Home The Washington Diplomat December 2008 Senior Goldman Sachs Banker WarnsYou Pay for the Government You Get

Senior Goldman Sachs Banker WarnsYou Pay for the Government You Get


The American economy, along with the rest of the world, is entering a difficult period in which slow growth, rising unemployment and deep uncertainty are likely to prevail for the near future.

Robert Hormats, vice chairman of Goldman Sachs International, believes that U.S. officials and international finance leaders have taken strong actions that should mitigate the severity of the economic crisis. But he warns that the global downturn is likely to affect people throughout the world and force policymakers to stay alert and flexible. It should also force everyone to rethink certain economic basics that seem to have been lost over the past eight years — namely, enormous spending increases and tax cuts don’t make fiscal sense.

“Clearly the American economy is weak. It’s not a pretty picture in the near term. How long it lasts is hard to know, but in the short term, things aren’t pretty,” Hormats said in an interview with The Washington Diplomat.

“It’s a very serious crisis. But I don’t find analogies to the Great Depression very helpful,” he added. “The Depression was so awful and we’re not anything close to that now. The policy responses by Congress, Treasury and the Federal Reserve have been much bolder now than they were back then. I think the policy response has been very robust and positive.”

Hormats also praised world economic leaders for their strong and decisive response in global forums such as the G20, the International Monetary Fund and World Bank, as well as in more ad hoc multilateral coalitions.

“What is very impressive is how many countries have come together to work on this collectively,” he said. “A great deal, even an unprecedented amount of international cooperation has been brought to bear on this crisis, in part because everyone has been affected by this. Everyone has to be part of the solution and has to take measures to resolve it.”

Hormats said the meeting of the G20 leaders hosted by President Bush on Nov. 15 should be viewed as an important gathering that represents one layer of an overlapping strategy of consultations that must continue well into 2009.

To that end, Hormats argues that the U.S. Congress should approve additional economic stimulus measures, but cautioned that their size should be determined by economic conditions in the coming months.

Congress approved and President Bush signed a 8 billion fiscal stimulus bill back in February, along with the larger 0 billion bailout package passed this fall. Congressional leaders and President-elect Barack Obama have said they want to pass additional stimulus bills that could include up to 0 billion in immediate spending and new tax cuts for the middle class early next year.

Hormats agrees more will be needed to boost the sagging economy, but after that, we need to return to some common sense economics and balance our national checkbook. “We need a big stimulus now — it will be large —but there should be an implicit obligation to put the country on sound financial footing afterward. This is part of our tradition,” Hormats said.

One of the leading experts in international finance, Hormats has an insider’s view on how U.S. international economic policy is crafted. In addition to being the vice chairman of Goldman Sachs International and managing director of Goldman Sachs and Co., he has held various government postings including deputy U.S. trade representative and assistant secretary of state. In addition, he served on the National Security Council from 1969 to 1977, during which time he was senior economic advisor to Henry Kissinger, Brent Scowcroft and Zbigniew Brzezinski. He is also a visiting lecturer at Princeton and a board member of the Council on Foreign Relations.

Last year, Hormats wrote a highly regarded book about American fiscal policy titled “The Price of Liberty: Paying for America’s Wars.” In it, he argues that the United States once had a long tradition of fiscal rectitude in which presidents from both parties paid down debt that was incurred during national emergencies — and planned prudently for the future.

“We had this notion that you borrow during wars or emergencies like recessions, but then you have enough discipline when the emergency is over to get back on sound financial footing so you can have the flexibility to deal with the next emergency,” Hormats said. “This gives you national resilience.”

That notion has been lost, he laments, and because the United States didn’t have a more balanced and cautious fiscal policy over the past eight years, the country is now less able to weather the current financial storm. “We would have been in a better fiscal position to deal with the current crisis and all the borrowing it will require if we had been running modest deficits or even surpluses over the last several years when the economy was growing,” he said.

Specifically, Hormats criticizes President Bush’s decision to borrow the entire cost of the Iraq war, breaking with a fiscal tradition that had been followed by presidents for two centuries.

“This is the first war in our history that we paid for entirely by borrowing. Entirely. For every other war there has been a tax increase to pay for a part of the war and spending cuts to make room in the budget to pay for the war. This time taxes were cut and spending on other things went up,” he said.

“When you build up these deficits and debt, it’s really a disregard for the future,” he added. “When you borrowed money for a war in the past, there was a very clear social contract that you paid down the debt when the war was over.

Hormats cautions that it would obviously be unwise now to push tax increases or spending cuts, but that once the United States gets out of the current mess, it’s critical to implement more disciplined fiscal policies — and have a more honest conversation with the American taxpayer.

“I would not hesitate to borrow heavily to get us out of this current crisis. But when we return to more normal times, the next president should go to the American people and say that they should get the government they pay for, and pay for the government they get.”

He added: “We should be particularly rigorous about exerting financial discipline after the crisis is over because it’s good fiscal policy, but also because you want to be in a strong positive fiscal position as you prepare for the retirement of the baby boomers, which is going to cause budget deficits to rise again. Someone has to level with the American people and say it’s in the American tradition to do this.”

And that candid someone has to include politicians from both parties, Hormats points out. “Leaders have been promising Americans a dollar’s worth of government for 90 cents worth of taxes. You can’t do that indefinitely. We have not demonstrated the capacity of exercising long-term discipline as we did in the past,” he said.

To that end, Hormats urges the Obama administration to develop a long-term financial plan that would scrutinize all federal spending, institute strong budget enforcement rules, and restructure policies on taxes, energy, Social Security, Medicare, defense and other entitlements — making tradeoffs where necessary to pursue a realistic economic agenda.

“We are not setting our priorities. We want to do everything. If you don’t have a rigorous process for allocating resources, you don’t make tradeoffs. Governing is about making tradeoffs. You can’t do everything,” Hormats said. “When we go back to more normal times in a year or two, we can’t go back to business as usual. We can’t go back to tax cuts and spending increases.”

The other reason for determining what programs we pay for and finding the money to pay for them, according to Hormats, is so that we don’t shift the economic burden to the next generation. Hormats noted that when he visits American universities, he is encouraged by how receptive young people are to his message of developing a more balanced approach to budgeting and economic policy.

“I give a lot of speeches at universities. Young people understand this in a minute. They understand it’s about them and they are not at the table. They know we are on a path that is not sustainable,” he said. “The key to good government in the 21st century is thinking ahead, planning. You have to look ahead and think about the long-term impact of what you are doing now.”

About the Author

John Shaw is a contributing writer for The Washington Diplomat.