The State of the U.S. Economy

Jason Furman discusses the state of the U.S. economy.

This symposium is presented by the Maurice R. Greenberg Center for Geoeconomic Studies and is made possible through the generous support of Stephen C. Freidheim.

HAASS: Well, good morning. Welcome to the Council on Foreign Relations and to today, which is the Stephen C. Freidheim Symposium on Global Economics. I’m Richard Haass, and I’m president of this organization; fortunate to be so. And I want to start off by thanking Steve, who just came, for his support over the years, as well as for his ideas in the subjects we might want to tackle and how to tackle them. He’s been a good friend of the Council, and we’re all grateful to him for making today possible.

The symposium is also presented by CFR’s Maurice R. Greenberg Center for Geoeconomic Studies. And I see Sebastian Mallaby, who has more titles than anyone I know, who’s also the Paul A. Volcker senior fellow for international economics. I want to thank Sebastian for his work in developing today’s event.

Today is the fifth in this series of symposia made possible by Steve Freidheim. All are on international economics. If one looks at what we’ve done over the years, one gets a pretty good sense of how the debate has evolved. The first symposium in the series was in May 2009. And as you might expect, given the date, it was what might be done to fix finance in the wake of the 2008 crisis.

The second Freidheim Symposium, in 2010, we looked at currency issues and what was then in the air, the pros and cons of capital controls.

In 2011 we discussed the U.S. fiscal gridlock—glad we solved that—and the eurozone crisis; glad we solved that too. God, we didn’t know how good we were.

Then in 2014, and I think the fourth of the Freidheim symposia, we looked at how the Fed’s approach to monetary policy had evolved over its first century. And one of the speakers at that time was Stan Fischer, who made the argument that the Fed’s independence is politically fragile. God, we’re batting a thousand here in issues that we’ve raised only to resolve.

Today’s Freidheim Symposium is a bit more cheerful, but we’ll see, reflecting the state of the economy, particularly here, the state of the domestic economy. But obviously the domestic economy does not operate absent context. Globally, China is slowing. And along with low energy and low commodity prices, we’re seeing more broadly a slowdown in the emerging markets.

I thought it was interesting, as I was reading the papers this morning, for noticing that Goldman Sachs had dropped its BRICS fund—all sorts of puns about dropping it like a brick—but essentially had morphed it into an emerging-market fund. And I took that as something of a sign of the times, and not surprising, because other than the “I” in BRICS, India, things ain’t so good.

But here things ain’t so bad in the United States. Growth will probably come in—I don’t know—2 ½ or so percent this year. And given all this, given what’s going on in the world, given what’s going on here and the connections between the two, we’ve decided this year to focus on the U.S. economy, what looks good and what doesn’t look so good.

For our second part of today, the second panel will have—will look at post-crisis financial regulation. The final event today will look at the whole question of U.S. productivity and the debate that Marty Feldstein and others have been waging about whether it is being, if you will, systematically undermeasured, that we’re better off than we realize; sounds like Harold MacMillan. We never had it so good. We just don’t realize it. That’s a reference to the ’50s, for those of you.

But we’re also going to look, though, at the possibilities from big data and the whole question of can we measure better than we do. And the argument is if we have a better take on what exists, then hopefully we can better tune policy to deal with it.

But before we get to the two panels, we’ve got a first session. And there we are extraordinarily fortunate with the two gentlemen we have: Jason Furman, who’s traveled all the way from Washington, D.C., who’s chairman of the White House Council of Economic Advisers, and he is joined by our own Bob Rubin. Bob, as you know, is co-chairman of the Council.

So, gentlemen, the floor and all that is yours.

RUBIN: OK. Now that Richard has projected that growth will be 2 ½ percent this year, we probably don’t need to have this session.

This is on the record, I believe. Yeah. OK, we’re on the record.

FURMAN: Unless we say otherwise.

RUBIN: Unless we say otherwise, in which case, in this large group, I have no doubt, Jason, your words will be held confidential.

When I was in Washington I had a theory that anything that you said, even if you talked to yourself, would leak. (Laughs.) So on that theory—in any event, let me just add my welcome to Jason for joining us. I will not introduce Jason because his resume is in your materials. And the practice at the Council is not to recite people’s resumes.

But I do want to say two words about Jason, if I may. I’ve known Jason since he was a star in the Clinton White House. And Jason is that unusual person who combines being an outstanding economist with understanding the politics and policy. And it’s only by understanding the two and bringing them together that you can think effectively about making policy and prognostication.

And my other comment about Jason, I guess, is that he has worked in and around political campaigns. And he was director of the Hamilton Project. He is now, as Richard said, head of the CEA. In all of these roles, he has had an enormous seriousness of purpose in that. I think there’s no question that the CEA today is enormously respected for the objectivity and the insight of its work under Jason’s leadership. And that’s a great tribute to Jason.

So what we’re going to do, Jason, is I’m going to spend about half an hour asking you a few questions, maybe interjecting a comment of my own, maybe not; more likely will. And then we will open it up to all the participants.

So let me get one question out of the way, although it’s the least interesting of all the questions, of all the things we might discuss, which is what do you think our economy is going to look like over the next year, year and a half?

FURMAN: Well, thanks so much for having me here. And I would be rude as a guest if I didn’t just agree with whatever Richard said about the U. S. economy. So I’ll go with something like your number. And I think what we’re seeing is a lot of domestic strength in terms of consumers, to some degree in terms of things like business investment and R&D. And that’s confronting a headwind from the global economy, which is moving us in the other direction. And, on balance, the domestic strengths seem to be outweighing those global weaknesses. And we can, you know, pursue either part of that in the way you want.

RUBIN: I thought, Jason—could I ask you a question?

FURMAN: Yeah.

RUBIN: Because Jason and I were together over the weekend at a conference, and one of the people there said that U.S. investment actually is not that strong except in software. Is that right or wrong?

FURMAN: Two questions. One is, where is investment today compared to where we thought it would be, you know, five or 10 years ago? And we’re way, way below that. And that’s something we should come back to, because that’s weighing on our productivity. The second is how much is it growing, you know, each quarter right now? And it’s growing a little bit better. Actually, it’s growing faster than overall GDP right now.

RUBIN: And what about investment in software? Because he said investment in software is very strong and that that portends well.

FURMAN: The strongest segment of investment we have, actually, is in R&D. And R&D is the largest as a share of our economy it’s ever been. So that’s actually—you know, if you want reasons to be excited about the future, that would be one of them.

RUBIN: OK. Let’s turn to what is to me, as an investor—which I am, and remaining involved in the policy discussion—the single most—well, it may not be actually the single most important, but a very central question is what do we think the long-term potential full employment rate of growth of the U.S. economy is? Productivity, as we all know, has been low in recent years. Is that a cyclical phenomenon?

Related to that, there’s enormous debate about whether the rapid rate of technological development in ways that are really significant to the economy is going to continue or not continue. And there are a whole host of questions caught up in this. Why don’t you—

FURMAN: Sure. There’s a big debate in economics, as probably a lot in this room know about, between the techno-optimists who look around at this amazing convergence of mobile devices, Cloud computing. Then you see it in medicine with personalized medicine, clean energy, advanced materials, nanotechnology, all that, and think that’s going to transform our productivity; and then the set of people that actually look at the productivity data and don’t see any of that in the data.

And there’s a couple of different ways to reconcile those. So you have the optimists who think we’re going to see it or we’re not measuring it, and you have the pessimists who think all those shiny objects are really exciting, but the main things we do in the United States economy are build houses, treat our increasingly, you know, older population for whatever maladies they have, and educate people. And those three sectors don’t see the same types of productivity. So even if, you know, everything is really exciting, and in Silicon Valley there’s some new app that can tell you when your milk has spoiled and tell you to go to the grocery store to buy new milk, doesn’t outweigh, you know, the bulk of where our economy is.

That’s, broadly speaking, the debate. I’d add on top of that that, you know, we saw a huge recession from 2007 through 2009, a really big shortfall in demand, and at the same time that that happened, we saw productivity growth, or what’s called supply, slow.

One possibility is that that’s just a coincidence—that you had a big demand contraction and you had a supply slowdown, and they happened at the same time and they’re unrelated. And that’s certainly possible. I tend to think that that demand collapse helped cause what we’ve seen on the supply side. And I think it comes back to the investment question we were talking about, that we had a recession, we had a lot less business investment.

Total factor productivity, which is the best measure of innovation, has mostly held up. But instead of having more capital per worker today, we actually have less capital per worker today than we had a few years ago. And so it’s the business investment side which has held our productivity back. And that, I think, is actually good news for the future, because business investment tends to be mean-reverting. If you have a couple of years of overinvestment, like we had leading up to the crisis, it leads to a couple of years of underinvestment, and vice versa. A couple of years of underinvestment because capital markets are clogged up, because there’s not enough demand to generate the investment, tends to reverse itself.

So I think the problem is less sort of the fundamental innovativeness, of which I think there’s a huge amount, and more just the prosaic problem of, you know, building plant and equipment. And I think that’s a problem that will solve itself as the economy recovers.

RUBIN: Well, that does raise another question, Jason. I was going to get at this a different way, but since you’ve gotten into it this way, there are some people who have the view that—apparently the rate of startups has declined quite a bit.

FURMAN: Mmm hmm.

RUBIN: And there are some people—Kim Schoenholtz teaching at NYU, some of you know, has this view that it may be that the dynamism of American economy has diminished, for whatever set of reasons, and that we’re not going to get back to a period of large levels of investment in advanced-looking areas or large numbers of new startups and all the rest because the dynamism has diminished in our society. And they point to, as I said a moment ago, the reduction of startups. Do you have a view of that?

FURMAN: I think that’s something we should worry about. And I think, you know—you know, I suspect everyone in this room knows that inequality is up. And a lot of people know the productivity statistics. The fact that people are less likely to move within their state, to move across their state, people are less likely to change their industry or occupation, business is less likely to, you know, destroy a job and create a job. A new business, the statistic you had, is less likely to start up.

And, you know, one that no one believes—if you look at the job tenure of a millennial today, someone between, let’s say, 18 and 30, it’s actually slightly longer than someone from age 18 to 30 a generation ago. So things are cycling less quickly through our economy. Something we don’t understand super well is some impediments in terms of, you know, zoning rules have gotten tighter; occupational licensing—that, you know, if you want to be a security guard in Michigan, you have to train for a year to do it, and someplace else you might need to train for a week. It used to cover just a small fraction of the economy. Now it covers 25 percent.

You know, bigger businesses—Best Buy replaced a bunch of corner stores, and that’s part of what’s showing up in the data you said. But I think that is something, you know, in trying to understand the causes of it and the consequences. And I think one of the consequences probably is, as you said, a challenge for productivity.

I think another consequence is just, you know, we recently saw the labor market, when we had higher unemployment, have much higher long-term unemployment, part-time, people not participating. And that seems to be a pattern that’s grown in the last decade or two. And it may also be related to this reduced fluidity in the U.S. economy. So I think tackling that should be an organizing goal for—(inaudible).

RUBIN: But do you think, Jason, if, in fact, that is happening in some measure, if it is, do you think that that’s a function of, as you suggested, to some extent it might be licensing, which is a real—occupational licensing, which is a big issue, which you know we don’t get—people don’t focus on it very much, and then zoning and other kinds of regulation. Or do you think there’s something cultural going on?

FURMAN: I don’t know. I don’t think we fully understand it. And, look, we don’t know if it’s a good or a bad thing.

RUBIN: Well, it can’t be a good thing to have less dynamism.

FURMAN: Oh, if the phrase is less dynamism, yes, that’s not a good thing.

RUBIN: No.

FURMAN: If you phrase it as people do a better job earlier in life figuring out the right job for them, getting matched to an employer, and they don’t have as much labor turnover as they used to have, that is a good thing. So that’s, to some degree, why the cause matters. If the cause is that we’re just more efficient now and we don’t need to turn over as much and we used to mess things up and have to, that’s a problem.

If the cause is artificial barriers that come from public policy, you know, then it’s a bad thing. And the culture—I don’t know. I mean, the culture seems, you know, in many ways more dynamic. You know, we sort of exalt people that drop out of college, fail three times in a row, and then start a company with a product that may or may not actually exist.

RUBIN: (Laughs.)

FURMAN: So the culture doesn’t seem to have a problem, but I don’t—I’m not an expert on that.

RUBIN: And let me ask you a question. And if you don’t think you should answer it, don’t answer it. If you look out five or 10 years—

FURMAN: About the exchange rate?

RUBIN: What?

FURMAN: About what the Fed should do?

RUBIN: What the Fed should do? We’ll get to that. (Laughs.) But I’m going to lead you into that a sneaky way so it’s hard for you to get out of it. (Laughter.) No, this question is a different one. What do you think the long-run full employment rate of growth in the United States economy is likely to be? Or if you don’t want to give your own answer, what do you think others, who you think as thoughtful, think it is likely to be?

FURMAN: Well, I mean—

RUBIN: It gets into this whole question, all these questions.

FURMAN: Like, one of the few misfortunes of my job is that I have to publish that number twice a year.

RUBIN: You have. Oh.

FURMAN: And the last one we published was 2.3 percent. And, you know, for the administration, that’s a post-policy forecast, so that assumes we’re reforming the business tax code, expanding trade, investing more in infrastructure, and dealing with our medium and long-run deficit. So I think we do need to take a lot of steps like that if we want to see even that type of growth.

And by the way, I mean, people have in their head these comparisons to historic growth numbers. Right now, if you look at the prime-age population, 25 to 54, it’s falling. You know, it used to be growing at more than a percentage point a year. So just our demographic structure isn’t going to be able to generate the same total growth rate as a couple decades ago. You know, growth per capita, though, you know, in some sense, is one of the things that matters.

RUBIN: So 2.3 percent if we meet our—if we meet our policy challenges.

FURMAN: Mmm hmm.

RUBIN: You’ve been around the political system for at least 20 years, I guess, or 25 years, whatever it’s been. As you look at the system today and you look at how it’s functioning, do you want to make any judgments about—I mean, look, right now you’ve got a House of Representatives that in some measure can’t act unless the so-called Freedom Caucus is willing to go along. I don’t want to get into politics and partisanship, but that’s not a partisan comment. It’s a question of functionality.

Do you think—and you don’t have to answer this if you don’t want, given where you sit. But do you think we should bet on the notion that our political system will be functional again? Or do you think that that’s really an uncertain question?

FURMAN: So I was in this building over the weekend for a Hamilton Project retreat.

RUBIN: (Laughs.)

FURMAN: And Larry Summers was up on this stage, and Bob Rubin, who, you know, by virtue for having paid for much of the event, got to ask questions.

RUBIN: Bob Rubin didn’t pay for much of the event, but he did get to ask questions. (Laughs.)

FURMAN: Asked Larry this question, to which Larry accused Bob of being a Spenglerian, leading, Hal Varian tells me, to a spike in Google searches—(laughter)—Spenglerian—as people went to figure it out.

You know, I think there’s certainly a lot to despair. And when you look at something like we’re pushing for a higher minimum wage, the majority in surveys of Republicans support that. The majority of independents support that. The majority of Democrats support it. And it’s not something we can pass in Congress.

You know, in some way I understand that, because a lot of, you know, my friends on the other side of the aisle do have a deep-seated belief that it’s a bad idea. I think that’s a mistaken belief. But, you know, in some ways I’m not surprised. Look at business tax reform, where both sides of the aisle say the same thing. We should do it revenue-neutral. We should cut the rate. We should broaden the base. And to date we haven’t been able to do that.

You know, I think in some sense it makes you bang your head against the wall even more, because you’re not even sure what the ideological disagreement is. It just can’t get done. So I think there’s a lot of reasons like that to despair.

You know, but then you look. I mean, Richard made light of it, you know, with a little bit of fairness, but a little bit of unfairness, our fiscal situation. We just reached a deal two weeks ago that buys back most of the sequester over the next two years, deals with the debt limit over the next two years, deals with disability insurance for the next, I think, eight years, and also dealt in a very responsible way with this weird quirk where Medicare premiums are going to spike up this year and then come down the next year, and did it in a rational way of smoothing that increase in a way that paid for itself.

So all that came together. There was no shutdown clock that preceded that deal coming together. No reporter even knew we were anywhere near it until basically the day it was concluded, so it didn’t make a lot of news. But our economy will have about 30,000 extra jobs per month next year because we reached that agreement and, you know, hopefully won’t have any of the drama.

Another example is there’s this thing called the doc fix in Medicare. And we put this formula in that basically said next year we’ll cut doctor pay by 20 or 30 percent. And we had that for over a decade. Every year, the next year we were going to cut Medicare reimbursement for doctors by 20 or 30 percent, and every year we’d get the night before, in one case a couple of weeks after, we would push that out by two months, by six months, by a year.

I worked on a proposal that went into our budget that said let’s fix this permanently. Let’s not have this cliff in doctors’ pay. But let’s also make it part of a delivery system reform where, rather than, you know, just paying for volume, you’re paying for quality, and do some of the things we did in the Affordable Care Act with hospitals and outpatient, extend it to doctor reimbursement.

When I put that in the budget, I think I would have bet against it on your, know, Spenglerian pessimistic grounds. Three or four months—earlier this year it passed Congress. And it’s a great reform. It’s going to bring stability and improve the way we pay doctors and help that part of the health system. And that actually came together.

So there’s not as much progress as I’d like, but I don’t think it’s all quite as bleak as you might think.

RUBIN: We live in a country where, if you can avoid shutting down the government and you can defer the debt ceiling, we say that our political system has triumphed. (Laughter.)

FURMAN: I’ll take what I can get.

RUBIN: What? What, what, Jason?

FURMAN: I’ll take what I can get.

RUBIN: You’ll take what you can get—I mean, you know, immigration reform and long-term entitlement reform, et cetera.

FURMAN: No, I—a good list.

RUBIN: Yeah, OK. Yeah, OK. (Laughs.) OK. So that’s the longer term.

Let’s start with—let’s go—let’s go to another question. We have had—no, I want to go back one step, if I may—

FURMAN: Sure.

RUBIN: —just if I could. When you say about investment in R&D and that that has really gone up, which actually is a very encouraging thing, could you be a little more specific? Is that in the health care field? Is that in software? And is that distinguishable from software?

FURMAN: It is—the statistics break out software from—

RUBIN: They do? OK.

FURMAN: It’s actually another one of the many improvements in our country is we didn’t used to have R&D in the national income and product accounts until about three years ago, but now we measure it.

RUBIN: Tell us what that’s about a little bit, the—

FURMAN: I don’t—my guess is it’s broad-based across a range of sectors. Maybe Hal or others know. I’m not quite as sure which sectors it’s coming in. One important fact, though—I’ll ask a different question that I know the answer to that I wanted to answer than the one you asked—

RUBIN: (Laughs.)

FURMAN: —is it’s happening on the private—

RUBIN: You don’t need me here. You can do—

FURMAN: But it can—you can take it as a sign of the government dysfunction you’re so worried about.

It’s all on the private side, not on the public side. So our research is falling as a share of GDP. Private research is rising as a share of GDP. And that pattern isn’t terrific, because what the private sector can do is much closer to market, much closer to development. The basic research that helps fuel all of that, we need to be doing more of.

RUBIN: Isn’t NIH falling as a percent of GDP?

FURMAN: As a percent of GDP, yeah.

RUBIN: I didn’t realize that.

Let’s turn to an issue that your administration has been very—and rightly—very focused on, which is this whole question of wage stagnation—

FURMAN: Mmm hmm.

RUBIN: —wage and benefit, total compensation stagnation, call it what you like. In the ’90s, as we all know, sort of all quintiles rose. In the last 15 years, or thereabouts, there’s been, roughly speaking, wage and benefit—wage or total compensation, however we look at it, roughly speaking, stagnant.

I’ll make an assertion and see if you can agree or disagree with it and then also respond to the question. It seems to me that a lot of that is a function of globalization and technology. And those also are the drivers, to some extent, of growth, or some fair measure of growth. So it makes it a much more complicated question if you believe that’s causally involved. So, A, on the causation, and B, on what we should do about it.

FURMAN: So, first of all, let me say I think the phenomenon is very much real. And some people think maybe it’s an artifact of the statistics. You sort of look at it this way or that way. You’ll see something different. And Paul Krugman pointed out in his column this morning that if you look at these Case-Deaton findings on the large increase in middle-aged white mortality in the United States, that—you know, that pretty much tracks with or is worse than what we’re seeing on the income side and is an indication, you know, that something real is going on. This is, you know, death. You know, you can debate, like, whether you’re measuring productivity correctly, but mortality is usually a much more straightforward event. (Laughter.)

RUBIN: That’s that kind of insight that has made Jason so valuable in this job. (Laughter.)

FURMAN: But we’ve looked at this—I look at the—what we see in incomes as a function of three factors. The first is productivity. The second is inequality. And the third is labor force participation. Productivity growth, as we were talking about, has been slower. You know, you can look at it since ’73 or you can look at it in the last decade. Either one, it’s slower than what it had been. Inequality has risen. So the share of income going to the bottom 90 percent fell from two thirds in 1973 to about half today. And for a while, we were making up for those two trends with a surge of women into the workforce. You had more two-earner couples rather than one-earner couples. Now we’re seeing that, you know, in reverse, and labor force participation rates are falling for men since the 1960s and for women since the late 1990s. And so I think it’s a combination of those three—the productivity, the inequality, and participation—that are driving that.

RUBIN: And what would you do?

FURMAN: If you think it’s three causes, there probably isn’t one thing behind all three of what I just said. I think it’s a large enough challenge that, you know, what would I do is a very long list of things. Some of them I’d put in the productivity bucket. You know, that investment in research, that business tax reform, immigration reform increases our productivity by bringing in more innovative people and having the people that are here already contribute in a better way. On inequality, you know, raising the minimum wage and expanding tax benefits like the earned income tax credit. And on labor force participation, we know a lot more on the female side—flexible workplaces, childcare, the tax penalty on secondary earners, set of things like that. For men, it’s much more vexing that you’ve seen it—the labor force participation rate decline for 60 years. And you know, I don’t think I fully understand why and thus can’t fully tell you what to do about it.

RUBIN: Richard, let me ask you this. About what time are we supposed to adjourn, then I’ll know what time we should start taking questions.

HAASS: I hate when you ask those trick questions, Robert.

RUBIN: (Laughs.)

STAFF: 9:45.

RUBIN: What time?

STAFF: 9:45.

RUBIN: OK, then I have a few more moments and then we’re going to turn to everybody else.

Let me ask you this Jason: There is a real disagreement—and I can cite two of your friends who have a different view on this. Alan Krueger thinks that we have pretty tight labor markets right now and there’s not much slack. And Larry Katz thinks there’s a fair bit more slack than Alan does, at least, that’s what Larry tells me. So what do you think the level of labor slack in the economy is? And I guess it’s a little bit of a complicated question, because you have 5 percent real unemployment, and then you have the underemployed and all the kind of things you go about. It goes, I guess, to the question of the probability of getting the long-term unemployed back into the labor force, if you had enough demand and so forth, so.

FURMAN: Yeah. I think we have slack in the labor market, but I think we are, you know, getting a lot closer to being there. We all know the official unemployment rate is 5.0 percent. That that’s a little bit below where it was on average in the previous business cycle. And so, you know, if that’s what you’re looking at you’d think we were basically fully healed. If you look at broader measures, the broadest official statistic is what’s called the U-6. And that adds in discouraged workers. It adds in a broader group who don’t say they’re discouraged. They’re not looking for a job. But if a job came along they say they’d probably take it. And it adds in people who are working part time for economic reasons, someone who wanted a full-time job but they only have a part time one.

That rate is now 9.8 percent. It’s falling really rapidly. It’s seven-tenths lower than where it was just four months ago. It’s a bit higher than it was in the previous business cycle, but only a bit. So I think those part timers have, you know, more room. Some of the discouraged workers, a lot of them are coming back, but there’s some more room there. The big question here is the participation rate. The participation rate is about three and a half percentage points below where it was before the recession. And how much of that do you think will come back? Nearly two percentage points of that is just we have an older population. And so the baby boomers are retiring. That’s perfectly expected, perfectly, you know, fine and not something we would think would reverse itself. The question is that remaining fall in the labor force participation rate. How much of those people will come back?

You know, my observation that I said before that the male labor force participation rate had fallen every year since the 1960s makes me think it’s a little bit more of an underlying trend. You know, put another way, in the year 1999 or 2000, you could have looked at the U.S. economy and made the assertion that we had not yet recovered from the 1991 recession because the employment population rate for prime age men in ’99 and 2000 was lower than what it had been in ’89 and 1990. That would have been a nonsensical statement to say that in 1999 we hadn’t recovered from that shallow recession eight years earlier. You know, tells you something about the metric that would have led you to make that nonsensical statement then. You don’t necessarily, you know, want to use that metric now.

RUBIN: It just occurred to me, Jason—

FURMAN: And if you figured out what I said about the Fed there, good luck. (Laughter.)

RUBIN: Well, that’s where I was—I’m not going to directly ask you the question. I thought we could induce—infer the answer from it. But you were very clever, so we don’t know your answer. OK, but, no, I think—

FURMAN: You set that policy more than 20 years ago and it stuck.

RUBIN: Which policy?

(Cross talk.)

FURMAN: Three administrations in a row.

RUBIN: Yeah, they’re stuck in the administration. It hasn’t necessarily stuck in Congress too well, at least in certain segments of Congress.

You said you thought the long term or you said the CEA published the number that the long-term unemployment rate of growth in the United States economy assuming we meet our policy challenges, and I guess there’s good assumptions there about technological development and all that sort of stuff, would be 2.3 percent. Do you know offhand—you may not know this—but if 10 years ago you had looked out 20 years, so in other words I’m saying in the next 10 years so now you go back 10 years, has that—

FURMAN: It has declined.

RUBIN: Would your expectation for the second 10 have declined?

FURMAN: Yeah, it has declined.

RUBIN: By a lot?

FURMAN: I think it was a little closer to three.

RUBIN: So to three? So it’s—

FURMAN: Three, maybe a—maybe a little bit below three.

RUBIN: And yet, what would have changed that would have caused it to come down?

FURMAN: Part of that is, you know, I tend to be on the optimistic side on productivity, but it’s hard not to look at the last couple years and revise down a little bit. So, you know, ’95 to 2005 was this amazing period for productivity growth. How much were you—thanks to you—how much were you extrapolating that forward or assuming that that was to some degree a little bit of, you know, above normal, and so you want to be below it. So the amount of weight we’ve placed on that one decade has diminished. And then the second is I think we’re taking more seriously this labor force participation issue, that it’s not just an aging population, but that there may be some other headwinds to the growth of the labor force going forward. And I think the combination of those two has brought the number down, for us and for everyone.

RUBIN: I’m going to ask you two brief questions, then we’re going to open it up to everybody else. You and I were both here on Saturday when a distinguished Harvard faculty member, Bill Wilson, told us—it was either Bill Wilson or Bruce Western; now I’ve forgotten which one—but one or the other told us that—I’m going to get this number slightly wrong—but that if you take male African-American high-school dropouts, 67 percent are going to spend some time incarcerated.

That is a population which if we could reach—and it goes to the high school dropouts more broadly—if we could reach that population and enable them to be successful members of our society and economy, the economic gain—I mean, obviously good of them—but the economic gains for all of us could be tremendous. Is there any serious effort being made to think about how to deal with that problem? I think it beyond just the cohort he was talking about, but really all high school dropouts. All the people who have been incarcerated obviously have an additional problem. It’s just very hard for them to get jobs.

FURMAN: Yeah. I think this—I think this is a very serious effort. And it’s something the president is really preoccupied with. Some of it is criminal justice reform. And that’s actually, you know, a potential for bipartisan—you know, for successful bipartisan work. But it goes broader than that. And the president has an initiative, My Brother’s Keeper, that’s motivated by this. And you know, I think the situation is bad enough that it almost gives you hope that there’s a lot of low-hanging fruit to make a big difference in improvement.

So to give, you know, one example, a year in prison costs $120,000. There’s a program in Chicago called Becoming a Man, which is basically a mentorship program where young men get together, sort of get in a group and put, you know, peer pressure on each other to not engage in criminal activity, to stay in school, to complete school. I think it costs, like, a thousand dollars—or less than a thousand dollars a person. If you have a success rate of one out of 120 of the people that you treat with this program, spends one fewer year in prison as a result of it, it’s going to pass a cost-benefit test.

When it’s been evaluated by—I think it was MDRC did the evaluation, Roland Fryer, who you’ve done work with before was involved in it, the cost-benefit rate is 60 to one, the benefits to the costs. And Rahm has taken this program up and scaled it to all of the schools in Chicago. And it’s this type of model that the president’s trying to spread nationwide through my brother’s keeper. Now, I’m not claiming that one program is going to solve all our problems. There’s a whole range of things we need to do. But there is—this isn’t a matter of there’s nothing we can do, we’re in some terrible cycle, we’ll never solve it. You know, there are things we can do.

RUBIN: You know, I’d share—this is not a world I know much about—but I would share your sense that there really is some hope that we’ll do more than we have done. I’m speaking at San Quentin in January. And as a consequence, I’d had some interaction with some of the inmates at San Quentin. The laws in California have changed. If you were a life prisoner, you now can get parole. And it’s had a real—a substantial impact on the behavior in San Quentin. Now, San Quentin is a special prison. It’s a better—I didn’t realize this, but you have to apply to get into San Quentin. You don’t ordinarily think of it. (Laughter.) That’s true. It’s not a stage three, stage four prison, it’s stage two prison. But it really is making a difference from the preparation and preparing for the future and so forth. On the other hand, businesses are very often unwilling to hire people who have been in prison. What do we do about that?

FURMAN: One thing that we just did in the federal government with our own hiring is we ended ban the box. So rather than asking people at the front end of an application process if they had a criminal conviction or background, we ask it towards the end of the process. And a range of research has found that when you do that, a lot of people, non-violent offenders, people with something, you know, when they were very young, a while ago, if you ask the question up front it’s just easy to throw the person out and forget about them. If you’ve interviewed them and then you find out—you might find out more about the context, you’ve invested a little bit more, and you might go ahead and hire them. A number of states and cities and businesses have, you know, changed that policy in terms of, you know, banning the box, as it’s called. So I think that’s, you know, one step. But there’s others too.

RUBIN: Why don’t we open it up to everybody? Who would like to ask the first question? This gentleman right here.

Q: Thank you. Good morning.

RUBIN: Oh, by the way, I should have said, when you stand up please identify your name, identify yourself, and keep questions brief so we can have more questions.

Q: Good morning. Arturo Porzecanski with American University.

Since we are at the Council on Foreign Relations, could I ask you to make some—if you could make some comments on the international trade side of things? I mean, there is a deal on the table and another one being worked on in the pipeline. Do you think they have the potential to further boost productivity or bring other gains?

FURMAN: Yes and yes. (Laughter.)

RUBIN: You want to expand on that? (Laughs.)

FURMAN: We concluded the Trans-Pacific Partnership, an agreement with 11 of our partners on both sides of the Pacific. It cuts or eliminates 18,000 different tariffs that our exporters face, many of them of 30, 40, 50 percent on things like autos, auto parts, agricultural goods. So just in a classic, you know, Ricardian economic sense it’s a good thing. I think a lot of what trade does, though, is not just you can buy cheaper things from someone else, you know, comparative advantage, static Ricardo, you know, traditional economic model, but that it helps lead to more innovation. And it helps leads to more innovation by expanding the size of the markets you’re innovating for, by allowing you to specialize. We specialize in microchips. Someone else specializes in—you know, in memory chips. Or just competition, I think, leads to more innovation too. So I think this will help with some of those innovation challenges we’ve talked about.

We have, you know, the highest labor standards we’re had. And even some of our critics have acknowledged that. A lot of—a number of the conservation groups have come out and endorsed it. And, you know, a range of other things, like reforming investor state dispute settlement to raise the standards even more from what in the United States were already pretty high standards for those agreements, I think that’s quite important. TTIP, we’re negotiating with the European Union. That started a couple years after TPP, and so it’s nowhere, you know, near the place where TPP is. We’re making some progress there, but we need—it’s been hard, I think, for some of the leaders in Europe to give it as much focus, given, you know, the many other things—you know, Greece, refugees, Ukraine—that they’re dealing with. And then there’s a couple others—trade in services, environmental goods—a number of multilateral agreements that are going on through the WTO at the same time that would be helpful as well.

RUBIN: I’d just add one thing, if I may. I just got back from China last Tuesday. And I don’t think, Jason, at least in my opinion, there’s no question, if we don’t approve this thing I think the world will see us has having pulled back from global engagement in a terrible way. I don’t know how one communicates that to the people that make this decision, unfortunately, but that’s a different matter. Next question? Yes, sir.

Q: Nise Agwha (ph) of Pace University.

As an economist, how would you argue that a minimum wage law would help the unskilled? Why would businesses hire somebody at a wage rate that is above their marginal productivity?

FURMAN: So first of all, I think the labor market is a market that has frictions. There’s a cost of identifying a worker, a cost of hiring them, and then a fixed cost, if you leave your job, of finding another one. And when you have those types of frictions, it creates a surplus, a difference between the marginal product of a worker and what they’re paid. And how you divide that surplus—I think there’s a number of wages in between those two numbers at which the market clears. And how you divide that surplus I think depends on, you know, market power and institutional structures. And those have been increasingly tilted in one direction and need to be tilted, you know, back in the other direction.

As a matter of theory, you pay someone better and you get better, you know, motivation and retention, and you get higher costs. And you know, which of those two is larger is empirically ambiguous. People who have studied this question and looked at a county or state that raised its minimum wage and a neighboring county or state that didn’t, looked at employment outcomes in the two, find that within the range that we’re talking about it was very hard to find employment effects or, if you find them, they’re very small. And so I think the, you know, empirical evidence suggests that the effects on employment are slim to none, the effects on wages are quite meaningful. And so I think, you know, given that it’s not a perfectly competitive market, the labor market, for these frictions, it—yeah, it’s putting a thumb on a scale that needs some help.

RUBIN: Ken. I think there’s a microphone over there.

Q: Kenneth Bialkin, Skadden Arps.

In ’16, there’s going to be a presidential election. And on domestic issues, as contrasted to foreign issues, foreign policy, would you care to identify the major differences in doctrinal or policy that you would anticipate between Democrats and Republicans in the context of that election?

FURMAN: I won’t do it in the context of that election, because my job isn’t to be involved in that election. But you know, as we go to, you know, Congress and we deal with our own differences, you know, one is how much we need to invest as a country. The president proposed a 40 percent increase in infrastructure investment, in surface transportation investment above what we’re doing now. The Republican House last week passed a 0 percent increase above the level that we’re doing now. That is indicative of, you know, a big difference in approach.

A second one is, you know, climate change, that we’re moving—we’re heading into Paris. Some of, you know, what we hope will be a really successful model for dealing with climate change, which is each country comes to the table and says what it can contribute, and we’ve said what we can contribute. And what we can contribute was fortunately based on laws that Congress has already passed that we can apply to reduce emissions by power plants, reduce emissions by automobiles. But there’s obviously a lot of controversy about that between the two parties.

And then the one thing that I think actually is good is that everyone is—the middle class income challenge that Bob referenced before, I think in some sense both parties are talking about. And if you can get past the debate about is there is a problem to a debate about what the solutions are, I think that’s healthy. I think we have a lot of different solutions, but we’re at least, you know, at the solutions phase of the debate, not the—you know, on climate there’s a bit more denying reality on, you know, the economic challenges, I think maybe because they think they can blame Obama because we’ve been around for long enough now. We can at least stipulate some of that same challenge, and then talk about what to do about it.

RUBIN: Dr. Shafer.

Q: Jeff Shafer, J.R. Shafer Incorporated.

As I listen to the set of issues you focused on—labor force participation, productivity, inequality, the problems of people who made mistakes when they were young—wouldn’t all of those be improved more by letting the labor market overheat than by anything else we could do, if you look back at the history of the last 50 or 60 years?

FURMAN: I think that was a second attempt at what—(laughter)—

RUBIN: (Inaudible.)

FURMAN: —(inaudible)—to trap me into. But, no, you know, so I don’t—this is not a forward-looking. But yes, as a general proposition this idea that there’s some rigid distinction between demand and supply, and that those each have—follow their own logic I think doesn’t make sense in a macro economy. I think how much productivity you have is a function in part of how much demand that you have. And one way to expand your productivity is to invest more. One way to invest more is if consumers are spending more, that’ll lead businesses to invest more, that’ll lead to more productivity. So I do think you can’t think about the supply-side challenges like productivity without thinking about the demand side.

RUBIN: Yes, sir. Way in the back. Could I ask Jeff a question? Jeff was undersecretary of the Treasury at one time, and we spent a lot of time together. If you did let it overheat, how do you know when to stop that overheating? Let’s say you do want that philosophy of life. When do you then get involved?

Q: Well, you just—you have to watch all the numbers all the time and look for the signs. But it does seem to me that putting more pressure on the labor market will cause hirers to go out and look hard at who they can hire. And they’ll look at people they wouldn’t have looked at otherwise. I have a daughter who has been running a business who is actively recruiting people with prison records because that’s who she could get. And the market she’s in is a little tighter than others in the country. And I think if you look back to the ’60s, there was a lot of pressure on the labor markets. And it ran on too long and we got some real inflation, but for quite a number of years it was delivering more benefits than costs.

RUBIN: Good. Yes, sir.

Q: Andrew Gundlach, Arnold and S. Bleichroeder.

I think most people, had they known how much credit would have been created back in ’09 and ’10, and was created, would have expected a much higher growth rate for the economy. And I think most people believe that it’s the money multiplier being so low that’s partially the cause of a—the growth rate that we have. Do you share that view? And would you go back and correct certain policies, in effect forcing the banks to put more money out into the Main Street economy. Obviously, it all leaked out into the financial economy, or some of it did. Would you have done anything retrospectively? And is that partially in your 2.3 percent growth rate going forward?

FURMAN: Yeah, I think that’s a good question. Economists have had, since Paul Samuelson, you know, 50-plus years ago, a basic workhorse model for investment. And it’s called an accelerator model. And the basic logic of it is the reason businesses invest is because they have customers that are going to want to, you know, buy the stuff that they’re producing, and they need the factories to produce that stuff for the customers, and so that investment is a function, you sort of work it out, of the change in output growth. When growth is strengthening you’ll invest more. When growth is not strengthening you’ll invest less. So that’s this workhorse theory.

There’s then a whole bunch of other theories. One is that your cash flow matters, and how much cash you actually have on hand. Another is the cost of capital, what that interest rate is matters. Another is the availability of credit, which I think you were talking about. Another is business confidence. Another is, you know, the regulatory environment. Are you making life hard or easy for people on regulation? So these are a whole bunch of theories on investment.

I would say most macroeconomists would place most of their weight on that first factor, the accelerator model, as compared to all those other factors I listed—credit conditions, confidence, regulation, cash flow, you know, et cetera. And when you look at the recent episode of investment, not just in the United States, but the investment shortfall I reference for the United States. You see a similar one in the U.K. and in other advanced economies. That basic accelerator model, with none of those other bells and whistles, pretty much almost exactly explains it. If you had known what GDP growth was going to be a decade ago, you would have predicted that this is what investment was without knowing, you know, anything else about any of those other factors.

And that’s something the IMF found in their World Economic Outlook last year, the OECD found in their Economic Outlook, and at CEA, we’ve found as we’ve looked at it. So I think—this gets back to Jeff’s point—that the biggest thing going on with investment is demand. If you have more demand, you’ll have more investment. And you know, there’s a bunch of other things we can do to improve the financial system, get credit flowing to small businesses, et cetera, et cetera, et cetera. But none of that is as important as just the fundamentals. If you have growth, you’ll have investment.

RUBIN: Yeah, I just—could I add one thing to that?

FURMAN: Sure, you can correct.

RUBIN: No, I don’t correct at all. No, I think you’re right. I think one of the lessons of the ’90s that we didn’t expect—in ’93 we did a deficit reduction program that was pretty good. And we kind of focused on interest rates, but not that much on confidence. It turned out that business I think got a lot of confidence out of thinking that we could actually manage our fiscal affairs. And I think that if we could ever do that again with respect to intermediate- and long-term fiscal position that might contribute to confidence. And confidence, as Keynes said, animal spirits are relevant to what business does.

FURMAN: Can I ask you a question, Bob? Do you think businesses are rational in their outlook? You’ve told us what you think of Washington. (Laughter.)

RUBIN: Well—

FURMAN: And then I have a follow-up. This is a trap. (Laughter.)

RUBIN: You know, I—no, it’s a right question. But I—you know, Jason, I know this. I still have a job. I still work. I’m in the five—not in the 5 percent. I’m in the other piece that works.

FURMAN: The 95.

RUBIN: The 95, yeah. And so what I do, I see a lot of companies. When they start talking about 5, 10, 15-year investments, you know, do they sit with a yellow pad and do what you would do, and I kind of think they should do, and so forth? Not necessarily. But I think how government works, their feeling—their views about—or, their lack of confidence in the effectiveness of our government in dealing with these issues, and the uncertainty that our fiscal position creates, I think enters into their thinking, yeah.

FURMAN: Right, because the thing is while, you know, you and your sort of nervous friends—

RUBIN: I’m not nervous.

FURMAN: —have been fretting about us not solving our fiscal problems, they’ve gotten a lot better.

RUBIN: They have.

FURMAN: You look at the fiscal gap, that’s a measure of the deficit over the next 75 years, how much you need to raise taxes or cut spending today to eliminate—stabilize the debt over the next 75 years. That was 5 to 10 percent about six years ago. Now CBO says it’s less than 2 percent, that fiscal gap. Now, we need to do more and we’ve proposed to do more, but it is a much—the experts think it’s a much smaller fiscal gap than they thought a couple years ago, partly because of things we did. We did three different fiscal bills, you know, increased revenue, cut spending in the Budget Control Act, and in the Affordable Care Act. And then partly a set of changes in our health system where health spending appears to be growing, you know, more slowly than what we had expected.

RUBIN: Well, though, that same CBO projects that, if I’m correct, 25 years out the debt-to-GDP will be 106 percent under current law, and 180-some-odd percent—

FURMAN: And you know what I’m going to say next.

RUBIN: No.

FURMAN: Oh, that a few years ago they’d said 200 percent.

RUBIN: Yep.

FURMAN: So that’s a lot of progress. It’s not all the way there, but it’s almost there.

RUBIN: It does lead me, because I was going to ask you, you know, that’s—look, do I think this weighs on—anyway, that is. Yeah, I think people sort of sense government’s not working. And I think this part feeds it. And I think that does affect confidence. But do I—so, I don’t know. It’s complicated. But that does—that does raise a good question, Jason. As you say, the rate of growth of health care costs has come down a lot. And that is, as Jason’s told me years ago, the principal driver of the federal programs that are then termed health care, pretty much in terms of the principal driver of the deficit. You think it’s likely that in the next 10 years with the aging population and the cost of taking care of them well, and so forth, that the rate of increase of health care costs, it will go—stay the same, go up, or go down?

FURMAN: We’ve seen a dramatic slowdown in health costs. You know, health cost inflation in the last year, just the cost side, I think is 1.1, 1.2 percent, which is lower than the overall inflation rate. For, you know, most of the last 50 years it’s been higher than the overall inflation rate. So it’s a dramatic change in our economy. You know, you have to think whenever you see something change quite a lot that, you know, partly you want to update your structural sense of what the underlying trend is. And partly it’s luck. And the luck part will mean revert away and the trend part will stay. So I think it would be foolish to extrapolate out from, you know, the last year or two and think you’d see the same rate of growth going forward.

But I also think it would be foolish to not update, you know, your sense about the future, when for five or 10 years now we’ve had this slowdown. And, you know, we understand some of what’s causing it. We reduced our reimbursement rate in Medicare. You know, on an ongoing basis going forward, that drives private sector reimbursement. We’ve done, you know, a number of delivery system reforms, alternative payment models. You know, you used to just pay purely fee for service. You know, the more you do the more you get. The more fragmented, the more everyone gets. Now, we set a goal of 50 percent of payments within Medicare being alternative payment models, where you bundle the payment together. For example, you get paid more for quality. If you save money, you know, you get to keep the savings. And you know, I think we’re already at about 20 percent, you know, up from zero a few years ago. And things like that are making a difference.

RUBIN: And the demographics of America?

FURMAN: That’s built—no one—yes, absolutely that goes the other direction. That’s built in. We’ve always known about the demographics. We haven’t gotten any new information on that. So set against that demographic trend, the so-called—you know, the excess health cost growth seems lower today than what we would have thought.

RUBIN: Yeah, I agree with that. Yes, ma’am.

Q: Thanks. Rachel Robbins.

Can you talk about the sectors of the economy where you see job creation over the medium to long term, assuming we can implement the policy changes that we need and assuming we can’t?

FURMAN: So I can’t decide—I get that question a bunch—whether I should figure out a better answer to that question or whether my answer, which is as, like, a humble economist that I want to get the policies right and then the sectors that do well will, you know, figure it out and they’ll do well, is the right, you know, capitalist answer, since we don’t—you know, we’re sort of not in the five-year plan business where I am. (Laughter.) So I don’t have—so there’s other people that can give you better, more visionary answers to that. I think it is important when looking at the economy that, you know, the big sectors we have are things, like I said before, I think housing, health, education are three of the biggest sectors of the economy we have. And you know, when they slow down, that creates a lot of challenges for different types of people trying to get into jobs, especially jobs, you know, sort of in the middle of the income distribution.

The big question maybe you’ll get to later on the panel where you’re talking about productivity, is to what degree technology, which has hollowed out jobs in the middle. And you sort of can’t replace the home health aide. And you can’t replace, you know, Bob Rubin’s insights that he shares. And it’s sort of all the stuff in the middle that is more easily replaceable. Will we continue to see that, or will you see things like Uber where you have an innovation that actually appears like maybe it rewards the skills of people, you know, who don’t have, you know, a huge amount of skills, and, you know, creates something more that they can do in a way that a lot of technologies before replaced people. Or is driverless cars going to then come along and replace those people? So it’s just a—sort of you got something for a moment then it was taken away from you. So I don’t—I don’t know. I think if we get the policies right, though, all of that will work a lot better.

RUBIN: Other questions? A whole bunch of them. Yes, sir. We’ll go in the back there.

Q: Joe Kronsberg, Cyrus Capital Partners.

I’m going to try to ask this question without invoking the Fed, but if it complicates it enough feel free to address it in a different way. But how impactful has the extreme fluctuations in currency been as it relates to investment in the U.S., as well as for wage competitiveness worldwide? And how impactful has that been as it relates to some of the investment decisions that companies made, and how you guys are looking at how to deal with that in the future?

FURMAN: So I’ll broaden that to the global economy as a whole, and pick up something I said in the very first answer to the question. Net exports are subtracting a little bit more than half a percentage point off the U.S. growth rate. A lot of the effects you see in the global economy, you know, just in your sort of standard macro models tend to be lagged. And so I would expect even if everything stays as expected in the rest of the world and bounces back a little bit, just the lagged effects of what we’ve seen this past year would continue to be a headwind for the U.S. economy in 2016, and potentially in 2017, but sort of more than half a point per year.

A lot of that is just global growth. If you look at a graph of, you know, the growth of the global economy and a graph of the growth of U.S. exports, those two look exactly the same. Now, if you conclude TPP, we’ll sort of a bit better than we would have done. And if you do something else, you do a bit worse. But the main thing that matters is how other economies are doing. And that’s why—you know, the OECD came out with their Economic Outlook today. They did the sort of familiar ritual that we’ve seen from the OECD and IMF twice a year for, you know, five years now. They downgraded the global economy. They recommended that more demand was needed.

And we just did a bit more demand here with this budget agreement. We have a fiscal stance next year that will actually be slightly expansionary rather than slightly contractionary—rather than contractionary, which you’ve seen in recent years. We’d like to see more of that in other countries around the world. You know, things like the way in which the refugee crisis is being dealt with in Europe might actually bring, you know, a little bit of extra, you know, fiscal impetus and domestic demand. But, you know, China, Japan, Europe, all those places, demand is an issue. And if they had more demand, you know, it would be good for them, it would be good for our exports, good for the world as a whole.

RUBIN: In that context, do you want to say anything about China? I mean, obviously—

FURMAN: China—no, there’s a whole bunch of issues, but the one I was just talking about, is—you know, is demand. And then the question is where that demand comes from. China’s in some ways quite lucky. They consume such a small fraction of their GDP that they could have an adjustment where the economy grows more slowly, consumer spending grows faster than GDP, so that savings rate is falling, and you actually insulate people from the consequences and actually make them better off in the course of that economic adjustment. So rebalancing demand towards consumption I think is the central—one of the—maybe the central macroeconomic challenge for China.

And what does that mean? A lot of the reforms that they say they want to do, actually doing them. So state-owned enterprises paying dividends rather than, you know, accumulating all the cash and benefitting people that run them, paying it out to people so they can do it, liberalizing interest rates, so people get, you know, a bit more on their bank accounts and can spend. You know, having more of a pension and health system so people have the security they need to not have to have so much precautionary savings, so the government, you know, does what it does more effectively, spread risk so people don’t have to. And then consumption-oriented, you know, fiscal policy. And there’s a lot of scope for all that. You’d have more consumption, more domestic demand, and, you know, help the global economy. There’s a number of issues too, but I think a lot of them, you know, are a function of and follow from, you know, that one goal.

RUBIN: I just had one comment to that. I’ve just gotten back from there. We met with quite a number of significant Chinese policymakers. I think the question is that that’s a good set of objectives, then the question is how much—at what pace will they get this done, and what are the internal resistances? And you know, it’s interesting, and Richard would know much more about this than I would, but it’s an authoritarian system in which there is still a very complicated internal policies. And that’s part of, I think the question of what will happen in China. At least that’s my view.

FURMAN: So it’s not just us.

RUBIN: What? It’s not just us? You know, since you made that comment a third time, I’ll say this. I actually think if you look at the resilience of our political system historically, the dynamism of our society, and the fact that politics changes very, very quickly in America, I think in the final analysis, I think we will recover what we need. I think it may be—functionality, this could be a long, messy process. And there’s no guarantees. And if we don’t, then I think we have a heck of a problem.

Yes, sir.

Q: Scott Pardee, latest from Middlebury College.

At breakfast this morning, we were discussing the need for infrastructure investment. I haven’t heard it mentioned.

FURMAN: Well, I talked out our 40 percent increase, yeah.

Q: Well, please flesh out your ideas on infrastructure investment, because we were all—you know, we were saying maybe it’s time for WPA or something like that. So we want to hear what you think at this stage.

FURMAN: Well, we don’t need a WPA. We need to pass a highway bill. (Laughter.) And, you know, historically we had done those for five or six years at a time. It’s not rocket science. Most of the money is formula grants for states that they then disperse. You can do fancier things on top of that with an infrastructure bank or financing facility to leverage your money, you know TIFIA is a loan guarantee program that leverages your money. We have these things called TIGER grants that are competitive grants that localities can apply to. So there’s a whole bunch of reform bells and whistles that can improve on it. But none of that substitutes for, you know, more dollars and more predictability. And we’ve done more than a dozen extensions of our surface transportation funding over the last five years, since 2008. We’ve been on this short term after short term. And that’s terrible.

We have now—both the House and Senate have passed longer-term reauthorizations. You know, they’re not at the funding levels we’d like to see. They’re not funded for as long a period as we’d like to see. You know, they have a number of other issues. But we’d—but moving forward in that direction would, you know, potentially represent progress. But absolutely agree with you.

RUBIN: Jason, there’s steady state funding, right? The authorization was steady state levels?

FURMAN: The House was steady state. The Senate was, I think, about 5 billion (dollars) a year above.

RUBIN: So a small increase. If you could get what the president wanted, how were you going to fund it?

FURMAN: We funded it with international tax reform, a one-time tax on the earnings that were overseas and deemed divided, that would be in conjunction with a permanent tax reform going forward for the international tax system, so not to be confused—

RUBIN: So it wasn’t deficit financed.

FURMAN: It was not deficit financed.

RUBIN: Yes, sir.

Q: Ed Cox, Patterson Belknap and, for full disclosure, chairman of the Republican Party here in New York State. (Laughter.)

With respect, you mentioned both raising the minimum wage and earned income tax credit. Could you discuss the tradeoff between the two, and which you would prefer as far as helping incomes at the lower end of the scale?

FURMAN: Sure.

RUBIN: Earned income tax credit, by the way, I think was said to be Ronald Reagan’s favorite social program.

Q: It worked. (Laughter.)

FURMAN: The—I’m slightly tempted to comment on what’s going on on the other side of the pond on this question, but I won’t do that. But Sebastian knows what I would have said.

RUBIN: Which other side of the pond?

FURMAN: Enough said. (Laughter.) You know, earned income tax credit has been hugely successful in not just—you know, if you have two children, for every dollar you earn it pays you another 40 cents. You get $1.40 instead of a dollar. And then at some point that tapers and phases down. And that doesn’t just give people extra money, it makes it more likely for them to work. And a new set of evidence is finding that the children in families that receive it have higher test scores, are more likely to graduate from school. So it may actually help inter-generational mobility, as well as people today. So I think it is—deserves its place as Ronald Regan’s favorite social program, according to Bob.

We’ve done really well by families with children. The biggest thing we need to do there is take the improvements we’ve made, which expire at the end of 2017, and make them permanent. Where we haven’t done as well is households without children. And we propose—right now, you get at most $500 and it’s complicated and a lot of people can’t get it. And we propose to expand who can get it, raise the amount, and make it so it’s a really noticeable incentive. And this, by the way, it’s not just people without children. This is non-custodial parents, so those—some of the types of challenges you were talking about before with—you know, with black men, for example. You know, if you don’t have the child but you’re paying child support, you know, this would benefit you as well.

We proposed that in our budget a year and a half ago. Paul Ryan made exactly the same proposal about six months later, and cited a report we did on it as his motivation. And you have now seen candidates from both parties running for president who have endorsed this. I think expanding the earned income tax credit for people without children is just a terrific idea. It feels like there’s an increased consensus. And I think it’s going to happen. I personally think—some people think that substitutes for a minimum wage increase. I personally think they complement, that there’s something to raising market incomes, something to raising incomes, you know, after taxes and transfers. And the two of them work together. So I’d like to do both of them. But you know, if somebody just wants to raise the childless EITC tomorrow and, you know, wait another two weeks to raise the minimum wage, that would be—

RUBIN: (Laughs.) I think I would wait a little longer, maybe. But I realized you meant the U.K., but what’s—I must have missed this, what has happened in the U.K. on this?

FURMAN: Just to report, but not to comment on, the government’s proposed a rather large increase in their minimum wage and a rather large reduction in their equivalent of the EITC.

RUBIN: Really?

FURMAN: The conservative government proposed that.

RUBIN: Huh. I didn’t see that. OK. Let me ask you a question. You said that 2.3 percent is your long term. How do you deconstruct that between increase in the labor force and increase in productivity? I mean, those are the two factors.

FURMAN: Right. Those are the two main—there’s a few other little technical things. It’s about 2 points on productivity and three-tens on the labor force.

RUBIN: Three-tenths on labor?

FURMAN: Yeah. But our—you know, we had a baby boom. We now have a retirement boom. And our working age population is basically not growing.

RUBIN: Would three-tenths still be your number if you had serious immigration reform?

FURMAN: It would be, for reasons I won’t bore you with, our forecast partly includes immigration and partly doesn’t. So I think it would be a little higher with immigration.

RUBIN: So 2 percent productivity and only three-tenths labor. Other questions? I think we are, Richard tells me, at the end of our time. So, Jason, you are—you were terrific, as you always are. And I think that if we had this—let me just say, I’ve known Jason a long time. And what you see is what Jason is, enormously thoughtful, knowledgeable and practical objective, and also sensitive to the political realities of the world we live in. So, Jason, I think you’re absolutely terrific. And thank you for being with us. (Applause.)

(END)

This is an uncorrected transcript.