Recovery May be Slower, Rivlin Says at Biz Breakfast

Standard forecasts, which generally call for the U.S. recession-ridden economy to bottom out late this year or early 2010 and then grow rapidly, “may be too optimistic,” warned Alice Rivlin, former federal budget director and head of the Congressional Budget Office, at the Club's Business Breakfast Tuesday.

“We may not get out of this as fast as forecasts suggest,” she said of the economic crisis.

Rivlin indicated that current economic models are based on statistics from recessions during the last several decades. “But none of those recessions started with a financial meltdown,” she said. “Our banking system was still functioning. It isn’t still functioning now.”

Moreover, she predicted, consumption will pick up more slowly than after previous recessions. “Consumers will be more cautious.”

Currently a senior fellow at the Brookings Institution, Rivlin reviewed the background of the crisis. “We all know pretty much how we got here,” she said, “but it’s a mystery why so many people did so many stupid things.” She pinned much of the blame on a “collective delusion that we all were a part of – that housing prices always go up and everybody pays their mortgages.” A “financial superstructure” erected on top of the bad mortgages, she said, “is what brought us down.”

“We don’t know how long the recession will last or how bad it will be,” Rivlin said. Her guess: “We will see some recovery next year, but it will be slow.”

Rivlin appeared at the Club the day after release of the Obama administration’s trillion-dollar plan to stabilize banks through a public-private partnership to buy their toxic assets. Calling the plan “quite complex,” she said it “likely will work if the private sector comes in quite aggressively.”

Meanwhile, she said, the recent stimulus package passed by Congress “is the right thing to do in size and principle.” And she is not worried, she said, that Obama’s proposed budget “is astronomical in the next two years.” But she expressed concern that the budget does not raise enough revenue to deal with long-term obligations.

In answer to a question, Rivlin said she does not believe that recent aggressive federal intervention in the economy means that the U.S. is moving toward socialism, as many conservatives suggest. She also said she doesn’t think that a proposed return to the 39% top income-tax rate would slow investment, but objected to the 70% top rate that existed prior to the Reagan administration.

Rivlin’s appearance was the second in the monthly Business Breakfast series sponsored by the Events Committee and open only to NPC members.