Jumpstarting Our Economy

In the Wednesday, October 27th edition of the New York Times, there was a persuasive editorial from Peter Orszag, the former budget director of the Obama administration, on the potential implications of the Federal Reserve Bank's decision to do a second-round of quantitative easing.  There are valid concerns about the tepid recovery, so there is a segment of economists, who believe policy makers need to be more proactive in improving economic conditions.  While examining the merits of this policy initiative, other policy options will be identified in jumpstarting our economy.

Our economic recovery has not been evident to many.  It should be noted that most recoveries have a lag between a boost in economic activity and improvement in the labor market.  This is because job creation occurs by increasing investment spending.  With businesses needing time to obtain financing and then converting that into expanding their facilities, it can take six months to a year before the labor market returns to its normal level.  However, this recovery is different due to significant damage of the Great Recession.  When looking at the permanent loss of jobs in manufacturing and other industries, there's the added burden of adjusting to the demands of a new economy.  Globalization and technology are changing our lives in a significant way and it is becoming necessary for all Americans to adjust their skill sets to adapt to these changes.

A couple of snags affecting our recovery involve recent legislation on health care and financial reform. While these efforts may provide more access to health care, there are still questions on whether this initiative will reverse the upward trend in health care costs.  Proponents of health care reform are counting on the health care mandate in increasing the number of Americans purchasing health care insurance.  Critics are concerned that the added mandates placed on businesses in providing their employees with health insurance are making them reluctant to do any hiring.  Then there's financial reform where a council of regulators will propose new rules that can have an impact on financing.  In particular, the banking system will want to know what these changes will mean for them and could impact their ability to lend now.  Without further clarity in these areas, private sector employment can be hampered well into the future.

All of the above factors and continued weakness in real estate are causing Fed officials to be concerned about the specter of deflation.  Since the relatively robust expansion during the fourth quarter of 2009, we have not seen enough economic activity to place a dent on rising unemployment.  The latest third quarter figure of 2% in real gross domestic product is an underwhelming total.  As the economy further slackens, there are legitimate concerns that we could experience deflation.  This would be the path that Japan took when their housing crisis caused their economy to crumble in the early 90s.  Even today, they have not fully recovered and have seen their economy and credit status tumble as a result.  The U.S. does not want to follow the path of Japan.

The Fed's plan to conduct an additional round of quantitative easing is focused on generating more economic activity.  Quantitative easing is a process where the Fed will sell short-term U.S. Treasury bills and use those proceeds to buy 10-year Treasury bonds.  They are hoping that the purchase of these longer term bonds will force interest rates down lower.  Lower interest rates will make it easier for firms to obtain financing and increase investment spending.  A rise in investment spending typically leads to more job creation.  In order words, they are printing more money and hoping this will lead banks to increase their level of loans.

Another potential benefit to the Fed's proposed efforts in increasing money supply is that it will drive the value of the U.S. dollar down.  While it's true that many are concerned about a devalued currency, it is actually an effective way to increase exports abroad.  In other words, U.S. goods will be relatively cheaper to foreign goods and it is hoped that will lead to more jobs here.

One downside risk to this strategy is that this could lead investors to believe inflation will rise in the future.  When investors believe that the government is not serious about maintaining price stability, they will take their funds elsewhere.  This could be in the form of investment to other global markets or simply investing in commodities, such as gold, crude oil, and other natural resources.  It also could also make foreign investors wary of buying U.S. Treasury bonds, which would force interest rates to rise.  These types of actions can inflict harm on the economy with a decline in stock market activity and rising interest rates placing downward pressure on economic growth.

There are others, who believe that this current economic malaise can only be corrected through fiscal policy.  Given that interest rates are already low, many economists speculate driving interest rates lower will have a minimal impact on businesses.  Many business leaders point to overall pessimism and uncertainty with new regulatory rules as reasons for not expanding.  Actually, Congress can play a more effective role in this instance because confidence within the private sector is low.

It should be noted that there are two divergent philosophies that can be used in jumpstarting the economy through Congress.  On one side, there is a belief in directing more government spending in infrastructure and job programs.  This action would create more immediate job creation, but would also be very costly.  While on the other side, they believe that private sector job growth expansion would take place if only their reins are loosened in the form of lowering taxes aimed at investment.  For instance, the U.S. corporate tax rate is among the highest in the world, so that could be lowered.  Also, reductions in capital gains tax and dividends would create incentives for investors to boost stock market activity.  The problem with these proposals is that there is no guarantee that lower taxes would necessarily all go toward job creation.  As we have seen during the recovery of the stock market, firms have chosen to hoard cash and not take on new projects.

What is not known by many is that there is still room for fiscal expansion in the next couple of years, but that needs to be followed with legislation aimed at legitimately curbing the deficit within the next four to six years.  As shown in July's Congressional Budget Office report on the federal debt, its debt level will reach 62% of gross domestic product (GDP) by the end of 2010.  That is actually at a manageable level, but we should start to be concerned when it reaches 90% or more.  If further government spending takes place, it needs to be balanced with politically unpopular initiatives that are the true drivers to our unsustainable federal deficits that are projected to occur by the end of the decade.  That would mean substantively restraining entitlement spending, such as Social Security, or finding additional revenue streams, such as the Value-Added Tax.  If neither takes place, then our future economic growth will be compromised as debt levels reach 90% or more of GDP by the end of the decade.  If we reach that threshold, it is likely that our credit rating will drop and interest rates will rise.  That will make it harder for firms to get cheap financing and driving consumer borrowing costs higher.

As we look to Tuesday where a new Congress will be selected, it is important that our new representatives reach common ground in finding ways to grow and sustain the current recovery.  The increased polarization in today's politics has made it more difficult for moderate politicians from both sides to draw ideas from both political perspectives in attacking our complex solutions today.  The presence of 24-hour news media and social networking sites are causing our current politicians to stick to party platitudes rather than risk ridicule or embarassment for "extending an olive branch" to the other side to break through our current stalemate.  Previously, we have seen the benefit of minimizing the power of the ruling party during midterm elections, as shown by looking at the Reagan and Clinton years.  However, those times were different and not as contentious, so it's questionable whether this new Congress will be able to work together to benefit the country as a whole.  That is why your vote this Tuesday is important, so use it wisely.

Economic Update - 3rd Quarter of 2010

As expected, the U.S. economy grew at a sluggish pace of 2.0% as reported by CNN Money.  We need economic growth exceeding 3% in order to generate jobs, but it should be noted that the economy is still growing.  While certainly not the only indicator, positive economic growth is a sign that we are not experiencing another recession.  As we look to the near future, most analysts are not expecting much higher growth, but the fourth quarter might see slightly improved numbers.

One of the key components to an economy is consumption spending.  It grew by 2.6%, so that's a sign that consumers are starting to loosen their pocketbooks a bit.  While still relatively low, it is the highest number recorded since the fourth quarter of 2006.  A weak labor market is keeping personal income rates low, so there's concern in the future.

Purpose of Blog

My overall goal is to increase economic literacy, so that all Americans will be better informed when performing their civic duty.  This blog will focus on policy, rather than research.  While there might be evidence of certain biases and perspectives that are shaped from my educational training and life experiences, it is my goal to broaden my audience to various political philosophies in an attempt to develop critical thinking skills by analyzing ideas on their own merits rather than demonizing one side over another.  It is distressing to see political discussion degenerate into attacks on people, rather than their ideas.  Hopefully after reading this blog periodically, your knowledge will be enhanced and you can filter through the misinformation currently prevalent in multiple media sources.  

My target audience is broad, but primarily aimed at individuals with limited knowledge of economics.  Known as the dismal science due to its arcane methodology and sophisticated use of models and mathematical equations, it can be intimidating to many.  My goal is to hopefully simplify it and allow you to understand its relevence through many aspects of society.  Even if you are highly knowledgeable of economics, I believe that you will also gain value in seeing how the basic fundamentals of economics play out in industry, government, and our regular lives.

Background of Blog Founder

I am currently the Assistant Professor of Economics at Darton College, which is located in Albany, GA.  I have served in this position since August 2007 where I primarily teach Principles of Macroeconomics and Principles of Microeconomics.  Here's quick overview of my background and teaching style. Regardless of where you live, you should consider our institution because you can earn an associate's degree purely online within Darton's Business Division.

I have been a resident of Dougherty County during my time at Darton College.  Even though I have not been a lifelong resident of the Albany area, I have been touched by the many relationships that I have made here and consider it my home.  Currently, I am appointed to serve on the Albany/Dougherty County Commission Board where we consider zoning and planning issues that impact both the City of Albany and Dougherty County.

Please note that the views expressed by me are solely my own and do not represent the views of Darton College.