By Jeff Carter
Thursday, December 01, 2011
Went to lunch today with a bunch of my fellow propeller heads. It was the University of Chicago’s Booth Graduate School of Business Economic Forecast. They have done this annually since 1955 or something like that.
Sometimes it’s really insightful. Other times, the most fun is when liberal political science professor Marvin Zonis makes his political predictions. At the December 2007 lunch, he predicted an Obama Presidency.
This year they had three economics professors speaking, Randy Krozner, Austan Goolsbee and Erik Hurst. They had an additional predictions from Krozner and Professor Michael Mussa.
Real GDP-Krozner thinks 2.7%, Mussa thinks 2.4%
Real Consumer Spending-Krozner +2.8%, Mussa +2.2%
Real Private Investment-Krozner +7%, Mussa +8.8%
Real Govt Spending-Krozner -1.5%, Mussa -.6%
Real Net Exports (2005 dollars)-Krozner -$500B, Mussa -$430B
Consumer Prices-Krozner +1.8%, Mussa +2.5%
Unemployment rate-Krozner 8.7%, Mussa 8.8%
Corp Profits after Taxes-Krozner +7%, Mussa +4.5%
Personal Savings Rate-Krozner 5.5%, Mussa 5%
Federal Budget-both think it will be -$1,250B
Time will tell if those predictions will be correct or not. Last year both economists missed the market by a lot. This can be directly attributed to a lot of things. Predicting into the future is terrifically difficult for any macroeconomist of any persuasion(Classical or Keynesian). Secondly, three events in the last year shocked the economic system. One was the earthquake in Japan. It left a big mark on growth. Second was the Arab spring. The third was the European economic crisis.
Randy Krozner spoke first. He was direct, to the point and succinct. He admitted why he had failed in his predictions the year before(see above), and offered some observations for next year.
1. We will have continued uncertainty in the US, and continued strife in Europe. He doesn’t see Europe rectifying itself quickly.
2. There will be no double dip recession. We will continue on a sideways path.
3. A bright spot, inventories are thin and they need to be rebuilt.
4. A lot of growth next year will depend on the American consumer. Consumption is strong relative to consumer income.
5. We won’t have job growth because of US fiscal policy, and European challenges.
6. Business is investing in software, not in capital structures or hiring. That means more efficiency, but not necessarily growth.
7. State and local governments will cut spending
8. Net imports should increase.
Krozner also spoke about Federal Reserve Monetary policy. He made an impassioned defense of Bernanke, and also made these observations. The Fed balance sheet has tripled since 2007. But, demand for US Treasury securities is putting a lid on inflation-combined with slow growth. More importantly, he said Bernanke kept us from deflation. Deflation is worse than inflation. Kroziner opined that when we look back on this period in twenty years, Bernanke might have a better reputation than he does today. He recalled how vilified Volcker was in the late 1970's and early 80's. Now people respect what Volcker did.
Austan Goolsbee was next. He was not as concise and tended to ramble a little. Part of that was because I think he tried to be entertaining. Goolsbee didn’t offer up a lot of predictions or projections. For the most part, he defended past policy.
He thought the de-leveraging that is taking place is going to take a long time. He mentioned that pre-earthquake and other shocks, we were humming along at a 3% GDP rate, but post we had trouble. He also added that next year, if we are under 2% growth, unemployment won’t go down.
“The challenge is growth.”, he said.
The reason for no growth currently is that the jobs that existed are not there. He has a good point here. Housing workers aren’t employable as housing workers anymore. So, he concludes we need more export growth, and more business investment. Ironically, the guy he worked for in Washington has done all he could to kill exports, and kill business investment!
Goolsbee said a lack of transparency is dooming the bank bailouts in Europe. It’s creating more uncertainty and he thinks Europe may be doomed. But, he added that the US is in better shape than anyone else.
Erik Hurst had a lot of interesting things to say. He has been frighteningly correct with regard to the housing crisis. He predicted that it would topple in December 2007.
Housing is what drove us from 1998-2007. Unskilled laborers were able to find jobs. Perceived housing wealth drove consumer spending. But, the long term real appreciation of housing is 0-2%. Supply and demand determine price, and housing is not going to rebound next year. It might even drop another 4%.
On the consumption side, Hurst doesn’t see a big bounce. Deleveraging is harming consumption. He asked, “Can any fiscal policy or monetary policy stimulate consumption when deleveraging is taking place?”.
Erik doesn’t see unemployment improving a lot either. As a matter of fact, he laid out a case where you might see a persistent rise in unemployment.
The most important variable in the unemployment numbers is the labor participation rate. It explains most of the rate drop from the highs to the current levels. People are dropping out of the workforce. In most of the cases, they are people with high school educations and are classified as low skilled workers. They have made the choice to not work in many cases.
The US has lost a lot of manufacturing jobs over the past decades. That’s where low skilled workers were able to find jobs. Wages have been driven down by automation and competition. But, for a brief time, 1998-2007, home construction could absorb those workers. That ship has sailed. Now, where do all those unskilled workers go?
What is very clear to me is that the stimulus package, and stimulus policies by governments fail. As Goolsbee said, the answer is growth. The stock market will go up as long as the government buys it, which they did yesterday. The US needs to implement some growth policies. Not targeted growth, or managed growth, or fair growth. Growth.
How do you do that? Short answer: Cut government spending, and decrease tax rates. That is guaranteed to generate growth. Long term answer: reform entitlements to market based alternative, privatize huge parts of the government, re-educate your unskilled labor, and make it cheaper to manufacture things here. That means lower regulation and lower corporate and employment taxes.
I didn’t stay for the entire Q+A, but one topic they talked about was the amount of money US companies have parked outside the US. Goolsbee doesn’t see it as a problem, and as a matter of fact discounts it. He mentioned that there was a lot of money parked on corporate balance sheets in the US that isn’t going anywhere.
That’s because the incentives are for the US companies to hold the cash, not use it. To ignite growth, change corporate tax policy. Make dividend taxes 0%, tax stock buybacks, and make corporate taxes 15%. You’d see structural investment and cash flow off balance sheets like never before.
It’s tough to predict economic futures, but it’s not rocket science to understand that current tax and regulatory policy is putting a bottleneck on growth.
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