CHAMPAIGN, Ill. – Without the government’s massive stimulus package, the U.S. economy could have spiraled into an epic collapse rivaling the Great Depression, a University of Illinois economist says.
Along with $787 billion to jump-start the sour economy, the stimulus package also provided an intangible that is as good as currency – a glimmer of hope, said Hadi Salehi Esfahani, an economics professor and former economic policy researcher for the World Bank.
“In economics, expectations are almost everything,” he said. “The picture of the future that we have in mind drives all of our spending decisions. Fear curtails spending, hope loosens it up. This stimulus package is providing hope and, in my view, has been managed very well given the circumstances.”
Based on hopes buoyed by the stimulus package, many companies hoarded workers rather than laying them off, preventing job losses that could easily have pushed unemployment much higher – perhaps to 20 percent – more than double the current rate, Esfahani said.
“Companies kept workers based on expectations that the recession would be short,” he said. “If they thought it was going to be long, they would have let workers go, and the downturn would have been much longer and deeper.”
Esfahani says the recession appears to be bottoming out, based on indicators such as housing sales, which are edging up in many cities, and rising consumer confidence. Commodity prices surged an average of almost 20 percent in May – the biggest monthly increase in decades – signaling that investors expect demand and production will soon rise.
Growing signs of inflation will also drive up spending, creating more demand for products and pumping more money into the economy, said Esfahani, a panelist for a June 13 economic forum in downtown Chicago who also will appear next week on “First Business,” a nationally syndicated television program focusing on markets and investments.
He predicts the lingering economic downturn will level off through the end of the year, followed by a slow rebound beginning in early 2010.
“It’s not going to be a classic V-shaped rebound, jumping right back up,” Esfahani said. “But I don’t think it’s going to go down a whole lot further. A little bit up, a little bit down for the next six months, then a rebound.”
Oil prices that have jumped from $40 to nearly $70 a barrel are another positive indicator, signaling that investors think production increases loom that will drive up energy demand and transportation, he said. Rising oil costs also could fuel inflation, sparking more spending.
But Esfahani warns that oil prices could impede recovery if they rise too much, too soon.
“If the price goes over $100, it could start choking recovery and we could have a period of stagflation, where inflation rises so much that people feel poorer so they spend less,” he said. “It’s a danger, but I doubt it’s going to be the case.”
The economy likely will fully rebound more slowly than historical averages because the current downturn is deeper than most, said Esfahani, the director of the U. of. I. Center for South Asian and Middle Eastern Studies.
“But in three years, the economy is going to be significantly beyond where it was two years ago,” Esfahani said. “And that has everything to do with our capability as human beings. There are more of us and we’re constantly discovering new things, new ways to do things. And whatever we discover is going to be put to good use.”
