Inside the Sausage Factory
A Perspective on Policy Decisions in D.C.

CHICAGO, March 10, 2009 — "Real GDP contracted at a 6.2% rate in the fourth quarter, almost double initial estimates. Everything from consumer spending to business investment and exports fell faster than expected. This reflects the depth and breadth of the crisis both at home and abroad. Inventories were also revised down, which many took as a sign of hope for the future—I am less sanguine as this doesn't appear to have set the stage for any inventory rebuilding in the near-term. Prospects for the second quarter are better but not exactly encouraging, with real GDP falling another 1.4%," says Diane Swonk, chief economist of Mesirow Financial, in her March issue of Themes on the Economy.

"Real GDP is expected to move into the black in the second half, but those gains will not be enough to stem the bloodletting in labor markets. The recession is not expected to "officially" end until January 2010, and only then can we begin to regain the ground lost to the financial crisis," notes Swonk.

In her March newsletter, Swonk provides a general summary of the meetings she attended at the National Association for Business Economics' Annual Policy Conference, March 2-3, 2009. Swonk shares insight into the direction of policy and what it all means for the overall economy, including:

• Budget Deficit. The message was fairly noble, with the administration trying to simultaneously address the need to reduce the budget deficit over time and shift the course of its priorities to rebuild the middle class. There was sufficient criticism on everything from the underlying economic assumptions, which most thought were too optimistic on revenues, to the increases in spending implicit in the plan. There was also a substantial amount of skepticism over the "savings" the administration claims to have found in the budget via the computerization of health care records and program cuts.
• Economic Stabilization. Most agreed that the magnitude of the package alone could not be ignored and would eventually help the economy. The consensus was that we would need more rather than less, especially in terms of unemployment insurance and food stamps, given the breadth of recent employment losses.
• Health Care Reform. The challenge is trying to reduce costs and increase coverage simultaneously, which is what the Obama administration is proposing. The result will, at least initially, add to, rather than subtract from health care inflation, given the sheer number of people who are uninsured-a number that is also expected to rise, as health care is one of the first costs cut when overtime hours are eliminated.
• Monetary Policy and Regulation. Most expected the Fed to emerge the big winner in the regulation game, with much of the regulation of the financial sector housed under the umbrella of Fed operation. That includes the regulation of non-bank financial institutions like AIG.
• Trade Policy. Many fear a rise in protectionism, especially given the Democratic control of Congress. Clauses to "buy American" and to forbid the hiring of highly-skilled foreign workers for firms that accepted TARP funds were particularly disturbing, as they suggest a step back rather than move forward on globalization

"There are no silver bullets to curing the problems we face, and economic conditions will get worse before they get better. That said, we will get through this and emerge a stronger and better balanced economy, if we avoid the temptation to become a more isolationist nation in the process. One of the most important lessons of the Great Depression is that protectionism hurts everybody, especially those we would like to help most, middle- and low-income households," concludes Swonk.

The March issue of Themes on the Economy as well as archived issues can be found at mesirowfinancial.com.

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