Jared Bernstein was Vice President Joe Biden’s chief economist from 2009 to 2011. Along with Christina Romer, President Obama’s chief economist, he predicted that the 2009 economic stimulus would keep unemployment below 8 percent. That prediction, which Bernstein, now a senior fellow at the Center for Budget and Policy Priorities, explains to National Journal, still haunts Obama. Bernstein also tells NJ about his gas-price fears, Greek debt, and the auto-industry bailout. Edited excerpts follow.
NJ: How would you describe the current economy?
BERNSTEIN: Improving, but still fragile. Have we achieved a self-sustaining virtuous cycle yet? No. But, for the first time in a while, that’s a distinct possibility. What needs to happen is more jobs, more growth, more income, and more investment. And that cycle is continuing. We’re not there yet, but we can see the beginnings of that pattern.
NJ: What threats do you see?
BERNSTEIN: Europe, oil, and fiscal drag. And I put fiscal drag first. It is entirely possible for Congress to self-inflict a level of austerity that could easily abort this virtuous cycle that we’re just beginning to head toward. [Federal Reserve Board Chairman] Ben Bernanke warned about this, and he has pretty good fiscal street cred. I worry about Europe and oil, too. Europe seems to bumbling its way toward some kind of solution. But the European recession could shave half a point off our [gross domestic product] growth. But I think it’s less of a risk than I did a few months ago. I’ve been worried about oil prices for months. We have a tightening of global supply with very little excess capacity.
NJ: How big is the risk that high gas prices could choke off or stall the recovery?
BERNSTEIN: It’s absolutely possible. But they would have to rise a lot more than the forecasts have them going up. If you think GDP is growing by 2 to 2.5 percent, we need every tenth of that, and every $10 rise in world oil prices per barrel cuts GDP by a tenth or slightly more. It slows you down but doesn’t send you into recession.
NJ: How much credit does President Bush deserve for a 2005 energy bill that opened up leases now responsible for modern highs in oil and gas production?
BERNSTEIN: The year 2011 was the first in many decades where we were a net exporter of petroleum products. There’s a lot of drilling and fracking going on. I’m sure Bush policy plays a role in that, no question. We knew that about Bush. But Obama has been quite aggressive on the supply and production side. He’s building his street cred on drilling and fracking so he can move forward on his clean-energy initiatives later.
NJ: Is Greece an isolated incident of debt contagion or a preview of grisly coming attractions in Portugal, Spain, and possibly Italy?
BERNSTEIN: My gut is that some of the other troubled economies share the problems that have beset Greece, but they are much worse [in Greece] than anywhere else. It is an insolvency question. That isn’t true anywhere else. If you can’t enforce revenue collection, like Greece can’t, you have an existential problem, and other countries don’t share that.
NJ: The 8 percent unemployment projection and the stimulus: How much do you regret that? What went wrong?
BERNSTEIN: What went wrong is we used the consensus forecast at the time. The numbers we used did not yet reveal the horrific depth of the downturn. We said by a factor of 2 percentage points the Recovery Act would result in that much of an unemployment reduction. The delta was correct. Our mistake was tacking it on to the consensus forecast. Obviously, it was a portentous mistake.
NJ: Why was housing policy so difficult to put together? How close are the White House and Congress to an effective policy?
BERNSTEIN: Answering backwards, the White House and Congress can barely agree on anything now. The biggest difficulty for us initially on housing policy was moral hazard. It’s one thing to write a paper for the Kennedy School at Harvard on what would solve the housing problem. But when you deal with national policy, what do we say to someone who has been breaking their back to live by the rules while you help someone who didn’t? The specter of moral hazard was always in that room. With pure economics, we’d have done cram-downs and wouldn’t have left it up to the voluntary impulses of the lenders. But here’s the reality: You can’t just be an economist; you have to be a political economist.
NJ: Was the GM/Chrysler bailout a close call internally? Do you have any misgivings about the way it was handled?
BERNSTEIN: It was a close call entirely, and it was the president weighing all arguments on both sides. And I will always give him credit for not putting his finger in the wind. It polled worse than [the Troubled Asset Relief Program], which was always a head-scratcher to me. It was definitely a close call. There’s no way I’m going to say it was perfectly implemented. But I’m struggling to think of what we would have done differently. I’m not saying this was painless. There was pain.
NJ: What is the best-case scenario five years from now on U.S. manufacturing?
BERNSTEIN: I don’t look to manufacturing to be a huge job creator. The sector has shifted from labor-intensity to capital-intensity. In five years, the best-case scenario is a robust manufacturing sector. We’d be closer to a balance of trade, and we would have robust supply chains in expanding sectors, like solar and wind technology.
This article appears in the March 3, 2012, edition of National Journal Magazine.