Economist Glenn Hubbard helps lead the economic team of Republican presidential candidate Mitt Romney. If Romney wins the GOP nomination and then the presidency, Hubbard might end up as U.S. Treasury secretary or the next Federal Reserve chairman. I chatted with him by phone yesterday. (Hubbard stressed he was speaking for himself and not the Romney campaign.)
1. How worried are you about the present state of the European debt crisis?
I am concerned simply because the situation is a bit of a replay of 2008. Greece plays the role played by Lehman Brothers, slow-moving policymakers in Europe play the role of slow-moving policymakers here. So, yes, it is a significant problem and could lead to banking failures in Europe and a spread to the United States through higher risk spreads and through money market fund problems. That said, the Europeans are taking steps, they could work this out. But I don’t see that they’re acting as boldly as I would act. Certainly the probability of a recession would rise if the Europeans can’t get their act together. … You could see higher credit spreads into an economy that is already somewhat fragile.
And this is not beyond the grasp of the Europeans. If they had a much bigger EFSF, and the ECB were willing to play a more supportive role, they could fix this. … It would require German taxpayers being willing to fund the much larger EFSF because, after all, that is what Europe really needs, the German taxpayer. Is the ECB going to play a bigger role? Certainly Mario Draghi has stepped up more than his predecessor. But it is enough? I doubt it.
2. Is there anything we can do about housing beyond speeding up foreclosures and hoping the economy picks up?
I do think there is another step, the mass refinancing of mortgages that my colleague Chris Mayer and I have suggested. It’s not a silver bullet, but it would be a very big positive effect not only on the housing market but on the economy as a whole. Given that it would be over the life of the mortgage, it would be the equivalent of a long-term tax cut. … and you would lower defaults … Others have suggested doing this on the asset side through principal writedowns, but that takes a lot of time and really would make me worry about contracts, basically. It’s really telling people you’re going to tear up a contract. … Mass refinancing is just basically allowing refinancing that would have happened in normal times anyway. And given that we already own all the risk as taxpayers—I wouldn’t have done that but we did, through Fannie and Freddie we own the risk—why not use it?
3. Back in 2009, you suggested a “good bank/bad bank” solution to deal with “too big to fail” banks. Is that still your position?
It still is. I think Dodd-Frank raced ahead to get something done before the Congress even had its FCIC inquiry and before economists and business people really thought it out. … And in fact, Dodd-Frank does almost nothing in terms of a true resolution mechanism … So the piece Luigi Zingales and I wrote before Dodd-Frank is still the right answer, or some variant of it. … We haven’t come up with a mechanism [to deal with another 2008-like situation]. Picture whoever the Treasury secretary is and whoever the Fed chairman is. … They will be faced with a really bad incentive. Do I do [bail out the banks] because everything is moving quickly or can I have a resolution mechanism to let some dinosaurs fail—and frankly that is what we need to do.
4. How should we reform the tax system?
When you talk about tax reform and growth … all the biggest effects come from two things: One is making the tax treatment of different activities neutral, so you’re not giving tax preferences in one area and not another. And the other is that you’re not biasing against the future, you’re not taxing saving and investment. … Take what Bowles-Simpson did. It does really well on the neutrality point; it broadens the base and lowers the rates. But it would actually raise taxes on saving and investment because it raises taxes on dividends and capital gains. So as a result, I don’t think of that as true tax reform. … [One] good idea would be the late David Bradford’s X-Tax, which is a progressive consumption tax. That strikes me as perfectly fine.
Alan Auberach, a wonderful economist who happens to be a Democrat, his own work would suggest you could see between half a percentage point and a full percentage point increase in growth every year for a decade if we did really good tax reform. I don’t know too many things in Washington that have as big a payoff as that. You’re not going to have the economy forever growing at 4 per cent, I’m not saying that. But you could have several years of supra-normal growth that would help us get out of the hole we’re in. And indeed, that is essentially what Governor Romney’s plan is. If you look at the economic growth effects of his plan, they’re enough to basically dig us out of the employment hole by the end of his first term.
5. What are your thoughts on the idea of the Fed targeting nominal GDP?
I’m not sure the Fed would be driven to do much more than it’s doing right now. It already has an amazingly accommodative monetary policy, and it’s hard to see how they could make it ever more accommodative. … What makes me nervous is anything that looks like temporary increases in inflation because our experience with those is that it’s a genie that’s very hard to put back in the bottle. I would much rather see us do the restructuring in the economy that we need for conventional monetary policy to work, which would mean clearing up the policy uncertainty that is limiting the willingness of business to invest, and helping to facilitate the deleveraging on the household side.
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