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Three Reasons We Need an Economic Wake Up Call
Several events of the past week should be a wake-up call to the Obama administration. Bottom line: the medicine isn't working. Stronger stuff is needed. Consider:
The June Unemployment Numbers. The green-shoots school was expecting that the rising rate of unemployment would continue to slow, as it did in May. But instead the number spiked back up. A total of 467,000 jobs were lost. The unemployment rate rose to 9.5 percent, and OECD economists project that U.S. unemployment will still be in double digits as late as 2011.
The 9.5 percent official figure -- the worst since 1983 -- conceals even worse news. The number of long-term unemployed is at record levels. This is the only recession since the Great Depression in which the job loss wiped out all the job growth of the previous recovery. As our friends at the Economic Policy Institute report.
We now have fewer jobs than in May 2000 when the recovery began, though the economy now has 12.5 million more workers. And there is less than one job opening for every five people seeking jobs. Hidden unemployment is also setting records - people with part time work who want full time work, as well as people whose hours have been involuntarily cut.
Until strong economic growth returns, companies will not resume hiring. And as long as layoffs continue, that means fewer customers and the downward spiral continues.
As EPI observes, President Obama's economic stimulus simply wasn't designed for a recession this deep. And I would add that stimulus funds are getting out too slowly. Compounding the problem is inadequate government policy on three crucial fronts:
State Fiscal Collapse. The states, unlike the Federal government, are not permitted to run current budget deficits. So in a deep recession, when tax receipts fall, their only choice is to cut program spending or raise taxes. Both are of course perverse in a recession, since they only further undercut consumer purchasing power.
As the new fiscal year begins, nearly every state is raising taxes or fees, or laying off workers and reducing programs. At least 48 states face red ink. Some of the state budget crisis is self-inflicted, as in the dance to the death between California Governor Arnold Schwarzenegger and Democrats in the legislature, compounded by a two-thirds supermajority requirement for any kind of tax reform. But most states are just plain hurting.
Massachusetts, with one of the most liberal governors, Deval Patrick, just hiked its sales taxes by 25 percent. A total of 24 other states have enacted tax increases and another 12 all have tax hikes on their agendas. Federal aid under the stimulus covers just 30 to 40 percent of the state shortfall, which is expected to total $350 billion by 2011. And 39 states have cut program outlays on the needy, according to the Center on Budget and Policy Priorities.
The New York Times reports that several states are cutting out summer school. This is just plain nuts.
Some aspects of the recovery program, such as rebuilding a banking system that serves the real economy, are truly challenging. But this part is really simple. Washington is the one part of the government with the capacity to run deficits. So Congress should pass an emergency revenue-sharing law, giving the states another $150 billion immediately. The only condition is what policy wonks call maintenance-of-effort. To receive the money, the states must maintain program outlay levels and taxing systems that were in effect on a date certain, say July 1, 2008.
Most of the stimulus money is still unspent because of various bureaucratic hurdles at all levels of government. This approach would break through all that. Washington would simply cut fifty checks.
The Foreclosure Catastrophe. When the Obama administration took office, they basically continued the Bush administration's program of voluntary loan modifications. They sweetened the deal by paying banks to reduce the principal or interest, spending $75 billion for banks (money that might have gone directly to homeowners.)
But with most distressed mortgages having been converted to securities, and the banks that collect the payments not wishing to get sued, the program is mostly a bust. The Treasury says that something like 50,000 mortgages have been modified, out of several million at risk of foreclosures. Treasury keeps telling Congress to wait a few more months to let the program kick in. But according to the New York Times' indispensable Gretchen Morgenson, the program is actually going backwards. Out of a sample of 3.5 million sub-prime and alt-a (undocumented mortgages better known as "liar loans") handled by five of the nation's biggest lenders, servicers modified 23,749 in February, but only 19,041 in May and 18,179 in June. Meanwhile, foreclosures in progress are over 844,000.
The consequence of this policy failure is a continuing downward spiral of more vacant homes, continuing declines in property values and home equity, depressed home construction, and stresses on homeowners who spend every penny of disposable income to keep their houses. The government needs a Roosevelt-scale mortgage refinancing program with one goal--to keep people from losing their homes. As Morgenson reports, when a bank forecloses, it loses about 63 percent of the loan value. Wouldn't it be better to reduce the monthly payments by 63 percent, and allow people to keep their homes? But only a much more direct government intervention can do that.
Busted Banks. The Administration's policy of pumping up busted banks, such as Citigroup and Bank of America has been a success only in the sense that these zombies are still in business. But surely the right test is whether credit is flowing again to deserving borrowers. Reports from the small business and community reinvestment communities suggest that credit is still very right, despite Federal Reserve policies of cutting short term interest rates almost to zero.
I still have to pinch myself when I realize that the President of the United States is Barack Hussein Obama. Like the rest of the progressive community, my heart swells when Obama, in Egypt, makes a brilliant speech on Middle East, or accelerates the progress of redeeming full civil rights for gays and lesbians. (I could find some quibbles on these fronts as well.) But these are not the issues that will cost him his presidency if he fails to grasp that the economic recovery and the moment of reform are slipping away.
As Republican missteps turn from tragedy to farce and back again, we should not get too cocky. The Republican ticket in 2012 could be Palin-Sanford; if unemployment is 11 percent, it will win.
Robert Kuttner is co-editor of The American Prospect, www.prospect.org and a senior fellow at Demos, www.demos.org. His recent book is "Obama's Challenge," www.obamaschallenge.com.
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Robert,
Good piece, but it is even worse than you presented.
"We now have fewer jobs than in May 2000 when the recovery began"
Actually, we had fewer jobs for ALL of the previous eight years than there were in 2000:
Civilian Employment-to-Population Ratio
http://www.princeton.edu/~pkrugman/ep_ratio.jpg
Notice no mention whatsoever of the fact that the United States allows 140,000 new workers to come to our shores every month. Of course we are going to have rampant joblessness and falling wages. You don't need to be Dr. Karl Marx to figure out that an excess of workers will create less opportunites and depressed incomes.
Xenophobia is no place to govern from.
So, how many generations do you have to go back to find your immigrant ancestors?
The country's economic well being is tried directly to the financial health of the middle class consumer, the very segment of the population that is being largely ignored in virtually every solution proposed to end the current crisis. The loss of jobs, rampant foreclosures, runaway household debt and climbing living expenses are the biggest threats. Until these issues improve there will be much more economic hurt to come, even for the upper class. Instead of continued trickle-down policies, which history has proved does not work; the President and Congress need much more focus on relief for the middle and lower classes. The money will eventually trickle-up to the top - as it always does.
I rent and I resent having spend my tax money on the loser crybaby homeowners.
Let's assume that we do allow the To-Big-To-Fail financial institutions to go bankrupt. That would mean Bank of America, Citi, Goldman, JP Morgan, etc... would have failed. Where do you think the companies of the United States hold their cash? At the time of the failure each individual (companies included) would have only been FDIC insured up to $100,000. It is now raised to $250,000. Many of these companies even hold 401Ks that would be wiped out just because some banker decided they could easily leverage up to 40 to 1.
The federal government would have to backstop the money anyway. Much of the "cash" that has been given to the banks was to make their balance sheets look better so they were not downgraded and forced into higher interest rates which would either cause the banks to fail or cause the banks to pass the interest rate hike on to customers.
If banks can clean up their debt then much of that borrowed money will come back to the Fed. I don't like seeing the fat cats make out well either, but the too big to fail has us in this trap. I personally would like to see tough regulation against Credit Default Swaps and would like to see some criminal charges placed. At least that would help discourage future issues.
invest the money directly in MAIN STREET.
As you say,
"Where do you think the companies of the United States hold their cash?".
Rescue the people, and the money still goes into the banks.
What about the $TRILLION Offenders?
Obama's SEC and Holder could simply arrest G0LDMAN and others for "Manufactured Insider Trading!"
Others for Misrepresenting products as LOW RISK "AAA" when they were HIGH RISK!
These are both Fraud Charges that are on the Books and many will qualify as Felony Charges.
These LAWS could be enforced Today or Tomorrow!
Chef Martha paid for something far less Catastrophic and Calculated!
We live in a world of instant gratification. Unfortunately changes in the economy and to a great extent the real world take years, not months, not weeks, not days - but years.
The Great Depression started in 1929, but the stock market did not bottom out until 1932 - THREE YEARS LATER. This recession has just started. Even if everything were working to perfection it would take another year for the inventory cycle in housing to play itself out. The jobs market takes even longer. Companies will not expand and employ new workers until there is a demand for their products and services. Some companies will try to position themselves ahead of the demand curve - but most won't. Foolish people have tried to shorten this curve by rah-rah tactics for the last four months - green shoots - attempting to create an upsurge in the market in order to make quick gains. But the stock market cannot pull the real economy out of its current downward spiraling trend - you need real jobs, real production, real demand. The stimulus is only intended to try and kick start the economy by replacing some of the jobs and income lost in the private sector. It will take 2 to 3 years for those replacement jobs to actually mature into income that consumers spend. So we are looking at 2 to 3 years before any green shoots are going to survive.
Get used to it and stop asking for or expecting miracles.
You wait years if you want!
We need CHANGE NOW:
1. Enforce LAWS on the Books
2. De-LINK Wall Street Money from Washington's Congress and the Executive Branch with Campaign Funding reform.
3. Create a TRUE Democracy where our Government Represents the People!
We can NOT WAIT! The Optimal Time is NOW!
I wish ScreenName05 would stop posting the same stuff over and over. Why don't you come up with something new?
ITS a FELONY CHARGE!
Obama's SEC and/or Holder could simply arrest G0LDMAN and others for "Manufactured Insider Trading!"
Others for Misrepresenting products as LOW RISK "AAA" when they were HIGH RISK!
These are both Fraud Charges that are on the Books and many will qualify as Felony Charges.
These LAWS could be enforced Today or Tomorrow!
Chef Martha paid for something far less Catastrophic and Calculated!
Office of Comptroller of Currency, OCC, Report:
JPM has Astonishing $88 Trillion in Toxic Assets/Debts!
JPM has 225,000 employees
JPM has $391,000,000 per employee in Toxic Debts/Assets
Goldman has $30 Trillion in Toxic Debts/Assets
Goldman has 27,898 Employees
Goldman has $1,075,345,903 per employee in Toxic Debts/Assets
BofA=$38Trillion in derivatives
Citibank=$32Trillion in derivatives & 300,000 Employees
Goldman=$30Trillion in derivatives & 27,898 Employees
Wells/Wachovia=$5Trillion in derivatives.
Britain's HSBC=$3.7Trillion in derivatives.
I am not sure if an emergency revenue-sharing law, which gives states more money, is the answer. I can only speak for Florida, Many financial problems here are self inflicted.
What I've seen in the past 10 years in the south is an extreme wealth transfer from the people's pockets into the accounts of big business. During Bush's reign (Jeb Bush, that is), insurance companies and big power companies got windfall payments from the State, mainly after the hurricanes, to cover claimed disaster losses. Today we know, these losses never existed, at least not for the power companies, who transferred gains to separate corporations, and then went to the state and cried for help. They didn't even fix their jury rigged electrical grids, the money just disappeared, and we are talking Billions. The same power companies are now opposing energy saving bills in the State, a field where innovative jobs could be created.
Many southern states have ruthlessly catered to the demands of big business (farmers, power companies, developers in the past. Recession or not, as long as the system down here works as it does, I'd say every dollar of federal money will simply feed into nepotism and profiteering.
Let the banks fail, they have proven they deserve it. There are thousands of small banks, with sound fiscal policy, that will fill the void. It's time to find out just how much money the big banks have lost. The government is quite good at seizing banks and finding out what is of value and selling off the good assets and burning the bad. It can't be any worse than what we are seeing. You believe in capitalism and free markets, let the markets do their work. When it's done, let's have some sensible regulations. Even cage fighting has rules.
Let these behemoths fail. It is the best cure for our economic problems. No company is too big to fail.
Stop whining about Obama's slow recovery. He didn't create this mess, he is only funding it.
LOL!
Sad but TRUE!
"stronger stuff is needed" : sounds like we continue to march down the road to serfdom that Hayek predicted.
Suspend all IMMIGRATION beyond a "hard cap" of 100,000 for a period of not less than FIVE YEARS including H1B and so-called "refugees" (most of whom are mere "econ. migrants"!)
WHAT?
Justification Please with Links !!!!!!!
The link: OBVIOUS even to HuffPo zealots: 12 million UNEMPLOYED (at the very least!) is very nearly equal to the 12-20 millions of ILLEGAL ALIENS presently in the U.S.--and NOT all working...
The PUBLISHED number of IMMIGRANTS of all ilks to the U.S. exceeds ONE MILLION per year...... (The U.S. Census Bureau keeps these data!)
Perhaps the "medicine" is simply WRONG. Perhaps "Stimulus" isn't the answer. Perhaps we should let the economic excrement flush itself out of the economic toilet NATURALLY before we consider massive government intervention in the economy. (And by this, I refer to the so-called "toxic assets" of all kinds. And the 'flushing' refers to their gradual write off AT A LOSS by firms and individuals in question without being "bailed out" with a TARP, TALF, etc., which I did NOT support from minute 1.)
Only when this 'garbage' is eliminated via write off can the economy begin to try to function properly. It may take years, if not a decade. to accomplish this. So we don't have a major 'economic boom'. But we won't have any bubbles that would burst, either. Economic activity may be lower than in the early 2000s, but so be it. As long as we have far fewer manufacturing / agricultural or "dirty jobs" being done in this country (as opposed to "paper pushers", which are, in a sense, not "real jobs" since they produce nothing that can feed/shelter/clothe anyone DIRECTLY), the US will deserve to be economically weaker. But since government is unable to create such jobs, their best bet is HANDS OFF!
That's nice if you can afford to wait years to get your next job or if your business can hold out. If you are one of the multimillionaires created during one of the bubble cycles, you might be able to wait it out. The rest of us can't wait that long.
"This is the only recession since the Great Depression in which the job loss wiped out all the job growth of the previous recovery."
Yet we fund the CR00KED Banksters and ignore Main Street, and that is the exact OPPOSITE to what FDR did! He started Rebuilding our Economy with Government Sponsored Jobs Programs building our National Parks and other long term projects.
$306 to Wall Street & Banks for Every $1 to Main Street is guaranteed FAILURE as Trickle Down Bank Funding is proven to be DE_AD!
California is suffering from political stalemate!
But it was the ENR0N Corruption that ruined California and the Federal Government allowed the ENR0N L00PHOLE to remain on the books so Wall Street is using the what was always illegal "Off-The-Books" accounting to hide $Hundreds of Trillions in Toxic Debts. Just look at this OCC Report on Toxic Debts:
Office of Comptroller of the Currency, OCC, Report:
JPM has Astonishing $88 Trillion in Toxic Assets/Debts!
JPM has 225,000 employees
JPM has $391,000,000 per employee in Toxic Debts/Assets
Goldman has $30 Trillion in Toxic Debts/Assets
Goldman has 27,898 Employees
Goldman has $1,075,345,903 per employee in Toxic Debts/Assets
BofA=$38Trillion in derivatives
Citibank=$32Trillion in derivatives & 300,000 Employees
Goldman=$30Trillion in derivatives & 27,898 Employees
Wells/Wachovia=$5Trillion in derivatives.
Britain's HSBC=$3.7Trillion in derivatives.
California also needs a new constitution. Because we need a 2/3 vote to pass any budget we are held in thrall to the minority party-in California's case the no new taxes Republicans. California needs new revenues now!
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