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The Daily Wildcat

The Daily Wildcat

 

    Stimulus may not yield instant results

    Unless you enjoy crunching numbers and analyzing supply and demand, the current economic situation has probably left you scratching your head trying, to figure out what went wrong.

    Any basic macroeconomics course would teach you the formula: gross domestic product = consumption + gross investment + government spending + (exports – imports). Basically, the country’s income can be measured on those four components.

    This formula also helps to explain why the government is looking to drive a $790 billion stimulus package into the lethargic American economy.

    The amount of $790 billion was informally agreed upon by the House and Senate on Thursday, according to the Associated Press. A vote is expected in the House today and in the Senate either late today or over the weekend.

    “”The overall demand in the economy is made up of four key sectors,”” said UA economics professor Gerald Swanson. “”Consumer spending, which I think everybody knows right now has been declining … investment spending – what businesses buy, because they’re not selling, that’s been declining. The export sector – the rest of the world – is declining.””

    “”The only one that we control, that might offset, is government spending,”” Swanson said, “”That’s where this last hope comes to make up for the decline in the demand.””

    As of Tuesday, the U.S. government has pledged roughly $8.8 trillion in total aid to various aspects of the economy, according to the New York Times.

    The country’s overall spending has declined, resulting in a low GDP.

    “”This whole thing is rooted in a crisis of confidence,”” Swanson said. He cited the stock system, banks and even “”the government(‘s ability) to solve problems,”” as things people have lost confidence in.

    “”Consumer confidence is at a low,”” Swanson said. When consumers don’t have confidence, they don’t purchase goods, resulting in an even lower GDP.

    “”One way or another – at some point – we do need to start shopping again,”” Swanson said, “”I don’t see that happening in the near future.””

    “”My basic feeling is that the stimulus package is nice but what we really need to concentrate on is stabilizing the financial systems first,”” Swanson said.

    The Federal Reserve has devoted $1.6 trillion to buy bad commercial loans of which it has so far spent $257 billion, according to the Times.

    “”The U.S. Treasury Secretary is trying to think of ways to take these so-called ‘toxic assets’ off the banks’ books,”” Swanson said. If they do so, it would be in order for banks to “”feel comfortable about lending again,”” he said.

    “”They can’t feel comfortable with lending money out because they don’t have the assets to do it,”” Swanson said.

    As far as when the problems with the economy will stop, Swanson said, “”we don’t know for sure. We won’t see a stop until the financial system stabilizes, so banks can start to make loans again.

    “”But the banking system won’t stabilize until the housing sector stabilizes,”” Swanson said. “”And we still have a large surplus of foreclosed homes on the market,”” he said.

    Currently the government has bought $212 billion worth of mortgages from failed companies such as Fannie Mae, Freddie Mac and Ginnie Mae, according to the Times.

    “”The other thing is there’s so much emphasis on the federal government stimulus but the thing that concerns me is people aren’t talking about the counter to that stimulus,”” Swanson said. The stimulus, if passed, will be “”offset by major cuts of every level of government other than the federal government.””

    “”We will continue to see the economy deteriorate for the rest of the year – I don’t think this will offset the downward spiral,”” Swanson said.

    As far as short-term effects are concerned, Swanson said we’re “”going to see unemployment increase significantly by summer.”” He believes that the unemployment rate will be at 9 percent by summer.

    “”A lot of the programs (in the stimulus) will help save some jobs,”” Swanson said, “”I really think it’s a program to save jobs more than to create jobs.””

    “”This is going to be the toughest job market for college graduates in modern time,”” Swanson said.

    Swanson affirmed the government’s decision to pursue a stimulus package and said, “”It can’t help but make a difference. The question is, will it be enough?””

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