New Jersey Courier-Post, March 22, 2009
The February jobs report sealed the case on the need for another round of stimulus. The report showed the unemployment rate jumping by 0.5 percentage points in the month to 8.1 percent.
With the economy losing an average of more than 650,000 jobs in each of the last three months, there can be little doubt that the unemployment rate is on a path to go much higher. It is likely to cross 9.0 percent by the summer and could be flirting with 10 percent by the end of the year. By comparison, President Barack Obama assumed that the unemployment rate would average just 8.2 percent for the full year when he constructed his stimulus package.
It is not just the economic aggregates that look bad. There is no major sector that seems poised to lift the economy at this point.
The housing sector is in a free fall. Every measure shows record or near-record levels of oversupply while potential demand is plummeting.
Soaring rates of unemployment and underemployment are sharply reducing the number of potential homebuyers. The plunge in home prices is also having this effect as even many long-term homeowners no longer have enough equity in their home to make a down payment on a new home.
Falling home prices are also sending consumption plummeting. Tens of millions of baby boomers now urgently feel the need to save as they approach retirement, having just seen their home equity vanish with the housing crash and their retirement accounts shrivel with the stock market plunge.
The non-residential real estate market is also plummeting, as its bubble is now bursting. This will lead to a sharp falloff in demand and another round of massive losses on bank loans.
Equipment investment is falling at the sharpest rate in more than 50 years. And, state and local governments are all cutting back spending under the pressure of large deficits. Any gains the economy was making on trade will be reversed both due to the rise of the dollar and the onset of recessions in all of our major trading partners.
In short, every major sector of the economy is now contracting. The only sector that can restore the economy to a steady growth path is the federal government.
The stimulus passed last month was a good start, but it was nowhere near big enough. The actual stimulus in the package was approximately $700 billion over the next two years. By comparison, the amount of demand that must be replaced over this period is close to $2.6 trillion.
For this reason, Congress must approve another round of stimulus. There are ways to inject money into the economy quickly.
For example, Congress could give employers a tax credit for providing paid time off to workers, such as paid family leave and sick days or shorter standard work weeks. This could provide an immediate boost to demand while giving tens of millions of workers paid time off.
There are other mechanisms that can be used to boost demand. But Congress must act quickly and creatively. The economy and the country desperately need help.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy. He also has a blog on the American Prospect, "Beat the Press," where he discusses the media's coverage of economic issues.