Speech at Economic Club of Indiana’s could have effect on Indianapolis Mortgage Business
Economist signals caution in 2010 forecast
By Erika D. Smith
erika.smith@indystar.com
Martin Feldstein is the economist who went out on a limb and told the world the United States was in a recession two years ago — long before his colleagues admitted as much.
On Tuesday, Feldstein, president emeritus of the National Bureau of Economic Research and a board member of Eli Lilly and Co., did so again. He told those gathered for the Economic Club of Indiana’s luncheon that there’s a good chance an economic recovery will not happen next year. This could have sever effect on the Indianapolis Mortgage Business
“The consensus among private forecasters and forecasters from the government is that the recession is over, and that we’re now in recovery and the GDP — the gross domestic product — next year will grow at a healthy rate,” the keynote speaker said.
“But frankly,” he continued, “I have a more cautious outlook. I think 2010 will be significantly weaker than that forecast, and I think there is a substantial risk that it could run out of steam sometime during the year, and we could actually see a double dip.”
Feldstein, who also is an economics professor at Harvard University and has been an economic adviser to three presidents, went on to paint a particularly sobering picture. More than once he drew sighs from the crowd at the Indiana Convention Center.
He cited concerns about continued weakness in the economy, including the unemployment rate. He also labeled boosts to the economy, such as the Cash for Clunkers program and first-time homebuyer credit, as temporary.
Here’s what else Feldstein had to say.
Question: What do you consider fiscally responsible health-care reform, and how likely is it that such a plan will pass?
Answer: Well, I know fiscally irresponsible health-care reform when I see it, and I see it just about every day. The (Obama) administration’s proposal is to add a trillion dollars to spending over the next decade if their estimates are correct. I think, if anything, those estimates understate the costs. I find it hard to believe that that is not going to add substantially to the national debt over the coming decade. The key to paying for that . . . is $500 billion of reducing spending on Medicare. I don’t think that’s going to happen.
Q: How likely do you feel the potential for genuine tax simplification taking place in Washington?
A: Much to my amazement, I’m serving on President Obama’s economic recovery advisory board, and within it there’s a subgroup that deals with taxation, and I find myself the chairman of it. But there’s a lot of complexity in the tax law — the personal tax law — that can be changed without raising people’s taxes and without any significant redistribution.
Q: Do you expect current Fed policies to contribute to new bubbles in the economy and should the floor (on interest rates) be raised to at least 1 percent?
A: Yes to the first and no to the second. At this point, we need the low interest rates. It would frighten the markets, probably trigger increases in long-term rates, if the Fed were to move quickly to 1 percent. But I do fear that there are bubbles.
Q: Do you think that the level of current gold prices may be a bubble?
A: A lot of people say they buy gold because they want to hedge against inflation. Why? . . . We have Treasury-inflated protected securities. They provide a real hedge against inflation. In 1980, the price of gold was $400. Twenty years later, the price of gold was still $400. So, it didn’t provide any hedge at all. . . . So it’s a pure gamble.
Q: Has the consumer savings rate really gone up? Meaning, are things worse than they seem?
A: I think people are nervous about the future. They look at these large fiscal deficits, and they know that can’t be good. Despite the president’s promises about not raising taxes, they suspect that their taxes are going to go up. And that contributes in a sense to the savings. It causes them to say: “I better not spend money now because I don’t know what my income is going to be after they get finished with me.”
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Comments
the last quarter of 2009 seems promising as we have seen lots of signs of econic recovery against the massive economic recession. i hope that in 2010 all our economies would be back on track. recession really sucks.
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