A Volatile Economic Outlook for 2010


“It’s a great time to be an economist. Everybody’s interested,” said Darden School of Business Professor Alan R. Beckenstein, who delivered the “Economic Outlook for the Year 2010” to Darden alumni in Charlottesville last evening. Beckenstein-web-2.jpg

“We seem to be out of the recession, with third quarter growth at an annual rate of 2.8 percent,” he announced. Other signs of hope for the new year are that inflation has been contained and the unemployment rate has dropped a little to 10 percent.

Yet, big questions remain: “Will there be a double-dip recession in 2011 when we exit the very expansionary monetary and fiscal policies that were used to rescue the economy?” asks Beckenstein, who leads Darden’s Global Economies and Markets area.

“This is the good part of the story,” he said. “We apparently got into this mess in the first place because of overly expansionary monetary and fiscal policies, aided by a global savings glut, which resulted in bubbles in both equities and housing. After a meltdown and total restructuring of our financial sector, we became engaged in a rescue program that aims to use very expansionary monetary and fiscal policies, with the continuation of the global savings glut. This is ironic in the extreme!”

Beckenstein describes multiple “signs of disequilibrium”: the U.S. dollar continues its rocky ride, lending by financial institutions remains impaired, and the mature, rich countries with low savings rates are being financed by poor emerging market countries with high savings rates, just to name a few.

“Surely, the answer to all this complexity is to pursue sound long-term policies and quietly build a solid foundation for growth and prosperity,” he said.

Yet, Beckenstein points out that U.S. policies currently support the short-term rescue mode. “Like the New Deal era of the 1930s, the rejuvenated Democratic Congress seeks reform, rather than rebuilding and renewal. In doing so, they are choosing political gains that are costly for reestablishing a basis for growth.” He adds, “The opposition is equally bankrupt of good ideas.”

While he agrees that initiatives such as the Cash for Clunkers program, new homebuyer tax credits and funding for the States have stimulated the economy, he worries about the future consequences of the massive deficits incurred by government policy. “The decisions to pursue health care reform and to promote climate change policy in Copenhagen while the economy is floundering and the government budget is a disaster is perplexing from an economic perspective,” he said.

“I’d like to see the pursuit of long-term, stable macro policies — debt reduction, moderate and stable monetary policy — and sound market-oriented micro policies,” he said.

In 2010, Beckenstein predicts 2.3 percent GDP growth and core inflation of 1.6 percent, slightly down from 2009’s 1.7 percent. He forecasts unemployment will decline to 9.4 percent, and he expects more volatility in the stock market with a several thousand point swing somewhere in the year.  

“Everything suggests volatility, not stability,” he said. So, brace yourself for a bumpy year.

Beckenstein will present his annual economic forecast tonight to Darden alumni in Arlington, Virginia at Sands Capital Management at 6 p.m. (more information and registration) and on Thursday, January 14 in Richmond at The Commonwealth Club at 7:30 a.m. (more information and registration).

Space is limited for the events, and an RSVP is required. Contact the Office of Alumni Relations (finlaya@darden.virginia.edu) for further details.

Founded in 1955, the Darden School of Business improves society by developing leaders in the world of practical affairs.

For more information, contact communication@darden.virginia.edu.

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