In an early morning keynote address Thursday, Vanguard Chief Economist Joe Davis suggested that the “biggest issue of our lifetime” is how the country deals with the persistent imbalance between our spending and our revenue, an imbalance that he suggested will not get any better for a very long time absent any tax reform.
In an interview after his presentation at Morningstar’s annual ETF Invest conference in Chicago, Davis was cautiously optimistic that one of the “viable bipartisan plans” that have been floated to fix that imbalance can be implemented.
Wistfully recalling 2011, when he said “we were close to a grand bargain,” he argued that a compromise “is needed to preserve the sustainability” of our still-fragile economic recovery.
“By all of us giving up something,” he said of plans like the Bowles-Simpson deficit reduction plan, “we all win.” If self-interest isn’t enough for Americans and their leaders to compromise, Davis suggested that “the bond market at the margins may nudge us” toward a deal with the “market’s invisible hand.”
In his speech, he said that one step toward longer-term deficit control would be to institute a balanced budget: “No country in history,” he said, “has ever had a fiscal when crisis when its budget has been balanced.” But he said in the interview that he nevertheless believes the “chances of a fiscal crisis” for the U.S. in the near term are “very low.”
Not so obliquely referencing the economic recovery and the government shutdown, Davis said in his speech and during the interview that the U.S. was still suffering from an “uncertainty tax” whose “removal would have positive effects” on the economy and the markets. He predicted “modest” economic growth next year, but below the Federal Reserve’s expectations for 2014, due to the effects of the uncertainty tax. He divulged that at Vanguard, “we monitor policyuncertainty.com daily” to keep track of the uncertainty signals.
Longer term, five to 10 years out, he sees not only glimmers of hope, but the real possibility that U.S. growth will “come into the light” and return to its historical levels, mentioning that in every decade since George Washington’s first term, the U.S. has had a healthy growth/inflation experience.