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Challenges To Economic Recovery

Posted Nov. 1, 2010

The economy is on the minds of many Americans today. Why isn't a more impressive and sustainable recovery occurring? The recession that began in December 2007 has been different than past recessions for a variety of reasons, and the recovery also looks different. Why is the recovery taking longer than it has in the past and how may this affect rural economies?

The main cause of the economic collapse was the overextension of credit. This is the first reason the economic recovery is slower. Easy access to credit eventually led to many loans that could not be paid back. This, in turn, resulted in tighter regulations when applying for loans. Currently, interest rates are much lower than in recent history, but down payment amounts have increased and much more detailed credit checks are being performed. Therefore, it has become more difficult to obtain funds from lending organizations. The agricultural community has remained relatively unharmed by many of the changes, however, as commodity prices and demands for agricultural products have remained relatively strong or rebounded faster than expected.

The second reason for the slow recovery is uneasiness over future tax rates. At the end of 2010, many Bush-era tax cuts for investors, small business owners and families are set to expire, which will result in higher income tax rates, an increase in estate taxes and higher capital gains tax rates. Small businesses are also unsure about future health care cost liabilities and the expensing of capital asset purchases. These issues and uncertainty about income flow will likely continue to lead consumers to be cautious about spending. Businesses will limit expansion because of the uncertainty of the impact that new employees and equipment will have on their bottom lines.

A third reason for a slow recovery in the U.S. is related to the historically high unemployment rate, which was 9.6 percent in September 2010 according to the Bureau of Labor Statistics. There are several negative economic impacts associated with having so many Americans without work, including decreased demand for goods and services, increased government expenses from unemployment payments and benefits, and a reduction in income tax revenues. A higher unemployment rate also results in many cutbacks or furlough time from companies. This leads to many individuals having less disposable income and a further reduction in demand for goods and services.

Some rural regions in the U.S. have experienced less of an economic downturn than other localities. However, fundamental problems remain in rural communities according to a 2010 article published by the Federal Reserve Bank of Kansas City.1 Many rural populations depend on government jobs and public funding for local services. With decreases in revenues from lower tax receipts, many state and local governments are facing tough budgeting decisions. Examples of these decisions may include Medicaid funding levels and the possibility of the reduction of government services through public schools, medical facilities and transportation departments. As a result, state and local governments are looking at ways to cut spending, increase efficiency and/or increase revenues to bridge the gap.

Once we have fully recovered, the economy, particularly in rural communities, may look very different. Hopefully, the problems and issues that are currently impeding economic recovery will be addressed intelligently with minimal negative impact on those recovering in its wake. America still has several speed bumps remaining in the road to recovery, but we have recovered substantially from our lowest point.

1http://www.kansascityfed.org/publicat/mse/MSE_0610.pdf

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