Interview With Fred Carstensen: Austerity Leads To Recession, U.S. Losing Competitive Edge

by: Harlan Levy

Economist Fred Carstensen is a professor of economics at the University of Connecticut and executive director of UConn’s Center for Economic Analysis.

H.L.: What do you see happening in Europe?

F.C.: The Italian parliament adopted austerity measures which will avoid sovereign bankruptcy for Italy. They will not have to get a bailout – for now.

The problem is that the austerity measures being imposed in Greece, Italy, Spain, Portugal, and Ireland, and more gently in other European countries will almost certainly put the European economies in aggregate in recession. With recession over the next two years, it will be increasingly clear that the sovereign debt crisis has not been solved, because effectively, Europe is reducing its own ability to generate economic growth, and without economic growth it is unlikely they can meet their debt obligations. So we will see this debt crisis re-emerge in about two years.

H.L.: What effect will this all have on the U.S.?

F.C.: Europe is an important destination for American exports. As the European economies slow and go into recession American exports will decline. At the same time, the dollar will strengthen against the euro, which will make German exports in particular more competitive with American exports. So we will lose export markets in other parts of the world as European exporters gain price advantage. Finally, European exports to the U.S. will become more competitive with domestic American products.

The consequence of this dynamic is that this will reduce American economic growth and, with the continued depression in both residential and commercial real estate, the American economy may go into another recession. And that’s without considering our own domestic policies.

H.L.: What do you see happening with those policies?

F.C.: Right now the private sector has been steadily but very slowly adding jobs. The public sector has been steadily losing jobs. The public sector jobs we have been losing in general have higher wages and better fringe benefits, specifically health care, than the private sector jobs we are gaining. So the job creation that we are seeing is less official than it would seem.

Second, the job creation has been well below what is necessary to create jobs simply for new people coming into the workforce. So, in fact, the number people who are unemployed and those who work part-time and would like to work full-time has been steadily growing. At the current rate of job creation we will never lower the unemployment rate. In fact, it will steadily increase, even if we can move from our current level of 80,000 to 100,000 jobs created monthly to 250,000, it would still take us at least six years to restore the employment level of 2008.

Some forecasts do not anticipate job recovery to that level until 2022. That means that this Great Recession will be 14 years, which is longer than the recovery from the Great Depression, which took 13 years.

H.L.: How do you rate Congress in all this?

F.C.: Currently, Congress seems quite determined to do nothing to address the challenges we now face. Indeed, in some ways, some elements in Congress clearly would like to make things worse.

H.L.: Who would do such a thing?

F.C.: It’s clear that there is a minority, in the House of Representatives in particular, who seem willing to bring the American economy to its knees. Even if Congress had been willing to pass every element of Obama’s proposed jobs initiative, it would only have modestly addressed the current economic malaise.

The hard reality is the U.S. is consistently losing its competitive edge. We are falling behind in the quality of our education and thus in the quality of our workforce. Our transportation infrastructure is literally going to pieces and currently imposes hundreds of billions of dollars in costs on our economy.

A good example of our situation is the consequence of the recently signed free trade agreement with South Korea. We will sell Korea a lot more beef to the benefit of cattle ranchers in Montana. South Korea will sell us more automobiles, high-end TVs, more sophisticated Droid phones, and the highly complex drilling platforms that we need to explore for oil. South Korea will capture virtually all of the high-value activity. The U.S. will capture food and raw material activity.

So cattle ranchers are the winners on the U.S. side, and Samsung, LG, and the high-tech sector of South Korea are the winners. IN South Korea, 60 percent of young adults go to college. Half graduate with engineering degrees. In the U.S., less than 40 percent of young adults graduate from college, and a very small share have technical degrees.

H.L.: What should the U.S. Do?

F.C.: Clearly we need an aggressive program on infrastructure improvements and strengthen our educational system. Both are strategic investments which have huge future payoffs.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.