In his new book Crunch: Why Do I Feel So Squeezed (And Other Unsolved Economic Mysteries), popular economist Jared Bernstein deconstructs the hidden, usually conservative, biases built into most analysis of the U.S. economy. Structured around a series of common "everything you ever wanted to know about money but were afraid to ask" questions, Crunch acts as a layperson's guide, a kind of Rosetta Stone for the often intentionally abstruse economese mouthed by pundits and politicians. I spoke with him by phone on the night of the Pennsylvania Primary and asked him to handicap the economic bona fides of the remaining presidential candidates.
In one section of Crunch, you discuss a president's role in influencing the health of our economy. How much or how little power can a president wield when it comes to steering our country's economic ship?
It's de rigueur for economists to be dismissive about the president's ability to affect the economy, but I think an objective look at their role belies that case. Presidents have three major tools with which they can impact the economy.
The first regards redistribution. The President has a great deal of influence in setting tax policy. Under Bill Clinton, for example, there were some progressive changes made in the tax code, and vice-versa under Bush. A lot of my book is concerned with the increase in income and wealth inequality. Tax policy can exacerbate that or offset it.
The second thing is, when the economy is weak or when the private sector engine of growth has stalled, presidents can be very influential in Keynesian types of stimulus. We just had a big debate about that here.
And finally, and I think this is the most underappreciated tool and the one with the greatest impact, is the regulatory agenda. Presidents can regulate and deregulate, and often times [do so] by fiat or executive order. For example, President Bush had the labor department make big changes to overtime rules. That may sound trivial but a lot of people depend on overtime pay.
Are there many differences between Hillary Clinton and Barack Obama in terms of economic policy?
I think they're a lot more similar than they are different. On every one of the tools I've mentioned, they're almost identical. There's obviously a difference in terms of their health care plans. But even that is really quite marginal.
It does look like Obama plans to cut taxes a little more deeply than she does ... and he may be more willing to let the tax code reset back to the pre-Bush era than she would. For example, on capital gains, he suggests that he would tax them at 28% percent, which is where it was when Bill Clinton came into office. [The current tax rate for capital gains is 15%] Hillary said she might go back up to 20% again.
I think the economy worked perfectly well when the capital gains rate was at 28% and we actually need the revenue if we're going to accomplish the agenda that Obama and Clinton have both set out without engendering large, unwieldy deficits.
I just learned the other day that John McCain's chief economic advisor is former Senator Phil Gramm. Can you discuss the significance of that choice?
You could fairly convincingly trace the current financial meltdown back to legislative changes that originated with Phil Gramm, including ending a banking regulation called Glass-Stiegel [and banning the federal government from regulating hedge funds].
It's no secret that McCain wants to further deregulate capital markets and that he wants to go way beyond Bush in terms of tax cuts. So if you didn't like Bush-onomics, and I didn't, you really won't like McCain-onomics.
But McCain originally opposed Bush's tax cuts, didn't he?
That's true. I don't know if he's pandering now and the old McCain is going to come back if he gets elected or if he's actually become a really vicious supply-sider, but I'm going to choose to believe what he's saying and what he's saying is quite discordant.
Can you use your economist's crystal ball for a moment? If McCain manages to win in the general election, but the Dems pick up seats in the house and senate as expected, what will happen in terms of our economic direction?
If McCain is elected, I think you'll see massive gridlock, unless the composition of congress changes. I think on domestic policy, you're going to see some really serious head-butting. I can't imagine him getting his tax agenda through, but on the other hand it's hard to imagine that the Democrats will be able to let the Bush tax cuts sunset either. I don't know how that particular train wreck plays out.
On the war, thinking as an economist, you've got McCain spending hundreds of billions of dollars cutting taxes and then hundreds of billions of dollars on [continuing the] war forever, too. The only way he does that without blowing an unbelievable hole in the budget is through massive spending cuts. He likes to talk about earmarks. You can't begin to scratch that itch [by cutting] earmarks. You can't even get there with discretionary spending. You're going to have to cut entitlements. So McCain's real targets if he's serious about all of this are Social Security and Medicare.
But unless the composition of congress changes dramatically, I don't see those cuts occurring, so I think McCain's agenda would wind up being major wheel spinning.
How would that kind of gridlock, if it occurred, affect our current economic situation? How much can and should the government do to avert a possible economic meltdown?
The government can apply some much needed stimulus to the economy as the private sector is recovering from the recession. That will happen. I'm confidant that so-called corrections will work themselves out, though it's going to be very painful.
I don't know that the person who takes office in January of 2009 is going to have a whole lot to do with that. I think the major economic difference between McCain and the two Democrats is less about stimulus and dealing with recession. I think it will show itself mostly in terms of regulation and redistribution, and restoring confidence in government.
On regulation, the Democrats are interested in trying to have federal agencies up and running again and doing what they're supposed to do ... and on the tax side, I think Democrats will be looking to raise needed revenue and also, they'll take steps to reverse market inequalities and [Bush's] regressive tax policies.
Of course, there's a big difference in health care, too [between McCain and the Democrats]. That would also be a government intervention that would play out very differently depending on who wins in November.
You talk in the book about a new brand of economic populism, embodied by politicians like Jim Webb and Sherrod Brown. Both Hillary Clinton and Barack Obama have tried to portray themselves as aligned themselves with that agenda, especially in Midwest and rust belt states like Pennsylvania.
Do you see either of them being able to legitimately wear the label of economic populist? I mean, will either of them actually stand up to corporate interests when it comes to things like trade agreements? Hillary's husband was the one who championed NAFTA after all.
Let's just say I'm not deeply convinced. I don't think Clinton or Obama would renegotiate NAFTA in any significant way that would have any real affect on workers either here or abroad. On the other hand, I believe that both of them will do a lot more for people who have been hurt by trade than other presidents have in the past, Democrat or Republican.
When I hear them debating NAFTA, I think it's just a code word for globalization. As I emphasize in the book, I don't think any one trade agreement has anything to do with how globalization really plays out here. We don't have unilateral trade agreements with China or India, for example, and they have tremendous impacts on our country. Globalization is a juggernaut and an ongoing force that is accelerated by technological change ... and I think Clinton and Obama would both do a bit more to craft a policy architecture that helps distribute the benefits of globalization more broadly.
Take health care. Health care isn't often talked about in the context of offsetting the effects of globalization. But in fact, globalization has made many workers less secure and has cost many workers good jobs with good wages and good medical benefits. The idea that you would rebuild social insurance, including health insurance, is actually an important offset to the economic insecurity that globalization has engendered for a lot of folks.
Put it this way, either one of their health care plans [Clinton's or Obama's] would do far more to offset the effects of globalization than renegotiating NAFTA.
I have one last question for you. You're one of the few progressive economists to appear regularly on CNBC's Kudlow and Company. How do you put up with all the rightwing windbags on that show?
[laughs] I'm kind of counterpuncher, so I enjoy a lot of it ... They'll put three or four guys up against me but I've always got the truth on my side and that's a pretty powerful force.
