Why the Stimulus Alone Won't Work

[Crewleader]

January 14, 2009

The Big Contraction
Why the Stimulus Alone Won't Work

By MIKE WHITNEY

There's no guarantee that Obama's stimulus package will work, but there is growing consensus that something has to be done...and fast! The economy is contracting faster than anytime since the 1930s. Unemployment is soaring, consumer spending is plummeting, and the country appears to slipping towards another Great Depression. The Federal Reserve's near-zero interest rates and massive liquidity injections haven't helped at all. That's why the focus has shifted from monetary policy to Keynesian fiscal stimulus. When businesses and consumers cut back on spending, the government has to make up for the loss in aggregate demand. That's what Obama's $775 American Recovery and Reinvestment Act is really all about. It won't fix the economy; it's just a way to minimize the shock of a hard landing. Economists Lawrence Mishel and John Irons make the case for stimulus in their recent article "How Bad Can It Get"

"Almost 2 million jobs were lost from December 2007, when the recession began, through last November, and economists are forecasting that at least another 500,000 more will have disappeared in December 2008. If so, this will be the steepest rate of job losses in the first year of any post-war recession. Without swift intervention, similar or higher monthly losses are expected to mount well into next year, and continuing weaknesses in the labor market are likely to persist for another two to three years. More than 5.5 million jobs are likely to be lost during this recession unless a major job-creating stimulus plan is enacted....

Obama is calling on Congress to pass a stimulus package that will cost $700 to $800 billion or more over two years. That amount could create 2.5 million jobs in the first year and a total of 5 million jobs in the first two years. If so, it would lower the unemployment rate by 3.2 percentage points, leading to a peak unemployment rate of around 7%. While unemployment will still be uncomfortably high, the stimulus package as envisioned by Obama would prevent double digit unemployment, give the economy a solid footing for future growth, and begin to meet long-term needs." (Lawrence Mishel and John Irons "How Bad Can It Get?" Economic Policy Institute)

Still, many people think that stimulus is a waste of money that will send deficits into the stratosphere. Libertarians, for example, argue that the cure for a credit bubble shouldn't be more credit. They want to see debts written down and balance sheets back in the black. Their prescription is similar to Treasury Secretary Andrew Mellon's in the 1930s who said : “Liquidate labor, liquidate stocks, liquidate the farmers – purge the rottenness from the system.” Mellon's rant may sound consistent with free market dogma, but following his advice would lead straight to catastrophe. The markets would crash and there would be riots in the streets. It's better to err on the side of caution and give the economy a badly needed boost of stimulus.

http://www.counterpunch.org/whitney01142009.html

[Warpy]

1. Mellon thought he had enough to ride it out

with a small hired army at his gates to keep the rabble at bay. Then he felt he'd be able to scoop up whatever was left after the disaster once the bodies were cleared away.

Sadly, the country is full of people who think that way.

Let's just hope they're not a majority in the incoming administration.