Adolfo Laurenti is deputy chief economist at Chicago-based financial services firm Mesirow Financial. Previously he was an associate economist at LaSalle Bank/ABNAmro.
Harlan Levy: What do the Europeans think of the situation in Congress, and how much will it damage U.S. financial credibility?
Adolfo Laurenti: We have contacts overseas all the time. Actually I just returned from a two-week tour of Europe. I was in Berlin, London, Paris, and Stockholm. We talked with central bankers, policy-makers, and other economists, and they really are having a hard time understanding why the U.S. is self-inflicting so much damage for apparently no reason.
I would not say our reputation is much damaged in the sense that nobody questioned the ability of the United States to pay our debt. It's not a problem of solvency, but it's proof that our budget process is broken, and the trust not in the United States but in the political leaders of the country has clearly been diminished.
In global terms, the real damage is not much in terms of economic growth. The real damage is increased uncertainty. Other countries that were on the verge of posting a better performance are somewhat pushed back into a wait-and-see position because of the huge uncertainty that the United States has unexpectedly imposed.
There is one silver lining to what we just experienced in the U.S.: We proved to the world that the topics of fiscal consolidation, controlling our spending, and keeping our overall debt in check are taken so seriously in the U.S, so seriously that we are willing to undergo a political crisis in order to deal with the issues.
I wonder if countries like Greece, Italy, Portugal, Ireland, Belgium and you can continue the list had a debt ceiling and sequestration in place 10 or 15 years ago how much better off they would have been today instead of suffering a sovereign debt crisis that has been very damaging to their economies.
The bottom line is that, yes, it did some damage to the U.S., but it also helped to keep our fiscal condition in check, which is a good thing.
H.L.: The extension of the debt limit goes until Feb. 7, and the word among Tea Party members and far-right conservatives is that the fight should resume again. What do you think of that?
A.L.: You mean, "We enjoyed it so much this time around, why not do it again?" This just highlights my uneasiness with the solution that has been found, which to my eyes is not a solution at all.
We just keep kicking the can down the road. The political calculation is that either side in the political spectrum will come to the next conflict in January somewhat weaker than in the last two weeks, so one of the two sides will be able to extract better conditions. This seems crazy to me. It's far easier to find solutions to our problems for good. We cannot go through shutdown threats every two months.
I do not like the short-term nature of this solution. We need a long-term fix to the problems. We cannot be hostages of the political processes and the changing political landscape every two months.
H.L.: So what would be an adequate solution acceptable to both Republicans and Democrats, if there is one?
A.L.: The solution was in the cards with the Simpson-Bowles Commission. It was bipartisan and not an easy compromise, but it had the backing of a majority of Republicans on the committee and delivered what were the requests of the Obama administration.
We can debate the specific items, but the reason that was a good framework was that it was a long-term solution. It took seriously some of the challenges we face in the short term and challenges we face in the long term.
It was very careful not to cut spending in the short term, because the economy is still somewhat fragile. In the long term it was suggesting a comprehensive reform of the tax system. There was a reduction of the actual tax rates but a broadening of the base by reducing tax deductions. There were some proposals for controlling spending on health care. There were some adjustments to inflation-indexed programs like Social Security. It was not perfect. We can discuss each individual item, but overall it was moving in the right direction, and it was both short-term and long-term-and balanced.
H.L.: What do you see in the newest economic data, or as much as was released in light of the government shutdown?
A.L.: I see a lot of uncertainty. We had a few of the regional Federal Reserve surveys coming in weaker than expected. Some actually were stronger than expected. Initial claims for unemployment benefits have been volatile, and we had some distortions in California, so the data was not reliable. And the retail data suggested some major effects from the government situation. The bottom line is that these numbers seem to be all over the map.
My sense is that the economy is just muddling through. I'm not sure it's going anywhere. All these contradictory data are just showing how much uncertainty is still in the system. And this is somewhat holding back hiring and investment.
H.L.: What about 2014?
A.L.: If you had asked me before this debacle, I would have said the economy was accelerating and that 2014 would be a year of surprising growth. The reason is that we some pent-up demand in business spending. We see progressive improvement in housing and very gradual improvement in the job market. All three were boding well for the future up to a month ago. Now I don't know if and how quickly we can regain momentum, and that's because of the uncertainty on our political front.
H.L.: How do you analyze housing?
A.L.: On housing, clearly the Federal Reserve is concerned that we may lose momentum in housing. That's one of the reasons they decided to postpone tapering off its monthly purchases of bonds and securities.
The second thing is that we are now running 10 to 12 percent increases in home prices over a year ago, and keeping in mind how deeply we lost values during the recession, prices still seem to be too hot right now. I would expect home price appreciation will slow down in 2014, because the rise has been a little excessive, even thought we fell behind in the recession.
But once again, the biggest story is the uncertainty created by the political system's debacle.