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Professor Sergio Rebelo addressed a group of alumni and guests at the Union League Club of Chicago on Feb. 7.

Kellogg international finance expert sees reasons for economic optimism

Professor Sergio Rebelo shares his insights as part of new alumni engagement initiative

By Adrienne Murrill

2/9/2007 - According to Professor Sergio Rebelo, the United States economy is humming along in “good shape.”

Rebelo, the Tokai Bank Distinguished Professor of International Finance at the Kellogg School, spoke to a group of more than 80 alumni and guests Feb. 7 at the Union League Club of Chicago. The lecture was the first of several in a new initiative between Kellogg and its alumni network, said Roger (“Whit”) Shepard, associate dean for Development and Alumni Relations, who introduced the professor.

For this initial event, Rebelo’s presentation was titled “Critical Issues in the World Economy.” The talk began with a detailed look at the state of the national economy, which currently enjoys steady growth, low unemployment, and low inflation rates.

One area of frequent concern, however, has been the ratio of federal debt to gross domestic product. “You often hear we’ve got to worry about the deficit and reduce government debt,” Rebelo said. “But the U.S. has some of the lowest debt to GDP ratios in the world.” While the U.S. debt to GDP ratio is 38 percent, Italy, Belgium and Japan have figures above 100 percent.

“Everything looks good here,” said the Kellogg finance expert who has published widely in macroeconomics, including his studies of the business cycle and the impact of economic policy on growth. “You don’t see any explosive spending trends.” An exception to that, though, is projected spending for Social Security and Medicare.

“One of the messages I want to stress is that if you’re thinking of retiring, don’t,” Rebelo joked.

Predictions from the Social Security Administration estimate that funds will run dry near 2040, but Rebelo cautioned the audience from thinking that this is an impending crisis.

“You have to marvel at a democracy like the U.S. that has gotten to the stage where people worry about something happening in 2040,” he said. Most governments in other countries worry about what will happen next year or before an upcoming election. “Social Security is a manageable problem because we still have time and we can use adjustment mechanisms that include increasing immigration to gain a larger pool of workers or raising the retirement age and payroll contributions.’’ Rebelo said the solution will likely involve a mixture of all three mechanisms. On the fiscal side of the economy, the projected growth in Medicare expenditure is a more serious problem that will have to be addressed.

The professor also discussed global economic issues, such as the increased price of oil, how outsourcing benefits companies, and the growth in emerging markets, specifically China.

Rebelo noted that China’s growth is a significant benefit to the U.S. for two reasons. When China opened its economy to foreign direct investments, this allowed American companies to lower costs by outsourcing in China and gaining access to the Chinese consumer markets. Also, China has become a low-interest lender to the U.S., allowing the U.S. to invest in China and potentially earn higher rates of return.

Following Rebelo’s presentation, attendees gathered for a reception with an opportunity for questions and answers with the professor.

Said Associate Dean Shepard: “We are instituting a series of ongoing presentations to give our alumni a share of all the disciplines represented in the Kellogg School faculty, and exposure to the great people and great work going on at Kellogg.”

The next alumni session faculty event is scheduled for San Francisco on Feb. 22, when Brian Uzzi, the Richard L. Thomas Professor of Leadership and Organizational Change, will present “Raise What You Know to the Power of Who You Know: How to Build a Better Network.”