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Three Reasons We Need an Economic Wake Up Call

Several events of the past week should be a wake-up call to the Obama administration. Bottom line: the medicine isn't working.

The June Unemployment Numbers. The green-shoots school was expecting that the rising rate of unemployment would continue to slow, as it did in May. But instead the number spiked back up. A total of 467,000 jobs were lost. The unemployment rate rose to 9.5 percent, and OECD economists project that U.S. unemployment will still be in double digits as late as 2011.

The 9.5 percent official figure -- the worst since 1983 -- conceals even worse news. The number of long-term unemployed is at record levels. This is the only recession since the Great Depression in which the job loss wiped out all the job growth of the previous recovery. As our friends at the Economic Policy Institute report.

We now have fewer jobs than in May 2000 when the recovery began, though the economy now has 12.5 million more workers. And there is less than one job opening for every five people seeking jobs. Hidden unemployment is also setting records - people with part time work who want full time work, as well as people whose hours have been involuntarily cut.

Until strong economic growth returns, companies will not resume hiring. And as long as layoffs continue, that means fewer customers and the downward spiral continues.

As EPI observes, President Obama's economic stimulus simply wasn't designed for a recession this deep. And I would add that stimulus funds are getting out too slowly. Compounding the problem is inadequate government policy on three crucial fronts:

State Fiscal Collapse. The states, unlike the Federal government, are not permitted to run current budget deficits. So in a deep recession, when tax receipts fall, their only choice is to cut program spending or raise taxes. Both are of course perverse in a recession, since they only further undercut consumer purchasing power.

As the new fiscal year begins, nearly every state is raising taxes or fees, or laying off workers and reducing programs. At least 48 states face red ink. Some of the state budget crisis is self-inflicted, as in the dance to the death between California Governor Arnold Schwarzenegger and Democrats in the legislature, compounded by a two-thirds supermajority requirement for any kind of tax reform. But most states are just plain hurting.

Massachusetts, with one of the most liberal governors, Deval Patrick, just hiked its sales taxes by 25 percent. A total of 24 other states have enacted tax increases and another 12 all have tax hikes on their agendas. Federal aid under the stimulus covers just 30 to 40 percent of the state shortfall, which is expected to total $350 billion by 2011. And 39 states have cut program outlays on the needy, according to the Center on Budget and Policy Priorities.

The New York Times reports that several states are cutting out summer school. This is just plain nuts.

Some aspects of the recovery program, such as rebuilding a banking system that serves the real economy, are truly challenging. But this part is really simple. Washington is the one part of the government with the capacity to run deficits. So Congress should pass an emergency revenue-sharing law, giving the states another $150 billion immediately. The only condition is what policy wonks call maintenance-of-effort. To receive the money, the states must maintain program outlay levels and taxing systems that were in effect on a date certain, say July 1, 2008.

Most of the stimulus money is still unspent because of various bureaucratic hurdles at all levels of government. This approach would break through all that. Washington would simply cut fifty checks.

The Foreclosure Catastrophe.
When the Obama administration took office, they basically continued the Bush administration's program of voluntary loan modifications. They sweetened the deal by paying banks to reduce the principal or interest, spending $75 billion for banks (money that might have gone directly to homeowners.)

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