Washington Post Columnist
Wednesday, January 6, 2010; 12:00 PM
Washington Post business columnist Steven Pearlstein was online Wednesday, January 6 at 12:00 p.m. ET to discuss what he expects from the economy in the new year.
Read today's column: Recession over? Not unless we make a major shift.
A transcript follows.
Great Falls, Va.: Thanks for the strong column. I'm sure you enjoy putting on the wonkish health care-guy hat, but in my opinion, your best writing comes when you synthesize several broad themes about the larger economy.
For my money, Krugman's 1 in 3 scenario is a bit too optimistic. In the coming year, the state and local governments are going to feel real pain, which was forestalled by the stimulus package. As you mention, much of the positive economic data has been due to the short-term effects of the stimulus package, but that can't continue. An example is the figures on car sales from the summer during the Cash for Clunkers program, contrasted with the more recent dismal sales numbers.
And all of that is without even considering the true health of the banks, which won't be doing much lending any time soon. Simply put, the banks are still in terrible shape, notwithstanding the trajectory of their share prices. The dog-and-pony stress tests were predicated on "worst case scenarios" of unemployment figures that were better than what we face now. The stress tests also did not account for commercial real estate loans, which makes for a looming debacle.
One could go on and on with the bleak factors. Sure, things are better than they were a year ago. But not as much better as people -- or the stock market, it seems -- want to think.
I don't mean to be a perma-bear, but I just don't think it's realistic for us to be out of the woods yet. We had a credit bubble of epic proportions, and for that action, now we need to suffer through an equal and opposite reaction.
Steven Pearlstein: Well, maybe you should be the columnist. I couldn't have said it better.
Fort Worth, Tex.: Steven, What do you make of the growing gap between employment in the private and public sectors? If I'm correct, most of the stimulus funds have been sent to states and localities, and the private sector shed way more jobs than the public did. Also, didn't USA Today have an article saying nearly 20% of gov. employees make $100,000? The income gap between private and public is growing too - in June the total compensation for public sector was %45 higher than private. What to make of this?
Steven Pearlstein: I'm not sure you are correct about the impact of the stimulus on job creation and retention, although there is no doubt that a big slug of the intial money went to state and local governments to forestall layoffs in vital services. That said, the bubble period results in overcapacity in both the private and public sectors -- both got to large to be sustainable without the credit bubble, and now both have to shrink. In the end, I don't think you'll find that one sector has shrunk much more of less than the other, although it will take years to get the final tally since the federal shrinking is yet to occur.
I also think you raise a good point about public pay, which during the good times grew out of control. I don't worry so much about the posted wages and salaries -- I'm happy for the public sector to be able to attract and retain the best workers. They do important stuff. What I don't like is the lack of accountability when we pay top dollar and get mediocre performance from people, or even worse, and can't seem to fire them because of outmoded civil service rules. And what is killing public finance are the benefits -- the gold-plated health benefits and the pensions and early retirements. Public employee unions have very quietly got big gains in these areas because they are largely out of view, but now that the government workforce is aging, it has become this huge fiscal noose around state and local governments. These benefits are way more generous than those now available in the private sector and they need to be cut back.
expense our way out of recession?: Help me out on the benefit for your prescription that we change tax laws so large companies can write-off as an expense on its income statement the full amount of some investment in equipment/R&D in one year rather than amortize those costs over many years (correlating to the positive benefits from those investments)? From a short term investors' perspective (there doesn't seem to be too many long term investors anymore), wouldn't a much larger hit to earnings in a current year (with no guarantees for a positive return on the investment in future years) be considered a bad thing and cause you to sell or not buy that company's stock? Why would management think that is something its current short-trigger shareholder base would want them to do?
Steven Pearlstein: Businesses keep two sets of books, one for shareholders and one for the tax man. To allow expensing of investments would be on the tax ledger -- general accounting principles would still depreciate investments, which is probably the right way to keep a company's accounts for that purpose.
Laurel, Md.: Steven, isn't part of the answer implied by #4 that we need to make more stuff here?
As a first step, maybe those of us with reasonably secure government jobs could target our spending to remain in America, instead of buying Indonesian clothing, Korean electronics and Saudi oil. Can you suggest what kinds of consumer spending generate the greatest velocity of transactions WITHIN the US?
Steven Pearlstein: Personal services are obviously a pure play in terms of stimulus.
Harrisburg, Pa.: Mr. Pearlstein,
In your column today, you make some sound observations and suggestions, but I'd like to know more about what you think about American jobs vs. international trade. It does not seem that American businesses are ready to re-employ a significant number of people. And where stimulus dollars might once have gone back into the American economy and generated activity, these days much of that money just goes to China as people spend their money at Wal-Mart. Do you see protectionism as a plausible course, or should the market be left to decide who works and where?
Steven Pearlstein: I don't like protectionism. But it is certainly time for us to draw the line with the Chinese and other Asians over their policies of keeping their currency pegged to ours despite years of rapid productivity growth and large trade surpluses, and if they refuse to allow their currencies to begin rising gradually, it would be reasonable to impose an across the board tariff to correct that distortion.
Washington, D.C.: Is the purchasing power of the Chinese expected to increase during the year? How important is the Chinese GDP relative to the global economy?
Steven Pearlstein: The chinese economy is very important, and the way it has been growing lately is a bit of a concern. Much of the growth has come in the area of domestic investment, which doesn't do much to help balance the trade flows. If the currency were allowed to rise, and China's economy opened more to foreign goods and services, then the Chinese could buy more of our stuff with their higher-value yuan, and that would help.
Bellevue, Wash.: Good morning. In today's column, you say that more government spending seems unlikely, but then make a case for it, as 'investment.' I hope we can pull it off, too, but how likely is it to happen, given all the populist ranting about the deficit?
Steven Pearlstein: I'm not sure how populist the deficit fixation is -- it's actually pretty conservative economics. But that aside, we have to get over this fixation on the deficit. Yes, it is a problem and yes we need to raise more in taxes and spend less on operations and income transfers -- government consumption, in effect.
But investment is different--it's not the same as pure spending. If you have investments that pay off 10% or more a year and can be financed with 3% money, then these are things that are worth doing any time money is cheap and available and there are people in the economy ready and available to do the work. Do more of it now, and less of it when the economy is booming and government would be competing with the private sector for scarce resources. That's why we need an infrastructure bank, which has a dedicated source of funding which it can use in a counter-cyclical manner, ramping up when the economy is slow and building up a reserve when the economy is strong. It makes so much sense and we ought to do it now, even if editorial writers and other budget scolds go nuts. They're just penny wise and pound foolish about this.
Alexandria, Va.: Dear Mr. Pearlstein:
Some observers argue that for the last 30 years, the benefits of increases in U.S. productivity have gone heavily to the top one or two percent of the population, not to the other 98 percent. These same observers maintain that the U.S. income tax system has transferred vast wealth to the wealthy, thereby reducing the living standards of everyone else. Do you agree with these assertions?
Should economic reforms thus include high marginal tax rates on very high earners, as these observers tend to propose? What reforms of the personal income tax system do you believe will contribute to economic recovery? Do you think that the current income tax system is fair?
Steven Pearlstein: The US tax and income transfer system (Medicaid, food stamps, earned income tax credit) is progressive, so your statement is incorrect. I think we can and should raise the top marginal rate to 40 percent federally, I think we can expand the amount of earned income that is subject to the payroll tax (SS, Medicare), there are some loopholes to limit or close that have a regressive effect (like the home mortgage deduction and the tax free treatment of health benefits). But we do have to realize that at some point, soaking the rich can be economically counter-productive.
It's not the government that is causing increasingly unequal distribution of productivity gains (income growth). It is the dynamics of a new globalized economy that is more reliant on services, and the increasing competitiveness of labor markets, and the shift in market power to certain companies and industries and individuals. And this is happeneing all around the world, not just here. Government can play a role in trying to redress this balance, but it can't all be put on the tax system. You have to deal with the institutional dynamics, the market dynamics, which can be done through regulation (labor laws, for example) but also unofficial norms of behavior. As they say, it's complicated.
Manhattan, Kan.: Hi Steve--interesting column today. It's not often that you agree so completely with your Nobel Prize-winning friend from Princeton. However, neither you nor Krugman have discussed the potentially stimulative effect of having the federal government hire 1.2 million workers for the 2010 Census. Has this shot in the arm been discounted because the jobs are only temporary(although some will last up to a year)? Even if they are temporary, won't they boost consumption, nonetheless, and make consumers and business owners feel more confident? The other potential boost to employment that I see may come from those who deferred their retirement over the last two years as they watched their investment portfolios shrink. Isn't the stock market now approaching levels that enable many of these folks to feel confident enough to retire, thereby freeing up jobs for others who are unemployed? I heard Peter Orszag argue on Charlie Rose a few months ago that this group may account for 1 to 1.5 points of the unemployment percentage. As they say, just asking.
Steven Pearlstein: All of the factors you cite are significant in terms of the short term jobs numbers, which is why you have to take these numbers with a grain of salt. A lot depends on who decides to be "in" the labor market at any time, and there are lots of people who don't have to be but might be at any time.
Cleveland, Ohio: A really basic question that I can't answer (I stopped at Econ 201):
How can an economy that actually makes very little survive? The last 10 years have been predicated on nothing, and we saw it collapse.
So unless we come up with something that people want to buy, whether it's intellectual property (books, music, medicine, blueprints), or goods (cars, machinery, computers, cookies, wheat), how will our economy be based on anything?
Since only 4% of our economy is dedicated to actually making things, how are the other 96% of us still employed?
Steven Pearlstein: That's, alas, an old saw. It is perfectly possible for a country to be prosperous and fully employed and still not "make" much. Most big economies have a mix of sectors and in the US, our manufacturing output continues to increase and has remained a relatively constant share of GDP, even though the number of people employed in it continues to shrink. That's good -- it means there are fewer employees who are more productive and make more money than before. Also you have to understand that the accounting for this is not as precise as you think. In the old days, the security guards and the maintenance guys and the marketing and IT department staff at the steel company were all listed as manufacturing employees. Today, those functions have often been outsourced to "service" companies that specialize in them and maybe do them better or cheaper, even though their employees may work right there in the manufacturing facility.
It's bad that we import so much more than we export. What we import and what we export is much less important.
Anonymous: Will the United States ever be able again to support the "continuous improvement" of mature industries? It seem that the "homerun" mindset of the Googles and Human Genome businesses preclude a slow steady economic growth.
Steven Pearlstein: Actually, we're pretty good at continuous improvement now, after learning it from the Japanese.
Austin, Tex.: Good morning, Steven. I enjoyed today's article. I wanted to ask a question about one of your sources of potential economic growth: trade.
Isn't it imperative for the economic health of our country to operate in trade surplus? It seems to me that we're spending too much of our money on goods made in China (for example).
It harkens back to the 1970's when my grandfather used to preach "Buy American". Wouldn't a movement to buy Made-In-USA goods be the best thing we could do for our own economy?
Yeah, it's going to cost more in the short term. But keeping money here and encouraging more domestic production of widgets will help drive down unemployment.
And if those widgets are better than the foreign widgets, well, we've got an export where we used to have an import. It builds on itself, but the only way to start is to consciously make an effort to buy American-made goods.
Is this a logical idea, or am I missing something fundamental?
Steven Pearlstein: There's nothing wrong with a voluntary, cultural preference for buying American, but protectionism is not a good idea. Also you have to remember that as globalization proceeds, countries more and more specialize, so one country does a lot of one thing, another country a lot of another thing, not just for itself but for the whole world. What that means is that there aren't always domestic substitutes for imports. So there are instances where we don't really have a buy-America option any more, and those instances are growing in number all the time. Because we are a big, rich, varied country, we don't realize that, but if you go to smaller countries, they have lived with that reality forever.
Columbia, Md.: In todays column you mention that "banks have repaired their balance sheets". Where does that come from? I've been in the bank consulting business for over 20 years and I'd certainly disagree with that statement.
My experience is with small to regional banks, not the money centers, so perhaps you are talking about them?
In banks I deal with, the regulators are coming in and the effect of their reviews is to require higher risk-based capital ratios than before. For instance, if you had a 12% Tier One RBC, now they are effectively placing constraints on you to require a 14% to get the same CAMEL numbers.
The effect of this is that the banks won't be increasing their outstanding loans balances anytime soon.
Furthermore commercial real estate losses have not rolled through yet.
Steven Pearlstein: I maybe overstated the case, just for the sake of brevity. Yes, there is a lot of capital raising and loan writing off to go, particularly in the regional and smaller banks.
Community Banks: Thanks for hosting these chats, Steve. There's a liberal blog advocating that people pull their $$ out of the big banks & open accounts at community banks/credit unions. If enough people did this, would it not potentially cause a collapse of the banking system and/or another financial meltdown resulting in a recession? Would it be the equivalent of a run on the banks?
Steven Pearlstein: It's not going to happen in such a big way so fast that you have to worry about it. But it is a good idea, in my opinion.
Boston: Can you please discuss how you distinguish between government spending (which you describe as unlikely and unaffordable)and infrastructure spending (which you describe as desirable and fund-able through other reductions)?
Steven Pearlstein: Farm subsidies, food stamp payments, spending for the operations of the army or the department of commerce -- that's all vanilla variety consumption of government services. Money spent to build a highway or a community college or to discover the secret of the human genome is investment, in that it has payoffs for many years thereafter to the economy as a whole. To lump them all together as spending and say we're doing too much is a stupid oversimplification. We need to think in terms of operational budgets (consumption) and capital budgets (investment), and consider them separately and differently.
Baltimore, Md.: Steven: Your chillingly correct prediction in early '08 about the impact of the mortgage meltdown was right on target. Do you have an equivalent prediction, for good or ill, for '10? That is, will there by one particular thing that will have a profound economic impact? Thanks.
Steven Pearlstein: It was '07 as well as '08, but no matter. This year, my prediction is for a nice spring followed by a setback in the summer and fall, with little overall job growth and not much income growth and a pullback in stock prices when it becomes clear the markets have got ahead of themselves. Because of our heightened expectations, it will be a depressing year, economically, though not a disaster in any absolute terms as long as you still have a job, which too many people won't. This is the year the commercial real estate bust will hit hardest, along with home foreclosures, but I don't see anything big other than those.
Great Depression similarity and Green jobs: Pearlstein, you are a sharp cookie even though I don't always agree with you. If the Great Depression is any guide, you are absolutely correct about the chances of another dip. But isn't Bernanke a Great Depression scholar? Doesn't he see this?
On a separate but related note, it seems that one thing our country needs to do is invest in itself. That means creating jobs in sectors that have the potential for significant growth and will also make the country stronger. With traditional fossil fuels becoming more scarce and thus more costly, alternative energy seems poised for long-term growth. And an investment in green jobs would do wonders for our country's energy independence, which according to many foreign policy experts is an end-state essential to our national security. So why has there been no massive initiative on this by the Administration? It would create jobs short-term and it is good for the country long-term. What gives?
Steven Pearlstein: I think the green jobs thing is probably oversold, although there is opportunity there. I suppose if you consider high speed rail and streetcars green jobs, then there is a potential to move the needle. But I'm just as excited by gas from shale to replace coal as an energy source, which I don't think qualifies as green.
Beaumont, Calif.: I think today's article pretty well summarizes the key issues facing our nation's extremely troubling future; you are correct in suggesting the recession is far from over. In an annual note I sent to friends and family I made the following comments: It is encouraging to see recently that the financial markets have rewarded those who continued to hold balanced portfolios and didn't panic: the next 6-8 months will help confirm if "selfish main street citizens","not in my backyard" government employees, greedy financial insitutions and corporations have learned anything from our walk to the "brink of world economic oblivion"! Thankfully our new President and his team are doing yeoman work as they attempt to steer the enormous changes that we all face to right our "ship of state". The thing that really worries me, Steven, is the number of Centrist, rational and bipartisan Democrats and Republicans who are retiring almost in mass as we speak from local, state and national office. These were the leaders who lead the efforts to attract the independents (I am a proud member of this group)who got Barack Obama elected last year. Your comments please.
Steven Pearlstein: Yes, the clearing out of the center -- particularly the radical center, as opposed to the mushy center--is dispiriting. Don't see how to reverse that dynamic, at least in the short run. I suppose it means electing a few more liberal Republicans over the opposition of the radical right and the Democratic left, but raising the political money for that isn't easy. It may require self-funded campaigns by millionaires.
Washington, D.C.: Hi Steven - Thank you for the very clear discussion of the challenges of a full economic recovery. You're right about excess capacity in the economy broadly.
But I think there's an exception: the green economy. There's nowhere near enough wind turbines, solar panels, or forests - and building or growing them will generate huge economic growth and employment (indeed, the green economy generally produces significantly more jobs than the "dirty" economy per dollar invested, as economist Robert Pollin and others have shown).
Given that Wall Street has significantly curtailed financing for the green economy (unwisely, I think, even for their own profit), taking advantage of this immense economic opportunity requires putting a price on carbon pollution and implementing other incentives for a green economy to spur much greater private investment. South Korea targeted a massive 81 % of its stimulus package at the green economy, and experienced 2.5% + quarterly growth in 2009, and is anticipating 4.6 % growth for 2010. Could this provide a model for the United States?
- Glenn Hurowitz (Senior Fellow, Center for International Policy)
Steven Pearlstein: Putting a price on carbon would be a really good thing. It seems that cap and trade is dead for the moment, which argues even more to go to a simple, gradually increasing carbon tax as an interim measure.
Alexandria, Va.: Hi Steven, I thought the original stimulus should have included more infrastructure investment and I doubt there will be much more in the future. It is a weakness of our systems that politicians cant spend money that wont provide benefits until the future. Anyone who votes for infrastructure funds will be accused of running up the deficit and wont have any benefits to tout. Do your really see some infrastructure investment soon?
Steven Pearlstein: I don't know if we can convince the budget scolds to get out of their defensive fiscal crouch to see the difference between the two kinds of spending. It is like a doctor who doesn't appreciate the difference between good cholesterol and bad cholesterol -- it's malpractice.
"... we're probably stuck with several more years of slow growth in jobs and income.": What about the effects of Federal tax cuts on growth and income? I imagine there have been far more Federal tax cuts than equivalent spending cuts, and that economic data over the last 100 years refutes the notion that tax cuts alone sustain long-term economic growth for any country. While tax cut promises are effective campaign tactics and actual tax cuts may spur short-term growth, it's obvious debt increases substantially over time without equivalent spending cuts or new revenues (e.g., our $12 trillion Debt Limit), and our addicted politicians are responsible for much of that.
Steven Pearlstein: I'm with you on that. No more tax cuts, even for the sainted middle class. If the middle class wants tax cuts, let it identify the government services and programs it wants to live without. I'm waiting....
Florida chick: The excellent UCF economist and forecaster sees real pain continuing for central Florida, where housing is cut in half and real unemployment is at least 13%, much worse for some career fields. Toss us a bone. Is there any silver lining, anywhere, for the ground zero locales like Orlando??
Steven Pearlstein: Foreign tourism, particularly from China.
Laurel, Md.: Hi, Steven, did you have a lunch conflict or is noon your new time for 2010?
On a more serious note, what can and should be done to make more productive use out of unused investment property? Shopping mall, steel mills and auto plants are sitting idle all over America. Do they have any future use; or should we declare them "blight" and bulldoze them?
Steven Pearlstein: No, I had to do a video interview for the On Leadership site at washingtonpost.com. If you haven't visited, you should check it out. Great interview with Santa Claus!
Chinese solar panels: What do you do about innovative green technology being developed here in the U.S. but the actual jobs going to the Chinese when U.S. companies set up manufacturing plants in China, as happened with some of the leading solar power companies HQ'd in Massachusetts?
Steven Pearlstein: Given the cost of shipment, and the relatively lower level of labor input, I'm a bit puzzled by these stories that all the production is moving to China. Unlike Tom Friedman, I don't think the die is fully cast on that one yet. We just need to develop a bigger and faster growing domestic market for this stuff, which is hard when there is still a lot of domestic energy production and the prices keep fluctuating up and down, discouraging investment.
Washington, D.C.: Mr. Pearlstein, Thanks for the comments re: public employee compensation and benefits challenges. I think one thing that's being lost in the very noisy (and largely merited) discussion is that the pension and benefit risks largely arise at the state and local levels, where defined-benefit pensions and full-service post-retirement health benefits are the norm. The flip side is that state and local employees -- especially white-collar employees -- are typically very, very poorly compensated.
By contract, Federal employees are much more generously paid, but pay a larger slice of the health insurance pie; pay for their own life and accident insurance, on a full-cost basis; and pay most of the cost of their retirement, which is largely a defined-contribution and not a defined-benefit plan.
Feds make more money than the locals, but the benefits package (while generous) much more closely resembles private-sector benefits.
-- From a former Fed
Steven Pearlstein: Thanks for that clarification.
washingtonpost.com: Check out the On Leadership video here: On Leadership with Santa Claus
Steven Pearlstein: That's it for today folks. Hope to "see" you next week.
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