WisBusiness: UW-Madison business dean predicts lingering unemployment even as market recovers

By David Wise

WisBusiness Staff

The nation’s stock market is already in recovery and gross domestic product should begin to recover in mid-2009, University of Wisconsin-Madison Business School Dean Michael Knetter said today.

High unemployment, however, will linger through the year, he predicted.

Knetter told Milwaukee Rotarians during their weekly luncheon that the change in the presidential administration is part of the reason for the market’s rebound.

“What we needed was a change of administration, a sense for the new team in charge and policy being developed to deal with the situation,” Knetter said.

He noted that Dem Barack Obama’s new administration does not have to deal with the day-to-day governance and has been able to focus on developing a plan to deal with the economic situation.

“Obama’s made great choices to go beyond his initial inner circle to bring in the very best people, and I’m sure they’ll have a good plan,” Knetter said. “And that has reduced uncertainty in the market.”

While he predicted a turnaround in stocks and GDP in 2009, reductions in unemployment will take longer, he said.

“We will be in luck if the bottom of unemployment is in January 2010; it might be little bit later than that,” Knetter said.

To get the economy back on track, fiscal stimulus is “certainly needed but difficult,” he said.

“Right now we’re in a situation where we’ve convinced everyone the root of all evil is we spend beyond our means, but of course, now we’re about to propose a solution that is more spending beyond our means,” Knetter said. “But that is what needs to occur. The Great Depression was an example of what happens when we don’t do that.”

Knetter encouraged personal spending as well, saying that if people saved all of their earnings it would “lead to continued chaos in the marketplace.”

“We all need to go out and do our civic duty and spend.”

Knetter said the federal reserve is acting aggressively to restore confidence in the financial institutions and is providing as much liquidity as possible, but that raises fears of inflation and depreciation of the dollar.

Knetter said depreciation of the dollar may be offset to an extent by depreciation of other currencies, but “inflation is going to be a global problem going forward.”

Although the American economy has taken a hit, it has still grown relative to the economy of the 1970s and 1980s, charts Knetter showed indicated.

The 1990s and 2000s were marked by greater than expected growth fueled by technological change and efficiencies gained through globalization — factors he expects to continue as driving forces once problems of demand in the market are addressed.

“As long as we have the kind of attitudes, institutions and investments that embrace those changes and find the way to compete and succeed in that environment,” Knetter said. “I think we have a bright future in front of us.”