An Uneven and Unreliable Economic Recovery
Recent economic reports present a mixture of disregard, denial, and disinterest. The Bureau of Economic Analysis reported GDP growth of 1.8%. The Economist wrote about how debt problems are constantly explained away and asked on its April 28, 2011 cover, “What’s wrong with America’s economy?” The Chairman of the Federal Reserve held a first-ever press conference that one writer tagged as “the message was the medium.”
Unemployment levels have apparently bottomed out, as have suburban home prices, and the markets are doing well. One boutique retailer we visited the week of April 25 reports an “awesome” spring, while a home remodeler we visited the same week sees 2011 so far as its worst start ever, largely a result the weather. A manufacturer we know had its bank loan called after missing a payment of some $2,500 by a day, likely a casualty of being on the wrong side of the transaction when successor banks take on the customers of failed banks.
The rate of recovery is agonizingly slow and highly unpredictable, noted Professor Martin Eichenbaum, Ethel and John Lindgren Professor of Economics at Northwestern University and the Co-Director of the Center for International Economics and Development. He spoke on “The Economy: Future Challenges and Opportunities” on March 10 at the Federal Reserve Bank of Chicago. Dr. Eichenbaum has a PhD from the University of Minnesota and has been on the faculty at Northwestern University since 1988. A report on his talk follows:
We are told that the recession is over. Maybe economists are celebrating, but most of the rest of us missed the party. The Great Recession was well named. The economic downturn that started in December of 2007 has been far more severe than any other since 1945. This one has fallen much farther in terms of unemployment levels and declines in economic activity, and it has also lasted far longer. As the first quarter of 2011 ends, more than three years after the recession started, we are finally starting to see signs hope and stability.
Employers hesitate to add new staff, and even if real estate values have fallen back to levels seen before the boom started, we have no reason to expect home prices to start climbing again as they once did. Mortgage capital is no longer available for the sort of binge that caused the housing bubble in the first place, and we have a vast oversupply in most markets, besides many more pending foreclosures.
Further, when lenders do provide mortgages in 2011 the standards for approval are actually responsible. That means that it is a lot harder to get a loan now than it was during the peak of the “Liar’s loans” madness before 2006. It makes a lot more sense these days to rent, especially if you plan to retire to Florida.
Fiscal Crisis of the States
But that’s just the recession. Dr. Eichenbaum noted that we face a far more important long term fiscal crisis in the United States and Europe that was aggravated by the current economic situation but will far outlast it. Besides chronic and massive deficit spending at the Federal level, every single state government in the United States faces a severe shortfall in funding pensions for retired state workers, and many municipalities struggle mightily as well.
For many states—and Illinois has one of the worst debt to revenue ratios in the country right now—the looming liabilities look to be disastrous. Problems in commercial real estate, a major alarm for banks in 2010, appear to be “papered over” for the short term. Yet a commercial real estate meltdown is still a distinct danger.
The problem is even more severe in Europe. The most troubled countries, Greece, Portugal, and Ireland (the indelicately nicknamed the “PIGS” when Spain is included), were forced to enact painful austerity measures about a year ago, and for Greece the cuts were a condition for receiving €110 billion in bailout funding from the European Union in May of 2010. But all of the countries of Europe face similar problems in terms of lavish pension and health insurance benefits promised to retirees that the same countries, arguably, were never likely to be able to afford and certainly can’t manage today.
The United States isn’t quite as bad off as the European Community right now, but long term the statistics look the same. For nearly every European country and for the United States, if current trends continue, within 40 years every single government will face upwards of 300% debt to revenue ratio. For example, we can look forward, every single year, to eight trillion dollar federal budgets, each with two trillion dollars in tax revenue and six trillion dollars in deficit spending.
This catastrophic level of indebtedness is impossible; it simply can’t happen, and it won’t happen. The old cliché applies, more than ever before in human history, in fact; whatever cannot continue, stops. In the United States, it means we face some wrenching decisions.
Tough Choices
One member of the audience asked Dr. Eichenbaum what he would do if God granted him three wishes to fix the economy, on the condition that he worked promptly. His first response was that he would teach politicians arithmetic. We can’t solve our fiscal crisis by cutting waste and fraud in government. It was silly 30 years ago for politicians to talk about addressing our budget deficit by eliminating federal subsidies to Amtrak and National Public Radio. It’s no more sane today.
We must raise taxes, and we must make significant and painful cuts in spending. But raising taxes only for the rich is not enough to solve the problem. Everyone will need to share in the sacrifice. Payroll taxes could rise to help secure Social Security in the future. In fact that could be done by applying the FICA tax to all levels of income, not just the first $110,000.
We could also help by boosting the minimum retirement age to 67 or 70. But Social Security is not nearly the problem it is made out to be; we can cover future pension costs with reasonable reforms. Medicare and Medicaid represent a real crisis. In Medicare and Medicaid we have promised our citizens, particularly our elderly citizens, something we as a nation cannot afford in years to come. Soaring health care costs and a rapidly aging population, along with a dramatic increase in life expectancy since Social Security was introduced, will make Medicare and Medicaid a devastating burden in the decades ahead if we don’t make some hard choices now.
Even these measures might not be enough. It will probably be brutal. But we must act, and delaying being honest about the situation only makes the consequences, and the decisions, more difficult and expensive later.
By the end of April, however, these questions are largely forced into the traditional boxes of debating over paltering expenses in exchange for raising the debt ceiling. Tough choices indeed.
—Mark Dawson and Collin Canright
