Rubin, Paulson Give Mixed Forecast on U.S. & Global Economic Recovery

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Two veteran observers of the global economy are offering mixed forecasts on its immediate and long-term prospects.

Robert Rubin, Treasury Secretary during the Clinton Administration and current co-chair of the Council on Foreign Relations, along with billionaire hedge fund manager John A. Paulson, took part in a public conversation on the economy earlier this week at New York's 92nd Street Y.

Although the U.S. economy appears to be recovering, both men said America's finances -- as well as the global economic system -- still face multiple risks that could derail any improvements.

"Serious Headwinds" That Could Impede Growth

"If you compare where we were to a year ago, we really are in much better condition," says Rubin. "There are indeed a goodly number of positives." But there are also, he says, "serious headwinds" in the form of possible impediments to growth. Rubin says these obstacles include "our long-term fiscal trajectory (which) is horrendous, unsustainable and dangerous" and undermines confidence -- as well as state and local government deficits "that are going to be have to be closed by their constitutions." Contributing to those figures, he says, are rising oil prices and high unemployment -- which Rubin estimates at 16%, if temporary workers and people who have entirely dropped out of the workforce are included.

"The probabilities are very unclear," he says. "While the most likely outlook may be the more positive forecast that many forecasters now have, there is a very real chance that what actually happens could fall short of that."

A Variety of Economic Scenarios

Rubin says that, as an investor, he is concerned about "low-probability events which, if they occur, could have huge consequences" -- events such as a resurgence of terrorism, possibly in a politically unstable and nuclear armed Pakistan. He also warns the U.S. fiscal deficit could cause a crisis in the bond market, that in turn could have "severe effects on our economy."

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"It's not inconceivable that something goes wrong in Europe," Rubin notes. adding that if default happens there, "that could have ramifications elsewhere." But he admits the future is far from clear: "This is the most uncertain and complex time in my adult lifetime in trying to make judgments about what is going to happen either in the short term or the long term."

For his part, Paulson predicts that, if serious "outside events don't occur," U.S. economic growth will rise 3% to 4% this year and continue improving in 2012. But a possible obstacle to this growth is the weakness of the U.S. housing market. "The housing market has stopped falling, it hasn't recovered," he says. "Home prices are still down 30% to 35% from the peak, new home construction is still at an all-time low. It's hard to spur employment growth without a return of new home construction."

Housing metrics, Paulson adds, appear "to have bottomed and are showing signs of improvement" -- with the percentage of homes going delinquent every month down 75% from the earlier peak. "As those trends continue, I expect housing prices will start to recover and new home construction will start to improve," he says, "and when that happens, that will be a boost to both employment and further economic growth."

Japan, the Middle East, Europe

There are three major uncertainties facing the global economy, Paulson notes. The problems facing Japan in the wake of last week's earthquake, tsunami, and nuclear reactor meltdowns could "derail or slow" global economic growth. Political turmoil in the Middle East has the potential to disrupt oil supplies, leading to higher oil prices and hampering global economic growth. And then there's the credit crises facing Greece, Ireland and Portugal, which are all at their debt limits, and possibly Spain, Italy and even France. "If they're not able to resolve this issue, this can create a risk to the global economy," he says.

Looking at the longer term, Rubin says although the U.S. has "a dynamic society" and "tremendous comparative advantage in the global economy...the real question comes down to our political system and whether it will meet its multiple challenges, most particularly putting our fiscal house back in order...and creating the resources necessary for the public investment that is requisite for competitiveness and growth."

Paulson says he is "rather optimistic" about the long-term prospects of the U.S. economy, which is now "growing very strongly, has very bright people, an entrepreneurial culture, and corporations that are global leaders. If the U.S. private sector is allowed to continue to grow, prosper and innovate, and the government gets the fiscal house in order, then I think the U.S. economy can continue to grow and remain the dominant economy in the world."
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