February 20, 2008

Thoughts on an Economic Slowdown

Bob Gitter

During the last 20 years, the United States economy has grown at about three percent each year. Since this is faster than the increase in population, there has been a gradual increase in the standard of living. If the economy grows much less than three percent, say a half-percent less, we have technically avoided a recession. But minimal growth will create unemployment, and the resulting economic hardship will still be large—although somewhat less than if the economy had actually shrunk and we technically had a recession. In short, think of it as whether the low temperature tonight will be two above zero or two below. In either case, it’s cold! Technical recession or not, in light of the sub-prime woes and increasing oil prices, a slowdown has occurred and an actual recession is possible.

One could wonder about the effectiveness of current government policies. Although some of my departmental colleagues might lend more expertise here, I will share my views. In prior decades, when the economy slowed down, the Federal Reserve System was the first responder. And in recent times of falling demand, the Federal Reserve has taken actions to make it easier for banks to lend money by reducing interest rates. The current sub-prime difficulties have made banks hesitant to lend money. The Fed has made loans easier to make but banks can—and some do—choose not to make them.

Fortunately, there is second set of tools we can use to jumpstart the economy: fiscal policy. This is exemplified by the recent $168 billion tax rebates that Congress and President Bush have enacted. The good news here is that this should help get the economy back on track. The bad news is that it takes a while for the medicine to work.

The best guess is that the checks will reach people during the course of the late spring. As the money is received and spent, and those who sell the goods and services re-spend the money they receive, the economic handicappers are betting on a better second half of 2008 than the first. Will the economy be growing at a three percent rate by the end of this year? I would think that in light of the severity of other problems, the growth rate will be less than that, but better than what we see now.

In closing, though, we must realize that the recession is a short-run issue. (This is despite what my colleague Norman Gharrity likes to say: “Things always look darkest before they get really bad.”) The tax rebates will be financed by borrowing the funds from the public and will increase the federal government’s debt. The more-than-nine-trillion-dollar debt, though, will grow less than two percent due to these tax rebates. This is not a change in the right direction, but it is a minor one.

However, there are long-run issues we need to deal with, including the federal government’s deficit. My concerns also include increasing economic inequality, a significant share of our work force without the necessary skills to succeed in the job market, energy, health care, the future of Social Security, and politically expedient but economically devastating responses to immigration and free trade. The economic slowdown is a more immediate, transitory and solvable problem with the proper medicine having been administered. The longer-run problems await a real response.

– Bob Gitter, Professor of Economics

Note: Other voices will be weighing in on the economy at 7:30 Thursday Feb. 28 at the annual Ohio Wesleyan Economic Outlook Conference. You are welcome to attend or watch it live as a streaming video. I always learn a lot from our speakers and trust you will as well.