Looking for an Economic Boost

Politics could hinder nation's recovery, local economists warn.
by Michael Puente

The presidential election is one year away and potential Republican candidates are already jockeying to be the party's nominee, each coming up with a plan for the nation's economic recovery. Most suggest cutting spending, slashing taxes and reducing government regulations as the answers to the nation's economic woes.

But GOP candidates don't miss a chance to criticize President Barack Obama's suggestions to get the nation rolling immediately, not in 12 months or more following the general election.

So while there are signs of positive economic growth for the coming year, politics could get in the way of any potential upswing, with both sides continuing to wrangle, according to several of Northwest Indiana's leading economics professors.

Dr. Amlan Mitra, professor of economics at Purdue University Calumet in Hammond, says President Obama's $447 billion jobs plan introduced in September will help the economy and is needed. “A massive stimulus can help to jumpstart the economy, but it all depends on how this will be approved and how the spending would be allocated and what type of projects. It is possible to jumpstart the economy in six months.”

Mitra expects the economy to grow next year by 1 to 2 percent, with the nation possibly slipping into a recession. But he says there's reason for optimism.

He says tax cuts can help if done to aid the lower, middle and working classes. But if rich Americans receive a tax cut, Mitra says it may not do as much for the economy. “For them, their buying power actually does not change much because of an additional savings. They actually have reached a point that their propensity to consume is marginal.”

One issue that worries Mitra is ongoing talk about the debt crisis. “The artificial crisis is the debt crisis. The real crisis is the jobs crisis,” Mitra says. “People can talk about the debt ceiling and about spending. I definitely think it's not a real issue. The real issue is ways to create jobs. It cannot be done without proper spending, without the right amount of spending. And this spending has to be in construction, education, infrastructure and transportation. It's pretty well known that only that kind of spending can create jobs in our society.”

Mitra says the debt crisis can't be resolved overnight. “The debt crisis is a long-term issue, but we are dealing with a short-term crisis right now: jobs. To say we can't spend any money on infrastructure is basically saying that we're not interested in growing the economy.”

Mitra says the government should aid small businesses in creating jobs. He says some Republican candidates for president have good ideas to do this. “Sixty to 70 percent of jobs are created by small businesses. If it has to do with where the money comes from, then we just have to find the money. We are spending billions in places where we don't need to,” Mitra says.

But as we move closer and closer to election season, political rhetoric may derail solutions. “Politics can get way off from actually solving the actual crisis. We all need to get together and think carefully and think what is good for the economy,” Mitra says.

Jeffrey H. Bergstrand, professor of finance in the Mendoza College of Business at the University of Notre Dame in South Bend, isn't convinced the nation will enter into recession but agrees that politics could block President Obama's plans.

And although Bergstrand sees the economy growing by 1 to 3 percent, unemployment may continue to rise. “There is just not a lot out there to drive those unemployment levels below 8 percent in the near term,” Bergstrand says, adding that he supports the president's plan to create jobs, although $447 billion may not be enough.

“It's absolutely necessary. The thing that is holding down production and jobs is demand,” Bergstrand says. “Consumer growth is going to be very tepid.”

Bergstrand says demand primarily comes from three sources: Consumers, business investment and the government. High unemployment, debt problems and falling housing equity are dampening consumer spending, he says, with investment spending by businesses on new structures, housing and equipment weak.

Bergstrand says tax cuts for consumers and businesses can provide some stimulus on consumer spending or businesses looking to hire. “But hiring is really going to be tied to higher-than-expected future sales,” he says.

If the federal government spends on infrastructure and provides additional aid to states, that could help grow the economy, he says. “Aid to state and local governments is absolutely necessary. We've had more than two years of state and local governments firing workers because they are hemorrhaging a loss of tax revenues,” Bergstrand says.

He added that even if $400 billion of Obama's plan makes it through Congress, it's only 2 percent of the gross domestic product, with a total gap of 8 percent to fill. “It can't provide that much help. It's absolutely necessary but it's not anything that's going to have a major impact,” Bergstrand says.

He says if Congress reduces the payroll tax, it could theoretically mean $250 billion gets pumped back into the economy, but realistically, a little more than half of it will be spent by consumers, the rest will be saved. That leaves federal government spending on infrastructure as a necessity to get people working, but acknowledges its passage through a polarized Congress will be tough.

“It's a good long-term expenditure. Firms and households are better off and more productive with better roads and highways. If you have any kind of government spending, infrastructure spending is the best kind of spending. There is no increase of government waste going on in this package, so I would like to see it go through,” Bergstrand said. “There could be room for more (spending) but politically, that's dead. But beyond the payroll tax cut, very little will get through Congress.

Derek Bjonback, associate professor of economics at Purdue University North Central in Westville, says what happens nationally will impact Northwest Indiana since the region is so heavily dependent on manufacturing, especially in steel. “The region really suffered with the national downturn in 2008 and 2009. It was a very steep decline for our region,” Bjonback says. He says Northwest Indiana steel manufacturers had pretty steady growth during much of the last 10 years until 2008 hit.

“My feeling is we're going to track our performance against our peers and the nation. Our manufacturing base is more than holding its own,” Bjonback says. “Even if we have very minor production (increases), that's better than a lot of other parts of the country that are losing. Manufacturing is still our bread and butter here. It's hanging in there. The steel industry is doing well.”

Professor of economics Jaishankar Raman of Valparaiso University says while it's not certain the nation will slip into a recession, it may have prolonged stagnation, which actually may be worse. “It also depends on how bad the situation gets in Europe. If there are bank and country defaults, then it can hurt our banks and our exports and thus affect our economy–at which point we might slip into a recession,” Raman says.

Raman, who is director of international initiatives at VU, says it's difficult to find a silver lining in the nation's prospects to turn the economy around unless “there are changes from the business community, government policy and consumer confidence. Each of these factors needs improvement and that feeds on each other.”

Like Purdue Cal's Mitra, Raman says creating jobs is important, but controlling the nation's debt is on equal footing. “Jobs are important but beyond that we need to think about the debt as well. We should think about debt even now, as we plan government policy (creating jobs, giving tax incentives, etc.).”

But given the nation's political climate, Raman hopes for the best. “If I was a cynic, I would say that nothing substantial will get done before the elections. I hope that is not true.”