Dr. Irwin Kellner's talk at the Friends of the Library-sponsored event last year was so popular that they asked him to return and update listeners on the current state of the economy. Friends' President Amy Bass, said, "Maybe we'll make this an annual event." Judging from the response of the participants who crowded the room at Louie's, that would likely be a welcome decision.
Dr. Kellner, a longtime Port Washington resident, is a noted economist, professor, writer, and public policy adviser. In his typical style, he moved directly to the central question: what is the state of the economy and the outlook for the future? Kellner answered by quoting Rodney Dangerfield, who when asked, "How are you?" typically responded, "I'm okay - now." Kellner said, "The economy is okay now, but I am increasingly concerned about going forward." He explained, "As was the case a year ago, all of the levers of economic policy in the open position, so it is no surprise that the economy is growing. Interest rates are at 45-year lows. The Bush administration has cut taxes three times since taking office and government spending is soaring, perhaps for reasons we would not wish to happen. The dollar has weakened, so goods that come from overseas are more expensive relative to ours, which helps the manufacturing sector." For these reasons, Kellner opined that our economy would most likely be "okay:" for at least the next four calendar quarters.
Positive signs include low mortgage rates that have kept both commercial and residential real estate strong. In addition, inflation on average is virtually nonexistent. However, Kellner emphasized that this is on average. Some prices are rising rapidly like gasoline, energy, health care, and education, while other prices remain the same or are falling. He speculated that perhaps sometime soon some of the rising sectors will "percolate" to the other sectors. Regarding the stock market, he said, "I have a little concern that perhaps the market has come too far too soon."
Kellner's biggest concern is the lack of job growth. He said that the private sector is adding virtually no jobs; virtually all of the job growth has been in the public sector. This is in spite of the fact that profits are very high (they have gone up by about 20 percent). Kellner said, "They [the corporate policymakers] say that they are 'not sure' about the economy and tax policy. That's nonsense. How long do you have to wait?" He pointed out that the Bush administration's capital gains tax cuts provided an incentive for businesses to invest in technology, which although good for profits, but enabled them to do more with the same or fewer people. It also enabled companies to escalate the outsourcing of jobs overseas, including high-level professional and technical jobs, which Kellner saw as a real problem. To make matters worse, a lot of the technical equipment is made overseas. Kellner cautioned that unemployment figures are misleading, because they do not include those who have been so discouraged that they have dropped out of the labor force. Including these individuals, Kellner estimated, would increase the unemployment figures by about 4 percent. Also not included are those who are underemployed - persons who are available for full-time work, but can only find part-time work, or "the aerospace engineer who is driving a cab." "If you added them in," said Kellner, "the unemployment rate would be over 10 percent." Many have run out of unemployment benefits, and people are resorting to debt to stay afloat. Kellner said that if firms don't increase hiring, spending will slow, which will cause more payroll cuts and could lead to a recession.
Another major concern, said Kellner, is consumer debt, which is skyrocketing. Consumer debt has risen faster than salaries. As a percentage of income, debt is currently at 110 percent, a record level. Ten years ago consumer debt represented 85 percent of income; in 1962 it was only 30 percent. He said, "We are building up a credit situation, which keeps the economy going. But there comes a point at which there is a limit to how much you can borrow." He added that the typical family or individual does not look at the total amount of debt, but tends to look only at the cost of debt service. Right now, debt service is low because interest rates are very low; but there will come a time when people cannot sustain this kind of debt, in which case the house of cards may come down. Kellner said, "I think we are living on borrowed time."
Kellner said that this consumer debt situation is one reason why it would be difficult for the Federal Reserve to raise interest rates. In addition, raising interest rates would put jobs in jeopardy, and consumer confidence would slip. He said, "If consumers become anxious, they will cut spending, and if spending goes down, companies will cut payrolls or outsource even more. Before you know it, the economic growth will be a memory."
What does not worry Kellner much is the enormous federal budget deficit, primarily because he does not put much stock in long-term prognostications.
Turning to politics, Kellner emphasized that he endeavors to be nonpartisan in his public statements. He noted the interesting fact that since 1900, every presidential year has typically seen the economy in recession, and the incumbent party typically loses. He added, however, "No one that I know, myself included, is predicting a recession as soon as this year. But you don't actually have to be in a recession to have the economy be a major factor." He noted that the polls right now show Kerry beating Bush. He said, "If the polls continue to show that Kerry beats Bush, the stock market, if it knows its history, should not take umbrage. The economy typically does better under a Democrat than under a Republican." Kellner cited figures to prove his point, saying, "The economy grows faster, incomes more, stock market goes up more, unemployment rate is lower under a Democratic President."
He went on to delineate both sides of the political situation from an economic point of view. In favor of Bush, Kellner said that you cannot blame him for a recession that took place only two months after he took office. In Kellner's view, the recession probably would have happened anyway, and there is a chance that Gore would not have moved as quickly to cut taxes. Kellner added, "You also cannot blame Bush for the bursting of the stock market bubble; that took place before he took office." Other things that Kellner would not hold Bush responsible for are the overbuilding of the technology sector, the corporate scandals, and what happened on September 11.
Having said that, Kellner went on to say what he would recommend if he were advising the President. "I would have cut taxes more on the lower and middle income because they spend every dollar and then some. I would not have cut capital gains dividends because that loses jobs. I would extend jobless benefits, because that puts spending money into the economy." In addition, he would give more money to state and local governments. He pointed out that almost all the states are running deficits, forcing them to increase taxes and cut spending, both of which counteract any federal stimulus to the economy. Furthermore, the main source of revenues for local government is property taxes and sales taxes, which are regressive taxes. Kellner would have the government invest in education and retraining. He would also encourage activities that by nature are labor intensive, like rebuilding the infrastructure. "You can't build a bridge or a highway overseas and ship it back," he said. "It would be like the WPA, but of course we can't call it that." He would initiate policies that would discourage outsourcing of jobs overseas, although he encouraged caution with respect to passing legislation in that regard, because there could be a backlash in other countries. "In 1930 under Hoover, the government enacted the Smoot-Hawley Tariff Act in order to stimulate the economy by creating a demand for US products, and thus creating more American jobs. But similar legislation was passed in other countries, which was one of the reasons for turning the recession into the great depression." (In an aside, Kellner opined that policy errors were what turned the stock market collapse into a depression.) In a subsequent conversation with this writer, Kellner added that it is important for the government to create an environment that is friendly to entrepreneurship and small business, since small businesses create the overwhelming majority new jobs.
Kellner presented an innovative proposal to stimulate the economy. He suggested that the government send everyone who paid income tax a voucher for $300 which must be spent within 60 days, could not be used to pay down debt, and could not be saved. He said, "You get $54 billion that would go into the economy immediately."
What Kellner would not do is cut back on Social Security, as has been proposed by Alan Greenspan, the chairman of the Federal Reserve Board. (Greenspan, whom Kellner referred to as "the master of circumlocution" recently recommended measures that would reduce future Social Security benefits to retirees, including raising the ages at which retirement benefits are paid and changing the inflation measure used to index the payments.) "In the first place," said Kellner, "Projections of deficit aren't worth the paper they are written on. Secondly, if we were in a deficit, to say that people on Social Security should help to reduce this deficit is to say that they are contributing to that deficit and that they are overly compensated for cost of living." Kellner continued by pointing out that, in his view, the system is creating a huge surplus, and cited figures to support this view. Regarding the CPI used to calculate Social Security cost-of-living increases, Kellner pointed out that items used by seniors tend to be rising higher than the overall cost of living (most glaring example: health care costs). What Kellner suggested with regard to Social Security is to suspend the tax (a very regressive one) for a couple of months. That would put money into people's hands immediately.
The lively question-and-answer period was far ranging. One of the questioners asked Kellner, who serves as Chair of County Executive Thomas Suozzi's Council of Economic Advisors, to comment on the local economy. He said, "We are doing much, much better in terms of job creation than the country as a whole. We added 11,300 jobs here in Nassau and Suffolk County. That is a sizable fraction of all the jobs in the country." He pointed out that Suozzi has a balanced budget, a surplus, and has achieved three bond-rating upgrades. "The big problem," Kellner said, "is all the unfounded mandates that come from Albany." The County Executive and the Nassau County legislators are trying to convince Albany to pay for what they enact. Kellner added that the U.S. Tennis Open and the U.S. Golf Open have brought a boost to our local economy, and real estate is booming.
Dr. Kellner is the chief economist for CBS MarketWatch and the North Fork Bancorporation. He is also the Augustus B. Weller Distinguished Chair of Economics at Hofstra University. He received his BA and MA from Brooklyn College, and completed his Ph.D. at the New School for Social Research. He and his family have been residents of Port Washington for over 30 years. He has been active in local affairs and has served for many years as a member of the Port Washington North Village Planning Board. He was the Village's first Commissioner of Historic Landmarks. Beginning his career as a financial journalist with Business Week, he worked in the banking industry for many years, serving as Chief Economist with Chase Manhattan Bank and its predecessors, Chemical and Manufacturers Hanover. When he can spare the time, he enjoys golfing.
Amy Bass encouraged everyone to come out and vote for the library budget on Tuesday, April 13 at Landmark. Polls are open from 7 a.m. to 9 p.m. She also reminded everyone to save Friday, May 14 for the annual book and author luncheon, which this year will feature James Traub, author of The Devil's Playground: A Century of Fun and Profit in Times Square.