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KEVIN HALLOCK: Good afternoon, everyone. Can everyone hear me OK back there? It's OK? Great.
So my name is Kevin Hallock. I'm the chairman of the economics department at Cornell. And as some of you know, we've been doing some things new with the organization of economics. I'm going to tell you a little bit about that before I introduce our panelists.
I want to tell you, first of all, that I congratulate you all for doing two things that our current students don't always do, and that is show up on such a nice day. And secondly, there are some people actually very close to the front row, which is very unusual.
AUDIENCE: [INAUDIBLE]
KEVIN HALLOCK: Oh, sorry.
[LAUGHTER]
AUDIENCE: You're smarter than [INAUDIBLE].
KEVIN HALLOCK: I thought you just wanted to be close to the panelists. So the economics departments, as you know, as many of you know-- we had something called the merger in 2011. We merged the former arts and sciences economics department that had about 23 faculty with 13 faculty from the ILR School's Labor Economics department into one new department of economics. And we also added nine senior faculty from the Dyson School, the College of Human Ecology, and the Johnson School into a department which now has just about 50 faculty overall. We have 700 majors. We have more than 100 PhD students. It's really quite a collection.
And it's quite exciting for us. We've been meeting now for a little bit more than a year together. We're making some very interesting job offers. We made two job offers to some up and coming stars just a week and a half ago. And I think this afternoon, if I have time, I'm sending out another offer to someone else that I think will cause a lot of excitement here. And I think this person is likely to come.
We also are very excited about other things that are happening, including the first large gift to the new department from an alum named Edward Meyer, who's from class of '48, who's just endowed the Edward Meyer Professor of Economics just-- I think will be announced publicly on Monday or Tuesday. But since we're just a close-knit group of friends here, I wanted to tell you first.
The format for this afternoon-- we have three distinguished panelists. They're each going to speak for six or seven or eight minutes on a topic related to economics, public policy, and the election. And then we'll open it up for questions.
So I'm hoping that more than half of our time is you just asking us questions. And I'll try to direct traffic and do that. And I think it's very exciting. We're very lucky. I feel privileged to be in the department with these three.
The first is Francine Blau, class of 1966, from Cornell. She's the Frances Perkins Professor of Industrial and Labor Relations and professor of economics. Her PhD's from Harvard. She's a specialist in labor economics, economics of gender, wage inequality, immigration, and international comparisons of labor market outcomes-- feel silly introducing these folks because I think you all already know them. She's going to talk to us about human capital and education, where that's the first topic.
Second will be Maureen O'Hara, who's the Robert W. Purcell Professor of Management and Professor of Finance in the Johnson School, and also professor of economics. Her PhD is from Northwestern. She's a specialist in finance market microstructure, banking, financial intermediaries, and liquidity in high-frequency markets. And she's also the chair of the board of ITG, which is a global agency brokerage firm. And she's going to talk to us about debt issues, deficits, and the difference in approaches to business issues.
And finally, Eswar Prasad is the Tolani Senior Professor of Trade Policy and an international professor in the Dyson School of Applied Economics and Management, and also professor of economics. His PhD from the University of Chicago. He's a specialist in macroeconomics of financial globalization, financial regulation, monetary policy, and so on. You'll see him frequently cited in the Financial Times, Wall Street Journal, New York Times, in addition to the others. He sometimes is listed as at the Brookings Institution. And some folks were asking if he'd left. No, he's also appointed at the Brookings Institution. But I like it when he lists his affiliation with Cornell. But the editors of the newspapers don't always want to cooperate with that.
So we're just going to have five to seven minutes from each of us, each of our panelists. And we're going to start with Fran Blau, who's going to talk about human capital and education.
FRANCINE BLAU: Thank you. Every time a time is mentioned, you may see me chuckle a little bit because I think I got 10 minutes, which seems to have gone down to six or seven. But in one of the memos, anyway, I thought it was 10. But I'm going to do my best. And I've asked for a big hook to just pull me off if I go over here because I know one of the things that's really cool about these kinds of events is hearing what you have to say and your questions.
So as Kevin said, I'd like to talk a little bit about human capital. Economists define human capital as investments that people make in themselves today that will increase their productivity and their earnings into the future. And education, which I'm going to particularly focus on, is one form of human capital investment. But other forms are on-the-job training, health, and a myriad of others could be mentioned.
And you might be saying to yourself, gee, I haven't heard too much about that in the election. And you're right. You haven't heard that much about it. And that's one of the reasons that I wanted to talk about it.
I'd like to start with some facts from an OECD report. And the OECD is the Organization for Economic Development-- Economic Cooperation and Development, comprised of a number, large number, of advanced industrialized economies, like the United States. And these are four findings of the report that I myself actually, even though I'm informed in this area, found surprising.
The first is the United States ranks 14th in the world in the percentage of 25 to 34-year-olds with higher education. That's 42%. The US ranks 28th in the OECD in the percentage of four-year-olds in early childhood education, with a 69% enrollment rate.
The third is that in all countries, the probability that you will get higher education is positively related to whether or not your parents have it. So if your parents are highly educated, you're more highly educated. Conversely, if you come from a family with parents who aren't well-educated, your chances of getting a higher education are lower. So bear that in mind. And the odds that a young person in the US will be in higher education if his or her parents are not high school graduates are just 29% in the United States, just 29%. And that's one of the lowest levels among all the OECD countries.
So what's going on here? It sounds like-- there's an expression, we're number one. We don't sound like we're number one in this area. And that's surprising and important to begin with.
But it's also surprising because historically, the United States was a leader. We were a leader in the public school movement that brought compulsory public education at the primary and secondary level to broad-- the broad population. We were a leader in higher education.
If you take the full population, we still look pretty good. But if you focus on younger people, we-- the rest of the world or developed world has caught up to us. And many have surpassed us.
Added to this, not even including that China and India are greatly emphasizing human capital and education investments-- although they're way behind us in terms of the incidence of people getting a higher education, they have huge populations now of highly educated people. And we've already seen this, for example, in the migration of a lot of programming jobs to India.
Now, why is this important? Of course, we'd like to be-- do well in everything. Why is it important to do well in education? First of all, investments in education are linked to economic growth. And there's interesting evidence, even within the United States, that social interactions among workers in the same industry and location create learning opportunities that enhance productivity.
Putting this a little differently, it's been found that workers in cities with-- where education level and the city is higher get higher earnings and are more productive, even if they themselves don't have higher education. And this is something-- contributes to the idea of what we call in economics an externality. That is, when people invest in education, they themselves get a benefit. But some of those benefits, positive benefits, spill over onto others. And this is the advancement of productivity and growth, fewer individuals needing government assistance, et cetera.
But education is also important to the type of growth and the type of society that we have. The days in which people could get pretty good incomes and be in the middle class without many skills and without much education are past. If we want to have a prosperous middle class, we have to have a well-educated population.
Education is also important for combating inequality. There's been this movement, the 1%, which is definitely an issue of concern. But you may not be aware that there's been a long-term trend in the United States over the past 30 years to rising wage inequality. And the dimensions of that rise are almost unprecedented except when we go back to the 1920s.
So the United States' levels of inequality that we've reached are high by our historical standards. They're very high, actually, by international standards, even compared to other economically advanced countries. And one estimate gives 2/3 of this increase to a growing divergence in earnings between highly educated, college-educated people and less educated people.
So actually, what we want to do is get more people well-educated so they move into the higher ranks and they get higher wages. But also, and maybe some people wouldn't like this, we want to move them in because by the forces of supply and demand, they're going to reduce that premium or reduce that gap a little bit.
So you might be thinking, isn't it true college graduation doesn't pay off the way it used to given the problem student have finding-- students have finding jobs during the recession, given the increased cost of college, and the debt that many students have? The press has been terribly misleading on this. The answer to this is a resounding no.
Brookings just came out with a serious study of this. They found the returns to education, investment in education, are higher than other investments, such as stocks, bonds, and real estate. And they haven't changed much. They've been pretty constant over the last 35 years.
What about the policy? So let's skip to the election and the policy, which is what you asked me to talk about. Have I convinced you that's an important issue? Is it a government issue? Yeah, it's a government issue because of the externalities that I've mentioned, because of the fact that it's difficult to borrow, to invest in your own education.
But what are we to do? Admittedly, we're in a bind. We have a serious long-term deficit issue. I'm emphasizing long-term because we can't-- despite what you read in the paper, we can't judge the deficit by what it is right now in the middle of a serious recession. As the economy picks up, revenues will also pick up. A recession puts a government into recession, to some extent. But we do have concerns in the long term, particularly as they relate to medical costs.
However, we have to figure out a way that we can invest today in our future-- our children, young people, are our productivity and our future tomorrow-- and still solve the deficit problem. And the deeper concern to me, if I'll be frank here, is the anti-government sentiment on the part of some candidates and their constituencies. Starve the beast. Government spending, unless I'm the beneficiary, is all about handouts, et cetera.
I think this is very misplaced. The size of government in the United States is not particularly high by historical standards. Actually, the share of taxes, federal taxes, collected last year was lower than it was in 2000. We have a lower share of GDP paid into taxes in the United States than most of the other advanced, industrialized countries.
So I think the problem is people are looking very narrowly at government. I get Medicare. That's a good program. I don't get [INAUDIBLE]. That's a bad program. And anybody on it is lazy and doesn't deserve the handout.
People need to consider the broader aspect of what government does, even from a self-interested perspective, even from a self-interested perspective. And I haven't even talked here about compassionate caring about others, which I also think is very important.
Now, let me also mention that health is another investment in human capital. And to me, that's actually one of the major contributions of Obamacare. We need a healthy, as well as a well-educated, workforce. Our old system was not producing it. We were one of the only advanced, industrialized countries where all individuals did not necessarily have access to health care. And indeed, it created a lot of-- or it still does because we haven't changed over-- created a lot of-- creates a lot of inefficiencies, something called job lock, where people are afraid to leave their jobs because they won't necessarily get health care at their new employment or they may have a pre-existing condition.
So let me briefly say what does this mean about the candidates. I think the Obama administration has a pretty good record on this issue, both in terms of concern and in terms of program. I'd like to see more expansion at the preschool level. That's very important. Obama has supported Pell grants to finance higher education. He has a very innovative educational policy called Race to the Top, where states compete for money for funds based on their educational reform plans.
By the way, I do want to mention that we took a major hit during the recession at the state and local level where most of the funds for education come from. They were wiped out by the recession. And a lot of teachers were laid off. Obama has plans and proposals to help them bring back these laid-off teachers.
What about Romney? I know less about his plans. I'm not trying to be funny here. But they do tend to change. And it's harder to get a handle on what they are. I suspect-- just guessing-- he'd be interested in efforts to increase the efficiency or performance of educational institutions if it didn't involve increased spenditures. I think at one time, he did want to cut back on Pell grants.
But regardless of Romney's views, I fear that he's a prisoner of his rhetoric. He's been campaigning on reducing taxes. And most experts believe that addressing the nation's problems, including deficits, is going to require some tax increases.
And Bush I made famous the expression, "read my lips-- no new taxes." And that was the reason that Bush II thought Bush I did not get reelection, because he broke that pledge. And I think it would be very hard for Romney to have any tax increases and, thus, to address this area and many other areas as well as they need to be. Thanks.
[APPLAUSE]
KEVIN HALLOCK: Thanks very much, Fran. I think what we'll do is take questions on everyone at the end. So next, Maureen's going to talk with us about the debt deficits and differences in approaches.
MAUREEN O'HARA: Well, thank you, Kevin. And let me echo Kevin's thanks for coming out today, a beautiful day. This is what you remembered when you were here, right?
[LAUGHTER]
It comes once a year. And you're here the right day. So I'm delighted to see you all. It's a little bit like the Monty Python thing now for something a little different because I really want to talk about the business side of the situation-- of the equation. And that reflects the fact that I'm a finance professor. But I think it also reflects the fact that when you look at this election, you can't avoid the whole debate about the economy, business, who's going to get businesses going again.
So I'm going to offer some thoughts on this. And I'm sure we're going to have a spirited debate when we're done. But let me just throw out some numbers and see where we get.
So the real question I want to think about is, how will the two candidates differ in their handling of the economy and business concerns? And let me just throw out a few little numbers just up front. We'll talk some numbers through the way here.
Who will handle the economy better? Well, know you can listen to us. But there are lots of poll numbers kicking around right now. The recent CNN poll gives that to Romney, with 58 to 40 believing that Romney will handle the economy better. The Washington Post-ABC poll of October 13 thinks that the economy and the country is on the wrong track.
So it's certainly the case that this is an issue that a lot of people are concerned with. Let we offer some interesting numbers. I really liked Fran's numbers because it helped put some things in perspective.
From January 2009, which is when the Obama administration begins, to now, median household income is the same. It's approximately $50,680. Now, if you adjust for inflation, median household income is now 8% lower than it was 10 years ago. So this is the erosion of the middle class that we keep hearing about. And that's real. But it is interesting that the median family income is actually the same over the four years.
The unemployment rate's actually the same. If you go back to January of 2009, the unemployment rate is the same. But there are 23 million either out of work, underemployed, or just plain dropping out. So again, as you compare these numbers, it's a bit confusing to quite know where we're at. But I found those rather intriguing.
Here's a number that I find really intriguing. Here's something that's not the same. Corporations are currently sitting on $1.7 trillion in cash. They're not investing that money. They're not hiring people with it. They are sitting on it. And that's really a big difference from four years ago.
Now, obviously, there's a lot of reasons for that, the financial crisis being one of them. But it's oddly reminiscent of when we think back to the Depression. I know many of you are probably history buffs and you remember that one of the things Roosevelt did is he was so mad at businesses who wouldn't invest, he put something called the undistributed profits tax on business.
That was blamed by many people for sending the economy back into a mini recession in 1938. But I just want to point out these problems have been around a long time. In recessions, when there is uncertainty, and I think there's a lot of uncertainty right now, businesses have not been willing to invest as much as one might have hoped.
It's a two-edged sword. That's the bad news. Here's the good news. They have $1.7 trillion to invest. So if we can get things going, there really is a turbo possibility here going down the path. So I just wanted to put that up front.
So now let's think about, how do we get businesses more interested in trying to invest and trying to use that money to put people back to work? I think one thing that we all would agree on is the business world cares about deficits. If you read the Wall Street Journal, it's every other article. But it's pretty clear. I think most people care about deficits. But the business community is particularly concerned. And I know many of you saw in yesterday's Wall Street Journal the 80 CEOs who sent that letter to Congress saying, you've got to get this deficit situation fiscal cliff under control.
Let's talk a little bit about what the deficit is. Most people will find that, actually, you have this block when it comes to this because you hear so many numbers kicked around, you're not sure what it is anymore. I actually tried to look it up. And even I got deficit overload. But let me tell you a couple of numbers.
The total federal debt held by the public is $11.3 trillion. That's a lot of money. That's actually not the total debt, which is a little bit over $16 trillion. And the difference is that between the $11.3 and the $16-- is that the Federal Reserve is actually holding a lot of that debt. So you don't count that so much. Plus, some of it's held by the government itself. So you don't count that so much.
When you think about these numbers-- when I was in graduate school, and I suspect it's true of my compatriots, it was very much the case that you were taught deficits don't matter. They're money you owe yourself. We were very much in the Keynesian world in those days. Now, we're not so sure.
Part of the issue is just size. To put into perspective, in the last four years, the Obama administration has run total deficits of $5.2 trillion. So when you think about the amounts we talked about and then you think about the deficits over the last four years, you can begin to see why people are concerned.
The deficit this year is $1.2 trillion. So it's a lot of money. And it is challenging. If you want to think about it slightly differently, we are borrowing about $4 billion a day on a good day. That's just a lot of money. And it scares people.
Why is it so big? Well, as Fran pointed out, we're in a recession. When you've been in a recession, there are lots of demands on government. There's been a lot more expansion of food stamp programs, largely because we have people who aren't employed. And they need help with food stamps. We have greater expenditure on a variety of things.
The Medicare prescription benefit kicked in. The wars in Iraq and Afghanistan are remarkably expensive. The stimulus was $719 billion. Tax cuts over this period were almost $800 billion. So you start adding it up and, as they say, you get to real money.
So which candidate-- or let's not say which. Let's say, how will the candidates deal with the deficits? Well, to address this, I went directly to their websites. I do not recommend that.
[LAUGHTER]
It's bewildering. However, after spending great time, I was able to come up with the following quotes from the websites. President Obama will "reduce our deficit in a sensible way using savings from ending wars to rebuild America."
So I think the vision that the Obama administration has is, I think, two pieces. One, when we end the wars, that does free up a lot of money. And to put that in perspective, we have put the total expenditure on wars in Iraq and Afghanistan-- is $1.2 trillion. That's the size of our deficit this year. That's how much we spent in 10 years on Iraq and Afghanistan. So there is money there that can be put to work.
I think it's also the case that, as Fran points out, when the economy gets better, tax revenues will increase. And that will help float things a little bit. But it appears that that's the main plan for the Obama administration-- is that the-- in a moment, I'm talking about tax increases-- that the change is not going to come so much from spending on programs. It's going to come from changes in defense spending and increases that are going to come about in revenues.
Governor Romney's website says, "He will immediately reduce non-security discretionary spending by 5%, cap federal spending below 20% of the economy by consolidating agencies, and he will move more things to the states." So part of what is going to happen, I believe, for the Romney plan is he actually is going to cut back on things. And I think the educational issues that Fran talks about will probably be shifted more to the states and away from the federal government. And it's a question of how you think that's all going to play out.
Is this going to work? Will Obama's plan work? Well, I don't know. $1.2 trillion is a lot of money that we won't be spending on Iraq and Afghanistan. On the other hand, Obamacare is going to be very expensive. And that's not yet part of the deficit numbers. So it's not clear how that's going to play out.
Will Romney be able to do it? That's hard to say because Governor Romney and, actually, President Obama, as well, envisioned changes in the tax plan. So for example, as we've heard many times if you've watched the debates, President Obama will cut taxes for the middle class and raise taxes for those making more than $250,000. Governor Romney will lower the marginal tax rates by 20% across the board, which would be a tax cut for everybody. But he's going to impose a cap on deductions. And I want to spend a minute on that because that's actually very interesting.
So let's, again, look at some numbers. In 2009, there were 140 million tax returns, of which 45 million itemized. So if you don't itemize, the cap on deductions is irrelevant to you. You're down to roughly 45 million people who itemize.
So it's going to affect a subset of borrowers. And there's a very interesting study out by the Pew Trust that looked at what would happen. So they argued that if you set the deduction cap at $17,000, this will raise $1.7 trillion over the next 10 years. If you set it at $50,000, it will raise $760 billion over that period. And it would be entirely paid for by the top 20% of the income distribution.
So the capping of deductions, I think, is an interesting way around the no new taxes because there won't be a new tax. There'll simply be less ability to avoid the taxes that you currently have.
One thing to note-- this is a disaster for all of us living in New York. And I think it's a disaster for the university because charitable deductions will fall under that cap. State income taxes currently will fall under that cap. And that, for those of us in high-tax states-- and proud as I am to be at Cornell, I wish we would move it to someplace where the taxes were lower. It's a challenge.
So it's a very interesting plan to see where that goes. I'm getting a signal that I have to stop. So let me talk about maybe two things. What else will they do for business? Romney's going to lower the corporate tax rate from 35% to 25%. Business is going to love that. We have the highest corporate tax rates in the world. So-- in the industrialized world.
Like Fran's saying, we like being number one. We are number one in how we tax corporations. But if you want them to spend that $1.7 trillion, I think a good plan is to cut those tax rates. And I don't think we're going to see that as much coming from the Obama side as the Romney side.
Obama wants to invest in new sustainable industries. I think this is the-- invest for the future. It's hard to say how successful that will be. It has not been very successful thus far. He promised in 2008 to create 5 million green jobs by investing $150 billion over 10 years. If you go to the Department of Energy website, we have only invested $21 billion so far. We've created 28,000 jobs. So maybe the second term, we'll do better.
Romney wants to make changes to Dodd-Frank. I know you're on the edge of your seat for that. But we'll have to wait. You can ask during the session. I'm not going to go through those. That will be very well-received, particularly by the finance community, which really hates Dodd-Frank.
Finally, let me just sum up because I know I'm running out of time. From a business perspective-- and I just want to focus on business and we can debate about how the economy should be handled more generally. From a business perspective, I think there's general agreement that Romney's plan is more business-friendly except for one thing. And that would be, of course, to the business empire of Big Bird, who will be in much worse shape if Mr. Romney comes along. But lest you feel too bad, the IRS reports that Big Bird's net worth in June of 2011 was $356 million compared to President Romney's estimated net worth of $250 million. So I think even Big Bird will be OK. Thank you.
[APPLAUSE]
KEVIN HALLOCK: Thanks a lot, Maureen. So we've heard a little bit about human capital. We've heard about business. And now we're going to switch to Eswar, who's going to talk with us about international aspects of this.
ESWAR PRASAD: Good afternoon. When I signed up for this, I thought it was going to be easy. I just tune in to the third presidential debate, Romney and Obama would have very different positions, and that would be my talk.
[LAUGHTER]
As it turned out to the surprise of all of us and to the consternation of some, Mitt Romney turned into Mitt Obama. And that poses certain challenges. So rather than talking about differences in their positions, let me talk about what I think are some very important challenges on the international economic arena that the new president, whoever he might be, is going to face. I'm going to talk about China, which has been very much in the news recently, a little bit about the global economy and the challenges to the US, and also emanating from the US, and third, think about the global economy and its evolution on a longer scale.
Now, of course, the China-US relationship is an important one. And it's been getting a lot of attention, especially with Ohio being a battleground state. Now, the reason for the stridency of tone of-- on China, of course, is related to the fact that the employment position in the US is very weak. And it plays into a very convenient political line of reasoning here in the US that the reason, or an important reason, for US economic woes is really to be found elsewhere. And of course, China has been doing its bit by doing certain things that seem unfair.
Now, Mitt Romney in particular has taken a very strong stance. And he has vowed that on day one, he will label China a currency manipulator. Now, the nature of one's rhetoric during the campaigns, and this is something that Fran referred to, as well, does have implications for how the relationship between two countries is going to evolve. And I think this is potentially dangerous.
Why? Because right now, it turns out there are simply no economically tenable grounds to call China a currency manipulator because, in fact, it turns out that China's trade surplus has fallen quite sharply from a peak of about 7.6% in 2007 to just about 2.1% of GDP. That number is falling because China's export markets, the US and Europe, are weak. And China, relatively speaking, is still growing strongly.
Now, it turns out that also, there isn't as much capital flowing into China. Why is this? Because international investors around the world are concerned about the eurozone debt crisis and turmoil in international financial markets. So they're not putting as much money into any emerging markets as they were in 2008 or 2008. And the same is true of China.
So in fact, China hasn't been accumulating as many foreign exchange reserves by intervening in foreign exchange markets. In fact, if you look at the level of intervention that has been undertaken by different countries, one might arguably make the case that countries like Japan and Switzerland have, in fact, been "manipulating their currencies" much more.
So the approach the Obama administration has taken is to say that the currency by itself is an area where some pushing is needed and where, in fact, there has been progress, as the president pointed out in his debate. In fact, the currency has appreciated relative to the dollar by about 11%. And China has made its currency somewhat more flexible.
So the currency is really not the right battleground. But there is an important battleground because what US firms, what US financial institutions want, really, is market access to this vast and growing Chinese domestic market. What they also want is better protection of their intellectual property rights.
So in fact, there is, even as we speak, a very productive dialogue going on between the US and China at levels that are not obvious enough to be reported in the papers. And I think that's going to be the productive approach because China needs a few things from the US. As Secretary Geithner pointed out in a speech a year and a half ago, there is a very clear quid pro quo. In addition to what the US wants, China wants access to US technology, wants access to investment opportunities in the US, which as you've heard have been blocked recently.
So I think there is a productive way to move forward on this. But currency is definitely not the way to think about this. The problem is so long as you have jobs in the US looking weak and, second, so long as Washington focuses on one number, a number that gets attention far beyond its merit, which is the US bilateral trade deficit with China, which has, in fact, continued to increase-- it hit a peak of $295 billion last year and is on pace to reach about $300 billion this year as well. And the problem is that that number ultimately ends up feeding very much into political rhetoric. So given the political transition here and the leadership transition in China, this is going to be a very difficult year for US-China economic relations.
Now, thinking about the global economy more broadly, there are, of course, many risks out there. One of the biggest risks the world economy faces is, of course, an even messier development of the eurozone debt crisis. And I suspect it's not going to end well.
I've always said that I'm something of an optimist. I think that things will get better before they get a lot worse. And I suspect that things aren't really going to work out well in Europe. And that's going to have fairly significant effects.
What can the US do about it? Should this have been covered in the debate because, after all, it is the biggest global economic risk? Frankly, very little that the US can do. It doesn't have the resources. And it doesn't have the political ability. Europe can get its own house in order. And what is really missing in Europe, in my view, is not a lack of resources, but a lack of political will.
But from the point of view of the rest of the world, and I can tell you this having been at the IMF/World Bank Annual Meetings just a couple of weeks ago in Tokyo-- from the point of view of the rest of the world, the euro is a big risk. But it turns out there is an even bigger risk that the rest of the world is concerned about, the US. Maureen pointed out the situation with the debt. And this is really a big concern for the rest of the world.
Now, there is this optimistic view that once the presidential elections are passed, once we have a lame duck Congress in place, somehow, miraculously from the heavens, rationality is going to descend on Washington and things will get fixed. The rest of the world is not holding its breath. There is an extreme degree of concern that the US could push things to the brink, which I think is increasingly likely. And that is going to have a pretty significant effect on financial markets.
Now, it's also affected the way policies are being run in the US right now. Given the fact that we're not doing the right things on fiscal policy, monetary policy is taking on much of the burden. In fact, not only are we not doing the right things on fiscal policy, we're getting it backward.
If you think about going off the fiscal cliff, the amounts that are involved are about $560 billion worth of fiscal action being withdrawn through a combination of tax cuts expiring and expenditure reductions. That's taking about 4% of GDP out of the economy in a year when the best-case scenario is that the US will grow at about 2 and 1/2%. So that's going to be a devastating body blow to the US economy, which will have an effect on the rest of the world.
And the concern also is that the US is not doing what needs to be done, which is to fix the longer term fiscal problem, because I suspect even if we don't go off the fiscal cliff, given the predictions about what are likely to happen in terms of the configuration of Congress, we are likely to end up in a situation where the US continues to not deal with the longer term fiscal problems. So rather than not withdrawing fiscal stimulus now and trying to deal with the long-term problem, we're not dealing with the long-term problem. It's perhaps getting worse. And in the short term, you're getting it backwards.
So this is what the world fears. And the consequence in the US, of course, is that monetary policy has taken on much of the burden. And this is true not just in the US, but in the rest of the world. The ECB and Japan, the Bank of Japan, are essentially holding the world economy and their economies afloat.
Now, central banks are being asked to do a lot. They're being asked, essentially, to put a floor on risk and to support growth. Now, they have been very effective at putting a floor on risk. And this is why we see financial markets doing so well relative to the real economy.
If you look at how business and consumer confidence are doing, if you look at how employment pictures looks around the world, with the US being somewhat better than much of the rest of the advanced economy world, it doesn't look like there is much room for optimism because the emerging markets are also beginning to slow down. And yet financial markets seem to be in a world of their own. And again, this is because, as far as financial markets are concerned, the three big central banks have shown that they're willing to limit risk.
But the problem is that central banks are now in a position, because fiscal policy can't do it anymore, of supporting growth. And this is something where they are simply not getting traction. And as has been pointed out by Maureen, if you think about corporations, it's not a lack of liquidity or money that is keeping them from investing. It is this much broader macroeconomic uncertainty. So I think the US, for itself and for the rest of the world, is going to have to deal with its domestic problems.
And then looking a little further ahead, how does the configuration of the global economy look? The US still remains very special in some ways. And this nicely feeds in to what our candidates would like us to believe about American exceptionalism. But there is a big risk here as well.
Maureen pointed out that the amount of debt in the US is a staggering $11.3 trillion right now relative to an economy of about $15.7 trillion. The US is very special among the advanced economies because about 48% of that debt is held by foreign investors, which is a wonderful thing when times are good because the rest of the world is willing to finance you. And it turns out the US is also very special because when things are really bad, then money comes back into the US.
So in fact, if you look at the US fiscal prospects, they look terrible. But the average interest rate that the US is paying on that $11.3 trillion worth of net debt is below 3%. This is untenable over the long run. I've done some calculations in collaboration with the Financial Times showing that if you look at the evolution of public debt around the world and just net public debt, emerging market economies over the period from 2007 to 2012 accounted for about 2/3 of world GDP growth at market exchange rates. They accounted for just 12% of the increase in global public debt.
Over the next five years, if IMF forecasts are to be believed, emerging markets will account for about 60% of global GDP growth and just 10% of net debt accumulation. The other 90% is the advanced economies, with the US, of course, playing a very important role in this, accounting for about 40% of the increase in public debt. And this is going to have implications not just for the global economic order, but for the US because as Fran pointed out, this country needs investments in infrastructure, in health, in education. And if you're sitting on such a large stock of debt, especially given the prospect that one day the world may not be that enthusiastic about lending to the US, it's going to be a very rocky road ahead.
So having said all this, who should you vote for? Given how difficult it is going to be, perhaps rather than voting for the guy you like, you should vote for the other guy because it's going to be a very, very difficult time ahead. Thanks.
[APPLAUSE]
KEVIN HALLOCK: Thank you. Thank you all. I have to say that it's-- it really is-- I meant this earlier. It's a privilege to work with folks like this. They're incredibly smart, obviously, but kind-hearted, caring, and committed faculty. And we have 47 others just like them-- maybe not exactly like them, but in our department. This really is a special place. And I think that this merger and what we're doing in the economics department is very exciting going forward.
So I want to open it up. There must be people with microphones. Are there? I have one.
AUDIENCE: [INAUDIBLE]
KEVIN HALLOCK: Sorry? Where's the-- oh, no. I'll answer questions about the economics department. We are not co-located yet. So the main office is actually in Uris Hall. But we also have an office here in Ives and some other places. But I want to take advantage of the fact that we have these here. I'll stay here all day and talk with people about the economics department. But let's talk about the election.
AUDIENCE: We're not doing mics. So people can just speak up.
AUDIENCE: So Dr. Prasad, you had mentioned the short-term optimism on the euro, the long-term pessimism. What's your long-term prognosis as to what you didn't like in the outcomes of the euro?
KEVIN HALLOCK: You might repeat the question, too.
ESWAR PRASAD: The question was about what I think will actually happen in the long run to the euro. I find it very difficult to see a politically and economically viable path for Greece, in particular, to stay within the eurozone.
The problem with many of the periphery euro countries, and the economists prefer to call them the eurozone periphery-- there was a while when they were called the PIGS-- Portugal, Ireland, Italy, Greece, and Spain. And then somebody got the more creative idea of calling them GIPSY, which sounded a little better, but not that much better.
The problem with all the periphery economies are they're being asked to do two very difficult things at the same time. One is to tackle their budgetary problems. And the second is to undertake structural reforms to improve their competitiveness. Doing any of these at a time is very difficult. Doing both is politically, potentially, fatal.
In the case of Greece, the best-case scenario if they do everything they need to do, and they haven't quite been able to do it-- if their economy actually starts recovering despite the very difficult circumstances on the fiscal front, if they can put in place all the competitive measures, then after five years, they will still be left with a debt burden of about 145% to 150% of GDP. So it doesn't make sense.
Now, the problem is a situation where Greece is not part of the eurozone is going to be very painful for Greece. But in my view, at least, there is hope for redemption there.
Now, one question is, isn't this going to lead to utter turmoil in financial markets? How can this possibly happen? And I think the ECB has hinted at an answer to that because the ECB can save the day.
What happens if there is a significant prospect of Greece leaving the eurozone? There is going to be panic. Money is going to be pulled out of Spanish banks, out of Italian banks. But the ECB can come in and say, I guarantee the deposits in every bank in every eurozone minus Greece country for the next one year. That will settle things down.
So I think although there is concern that it's not easy to lay out a strategy where you have an exit of Greece that doesn't cause financial market turmoil-- it will cause turmoil. But my own view is that it can be handled. But Greece-- I mean, Europe needs time. They've taken a number of steps. They need to do a lot more before the firewalls around the rest of Europe are strong enough to permit a Greece exit in one form or the other. So I think it will happen.
AUDIENCE: Hi. One of the wonky subtexts of the campaign is an argument-- it's the proper percentage of the economy being eaten up by government expenditures. And I think, if I remember correctly, the number is somewhere around 25% now. And I think if I remember correctly, the Romney campaign here and there has said that they would be sure that the number would never go above either 19% or 20%. And except for post-World War II era or during World War II, that has been more standard amount of government spending. Could you perhaps explain for us if there's an idealized number between 19% and 25% and where you see with each of these-- each of them-- where you see this going and what the implications are for our economy longer term? It's for Maureen or Francine or both.
MAUREEN O'HARA: I'll make a stab. You raise a really good point. To get to where Governor Romney wants us to go is really going to have to require slashing a lot of expenditure at the government level. And depending on your perspective, we are underfunding the government as it is or the government has gotten too big already, and bringing it down will help.
There isn't any one number because it really depends-- I think the problem with the government expenditures right now is that we have champagne tastes and beer budgets. The taxes are too low. And expenditures are too high. You could have 25% expenditures if you had taxes that were equal to that. But we're not, seemingly, getting there.
Now, the interesting question is, how is Governor Romney going to do what he says he's going to do? Got me. But--
[LAUGHTER]
--I will tell you, I actually had-- I was at a small lunch with President-- with Governor Romney in March at [INAUDIBLE].
AUDIENCE: Excuse me, would you use the mic?
MAUREEN O'HARA: I'm sorry. I was at a small lunch where he was the speaker. And someone asked him about, well, how are you going to-- who are you going to put as heading your cabinet offices? And are you going to use businesspeople? And he said, yeah, I probably will use businesspeople to run the cabinet. But I don't know how many cabinet offices I'm going to have because we haven't actually looked at the structure of government in 60 years.
And we just keep adding things. We don't subtract. And he told a little story about how when he became governor in Massachusetts, it was brought to his attention that the state Environmental Protection Agency was the number one entity that was suing the State Department of Transportation.
So he called the heads of both groups in and said, this doesn't make sense. We shouldn't be suing each other. And the EPA guy was of the opinion that Transportation was wrong. And Transportation was-- the opinion-- EPA was useless. And so they went away with nothing resolved. And so they discovered the next day that he had actually combined them into the new Environmental Protection and Transportation Agency so that they couldn't sue themselves.
So I think it's a very apocryphal story of, where do you think Governor Romney will go? I actually do think he will slash federal spending. I think he will do a number of things like that, some of which will not be popular with some people and some of which will be very popular. I do think he will dump more back onto the states. And so the federal expenditure may well get down to where he wants to hold it. But then, of course, we will be stuck with states who will be running deficits. So it's a very interesting prospect of the role of the federal government versus the state government.
KEVIN HALLOCK: I have a specific question from Fran. But I think she's going to answer it, anyway. So go ahead.
FRANCINE BLAU: Well, no. I don't know if I am or not. But a lot of states are not allowed to run deficits.
MAUREEN O'HARA: Exactly.
FRANCINE BLAU: So it's going to mean just slashing and-- in some cases. And there's a lot of things. What I'm trying to point out, and I think Maureen is not disagreeing, is it's not a magic size of the government. And our government sector is not larger under Obama than it was a few years ago. And it's not larger than other advanced, industrialized countries. It's what the government needs to do and how it does it. And when you pass things on to the states, you set up a lot of inequalities across the states that sometimes lead to a race to the bottom.
If Mississippi decides to have the lowest Medicaid coverage, then that might mean their taxes are lower. And maybe firms will want to move there. I don't know, a little competition between the states.
But I can't get a handle on what Romney's going to do because he's going to make all these big cuts. And then you say, what about-- oh, no, no. I wouldn't touch education. Anything you ask him about specifically apart from Big Bird he will not touch. So I don't know what he's going to do. But what were you going to ask?
KEVIN HALLOCK: I was going to ask what you thought about inequality. That's what I thought.
AUDIENCE: I have a more parochial question. But lately, I have been reading about-- in The New York Times [INAUDIBLE] section, for example, there was a story about how more and more women are becoming major breadwinners in the family. And I've also been hearing that women are still making only 78% of what men make in terms of salary.
What is your view on how the candidates would deal with these kinds of problems? First of all, are they true, the things that I've heard? And secondly, how would the candidates deal with them?
FRANCINE BLAU: There has been a substantial decrease in the gender pay gap. That combined with-- especially at the height of the recession that disproportionately negatively affected men-- has led to an increase in the share of families where the wife might earn a little bit more than the husband. I think it's 38% of families. But a very small proportion of families is-- the wife, the major breadwinner.
So there still is a gender pay gap. There has been an enormous amount of progress. But there still is a gender pay gap. I think that New York Times article was all focused on one locality where a plant had closed.
I think in terms of the candidates, I just have to say that I don't see much emphasis on gender issues from the Romney camp despite the women in binders-- that quote where-- that led to cartoons of women being wrapped in binders. He might have had binders full of women. But an interesting point is he did not-- he did misspeak there. He did not develop those binders full of women, nor did his staff. It was an independent group of female activists who presented him with those candidates.
So I think that President Obama has the track record of concern with this issue. One thing I've noticed in studying this issue of-- over a very long period of time is our laws don't necessarily and haven't necessarily changed. We passed our major anti-discrimination law in the mid '60s. But enforcement does change with different administrations. It has tended where the candidate is not as committed, then the agencies are not as committed to enforcement.
KEVIN HALLOCK: We've got one back there in the back.
AUDIENCE: There's been a lot said about small business. I wonder if you could define it and let us know which candidate is better?
MAUREEN O'HARA: That one is tough. No one has a good definition of small business. The Obama administration actually did have a plan for small businesses in the first term. And I was reading it on his website. And it was really small businesses. You could get $10,000 grants from the government for starting these small businesses.
So at one level, that really is small business at writ small. And it's possible that President Obama will be better at what many people would call really tiny, tiny businesses.
The small business-- it's interesting. As a finance professor, businesses that are-- have market caps of $2 billion or less are considered the small-cap firms. Nobody would realistically call a $2 billion business small. But I think oftentimes, when Governor Romney is talking about small businesses, he's really talking about businesses that are family farms and things that often have net worths of several million dollars all the way up to $20, $25, even $50 million.
So who's going to help small businesses? I think it's all a question of, how small is small? And I think your question is a great one. I think Obama will help the really little guys. I think Romney will help the bigger small businesses.
FRANCINE BLAU: I think there's a little bit of an exaggeration of the emphasis on small business. There's a figure. And I can't remember what it is. But I'm making it up. Small businesses create 35,000 jobs a month or something-- making it up. They destroy about that because there's enormous turnover in small businesses. It's not their fault. But they just-- there's a lot of turnover. So you count the jobs they create, but not the jobs they lose when they go under.
So there's just a lot of churning. And I think it is-- in honesty, I think it's partly a political thing because there's a lot of people who have small businesses. And it's a courting of those voters.
KEVIN HALLOCK: We need to keep on time. So I'm going to take two more questions, one there. And then you're next over there.
AUDIENCE: I have a question on the unemployment. It was said earlier that in 2009, the unemployment rate was about 8%. And it's stated that today, the unemployment rate is still around 8% and that even though the latest numbers dropped below 8%, it was-- been responded to that more people that are unemployed are seeking-- more people not seeking employment. I don't understand those numbers because my observation is that the group of people that were unemployed in 2009 are not the same people today, meaning in the sense that if you look at the-- let's call the $50 an hour executive versus the $10 an hour laborer.
If you looked at the 2009 group of people, more and more executives were being laid off. That has a significant impact on our economy. My observation is that a lot of them are back at work. Has somebody drilled down on the unemployment rate to look at, really, that mix of people, because we look at economic numbers today? We hear car sales are booming. We hear the real estate market has bottomed and getting better. We hear manufacturing numbers are up. But yet the unemployment rate is still the same. I don't quite understand it.
FRANCINE BLAU: That's a very big, long question. But I would like to make a few points. I do think that the stimulus that-- I think Maureen and I probably differ about the stimulus. I think the stimulus avoid a catastrophic-- a catastrophe that could have happened to the economy. I think we're doing-- we could have done better with a larger amount of stimulus. And by the way, I think that the lack of aggregate demand, sufficient aggregate demand, is one reason that businesses are sitting on these investments.
In general, about the unemployment rate, we do know the groups. And really, whether it's the height of a recession or a recovery, like we're in now, and I think things are picking up, it's always the less educated people who have higher unemployment rates. In the first flash of the bottom falling out of the financial markets, you heard about some executives and high-level people who were-- lost their jobs. But I think you're right. A lot of them have been re-employed. Unemployment rates are historically high for well-educated people. But they're much lower than they are for the less educated.
KEVIN HALLOCK: Go ahead.
MAUREEN O'HARA: I was just going to say, I actually think it's complicated this time around because if you look at industries that I spend time in, the investment banking, Wall Street crowd that has become in the middle-- that is just permanently smaller by a substantial amount. Those jobs went away. They're not coming back. Banking is smaller for-- if you look at employment in banking.
If you look at lawyers, the legal profession has basically taken a huge hit over the last four years. But that's not necessarily due to the financial crisis. It's due to technology. If you look at a lot of the fields that used to be the places where middle-class kids could go to college and get a job, accounting firms more and more gets farmed out to overseas, and lawyers.
So I think what's interesting to me, and I really like your question, as well, is that it isn't just the people at the bottom now. There has been a structural shift in a number of industries that used to be relatively high paid. And I don't think we know the answer, necessarily, to your question.
FRANCINE BLAU: But I'd just like to point-- yes, the labor force is always changing and shifting. But those people aren't necessarily unemployed. They may not be employed where they'd like to be. And I wouldn't disagree that some sectors are shrinking and other sectors are expanding.
KEVIN HALLOCK: Also, I think the point that starting in the mid 1990s, there's evidence-- not numbers, but the change in reporting on this thing and the implicit contract between firms and workers in both ways-- there's some perception that workers are less committed to firms and firms less committed to workers. The stigma associated with being laid off from a job now is tiny compared to what it was a generation ago. I think there's been a dramatic shift in that. So we have one more question over here. That's the final question to keep you on time.
AUDIENCE: My question is geared to monetary policy. You talked about how it's been-- basically saved this economy. What's your outlook for the Fed going forward with Bernanke if he does not get elected to another term?
And also, at what point do you think interest rates will actually go up, because a lot of people on Wall Street are worried about the chances of rates going up? And that's why most corporations are keeping this huge amount of cash on their balance sheets. Can you talk about that?
ESWAR PRASAD: A good academic economist is never going to predict interest rates or exchange rates. We don't know any more than the market does. What is interesting, of course, is the fact that in periods of extreme financial stress in the US, as well as abroad, money keeps coming into the US, thereby keeping interest rates at the outer end of the yield curve at a 10 to 30-year horizon quite low. And that's one of the remarkable features of the financial crisis and the period that has followed.
The concern that I have is that there could be a tipping point when bond investors get very worried. Now, the reality the world economy faces right now, which frustrates the rest of the world, including countries like China, is there isn't any other place to hide. The question that we don't have a good answer to is, if not the dollar, then what? And so long as we don't have a good answer to that question, I think the US is relatively safe.
So the US does have this very special feature right now that it is still the bedrock of the international financial system because our markets are so deep and liquid. And there is, one might argue, a somewhat childlike faith in the US ability and willingness to eventually pay off some of this debt. And that's something that, again, keeps things on a knife edge. So because there is no alternative, interest rates are low here.
So again, it's very hard to figure out when a tipping point might come, what might trigger it. It could be something like China deciding that if there is a conflict that escalates with the US-- that its territorial integrity matters more than shooting itself in the foot economically, which is what would happen if it stopped buying US treasuries, for instance.
So it's hard to say what the tipping point would be. But if that were to come, it is going to be very, very ugly. But I think, again, if you think about the amount of money that US corporations are holding, I would ascribe it much more to the factors that Fran and Maureen have talked about-- a general climate of uncertainty, the lack of confidence, and the fact that you don't have aggregate demand. I think those are the bigger concerns in the short run.
Eventually, I think the Fed can sort this out. And again, the world seems to view the Fed with enough credibility that it can pull this out. But again, that's going to be a pretty big challenge when the time comes, when inflation starts rising and this liquidity has to be soaked back. So I don't have a good answer for you. But it's going to be tough.
KEVIN HALLOCK: I want to thank you all for coming, and particularly thank our panel.
[APPLAUSE]
These three are incredibly busy people. And it was great for them to spend some time with us today. If you want us to talk about the economics department details, just come on up at the end. And I'd be happy to talk about it. So thank you very much.
[SIDE CONVERSATION]
What impact will the upcoming presidential election have on future economic policy and the potential for economic growth? A panel of top economists from Cornell's university-wide Department of Economics share perspectives on a wide range of topics, including human capital, job creation, international trade, wage inequality, and global finance.
This event was part of the Trustee Council Weekend 2012 activities.
