Slipping a Slurpee While the Economy is in a Ditch

No need to help me out the ditch, doing just fine on my own - by Michael PereckasThe U.S. economic recovery seems likely to stall yet again as it attempts to finally get out of the ditch.  In an economy at full employment 18,000 jobs added would be a bad jobs report (over 100,000 new jobs a month are necessary just to keep up with population growth), with 9%+ unemployment 18,000 new jobs is a disaster. 

Our best hope for a new recovery is in just how bad things are.  The U.S. housing market has been terrible for so long that very little new construction has taken place, and we don't have enough housing.  Eventually people will get tired of living with their parents and construction will have to pick up.  Right?

Yet, there is nothing mysterious about why household creation has been so slow.  Labor force participation and employment-population-ratio have both dropped sharply, so basically a bunch of people aren't working or even looking for a job.  Without an income you can't move out of your parents/sister/aunt/best friend's house.  On top of that, the housing market is a mess (huge amount of unsold inventory, lots of new houses coming onto the market through foreclosure, and many more properties that will eventually enter foreclosure) and credit doesn't seem likely to flow into new construction any time soon.  I think that once (if?) the recovery gets going, new construction might provide a bounce back, but I doubt construction will come before job growth.

Meanwhile, the Fed is basically just washing its hands of doing anything (What? We prevented the last dip, you mean we have to keep promoting economic recovery?) and the politicians are fighting over how much to cut off the deficit in the next 10 years (or we'll really wreck the global economy).  It's just a bit rich to see this now or never approach to debt from the same people who spent $860 billion extending the Bush tax cuts in December.  If Mark Zandi is right, this budget deal will cost the U.S. 700,000 jobs.  I wonder if that is included in the calculation for the budget impact of this deal?

I know the liberal party line is to defend the original stimulus, but let's face the facts: it was poorly designed, poorly sold, and poorly executed.  It distracted from what was important immediately (the necessity of monetary expansion) and created a massive blowback that derailed the president's policy agenda (pour out a little liquor for cap and trade).  It clearly did not get the job done - note, things would have been worse without it, but that's not the same thing as actually getting us to a sustainable recovery - and made it impossible to follow it up with anything else once it became apparent that it wasn't enough. 

Imagine that instead of rushing the stimulus through, the new Obama administration had focused on monetary policy while it carefully designed a economic package of state and local stabilization, unemployment and food stamp expansion, and comprehensive infrastructure strategy.  If things had actually had gotten really bad (CBO estimates unemployment would have been 11%+ without the stimulus) then the huge stimulus Krugman says was necessary would have been politically possible.  If things hadn't gotten so bad (I'm imagining massive monetary stimulus, rather than the anemic stuff we got), then the package could have been an opportunity for good policy making, rather than a hodge-podge of whatever was lying around.

Instead, US infrastructure still is in bad shape, we've lost 500,000 public sector jobs since Obama took office, and the very concept of stimulus is discredited. 

The fact is whatever you think of stimulus and whether or not you believe in Keynesian economics where there is a multiplier on fiscal expansion (meaning that you get more than a dollar of new GDP for a dollar of spending) during a recession this much isn't in dispute: borrowing moves consumption from the future into the present.  If you think the U.S. will be better off in the future than it is now (and good god, I hope so), then it makes sense to borrow to increase employment now.  Interest rates are low, there is lots of work to do, so let's do it. 

Or we could just wait and see.  It has only been three years, surely any minute now the economy is gonna bounce back all by itself...