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In print | Published February 7, 2008

Phoenix reporter Matt Bleiman recently sat down with Editor in Chief of the American Prospect Robert Kuttner to discuss his views on the state of the American economy and what factors he believes may lead to either a recession or a recovery. Kuttner gave a lecture Monday at Swarthmore entitled “Deregulation, Financial Risks, and the New Politics of Managed Capitalism.” Co-founder of the Economic Policy Institute, Kuttner is the also author of six books, most recently “The Squandering of America: How the Failure of our Politics Undermines our Prosperity.” In addition, Kuttner has been granted an honorary doctorate from Swarthmore College:

Is the economy headed towards a recession, and if so what are the implications of that?

Yeah, it’s headed towards a very severe recession and the difference between this recession and others since the ’30s is that this recession was caused by damage to banks and other financial institutions which makes it harder to cure because if a bank has lost a huge amount of money then a bank is reluctant to lend money and that has a contractionary effect on the whole economy.

Recently the Fed has been cutting – they’ve cut interest rates twice and there’s been a lot of talk in Congress about stimulus plans, so how do you think this is all working to help the problem? Is it going to be a long-term issue?

Well, it helps a little bit. I don’t think it fixes it. First of all, I don’t think the stimulus is big enough. The stimulus is about one percent of GDP – about $150 billion in an economy that’s almost $15 trillion. That’s not big enough given the damage that the economy has suffered. You also have housing values really taking a hit and the average middle-class family has most of its net worth in their house. Now, most housing values are declining at the rate of about seven percent this year. That means that people’s homes are going to lose about $2 trillion in value, so unless Congress and the administration do something a lot bolder to prevent the slide in housing values and the increase in foreclosures, that’s going to really be a dead weight on the economy. If your house is worth less money, you’re less inclined to buy consumer durables, you’re less inclined to put money into home repair, you’re less inclined to go out and buy a new house – and so the damage to the housing sector is another really serious problem that is not going to be fixed just by lowering interest rates.

Do you think now is a good time where the people can capture the need for greater regulation due to the fact that what’s happening now isn’t working?

I think the job of political leadership is to help people connect the dots. Most ordinary citizens do not connect the dots between the sub-prime collapse – which is pretty technical and pretty hard to understand – and the failure of deregulation. So, before this becomes an opportunity to have some consumer protection legislation enacted, the leaders are going to have to use this as a teachable moment. I think you need re-regulation, you need a lot of public spending, and you need a whole set of policies to improve the distribution of income and recreate economic security in this country.

So it’s more of a long-term plan that needs to be totally reworked and fixed back into the economy, would you say?

Well, I think there are short-term things we need to do. For example, let me give you one. The stimulus package is about $150 billion. What happens in this kind of a downturn is that state governments find that their tax receipts are not as plentiful as they anticipated because people are spending less money at the store so sales tax receipts are down, people are earning less because there is higher unemployment so income tax receipts are down and their homes are worth less so property tax receipts are down and that means that states and cities and towns have less money to spend. So at exactly the moment when you would expect states and cities and towns to spend more money, cities and towns are spending less money and they are adding to the recession. One of the things that the federal government ought to do is it ought to have emergency aid to states and cities

Seeing as this is all happening now before the presidential elections – I saw you were a supporter of John Edwards’s policies for the election. Now that he has dropped out, how do you think that is going to affect things, or which of the candidates do you think is going to pick up his ideas?

I think as the economic situation worsens, I think whether the Democratic nominee is Obama or Clinton, I think you’re going to find both of them recommending stronger and stronger recovery measures because circumstances are going to demand it.

And you feel the Democrats, in general, are more capable of revitalizing the economy than the Republicans would be?

Well, I think philosophically the history of the Democratic party is of a party that’s more inclined to use government to produce economic recovery and to create a more balanced economy. The Republicans’ philosophy is less government, more tax cuts and they’re particularly ill equipped to lead the country in a situation like this one.

Finally, this is a big situation in the country. Do you think it has any specific effect on the students who are at a school like Swarthmore? What impact does it have directly on young people?

I think its a particularly tough time to be starting out in the economy because companies are not doing as much hiring, universities are not doing as much hiring. A lot of jobs that younger people have don’t have health insurance. People who don’t come from affluent families have tuition bills and loans to pay off. A lot of young people have credit card debts to wrestle with. It’s a tougher time to be starting out than it was when I was starting out when the economy was at the beginning of a long boom. Swarthmore students are better positioned than a lot of other young people because they have an excellent education – a degree from a wonderful college. Many of them are from affluent families so they have a head start. But it’s a difficult time economically to be young. It’s also a good time to be idealistic.

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