Economist Mark Zandi: On Stimulus, Jobs, State Finances, Inflation and the Year Ahead

By: - December 9, 2009 12:00 am

Mark Zandi, chief economist for Moody’s

Mark Zandi, the chief economist for Moody’s, said Tuesday (Dec. 8) that additional federal stimulus dollars are crucial to helping state governments avoid Draconian spending cuts and tax increases in the difficult budget year ahead.

Reacting to President Obama’s call on Congress to boost aid to state and local governments, Zandi said if states do not receive additional federal money, it could slow the recovery, because states would have to cut spending and jobs and raise taxes.

“If we’re focused on creating jobs, state and local governments are one of the largest employers,” he said. “It can’t help the job market if we’re cutting jobs.” interviewed Zandi in the Philadelphia offices of the Pew Charitable Trusts, of which the news organization is a part. Excerpts of the interview, edited for space and clarity, follow:

How crucial is it for states to get additional stimulus?

I think it’s vital states get additional stimulus. If no more aid is forthcoming, then they’ll be cutting jobs, programs and raising taxes…because their fiscal situation continues to deteriorate more rapidly. Tax revenues are still falling at a very rapid clip. So states are going to have a huge hole beginning in 2011 when the current stimulus runs out. I suspect they’ll be cutting spending and raising taxes long before reaching that cliff.

States have run out of budget tricks-various ways of managing through it. I don’t know if states have many more rabbits in the hat they can pull out.


Do you think the Obama administration and
Congress understand the fiscal situation facing states?

In part, they (officials in Washington, D.C.) feel this is a therapeutic process, right? You (states) need to go through your budget carefully and weed out bad programs and look for inefficiencies. They don’t want to let states off the hook.

It’s clear when you look at revenue data that without some help, the spending cuts states would have to make will cut into the bone and threaten the broader economy.


What’s your latest prediction for the peak of the jobless rate given the drop last week in the rate from 10.2 percent to 10 percent?

10.6 the third quarter of 2010, so there will be a month or so when we get close to 11 percent.


Could it take as long as five years for the economy to replace all of the jobs lost since the recession began?

Yes…we’ve probably lost 8 ½ million jobs from the peak to the bottom (of the recession). To get 8 ½ million jobs back, that’s almost two million a year or 175,000 a month. That’s a lot of jobs. That’s doable, but even that may be a stretch.


That suggests a longer lag time for states to recover from the recession than the usual two years.

Yes. With a little bit of luck, fiscal 2011 revenue could be back to the 2008 peak in some states.


Earlier in the year, you said that unlike previous recessions, there are no places in the country where you can move to find work. If you’re unemployed in Michigan, you can’t go to Florida as before. Is that still true since some regions are doing better than others?

It’s still true. The one big state that has been a magnet for unemployed workers is Texas. The Texas economy went through a recession, but it was modest. It is still an attractive place to go.

There are pockets of strength regionally that are developing: tech centers, areas where health care is strong like Boston, Raleigh, N.C., Orange County, Calif., Seattle, Philadelphia and Washington, D.C.

The other problem with respect to people moving is the fact that 15.6 million homeowners are under water on their homes (owing more than their homes are now worth). It makes it more difficult to move when you’re under water. Mobility has been significantly impaired, which is why unemployment will remain higher for a longer period. One of our economic strengths is the mobility of our population. We can adjust to shocks in the economy more quickly than, say, in Europe, where people don’t move. When mobility is impaired, we’re not going to adjust as fast.


What is driving the momentum in the stock market?

We’ve stepped back from the brink of disaster… we got a recovery, not more recession. The bounce back is related to this really remarkable swing in our fortunes. We’re still in tough shape, but we were really on the brink of a depression nine months ago.

To some degree, it reflects the strength of large businesses doing better than smaller businesses because they sell to a global marketplace. The global economy is doing better, particularly Asia. People view export growth as a key source of growth for the economy so that works in favor of big, publicly traded companies.

Maybe it’s a bit overdone. From an investment perspective, one might argue that (the market) has come a long way quickly. It may not decline, but it may pause for awhile as investors figure out where the economy is heading in 2010.

The other possible explanation is that economists like me on the negative side could be wrong. It could be investors see something I don’t, and I’m overly pessimistic. I don’t think we’re going back to recession but maybe the economy will be stronger next year.


Do we have to worry about inflation?

No, certainly not in the next 12 to18 months. In fact, a key risk in the near term is deflation (a decline in prices). Inflation is slow, below targets, and it will slow further given the 10 percent unemployment rate and weakening wage growth. Consumers are spending again, but they’re not aggressively spending. In 2011-2012, when the economy gets its groove back, we may have a period of inflation above the target but it’s certainly not a reason for the Fed to be aggressive now.


So much of economic news is gloom and doom. Even the end of the recession was not celebrated because it didn’t feel like it was over. Is there anything positive you can say about the economy as we head into a new decade?

For the near term, we’re clearly headed in the right direction. GDP (gross domestic product) is growing, the job market is stabilizing. The best forecast is that a year from now, we’ll bring down the jobless rate.

Another reason for optimism is we’re righting some of the wrongs. One of the wrongs is the high level of indebtedness of U.S. consumers. We’re working through that pretty quickly. Leverage (borrowing) is falling rapidly, in part, because people are defaulting and, in part, because other people aren’t borrowing at all or are repaying their debt.

In the housing market, the excess homes we built, the inventory, is being worked off very rapidly. Demand is weak, but supply is even weaker.

Last, I think we are using the recession as an opportunity to make more fundamental changes in our financial system and the health care system. We may not all be happy with how it turns out, but we’ll have a better system because of it. So there’s reason to be optimistic in the long run. We still have huge challenges not the least of which is our federal fiscal problems… We haven’t addressed that yet.

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