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What type of U.S. economy lies ahead?

Posted Dec 23rd 2008 5:30PM by Joseph LazzaroJoseph Lazzaro RSS Feed
Filed under: Forecasts, Politics, Recession

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To say current economic conditions are challenging the acumen of those who are charged with adjusting to them or planning for them would be an understatement.

And it goes without saying that in these volatile times, investors, like business executives, have to keep an eye on the near-term and the long-term.

The U.S. Federal Reserve has embarked on various liquidity measures, including quantitative easing. Meanwhile, the U.S. Treasury, as a result of $350 billion in deployed TARP money (and another $350 billion available to be deployed if Congress approves), has stabilized the financial system, at least for the time being. And if economic history is any indicator, look for the bulk of the Fed's monetary stimulus to begin to take effect within three months of deployment.

Meanwhile, the Obama Administration and new U.S. Congress are expected to act quickly on a large fiscal stimulus package that could pump an additional $800 billion into the U.S. economy over two years. And if economic history is valid here, as well, look for the fiscal stimulus to begin to take effect within six months.

Will demand-based growth rev up, as usual?

But with near-term and longer-term stimulus in place, from a policy standpoint, what should the United States do, particularly after the Obama Administration's 2009 stimulus package has been passed? Just sit back and let the U.S. economy work its magic?

Not quite, says economist Richard Felson, as the great demand-centered U.S. economic cycle may not return in the decade ahead.

For one thing, asset price damage (housing, stocks, private equity, related investments, commodities) means that the economy almost certainly will require a second fiscal stimulus package in 2010, or perhaps as early as Q3/Q4 2009, Felson said. In other words, the Bush housing boom that fed GDP growth earlier is not returning. "The housing sector will recover, but the nation will still need to make up for that slower growth via another growth engine," Felson said

Contemplating the "Wal-Mart model"

Historically, that engine of growth would be the U.S. consumer. However, as economist David H. Wang observed, the recovery ahead will be the first following the start of the globalization era. "This will not be your father's economic recovery. 'The consumer' that we used to know from previous economic expansions is a smaller percent of the adult population," Wang said.

Further, while research is by no means complete on the above -- economists are just beginning to assemble and analyze data on the impact of globalization on the U.S. workforce -- if the "Wal-Mart model" has prevailed (at present, the data is inconclusive), this will be a recovery like no others, Wang said.

"The Wal-Mart model, and comparable models, offer the benefit of lower-priced goods," Wang said. "The problem is the wage structure of the Wal-Mart model conflicts with the U.S. consumption model. There is a contradiction, the two cannot exist simultaneously, certainly not exist and achieve the level of GDP growth the U.S. did previously, other factors being equal. Most investors, and even some business executives, don't see this."

Further, if one adds the U.S.'s existing service sector workforce and its permanent underclass (lingering poverty rates are higher in the U.S. than in other industrialized nations) to the Wal-Mart model, the prospects for U.S. GDP growth look even more subdued, says economist Peter Dawson.

Education, worker retraining deemed keys

"If we are in a 'Wal-Mart world,' for lack of a better metaphor, that further muddles the U.S. GDP growth forecast," Dawson said. "It would also place more emphasis on the need for education and worker retraining, which would then become a pillar of real wage growth and a return to adequate U.S. GDP growth. And that speaks to large public investment in education."

At least initially, the Obama Administration will emphasize infrastructure spending over education, as it will jump-start the economy quicker, Dawson said. "That focus may have to shift to education and retraining, if in fact the United States has entered this 'brave new world' projected by the Wal-Mart model," Dawson added. "But right now, it's just too soon to tell whether we've entered it."

Economic Analysis: Compelling questions from economists Felson, Wang, and Dawson, and ones for which there are no quick and simple answers, at present. But one thing is certain: the U.S. economic recovery is not likely to amount to a "one-and-done" fiscal stimulus task.

Tags: Democrats, featured, Fed, fiscal stimulus, gdp, globalization, median incomes, Obama Administration, Republicans, TARP, Treasury, U.S. economy, Wal-Mart, Wal-Mart model, WMT

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