For the economy, it’s not quite the best of times, but it’s definitely not the worst. Wages still lag for most people, but the six-year economic recovery is finally posting sustained significant job growth. Silicon Valley continues to increase its lead over the rest of the economy, but many people are beginning to worry that governments are overly reliant on the Valley to produce growth and tax revenue.
These issues were addressed by Forbes Media chairman and editor in chief Steve Forbes and UC Berkeley economics professor Alan Auerbach earlier this year at The Commonwealth Club. Their conversation, excerpted below, was moderated by former Goldman Sachs General Partner John R. Farmer.
John Farmer: We’ve read of historically low U.S. interest rates — but well above many developed countries’ interest rates — a significant rebound in housing, the lowest oil prices since the mid-’80s, unemployment at the lowest level since 2007, the [U.S. being the] world leader in job growth since 2010, and a robust domestic GDP with the deficit at a seven-year low. Can all of this be real? What is in store for us?
Alan Auerbach: It’s real, and if I had to choose a country in which to live right now, the United States looks pretty attractive compared to most other developed countries. All of the things you mentioned are very positive signs. The U.S. economy grew very well in the second half of last year and is going to grow again this year, which is not true of many other economies. On the other hand, there are definite problems in our current economic performance, and some dark clouds on the horizon, which mean that while what you’ve mentioned is certainly real, there are still many things that we should be concerned about.
Steve Forbes: Yes, the U.S. economy has gotten better, as it well should have six years into a recovery. The recovery supposedly began I think in 2009, and it’s been [one of] the slowest, if not the slowest, in American history. While the unemployment rate is down, we all know [the prevalence of] part-time workers and low labor force participation rates are still very, very worrisome. So we’re like a batter – I know I’m in the town of the world champions – batting .270 or .275, and winning the batting title only because the rest of the world is doing much worse than we are.
While 2015 should be a good year for the U.S. economy, I think [there are] two things we have to watch out for. One is deterioration politically around the world. We saw the coup in Yemen, which means more volatility, dangerous volatility, in that part of the world, which spills over to us. Russia is on the move again in Ukraine, and who knows what else is going to blow up, so the political situation is not good. The other thing is the world global economy as a whole is going to be very disappointing this year, below what the IMF [International Monetary Fund] and others think it is going to do. Europe is in a recession; Japan is in recession; I think Mexico and Brazil are at or will be in recession; China is slowing down. So that’s going to impact us, and bring us down. We’re not strong enough yet to be the locomotive of the world.
Farmer: Would you comment on other indicators of the state of the recovery in the U.S.?
Auerbach: Well, the economy is doing well in many respects. Investment was strong in the second half of 2014, which is finally happening; there’d been a lot of concerns that corporations were sitting on cash. That’s still true to a certain extent, but investment is starting to pick up. The concerns that I have about the U.S. economy, other than the fact that the growth we had last year is much delayed after a recession that ended over four years ago, are that we have very weak labor force participation, much below where it was at the beginning of the recession, and we don’t really have a good explanation for that. We have very, very weak wage growth that normally would be picking up as the unemployment rate falls. The unemployment rate has fallen to under 6 percent, but wage growth is still very weak. In some respects the U.S. economy looks good, and in other respects it looks less good.
In terms of international competitiveness, the fall of the euro is good news for Europe, but it’s not good news for the United States. The weakness around the world is certainly going to pose problems for the U.S. economy in the next year and the years to come.
Farmer: The Bay Area obviously benefits immensely from the growth of the technology business, but can high-tech innovation continue to drive job growth in this area, and what is the impact on the rest of the nation?
Auerbach: I think this area is blessed to have all the innovation that happens in the Valley. And it is the thing that has made the San Francisco Bay Area the strongest part of the U.S. economy over the last few years. Whether that growth rate continues is certainly questionable, and as happened 15 years ago, there are going to be recessions, there are going to slowdowns, there will be sectoral reallocations as people discover that certain things aren’t working, but certainly the trend is very positive. It’s making over the Bay Area: it’s becoming a wealthier, more educated population over time, and there’s very little reason to think that’s going to change. It’s going to be good for California; it’s going to be good for the rest of the economy.
There are problems associated with it. One is that the California government is coming to rely more and more exclusively on Silicon Valley to fund itself, and that’s good when times are good, and not so good when times aren’t good. We haven’t figured it out, or at least not had the political will to do anything about that in California. So we’ll probably have another painful period when the next recession hits Silicon Valley, the way we did the last time when the dot-com bubble burst. But on the national scale, that’s a minor concern relative to the benefits that we gain from having Silicon Valley here.
Forbes: Again, with the Valley you can’t predict ups and downs. It is an absolute unique national and global asset. We should remember [that] if there is another recession, the last one was not the end of the Valley, even though a lot of people got swept away from it. It came back pretty quickly, and it will again. You remember in the movie, The Social Network, where Justin Timberlake [playing Sean Parker] says to [Mark] Zuckerberg, “You have to go to the Valley.” This was when Facebook was going to get some financing: “You have to go to the Valley.” That’s still true, and even though there are many other centers of high tech, this is the epicenter.
Unfortunately the state of California, as Alan said, [has] depended on the Valley, and the rest of the state has done not nearly as well – the rest of the state, a lot of it, has been hurting. [The Valley] is like an oasis in the desert, and California’s got to make structural changes, because the rest of the state is not doing well at all.
Farmer: There’s concern about income inequality and the wealth gap. What are the economic consequences of growing income inequality in the U.S.? Will income inequality continue to increase? And is this an economic problem, or more of a social problem?
Forbes: I think people’s concern is not so much inequality in and of itself, but the fact that incomes for many people have stagnated. I may reference that median incomes today are still lower than they were in 2007, and this has been a top-tier recovery. The top 10 percent have done very well, though the members of the top 10 do change, but it hasn’t been a very broad-based recovery. People don’t mind if Bill Gates makes a zillion dollars, they want to know are they moving up – are they moving ahead? So that’s the problem: It’s not so much inequality [as] it’s that we’re not growing the way we should.
The thing we should keep in mind is that the quality of life gap between the very rich and the rest of the world is narrowing. If you look at The Simpsons 22 years ago and look at the possessions they had, even though their incomes have gone nowhere after 22 years in cartoon land, it’s a very different quality of life [that they have today]. So things that we now take for granted – handhelds and the like – [it’s] amazing, in terms of the quality of life.
You’re going to see more of that gap [closing]. You’re going to see the same things in other areas as far as closing the gap in the quality of life between the West and the rest of the world. We’ve got to get some policies right, and then the rest of these things will come to pass.
Auerbach: First of all, I think the fact that The Simpsons is central to our discussion is indicative of the decline of American civilization. That’s equally shared and not an issue of inequality.
There are interesting issues about [these challenges], whether it’s inequality, whether it’s levels of income, whether it’s levels of standard of living, which as you say, are more equal than levels of income. First of all, this is not anything that is due to U.S. policies, though some people suggest it. The most important factor driving it is globalization, and the fact that if you have a skill that is in demand worldwide, you do very well, and if you have a skill for which there are great substitutes in developing countries with lower incomes, you’re not going to do very well. It’s here to stay in terms of the underlying market forces that are driving inequality.