Are we heading towards another recession?

September 23, 2011

The International Monetary Fund issued a warning that Europe’s debt problems and a sluggish U.S. economy is in danger of undermining global economic growth and sending us into another recession. But, according to Jay Kaplan, an a senior instructor in economics at the University of Colorado Boulder, depending on how you look at it we’re already in a recession or will be there soon.

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Sept. 23, 2011

The International Monetary Fund issued a warning that Europe’s debt problems and a sluggish U.S. economy is in danger of undermining global economic growth and sending us into another recession. But, according to Jay Kaplan, an a senior instructor in economics at the University of Colorado Boulder, depending on how you look at it we’re already in a recession or will be there soon.

CUT 1  “The jobs report for August shows that there’s a net exchange of zero jobs. And statistical evidence for the last 50 years shows that when you have four consecutive months - which August was the fourth - that type of anemic job growth it’s either a sign that we’re in a recession or going into a recession. (16) For the U.S., Europe’s important because we export to Europe. If they slow down, that’s less exports from us and that slows our job growth in our economy.” (:24)

In fact, Kaplan says there is an argument that we never recovered from the recession of 2008. He cites a book called “This Time Is Different: Eight Centuries of Financial Folly,” written by two economists, Carmen Reinhart and Kenneth Rogoff.  The authors studied 250 financial crises in 66 countries over 800 years and found that when countries suffer a recession caused by a financial crisis it can make for a painful recovery recover.

CUT 2  “Over the last 800 years when you have a recession or depression caused by a financial crisis, which the United States just went through, the recovery is much more extended. In a normal business cycle, recovery is about one year. When you have a financial crisis the recovery takes five or six years. (:17) So, if you do that math, our recession ended in the summer of 2009. We’re just in the middle of recovery.  We have maybe two to three years more of tough sledding.” (:27)

And action being taken by Congress isn’t helping the economy, says Kaplan.  At a time when unemployment is high and the economy is sluggish, Kaplan says hasty budget cuts, combined with tax cuts, could further weaken economic growth.

CUT 3 “The general economic principle is that the most effective way to create additional economic activity is through government spending rather than tax cuts. So government spending is always going to be more effective in creating jobs. (:14) Let’s say you have the equivalent amount of cuts in government spending and an equivalent dollar cut in taxes, the net result will be a decrease in economic growth.”

Kaplan’s advice is to accept the fact that history shows us it will take time to restart our economic engine.  And in the meantime, he says, we should develop strategies for the future.

CUT 4  “We’re putting band-aids on a huge problem and I don’t think that there is any solution. The only solution is time. (:05) I would say take the long view. What can we do to stimulate long run economic growth as far as education, our infrastructure? With the critical problems this country faces in the long run, now’s maybe an opportunity to address that because I don’t think there’s much we can do in the short run.” (:19)

Jay Kaplan can be reached at 303-492-2651 or email, Kaplan@colorado.edu.

 

-CU-

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