LC Bulletin: National debt on doorstep

September 9, 2011. Retrieved online September 13, 2011 from Samantha Roberts, Las Cruces Bulletin

America’s problems have countrywide, local impact

“We have a real, bona fide, major problem,” said retired U.S. Sen. Pete Domenici about the condition of the United States economy.

Many economists agree with Domenici, but others are also hopeful. However, whatever one’s opinion may be, there is no doubt the national debt is a problem as well as other factors, such as unemployment and funding Medicare and Social Security. A series of non-connected discussions have been held to update the public on these crucial topics.

On Aug. 24, the Greater Las Cruces Chamber of Commerce held its quarterly Economic Update forum, broadcast on KRWG-TV, New Mexico State University’s TV station. The economic panel included NMSU regents professor of economics Jim Peach with a national perspective, NMSU economics professor Chris Erickson with a regional perspective and NMSU regents professor of finance Ken Martin with a financial perspective.

National perspective

“The average forecast for real (gross domestic product) is 3.2 percent – down 2.2 percent in the last three weeks – and I expect that to stay consistent for the remainder of the year,” Peach said.

Peach said, based on the slight growth in GDP the U.S. has seen this year, there should be no reason for a recession; however, more “doom and gloom” is to be expected.

“There is a supply chain disruption with Japan, the housing market is still declining and unemployment is still high,” said Peach, adding that problems in Europe are also contributing factors. “But banks are in better shape than they were in 2007-08.”

In the forum, Peach also compared the problems the U.S. is facing now to problems in the past, calling them minor in comparison to previous crises. “I am confident we can overcome our problems,” Peach said. “Yes, we do have problems, but (the U.S.) also has a lot going for it.”

Peach continued by saying it was going to take a while before Americans began to feel like their country was out of a recession.

“We are only seeing modest growth,” he said. “One reason is the labor market is a wreck. We need bigger stimulus funds to solve the problems of the aggregate demand.

“Also, our roads, airports and schools are in terrible shape.”

Regional perspective

New Mexico felt the down economy in October 2008, about 10 months later than the rest of the nation, Erickson said in his opening statement.

“I think we are at the bottom,” he said, “and I expect to see growth in the state.”

However, Erickson said there are still factors preventing growth, such as national cutbacks.

“Federal fiscal cutbacks could target Sandia and Los Alamos labs,” he said, “but I do expect the state to start doing better.”

Erickson said he predicts a 2.2 percent growth in 2012 with a 5 percent growth in wages and salaries.

“These are not negative numbers,” he said, “but Las Cruces is in a double-dip recession.

“2009 was down, 2010 was a good year and we have seen negative growth since December 2010.”

Erickson said one reason for the recent downturn is the Base Realignment and Closure (BRAC) project that ended in 2010.

“BRAC added about 1 percent local growth from 2005-10 that has ended,” he said. “Also, NMSU funding is down 17 percent from its peak.”

Erickson said a third factor for the doubledip recession is the real estate market.

“But there are some positives,” he said, “such as Spaceport America and Union Pacific. I see slow and steady growth in 2012, but not a booming economy.”

Erickson said he finds the solution to New Mexico’s funding problems in the private sector.

“It is economic gardening, where you support local businesses with deep roots in local business rather than attempt to attract outsiders to the area,” he said.

Financial perspective

“The debt debate created uncertainty,” said Martin, adding the Standard & Poor’s downgrade from AAA to AA+ and European interest rates were also contributing factors.

In regard to U.S. Federal Reserve Chairman Ben Bernanke’s Aug. 26 statement, Martin said the chairman stated the obvious.

Bernanke gave a very lengthy answer to the question, “Why has the recovery from the crisis been so slow and erratic?” but critics said he danced around the obvious.

“Historically, recessions have typically sowed the seeds of their own recoveries as reduced spending on investment, housing and consumer durables generates pent-up demand,” Bernanke said in his statement. “As the business cycle bottoms out and confidence returns, this pent-up demand, often augmented by the effects of stimulative monetary and fiscal policies, is met through increased production and hiring. Increased production in turn boosts business revenues and household incomes and provides further impetus to business and household spending. Improving income prospects and balance sheets also make households and businesses more creditworthy, and financial institutions become more willing to lend. Normally, these developments create a virtuous circle of rising incomes and profits, more supportive financial and credit conditions, and lower uncertainty, allowing the process of recovery to develop momentum.”

Martin said he is also keeping his eyes and ears on the Institute for Supply Management as it releases its data.

“As for the future, it is hard to predict if this is a squall or a hurricane,” Martin said. “But America has a firm ground and corporate earnings are good, and there is validation in the stock market. Remember, corporate economics is not the same as home economics.

“Insider buying is at record levels, inflation is down and interest rates are down.”

During a questions-and-answer session, an audience member brought up American’s overcoming the negative feelings with the deficit. “They are unfortunate, but natural disasters help,” Erickson said. “They increase GDP because people have to rebuild.”

Other questions answered at the forum included a solution to homeowners who might be upside down on their property.

According to the experts, about 1 percent of homeowners miss a normal, monthly payment; however, in the first quarter of this year, 8.5 percent of homeowners missed a payment, and 14.6 million people owe more on their home than what it is worth.

“A single indicator we will be out of the recession will be a good housing market,” Peach said.

Erickson said inflation might be the answer to help homeowners.

“The bank would take the hit, but they should because they lent without taking account of the repercussions,” Erickson said.

Domenici Conference

Domenici was joined with colleagues during a two-day conference Wednesday and Thursday, Aug. 31-Sept. 1, at the Las Cruces Convention Center.

Opening with a hard-hitting statement, Domenici set the stage for the audience that the U.S. is in trouble, but he also said he believes there are solutions.

“We owe so much to others,” he said, “and 50 percent of it is owed to China. That is not a good thing.”

Domenici said the problem is obvious, Americans are spending too much money, and the situation will only get worse unless we change the way we do it now.

While referring to a graph of America’s debt, Domenici said he has never seen anything like this, except during World War II.

“During WWII, we had no problem borrowing from other countries, but we had a war to win,” he said. “Win the war and pay people back later.”

However, after the war was won, Domenici said the debt decreased and maintained a consistent level long after WWII – about 30 percent.

“Entitlement programs have paved a negative pathway,” Domenici said.“These programs are close to reaching a point that the U.S. cannot continue to pay them.”

With a current national debt at more than 60 percent of GDP, Domenici said he does not know what will happen when the amount is maxed out at 100 percent.

“We are struggling to keep the debt at 60 percent,” Domenici said.

To fix this vast problem, Domenici said a 12 person, bi-partisan congressional committee has been charged with finding the solution.

They are asked to decrease the debt by $4 trillion or more over the next 10 years, said Domenici, adding that the U.S. debt is growing at $1 trillion per year.

“The Senate can’t filibuster this committee and they only need 51 votes to win,” Domenici said.

As for Domenici’s solutions to America’s problem, he supports three changes – a reform tax code, a payroll tax holiday that will give employers one year without having to pay payroll tax and decrease the growth rate of Social Security and Medicaid through alternative optional plans.

PETE DOMENICI, retired U.S. senator

Read the Las Cruces Bulletin article.

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