Two perspectives: 2014 U.S. economic forecast
James Glassman and Lee Ohanian have very different takes on the current and near-future health of the U.S. economy. Glassman, managing director and senior economist at JPMorgan Chase & Co., says that a decent economic recovery is in progress. Ohanian, Associate Director of the Center for the Advanced Study in Economic Efficiency at Arizona State University and economics professor at University of California, Los Angeles, says that the U.S. economy remains significantly depressed.
James Glassman and Lee Ohanian have very different takes on the current and near-future health of the U.S. economy. Glassman, managing director and senior economist at JPMorgan Chase & Co., says that a decent economic recovery is in progress. Ohanian, Associate Director of the Center for the Advanced Study in Economic Efficiency at Arizona State University and economics professor at University of California, Los Angeles, says that the U.S. economy remains significantly depressed. Glassman and Ohanian were featured speakers at the 50th Annual Economic Forecast Luncheon, co-sponsored by the W. P. Carey School of Business Department of Economics and JPMorgan Chase.
Ohanian: Below the long-term trend
When Ohanian says that the U.S. economy remains significantly depressed, he is looking predominantly at two components of economic growth: employment and per capita gross domestic product (GDP). “Employment as a fraction of the adult population, and most of the components of GDP, are farther below their normal trend levels today than during the financial crisis or at the trough of the recession.” (Follow Ohanian's slides)
In other words, while employment and per capita GDP have grown since the depths of the recession, those numbers would have been bigger had the recession never occurred. “We’re way below where we should be,” explains Ohanian. “We should have 8 million more jobs and GDP per capita should be 10 percent higher than it is.”
Isn’t it normal after a recession for the economy to remain below its long-term trend? Ohanian says no. “Typically, severe recessions are followed by very rapid recoveries that return the economy to its long-run trend. Thus far, such a recovery has been absent from our economy.” He adds, “In fact, this is the only recovery from a severe recession in the history of the United States in which the economy has not gained at least some ground relative to the normal long-run trend.”
Ohanian says this is partly due to government policies. In the aftermath of the last severe U.S. recession (1980-81), the government did little in the way of short-term “stimulus” and instead made long-run economic policy changes.
In contrast, Ohanian says, “much of the economic policy response since 2008 has been a collection of short-run policy measures.” Ohanian cites Federal Reserve policies (some of which were useful, he says, but continued long after the crisis ended) as well as the American Recovery and Reinvestment Act (ARRA) -- “Cash for Clunkers” -- and various tax credits for home buyers. None of these, he says, show any evidence of having promoted employment growth.
In fact, Ohanian says, post-recession economic policies may have had the opposite effect, actually depressing job creation. The tax increases which followed a substantially expanded federal debt fall into that group. “As a consequence of increased spending and tax cuts, the federal debt doubled from about 35 percent of GDP to about 70 percent of GDP. This in turn led to tax increases on some U.S. earners. For example, the highest earners, some of whom are entrepreneurs and substantial job creators, are now subject to tax rates that are greater than 50 percent when taking into account all federal, state, and local income and sales taxes.”
That is problematic for the economy because high tax rates reduce the incentive to work, Ohanian says. “Research shows that tax rates at this level depress economic growth by reducing the incentives to produce. This includes research by ASU’s Edward Prescott, who was co-winner of the Economics Nobel Prize in 2004. Specifically, Europe and some other countries have had tax rates at this level for many years. All of these countries have experienced a large reduction in hours worked once these high tax rates were adopted.”
In addition to high tax rates, Ohanian says that various social safety net programs (“which are certainly needed in our society”) have been structured such that they reduce the incentive to work: “For example, many forms of federal and state aid to families are reduced or removed as a participant’s income grows.” Like high tax rates, the loss of welfare benefits disincentivizes work, according to Ohanian. “These work disincentives have grown significantly in the last five years, and will grow even larger in coming years due to Affordable Care Act health insurance subsidies that depend on income.”
Ohanian does not expect the economy to return to its long-term trend 2014. “The economy in 2014 will be similar to the economy in the past few years, says Ohanian. “We haven’t had the recovery we should have, and it’s looking less likely that we will … we won’t until the economic policies that reduce people’s incentive to work are reversed.”
But Ohanian doesn’t see that happening anytime soon. So, he expects 2014 will be largely the same as 2013, which was largely the same as 2012 and 2011. “There’s a common theme running across all these years: growth far below what we would expect in a recovery -- and what the economy needs to get back to its long-run trends.”
Glassman: Stock market signals economic recovery
Shifting focus to corporate profits and the stock market reveals a very different picture: “obvious signs of recovery” according to James Glassman, managing director and senior economist at JPMorgan Chase & Co. “Despite the popular view that the U.S. economy is ‘stuck in a rut’, key leading indicators of national economic activity imply that the U.S. economic recovery is solid, only in mid-stream, and building momentum,” he says. (Follow Glassman's slides)
Like Ohanian, Glassman recognizes that 8 million jobs have not yet materialized, but he nonetheless takes an optimistic stance. “It always takes a long time to get back on our feet,” Glassman says, “but layoffs are back to normal and employment has increased by 7 million jobs and continues growing. And the federal deficit that's behind a lot of the pessimism is rapidly coming down.”
“No, it’s not as boomy a recovery as we’re used to,” Glassman acknowledges, “but that is because in usual recoveries, the housing market takes off as the Fed cuts interest rates. That hasn’t happened this time because housing was the problem to begin with.” But, he says, we’ve largely put those housing market mistakes behind us. “We’ve recovered from that damage, and the recovery we’ve seen so far has a fair amount of momentum.”
One of the leading indicators of that recovery, says Glassman, is record levels of corporate profit, which create an incentive for businesses to “think forward.” And they are, as the new expansion in capital spending and hiring indicates. “The recession didn't derail ongoing economic growth in the developing world,” he says. “That's why profits are so strong -- because half the world is transforming.”
That economic transformation in developing markets is also why the equity market is so strong, says Glassman. “Investors, trained to smell opportunity, are convinced that we’re on the path to full recovery.” The Dow Jones Industrial Average, a broad index often used as a proxy for “the stock market” hit an all-time high of 16,000 on November 21, 2013. It has risen 24 percent in the last year.
Some see rising equities as evidence that the U.S. financial markets are in a Fed-induced bubble. Glassman, however, says that the performance of the stock market makes sense given “phenomenal, never-before-seen” corporate profits. “Investors in the equity market take their cue from the performance of the business sector,” he explains. “Record corporate profits have been going on for a while. Relative to this record level of earnings in the business sector, the stock market is fairly valued.”
Will the stock market continue to rise apace? Glassman says no. “Further stock market gains are expected to be more moderate and parallel the expansion of national output and business earnings.”
Some pessimists, says Glassman, dismiss record profit margins and a booming stock market as the result of the Federal Reserve Bank printing money. Glassman says that’s simply not true. “Because the stock market is so strong but the economy still recovering, many assume that the market must be inflated by the ‘money creation’ of the Federal Reserve. This is doubtful for several reasons.”
“First, investors take their cue from the performance of business profits, and stock prices merely have been responding with some delay to the performance of businesses. Second, the Fed’s asset purchases are not the same as ‘printing money’. Third, the business sector, not the Federal Reserve, creates profits. Finally, the unusually low level of interest rates engineered by the Fed only indirectly benefits businesses, because they are able to fund most of their capital projects with funds generated internally.”
Glassman says that those who think the Fed’s so-called “quantitative easing” is tantamount to printing money “are confused about what's going on and what the Fed is doing.” He explains, “The media refer to what the Fed has been doing as quantitative easing, but the Fed never refers to it that way. Quantitative easing implies that the goal is to increase the money supply. That is not the Fed’s goal. Instead, the Fed refers to its policy as ‘large-scale asset purchases’ because its goal is to push long-term interest rates down, to incentivize investors to move from cash to long-term risk assets (like equities) and to incentivize businesses to borrow.”
Indeed, Glassman says that the Fed’s asset purchases have not increased the money supply. “As excess reserves increased from $1 trillion to $4 trillion, the monetary base surged. But the money supply did not. Why? Because those reserves were never intended to actually be loaned out into the market. The Fed was using this tool to drive down interest rates because its usual tool -- the Fed funds rate -- was already at zero.”
Point counter point
Why such divergent views between these two economists, Glassman and Ohanian? The answer is that one’s perspective on the health of the U.S. economy depends on where one looks. Focus on where the economy would have been sans recession, as Ohanian does, and the status quo indeed looks grim. Focus instead on improvements since the downturn, as Glassman does, and the view is much rosier.
Ohanian and Glassman agree on one point: the economy has not recovered yet. How and when the economy will get to recovery depends on where you look.
Bottom line
When Ohanian says that the U.S. economy remains significantly depressed, he is looking predominantly at two components of economic growth: employment and per capita gross domestic product (GDP). “Employment as a fraction of the adult population, and most of the components of GDP, are farther below their normal trend levels today than during the financial crisis or at the trough of the recession.” (Follow Ohanian's slides)
In other words, while employment and per capita GDP have grown since the depths of the recession, those numbers would have been bigger had the recession never occurred. “We’re way below where we should be,” explains Ohanian. “We should have 8 million more jobs and GDP per capita should be 10 percent higher than it is.”
Isn’t it normal after a recession for the economy to remain below its long-term trend? Ohanian says no. “Typically, severe recessions are followed by very rapid recoveries that return the economy to its long-run trend. Thus far, such a recovery has been absent from our economy.” He adds, “In fact, this is the only recovery from a severe recession in the history of the United States in which the economy has not gained at least some ground relative to the normal long-run trend.”
Ohanian says this is partly due to government policies. In the aftermath of the last severe U.S. recession (1980-81), the government did little in the way of short-term “stimulus” and instead made long-run economic policy changes.
In contrast, Ohanian says, “much of the economic policy response since 2008 has been a collection of short-run policy measures.” Ohanian cites Federal Reserve policies (some of which were useful, he says, but continued long after the crisis ended) as well as the American Recovery and Reinvestment Act (ARRA) -- “Cash for Clunkers” -- and various tax credits for home buyers. None of these, he says, show any evidence of having promoted employment growth.
In fact, Ohanian says, post-recession economic policies may have had the opposite effect, actually depressing job creation. The tax increases which followed a substantially expanded federal debt fall into that group. “As a consequence of increased spending and tax cuts, the federal debt doubled from about 35 percent of GDP to about 70 percent of GDP. This in turn led to tax increases on some U.S. earners. For example, the highest earners, some of whom are entrepreneurs and substantial job creators, are now subject to tax rates that are greater than 50 percent when taking into account all federal, state, and local income and sales taxes.”
That is problematic for the economy because high tax rates reduce the incentive to work, Ohanian says. “Research shows that tax rates at this level depress economic growth by reducing the incentives to produce. This includes research by ASU’s Edward Prescott, who was co-winner of the Economics Nobel Prize in 2004. Specifically, Europe and some other countries have had tax rates at this level for many years. All of these countries have experienced a large reduction in hours worked once these high tax rates were adopted.”
In addition to high tax rates, Ohanian says that various social safety net programs (“which are certainly needed in our society”) have been structured such that they reduce the incentive to work: “For example, many forms of federal and state aid to families are reduced or removed as a participant’s income grows.” Like high tax rates, the loss of welfare benefits disincentivizes work, according to Ohanian. “These work disincentives have grown significantly in the last five years, and will grow even larger in coming years due to Affordable Care Act health insurance subsidies that depend on income.”
Ohanian does not expect the economy to return to its long-term trend 2014. “The economy in 2014 will be similar to the economy in the past few years, says Ohanian. “We haven’t had the recovery we should have, and it’s looking less likely that we will … we won’t until the economic policies that reduce people’s incentive to work are reversed.”
But Ohanian doesn’t see that happening anytime soon. So, he expects 2014 will be largely the same as 2013, which was largely the same as 2012 and 2011. “There’s a common theme running across all these years: growth far below what we would expect in a recovery -- and what the economy needs to get back to its long-run trends.”
Glassman: Stock market signals economic recovery
Shifting focus to corporate profits and the stock market reveals a very different picture: “obvious signs of recovery” according to James Glassman, managing director and senior economist at JPMorgan Chase & Co. “Despite the popular view that the U.S. economy is ‘stuck in a rut’, key leading indicators of national economic activity imply that the U.S. economic recovery is solid, only in mid-stream, and building momentum,” he says. (Follow Glassman's slides)
Like Ohanian, Glassman recognizes that 8 million jobs have not yet materialized, but he nonetheless takes an optimistic stance. “It always takes a long time to get back on our feet,” Glassman says, “but layoffs are back to normal and employment has increased by 7 million jobs and continues growing. And the federal deficit that's behind a lot of the pessimism is rapidly coming down.”
“No, it’s not as boomy a recovery as we’re used to,” Glassman acknowledges, “but that is because in usual recoveries, the housing market takes off as the Fed cuts interest rates. That hasn’t happened this time because housing was the problem to begin with.” But, he says, we’ve largely put those housing market mistakes behind us. “We’ve recovered from that damage, and the recovery we’ve seen so far has a fair amount of momentum.”
One of the leading indicators of that recovery, says Glassman, is record levels of corporate profit, which create an incentive for businesses to “think forward.” And they are, as the new expansion in capital spending and hiring indicates. “The recession didn't derail ongoing economic growth in the developing world,” he says. “That's why profits are so strong -- because half the world is transforming.”
That economic transformation in developing markets is also why the equity market is so strong, says Glassman. “Investors, trained to smell opportunity, are convinced that we’re on the path to full recovery.” The Dow Jones Industrial Average, a broad index often used as a proxy for “the stock market” hit an all-time high of 16,000 on November 21, 2013. It has risen 24 percent in the last year.
Some see rising equities as evidence that the U.S. financial markets are in a Fed-induced bubble. Glassman, however, says that the performance of the stock market makes sense given “phenomenal, never-before-seen” corporate profits. “Investors in the equity market take their cue from the performance of the business sector,” he explains. “Record corporate profits have been going on for a while. Relative to this record level of earnings in the business sector, the stock market is fairly valued.”
Will the stock market continue to rise apace? Glassman says no. “Further stock market gains are expected to be more moderate and parallel the expansion of national output and business earnings.”
Some pessimists, says Glassman, dismiss record profit margins and a booming stock market as the result of the Federal Reserve Bank printing money. Glassman says that’s simply not true. “Because the stock market is so strong but the economy still recovering, many assume that the market must be inflated by the ‘money creation’ of the Federal Reserve. This is doubtful for several reasons.”
“First, investors take their cue from the performance of business profits, and stock prices merely have been responding with some delay to the performance of businesses. Second, the Fed’s asset purchases are not the same as ‘printing money’. Third, the business sector, not the Federal Reserve, creates profits. Finally, the unusually low level of interest rates engineered by the Fed only indirectly benefits businesses, because they are able to fund most of their capital projects with funds generated internally.”
Glassman says that those who think the Fed’s so-called “quantitative easing” is tantamount to printing money “are confused about what's going on and what the Fed is doing.” He explains, “The media refer to what the Fed has been doing as quantitative easing, but the Fed never refers to it that way. Quantitative easing implies that the goal is to increase the money supply. That is not the Fed’s goal. Instead, the Fed refers to its policy as ‘large-scale asset purchases’ because its goal is to push long-term interest rates down, to incentivize investors to move from cash to long-term risk assets (like equities) and to incentivize businesses to borrow.”
Indeed, Glassman says that the Fed’s asset purchases have not increased the money supply. “As excess reserves increased from $1 trillion to $4 trillion, the monetary base surged. But the money supply did not. Why? Because those reserves were never intended to actually be loaned out into the market. The Fed was using this tool to drive down interest rates because its usual tool -- the Fed funds rate -- was already at zero.”
Point counter point
Why such divergent views between these two economists, Glassman and Ohanian? The answer is that one’s perspective on the health of the U.S. economy depends on where one looks. Focus on where the economy would have been sans recession, as Ohanian does, and the status quo indeed looks grim. Focus instead on improvements since the downturn, as Glassman does, and the view is much rosier.
Ohanian and Glassman agree on one point: the economy has not recovered yet. How and when the economy will get to recovery depends on where you look.
Bottom line
- James Glassman, managing director and senior economist at JPMorgan Chase & Co.: “Record corporate profit margins and a booming stock market send a powerful message: economic recovery has gained momentum. And it’s not because of the Fed, which contrary to what pessimists might believe, has not been propping up the economy by ‘printing money.’ We’re not recovered yet, I’d called this the fifth inning, but we’re on our way.”
- Lee Ohanian, Associate Director of the Center for the Advanced Study in Economic Efficiency at Arizona State University and economics professor at University of California, Los Angeles: “The economy in 2014 will be similar to the economy in the last few years. That economy remains depressed, with GDP per capita and employment far below the levels at which they would be had there been no recession. That is partly due to government policies that disincentivize people to work.”
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