In his State of the Union address Monday night, President George W. Bush announced a $150 billion proposal to stimulate the ever-slowing economy.
Over the past few weeks, the United States and even the world economy has already hit lows unseen last year. Last week, the Dow Jones stock market experienced a more than 400 point drop in one day. Although in the past few days the Dow Jones Index has experienced a steady upwards return, an impending recession still poses a serious threat.
In economic terms, a recession is defined as a decline in GDP for two or more successive quarters in a fiscal year.
“After recession, terrorist attacks, corporate scandals and stock market declines, our economy is recovering…yet it’s not growing fast enough, or strongly enough,” President Bush said in his State of the Union address.
“With unemployment rising, our nation needs more small businesses to open, more companies to invest and expand, more employers to put up the sign that says, ‘Help Wanted.’”
According to the President’s plan, tax cuts from 2004 and 2006 would be made permanent this year, and an average of $1000 will go to workers’ paychecks.
In addition, the Bush plan also calls for lower taxes for all businesses, regardless of size, large or small. The President’s plan runs on the hope that the extra money not given to the government will spur consumer and business spending.
“Theoretically what [President Bush is] saying sounds strong,” said Michael Kraus, a fifth-year Industrial Engineering and Economics major and Senior Financial Director of the Student Foundation Investments Committee.
Kraus expresses that the economy does not always work in accordance with theory, as it is more of an equilibrium situation than anything.
“Say $150 billion goes into the economy. That’s $150 billion less for the government…we’re in such a huge federal deficit,” Kraus said.
Although stringent and beneficial regulations are important for economic regulation, the money has to come from somewhere. “I think it’s kind of silly that [President Bush] makes it seem like he signs this paper and suddenly there’s $150 billion more in the economy. If you were a $40,000 a year family of four, if you get $1000 back, what do you pay for to get [it] back? What stimulates the economy? Buying a Ford or [a product from] an American-made company, but a family of four is running up financial stresses, and the only thing they can do is pay off credit cards or pay off mortgages,” Kraus said.
What does this government stimulus mean for Tech students? Students currently invested in stocks can probably see and feel the effects of a possible recession right now.
Much of the sectors causing the stock drop are due to the technology industry, oil companies and services industry. The bad shape of the economy will in turn affect the job market and increase unemployment rates, which have gone from 4.7% to 5% in the past month.
“I think that [is] the way the stock market goes,” said Rachel Johnston, a first-year Management major .
“For people who don’t have stocks or are looking to buy stock, it’s kind of a good time to buy, because prices are a lot cheaper. I already own stock, so from my vantage point, if I want to sell stock it’s not worth it…I can’t make any profit from them right now, and I can only hope that this recession goes out,” Johnston said.
Most employees are shareholders in the companies they work for. It makes sense that the stock market has undeniable connections to the job market.
“I’m a fifth year, [and] jobs right now are becoming a lot more scarce,” Kraus said.
“[Fewer] companies are hiring more people, especially the higher tech companies that are hit by the recession more. It all comes to our ability to spend and buy, especially with inflation,” Kraus said.
In addition, much of the problems with the current stock market status are due to the housing crisis and growing prices on overseas oil.
According to a report sent out by online company Realty Trac, in 2007, the number of foreclosures grew by 75%, with more than 405,000 families losing their homes.
In order to alleviate the situation, the Federal Reserve has recently cut interest reates to 3%.
“The Fed dropped 75 basis points last week, and that hasn’t happened in 25 years. In the industry movements take months to happen in the economy,” Kraus said.
A basis point is a financial unit equal to a hundredth of a percent. It is commonly used to measure increases and decreases in interest rates. The unit is very small because changes in interest rates are usually miniscule.
Kraus suggests that the drop in basis points is related to a lack of investor confidence, as 75 points is a very large amount.
“[The Fed] dropped [interest rates] 75 basis points eight days before a scheduled event, and it showed that the Central Bank was spooked…[spooked] investors spooks everyone else,” Kraus said.
“Capitalism is the name of the game,” said Warren Willis, a first-year Biochemistry major “[The highs and lows are] just the way it is.”
For more information concerning investments in the stock market, the Tech Student Foundation, the largest student-run investment fund in the nation, is offering an investments seminar on Saturday, Feb. 23 at 8:15 a.m. in the College of Management.
The seminar will feature speakers such as Jack Guynn, former President Emeritus of the Atlanta Federal Reserve; Stephen Fleming of the GT Venture Lab and more.
Registration is available at www.gtsf.gatech.edu/seminar, and ends on Monday, Feb. 4.