Magazine article Real Estate Issues

Focus on the Economy: The Public Policy Piece of the Economics Puzzle

Magazine article Real Estate Issues

Focus on the Economy: The Public Policy Piece of the Economics Puzzle

Article excerpt


There once was a barroom prohibition against discussions of religion or politics-a rule no doubt instituted for the protection of both the inventory and the real estate. The pages of Real Estate Issues are a more sober context, though, and I am going to hazard an economic discussion that may cross over the line into politics, at least implicitly. In the Winter edition of REI, this column attempted to offer some diagnostics on the U.S. economic cycle. At that time, I suggested that we'd deal with public policy, business management, and world affairs in a series of essays. What follows are some observations on the public policy dimension of the economy.

On March 28, 2002, the U.S. Bureau of Economic Analysis (BEA) released its "final" revision of fourth quarter 2001 GDP statistics. The BEA reported that the national economy had expanded at a 1.7 percent annual rate, posting a net growth of 1.2 percent for all of 2001, despite the third quarter's contraction of 1.3 percent. In the year's final three months, the turnaround was led by a 6.1 percent advance in personal consumption expenditures and a 10.2 percent rise in government expenditures from third quarter levels.

To determine the implications for real estate, let's take a look at that 10.2 percent increase in government spending, first on a policy basis. Next, in some detail, we'll unpack how budgetary choices-fiscal policy-affect the business cycle. Finally, we'll examine the complementary tool available in Washington-- monetary policy-exercised through the Federal Reserve Board, also with an eye to cycles and local effects.

First of all, it is always a good idea to be wary of quarter-to-quarter shifts, (and even more wary of month-to-month changes). The shorter the period, the more volatile the figures are likely to be when they are reported in the economists' standard measure of the "seasonally adjusted annual rate" (SAAR). Nevertheless, when we look at the "real" (i.e., constant dollar) annual percentage change in government spending for the year, we do see an increase in spending of 3.6 percent. The fourth quarter surge followed a change in government expenditure in the third quarter that was just 0.3 percent, betraying a "Johnny-come-- lately" response by budgeteers to a recession that the National Bureau of Economic Research says began in March 2001. A classic headline was published in the New York Times last month: "Fed Chief Sees Decline Over; House Passes Recovery Bill" (March 8, 2002).

However late, though, an increase in governmental spending at points of national economic weakness is a fully appropriate action at the federal level. This is true even if it means running a federal budget deficit. The right time to run deficits is in recession; the right time to run surpluses is during expansions.

This rule of thumb is something that had been neglected for a quarter century, as we ran federal budget deficits in good times and in bad. The national debt is now about $6 trillion, and in fiscal year 2001 the U.S. Treasury had an interest expense on that debt of $360 billion. (See Exhibit 1). That is roughly equivalent to the entire Defense budget for consumption and investment for the year. So, in terms of policy, while the counter-cyclical spending surge is the right move, it should not be made permanent. One key to keeping policy options optimal in future downturns is to return to running a prudent surplus once the economy is safely back in growth mode. It would be a major mistake to back future policymakers into a corner by broad-based tax cutting that seeks to starve the government of revenue. That was the philosophy of Arthur Laffer and other "supplyside economists" of the 1980s-intellectually bankrupt and disastrous in application.

Budgets are planning documents and government money is actually spent by appropriations bills. Funds for the military, for highways, for unemployment insurance, and for Medicaid, all grew at double-digit rates by the end of 2001, despite the inability to negotiate a stimulus package in Washington until early March 2002. …

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