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Economic Crisis All Over Again

Economic Crisis All Over Again. MIT Department of Urban Studies and Planning Stata Center Cambridge, MA Barry Bluestone Dean, School of Social Science, Urban Affairs, and Public Policy February 17, 2009. The 1970s - Troubled Times. OPEC and the Energy Crisis

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Economic Crisis All Over Again

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  1. Economic Crisis All Over Again MIT Department of Urban Studies and Planning Stata Center Cambridge, MA Barry Bluestone Dean, School of Social Science, Urban Affairs, and Public Policy February 17, 2009

  2. The 1970s - Troubled Times • OPEC and the Energy Crisis • Declining Productivity; Sluggish Growth, Rising Unemployment • Wage Declines, Stagnant Family Incomes • Growing Inequality

  3. The 1980s • Supply Side Economics • Massive Tax Cut/Massive DOD Buildup • Growing Federal Deficits • Deregulation • Privatization • Rising Inequality

  4. Why Prosperity Ended?The Conventional Wisdom Oil Crisis Strong unions generate Wage-Price Spiral Mushrooming Federal Deficits Inflationary Pressures Falling Family Saving Rates Too much Government Regulation Too much Social Welfare Spending Corporate Myopia in face of Import Challenge

  5. Prosperity Regained 1995-2000

  6. Wall Street Model Policies Tight monetary policy to keep inflation under control Deficit Reduction/Surplus Generation to raise aggregate savings rate Free Trade to keep prices down Weak Trade Unions to keep wages down Welfare Reform aimed at increasing labor supply

  7. The Wall Street Model of Growth

  8. The Wall Street Model

  9. You Live by the Wall Street Model … You die by the Wall Street Model • Based on stock market appreciation • Focus on financial transactions, not real production of goods and services • Casino Society • Massive Debt – Government, Households, Foreign • Massive Redistribution of Income and wealth • ... CREATES MASSIVE INSTABILITY

  10. 11,616,000 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

  11. January 2009: 7.6% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

  12. Loss in Employment (December 2007-December 2008)

  13. Personal Savings Rates Plummeting

  14. Federal Debt nearly double since 2000

  15. The Debt Bomb • With massive personal debt, federal debt, and adverse balance of trade • With the Wall Street psychology of quasi-Ponzi schemes, the tinderbox was set for ignition • The unraveling of the subprime mortgage market was the spark that set in motion the economic collapse we have experienced

  16. Economic Collapse • Massive Foreclosures • Massive Wealth Effect … with personal portfolios in free-fall • Translation of financial collapse into real economy … with sharp cutbacks in demand and consequently sharp increases in unemployment • Now states and cities in free fall, adding to the crisis • Vicious Circle … with a stimulus package perhaps not large enough or soon enough to keep unemployment from reaching 10 percent by late this year

  17. A Better Stimulus Package

  18. What Really Needs to be Done? – National Economy • Phase I – Instant Stimulus • “Uncle Sam” Debit Card • Home Price Insurance System • Phase II – Short-term Stimulus • Massive General State and Local Revenue Sharing • Extended Unemployment Benefits • Phase III – Longer-term Stimulus • Public Infrastructure Investment

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