LEWISBURG, Pa. — Welcome again to "Ask the Experts," a regular web feature that highlights the expertise of various Bucknellians in a range of topics related to current news events and other timely subjects. || Ask the Experts archive
This week, we asked Stephen Stamos, professor of international relations, about the state of the U.S. economy. Stamos is the author of six books, including Economics: A Tool for Understanding Society, International Economics and The ABC's of International Finance, and is currently writing another with Patrice Franko, a 1980 Bucknell graduate now teaching at Colby College. The Puzzle of 21st Century Globalization is scheduled to be published by Rowman & Littlefield in September.
Q: What is your assessment of the economic environment and prospects for recovery?
A: We've had two quarters of economic growth, 2.2 percent in the third quarter and 5.7 percent in the fourth quarter. Technically, the recession is over. But the consumer who typically accounts for about 72 percent of GDP (Gross Domestic Product) has really changed consumption patterns and behavior. People are more careful about spending. They have less to spend. They feel poorer. Their household net wealth has been decreased by the decline in home equity and their retirement accounts have been hard hit. In the worst of this crisis, people lost 30 to 40 percent of their home values and 30 to 40 percent in their retirement accounts. And now, consumers are increasing savings to a level of about 5 percent of after-tax income. A year ago, it was zero. Typically, when the economy is growing at a steady, sustained clip, we expect consumer spending to be a sizeable part of it. Consumption spending has dropped to 67 percent of GDP. It begs the question, if the consumer isn't spending, what is going to replace that if we're going to have anything more than anemic growth?
Private sector investment has pretty much stalled out, too. Fundamentally, you're not going to get an expansion in investment until there's a demand for what it is people produce. In the absence of the growth of demand, there's no need to produce more.
Growth is likely to be 2 to 3 percent next year, the first half being a little stronger than the second half. What's happening is that the U.S. stimulus driven largely by the government is coming to an end. In stark terms, you've got a Federal Reserve monetary policy that's the easiest it's been in history and we're running a deficit of $1.6 trillion and we still can't get beyond anemic growth. We could be in for a long period of stagnation.
Q: Unemployment is now at 9.7 percent. Is there any possibility for jobs growth?
A: We looked at the 20,000 decline in the January employment report and thought that was an improvement. But we went back with recalculations and learned that we'd lost a million-and-a-half more jobs than we thought in this recession. So, since it began in late 2007, we lost 8.5 million jobs. When you look at the number of jobs you need to create for new labor force entrants, what that means is that to get back to the pre-recession level of unemployment we would need to create 11 million more jobs. In economic terms, it takes about 2 to 3 percent of real GDP (Gross Domestic Product) growth to generate a one percentage point decline in the unemployment rate. There isn't going to be any really quick or dramatic drop in these numbers. Worse, the sort of head-fake of an unemployment rate going down to 9.7 percent from 10 percent was probably more of an aberration because fewer people are looking for work and more are discouraged. When they re-enter the labor force to search for work, they'll come back on the rolls of the unemployed. And we're still getting large numbers of people filing for initial claims and extensions for unemployment benefits. This is not a great picture.
Strikingly, we've seen productivity growth off the charts, but that's not the kind of productivity growth we need. When you have unemployment at almost 10 percent and productivity growth at 9 percent, that means the few people working are producing more and working harder.
Q: Is there any help left in the federal stimulus package?
A: Last year, 30 percent of the stimulus package was spent. About 60 percent will be spent this year and the remaining 10 percent next year. We can expect some continued support, but the debate is whether these are brand new jobs being created or are these preserving jobs that people might lose otherwise if that spending wasn't out there.
What doesn't get talked about is the way this money is being used to extend services to people in terms of extended unemployment, health care access, Medicare access. The dramatic reality aside from the national economy up against all of this is that state and local governments have been crucified. Their financial status is continuing to undermine the strength of the national economy.
Q: Given the stimulus and deficit spending, is there a fear of near-term inflation?
A: Some in the last few months have wrung their hands about possible inflation. Currently, there is no inflation in the system and will not be for a year and a half or two years no matter what. There is a larger fear of deflation. That was the Achilles heel for the Japanese economy in the 1990s. They sat with a monetary policy like ours for 15 years and it didn't do anything. The deflationary fear is more ominous to me. This deficit obsession right now is really misplaced.
Q: Your thoughts on the administration's proposed budget?
A: It's a proposed $3.8 trillion with a $1.6 trillion deficit built in. But $2.4 trillion of the budget is protected and mandatory - defense, Social security, Medicaid and Medicare and the interest on the public debt. The interest, even at these low rate levels, is $250 billion a year. With projected deficits the interest payment on the public debt is going to triple to about $750 billion in 10 years.
Under current legislation, 83 percent of the budget is basically fixed and frozen. There can be a conversation about the other 17 percent, which is viewed as discretionary. That debate is going to be over the built-in jobs bill and some other spending related to job creation and employment.
In some ways, it's a ceremonial dance in Washington that is prolonged. It allows for the lightning rods to come out to debate and argue. Budget forecasts by the Congressional Budget Office and Office of Management and Budget clearly document the nightmare we're heading toward. Without health-care reform that reduces costs, without revisiting Social Security in terms of benefits, extending time periods for people to qualify and paying a little bit more into it, we can see that these are literally going to bust us. You can say to any legislator today, you've got a short-term and a long-term responsibility to the country and you've got to start acting like that on both counts. Not to do that means you're here for some other reason.
Q: What are some of the major global issues in the current environment?
A: I've long been an advocate that we need today something on the order of a new Bretton Woods conference. This has been evident since the 1987 stock market collapse. The financial characteristics of the world have changed dramatically, fed by globalization that's been emerging for decades. The fact is we need an active G-20 group thinking about structures, institutions, policies — whether it's the WTO, the IMF or World Bank or common financial regulations throughout the global system in terms of banks' behavior, leveraging and capital. We're just going to have to move to that. That means abandoning national sovereignty in some areas to gain more stability and security longer term. It's a different cooperation in the world.
We get the short-term benefit of capital moving here, chasing the dollar. Now, countries in Europe are having trouble. They need capital investment for jobs. Look at the unemployment rate across some of those countries, it's staggering. Spain is almost at 20 percent. Now some of them are getting into debt situations that could generate defaults. The problem is the money that they've borrowed is with banks in the U.S. and Europe that still haven't cleaned up their balance sheets and who are still carrying toxic assets. These defaults will bring those up to the surface again — which is why the stock markets are reacting the way they are.
One of my fears is that we could go along at a low level of anemic economic growth, prolonged stagnation and hit another international crisis of some sort. Even with a slow economy and high unemployment, we could be looking at oil at $150 to $200 a barrel again and running our trade deficit up to 7 percent of GDP, which would cause a collapse of the dollar. The point is if you don't fix this other stuff, you could entertain this scary stuff. Even if we had a functioning political system with good will, this would be a tough thing to take on right.
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