Oct. 14, 2011
Is the U.S. Headed Toward a Second Recession? Emory Expert Weighs In
With employment growing at a very slow pace and government in-fighting getting in the way of needed economic policy responses, Emory University visiting economics scholar Sheila Tschinkel says a second recession is still possible, even if it is not the most likely outcome.
“I think we’re headed towards slow growth,” she says. “But, I will say the probability of recession in my own mind is higher than it was six months ago when I really thought the recovery was gaining a little more strength.”
If we have a “double dip,” she added, it will be because of poor policy and not because it was our destiny.
The Path to Economic Recovery: Expand the Deficit Now
Tschinkel, a former senior vice president at the Federal Reserve Bank of Atlanta and U.S. Treasury economic advisor in Europe and Asia, says even though it’s very important to reduce the federal deficit in the long run, now is not the time for fiscal austerity.
“I think we should consider expanding the deficit by having the government’s role get a bit larger right now,” Tschinkel explains. “I know a lot of people object to this, but the reason it is logical is that if consumer demand is weak because unemployment is high and business doesn’t want to expand because of its concern about weak consumer demand, then that is precisely the time for government to expand demand. Lifting demand will help get things going.”
Reducing the Deficit: Timing is Everything
While cutting spending will become important, Tschinkel says, it’s the not best way to reduce the deficit now. Faster economic growth is the surest way to grow revenue and to truly start getting the deficit under control.
“When you have faster growth, people pay more taxes because their incomes are higher,” she says. “Businesses pay more taxes because they’re earning more, and that’s really how you start to reduce a deficit.”
In the future, revenue will rise more slowly than spending even if the economy is growing at a healthy pace. We should be thinking of ways to reduce the deficit and introduce needed changes in spending and taxes just as soon as growth is stronger and unemployment has fallen significantly.
But right now, we should be making changes that reduce economic slack.
Tschinkel also serves as a distinguished visiting scholar at Emory’s Halle Institute for Global Learning.