Given Tuesday's inauguration of a new president I am going to summarize current hurdles to economic well-being.
The challenges in the near term are quite transparent. As many have already discussed, we are possibly on the verge of what could be the worst economic downturn in more than 75 years. So let's dive right in.
Currently, the unemployment rate is about 7.2 percent. Most economists believe unemployment will reach somewhere from 9 percent to 10 percent before the economy begins to recover.
If you had asked me a year ago about the other worry - inflation - I was concerned about a spiraling supply-side inflationary spiral-stagflation. If, on the other hand, you had asked me about inflation four months ago, I wouldn't have worried about it at all. Now I am worried about the possibility of deflation, "negative" inflation. Annualized inflation rates are falling dangerously close to zero, about 0.1 percent in December. In the last quarter of 2008 monthly inflation rates were negative.
Deflation is associated with declines in aggregate demand for goods and services, and while falling prices are good for purchasing power, they are bad for firms' costs-revenue calculations. As prices of goods and services fall, firms pull back on their payroll to trim costs, which raises unemployment, further dampening demand, and the economy enters into a vicious downward spiral.
What are the fixes?
Economic policymakers have two tools they can use to right the economy: monetary and fiscal policy. To date, monetary policy has failed despite the Fed's new zero policy interest-rate target. This should encourage lending, but uncertainty and lack of confidence have gummed up credit markets. Despite the Fed's best intentions, the money supply is shrinking; theory suggests that with zero interest rates, money should become infinite.
With monetary policy effectively sidelined, we must rely on fiscal policy to pull out of the hole. The current price tag of the Obama fiscal stimulus is $825 billion over two years. And while that may seem to be a lot of money, it is a lot less than the Federal government would have to spend if nothing was done. Without it, we could look forward potentially to a decade of economic doldrums.
Support for this fiscal stimulus has almost universal support from both sides of the congressional aisle with the debate about how the money will be spent. Tax cuts? Road construction? Education? Energy?
Here's my two cents: Temporary tax cuts are useless. Any tax relief should be of the permanent variety - not like the Bush "permanent" tax cuts which are set to expire in 2011.
Nor should the fiscal stimulus package be used for long-term investments in human capital, new energy technologies or other long-term programs. These are ideal long-term investments for the future, but they will have relatively little impact over the next six to 18 months when we need it.
Rather, we should concentrate on projects which pump cash into the economy yesterday - not in five years. Repairing infrastructures is a sensible start, with a couple of caveats. First, it is no substitute for investment in new infrastructure investment along the lines of the telecommunications or the interstate highway system. And second, it remains to be seen how far-reaching road and bridge repairs will be.
firstname.lastname@example.orgRobert "Tino" Sonora is an assistant professor of economics and co-director of the Office of Economic Analysis and Business Research at Fort Lewis College.