Economists Answered Your Questions on Volatile Markets

Dustin in Atlanta, Ga., -- this is kind of an overview -- "Doesn't the notion of an economic stimulus package equate to putting a band-aid on an economy that already has severe, gaping wounds? Are temporary solutions really going to make our economy better or worse?"

I'll start with you, Nick, just -- I mean what's the idea of a package, what's -- ?

NICK PERNA: I love it. You know, the analogy to me would be, it's a little bit like the patient that has a heart attack, OK? And, it's -- at that moment, we don't talk about, well, let's change your diet, let's get more exercise, get your cholesterol count down. No, what we'll do is an angioplasty or whatever.

And so, a stimulus package is, in a sense, an angioplasty or it's, you know, it keeps the patient alive, if you will.

JEFFREY BROWN: You fix the immediate problem.

NICK PERNA: You fix the immediate problem. And I think among economists, we disagree as to what appropriate, the appropriate action is. But I think, you know, we tend to agree that there are some things that are very effective in the short run, as a stimulus package. We could argue about what's most effective. And there are some things that are much more important for the long-run growth of productivity. And sometimes these are at odds with each other.

But right now, the problem is one of -- nobody wants a recession. Mr. Bernanke doesn't want a recession, and what can we do? The Fed's trying to do its part by lowering interest rates. And the Congress feels that there's an economic and also a political role in the stimulus package.

DIANE SWONK: Well, and I think that, picking up the political side of this, you know, election years make for strange bedfellows, and it's really remarkable how quickly Hank Paulson came back over the weekend and said -- this morning, in fact -- hey, guess what? We all agree. There needs to be a stimulus package, and we think we can get one done. Democrats and Republicans alike, something agreed upon before the end of winter, before spring actually hits. That's a remarkably short time when it took them how long to fix the AMD? Fifty-one out of 52 weeks?

NICK PERNA: Mmm hmm.

DIANE SWONK: This is really something stunning, you know, and so I really do think election years makes for strange bedfellows.

I would precursor it to say, now, yes, it will give the U.S. economy a shot in the arm, but we're talking about not a minor sum of money here, and it will widen the budget deficit, being on the Congressional Budget Office, when revenues are already slowing. And so, you know, I wouldn't want to be, you know, the next president standing there in 2009 -- I tip my hat off to people that want to run for the job, because it's going to be inheriting a lot of problems, not the least of which is, you know, deficit issues, and you know, the expiration of the Bush tax package and how that will be handled. Which, I think there will be a lot of class warfare when we get down to that.

JEFFREY BROWN: Well, help us, because the next question and I'll start with you Diane, on this one, is a little bit of looking at context and history. This is from Blake Rodgers, Madison, Wis.. "Is the concept of a stimulus package to ward off recession a new one? If not, has this type of measure worked in the past? Do they somehow think that they can micro-manage the economy to avoid a recession?"

This goes to what you're talking about, but give us some past examples that help policy makers think about what to do now.

DIANE SWONK: Well, there has been some effect of fiscal stimulus, and I think, you know, Nick is exactly right, the debate between over the long run what you want, and what you want in the near term. What works, send people cash, people who have the least amount of money, who are spending paycheck to paycheck, they will spend it the quickest, you know that.

We know that those people who get money who already have money will save it more. And so, if you really want to stimulate the economy, it's sort of contrary to what economists say in terms of being conservative in your own, you know, financial situation. We want you to take this money and spend it, if that's what it's intended for. It's just a temporary fiscal stimulus package.

And, in fact, there was a little bit of a stimulus package in 2001 that did help the economy a bit. I also think the Fed easing ahead of the recession in 2001 helped to dampen the blow of the recession. It was kind of hard to, you know, I mean, we were -- at that point in time we were really talking about more of an investment-driven recession coming off the Y2K bubble, and the tech bubble. But, I think it is important to note that, yeah, it has helped in the past. Is there a lot of politics mixed in this one? Of course there's a lot of politics. It's an election year. Does that mean we're going to go too far? Of course it does.

[Laughter.]

DIANE SWONK: You know, I mean, that's just kind of the whole process is that --

JEFFREY BROWN: No question in your mind, huh?

DIANE SWONK: No question. You know, the reality is -- will these problems cure the ills that ail the U.S. economy, and I think there's a larger problem. There's the question of recession, which Nick was very good about, you know, the angioplasty versus, you know, do you just let the patient die. But I think there's a larger issue here, and that's income inequalities have become so large that a vast majority of Americans have been arguing, we're in a recession, for a long time, despite the fact the data just doesn't show it.

Employment data, you know, in the unemployment claims, actually fell in the most recent week. Consumer confidence improved. Yet, you know, people -- there is a large number of people who feel left behind by this economy, and coming from Detroit, I get it. They think they were worth what they were paid, as much as Britney Spears thinks she's worth what she's paid.

JEFFREY BROWN: Well, before we go there, Nick, you comment on the past, I mean, what examples do you look to?

NICK PERNA: Yeah, there are a couple of things I wanted to comment on. One of them was, is, since I'm much older than Diane, I remember -- I remember the Kennedy/Johnson tax cuts. I was still in school, I -- you know --

DIANE SWONK: I was born.

[Laughter.]

NICK PERNA: What was that?

DIANE SWONK: I was born.

[Laughter.]

NICK PERNA: Watching Sesame Street. But the thing is that, they were sort of like the granddaddy of fiscal stimulus, the granddaddy of the grandmother. And what people looked at was, was it wasn't so much to ward off recession, rather there was this very morose outlook when President Kennedy took office. Morose outlook, particularly among business people. And so, the Council of Economic Advisors, at the time, came up with ideas like the investment tax credit.

So, the first installment of the package was slanted towards business. And it wasn't until after Kennedy's death, and then under President Johnson that the household consumer part of it came into play. And this kind of gave just, fiscal policy a great name back then, OK?

But then, I think, if someone's really interested in this stuff, there's a really good study posted on the Congressional Budget Office's Web site, and it just came out today, it's a reprieve of the analysis of what's happened in the past, particularly in 2001. And it supports exactly what Diane is saying, that if you want a quick-hitting stimulus package, you've got to slant it towards those who are going to spend it, OK? And that's typically people with low incomes.

And it's -- interestingly enough, in the CBO study -- it's people who are very much in debt, because they're the people who will spend.

DIANE SWONK: And they're not going to pay off their credit cards with it, are they?

JEFFREY BROWN: Well, you know, there are a number of questions here. So let me -- just along those lines. So, let me throw that out, because that's exactly what people are wondering about.

John McDaniel from Cincinnati, Ohio, says, "Given that personal credit card debt is high among many, many Americans, could it be said that the smartest thing for most people to do with $500 or $600 of tax rebate, would be to pay off debt? And if people were to wake up smart enough to do just that, what would the economic effect be? I feel that handing out money in order for the country to spend its way out of a recession is foolhardy in the presence of so much personal debt."

And then Bonnie Pumphret from Rehoboth, Mass., "Why should we stimulate the economy by giving consumers cash to spend more? The whole thing is a house of cards. We need to stimulate consumer savings which would provide domestic capital for the economy."

DIANE SWONK: Well, those are all things that, you know, Nick and I think, agree on, absolutely in the long term, that's exactly what you want. But, in the middle of a crisis, these people must have a little job security to be feeling as secure about things as they do. I mean, in the middle of a crisis, the worst thing you can do is put more people out of work that are already, you know, on the edge on their credit cards, and then have them default on you. That's really not where we want to be right now, and so, you know, in theory -- I'm not saying that's where we are, per se, but in theory, if you want a fiscal stimulus package, you've got to stimulate where the -- you don't just give people back money to pay down their credit cards. They should be taking care of their own fiscal houses a little better.

On the other side of it, I think one thing that's really been ignored is the mortgage resets now have been lowered quite dramatically. The Fed has given us one and three-quarter percentage point lower since September. And in fact, according to Mortgage Bankers Association, a lot of the mortgage resets not only have "re-fi"s surged, where people are refinancing into fixed, lower rate mortgages, but also those who face an adjustable rate mortgage, even if they're not in trouble, they may be on the brink of trouble, and they now are resetting lower, rather than higher, which is reducing the servicing cost of bad debt.

And I think those are important issues in the middle of the kind of fiscal -- certainly in the kind of situation we have today in financial market.

NICK PERNA: Can I just add to -- ?

JEFFREY BROWN: Yep.

NICK PERNA: Back to the -- this debate over whether people will save it or should save it -- this is exactly where the short run and the long run confront each other --

DIANE SWONK: Exactly.

NICK PERNA: -- in our disagreement. In other words, we want people to be long-run savers, but we want them to be short-run spenders in order to get us out of this.

DIANE SWONK: And at the end of the day we all want to believe in Santa Claus, don't we?

[Laughter.]

JEFFREY BROWN: And where do you draw the line between short- and long-run? When do you want us to spend, and when do you want us to save?

NICK PERNA: It's always the case is that the long run we're all dead. So, for the politicians, the long run is February the 5th, isn't it?

[Laughter.]

DIANE SWONK: Yeah. A lot of people will be dead by then.

NICK PERNA: One of the arguments, then, for a rebate, OK -- there are questions as to how effective rebates are, this is where you give people money back in a lump sum -- that's what we did in 2001. So, one of the disadvantages is the question of how much people actually spend out of rebates, compared to what they would spend on permanent tax cuts. But an advantage of it is, that it doesn't permanently impair the budget deficit, OK? It's a one-time hit, as opposed to a permanent increase in the budget deficit, OK?

DIANE SWONK: And this is a real debate right now, I think this is really important. And, you know, Bernanke was very clear -- timely, targeted, you know, in terms of the tax cut. And any kind of stimulus we see has got to be timely and targeted. And timely means, do it now or don't do it. And targeted means, make it so everyone who gets it, spends it.

JEFFREY BROWN: And he also said, I think one of you already mentioned this, that more -- you get more bang for the buck from giving it to lower to middle income people.

DIANE SWONK: The evidence on this is sort of unequivocal.

JEFFREY BROWN: Is that right? And why -- explain that.

DIANE SWONK: Well, you know, the evidence suggests that if you're living paycheck-to-paycheck, you get an extra three hundred bucks, you're going to spend almost all of that 300 bucks or 800 bucks. If you're not living paycheck-to-paycheck, if you're someone who's got a cushion, chances are more that you're only spend 30 of 300, or 80 of an $800 check. And that just isn't going to have the same bang for the dollar in terms of reigniting economic growth.

Now, we can debate whether or not it's needed, but that train's already left.

JEFFREY BROWN: There was a question here from Tom McArthur [of] Seattle, and this goes to the other side of it: the government spending programs. "With the proposed economic stimulus package of $800 rebates, it should be little wonder that the vast majority of the public thinks that those in Washington are insane. Not only are we billions in debt, but the rebates will do little or nothing to address the issue. What is needed is a Work Program Administration, WPA, or Civilian Conservation Corps, CCC, that will put people to work, doing the backlog of needed public improvements which taxes will not support, and will create more gainfully employed taxpayers."

Now, that goes back to what one of you was talking about a long time ago, when people thought about how to do these kinds of programs. What's the thinking on those kinds of programs today?

NICK PERNA: You know, I think the problem with public works is -- the advantage of public works is that we end up building infrastructure or rebuilding it. The problem is one of timeliness, and getting these things into effect, getting -- even a Civilian Conservation Corps going, or whatever, it takes -- by the time these things would be felt in the economy, it might not only be too late, it might be counter-productive, in other words, the economy could be in the recovery stage, and what you would end up doing there is having public spending clash with private spending.

That's why, go back to what Bernanke said, timely and targeted -- timely means -- if you had these things on the shelf, OK, so that we could somehow or another gin up works projects that would employ 10 or 15,000 or 25 or 30,000 unemployed people, and do it immediately, that's one thing -- but we don't. And so, I think that's why, we have to focus much more on the tax cuts.

DIANE SWONK: And even one point further than that, I mean, the original public works projects came out of the Great Depression, that was a decade-long phenomena. And so, you really did have some time to think about it, some time to take action on it. But then there is a sense that, you know, how do you sunset these programs when they're not needed anymore? And, you know, one of the last things we really need in Washington is more spending programs without any priorities.

JEFFREY BROWN: OK, we had a number of people write in about another unintended possible effect, which is inflation. And actually, this was raised in the discussion I did last week, it was raised by Rep. Paul Ryan.

Jim Kelly from Manhattan Beach, Calif., "I'm concerned about unintended effects, and the question if the consumer price index really accounts for the experience of the average household. So, my question is, if we really stimulate now, what happens with inflation later?"

Randy Hathaway of Lummi Island, Wash., "Could you please assess the possible impact on inflation, as well as the Federal deficit with regard to the present economic stimulus package options being presently considered by Congress and the President?"

DIANE SWONK: Well, my own view, and I would be interested to see how Nick chimes in on this -- I think we're set up to over-stimulate the economy now. I think we've gotten ourselves in this unfortunate position, in part because of some incohesive messaging by the Federal Reserve and inconsistent messaging, and that's gotten them to the point they've got to go too far.

The tax stimulus is one thing, but frankly, you've got cumulative -- a percent and three-quarters working on stimulating the new economy out there in the second half of the year. That's a lot of stimulus going into the economy, and at some point in time it will kick in and we're lucky to even get more. And I think that is something, you know, basically at this stage of the game, the Feds decided to allow ourselves to get a little singed, and then recalibrate, as they put it. They'll be having to take back interest rates, which again makes it -- these interest rate easing which makes it all harder for an incoming President in their first year, because they're going to have a Federal Reserve that's raising rates, and they're having to deal with not only the end of the stimulus, the residual effects on the budget, but then in a larger sense, what do you do with the expiration of the tax cuts that are out there?

JEFFREY BROWN: But you're worried about over-stimulating, meaning --

DIANE SWONK: Yeah.

JEFFREY BROWN: -- meaning rising inflation?

DIANE SWONK: Yeah, you know, the composition of growth is really one of income inequalities, and that -- this, all the stimulus in the world doesn't really change that. And so it's not going to make people happy enough, but you do risk inflation down the road. We've already flirted with it, and you know, the interesting thing is the core -- the non-food, the non-energy part of inflation is really broken away from the overall inflation rate since about 1999. So, it's not been the best indicator of future inflation.

So, the thought that the Fed is sort of targeting that is not, you know, not exactly as relevant as it once was. And it is an issue that's come up, within and outside of the Fed.

NICK PERNA: I tend to be less concerned about inflation. I think what's going to happen is this global slowdown/possible recession is going to knock the wind out of a lot of commodity speculation, oil speculation and so on.

And even if inflation is a problem, I think, you know, the Fed can deal with it down the road, they just have to raise interest rates. I think that right now, we face a very serious risk of recession right now with those mortgage resets that Diane was talking about. It would make it, it would create lower interest rates, but now I don't have the income to pay it. And I think what you would see is that many of the financial problems that we've got would become much more intense in a recession.

One quick comment -- buried in the, one of the questions that you read was a question about, does the CPI [Consumer Price Index] really measure the average person's experience? And the answer is a resounding yes. You know, people -- I get all kinds of questions when I'm out on the circuit, and you know, "Is it true that the government excludes food and energy?" No, it doesn't. We economists take it out so we can see what's happening, and then we put it back in. But, you know, the Consumer Price Index is by and large a very good measure of the average person's -- or average household's -- experience with inflation in the United States. And there are all kinds of people out there saying wacko things about it, you know, that there's some kind of a cabal in Washington to suppress the inflation rate, you know --

DIANE SWONK: They don't have that much organization --

NICK PERNA: They're not bright enough to do that.

DIANE SWONK: No, not at all.

NICK PERNA: And, you know, we can argue -- Diane and I can argue whether the real inflation rate's a half a point lower, or three-quarters lower or three-quarters higher, but it certainly is not a lot different then what you get from the Consumer Price Index.

Kathy in Priest River, Idaho, "The working class is groaning under the tax weight we are forced to bear already. It seems like every economic stimulus is political shorthand for tax cuts for the rich, and we sink further."

DIANE SWONK: Well, you know, again, this gets into the issues that Nick was talking about earlier, in terms of, you know, what is the best tax policy over the long run versus the short run. I mean, I think there is some issues that we're going to have to deal with, with the rich giving up some of the tax cuts that they're already given us, but you know, the last thing you want to do is, the part that's carrying your economy that's starting to falter is tax them, that's not the best thing, either.

And investors, you know, are taking it on the chin right now. So, those very investors that, you know, were helped out by these tax cuts are now being hurt by what's happening on Wall Street.

So, I do think that people are often asymmetric on how they look at winners and losers. Those people who feel left behind see the winners as always winners, and those people who have, you know, moved up in this economy, you know, they don't always get the credit they deserve for helping the rest of the economy move forward, either.

So, I do think these are going to continue to be overshadowing issues of the election, and my concern is one that's actually much larger than this, and that is, you know, rise in popularism, the fact that you know, the Edwards and Huckabees of the world are still out there, who don't really have economic advisors -- this is something all economists should be very concerned about, is that these guys -- or Ron Paul and the ones that, you know, eliminate the Federal Reserve entirely. You know, a really false look at what libertarian is. I think these are the things that should concern us, is that these fringe guys have any votes at all. Because they have a significant vote, and I think --

JEFFREY BROWN: You're calling Huckabee -- you're calling all these people "fringe people"?

DIANE SWONK: Yeah, I'll call them fringe people. I don't like the populism, I don't like the fact that, you know, I mean, to me Chavez equals populism. And, you know, there's a lot of candidates on both sides of the equation that are more moderate -- or at least a few candidates that are more moderate in their economic views that, you know, this sort of isolationist, protectionist, you know, put our heads in a hole and not look at ourselves in the mirror, will get us.

JEFFREY BROWN: Nick?

NICK PERNA: You know, I think part of the problem here, is again, the long run versus the short run.

DIANE SWONK: Yeah.

NICK PERNA: But, you know, we have a referendum underway, and people who are disturbed with the current distribution of income may end up having some clearer choices as we get to November. And that's, to me, the way to deal with it. You know, if it's a candidate who says that, "What I'm going to do is I'm going to undo some of the tax cuts that were passed over the last few years," and that's how you redress that.

I think the problem with trying to do it right now, and saying we ought to pass -- let's say you could even get the legislation through -- we ought to repeal the reduction of the capital gains tax -- you know, that would be -- I don't care what your politics are, that would be very dangerous to do, because it could really, really taint the stock market.

DIANE SWONK: Exactly.

NICK PERNA: And it could set into motion some global financial rumblings that, you know, we have no idea how they'd end up.

So, I think, again -- go back to the nice, simple stuff, and keep it at that.

DIANE SWONK: And, I guess, you know, as you said, Nick -- I mean, the reality will be, we do have a chance. I mean, equity is part of any politician's game. And as much as I don't like populism, I do think that if people are really concerned about income issues, they do have some choices to make. My concern is that they don't just slip into sound-bite, populace answers, and you know, some of the anti-immigration, anti-free trade rhetoric that's become so popular.