Mark Zandi, Chief Economist at Moody's.com & Harvard Economics Professor Kenneth Rogoff on the State of the Economy
Monday, August 10, 2009
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SUSIE GHARIB: More analysis now on the outlook for the economy. Joining us, two prominent economists with different viewpoints: Kenneth Rogoff, professor of economics at Harvard University and Mark Zandi, chief economist at moodyseconomy.com. Gentlemen, good evening. Thank you for joining us.
MARK ZANDI, CHIEF ECONOMIST, MOODY'SECONOMY.COM: Thank you.
GHARIB: I think one thing that we can probably all agree on is that the worst of the financial crises is over but the question now is, are we still in a recession or are we in a recovery? Mark, what do you say to that?
ZANDI: You know the recession is just about over. This has been a very severe downturn over a year and a half, but I think it's just about at the end of its tenure. I think it's going to be a bit of a slog over the coming year, but the good news is this long dark period is just about done.
GHARIB: Ken, do you agree with that?
KENNETH ROGOFF, ECONOMICS PROF., HARVARD UNIVERSITY: Well, I do. I mean I think that we're not falling off a cliff and jobs are still going down and probably will for a while longer. But we'll get a slow recovery. The question's what's ahead.
GHARIB: And what is ahead?
ROGOFF: Well I think we're looking at five years of much slower growth than we saw before the financial crises. There's so many challenges -- home prices. I don't think they're bouncing back. I think consumption is going to be weak for a long time and with all this debt, taxes are going to have to go up. All these new programs, taxes are going to have to go up. That's not good for growth either. So I see a period of much slower growth leaving us vulnerable to a recession down the road sooner than we might normally expect.
GHARIB: So Mark, will you tackle some of those, whether it's housing and growth?
ZANDI: I agree with Ken that the next -- at least over the next six to 2 months the economy is going to struggle. It's going to be out of recession but grow very slowly. But I do -- I'm more optimistic about the longer term as we get into 2011 and 2012. I think some of these impediments to growth will fade away. The problems in the financial system are serious, but we will overcome them. The policy efforts in this regard have been quite good and I think they will succeed at banks and other financial institutions will begin to extend out more credit. And moreover, in some of these hard-pressed sectors of the economy like housing, like the vehicle industry, the level of activity is incredibly low. The housing construction is at a post World War II low as are vehicle sales. You can't keep those levels of activities that low for very long. Demographics are going to compel much higher levels of construction in vehicle building and that will drive a lot more growth as we make our way into the early part of the next decade.
GHARIB: And a real critical part about growth is that what's happening in the job market. Now some people are saying that that unemployment rate that notched down a little bit that we saw on Friday is a statistical fluke and so as long as people are still unemployed and there are a lot of people without jobs, they are not going to be spending and so we cannot get growth. Ken, what do you say to that in terms of the outlook for the job market?
ROGOFF: Well it's certainly challenging. I mean I think the unemployment rate is going to get over 10 percent before this is over. I mean it depends a little bit on how many people get discouraged and just pull out of the labor force. But I think the big impediment is people seeing their wealth go down. I don't think housing prices are going to come back strongly for a very long time, not two years, three years, maybe seven years and that's going to cause people to spend less. That's 70 percent of our GNP. That's a big factor of demand. That's going to be tough to replace it with anything else.
GHARIB: Is the housing market in that crises yet? Go ahead, Mark.
ZANDI: Well, I was just going to say Susie, one reason for optimism is that everyone was so pessimistic. I mean I think if you go back to the end of last year, early this one, the financial system was collapsing. People panicked, consumers business people investors just completely panicked and businesses slashed investment. They slashed payrolls and I think they overdid it and I think they'll realize that come this time next year. They'll feel like the coast is clear and when they do, they'll start hiring much more aggressively. So the job market -- Ken's right, the unemployment rate is going to rise before it falls, but by the time it starts falling in 2011 and 2012, I think will fall quite substantially and we'll see a lot more job growth than anyone anticipates at this point.
GHARIB: Let me ask both of you this question of the consumer. Let's say consumers start getting their jobs back. Will they spend like they did in the past? Can we still think of the U.S. economy, the engine of growth is going to come from the consumer or has that changed through this financial crises? Ken?
ROGOFF: I don't think it's going to be the same. I mean I don't think housing prices are going to come back. I don't think credit's going to be the same. I hope it's not going to be the same. I hope they're going to do some regulation. They are being very soft now but they are going to have to start reining it in at some point so. We're going to have to have more exports and we're going to have to depend more on investments. I think we're going to have to depend more on the government. I think there will be another stimulus package. I think eventually there will be higher taxes.
GHARIB: Mark?
ZANDI: Yes, I think we're at a point with respect to consumer spending. U.S. consumer power is growth. The global economy really for the past quarter century that's Evident in the declining saving rate over that period. And I do think U.S. consumers at best will do their part. They will do no more than that going forward. But the good news is that we are seeing much stronger and will see much stronger growth from overseas in many emerging economies, in China, in India, eastern Europe, South America. Those consumers want to spend more. They will spend more. Their saving rates will come down and we will have the goods and services to sell to them.
GHARIB: Let's hope they do buy things made in the USA. Gentlemen both, thank you so much for coming on the program. We really appreciate it.
ROGOFF: Thank you.
ZANDI: Thank you.
GHARIB: My guest tonight, Kenneth Rogoff of Harvard University and Mark Zandi of moody'seconomy.com.
