Is the United States Really Making a New Beginning?
AN ADDRESS BY Walter E. Hoadley,
EXECUTIVE VICE-PRESIDENT AND CHIEF ECONOMIST, BANK OF AMERICA NT SA, SAN FRANCISCO
CHAIRMAN The President,
Ladies and gentlemen: Few forces have been more decisive for the development of the modern world than banking. Through organizing capital and credit, it has made possible the exploration of unknown territories, the discovery of unused resources, the foundation of new industries, the expansion of world trade.
Probe the history of the Western world since the Middle Ages and you will find banking near the centre of whatever has made for human progress. The Empire Club of Canada is therefore privileged today to welcome one of North America's leading bankers, Dr. Walter Hoadley, executive vice-president of the Bank of America.
Born in San Francisco, Dr. Hoadley received his education there and at the University of California at Berkeley where he earned his doctorate in economics.
His entire career has been devoted to business economics. He held senior positions with the Armstrong Cork Company and the Federal Reserve Bank of Philadelphia before joining the Bank of America in 1966. Widely recognized as the dean of business economists in the United States, he has been a prolific writer on finance and trade, still functioning as a columnist for Dun's Review and The Chicago Tribune.
The wide respect he enjoys in the business community and among economists is shown by the responsible and prestigious positions he has held. A few of them have been: national president of the American Finance Association, national president of the American Statistical Association, chairman of the Conference of Business Economists, chairman of the United States Business Council. He has served on six task forces appointed by the President of the United States, was a keynote speaker at the 1972 White House Conference on Business in 1990. He has been honoured by six universities.
Dr. Hoadley's visit is especially pertinent to us all in the club because the economic well-being of our country is influenced so profoundly by economic developments in the United States. When you are in bed with an elephant, the slightest stir in the night can signal disaster, and Canadians therefore watch with concern what happens, and equally, what does not happen south of the border.
We therefore appreciate the chance to hear a distinguished banker and economist from the United States speak to us about the policies of his country's new administration.
Distinguished members of the head table party, members of The Empire Club of Canada: It is a great honour and a privilege for me to be here today. I have heard a great many comments through the years about this great organization and I am tremendously impressed with the stature of the group, not only here in Canada, but in my country and in many other places in the world. I am always embarrassed by the kind of generous introduction that has just been given, because I remember so well what I was told years ago, that economics after lunch is cruel and inhuman punishment. However, I have also been told that after dinner it is even worse. In my own country, last year the most distinguished honour for effective economic presentation was given to a colleague in economics who observed five minutes of silence, spent almost entirely in praying for more accurate forecasts.
We really shouldn't apologize for forecasting, because literally all of us are required to make forecasts every day. And underneath each one of those forecasts, in an underlying sense, is some perception which we believe, and which we are using, consciously or unconsciously. If there is any value in my presentation today, it is an opportunity to check your thinking against mine and mine against yours. Because, in this very rapidly changing and uncertain world, so many people seem to be just stopping and waiting for things to happen.
I like to present my conclusions at the outset of a speech, so that if people have other things on their minds or would like to depart early they can do so. Those who have nothing better to do can remain. So let me say that to the question I am addressing, whether the United States is really making a new beginning, my answer is yes--the odds are sixty/forty. You can see that I'm not one hundred per cent sure. But I learned a long time ago to put a probability on every forecast, just to remind me that there e no certainties, but that we are always playing odds.
I believe that the United States is making a new beginning because, first of all, the mood in our country--and I think to a considerable degree here in Canada--seems to be one of recognizing basic problems. The people in the United States clearly have now put inflation control well ahead of unemployment,
which is one of the most profound changes in public attitude. That gives the new administration the base for looking more forcefully at correcting many of the problems confronting our country. I think we can also say a new beginning is under way in the United States because, perhaps for the first time, more people are looking at our country in relation to other countries. Your chairman's comment about the elephant is very relevant and interesting because the elephant also can have troubles. And the elephant, many times, finds people studying its anatomy much more carefully than the elephant itself. I am always impressed by how many people around the world, and particularly in Canada, know so much about my country, whereas many of my fellow countrymen are not all that interested. But a comparison of the United States with other countries provides a basis for our people to think a little more positively about the future. We grew up, many of us, in an atmosphere where the United States . was fifty per cent of the world economy, and now we are just a miserable twenty-five per cent. We still have a great deal to offer and a great deal by which to judge our performance in a positive way, and are beginning to make the comparison rather than considering ourselves alone. And when we do that, we recognize that the problems of the United States are not unique to us, and it is the relative performance of the United States and not the absolute which may be important to watch.
Thirdly, I think we are making a new beginning because we have a new President, a new administration, following one which was by most standards considered quite unsuccessful. In our system, we seem to have a self-correcting process. Certainly, in the United States, we seldom do anything directly. We waver, we move, but when the pendulum swings and is just about to hit the wall, somehow the common sense of our people moves us into the corrective path. And so we have a leader who has the opportunity, and I think the ability. The danger is that we may expect too much too soon. But a new beginning, in my judgement, is under way.
That, in a panoramic way, gives you the clue to what I am about to say. Let me try, then, to support the thesis that something new is happening in the United States.
Let me begin by saying that uncertainty is almost a way of life. Many of us, of course, would prefer that the world were more serene--perhaps all of us would--and that the crystal ball were clearer. But unhappily that is not the case, and we have the choice of whether we will cringe and wait for things to get better, or whether we will try to find some things that need to be done and get on with the job. People ask how we can plan in uncertain times. We don't know whether things are going up or down, getting better or worse. It is true that uncertainty is rife in our country. But are we not making decisions every day? In my judgement, the most short-sighted decision is to assume that tomorrow and tomorrow will be the same as today. The problem is to define the "new normal." If we define normal in terms of perfection, we are going to be disappointed. But if we can somehow understand the process of change, then we can proceed.
My prescription for this, for those who look at our country from inside or outside, is first of all to be very cautious about studying the United States in conventional terms of business cycles. Every one of us in this room has, at some point, been exposed to very helpful and very important business-cycle analysis. I am not saying to abandon it. But I am saying that the major problems facing the United States are, without exception, not cyclical. They are basic. They are structural. Therefore, they will not go away just automatically. We have to do something about them.
The first problem in the United States is lack of confidence in ourselves. That will not disappear because someone says wait thirty-nine months. The second critical problem is inflation. Some phases of it may be cyclical, but it is a basic problem in America and it is a fungus, a cancer. It is involved in energy, productivity, innovation, investment, the dollar, trade. The structural changes in the United States are under way in a relentless fashion. Therefore, if people are looking for a pattern of tranquillity and straight lines on charts, they will have a long wait. We have to somehow focus our attention on the underlying changes in the United States and look for the underlying directions and, above all, corrections.
We have a situation in our country, and it has been true for a long time, where the contrasts are very apparent if you look for them. But if you listen to the description as given by the media you hear only about the weaknesses. As of this moment, it would be my judgement that seventy-five per cent of the United States economy is flat-out, fully employed. The other part of our economy, automobiles, steel, housing and related activities, representing perhaps twenty-five per cent, is extremely weak. The average of the two is what you hear about, if you hear about anything other than the weakness. It is dangerous to generalize about the U.S. economy because within it are these great contrasts.
Let me put it in perspective by saying that, in my judgement, we are short one million people to fill jobs for computer programming and maintenance. That is a way of saying that change in America is thwarted because our ideas, our hardware if you will, are ahead of our ability to carry it out. This could even be a threat to the resumption of more vigorous growth in the United States.
The political and economic power of the United States has shifted west from the Mississippi River and south of St. Louis. I do not say this because I happen to be based with an organization that is headquartered in San Francisco. It is a relentless movement of people, resources and dynamism. To speak of our country as monolithic from coast to coast is obviously not very wise--and the same is true of Canada. These contrasts need to be mentioned and brought out. It does not mean that the north-eastern part of the United States is doomed. The exodus of people toward the south and the west, the inflation there and the pressures and shortages in housing and many other things mean that the north and east will rise again. That is the dynamism, the self-correction, of our country.
One of Mr. Reagan's major problems is to strike a consensus in America. I am sure all of you realize that in our country we have people of different ideologies--and unhappily, their leaders never speak to each other. They give speeches about each other, but they don't know each other.
There are fifteen to twenty per cent of the voters in the United States who are dedicated to "quality of life" and environmental control. They couldn't care less about growth and conventional economic wisdom. They are young people and they won't go away. They are not rising in numbers any more, certainly not relatively, but they are too large a block of votes for anyone to ignore. They don't have a great deal in common with others.
We have another group in the United States that might be described as egalitarian--social liberals, or people who look to government to handle the problems of the underprivileged and to somehow redistribute wealth and income. A generation or so ago they represented two-thirds of the vote in the United States. Mr. Carter's recent experience suggests that maybe that ratio is one-third now.
We also have a group of fiscal conservatives. Mr. Reagan is their champion. He probably has just about half of the voters in that group.
Ideologies, leaders not speaking to each other, dynamism--no wonder there is compromise. Mr. Reagan's popularity poll at the moment is fifty-nine per cent. Consensus-building is difficult in any country because political reality is the accommodation of these differences. But in the United States the public is more and more speaking to each other, and a consensus is forming across America about the correction of the major problems we face. If the leaders don't begin to talk to each other, they will not be the leaders indefinitely.
We have another profound change in the United States. It is illustrated in many organizations, certainly in the corporate world, but it is also true in the field of religion, in labour, in education, in government. The leadership in the United States at the moment is sixty per cent of my generation. We are the depressionscarred generation. But in a matter of five years we will be only five per cent of the leadership. One of the most profound management changes that we have seen is coming. Right behind us is a group of extremely able leaders, people whose education and professional skills far exceed ours.
These people have had a great deal of experience. And yet, if you think about it, a perplexing problem confronts them because the first half of their career was based on the great surge of the United States, when the United States had half of the world's economy, when we had most of the trump cards, when the image of the dollar was much stronger, when we were perceived to be a more powerful nation than we are at the moment. But changes occurred in mid-stream for these leaders, social tension, inflation, a change in image of the United States on the negative side. SO we have a risk-aversion generation right behind us.
Again, I am generalizing. There are many exceptions. Risk-aversion means a leadership without quite the same pioneering spirit. They are more defensive, more cautious, more careful--more pro-United States, if you will. They are not necessarily protectionist, but at least cautious.
There is a third group of leaders behind the ones I've just described. These are the new entrepreneurs. They have watched the older generations work through the problems--perhaps in frustration! They did not have the responsibility, but they had the time and the vision to see opportunities, many of them quite personal. They are not internationalists to the same degree as older leaders. They are quality-of-life people and they have a computer mentality which means they are perfectionists.
This generation has some little quirks in it. One headache and their health is a disaster; one argument with the wife and the marriage is no good. But these are the people with a new thrust in U.S. leadership. This change is taking place now and over the next few years. The blend of the best will provide a whole new basis for a new beginning. This is my prediction.
But it will not take place without some adjustments in individual areas. It is, indeed, a confusing time. The economy of the United States is mixed. The political and social power is changing. Management is changing. Structural change is overwhelming the business cycle.
Perhaps the most important problem is the perception (the greatest threat to President Reagan) that somehow we will not get on top of the inflation problem. Sweeping through the world, since the fall of 1973, has been the feeling that something basic is happening to erode the integrity of the purchasing power of our money. A far greater perception of what inflation is all about is evident today. Seven or eight years ago, when we polled people across the United States and asked them about inflation, they could hardly give us a definition. Today, ninety-five per cent can not only give us a good definition of inflation in economic terms, but they are behaving, by their own admission, differently in light of it.
The President of the United States confronts a situation where the basic attitude is at least moderately negative as to whether we can get things under control. It doesn't mean that people don't hope that we can, but they are not certain.
It is a confusing period, a period of enormous change, not only in economic and social terms, but in psychology and confidence. It is also a time when people are asking what is the right thing to do. We have, as you know, certain limitations on the use of energy in the United States. Those of you who have driven in our country may well ask what the speed limit is. The only person I know who has observed it is my neighbour's son, backing his father's car out of the garage. But I think the people of the United States are finally coming to recognize the seriousness of the energy problem. The President has decontrolled oil, not gas. Conservation measures are beginning to show up in statistics. I think I can say that within the last six months the people of the United States have made the decision to win the energy war.
That bodes well for all of us, but it has been a long time coming. Last week in Paris I checked out prices. There, one gallon of gasoline costs $3.50 (U.S.). The prevailing average in the United States is about $1.50. The tax structure in France is sixty per cent. We have simply not faced up to reality. But I think we are now prepared to do that. The mood in America is a willingness to get on with the job.
As you know, the utilities charge on the basis of an annual estimate of what gas and electricity will cost and spread that over equal monthly installments. Costs only come to the attention of consumers of energy in the United States in mid-year, in early fall, when those charges are rerated. Last year they went up between forty and sixty per cent on average. Believe me, that brought the reality of energy costs to the US. consumer.
The greatest concern in the United States about inflation is not in the kitchen, it is in the board room. These perceptions provide a base for a new beginning, but much hinges on the attitude toward the new Reagan administration. For those who are outside the United States looking at our country, I need only remind you that the United States electorate gave President Reagan a domestic mandate, not a foreign mandate. In fact, in the scale of values in preferences and priorities, assistance to other countries is at the bottom of the totem pole politically in the United States. There is not necessarily a mood of protectionism or anti-internationalism, but there is a kind of feeling that we don't have friends. We hear almost nothing positive from abroad. We understand that it is, politically, in many countries, necessary to challenge, question and attack the United States, perhaps in many instances with reason. But the media constantly tell the people of the United States that we are hated all over the world. I don't believe that's true. It's not clear that we are loved--and why should we be? What I am saying is that Mr. Reagan is not going to please the people around the world immediately. He is going to live by the mandate of correcting, as well as he can, the domestic base of the United States in order to ensure his own credibility at home.
I am on my way to Washington tomorrow, to chair a gathering, on the international monetary policy of the United States, of administration leaders and people from the business and financial community. It is still not entirely clear who the members of the administration team will be. That doesn't mean that the process is not under way. It simply means that the President has a domestic mandate well ahead of the foreign. We need to give him time and patience.
The critical question is whether the President's program will be approved, and if it is, whether it will work. The strategy, as I see it, seems to make a great deal of sense. He has articulated a strong doctrinaire point of view--although not quite as doctrinaire now as when he was the candidate. To get the attention of the American people beyond about twenty-seven seconds requires a distinct and unequivocal statement. This is why economists are not very useful! But Mr. Reagan has attracted the attention of the people and the debate is going on. The tragic assassination attempt has obviously slowed the President's momentum. But it is my feeling that when the chips are down, in May or June, the President will emerge with most of his spending cuts intact.
He has problems on the tax front--a classic case of the paradox that traditionally political leaders in our country have loved to give tax cuts and here the opposition is saying "Don't." But the President has hurdles to go over. Congress will want to go home on or about August first. There is a good chance that when they go, the President will have perhaps two-thirds of what he wants, but not without compromise.
As I judge it, this is a President who is asking far more than he expects to get, but whatever he gets will be far more than any previous President on the supply side of our economy. However, one is unable to prove the economic veracity of the program. The fact is that the President has made a stinging point in saying that if anyone has a better idea of how to solve the inflation problem, tell us what it is and we will look it over. New ideas are not forthcoming. We know, as the President says, that whatever has been done in the past, whatever short-term improvement there may have been, has given us a worse inflation problem in the long run. I think he will get his approval on that argument alone.
Whether it will work or not depends very much on the action of the people of the United States. There is no way you can say what will happen with any certainty. It depends on the board rooms, and whether they are managed by leaders who are prepared not only to wish our country's leadership well, but to do something about it. In my judgement, twenty per cent of the tax savings must be put into savings and investment. At the moment, there is probably a saving rate of about five per cent. We are talking about marginal differences.
Here we have a President who, in the weeks ahead, will become a marketing, merchandising, sales-minded President. I believe that his success will depend upon whether the people in our country see that it is in their interest to do things at the margin that will strengthen the United States economically. Therein lies the critical point. My forecast is that there is a basic belief that the correction time is here, that we have tried to throw money at problems and it hasn't worked. We have destroyed people with good intentions. It is time to take a fresh look. This is, in my judgement, the decade of destiny for the United States. Perhaps, in light of the assassination attempt, this is the administration of destiny. Success, not only achieved but perceived, between now and the fall of 1982 and a report card in the Congressional elections will change attitudes positively, not only within the United States, but also from the outside, toward the dollar, toward interest rates, toward investment. I need only say, think of the consequences if the perception is negative. We can ill afford to have two unsuccessful Presidents back to back. My prediction is that we will not.
The thanks of the club were expressed to Dr. Hoadley by Sydney Hermant, a Past President of The Empire Club of Canada.