The administration's biggest economic mistake so far was to badly underestimate last January how bad the employment situation would become by fall. As a result, it low-balled the stimulus -- settling for a plan that, while avoiding even worse job losses, didn't go nearly far enough.
Obama has to return to Congress, seeking a larger stimulus.
Yes, I know. We're already in the gravitational pull of the midterm elections (look at the bizarre attention given to gubernatorial elections in New Jersey and Virginia, and even to a congressional election in the 23rd district of New York, as supposed harbingers of voter behavior a year from now!) so it will be even harder to round up the needed votes from Blue Dog Dems fretting over the deficit. And you can forget the Republicans.
And yes, I know: Only about half the current stimulus has been spent, so it will be awkward to make the case that we need a larger one.
But here's the problem. Everything else on the table -- a new jobs tax credit, more loans to small businesses, more help to troubled homeowners, another extension of unemployment insurance, another round of subsidies to first-time home buyers -- are small potatoes relative to the importance and likely effect of a larger stimulus. Some of these initiatives may do some good, but even combined they'll barely make a dent in the growing numbers of jobless Americans.
Meanwhile, the states are slicing their budgets, laying off workers and ratcheting up taxes. That's because state tax revenues are falling off a cliff, and almost every state is barred by its constitution from running a deficit. That means the states are actively implementing an anti-stimulus plan.
Let's be clear about this. The national rate of unemployment will almost surely hit 10 percent; we'll know Friday whether it already has. This is more a psychological and political threshold than an economic one (it doesn't include everyone who's too discouraged to look for work, or working part time who'd rather be working full time, or working fewer hours in an ostensible full-time job, or otherwise fully employed but being paid less; the Bureau of Labor Statistics' payroll survey, also due Friday, provides a more accurate picture). But it nonetheless represents a degree of hardship this country hasn't seen in decades.
Public approval of Obama’s handling of the economy has slipped to 46 percent in an Oct. 30-Nov. 1 CNN poll, from 59 percent in March. Remember, Obama was elected in part because the public didn't have confidence in McCain's ability to manage the economy. In exit polls last November, almost two-thirds of voters listed the economy as the nation's top issue. If the job numbers don't start moving in the right direction, not only will Obama's poll ratings continue to drop but congressional Dems will all be in trouble.
That should be Obama's selling point to the Blue Dogs. He should tell them the economy needs a bigger stimulus in order to show improved job numbers by the mid-term elections. And he should make sure they understand that they're more politically endangered next November if the the job numbers aren't moving in the right direction by then than if they vote for a larger stimulus now.
Barack Obama is trying once again for balance. On the one hand, he wants enough government spending to offset the timid spending of consumers and businesses. Otherwise, the jobs and wage recession could drag on for years. On the other hand, he doesn't want to set off more alarm bells about the budget deficit. Otherwise, conservative Democrats might join forces with Republicans to block heath care. So what does he do? A little bit more stimulus spending, but stimulus spending that doesn't look like more stimulus because it's not really adding to the deficit. It's coming out of savings from money already authorized to be spent on the bank bailout. Hmmm?
No president in modern times walks a tightrope as exquisitely as this one. His balance is a thing of beauty. But when it comes to this economy right now -- an economy fundamentally out of balance -- we need a federal government that moves boldly and swiftly to counter-balance the huge recessionary forces still at large.
States and cities, for example, are estimated to be $350 billion hole this year and next. They can't run deficits so they're wildly cutting spending, cutting jobs, cutting contracts, and raising taxes and fees. That's a huge anti-stimulus package roughly as big as the remaining direct spending in the old federal stimulus package. Which means, Obama's "new" stimulus, announced today, is about all we have, and it's not nearly enough.
The word in Washington is we're out of the woods. The rate of unemployment dipped from 10.2 percent in September to 10 percent in October. In our nation's capital, a one-month trend marks a turnaround. Don't believe it for a moment. The real story of October was the increasing number of Americans who dropped out of the labor force, too discouraged even to look for work.
Main Street is hurting worse than ever. Ten percent unemployment translates into roughly 18 percent of our workforce unemployed or underemployed. Housing markets are in terrible shape: One quarter of homeowners are paying more each month than their houses are worth; the rates of tardy mortgage payments continue to rise. Thirty percent of American households contain someone who has lost a job and can't find another, and yet almost all households are dependent on more than one wage earner in order to make ends meet. A quarter of all American children are now dependent on food stamps.
There is no reason to tolerate this degree of misery. We know exactly what to do. The government has the fiscal tools to do it. Start by bailing out state and local governments. (If Congress would prefer to call it a loan and require payback over the next five years, fine.) Renew unemployment and COBRA benefits. Increase federal spending on infrastructure. If we have to, hire people directly. The package should be $400 billion over two years.
We don't know exactly how much the President is proposing to spend, but sources tell me it's in the range of $70 billion, redirected from the $200 billion in TARP savings. The President's small, calibrated attempt to balance a stimulus with deficit reduction will in fact make the deficit worse over the long haul. It postpones the day when we're back to near full employment, when almost all Americans who need a job get paychecks on which they pay taxes. This isn't really balance at all. It prolongs the economic imbalance.
Brad DeLong and FireDogLake are both highlighting an exchange between Robert Kuttner and President Obama yesterday that is worth echoing far and wide... but only if you are interested in a thoughtful and nuanced look at the economic policy challenges faced by the United States right now.
ROBERT KUTTNER: You know, most of the things that have been proposed today cost money, and there is this concern about the federal deficit. I hope that your administration will recognize, as I know you will, that it's possible, first of all, to reduce the deficit over time and sometimes in the short run realize that you need to increase the deficit. And I hope the concern about the deficit in the long run doesn't crowd out the need for additional spending in the short run. And I also think that some of these programs that increase jobs and increase GDP are probably the fastest way to get the economy back on a track that will reduce the deficit over time. It's certainly a better way to reduce the deficit than putting ourselves into a -- into a debtor's prison and assume we can deflate our way to recovery.
BARACK OBAMA: Well, I think this is an important point. You know, we've been talking a lot about specific initiatives. There is a macroeconomic element to this whole thing. And so let me just amplify what was just said.
We have a structural deficit that is real and growing, apart from the financial crisis. We inherited it. We're spending about 23 percent of GDP and we take in 18 percent of GDP and that gap is growing because health care costs, Medicare and Medicaid in particular, are growing. And we've got to do something about that.
You then layer on top of that the huge loss of tax revenue as a consequence of the financial crisis and the greater demands for unemployment insurance and so forth. That's another layer. Probably the smallest layer is actually what we did in terms of the Recovery Act. I mean, I think there's a misperception out there that somehow the Recovery Act caused these deficits.
No, I mean, we had -- we've got a 9-point-something trillion-dollar deficit, maybe a trillion dollars of it can be attributed to both the Recovery Act as well as the cleanup work that we had to do in terms of the banks. In turns out actually TARP, as wildly unpopular as it has been, has been much cheaper than any of us anticipated.
So that's not what's contributing to the deficit. We've got a long-term structural deficit that is primarily being driven by health care costs, and our long-term entitlement programs. All right? So that's the baseline.
Now, if we can't grow our economy, then it is going to be that much harder for us to reduce the deficit. The single most important thing we could do right now for deficit reduction is to spark strong economic growth, which means that people who've got jobs are paying taxes and businesses that are making profits have taxes -- are paying taxes. That's the most important thing we can do.
We understand that in this administration. That's not always the dialogue that's going on out there in public and we're going to have to do a better job of educating the public on that.
The last thing we would want to do in the midst of what is a weak recovery is us to essentially take more money out of the system either by raising taxes or by drastically slashing spending. And frankly, because state and local governments generally don't have the capacity to engage in deficit spending, some of that obligation falls on the federal government.
Having said that, what is also true is that unless businesses and global capital markets have some sense that we've got a plan, medium and long term, to get the deficit down, it's hard for us to be credible, and that also could be counterproductive. So we've got about as difficult a economic play as is possible, which is to press the accelerator in terms of job growth, but then know when to apply the brakes in the out-years and do that credibly. And you know, we are trying to strike that balance, but we're going to need help from all of you who oftentimes are more credible than politicians in delivering that message.
Because we want to leverage whatever public dollars are spent, and we are under no illusion that somehow the federal government can spend its way out of this recession. But it is absolutely true that any of the ideas that have been -- been mentioned here are still going to require some public dollars, and those are actually good investments to make right now.
Like many Salon readers, I feel a great deal of anxiety about where the U.S. is headed, and there have been many disappointments in this first year of the Obama presidency. But I really can't think of anything I'd rather have confronting our challenges than the guy who spoke the words above yesterday.
Before the Bureau of Labor Statistics released the non-farm payroll report for November this morning, you didn't have to look hard to find headlines like "Jobs Report Has Market On Edge." In part this was due to a not very encouraging private sector labor report released on Wednesday, but the anxiety also had its roots in a mysterious comment made by White House Press Secretary Robert Gibbs on Thursday.
"One payroll estimate came out ... yesterday and it seemed to suggest that [the unemployment rate] might tick upward."
At Capital Gains and Games Pete Davis offered some context for this remark.
Every year or so, at the request of clients, I talk to Administration officials about when they receive advance economic data. The uniform answer is that the Fed Chair and the Chair of the Council of Economic Advisers receive the data at 5 p.m. the night before and that the CEA Chair writes a short memo to the President and a few senior officials, which is conveyed between 5:30 p.m. and 7 p.m. depending upon what else is going on. A few key congressional staff get briefed a few minutes ahead of the 8:30 a.m. release, but they are sequestered with no means of communication until then.
Gibbs is far too professional a communicator to make an off-hand comment like that without being prompted. My guess is that White House National Economic Council Director Larry Summers put him up to it with the President's assent and that this was done without knowing the unemployment number in advance. They suspect tomorrow morning's number will be higher, and they want to diminish the political impact. If they're wrong, it won't hurt them.
I'm not sure that I fully understand Davis' post. On the one hand he suggests the president had been given a heads up on the new numbers, but on the other he says that the directive to Gibbs was made "without knowing the unemployment number in advance." But whichever is true, the White House ended up seeming just as flat-footed as the consensus expectation of Wall Street analysts.
But back to the report. The top-line numbers, 10 percent unemployment, only 11,000 jobs lost, immediately goosed the stock market. But inside the numbers the news was also pretty good. The U-6 number, which measures workers who have stopped looking for work or are involuntarily part-time, dropped from 17.5 to 17.2 percent. Hours worked per week rose, suggesting that employers may soon feel pressure to hire new workers. Temp work took a big jump upward, another very positive sign suggesting economic recovery.
The main reason for caution? The monthly non-farm labor report is subject to extreme revisions in the months ahead. In this report, the BLS trimmed job losses for September and October by a significant margin: September's 263,000 number dropped to 139,000 and October's 190,000 fell to 111,000. So it is altogether possible that this month's 11,000 drop could turn out to be much worse later on.
Optimistic labor market analysts were predicting that the U.S. economy would shed at least another 100,000 jobs in November. The actual number, according to the Bureau of Labor statistics? A mere 11,000. The unemployment rate even fell, from 10.2 to 10 percent.
The numbers are a big surprise. As the BLS notes, "in the prior 3 months, payroll job losses had averaged 135,000 a month." But even such a negligible loss represents the 23 straight month in which the labor market contracted, which hasn't happened since the 1930s, so the champagne should stay in the fridge. I'll have much more analysis in a follow-up post. But for now, this is by far the best news on unemployment we've seen all year, and it raises the very real possibility that the economy could start to add jobs in December.
Just in time for President Obama's jobs summit, Reuters columnist James Pethoukoukis gives us a glimpse at Goldman Sachs' economic outlook, compiled by ace forecaster Jan Hatzius. (Found via Calculated Risk.)
The key line:
...(2) a peaking in unemployment in mid-2011 at about 10 3/4 percent.
The unemployment rate sits at 10.2 percent right now. The prospect that it might remain above 10 percent for another year and a half is, as Pethokoukis rightly points out, a massive political disaster in the making for Democrats.
Other forecasts have predicted that unemployment would peak in the first quarter of 2010 and then start to slowly fall, but an article published today in Bloomberg News ranks Hatzius as the most accurate economic forecaster on Wall Street, so his doom-and-gloom cannot lightly be ignored.
On a happier note, there appears to be real momentum on the weekly jobless claims front, with new filings for benefits falling for the fifth straight week to the lowest point in more than a year, and with the four-week moving average dropping like a rock. But that's a slender thread upon which to hang, when faced with the scenario foretold by Hatzius.
Most ideas for creating more jobs assume jobs will return when the economy recovers. So the immediate goal is to accelerate the process. A second stimulus would be helpful, especially directed at state governments that are now mounting an anti-stimulus package (tax increases, job cuts, service cuts) of over $200 billion this year and next. If the deficit hawks threaten to take flight, the administration should use the remaining TARP funds.
Other less expensive ideas include a new jobs tax credit for any firm creating net new jobs. Lending directed at small businesses, which are having a hard time getting credit but are responsible for most new jobs. A one-year payroll tax holiday on the first, say, $20,000 of income -- which would quickly put money into people's pockets and simultaneously make it cheaper for businesses to hire because they pay half the payroll tax. And a WPA style program that hires jobless workers directly to, say, insulate homes.
Most of this would be helpful. Together, they might take the official unemployment rate down a notch or two.
But here's the real worry. The basic assumption that jobs will eventually return when the economy recovers is probably wrong. Some jobs will come back, of course. But the reality that no one wants to talk about is a structural change in the economy that's been going on for years but which the Great Recession has dramatically accelerated.
Under the pressure of this awful recession, many companies have found ways to cut their payrolls for good. They’ve discovered that new software and computer technologies have made workers in Asia and Latin America just about as productive as Americans, and that the Internet allows far more work to be efficiently outsourced abroad.
This means many Americans won’t be rehired unless they’re willing to settle for much lower wages and benefits. Today's official unemployment numbers hide the extent to which Americans are already on this path. Among those with jobs, a large and growing number have had to accept lower pay as a condition for keeping them. Or they've lost higher-paying jobs and are now in new ones that pays less.
Yet reducing unemployment by cutting wages merely exchanges one problem for another. We'll get jobs back but have more people working for pay they consider inadequate, more working families at or near poverty, and widening inequality. The nation will also have a harder time restarting the economy because so many more Americans lack the money they need to buy all the goods and services the economy can produce.
So let's be clear: The goal isn’t just more jobs. It's more jobs with good wages. Which means the fix isn’t just temporary measures to accelerate a jobs recovery, but permanent new investments in the productivity of Americans.
What sort of investments? Big ones that span many years: early childhood education for every young child, excellent K-12, fully funded public higher education, more generous aid for kids from middle-class and poor families to attend college, good healthcare, more basic research and development that's done here in the U.S., better and more efficient public transit like light rail, a power grid that's up to the task and so on.
Without these sorts of productivity-enhancing investments, a steadily increasing number of Americans will be priced out of competition in the world economy. More and more Americans will face a Hobson's choice of no job or a job with lousy wages. It's already happening.
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