With Unemployment Soaring, Will the U.S. Require a Second Stimulus?

By Jason Simpkins
Managing Editor
Money Morning

With unemployment soaring, perhaps to more than 10% by yearend, anxiety is growing in Washington over the effectiveness of the $787 billion stimulus bill passed in February.

Indeed, some of U.S. President Barack Obama's advisors have already acknowledged that the administration underestimated the rapid rise in unemployment and that a second stimulus may be needed.

Laura Tyson, former chair of the U.S. President's Council of Economic Advisers during the Clinton Administration and current advisor to President Obama, said Monday that the $787 billion stimulus passed in February was "a bit too small."

"The economy is worse than we forecast on which the stimulus program was based," Tyson said during a speech at the Nomura Asia Equity Forum in Singapore. "We probably have already 2.5 million more job losses than anticipated."

The unemployment rate rose to 9.5% in June, its highest level since 1983, and is expected to climb above 10% by the end of 2009. When the first stimulus bill was passed earlier this year, President Obama's top advisors said the package would keep the unemployment rate from rising above 8%.

"The economy has lost 760,000 jobs this year -- and some forecasters expect the unemployment rate to exceed 8 percent by the end of next year," the White House said in an outline of its economic agenda. "Addressing the financial crisis will help prevent the most severe loss of jobs from the crisis. But taking direct steps to create jobs will also strengthen the economy and help with the financial crisis. Barack Obama and Joe Biden's overall economic agenda is pro-jobs, including their plans to eliminate America's dependence on foreign oil and bring down healthcare costs."

Some 467,000 jobs were lost in June alone, and about 6.5 million jobs have been lost since the recession began in December 2007, according to the Labor Department.

A key problem with the stimulus plan is that a large portion of the money hasn't been distributed quickly enough. The Congressional Budget Office estimates that only 11% of the $308 billion stimulus funds allocated to discretionary programs will be spent in the current fiscal year, and only half by the end of fiscal 2010.

"The money is just really starting to come out in more significant amounts now," said Tyson. "The stimulus is performing close to expectations but not in timing."

President Obama has also acknowledged that funds haven't circulated as quickly as his administration hoped but still defended the stimulus' slow start.

"You just can't push [funding] out that quickly, partly, not just because the federal government has to process applications but also because states and local governments have to gear up to get these projects going," President Obama said in an interview with Fox News. "There are a whole bunch of critics out there who said we shouldn't have any stimulus at all. And in fact, some of the same folks who are now saying, 'Where are the jobs?' don't really have a recipe other than doing nothing for the economic circumstances that we're in."

In a demonstration of how the mounting job losses are becoming a political powder keg for the Obama administration, U.S. Rep. Tom Price, R-GA, head of the GOP's Republican Study Committee, recently called President's economic policy into question.

"After five months of the so-called stimulus, Americans are left with just one question: Where are the jobs?" he said.

Meanwhile, House Minority Leader John Boehner, R-OH, mocked the president with a video of a bloodhound named Ellie Mae supposedly sniffing for jobs.

"She hasn't found any stimulus jobs yet," he taunted. "Neither have the American people."

Of course, the implementation of another stimulus package bears political pitfalls of its own. To begin with, if the White House intends to argue that the existing stimulus plan simply needs more time to take effect, it cannot simultaneously argue that additional stimulus is needed. More importantly, though, concerns about the United States' spiraling budget deficit is on the rise both at home and abroad.

A recent report by Rasmussen Reports showed only 27% of voters support a "another economic stimulus package this year," while opposition has risen to 60%, Politico.com reported.

Similarly, in a survey presented to the Aspen Institute last week, pollster Doug Schoen found that, by 56% of the public doesn't believe the government "should spend money to stimulate the national economy, even if it means increasing the budget deficit."

The Congressional Budget Office recently forecast the U.S. budget deficit for fiscal 2009 to reach $1.825-trillion.

Following her remarks at the Nomura Asia Equity Forum, Laura Tyson told reporters that the 2009 budget shortfall is "likely to be worse" than the equivalent of 12% of gross domestic product the administration forecast, as well as the 8%-9% predicted for 2010.

With such considerations, it's hard to imagine another large stimulus passing through the halls of Congress, even with a clear Democratic majority.

"We've barely swallowed the first medicine," U.S. Rep. Jim Cooper, D-TN, told the Wall Street Journal. "It's too early for a double dose."

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