By Dean Baker
USA Today, July 14, 2009
See article on original website
The latest job numbers are not good. It is clear that the recession is going to be much deeper than most economists had expected. While Republicans are eager to proclaim President Obama's stimulus program a failure, unless we want double-digit unemployment for years to come, we will need to press ahead with a much bigger dose.
The basic arithmetic is simple. The collapse of the housing bubble cut annual demand in the economy by $1.3 trillion due to reduced construction, home sales and consumption. The stimulus package approved by Congress in February provided a boost that will average about $300 billion a year in calendar years 2009 and 2010. Is anyone surprised that the economy isn't racing forward?
This is not just an arithmetic lesson. Nearly 15 million people are unemployed, with almost 9 million more able to find only part-time work. Wages are being cut for those who still have jobs.
The weak labor market feeds back on the collapsing housing market to make the foreclosure situation even worse.
Stimulus works. We used the stimulus of World War II to get out of the Great Depression. President Reagan used the stimulus of large tax cuts to help pull the economy out of the 1981-82 recession. And, President Obama's stimulus has worked to keep many teachers, firefighters and other public sector workers employed. The tax cuts and extended unemployment benefits also put more money in our pockets and helped sustain consumption.
Nonetheless, $300 billion a year in stimulus will not offset a $1.3 trillion drop in demand, just as we can't lose 50 pounds by taking a walk around the block. We need more aid to state and local governments and other forms of stimulus.
The anti-stimulus crowd is trying to scare the public by touting big deficit numbers and whining about the burden on our children. This is a complete misrepresentation of economics. After World War II, our government debt was 120% of gross domestic product, $18 trillion in today's economy. This huge "burden" presaged three decades of the strongest growth in U.S. history.
Unemployed parents being evicted from their home is a burden on our children. Running deficits to create jobs is not.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy. He also has a blog on the American Prospect, "Beat the Press," where he discusses the media's coverage of economic issues.