How Long will this Recession Last?
Economists Are Divided on When the Economy will Recover.
Mar 9, 2009
There now seems to be some general agreement on when it began (December 2007, according to a December 3 article on CNNmoney.com), but there isn't much agreement on when it's going to end.
A recent article in the Christian Science Monitor, a generally bi-partisan newspaper, stated that economists are predicting that conditions will begin to improve by the middle of 2009. Economists cited by National Public Radio have said the economy should begin to improve by 2010. Paul B. Farrell, a contributor to Marketwatch.com, predicted a recession in February, 2008, and listed 11 reasons why it would last into 2011.
Some of his reasons included the housing crisis, which he said will continue to go unresolved, massive debt at all levels of government, the increasing cost of wars abroad, lobbyists running Washington and Americans being encouraged to spend like there is no tomorrow by both corporate America and the Bush administration.
What is Different Now?
Things have changed a little since then. Barack Obama has been elected president and is furiously working to resolve the housing crisis, the problems in the banking sector, and the rapid decline in the job market.
However, Nouriel Roubini, an Economics Professor at NYU Stern School of Business, who predicted a recession in 2006, told Bloomberg last month said he didn't think the economy would be positively affected by any of the measures the Obama was taking would impact economic conditions, because so many different factors have led to the recession.'
"There is a consensus that says there is going to be a return to positive growth in the second half of the year, but if you look at the situation of the U.S. Housing sector, falling jobs, falling equity wealth, falling home prices, the credit crunch, the need to recover savings, I don’t see consumption recovering, frankly," Roubini said in an interview.
Why Will it Last that Long?
The problem is that all parts of the United States economy are inter-connected. With a rise in foreclosures and job loses, consumers are losing spending power. This in turn, hurts businesses which rely on that spending power. These businesses are then forced to cut back on their expenses, and for many businesses, labor is their biggest expense.
A stimulus package, which is nearly $800 billion, was passed at the beginning of this year, and there are further bank bail-outs in the works, which could cost as much as $1 trillion. This would lead to one of the problems Farrell warned us about, ballooning US deficit.
The Stimulus Package Could Have Long-Term Consequences
Obama has called for a repeal of the Bush tax cuts, which would restore the tax rate paid by the highest earners in the United States to 39 percent, unfortunately, he's facing fierce opposition by republicans, and even some opposition by moderate democrats. The bail-out package was paid for by the government taking out bonds, according to reports on National Public radio, and these bonds will have to be paid eventually, most likely the those who are now in their 20s and 30s. There will need to be a tax hike at some point, the only question is when will it be, and who will pay it.
But the more important question is will any of this work? Well, the vote doesn't seem to be in yet. The job loss numbers for the months of January and February were abysmal, according to the U.S. Department of Labor, but most of the stimulus programs designed to create jobs haven't started to take affect.
There Have Been Attempts at Bi-Partisanship
A large portion of the stimulus (roughly a third) included tax breaks, mostly added to garner the republican votes needed in the Senate to bring the bill to a vote (a bill only needs 51 votes to pass the senate, but requires 60 votes to be brought to the floor, which creates the opportunity for a minority party filibuster). Conservative economists claim tax cuts will help economic growth by increasing the spending power of average Americans and allowing businesses to set aside more money to hire new employees.
However, a non-partisan research committee presented a report to Congress at the end of 2008 which reported that every dollar of tax cuts would put roughly a dollar back into the economy. This was because during a recession, businesses and individuals tend to save money, rather than spending it. This same committee reported that government programs designed to create jobs were a much better method of improving overall economic conditions.
In addition, there were billions set aside for programs which had nothing to do with the economy at all (everyone remembers Louisiana Governor Bobby Jindal's comments about millions being dedicated to volcano monitoring). Many economists seem to think the stimulus package should help turn things around by the beginning of next year, but there are still plenty who think otherwise.
So When Can We Expect a Turnaround?
No matter what action is taken, there are those on both sides of the isle that have their own opinions on why it is, and why it isn't going to work. The United States economy, and the emerging global economy are something that few agree on, and no one seems to fully understand. So if you want to know when things will start to get better, well, the vote is not quite in yet.
