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Mid Atlantic Economic Symposiom

Economy Looks Better on Paper than in Reality

Published on November, 22, 2005

By Ed Waters, Jr., News-Post Staff

Frederick—The U.S. economy looks better on paper than it feels to most residents.

That was one of many statements made at the recent Mid-Atlantic Economic Summit held at Hood College.

The remark was made by Diane Swonk, a leading economist who sits on advisory boards for the Federal Reserve, is often a guest on television shows and is past president of the National Association for Business Economics.

Also speaking was John Weinberg, director of research and senior vice president of the Federal Reserve Bank of Richmond.

"The economy has had some remarkable shocks," Ms. Swonk said, referring to the hurricanes in the Gulf area, the continuing war in Iraq, soaring energy costs and other negative factors.

"People are traveling less, renting DVDs instead of going to the movies, turning the heat down a notch or two. Energy prices were going up before, but Katrina crystallized those higher prices," she said.

"Both sides of the aisle have offended me," Ms. Swonk said of Congress, adding that she didn't support term limits. "They got us into this mess, they need to stay on and clean it up." She said Americans often vote for someone who will simply promise to "bring home the bacon" to their state. "We behave like a child waiting for Santa Claus to deliver something to us."

Ninety-one percent of Americans earn less than $100,000 a year, yet the remaining 9 percent earn more than half of the money in the nation, Ms. Swonk said. Those that earn more than $500,000 a year are about 0.5 percent of the population.

"Some people in New Orleans didn't want to leave on Aug. 29. Why? Because Aug. 31 was payday and they were living paycheck to paycheck, but the hurricane and flooding hit," she said.

People are using credit cards more for gas and other purchases, causing a rise in credit card delinquencies, she said. Warm weather, good for those worrying about high home heating costs, are hitting retailers because people aren't buying winter clothes.

"It is an economy that looks better than it makes us feel," she said.

Some industries have boomed because of the hurricanes, she said, such as construction. "Caterpillar (which manufactures construction equipment) is booked, and in Indiana the recreational vehicle and mobile home business is also booked."

She called the pension cuts at some major companies "a moral hazard," but added that paying a typical United Auto Workers member $140,000 a year in wages and benefits, "you can't keep doing that when you hire an engineer at only slightly more than that."

Both Ms. Swonk and Mr. Weinberg commented on the real estate "bubble," where some fear the soaring property prices are bound to hit a point and collapse.

"The jump in real estate prices is not just in Maryland, or the U.S., but global. People are looking for somewhere to put their money to make money," Ms. Swonk said. She called the real estate market changes "a slowdown, not a collapse."

"The demand is strong, that is why prices are higher; it's fundamental, but that is not to say there isn't some 'froth' in there," Mr. Weinberg said. "Commercial real estate has remained strong."

But Wayne Six, a local real estate appraiser in the audience, said he had did more foreclosures in the past three weeks than he had in the past three years. He said a drop of 10 percent in house prices can negatively affect the equity value of the homebuyer. "It leaves them with an upside down situation," he said, owing more than the house will sell for.

Mr. Weinberg said the U.S. has had a long history of "subsidizing" homeownership through mortgage interest tax deductions, financing programs and other ways to helping in home purchases. The removal of the mortgage tax deduction has been discussed in Congress, but is a controversial issue.

"Homeownership enhances the sense of citizenship," Mr. Weinberg said.

Dr. Ron Volpe, president of Hood College, said the small, independent college mirrored the free enterprise system. "We have to deal with variables and have an $85 million annual budget. We have a big impact on the local economy."

The program was hosted by Chris Murray, of Murray Financial Group, and WFMD Radio.