Burning questions about the economy answered by Dr. Raha

By Stacy Nguyen
Northwest Asian Weekly

Dr. Arun Raha

Dr. Arun Raha first arrived in Washington state from Kanpur, India, 26 years ago to earn his Doctor of Philosophy in Economics at Washington State University after earning his master’s degree from the Delhi School of Economics. Like many other students from abroad, Raha experienced culture shock. “There are much fewer people here,” he said, laughing.

“But I’ve grown used to it. I like it. And I’ve never regretted it.”

Today, the ever-amiable Raha has a tough job — providing precise economic data, so that lawmakers can make important decisions. Raha is the chief economist for the State of Washington and executive director of the Economic and Revenue Forecast Council. He is responsible for presenting quarterly forecasts of Washington’s economy and general-fund revenues. <!–more–>

NWAW: You’ve won many awards for forecasting. What is forecasting?

AR: Actually, I’ve only won two awards (the Federal Reserve Bank of Chicago’s top overall forecast prize for 2007 and the Wall Street Journal’s forecasting award in January 2005). … And they came in the form of certificates, not money (he said, jokingly).

Forecasting is essentially trying to predict what the economy will do. … The way to do it is to look at the mathematical relationships of variables that have held in the past and project them into the future. So we look at past incomes and figure out where we expect incomes to go based on where we are.

Forecasting is like driving a car forward, while only looking in the review mirror. All you have is what has happened already, but you’re going forward.

It’s a tough job, is what I’m trying to say.

NWAW: How has Washington state weathered the recession compared to other states in the country?

AR: Washington has three things that are very positive.

(1) We have a very strong aerospace manufacturing sector.

(2) We have a strong software publishing sector.

(3) We are a trade-intensive state. We actually are the nation’s most export-intensive state per capita.

In this recession … though we were very strong [overall], we were still hurt very badly, especially in our (nonresidential) construction sector, which is still very weak.

Another thing we were severely affected by was the decline in our state revenue because it depends on how much we are all spending (on cars, retail). During this recession, what we saw was people hunkering down and cutting back on discretionary spending. They cut out everything nonessential, paid down credit card debt, and were very cautious. Our state revenue has declined for two years now because of this.

But things are improving. The recovery is slow. It’s been two steps forward, and one step back. But we are better off today than we were a year ago. And in a year’s time, we’ll be even better off.

NWAW: Though the recession has ended, when will we actually ‘zero out’ and feel that we’ve recovered?

AR: It depends on how you look at it.

If you look at the amount of output the economy produces, we are actually back to where we used to be before the recession. The recession officially ended in June 2009.

But the thing is, we are producing with a lot fewer people, so nationally, we are about 7 million jobs in the hole. In the state, we are 175,000 jobs in the hole, which means we have that many fewer jobs than we had when the recession started.

My best guess is sometime at the end of 2013, we’ll recover all these jobs.

NWAW: How is it that jobs lag behind output?

AR: There are two main reasons.

(1) What we have seen during the last three recessions is businesses reinventing their business processes — and worker productivity increases. So there is a higher amount of output with fewer workers working.

(2) Also, credit to small business still remains tighter than normal. Small businesses are ones with 50 or fewer employees. And these businesses create most of the jobs in the economy. In effect, the largest job-creating sector in the economy is starved for credit (because banks have to reserve more money due to real estate loans that have gone bad and are not able to give as many loans to small businesses).

NWAW: You’ve said that due to the earthquake, tsunami, and nuclear situation in Japan, there will be a shortage of cars from Japan, which will affect people here in Seattle. How?

AR: Japan is our third largest trading partner. For a while, we had a problem of ships going over. … There is a lot of debris clogging up the ports. … So Japan buys our apples, they buy our wheat, later, our cherries (perishable items that need to be refrigerated) — but those items are not getting there.

The failure of the power plant has resulted in disruption of power supply throughout Japan, which does not have the power supply cushion it needs to let everyone power what they need, so there are cutbacks. What that has done is that — as the world’s third largest economy — Japan is an important part of the global industrial manufacturing supply chain and provides automotive parts, automobiles, and smart chips.

If you’re in the market for a Prius (or another Japanese car) … there’s a shortage. It’s taking longer for you to get one. Also, American cars depend on Japanese parts and computer chips. …

Electronic goods like iPads and smart phones have Japanese chips. That supply chain is disrupted just when consumer spending is beginning to pick up again.

NWAW: How do rising gas prices affect our economy?

AR: The more people spend on gas, the less they spend on other things.
People adjust their [discretionary] spending because, especially in other parts of the country, people have very few alternatives to personal transportation. They have to buy gas. Gas is what we call an inelastic demand, meaning the demand for it doesn’t change that much in the short term because it takes a lot to change our transportation habits. In the short term, you are kind of stuck.
Today though (May 5), crude oil prices fell by almost $10 a barrel.  Hopefully by next week (May 9–13), we’ll see gas prices retreat.

NWAW: Can you give us some investment tips?

AR: No investment tips from me! (He laughed and said he wasn’t qualified to give that kind of advice.)

Previously, Raha was vice president of economic research at Swiss Re in New York and manager of economic analysis at Eaton Corporation, and he served on the Ohio Governor’s Council of Economic Advisors. He is a former member of the Board of the Automotive Market Research Council. ♦

Stacy Nguyen can be reached at info@nwasianweekly.com.