J. Fred Giertz is a University of Illinois professor of economics and member of the Institute of Government and Public Affairs at Illinois. He discusses the outlook for the national economy in 2011 in an interview with News Bureau Business and Law editor Phil Ciciora.
What direction do you see for the national economy in 2011?
I think the economy is going to continue to grow. It's been growing for the last 18 months, actually. So in one sense, the recession is long over and the economy is moving along, albeit rather slowly for a recovery. Businesses are doing fairly well - profits have come back and firms seem to have a lot of cash on hand. The stock market has also had an amazing recovery since March 2009.
All of those things are good, but the one big lingering concern is the high rate of unemployment. Over the past two years, the unemployment rate has barely budged; in fact, it's actually a lot higher now than it was at the beginning of the recession two years ago. It did come down a little bit but now it's bounced back up to near the 10 percent level. The problem is that the current growth rate is not strong enough to absorb new entrants into the workforce along with those who are unemployed.
So our leaders in Washington should be concerned not only with economic growth but also with the unemployment rate. And that's probably a major reason for the compromise on the Bush tax cuts and the extension of unemployment benefits between the president and Republicans. I think of it as a stealth stimulus bill. The first stimulus bill was a straightforward one, where Congress appropriated large spending increases (along with smaller tax cuts and rebates) to stimulate the economy. The new plan is a backdoor, stealth stimulus that keeps taxes low and increases the deficit not through spending but through lower tax revenue.
No one knows exactly how effective this is going to be. It's not going to have a dramatic impact where we're going to jump back to 5 or 6 percent unemployment anytime soon, but it may eventually point us in the right direction.
Have fears of a double-dip recession been put to rest?
Yes. We're not worrying so much about a double-dip recession anymore. That's positive news, but the rate of recovery is still much slower than in a typical recovery. The high unemployment rate is also very difficult for people to accept.
How did this recession compare to ones we experienced in 1990 and 2001?
This was not a normal recession, since it was accompanied by a financial panic. In the U.S. and around the world, financial panics are relatively rare but when they occur, they tend to make recoveries very slow. By comparison, the recessions of 1990 and 2001 were very modest in terms of their impact.
But this is not that type of recession. It's been a much more severe one, and the recovery is going to be much slower. It took us 12 years after the Great Depression to get back to a reasonable level of growth and employment. I'm not saying it's going to take that long this time, but anytime there's a financial panic it's very difficult to work your way out of that, and that's where we are now.
How do we handle long-term problems like the deficit while mired in a prolonged economic slump?
The problem is that these short-term policies we've enacted to stimulate the economy are exactly the wrong prescription for the long-term. We've blinked in the face of making hard choices, but at some point we're going to have to make this change.
As a country, we're going to face many problems over the next few decades, chief among them the fact that we're spending more than we're taking in - about 50 percent more than what we're taking in, in tax revenue. Unless changes are made, the impacts of an aging population along with rising government health care costs will result in an equally bleak budget picture 10 years in the future that will only grow more severe in succeeding years.
That's not catastrophic in any particular year, especially during a recession. But that gap somehow has to be closed, and what we've done with the tax cuts is not a good
long-term strategy. So we have to recover from this recession and then focus on the longer-term problem of getting our fiscal house in order by reducing the rate of spending growth and increasing revenues - both of which are politically unpopular.
What conditions have to be in place for us to consider focusing on more of a long-term approach?
The question is, when do you stop worrying about the short-term and start thinking about the long-term? Politically speaking, I think it won't be feasible until we're at 6 or 7 percent unemployment. But most of these changes don't have to be made instantaneously; we need to set ourselves on a path toward stability.
It's a problem in that you can get away with spending more than you're taking in for a few years but after a while it gets to a certain size where interest payments start to grow exponentially, and it becomes very difficult to extricate yourself. I think it's important to take action sooner rather than later, but it appears that we're at least two years away from doing that.
Right now, inflation is very low. Do you see that changing?
Inflation is really good by conventional standards. A few months ago everyone was worried about deflation. Those fears have subsided. So we're in a situation where we don't have much inflation, and we also don't have many worries about deflation, but there are some constraints going forward with the interest rate being close to zero and inflation being near zero. That makes it very hard to conduct monetary policy. So there are some problems there, but certainly not insurmountable ones.
Is there anything more that the government can do, or do we just need to wait and let the business cycle take its course?
We need to keep doing what we're doing, and hope these measures pay off. And once they pay off we need to change our plans, because we can't permanently continue on this path of large deficits. They're going to have to be reduced at some time. Now is not the time to do it, but that time is going to come very soon.