Nothing to worry about, yet, economist Thornberg tells Palos Verdes Chamber
Beacon Economics economist Christopher Thornberg addresses the Palos Verdes Chamber of Commerce. Photo
Economist Christopher Thornberg took the stage at Terranea looking more like the keynote speaker for the resort’s annual Code Conference than for the Palos Verdes Chamber of Commerce’s annual Economic Forecast Board Installation breakfast, on Friday, January 18.
He was wearing a tan tie, tan sports jacket and Levis.
“Notice my hipster tech look. All I need is a beard,” he began. “You might think economists are hip. We’re not. My suit pants just fell off my hanger,” he explained.
Thornberg made his name as an economic forecaster by predicting the 2008 Great Recession in 2006. He subsequently became a sought after speaker by business groups up and down the coast by making the ‘dismal science’ entertaining, often at the expense of fellow economists and politicians.
Thornberg quoted Chapman University economist Joel Kotkin’s finding that California recently became the world’s fifth largest economy. Kotkin’s many publications include a column in Forbes.
“But he says all the growth is coming from Silicon Valley. The rest of the state is a hell hole. It’s okay to think that. But why did he have to say that?
“Joel has reached an interesting point in his career where he no longer needs facts to back up his opinion. We all get there. My father is there. I’m getting there.
“But look at the data,” he said in a pleading voice.Then he showed a slide of Kotkin’s own economic data showing the Bay area “punching above its weight” but not surpassing Southern California
“The Bay Area has never been a dominant source of growth, ever, from an income or job perspective. It never will be. It’s too small. It has seven million people. Los Angeles County alone has 10.5 million.
“Los Angeles County added 645,000 new jobs over the last five years. That’s more than any other market in the nation.”
Labor and The Wall
Thornburg madeTrump a running gag throughout his talk — by never speaking his name. “I have had two young children since I started speaking to you four years ago and I’ve had to learn to watch my language,” he said.
He did talk about the Wall. The debate over “the wall,” Thornberg argued, “tells you all you need to know about U.S. politics. It’s really ugly stuff.
He showed a cartoon by the Denver Post’s Mike Keefe of the $18 billion wall with an $18 ladder leaning against it.
“The federal budget is $3.8 trillion. $1.8 trillion is discretionary spending. An aircraft carrier costs $14 billion. For close to a month, the government has been shut down because of a fight over $5.7 billion. That’s chump change to the fed and Jeff Bezos.”
“You can’t argue against uncontrolled immigration. But that conversation is separate from the need for more immigrants.
“It’s not left versus right. It’s rhetoric versus reality. If we vote for closed borders, that’s fine. That’s democracy. But don’t pretend it will be good for the economy. It’s going to slow growth. That’s the cause and effect you have to deal with.
“18 million boomers are retiring. Anyone doing business needs to think about that demographic. They have time and money.
“Unfortunately, their retirement will constrain labor. If you want the economy to grow faster, you need immigration to increase the number of workers. No immigration, no growth.”
Look at the data
To understand the economy, Thornberg urged his Palos Verdes audience to “forget the headlines and the rhetoric. Ignore all the craziness over politics and the stock market.”
“Look at the data,” he said as he projected a slide headlined, “Why so glum?” 2018 was a good year. Labor markets were good. Business investment good. Consumer spending good. Exports, energy good. Inflation completely restrained.”
He noted that the U.S. is now the world’s largest oil and gas producer. “We’re 20 percent larger than Saudi Arabia and 25 percent larger than Russia.”
“There’s not a reason in the world to look at this data and worry.
“The Wall Street Journal just released a poll of 60 economists who agree we’ll have a recession in 2020.
Remember last year’s Wall Street Journal poll? Recession in 2019.
Remember the poll the year before that?”
Thornberg inserted a practiced comedic pause to allow his audience to shout out the answer.
“That’s right. 2018. The next recession is always two years away.
“A reporter called to ask me when I thought the next recession would be. I told him, ‘Don’t be stupid like the Wall Street Journal.’ If you answer that question you are unqualified to answer that question. Because the question isn’t ‘When?’ The question is ‘Why?’ If you don’t have a why, the answer is never.
“No one knows when the next recession is until you see conditions that create recessions.
“In 2006, when I made that call, if you looked at the data the coming recession was obvious. We were overspending and over borrowing.
“Today, it’s not all good news. We have a housing shortage, a volatile stock market, a government shutdown and global tradewars. These are all economic stressors. But do they rise to the level of causing a recession? No. Not even the shutdown. Not yet,” he said, adding another comedic pause.
“The economy is kicking along on every cylinder.
“Last year, fourth quarter GNP growth was 3.2 percent. Consumer spending up 3 percent. Consumer savings rose to 6 percent. Consumer delinquencies are at a record low.
“GM announced 14,000 layoffs. Cars are lasting longer and people are ‘cutting the cord’ with Uber. This is called doing business, adapting to change. If GM had been doing this for the last 30 years, they wouldn’t have gone bankrupt in 2009. Yes, we need to worry about those 14,000 people. But this is the strongest labor market we’ve ever seen. It’s not 2011. They’ll land on their feet.
Thornberg characterized the Los Angeles teachers strike as “teachers wanting money the district doesn’t have.” “Spending for students is low (relative to other states). Spending for teachers is relatively high. A 6 percent, retroactive pay raise with no reform of unfunded benefits? Teachers need to take a breather.” The long term solution, he said, is for the State to increase LAUSD funding.
Real estate is rational
“The mortgage rate hike caused the housing market to take a breather in 2018. Sales slipped from 5.5 million to 5.2 million. This is the market behaving rationally. Yet that tiny blip has led to mass panic.
“People say, ‘Look what happened last time housing sales fell.’ In 2006, sales fell from 7.2 million to 4 million. That’s a slow down. We were building 2.5 new units for every new homebuyer. It took years to get rid of that oversupply. Now it’s a tight housing market. Ownership rates are at a record low. We have the cleanest mortgage market ever. We have mortgage regulation by credit scores. The 2010 Dodd-Frank (Wall Street Reform and Consumer Protection Act) may have long term negative impacts. But it’s created one of the safest housing markets ever.
“People say the housing shortage is an affordability crisis. That’s a stupid argument. The problem is not enough homes. We need 250,000 new units per year and we’re building 130,000. If you work on affordability, using rent control, you worsen the housing supply and worsen affordability. Focus on increasing supply and you fix the affordability problem.”
Thornberg said Prop. 13, “the most ridiculous tax ever,” is part of the problem. The Prop 13 initiative was approved by voters in 1978 because homeowners, particularly the elderly, were being forced to sell their homes, due to state and local governments increasing property taxes whenever they were short of funds. Prop. 13 limited those increases to 2 percent a year.
“It’s a horribly regressive tax in a progressive state. It forces the state to rely on volatile income taxes for 70 percent of its general fund income.
“And it contributes to the housing shortage because, any city manager will tell you that 80 percent of their budget goes to residents. But property taxes are only 20 percent of their revenue. So they don’t want more housing built. They want more commercial (for sales tax revenue). We need to incentivise cities to build more housing. I’d flip the ‘split role’ initiative (on the 2020 State ballot). Keep Prop 13 for commercial and get rid of it for residential.
“We need to be like Texas. 3 percent property tax and no income tax. Every state has seniors and they aren’t all losing their homes. They have property tax discount for seniors.”
Stock market is Playstation 4
Thornberg was even less concerned about the stock market’s instability than he was about the housing market.
“The stock market is not quite as smart as you think it is. Recent headlines about the 10th anniversary of the Lehman Brothers bankruptcy would have you believe the stock market caused the recession. The stock market didn’t even see the problem until nine months after it began, in Dec. 2007.
“For those of you worried about last month’s selloff, if you bought in 2010, you still averaged an 11 percent per year return. You’re still way ahead.
“What you should be worried about is the stock market’s behavioral problems. There have been six sell-offs in the last six months. Typically, there is one selloff in six months (defined as a 16 percent drop from the previous six months). This was not about the economy.
“We no longer have stock brokers determining value based on earnings and quality of management.
“Now, it’s Playstation 4. Trades made by the nanosecond with the sheer object of beating someone else’s program. It’s not a market. It’s a video game.
“What was it about this time? Interest rates hit 5 percent. Sell. Why. That’s what the program said. So this guy sells, then that guy sells and it cascaded through the system and all hell broke loose.
“Is 5 percent a scary number. It was at 4.6 percent. Back up 30 years when interest rates were 14 percent rates and we see the change was a blip.
“The fact that we allow video games to dominate the market should scare us. But there’s not even a conversation about it.”
2019 forecast
“The policy debates are about the wrong questions. Ask the right questions and the problems can be fixed. Turn off the weapons of mass distraction. Ignore — oops, I almost said it — Twitters. Focus on the real things.
“We need to deal with underinvestment in infrastructure, rising wealth inequality, healthcare cost inflation, and pension and entitlement issues. If we don’t, it will catch up with us. In 10 years we could have an European style debt crisis.”
But in the short run, he said, “It’s bizarre to feel sorry for ourselves in the most prosperous economy, ever. In 1973 life expectancy was 68. Today it’s 76. Infant mortality rate is down, crime is down, we’re healthier, the environment is cleaner. We live in the most amazing times ever.
“GNP may slow to a solid 2.5 percent because the sugar rush from the stimulus will have worn off. Otherwise, my forecast for 2019 is unchanged from 2018. I see no reason for change. It’s going to be a good year. ER
CPA and breakfast sponsor Hank Parker with Christopher Thornberg.
Christopher Thornberg with Rolling Hills Estates Councilwoman Britt Huff and Rancho Palos Verdes Mayor Susan Brooks
Cortney Medak of Promenade on the Peninsula is recognized as the Volunteer of Year.
Rancho Palos Verdes Mayor Susan Brooks swears in the 2019 Palos Verdes Chamber of Commerce Board of Directors.