U.S. Economy Will Recover
Jobs, credit and housing will be keys to growth.
John Otte
Published: Feb 26, 2009
Farm Futures Economic Editor John Otte is attending the 83rd USDA Agricultural Outlook Forum in Virginia this week.
Sober optimism for getting the U.S. economy going again. That's the message Larry Summers, Director of the National Economic Council, Assistant to President Obama for economic policy delivered to participants in the opening session of today's USDA Agricultural Outlook Forum on Global Agriculture and Rural America in Transition in Washington, D.C.
Summers described two vicious cycles. People lose jobs, so they stop spending. People don't buy, so more people lose jobs and stop spending.
People who lose their jobs can't pay their loans, so banks can't lend. The result is the economy falls short of its potential.
"We must restore our capacity to produce and to earn," he continues. "Doing so will restore vitality.
Supply and demand falter. "Markets are usually self stabilizing," explains Summers. The price of wheat goes up. Some buyers stop buying and producers up production. Lagging buying and more wheat coming on the market depress prices. The market stabilizes at equilibrium.
"Once or twice a century, the self-stabilizing process fails to work," he says. "That's where we are now."
A weakening U.S. economy, weakens the global economy. A weakening global economy weakens the U.S. economy. Distrust and lack of confidence bring more distrust.
"Those vicious cycles all converged at the same time," he says. "We need to address these vicious cycles. And that is what President Obama's policies will do."
Jobs are crucial. The U.S. economy lost 600,000 jobs in January and 500,000 in December.
"If we keep losing jobs, it will be difficult to fix anything else," says Summers. "That's why the president called for jobs creation. The American Recovery and Reinvestment Act brings people who need jobs together with the work that needs to be done."
The plan calls for creating 3 to 4 million jobs.
The program is not without controversy. For example, some criticize providing aid for students.
"When people don't have to sell their houses or don't have to cut spending to put their children through school, that's stimulatory," says Summers. "That's my view."
The object is to reverse the cycle.
People who are saved from unemployment spend more money. People spending money creates markets for other peoples' work. Those people also spend more money. Banks get repaid. That positions banks to make loans.
Create financial stability. Excesses occurred in the financial system. Some people thought trees grow to the sky. Others developed a "heads I win, tails the government loses" attitude.
"CEOs should not be buying corporate jets with tax payer money," says Summers.
People have a right to be angry. Some have adopted the attitude of "let them fail."
"But if credit shrivels up and banks don't lend, we will not have a vibrant growing economy no matter what the government does," warns Summers. "We have no choice but to get credit flowing in the economy. Unfortunately, I cannot assure you that there will not be unintended consequences and unintended victims."
In an effort to get credit flowing again, the administration has set aside $1 trillion for consumer credit, small business lending and agricultural credit.
Housing financing aid. When foreclosures occur, a family is ruined. The neighborhood suffers. Value of everyone else's property falls. Keeping people in their houses is a second part of the effort to get credit flowing.
Suppose a family had a $50,000 down payment. They bought a $250,000 house. They have an 8% mortgage. They would like to refinance to a 5% mortgage. The catch is the value of the house has fallen to $200,000. They have no equity. So the bank won't refinance it.
"Our plan will help those type of people stay in their houses," says Summers.
Long term optimism. "Our problems were not made in a week, a month or a year," recognizes Summers. "We cannot solve them in a week, a month or a year.
"But we will solve them," he declares. "Our economy will improve. It will provide jobs for anyone willing to work. Expanding markets will drive our production capacity.
"In the future we will look back on this period and remember that we have learned our lessons," he says. "We are building the foundation for even greater prosperity in the future."
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