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The “Views on America’s Economy: At Home and Abroad” panel with Dr. Alan Greenspan, David Rubenstein, and David Hale, all moderated by Maria Bartiromo lived up to its billing. It was standing-room only, even after additional seating were added in the adjacent lobby. I came away from the panel wilth interesting insights about the state of our economy and our prospects moving forward. Some of the insights came from the times when the panel had a consensus, and some from the divergence of opinion.
Will there be a double dip recession?
There seemed to be a high degree of confidence that we will not have a second dip. At the same time, none of the panelists described the near-term growth prospects as very rosy. Our recovery will look gradual compared to other recessions.
What is constraining growth?
The continued deleveraging of the American consumer and the lingering impact of the housing collapse will constrain economic growth. At the same time, the aftereffects of the recession on state and municipal tax receipts is driving continued downward pressure on the associated employment with roughly 300,000 jobs at risk. These forces are sufficiently strong to offset most of the beneficial impact from the recent increases in business investment and the accelerated growth of exports. That said, both the business investment and export growth should continue.
Is there any way to shift to a faster recovery?
Relative to other countries, American companies cut payrolls much faster. This reduced payroll results in higher output per worker (or in other words productivity) measurements. As businesses grow, they should need to add workers at a pretty healthy rate. It will take a while to replace the roughly 8,000,000 lost jobs. Further, capital to fund the job expansion should be plentiful. At the end of the first quarter corporations had more the $1,800,000,000 in capital on their balance sheets. In addition, banks had deposited another $1,000,000,000 with the Fed. These Fed deposits are currently earning 0.25%, much less than the 2-3% they could get from low-risk, short-term corporate loans. Collectively, this $2.8 trillion dollars could be a far more stimulative impact on the economy than government action.
But, the money is not being deployed. Businesses and banks have a very high degree of risk aversion. When business leaders see risk, they minimize their exposure to the risk and, hence, they are waiting for “the skies to clear”.
What can government do to get this business-driven stimulation to occur?
Now we enter the world of politics and the consensus disappeared quickly. David Hale thought a string of legislative accomplishments (i.e., healthcare reform followed by financial reform and capped by a new energy bill) would bring clarity to the future regulatory and tax environment for businesses. The clarity would reduce risk aversion and the $2.8 trillion would be begin to be deployed. David
Rubenstein felt that the financial reform bill contained so many ambiguities which would be defined over time that passage and enacting the legislation would have limited impact on business risk aversion. Dr. Greenspan seemed to agree.
All agreed that the current political climate made additional government-supplied stimulus unlikely and Dr. Greenspan seemed to think the stimulus would have minimum benefit.
Is America likely to go the way of Greece?
David Hale described our risk of becoming another Greece as 5 to 10 years away, at a minimum. Our government debt is lower, while our spending, particularly on entitlements is not yet as problematic. In some ways, the trouble in other countries, particularly parts of Europe, have made the dollar relatively less risky. As a result, we can finance our current deficit spending with subsidized interest rates.
Dr Greenspan expressed the concern that this situation could change as people find gold the least risky source of money and our debt is no longer subsidized. David Hale described the large potential purchases China may make as they build a gold inventory consistent with the scale of the economy (using their accumulated reserve of dollars). At the same time, consumers can now purchase gold as easily as stocks through ETF’s. Gold could easily double or even triple in price (no, this is not a commercial as you see on TV).
Fundamental to the long-term answer is our approach to the projected and sustained $1 trillion a year deficits. Again politics entered into the conversation and the panelists diverged. At the end of the day, there are a handful of really big issues to address:
* How do we restructure entitlements to more sustainable models? Entitlement growth is crowding out all other spending and cannot remain on its current course. Clearly, the necessary changes are painful and something politicians, in particular, are very reluctant to do. David Rubenstein asked the audience some questions about what changes the audience members were willing to accept. Interestingly, a clear majority were open to higher retirement ages, means testing, and even outright benefit cuts to Social Security.
* How much will taxes be raised and what is the structure of those increases? The panel spent time discussing whether Obama’s $250 thousand income line would be crossed (i.e., would people making less than that amount face increased taxes?). David Hale pointed out that America is the only major industrialized country without a VAT tax. There wasn’t much commentary on the idea, but neither David Rubenstein nor Dr. Greenspan seemed too keen on the idea of a VAT tax. Further, the murmurings in the audience seemed to indicate a lack of popularity there as well.
* How do we make these changes? Our political system is gridlocked and will probably remain that way. These changes are not popular and it is tough for politicians to vote for such legislation. David Rubenstein saw the Base Realignment And Closing Commission as an interesting approach (i.e., have an independent body recommend the changes and Congress votes up/down on the basket of changes). Dr. Greenspan thought the current issues are more complex and touch more people so David’s approach would have troubles. David Hale thought the lame duck session of Congress following the elections in November might be able to enact some of the changes.
Will there be a double dip recession?
There seemed to be a high degree of confidence that we will not have a second dip. At the same time, none of the panelists described the near-term growth prospects as very rosy. Our recovery will look gradual compared to other recessions.
What is constraining growth?
The continued deleveraging of the American consumer and the lingering impact of the housing collapse will constrain economic growth. At the same time, the aftereffects of the recession on state and municipal tax receipts is driving continued downward pressure on the associated employment with roughly 300,000 jobs at risk. These forces are sufficiently strong to offset most of the beneficial impact from the recent increases in business investment and the accelerated growth of exports. That said, both the business investment and export growth should continue.
Is there any way to shift to a faster recovery?
Relative to other countries, American companies cut payrolls much faster. This reduced payroll results in higher output per worker (or in other words productivity) measurements. As businesses grow, they should need to add workers at a pretty healthy rate. It will take a while to replace the roughly 8,000,000 lost jobs. Further, capital to fund the job expansion should be plentiful. At the end of the first quarter corporations had more the $1,800,000,000 in capital on their balance sheets. In addition, banks had deposited another $1,000,000,000 with the Fed. These Fed deposits are currently earning 0.25%, much less than the 2-3% they could get from low-risk, short-term corporate loans. Collectively, this $2.8 trillion dollars could be a far more stimulative impact on the economy than government action.
But, the money is not being deployed. Businesses and banks have a very high degree of risk aversion. When business leaders see risk, they minimize their exposure to the risk and, hence, they are waiting for “the skies to clear”.
What can government do to get this business-driven stimulation to occur?
Now we enter the world of politics and the consensus disappeared quickly. David Hale thought a string of legislative accomplishments (i.e., healthcare reform followed by financial reform and capped by a new energy bill) would bring clarity to the future regulatory and tax environment for businesses. The clarity would reduce risk aversion and the $2.8 trillion would be begin to be deployed. David
Rubenstein felt that the financial reform bill contained so many ambiguities which would be defined over time that passage and enacting the legislation would have limited impact on business risk aversion. Dr. Greenspan seemed to agree.
All agreed that the current political climate made additional government-supplied stimulus unlikely and Dr. Greenspan seemed to think the stimulus would have minimum benefit.
Is America likely to go the way of Greece?
David Hale described our risk of becoming another Greece as 5 to 10 years away, at a minimum. Our government debt is lower, while our spending, particularly on entitlements is not yet as problematic. In some ways, the trouble in other countries, particularly parts of Europe, have made the dollar relatively less risky. As a result, we can finance our current deficit spending with subsidized interest rates.
Dr Greenspan expressed the concern that this situation could change as people find gold the least risky source of money and our debt is no longer subsidized. David Hale described the large potential purchases China may make as they build a gold inventory consistent with the scale of the economy (using their accumulated reserve of dollars). At the same time, consumers can now purchase gold as easily as stocks through ETF’s. Gold could easily double or even triple in price (no, this is not a commercial as you see on TV).
Fundamental to the long-term answer is our approach to the projected and sustained $1 trillion a year deficits. Again politics entered into the conversation and the panelists diverged. At the end of the day, there are a handful of really big issues to address:
* How do we restructure entitlements to more sustainable models? Entitlement growth is crowding out all other spending and cannot remain on its current course. Clearly, the necessary changes are painful and something politicians, in particular, are very reluctant to do. David Rubenstein asked the audience some questions about what changes the audience members were willing to accept. Interestingly, a clear majority were open to higher retirement ages, means testing, and even outright benefit cuts to Social Security.
* How much will taxes be raised and what is the structure of those increases? The panel spent time discussing whether Obama’s $250 thousand income line would be crossed (i.e., would people making less than that amount face increased taxes?). David Hale pointed out that America is the only major industrialized country without a VAT tax. There wasn’t much commentary on the idea, but neither David Rubenstein nor Dr. Greenspan seemed too keen on the idea of a VAT tax. Further, the murmurings in the audience seemed to indicate a lack of popularity there as well.
* How do we make these changes? Our political system is gridlocked and will probably remain that way. These changes are not popular and it is tough for politicians to vote for such legislation. David Rubenstein saw the Base Realignment And Closing Commission as an interesting approach (i.e., have an independent body recommend the changes and Congress votes up/down on the basket of changes). Dr. Greenspan thought the current issues are more complex and touch more people so David’s approach would have troubles. David Hale thought the lame duck session of Congress following the elections in November might be able to enact some of the changes.
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