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Time for Creative Thinking on the Economic Front

Steve Allen, Professor of Economics and Associate Dean of the Graduate Program in the Poole College of Management spoke about the current state of the economy at the SCRC meeting on December 1-2, 2011. In this lecture, he outlined some key thoughts for executives to consider in a glum market, and provide some thoughtful statistics to color his views. First, on the jobs front GDP is muddling along, but we are in the worst job market since the Great Recession. He pointed out that the 6.5% job drop has not moved at all, leaving us at 9% (or really 16% if you consider the U6 number). This is a very sobering reminder of how far we have to go…

Another sobering figure provided by the Congressional Budget Office was that between 1971 – 2010 – Revenues – were about 18% of GDP , and of that, social security and entitlements were about 7% – and everthing else (including the military and non-entitlement spending but NOT interest payments) was about 11.5 percent, so things stayed roughly in balance. But if we keep revenues the same at 18%, and account for the demographic change that is underway, Social Security and major programs will be 12.2% of GDP , and non-interest payments 11.5% – which leaves us with a significant deficit of about 5.6% of GDP, (ignoring interest payments!)

The slow pace of the recovery was attributed to a number of things. First, deleveraging takes a long time. Household debt is currently at levels that are close to 90% of GDP, which is an astronomical figure. It takes awhile for housing to sort itself out. A second reason sometimes attributed is that the stimulus wasn’t big enough. By comparison, Bush’s stimulus in 2008 was $130B, vs. $800B by Obama in 2009. At the time, an economics expert on stimulus, Cristie Romer, had recommended $1.2 T in stimulus, but it is debatable whether this would have passed Congress. Other explanations used include the fact that the nature of the stimulus was poorly designed, and that monetary policy can only do so much. There is also a strong case to be made that the nature of the economy has changed forever – the jobs in housing and financial services are likely gone forever, and we are unlikely to see this level of employment in these sectors ever again.

Across the globe, Dr. Allen pointed out that several sectors are in need of major reform. In Europe, it is almost certain that Greece will default to the drachma, and that more austerity will be pushed at all levels in all countries in the EU. Second, China is suffering from too much investment, with empty apartments and buildings, rampant inflation, and lower growth due to lower demand from the West. And finally, the US has taken good measures, but is also facing a good deal of default on debt, especially in the area of student loans.

Several issues were discussed that executives need to consider in this environment. One of the big issues is how to promote growth! Several ideas emerge here. First, there is a need to woo immigrants for technical jobs that are going unfilled today. Second, why not give a tax cut to people who are trying to cut unemployment, in lieu of a payroll tax cut across the board! Take the tax cut, and divide it by the number of jobs, and award $250K to every new job created! Third, rather than throwing money at federal programs, let training be done in the private sector. And finally, new thinking needs to be addressed to the problems of underwater mortgages.

Although things do indeed look glum, Steve finished up with the thought that there are reasons for optimism. First, corporations are flush with cash, and the US is still the global technology and innovation leader. But unfortunately, the biggest issue is the dearth of leadership in both parties, and the lack of creative thinking and action in an environment that is increasingly difficult to change over time…