The recovery bill is way too small - Redux part Cinq

You've heard this here before (and heard it about the TARP bill as well), and now the evidence is mounting, especially in light of Friday's unemployment number. The very large problem being that reality is rapidly outstripping even seemingly bleak economic projections. The foremost disconnect presently being that Team Obama forecast an average unemployment rate of 8.1% for all of 2009. As of Friday, it was already 8.1%, and clearly on its way to the mid-9's by year end (and more and more it looks as though it'll peak in 2010 near 11%: Unemployment Rises to 8.1 Percent ) So, the projections upon which the $800B plan was enacted are no longer operational...

The scary thing is that while plenty of folks have been worried about the rescue being too small, very few were heard during the 'debate' in Congress and in the media. Instead, we were fed predictable ideological pablum from folks who mostly continue to be in denial about the severity of the crisis we face, and who wish to compare it to the early 1980's, when Ronald Reagan supposedly rode to the rescue with tax cuts and monetary easing....

Times have changed folks, this is indeed the worst crisis since the Depression, and not nearly enough is being done about it. Here's Martin Feldstein (a Reaganite, btw) a few days ago in the Taipei Times (yes, it's often safest to speak the truth from very far away, and on page 9 at that!): http://www.taipeitimes.com/News/editorials/archives/2009/03/03/2003437472

Excerpts, emphases mine:

Tuesday, Mar 03, 2009, Page 9
The massive downturn in the US economy will last longer and be more damaging than previous recessions because it is driven by an unprecedented loss of household wealth. Although the fiscal stimulus package that US President Barack Obama recently signed will give a temporary boost to activity sometime this summer, the common forecast that a sustained recovery will begin in the second half of the year will almost certainly prove to be overly optimistic

This time, however, the fall in share prices and in home values has destroyed more than US$12 trillion of household wealth in the US, an amount equal to more than 75 percent of GDP. Previous reactions to declines in household wealth indicate that such a fall will cut consumer spending by about US$500 billion every year until the wealth is restored. While a higher household saving rate will help to rebuild wealth, it would take more than a decade of relatively high saving rates to restore what was lost.

What gets really scary is that Felstein has a hard time figuring out what to do (other than more stimulus in the near term). That's because he can easily foresee a lot of longer-term bad scenarios, the policy responses to which are unclear:

The stimulus package would thus fill less than half of the hole in GDP caused by the decline in household wealth and housing construction, with the remaining demand shortfall of US$450 billion in each of the next two years causing serious second-round effects. As demand falls, businesses will reduce production, leading to lower employment and incomes, which in turn will lead to further cuts in consumer spending.
To be sure, an improvement in the currently dysfunctional financial system will allow banks and other financial institutions to start lending to borrowers who want to spend but cannot get credit today. This will help, but it is unlikely to be enough to achieve positive GDP growth.

A second fiscal stimulus package is therefore likely. However, it will need to be much better targeted at increasing demand in order to avoid adding more to the national debt than the rise in domestic spending. Similarly, the tax changes in such a stimulus package should provide incentives to increase spending by households and businesses.

Although long-term government interest rates are now very low, they are beginning to rise in response to the outlook for a sharply rising national debt. The national debt held by US and foreign investors totaled about 40 percent of GDP at the end of last year. It is likely to rise to more than 60 percent of GDP by the end of next year, with the debt-to-GDP ratio continuing to increase. The resulting increase in real long-term interest rates will reduce all forms of interest-sensitive spending, adding further to the economy’s weakness.

So it is not clear what will occur to reverse the decline in GDP and end the economic downturn. Will a sharp US dollar depreciation cause exports to rise and imports to fall? Will a rapid rise in the inflation rate reduce the real value of government, household and commercial debt, leading to lower saving and more spending? Or will something else come along to turn the economy around.

Only time will tell.

Oy Vey. The Great Recession surely is WTYTII