MS. DIANE REHMThanks for joining us. I'm Diane Rehm. Tomorrow, President Obama is expected to announce he had another plan for boosting jobs. This one centered on business tax cuts. But there is not much hope for a bipartisan support. Despite the economy, congressional Republicans have very little incentive to back up the administration with midterm elections fast approaching. Joining me to talk about prescriptions for the seemingly stalled economic recovery, Dean Baker, he's co-director of the Center for Economic and Policy Research, Greg Ip, he's U.S. economics editor for The Economist and the author of a brand-new book, it's titled "The Little Book of Economics." Joining us from a studio at Columbia University, Glenn Hubbard, dean of the Graduate School of Business, author of "Seeds of Destruction." And joining us from his office, Jared Bernstein, chief economists and economic policy adviser for Vice President Biden and executive director of the vice president's Middle Class Task Force.

MS. DIANE REHMThroughout the hour, we'll urge you to join us as well, 800-433-8850. Send us your email to drshow@wamu.org. Join us on Facebook or Twitter. And good morning to all of you.

MR. DEAN BAKERGood morning.

MR. GREG IPGood morning.

MR. JARED BERNSTEINGood morning.

MR. R. GLENN HUBBARDGood morning.

REHMJared Bernstein, I'll start with you. The jobs report that came out last Friday has been described as mildly positive. Give us a sense of where we are.

BERNSTEINWell, for eight straight months, we've been producing net job growth in the private sector. These jobs reports have been a little bit tricky in recent months because of all the workers hired for the decennial census. As they came up, we saw big increases in the toll, as they came off, we saw decreases, so the best way to get a kind of straight read on it is look at the private sector. So far this year, the private sector has created over three-quarters of a million jobs. That's not enough to get the unemployment rate moving in a -- in the reverse direction, at 9.6 percent. It's way too high for anyone's comfort.

BERNSTEINBut if you think about the swing from where we were to where we are in the first quarter of last year, when President Obama and Vice President Biden took office, this economy was hemorrhaging jobs at a nightmarish rate. And I know you -- Diane, you and I talked about these numbers for years. I was gonna say decades, but it's years, anyway. I've never seen numbers like that. Well, over 2 million jobs lost in just the first quarter of last year, 4 million jobs in the first six, seven months of last year, so...

REHMSo what...

BERNSTEIN...this swing from those horrifying negatives to positives is obviously good news and I think a reflection of the way our policies have helped, particularly The Recovery Act.

REHMGood news, but as you said yourself, certainly not enough. What is the president considering at this point?

BERNSTEINThe president, in recent days, has introduced a number of ideas. Yesterday in Milwaukee, he talked about an infrastructure program, really kind of the front leading edge of a multi-year reauthorization of the national infrastructure, surface transportation, focusing on roadways, on railways and on runways. Ultimately, we're talking about rebuilding, repairing 150,000 miles of roads, 4,000 miles of rail, which by the way, has special meaning to my boss. The vice president is an advocate for rail travel and that includes high-speed rail and renovating much of the nation's runways.

BERNSTEINAlong with that, the president's introduced some important tax incentives on the business side of the equation, things that will help bring some of that business investment, capital off the sidelines, lower the cost of borrowing and investing. That's very important right now to help stimulate that section as a sector in our economy where credit is flowing again, but again, not freely enough.

REHMAnd what else might he introduce tomorrow?

BERNSTEINWell, I don't want to get ahead of the president's introductions, but in recent days, I think the key point is that he has talked about very aggressively building on the momentum we had. You know, you're asking about tomorrow and that's a fair question, but I wanna talk for a second about yesterday, in a sense. You know, that we have a very important and I think extremely helpful small business bill that's stuck on Capitol Hill because been filibustered by Senate Republicans.

BERNSTEINIn your introduction, you talked about kind of the political economy, what's going on. It's very important right now. I think folks need to know that we have a bill up there that's -- it was bipartisan in terms of its intellectual foundation, ideas that come from Republican and Democrats to provide credit and again, taxes incentives at this time directed right at small business. And the idea that you would hold up a bill like that, $30 billion of credit, $12 billion of tax cuts over 10 years for small businesses, the idea that you would hold that up for political reasons in this economy is a terrible, I think, indictment of how some folks up there are using political motivation to block a much needed economic progress.

REHMAll right. Jared Bernstein. He is chief economist, economic policy adviser for Vice President Biden. Turning to you, Glenn Hubbard. What do you think of these approaches? Putting aside for the moment the political aspects of it, what do you think of these approaches?

HUBBARDWell, we're clearly at a time in the economy where we have to realize that we have long-term structural problems and that over the past decade or so, policies both ignored those problems and in some cases made them worse. In the present environment, I think a key thing President Obama and his team could do is clarify the enormous policy uncertainty that they have generated in everything from health care to tax policy to regulation. In terms of the new proposals, certainly the proposal for investment expensing is a good idea. Many economists, I put myself in that group, suggested it two years ago. I'm glad to see the president do that, but the administration should know that some of that impact will be blunted by the capital tax increases they're passing. So I think -- or they're seeking, so I think what we really need is a focus on the long term.

REHMFocus on the long term. Dean Baker.

BAKERWell, we have to focus on the long term, but I think the immediate focus has to be the short term and this is really a tragedy. We're still sitting here, 9.6 percent unemployment, very low prospect that will come down anytime soon. In fact, my bet is that we're gonna see a higher unemployment rate, probably over 10 percent, by the end of the year. And, you know, Jared's right. We're certainly happy we're creating jobs, but, you know, 70,000 a month doesn't even keep pace with the growth on labor force and, in fact, the trend is downward. We were creating jobs considerably more rapidly earlier in the year than we are now. So I'm -- you know, I'm happy to see the president's proposals. They're a foot in the door. The infrastructure, in particular, I think's good. We probably need to multiply that by about a factor of 10.

REHMAnd to you, Greg Ip. What realistically can the administration accomplish, hope to accomplish, before the midterm elections?

IPVery little, Diane. Let's go through these proposals. Let's just assume that the Republicans decided that they loved Obama and wanted to give him everything he wants. What would the impact be? It would be very, very small. A lot of these initiatives, for example, the business tax investment credit, all they do is they shift spending from one period into another. Now, the economy is so weak, so it would be nice to have a little of that business spending now instead of two years from now.

IPBut you can talk to businesses. The cost of buying stuff is not the issue. Interest rates are at rock bottom. And, in fact, business investment is one of the few bright spots in the economy right now, their research in development tax credit, making that permanent. Well, that's been part of their budget for years. And I guess we knew it all the time, just saying yet again, we're gonna make it permanent and actually making it permanent will just confirmed what people already expected.

REHMWhat about the infrastructure?

IPThat actually does have the potential to be very helpful. $50 billion in 12 months, it's not going to create 8 million jobs, but it's not chicken scratch either. And, you know, wisely, the president says, we'll pay for it over 10 years with other revenue initiatives. Unfortunately, it's the thing that the Republicans are least likely to play ball with because they can portray it as more big-time spending. Essentially, everything here gets hung up on the horns of the Bush era tax cuts, which all expire at the end of this year. And the Republicans have been clear. They want all of them, including those for the upper income tax payers, extended. And the administration has been equally clear. They don't -- they only want the ones for -- they want to extend them for everybody but the people in the upper income brackets.

REHMAnd Jared Bernstein, what about those tax cuts? There's been so much said about them. Are they kind of a trading chip that you've got there in the administration with the Republicans who don't want any of what the administration's proposing?

BERNSTEINWell, wait a second. I mean, the administration is proposing considerable tax cuts just with the expensing and the permanent R&D credit that are going to be extremely helpful for business. And by the way, let's not forget that almost 300 billion of the $787 billion Recovery Act passed in February 2009, was tax cuts. So our tax cut credit out there on the street ought to be very strong. I disagree, by the way, with one point that Greg made when he called the expensing initiative a small initiative. This is an initiative that could increase the investment of small businesses by 200 billion, I should say can reduce the tax consequences of investments of small businesses by 200 billion over the first couple of years. The longer term cost is about 30 billion because -- he's correct, they're pulling investment forward. But 200 billion is big bucks. This is an historically very large tax incentive.

BERNSTEINOne other point I wanted to make. You know, Glenn, by the way, I thought that the roundup you just gave was pretty favorable on the proposals that the president has made. I think Dean is, of course, right that we have short-term issues and we're working on those.

REHMAll right. Jared, short break here. We'll be right back. And your questions, comments are invited.

REHMAnd welcome back. We've got numerous people with us. Jared Bernstein is on the line, he's chief economist and economic policy adviser for Vice President Biden, he's executive director of the v.p.'s Middle Class Task Force. Here in the studio, Dean Baker is co-director of the Center for Economic and Policy Research, Greg Ip is U.S. economics editor for the The Economist and Glenn Hubbard is dean of the Graduate School of Business at Columbia University. Greg Ip, is the administration getting credit for anything it's done right?

IPWell, broadly speaking, no. The president's approval ratings are going down. His approval ratings on the economy are even worse than his overall ratings. Intriguingly, his approval ratings on the deficit are even worse. And this kind of creates a dilemma because if you wanted to help the economy right away, you would probably increase the deficit, so whatever you do, you're gonna lose support one way or the other.

IPI think it's important to realize here that the administration has been handed a very, very tough hand. We know from previous countries that have been through financial crises that the recovery is always extremely weak. The simple matter is people are trying to pay down debt, either because they can't borrow because they have too much debt or because banks aren't willing to borrow. And so it's gonna be a sluggish economy for some years now. Stimulus helps soften that process, make it a little less violent, but the sad reality is that it's gonna be a tough couple of years and these are not environments that are conducive to long life spans for politicians.

REHMJared Bernstein, realistically, what do you believe the administration can hope to accomplish before the midterm elections?

BERNSTEINWell, I think that -- let me speak narrowly and then broadly quickly. On a narrow point, I think it's important to recognize that everything we've talked about so far in terms of new initiatives, at least in terms of the infrastructure and the R&E tax credit, are paid for, so there is a way to square the circle Greg mentioned, which is introducing programs and then making sure they're paid for over the 10-year budget window.

BERNSTEINI think in the broad sense, Diane, that's an important and not a hard question to answer and the answer is a choice. Do you want to choose to move forward, building on the moment of what we've done, what we've accomplished? Again, I take your point that many of the accomplishments are underappreciated or hard to pull out and that’s understandable, given that the unemployment rate is so high.

BERNSTEINBut if you look at where things were and where they are, whether it's unemployment, whether it's job creation, whether it's the housing market, whether it's the financial system, whether it's the auto companies, the choice is do you want to move forward and build on that momentum or do you want to move backwards to a policy set that, as Representative Sessions, the chairman of the Republican House Re-election Committee said, we wanna take things back to precisely the policy agenda pre-Obama, in the Bush years? This is the policy set that created the mess we're into, a policy set based on trickle-down economics, based on inequality, based on deregulation, and it's precisely the set that got us into the mess. So I think between now and the election, we have to focus on the choice that's implicated here, the president said that I thought very effectively yesterday.

REHMAll right. And turning to you, Glenn Hubbard, your, pardon me, new book is titled "Seeds of Destruction: Why the Path to Economic Ruin Runs Through Washington, How to Reclaim American Prosperity," what do you say to Jared Bernstein's assessments?

HUBBARDWell, first, the problems that we're facing are a long time in making and have bipartisan roots. We have systematically over-worried about consumption and under-worried about investment for a long period of time in the economy and I think to blame one set of policies misses the point of where we are now. I agree with Greg Ip's observation that the president inherited a very tough hand. The recovery is likely to be difficult, but it doesn't have to be as bad as it is.

HUBBARDWe know from other cases in other countries at other times, there are ways to respond to financial crises and do fiscal consolidations that are better. I think the box the president and the administration find themselves in is too lax, a lack of focus and a lack of content. The lack of focus was the economy is just now the focus instead of the unfocused stimulus package designed by Congress and a health care bill that probably made long-term problems worse and a lack of content, so I think that's really where we are.

REHMWhat do you say…?

BERNSTEINCan I respond to that, Diane, quickly?

REHMSure. Go ahead, Jared.

BERNSTEINThis is Jared. You know, if you -- I think that where Glenn is coming from makes sense right now and it's one of the reasons why you hear the president out here talking about significant investment programs that, by the way, Glenn is, I think, appropriately cheerleading for. The thing about it is, though, is think back to where we were a year ago. You know, the Recovery Act is called the American Recovery and Reinvestment Act. It actually has a lot of investment in it, but the investment was back-loaded relative to the recovery initiatives. Tax cuts immediately for families and businesses, state relief to help teachers and cops stay on the job.

BERNSTEINYou know, I think in discussions like you just heard from Glenn, I think the initial buffer that that fast out the door program created, the three and a half million jobs saved or created from that, has been critically important in the initial stages of recovery. Unemployment insurance, making work pay. I mean, Dean can speak to this as well, but I think we often forget where we were a year ago and how our actions helped to ameliorate the bump. Not -- by no means all, but some of that pain.

REHMBut Jared, how do you respond to the critics who say, the president should not have put health care first, he needed to focus on jobs right away, he's coming to the issue too late?

BERNSTEINLook, you gotta walk and chew gum around here. And the president, I think to his credit -- and I don't mean credit today, I mean credit in an historical sense, didn't put his political finger up to the wind and said, what should I do? He -- and in fact, he looked at the unsustainability of our current health care system and the millions who are being poorly served by that. He looked at the long -- medium and long-term effect of health care spending on the deficit and he undertook, in a politically tough environment, to solve it and he accomplished something that has eluded Democrats and Republicans for decades. And I think it was an amazing accomplishment. And at the same time, he did that less than four weeks into office. He signed the largest stimulus package in the history of the nation. And while I understand that it hasn't done everything, it's made an important difference.

REHMGlenn Hubbard.

HUBBARDWell, I think the stimulus package was 814 billion of tuition to learn that the -- Keynesian-style approach and near-term consumption support really wasn't the right stimulus package. I think that's why the administration is at the door again. Health care, you know, is probably the subject for another day. But what the plan definitely did do was not tackle and, if anything, raise health care cost and certainly raised the cost of employment. So whether or not it was good health care policy, I don't think it was, but whether or not it was, it clearly was unrelated to or adversely affecting the employment situation.

REHMDean Baker.

BAKERYou know, I just want to get back to the point Greg made. I mean, the headwinds that the Obama administration is seeing and he's absolutely right. We had a severe financial collapse, the collapse of the housing bubble. But this was entirely predictable and this is why I can't understand we're still talking about this like we're surprised by this. Now, my calculations are we lost on the order of 1.2 trillion in annual demand with the collapse of the bubble. About half of that is due to lost construction. We have huge overbuilding in both residential and non-residential real estate. That's not gonna come back anytime soon.

BAKERThe other half is lost consumption, not because people have bad attitudes, but they lost on the order of about $6 trillion in housing wealth and they're about to lose another 2 trillion as house prices continue to fall through the rest of this year. Now, we tried to make that up with the stimulus package and let's boil this down a little. It's 814 billion by Glenn's number. That's ballpark. But we have things there like the AMT that not, by any stretch of the imagination, was stimulus and then some of that spent later, which is fine. But if we say how much was actually spent in '09 and 2010, it's about 300 billion a year and roughly half of that is offset by cutbacks at the state and local level, so what we're doing is we're trying to offset a decline in demand of 1.2 trillion with net stimulus from the government sector of 150 billion.

REHMSo you believe that the first stimulus package should have been bigger just to start with?

BAKERAbsolutely. And what President Obama had to do, which I really give him blame for, is that he didn't sell it. He didn't say, here's why we have to do it. Private sector demand has collapsed, government is picking up the slack. We know it's a big deficit. Big deficits are not harmful when there's a lot of slack in the economy, as there is.

REHMSo now Grep Ip, people are talking about the, quote, "new normal." What is that?

IPWell, I'm gonna say something a little bit kind of odd for this show and that's -- I'm gonna be optimistic, actually, because we've had a rough period, as I said. We're in a deleveraging cycle. That means we've had businesses and consumers take on too much debt and we've seen these before. We saw it in Japan, we saw it in the United States in the early 1990s, but as I talk about it in my book, the long term picture of growth is not a story about demand, how much do you and I spend today. It's about supply, how much can our economy produce? And one reason I'm optimistic about the United States is that our population growth is very solid. It's higher than almost any other country, including Japan. In spite of all the rhetoric that you hear about how Obama is a socialist and so forth, in fact, this administration, like every administration that came before him, believes at a free market economy, that it can be made to run better.

IPBut I mean, this is a guy who couldn't wait to get rid of his holdings of banks and basically pushed General Motors towards a initial public offering. That's a long way of saying, I think, the infrastructure for long-term growth is there. And I even think that the last six months of growth are a little bit of an anomaly. We had a crisis in Europe that, I think, hurt confidence. We had the oil spill in the Gulf of Mexico that hurt confidence. Both those things are moving into the background. And I think there are small signs that confidence is picking up. The fact that the employment numbers for August, yes, they were weak, but they were a bit better than expected. There were a few positive sides in there. The stock market's got a bit of its mojo back. I think these are signs that things will be better in the next six to 12 months, not worse.

REHMGreg Ip, he is the author of "The Little Book of Economics: How the Economy Works in the Real World." And you're listening to "The Diane Rehm Show." We're going to open the phones now, first to Clover, S.C. Good morning, Benjamin. You're on the air.

BENJAMINThanks, Diane. Longtime listener, first time caller.

REHMThank you.

BENJAMINI had a question that I don't think either of your guests has addressed this morning. Given that about 1 percent -- the top 1 percent of America's income tax brackets controls 40 to 60 percent of the wealth in this country, why aren't we talking more about raising taxes on them?

REHMWell, the president is doing precisely that thus far. Jared Bernstein, what are the indications that the president will let the Bush tax cuts remain on the entire population?

BERNSTEINThe president has been very forthright about allowing the tax cuts to sunset for families like the ones the caller was speaking to. It's a very important part of tax policy, both in terms of the caller's question about increasing inequality. You know, something that's been underappreciated, a point Paul Krugman made in a column a few weeks ago, if you were to extend these tax cuts, over 50 percent of them would go to families, not in the top 1 percent, but in the top .1 percent, the top, you know, one-tenth of that top 1 percent average income about 8 million bucks, so that's how skewed these would be. And you're talking about blowing a $700 billion hole in the deficit if these tax cuts for the high-end were made permanent. The middle class tax cuts, on the other hand, very important to maintain those, make sure that they're permanent and that's our agenda.

REHMGlenn Hubbard, what's your view of these tax cuts letting them go for the upper part of the economy above 250,000 income?

HUBBARDWell, I think the caller raises a great question. The really big question is what kind of government do we want? And a government in the president's budget is a government of 25 percent of GDP heading northward. The Bush tax cuts are, in some sense, a red herring there. We would need not only to let the top tax cuts expire, but really raise taxes on middle income people if we want a government that big or we could cut government. My own view is that we ought to extend all of the tax cuts until we're ready to have a discussion about two things. And honestly, one, how big do we want government to be and second, what tax reform do we need to pay for? The dirty little secret is if we want the president's government, we would have to raise taxes on everyone.

REHMDean Baker.

BAKERWell, this argument about how big do we want government to be, what we want, at least in my view, I think most of the economists will agree with this, is you want government to do what it does most efficiently. You know, for example, Social Security is much more efficient than private sector investment plans. We got an awful lot of debt on that. In fact, Medicare is much more efficient than private insurance plans. Where does things more efficiently, we should have the government do it. It doesn't make sense to say, we want it done less efficiently because we have some magic number, 25 percent, 20 percent, whatever number you want where the government can't get bigger than that.

REHMLet's go to Springfield, Va. Good morning, Vince. You're on the air.

VINCEGood morning and thank you for taking my call.

REHMSurely.

VINCEI am a small businessman and in the past two years, I've seen my employee force going from 200 to a grand total of 25 today, so I wanna know what it is that you think this bill is gonna do for me by giving me -- look, I don't need a loan, I don't need either tax break. What I need is a place to work and I'll pay my taxes and I don't need to borrow any money.

REHMJared Bernstein.

BERNSTEINI think we have to think about two important parts of the economy right now. One, which is, I think, on the top of the scale is what economists call aggregate demand and that's what the caller is asking about. This is folks coming in the door to buy the goods and services that American businesses make and produce. There is nothing that's going to restore business confidence and get this economy humming again in that sector than folks doing precisely that, getting back to a normal, healthy, robust, self-sustaining expansion. That's what every part of our economic policy has been targeted at thus far. We also can't forget that we had a huge financial crisis and that lines of credit were very much shut down. And there are many small businesses, not the caller, but there are lots of other small businesses who say they have -- they're credit worthy, they have projects ready to go, they have good plans on the shelf and they're having trouble getting the credit they need. The small business bill on the Hill filibustered by Republicans right now would go a big step towards solving that problem and it is part of the problem.

REHMDean Baker.

BAKERWell, I think -- again, I think there are some cases where you have small business have difficulty getting access to credit, but I think far and away, the basic story is the lack of demand. And again, this gets back to we lost 1.2 trillion in demand. We have to make that up somehow. I don't see another way than the government doing it, at least in a short term. I'm open to ideas, but I just don't know where that comes from.

REHMDean Baker, he is co-director of the Center for Economic and Policy Research, he's author of "Plunder & Blunder: The Rise and Fall of the Bubble Economy." When we come back, more of your questions, comments. Stay with us.

REHMAnd sorry to say Jared Bernstein had to leave us. He is, of course, the chief economist and economic policy adviser for Vice President Joseph Biden. Here's an email. "Please ask exactly how the last 10 years of tax cuts helped. We have the worst economy we've seen in decades, along with the lowest tax rate in 40 years. Historically, there is absolutely no correlation between low taxes and a prosperous economy. I would like to hear facts that cutting taxes for the wealthy helps the economy." Glenn Hubbard.

HUBBARDWell, it's a great question and we have numerous examples. I'd say a key example that I would begin with is the Kennedy tax cuts and the introduction of investment incentives and cuts in the top rate, that I think were very important for investment and expansion. We saw this as well for investment in the early 1980s tax cuts and certainly tax cuts in the decade that preceded had very positive effects for consumption and investment. A lot of things go on in an economy besides tax policy. Where I really agree with the questioner is that we really have to think about a tax code that makes sense. And it's not simply extending or getting rid of tax cuts that are in place, but really rethinking tax reform, which would be a broad base and low marginal rates for all tax payers.

REHMDean Baker.

BAKERWell, if you compare the Bush years to the Clinton years that preceded them -- and again, lots of things were different, it wasn't just the taxes, but the point is the -- I mean, did quite well during the Clinton years. They grew rapidly and most importantly, at least for, I think, most people, it was broadly shared. You saw a good wage growth, particularly the last four years, '04 to -- or '96 to 2000. Substantial rises in family income, by contrast, that fell through the floor. Wages are basically stagnant all through the last decade and family income also was pretty much stagnant and we had this build up in the housing bubble that gave us this huge crash. Now, all of that is not -- cannot be blamed on the tax cut, but you have to look pretty hard to find anything that's very positive about that cut.

REHMHere's an email from Lori. She says, "This country was strong, had the best infrastructure in the world, until the Reagan tax cuts took the financial base away. The only way the U.S. can get back a solid infrastructure is to rescind the tax cuts back to where they were in 1974. The wealthiest people pay the most, the poorest people pay the least. This tax cuts are where our country lost the funding for infrastructure and is the true reason we are behind, along with outsourcing jobs, over the past 30 years." Greg Ip.

IPI think, actually, there's probably way too much attention by both Democrats and Republicans on the negative and positive impacts of the Bush tax cuts. In my estimation, they had far less impact, either positive or negative, than they usually get attention for. Federal taxes, their share of GDP has been around 20 percent, like, with dips above and below for -- excuse me -- around 18 percent of GDP for some decades now.

IPYou know, a harsh reality in this country now is that both parties are in denial about taxes. You essentially have a Republican Party that says 100 percent of people should not pay higher taxes and the Democratic Party says 95 percent of people shouldn't pay higher taxes. Against that, you have the reality that spending the share of GDP is at, like, a 50-year high and revenue is at a 50-year low and that is an arithmetic gap that has to be filled somehow. And unfortunately, everybody's gonna have to get used to the idea that if we want this government, somebody's gonna have to pay higher taxes and that's not a discussion that we're having.

REHMLet's go to Tim in Dallas, Texas. Good morning, you're on the air.

TIMThank you for taking my call.

REHMSure.

TIMYou know, I hear, you know, obviously, this show is about what does -- what should the government do? What shouldn't the government do? But what I never hear really talked about on a serious, you know, way is the children of America. And by the children of America, I don't mean the kids of America. I think this country has acted like really spoiled children for a really long time, completely ignoring the elephant in the room, which was living beyond our means, driving up massive personal debt, negative savings rates for the most of the last decade, at least, the real estate bubble, which we don't need to talk about that much and this is all from the richest country in the world.

TIMSo in essence, in my personal opinion, is that we kind of got what we deserve recently in terms of the economy, but instead of being good little children and taking our medicine, we expect an immediate fix from the government right now. And more importantly, we want an immediate fix that we don't have to sacrifice anything more for.

REHMDean Baker.

BAKERWell, let me just say a bit about the personal debt because, I mean, again, this is a horrible story. We can go back to that as clearing off, savings rate was basically zero '04 to '07, when the economy -- when the bubble collapsed, but this is actually a perfectly reasonable thing for people to do when house prices were going through the roof, so someone sitting there, they have a house that was selling, they paid 250,000, they have a mortgage on it of, let's say, 200,000, suddenly, the house is worth 350, 400, 450. That happened many, many places. Perfectly reasonable thing in that context to go out and borrow 20,000, 40,000 against your house.

BAKERYou could use it to, you know, maybe you make the house better, maybe you buy a car, maybe take a vacation, maybe you pay for your kid's education. All that is perfectly reasonable in a context where those prices are gonna stay there. Now, of course they didn't, but almost every economist in the country -- I was arguing against them. I could tell you that all of them were saying, Dean Baker's a nutball. House prices are gonna keep rising. And in that context, that was perfectly reasonable behavior.

REHMBut Tim is saying now that all this has happened, we, the children, want it fixed right away. Greg Ip.

IPWell, you know, I wouldn't use the same words, but I essentially agree with exactly what the caller is saying. We're having, basically, a mother of a hangover from like...

REHMYou bet.

IP...a two-decade orgy of borrowing and spending and not saving at all, but the good news is that we actually are making progress. The saving rate, yeah, it went down to zero a few years ago, it's now back up to 6 percent, which is a lot of the way towards were economists think it has to go to start repairing the damage. Housing prices got about 40 percent above their justifiable level. They've basically come all the way back to something normal. Now, Dean here thinks we're going down further. I hope he's wrong, but in general, we have gotten rid of most of that housing bubble. This, as I was saying earlier, is a long painful process of working our way through these debts. The banks have to write off all the toxic loans that will never get repaid, people have to get used to the idea that they can't use their houses as ATMs any longer, but everything we've seen suggests that that process is underway.

REHMTim, thanks for your call. Let's go to Miami, Fla. Good morning, Seth.

SETHGood morning. Thank you very much and as always, I find your show very informative.

REHMThank you.

SETHI'm hoping you can clarify a little bit for me and I had some information earlier. From the previous stimulus, I heard that the economy grew at .4 percent. I'm curious as to how that relates to how much we spent as to how much the -- how much it contributed to the economic growth.

REHMGlenn Hubbard.

HUBBARDI think there's a wide range of opinion among economists, perhaps not surprising to anybody. I would associate myself with the view that the stimulus had a pretty modest impact. It's already come up in discussion that a lot of what was in the 814 billion wasn't stimulus at all, so it's not surprising it wouldn't have much impact. We could have given $100,000 to every newly unemployed person instead of doing the stimulus. It just shows how wasteful it was. We need a better way and the president, I guess, is now trying to find one.

REHMLet us just say, for a point of clarification, that the president tried initially to get a larger stimulus package to do much, much more, but it was whittled back and whittled back, same thing with the health care plan. Dean Baker.

BAKERNo, that's right. The president's proposal was originally 800 billion or so, I think, was more stimulatory that what he ended up by the end of the day by Congress. I think even that was too little. We know from various reports that Christy Romer's chief economist had wanted to have 1.2 trillion. I think even that might have been on the low side, so he didn't get as much as he wanted. I think I differ with Glenn. I mean, again, I've been critical, it was too small, but the projections, the calculations from the Congressional Budget Office are that it would reduce the employment rate by between eight-tenths and 1.7 percentage points, not enough. You know, we're still hitting 9.6 percent unemployment, but I think, you know, that's much better than, say, 11.

REHMSo Greg Ip, you wanna weigh in here?

IPOne of the unfortunate things about macroeconomics is that it's not like an experiment where you can test a bunch of sick people and a bunch of healthy people to see if the drug works. You've got a situation here where the patient was extremely ill, running a high fever, a big infection. We gave him a lot of traditional antibiotics and he's not completely better, but he stopped getting worse. We cannot prove that the antibiotics are the reason he's not getting worse and we can't prove that if we hadn't given them to him, he'd be better. But most of what we know from economics -- and this is nonpartisan people like this Congressional Budget Office speaking, is that it probably did some good. We're not sure how much good, but it probably did some good.

IPBut there are other things going on as well. The Federal Reserve did a lot of stuff. You know, they lowered interest rates to zero, they did some funky stuff like buying bonds. We had the stress test, which I think took a lot of uncertainty about the health of our banks away, so in some sense, we had a like a three-front war on the crisis and the recession. Nobody will ever be able to prove how much each of those fronts contributed to the turnaround that we've had or how much better things would have been if a different path had been pursued.

REHMGreg Ip is the author of "The Little Book of Economics: How the Economy Works in the Real World." And let's go now to Guillermo in Raleigh, N.C. Good morning, you're on the air.

GUILLERMOHello, Diane.

REHMHi.

GUILLERMOThanks for taking my call.

REHMSure.

GUILLERMOI'd like to just make a comment today. I listen to your show frequently and over the last few weeks, I've had many moments where I felt like picking up the phone and trying to interject, so my comment today, you're talking earlier about should Obama have focused on purely jobs on the front, was focusing on health care change a mistake. And sometimes when I'm listening to the show, I get the impression of the people on the show are in their own little echo chamber and they don't actually get out and talk to people, for example, like me, who buy their own health insurance, middle class, I have a wife with MS.

GUILLERMOYou know, I'm happy that Obama's our president. I don't wanna go back to Bush era tax cuts. I don't like the feeling that people are goldfish and they forget what it was like a year and half, two years ago, so I'd just like to emphasize that sometimes the people on the show need to be more clear about when they're making a statement that is their opinion and not necessarily grounded in facts, because it can get confusing sometimes. People listen to this and think, oh, Obama shouldn't have done health care. He's doing terribly. He's about to lose the reelection. And, you know, I'm happy with Obama. I'd like him to win reelection and I think that health care debate was important.

GUILLERMOYou know, on Friday on your show, you had a person who said that Obama didn't try and work with the Republicans and that he could have gotten a bill through and I've been watching the news for the last couple years and kind of seems like the Republicans didn't really wanna help. And so, you know, there's a mismatch between what I see on the news, what I experience in my life and what I'm hearing on these shows.

REHMI certainly understand your point, Guillermo. And I'm sorry about your wife. I can imagine that's got to be very difficult for you. Is there a lack of understanding between what's happening in the real world and what's happening in the political world, Dean Baker?

BAKERI think there certainly can be and probably is. I mean, again, part of the story to me, I keep looking at the unemployment rate. We have 9.5 percent -- 9.6 percent unemployed. That corresponds to 15 million people without jobs, another 9 million who are working part-time would like full-time. We'd still -- with several million more who've dropped out at the labor force all together. That's a crisis. But here in Washington, there's this idea, well, we're on the right path, you know, things are going in the right direction. And I'll agree with that, but the point is that's not good enough, so if we get back to normal levels of employment, six, seven years down the road, that's a large chunk of people's working lifetime where they've been struggling to get by. They don't get those years back.

REHMDean Baker, he's co-director of the Center for Economic and Policy Research, he's author of the book "Plunder and Blunder: The Rise and Fall of the Bubble Economy." And you're listening to "The Diane Rehm Show." And to Fort Worth, Texas, good morning, Susan. You're on the air.

SUSANGood morning. Well, there's just lots and lots I could say, but I've got a couple of points that -- just recently -- and I agree with the last two callers. I heard the CEO of Mott's, the applesauce company...

REHMYeah.

SUSAN...of the last day or two and he was very smugly justifying why he and the other CEOs should be making these huge amounts of money while hiring part-timers for his company. People need to understand, over the last -- at least 30 years, that CEO pay has gone from 40 percent of what their employees make to over 400 percent and I think if this keeps up, we're gonna eventually have a revolution because of the rich getting richer and the poor getting poorer. We're gonna turn into Mexico.

REHMGlenn Hubbard.

HUBBARDWell, I couldn't agree more with the thrust of the question. We have seen very large increases in executive compensation. There are many CEOs who are well worth the money they're paid, but there's also real questions and the question that raises, one, whether the process we have for compensating executives always leads to fair outcomes. I think that's an open question. I think we're a long way from becoming Mexico, but I do think it's a very, very important question for corporate governance. Yes.

REHMWhat about Wall Street's role in this entire crisis and how it could affect our getting back to the new normal, Greg Ip?

IPWell, it certainly had a big role in us getting into the mess. I'm not sure I'd look at them for helping us get out of the mess. Interestingly, we had a very, you know, spirited debate for the last year as we move towards getting the financial regulatory reform bill passed and there was a lot of concern, you know, in the run up to that bill passing that the government would impose a lot of unnecessary regulation and this would hurt lending and so forth. It's early days, but we don't really seem to have seen that. In fact, I have seen some signs that credit might finally be loosening up, which I think speaks to fact that the real issue out there isn't, you know, the regulation, it's just the uncertainly over everything. You know, the other caller had mentioned health care. I will say -- we had talked earlier, is the president getting approval, you know, benefit of the doubt for anything? Actually, his approval on health care has actually gotten a little bit better in the last five or six months, I think perhaps because it sort of dropped out of the headlines.

REHMDean.

BAKERI was gonna say with Wall Street, I really see a lot of the problem centering there that, you know, certainly the bubble itself is fueled by Wall Street's speculation, but also getting back to the other caller's point about the CEO pay, Wall Street really is the center of outsized pay packages and I'd love to see those brought in line. My favorite method is the financial speculation tax. You could raise a ton of money that way, get rid of a lot of the waste on Wall Street and also, I think that would put some downward pressure on the pay of these CEOs. Basically, they appoint their own boards, who then go out and give them big paychecks. That's a good deal. We'd all like that.

REHMGlenn Hubbard, last word.

HUBBARDWell, certainly we've had Wall Street problems throughout the financial crisis, but two things haven't been mentioned in this discussion. One is the role of the GSCs, Fannie and Freddie, that were implicit wards of the state before they were explicit, were the vortex of the crisis and the Federal Reserve's easy money policies early in the decade also helped fuel it.

REHMAll right. We'll leave it at that. Glenn Hubbard is author of "Seeds of Destruction: Why the Path to Economic Ruin Runs Through Washington, How to Reclaim American Prosperity." And Gregg Ip, he's U.S. economics editor for The Economist, author of the new book "The Little Book of Economics." And Dean Baker, co-director of the Center for Economic and Policy Research, author of "Plunder and Blunder: The Rise and Fall of the Bubble Economy." Thanks to all of you. And thanks for listening. I'm Diane Rehm.