The following is a contribution from our chief Federal Reserve reporter, who is out in the field at The Economist magazine’s annual economics conference:
By Jonathan Spicer
What is the most overvalued asset across the world’s advanced economies? Vincent Reinhart, the chief U.S. economist at Morgan Stanley, posed that rhetorical question on Thursday at one of New York’s signature economics conferences. After a pause: “The answer is, voters’ expectation of the net present value of the entitlements they … are expecting. Why? Because they by and large don’t have a tax system to support that,” Reinhart said.
It was a cold shot of reality as the United States roars toward the so-called “fiscal cliff” on Jan. 1, when a series of automatic tax rises and spending cuts will take hold and seriously damage the economy – unless lawmakers step in to prevent them. Most economists and investors are still betting the worst of the cliff will be avoided, probably by putting off tough questions on tax reform and longer-term government spending. That means Congress kicking the can down the road – yet again – on finally setting a plan to meaningfully reduce the massive U.S. debt after three straight years of budget deficits topping $1 trillion.
Reinhart, a former U.S. Federal Reserve official, continued his argument at the conference hosted by The Economist magazine: “So the most important thing to do to get fiscal consolidation right is to have a conversation with your population that they are not as wealthy as they think they are.” That conversation has not happened so far in the presidential election campaign. And not that it will before the Nov. 6 vote. The problem, as panel moderator Philip Coggan of The Economist pointed out, is getting “the 2013 Congress to commit the 2015 Congress” to such painful programs.
For other views on the fiscal cliff, please see my interview earlier this week with Joseph Stiglitz, a Columbia University economics professor and Nobel Prize winner, who said that that is his biggest economic fear. He also said millionaires are keeping some of their income in offshore locations like the Cayman Islands to protect it from taxes. Youtube URL: http://www.youtube.com/watch?v=tCKcTMfdOVk