We’ve seen a combination of economic theories come together to try digging out of this economic recession. So far, the government has spent money on propping up our financial institutions that were “too big to fail,” invested in infrastructure and energy, reduced interest rates, cut taxes and put money back into consumers’ pockets to give the economy a jolt. We turn now to lessons in economics to learn what we can do to prevent further collapse and get back on-track and restore our status as a global economics super power.
Anyone who studies basic economics saw the current recession coming for several years now, although it was hard to predict just how hard and how fast we’d fall. Mere months before the bottom fell out, causing enormous financial institutions and mortgage giants Fannie Mae and Freddie Mac to collapse, Treasury Secretary Henry Paulson was quoted as saying, “the fundamentals of the economy are sound.” In Economics 101, students learn the signs of a recession, which are job losses, exports support manufacturing, a drop in housing prices, a decline in profits, limited impact of short-term stimulus dollars, rising inventories, artificially low interest rates, lack of buyer confidence and lack of investor confidence. The American economy had all the ingredients for the perfect disaster.
Predicting an economic recession is challenging, since so many factors can affect the ebb and flow of the economy, but education economics professors say there are some obvious predictors. A stock market drop often precedes the start of a recession, they say. In “Stocks For the Long Run,” the author mentions ten recessions that were preceded by a stock market downturn 0 to 13 months prior, although other experts suggest half of the declines (of 10% or more) since 1946 have not been followed by recessions. In fact, half of the declines occurred once a recession had already started. Another way to look at economic stability is to look at the profit from 10-year/3-month Treasury securities, although it sometimes takes 6 to 18 months to show a recession after declines. A third predictor is a three-month rise in unemployment rates and jobless claims. Lastly, real estate markets often weaken before a recession, although microeconomics experts say this can go on for long periods of time before a recession ever hits.
Top market economists disagree vehemently on how we can dig out of the economic recession. Some argue for a heavy-handed government comparable to Franklin D. Roosevelt’s, where the “New Deal” programs stimulated much-needed industries. Others argue for decreasing business taxes and regulation to create more jobs or investing in energy/infrastructure to create more jobs. Perhaps we really found our way out of the Great Depression through World War II production and exporting. The current administration has used a number of different approaches so far to stimulate our road to recovery, but eager Americans wonder when we’ll actually see the signs of a rebound.
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