Ed Lotterman doesn’t think either the sky or the U.S. economy is going to fall anytime soon. But Lotterman, whose “Real World Economics” column has been published by the Idaho Statesman since 2006, says he is less optimistic about the economy than he was five years ago.
A former economist for the Federal Reserve, Lotterman traveled in November from St. Paul, Minn., where he teaches at nearby Augsburg College in Minneapolis, to Boise to speak at the Boise Metro Chamber of Commerce’s annual economic-outlook conference. He met with Statesman readers and journalists and with local economists. He cited problems threatening America’s economic growth, including a stock market bubble, skyrocketing higher education costs and political turmoil at home and abroad. He fielded questions.
Q: Home prices have recovered nationwide since the Great Recession. How much confidence do you have in the housing market?
A: I think we’re putting air back in the market. The Case-Shiller (Home Price Index) has a pretty consistent index across 20 metro areas. If you look where the index stands relative to say, August 2007, prices in places like Las Vegas may have overshot on the way down, but I think they’ve come up too far to be sustainable.
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Q: Do you see bubbles forming in other markets?
A: There certainly is a bubble in farmland prices. I think there’s a bubble in U.S. stock prices. This is based on a gut sense, but the market is too high, because there is very cheap money and, culturally, we’ve got this this crazy search for yield.
Q: Has the Federal Reserve driven us that way by suppressing interest rates?
A: It has. And they say there’s no inflation, and there isn’t much. But they are ignoring this inflation of asset prices, and that can really be distorting. It certainly is in agriculture, and I think it is in terms of the stock market.
Q: You mentioned that you aren’t a doom-and-gloom economist, yet you are more pessimistic than you used to be. Why is that?
A: I don’t think we’ll see a repeat of1929, but I think it’s entirely possible that we go into another recession or a situation like Japan’s of very slow growth, or we slump sideways. You’ve heard that world won’t end with a bang, it will end with a whimper? I think the chances of the whimper are higher than they were five years ago.
Q: Employment is improving. Wages are growing slowly. Why the pessimism?
A: First, China’s economy is not going to collapse, but it has to stop to catch its breath. We’re already seeing some of that, but I think it’s going to be more severe than people expect, and it’s hard for China’s economy to take a breather without there being problems.
Second, the Euro as currently structured is a failure, and I’m not sure how they can unwind that without Europe going through a wrenching readjustment.
Third, there are political problems in Europe. You have that generation that lived through the war, and they lived through the hunger winters of 1945 and ‘46 that agreed that we have to make sacrifices so that we have a good food supply. That consensus has broken down. The 25-and-35-year-olds don’t have the immediacy that motivated their 60-year-old parents. I think Europe is in for a rough patch.
Q: So, problems in China and Europe could reverse our recovery?
A: Yes. It’s not that we’ll be in a catastrophic situation, but we could be in for a chronic slump. The Japanese GDP has trended sideways for 25 years. I think we could have a decade of that here, or perhaps even two. If that decade happens when your kids are between the age of 25 and 45, it’s going to make a big difference in their lives.
Q: What industry growth or policy change could prevent that slump?
A: I think we should invest in infrastructure. We’re like a South Bronx landlord that’s depreciating on his properties. We aren’t replacing infrastructure like roads and sewers and bridges and schools as fast as they are wearing out. We’re just living off depreciation.
I think we could restore the level of public funds at state universities to the proportion of costs to what it was when I was a student and the state of Minnesota picked up 65 percent of my education in the 1970s. For my son in the 1990s, it was more like 40 percent, and now it’s more like 30 percent in Minnesota.
Q: Are policymakers helping or hurting the economy?
A: I think that the president, but especially Congress, is a source of uncertainty and instability. Every time Congress gets mired in a budgetary mess, it’s announcing to the world that our political system is dysfunctional. When we have these perennial budget crises and brinksmanship, that undermines confidence in financial markets and in households and among investors.
Q: How do economists see the presidential field?
A: I wrote a column awhile ago about how there’s a higher proportion of Republican economists now than at any time in my professional life. There’s all of these bright, solid, respected Republican economists, but who do the Republican candidates go to? Shysters and charlatans. There are very good Republican economists, but none of them are being called upon.
Q: Are any of the presidential candidates particularly strong on economics?
A: John Kasich. He’s not suffering from delusions. If push came to shove, Marco Rubio would be more reasonable than the rest of the Republican field, or certainly more than Ted Cruz or Donald Trump. Jeb Bush would be pragmatic. I don’t see him as much different than Mitt Romney. To get through Iowa and New Hampshire, and to break out of a pack of candidates, they have to pander so much to the wackiest elements that they box themselves in, policy-wise.
Q: How about the Democratic candidates?
A: I think Bernie Sanders is a little delusional. I don’t think Hillary Clinton is a great economist, I think she’s realistic, and I think she’d have realistic advisers. I think Sanders will force Clinton to support a higher minimum wage that I think most Democratic economists think would be imprudent.
Q: Some look to cities like Seattle that created a $15-an-hour minimum wage as a template for other communities. In several years, when we have more data, what lessons, good or bad, will Seattle’s experiment teach us?
A: For Seattle, is $15 enough to have an impact on employment? Probably not. The prevailing wages are already high enough in the Puget Sound that a $15 minimum wage in Seattle might not affect employment as much as, say, a $10 minimum wage in Lincoln, Nebraska.
Lotterman’s grade for the Federal Reserve for recession-era policy shifts: “B or B-minus.”
Q: How are Idaho sugar beet farmers tied to Midwestern corn growers?
A: The U.S. sugar policy is to keep prices somewhat above free-market prices by restricting imports, so domestic prices are above world prices. Sugar producers are well organized politically, but the real political support for the sugar program comes from corn producers. As long as sugar is, say, four cents a pound higher than it would be at wholesale level, that makes high-fructose corn sweetener more competitive to a bakery, to a soft drink bottler.
Q: So the corn lobby protects Idaho sugar beet producers?
A: To get through the Iowa caucuses, candidates don’t want to upset the corn producers by saying you want to get rid of the ethanol mandate, and you don’t want to say you want to do away with the sugar program.