Lack of confidence creates vicious economic cycle

L-R: Michael Miller, Deidre McCloskey, and David Greising

If you are confident that the economy will turn around in the near future, then you would be in the minority…and that’s just the problem, according to a panel of economic experts.

It’s all about confidence and the U.S. doesn’t seem to have any right now, said Michael Miller, an associate professor of economics at DePaul University at CREW Chicago’s annual economics program.

As a result, the economy will most likely linger through anemic growth for quite some time, but, like all rough periods in our nation’s history, this too shall pass and the likelihood of a true double-dip recession is very low, he added.

While the nation has not slipped back into a period of negative growth that would signal a recession, it is growing at such a slow pace that it cannot keep up with the demand for jobs from displaced workers and new job seekers entering the workforce.

Miller pointed out that GDP will only grow at around 1 percent this year and is projected to grow at 2.5 percent next year. In order for the economy to keep up with demand for jobs it would need to add 200,000-300,000 jobs a month for several years to bring the unemployment level to a historic 5-6 percent. With no jobs added last month (17,000 added in the private sector and 17,000 lost in the public) it looks pretty grim.

The problem he says is an utter lack of confidence in consumers and businesses alike.

“After a recession, Americans historically show confidence once growth begins,” said Miller. “Now, we have no confidence.”

This sentiment was echoed by Deirdre McClosky, professor of economics, history, and English at the University of Illinois at Chicago.

“Real estate is all about location, location, location,” she said connecting with the crowd of mostly real estate professionals. “This issue is all about confidence, confidence, and confidence.”

The national savings rate has gone up, which is not in step with historical trends that follow a recession. As a result, everything is stuck, creating the vicious economic cycle we find ourselves in: people aren’t buying anything because they don’t have jobs or they can’t get a loan, and companies aren’t hiring or providing loans because consumers aren’t buying anything.

Both Miller and McClosky noted that financial crises have been the hardest to recover from historically. So, it is not extremely surprising that the country is having difficulty several years after the initial shock.

Miller takes solace that there is tremendous pent-up demand, and, eventually, whether consumers want to or not, they will have to spend. Appliances break, cars need to be replaced, and delayed home improvements eventually must be addressed. There is also hope in demographics. We are still a growing population and a large portion of young workers have been unable to venture out on their own and become renters or homeowners. They have college degrees, but they are still living with their parents.

Once the economy picks up, this segment of the population should emerge and provide a much needed spark.

Putting it into a historical perspective, McColsky noted that since 1800 the country has been through 40 downturns and many of them, especially the Great Depression, were much more severe than today.

“This too shall pass,” she said.

The likelihood of a double-dip recession is remote in the eyes of Miller because there is not an inverted yield curve. An inverted yield curve, when long-term debt instruments have a lower yield than short-term debt instruments of the same quality, is almost always a harbinger of a recession.

The conversation turned a little political, with Miller declaring his Republican allegiances and McClosky describing herself as a “motherly libertarian.”

When the question of another stimulus arose, which is being proposed by the Obama administration right now, they took different approaches.

Miller thought the first stimulus was important to stabilize the economy and it supported the lowest income levels that were hardest hit by the initial recession. Now, however, it is time for the government to get out of the way.

“Government can’t make it better, it can only make it worse,” he said. “The government has to let the engine of entrepreneurship go.”

The Federal Reserve will continue to keep interest rates low, but as he pointed out, rates aren’t the problem.

“People aren’t buying homes because rates are too high, but because they don’t have jobs,” he said. “It’s confidence.”

McCloskey said that if China really wants to continue to loan us money at such a low rate, we should take it.

Both agree that tax reform would be the single most important thing that could help the stalling economy by simplifying the system and closing loopholes.

–Mark Thomton

 

 

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One Response to Lack of confidence creates vicious economic cycle

  1. armando says:

    Mark Thomton you are an incredible writer and conversationalist. You are also quite handsome.

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