Three Analysts Answer Three Big Financial Questions
Life + Money

Three Analysts Answer Three Big Financial Questions

iStockphoto/The Fiscal Times

When Mark Zandi speaks, Wall Street and Washington usually listen. During the financial meltdown three years ago, the Moody’s Analytics chief economist was a familiar and sometimes reassuring face on major cable networks and on Capitol Hill. When the government came close to its first default ever last summer, Zandi made the rounds on networks describing the potential consequences of a stalemate between the White House and Congress.

Zandi is part of a new generation of high profile media savvy economic analysts who are helping to shape the national debate on the economy, unemployment, the deficit and international affairs in a crucial election year. Once a relatively staid community of erudite and academic experts, today Zandi and others like Diane Swonk of Mesirow Financial and Paul Ashworth of Capital Economics have become the go to authorities for explaining and simplifying highly technical material to the masses.

What makes them different from well-known academic economists like Joseph Stieglitz, Nouriel Roubini, Kenneth Rogoff and Paul Krugman, to name a few, is that they are dealing with more than economic theory.   Zandi, Swonk and Ashworth meet regularly with business clients to hash out data on housing, employment and interest rates and formulate business strategies. In return, their high-level clients frequently offer inside scoops that inform their future forecasts.

“Economists back then when I was in school were pretty green eyeshade in academic institutions,” Zandi said in a recent interview, referring to his time spent studying at the University of Pennsylvania.  “I knew I wanted to be an economist from very early on, but I never really thought of it as being in the public eye.” 

As the global economic crisis has come to dominate the national debate, their economic jargon translation skills have overtaken economic forecasting prowess as their biggest selling point. “The real value of somebody like Mark [Zandi] is not that he can predict the future accurately, but that he can tell you how the economy is now, what it seems likely to do, and give you a sense of the trajectory and what the likely risks are in a way that’s crystal-clear,” said Darren Gersh, Washington bureau chief for PBS’ Nightly Business Report.

But many times, the experts are wrong. 

At the start of 2011, Zandi forecast that the U.S. economy would grow by more than 4 percent by year’s end.  In reality, U.S. GDP grew at less than 2 percent last year, partly because of high energy prices resulting from a political crisis in Libya, the Japan earthquake and tsunami, and the debt ceiling fiasco.

Swonk forecast repeatedly during the early and mid-2000’s that the growing housing bubble would burst, and real estate values would start falling.  Her prediction came true, but not until 2007 when the subprime mortgage crisis carried the housing market down with it. Ashworth predicted that the U.S. economy would continue to contract through 2009 on the heels of rising consumer debt and constrained bank lending.  It turned out the recession officially ended in June 2009, and the economy slowly started its upward crawl.

“The problem is, when you’re using the past 30 years’ data to establish these relationships between everything in the economy, and then you have a once in a generation event like the one we’ve just gone through with the financial crisis, then those models aren’t going to pick that up,” Swonk told The Fiscal Times.


One of the biggest forecasting dilemmas Ashworth says he faces is how to account for the potential of a Eurozone breakup in his reports.  Ashworth is convinced that the southern European countries won’t be able to remain in a fixed currency with the northern countries, but says the lack of clarity on the timing of a breakup makes it hard to factor into a forecast.  “We have no idea about the timing.  This is something that might fall apart in two months, three months, or take another couple of years,” Ashworth said. 

They do, however, get it right more often than not.  As a result, their popularity has surged along with their client lists. Swonk accurately predicted that the unemployment rate would be 9.8 percent at the end of 2010 and the economy would expand by a modest 3 percent.  Zandi correctly forecast that the stock market would hit bottom in the first three months of 2009, and Ashworth was right in predicting the U.S. economy would grow at a 3 percent rate in 2011. How will they score on three of the most controversial economic questions facing the country today?  Here's what they said:

Is Bernanke doing the right thing keeping interest rates low?

Yes, the Fed’s zero interest rate policy is appropriate given the 8 percent plus unemployment rate and still low inflation and stable inflation expectations.  The low interest rates make it easier for debtors to reduce their debt loads, makes business investment more attractive, and is supporting stock and house prices…But it will also be difficult for the Fed to land the inflation plane right on the tarmac; I suspect inflation will be above the Fed’s target later in the decade as the Fed will be slow to raise rates and drain liquidity in the financial system fast enough once the economy is in full swing.

Is it the right thing? History will only tell, but I would rather have him [Bernanke] than anyone else rolling the die on where the risks lay.

I do, at least for the current year.  When the economy is as fragile as it is right now, you certainly wouldn’t want to jump the gun on this one—we still do need it to get the economy running again. But as the economy returns to normal, the unemployment rate returns to a more normal rate, you have to start getting interest rates back to more a more neutral level, because otherwise you’ll just be sowing the seeds of the next housing bubble.  

Should the government extend the Bush-era tax cuts?

Yes, the Bush-era tax cuts should be extended, but only if policymakers are able to raise a significant amount of tax revenue from tax reform – scaling back the deductions and credits in the tax code. If they are unable to do this through tax reform and/or entitlement reform, then allowing the Bush-era tax cuts to expire for households in the top tax break may then be needed.

We need fundamental tax reform that simplifies the system and eliminate loopholes on both individual and corporate taxes. Adam Smith argued for graduated instead of flat tax and I agree. Some benefit to encouraging capital formation and long term investments with lower capital gains. But no ability should exist to structure a company on such rates alone.

Yes, in the near term they should.  Because of the sort of shock to the economy that we’d be talking about in early 2013, if they’re allowed to expire, is too drastic.  But in the long term, you do need to get the budget back to balance.  A lot of that can be achieved by spending cuts, but probably some of that does need to be achieved through a proportionally smaller amount through tax hikes. 

According to a new report from Harvard Business School, America is struggling competitively with other countries for jobs and investment.  One major reason, according to the report is “over regulation” by the government.  Do you agree that U.S. business is over-regulated?

Yes, but the much bigger problem for businesses and the broader economy is the uncertainty over the regulatory and legal environment. As a small business owner, I could adjust to changes in government regulation, but only if I had a clear understanding of what those changes were.  It is vital for policymakers to nail down all the moving parts in financial and healthcare reform….Until there is more clarity, businesses will be slow to increase their investment and hiring.

Regulation always picks up in wake of financial crisis. Finding balance is difficult, but I wouldn't want to regulate us down to China and the environmental, intellectual, and human rights infractions there.

If you’re comparing America with developed European countries, for instance, then no, I’d say America’s very competitive—it has competitive labor costs and doesn’t have as much red tape.  But of course, if you’re comparing it to developing countries like China, then yes, of course the U.S. has more by way of red tape, restrictive labor laws, and regulations…But I don’t think the regulation has increased markedly in the last four years in the U.S.