President George W. Bush publicly stated yesterday that the U.S. economy was not in a recession and that he believed it would not fall into a downturn. Given that economic reports show that U.S. consumer confidence has slumped to its worst in five years, and home prices fell 8.9 percent last year, his view is not one that everyone shares — including a number of scholars at Stanford.

Emeritus Economics Prof. Joseph Stiglitz, a Nobel-prize winning economist who formerly served as vice president and chief economist of the World Bank, said Tuesday that the U.S. economy is probably in a recession with the housing-market collapse dragging down consumer spending.

Michael Boskin, professor of economics and senior fellow at the Hoover Institution, feels that the economy will at best reach aspects of recession in 2008 and may even have already entered one.

“Whether we skirt recession or not, it will not feel good economically in the first half of the year,” he said. “The economy may well rebound some in the latter part of the year as primarily monetary, and to a lesser extent fiscal stimulus kick in.”

Boskin went on to describe how the epicenter of the problem is the sharp deterioration in the housing market and related financial instruments, most specifically, collateralized subprime mortgages. These subprime mortgages were increasingly made with no money down, no income verification and very low starter teaser rates. Subprime lending is the practice of making loans to risky borrowers who do not qualify for the best market interest rates because of their deficient credit history.

The Federal Reserve “brilliantly” and “aggressively” lowered interest rates to one percent to combat the 2001 recession and reduce the risk of outright deflation, Boskin explained. However, he felt that they kept the rates there for too long and raised them too slowly once the economy firmed in 2003.

“That easy money sparked a housing price mini-bubble [in which] prices went up far more rapidly than income or rent,” Boskin said. “That [bubble] is now bursting and is a major but not the only manifestation of paying the price for the excessively easy monetary policy.”

According to Boskin, the best that can be hoped for is a growth in net exports, which, driven by the weaker dollar and growth abroad, would offset the softer consumer spending. Furthermore, if business capital spending holds up, the blow to the economy could be softened. He said, however, that growth abroad is likely to slow as well because the notion that the other economies have decoupled from the American economy is overblown, and many countries have problems of their own, including unsustainable housing and land prices.

A similarly negative view is held by Nicholas Bloom, assistant professor of economics, who views the future of the economy with pessimism.

“Our economy at the moment is at the same level as 9/11 and the Cuban missile crisis put together,” he said. “I don’t think I have ever seen a credit crunch of this size before.”

Not all professors have such a somber outlook. Gavin Wright, professor in American economic history, was unsure of the future.

“I do not know, and no one knows with any confidence, how severe or lasting the current downturn will prove to be,” Wright said.

But the fact that no one knows the severity of the credit crunch is what Bloom asserts is the very problem.

“People wonder whether their bank is the one that is going to go under, which further generates uncertainty,” Bloom said.

People do not know where the economy is heading and so uncertainty develops. He explained that the surge of stock market volatility is a good measure of uncertainty. This uncertainty causes firms to spend and invest cautiously.

Bloom gave the example of a company planning to invest in new machinery or employ new staff. In a weak economy, the company will want to wait before spending any more money to see if the economic situation improves. However, the slowing of cash flow exacerbates the situation.

“This is a direct effect of the credit crunch,” Bloom said. “The uncertainty causes a rapid freeze in activity. There have been 18 shocks like this since 1960.”

While Wright did not specifically comment on the future, he felt that some fiscal and monetary stimuli may be justified in order to improve the economy’s outlook.

“The one outcome to be avoided is using a temporary business downturn as an excuse to exacerbate and entrench a long-term federal budget deficit,” he warned.

Wright explained that such a measure was introduced early in the Bush administration, when large tax cuts were implemented shortly before a major expansion of military spending.

“The resulting budget deficit is the main proximate cause of the trade deficit and the declining dollar,” he said.

Wright added that all the talk of recession should not divert people’s attention away from what is, in his opinion, the most serious long-term problem facing the U.S. economy — the high and widening inequality of incomes. He said that this was a problem to the extent that median incomes have barely changed even during a time of business cycle recovery.

“Addressing that problem in a serious way will have to involve an entirely different policy toolkit,” Wright said.

According to Bloom, during the Clinton administration, when Alan Greenspan served as chairman of the Federal Reserve, productivity grew at a rate of about one percent a year. As a result, Americans are now eight to ten percent wealthier than their counterparts in Europe. However, he said that the general raise in productivity seems to have ended around 2005, around the same time that the U.S. appeared to be heading toward a recession.

“The long-term beneficial trends slowed down at the same time as the other economic problems kicked in, which makes the future look even bleaker,” Bloom said.

However, the future may not be entirely dreary.

“The silver lining is that, despite its many problems, we have a strong economic system — if we can keep it,” Boskin said, “and [we] will get through these problems.”