BPR Interview: Steven Rattner

Brown Political Review’s Henry Knight sits down with Steven Rattner ’74. A New York Times Op-Ed contributor and recent author of Overhaul, Rattner was the leader of President Obama’s task force to rescue the auto industry in 2009.

Brown Political Review: One of the most striking phrases employed in President Obama’s reelection campaign was Joe Biden’s “Osama is dead, and General Motors is alive!” In retrospect, how do you evaluate the strategy you pursued to rescue the auto industry? Would you do anything differently?

Steven Rattner: I think in retrospect the president made the right decision to rescue the auto industry. Time has proven that. The companies are healthy again. They’re profitable, they’re hiring more workers, they’re producing more cars. It’s very hard for me to understand what the argument would be that the president shouldn’t have done anything. As for what we could have done differently, I’ve said that I think in retrospect we may not have fully appreciated how competitive this industry is and how important it is for this industry to have the lowest possible cost. But on balance, I really don’t think there’s anything material I would do differently.

BPR: In a recent article for The New York Times you wrote, “From Washington’s point of view, divesting its remaining shares [in GM] will end an uncomfortable and distinctly un-American period of government ownership in a major industrial company.” What was the toughest decision your task force faced?

SR: The toughest decision we faced was whether or not to save Chrysler. Chrysler was the number three company in Detroit. It was very hollowed out. It didn’t have any operations of any consequence outside of the U.S. Its cars did not rate very well on any of the consumer reports lists. A lot of people said that we should let Chrysler go, that that’s what capitalism was all about: some companies succeeding, others failing. We made a determination that Chrysler could be saved and the president made a decision that Chrysler should be saved. At that moment the economy was in what felt like a free fall, losing 700,000 jobs a month, and the idea of 300,000 more jobs going in an instant was very unappealing. That was the toughest decision. It was fully argued within the administration with people on both sides of it, providing very good substantive arguments. As I said, I think it’s very clear the president made the right decision in the end.

BPR: Taxpayers were outraged by TARP [the Troubled Asset Relief Program] and the bailout of the automobile industry. Did they have a right to be angry?

SR: I think people were angry at the beginning. It was very unpopular. The polls all said it was unpopular. But if you look at the polls now, a majority of Americans feel we did the right thing. There certainly are still critiques. There always will be. But a majority of Americans thought we did the right thing and so I’m not going to spend too much time worrying about how a minority of Americans feel. I don’t like the idea of government messing around in the private sector. I am a capitalist. But there are times when markets fail, when the private sector needs help from the government because there is no private capital available or some other reason. This was one of those times. This is the kind of thing that I think government exists to do. Not to just freely muck around in the private sector whenever it feels like it, but when there is some sort of clear market failure, as there was, I think it’s appropriate for government to step in.

BPR: What is your opinion of the fiscal cliff deal brokered at the beginning of 2013, cementing Bush-era tax rates for incomes up to $450,000 for families and $400,000 for individuals?

SR: I think it was directionally the right thing to do. We needed more revenue. It should come from the wealthiest Americans. That, however, is not enough revenue to really solve our fiscal problem. It’s about $650 billion over ten years. I think, at a minimum, you need roughly double that to make meaningful progress on the budget problems and so, there needs to be a step two on the revenue side, which should be more taxes mostly coming from upper-income people some time over the next year or two. It doesn’t need to be right this minute but we need to be working towards that.

BPR: Earlier this year Republicans reversed course by voting to temporarily extend the debt ceiling. Are there signs of compromise beginning to emerge from the partisan bickering in Washington? What are the prospects for a larger deal resolving the deficit?

SR: No, I can’t say that I’m very optimistic that there are signs of progress on the gridlock in Washington. As we are talking at this moment, it looks like sequestration is going to go into effect, which is a truly stupid idea. The Republicans backed off the debt ceiling because it was a politically disastrous place for them to be, but I don’t really see any signs that the gap between the two parties is any closer. The only good thing I can say is that this series of deadlines is gradually forcing a set of steps to address the fiscal problem. It’s not the right way to run a railroad. It’s a terrible way to make decisions. Maybe we’re getting there gradually. But do I see any real change in the mood in Washington or the ability of Washington to get stuff done? No.

BPR: If Congress doesn’t take action to stop the sequester, which appears to be a likely scenario, then what are its immediate effects on the economy?

SR: There are two kinds of effects. One is called the macroeconomic effect. Any time that the government changes its behavior, in this case by spending less, it has an economic effect. The effect of spending less is simply to slow the economy because there’s less money in the economy. We will see that happen. It’s not a change in the economy from being in a recovery mode to being in a recession mode, but it will have an effect.

On a more microeconomic level, there will be a lot of individual effects. For example, unemployment payments will immediately go down by 11 percent. Everyone talks about air traffic control, agricultural inspections, things like that. There will be lots of small—and maybe not so small—dislocations in different pockets of the economy where the spending cuts take hold. In the long run, the thing I’m most worried about is that we are cutting the wrong kinds of spending, that the spending cuts that have been going on for the last two years are disproportionately weighted towards some of the things we should be spending more money on. Things like research and development, infrastructure, and the like. These are important investment programs that we’re shortchanging and that we’ll be shortchanging even more, and that, to me, is very worrisome.

BPR: How do you think Medicaid and Medicare can be restructured to preserve a relatively robust level of care for the elderly and the poor?

SR: Medicaid isn’t really that much of a problem. It’s a pay-as-you program just like unemployment insurance, where we’re taking care of a group of people who can’t afford their own medical care. There are certainly things we can do to reduce the cost, but the bigger problem is Medicare. And the problem there is what I call the intergenerational transfer problem. The government is promising me a set of Medicare benefits when I turn 65 in a few years that I will not have paid for by virtue of my Medicare taxes. So my kids, who are your age, will have to pay for that. That to me is the really unfortunate part of Medicare: the bills that my generation is leaving for your generation. We don’t have to deal with that today. It’s not going to cause some economic or financial collapse in the short run. But the longer we let it go on like this, the bigger the bills are that we’re leaving for the next generation, and so my view is that we should do something about it sooner rather than later. There are other people who make the point that we don’t have to, and I get that point but I just don’t think it’s fair, so my vote is we do something about it.

BPR: One criticism of Medicare’s structure is that it leads to the overconsumption of health care. How do we deal with that overconsumption?

SR: This is one of the toughest moral dilemmas, because in pretty much everything you do and I do in the course of the day, we make decisions on how much to use based on price: how much gasoline to buy, what restaurant to go to, what clothes to buy. In health care, when you essentially say that everyone should have what they need, you’re basically saying that price should not be a factor in their decisions. That then raises the possibility of overconsumption because “why not, you’re not paying for it.” There’s definitely some of that going on right now. I don’t have a perfect solution to that because I know that as a society, we certainly don’t want to go to a place where the amount of health care you get is decided the same way the amount of gasoline you buy is. But I think we have to get to a place where there is some economic impact on people based on their decisions. So, for example, co-pays, where you’re required to pay at least something towards your medical care… you could make it smaller for people who don’t have the means, but a $10 or $20 co-pay is a big deal and will at least force people to stop and think about it before they visit the doctor. For someone who’s better off, you could make those co-pays higher. You need to do things like that so that people do have some incentive to use the right amount of medical care to get the care they need, but not to use more than they need.

BPR: What do you think the Democratic Party will gravitate towards in its plans to reform Medicaid and Medicare?

SR: I think, in brief, the Democratic approach is going to have two components. One is simply better management of the health care system. Using some of these new innovative ideas for how physicians are compensated– for example, compensating them based on results, not just on amount of time spent. Innovative practices, I think the Democrats will put a lot of stock in. And the second I thing I think you’ll see Democrats put some stock in is asking the wealthy to bear more of the burden, whether it’s higher premiums or having benefits phase out for people above a certain income level. We’ve not really done very much of that with Medicare and I think the Democrats would like to start thinking about that.

BPR: If austerity isn’t the answer and you believe too much deficit reduction right now would cripple economic growth, then when is it financially responsible to enact drastic deficit reduction?

SR: I don’t think we’re in any immediate danger of the markets erupting or people not buying our debt. I think it’s more of a fairness issue, of how much more debt my generation wants to pile up and leave for your generation. The longer we wait, the more debt there will be. That has to be balanced against the fragile economic recovery and not doing too much too soon. I’m not particularly religious or dogmatic about how much we do immediately or the need to do a lot immediately. I just want to see us get onto the right path, and we’re very clearly not on that path at the moment.