Three professors from the Ross School of Business spoke to an audience of about 60 people in the Colloquium room of the Business School yesterday afternoon, addressing the current economic crisis in three areas: tax policies, the banking sector and the auto industry.

Ariel Bond/Daily

Martin Zimmerman, the Ford Motor Co. clinical professor of business administration, spoke about President Barack Obama’s industrial policy and the actions in the auto industry.

He said there is a major need for reconstruction of this important industry, which contributes 4.5 percent of the nation’s gross domestic product.

“This recession in the auto industry is truly severe,” Zimmerman said. “No one in this industry is making money.”

Zimmerman said this explains why, in December, the Detroit Three were knocking on the federal government’s door asking for funds, and that otherwise they would have completely shut down.

He said the issue now is the pressure on the companies to make faster progress and more extreme progress on structural cost to not waste taxpayers’ money.

Zimmerman said this might be a “bargaining strategy” on the part of the Obama administration in order to encourage the automakers to work harder, instead of relying on the government to bail them out.

But we’ll have to see in the next couple months, he said, whether the Obama administration lets these companies fail or not.

Joel Slemrod, director of the University’s Office of Tax Policy Research and a Business School professor, said that for a long time our country has been in financial unrest, and many believed that it was “going to take a crisis to get our political system to deal with it.”

“Well, folks, we have our crisis,” Slemrod said. “But it is not clear that it will break down our political impasse.”

Slemrod said that Washington’s tax policies played three crucial roles in the financial crisis — cause, remedy and victim.

Slemrod said tax policies have contributed to the crisis by causing more corporate bankruptcy, more American overspending and a narrow focus on short-term goals to boost the economy.

The tax policies caused more Americans to spend beyond their means by “making us think we are richer than we actually are,” he said. Slemrod argued that Americans were spending without realizing the deficit meant more tax increases later.

Another factor, he said, is that “we’re facing a period with tremendous underutilization of resources not only with unemployed people, but with unutilized capital.”

Slemrod said the will to spend is quite low right now in the country, and that only a fifth of Americans said that if there were tax cuts they would spend more.

He said the country should focus on how tax policy has contributed to the growth of the economy, how the tax burden is distributed among people and how much it contributes to spending.

But Slemrod said he doesn’t believe tax policies were the main cause of the financial crisis. He said “tax cuts (are) the white knight that has kept this contraction from being even worse than it is.”

The tax cuts of 2009 will be delivered in a different way than 2008, Slemrod said. Instead of a large rebate check being sent through the mail, taxes will be withheld on your take-home paychecks, Slemrod said. This will make peoples’ checks larger than the month before, encouraging them to spend more, compared to the fact that they would be more inclined to save a check with a big number on it.

But Slemrod said tax policies would ultimately fall victim to the current recession because “the budget gives very little attention to the long-term fiscal problems that the federal government faces.”

He added that this “may lead us to have worst tax policies in the long run.”

One goal to boost the economy, he said, is to increase the tax burden on the more affluent citizens.

But Slemrod said to correct the current crisis, “there is no way we can do this by raising taxes on only high-income people, it’s going to take high increase over a broad sloth of people.”

Another goal current tax policies aim for is encouraging people to spend more money. But Slemrod said it should be just the opposite. The government should be working to have people spend less and save more, he said.

The result will either be that future taxpayers will raise the taxes on themselves, or they will cut back on their promises. He said most likely there would be a combination of the two.

Prof. Amiyatosh Purnanandam, the Bank One assistant professor of Finance, and an expert on various aspects of risk management, spoke about the banking sector in the downturn.

Purnanandam discussed the three tiers in the banking system: government trying to regain confidence in the banking system, injecting capital in the banking sector and injecting liquidity in the banking sector.

The recession, Purnanandam said, has caused many consumers to lose faith in the banking system.

Purnanandam said one way to increase the capital would be encourage consumers to buy “preferable stocks.”

If not, we need to inject more liquidity by providing consumers with credit, he said.

But Purnanandam said he realizes that this creates a vicious cycle.

“If the problem was too much borrowing by consumers and too much borrowing in the market than what are we trying to achieve by supplying more credit?” he asked.

Leave a comment

Your email address will not be published. Required fields are marked *