Your 401k could take ten years to recover, top economist says

There are no fast solutions – either for the US economy or for individuals trying to rebuild retirement funds clobbered by the falling stock market.

That was the message from Mark Zandi, one of the nation’s top economists. Mr. Zandi is co-founder and chief economist of Economy.Com, a firm that provides various kinds of research to individual, business, and corporate clients. He was the guest at a Monitor-sponsored breakfast for reporters on Thursday

Waiting and waiting for the Dow

How long will it take the stock market to recover? “It could be a decade,” Zandi said. “If I were an individual thinking about the size of my nest egg, and what I would need for retirement, I think the appropriate assumption is that I am going to get 5 percent annualized returns on my assets.” Many investors enjoyed much faster growth before the stock market collapsed.

For the US economy, things are getting “measurably worse,” Zandi said. He predicted 2009 would be a “very difficult year -- washout,” with the economy contracting 2.5 percent. That is twice as big a decline in economic activity as the Obama Administration predicts in its budget.

Growth again in 2011

As for 2010, “I don’t think we go anywhere -- basically a flat year,” Zandi says. He added, “I think we get growth in 2011.”

Zandi has bipartisan credentials. He was an advisor to the McCain presidential campaign in 2008. The New York Times recently referred to him as a McCain campaign adviser who has become the Democrats’ favorite economist because, unlike Mr. McCain, he backs the stimulus spending. Zandi gave a presentation at last week’s White House fiscal summit.

Too small a boost

He thinks the stimulus package that Mr. Obama signed February 17 should have been bigger. Its $787 billion size was “a reasonable number maybe three months ago given the consensus forecast at that time,” Zandi said. But “in the context of our current forecast it feels too small to me. I would have made it larger, probably closer to a trillion dollars and I would have increased it with tax cuts.”

The Obama administration has done an inadequate job selling the various programs it has put in place to help financial institutions and consumers, Zandi said. “All of these policy efforts matter in terms of the dollars and cents. But the key thing is, does it convince people, is it going to shore up confidence or at least stabilize confidence? If there was a criticism it is that the administration hasn’t sold these policy efforts well enough,” he said.

Get busy on the deficit now

When asked if the government would be able to sell all of the debt it will need to cover massive budget deficits, he replied cautiously. “In 2009, yes. In 2010, probably because no one else is borrowing,” he said.

But the White House and Congress should take speedy action to deal with large projected budget deficits in future years, Zandi warned. “If we don’t make concrete progress with respect to our long term fiscal situation in the next year, then interest rates will rise beginning in 2010 and certainly 2011 and 2012 when the economy finds its footing and we go from deflation to inflation. And the dollar will probably fall in value at [that] time, exacerbating the inflationary situation and the higher interest rates. So it is key for policy makers to make really concrete progress with respect to the long-run budget situation in 2009.”