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March 31, 2009

Are there any safe areas?

This recession has affected almost everyone - households, businesses as well as communities. Focusing on communities, are there any that have seemed to fare better than others during this downturn?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"That's a real interesting question, and a study came across my desk that looked at communities in California. Of course, California, a very big state, has had major economic problems, like most of the states. And what this study found is that, yes, there were some communities that are actually faring fairly well during this recession. They are communities composed number one, of a high percentage of retirees. And they're composed, number two, of areas that have not grown very fast recently. Now why would those two characteristics actually help a community during this recession? Well, if we think about retirees, they are dependent upon their pensions, not on jobs, so you're not going to have layoffs for retirees. Now obviously many retirees have seen their retirement money hurt during this recession, but I think in general most retirees have fared better than the public at large, who have suffered big job losses. Secondly, communities where there's been very little recent growth . . . those are areas where there's less likelihood of housing problems since most of the homeowners there would have bought their homes a long time ago, not within the last 3 or 4 years. And those folks who have bought in the last 3 or 4 years may be the ones who have problems. This is not to say that these communities are not facing issues, but probably as we look around the country, these communities - more so that others - have been safe havens during this recession."

Posted by Dave at 08:00 AM

March 30, 2009

Target date funds

Everyone is reevaluating their investments, especially those people who are saving for retirement. There's a kind of investment fund specifically for retirement planning called a target date fund. What is it and how does it work?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"For a long time, experts have told people who are saving for retirement that what you do is the following. When you're young and you have a lot of years ahead of you for your investments to work, that's the time to take more risks. That's probably the time to put more of the funds into the stock market, for example. Then, however, as you get closer to your retirement date, you gradually move those more risky funds into safer investments, like maybe bonds and CDs. But to do this, you have to actively manage those monies. Well, a target date investment fund is one that says, look, we'll do all that for you. You just give us the money and we'll invest the money, and we will move that money to safety as you get closer to your target date - hence the term target date - your target date for retirement. So you don't have to worry about anything about making sure that, oh, when I'm 40, I've got to reduce my stock exposure by 10 percent, something like that. The fund will gradually do it for you. And therefore this will be a fund that will be safer because it will recognize that you do have to do these changes over time. So these have become very popular. One issue we have seen recently, however, is because this recession has been so devastating for virtually all kinds of investments, it really hasn't mattered because people who have had their investment funds in what they considered to be fairly safe corporate bonds have suffered as well as people who've had their money in the stock market. So I guess the bottom line here is that target date funds aren't something that you can just forget as an investor. You have to track those just as if you were managing your money on your own."

Posted by Dave at 08:00 AM

March 27, 2009

A move to boost lending

The Federal Reserve recently announced the details of a major program designed to increase lending to both businesses and consumers. It's called the TALF. How will the TALF work, and will it stimulate lending and spending?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, TALF stands for Term Asset-Backed Securities Loan Facility. No wonder people call it the TALF. And let me illustrate how it works with an example. Let's say that you want to buy a car. You go to an auto dealer, and, indeed, you do buy a car. And you take out a loan from that auto dealer. The auto dealer will then take your loan as well as other loans that he's made and bundle them together and sell them to investors. Now the investors who buy those loans will borrow money from the Federal Reserve at very low interest rates to fund that purchase. Now if you do not make your car payment, the Federal Reserve will actually be on the hook for those losses, at least the initial losses. So supporters say that this is going to reduce the risk to auto dealers and to investors of making loans available to consumers. And so they say lending will go up. Critics say no, consumers will still be reluctant to buy, for example, cars as long as their jobs are at risk. So the question really here is what is going to be the first to improve? Will lending go up and improve the economy and actually give a boost to jobs so more people will want to borrow and spend? Or will it simply be that consumers are going to sit on the sidelines regardless of how easy it is to borrow money? We'll obviously have to wait and see whether the TALF does work."

Posted by Dave at 08:00 AM

March 26, 2009

Measuring changes in home prices

We take it for granted that we can track price changes. For example, we're very aware of whether gas prices are going up or down as we drive down the road. But what about something like home prices? How easy are they to track?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Of course, home prices have been the subject of a lot of attention over the last couple of years. One problem is that they are really much harder to track, and the big issue here is that all homes don't sell each year. Gas is sold every day, so you can go see what the price is. But every home is unique, and that unique home doesn't sell every year. And that can create big problems in tracking the price. Let me give you a real quick example. Let's say a home sells in 1990 for $200,000, and then in 2009 it sells for $350,000. If you look at that, you say, well, that house has gone up in value - gone up in price - the homeowner made money. But what if in 2007 - at the peak of the real estate boom - even though the home didn't sell, what if it's assessed value, what if an appraiser came in and said, well, if you sold this house this year, in 2007, actually it would sell for $400,000? Well that means since it sold for $350,000 in 2009, the house price has actually gone down in the last couple of years. That's not going to show up anywhere because the house didn't actually sell. So this is a big issue in tracking home prices, and I think it adds a lot of complexity to our figuring out exactly what's going on in the housing market."

Posted by Dave at 08:00 AM

March 25, 2009

A growing world middle class

Sometimes it's valuable to step back from the current situation and look at some broad changes that have been occurring over many years. When we do this for the world, what's one of the biggest trends that you see?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"I think without a doubt it's the growing world middle class. I think this has been one of the most unheralded implications of our world economy. The middle class has been growing by leaps and bounds in the world. For example, 100 years ago, only 12 percent of the world population would be classified as middle class; 20 years ago, it was 33 percent. Today, it is 50 percent; 50 percent of the world now has what we would call a middle class standard of living. And this is expected to go higher. This has big, big implications for the world. Obviously one is that there is a general rising standard of living around the world. Another implication is there will be changing purchasing patterns. For example, food. Middle class families eat different kinds of foods - for example, more meat - than non-middle class families. So that will be a big implication for farmers and food. Energy use. Energy use goes up as your standard of living goes up, so that's a challenge. So lots of implications here, but I think we can't deny the fact that the world is getting better, simply in terms of a rising standard of living."

Posted by Dave at 08:00 AM

March 24, 2009

Economics and politics

When many people hear economics, they also think politics. That is, they link the two, almost thinking there's an economic approach to go with each political philosophy. Is this the way you, a professional economist, see it?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Not at all. Professional economists - by professional economists, I mean those with advanced degrees who were trained at colleges and universities - we all studied one kind of economics. There's not a particular kind of economics for one political party or political philosophy and another for another philosophy or another party. We all studied the same kinds of basic economic theory. Then you might say why do economists disagree? Well, I don't think we do disagree so much in the theory. I think it's often that we disagree more in the empirical support for the theory. Let me give you one example - the stimulus plan. Many economists, or I would say all economists would say, look, the stimulus plan is going to be funded by the federal government going to the capital markets and borrowing that money. Now, is there going to be an impact on the capital markets? And economists would, I think, agree that, yes, there can be impact. That is to say that if you're increasing the demand for borrowing, you're going to increase the interest rate. If the increased interest rate causes private borrowing to go down, then the stimulus plan is not going to be as effective. Economists will generally agree with that line of logic. What they will disagree about is the amount by which the interest rate goes up and, therefore, private borrowing will go down. And different economists will look at different studies, read them differently, think one study is done better than the other. So it's not a disagreement on the philosophy. It's a disagreement on the empirical implementation of that particular logic."

Posted by Dave at 08:00 AM

March 23, 2009

Challenges for charities

With the current financial problems in the economy, many charities are having trouble raising funds. But at the same time, these charities frequently see an increase in the use of their services. How can charities reconcile these two sides of their operations?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Unfortunately, it's going to be very, very difficult. You're absolutely right, charities are really caught between a rock and a hard place as more people are looking for help, yet because the economy is down charities are having trouble raising money. I think what charities have to do is, clearly, do the best they can. I think they have to make an appeal to their donors that, 'Look, this is a tough time. We need money now more than ever.' I think perhaps they need to think outside of the box. Maybe instead of raising money and buying services and products, perhaps barter. Bartering has increased in popularity during the recession, so barter for services or barter for donations or products. Maybe joint fund raising and joint operations of services where there are complementarities between charities. Pool their resources. Pool their fund raising, perhaps that would help them. I think if a charity this year can maintain the donations they had last year, they will be doing well."

Posted by Dave at 08:00 AM

March 20, 2009

Finding rural jobs

Many rural counties have unemployment rates above 10 percent, and even in the best of economic times, their jobless numbers are much higher than the urban counties. What kinds of industries are rural areas most likely to attract in order to generate jobs? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, fundamentally, rural counties are obviously different than urban counties, so we can't expect rural counties to attract the same kind of jobs. And what rural counties should do is use their advantages, which are space, lower costs, available labor and natural amenities. Now one of the industries that definitely fit rural counties is agriculture. And the good news is that agriculture is expected to expand over the next 20 years, with the growing world population and growing standard of living across the world. And North Carolina has a very productive farming sector. Secondly, manufacturing. You can still attract manufacturing firms to rural areas to take advantage of lower costs as long as those manufacturers have a way to move their products into the bigger urban markets. In terms of attracting businesses that are based on those natural amenities that we find in rural areas, this is where we would find tourism, second home, retirement communities and also what I call foot-loose professionals . . . professional jobs, professional firms that want to take advantage of the pretty rural environment and perhaps use modern technology to still communicate with their urban clients."

Posted by Dave at 08:00 AM

March 19, 2009

China's economic problem

Most major countries around the world are experiencing an economic downturn. China is no exception. China has certainly become a more important part of the world economy in recent years. Does China have a special economic problem?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"They really do, and it's related to two things: people and migration. Everyone knows China has a lot of people - over a billion people - and actually most of them are still very, very poor. And what's been happening is that millions, millions of these poor, primarily rural folks have been migrating each year to the cities, and moving to those cities in hopes of finding jobs. For simple stability, China has to find jobs for those in-migrants. That's one big reason China has emphasized manufacturing because manufacturing jobs are jobs, in many cases, that can be taken by someone, at least in China, who doesn't have an extensive kind of educational background. Now with the world recession, China's economic growth has slowed. In fact, its growth rate has been cut in half. Indeed, China is so worried about this that they just passed a stimulus plan that is twice as big as the U.S. plan on a relative basis. So this is a long-run problem that China has, how to find jobs for these rural migrants going into the cities, and the recession - the worldwide recession - really isn't helping."

Posted by Dave at 08:00 AM

March 18, 2009

Are loans up?

A dropoff in lending has been a key aspect of the recession. Some government actions have been directed at increasing lending activity in the economy. Has it worked?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, the good news is that some economic information suggests, yes, it is actually working. If you look at debt issued by U.S. corporations - that simply means U.S. businesses going out and borrowing money so they have to get loans - that debt, those loans, have increased significantly in recent months, and indeed, they are now back to 2007 levels. This means those corporations are, indeed, raising money successfully, and there are investors out there who are willing to loan money to those corporations. And I think you could more broadly say this suggests some slight increase in confidence in U.S. businesses. Now you combine that with the fact that we've had a two-month increase in the index of leading economic indicators, and it does give us some reasons for hope about the economy, not necessarily immediately, but down the road perhaps six to nine months."

Posted by Dave at 08:44 AM

March 17, 2009

Good news in North Carolina

We're ready for some uplifting, happy economic news. Bring it on. Hit us full force with something positive.

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, here's some good economic news about North Carolina, indeed, about the manufacturing sector of North Carolina. Recently, it was announced that ASCO Power Technology, which makes communications hardware, will be creating over 300 manufacturing jobs over 5 years in Davidson County, which is located in heart of the Triad region of North Carolina. I think this is important for several reasons. First of all, it indicates that even in a bad economy, we still periodically have announcements of businesses moving here or businesses expanding. So that's good. Secondly, it's in manufacturing, so it shows we can still attract, here in North Carolina, manufacturing companies. And thirdly, I think it shows that North Carolina is still competitive, still attractive for new businesses, particularly in manufacturing, and during a recession. So some could say that Christmas has come 10 months early."

Posted by Dave at 08:00 AM

March 16, 2009

Should we nationalize the banks?

The notion of the federal government directly taking over banks has been receiving some serious attention. Why would this be done? What would it mean? And who would be the winners and losers?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, it would be done, I think, as a last-ditch effort to save banks that perhaps on paper are really insolvent. That is, their liabilities are greater than their assets. And I think it would be an effort that would only be used after the federal government decided what they're doing now in terms of infusing new money into the bank, providing low-cost loans to them, is not going to work. What it would mean would essentially be that we taxpayers now own the banks. And the federal government would go in and perhaps put in their own managers. They would go in and put new rules in, and they would try to reorganize those banks they had taken over to get them into some sort of good financial shape. Who would be the winners? Who would be the losers? Big losers potentially might be the shareholders, the existing owners of the banks. It depends on what they would get in terms of a buyout. The winners - hopefully - would be all of us in the sense that if this effort were successful that it would return those banks to solvency. It would help solve a big problem in the economy, but we've never done this before. And this plan has had mixed success in other countries. I don't think it's a road we want to go down unless it's absolutely the last alternative."

Posted by Dave at 08:32 AM

March 13, 2009

Help for homeowners

The Obama administration has unveiled a program to help homeowners having trouble keeping their homes. Why is this being done? Is it just help for troubled homeowners, or is it help for a broader part of the economy?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"This home-owning problem has become very controversial, and I think, actually, the answer to your question is, it is supposed to help both. Obviously, if you have a program that's going to go in and say to a homeowner, 'Look, we're going to get your mortgage payments down to a level you can afford. We're going to renegotiate with your lender,' that's obviously helping that person. Yes, maybe they did get in over their head, but it's helping that person. The broader impact, though, is that clearly this recession has had its roots in the housing market. And a big problem in the housing market is the foreclosures. Until we get that fixed, really, the broader economy, which affects all of us, won't get better. So I think you can look at this new program as helping both those individual homeowners as well as the broader economy. We'll obviously have to wait and see if it works."

Posted by Dave at 08:00 AM

March 12, 2009

Do some businesses gain from a recession?

The news hasn't been good for consumers or businesses. Just like consumers, many businesses are seeing their sales and income fall, and bankruptcies have risen. But can any type of business actually thrive during a recession?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Yes, there can be businesses that benefit from a recession. What they do is they benefit from changes and how consumers spend their money. I think it makes sense that during a recession consumers will try to shift to cheaper brands, cheaper products. For example, they'll eat out less at full-service restaurants, perhaps eat out more at fast food restaurants. They will keep their cars longer. They won't buy new cars. And so in both of these examples, you can see that some businesses may gain. For example, if people are keeping their cars longer, that means repair shops probably are going to do more business. So we typically see auto repair shops do better during recessions. Again, in the restaurant business, we see the full-service restaurants perhaps take a hit, but you may see the fast food, lower-priced restaurants actually do better. And again, this is all due to consumers trying to get the most out of their money and shifting how they spend their money. And those businesses that benefit from that shift actually can do well during a recession."

Posted by Dave at 08:00 AM

March 11, 2009

Keeping low prices

People usually focus on businesses as the player that sets prices in our economy, but often overlooked is the other player, the consumer, and the importance the consumer has in ensuring low prices. Describe the role of the consumer.

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, it's really a two-person game: businesses on one hand and consumers on the other hand, and the economic game doesn't work well unless you have both playing very hard. So, we need competition obviously between businesses. We need businesses to strive to provide what consumers want, but we also need consumers to keep businesses on their game. We need consumers to actually play one business off another by shopping around and comparing prices, and comparing quality. That's what keeps businesses on their toes, and if consumers don't do that, we can see one of the impacts being higher prices. A good example of this is gasoline prices. Now everyone knows gasoline prices have come down dramatically, but we've had a little bit of a bounce upward recently. Some economists think that's due to the fact that consumers simply aren't shopping around as much for low gas prices. Now we did that a lot when gas was $4 a gallon. Now that gas is under $2 a gallon, we say, 'Oh, well, it doesn't matter as much.' And that gives those businesses, those retailers, a little bit more pricing power. They're able to punch up that price just a little bit more. So again, you need both players in the game. You need both players playing very hard to keep the game on line."

Posted by Dave at 08:00 AM

March 10, 2009

Some signs of life?

Everyone wants to know when the economy will get better. So as you look at the various economic indicators, do you see anything that's hopeful?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, I do ... very slight, very faint, but I think you can point to a couple of hopeful things. Number one, in the housing market - and of course, that's key to everything, we have to get the housing market back on track - housing starts - that is, new construction - have actually been dropping faster than housing sales, so that suggests that in the near future, we will probably see those two come together, which we need to have done in order to have stability in the housing markets. Secondly, commodity prices - everything from the price of gas to the price of oil, the price of some precious metals - seem to have bottomed out and are beginning to show some edging upward. I think that's important because it may show that there's a little bit more demand there, which is really the whole start of the economic supply chain. And then lastly there are some long-run indicators that are done by private sector forecasters that indicate that we have bottomed out, that those indicators are not pointing down. There's a little bit, very tiny, upward trend in them, so I think that might suggest some hope for an economic turnaround, however slight, toward the end of this year."

Posted by Dave at 08:17 AM

March 09, 2009

We're not there yet

The latest numbers on the broadest measure of economic activity in the country - the gross domestic product - were recently released, and they weren't pretty. Gross domestic product on an annualized basis dropped almost 4 percent in this first quarter. How bad is this?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, it's bad, and it's bad in the sense that we haven't seen a drop this big recently. For example, the biggest drop we saw in gross domestic product during the last recession in 2001 was 1.4 percent. It's also bigger than the reductions we saw in the 1990-91 recession, but it is less than the drops that we saw in the recession of the early 1980s, when gross domestic product in two consecutive quarters fell by first 4.9 percent and then 6.4 percent. So we have a way to go there. But of course, the all-time record is held by the Great Depression. We had double-digit decline in gross domestic product over the period 1929 to 1933. And of course, that's better known as the Great Depression. That is a record that I am very confident will continue to hold."

Posted by Dave at 08:00 AM

March 06, 2009

Will foreign investors dump our debt?

It's well known that foreign investors own a substantial slice of our federal or national debt. This raises two important questions. How much to they own, and second, will there ever come a time when they won't want to buy our debt?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, regarding the first question, if you take all foreign owners together, they currently own about half of the total national debt. The biggest owner is China. They have a 10 percent share, followed by Japan at just under 10 percent and the United Kingdom at 6 percent. Now recently the federal government has had no problem at all selling its debt. In fact, during this financial crisis, which is really worldwide, investors around the world, I think, see the U.S. as a safe haven for parking their money, and they've been doing that. And so interest rates on federal debt have gone way down, and the federal government has had no problem selling that debt. I do think, however, we need to look at the long run. I don't think it's a matter that we'll see some country in the future all of a sudden dump our debt, simply because that would hurt them. That would send the value of those debts down, and they would get less money for them. But I think we do need to worry about the capacity of foreign investors to continue to buy so much federal debt. And I think one thing that foreign investors will look at will be whether we can address our federal spending and the levels of our debt once the recession is over."

Posted by Dave at 08:00 AM

March 05, 2009

Beefing up broadband

By many measures, our country lags behind others in the availability of high-speed, high-capacity Internet service, particularly in less-dense areas. Some have proposed spending billions of dollars at the federal level to remedy this. Would this be a good idea?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, many people have actually found a link between economic growth and broadband availability, so I think it is pertinent to ask if you want to improve economic development in many parts of North Carolina - for example, rural areas - would broadband - pushing broadband - be a way to do that. Well, I think the tentative answer would be 'yes,' but that still raises a lot of questions. First of all, if broadband isn't available, is it simply because people there don't want it, are aren't willing to pay for it, or are there some impediments to private firms providing it? Secondly, if government were to get in and directly provide broadband, would that mean that they're going to push away, for example, private competition, private companies? And many economists say that you need competition in order to keep prices in line. And then finally, if you do decide to have government help, what form should it take? Should you actually have government providing the service, or should we use government to provide tax breaks and grants to encourage private provision?

Posted by Dave at 08:00 AM

March 04, 2009

Jobs for rural North Carolina

Many rural counties in North Carolina have lagged their urban counterparts in economic growth, even in the best of times. Then, when recessions hit, we see conditions in many rural counties go from bad to worse. What do economists see as the future for jobs in rural North Carolina?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, actually there are many options for economic development in any rural area, but especially here in rural North Carolina. Agriculture, I think, tops the list. Agriculture traditionally has been a rural industry simply because you need a lot of land, you need a lot of space. And, I think the outlook is rather bright for agriculture. Export growth looks good, new product development, and of course, there's the aspect of fuel. Agriculture may be asked in the future to provide some of our fuel source. Manufacturing ... many people don't remember that the textile industry and apparel industry in North Carolina were really rural-based industries, so North Carolina has a history of having factories in rural areas, and I think they can continue to do that. Costs are often lower in rural areas, and as long as there's good infrastructure for shipping those manufactured products, this is a good fit for rural counties. Service jobs not requiring face-to-face contact, the so-called call center model, many of those jobs are moving to rural areas. And then I think finally we have to remember that one of the things that makes rural areas so great is they have great amenities ... natural amenities: mountains, beaches, lakes, rivers. And, this is attractive to tourism, it's attractive to second-home development and it's attractive to retirement development. I think all of these certainly have a future in rural North Carolina."

Posted by Dave at 08:00 AM

March 03, 2009

Don't forget the Fed

Much of the recent attendance given to federal policies has been focused on the new stimulus package working its way through Congress. But we shouldn't forget that the nation's central bank, the Federal Reserve, has also been working hard to contain and ultimately end the recession. How important are the actions of the Federal Reserve?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"They are very important, and I think with the Federal Reserve, they work sort of behind the scenes. They don't get a lot of the flashy press attention that the Congress and the president do when they're talking about a stimulus plan and the federal budget. But behind the scenes, the Federal Reserve has been very active. They have lowered interest rates. They have dramatically increased the supply of money and credit, and they have bought or backed many questionable financial assets from banks and other lenders. Now there's a substantial amount of economic literature showing that the Federal Reserve's policies can actually work faster and stronger than the additional spending or tax cuts that we will see coming from the Congress and the president. I think the big reason is the Federal Reserve simply can move faster. You don't hear a lot of debate about their policies. They meet in secret, and they can move very quickly once they make a decision for action. So I think it's very important to realize that the Federal Reserve has been working behind the scenes. Many economists think that what they've been doing over the last year will really begin to kick in toward the end of this year. But also the Federal Reserve has to have a withdrawal plan. Because once the economy is back on track, it will be very interesting to see how they remove some of those additional monies and credits they put in the economy, and to what degree they increase interest rates."

Posted by Dave at 08:00 AM

March 02, 2009

Worrying about the long run

The federal government's actions to contain the recession, including assistance to the banking system and other sectors, tax cuts and the new stimulus bill will run up a tab of close to $2 trillion, most of which will be new government debt. Do we need to be concerned about the long-run implications of this debt on the economy?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, we do because importantly other parts of the federal budget are also driving us toward more debt, particularly those big three - what economists call entitlement programs - Social Security, Medicare and Medicaid. They are growing at very high levels, and if the tax situation stays the same, we will have to see the federal government borrowing more money to fund those programs. So if you put that borrowing in the future on top of the additional borrowing - the $2 trillion - you can obviously see where we are facing a big, big debt problem down the road. Now fortunately, people in the government are concerned about this, and they've mentioned this. In fact, the new director of the Office of Management and Budget has as much as said that, 'Look, once we get past this recession and the stimulus bill, we are going to have to tackle the structural focus in the federal government for increasing government debt.' So I think this will be the next big challenge for the government. Once we get over the recession, how do we corral, how do we limit the increase in government debt? Because without it, either that means other government programs get crowded out or we have significantly higher taxes."

Posted by Dave at 08:00 AM