Get Used to a Lower Speed Limit
A 20-year veteran journalist with The Economist, Zanny Minton Beddoes projects a solid U.S. economic recovery later this year, with a 2 percent growth rate now considered respectable. A NACUBO annual meeting keynoter, she also sees a transformational period for higher education that is just beginning to gear up.
By Bob Shea
In spite of continuing high unemployment numbers, the U.S. household balance sheet has improved and the ingredients are in place for a more solid economic recovery this year, says Zanny Minton Beddoes, economics editor for The Economist. In that position, she oversees all the publication's American and global economics coverage and manages a team of writers from around the world.
Minton Beddoes is the winner of two of the highest honors in her field: a 2012 Gerald Loeb Award for economic journalism and the "Journalist of the Year" honor for financial journalism, awarded by the Wincott Foundation. She joined The Economist in 1994 after spending two years at the International Monetary Fund. Earlier, she worked as an adviser to the minister of finance in Poland. She has written extensively about the American economy and international financial policy, and has testified before Congress on the introduction of the euro.
A frequent TV and radio commentator, Minton Beddoes is a member of the Research Advisory Board of the Committee for Economic Development and has been a trustee of the Carnegie Endowment for International Peace. She holds an undergraduate degree from Oxford University and a master's degree from the Kennedy School of Government at Harvard University.
Minton Beddoes will share her perspective on U.S. and global economics during her keynote address at the NACUBO 2014 Annual Meeting in Seattle. A recent conversation previews her thinking on these topics.
What is your perspective on the United States economy, both in the near term and farther into the future?
In recent years, most forecasters have begun the year feeling rather optimistic that the recovery was about to accelerate, but as the year progressed, those expectations were dashed. Once again, 2014 began amid great optimism that there was oomph in the U.S. economy, that there was acceleration, and that finally the shadows of the financial crisis were being put behind us. But, with the very harsh winter and absolutely paltry first quarter GDP growth—which may be revised down even further—basically, the economy didn't grow.
The real question now is how much of the most recent weakness is temporary and weather-related—or is history repeating itself, with the hoped-for and expected acceleration not happening.
There are several reasons to believe that the underlying economy is strengthening, and that the recovery is solid—not a kind of 1980s "morning in America" style growth rate, but reasonably solid.
One is that the U.S. household balance sheet clearly has improved dramatically and U.S. companies are flush with cash, so the impact of 2008 really has receded. As we've learned from the work of various academics, almost always after these financial crises we experience several years of subpar growth as balance sheets are cleaned up. That's indeed what happened, and we're now getting beyond that hangover. That's one real reason for optimism.
What other reason do you see?
The economy is no longer affected by tightening fiscal policy. Last year, a combination of tax increases and spending cuts, particularly the sequester, dragged the economy down by something like 1.75 percent of GDP. Now, there is a little bit of tightening, but it's on the order of about half a percent of GDP, so government fiscal policy isn't dragging down the economy as much. As a result, we're likely to have higher growth for the similar level of private dynamism.
Those are two powerful reasons why I think one would expect growth to be better this year.
Are there factors we should be watching out for?
Some uncertainties remain. Here's one: Is the labor market really strengthening? We're not going to get a durable, strong recovery until we reach a virtuous cycle of greater job growth, stronger incomes, more spending, and more investment. I think we're seeing some signs of that now with a reasonably healthy jobs figure.
We still see a very high long-term unemployment rate and some very disappointing numbers on labor force participation, with the share of people in the workforce at a 30-year low. That has something to do with structural shifts, as well as the aftermath of the crisis. In a recession, people who have been out of work for a while give up looking for work and drop out of the labor force. But, as the economy improves, many of them might start looking again. So, we would expect some turnaround in those figures as the economy strengthens.
One reason to believe that the economy is strengthening is that the U.S. household balance sheet clearly has improved dramatically and U.S. companies are flush with cash, so the impact of 2008 really has receded.
But, I think there's something else going on, which is a more secular change. We're in the middle of a very big technological transition. Some people who have lost their jobs and don't readily have the skills for getting new ones are disproportionately leaving the labor force. And, looking at the past few years, the rates of people on disability have risen dramatically.
So, there are some underlying structural shifts as well as some cyclical shifts. And, hopefully, as the economy strengthens, the latter of those will improve.
What about Federal Reserve policy?
Just as very loose monetary policy and the Fed's quantitative easing program underpinned the economy-and certainly asset prices—in the past few years, now there's a lot of uncertainty about what happens if interest rates rise too high, too quickly—which could create a big headwind. I don't really expect that; the Fed has been pretty clear that it's on a very predictable and gradual course toward reducing its bond purchases. And, it's been pretty clear that it's not in any hurry to raise interest rates.
Federal Reserve Chair Janet Yellen is very focused on making sure that a strong recovery is in place. She's very focused on unemployment, and she's not going to precipitously raise interest rates. So, I think the monetary policy will move slowly and predictably.
Putting that together with the under-lying balance sheet improvement and the economy's natural tendency to grow, we have the ingredients for a more solid recovery this year. I think the really dismal GDP performance of the first quarter was an aberration that was largely weather-related.
You said you didn't see a return to the growth rates of the early '80s. How do you see the growth for the next few years?
I gave that as an example because in the early 1980s, a very deep recession was followed by a swift bounce back—what's called a V-shaped recovery. This recovery has not really been V-shaped; it's been more of a U. With the secular changes I mentioned earlier taking place, the underlying speed limit of the economy is slower than it used to be.
Two things determine how fast the economy can grow. One is the number of workers and the amount of labor input; the second is how productive people are. The baby boom generation is aging, and so the growth rate of the U.S. labor force is slowing. That, in and of itself, will drag down the potential growth rate. In addition, productivity has not done all that well in recent years. While productivity accelerated in the late 1990s and again early in the past decade, more recently, we haven't seen that. We are entering an era where 2 percent growth is perfectly respectable.
What about the gridlock in the U.S. Congress? How might it damage the country and, specifically, higher education?
Gridlock is problematic in two senses. In the first, brinksmanship results in policies that are damaging. The obvious example is the sequester, which, nearly everyone would agree, is a daft way to conduct fiscal policy, and clearly has damaged higher education through the slashing of basic science projects, NIH budgets, and so forth. I don't think anyone believes this was a terribly good way to run budgets.
The other sense is the opportunity cost of not getting anything done. A number of policies, reforms, and improvements need to be made, whether it's immigration reform, an infrastructure bill, or disability reform. So, we have outright costs, but more importantly, we have the opportunity costs of not getting those important things done.
What is so negative about sequestration?
There's increasing acknowledgment that we're just at the beginning of this wave that some call the second industrial revolution, or second machine age.
If you have to cut costs in your department, do you cut X percent across the board, or do you look for the most sensible place to cut? You do the latter, right? Sequestration is a barmy way to go, and actually, it's very costly. If you look at the broad gamut of the U.S. budget, there's mandatory spending, which includes programs like Social Security or unemployment insurance, and then there's discretionary spending. Mandatory spending is completely off limits anyway. This sequester was only on discretionary spending, and then very poorly thought through about how to do it within that limited category.
The result is a disproportionate cut to things that are enormously important for future growth. I think everyone agrees that investment in basic research and development is really central for future productivity. So, it's very shortsighted to cut it. There's a very clear link between investment in basic research today, and productivity and innovation tomorrow.
Looking beyond our borders, where do you see the global economy, and our country's place in that economy?
The United States is still the world's biggest economy, although China is catching up fast. If you measure on the basis of purchasing power parity, it may already be as big as America's economy. The biggest single uncertainty over the world economy is actually what is going on in China. As the world's second biggest economy, it has underpinned a huge amount of global growth, partly because of its voracious appetite for commodities. It's also a central part of the emerging-economy supply chain.
The single biggest risk facing the world economy is the chance of China's economy slowing very fast and suffering a hard landing. People worry about it because there's been an explosion of credit, an explosion of leverage in China's shadow banking sector, and that could all end in a bust. There's a concern that China has basically fueled its investment-led growth with massive increases in credit, and as they try and change their growth model—from one based on investments to one based more on consumption—that's never an easy transition to make. More often than not, it ends in a very sharp reduction in growth.
I'm sure the China banking system holds an awful lot of bad debt, but it doesn't necessarily mean a huge financial crisis or an absolute collapse in growth. In the end, the Chinese government has the capacity to underwrite a huge amount of bad debt. And, even if there is a very nasty financial mess, they can effectively clean it up and underwrite it, because they have the resources to do that. It's likely that we will see headlines about corporate failures and shadow bank failures in China, which will result in a lot of worry about how much the economy is slowing. But, I'm not convinced that there has to be a hard landing of a scale that will fell the global economy.
From your vantage point, what is the economic outlook for American higher education?
I'm absolutely not an expert on higher education, but it seems to me that this is an industry at the very beginning of a period of transformation after—in some cases—centuries of operating with basically the same model. Three important waves of change are hitting the industry.
One is the dramatic change in the nature of the skills needed for the modern economy. Over the last 30 years we've had the computer revolution and the IT revolution. But, there's increasing acknowledgment that we're just at the beginning of this wave that some call the second industrial revolution, or second machine age. The combination of computer power, big data, and so forth, are likely to wreak many more disruptive changes ahead. So, the necessary skills base is changing.
At the same time, the technological revolution is also changing the supply side of higher education, MOOCs [massive open online courses] being the obvious example. The capacity to provide high-quality online education at near-zero marginal cost is, again, a huge change.
The third wave is the growing recognition that the existing business model of annual cost increases so dramatically outpacing the CPI [consumer price index] is really not sustainable.
Put those three together, and we have very powerful disruptive forces. I don't think they mean it's going to be the end of universities, but it does mean that, over the next few years, you will see big changes in different segments of that market. And, I expect it will be more complicated than simply MOOCs taking over everything or MOOCs making no difference at all. The result will be somewhere in between, with business models changing, existing players adapting, and much more of a combination of online-based and face-to-face learning. The interesting thing is what is going to emerge by the end of the transformation.
But, those three factors are the major drivers, and we are closer to the beginning than the end of this very big transformation.
It's not unlike the disruptive change in any number of industries, my own included—the newspaper business continues to go through a massive period of disruption as technology and other factors press for a new business model.
Higher education is under scrutiny from the Obama administration, the Congress, and the states with regard to improving quality and increasing graduation rates. What are your thoughts about the administration's proposed ratings system, and how it relates to the market determining where value is added in American higher education?
I'm going to answer that in a general way, which is that markets need transparency to function effectively. So, I'm all in favor of more metrics and means of comparison and things that improve transparency. While there are always risks that any metric is misunderstood or too simplistic, they are outweighed by the fact that basically more information is better.
The New York Fed recently issued a report indicating that student debt levels now exceed those of credit card debt. What impact might that have on the U.S. economy?
Student debt levels are high. However, they're a relatively small share of overall credit and do not represent another subprime crisis in the making.
What is likely to happen is that the scale of debt weighing on individuals will affect their ability to buy houses, to consume, and to buy other things. In that sense, it will also weigh on the economy; and, therefore, it does have macro consequences. The prospect of taking on debt is a deterrent to some people about going to a university at all, or it may influence students to drop out. For the people who eventually go through school—graduating or not—and are laden with those debts, it does affect their financial decisions throughout their lives.
You are known as someone who can talk about economics and markets in an accessible way. What advice would you have for our members—who are all in the finance, accounting, and budgeting space—on how to communicate effectively to a broad group of constituents?
What I try to do is to be clear and avoid jargon. There's no reason for anything to be presented in a complicated way. Everything can be explained simply. For me, the important thing is to try and understand something myself, because it's hard to explain a concept to anybody else if you don't really understand it yourself.
There's an old adage about journalism, which is to simplify, then exaggerate. The simplify bit is certainly absolutely crucial. You ought to be able to explain pretty much anything in easily accessible terms.
BOB SHEA is the senior fellow for finance and campus management at NACUBO.