Unemployment and Unstimulus

It’s important to understand the gravity of our unemployment situation. Last month, the unemployment rate ticked up to 7.6%. As the following chart from the Bureau of Labor Statistics shows, there have been only four previous times since 1948 that the rate has exceeded 7.5%:

From the data series, these are the only years since 1948 that experienced at least one monthly unemployment rate above 7.5%:

1975  1976  1977
1980  1981  1982  1983  1984

In the 62 years of data, only 11 saw unemployment exceed 7.5% during at least one month. That’s less than one in five years, and we’re in one of them today.

Turn now to the prospects for job creation through the stimulus plan. The Congressional Budget Office — which is managed by Democrats, mind you — pointed out that half of the plan’s spending won’t even hit the street until after 2010, and that “the legislation would result in a slight decrease in domestic product compared with CBO’s baseline economic forecast.”

On top of that, it’s looking inflationary. Economist Allan Meltzer of Carnegie Mellon told Newsweek: “I think this is the introduction to a disaster. We’re going to face a big inflation. Everybody talks about how much we need to do now. But no one talks about how we’re going to unwind what we’re doing now.” He thinks the combination of low interest rates and runaway government spending will take America back to 1970s-style stagflation.

He’s not the only one worried about the stimulus bill. Below are two excerpts from last Friday’s episode of KCRW’s Left, Right & Center.

The Huffington Post co-founder Arianna Huffington reported from the TED Conference:

Here at the TED Conference with a lot of new thinkers and innovators is the sense that this is an opportunity to really build the economy of the twenty-first century, and that the stimulus package is not doing that, that it is not bold enough, that it is not big enough. Paul Krugman made that same point today in a column talking about the fact that you can’t build a bridge halfway over a chasm. And that sense is actually echoed by a lot of people I’ve stopped, many of whom will not go on the record whether it’s on education — we’re going to spend all this money on education, why not also bring about some real reforms: teacher accountability, marriage pay, things that Obama endorsed during the campaign. On the green economy, it’s clear that the jobs we are talking about are not going to be enough to make a real dent in the rising unemployment. Three-and-a-half million jobs, that’s about a two percent increase on the unemployment scale and before we know it we’re going to be in double-digit unemployment, especially if you include the people who are no longer even on the rolls because they have stopped looking for jobs.

Tony Blankley, who worked for both President Reagan and Newt Gingrich, said:

There are two questions. One: How big should the stimulus be? I suggested in a column a couple of weeks ago that if World War II is the precedent, the stimulus should probably be about 2.5 trillion, not one trillion because during World War II we were spending twenty, twenty-five, thirty percent of the GDP and deficit. So, it may be too small, depending on the theory, but what Arianna cited is that Obama is trying to do more than stimulus in the stimulus package. We do need a stimulus bill as quickly as we can rationally construct it. We’re going to have one. The problem is that when you talk about all the new policies you want to invest in, policies for the twenty-first century beyond the stimulus, each one of those policies is going to be disputed, not just by Republicans but by factions within the Democratic party and by different chairmen and different bodies. The idea that you can both build a stimulus quickly that in fact stimulates, and advance all the policy dreams of the progressive blogosphere for the next century is legislative madness. Obama ought to stick to developing a stimulus package, which I think could pass with bipartisan support.

Let me make a shocking suggestion. This is a time when we could actually use a leader. Sometimes, a president is a leader. He could have actually designed a rational bill, worked with his allies in Congress, and enacted it. But instead he passed the buck to Pelosi who wrote this ridiculous porcupine bill that is not stimulative enough. Do you know that for every billion dollars you spend on infrastructure you get thirty-five thousand jobs. For one-hundred billion, you create 3.5 million jobs. We should be doing more infrastructure, and less la la la stuff. But he decided to sit back passively and let all the nitwits on the hill work their will. We’ve been watching them work their will across the spectrum. So we lack leadership, having just elected a president.

The Treasury’s new plan, to be announced by head tax-cheat Tim Geithner, was found over the weekend in Barron’s to be lacking for three reasons:

  • It targets banks only, which comprise just 20% of the private credit market, whose deep freeze is a big part of the current problem.

  • Buying up bank loans isn’t nearly as effective as buying asset-backed securitizations stuffed with hundreds of loans diversified by issuers and geographical locale, but the Treasury is going with the bank loans anyway.

  • Finally, “It appears to be a fairly bald attempt by authorities to buy time for banks and put off the day of reckoning when they must recognize losses on the damaged goods now carried at full value in their held-to-maturity accounts.”

Whispers among bankers are that they might be better off holding their bad assets for a potential recovery down the road than they would be selling them into a bad bank at markdowns and then letting the government profit from them. Remember, the Resolution Trust Corporation of S&L; Bailout fame received its assets from banks that had already been nationalized. More than just a bad bank asset collector, it was a dead bank body parts collector. Hard to see the good news for the financial sector if that’s where all this is headed.

Better would be Paul Romer’s suggestion in last Friday’s Journal that we stop using money to resurrect the legion of bad banks, and start using it to start new good banks:

The government has $350 billion in Troubled Asset Relief Program (TARP) funds that it can use to encourage new bank lending. If this money is directed to newly created good banks with pristine balance sheets, it could support $3.5 trillion in new lending with a modest 9-to-1 leverage. Right out of the gate, the newly created banks could do what the Fed has already been doing — buying pools of loans originated by existing banks that meet high underwriting standards.

If the TARP funds go to existing banks, much of them will end up stuck in financial institutions that are still bad after the transfer. We know from the previous
round of TARP that giving more capital to bad banks generates very little net new lending.

We should pay attention to the stimulus package and what the Treasury has on tap, but we shouldn’t expect much. All that talk from the campaign about a new day in Washington sure feels like a long time ago, doesn’t it?

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