Newswise — Unless Americans spend the tax rebates they are about to receive on new purchases, the rebates are unlikely to give the slumping economy a boost, says a distinguished University of Mississippi economics professor.
Experience with tax-rebate initiatives suggests that most Americans will save their rebates or use them to pay bills, said William F. Shughart II, F.A.P. Barnard Distinguished Professor of Economics at UM and senior fellow at the Independent Institute in Oakland, Calif.
"Neither of those two things stimulates the economy, but that's what happened following the most recent rebate initiative, when $400 was returned to individuals ($800 to couples) soon after 9/11," Shughart said.
Whether or not the rebates and Washington's economic stimulus package avert a looming recession, Americans are paying more for food, fuel, homes and health care. They are expecting the next president to provide relief.
Candidates for the job will be at the University of Mississippi Sept. 26 for the first presidential debate. Its focus is domestic issues, and the economy is sure to be among them. Faculty members here are keeping an eye on what Bush describes as an economic "slowdown."
The downturn cannot be called a recession, at least not yet. Economists define a recession as two quarters of negative growth in the gross domestic product. The fourth quarter of 2007 showed anemic but positive growth in the GDP " 0.6 percent.
However, in March, the Federal Reserve attacked the liquidity squeeze at big banks by accepting illiquid assets as collateral for loans and making them available not only to commercial banks but also to investment houses. This enabled Wall Street firms to borrow billions of dollars at favorable rates and likely means further government intrusion into the private economy, Shughart said.
"The market has to be purged of some of the players who have made bad business decisions," he said. "The pain has to come at some point, and, once the pain clears, we can get back to business. But keeping bankrupt firms and banks on life support is not going to get it. The housing crisis involving subprime mortgages has really affected only four states. It's overblown, and I think the Fed has overreacted " has gone into uncharted territory."
Ken Cyree, interim dean of the School of Business Administration and associate professor of finance, agrees.
"The most recent numbers show that 94 percent of this country's mortgages are paid on time, but the media has focused on the 6 percent with problems," Cyree said. "I am not suggesting that things are rosy, but I would argue that it's not like someone said on the news the other day, 'the worst recession since the '70s.'"
The minor player in all this, Shughart said, is President Bush."No president can do much of anything about monetary policy," he said. "He can cajole Ben Bernanke (chair of the Federal Reserve), but the Fed is fairly independent of politics, so whatever policy is being pursued under George Bush will probably continue under the next president.
"As far as taxing and spending, the new president is not going to have much wiggle room. Real interest rates are already negative. We can't go any lower than zero with the federal funds rate, so there's not much room left for the Feds to move. Both Democratic candidates talk about implementing new spending programs " national health care, more money for homeowners to pay their mortgages " but where is it going to come from?"
Although the president's options are fairly limited, consumer expectations rise when a new administration takes office, said Mark Van Boening, chair and professor of economics.
"By the end of Bush One's tenure, people pretty much had a negative view of his economic policy," Van Boening said. "It's debatable whether or not that was a fair assessment because we were in an economic downturn somewhat independent of his policy. Regardless, there was a belief that (Bill) Clinton was going to turn things around, so there was this self-fulfilling consumer euphoria. It took six to eight months to wear off."
In other respects, a president is powerful, Shughart said: "President Bush has overseen the greatest expansion of the welfare state since LBJ, Medicare Part D has been a budget-buster, No Child Left Behind has caused massive increases in education spending and on top of that there's the Iraq war."
What the next president does regarding President Bush's tax cuts will impact taxpayers' pocketbooks, he said.
"The tax cuts were very important in spurring growth after 9/11," he said. "If they go away, it means people will have to adjust to higher taxes, which is the wrong thing to do when the country is facing a possible recession."
Although unemployment rose from 4.8 percent in February to 5.1 percent in March, a more certain indicator that the economy may be headed into a recession is growth of the labor force coupled with the rise in unemployment, said Professor of Economics Lewis Smith
"The labor force grew by about a million last year, which is fairly normal, but actual employment has gone down," Smith said. "That's more worrisome than the unemployment rate. In addition, the number of people who are working part time but want to work full time has gone up, so we're not only experiencing a growth slowdown but also negative employment growth."
Also of concern is funding for Medicare and Social Security, programs designed for a nation of people with life expectancies of 65 to 70, not 80 and older.
"With the baby boomer generation aging, costs are going to continue to get higher and higher and claim a larger percentage of the budget," Van Boening said. "If this isn't addressed now, then suddenly the country is going to face a problem that government won't be able to solve."
Just how much the new administration can do depends on which party wins the presidency and on the makeup of Congress, Shughart said. "Really, all a president can do is set the policy agenda. Major changes depend on whether Congress enacts the policies he (or she) puts on the table."
Most economists agree that Americans have a bout of inflation coming. It is usually what happens following interest rate cuts and expansion of the money supply, so Shughart questions the treasury secretary's recent reform proposal calling for increased Fed power.
"It's unclear whether the Fed is equipped to monitor market instability and to anticipate problems in housing, insurance, investment banking, securities " the entire financial system," he said. "If it recognizes a problem, it's also unclear whether it's equipped to do something about it."
The same is true, he says, of the country's burgeoning budget deficit, which continues to swell rapidly as more is spent on the war and social programs.
"If the federal government decides to stimulate the economy with additional spending, where is it going to come from?" he asked. "The likely candidates are larger budget deficits, which imply higher future taxes, and money supply expansion, which produces more inflation."
Another factor contributing to the economic melee is the rise in gasoline prices, which is driving up the cost of everything from food to electricity. But "big oil" is in control, Van Boening said, and there's little a president or anyone else can do.
"Countries with substantive oil resources, particularly those in the Middle East, have become very savvy since the 1940s and '50s, when they let foreign companies or countries export their wealth," he said. "They've learned to form cartels or agreements that restrict quantity and keep profit up. Although the OPEC cartel controls only 25 percent to 30 percent of the market, its lead is followed closely by Venezuela, Mexico and other smaller oil producers, so it effectively becomes a rather large cartel."
With the cost of goods and services rising and the nation's economic future uncertain, what can voters do to ensure they remain solvent?
Two UM associate professors of finance " Robert Van Ness, Tom B. Scott Chair of Financial Institutions, and Bonnie F. Van Ness, interim associate dean for undergraduate programs " offer advice to other families that they themselves follow: Live within your means.
"A lot of people obviously have not been doing that," Robert Van Ness said. "The popular press has compared home refinancing to homeowners using their home equity like ATM machines. Don't take a vacation off your home equity unless you expect to be paying for that vacation for 30 years.
"The same is true for credit cards. If you're rolling credit card debt over when you refinance your home, then you're basically paying for lunch for 30 years. Think about what you're doing before you do it."
This advice also rings true for those considering shuffling their assets.
"Whether or not it's time for an individual to do something with her assets in light of the economic situation depends a lot on a person's age and when funds will be needed," said Bonnie Van Ness. "If you're 55 and older, then you probably shouldn't be taking as high risks with assets in stocks as someone who's younger.
"While bonds have a maturity date down the road and are less risky than stocks, they do have an inverse relationship with interest rates. People can really mess themselves up thinking they're doing the right thing by getting into bonds when they don't think about the time horizons."
Regardless of what experts say, voters are looking to the next president for relief beyond a one-time rebate check. A Jan. 31 Associated Press-Yahoo News survey indicates 75 percent of voters believe the president can influence health care costs and 69 percent believe he or she can influence gasoline prices. Fifty-five percent think the president can change how things work in Washington: 44 percent are unsure.
This year's race to the White House has provided Ole Miss students, faculty and staff the opportunity to host a presidential debate. It also inspired plans to enrich the academic environment. Among them is a special section of Current Global Economic Issues, an economics course to be team-taught this fall by Van Boening, Shughart, Smith and others.
During the semester, the professors will test the depth of their students' knowledge of economic and financial systems here and abroad. Similarly, voters watching the debate broadcast from Ole Miss will be plumbing the depth of presidential candidates' knowledge of economic and other domestic issues. Results of this test may catapult one of them into the White House.
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