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Economist: Only cloud in our future is budget deficit


Carl Tannenbaum uses a lot of humor when he comes to the unpleasant part of an economic forecast, and he reached deep into his store of funny stories at last week’s 2005 Economic Forecast Forum when the subject was the staggering federal budget deficit.

“My concern is really quite acute,” said Tannenbaum, senior vice president and chief economist of LaSalle Bank Corp. in Chicago and a regular speaker at this annual event. “Long-term interest rates have stayed low, and that’s been very helpful to the economy. But if we don’t get the budget under control, we’re not going to be able to keep interest rates at these levels.”

And if we don’t make adjustments to the structure of the Social Security system, he said, “our children will be paying tax rates of 70 percent.”

Still, Tannenbaum presented a generally optimistic short-term outlook to a late-afternoon audience at the Hotel Fort Des Moines. For 2005, he predicted gross domestic product growth of 3.6 percent, down slightly from 4.4 percent in 2004; an inflation rate of 2.1 percent compared with 2.7 percent; and an unemployment rate of 5.2 percent vs. 5.4 percent in the year just past.

“We’re betting that oil prices will ease, unemployment will be lower, and we’ll have slowly rising interest rates,” he said. The rates were slashed in response to alarming economic developments, but “we don’t have an emergency any more,” Tannenbaum said. In his final year as chairman of the Federal Reserve Board, “Alan Greenspan is just trying to get the rates back to a normal level.”

Tannenbaum classified the existing situation as a “Rodney Dangerfield economy,” meaning that, like the late comedian, it’s not getting the respect it’s due.

“We just finished a pretty good economic year,” he said. The GDP grew at nearly 4.5 percent, a strong finish resulted in a respectable performance by the stock market, and the nation gained 2.2 million jobs, Tannenbaum noted.

Concern over the loss of manufacturing jobs is misplaced, in his opinion. “The United States has been losing manufacturing jobs for 60 years. China lost 8 million manufacturing jobs last year,” he said. “That’s because manufacturers have become more efficient. Output is at a record level.”

He also brushed aside worries that consumer spending will begin to slacken, pointing to strong car sales in December and a generally strong holiday retail season. Despite a decline in Americans’ rate of saving and increases in consumer debt and personal bankruptcy, Tannenbaum said he doesn’t believe U.S. consumers are “tapped out.”

“We have more debt, but collectively we’re richer, and everyone seems to have gotten very smart about managing the cost of debt,” he said. “As long as we keep the job engine going, people will be handle their debt.”

Looking at the business side of the ledger, Tannenbaum accused U.S. corporations of being “way too conservative” in 2004. He attributed that mindset to concern about rising energy and health-care costs, uncertainty about consumer demand, the turmoil of the presidential election campaign and the effects of the Sarbanes-Oxley Act of 2002.

“A lot of American companies spent 2004 accumulating cash,” he said. “We need companies to look forward and be energized for the economy to grow.”

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