WASHINGTON'S LEADING BUSINESS MAGAZINE

2012 Economic Outlook

The bad news: We’re not out of the woods yet. The good news: Thanks to Boeing, we’re in better shape than the rest of the country.
Dick Conway |   January 2012   |  FROM THE PRINT EDITION

After harsh treatment by the Great Recession, the Puget Sound economy is back in its customary position, growing faster than the rest of the nation. Boeing, which recently added several thousand workers to its payroll, is providing much of the drive. But the economic future of the region—and indeed the nation—will be significantly shaped by events and decisions taking place in the “other” Washington.

When Joseph Stiglitz, winner of the Nobel Prize for economics, was asked recently about the Occupy Wall Street demonstrations, he gave an answer that was as much about politics as it was about economics: He said he was surprised the protests hadn’t started earlier.

Four years after the housing bubble burst, triggering a financial crisis, we remain mired in slow growth and high unemployment. Yet we as a nation are divided as to how to get the economy back on the road. The Keynesian approach advocates stimulating aggregate demand in the economy through additional infrastructure and other spending. Supply-siders prefer low taxes, a balanced federal budget and deregulation, with the goal of encouraging new savings and investment leading to greater employment opportunities.

Liberals and conservatives tend to view Keynesian and supply-side economics as being at odds with each other. Both approaches have a role in achieving stable growth, low unemployment and minimal inflation. There are times in the life of an economy, however, when one set of policies works better than the other.

 

Forgotten lessons

History suggests that Keynesian tactics are more effective than supply-side measures in pulling the economy out of deep recessions. The economic recoveries from the Great Depression and the double-dip recession that began in 1980 illustrate this point. Real Gross Domestic Product (GDP) fell 30 percent in the three years following the 1929 stock crash that triggered the Great Depression, while the unemployment rate climbed to 25 percent. Initially, little was done to staunch the bleeding. At the time, monetary policy was hamstrung by the gold standard. Any expansion of the money supply would have resulted in an outflow of gold. Moreover, most economists assumed that falling wages would eventually increase demand for labor and put the economy back on a growth path.

That didn’t happen. In 1933, newly elected President Franklin D. Roosevelt initiated sweeping changes to economic policy in what he called the New Deal. Among other things, he took the United States off the gold standard; he created the Reconstruction Finance Corporation to increase the liquidity