Economist Answers Questions from Regular Joes The economic news this week was troubling and confusing, particularly to the average person who is not an economist. Carnegie Mellon economics professor Marvin Goodfriend talks to Andrea Seabrook about how the economic news affects ordinary Americans.
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Economist Answers Questions from Regular Joes

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Economist Answers Questions from Regular Joes

Economist Answers Questions from Regular Joes

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From NPR News, this is ALL THINGS CONSIDERED. I'm Andrea Seabrook.

The economic news is bad. Sure. But it's also way confusing. What's a person to make of the meltdown of a top Wall Street investment bank, turbulence in the market, the housing slump, the credit crunch, not to mention what the Federal Reserve has been up to - probably not much - unless that person is an economist.

Well, we've invited Carnegie Mellon economics professor Marvin Goodfriend to join us. He's in the studio of WQED in Pittsburgh. Thanks very much for being here.

Professor MARVIN GOODFRIEND (Economics, Carnegie Mellon University): My pleasure, Andrea.

SEABROOK: Now, professor, we've collected some questions from Americans across the country about how all of this news affects them. Are you ready? Here we go.

Ms. SANDRA BEATS(ph) (Resident, Laramie, Wyoming; Front Desk Clerk): Hi, I'm Sandra Beats. I am 39 years old. I live here in Laramie, Wyoming. I'm a front desk clerk. Why is everything so high? I see no reason for it to be so high.

SEABROOK: Americans haven't really worried about serious inflation for a couple decades or more. But Sandra Beats, as we heard, is worried about the prices of everything. And that's actually one of the things the Fed is trying to deal with. How does all that work?

Prof. GOODFRIEND: Well, the problem is that the Fed has had to move in the other direction with interest rates, with monetary policy. But the Fed has been easing so-called, making monetary policy easier, providing more money in the last few months to fight this credit turmoil that we've had. And as a result, that's not helpful to fighting inflation.

SEABROOK: Hmm. Let's hear another comment. We got this one from Zach Cossack(ph) of Charleston, West Virginia.

Mr. ZACH COSSACK (Resident, Charleston, West Virginia): I work here, at the (unintelligible). Wall Street does affect me a bit, but I don't see any immediate effect from it right now.

SEABROOK: Now, Zach Cossack is 18 years old. He doesn't own a home, he's not looking to expand a business, and he's not heavily invested in the stock market. He sort of sees this stuff on Wall Street as really not having much of an impact on his life. So how true is that?

Prof. GOODFRIEND: I think that's more or less true. He's young enough that we're going to get through these problems in a short order relative to the life that lies ahead of him. You know, things will be more or less on track by the time he'd - starts to be interested in buying a house and so forth. So I think he's right to think that there's some distance between these developments that are occurring elsewhere in the economy in his own life.

SEABROOK: Our next questioner hits on another topic we've been hearing a lot about lately, commodities.

Ms. TAMMY DENNIS(ph) (Resident): My name is Tammy Dennis, 44. And right now, I'm in between jobs. Is a loaf of bread really going to cost a bag of gold?

(Soundbite of laughter)

SEABROOK: That's a good question. And it touches on two things: bread, or specifically, wheat and gold. So what does that mean?

Prof. GOODFRIEND: Food is one of those things that people want to buy more of in a better quality of when they become a little bit more wealthy. And a lot of people are becoming a little bit more wealthy in China and India. And that's pushing the - what we say, as economists, the relative price of food like wheat, much higher than it's been. And it's likely to stay higher as relatively to the other things Americans are interested in buying.

SEABROOK: So what does this mean to Tammy Dennis? Does it mean that it's not just the bread but everything else that's going to be more expensive?

Prof. GOODFRIEND: I think Americans are going to have to get used to the idea that fuel is going to be permanently a little higher or much higher than it has been in the past, and food is going to be higher than it has been in the past as a relative price compared to other things that Americans buy just because, again, of these huge countries that are coming online.

SEABROOK: Now, we also spoke to Barbara Fight(ph) of Norman, Oklahoma, about how business is in her neck of the wood.

Ms. BARBARA FIGHT (Resident, Norman, Oklahoma; Store Owner): I have a store so it's real contingent on the economy. However, it doesn't seem to really be slowing down. So the girls, their parents are still letting them buy clothes and things, so it's been okay.

SEABROOK: Now, as you heard, Barbara Fight isn't feeling the crunch here. What does that say to you?

Prof. GOODFRIEND: Well, it's interesting that Barbara mentions clothes because there are some goods that economists like to call consumption goods - things that people really need to buy on a regular basis, and they tend to continue to buy these goods even through recessions. And clothes is one of those things, you know? Every year, you have to buy some new clothes for your kids or for yourself. And so clothes is not one of the first items to see the downturn. What starts to see the downturn are those purchases that we have the capacity to put off for the next year such as, we don't have to improve our - build another room on our house. We don't have to buy another car. These are called durable goods, which you really can decide whether to buy this year or next year.

SEABROOK: So what if Barbara Fight wants to expand her store or hire new people for her store - in other words, what if she needs credit?

Prof. GOODFRIEND: She's probably going to think twice about doing that because that's a durable good purchase that she can put off a little bit if credit is a little expensive this year.

SEABROOK: Our next questioner is 53-year-old Dave Martin(ph). He wonders if the government can do anything to help people keep their homes.

Mr. DAVE MARTIN (Resident): I would be curious about, you know, what are the effects of us helping out the foreclosure situation.

SEABROOK: Dave Martin is not alone. Many Americans are wondering how they can avoid foreclosure.

Prof. GOODFRIEND: Well, this is an important issue that a lot of people are discussing. There's a lot of talk about potential help from Washington. The lion's share of the public is not at risk of foreclosure. And so, there's a real issue about the extent to which the public would support too much help for those people who got stuck in bad situations.

SEABROOK: But there's a political thing going on here, too. Democrats are pointing out that while ordinary people are losing their homes, one of Wall Street's biggest firms got a big bailout. And so, I imagine some of the people we've talked with wouldn't mind getting a bailout, too. Why should the big companies get bailouts and not the people?

Prof. GOODFRIEND: I would describe what happened to Bear Stearns as hardly a bailout. The government mobilized to make sure that when this investment firm ran into trouble, it would contain the trouble within Bear Stearns. So in other words, if the government had not mobilized to facilitate this purchase of Bear by another company, what would have happened is Bear, on Friday last week, would have declared bankruptcy because it would have defaulted. And that bankruptcy would have put in jeopardy all the customers that it does business with. And then it would put the customers of those customers in jeopardy. And should Bear have been allowed to fall on its own devices to go bankrupt, so to speak, you would have had concentric circles of problems emerging and radiating out from Bear throughout the whole economy.

SEABROOK: I have to say, it sounds a little trickle-downish to say that and not also advocate helping people from having their actual homes being foreclosed on.

Prof. GOODFRIEND: The government is helping people work with firms, with their lenders, to try to minimize the extent to which foreclosures cause hardship to people. There are lots of programs that are in place - that are trying to educate people and their lenders - how to get together and get through this with the minimum hurt to either side in the same way that the government facilitated the purchase of Bear by another investment bank.

SEABROOK: Professor Marvin Goodfriend teaches economics at Carnegie Mellon University in Pittsburgh. Thanks very much for fielding our questions.

Prof. GOODFRIEND: Thank you, Andrea. It was my pleasure.

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