Interview with US Economic Recovery Advisory Board Chair Paul Volcker America Must 'Reassert Stability and Leadership'

Paul Volcker, 82, is one of US President Barack Obama's leading economic advisors. SPIEGEL spoke with him about the economic challenges facing the US, whether new taxes are needed to address public debt and how America can return to a position of economic leadership.

The financial crisis has led to a decline in American economic supremacy. Here, two traders taking a break on Wall Street in March.

The financial crisis has led to a decline in American economic supremacy. Here, two traders taking a break on Wall Street in March.

SPIEGEL: Mr. Volcker, you grew up during the Great Depression. What sort of childhood memories do you have from those difficult times?

Volcker: Well, my memories are quite limited. My father had a stable job. He was a city manager at that time. We weren't wealthy, just middle class living in a growing suburb of New York, and that was not in the middle of depressed America. I know that my mother at that time did not let me take a part time job and she often said that other people needed the job more than I did.

SPIEGEL: Can the current situation be compared with the Great Depression?

Volcker: I remember there were people, beggars and tramps as we called them, who wanted to be fed. So it's true, today we also have people who are relying on food stamps and other payments but we are a long way from the Great Depression. We are in a serious, great recession. Today we have 10 percent unemployment, but at that time it was more like 20 or 25 percent. That's a big difference. You had mass unemployment.

SPIEGEL: But even though there are still more people being fired than hired, the Chairman of the Federal Reserve Ben Bernanke is saying that the recession is technically over. Do you agree with him?

Volcker: You know, people get very technical about these things. We had a quarter of increased growth but I don't think we are out of the woods.

SPIEGEL: You expect a backlash?

Volcker: The recovery is quite slow and I expect it to continue to be pretty slow and restrained for a variety of reasons and the possibility of a relapse can't be entirely discounted. I'm not predicting it but I think we have to be careful.

SPIEGEL: What is the difference between this deep recession and all the other recessions we have seen since World War II?

Volcker: What complicates this situation, as compared to the ordinary garden variety recession, is that we have this financial collapse on top of an economic disequilibrium. Too much consumption and too little investment, too many imports and too few exports. We have not been on a sustainable economic track and that has to be changed. But those changes don't come overnight, they don't come in a quarter, they don't come in a year. You can begin them but that is a process that takes time. If we don't make that adjustment and if we again pump up consumption, we will just walk into another crisis.

SPIEGEL: As chairman of the Economic Recovery Advisory Board, you advise President Barack Obama on how to prevent such a recurrence. Is he following your guidance?

Volcker: We have various working groups that work on and make recommendations on particular problems like retirement programs and social security. We made some recommendations on financial reforms, which were not accepted, but that is part of the game. The president is more eloquent than I can be on these issues. Getting it done as compared to talking about it is a problem, but we have some suggestions along that line.

SPIEGEL: The US has not yet instituted any kind of reform policy. What we see is the government and the Federal Reserve pouring money into the economy. If one looks beyond that money, one sees that the economy is in fact still shrinking.

Volcker: What should I say? That's right. We have not yet achieved self-reinforcing recovery. We are heavily dependent upon government support so far. We are on a government support system, both in the financial markets and in the economy.

SPIEGEL: To get the recovery to the point where it is right now has cost a lot of money. National debt will probably reach $12 trillion in 2019. Just serving the debt costs $17 billion a year -- at least according to this year's forecast. That's difficult to sustain.

Volcker: You've got to deal with the deficit and you've got to deal with it in a timely way. Right now, with the unemployment rate still very high, excess capacity is still evident, and the economy is dependent on government money as we said. We are not going to successfully attack the deficit right now but we have got to prepare for attacking it.

SPIEGEL: Should Americans prepare themselves for a tax increase?

Volcker: Not at the moment, but I think we would have to think about it. The present tax system historically has transferred about 18 to 19 percent of the GNP to the government. And we are going to come out of all this with an expenditure relationship to GNP very substantially above that. We either have to cut expenditures and that means reducing entitlements and certainly defense expenditures by an amount that may not be possible. If you can do it, fine. If we can't do it, then we have to think about taxes.

SPIEGEL: What kind of taxes do you have in mind?

Volcker: Maybe we should talk about energy taxes, which could be a big revenue producer.

SPIEGEL: The Harvard Professor Niall Ferguson has written a Newsweek cover story where he essentially argues that America is in great danger due to steep debt, slow growth and high spending. Do you think it is overblown?


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