Q&A: The economic recovery's importance to Ohio
Dr. Jason Seligman, assistant professor, John Glenn School of Public Affairs
As President Obama and Congress continue to battle over the best course to cure the country’s economy, voters are likely to enter a critical mid-term election sifting through conflicting ideas rather than solid policy solutions.
Last week the NBER declared the recession over as of June 2009, and yet for many it does not feel at all as if the economy has recovered – in the year since the recession “ended” the unemployment rate declined by only 0.4 percentage points to 10.4 percent as of June 2010… Why did NBER declare the recession over and should we feel that is true for Ohio, or just generally for the US?
If you are familiar with their approach, NBER marks recessions from “Peak to Trough” that is, from the time the economy started to persistently decline, until the time at which the economy began to consistently improve, so the “end of a recession” is not meant to make full recovery. NBER focuses on the US economy, not the economies of individual states, but in this case patterns of change are similar whether we look at the US, or Ohio – though levels are somewhat different—for example to mirror the “0.4 and 10.4” stats you reference for Ohio we have had a decline of 0.1 percent in the US from June 2009 to June 2010, with June 2010’s US rate lower than ours – at 9.6 percent. Incidentally two things worth adding are that this wedge between Ohio and US rates has been fairly consistent since about 2004 when it emerged, and also that the BLS estimate for Ohio’s August rate is 10.1 percent, so things appear to continue to be improving albeit slower than anyone would prefer.
Why is the Economy taking so long to come around this time? What is different?
Good question. In fact there are several differences to consider between this recession and many of the previous recessions. First, this recession was brought on by a large scale financial shock, not only in equities, but across several important financial assets which were collateral for lending, including most viscerally for consumers, the values of homes. Available credit for facilitating lending and borrowing contracted very dramatically. Credit conditions have really improved in this country, for example both mortgage and business lending rates are at or near historic lows. However, the process of deleveraging over the past couple of years chastened businesses and consumers alike responded to tightening as we would expect -- by increasing savings. Further, our population is aging and the way that we save for retirement is very different now than it was in the past. As asset values declined over this recession many households experienced the first important observable retrenching of their long term financial health—that may motivate increased savings over the long run. Whether this increase in savings rates is a short or a long term trend is not yet clear but for now it appears that consumers are much less eager to borrow and spend, slowing the gains in consumption we might have otherwise seen. Finally, the sovereign debt crisis in Europe over the past spring also impacted those nations ability to contribute to the recovery with some impact for US Exports further damping demand for the goods and services we in the US offer to global markets.
You mentioned the Sovereign Debt Crisis as a European event, but closer to home both the National and State fiscal pictures are far from rosy; should Ohio voters worry about our State’s budget? Why or why not?
Ohio voters and their children hold the largest claims on current fiscal policy. Our voters in particular are the stewards of our public institutions. To the extent policy makers get things right, the value of those claims, and our quality of life here in Ohio have a much better chance for improving, so yes Ohio voters should be concerned-- not just now, but rather consistently. When I speak with policy makers and policy advocacy groups I try to distinguish between the longer and shorter run. Over the short run, a business cycle say, it is very natural for a State to experience cyclical deficits as declines in private sector economic activity increase demand for services just as revenues decline, so this does not concern me in and by itself. Structural deficits are a much greater concern; that is deficits which persist even in the best of times, when our state’s economy is at-or-near full employment. What’s more, given the stress on the public sector over recessions, a full employment balanced budget is arguably not sufficient, policy makers need to plan for real tangible surpluses over these periods, and for their prudent management until they are required to be drawn against. Coming out of this recession we need to think about increasing the amount of surpluses that are committed to “Rainy Day Funds” before next proposing to either expand services or cut taxes.
What economic criteria should voters focus on during the remainder of the election campaign?
Well, I think generally we need to go back to basics--if a candidate promises you something that sounds too good to be true, it just might be. The “economic criteria” right now is a public sector management criteria. Will this person marshal and sustain the public sector to best support its mission and thereby foster sustainable long-term growth in the private sector?
A candidate that tells you they are going to they are committed to increasing the “rainy day fund,” to go with that last point, that is a message candidates need to get better at telling and that voters need to get better at hearing. Right now the US Federal Government’s proposed structural deficits are not sustainable, and yet Ohio along with the vast majority of states have depended on Federal Assistance over the current recession. In fact even just after having to forestall planned decreases in sales taxes, some policy makers last year proposed eliminating the income tax in Ohio, plans that were by and large not credible and that would have frustrated business and consumers’ ability to plan over the next decade. If the federal government should become a less credible fiscal partner over future downturns, and we do not plan for that, we will be in much worse shape in future recessions. The way fiscal issues are portrayed by many candidates they sound technical boring and maybe even inconsequential but they are pretty simple in as much as they frustrate the ability to plan things big and small. Let’s bring it home for a moment; imagine not having a solid sense of what your rent or mortgage payment would be in three months time, an allegory to federal tax policy right now—can you afford a vacation next year, can you replace your roof, can you buy a new computer or commit to after school activities to help your child improve their health and smarts? Right now, in this election I’d argue that prudent tax policy is fundamental to people’s ability to make informed decisions. Everyone likes a nice vacation, but which is worse expecting to have to skip one next year, or planning one only to have your hopes dashed? Irresponsible campaign promises have got to come to an end. Voters must ground pie-in-the-sky promises and the candidates that make them.
What should voters consider generally as they make their own plans in light of current uncertainty?
Well I think we have to be more critical and creative thinkers both in civic and private affairs. The saw “I’m not going to vote, because I do not like the candidates,” is that really going to afford you a better public sector? One should vote and also participate in the discourse to shape the candidates in the first place. Would you say, “I’m not going to save for retirement, because I don’t know what is going to happen with health care costs,” we all know that is not really going to afford you a better retirement. Of course one should save and also engage the very dynamic health care environment – which let’s not forget includes not only doctors, pharmaceuticals, and insurers but also diet and exercise.
I think as a nation we have to think again about the country as if it were a business – business people know that profits are a function of both costs and revenues. If you think things are not working, ask yourself is our nation’s problem fundamentally on the cost side, or on the income side? I’m optimistic. I think our problem is on the income side, so we need to invest in our public and private sector alike to build the capital that will sustainably improve living standards. That is the enlightened self interest approach, now more narrowly consider household habits, for while the systemic problem for us as a group may be on the income side, growing wealth requires increases in investment which themselves require sacrifice.
Most succinctly I think voters and all economic agents really should think about their long term goals—their dreams if you will, and balanced measured approaches for their realization. Many say planning beats dreaming – but you must plan to realize your dreams. Both are needed. And because we are human and the world is complex if our plans derail a bit, we must be patient with ourselves. Don’t give up on your dreams simply realize that they alone are not enough and commit to learn how to best plan to meet them.
