SPP: First Jeff I just wanted to get a little bit about your background. I know you’re a professor at Harvard and I kind of wanted to hear how you got there and what it is you’re most interested in and kind of things like that; your path to today.

Jeff: Well I’m a Professor at Harvard as you say. My undergraduate and graduate work was done at Columbia University in New York. I’m trained as a Political Scientist but since an early age, certainly an early academic age, I’ve been interested in the intersection between politics and economics. The field that I’m in broadly put is generally thought of us as political economy and within that the politics have been national economics.

Back when I was a graduate student people doing political economy were almost exclusively in political science, but in the last 15 or 20 years there’s been a proliferation or an expansion of interest in political economy and I’m an economist as well. So now it’s a pretty interdisciplinary field.

My particular interest within political economy, are on the politics of international monetary and financial relations, money, exchange rate, debts, international investments, and things along those lines. And that’s where most of my academic work has been done. As I sometimes say “Crisis are my business and these days business is very good.

SPP: So I guess speaking of crisis we’ll jump right into the main reason we’re talking to you is because we want to learn how to fix this crisis and you talk in depth about it in your new book “Lost Decades”, which I have to say is an awesome book. I loved it because I’m a finance manager. I understand money but I don’t really understand the politics behind it. So it kind of puts it all together and it was just really well written for anyone to understand.

I realized that it takes many pages and many words to explain everything that’s happened, but before we get into some more direct questions I was hoping you could give us kind of your elevator pitch.

Jeff: Right.

SPP: Your quick synopsis of where we are economically as a country and how we got here.

Jeff: Right. So thanks for the kind words of course. It’s wonderful to know. The reason we wrote the book really is to try to bring some ideas that we thought were straightforward and really were current among scholars who work in these areas to a broader public because we didn’t think they were getting the airing that they should. We didn’t think that this point of view, this really understanding of the crisis was being talked about and understood in the broad general public. There was a focus on individual firms, individual people, individual decisions, but not on the big picture.

And that takes me to the elevator talk as you call it, which is the way I think to think about this crisis is as a classic debt crisis, such as we might think of a debt crisis in Mexico or Brazil or Turkey or Russia or Thailand. The United States like those other countries borrowed very heavily for a long period of time between 2001 and 2007 or between half a trillion or a trillion dollars a year from the rest of the world. And much of the money that was borrowed was not used very wisely. It was used to fund budget deficits that were really not economically justified, and it was used to finance household consumption, much of which went into a financial and real estate boom which became a bubble.

So in a way one way to think about this for a century American economists and others, the IMF and others, went around the world telling developing countries, telling poor countries don’t borrow unless you’re going to use the money for productive purposes. Don’t run big budget deficits and just borrow the difference so that you don’t have to raise taxes. Don’t borrow for current consumption. If you’re going to borrow, borrow to increase the productive capacity of the society. In the last 10 years we showed that that was pretty good advice because we ignored it and we got ourselves into terrible trouble. So that’s the quick and dirty, but I can develop that in more detail if you want.

SPP: Oh absolutely.

Jeff: Really to go back to, not the beginning but to go back to where the current – so let’s start with the title of the book. The title of the book is “Lost Decades” with an s, which may sound pessimistic but as we know a pessimist is just a well informed optimist. We hope that we’re wrong about lost decade that is plural. We know that we lost one decade, that is the first decade of the century was lost because whatever growth there was in the first seven years was wiped out by the recession, but let’s go back and try to understand what happened there.

It’s hard to remember but 11 years ago in 2000-2001 the federal government was running a massive surplus. After very difficult 1990s and a lot of bipartisan wrangling, and eventually agreement, the cutbacks and spending and increases in taxes led to about a $240 billion dollar surplus in 2000. And in fact the Congressional Budget Office at that point projected that it’s then current trend by the year 2006 the entire federal debt would be paid off. In retrospect that seems an amazing thing and it also seems like it might have been a good thing. At times some people thought it was not such a great idea for some strange reasons. Not strange in the sense they’re wrong but reasons that, it’s hard to remember now. Alan Greenspan thought it wasn’t a good idea because if the federal government runs a surplus and buys that gold instead, once it does that it has to start saving money. And the reason it starts saving money is that we know that 20, 25 years ago we’re going to run out of money for things like Social Security and Medicare and Medicaid. But what Greenspan was concerned about is if the federal government is saving money it has to buy assets. He didn’t like the idea the federal government and surplus going into, say the stock market or the bond market and buying shares in private companies. So he thought it was a problem.

Then some people thought it was a problem because if the federal government ran out of treasury securities the way the Fed runs monetary policy in the US is that it buys and sells treasury securities on the open market. If it runs out of treasury securities it would have a lot more trouble running its monetary policy. So there were people who actually saw this surplus as a problem and there was some discussion about this in 2000-2001. But as we know in retrospect this problem was solved with a stroke of a pen by George W. Bush with the tax cuts of 2001 and then 2003. Those tax cuts are engineered the biggest single turnaround in the federal government’s fiscal position in peace time American History from about a surplus of $240 billion to a deficit of well over$400 billion.

We financed most of that turnaround of that deficit by borrowing it from abroad. We borrowed hundreds of billions of dollars a year from overseas to finance this budget deficit that resulted from the tax cuts. In addition to leaving the budget deficit it stimulated the local economy, domestic economy. So big government engineered these tax cuts, people have more money in their pockets, they’re spending more. That then was allied with a very, very loose monetary policy. The Fed pushed interest rates down to 1%, very, very low levels in 2002.

Now remember 2001 we had a short recession and it was also 9/11. So at the economic level there was some concern about the recession and 9/11, but the fiscal deficit to government spending was meant to try to stimulate the economy, and the lower interest rates were meant to do that. But the low interest rates persisted for a very, very long time until the end of 2004. It was the longest period of such low interest rates, again in modern peace time history. And so you have interest rates of 1%, the Feds interest rates of 1%, when inflation is 2 1/2% or 3%, which means that in economic terms it’s called negative real interest rates, you’re essentially paying people to borrow.

So you have the government injecting lots of money into the economy borrowed from abroad, and then very, very low interest rates so that there’s a big incentive for private households to borrow, which they did. So American households started borrowing massively, they didn’t know it at the time but most of the borrowing they were doing was supplied by foreigners. Foreigners were the people who were supplying this half a trillion to a trillion dollars a year was being used for the federal government to borrow and for households to borrow.

So when the country, again going back to the general process of debt, when the company borrowed from the rest of the world there’s some things that pretty much always happen. You got to spend the money on something. So one thing you spend the money on is hard goods like cars and steel and computers and clothing and footwear. So we get a big trade deficit, we start borrowing by lots and lots of imports from the rest of the world. Our imports from the rest of the world skyrocket after 2001-2002. So that’s the first thing that happens and that’s typical of a borrowing spree as you might call it.

The second thing is you spend a lot of things that don’t get traded across borders because actually most of what people consume are not things that enter into international trade. People consume restaurant food and entertainment and healthcare and education and housing, in fact the single biggest component part of the average American household’s consumption basket is shelter, about a third of expenditures. The money that’s coming into people’s pockets, both because of the tax cuts and because of the direct borrowing from abroad, is being spent very heavily on the use non-traded services like entertainment and healthcare and education, and especially housing.

So starting in 2003 as this process gets going there’s a big upsurge in the price of all these services, especially housing. So the money comes into the country, gets spent a lot of it on imports and a very large portion of it on services who prices arise, and those services in particular are concentrated in real estate and in finance. So you got a debt finance expansion of consumption so people are consuming more and more based on this borrowing from the rest of the world. This debt finance expansion of consumption becomes a boom. The boom eventually becomes a bubble, especially in housing and finance, and the bubble burst. And that’s what takes us to 2008. And right now we’re left with picking up the pieces.

Now one of the reasons I think it’s important to develop this understanding of the crisis as a classic debt crisis is that we know from many, many dozens, even hundreds of past experiences the debt crisis are different than other crisis. So we often think of recession as a typical cyclical recession where every five to seven to ten years the economy goes through a slump and then it recovers. But a debt crisis is different. And again as I say we know this because of the 150 or so debt crisis that we’ve studied over the past 100 or so years. A debt crisis is different for two reasons, economic reasons and political reasons, excessive reasons, economic and political.

Economically a debt crisis is different because the aftermath of a debt crisis the country has a debt overhang, as we call it, that is there’s this massive accumulated debt that has to be dealt with, it can’t be ignored. And creditors, that is the people that are owed the money, now have all these bad debts on their books and they got to figure out what to do. They got to restore or rebuild their balance sheets. They’re not willing to start lending, especially to risky borrowers, as long as they’ve got all these bad debts on their books.

So from the standpoint of creditors there’s this great reluctance to make new loans in the aftermath of a debt crisis and that recharge recovery. From the standpoint of borrowers, that is the one who owe the money, the debtors, there’s a similar problem, which is you’ve got all these debts and they’ve got to be paid off. Paying off this accumulated debt, especially when times are tough means you have to spend less, you have to save more, and you’ve got to save up your money so you can try to service your debts. So on the debtors side, people are very reluctant to spend. And so recovery from a debt crisis economically is very, very slow.

But then there’s the political side. So the economically we know that the recovery for a debt crisis is very, very slow and very difficult, the political side in some ways is even more worrisome because debt crisis typically always turn into major political conflicts. And the reason is that the most logical thing for people to do in the aftermath of a debt crisis in the political arena is argue over who’s going to pay for it. Who’s going to bear the burden associated with the dealing with this debt overhang? Is it going to be taxpayers, is it going to be government employees, is it going to be bankers, is it going to be beneficiaries of government services, workers, managers?

SPP: So my next question was going to be debt crisis is almost worldwide now because there is debt crisis going on in Europe as well. Is that going to be a huge hindrance on the recovery of America or are we going to be able to get around recovering? Because you mentioned lost decades and when I think about that I see this taking longer just because of the fact that what’s going on economically worldwide as opposed to just in the US.

Jeff: Well there’s no doubt that the fact that this is a global crisis is bad news for us and the rest of the world. So one of the things, one of the distinguishing characteristics of this crisis is not only how deep it’s been, it’s been the most serious crisis since the Great Depression of the 1930s, but how global it’s been. I mean often there are have been recessions where the US has been struggling and Europe’s been doing all right or Europe has been struggling and US and Japan has been all right. But here we have a circumstance where the three major pulls of the developed world, Japan, the US, and Western Europe are all doing very poorly.

And that’s bad because although there are many other countries in the world those three regions, North America, Japan, Western Europe account for the vast majority of the world’s economic activity. We can’t rely on potential customers in Europe to pull us out of the recession and they can’t rely on us. So there’s no question that the global nature of the crisis will prolong the misery. It’s also the case that just as we have a debt crisis we owe a lot of money to the rest of the world. The fact that within Europe there is a debt crisis means that they’re mired in the same kind of 4economic and political morass.

There’s a more tangential thing, which is that many of the debts, some of the debts that are causing problems in Europe are owed to American financial institutions. Just this past week a major American financial institution, MF Global run by John Corzine went bankrupt because of its exposure to European debts. So there are particular aspects of the American, or particular elements of the American financial system that are in particular trouble in specific trouble because of the European situation. But the broader picture is with the entire industrial world in meshed in very slow growth, very high unemployment, in the case of Europe probably about to fall into another recession. There just aren’t enough real engines of economic growth out there to pull us out of this thing with any reliability.

SPP: As I understand it globally, this is way above my pay grade, but the amount of wealth doesn’t change. I mean it just changes hands. Is that a fair assumption?

Jeff: Well I suppose so it changes hands in the sense that if I owe you a $1 million dollars then you default on that loan now I no longer owe you a $1 million dollars, but there are real effects of these things.

SPP: Yes that’s what I was going to say, where is all the wealth now if it’s not in these industrialized nations?

Jeff: Well the industrialized nations still have most of the world’s wealth, but what’s happened is that we’ve had a terrible shock. So trillions of dollars of wealth in the US, I won’t say disappeared, but the wealth of the country declined dramatically when stock prices went down and when housing prices went down. And people have this idea that that’s somehow fictitious. It’s not fictitious.

So imagine on the upswing the average American family your home is worth $150,000 dollars and you’ve got about $150,000 dollars in retirement savings this is around 2000. And between 2000 and 2007 your home appreciates to $250,000 dollars and your retirement savings go up to $250,000 dollars. You now are richer and your behavior changes. You can refinance your mortgage, you can take money out of your house, you can maybe save less. Because you say “Gee my retirement fund is really well-funded. I don’t have to worry about putting more money into it that can spend more.

So you actually change your behavior because you feel like you’re wealthier. And you are wealthier, your house, the market price your house is going up, the market price of your retirement savings has gone up. Then all of a sudden there’s a shock and you’re back down to a $150,000 home and a $150,000 retirement savings, and you again have to change your behavior. Now you have to save a lot more. Now you can’t spend as much. So there is a real impact of this wealth. I mean it seems strange to think of wealth disappearing. But what else would it mean if you had, say $100,000 dollars in stocks and the stock price goes down? It has a real impact on how rich you are.

SPP: You mentioned we went into a deficit because of the tax cuts and then war spending under Bush. Another thing that I guess has plagued us is the rising cost of healthcare and then the demographics of just the way that the population through the United States, like we’re getting older and those people are requiring healthcare. And healthcare is about I guess what half government spending or maybe a little bit less. Once we start to level out, again I guess in age, do you see that the healthcare, social security stuff will start to get fixed, or do you think that this will still be a problem as we move throughout the years?

Jeff: It’s not going to fix itself.

SPP: Right.

Jeff: So there’s two aspects of this. One is demographic and the other is cost. The demographic one is that as you say we have an aging population. Now we don’t have as quickly aging or as aged a population as many European countries, largely because of immigration. I mean immigrants and their families tend to be younger. So one of the reasons that our situation is not as dire as that of, say many Europeans countries is that we have younger immigrant groups. The population is aging and so if things keep going the way they are now the money that is contributed to pay for Medicare, Medicaid and Social Security will not be sufficient to support the generation that retires and needs Medicare, Medicaid and Social Security 15 to 20 years from now. So that’s the first thing.

For Social Security, well let me just say the second thing. The second thing is, which doesn’t apply to Social Security, is that Medicare and Medicaid which are of course about healthcare, face the problem of dramatic increases in the cost of providing healthcare. So even if we were covering the same number of people with Medicare and Medicaid we’d be realizing 8%, 10%, 12% increases every year because the cost of healthcare is going up 8% or 10% or 12% a year.

So there are two interrelated problems. The first is that the number of people that have to be covered by these programs is increasing. And the second is the price of or the cost of the healthcare portion of the program is increasing. Those are two somewhat separate problems, not entirely separate. The reason it’s perhaps useful to make that separation is that Social security is less of a problem than Medicare and Medicaid because Social Security doesn’t have the healthcare cost built into it.

Social Security could be dealt with in a variety of ways, none of them particularly popular politically but not impossible. So you could tax Social Security benefits at a higher rate, people could retire a couple of years later, there are a variety of relatively straightforward fixes to Social Security. As I say, none of them politically popular but it’s not that difficult an issue.

Medicare and Medicaid are more problematic because they require some addressing of the problem, which no one really I think has a good handle on as to why healthcare has been increasing in cost so dramatically in the US. I mean it’s not just that it’s increasing in cost it’s that we seem to be getting less bang for our buck in healthcare than a lot of other countries.

SPP: Right.

Jeff: So we spend more of our GDP on healthcare than anybody else, but we don’t get better results than anyone else. So there are real questions as to whether there is waste in the system? Could it be designed better? Why is it so expensive? What can we do to reduce its cost to us as a society? Those are enduring problems. Those aren’t problems for the next two years those are problems for the next 15 or 20 years, and they have to be addressed. We cannot continue to underpay for social programs that people want.

Now one thing I would say here it’s a lot of talk about fiscal responsibility and everybody’s for fiscal, I mean who could say they’re not in favor of fiscal responsibility it’s like motherhood and apple pie, but fiscal responsibility doesn’t mean that you have to cut back necessarily, what it means is that you have to decide as a society to pay for the things that the society says it wants.

So if say we want the certain level of military spending or national defense we got to pay for it. If we say we want a certain quality of infrastructure we have to pay for it. If we say we want a certain level of social programs, Medicare, Medicaid and Social Security, we have to pay for it. And we’ve not been doing that. For the last 10 years we’ve not been paying for the things that people say they want, and that’s not tenable.

SPP: I actually had a different question I wanted to ask you but now that you say that, that point literally boils my blood because I agree with you. Everyone you talk to is going to say “We need to spend a large amount on military, maybe not as much as we do but enough to keep us safe. And we need to fund Social Security, or at least help out the older people in society.” And we’ll say all these things but then you say “Okay, well let’s raise taxes” and it never or almost never gets a positive response.

Jeff: Of course.

SPP: And that drives me insane. So especially because…

Jeff: I think it was Edward Dirkson the Senator used to say that the general American attitude was “Don’t tax you, don’t tax me, tax that fellow behind me the tree”.

SPP: Right. Exactly. And when you look historically I believe we have historically low tax rates why is that? Why can’t we convince people that we need to raise them? I mean even smart people I talk to say “Raising taxes won’t help.” And I’m not an economist or anything, it just seems like of course it will help. So what’s your response to that?

Jeff: Well so I think it is true. The last time I looked at the numbers I think our tax take as a share of GDP is lower than it’s been since the early 1950s. So we are not a heavily taxed society compared to others, including other societies that most people would think of as being. We’re not talking about Sweden or something. So we’re not that heavily taxed as a society.

But you asked I think in many ways a more troubling and difficult question, which is, why is there such resistance. And I guess I have in a way a cynical or perhaps troubling view of this which is our society is divided in many ways. Perhaps one of the best ways to think about it is, is to think about what’s happened in the aftermath of the crisis. So the crisis had different affects on different people.

And one way of thinking about this which we present in the book, is think of if the worse of the crisis is when the unemployment rate is about 9.9% almost 10% we think of the labor force divided into thirds. The bottom third, the poorest third of labor force, which is workers and dependents that’s 100 million people .That’s not just a few people. But the bottom third the unemployment rate there was 17% or 18%. And then if you add on people who would like to work full time bug couldn’t find full time work so they were working part time, and people who had been looking for work so long that they’ve dropped out of the labor force, so called discouraged workers, the unemployment plus underemployment rate rises above 35%. It sounds like a depression.

Then you look at the top third, the wealthiest third of the labor force, again about a 100 million people and their dependents. And unemployment there is 4% and unemployment plus underemployment is 8%. So you have one segment of the population that actually things are not so great but it’s not that serious a crisis. And then another segment of the population that is really, really struggling. And there are people who will say “Why should I pay more taxes to deal with the crisis that is not really that severe and have a severe effect on me?”

I mean by analogy think of the European context where Germans say “Why should we pay higher taxes to help out the Greeks?” To some extent I could say there’s a similar potentially, similarly regionally differentiate here. Here in the greater Boston area the unemployment rate is around 5%, housing prices have gone down a few percent, things are actually pretty good. In Las Vegas unemployment I think is 15% and housing prices have gone down about 50%. More than half the homes in the Las Vegas area are underwater; very few in the Boston area. So I might say “Well why should people in Massachusetts pay to bailout people in Nevada?

So I think part of the problem is the notion that increased taxes are going to people who aren’t me. Why should I pay more taxes for people who aren’t me? And then I think it’s a very, very shortsighted and narrow minded view for two reasons. First of all, a lot of the taxes that we’re talking about, a lot of the needs, at least the needs that I feel we’re talking about, are not about putting money in the pockets or another group, they’re about things like building up the infrastructure, building up the educational system, building up the healthcare system, that will increase the productivity, the economic efficiency of the country as a whole. We have a crumbling infrastructure and an educational system that has a lot of problems, and if those continue everybody’s going to be worse off.

And then the second thing is that there is such a thing as the desire that I think as a society, at least I believe as a society, we’ve made certain commitments to the least well off not to let people starve in the streets. And for that matter also to protect our borders from whatever threats there may be. Those are things that I think if we have decided politically we are going to do we have to decide politically we’re going to fund.

SPP: Right. And the thing you mentioned about the difference between Boston and Vegas. I mean we’re in DC now and a lot of my friends work in some form for the government or contractor, or something like that, and we’ll say some have even joked, “What recession?” Because it’s so recession proof that I think that kind of blinds you to the greater scheme. So I understand that as well. I did want to ask you one thing, in my opinion kind of capitalism means working within the confines of your market and the law to exploit inefficiencies, efficient market theory and all that.

So when a CEO pays low wages to his employees but take a huge salary, or when someone who makes $30,000 grand a year, buys a half million dollar house, or when a trader leverages to get a bigger bonus, are these the people that are at fault? I mean do we need to ask these people to be more socially responsible? Because that’s pretty tough to do and they’re going to be just as justified in saying “Look I followed the rules.”

Jeff: Right.

SPP: Or do we instead blame the policymakers who deregulated this and allowed for this to happen?

Jeff: Yes. Well I think that’s a very important question and to some extent it involves morality or ethics and I think individuals have to follow their own guidance on that. But if I’m thinking about it from the standpoint of the society I think the real problems typically are with the incentives not with individuals. I mean individuals some of the more sensationalistic coverages of the crisis do things like point to greedy bankers snorting cocaine, and things like that.

Well my guess is that there’s always been a lot of greedy bankers, and maybe there’s always been a lot of bankers snorting cocaine, but that didn’t lead to a crisis. For the crisis to take place in the way that it did the incentives had to be wrong. That is it had to be the case that policy had changed so that people were doing things that might have been rational for them as individuals but that imposed a terrible cost on society.

And so an example would be you talked about, forget about executive compensation for a moment that’s a somewhat different issue, but the leverage, all the borrowing that went down in this period. There were a series of decisions made that affectively made it incredibly attractive for people in the financial sector to lend more than they should have and for people in the household sector to borrow more than they should have. So I already mentioned monetary policy. Monetary policy was essentially providing potential borrowers with interest rates, close to zero and when interest rates are close to zero. Guess what people are going to borrow?

By the same token financial and regulatory policy was making it ridiculously easy for financial institutions to extend loans, well beyond what I think is now clear, what’s prudent level. There were decisions made in 2003 and 2004 to allow financial institutions to take on much riskier loans than they had been allowed to do before, and to take on much more of them than they had been allowed to do before. So the financial institutions are trying to make money. How do you make money as a financial institution? You don’t make money by not lending it out you make money by lending it out and you make money by lending out to every riskier borrower’s because the riskier borrowers pay you more money.

Now why does that make sense? It makes sense from a financial institution standpoint if you know that if you get in trouble the government’s going to bail you out. So if you put together the idea that monetary policy is making it ridiculously attractive for households to borrow, even when they probably shouldn’t. Regulatory policy is making it far too easy for financial institutions to lend money out and take on very risky loans. And regulatory policy is also providing an implicit or explicit guarantee to the banks that are seen as too big to fail, then you have a formula for disaster.

SPP: I’m sorry I know we’ve gone over on time. My listeners will not forgive me if I don’t ask. So what’s the solution? At least how do I want it in your book? I’m not holding you to the fire but I’m just wondering what would you recommend?

Jeff: It’s very important to separate out the short term from the long term. I think we have some very serious short term problems, largely because the recovery is so sluggish. We are now two years after the end of the recession, or the alleged end of the recession, we still have 9% unemployment. And the average worker today – in most recessions since the 1930s when people lose their job they usually get a new job within three or four months. In this recession it’s been nine or ten months and it’s getting worse.

Every year for the last three years three million more Americans have fallen into poverty, so we have some very serious problems. The recovery is in trouble. It’s very slow. And that’s the short term issue. So I think the first problem is how do we get the economy going again so that we have a modicum of economic growth and can get back on track. And I have a couple of answers there and I’ll come back to that, but I also want to say that it’s important to separate that short term problem from the long term problem that seems to be getting a lot of attention. I think in some sense an unwarranted attention now.

People talk about our fiscal problems as if they were a short term problem. Our fiscal problems that is the fact that we will have over the next 20 years very, very large deficits, so we have to deal with them. That’s not a problem for this year or next year. If we try to balance the budget tomorrow we throw the economy into a depression. So in the long run we need the fiscal responsibility we were talking about before. In the long run we need to access what the country is willing to pay for and what we need to pay for, in national defense, in healthcare and education and infrastructure and things like that. That’s the long term solution. So I just want to be clear about that distinction because, unfortunately it is rarely made as a popular debate and people say “Oh we’ve got all these deficits over the next 20 years, let’s cut back immediately.” And that would be a big mistake.

Going back to the short term problem I think there are two big issues. Again one’s economic and one’s political. The political one is that we seem to have become mired in a political environment in which, whether it’s due to partisan politics or the fact that we seem to be eternally in an election year, no matter when it is we always seem to be in election season, or the polarization of society, or some of the other issues we’ve talked about. It seems to be extremely difficult and increasingly difficult to get agreement on how to confront what really are national problems, like slow growth, high unemployment, drop creation, things along those lines.

So there’s a political problem here that I think has to be addressed. A political problem associated with the unwillingness or inability of the American political system to work out a consensual attack on what really is a series of problems for the country as a whole. So that’s sort of backdrop. More specifically, and I know you’re looking for a silver bullet or a stake to drive through the heart of our current short term economic problems, I’ll got out on a limb and give you a one word answer, which is not a solution but a step towards a mitigation of the problem, and that is inflation. The biggest problem we face as a society is this debt overhang. We have massive debt, which cannot be serviced as they were contracted. There are 30 million households in America that own more than they can reasonably be expected to pay back. And that is bad, both for the households and it’s bad for the financial system, because the financial institutions are holding onto lots of bad debts and are desperately trying to struggle their way through this very difficult financial environment.

So if we were talking about Europe we’d say “Well they need to restructure those debts and reduce the amount that Greece owes to Germany, or whatever it might.” We’re talking here about tens of billions of households. You can’t do that you can’t go and renegotiate every mortgage in America. But that’s what inflation does. What inflation does is it reduce the real debt burden because your debts are in nominal terms, nominal dollars. If you run 3%, 4%, 5% inflation for a few years you reduce the real debt burden.

And I have to say before anybody objects that I’m being a crazy radical, that this is not just supported by crazy radicals. That is people like Tim Rogoff, the former Chief Economist of the IMF, was a lifetime conservative Republican and worked in the Bush Administration. People like Greg Manique and others with impeccable conservative credentials have said something very similar. That is that several years of moderate inflation, 3%, 4%, 5%, would dramatically reduce the burden of this debt. And the principle drag on the economy at this point is the debt burden. If we could get real interest rates negative so that people would start spending so that the debt burden would start going down, then that would help us, it wouldn’t do everything but it would help us towards a recovery.

And so in the short run I think that what we need is more stimulative monetary policies, I would say more stimulative fiscal policies as well but politically that seems pretty much impossible or close to impossible. And in the longer run we need to confront the broader issues associated with getting our house in order; getting our economic house in order. I don’t know if that answers your questions but it’s my shot.

SPP: No that’s incredible. We’re not saying everybody has to believe it but at least it’s a theory by somebody like yourself and also some other smart people. So that’s what we’re trying to do here is just learn from the best we can.

Jeff: Good.

SPP: Jeff I really, really appreciate your time. Like I said, I know we went over but sometimes we get excited and we just keep talking. Jeff: Well you know us professors we like to talk, so you don’t have to apologize. You give me a bully pulpit and I’ll use it.

SPP: Yes. No we like that. And again your book “Lost Decades: The Making of America’s Debt Crisis” is phenomenal. Congratulations on that. We will put a link to where you can buy your book on Amazon and whatnot on our Web site, along with the post, which is www.smartpeopelpodcst.com. I really appreciate you being on this show.

Jeff: It was my pleasure. Good talking to you.

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