The question on the mind of many investors has to be: where is the U.S. and world economy headed?  Are we moving toward a double-dip recession, or is the economy in the early stages of a long-term recovery?

At a recent industry conference in San Diego, financial professionals heard a keynote presentation by economist Todd Buchholz, former White House director of economic policy and, before that, economics professor at Harvard University.  His presentation was extremely candid, describing the 2008-2009 economic meltdown as “the most tumultuous economic times any of us have ever been through,” later noting that it was a period when the Beardstown Ladies investment club outperformed the leading brokerage house investment divisions, when Mattel, the company that makes little hot wheels cars, has more market value than General Motors, which manufactures real ones.

But haven’t we emerged from complex economic times in the past without this lingering uncertainty about where things are going?  Buchholz said that if you aren’t sure what’s going on, you aren’t alone.  Economists are discovering that their economic models have grown increasingly out of touch with the realities of the marketplace.  One big reason is that the world has changed dramatically.  “When the Berlin Wall was pulled to the ground, millions of workers who had been trapped on the other side were suddenly free to compete against you, me, somebody writing software in San Diego or assembling textiles in North Carolina,” Buchholz told the audience.  “When you add in India and China, you have billions of new workers in the global workforce, which pushes down labor rates and inflationary forces here at home.”

Today, the American worker is caught between two negative forces.  It’s hard to negotiate for higher wages when more than a billion workers are competing for his/her job.  At the same time, newly-industrializing nations like India and China are clamoring for commodities, which raises the world price of everyday items like gasoline, cotton, cement, metals, food and whatever is made from those things.

So where do we stand today?  Buchholz applauded the fact that the Federal Reserve Board has taken interest rates to zero and (as he put it) “stomped on the money supply accelerator.”  He doesn’t expect this to lead to high inflation down the road because wages will be kept low by global competition for jobs, and because the new money is actually offsetting the 2008-2009 destruction of value in the real estate markets and the private sector.  Unlike some economists, Buchholz believes the fact that housing inventories and home starts are going down is a good thing, because it means that home prices will be primed to rise again.

Jobs?  Buchholz conceded that the job market is brutal right now, but he thinks this is normal at this stage of a downturn.  “Whenever you have a recession, companies fire people and cut costs,” he said.  “When business picks up again, as it has in the U.S., they don’t immediately call them back.  Instead, they say, hey, Bill, can you stay an extra hour?  Or: hey, Joe, come in a bit early tomorrow morning?”  Recent rises in temporary worker hiring and overtime may be a precursor to hiring back full-time employees.

The bottom line?  Buchholz doesn’t expect to see a double-dip recession.  “Consumers are showing more resilience and more composure than most professional economists anticipated,” he said.  “This is not a rip-roaring recovery, by any means.  But earnings are better than expected, corporate cash on hand is greater than expected.  Instead of a recovery that would grow the economy at 4-5% a year, we could see 2-3% growth for a while.”

Is there a danger to this cautiously positive vision?  Buchholz said that what worries him most is a backlash against capitalism in the U.S. Congress, which might impose trade barriers to protect U.S. industries.  “There were three terrible policy mistakes that the government made which caused the Great Depression,” he told the group.  Two of them are unlikely to be repeated: the Federal Reserve allowed the money supply to collapse by 30%-the opposite of what the Fed is doing today-and Congress raised taxes dramatically across the board.  But the third mistake was passing significant tariffs, triggering retaliation from other companies—and suddenly world trade fell by 40%.  “I am very concerned today about trade tensions brewing around the world,” said Buchholz, “even among friendly countries with the U.S.”

At the end, Buchholz said that the most pressing issue, in his mind, is getting our educational system back into the global top tier.  He said that increasingly, wealth is measured by the application of education and intelligence, and the world is catching up to the U.S.  “Whoever harnesses intelligence most,” he told the group, “will prosper most in the 21st century.”