Renowned economist Dr. Peter Morici talks with the Opportunist’s Managing Editor Leslie Stone about his career, what he thinks about the state of the U.S. economy and who he would like to see at the helm of the Federal Reserve Bank.
An expert on international economics and agreements, macroeconomics and industrial policy, Dr. Peter Morici has advised many leading corporations and governments on trade and regulatory issues. He serves on the Reuters macroeconomic forecasting panel, and his views are frequently featured on CNN, Reuters Financial Network, Bloomberg News, CNBC, ABC, Fox, National Public Radio and the BBC, as well as in columns and opinion pages of newspapers and online news portals both at home and abroad. “I have spent the last 10 years or more of my career as a ‘public intellectual’ writing op-eds that are published quite regularly in newspapers,” Morici says. “I enjoy writing about the American economy and its place in the world, bringing together my knowledge of international law and economics and an understanding of the Washington political scene. It’s ludicrous to talk about public policy economics without talking about politics because all that matters is what you can really get done.”
Opportunist: You have been outspoken in your criticism of President Obama’s economic strategy. Why do you think the country’s recovery has been so slow?
Dr. Morici: Obama’s strategy is not an absolute failure. The country is stabilized but, at best, the U.S. economy is mediocre. I’m very happy to see the recovery is surviving, especially with these higher taxes and so forth, but I sure would like to see it do better … and I think it could do a lot better. When you look at the Reagan years, for example, you will see that the country experienced double-digit inflation followed by double-digit unemployment and two recessions. In spite of that, President Reagan managed a growth rate better than 5 percent—at the same point in recovery that we are currently in. Obama’s growth rate is slightly more than 2 percent.
Opportunist: What are the distinct differences between the two administration’s handling of the country’s economic crisis?
Dr. Morici: The difference is Obama is heavily regulating the economy and taxing wealth, which basically taxes investment and jobs creation. And all of these terribly difficult regulations are causing American businesses to go to friendlier, more hospitable pastures. Also, he campaigned about doing something about the currency issue but he has not followed through on that. There are four major economies in the world: Japan, China, Germany and the United States, and other economies have currency policies that unofficially undervalue their economies and underprice their exports. Unfortunately, those measures cost Americans jobs and growth. Without those unfair currency policies—even with the current regulations that are in place—the U.S. economy would be growing at 4 percent. If we didn’t have all the regulations, the U.S. economy would be growing at a rate of 5 or 6 percent, and unemployment would only be about 5 percent. There would still be lots of people looking for work, but there wouldn’t be so many sitting on the sidelines.
Opportunist: What, if anything, can we do with the U.S. Tax Code to improve our economy?
Dr. Morici: I don’t believe it’s possible to have meaningful income tax reform with Mr. Obama in the White House because he’s so bent on income redistribution. How much tax do we collect? And how flat and simple is the tax structure? Mr. Obama wants lots of taxes and a progressive rate structure and a complex code so that he can subsidize pet projects and the behavior that he likes. He will deny he is a redistributionist and that he wants a complex code, but as Chrysler’s Lee Iacocca was fond of saying: ‘You’re known by your deeds.’
Opportunist: Are you in favor of a return to the Gold Standard for the U.S. dollar? If so, how would that affect the euro and the Chinese yuan?
Dr. Morici: Returning to the Gold Standard is like returning to mules and water power. It’s an absurd proposal. It’s about the best idea since reopening the Erie Canal.
Opportunist: How did you end up choosing this career path?
Dr. Morici: I was introduced to economics at 16 while still in high school, but I never intended to be an economist. I went to college to become a high school math teacher. When I was registering for classes and went to sign up for sociology, I discovered that class was closed so I said ‘put me in economics.’ I was in class about a month when my professor pulled me aside and asked if I wanted to get a PhD. He said he knew I was born for economics by the third time I opened my mouth. I finished my undergraduate work and received my PhD in Economics at age 25 from the State University of New York at Albany. After graduation, I taught at Augsburg College in Minneapolis for a few years. It was a very nice place, but not consistent with my ambitions.
Opportunist: What were your ambitions?
Dr. Morici: My parents wanted me to teach high school social studies, and my mother couldn’t understand why I would want a PhD in economics. So, one day I put a textbook on the dining room table and said, ‘You want me to teach this book, but I want to be the guy who writes this book.’ I wanted to be like the person I admired most, although he was certainly much more liberal than I ever was, and that was John Kenneth Galbraith.
So I left Minnesota and came to Washington, D.C. I got a job at the Federal Energy Administration, a precursor to the Dept. of Energy, where I spent 18 months before going to work for the National Planning Association. The NPA was a public policy think tank like the Brookings Institution. It was around for about 65 years—from the time of the Great Depression into this millennium—and while there I managed their research program and got to write about international issues. But the stuff I did there wasn’t nearly as spicy as what I do now.
Opportunist: When did you return to academic life?
Dr. Morici: At the age of 39, actually just a few months shy of 40, I went back to academic life and became an economics professor at the University of Maine. I also served as the director of their Canadian-American Center, the largest Canadian studies program in the country, dedicated to the Canadian economy, and wrote about NAFTA and the U.S. trade agreements in Canada and Mexico. That leveraged me to become the chief economist for the U.S. International Trade Commission for two years.
Opportunist: What do you enjoy most about your work?
Dr. Morici: I have always enjoyed the life of the mind.
During my time at the University of Maryland, I have maintained close private sector ties. I am conservative, but I do have a great deal of respect for organized labor that probably goes back to my NPA legacy and the whole business labor thing, but I was the most conservative economist there. In the last 10 years I have been devoted to policy research.
Opportunist: Based on your expertise of free trade agreements, do you believe the United States and Europe should enter into a NAFTA-like free trade agreement?
Dr. Morici: Well, yes but not right now—and not unless currency is the key element. The euro is too unstable at this time and it takes a long time to negotiate a free trade agreement. Until now, free trade agreements have not addressed currency and exchange rates and I do not believe we should have any more deals that do not address those.
Opportunist: Do you see the recent situation with the banks in Cyprus as a foreshadowing of things to come?
Dr. Morici: Banks in Europe are in difficult straits because they hold a lot of government debt and the individual governments do not have the capacity to print money. Central banks cannot act as lenders of last resort. For example, Spain’s central bank must borrow euro to recapitalize failing banks. Unfortunately, uniform regulation administered by the European Central Bank will not solve that problem. It is not empowered to recapitalize banks the way the Fed did for the large U.S. banks.
Opportunist: Will the value of the euro be adversely affected as a result?
Dr. Morici: If we start seeing bank failures there, then yes. Right now the euro is holding up pretty well because the European Central Bank is propping up the private market for sovereign debt, Spanish bonds and so forth. However, the European banks are facing a lot of private loan failures, and there is high unemployment in places like Greece and Southern France and Spain. We could start to see banks fail because of either private defaults or a second round of sovereign debt crisis in the south. It isn’t clear how that crisis will be resolved, but that will surely weaken the euro quite a bit and could ultimately lead to its demise.
Opportunist: Based on the Fed’s introduction of new money into the money supply by a central bank, aka quantitative easing, do you see hyper-inflation or deleveraging as a result? If so, when might either of these really begin to affect our economy?
Dr. Morici: We are already seeing inflation. The stock market and housing market have dramatically increased in value and quantitative easing has helped that, although we may have a bubble in the housing market already. Whether inflation affects the general cost of day-to-day expenses will depend on how the Fed ends quantitative easing. It is one thing to stop buying bonds; it’s another to start selling the bonds you bought to remove liquidity from the system. If the Fed only slows its purchase of bonds we will eventually have inflation.
Opportunist: Do you believe that quantitative easing by the Fed will start to pull back by the summer’s end? If so, how will it affect the stock and bond markets?
Dr. Morici: It should, but it isn’t clear that it will. Pulling back will strengthen the dollar quite a bit. With conditions as they are in Europe, Japan’s plan to double money in circulation, and China undervaluing its currency, the Fed’s options are limited. It may well pull back quantitative easing by the end of the summer, but there are risks.
Opportunist: Should the Fed’s dual mandate of price stability and unemployment be eliminated so it’s just monetary policy?
Dr. Morici: Monetary policy is what they do. Their targets and goals should really encompass two mandates: price stability and full employment—whatever that is. The mandate of controlling inflation and keeping unemployment down is a solid and sound policy and should not be changed.
Opportunist: Chinese cyber-theft of U.S. intellectual property costs the U.S. economy billions of dollars. What economic or policy steps would you suggest to stop it?
Dr. Morici: Diplomacy doesn’t work with China. Simply talking with the Chinese is like pouring water on a brick wall in the sun. It gets cool and damp for a few minutes and then it gets hot all over again. So it’s necessary for the United States to retaliate. Unless we bring real pressure to China it won’t change.
Opportunist: Do you believe the current administration’s energy policy is helping the country’s move toward energy independence?
Dr. Morici: Obama’s energy policy basically prohibits oil production along the Atlantic, Pacific and East Gulf coasts and limits parts of Alaska. That is certainly not going to increase our likelihood of becoming independent. It means we import our energy from countries that do not like us, are very unstable—or both. Even if we produce a lot more oil we would still need to import from places like Canada and Mexico, but we would be importing a lot less from the Middle East and Africa. Also, the current policy is sending more American consumer dollars abroad, which won’t be coming back to buy U.S. exports, and our growth is slower and we have more unemployment as a result.
Opportunist: Housing seems to be recovering, and yet just this week there are reports of a sales downturn in some key markets. For example, about 30 percent of Florida real estate was sold to cash buyers as opposed to new home buyers. Do you believe we are currently in, or returning to, a real estate bubble?
Dr. Morici: Well, there are several distinctive housing markets: new homes, existing homes and within existing homes there are vacation homes as well as primary dwellings. We are seeing good recovery in markets for existing and new homes. Second homes, or vacation homes, are a luxury that many Americans thought they could afford but have learned they cannot. So, the circumstances in Florida are much like the circumstances in Spain. There just aren’t enough buyers because so many of the homes are vacation homes. For those folks who want a vacation home in Florida and who don’t view it as an investment—just a vacation—this is a good time to buy. Florida is an excellent place to buy a retirement home. The climate is favorable, politics are focused on the elderly because the population tends to be older, and that state has no income tax. For folks who have worked hard and who might not be rich but have certainly amassed a reasonable amount of wealth and are comfortable in their retirement, that’s about as good as it gets.
Opportunist: Who would you like to see as the next Chairman of the Federal Reserve and why?
Dr. Morici: We need to consider who the president deems acceptable candidates. Among those, I would choose Lawrence Summers. He is not an ideal candidate but probably the best of the list that has been shown.
Follow Dr. Peter Morici on twitter @pmorici1
Leslie Stone is an award-winning writer/editor with more than two decades of experience covering business, finance and lifestyle issues for newspapers, magazines and online publications. Originally from Virginia, she currently resides in Florida. Follow her on twitter at @les7989.