Politics & Government
Economist more optimistic about ‘soft landing’
Klepper-Smith says federal government needs to address soaring gross federal debt
By Scott Benjamin
With inflation raging last year and interest rates continuing to rise into this spring faster than any time since Paul Volcker chaired the Federal Reserve Board during the early 1980s economic stagflation, signs pointed toward a recession.
Now an increasing number of the 60 economists surveyed by The Wall Street Journal think the American economy can avoid a dramatic downturn.
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So does economist Donald Klepper-Smith, who has delivered the keynote address at a number of the recent Greater Danbury Chamber of Commerce Economic Forecast Breakfasts.
“The prospects of a soft landing are better now than they were six months ago,” Klepper-Smith of DataCore Partners said in a phone interview with Patch.com
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“The U.S. economy has been rather resilient in avoiding a recession,” he remarked. He said that he largely attributes that to “unprecedented” monetary and fiscal stimulus during the pandemic.
Klepper-Smith, who was chairman of former Gov. M. Jodi Rell’s (R-Brookfield) economic team, noted that inflation was at about an eight percent annual rate in late 2022 and has averaged about five percent through the first five months of 2022. The most recent reading was three percent.
“The Federal Reserve has so far been able to engineer the soft landing that everyone has waited for,” he said.
Forbes has reported that the Federal Reserve Board increased rates 10 times between March 2022 and May 2023 to help tame inflation. Wall Street Journal reporter Nick Timiraos has stated that the Fed may again increase rates later this month, which would place them at a 22-year high.
However, Klepper-Smith said the public should be alarmed about a $32 trillion gross federal budget debt that is growing in leaps and bounds.
National Public Radio (NPR) has reported that the federal Treasury Department has indicated that the deficit through the first nine months of the current fiscal year increased nearly $1.4 trillion – a 170 percent rise from the same period during the previous fiscal year.
Interest payments over the first nine months of the current fiscal year reached $652 billion – a 25 percent increase over the same period during the last fiscal year, according to NPR.
Klepper-Smith lamented that tax revenue for the first nine months of the current fiscal year, which ends on September 30, were down 11 percent and government spending increased by 10 percent.
“At some point we have to live within our means,” he declared. “That is non-negotiable.”
Klepper-Smith said that he largely agrees with the recent New York Times editorial that stated, “Republicans must accept the necessity of collecting what the government is owed and of imposing taxes on the wealthy. Democrats must recognize that changes to Social Security and Medicare, the major drivers of expected federal spending growth, should be on the table. Anything less will prove fiscally unsustainable.”
“Both parties are responsible” for higher deficits, he commented.
On another topic, he said he agrees with Robert Lighthizer, the U.S. Trade Representative for Republican former President Donald Trump, who wrote in his recent book, “No Trade Is Free,” that American trade policy should reach a middle ground between “old-school protectionism” and “unbridled globalism.”
Lighthizer complained that the Permanent Normal Trade Relations with China and the North American Free Trade Agreement, which were negotiated in the 1990s and early 200s, cost the United States jobs and widened the trade deficit.
Klepper-Smith remarked, “We have to balance globalism and protectionism. I believe in open markets, but I’m also a pragmatist. When you look at how China is playing and how other major countries are playing in trade, you have to engage in trade practices that sort of look at economic growth in a pragmatic way that keeps people employed.”
He said that he generally supports recent efforts by the Biden Administration “that allows for an adequate supply” of microchips.
Klepper-Smith said if the United States is to “continue to be a world leader in economic growth” it will have to boost its production. He noted that two years ago it was difficult to produce enough cars and refrigerators due to a lack of microchips.
“China is clearly in the lead” in producing microchips, he commented.
For some time, Klepper-Smith has said that the ripple effects from the pandemic have made the economy more unpredictable than at any time in his more than 40 years in the profession.
As a result, he declared, “The way we conduct business is going to be different in a post-pandemic environment.”
“One of the biggest surprises that we’ve had in the last five years is that [we thought] people needed to be in a traditional office setting to be productive and to maximize productivity,” he remarked. “But now we find that’s not the case; that many workers can be just as productive in a home office setting.”
“The downside to that is that your metro areas, such as New Haven, Hartford, Stamford and Bridgeport have been adversely effected in their commercial areas because you don’t have as many people going in and out of there on a daily basis,” Klepper-Smith continued.
Additionally, he said that the job market is starting to experience “major structural change.”
A 2017 Price Waterhouse Coopers study indicated that by 2032, 37 percent of the current jobs would be obsolete.
Klepper-Smith, the emergence of Artificial Intelligence and the continued growth of robotics has already had an impact as companies have sought less expensive cost structures.
He projects that artificial intelligence will “displace a lot of new jobs going forward.”
During a 2016 forum in Ridgefield Fox News host Larry Kudlow of Redding, who would become the director of the National Economic Council under Republican former President Donald Trump, scored Connecticut’s economy at zero on a scale of up to 10. The other panelist, Ridgefield native Jared Bernstein, who is now the chairman of the Council of Economic Advisors under Democratic President Joe Biden, rated the Nutmeg State’s economy at 3.8.
Klepper-Smith said there has been improvement.
“The fiscal situation we’re in is considerably better than where we were in 2018, 2019,” he commented. The state has had surpluses in recent years and has started to reduce its pension debt, partly through the fiscal guardrails that were approved in 2017.
The 2018 report from the state Commission on Fiscal Stability & Economic Competitiveness reported that Connecticut’s economy had contracted eight percent between 2007 and 2016.
Klepper-Smith commended Gov. Ned Lamont (D-Greenwich) and the General Assembly for reducing middle class income tax rate from five to 4.5 percent and the lower income rate from three to two percent.
“Anything you can do to put spending power back in consumers hands is a win-win,” Klepper-Smith said.
In an interview with Patch.com, state Rep. Farley Santos (D-109) of Danbury said that the tax reductions were “the largest in Connecticut history and “people will feel that” as they prepare their household budgets.
However, Klepper-Smith commented that overall in comparison to other states, Connecticut’s economy has made “modest progress.” Although, he said that manufacturing has remained strong.
“In the last 24 months or longer there has been an unprecedented amount of monetary and fiscal stimulus at the national level,” Klepper-Smith said.
“What has happened recently through the first half of 2023 [in Connecticut] has largely been a function of the stimulus that we’ve received,” he added. “It is not a function of economic activity.”
Klepper-Smith said that, among other things, the state is plagued by a lack of housing, which has inhibited job growth.
He remarked that Connecticut has 29,000 fewer jobs than it had in March 2008, shortly before the Great Recession
Klepper-Smith added, “The job recovery rate in Connecticut is 90 percent, whereas nationally it is 304 percent” since the Great Recession.
Resources:
Phone interview with Donald Klepper-Smith, Tuesday, July 18, 2023.
https://www.wsj.com/articles/economists-are-cutting-back-their-recession-expectations-74118938
https://www.nytimes.com/2023/0...
https://www.wsj.com/articles/t...
https://www.forbes.com/advisor...
https://www.nytimes.com/2023/0...
https://patch.com/connecticut/brookfield/marquee-economists-disagree-american-recovery-0
Interview with Farley Santos, Patch.com, Thursday, July 20, 2023.
Robert Lighthizer, “No Trade Is Free,” Broadside Books, 2023.
