Banking & Finance, Government, and Human Resources

Expert: Economy nears end of recession recovery phase

Former Federal Reserve Bank of Atlanta president and CEO discusses immigration and economic impact at World Affairs Council luncheon.

April 28, 2017
| By Pat Evans |
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Dennis Lockhart
Former Federal Reserve Bank of Atlanta President and CEO Dennis Lockhart said a feasible “modern, intelligent immigration program” is needed for faster economic growth. Courtesy World Affairs Council

The former Federal Reserve Bank of Atlanta president and CEO believes immigrants are good for the economy and the repatriation of overseas funds has little effect.

Dennis Lockhart, who stepped down from his position in February, made the comments at the World Affairs Council luncheon on April 21 at The University Club. The discussion was moderated by Charles Shapiro, a previous speaker at World Affairs Council of Western Michigan, president of World Affairs Council of Atlanta and former U.S. ambassador to Venezuela.

Lockhart began the discussion by explaining the economy is near the end of the recovery from the Great Recession, which started roughly three months into his tenure in 2007.

Much of the rest of the discussion centered on how the central bank can keep the economy rolling forward and why the recovery has felt so delayed.

“If you look very closely, there are a lot of positive points,” Lockhart said. “If you want a faster economic growth and want the workforce to grow at a reasonable pace, you have to have a modern, intelligent immigration program, if it’s politically feasible.”

One of the secular trends that kept the economy from feeling a full recovery was a consistent decline in workforce participation, which Lockhart believes now to be stabilized at 63 percent, thanks to a number of scenarios run by his staff prior to his departure.

His staff also looked at the past 30 quarters, in which they found 25 quarters with news headlines to keep businesses cautious about investments, including the fiscal cliff, debt ceiling, Greek debt, oil volatility, European bank weakness and the weakening of the Chinese economy.

“These have positioned the economy for a central question,” Lockhart said. “Do we continue with a moderate pace of growth or the much more vigorous growth that has been promised by (President Donald) Trump?

“Rapid growth would solve a lot of problems. It could extend our power around the world and attack things like inequality, educational system and various other issues domestically that need funding.”

Lockhart is confident with continued 2 to 2.5 percent economic growth for the foreseeable future, but skeptical of the 3.5 to 4 percent growth Trump has promised since his presidential campaign.

He believes the soft forecast of two more interest rate hikes this year is realistic, but three is possible.

A variable in the continuing economic increase will be the opposite of the quantitative easing that occurred during the recession, where the Federal Reserve increased its balance sheet from $900 billion to $4.5 trillion and invested the balance in securities. One of the major questions moving forward, Lockhart said, is shrinking those funds as the securities mature to normalize the balance sheet. Pacing will decide whether it leads to inflation, he said.

“You let securities mature, then destroy the money,” he said. “It’s really complicated stuff. As the balance sheet shrinks, it takes some stimulus out, but economic momentum should continue.”

Lockhart said it remains to be seen whether artificial intelligence, automation and IT will be as transformative of a technology as electricity or computers. If the new technologies prove to be disruptive, they could lead to jobs becoming more educated and cognitive and less about working with hands.

“It’s still early to conclude that internet of things, artificial intelligence, robotics, automation; it’s too early to judge the impact it will have on productivity. It’s just beginning to accelerate,” Lockhart said. “I’ve talked to industrialists who say this is real. We’re investing in these tools and the nature of factory and other kinds (of work) that we consider mid-level and blue collar will change.”

A major theme Lockhart believes is underplayed by economists is the demographic influences and what happens with the economy.

Lockhart also said he does not believe the repatriation of funds from overseas would inject any extra money into the economy.

“They’re not out of our economy, bringing them home is more of a notional thing,” he said. “This idea that it’s magically repatriated and a big boost to our economy; I’m not so sure.”

There are some headwinds Lockhart fears could hamper the economy in the near future. The French election and North Korea are both areas of concern he mentioned, but with the way the U.S. economy plowed through Brexit, the effects are unpredictable.

He does believe in four actions to accelerate the economy: tax reform, tax cuts, deregulation and infrastructure spending. Lockhart was especially in favor of deregulation of banks.

“That’s the big package that will generate 3 to 4 percent growth,” Lockhart said. “I am supportive of the idea that the pendulum swung so far after the crisis, it can swing back and be much more risk plausible. The idea a small community bank is systematically important doesn’t make sense; they’re not.”

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