November 07, 2008

The Economy, or, From the toilet to the sewer

The unemployment rate in the US has now reached levels not seen since 1994 and is expected to continue to climb. The White House, for it's part, is still not real comfortable confronting reality...

On Friday, a spokeswoman for President Bush, Dana Perino, called the employment numbers “a stark reminder of how critical it is we keep focused on utilizing” the programs that Washington has put in place, including a $700 billion bailout of the financial system.

“We know what the main problems are — tight credit and housing markets — and we have the tools to solve them,” Ms. Perino said. “The programs we’re putting in place will improve the flow of credit to consumers and businesses that will spur economic growth, job creation, and stabilization of our financial markets.”

A year ago, that was the problem. What has been put in place doesn't prevent a recession, it merely prevents a widespread collapse and a resulting depression. We're out of the woods there. However, we're entering a very dangerous time with unemployment creeping ever higher. Of course, these rates HAVE been high for years. We just haven't seen them because BLS has been politicized and the numbers were massaged.

Typically, unemployment is a lagging indicator. First you see credit tightening, then businesses pulling back, then consumers, then layoffs and escalating unemployment followed by renewed growth. In other words, this is the crescendo. However, this doesn't mean things won't get worse before they get better. To wit...

Many economists expect this picture to worsen as the consequences of the global financial crisis ripple out to businesses and households. Though the $700 billion taxpayer-financed bailout has staved off fears of an imminent collapse and restored some order to the financial system, it has not persuaded banks to lend freely. Credit remains tight for businesses and homeowners.

OK, one way or another we have to get money back into the economy. If banks won't lend, then the government may do well to start lending itself or do a far larger stimulus package to reinflate the economy and kick start growth. We can worry about the resultant inflation once we are past the risk of deflationary death spiral. Inflation is easy to cure compared to deflation.

My personal preference is to dump $1.5 trillion over 5 years into infrastructure. Schools, roads, public transport, etc. all need improvement and those improvements are expensive. For one thing, it lessens the budgetary constraints on the states and munis. For another, it drives job and wage growth from the lowest levels which creates a solid base from which to expand the economy dramatically over the next 20 years. Given the global financial crisis, the government can obtain this funding at very attractive interest rates.

The long term prescription is wage growth at the bottom which will, in turn, drive up savings rates. Which is why tax policy at the corporate level needs to change dramatically.

Posted by mcblogger at November 7, 2008 12:01 PM

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