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Diplomacy in Action

Trends in the U.S. Economy


Steven Rattner, Chairman, Willett Advisors LLC
New York, NY
March 12, 2014




State Dept Image/Mar 12, 2014/New York, NY
Date: 03/12/2014 Location: New York, NY Description: Steven Rattner, Chairman of Willett Advisors, LLC, briefs at the New York Foreign Press Center on ''Trends in the U.S. Economy.'' - State Dept Image

3:00 P.M. EDT

NEW YORK FOREIGN PRESS CENTER, 799 UNITED NATIONS PLAZA, 10TH FLOOR


MODERATOR: Good afternoon. I’m Alyson Grunder, the Director of the New York Foreign Press Center. We’re very pleased to have with us today Steven Rattner, the Chairman of Willett Advisors LLC. In addition, he serves as the Economic Analyst on MSNBC’s Morning Joe and is a contributing writer to The New York Times Op Ed page. He previously served as Counselor to the Secretary of the Treasury and led the Obama Administration’s successful effort to restructure the automobile industry, which he chronicled in his book, Overhaul: An Insider’s Account of the Obama Administration’s Emergency Rescue of the Auto Industry.

MR. RATTNER: Thanks so much. Thank you for all being here. I’m honored to be asked to come and speak before you. As you can see, I brought some slides. What I thought I would do would be to talk for maybe 15 or 20 minutes about some of the issues that are going on in the U.S. economy, talk a little bit about some of the political dynamics. I’m not here as a spokesman for either side of the political debate. I’m going to give you a very neutral report of how I see things going on in Washington, or not going on in Washington, as the case may be at the moment, and then I’m happy to have a discussion and take questions or comments or anything else.

So if you start with the state of our economy now, this is our gross domestic product over the last 13 years or so, since 2000, when, as you know, we had a very mild recession after that. But as you go across, you can see that in the 2008-2009 period, as you would imagine, we had that very steep recession.

We had that very steep recession, followed by reasonable amounts of economic growth, a slower recovery in these last four years than what we’d normally expect after a recession, especially after a deep recession, for reasons that I’ll talk a little bit about.

In 2013, we had, as you can see, a 1.9 percent growth rate. I think the consensus is that the rate of growth of the economy is accelerating, and that in 2014 we might have a growth rate as high as 3 percent. I’m personally not sure that that’s going to happen, but that is the consensus of many economists, and I’ll talk a little bit more about what’s driving that.

Coupled very closely to growth in the minds of people is the job situation, and so this chart shows you two different ways of looking at the job situation. The red and the blue bars talk about job losses and job gains on a month-by-month basis going back to the depths of the recession. You can see that in early 2009, we were losing 800,000 jobs a month in some periods. And then you can see that in 2010, with a little bit of a reversal, essentially it turned positive. And really since the middle of 2010, we have gained jobs every single month – not as many jobs as we would like, not as many jobs as we normally gain, but the trend has at least been positive.

You probably saw last Friday the announcement that we gained 175,000 jobs in February. That is about the average of what we’ve been gaining over the last year or two. And that is, again, just like the GDP number I talked about, that is a slower rate of recovery than what one would normally expect to see, especially after such a deep recession.

The black line is the unemployment rate, and so as you can see, it peaked at around 10 percent. And with some fits and starts, it has been declining since then. And in the last month’s report, it was at 6.7 percent, actually slightly higher. I’m sure many of you understand that the unemployment rate is sometimes a misleading number, because it is measured based on how many people are looking for work. And so in a period like this of high unemployment, many people leave the labor force, they’re not looking for work anymore, they don’t count as unemployed anymore, but they don’t have jobs either. And so this unemployment rate – and I’m not going to be able – have the time today to get too deeply into this particular issue, but the unemployment rate almost certainly understates the extent to which Americans feel worried about their job situation or would like to have jobs and don’t.

Now, wages are a key second part of this. They don’t always get as much attention. Every month when the Labor Department announces the unemployment numbers, they also announce wage numbers. But for whatever set of reasons, your colleagues in the press in the U.S. don’t pay as much attention to the wage numbers. I think they’re at least as important, maybe more important because they affect not just the people who are unemployed but the much larger number of people who are employed. And the problem here, as you can see, is that there has not been very much wage growth. Again, normally coming out of a recession, you would expect to see pretty strong wage growth. And these numbers are all adjusted for inflation. This is what we call real wage growth. But you would expect to see significantly positive real wage growth, that people’s incomes after inflation are going up. And as you can see here, they’ve gone up, they’ve gone down, and on balance they really haven’t moved at all. I mentioned earlier that I would talk a little bit about why I think the economic recovery is slow. The fact that wages are stagnant, the fact that there’s not more purchasing power in the economy, is one of the major reasons why we are not having faster growth and why unemployment is not going down faster.

As you can see all the way on the right, in the most recent report we had a 1.2 percent wage growth year over year after inflation. That’s actually not a bad number, but as you can also see, it’s one month. It’s kind of bounced up and down. If you look with your eye from August of ’11 when it was sort of near the bottom, you can see that it appears that wage growth is gradually getting a little bit stronger. But given the back-and-forth pattern of these numbers, I think it is too early – way too early – to declare victory.

Now, we also have a longer-run problem of income in this country, which is the fact that if you go all the way back to 2000 and you look at what median income – it’s not quite the same thing as average, but essentially average income – after inflation has done, you can see that back in 2000, it was about $56,000. And then you can see we had that recession I mentioned before, when the dot-com bubble burst and so forth, and median incomes did drop to 54,000. Then we had a recovery and they went back up to 55,627, literally. But what’s interesting is they didn’t recover even back to where they were in 2000, and that is, I believe, the first time in our history that that’s happened, where you’ve had a recession and a recovery but you haven’t gotten back to where you started from. And then since then, as you can see, they’ve essentially been going down. 2012 is the most recent time that we have this data from – you can see that they seem to have leveled off, but you can also see that the average American has lost about 8 or 9 percent of his or her purchasing power over these 13 years. And that’s really not a good place for us to be.

Now, part of why that’s happened is because of this chart. So what this chart shows you – the top line, the slightly lighter blue-colored line, shows you productivity, how much more efficient American workers are becoming each year. And as you can see, with some deviations, it’s a pretty steady path all the way from 1948 to 2012, where this ends. But you can see that starting as long ago as the 1970s, the additional productivity that American workers were creating was not being passed through to them as compensation. Their wages were not going up as fast as they were producing more things. And there are a lot of theories for why this is. Globalization certainly is a big part of it, but this is essentially a fact, and it is also part of why corporate profits have been very strong, because business has been able to keep their costs down, and the stock market has been very high, but it also fundamentally gets to the fact that it is hard to have a strong recovery when people do not have increasing purchasing power.

I was asked to talk a little bit about manufacturing. In the course of what I did with autos, I had a very interesting experience learning about manufacturing. It was not a part of the economy that I had previously spent much time in. And I don’t have time today to go through everything I learned, but I want to just show you a couple of things that will give you a sense as to what’s going on out there.

So first, in terms of jobs, I talked before about overall job trends. This takes the overall picture, which is represented by the black line in the middle, where you can see that, going back to 2007, which was right before the recession started, if you follow that black line in the middle you can see that the number of jobs dropped, and it’s now essentially back to where it was back then. But you can then see that there’s a lot of variation. And so the top line, which is green, shows you that in education and health, we’ve had significant additional jobs created. The purple line, professions and business, you can see there’s been some job creation. Government has been negative, because we’ve been shrinking government both in Washington and at the state and local level. But then the bottom line, you can see, is manufacturing, and you can see that manufacturing took an enormous drop. We literally lost 6 million manufacturing jobs from the peak of our manufacturing employment to the bottom of it. And we’ve gained back only about 600,000, less than 600,000, since then.

So we are still – so when you read these stories, as I read them, about how manufacturing is on the comeback in the U.S., there is some good news out there, but unfortunately, it’s a mixed picture at best, and we still have huge problems in manufacturing. Now, why do we have huge problems in manufacturing? Again, I don’t have the time to get too deeply into it here today, but fundamentally, in my view, one of the major problems is simply we’re living in a global world and companies increasingly can source their labor from wherever it is the cheapest. And so this chart shows you what it costs per hour to hire a manufacturing worker in the U.S. Most of this data is as of 2012, some of it’s a little bit older, but directionally it’s the same.

Germany, as you can see, is very expensive. Germany is a special case. We can talk about it if you want. But then you see the rest of the – the developed countries all essentially clustered between $31 in the UK to $45 in Germany, and then you look at some of the most successful developing countries and you can see the difference – $6.36 in Mexico, $1.74 in China, $1.46 in India. And I can tell you from my experience with autos that in Mexico, where many, many cars are assembled today by General Motors, by Ford, by Chrysler, they will tell you that the productivity of their workers in Mexico is now very, very high, and so if you can essentially get very similar productivity at a small fraction of the cost, you would naturally move more production there.

And so last year in this country, we assembled 10.5 million cars, all the car companies put together, which was about the same as what we assembled in 2006. Over that same period, the number of cars that were assembled in Mexico went up by 50 percent. So we essentially just got back to where we were, Mexico up by 50 percent. Those cars were not being assembled for Mexicans. They were being assembled largely for our market and, to some degree, for export to other markets.

So as we live in this increasingly global world, it is an increasingly difficult situation for the U.S. to maintain a strong manufacturing base. One of the ways we’ve done it or one of the ways we’ve kept jobs has been by cutting wages. That’s what I showed you before. That’s not a really great way to grow an economy and to make people more prosperous and so forth, but we have not had too many choices. And manufacturing in our country is down to about 12 percent of our economy, down from 28 percent back in the 1950s. We’re increasingly a service-based economy.

I want to talk for a minute about another major issue in this country. I was just on the way over here reading an interesting article that I recommend to you all in today’s New York Times by Eduardo Porter about the history and reasons behind income inequality, and it’s a much discussed subject not just in America about principle, but particularly in America because our income inequality is certainly the worst of any country in the developed world.

So let me start just a little bit of history. If you go back to the end of World War II, 1947, and you look at that 32-year period from 1947 to 1979, incomes generally rose together, and what these five bars do is they take the 20 percent highest income, then the next 20 percent income, the next 20 percent income and so on down to the bottom 20 percent. So it divides everybody who’s earning a living into five groups based on their income. These numbers are also adjusted for inflation. You can see that during this very robust period of 30 years, you got not just significant income increases. These 2.2, 2.5 percent numbers may not seem that large, but those are very – when you compound every year – very significant increases in income. It was very evenly distributed. Within a few tenths of a percentage point, everything moved together.

Now, starting in 1979, you started to have this divergence toward greater income inequality. So you can see on the right the top fifth grew by 1.7 percent a year, less than what we saw in the earlier period, but still not bad. But literally, as you go group by group, it gets smaller and smaller. The only good thing to say about this chart is that everybody grew, at least. Even if you were in the bottom 20 percent, your income grew on average after inflation, but you were getting greater and greater income inequality. And this takes us to 2000.

So in the last dozen years, here’s what happened: Nobody grew. And so again, you have the wealthiest 20 percent people at the right, and they had a relatively small drop in their annual income. But as you move further and further to the lower incomes on the left, you have bigger and bigger drops. So income inequality was getting wider, but what has made, I think, people particularly unhappy is this feeling and reality that they were going backwards, that even though it’s bad enough when people at the top are getting rich or wealthy faster than you are, but the fact that you’re going backwards and they’re still moving further away from you, I think, is a big cause of a lot of the political tension and discussion that we have around this issue today.

Another way to look at this is to look at the income share of the famous top 1 percent that you hear so much about. That’s the green line at the top. This chart goes all the way back to 1913. It’s done by some very capable economists who are mentioned a lot – just came out with a new book, actually, which was the focal point of this article I was recommending to you. And what you can see is that the top 1 percent, if you look at the green line, is all the way back to where it was in the 1920s, which is what we consider to be kind of our gilded age or our period of greatest income inequality in this country in our history.

To give you some figures, the top 1 percent is about 800,000 households. It takes an income of $371,000 to get in that top 1 percent. In other words, the lowest income of anybody in the top 1 percent is $370,000 a year. The average income of people in the top 1 percent is about $440,000 a year, so it’s obviously a wealthy group. The red line at the bottom is the top 0.01 percent. That is literally 16,000 households in our country of 350 million people. It takes $7 million a year to get in that group, and your average income is $21 million. And so you can see that those 16,000 households, 0.01 percent of the country, received in 2012 4.1 percent of the income. They may sound like small numbers, but they’re really big numbers.

We also talk in this country a lot about how to fix both the wage problem and the income inequality problem, so I thought you’d be interested in some of this data which shows what happens – it takes the country and divides it differently. It divides it by education. And so it goes back to 1979 and says, on the left, if you did not even have a high school degree, on average, what happened to your weekly pay after inflation, and the answer is it dropped by 24 percent. And that’s obviously a huge drop.

If you go all the way to the right and you had a college degree or a post-graduate degree, your income went up by about 15 percent. So you can see that part of the reason for our growing income inequality is this difference in education levels from top to bottom. And it’s why people talk about education as one of the potential solutions to our problems.

Another way people think about income equality as everyone studies it and tries to figure out why it’s occurred and what to do about it and so forth is to look at it across different countries. I mentioned before that the income inequality problem, if you think it’s a problem, as I do, is not just limited to the U.S. So here are a whole bunch of other countries – principally in Europe, but developed countries. And you can see – if you look at the horizontal red line that’s toward the bottom, everything above – every country above that line had more income inequality over the roughly 50 years since 1960. It’s comparing 1960 to 2010, so roughly 50 years. Everybody above the red line has had more income inequality. Everybody below the red line has had less. So you can see that the vast majority of these countries had more income inequality over that period. You can see in the upper-left corner that the U.S. had the most increase in income inequality. You can see that the UK and Ireland were the next.

Now, moving from left to right is what happened to tax rates during that period. So the further left you look at this chart, the more tax rates were cut during this period. The more you move to the right, the more tax rates were increased. And so the vertical red line would be no change in tax rates. You can see that there’s no country to the right of that vertical red line. No country increased their tax rates – of these countries, anyway – increased their tax rates over that 50-year period. Everybody more or less – like Spain kept them the same, but everybody more or less decreased them or left them the same. And you can see by looking with your eye that the bigger the decrease in top tax rates, the more income inequality rose, not – doesn’t work out for every single country, but on balance, it seems to be a pretty high correlation. So it’s just something to think about.

Let me close by turning – talking a little bit about what’s going on in Washington and about one other policy issue that’s much in the news these days, and then I will stop. So we talk a lot, you hear a lot, about things not working in Washington, and so – I’m a numbers guy, I’m a chart guy, and so I bring some charts to show you that, in fact, that’s true. That if you look at the number of laws passed by Congress, and we – our Congresses work every two years, as you probably know, so each of these blue bars is – except for the last one – is a two-year period. And you can see that – going back over 50 years you can see that the number of laws has actually gradually been decreasing, but you can see the 112th Congress, which is the one before the current one, passed fewer laws than any other Congress in modern history. And you can see that the 113th Congress, which is only halfway over – so that 77 is half of a Congress – so they could improve their score, but at the moment they’re on a track record or on a trajectory where they will beat the record of the last Congress in terms of fewest laws passed.

Now some people say that’s a good thing. They don’t really want Congress to do anything anyway. My view is that we have a lot of problems in this country and we need to solve them, and Congress gets paid to solve them. And the fact that they’re not passing any laws, I think, is not a great thing at all. And it’s contributed to this, which is Congress’s approval rating in the country. And so here’s about 12 or so big institutions – the military, small business, police, all these things – and you can see the fourth from the bottom, TV news and newspapers – which is all of you guys – you have a 23 percent approval rating, which isn’t great, but Congress has a 13 percent approval rating, and they are absolutely at the bottom. They’re below big business. They’re below banks. They’re below all of us in this room, and so the country’s really not happy with the situation.

This has also had a very substantive and real economic effect, that if you look at – this is consumer confidence, and if you believe as I do that consumer confidence plays a role in people deciding to spend money and how they conduct themselves, what you can see clearly from this chart is how a number of important events, most of which, but not all of which, involve Congress, hurt confidence.

So you can see, just to take a couple that – a first one that doesn’t, Lehman Brothers fails, confidence drops, what you’d imagine. Congress passes the Recovery Act, they actually did something, and confidence goes back up again. And then you can see the big drop when our AAA credit rating was lowered, you can see a drop during the fiscal cliff, you can see a drop during the government shutdown last fall. So it’s pretty well documented that every time Congress needs to go off the rails, it hurts consumer confidence and hurts what is actually going on in the economy.

Now the other thing that has been going on in Washington that affects the economy fairly significantly is the deficit. And I’m personally in favor of cutting deficits – a whole other discussion – again, I didn’t really come to talk specifically about that. Some people are not in favor of cutting deficits, but what is really not in dispute is that the deficit has been coming down enormously, right? It has come down from about $1.3 trillion to I think about $550 billion this year.

And what that is what we call fiscal drag. It takes purchasing power out of the economy and causes the economy to grow more slowly. So we talked about how wages have kept the economy from growing as fast as we would all hope; this shows you how the reduction of the deficit has held the economy back. If you look at the last three bars to the right – 2011, 2012, 2013 – you see that in each of those years, the sharp reduction in the deficit took away anywhere from .9 to 1.5 percentage points from GDP. So instead of 2 percent in 2013, we would have had 3.5 percent, if the deficit had just remained unchanged. 2009 you can see how the government can help the other way when we passed the big stimulus package and it actually added 3 percent to the growth rate of the economy in that year.

Now, I’m not here to take a side on Obamacare either, but it is another big important issue and I think somewhat confusing to people, so I brought one slide to try to tell you how I think about Obamacare and what it really is. And I’m not here to talk about websites and whether you keep your insurance or you don’t keep your insurance, but really to try to deal with the forest more than the trees in the sense of – so what is Obamacare really about?

What Obamacare is really about is taking those two bars on the right of the uninsured and taking the number of uninsured from 56 million Americans is the real goal for the next 10 years, and a lot of other stuff around it, a lot of it’s important, but that is the major policy component of is the real goal for the next 10 years, and a lot of other stuff around it, a lot of it’s important, but that is the major policy component of Obamacare. And it does that in a couple of ways. If you now go to the second set of bars from the left where it says Medicaid chip, Medicaid is our healthcare plan for low-income people. It moves 13 million people on to that plan. And the second thing it does, if you see the middle where it says exchanges, which we didn’t have any of before, it’s creating these exchanges – this is the healthcare.gov kind of idea – but most of the people on those exchanges, all the ones with the shaded red line, are getting subsidies. They’re not as poor as the people on Medicaid, but they’re poor enough that they’re getting government subsidies to buy insurance. And so 24 million people will be able to buy insurance on those exchanges – some with subsidies, and some being able to simply buy insurance better, cheaper, faster than they used to before there were exchanges. I’m a great believer in exchanges, and I think once we sort out the technical problems, I think the rest of the country will be too.

So that’s really what Obamacare is all about at the end of it all, and there are now 4.2 million people who’ve signed up on the exchanges, and I think we all should hope that as this – as the technical issues get resolved and as all the different bits and pieces get sorted out, that we will achieve these goals because that’s what I think we should be doing in this country, which is getting people health insurance.

So just to close with, I think, a summary of what I’ve basically been saying for the last 20 minutes or so, I do think the economy is getting – is growing a little bit faster in part because the deficit isn’t coming down as much anymore – we’ve kind of got the deficit down a lot. I’ve talked to you a lot about the problem of stagnant wages, where I don’t think at the moment there’s any great reason for hope. We have a persistent high unemployment rate – if we continue – so we added 175,000 jobs last month. If we just add 175,000 jobs a month, it will take us until the end of 2019, which is five years – more than five years from now – to just get back to where we were before the recession began, which is a pretty depressing thought. And on a really depressing thought, I don’t think we should expect very much from Congress. They don’t seem to be in the business of passing anything, and certainly not the kinds of fundamental changes that I think – whatever your politics are – the kinds of fundamental changes that I think everybody agrees we need to keep the country moving.

So I don’t mean to end so negatively. I do think there’s a lot of good things to say about how things are going in America, but I’m trying give you sort of a balanced picture.

So with that, I’m happy to, I guess, take questions.

MODERATOR: Great. So, would you mind if I call --

MR. RATTNER: No, no. You’re in charge.

MODERATOR: And when you’re called upon, if you could please state your name and your media affiliation.

QUESTION: I have two questions. First of all, could you comment --

MODERATOR: Name and affiliation.

QUESTION: Oh, sorry. (Laughter.) Makiko Yamazaki from Jiji Press, Japanese news agency. I have two questions. First of all, you mentioned that it is difficult for the U.S. to maintain a strong manufacturing base, but do you see any future at all and if you see --

MR. RATTNER: Any future what?

QUESTION: Future in manufacturing in the U.S.? And also could you comment on recent developments at GM regarding recalls?

MR. RATTNER: So, on the first question, what I was trying to do with these slides, and I wrote a pretty long article for the New York Times a couple months ago saying the same thing with many more words, is to try to inject a note of reality into the discussion around manufacturing in this country, because too often I think you pick up the newspaper and there’s a story about some company bringing a thousand manufacturing jobs back to somewhere in Kansas. And what it doesn’t tell you are two important things: One, that we, as I said, we lost 6 million jobs, we’ve gotten back less than 600,000. In fact, manufacturing employment has grown more slowly since the recession ended than overall employment. So manufacturing as a jobs share of the economy are actually still falling, contrary to what you may think if you read just the newspapers every day. And secondly, when those jobs come back, they often come back at much lower wages. It takes cutting wages in order to get those jobs.

So for example, when Volkswagen opened a new plant in Chattanooga a couple of years ago, they paid their workers at that time – they’ve raised it a bit since – this is the one where they had the whole discussion about unionization, you probably were following that – they paid their workers $14.50 an hour. A typical old school, old line General Motors worker – or Chrysler or Ford – gets paid about $28 an hour. Fourteen dollars and fifty cents an hour is $30,000 a year. Remember I said that median incomes are $50,000 a year. So these are not really even middle class jobs. So that’s what it’s taken.

So all I want to say is I think being in manufacturing is great. I think Germany certainly is still very important in manufacturing for reasons we can talk about, but I think we have to be realistic that these jobs are not going to be as numerous as they were, and they’re not going to pay as much as they did. And manufacturing, as a share of this economy, at best may stay at its 12 percent – may well continue to go down. But it isn’t going back up to 24 percent or any of those other numbers that we were once at.

On the second question, on the GM recall – the issue – the problems they had were before we got there, and the recall is after I left. So we happily – none of this came up on our watch. There’s a criminal investigation underway. I really don’t think I should be talking about that, especially since I don’t know anything about it, and we’ll all watch it unfold together.

QUESTION: (Inaudible) talks about something about U.S. housing markets, which seems – (inaudible) in U.S. economy.

MR. RATTNER: I’m sorry. The U.S. what?

QUESTION: Housing market.

MR. RATTNER: Housing market?

QUESTION: Yeah.

MR. RATTNER: Yeah. You mean just – anything in particular?

QUESTION: Yeah. Housing market, there seems to be an important push for the U.S. economy. What do you think about it in the future?

MR. RATTNER: Yeah, actually that’s – I didn’t bring that slide, but there is a slide. Housing has been – when you look at those growth numbers, housing, which means construction, basically, of houses, has been an important part of the economic growth in the last few years. We – everybody knows the story: The housing market became a bubble, the prices were too high, too many houses were built, you had a crash, not very many houses were built, and now you have – you’re in a situation where supply and demand are in reasonable balance. Housing prices are going up. I think they’re up 12 percent year over year on average. They’re not going to continue to go up that fast. Housing construction has resumed. And so I think housing is now in a relatively normal balanced place where it will be a contributor to the economy. It’s not the biggest part of the economy; it’s a relatively small part of our economy. But I think we’re now in a fairly normalized housing environment where we’ll have some continued house price growth, we’ll have home construction, but I don’t think we’re going to see these wild swings that we saw a few years ago.

QUESTION: Ying Gou with (inaudible). A follow-up question. The House and the Senate just reached an agreement to wind down Fannie Mae and Freddie Mac. How do you interpret the impact of this move on the housing market?

MR. RATTNER: Well, first, what they announced, which is an important step, was an agreement between the Republican and the Democrat who are at the top of the Banking Committee on the Senate side. So that’s one piece of a big puzzle that you still have to put in place in order to get a bill passed and actually wind down Fannie Mae and Freddie Mac and get something else in its place.

I thought the proposal was very constructive. I think everyone who is thoughtful about this issue recognizes that the federal government will always have a role to play in housing finance that you want to maintain – in a similar vein to the last question, in order to maintain stability in the housing market, you have to be sure there’s a kind of lender of last resort and somebody who’s there to keep finance going if the private sector stops. And that’s really why Fannie and Freddie were created in the first place.

And – but on the on the other hand, we’re in a situation now where Fannie Mae and Freddie Mac are providing something like 90 percent of the housing finance. And the way those business were structured, which were this sort of crazy public-private partnership, was what led to a lot of the problems we had. They had all the wrong incentives. The structure was terrible. I can go into more detail about that. And so they need to be wound down, and I think the idea that’s at hand where the government would be a kind of guarantor of last resort is the right direction that we should be going on our housing program. But I would not hold your breath until it is passed. I think there’s still a long way to go.

QUESTION: My name is Louise, and I’m with the daily newspaper in Denmark, Borsen. What do you expect out of the midterm elections, and do you think that might change your outlook either way, up or down? Thanks.

MR. RATTNER: So there was an election yesterday in Florida for one House seat and I think the – I’m not a political consultant, but I think the general takeaway was it was a better day for the Republicans than for the Democrats. It was a seat that could have gone either way. There were – you had two candidates that weren’t perfect, but at least were both in the zone of reasonableness, and the Republican won. And I think that if you look at the polls and things, it does suggest to you that the Republicans, for all the mistakes they’ve made, are probably playing a somewhat stronger hand than the Democrats. It seems to me quite unlikely that the Democrats will take back the House of Representatives. I mean, I’m a Democrat. I hope they do. But I think it’s relatively unlikely.

It is, as you know, I’m sure, relatively conventional for the party in the White House to lose seats during a midterm election. It actually – in 1998, under Bill Clinton, it actually gained seats, and I think there was one other time they did, but it’s very rare. So normally, they lose some seats. So that’s where you start from. So I think the House will stay Republican.

The problem in the Senate for the Democrats is that they’re – of the 34-or-5 senators who are up for reelection, seven of them are Democrats in states that President Obama lost last year, so states like North Carolina, Louisiana, places like that, Montana. And so you’re – the people who are running there are basically running a little bit up against the grain. And so I think the general expectation is that the Democrats will lose seats in the Senate, but I don’t think anybody knows, and it’s not even knowable, that they will – that they would lose control of the Senate. I think that seems unlikely.

Look, I think our system of government, with all of our checks and balances, means that when you have divided government like this, and the Republicans control part and the Democrats control part, it is harder to get stuff done. And I don’t really see anything likely to happen in this midterm election that’s going to change that. As I said, President Obama is still going to be President for two more years. The Republicans are likely to still control the House. Whether the Democrats or the Republicans control the Senate isn’t going to break the stalemate, and I think we’re still essentially in a stalemate situation.

If the election – if the result of the election is outside of the kind of normal boundaries that I just described, then people will say okay, the voters have spoken and now we should go this way or we should go that way. But if it’s within those kind of boundaries, I don’t think it’s going to push the Congress or the White House to suddenly go in some other direction.

QUESTION: (Inaudible) talk about whether (inaudible) would lead to sort of less support for the extreme right (inaudible) businesses and maybe more moderate Republicans (inaudible)?

MR. RATTNER: I think that is happening. I think that – and this is fairly typical – that when a party is out of power, or is more hungry for power, they are more disciplined about who runs for what office and making sure their candidates are plausible. And so what you saw happening over the last few months was a big effort by what I’ll call the Republican establishment, the more senior Republicans, the ones who weren’t quite as extreme in their views, trying to prevent the more extreme Republicans from winning some of these primary contests. And so you saw the other day in Texas Senator Cornyn won his primary election against a very, very, very conservative challenger. And I think you’ll see as these primaries unfold over the next few months, I think you’ll see the, quote, “establishment Republicans” typically getting the nomination and the more extreme Republicans not.

So I don’t think – I’m not saying the Tea Party has been destroyed. I’m not saying they’ve disappeared. I’m not saying that the whole world has changed. I’m just saying the Republicans are very much in the frame of mind at the moment that they want to win some elections, and they don’t want to be the bad guys. And so they’re trying to be more – to have more of a broader appeal. And if you watched or were we’re at the CPAC conference, the Conservative Political Action Committee conference late last week, you saw that even senators like Ted Cruz and Rand Paul, who are very, very conservative by any measure, were attempting to be broader in their appeal and to be reaching out to many of the groups that they have not had any support from in the past.

I think at the end of all this, the public is going to get past sort of the fancy words and is going to start looking at the proposals and the policies. And that’s where the Republicans really haven’t moved very much and where I think they have a challenge in getting minority voters, Hispanics, women, all these different groups, to support them. And as you know, the demographics in this country are moving that way. And so that’s something the Republicans are certainly well aware of, but it’s not so easy to change. And that’s the debate they’re having within their own party.

MODERATOR: Astrid (inaudible).

QUESTION: Astrid Doerner with Germany’s Business Daily Handelsblatt.

MR. RATTNER: I know (inaudible).

QUESTION: (Laughter.) Thank you. During the bailouts of GM and Chrysler, there was a protection installed that for liability reasons, everything that happened before the bailout remains with the old companies. Can you explain that a little more, and what that means, like, with today’s – what is left of old GM and who is there to pay if anything were to happen there?

MR. RATTNER: So it is typical – not typical – it is the rule in bankruptcy that after you’ve reorganized a company in bankruptcy, all the previous debts and obligations are either paid off or eliminated or they go away. So, for example, in the case of GM, after the bankruptcy, the – some of the debt holders got whatever they got, and the rest of what they were owed disappeared. If you think about it, someone who has a car warranty, who has this protection, is just another kind of creditor. They’re just like somebody else that GM, in their case, potentially owes money to. The case of a supplier, they actually owe money to them.

And so what happens in bankruptcy is the suppliers often lose money because they have bills outstanding that aren’t getting paid. The bond holders often lose money because they have debt that isn’t getting repaid. And the fact is in bankruptcy, if there’s a product liability issue like that, it’s not – there’s no further responsibility. That’s just normal. And so what we did in General Motors was actually better than normal in the sense that there were some obligations – future – obligations resulting after the day of the bankruptcy were taken on by new GM, even for cars that had been sold before the bankruptcy, didn’t have to take that on, did. But this group of people whose – who had claims from way back then, their claim resides with old GM.

Now, we’ll see how life unfolds. GM may decide to voluntarily provide some assistance because they want to maintain good relations with their customers. They may – someone may come up with a different legal theory as to what their liability is. And I’m not a liability – I’m not a lawyer, but my understanding is both a) that what we did was, as I said, more generous than most bankruptcy reorganizations, and b) it is what it is. And the answer is there’s not much left of old GM. There is not going to be a lot in old GM to satisfy those kinds of claims.

QUESTION: But there is still an old GM somewhere? Or how --

MR. RATTNER: Yeah, there’s an old GM, I think. I don’t know. I haven’t gone to visit them in a long time, but there’s an old GM somewhere. But remember, the old GM has some assets that we didn’t want, so we left them in old GM. And then it’s got this huge pile of liabilities that we also didn’t want. So there’s a few assets, but there are not going to be enough assets to satisfy everybody who has a claim, whether it’s a product liability claim or whether it’s a supplier or whether it’s whatever. There’s not going to be enough assets to satisfy them all. So that is a problem, and I don’t know how it’s going to get resolved, and it’s not my business anymore.

QUESTION: Lucky you.

MR. RATTNER: Lucky me. (Laughter.)

QUESTION: Thank you.

QUESTION: Thank you very much. My name is Ahmed Fathi. I am with The Economics Channel. With regard to Obamacare, some allegations have been circulating that the – if the Obamacare is applied or implemented, that it’s going to – we’re going to lose jobs, it’s going to raise the cost of creating new jobs, it’s going to raise costs for the existing companies. Where is the truth and the myth in these allegations? Is Obamacare going to benefit the labor market or it’s not going to benefit the labor market?
 

MR. RATTNER: Well, I think you’re talking about two different ways in which jobs may be sort of lost. One way that I think you’re referring mostly to is the idea that you raise costs and companies don’t hire as many people and so on. But the other thing that has been – gotten a lot of attention was a report from the Congressional Budget Office that said something like 2 million people are going to stop working because of Obamacare. So let me take both of those, those two separate points, but they’re related.

Look, on the first point, there are many things that we require employers to do in this country that cost jobs. We have minimum wages. We can debate how much of an effect that has on jobs, but certainly if you had no minimum wage, you would have some more people working then with a minimum wage. Whether it’s a lot or a little, economists disagree, but there’s some amount. We have what we call occupational and safety standards, that in factories and offices you have to do things a certain way and provide protection against injuries and things like that. That costs companies money. And surely, if you had no protections of that sort, companies would hire more – potentially would hire more people. They’d have more profits, anyway, and may hire more people.

So we regularly impose requirements on employers to do certain things that we think are in the national interest. And so requiring them to provide healthcare if they’re above a certain size is only one more thing. And I don’t remember the statistic, but as you know – so if you’re above 50 employees, you have to provide healthcare. Don’t hold me to this number, but I – my recollection, over 80 percent of companies already do that, that you’re not talking about a huge number of companies – 50 employees is actually a reasonably good-sized business. That is not somebody running a corner grocery store. And those people typically already do provide health insurance and are not going to be affected by this.

So my view is, are there going to be some jobs lost because of that, for that reason? Yeah, probably. Is it a lot? I don’t think so. And is it part of running what I believe to be a responsible government that provides healthcare for its citizens? I think yes, so that’s my view on that.

The second one is one that people are very confused about, I think, which is this report about 2- or 2.5 million jobs being lost. That’s not what the report said. What the report said was that 2- or 2.5 million people might choose to stop working because of Obamacare, because they don’t have to work anymore because now they have health insurance. That’s a very different thing. That’s – what they’re saying is that 2- or 2.5 million people are working today not because they want to work but because they have to work because they have no health insurance, then can’t afford to pay for their medical care, and that once you provide this benefit they won’t work. That’s no different than Social Security. If we got rid of Social Security in this country, more people would work, not because they want to work but because they have to work. If we got rid of any – many of – of our food stamp program, of many of our other social welfare programs in this country, people would go back – would start working because they’d have to work. That, to me – that’s not, to me, a great outcome, that you have more people working because the government isn’t willing to provide some basic level of support to these people.

So that doesn’t bother me at all. I think that’s fine. I think that’s part of what we’re trying to accomplish in this country, which is to give people some choices within reason. These 2- or 2.5 million people, they’re not going to go – they’re not going to be in the Bahamas on a cruise. They’re going to be able to, at the margin, not have to work in some relatively low-paying job simply to provide their own medical care, because they’ll be able to participate in Obamacare.

QUESTION: All right. I’m Erik Bergin for the Swedish Daily News. About the income inequality, the President has proposed a sort of minimum wage of $10, and a lot of people are opposing that, obviously, saying that it will lead to increased unemployment and so forth. But what’s your take on that, and do you think that’s the right solution to the problems you were showing before on the slides there?

MR. RATTNER: So a couple points. First, again, as I said before, we can all recognize that there are tradeoffs, and that anyone who says that having Obamacare doesn’t cost anything is kidding themselves, or doesn’t lose a job is kidding themselves. Anyone who thinks that the minimum wage, raising it, doesn’t affect jobs at all is kidding themselves. But, one, the minimum wage today, even if you raised it to $10.10, you would only be raising it back to roughly where it was in the 1960s, when you adjust for inflation. It is very low today because it has not been raised very often in recent years. And two, I think serious economists who have studied this have found that, at reasonable levels, say – nobody – you can’t say exactly what’s reasonable, let’s say $10.10 is reasonable, the number of jobs that would be lost is very minimal relative to the benefit. I think the figure was something like 6 million people that come out of poverty, from below the poverty line to above the poverty line, by raising the minimum wage.

Raising the minimum wage is not the best policy tool that we have, probably, that we have a program that the President just proposed to expand called the Earned Income Tax Credit, where people – so getting back to this point about people having an incentive not to work because of their social welfare benefits, you give them tax credits if they work so that it encourages them to work. That’s a – I think most economists who have looked at that, Republicans and Democrats, think it’s a very effective program. It’s limited now in size. It only applies to people which children, and the President has proposed to expand it to people without children.

I think some of these other policy ideas may be better, but minimum wage is easier for Americans to understand. They get the idea that giving somebody a $10.10 wage, where if you do the multiplication, it’s still – I think it’s $20,000 or $23,000 a year income, it’s not a huge amount of money, is something that is the right thing to do.

So look, my view on this income inequality thing is that income inequality is happening because of a lot of very powerful forces in the world. And as I showed you, it’s not only happening here; it’s happening everywhere, probably in almost every country that’s represented in this room. And we – and our ability to reverse that in a sensible way is limited. There aren’t that many policy changes we can make that would not hurt the economy that would reverse it. And so therefore, my view is that the people who are at the top, who are the beneficiaries of this trend, have an obligation to help those at the bottom, which means more progressive taxation policies, more – not fewer social welfare programs, but more social welfare programs to help the people at the bottom who simply can’t earn a living wage anymore.

So I would much rather see us help those people at the bottom by government playing this role than by doing something that would be destructive of our economy in terms of changing our basic free market approach to how we run our economy.

One more. Maybe there’s no more. Oh, there’s lots more.

QUESTION: So I have another question. I think a month ago, two MIT scholars published book, The Second Machine Age. They painted a rather rosy picture for the U.S. economy in the future, and also they said the U.S. economy is undergoing a transformation. So I’m wondering if you have read the book. Do you agree with their conclusions?

MR. RATTNER: Well, it’s funny, I just got the book, but I got the book because I was under the impression they weren’t so rosy, that they were actually – if I have the book right, that they were really focused on the impact of technology and how technology was going to actually put a lot of people in America out of work. Does that ring – is that --

QUESTION: (Inaudible) to --

MR. RATTNER: Okay.

QUESTION: -- adapt (inaudible).

MR. RATTNER: Yeah. Well, that’s – okay. So what they’re arguing, I think – I will now – I have the book. I just got it. I’ll go read it, because I want to write something about this. What they’re basically arguing, and it’s something you hear more and more of, is the idea that all this technological change is going to put people out of work who don’t have the skills to get one of these highly technical jobs, and therefore will be unemployed. And I guess their rosy part is now if we do all these things with education, like what I was talking about, then everything will be fine. Well, I’m not sure we’re going to do all those things, but there is a great fear in America right now about technological change and the effect that it’s having on the average worker. And there’s a belief – and that’s why I’m surprised at your takeaway from the book, but there is, I think, a belief among a lot of very smart people that we’re not going to be able to – we’re not going to find a way to solve this problem, and that there are going to be – or at least if we do, it’s going to take 20 years, and that in the meantime there are going to be many, many Americans out of work because of technological change taking away their job.

My view of that is the following: One, technological change is – or automation, some people call it – is just another word for more productivity, right? It’s just another word for using machines to help replace some of what people do. That is fundamental to having economic growth. We’ve had technological change and automation for several hundred years in the world, all over the world, and that’s why the world has grown relatively fast, because people – as I showed you that productivity chart, people get more productive. And if you don’t have technological change, then you can’t have economic growth. It’s not possible. And so when you look back at the world from like 1200 to 1600, there was not a lot of economic growth, because there was very little technological change.

So technological change is our friend. We have to have it or we can’t grow. The question is, can you then find other things for people to do so they’re not put out of work? If you go back 100 years, something like 40 percent of Americans worked as farmers. And gradually, we had more machinery, technological change, on the farms. And people worried, what are we going to do with all these farmers? They’re going to have nothing to do. Today 2 percent of Americans are farmers, and we produce far more agricultural product than we’ve ever produced before because of technology. And all those other people found other things to do. So to believe that this time will be different, you have to believe that this time we’re not going to find anything else for those other people to do.

In the course of researching this piece that I’m going to write on this subject, I found a cover of a magazine in this country – Life magazine, which you’ve never heard of because it’s gone a long time – from 1963, so exactly – almost exactly 50 years ago, and it basically said in the cover, in big letters it said, Automation is Taking Our Jobs Away, or something like that. Well, that was right before one of the greatest jobs booms we’ve ever had in this country, where we did have a lot of automation but where we found other things for people to do.

So I guess I agree with the rosy scenario in the sense that I think we will find other things for these people to do because we have to, because we have to have technological change, because if we don’t have technological change, then we will have no economic growth, and that’s a really bad place to be.

So on that note, I think I’ll conclude. Okay.

MODERATOR: Thank you so much. I just want to remind everyone that the views expressed by Mr. Rattner were his own, not those of the State Department. Thank you again.

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