Employment opportunities are shrinking, food and gas prices are rising, houses are being foreclosed and banks have stopped their liberal lending policies. Does this mean our economy is in a recession, that daunting word that strikes fear in the hearts of the government and consumers alike? Not necessarily. Does the Federal Reserve System, the central bank of the United States, have a plan to help stimulate the economy beyond a temporary fix? Only time will tell, say economists.
First of all, it must be noted that recession has a complicated definition, and can only be officially announced by the National Bureau of Economic Research, said Kevin Salyer, professor of economics at UC Davis, in an e-mail interview.
“A rule of thumb definition is two quarters (6 months) of negative GDP growth,” Salyer said. “We are not technically in a recession yet (but some economists believe we are … and today’s jobs data suggests that they might be correct).”
According to the National Bureau of Economic Research’s website, a recession is a significant decline in activity spread over the economy, and can be seen in industrial production, employment, real income and wholesale-retail trade. The economy naturally rises and falls in highs and lows, and a recession begins just after a peak of activity and ends when the economy reaches its trough. As of yet, the bureau has not officially announced that the economy is a recession.
There are many causes for economic downturns, but the current decline can be mostly attributed to the housing markets, said Thomas Mayer, professor emeritus at UC Davis, whose specialty is monetary economics and macroeconomics.
“It’s the result of prices having been too high, having to come down, and the financial system taking excessive risk,” said Mayer. Another consequence of the downturn is the loss of trust in financial decision making, he said.
Salyer also agrees that the current economic fall can be blamed on the housing market.
“The current situation seems to be primarily caused by the fall in housing prices and the resulting increase in foreclosures which is causing housing prices to fall even further,” Salyer said.
The resulting dip in revenue from the housing market has several consequences, Salyer said. One is that since individual household wealth lowers, consumer spending is therefore negatively affected. Another is that lenders are not being repaid by homeowners, so banks and other financial institutions do not have enough money to make more loans to businesses, individuals and other banks.
These results cause a cyclical aggravation of the economic downturn, because they all build upon each other and negatively affect employment.
“The resulting credit crunch is exacerbating the fall in aggregate demand due to households,” Salyer said. “All of these factors will then result in a fall in labor demand which will cause unemployment to rise.”
To help quell the downturn, the Federal Reserve has been lowering lenders’ interest rates and has taken unprecedented lending actions to banking sectors, said Salyer.
“They have started lending directly to securities dealers and relaxed the types of assets that they will accept as collateral for these loans,” Salyer said.
The federal government, too, has their own plan to help turn the economy around. Depending on eligibility, millions of Americans will receive a refund check ranging from $300 to over $1,200 under the Economic Stimulus Plan, according cnn.com. The government is hoping that the checks will boost consumer spending and aid in the reversal of the economy’s current path. However, economists and citizens alike are skeptical of how well the plan will work.
“I don’t understand how the stimulus checks are supposed to help in the long run,” said Samantha Leseney, a senior sociology major at UC Santa Barbara. “Six hundred dollars is not going to go very far in our society, so what are they going to do when, and if, people spend their money and then run out again?”
“The end of a recession will not materialize with an over-stimulated economy,” said Mayer. “We do not know enough at this time to forecast the economy adequately.”
Salyer thinks that the stimulus checks will have more of an influence on people’s mentality than anything else.
“It might provide some psychological affect that the government is doing something to avert a recession, but the affect on consumption demand will not be enough to offset the influences of unemployment, uncertainty due to the liquidity crisis and housing foreclosures on aggregate demand,” Salyer said.
Only time can tell when the economy will turn itself around, but the public should not be too discouraged by the current lapse in the economy’s progress. Though the Fed is trying to help by lowering interest rates and the government is handing out checks to help stimulate consumption, the economy cannot have a boom without having a fall.
JACQUELYN FLATT can be reached at science@ucdavis.edu. XXX
