The Ground Floor

"Muddling Through" Toward Economic Recovery

What is keeping the economic recession from morphing into a "full-scale" depression is a series of quick, unprecedented action by the Federal Reserve Board to thaw the credit markets, says former Federal Reserve Board Governor Frederic S. Mishkin, now Lerner professor of banking and financial institutions at the graduate school of business at New York City’s Columbia University.

Mishkin, a keynote speaker at ULI’s recent Spring Council Forum, praised the Fed’s actions to shore up the nation’s financial system by pumping capital into institutions and by continuing to lower interest rates. Had the Fed not 'pushed the envelope' to make capital available, "there would be a global depression," he predicted. "The economy will recover only if the financial systems recover."

According to Mishkin, the economic stimulus package alone will not end the recession, primarily because the number of jobs the package is expected to create--about 2.5 million--will only dent the millions of jobs that have been lost and are continuing to be lost. As a result, more federal intervention is needed, despite the political risk and unwillingness by the U.S. Congress to spend funds on any additional "bailouts," he explained. "The Administration has to reallocate enough resources to fix the financial system. If it (the Obama Administration) does not get this right, it will fail, no matter how good its (domestic) policies are."

In Mishkin’s view, the Obama Administration would be better off forging ahead with steps necessary to restore the credit markets now, rather than getting bogged down in politics while the economy languishes. He described four possible economic scenarios:

The "happy" scenario, in which the recession is deep, but the recovery is quick and significant. This scenario is not likely, he said, due to the severity of the financial crisis.

An economic depression, which "is not out of the realm of possibility," he said, "if more shoes drop (specifically in the form of financial failures)" and further federal intervention is stymied.

The "Japan" scenario, in which monetary policy is not eased consistently, and thus impeding the financial recovery. (This refers to the extremely slow response by Japan’s government to turn around that nation’s financial markets when Japan entered into a recession years ago that lasted for more than a decade.)

A scenario of greatly increased financial regulation that, while perhaps well-intended, is poorly planned and ineffective at stabilizing the financial system, further hampering an economic revival.

Mishkin’s best guess: The nation "will muddle through" and experience a slow recovery.  Perhaps the only good news from the recession: 'there have never been more interesting times" for economists, he said.

The Presidential Election and the Economy

This post was written by Marge Fahey, director of media relations for ULI.

Two former HUD secretaries sparred over presidential politics and the effects the outcome of this year’s election will have on the nation’s crippled economy. Jack Kemp (Republican) and Henry Cisneros (Democrat) defended their candidates with vigor and a sense of humor.

Kemp gave Senator Barack Obama kudos for “not losing his cool” during a grueling 19-month campaign. However, he has a “fundamental disagreement” with Obama’s tax credits and sees them as “welfare.”  And, he says, Obama’s tax plan is “a redistribution of wealth.  “I don’t see anything … that is pro-business.”

Cisneros joked that he had to clean up after Kemp as HUD Secretary, and defended Obama’s economic program saying it is “focused on getting resources to working people; anyone earning under $250,000 gets tax cuts or rebates.”

He said Obama favors a second stimulus that is heavy on infrastructure and renewable energy initiatives that will create new jobs. “The choices Obama has made take fiscal discipline and are the right choices,” Cisneros emphasized.

While Kemp admitted the budget deficit is too big, he said it has to be measured against the ability to service the debt. The U.S. GDP is $13.6 trillion and the deficit is 3.3 percent of GDP. Senator John McCain would have to cut spending and “end the war with honor.”  McCain favors cutting the corporate tax rate from 35 percent to 25 percent, and opposes raising tariffs on Mexico and Canada.

Kemp argued that renegotiating NAFTA would cause the U.S. to lose its biggest trading partners. Cisneros, said, however, in a private conversation with Vicente Fox, he spoke of how the world is excited about the potential world leadership of Obama.

Obama favors eliminating the Bush tax cuts, reducing expenditures in Iraq within a 16-month period, and eliminating corporate tax breaks to save money, Cisneros stated. Obama puts emphasis on infrastructure: roads, water, ports, and the capital available for new industries, he added.

The debate then moved to the housing market and Cisneros stated that price stabilization is the key to recovery. Kemp suggested there is agreement between the two candidates on this issue. Mortgages should be renegotiated so people can stay in their homes, and there should be total transparency going forward.

In a tit for tat exchange, both men defended their candidates but one question from the audience about Obama being too liberal brought this response from Kemp: be careful about the use of that word; he is “left wing and supports class warfare.”

Cisneros took issue, saying: “Obama has shown in his record, his temperament and his leadership that he understands the country, the moment, the need for change, and will govern from the center.”

NIMBYs On the Rise?

NIMBY (Not In My Back Yard) activism is as bad as ever and getting worse, according to startling new statistics from a consulting company that specializes in overcome opposition to development.

The third-annual Saint Index, a gauge of public opinion on urban development, found one-quarter of Americans say they or a family member have actively opposed a development project. That means Americans are twice as likely to oppose development than support it. Among the findings, 78 percent of Americans think there should be no new development in their community, 44 percent oppose new apartments or condominiums (up from 34 percent in 2006), and 69 percent say their local government is doing a fair to poor job on planning and zoning.

The news isn't all bad, as support has significantly increased for new power plants. Overall, 38 percent say they support local power plants, compared to 23 percent in 2006. The most striking support is for wind farms, with 76 percent saying they would support it. Next are hydropower 53 percent and biofuel 50 percent. The least popular is nuclear power, with just 31 percent supporting respondents.

ULI's 2006 book "Breaking the Development Logjam: New Strategies for Building Community Support" describes a host of tools available to developers to engage with community members, arguing that "this book's premise is that when people are well informed about community development in general, and proposed project in particular, the likelihood of securing their support for a project greatly increases."

The significant changes in the Saint Index support the belief that views can shift according to information available to them. The complex character of development, especially in existing urban areas, means a proactive strategy to engage community members and build support is more important than ever.

Harnessing the Sun

The U.S. Department of Energy (DOE) will invest up to $13.7 million over three fiscal years (2008 – 2010) in 11 university-led projects focusing on developing advanced solar photovoltaic (PV) technology manufacturing processes and products. Combined with a minimum university and industry cost share of 20 percent, up to $17.4 million will be invested in these projects.

University projects have the potential to significantly reduce the cost of electricity produced by PV from current levels of $0.18-$0.23 per Kilowatt hour (kWh) to $0.05-$0.10 per kWh by 2015 -- a price that is competitive in markets nationwide, the DOE said. President Bush’s Solar America Initiative aims to make solar energy cost-competitive with conventional forms of electricity by 2015.

Each participating university will work with an industry partner to ensure the projects retain a commercialization focus and that results are quickly transitioned into market-ready products and processes.

A Congressional Remedy for the Housing Crisis?

Congress returns this week to rising fears of recession and a growing crisis in the housing markets. Proposals for Congessional action are being developed but no consensus for action has yet emerged.

Sarah Rosen Wartell of the Center for American Progress wrote the following update Monday:

There are increasing indications that the President is sure to offer a proposal in his State of the Union address or before for: (1) a universal tax rebate of some form and (2) business investment tax incentives. He continues to argue for making the Bush tax cuts permanent as well.