Things just might get worse before they get better. The U.S. economy, one quarter of negative growth away from officially being in recession, is plagued by insidious uncertainty, financial and otherwise.
Bad news keeps rolling in by the week, with unemployment on the rise, factory orders down, and consumer spending dropping. Contributing to the tenuous environment are reports of suspected terrorist activity, new occurrences of anthrax, and turmoil in our transportation system.
And a jittery stock market gives testament to the fact that, from an economic standpoint, few things are worse than uncertainty.
The same distaste for instability is shared by government leaders, however, who find themselves struggling to find ways to address the deteriorating situation. In the case of President Bush and congressional leaders, an interesting situation exists. Having already enacted personal income tax relief, and with a shrinking surplus likely to become a deficit next year, there seems to be little room for an active fiscal policy response.
Yet, there are a handful of possibilities. The schedule of tax rate reductions could be accelerated, and government discretionary spending could be increased to jump-start growth. These options, however, are rather blunt and probably would be rather ineffective individually.
After all, the tax cuts have yet to run their course in the first place, and the government tends to be less efficient than the private sector in deciding where to invest its funds.
As another option, some further strategic spending or tax abatement may be in order for corporate America, especially industries particularly hurt by the recent attacks. The continued infusion of additional funds into these businesses may be necessary to keep them in operation — the airline industry stands out as one most in need.
It is fitting that good corporate citizens, the engines of our economy, are given a hand up when knocked down by noneconomic forces.
The folks at the Federal Reserve could also play a role in helping the economic condition, but again the prospects for a quick fix through monetary policy are bleak. Nonetheless, many predict that the Fed will cut the federal funds rate on Tuesday in what would be the 10th rate reduction this year.
Unfortunately, at this point, additional rate reductions are unlikely to have any dramatic effect on the economy. Interest rates are already almost lower than the inflation rate, which means that the cost of borrowing in real terms is approaching zero. This idea is also seen in recent offers from automobile companies for zero percent financing of new purchases.
Clearly, then, the interest rate is not the prohibitive factor in firms’ and consumers’ decisions not to spend: uncertainty is. That is, existing monetary policy is already strongly encouraging expansion, and further actions by the Fed will offer little improvement in short-term conditions.
True, both fiscal policy and monetary policy are somewhat blunt instruments in helping the economy directly in the near term; yet this is not to say that there is no hope for economic recovery.
Instead, the key to a recovery seems to lie not in government but in the consumer. A strong holiday shopping season, replete with consumer spending, will be a healthy boost to the situation.
Of course, central to increasing consumer spending is increasing the now dwindling consumer confidence. Insofar as tax reductions or interest rate cuts signal to consumers that the government is pushing for a recovery, they may have a positive effect on the consumption decisions of Americans.
Aside from these signals, though, Americans must realize, through the press and government leadership, the power that they have as consumers to improve the economic health of the country. They are, after all, the very root of the economy and the drivers of product demand that influences all other agents.
A recession can be a self-fulfilling prophecy if consumers stop making purchases because they anticipate that conditions will worsen.
Instead, by pumping money into the system, consumers can do a great service to the economy and help send the United States on the road to brighter fortunes — probably a good idea for us to consider in our individual consumption decisions.
If not, things will definitely get worse before they get better.
William Edwards is a senior in Pierson College. His columns appear on alternate Mondays.