The Federal Reserve doesn't seem very confident about the future. Last week, the Fed committed to near-zero interest rates until 2013, indicating that the Fed board isn't anticipating much growth in the job market.
That's a troubling prospect for Americans, and it leaves a big challenge looming over Washington about whether the government can push growth above the painfully low bar set by the Fed.
Joseph Stiglitz, a professor at Columbia University and a Nobel Prize-winning economist, tells Weekend Edition Sunday guest host John Ydstie the president can create job growth by stimulating the economy. He also says there are investment projects that could bring back a high rate of return, like infrastructure, technology and education.
John Taylor, professor of economics at Stanford University and a senior fellow in economics at the Hoover Institution, agrees that the economy could be boosted enough to create more jobs, but not with another stimulus package.
"I agree we need much more growth, and I think [the president] could do things that would get through the Congress," Taylor tells Ydstie.
He suggests cutting government spending, and he thinks the recent budget deal had the right approach. Another way to promote growth, Taylor says, is to stop talking about tax increases.
"It makes firms worry, it makes businesses worry, it makes consumers worry about the future," Taylor says.
He also blames certain government policies he says have failed for slowing economic recovery, including the stimulus package. People and states did not actually spend the extra money they were given for the stimulus, Taylor says.
Stiglitz, however, says the stimulus worked. While he says 10-percent unemployment isn't great, it could have been worse. He says more stimulus would help the economy, but he doesn't think it would get through the political process.
"That's why I'm very pessimistic about the prospects of the economy," Stiglitz says. "So when the Fed says it doesn't think that growth is going to come before 2013, I think, given the political reality, we should be thinking 2015 or beyond."
As for the longer-term impact of the debt deal, Taylor says it doesn't solve the deficit problem, but it is a step forward.
"There's more to be done, I just think that we ought to recognize that there's some progress being made," he says, "and part of that progress as the result of these tough discussions in Washington."
JOHN YDSTIE, host: For more, we're joined by two economists. John Taylor is a professor of economics at Stanford University. He joins us from the Stanford campus. Joseph Stiglitz is a professor at Columbia University and a Nobel Prize-winning economist. He joins us from New York. Welcome, gentlemen.
JOHN TAYLOR: Nice to be here.
JOSEPH STIGLITZ: Good to be here, good to be here.
YDSTIE: President Obama says he is going to focus now on creating jobs, but, of course, the Fed suggests that for the next two years there won't be enough growth to create any jobs. Is there anything the president could really do to boost job growth, Professor Stiglitz?
STIGLITZ: Yes. I think he can stimulate the economy. They can borrow money in a close to zero rate of interest. We have lots of investment projects that yield returns that are very high - 10, 15, 20, 25, 30 percent. Infrastructure, technology, education, design taxes in ways that encourage investment. Right now, we have an insufficiency of aggregate demand.
YDSTIE: People just aren't buying things and businesses aren't buying things.
STIGLITZ: Exactly. And government sector is not creating jobs to fill the hole. And with that weakness, investment is going to be relatively weak.
YDSTIE: Professor Taylor, what do you think? Can the president boost economic growth enough to produce more jobs?
TAYLOR: Yes, absolutely, and I agree we need much more growth. And I think he could do things that would get through the Congress. Number one: trying to get rid of this really very large increase in government spending we've had over the last three or four years, And if you want to go back further, that's fine. I'd say the kind of budget deal that was just worked out has the right approach and that's the kind of thing. It creates certainty that debt is not going to be a problem in the future, we're not going to have a government-caused financial panic, we're not going to have the threats of inflation or deflation. Businesses have plenty of cash right now to invest and create jobs. They're just sitting on it because of these concerns. That's number one.
Number two: stop talking about tax increases. It makes firms worry. It makes businesses worry. It makes consumers worry about their future. Number three: try to find a way to at least temporarily roll back some of this big increase in regulations in the health care, in the financial sector. It is a drag. The reasons we've had this abysmal recovery is largely related to the uncertainty in the interventions by government policies that have failed quite frankly - the stimulus package, the Cash for Clunkers, first-time homebuyers, the quantitative easing. If we can reduce that and have a more stable policy, that removes a lot of the uncertainty, a lot of the concerns and will increase demand and get the economy moving.
YDSTIE: Professor Stiglitz, I want a quick view from you about points Professor Taylor made about the stimulus failing.
STIGLITZ: The stimulus actually worked. If it had not been for the stimulus, the unemployment rate would have peaked somewhere around 12-and-a-half, 13 percent. With the stimulus, it was brought down to 10 percent. Now, that's not great, but they forecast that the effect would be to reduce the unemployment rate by around 2, 2-and-a-half percent, and they were actually on target. Where their mistake was, they did not realize how severe the economic downturn that they had to deal with.
TAYLOR: I would just add, and it's going back to Joe Stiglitz's point about the stimulus. I have looked at this with the numbers, looked at what happened, traced the money, and I don't find an impact. The studies that show it had an impact, they just simulate models. When I look at the data, where it went, temporary tax reductions went into people's pockets, they didn't spend it. This money that sent to the states, they didn't spend it. They actually put it in their coffers. You can't see any impact on the infrastructure or the things that were supposed to happen. And those are the facts.
YDSTIE: Let me ask you this, Professor Stiglitz: you're suggesting more stimulus, but can you really hope that it's going to get through our gridlocked political process?
STIGLITZ: No, I don't. And that's why I'm very pessimistic about the prospects of the economy. So, when the Fed says it doesn't think that growth is going to come before 2013, I think, given the political reality, we should be thinking 2015 or beyond. And the critical number here is what is the growth rate to create new jobs for the new entries in the labor force? And if our economy were in normal mode, the labor force would be growing roughly at 1 percent a year, productivity would be somewhere around 2 to 3 percent per year. And that means if you don't have growth in the range of 3 to 4 percent per year your jobs deficit is getting larger. So, we are going to have to grow faster than 3 to 4 percent. And no one is seeing that within the next two or three years.
YDSTIE: And Professor Taylor, what about you? You suggested that this deal that was agreed to really does have some legs and can do some good. Do you think it will result in final savings that will be approved by the Congress?
TAYLOR: Well, we'll have to stick with it and that's the big question. And I think it did represent progress - there's a long way to go. And, by the way, that doesn't solve the problem of the deficit. Even if we had four trillion rather than two, that wouldn't solve it. You need something like six trillion over 10 years gradually implemented to make it work. So, there's more to be done. I just think that we ought to recognize that there's some progress being made and part of that progress is the result of these tough discussions in Washington.
YDSTIE: John Taylor is a professor of economics at Stanford University and a senior fellow in economics at the Hoover Institution. He joined us from the Stanford campus. And Joe Stiglitz is a professor at Columbia University and a Nobel Prize-winning economist. He joined us from New York. Thanks to you both.
STIGLITZ: Thank you. I enjoyed it.
TAYLOR: Thank you.
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