Our former president’s remedy for our fiscal woes? Focus on jobs and mortgage relief – and clean up the tax system.
FORTUNE — President Bill Clinton presided over one of the most robust economies in American history. And while some of his success may have been a result of timing and some luck, his leadership his ability to create a consensus, in particular surely had a role and has some people waxing nostalgic over Clintonomics. (Clinton has a new book on the economy, Back to Work, coming out Nov. 8.) Fortune managing editor Andy Serwer met to discuss current economic events with the 42nd President, who was in the midst of his annual Clinton Global Initiative extravaganza in New York City. Edited excerpts:
How to fix the economy and create jobs
First, Congress and President Obama can adopt strategies designed to unleash the massive amount of capital that is accumulated but not being invested. There’s some $2.2 trillion in cash in American banks that is not committed to loans. A couple hundred billion has to be held back for bad mortgages, but there’s about $2 trillion that could be used in cash reserves for up to $20 trillion in loans. So, in theory, that would take the world out of recession. And U.S. corporations have about $2 trillion more that they have decided not to invest.
The second thing is to accelerate the resolution of the home mortgage crisis, which would make businesses more eager to borrow, expand and consumers more willing to spend. These kinds of financial crises typically take about five years to get over. What we’re really trying to do is beat the historical trend by getting over it more quickly. We can’t do that unless we do on a larger scale what we did in the S&L crisis, which is to flush the debt quicker.
The third category includes things that will strengthen our position today and tomorrow. We need to bring back manufacturing. We need to focus on exports. We need to focus on green technologies. There are dozens of things we could do that would create jobs.
I cannot emphasize the boost I think it would give the economy if we had a system that said to people whose homes are worth less than the mortgages that you can write down your mortgages to the value of your home if you can make the payment. Or you can extend the mortgage out and lower the interest rate. I don’t think we ought to keep dumping these houses on the market when it’s so depressed. Can we get the votes to do it? I don’t know. When the Tea Party started, they seemed to object to the bailout of the big banks, claiming they were being protected from their own mistakes. That was true, but irrelevant. If a financial collapse had happened, we would have all paid. Now a lot of people argue that you shouldn’t rewrite these mortgages because people never should have taken them out in the first place. There’s a big problem with that thinking. The market is so depressed that it’s hurting everyone else.
The only fair thing to do is a version of what we did with individual tax reform back in the ’80s. We need to broaden the tax base by cutting down on deductions and credits and lower rates. I think Congress will do that within a year. I would also like to see money repatriated now for free, with no taxes. We’re the only rich country in the world that still imposes taxes on corporations on money they earn overseas. I think they ought to bring it back for nothing if they put people to work with it. And if they want to spend it on compensation or stock buybacks or dividends, let them pay the long-term capital gains rate.
“The Buffett Rule” (The rich pay more)
If we had to raise revenues, it’s fair to ask those of us in high-income groups, who got the primary benefit of growth over the last decade. More than 40% of the income growth went to the top 1% of us. That’s a stunning statistic. The lion’s share of the tax cuts in the last decade, under President Bush’s tax cuts, benefited us. The problem is, no matter how much tax we pay, it won’t get the budget in balance. I don’t mind paying more. But how much is not nearly as important as our having both an aggressive effort to restore growth today and a 10-year plan.
The private sector’s obligation to create jobs
If you’re in the private sector, your first obligation to your investors, to your customers, and to your employees is to provide a product or a service at a sufficient profit to keep the enterprise going. But when a company does have extra money, I think it’s a good idea to invest in the community, because I think it’s not only the morally right thing to do, it’s good for the companies involved.
The Tea Party’s government phobia
The problem is that there’s not a single example on the planet of a successful economy that runs on the antigovernment model. All the successful economies have public/private cooperation to generate economic opportunity, provide a good education, create an environment where government and the private sector work together and advance economies. The only thing I’d say to the antigovernment crowd is that we’ve got to do what works and what works is cooperation, not conflict.
Does the President have power over the economy?
Oh, quite a bit. Look at President Reagan’s policies. I give him a lot of credit for the deregulation work he did and the bipartisan resolution for the Social Security problem. But I also think that his tax cuts, which were very large, spurred economic growth in a way that wasn’t sustainable. It worked, but when the first President Bush took office, he basically got all the downside of having a deficit-spending model of generating jobs. Now, my program wouldn’t have been successful either if we hadn’t had a theory of private sector growth. I was fortunate. I became President when the information technology revolution broke out.
More on the housing market
There are all these options and I don’t think we ought to keep dumping these houses on the market right now when it’s so depressed. I’d like to see them converted into rental property in an aggressive, comprehensive way, and let people rent it for the price of the utilities, the taxes, and the maintenance, just to maintain the housing stock. Then as the economy picks up, you can put it back on the market in a way that will support economic growth, not undermine it. That’s what I think should be done.
And in a larger sense, the market is so depressed that it’s hurting everyone else. It used to be as a rule of thumb, people would say, well, if the mortgage is foreclosed on on your block, it will drive down the value of your house because it’s on your block, by 10, 15, 20%.
But now there are so many houses that have been foreclosed on, it’s driven down the value of almost everybody’s houses, except — let’s talk about the upside — the people that are in the prosperity centers of America: in Silicon Valley, in San Diego, in Orlando, and places where the economy is booming. Except for those places, this is a problem.
I can’t — I think it would really get us going in a hurry if we could flush this out.
On paying more taxes
No, no, I’m in favor of it because — and I don’t consider it class warfare. I mean we had — if you look at from 19 — from the end of the Second World War to about 1980, we had enough inequality to reward hard work and raw talent and creativity, and enough equality to build the world’s greatest middle class and allow poor people a reasonable chance to work their way into it.
And the distribution was the bottom 90% had 65% of the income; the top 10% had 35% of the income; the top 1% had about 9% of the income.
And those numbers have changed in the last 30 years. The 90% share has dropped from 65 to 52. The 10% share has gone from 35 to 48. The 1% share has gone from 9 to 21.
That’s a breathtaking increase in inequality, and I don’t think it’s good for our long-term stability.
On the Clinton Global Initiative
This year we’re working on the creation of jobs in America and around the world. We’re working on building an economy that can be maintained. That is helping countries develop an economic model that takes account of the challenges of global warming and resource depletion locally, where you can still keep promoting growth and jobs in a sustainable way.
And we’re working on trying to equalize opportunities in the world for girls and women because that’s a big economic drag on a lot of very poor countries. It’s not anything we think about. We tend to take that for granted in America, that women should be able to stay in school as much as they want, and have access to the workforce. That’s not the case in many, many countries.
A shorter version of this interview originally appeared in the October 17, 2011 issue of Fortune.