This article first appeared in the St. Louis Beacon, March 19, 2009 - Even as the nation fixates on the employee bonuses handed out by taxpayer-bailed-out insurance giant AIG, the key to fixing the nation's economy still hinges on getting the banking system functioning again, says Alice Rivlin, a former vice chairman of the Federal Reserve and budget director for President Bill Clinton.
"There's a very big backlash, and it's fastened on the AIG bonuses,'' said Rivlin, who will deliver the keynote address Friday at a Washington University conference on the federal budget and taxes. "The bonuses are sort of symbolic. They aren't that important in themselves, but they're a symbol of the anger of the public and the Congress at the whole Wall Street out-of-control mess that brought us to this point.''
Rivlin, now a scholar with the Washington-based Brookings Institution, understands the outrage over AIG -- and federal bailouts, in general -- but she warns that we're all "in the soup'' together.
Since leaving the government, Rivlin has been an active proponent of getting the federal budget deficit under control. She participated in "The Fiscal Wake-Up Tour," a joint initiative of Brookings and other private foundations, to explain why Americans should be concerned about the growing national debt, projected to reach beyond $1.2 trillion in 2009.
In a phone interview, Rivlin said she will tell conference participants that even though the recession must be the focus for the present, the nation can't lose sight of its long-term economic future.
"There is an opportunity to do things in the near term that will help, such as Social Security reform,'' she said. "The other big areas are health-care reform and tax reform.''
Here are excerpts from the Beacon's interview with Rivlin:
What is your take on the Fed's announcement Wednesday that it will buy $300 billion of long-term U.S. Treasury bonds and $750 billion worth of mortgage-related securities?
Rivlin: We've got two big short-run problems. One, the economy is in deep recession. The other is that the banking system isn't functioning, and they're reinforcing each other. The Fed is trying to work on getting the banking system back to functioning again, which means getting banks lending more.
What the Fed did [Wednesday] will help a lot. They're intervening directly to buy up asset-backed securities, that is bonds backed by mortgages, and credit cards and auto loans and student loans and small business loans and all of that to get money flowing again. And I think that's already working to some extent, and it's quite likely to work better.
They're also putting downward pressure on interest rates for mortgages and other loan rates. And that will help, too. If they can get mortgage rates down further, that will help people who are paying on their mortgages but can't afford them.
China, which owns more than $725 billion in U.S. Treasury bonds, recently expressed concern over its investment. Is the Fed's action tied to that?
Rivlin: Well, if the Fed buys them, we're less dependent on the Chinese.
There's no big connection. We're borrowing a lot of money. We will have to borrow some from the Chinese. What the Fed is doing is trying to help keep interest rates from going up too high.
In your testimony before the House Budget Committee in January you made a case for not including long-term projects in the economic stimulus plan. Why did you think that was a better option?
Rivlin: That's been overtaken by events. I thought we needed a major stimulus to the economy, and at the time I would have made it a limited type of stimulus, getting money out to people who would spend it quickly in the form of food stamp increases, unemployment increases, tax cuts for working people and aid to the states to keep them from cutting back employment.
I thought that was very urgent, and we've now done it. But at the time I thought that some of the other investments in future productivity, which are also very important, should have been put in the budget rather than in the stimulus package. They didn't do that, but it's not something to discuss now because that moment is passed.
Will the $878 billion stimulus legislation be enough to fix the economy?
Rivlin: We don't know yet, but I think it's beginning to get out there. It will certainly help, but it's also important to get the banking system working because if the banking system's not working and people can't get credit, the stimulus will be temporary. It will not really jump-start the economy the way that it's supposed to.
Last weekend, Fed Chairman Ben Bernanke said the recession would "probably" end in 2009. Do you share his view?
Rivlin: We don't know yet, and Bernanke doesn't know. He's saying we're beginning to see some positive signs. But he also said at the same time and really in the same sentence that it all depends on getting the banking system functioning again.
Will the fallout from the AIG bonuses make it more difficult to convince Americans to support future bailouts? There is a lot of resentment being expressed by people who say they shouldn't have to bail out those who acted irresponsibly.
Rivlin: There is a moral hazard problem, but the answer is if the whole economy goes down fast and we don't have banks that can extend credit to people, these "holier than thou people'' are going to be caught in it, too. They are not going to be immune just because they paid on their mortgages. Their houses will be worth less. Their jobs will be in jeopardy. And they're going to be in the soup just like everybody else.
We can't draw a line around the people who didn't do anything wrong -- didn't borrow on their credit cards, didn't buy automobiles or houses they couldn't afford. There are a certain number of those people, but they'll be engulfed just like everybody else.
You participated in the 'Fiscal Wake-up Tour.' What should people who are not economists know about the federal budget deficit? Should they be worried?
Rivlin: They should be worried about the long-run deficit because we have gotten ourselves into the position over the next 20 or 30 years of having promised more than our current tax system would support. That's mostly because of three programs: Medicare, Medicaid and Social Security, but particularly Medicare and Medicaid. That's partly because the population is aging, and it's mostly because health-care spending per capita is going up very rapidly. The cost of the promises made to older people is going up very fast, and taxes won't go up that fast so we will have a growing deficit in the future and we have to figure out what to do about it.
That's been the major message of the 'Fiscal Wakeup Tour' -- that the problem is out there. It has nothing to do with the current [economic] crisis, although that makes it worse. But the problem's been there for a while. It's not a new problem, but it gets more urgent every year.
What can be done to fix Medicare and Social Security?
Rivlin: Social Security is the easier one to fix. I would do a combination of things. I would raise the retirement age at some point in the future, gradually, and I would index it to longevity. And I would change the way that benefits are calculated to make them a little less generous for upper-income people. I would probably raise the ceiling on income subject to tax -- not all the way but partially. This would be a compromise, but no one thing need be very large.
And this should all start in the future. When we raised the retirement age the last time -- in 1983 -- it didn't take effect for more than 20 years and is just now coming into full effect.
About Alice M. Rivlin
Current: Alice M. Rivlin is a visiting professor at the PublicPolicy Institute of Georgetown University; senior fellow in theEconomic Studies Program at the Brookings Institution in Washington, serves on the board of directors of the New York Stock Exchange.
Experience: served as director of the White House Office ofManagement and Budget during President Bill Clinton's first term; served as vice chair of the Federal Reserve Board (1996-1999); was founding director of the Congressional Budget Office (1975-1983).
Personal: born in Philadelphia and grew up in Bloomington, Ind.;earned a bachelor's degree in economics from Bryn Mawr College and a doctorate in economics from Harvard
