Well Then, This Time, Anticipate
Joe Biden went on ABC's "This Week" today and said that his Administration, along with the consensus economic community, misread the severity of the recession:
STEPHANOPOULOS: While we've been here, some pretty grim job numbers back at home -- 9.5 percent unemployment in June, the worst numbers in 26 years.
How do you explain that? Because when the president and you all were selling the stimulus package, you predicted at the beginning that, to get this package in place, unemployment will peak at about 8 percent. So, either you misread the economy, or the stimulus package is too slow and to small.
BIDEN: The truth is, we and everyone else misread the economy. The figures we worked off of in January were the consensus figures and most of the blue chip indexes out there.
Everyone thought at that stage -- everyone -- the bulk of...
STEPHANOPOULOS: CBO would say a little bit higher.
BIDEN: A little bit, but they're all in the same range. No one was talking about that we would be moving towards -- we're worried about 10.5 percent, it will be 9.5 percent at this point.
STEPHANOPOULOS: But we're looking at 10 now, aren't we?
BIDEN: No. Well, look, we're much too high. We're at 9 -- what, 9.5 right now?
BIDEN: And so the truth is, there was a misreading of just how bad an economy we inherited. Now, that doesn't -- I'm not -- it's now our responsibility. So the second question becomes, did the economic package we put in place, including the Recovery Act, is it the right package given the circumstances we're in? And we believe it is the right package given the circumstances we're in.
We misread how bad the economy was, but we are now only about 120 days into the recovery package. The truth of the matter was, no one anticipated, no one expected that that recovery package would in fact be in a position at this point of having to distribute the bulk of money.
STEPHANOPOULOS: No, but a lot of people were saying that you needed to do something bigger and bolder then, including the economist Paul Krugman. He's saying -- right now he's saying the same thing again -- don't wait. You need a second stimulus, you need it now.
BIDEN: Look, what we have to do now is we have to properly, adequately, transparently and effectively spend out the $787 billion.
First of all, Stephanopoulos was the first to say "misread the economy." So it was kind of a leading question, and a Hobson's choice for Biden between two bad options - a bad read or a failed stimulus. Next, Biden and many of his White House colleagues have been pushing this idea that nobody could have anticipated the depths of the economy for several weeks now. But the truth is quite different. Plenty of people dating back to late last year were saying that unemployment was headed for double digits, and that the stimulus package conceived by the Obama Administration, especially with its 40% tax cuts, would be insufficient. The Administration's white papers and boasts about recovery didn't check out, the same way that their "adverse scenario" for the stress tests didn't check out. The worst thing about Biden's statement is that it's flat wrong.
But beyond that, the White House's touting of the stimulus as a world-historical fix to a broken economy presupposed this backtracking. They knew at the time that it would take months to get the stimulus funds out to people and businesses, and that the economy, which was already reeling, with four straight months of job loss over 400,000 at the end of 2008, would only continue to bleed. And yet the timing of passage, at the beginning of the first term, necessitated touting it as something of a panacea. But we all saw the gruesome legislative sausage-making that went into passage, with Presidents Nelson and Collins pulling this program and that out of the package just to reach some arbitrary number above which we could not spend.
The stimulus package is not bad, and much of it will hit the economy in Q3 and Q4 of this year, so its impact has yet to have been felt. But it was clearly not sufficient to meet the demand shortfall at the time, and the recent job numbers just prove it.
The June employment report suggests that the alleged ‘green shoots’ are mostly yellow weeds that may eventually turn into brown manure. The employment report shows that conditions in the labor market continue to be extremely weak, with job losses in June of over 460,000. With the current rate of job losses, it is very clear that the unemployment rate could reach 10 percent by later this summer, around August or September, and will be closer to 10.5 percent if not 11 percent by year-end. I expect the unemployment rate is going to peak at around 11 percent at some point in 2010, well above historical standards for even severe recessions.
It’s clear that even if the recession were to be over anytime soon – and it’s not going to be over before the end of the year – job losses are going to continue for at least another year and a half. Historically, during the last two recessions, job losses continued for at least a year and a half after the recession was over. During the 2001 recession, the recession was over in November 2001, and job losses continued through August 2003 for a cumulative loss of jobs of over 5 million; this time we are already seeing more than 6 million job losses and the recession is not over [...]
These job losses are going to have a significant effect on consumer confidence and consumption in the months ahead. We’ve also seen extreme weakness in consumption. There was a boost in retail sales and real personal consumption-spending in January and February, sparked by sales following the holiday season, but the numbers from April, May, and now June are extremely weak in real terms. In April and May you saw a significant increase in real personal income only because of tax rebates and unemployment benefits. In April, there was a sharp fall in real personal spending, and in May the increase was only marginal in real terms [...]
The other important aspect of the labor market is that if the unemployment rate is going to peak around 11 percent next year, the expected losses for banks on their loans and securities are going to be much higher than the ones estimated in the recent stress tests. You plug an unemployment rate of 11 percent in any model of loan losses and recovery rates and you get very ugly losses for subprime, near-prime, prime, home equity loan lines, credit cards, auto loans, student loans, leverage loans, and commercial loans – much bigger numbers than what the stress tests projected.
We're just in terrible trouble right now, and the 50 little Hoovers wreaking havoc on state budgets aren't exactly helping, either. At this point, a Japan-style decade of zero growth might be welcome, with a double-dip recession possible.
I think the Administration did a decent enough job reacting to the chaos of a potential depression. But now they need to look at the reality of the situation and recognize that we will need another stimulus, which I would like to see focused on fiscal stabilization for the states. For the second week in a row, a major Administration figure dodged the question when asked, but did not dismiss it out of hand. They need to at least draw up some plans. If nobody could have anticipated the state of the economy prior to the first stimulus, the least the White House can do is anticipate the second round.
...The Shrill One says it better.