Canada, Former Obama Adviser Warns of `Bumps' in Economic Road

September 2010 ~ Goolsbee to Lead Council of Economic Advisers

November 28, 2011

Former Obama adviser warns of `bumps' in economic road

Toronto - If the United States is going to survive the next 18 months, it will have to rely on its own strengths, Austan Goolsbee, President Barack Obama's former chief economic advisor, said in a speech in Toronto Monday.

`It's like my grandpa used to always say, '80 per cent of the world doesn't care about your problems. The other 20 per cent are glad','' Goolsbee said in a lively lunchtime session hosted by the Economic Club of Canada.

The crowd of 200 at the Royal York Hotel were often in stitches, even as the noted economist presented a rather bleak picture of the global economy.

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Goolsbee, who recently left the post of chairman of the Council of Economic Advisers in Obama's cabinet to return to teaching at the University of Chicago, said the U.S. economy will not be able to avoid the ``bumps in the road'' of the next 12-18 months but is nonetheless in a relatively strong position.

``Prospects are pretty good, compared with others,'' he said. ``We're going to be shifting back towards export and business investment-based growth. But shifting the focus of the economy, especially if you have asset values falling, it takes a long time.''

However, Europe is facing a ``dual crisis,'' starting with fundamental solvency issues with its banks, which are suffering the consequences of holding billions in government bonds without any backing capital.

``This is a terrible mess,'' he said. ``The banks will need to recapitalize, do a stress test, open up the books for all to see to restore some public confidence.''

Goolsbee also compared the currency plight of Greece, Italy, Spain and others struggling with the euro, with the reunification of West and East Germany.

When the two sides reunited in 1990, the East German currency was revalued at a 1:1 ratio, which was fine for East German savings accounts, but almost completely wiped out the competitive advantage of the country's manufacturing overnight.

``And this is with two countries with a common language, and the ability for people to move,'' Goolsbee said. ``Seven million Greeks are not going to move to West Germany.''

As for the United States, there are two factors playing in its favour: the world's most productive workers, and faith in the U.S. consumer.

``The problem of the United States has never been about quality. We have the most productive workers, but also the highest wages. But that dynamic is changing,'' he said.

Goolsbee has also spoken with many citizens who have had their children return home from college due to lack of prospects, which will eventually help the economy.

``Well, 200 years of American history indicate that at the slightest indication of something better they will get out and get their own place,'' he said. ``Our demographic trends aren't nearly as bad as Europe or Japan, and there is also a massive innovation and entrepreneurial spirit.''

However, Goolsbee was far less kind when speaking about his time in the nation's capital, calling it ``utterly dysfunctional'' due to partisan bickering.

``The United States government almost caused the biggest default ever purely because of stupidity,'' he said.

He also considers the recent Keystone XL pipeline delay an opportunity for Canadians to experience Washington politics.

``The people opposed to the pipeline, it's naive to think the tar sands won't be developed if the pipeline is delayed,'' he said. ``It's a taste of the Washington dysfunction.''

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