U.S. Economy Seen Leading Others : Recovery: Economist Henry Kaufman says nation has already gone furthest in business restructuring and financial rehabilitation. But the growth rate will be slow, he says.
The U.S. economy will continue to grow faster than that of any other nation, including Japan and European countries, economist Henry Kaufman told an Irvine audience Wednesday.
That’s because the United States is well ahead of other countries, he said, in business restructuring and financial rehabilitation.
“Five or six years ago, to say the economic growth of the U.S. would be better than the rest of the industrialized world would have been a surprising statement,” he said. “We have made a lot of progress the hard way, the painful way.”
Even so, the U.S. growth rate will be slow, he said, only 2.5% to 3% this year. And this nation’s growth will not be enough to lead the rest of the world out of recession, he said.
Kaufman, whose specialty is global perspective, did make one observation about the future of the Southern California economy: Military cutbacks, he said, are likely to be larger than President Clinton is willing to say now.
Kaufman, who earned legendary status in economic circles in the 1980s by predicting the banking crisis, spoke at the annual Economic Forum of Chapman University. The $200-a-plate event attracted 750 people--the most in its 27-year history--and raised $150,000 for faculty support and scholarships.
Kaufman’s topic was how the current recession differs from those of the past. A recession is a normal event in the business cycle, he said, but this one is different for several reasons:
* Because of budget deficits, the U.S. government is limited in the fiscal policies--tax cuts and spending increases--that it can use to stimulate the economy.
* Financial institutions have made an unprecedented number of bad loans and investments, not just in the United States but in Japan, the United Kingdom, Canada, Australia and continental Europe. As a result, lenders are cautious about speculative investments, and they are insisting on control over how the money they provide is used.
* The sharpened focus on where to invest is leading to a greater regionalism in finance, with Germany focusing on Eastern Europe, Japan on East Asia, the United States on Latin America.
* This is the first full business cycle in which financial markets have been substantially deregulated worldwide.
* Corporate restructuring is so dramatic that laid-off workers cannot anticipate, as in the past, that they will go back to work once business improves.
* Business is increasingly able to locate its manufacturing plants where labor is cheap, which means labor will eventually become more mobile. Because business can use cheap labor, inflationary pressure is reduced.
* As institutions have become more conservative, households have become the risk takers. Millions of people have branched out from merely holding deposits in banks, thrifts and pension funds to becoming direct participants, primarily through mutual funds.
That last situation, Kaufman said, could lead to government intervention in financial markets if small investors use their power as voters to force changes.
That will create volatile markets, he predicted: “The household sector may not appreciate all the risks it is taking on, with the result that it may act quite unpredictably if there is a sudden upheaval in the financial markets that dramatically reveals the risk exposure.”
Profile: Henry Kaufman
Title: President, Henry Kaufman & Co., New York.
Nickname: “Dr. Doom,” for bearish economic forecasts and admonishments against junk bonds.
Credentials: Ph.D. in banking and finance, New York University, 1958.
Background: Former chief economist, Salomon Bros., and economist, Federal Reserve Bank of New York. Author of “Interest Rates, the Markets, and the New Financial World.”
Honors: George S. Eccles Prize for economic writing, 1987.
Source: Henry Kaufman & Co., Times reports