Rubenstein, Schwarzman Downbeat on U.S. Economy

(Reuters) – The heads of two of the world’s most powerful private equity firms issued a dire report on the U.S. economy on Wednesday, signaling problems for political leaders and their own firms’ ability to realize profit on their portfolios.

“We never really emerged from the last recession,” Carlyle Group co-founder David Rubenstein said at a breakfast session at Lincoln Center that also featured Blackstone Group Chief Executive Stephen Schwarzman.

“It will last a few more years before we get unemployment to a level that is tolerable,” Rubenstein said.

The two executives oversee funds holding hundreds of companies globally, given them acute insight into the state of local economies. The prolonged recession has slowed private equity firms’ strategies of buying companies on the cheap with hopes of selling them or taking them public at a hefty profit within three to five years.

While the U.S. recession officially ended in June 2009, the nation’s inflation-adjusted economic output last quarter fell to its lowest level since the fourth quarter of 2007 when the recession officially began.

Unemployment has been stubbornly stuck above 9 percent in the United States, and economists say the reading is closer to 16 percent when the calculation includes part-time “underemployed” workers and those who given up on searching for jobs.

A depressed housing market, which is one of the key factors holding back the economy, may have another 3 percent to 5 percent to fall but was nearing the bottom, said Schwarzman, a major Republican party donor who at one time was reported to have ambitions to be the U.S. Treasury Secretary in a Republican administration.

“Poisonous political dialogue and the attacks on business (have) led people to be predictably very cautious, not investing, not wanting to hire,” Schwarzman said. “The general uncertainty has basically frozen the economy.”

U.S. economic growth slowed sharply in the first half of the year and business and consumer sentiment weakened considerably over the summer amid the budget ceiling impasse and economic problems in Europe.

The U.S. economy is currently growing at a 2 percent annual rate, a level some economists consider to be “stall speed” and vulnerable to shocks like an escalation of the European debt crisis.

The two private equity titans blamed political inaction in Washington for failing to jump-start the economy.

Rubenstein — who has long railed against efforts to raise taxes on private equity funds’ profits from their current 15 percent rate — said it will take a massive dive in the stock market, a steep decline in the dollar or some other shock to spur politicians to move decisively on economic fixes before the next election.

“Right now people in Washington are saying, ‘Well, it’s not great, but we will wait till the next election.’ So we are 14 months away,’” Rubenstein said.

TAX REFORM

The private equity executives also weighed in on the battle between Republicans and Democrats over what combination of tax hikes and stimulus is necessary to cut the U.S. government’s budget deficit, which is expected to be about $1.3 trillion this year.

Rubenstein, who served as a domestic policy staffer during the Democratic administration of President Jimmy Carter, said in the short-term the Bush tax cuts should be allowed to expire — if all strata of American households bear the burden of higher taxes.

The deep tax cuts enacted under President George W. Bush in 2001 and 2003, which include the 15 percent capital gains cut that benefit the private equity firms, will expire at the end of 2012 for households making more than $250,000 a year.

“Right now we have 46 percent of households in the United States that are paying no federal income tax,” Rubenstein said. “My own view is everybody should pay something, and maybe the upper income people should pay more. But I like the idea that everybody is contributing.”

Schwarzman favored a simpler tax structure, both for corporations and individuals.

In an opinion piece published in The Financial Times earlier this month, he wrote that raising taxes on the wealthiest 2 percent of Americans will not be enough to cut the deficit. President Barack Obama has proposed a new minimum tax on millionaires.

No group or special interest, except for the poor and disadvantaged, should be exempt from any future budget adjustments, he wrote in the article published on September 11.

Still, there might be some positive signs in the economy.

“There is a happy story here but you might have to wait for a bit,” Schwarzman said.

Blackstone’s shares were off 3.4 percent at $12.33 in afternoon trading on the New York Stock Exchange.

(Reporting by Paritosh Bansal; Additional reporting by Jason Lange; Editing by Lisa Von Ahn and Matthew Lewis)

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