The US Prepares To Go “All In” To Save The Economy

There is still a place in the world of economists where the Tooth Fairy visits. It is where those who believe unemployment is about to improve, consumers will have access to growing amounts of credit that they will use to buy things they think they can suddenly afford, and where federal taxes will not go up sharply in 2011 as expected.
The President made his case yesterday for ratcheting up spending to improve the jobless rate. “There are those who claim we have to choose between paying down our deficits on the one hand, and investing in job creation and economic growth on the other. But this is a false choice,” he said at a public appearance. The statement was disingenuous. Almost every financial expert in the Administration knows that there is a good chance that GDP will begin to drop again early next year if unemployment stays above 10% and worse if the chronically jobless remain unemployed for many more months. It is becoming more obvious with each passing day that entire industries have been wiped out in the last two years, and that there is absolutely no place for those workers to go to find new jobs. These people will drop out of the job market, perhaps permanently, work part-time, or take work at a fraction of what they made in their old positions. These chronically underemployed citizens will not be real consumers in any of these cases. Day in and day out, they will barely be able to afford the basics of shelter, food, and clothing.

CNN did one of its frequent polls recently. This survey covered 1,041 people who were interviewed on December 2nd and 3rd. Eighty-four percent of those asked think the economy is still in recession. Thirty-six percent believe that the recession is “serious.” Thirty-nine percent think that the economy is getting much worse, which is higher than the figure from the last CNN poll conducted on between October 16th and 18th. The economy is supposed to have gotten better over the two months between the surveys, according to most government numbers and polls of private economists.

Ben Bernanke may say the recession is over and that the economy faces some “headwinds”, but most people don’t think the recession is over at all.

The conversation about beginning new jobs programs and infrastructure projects, perhaps using some of the unexpected $200 billion windfall in the TARP pool, shows how clear it has become to the Administration and some members of Congress that a second recession may already be just this side of the horizon. The Federal Reserve’s latest monthly report on consumer credit shows that personal spending is likely to stay in full retreat. Holiday spending may still drop this year compared to last which is extraordinary because the 2008 Christmas season was a disaster, causing  thousands of stores to close and tens of thousands of layoffs in the retail industry.

The government’s gamble is now clearly moving in the direction of spending another $100 billion or more for the sole purpose of helping jobs growth. That number may even go higher as it becomes clear that hundreds of thousands of people are losing their social safety nets because they have been out of work so long. There is only one job for every six job seekers based on data released this week. That number is getting slightly worse each month. The only way to create employment quickly is to bribe businesses to hire people with tremendous tax incentives or create government programs that will put the jobless back to work building roads and bridges. “Bribe” may seem too strong a word, but many companies have already decided they can live with the workers they have and just demand that they be more productive. These businesses have little incentive to put ads in the “Help Wanted” section of a newspaper or CareerBuilder.com.  A financial incentive from the government might get them back into the spirit of hiring.

The risk of investing more money into the economy is that the deficit will rise almost immediately and the national debt will move up shortly thereafter. Moody’s warned that the US could lose its “Triple-A” rating within three years because of debt which is already over $12 trillion and worsened by a stagnant tax base. The government can do nothing beyond what it has done already and must hope that the  repair of the economy will slowly begin. This will result in higher tax receipts and will lower the deficit, if it works. There is a good chance that it will not which means that the $787 billion stimulus package will not have come even close to reaching it goals. The country will still be faced with a crippled economy. America’s ability to pay for the largest stimulus package in its history will have been undercut by the failure of the program itself.

The government will almost certainly not stand by and let the stimulus plan fail without giving it another huge booster shot. This move could be seen as protecting the first plan. If our government is honest, it will be a decision based on the realization that they economy will be a wreck in two years and the deficit will still be growing rapidly. The Administration’s alternative is to take this huge gamble and double down on stimulus efforts. If it works, a growing jobs base could reverse the economy’s slide. If it does not, the national debt will be greater than it might have been.  But, if it works, it will be remembered as one of the most important political and economic decisions in generations. 

 Mr Obama and his economic team have a chance to be remembered for courage and the belief that American citizens are committed to being part of a great 21st Century Works Program that will rebuild both our aging infrastructure. repair our educational and health care system and create a new culture of hope.

Douglas A. McIntyre