U prof on economy: Hang on!

4:29 PM, Aug 6, 2011   |    comments
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Professor Varadarajan Chari

MINNEAPOLIS - University of Minnesota Economics Professor Varadarajan Chari has some advice for Minnesotans who watched stocks plunge on Thursday.

"Hang tight! It is okay!" Chari said outside the Minneapolis Federal Reserve Bank headquarters where he is a consultant. "The history of the American economy has been that, eventually, we go back to growing at about two percent a year in per capita terms. I haven't really seen anything that diminishes my confidence that three, four, five years down the road, we will grow at two, three percent a year in per capita terms."

Chari correctly predicted that the long-awaited deal to extend the federal debt limit would not prevent the stock market from falling.

"We should not pay too much attention to the market. Markets go up. Markets go down. That is the nature of the stock market. So, paying a great deal of attention to day-to-day fluctuations in the stock market? Guess what? Just go to Mystic Lake [Casino]. You are going to have more fun than watching the market go up and down," said Chari.

Instead, the economist suggested that investors should care about the "long run prospects" for the stock market, meaning over several years and not a few days or even a year or two. Chari insisted that it is the economy that drives the stock market and retirement savings.

Friday's unemployment numbers were welcome news to many economists, since the 117,000 new jobs created in July were greater than the 85,000 predicted. However, Chari said that a robust recovery would require about 300,000 jobs a month being created.

Chari warned not to become intimidated by the "R" word: recession. He said the possibility of a double-dip recession will depend on data that is not yet available.

"I think the word recession has been overstated," Chari added. "People regard, correctly, the slow pace of recovery over the last couple of years, as a recession. Indeed, they should. We should not get too carried away by the word because sometimes the word means, if we grow at plus .2%, you are not in a recession. If you grow at minus .2%, you are in a recession. For any living, breathing human being, what is the difference between being plus .2 and minus .2? The words are less interesting than the data.".

He pointed out that the data suggests the economy is growing "very, very slowly and, by all indications, we are apt to grow slowly for a little bit of time."

Chari believes economic reforms at the government level are required in America to avoid the problems that Europe has been facing at present.

"The severity of their problems is much greater because the baby boom, in effect, has already aged (in Europe), so they have a lot more older people as a fraction of their population than we do."

He says America will have that percentage of older citizens in 10 or 15 years, which is when Chari thinks entitlement programs like Social Security will be a bigger problem than now.

"How will we solve the problems of ever-escalating health care costs?" Chari asked. "As people age, they use up a lot more health care resources, understandably. We need to find some way of taming those kinds of costs. Absent that, we will all have to settle for a substantially lower level of consumption of goods and services."







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