Spendthrifts and Gluttony Needed to Revise Economy (Commentary by Jeff Collins)

Out with the old and in with the new.

That is the order of the day. One can only hope that the cloud that hung over 2008 is gone and is soon to be replaced by a promised silver lining.

I myself would take a modest improvement, an incremental move towards our long-term trend growth rate.

My gut tells me I am asking for too much but at the beginning of the year we are allowed to give in to hope. We haven’t yet reverted to our old ways, resolutions are still being kept, and we can all see ourselves thinner, stronger and smarter.

Around this time of year we also get to look back at what was. It is like a funeral for an acquaintance, someone we knew but were not fond of.

Not all of the economic data have arrived to tell us how bad it was but here are a few stats worth noting. The U.S. economy experienced twelve consecutive months of job losses according to the U.S Department of Labor, Bureau of Labor Statistics.

The number of jobs lost in December was estimated at 524,000.

For the last four months of 2008, the economy shed 1.9 million non-farm jobs. Of course this implies a rising unemployment rate.

In December the unemployment rate for the U.S. economy stood at 7.2 percent. Roughly 11 million Americans were unemployed, up 2.6 million since the start of the recession in December 2007.

U.S. Gross Domestic Product will undoubtedly be negative for the fourth quarter, implying negative growth for two consecutive quarters.

Things very well may have been worse were it not for the stimulus checks that propped up consumer demand in the second quarter.

Retail sales data reveal a dismal story. Flagging consumer confidence has reduced American consumers to gaunt reflections of their former selves.

It is important to remember that it is the consumer that drives the economic bus. Two-thirds of GDP is consumption. The strength of our economy rests on their broad shoulders.

Our hopes for 2009 seem to reside with the collective emotional well-being of soccer moms and Joe Six-packs. It could reasonably be asked if tax cuts and cheap money will turn the trick.

Is knowing that I have had my marginal tax rate reduced enough for me to throw caution to the wind and hit a drive-thru for a latte?

How about historically low interest rates?

At zero percent interest, isn’t money free?

We are about to witness the greatest governmental economic intervention since the Great Depression.

The “Stimulus” package is designed to instill confidence and return us to our gluttonous ways.

We consume not just as patriots, but also as citizens of the world.

The world needs us to absorb their output of textiles and plastics.

However, there is genuine concern that the stimulus, in the form of tax cuts and government spending, will have little effect other than to bloat the Federal debt and mortgage the future of our children and our children’s children.

These concerns may be well founded but need not be realized.

It is important to understand that not all spending is spending.

When government builds roads, improves schools and the health of the populace, and stimulates research and development, it doesn’t spend but invests.

These types of expenditures make us more productive in the future. The effects of investment increase the size of GDP and subsequently the tax revenues to pay off the IOUs that are a necessary consequence of governmental action to create jobs.

Good riddance 2008. I, for one, could use a latte.

(Jeff Collins, Ph.D., is an economist and partner in Fayetteville’s Streetsmart Data Inc., which produces a quarterly report on real estate in northwest Arkansas. For more information, call 479-872-1000.)