You Decide: What should be done now?

Media Contact: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

By Dr. Mike Walden
North Carolina Cooperative Extension

Worries persist about the economy. Although the economy is in better shape than it was a year ago, unemployment is still high, family budgets are still tight and confidence about the future isn’t very good. Progress is being made in very small steps, and some economists openly talk about a return to recessionary conditions (the “double dip”) within a year.

People want something done, and they’re looking to government — particularly the federal government — to get the economy moving.

But what should be done? Here’s the problem, increasingly there’s disagreement — especially among economists — about what policies should be put in place to mend the economy. The lack of a clear
direction makes it all the more frustrating for folks without jobs or with depressed incomes.

Part of the disagreement over new initiatives comes from arguments about what existing policies have already accomplished. To date, it is estimated that over $3.5 trillion has been spent by the federal
government — including the Federal Reserve — to fight the recession. Much of this new spending has been financed by borrowing, which has added to the national debt.

And while the $3.5 trillion clearly hasn’t brought prosperity, an argument has been made that without the spending, the economy would be in much worse shape. For example, the president’s chief economic adviser
estimated that without the $800 billion stimulus plan passed last year, there would be between 2.5 and 3.5 million fewer jobs today.

Two private economists recently issued an even bolder assessment. They estimated that without the $3.5 trillion anti-recession effort, job losses would have been /double/ what they’ve been, and the economy today
would be in another Great Depression.

One of the problems with such conclusions is that they’re based on guesses, albeit educated guesses. Economists estimate what the economy would be like without the policies, compare those results to what the economy is with the policies, and then take the difference as being the impact of the policies.

The “rub” — the source of disagreement — between economists comes from there being many ways to estimate what the economy would look like without the policies. Specifically, economists disagree over three
aspects of economic model building.

First, they disagree over the impact of government spending. Some believe each dollar of government spending results in more than a dollar of impact on the economy. Others think the relationship is one to one — one dollar of government spending has one dollar of impact on the economy. And still others think a dollar of government spending actually results in less than a dollar of new economic activity.

Economists also disagree over how taxes enter the mix. In particular, some economists say the impacts of government spending are muted if people expect the resulting higher debt will lead to higher taxes.
People, therefore, save more in anticipation of a higher tax bill later, and higher private saving counters the increased government spending.

Last, economists disagree over how businesses react to government stimulus plans. On one side are economists who say government borrowing and spending simply displace private business borrowing and spending, leaving no net effect on the economy. Countering this viewpoint are economists who argue that during recessions, businesses aren’t borrowing and spending, so there’s no business activity for the government to displace.

So while there are certainly political fights about what to do next for the economy, there are also clashes between different economic perspectives. Those economists whose theory and research suggest government spending boosts the economy are now calling for more of it — a second stimulus.

But those economists who worry about the impacts of new public spending on borrowing, debt and future taxes say just the opposite is needed — curtailed spending and movement toward a balanced budget.

So perhaps it’s no surprise policymakers are divided on what to do if economists can’t agree. However, in their defense (after all, I am one), it’s always been a challenge for economists to explain the big (“macro”) economy, simply because the macroeconomy involves millions of decisions daily affecting trillions of dollars. It’s hard for economists to get their collective arms around the big economy.

Maybe one day economists will collectively decide what the “truth” is. But until then, you decide.

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Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. He writes his You Decide column every two weeks. Earlier You Decide columns are at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm