J.D. Foster and Avi

" Around to begin the program over the last couple of days we have heard about. Economic stimulus act signed into law -- now a law nearly 800 billion dollars and today. In Arizona president Obama unveiled. His housing plan that's going to. A -- according to him this beginning of the end of the problem. Kind of an oblique reference to Churchill's words from World War II. And I thought we should try to shorted out and help us do that we have an economist from the Heritage Foundation. Is -- your fellow there earnest. Were before that in the office of manager and budget at the White House. JD Foster online with -- us JD good afternoon thanks for joining us on the program. -- and try to do it. Hard let's start first with the economic stimulus program. 800 billion dollars shouldn't fear and the interest let's round that off from the cool trillion dollars. I guess my first question is as you look at the program as an economist. Isn't going to work."

" No it's not gonna -- at all while it is so in fact it's worse than not going to work. Unless your goal in working is to expand the size of the federal government. What is this program is actually going to weaken the economy. Not just in the long run but in the short run. And it's going to do so for that very simple fact that we are going to be selling so much depth into the public markets. That it is going to be significant upward pressure on interest rates. And that that is going to this slowdown in the economy from. What one sector to the other from one coast to the other. Everything from consumer loans to business loans home mortgages they're all going to be facing higher interest rates because of this plan. And that's where say economy ultimately will be weaker."

" Now you've gone to live little -- this direction I want to I don't want to get to the unwritten play devil's advocate input for the arguments that are used by the other -- justified but you've gone in the direction that I certainly want. Some help with and that is. Where's the money coming from -- and 800 billion -- trillion dollars that is going to be spent by the government where they get the money."

" Well let's let's take a quick step back and remember that the federal government was going to be running a deficit this year without the stimulus. Of about a trillion and a half stars and will do so again next year. So it when you add in the stimulus rounding dealing round -- about federal government soaring. On the order of two trillion dollars in 2009. And another two trillion dollars in 2010. And the federal government is going to be barring them money from two -- The American people and everybody else in the world. We're going to be borrowing it from that the sabres in this country. And then we're going to be borrowing it from people who save or broaden we're going to be importing they're saving. To fund our federal government."

" If you're just joining us good afternoon to you this is Don Nelson in for Howie Carr on the line with me JD Foster economist from the Heritage Foundation. And we are talking about. These significant economic. Stimuli in quotes that have been put forward by the administration over the last couple of days. We pursue this little further JD you -- were going to be borrowing it from the sabres of America and from others who wish god a couple of she million dollars. Lying around so whose kids even loan lender to Russian mission comes to me. And said look like the Marshall money pitched ten bucks I can do it he pitched ten million I can't no matter how much I want to. George got this kind of money we're wears two trillion dollars you know nine and another two trillion in 2010. We're going to come from."

" Well largely is going to come from. As interest rates rise again it's going to be crowding out investment. At home. And is going to be crowding out take consumer purchases people who don't buy things on credit because interest rates too high. And so -- we -- very large economy and we have an enormous. Financial sector still although it's obviously greatly weakened state there's still an awful lot of capital they're a lot of cash. A lot of right now are sitting in fairly. Secure places to people who are afraid. The money is there to be borrowed. The problem is from the federal government borrows a suspended that means the money isn't available to the private sector to spend with a private sector spending it. Much of that goes into investments in new equipment and new factories. That help -- to grow in the future so what this spending is doing. There's -- saying we're going to pay for government consumption today at the expense of private investment today and that -- returns to that tomorrow."

" You haven't mentioned China and Saudi Arabia have heard people say that all the Chinese and the saudis who will lend us the money. And -- to that."

" But the saudis have you know oil and exporting countries generally tend to run surpluses ability significant drop in the price of oil their surpluses are decorated anymore. A -- which we can all be thankful. The Chinese. Have been traditional exporters of capital and they will likely continue to do so somewhat but the Chinese economy itself just now. In real trouble in the Chinese Government is using its resources to trying to prop up there economy much as our government is doing here. Another country where we often borrowed these savings from Japan. But Japan has its. Seeing an enormous -- flow that -- had been sent out the rest of world primarily now the states and now flowing back to Japan. And Japan itself. Right now is sliding into a very deep recession yeah they're using their own resource."

" there are basket commissioners if you believe that you hear the news."

" Well they are best case it's to be sure."

" Let me play devil's advocate now in terms of the expenditure side. The liberal economists and they frequently cite the Great Depression as evidence of this. Say that when the government spends you create jobs that was say Illinois Obama is estimating four million jobs going to be created -- shaved. You see people going off to build a bridge as a ribbon cutting the politicians of their you she workers with wheel barrows and and -- and all the other things and then they're going to build a bridge on you see -- hop these jobs have been created. What's wrong with the argument."

" Well if we can and need a Paul Harvey moment here you know where he would say and now the rest of the story and I'm afraid I can't decide against his. Expand the ways but -- get the idea traditional question that if we put all this money Intel highways and bridges and and actually it is only about 6% of this bill goes into transportation -- thinks. What to an extent that you have that kind of funding their work. Energy products yeah prodigy create some jobs and no question about it. You had to borrow the money didn't. We're going to take that money out of the private sector when he took the money out of the private sector -- destroy jobs. That's the rest of the story they only focus on what happens when you spend the money they ignore what happens when you borrow the money. And I talking about the interest rates increase here. Even if interest rates didn't increased they're taking the money out of the private sector that would have been used for. Consumer spending bill that created same jobs it would have been used for business investments that would have created jobs so. You're creating jobs and want to hand -- destroying jobs on the other. On balance. It's about a zero net net job creation until he -- he interest rates fact that it becomes a negative."

" Before we leave this -- the borrowing do want to ask you about printing the money is there any possibility that -- this money. That the federal government is going to spend is simply going to be run off a printing presses."

" Do you can't tell you it's it's impossible but they're it's extraordinarily unlikely. Monetary policy right now is that it's for we will independent of fiscal policy and it should be. And in fact monetary policy is completely absorbed. And trying to sustain our financial system. And in doing so has in fact. In north printed an enormous amount of money to very little effect so far. But that's going to be a problem down the road. The expectation that I that I think is pretty universal across economist and in a financial markets is once the academy does gain traction. Whenever that finally is we start to recover. The Fed's going to quickly withdraw those funds so we don't inflate the economy."

" Huge spoke about the Vietnam moving interest rates is going to be driven up because. The government is going to go into the marketplace ended in order to force other. People how they're going to have to raise the interest rates and that people won't move blown the money to the government. Do you have any estimate as to where the interest rate will get to. Over the next year or two."

" Well I'd get a median estimate of of how much higher interest rate would be that it would be otherwise. And and I get that because there is now finally something of consensus among economists who study this. As to what federal borrowing domestic interest rates and the proportionate normally the effects are pretty small for example. In 2005. The budget deficit probably resulted in the interest rates being. But what are called five basis points higher than. Percent to 3% there have been three point 5 very very small -- and now we're talking about increasing the amount of debt and enormously. Two trillion dollars a year when publicly held debt going into this into 2009 to about six truck so. -- about a 13 increase each year. At that rate you're talking about a half a percentage point increase in interest rates this year and another half percent for a total of one percentage point increase in interest rates. And at the end of 2010. Figure out if mortgage rates were going to be 5% now they're going to be 6%."

" And yet new deal but when we're really dilution of those just joining our money Nelson filling in for how -- car this afternoon on the line with me JD Foster congress from the Heritage Foundation. It -- all your usein of 1% interest rates it goes from five to 6% that's not a does sound like a walking big hit. And I wonder people even notice I don't know that most people would know. The interest rate good to -- better than plus or minus 1%."

" Or they often and they don't put it to march and it has a huge effect on. On the economy think about what happens in normal times when the Federal Reserve for example is changing monetary policy. The the whole financial system waits with baited breath -- they -- the interest rates a quarter point. This -- typically moves in quarter point moves -- about one full percentage point difference but I think you have another way if you root thing think about buying a home. And you could afford a home with 5% mortgage rate it can't afford that for all home perhaps at 6% mortgage -- payment due to lie it's just."

" let me go back to. The depression here you've given a good economic argument as to why in the expenditures. Of the government during the thirties really didn't work and the unemployment rate. -- it came down a little bit then went back up -- acknowledged that the depression ended because of World War II. Now I -- economically speaking World War II can be viewed as a massive. Government program. It was done in deficit with a deficit went up and we spent a ton of money. I met polish some of the depression and it didn't come back when all the G Irish came back from the war. Why did that work why did the massive spending work of with a fury of spending more doesn't do any good. Why did that work and why didn't we go back into depression after the men came back then we're no longer shoulders."

" Well that what your last question -- take great what because. Eight we went from. Enormous amount of the government spending to pay for the war should expect to a rapid contraction in government spending. And if if increasing government spending exposed to help the economy a massive reduction and spending should've put us into the Great Depression to. It didn't happen at some reason is. That they did this spending isn't what Prodi economy in the first place. Now why did go to war itself get us out of the depression I think there's a couple. Explanation for that visited it this number of elements. One of which isn't in going to the war. We were in a situation where -- we're asking our economy to produce for very different. There are directed by the government -- so we all as a nation agreed to that we needed tanks and airplanes and we need to pay for soldiers and so forth. And that allowed the nation's economic forces to rally around producing those things because that's what was needed at the time. There wasn't that same sort of forced rallying the economy to produce something in particular prior to the war. But I think a much bigger effect the people don't realize is that for a variety of reasons -- the Great Depression. If you had a child -- real wages rose significantly. From the beginning of the Great Depression to the end real wages -- something over 20%. He did have a job of course you're in real trouble that was part of the problem real wages were rising but labor markets were clearing. What happened what went into the war waging price controls. Consequence of that was the while productivity continued to rise wages were frozen. And so real wages relative productivity. Fell back more to normal levels certainly people were no longer be priced at labor market."

" Whom. The well let me go on we we have a limited time -- you and I want to go on to the housing bill that was proposed to the housing program proposed today by Barack Obama. 75 billion sounded like it was load of me and I am not going to get any calculation that child like he wasn't going to be able to do it for that amount. But it was. In effect a program to China bailouts and the people who were in trouble with through with their mortgages and poured in what amounted to restrictions. -- edicts from Ramallah on the banking the lending industry. I know that its new -- had a chance to review it thoroughly that what's your take on his proposal."

" Well he is not trying in this plan to solve every aspect of our housing sector's problems and that is encouraging because that would be extraordinarily. Expensive and ultimately would fail. There are some elements in this program that makes some sense for example if you are in a mortgage that. And in your home has dropped significantly in the value. He's got an incentive in here to encourage. US a ball in your letter to come together and -- the loan. And he's going to do it in a way that's going to put a little little federal money behind it it if you it's a lender -- reworked alone enough. And that that's a reasonable thing to do loan modifications. To keep people in their homes as long as there's not an extensive bailout either to blender or the borrower. Is a reasonable policy and that's partly what he's trying to do here. But then he has another part of the policy. You know we have a lot of these home mortgages today were packaged and sold off to other people in their serviced by what are called service -- The somebody else actually overblown maybe somebody in Europe for that matter. But there's an American service -- services that long. -- for US and homeowner and the lender. Part of the problem we have in in loan modifications to date the Serb pressures faced no incentives. Other than just being -- people. Two -- was slowly modification they don't get paid if they spend time and effort during a loan modification. On the other hand if they do and anyone who owns the security the downstream securities. Don't like it -- to colon suit which is freezing the service urged. Obama comes in and says okay we're going to create the incentive structure to encourage -- rushers to. We do these loan modifications. They probably don't have enough money into for this but at least they're heading in the right direction but they don't eliminate. The lawsuits. And if you don't create protection for the service -- who are in a position to do loan modifications are treated being sued. If you don't give -- protection from lawsuits. They're not going to do that this looks at a loss it's an oversight it's hard to imagine because has been talked about so extensively. At a loss it was perhaps they were afraid of the trial lawyers who. Looking at this as an opportunity for more. Lawsuits I can't explain why it'd be -- but without dealing with the liability side for service cherished. This is an -- part of the plant."

" Bottom line -- as we wrap up the interview houses his housing proposal which she announced today. She gonna work or not."

" I think it will help it a little bit. Based talk about. Helping us fortified million now homeowners should stay in their homes -- which has seen suggest. Maybe 20% of that 10% of that it's not going to change things significantly. For the economy overall it will help some individuals families."

" Location your bottom line here on this first proposal should meals proposal that's going to be a failure this one's lieutenant 20% the success rate. Are we going to come out of this recession and if so went."

" We will come out of the recession because our basic strengths and our institutions are are too strong an American people work. Are too strong but I'm afraid we're talking about. Finally coming out seeing the end of the tunnel really. At the end of 31 perhaps."

" eleven just in time for Obama's reelection as she claims credit."

" Well I'm I'm not sure he's going to be given too much credit -- points and."

" Check Jodie Foster for marriage foundation JD thank you for being with us this afternoon -- feeling. We may need further guidance and economic matters before this is all over hope we can have your back. Thank -- thanks. This is Donnie Nelson if you're just joining us settlers -- JD Foster from the Heritage Foundation. New Wii is an economist and has a longer I didn't go through all his biography and obviously a long career and history of the involvement. At the highest levels -- in the United States government in economics. Giving a rather pessimistic taken unless sake he eventually it's not like I interviewed him first and then bring about a -- knew he was gonna say. Until the -- his passion mission was refreshingly blunt -- a little bit surprising and disappointing okay knowledge short term. No this is this program of course. He is for the people organize the pick up the tab for all of the programs that are being proposed. The the."