Congressman Bill Foster, businessman and noted scientist before he got involved in public service, took a fact-based, no-nonsense approach to the country’s economic problems.
“The big picture is that we have been living off the fake income from our houses appreciating and from borrowing money abroad for at least the last 8 or 10 years, and that has to stop and it has to reverse,” Foster said. “And when it does, our standard of living unquestionably will have to decrease.”
A Democrat who represents the 14th District in Illinois, Foster sits on the Financial Services Committee. He spoke February 18 at Gleacher Center to the student-led Chicago Booth Government and Politics Group.
Foster compared fixing the economy to designing an integrated circuit: ways must be found to squelch oscillation.
“There are numerous opportunities to do that in the financial markets,” Foster said.
In real estate, for example, a good ratio to examine is that of purchase prices to one-year rental prices, because “purchase prices go through this wild gyration and the rental prices stay more or less constant,” he said. “If you look at the ratio of those two, it’s a pretty reliable flag for an asset price bubble.” Mortgage origination requirements could be adjusted based on a formula derived from the ratio, Foster said, so “you can be in a situation where you don’t have a politician in the feedback loop.”
“The difficulty, of course, is that as the bubble is on its way out, it’s very hard to get a politician to rain on the parade and say, ‘I’m sorry, guys, we’re going to turn off the mortgage origination requirements’ so that we’re not building as many McMansions out in the farmland this week.”
China’s leaders recognized the asset bubble and “told all their regional banks they have to deposit more in the central bank,” so now they aren’t faring as poorly as the United States, Foster said.
To address the recession, Congress recently passed a $787 million stimulus package, “which is basically a big burst of deficit spending,” Foster said. He said people learned from the Depression that a way to get out of it is through such spending.
“The difficulty is that’s a card we’ve played for the last 8 years, and it hasn’t ended well,” Foster said. “And so the idea that a lot more deficit spending is appropriate at this point is still everyone’s best guess.”
Tax breaks in the stimulus package heavily skewed toward the middle class and the working class will help, Foster said. He said he’s learned by comparing the last eight years to previous ones that “the economy as a whole performs better when the wealth is more evenly distributed.”
From around the 1950s to the 1970s, Foster said, if given $1,000, a wealthy American would reinvest in high-earning American companies. Today a wealthy American would give such a check to a fund manager who would look for the high yields, “typically off shore,” resulting in an “accelerated flow of capital offshore.”
“The shift in tax policies and other policies that caused an increasing fraction of the wealth to pile up on the very top actually accelerated the plight of industrial capital offshore, and that’s one of the things that hurt this country,” Foster said.
Victor Zhorin, a student in the Evening MBA Program, said afterward that it sounds like “the financial system is going to change for sure” and will be based more on “fundamentals of the economy and not just on speculative trends in asset markets.”
“It’s very hard to distinguish the real (asset) bubbles from investment opportunities,” he said. A problem with eliminating part of the bubbles is that it could result in “no high returns, either,” Zhorin said.
—Mary Sue Penn