The Choice: Second Stimulus Or 'Lost Decade'

It's worth slogging through the minutes of the June Federal Reserve Open Market Committee meeting [1]. Read the deliberations of the Fed board members and staff and you see an economic horizon that is much more dangerous than what is suggested by the assurances of the White House and some of our allies in Congress.

Even though the Obama administration is tamping down talk of a second stimulus plan right now, the prudent course would be to prepare the political ground to begin pushing one through Congress this fall. The alternative, according to some of the thinking at the Fed, is a period of above-average unemployment that would begin to look like the Japan "lost decade" [2] of economic recession.

One mistake Japan made was being too timid in using government funds to create jobs that would lay the foundation for future economic growth. The Congress has already made a similar mistake, passing a $787 billion stimulus bill earlier this year when many economists were saying that the economy needed a spending plan that was twice that size. And keep in mind that a third of that stimulus was not government spending, but was various forms of tax relief, at the insistence of conservatives in both parties.

It is no surprise, then, that the actual dollars available for job creation are barely making a dent in the wave of layoffs still taking place in both private industry and in state and local governments. (Note the links in Terrance Heath's detailed look [3] at the economic "recovery" thus far.)

Against that backdrop comes this sobering assessment from the Fed:

With the strong adverse forces that have been acting on the economy likely to abate only slowly, participants generally expected the recovery to be gradual in 2010. Even though all participants had raised their near-term outlook for real GDP, in light of incoming data on labor markets, they increased their projections for the path of the unemployment rate from those published in April. Participants foresaw only a gradual improvement in labor market conditions in 2010 and 2011, leaving the unemployment rate at the end of 2011 well above the level they viewed as its longer-run sustainable rate. ...

Most participants indicated that they expected the economy to take five or six years to converge to a longer-run path characterized by a sustainable rate of output growth and by rates of unemployment and inflation consistent with the Federal Reserve’s dual objectives, but several said full convergence would take longer.

Can the United States take the risk of five to six years of above-average unemployment? Already, working-class families fell behind during the past eight years, as a conservative White House and Congress focused economic policies on top-end tax cuts and corporate deregulation rather than on improving the wage-earning prospects of middle-income families.

Yet the message from the right wing is more trash talk. This past weekend, House Minority Whip Eric Cantor railed against "pork barrel spending, government waste, and massive borrowing" during a radio address. Their alternative: They call it tax cuts for small business. In reality, much of what they propose is the same tax-cutting for the wealthy that didn't stimulate the economy for working families when Republicans seized the chance to impose that prescription after 2001. Conservative ideologues in Congress, having sabotaged the political climate for a robust stimulus months ago, have pronounced the compromised result a failure and are well-positioned to try to convince the public that conservative policies that have demonstrably failed in the past will someh

While some additional targeted tax relief directly tied to job creation ought to be on the table, the Fed minutes underscore the depth of the economic trench the country is now in, and how pulling out of that trench requires stimulating demand. If the unemployed continue to believe they have few options and workers continue to fear they will lose their jobs at any moment, no amount of tax cuts will prompt businesses to invest to meet a non-existent demand. The surest way to rapidly stimulate demand is to have the public sector put people to work (as well as keep people in jobs they now have) doing the work that needs to be done. That rejuvenates the economy and puts the government on the path of keeping its deficit in check.

Congress needs to get the message that whatever the costs of a federally-led job-creation effort this fall, and whatever the political difficulties, those costs will be minor compared to the economic and social costs of six or more years of sustained unemployment. Rather than patience, the public and their representatives in Congress need to be primed for urgency.