Traders work on the floor of the New York Stock Exchange on January 27, 2014 in New York City. Following a drop of over 300 points on Friday, U.S. markets stabilized in early trading January 27, with the Dow Jones industrial average and the S&P 500 up slightly.

Traders work on the floor of the New York Stock Exchange on January 27, 2014 in New York City. Following a drop of over 300 points on Friday, U.S. markets stabilized in early trading January 27, with the Dow Jones industrial average and the S&P 500 up slightly.

For the past few years, we’ve heard a similar message from economists every early January: This will be the year the economy would finally recover. And every year, those promises have fallen short. Now, as we enter 2014, we are hearing a similar theme and this time, observers say, there really are signs for optimism. They point to stronger consumer confidence, fewer drawn out budget battles in Washington and less volatility around the world. Yet even as the economy seems to be slowly improving, President Barack Obama plans to highlight economic disparities in his State of the Union address tonight. Diane and her guests check in on the U.S. economy.


  • David Wessel Director, Hutchins Center on Fiscal & Monetary Policy at the Brookings Institution; contributing correspondent, The Wall Street Journal; author of "Red Ink: Inside the High-Stakes Politics of the Federal Budget."
  • Greg Ip U.S. economics editor, The Economist, and author of "The Little Book of Economics: How the Economy Works in the Real World."
  • David Leonhardt Managing editor of a new New York Times website covering politics and policy; author of the e-book: “Here’s the Deal: How Washington Can Solve the Deficit and Spur Growth."


  • 10:06:53

    MS. DIANE REHMThanks for joining us. I'm Diane Rehm. This week, Ben Bernanke finishes his tenure as chair of the Federal Reserve. His successor Janet Yellen inherits an economy much improved since the days of the Great Recession. Many economists say there are reasons to be optimistic this year. Here with me to discuss the state of the U.S. economy: David Wessel of the Brookings Institution and The Wall Street Journal, Greg Ip of The Economist, and David Leonhardt of The New York Times.

  • 10:07:33

    MS. DIANE REHMAnd throughout the hour, you are welcome to chime in. Give us a call, 800-433-8850. Send us an email to Follow us on Facebook or Twitter. And welcome to all of you.

  • 10:07:54

    MR. GREG IPThank you, Diane.

  • 10:07:55


  • 10:07:55


  • 10:07:56

    REHMDavid Wessel, should we be more optimistic this year than we have in the past?

  • 10:08:05

    WESSELI think we should be more optimistic, but we should be very careful in our optimism. The economy is definitely getting better, but it's far from healthy. We still have very high unemployment. And just today we got some disturbing indicators. The government reported orders for big ticket items, and they -- like, refrigerators or machine tools and stuff, and they were very disappointing. So it's a reminder that it's not baked in the cake that this is going to be a good year. But it looks like it will be a better year than those we've had for the last couple.

  • 10:08:43

    REHMDavid Leonhardt, do you agree?

  • 10:08:46

    LEONHARDTI do agree. I may be a touch more worried and pessimistic, but that comes with the caveat that I don't think we're going to know when the economy takes off. So the fact that I'm a touch more pessimistic doesn't mean it's not going to take off. To me, the most sobering statistic out there is the percentage of adults with jobs.

  • 10:09:05

    LEONHARDTIf you look at that statistic, it looks like a flat line over the last few years. It doesn't look like the economy's improving. And so the main rate -- the main reason the unemployment rate has fallen is because more people have dropped out of the labor force and are thus not looking. Now, some of that is because we're aging and is perfectly healthy. But much of it is not. It's that the economy is just not producing jobs.

  • 10:09:25

    LEONHARDTConsumers are still scarred by the crisis. The federal and state governments are basically still not helping the recovery very much. And so I don't think this will be a gangbuster's year. David wasn't saying it would be a gangbuster's year. The only thing I would say is it is always, after a long slump, easy to point to reasons to be pessimistic.

  • 10:09:42

    REHMMm. Mm.

  • 10:09:43

    LEONHARDTAnd the one little, I think, emotional reason for optimism is the year 1996. In 1996, everyone was pessimistic. People running for president were pessimistic. In the beginning of the campaign, it was Pat Buchanan's pitchforks. And in retrospect, we think about it as a year of the Internet boom. And it's often hard to see good times coming.

  • 10:10:00

    REHMMm. Greg Ip, what about good luck, bad luck?

  • 10:10:05

    IPWell, it's -- you have to -- one of the reasons all of us are very cautious about declaring this the great year is because many of us have done so in previous years only to be disappointed. And the reasons for that disappointment run the gamut from the ongoing crisis in Europe to a tsunami in Japan to our various fiscal showdowns which ended up with us as a country collectively shooting ourselves in the foot.

  • 10:10:28

    IPAs you look to the coming year, one of the reasons for optimism is not so much that there are all these positives. It's the absence of negatives. So, for example, we believe that all the fiscal austerity of higher taxes and sequester over the last year probably cut about 1.5 percentage points off of economic growth. In the coming year, that drops to about a half a percentage point, so that alone is a reason for optimism.

  • 10:10:52

    IPOn the housing side, one of the reasons low mortgage rates haven't propelled the housing market up faster is because so many people cannot get a mortgage because their houses are worth less than their mortgage. That's turning around as housing prices go up. And even Europe seems to have emerged from its recession and is once again growing. So if you're simply to look at that absence of negatives, that alone gives you a fundamental reason to be somewhat optimistic on the coming year.

  • 10:11:17

    REHMBut the...

  • 10:11:17

    LEONHARDTThat's such a telling comment.

  • 10:11:18

    REHMGo ahead.

  • 10:11:18

    LEONHARDTI'm sorry, Diane. Such a telling comment that Greg's saying, which is one reason to be optimism is that the federal government will do less damage to the economy this year than it has recently. It will still do damage, just not as much.

  • 10:11:29

    REHMAnd what you're saying is politics has played a major role.

  • 10:11:35

    LEONHARDTOh, yes. I mean, I think at this point, there are many issues that we can debate at length about what their effect is. But I think the track record of austerity in the wake of financial crisis is fantastically bad. And we engaged in some austerity over the last couple years, and that's done real damage to the economy.

  • 10:11:50

    REHMWhat about the fact that Janet Yellen is taking over the Fed, Greg?

  • 10:11:56

    IPSo it's interesting because you go back to when Ben Bernanke took over from Alan Greenspan back in 2006. At the time, the economy looked great. Unemployment was around 5 percent. It was, you know, steady growth and low inflation as far as the eye could see.

  • 10:12:10

    WESSELGreenspan always had good timing.

  • 10:12:11

    IPThat's right. Yeah. He left at the top. The -- what we didn't realize at the time and we now know is that there were these fissures opening up in the economy underneath our feet, and they were going to drag us down to this terrible recession. You could almost make a case that we are in the mirror image today where, as David was saying, we are far from healed economy.

  • 10:12:29

    IPThe number of people with jobs, as David Leonhardt was saying, is still painfully low. But you can turn to these positives and actually say things are going to get better. One thing, though, to keep in mind is that we are still in this post-crisis working-out period. And we simply do not have a lot of the usual slingshot accelerators that we often benefit from, one of which is the ability of the Fed to cut interest rates as low as it wants to to get growth going stronger.

  • 10:12:53

    REHMHow different is Janet Yellen likely to be from Ben Bernanke?

  • 10:12:59

    WESSELI don't think Janet Yellen will be very different initially from Ben Bernanke. I think they have different backgrounds, think over her career she's been much more worried about unemployment than he was in his pre-Fed years. But I think the policies that the Fed is pursuing the last few months and the ones that they'll ratify again in Mr. Bernanke's last meeting this week are ones that she's had a huge impact on. And so there'll be a lot of continuity. So I don't think we'll see any big change right away.

  • 10:13:31

    WESSELWe'll have to see over time. I think there'll be a couple interesting tests. One is let's say we're all a little too conscious, and the economy really takes off. That'll be quite tricky for her to be able to respond quickly enough to avoid a bubble or inflation. And the second thing is we -- one never knows how someone will handle a job of such prominence and influence. And so it'll be really interesting to see...

  • 10:13:58

    REHMMm. Mm.

  • 10:13:58 she handles going from being a very competent and learned and conciliatory person inside the Fed to being the face of the American economy.

  • 10:14:09

    REHMWill she be as transparent as Bernanke is trying to be?

  • 10:14:15

    WESSELYes. I think so. I think that she and he both agree that transparency has served the Fed well, helps build public support for the institution and makes monetary policy work better. I think it will be interesting to see whether she can get the other members of the Fed's policy committee to pull a little more in the same direction.

  • 10:14:33

    WESSELThat was something that Bernanke didn't have much luck at. And it's not clear to me he even tried. He kind of seemed to encourage this let everybody say what they think after the meeting. And I suspect she'll try a little more to say let's have a big argument in the room, but once we reach a decision, could everybody at least support it for 45 minutes after the meeting ends?

  • 10:14:51

    REHMIs that argument likely to be over stimulus, how much to go forward with, when to pull back?

  • 10:14:58

    LEONHARDTYes. It is. Janet Yellen and Ben Bernanke have been on the more pro-stimulus end of the committee at the Fed that makes decisions. And so I think there are some members who are more worried than Chairman -- are we using Chairman or Chairwoman Yellen? What's the official (unintelligible) ?

  • 10:15:15

    WESSELShe wants chairwoman, I'm told.

  • 10:15:15

    REHMHow about chair?

  • 10:15:16

    LEONHARDTShe wants chairwoman.

  • 10:15:17

    REHMHow about chair?

  • 10:15:18

    LEONHARDTOK. Chair...

  • 10:15:19

    WESSEL(unintelligible) chief we'll call her.

  • 10:15:21

    LEONHARDTThen she is. Now, it's interesting because the Fed has basically made the mistake only one way over the last few years. They have been too optimistic about the economy. And so the people who have said we're about to set off inflation have been wrong, and wrong, and wrong. And -- but that doesn't mean that they'll always be wrong. At some point, we may actually have inflation to worry about.

  • 10:15:40

    LEONHARDTAnd the mistake that Bernanke made, despite an overwhelmingly successful tenure, was listening too much to those worries. And as a result, he withdrew stimulus too early on multiple occasions and then had to double-back and say, oops, the economy is weaker than we thought. We're going to do it again. And so it'll be interesting to see, does Yellen try to bring people over to her point of view, which is hard. These are highly intelligent, proud people. Does she try to push through some of the opposition more than Bernanke did? We'll have to see.

  • 10:16:08


  • 10:16:09

    IPYou know, I think the nice problem for Chairwoman Yellen would be if the economy grows faster than they expect and that she has to hold back people who want to withdraw stimulus faster. Where I think the real test will be is what if, once again, we have a disappointment as some recent economic numbers suggest we might. What does she do about it? Because you're in a situation now where the stimulus that they have been undertaking in the form of buying bonds by printing money, they've now got a program out where they intend to dial that back to zero by the end of the year.

  • 10:16:39

    IPAnd that's not driven just by their optimism -- it's not driven just by their optimism about the economy but by a growing sense within the Fed that it's not as effective as it used to be and that there are costs to this bond buying. It might be developing bubbles. So what happens if she's now faced with a situation where the economy looks like it needs more stimulus?

  • 10:16:55

    IPDoes she dial that back up knowing full well that it will not achieve the results that it may have a year or two before? How about interest rates? Interest rates are still zero. You can't push them further below zero. Do you change your language to try and reinforce your commitment to zero? Those, I think, will be the real tests.

  • 10:17:11

    REHMGreg Ip of The Economist, David Leonhardt, The New York Times, David Wessel of the Brookings Institute and The Wall Street Journal. David Leonhardt, why did we see the stock market take such a dive last week?

  • 10:17:30

    LEONHARDTOh, who knows?

  • 10:17:31

    REHMOh, (word?).

  • 10:17:33

    LEONHARDTI feel comfortable talking about the stock market in long term, but I'm very wary of people who tell you why the market did what it did. So I'll try not to be one of them. But let me talk for a minute about where I think the market is overall. I think the market is still somewhat expensive. I think if you look at the level of the stock market relative to long-term earnings over the last 10 years, say, the stock market is not cheap.

  • 10:17:56

    LEONHARDTI'm not saying it's in a bubble. But the stock market is not cheap. And so despite the big fall, it's come back a huge amount. It's come back much more than the economy has. And as a result, when you have economic uncertainty or little bits of bad news, I think there's more potential for it to do damage because it's starting off somewhat expensive.

  • 10:18:16

    REHMAll right. I want to hear what you have to say. Give us a call, 800-433-8850. Short break here. We'll be right back.

  • 10:20:01

    REHMAnd welcome back. We're talking about the current state of the economy in anticipation of the president's State of the Union Address this evening. We'll hear what he has to say about minimum wage. Greg Ip, what do you expect?

  • 10:20:22

    IPI expect two things on the minimum wage. The first is, well, one announcement that actually was made today is that by executive order he will require all federal contractors to pay $10.10 per hour minimum to its workers.

  • 10:20:34

    REHMWho are those federal contractors?

  • 10:20:37

    IPThis might be a situation, for example, where a private company is hired to do cafeteria services on a military base. And if they were making, for example, eight or $9 an hour, they will now make $10.10 per hour.

  • 10:20:48

    REHMWhat about road workers, if you were to hire federal contractors to do road work?

  • 10:20:55

    IPYou're getting into areas where I think we need to see a little bit more about the detail of the announcement before I can speak with some authority. But, for example, Larry Mishel, I think, of one of the think tanks believes that we're talking about anywhere from half million to a million workers who might be potentially affected by this. Now, Obama has bigger ambitions than that. He would actually like to raise the federal minimum wage for everybody, not just those who work for federal contractors.

  • 10:21:17

    REHMBy 2015.

  • 10:21:19

    IPThat's correct, $10.10 per hour, and then index it to inflation. And this would affect at least 2 million workers and possibly more as people who are making just above the minimum get bumped up the pay scale.

  • 10:21:31

    REHMBut he cannot do that by executive order, can he, David?

  • 10:21:36

    WESSELHe cannot. I think it's important to note that the executive order only applies to new federal contracts...

  • 10:21:40


  • 10:21:40 there's not a whole lot of people who are going to get a raise on Friday even if he signs the order.

  • 10:21:45

    REHMOK. So that's the 500,000 to 1 million?

  • 10:21:49

    WESSELRight. I think it's a very important symbolic gesture for two reasons. One, it's a reminder that if Congress doesn't want to act, the president does have some muscle. And obviously the White House is looking for every bit of that muscle. And, secondly, it's clearly become part of the Obama and Democrat strategy to say we are going to reward work and to put pressure on the Republicans to come along and do something legislatively for people who work, who are the most appealing of the people at the bottom of the income ladder.

  • 10:22:23

    LEONHARDTCongress is obviously very important on all these issues, but it's not the only thing that matters. And so not only does Obama have the opportunity to unilaterally raise the wages of these hundreds of thousands of federal contractors. He also has the ability to move the debate. And the federal minimum wage matters less than it used to because many more states over the last 20 or 30 years have raised their own minimum wage.

  • 10:22:44

    LEONHARDTAnd Democrats have had a lot of success passing state initiatives. They just passed one in New Jersey the same day that Chris Christie won a resounding reelection. And so I think part of what he's trying to do here is also move the debate and maybe potentially get it on more state ballots going forward.

  • 10:22:59

    REHMAll right. Here's a tweet from Cameron: "What safety measures are being taken to prevent more fissures from opening in the economy that could lead to another crisis?"

  • 10:23:14

    IPMost of those efforts are taking place at the financial level where there's been a lot of work both internationally and here in the United States to require banks, for example, to hold more capital so they can absorb losses better, to require companies that sort of behave like banks but aren't banks to submit themselves to similar regulations, to require greater disclosure and more regulations protecting consumers who get mortgage products and so forth.

  • 10:23:38

    IPI would say, though, at this point, that the next financial crisis is probably not the primary concern for our economy. There is so much caution out there on the part of both borrowers and lenders, that what the country probably needs right now is a little bit more risk taking. And this would, for example, make it easier for banks to -- or encourage banks to make more loans and add a bit more impetus to the housing market, which is an essential ingredient for the recovery.

  • 10:24:02

    REHMAnd following up on that, David Wessel, here's an email from Jake: "Please explain the mechanics of what would cause inflation because of the Fed stimulus if the economy takes off."

  • 10:24:21

    WESSELThe notion is that if the Fed prints too much money and too much of it is lent out and we get to the point where the economy has absorbed all the unemployed workers and the Fed still has its foot on the monetary gas pedal that inflation would follow. But as Greg Ip pointed out, there are people who have been predicting that inflation's about to take off for about five years now. And, in fact, inflation is lower than the Fed's target. It's lower than the European Central Bank's target. So it's not -- on my top 25 worry list it doesn't make number 25 even.

  • 10:24:56

    REHMShould inflation be at one to 2 percent?

  • 10:25:03

    WESSELThe Federal Reserve and a lot of economists think that the economy works better if you have a little inflation. And, in part, that's a lesson of the crisis. We had a session at Brookings the other day where John Williams, president of the San Francisco feds spoke, and he pointed out that if you look over history, we had previously thought of getting interest rates to 0 and not being able to push them lower was extremely unusual because our frame of reference was the United States over the last quarter century or so.

  • 10:25:33

    WESSELBut if you look internationally and you look across history, it happens somewhat more often. So the reason to have a little bit of inflation is so you're less likely to hit the zero interest rate threshold, which is a problem. But it is worth keeping in mind that there are a few economists who think 2 percent is too low.

  • 10:25:51

    WESSELOlivier Blanchard, the chief economist at the International Monetary Fund, has said that. And there are other people, Paul Volcker notably, who think that this is a dangerous tenancy, that if you start to accept a little inflation you'll accept a little more, you'll accept a little more. And pretty soon we'll be back to where we were in the bad old days of the '70s.

  • 10:26:08

    REHMThat's the issue, isn't it? If it's a little bit, it's going to be a lot, Greg.

  • 10:26:13

    IPCertainly the people who want to worry about inflation will say that. But, in fact, you don't have much evidence in the theory or in the historical record that that happens. In the 200 and odd years that the United States has been an independent republic, we have had only one serious peace time inflation. That was in the 1970s. And frankly, many people continue to want to fight that battle even though that battle was won many years ago.

  • 10:26:33

    IPAnd one of the problems is that, going back to one of the points David made -- David Leonhardt made, is that each time the Fed, in the last five years, has made an error, it's been an error in the form of pulling back too quickly because it was afraid of repeating some of those inflationary mistakes. The result is we have inflation that is too low and an economy that's still too weak.

  • 10:26:51

    LEONHARDTBut I think there is a sense, and I'm sure you'd agree with me Greg, that although the wages and prices are not going up very much, there's concern inside the Fed and outside that by keeping interest rates so low, they're building financial bubbles that'll hurt us in the future.

  • 10:27:06

    LEONHARDTThat one reason the stock market has been so strong is that people are taking their money out of bonds because the Fed has successfully pushed those rates down. And when rates are low, people start to do stupid things. And you see a few signs of that happening. So inflation in asset prices in stocks and weird securities could be a bigger problem.

  • 10:27:24

    REHMAnd savings. How about savings? People -- older people who put their money in banks and who get nothing in return.

  • 10:27:34

    LEONHARDTYes, that is a problem. I think that by and large the last five to 10 years have actually been much harder on younger people than older people. So you're right that the very low returns for savings have hurt older people. But if you look at the overall numbers, the income hit that younger people have taken has actually been bigger than the income hit that older people have taken. And there's a way in which inflation actually helps younger people. I know we all sit around thinking inflation is just bad, right. But it's not.

  • 10:27:59

    LEONHARDTIf you have any kind of debt, inflation helps you. It helps you pay off your mortgage. It helps you pay off a car loan. Inflation essentially helps -- encourages risk as long as it doesn't get 1970s style. So there are downsides to low inflation. There are risks that inflation could go much higher. But I think -- I agree with Greg and David that the overwhelming risks right now are all pointed toward an economy that is too weak with too little economic activity and too little inflation.

  • 10:28:26

    REHMAnd the question becomes, do you expect more jobs in the coming year?

  • 10:28:33

    LEONHARDTYes, I certainly do. I think we'll have more than zero job growth. I think the question is, do we get something that is high enough that actually begins to move that number of the percentage of people with jobs. And I guess I would say I'm cautiously optimistic that we will but I don't think it's going to look anything like a 1990 style boom.

  • 10:28:50

    WESSELAnd it's really important because we know that people who have been out of work for a long time tend to have a hard time getting jobs. And the president's going to talk about that tonight. He has this initiative where apparently a number of big companies have agreed that they won't discriminate against people who've been out of work for...

  • 10:29:07

    REHMHe's got 100 leaders coming to the White House to talk about this.

  • 10:29:12

    WESSELRight. We'll see how much that actually accomplishes. It's better than nothing but I'm not sure it does much. But, I mean, here's one striking fact. If you look at men between the ages of 25 and 54, men in their prime working years, more than 1 in 6 of those men is not working. And that's much higher than it's been at any time since World War II when the statistics go. And those are the people who you expect to be working in the economy.

  • 10:29:39

    REHMOf course.

  • 10:29:40

    WESSELThey're not kids in high school, and they're not retirees.

  • 10:29:44

    LEONHARDTThis is a good point -- time to mention that if you just looked at the unemployment rate, which is the number we're most familiar with, it's down to 6.7 percent. That seems very low. It's come down quicker than most people would expect. But one of the reasons it's come down so quickly is not because so many people are finding work.

  • 10:29:58

    LEONHARDTIt's because so many people are no longer looking for work. But we don't really fully understand why that is. We know that some of these people are the so-called discouraged workers who've simply given up the hunt. And once the economy gets better, they'll come back in, and they'll look for jobs again.

  • 10:30:10

    REHMWe don't know what percent...

  • 10:30:11

    LEONHARDTBut a lot of those people do not fall into that category. We think those might be people who have retired early. They might be people who've gone on a disability program and many of those people will never ever get off the disability program. And I think that's -- when you talk about will we see job growth this year, I think the answer is yes. But we, in the last five years, have learned to lower our expectations about what normal job growth is because there seems to be something going on in the demographics of our country that suggests the working age population is not as big as we thought it would be.

  • 10:30:40

    REHMWhat about making college affordable? What does the president hope to be able to do either by executive order or pushing this Congress?

  • 10:30:53

    WESSELWell, I don't know what the president has in mind for the State of the Union. What he's talked about is making it easier for people to go to college, making it harder and putting more pressure on colleges not to raise tuition so much and to look for ways to help people make better choices about going to college so that you don't end up going to someplace, getting a degree, or even worse, not finishing a degree in a field where there are no jobs.

  • 10:31:21

    WESSELSo at the moment, I think he's very focused on making the colleges more competitive, making them look more like ordinary businesses that have to compete for students and providing more information. Some of that he can do through executive order, and there's some stuff in training.

  • 10:31:38

    LEONHARDTThe real problem is not people who graduate from college with debt. The extreme stories you hear about the poet who graduates from USC with $100,000 in debt are extreme stories. There are actually relatively few kids like that. Most people who graduate from college end up with something on the order of $25,000 in debt.

  • 10:31:56

    LEONHARDTThat's the typical debt to graduate from college. Inflation adjusted -- it's what I graduated from college with, so it's a number that I have some personal experience with. With a bachelor's degree, that's eminently possible to pay off. The problem, as David was getting at, are the people who graduate with debt and no degree. That is really hard. And so what...

  • 10:32:14

    REHMDebt and no degree because they drop out?

  • 10:32:17

    LEONHARDTBecause they drop out. And there are huge numbers of people who do that. We have gotten very good at making sure massive numbers of young Americans go to college. We are not that good at making sure massive numbers graduate. And so part of what the administration is signaling here is that it wants to help kids make better decisions about going to colleges where they are more likely to graduate. To graduate with $15,000 in debt and no degree is really bad. To graduate with $25,000 in debt or even $35,000 in debt and a four-year degree is fine.

  • 10:32:48

    REHMDavid Leonhardt of The New York Times, and he'll be the managing editor of a new New York Times website covering politics and policy. Congratulations, David.

  • 10:33:02

    LEONHARDTThank you, Diane.

  • 10:33:03

    REHMAnd you're listening to "The Diane Rehm Show." Let's open the phones, 800-433-8850, first to Bob in Grand Blanc, Mich. You're on the air.

  • 10:33:19

    BOBThank you, Diane, for taking my call.

  • 10:33:21


  • 10:33:22

    BOBHere's my question. Central banks are so influential, not just in this country but in the global economy. Here's my question. A lot of people have challenged the legitimacy of this marketplace with the quantitative easing that's been going on with the Federal Reserve in the past couple of years or several years.

  • 10:33:42

    BOBMy question is, what would be the true valuation of this marketplace without all of the influence of the Federal Reserve? I'm just curious to know what the true valuation of the market would be without all of this artificial stimulation because so many people, or at least a number of people, have challenged the legitimacy of the value of these equities of this marketplace. Thanks, again, Diane.

  • 10:34:04

    REHMAll right. All right. Thanks for calling, Bob. Go ahead, Greg.

  • 10:34:09

    IPWould it be a cop-out to repeat what David said earlier, which is we don't know what the true valuation is or should be? But I will make one quick point, which is that you often hear this, that the stock market is doing what it's doing only because the Federal Reserve is basically feeding it these artificial stimulants. I don't think that's quite right. What the Federal Reserve is doing is trying to keep credit cheap so that people who do want to borrow can borrow. That generates demand. That generates jobs. That raises profits in the future. That makes stocks more valuable.

  • 10:34:35

    IPThey're also sort of cutting off the downside risks of the economy falling back in recession. That raises confidence by investors and makes them more comfortable to take the risk of buying stocks. It is one of the reasons that you are seeing this sell-off in markets around the world right now, nervousness that they're about to lose the support from the Federal Reserve.

  • 10:34:53

    IPIf that's all that's going on, I'm not frankly that worried because you often see this when the Federal Reserve or other central banks move from a stance of being easy with money to being a little bit less easy with money. What I'm more concerned with is if this shift in central banks is coincident with a slowdown in the underlying strength of the economy. For example, we did see some signs out of China that the economy there is slowing down perhaps more than people expected.

  • 10:35:18

    REHMAnd there was talk about developing countries as well.

  • 10:35:23

    IPAbsolutely. So emerging markets, places like Russia, places like Brazil, places like Turkey have received a lot of interest from investors in other countries seeking better returns than they could get from the very low interest rates available here in the United States.

  • 10:35:35

    IPSo as investors begin to realize that interest rates may be a little less friendly, they're taking money out of those markets. And it's aggravated by the fact that they're learning that there are a lot of structural weakness in those countries, enormous levels of political instability in places like Turkey and Russia -- excuse me, and Ukraine.

  • 10:35:52

    REHMAll right. To Richard in Haverhill, Mass. You're on the air.

  • 10:35:58

    RICHARDOh, thank you, Diane. You know, speaking of the Fed, they've kept the rates so low that companies that could borrow very cheaply, which also, like he just said, which helped their stock prices and everything else. But right now, you know, U.S. corporations are sitting on 1.8 trillion in cash. They're not investing that in this country in jobs and job creation.

  • 10:36:21

    RICHARDThey're making more money abroad in the last years for investing their money abroad. And if the TPP ever goes through, the Transpacific Partnership goes through, why would they have the incentive to invest their money in this country? And the only one that's benefitting by this is not Main Street at all but people that are involved and have investments in the stock market.

  • 10:36:47

    REHMAll right, sir. David Wessel.

  • 10:36:51

    WESSELI think the caller makes two points, one of which I agree with and one of which I don't agree with. It is true that it's extremely disturbing that companies have so much cash that they don't know what to do with and they don't seem to have enough confidence in the U.S. and the global economy to use that cash to invest more in plant and equipment and R&D and giving raises to their workers. And that is a really serious problem. And it's a sign of dysfunction in our economy right now. I'm not so worried about trade destroying jobs here as he is.

  • 10:37:27

    REHMDavid Wessel of the Wall Street Journal and the Brookings Institution. Short break, we'll be right back.

  • 10:40:01

    REHMAnd welcome back. One question I have for all of you: In addition to trying to push the minimum wage, what else can or should the president be doing to try to assist this problem of income inequality? David Wessel?

  • 10:40:25

    WESSELHow come I got picked at?

  • 10:40:27

    REHMI don't know. You just got it. You were looking down.

  • 10:40:33

    IPIt's like back in elementary school. You in the back row.

  • 10:40:34

    REHMYeah, right, right.

  • 10:40:36

    WESSELSo, look, there's a really interesting debate. And I'm, frankly, heartened by the fact that now in Washington we are doing a little less arguing about whether there is more inequality. And we're doing a little more talking about, if you want to reduce inequality, what should we do about it? And there's also, I think, a very welcome and robust debate about what can we do to make it easier for people who grow up in poverty to get to the middle class? Look, there is a very simple way that the president could reduce inequality, which is it raise taxes more on rich people and give that to poor people.

  • 10:41:11

    WESSELHe's done some of that. That's not going to happen again. Everything else from here on in is going to be really hard because the market economy is clearly widening the gap between winners and losers, and it's making it harder and harder for people at the middle to get good jobs. And it has a lot to do with technology and globalization. And those are things that you can't outlaw or change by executive order.

  • 10:41:37

    REHMWhat was the book you were just talking about, Greg?

  • 10:41:41

    IPSo there's been a lot of talk actually about this book by Erik Brynjolfsson and Andrew McAfee. It's called "The Second Machine Age." And it basically discusses how advances in technology are now going after jobs that used to be thought safe from machines because they involved uniquely human qualities. Driving a car, for example, used to be something that involved so many sort of instinctive reactions, you know, did that light change, did a little kid run into the street -- that only humans could do this.

  • 10:42:05

    IPBut it turns out now Google has cars that can do this. And in this book they explore countless areas of human activity, whether it's grading exams, designing a new beer bottle, underwriting insurance -- they think machines will eventually be able to do. And the troubling message is that people who have traditionally come out of high school or college with the skills to do those middle-level jobs are now going to be out of opportunities, fighting with the other people at the bottom of the scale for the jobs that machines cannot do, such as folding hotel towels.

  • 10:42:35

    LEONHARDTThat general idea is not new. There's this wonderful book by Claudia Goldin and Larry Katz called, "The Race Between Education and Technology." And this is a long-term issue of human society over time. Technology moves forward and our skills move forward. And if we can get them both to move forward, that's great. We'd become a much richer society. We can live more healthfully. We can live longer. We can have more leisure and more resources. The problem is that when technology moves ahead of education essentially a lot of people get left behind.

  • 10:43:04

    LEONHARDTSo we were talking before about education. Absolutely one of the most important, if not the single most important thing that can happen for inequality is higher levels of education. And so all these attempts to improve school systems, all this stuff about college, that's all very important for inequality. It's not the only thing. Things like how much of our economy Wall Street takes up also matter. Tax rates also matter, but education is crucial.

  • 10:43:27

    WESSELRight. But education is a long-term thing.

  • 10:43:29

    LEONHARDTYes, it is.

  • 10:43:30

    WESSELWe're not going to change that overnight. But I think the other thing that we've seen is that choices that people make, as parents or as kids, have a big effect as well. So if you can get through high school and graduate without getting pregnant, without getting arrested, you have a much greater chance of going from poverty in the middle class than the opposite.

  • 10:43:48

    IPBut I would also caution against thinking that education is the magic bullet that solves all this problem. Because one of the things that we've discovered over the last 10 years is that, even among people who do have higher levels of education, inequality has grown. The best paid university graduates are pulling away from the lowest paid university graduates. There are people out there getting law degrees who cannot find jobs in law firms.

  • 10:44:10

    REHMQuite right.

  • 10:44:10

    IPAnd so one of the interesting areas perhaps for policy is to explore what we can do, not at that later part of youth, in terms of higher education, but before they even begin to get into elementary school. That's why you see a big push in many localities in states for universal pre-K. And that is another thing that I expect to hear the president talk about tonight.

  • 10:44:30

    LEONHARDTI agree with Greg that education is not a magic bullet. But I would say to anyone out there, if you are trying to decide whether to go to college, whether to stay in college, if you're trying to decide whether to send your kids in college, everyone you ever hear expressing skepticism about education, from a think tank or in a publication, is saving a lot of money to send their own kids to college.

  • 10:44:47


  • 10:44:47

    LEONHARDTAnd so I would urge every single person, do not think that you can succeed in this society without education.

  • 10:44:53

    REHMHere is a tweet from Sid: "Many people, like my brother and myself, have dropped out because there's huge age discrimination. My technical skills are excellent." What do we say to him?

  • 10:45:12

    WESSELHe's right. I mean, look, we know that when employers can be choosy, they tend to shy away from older workers who they think have less technical skills and less flexibility and less agility and demand more money than younger workers. So one solution to that is, if we had more jobs, employers couldn't be so choosy. In the '90s, I did a story about Grand Rapids, Mich. It was a story about what's it like to be at full employment.

  • 10:45:42

    WESSELAnd one of the things I discovered was that at the Goodwill Center, which found jobs for developmentally disabled people, they had sent workers to one place and the other factory in town was complaining it wasn't fair. You're sending all your disabled workers to that place. That's what happens when you run a high-pressure economy with lots of jobs. And we're not there.

  • 10:46:06

    REHMAll right. Let's go back to the phones to Randy, in Mantua, Ohio. You're on the air.

  • 10:46:14

    RANDYThank you, Diane.

  • 10:46:15

    REHMRandy, are you there?

  • 10:46:17

    RANDYYes. Can you hear me?

  • 10:46:18

    REHMYes, sir. Go right ahead.

  • 10:46:20

    RANDYIt really makes me angry that economists are saying there is little or no inflation. I've calculated my personal inflation to be at least 50 percent in the last 10 years -- the grocery store bill, the fuel oil bill, the gasoline bill, service fees. Where do they get off saying there's no inflation? That's ridiculous.

  • 10:46:46

    REHMI think Randy has a good point for individuals. Going to the gas pump, going to the buy a quart of milk, going to the movies, it used to be -- I'm dating myself -- I paid 12 cents to go to a movie many years ago, and now it's, what, $8.50?

  • 10:47:12

    LEONHARDTI obviously can't know what the inflation he's experiencing is. I do know that, as human beings, we focus much more on the prices going up than not going up. And so as a result, we tend to think inflation is higher than it actually is because we pay much attention to the prices rising. I was walking around New York City, where I grew up, the other day, and I passed two storefronts advertising slices of pizza for a dollar.

  • 10:47:34

    LEONHARDTThat's how much I bought slices of pizza for in the 1980s. And so the idea that -- but I didn't suddenly think to myself, there's no inflation. This is wonderful. I instead tend to focus on the things that are more expensive than they used to be. What's hard to balance is that there are many things that are not more expensive. And yet the things that are more expensive occupy a bigger -- they're more salient, as psychologists would say.

  • 10:47:54

    WESSELI think the other thing is that people don't remember that if you spend $1,000 on a television today, you get one heck of a lot more television than you did 10 years ago. And the way economists and the government think about that, that's actually falling prices.

  • 10:48:09

    IPI also think people need to remember that inflation doesn't mean prices are going down. It's about how fast they're going up. And a lot of things are going up less rapidly than they did before. One prominent example, healthcare costs. Against all expectations, healthcare inflation is now running at one of the lowest levels in quite a few years.

  • 10:48:25

    LEONHARDTAnd that's also a great example of how we don't feel that way. Because one of the reasons that healthcare costs, the growth rate of them have slowed, is that we're all now paying more out of pocket. We're having less taken out of our paychecks before we ever see it. We're paying more out of pocket.

  • 10:48:36


  • 10:48:37

    LEONHARDTSo we feel like it's going up.

  • 10:48:38

    REHMAll right. To Mike, in St. Louis, Mo. You're on the air.

  • 10:48:44

    MIKEHi, Diane.

  • 10:48:45


  • 10:48:46

    MIKEThis conversation sounds like the Mad Hatters Tea Party in "Alice in Wonderland," people describing different ends of inflation and how it affects people. And I also heard the term leveling the playing field, which is kind of indicative of what my question, which is about standards. We have standards for a gallon of milk or a gallon of anything and for a pound or for a foot. And yet, for the most important value that we have, our money, it's completely arbitrary and causes inflation and, again, this Mad Hatters Tea Party commentary about what things cost and what things are valued at.

  • 10:49:27


  • 10:49:28

    IPI'm reminded of headline in The Onion, that great satirical magazine in which Ben Bernanke suddenly stops in the middle of a testimony. He pulls out a $20 bill and says, it's all a figment of my imagination. It's all illusory. And the caller is right. You know, there is something about money which is essentially all about the confidence that you have in it. Money does several things. It's essentially one way you can store your savings.

  • 10:49:49

    IPIt's a unit of account. It's a way that you can transact with other people. I don't notice a lot of people abandoning dollars and using Euros instead because they don't believe that the dollar is going to retain its value. So, notwithstanding the fact that it doesn't have, you know, gold standing behind it, the Fed seems to be doing a pretty good job of over time maintaining people's confidence in its purchasing power.

  • 10:50:09

    REHMAll right. Let's follow up on that with Bill, in Galax, Va. Hi. You're on the air.

  • 10:50:17

    BILLHey, thanks for having me on.

  • 10:50:18


  • 10:50:19

    BILLI have a couple of questions. What do you think of the program, the print, money reprinting large amounts of money every day? Do you think that is necessary? Also, how do we rebut the comment of people like Glen Beck, Rush Limbaugh and other ilk, about this program? My feeling is that Mr. Bernanke knows, you know, he knew what he was doing when he initiated the program. And you said something about how do we feel about raising the minimum wage. I'm all in favor of it. I think we're very low. It seems that the European countries have pretty high minimum wages.

  • 10:51:03

    REHMAll right, sir. Thanks for calling. David Leonhardt?

  • 10:51:07

    LEONHARDTI'll start with the last question. So the minimum wage fell in real terms -- that is adjusting for inflation, which is what matters most -- quite sharply in the 1980s. It peaked in the '60s and then fell quite sharply in the 1980s. It's actually remained roughly constant, meaning it's come up with inflation over the last 20-plus years. But as the caller notes, it's also lower than in much of Europe. So it depends on your framework.

  • 10:51:30

    LEONHARDTI think the way to rebut the worries about how printing money is going to lead to runaway inflation is to point out -- as I alluded to earlier, we have heard those worries now constantly for six years. And, I mean, the president of the Kansas City Federal Reserve warned of German-style inflation. And when he warned of that inflation was higher than it is today. And so those predictions have been just proven wrong so many times that it's worth taking people back to how often they've been wrong.

  • 10:51:54


  • 10:51:54

    IPI think the other thing to say is, what would it have been like had the Fed not done all these things? And the people at the Fed and Ben Bernanke certainly believe that the economy would have been worse without them. But some people just don't believe that.

  • 10:52:26

    REHMJust one quick thing. Printing money can't cause inflation unless people go out and spend the money that gets printed. And the big problem we've had for the last four or five years, the Fed's been printing it, and not enough people have been spending it. We want to get to a situation where enough people are spending it that the level of demand in the economy is back to normal levels.

  • 10:52:27

    REHMBut, as you said at the outset of this program, the consumption of large manufactured goods is sort of down.

  • 10:52:40

    WESSELIn the month of December. That was after several strong months. So the question mark in a lot of our minds right now is was December an anomaly or is it the start of a new swoon in the economy. Right now, I've got my fingers crossed. I'm hoping December was just an anomaly.

  • 10:52:52

    REHMAnd you're listening to "The Diane Rehm Show." Let's go to Chris, in Byron, Ill. You're on the air.

  • 10:53:04

    CHRISYeah, good morning. I agree that these people sound like they're kind in fantasy land. I was told I could make two points. One is when they talk about job creators -- and they always talk about the business leaders, small, medium or large, being the job creators. Consumers are job creators. So that's one thing they need to change. No businessman can run a business and hire people if there's no consumers.

  • 10:53:28

    CHRISAnd the business model for the global economy has been to make something somewhere where it's cheap, ship it to the United States, and have the middle class buy it. The problem is the middle class has no money any more. It's disappeared. And the economists are always mesmerized by why we have slower and slower recoveries when the answer is very simple. The more jobs you ship overseas as time goes by, the less jobs there are for people to go back to.

  • 10:53:50

    REHMAll right, sir. Thanks for calling. David Wessel?

  • 10:53:53

    WESSELWell, the caller is right, that one of the big problems in the economy is there's not enough demand and that's one reason why businesses are reluctant to hire and expand. We would have more demand if households had more income. They would have more income if there were more jobs, and if more of the growth in the economy went to the middle class and less of it to the top .01 percent. So that part the caller's right on.

  • 10:54:17

    WESSELIt is true that over time we have bought more of our things from abroad. There's no doubt about that. So if your livelihood was in making things at a factory, you may very well be disadvantaged. But most jobs in our economy are not making things. Most jobs in our economy are providing services. And some of them are lousy jobs and some of them are great jobs. And we will over time have every reason to expect that a growing fraction of our workforce will be in services. That's just life.

  • 10:54:46

    REHMI've heard two callers, maybe three, say that you all are living in fantasy land. You, David Wessel, from the Wall Street Journal, you, Greg Ip, from The Economist, you, David Leonhardt, from The New York Times, do you represent a narrow path of thinking that is totally contradicted by other people? You know, Rush Limbaugh, notwithstanding, but, I mean, are there really other people out there who just think -- I'm talking about trained economists and people who really know this stuff -- who just think you all are dead wrong?

  • 10:55:36

    IPWell, one thing we do know is that the country's become very polarized in the last four or five years.

  • 10:55:40

    REHMYou bet.

  • 10:55:41

    IPAnd so I am quite sure that there are people who disagree violently with me, but they also disagree violently with each other. And that doesn't necessarily tell us who's right and who's wrong. But it's not just that. It's also the case that many of the problems we're dealing with are difficult problems. So let's talk about one of the issues that I think is arousing the sort of sense that we're all in fantasy land. Does the Fed buying bonds by printing money actually help? Well, the Fed thinks it does. They think that when they buy bonds, long-term interest rates go down and more people will buy houses.

  • 10:56:13

    IPBut the truth of the matter is this is kind of like frontier stuff. Nobody's done it before, and so we can't really be sure. And there are thoughtful people on both sides of that debate -- those who think it helps a lot and those who don't think it helps at all and might actually be doing some harm. And, unfortunately, we do not have the luxury of controlled trials, like you do when you're testing a new drug, to tell us whether it does more harm than good.

  • 10:56:34

    LEONHARDTI think if you took some sort of consensus of economists, it would reflect much of what you're hearing here. Now, I know that's not going to persuade the callers. I think they come from both a populist left and a populist right that's growing. And I think that's part of what you're hearing here.

  • 10:56:46

    REHMWhat grade would you give Ben Bernanke?

  • 10:56:50


  • 10:56:51

    REHMGreg Ip?

  • 10:56:52

    IPA to A-minus.

  • 10:56:53

    REHMAnd David Leonhardt?

  • 10:56:55

    LEONHARDTB-plus. He made too many mistakes since the crisis for me to get to an A-minus.

  • 10:57:00

    REHMAll right. You have it all. David Leonhardt, Greg Ip, David Wessel, thank you so much. And thanks to all of you for listening. I'm Diane Rehm.

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