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Economist tells Hudson audience he's pessimistic

Economist Edward Lotterman speaks to an audience in the River Room of The Phipps Center for the Arts last Thursday, Feb. 21.

Edward Lotterman didn't have much encouragement to offer in his address in Hudson last week on the economic outlook.

The economist, newspaper columnist and college professor was the speaker at a breakfast forum sponsored by First American Bank of Hudson.

"I'm normally a very optimistic person. But right now I'm still a pessimist," Lotterman said, "because the possible things that could go wrong really outnumber -- and are bigger in size or possible impact -- than the things that could go right."

The address he gave Thursday in the River Room of The Phipps Center for the Arts was titled "Today's Economic Environment." About 60 people were in attendance.

Lotterman writes the column "Real World Economics" that appears in the business sections of the St. Paul Pioneer Press and three other daily newspapers. He also is a professor of economics at Augsburg College and has taught at a number of Twin Cities area schools over the last 30 years.

He was the regional economist for the Federal Reserve Bank of Minneapolis for most of the 1990s.

Lotterman grew up on a farm in southwestern Minnesota and still owns agricultural land there. He began his talk with what he likened to an agriculture agent's assessment of the current situation.

"We're not technically in a recession anymore, but it sure feels like it to a lot of people," he said.

He said the country is slowly recovering from one of worst recessions in its history, brought on by "the collapse of a big asset bubble in both housing prices and in financial assets."

"There are recessions, and then there are recessions," he said, explaining that when a recession follows a financial crisis like the country experienced in the fall of 2008 -- with many large banks either failing or on the brink of it -- it takes longer for the economy to recover.

"It really doesn't matter who the president is," he added. "... We're sort of getting through that hangover."

The outlook

The truth is that no one knows what is going to happen in the coming months and years, Lotterman said.

"If you came here to hear Ed Lotterman tell you what's going to happen, he can't," he said. "And the secret is that no other economist can."

He said that in normal times, economists are pretty good at predicting what the next quarter or year will bring as long as the economy is on an upward or downward trend.

"But they are no good at all at telling you when the trend is going to bend from up to down, or down to up," he said.

"In a situation like now, when there are so many balls in the air -- so many things that could turn out one way or the other -- to hear someone say, 'this is our forecast,' I don't trust it greatly," he said.

"Things could continue to improve, and things could get worse. And we don't really know."

Downside uncertainties

Lotterman listed a war or crisis in the Mideast, failure of the euro system, a slowdown in the Chinese economy, a return of inflation and consequent reduction in the money supply, bringing higher interest rates, a new financial crisis and a loss in confidence in the U.S. dollar as things that could put the economy back into recession.

He noted the political pressure for military action to prevent Iran from developing an atomic bomb.

"I like Chuck Hagel," Lotterman said forthrightly about President Barack Obama's nominee for secretary of defense. "You know the principal reason he isn't being confirmed right now is because he doesn't have sufficient enthusiasm for going to war with Iran. Well, we go to war with Iran and it is going to do something."

More than 30 percent of the world's oil still flows through the Strait of Hormuz, and a war with Iran could disrupt that flow, causing gas prices to spike, which would negatively impact the world economy, he said.

Lotterman said that while the euro and Europe aren't an "acute problem" anymore, there are underlying contradictions in the euro system that aren't getting resolved.

"I don't think the euro system is going to exist the way it is right now five years from now," he said.

He added that many business contracts are based on the euro's existence. "To unwind all of that without having some major bobble in the European economy is unlikely. You can't do it neatly," he said.

Lotterman had harsh words for big investment banks that he said are returning to some of the old risk-taking activities that led to the 2008 financial crisis.

He quoted a passage from the Old Testament book of Proverbs about a dog returning to its vomit to describe the banks' behavior.

"They got hit and they got bailed out, and they are just returning to some of the old risk-taking activities and hiding things, and complex financial transactions, that they were in prior to 2008," he said. "...I'm not saying the financial sector is going to blow up, but there's a possibility. And the possibility is substantially greater than zero."

Fiscal issues

Lotterman also had strong criticism for lawmakers who over the decades haven't taken steps to address the nation's growing debt.

"Social Security has covered up underlying budget problems for some 30 years," he said, referring to the federal government's practice of using Social Security taxes to pay for other programs.

The national debt tripled in the 1980s when President Ronald Reagan wanted a stronger military and lower taxes, and Democrats refused to cut social spending, Lotterman said.

At the end of the Clinton Administration, the nation ran a slight budget surplus for a few years, "and then we p---ed it way," he said.

"I've been giving talks about the unsustainability of federal finances for 20 some years. Now everybody is concerned about the deficit. My reaction is, well where the hell were you back in 1991? Where were you in 2000?"

Lotterman said the debt grew during George W. Bush's presidency when the country went to war in Iraq and Afghanistan, added a Medicare prescription drug benefit and cut taxes.

People are now blaming the stimulus spending that followed the 2008 financial crisis for the growing debt, he said, but "these big budget deficits were baked into the cake well before then."

"Everyone knew it was going to blow up."

Citing the failure of Congress to agree on deficit reduction and the uncertainty created by debt ceiling and sequester deadlines, Lotterman said the details of an agreement aren't as important as reaching one.

"We just need this not to be a recurring and recurring and recurring (phenomenon)," he said. "Republicans talk about businesses needing to know for sure what their tax rates are going to be, and (say) the uncertainty about tax rates is weighing on the economy. It is, but just the uncertainty about the whole fiscal situation is weighing on the economy."

Lotterman said that what is frustrating to him is that there are things the two parties could agree upon, such as the elimination of tax loopholes, but politics get in the way.

On the positive side, housing prices and construction are starting to recover, the stock market is high, and fracking and directional drilling have resulted in an abundant supply of cheap natural gas, Lotterman reported.

Alternative scenarios

He laid out four alternative scenarios for the future.

The rose-tinted outlook is that we'll continue to have a slow, steady recovery, with employment growing faster than the labor force.

The realistic, optimistic outlook is that the economy will continue to grow, but not fast enough to reduce unemployment. "You just stay in this kind of sluggish state."

Another realistic, but more pessimistic, outlook, he said, is for the gross domestic product to grow at less than 1.5 percent, with no change or some increase in unemployment.

The fourth scenario -- a new financial crisis in which things "really fall apart" -- isn't impossible," he said.

The good news, Lotterman said, is that the situation in the Twin Cities metropolitan region is kind of like Garrison Keillor's fictional Lake Wobegon -- above the national average.

First American Bank

Lotterman was introduced by First American Bank President John Malmberg, who reported that the Hudson bank's assets grew 19 percent in 2012 to a total of $95 million.

First American also increased its lending 28 percent, far above the average increase of 1.7 percent for banks in the Twin Cities metro area.

Malmberg said the bank's increase in market share was a reflection of its competent and hard-working staff.

Randy Hanson

Randy Hanson has reported for the Star-Observer since 1997. He came to Hudson after 11 years with the Inter-County Leader at Frederic, and eight years of teaching social studies. He’s a graduate of UW-Eau Claire.

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