As the recession continues to pound the nation, its blows are visible day by day in Brunswick. Whether it is a business closing its doors or an e-mail from President Barry Mills on the Blue Tarp Committee's plans to carry the College through the crisis, the Bowdoin community can see the signs of economic downturn. This week, the Orient asked the Economics and Government Departments to speak on the subject of the recession and share their views of the Obama Administration's efforts to end the recession as well as the recession's long and short-term effects on the government.
William D. Shipman Professor of Economics John Fitzgerald:
The recession induces, and in a sense is caused by, reduced spending by consumers and businesses. Reduced spending is caused in part by a massive loss of wealth from falling house prices and falling stock prices, coupled with problems in the banking system. The contraction is severe and unemployment will likely rise further.
In the near term we need two things: more spending and a sound financial system to provide credit for the recovery. The stimulus package increases government spending, and thus overall spending, but even more short-term government spending would be helpful. The tax cuts and long-term spending in the stimulus package are less helpful than immediate spending, and are not sustainable. As for the financial system, the banking system needs liquid assets to weather the storm, and the Federal Reserve is providing them with bucket-loads. Major banks in the financial system need to reduce their portfolios of high-risk under-performing assets so that they can begin to take on more normal loan risks. It is not yet clear that the bank rescue plans in place will really induce banks to do this, but some type of additional massive aid to shore up the financial sector is probably necessary. The question is how to do it.
Professor and Economics Department Chair Deborah DeGraff:
Overall, I am supportive of the Obama Administration's initiatives to address the current economic recession. I believe that stabilizing the financial sector of the economy and, particularly, restoring a reasonable availability of credit to individual consumers and producers is fundamentally important to returning to conditions of economic growth, or at least avoiding further contraction. Restoring confidence in the financial sector will also likely help to recover some of the losses in valuation in the stock market. In addition, targeted government interventions to relieve economically distressed households or to generate new production and employment will lessen the depth of the recession and promote a faster recovery, while simultaneously supporting new policy initiatives in areas such as the environment, education, etc. While I believe that the focus on the short-term is important, I hope that the administration will also sustain its focus on regulatory reform of the financial sector broadly defined (e.g., including mortgage brokers and insurance providers in addition to investment banks) in order to reduce the likelihood of the types of irresponsible and destructive behaviors that have developed in these areas during the past two decades and that underlie much of the current macroeconomic condition. If such measures are taken, and individuals also learn some lessons about responsibility in their personal finances, I am cautiously optimistic that the U.S. economy can emerge from this episode a few years from now in a stronger position, albeit with a continued and even greater need to reduce the federal debt.
Associate Professor of Economics Gregory DeCoster:
The U.S. economy continues to be in an essentially unprecedented and relatively precarious state. The level of uncertainty regarding the future path of the economy is quite high. A few points are, however, quite clear. A necessary (though not sufficient) condition for a sustainable economic recovery is that the banking system be returned to a reasonable degree of health. The policies implemented by the administration to date have little chance of making much progress toward this critical objective. As regards the recession, monetary policy has been astonishingly aggressive; fiscal policy somewhat less so. Whether these policies will prove adequate to arrest the ongoing decline in economic activity is unknown. What is known is that current monetary and fiscal policies are not sustainable over any substantial period of time. Yet, continuation, and possible expansion, of the policies will be a necessity at least until such time as the administration seriously addresses the problems in the banking system. There are a variety of potential permanent solutions to the banking problems, although most come down to some version of nationalization of some set of banks or, at least, the vast quantities of so-called toxic assets on bank balance sheets. Exactly why the administration has steadfastly refused to get on with what seems inevitable is actually quite puzzling. But, with the appropriate humility that should accompany any forecast, I am fairly confident in the belief that as the administration dithers the ultimate price tag grows—probably fairly rapidly.
Associate Professor of Government Henry Laurence:
"In this present crisis, government is not the solution to our problem: government is the problem" declared then-President Ronald Reagan in 1981.
Those days are over (apart from the music and hairstyles, of course, kept alive by hordes of screaming Racer-X fans). The biggest impact of the economic meltdown has been a shift in attitudes toward the appropriate level of government involvement in the economy. Far from being the problem, massive government intervention—in the form of trillions of dollars in stimulus spending and billions in welfare handouts to Wall Street bankers—is generally regarded as essential to economic recovery.
Perhaps, if the history of the last Great Crash is any guide, this will usher in a period of closer, better supervision of big business. No longer will Peanut Corporation of America be allowed to sicken and kill hundreds of Americans by "re-testing" and selling food when initial reports indicated salmonella. No longer will systemically vital American Insurance Group (AIG) be allowed to make massive bets on the housing market without the assets to cover losses, thereby apparently requiring tens of billions of my tax dollars to repay their gambling partners (Don't worry, I'll hand the tab off to you guys). No longer will we believe the fiction that our broken system of for-profit health care is more efficient than all the myriad alternatives on offer in other rich countries, most of which secure better, more equitable health outcomes for far less money.
The operative word is "perhaps." In the 1930s, Congress undertook serious reform of regulatory institutions, creating an economic system which worked well and equitably until dismantled five decades later. However, I don't yet see signs that President Obama intends to do more than tinker at the edges of the current system, despite all the hypocritical hysteria from the tea-bag right. Still, the ideological winds have definitely shifted, to the great consternation of Reagan-wannabes such as Sarah Palin, who famously demanded "Government, just get out of my way!" only to insist on stricter federal oversight of financial markets a few sentences later. Her confusion tells the same story as my receding hairline and creaking dance moves: we're not in the '80s any more.
Visiting Assistant Professor of Government Richard Skinner:
In the short term, the recession has increased the demands on government while reducing the resources available to it. State governments have been hurt especially by the downturn, since it has reduced the revenues available to them through income and sales taxes, while also increasing the demand for social services such as Medicaid and unemployment compensation. Almost all states have a constitutional requirement to balance their budgets every year, forcing them to cut spending and raise taxes, just when such moves have the most severe economic impact. Not surprisingly, the Obama Administration has aimed much of its stimulus funding at the states.
The federal government, since it is under no requirement to balance its books, can run a deficit. Since U.S. government securities are still considered to be among the safest possible investments, Washington can easily borrow billions from jittery financiers at a low cost. Not only has Obama embarked on a wave of spending aimed at reviving the economy, he has intervened in the private sector, especially the auto and financial industries, at a level almost unprecedented in American history.
In the long term, it is possible that we are seeing a reversal of the trend toward free markets that began as a response to the inflation and sluggish growth of the 1970s. Polls showed an unusual public appetite for government intervention and a growing skepticism of big business. So far, they also indicate that citizens remain confident in Obama's ability to manage the economy. Should he retain this support, he may be able to expand the federal government's role in a variety of areas, especially health care, education, and energy.