Thursday, January 12, 2012

What's next for the economy?

The Graaskamp Center publishes a monthly newsletter on issues and events in the real estate industry and UW real estate community. The January 2012 issue includes this look at the year ahead by members of our faculty and executive Board of Advisors.

With 2012 upon us and a presidential election fast approaching, many of us are trying to make sense of economic news and data that alternately points to a potential stabilization and recovery or to a double-dip recession and a global debt crisis. What should the next administration do about to support economic growth? And how will the spill over from the debt crisis in Europe impact the U.S. economy now and in the future?

To get a better idea of what to expect, we asked a panel of Graaskamp Center board members and our own faculty experts to share their insights and wisdom on these important topics.

David Neithercut, President and Chief Executive Officer (CEO) and a Trustee of Equity Residential, assumed the CEO title on January 1, 2006 and has served as President since May of 2005. From January 2004 to May 2005 he served as Executive Vice President of Corporate Strategy, leading the company's Transactions, Portfolio Management, Development, Condominium and Research groups. From 1995 until August 2004, he served as Equity Residential's Chief Financial Officer. In this role he was responsible for all of the company's capital market activities and participated in debt and equity offerings as well as merger and acquisition activity with a combined value in excess of $10 billion. Mr. Neithercut is a member of the Board of Directors of General Growth Properties (NYSE: GGP), a leading owner and operator of shopping malls.

Timothy Riddiough is the E.J. Plesko Chair of Real Estate and Urban Land Economics, Director of the Applied Real Estate Investment Track (AREIT), and Professor of Real Estate at the Wisconsin School of Business. He teaches courses in Real Estate Finance, Real Estate Capital Markets, and Microeconomics and is best known for his research on real options, mortgage pricing and strategy, and land use regulation. Professor Riddiough is best known for his work on credit risk in mortgage lending, mortgage securitization, real options, REIT investment and corporate finance, and land use regulation.

Michael Robb is Executive Vice President for the Real Estate Division of Pacific Life Insurance. He joined Pacific Life in 1976 and after holding a variety of executive positions with the company, Mr. Robb was elevated to his current position of Executive Vice President of Real Estate Investments in January of 1995. He is responsible for managing a real estate portfolio of commercial mortgage loans, commercial mortgage backed securities, unsecured REIT debt, equity real estate, and servicing portfolios of over $19 billion dollars.

David Shulman is Adjunct Professor and Advisor to the Applied Real Estate Investment Track (ARIET) for the Graaskamp Center for Real Estate. He is also Managing Member of David Shulman, LLC. Shulman was formerly a REIT analyst and managing director at Lehman and was employed by Salomon Brothers, Inc. in various capacities. Professor Shulman has been widely quoted in the national media and coined the terms "Goldilocks Economy" and "New Paradigm Economy." In 1990, he won the first annual Graaskamp Award for Excellence in Real Estate Research from the Pension Real Estate Association.

Question: Since becoming President, Barack Obama and his administration have implemented many fiscal/economic programs and initiatives to jumpstart the U.S. economy. In your opinion, what were the actual results of these programs? Have they helped or hurt the economy?

Neithercut: I think that much of what took place at the onset of the financial crisis was necessary to avoid a total collapse of the global financial system. The government did what it needed to do to stop the problem. From that point forward, I think the government's programs have not harmed nor helped but have been totally ineffective and is a pretty clear example of the government impeding the market's ability to right itself.

Riddiough: At the macro level, results have been mixed at best. Let me focus on one of his particular initiatives, as it illustrates what I believe has been Obama's biggest problem with managing the economy. His whole approach to addressing the foreclosure crisis, although well intentioned, has been confusing and inconsistent. Worse, it has been ineffective and has created additional uncertainty in housing and banking markets. Ineffective and inconsistent policies have created additional uncertainty in an already very uncertain economy.

Robb: I have seen no result whatsoever. There is the Canadian shale fracking project "shovel ready" which would create thousands of jobs which he and the environmentalists won't approve. The housing fix or lack thereof is a joke and he still does nothing but blame the Republicans for the mess we are in.

Shulman: The initial stimulus marginally helped, but the whole notion of "timely, temporary and targeted," is very difficult to implement. Moreover too much of the spending represented the accumulated wish list of the House Democrats. Indeed the support for state and local government probably hurt because it delayed the ultimate restructuring that has to take place. The biggest failure is that "reform" is the enemy of economic growth in the short run. As a result the healthcare legislation likely slowed the economy along with all of the uncertainty associated with the energy bill that failed in the Senate.

Question: Given the current state of politics and the economy, what should Obama or the next administration do to improve and stabilize the economy? In other words, where do we go from here, and how do we avoid making the same mistakes in the future? Please outline three or four points that you feel are most pertinent to you as a real estate professional or to the real estate industry in general.

Neithercut: The answer to our problems can be found in economic growth. We can't tax our way out of it and we can't spend our way out of it. Growth is the answer and I think that growth has been hampered by uncertainty on tax policy, etc. Real estate needs growth to prosper--growth in jobs, growth in income and spending, etc. Economic growth is not evil but is the means by which all else is possible. We need to facilitate credit to small business and have a tax policy that is consistent and fairly applied.

Riddiough:This is a hard question to answer because there is a big difference between what should be done in theory and what will actually get done in the current political environment. Given that the U.S. economy does not slip back into another recession, I do not expect that Obama will be able to get much done until after the next election (should he be reelected). I anticipate that only the Fed will execute policy initiatives over the next year in an attempt to improve and stabilize the economy.

Robb: Approve the Canadian shale project. Spend money to retrain factory workers for 21st century job skills. Do away with ALL tax deductions, including mortgage interest , and only keep ones that actually create jobs and finally, go to a 3 or 4 simple tax rate structure, again with virtually no deductions and exempt from taxes anyone making less than $50,000, but force people off the welfare rolls by getting them the under $50,000 jobs. A lot to ask for but would stimulate both individuals and corporations.

Shulman: Policy is trapped because we probably live in world of "Ricardian Equivalence" which means that deficits today mean tax increases and/or program cuts in the future. A new administration should be supportive of domestic energy and the Keystone XL Pipeline should go forward. A real program would include a major infrastucture expansion that would waive or fast track environmental approval and waive the prevailing wage requirements of the Davis-Bacon Act.

Question: Do you think the Europe and United States are headed toward a debt crisis? If so, how will this affect the real estate markets?

Neithercut: Is there anyone who doesn't think that Europe has a debt crisis?!? And we will have one soon if we are not awfully careful. To not learn from the mistakes in western Europe would be criminal. A debt crisis will inhibit growth and that will be very bad for the real estate markets.

Riddiough: There is already a debt crisis, and it has already shut down the CMBS market after that market had reemerged over a year ago. All very bad news. Be aware of the coming crisis in refinancing a mountain of commercial real estate mortgage debt coming due over the next five to six years.

Robb: They are not headed towards a debt crisis; they are IN ONE. Will only hurt real estate if rates go way up-right now, in this artificial low rate environment, it is actually helping commercial real estate.

Shulman: Europe is in a recession. The U.S. will escape its worst effects providing the Euro crisis does not morph into a banking crisis. Obviously a banking crisis would bring back memories of the Lehman crisis in 2008.

The Graaskamp Center's newsletter The Real Estate Connection is published monthly. You can subscribe (via Constant Contact) here.


  1. Nice informative blog, thanks for sharing.

  2. Hope the economy improves this year. Keeping my fingers crossed.