Archives: Global economic outlook, Chicago style

Global economic outlook, Chicago style
January 20, 2003
By Jeff Meredith

CHICAGO - In light of the terrorism threat and so many corporate accounting scandals, economist David Hale finds it amazing that the US economy grew at the rate it did during 2002.

And while that was a modest three percent (the economy grew four percent during the third quarter, 1.3 percent during the second quarter, and five percent during the first quarter), Hale maintains that the US is still the world economy's "growth locomotive."

"2002 was a year of three percent growth in the face of really awesome and unprecedented shocks, shocks that really have no parallel in my working career. But we achieved this because the American economy does have fundamental strengths. It does have a very dynamic and productive business sector, it does have potential for growth when times are good," said Hale.

"We've had tremendous drives in productivity, we've had lots of restructuring. This will at some point in the year ahead set the stage for better profit growth. As we get better profit growth, that in turn will set the stage finally for a recovery in capital spending, a reversal of the factor which caused the downturn in the first place."

Hale, a leading economist often consulted by the Federal Reserve and the Department of Treasury, made his remarks during the Strategic Management Association's 18th Annual Economic Forecast. He was joined by Greg Mount, Bank One's deputy chief economist and senior international economist. The two broke with the stodginess that can make such economic forecasting last an eternity and revealed a wit that kept the audience engaged.

"I fear that Ross Perot may be on 'Larry King' again soon," said Mount, when one audience member asked about the federal government's return to deficit spending. When another attendee asked what new technology could be a driving force for increased capital spending, Mount quipped, "It will not be clones."

Mount said he doesn't think people will be euphoric again about technology. He noted that it takes the US economy an extraordinarily long amount of time to become accustomed to new technology - the banking sector, for example, is still experiencing structural change from the use of ATM machines.

Mount's talk mainly focused upon the tremendous productivity gains seen by the US economy and discussed how the current economic recovery resembles that which followed the 1990-1991 recession.

"We had a jobless recovery, the one that tossed the first President Bush out of office. This President [George W.] Bush appears to be learning from those mistakes with a stimulus package during a recovery, which isn't necessarily good economic sense," said Mount. "I saw it as him announcing he's running for re-election," Mount added to some laughter.

President Bush's $674 billion tax cut plan has tax-free dividends at its core. Economists have estimated that more than half the benefits of eliminating the tax on stock dividends would flow to only five percent of taxpayers. Hale acknowledged that the proposal is a concession to upper income groups.

"There's no doubt that there's an awareness, a recognition that the Bush program is not going to be a program for reducing inequality. Because of the nature of our tax system, because of the nature of how we pay taxes, it's impossible to cut a package for the stock market without helping high-income people," said Hale.

"The administration has chosen to take the route of promoting the stock market. So when you're promoting the stock market, by definition you're helping well-to-do people. There will be a great debate about that, the Democrats will challenge it. My sense right now is that Bush will get maybe not everything, but much of what he wants. In 2004, we'll be debating it again - if we get a Democratic administration in 2005, then you'll change the focus to Social Security tax and new kinds of public spending ... it's a different agenda," said Hale.

Hale praised the fast track negotiating authority which Congress gave President Bush over the summer, making it easier for him to negotiate international trade deals without interference. Every president since Gerald Ford has had fast track authority, but President Clinton failed to revive it after it expired in 1994, mainly due to Democratic opposition. Hale ripped Chicago's congressional delegation for not playing a "positive role" in the passage of the bill, stating that most were "allied with the protectionists."

"Under American law, we can only really have effective trade talks if the American president enjoys this authority. Other countries insist on this because they don't want to negotiate trade agreements with the US that might end up being changed by the Congress in the months, weeks that follow," said Hale.

"The [congressional] delegation of this city, despite the fact we consider Chicago to be a global city, is very firmly aligned with the most dark and reactionary forces of this economy. If you do have any contact with your members of Congress, I do hope you'll criticize them ... this delegation is a very, very severe liability to the city and a real major problem in terms of the creation of effective national and global trade policy," Hale added.

Hale's harsh criticism of Illinois lawmakers this year actually was an improvement over his 2002 economic forecast remarks when he said the Chicago congressional delegation "are the allies of terrorists themselves."

While many thought the globalization movement was dead in the water after the 1999 shutdown of WTO meetings in Seattle and the events of 9/11, Hale said that November 201 trade talks in Qatar revived it. Qatar is a tiny Arab nation that didn't offer the specter of protesters. While it is home to Al-Jazeera, the oft-proclaimed Arab CNN, the country's government restricts freedom of assembly and freedom of speech.

"The governments of the world decided to guarantee that we'd have successful trade talks ... to show to the world that the terrorists could not win," said Hale, maintaining a certain blindness to civil society's opposition and its inability to even present its views to the WTO during its last major gathering.

Both Mount and Hale forecasted improved capital spending in 2003 as corporate profits pick up. While American consumers have been saddled with debt, they said that the home refinancing movement allowed them to clear away bills and find new spending power. Mount is not as concerned about consumers as he is with corporate indebtedness in 2003.

"The housing market does not look like it's a bubble ... this refinance boom really went into reducing their debt services burden, and increasing their ability to spend. These consumers are not stupid, they did a very good play on these low interest rates," said Mount. "Corporate indebtedness, that is another problem - particularly in the high tech sectors. Right now, corporate indebtedness is the number one problem corporations are facing."

Hale devoted some time to the possibility of war with Iraq and how it could impact the economy. He said a quick, decisive military victory could spur business confidence and drive the price of oil down significantly.

"The best guess of most informed people is the war will last three weeks, four weeks. It will be a decisive, clear-cut American victory and the Americans will take over. The price of oil will collapse ... giving us a better economy in the second and third quarter of this year," said Hale, who stressed that "all of this is highly speculative."