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The Economic Crisis: Is there a Middle Ground? III + NCRCRD Webinar, April 2011

The Economic Crisis: Is there a Middle Ground? III + NCRCRD Webinar, April 2011. Abner Womack Professor Emeritus & Research Professor FAPRI, Food and Agricultural Policy Research Institute Agricultural and Applied Economics University of Missouri. Most severe recession since 1930s

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The Economic Crisis: Is there a Middle Ground? III + NCRCRD Webinar, April 2011

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  1. The Economic Crisis:Is there a Middle Ground? III +NCRCRD Webinar, April 2011 Abner Womack Professor Emeritus & Research Professor FAPRI, Food and Agricultural Policy Research Institute Agricultural and Applied Economics University of Missouri

  2. Most severe recession since 1930s • How we got here: Contributing factors • How bad is it?: Consequences • How long before recovery • Current policies – Stalemate in DC • How to speed up recovery: What can we learn from the past? Is there room for middle ground? • Similar strategies used by both parties since the 30’s • Optimistic that lesson learned can serve as a basis for compromise today Comments on the Economy:Macro Indicators Based on Work in Progress

  3. Level of Debt: Dominant Factor Substantial Debt in all 4 Sectors of Economy Household ------ Demand Side Corporate ------ Supply Side Financial -- --- Loans and Services Government ----- Services & Regs No turn-around likely until paid down substantially – but at what level?

  4. Other Contributing Factors 1. Consumer: 70% of economic activity Excessive unemployment Wealth and income concerns 2. Increasing energy price concerns Macros: low interest & exchange rate Global Labor and industry competition 5. Global weather extremes 6. Dueling philosophies – locked down Where is the compromise? Cut, spend, tax, invest, regulate

  5. #1: How We Got Here: Financial Mismanagement & MeltdownFinancial Crisis Commission, January 2011 Failure by two administrations Corporate mismanagement Heedless risks by Wall Street $40 in assets, $1 in capital Shoddy mortgage lending Failure in government regulations Failed capital restrictions

  6. Banking Industry Leverage Example Total invest % down Bank Invest Indiv invest Bank Profit(1%) 1. $200,000 50% $100,000 $100,000 $2,000 2. $400,000 25% $300,000 $100,000 $4,000 3. $1,000,000 10% $900,000 $100,000 $10,000 4. $2,000,000 5% $1,900,000 $100,000 $20,000 5. $5,000,000 2% $4,900,000 $100,000 $50,000 6. $10,000,000 1% $9,900,000 $100,000 $100,000

  7. How Bad Is It?: Total Market Credit Debt 380% of GDP in 2009 ($52.3 trillion)

  8. FDR HST IKE JFK LBJ NIXON-FORD JC REGAN BUSH CLINTON BUSH II 33% 24% 7% 18% 22% 51% 18% 27%

  9. “Have Done Little to Prevent a Repeat of These Events in Near Future”– Thomas Hoenig, President, KC Federal Reserve Bank, Summer 2011 Year Commercial Banks Largest Control Assets 1913 21,000 5 2.5% 1980 14,000 5 14.0% 2010 7,000 5 60.0% 20 86.0% Several of the 20 largest nearly brought the economy down

  10. Neil Barofsky, Special Inspector General for TARPS (Troubled Asset Relief Programs) “The same ‘too-big-to-fail’ firms that nearly brought down the U.S. financial system in 2008 have become more interconnected and continue to maintain an unfair advantage over small competitors.” -- Neil Barofsky, Special Inspector General for TARP, commenting on the state of the U.S. financial system on his last day as Inspector General (Wall Street Journal, March 31, 2011)

  11. Rising Unemployment Rates Will Limit the Recovery

  12. Rising Unemployment Rates Will Limit the Recovery

  13. Rising Unemployment Rates Will Limit the Recovery

  14. Total unemployed +marginal attached +employed part time for economic reasons 24 Mil 10.5 Mil 12.0 Mil 27 Mil Civilian labor force 155 Mil Employed 142 Mil Unemployed 13 Mil Feb. 2012 bls.gov

  15. #2: Other Contributing Factors: Divergence of Wealth and Income Economy Turns on Consumer Spending-70% of Eco Activity Top 1% have 35% of wealth, gained 15% since 1980 Top 10% have 48% of income, gained 13% since 1980

  16. SOURCE:POWER IN AMERICA, G. WILLIAM DOMHORR

  17. 80% households < 50% income 14 % household income 40% of Families < 12% Household Income 60% of Families < 28% Household Income 80% of Families < 48% Household Income

  18. How Long Will it Last? Drop 50%?“Consumer is Not Doing Very Well”

  19. #3: Other Contributing Factors Interest rate Exchange rate Energy – crude oil Global labor competition and manufacturing

  20. Testimony on the energy and oil market outlook for the 112th Congress, Richard H. Jones, Deputy Executive Director of the International Energy Agency, Feb. 3, 2011, Washington, D.C. Possible Economic Trouble Ahead if Recent Price Gains are Sustained

  21. Black Sea Region February 2012 SOURCE: University College London, Department of Space and Climate Physics

  22. How Bad Is It?: No Quick Recovery LikelyClimate Ripe for Additional Pressures • Public & Private Debt–Banking Regs(380%-350% of GDP) • Household debt/Income (133%-116%) • Unemployment (10%-8.3%) • all categories (17.5%-16%) • food stamps ( 1 in 7) • jobs available ( 1 to 4) • wealth-income (1%-35%, 10%-48%) • Energy –increasing prices (economic pressure) • Interest rate-Exchange rate-labor (+’s & -’s) • Political Stalemate (cut, spend, tax, regulate, invest)

  23. Current quarter model, K lien and Ozmucur Mar12, 2012

  24. Current quarter model, K lien and Ozmucur Mar12, 2012

  25. Real GDP per capita, 2011 dollar 1.5% yr 2.6% yr 9% IHS Global Insight Projections January, 2012

  26. #5: Other Contributing Factors: Government Response Trouble Assets Relief Program (TARP): $700 billion authorized Stimulus: $787 billion (6% of GDP) Federal Reserve: low interest $400 billion government bailout Stalemate in D.C. – cut taxes and government spending Feds printing $$$$$$ (1.5 trillion)

  27. White House Data on Gross National Debt

  28. 1980-current Supply side – Market approach; trickle down LENIENT lending Repealed Glass Steagall Lowered taxes Weaker labor unions Social programs – Added Health Care Less government – more market signals 2 major wars #6: Political Meltdown 1930s-1979 Keynesian – Counter Cyclical Approach TIGHT lending Glass Steagall Act Graduated taxes Strong labor unions Social programs – Medicare, Medicaid Structural investment programs – more govnmt 3 major wars

  29. 2010 10% Unemployment (15 million)+ 7.5% part time and marginal (27 million)

  30. Federal Budget – Share of GDP

  31. Option I: Stay the Course – Banker Summary Deflation: “Several more years” Long-term decline in standard of living Unwinding of commercial and real estate will be painful Serious wealth destruction Lending money – doing the same thing Another bubble

  32. Summary, lessons from the past 1950-1979: 7 Recessions 1980-2008: 4 Recessions Strengths and weaknesses in both philosophies Question: Is blending philosophies a faster way to recovery and job growth?

  33. Been There Before: High Debt and Unemployment New Deal Marshall Plan Interstate highway system Space program Military build up – cold weather priority Deregulations (banks), more regulations (environment), and lower taxes Blending philosophies

  34. Option II. How can lessons learned from the past be applied for job creation in periods of substantial debt? Government policy levers -five Investment Regulate/Deregulate Budget balance- cut & spend Examination of tax codes How can they be used for job creation with high levels of debt?

  35. Suggestion from working session: (1) Energy Priority program- investment for world leadership in energy production Well funded -- over next 20 years Energy Bill with spillover in related sectors Provide stable, efficient, equitable energy supply meeting environmental guidelines World dominance in energy research Energy efficient transportation – all sectors Energy efficient – housing and corporate Energy efficient water and sewage Stimulates the Economy

  36. Suggestion from working session: (2) Sufficient regulations to prevent – reckless lending again Too big to fail – has gotten bigger Low capital lending base Adequate regulations &enforcing regulators Dodd-Frank Bill (does it plug the holes?)

  37. Suggestion from working session (3) Tame Program Costs Social Security and military get 40% of Federal budget Medicare and Medicaid get 23% of Federal budget Decrease rate of increase Provide support to unemployed during recovery

  38. Suggestion from working session (4)Balance macro’s in determining winner and losers Careful assessment with implication nationally for: -lower interest rates -Lower exchange rate -energy price implications -exchange rates between major competitors-china

  39. Suggestion from working session (5)Serious examination of tax code Rebalance across households Direction of divergence in wealth and income Off-shore tax advantages Careful analytics on advantages domestic and international

  40. Can the Public Sector Afford Investment?

  41. Top 20 Countries by GDP

  42. Understand the Problems: First Step in Finding Answers Not in a recession Not in a depression Stagnant – not moving for several more years Look back to look forward Stimulating territory for finding current opportunities

  43. Optimistic that lessons learned from the past can serve as a basis for compromised middle ground Option (1): Stay the Course Long, slow recovery until around 2018 Option (2): Find a Balance Accelerate the recovery Invest – Ike level support for energy bill Regulations/Deregulations – trade, banks, energy Budget balance-Cut & spend Tax code examination Analytics: 30-50 Year Footprint Cost Benefits for Longer Run Payback – like models used in ag policy analysis Across all four sectors – 4-legged stool

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