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Fromsixeconomists,sixwaystoconfront2012
Believeitornot,timesaregettingbetter.
Atleastthat'swhatthedrystatisticskeeptellingus.Industrialproduction,GDP-thekindoffiguresthatWashingtonandWallStreetsweatover-suggestthattheeconomyisonthemend.
YetifwegobeyondtheBeltwayandtheBattery,towheremostofAmericanlifeislived,thenumbersdon'talwaysaddup.Yes,theGreatRecessionofficiallyendedin2009.ButmanymillionsofAmericansareoutofworkorcannotfindfull-timejobs.Homepricesarewobbly.Theforeclosurecrisisdragson.AndtheOccupymovement'scampaignagainst"the1percent"hasunderscoredtheravagesofincomeinequality.
Itwas,asalways,ayearofupsanddownsinbusiness.Washingtonsaidthenation'sAAAratingwassafe,butStandard&Poor'sconcludedthatitwasn't.Europeinsistedthatitscurrencywassound,butinvestorsworrythatitisn't.WallStreetseemedperpetuallyonedge.Aftersomanywilddays,theAmericanstockmarketended2011aboutwhereitbegan.
OnthissideoftheAtlantic,aftershocksofthefinancialcrisisof2008-9arestillreverberating,thoughtheworsthaspassed.Now,howEurope'seconomictroublesplayoutmaydeterminewhetherjobgrowthherefinallypicksupenoughto
makeupforallthelostground-andwhetherthat401(k)isricherorpoorernextJan.1.
Wheretogofromhere?Andhowtofacethechallengesahead?SundayBusinessaskedthesixeconomistswhowritetheEconomicViewcolumntodoalittleblue-skythinkingonissuesasvariedastheFed,Europeandhousing.Youwon'tfindstocktips.Butif2011wasanyguide,thebestadvicefor2012maybethis:Holdtight.
DearMrBernanke,pleasetellusmore
NGregoryMankiw:AprofessorofeconomicsatHarvard,heisadvisingMittRomneyinthecampaignfortheRepublicanpresidentialnomination.
Whatcanwedotogetthiseconomygoing?
That'sthequestionBenBernankeandhiscolleaguesattheFederalReservemustbeasking.Officially,therecessionendedawhileago.Butwithunemploymentlingeringabove8percent,itstillfeelsasifwe'remiredinaslump.
TheFed'stypicalresponsetolacklustergrowthistoreduceshort-terminterestrates.Toitscredit,itdidthat-quicklyanddrastically-astherecessionunfoldedin2007and2008.Thenittookvariousunconventionalstepstopushdownlong-termrates,includingthoseonmortgages.Mr.BernankedeservesmorecreditthananyoneforpreventingthefinancialcrisisfromturningintoasecondGreatDepression.
Now,thekeywillbemanagingexpectations.Financialmarketsalwayslookahead,albeitimperfectly.TheynotonlycarewhattheFeddoestodaybutalsoaboutwhatitwilldotomorrow.Withofficialshort-termratesalreadynearzero,whattheFeddoesthisyearwillbelessimportantthanwhatpolicymakerssaytheywilldonextyear-ortheyearafterthat.
AcrucialquestionishowquicklytheFedwillraiseinterestratesastheeconomyrecovers.Sofar,Fedpolicymakershavesaidtheyexpecttokeeprates"exceptionallylow"atleastuntilmid-2013.Therehasevenbeentalkaboutextending
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thattimeframebyayear,tomid-2014.
ButCharlesI.Plosser,thepresidentoftheFederalReserveBankofPhiladelphia,wasrightwhenhesaidrecentlythat"policyneedstobecontingentontheeconomy,notthecalendar."Thekeytomanagingexpectationswillbespellingoutthiscontingencyplaninmoredetail.Thatis,whatdoestheFedneedtoseebeforeitstartsraisingratesagain?
Unfortunately,economistsdon'toffersimpleandunequivocaladvice.Somesuggestwatchingtheoverallinflationrate.Otherssaytowatchinflation,buttoexcludevolatilefoodandenergyprices.Andstillothersadvisetargetingnominalgrossdomesticproduct,whichweightsinflationandeconomicgrowthequally.
ForgingaconsensusamongmembersofFederalOpenMarketCommittee,whichsetsmonetarypolicy,won'tbeeasy.Infact,itmaywellbeimpossible.ButthemoreclaritytheFedoffersaboutitscontingencyplans,thebetteroffwe'llallbeintheyearsahead.
Twobigproblems,tworeadysolutions
ChristinaDRomer:AneconomicsprofessorattheUniversityofCalifornia,Berkeley,shewaschairwomanofPresidentObama'sCouncilofEconomicAdvisers.
TheUnitedStatesfacestwodauntingeconomicproblems:anunsustainablelong-ru
nbudgetdeficitandpersistenthighunemployment.Bothdemandaggressiveactionintheformoffiscalpolicy.
WaitinguntilaftertheNovemberelections,asseemslikely,wouldbeirresponsible.Itisalsounnecessary,sincethereareplanstoaddressbothproblemsthatshouldcommandbipartisansupport.
Onthedeficit,thebigworryisn'tthecurrentshortfall,whichisprojectedtodeclinesharplyastheeconomyrecovers.Rather,it'sthelong-runoutlook.Overthenext20to30years,risinghealthcarecostsandtheretirementofthebabyboomersareprojectedtocausedeficitsthatmakethecurrentonelookpuny.Attheratewe'regoing,theUnitedStateswouldalmostsurelydefaultonitsdebtoneday.Andlikethecostsofmaintainingahome,thecostsofdealingwith
ourbudgetproblemswillonlygrowifwewait.
Wealreadyhaveablueprintforabipartisansolution.TheBowles-SimpsonCommissionhashedoutasensibleplanofspendingcuts,entitlementprogramreformsandrevenueincreasesthatwouldshave$4trillionoffthedeficitoverthenextdecade.Itsharesthepainofneededdeficitreduction,whileprotectingthemostvulnerableandmaintaininginvestmentsinourfutureproductivity.Congressshouldtakeupthecommission'srecommendationthefirstdayitreturnsinJanuary.
Butwecan'tfocusonthedeficitalone.Persistentunemploymentisdestroyingthelivesandwastingthetalentsofmorethan13millionAmericans.Worse,thelongerthatpeopleremainoutofwork,themorelikelytheyaretosufferapermanentlossofskillsandwithdrawfromthelaborforce.
Despiteheatedrhetorictothecontrary,theevidencethatfiscalstimulusraisesemploymentandlowersjoblessnessisstrongerthanever.Andpairingadditionalstrongstimuluswithaplantoreducethedeficitwouldlikelypackaparticularlypowerfulpunchforconfidenceandspending.
ThepayrolltaxcutforworkersandemployersandtheextendedunemploymentinsurancethatPresidentObamaproposedlastSeptemberwouldhelpputpeoplebacktowork.
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Butevenbetterwouldbemeasuresthatincreaseemploymenttoday,whilealsoleavinguswithsomethingoflastingvalue.Becausemanypeopleworryaboutincreasingtheroleofthefederalgovernment,whynotgivesubstantialfederalfundstostateandlocalgovernmentsforpublicinvestment?Tellthemthatthemoneyhastobeusedforeitherphysicalinfrastructurelikeroads,bridgesandairports,orforhumaninfrastructurelikeeducation,jobtrainingandscientificresearch.Thenletthestates,citiesandtownsfigureoutwhatwouldworkbestfortheircitizens.
RonaldReaganoncesaidthat"therearesimpleanswers-therejustarenoteasyones."Whatneedstohappenonfiscalpolicyisrelativelystraightforward.Thehardpartisgettingpoliticianstodoit.
ThickeningcloudsoverEurope
TylerCowen:AprofessorofeconomicsatGeorgeMasonUniversity.
How,andwhen,willEuropegetoutofitsmess?
Theshortansweristhis:notanytimesoon,andnotwithoutmorepain.ThelongerthatEurope'stroubleslast,theworseandmoreinsidioustheybecome.Insolventgovernments,troubledbanks,divisivepolitics,painfulausterity-thelistofproblemsisformidablealready.
Thebest-caseoutlookisthattheeurozonewill,ineffect,growitswayoutofthiscrisis.TheEuropeanCentralBankisnowextendingunlimitedloanstobanksinthe17nationsoftheEuropeanUnionthatusetheeuro,providedthatthosebanksputupcollateral.Theloansdon'thavetobepaidbackforthreeyears,bywhichtimeitishopedthatsteadygrowthwillhavereturned.
Intheory,theseloansshouldensurethatEurope'sbanksstayliquid.Someofthesebanks,inturn,arealreadylendingmoneytotheirnationalgovernments,andothersmaybeforcedto.Intheshortrun,thiswillhelpkeepeurozonegovernmentsfunded,too.
Iftheeconomystartsgrowingagainbeforetheloansaredue,thecentralbank'seffortstofixtheContinent'ssolvencyproblemswillhavesucceeded.Theplan
willhaverelievedpressureinthemoneymarketsandonthebanks,sincetheywouldbebackedbywealthier,morecrediblegovernments.WewouldprobablyhavetowriteoffGreece,but,underthiscircumstance,othereurozonecountrieswouldavoidamajorfinancialcrisis.
Thereare,however,severaldarkerpossibilities.Oneisthattheeconomiesofsomemajoreurozonenationswillcontinuetostagnate.Inper-capitaterms,Italyisalreadypoorerthanitwas12yearsago,somaybeit'sstuckinaslow-growthmode.Ifthat'sthecase,moreborrowingfromtheEuropeanCentralBankissimplystretchinganunsustainablesituation.
Eventually,thecentralbankwouldhavetoletitbeknownthatitisnotexpectingitsmoneyback.Inthiscase,banksinweaknationswouldprobablybeunable
toraisefundsfromtheprivatesector.Confidencewouldevaporate.Somecountrieswouldendupabandoningtheeuroandprintingtheirowncurrencytokeeptheirpromisestobankdepositorsandbondholders.Theconsequencescouldbedisastrous,notonlyforEurope,butfortheglobaleconomy.
AseconddangerwouldariseinEuropeifanelection,probablyinasmallercountry,gaverisetoagovernmentthatrepudiatedtheeuro.Then,too,allbetswouldbeoff.
Myguess-andguessistherightword-isthatoddsofthisendingwellareab
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outoneinthree.Otherwise,fastenyourseatbelts.
WhytwoPaychecksarebarelyenough
RobertHFrank:AneconomicsprofessorattheJohnsonGraduateSchoolofManagementatCornellUniversity.
Whydomanymiddle-classfamiliesnowstruggletogetbyontwopaychecks,whereasmostgotbyonjustonebackinthe1950sand'60s?
Theanswer,accordingto"TheTwo-IncomeTrap,"byElizabethWarrenandAmeliaWarrenTyagi,isthatmanysecondpaycheckstodaygotowardfinancingalargelyfruitlessbiddingwarforhomesingoodschooldistricts.
Parentsnaturallywanttosendtheirkidstogoodschools.Butqualityisrelative.Becausethebestschoolstendtobethoseservingexpensiveneighborhoods,parentsmustoutbid50percentofotherparentswiththesamegoaljusttosendtheirchildrentoaschoolofaveragequality.
Howhardisthat?IconstructedameasureIcallthetoilindex.Ittracksthenumberofhoursamedianearnermustworkeachmonthtoearntheimplicitrentforthemedian-pricedhouse.
From1950to1970,whenincomesweregrowingataboutthesamerateforfamilies
upanddowntheincomeladder,thetoilindexactuallydeclinedslightly.Butsince1970-aperiodduringwhichincomeinequalityhasgrown-thetoilindexhasrisensharply.
Theincreaseintwo-earnerhouseholdsexplainsonlypartofit.Theclimbinthetoilindexwasalsodrivenbytheeasycreditthatfueledthehousingbubble,aswellasbyanexpenditurecascadeinhousingcausedbygrowingincomedisparities.
Since1970,thetop1percenthavecapturedmostoftheincomegrowthinthenation.Likeeveryoneelse,therichspendmoreonhousingwhentheyhavemoremoney.High-endhousesbecomebiggerandfancier.Thatshiftstheframeofreferenceforthenearrich,andsoondowntheincomeladder.Becausethemedianhourly
wage,adjustedforinflation,hasbeenfalling,there'sreallynootherwaytoexplainwhythemediannewhousebuiltintheUnitedStatesin2007wasabout50percentlargerthanitscounterpartin1970.
Theincreaseinthetoilindexhasbeenspectacular.Fromapostwarlowof41hoursamonthin1970,itrosetomorethan100hoursin2005.Althoughithasfallensincethehousingbubbleburst,themiddle-classsqueezepersists.
Growingincomedisparitiesdon'tjustmakethe99percentangry.Theyalsoraisethecostofachievingbasicgoals.
Ataxcredittofixahousingmess
RobertJShiller:AprofessorofeconomicsandfinanceatYale.
Weusedtotalkalotabouthelpinghomeownersintrouble.
Instead,thebankerswerebailedout-andnowwehardlytalkatallaboutaidingordinaryAmericans.
Yettheproblemsfacinghomeownerstodayareevenbiggerthantheywereinthedarkdaysofthefinancialcrisis.AccordingtotheS&P/Case-Shiller20-cityHomePriceIndex,homepriceshavefallen13.2percentsinceLehmanBrotherscollap
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sedinSeptember2008.Overthesameperiod,ofcourse,unemploymenthasclimbed.
Inotherwords,morehomeownersareunderwaterontheirmortgages-andmoreAmericansareoutofwork.Andhomepricesarestillfalling.
Soweneedtoovercomethesensethatrealhelpisimpossible-andtothinkaboutapproachesthatmightbepoliticallyfeasible.Despiteconcernoverournationaldebtandageneraldistasteforspendingtaxpayerdollarsonpeoplewhomayhavebeenlessresponsible,therearesomepotentialsolutions.
ProfRichardKGreen,directoroftheLuskCenterforRealEstateattheUniversityofSouthernCalifornia,hasproposedchangingthetaxsystemsothatitoffersstronger,moretargetedencouragementforhomeownershipbyfocusingonpeoplewhomightbegivingupthedreamofbuyinganyhomeatall.Thecurrentmortgageinterestdeduction,ProfessorGreenargues,basedonhisworkwithProf.AndrewReschovskyoftheUniversityofWisconsin,ismostlyanincentiveforrelativelywealthypeopletobuildbiggerhouses,ratherthanforpeopleofmodestmeanstobuyahome.Italsoprovidesastrongincentiveonlyforpeopleinhightaxbrackets,whobenefitmorebecauseoftheirhighermarginaltaxrates,andwhotendtoitemizebecausethestandarddeductionislessadvantageousforthem.
ProfessorGreenwantstooffermorehelpforlower-incometaxpayers.Hesuggestscreatingarefundabletaxcreditasapercentageofmortgageinterestpayments,
onethatcouldbeusedevenbythosewhotakethestandarddeduction.Thiscredit,presumablywithsomedollarlimit,wouldbeavailabletoallhomeowners.(ThatisincontrasttotheHARP2.0mortgagerefinancingprogramfromtheObamaadministration;itisavailable,arbitrarily,onlytothosewithFannieMaeandFreddieMacmortgages.ProfessorGreenproposespayingforthischangebygraduallyphasingouttheexistingmortgageinterestdeduction.
Homeownershipfosterscitizenship,buildsstrongerfamiliesandcommunities,encouragesactiveparticipationintheeconomyand,ultimately,bolsterseconomicconfidence.ProfessorGreen'sproposalisanexampleofachangethatwouldn'tsmackofabailout,butwouldhelpvulnerablepeoplewhoarelosinghopeintheAmericanDream.
Theanswerstartswithasaladbar
RichardHThaler:AprofessorofeconomicsandbehavioralscienceattheBoothSchoolofBusinessattheUniversityofChicago.
Incaseyou'veforgotten,wehaveacrisisinhealthcarespending.Butemployerscanhelpusdealwithit-andsavethemselvessomemoney-withafewnudges.
Thethesisof"Nudge,"whichCassR.SunsteinandIwrotein2008,isthat"choicearchitects"canoftenhelppeopleachievetheirgoalssimplybymakingthenecessarystepseasier.Aschoicearchitects,employerscandoalottoimprovetheirworkers'health.That,inturn,canleadtomoreproductiveworkerswhohavefewersickdaysandcostlesstoinsure.
Wheretostart?First,makeiteasiertoeatwellwhileatwork.Thatdoesn'tmeanlimitingthecafeteriamenutotofuandcauliflower.Itmeansofferingvarioushealthful,tastyoptionsthatarefeaturedprominently.Putanattractivesaladbarincludingsomehealthyproteinsbeforetheburgerline,forinstance,andsubsidizethehealthyfood.
Second,makeiteasiertogetsomeexerciseduringtheworkday.Walkingjust30minutesadayprovidesnoticeablehealthbenefits.Someambitiouscompanieshaveinstalledtreadmillswithworkstations,buttherearelower-costsolutions.Eve
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nasmalltomidsizebusinesscanprobablyarrangeadiscountatahealthclub.
Youdon'thavetoleaveworktogetsomeexercise.Agoodplacetostartisonthestairs.Walkingafewflightsseveraltimesadayisagoodstartonthat30minutes.Toenticeworkers,companiesshouldmaketheirstairwellsattractiveandfun.Addmusic,muralsorgraffiticontests.Ortrylotterieswithachancetowinanytimeyouwalkupordownoneflight.Finally,betteralignhealthinsuranceincentiveswithbehavior.Oneofthebiggesthealthcareproblemsisthatpatientsdon'tkeepupwiththeirmedications,eventhosethatmightsavetheirlives.Whychargepeoplewho'vehadheartattacksaco-paymentwhentheyfillprescriptionsthatreducethechanceofanotherattack?Instead,makethoseprescriptionsfreeandusetechnologytoremindthemtotaketheirmedicine,eitherwithatextmessageorapillboxthatstartsbeepingifyouforgettotakeyourpills.
Andhere'sapracticeweshouldusemoreoften:Offerinsurancediscountstorewardhealthybehavior.Saving$500onapremiumisagoodincentivetoquitsmokingorlosesomeweight.
MyNewYear'sresolutionistotakeatleasttwowalkingmeetingsaweek.Howaboutyou?
AversionofthisarticleappearedinprintonJanuary1,2012,onpageBU1oftheNewYorkeditionwiththeheadline:IJustGotHere,ButIKnowTroubleWhen
ISeeIt:FromSixEconomists,SixWaystoConfront2012.