Kaufman, president of the consulting firm that bears his name, gave his downbeat assessment at the World Leadership Forum, sponsored by the Foreign Affairs Association, held annually in New York. Henry Kaufman has a reputation for seeing half-empty glasses where others see them as half-full, which explains why Barron’s calls him the “original Dr. Doom,” possibly to distinguish him from another Dr. Doom, Nouriel Roubini, who’s also well-known for predicting busts and financial crises.
Kaufman’s reference to the title of Thomas Wolfe’s famous novel was meant to underscore how difficult it is for economists to predict future trends because they’re too reliant on precedent. “Nostalgia is a very powerful draw,” he says. Analysts tend to look back; as a result, they’ve expected a recovery from the Great Recession to duplicate the recovery from the Great Depression, but this kind of cyclical analysis, Kaufman contends, fails to capture key structural changes. These changes are “akin to tectonic shifts.” Economic conditions are so fundamentally different today that precedent fails to offer much guidance. One problem is that we really don’t know what is happening day-to-day, but often think that we do because information is so abundant and easily accessible. “Heavy reliance on statistics’ carries considerable risks especially on the policy side,” Kaufman says. Economic data is constantly being updated and revised, calling the original data into question — GDP, the consumer price index, productivity, core inflation, etc. — so that it would be a mistake to use any particular benchmark as a basis to make policy. The Fed has been waiting for months to get a better sense of how well the economy is holding up before raising interest rates, for instance, but the data it’s looking at to make their decision is so ambiguous that it keeps delaying taking action.
Debt is a big problem, too, says Kaufman, and it’s only going to become bigger. Government borrowing is now 101 percent of GDP (it was 54 percent in 2000), but while that level may be sustainable for the time being, it can potentially hamper Government efforts to spur a recovery in the event of another downturn. Household debt and student loan debt (north of a trillion dollars) are at record levels. At the same time there’s been increasing consolidation of financial institutions on Wall Street, resulting in diminishing competition (and exacerbating volatility). The ten largest financial institutions now hold eighty percent of the nation’s wealth. Just a generation ago there were several hundred firms. This kind of concentration — which is a worldwide phenomenon — has put a greater burden on central banks, prompting them to intervene more forcibly to keep these financial behemoths in check. They are routinely domiciling regulators on the premises of these firms and some even sit in on board meetings, a trend Kaufman calls “unhealthy.” So the kind of role we saw the Fed playing in the 2008 recession — pumping billions of dollars into the banks to keep them from going belly-up — is unlikely to be an aberration. But while central banks were able to keep the economy afloat six years ago — the European Central Bank has been goosing the economies in the Eurozone using a strategy similar to the Fed’s — Kaufman has grave doubts whether they’ll be able to do so the next time around. That’s because the traditional methods the Fed has used in the past — lowering interest rates, ramping up quantitative easing, and scaling back capital requirements for banks (so that they’ll have more cash on hand to make loans) — may offer far less bang for the buck than they had since 2008. If interest rates are effectively zero, as they are now, how can you lower them further?
The political climate has also made it harder for the Government to respond quickly and effectively, Kaufman points out. Already there are calls in Congress to curtail the Fed’s independence. And there’s unlikely to be much of an appetite for the kind of stimulus program that President Obama barely managed to get lawmakers to pass in 2009. Many Americans understandably reacted with indignation when the Fed bailed out the banks while leaving individuals to sink or swim on their own.
If anything, Kaufman takes an even dimmer view of economic trends abroad. It wasn’t so long ago (before the Shanghai stock market began to tank and Brazil’s economy faltered) that emerging markets were booming (or enjoying a bubble). Investors poured billions into the BRICs (Brazil, Russia, India and China), but with the notable exception of India, they have stumbled or sunk into recession. (Not all economists were enamored with the BRICs in the first place; one joked that the acronym really meant ‘Bloody Ridiculous Investment Concepts.’) Countries like Brazil, Russia, Chile, and Angola, for example, all depend heavily on commodity exports to make up a large part of their GDP. The recent drop in commodity prices and the shrinking demand for them (especially from China) have taken much of their luster off their reputations. While there’s no denying that these countries have experienced enviable periods of growth — even Angola was seeing seven percent annual growth for a while — that pulled millions out of poverty, these booms haven’t benefited everybody equally. (That is, of course, also the case in the United States.) Their governments are very often dysfunctional and money has mostly gone to people at the top, making a few people very rich and leaving behind the majority of their populations. “Their robber barons don’t keep their money at home, but put their money into real estate in places like London and New York,” Kaufman notes, in contrast to the American robber barons of the late 19th and early 20th Centuries who invested their money at home so that to some degree everyone ended up benefiting from their greed.
Inequality of the distribution of money also means inequality of opportunity, which is one of the major factors behind the recent surge in migration. The United Nations distinguishes between refugees (who because of war or persecution are unable to return home) and migrants (who are usually seeking job opportunities unavailable at home). But the distinction is beginning to blur. In any case, the migration crisis is going to be with us for several years to come, and that has significant implications for the economy, too, particularly in Western Europe and the United States where most of the migrants hope to find a new home. But that presents a conundrum, Kaufman points out. Capitalism is based on mobility – not just the free flow of capital but the free flow of labor. Well, labor is flowing and like water, if one outlet is choked off, it will inevitably find another. Yet it’s also clear that Europe and the U.S. can’t absorb all these migrants. At the same time the conflicts in Syria, Iraq and South Sudan aren’t about to end any time soon. Nor is there any reason to think that countries in the developing world will be able to provide enough jobs to meet the needs of their populations. “No one has an answer,” Kaufman says, possibly the most candid admission you can expect to get from an economist even if it’s one you don’t want to hear.
