With the current economic crisis, high unemployment across the country and the budget crunch in Pennsylvania, no issues loom larger in this fall’s election than jobs and the economy. To get you up to speed on it all, we help explain how we got here and how candidates from both sides plan to push an economic recovery.
- Sept. 20, 2010
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How did the economy get so bad?
Most economists link the current economic crisis, also known as the credit crisis, to the “sub-prime” mortgage business begun in the United States during the 1990s. These mortgages allowed people with poorer credit histories to buy houses. Financial companies and banks figured out ways to bundle these mortgages together and sell them to investors as a way of spreading the risk of lending to these homeowners. The federal government increasingly allowed this as a way of helping more people afford to own a home. Interest rates were low, lots of people were buying houses, and prices went up and up, making everyone feel richer.
Having more people owning homes seems like a good thing. What went wrong?
The trouble began between 2004 and 2006, when interest rates began to increase and lenders hiked the adjustable rates they charged on many subprime mortgages. The higher rates, in addition to putting stress on people paying off their mortgages, also scared away new potential homeowners and brought an end to the housing boom.
So that’s when prices fell and many homes lost value?
Yes. As fewer people were looking for houses, prices stagnated, and then declined. Some people were left paying for mortgages that exceeded the value of their homes. People began to stop paying their mortgages; lenders began to lose money.
So that’s why the economy fell apart in 2008?
It’s a little more complicated than that. Because banks and financial institutions had sliced and diced packages of subprime mortgages in so many complicated ways, it was hard to tell who was really going to lose money on the unpaid mortgages, which made it hard to figure out what the investments in mortgages were really worth. This caused banks to stop lending money, since they didn’t know whom to trust; investors stopped buying assets because they didn’t know what they were actually worth; the value of your 401k or pension fund dropped overnight. The economy nearly ground to a halt.
Ok, so people lost money on houses. Why does that mean so many people also lost their jobs?
For a long time, the American economy was living off the ever-increasing value of houses. As long as housing prices kept going up, the owners kept making more and more cash. They spent that cash on things – cars, electronics, vacations, bigger houses. Once that spending stopped, the people who made and sold those products saw business decline and they had to start letting workers go. Banks, meanwhile, were afraid to lend anyone any money, so even healthy businesses couldn’t get the credit they needed to hire workers.
So how bad is unemployment now?
Nationally, about one out of every ten Americans is unemployed. Pennsylvania is only in slightly better shape, with 9.3 percent unemployment. Low income groups are especially vulnerable in this environment – the Census Bureau says the poverty rate is at its highest in nearly 20 years.
How did the Philadelphia area do compared with the rest of the country?
Better than a lot of places, though not so well. A recent Temple University report showed that the region lost about 80,000 jobs during the depth of the recession, from mid-2008 until mid-2009. Hardest hit were construction and manufacturing jobs, particularly anything related to homebuilding. There were even a few bright spots in that period, including job gains in certain retail stores, including gas stations.
When are things going to improve?
We are through the worst of it and the recession is over, economists tell us, but things have not started to get better yet. Unemployment rose rapidly from about 5 percent in 2005 to the current level in 2010. Now everything is stagnant. Job loss has stalled for the past few months in Pennsylvania, but locally and nationally, the economy is not yet growing, businesses are not increasing traffic, and there are not enough new jobs.
Is there any good news on the horizon?
There has been some good news. The restructured American car companies GM and Chrysler are all heading in the right direction after avoiding near catastrophe in winter 2008-2009. The technology, research and education sectors are healthy. In Philadelphia, Penn continues to expand, the recently announced Navy Yard “energy innovation hub” looks promising, and casinos are going up across the state, all providing construction jobs. But on the whole, few of the employers that cut jobs when the economy went south have begun to hire and expand.
How has the government tried to reverse the fortunes of the economy?
Jobs and the economy have been the most important issue in Washington for the past two years. The Democratic and Republican parties have disagreed strongly about how to address the crisis. Republicans have advocated cutting taxes on consumers and businesses. Democrats have pushed aggressively to use taxpayer money to create jobs and keep businesses running. The Democrats have mostly gotten their way for the past two years thanks to a majority in both the Senate and the House of Representatives.
So what has actually been done?
Here are the major attempts by Washington to rescue the economy and mitigate the effects of the recession on American families and businesses:
The Bank Bailouts: The bailouts were controversial to say the least, especially when news leaked that bank executives awarded themselves huge bonuses even when their firms were receiving billions in taxpayer aid. Although they disagree on details, economists say the bailouts prevented the credit crisis from getting even worse than it was, with more banks failing and people losing even more money.
The $800 Billion Stimulus Package: Approved by Congress and signed into law in February 2009, this massive package of emergency aid, also known as the American Recovery and Reinvestment Act (ARRA), went to keep healthcare clinics running, schools open, and workers busy on public infrastructure projects in communities around the country. Philadelphia received $600 million in much-needed aid that went to public infrastructure projects around the city. The stimulus also paid for the popular Cash for Clunkers program.
The Auto Industry Bailout: This deal rescued perhaps America’s most important manufacturing industry. Two of the ‘Big Three’ were near collapse in late 2008 after years of mismanagement and declining sales. The federal government put both GM and Chrysler into bankruptcy, forcing them to cut unprofitable products (even classic names like Pontiac and Hummer), and handing control of Chrysler to the Italian company Fiat.
Why does the government need to do any kind of “stimulus”?
The idea is that if the government pumps more money into the economy, more people will have jobs and money to spend, meaning companies will have more business and will not have to lay off workers.
But doesn’t that just add to the government’s already big deficit?
Yes, and that’s the crux of the political dispute. Democrats say the government needs to keep spending money to get the economy growing again, which will increase tax revenue, making the expense worthwhile. Republicans argue that government has its fingers in too many parts of the economy and it should be letting business do its own thing, not taking on more government debt. Economists themselves are split as to which is the best approach.
So how does all this relate to the 2010 election?
Well, the members of Congress are the ones who say how much the federal government will spend to stimulate the economy. If you vote for Republicans, there probably won’t be as much direct federal spending on the economy, since they tend to favor business tax cuts. If you vote for Democrats, you might see another stimulus bill of some sort and probably less tax cutting. Congress members also decide how much to spend on expensive items like fighting terrorism and the wars in Iraq and Afghanistan.
What about the new Governor?
It’s simple: the top priority for the next Governor will be to figure out how to bring jobs to Pennsylvania. Both candidates agree that the winner of this race will be the one who sells his job plan to voters. They don’t have the kind of resources the federal government has, but they can deal with tax rates and economic development projects.
What does each candidate plan to do?
The Democrat, Dan Onorato, plans to invest money in and around Pennsylvania’s research universities, which provide stable jobs and spin off lots of entrepreneurial new businesses. This plan worked for Onorato as County Executive in Allegheny County, where he led the charge to reinvent the rust-belt city of Pittsburgh as a research and education center focused on the University of Pittsburgh.
And Corbett?
Corbett plans to make Pennsylvania friendlier to businesses by lifting tax burdens, regulations, and legal barriers that he says prevent businesses from expanding and creating jobs. He wants to clean up corruption and dysfunction in state government, making Pennsylvania a more attractive place for businesses and investors.
How can I learn more about all the candidates’ plans to shore up the economy?
Nobody says it better than the candidates themselves; we have links to their campaign websites here on
our look at some key races. And check out our partnership with
Philly.com known as
Election 2010, looking at
the issues and what the candidates are saying about them in six of the most closely-watched races in the area.