November 18, 2015
Washington, D. C.


          Good morning and welcome to this 8th Bernard Schwartz Symposium of Economists for Peace & Security, this one entitled Inequality, Austerity, Jobs, and Growth. I’m James Galbraith; I’m the chair of the board of EPS. And it’s a particular pleasure for me to be able to open these proceedings.
          I want to do so by extending especially a word of thanks to Bernard Schwartz, who has, from the inception of these symposia, provided us with unstinting support and encouragement; so Bernard, thank you very much, as always, for your backing.
          The tragedy in Paris last weekend casts its shadow over these proceedings. One of the historic functions of economists, and especially of those in Economists for Peace & Security, is to remind us that rational calculation pays, and that in particular calls for war, retribution, however good they may be for television ratings, often lead to actions which one has cause later to regret. In 2003, EPS issued a warning to that effect with respect to the then-impending invasion of Iraq. We made the case that it would have been wise to consider the costs before taking action. That failure is what led in part to the situation that we face today. I don’t wish to dwell on the point; I’m sure that later panelists at this symposium will have more to say on it.
          But it is also our function as economists to speak to the larger priorities that we face, the challenges that we face to maintain the kind of prosperity that generates for all of us the society in which we wish to live; and so that is a task that spans the international and the domestic front.
          And it is my enormous pleasure this morning to be able to introduce as our keynote speaker a senior official of this administration who has in recent years held major responsibilities in that domain. Sarah Bloom Raskin is a veteran of the Joint Economic Committee from the era of Galbraith and Kaufman. She was the commissioner for financial regulation in the State of Maryland. She has been a governor of the Federal Reserve Board. In that capacity she was at the time not alone, but tied for having held the position of the highest ranking woman ever to serve in that institution, since been surpassed by one degree. She is presently the highest ranking woman in the history of the Treasury Department as deputy secretary. Oh, and one other point: I almost neglected to mention that she has had the deep wisdom not to mention the uncommon common sense to be married to a fellow named Jamie. So on that note, let me introduce and welcome to the podium my good friend, our distinguished colleague, Secretary Sarah Bloom Raskin.

          Well, good morning. Thank you, Professor Galbraith, for that kind introduction, and thank you for inviting me to speak here this morning.
          Economists for Peace & Security has helped make our country make progress on a wide range of issues by cutting across academic disciplines and policy areas and really bringing the best economic thinking to bear on our greatest security challenges. And that’s part of why it is such a privilege for me to be able to participate in this year’s Schwartz Symposium.
          Now, when Jamie asked me to share all of my wisdom this morning I had to smile, because it brought to mind two stories, one of which is true, and the other I’m not so sure about. But the one I’m not so sure about I got from my husband, Jamie, who lived in the Galbraith’s house in Cambridge during his law school years. And in this story John Kenneth Galbraith was invited to share all of his wisdom with allegedly the American Economic Association when he was being given an award. And he urged Mrs. Galbraith to join him, and Mrs. Galbraith was reluctant, but ultimately attended because John Kenneth Galbraith said he would be sharing all of his wisdom; and so he urged her to come with him. And the story as I heard it was that John Kenneth Galbraith was very excited about his remarks in which he was going to be sharing all of his wisdom, and he went and gave his remarks, was given this prize, and when the remarks concluded, and John Kenneth and Kitty were heading home, John Kenneth turned to Kitty and said, Well, what do you think? I shared all of my wisdom. Are they wiser? To which Mrs. Galbraith responded, I’m not sure how much wiser they are; but they are definitely older.
          That is the story I think may be apocryphal; but what I know for sure is that I would not be here today with any of my alleged wisdom if it were not really for my work in 1982 as an intern for Jamie Galbraith, who at that time was the staff director of the Joint Economic Committee. And at that time I had been planning to go to medical school, where perhaps in retrospect I could have done more to enhance the social good; but it was really from Jamie Galbraith that I learned that economics was a key factor for social good, and the experiences he provided me really set me on a different path.
          The approach of my remarks today is to start with one of the four topics, namely the topic of economic growth, which is the traditional macroeconomic metric that we focus on to elaborate upon ultimately the important topics suggested by the other three headings: inequality, austerity, and jobs. And these are issues which we discuss robustly within Treasury, including with Deputy Assistant Secretary Tara Watson, who is here with me this morning and is a professor from Williams College.
          When economists discuss growth we mean GDP growth, the rate at which our economy’s output is expanding over time. To be sure—and as the thinkers here well know—GDP growth is an imperfect metric for capturing and quantifying all the many important things that bear on social welfare and common good. In fact, the risks associated with a focus on macroeconomic growth that is unhinged from inclusive growth are significant. Speaking purely from the perspective of the macro economy, inclusive growth is necessary in order to achieve more sustainable macroeconomic growth over the long term. A growing body of research provides evidence suggesting that less heterogeneity in income and wealth may actually facilitate higher endurable economic growth, contradicting the conventional view that greater heterogeneity—in other words, inequality—had a silver lining purpose of achieving better growth. In the traditional model, economists believed that more income flowing to high-income households meant greater overall savings and investment, which in turn meant greater growth.
          But these considerations are only part of what determines how an economy shrinks or expands. In particular, by limiting broad access to engines for wealth creation, like housing and education, non-inclusive growth can limit macroeconomic growth and make it less sustainable in the face of adverse shocks. Think of it this way: When it comes to the potential for macroeconomic growth to advance broad-based prosperity and well-being, inequality hampers it, austerity thwarts it, and you will have fewer jobs without it. And achieving inclusive growth that breaks us out of the anemic and insufficient short-term macroeconomic growth will not be possibly, in my view, by just the invisible hand. Importantly, government must help to foster and enhance it.
          So today I want to talk about policies that promote inclusive growth and the questions that inclusive growth raise[s] in terms of government policy in an economy driven more and more by technological change. To frame this challenge I want to share two scenes from my summer involving my car and me.
          In the first scene, I’m driving south on 95 with two dogs [in] an aging car on a rainy, dark day. My car starts making ominous noises, and I see that I’m passing a New England town where, in the not-too-distant past hardworking factory workers flourished. I’m in one of those towns where payday lending shops and we-pay-cash-for-jewelry trucks have sprung up between abandoned buildings. I was in one of those desolate downtowns that is a shell of a once vibrant community. Before its final gasp, my car valiantly struggles to reach a gas station with a bustling set of activities in its garage. I’m approached by the garage’s mechanics and, thanks to their extraordinary and expert intervention, with skills honed over decades, the car is repaired and I’m back on my way.
          Now for the second scene, later that same week I’m on the other side of the country, traveling again in a car, but this time, behind a driverless car in California. Here, where the economy is speeding into the future, a car is just as likely to be repaired by a computer programmer as an auto mechanic, and lines of code have become as important to vehicles as brake pads. As I watched the small, futuristic pod whizz along, I thought back to the New England mechanic and all of the other skilled laborers across the country, and wondered about jobs in the economy of the future. To achieve sustainable macroeconomic growth, we need to make sure that the economic opportunity and security promised by technological advancement is within reach of all Americans. We need to make sure the prosperity of our future economy is broadly shared. This is the challenge of achieving inclusive growth, and I don’t see how it is to be achieved without a steer from government.
          Before we discuss the challenge let me review where we stand today: Seven years ago, the worst financial crisis since the Great Depression plunged our economy into recession. Real GDP shrank 4.2 percent between the final quarter of 2007 and the second quarter of 2009. When the president took office in early 2009, the economy was still shedding 750,000 jobs per month. In total, 8.7 million Americans lost their jobs; 5 million Americans lost their homes; and $13 trillion of household wealth was destroyed, wiping out two decades of gains.
          The recovery took hold midway through 2009, and since then the economy has expanded at an annual rate of 2.1 percent. Since employment hit bottom in February 2010, the number of jobs has risen by 13 million. During this time, the unemployment rate fell by half from 10 percent to five percent. Today, consumer confidence is at an eight-year high; real hourly earnings are rising, 2.6 percent over the past 12 months ending in September; and consensus forecasts expect real GDP growth of 2.6 percent next year. We’ve come a long way.
          But there are other metrics we must consider as well. The share of the population below the poverty level, 14.8 percent in 2014, was unchanged from its 2012 level and remains more than a full percentage point above its level in 2008. The share of workers who are working part-time but would like to be working full-time at 3.6 percent last month has come down, but is still high relative to its pre-recession average of 3.0 percent. The labor force participation rate for prime-age workers, which stood at 80.8 percent last month, is at its lowest point since 1984. Too many young men are neither working nor enrolled in school, the highest percentage in three decades; and 14 percent of young adults between 25 and 34 continue to live with their parents. For those who have a job but lack a college degree, average earnings are only $28,000 per year, $4,000 less in real terms than they were in 1979. Thus, despite the progress we have made in terms of the overall economic recovery, not all Americans are sharing in this progress. To do that we’re going to have to make growth more inclusive, which means reducing poverty, increasing youth employment, and raising wages.
          Achieving sustainable growth involves many factors. Economists’ models may dwell on capital labor and natural resource endowments; but studies comparing growth in different countries show that institutional factors are also critical. Having a fair legal system, appropriate regulation, and sufficient government investment are essential to promoting inclusive growth. It’s clear that a vibrant private sector animated by cooperating economic agents and thriving commercial activity is necessary to stimulate growth; but it’s also essential to have a meaningful rule of law, including judicial processes that are fair and transparent and accessible.
          Financial instability also stifles growth. On the one hand, risk-taking and leverage are vital components of a healthy and growing economy; but when the rules meant to calibrate safe levels of risk-taking and leverage are set incorrectly or are not appropriately enforced, these activities can precipitate a collapse that sets the economy back years. After the recent financial crisis, for example, it has taken years for households and businesses to rebuild their balance sheets. The economy experienced trillions of dollars in lost output. Even now, residual effects from households and businesses feeling their future prospects are more uncertain may be weighing on economic activity. In other words, inclusive growth requires prudent financial regulation so that households and businesses can reap the benefits of economic opportunities.
          Beyond creating the legal and regulatory preconditions for growth, a distinguishing feature of government is its ability and indeed its responsibility to invest in the common good with a long-term perspective. We need to design those government institutions that focus on the economy to consider the unquantifiable costs associated with government inaction, as well as the unquantifiable benefits that enhance the common good. We need to refine our government institutions to contemplate for the long term, rather than the short term--examples of failures and successes in all these regards come readily to mind—a monetary policy like the one we had in the 1930s that is inflexible and unable to take into account changing conditions, rather than one that provides needed countercyclical support to economic activity; a fiscal policy that veers towards shutdowns of government, rather than long-term planning for a sound fiscal future. The design of how our economic policy levers get pulled by government entities in both the legislative and executive branches, as well as the independent regulatory agencies, is relevant to inclusive macroeconomic growth.
          More obviously, we set ourselves up for inclusive economic growth when we make long-term investments to build bridges, and when we open airports, or when we open a new preschool in an underserved community. We make them when we reform our health care system so that millions of Americans have access to regular medical care, enhancing labor mobility and supporting productivity. And we support growth when we reform and safeguard our financial system to reduce the risk of instability so that our economy can operate on a firmer footing, and so that, if another financial crisis hits, our economy can withstand the harm.
          The recent economic downturn set growth back both here and abroad, spurring contractions in private commercial activity around the world. In the United States, rather than let the economy sink into another Great Depression, the president responded quickly and forcefully to support all segments of the economy. The legislative response was comprehensive and included support for aggregate demand, hope for struggling homeowners and the unemployed, measures to realign the financial sector toward confidence-enhancing financial intermediation assisted by attention on individual consumers and financial markets for consumer financial products. These expansionary fiscal states played an important role in shortening the downturn and restoring growth. The American Recovery and Relief Act released hundreds of billions of needed dollars into the economy, supporting the labor market, assisting state and local governments to avoid deeper cutbacks, and investing in new research and development and better infrastructure. The administration also pursued targeted measures such as investment in the automobile industry, which independent estimates have shown saved more than 2.5 million American jobs.
          Another essential component of the US response to the economic downturn was the fiscal expansion triggered by the usual countercyclical provisions of government programs such as Social Security, unemployment insurance, Medicare, and Medicaid. These core programs acted as automatic stabilizers and accounted for a meaningful percentage of our fiscal expansion, especially between 2010 and 2012. By enacting the Affordable Care Act in 2010, we added to the set of tools that automatically mitigate a downturn, because the ACA protects families’ access to health care and cushions their budgets in the face of job and income losses. Monetary policy as well was appropriately accommodating, and through successive rounds of large-scale asset purchases, the recovery gained traction. 
          The effect of monetary policy on inclusive growth is a topic for another day. Given where we are now in the economy, what types of additional investments would promote inclusive growth going forward? Let’s briefly look back to look ahead: Eighty-five years ago, also following a financial collapse, John Maynard Keynes wrote an essay entitled, “Economic Possibilities for Our Grandchildren.” In the face of a massive depression and global retrenchment, Keynes thought that technological change and continued advancement would allow the economy to grow to multiples of its current size; but that that growth would create significant challenges as well. Aspects of this perspective are relevant. Technological changes continue to come at a breakneck pace. The Internet Revolution has brought more than just texts and Tweets; it has brought new advancements in manufacturing, health sciences, and information services. Computers can now help diagnose an illness, identify and eliminate inefficiencies throughout production and distribution processes, and answer complex questions by searching huge stores of data and information. Machines can now communicate performance data instantly, report and assess malfunctions within their own systems, and improve their own energy efficiency. With each advance, it costs less to produce more.
          But there’s evidence that this technological change has contributed to rising inequality. Over the last several decades, as the US economy has grown, that growth has not translated into similar gains in middle-class incomes. The middle three quintiles of households saw their income grow by 16 percent in real terms between 1979 and 2011. In contrast, earnings for the top 10 percent of households have more than doubled over the same period, and market incomes for the top one percent have almost tripled.
          At the same time, in the most recent recovery, real median hourly wages declined two percent. Those real wage losses were broadly shared. Workers in the bottom 25th percentile saw their earnings decline the most, an average of three percent; and those in the 75th percentile saw their earnings decline by two percent. As I’ve noted before, while more than half of all job losses in the recession were in middle-wage occupations, only one-third of subsequent job growth has been in these areas.
          There are several policies which could help make our growth more inclusive: One, which would directly address this, is a proposal to raise the minimum wage from $7.25 per hour to $10.10 per hour. If adopted, this raise would benefit 28 million workers and move our minimum wage closer to its past inflation-adjusted value. Even higher levels, like one proposal in Congress to raise the minimum wage to $12.00, would have even greater benefits. If growth is currently being propelled by innovation in the technology sector, then we need to determine how to make the benefits of that growth shared. The car mechanic who fixes my car needs to have the skills to fix a driverless car. The government, if it can be incentivized to balance between short views and long views, has the ability and responsibility to support the development of those skills through grants and loans for education and job training. At the same time, government needs to insure that investment is productive, that schools work to insure that students don’t just enroll, but complete their studies, and earn their degrees, and they receive an education that produces meaningful advancement and a return on investment.    
          Choosing investment over austerity was the right choice in the face of the financial crisis, and recognizing the role of public spending in driving inclusive growth remains critical to our future. If it’s true, as some argue, that our economy is on the verge of reaping benefits from technological breakthroughs, then we need to lay the groundwork in the design and activity of our government institutions to determine how everyone in society is to participate fully in this transformation. As we look ahead to the drivers in the next business cycle and beyond, we must continue to ask Keynes’s question: What can we reasonably expect the level of our economic life to be 100 years hence? What are the economic possibilities for our grandchildren?
          We must, as Keynes put it, “disembarrass ourselves of short views and take wings into the future.” I trust that it will be through gatherings such as these that we will continue to explore what these wings into the future mean, and together chart a path forward toward a more inclusive and therefore stronger economy. Thank you.

          Thank you for a truly far-reaching keynote speech for this morning’s meeting.
          I was struck by the balance between two themes in what you had to say, one of them invoking the tradition of Keynes, focusing on the choice, as you say, of investment over austerity, macro stabilization as the choice that the United States made, in contrast with Europe generally speaking, especially the European periphery; and on the other side, the emphasis on the range of institutional questions that are required, necessary to be addressed, in order to make the macro stabilization truly inclusive.
          Just as an opening observation, it seems to me important to see in these remarks, if you like, the return of that institutionalist tradition which framed the construction of the American economy and society in the 20th century and which sometimes tend to be a bit underemphasized.
          Now the function of the Treasury Department in particular is to assure that the public functions of the United States can be financed, and that this can be done in a sustainable way. There is, of course, a great deal of conversation, particularly in this town, about the challenges of financing the kinds of public institutions that we have, in particular social insurance programs. I’m just wondering if you could comment for a little bit on the experience of the last seven years in that respect. What have we learned about, let’s say, the financial side of this choice. Was investment over austerity something that we were warned we couldn’t afford? Have you come to a different conclusion […?]?

          Well I think one thing that we have seen, having gone through the crisis and watched the trajectory of the recovery, is that the so-called automatic stabilizers, the bedrock of our social programs that were designed to be countercyclical, programs like Social Security, Medicare, Medicaid, unemployment insurance, some of the automatic features that were put in place well before this crisis, served us well. They, I think, were a very important part of the recovery; and the fact that they were automatic was critical to being able to maneuver through the economy. In other words, we didn’t need legislation to have those pieces work. Now we had to fight quite a bit to keep those pieces from being dismantled, and that continues to be an enormous set of challenges; but I think a feature in fiscal design that has an automatic countercyclical nature is a good one, is one that deserves some focus; because we’ve seen that it is through those features that we are able to get some momentum on the fiscal side to a recovery. In terms of design, fiscal design, I think we should put some thought into not just how we fight to save those pieces, but what other features could be built in that are automatic, that are appropriately countercyclical, and that would, in essence, buffer us not just from the magnitude of the downturn that we recently had, but help in the recovery and moving into a better trajectory, a quicker trajectory, in the aftermath.

          Just following up on that for a second: One of the challenges that you spoke of [are] the consequences of all the new technologies for the future of employment. Would it be fair to say that particularly the automatic programs, the programs that support health, that support education, provide one of the sources of demand for labor which is less likely to be undermined by technological change, and provides a path forward for providing employment possibilities that are necessary for growth to be truly inclusive?

          Possibly. Possibly. I mean in these comments really to open a discussion where I haven’t seen a robust one yet develop on precisely that question, which is what, say, those automatic stabilizers do in the face of what I think is a very strong technological bent to our future economic growth. So in other words, I’d like to test the applicability of the current automatic stabilizers, to use that term, to a set of changes in our economy to, in essence, see whether the current ones we have in terms of health and education are really sufficient to deal with what I think is going to be a completely transformed set of jobs in the future. So I think I don’t know, and I think I’d like to see more study of that and more discussion of it.

          I think one of the things that we’re clearly observing is that a new technological world in which the capacity to save labor has been enormously enhanced by the shift to digital technologies and finding areas of, let’s say, economic endeavor or human endeavor generally that can provide the employment, that are not displaceable, is the core institutional challenge. It strikes me that this is something where we have been very fortunate to not have dismantled the programs that support activity in at least those two areas, education and health, which have, let’s say, a very strong labor-using element to them.
          Let me ask you another question—

          Let me just say on that point, just to give one refinement: It would be in essence health and education stabilizers that not just cushion a downturn, but also somehow position people, position our human labor here to be able to be positioned in a way not just to prevent massive deterioration in income and wealth, but to position people to be able to thrive in this sort of economy.

          Think about environmental services and cultural activities [are] also ways in which human potential can be realized in taking advantage of the technological possibilities, and not simply being sidelined by them.
          Let me ask you about another area of responsibility for which you’ve had considerable exposure, which is the question of financial reform. We’ve obviously seen a considerable movement in the direction through the Dodd-Frank law, the Volker Rule, in the direction of bringing financial instability under control; but I wonder how you would assess and what you would see as the, broadly speaking, the next steps, the next things that should be on the agenda?

          So I think the financial crisis pointed to the need for comprehensive reform. That, I think, is clear. The type of comprehensive reform we achieved was primarily the reform articulated in the Dodd-Frank Act, and it was, as legislation goes, quite comprehensive. I don’t need to remind people, it created a Consumer Financial Protection Bureau where one had not existed before. It spelled out the need for large institutions, the so-called too-big-to-fail institutions, to be incentivized to shrink through the preparation of living wells, resolution plans. These institutions were put under enhanced prudential standards, new cooperation and coordination mechanisms through primarily the Financial Stability Oversight Council that was another title of Dodd-Frank. There were provisions regarding derivatives and clearing, and the attempt here was an attempt at comprehensive reform, and that was necessary, and that was, I would argue, because a lot of those pieces were not in place prior to the crisis [and] an important trigger to, in essence, many of the catalysts underlying the financial crisis.
          There was another piece of Dodd-Frank, I should hasten to mention, which has not been achieved yet, and it had to do with risk-taking and incentive compensation, limiting incentive compensation because incentive compensation that in essence is funded through, or supported by, taxpayer dollars and that incentivizes risk-taking is not good for financial stability and we know is also an important trigger for downturns or for this financial crisis. That was Section 956 of Dodd-Frank—not done. I don’t think there’s any excuse for why it has not yet been completed, but there are parts of Dodd-Frank that have not been accomplished. So I think that there were things within Dodd-Frank, I think the attempt was to, at the moment, be comprehensive. I think many of you know that dismantling Dodd-Frank is very much a live agenda item for this Congress. The idea is that we’re going to somehow be better off if we move towards a system that existed prior to what reforms were put in place by Dodd-Frank. That is, I think, a mistake; but that’s what the discussions mostly are about, is what can be pared back from Dodd-Frank, rather than what still needs be done and what should be done that was not done. So I think the agenda for us from a financial reform perspective is one that we need to continue to pay very close attention to, or else we’re going to risk moving our economy into the same, creating the same conditions that existed prior to the crisis.

          Would it be fair to say that the experience of the last decade leads us to the conclusion that deregulation does not make us safer?


          Okay, on that note I have to say I cannot confirm or deny the veracity of Jamie Raskin’s story about my parents; but we are certainly wiser for having had you here, and I don’t feel a minute older than I did at 9:00. So on that account I would have to say, though, that it was the kind of remark that my mother very well might have made under those conditions.
          Secretary Raskin, thank you for joining us. Thank you very much for your remarks.