World Banks Warns The Worst May Not Be Over

Zoellick’s view of the worldwide economy was in the minority just a few weeks ago, and it still may be. The minority is growing quickly, however, as it becomes clear that unemployment may remain crippling and consumer spending may remain somnolent for many quarters to come.

The World Bank president’s comments are particularly unwelcome in America; at least among those in the government who are thrashing to defend a stimulus package that is not stimulating and a budget which has turned out to be profligate when it should be austere. It now appears that the acceleration of federal spending which had as its foundations in an unemployment rate that would peak at 8% and a quick recovery in GDP is based on corroded assumptions. The AP recently quoted Lawrence Mishel, president of the Economic Policy Institute, as saying “Perversely, you actually have to have higher deficits to generate some growth.” In other words, the amount of the $787 billion stimulus package is insufficient and never was sufficient.

A new stimulus package’s costs would have to come out of the body of the Budget. Federal tax receipts are dropping rapidly. The need for federal money is increasing, particularly among crippled states and municipalities. The Treasury could try to test the limits of its borrowing power by asking world capital markets to absorb another several hundred billion in American debt by financing a second stimulus package, but it dare not do that. The Administration has been warned too often that the country is overextended and people in The White House say that they lose sleep over the expanding national debt.

The issue of setting a new stimulus and cutting government programs which are already in the budget becomes an epistemological one. Most economic forecasters say that they cannot see one year ahead. Some have taken that down to a quarter or two. The blending of employment, company earnings, ongoing consumer and bank leverage, and the credit markets make forecasting no better that phrenology.

The government can only avoid a huge tax increase to provide more stimulus capital if it is willing to tear out a number of current government spending programs. It is hard to imagine that the money will come from defense or social programs. Looking again at the government’s 2010 budget it is remarkable how small the non-defense discretionary part of the spending is. The people at NASA and parks and recreation are going to have to survive on less. It may take longer to restore the Louisiana wetlands. The $355 million earmarked for cybersecurity may have to be curbed.

It would not be fair to say that the budget as it is written now is filled with nonsense, but it has a large number of programs which could be pushed out for a year or more without compromising the national interest. Congress and the Administration are going to have to go through those spending plans with a fine-toothed comb because they will need to find several percent of the planned total of $3.951 trillion dollars in budgeted spending for this year to be moved into packages to support the national employment base. The economy could actually turn fairly fast if joblessness can be arrested at a 10% level and then turned back in the direction of 8% quickly. A prolonged period of double-digit unemployment kills all of the government’s tax receipt and most of its stimulus goals.

The US has run out of its ability to readily raise large amounts of money beyond what it has already told investors to expect. Someone has to be the one capable of telling the American citizens the bad news that not everyone gets to sup at the government’s table this year. With the economy turning back in the wrong direction, at least no one should be be surprised.

Douglas A. McIntyre