Though the U.S. economy is in excellent shape right now, problems could be lurking on the horizon, an Aspen Institute panel generally concluded on Sunday afternoon.
The discussion on the “State of American Capitalism,” part of the institute’s McCloskey Speaker Series, featured former Federal Reserve Chair Janet Yellen and economist Kevin Warsh, a former member of the Fed’s board of governors, in conversation with Neil Irwin, senior economics correspondent for The New York Times.
The panel tackled issues related to low interest rates, inflation, quantitative easing, the global economy and even what it’s like to interview for the Fed chair position with Donald Trump, which both Yellen and Warsh did.
Irwin got the conversation started by noting that July 2019 is the 10th anniversary of the country’s current economic expansion, making it the longest in the recorded history of the United States going back to the early 1800s. He asked the panelists, however, to think back 10 years to the start of the expansion, which they both played a role in kickstarting, and the scary economic times that led up to it.
“If we were to go back in time and I could tell you we’re turning the corner and the economy’s going to grow for the next 10 years at least, I think you’d be pleasantly surprised and relieved,” Irwin said. “At the same time I think you’d also be surprised at what it has taken to achieve that — the amount of monetary easing, the years of uncertainty, what a hard slog this has been. So what do we know now that we didn’t know 10 years ago? What does the nature of this expansion teach us about how the world economy has changed?”
Yellen admitted to being surprised at the amount of monetary policy and fiscal stimulus it took to initiate a recovery.
“We know that financial crises cause great damage in an economy,” she said. “So there was reason to believe it would be a tough slog to generate a recovery, but I never would have believed at the beginning that interest rates would be at zero for seven full years.”
It was a phenomenon that may have taken Yellen by surprise, but at the same time, interest rates had been gradually declining in advanced countries around the world for at least a decade before the global economic crisis due to a number of factors, meaning lower interest rates were necessary to keep economies on track. It’s a situation that still exists today.
“I think the new normal now looks like it will be a world in which, in advanced countries, interest rates remain low for the foreseeable future,” Yellen said.
Warsh said he would have believed, 10 years later, that the economy would be in a strong expansion. He also would have believed that interest rates would be as low as they are currently are.
“I just wouldn’t have believed both of them together,” he said.
Warsh said he felt that — armed with a lot of credibility and a lot of ammunition at the time of the last crisis — the Fed did an OK job, but they still got some things wrong.
Looking ahead, he expressed concerns for the people who are running the Fed now.
“I worry, over the horizon, that this recovery will end like all do,” Warsh said. “There will be another shock. We will not be perfect forecasters of that shock, like we missed the last one, and I worry about the legacy we’re leaving.”
He cited consistently low interest rates and quantitative easing — a monetary policy in which a central bank, such as the Fed, stimulates investment and injects money into the economy by buying securities with money that didn’t previously exist.
“My intuition in 2011, ’12, ’13, ’14 was that these were good opportunities to get out of the extraordinary business of quantitative easing,” Warsh said. “That was my sense then, and I stick with it today.”
Taking a break from strict economic talk for a moment, Irwin asked the panelists what it was like to sit through an interview with President Trump for the Fed chair position. Yellen claimed to have had a good interview with Trump, citing the double-digit economic growth in China and wondering how we could have something similar in the U.S. rather than what he saw as our “anemic” growth.
“I expressed some skepticism that we would be able to achieve growth rates like that,” she said.
“No comment,” said Warsh about his own interview with Trump. “The only thing I can acknowledge in front of this large group is that it was reported by one of Neil [Irwin’s] colleagues that in my interview the president said I was a very good-looking man.”
Neither Yellen nor Warsh was chosen by Trump to head the Fed. The current chairman is Jerome Powell, a Trump nominee.
From there, the conversation moved into a discussion of whether the Fed’s apparent plan to lower interest rates again is the right move, right now.
Yellen seemed to think it was, while Warsh wondered why the Fed would raise rates in December only to lower them now. The rest of the world, he noted, takes many of its cues from the U.S. and the actions of the Fed to manage their own economies, so there should be good reasons behind our actions.
“The decisions that we make have to have a rationale that’s compelling,” he said. “So hewing to it because the stock market and bond markets want the Fed to raise this week, that’s not the right reason to go.”
Asked next if growing deficits and debt are something to be worried about, Yellen and Warsh responded with somewhat complicated answers. Right now, with interest rates as low as they are, payments on the national debt are relatively unchanged as a percentage of the economy, meaning that it’s not a glaring problem at this time. But that could change rapidly and make debt a much more considerable problem, although Warsh saw the issue as one that depends on who’s currently in charge of the country’s pursestrings.
“As far as I can tell there’s a new policy consensus in Washington, and it goes something like this,” he said. “When Democrats are in power in the White House, Republicans are for fiscal austerity and balanced budget deficits that are neutral, but the roles are reversed. When Republicans are in power, Democrats and their need for having a balanced fiscal situation seem to be lacking too, so I see a bipartisan consensus away from the kind of Economics 101 that you read and Janet taught.
“So here’s my view, for what it’s worth: We have doubled our nation’s debt over the last five-and-a-half years, but we’ve let Congress get away with it. How is that?”
Part of the reason for this is that debt interest payments, due to low rates, are lower and not higher, so Congress doesn’t have to include in its calculations the idea that rates may go back up.
“This is a dangerous phenomenon,” Warsh said.
Irwin noted the buildup of private and corporate debt in the U.S. economy and wondered if it meant that another bubble is forming like the one that burst in 2007 and triggered the global economic crisis.
Both Yellen and Warsh agreed that was definitely a possibility that concerned them, in part because much of the economic growth has gone to companies buying back shares and increasing dividends rather than re-investing that money in property, plants, equipment or software.
“We’re betting too much of the house that everything’s benign,” Warsh said. “Boy, that reminds me of the period that preceded us.”