I attended the March 5th Rabobank Business Symposium, with guest speakers, Bill Watkins and Robert Parry, (both PhD’s in economics), and James Lokey, president of Rabobank and Chairman of the California Bankers Association. I was very impressed with the quality and depth of the discussion of the national and local economies. And although I respect the work of Dr. Watkins, I have to respectfully disagree with his conclusions about the future of the U.S. economy.
Doctor Watkins is well-known and widely respected as being our foremost authority on the local economy, and his analyses of the California economy and the local Ventura and Santa Barbara County economies appeared to me to be spot-on. But with regard to his expectations for the national economy, I could not disagree more.
First, I would like to discuss what I think he got right. He expects that Ventura County and north Santa Barbara County will follow (as they have been following) the state economy further down, and that unemployment, housing prices, and retail sales will likely suffer just as much as with the state of California, and to a relatively worse degree than the nation as a whole.
But, for south Santa Barbara County, Watkins expects that we will continue to outperform the state and possibly the nation as well, in terms of fewer jobs lost, better resistance of home prices to declines, less dramatic declines in retail sales, and a quicker rebound for the local, south county economy. I completely agree, and those of you who read my column; “Is it really Different in Santa Barbara” will see some striking similarities between my expectations and those of Dr. Watkins regarding the local economy.
But, this is where the similarities between his analysis and mine end. Watkins believes that the national economy will not show positive GDP growth until the first quarter of 2011 (Lokey agrees with Watkins on this point). This not only contrasts sharply with my own expectations, but is drastically different (more pessimistic) than the expectations of many mainstream economists.
Watkins bases his expectations on a very sophisticated model, which he has developed along with a team of very capable academic scholars. I questioned Watkins about the reasons for these significant differences in his expectations, compared with the mainstream economist community, and he points to two main factors: First, he does not expect the stimulus and bailouts from the Federal government to be effective, while I, and most mainstream economists, believe these actions will yield positive results. I simply do not see how the government can inject well over $2 trillion into the economy and not have this result in a substantial positive impact . Also, I do not see how that impact will take years to manifest in terms of positive growth. On the contrary, I believe we will see significant signs of the $898 billion stimulus, the TARP (Troubled Asset Recovery Plan), the TALF (Term Asset-backed securities Lending Facility), and the foreclosure plan impacting the economy before the end of this year. I’m not anticipating that GDP growth will jump this year, but I do think we will see signs of consumer spending coming back, and that the stock market will respond favorably this calendar year.
Watkins’ second key point of contention with other economists, and his second reason why he sees the recession lasting until the first quarter 2011, is that he believes many of the other economist’s forecasts place too much importance on the average duration of recessions, and he disagrees with the start date of December 2007 for the recession, which most economists are using (he believes the recession did not start until July of 2008). He may be correct in this assessment, as the definitions that economists use to determine when recessions start and end can be arbitrary and differ widely.
We should not be concerned with when the recession started, but rather with when it will end. The current recession is unlike any we have seen, so trying to determine how long the current recession will last by comparing it to the duration of past recessions seems pointless. We need to focus on the factors we can identify and monitor, which will offer insights into the recovery to come. Believe me, the economy will recover. The world is not coming to an end!
We can use a historical comparison to the Great Depression (not even Watkins believes we are headed into another Great Depression) to try and gain some perspective on this issue. During the depression, the government did almost nothing, especially during the first few years, except to pass protectionist laws that exacerbated the problem. President Hoover believed that in a free market system, government should not interfere, but instead, should allow the market to work-out its own problems. Then he went fishing. By the time FDR came into office, things were so bad that no matter what he tried; nothing worked. It finally took a war to pull us out of the pit of the depression.
A second key difference is that we had no depositor insurance, so when banks failed, as they did by the hundreds, people lost their money. Today we have depositor insurance (FDIC) and investor insurance (SIPC). The FDIC has performed a great service to the public and the economy by reassuring depositors that their money is safe in our banks. This has been a major factor in stabilizing the banking system and preventing a run on the bank scenario, which happened regularly during the great depression.
Today, not only has the government been very proactive, but they have many effective tools, which the government simply did not have during the depression. The government can lower interest rates (they are at zero percent now), expand the money supply, loan money to banks, enact stimulus packages, and they can coordinate all of their activities with governments around the world to more-effectively address the global aspects of an economic downturn.
Another significant difference is that today, people have money—about $5 trillion sitting in money markets, and trillions more in CD’s, treasuries, gold, and other bank deposit accounts. During the Great Depression, people simply did not have any money. Most importantly, unemployment is up—now at 8.1 percent—but is nowhere near the 25 percent peak in the unemployment rate of the depression. This means that today, approximately 92 percent of all eligible workers are employed, and 96 percent of college-educated workers have jobs.
People are working, they are earning money, and they are saving money. We know they are saving because they are not spending right now. When the stimulus kicks-in, and consumers gain confidence in the economy, they will start to spend, using their savings along with stimulus money. And, since 70 percent of total economic activity stems from consumer spending, once confidence is restored and consumer spending rebounds, the overall economy will rebound as well.
With all of this in mind, I have to respectfully disagree with Dr. Watkins’ pessimistic expectations for the U.S. economy. He may very well be proven right if the stimulus plan and other government actions are ineffective. But I believe we will see a positive and significant impact from the government’s intervention, and that the economy will rebound much sooner than Watkins expects. For all of us, I sincerely hope that he is wrong and I am right.