Economist details aftershocks of recession

While economists have determined that the recession officially ended in summer 2009, Americans still face four challenges in balanced economic growth, according to an economist at the University of Montana.

Patrick Barkey, director of the Bureau of Business and Economic Research at UM, discussed paying for the recession at a recent economic forum in Kalispell.

The biggest challenges are low savings rates, adjustments in the financial sector, global trade imbalances and government budgets, Barkey said.

Americans were on a borrowing binge in the bubble years before the recession, helped by rising home prices and infusions of investment capital from abroad, he said. If people want to avoid drastic reductions in their standards of living in retirement, they must increase their savings now the recession has ended, he said.

As people increase the percentage of their pay that they save, it means they spend less and that means “a few less restaurants or a few less car dealers,” Barkey said.

After growing in the past decade, the financial services sector of the economy is expected to decrease. Today it constitutes 14 percent of the overall economy.

As the global economy has expanded, so have persistent surpluses and deficits in goods and service flows in some parts of the world, Barkey said. That has put pressure on exchange rates that are becoming increasingly difficult to manage, he said.

The U.S. now imports more than it exports. Countries in that situation, which include the United Kingdom, eastern Europe and Turkey, all have trade deficits. But there are trade surpluses in oil-producing countries and in Germany and Japan.

“The imbalance is getting worse,” Barkey said, “but the 2009 global recession knocked it down.” He pointed out the imbalance “can’t go on forever,” because “countries are piling up reserves of other countries’ currencies.”

That translates to good news for individual exporters. As countries with emerging economies grow, they buy U.S. goods.

Because government deficits exploded during the recession, deficits now have to be paid off, which will be tough, he said. But even harder will be solving the longer-term structural issues the recovery has revealed.

Local governments were affected less by the recession, Barkey said, because of their dependency on property taxes that are less affected by a recession than some other taxes. But he pointed out that as property values drop, as is predicted, “that will hurt state government revenues.”

Many states were affected by declines in sales or income tax revenues. States have had some infusion of money from federal stimulus programs, but that money is going away, leaving another gap for local governments, he said.

The recession has revealed problems that many states have had for years, Barkey said. Nationwide, states have racked up $140 billion in deficits, he said, and while that amount is expected to drop next year, it will still stand at $102 billion.

Public pension accounts held by states also are underfunded, he said.

“It’s worse than people think. Governments have promised these payments, they are obligations that state governments haven’t set enough money aside” to cover. Barkey said a Pew Center study shows that states are a trillion dollars short of the money needed to pay people who have been guaranteed pensions.

Things have gotten worse because investments aren’t yielding returns as great as in the past, so less money is getting set aside to fund pension accounts, he said.

Federal government has experienced huge deficits, but the real problem of what happens after the recession, when total government debt takes off as baby boomers retire, is yet to surface, he said.

“The aging of baby boomers is upon us and that will impact spending on Social Security as well as the federally funded share of health care. The promises to older Americans must be kept and the obligations of past deficits must be paid,” Barkey said. “But what can and must be changed are the promises to future generations, no matter how unpleasant this may be.”

Debt is growing as a portion of the U.S. economy, he said, and that’s unsustainable.

“Congress has not been doing a good job of fixing these problems,” Barkey said. “We should have tackled them 20 years ago.” The solution, he said, is not for Congress to continue its practice of temporary tax provisions.

So, Barkey asked, how can we get on the right course?

One step, he said, is to change the practice of reducing federal payments to state and local governments in matching fund programs. Now, when the local governments implement innovative techniques to save money, their share of federal funding also is reduced. That should end, he said.

Another needed step is for government pension reform. “We can’t afford the system we have. Government needs to move away from it as private businesses have. We can’t add more people to underfunded programs,” Barkey said.

As well, he said, Social Security reform is necessary. But entitlement reform equals entitlement decreases, which is unpopular.

“Is it fair or unfair?” Barkey asked. “I don’t know. It simply needs to be done.”

Reporter Shelley Ridenour may be reached at 758-4439 or by e-mail at sridenour@dailyinterlake.com.