Let's Get Fiscal

By MIKE WHITNEY

Nov. 18, 09

"Our greatest primary task is to put people to work. This is no unsolvable problem if we face it wisely and courageously. It can be accomplished in part by direct recruiting by the Government itself, treating the task as we would treat the emergency of a war, but at the same time, through this employment, accomplishing greatly needed projects to stimulate and reorganize the use of our natural resources."

Franklin D. Roosevelt, Inaugural Address, March 4, 1933

There's no reason why a sharp-witted politico like Barack Obama can't survey the wreckage around him and draw the same conclusions as FDR. The unemployment crisis should be the president's first order of business; Job 1. Instead, Obama is paralyzed by indecision, unable to settle on a policy that he's willing to stick with through Hell-or-high-water. His lack of resolve shows that he's got his priorities mixed up and that he's getting bad advice from his lieutenants.

 

The economy needs more jobs to get back on track and make up for flagging demand. Those jobs are not going to come from the private sector which is struggling just to stay afloat. They'll have to be created by the government; major public works programs expressly designed to put millions of people back to work. These are precisely the kind of programs that conservatives and Libertarians despise, which is important, since it lays the groundwork for a national debate on the role of government. This is a debate that Obama can win, provided he stops waffling and shows some moxie.

 

Unemployment has reached a 26-year high of 10.2 percent, but the "real" rate of joblessness (underemployment) is now hovering at 17.5 percent. These are Depression-era numbers. The Fed's zero-rate policy and liquidity-injection programs have sparked a 62 percent rally in the stock market since early March, but had no material effect on unemployment which is headed higher. A growing number of economists, including Paul Krugman, Nouriel Roubini and Marshall Auerback, are calling for bold action to stop the bleeding and put the country back to work.

 

But the poll-driven Obama administration is afraid to break with the "pro growth" small-government dogma which has guided state policy for the last 30 years. Obama knows the economy needs another round of stimulus, but he's afraid to move forward for fear of offending Wall Street and fatcat party donors who see any expansion of government as a threat private profit-making. As a result, the economy continues to be whipsawed by rising joblessness, soaring defaults, and tighter credit. Here's a quote by Obama's chief economic advisor, Lawrence Summers, which helps to clarify the point:

Indeed, in the current circumstances the case for fiscal stimulus -- policy actions that increase short-term deficits -- is stronger than ever before in my professional lifetime. Unemployment is almost certain to increase -- probably to the highest levels in a generation. Monetary policy has little scope to stimulate the economy given how low interest rates already are and the problems in the financial system. Global experience with economic downturns caused by financial distress suggests that while they are of uncertain depth, they are almost always of long duration.

The economic point here can be made straightforwardly: The more people who are unemployed, the more desirable it is that government takes steps to put them back to work by investing in infrastructure or energy or simply by providing tax cuts that allow families to avoid cutting back on their spending. ("A Bailout Is Just a Start", Lawrence Summers, Washington Post)

The article was written by Summers in September of 2008, which shows that he knew what needed to be done more than a year ago. That's impressive, but where are the infrastructure and green technology projects that were promised? Where are the new jobs?

Originally, Obama assured the public that the $787 billion stimulus package (aka--The American Recovery and Reinvestment Act) would create 3.5 million new jobs.

 

But--even by the administration's own calculations--less than 1 million jobs have been created so far. Too much of the ARRA money was devoted to tax cuts (to appease Republicans and Bluedogs) which diminished its overall effectiveness. Here's an excerpt from an article by Alec MacGillis in the Washington Post which gives a breakdown of the costs:

"Two-thirds of the stimulus went toward tax cuts, fiscal aid to states, and expanded unemployment benefits and food stamps. These efforts helped cushion the recession’s blow, saved public jobs and, by injecting demand into the economy, bolstered employment indirectly.

The remaining third of the stimulus, however, was expected to be the real jobs generator: $250 billion for infrastructure — roads, transit, water treatment — and for investments in energy efficiency, broadband access and other areas. But it is becoming clear that much of that spending is not producing many new jobs." ("Unlike the New Deal, Obama’s plan does not put people on the public payroll", Alec MacGillis, Washington Post)

So, while $11.4 trillion has been used to prop up the financial system, a paltry $250 billion has gone to creating jobs. No wonder unemployment has zoomed to 17.5 percent.

Here's Summers again:

The American Recovery and Reinvestment Act (ARRA) will do some of the work that the nation has needed done for a long time—doubling renewable energy capacity in the next 3 years, supporting middle class incomes, modernizing ten thousand schools, and making the largest investment in the spine of our national economy – the nation’s infrastructure – since Dwight Eisenhower’s investment 50 years ago...

 

Between 2000 and 2007 – a period of solid aggregate economic growth – the typical working-age household saw their income decline by nearly $2000. The decline in middle-class incomes even as the incomes of the top 1% skyrocketed has a number of causes, but one of them is surely rising asset prices and the fact that financial sector profits exploded to the point to where they represented 40% of all corporate profits in 2006.

 

Confidence today will be enhanced if we put measures in place that assure that the coming expansion will be more sustainable and fair in the distribution of benefits than its predecessor.

Summers sounds more like Huey Long than Milton Friedman, spouting populist blather about the growing inequality and the "fair distribution of benefits". What rubbish. Nearly all of the emergency government funding has been pumped into financial markets where the investor class is raking in bigger profits than ever before. Even worse, according to an article released last week by Politico.com, Team Obama is about to lunge even farther to the right. Here's a quote from Politico:

"President Barack Obama plans to announce in next year’s State of the Union address that he wants to focus extensively on cutting the federal deficit in 2010 – and will downplay other new domestic spending beyond jobs programs, according to top aides involved in the planning.

The president’s plan, which the officials said was under discussion before this month’s Democratic election setbacks, represents both a practical and a political calculation by this White House." (politico.com)

Uh, now who exactly is telling Obama that trimming the deficits (which involves raising taxes or cutting spending) in the middle of a severe economic downturn is a good idea? Summers, perhaps?

This excerpt from Politico just highlights the yawning chasm between blabber and policy. If Obama decides to cut the deficits and jettison the jobs programs, the economy will slide right back into recession. Is that what he wants, or is he just an unwitting victim of Summer's crummy advice?
 

Summers knows that the 3.5 percent surge in GDP in the 3rd Quarter was entirely the result of Obama's fiscal stimulus. He also knows that government jobs programs will increase demand, boost consumer confidence, add to state revenues, and spur growth. So why is he caving in to the deficit hawks and the dollar demagogues instead pushing Obama to rally the country to use the nation's vast resources to put its people back to work?

 

The Fed can't do it. In fact, the Fed already has its back against the wall. It's balance sheet has ballooned to more than $2 trillion in the last year alone. It's getting no traction from its zero percent interest rates, and its $1.75 trillion quantitative easing program is set to end by the end of the 1st Quarter 2010. Fed chair Ben Bernanke has stabilized the financial markets, but the liquidity is still not getting to the people who need it most because the credit system is still gunked up with toxic paper.

 

That's taken the "trickle" out of trickle-down, which is why the economy needs a lift, a direct infusion of stimulus to the jugular; to patch household balance sheets and perk-up consumer spending. The stimulus should be part of an aggressive reform agenda aimed at job creation. Otherwise things will only get worse.

 

How bad will it get? Here's a clip from Nouriel Roubini's RGE Monitor, "The Worst is yet to Come":

Think the worst is over? Wrong. Conditions in the US labor markets are awful and worsening....

The long-term picture for workers and families is even worse than current job loss numbers alone would suggest. Now as a way of sharing the pain, many firms are telling their workers to cut hours, take furloughs and accept lower wages. Specifically, that fall in hours worked is equivalent to another 3 million full time jobs lost on top of the 7.5 million jobs formally lost.

This is very bad news but we must face facts. Many of the lost jobs are gone forever, including construction jobs, finance jobs and manufacturing jobs. Recent studies suggest that a quarter of U.S. jobs are fully out-sourceable over time to other countries...

 

So we can expect that job losses will continue until the end of 2010 at the earliest. In other words, if you are unemployed and looking for work and just waiting for the economy to turn the corner, you had better hunker down. All the economic numbers suggest this will take a while. The jobs just are not coming back.

 

There's really just one hope for our leaders to turn things around: a bold prescription that increases the fiscal stimulus with another round of labor-intensive, shovel-ready infrastructure projects, helps fiscally strapped state and local governments and provides a temporary tax credit to the private sector to hire more workers. Helping the unemployed just by extending unemployment benefits is necessary not sufficient; it leads to persistent unemployment rather than job creation." ("The Worst is yet to Come", Nouriel Roubini's RGE Monitor)

This isn't the time for hemming-and-hawing. Obama should be using his clout to launch a trillion dollar "Get America Back to Work" campaign with all the public relations rigmarole to go along with it. 17.5 percent "real" unemployment is only part of the story, too. There's also 300,000-plus foreclosures every month, record personal bankruptcies, plummeting state revenues, and countless maxed out homeless shelters and food banks.

 

We're in the throes of a low-grade depression that requires emergency mobilization aimed at expanding the public workforce and increasing wage-and-benefits packages to spark greater demand. The states should be given open-ended funding to cover losses in annual tax revenue as long as they agree to an across-the-board firing freeze for all state and local employees. Government resources should be provided in block grants to states for green technology, infrastructure projects, foreclosure relief, low income housing, and public health care facilities. Whatever it takes to rev up the industrial flywheel that keeps the economy purring; Do it!

 

The Fed's monetary remedies have flopped. It's onto Plan B, which means bold New Deal-type jobs programs; direct public-service employment which eliminates the waste of tax credits for private sector hiring and misdirected stimulus which disappears down a black hole. Put money back in the hands of the people who will spend it (workers) and build a stronger economy where everyone benefits. The system needs to be rejiggered; everyone knows it. The essential balance between supply and demand has been upset and can't be restored without a larger public workforce. Much larger. Larger public workforce. Larger bureaucracy. Big government.

 

 

Mike Whitney lives in Washington state. He can be reached at

 

Source: Counterpunch