How the Economic Decline Affect Us Locally

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The Champaign-Urbana economy reflects what is happening
nationally. The decline in sales, jobs, and construction,
and the rising mortgage foreclosure rates are less severe
than surrounding communities such as Decatur and
Danville because of the stabilizing influence from the University
and from regional health care facilities. But they are
substantial. Construction is down and has excess capacity,
and the unemployment rate has climbed from 4.3% in
April and is near 6%. This is very likely to go higher. The
impacts of unemployment are shown by substantial
research to include a decrease in happiness. But the
decline affects more than 6%, and closer to three times
that. The usual rule of thumb is that another 6% have
stopped seeking work and dropped out of the labor force,
and still a third 6% or so feel their jobs are threatened.
This 18% gets out to the polls to vote, and they become a
determining force in many elections.
The problem is that the economic decline nationally and
in Champaign-Urbana reasonably can be expected to continue.
There are thus far no national policies that have been
put in place capable of turning the real economy around.
Monetary policies involving the banks and the financial
sector, especially that of setting interest rates by the Federal
Reserve and the infusion of government money into banks,
are not sufficient under conditions where people are loosing
their jobs, sales are off, debt is high, excess capacity
exists, and the investment outlook is impaired. Fiscal policies
are the heavy artillery under this situation.
There are major $700 billion monetary policy steps being
taken to stabilize the banks and financial sector, and something
like this was necessary to prevent disaster. But President
Bush is wrong in contending that we just need to wait for
these monetary steps to work. Businesses with falling sales,
excess capacity, and debt twice as high as a percent of GDP as
it should be are not likely to borrow to invest in their plant or
store, nor should they be if they are reasonable. Consumers
with new durables, high consumer and mortgage debt, and
decimated stock and mutual fund portfolios also will not borrow
much more. Monetary policy and the Federal Reserve
can lower interest rates further, and although this is accommodating,
it is like pushing on a string.
How long will this decline last? In the 1980’s 6.5 million
jobs were lost from the peak in July 1981 to the
trough in November 1982, a decline that lasted 16 months
before the turnaround. The current decline could be even
worse, given the high debt and slowness in putting in
place a well designed fiscal policy. If the decline again
should last 16 months that would put the trough in the
late Fall of 2009. If there are Federal expenditure cuts as
some have advocated, this is an inappropriate stabilization
policy that would reduce purchasing power and lower
aggregate demand and in the short run make the trough
deeper and delay the recovery into 2010 or later.
Based on the experience with past recessions and on a
little thought about how the economy works, once a credible
fiscal policy involving taxes and government expenditures
is enacted, it is likely that the stock market will
surge. The stock market depends in large part on expected
future earnings, As the unemployed and others receive
increases in their disposable incomes due to tax cuts,
expenditure increases, or both, they spend it raising sales
and reducing
excess capacity.
This, in turn,
stimulates borrowing
investment by
businesses with
the result that if
the effort is sustained
the trough
of the recession
tends to follow in
about 6 months.
In Champaign-
Urbana, of
the economic sectors
in manufacturing
has fallen by far
the farthest, falling by 2000 persons since 2000. Financial
services fell very sharply during the 2000 recession, and
then leveled off, but will now very likely fall significantly
as the 2008-2009 economic decline deepens.
The University’s budget is likely to see continuing strain
as the state’s fiscal crisis is made more acute by falling sales
tax and income tax revenue. Enrollments are unlikely to
be affected since there is a high demand for admissions,
which are capped and rationed among the colleges. 2009
graduates will face a weaker job market. But investment in
human capital is very long-term, and with 45 or more
years for each graduate to be in the labor force the relatively
short-term losses in starting salaries and longer job
search times will be quickly recouped.
Parkland College is very likely to see increased enrollments.
As job markets for high school graduates weaken,
their foregone earnings costs of attending college fall, and
it typically becomes more advantageous for more to enroll.
But the other side of the coin is that with Parkland so
heavily dependent on property tax revenues and state support,
as house prices level off and fall, mortgage foreclosure
rates rise, and housing vacancies occur, these forces
are very likely to sharply restrict Parkland’s revenues.
Health care delivery system employment is the one bright
spot. It is likely to continue its long trend upward in Champaign-
Urbana since 1995. Some reforms of the health care
delivery system may come early in the new administration,
such as coverage of children. But major changes in coverage
or in the control of health care costs are a longer term structural
reform that is not likely to be the first priority given the
national economic crisis and Illinois’ fiscal crisis.
In the short run the Christmas shopping season in
Champaign-Urbana is likely to follow the national pattern.
The job losses mentioned above, high consumer credit
card debt, and
40% plus stock
market losses by
many shoppers
means that there
will be restricted
purchasing. Credit
availability due to
the financial sector
bailouts will not
increase disposable
income. That
means that it
should be active
and lively, but
many more early
discounts, and not
as good as last year.
So, there are
good reasons that Ben Bernanke, head of the Federal
Reserve, endorsed another round of fiscal stimulus and
stressed expenditure increases rather than cuts in the short
run. The package needs to be better designed than the last
one to put the money in the hands of those who will spend
it, thereby getting more bang for the buck. Investment tax
credits are excellent for longer run growth, but not as part of
a stimulus package because businessmen with excess capacity
and lagging sales are not generally very interested in
investing in new plant and equipment. Inflation is not a relevant
worry at a time when there is slack demand, unemployment
in the labor market, and falling housing prices. It
will return only after full recovery is achieved, and only if at
that time the Federal budget is not balanced. Some have
estimated that a new stimulus package approaching $450
billion will be needed. The alternative will be a much deeper
recession with recovery long delayed.

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