A slow economic recovery will follow the boom.
Photo by Chris Strong
The basic production machinery of the U.S. economy is still effective, agreed faculty panelists at Business Forecast 2011—but they emphasized different challenges for the economy to recover fully from the crisis.
My forecast is much like the weather today: partly cloudy with a chance of intense storms coming down the line, because we still have a lot of fragilities out there,” said Randall Kroszner, Norman R. Bobins Professor of Economics and former governor of the Federal Reserve Board.
Kroszner was one of three Booth faculty who shared economic and political predictions at Business Forecast 2011 at the Sheraton Chicago Hotel and Towers on November 30. The annual event drew a crowd of about 1,000 alumni, students, and members of the business community, and kicked off six such forecasts across three continents in New York, London, Los Angeles, Singapore, and Beijing.
Kroszner projected “reasonable, but not extremely robust” growth of 3.4 percent in real GDP and said he is optimistic the country will weather the current storms. He is not convinced the United States will be stuck in low growth for a very long period of time because, among other reasons, real private investment rose an “astonishing” 19 percent in 2010, Kroszner said.
“There has been incredibly strong investment in equipment and software,” he said. “Firms are still willing to invest, and part of the reason for that is productivity has remained quite high. The bottom line is that the basic production machinery of the economy is not broken.”
A 3 percent increase in consumption will power the recovery, but the country will see very little growth in jobs,
Kroszner said. Businesses are reluctant to hire permanent workers because of uncertainty about taxes and regulatory burdens, the unsustainable long-run fiscal trajectory of the federal government, and concerns over health care costs, he said.
During 2011 the U.S. economy will be slowed by the effect of “distorted behaviors” causing the “misallocation” of economic resources during the boom years that preceded the recent recession, said Erik Hurst, V. Duane Rath Professor of Economics and Neubauer Family Faculty Fellow. As a result, Hurst predicted: Housing prices will not recover in 2011 or anytime soon. “It’s just not in the data,” he said. “You’re basically going to get many years of normal housing price growth, which is essentially zero to 1 percent in real terms. This is probably going to happen for the next decade.”
Recovery from this recession will continue to be less robust than after previous recessions because Americans must deleverage their overspending during the economic boom and build up assets. “This doesn’t mean we’re going to be sluggish forever; it just means we’ve got some work to do and it’s going to take a little bit of time,” he said.
Unemployment will remain relatively high in the short run because the housing boom created a glut of construction workers—and, in some states, of mortgage workers—who must be retrained to meet demand in new fields. “The bulk of the unemployed are construction workers, but nobody’s hiring construction workers anymore,” he said.
Because of these misallocations, the government has limited policy options to stimulate the growth of housing prices, spur economic growth, and reduce unemployment, Hurst said. “That doesn’t mean policy isn’t going to be important, but it’s not going to be solving the glut of housing supply, the desire for us to save, and the fact that we have workers in one industry that we have to move to another industry,” he said.
The public should not expect the current recession to subside quickly, because it is the direct result of the boom that preceded it, Hurst said. “The boom took a decade to happen,” he said. “For a decade, we reallocated our production towards certain sectors. To expect ourselves to undo that overnight just doesn’t make sense. The public, policy makers, and academics should realize that the bust we’re going through was directly related to the boom during the prior decade.”
The “two-faced” nature of economic recovery in the United States and Europe is “quite worrisome,” said Raghuram Rajan, Eric J. Gleacher Distinguished Service Professor of Finance. In states that didn’t suffer as much from the housing bust, employment and sales are growing, he said. People with incomes of $75,000 or more are more optimistic about the economy, while unemployment for people with college degrees is half as high as for those without degrees, he said. “These divisions across geographic and income segments cause a deterioration in political dialogue,” Rajan said. “In the United States, the left does not want to talk to the right, which is a recipe for gridlock. In the past, government not working may not have been a bad thing. But government not working when your fiscal deficit is 10 percent of GDP is not a good idea. Much needs to be done to bring things back under control, and that requires cooperation.”
In Europe, Germany’s economy is extremely strong after recovering from mistakes during reunification 20 years ago to become an “export powerhouse” that generates profits exporting even to China, he said. “In a sense, Germany did penance for the last 10 to 15 years for having a bloated econ-omy,” Rajan said. “They are saying, ‘We took the pain over 15 years and have become competitive.’”
Meanwhile, much of the rest of Europe has not kept pace, he said. “This is where tensions come,” Rajan said. “It’s hard to predict what will happen. There is no chance the euro as a concept will fall apart. The concept for integration in Europe—to make sure that
Germany and France will never fight a war again—still holds. The idea of binding these countries together will persist. They are close enough in the kinds of economies they have that common currency is sensible, and they will be joined by countries similar to the Netherlands, Austria, Finland, and so on.”
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