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Michigan Credit Union League Home » Information Services » Publications » Contact » 2009 » 1st Quarter » Economic Update  

MSU Economist Charles Ballard Has
Optimistic Take on Long-Term Economy

Michigan State University Economics Professor Charles Ballard has no shortage of experience and economic expertise. Along with serving on the University’s economics faculty since 1983, he has authored two books: “Michigan at the Millennium” and “Michigan’s Economic Future.” He has also served as a consultant for the U.S. Departments of Agriculture, Health and Human Services, and Treasury. News media statewide have wanted his perspective on Michigan’s turbulent economy, particularly with the passing of the stimulus package designed to get the U.S. economy back on its feet.

Although Ballard recognizes that the worst is not yet over with regard to some of the immediate challenges, his long-term economic outlook is a positive one. MCUL Information Services Coordinator Bryan Dahl had a chance to speak with the professor regarding several state and national economic issues, and credit union leaders should note that Ballard will expand on these ideas during MCUL’s 2009 Annual Convention and Exposition in Traverse City.

Based on what has been said by many economists, lawmakers and the media, a national economic turnaround isn’t likely for 2009, and things are going to “get worse before they get better.” Do you agree with that sentiment?

Ballard: Unfortunately, I do agree, because the damage done to the economy in recent years is so profound. The damage was done by “wizards” on Wall Street, regulators who were either asleep or deliberately turned a blind eye to what was going on, and by individual borrowers and lenders who were swept up in the frenzy of the housing bubble. I don’t think any of these people woke up one morning and said “I’m going to do things that will wreck the economy,” but the net effect of their actions is sort of like sending a wrecking ball into the edifice of the financial system. Fortunately, the wrecking ball did not take enough swings to knock things down completely, but a lot of damage was done. The credit markets came perilously close to systemic collapse last fall, and they still are not working anywhere near the way they should. It will take a while to rebuild. I think there is a good chance that the economy will reach bottom sometime in the second half of this year, or early in 2010, but frankly, it’s very hard to predict, because we have essentially no experience with a financial crisis like this.

The economic stimulus package signed by President Obama consists of enormous spending coupled with tax cuts. Do you foresee this being beneficial to the national and state economies in the short-run, and what about down the line?

Ballard: I do think it will be beneficial, although as I have said, it will take time.  It’s important to be careful in defining beneficial. The definition of beneficial should not be with reference to some Nirvana where all of the problems go away by next week. Rather, we should define beneficial in relation to what would happen if we were to do nothing. In view of the magnitude of the problems, I believe that there is huge danger in doing nothing. It’s a good thing that the Fed moved aggressively to cut interest rates, and it’s a good thing that elected leaders have passed a relatively aggressive fiscal stimulus plan. Without aggressive action, I believe there was real danger that the downward slide would last for a very long time. Even with aggressive action, it will probably be many months before we see any substantial improvement. A lot of the public debate on the value of the stimulus plan has been pretty silly. Many folks in Congress have said that only tax cuts can stimulate the economy, and that government spending will not accomplish this. On the other side of the spectrum, I saw Bill Maher on Larry King’s program saying that government spending will stimulate the economy, but tax cuts will not. I disagree with both. I believe that government spending and tax cuts can stimulate the economy.

For a state that has already been coping with a crippled economy for years, how bad do you see things becoming in a manufacturing state like Michigan if the national economy sinks lower during 2009? Is there any foreseeable turnaround for Michigan and similar states?

Ballard: I remain optimistic regarding the long-term prospects of the Michigan economy. But just as it will take time for the national economy time to heal, it will also take time for the Michigan economy to heal. Michigan faces a double challenge: We have to weather the national downturn, and we also have to reverse the very long-term trends that have led Michigan’s economy to grow more slowly than the national average over the last half century. In the short term, I think we can help Michigan’s economy by reforming its tax system to become more welcoming to businesses. Over the long haul, however, I believe that the key lies in the skills of our workers. We are below the national average in terms of the college attainment of our adult population. We need to reverse that.  In fact, we are underinvested in education, from pre-school to Ph.D.  One possible silver lining in the current cloudy economy is that this crisis may be severe enough to jolt us, once and for all, out of pining for the good old days of the 1950s. Those days were great for Michigan, but they are gone, and they’re not coming back. We need to take our eyes off the rearview mirror, and focus on the road ahead. Maybe this crisis will be sufficiently deep that it will help us finally to get the message.

How have consumers responded in the past year to economic trends? Do you see numbers indicating people are spending less, and/or saving more?

Ballard: Yes, consumers are spending less. In the long run, this will be a very healthy development, because Americans got away from saving, and that got us into trouble. In the short run, however, a cutback in spending is problematic, because it can exacerbate the recession. That’s why the federal government is trying to make up for some of the lost demand with the stimulus package.

How important of a role do you think credit unions have in this economy as financial institutions that are well-capitalized and have money to lend?  
Ballard: I think credit unions are more important now than ever before. Credit unions have done a much better job than many other financial institutions in terms of steering clear of some of the high-risk lending practices that have contributed to this crisis. I have little doubt that we will see increased regulation of the financial services sector, and the challenge will be to avoid throwing out the baby with the bathwater. I hope we can have appropriate increases in regulation of some of the high-risk practices that have contributed to this crisis.  On the other hand, I hope we can avoid an extreme overreaction, by which the entire sector is shackled too severely.

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