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CNBC Exclusive Interview With Austan Goolsbee, University of Chicago Booth School of Business On CNBC’S “Squawk Box” Today

LONDON, 15th November 2012. Following is the unofficial transcript of an exclusive interview with ustan Goolsbee, Robert P. Gwinn Professor of Economics, University of Chicago Booth School of Business and formerly the Chairman of the Council of Economic Advisers under President Obama, today on CNBC's Squawk Box.


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Key soundbites:

The euro zone crisis is not solvable compared to the US:

Austan Goolsbee (AG): "The issue of what is the euro zone going to do is a much, much harder problem, in my opinion, not solvable, as compared to the United States. I'm of the view, you've got a fundamentally misaligned exchange rate, and that is not an easy problem to solve. Either the rich countries are going to subsidise to hold the thing together on a permanent basis, or it's going to be very hard to keep the euro zone together. So I don't really have a solution on that one."

Mass austerity is not really working:

"Just engaging in mass austerity and counting on that to be stimulative is not really working at a time like this. You know, the conditions are a little different than they were in some other countries where people thought austerity would be a little more growth-generating. I think now, you gotta take a second look if you're advocating big austerity and you think that it's going to generate growth. I don't think that evidence has backed that up."

On Fiscal Cliff – one more celebrity death match to come:

"I'm not totally convinced we're going to be able to figure it out because, as I say, it still kinds of feels like there's one last celebrity death match that's lingering in there…. Primarily of the people who came in in 2010 and their view is: it doesn't who won the election, it doesn't matter what the President said. I will stand here and stop the gear, stop everything, and I'm going to fight them to the last."

On what President Obama is going to do next when it comes to negotiating with the Republicans re Fiscal Cliff and Debt Ceiling:

"I think the President made it pretty clear, pretty specifically how he thought it should play out. And he won the election. So there's not any mystery what the President's playbook's going to be. He's going to say let's do exactly what I said we should do."

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CNBC's Kelly Evans (KE): "How important is it for an agreement to be reached on fiscal cliff and in your view, is it the Republicans who need to be willing to give in to higher tax rates on the wealthy?"

(AG): "You got two important questions there. I think it's fairly important for the economy that they try to figure it out or at least the Congressional Budget Office has estimated what will happen if we go off the fiscal cliff in the US and the answer is we go back into recession starting the beginning of 2013. So I think there's going to be a lot of pressure, people… business have been getting very anxious – they didn't… they weren't put much weight on the probability that this would happen. I think they were just kinda… I think they had their head in the sand, and said… they'll sort it out. As to who's… who has to budge, I think the President was basically pretty specific throughout the campaign. He said I want to do a balanced deficit plan, and that's going to include more revenue from high income people. So I think there is not any question that he is going to say we had a vote on this subject and that's what the American people are for. I think you saw in the debt ceiling last year, in the period before that around the extending the budget so that there wasn't a government shutdown in 2010, and now, in my opinion, the primary roadblock to reaching a grand bargain deal, a big one, is that there's some group of the Republican Party that won't tolerate any revenues… and so… we're at a bit of loggerheads over that, that subject… and that's what's going to play out over the next few months."

(KE): "As someone who was chief economist in the White House, if you were there today, what would your ideal deficit reduction strategy be say in the next 10-20 years in the US?"

(AG): "You know the budget's done in a 10 year cycle so it's usually best to think of it that way on that front. I think some variant of the balanced approach that's like the one in the fiscal commission that Bowles… the Simpson Commission or they're other bi-party commissions like that… or that they almost had last summer. Any of those would be a perfectly good starting point that you start analysing… you gotta do some on the entitlement side, you gotta do some on the discretionary spending side, and you have to do some revenue. If you try to do it without any revenue, or as in the Republican's plan, big tax cuts on top of the deficit reduction, I basically think you can't do it because the implied squeezing of social security, of Medicare, of the science/innovation budget… all budget things.. you really have to squeeze those so hard, that I think there would be immediate backlash. Nobody is going to want to do that. As I said, I think the President made it pretty clear, pretty specifically how he thought it should play out. And he won the election. So there's not any mystery what the President's playbook's going to be. He's going to say let's do exactly what I said we should do."

(KE): "If the American people have to adjust to the reality of entitlement reform in order to help fix the deficit going forward, would it not be easier for a Democratic President to push for some of those changes that he knows that you know probably needs to happen in order to keep the system on a stable footing?"

(AG): "Maybe… yeah, I'm just a policy guy. I'm not the… I don't know exact what the latest executive strategy is. I know that in the Grand Bargain negotiations last year, and in all of the bi-partisan commissions that look at the issue, the entitlement reforms got to be in there… that doesn't mean privatizing social security. It doesn't mean voucherising Medicare. But you do have to make reforms in those programmes if you're going to make a serious accounting that will bring our fiscal house into order in the US. At the same time, if you try to do it 100 percent with that, the implications for the ordinary people's retirements and healthcare are pretty profound, if you just go look at what cuts that implies. And the President's argument through the campaign was: it doesn't have to be that grievous of a cut if we do this in a shared/balanced way. You know, we're gonna have some revenues, and some reforms, and some discretionary freezes and cuts. That you can do that in a way that's much more manageable. And I think that the data does basically back that up, that the US' problem is of an important size, but if you compare the demographic… ageing problems of the US relative to any of the rest of the advanced worlds, it is far less pronounced than any of the advanced world. It is definitely of a manageable size, though it is significant."

(KE): "What's the more pressing issue? Is it the fiscal cliff? Is it the debt ceiling that we're likely to hit in the first part of next year? And what can be done to keep us from repeatedly running into this kind of issues going forward?"

(AG): "OK. It strikes me, what's not going to happen is that the President will not, on the fiscal cliff, agree to some extension, without touching the debt ceiling… to then give the opportunity to a second time for the Tea Party to go down and then hold hostages and say we're going to blow the full faith in credit of the US government unless we get our way. That is what happened in 2010. The administration and the leadership of the Republicans thought, well, we're making a deal together, we're showing the world things can be done in a bi-partisan way, we're extending all our tax cuts for two years. That took away all the space there was to negotiate. And so that debt ceiling experience was deeply undermining of consumer confidence, seriously undermine the economy as well as being bad politics all around… and contributing to the universal view in the United States that there's total dysfunction in Washington. So for sure that is not going to play out the same way it did the last time. As a matter of what is most pressing, obviously the fiscal cliff is the most pressing. I'm not totally convinced we're going to be able to figure it out because, as I say, it still kinds of feels like there's one last celebrity death match that's lingering in there…. Primarily of the people who came in in 2010 and their view is: it doesn't who won the election, it doesn't matter what the President said. I will stand here and stop the gear, stop everything, and I'm going to fight them to the last. And as I say, that mentality, has been the biggest road block. We would have had a Grand Bargain. We would have already sorted this out. The next ten years of our fiscal consolidation in the United States would have already been done last year if we could've gotten out of that mentality. We couldn't then but hopefully we can in 2013."

(KE): "Looking back at your time at the White House, what are you proudest of and what is your biggest regret?"

(AG): "It was a… you know, I was an economics Professor. I wasn't… this wasn't my normal world. I think historians are going to look back, and view the avoiding of a great depression as a major, major accomplishment. That had virtually nothing to do with the 2012 election and people don't, in the moment, like to think, well, it could've been worse. You know how much does that count for? But I think, for the President and the whole administration to come in in the middle of the worst economic downturn in all of our lifetimes. And to turn it around so that now people can say… well, we're not growing fast enough, we need more job creation… it's true, we do need to grow faster. We do need more job creation, the alternative was something horrendously worse. That we didn't have that… that's probably the thing that was the most meaningful. My biggest regret, I guess is not anything different than the descent of Washington into this partisan warfare. And the inability, especially last summer, in the debt ceiling negotiations. But at several points along the way, we couldn't break out of this mentality. That the President's for it, we're against it. They're for it, the administration's against it. We've got to get out of that approach otherwise, several of these big issues that now confront the United States are just going to sit there and fester, you know, for some more years."

(KE): "And when we look at Europe, when we look at the public spat between the IMF and the Commission… the changing attitudes away from austerity towards more stimulus or more growth friendly measures… How important is it in your view: is it that there is a consensus? And how much damage has already been done in the time lost over last couple of years when more aggressive austerity measures were pursued?"

(AG): "Look, I think some damage… the issue of what is the euro zone going to do is a much, much harder problem, in my opinion, not solvable, as compared to the United States. I'm of the view, you've got a fundamentally misaligned exchange rate, and that is not an easy problem to solve. Either the rich countries are going to subsidise to hold the thing together on a permanent basis, or it's going to be very hard to keep the euro zone together. So I don't really have a solution on that one. In the US, I think we ought to learn this lesson, from within this euro zone crisis, that just engaging in mass austerity and counting on that to be stimulative is not really working at a time like this. You know, the conditions are a little different than they were in some other countries where people thought austerity would be a little more growth-generating. I think now, you gotta take a second look if you're advocating big austerity and you think that it's going to generate growth. I don't think that evidence is going to back that up."

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Hugo Foulds, Director of Communications, EMEA
hugo.foulds@cnbc.com
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