Chicago Booth Faculty See GDP Stabilizing, High Unemployment

Published on December 02, 2009

Real GDP will climb 3.4 percent, but the unemployment rate will remain elevated in 2010, said Randall Kroszner, Norman R. Bobins Professor of Economics and former governor of the Federal Reserve Board. “I think we are starting to stabilize and come back,” said Kroszner, one of three faculty panelists who spoke at during Business Forecast 2010 at the Hyatt Regency in Chicago on December 2.

Data are always “choppy” when the economy is around a turning point, but before the middle of 2010, the U.S. economy should see growth in payroll jobs, he said. “We’ve been losing jobs at a declining rate,” Kroszner said.

Other good news is that productivity levels are at all-time highs, Kroszner said. “The strength of the productivity numbers is quite astonishing,” he said. “Some commentators argue the shock has fundamentally reduced productivity in the economy, but that’s really not the case. As a result, we will be able to step back relatively strongly.”

Both Kroszner and Erik Hurst, V. Duane Rath Professor of Economics and Neubauer Family Faculty Fellow, warned of the potential dangers of stripping the Federal Reserve of its “invaluable” independence. A proposal to allow the General Accountability Office to expand its authority to cover Fed monetary policy would essentially create opportunity for investigation and undue pressure from Congress, Kroszner said.

The Fed’s independence is important to macroeconomic stability because research shows that policy makers, such as Congress and the president, tend to think in more short-sighted terms about the economic policies they prefer, Hurst said. Increasing demand by keeping interest rates low and spurring investment puts much more pressure on prices and tends to result in inflation, he said. “Inflation rates are very hard to get rid of for us as policy makers,” Hurst said. “With weak central banks that are at the whim of the legislature or the president, you tend to get higher inflation rates.”

Hurst was happy to report that his “take it to the bank” prediction at last year’s Business Forecast that housing prices would fall about 10 to 12 percent in 2009 was on target. “Nominal housing prices have reached their bottom, but real housing prices will continue to erode for the next three or four years or so,” he said.

Hurst agreed with Kroszner’s prediction that the economy will grow in 2010, but emphasized that recovery will occur very slowly, in large part due to the “chicken and the egg” story of economic uncertainty and activity. “Uncertainty over policy, economic activity, and the loan portfolios of banks are all sitting around in the background,” he said. “How do you get consumers and businesses to spend in a world where there is increased uncertainty and they want a forecast? The answer is, when the economy starts to get better.”

As recession and recovery drag on, the humiliation, anger, and mistrust that powered politics in 2009 will be heightened in intensity across the world, including the United States, said Marvin Zonis, professor emeritus of business administration. U6, the broadest measure of unemployment in the country, has reached a post-Depression high of 17.5 percent, Zonis said. To make things worse, the homes of 332,000 Americans were foreclosed in October 2009 alone, and 7 million more foreclosures are projected, he said.

President Obama’s approval ratings have fallen almost in perfect correlation with the state of the economy and rising unemployment, Zonis said. As unemployment continues, Republicans will “smell blood” and win a substantial number of House and Senate seats in 2010, but probably not enough to overcome Democratic majorities, he said. “To slake rising popular anger, Democrats will adopt populist measures such as serious anti-market financial regulation and a second stimulus bill that will be called a ‘jobs promotion’ bill,” Zonis said.

In political economy in general, 2010 will be marked by “wicked problems,” he said. “Wicked problems are characterized by two phenomena,” Zonis said. “Number one, they are really complicated, intractable, and may be impossible to solve. Two, the very effort to solve such a wicked problem may in the end create new wicked problems. That’s what we’re looking forward to in 2010.”

Despite failing entirely in his “death watch” for 2009, Zonis boldly predicted the U.S. will finally track down Osama Bin Laden and Ayman al-Zawahiri in 2010. “Pakistani intelligence knows where these people are, and the U.S. will put a full-court press on them in order to locate them and have them killed,” he said.

                                                                                                                    — Phil Rockrohr