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Recession’s length is really up to our leaders
For the first time in a generation, we’re apparently experiencing a significant economic recession.
Since it probably will involve a substantial decline in economic activity, both in extent and duration, our political leaders face a situation that few of them have been through.
The bursting of the “dot.com bubble” and general decline in the stock markets that began in 2000, even when followed by the disruption and costs of the terrorist attacks in 2001, didn’t result in a significant downturn — partly because of the “failed economic policies” of the current federal administration.
Young folks ought to pay close attention to see how things work out this time, and we older folks can see whether anything we learned long ago turns out to be useful.
As with many periods of economic growth, this past one involved quite a bit of borrowing to buy now rather than later.
At some point, borrowing money to buy now has to slow down, if not end. The future holds only so much promise of earnings with which to pay those debts.
When the slowdown occurs, economic activity usually drops. Consumers are “tapped out,” and managers don’t believe that borrowing to expand the business would be likely to produce more profits.
Some people have already learned a painful lesson about real estate prices. If they thought the important thing was the monthly payment, rather than the price paid, they probably don’t think so anymore.
Here in South Kitsap, the market values of homes soared after 2003, as lower interest rates made it possible to make the mortgage payments despite the price increases.
The market began to slow down in 2007, then prices began to decline — and the end of that decline is not yet in sight.
Since real estate values don’t usually decline by much or for long, the current situation may really be different from what most of us have experienced.
The construction industry is a big part of our total economy. People earn a living building new homes and business places. People have jobs manufacturing, transporting, and selling the furnishings and equipment for new structures.
The slump in automobile sales is also having a significant impact on a national and local level.
Automobile manufacturers, both foreign and domestic, increased sales by offering low-interest loans to purchasers.
The effect was similar to what occurred in the housing market. Auto sales increased, but not forever.
Consider only the situation in those two industries — construction and automobiles — and you have the explanation for almost all the decline in local sales tax revenues.
It’s enough to make one wonder why the drop in sales tax revenues would be a surprise. Is it only through hindsight that the unusual growth in real estate and auto sales for the few years up to 2007 becomes apparent?
The business cycle of growth followed by recession and then a return to growth is familiar to most of us, and the more extreme situation of “boom and bust” isn’t unheard of.
On a local level, our government leaders ought to study what has occurred over the past ten years to see if they can figure out how to determine the difference between ordinary growth and a boom.
Planning for the impact of a slight recession on sales tax revenues is not the same as recognizing you’re in a boom and planning for the bust.
If a boom is occurring in a significant sector of the economy, like housing construction, it would probably be a mistake to act as though the resulting increase in tax revenue will continue or perhaps drop to a slightly lower growth rate.
Most of our local government entities did plan on the effects of a slowdown in the economy or even a recession like the two that occurred in the past 25 years.
They assumed that sales tax revenues would increase by no more than 2 percent this year, rather than the long-term average of about 5 percent.
Since we are apparently experiencing the bust part of a boom and bust cycle, rather than an ordinary business cycle downturn, their budget projections weren’t pessimistic enough.
Kitsap Transit seems to be an exception — their sales tax revenue projection for this year was optimistic.
Instead of a slump they projected an increase of 6.7 percent for 2008, as though the boom was still happening.
Whether trimming budgets by a lot or a little, local government leaders should learn from the experience and incorporate their “lessons learned” into future budget deliberations.
Sooner or later, things will turn up again, and it will be possible to make all the same mistakes — or to avoid the ones you learned about this time.
Robert Meadows is a
Port Orchard resident.