With state and local governments trimming jobs, the stock market in yo-yo mode, Euro-land in crisis and U.S. bonds getting downgraded, economists say the chances of a return to recession are growing.
What can be done now to boost growth? Experts offer lots of ideas — many of them contradictory, some of them politically impossible. Every idea has a rationale, every idea a counter-argument.
Here are the most-discussed notions:
1. Tax cuts
Cutting taxes is one way to put more money in the hands of consumers and companies. But which taxes? And how do you make sure the money is spent and doesn’t get saved instead?
Slice corporate taxes and rewrite the tax code, said Aparna Mathur, resident scholar at the American Enterprise Institute. “There is so much uncertainty about what kind of taxes they are going to face.”
American businesses have held back on hiring, even though they have roughly $1 trillion set aside in cash, she said. “The issue is that they don’t know what to plan for.”
But business uncertainty is not new, argued Robert Shapiro, chairman of advisory firm Sonecon and former undersecretary of commerce for economic policy. Better, he said, to trim payroll taxes for employers — that would make it cheaper to add employees.
Reason against it: If the cuts are not well-aimed, they will add to the deficit and won’t help the economy.
2. Stimulus
When spending by consumers and companies shrinks, the economy contracts, but government can fill the gap with a stimulus. The idea is to add more demand for goods and services, not to permanently replace private sector spending.
That extra spending is meant to stimulate the spending of households and firms until the economy is expanding without need for outside help.
There are lots of ways to add demand: Government can buy bombers, build roads and repair bridges. It can hire forest rangers, firefighters and fisheries workers.
Of course, government pays for it by going into debt — selling bonds to investors. Those loans, so the plan goes, can be paid back later when the economy is growing healthily.
The stimulus can be modest. For instance, the government could extend unemployment insurance for millions of job-seekers, spend money on job training programs and provide tax credits to companies that hire, said Adrian J. Cronje, partner and chief investment officer at Atlanta-based Balentine, an investment advisory firm.
Reason against it: Stimulus adds to debt and may not fix the worst of the leftover finance problems.
3. (More) Federal Reserve action
The Fed has cut short-term interest rates nearly to zero. To keep longer-term rates low, it has bought billions of dollars in bonds. It has backstopped banks and made their borrowing cheap. Those actions have, by many accounts, staved off collapse of the financial sector, but Wall Street profits have not led to hiring, higher incomes and solid growth.
Yet the Fed is not out of ammunition.
Fed officials last week vowed to keep short-term rates low for two years, and they said they’d consider more purchases of assets.
That could push down the value of the U.S. dollar. So far a weaker dollar has been good for American exports and job growth.
Government officials traditionally call for a strong dollar, Cronje said. “But they need to turn a blind eye to its weakening, because this is a tailwind that the economy needs.”
Reason against it: If the economy rebounds, the Fed may have set the stage for runaway inflation.
4. Foreclosure action
The collapse of the housing bubble took millions of jobs with it, and the worst of the pain came in regions with the most enthusiastic building.
Like Atlanta.
“Our housing market has been harder hit than most,” said Emily Sanders, CEO of Norcross-based Sanders Financial Management. “We have a deeper hole to dig out of.”
Delinquencies and foreclosures clog bank balance sheets, paralyze homeowner finances and pull down prices.
That dampens consumer spending, which represents more than two-thirds of the economy, Shapiro said. “So long as home values continue to decline, people will continue to feel poorer — which they are.”
Shapiro calls for the government to let homeowners refinance their mortgages — regardless of their current home values. Even better, the government could just loan homeowners who are in trouble the money they need to keep their homes.
“The goal is not to eliminate foreclosures but to bring them back to normal levels,” Shapiro said.
Reason against it: A badly run program might reward some banks and buyers who made bad decisions and still not refloat the market.
5. Resolution Trust, redux
The burst of the housing bubble, the unprecedented explosion of consumer debt and the disastrous financial crisis of 2008 left an economy strewn with “bad” assets — property worth less than what an owner owes on it.
With so many bad assets, the market cannot get healthy — and prices cannot rise. Those assets need to be written off and their value determined by the current market, Cronje said. “Someone has to recognize the real losses. The foreclosure pipeline has to be drained.”
Meanwhile, lenders are loath to lend, consumers hard-put to spend – and the economy barely moves.
One way out is to take a lesson from the Savings and Loan crisis of the late 1980s, said Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University.
The Resolution Trust Corp. spent hundreds of billions of dollars purchasing — and often reselling — bad assets.
“Now, you could have an RTC-type entity to buy up distressed assets,” Dhawan said. That would free many homeowners from their largest financial burden. “Once you do that, then if I go ahead and give you a tax cut, you’ll spend it and I’ll boost the economy.”
Reason against it: Taxpayers would pick up a huge tab for something the market should eventually take care of.
6. Just do something smart. With authority
The sometimes nasty and often unproductive tussles over the debt ceiling were followed by a downgrade of U.S. bonds by one of three major agencies and a series of triple-digit down days on the stock market.
Yet the last few weeks have not radically changed any economic fundamentals, said economist Roger Tutterow of Mercer University.
The worst problem is not economic, it’s the dearth of leadership, Cronje said. “We really need somebody, someone to stand up and show leadership, to be honest about the painful choices that must be made, someone who says, ‘This is what needs to be done’ and then goes and does it.”
Only thing is, what needs to be done depends on whom you ask.
Jeffrey Humphreys, director of the Selig Center for Economic Growth at the University of Georgia, supports broad reform of entitlements like Medicare and Social Security, but he says details aren’t essential. “I believe if we had a plan in place, it would have an immediate positive impact.”
Reason against it: The danger is picking a bad solution, just to have a solution. Cutting benefits for people in the future may not create jobs and market stability now.
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