Economist Urges Policy Makers To Play To Rim's Strengths -- Tourism, Second Homes, Retail


A noted economist's summary of a bleak economy added up to this: How long can you hold your breath?

The recession triggered by the mortgage meltdown had spawned sweeping economic problems that haven't hit bottom yet, but which should ease in a year or two, said Phoenix economic forecaster Elliott Pollack on Thursday.


Valley economist Elliott Pollack spoke to about 75 people in a discussion sponsored by the Payson Institute of Learning.

Of course, that's assuming the Federal Reserve or Congress doesn't do something so mind-numbingly stupid that it turns a recession into a new Great Depression as the government did in 1929, the outspoken libertarian economist told about 75 Payson movers and shakers at a discussion sponsored by the Payson Institute of Learning at the Community Presbyterian Church on Main Street.

Pollack said the meltdown in the construction and home-buying sector brought on by a speculative frenzy in new ways of packaging mortgages as investments caused some of the worst economic woes in 30 years.

This year will be bad and "next year is iffy. The worst is still in front of us," said Pollack, who has been an economic forecaster in the Valley for years and whose pitch on May 29 centered mostly on economic figures from the Valley.

He said businesses will have to focus on just getting through the next year, sustained by the knowledge that all the economic fundamentals in Arizona remain sound, and that ultimately, the downturn will simply wring the "excesses" out of the unrealistic and inflated housing and construction boom that led up to the recession.

Pollack also urged the blue chip audience that included four town council members and numerous community leaders to remain realistic about the Rim Country's economic prospects, but to aggressively build on the economic strengths that include tourism, second-home buyers and regional retail businesses. At best, the region might attract some small businesses, especially if the owner wants to live in Payson for the lifestyle.

He said much of the current problem stemmed from the excesses in the mortgage and financial markets, in which lots of people made huge amounts of money loaning money to people with no hope of actually making payments long term.

Financial experts invented all sorts of new ways to bundle up mortgages that made it difficult for secondary investors to understand the risks they were taking.

"People got carried away and never looked at what would happen to that instrument in a downturn. No one thought housing prices would go down. But once someone tells the emperor he's not wearing any clothes, everyone looks and says -- ‘hey, he's got not clothes.'

"The difference now is that they're lending only to qualified buyers. Three years ago, they were loaning money to anyone breathing. Now you have to have things like a job," he said, in a caustic, statistics-laden presentation that had the audience alternately laughing and groaning.

Insisting that as a libertarian economist he "hates" both parties, he said only the federal reserve's support for the banking system kept the mortgage crunch from turning into the kind of run on the banks that transformed a similar downturn into the Great Depression in 1929.

By contrast, he said, Congress seems intent on repeating the mistakes of lawmakers that created that previous depression, by talking about raising taxes and putting up trade barriers.

"The difference between where we are today and 1929 are the actions of the Fed," to prop up trembling financial institutions that might otherwise be bankrupted by the weight of the bad loans they bought as an investment. By contrast, in 1929 the government responded to the bank failures by reducing the money supply.

"Out of the three things the government did that turned a recession into a depression," we're in the process of doing two of them now. "Eighty years later, they haven't learned a thing -- the Fed is the only thing that separates us from a depression. But the good news is -- that's enough."

He noted that Arizona has been particularly hard hit by the downturn, largely because real estate speculation had reached such heights here. He said Arizona dropped from one of the fastest growing states economically to among the worst. "This is the worse we've ever done," he said.

Among the 50 states this year, Arizona ranked 46th for economic growth overall, 49th in construction, 47th in finance and 48th in transportation and communication. Employment in the Valley actually shrank slightly and "construction employment is as bad as it's ever been -- but the worst is not over."

Rim Country has largely mirrored the performance of the Valley, but on a far smaller scale. Housing construction fell from a peak of 648 several years ago, to about 150 this year. Single family construction fell from an annual rate of about 350 to just 100.

And as bad as it was last year, Pollack predicted only half as many permits will be issued in the Rim Country in the current year.

Fortunately, the economic fundamentals remain strong in Arizona.

"This is temporary. We'll get through this, but it's going to take awhile," he said.

He urged policy makers to play to the region's strengths. For instance, he suspects that the soaring price of gasoline and airplane tickets could work to the Rim Country's advantage -- since the area remains within a tank of gas of the state's major population center. "People are going to vacation closer to home and gasoline is a problem. But they're still going to travel. But instead of driving up the hill in a vehicle that gets 12 miles a gallon, they'll be driving a car that gets 22 miles per gallon."

He said the Rim Country will never attract major employers, due to the distance from the state's main transportation hubs. "You don't have the labor base and the amenities don't warrant it. Some small company's owner might really like Payson -- and you can get that business, but they'll be hard to find. So you need to make it as attractive as possible for tourists and second-home owners and retail to serve the surrounding area."

Play to your strengths, he urged the policy makers in the audience. "If you have an advantage in the second-home market, flaunt it."

But in addition, providing affordable housing for workers in town to address the weak labor supply will mean embracing higher density projects. "Flagstaff is deliberately pricing itself out of the housing market -- and Prescott is pricing itself out of the housing market." That could give Rim Country an advantage in attracting those second-home buyers, providing it can also provide work force housing.

Somewhere amidst all the economic trauma, real estate investors and home buyers should get a glimpse through a window into a "25-year buying opportunity" after the market bottoms out. He said that hasn't happened yet, but should happen within the next year.

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