Mark Zandi is chief economist of the economic research and consulting firm Moody’s Analytics. He is also the author of Financial Shock, an exposé of the financial crisis. His forthcoming book, Paying the Price, provides a roadmap for meeting the nation’s fiscal challenges.
H.L.: How upsetting to the U.S. and global economies is the turmoil in Egypt, Tunisia, Yemen, and any other countries that follow their lead?
M.Z.: It’s premature to draw any conclusions. I don’t know. I assume if the turmoil spills over into much of the Middle East it would be a problem for the global economy, but it’s much too early to think that that is what’s going to happen here.
H.L.: What do you think of the dramatic negative stock market reaction on Friday?
M.Z.: Stocks react to information that’s often important and a lot of times not.
I don’t think it’s important from a macroeconomic perspective. It’s obviously important to people in the market, but I don’t think it has any meaningful broader economic meaning, at least not yet. The market has been going pretty much straight up for six months. It would be surprising if it didn’t correct at some point in time.
Fundamentally, the economy is in good shape. Corporate earnings are strong. Interest rates are low. Prospects are good. Valuations are reasonable. I don’t see any reason the market should go down for any extended period of time. It may correct, but I don’t think there’s a reason to be nervous about the stock market.
H.L.: What’s your outlook for the economy in 2011 and 2012?
M.Z.: I’m optimistic; I think growth will accelerate and create more jobs, and unemployment will decline. The unemployment rate today is somewhere between 9.5 and 10 percent, and I expect it to be close to 8 percent by the end of 2012.
There are many reasons for optimism. But fundamentally it’s because American companies are very profitable, and their balance sheets are strong. It’s no longer a question of can they invest and hire more aggressively. It’s a question of are they willing. I expect they’ll become more willing as we move through 2011.
H.L.: Talk a bit more about the jobs picture.
M.Z.: The economy created 1.35 million private sector jobs in 2010 from December to December, and I expect job growth in 2011 to double that — somewhere between 2.5 million and 3 million. That’s enough to bring down unemployment in a meaningful way.
H.L.: Is the housing situation stuck in the mud?
M.Z.: Yes. The weak link in the economy remains housing. Home sales, construction, and house prices are still moribund and very weak. I would say the market is stabilizing but at very low levels. I do expect more house price declines this year, because there is still a couple of million loans in the foreclosure process that will go to a distressed sale during the year, and that will put downward pressure on house prices.
Housing remains a threat to the economy. I think it’s the most significant threat to the economy at this point. I think the economy will make its way through and digest the house price declines, but that’s the key risk.
H.L.: Will Congress do anything on the deficit the next two years, or are we in for a continuing stalemate over Republican efforts to slash spending and Democrats intent on spending now and cutting later? If so, will that be a substantial threat to the economy?
M.Z.: I don’t think there will be a significant amount of progress in addressing our fiscal problems in the next two years. I think our deficit will shrink in the next two years because of the better economy, and I’m hopeful that policy-makers will use the next two years to develop an intellectual consensus about what to do, and then when the next president takes office there will be legislation, and we’lll meaningfully address our fiscal problems.
H.L.: What’s the correct policy on spending and deficit reduction?
M.Z.: My view is that roughly three fourths of the deficit reduction should come through spending restraint and one quarter through tax increases. On the tax side, I think we nee to focus on reducing tax expenditures like the mortgage interest deduction, the property tax deduction. If we reduce those expenditures we could even lowermarginal tax rates.
On the spending side I would focus on two things: One is cutting discretionary non-defense spending, which the president has proposed, and the Republicans in Congress seem amenable to. I’d also focus onSocial Security, and I’d move it from being an entitlement to being an insurance policy so that your benefits depend on your financial situation.
H.L.: What should we do about Medicare.?
M.Z.: That’s clearly a serious problem, but I would wait to address that until after we do the things I just proposed. It’s a very difficult problem that requires a look at the health care system, and I don’t think anyone’s prepared to do that in the next several years,and I don’t think we need to. We can redress that a few years down the road.