Economist Perna hopes Congress isn’t ‘suicidal’

Written by Jake Kara, Press Staff
Tuesday, 10 April 2012 04:36

The “great recession” is being followed by the “not so great recovery,” according to economist Nick Perna.

Economic indicators don’t all point one direction, but a “reasonable” expectation based on current information is continued recovery — if at a painfully slow pace. That’s the picture Mr. Perna, an influential economist who has advised numerous banks including the Federal Reserve Bank of New York, painted for the Board of Finance last Tuesday night as that board prepared to decide on a 2012-13 spending plan to send to voters for approval.

Mr. Perna said that Board of Finance Chairman Dave Ulmer’s analysis that “we’re looking at sort of mixed signals” on a local level, was “a great backdrop” for an overview of the economy. He touched on similar themes as in a September Ridgefield Playhouse appearance, saying we’re still in the midst of the aftermath of the “great recession,” which he calls the “not so great recovery.”

He saw reasons for optimism and concern and warned that global economics and political winds in Washington could alter the course of the U.S. recovery.

The recovery

While gross domestic product, or GDP, a measure of the size of the economy, stopped shrinking in 2009, technically marking the end of the recession, the economy hasn’t bounced back. The “speed” of the recovery has been about half that following a recession in the 1980s, Mr. Perna said. In the same amount of time that about three points were “knocked off” the unemployment rate in the 1980s, that figure has only dropped 1.75 points in recent years.

Mr. Perna drew distinctions between the recoveries of the 1980s and today.

The current recovery is unusual in that it hasn’t been driven by a rebound in housing, he said. And it’s the first time that state and local spending has been on a consistent decline. Additionally, he cited foreign economies having an impact on the U.S., including Europe’s current recession hurting exports.

“Europeans have done exactly the wrong thing,” Mr. Perna said of the move in European countries toward austerity budgets. Perhaps the most extreme case he pointed to was the situation in Greece, where crippling debt was alleviated by eurozone countries that in exchange required a severe paring down of government spending.

“The Greeks were wild and crazy and threw great parties,” he said, but now they’re paying the price by being put in “debtor’s prison” by nations offering economic assistance in exchange for severe spending cuts. “How do you get somebody to repay their debts when you’re putting them in debtor’s prison?” Mr. Perna wondered aloud.

Political winds

The U.S. is on the right track at least on interest rates, which Federal Reserve Chairman Ben Bernanke said will remain low through 2014, unless there is a faster than expected recovery.

However, Mr. Perna doesn’t have a great deal of faith in policy makers’ ability to rise above political bickering and come up with solutions. He warned of a number of changes that are due to impact the economy unless Congress acts.

The Bush-era tax cuts, a source of some political contention in the past, are set to expire, and could mean a tax increase. Mr. Perna separated himself from absolutist anti-tax rhetoric, saying there are reasonable times to raise taxes, but in the midst of a fragile recovery, that could strike a blow to the economy.

He also raised concern about across-the-board cuts set to tear into the national budget on Jan. 1 if Congress fails to come up with an alternative. The cuts were set up as a plan B amid partisan gridlock over raising the national debt ceiling. At the time, a “super committee” was be formed to come up with a budget deal, but the committee “couldn’t even agree on what time to have lunch,” Mr. Perna said. Still, Mr. Perna said he has his “fingers crossed” that Congress might work something out to avoid the cuts that he views as counterproductive and sure to unpopular with many people.

“Hopefully they’re not that suicidal,” he said.

Credit rating

That debt ceiling debate preceded the nation’s credit rating being downgraded by credit rating agency Moody’s, and as a result, Ridgefield’s Aaa rating came under scrutiny, but was ultimately upheld along with many Aaa-rated municipalities. Mr. Ulmer said a key point in Ridgefield’s coming out unscathed was that Ridgefield is relatively independent of the federal government, either directly or by high employment in federally dependent areas like Bridgeport. More Ridgefielders are employed in less fed-dependent areas, like Westchester County, Mr. Ulmer said. He asked Mr. Perna what he would be looking at if he were a credit rating agency.

Mr. Perna posed the hypothetical question of what might happen if a large number of municipalities default on their debt. While the “knee-jerk” assumption is that municipal bond rates might spike, he said that demand for the tax-free securities and flight to quality bonds might actually be favorable for Ridgefield if it holds onto its high rating.

“I never understood what it meant to put a nation on credit watch,” Mr. Perna said, questioning the methods of the rating agencies. “I thought that was really stupid.” He said there was never a risk that the country couldn’t pay, but that it would default on its debt.

As for what would be a good confidence booster for people assessing the nation’s financial health, Mr. Perna said he’d like to see consistently shrinking budget deficits — not necessarily a slashing of the national debt, which he said the country has no problem repaying.

“We don’t have to get rid of our debt,” Mr. Perna said.

State-level anomalies

On the state level Connecticut is doing “OK but not spectacularly well,” he said. The state’s 7% job loss rate was on a par with the national 6% in the recent recession — much better than in the 1990s, when Connecticut lost jobs at a rate five times higher than the 2% lost nationally.

Job growth was abnormally high in January and February, Mr. Perna said, adding that that was owing to an unusually mild winter. In that time, some 10,000 jobs, including lots of construction jobs, were added in the state. That is about nine months to a year’s worth of job growth, he said. “Not that this isn’t real,” he said, the figures will probably remain modest through the rest of the year. Over a 12-month average, he said, numbers are probably more sensible. The disruptions caused last year by a hard winter and two severe weather events that halted much of the state for weeks will even out the spikes.

For instance, a more humbling figure shows some 4,000 jobs were lost in the last two months of last year.

Ridgefield’s roughly 5.5% unemployment rate is one of the lowest in the state, Mr. Perna said. “You don’t want to watch the month-to-month wiggles,” he said, adding that unemployment data is reported in a somewhat mystifying way.

The “greater Danbury” area, northern Fairfield County, is growing jobs four times faster than the state, Mr. Perna said, but Ridgefield falls into the Bridgeport/Stamford region, which isn’t recovering as well.

Hopefully, he said, Ridgefield’s figures are closer to the Danbury’s.

However, jobs figures aren’t even that great of an indicator for Ridgefield’s prosperity, since people tend to work in other areas and bring their money home to Ridgefield. He said income is probably a more important figure to keep an eye on.