Coming Around On The Jobs Crisis

Bob Herbert wonders today if the Obama Administration understands the nature of the jobs crisis. He says that millions of Americans need to get back to work, and if the private sector is unwilling or unable to produce those jobs, then the government must step in. This was the most crucial passage:

The survey for the Economic Policy Institute was conducted in September by Hart Research Associates. Respondents said that they had more faith in President Obama’s ability to handle the economy than Congressional Republicans. The tally was 43 percent to 32 percent. But when asked who had been helped most by government stimulus efforts, substantial majorities said “large banks” and “Wall Street investment companies.”

When asked how “average working people” or “you and your family” had benefited, very small percentages, in a range of 10 percent to 13 percent, said they had fared well.

I think the White House got an advanced copy of Herbert's column, because their message today has a lot to do with jobs. Peter Orszag reiterated that the President is "exploring additional options to promote job creation." Bloomberg covers it as well:

President Barack Obama is considering a mix of spending programs and tax cuts to respond to widening job losses that would amount to an additional economic stimulus without carrying that label.

The discussion of the initiatives, including a boost in transportation spending and an extension of an expiring tax credit for first-time homebuyers, comes as the White House is balancing rising concern about unemployment and a budget deficit the Congressional Budget Office estimates will total $1.6 trillion for 2009, and $1.4 trillion in 2010.

Administration officials have told allies in Congress that a broader transportation bill, and extensions of a homebuyer tax credit and unemployment benefits are all on the table, a Senate aide said.

As well as Herbert's paper, The New York Times:

President Obama’s economic team discussed a wide range of ideas at a meeting on Monday, following his Saturday radio address in which he said it would “explore additional options to promote job creation.” But officials emphasized that a decision was still far off and that in any event the effort would not add up to a second economic stimulus package, only an extension of the first [...]

Among the options for additional steps is some variation on Mr. Obama’s proposal during the stimulus debate to give employers a $3,000 tax credit for each new hire, which Congress rejected last winter partly out of concern that businesses would manipulate their payrolls to claim the credit. Another option would allow more businesses to deduct their net operating losses going back five years instead of the usual two; Congress limited the break to small businesses as part of the economic stimulus law.

Not to mention the WSJ and a separate Times article.

Calculated Risk worked through some of the safety net options the other day. Extending unemployment benefits and COBRA reductions sounds fine, but I don't see exactly how they create jobs - though added consumer spending may save some. The homebuyer tax credit, while popular, is a complete waste of money, costing tens of thousands per new home sold, and it isn't boosting housing and construction to any great degree.

As for the rest, infrastructure spending through the transportation bill would be great, but is the Administration willing to waive paygo rules, or do they have some idea to pay for it? The business tax credit for new hires seems ripe for abuse, as does the "carry-back" provision allowing major tax breaks for corporations. That just sounds like trickle-down economics to me, and thus far it hasn't worked.

Robert Reich has some much better ideas, though he does side with the new jobs tax credit.

Use existing authority under both the stimulus package enacted earlier this year and the nefarious TARP bailout fund -- extending and combining them into a fund to make up for state and local cuts in public school budgets, childrens' health, public health (we need workers to administer swine flu vaccine) and public transportation. Instead of bailing out banks and giant automakers, we should switch to bailing out public services that average people need.

Propose a one-year payroll tax holiday on the first 20,000 of income. Republicans as well as Blue Dog Dems could go along with this, and it would be a highly progressive tax cut since 80 percent of Americans pay more in payroll taxes than they do in income taxes.

Give small businesses a "new jobs tax credit" for every net new job created over the next year. Granted, under normal circumstances this sort of jobs credit doesn't have much effect, and it's difficult to separate hires that would have happened anyway from net new ones. But we're not in normal circumstances; small businesses, which are responsible for most new jobs, still aren't hiring. They need a boost.

Dramatically expand the Small Business Administration's lending programs and have the Fed buy up the SBA's debt. Big banks are not lending to small businesses. TARP has been an utter failure in this regard. The SBA and the Fed should circumvent them and help small businesses get the capital they need, so they can start hiring again.

These might work in separate bills instead of one big stimulus bill that would have a target on its back. There's no question that state aid should be on the top of the list, and I think accelerating infrastructure spending is vital enough that deficit spending makes sense; government interest rates remain low, after all.

More than anything, the Obama Administration has to show through their actions a concern for those struggling right now. The jobs picture is intimately tied to their economic fortunes, so they have every incentive to do so.

Still Shedding Jobs

Last month's employment report:

Nonfarm payroll employment continued to decline in September (-263,000), and the unemployment rate (9.8 percent) continued to trend up, the U.S. Bureau of Labor Statistics reported today. The largest job losses were in construction, manufacturing, retail trade, and government.

Household Survey Data

Since the start of the recession in December 2007, the number of unemployed persons has increased by 7.6 million to 15.1 million, and the unemployment rate has doubled to 9.8 percent.

The change in total nonfarm payroll employment for July was revised from -276,000 to -304,000, and the change for August was revised from -216,000 to -201,000.

Economists were hoping for something around 175,000 losses.

Earlier this week, I wrote about how Obama's approval rating is intimately timed to the jobs situation. A report by two professors at Rutgers says it will take until 2017 for jobs to reach pre-recession levels. That could be two Presidents from now, the way things are going.

Obama doesn't need a full recovery, but he needs to show improvement. And the only way, at this point, to improve the jobs situation is with another stimulus.

...Krugman:

Stocks are up. Ben Bernanke says that the recession is over. And I sense a growing willingness among movers and shakers to declare “Mission Accomplished” when it comes to fighting the slump. It’s time, I keep hearing, to shift our focus from economic stimulus to the budget deficit.

No, it isn’t. And the complacency now setting in over the state of the economy is both foolish and dangerous.

Obama's Approval Ratings And Jobs

John Judis has a compelling piece up arguing that the fortunes of Barack Obama relies entirely on the fortunes of the economy, and specifically the jobless rate. Judis shows a direct correlation between the approval ratings of past Presidents and the jobs number.

When Roosevelt took office in 1933, unemployment was almost 25 percent, but, during his first term, it fell steadily-- to less than 14 percent in November 1936. The economy, in other words, seemed to be healing. Gallup wasn't measuring presidential approval then, but FDR's rising popularity was evident in election results: Democrats picked up congressional seats in 1934 and 1936, despite already enjoying huge majorities; and, in 1936, Roosevelt won in a landslide, carrying the Electoral College by the largest margin ever.

The arc of Reagan's popularity illustrates the same phenomenon. In July 1981, when unemployment stood at 7.2 percent--what it had been at the end of Carter's presidency--only 28 percent of Gallup's respondents disapproved of Reagan. But, by January 1983, after unemployment had risen to 10.8 percent the previous month, Reagan's disapproval rating was a whopping 54 percent. In November 1982, even a crippled Democratic Party had been able to win seats in the House and Senate. During the same time, Reagan benefited politically from surviving an assassination attempt, got Congress to approve his signature tax and budget programs, and certainly didn't make egregious political errors. What mattered, finally, was the economy. And, as the economy turned around, so did the GOP's political prospects. By November 1984, unemployment had dropped back to 7.2 percent, and only 30 percent of respondents disapproved of Reagan. In that month's election, he claimed a landslide victory over Walter Mondale.

Today, we see that joblessness has risen under President Obama, and his approval ratings, while still decent, have softened (they've picked back up in recent weeks). The economy may be improving under various statistics, but until people are working again, Obama will not be credited for it. It's hard to argue with Judis' charts. With the exception of goodwill toward Bush 43 after September 11, approval ratings and job loss have followed the same trajectory in most recent years.

Judis offers some thoughts about Obama's options:

So what can Obama do? It's easy to say what would really help: rapid job growth, the revival of the housing market, transit systems that aren't breaking down, the reinstitution of after-school programs, crowded shopping malls and auto showrooms--the kind of things that go with a robust economic recovery. But the U.S. economy isn't going to morph overnight from its current woeful condition to a state of buoyant full employment. In a September 14 speech, Janet Yellen, president of the Federal Reserve Bank of San Francisco, warned of a "tepid" recovery that is "vulnerable to shocks" and an "unemployment rate [that] will remain elevated for a few more years."

What Obama and the Democrats have to hope for, then, is not a full recovery, but sufficient improvement in jobs, wages, and public services to convince voters that the economy is on the mend. That's what helped Roosevelt and Reagan keep their majorities--and, in Roosevelt's case, what lay the basis for nearly four decades of Democratic hegemony. With the Republicans in disarray and demographic trends favoring the Democrats, an uptick in the economy for which voters credit Obama could lay the basis for a new Democratic majority. But, to accomplish this, Obama must promote programs that visibly and immediately provide economic relief.

I think passing a health care bill will give some relief, but with most of the provisions delayed until 2013, this cannot be the end of it all - the political impact of health care may be long-term rather than short-term. Subsequent bills in the end of this year and 2010, job-creating bills, need to be put into effect. The stimulus package has a lot more room to run, with hundreds of billions left to be allocated. This should not only be managed well but expanded, even if it means more deficit spending in the short term.

Moreover, to avoid what marred Roosevelt's second term--the precipitous double-dip in the depression that occurred in 1937–1938--Obama should turn a deaf ear to those who are calling for fiscal responsibility. He should keep pouring money into jobs and into the pockets of people who will spend until the unemployment rate begins going down and wages begin going up. That may mean a second stimulus (despite the current hostility toward spending in Congress) would be worth pushing. He might also be wise to follow Reagan's example and get tough with foreign competitors who are using import barriers, export subsidies, and currency manipulation to inflict large trade deficits on the United States. And, whatever he does to try to mend the economy, Obama should never stop loudly trumpeting his efforts--so that he is able to reap the credit when improvements occur.

In the absence of efforts like this, I shudder to think what will happen, not only to the Democratic majority, which is a lesser concern, but to the landscape of the workplace. Millions and millions of jobs are unlikely to ever be replaced by private industry. And continued joblessness, along with option ARMs recasting, will lead to the higher foreclosure rates we keep seeing, leading to job losses in the construction sector, leading to more risk of foreclosures, leading to more job loss.

People are starting to believe more strongly in the stimulus as a job creation engine. But it's probably going to take more than that to get the kind of tangible recovery needed, not just for Obama and the Democrats, but for the fortunes of regular people.

12.2%

The latest unemployment figures from the Bureau of Labor Statistics:

Fourteen states and the District of Columbia reported jobless rates of at least 10.0 percent in August. Michigan continued to have the highest unemployment rate among the states, 15.2 percent. Nevada recorded the next highest rate, 13.2 percent, followed by Rhode Island, 12.8 percent, and California and Oregon, 12.2 percent each. The rates in California, Nevada, and Rhode Island set new series highs.

So much for that canard that businesses are flocking to Nevada, considering it has a higher unemployment rate than we do. Nonetheless, California is in deep trouble, with a loss of 741,000 jobs over the last year, an increase of 4.6% in the jobless rate since last August.

And there are no economic recovery plans in the works. I guess we're supposed to sit and wait until things get better.

The Schwarzenegger Plan For Indefinite Depression

Senate Democrats have sent a letter to Governor Schwarzenegger asking him to reconsider his veto of the renewable energy standard and subsequent executive order. The strongly worded letter has about as much currency as the eleventy billion-dollar bill, but it does explain why the Governor's hypocritical action is a bad deal for California.

Respectfully, an Executive Order does not have the force and effect of law. Additionally, such a proclamation will only cause confusion and uncertainty to California's energy markets, jeopardizing California's role as the world leader in renewable energy development and green jobs.

As you noted when you signed AB 32, the landmark "Global Warming Solutions Act of 2006," administrative actions are no substitute for a statute that is permanent and enforceable.

Directing the California Air Resources Board to implement an RPS program is a fundamentally flawed approach. The CARB is not an energy agency; it is an air quality regulatory agency. There are numerous provisions of law which impair the CARB's ability to implement a renewable portfolio standard. Assigning this new responsibility to the CARB will not result in new renewable energy being built soon--it will only lead to litigation, regulatory confusion, and delay.

In our view, it is essential to green businesses and the renewable energy investment community which bring jobs and capital into California, that California's 33% RPS be statutorily established and not subject to the whims of changing administrations.

There's only one reason that Schwarzenegger gave the CARB the ability to implement a renewable energy standard - so he can go on talk shows and crow that he's instituted an environmental achievement. Except, as is explained here, it won't. It will get tied up in court challenges and confusion, without a clear mandate for the standard or penalties thereto.

Schwarzenegger has responded to this by calling the Legislature's bill "protectionist," and saying that if we get water from the Colorado River, we should be able to get renewable energy from other states as well. The difference is that a commodity is not the same as a job. The twin goals of a renewable energy standard are to spur the usage of renewables as a means to lower greenhouse gas emissions, and to build a green-collar economy that will create millions of new jobs. Schwarzenegger would rather give those jobs away. And given the perilous state of the economy here in California, we simply cannot afford that.

Job losses in the public sector will prolong the economic pain in California through 2010 even as a recovery gets under way nationwide, two forecasters predict.

Jeff Michael, a forecaster at the University of the Pacific, said Tuesday that California's recession will be over before the end of the year. But the cutbacks in state and local government, along with the continuing fallout from the mortgage meltdown, will make 2010 feel like another year of recession, Michael said in UOP's latest quarterly forecast.

Similarly, the newest UCLA Anderson Forecast predicts a sluggish recovery because of the weak public sector. UCLA senior economist Jerry Nickelsburg is more optimistic than Michael about the housing market, and says California will outperform the U.S. economy starting in 2011.

Yet both economists say Californians can expect continued high unemployment for a couple more years or so. The unemployment rate is currently 11.9 percent in California and 11.8 percent in greater Sacramento.

And yet here is Arnold Schwarzenegger vetoing the only major bill that would produce any semblance of an economic recovery for California.

Financial Reform FAIL And A New Metric For Recessions

Simon Johnson had the same problem as I did with the President's speech on financial reform:

As a diagnosis of the problems that let us into financial crisis, it was his clearest and best effort so far. He didn’t say it was a rare accident for which no one is to blame; rather he placed the blame squarely on the structure, incentives, and actions of Wall Street.

But then he said: our regulatory reforms will fix that. This is hard to believe. And even the President seems to have his doubts, because he added a plea that – in the meantime – the financial sector should behave better [...]

Louis Brandeis, of course, would have seen things differently. The author of “Other People’s Money: And How The Bankers Use It,” was under no illusions concerning the underlying financial power structures and how they operated. He would have regarded an appeal to the better nature of bankers as somewhere between humorous and sad.

The only thing that will make a different is regulation. This is the lesson of the 1930s in the US – the regulations imposed at that time created a financial sector that did not impede growth after World War II; basic intermediation (connecting savers and borrowers) worked fine and destabilizing frenzies were avoided. During this period, the financial sector came up with venture capital, ATMs, and credit cards – arguably the three most important financial innovations of the past 100 years, and much more helpful of real innovation than anything you’ve seen since 1980.

As Johnson has repeatedly argued, we need to break up the biggest banks, end the revolving door between Wall Street and Washington and ensure that the executives taking the risks put their own fortunes at stake instead of gambling with our money. Sadly, none of these elements exist in the more modest reform proposals from the President, and even those are faltering in the face of institutional pressure.

As a result, we muddle through, resetting the clock to the pre-bailout days without having fundamentally fixed the system or prevented the possibility of a relapse. It's great that Ben Bernanke thinks the recession is over. But the 9.4 million people who have lost their jobs would disagree with him. Their personal depressions continue, and I would argue that this is a direct result of allowing the titans of Wall Street trillions in Treasury wealth while ordinary Americans suffer with a too-small stimulus and not much prospect for recovery.

Fifteen million Americans are locked in the nightmare of unemployment, nearly 10 percent of the work force. A third have been jobless for more than six months. Thirteen percent of Latinos and 15 percent of blacks are out of work. (Those are some of the official statistics. The reality is much worse.)

Consider this: Some 9.4 million new jobs would have to be created to get us back to the level of employment at the time that the recession began in December 2007. But last month, we lost 216,000 jobs. If the recession technically ends soon and we get to a point where some modest number of jobs are created — say, 100,000 or 150,000 a month — the politicians and the business commentators will celebrate like it’s New Year’s [...]

At some point the unemployment crisis in America will have to be confronted head-on. Poverty rates are increasing. Tax revenues are plunging. State and local governments are in a terrible fiscal bind. Unemployment benefits for many are running out. Families are doubling up, and the number of homeless children is rising.

It’s eerie to me how little attention this crisis is receiving. The poor seem to be completely out of the picture.

Joseph Stiglitz has a similar view in today's Guardian, arguing that the Administration through saving the financial system has perversely created banks that are not only too big to fail but too big to resolve, the way you would other entities which cannot meet their obligations. In a separate piece, he argues that the metric for evaluating recession - gross domestic product - now has almost no bearing on everyday lives, and ought to be scrapped in favor of something that truly reflects the outlook for ordinary people.

The big question concerns whether GDP provides a good measure of living standards. In many cases, GDP statistics seem to suggest that the economy is doing far better than most citizens' own perceptions. Moreover, the focus on GDP creates conflicts: political leaders are told to maximise it, but citizens also demand that attention be paid to enhancing security, reducing air, water, and noise pollution, and so forth – all of which might lower GDP growth.

The fact that GDP may be a poor measure of well-being, or even of market activity, has, of course, long been recognised. But changes in society and the economy may have heightened the problems, at the same time that advances in economics and statistical techniques may have provided opportunities to improve our metrics.

I remember Andy Stern coming up with the same idea in his book a few years ago. If we continue to use a metric based on the desires of elites, then they will please themselves with growth results even though the mass of people continue to suffer. Believe it or not, common statistics can actually change policy for the better. The problem lies in getting everybody to use it.

...Kevin Drum offers up real median income growth as a better metric. If that's the case, we've actually been in a depression for a decade.

Falling Down On Making The Argument For Good Government

I think this post from John Aravosis is a little bit unfair, but only a little. The White House has soft-pedaled their defense of the stimulus package, but really with the jobs picture as it is, it was always going to be a hard sell to tell people who are losing their job that the stimulus prevented things from getting worse. The problem lay in the lack of job creation in the stimulus itself, rather than job saving. Those who follow these things closely understand that the stimulus really saved us from a deep recession if not a depression. But we also know it didn't go far enough to truly bring about recovery. Those who look at their own lives and don't pay attention to the day-to-day debate only see that they and their colleagues can't find work.

I think the White House will eventually get some credit for the inevitable recovery, but only if it includes jobs. A second stimulus simply won't happen now, and we're basically at the mercy of large firms and when they decide to hire at this point, which isn't likely in the near term if they can increase productivity without bringing anyone back.

That said, when the White House goes out and defends the stimulus, the least they can do is defend the underlying ideology. This AP "fact check" on the stimulus is fairly ridiculous, more a nitpick than a fact check, but assuming they quoted Biden right, this is terrible:

Biden exercised some restraint in his praise for the stimulus' impact. He took a more cautious approach, for example, when asked if his declaration of stimulus success means Americans can now rethink the common view that government is wasteful and inefficient.

"I think it's too early to make that decision, to be very blunt about it," he said.

No, it's not too early to make that decision. The point of stimulus is to get money out quickly and into people's hands. If anything, Biden and his team are being too deliberate about that, to keep away the newspaper headlines of wasteful spending. Pro Publica, for example, needs to blow it out their ass. Anything that creates jobs is stimulus, people. Pro Publica tries to catch Biden in a lie by claiming that money isn't flowing to hard-hit communities, when Biden was clearly talking about increased unemployment benefits and food stamps and help for all low-income Americans. It's hoops like this which modern Presidencies have to jump through that create such a "common view" about inefficient government.

But Biden needs to attack that. The fact of the matter is that public investment creates jobs and saves people's lives. It's OK to state that aggressively. If he doesn't, Republicans certainly won't. And they'll continue to demonize government.

The Administration is in a tough rhetorical spot, considering the jobless recovery. But that's not a time to give ground.

Washington, We Have A Jobs Problem

The jobs report for August showed another 216,000 losses. That's far less than previous months, in fact the smallest in a year, but still not very good. The unemployment rate jumped up to 9.7%, and it'll basically be a matter of time before we're at 10%.

The AFL-CIO released a stunning report about young workers, showing their struggles in the past decade, where they have less jobs, worse jobs and no security.

Some of the report’s key findings include:

31 percent of young workers report being uninsured, up from 24 percent 10 years ago, and 79 percent of the uninsured say they don’t have coverage because they can’t afford it or their employer does not offer it.
Strikingly, one in three young workers are currently living at home with their parents.
Only 31 percent say they make enough money to cover their bills and put some money aside—22 percentage points fewer than in 1999—while 24 percent cannot even pay their monthly bills.
A third cannot pay their bills and seven in 10 do not have enough saved to cover two months of living expenses.
37 percent have put off education or professional development because they can’t afford it.
When asked who is most responsible for the country’s economic woes, close to 50 percent of young workers place the blame on Wall Street and banks or corporate CEOs. And young workers say greed by corporations and CEOs is the factor most to blame for in the current financial downturn.
By a 22-point margin, young workers favor expanding public investment over reducing the budget deficit. Young workers rank conservative economic approaches such as reducing taxes, government spending and regulation on business among the five lowest of 16 long-term priorities for Congress and the president.
Thirty-five percent say they voted for the first time in 2008, and nearly three-quarters now keep tabs on government and public affairs, even when there’s not an election going on.
The majority of young workers and nearly 70 percent of first-time voters are confident that Obama will take the country in the right direction.

At the low end, workers are often paid under the minimum wage and cheated out of overtime pay.

This is just not sustainable. A thin layer of the super-rich exploiting a permanent underclass, with many out of work or unable to gain independence, will not result in a workable society. Social unrest is a more likely outcome.

We cannot forget this. The Democratic Party is becoming reliant on the professional class instead of the working class, and it leads to policy that doesn't help workers. The shrinking unionized sector, and the inability to create policy to reverse that trend, will come back to hurt the so-called "party of the people."

Labor's lack of clout to pass EFCA in even the most overwhelmingly Democratic -- and progressive -- Congress in decades is an indication that we already have a successful progressive movement in which labor plays only a modest role. Union support was less crucial to Obama's nomination and his general election victory than it was to any previous Democratic president, which is why he's not obligated to twist arms to pass the bill. Many Democratic victories in 2008 were in states and districts where labor is weakest, like Virginia and North Carolina. And I know dozens of engaged liberals who have no idea why EFCA matters.

The new progressive coalition follows the lines of the "emerging Democratic majority" that Ruy Teixeira and John Judis predicted in their 2002 book of that name: minority, professional, and younger voters, with help from a large gender gap. This is a coalition that can win without a majority of white working-class voters, whether union members or not. (Those who were union members were always solid Democrats.) In many ways, that's good because it helps to bring an end to the culture wars that limited the party's ability to speak clearly about matters of fundamental rights and justice.

But it's also dangerous. A political coalition that doesn't need Joe the -- fake -- Plumber (John McCain's mascot of the white working class) can also afford to ignore the real Joes, Josés, and Josephines of the working middle class, the ones who earn $16 an hour, not $250,000 a year. It can afford to be unconcerned about the collapse of manufacturing jobs, casually reassuring us that more education is the answer to all economic woes. A party of professionals and young voters risks becoming a party that overlooks the core economic crisis--not the recession but the 40-year crisis--that is wiping out the American dream for millions of workers and communities that are never going to become meccas for foodies and Web designers.

I think the lack of connection between Democrats and the working class reflects itself in all these jobless recoveries we're seeing. Policy just isn't made for the median income, but of, by and for the rich. It's a very dangerous situation.

Um, The Stimulus Is Working

Conservatives very smartly conflated the bailout and the stimulus in people's minds, and traded off public anger with one to demonize the other. They're still doing it, too, with Eric Cantor today suggesting to cancel the rest of the stimulus and "pay off the debt." Most of the debt comes from Bush-era policies, so this is nonsense. It's also wrong to state that the stimulus should be cancelled because it's not working. In fact, Rupert Murdoch's Wall Street Journal tells us the opposite today:

The U.S. economy is beginning to show signs of improvement, with many economists asserting the worst is past and data pointing to stronger-than-expected growth. On Tuesday, data showed manufacturing grew in August for the first time in more than a year. "There's a method to the madness. We're getting out of this," said Brian Bethune, chief U.S. financial economist at IHS Global Insight.

Much of the stimulus spending is just beginning to trickle through the economy, with spending expected to peak sometime later this year or in early 2010. The government has funneled about $60 billion of the $288 billion in promised tax cuts to U.S. households, while about $84 billion of the $499 billion in spending has been paid. About $200 billion has been promised to certain projects, such as infrastructure and energy projects.

Economists say the money out the door -- combined with the expectation of additional funds flowing soon -- is fueling growth above where it would have been without any government action.

Many forecasters say stimulus spending is adding two to three percentage points to economic growth in the second and third quarters, when measured at an annual rate. The impact in the second quarter, calculated by analyzing how the extra funds flowing into the economy boost consumption, investment and spending, helped slow the rate of decline and will lay the groundwork for positive growth in the third quarter -- something that seemed almost implausible just a few months ago. Some economists say the 1% contraction in the second quarter would have been far worse, possibly as much as 3.2%, if not for the stimulus.

The recovery is still jobless thus far, which means it's not a real recovery yet. And the White House made two mistakes - one, they soft-pedaled the recession, claiming that unemployment would not go above 9% or so, leaving them susceptible to the charge that the stimulus isn't working; and two, they put too much of the stimulus into tax cuts instead of the public investment that would have made it even more successful, particularly on the jobs front.

But without the public investment the stimulus has thus far provided and will continue to provide, we'd be mired in more negative growth and a near-depression. That's the reality.

The President has actually tried to talk up the benefits of the stimulus, but not in a forceful way. As a result, the conservative conflation has led to a souring on government, directly attributable to a lack of leadership and messaging.

Paul Krugman argued recently that Obama hadn't effectively used the bully pulpit to slay "government-is-bad fundamentalism." This is only one poll, but it's fair to ask whether these numbers bear that out.

Obama's poll slide has prompted some to ask whether his presidency might fall short of the transformative moment many expected. I think it's too early to reach a conclusion on this. If Obama pulls out a health care victory, everything will shift again.

But for a time it seemed like shattering the government-is-bad paradigm was distinctly within Obama's reach. General confidence in the government's ability to secure the public's well being seems like pretty good number to keep an eye on when gaming out the potential for transformation of this moment, and of this presidency.

This has mostly resonated in the health care debate, with insurance companies inexplicably getting somewhat higher marks now than government as a health care provider, despite the fact that the groups with the highest satisfaction with their health care are seniors (government-provided single-payer system), and veterans (government-run NHS-style system).

Politics is about storytelling. Obama during his campaign actually started to tell a pretty decent story about government as a guarantor of basic rights, which can equalize opportunity and give everyone a shot. He told a story of community, where we take care of each other and use government as a means to do so.

That's basically gone. And as a result, the public investment program that averted a depression is considered a failure.

Very dangerous.

About That Deficit

Many are speculating that the President re-appointed Ben Bernanke in the middle of his vacation to get the story away from this:

The Obama administration, citing an economic downturn that has been deeper than it had first thought, raised its estimate on Tuesday of the government’s deficit over the next decade to $9 trillion from $7.1 trillion.

Despite the shortfall, White House officials said they saw no reason to back away from President Obama’s ambitious and costly goal of overhauling the health care system. The new amount includes the cost of the health care overhaul as well as about $600 billion in additional revenue that the administration hopes to raise, two initiatives Congress has yet to approve [...]

Analysts at the Congressional Budget Office put their 10-year deficit estimate slightly lower, at $7.14 trillion, though the agency uses a slightly different method to reach its number. The budget office takes into account only policies already in place, while the administration can consider policies and budget decisions that its hopes to install.

White House officials predicted that the budget deficit this year will peak at $1.58 trillion, though they said the 2009 shortfall will be about $261 billion lower than they had predicted in May. The main reason is that officials have decided that they will not need another round of bailout money for the nation’s banks. The Congressional Budget Official also estimated a deficit this year of about $1.6 trillion.

Paul Krugman puts the numbers in perspective, saying that the added debt in the next decade is bad, but would equal 40% of annual GDP, which is comparable to what many other countries have dealt with in the past. What I'm wondering is if the deficit has ever actually been registered that way. I've certainly never seen it reported in the papers in ten-year increments - you usually see what the annual deficit is, and then the total debt. This seems like a new tactic that plays to the fiscal scolds.

Meanwhile, the way to reduce deficits is to increase productivity, output and employment, and that's the real problem with these numbers.

The real story in the new CBO projections should be the more dire economic outlook. CBO now expects the unemployment rate to be near 10 percent through most of 2010. Its new projections will show that the unemployment rate will only return to more normal levels in 2013 or even 2014, more than six years after the collapse of the housing bubble threw the economy into recession.

The implication of the new CBO projections is that millions more people will be needlessly suffering because of the economic mismanagement of the Greenspan-Bernanke-Bush crew. CBO views 4.5 percent unemployment as being the sustainable rate of unemployment. If the unemployment rate is 10 percent, more than 8 million people are needlessly out of work, with another 5 million or so being forced to work part-time because they cannot find full-time employment. These people will be struggling to pay their health care bills, cover their mortgage or rent payments, and meet other necessary expenses for themselves and their families.

The rational response to the news that the economy will be far worse than had previously been projected should be a demand for more stimulus. After all, why should millions of people lose their jobs, their homes, and their health just because the people who managed the country's economic policy over the last decade were incompetent?

But the focus is placed on the deficit, meaning that the ability to spend our way into full employment has become politically impossible. A second stimulus looks unliklely at this point.

...by the way, a good bit of these 10-year projected deficits - probably half of the total - comes from Bush Administration unfunded mandates. Ten years' worth of Bush tax cuts for the wealthiest Americans could have filled the rest.

...And also note that this near-term projection has a deficit that's $260 billion less for FY2009 than expected, because there is no need for another bank bailout. That could be a headline too, if reporters wanted to write it, especially considering that near-term projections are more reliable than ones about what the economy will look like in 2019.

Stories Of Government Working

After a minor stumble, the House today passed the Food Safety Enhancement Act, which would bolster the Food and Drug Administration's efforts to ensure food that's not contaminated and vomit-inducing. La Vida Locavore has more. Basically, the bill would properly fund the FDA to carry out their mission, paid for by the food producers, and would enact stringent performance standards for food producers, with mandatory trace-back systems and frequent inspections of facilities. And it would apply the standards for domestic food safety to imported food as well.

Given how pretty much almost everyone in America eats food, and given the high profile of food outbreaks during the age of e.coli conservatism, if this gets through the Senate I would hope that somebody would let the public know. It ain't health care reform, but it's an important measure with a tangible effect on people's lives. I'll give you a couple others. The stimulus package provided $100 million dollars for the nation's food banks to make sure the truly needy could find food this year during these economic struggles. Food assistance is up about 30% this year over last year, and so providing some stimulus funds to feed people has a real human benefit, in addition to allowing the hungry some breathing space to get back on their feet. And the House pumped in some more money for highway and unemployment funds, so that people who are jobless can continue to access benefits and construction projects in the states can continue.

We have a problem with the conservative demonization of government, mainly because too few people are out there telling the story of government when it works. It makes it easier to lift the heavy policy objects when you restore a little bit of trust that when government is properly organized and managed it can actually help people.

This is another failure that liberals would be wise to counteract.

UPDATE: The roll call. The food safety bill passed 283-142. A few House liberals voted against it, I'd be interested to hear their thoughts.

UPDATE: The President:

"Today the House of Representatives passed H.R. 2749, the Food Safety Enhancement Act of 2009, legislation that will raise food safety standards, allow the FDA to issue mandatory recalls of harmful products, and enhance our oversight of imported food.

This action represents a major step forward in modernizing our food safety system and protecting Americans from foodborne illness. Those are the goals of the Food Safety Working Group I convened in March and charged with making recommendations to improve our food safety system. And that is why we announced a new rule to control Salmonella contamination in eggs and are working to reduce the presence of harmful pathogens such as E. coli in meat and produce; strengthen our capacity to trace the source of outbreaks; and update our emergency operations procedures.

I commend the House of Representatives for its action today and look forward to working with the Senate to enact critical food safety legislation."

This stuff matters too.

Stimulus As Self-Preservation

I've seen enough polls showing a small but demonstrable downtick in President Obama's approval rating that I think it can be pegged as a trend. Polling expert Mark Blumenthal attributes this fall to the concurrent fall in economic indicators:

While the significance of the shift among independents may vary, depending on what poll you look at, the decline in Obama's numbers during June and July has a clear culprit: A spate of bad economic news over the last 10 weeks.

Read more from Mark Blumenthal on the economy's effect on President Obama at Pollster.com.
Obama's ratings fell in June and July after remaining mostly flat during the spring. Our Pollster.com trend estimate, a composite of all public polls, had shown Obama's job approval rating at a fairly consistent 59 to 60 percent during March, April and May. His approval percentage fell roughly 5 percentage points during June and the first week of July, however, and as of this writing, stands at 55 percent [...]

We can see the effect clearly thanks to a new question tracked since December by the Pew Research Center's News Interest Index surveys. Once a month, they ask Americans if they are "hearing mostly good news about the economy these days, mostly bad news about the economy or a mix of both good and bad news." Back in December, four out of five respondents said they were hearing mostly bad news. Early this year, that number steadily declined, bottoming out at 31 percent in mid-May. As Pew reported last week, however, perceived bad news has once again increased, to 37 percent in mid-June and 41 percent in the first week of July.

The chart below compares the trend in perceived bad news to Pollster.com trend estimates for both the Obama job rating and a question asked in many national polls about whether the country seems to be "headed in the right direction" or "off on the wrong track."

Not surprisingly, the "right direction" and "heard mostly bad news lately" trend lines are mirror images of each other. And while Obama's approval number held mostly steady from March through May, the chart strongly implies that the recent bad economic news has taken its toll.

The President is starting, as expected, to own the economy, as his decisions take prominence over those of his predecessor. And with the jobless rate, by Obama's own admission, likely to tick up over the next several months, in addition to the crisis of the underemployed (as much as 1 in 4 workers in some states), this is likely to continue and further drag on both the economy and the President's approval rating. Therefore he has a responsibility for his own self-preservation to turn the economy around for working people, and that means at least preparing for the eventuality of another round of stimulus, even if it's not needed. Even Mark Zandi, one of John McCain's economists during the campaign, admits that:

It is premature to conclude one way or another if the economy needs another dose of fiscal stimulus. The current stimulus has not had a sufficient opportunity to work, and while it has already provided some benefit to the economy -- the downturn would be even worse without it -- its benefit won't be fully felt until later this year. A reasonable judgment regarding the need for more stimulus should wait until year's end.

Planning now for another round of stimulus is prudent, though, given that the economy remains in an extraordinarily severe downturn and the risks are decidedly to the downside. If additional stimulus is needed, then it probably should include more aid to hard-pressed state governments, whose budget woes are intensifying, more aid to stressed households hammered by what will be double-digit unemployment, an expansion of the housing tax credit to stem the ongoing slide in house prices, a delay in legislated increases in marginal personal tax rates in 2011, and perhaps even a payroll tax holiday.

I'd tend not to include additional tax cuts, which have been revealed not to work as stimulus. Because of the lag time with getting infrastructure projects and other federal monies into the hands of communities, most of the stimulus money currently in the economy comes in the form of tax cuts. And it has had little stimulative effect.

Oberstar defended the $27 billion in the stimulus for highway and bridge projects as the right amount to help the economy during the next year. However, he said that more transit money in the stimulus would have been helpful to an economic recovery over the next three years, rather than the nearly $300 billion in tax cuts.

“Not many people realize they got a tax cut,” Oberstar said. “I have not received a single e-mail, phone call, snail mail, personal comment from anybody since we enacted this bill, since the end of February, saying, ‘I got my tax’ or ‘Thanks for the tax cut’ or ‘I hardly noticed it’ or anything.

“But I have had people saying, ‘I’m back at work because of the funding in the surface transportation program.’”

I know the fiscal scolds don't want to hear about another stimulus and additional federal debt. But Robert Reischauer has a decent compromise proposal to "time-release" deficit reduction measures in tandem with stimulus funding:

[A]ny "Son of Fiscal Stimulus 2009" should include a significant "time released" package of deficit-reduction measures. While these tax increases and spending cuts shouldn't begin phasing in until 2013 or 2014, when the economy has recovered, we need to send a strong signal to our creditors that, notwithstanding our addiction to another shot of fiscal stimulus, we will soon be on the recovery road to fiscal responsibility. If we don't, the nation could face a more serious economic collapse in the not-too-distant future -- without an ability to borrow to finance needed fiscal stimulus.

That would certainly achieve the goal of ensuring the most stimulative actions stay in the bill, while allaying concerns about debt (which aren't entirely off-base).

Talk To Us Like Adults

The President returned from his overseas trip and came out fighting by defending the recovery package amidst signs that Republicans would attack it as a failure.

Nearly six months ago, my administration took office amid the most severe economic downturn since the Great Depression. At the time, we were losing, on average, 700,000 jobs a month. And many feared that our financial system was on the verge of collapse. The swift and aggressive action we took in those first few months has helped pull our financial system and our economy back from the brink. We took steps to restart lending to families and businesses, stabilize our major financial institutions, and help homeowners stay in their homes and pay their mortgages. We also passed the most sweeping economic recovery plan in our nation's history.

The American Recovery and Reinvestment Act was not expected to restore the economy to full health on its own but to provide the boost necessary to stop the free fall. So far, it has done that. It was, from the start, a two-year program, and it will steadily save and create jobs as it ramps up over this summer and fall. We must let it work the way it's supposed to, with the understanding that in any recession, unemployment tends to recover more slowly than other measures of economic activity.

And it's fine for him to defend that action - I generally agree with his assessment that it's ramping up, that unemployment lags behind economic growth, that this summer and fall should see more stimulus money pumped into the economy, that the package was necessary and even proper. It's fine for the White House to wrestle control of the debate away from Republicans on that score. But this does not address at all those critics who found the stimulus package too small, and who continue to find shortfalls in demand that need to be filled by public spending.

Last December the Obama administration to be decided on a fiscal stimulus package which they believed would have minor effects on the economy in the first two quarters of 2009 and major effects--would push unemployment down below what it would other wise have been by more than half a percentage point--starting in the third quarter of 2009. They believed that the economy was not that weak, and that with the fiscal stimulus package taking effect unemployment would be peaking now at a rate of 7.9%.

Instead, unemployment is now probably in the 9.5-9.7% range--and without the stimulus package it would right now have turned out to be above 10%:

The financial crisis of last fall hit the economy's levels of production, spending, and employment much harder than people thought at the time. If we had known then what we know now, it would have been prudent then to propose twice as large a fiscal stimulus program as the Obama administration in fact did propose.

It is interesting and important to note that the excess unemployment now forecast over 2009 relative to last December's forecast is of the same magnitude--1.2%--as the deficiency in real GDP [...] If I were running the government, I would be trying to make up that GDP shortfall right now: I would be rushing a clean $170 billion--$500 per citizen--aid-to-states-that-maintain-effort package through the congress this week. It would seem the right and the obvious thing to do.

The White House is simply not speaking straight with the public on this one. They have every right to defend their actions, but the evidence clearly shows that they did not go far enough back in February. That's an intellectually consistent stand, rather than this mish-mosh of "we misread how bad the economy was, but we would have done the exact same thing if we knew and it's working great." Continuing that incoherent course risks a loss of credibility.

The Stimulus Trap

Krugman today:

Normally, then, we expect policy makers to respond to bad job numbers with a combination of patience and resolve. They should give existing policies time to work, but they should also consider making those policies stronger.

And that’s what the Obama administration should be doing right now with its fiscal stimulus. (It’s important to remember that the stimulus was necessary because the Fed, having cut rates all the way to zero, has run out of ammunition to fight this slump.) That is, policy makers should stay calm in the face of disappointing early results, recognizing that the plan will take time to deliver its full benefit. But they should also be prepared to add to the stimulus now that it’s clear that the first round wasn’t big enough.

Unfortunately, the politics of fiscal policy are very different from the politics of monetary policy. For the past 30 years, we’ve been told that government spending is bad, and conservative opposition to fiscal stimulus (which might make people think better of government) has been bitter and unrelenting even in the face of the worst slump since the Great Depression. Predictably, then, Republicans — and some Democrats — have treated any bad news as evidence of failure, rather than as a reason to make the policy stronger.

Hence the danger that the Obama administration will find itself caught in a political-economic trap, in which the very weakness of the economy undermines the administration’s ability to respond effectively.

This does seem to be the case. When officials try to find solace in only 565,000 new jobless claims, the credibility gap expands. And so the White House gets caught in between calling zero-growth, no-recovery policies the greatest thing since sliced bread, while constrained by the opposition from doing anything to fix the very real problems in the economy. Joe Biden and Barack Obama should defend a stimulus that has barely gone out to the public. A world without one would certainly be worse, and the last two quarters of the year should see much more money reaching the economy.

But we have to be honest about what's happening here. Foreclosures remain unsustainably high, and the efforts to shrink them have simply failed to this point because lenders stubbornly refuse to rework loan terms. The Administration is trying desperately to fix this, but with no success. And even if they could fix it, increased joblessness would supplant bad loans and keep foreclosures at a similar level. Unemployment's rise also begets reductions in consumer spending because nobody has any money. And more real estate meltdowns can be expected. In this environment, with the economy out of the woods for depression but hurtling toward a long period of stagnancy, of course further stimulus efforts should be readied.

But never let it be said that this White House isn't planning to help those in need. Not the people, mind you; the banks:

As the financial system tries to right itself after its near-collapse last fall, the Treasury Department has assembled a team to examine what could yet bring it down and has identified several trouble spots that could threaten the still-fragile lending industry.

Informally known as Plan C, the internal project is focused on vexing problems such as the distressed commercial real estate markets, the high rate of delinquencies among homeowners, and the struggles of community and regional banks, said government sources familiar with the effort.

Part of the mission is assessing which firms are the most vulnerable and trying to decipher what assets these companies hold and whether they pose a danger to the wider financial system. Plan C is a small-scale, relatively informal approach to a problem the administration hopes to address in the long term by empowering the Federal Reserve to oversee systemic risk.

They take care of their own.

A Stimulus For The States?

Yesterday on ABC, Joe Biden claimed that the Administration misread the severity of the economic crisis, and did not dismiss out of hand the need for a second stimulus package, though he preferred to wait and see how the first one takes once more of its money flowed into the system. If the White House failed to anticipate negative economic results previously, they need to fully anticipate the potential for continued losses this time around, and have some form of stimulus ready sooner rather than later.

Among the most pressing problems right now is the widespread revenue shortfall among the 50 states, most all of which have balanced budget agreements and must resort to mostly cuts to deal with the crisis:

Wait — there’s more bad news: the fiscal crisis of the states. Unlike the federal government, states are required to run balanced budgets. And faced with a sharp drop in revenue, most states are preparing savage budget cuts, many of them at the expense of the most vulnerable. Aside from directly creating a great deal of misery, these cuts will depress the economy even further.

Robert Kuttner details the troubles in the states more directly, finding that California is not alone in its fiscal problems, though they may be more intractable here. Cutting program spending directly runs against the purpose of federal stimulus, to make up for the lack of consumer spending and private investment by providing a money injection into the economy. The Center on Budget and Policy Priorities writes that 39 states have cut programs that go directly to the needy. We are not alone.

The combination of a creeping suspicion by economists about the need for a second stimulus and the crisis in state budgets have led many to wonder whether to combine the two. Though no state, and not California either, has called for a "bailout," there are compelling reasons to believe that fiscal stabilization would make sense at this time so that state government doesn't counter-productively nullify the goals of the federal stimulus. One of the last items cut from the stimulus package was a large fiscal stabilization fund for the states that could have mitigated budget cuts.

The Chicago Federal Reserve wrote a paper examining this possibility for state fiscal relief, by comparing today's situation to other recessions.

The idea of federal support for state (and local) governments in a downturn is hardly a new one. For example, in response to the recession of 1973-75, Congress enacted the Antirecession Fiscal Assistance (ARFA) program, which was combined with general revenue sharing grants and the Local Public Works (LPW) program to provide unrestricted grants and infrastructure funding to the states. In addition, Congress had passed the Comprehensive Employment and Training Act (CETA) in 1973, and in conjunction with these other programs, it became an antirecessionary mechanism for delivering job training. More recently, in 2003, Congress passed the Jobs and Growth Tax Relief Reconciliation Act, as states dealt with a slow recovery from the 2001 recession.

The purpose of such funding is primarily to stabilize fiscal behavior in the state government sector. This aid is intended to smooth the budgetary actions states would be forced to take in the face of declining revenues and increasing demands from programs such as Medicaid and unemployment insurance.

The Chicago Fed criticizes the 1973-75 efforts, but their critiques are primarily ones of timing. They say that the funding for state aid arrived while economic recovery was already taking place, coming too late to stop states from taking their budget actions. When it arrived, the aid "may have contributed to post-recession inflationary pressures."

I simply think we're in a different situation right now. Despite the talk of the "green shoots" crowd, the economy has not bottomed, and in fact may be about to head into a "double-dip," W-shaped recession. Rising foreclosure rates and continued unemployment threaten economic recovery, and many economists feel that the economy will not start to recover until mid-2010. So now seems to me to be the perfect time to work to deliver anti-recessionary aid targeted to the 2010 budget cycle in the states. There is a concern that the money to the states would go simply to building a surplus instead of being spent, but with the tough choices being made across the country right now, the possibilities of that seem remote, and anyway language could be written into any bill to negate that possibility.

Significantly, the 1973-75 aid was triggered by unemployment figures.

In the case of the 1973-75 recession, the federal relief programs used three triggers based on unemployment. Aid under the ARFA program was provided when a jurisdiction’s unemployment threshold rose above 4.5 percent. Aid from the LPW program was based on the total number of persons unemployed, as well as the number unemployed in excess of 6.5 percent, in that jurisdiction. And aid under CETA was prompted by all three triggers.

The use of the unemployment rate as a trigger has a number of advantages. First, the unemployment rate is readily available at both the state and local level, so it can be used to direct aid in a more focused manner – even potentially to steer aid to specific metropolitan areas within states. Second, it is available on a monthly basis. However, in evaluating the effectiveness of the federal government’s aid package of the mid-1970s, the GAO found that the structural change built into national labor markets caused this trigger to turn on well into the downturn and maintain aid well into the recovery.

I don't think this is a bug, but a feature. We hear a lot about unemployment as a "lagging indicator" of economic performance, but to the unemployed, it's the ENTIRE indicator. And given that income tax makes up such a large sum of state revenue (particularly in California), unemployment is intimately tied to state budget performance. The Chicago Fed worried about inflation, but again, this recession is not like all other recessions, and right now we're in fear of a deflationary spiral.

Finally, the Chicago Fed worries about rewarding "bad fiscal behavior" when budget shortfalls are caused by a "structural deficit caused by an inefficient tax system and/or unsupportable public spending." We can expect to hear a lot of this if a second stimulus really kicks into gear, and I would just say that it's not morally defensible to punish individuals for the tangle of their state political structure. I don't want the possibility of federal relief to disable local efforts to arrive at sustainable budget practices, but I think there's a way to provide help to those who need it while also not letting the legislative leadership off the hook for their failures.

That the Chicago Fed is putting out papers about state funding at all is a sign that such a prospect has gained momentum. I think their concerns, while legitimate, are all addressed by the nature of this downturn, and legislation can be drafted to allay those concerns as well. Any second stimulus must include state fiscal relief. My one hope would be that the solution is enduring, so that never again will states be in the position to forestall economic recovery through perverse and ill-timed budget cuts.

... Ryan Avent makes the case for denying California federal aid, or at lest conditioning it to changes in the long-term budgeting process. Like Robert Cruickshank, I don't believe that the federal government would provide such a great, progressive solution with their conditioned aid - it would probably look more like an IMF bailout. I agree in a roundabout way that any federal aid may give Democratic leaders the impression that their problems can be solved from outside rather than from within. But that's a leadership problem separate from the problem of real people's lives getting squandered because of a political stalemate.

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?

STEPHANOPOULOS: 9.5.

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.

I Don't See That Curve Bending

We're still in uncharted economic territory:

Employers cut a larger-than-expected 467,000 jobs in June, driving the unemployment rate up to a 26-year high of 9.5 percent, suggesting that the economy's road to recovery will be bumpy.

The Labor Department report, released Thursday, showed that even as the recession flashes signs of easing, companies likely will want to keep a lid on costs and be wary of hiring until they feel certain the economy is on solid ground.

June's payroll reductions were deeper than the 363,000 that economists expected and average weekly earnings dropped to the lowest level in nearly a year.

However, the rise in the unemployment rate from 9.4 percent in May wasn't as sharp as the expected 9.6 percent. Still, many economists predict the jobless rate will hit 10 percent this year, and keep rising into next year, before falling back.

All told, 14.7 million people were unemployed in June.

Here's the latest chart showing job losses, from Calculated Risk:



We have two problems threatening economic recovery: joblessness and foreclosures. The stimulus is supposed to at least mitigate the former, and the Obama Administration is expanding their program to mitigate the latter, including homeowners that owe up to 125% of the value of their homes on their mortgages into their modification plans.

Neither look to be sufficient for the scale of the problem. It's almost unfair what the President has had to deal with since coming into office, but I fear we're in something of a death spiral.

Done In By His Own Rhetoric

Paul Krugman puts into words something I've been feeling the past few days.

Back in March, when I was lamenting the inadequate size of the Obama stimulus, I made this prediction:

Republicans are now firmly committed to the view that we should do nothing to respond to the economic crisis, except cut taxes — which they always want to do regardless of circumstances. If Mr. Obama comes back for a second round of stimulus, they’ll respond not by being helpful, but by claiming that his policies have failed [...]

It’s only June, but Republicans are already claiming that the Obama economic plan has failed. (Yes, that’s insane — hardly any of the money has flowed to the economy yet — but this was predictable.) Meanwhile, unemployment is already above 9 percent. And the green shoots are looking browner by the week, especially on the jobs front: new claims for unemployment insurance are stubbornly running at more than 600,000 a week, far above the 350,000 or so that would be consistent with a stable unemployment rate.

We really do need a bigger stimulus. But it’s going to be hard slogging.

Pointedly, when asked at his last press conference if we need a second stimulus, Obama said "Not yet."

My worry comes from the fact that Obama and his White House take every opportunity to sell the great economic benefits of the Recovery Act, how it creates a new era by investing in the policies we need to return to economic growth, etc. And yet they knew that the stimulus was kneecapped in the Senate and turned into a worthwhile but inadequate effort to deal with an historic shortfall in economic activity. It was always going to be hard to reconcile that disconnect between continuing bad times and this laudatory language used to describe a stimulus that has barely begun to reach the ground. But that tightrope is starting to fray at the edges.

Barely half of Americans are now confident that President Obama's $787 billion stimulus measure will boost the economy, and the rapid rise in optimism about the state of the nation that followed the 2008 election has abated, according to a new Washington Post-ABC News poll.

Overall, 52 percent now say the stimulus package has succeeded or will succeed in restoring the economy, compared with 59 percent two months ago. The falloff in confidence has been sharpest in the hard-hit Midwest, where fewer than half now see the government spending as succeeding. In April, six in 10 Midwesterners said the federal program had worked or would do so.

This was inevitable. With the global economy tracking the Great Depression (more charts on that) but the financial elites eager to get back to the hard work of accountability-free pillaging of the middle class, a credibility gap between the "green shoots" public statements and reality was bound to emerge. And if oil shoots back up to triple digits, the resulting squeeze in consumer spending could devastate growth even more.

This presents a vexing problem. Obama needs a national economic rebound and would probably support a new stimulus if he thought events warranted one, but he's hemmed in by his own rhetoric about the first stimulus.

You're Allowed To Do That?

Banks received TARP money in exchange for agreements with the federal government to offer back dividends, among other things. And now, some banks are flat-out not paying them anymore.

At least three small, cash-strapped banks have stopped paying the U.S. government dividends that they owe because they got $315.4 million in capital infusions under the Troubled Asset Relief Program [...]

Treasury spokeswoman Meg Reilly said Monday that "a number of banks" that got taxpayer-funded capital under TARP are no longer paying dividends to the government. "Treasury respects the contractual rights of [TARP recipients] to make decisions about dividend distributions, and that banks are best positioned to decide how to manage their own capital base."

The moves are a sign of the deepening misery for large swaths of the U.S. banking industry, suffering under bad loans and the recession even as large firms such as J.P. Morgan Chase & Co. and Goldman Sachs Group Inc. rebound from the crisis, including by repaying their TARP funds last week.

Remember that whole "sanctity of contracts" that the United States cannot abrogate, during the AIG bonus debate? I guess that's no longer operative.

Yves Smith writes:

Plenty of folks, including yours truly, were skeptical of Treasury's claim, made often with a straight face. that the government was exercising care on who got TARP funding (as in it was not just handing out dough willy-nilly, but did have an eye to getting taxpayer dough back). That of course presupposes that the banks getting the money were just a little bit bad off, as opposed to in Serious Trouble (belied by the aggregate size of the effort) [...]

Given that there are no formal penalties for suspending TARP dividends, save a negative reaction in the markets, which would affect stock prices and borrowing rates, there consequences of missing payments may be de minimus. While three small banks missing payments is in theory no biggie, the action does point up the disconnect between the PR of TARP (protect the taxpayer) and practice (protect the banks). Even if the result of pressure to bolster capital levels, this precedent may encourage others to follow.

OK, if you still think the banks are solvent, let's just for one day pull the plug on all the special vehicles that the Federal Reserve and the Treasury Department and the FDIC have been offering these firms, and watch the entire financial system absolutely melt. What this means for the future is that we're propping up a sick system, just as Japan did in the 1990s, and their experience shows a lost decade with little or no economic growth, because the money dumped into the black hole of the banking system does nothing for the larger economy. That's why we're going to see 10 percent unemployment soon, that's why the so-called "real" economy is cause for such concern, and that's why those of us hearing about these "green shoots" are not impressed.

And I have to agree with Atrios- what exactly is recovering in this recovery if everyone is broke and out of work and the numbers for everything except Government Goldman Sachs bonuses are down? I understand that unemployment is a lagging indicator, so please don’t spam the comments with that (it is an insight so trite it ranks up there with “correlation does not equal causation.” Thanks. I had intro to stats as an undergrad, too.).

And I’m being serious. What exactly are we basing these claims of green shoots and recovery on other than pixie dust?

The root cause of this is the dysfunctional financial system, and that system is not being fixed. So the public suffers the consequences.

Yes, Cutting Jobs And Services Does Affect The Economy

Dan Walters had a funny column a few days back, excoriating anyone who use "numbers" and "projections" to theorize about the impacts of budget cuts. As if it's some kind of novel idea that an economy dominated by government spending would rise or fall based on the amount of that spending. Mr. Walters, 1937 called and wants a word with you.

Anyway, let's look at the heart of Walters' complaint. First he says that we must have a hefty budget reserve because the economy is likely to go south, and because it will signal to bankers that "we're solvent so they'll buy our short-term notes." As I noted earlier, this is nonsense given the clear Constitutional duty to repay debt before practically everything else. Then he says this:

Democrats and Republicans are equally guilty, meanwhile, of emitting self-important nonsense about the impacts of their actions on the state's recession-wracked economy. While Democrats claim that cutting "safety net" programs and/or public payrolls will worsen the recession by taking money out of circulation, Republicans claim that raising taxes will retard recovery by discouraging investment and/or consumer spending.

Both practice voodoo economics. The entire deficit on which they are working, $24.3 billion including Schwarzenegger's desired reserve, is well under 2 percent of the state's economy. The lesser cuts and taxes they are debating would merely shift relatively small amounts of money from one form of spending to another, all within the state's economy, so the macro economic impact would probably be nil, no matter what they do.

That's a strange opinion, especially because in the next sentence, he argued that a budget filled with gimmicks would threaten our economic future, even though such gimmickry would effect the same small amount of cash, from a macroeconomic perspective. But to his main point - cutting spending for state services, cutting jobs, cutting salaries for public employees and their related vendors, has a multiplier effect that in fact does weaken the prospects for economic recovery. You don't have to take my word for it. John Myers ran a story on this just today.

"It's hard to see how the country recovers if California does not," says U.S. Rep. Zoe Lofgren (D-San Jose). Lofgren says she thinks congressional authorization of loan guarantees for any state will happen. But no one thinks it'll happen in time for California, which needs to go to market -- assuming a budget deficit deal is agreed to in the state Capitol -- early next month.

Lofgren says she's particularly troubled that the national stimulus and recovery programs... which are expected to benefit California by as much as $80 billion... could be drained of their help by the cuts needed to balance the state budget. "It is contrary to the efforts that we're making," she says.

This is a fact neglected by Walters, the very real possibility that certain spending cuts would result in the forfeiture of stimulus funds as well as regular funding, multiplying the effect of the cuts. Many of the programs that Schwarzenegger wants to eliminate, like Healthy Families, CalWorks and Medi-Cal, have their funding matched by the federal government. Clearly any dollar cut there would mean $2 in practical cuts to Californians. And losing out on stimulus dollars could number in the tens of billions.

This UCLA Anderson Report also speaks to the impact of state spending on California and the nation at large.

According to UCLA Anderson Forecast senior economist Jerry Nickelsburg, there is nothing happening in California that will help pull the state out of recession in advance of the nation.

"California," Nickelsburg writes, "is in for a continued rough ride for the balance of 2009 and is not going to see economic growth return until the end of the year, shortly after the U.S. economy begins to grow."

The dire conditions surrounding the state budget will contribute to prolonging tough conditions in California, according to the report.

In his essay, Nickelsburg notes that Gov. Arnold Schwarzenegger is attempting to close the state's $24 billion budget gap with a combination of fee increases, forced borrowing from local government, the sale of state assets and, primarily, budget cuts.

Yet that the real risk for California, Nickelsburg writes, is the possibility that there will be no budget agreement at all and that the chaotic and inefficient spending cuts that would likely follow would have an even more severe impact on the ability of California to stem the downturn in economic activity this year.

The rhetoric has risen to the extent where a prolonged stalemate, like every year given our broken governmental structure, is possible. But clearly, Nickelsburg is demonstrating that state spending does have an impact on the economic picture at large, especially at a time when there's 11.5% unemployment and a growing dependence on state services.

That one of the top political reporters in the state would deny this economic reality is just baffling.