Heavy job losses make stimulus a must

By Rawle Lucas
Special Allocation of Funds
The news out of Washington on Wednesday was that the Obama administration would get nearly $800 billion to spend on energizing a lackluster US economy. The divided US Congress, it appears, is willing to give the new President most of the money that he requested for his economic recovery plan. In a press conference on the night of Monday February 9, 2009, President Obama reiterated that the money to be appropriated by Congress under the current economic circumstances would be used to save or create over 3 million jobs and to help bolster confidence in the financial and consumer markets. The push by the Obama administration for the special allocation of funds, made up of a combination of tax cuts and public spending, was prompted by the staggering job losses incurred by the US economy over the last year. In a recent release of the job numbers, the Bureau of Labor Statistics (BLS) reported that the economy had lost 2.6 million jobs in 2008 causing the unemployment rate to rise to 7.6 percent. When January 2009 numbers are added, adjusted for time out of work, the job loss stood at 3.7 million. Some estimates include persons who have given up looking for work and put the jobless rate as high as 13 percent. No matter from which perspective the numbers are considered, the unemployment situation is bad and is expected to get worse before it gets better as demand for goods and services across almost all industries continue to decline. The speed with which the fortunes of US consumers in all 50 states changed is alarming as once dominant and prominent sectors of the US economy falter and stumble. Almost half of the job losses occurred within the last three months of 2008 forcing the Obama administration to confront this crisis head-on and to request Congress to give it money urgently to jolt the economy to life as a matter of priority. Job Creation The focus on job creation is driven by the realization that nearly 70 percent of economic output in the US economy result from consumer spending and if spending were to decline precipitously things could get worse. Consumers use the money that they earn from employment and the money borrowed from banks and other lenders to buy food, clothes, household items, cars and other goods, and to invest in housing and education. These expenditures play a big part in helping the economy to expand and without jobs existing levels of expenditure cannot be sustained. The 401(k) plan is a popular vehicle that is used by workers for retirement savings and is the most dominant way of getting consumers invested in the stock market. Those savings form part of the money available for spending by businesses. Not so long ago, the US economy was booming and was posting over 3 or 4 percent growth annually between 2004 and 2007. Business investments were plentiful and companies were hiring continuously as they expanded operations to take advantage of the profligate consumer spending. People who wanted to could find additional jobs to either supplement their income or get in on the good times. Conversations among friends and family were about hot house prices, new housing developments, vacation travel, the latest electronic gadgets and the seemingly endless increases in stock value. Only the lazy and foolish were thought to be missing out on a good thing and the opportunity to participate in the easiest wealth creation and income generation events of modern times. All of that was happening barely over a year ago. Deep Trouble In a stunning reversal of fortunes, the US economy staggered like an over indulgent partygoer to the end of 2008. It was not until September 2008 that most people realized that the US economy was in deep trouble and that dark clouds had gathered ominously over their jobs and retirement savings to obscure the future ahead. A very tight labor market started to loosen slowly at first and by August had given up only about 1 million jobs, even though Bear Stearns had disappeared as an independent investment bank and the financial system had begun to display stresses. Since September 2008, when the investment firm Lehman Brothers fell on the sword and it became clear that the financial markets had lost their way, job losses began to accelerate. Consumers started cutting back on their spending as they lost their jobs and their income contributing to a downward spiral in consumer spending and job losses. Banks and credit card companies began slashing credit limits of borrowers making it harder on consumers. Consumer spending fell over 2 percent in the fourth quarter of 2008 as disposable incomes fell by a similar amount in the same period. During the same three-month period, the US economy lost about 1.6 million jobs and 3.8 percent of its output. Helpless The situation was compounded by a stock market that was in free fall with businesses and individuals combined losing over $6 trillion in income. The credit markets were frozen and no amount of prying and probing by the Federal Reserve was getting that market unglued. Even the most ardent of free market advocates were alarmed to see that the much vaunted and adored Federal Reserve appeared helpless as its major monetary tool, interest rate adjustments, proved incapable of loosening up the credit market. By December 2008, the Federal Reserve had reduced the federal funds rate, the rate that banks charge each other for overnight loans, to 0.25 percent. Also, the Federal Reserve had already lent over $2 trillion to financial institutions, and along with the Federal Deposit Insurance Corporation (FDIC), had guaranteed an additional $6 trillion to various financial institutions. Much of the financial and monetary activity was precipitated by the collapse of the US housing market and the rapid rise in home foreclosures. Process of Elimination Despite the sizable investment and commitment, nothing that the Federal Reserve has done appears sufficient to reassure investors and to save the jobs of consumers. With businesses and consumers either holding back or becoming incapable of spending, the US government is forced to step in. Through this process of elimination, the Obama administration has the burden of creating the conditions that could facilitate the increase in domestic demand. The feeling that the US government must undertake this massive spending cuts across all ideological spectra despite the unwillingness of most Republican lawmakers to support the economic recovery plan proposed by President Obama.