C-SPAN/NEWSMAKERS

Host: Greta Wodele

Guest: Christina Romer, White House Council of Economic Advisors

Reporters: Jim Kuhnhenn, John Shaw

GRETA WODELE, MODERATOR, NEWSMAKERS: … Christina Romer, Chair of the White House Council of Economic Advisors. Welcome to Newsmakers.

CHRISTINA ROMER, CHAIR, WHITE HOUSE COUNCIL OF ECONOMIC ADVISORS: Great to be here.

WODELE: To help us with the questions are two reporters, Jim Kuhnhenn with the – Political Reporter with the Associated Press and John Shaw, correspondent with Market News International. Mr. Kuhnhenn has our first question.

JIM KUHNHENN, POLITICAL REPORTER, THE ASSOCIATED PRESS: Dr. Romer, how are you? Thanks for joining us. We have new unemployment figures that came out on Friday, 8.9 percent; worst since 1983. They're as bad as what the White House initially said it would be without an economic stimulus. We do have an economic stimulus and still they're that bad. What happened?

ROMER: Well, you certainly have the right thing which is they are bad and that is something that we all have to acknowledge because when 8.9 percent of your labor force is unemployed that is certainly terrible.

In terms of how they compare to our forecast, of course our forecast was made back in January and one of the things that happened is a lot of deterioration both in our economy and the world economy in January and February. So I think if you look at a lot of the private forecasts they became more pessimistic as the first quarter went on.

KUHNHENN: If I could tie this and follow up to the – you could the administration just finished the stress tests of the banks this past week. We had announcements on Thursday. The stress test was based on the worst case scenario that these banks could confront in order to determine whether they were well capitalized or not.

But some critics are saying that the worst case scenario that you used is actually upon us including the unemployment numbers. How badly stressed were these banks and were they actually dealing with data that we're – that's confronting us now?

ROMER: So the important thing is that it was supposed to be a more adverse scenario, not necessarily the worst case, but it did have an unemployment of 10.3 percent which is certainly higher than where we are now, but as you point out not dramatically so.

I think one of the things that's important is that if you actually look at the loss rates that we put onto banks, or ask them to use in figuring out where they stand, they actually are pretty stringent. So even if the scenario's perhaps not as bad a case as it could have been, we think that actually the supervisors used a very reasonable estimate for what in a pretty bad case the loss rate would be like.

JOHN SHAW, CORRESPONDENT, MARKET NEWS INTERNATIONAL: Dr. Romer, another big issue this past week concerned the budget and the administration releasing its expanded version of the fiscal year '10 budget. Now, I know you're not the White House budget director, but you've been very involved in the meetings and so forth.

You came out with about $17 billion in additional cuts, about 121 programs that were cut and eliminated. Some said too much, some said not enough, but a lot of independent analysts thought that in the $3-1/2 trillion budget you really need to get more savings wrung out.

We're going to have more than a trillion dollar deficit in the next couple years. Where do we go forward in terms of getting the savings part of the budget under control?

ROMER: All right. So you point out some very good things, right. We do put that line by line going through the budget and came up with this $17 billion. It is so important to realize that it's just a part of what we're doing. Think about what the President announced earlier this week about closing tax loopholes. That's another $100 or $200 billion.

So that's certainly – there's lots more kind of revenues or cuts there. And then the other thing, if you want to know why is the President pushing health care reform so tremendously is understanding that when you actually look at that budget going out in time, the thing that is going to bankrupt us is government expenditures on health care.

And so coming up with a comprehensive reform that both brings down what the government is paying and what private people are paying is going to be absolutely crucial for getting the kind of fundamental improvement in the budget that's really making – that's where the big numbers, the big dollars are.

SHAW: Are you happy that the Congress is starting to intensify work on health care reform? The Senate Finance Committee continues to hold meetings. I think the House Ways and Means committee did as well. Are you feeling like health care reform is on track and will yield the sort of long-term savings that are really critical to getting the long-term budget outlook improved?

ROMER: I mean we're absolutely thrilled that Congress is working on it. It's, you know, as the president said it is a top priority and it is so important for the budget, for average households, for businesses and for just the American people, especially the millions that don't have health care.

And so we think it's absolutely important. We are very optimistic. I think, you know, in our meetings with such a wide range of people what we are finding is that there's a consensus like there's never been before.

That now is the time that it needs to be done and I think it's going to be important because a fundamental part of getting costs under control and again, dealing with the budget deficit that results from those costs, is kind of putting into place some fundamental reforms.

And those aren't going to be easy. They are going to take a lot of hard work and people really thinking about these and so it's crucial that we're moving forward. But I'm very optimistic that this is the time we're actually going to get it.

KUHNHENN: Dr. Romer, one of the things that this, despite the unemployment numbers, people are talking about some indicators that show us that perhaps we can see the bottom of this recession. However, you and others, Fed Chairman Bernanke, have talked about the pace of the recovery and the pace of that recovery is likely to be quite slow.

And I'm wondering if you could talk a little bit about what your vision of it is? You have – I believe you have talked yourself about how it's not going to be driven by particularly high consumer spending. If that's not the case what's going to drive it back up and what – is it likely to meet what the president's original budget expectation was of 3.2 percent GDP growth in 2010?

I believe Chairman Bernanke told republican Senators this week that it would likely be 2 percent, so I'm wondering how that squares with your vision of recovery?

ROMER: All right. So you're absolutely correct and I think that if you look at most private forecasts there's a lot of consensus that will probably, say, in GDP terms bottom out sometime in the third quarter, maybe see positive growth by the fourth quarter of 2009.

But really, the big issue is how fast is that recovery? When we start growing do we grow quickly because we know that until we get growth in GDP in those ranges of kind of 2-1/2 percent, we actually still see the unemployment rate rise. So it's so important that we actually not just get growth but robust growth.

Now, you're right. I have certainly said that given what's happened to housing prices and people's 401(k)s, the chances that consumers are ever going to go back to their really high spending ways I think is not very plausible and nor do I think they probably should. We were a country that needed to be saving more.

I think if you ask me where could that robust growth come from, it's probably going to be from business investment, right? That if we can give the right incentives, can we create the right environment were firms feel confident and start doing the crucial investments that we need, that can be I think an important engine of growth.

And I'll just give an example, think about what we're doing in the energy sector of our emphasis on renewable energy, if we put in place a cap and trade system, all of those will give incredible incentives to coming up with new kinds of power, new investments in that area, and that could be I think an important engine of growth going forward.

So I think it is still very realistic that we could have not just anemic growth in 2010, but good robust growth like you'd normally have coming out of a recession this severe. I think one of the things that will be important is what happens in the financial system because to the extent that we can heal the financial system, get lending going again, that obviously is going to be a big help as well.

KUHNHENN: So by robust growth, what are you talking about roughly? Is it in that three percent range? Something above 2.5 where you could actually see unemployment begin to drop?

ROMER: Absolutely. I think, you know, certainly I think 3 percent is very reasonable. You know, I will point out coming out of some other severe recessions say in 1975 or 1982, seeing numbers like four percent or five percent real growth in the year were actually pretty standard. And so, you know, I think that's not, you know, that's not the most likely outcome but it's certainly possible.

SHAW: You had mentioned Mr. Bernanke's meeting with Senate republicans and one of the other things that some of the republicans said that they said to the chairman during the meeting was that they're a little concerned about the Fed's independence. They said it seems like the Fed has been working a little bit too closely with the administration.

The Treasury, of course Mr. Bernanke said during a crisis like this it's critical to have the central bank working with the executive body and so forth. What is your sense of your administration's relationship with the Fed and how mindful you are of its need to be independent?

ROMER: We are completely mindful. I mean one of the central tenets of how our economy, or certainly our economic policy is done is the independence of the Federal Reserve and that is something we completely respect.

But also what Chairman Bernanke said is so incredibly true. In a crisis situation like this everybody's got to be working together and that is certainly what the Fed and the administration have done and I think it is a big reason why we might be seeing these glimmers of hope and it's a big reason of why the evaluation of the banks went so smoothly and seamlessly and why we're putting in place I think a very good financial rescue plan.

SHAW: One other issue that's striking to me is Congress is working to create a commission to look at the financial crisis that exploded in 2007, still continues, and I'm wondering, a lot of people have noted and there's a lot of books that have been written.

There's already a growing literature on the crisis, but as someone who studied economic crises, is there something that this panel might be able to look at that you'd be particularly interested in? I mean there are some aspects of this financial crisis that have surprised you and you'd really like to know more about?

ROMER: That's a fantastic question. I do suspect that economists will be looking at this crisis for many years to come, not only in the next year or two. I think one of the questions that is still very high in my mind is sort of what set off the bubble in housing prices? You know, I think there are lots of stories out there.

Was it keeping interest rates low? Was it high saving in the rest of the world? That's a link that has not really been investigated or proved enough to my satisfaction. So I'd love to know more about and see some more evidence on just what we think might have gone on because of course the whole reason Congress is having a commission like this is to figure out what went wrong so it doesn't happen again and so that's a question I think we need answered.

KUHNHENN: Dr. Romer, I wondered if you could talk a little bit with us about where you stand on financial regulation right now? It has been one of the legs of the president's economic recovery stool. And wondered where, if you're going to proceed with seeking certain aspects of it first, the systemic risk regulator first?

What you will be doing with these instruments that have not been regulated in the past, derivatives, credit default swaps and so on. Where is the administration right now on that? There's been some criticism on The Hill that even though Secretary Geithner for the Treasury, laid out an outline for what he wanted to do that there hasn't been a specific plan delivered to The Hill.

ROMER: You know, the President has stated that it absolutely is a priority. It very much feeds into what you were just saying about the commission looking at what went wrong in the previous crisis because I think one of the pieces of advice that we've gotten.

And I know for example from Paul Volcker is to make sure you don't go too fast on this, to think about this because financial regulatory reform, it's important to get it right and so that is very much what we have been focusing on and doing.

You certainly saw one of the, you know, we did break off one piece early and that was the credit cards, some of the consumer protections and that's going to be a part of the overall regulatory reform. In terms of where we are I don't want to get ahead of the process, but absolutely it is moving forward and I know that I anticipate we will be providing a lot more information before too long.

KUHNHENN: But are you doing it as a package or do you intend to do it still to some elements of it first before you do other aspects of the package?

ROMER: Right. I mean you've got the nail right on the head. That is sort of the crucial issue because it is so inter-related I think it's very hard to break off pieces precisely because what you want is a coherent structure. One of the things we think went wrong in the last crisis is that sort of fragmentation, the idea that there's lots of regulators, sometimes people even kind of shop by who they want to be regulated by.

And so you've got to set up a kind of comprehensive system to make sure that you've got things covered, you've got it organized right. Whether once you have the basic framework you can start carving up pieces, I think that sort of still remains to be seen. But we are sort of having to move forward I think on a pretty comprehensive program.

KUHNHENN: Going back to John's question about the Fed's independence, do you think is the Fed the best place to have an overarching risk regulator and, well, risk regulator?

ROMER: Yes, I mean that is certainly one option. Right now they're kind of the most natural but where it will ultimately end up I think we'll just have to see. I don't want to get ahead again.

SHAW: I wonder if you could just give us some insights into just the White House economic decision making because you have so many huge issues on the plate? I mean you have an ongoing crisis, you were talking about financial services reform, there's climate change legislation, health care.

How are you trying to just sequence these issues so Congress is working as fast as it can but the agenda is not so overloaded that people are reacting with, you know, imperfect information and adequate information? Do you have this sequenced out for the next year and a half or so as to just how these pieces should be put together?

ROMER: I mean it is a lot of stuff happening all at once and I think the truth is we're not sleeping terribly much just simply because there is so much happening on the economic scene. I think the president has made it incredibly clear just how important health care reform is and so that is certainly moving ahead full steam.

We know that climate change, Congress is working on a bill, so at some level, you know, our – the work that the White House is doing on economics is a little bit driven by Congress's timetable and if they're moving, we need to be moving with them to make sure that we're keeping up and thinking about the same issues and all of that.

And then obviously there are ones where maybe we're in the driver's seat a little bit more; we're just trying to scheme them all out. But you are right. That there is a lot and we're certainly having to make sure that we cover all our bases and keep doing all the crucial research.

KUHNHENN: If I could bring it back to the beginning with unemployment, given that that's probably one place that Americans are really – they're very interested in that, and curious how high do you think that unemployment rate will get before it starts going down, understanding of course that it is an indicator that follows after we're seeing the recession bottom out and start improving?

ROMER: No, so you do get the crucial fact which is even if we get what I very much hope of positive GDP growth in the fourth quarter, we probably won't see positive employment growth until a quarter after that. Until we get GDP growth above 2-1/2 percent we probably won't see unemployment come down. It'll keep rising.

You know, again, I may be going to tell you what most private forecasters are saying and they're saying numbers like 9-1/2 percent is kind of where I think most of the market expectations now are where we are going to top out. Boy, I hope it doesn't get that high but I think that is unfortunately pretty realistic.

WODELE: I think we have time for one more question.

SHAW: And maybe I'll kind of go the other end and kind of an international question, Senate Finance Committee Chairman Max Baucus said on Friday that the United States really needs a comprehensive approach to its relationship with China on the economic front.

You had inherited a process from the previous administration. Are you changing that process or are you expanding it or what – how are you relating to this hugely important power, economic power, China?

ROMER: You know, I think the important thing is that, again, you mentioned all the things we're doing on the domestic economy and yet one of the things the president also had to do very quickly when he came into office was go to the G-20, start providing some international leadership so that there are just all these crucial issues on international coordination, on, as you pointed out, our relationships with major emerging powers.

You know, all of that is something that we also have teams working on and I think we're going to be coming, you know, we'll certainly be working to make sure we have a good and productive relationship and put the whole world economy back on track, not just our own.

WODELE: All right, Ms. Romer, I think we can squeeze in one more here if we can real quickly, do you have a follow-up, Jim Kuhnhenn?

KUHNHENN: Well, Dr. Romer, I do want to ask one last question then about the deficit and a lot of your ability to reduce that deficit of course has to do with your policies, but also with how quickly the economy recovers. You have to reach certain levels of growth so that it creates the revenues that you need.

Is that, cutting the deficit in half, down to about $530 billion by the end of the president's first term is that still a reasonable expectation do you believe? Or is that going to be adjusted when you start looking at and start applying the new economic conditions that are before you?

ROMER: I think it is still realistic. It is certainly something that the president has felt very strongly about. Again, we don't – I wouldn't want to promise anything because I can't promise what the economy will do, but I certainly anticipate that we're going to be working very hard, that is a goal that the president set.

And I think, as I think I've pointed out before, when we look out one, two, three years from now I think the idea that we are going to have good growth and that that's going to be generating the kind of revenues that we needed and that we're expecting, I think is still very plausible.

WODELE: OK, Christina Romer, Chair of the White House Council of Economic Advisors, that you for being on Newsmakers.

ROMER: It's great to be here.

KUHNHENN: Thank you.

WODELE: Jim Kuhnhenn, if I could begin with you about what you heard there from Ms. Romer on economic indicators and future growth?

KUHNHENN: Well, I think they have a fairly optimistic view of things and it doesn't necessarily match up with some other economists are saying, but it's not totally out of line. But even a percentage point here or there makes a big difference in their view of what they're going to have available and what's going to be at their disposal in terms of revenue, what the growth is going to be, and it, frankly it's something that affects them politically as well.

If you – obviously Congress is going to be approaching mid-term elections next year and if they're not seeing progress in the way that they were expecting to they're likely not to embrace some of these – the more expensive policy options that the president is advancing. So I think that's a legitimate concern for the president to have.

And at the same time as we heard and as we've seen all week there are people talking about these glimmers of hope. Chairman Bernanke calls them the green shoots that indicate that maybe the bottom of the recession is before us. That's good for the President to have. It's a tough argument for him to make in light of high unemployment to go out there and sound Pollyannaish about the economy if those particular numbers are still staring them in the face.

WODELE: John Shaw, what economic indicators are Congress going to be watching? As you say, there is an election coming up in 2010, so the White House and Congress, what are they watching for over the next few months?

SHAW: The House Speaker, Nancy Pelosi had a press conference this week and she was asked about her agenda and she spew the word jobs five times; just read it off. So clearly I think the congressional leadership on the democratic side really would love to see signs that the economy is getting stronger and would love to see that starting to get reflected in employment numbers.

You know, we had a job loss of 500,000 plus. You know, I think the hope is that that number starts shrinking and that by early next year, you know, there's some – actually some positive job growth. That this is a tough patch because there is so many big, big things on the agenda and it seems more doable and more plausible if you can say that the plan that you put into place is showing some signals of working.

And the administration, if the economy starts to stabilize and grow will use that as an indicator that their policies are sound and will use that to push other programs which are wildly ambitious and in other years would be the sort of centerpiece of the whole year is now, you know, some of the things that we're talking about, financial services reform, health care reform, climate change. In more typical years that would be the issue of the year as opposed to one of four or five.

WODELE: Jim, you asked her about where she's looking for growth and she said probably not from consumers but from business investment.

KUHNHENN: Business investment, right.

WODELE: What did you make of that answer?

KUHNHENN: Well, I think that that's a – the president has been talking about trying to use the business sector as the driving force of the economy. The problem with consumer spending is that it was – it relied on people maxing out on credit cards, everything that got us into the bind, into the problem that we have right now.

And the president has been talking about trying to get away from the bubble and bust cycles of the economy. I think that the administration's economic team believes that if you have a business-driven that it's going to be something that is probably going to be a little shallower but a little more consistent.

It's also a great political message because democrats are viewed as being anti-business and if he can make the case that everything that he is doing is designed to bolster the private sector he'll get some argument about that, of course, but that – I think that that helps him in the end as well.

SHAW: I was going to say I think long-term the thing I think was very striking in her comments was just how central health care reform is to everything because the administration's budget has been under a lot of criticism, particularly from republicans but also independent people who said, you know, out of the 3-1/2 trillion deficit, budget, excuse me and the trillion dollar plus deficit, to come up with $17 billion in savings is not even really serious.

And yet the administration, as Dr. Romer said, is really saying but the big piece is yet to come. It's health care reform. If we can turn that around, get huge savings out of that, they hope, that it will make the fiscal picture look much more plausible. Absent health care reform I think their economic program is hard to really justify.

WODELE: Did we – go ahead.

KUHNHENN: No, I think this, the exercise that they went through was kind of a micro-cutting exercise. I think the visuals of that and I think the public probably sees $17 billion as a sizeable number, but nevertheless it is half a percent of the entire budget. It also proves that the true way to deal with deficits is on the economic growth end and on the revenue end and they have a plan, a $634 billion health care plan that they believe will be a key to reducing entitlement costs, Medicare, Medicaid in particular.

And I think that's where they see the big gains of making an initial investment of that size that has long-term consequences.

WODELE: Did we hear a priority list from her in there? Is – she seemed to bring up health care more than once and then followed by that climate change.

KUHNHENN: Well, I think that because health care gets into the cost savings in the long run and addresses an entitlement issue that has been lingering over this country for so long. So I think that's – health care's clearly at the top and it was at the top of his agenda during the campaign.

And but climate change I don't think, is far behind. It's an issue of whether to use it as a revenue producer or not.

WODELE: Does that priority list from the White House match what Congress wants to do first?

SHAW: I think so in the sense that I think health care reform has – is moving along pretty well. The big decisions have to be made. The Senate Finance Committee's put together a really thoughtful process beginning last year with discussions, roundtables, white papers. They brought all the actors in and it's obviously a very carefully thought-out process.

But in the end it's going to be very interesting to see if the republicans are willing to engage. As Senator Grassley, the ranking republican on the Finance Committee has – he works closely with the chairman and says he wants to work with them, but I think a lot of people are not convinced that at the end Senator Grassley's going to cut the deal that Senator Baucus wants and needs him to cut. That'll be fascinating to watch I think.

WODELE: On regulation, on regulating the financial institutions she put out there that where they're looking for growth is from business investment.

KUHNHENN: Yes.

WODELE: Businesses will say you've going to deter investment if you put too many regulations on us.

KUHNHENN: Yes.

WODELE: So how do they square those two things …

KUHNHENN: Well …

WODELE: … and are you hearing from – did you hear from Ms. Romer today that regulation is a real priority?

KUHNHENN: Well I think it is but it was interesting that you pointed out that Volker has been urging caution. Volker is kind of an unseen hand here; we're not exactly sure how much of a player he has been. He's chairing an economic recovery advisory board that the president set up. And he has periodically met with the president, although this board itself hasn't met. It's not expected to meet until later this month.

But Volker has been, and we've heard from other administration officials, that Volker has been one who has been urging caution and urging a comprehensive approach because one thing can lead to others.

Remember the regulation is on financial institutions and on financial instruments that many believe caused some of these problems, so ultimately how they affect it – the effect on business and business activity is tangential, but and so it depends on how restrictive they are.

Back in '99 and 2000 there were efforts to, well, Congress undid legislation that had separated banks from other financial institutions. They were allowed to work together; dome people claim that was a big problem with the crisis.

There were efforts – some people wanted more regulation of derivatives and these other instruments. That didn't happen; people claim that's another cause for this. So that's – all of that is back in the mix and being looked at as to what the examination of regulation is going to look like.

WODELE: A commission for looking into how we got into this financial situation. She said she's interested in the housing bubble, more information on that. It sounds like the administration is supportive of a commission. Where is that in Congress?

SHAW: It's moving along. I think it's likely to become part of the bill that passes in the next couple of weeks. I mean the point I was trying to make gently is that there is a whole raft of literature by independent people.

There's people with partisan views, too, but there's a whole raft of literature the Congressional Research Service has a ream of studies, so it's not clear to me what actually this commission can do that good independent academics, you know, wouldn't do, but it seems like it is moving in that direction.

And I think the administration doesn't want to – it's not a winning issue to block. That might appear that you have something to hide so they're like sure. I mean what's less clear is whether they are willing to slow down their agenda until this report comes out and it didn't appear from what Ms. Romer said that they're interested in doing that.

And that people who are pushing it are saying, you know, what's the purpose of having it if you're already going forward with things like financial services reform?

KUHNHENN: Yes, right. I don't know what they learned or how they adapt what they learn to something that's already out of the barn, so to speak.

WODELE: OK. Jim Kuhnhenn, political reporter with The Associated Press and John Shaw, correspondent with Market News International. Thank you both for your time.

KUHNHENN: Thank you.

SHAW: Thank you.

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