Strong government leadership would boost economy

Economist Mike Knetter, Ph.D., foresees another year of steady, but slow, growth in 2013.

Knetter, who is the president of the University of Wisconsin Foundation, served as a senior staff economist for the Council of Economic Advisors for former Presidents George H.W. Bush and Bill Clinton.

Knetter presents his macroeconomic overview every year at the Northern Trust Economic Trends Breakfast presented by BizTimes Media.

BizTimes executive editor Steve Jagler interviewed Knetter in advance of the breakfast. The following are excerpts from that interview.

BizTimes: As the saying goes, before you can know where you’re going, you need to know where you’ve been. So, what are your main takeaways from 2012? Was it a year of steady, but slow growth?

Knetter: “Yes, 2012 growth was slower than I expected, but it gathered momentum over the course of the year.”

BizTimes: OK, now let’s bottom-line 2013. What kind of GDP growth are we likely to see, and what will be the pace/timing of that growth?

Knetter: “I’m looking for much of the same with a slightly better year overall than 2012 on the real GDP growth front. The main risks to this forecast remain largely the same. Primarily, our political leaders still seem unable to develop and agree upon a durable solution to our fiscal imbalances. Three years ago, I supported near-term stimulus but made the point then that it needed to be paired with long-term adjustments to assure fiscal sustainability into the future in order to be truly effective. Over the past three years, we have made no significant long-term adjustments to our tax or entitlement programs. This both weakened the near-term effect of stimulus and has left us with a greater challenge in resolving the underlying issue.

“In addition, Europe’s ongoing fiscal problems threaten the economies of the Eurozone and by extension the U.S. While political risk remains in the fragile regimes in the Middle East, disruption there has less economic impact today than it did several years ago as a result of increased supply of energy in the U.S.”

BizTimes: Last year, you predicted that the national unemployment rate would fall to below 8 percent by the end of 2012, and you were spot on. What do you think the national unemployment rate will do in 2013?

Knetter: “Although the economy grew less than I expected, unemployment fell on forecast. That means more people left the workforce (or failed to enter) than expected. We probably won’t see that happen two years in a row. So, I think unemployment will end the year around 7 percent.”

BizTimes: What did you make of the emergency bill passed by Congress on New Year’s Day to avoid the fiscal cliff?

Knetter: “It was the weakest possible resolution of the cliff issue at the last moment. What else would we expect from political leaders today? It is very sad that they are unable to communicate and work together to solve serious mounting problems. Of course, maybe their poor performance is simply mirroring what the electorate seems to want, given our tastes in media commentary.”

BizTimes: Large corporations continue to have strong balance sheets and record cash reserves. What needs to happen to get them off the sidelines and investing for growth?

Knetter: “A fiscal plan that restores long-term confidence in the direction of the country on issues that will shape returns to capital. Building a new plant or making other major investments is a serious long-term bet. By not making those investments today, business leaders are preserving their options for the day when the future is more certain. If the resolution is an adverse one, I expect you will see much of the money invested outside the U.S.”

BizTimes: Wisconsin’s economy continues to have a strong reliance on manufacturing. Will that be an asset in 2013?

Knetter: “I think that will be a slight positive in 2013. The dollar remains relatively weak against many major currencies–inexplicably so against the Euro. This will help our manufacturers in the tradable goods sector. While upstarts in developing economies are still a competitive force to be reckoned with, we have advantages over the manufacturers in developed countries.”

BizTimes: What sectors of the economy are poised for growth in 2013 and why? What sectors of the economy are poised for contraction in 2013 and why?

Knetter: “I think our manufacturing, mining and agricultural sectors will do fine again this coming year thanks to the weaker dollar. The rebound in energy is having real effects in many regions. The United States will continue to be a leader in innovative technologies, particularly in the information economy, but this does not affect a large number of workers. The financial sector is weakened, and I do not see a major turnaround on the horizon. Governments will be hard-pressed to expand employment or wages, so that sector will be a drag on the economy, as well.

“Education and health care remain big areas of opportunity for the U.S. economy. Cost pressures and affordability concerns may drive fundamental changes in American higher education in the coming decades. Our international dominance in the higher education sector is at risk, and I believe that our country’s leadership there has been central to our overall economic leadership. For generations now, the best and brightest from around the world have come to America for advanced education and research. Many of them have remained here, contributing greatly to our economic potential. We are at risk of losing that dominance in the next two decades as our institutions struggle with their own funding crises due to competing government priorities and inability of middle class families to finance ever-increasing tuition.

“On the bright side, necessity can be the mother of invention and innovation. The funding crisis in higher education may finally drive significant application of technology to more widely distribute basic knowledge at a lower cost and higher quality. Whether the governance structures that prevail in higher education will find an innovative solution to this crisis remains unclear. But there is real opportunity here, and seizing it may be important to maintaining our international leadership in higher education.

“Health care is such a large part of the economy with myriad regulations that it remains an area of opportunity for improvement. Reforming in ways that strengthen incentives for supply of the right kind of health care services and moderate demand for procedures that have poor cost-benefit ratios remains an opportunity for the U.S.

“Making big improvements in higher education and health care would have huge long-term payoffs for the U.S. that might offset some of the current drag we face from our fiscal problems. Failing to address these challenges will compound our national problems over time.”

BizTimes: What is your outlook for inflation?

Knetter: “Inflation will remain tame again this year, but I have longer-term concerns due to the expansion of credit by the Fed.”

BizTimes: What is your outlook for the value of the U.S. dollar?

Knetter: “I have no good reason to think it will change substantially unless something dramatic happens in Europe.”

BizTimes: Will the U.S. economy face some headwinds with contractions in the world economy, i.e. the Euro Zone and China?

Knetter: “Yes, that remains the number two risk to my forecast.”

BizTimes: Finally, are you worried at all about the nation falling into a double-dip recession?

Knetter: “I don’t think that will happen this year and if it did, let’s face it, it’s not a long way down to technical recession anyway. We continue to underperform economically due to a failure of national leadership to resolve important fiscal and related issues.”

BizTimes: Are there any other macro-economic factors that our readers should keep their eyes on for 2013?

Knetter: “The developed economies of the world are struggling with a once-in-a-generation crisis. The immediate crisis of 2008-09 was moderated by heavy fiscal and monetary stimulus. Policy has continued to be very expansionary now for several years, with quite meager outcomes. In the meantime, the national debt has continued to mount quickly and central banks have made unprecedented purchases of private assets to keep markets afloat.

“Whether and how we restore long-term fiscal and monetary stability is the central issue of the day. It is largely in the hands of political leaders to get this resolved. I am not sure our national political leaders are up to the job, but this is the important thing to watch right now.”

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