Stephen Moore, gives an overview of the global economy and the general state of economic growth in the United States while reflecting on politics and the campaign season ahead. (32 min.)
Stephen Moore Interview Full Text
Wade: This is a huge call today. We have over 300 people registered for our call today, and I think it’s in part, Steven, your growing popularity with our team. And it’s obviously the topics of the day. This is a point in American society where we are equally fixated on economics for fear and hope I think. And so we have just a really fantastic things to talk about, and we’re honored to have you here. I think we’ll start the recording and let’s get right into it. Okay, Steven?
Stephen: Well, that sounds great, Wade, thanks for having me again, and I’ll just start with the headline in the Wall Street Journal today, which I know you read, and I’m sure most of the listeners have. It says, “Europe signals global gloom,” can’t be much more depressing than that. The jobs number came out on Friday for the U.S., and as everyone knows we had a grand total of zero new jobs. And that comes on top of the last three months, which have been pretty close to zero as well. In fact, in the last four months we’ve created very close to zero net new jobs at a time when it should be in what was supposed to be a summer of recovery.
So what I’m saying is I think there’s no question – people always ask me, Wade, is this a double dip recession. I don’t think there’s any question this is a double dip jobs recession when you’ve got 9.1 percent unemployment. When you include people who can’t find full-time work, you’re closer to 15 percent. A lot of people are working in part-time jobs, but it’s hard to feed your family and pay the mortgage if you’re only working 20 hours a week. So it’s a pretty lousy jobs picture right now, and of course that all ties into the speech that President Obama is gonna give Thursday. This will be a big speech. I think it’s the last opportunity make a big economic speech about changing the direction of things.
From what I’m hearing from my sources over the weekend is that the President will come out with a plan that will be somewhere in the neighborhood of maybe $300 to $500 billion in additional stimulus spending and tax cuts. And that will include things like an infrastructure bank to build more roads and bridges and public works projects. It will include an extension of the payroll tax cut. As you know, we have a payroll tax cut in place right now that will cut two percentage points from the payroll tax that the workers pay.
And the President’s gonna want another year extension of that and then he’ll have some small business tax cuts, and unemployment insurance and training. And that will be the kind of theme that President Obama is gonna say look, we need this spending, we need to come together to get jobs back. Wade, I don’t think Republicans are gonna go for that. I think they’re going to say look, we’ve tried this before that this sounds a lot like the first stimulus plan. So I don’t anticipate there’s gonna be a lot of agreement on that.
And I think the next couple of months in Washington is going to be a butting of heads of how do we stimulate the economy, because I don’t think there’s any question that some kind of pick me up for the economic is necessary to prevent the possibility of a double dip recession. So that’s kind of the context that’s going on in Washington, and we can talk a little bit more about that in the Q&A. But the other point I wanted to make just very quickly is what’s happening in Europe right now. I think Europe is a kind of flashing alarm, Wade, about what could happen in the United States if we don’t get our fiscal situation under control.
Essentially, Europe’s story, as everyone knows, is a story of debt, and it’s a story of way too much debt financed entitlement programs, income redistribution programs. Wade, I think you wrote a book over ten years ago that this was gonna happen. What was the title of your book, Wade, again?
Wade: It was New Century New Deal.
Stephen: That was a great book, and I remember when you and I first met you had just come out with that book. And it warned about what happens if these countries in Europe and of course the United States don’t get their old age programs under control. I think the central point I wanted to make to people, everyone knows what’s going on in Europe with this debt crisis. But the central point I wanted to make is that this is driven by two things: (1) politicians who won’t be serious about getting programs under control. And that’s true in Europe and it’s also unfortunately true in the United States.
And it’s driven by the second factor of demographics, and there’s a saying and I think it’s in your book that demographics is destiny. And we are moving to a situation in the United, and Europe is a little bit ahead of us, where over the course of the next 15 to 20 years, we’re gonna have 75 million baby boomers retiring. Those are 75 million people who are today working for the most part and paying taxes who in 15 to 20 years time won’t be paying taxes and working they’ll be collecting benefits. Now we can see that this train is gonna crash, right? And the reason Europe is important, Wade, is I think they’re about five or six years ahead of us on the train track.
So I just think pay attention as investors to whether the United States and countries like Germany and France and Italy and Spain get serious about making cuts in these kinds of programs that are simply becoming unaffordable because in a lot of these countries you’re moving towards a situation where you only have essentially two workers for every one person collecting these benefits, and it’s simply not sustainable. And so that’s kind of my message is this is a real time of choosing for the United States and Europe about – there’s two possibilities in Europe right now.
Possibility number one is that the politicians do the right thing, and they start to take the steps to get these programs under control, and it doesn’t take huge steps. You’ve got to raise the retirement age. You’ve got to maybe change the benefits structures of the program so that maybe Warren Buffets of the world don’t get a Social Security check. It’s not that hard to do, but the point I make, Wade, is that if they don’t do this, if they don’t make these wise choices now, then the bomb vigilantes, the bomb markets are gonna force these choices on countries like Germany and France and Spain and eventually the United States.
And as we’ve seen from some of these countries that’s a much more painful way to go about it. So that’s my quick message right now, and, Wade, I’m happy to open up questions from you or anyone on the line.
Wade: Steven, let’s stay in Europe for a second. We have the European union now is I think 10.1 or 10.2 unemployment. And obviously of those countries that have tried to move most radically toward a balanced budget process, let’s just say Ireland maybe, England, Spain, and I guess throw Italy in that, all but England in fact have unemployment that’s well above that average.
Wade: So the non-stimulus countries seem to be fairing the worst from an unemployment standpoint. So what are the lessons for us?
Stephen: Well, I think one of the lessons is it matters a lot how you reduce a deficit. I think debt is not an unmitigated evil. Everyone knows this in their private life, and you’ve got investors and business owners and people who work for corporations. Debt is a perfectly sound way to finance investment. It depends on what you’re getting for the debt, and I don’t know a lot about the particulars of the countries that you’re talking about. But I do know in general these countries have tried to deal in part with these crises by raising taxes.
And I don’t see that as the most viable way of dealing with the crisis because that just sucks money out of the investment portfolios and it sucks money out of the pockets of the people in Europe. I think it’s much more important to deal with the long-term programs that I mentioned. There are healthcare programs. There are income retirement programs. There are welfare programs. And, Wade, that’s not what’s happening in Europe so much. And it’s interesting because people keep pointing to Germany as kind of the one country that is running counter to the trend, and the Germany economy has done actually quite well much better in the U.S. and most other countries.
But the problem that Europe has is that these countries, because of the EU and because of the Euro, they are inextricably tied together. So if Greece falls or Spain falls or Portugal falls it affects directly how countries – it has a contamination effect, and that’s the problem for a lot of these European countries. And it’s one reason to be a little bit worried about Germany because it’s hard for Germany to delink from what’s happening in the rest of these European nations.
Wade: You are a practitioner of a very difficult science because it’s always a moving laboratory economics. So you’ve touched upon what you think the President is going to recommend. What would be your recommendations? In a perfect world, what would’ve been the four things on your agenda that you would have put into place in 2009 when he inherited t his?
Stephen: Well, first of all, I know a lot of people think that I’m, you know, unmedicated fan of the Republicans and I’m not. I think Republicans got us into this crisis in the first place, Wade, so for the Democrats who listen to this show and this broadcast, I wanted them to know I think both parties are responsible for this crisis. I think Republicans through a lot of their big spending policies in the 2000s under Bush kind of launched this crisis, and their inability to deal with Fannie Mae and Freddie Mac and the housing bubble. But I do think that a lot of programs that Obama has tried to put in place haven’t worked very well. I am not a Kanzian. I kind of reject that model.
I had a piece in the Wall Street Journal a week ago Friday called Reaganomics vs. Obamanomics, and the only point I was making in that piece was, look, both Reagan and Obama inherited great economic crises no question about it. Everybody remembers the 70s and the huge decline in stock prices. Stocks fell by about 60 to 70 percent in real value in the 70s early 80s. Then we had the housing crisis, and the point I made in this piece was when Reagan – I think Reagan for the most part got it right – we cut tax rates to make stimulate more investment. We obviously cut the inflation rate under Reagan, and at that point Paul Volker was running the fed.
We’ve got regulations off the backs of businesses, and at this stage of the Reagan expansion, just to put it in context where we are today vs. where we were at that stage, the economy was growing in 1983 and 84 at six percent. And we were producing about 250,000 jobs a month. Right now what have we got, less than one percent growth and almost zero job growth. So I just think that the proof of the pudding is in the eating, and the program hasn’t worked all that well in my opinion. And I think spending as a stimulus just doesn’t work, Wade. It just takes money from the private sector and gives it to the government, and there’s no net increase in consumption or investment.
What should we do now? Very quickly I think we should blow up the tax system and start over again, and let’s have a pro-investments, pro-capital formulation tax code. By the way it gets rid a lot of these stupid deductions and credits that benefit rich people, so Warren Buffett pays more in taxes. I think the President took one big step, a very hopeful step, on Friday when he announced he was going to suspend some of these EPA rules that are just job killers right now at a time when the chemical industry and the mining industry and the oil industry want to create jobs but they’re being held back by the EPA. So I think deregulating would be a big thing.
I think cutting taxes, and I think putting in place – and this is where I think the President might be doing the right thing – putting in place a long-term plan, Wade, that brings this huge debt down. And that means one or two trillion dollars over the next five or six years.
Wade: One of the things that I have read that I’d love to hear your thoughts on is when we look at the last 13 or so recessions, none of them have been deleveraging recessions except for the great depression, right? And subsequent to Reagan’s term, which each of the recoveries after that one each one has been slower and less satisfying.
Stephen: That’s true.
Wade: I’ve seen a bunch of stuff on that one of them is demographics. So our society has grown older since that period of time, and the rest of the world has obviously caught up dramatically to us at 30 years.
Wade: And each of these times has been more of a jobless recovery than the last.
Wade: Because a lot of these jobs don’t recover. They recover somewhere else. They recover in Mexico. They recover in India. They recover in China.
Wade: What’s your thoughts on that?
Stephen: Right. I agree with the premise. Mostly I do, Wade. I think it’s a little bit of an excuse that politicians use for not doing the right thing by saying this is – I just finished reading this book by Ken Rogoff, This Time is Different, and Ken who I respect a lot, one of the great economists in the country from Harvard, says look it’s gonna take five years to get out of this. And this is an asset bubble burst sting, and in fact I’m gonna be on CNN Friday debating him on this. Look, my view is this isn’t different. All these recessions they always have a diff – I mean every recession is somewhat different.
But, look, if you do the right thing, and you get the right policies in place you can get out of these much faster. And we’ve wasted two-and-a-half years, in my opinion of getting out of this because we didn’t do anything to encourage business investment and business spending. As you know, Wade, I’m a supply sider, it’s all on the supply side. How do you get businesses to increase productivity in growth and output? And that just simply hasn’t happened, and the worry is people are now saying well this has similarities. Ken says this has similarities to the great depression. That’s a very scary outlook to say it’s gonna take ten years to get out of this.
I don’t believe that. I think the right policy prescriptions could get us out of this in less than 18 months.
Wade: You mentioned that you are forecasting Obama’s plan an infrastructure bank, and I read somewhere there’s at least a million unemployed construction workers, right? And then that obviously ties into your other point that you made, which is housing, so in my mind you clearly have in Europe and not so much in the Untied and in Japan obviously. We all face these huge long-term entitlement problems that we’re not facing up to, and we’ll talk about that in a second. But right now we all have this huge gap in capacity vs. consumption, and the United States I can’t help but think this tremendous overlay of housing and how it weighs on Americans’ minds must still be at its core.
What’s the solution for moving this housing from the walking dead to something that moves us toward consumption and gets it off the table?
Stephen: One of the points I just made on Fox News before we did this interview was that I mentioned there’s this kind of negative feedback loop that we’re in on economy. We’re not creating jobs, and we’re not creating higher wages, so therefore, people have less money. Obviously, they don’t have a job they can’t pay their mortgage. If they can’t pay their mortgage, more people foreclose, right, and then housing prices drop and that reduces construction and then more people lose their jobs. It’s this kind of negative feedback loop that we haven’t been able to get out of now for almost three years. It’s interesting about housing.
I’m sure that there are a lot of people who listen to this are much more experts than I am on the market, but it is interesting to look at the housing market and demographics. Wade, because of the housing depression we’ve been in for the last over three years, there’s been almost no net new housing built in this country for three-and-a-half years. That’s pretty amazing, isn’t it? Count me as a fool, but I do think real estate is a market where it’s gone pretty close to as low as it can go. And also if we’re in a period of slow growth and maybe rising prices because of fed policies, real estate is not a bad way to be invested. It’s a pretty good hedge against low growth and inflation.
So I’m not as dower on real estate and housing as other people just because it’s hard to imagine given the big losses that have already taken place and the fact that we’re gonna have to man from housing, from immigrants to entrances into the workforce, we’re gonna have to resupply our housing. You can’t go for years and years without rebuilding it, and so I’m not quite as dower on housing as maybe others are.
Wade: I don’t know the answer, but I think in these leverage situations, any of these asset bubbles, the key is how does the system address the real value of the resulting asset?
Wade: So if 40 percent of people have housing stock that is below their mortgage value, which is one statistic I recall having seen, then how do we flush that out? How do we move beyond that? And whether that’s Fannie Mae and Freddie Mack writing it down, whether that’s banks writing it down, I think there’s got to be some part of the solution is there.
Stephen: It’s a great question, and this recession is very easy to pinpoint what’s going on here. We’re having a pricing reevaluation, a massive reevaluation of housing and other types of assets, right? And I believe when you asked me, for example, what the President did and what we should have done, and this started under Bush and it’s continued under Obama, is that we continue to not let the housing market reach its bottom, right? We keep trying to push people to pay – we give them money to pay their mortgages and so on – and I believe hindsight is 20/20. I believe we would be in better shape in the housing market if we just let the market crash.
Let it find its bottom and that might’ve meant in some markets 40 percent reduction in values, and then let us climb out of it. I think if we had let that happen, we’d be in an upstage now in housing, but we’ve sort of delayed the day of reckoning in housing. And that’s why this housing recession goes on and on and on, but look, if you get jobs back, and you get some confidence in this economy and business is spending again, housing will snap back. And you could see another resumption of the kind of bull market in houses that we saw in the 90s through 2005.
Wade: Although immigration has obviously slowed over the last two-and-a-half years it hasn’t stop. I think our net population growth is still in that two percent range is it not?
Stephen: We’re a little bit above replacement level fertility, and by the way this is an important point. People don’t in your business, Wade, in my opinion, don’t pay close enough attention to demographics. You and I think alike on this. I think immigration is one of the great assets to this country because it does increase demand for housing and goods and services. Of course immigrants obviously it’s not just a cliché they come in, they work hard, they fill niches in the labor market. A lot of our brain power comes from immigrants, and this is one big advantage that we have. The fact that we’re still a melting pot is a big advantage that we have over countries like China and Indian and Europe especially.
Those countries many of them are losing population where we’re gaining it through these young minds and young strong bodies that are real assets. And then you include the fact that our birth rate is a little bit harder than Europe’s is, and you can understand why it’s easier to be more optimistic about the United States than Europe.
Wade: One of my friends, Bill Gross, from Pimco in the last week or so threw in the towel and admitted how wrong he’d been on the bond vigilantes. Today the tenure treasury is at 1.98.
Stephen: It’s amazing.
Wade: So –
Stephen: Can I just say one thing, Wade?
Stephen: I raise my hand and say I was wrong too. I was with him. This is the thing. I was afraid you were gonna ask me this because this is the one thing that completely has me scratching my head. How is it that these bonds prices are so low, and I just don’t have a great explanation for it because I do think that there’s a bubble in this bond market right now. But I’ve been saying that for two years and I’ve been wrong.
Wade: So if that’s the case, do we not have a sustained risk of deflation in this society?
Stephen: That’s a tough question. First of all, on your point about bond prices, bond prices in real terms are negative right now. Have you ever seen that in your life, Wade, when you take into account inflation? It’s amazing. Essentially, people are giving the government money in exchange for ten years getting less back. So it obviously signals extreme risk aversion right now. It’s the gloom that the Wall Street Journal pointed out on the front page today, and the question is why the bomb vigilantes haven’t revolted yet.
And all I can say about this is that if they do – if and/or when they do, as we can see from what’s happened in Iceland, and what’s happened in Ireland, and what’s happened in Greece, and these other countries, once these markets snap, they snap with a ferocious vengeance. So that’s all I can say is I just can’t see why people are investing in ten-year treasuries at 1.98 percent interest rates. Your question about deflation is a good one. This is the big debate that’s going on. I don’t believe it. I don’t believe in deflation, (a) because I do not believe that Ben Ranacke will allow deflation.
He believes that the lowering of prices in the 1930s is what caused the depression. (b) look at gold prices, Wade. Gold is I think today I can’t – I don’t have a monitor right in front of me I saw it up to $1870.00. In the last two-and-a-half years gold prices have gone from $900.00 to $1870.00. That signals two things – one again, incredible risk aversion, and (2) people are losing faith in paper currencies, whether it’s the Euro, whether it’s the Yen, whether it’s the greenback. And so they’re investing in gold and silver and other commodities as a hedge obviously against potential coming inflation. So I would toss this question back to you, or others who might be in the deflation camp, if the future is suggesting deflation in prices, then why is it that gold keeps rising in price?
Wade: It’s a conundrum.
Stephen: It is. It is. I don’t think there’s a good answer.
Wade: I cannot justify the price of gold other than a flight to some – other than – which could be correct or not correct – but out of paranoia. Other than that I can’t understand it. I don’t want to spend a lot of time because we’re gonna have unfortunately over the next year-and-a-half way more time than we want, but we’ve had like three debates now among those aspiring to the Presidency on the Republican side.
Stephen: Uh huh.
Wade: Clearly the President doesn’t look invincible. What’s your thoughts?
Stephen: The President if you would have asked me six months ago I would’ve said he was pretty close to being invincible. Now he looks very much vulnerable, and his numbers are lousy now. It’s interesting about Barack Obama, the American people really like Barack Obama, and they really want him to succeed. And yet his numbers are falling because the program hasn’t worked very well, and people are getting impatient about where the economy is headed. So (a) is he [inaudible]? Absolutely yes. No president has since Franklin Roosevelt was re-elected with an unemployment rate above eight percent, and we’re above nine percent. And his own budget suggests that we’re gonna be above nine percent on Election Day. And so that makes him extremely vulnerable.
The only thing that can save Barack Obama is a strong recovery over the next 12 months where people feel like things are getting better. And if that happens he’ll get re-elected, or (b) the total incompetence of the Republican party, Wade. This Republican party they don’t have a strong candidate right now. Right now it looks like a race between Mitt Romney and Rick Perry. Both of them have assets but both of them have flaws. One is Rick Perry you never know what he’s gonna say next, and Mitt Romney who you know and I know very well personally, and I like the man tremendously as a person, I think he’s a great American, he is charismatically challenged.
He’s very stiff and he has trouble communicating and connecting with the American people, in the way that Bill Clinton did or Barack Obama did or that Ronald Reagan did. So I say right now it’s a toss up this election.
Wade: Let’s go back to one thing. You get to do the counterpoint. So the President finishes his speech on Wednesday night or Thursday night I forgot now, Thursday night, I guess, you get to do the response. What would you say?
Stephen: (1) stop the spending and stop the debt. We just can’t keep running up these spending bills. I think that will calm the market if people feel like there’s some fiscal control in Washington. (2) we’ve got to get very serious about making our tax system competitive. We can’t go forward with 35 percent corporate tax rate when we’re the highest in the world and putting our companies in a 15 or 20 percentage point disadvantage. I think looking at the regulations that have happened under this administration whether it’s EPA or the National Labor Relations Board or the FDA. I could go through so many examples of where the administration is just killing jobs.
A great example – the folks haven’t looked at my piece on Green Energy vs. Real Energy, it was in Friday’s Wall Street Journal, where I just pointed out this is such a great story. I just want to take a minute to tell people about it.
Wade: Oh, no, go ahead.
Stephen: This story about the Marcellus Shale, are you familiar with the Marcella Shale?
Wade: Well, I own land in the North Dakota oil boom.
Stephen: Okay. So you know what I’m talking about. You’ve got it in North Dakota, you’ve got it in Texas, but this is an amazing story what’s happening in Pennsylvania and West Virginia right now. Central Pennsylvania and towns like Wheeling, West Virginia, which are depressed towns, this is the rush belt of America we’re talking about, that are absolutely booming right now because they’re sitting atop this incredible gift from God, which is like 50 years worth of natural gas. And we can get it at an incredibly cheap price now. Look at what’s happening the national gas prices have actually fallen over the last three years as the oil price has gone up. Because of the fracking process we now can be literally in natural gas because of what you’ve got in North Dakota, in Pennsylvania, West Virginia, Texas.
We can be the Saudi Arabia of energy over the next century if we out energy policies right. And if I’m Barak Obama I’m like go to it, get the stuff. You’ve got Exxon in the Gulf of Mexico which in the last few years has made three major finds of oil bigger than they’ve ever found in the Gulf of Mexico. That’s all being held up by Obama’s people and the EPA and Interior Department and so on. That makes no sense. You want to create jobs, you know what, Wade, what industries in America over the last four years has created the most jobs?
Wade: I thought it was healthcare but I could be wrong.
Stephen: Well, healthcare is up there. It might be healthcare, but right up there with healthcare is the oil and gas industry. And because we’ve had these amazing finds and because we’ve $80.00 to $100.00 barrel of oil. So that’s a perfect example. All the Obama Administration should say is go to it guys, get that natural resource. Every time we’re able to pull a barrel of oil out of the Gulf of Mexico that’s one less barrel that we have to import from Saudi Arabia. That’s a big deal. And it’s a perfect example of if we had kind of a laissez-faire I’m not talking about polluting the environment.
Obviously we want to make sure there aren’t accidents, and clean drinking water, but there’s ways of doing this without putting the environment in jeopardy. And boy would that make a difference. You could literally create hundreds of thousands of jobs through this kind of America First energy policy. It’s just one example of what could be done that’s not happening.
Wade: I didn’t hear you say something that would address unemployment in the short-run.
Stephen: You know what, I’m not sure there is a lot you can do in the very short-run. There’s no silver bullet here. I’m sorry to say that, Wade, but I don’t see –
Wade: I agree with you.
Wade: I agree with you. I wish there were but I don’t believe there is.
Stephen: Confidence has a lot to do with it, and if you put in place – I think – I’m not trying to sound like a Republican here, but I do think there’s been a bit of a loss of confidence in this President’s ability to deal with the crisis. He’s sounding and looking unfortunately more and more like Jimmy Carter everyday, and that’s obviously not the direction we want to go. So I think a resumption of the kind of confidence that the economy is on the right track could help a lot and that’s psychological.
Wade: It can’t overrun the facts on the ground as they say.
Wade: Well, Steven, we’ve taken up 30 minutes. It’s been fantastic as always, and we will hear from you in October.
Stephen: Okay. I’ll talk to you guys soon, thanks so much you have a great week, bye.