Economists give their prognoses for recovery

Left to right: Adrienne Ortyl, Paul Harrington, and Alan Clayton-Matthews.

Back in March, when economists and other observers were trying to figure out what kept consumers spending even as indicators of an impending downturn piled up, The Boston Globe‘s Adam Pertman trotted out this theory: “Many Americans [are] feeling certain that any downturn probably will be short-lived because that is their experience in the last decade or so… After two decades of boom, bust has become a less accessible concept.” He then quoted a consumer psychologist who observed, “The younger people in the market have never experienced a real downturn or recession and may not be able to identify with that or know how to behave in preparation for it.”

Perhaps I’m just showing my age, but I don’t think I’m the only one around here who remembers what a recession feels like. From 1989 to 1991–and with after-effects felt for another couple of years–Massachusetts went through a wrenching economic contraction. Once-mighty technology companies like Wang Laboratories shut their doors forever. The venerable Bank of New England failed, brought down by loans that went bad as the real estate market collapsed. Families lost their homes to foreclosure because the houses were no longer worth enough to guarantee their mortgage loans. Unemployment rates approached double digits statewide, peaking at 9.6 percent in July 1991. Joblessness reached 15.9 percent in North Adams that month, 16.1 percent in Lawrence. In New Bedford, 18.2 percent of residents were out of work; in neighboring Fall River, 21.6 percent. The bottom fell out of the state budget, forcing service cuts and back-to-back income tax hikes, and even those measures weren’t enough to keep the state’s bond rating from falling to junk levels.

We now know that once again Massachusetts, and the rest of the country, is in recession. In fact, it has been, according to the authoritative National Bureau of Economic Research in Cambridge, since about the time Pertman was scratching his head about why people didn’t seem to be hunkering down. The casualties have started to mount: Layoffs in the hundreds, if not thousands, have been announced by such pillars of 1990s prosperity as EMC Corp., the Hopkinton-based data-storage manufacturer that was the fastest-growing company in Massachusetts all decade, and Fidelity Investments, a symbol of the everyone’s-in-the-stock-market-now era. Still, so far this economic downturn looks nothing like the last one. Is that because this recession won’t be so bad? Or is it because the worst is yet to come?

We asked three economists who crunch the Massachusetts numbers as hard as anybody to talk with CommonWealth about what’s happening in the economy and what to expect in the coming months. Alan Clayton-Matthews is assistant professor of public policy at the University of Massachusetts-Boston and president of the New England Economic Project, a consortium of regional economy watchers; Paul Harrington is associate director of the Center for Labor Market Studies at Northeastern University; and Adrienne Ortyl is an economist at DRI-WEFA, a Lexington-based market analysis and forecasting firm that projects economic trends for the state. At the beginning of December, we gathered in a conference room at Citizens Bank’s Boston headquarters to take the region’s economic temperature. The consensus prognosis: This recession won’t be as severe as the last one. But we’re not out of the woods yet. What follows is an edited transcript of our meeting.

CommonWealth: Everybody knows that the US economy is cyclical. For every upturn there is a downturn. But just as every expansion is unique, so is every recession, in terms of depth, severity, and what brings us out of it. The most recent expansion was the longest continuous period of growth since World War II. What brought it to an end? And what’s going to have to happen in order to get us out of the recession that we find ourselves in now?

Clayton-Matthews: We can start with what led [us into] the recession, and that was a bubble in spending on technology products by households and businesses, primarily businesses. [Until recently, technology spending] led to a virtuous cycle: Increased sales of technology products led to increased profits of companies that were making them, then increased projections of future revenues led to increased stock prices, which led to increased ability for companies to spend–and ultimately to overspend, [resulting in] overinvestment. Subsequently, when things started to go sour, when firms could no longer sell all that they had in the pipeline, a vicious cycle set in, one in which firms cut back on spending, particularly for investment in technology products. It was recognized that there was overinvestment, and that led to enormous and rapid declines in spending on semiconductors, on semiconductor machinery, on computer and electronic equipment, and on telecommunication equipment.

Harrington: I would put that in kind of a broader perspective. If you think of the 1990s, and actually into the 1980s, there has been this long-term imbalance in foreign trade between the United States and other countries. What that does is take income out of the US, [which] slows down economic growth. During the decade of the ’80s, government stepped in and ran very large deficits to inject spending into the economy. So it was government debt that created the expansion of the ’80s. In the 1990s, government changed its mind and began to run surpluses, which also pulled income out of the economy. So you had two things dragging the economy to slow down. One was government surpluses and the second was a balance-of-trade deficit. To offset that, consumers began to spend at unprecedented rates. So the expansion of the 1990s was really a consumer-led expansion. And what I think fueled that consumer expansion was really this rapid growth of what consumers considered to be their wealth, in terms of housing assets, also what they saw in terms of their portfolios, in the rise of 401(k) plans and the like. So that, as Alan said, we had this run-up in these values and there was what [Federal Reserve Board chairman Alan] Greenspan referred to as irrational exuberance. And it had sort of the virtuous aspect to it in the short run, but in the long run it wasn’t sustainable. But consumers based their exuberant consumption on the exuberance in these markets. Once the markets fell apart, then consumer spending fell apart and that’s really what drove us into the downturn.

“Massachusetts will be right in there with the rest of the nation in recovery.”

Ortyl: I think September 11th played a big role in worsening the situation as well. Certainly consumer confidence was hit very hard after the events of September 11th. That also spurred some other things. Particularly in Massachusetts, the hotel industry really had heavy losses right after September 11th. It seems to be coming back a little bit, but it’s still not up to the level it was. Part of that is consumers just aren’t out there spending. That goes to the point that consumers really did lead this expansion. So going forward, with consumers not spending, somebody else is going to pick up the slack. That will probably be the government, with fiscal stimulus. The difference between this recession and the last recession is the government and monetary policy are really geared towards making this recession milder. You have the Fed with unprecedented easing [of interest rates] and then also the fiscal stimulus, which will certainly boost the economy and help make this a milder recession.

CommonWealth: I think we all began to sense the slowdown in the economy early last year. And it’s recently been announced, by the National Bureau of Economic Research, that we are officially in a recession and have been since March. And since most recessions in recent times have lasted between six months and a year and a half, that means we’re well into it, perhaps even near the end. What I read in the business press and elsewhere is that the expectation nationally is this recession will be relatively short, with recovery beginning as early as the second quarter of 2002. Should we really be expecting recovery so soon?

Harrington: I think a part of it is, what do you mean by recovery? I think the consensus is GDP [Gross Domestic Product] growth will turn around, although the third quarter was a much bigger drop–and that’s pre-September 11, for the most part–it was a much bigger decline than anyone thought it was going to be. In fact, it was twice the decline that the consensus [expected]. But there is a difference between GDP growing and the job market recovering and incomes rising. If you remember the recovery out of the recession of the early ’90s, that was characterized as the jobless recovery. It was a recovery that really didn’t play into the labor market until ’96, ’97, ’98, once consumer spending got going. So it may well be the case that we turn around GDP growth, and it may actually help the financial markets a little bit. But whether that will play out in the labor market at a very powerful rate, that’s a different question.

Ortyl: Well, I think for Massachusetts it will [result in job recovery], though…Certainly I think job growth in financial services will slow considerably, but DRI-WEFA does not right now have any [projection of] real declines in financial services employment. Also, I think one of the differences between this recession and the last recession is construction. Last recession, the construction sector was hit [very hard]. Employment in the construction sector had a 50 percent drop, peak to trough, the employment base cut in half, to 70,000 people. You certainly will have declines in the construction sector through most of 2003 in Massachusetts, but not nearly the level of declines that you had in previous recessions. There just wasn’t the overbuilding in this expansion that there was in the previous one.

CommonWealth: Let’s get into that a little bit more, in terms of the impact of the recession on Massachusetts, in particular, and in comparison with the last recession. The last recession, officially, was from mid-1990 to mid-1991. But in Massachusetts we were already hurting by 1989 and we were well into 1992 before we had anything that felt much like recovery. Should we be bracing ourselves for a similar economic siege? Or is this recession likely to be very different for Massachusetts?

Clayton-Matthews: I think we’d all agree it’s probably going to be very different. It should be a lot less deep and not as prolonged. In the last recession, Massachusetts lost an enormous number of jobs, 364,000 jobs between December ’88 and December ’91. This time, the New England Economic Project expects there to be a total job loss of about 52,000. That’s less than one-sixth, one-seventh [the job loss].

CommonWealth: So what will make this recession very different for Massachusetts from the last one?

Clayton-Matthews: The causes are very different and we don’t have the same set of negatives that we did back then. Adrienne, you pointed that out earlier in the discussion. Our banking system is in better shape. We don’t have the real estate bubble. Defense is not going down the tubes as it was then. The real estate markets, in contrast, are in fairly good shape- well, especially residential real estate markets are in good shape. Commercial real estate markets are not [as strong], but they’re not in as bad shape as they were at the end of the ’80s. And there is likely to be an increase in defense spending, which will help the Commonwealth. And most importantly, at the end of the ’80s we were concentrated in the production of high-technology goods, but they were mini-computers, and the market for mini-computers disappeared. Now we are still concentrated in the production of high-technology products–computers and communication equipment–but we are producing items that are in demand. Aggregate demand for these have fallen, so production has fallen, but when it picks up again Massachusetts will be right in there with the rest of the nation in the recovery.

“Will middle-class families find themselves better off? The answer is no.”

Harrington: I think we may have a little more trouble than we thought. When we take a look at the unemployment data in Massachusetts and New England relative to the country, we led the nation in the rise in unemployment. If you go back to the beginning of [last] year up through October, you’ll see that the number of unemployed persons rose by about 37 percent in the nation. Massachusetts is up over 80 percent. So we’ve hit this recession earlier and more heavily than other parts of the country. The second thing, though, is that the employment data that some of the forecasts are based on I’m not sure is tracking the economy very well right now. When you take a look at the employment data over the last year, it basically suggests we’ve added, third quarter to third quarter, about 28,000 [to] 30,000 jobs. [But] when you look at state revenues, particularly withholding revenues, which come right out of payroll, they’re down…by about 6 percent. Well, one of those two numbers has to be wrong…

Clayton-Matthews: What you are worried about is that they are overcounting employment, which they tend to do at peaks. But I think that can be reconciled with the state’s withholding tax revenues by looking at the pattern by which those revenues have come in over the course of the last couple of years, and…2000 was an enormous year in terms of bonuses and stock options. So we are partly comparing the shortfall or the decrease in withholding tax revenues to an enormous boom in 2000.

Harrington: Except, you’re going to pick up those bonuses in the first quarter.

Clayton-Matthews: No, not in 2000. I’m estimating about $9.5 billion were picked up in the fourth quarter of ’99, first quarter of 2000, which is the normal bonus season. But what is striking about 2000 is that throughout the rest of the year wages and salaries, as measured by tax revenues and withholding, were much higher than what you’d expect the trend to be. On the order of $3.3 billion in the second and third quarters. That is probably primarily due to people cashing in on their stock options at the last time they could. Now, however, especially in the third quarter of [2001], withholding tax revenues are indicating that wages and salaries are $2.7 billion below what you would have expected in the third quarter on a normal trend rate of growth. And that’s indicating, partly, reductions in salaries, but mostly I think…

Harrington: Layoffs.

Clayton-Matthews: Exactly, layoffs in manufacturing and reduced salaries and bonuses for that small minority of highly paid workers.

Ortyl: I think also that when you talk about the run-up in unemployment…you’ve got to think about [how much] Massachusetts is highly concentrated in high-tech. That was the sector that’s been hit hardest first, and certainly the job losses from all the big [high-tech firms had an effect]. EMC Corp. continues to announce job losses today. That’s partly the reason Massachusetts is ahead of the curve on the unemployment rate. Also, the point that Alan makes about bonuses is an excellent point. A lot of companies–you are hearing the anecdotal stories that they are slashing bonuses, cutting back on Christmas parties. Some are even suspending bonuses altogether. I think that’s part of the reason for that [withholding tax] revenue drop.

CommonWealth: So, is the unemployment situation worse than it looks? The unemployment rate in November was 4.2 percent statewide. Historically, that’s a number that looks pretty good. It doesn’t look good compared to two years ago, when we were at 2 percent unemployment. But is that a worrisome level in and of itself? Or is there something worse that isn’t showing up in this number?

Harrington: You need to think about it in the context of how it got…down to that 2.3, 2.4 level. And the way we got down to that level was not a very robust recovery during the 1990s. In fact, it took us to the beginning of 1998 to recover all the jobs that we lost in the [1991] recession…The reason our unemployment rate came down so sharply was simply because we just didn’t have much labor force growth. That’s true in the state, that’s true pretty much in the region, particularly relative to the country. A combination of population out-migration, particularly of younger, better educated people, and some moderate job growth resulted in the unemployment rate coming down very sharply. So what that says is we are starting this downturn in a relatively better position. But the question in this downturn is, how rapidly are you falling? And the data suggest to me, at least the unemployment data and the claims data suggest to me, we are falling relatively more rapidly than the rest of the country.

Clayton-Matthews: The initial claims data suggest we are falling very rapidly. The last month was as high as about the highest month in the last recession. The question is, have we laid off most of the workers that are going to be laid off? Or will this continue and spread?

Harrington: I think Adrienne absolutely hit on it. The [key] question, to me, is what happens to construction payrolls. If construction payrolls really start heading south, then I think the state and the region will get into really big trouble. That’s, in many ways, the canary in the mine.

Ortyl: [Construction jobs] are definitely going to go down. You have a ton of office space now coming back on to market for sublease. You have also companies like Sun Microsystems, EMC, putting on hold plans to develop the new campus-type developments. So I think you are certainly going to see declines. I think residential is, as Alan said, not going to be hit as hard as the commercial real estate market. But in terms of comparing this recession to the last recession, I don’t think you are going to get the deep declines. Our projection, peak to trough, with the trough being mid-2003, is for 5,000 job cuts over the course of the recession.

Clayton-Matthews: Mid-2003, are you saying, Adrienne?

Ortyl: Right, we expect [that] construction payrolls will continue to decline through the third quarter, actually, of 2003.

Clayton-Matthews: Construction employment, according to the payroll surveys, has been declining slightly in the past few months, but very moderately. And the hope we have, and it’s based upon two good probabilities, is that the construction sector will hold up long enough for the other parts of the economy to start growing again. Therefore we won’t get wave upon wave of unemployment, but it will be smoothed out somewhat. There is good reason to think that might happen. The Big Dig is still at its high point or near its high point. There still is a lot of commercial office space being built now. That is in the pipeline and will continue. That will actually help us in the next decade, having that [additional office space] when we do recover. And residential construction employment, although that¹s slowing down and I expect will decline, I think the rate of slowdown will be pretty low.

Ortyl: I think it’s important to note that these declines, the quarterly declines, will not be nearly as severe as the previous recession. In the previous recession it was 20 to 30 percent declines each quarter in construction payrolls. They won’t be near that level.

Clayton-Matthews: We haven’t fully addressed the question of why economists are saying that it’s reasonable to expect we’ll start to recover mid-[2002]. That’s partly, as Adrienne pointed out, very aggressive fiscal and monetary policy. But it’s also partly because of the industry mix we have [in Massachusetts]. We have another big sector outside of technology goods, [and that’s the] medical science sector, which includes biotechnology, pharmaceuticals, and medical devices. That works on a totally different cycle of demand. In fact, demand for those services and products is expected to increase, year over year, for two reasons. Partly [it’s] because of an aging population, but secondly because worldwide incomes are in a rising trend, and health expenditures are a normal good. What that means is, as worldwide incomes increase, demand for medical services, devices, [and] pharmaceuticals will increase, probably more than proportional with income. And we are a big exporter in those markets. So that bodes well. Our higher educational institutions should do well over the coming years, partly for demographic reasons. There will be a bulge of new entries to college. But that’s also another export for us, in terms of students. And the financial services sector, although it’s slowed down to a virtual halt now–we have had a burst of the bubble in the stock market–it’s somewhat nice that we’ve only slowed to zero growth and not gone negative. I expect that financial services will continue to be at least stable and give us slow growth in the future simply because we have a lot of money coming in through retirement accounts and a lot of our financial services are handling that type of money.

Harrington: Again I find myself less sanguine. When I look at where this recession came out of, it really was two sectors. One was the high-tech manufacturing industries– telecommunications, electronic components–that had very dramatic losses. That’s been in that [routes] 128-495 belt area. Western Massachusetts hasn’t seen very much of this [decline in high-tech manufacturing employment], and the city of Boston hasn’t gotten so much. This is a suburban [phenomenon], because that’s where a lot of our growth has been. The second area where we’ve had a very dramatic slowdown in performance is in terms of computer and data processing and in some of the high-tech service industries, as well. And both of these industries are really very big export sectors. When you get declines in those industries it puts us in kind of a funny spot…

In terms of monetary policy and fiscal policy, monetary policy seems to be pretty good at slowing down the economy, but I’m not sure if it’s that good at heating it up. In the last recession, the Federal Reserve cut interest rates 43 times over a period of four years, and we didn’t have job recovery until ’95-’96. The second thing is, the capacity utilization rate for the US economy is about 75 percent now, 74 percent. What that means is–the point again that Adrienne was making–if we’ve got a lot of excess commercial property and productive capacity, even if interest rates are low and the cost of borrowing’s low, why would I seek to expand that capacity?

Clayton-Matthews: Paul’s enunciated the biggest scare we have, that the decline in demand for some of these technology products has been so steep and there is so much excess capacity that it’s hard to see that [industry] coming back [or] when it’s going to come back. Every quarter the turnaround gets delayed a quarter…The downturn has really been phenomenal in semiconductor equipment. Production has fallen by about 75 percent since last fall. We export a lot of these products. In the fall of 2000 we were exporting 40 percent more than we were in 1998. And now that’s all disappeared in the space of nine months. So that’s a phenomenal drop.

Ortyl: That also leads to the role that the global economy will play in this recession recovery. Last recession you had Japan and Europe all still growing strong. It was basically the US that was in recession. This time around you have more troubles globally, obviously, with Japan, Hong Kong, China. In the prior recession, those emerging markets [and] Japan really helped to pick up some of the slack for the US economy and the businesses in the US. This time around you don’t have that. So that could make this recession a little bit worse. But DRI-WEFA is still projecting a mild recession. We are still talking 1 percent peak-to-trough [decline] in real GDP.

Clayton-Matthews: I think we can expect that the next recovery is going to be slow. In every expansion, there are usually mistakes that are made regarding misallocation [of resources or misplaced] expectations, and a lesson learned. In the expansion of the ’80s, the lesson was the bubble in real estate. Therefore, throughout the expansion of the ’90s, banks were very careful in lending practices, builders were very careful not to build on speculation, and there was no repeat of the real estate bubble. However humans, being what they are, will continue to make mistakes. This time it was the bubble in technology equipment and in the stock markets. So I think we can pretty much guarantee that in the next expansion, there will not be this bubble mentality, certainly not in technology, and perhaps not in any new type of product outlay…Ultimately, something will happen and another mistake will be made. But I think we know it’s not going to be a stock market bubble. We won’t see the rapid increases in wealth that we did this past decade.

Ortyl: I’d agree with Alan that I think it will be a slower recovery. And then, once you get past, I’d say, 2003–you’re only talking about 2003 to 2006–probably about 1.5 percent average annual growth in total payrolls, which is certainly slower than we had seen the past few years at the end of this expansion. So I think that really tells you that it’s going to be a slower recovery going forward.

CommonWealth: Paul, I’d like you, as our expert in the labor market, to sort out for us who’s paying the price for this recession. We see in the city of Lawrence, once again, a return to double-digit unemployment, 11 percent in November. That’s one indication that, as usual, the recession is hitting hardest the people at the bottom. On the other hand, I think we all know people in the high-tech world, software engineers who a year ago could have written their own tickets, who can’t find a job at all. Who’s bearing the brunt of this downturn?

Harrington: Recessions almost always sort people by level of educational attainment and occupation. I don’t think there is much of an exception in this one, although there is some. Part of the problem, though, in fairness, is we don’t have very good data within the state about who it is that gets beat up. Certainly when you look at the national data, the rise in joblessness has been very heavily concentrated among high-school dropouts, high-school grads in…blue-collar occupations. Joblessness has risen among professional, technical, managerial workers, college grads, but not nearly at the rate that it has for people with fewer years of schooling. And that’s primarily because firms view better-educated workers as a little bit of a capital good. They don’t want to shed it as quickly, because it’s harder to get back when the economy recovers. Having said that, I think two things strike out at you when you review unemployment-insurance data in Massachusetts. One is, a lot of the rise in overall unemployment in the state again appears to be in that 128-495 area. It comes out of those high-tech manufacturing firms and also some of the service firms that have had layoffs out of the tech side. In that sense, I think people who are in engineering fields probably felt some pain…When you look [overall] at who gets beat up in an economic recession, it’s young people, and it’s people with fewer years of schooling, and it’s people who work in blue-collar occupations, primarily. And I think that’s going to be the story in Massachusetts…The second thing I think that no data captures at all has got to do with the immigrant population. Over the last six or seven years we’ve developed this sort of gray labor market in the US and particularly in southern New England that’s characterized by people working in very informal, casual relationships. They’re oftentimes people who are undocumented aliens. And the real question is, for these individuals, what happens to them?

Clayton-Matthews: The people who are getting hurt primarily are production workers in manufacturing, and those workers are skilled workers. They are skilled workers, but they are not necessarily college educated. They may have two-year college degrees, they may have some technical degrees, or they might be high-school graduates. But they have been laid off by the thousands now in this downturn. The other segment that’s gotten hurt is the segment that’s very highly paid, [and] a lot of their pay depends on stock options and bonuses. Now, perhaps you can’t cry too much about them…To the extent that they are unemployed, that may put them in very severe personal financial trouble, they may lose their houses, but they will come back. They will get jobs because, as Paul said, they are educated.

CommonWealth: I’m wondering what the long-term effect may be on household incomes. Paul, your colleague Andy Sum has found that median household income in Massachusetts at the peak of the ’90s expansion had not yet gotten back to the level of the 1980s peak. Alan, you’ve noted in your writing that income growth in the ’90s has been geared toward high-tech manufacturing workers, engineers, and executives. As we go through this recession and come out of it, what’s likely to happen to middle-class family incomes in Massachusetts?

Harrington: I don’t think there’s much question. If you take a look at the data for the last recovery, all the income gain that we did generate in the state came from people who were in the top fifth of the income distribution, and it was suggested that has a lot to do with people who work in the finance and high-tech sectors of the economy. If you were in the 80th percentile or below of the income distribution, you did not get back to what your 1989 income levels were. And part of what’s underlying that is, as we move out of the manufacturing sector into services and high-tech services and finance, construction, and a lot of low-end services, it’s the industrial structure itself that causes the income distribution to widen…So the inability to generate manufacturing jobs itself–as we actually lose manufacturing jobs–contributes to this growing income gap. In the absence of a strong manufacturing recovery, which you would have to put in a minor miracle category at this stage, the outlook for people who get 96, 97, 98 percent of the family income through working, it’s hard to see where they are going to get lots of strong income gains in the recovery.

Clayton-Matthews: I think the gains in the ’90s were a bit better than you are characterizing them, Paul, because the people in the ’90s were not the same people as in ’89. We had a lot of immigrants [move into Massachusetts]…During the latter half of the ’90s, unemployment rates among minorities and among less skilled workers, those with a high-school education or less, improved dramatically…That reflects more income because of more jobs. Wage rates did not [rise dramatically]. If you weren’t in the top tier of professional, highly educated workers you didn’t get very much increase in wage rates…But you were likely to get a job and to be working more hours than before. And that was a real gain. What we are seeing now is that happening in reverse. People are losing jobs. Many people who are moderately skilled or less skilled are losing jobs and they are losing incomes. That’s a big loss. Their incomes won’t come back until employment picks up again.

Harrington: But there is a big difference between personal income growth and family income growth. If the question is, will personal income rise as the economy recovers and generates jobs, the answer is yes. If the question is, will middle-class families find themselves better off, the answer is no. In the [recession of the] early ’90s, the unemployment rates never got as high as you would have expected, because we had this out-migration of younger, better educated people. When the recovery came, unemployment rates dropped very rapidly because of the slow- essentially no- labor-force growth…, but family income didn’t rise during much of the decade. By ’99-2000, the labor market really did tighten up…and family incomes really did come back. But we found ourselves in the ’90s in a very narrow recovery coming out of a few industries that bolstered household income [only] toward the end of the decade. But the ’90s were not, in my opinion, a period of, as some have categorized it, unprecedented economic growth. I think quite the contrary. I think this was not a great recovery…It was slow labor-force growth that really got unemployment rates down and provided access for people at the bottom of the labor market. As the economy has tilted I think those groups get beat up very quickly.

CommonWealth: We’ve talked a little bit about what we could hope to get out of the federal government in terms of getting the economy back on track–the fiscal stimulus of government spending, tax cuts, though how much more the Fed can go in terms of reducing interest rates is unclear. But what, if anything, should we expect from the state?

Ortyl: I think it’s more going to be a federally led recovery in getting the economy back on track. I think the Fed will cut the federal funds rate another 25 basis points [to 1.75 percent, at its December meeting]. Also I think we will get some type of fiscal stimulus package from the [Congress]. That will do a lot to boost the economy, in terms of the further rate reductions and refinancing [home mortgages]…But instead of going out spending, [consumers] are paying down debt. I think for things to really turn around you are going to have to have consumers get out there and spend. I don’t know if there is a whole lot the state can do. I think it will be up to basically the federal government and consumers.

Clayton-Matthews: I agree with Adrienne. The state can’t do anything to get us into recovery mode right now. But it can do two things. One, it can mitigate the hardships of this economic downturn through unemployment insurance policies and subsidizing health care or health insurance. And the state can also do things to ensure that the next recovery is healthy. The number one thing the state should do is to not take the foot off the pedal of education reform and spending. Keep that going, because our comparative advantage in Massachusetts is a skilled labor force. The manufacturing sector we have left is one that is based on skilled labor. It’s the only manufacturing sector that can survive in the high-cost economy that we have. So we have to continue education reform and education spending for the residents of the Commonwealth. Also, we have a high cost of living primarily because housing costs are so high. The state should try to do anything it can to make houses more affordable because…young families are leaving the state because they can’t afford to live and send their kids to school in the communities they want to in Massachusetts.

Ortyl: I think those are very good points. And that’s also part of the fiscal stimulus from the federal government that we are going to get. A lot of that will be in transfers to state and local governments, a lot in medical transfer payments. I think that certainly will help ease the burden on the citizens of Massachusetts.

Harrington: If I could expand on that to include our congressional delegation. If you go back to the 1980s, for every dollar we sent to Washington, DC, we got $1.20 back. Now, we are down to below 80 cents. Our congressional delegation has really got to start delivering [back home] much higher fractions of the expenditures that the federal government makes. I think it’s really essential that we get [our] congressional delegation [to] respond, because…we have not been getting, certainly, our historic share, or even our fair share. And related to this is the defense issue…As one government affairs official from a big defense firm said to me, “Trent Lott loves our company. He just loves us in Mississippi.” The allocation of a lot of these programs is really done on a political basis. We’ve got to really do a better job at getting it back. Sen. [Edward] Kennedy is a star in this area, but I’m not sure the rest of the delegation has pulled its weight, to be frank.

Clayton-Matthews: It’s going to be harder to do [because] the size of our congressional delegation is not going to increase over time. It’s probably going to decrease.

Ortyl: I think Paul has a very good point about the defense contractors. If we can get some type of a rebound there, and perhaps after September 11th we can, I think that will be a big plus for the state.

Harrington: But [as to] Alan’s point [about] mitigating the hardship, that’s right. What role can the state play in that? One is certainly the unemployment insurance system. The unemployment insurance system itself is not in particularly strong shape. I mean, if we got into a recession like we were in in the early ’90s, we’ve got about enough dough in there to last six months. I don’t know if you recall this, [but] back in the late 1990s there was the whole New Economy, where you didn’t have to make profits anymore. And the proponents of the New Economy said, let’s tap into this UI fund, in two ways. One, let’s cut those UI taxes, because we’re not going to get into a recession anymore because we are in a new economy. That was the business group. Then the labor groups said, let’s use that money for Baby UI [paid family leave for birth and adoption],…because we’re not going to get into a recession anymore. Well, the answer is, we do need that money. If this recession gets more severe we could find ourselves in the place of going back to the business community in the middle of a recession, asking [for an] increase in their employment insurance taxes. That happened to us last time, and we could find ourselves in that spot again.

CommonWealth: But now, there are proposals in the Legislature to freeze or cut unemployment taxes, because of the large surplus in the unemployment fund today [a freeze passed in December, cancelling a scheduled increase].

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Harrington: Believe me, it’s not much of a surplus. You look at the $2 billion [in the UI fund], and I’ll tell you right now, through the third quarter [the fund was] already in a deficit [on a] quarterly operating [basis]. Our revenues are less than our expenditures, which is what you would expect during an economic decline. The point is, this is going to do nothing but grow for a while. So we could find ourselves in that spot. The second thing has got to do with the welfare system…Almost all the caseload reduction we’ve [gotten recently] is because of welfare reform, not because of improved economic conditions. And the fact of the matter is, when you look at family poverty rates in this state we’ve made no gains at all over the last 10 years. As the employment situation deteriorates, family incomes are going to drop, those people at the bottom of the income distribution are going to have a tougher time, and you are not going to have the welfare system in place that’s going to carry [them], if we get into a long and extended recession. So we may have to do some things on the welfare side.

And the third area, which I think Alan is dead right on, has got to do with, what do we do to ensure a stronger recovery? Part of what I think has happened here is that we’ve had an economic development strategy in this state that’s just ignored the manufacturing sectors. If you go through the data,…over 30 states had net gains in manufacturing employment in the US over the [1990s expansion]. And we’ve just had a set of strategies- I can remember Gov. Weld, shortly after he was elected, on public broadcasting saying, “Yes, it’s a good thing that we got rid of those old smokestack industries.” Well, governor, it’s a bad idea. Trying to have a set of strategies that are designed to create manufacturing employment opportunities, similar to what Tom Menino is trying to do in Boston right now, I think really has a lot of merit. So trying to set the stage for an industrial recovery is right. I think the second part of that strategy, though, is that we need to start thinking about how to use some of the state funds we have on work force development activities. To the extent that we can get out there and provide education and training services to dislocated workers, that probably matters a lot as well, because when the recovery comes,…and I think Alan and Adrienne both said this, recovery is probably not going to come out of places where we [are getting] worker dislocation [now]. So, the idea of engaging in retooling activities for some of these individuals I think makes a lot of sense.