Iowa Public Television


Dr. Neil Harl, Economist Iowa State University

posted on June 5, 2009

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Borg: Reading economic tea leaves. In Iowa and across the nation investors, government executives, stressed families are seeking information on the strength of the economic recovery. We're getting insight from Iowa State University Emeritus Economist, Dr. Neil Harl on this edition of Iowa Press.

Funding for Iowa Press was provided by Friends, the Iowa Public Television Foundation. The Iowa Bankers Association ... for personal, business and commercial needs Iowa banks help Iowans reach their financial goals. And by ... the Associated General Contractors of Iowa ... the public's partner in building Iowa's highway, bridge and municipal utility infrastructure. By Iowa's Private Colleges and Universities ... enrolling 25% of the total Iowa higher education enrollment and conferring 44% of the baccalaureate and 40% of the graduate degrees in the state. More information is available at The Iowa Hospital Association ... supporting the missions and visions of Iowa's 117 community hospitals. The Iowa Hospital Association ... we care about Iowa's health.

On statewide Iowa Public Television ... this is the Friday, June 5th edition of Iowa Press. Here is Dean Borg.

Borg: Some economists are see light, if only a flicker, at the end of the tunnel. Others say it's a mirage warning to be prepared that the economy isn't likely to improve anytime soon. Today we're tapping the economic expertise of Dr. Neil Harl, he's an Iowa State University Professor Emeritus with special expertise on China. Dr. Harl, welcome back to Iowa Press.

Harl: Pleased to be back with you.

Borg: We're really seeking your insight today. Everybody wants to look in that crystal ball that you have access to. Across the table, Associated Press Senior Political Writer Mike Glover and Des Moines Register Political Editor Kathie Obradovich.

Glover: Dr. Harl, just recently new unemployment numbers are out, the unemployment rate is over 9%, people say this is the worst recession in at least 30 years. Give us your take. Where are we? How bad is this recession? How deep is it? Can you compare it to anything?

Harl: Well, when we're all on the way down no one wants to see us go any deeper than we are at the present time. I was here in November and you remember I was pretty negative. I'm still more negative than many. I think we're within, however, three or four quarters of seeing the bottom. The fourth quarter of '08 the gross domestic product was down 6.3%. The first quarter of '09 the same statistic was down 5.7%. That's still a long, long way from reaching the point at which we officially wouldn't have a recession. So, I'm believing that we're going to see the end somewhere in the fourth quarter of this year or the first quarter of next year. But the critical issue, I think, is not so much when we hit bottom, I think it's how long it's going to take us to climb out. You may recall when I was here in November I said this is a different kind of downturn. This was a downshifting and a downshifting because we had created a situation where people became fearful, very concerned about their future. It has become chic, it's has become the thing to do to be thrifty, to be saving and you didn't hear that five years ago or ten years ago. I think we are undergoing a massive change in our thinking as consumers. And if consumers aren't convinced that they should be spending we're going to have a very long slog before we're out of this. I've been saying I think we could have three to five years of something less than what we had when we started.

Glover: And give us a direction, point the arrow. Is the arrow going down? Is the arrow going up? Is the arrow going flat?

Harl: The arrow I think is still headed down but it's not nearly as steeply oriented as it was. I think we're beginning to see the effects of a number of things. One is every downturn eventually reaches a bottom and I think that would have happened anyway but we also have massive stimulus programs coming into play and those are beginning to cushion the bottom. But we have a situation where we have a huge amount of debt. We had lived beyond our means as individuals, as families, as governments and as companies and we have to pay off that debt. Interestingly, the savings figures look very positive if you take the very long view. But if you are concerned about how fast we are going to come out of this recession those higher savings numbers don't look so good.

Borg: With that philosophy, how do you explain how the stock market is rebounding?

Harl: I think the stock market is ahead of the game, if you will. I hate to say this because I think we could see some denting on the stock markets. As an advanced indicator usually we assume six to eight months. I don't think that what the market is signaling is really justified and I think investors may very well begin to have some second thoughts. So, I see some potential softness in the stock market. I think it's gotten ahead of things.

Obradovich: We're hearing the National Governors Association, among others, saying as far as state budgets are concerned that this is the worst time in a 30-year cycle and also that they think it will be 2011, 2012 before state governments across the country start recovering. Do you agree with that? What do you think legislators ought to be doing right now?

Harl: I agree fully with that. In fact, I think it may be 2014. Some of the analysis supports that and I'm inclined to agree. When you look at the array of states we have about a third of them now that are in pretty serious financial plight headed by California, of course, but there are others and they are struggling. They are struggling and even some that are headed by republican governors are talking about raising taxes. But this stimulus is going to end about 2011 and that's going to leave the states with some problems. They're not going to have this inflow of capital, they're going to be left with some commitments that they have to continue to meet.

Obradovich: So, what do you think they ought to do?

Harl: I think that the states need to do several things. Number one, I think they do need to look on the revenue side. Iowa came very close to taking a good look at its state income tax. I think that is very appropriate. I think that we've got to get some more revenue ...

Obradovich: So you think we should raise taxes?

Harl: I think there is justification for that but carefully because you don't want to reduce your chances for growth. But I think cutting spending is the big one and it's got to be done, we're just not going to have the revenues.

Borg: Following Kathie's question on government, 2010 election is a big one, in fact, we're electing a governor here and a U.S. senator. What should voters be looking for in candidates?

Harl: I think they should be looking at candidates who are taking the long view. Some of the governors are putting out four-year budgets. I think that's a good thing. I think going that far out gives the voters an idea of where the priorities are and I think that is one thing that should be looked at very carefully just to encourage budgets long enough in terms of duration so that they can see what's happening, likely to happen to revenues and to expenditures and how much is going to have to be cut somewhere.

Glover: Let's look back at the last legislative session and what you're saying is that income tax overall package that they had, which would have raised some additional revenue, was something they should have done and that's the path they ought to be going down.

Harl: I think it's one of the paths they should be going down. Certainly I think they should be looking at paring expenditures wherever they can. And there are a number of very sensitive political issues on the tax cutting side or the cost cutting side but I think they're going to be forced into it and the state that gets out in front and begins to plan ahead two, three, four years I think is going to be in a much better position to deal with the problems.

Glover: Both the state legislature and Congress have approved major infusions of capital into the market as a stimulus. Is that the right track? Is that what they ought to be doing? Is that going to make a difference?

Harl: I have little disagreement with spending like it's proposed in Iowa because I think it's going to be diverted to projects, the kind of projects that otherwise typically are underfunded. I think we need that kind of expenditure coming at a very good time. However, to the extent the stimulus packages, both state and federal, are based on trying to convince consumers to spend more I think that is wide of the mark. I think we should go easy on that aspect because it's not going to happen like it would have happened ten years ago because there has been this change in attitude and I don't think we're going to convince consumers to necessarily buy a big ticket item, buy discretionary kinds of things because I think there's been a change.

Glover: Are we just headed for a lower standard of living?

Harl: I haven't talked publicly very much about this but I think that what we have to adjust to is some downshifting of expectations and some downshifting possibly in the standard of living. Back in the late 80s, early 90s I spent seven years on OTA, Office of Technology Assessment, I chaired the group in Washington in 1993-1994. We spent a year looking at what was happening to standards of living in this country and we finally concluded that the presence of free trade, the presence of free flow of capital and the presence of technology being equally available everywhere it's difficult to maintain a premium standard of living unless you can develop more technology faster than any of your economic competitors. And we're having difficulty doing that because if technology is revealed in the United States in the morning you'd find it in South America in the afternoon and China the next morning. And so it moves very quickly because the commercializes of technology want to make money ...

Obradovich: I didn't mean to interrupt but do you think that people's standard of living has been mostly supported by living on credit as opposed to ... ?

Harl: I think a part of it has been and that part is going to suffer for a while, at least, as that debt is paid down. And it isn't just individuals, it's companies, IPOs, people leveraging themselves to the hilt, this is something that has come up in the last 20, 30 years. Business schools teach leverage yourself, buy a company, leverage it and at age 35 you should be sitting on the beach. Well, that is, I think, misleading in a world in which risk is real and what we're now realizing is that there is real risk involved in debt and one of the bubbles that got burst by the housing debacle was the debt bubble and now we're looking in a totally different way. We're granting up new regulations in Washington, it's a hot topic right now in Treasury, in the Federal Reserve and elsewhere in the federal government and it's going to assure more transparency, it's going to ensure much more oversight over the use of debt. It is a problem that had gotten way out of hand.

Borg: You spoke about the housing bubble, we're being told right now not to put too much stock in an economic recovery until you see housing come back. Is that the way you view it?

Harl: I'm inclined to believe that is the case and that's one reason why I began working on the housing side in February of 2008. I was approached because some of the work we had done in the 80s in the farm debt crisis was noticed online by one of the foundations and they asked me what we had developed then and gotten into federal law might work this time and I said, I think it would. So, I sent a letter to every senator urging the passage of Senate 2636 which would have, I think, tended to stabilize the housing side. But, in fact, I believe today that if they had done that it could have headed some of this off. But I don't think we're going to have real stability until we get stabilization in the housing market.

Obradovich: Take us back a little bit to talk about the farm debt crisis because you had a lot of experience with that. Obviously this situation is not playing out exactly the way it did in the 80s. Tell us a little bit about what's different now. Who is being impacted that wasn't impacted before? Are there some similarities in the way we might climb out of this?

Harl: There are similarities, let me talk about those first because that's what I think is really important. Obviously housing is not the same as farming but the problems are not that different. When you have defaults, when you have people who can't pay then who is left hanging for that? Well, it's not necessarily the debtor because the debtor can walk, they can walk away, they're doing it on the West Coast, they're doing it in the southwest, just abandoning their houses and if they have no assets it's not very fruitful to go after them or they can file bankruptcy. And so the most vulnerable player in all of this is the lender. The lender has abandoned equity capital ranging from two or three percent up to maybe eight for the better capitalized commercial banks. And you wipe out that band of equity capital very, very quickly. So, what, in my view, we need and what we concluded back in the mid 80s was when you have widespread potential defaults, and we have that in spades today, the best thing you can do is to urge the lender and the borrower to sit down across the table, work out something that is feasible for that borrower and focusing on three things, stretching out the payment period for the obligation, reducing the interest rate possibly which causes some lenders to gulp and thirdly even forgiving some principal because in a world of falling collateral values it is very clear that the costliest alternative usually is to push hard against the borrower, push them into foreclosure, push them into bankruptcy and then you've got time and loss of interest and all kinds of expenses.

Glover: What happens to land prices during this particular downturn?

Harl: In agriculture in the 80s we lose 63% of farmland values. We will have lost approaching that before we're all through this in some markets, not all markets. Des Moines, Iowa, for example, has done better except in the western suburbs and there's some pretty steep discounting going on with respect to the area and ran up its housing values so quickly. So, you can almost predict this by looking to see what the growth path was in an area.

Glover: During the 1980s I remember one thing that a lot of people urged people to do was diversify the state's economy, we can't rely on farming solely, can't rely on agriculture solely, diversify the economy. The latest round of layoffs included a big layoff at the Principal Financial Group in downtown Des Moines. Des Moines would seem to be a financial services hub and that was recession proof. What does that say?

Harl: It says that we have an integrated economy to the point where you can not easily predict who is going to have trouble and who isn't and I give some additional examples. Some commercial banks are in trouble in this state. Why? Because they invested in preferred stock or Fannie and Freddie and they were told by the regulators this is one of the safe things to do, it's almost the same as a branch of government and you know what happened to that preferred stock. And there are banks in Iowa that lost 50% of their income last year because of that. There are some that had invested in packaged real estate securities in the West Coast and, of course, we know what has happened to those as well.

Borg: I'd like to have you look right now at agriculture and then ahead at what it might portend for me as a consumer of food in the future. Because of high production costs it might seem that green farmers are doing well right now but they say that they are pinched economically because of high land rent costs, production fertilizer costs and so on and pork producers are paying high prices for grain and are going out of business. What does that mean for me in buying food in the future?

Harl: Well, agriculture is not an economic island. I testified in Congress on April 1st about this and the key point I made, the very first paragraph was agriculture is not an island, it is missing the bullet here but the longer this thing continues, the downturn, the global meltdown, the more it affects agriculture. Now, when you look within agriculture, you have to separate agriculture from rural areas, rural areas have been hurting far more than the agricultural sector has been because those are the people who have been laid off from Deere and Principal and those that live out in rural areas. But agriculture has been buoyed up because we've had better commodity prices, grains and oil seeds, soybeans, wheat and corn have done reasonable well, hogs have not and one of the reasons is that we have had high feed costs. Now, the dynamic of that is such, however, that you have to squeeze before you change supply, you squeeze the producer. Hog producers are now being squeezed because of the high feed costs and that means somebody is going to stop producing hogs or cut back on producing hogs and that's what raises the price to the consumer, it's a longer process than it is when GM, that's not a very good example, but when a company like Deere sets its price for products and it means to enforce that price. Agriculture can't do that, there are too many producers and so we go through this squeezing process before it shows up in the supermarket.

Borg: But it will show up?

Harl: It will show up eventually.

Obradovich: Another person who's getting squeezed is the consumer out there and I think people are awfully confused right now about what they ought to be doing. What is your advice for the viewers today about should they be investing in the stock market? Should they be burying their life savings in the back yard? Buying gold? What should people -- should they be going and buying refrigerators right now? What should they be doing to help?

Harl: I think every individual consumer has to take a look at their own situation. If they want a new refrigerator in the next two or three years, they want a new car in the next two or three years and they can afford it this is a great time to buy from the standpoint of your own self-interest -- you get discounts that are very attractive -- or you want to do some work on your house. But if you're close to the edge already this is not the time to extend yourself any further. You need to pay down on your debt. So, for some it's a great opportunity to take advantage of these soft prices, the supermarket and elsewhere, but mostly elsewhere. I think if you take the very long view on the stock market I'd tend to think that investing in equities is still a good move but I wouldn't put all of my sheckles in one place, I would diversify, I'm not a great fan of gold because gold does not produce income, it has a certain appeal, it has had historically going back centuries. And there are those who believe that's a good hedge and I wouldn't disagree with that but I think I would be inclined to diversify your portfolio as much as possible.

Glover: We're in the first six months of a new president, a new democratic president, Barack Obama. Give him a grade. How is he doing?

Harl: I think he's doing quite well, quite well. I have watched closely several things. Number one is economic policy, he has some very bright people, inherited a huge problem. I was not in agreement until last September that we needed a big bailout and I didn't like the way it was handled and still don't. But I think that the new team is really on top of it and I think they're going to bring us through okay. But the other thing is I think the president is making a mark around the world. I think the speech a couple of days ago in Egypt is an example of that.

Glover: Best things he's done, worst things he's done?

Harl: The best thing he's done is to reach out to the rest of the world. The worst thing he's done I would say it's going along with the idea that we should provide benefits, bailout benefits to companies without asking as much as we should have. I think that any time a firm gets benefits from the U.S. government it should go through the equivalent of Chapter 11 bankruptcy whether they file Chapter 11 or not and that means big banks, big financial institutions, others that take government money need to have a lot more expected of them and I am a little disappointed in that respect.

Borg: We're getting near the end of the program and I want to tap your expertise on China. China has, correct me if I'm wrong, built its economy on loaning money to the United States so that the United States could buy Chinese exports. Now, the American consumer is cutting back and China is beginning to hurt. What does that portend in the future?

Harl: It portends a lot and I am very concerned about that. In I believe it was April exports were off 22% in China. That is the third month of very, very substantial cuts in exports. Actually I would re-state a little bit, Dean, what you had said. I think that China's business plan was to take advantage of their low cost labor and their expertise and hardworking labor force to produce products they knew could be sold to the rest of the world and they have done that.

Borg: What does it portend?

Harl: It portends with the reduction in demand for what they've been producing. It means reduced incomes in China. Let me tell you what that means for agriculture in Iowa. This is one of the things we've been watching very closely and I'm very concerned about it and that is those countries, India, China and the other countries in the Pacific Rim all have a very high income demand for food. In fact, in some of those areas it's as high as 70%. So, as their incomes went up a lot of it went for additional food, particularly more protein. We're reversing that now, we're reversing it in the sense that their incomes are going down so their food demand is going to drop. This has been one of the most stable and enduring features of agricultural demand has been the fact that the third world was eating better. And so the longer this goes the more threat it poses to food demand in those countries.

Glover: Long-term what can we do about that? How should our policies change to adjust to it?

Harl: I don't think we're going to change China's hard work ethic, I don't think we're going to change the fact they have an advantage in terms of labor costs nor do we want to. I think what we want is to be sure we work with China as a power, an economic power in the world. I think they will continue to be a major supplier of ours and they're going to continue to hold a lot of U.S. dollars, there's no question about that. What we don't want is an unfriendly China so I think what the president is doing with respect to the Muslim world needs to be done in spades with respect to countries that aren't on the other side of the fence like North Korea and the others.

Borg: I have to call time and I'm sorry that I do. Thank you so much for sharing your expertise with us.

Harl: It's a great pleasure.

Borg: We'll have another edition of Iowa Press next weekend at the usual times, 7:30 Friday night and 11:30 Sunday morning. I'm Dean Borg. Thanks very much for joining us today.

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Funding for Iowa Press was provided by Friends, the Iowa Public Television Foundation. The Iowa Bankers Association ... for personal, business and commercial needs Iowa banks help Iowans reach their financial goals. And by ... the Associated General Contractors of Iowa ... the public's partner in building Iowa's highway, bridge and municipal utility infrastructure. By Iowa's Private Colleges and Universities ... enrolling 25% of the total Iowa higher education enrollment and conferring 44% of the baccalaureate and 40% of the graduate degrees in the state. More information is available at The Iowa Hospital Association ... supporting the missions and visions of Iowa's 117 community hospitals. The Iowa Hospital Association ... we care about Iowa's health.

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