Uncertainty around long-term policies is frightening business leaders and hurting employment, Hubbard told MarketWatch. Meanwhile, neither Democrats nor Republicans are focused enough on training America’s workers, he said.
While payrolls have gained fairly steadily over the past two years, the U.S. economy today has about 5 million fewer jobs than when the Great Recession began. Proposals from Romney would provide much needed clarity, and support employment, Hubbard said.
Hubbard, dean of Columbia Business School and a former chairman of the Council of Economic Advisers under George W. Bush, spoke with MarketWatch about employment, and its intersection with tax policy, trade and regulations, among other areas.
The following is an edited transcript of the conversation:
MarketWatch: Job creation during the Bush years was somewhat uneven, despite the tax cuts that you helped craft. Why didn’t the tax cuts spur more job growth? How would Gov. Romney’s tax proposals be more effective?
Glenn Hubbard: Well, first you have to step back and realize that tax changes and policy changes generally are only one part of the economic tapestry that gives you a job market. And the best thing that public policy can do is to try to get growth to be as fast as possible. And I don’t think there’s any question that the 2001, 2003 tax cuts supported growth.
I think the ethos for Gov. Romney is to use a whole variety of policies, of which tax policy is one, to try to raise the rate of growth. We’ve had a recovery from the financial crisis that would be well below what one might normally expect for a recovery from such a deep recession. And to counteract that we need better tax policy, but we need a whole variety of different policies generally.
Q: Gov. Romney has said that under an administration that he leads, the Treasury Department would designate China a “currency manipulator” if that country fails to move quickly to bring its currency to fair value, and countervailing duties would be imposed. How quick is “quickly”? And what would you say to U.S. exporters to China who are worried about losses if the U.S. adopts a hostile posture?
A: Well, in the first place, if you read the totality of everything Gov. Romney has said about China, the core of what I think he would like to focus on is in intellectual property, where the Chinese have violated global intellectual property rights conventions. I think he would like to use leverage to make that better.
I don’t think it will come to anything like the scenario you’ve outlined simply because I believe Chinese leaders and U.S. leaders can do what’s in the best interest of both China and the U.S. I mean the reason China should get its intellectual property protection right is not to help us, it’s to help grow entrepreneurship in their own economy, and reforming the Chinese financial system isn’t to help us, it’s to help credit allocation in their own economy.
I don’t expect the U.S. and China to get into a trade war simply because I think there are good people on both sides who realize that that’s not in either economy’s interest.
Q: Real earnings have been stagnant or falling for many U.S. workers for decades. Meanwhile, data show that union members have higher earnings than non-union members. Is that an argument for why the U.S. needs unions?
A: What unions have typically done is raise wages to the point of making sectors not competitive or imposing work rules that make those sectors not competitive. What we really need is to raise the skill level of American workers. There are two big trends in labor markets that are concerning. You’ve referred to incomes as stagnating. That’s both false and true. It’s true in the sense if you look at money wages people take home. It’s false in the sense of total compensation, because what has happened is compensation has pretty much risen with productivity.
The problem is a lot of that has gone into higher health-care costs. So we really have to fix that. That’s big problem No.1. Big problem No. 2 is that we haven’t invested enough in skills and education for America’s workforce. Neither political party has been very good about this, and we really need a plan to do that.
Q: Gov. Romney has indicated only lukewarm interest in your mortgage-refinancing proposal. What are the chances that you can bring him around?
A: I think what Gov. Romney’s rightly focused on housing is: What should America’s long-term housing-finance situation look like? And it’s quite clear that a housing market that depends on being completely dominated by Fannie Mae, Freddie Mac and the FHA is not a stable situation. So he’s talked about, and I think will continue to talk about, what it would take to get a private market together in housing. President Obama has basically avoided or not done any attempt to intervene in any positive way in the housing market. I think in the financial crisis that’s been a shame.
Q: What other major housing-market initiatives might interest Gov. Romney?
A: Well, I think where he’s focused and rightly so is just in getting the long run right. This would mean getting Fannie Mae and Freddie Mac out of the big portfolio holding business and right-sizing the role of government and crowding in more private capital into housing. And to the extent that we want to subsidize housing for any group in the United States we should do so explicitly, not by trying to manipulate housing regulation.
Q: What are the best steps the Obama administration has taken when it comes to creating jobs?
A: I can’t think of a single thing that the president has done that would be good in that regard. In fact, Steven Davis, an economist at the University of Chicago, has done work to suggest that the policy uncertainty alone in [recent years] has probably destroyed about 2.3 million jobs. There’s a lot the president could have done, if that was your question. A better stimulus package would have been a good first part. Less policy uncertainty would be a good second part. And third, focusing on growth rather than threatening large tax increases on entrepreneurs and successful companies might be a good conclusion.
Q: Do you think that the stimulus added any jobs?
A: I join the economists that are quite skeptical that the stimulus package did very much at all. I think the fact that you don’t hear the president running on his actual record is a good sign that he would agree with that as well. It’s a shame because there were stimulus packages that would have been very effective; the president simply chose not to do them.
Q: In his economic plan, Gov. Romney promises to roll back regulations. Companies always want fewer rules, but what makes you think that fewer regulations and rules would cause substantial gains in output and employment?
A: I don’t think it’s a matter of fewer or more, but smarter. Currently we have a system where the regulatory process is routinely flouting cost-benefit analysis, just refusing to do it, even though for decades that’s how regulation has progressed. And so I think what Gov. Romney says is: Let’s step back here and take a hard look at the costs and benefits of these regulations.
Q: Some are concerned that the cuts in Rep. Ryan’s budget proposal [which Romney has endorsed] could harm many Americans. What’s your response to that?
A: Well, first of all we’re on a budget we can’t afford, and so any comparison to that budget is a bit irrelevant because we can’t afford it. If you wanted to ratify the current budget trajectory this president has us on we would have to raise all taxes immediately by 20%. I don’t think that’s what the American people signed up for. And so we do need to right-size government. I think what Gov. Romney has said, and I would agree with it, is we can do that in ways that cuts programs principally for more affluent taxpayers. So, for example, if we reform Social Security and Medicare, let’s do so in a way that really trims the rate of growth for spending mainly for upper-income people. So I think that’s where the debate needs to be.
Q: The U.S. recently OK’d free-trade agreements with South Korea , Colombia and Panama. Do these deals show that the Obama administration is serious about free trade?
A: Well, they are certainly welcome. The president woke up at some point, somebody whispered “trade” in his ear, I suppose because he had been against them for some time. But whatever the reason I think we should thank the president for doing that. The president has not been, generally speaking, a friend of trade. But those agreements are positive and we should all celebrate them.
Q: Given today’s political climate, realistically is there anything else an Obama administration should have done or should be doing on free trade?
A: Well, it’s kind of hard to go back to the beginning, but the president had a bully pulpit to talk about free trade and he demonized it. I really think that trade is one of those areas where it’s enormously in the interest of Americans, and the president could have talked both about the gains from trade and tried to come up with institutions that would cushion blows in the domestic economy from trade. But he’s chosen to do neither of those.
Q: What is the most useful proposal from Gov. Romney to create jobs?
A: I think it’s the package as a whole. What’s needed from a policy perspective is to clarify what our long-term policy path is. Talking to business leaders, which is something I do a lot, they’ll tell you they are just frightened. They don’t know what the long-term path of tax rates is. The nation doesn’t have its fiscal house in order. A package that would actually give long-term stability and credibility to the budget would give us huge room to move in the near term to supports jobs and growth. That’s an important lesson in Europe and that’s an important lesson in the United States . The president has chosen to do just the opposite – to amplify policy uncertainty and make it worse. But I think that the clarity in what Romney is proposing will really help.
Q: There are some who think the economy could benefit from additional stimulus. Thoughts?
A: “Stimulus” means so many different things. The question for anybody who would talk about stimulus now is: How do you couch that within a framework that would bring down the long-term budget problems? Most of the people advocating more stimulus now don’t even have a responsible long-term budget. So to my mind that’s just a nonstarter.
Q: Is it ever worth widening the deficit to help the economy grow?
A: I don’t think there is any argument that increasing the deficit would be a very good idea right now, particularly the way this administration would want to do it. If you wanted to make an argument for stimulus the way you could make it is that if you put the long-term budget path in a credible direction you would so reduce the present value of problems that you would have some room to move today. That’s an intelligent argument – that’s not one the administration is making, but it would be an intelligent argument. That’s not usually though what stimulus types mean. They just mean devil may care.
Q: There are still lots of unemployed and lots of long-term unemployed. What’s the best thing we can do to help?
A: Thank you for asking that question. That’s the most important question in our whole conversation. Every American ought to be angry about two things. One, how high the unemployment rate is. And more important, as you rightly noted, the very large fraction of people that are long-term unemployed. The best thing we can do right now is to get growth up and that will pull the labor market. The second best thing we can do is to really focus on the skills that those long-term unemployed need. Unfortunately, in the current Washington debate, we are not focused enough on either one of those.
Ruth Mantell is a MarketWatch reporter based in Washington.