An Interview with Alice Rivlin

Almost two years ago, Addison, Kate and the rest of the I.O.U.S.A. team were lucky enough to have the opportunity to sit down with the first director of the Congressional Budget Office, Alice Rivlin. What follows is an excerpt from the full interview transcript, which can be found in the recently released I.O.U.S.A. companion book.

Alice Rivlin has been surprising teachers and peers since college, when she switched majors to study economics after taking a summer school class. Known as a "deficit hawk" with Robert Rubin on the team that balanced the budget during the Clinton Administration, she served as the first director in 1975 of the Congressional Budget Office, an impartial, quasi-governmental agency created by the Congress as a source of reliable, untainted numbers on the economy. Today she works at the Brookings Institution, a liberal think tank in Washington, D.C.

Q: You were the first director at the CBO. How did that come to be?

Alice Rivlin: The Congressional Budget Office, which has been around now for quite a long time, more than 30 years, was brand-new in 1975. The Congress did not have a budget office that helped them look at the federal budget and make decisions about it the way the Office of Management and Budget helps the president make his decisions. So they thought they needed one. They passed a law called the Budget Reform Act of 1974 that set up the Congressional Budget Office. And I was very lucky; I got to be the first director of that office. I was there eight and a half years. I loved it. It was a fascinating thing to do. I loved it in part because I like working for the Congress. It is a very interesting group of people, and the issues are interesting. And I think I also liked it because it was entrepreneurial. I got to set up this whole new organization. That is a little bit like starting a new company.

Q: Let’s jump ahead to 1993 and the Clinton administration. What was your title during the Clinton administration, and can you explain to me how the policy was determined in January of 1993? How did that battle go about, and how do you feel the results turned out?

Alice Rivlin: In early 1993, I was the Clinton administration’s designated deputy director of the Office of Management and Budget. The first director was Leon Panetta. Somewhat later he became Chief of Staff for the president, and I became the Office of Management and Budget director. But in the early period, even before the inauguration, when we were working out of Little Rock, we were really focused, the whole economic team was focused on what the president thought was the highest priority: Figure out what I am going to do about the budget. The budget was in deficit, [and] everybody was worried about it. We knew that if it stayed on the track that it was on, that the budget deficits would keep rising. We would have to borrow more and more money. And we would be paying higher interest rates on that government debt. So it was a high priority among the economic team to figure out how we were going to get the budget deficit to come down. We had a lot of discussion about how fast it should come down.

The president had made promises during the campaign. He had said he was going to have a big infrastructure program to improve roads and bridges. He had said that he was going to have a middle-class tax cut. He had said that he was going to do health care reform which, indeed, he tried to do. And that he was going to do welfare reform, which eventually we did achieve. But we could not figure out exactly how we were going to do all of that and still have the budget deficit coming down. So we had a lot of discussions about it, first around a big table in the Governor’s Mansion in Little Rock, and later around an even bigger table in the White House. And there was controversy within the Clinton team about how fast the budget deficit could come down. I was one of the so-called hawks, along with Bob Rubin and Secretary Benson at Treasury, and Leon Panetta. We all thought that getting the budget deficit down was extremely important to the future of the economy, and that making a strong move on the budget deficit would bring interest rates down. So we were focused on that. Others were focused on two things: One was whether the president’s campaign promises could be paid for. And the other was whether bringing the deficit down too quickly would be bad for the economy, because we thought that the recovery from the recession was a bit shaky, and nobody wanted to derail the economy and bring it to a screeching halt. As it turned out, the economic recovery was actually stronger than we thought it was going to be. So we were not skating on quite as thin ice as we thought. But that was a worry.

Q: Are you proud of what you were able to accomplish as a team and as an individual?

Alice Rivlin: I am extremely proud of what happened as a result of the Clinton budget reform. We made some really hard decisions in 1993. The president was very much into it. We spent hours and hours in the Roosevelt Room in the White House with the president discussing how we were going to cut spending, and what we were going to do about taxes. We put together a package that passed the Congress with great difficulty, by one vote in each house. That was a squeaker. But in retrospect, it worked. Interest rates came down, and the economy improved. I am not saying that was all because of the Clinton plan, but it certainly helped. And by about four years later, we not only had a balanced budget, the budget was moving into very substantial surplus.

Q: Can you tell me, was it just the White House that was able to get those victories in the late 1990s? Or did you benefit from having a Republican-led Congress, and if so, how?

Alice Rivlin: I think almost all progress on fiscal responsibility has been as a result of a bipartisan compromise. That was quite obvious in 1990, when President Bush Sr. made a deal with the Democratic Congress to reduce the budget deficit and to put in place some rules about how the Congress could consider the budget. And it was even more obvious, I think, in 1997, when the Clinton administration had to cut a deal with the Republican Congress to keep progress on the deficit going. It was not fun. It was a very difficult negotiation that went on for several years, actually, between the Republican-led Congress and the Democratic Clinton administration, with the president vetoing frequently and using the veto as a weapon. But we cut a deal. And the Budget Act of 1997 was the one that really pushed the budget from deficit into substantial surplus.

Q: Numerically speaking, what does life look like in a recession as opposed to what life looks like during economic growth and good times?

Alice Rivlin: From a budgetary point of view, recession is a very difficult thing. Now, it is difficult for everybody. People lose their jobs and companies cannot make a profit in a recession because they are not selling as much. But from the point of view of the federal budget, the result is since people are not earning as much, they are not paying as much tax, and some of the programs that the government has actually increase automatically when there is a recession – unemployment compensation, for example. More people are making unemployment compensation claims because more people are out of work. So that spending goes up, and the tax revenues go down, and you have an automatic larger deficit in a recession.

Q: In a recession, what are the key numbers that you are looking for and hoping not to see?

Alice Rivlin: The thing that economists watch all the time is the unemployment rate – how many people are losing their jobs. If the unemployment rate is going up, clearly, that is bad. It is not always the first sign of a recession. Sometimes a recession will start with profits going down, and sales going down. Those things happen before the job layoffs happen. But the thing that is hardest on most people, of course, is a rise in the unemployment rate.

Q: Let’s imagine for a moment, though, it is 1999 and 2000. If someone were to tell you what our federal debt would be, and what our deficit would be today, would you be surprised? Can you characterize the road that we have been on financially forthe past six or seven years?

Alice Rivlin: In the late 1990s, the economy was growing very strongly. The stock market was rising fast – as it turned out, too fast. And all kinds of signs in the economy were positive. Unemployment was very low. And even with low unemployment we did not have much inflation. So the whole economy looked very, very good. And the federal budget looked terrific. It had a large surplus in those years in the late 1990s. It had such a large surplus that people were even beginning to worry about the surplus. My then colleague Alan Greenspan worried that the surplus was so large that we would pay off the whole national debt. I never thought that was a very serious worry, but he was genuinely worried about it.

Q: Why would that be a problem?

Alice Rivlin: Well, he thought it would be a problem because then if the government kept running a surplus, it would have to buy private securities. And that would mean that the government would end up owning bonds of states or corporations or even conceivably stock. I did not think we would ever get to that point, so I was not worried about it. But that was what was concerning him, or that is what he said at the time.

Q: But wasn’t there a flip side to that argument that we should be bolstering our entitlement programs?

Alice Rivlin: Well, when we were running a surplus in the federal budget, [that] was exactly the moment when we should have taken strong measures to shore up the Social Security system. And, indeed, President Clinton suggested that. He had a slogan for it: "Save Social Security First." He wanted to invest in the Social Security system to make sure that it was solvent for the future, before we cut taxes or did anything else with this surplus. And in retrospect, that was a very good idea. But we did not do it. People were not sufficiently concerned about the future to take the prudent measures that we should have taken to invest in the future so that we would have plenty of money to pay for the benefits that we know are going to be needed as the baby boom generation retires.

Q: It seems there is a different song that people are singing today, seven or eight years later. How would you characterize the road that we are on? Are we heading toward some severe financial difficulties?

Alice Rivlin: Right now, if you look at the federal budget, it is running a deficit and it will probably run a deficit for the next several years. Those deficits in the near term – the next three, four, five years – are not huge. They are not off the charts. We have been there before. But what is really worrisome is the longer – run future. If you look at just three programs, Medicare, Medicaid, and Social Security, the spending for those programs under current rules will rise very rapidly over the next few years – indeed, for the foreseeable future. And that is for two reasons. It is mostly because the medical programs are growing, because we are all using more medical care, more medical care per person, per patient, per anything. That has been growing over several decades, and will continue to grow.

The other aspect is the baby boom generation retirement, and the fact that we are all living longer. That is the thing that most people emphasize, but it is not actually the most important thing. It is part of the problem of federal spending going up in the future, but the medical care programs are going up even faster, and they are the biggest part of the problem. What that means is that since spending on those programs will go up automatically unless we change the rules, we will have to do something. The spending on those three programs by sometime in the 2030s is likely to be about one-fifth of everything we produce. Now, one-fifth of everything we produce is about what we now spend to finance the whole federal government. So unless we are willing to raise taxes and keep on raising them, or close down the rest of the federal government, we have got a very big problem staring us in the face in the next couple of decades.

Q: Is there a solution, and what does that solution look like? A lot of people think it is almost hopeless. How do we dig our way out of this?

Alice Rivlin: I do not think anyone should see the fiscal future as hopeless. In the first place, we are not the only country with this problem. Everybody is facing rising medical care spending. That is true all over the world. And all successful countries are facing an aging population, people living longer. So these things are part of life in all kinds of countries. And we have a good, functioning democracy. We can get together and solve these problems. We are not a poor country – it would be much harder if we were. We are a rich country. And increases in longevity and rising medical care spending are symptoms of being a rich country. However, we have got to do something about it. We have got to decide, are we getting our money’s worth for all of this spending? And who is going to pay for it? And we have to figure out how to balance the federal budget in the long run, or come very close to balancing it, because if we do not, we will just keep on borrowing, and passing the bill on to future generations who did not create this problem.

Moreover, we cannot borrow that much. We can borrow $200 billion a year as we are now doing. The rest of the world seems quite willing to lend us that much money. But when we get to the really big deficits of the future, nobody is going to be willing to lend us that much money. So we are going to have to figure out what to do.

Q: What is a deficit and do they matter?

Alice Rivlin: I think deficits matter. A deficit occurs when the federal government is spending more than it is taking in revenue. And that means it has to borrow money. Now, right now we are borrowing some $200 billion a year. That means we are not paying for the government services we are asking our government to provide. We are borrowing the money and passing that bill on to our grandchildren. Now, I do not think that is a moral thing to do. I think the real reason to not run a deficit is that it is not fair to our grandchildren or our children, future taxpayers, whoever they are, to pass them the bill for the things we want to do now.

Economically, it is also risky. If you borrow a lot of money, then you have to pay interest on it. The interest becomes a bigger and bigger percentage of what the government spends, and that is really wasted money. You do not get anything for it. And then there is the problem that people might not want to go on lending to the United States government forever. Now, much of our borrowing is from other countries, particularly from central banks in Asia, who are willing to lend us large amounts of money – but they might not be willing to do that for a long time. If they begin lending us less, then we would be in some economic trouble. Interest rates would go up. We would have to pay more to borrow from somebody else, and if it really got out of hand, we might have a spike in interest rates and a recession.

Q: Why should someone who lives in this country, and has no interaction with the government or in, say, Wall Street, know about economics and the federal government and how they work? Why should they care about it?

Alice Rivlin: Everyone should care about what their government is doing because it affects their lives very directly. If taxes go up or if spending is cut for something that you really care about, like roads and bridges, or education or health care, then you are going to feel it right away. It is not remote. People may think somehow decisions are made by other people far away, but in a democracy that is not really true. It is your representatives in Congress or in the Senate that are influencing what happens to the U.S. economy and what happens to the federal budget. So it is pretty important for people to pay attention to it.

December 11, 2008

The rally seems to be continuing. The Dow rose 70 points yesterday. Oil slid up to $44. Commodities went up too. And gold shot up $34 – to $808.

The markets must be "looking ahead"…right over the worst economic news in 60 years.

It’s the "worst spending slump since ’42," says a headline at Bloomberg. In ’42, the United States was at war with Japan and Germany. And it looked for a while as though we might lose! No wonder spending collapsed…the economy was shifting to a ‘war footing.’

And now spending is collapsing again. And this time the economy is again shifting to a war footing – a war against deflation. Why fight deflation? Doesn’t it lower the cost of living? Doesn’t it make it easier for poor people to eat?

Well…yes…maybe. Deflation lowers prices. Deflation favors the poor…at least in the early stages.

The number of corporate bankruptcies is expected to soar next year. According to the Financial Times’ tally, more than 300,000 businesses will go bust in America, Britain, Western Europe and Japan. Who owned those businesses? Not the poor.

You can do the math as well as we can, dear reader. Imagine that each bankruptcy puts 100 people out of work. Let’s see, that 30 million people without jobs. The middle-class unemployed draw down their savings and begin spending their pensions; the poor will have to continue to live hand to mouth. Advantage: the poor again.

Yes, it’s the planet’s first Worldwide Depression. And the planet’s first Worldwide Bailout. Now the meek are inheriting the world. The downtrodden are getting up off the ground.

The latest news from India tells us that the government is pumping $4 billion into the economy to try to pep it up. $4 billion may not be much to you…we’re now used to trillion-dollar bailouts…but India is a poor country. A billion still means something.

The latest measure brings to $60 billion the total India has committed to the fight against the slump. Even that, say critics, will not be enough. But India is not in such a bad slump – at least, not yet. GDP is moving ahead at a 7% annual rate. Indians may be poor…but they have little debt…and they’re getting less poor every day.

Our Indian colleague, Ajit Dayal, says India is in a good position:

"Our financial sector never went in for sub-prime debt. There is very little consumer credit in India. Inflation is going down; it’s expected to be only about 1% next year. The economy is still growing fast. We have a huge domestic demand; we aren’t as reliant on exports to the USA as China is. And our stocks are very cheap. You can buy companies in India now for less than the cash they have in the bank…and at 2…3…5 times earnings. There is even an oil company paying a 10% dividend. India will be just fine. And as soon as foreign investors realize it, Indian stocks will rise again."

Meanwhile, in the U.S.A., Mr. Obama hints at what is ahead. It will get worse before it gets better, he keeps saying. And if it doesn’t get worse on its own…he’ll help make it worse!

The Financial Times reports:

"While noting the US budget deficit might already surpass $1,000bn, Mr. Obama added:

"’We understand that we’ve got to provide a blood infusion to the patient right now to make sure that the patient is stabilized. And that means that we can’t worry about the deficit.’"

So you see, Republicans…Democrats…deficits still don’t matter. Even though deficits are the root cause of the present predicament, the Obama Administration is planning to give us more of them. Oh dear reader…this is going to be Hell to live through…but it’s going to be fun to watch.

We’re going to see more transfusions than in a Baltimore emergency room on Saturday night…there’s going to be blood all over the place. Deficits will hit more than $2 trillion before this is over.

And what else? The price of gold will probably go to $2,000…so take advantage of the low price now, while you can. In fact, you can still get gold for just a penny per ounce…

Yes…it’s going to be fun…

Will all these bailouts work? Of course not. The government has no real savings. What can it do? Either borrow…or just print up the money the way they do in Zimbabwe. Either way, all it is doing is shifting resources away from people who earned it…and towards people who didn’t.

It’s a hidden tax that people don’t complain about…because they don’t understand it. Who will be the recipients? The insiders, of course…but also the outsiders. That is, while the elites will skim a good deal of the loot for themselves, quite a lot of it will go to "the poor." Why? Well, two reasons – one legitimate…the other corrupt. Since the poor have no balance sheets to repair, the feds can be sure that if they give the poor money it will go right back into the economy. More importantly, the poor vote. And you can buy more poor votes for less money than you can buy rich ones.

So you see, dear reader, the poor are coming out way ahead. Everyone else is losing money…and they had nothing to lose.

Keep reading for today’s guest essay, where Alice Rivlin, who was the first director of the Congressional Budget Office, and now works at the Brookings Institution, explains why she thinks deficits matter.

*** So far, the bailouts have worked like a straightjacket. The more the feds fight against the correction, the tighter the straightjacket binds…restricting their movement even further. Already, they’ve committed more than $10 trillion in various bailout measures…and the more they try to fix the problem, the worse the problem gets.

They’ve not got much wiggle room left. As for monetary policy, the Fed has used all but 100 of its basis points. A couple more rate cuts and the key Fed rate will be zero.

Could it go below zero? Not really. But the feds could impose a penalty on cash deposits…as Switzerland once did. Or…they could simply inflate the currency so people will want to get rid of it as quickly as possible. Either way, people who save their money for a rainy day will lose money.

Of course, they’re losing money already. The real rate on savings is negative… the inflation rate is about 3% or 4% while the return from money market funds is zilch. Well, actually, zilch would be an improvement. Savers are losing a couple of percent per year – just to inflation.

Who saved money? Not the poor.

But even the savers count themselves among the lucky ones. Stocks are down about 50% worldwide. Mutual funds have gotten hammered. Hedge funds have been clipped for big losses. Leading American brand-name companies are down 50% to 80%. Middle-class Americans have seen their 401(k)s cut in half…while their houses have lost 20% of their value, and are still going down.

The poor have none of these things. In fact, the poor have no financial assets at all.

Remember the advice financial planners used to hand out: put your money into a balanced portfolio of various asset classes. One might go down…but they won’t all go down.

Oh yeah? Almost every asset class has been hit hard…growth stocks…retailers…technology…energy…emerging markets… And not just stocks, suppose you put your money into one of those nifty partnerships with swaps and SIVs and other investments the experts said were as safe a T-bonds? You’d be lucky to have anything left at all.

And commodities? Weren’t they supposed to be so scarce that they couldn’t go down? Even we cynics at The Daily Reckoning were almost convinced. We knew oil was too expensive at $147…but we thought it was fairly priced at $90. Now, it’s less than half that.

Just goes to show…you never know. You know that what must happen, will happen. But you never know how much it will happen…or when.

Now investors are losing money in EVERY ASSET CLASS – including cash. Is this a first? Maybe.

But now we can more fully appreciate the elegant wisdom and justice of the free market system. Mr. Market may be a hanging judge…but at least he’s fair.

The great asset bubble seemed to prove out the old expression "the rich get richer and the poor get poorer." But it was all a mirage, caused by a bubble in credit. The rich were getting richer…but only on paper. And now paper of all sorts is going up in smoke. The "rich" have lost a quarter to a half of their wealth. The poor have lost relatively little. Now, the rich get poorer. And the poor? Well, they will always be with us. But being poor is not so bad. Many of the middle-class lumpenhouseholders, for example, are "upside down" on their mortgages. They’re below zero, in other words. The poor – with nothing – are ahead of them.

Who would have thought?

*** The English press has focused on the personal side of the downturn.

Turns out, a lot of women who married rich men in the financial industry were in it just for the money. "Toxic wives," at least, that’s what the press calls them.

A recent article mentioned a man who had turned to his wife a year ago and asked:

"Would you still love me if I lost all my money?"

"F*** no," was the reply.

The banker thought his wife was just being playful. But when he lost his job in The City (London’s answer to Wall Street) she moved out…taking what little money he had left.

The commentators despise these women; they married men only for the money. But what’s wrong with that? Money was all these men had. Besides, anyone who marries for money earns it.

Meanwhile, the Financial Times reports on another phenomenon, said to be linked to the financial crisis. Men and women – usually married – are turning to "adultery websites" for comfort. One is called "Illicit Encounters" and features people who appear to be professionals – many from the financial industry. They describe themselves as investment bankers or stock analysts, go by handles such as "Alpha 123" or "CityGent", and say they are looking for love, romance, or just casual sex. The website charges men 119 pounds. "Women go free."

Until tomorrow,

Bill Bonner
The Daily Reckoning