by Mitt Romney
Investors who bought the packages from Wall Street were so anxious to get the higher interest rates provided by these securities that they failed to look into the creditworthiness of the borrowers. And investors were blindsided by the private rating agencies that inexcusably never understood the risks or at least never went out of their way to publicize them. One Harvard economist told me that in a discussion he had with one of these agencies, he asked what their risk model showed would happen if the price of houses went down. Their answer: Our model doesn’t let us input negative numbers.
In his capacity as chairman of the Federal Reserve, Alan Greenspan made a decision to hold down interest rates for an extended period that didn’t help, either. He was motivated by a desire to avoid deflation—and in that respect, it worked. But the low interest rates also meant low mortgage payments, which allowed borrowers to afford a bigger mortgage and pay a higher price for a home. Those who sold their homes were very pleased, indeed.
And all of this was helped along by a big dose of irrational exuberance, which accompanies the growth of every bubble. Average Americans became speculators. Debt looked cheap and easy to refinance as long as prices kept going up. A lot of people made a lot of money, creating a contagious craving to get in on the game: mortgage bankers, real-estate agents, rating agencies, Wall Street firms, home sellers, home builders—even the politicians benefited from fuller campaign chests.
Then in 2008, interest rates ticked up, housing values stalled or declined, and hundreds of thousands of high-risk borrowers began to default on their mortgages. Suddenly the securities Wall Street had sold here and around the world plummeted in value. Investors dumped the securities at huge losses. Others tried to catch the last train leaving the station and flung their securities into a market that was rapidly retreating. Panic replaced exuberance, one of the most dangerous of all macroeconomic forces. Many of the banks and Wall Street firms that still held some of the securities were pushed toward insolvency.
Who’s to blame? Well, just about everybody. The Federal Reserve should have seen the problem when it realized how many of the mortgages issued in 2006, for example, were substandard. Bank regulators should have recognized that these mortgage-backed securities were very high risk and should not have been allowed to constitute a large percentage of an institution’s reserves. The ratings agencies should have done their jobs and busted the pretenders. The politicians should have realized that when you interfere with the market—as they did with Fannie Mae, Freddie Mac, and with their home-ownership initiatives—bad things can happen. Wall Street should have done enough due diligence on the enormous pool of high-risk mortgages to appreciate the risk they involved, and the buyers of the securities should have done some due diligence as well. The Treasury secretary and congressional oversight committees should have been on the watch for this kind of game-changing discontinuity, and yes, because the buck stops at the top, former president George W. Bush can’t escape some of the blame, either. Nor to his credit has he tried to. It would be a wonderful thing if Senator Chris Dodd, Congressman Barney Frank, and the others who had actually pushed for the destructive government policies would own up to their share of the responsibility for the fiasco that so deeply wounded millions of Americans.
Some argue that blame rightfully ought to be assigned more narrowly—usually as part of their effort to deflect blame for their own failures. Wall Street greed is a common and easy target. That greed is surely part of the story. So are massive Wall Street miscalculations. Investment banks were overleveraged. Some of them had sought to identify and evaluate the risk that they had on their balance sheets, but their risk models famously were based on the 99 percent range of possibilities. But as Nassim Taleb, author of The Black Swan, has explained, the bankers didn’t adequately consider the 1 percent probability that national housing prices would collapse. There were voices of warning, but for the most part, they went unheeded. That’s why so many firms—and tens of thousands of investment bankers—have disappeared.
The human cost of all these errors is staggering. Millions of men and women have lost their jobs. Millions have lost their health insurance. Millions have seen lifelong savings and investments drop precipitously or even vanish. As homes have plummeted in value, millions of Americans owe more on their mortgage than their home is currently worth. The trillions of dollars in wealth that have been lost is only a partial measure of the hardship. Seniors worry that insufficient retirement funds could mean they may be forced to enter a nursing home, where Medicaid will pay the bills. Parents worry that they will unable to afford to send their child to college. Without health insurance, families fear that a sickness or disease could impair not only finances, but also health and life. Parents who had sacrificed and invested themselves in new homes, new neighborhoods, and new schools for the sake of their children have followed the sheriff out their front door.
The issue now is how to end the hardships, how to help the economy recover. First off, it is necessary to say again that the economy will in fact recover. Downturns are always followed by recoveries and there is nothing so uniquely terrible or discontinuous in this recession as to suggest that there will never be a rebound. As I write this, encouraging signs have begun to appear. But the depth and length of the downturn, the rate of the recovery, and the long-term effects of both will be very much influenced by the actions which government takes and has taken.
President Bush signed a 152 billion stimulus bill early in 2008, but as the magnitude of the economic slide became more pronounced, a second stimulus was called for. The 12 trillion reduction in individual net worth meant that annual consumption would fall by over 500 billion. This would not be made up by rising exports because the dollar had strengthened, due to the flight to safety. Nor would investment fill the gap; lenders with capital and equity investors had become scarce. The second stimulus could have been passed in 2008. Then, too, President Bush would have had a hand in shaping it. But congressional Democrats were too wary of allowing Bush to participate in fashioning such a package, because he certainly understood much more than they the crucial role played by tax cuts in reversing the post 9/1l recession.
The all-Democrat stimulus that was passed in early 2009 will accelerate the timing of the start of the recovery, but not as much as it could have had it included genuine tax- and job-generating incentives. President Obama and his economic team said their stimulus would hold unemployment below 8 percent. But unemployment soared well above that level. Not only has the 2009 package already been far less than successful, it will impose a heavy burden on the economy in the intermediate and long term.
Borrowing money to stimulate the economy is quite clearly a two-edged sword. The money you borrow can get things going again, but the borrowing will eventually drive up interest rates and divert future resources to service the debt and repay the principal. That’s why every stimulus should be crafted with care and exactitude; every dollar should immediately create jobs, encourage business expansion, or provide for essential needs such as equipment for our troops at war. Instead, Congress crafted and the president acceded to a stimulus that funded unnecessary pet projects, long-term programs, and delayed employment initiatives.
In 2009, I spoke with the director of stimulus funds for a mid-Atlantic state. He candidly acknowledged to me that less than 10 percent of the federal funds his state received would actually create jobs. This has been true across the country. What a disheartening diversion of resources that could have instead powered a meaningful set of investments, protected our troops in combat, and created new jobs.
Given the shortcoming of the current stimulus, voices may emerge to craft another one. That would be the wrong course. The right course would be to fix the current stimulus by removing programs and by substituting tax incentives that create employment, such as a robust investment tax credit, a one-year write-off for 2010 capital expenditures, and a lower payroll tax. The answer is not to repeat the stimulus but to repair the stimulus. We need to sti
mulate the economy, not the government.
Of course the financial system itself must not be allowed to collapse, but individual institutions that do not show the capacity to right themselves should be allowed to fail. Nonfinancial businesses should also be allowed to fail; if they have future prospects, bankruptcy will allow them to reemerge as stronger, viable employers. General Motors shares should be put in the hands of the public, not the government. Politicians will only get in the way of GM’s recovery.
To speed a sustainable recovery, we must also demonstrate to the world that we have become financially responsible. The president has done just the opposite with plans that would double the national debt in five years. Massive trillion-dollar deficits could take us beyond the tipping point and lead to a worldwide crisis of confidence in America. Accordingly, our currency could experience very high rates of inflation, wiping out savings, further devastating the pool of capital needed to grow jobs, and threatening our economic vitality. We must rein in our trillion-dollar deficits, solve our looming entitlement liability problem, and show an unwavering commitment to stop spending what we do not have. New expensive programs and entitlements must be off the table. If we do not bring government finances under control, our recovery will be long and slow, and we will risk another downturn precipitated by a severely weakened dollar.
Ultimately, the recovery depends on the very same things that strengthen our long-term economy: investing in productivity, stimulating investment and innovation, exercising fiscal discipline, and securing our energy needs. There are no quick fixes, only enduring values.
Despite the huge role our nation played in the financial crisis and the resulting global recession, America’s economy remains the most powerful and productive in the world. Our GDP, GDP per capita, productivity, and standard of living are the highest of any other major economy. We have generated more patents than the rest of the world combined. Over the last two decades, our economy has grown faster than that of any other developed nation, accounting for almost one third of the entire world’s economic growth. U.S. per capita disposable income, adjusted for inflation, rose 37 percent between 1986 and 2005. The poverty rate fell from 22 percent in 1959 to 13 percent in 2005.
Despite our accomplishments, our record is not perfect. Our poverty rate, before counting welfare, health, and transfer payments, is high for a developed nation. Far too many American families live below the poverty line, and many more live with worry and insecurity. Racial minorities especially have not shared equally in the nation’s economic success, and there is a growing gap between the highest-earning households and the lowest. In his book Income and Wealth, Alan Reynolds points that the gap is even greater between those who have college degrees and those who do not. In the fifteen years between 1989 and 2004, individuals with college degrees saw their real earnings rise by 61 percent, compared with only 12 percent by those who had a high-school diploma or less. Education pays—particularly in a world where two billion uneducated, unskilled workers have joined the workplace.
We must also be concerned about our continuing loss of manufacturing jobs and the impact this has had on many middle-class families. Today, manufacturing employs only 11 percent of our workforce, but manufacturing output continues to grow because of productivity improvements. National output per employee more than doubled from 1987 to 2005, propelling America’s manufacturing output to grow by 77 percent, excluding inflation. But despite that growth, some major manufacturing sectors have declined sharply, and others have disappeared altogether.
Some people contend that it’s acceptable to lose manufacturing jobs to offshore sites as long as American firms keep their high-paying research, engineering, and development staffs here at home, but I don’t agree. My experience is that ultimately, development and manufacturing will take place in the same locale—there’s simply too much need for collaboration between the engineer and the manufacturer to make any other arrangement viable. This has ominous implications for America. In a recent survey, most CEOs said they would prefer to carry out their R&D in China, rather than in the United States. As I have discussed above, the best way forward is not to erect trade barriers but instead to facilitate innovation and productivity that will sustain our global manufacturing competitiveness.
For the past three decades, we have imported far more goods than we have exported. Prior to that time, the United States was the world’s largest exporter; today China is. Much of what America produces is intellectual property, and a good deal of it is simply stolen by companies in other nations. In a service and technology driven economy like ours, we must ensure that ideas, discoveries, inventions, patents, designs, and trade secrets are protected, and that their use is properly compensated when they are incorporated by others; so far, this is something we have failed to do.
The most pointed criticism of our economic achievements is directed at the financial crisis that began in 2008. In fact, our economy has endured a number of recessions in its history, though this one has been the most painful since the Great Depression. No other developed nation or economic system of which I am aware has escaped downturns and contractions, except those few countries that base their economies on the sale of natural resources. This is the nature of the economic cycle, which we have not yet determined how to overcome. But the cycle can be managed much more adroitly than our government did in the years leading up to 2008. The key is that we learn from the painful years behind us. We also have to remain confident that, even recognizing the imperfections, it is undeniable that America’s economic success is an unparalleled accomplishment.
The issue is not where we have come, but where we are going. If I may return to my engine analogy from earlier in this chapter: Our economy is powered by two pistons—the first is productivity improvement in existing businesses and the second is the creation of new businesses. To operate efficiently, the engine requires the rule of law, dynamic regulation, a stable currency and financial system, skilled labor, and adequate low-cost capital. It’s an engine that is driven by innovation, which in turn is the product of creative, educated, and highly motivated people.
As with all engines, there are things that make it run faster and things that slow it down. On the acceleration side, there is education, especially in disciplines that generate productivity-enhancing innovations. There is research, development, competition, trade, thoughtful immigration policies, and a culture that promotes entrepreneurship.
Thankfully, we don’t have to deal with economic decelerators like rampant corruption, risk of nationalization, or the civil wars that stall many developing nations. But there are a number of things that slow our economy down. Wasteful spending by government drains capital that could otherwise fuel growth. Excessive taxation and outmoded regulation are economic brakes. Efforts to impose unions, restrict competition, and limit trade retard innovation and productivity. Frivolous and excessive litigation burdens businesses and discourages invention. And annually draining hundreds of billions of dollars from our economy to buy foreign oil slows our economic growth. Unfortunately, a number of these are components of the economic agenda that prevails today in Washington.
To strengthen America’s economy, we must minimize those things that retard economic growth and promote those things that accelerate it. A growth agenda favors low taxes, dynamic regulation, educational achievement, investment in research, robust competition, free trade, energy security, and purposeful immigration. And it seeks to eliminate government waste, excessive litigation, unsustainable entitlement liabilities, runaway health-care costs, and dependence on foreign oil. This, in a nutshell, ought to be the economic agenda for America.
A productivity and growth strategy has immediate and very personal benefits: economic vitality, innovation, and productivity are inexorably linked with the happiness and well-being of our citizens. While it is undoubtedly true that innovativeness raises uncertainties, Nobel laureate Edmund Phelps observes that an innovative, capitalistic economy like ours also promotes ‘vitali
st’ lives. It produces the stimulation, challenge, engagement, mastery, discovery, and development that constitute the good life. His research bears out his conclusion: Compared with workers in European countries, those in America have greater opportunities at work for taking initiative, take greater pride in their jobs, and have higher levels of satisfaction not only with their jobs but also with their lives. So promoting innovation and productivity undergirds a good share of our happiness. It permits us to enjoy a high and rising standard of living, and it makes possible our dream that our children will enjoy lives even more rewarding than our own.
But there is much more that compels us to pursue a productivity and growth agenda—it is essential to preserve the America we know. For if Washington were to continue to depart from this strategy, acting in ways that depress productivity and growth, America would decline. We would be surpassed as the world’s leader, and lament as freedom is stealthily stripped from our descendants and from our friends around the world. It was not for this that the Founding Fathers established the nation, nor for this that hundreds of thousands of our brave men and women shed their blood.
America is freedom, and freedom must be strong.
No Apology: The Case For American Greatness
6
The Worst Generation?
In his 1998 book, journalist Tom Brokaw coined a term for those Americans who survived the Great Depression, defeated the Axis powers in World War II, and created the most prosperous society in history: the Greatest Generation. These men and women—our parents and grandparents among them—succeeded in these epic tasks, not out of a desire for personal glory or a comfortable lifestyle, but because they simply believed that vision, sacrifice, and success were vital for their children and to the generations that would follow them.