Colgan Predicts "Monstrously Slow" Economic Recovery in Maine Breakfast with Charlie “Our new approach to U.S. fiscal policy is best explained by Cleavon Little in ‘Blazing Saddles’ when he holds himself hostage.” Slide, Colgan Presentation 1 2 The 2013 Maine Economic Forecast If nothing goes seriously wrong:



Employment will go up 0.5% (3,100 jobs). So will wages. Unemployment will remain basically unchanged at 7.2 to 7.4%, giving Maine a total of 596,000 jobs. GDP?will grow 2.7%, compared to 1.8% in 2012.



If spending cuts stay where they are:



Unemployment could rise to 8.3%, Maine could drop to 590,000 jobs, and GDP could crawl forward 0.5%.



And if there is no agreement on debt ceiling or anything else:



Unemployment would rise to 10 percent and Maine could drop to 575,000 jobs, and GDP would drop to a negative number at -3.5%.



"Right now, I'm being upbeat," said Colgan, who said he thinks there is a 50:50 chance for the rosiest prediction.



Colgan told the packed crowd of business people and administrators at USM in Portland on Tuesday, January 8, that the half-sunken luxury liner is a fitting image for how effective politicians have been at handling the U.S. economy in 2012.



Colgan's annual economic forecast, held in the early morning at USM every January, is known as Breakfast with Charlie.



"We have spent basically the last six months devoting heroic efforts to fixing a leaky window in the first-class lounge," said Colgan, referring to political inaction over everything from the debt ceiling to the budget.



Meanwhile, long-term problems - like unemployment, stagnant middle-class incomes, reshaping the most inefficient health care system in the world and funding Social Security and Medicare - have gone completely unaddressed, said Colgan.



Maine Faces "Monstrously Slow Recovery"



In the past two years, the U.S. has recovered 57 percent of the jobs lost during the recession, but Maine has recovered just 10 percent. In 2012, job growth, wages and salaries in Maine remained stagnant, said Colgan, who predicts Maine will not regain the number of jobs lost until at least 2015 - eight years after the recession began.



Typically, construction, manufacturing, and retail sales lead the way back to growth. This recession is different, said Colgan, with education, leisure, health care, and professional and business services sectors leading the way.



That puts Maine in a bind.



The timber industry, the key economic player in the state, primarily produces wood for construction and pulp for paper. Both markets remain soft: the housing industry has not picked up in the wake of the burst housing bubble, and demand for newsprint is dramatically down as consumers switch to digital media.



Second, the tourism sector is growing globally but flat in Maine. In spite of efforts to rebrand tourism, the state still primarily appeals to older, seasonal scenery-seekers.



Third, the manufacturing sector continues downward.



Fourth, Maine is not well positioned to provide professional and business services, the strongest growth sector in the U.S.



Finally, we don't have much clout.



"We are 0.4 percent of the national economy," said Colgan. "We are the hair on the end of the tail of the dog and, unless the dog gets moving, we just kind of flap around with the breeze."



So, why isn't the dog moving?



According to Colgan, the recovery of the American economy has been excruciatingly slow because of the collapse of the housing market, wage stagnation for the working middle class, increasing income disparity between the middle class and the rich, the European economic meltdown and the failure of U.S. policy.



The Housing Casino



Colgan illustrated how we bet on housing. Eighty-eight trillion dollars was bet on U.S. mortgages through credit default swaps and other financial engineering from 2005 to 2009, he said. In 2008, the mortgages themselves were worth only $1.3 trillion.



"The size of the U.S economy is $14 trillion, so ... we were betting six times the size of the U.S. economy every year just on mortgages," he said.



It was a global housing casino, said Colgan, and when the games stopped, financial institutions started to fall like a house of cards.



"The good news is that the U.S. has . . . cleaned up the financial sector. For the most part, we've done the recapitalization of the banks, we've done all of the things that the Japanese never did and the Europeans have done belatedly, so our financial sector today is in a much better position coming into the recovery period because we bit the bullet," said Colgan.



"It was a horrible period. It was grossly unfair, but it saved the economy," he said. "The Costa Concordia, the cruise liner which sank off of Italy last year in one of the most spectacular cases of bad navigation in history . . . lies, even today, half underwater, submerged on a rock some 100 meters offshore," said Charlie Colgan, an economist at the USM Muskie School of Public Service and the state's best-known economic prognosticator.Colgan told the packed crowd of business people and administrators at USM in Portland on Tuesday, January 8, that the half-sunken luxury liner is a fitting image for how effective politicians have been at handling the U.S. economy in 2012.Colgan's annual economic forecast, held in the early morning at USM every January, is known as Breakfast with Charlie."We have spent basically the last six months devoting heroic efforts to fixing a leaky window in the first-class lounge," said Colgan, referring to political inaction over everything from the debt ceiling to the budget.Meanwhile, long-term problems - like unemployment, stagnant middle-class incomes, reshaping the most inefficient health care system in the world and funding Social Security and Medicare - have gone completely unaddressed, said Colgan.In the past two years, the U.S. has recovered 57 percent of the jobs lost during the recession, but Maine has recovered just 10 percent. In 2012, job growth, wages and salaries in Maine remained stagnant, said Colgan, who predicts Maine will not regain the number of jobs lost until at least 2015 - eight years after the recession began.Typically, construction, manufacturing, and retail sales lead the way back to growth. This recession is different, said Colgan, with education, leisure, health care, and professional and business services sectors leading the way.That puts Maine in a bind.The timber industry, the key economic player in the state, primarily produces wood for construction and pulp for paper. Both markets remain soft: the housing industry has not picked up in the wake of the burst housing bubble, and demand for newsprint is dramatically down as consumers switch to digital media.Second, the tourism sector is growing globally but flat in Maine. In spite of efforts to rebrand tourism, the state still primarily appeals to older, seasonal scenery-seekers.Third, the manufacturing sector continues downward.Fourth, Maine is not well positioned to provide professional and business services, the strongest growth sector in the U.S.Finally, we don't have much clout."We are 0.4 percent of the national economy," said Colgan. "We are the hair on the end of the tail of the dog and, unless the dog gets moving, we just kind of flap around with the breeze."So, why isn't the dog moving?According to Colgan, the recovery of the American economy has been excruciatingly slow because of the collapse of the housing market, wage stagnation for the working middle class, increasing income disparity between the middle class and the rich, the European economic meltdown and the failure of U.S. policy.Colgan illustrated how we bet on housing. Eighty-eight trillion dollars was bet on U.S. mortgages through credit default swaps and other financial engineering from 2005 to 2009, he said. In 2008, the mortgages themselves were worth only $1.3 trillion."The size of the U.S economy is $14 trillion, so ... we were betting six times the size of the U.S. economy every year just on mortgages," he said.It was a global housing casino, said Colgan, and when the games stopped, financial institutions started to fall like a house of cards."The good news is that the U.S. has . . . cleaned up the financial sector. For the most part, we've done the recapitalization of the banks, we've done all of the things that the Japanese never did and the Europeans have done belatedly, so our financial sector today is in a much better position coming into the recovery period because we bit the bullet," said Colgan."It was a horrible period. It was grossly unfair, but it saved the economy," he said. High U.S. Productivity, Stagnant Wages



One of the reasons why the national economy is back to a higher Gross Domestic Product (GDP, or the market value of all legal goods and services produced in the country in a given time period) is that productivity is higher now than it was before the recession. But that increased productivity is being accomplished by about 5 million fewer workers who are working much harder and getting paid less for it, said Colgan.



Conventional economic wisdom is that incomes go up when productivity grows, allowing consumers to spend more money.



But that hasn't happened. The bulk of the population, the middle class, has been declining in real income since 1980. The top 20 percent of the population started to assume the largest share of national income in the 1990s, with the top one percent getting the largest share.



The decline in the value of working wages is a long-term problem that has been exacerbated by the 7 to 8 percent unemployment rate, which has pushed wages further down.



What it adds up to is a lot less shopping.



"There is no way the national economy can grow ... you can't run a mass consumption society, which is what we are, for better and worse, when the masses don't have any money to consume," said Colgan.



Several things need to happen, said Colgan. Households need to get out from under their debt (which they are doing to a large degree) and then job growth and wage growth can begin.



U.S. Fiscal Policy



The inability of the U.S. Congress to make economic policy decisions that the country desperately needs them to make is a big factor in the sluggishness of the recovery.



"Our new approach to U.S. fiscal policy is best explained by Cleavon Little in 'Blazing Saddles' when he holds himself hostage," said Colgan, referring to the 1974 satirical Mel Brooks film where Little plays the sheriff of a Western town.



In 2009, the Obama economic stimulus package was designed to get the dog moving, but the adminstration also stuck in some things they wanted, such as the Race to the Top in education and renewable energy projects, said Colgan.



The president wasn't the only one who attached policy wish-lists to the economic stimulus.The recession gave political footing to the tea party and to large-scale funding of political races by the wealthy who wanted to see a wholesale reduction in government, said Colgan. And those policy debates have stalled action that could help the economy recover.



"What you have had is a debate over whether the federal government should exist at all as a meaningful entity," said Colgan.



That fight is far from over.



"This crisis provided a huge opportunity for that side of the debate as revenues plunged to 1950s levels as a percentage of GDP. They looked at the deficit and said: 'Now is the time to cut, cut, cut,' and they are still arguing for it."



The truth is that the deficit has been going down on its own faster than at any time since post World War II, said Colgan. Why? Because, as unemployment slowly shrinks, people go off public benefits, earn wages and spend money. The economy is designed to do this, said Colgan, and as we are saying cut, cut, cut, it is actually fixing itself while no one pays attention.



There are other, more pressing problems - like the fiscal cliff.



"It would have subtracted between 2 and 4 percent of GDP from the economy and put us back into recession," he said.



Colgan said the fiscal cliff problem is not fully resolved.



"We have resolved the first part of the fiscal cliff drama; the fiscal cliff was put in place to get us past the debt crisis, which was put in place, in part, because the Bush tax cuts were due to expire because the Republicans put the Bush tax cuts into place through budget reconciliation and thus had to put an end date on them, so it all goes back to a set of decisions that goes back to 2002-2003."



Spending cuts are still on the table for another two months and the debt ceiling will be back as early as February 15.



"The Republicans will say, If you don't give us what we want we will extend the debt limit, maybe a month at a time, so we can have a crisis every month," said Colgan.



And, at the end of March, the government will run out of money because Congress could not pass a budget for fiscal year 2013. The result will be a government shut-down or another continuing resolution.



"We are still held hostage to a fiscal policy that says: Cut spending, do what we want or we'll blow up the economy." One of the reasons why the national economy is back to a higher Gross Domestic Product (GDP, or the market value of all legal goods and services produced in the country in a given time period) is that productivity is higher now than it was before the recession. But that increased productivity is being accomplished by about 5 million fewer workers who are working much harder and getting paid less for it, said Colgan.Conventional economic wisdom is that incomes go up when productivity grows, allowing consumers to spend more money.But that hasn't happened. The bulk of the population, the middle class, has been declining in real income since 1980. The top 20 percent of the population started to assume the largest share of national income in the 1990s, with the top one percent getting the largest share.The decline in the value of working wages is a long-term problem that has been exacerbated by the 7 to 8 percent unemployment rate, which has pushed wages further down.What it adds up to is a lot less shopping."There is no way the national economy can grow ... you can't run a mass consumption society, which is what we are, for better and worse, when the masses don't have any money to consume," said Colgan.Several things need to happen, said Colgan. Households need to get out from under their debt (which they are doing to a large degree) and then job growth and wage growth can begin.The inability of the U.S. Congress to make economic policy decisions that the country desperately needs them to make is a big factor in the sluggishness of the recovery."Our new approach to U.S. fiscal policy is best explained by Cleavon Little in 'Blazing Saddles' when he holds himself hostage," said Colgan, referring to the 1974 satirical Mel Brooks film where Little plays the sheriff of a Western town.In 2009, the Obama economic stimulus package was designed to get the dog moving, but the adminstration also stuck in some things they wanted, such as the Race to the Top in education and renewable energy projects, said Colgan.The president wasn't the only one who attached policy wish-lists to the economic stimulus.The recession gave political footing to the tea party and to large-scale funding of political races by the wealthy who wanted to see a wholesale reduction in government, said Colgan. And those policy debates have stalled action that could help the economy recover."What you have had is a debate over whether the federal government should exist at all as a meaningful entity," said Colgan.That fight is far from over."This crisis provided a huge opportunity for that side of the debate as revenues plunged to 1950s levels as a percentage of GDP. They looked at the deficit and said: 'Now is the time to cut, cut, cut,' and they are still arguing for it."The truth is that the deficit has been going down on its own faster than at any time since post World War II, said Colgan. Why? Because, as unemployment slowly shrinks, people go off public benefits, earn wages and spend money. The economy is designed to do this, said Colgan, and as we are saying cut, cut, cut, it is actually fixing itself while no one pays attention.There are other, more pressing problems - like the fiscal cliff."It would have subtracted between 2 and 4 percent of GDP from the economy and put us back into recession," he said.Colgan said the fiscal cliff problem is not fully resolved."We have resolved the first part of the fiscal cliff drama; the fiscal cliff was put in place to get us past the debt crisis, which was put in place, in part, because the Bush tax cuts were due to expire because the Republicans put the Bush tax cuts into place through budget reconciliation and thus had to put an end date on them, so it all goes back to a set of decisions that goes back to 2002-2003."Spending cuts are still on the table for another two months and the debt ceiling will be back as early as February 15."The Republicans will say, If you don't give us what we want we will extend the debt limit, maybe a month at a time, so we can have a crisis every month," said Colgan.And, at the end of March, the government will run out of money because Congress could not pass a budget for fiscal year 2013. The result will be a government shut-down or another continuing resolution."We are still held hostage to a fiscal policy that says: Cut spending, do what we want or we'll blow up the economy." X