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Old formulas don't add up on economy

Published Oct. 12, 2005

There's a reason we feel so bad even though economists keep telling us the recession is over: We're using different thermometers to gauge our health, says Nobel prize-winning economist James Tobin.

The technical definition of recession that many economists rely on is two consecutive quarters of decline in the gross national product, the nation's total output of goods and services.

"That's based on the assumption that par for the economy is zero growth," Tobin said. "But zero or 1 percent growth is stagnation. The economy has to grow 2.25 to 2.5 percent to keep unemployment from rising. Zero growth is not satisfactory for the American people."

"Especially if you're unemployed," chimed in J. Paul Horne, international economist for the brokerage firm Smith Barney, Harris Upham & Co.

Tobin, a retired Yale University professor, and Horne, who is based in Paris, took time out for an interview before giving speeches at the annual meeting of the National Council on Economic Education, which ended Tuesday at the TradeWinds resort. About 450 people attended.

"The basic underlying problem is that wage rates (adjusted for inflation) have been either declining or basically staying the same for 20 years," Tobin said. "Even when the economy was growing, it wasn't fast enough. Now we have the insecurity of unemployment on top of having not very good jobs even when we have jobs."

"From Europe, what we see is very slow growth in productivity in the U.S.," Horne said. He says productivity improvements and incentives to increase savings are keys to revitalizing the economy.

Tobin says the way to do it is to increase government spending in areas such as schools and highways.

He says this is not the right time to balance the federal budget.

"Anyone who came into office and tried to do the things that (Ross) Perot and (Paul) Tsongas suggest would end up in 1996 in the same situation (President) Bush is today or worse," said Tobin, who served on President Kennedy's Council of Economic Advisers. "Superimposed on an already weak economy, a drastic deficit reduction plan would be a disaster."

One of the few bright spots in the economic picture is the weak dollar, Tobin and Horne say. The decline in the dollar against foreign currencies makes U.S. exports cheaper for foreigners to buy, which helps preserve U.S. manufacturing jobs.

"It's only a problem for those of us who get paid in dollars and have to spend French francs," Horne said.

However, Horne says he is concerned about the future of European unity following turmoil in the currency markets and the narrow French vote in favor of the Maastricht treaty, which calls for the eventual adoption of a single European currency. "Business invested so much in betting on a single market and this movement is diminished," he said.