America’s economy will eventually run smoothly again, say two experts who spoke at the 2013 Endowment Management Forum in February, but repair will be painful and prolonged.
By John J. Lively
There's a place for economic optimism—if you take the long view toward recovery. So concluded two of the keynote speakers at NACUBO's 2013 Endowment Management Forum: Charles Ellis, author, adviser on investing, and teacher at Yale University; and A.B. Stoddard, political commentator and associate editor of The Hill. In an interview with Business Officer, Ellis and Stoddard shared observations that ranged from how to manage the glut of financial information available for decision making, to the impact of political polarization on the economy, to whether investors can rely on regulatory oversight of the markets.
We have financial information and data available in many forms. In the United States alone, we can find this information on major cable networks, numerous blogs and Web sites, and other major news outlets. Do we have so much information that we really aren't able to determine how much is important and what we really need?
ELLIS: It has always been true that we have a great deal more data than can be usefully put to work. The question really is: Do we have enough information—that is, data with a real purpose or value? For most people, most of the time, there's enormous variety and accessibility of data and information, particularly data.
When you get out to the "decision edges"—either in terms of the type of investing you would be doing, or the time horizon you want to use, or the organizations you might work with—then you're into your own kind of periphery, and I think there's no way that there's going to be enough information to be helpful when you're at the boundary lines.
STODDARD: As people become more used to having this much information, we will adjust and find a way to be informed by it. For those who aren't investors but who need to learn more about what the challenges are, I think the better informed they are, the better off everyone will be. As long as people are learning to access the information so that it informs them and educates them, I think it's a good thing. They don't have to ingest it all; they have to learn to pick and choose.
ELLIS: I'd like to make a major emphasis here: The external data and information are not nearly as important as understanding your own internal realities—who you are, and what are the realities of your financial situation, your investment situation, and the people involved in it. If you do a really good job of understanding yourself, you'll be very well protected against most of the mistakes most people make most of the time.
Take asset mix as one example. If your investment horizon is more than 15 years, you should probably be 100 percent in stocks—reduced only to the extent that it helps to defend against your internal risk of being afraid and selling when markets drop, so you can stay your course.
Sometimes I think we are moving toward overload with regard to the available data and our ability to integrate it into coherent decision making. Are things so detailed now that it's hard for the average person to understand and come to grips with them, or is that just the nature of modern life?
ELLIS: The answer to both is the same. Yes.
STODDARD: We're in a real crisis in government right now. People really need to know what paths we can take to rein in health-care costs and what a burden Medicare faces in the next decade. These are weighty policy questions that can be easily demagogued, and people can be frightened about these issues more easily than they can understand them. At this austerity precipice where we've not had to legislate and govern from before, it's incumbent upon members of both [political] parties that they learn to tell the stories of these issues more carefully and with more purpose.
"We've got this curious blend of real economic problems and real political problems, and both tend to reinforce each other."
People can go on the Internet. They can watch cable chatter at night. But, they're going to hear more about a fight than they are about the meat of the matter, and it doesn't help the debate. Those who are making these decisions at the highest levels in Washington really need to learn to be better explainers of these very important policies that are going to be changed.
It seems that years ago Medicare and Medicaid were simpler to understand, but now they are so much more complex. We have a hard time finding out what's really going on when the reality is basically described in terms of consequences, rather than in terms of the moving parts that might lead to those consequences. How could the public get at more information that would be useful for decision making?
STODDARD: The problem is that Washington is an industry made up of interest groups; there's a lobby for every interest, they're well funded, and they have loud voices. So, I think it's incumbent on the leadership-the president, the speaker of the House, the majority and minority parties in the Senate and House—to make sure that they're having a conversation with people. And, as you said, not always talking about the consequences, which, by the way, they always massage to win on their talking points. But, to really talk about the opportunities we have to change things, so there can be more optimism and less political battle about the changes that can be made. With a few compromises on both sides, a program like Medicare might be saved or even revolutionized.
Polarization is what prevents leaders from being honest when they talk about these important programs with the public. They always want to pick sides and say the other side is trying to ruin the middle class or seniors' lives and so on, but that's not honest. It's really up to the leaders to talk to people about what change is coming and why it's going to be all right.
What do you see as hopeful signs?
ELLIS: If you look backwards over the last 30 or 40 years, there were moments when you could have said the world is falling apart, we're never going to work our way out of that. Vietnam was a difficult time; the dot-com era was a difficult time; and we had oil prices changing rapidly. If you look forward, you can say, there are all kinds of terrible problems. But, you could also turn and say, no, there are some real positives. Automobiles, on average, are older than they've ever been. The housing market looks like it's turning. It looks like politicians are finally going to cooperate, and so on.
We've always lived in difficult times, and we will continue to. One part of it is that they really are difficult. But, another is that we have so much factual information from all over the world that we know about more crises than we can deal with. In years gone by, the information about many foreign problems didn't get to us so we didn't even realize they were going on. We've got to be prepared for the reality that there are always going to be lots of different kinds of difficulty.
The problem right now, which A.B. is correctly focusing on, is that we've got this curious blend of real economic problems and real political problems, and both tend to reinforce each other.
STODDARD: What I've learned from the last couple of years, as the polarization has reached such a crisis level, is that neither party is interested in taking us over a terrible cliff in a way that would be irreparable. When the moment comes to panic, people do what they have to do, but sometimes they vote no and the markets rattle. However, they let it get very close to the edge. So, while I'm heartened that we are still the envy of the world, and we are going to be responsible and not default on our debts, I see in the political parties a willingness to put it off—and to really tolerate uncertainty.
Meanwhile, why should any corporation have invested in new hires in 2012 without knowing what their taxation would be? Why would the Pentagon make plans for the cuts to come, when they were told by members of both parties that cuts would never come? There's so much uncertainty that's become engrained and we tolerate it. That, to me, is disturbing. That's the result of this gridlock—and it does have global effects.
So you're optimistic that ultimately a solution would come at least at the federal level. At the state level, however, many of NACUBO's member institutions have had reductions in public financial support, which has resulted in increased tuition. We see student loan amounts going up each year. Do you have a take on the impact all this will have?
ELLIS: From here forward, we're going to have more difficulties than normal. I think the important part of what you're getting at is that the impact on specific institutions will vary in severity substantially. We've got a national problem, but it really shows up in very specific communities, schools, and universities.
STODDARD: I, too, feel really pessimistic about the fact that state budgets are broken and it doesn't look like they will have a chance to recover for a while. We're having to do everything with less; student loan debt is enormous and is a drag on the economy; and it's a challenge to fund anything anymore. I think that this is going to be a very tough time for higher education, and we're going to have to hope that the private sector steps in as government is less able to provide what it once did.
ELLIS: One human tendency we should all guard against is saying, "We need higher returns, so let's make some changes to get more." Each institution should stay the course with the investing they know they can do well.
Is it still possible to expect that markets can reasonably be overseen by either the auditing profession or government regulators?
ELLIS: Will the auditing profession be able to handle their part of it? I think the answer is yes, and probably handle it better in the next 10 years than in the past 20 years because the profession itself has taken on much more self-discipline. Certainly, federal regulation has contributed to that process. I have a very optimistic view about the quality and the talent of the individual people who are involved in government regulation. But, given the speed and dynamics of change in the markets, complexity of legislation like Dodd-Frank, and trying to confer broad sweeping statements into specific rules, it's really difficult.
I believe it will be harder for regulators to do all the jobs that they're being charged to do. It's going to be increasingly clear that success depends on the leadership and the management of individual business organizations—not on the regulators overseeing them.
STODDARD: Watching regulation as an issue in politics, I see the regulatory landscape shift with overreach and political backlash, swinging back and forth every decade or so. What happens with the implementation of Dodd-Frank and our overall economic outlook in the next five to eight years will determine whether or not the regulatory landscape changes again.
Back to uncertainty and austerity, I hope that while we're in such a difficult time in this country we're watching what's happening in Europe. We have to stabilize our situation here to remain credible as an economic leader on the world stage. To do that, we have to be able to bring our parties together to make decisions.
I also hope the American people can begin to have a debate about what our essential services are. Everything we thought growing up would always be provided is just not going to be provided; we can no longer afford to hold on to everything that we thought we had. The government can't keep the promises that have been made to people who expected pensions. So, we need to have a debate about what essential services are, and what government can and should pay for. I don't think that debate has begun in earnest.
Any other observations you'd like to share with our members?
ELLIS: Here's a visual image that may help. Our economy-and the society that depends on our economy-has been in the equivalent of a terrible automobile accident. The good news is, we're going to live. The bad news is that getting back to full health is going to take years. And, there's going to be a series of operations, some of which will be painful, and many of which will be difficult.
Then, physical rehabilitation will take a long time. We won't enjoy the process of rebuilding our muscles. We won't enjoy the process of getting back to good health. It will be difficult, and that will be a tremendous burden on the fabric of our politics and our society. But, if we are able to stay on course—which is very hard for any society to handle, particularly one as vital, exciting, and political as ours—we will be back in good health in time, but it will be a long time.