UA Professor Gerald Swanson delivered a grim forecast of the 2009 economy last week.
Swanson, who has been named the Thomas R. Brown Chair in Economic Education at the Eller College of Management, has been warning about the dangers of deficit spending for more than a decade, beginning with his New York Times best-seller Bankruptcy 1995: The Coming Collapse of America and How to Stop It.
His most recent book, America the Broke: How the Reckless Spending of the White House and Congress Is Bankrupting Our Country and Destroying Our Children's Future, was published in 2004.
Just how bad is the economy right now?
No if, ands or buts about it: It's going to be the longest recession since the Great Depression.
How far are we from the bottom?
We won't hit bottom before summer or later next year. What's going to happen is a lot of the mass layoffs mentioned with the banks and the carmakers and the electronic firms are going to come at the end of the year, and so we're going to see some major jumps in the unemployment rates.
What needs to happen to turn it around?
The only thing that's going to turn it around is to get some kind of stability in the housing market. That's what's throwing everything else off. But there is another whole wave of resets happening in 2009, because they gave these people three-year loans, and the peak of the housing frenzy was 2006. The other thing I'm hearing from bankers is that we're starting to see some more defaults from business. Across the board, from credit cards to student loans, they're starting to see their defaults rise.
Is there any simple way of explaining what happened with the banks and Congress back in September?
In the middle of September, in one fateful week, the credit markets of the world started to freeze up because of the uncertainty of our toxic debt--the mortgage-based securities. Great Britain seemed to be in such bad shape that the European Union countries would not accept British credit cards for one day. It was so bizarre.
The United States was sort of looked at as the villain in all this, so we stepped forward. We knew we had to do it fast, because you can't let the world stand still for a couple of days, and we knew we had to do it with funding that got everybody's eye. That's why the number was so horrendously large--$700 billion. Once we told the rest of the world that we were willing to put our financial might behind what was going on, then the other central banks and other governments of the world stepped in to try to stabilize the financial markets.
So you think it was necessary for Congress to act.
Yeah. What they did, I don't think was very good, but my basic feeling is that we didn't have a choice. What we did was really ugly, but we did it.
What do you make of the request from the Big Three automakers?
I'm definitely against it. It sets a bad precedent. I think the federal government should facilitate a structured bankruptcy so all the contracts can get opened up, and (the the Big Three) can get itself back on a competitive keel. I really think the money we give them now is going to go down a black hole.
You've written a lot about the dangers of all of this borrowing by the federal government. What are your thoughts on federal spending at this point?
I get asked that a lot, because the scenario we have going on is the scenario I had in my book. The key thing is, the problem that I was worried about is still on the table. We have done nothing to handle the tens of trillions of dollars in unfunded liabilities for Social Security and Medicare.
The first (baby) boomers retired this year. Every year we wait, that unfunded mandate gets larger and larger, and I never envisioned having this much debt in front of us before we started to tackle this problem. We are talking a trillion dollars this year, and I have little doubt that next year, we'll exceed that. It doesn't give us any room to borrow to fund Social Security and Medicare.
What the government has been doing is borrowing from these trust funds, and there's always been a surplus, because the boomers have been working and paying Social Security. But Medicare has been in the red for many years; we spend more than we take in on the Medicare tax. That's the biggest problem. Medicare will dwarf Social Security, because the expense is uncontrollable.
They've been able to mask it by borrowing from Social Security, but more people are going to be drawing Social Security, so there will be less to borrow from that tax account. They'll have to go to the market for more and more government debt.
It's a little unnerving. We've got major imbalances that nobody has had the political courage to address. Nobody--Republican or Democrat--said a word about Social Security or Medicare during the presidential campaign.
I told someone the other day: I get mentally worn out trying to figure out this conundrum, trying to get to the "this will do it" phase. If we had any kind of disruption through some kind of minor terrorist attack, something like India just had, this economy is so fragile that we'd be in real trouble.