On Everyone’s Mind: Recession, Jobs

March 8, 2011

In this introductory column of Counterweights, we hope to present issues that are front and center in the lives of Georgians. The economy has certainly been on the minds of most citizens, both those who have endured job losses and unemployment and those who have felt the pinch in the businesses they own and run. We will explore the issue of the recession’s impact on the economy and the fastest, most promising way to build job creation – from the point of view of the left and the right. Our knowledgeable faculty members will present the two positions. Dr. John Reiners, professor of economics, will represent the liberal policy initiative and rationales; Scott Akemon, instructor of political science and history, will give the conservative perspective and rationale on these issues.

Georgia Highlands College does not endorse one point of view or party. The opinions expressed in this article represent ideological thinking from two positions, and don’t necessarily reflect the personal positions of either professor.

At Issue:
The recent recession has hit every region of the United States, creating startling jobless rates and crippling state budgets. Georgia has been one of the hardest hit, with over 10 percent declines in state tax revenues. Education and human services have been particularly hard hit, with state workers taking furloughs, public schools increasing class sizes, and the state cutting services like public transit. What has been the impact of the federal bailout, the stimulus bill, and even China on us? Reiners and Akemon have some comments.

The Georgia Economy

Reiners: While the Great Recession of 2007-2009 is officially over, the Georgia economy still struggles to recover. Unemployment remains high here – more than 10 percent – and that’s well above the national average. The biggest reason for Georgia’s downturn has been its dependence on the economic growth of greater Atlanta. Until the recession, the metro Atlanta counties had been expanding at some of the nation’s fastest rates – and that was driving a thriving new home construction business. The Atlanta housing market was a money machine. But when the housing bubble burst, metro Atlanta and the state of Georgia were hit hard. Small companies in the home construction industry were decimated. A local Rome example was Wheeler’s, which had been one of the most admired companies in Georgia with its rapid regional growth in sales and profits. Wheeler’s was a huge lumber supplier to the Atlanta market, and when those housing contractors failed they could not pay Wheeler’s – and the company had to declare bankruptcy. Additionally, Georgia reigns as the carpet capital of the nation, and when housing screeched to a halt, many carpet orders did too. Both Mohawk and Shaw endured substantial layoffs. The Dalton area, where most of Georgia’s carpet industry is located, has led the state in unemployment rates, topping 12 percent at one time.

Akemon – I certainly agree that the collapse of housing is a still huge issue here in Georgia. For many Georgians, the number of jobs lost has magnified the need to seek new job skills or further their education as Georgia continues its transition from manufacturing to a service-based economy. Institutions of higher learning throughout the state, from technical colleges to universities, have seen their enrollments increase since this recession began. Service-related majors such as nursing have helped drive these historic increases, and GHC is certainly reflective of that. It is difficult to gauge how long it will take for this transition to a service economy to be completed, especially when former manufacturing facilities in Floyd County such as General Electric and Burlington still stand unused. This employment picture is reflective of other counties throughout the state. The good news for Georgians is that the free market economy will bounce back. Historically since the end of World War II, recessions have been followed by periods of expansion that lasted at least twice as long as the recession itself. What is most important for Georgians is that we prepare ourselves for this future growth by making proper transitions in our jobs and education levels.

Reiners – Yes, a recession is a great time for people to come back to school and upgrade their skills, but a better educated workforce is only part of the solution. A key part of the recovery in Georgia depends on the government to continue spending rather than focusing on cutting expenses and reducing taxes.

Akemon – Wait a minute. It’s folly to depend on the government to lead us out of recession. We have to focus on small businesses. Both cutting taxes and loosening constrictive regulations is crucial for them to survive and thrive. They are the backbone of our economy, and when they’re growing and successful, we all will be. Too much taxation and regulation kill small businesses. In terms of business taxes, Georgia has an opportunity to lower its taxes and compete well against its neighbors. Both Alabama and Tennessee tax corporate profits at 6.5 percent, which is higher than Georgia’s 6 percent, yet Florida and South Carolina are even less, taxing at 5.5 and 5 percent respectively. I like the recent state tax commission proposal to reduce corporate income taxes to 4percent. And we need to ease business regulations as well. Obviously the state of Georgia cannot overturn federal regulation, but might be able to ease some of its impact.
One expenditure I would like to see increased in Georgia is infrastructural improvement. Building new roadways while expanding and improving those that already exist can reduce drive time and costs and add profits, especially in the trucking industry. Certainly such infrastructural improvements to the port of Savannah could reduce loading time and lead to more goods being exported, thereby leading to increased revenue.

Reiners – Yes, I agree that a stronger infrastructure in Georgia will be a big help to all businesses. And I totally agree that small businesses are key – they will lead the recovery. Let’s go back to the example of Wheeler’s. They have come back from bankruptcy, restarted their business, and I have no doubt they will come back as a strong company. But to sustain that growth and encourage more we must see continued government spending. The absence of federal stimulus money for Georgia in 2011/2012 will be a real handicap – that means the state must spend more of its own funds to keep all the teachers, police and firefighters working. Georgia tax revenues have finally started to increase, but they will not be enough to offset the loss of federal stimulus dollars. Governor Deal has promised that there will be no furlough days this year. Of course, we all know the term “furlough days” was Governor Perdue’s language for pay cuts. I would be happy not to have a pay cut, but I am more worried about how the budget deficit will be met without pay cuts. Certainly that will mean layoffs. To meet the shortfall in Georgia revenues this year that would mean laying off thousands of state employees. Losing that many wage earners would devastate those families affected and the Georgia economy. Rather than forcing thousands into unemployment, I believe all state employees should share the burden and take a 7 percent pay cut. We have to find a way to balance the state budget without huge cuts in personnel or critical programs.

Akemon – Franklin Roosevelt tried to spend our way out of the Great Depression with all the New Deal programs, but it never worked. The 1930s recovery, much like our present effort, was slow and sporadic. World War II really was responsible for bringing us out of the Great Depression. The government’s use of trial and error techniques for spending programs means a lot of waste. And that’s how I feel about TARP – the Temporary Asset Relief Program. Why couldn’t we let the failing mega corporations’ fate be played out in the free market? If General Motors, for example, had just been allowed to go bankrupt, other manufacturers with better business models would have taken their place. Or if we had just let some of the big banks fail, we would have saved billions of tax payer dollars, and new, better financial institutions would have developed.

Reiners – Wait a minute. Without TARP (don’t you just love all these government acronyms), we would have been in terrible shape. I really believe we were on the brink of a collapse of the entire economy when many of big banks looked like they might fail. Money is the life blood of an economy. Francois Quesnay, a physician to King Louis XV realized that back in the 1600s – and he’s right. If banks shut down lending, money stops flowing and the economy literally comes to a grinding halt. And for a while in 2008 none of the banks knew whom they could trust, so they just stopped lending to everyone. An economy cannot survive like that. So TARP was really a necessity – and according to the latest reports, 74 percent of the TARP funds lent to the banks have been repaid! But yes, the repayment of money lent to the auto companies and the AIG insurance company has been a lot slower. But if GM had been allowed to fail, thousands of GM employees would have been out of work – and thousands more at all the auto supply companies would have lost their jobs too.

Akemon – But you have to admit that the Obama stimulus package has been a gross misuse of our taxes. The US government has spent almost $800 billion on the so-called stimulus bill, and here we are still in the midst of a terrible economy with unemployment still at 9 to10 percent. Government spending cannot bring us out of a recession; we have to provide greater incentive to private industry with lower taxes and reduced regulations.

Reiners – I agree the economy is not where it needs to be. But without the increased federal spending and the tax cuts that were included in that stimulus package we might well be seeing 15 percent unemployment right now and a declining Gross Domestic Product. The stimulus was a great example of bipartisan action in a timely fashion. In just a few months Congress put together the stimulus package, passed the bill in February 2009, and the economy started growing again by third quarter of 2009. The irony is many of the conservative candidates in 2010 ran against that act claiming it was another example of wasteful federal spending. The stimulus was exactly what we needed at the right time. And that’s the key point. The federal government should only temporarily increase spending and run a deficit when the economy is in recession. But when the economy is in full recovery, the federal government has to cut back and balance the budget or even run a surplus. That will be the real test of a good government.

Akemon – But good government is minimal government. The government should not be intruding on businesses. During the bailout, some of the big banks were literally forced to take government money. The big Georgia bank, Sun Trust, did take TARP and they have already repaid their loan in full. But the successes of Sun Trust and other well run banks was quickly overshadowed by the media attention on Wall Street banks and AIG who paid big bonuses after receiving tax payer money. If government would just stay away from trying to tell businesses what to do the economy would be a lot better. A huge part of the housing market collapse and the resulting problems with the banks was caused by zealous Congressional leaders who pushed for home ownership for everyone. Fannie and Freddie were guaranteeing loans for people who should never have qualified for home loans.

Reiners – Hold on. Blaming the financial collapse on federal laws is like blaming I-285 accidents on the government for setting the wrong speed limit. What happened to individual responsibility? The banks were the ones who made the aggressive loans, the ones who developed the complex financial derivatives and collaterized debt securities. Why? Because they could make a huge profit from them. But the banks miscalculated how much risk they were taking.

Akemon – I worked in the mortgage industry prior to coming to GHC and saw firsthand scenarios where individuals not only had second mortgages but even third mortgages. In some cases, mobile homes had a second lien holder with rates for both as high as 22 percent! But when the recession hit, many of these lenders disappeared from the horizon. That’s how the market should operate. Unethical or poorly managed firms go broke during hard times, leaving behind the better companies — and reducing the future need of government intervention.

Reiners – Yes, in an ideal economic world, there is perfect information flow and unethical behavior is punished. But in the real world, companies can maximize profits by enticing people into deals they should never make. Look at Citibank, one of the largest in the country. In 2007 – just before the recession – they made $22 billion in profit. That was almost a 20 percent profit margin, unheard of in banking. In the old days, banks were conservative companies making 2 to 4 percent returns. Then banks found high-interest subprime loans, and they found even higher returns on collateral debt swaps. But when the housing market collapsed, so did the big banks. And if the government had not bailed out the banks, the economic crisis would have been much worse.

Akemon – The banks may have been part of the problem, but the question now is what do we do to fix it? How do we restart the Georgia economy? I still argue for lower taxes and easing regulations on businesses. Take Georgia’s personal income tax rates. Our 6 percent income tax is higher than three of our five neighboring states (Tennessee and Florida have none; Alabama is only 5 percent). Governor Deal has already proposed reducing personal income tax to 4 percent, and I think that is a big step in the right direction.

Reiners – I agree that we need to reduce the state’s personal income tax rates for lower and middle income Georgians, but we really need a slight increase in the rate for higher income families. Look at the current Georgia income tax. It was intended as a progressive tax which would tax higher incomes at a higher rate. But we are stuck at 1933 rates! The current top tax bracket is $7,000; anyone who earns above that pays the top rate of 6 percent. Georgia needs to update its income tax schedule to create a true progressive tax, and that would reduce income tax rate for middle and lower income families. And I think a small, say one-half percent, increase in the top bracket would create the income needed to avoid deep cuts in some of Georgia’s essential educational and human services.

Akemon – That’s the classic liberal strategy. Increase taxes so the government can spend more. This failed strategy got us into this economic mess. Taxes are already too high in the United States. We pay some of the highest tax rates in the world.

Reiners – That is true for corporate taxes. Corporate taxes in the United States are some of the highest in the industrialized world. But individual taxes are relatively low on an international basis. In a 2005 study, only Korea, Ireland, Australia, and Japan had lower individual tax rates than the United States. In terms of taxation as a percentage of a nation’s GDP, the U.S. ranked 17th among the top 18 industrialized nations (Japan was the only country below us). So compared to other countries we are actually paying lower taxes. But one huge problem with US taxes is that they are so complicated. What we need is a simpler tax system that is easier to understand, fair to all, and provides incentives for all Americans to work harder.

Akemon – I hate to say this, but there is also one form of taxation I really like – the SPLOST. The Special Purpose Local Option Sales Tax is a great way for local governments to efficiently collect additional revenues. It is a minimal tax (usually 1 percent). It is applied to all purchases within the county, and it is easy to collect for the companies and governments. And it helps provide key local infrastructure that supports business development.

Reiners – I agree. I think SPLOST is an example of a good tax – it’s a low rate, applied to all purchases, easy to collect, and has a big economic impact locally.

Akemon – Let’s talk China and its impact on our economy. It worries me a lot that China has become the primary manufacturer for the U.S. and now the primary lender to keep the government afloat. We are giving up way too much power in our economy to China.

Reiners – Yes, we depend on China to fund the great American deficit. China owns almost $900 billion of U.S. securities that finance our $14 trillion debt, but that is less than 7 percent of all our debt obligations. So no, I don’t think China’s ownership of a big chunk of our debt will hamper the state or national recovery. I think the fact that China and other countries are now providing low-cost manufacturing options for us will actually help us in the long run. Most of the jobs we have lost to outsourcing of manufacturing have been relatively low-skill, low-wage jobs. Those are exactly the jobs we don’t want to protect and keep in America. We want to protect the high-skill, high-wage jobs.

Akemon – Following my graduation from college, I worked as a district manager for Big Lots and I can verify that most of what we sell in the U.S. retail market is made in China. However in a recession such as this, retailers like Big Lots see their bottom line profits increase because people are looking for bargains. As some companies are forced to dump their goods that aren’t being purchased by consumers, Big Lots can buy them for pennies on the dollar. It’s a sad commentary but in economic downturns these retailers actually offer more American-made products than normal as American manufacturers fail or come close to collapse.

Reiners – Yes, the outsourcing of manufacturing is rough for a community to get through, but it can strengthen an economy in the long run. Floyd County is a perfect example of this. Years and years ago this was a strong textile manufacturing county. We have had the Lindale, Shannon, Celanese, and Trend mills all employing thousands of workers each. But the result of losing all those textile jobs has been that the workforce of Floyd County reinvested in education and training to improve worker skills, and the Chamber of Commerce has actively recruited new businesses. Now we have Pirelli, F&P, Neaton, Advance Steel and many other employers offering much higher wages than anyone ever earned in the textile mills. That’s the key – concentrating on improving the knowledge, skills and abilities of our workforce. Then we won’t have to worry about China or other countries, and we will attract new entrepreneurs and industries here.

We invite your comments and opinions about the state of our regional economy. Just remember, keep it polite and civil. In our next issue, we’ll talk about immigration – its problems and opportunities, both in a historical and practical/current context. We hope you’ll join the conversation.

2 Responses to On Everyone’s Mind: Recession, Jobs

  1. John Elish on March 8, 2011 at 9:02 pm

    Great article, it gives both sides of the issue fairly. unlike most of the media. We need articles that make the reader think, research and then make an informed decision. Slanted articles produce sheep.

  2. Kate Dougherty on March 9, 2011 at 2:13 pm

    Dr. Reiners, Mr. Akemon made your case for government spending when he casually remarked, “World War II really was responsible for bringing us out of the Great Depression.” Talk about government spending!

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