You Get The Recovery You Pay For
July 14, 2009 - 10:01am ET
From the beginning of this economic crisis, policy makers seem to have forgotten (or perhaps learned too well) a basic economic rule. It's one I used to have paraphrased in a sign on my desk in a previous job: You can have it fast, you can have it cheap, or you can have quality. Pick any two.
Put another way: You get what you pay for, and you pay for what you get. Judging from the sizes of their campaign contributions, the ever-rising cost of the bailout, and the distressing lack of accountability (so far), the financial sector knows this well. From the deregulation and lax oversight that got us here, to the trend towards returning to something like business as usual, they're getting what they paid for.
Unfortunately, when it comes to the recovery, so are we. We were told, when they sold us the bailout that getting the banks solvent again and — more importantly — getting the banks lending again was key to recovery. That was more than a year ago, and more than 1 million jobs ago. Or more than 6.5 million jobs ago, if you go back to when the downturn really started, in late 2007. And where are we?
It would be easy — and it's very tempting — to seize upon the news that new jobless claims have dropped below 600,000 for the first time as a sign that just maybe the recovery has just about started. But long-term claims have gone up.
If we're entering recovery, it's one in which hiring isn't likely to rebound.
Even as the nation's economy begins clawing its way out of the worst recession in 60 years, there are growing signs that this recovery could come with an unsettling twist: The wheels of commerce may begin to turn again without any substantial boost in jobs.
Not only is the national unemployment rate, now 9.4 percent, likely to climb into double digits later this year, but it is also expected to remain there well into 2010, economists say. That would prolong the misery of the unemployed, squeeze retailers and other businesses, and add millions of dollars in government costs and lost productivity. It could even threaten the recovery itself.
Though it's common for the jobless rate to keep climbing for a time after economic output turns positive, the aftermath of the last two downturns, in 1990-91 and 2001, introduced the idea of a "jobless recovery." Even though the economy improved, many unemployed workers discovered that jobs as good as the ones they'd lost were almost impossible to find.
This time, many economists say, there are new factors that could make the problem worse. Many more layoffs in this recession have been permanent, not temporary.
If this is a recovery, it's a jobless recovery. But it's the recovery we paid for, based on whom we've chosen to bail out thus far. (Or, you could say it was the recovery paid for by the financial services industry: Commercial banks alone spent $37 million on the 2008 elections and have spent $12.5 million on lobbying during the first half of 2009, according to the Center for Responsive Politics.)
The Job-Creation DeficitAs Leo Hindery Jr. and Leo Gerard write:
By the administration's own estimate, the stimulus plan will "save or create"—there's that phrase again—just 3.5 million jobs over the next two years. But this amount represents less than 30 percent of the unprecedented 14.5 million jobs that have been lost since the recession began in December 2007, and it is just 12 percent of the workers already unemployed.
And yet this is only part of the story of the job-creation deficit we face. Just as worrying as the massive jobless numbers is the fact that our economy is bleeding jobs in the very sector that must grow in order for us to move away from debt-financed consumption as the principal engine of economic growth. Since this recession began, manufacturing has lost 13 percent of its workforce, reflecting a further downsizing of our tradable goods economy.
If these conditions continue, we will head not just toward a jobless, and a manufacturing jobs-less, recovery but also toward an even more weakened economic base that is incapable of sustaining a vibrant middle class.
In the meantime, states are struggling to repair budgets decimated by the consequences of a "Bankers and Wall Streeters first!" approach to economic recovery. And some states are using stimulus dollars just to get by, so desperate have their financial circumstances become — squeezed by growing in equality, exacerbated by tax cuts and the resulting decline in revenue
Not only have the growing ranks of the unemployed impacted state budgets, but the combination of never-ending layoffs and lack of hiring increases the numbers of those needing or requiring federal- or state-funded services. Homelessness is shifting to suburban and rural areas, and more families are joining the ranks of the homeless. In just two months, food stamp enrollment has increased by 1.2 million. Not surprisingly, more American children are living in poverty and living with hunger.
A growing number of American children are living in poverty and with unemployed parents, and are facing the threat of hunger, according to a federal report released yesterday.
According to the report, "America's Children: Key National Indicators of Well-Being," 18 percent of all children 17 and younger were living in poverty in 2007, up from 17 percent in 2006. The percentage of children with at least one parent working full time was 77 percent in 2007, down from 78 percent in 2006. Those living in households where parents described children as being hungry, having skipped a meal or having gone without eating for an entire day increased from 0.6 percent in 2006 to 0.9 percent in 2007, the report said.
Federal officials said the statistics predate the current economic downturn, and forecast harder times for some of the country's 74 million children 17 and younger.
"It foreshadows greater changes we'll see when we look at these figures next year," said Duane Alexander, director of the Eunice Kennedy Shriver National Institute of Child Health and Human Development at the National Institutes of Heath, one of the government agencies that participated in the study.
Job losses are also fueling the foreclosure crisis (which is also feeding the homelessness crisis), pushing previously "safer" mortgages into foreclosure, resulting in a still record number of foreclosures as recently as May.
Household debt, which has almost doubled since 2000, because Americans have made little progress in shrinking their debt, and are instead falling behind on credit card debt at a record pace. The likelihood of this trend is narrow, considering that the economy is projected — for all the crowing about a "recovery" — to continue losing more jobs than it gains each month.
But, this is the "recovery" we get because it's the recovery somebody already paid for. A look the outcome of economic policy making suggests who this recovery is for, with just a simple question. Who's gotten the most help?
More than a year ago, when foreclosures were on their way up. progressives were clearly saying that the two keys to economic recovery were both based in the "real economy": (a) keep people in their homes, and (b) keep people working. On both fronts, the "real economy" lost out.
In April, the Senate voted down a bankruptcy reform provision that would have allowed bankruptcy judges to modify mortgages. which could have put pressure on lender to modify delinquent mortgages before they landed in bankruptcy court and which the finance industry lobbied hard to defeat. This despite statistics showing that of the 8.7 million homeowners were facing bankruptcy, 1.7 million would have been helped by the provision.
In fact, by the time anything with a hint of economic recovery about it reaches the Senate, most legislative time and energy seems dedicated to altering to actually help fewer people. So instead of legislation that helps even a fraction of those who actually need it, the administration is reduced to prodding banks to do what they fought so hard not to do (or paid their lobbyists to help them avoid) in the first place.
The Obama administration yesterday scolded the heads of the country's largest banks, urging them to move faster and do more to help millions of distressed homeowners under a federal foreclosure prevention program.
In a two-page letter, Treasury Secretary Timothy F. Geithner and Shaun Donovan, secretary of the Department of Housing and Urban Development, acknowledge that the government program, known as Making Home Affordable, has yet to gain traction since being launched in March.
"We believe there is a general need for servicers to devote substantially more resources to this program for it to fully succeed and achieve the objectives we all share," the letter said.
Under the program, lenders are paid with taxpayer dollars to help borrowers stay in their homes by modifying their mortgage, including lowering their interest rate or extending the term of the loans. So far, more than 270,000 homeowners have been offered modifications, but it is unclear how many mortgages have been adjusted. Lenders have been overwhelmed by requests for help as rising unemployment rates cause more borrowers to fall behind on their payments. The administration had aimed for the program to help up to 4 million struggling borrowers.
Around the same time that the Big Three automakers had to jump through flaming hoops (and ultimately slash salaries, jobs, and benefits) to get the $25 billion they needed just to survive, Citigroup got $20 billion for little more than just asking.
Fast forward to May of this year, and the Senate passes credit card reform bill that imposed some restrictions on late fees and over-limit fees, as well as rate increases. But it's reform with a big gaping hole in it.
Banks also will have nine months to implement many of the changes — too late, some advocates say, for the most vulnerable consumers. The Federal Reserve has issued a rule that clamps down on some of the same practices addressed by Congress, but the rule doesn't take effect until mid-2010.
Credit card issuers "may be tempted to hit card holders with an additional wave of interest rate increases before the law takes effect," says Travis Plunkett of the Consumer Federation of America.
In the past year, banks have raised many consumers' credit card rates even as the Federal Reserve has cut short-term interest rates. Banks say higher funding costs, along with surging loan delinquencies and defaults, have forced them to reassess card risk.
Yet the higher rates have made it even harder for consumers to pay their card bills. A record number of consumers are falling behind on these bills, and a near-record number are giving up on them.
Not only did the banks get a huge window of time to do whatever they wanted before the legislation went into effect (the original bill would have required credit card issuers to make changes within 90 days, as opposed to nine months), but they also got a few more big wins. They got bans on universal default and multiple overdraft fees dropped from the legislation, as well as a measure to cap interest rates at 15 percent.
Fast forward to the present and, sure enough, people are having trouble paying their bills. And, sure enough, credit card issuers were "tempted to hit cardholders with an additional wave of increases" while they still had time.
Citigroup Inc. has increased interest rates on up to 15 million U.S. credit card accounts just months before curbs on such rises come into effect, the Financial Times reported, citing people close to the situation.
Citigroup had upped rates on 13 million to 15 million credit cards it co-brands with retailers such as Sears, the paper said.
In a statement, Citigroup said "We have adjusted pricing and card terms for some customers as part of our regular account reviews. This is an ongoing process to ensure we offer terms, interest rates, credit lines and products based on individual needs and risk profiles."
And all political leaders like Sen. Chris Dodd could do was "warn" them.
I'm sure that will bring them right into line.
At every turn — from CEO salaries, to foreclosure prevention, to abusive credit card company practices — our political leaders have essentially left real reform in the hands of some of the entities whose behavior played a huge part in creating the current crisis; counting on them to do the right thing, instead of implementing real reform that includes oversight, accountability, and consequences for violating new regulations and standards.
Here's the thing when it comes to banks, credit card companies, and the rest of the financial sector: They aren't going to do it unless they have to do it. You can scold them, warn them, or even beg them to cut interest rate, start modifying mortgages, start lending again, etc. There there is no penalty for not dong it, but there is a possibility of profit for not doing it, they will chose the latter. Every time. Remember, these are people who argued — in the face of the devastation their financial shenanigans have caused in the lives of people who are already struggling in this economy — "But we delivered for our stockholders."
And we've spent hundreds of billions to help them continue doing so. But our governments efforts to aid the "real economy" by (a) keeping people working and (b) keeping people in their homes has paled in comparison to the efforts to save Wall Street. Arianna Huffington calls it "mission shrink."
Remember how, back when taxpayers were being asked to fork over hundreds of billions of dollars to bail out Wall Street, we were told it was essential to saving Main Street?
Well, in just a few months, we've gone from saving the banks in order to save the economy to just saving the banks. It's the opposite of mission creep.
But that assumes that the mission was to save Main Street at all. The rhetoric that saving Wall Street will result in a kind of "trickle down recovery" is about as absurd as "trickle down economics." And just as Americans were told to "just wait" for the prosperity enjoyed further up the economic food chain to rain down on them, now we're being told to "just wait" for the recovery we've heard so much about to trickle down our way.
Faced with an economic downturn that has proved deeper than the White House initially projected, Mr. Obama asked Americans on Saturday to remain patient, arguing that his $787 billion stimulus plan had saved the economy from collapse and put it on a gradual course to recovery.
“As a result of the swift and aggressive action we took in the first few months of this year, we’ve been able to pull our financial system and our economy back from the brink,” he said, deflecting calls for a new round of stimulus spending and saying that his plan was intended to work not in a few months but over two years.
Facing an array of challenges on Capitol Hill and concern about the huge budget deficit, he cast his main legislative initiatives, starting with his call for overhauling the health care system, as part of a long-term plan to rebuild the economy on a sounder foundation.
For nearly a decade, we've waited for the benefits $1.35 trillion 2001 Bush tax cuts for the wealthy to rain down on us. We've waited in vain: and our rewards have been low-to-no job growth, massive deficits, and no energy policy, just to name a few. We went from here:
As the Clinton administration ended, the United States entered the new century and decade with the strongest, most-resilient, most-adaptable, and technologically advanced economy on the face of the earth, according to an analysis by the U.S. Central Intelligence Agency. Job growth had been enormous in the 'Roaring 90s' -- with more than 22 million jobs created in eight years. Median incomes were rising, poverty rates were at their lowest levels in decades. Business investment and new business formation were strong. The stock market was booming, capital markets were sound, and driven by the promise of new technologies, the United States was poised to enter a new phase of growth and development, with the benefits spread across its society.
To the hole we're in today. And we aren't going to get out of it by shoveling money at Wall Street and the financial industry. They've already got the recovery they paid for.
Just this week, the bankers and their lobbyists -- who you might have reasonably thought would be the political equivalent of lepers in the halls of power these days -- have kneecapped substantive bankruptcy reform in the Senate, helped pull the plug on a government-brokered deal with Chrysler, and tried feverishly to throw up a roadblock in the way of credit card reform in the House.
You heard me right. America's bankers -- those wonderful folks who brought us the economic meltdown -- are still being treated as Beltway royalty by those in Congress.
According to Sen. Dick Durbin, the banks "are still the most powerful lobby on Capitol Hill. And they frankly own the place."
When it comes to reforming our financial system, we are truly through the looking glass. I mean, since when did it become "to the vanquished go the spoils"? How do the same banks that have repeatedly come to Washington over the last eight months with their hats in their hands, asking for billions to rescue them from their catastrophic mistakes, somehow still "own the place"?
We won't begin to dig out of this hole until we start investing in the recovery of the real economy. Otherwise we are bound to get more of the same. Be assured, Republican lawmakers aim to do just that. They managed to trim jobs out of the original stimulus. They've urged their leaders to target the stimulus, and proposed to kill the stimulus, as part of their budget proposal (which was a laughable rehash of the past eight years).
That's because according to them, the stimulus isn't working. But the Center on Budget and Policy handily debunks the myths about the stimulus.
1: The recent rise in unemployment does not mean the law is not working.
No mainstream economist believed the law would immediately revive the economy and cause unemployment to begin falling. In addition, at the time Congress enacted the law, virtually all forecasts in both the public and private sectors underestimated the severity of the downturn. Nevertheless, the law has slowed the decline and will help the turnaround occur sooner than it would have otherwise. ...
2: The Administration and Congress expected the stimulus money to be spent gradually over the next two to three years, and what’s been spent to date is stimulating the economy and helping millions of Americans.
CBO estimated that one quarter of the recovery-law spending would occur in fiscal 2009, and has said that the funds already expended have helped strengthen the economy. In late May, Elmendorf stated that “the rate of spending [for the stimulus bill] is broadly consistent with the assumptions that CBO used to estimate the macroeconomic effects of the legislation. Under those assumptions, ARRA will boost the level of GDP by the end of this year by between 1.4 percent and 3.8 percent….”
The law “is currently bolstering disposable income,” Elmendorf said. “Specifically, lower payroll tax withholding resulting from that legislation began in March and was fully phased in on April 1, and unemployment insurance benefits have been increased.” 
3: The nation faces a very serious long-term budget problem, but the recovery law will exacerbate that problem only a very small amount.
Although the recovery law significantly increases short-run deficits, the fiscal effects of the bill over the long run are tiny. In January, the Center on Budget and Policy Priorities calculated that the recovery law would add just 3 percent to the budget shortfall through 2050.  That’s because the tax cuts and new spending in the law are temporary. The main driver of the nation’s long-term budget shortfall is ongoing factors, the most notable of which is steadily rising health care costs.
CBO projects that the law will increase the number of people with jobs by 2.5 million next year. In addition, millions of others will benefit from the higher incomes produced in an economy that is less weak than it otherwise would have been. The economy clearly needed the boost in demand that the new spending and tax cuts generate. Failing to provide this boost due to fear of very slightly increasing the long-term budget problem would have been foolish.
4: The law was specifically designed to help states close their budget shortfalls.
State revenues have fallen sharply due to the recession. As a result, states face a combined $350 billion in projected budget gaps over the next two years. Because states also face legal requirements to balance their budgets, they must enact program cuts and tax increases to close their budget gaps. Such measures, however, reduce demand for goods and services, making a weak economy even weaker. Without federal funds, states would have to take even more dramatic measures that, by reducing demand, would cost jobs and make the recession even more severe.
It isn't that the stimulus isn't working. It's that it's not enough. It never was.
Bear in mind just how big the U.S. economy is. Given sufficient demand for its output, America would produce more than $30 trillion worth of goods and services over the next two years. But with both consumer spending and business investment plunging, a huge gap is opening up between what the American economy can produce and what it’s able to sell.
And the Obama plan is nowhere near big enough to fill this “output gap.”
...Even the C.B.O. says, however, that “economic output over the next two years will average 6.8 percent below its potential.” This translates into $2.1 trillion of lost production. “Our economy could fall $1 trillion short of its full capacity,” declared Mr. Obama on Thursday. Well, he was actually understating things.
To close a gap of more than $2 trillion — possibly a lot more, if the budget office projections turn out to be too optimistic — Mr. Obama offers a $775 billion plan. And that’s not enough.
The jobless numbers, compounded by the the number of long-term unemployed who will lose their benefits by September, if something isn't done, in an economy where hiring just isn't happening.
If we want a recovery for the real economy — the economy of Main Street and the kitchen table — we have to invest in it it.
Otherwise the only recovery we'll get is the one that's already been paid for.
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