Welcome to the TIME Subscriber Q&A with Rana Foroohar, TIME’s assistant managing editor in charge of economics and business. She has written this week’s cover story on General Motors CEO Mary Barra.
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DonQuixotic asks, Rana, what are your thoughts on the current tech bubble and overvaluing of tech companies? Are we inevitably headed towards another tech market crash similar to the dot-com bubble of the early 2000’s? Is there anything we can do to mitigate the damage, or prevent it?
I think tech stocks are definitely over-valued; aside from commercial real estate, and certain lower grade corporate bonds, they are probably the frothiest part of the market right now. The model of many Silicon Valley consumer oriented firms is to spend as much money grabbing as much market share as possible, the idea being that they’ll figure out how to make money later. I think a fair number of them won’t (although there will still be some big winners in each category). The problem is that when you bet on tech, particularly in the early portion of a new business cycle, it’s hard to pick the winners – that’s why Warren Buffett tells me he rarely bets on tech! In terms of mitigating damage – I’d stay indexed in a diverse mix of big U.S. firms – don’t focus in too much on one sector.
nflfoghorn asks, If the economy is much better and unemployment – if not more prevalent – has held steady, why do so many people think the president is doing a poor job handling it, especially since we went through a severe recession?
It’s a great question – and as I write in my column this week, I think the answer is that people don’t feel like we are in a recovery, because only a fraction of the middle class jobs have come back (most job creation in this recovery has been in the low pay or very high pay sectors – there still aren’t enough jobs in the middle, which is where most Americans are). Until middle class job creation is more robust, and income starts to rise, I expect poll numbers will stay low.
nflfoghorn asks, Hello Rana – What do you think Mrs. Barra’s impact has been on GM’s culture? Has she been able to put her stamp on a company notorious for doing things on the cheap and endangering lives? What do her peers at Ford, Chrysler/Fiat, et.al. think of her leadership?
As you’ll read in this week’s TIME cover, reviews on Mary’s handling of the crisis have been good, but reviews about her overall management style are mixed – some folks that I really respect, like Bob Lutz, think she may not be able to be confrontational enough to change GM. Others say she has an iron fist in a velvet glove. My own sense is that she’s slowly but surely making changes, but that in a company this size, it’s going to be a multi-year process and she’ll need to bring in disruptors from the outside as well, if she’s going to effect real change.
deconstructiva asks, Rana, what’s your take on raising the minimum wage? I think it should be raised, if only for two reasons –
(1.) It never kept pace with inflation, else it could in the 20’s, or least much higher.
(2.) With current minimum wage, many people at that level who are raising families have to rely on govt. assistance like food stamps, and I think no one working full time should ever have to rely on food stamps.
It’s interesting that people who are against raising the minimum wage often don’t address the fact that in many states, average hourly wages are already way above the national minimum, and it doesn’t destroy jobs (the common argument of those against a national raise). My feeling is that we could and should raise the minimum wage, but that we have to do many other things at the same time – most importantly revamp K-12 education and make sure educators are better connected with job creators – to make sure that higher wages don’t result in job losses to other countries, or to technology.
yogi asks, RF, do you think the recent changes to corporate tax rules will stem the tide of corporate inversions? If not, do you know of a potential better way or will it simply take customers turning away from the companies that invert to cause others not to?
I think the Treasury’s new rules are a good start, in large part because they lay down a political market – it’s not OK for U.S. firms that have benefitted from US taxpayer investment (in the form of education, infrastructure, state R & D, etc) to eschew paying their fair share of taxes. That said, we need to go a lot farther – as I wrote in this column on tax inversions, we should also rethink and revamp our tax code and stop rewarding the use of debt over equity, which is often what fuels these deals.
DonQuixotic asks, Rana, how damaging will collapse of China’s housing market be to the global economy? Once it’s come and gone, how long will it take China to recover, and what impacts do you believe it will have on the global market and global trade once they do? How do you think it will reshape it?
Fascinating question – and probably the most important question in the global economy today. China is already suffering a major economic slow down. The government says the economy is growing around 7 %; I think it’s more like 4 %. Either way, it’s clear that there’s a crisis in middle class job creation – there are more unemployed college grads in China than lower end workers.
All this connects to the real estate bubble; until China revamps an economy built on cheap labor and cheap capital, it’s growth will remain muted, which is one reason the global economy isn’t growing faster. This isn’t a Lehman type situation – China’s banking sector has a lot of bad real estate loans on the books, but it’s a closed, mostly government run system, so the bad debt itself won’t necessarily ricochet around the globe. But if unemployment grows, it could cause social unrest, and if the government were to be destabilized, that would be a major shock to the global economy.
Right now, the Chinese leadership is trying to consolidate power and (hopefully) launch a new series of economic reforms. Hopefully, this will happen. But even if it does, we’re looking at a transition that will take a decade or more. Chinese double-digit growth is definitely a thing of the past.
deconstructiva asks, Rana, where do you think the next big global currency crisis will come from? Europe grabbed most of the attention in recent years, but might someone take their turn next? We remember the big Asian currency woes in past years, and Russia’s default in the 90’s caused chaos …and that infamous LTCM fund back then held a LOT of Russian debt, only we didn’t know that until THEY crashed and burned. Indeed, might the next big currency crisis involve rogue trading and speculation as much, if not more, than said future country’s own economic woes?
Great question! I don’t think the European debt crisis is over – we could still see defaults flair up. But the issue I’m most worried about right now is the assumption that the dollar will stay strong forever. For starters, a stronger dollar isn’t an unadulterated good – it acts as a kind of dampener on credit and lending in the global economy, since so much business is done in dollars (and right now, you could argue we need more lending in certain sectors). But also, it’s based on the assumption that the US markets and economy will remain strong (or at least stronger than many other parts of the world) indefinitely. As interest rates rise, probably in the second half of next year, you could see a lot of volatility as the tide of easy money goes out, and we see who has been swimming without their shorts!
PaulDirks asks,You recently wrote “When the majority of people don’t have more money, they can’t spend more, and companies can’t create more jobs higher up the food chain.” But isn’t this a classic prisoners dilemma for managers? Every company is doing it’s best to hold it’s own costs down but no one can unilaterally raise wages without their competitors undercutting them on price. That’s why a minimum wage adjustment makes sense. It lowers all boats slightly but it breaks the logjam that holds everyone back. What will it take before the USCOC types actually understand that it’s in their own interest to do something about wages?
You’ve summed up the problem well. As I say in one of the answers above, I don’t think a minimum wage hike would hurt growth – but I also don’t see the political will to push it through in the next couple of years, since we’re heading into an election cycle. What’s interesting is that some enlightened companies are actually trying to create higher wage workers (which they correctly realize are their future employees and customers) themselves – IBM, for example, has started a series of high schools to churn out kids who can walk straight into 50K a year jobs. See my cover on that, here.
Sue_asks, Rana, in your story on the 3% economy (which was very good, btw), you mention student loans/debt as the next crisis point. As a parent with one child in college and another going next year, I have a very personal interest in this issue. My daughters are going to graduate college with mortgage-level debt hanging over their heads. And not just my daughters, but an entire generation of students. This is going to have far-reaching effects on the economy – just, for example, home-buying and potential small-business startups. Who can do either when they’ve already got such a daunting debt load? It also impacts parents who want to help their kids pay off (or at least down) some of that debt. We put off things like trips, new car purchases, home renovations (or buying new homes for ourselves) to help the kids.
My question has two parts.
1) What needs to be done to fix this problem? I know Sen. Warren has some ideas, but what other options are there?
2) What are the chances that anything will get done? Is there any widespread sense that this is a problem and that it needs to get fixed?
As the mother of two kids myself, aged 8 and 12, I’m also extremely concerned about this. I make a good living, but am struggling to save the 70K or so each of them will need to attend a private university debt free. It boggles the mind to think about how average Americans on a median wage can ever imagine doing this. Aside from Senator Warren’s ideas, which I think are great, this is one area where some financial innovation could help.
One of the major problems with the student loan market is that it’s fixed, and static – there are two set rates for loans, they are high, and they can’t be refinanced. We should change that (a la Warren’s ideas) but we should also encourage more innovation in the student lending market. For example, I’ve spoken to internet entrepreneurs who are creating “crowd funding” type models for student loans, where alumnae from individual colleges (who have a better sense of the opportunities and risks associated with various degrees from particular schools) can loan money to graduates themselves, at lower rates.
There’s a company called SoFi that’s doing this successfully. I also imagine that companies themselves will get more involved in sponsoring talented students, paying their way through school in exchange for a set number of years of employment with the firm at the end of a degree. One could argue this is a kind of paid, indentured servitude. But in lieu of more government action (which I would of course like to see) it’s not a bad option for some students, particularly in high pay fields like technology.
deconstructiva asks, Rana, we still have chronic long-term unemployment in our recovery, so how do you think we should best address that so that everyone – literally – who wants to work can go back to work? (As one of those long-term unemployed, alas, I definitely have interest in fixing this, but I digress.) The major caveat, as we know, is that Congress is doing almost nothing on this thanks to the GOP and the Tea Party’s obstruction. So given that, what can we do? I’d rather face the classic economic “problem” of wage inflation from full employment than to face mass unemployment, which is a problem in ANY sane economic model.
A couple of years ago, I interviewed Warren Buffett and we talked about this question. His view, which I share, is that in an economy undergoing the kind of structure shifts that ours is, we might need to have a stronger welfare state – by that I don’t mean handouts so much as subsidies for work that’s not rewarded properly by the market.
One good idea Buffett suggested was that the state could subsidize childcare and elder care workers in order to allow more women to rejoin the workforce in other areas. That could potentially boost not only employment, but also economic growth and the tax take. We need to find ways to release human talent and reward people for valuable skills that the market may not properly appreciate – as we all know by now, markets aren’t perfect!