In a panel discussion on “Ways Out of This Mess,” five economists in CLAS generally agreed that fiscal policies, not monetary moves by the Federal Reserve, will provide the path out of the nation’s economic slump. Spurring economic growth is more important that worrying about the nation’s debt and deficits, they said.
Getting five economists to agree was itself unlikely, economics department head and professor Metin Cosgel, the moderator, warned at the start of the Nov. 16 public forum.
He asked each of them what they would advise President Barack Obama to do about the economy if they had his undivided attention for ten minutes.
Infrastructure spending, investing in education, and restructuring mortgage debt were among the solutions that several of them offered.
The way out of the economic mess will not be easy or short, said Arthur Wright, economics professor emeritus and co-editor of the department’s Connecticut Economy magazine.
But he said that worrying about debt and deficits is “looking at the problem from the wrong end.” Short-term spending on infrastructure would encourage investors, and reducing a mountain of mortgage debt would allow people to move on with their lives, he said.
Then, a long-term solution must be worked out for the deficit that will include higher taxes and cuts in benefits.
“The longer we postpone it, the worse it will be.”
Restructuring mortgage debt “would be a huge game changer,” said Steven Lanza, editor of The Connecticut Economy. It would free people to spend more and businesses to invest and hire.
Stephen Ross, professor of economics and an expert on the subprime mortgage market, said that financial reforms so far have fallen short in addressing the mortgage debt problem. There is still no mechanism for monitoring aggregate leveraging in the mortgage market, he noted.
He suggested that a program to ease refinancing for people with negative equity in their homes would be “a great macro-economic stimulus.” It would not solve the foreclosure crisis, however – only time will take care of that, he said.
He warned against dissolving Fannie Mae and Freddie Mac, the government sponsored private housing lenders that are now in conservatorship. “Who in the world is willing to take over their balance sheets? That would cause another Great Depression,” he said.
Lanza compared the nation’s crumbling infrastructure with the Monteith and Arjona buildings, and said the government needs, short-term, to “spend like a drunken sailor” on infrastructure and education, areas that will have long-term benefits and short-term stimulus.
Giving everyone who has been unemployed long-term a federal job was the novel approach proposed by Lanse Minkler, associate professor of economics. He calculated the cost at $308 billion, based on 2009 employment figures, compared with $450 billion, the cost of Obama’s recent stimulus plan, which was rejected by Congress.
Not only would hiring everyone reduce unemployment, but it also would cut federal spending on housing programs and Medicaid, he said.
“It’s at least somewhat feasible,” he said.
“We really have to restore economic growth,” said Fred Carstensen, professor of economics and director of the Connecticut Center for Economic Analysis. Infrastructure spending on the nation’s roads and ports would lead to economic paybacks, he said, as would investments in education and in retraining workers in the latest manufacturing technologies.
He also suggested going back to a 1791 Hamiltonian idea, an 8 percent tariff on all imports.
“We are basically back in the Great Depression and we need policies to change that,” he said.
Minkler and Ross argued that despite the state of the economy, the situation of most Americans is not dire. The federal stimulus program was a huge success, Ross said, and standards of living have actually been rising for decades. While there are a lot of things that can be done to help people, “It’s not that bad,” he said.
“There’s a pretty robust world economy – it’s amazing what we’ve survived.”
“As Americans, most of us are very well off,” said Minkler. “Forty percent of the world lives on $2 a day.”
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