More Stimulus … Now!
Having reflected on this week’s ‘not so good’ jobs data I can come to only one conclusion: we need, as a matter of urgency, to push through a second stimulus package. Those of us who thought that the original package was far too small and poorly constructed are on the verge of being vindicated. And this is one time I wish we were wrong.
This does not mean that the current package is not working: it is facile and disingenuous to argue that. We can allow the Wall Street Journal to rant about the administration’s failure, the ideological divide runs too deep for the WSJ to be supportive and, in any case, any organization run by Rupert Murdoch nowadays runs fast and loose with the facts – the WSJ has been reduced to being a shill for Hooverite policies, safe in the knowledge that it has no responsibility and therefore is able to say stupid things.
No. The existing package is working. It just is miserably inadequate to the task.
What disappoints me most is that this inadequacy was always easily predictable. The failure was not one of analysis or even understanding the correct policies. It was a failure of political willpower.
Having just won a crunching electoral victory Obama decided to be weak. He adopted unnecessarily centrist positions in order to woo ‘centrist’ GOP Senators. He watered down policies in order to avoid confrontation and he reached out to the very people who caused this disaster – bankers – for advice about the cure.
With much of his agenda now so lame that it makes a mockery of his call for change, now is the time to discover his missing backbone.
And I mean now.
Not the Fall.
Let’s recap the situation we find ourselves in:
- The economy is still shedding jobs in large numbers. Not as rapidly as before, but still enough to scare everyone.
- This masks the problem: we need to be adding jobs to keep up with population growth. It is easy to forget this. Under normal circumstances the economy needs to add about 100,000 jobs each month just to keep up with our growing workforce.
- So a loss of 500,000 jobs in one month leaves us 500,000 + 100,000 adrift of where we need to be to keep the economy close to its potential.
- Do the math: we have lost a net of about 6,500,000 jobs due to the recession. And demographics have added about 2,000,000 new workers during the same period. So we are 8,500,000 jobs in the hole.
- Worse: the labor surveys are beginning to show tons of worker disillusionment. The number of people who report that they are part of the workforce is shrinking – despite the demographics just mentioned – so the economy is losing capacity.
- Lost capacity constrains future wealth generation. The OECD estimates that the recession will permanently shrink US wealth by about 1% per annum. That’s $145 billion, or plenty enough to provide for health care.
- The current Federal level stimulus is, at least in part, being offset by spending cuts at the State level. So we have contradictory economic policies: the Fed’s are trying to expand the economy, while the States are trying to shrink it. This needs sorting out.
- We are playing for big stakes.
- We need appropriately big responses.
Are we getting them?
No.
Instead we have a lame stimulus that was, because of excessive pandering to ‘centrists’, tilted towards ineffective tax cuts and cash rebates. We have a limp set of banking reform proposals that are thick with micro-level bureaucratic kluges and exceedingly thin with respect to the big issues like regulatory capture and ‘too big to fail’ solutions. And we have a health care plan being tossed and turned by those same centrists that screwed up the stimulus.
Meanwhile the economy burns.
I mentioned yesterday that we should not panic over one month’s data. But the warning signs are flashing distinctly and brightly on the downside. What worries me most is that wages are showing every sign of decline. And I doubt that the official figures properly catch the localized, but now frequent, give-backs by workers: shorter work weeks, furloughs, and outright wage cuts. This is the stuff of deflation.
I have argued all I can about the fears now building amongst many right wing commentators that we are running a risk of high inflation. I don’t believe that inflation is a credible risk anytime soon, and certainly not as long as the economy is stuttering so far from its potential. It is ridiculous even to think such a threat exists in the near term. Longer term? Yes. Shorter term? Not a chance.
On the contrary. The risk is still on the downside. Deflation, which is a sure associate of depression, is still a bigger risk than inflation is.
The problem comes down to analytical accuracy.
All those viewing the scene through the prism of textbook economics will see inflation as a problem. That’s because the textbook is wrong. The effects of financial relationships and in particular the effects of uncertainty are not accounted for in textbook theory. As a result the textbook fails to contain analysis of a recession where labor markets are thrown way out of balance and where debt reduction becomes critical. Combine these issues and deflation becomes the problem. And the textbook offers no cure.
The liquidity trap we find ourselves in – a situation where normal monetary policy is totally ineffective – reduces our policy options to just one: a purely Keynesian stimulus.
That is, government consumption in excess of its means. Ugly but effective.
Tax cuts and cash rebates do not work as part of such a stimulus precisely because of the de-leveraging that we need: consumers hoard cash they do not spend it. They reduce debt or keep cash in excess of normal requirements. Why? Because of the uncertain environment. The more they hoard the more uncertainty creeps in via increased unemployment. The consequent downward spiral does indeed self-correct, just as the market magic believers argue it will. But the cost is devastating and the time lost is enormous. It may be a decade of lost wealth accumulation if we do not act forcefully.
So we need more stimulus. And we need it now.
