The Case for a Second Stimulus Now

President Barack Obama plans to give a major economic speech after Labor Day. It has been suggested that “finally, Washington is going to have a serious conversation about creating jobs.” But it is also the American people who finally need to have a serious conversation about the economy and about jobs. We need to disengage ourselves from not only partisanship but the realm of economic “myth, dogma and faith”–do our homework about what is known about how the economy actually functions, and hold not only the politicians but the mainstream media and ourselves accountable. This is not a private fight, it is our fight.

The ideal jobs package would inject hundreds of billions of dollars into the economy as quickly as possible – but in a way that paid for itself over the long run and, ideally, diminished automatically once a strong recovery is under way. And because a loss of faith in the economy can quickly become self-fulfilling, it is crucial to restore consumer and business confidence now.

Nearly 70 percent of demand in our economy is from consumption, but consumption has been depressed for these reasons: The economy has been creating few jobs. Workers do not have the bargaining power to push up their wages in a weak labor market. The loss of wealth of homeowners because of the loss in housing equity will cause them to cut back in consumption in order to rebuild savings. Trade is unable to provide a boost because most of our major trading partners are also mired in stagnation.

This leaves the government as the only remaining candidate for boosting the economy. The current consensus in Congress that spending must be cut in the near-term will significantly delay a full recovery.

The Problem

For most of the past 70 years, the U.S. economy has grown at a steady clip, generating perpetually higher incomes and wealth for American households. But since 2000, the story is starkly different. There was zero net job creation between 2000 and 2009. No previous decade going back to the 1940s had job growth of less than 20 percent.

7.5 million jobs were lost between December 2007 and February 2011. The economy needed to create 3.8 million jobs during this time to absorb new potential labor market entrants. According to Josh Bivens of the Economic Policy Institute, this means that more than 11 million jobs are needed to return unemployment back to the 5.0% pre-recession rate.

We have an unemployment crisis. The unemployment rate climbed to 10.1 in 2009 and declined only to 9.4 percent by December 2010. Almost 9 million workers who have wanted full-time work in the past two years have been employed only part time. According to figures released August 5, 2011 by the Bureau of Labor Statistics, the unemployment rate was 9.1 percent in July, 2011.

The cause of the loss of jobs: The reason for the currently high unemployment rate is, as Bivens explains, a collapse in demand for goods and services from U.S. households and businesses, not a collapse in our ability to supply these goods and services. Essentially, the bursting of the housing bubble erased trillions of dollars of wealth from household balance sheets. The pullback in consumer spending and construction cascaded throughout the economy. In short, the burst housing bubble led to sharp reductions in private-sector spending by households and business.

The average lag, in months, between economic recovery and employment recovery after the nine previous recessions: 10. Projected lag, in months, after this recession: 60. (According to the Sept. 2011 Harper’s Index.)

The Labor Department reported that the economy created 117,000 jobs in July (bringing the unemployment rate down to 9.1 percent) The private sector added 154,000 jobs; the public sector lost 37,000. The Labor Department revised the prior months’ growth slightly to bring the average of job creation over the last three months to 72,000 jobs per month. This rate of job growth is below the 90,000 a month needed to keep pace with the growth of the labor force. With the government shedding 30,000 jobs a month, we will be fortunate if the unemployment rate doesn’t rise over the rest of the year.

Forecasters in early 2010 expected the job market to turn around based on the assumption that the financial crisis was, for all practical purposes, over. That did not happen. As 2011 began, the recovery of the U.S. economy appeared healthy and a self-sustaining expansion imminent. Job growth was strong, unemployment was falling, and income and consumer spending were accelerating. Incredibly, in August the economy is struggling to avoid another recession due to a string of unfortunate shocks: surging gasoline and food prices, fallout from the Japanese quake in the spring, the debt-ceiling drama, a revived European debt crisis, and the Standard & Poor’s downgrade. Public confidence, already fragile after the nightmare of the Great Recession and Washington’s heated policy debates, has been severely undermined. Stocks are nearing bear-market territory. The odds of a renewed recession over the next 12 months are one in three, and rising with each 100-point drop in the Dow.

The Solution

The economy will add roughly 2.5 million jobs per year over the 2011–2016 period, according to the CBO. However, even with significant increases in the number of jobs, a substantial reduction in the unemployment rate will take some time. According to the most recent CBO report, unemployment will remain above 8 percent until 2014. According to the January 2011 long-term CBO forecast, only by 2016, does unemployment reach 5.3 percent. The latter is close to the agency’s estimate of the natural rate of unemployment. A return to pre-recession unemployment rates at any time before 2016 is extremely unlikely absent some policy that fills the gap left by retreating private demand and spending.

As Harvard economist Jeffrey Liebman recently explained to The New Republic’s Jonathan Cohn, Okun’s Law is a basic tenet of economics about the relationship between growth and unemployment. It tells us that in order to reduce the unemployment rate by 1 percentage point, the Gross Domestic Product (GDP), the market value of all final goods and services produced in a country in a given period, needs to grow 2 percent faster than the trend for that year. The most recent economic forecast suggests that the GDP will grow at an annualized rate of near 2 percent this year and 3 percent next year. Liebman concludes, “we need real GDP to grow at 4.5 percent a year for two years to bring the unemployment rate below 7 percent. Achieving 4.5 percent growth for the next two years should be the goal of U.S. economic policy.”

The Gross Domestic Product (GDP) is the market value of all final goods and services of a country in a given period. In CBO’s projections, growth of real GDP averages 2.4 percent annually from 2017 to 2021, a pace that matches the growth of potential GDP over those years. The unemployment rate, as indicated above, averages 5.2 percent in that same period. Moody’s has lowered the forecast for U.S. real GDP growth to 2% annualized in the second half of 2011, and just over 3% in 2012. The economy needs to grow 2.5% to 3% per year to add jobs fast enough to keep the unemployment rate stable; this will not happen soon.

More than 11 million jobs are needed to return unemployment back to the 5.0% pre-recession rate. It would take roughly four years of annual economic growth averaging 5% or greater to achieve the needed level of job gains. Unfortunately, the U.S. economy has grown at an average annualized rate of just 2.8 % since the recession ended, and the historical evidence argues that this is the growth rate we should expect for quite some time.

As Richard Parker explains in his review of Jeff Madrick’s “The Case For Big Government: “Our vastly overheated debates about today’s ‘big’ versus yesterday’s ‘small’ government rarely focus on that simple fact: since the late 1950s, American government—federal, state, and local —has spent approximately 30 percent of GDP, and neither Democrats nor Republicans have altered that by more than a percent or two, upward or downward. Indeed, the size of government, as a share of GDP, reached its greatest extent since World War II not under Kennedy, Johnson, or Clinton, but under Ronald Reagan, and on average has been higher under Republican presidents.”

Further, 62 percent of Americans say creating jobs, not cutting spending, should be the nation’s priority now.

As soon as President Barack Obama took office, he requested an economic recovery plan from Congress. The American Recovery and Reinvestment Act of 2009 (ARRA) was a $787 billion stimulus measure designed to jumpstart the economy and create and save 3.5 million jobs, give 95% of American works a tax cut, and begin to rebuild America’s road, rail, and water infrastructure with an unprecedented accountability.

It is generally agreed by economists that the stimulus was not as large desirable, but its size was all that was possible given the consistent obstructionism of the conservatives in the 111th Congress. The footprints of that stimulus bill can be found in just about any area of the economy.

A report released in July 2010 found empirical evidence that the government’s direct intervention to stabilize the economy since 2008–the Troubled Asset Relief Program (TARP) of October 2008, and the fiscal stimulus package, which includes ARRA, “helped avert a second Depression.”

It is clear, that regardless of the recent debt ceiling decision, the mission of the so-called “Super Congress,” and the continued resistance of the conservatives in both parties to expanding government expenditures (and increasing revenues), the issue of another stimulus must be revisited given the current economic and job statistics and projections.

Jonathan Cohn encapsulates the three essential elements of a successful jobs agenda:

1. Size: The jobs program should be big.

Based on Okun’s Law, what we need is a second stimulus bill as large as the ARRA. But this time the composition needs to be 100 percent stimulus, in the neighborhood of $300 to $400 billion a year. But as Cohn says, ” The point is not to get hung up on a specific number. The point is that whether it’s $300 billion, $400 billion, or more, we’re talking about a lot of money.”

2. Speed: The economy needs help now.

Cohn explains, ” That’s not necessarily an argument against measures with delayed impact. The sorry state of American infrastructure would call out for public investment even if the economy were growing rapidly. With interest rates as low as they are, it’s frankly stupid not to borrow money to build infrastructure. Besides, the way things are going, we’re going to need stimulus in 2012, and 2013, and maybe beyond.”

But he notes that since infrastructure work can be slow, we should embrace ideas such as Jared Bernstein’s FAST proposal that would quickly “finance a burst of school repair and renovations around the country.”

According to a recent report by the American Society of Civil Engineers (ASCE): Nearly 30 percent of the nation’s 590,750 bridges are “structurally deficient or functionally obsolete”; The number of unsafe dams has risen by 33 percent to more than 3,500; Public transit facilities—including buses, subways, and commuter trains—are dangerously under-funded, even as demand for them has “increased faster than any other mode of transportation;” Current funding for safe drinking water amounts to “less than 10 percent of the total national requirement,” while “aging wastewater management systems discharge billions of gallons of untreated sewage into US surface waters each year”; The ASCE began including public schools in its infrastructure report card in 1998; in that year it gave public schools an F, followed by a D- in 2001 and 2003, and a D in 2005. Government investment in all these vital facilities is generally held to be below the level needed simply to maintain them in their current poor state.

3. Smarts: We need to be fiscally smart.

Cohn says, “Deficits aren’t a problem right now, notwithstanding what so many politicians and pundits have been saying. But they will be a problem in the future. That’s an argument for offsetting economic boosters with spending cuts and/or revenue increases in the future. Fortunately that is easy to do. All of the measures that are, or should be, under consideration would be temporary and relatively short-term. So it’s relatively easy paying those off over time.

Cohn futher argues we can make these proposals smart by making them “expire when economic conditions improve … no longer requiring separate acts of Congress as each new emergency arises.”

History suggests that a tenuous recovery is no time to practice austerity. In the Great Depression, Franklin Roosevelt’s New Deal generated growth and reduced the unemployment rate from 25 percent in 1932 to less than 10 percent in 1937. However, the deficit hawks of that era persuaded President Roosevelt to reverse course prematurely and move toward budget balance. The result was a severe recession that caused the economy to contract sharply and sent the unemployment rate soaring. Only the much larger wartime spending of the 1940s produced a full recovery.

Action

Share this material with your contacts and mainstream and alternative media. Contact the White House, and Congress. Contact members of the new “Super Committee.” Even though the Commission on Fiscal Responsibility and Reform completed its work at the end of 2010, sending comments is recommended: commission@fc.eop.gov.

For more details about how we can create jobs now, check out the following:

“Economists Warn Politicians: Grave Danger Ahead. Spur Jobs Before Deficit Reduction,” News conference hosted by Campaign for America’s Future.

“A New Bank to Save our Infrastructure,” by Everett Ehrlich and Felix G. Rohatyn, New York Review of Books, 2008-10-09.

“Good Buildings, Better Schools. An Economic stimulus opportunity with long-term benefits.” Mary Filardo, Economic Policy institute, 2008-04-29.

“Don’t Kill Growth and Jobs in the Name of Deficit Reduction,” Institute for America’s Future, 2010-09-16.

“Judging Stimulus by Job Data Reveals Success,” David Leonhardt, The New York Times, 2010-2-16.

“How Can the Economy Recover?”, Jeff Madrick, The New York Review of Books, 2010-12-23.

“Bold Endeavors: How Our Government Built America, and Why It Must Rebuild Now,” Felix Rohatyn, Simon & Schuster (February 24, 2009).

“The Economic Consequences of Mr. Bush,” Joseph E. Stiglitz, Vanity Fair, December 2007.

“Back to Work, A Public Jobs Proposal for Economic Recovery,” Philip Harvey, DEMOS, 2011-02-09.

“Real Plans for Putting People to Work,” Michael Winship, Consortium News, 2011-08-20.

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