Two new economic studies just came out that, especially taken in combination, are truly stunning and profoundly troubling. The first, by the Center for Economic and Policy Research (a DC-based think tank), reported that the federal government is essentially subsidizing the Too Big to Fail (TBTF) banks in terms of the interest rates banks must pay to borrow funds. The second, coming out of Rutgers University, tells us that- if all goes quite well- that we don't get back to our pre-recession level of employment until the last half of 2017.
These two things are each worthy of huge concern. In combination, they spell very, very big economic trouble for America.
Let's take the TBTF issue first. The administration certainly deserves plenty of credit for stabilizing the collapsing economic system when they came into office, but the way they did it was to resuscitate the big Wall Street banks rather than to restructure the system. In the process the TBTF banks actually got even bigger because of (sometimes forced) mergers some of their competitors going out of business. The TBTF banks are even bigger and even likelier to be bailed out in a future economic crisis.
Now it turns out that in addition to having helped bail them out in the first place, we are subsidizing them in other ways. The CEPR report makes clear the gap in the interest rate they have to pay between the TBTF banks (which are generally doing quite well) and smaller regional banks is getting bigger as a result of government policies. As the report notes:
If this gap is attributable to the TBTF policy, it implies a substantial taxpayer subsidy for the TBTF banks. In effect, because of the government safety net being extended to investors who lend money to these banks, the TBTF banks are able to borrow at a much lower cost than banks who must borrow based on their own credit worthiness. The increase in the gap of 0.49 percentage points implies a government subsidy of $34.1 billion a year to the 18 bank holding companies with more than $100 billion in assets in the first quarter of 2009.
Even as the big banks rake in massive profits, the smaller independent banks continue to struggle, with many going out of business.
Now let's take a look at the jobs report. An average of 1.3 million people are added to the American labor force every year, because of young people entering the job market, mothers re-entering the labor force, legal immigration, etc., so in order to get back to full employment, we have to produce a lot more jobs than that. And when you add to that the fact that the 2001-2010 decade will be essentially a lost decade in terms of job growth -- a job-shedding recession at the beginning, massive job losses at the end, and very weak private sector employment growth in the "recovery" in the middle of the decade -- we have dug ourselves into a deep, deep hole in terms of the number of new jobs we have to create in this century.
The Rutgers report estimate says that if the United States started producing 2.15 million jobs a year, starting at the very beginning of 2010, it would take almost eight years in a row of producing those numbers before we got back to December 2007 labor market conditions. That's August 2017. To put that in perspective, consider the following:
- The average post-World War II economic expansion is 58 months, compared to the 80 months at 2.15 million jobs a year this report says we would need to be back to pre-2008 crash labor market conditions.
- In the Clinton years, we had the strongest, most sustained jobs growth since the 1960s, and averaged about 2.75 million new jobs a year. That says this kind of job growth is at least possible, which is good, but on the other hand, we were just coming out of a relatively mild recession in January 1993 when Clinton took office. Obama is faced with a far deeper hole to get us out of.
- Things in December 2007, just before this recession came in weren't exactly hunky dory. In the 2001-07 "expansion", private sector employment lost ground compared to the number of people in the workforce, by a total of 550,000 fewer jobs than new people entering. Income for workers with jobs, meanwhile, remained essentially flat.
- Getting us back to that mediocre December 2007 pre-recession place assumes steady, consistent, strong job growth year after year until late 2017. Even optimistic economists are not predicting a lot of job growth in 2010. And this kind of steady expansion assumes no slowdown when the stimulus money runs out in 2011, when the federal budget deficit starts to be trimmed by Congressional budget hawks, or when another speculative bubble created by Wall Street might burst.
Which brings me back to our Too Big to Fail banker friends. This country needs an economic policy whose central focus, whose number one priority, whose driving mission is the creation of good jobs. Having a few big bankers making money through speculative trading does nothing to create jobs, and endangers us over and over again in the years to come.
We need to get health care reform passed, because (among other reasons) a good bill would cut costs and make our entire economy more productive. But then we need to get down to the hard work of (a) restructuring our financial system and breaking up these Too Big to Fail banks; and (b) a major new policy initiative to spur job creation in a very big way.