Ask an Expert: Economic Conundrum

As bailout focus shifts, government tackles a tough dilemma

Americans?
Harrison: African Americans are a substantial percentage of the auto manufacturing labor force and would be hurt by layoffs. The troubled U.S. firms and their suppliers are concentrated in Detroit and Midwest states where unemployment is already among the highest in the nation. To give you an idea of the impact, Detroit already has the highest foreclosure rate of all metro areas in the nations, and African American workers and neighborhoods are among the hardest hit.

First there was the housing market meltdown, then the financial sector, now the auto industry is taking a hit and credit card companies stand closely behind, what other sectors look fragile?

Harrison: Construction has crumbled with the housing market. Consumer spending, which drive two-thirds of the economy, is diving, both as credit shrinks and as people try to save in the event of lay-offs or furloughs. People are cutting back on discretionary spending, which is hitting retailers. Transportation — shipping, trucking, air freight — is declining with few goods to transport domestically and internationally. State and local governments lose taxes and must shed workers. Healthcare is about the only industry that is still growing and that might continue to through a recession.

Morris: The outlook for the whole economy is rather bleak, since mortgage and credit card debt has underpinned consumption for some time. But at some point the borrowing spree had to end. It’s not possible to shop on credit forever – at some point the bills must be paid.

What should be Obama’s first steps in going forward in dealing with the economy as president?

Harrison: Jobs, jobs, jobs. When Sen. John McCain said the fundamentals of the economy were sound, we had already lost 750,000 jobs this calendar year. Now it’s nearly 1million. Nobody paid enough attention to this. The economy will, of necessity, keep sinking until these people are back at work and able to pay for their living expenses.

Also, infrastructure. Under the first stimulus package, the tax rebate check allowed individuals to go on for a few more months. If we put the money instead into putting people to work, i.e. rebuilding roads, the electric grid, green energy systems, schools, etc., we have something in a few years from now that will increase the efficiency of the economy and the quality of life.

Morris: The first step should be to create a more stable environment for entrepreneurs and businesses generally. That means ending the seemingly arbitrary interventions in the financial markets and allowing market participants to identify better ways of pricing risk. It means removing where possible distoritionary taxes and regulations that undermine entrepreneurial behavior.

I would advocate the introduction of a flat federal income tax and the elimination of the federal corporation tax. That would eliminate many of the tax scams that currently exist, incentivize entrepreneurial behavior, and enable individuals and families to save, invest and consume more of their hard earned cash – contributing to a stronger economy, with benefits for all.

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