Thank you very much, Stanley (Fischer), for those overly generous words. I’m reminded of what Lyndon Johnson always said when he was introduced too generously. I wish my parents had been here for that. My father would have appreciated it and my mother would have believed it.
And as a part of the international financial community, Stan, let me acknowledge and congratulate you on your remarkable service as the Governor of Israel Central Bank. Since I first met him, when he used the force of his personality, the brilliance of his rhetoric, and the power of his ideas to overcome the concerns of a young financial official about certain ideas with respect to the Middle East, I have admired and learned from Shimon Peres’ largeness of spirit.
He is an inspiration to all of us, nevermore than last night. And I have already marked my calendar for June of 2023 and the celebration of his 100th birthday. Stan asked me to speak about the American economy. I have good news. There are no certainties. There are enormous risks. There are substantial problems. But I think it is a reasonable judgment that the American economy is coming back that the recovery is going to accelerate and that America is going to continue to have the capacity for economic strength and global leadership that it has had for many years.
Let me explain why, first, in a cyclical sense, and then in a longer-term structural sense. We’ve come through a very difficult period. Economic historians will debate it and study it and explore its nuances for a very long time. But at some level, it wasn’t all that complicated.
People got much too confident. They borrowed too much. They built too much. They priced assets too highly. Then they realized that they were wrong and all of a sudden they were much less wealthy than they thought. There was much more capacity than they needed and they had much more debt than they planned on having. They all stopped spending and the economy turned down. And in one way or another, that spread too or was replicated in much of the world.
Fortunately, fortunately, President Obama and Chairman Bernanke understood this. They understood that the central irony of financial crisis is that it is caused by too much confidence, too much borrowing and too much spending, and it cannot be resolved without more confidence, more borrowing and more spending. That’s why we launched the Recovery Act, that’s why the banks rescued, that’s why monetary policy provided liquidity.
But it took time. It took time because those debts had to be worked off, that excess capacity had to diminish and confidence once shattered takes time to return. But here is the good news. While growth has been happening for nearly five years – nearly four years, it now is likely to accelerate. It’s likely to accelerate because the housing sector, which is only about 4% of the economy, but is more than half of the business cycle, has now turned decisively.
House prices nationwide are up more than 10% over the last year. And little realized is this; we need about 1.5 million new houses built every year to take account of a growing population. We had an excess of that – above that over the bubble period, but the trough below that was twice as large between 2008 and 2013. That means we are now headed for being short on housing not with too much. That can be a complicated statistical calculation or it can be a simple human observation.
Young people may like living with their parents for a little while and their parents may like having them home for a little while, but after a few years, that changes. Family formation and the demand for housing in the United State are now rising rapidly and housing will be a major private sector impetus to recovery.
So also will the fact that consumer debt service is now back to levels of almost two generation ago, while consumer wealth is pushing historic highs. And then there is this, United States is going to grow its energy production over the next several years more rapidly than any country ever has before. Nearly a $100 billion will be invested in the fracking revolution. And that doesn’t count the positive impact of low-priced energy on our manufacturing sector in increasing competitiveness. That will be a major private sector tailwind as well.
And so the private sector side of recovery is going to be gathering momentum. At the same time, the public sector, through its fiscal policies, has been a substantial headwind for some years now. After a very substantial increase in spending, that jolted the economy out of the gathering depression in 2009 and 2010, public spending has been falling rapidly and revenues have been increasing for the past three years, slowing economic growth by a percentage point or so each year. That process is now essentially over. The headwind will not be blowing again next year the way it has blown for the last three years.
And so you have rising private sector demand and no longer a public sector that is laying people off on a large scale, indeed, public employment will rise over the next year. Taking these factors together, my expectation is that barring a major shock from abroad, U.S. growth will move to the 3% range by the end of this year and will accelerate from there.
To be sure, there are questions people ask about all of this. Perhaps the largest one is what about U.S. budget deficits? There is no question that for the long run the United States requires further fiscal adjustments. But here is the good news, if Congress takes no further actions according to conservative projections, less optimistic to the ones I just made, U.S. debt to GDP ratio in 2015 will be lower than it is now and in 2020 will be lower than it is in 2015. Debt falling relative to income, this is not a situation that appears out of control in a way that it once did.
Why? Some of it is economic strength, some of it is revenue collections probably associated with a strong stock market running ahead of expectation and very importantly, very importantly, healthcare costs are traditional bugaboo of the U.S. economy. Government healthcare costs are now expected to total a trillion dollars less over the next decade than was the case just two years ago, in part, as a consequence of the measures that President Obama has introduced. And so the budget deficit situation is less serious.
I will leave to my good friend, Steve Schwarzman, whose performance in financial markets shows him to have more acumen on these matters than I, a detailed discussion of the consequences of Federal Reserve actions. Suffice it to say that even after the most difficult and rocky period of adjustment and tightening that the United States has experienced when the Federal Reserve had to tighten monetary policy after a protracted period of ease in 1994. It was a difficult period in financial markets and there maybe periods of volatility in the future.
But it does bear emphasis that the GDP statistics were strong in 1994 and very strong for the next five years and the stock market was as well. I am confident there will be challenging moments. But I believe that the momentum of this recovery will continue. And I note that inflation pressures remain quiescent in the United States, if anything, the tendency being towards decreasing inflation.
I am much less optimistic about important to other sectors of the global economy. Europe seems to me to face profound problems that go beyond the challenges of the monetary union. I am encouraged, but still vary with respect to the bold and necessary experiment that Japan has embarked on. And emerging markets will continue to emerge, but each have important challenges in the months and years ahead.
The success of the global economy will, I believe, benefit substantially from an accelerating recovery. And I believe also that the success of the global economy will benefit from a period of sustained and rapid U.S. growth that goes beyond cyclical recovery. And while I am as aware of anyone of the frustrations and problems associated with the political divisiveness and the extent of political divisiveness in Washington today, I am also mindful of five important structural advantages and real sources of structural strength that the United States has looking at the next few years.
First, demography. We, unlike the remainder of the industrialized world, will have a labor force that will grow immigration apart over the next generation. Second, we stand out in our capacity to accept, assimilate and benefit from immigration. United States was built by immigrants. Franklin Roosevelt famously reminded the Daughters of the American Revolution that in United States, we are all immigrants. We are very likely to pass historic immigration reform legislation this year. But whether we do or whether we don’t, we will benefit from the large number of people who will seek to study in the United States and to come and to work in the United States.
Third, we will benefit from a capacity for technology and entrepreneurial innovation that I believe with a possible exception of Israel is unmatched around the world. We remain, perhaps along with Israel, the only country in the world where you can raise your first $100 million before you buy your first suit. The Zuckerbergs, the Jobs, the Gates, the Bezoses and many others come naturally from the United States. Some of it is the financial system, some of it is the universities, some of it is the culture.
Fourth, we will benefit from what is happening in energy. Energy is a bigger deal for the United States economically and a smaller deal geopolitically than most people suppose. Let me be very clear, even when the United States has fully achieved energy independence, we will live in one world that will have one oil price. That price of oil will continue to depend on what happens in the Middle East. Anyone who supposes that the United States no longer has a vital interest in what happens in the Middle East, because of what happens with oil, is making a huge mistake, that is not a mistake the United States will make.
But what happens economically because of the magnitude of these resources, the export potential natural gas represents and the competitiveness potential that low cost energy represents, will be a powerful driver of economic growth in the United States for a decade or more.
And last, I believe the United States will benefit from its capacity for audacity. Whether it is bold schemes, whether it is new entrepreneurs, whether it is angry people starting their own ventures to prove themselves, Americans have had a capacity for audacity that has propelled our country forward for 200 and some years.
With these positive economic developments, we have the capacity for another generation or far more of leadership. I expect and pray that we will find the confidence. Thank you very much.
[No Q&A session for this event]
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