The following appeared in the October 19, 2009, edition of The Dallas Business Journal. Professor Tom Fomby, chair of SMU's Department of Economics in Dedman College, provided expertise for this story.
October 22, 2009
Unemployment is not likely to decline until the first quarter of next year, and a push back to a balanced federal budget will take the kind of fiscal constrain that occurred in the 1990s, according to Dallas economist professor Tom Fomby of Southern Methodist University.
Fomby made that statement in response to Federal Reserve Chairman Ben Bernanke’s assertion on Monday that a balanced international economy will depend on increasing America’s savings rate and growing Chinese consumption to balance out the markets, while also decreasing the federal deficit.
“Admittedly," Bernake said, "just as increasing private saving in the United States is challenging, promoting consumption in a high-saving country is not necessarily straight forward. One potential effective strategy is to reduce households’ precautionary motive for saving by strengthening pension systems and increasing government spending on health care and education.”
Fomby told the Dallas Business Journal that Bernanke’s theory is one in which the economy benefits from a type of “multiplier effect,” where if you spend a dollar in the economy, it sends more dollars throughout the economy.
“China is doing well,” Fomby said. “If it spends one dollar, the world gets four.” That means China is playing a key role in boosting international economies, he added.
When asked about the challenge of cutting down America's current deficit, Fomby advised learning from the 1990s.
"I would go back and look at the data concerning the Clinton years," he said. "Clinton went with the moderate approach and pushed for a balanced budget. He was able to achieve it over a four-year period."
However, Fomby adds that the government in the 1990s started with a deficit that was negative in the billions, not the current $1.4 trillion.
# # #