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Two Economists Diverged in a Yellow Wood

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They say it’s hard to find two economists who agree with each other, and that seems especially true regarding the recession.

For example, in summer 2008, I had dinner with some friends and Dr. James F. Tucker, my former boss and mentor at the Federal Reserve Bank of Richmond. I asked him if we were in a recession. He said we were; I said we were not in recession.

Now here we are at what looks to me to be the start of the recovery. I see the continued drop in employment slowing, consumer spending starting to rise, housing improving, factories reporting modest gains in output and the stock market moving ahead. So I thought this would be a good time to check back in with Tucker to get his take on the state of the economy.

Q. Are you in agreement with forecasts that the recession has ended?

A. No, not entirely. While I believe that the economy has shown some progress recently, there are a few serious trouble spots that need attention before we should talk about a recovery.

One of my reservations right now has to do with consumer spending, which makes up about 70 percent of our gross domestic product. Consumer spending is still significantly below the pre-recession level. Only expenditures for the sales of new housing show any noticeable uptick, and this may be due mainly to the $8,000 federal tax credit for first-time home buyers. Retail sales and food services are still down about 9.5 percent from last year, and some of the sales are likely coming from so-called “rainy day” savings.

Perhaps my biggest concern in any discussion on recovery is our current state of unemployment. The latest data show an unemployment rate of 9.7 percent, a figure that is likely to go even higher by the end of this year. I just do not see how we can talk about a recovery without considering our problem of unemployment.

Q. Why do you think the current rate of unemployment is so crucial at this point, when experts feel that GDP, the broadest measure of the nation’s economic activity, seems to be growing?

A. Remember, GDP is technically a measure of how much goods and services our economy is producing, and while it might increase for two consecutive quarters, it does not address how well the people in the economy are living. After all, the economy functions for its people, and when we have some 14.9 million, or almost 15 million, workers, without jobs and looking for a way to enjoy these goods and services, the economy is not doing well, and any talk about recovery is far from being realistic.

Q. Some observers say that new jobs are being created. If this is true, why does the unemployment rate remain so high, and what can we do to improve on this rate?

A. Technically speaking, the unemployment rate will improve only when the rate of the number of people hired exceeds the rate of the number of people fired. Put simply, the nation’s employers must hire more people than they lay off.

People are hired when demand from consumers and businesses encourages private and public employers to increase their investment. Currently, the federal government’s stimulus program is aimed at increasing demand by funding projects in transportation and a few other areas of activity. This effort has created some jobs and will no doubt create more in the future. But more effort is needed now.

Reprinted with permission from the Richmond Times-Dispatch

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