Subscribe to Money Morning get daily headlines subscribe now! Money Morning Private Briefing today's private briefing Access Your Profit Alerts

Misguided Policy Paving the Way for a Double-Dip Recession

With unemployment still hovering near 10%, policymakers should be doing all they can to combat joblessness and reinvigorate a recovery that is showing signs of weakness.

But they're not.

Instead, they're reeling in stimulus measures and enabling a double-dip recession, simply for the sake of fiscal austerity.

The Labor Department is expected to report today (Friday) that the unemployment rate held steady at 9.7% in June, or worse, edged up to 9.8%. That would follow yesterday's (Thursday's) disappointing report that showed new claims for jobless benefits jumped by 13,000 to a seasonally adjusted 472,000. The four-week moving average, which smoothes out volatility, rose by 3,250 to 466,500 – its highest level since March.

That's not good for an economy that is backsliding. The U.S. economy grew at a 2.7% annual rate in the first quarter, less than previously calculated. That's less than half the 5.6% growth in gross domestic product (GDP) the U.S. market experienced in the fourth quarter of 2009.

A big reason for that revision was consumer spending, which was revised down to 3% growth from the previous 3.5% estimate. And with the economy struggling to add jobs, American consumers are showing no sign of mounting a comeback. On the contrary, they are retreating.

Retail sales plunged 1.2% in May – the biggest decline in eight months, according to the U.S. Commerce Department. And the Conference Board said Tuesday that its consumer confidence index plunged to 52.9 in June. That's the lowest level since March, and steeply lower than the downwardly revised 62.7 it posted in May.

But rather than lending a hand to the American consumer, Congress is kicking the legs out from under the staggering economy by refusing to extend unemployment benefits and keeping billions from cash-strapped states – thereby enabling a double-dip recession.

With Democrats unable to secure the 60 votes needed to end a Republican filibuster, the Senate on Wednesday failed again to restore jobless benefits for people out of work more than six months. And with Congress scheduled for a weeklong vacation, those benefits have no chance of being appropriated until mid-July.

Unemployment insurance typically lasts 26 weeks, but since 2008, Congress has periodically extended benefits by a period of 73 weeks. But since no compromise has been reached, more than 1.3 million unemployed Americans will have to make due without that income.

A total of 2 million Americans will lose their unemployment checks by July 12. And that number will continue to snowball in July as more of the 4.9 million people who continue to receive the emergency aid see their unemployment payments expire.

"People whose benefits are going to run out will simply not have the spending power necessary to help drive growth," Dan Greenhaus, chief economic strategist at Miller Tabak, told The Associated Press.

Republicans who opposed the legislation did so citing concerns about the deficit. The Congressional Budget Office CBO report earlier this week said the government's official debt to the public is in the process of surging from about 40% of gross domestic product (GDP) when the recession began to 62% by the end of this year.

"No one's disputing the value of these very important programs," said Sen. Scott Brown, R-MA. "But we also have to have tough choices and we also need to live within our means."

Still, economists caution concerns about the deficit may be premature, considering the fragility of the recovery. 

Nobel prize-winning economist Paul Krugman said on Sunday that we are in "the early stages of a third depression," and misguided policy is a big reason why.

"Around the world – most recently at last weekend's deeply discouraging G-20 meeting – governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending," Krugman said in the New York Times. "The Obama administration understands the dangers of premature fiscal austerity – but because Republicans and conservative Democrats in Congress won't authorize additional aid to state governments, that austerity is coming anyway, in the form of budget cuts at the state and local levels."

U.S. President Barack Obama last month urged lawmakers to spend about $50 million to help states pay for Medicaid programs and avoid teacher layoffs, but that effort, too, faltered in the face of a Republican filibuster.

Meanwhile, layoffs in the public sector continue to mount as state governments struggle to close persistent budget gaps. New York city, for example, approved a budget on Tuesday that cuts about $1 billion in spending at the expense of 5,300 jobs.

Democrats jettisoned numerous other provisions from the jobless bill – including $16 billion for cash-strapped state governments, $1 billion for summer jobs and $32 billion in special-interest tax breaks that expired earlier this year – in the hopes of winning Republican support. But now it appears those sacrifices were made in vain.

The lack of progress in Washington has not gone unnoticed by Wall Street. The Dow Jones Industrial Average has plunged more than 1,400 points – about 12% – since late April and the Standard & Poor's 500 Index is down some 15%.

"It's almost as if the financial markets understand what policy makers seemingly don't: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating," said Krugman.

According to Krugman, the decision to abandon the loose fiscal and monetary policies that pulled the world out of its nauseating plunge in 2008 and 2009 is nothing short of misguided at a time when the recovery has yet to prove itself sustainable.

"In the face of this grim picture, you might have expected policy makers to realize that they haven't yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy," he said. "And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again."

News & Related Story Links:

Join the conversation. Click here to jump to comments…

  1. Hivno | July 2, 2010

    And exactly where is the money going to come from ? Maybe that's what policymakers are realizing, you can't just continue printing. More QE =inflation.
    Who suffers then ? The same victims as in this article.
    Is this artcile written with serious intent ?

  2. fallingman | July 2, 2010

    Keynesian drivel.

    It's a case of pay me now or pay me later…in spades. Time to take our medicine.

  3. Scott Lowden | July 2, 2010

    The Keynes/Krugman formula is not about economic policy. Does anyone with common sense believe it is helpful to extend unemployment benefits so the unemployed will spend money at the local Starbucks? This is all about a socialist power grab. After they run up the public debt to pay for the unemployment benefit increase, they tell us that the deficit we are running is unsustainable and that the responsible thing to do is raise taxes to pay for it. Result: Government consumes more of our wealth. Watch: VAT to follow this fall's elections. Those who oppose it are pronounced weak on the deficit. The media will help promote it.

  4. Ronald g oconnor | July 2, 2010

    Krugman will never understand that the brains and know how in the private sector is what will pull the economy out of the dump the fastest. We don't need more inefficient gov spending, which favors some businesses and industries at the expense of others ( ex. supporting solar tech ). We need tax policy that will keep the money in the right hands. It's always worked best and always will, because it's much more efficient.

  5. Mike Dunn | July 2, 2010

    Mr. Simpkins: Don't blame the Republicans for this economic mess. The Democrats have full control of both the Executive branch and both houses of Congress and can pass any bills they wish. If they want to they can extend unemployment insurance payments as long a period of time that they want. Personally, I studied quite a few economics classes at a big name university in the sixities and have felt for years all this deficit spending and debt would finally lead to the problems we see today. We can not continue to pile on more and more debt. We are BROKE as a nation. We need to face up to it and delevarage this huge national and personal debt-Mike

  6. Jay Peroni | July 3, 2010

    Is this serious or a joke? The republicans and conservative democrats have it correct: spend less than you make and stop the insanity!

  7. Chester Campbell | July 3, 2010

    As I understand it, the Republicans propose to use unspent funds already approved for the stimulus program but Democrats decline.

  8. USintrouble | July 3, 2010

    I guess all we have to do is spend, spend and spend and all of our problems will go away. Let's bail out the states. I know, let's just give everyone life time unemployment benefits if that is what it takes to help the economy. I am sure China will have no problem footing the bill forever.

  9. Dan S | July 3, 2010

    Necessity is the mother of all invention. There are a lot of very smart people accepting unemployment waiting to get their old career back. They have great ideas and would likely have pursued them if there were an absolute and finite time-line for unemployment benefits.
    Who knows they may have even been able to stop the BP leak!
    I just can't see how we will ever spend our way out of this.

  10. Richard Lefcourt | July 4, 2010

    While I agree that socialist spending has led us to a point where interest on the national debt is eating too much spendable cash, I think Krugman among others misses the fundamental problem we've been suffering with for many years: negative balance of trade. As long as America keeps bleeding half a trillion dollars or more annually to pay for imported goods, foreign oil, and remittances by America-based workers to friends and families abroad, no amount of stimulus spending will provide any long-term improvement. A more permanent answer to our problems will be the restoration of American manufacturing and a switch to domestic natural gas and nuclear energy production.

  11. Lance Lyons | July 6, 2010

    I am simply amazed that with all the history available to us that proves to me that Keynes economic theorem of spending and taxing does not work, the Democrats continue to believe that it will work if only they spend more for the sake of economic justice. The stimulus outcome is always small and always puts future generations further in debt.

    The Democrats and current administration continue to defy our trust by manufacturing crisis after crisis, then responding with legislation that punishes the related private sector with added regulation and government oversight. As the government grows, it drowns out the available jobs to the private sector and increases the cost of doing business. The private sector always responds by laying off workers, further increasing the American people's and state's indebtness to the federal government.

    Our taxpayer dollars need to be used responsibly. The government continues to be irresponsible by redistributing more money than it receives. Expanding unemployment and other entitlement programs only accomplish the enslavement of the people to the governement. The only proven way to lift the economy out of a recession is to incentivize the private sector with clear and simple tax policies. With a consistent and low corporate tax burden, companies will be incentivized to expand their business and put people back to work ending the cycle of high unemployment; thus, expanding the flow of money increasing spending and revenue to the federal government. This is the Keep it simple, stupid (KISS) theory!!!

  12. Doug Stevens | July 7, 2010

    Please, for all our sake, we need term Limits now!!! Get these moron

    politicians out, or at the very least limit their ability to do more damage!

  13. John S. | July 8, 2010

    I thought these guys were saying that deficit spending, artificially low interest rates, and printing money caused the bubble that led to our current mess. And now Jason Simpkins says we are in trouble because we don't have enough of the same??

    I'm with the Austrian Economists that say End the Fed, stop the government meddling in the economy, and let the market work. (They also say the Great Depression would have been over much more quickly and promptly forgotten about if the government had done nothing, just like the crash a decade or two before.)

    The business cycle is supposed to have ups and downs, and both are important. We can't have just "ups" and the longer we put off the correction the worse it will be.

    The National Inflation Association has some interesting videos on all of this.


  1. […] » Advanced Search RSS Recent Favorites July 6, 2010We Want to Hear From You: Are Retailers' Stimulus Measures Persuading You to Spend? July 10, 2010Ignore the "Experts": 7 Reasons Not to Invest in Japan July 14, 2010The BP Relief Wells … And the Two Nightmare Scenarios to Fear July 6, 2010History Shows Stock Market Plunge May Just Be Par for the Course July 2, 2010Misguided Policy Paving the Way for a Double-Dip Recession […]

Leave a Reply

Your email address will not be published. Required fields are marked *

Some HTML is OK