Where Economists Meet Since 1968
“The New Economic Reality: How New and How Real?”
Summary of remarks by
Lynn Reaser, PhD,
Chief Economist, Fermanian Business & Economic Institute
Point Loma Nazarene University
May 13, 201
Dr. Reaser began her informative talk on the state of the economy with a story that underscored how economists often congratulate themselves for being closest to the answer compared with their peers even if far from the truth. Reaser covered five topics: the global outlook and economy (particularly in light of the defaults in Greece last week); the American economy; the state of financial markets; the new economic reality; and implications of all this for economists.
Last week the world was preoccupied with the specter of Greece defaulting on its debt, and the implications that could have for global financial markets. Looking at a longer-term picture yields a more promising outlook. Globally, the manufacturing sector has rebounded surprisingly well, as has international trade. China, one of the world’s largest economies, albeit still a developing country, has recovered well from the recession, too. Growth rates will continue to diverge across countries as the world emerges from this recession.
Still the situation in Greece is not trivial, and Europe decided, like other entities that had been saved during the ongoing financial turmoil, that Greece was too big to fail. The European Union most likely will try a tripartite approach: a trillion dollars in loans; purchase of troubled bonds; and the opening of swap lines. Questions remain: Will Greece follow through with necessary fiscal reforms? Will banks rebuild their resources? Will the markets work through the current imbalances to reach a new equilibrium? As for the European Central Bank, although the LIBOR rate has stabilized, the challenges are to ward off inflation and to make sure government intervention does not create a culture of moral hazard.
In the meantime, in the United States, the dollar has rallied against the Euro, among other factors, due to this recent turmoil in Greece. Furthermore, the American economy grew slightly in 2009 and is forecasted to grown even more strongly in 2010. In part this is due to consumers spending more, as signs of “frugality fatigue” set in. The inflation rate remains modest. Companies are flush with cash. Output is set to recoup losses this year.
Still, the recovery has been weaker than usual after a recession, even as there is still much American Recovery and Reinvestment Act (i.e., stimulus) money in the system. (Not all projects were as “shovel ready” as had been hoped.) State and local governments are still struggling financially. Job growth (aside from a temporary bump from census employment) continues, albeit slowly, and the previous high in employment is not expected to be reached again until 2013. In the same vein, the unemployment rate is poised to dip slightly.
As for financial markets, the Fed’s balance sheet (after having purchased bad assets from financial institutions) has exploded. The expectation is that the Fed will eventually withdraw liquidity from the banking system and raise interest rates. The interest rate on the 10-year treasury is expected to rise to 4.25 percent by the end of 2010.
Over the long-term, the amount of debt held by the public sector (particularly the federal government) is staggering -- $24 trillion dollars in the next ten years. Also there are various risks to economic well-being: China, oil prices, sovereign risk, terrorism (including cyber-terrorism) and another commercial real estate bubble.
Given the great economic turmoil of the past two years, there have been some fundamental changes in the global economy and economy thinking. Emerging markets are leading growth; government debt has escalated, and there is less faith in the discipline of markets. New trends, such as consumer thrift and an interest in a green economy, may be fleeting. At the same time, the more things change…the more they stay the same…we will have social contracts, trade barriers, a complex tax system, and entrepreneurship for a long time.
As economists, the profession missed the mark in predicting and preventing the recent economic meltdown. Dr. Reaser gives economists the following advice: Use more imagination; resist the herd; give ranges in forecasts; name and monitor risks; know biases; be humble; be accountable; analyze rather than report; draw out steps for action; and “lose the jargon.”
After her prepared remarks, Dr. Reaser fielded questions. Below are a sampling:
Q: The large amount of public debt (and the large ratio of federal deficit to GDP) cries out for tax increases. Yet our country’s culture is against tax increases, and there is a limit to how much we can reduce spending. How do you reconcile this?
A: Yes, it is difficult to raise taxes and elected officials are going to have to make increasingly difficult choices. Ultimately, the growth of entitlement programs will need to be curbed.
Q: Have there been declines in productivity?
A: There was actually an increase in productivity in the last part of 2009. Still there are limits to productivity, which is why companies will need to rehire.
Q: Is the lack of confidence in markets permanent?
A: The current sentiment against markets may be an overreaction, and perhaps there will be a renewed faith in markets.
Q: We don’t like regulation, but still purchases are undercapitalized. Should we have government saying we can’t purchase / capitalize?
A: Look at the IPO model: Take a company, revamp its business model, go public. There are various capital, engineering, and modeling risks. The problem is you can’t regulate everything.
Q: Is California too big to fail?
A: Probably, but it hasn’t fallen into the ocean yet. It’s actually turned the corner, with tax receipts above expectations.
Dr. Alison Lynn Reaser is currently Chief Economist of the Fermanian Business and Economic Institute of Point Loma Nazarene University. From 1999 to 2009, she served as the Chief Economist for Bank of America Investment Strategies Group. She also previously served as Barnett Bank’s and First Interstate Bank’s (Wells Fargo Corporation) Chief Economist. Dr. Reaser is active in many professional organizations, including serving as the current President of the National Association for Business Economics. In the past year, she has also been a member of the Boston Economic Club and the American Bankers’ Association’s Economic Advisory Council. Previously, she served on the Governor’s Council of Economic Advisors for the State of California; Leadership Florida; was a fiscal advisor to cities of Los Angeles and San Francisco; California’s Economic Strategy Panel; Chairman of the Board of Economic Advisors to the Los Angeles Area Chamber of Commerce; President of the Economic Roundtable of Jacksonville; President of the Los Angeles Chapter of the National Association for Business Economics; and member of the Editorial Advisory Board, Contemporary Economic Policy. She holds a B.A. in Economics (cum laude) and a M.A. and Ph.D. in Economics, all from the University of California, Los Angeles.
Rapporteur: Rich Levy
National Economists Club
P.O. Box 19281
Washington, DC 20036
703-493-8824
info@national-economists.org
