Save the Economy, Hike the Deficit!

May 27 - 29, 2011
Careening Toward a Third Depression

By MIKE WHITNEY
http://www.counterpunch.org/whitney05272011.html
How do you light a fire under Congress? How do you get these guys to do what they're paid to do?

We're 5 years into this slump, millions of people have lost their homes and jobs, 44 million people are on food stamps, the economy is in the tank, and congress won't lift a finger to help. What's that all about? You'd think that the revision in GDP and the uptick in unemployment claims would set off alarms on Capitol Hill. But it hasn't. They just shrug it off and move on. What do they care? They get their fat paycheck one way or another, so what difference does it make to them? Besides, if they play their cards right, they'll nab a 6-figure lobbying job as soon as they retire and spend the rest of their lives working on their chip-shot and swilling single-malt at the club with their moneybags friends. Doesn't that piss you off?

Congress just doesn't seem to "get it". They don't understand what people are going through; how maxed out they are. We're in the middle of a Depression and all they want to do is score points playing political circlejerk by stonewalling the debt ceiling or jacking-around with Medicare. Meanwhile, unemployment is on the rise (Initial claims rose to 424,000 on Thursday), GDP is falling (1Q GDP revised to 1.8%), durable goods are down 3.6 percent in April, the market is topping out, business investment is flat, Europe's on the ropes, Japan is in a historic slump, China is overheating, the output gap is as wide as it was 6 quarters ago, bank balance sheets are bleeding red from falling home prices and non-performing loans, and the housing market is crashing.

Did I miss something?

Oh yeah, and the Fed's goofy QE2 program is winding down, which means that the last drop of monetary stimulus will be wrung-out by the end of June. That ought to be good for stocks.

So, excuse me for asking, Mr. Bigshot Congressman, but would you mind lending a hand? A little stimulus would be nice. You know, just enough so we can get a job and feed the kids. And if you're worried about the deficits; don't be. They're not a problem. That's just more GOP scaremongering. Here's how economics professor Bradford DeLong sums it up:

"The biggest problem generated by this right now is that Washington DC's focus on the Dingbat Kabuki theater of the long-run fiscal stability of America is keeping it from taking any effective steps to use government to boost employment and output now. And things aren't helped by the fact that the way the rescue of the banking system was carried out convinced a lot of people that stimulus policies exist to enrich the top 1% of Americans at the expense of everybody else.

This means that our hopes for economic recovery right now rest not on any government boost to aggregate demand--whether through fiscal, monetary, or banking policy--but rather on the natural equilibrium-restoring full-employment achieving market forces of the economy, especially in the labor market.

And so we are in trouble: right now there are no signs that the economy is crawling up back to anything like full employment on its own. ... The economy will grow, but we won't close the gap between actual and potential output. We will not for a long time to come get back to the 62 to 64% of the adult population having jobs that we thought was normal back in the decades of the 2000.

And that is the depressing overall macroeconomic picture. I wish I could paint a better one....("DeLong: The Economic Outlook as of May 2011", Economist's View)

Deficits aren't the problem, they're the solution. The government needs to increase spending to make up for the loss of activity in the private sector, otherwise, we're back in the soup. But, here's the good part; the government can borrow at rates that are lower than ever. Just look at the bond market. The 10-year is stuck at 3.12. That means that money is cheap because no one is borrowing, because, well, because the economy is dead-in-the-water. It's like Treasuries are yelling, "Wake up, you idiots, we're in a Depression!"

Besides, deficit spending isn't always a bad thing anyway. Just ask a guy who's been out of work for 99 weeks how much he cares about deficits. Not much, I'll bet. All he cares about is getting a job and paying the bills. Here's a clip from economist Mark Thoma who explains how deficits can actually rev up the economy:

"When the economy goes into recession, deficit spending through tax cuts or the purchase of goods and services by the government can stop the downward spiral and help to turn the economy back around. Thus, deficits can help us to stabilize the economy. In addition, as the economy improves due to the deficit spending the outlook for businesses also improves, and this can lead to increased investment, an effect known as crowding in. Deficits also allow us to purchase infrastructure and spread the bills across time similar to the way households finance the purchase of a car or house, or the way local governments finance schools with bond issues." (Government Deficits: The Good, the Bad, and the Ugly, Mark Thoma, CBS Moneywatch)

Deficits are just a way of investing in the future, like student loans. You don't hear anyone crybabying about paying for college, do you? No, because it improves their chances for making more money in the future. Sometimes you have to take on a little debt to create better opportunities for yourself. That's just the way it is. It's the same with the economy, the deficits are a bridge to the next credit expansion. But once things are up-and-running and revenues increase, then the government can throttle-back on spending and balance the budget. That's how we've always done it in the past, until we started listening to the Voodoo crackpots, that is. Besides, if we don't increase the deficits now and put people back to work fast, we're going to be stuck in this "underperforming" funk for a very long time. So, we're just shooting ourselves in the foot.

How did we get to where we are today?

Well, when the financial system crashed, the economy plunged and then reset at a lower level of output. So--while we're no longer in freefall--we're still no where near where we should be. And, guess what, we can't get back to trend when 9% of the workforce (16.5% underemployed) is on the sidelines. We have to put people back to work and get them spending. That's the only way to boost demand and kickstart the economy. Of course, big business doesn't mind the current policy, because more of the profits from productivity go to them during a sluggish recovery. So, they're just fine with the way things are right now. They also like the fact that high unemployment puts more pressure on wages. CEO's love that part.

So, how dire is the situation right now?

Well, consider this: QE2 ends on June 30, right? But according to economist David Rosenberg, there's a "89% correlation between the Fed's balance sheet and the movements in the S&P 500 over the past two years." So when the Fed stops purchasing US Treasuries, then stocks will retreat.

Add that to the fact that the states are cutting costs and laying off state workers at record pace to balance their budgets. That just increases deflationary pressures. When money is drained from the system, activity slows, demand weakens, revenues shrink, deficits bulge, and more people are laid off. It's a vicious circle.

Here's how Paul Krugman breaks it down on his blog this week:

"Last year I warned that we seemed to be heading into the "Third Depression" — by which I meant a prolonged period of economic weakness:

' Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.'.....

And nobody in power cares! (Third Depression Watch, Paul Krugman, New York Times)

And that's what makes this political burlesque on Capitoll Hill so excruciating to watch, because it's such a waste. Peoples lives are being ruined for nothing, just because Congress doesn't have the courage to do the right thing. Do you think they'd hesitate if they had to pony-up for another multi-billion dollar weapons system, or another bailout for Wall Street, or more tax cuts for their tycoon friends? Of course not. The only time congress worries about red ink is when it might help working people. Then they throw a major hissyfit, waving their hands overhead and babbling hysterically about the free market. Give me a break. The world's not going to end. The truth is, the rest of the world WANTS us to borrow more because they want to maintain strong demand for their exports and keep their workers busy. That's why they're willing to lend us money so cheap.

So, why don't we oblige them? Why don't we borrow enough money to whittle down unemployment to 4 or 5% and get back on track? After all, we know that fiscal stimulus works, because the non-partisan Congressional Budget Office (CBO) released another report on Wednesday saying that Obama's American Recovery and Reinvestment Act (ARRA) was a booming success.

Here's a clip from the report:

"The economic stimulus package passed by Congress in 2009 raised gross domestic product, created jobs and helped lower the country's unemployment rate this year..... the Congressional Budget Office said Wednesday.

The Obama administration and Congressional Democrats said the American Recovery and Reinvestment Act, passed while the U.S. struggled to emerge from a severe recession, would save or create 3.5 million jobs while cutting taxes, investing in roads, bridges and other infrastructure, extending unemployment benefits and expanding aid to states....

The CBO report out Wednesday said the plan increased the number of people employed by between 1.2 million and 3.3 million, and lowered the unemployment rate by between 0.6 and 1.8 percentage points in the first quarter of 2011.

The stimulus package also raised gross domestic product, the broadest measure of economic output, by between 1.1% and 3.1% in the same period...." ("CBO Says Stimulus Boosted Growth, Will Add More to Deficit", Wall Street Journal)

Okay, so ARRA boosted growth by roughly 2% and added about 2 million new jobs to the workforce just like the administration predicted. So, that settles it, right? We now have solid proof that the program worked, so what are we waiting for? Congress needs to push through a second round of stimulus, put people back to work and get the economy firing on all 6 cylinders. No more foot dragging.

Mike Whitney lives in Washington state. He can be reached at fergiewhitney@msn.com

Our Economy Needs at Least $2 Trillion in Stimulus Spending Right Now -- Tens of Millions of Jobs Are at Stake

Posted on July 16, 2009

http://www.alternet.org/story/141344/

By Dean Baker, Guardian

When her husband was in the oval office Laura Bush launched an initiative to promote literacy across the country. Unfortunately, there was no comparable effort to promote numeracy in our nation's capital. This has been evident in the discussion of the stimulus among politicians and commentators in the week since the June job numbers were released.

Republicans were anxious to pronounce the stimulus a failure, while Democrats insisted that the package just needed more time, pointing out that most of the money had not yet been spent. Neither assertion can withstand the test of third grade arithmetic.

The basic story is that the stimulus was too small, pure and simple. It would have been too small even if the Obama's administration's projections for the severity of the recession had proven accurate. However, since the downturn is considerably steeper than they had projected, the inadequacy of the stimulus is even greater.

Here are the numbers. The unemployment rate is currently 9.5 percent and virtually certain to cross 10.0 percent by the end of the summer. It is likely to hit 11.0 percent early next year, but we'll just work off the 10.0 percent figure.

The target for unemployment should be no higher than 5.0 percent. (The year-round average for unemployment in 2000 was 4.0 percent.) This leaves a gap between actual unemployment and our employment target of 5 percentage points. As a rule of thumb, it takes a 2 percentage points increase in GDP to reduce the unemployment rate by 1 percentage point. This means that in order to reach our target of 5 percent unemployment, we would have to increase GDP by 10 percent, or $1.5 trillion.

Different types of stimulus have different multiplier effects. One dollar of addition spending is generally estimated to have a multiplier effect in the neighborhood of 1.5, meaning that for every dollar we spend on a government project, we increase GDP by $1.50 as the people we hire go out and spend their paychecks, creating new demand.

The multiplier effect on tax cuts is generally estimated as being in the neighborhood of 0.9, or less. This means that $1 of tax cuts will end up increasing GDP by about 90 cents. Unlike spending on things like road construction or health care, a tax cut does not directly generate demand. It only generates demand when people go out and spend their tax cuts. Since much of any tax cut will be saved, the stimulus effect of tax cuts is almost always less than the effect of direct spending.

Okay, if we have an annual GDP shortfall of $1.5 trillion and we decided to fill it by spending, then we would need approximately $1 trillion per year of additional spending. Alternatively, if we tried to fill the gap with tax cuts, we would need $1.65 trillion per year in tax cuts. After pulling out spending for later years, and the alternative minimum tax fix, the Obama package provides about $300 billion a year in stimulus. This is obviously inadequate.

When the Republicans jump on the June jobs numbers and say that stimulus doesn't work, it is like the obese person complaining that dieting and exercise don't work because he is still overweight after passing up dessert and taking a walk around the block. There is a question of magnitude here that they seem to have missed.

The "give it time" crew don't fare too much better. While only about 15 percent of the stimulus has gone out the door thus far, it is the rate of spending that matters.

To put this point simply, suppose that we would spend the $600 billion 2-year stimulus at the rate of $25 billion a month. Assume that we have ramped up to this spending rate, so that by May we have reached the $25 billion rate of monthly spending. While it may be true that at the end of June that we have only spent 15 percent of the stimulus, the rate of spending will not be increasing substantially from current levels. This means that whatever boost to monthly consumption and output we expect from the stimulus, we are now currently seeing. This boost will continue through 2010, but we will not get an additional boost from the stimulus further down the road.

The actual story of stimulus spending is somewhat more complicated, but this simple story captures the basic picture. The additional boost from new projects that are yet to be started will not make a big dent in the economic picture.

In short, we badly need another very big dose of stimulus. Unfortunately, the politicians and pundits in Washington are either too ignorant, dishonest, or scared to talk about the $2 plus trillion stimulus that this economy needs. As a result, tens of millions of people will lose their jobs and/or their homes because of continued economic mismanagement. In economic policy circles, mismanagement is a job qualification, not a fault.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy.

If You Value True Democracy, Here's How You Protect It...

http://www.csmonitor.com/2009/0401/p06s10-woeu.html

Europeans are taking militant actions to protect their jobs, pointing to a growing anger - and willingness to act on it - among workers in the European Union.

In the latest such move, staff at US automotive-parts manufacturer Visteon in Northern Ireland occupied a factory. . .

The British arm of Visteon, which is a major supplier to Ford, announced Tuesday that it was cutting almost 600 jobs across the United Kingdom, including 210 in Northern Ireland. It filed for bankruptcy the same day.

Workers immediately occupied Visteon's manufacturing facility in Belfast, seeking an enhanced layoff package, which they say should be financed by the factory's former owner, Ford Motor Co.

In Ireland, fired workers at Waterford Crystal occupied the world-renowned glassmaking factory after it was shut down. The occupation, which started in late January, ended after almost two months with the announcement that 176 jobs had been saved for at least six months.

In Dundee, Scotland, staff at Prisme, a box manufacturer, are in the fifth week of an occupation and are reportedly planning to restart the business as a workers' cooperative.

In France, workers at Caterpillar took the dramatic step Tuesday of kidnapping four managers, who were held for 24 hours at the company's plant in the southeastern city of Grenoble before being released Wednesday.

U.S. Loses 533,000 Jobs in Biggest Drop Since 1974

By LOUIS UCHITELLE, EDMUND L. ANDREWS and STEPHEN LABATON

This article was reported by Louis Uchitelle, Edmund L. Andrews and Stephen Labaton and written by Mr. Uchitelle.

The government’s report of a giant job loss in November, the biggest monthly decline in a generation, puts more pressure on Congress and the administration to move quickly on a stimulus package, mortgage relief and perhaps financial aid for Detroit’s big automakers.

The nation’s employers cut 533,000 jobs in November, the Bureau of Labor Statistics reported Friday.

Not since December 1974, toward the end of a severe recession, have so many jobs disappeared in a single month — and the current recession, far from ending, appears to be just gathering steam.

“We are caught in a downward spiral in which employment, incomes and spending are collapsing together,” said Nigel Gault, chief domestic economist for IHS Global Insight. “With private spending frozen, we have no choice but to rely on a stimulus package to revive the economy.”

The unemployment rate rose to 6.7 percent, up just two-tenths of a percentage point from October, but up six-tenths over the last three months. More than 420,000 men and women who had been working or seeking work in October left the labor force in November.

More significantly, the unemployment rate does not include those too discouraged to look for work any longer or those working fewer hours than they would like. Add those people to the roster of the unemployed, and the rate hit a record 12.5 percent in November, up 1.5 percentage points since September.

Noting that 1.9 million jobs have been lost since the start of the recession a year ago — two-thirds of them since September — President-elect Barack Obama invoked public spending as the best way to get a dead-in-the-water economy moving again. “This painful crisis,” he said in a statement, is an opportunity “to improve the lives of ordinary people by rebuilding roads and modernizing schools for our children,” and by investing in clean energy projects.

A goal of all this spending is to generate 2.5 million jobs over the next two years, he said, repeating an earlier pledge. Given the accelerating job losses, hitting that target would barely recover the jobs that have disappeared over the last year.

As part of Friday’s announcement, the government revised higher its estimates of jobs lost in September and October. Instead of 524,000 jobs disappearing in those months, 723,000 were lost, or a total of 1.2 million jobs in just three months. In all, jobs have been lost in each of the last 11 months.

“Obama is being deliberately unclear about those 2.5 million jobs,” said Robert Pollin, a University of Massachusetts economist. “He is not going to add 2.5 million on top of recovering the 1.9 million that have been lost so far this year.”

Despite the deterioration of the labor market, Democrats in Congress and a lame-duck president remain in a standoff over rescue measures.

At its core, the stalemate between the Republicans and the Democrats springs from fundamentally different views about the nature of the crisis and the role of government in resolving it. The White House contends that it has rightly focused on the credit and housing markets, while the Democrats see economic problems that can be resolved only through broader intervention.

New efforts to adopt a broad economic package are likely to wait until the new president takes office and Democrats have bigger majorities in Congress. That delay poses the possibility of a deeper recession, according to some experts.

President Bush, appearing in front of cameras on Friday morning at the White House, said he was “concerned about our workers who have lost jobs.” But he offered no hint of softening his opposition to either a stimulus package or a bailout of the automobile industry, saying that the measures already put in place by the Treasury Department and the Federal Reserve to ease credit problems would take time to work.

Shortly after his appearance, a White House spokesman, Scott Stanzel, dashed any expectation of a change in policy when he said that officials expected a stimulus package would “happen in the next administration.”

Support is building for a significant stimulus package as the economy slips into a deep recession. Most forecasters expect the gross domestic product to contract in the current fourth quarter at an annual rate of 4 or 5 percent, and continue to contract through most of next year, shrinking by 2 percent for all of 2009 — a contraction that has occurred only once since World War II: in 1982, a year of severe recession.

“If there was any doubt that a very large fiscal stimulus is required, then the numbers we have been getting recently should dispel that doubt,” said Jan Hatzius, chief domestic economist for Goldman Sachs. To offset the private sector retrenchment, he added, “we will need a stimulus package of $600 billion at an annual rate, or $1.2 trillion over two years.”

Economists and policy makers increasingly share his estimate of what it will take to revive America’s $14 trillion economy, with Democratic leaders talking recently about a stimulus package of $400 billion or more.

Though any broad economic package seems to be delayed, Democrats still had faint hopes of approving next week a rescue package for the car companies. Their goal would be to prevent far more rapid deterioration in the job market.

The latest job numbers were stark evidence of a breakdown in consumer spending and business investment since mid-September, when the Treasury Department and the Federal Reserve decided to let Lehman Brothers fail, delivering a shock to the financial sector. Almost simultaneously, stock prices began a free fall, undermining the wealth and the retirement accounts of millions of Americans.

“We have recorded the largest decline in consumer confidence in our history,” said Richard T. Curtin, director of the Reuters/University of Michigan Survey of Consumers, which started its polling in the 1950s.

Job loss has played a big role in this erosion, he acknowledged. But so have fewer hours of work, smaller bonuses, less overtime, falling home prices, falling stock prices and a drumbeat of job cut announcements — the most recent, this week, from big names like AT&T, Viacom, CVS, DuPont and the Avis Budget Group.

The Dow Jones industrial average, down more than 20 percent since mid-September, fell Friday morning in response to the November jobs report, but recovered later and gained 259.18 points, or 3 percent, by the end of trading, to close at 8,635.42.

With home prices still in decline, one in 10 mortgage holders was either delinquent on loans in September or in foreclosure, the Mortgage Bankers Association reported Friday. That was up from 9.2 percent in June and the highest percentage since the association began to collect this data 30 years ago.

The mortgage crisis makes lenders ever more reluctant to lend for the purchase of homes, autos and other big consumer items. In more normal times, lenders bundle these loans into securities and sell them. The buyers of these securities have disappeared in the current credit crisis, however, and the Federal Reserve is considering ways for lenders to borrow from the Fed, using the securities as collateral.

Jobs disappeared last month from every sector of the economy except health care and state government, which mainly added educators. The biggest losses were in manufacturing, construction, retailing — despite the first month of Christmas shopping — financial services, hotel and restaurant work and temporary workers. Over the course of the recession, 604,000 jobs — nearly one-third of the total — have been eliminated in manufacturing, and the Big Three automakers promise more layoffs to qualify for a federal bailout.

“Business shut down in November,” said Mark Zandi, chief economist at Moody’s Economy.com. “Businesses are in survival mode and are slashing jobs and investment to conserve cash. Unless credit starts flowing soon, big job losses will continue well into next year.”

The administration says its recent actions are beginning to make credit flow more easily. “We are pulling some very significant levers on the economy right now, through what we’re doing with Treasury and what we’re doing with the Fed,” said Tony Fratto, a White House spokesman.

Jack Healy contributed reporting.