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UCI business school forecasts modest economic growth for 2013

Hundreds attend Paul Merage School of Business and Irvine Chamber Economic Forecast

by Caitlin AdamsPublished: January 25, 2013 05:15 PM

Dean Andrew Policano (L) and
Dr. Marci Rossell (R)
On Friday morning more than 800 local business and community leaders filled the ballroom at the Irvine Marriott for the 2013 UC Irvine Paul Merage School Business Outlook, presented by the Irvine Chamber.

Dean Andy Policano of UCI’s business school and Dr. Marci Rossell, former chief economic advisor for CNBC and a financial journalist, jointly presented keynote speeches. Policano provided the 2013 U.S. Outlook and economic report; Rossell offered commentary, historical and geopolitical context.

The Paul Merage School projects national growth at 2 to 2.5 percent for 2013, and inflation remaining steady at approximately 2 percent. Unemployment is expected to decline very slowly, but remain above 7 percent for the year. The five-year outlook projects higher taxes, higher interest rates, increased inflation and lower Social Security and Medicare benefits.

Policano began the presentation with a review of the previous year and assessment of how well the January 2012 Outlook stood up to the economic realities of the year. In all, the actual statistics followed fairly closely; the 2012 outlook projected national economic growth at 1.8 to 2.4 percent, with actual growth recorded at 2.1 to 2.3 percent. Inflation for the year remained at approximately 2 percent, as predicted. And unemployment fell to 7.8 in September and closed the year at the same rate, whereas the outlook projected the rate to remain above 8 percent until late in 2012.

“I can't take too much credit for this because economists have been pretty much predicting this very slow growth pattern in the United States, so it's pretty easy to figure this out. The economics actually underlying our current situation are straightforward. Economics is not the problem. What is the problem?”

Unemployment continues to struggle because companies are not ready to hire, given the current climate. Policano cited economic uncertainty and job creators waiting for positive signs of sustainable growth. If the current unemployment rate factored in discouraged jobseekers that have given up looking for employment and underemployed workers, the rate would be closer to approximately 9.2 percent. Just to maintain the current rate would require 125,000 new jobs every month, and even if the country were to add 200,000 new jobs monthly, the rate would remain above 5 percent until 2018.

Rossell’s take on 2013 is more reflexive: she explains that 2013 is a complete transition year where we feel the full recovery that occurred last year. She argued that all the events that define an economic recovery occurred in 2012, including improved economic activity, production and housing; everything except, she agreed with Policano, employment growth.

Rossell went on to say that the current situation may be viewed as history repeating itself, drawing parallels to the present economic landscape with the events of the late 1980s; an Asian nation was the strongest economy in the world (Japan); Russia was just ending a decade-long engagement in Afghanistan; and a new economic powerhouse joined the world in the form of a unified German state. Following soon after was the first modern financial crisis, in the form of the Asian currency situation in 1996; the International Monetary Fund and World Bank imposed austerity measures… a situation currently embroiling several European nations.

So what could Congress do to boost the economy? Policano addressed the issue of the trillion-dollar coin, and why it was rejected as a stimulus measure. He explained that minting the trillion-dollar coin is effectively the same as the Treasury creating a zero-interest rate bond and selling it to the Federal Reserve for cash.

"The treasury pulls out a blank piece of paper and throws it through the press, and on the other side comes out a trillion-dollar bond, and then the treasury says, 'okay, I've got this bond, and what I’m going to do is sell it to the Federal Reserve system.’ And so [Chairman] Ben Bernanke over at the Federal Reserve System takes a blank piece of paper from his pocket, puts it through his printing press, and that comes out as money in cash. So Ben Bernanke takes this cash and hands it back to the Treasury, and now the Treasury is free to spend it."

Policano said the economy is already performing this same transaction to the tune of more than half a trillion dollars every year. However, the practice is not applicable to the trillion-dollar coin because the Federal Reserve would lose its independence in becoming tied to the Treasury. On the other hand, the economy needs the stimulus that such a bond would provide. The trick, Policano said, is to create enough stimulus when it’s needed, but stop when inflation kicks in.

On the question of avoiding the fiscal cliff, Policano said the measures taken will do very little to control debt. "If we did the fiscal cliff, while we're not getting as much revenue as we would have gotten from the treasury, so the increase [in the debt] there is $4 trillion over [2013 to 2022]. And what about how much has it helping us control the debt –– very marginally at this point."

Policano emphasized that what the country needs is a short-term stimulus to boost the economy, while at the same time having a long-term plan to control debt. "If you can borrow at zero percent and make any positive return on that loan, would you do it? Well, of course you would. And by the way, what's the least controversial for us to put revenue back in the treasury then, what's the least controversial way to bring in more tax revenue? Well, it's the growth economy. So if we grow the economy, more tax revenue will help our debt problem."

Policano explained that in order to achieve a growth economy, the government needs to provide job creators with growth incentives, improve job training and tax "the bads", such as alcohol and cigarettes as opposed to "goods", like employment, in the form of payroll taxes. The housing industry is beginning to recover, "but there, if we have excess supply of housing the best thing to do is put people in those houses that are unoccupied, and give them the opportunity with the incentive to rent to own."

For the long term, Policano proposed a number of changes, including reduce postal service to five days a week, end some farm subsidies and increase Medicare copayments, among other steps.

Rossell added some international context to what’s coming in the years ahead. She explained that Europe’s imbroglio with the euro is going change from a currency crisis to a chronic illness. “You can’t expect to get global growth from Europe.” Japan may be experiencing its best economic growth in 20 years, with the onset of deflation; however, this is tempered by the increasing burden of any debts the country is carrying. She suggested that emerging markets to watch are China and India; whereas the China used to sell a lot of products to the U.S., in the past five years, the country has become an increasingly large importer of American goods.