re at the CEA, you’re internal to the administration. So what you’re spending most of your time is working on the administration’s proposals. The administration comes up with the budget, the administration comes up with ideas, and it asks its allies in Congress to forward those things. The economic team in general is not who they ask to go down and negotiate with the Congressmen themselves. But if Congress comes up with ideas and they come back over to the administrative branch, they will often ask the CEA what we think about them. After Congress turned Republican and became much more confrontational with President Obama, it became more reactionary. Paul Ryan has released a budget. Compare and contrast it to the administration’s budget. And what are the differences, what would be the impact on the economy, on various groups, on income distribution.
The Politic: Was there ever a time when the economists on the CEA clashed, and if so, how would those differences be resolved?
Austan Goolsbee: Yeah, all the time. The economists would have different views, and the economic team is not just economists. On every issue, there are a bunch of constituencies and everybody has to balance that out. My view was everybody has a role to play and really the CEA’s role, especially, is advisory to the president. And it’s the president’s decision to make. In policymaking, the staff resolve probably ninety-percent of things. The ten percent of things that can’t be resolved go up where the deputies sit and try to hash out those things. You resolve ninety percent of those issues; the ten percent go to the principals. So the Secretary of the Treasury, the Head of the OMB, CEA, NEC, plus whoever else is relevant try to hash those out. And the ten percent of that that cannot be resolved tend to be big, thorny issues with a lot of constituencies, and those have to go to the President. And they have a meeting, everybody says they’re for it or against it, and then the President would decide.
The Politic: There’s been some discussion in the Euro Zone about banks implementing negative interest rates. What do you think about this? Do you think this could work in the United States?
Austan Goolsbee: It’s an interesting idea. It’s most relevant when you’re facing a deflationary period, when you’re facing the zero lower bound as economists call it. The market is telling you it wants negative interest rates, but we’ve always sort of thought zero is the lowest you can go, so therefore you’re stuck in this stagnant period. Negative interest rates are kind of like pushing a string. The Fed can pull a string, but how can it push a string? I don’t know how realistic it is as a solution to that problem, because as you can imagine, you have an alternative to negative interest rates – that is, paying the bank to hold your money. You could keep your money under your mattress and make nothing – people have an outside option that pays zero. They’re probably willing for the safety aspect to contemplate small negative interest rates, but I think if you have anything like the substantial negative interest rates that the formula would imply we needed when we were the lowest. Economists have a formula for what should the interest rate be. If you plug in the economic conditions, at the worst points in the economy, the formula was basically saying interest rates should be -3.5%. You can’t have interest rates like that because than everybody will opt for the zero interest rate option.
The Politic: A new report came out last week. Unemployment keeps decreasing, just reaching 5.0%. Consumer spending is decent. Yet, we still have very low inflation and low wages. What’s your take on this?
Austan Goolsbee: My take is the economy is not as strong as the optimists hoped, and it hasn’t been for six years. A lot of people in that same group are in the Fed Forecasting division, and they keep thinking we’ve turned the corner, and that we need only wait until next year for the economy to take off. And I just don’t think that’s true. The Fed has over predicted how fast we would be growing for six years in a row. And I think fundamentally what happened is we had a bubble that popped. The forecasters, not just at the Fed, but in the private sector too, had in their mind reversion to the mean. They say we know what happens when housing prices go up, people borrow, people are going to spend, gas prices are down, and so the economy is about to take off. And I think the flaw in that logic is that 2006 is de facto what they’re considering normal – but 2006 is not a thing that was not normal. When you have a bubble pop, you have to shift the major focus of what the economy is doing. You have to retrain workers; people have to move from low growth states to high growth states. All of that stuff takes a long time and happens only gradually. So, I think it’s not as positive, I’m not saying it’s bad, I think it’s modestly better each year. And I think that’s where we are. I think that’s why we don’t have any inflation. And I don’t think we’re going to have any inflation until financial markets recover to where they were and we have sustained and substantial growth, which we haven’t got yet. We’ve got the unemployment rate down, but everybody knows the unemployment rate’s not the same thing it was twenty years ago, or fifty years ago. Because over that whole time we’ve had labor force participation rates going down, so people who used to be counted as unemployed are not in the labor force anymore. So just looking at the unemployment rate kind of gives you a mistaken picture of how much slack is there.
The Politic: So going forward with the economy, do you think the Fed should continue to keep interest rates low?
Austan Goolsbee: Yeah, I think so. The Fed wants to raise rates. They have wanted to raise rates for many years. So I think that it’s quite likely that they do. I think it’s not a mistake, but it’s at least too aggressive. I just don’t think the economy is there to support it yet. We’ve got one good month of jobs numbers, but that follows a couple bad months of jobs numbers. Overall output is not been that good and the rest of the world has been in the dumps. So I fear if they raise early and if they keep raising, it’s going to continue to make the dollar more expensive and we’re going to see a series of complications for the U.S. domestic economy. It’s now a world economy: the U.S. is not just on its own island anymore. You pose a lot of difficult problems for us if you raise rates in an environment where everybody else is cutting rates. And you’ve seen in Europe, I understand the central bankers want to get off the zero lower bound. They are afraid of bubbles from lower rates, and they should be. But you see how hard it is to get off of zero lower bounds. We’ve basically tried for twenty years to get off the lower bounds. In Sweden, they were very confident. They raised rates, said they were maybe too confident, and cut rates back down again. I’m kind of nervous that’s the situation the Fed is in.
The Politic: Do you think there’s any potential consequences of having so much, essentially, free money in circulation?
Austan Goolsbee: Yes, there’s some chance that you generate bubbles. The thing that people have to remember is that the Fed is not really printing money, but let’s call it printing money. The Fed is only doing that because the private sector version of the printing of money is completely broken. In the language of economics, the velocity of money fell tremendously during the recession. And everything the Fed has done to expand the monetary base is just to counteract the damage inflicted on the financial system’s health. There hasn’t been any inflation despite the fact the monetary base has gone up so much. The forward printing press has just been counteracting the negative printing press of the damage in the system. So, yes, there are possibilities of problems, of this cheap money. Just remember why the Fed did it – they were trying to get people to take more risk, to make more investment, to save less, and consume more. That’s the point of the policy. So when people come back and say the Fed is leading people to take risky investments and punish savers, that’s the point of the policy, so I don’t totally understand their critique.
The Politic: Because we haven’t been seeing as much investment and growth as we would like to see, a lot of people, particularly in the Republican Party, are pointing to the regulatory measures which they say not only punish big banks but also hurt small businesses. How would you respond to that, and how would you characterize the environment for small businesses in America today?
Austan Goolsbee: Well, I agree with you that a number of Republicans have said that. The economist in me says the evidence doesn’t support that at all. One, the same slow investment, the same slow accumulation of cash on the balance sheets of companies that they’re not using exists in every advanced country and advanced economy in the world. You see it throughout Europe, Asia, Australia, in places where they’re returning to profitability but they’re not investing. The fact that you see the same thing everywhere, even in places where they didn’t have an election in 2008 and they didn’t follow the same stuff that we did here, strongly suggests it has nothing to do with we’ve done here. Indeed, compared to what the rest of the advanced world has done, the U.S. has done the best of those economies. The second I’d say is the way economists normally look at regulatory impact is compare groups who are affected to groups who are not affected. Whether it’s the Affordable Care Act, or Dodd-Frank, or whatever regulation they cite, there are a series of groups more or less affected, but there aren’t huge disparities between the groups. So the argument with the Affordable Care Act is this regulatory measure is going to lead to a whole bunch of full time people getting fired and everybody’s going to shift down their hours because they’re only going to want part-time people. Only the data do not support that at all. All the net jobs of the last five years have been in full-time employment. Actually, part-time employment has barely gone up. If you compare companies above and below the fifty-person cap at which the mandate does not even apply, you see no differences in job growth rates above and below the threshold. Looking at Dodd-Frank, you’ll hear them it’s killing small banks – actually, the lending of the big banks and small banks has grown at the same rate since Dodd-Frank has passed. I completely understand the political motive and mindset that tries to turn that into regulation. I just think if you take a step back and ask objectively, there is very little evidence that those regulations have had a differential impact. I still think there are wide classes of things we would do better to reconsider regulations that have been on the books for fifty years. But I think the history has not been kind to the view that ripping up all the regulations and throwing them out will lead to economic nirvana. Indeed there are many people who think the economic crisis in 2008 was caused by being too aggressive and ripping up the rules.
The Politic: My last question actually ties back to the economic crisis in 2008. Back then, there was a lot of debate about bailouts. From a pragmatic approach, it was that we needed to bailout these banks otherwise our financial system would collapse. Now with Bernie Sanders in the presidential race, that debate about banks being “too big to fail” has been reinvigorated. What is your view on this matter?
Austan Goolsbee: So there are several issues embodied in that question, and I like the question. First, on the rescue itself, the TARP of 2008, I’m of two minds. I’ve always been massively furious that we ever got to the situation that we’re having to bail out banks. And I think we suffered through 2009 and even 2010 with the fact that they bailed out the banks and did not put, in my opinion, tough enough conditions on the banks to get the money. So what seemed to me in 2009 was people yelling at the Obama administration, why didn’t you make the banks do A, B, and C to get the money. It was because they already had the money, and they didn’t have to do it. They got the money without conditions. Now I have heard the defenders of the 2008 bailout say if we put too many conditions, they wouldn’t have taken the money, and if they didn’t take the money, then the whole thing would have fallen apart. But I think that was an original sin that we continue to live with. Now that said, that is a different question then what “too big to fail” means. When I see Bernie Sanders and others talking about “too big to fail” as well as Glass-Steagall, I kind of think they have it confused. Or at least I don’t understand their critique. Fundamentally, the crisis was not about being large in terms of how many deposits each bank has. That’s kind of the thing they’ve been saying in the debates is that they were too big to fail before, then we had the crisis, now they’re even bigger. By implication, we’re about to have another crisis. That’s just confused. The thing that threatened to blow up the world was that they were so interconnected. Bear Stearns and Lehman were not by any means the biggest banks. That’s not what made them dangerous. It’s that they were so connected with these other banks, that if they fell, they were going to be dominos and bring down the financial system. That was the fear. Much of Dodd-Frank was about how do you separate them so that if one of them falls, they don’t knock down all the neighbors. And I think we a nation have done a lot of good things to remove that “too big to fail” aspect. I still think there’s more to be done. I would highlight thinks like the Volcker Rule. Glass-Steagall just says banks can’t hold securities. But in today’s world, if I make a loan to General Electric, and I buy General Electric’s commercial paper, that’s the same thing. You’re making a loan either way. Glass-Steagall would say, no you can’t buy their commercial paper, but you are allowed to make them a loan. The Volcker Rule, the rule that says real banks should not be able to trade from their own account – I totally agree with that sentiment. I think we need to be extremely vigilant because the banks themselves would very much like to water that down and get back into the trading and speculative activity they did before the crisis. And with that point, I agree with the sentiment that Bernie Sanders and Martin O’Malley have expressed. It’s kind of like Paul Volcker’s old thing – I got to know Paul Volcker very well, he’s a dear friend and mentor I’ve worked with – and his view is basically you’ve got to keep an eagle eye on the financial sector because, like anybody else, if you give them an inch, they’re going to take it. And so, we’ve got to be extremely cognizant and have a regulatory focus on them. The short is answer it’s not really who’s big in terms of deposits – deposits are one of the safest things in existence. I think it’s more about the banks being involved in activities that could blow up the world. And importantly, they’re not all banks. Economists call them shadow banks, but they’re market funds and hedge funds and mutual funds and stuff that there is no banking regulation on. And for sure, we’ve got to keep an eye on them.