‘Stimulus’ isn’t a dirty word

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Many economists and experts say we’re in uncharted territory as we navigate through a still-shaky economy. So we approached a professor of finance who has been studying and researching economics for years to get a better understanding of what’s in store for our economy.

In this interview, Mark A. Johnson, Ph.D., assistant professor of finance at Loyola University Maryland, predicts the likelihood of a double-dip recession this year and next year and whether we can hope for job growth and an economic boost from potential stimulus programs from the Fed.

What are the odds of a second recession later this year or in 2012?

The odds of a recession later this year are as not great as they are for next year. The chances of the beginning of a new recession in the end of 2011 may be 15 percent to 20 percent. Part of this lowered probability is attributed to the holiday season and the consumption that accompanies such year-end holidays. Moreover, some retailers may add seasonal employees, which will provide much-needed income to households.

Next year, things will be interesting. As the European debt crisis persists and causes uncertainty in global markets, this will continue to feed into uncertainty. Next to jobs, the items lacking most in the United States right now are leadership and confidence. I still am optimistic. If I had to place numbers on paper, with low GDP growth numbers, 8 percent to 9 percent unemployment, and higher gasoline costs, the probability of a new recession next year would be 35 percent.

Until confidence returns where consumers can and want to consume more, and until businesses invest more in fixed assets, (research and development), and hiring, we will stay in this uncomfortable economic place that is not bad enough to be classified as a full-blown recession, but is hardly an expansionary cycle. If at some point the economy does not take visible, albeit small steps toward expanding, I worry recessionary fears could become a self-fulfilling prophecy.

Can the Federal Reserve enact any additional policies to jump-start the economy, or more specifically, job growth?

The Federal Reserve will most likely implement QE3 (the third round of quantitative easing). This unconventional approach to monetary policy is used as an attempt by the Federal Reserve to improve and stimulate the economy. This unconventional approach is what they have to work with because their other, more-traditional policy tools have taken them only so far, and this is arguably what is left in their toolbox.

The Federal Reserve may even look to rename QE3 to something else partly because it is hard to keep track of all of these programs. Moreover, words even remotely close to “stimulus” in today’s political environment are toxic.

What will happen if QE3 is enacted? Long-term interest rates will come down some and at some point, the cost to rent will exceed the cost to buy a home. Those with jobs will not be able to ignore still-falling home prices and cheap money. Additionally, businesses may refinance their debt if they have not done so already. Private sector jobs will be created if QE3 is implemented, but it likely will not bring down unemployment enormously. The public-sector layoffs will thwart some of the private-sector hiring as cities and states work with smaller budgets, resulting in unemployment hovering around 8 percent for most of next year. Potential negatives for QE3 include negative public perception and inflationary pressures, which will become a concern again. With the Federal Reserve’s dual mandate of full-employment and price stability, 99 percent of their time, resources and attention are focused on the former and not the latter, and arguably rightly so.

What role does fiscal policy play in the health of the U.S. economy, both now and in the years to come?

Fiscal policy is equally important as monetary policy. With the federal debt approaching $15 trillion, Americans are seeing the consequences of ignoring fiscal policy and assuming the government will take care of its own fiscal health sooner rather than later. Now with proposals such as the “Buffet Rule” and opposing responses such as “class warfare,” Americans still do not want to deal with the problem. Simultaneously reducing government spending and increasing government revenue are critically important to reducing our country’s debt. But no one wants to talk about these items, and you’re far more likely to lose friends than make them by suggesting items such as these. Now would not be a bad time to seriously discuss term limits for Congress, which may help incentivize them to do the right thing instead of the popular thing regarding putting our country on a better, more sustainable path.

What issues should be given more consideration in regard to the American economy? What issues may be having a greater economic impact than the average American realizes?

Food and energy prices are a serious concern. It is hard for a household to have discretionary money available if basic items require more and more financial resources, and what makes this problem worse is that these challenges come at a time with high unemployment and stagnant wages. Another serious concern facing our country is severe cuts for funding education. This will have serious long-term structural ramifications for future generations.

We would like to thank Mark A. Johnson, Ph.D., assistant professor of finance at Loyola University Maryland, for offering his insights and Greg McBride, CFA, senior financial analyst for Bankrate.com, for helping construct the questions for this interview.