OK, Thursday’s jobs report settles it. We’re going to need a bigger stimulus. But does the president know that? Let’s do the math.
Since the recession began, the U.S. economy has lost 6.5 million jobs — and as that grim employment report confirmed, it’s continuing to lose jobs at a rapid pace. Once you take into account the 100,000-plus new jobs we need each month just to keep up with a growing population, we’re about 8.5 million jobs in the hole.
Thursday’s report also showed wages stalling and possibly on the verge of outright decline. That’s a recipe for a descent into Japanese- style deflation, which is difficult to reverse. Lost decade, anyone?
Wait — there’s more bad news: the fiscal crisis of the states. Unlike the federal government, states must run balanced budgets. And faced with a sharp drop in revenue, most states are preparing savage budget cuts. Aside from directly creating a great deal of misery, these cuts will depress the economy even further.
So what do we have to counter this scary prospect? We have the Obama stimulus plan, which aims to create 3.5 million jobs by late 2010. That’s much better than nothing, but it’s not remotely enough.
All of this is depressingly familiar to anyone who has studied U.S. economic policy in the 1930s. Once again a Democratic president has pushed through job- creation policies that will mitigate the slump but aren’t aggressive enough to produce a full recovery. Once again much of the stimulus at the federal level is being undone by budget retrenchment at the state and local level.
So have we failed to learn from history, and are we doomed to repeat it? Not necessarily — but it’s up to the president and his economic team to ensure that things are different this time. Barack Obama and his officials need to ramp up their efforts, starting with a plan to make the stimulus bigger.
There won’t be any cooperation from Republican leaders, who have settled on a strategy of total opposition, unconstrained by facts or logic. Indeed, these leaders responded to the latest jobs numbers by proclaiming the failure of the Obama economic plan. That’s ludicrous, of course. The administration warned from the beginning that it would be several quarters before the plan had any major positive effects.
It’s also not clear whether the administration will get much help from Senate “centrists,” who partially eviscerated the original stimulus plan by demanding cuts in aid to state and local governments — aid that, as we’re now seeing, was desperately needed.
And as an economist, it has been a rude shock to see so many of my colleagues with good reputations recycling old fallacies — like the claim that any rise in government spending automatically displaces an equal amount of private spending, even when there is mass unemployment — and lending their names to grossly exaggerated claims about the evils of short-run budget deficits. Also, as in the 1930s, the opponents of action are peddling scare stories about inflation even as deflation looms.
So getting another round of stimulus will be difficult. But Obama administration economists understand the stakes. Indeed, just a few weeks ago, Christina Romer, the chairwoman of the Council of Economic Advisers, published an article on the “lessons of 1937” — the year FDR gave in to the deficit and inflation hawks, with disastrous consequences both for the economy and for his political agenda.
What I don’t know is whether the administration has faced up to the inadequacy of what it has done so far.
So here’s my message to the president: You need to get both your economic team and your political people working on additional stimulus, now. Because if you don’t, you’ll soon be facing your own personal 1937.
