International Monetary Fund Managing Director Christine Lagarde delivers opening remarks during a panel about sustanable and robust economic growth at the Jack Morton Auditorium at George Washington University October 8, 2014 in Washington, D.C. The IMF and the World Bank Group are holding their 2014 annual meetings in Washington.

International Monetary Fund Managing Director Christine Lagarde delivers opening remarks during a panel about sustanable and robust economic growth at the Jack Morton Auditorium at George Washington University October 8, 2014 in Washington, D.C. The IMF and the World Bank Group are holding their 2014 annual meetings in Washington.

The financial markets swung wildly last week, as concerns grew over a global economic slowdown. The International Monetary Fund has slashed its global growth forecasts, and the eurozone may be on the brink of its third recession since 2008. World economic leaders met this weekend in Washington and vowed to take bold action to bring stability, while remaining divided on next steps. The U.S. remains a bright spot in the world economy, with encouraging trends like declining unemployment. But Fed officials have said the situation in Europe could delay interest rate increases, and many worry about the slowdown’s impact on the U.S. economy’s forward momentum. The global economic slowdown, and what it could mean for U.S. recovery.


  • Alice Rivlin Senior fellow, Brookings Institution, vice chair, Board of Governors, Federal Reserve System (1996-99); director, White House Office of Management and Budget (1994-96); and founding director, Congressional Budget Office (1975-83).
  • Douglas Holtz-Eakin President of the American Action Forum, chief economist and director of the Congressional Budget Office from 2003 to 2006.
  • Jared Bernstein Senior fellow, Center on Budget and Policy Priorities, and former chief economist and economic policy adviser for Vice President Joe Biden.
  • Robin Harding U.S. economics editor, The Financial Times.


  • 10:06:53

    MS. DIANE REHMThanks for joining us. I'm Diane Rehm. Much of the recent economic news in the U.S. has been positive with better than expected employment figures, but outside the U.S., the situation looks very different. The International Monetary Fund puts the risk of a triple-dip recession in the Eurozone at 40 percent. Also, Japan's economic stagnation continues and prospects for China remain unclear.

  • 10:07:26

    MS. DIANE REHMHere to talk about the weakening economies in Europe and Asia and how the U.S. could be affected, Jared Bernstein of the Center on Budget and Policy Priorities, Alice Rivlin of The Brookings Institution, Robin Harding of The Financial Times and Douglas Holtz-Eakin of The American Action Forum. I'm sure you'll want to weigh in. Give us a call at 800-433-8850. Send us an email to

  • 10:08:01

    MS. DIANE REHMFollow us on Facebook or Twitter. And welcome to all of you.

  • 10:08:09

    MS. DIANE REHMGood to see you. Robin Harding, is the Eurozone the crux of the matter here?

  • 10:08:17

    MR. ROBIN HARDINGI think the Eurozone is at the heart of the sort of market wobble that we saw last week because the Eurozone economy is really in a bit of a mess and there was some bad data last week on Germany, their exports, their industrial production. And the real worry is it looks like inflation in the Eurozone is going down and down and down and down. It's now this worry that you might have a situation of actually falling prices in Europe.

  • 10:08:43

    MR. ROBIN HARDINGAnd so combined with the fact that countries like Greece are still in a terrible mess, everyone's really quite worried about what's going on there.

  • 10:08:51

    REHMAnd Spain as well with unemployment so high.

  • 10:08:55

    HARDINGSpain, Italy, Portugal. In all these countries, unemployment is really terribly high and there's not really much of an end in sight.

  • 10:09:03

    REHMYou know, I was somewhat surprised to learn that Germany is in such bad straits right now. What's going on there?

  • 10:09:14

    HARDINGSo Germany's not exactly in bad straits. It's been by far the best performer in the Eurozone, mainly because it sells all its luxury cars and everything to the rest of the world. But what's happening now, I think, is that the weakness of all the rest of the Eurozone is finally starting to drag Germany down because, you know, if France is in a bad way and everyone else is in a bad way, then who are you gonna sell those cars to. There's no one left to buy them.

  • 10:09:41

    HARDINGThe other thing that's happening is we've got some geopolitical concerns to the east of Germany in Ukraine and Russia and that's another thing that's now starting to weigh quite heavily on Germany.

  • 10:09:52

    REHMAlice Rivlin, these countries, I mean, the Eurozone, our biggest trading partners so what does that mean for us?

  • 10:10:02

    MS. ALICE RIVLINWell, it doesn't mean anything good, but it doesn't mean a disaster either. The United States is less dependent on foreign trade than most of the rest of the world. We do sell to Europe. If Europe isn't doing well, it's not good for us. But I think our economy has a good deal of momentum right now and will probably sail through this unless it gets a lot worse.

  • 10:10:28

    REHMBut what do you make of the wild ride we've seen on Wall Street recently?

  • 10:10:36

    RIVLINWell, nobody knows what to make of that and I think it's just evidence that Wall Street doesn't understand what's going on. It's a bit jittery and every time a little bad news comes out, it falls. It's possible that the market was too high anyway in relation to the prospects for U.S. companies and that this is if the nature of a correction. But who knows?

  • 10:11:04

    REHMWould you call it a correction, Jared Bernstein?

  • 10:11:08

    MR. JARED BERNSTEINTo some extent. I agree with Alice that you don't want to try to understand the economy by looking at the stock market. That's sort of like trying to understand human behavior by looking at a manic depressive. It's just way too wobbly. But I do think there's a bit of over valuation and I think that there's a bit of a detachment from the markets that have generally done very well in the advanced economies, particularly in the U.S., and the economics that we've been talking about thus far, Europe's ailments well described by Robin.

  • 10:11:44

    MR. JARED BERNSTEINYou know, GDP there is just crawling along. As he mentioned, deflation is on the scene, industrial production most recently has been negative. Now, the U.S. is doing better, but we've got problems, too. Our unemployment rate is still elevated. We've got a lot of inequality. Certainly, wage-growth isn't reaching the middle class in any big way. So I would argue that whether we're talking about U.S., Europe or even the emerging markets, China, Brazil, which are doing better, all of these economies still face some difficulties.

  • 10:12:14

    REHMAnd how do you see it, Douglas?

  • 10:12:16

    MR. DOUGLAS HOLTZ-EAKINI would agree with the way Robin assessed it at the outset. I think there's a real problem in Europe from the geopolitics to the east. You cannot underestimate the uncertainty that that's produced. And there's a real lesson here in Europe and elsewhere on the dangers of export-lead growth strategies. I mean, an enormous number of the emerging markets and Germany, for years, have relied on export-lead growth. They haven't really made the transition to having domestic purchases of their products.

  • 10:12:43

    MR. DOUGLAS HOLTZ-EAKINAnd in these situations, that's a very risky strategy and we're seeing what happens.

  • 10:12:47

    REHMThere seems to be a unifying theory that inflation is a terrible, terrible thing and that that is possibly what's driving all this. How do you see it, Robin?

  • 10:13:07

    HARDINGSo I think, and I've got some distinguished economists here who will correct me if I'm wrong, but what you want is just the right amount of inflation.

  • 10:13:14

    REHMI know.

  • 10:13:14

    HARDINGYou don't want a lot of inflation. That's very bad. But what you also don't want is prices going down because if prices are going down, why should you buy anything now? You're going to be able to buy it cheaper the next day so why should you invest any money. So falling prices are almost as bad, maybe even worse, than rising prices. So that's why what everyone wants is this nice happy medium of 2 percent inflation.

  • 10:13:34

    REHMBut finding that happy medium, Alice, seems to be the magic touch nobody has.

  • 10:13:42

    RIVLINWell, there's no magic touch in any of this. I think one could say that the Federal Reserve has done everything it could and has been reasonably successful, but we aren't using our fiscal powers and neither are the Europeans to keep the economy growing at a faster rate.

  • 10:14:03

    REHMExplain what you mean.

  • 10:14:05

    RIVLINWell, we could be investing more in things like infrastructure. So could they. And the countries, the strongest countries in Europe, and that does mean Germany, could be helping the rest of Europe by doing more investment in infrastructure and things like that, the skills and things that both create jobs and make growth better in the future. Our obsession with getting the budget deficit down and the Europeans has been part of the problem here.

  • 10:14:40

    REHMPart of the problem, Jared.

  • 10:14:42

    BERNSTEINVery much so. What Alice is referring to is this austerity problem where you take -- governments take fiscal support out of the economy too soon before the private sector is ready to pick up the slack. I'd like to make a comment on inflation that I think is very important in this case. It's not intuitive, either. You're absolutely right. You don't want too much. But one of the problems facing the U.S. and European economies that got us into this mess was a large debt overhang.

  • 10:15:09

    BERNSTEINWe were way too leveraged, meaning households and businesses took on more debt than they could sustain. One of the things inflation does for you, it actually erodes the value of your debts so it actually helps you deleverage in a way that is favorable to some of these economies trying to come out of the doldrums and when inflation is too low, that mechanism is cut off.

  • 10:15:31

    REHMSo what do we do, Doug, about what's happening in Europe?

  • 10:15:40

    HOLTZ-EAKINI don't think we do much about what's happening in Europe. Most of the U.S. problems are self-inflicted and we should be doing a better job of using our fiscal policies to grow more rapidly. We talk a lot about tax reform. We don't do it. We talk about having a more sensible infrastructure program, but we've never really done reforms to the Highway Trust Fund and we don't really undertake thoughtful infrastructure programs in the United States.

  • 10:16:06

    HOLTZ-EAKINWe have 100 programs at the Department of Transportation. They're not synchronized in any way. We get a really inefficient use of our money so we could do a lot better. And if we did, then we could take the pressure off the Fed to push the economy forward, which it's really not very good at. I mean, it really hasn't been able to generate a lot of growth despite the fact that interest rates are zero and it's undertaken extraordinary efforts to put credit into the housing market.

  • 10:16:29

    HOLTZ-EAKINGet them out of that job. They, then, can be ready for any financial shocks that come out of Europe. The Fed's very good at playing defense. If things go bad, they can flood markets with money and we should free them up to do that job. That's what they're best at.

  • 10:16:40

    REHMSo where do you see Europe going next, Robin?

  • 10:16:46

    HARDINGSo I'm afraid it's very hard to be too optimistic about Europe because they just haven't fixed the underlying problems here, which is that you have a currency union so all these countries that have joined the euro, they're all sharing the same currency, but you don't have a united government so you can't have the governments of the Eurozone saying, look, things are a mess in Greece. We've got to spend lots of money in Greece to fix it.

  • 10:17:13

    HARDINGYou go and ask for Germans to do that, they'll say, well, you know, no, thank you very much.

  • 10:17:17


  • 10:17:17

    HARDINGAnd it's a similar problem with the banks. So you've got banks in a mess in some of these countries, but how do you go to the German taxpayers and say, you know, sorry, guys, you need to hand over billions of euros to help fix the banks in Spain. They're not going to do that. So there's this very deep problem there. You add to that the fact that the European governments are reluctant to do what Alice and Jared were saying, which is do infrastructure spending and use their own budgets to this.

  • 10:17:45

    HARDINGAnd then, you add the fact that the Germans have this deep memory of hyper inflation in the 1930s and thus, they're very reluctant to let the European Central Bank take any risks. It's very hard to see how Europe gets out of this on any realistic time scale. It's going to take a very long time to sort these problems out.

  • 10:18:04

    BERNSTEINIf I can combine two comments from Doug and Robin, Doug correctly pointed out that the Federal Reserve can kind of set the table in terms of lowering borrowing costs. They can make the interest rate that borrowers face very, very low and they've done so. But unless there's more demand in the economy, people aren't going to take advantage of the actions of the Fed so you need -- as long as the private sector isn't creating the optimal demand, you need the fiscal sector to do that and that's where the breakdown is occurring.

  • 10:18:36

    REHMJared Bernstein of The Center on Budget and Policy Priorities. Short break here. We'll take your calls when we come back.

  • 10:20:00

    REHMAnd welcome back. Our first tweet, Holly wants to know, "Is the euro an endangered species," Robin?

  • 10:20:12

    HARDINGI don't think it is, no. And if you think what's happened to Europe in the last five years, they've kept the euro going despite all that. So I don't think the euro's going anywhere. But that means you've got to find another way to solve this problem.

  • 10:20:25

    REHMAnd to you, Alice, here's an email from Sam. "What is Europe's situation going to mean for interest rates here at home?"

  • 10:20:38

    RIVLINI don't think Europe's situation will mean a lot unless of course it gets a lot worse for interest rates here. The Fed is signaling that it will keep interest rates low, which it's been doing for a very long time for a considerable period, whatever that means. It probably means that they will start raising interest rates sometime next year but not very fast, or maybe not even then. So I don't think we're going to have much impact from Europe.

  • 10:21:06

    REHMDo you agree with that policy on the part of the Fed to continue to keep interest rates almost at zero?

  • 10:21:17

    RIVLINI do for now although it does have some downsides. It invites some investors to, as they say, reach for yield. Do something riskier than they would otherwise do just to get a higher interest rate or dividend. But for the reasons Jared stated earlier, we still have a slow-growing economy, better than Europe, but not a really robust economy. And we still have nearly 6 percent unemployment. It'd be a lot better to get that down.

  • 10:21:51

    HOLTZ-EAKINYeah, I think we should pray for higher interest rates because when we finally see them we'll -- that will mean the Fed really believes the recovery has taken hold and we're growing at a more rapid rate.

  • 10:21:59


  • 10:21:59

    REHMBut you don't think they ought to be doing that now?

  • 10:22:01

    HOLTZ-EAKINNot right now. I'm not a big fan of these what they call the large-scale asset purchases, going out and buying up treasuries, going out and buying MBS. But I think the low interest rates are absolutely appropriate. And I'm less interested in when they start raising interest rates and more interested in looking at the end of 2015. Where do they have them? If we've still got interest rates at say 1.5 percent and we've got inflation that's 2 percent, we're still basically running negative real interest rates. And that's a pretty loose monetary policy.

  • 10:22:31

    BERNSTEINYeah, I have a somewhat -- a slightly different view from Alice on this point, just slightly, because I think she's probably right in terms of how this all affects Federal Reserve interest rate policy. I would put a little more emphasis on the possibility that this could lead the Fed to keep interest rates lower for longer for two reasons. One...

  • 10:22:50

    REHMYou mean if Europe remains...

  • 10:22:52

    BERNSTEINIf Europe remains weak, as I think it will and as I think Robin correctly suggested that, you know, the future doesn't look a whole lot better than the past but at least in the near year term, both slow growth in Europe -- and something else that we haven't mentioned, because Europe's growing slowly, the value of the euro is declining pretty sharply relative to the dollar.

  • 10:23:12

    BERNSTEINNow a stronger dollar means less inflation in our economy. So slower growth and less inflation could both, together push the Feds to hold rates down lower for longer. I actually think if they need to do that they should.

  • 10:23:26

    RIVLINOh, I don't disagree with that but what they will be looking at is the U.S. economy, the effect of Europe on the U.S. and that's what they should be looking at.

  • 10:23:35

    REHMSo in -- go ahead.

  • 10:23:38

    HOLTZ-EAKINAnd I would say, when you look at Europe I think an important thing to remember is that you can toss all the economics when it comes down to whether the euro will survive or not. It's a political union that gives Europe as a whole a more substantial footprint on global affairs. And that's why they united. It wasn't about the economics ever and it will cling together despite bad economics.

  • 10:23:58

    REHMDo you agree with that, Robin?

  • 10:23:59

    HARDINGNo, I think that's basically correct. And you think back to when the United States was created and it sets up its currency, you know, the early years of that were fairly rocky and the early monetary history of the U.S. is fairly rocky. But it was about building a nation and building a political union. So no one was going to say, well gosh, the currency isn't working out very well, so let's abandon this and go our separate ways. There's a much deeper political project behind this.

  • 10:24:25

    REHMSo what do we do? Do we simply ignore what's happening in Europe and continue to proceed as we have done?

  • 10:24:36

    HOLTZ-EAKINThere is an important place for the large scale international consultations that go on all the time, the G20s and visiting and talking about what Europe might do better, talking to the Chinese about developing a domestic economy. All of that's useful information sharing, useful advice giving. But when it comes to actually doing things, the U.S. is going to look at the tools it has to affect the U.S. economy. The Fed's going to look at the U.S. inflationary, the U.S. growth rate, the U.S. unemployment rate. And hopefully our congresses and administrations will look at the tax policies we need. They'll look at the infrastructure...

  • 10:25:08

    REHMBut they're not doing anything right now.

  • 10:25:10

    RIVLINNo, but that's the problem. They aren't doing anything.

  • 10:25:12

    HOLTZ-EAKINI don't disagree with that.

  • 10:25:15

    RIVLINThat's -- our political gridlock is extremely dangerous. The best thing the United States can do for the rest of the world is run a strong economy here. We're very big, we impact the rest of them. And if we're growing more rapidly and our unemployment rate is going -- coming down, that's good for everybody. But the reason that isn't happening is that we're in total political gridlock.

  • 10:25:42

    HOLTZ-EAKINAnd I think what the IMF and the World Bank just said is very important in the following sense. They said, look, the world needs to grow more rapidly. And when policymakers are faced with actual choices, there are always tradeoffs. There are lots of things that you can do. What they're saying is, when you face a decision that says this will help growth or it'll help something else, choose growth. And I think that's a discipline that we need right now. It is so important in the U.S. to grow more rapidly. It is so important outside the U.S. to grow more rapidly that you cannot undertake large scale projects of another type. You've got to focus on growth.

  • 10:26:12

    REHMKey question, how?

  • 10:26:14

    BERNSTEINYeah, that's where I was going. I think there are basically two ways in which economists, by default, think about answering this question how. One is fiscal policy and one is monetary policy. The monetary authority has been discussed, the Federal Reserve. I think they've been doing a good job. I think they've been doing the best they can do. They can't do it all by themselves, as Doug said. It's on the fiscal side where we've dropped the ball. Now the problem here, as was just discussed, is that, well, congress isn't going to do anything. So does that mean we're dead in the water? And the answer is no. You have to look below the national level.

  • 10:26:51

    BERNSTEINGovernors still have to do stuff. They have to run states, they have...

  • 10:26:55

    REHMBut they say they're broke.

  • 10:26:57

    BERNSTEINWell, you know, if you look around some of the cities, you begin to see some promising developments. It's not enough -- and with a dysfunctional federal government we can't go nearly far enough. So I'm with my colleagues on that point. The Port of Cleveland, I just read, is digging out...

  • 10:27:13

    REHMWhere I'm going tomorrow as a matter of fact.

  • 10:27:14

    BERNSTEINOkay. Well, you might want to go look at the big dig project over there in the port.

  • 10:27:17


  • 10:27:18

    BERNSTEINApparently they're digging out a deep enough port so they can have a waterway all the way to Europe. I mean, I didn't even know you could get to Europe from Cleveland but apparently it can be done. So if you look at some of these sub-national activities, they can't do nearly enough. We absolutely need a better process at the federal level.

  • 10:27:39

    REHMAnd you're saying the State of Ohio is paying for this big dig with money from the Feds.

  • 10:27:43

    BERNSTEINAbsolutely. They're getting some -- but the federal investment in public infrastructure...

  • 10:27:52 highways.

  • 10:27:53

    BERNSTEIN...everybody left, right, center agrees, this needs to go up. How we pay for it, we could have good arguments about it but everybody agrees this needs to go up.

  • 10:28:01

    RIVLINAnd some of it can be public private partnerships too.

  • 10:28:04


  • 10:28:05

    RIVLINAnd that is happening, toll roads and that sort of thing.

  • 10:28:08

    HARDINGI think this is all good stuff. I think the panel is slightly too pessimistic about the quality of U.S. economic policy. U.S. economic policy, you look around the world, looks so much better than what's happening everywhere else.

  • 10:28:20

    REHMWell, but it's all comparative, that's the problem.

  • 10:28:23

    HARDINGWell, so apparently the U.S. is doing extremely well. And the rest of the world -- and I think this is slightly a problem for the U.S., the rest of the world is relying on the strength of U.S. growth to drag it through these difficult times.

  • 10:28:34

    HOLTZ-EAKINJust one quick point, one quick point. When you say the U.S. is doing really well, there are a lot of people in the U.S. who heard that and just said, no, we're not.

  • 10:28:43

    REHMNo, we're not.

  • 10:28:44

    HARDINGSo say -- the U.S. is doing well. I said U.S. policy is doing well.

  • 10:28:46

    HOLTZ-EAKINAh, I see. Okay. So you have to separate out the macro growth indicators where we are doing better than these other countries and how average folks are doing.

  • 10:28:54

    BERNSTEINI mean, this has been a very bad recovery for anyone who's trying to find a job, get a raise. It's not a good recovery. There's no way around that. The thing that concerns me is what Robin said is right, the rest of the world is looking at the U.S. as the last retail market on the planet and they want to sell to the U.S. consumer. That was, in fact, the structural problem that led us into the great recession. I think we really need to worry as a global economy about repeating those structural errors where everyone's selling into the U.S., the U.S. consumers' are financing those purchases by borrowing a lot. That was a recipe for disaster, needs to be fixed.

  • 10:29:26

    REHMHow do we avoid that, Alice?

  • 10:29:29

    RIVLINWell, it's not easy but at the moment we are still in what Jared described as a deleveraging period where people are reducing their debts. That is beginning to turn around.

  • 10:29:47

    REHMHave a good effect.

  • 10:29:49

    RIVLINYes. Within limits people borrowing money for consumption and buying houses and so forth is a good thing. And the lower interest rates help that.

  • 10:30:01

    REHMBut doing so within the reality of their own individual economies rather than buying far more than they can actually afford.

  • 10:30:14

    RIVLINOh, absolutely. We learned the lesson of rapidly declining lending standards in all of that.

  • 10:30:23

    REHMAll right. I'm going to open the phones now, 800-433-8850. First to Milwaukee, Wis. Hi there, Jeff. You're on the air.

  • 10:30:37

    JEFFThanks for taking my call.

  • 10:30:38


  • 10:30:40

    JEFFFrom what I understand this is to your economist in the group. Wells Fargo has put out a warning to their employees reducing all travel because they're forecast is for the American economy to take another downturn. And they're concerned about obviously their share price and dividends to their stockholders. I'll hang up and listen for the response to that...

  • 10:31:00

    REHMAll right. Thanks for your call. Jared.

  • 10:31:03

    BERNSTEINWell look, I'm about to tell you about what the forecasters really say but as I'm saying it I'm always -- I'm going to caveat that the forecasters have been wrong a lot. But what the caller suggests -- what Jeff suggests is not consistent with the general forecast for the U.S. economy, which is to continue growing actually a little faster than we've been growing now. So we've sort of been puttering along at 2, 2.5 percent. There's thoughts that we're going to do a little better, 3, maybe 3.5, 4 percent for the next few quarters in terms of GDP growth.

  • 10:31:35

    BERNSTEINHowever, and by the way, the IMF just was another example of this, every forecast continually is marked down as reality intrudes. And people are -- these forecasts have been consistently too optimistic. So I don't see a recession in the near term in the U.S. case but I am wary that any growth acceleration may be too optimistic.

  • 10:31:57

    REHMSo a company, a bank like Wells Fargo taking this action, what does that indicate, Alice?

  • 10:32:05

    RIVLINWell, I think mainly it indicates that if you're a very large bank that got into deep trouble, you're very cautious.

  • 10:32:13

    HOLTZ-EAKINAnd I think that's been one of the hallmarks of the weak recovery is the financial sector as a whole is exceedingly cautious. And there are concerns about making bad loans and having those loans come back to them. And litigation that comes from those loans I think has been the real Achilles Heel of getting the housing market going again, getting lending to households going again. And when that happens, we will actually see the U.S. economy do much better. We've got to get past this period.

  • 10:32:39


  • 10:32:39

    HARDINGBut can I just say that when a company does travel bans, and I've seen this happen, it usually says quite a lot more about the company's short term profit target than it says about the broader state of the economy. So I would be careful about reading too much into that.

  • 10:32:53

    REHMRobin Harding is U.S. economics editor for the Financial Times and you're listening to "The Diane Rehm Show." Let's go to Fosil in Detroit, Mich. Hi, you're on the air.

  • 10:33:11

    FOSILHi. Like the previous caller I just wanted to see what the impact of the slowing growth in Europe would mean for American multinational corporations. You know, here in Detroit, you know, we have Fiat/Chrysler. And they just transferred the stock from Milan to the New York Stock Exchange yesterday. And even five years ago, you know, Fiat bailed out Chrysler and now everyone's saying that Chrysler's really pulling Fiat's weight in the European market.

  • 10:33:36


  • 10:33:37

    HOLTZ-EAKINWell, I think there are two important channels. The first is just, you know, sales, U.S. sales in Europe. As Europe weakens those sales are going to be diminished and they'll not be as profitable as result. And that'll hurt U.S. workers. That'll hurt U.S. profitability. The second is exchange rate fluctuations. What you'd like to have is when those dollars -- when the sales come back to the U.S. you want to have -- show very strong profits. And as the dollar changes in value it affects their profit.

  • 10:34:06

    HOLTZ-EAKINAnd we saw this early in the recovery that a lot of the U.S. profitability was actually from foreign sales and bringing the money back. And so there'll be those two channels of impacts. But I don't think any of them are going to be very large for the U.S. economy as a whole.

  • 10:34:18

    BERNSTEINI would only add that when you're thinking about multinational corporations, U.S. corporations abroad, don't just think of Europe. Think of Asia as well. Lots of our multinationals locate there, particularly many of our manufacturers. And the emerging market growth story is better than the ones we've talked about so far. They didn't have quite the credit bubble or the housing bubble that we've talked about. The debt overhangs didn't plague them as much.

  • 10:34:44

    BERNSTEINHowever they too have experienced slower growth. Now for China slower growth means 7 percent as opposed to 10 percent. So that's a big difference. But their slow growth will impact as well.

  • 10:34:54

    REHMAnd to Durham, N.C., hi there, Trevor.

  • 10:34:59

    TREVORHi there. Thank you for having me on the show.

  • 10:35:02


  • 10:35:02

    TREVORThis is a really interesting discussion.

  • 10:35:04


  • 10:35:04

    TREVORI did have a question about comparative economic policy and I was just wondering, so Japan has faced slow growth for decades now. What have we learned about monetary and fiscal policy from their situation?

  • 10:35:20

    HOLTZ-EAKINDon't be Japan.

  • 10:35:22

    RIVLINYeah, I think...

  • 10:35:23


  • 10:35:24

    RIVLINI think one thing we've learned is never let a deflation take hold because it is terribly hard to turn around.

  • 10:35:33

    REHMTell me what happens in deflation.

  • 10:35:37

    RIVLINPrices go down.

  • 10:35:39


  • 10:35:39

    RIVLINAnd, as I think Doug said earlier or somebody did, if you know that prices are going down, why buy your refrigerator now? It'll be cheaper next month.

  • 10:35:51

    REHMOkay. So what's happening in the world oil market? Price is going down, Robin.

  • 10:35:57

    HARDINGWell, so I think this reflects everything we've just been talking about. If you have slow growth in Europe and you have also weaker growth in China or in emerging markets then who's going to buy all the oil? And as a result, we're seeing some downward pressure on oil prices, that's a benefit to U.S. consumers.

  • 10:36:13

    HOLTZ-EAKINThere's been an enormous revolution in world oil markets. And this week the U.S. will surpass Saudi Arabia as the world's largest producer of oil. The additional, you know, 3.5 million barrels a day that the U.S. has brought to world markets has changed the way the world operates.

  • 10:36:29

    HOLTZ-EAKINWe couldn't have imagined ten years ago that we'd have so much unrest in the Middle East and have oil prices falling. It just would not have happened...

  • 10:36:34

    REHMIt's also fracking, is it not?

  • 10:36:38

    HOLTZ-EAKINIt's the hydraulic fracturing and the horizontal drilling. It's been an enormous technological revolution. But what it's done to global markets changes the impact on the U.S. What always happened before is oil prices went up, they were taxing the U.S. consumers, we saw our growth rate badly diminished. It's a very different story when you own the oil. Prices go up and down. You benefit when it goes up.

  • 10:36:57

    HOLTZ-EAKINAnd so we're far more insulated now than we have been in the past. And world oil markets are more placid than they've been in the past given the same geopolitics. It's a big change in our environment.

  • 10:37:07

    REHMBut doesn't our insulation from that kind of price hike affect other countries? I mean, you've got Russia with the oil going into Ukraine. We've got a whole mess there. I'm going to have to take a short break here and you all can talk about that when we come back, 800-433-8850.

  • 10:40:01

    REHMAnd here's a tweet from Jamison, "What impact are the social programs in European countries having on their economies versus the U.S.?" Robin?

  • 10:40:16

    HARDINGWell, it's a great cushion for people who are unemployed. It's -- pensioners are, in many ways, better looked after in some of these European countries.

  • 10:40:26

    REHMIn Greece?

  • 10:40:28

    HARDINGWell, but this is the problem, it costs a lot of money. So it's a cushion while you can afford that safety net.

  • 10:40:34


  • 10:40:35

    HARDINGBut then when you have a crisis to the extent that Greece has and you're forced to then slash these benefits, it makes the situation even worse because those benefits were what were providing the spending power that was keeping your economy going at all. So in a sense, you know, they're a two-edged sword. There's a benefit when times are okay, but it's -- they're a problem for some of these European economies now.

  • 10:40:58

    REHMAnd what about 25 percent unemployment in Spain? How are social programs affected there?

  • 10:41:08

    HARDINGSo I'm deeply concerned about the high levels of youth unemployment in Europe. I mean, it strikes me that this is a really bad situation in two ways. First, it harms those individuals. All the evidence is that if you don't get in the labor market, get jobs, keep moving up the job ladder that your career never turns out to be what it should be. I'm concerned about that in the U.S. quite frankly, we're at very high teen unemployment still.

  • 10:41:30

    HARDINGAnd the second is Europe is aging. Just as the U.S. aging, Europe is aging, actually ahead of us. And they need those young people working to support these social programs we're talking about or they're not going to make it. They're going to have to restructure those programs.

  • 10:41:45

    REHMWhat about…

  • 10:41:45

    HARDINGAnd I think that's one of the great lessons of Japan, for example. Japan is aging ahead of everyone. Japan and Laos essentially know immigration. So its population is now shrinking. And it's an example of how they haven't adapted their social and fiscal programs to the demographics realities. This is something the U.S. has -- can learn a lot from looking around the globe.

  • 10:42:06

    REHMAnd what about the birth replacement rates? How are they going?

  • 10:42:13

    HARDINGThey're, you know, Japan is shrinking, Europe birth rates are very low. France has, for example, undertaken some very aggressive we will pay you to have babies programs, in recognition of the demographics. So this is something that is increasingly recognized as sort of a structural reason why the world is growing more slowly. These big Western economies have a demographic problem.

  • 10:42:34


  • 10:42:34

    RIVLINWith a partial exception of us, because we have a good deal of immigration. Immigrants tend to be young. And they also tend to have more children. So…

  • 10:42:45

    REHMBut you've also got objections to immigration going on here.

  • 10:42:50

    RIVLINWe do. But as an economist it seems like a good thing.

  • 10:42:55

    BERNSTEINRight. And I think most of the economists are in agreement, very much in the spirit of what was just discussed on the immigration point. On the safety net point, I just want to make one reference to our own economy, as well as that of Europe. One of the things you do when you make -- you do this austerity move, where you start cutting your fiscal support for the economy too soon and undermine the growth -- you've seen that big time in Europe, but you've seen it here as well. And a good example is unemployment insurance benefits were ended too early here.

  • 10:43:29

    BERNSTEINWe still had high long-term unemployment. We still had lots of people who couldn't find their way into the job market. Not because they were lazy, but because they didn't have the jobs. And that kind of feedback effect that Robin described, where that spending helps to boost growth, we lost that. And that was a problem here as well.

  • 10:43:45

    REHMHere's an email from Greta, in Arlington, which I think is going to interest a great many people as to how you all answer this. "How can the U.S. justify its artificially keeping interest rates low? A large segment of the population are baby boomers, who are savers, and we are now the losers with this fiscal policy." Alice?

  • 10:44:18

    RIVLINThere are definitely losers when you keep the interest rates very low. Savers, people on fixed-incomes are not doing well. And that is a downside. It's a serious downside. But people don't do well when the economy isn't growing, it isn't creating jobs. So the trade-off is do you want more investment and more job creation or do you want benefits for savers?

  • 10:44:45

    REHMAre we creating enough jobs, Doug?

  • 10:44:49

    HOLTZ-EAKINNo. We're not really have this sort of extremely rapid job creation that I think everyone would like to see for, you know, a catch-up period of something like a year. We're doing better. But it's a steady climb. I think the more important problem is the absence of real wage growth. I mean, average hourly earnings adjusted for inflation are only 70 cents above what they were in 2007. And unless paychecks are going up, households are not going to be able to spend, we're not going to see the kinds of confidence in the economy that I think, you know, everyone would like to see.1

  • 10:45:20


  • 10:45:21

    HARDINGI have to say I disagree with the premise of the question. I don't think the interest rates are artificially low. And all the interest rate does is balance the amount people want to invest and the amount people want to save. And the reality of the economy after the recession is there hasn't been enough investment relative to the amount of saving. So all the Federal Reserve is really doing is just reflecting the fact that these things aren't in balance. And so the interest rate has to be exceptionally low to try and make them balance.

  • 10:45:47

    REHMThere is still a question, however, about all the money that banks are setting on.

  • 10:45:54

    BERNSTEINYeah, that's a really important question. And, in fact, one of the reasons why the Federal Reserve is holding down rates for so long is to try to get banks and other investors back into the game. Our investment levels, they're not terrible. They're considerably weaker in Europe and even some of the emerging markets are having investment problems. But they're not as strong as they ought to be given how cheap borrowing is.

  • 10:46:21

    BERNSTEINThe reason the private -- one the reasons the private sector isn't doing enough is because of weak demand throughout the economy, as I've been stressing. But that's all the more reason for the fiscal authorities to get into the game, borrow when it's cheap and invest in infrastructure, public goods that we all very much need.

  • 10:46:38

    RIVLINI think we all agree with that, but it brings us back to the basic question, political gridlock that's…

  • 10:46:43


  • 10:46:43

    RIVLIN…keeping us from doing it.

  • 10:46:45

    REHMAll right. To Patrick, in Cleveland, Ohio. Hi, there.

  • 10:46:50

    PATRICKHi. Thanks for having me on.

  • 10:46:51


  • 10:46:53

    PATRICKThat, actually, your conversation currently just dovetails well into what I wanted to talk about is that that's exactly what Cleveland has been doing. They've been borrowing and investing locally because of the gridlock at the national level. And despite a little lack of investment from the state level, the city locally has been borrowing cheaply, investing locally and that's on the backend of the tough decisions of, you know, transitioning from the manufacturing base to a tech or a health care economy.

  • 10:47:27

    PATRICKAnd so I just, you know, I -- we in Cleveland, in Ohio, think of our city and state as a bellwether. And hopefully it's a sign for -- the Rust Belt Renaissance is a sign for the future economy, even with a national gridlock.

  • 10:47:43

    REHMWhat do you think, Doug?

  • 10:47:44

    HOLTZ-EAKINI want to emphasize something because I think people often, you know, think of the federal government as the end all, be all. Most infrastructure is local. I mean, it is helping the people in a particular area. And it's appropriate then that the local authorities take the lead on picking projects, which ones are going to be the most beneficial, whether they're for economic growth or for, you know, benefits to the community. If you're going to pick projects you should pay for them as well.

  • 10:48:07

    HOLTZ-EAKINIt improves the incentives. And we should have the federal government focused on those things which serve a national purpose. And for me, that purpose is connectivity and economic growth. And we ought to have the federal government thinking hard about 21st century connectivity, how do you get goods from ports to rails to consumers. And that's what the federal government should be doing. So we need to perhaps spend more, but I think we need to rethink our strategy.

  • 10:48:32


  • 10:48:32

    RIVLINAnd most education is local, too. And the same comments apply there. We need drastic improvement in our skills and our education at all levels. And that's primarily a state and local matter.

  • 10:48:49

    BERNSTEINAnd just another comment about this gridlock, the national gridlock. It's -- I’m glad to hear from this caller from Cleveland. We were talking about Cleveland infrastructure yesterday. You're going there tomorrow, so you'll get a first-hand look. But it's not just infrastructure. If you look at minimum wages, many states are taking that into their own hands, as well. The president keeps trying to push a federal increase. It's not going anywhere.

  • 10:49:10

    BERNSTEINBut states and even cities have been acting independently. There's even some movement on the immigration front at the state level. I mean it'd be good fodder for a show here, actually…

  • 10:49:18


  • 10:49:19

    BERNSTEIN…is what's happening at the sub-national level because that's where the action is.

  • 10:49:23

    HARDINGI just want to be boring and skeptical again. I mean, I think the local and state investment is great, but you've got to remember there's limited taxing powers to back that up. And you can't invest in something if you can't then capture the revenue that it generates. So, you know, it's great and the more of it the better, but it's inherently kind of limited.

  • 10:49:41

    REHMAll right.

  • 10:49:41

    BERNSTEINWell, just -- I mean think about this port of Cleveland example that a caller may have just been talking about, is they're borrowing in private markets and they're certainly going to be able to extract, you know, wealth from that port once it's up and running.

  • 10:49:52

    REHMAll right. To David, in Boca Rotan, Fla. You're on the air.

  • 10:49:59

    DAVIDGood morning.

  • 10:50:00


  • 10:50:01

    DAVIDI agree with the recent comments concerning wages. It seems to me a federal policy would be best and it's not fiscal, it's not monetary, but it has to overcome gridlock. 70 percent of the economy is consumption. If consumers don't have money in their pockets, where's the economy going to go no matter what else you do? Especially given government borrowing.

  • 10:50:25

    REHMSo you'd like to…

  • 10:50:26

    DAVIDAnd that's all I have to say.

  • 10:50:27

    REHMI gather you…

  • 10:50:27

    DAVIDA minimum wage increase.

  • 10:50:28

    REHMAll right. That's what I thought he was leading to. Doug?

  • 10:50:32

    HOLTZ-EAKINI'm not a fan of this, especially now. In the end, the minimum wage affects a very, very few members of the labor force. They're our least skilled workers. Raising the minimum wage at this point is going to stop some of them from getting jobs at a time when we really need them to get jobs. And I think it has a very perverse redistribution, which is you stop a person who's the least skilled and less affluent from getting a job, and essentially give the money to someone who has a job. That doesn't make any sense to me.

  • 10:51:04

    REHMHasn't that theory been proven wrong?

  • 10:51:07

    HOLTZ-EAKINNo, no.

  • 10:51:08

    BERNSTEINFor the most part, yes.

  • 10:51:09

    HOLTZ-EAKINLet me finish. It isn't true that…

  • 10:51:11

    BERNSTEINAre you starting a fight with me?

  • 10:51:14

    HOLTZ-EAKINWell, I mean, it isn't true that you're going to see large scale layoffs if you raise the minimum wage. It's not going to affect most people in the labor market. There are going to be 130 million people in their jobs. It's going to be a couple hundred thousand people. And they're going to be in, you know, restaurants and they're going to be in retail. And they're not going to get hired.

  • 10:51:31

    HOLTZ-EAKINAnd raising the minimum wage, most estimates -- if you hone in on that group -- affects the hiring of that group by something that looks like about a year's worth of job growth. I don't see any reason to put them all out of work for the year.

  • 10:51:43

    BERNSTEINI think that Doug is going beyond what actually the research shows. Now it is true that if you look at a recent study by the Congressional budget office, something like 500,000 people would lose their jobs if minimum wage increased to 10.10, 24.5 million, on the other hand, would get a pay increase. That's 49 beneficiaries per one job loser. And I disagree with the point Doug made that said that those guys aren't going -- or gals -- actually most of them are women -- are not going to get a job.

  • 10:52:13

    BERNSTEINIn fact, there's a great deal of turnover in the low-wage labor market. They will get another job and it will be at a higher wage. Furthermore, these are not kids who are, like, high school, just high school dropouts or just have a high school education. The average age is 35 years old of someone who would benefit from a minimum wage increase. They're more highly educated. They're more likely to be parents. They have kids. So I think we have to, you know, get the facts straight on that part of the discussion.

  • 10:52:37

    REHMAlice, weigh in.

  • 10:52:41

    RIVLINI'm somewhere in the middle. I think that a minimum wage increase is a good thing, but I don't think it's a panacea.

  • 10:52:46

    BERNSTEINI agree with that.

  • 10:52:47

    RIVLINIt doesn't -- it has to be done in connection with other job increasing programs and skills increasing programs.

  • 10:52:56

    REHMAll right. To Adam, who's in McHenry, Ill. Hi, there.

  • 10:53:04

    ADAMHi. Thanks for having me on the show.

  • 10:53:05


  • 10:53:07

    ADAMI just wanted to call because I was listening to the call earlier or the -- your panel earlier. And I thought there was really only one side of the fiscal debate being represented, that we ought to be spending more money on things in order to stimulate job growth. And I think the other side would say that, you know, in order to spend that money you need to tax the economy, tax the people, which takes money out of the private sector, which more efficiently allocates that money. And that to the extent that fiscal policy should try to stimulate the economy at all, that ought to be through tax relief.

  • 10:53:39

    REHMAll right. And before anyone answers, let me just say you're listening to "The Diane Rehm Show." What's your response, Jared?

  • 10:53:51

    BERNSTEINThere are times for the kind of fiscal stimulus or investment that we're talking about and times where you want to pull that back. And this is a time for doing more, particularly in European economies, but here as well. Borrowing costs are very low and there's actually a significant return to these infrastructure investments that helps boost growth.

  • 10:54:14

    BERNSTEINAnd if the caller is concerned -- as am I -- about a more sustainable budget, history is very clear on this point. The best thing you can do to sustain your budget deficit, especially at a time like this, is not go austere, but is raise growth.

  • 10:54:29

    RIVLINI don't think any of us are in favor of tax increases right now. Most of us are in favor of a tax reform that could broaden the base of the income tax and actually give us lower rates and raise some more revenue into the bargain. And what Jared is saying, I think, is we need to have a responsible long-term fiscal policy so our debt isn't growing too fast. But we don't need to be taking austere measures now.

  • 10:55:02

    REHMWe haven't talked about Russia. And I want to have your understanding of what role Russia may be playing in this overall world picture, Robin.

  • 10:55:16

    HARDINGSo we talked a little bit before about the effect that Russia may be having on German growth. I think the thing that's really interesting here is to note just how effective U.S. sanctions on Russia have been already. Russia's economy has gone from growing to about 2 or 3 percent to now hovering on the verge of recession. And that's obviously not good for global growth, but it shows that sanctions are working.

  • 10:55:43

    HARDINGAnd I think they've really judged them very well so far. They've inflicted a lot of pain on the people in Russia who are responsible for its actions. And so far they've just about managed to avoid that from becoming something which is really damaging to global growth and to the citizens of Russia. So so far I think they've calibrated it very well.

  • 10:56:03


  • 10:56:03

    HOLTZ-EAKINI think one of the things to remember is that just the key role of Russian natural gas in the European economy -- and natural gas differs from the oil market, in that it's far more regional. Those -- we don't have a world market for natural gas yet. But I think the geopolitics would change dramatically, again, if we started having real international sales of liquefied natural gas exports in the U.S., into Europe for example. That would take away a lot of the bad news from Russia spilling over into the rest of Europe. And that's something that I -- it's worth keeping your eye on.

  • 10:56:35

    REHMDo you agree?

  • 10:56:37

    BERNSTEINI do. I mean I think when we talk about geopolitical unrest, we've actually seen not so many negative effects here from that yet. But if you want to see that you have to go to Russia.

  • 10:56:51

    REHMJared Bernstein, Alice Rivlin, Robin Harding, Douglas Holtz-Eakin, thank you all.

  • 10:56:58

    HOLTZ-EAKINThank you.

  • 10:56:59

    HARDINGThank you.

  • 10:56:59

    BERNSTEINThank you.

  • 10:56:59

    RIVLINThank you, Diane.

  • 10:57:00

    REHMAnd thanks for listening. I'm Diane Rehm.

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