Reaching Economic Recovery Blindfolded

The $787 billion stimulus package passed by Congress in 2009 did better than Republicans would have you believe and worse than the progressive Democrats maintain.

The U.S. economy needs another transfusion of gigantic proportions but without the pratfalls of the last one to avoid
what Kensyian economist Paul Krugman predicts a third prolonged depression since 1873.

Actually, I have one foot on Krugman's boat and one on the dock. Which poison would you prefer:

Risking inflation and a massive debt.

Holding fast to prolonged unemployment potentially longer than in the 1930s during the last Great Depression when it took a world war to scrape ourselves out.

The error of Krugman's ways is printing money (inflation) and selling U.S. Treasury notes at loan shark interest rates.

Krugman argues the panic-generated 1873 Long Depression and 1933 Great Depression

(B)oth included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.
We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense. 

And,

(Y)ou might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy. 

So,

The Obama administration understands the dangers of premature fiscal austerity — but because Republicans and conservative Democrats in Congress won’t authorize additional aid to state governments, that austerity is coming anyway, in the form of budget cuts at the state and local levels. 

Thus,

It’s almost as if the financial markets understand what policy makers seemingly don’t: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating. 

Let's leave Krugman, Fed Chairman Ben Bernanke and Treasury Secretary Timothy Geithner to their own little world and pontificate what a new stimulus would do where the last one left off.

In the broadest terms, the 2009 stimulus with a year to go got us where we are today: Saving public sector jobs with bailouts; tax breaks for the private sector where jobs failed to materialize as hoped.

A report by the nonpartisan Congressional Budget Office shows the Recovery Act has increased the number of workers by between 1.2 million and 2.8 million. The CBO also projects that 3.7 million jobs could be attributed to the stimulus by the end of September. 

When the Senate killed a mini-version of a stimulus bill last week most of the attention was placed on the failure to extend $47 billion in unemployment benefits.

But it also would have expanded the COBRA subsidy by $7.8 billion; increased Medicaid payments to states by $24.1 billion; extend the welfare emergency fund by $2.5 billion and provide $1 billion for summer jobs.

The Bureau of Labor Statistics for May was bloated with a once-every-decade hiring of federal census workers which accounted for 411,000 new jobs, excluding farming.  Only 41,000 new jobs in the private sector were added. Unemployment dipped to 9.7% meaning 15 million Americans out of work. The civilian labor participation force for jobs was 65% and the employment population rate was 58.7%. About 2.2 million were marginally attached to the labor force showing no improvement for the past year. Factory employment gained 29,000, bringing that total to 126,000+ in the past five months.

On the downside, construction jobs decreased 35,000 and that signals an even deeper problem.

Part of the $787 billion stimulus was a program offering an $8,000 tax credit to new home buyers. The program ended April 30 and new home sales dropped abruptly to the lowest levels in 40 years.

"The tax credit expired as the peak home-buying season kicked off," said Mark Vitner, senior economist at Wells Fargo Securities. "Imagine what would happen to retail sales if they canceled Christmas."
 
 Dumb.

The backlog of unsold new homes is 210,000 which is a drain on market values and only perpetuates the drop in new construction jobs.

Another failed Obama program was helping drowning homeowners with mortgages in the Home Affordable Modification Program. Out of 3 million eligible, only 170,000 borrowers were approved and more than half of those defaulted for missing payments more than three consecutive months.

Banks bailed out by the government took the equity to regain profits but a renewed vigor by tougher banking regulators curbed their ability to loan in a much tighter credit market.

The ultimate result was between the stimulus and bank bailouts the public sector for the most part held on to their jobs, the banks rebounded and the private sector business community gained additional tax breaks and credits.

The only guy left out was the poor soul living on Main Street.