Practitioners of the dismal science rarely elicit much mirth from audiences when they explore the state of the economy, but Austan Goolsbee is an exception. Speaking at a general session at the 2012 NAPFA national conference in his hometown of Chicago, where he teaches at the University of Chicago, Goolsbee provoked serious laughter numerous times as he took a hard look at economic prospects in the United States and Europe for the more than 500 attendees of the fee-only planner group’s annual gathering.
Goolsbee (left), former chairman of President Obama’s Council of Economic Advisers, began his talk by contrasting the U.S. and European responses to two separate crises: the 2008 credit crisis in the U.S. and the ongoing sovereign debt crisis in the euro zone.
He argued that if you “cross out mortgage-backed securities and insert government bonds,” then the euro zone crisis is nearly identical to the earlier U.S. meltdown. “The lesson of TARP should be ‘This is how to do it’” by recapitalizing the banks, and opening their balance sheets for all to see. However, “Europe took the opposite lesson” and has failed to disclose the scope of the sovereign debt issue for its banks, which has led to an erosion of confidence in the markets in European debt and the European banking system itself.
“Banking crises must be dealt with quickly,” Goolsbee counseled, “or else they morph into something terrible.” While in the U.S., “we did the best we could and still had a terrible recession,” he predicted that a worse fate awaits Europe, including “an awful recession.” Current austerity measures throughout the euro zone, within which he said there were “humongous trade imbalances,” would not be effective. “If you’re not growing, you’ll never balance your budgets; all the austerity in the world won’t fix it.”
As for the American economy, the fundamental question, he said, is “Why aren’t we growing faster?”—as tends to be the case after most deep recessions. The reason is that the primary drivers of growth in evidence in the 2000s, high personal consumption and housing, are no longer a factor. Now, personal consumption is only growing as fast as income and the once-negative savings rate is holding steady at around 5%. Government spending will continue to fall, Goolsbee said, and while the health care, services and, “surpisingly,” the manufacturing sectors are showing healthy signs of growth, it’s not enough to push U.S. economic growth past 3%.
Goolsbee sees positive signs for the economy in the high level of corporate profits, which he suggested could lead to the private sector as “the sustaining driver of growth.” But he also warned of the “fiscal cliff at the end of the year,” when the Bush-era tax cuts sunset and Congress will be forced to deal with budget sequestration and the debt ceiling.
As for the U.S. budget deficit, he said there’s a short-term deficit and a long-term deficit which are “totally different.” The short-term deficit was caused by the recession and will disappear as “we slowly work our way out of it” through restored economic growth and the tax receipts that come with that growth.
The longer-term deficit is a structural problem, he said, caused by the aging of the American population and the rise in health care costs. Referencing politics, he said that “conflating the two” kinds of deficits “has not done the country any good.” Moreover, he said “I’m not so sure we’ll address” those issues pushing us toward the cliff until the election, and “maybe even later.” That uncertainty will produce volatility and affect the markets throughout the year, particularly in the U.S.
Over the medium term Goolsbee is more optimistic. “We have problems, but compared to the rest of the developed world they’re not so bad,” he said, citing our debt-to-GDP ratio, our entrepreneurial culture, “pent-up investor demand” and even our relatively high birth rate. “If we can get past this bumpy, painful time,” he said, the U.S. economy can have a brighter future. “Our job market will improve,” he predicted, we just “need politics that matches our economy.”