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Seven Questions: Keith Hennessey
The Bush administration economic advisor who witnessed the U.S. economy’s crash critiques Obama’s performance.
Keith Hennessey, a top economic advisor in the Bush administration, had a front-row seat when the global financial crisis first hit. He joined the White House in 2002 and had the dubious luck of becoming director of the National Economic Council in November 2007 — just in time to watch Lehman Brothers collapse and the United States descend into the worst recession since World War II.
After leaving the White House, Hennessey has used his policy expertise and popular Web site to analyze and criticize Congress and the Obama administration. On July 15, Hennessey joined the Financial Crisis Inquiry Commission, which will deliver a report to Congress on the roots of the crisis next year.
In this interview with Foreign Policy‘s Michael Wilkerson, Hennessey discusses the onset of the economic downturn and his concerns about Obama’s economic policies, from stimulus money to reducing carbon emissions. On all fronts, Hennessey says, White House reporters need to ask harder economic questions, and he is happy to supply them. Excerpts:
Foreign Policy: You took over as National Economic Council director in November 2007. Was it already clear at that point that the United States was headed for a serious recession? If so, was the "shot in the arm" stimulus that President George W. Bush put forward too small?
Keith Hennessey: No. I took over at the very end of 2007. At that point the president’s advisors thought that we were at risk of a mild recession in 2008 or maybe a slowdown. And in fact that’s what we had up through the summer. 2008 was not an economic and financial crisis — or we didn’t feel the full effects of the crisis — until the events of late summer [or] September. We thought 2008 was going to be a weak year economically but not a crisis year.
At the time … the size of what President Bush proposed was considered quite large. Because the economy was not in obvious and visible decline at that point, the $150 billion that President Bush proposed was considered quite large compared to what Washington was used to. $150 billion in a year is big.
Now, in retrospect, and now that we’ve gone through a year and a half of dealing with much more severe problems, it looks relatively small in comparison. But at the time it was not a small package.
FP: What were the other things on the agenda in between getting that first package launched and delivered and dealing with the immense banking crisis in September?
KH: Once the Bear Stearns problem happened in March, the financial crisis dominated economic policymaking from that point to the end of the administration. So you really only had about a month between the enactment of the stimulus in mid-February and the first shock from the financial crisis in mid-March. We really spent from March through the president’s last day dealing with the financial crisis and the consequences of it. And related things like the auto situation, which you can argue was closely related to the financial crisis.
FP: There is a perception that reckless bankers in the United States wrecked the global economy. To what extent should the United States be considered responsible for causing the economic downturns elsewhere? Especially because it seems like the U.S. has policy instruments to get out of it that not all of these other countries have.
KH: There are some aspects to the U.S. system that are somewhat unique. A lot of the problems in the underlying financial assets — in mortgages specifically — were largely confined to the U.S. But you had banks and large financial institutions around the world that were making the same bad decisions as American bankers. So while there were some aspects that are uniquely American I think that there are a lot of aspects that were global in nature or that were replicated across other countries. Trying to isolate one single cause is probably a mistake.
FP: What worries you about the deployment of current stimulus measures? Is another stimulus required?
KH: The Obama administration put most of [its first stimulus bill] out through government bureaucracies. And I think that that is too slow. I think that the stimulus will have some effect beginning late this year and into next year at increasing economic growth. I just think that had they done it in a different way — had they put money directly into people’s pockets — we would have seen the increased economic growth much faster.
We’ve actually seen this over the past week with the so-called "Cash for Clunkers" program where as soon as the government made those incentives available, hundreds of thousands of people went out and took advantage of that provision and you can see how quickly the money went out the door, as opposed to the stimulus where it’s taking months and months and months and the government bureaucracies are slowly churning away trying to figure out how to spend this money.
FP: Would you be in favor of increasing funding for "Cash for Clunkers"?
KH: No. While I used "Cash for Clunkers" as a demonstration of a concept of getting money into people’s hands, I think it is a silly program and a wasteful program. I think that it is amazing that we are paying people to destroy assets. I think as a matter of environmental policy it is incredibly inefficient. I think that basically what it is doing in part is encouraging a lot of people who had planned to buy cars sometime over the next six months to accelerate those car purchases to today. So I think it’s largely a timing shift in the same way that sales tax holidays do not dramatically increase the amount that people buy. They just shift that buying to the weekend of the sales-tax holiday.
FP: On your blog, and in the media, you have been skeptical about the prospects of a cap-and-trade solution to global warming. What are your concerns about the bill that recently passed in the U.S. House of Representatives?
KH: Basically that it won’t work to achieve its stated goals. I think that the principal problem that we have is that we’re trying a national approach to a global problem. The House bill, like most legislative proposals, would raise the cost of carbon in the United States. This only works if all countries or at least all of the largest greenhouse gas emitters reduce their emissions. My fear is that if the House bill were enacted into law we would raise energy prices in America, we would make American firms less competitive relative to their counterparts in China and India, and we would do so in such a way that they’re not having any significant effect on the amount of greenhouse gasses going into the atmosphere because other large emitting nations aren’t limiting theirs. So, costly for Americans and ineffective as an environmental matter. That doesn’t sound like a good deal to me.
FP: You have frequently used your blog to suggest questions reporters ought to ask the White House about economic policy. Is this because reporters lack fluency in economics or because you think they aren’t asking hard-enough questions?
KH: Depending on the reporter, [the answer is:] a little bit of both. White House reporters have to cover a wide range of topics so I wouldn’t expect all of them to be experts in economics. But I know that the questions I had to deal with as a White House staffer seem a heck of a lot harder than the questions that the current White House press corps seems to be asking. Getting that kind of information out into the public space elevates the level of debate. What we need to be having is a discussion about the policy and not just lots of coverage about the beer summit.