CSAD: Interview with Douglas Holtz-Eakin

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Douglas Holtz-Eakin is a former director of the Congressional Budget Office and served as chief economic adviser to John McCain during his 2008 presidential campaign.

TKO: Is economic inequality a problem? If so, why?

DHE: Inequality per se is not a problem.  We want those who work harder, invent new products and services, and otherwise contribute more value to be rewarded for that, thus generating desirable inequality.  We are uneasy about inequality if it seemingly stems from the wrong sources – regulatory capture, political influence, etc. – or leads to poor policy and economic outcomes. 

TKO: To what extent can/should the government be involved in reducing inequality.

DHE: It should be especially involved in addressing poverty – America has a proud tradition of caring about its least well off – and in improving the K-12 education system to ensure that our young have a fair starting point in global markets. 

TKO: Can you elaborate on the difference between relative and absolute mobility as they relate to metrics of evaluating economic inequality?

Absolute mobility is the distance between the rungs of a ladder as you ascend or descend.  Some ladders have small jumps, while others are larger.  Relative mobility is which run of the ladder you rise or fall to – no matter how far it is above the ground. 

With greater inequality, it takes a lot more absolute mobility (an increase of, say, $50,000 instead of just $30,000) to achieve the same relative mobility (rising 2 quintiles in the income distribution, for example). 

TKO: In a recent blog post for The Huffington Post, you state “new policy will not be any better until there is a way to effectively constrain future Administrations, agencies, and Congresses from inappropriate reactions at times of distress.” Can you comment on what appropriate regulatory policy would look like as well as on the effectiveness of current financial policy?

The quote is in the context of how to think about the issue of “too big to fail” and financial regulation in general.  Too big to fail is the poor incentives created because Congress/Administrations have propped up failing institutions (not only banks, but also car companies, etc.).  The better path would be to stick to bankruptcy law which as served us well; one might contemplate a modified version of bankruptcy to accommodate the liquidity needs of failing banks.  Our current policy is too complicated and perpetuates the problem by creating special designations (e.g., “Systemically Important Financial Institution”) that ensure preferred treatment in the future.

TKO: Is it fair to blame financial deregulation as one of the primary causes of the recent recession?

No.  Our system was characterized by under-regulation (state-based mortgage brokers) and over-regulation (affordable housing goals for Fannie Mae and Freddie Mac.  The roots of the crisis are complex and laid out in the dissent that I provided to the Financial Crisis Inquiry Commission.

TKO: Could you discuss your predictions for how the social security system will affect different socioeconomic levels of Americans over the next several years?

DHE: It is difficult to say. Social Security is in deep financial trouble, with the disability fund set to be exhausted within 5 years and the retirement fund in 20 years.  When or if the latter occurs, benefits will be cut by 25 percent across the board – including those for people in retirement.  It is a disgraceful way to run a pension program.

Accordingly, it needs deep reforms.  Those reforms would likely include raising the minimum benefit and increasing payroll taxes, with the upshot being that it will be even more progressive and re-distribute even more from the high lifetime earners to the lower lifetime earners.

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