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Dr. Neil Harl Discusses the Economy

posted on April 30, 2010

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Economic paranoia.  Voters pondering the economic recovery, wondering if it's solid or depending on temporary government spending.  Insights from Iowa State University Emeritus Economist Neil Harl on this edition of Iowa Press.

Borg: The political campaign quip "it's the economy, stupid" isn't applying this year. Everyone, especially incumbent candidates hoping for reelection, know that it is the economy that voters have on their minds. Positive signs, like spring flowers, are popping up here and there, but most everyone agrees the recovery is slow and may be uncertain. Iowa State University Professor Emeritus Neil Harl is tracking the trends, just as he has throughout his entire career. Today we're calling on that experience and expertise. Professor Harl, welcome back to Iowa Press.

Harl: Thank you. It’s a great pleasure to be here.

Borg: We're anticipating those insights. Everybody likes the crystal ball. And across the table, Associated Press Senior Political Writer Mike Glover and Radio Iowa News Director Kay Henderson.

Glover: Professor Harl, I’d like to get you to step back for just a second and give us your take on where the economy is right now. As Dean mentioned, the conventional wisdom, which may be neither conventional nor wise, is the economy is on a slow road to recovery with a lot of peril. What’s your take?

Harl: That's precisely my take. I think we've reached the bottom, provided we aren't jarred by events elsewhere outside this country. I’m very, very concerned right now about the EU, the European Union. I think that Greece and Portugal and Spain are facing a crisis of confidence within their own countries. They have been doing some foolish things. They have not leveled with EU and as a consequence, they're going to have to have a massive bailout. And if there's blinking and that doesn't continue to the continent, then it's going to really cause a lot of heartburn elsewhere around the world.

Glover: We're going to get to the overseas things in just a moment, but I’d like to keep our focus on the U.S. , if I could right now. On both the national level, President Obama, and the state level, Governor Culver, they have launched large stimulus programs. Is that why the economy began the recovery? Are they working? Did they do what they needed to do?

Harl: I think it's a factor. I think the people in charge understood early on there were two ways this could be handled. One way is to do nothing, fold your hands, and let the decline occur, and that would have meant a very high rate of unemployment. It would have meant that the people would have suffered a great deal more. They chose the other route and that is to use government funds. So today when people say I don't like where we are as a country, they need to compare it to where we probably would have been had nothing been done. I was not supportive of the big bailout until we got to September of 2008, and then there was nothing else we could do, unless we just are willing to see our people suffer like they did in the 1930s.

Glover: Where would we have gone without the stimulus packages?

Harl: We would have gone spiraling down until we had reached a lower level than we did with the stimulus, in my view, and we would be suffering yet. And then decline in revenues, it would have been traumatic, probably worse. Bernanke -- Ben Bernanke, the fed, is a student of the depression. A lot of his research had to do with looking into why certain things were done and were they effective. And I think he became convinced that this is a time when government needs to respond to avoid the suffering that would have occurred otherwise.

Henderson: The U.S. senate has begun debating a financial regulation bill.

Harl: Yes.

Henderson: Do you think they're headed in the right direction?

Harl: I think they are. I think, if anything, I would have gone a little bit farther. They have to curb derivatives, synthetic, collateralized debt obligations, as they're called. And it's clear that those have no place, in my opinion, in banked. They have to be transparent. They have to be secured to an acceptable level. This has been a mischievous concept. It has some benefits but it almost wrecked the economy. And so we have to get that under control. I think what they're proposing is good. I have been very supportive of enhanced regulation. I was terribly disappointed what I saw unfolding over the last twenty years, the move toward deregulation, because I felt confident we were going to have serious problems down the road.

Henderson: Republicans are wary of creation of a consumer protection agency. They worry that it will have too broad a power to crack down on the private sector.

Harl: I don't share that, no. I think that if there are instances of excesses, they will be curbed in our kind of system. We can always amend what we pass, but I think in general this is going to be a positive move. Almost always when we have a crisis in this country, we overreact. We go a little too far. But then we pull back and we eventually get something just about right. When the SEC was created, for example, there was the same kind of argument, and the rest of the -- going back to the Federal Reserve days, the same kind of arguments were being made then.

Borg: So you must be worrying a little bit now as to whether or not those financial reforms are actually going to be getting through congress.

Harl: I am indeed worrying about that because I think that's the most critical issue right now facing the United States congress is to see this doesn't happen again.

Borg: You said a moment ago that there were different options that the nation could have taken and they chose to use government funds and stimulus to lesson the blow, if you will, of what was happening in the recession. But those were warnings also at the same time that inflation isn't far behind. How soon? Because of the excessive government spending.

Harl: I testified April 1 of last year, 2009, about this issue in Washington. I was chided slightly by some who thought I was too likely to predict we were going to have some inflation. They were very sensitive about that. But I still believe we will when consumer spending picks up. Not until then. I have been saying that will probably occur sufficiently for the fed to change this policy within the next two quarters, possibly three, but I think more likely it will be the fourth quarter of this year.

Glover: Professor Harl, this is Iowa. You have a lot of expertise in the farm economy. Step back for a second and talk to me about the health of Iowa's farm economy and the nation's farm economy.

Harl: I think that the farm economy is really quite healthy, not completely so but I think it's in pretty good shape. It has come through this downturn surprisingly well. Commodity prices have stayed at a nice level. Not as high as they were, but they are higher than they could very well have been. And quite a bit of that is attributable to the demand for corn, which is attributable to two things, ethanol on the one hand and the fact that third world countries are eating better on the other. and that's the more enduring part of the health of the U.S. economy is the countries -- the low-income countries of the world -- the Bangladeshis, the Indias, the Chinas, and the others that are low income historically -- those countries have been doing better in terms of income, because of globalization and trade, the kinds of things that strike terror in the hearts of people who live in Newton, Iowa, because they lost their jobs. Yet that is what is raising incomes around the world. They’re eating better. Their income elasticity of demand, which means the proportion of additional income going for food, is as high as 70 percent in some of those countries. So you get a huge impact when their income goes up.

Glover: And as we speak there's a hearing being held on the 2012 farm bill. You give congress a lot of advice. What ought to be in that 2012 farm bill and, more importantly, what should not be in that farm bill?

Harl: Well, the first thing I would mention -- and I did within the last couple of weeks as I was asked about this -- we've got to start looking -- we're at a different crossroads than we were eighty years ago. Up until the early '30s the question was is there room for a national food and agriculture policy. The answer was no all the way through the '20s. But that changed in 1933. And today we're at a crossroads that asks is there room for a global food and agriculture policy, and I think there currently is. So many of the issues we face are issues that can only be solved if we deal with agriculture on a worldwide basis. Food safety: we import lots of foods; we inspect about 2 percent. Unless we have rules in place, regulations in place around the world, we're not going to make a lot of progress in terms of food safety. Food security, conservation, trade, all of these are worldwide issues, and we need to look at whether there's room for a global food and agriculture policy. So I think -- and I have suggested that there be some effort made to start looking beyond our borders, because I think that's the place we are today. I think beyond that, one of the big issues is going to be energy policy because the future of ethanol, which is a big issue for agriculture, is dependent upon technology, dependent upon economics of conversion, and government policy. And government policy has been very favorable to ethanol for thirty years. First the corn growers got on board and were supporting it. And then the environmentalists found it was better than MTBE as an additive. And then investors started looking and said, gee, if you've got government on your side and all that, you can't lose. So they were on board. It really took ethanol out of the market, if you will, and it became a policy you issue. So it now is a place where it is a big policy issue for the agricultural sector. Now, we can fall back to a lower level of price for corn, but it also affects soybean price and indirectly wheat because they're competing for acreage.

Borg: Kay?

Henderson: Let's delve a little more deeply into the ethanol issue. Do you think this oil spill in the Gulf of Mexico is going to change the debate about ethanol subsidies in Washington, D.C.?

Harl: I think it may -- it will have an impact. I think it will have an impact on drilling offshore. I think it is a striking reminder that there are hazards involved. I think the question becomes a one of to what extent are we willing to substitute materials for oil, and that's really what ethanol requires with their mandate subsidies and with the tariff on imported ethanol.

Henderson: What about the E15 decision, whereby the EPA would say let's put not a 10-percent blend of ethanol as an additive in gasoline but a 15-percent --

Harl: I think it's likely that's going to be approved. It’s not a certainly yet but it appears to me that that is going to happen.

Henderson: And the economic boom?

Harl: Well, I think a lot of that has pretty well been built in. They’re bumping up against the wall, as it's called, and I think that there may not be as much impact in terms of pricing as we might think. There will be some -- some additional buoyancy but what it will avoid is a jolt downward that would eventually occur.

Glover: Professor Harl, I’m going to take you where I think you wanted to go when you began this show, and that's the world economy. A lot of things going on in Europe. Tell me what your biggest concerns are about some of these crises, like we've got in Greece , the EU, things like that. Talk to me about that, the effect the EU has on the United States .

Harl: The EU is a relatively young collection of countries, and they don't have the same kind of a track record on seizing these crises and using their resources to deal with them. they're haggling over how much Germany should be contributing and how much the others should be putting in, but they've got to come to the table with real resources to stabilize this thing, and they've been slow to do so. And so Greece is in such dire straits that they are, of course, number one, but there are some others that aren't too far behind.  Greece did some very foolish things over the last twenty years, and they were not revealed to the EU fully.

Glover: Well, talk to the average viewer of this program, the average Iowan who is watching Iowa Press this week. Why should they care what's going on in Greece ?

Harl: They should care because our economies are so integrated today, through trade and otherwise, that if there is a disease in Europe, the sneezing it going to be heard and the pain is going to be felt elsewhere around the world. We don't want to have a massive stabilization of trade patterns. One of the things that could happen is it could derail the china situation. They are not the strongest in terms of banking and finance, but they've got a huge benefit going in terms of producing low labor cost products. And if there is a massive interruption of trade, that does not help that country. So we don't really want to go there and see the kind of interruption that --

Glover: So you think trade would be the big fallout for all this.

Harl: I think trade would be one of the biggest ones.

Borg: Let me take you in a different --

Harl: Trade and capital flows.

Borg: Let me take you in a different direction on what's happening in Greece and the debt there. People are concerned about the U.S. debt too. Is this a possible harbinger of what could happen to the United States ?

Harl: I think that it's not as likely, and I believe that the people that are calling the shots here internally -- that would be the fed and the treasury -- are aware of the hazards. It is absolutely crystal clear we've got to have more revenue in the system or we've got to cut spending. We face, right now as a country, a terribly important question: how many governmental services are we going to demand and are willing to pay for?

Borg: When you said more revenue in the system, you meant more tax revenue, raising taxes.

Harl: Primarily taxes and taxes have to go up. I don't think there's any other way about it because I don't perceive that people are going to accept a massive drop in government services. They want to cut defense. They want to cut Medicare. They want to cut all the highways. They want to cut all the services that they've come to enjoy. People would like to have all those services provided but not pay for them. And so we've got to face up as adults to the point that -- the fact that we've got to support those things.

Borg: What you're saying is let the Bush tax cuts expire then?

Harl: I have reached that conclusion a long time ago.

Glover: And what is the worst thing -- if you're giving some prognosticosis to what people can do about the economy, the budgets, and all that kind of stuff, what's the worst thing that government either in Washington or in Des Moines can do, because it seems to me they're facing about the same thing?

Harl: I think that Iowa is -- they're not in as bad of shape as some of the other states. But remember, they're probably not going to have as many federal funds coming in 2011 as they had in 2010 fiscal year. So the real test is going to come in terms of how states are going to handle fiscal 2011.

Glover: Let's talk about political reality. Governor Culver is up for election this year. He just passed a big stimulus package, pushed it through the legislature, and is proud, bragging, as he heads into his election campaign that he did all this without raising taxes. Is he just wrong headed about this, and how do you convince people?

Harl: I think that Iowa can, with some adjustments in its tax system, come through this okay. A lot of that is bonded indebtedness. It’s stretched out. But we're going to have to take a close look at our revenue streams and take a close look at the budgetary exposure we have and we're going to have to cinch up the belt here. Taxpayers almost everywhere are going to have to adjust to the fact that life is going to be different going forward, and they're going to have to pay more taxes or we've got to downshift in terms of what we're doing --

Glover: Which tax?

Harl: What tax?

Glover: Which taxes? Which taxes do you think economically make the most sense? Income? Sales? Property?

Henderson: What about the VAT?

Harl: Pardon?

Henderson: The VAT.

Harl: You know -- we've had some arguments over --

Borg: The value -- vat is the value added tax that Europe has.

Harl: It's common in Europe. I’ve had a lot of debates with people about the vat. What concerns me about the VAT is two things. Number one, it's mildly influxionary. And if we're in a period going forward when we're already fighting inflation, then do we want to add some additional fire to that. Secondly, it puts taxes beyond the gaze of people. And so it's easy to implement, and it just comes out you're paying a little bit more for your products. I would rather see a little bit more transparency and people know what is being spent and know what they're getting. I think long term may be a healthier situation. I’ve watched California, for example. It really made some hugely disadvantageous moves over the last thirty years, and we don't want -- I think we want to learn from those kinds of experiences.

Glover: Sounds to me like you're headed toward the income tax. It’s progressive.

Harl: I think we're going to have to -- to raise the income tax above its current level for people making a lot of money. And I wouldn't rule out even some modest increases for middle income and maybe moving back down a little bit in terms of the upper reaches of the lower income groups because we've got to support the government. We can't very well, with the kind of system we have, downsize government. That’s what got us into trouble in the first place. That’s what contributed massively to the last two years trauma was that we were in the process of trying to downsize government and we had sec and other agencies on a short leash. They were not allowed to do things. They were cutting payrolls in sec and elsewhere on the regulatory side of government. We now realize I think, I hope, that we made a huge mistake in following the message of those in '94 and '95 that we downsize government.

Glover: You are a professor emeritus at Iowa State University. Very well respected professor of economics. Your advice is listened to by a lot of people. how do you convince a politician to go down the path that you follow, because inevitably at the end of the day a lot of politicians are going to have to do things that are going to make a lot of voters mad to get this done.

Harl: Well, I think there is a massive educational job here. And I think what we need to do -- and it may take an election cycle or two before we really succeed at it. We’ve got to make it clear to people that there is no free lunch, that we have to cinch up our belts and we have to pay more, or we've got to suffer reduction in services. They’ve been told politically now for quite a number of years, we can cut your taxes and it will raise revenue. Well, that was absolute sheer and utter nonsense.

Borg: Did you say so at the time?

Harl: Yes, I did indeed. And I can show you in writing that this was a foolish move and we're going to have to deal with those tax cuts. Now, I think Iowa also needs to take a look at some other things.

Glover: Like what?

Harl: The way we govern ourselves. We have -- we still have township governance in this state.

Henderson: Mm-hmm.

Glover: Sure.

Harl: We have about 1,600 townships that have township trustees. That is a remnant of the 19th century. My great-grandfather could make a trip from the corner of the county where he lived to the county seat, pay his taxes, and get back home before dark. If we used that same guideline today, we won't need township -- we wouldn't need as many counties.

Borg: Let's take that a little bit further. Is that a crisis that needs to be sold immediately rather than --

Harl: No, I think it's a long-term proposition because it's intensely political. It’s freighted with a lot of political consequences. And a lot of these are. And we may lose some people in the elections the next couple of cycles, but we've got to slowly begin to get across to the public that there -- we've got to generate more revenue or we've got to change the face of government entirely. And I don't think they really -- at the end of the day, I don't think people are that interested in seeing their world change. They think they can possibly have it both ways.

Henderson: Talking about the SEC and the financial regulation bill that we discussed earlier, there may be a criminal probe of Goldman Sachs.

Harl: It looks like it now.

Henderson: Should there be an effort to outlaw some of the financial shenanigans -- people would use the word shenanigans to describe what happened -- some of the instruments that were being used?

Harl: I think so. I think so. And I also think it may not be out of the question to talk about divestiture. I think it's time --

Henderson: Monopolies? There are monopolies we need to --

Harl: I think the level of competition is low --

Borg: Breaking up Goldman Sachs.

Harl: breaking up Goldman Sachs and maybe a couple of others as well. I think they've gotten to the point where they are a threat to the long-term health of the economy.

Glover: You're asking politicians to make some difficult choices. I’m going to ask you to direct your next answer to consumers. Are consumers, in your view, going to have to just learn to live with a lower standard the living? Is the next generation not going to have all the benefits that we have?

Harl: That's a harsh assessment. I don't think so because I believe what we may see is a plateauing more than a decline in level of living. And I think we're going to have a plateau here for a while until we get back to a point where we aren't running huge deficits. We’ve got to deal with that. It’s almost criminal for us to shove those bills over onto our children and grandchildren. It isn't good economics and it's not very good politics.

Glover: Is there any sign you've seen that that's where the nation is headed?

Harl: Well, I’m a congenital optimist. I keep hoping. But, you know, you have to be very brave in politics. That’s why I’m not in politics. I’ve been encouraged from time to time. But I can pick the shins I kick, so I don't have to deal with all those issues. But we've got to get to the point where we are willing to stand up for what is best for the country.

Borg: Last question, Kay.

Henderson: Very short. Are people able to wrap their mind around the end of a new economy which requires new skills and different kinds of jobs? We aren't going to be making cars perhaps?

Harl: I think it's inevitable. I was thinking about this a moment ago when you asked me about agriculture because agriculture is a very privilege state because climate and soils are not mobile. Anything that's mobile is going to where the cost of production is the least, whether you're producing widgets or whether you're replacing knee joints or hip joints or whatever. And that is -- that's economics and the power of that is so great that we're going to have to adjust to it.

Borg: Another thing that's inflexible is time, and we're out of it.

Harl: I understand that, yes.

Borg: Thank you, Dr. Harl. Before leaving we're reminding you that the internet is your link to our Iowa Press staff. The e-mail address at the bottom of your screen is, and we'd like to hear your comments. We’ll be back next weekend, usual times, 7:30 Friday night and 11:30 Sunday morning. I’m Dean Borg. Thanks for joining us today.

Tags: economy ethanol European Union financial regulation Iowa Neil Harl politics rural taxes