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February 26, 2010

Progress on poverty

The recession has affected the entire world, increasing unemployment and decreasing incomes. But have the world's economic woes of the last two years hidden some big advances in well-being?

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

"They really have. ... We have actually had a very big drop in world poverty. In fact, it is down 75 percent in the last 40 years. The percentage of the world's population living on less than a dollar a day fell from 27 percent in 1970 to only 5 percent in 2006.

"And this ... is even more impressive given the world's population increased 80 percent during this time period.

"In fact, another measure of world global well-being finds that it has doubled over this time period.

"So, yes, we have had economic problems not only in our country but in the world over the past couple of years, but this should not hide the fact that we have made a lot of progress on reducing poverty all around the globe."

Posted by deeshore at 08:29 AM | Comments (0)

February 25, 2010

Helping students graduate

A college education is more important today than perhaps ever before. But as more students go to college, there's also an increase in the number of students who drop out or who can't graduate on time. What can be done about this?

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

"Colleges and universities ... are recognizing this -- increasingly recognizing this as an issue. And they are doing something. They are spending more money on things like student services, on tutoring and other special programs to help students who perhaps, not to use a ... a pun, not making the grade. The question is, are these programs effective?

"Well, now we have a new study released from the very prestigious National Bureau of Economic Research that directly answered this question. The authors actually found a positive association between program spending -- spending on things like student services and tutoring -- and graduation rate. Specifically, what they found was that for every increase in spending on student services of $500 per student, that was correlated with an increase of the graduation rate of 1.7 percent.

"So it looks like these focused, specialized spending programs on students who are lagging behind can have a pointed payoff."

Posted by deeshore at 08:17 AM | Comments (0)

February 24, 2010

Lasting effects of recession

The recession has affected jobs, incomes and wealth. But is there any research to suggest that recessions change the way people look at the economy and government?

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

"There is. ... In fact this is based on some new research that economists have done. What they find is a very curious result: They find that people who grew up, who have their formative years during recessions, number one, they tend to be more supportive of government intervention in the economy, particularly in terms of the government helping to support incomes during a recession.

"But number two -- number two, and this is very interesting -- those same people have less confidence in the government. That is to say that they want the government to do, to help, but they don't think the government is going to be very successful.

"And I think on the surface you would say, 'Boy, this is very contradictory.' But perhaps what is going on is people are just grasping at anything they can get. When economic times are bad, they want help. And they look to the government for help.

"But at the same time they may be saying, 'Well, I don't have a lot of confidence that this is going to help, but I don't really have any choice.'

"So it is very interesting how economic cycles can have impacts, in this case, on how we view the economy and how we view governments' role in that economy."

Posted by deeshore at 07:35 AM | Comments (0)

February 23, 2010

The new workforce

In today's rocky economy, it's all about jobs and when they will come back. When economists look at today's job market, do they see any trends that will help answer this question?

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

"We do see some trends. However, these are trends that are likely to create more stress for workers.

"First trend is that since the 1980s, each successive recession we have seen it has taken longer to recover the lost jobs. For example, the 1980 recession: It took 10 months to get the jobs back. In 1982, it took 27 months; 1990, 32 months; in 2001, 48 months. And many economists right now think that to get the jobs back that we have lost during this recession, it is probably going to take maybe 5 years. So that is unfortunately not a good trend for workers.

"The second trend that we have seen is right now, with labor so available and businesses facing such an uncertain future, that we have seen temporary work increase. In fact, it is now estimated that 25 percent of workers have either a part-time job or a temporary job or some kind of non-standard work.

"And of course, most people I think would rather have a full-time job that they can count on and they have job security.

"So unfortunately ... these are two trends that don't bode well for the workforce, and all I can say to our fellow workers out there is be prepared."

Posted by deeshore at 07:39 AM | Comments (0)

February 22, 2010

The Fed caught in a vise

One of the common complaints heard today is that not enough is being done to stimulate jobs. The Federal Reserve is in particular being criticized. What can the Fed do?

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

"The Federal Reserve is really caught between a rock and a hard place because Congress has given them two tall orders: On the one hand, Congress has said to the Fed, 'We want you to work toward keeping prices stable as much as possible.' Now what that usually translates into is a very low inflation -- rule of thumb would be to keep inflation to 2 percent or less.

"The second mandate however they've given the Fed is to create economic conditions that will result in full employment.

"The problem for the Federal Reserve is oftentimes to do one, they can;t do the other.

"And right now, right now is the perfect example of that. The Federal Reserve over the last year and a half has created a whole bunch of money (to use a real technical term) -- in fact, over $2 trillion cash that they have printed in order to shore up the economic system.

"And that's also helping we think eventually to give banks the resources to make loans and therefore for businesses to create jobs.

"But, but now the concern is -- and you hear this in many quarters -- that if that cash that excess cash is left in the economic system it could spark higher inflation.

So the Fed is really caught right now between these two goals: Do they pull back that cash in order to try to preserve price stability, but if they do that they may cause the economy not to grow as fast and not create as many jobs.

"So this is a perfect example of where the Fed perhaps can't meet those two mandates. I think quite frankly that's why many people right now are mad at the Fed."

Posted by deeshore at 09:13 AM | Comments (0)

February 19, 2010

Is debt bad?

Debt is a four-letter word to many. Many people who took on large debts in recent years are now in financial trouble, and the government's climbing debt is an added worry. But can we just simply say that going into debt is bad?

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

"No, I wouldn't make that blanket statement. ... We really have a love-and-hate affair both with debt. We like what debt can afford us to do in terms of buying things and having things. We certainly don't like to pay it off. And that is natural.

"I think most people need to ask two essential questions before taking on debt: First of all, are they using the debt in such a way that the benefits of having that debt, of going into debt, are greater than the costs?

"A real good example where the answer would be yes is going into debt to get a college degree. There is no question that for most people, the vast majority of people, students, that going into debt in order to have, get, a college degree where you are likely over your lifetime going to earn $1 million more than if you had stopped with a high school degree, that is worthwhile. That makes sense.

"Or for example, another good example would be purchasing a vehicle so you can go to work and the only way you can purchase that is to go into debt.

"The second question you have to ask is, Can you afford that debt? Can you afford to pay that debt? Can you afford to fit it into your income while you are having to pay if back?

"So those are two very important questions. If the answers to both are yes, then I think going into debt makes great sense. If the answers are no, then you may want to think again."

Posted by deeshore at 10:41 AM | Comments (0)

February 18, 2010

Balancing our books

Most households have had to make major changes in their spending behavior during the recession. Now that we are looking to life after the recession, people are asking whether households will return to their old spending ways. Will they?

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

"Many economists ... think not. And here is what really happened: If you look at the period of time from 1980 to 2007, we had an unprecedented increase in household wealth, primarily due to a good stock market and then later in that period a booming housing market. Now what this increase in wealth motivated us to do -- and it was quite rational -- is to borrow money, spend money, and not save any money.

"Now during this recession, that household wealth has collapsed -- down 20 percent, over $11 trillion dollars. And what this has further done is [it] has exposed the debts that households have. No longer are our debts being carried by our high wealth because now we have lost a large part of that wealth. And so what we have to do in engage in something economists call de-leveraging -- that is to say, we have to begin to spend less, save more and pay down on our debt.

"And we are doing that. We are actually -- we have been -- doing that over the last year and a half.

"The down side of this is that that means that consumer spending in the economy, which is the main driver of our macroeconomy, is going to be very tepid -- very modest economists think -- over the next couple of years as we do go through this de-leveraging. And that is going to mean a slower-growing economy and slower job growth."

Posted by deeshore at 08:07 AM | Comments (0)

February 17, 2010

A parable of what happened

People are still searching for ways to explain what happened to the economy over the past couple of years. Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, offers a parable to help us understand.

"Let's say ... that you live in a beautiful rural area, no neighbors that you can see. You are out there in paradise. You come home one night, and your house is on fire.

"There is no fire department, city fire department that is there on the scene because you are out in the rural area, and let's say there is no volunteer fire department also. All your possessions, all your worldly possessions are in your home, and you have got to save your house. You have got to save it from burning to the ground.

"So what you do is you quickly drive around to all the neighbors that you can find. You say to them, 'Please, please come help me put out this fire. I'll pay you anything you need; I'll sign an note owing you money in the future.'

"And let's say you do get enough neighbors to do that. They come, they help you put out the fire; you save your house.

"Now, now of course what you have to worry about over the next couple of years is how are you going to pay off those debts, because you are now in debt to your neighbors.

"Well the analogy here is that, think of that house as the economy. And our economy was burning down about a year and a half ago. And so what the government did is they borrowed; they printed money; they did anything they could to save that house -- save the economy. And they did.

"Now the challenge as we look forward is, How are we going to pay back those debts? What are we going to do to pay off those people that we owe for saving our economy?"

Posted by deeshore at 07:11 AM | Comments (0)

February 16, 2010

What China does

China has one of the fastest-growing economies in the world, and its manufactured products are seen everywhere. But when we see a label stating "Made in China," what does this really mean?

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

"In most cases what that label should mean is 'Assembled in China,' because what the current Chinese model is, is one where China purchases parts and components for products from other parts of the world, other countries. They import those parts and components to China. They then assemble those products -- those components I should say -- in China into the final product, and then ship it to other parts of the world, other buyers.

"So for example, let's say that you go to a retail store here in the U.S. and you buy something for $100, and that product says it was made in China. About half of that $100 actually doesn't go to China -- it doesn't go to any of the parts components. It goes to the people involved in getting the product from the wholesale level to the retail level. This could be the transporter, this could be actually the retailer. And much of that money would likely go to people here in the U.S.

"Then you take the remaining $50, half of that $25 actually goes to the makers of the components, the parts -- oftentimes non-Chinese firms.

"And then the final $25 does go to a Chinese company for the assembly of that product. So out of that $100, $25 dollars actually goes to China, $75 goes to other entities.

"That is really what the current Chinese model is. Now where China does want to go is they want to be more of the, not only assembler, but also producer of the parts and components so that they get more of that $100."

Posted by deeshore at 08:01 AM | Comments (0)

February 15, 2010

What was saved?

Many people are frustrated over how the banking system has been treated differently than other sectors of the economy. During the recession, the government provided large amounts of assistance to the banks while allowing many other businesses in other parts of the economy to fail. Why has there been this seemingly double treatment or, as some would say, double standard?

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

"The answer that is given -- I think the answer you have to give -- is that the banking system ... is what was saved. Now obviously individual banks make up that system. But really, the policy objective was to save the system.

"And we can't get by in the economy without that banking system. The banking system is essential ... to any functioning economy anywhere in the world. Because it moves money around -- it moves money from lenders to borrowers. It sort of is the grease, if you will, that keeps the economic engine going.

"Now that said ... we still, I think, have several questions as we move forward, as we are concerned with what will happen next time that we are in this kind of situation. Questions like, 'Do the banks need to be smaller? Have we gotten to a system where we have too many large banks? Too big to fail? Do we need to look at perhaps a policy regime that encourages banks to be smaller?'

"We also have questions about whether banks should self-fund, if you will, a bailout fund for themselves. The president has talked about a specialized bank fee that would pay off the TARP money that was used to help the banking system.

"While some are saying we need to actually have a reserve fund set aside funded by the banks so that the next time they do get in trouble, the big ones, they can tap into that fund.

"And then lastly a lot of debate about ... whether the loans that banks made need to be restricted -- in terms of what kinds of loans, what kinds of investment they get into.

"These are all very, very important questions that we are just beginning to grapple with after this very significant event in our economy."

Posted by deeshore at 08:04 AM | Comments (0)

February 12, 2010

Why is lending tight?

There are many stories about potential borrowers with excellent credit ratings not being able to obtain loans. Why is this occurring? Is it a matter of the money not being available?

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

"Actually ... the money is there. The banking system, banks, are sitting on over $1 trillion dollars of excess reserves in their vaults -- in other words, money they don't need to cover their existing loans.

"Also they have established very, very high lending conditions. You have to have excellent credit; everything has to look right in most cases in order to get a loan.

"One reason you can say that is behind this is simply it is a sign of the times. In fact, every time we go through a recession we see this. We see that banks are perhaps less willing to lend. We see that lending standards are high. And also -- and you hear this from the bankers -- they simply don't see the loan demand out there.

"Businesses right now simply are not that optimistic about the economy. They are reluctant, like many people, to take a chance on the future economy.

"So in economics lingo, I think this is actually a combination of supply and demand for loans. The demand is not there. And although the money is there, the standards are high, which reduces the supply.

"I think what will happen this year is you will see this situation gradually, gradually get better if we follow past patterns. Standards will become a little lower. Banks will be willing to dip into that trillion dollars of excess reserves. And there will be more loan opportunities out there that look good."

Posted by deeshore at 08:17 AM | Comments (0)

February 10, 2010

Refinancing and the financial crash

Many people have been looking for answers as to why the housing market plummeted after doing so well earlier this decade. What role did refinancing have?

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

"Well, according to a new study, ... it had a big role. What happened was as home values went up, more and more households took advantage of refinancing. They said, 'Well, gosh, if I want to take a trip or buy a new car, whatever, I can just go in and essentially extract some of the value of my house through refinancing.'

"What this did was it resulted in homeowners taking on more debt. In fact one -- this study that I am citing -- finds that refinancing actually resulted in real-estate loans increasing directly by 20 percent.

"Then when we had the real estate crash come, many of those folks who had refinanced first of all found that they were over their heads in debt. And secondly many of them found that because home values were going down, their home value was actually less than the value of the loans they now had against the house. And this just contributed to the foreclosures and all the problems we have had in the housing market.

"Now does this say that refinancing is bad? Certainly not -- (I'm) not suggesting that at all. But it did play an element as people got into this frenzy in the real-estate market. It did play an element in building up that real-estate bubble and then having that bubble burst."

Posted by deeshore at 09:19 AM | Comments (0)

February 09, 2010

Reactions to consumer recalls

Periodically the government's consumer watchdog, the Consumer Product Safety Commission, will issue recalls for certain products. Do consumers seem to pay attention and react to these recalls?

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

Yes, definitely. . . . And we find that the product that is recalled -- the company of the product finds that first of all their sales go down in some cases by as much as 30 percent or more. And also the stock value of that company goes down.

But interestingly a new study finds that these impacts don't stop there. What they found is that other companies in the same industry -- even though these companies have not had recalls, but if they are manufacturing the same kind of product -- they also experience a decline in sales and a decline in their stock values.

So my point is that let’s say company A has their toys -- a particular kind of toy -- recalled, what I am saying here is that company B, who is also making toys but they haven't had a recall, they are going to suffer too. So the entire industry suffers.

And so this is a good incentive for all companies in a particular industry to try to do things to make their products safe so that they don't suffer these adverse impacts, not only on their sales but on their stock values.

Posted by deeshore at 08:06 AM | Comments (0)

February 08, 2010

Deals in real estate

By many measures the real estate market has taken the biggest hit during the recession. Most people know about the problems owners have had selling homes, but have the problems in real estate extended to other parts of the market?

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

"Well ... the big focus has been ... on home owning. And everyone knows we had a big boom in home owning, and then we've had a bust and that has affected prices. And there are a lot of deals out there for homes because prices have come down so far and that has gotten a lot of publicity.

"But also affected has been renting as well as commercial and industrial real estate. And all of them have been affected pretty much in the same way. So what I am saying here is that not only are you finding deals in buying a home, you are also finding deals, for example, in renting.

"We have right now in the rental market a classic situation of supply greater than demand. So we have seen rents fall. Because of the recession, we have seen vacancy rates go up.

"So, for example, if you are a student coming back to college for the spring semester, and you need to find a place to live, you can find some great deals out there -- either in terms directly of the rent, or you have many landlords who are offering free things, like free cable TV, new carpet, et cetera.

"So the entire real estate market has been affected by this boom followed by the bust, and right now the buyer or the renter is in the driver's seat."

Posted by deeshore at 07:47 AM | Comments (0)

February 05, 2010

Don't forget inflation

When comparing economic numbers, it's important to adjust for inflation. Why is this important? And is there a particular market where controlling for inflation is sometimes forgotten?

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

"Inflation simply means the cost of living is going up. So if, for example, ... your income rises with the inflation rate that means you are only treading water; you are not really getting ahead. Same way for a business, if their prices or their revenues go up only with the rate of inflation, they are not also getting ahead.

"So it is typical for people to look at their salary gains and say, 'OK, if I had a salary gain of 3 percent but the inflation rate was 2 percent, I'm only one percent ahead.

"One area, though, where it seems like we forget to do this more so than others is in investing -- and particularly in the stock market. You will hear stock analysts always quote stock prices or index values as going up at a certain percentage rate and they don't, they don't back out the inflation rate.

"And when you do this what you see is, for example, the stock market has not performed as well over time as we would have thought. In fact, the market decline that we saw in 2008 and 2009 would have been much larger when you take account of inflation.

"So inflation is very important. It affects every aspect of our financial lives but particularly you should not forget to take it into account in the financial area."

Posted by deeshore at 08:06 AM | Comments (0)

February 04, 2010

Is the housing market back to normal?

Most economists agree the recession started in the housing market. We had unsustainable increases in housing prices followed by a steep drop in those prices. Recently housing prices seem to have stabilized. Does this mean the market is back to, as economists say, equilibrium?

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

"Well, I think I would tentatively say yes, although it does depend on what measure you look at. One indicator that economists track is the ratio of house prices to rents. And that skyrocketed during the housing boom. It has now retreated and by some measures it is back to normal.

"Another indicator suggests however that housing prices still have a little bit to fall, maybe about 15 percent. If that's the case, then that means in some markets housing prices would have been almost cut in half during this economic recession.

"But the good news does appear to be that the worst of the declines, if we still have some declines in housing prices to go -- the worst of them, the biggest chunk of them -- are over.

"Another piece of good news is that we are actually doing better in our country in terms of the housing market than in some other countries, like Spain and England and Ireland, where housing prices still appear to be widely overvalued. And so they are going to see further drops in those housing values."

Posted by deeshore at 07:57 AM | Comments (0)

February 03, 2010

Update on the state's budget

With the economy appearing to improve, will North Carolina's leaders still have a budget struggle this year? Specifically, will they be looking at a gap between planned expenditures and expected revenues?

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

"Unfortunately, ... it looks that way, although the gap is not going to be as big as it was last year. So far this fiscal year -- and you have to remember the state runs on a fiscal year which goes from July to June 30th -- ... we are looking at half that over and half of it to go.

"So far this fiscal year, general fund revenues for the State of North Carolina are running 1.5 percent below expectations. That has resulted in a gap of a $110 million. Obviously not trivial, but not gigantic.

"Some specific tax revenue sources are way off. For example, sales tax revenues are off 12 percent, individual income tax revenues are down 4 percent. But the good news: Corporate income tax and franchise tax revenues are up compared to last year.

"I think that is indicative of the rebound in business. So it looks like, yes, our public decision makers are going to have a budget situation that requires some hard decisions when this fiscal year ends.

"Now looking to the next fiscal year -- that would be July 1, 2010, to June 30, 2011. Of course that's way off in the future in terms of economic forecasting, but the thought is right now that revenue growth is still going to be sluggish. We are going to have a sluggish economic recovery that will result in sluggish economic growth and revenue growth, and so I think budgeting will be ... a challenge."

Posted by deeshore at 08:01 AM | Comments (0)

February 02, 2010

North Carolina's gains

With the devastating recession that has occurred in the past two years, some are saying the decade of the 2000s was, economically speaking, a lost decade. Is that true, especially for North Carolina?

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

"I would not agree. When economists look at economic change, what we tend to do is we look at a business cycle. So in this case what I would argue you would want to do is you want to look at the beginning of the growth period in the last decade which was 2001, and look at what happened over the period of time, which the economy grew and it grew to the end of 2007. And when we look at that for North Carolina, we actually see some very significant improvement.

"In terms of total economic output our state expanded by 18 percent -- fastest in the nation over that 7-year period. We saw sectors like health care, education, information and finance expand at very rapid rates.

"What may be surprising some people, however, is that over that period of time, North Carolina's manufacturing output also went up -- specifically durable goods manufacturing; things like machinery. In fact, machinery expanded three times as fast as the overall economy.

"And there were some tremendous gains in some particular sectors. The production of computer equipment and motor vehicle parts over that 2001 to 2007 period increased by over 100 percent in North Carolina.

"So what this suggests is we had a very robust economic period before the recession. Hopefully we will get that back as we move past this devastating recession."

Posted by deeshore at 07:59 AM | Comments (0)

February 01, 2010

Will the Jobs Start Returning?

We've had some good news about the economy in terms of production. The nation's gross domestic product has been rising, as have factory output and factory orders. But the big question everyone is asking is, When will this good news translate to jobs?

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

"I think we are very close. ... And one indicator that economists look at to get an advanced suggestion of where jobs are going is the weekly claims for unemployment. This is simply new people who are newly unemployed going and filing for unemployment insurance.

"Nationally we have seen that number around the 420,000 to 430,000 a week mark. And it is widely thought that once that number gets down to 400,000, that is consistent with job gains. You have to remember we are always going to have churning in the economy and people becoming unemployed even in the best of times.

"In North Carolina, the latest week showed that we were down to only 10,000 people newly filing for unemployment. That's a very low number, and that also is consistent with job gains.

"So I think that both in the nation and here in North Carolina and, indeed, maybe first here in North Carolina, we are going to start to see job creation starting this quarter -- that is, the first three months of 2010. But we have a long way to go. We have lost 250,000 jobs in North Carolina during this recession. We maybe maybe will get 40,000 of them back this year."

Posted by deeshore at 08:02 AM | Comments (0)