Good policies can save the U.S. economy

The recent actions of President Bush and Federal Reserve to "rescue" the nation from the current economic crisis have not restored confidence in U.S. financial markets. Instead, they have created considerable fear about the underlying strength of the U.S. economy. Yet, the economy is a great deal stronger than many believe, says Lee E. Ohanian, a professor of economics at the University of California, Los Angeles.

Despite the September employment report, he says, there are no signs that the economy is on the verge of a depression:

Real gross domestic product (GDP) rose at an annual rate of 2.7 per cent over the last five quarters, which is on trend, once a correction is made for the decline in the growth rate of the working-age population.

Productivity growth remains rapid, consumer instalment borrowing, which represents most consumer nonmortgage borrowing, is up 5 per cent year over year and the interest rates on these loans are equal to, or below, the levels that prevailed over the last five years.

Commercial and industrial loans are up 9 per cent year over year.

To those with good credit histories, conforming mortgages are available at 30-year fixed rates of around 6 per cent; that represents an inflation-adjusted mortgage rate that is low by historical standards.

The U.S. particularly needs highly skilled workers. These workers not only would purchase homes, but would generate higher living standards for all Americans, says Ohanian.

Source: Lee E. Ohanian, Good Policies Can Save the Economy, Wall Street Journal, October 8, 2008.

For text: http://online.wsj.com/article/SB122342618776613613.html

For more on Economic Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=17

FMF Policy Bulletin/ 14 October 2008