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It's Still the Economy

posted by Christian E. Weller

You can't be serious! Federal Reserve chairman Ben Bernanke says what anybody with a passing interest in economics already knows -- that it will take time for the economy to turn the corner -- and the market tanks. The market seemed punch drunk on the massive stabilization packages -- $2.5 trillion and counting -- that the industrialized world was showering on failing financial institutions. A mere 36 hours later, though, Wall Street realized that it cannot regain its strength without a healthy Main Street. It was a weakening labor market, following a bursting housing bubble, that contributed to the massive foreclosure wave and to the crisis. No amount of tinkering with the stabilization package will detract from the fact that people and businesses need more income, not loans, to pay their bills and to invest in their future. It should be clear by now to everybody, even extremely myopic financial markets, that the next policy step lies in helping U.S. businesses and families back on their feet through a well designed second economic stimulus.

There is an important symmetry to contemplate. It took seven years of accelerated debt growth to build up a record mountain of household debt, largely because of slow growing and even declining family incomes. It will also take many years to reduce this debt burden for families. This can either happen through a massive wave of foreclosures that last several more years, through much slower consumption growth, or through faster income growth. The choice is a no-brainer, but faster income growth does not grow on trees as the past few years have shown, when the U.S. experienced the slowest job growth since the Great Depression, flat wage growth, and declining health insurance and pension benefits.

The need for economic policymakers to design policies to jump start the rest of the economy, not just lending between banks, is abundantly clear. The unemployment rate has jumped by 1.4 percentage points from September 2007 to September 2008 to its highest level since September 2003, industrial capacity utilization has dropped by 2.5 percentage points from August 2007 to August 2008 to its lowest level since September 2004, and durable goods orders declined by 5.2% from August 2007 to August 2008 to its lowest level since January 2006. That leaves only exports to hold up economic growth -- a rather flimsy proposition for a $14 trillion economy, especially when global growth is expected to slow sharply as a result of the global financial crisis.

An economic stimulus to respond to this crisis will have to be large, but also timely, temporary, and targeted. Many measures will meet these criteria -- improved unemployment insurance, food stamps, and aid to struggling states among them -- and many measures will not -- permanent capital gains and dividend tax cuts, extension of existing tax cuts after 2009, among the most often cited. Policymakers  of both parties have already made noise that they are willing to engage in a constructive discussion over a second economic stimulus. If it meets the four criteria laid out above, it might just do the trick and we can finally stop being glued to our TV screens fretting over Wall Street's gyrations and what they may mean for our jobs, our savings, and our retirement.


I think Wall St. people truly believe that they can create real wealth by inventing new "financial instruments" and that actually making and selling stuff is obsolete. I blame the weakness of organized labor for some of that thinking. People have forgotten why every economy needs a manufacturing base.

That was a great post. I will have to bookmark this site so I can read more later.

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