Actually, it's all OK, says Hubbard

Potential Greenspan-successor tells CSFB conference that worries about the US are overblown.

Glenn Hubbard, the Dean of Columbia Business School and former Chairman of George W Bush's Council of Economic Advisors, is the man credited with Bush's massive first term tax cuts. As such, there are some who think of him as the 'Father of the deficit'. He could also be the man who replaces Alan Greenspan at the Fed next year.

It was no surprise therefore that at the CSFB Asian Investment Conference on Friday, he spoke to a full house.

Previous sessions during the week had seen influential figures such as Joseph Stiglitz and hedge fund guru, Art Samberg make very negative predictions on the US economy. Hubbard acknowledged this at the start of his speech when he said: "I've never sensed such nervousness among financial market participants as that which I feel now."

However, Hubbard contended that the US is in far from bad shape. "The US economy is at close to full employment; household wealth has rebounded to close to record highs; and productivity growth is signaling to households that wages will grow rapidly. Furthermore there is the greatest optimism among small businesses in three years and the economy is set to grow at 3.5%."

He painted an "optimistic scenario" and said a structural shift had taken place in the US economy. "If you'd said to a group of economists 10 years ago that the US's long term potential growth rate was 3.5% you would have been laughed at. It used to be 2.5% and anything above that created inflation. That has changed thanks to a sea change in productivity growth. This has been brought about by new business methods and improvements in financial markets, which have helped to spread and share risks."

He admitted that his generally optimistic view was often met with scepticism. The main lines of attack were that a high oil price could lead to recession, that the US consumer was "tapped out"; that the US real estate market was a bubble waiting to pop; and China would have a hard landing. He noted: "Oil prices are nowhere near as high as they were in the 1970s if you look at them in real terms; and the US consumer is in fact sitting on record amounts of household wealth."

He conceded that the housing market was in the early stages of a bubble. "But there is only a remote possibility of a hard landing in China."

He also said he didn't think the world's central banks were likely to dump the dollar, "because it isn't in their interest to"; and that it was impossible to judge when the level of the US current account deficit became a problem, since the US was financing it with the world's dominant reserve currency - and this had never happened before, so there was no prior example by which to judge it.

He agreed that Americans needed to save more but said the increase had to be gradual, rather than sudden.

Above all, he extolled the benefits of productivity gains in the US. "Since 1979 the US worker has become two thirds more productive and at the same time the economy has created 40 million jobs."

He also said that the US was uniquely well positioned thanks to its abundance of entrepreneurs who could unleash creative destruction - and thanks to its highly developed financial system that could help finance this process.

But Hubbard conceded that he had a few worries. Top of his list was the risk of a terrorist attack destabilizing financial markets. His second worry was that domestic demand growth outside the US would grow more slowly than was necessary. And thirdly, he worried that a logjam in Congress would prevent the necessary cuts to the fiscal deficit.

He particularly stressed that strong action was needed on pension reform. "If we go forward 25 years, our old age retirement programmes will consume 10% more of GDP than today, and to finance that will require taxes to rise by 50%."

All in all, Hubbard's optimism was the diametrical opposite to the pessimistic view of the US economy that was presented by Stiglitz in the opening session of the conference. Hubbard's benign view seemed to be that the US could grow its way out of trouble. Nobel Prize winning economist, Stiglitz felt that "we are looking at a larger and larger deficit" and even suggested the dollar may cease to be the world's reserve currency.

It turned out that the only thing both Hubbard and Stiglitz agreed on was the damage to the US that was being done by the decline in foreign students at US universities in the wake of the 'War on Terror'. "We both agree on that," he said. "It is a problem, and we are getting the government to recognize this. It's changing, but changing too slowly."