In the light of evidence like this on how fiscal stimulus may actually have served to produce unemployment:
Economic growth is supposed to create jobs. However, the U.S. economy shed twice as many jobs (1,332,000) in the third quarter of 2009, when GDP grew at a robust 3.5% annual rate, than it did in the second quarter (691,000), when the economy contracted at a 0.7% rate.
How can this be? To paraphrase the 1992 Clinton campaign, “It’s the bonds, stupid!”
The massive sales of U.S. Treasury bonds to finance “stimulus”, bailouts, and other government spending is sucking capital out of the private sector and destroying jobs. Once again, the October 6th BLS report tells the tale.
The BLS “household survey” showed job losses of 589,000, while their “establishment survey” showed a reduction of payrolls of only 190,000. This shows that most of the damage is being done in small business, “under the radar screen” of the BLS.
Small businesses-especially new small businesses-account for essentially all net job growth. However, business creation and expansion requires capital, and more and more of the nation’s capital is being commandeered by the U.S. Treasury in the name of “stimulus”.
or this predicting that the unemployment rate may well rise over 12%:
10. But when we do start to see the economic clouds part in a more decisive fashion, what are employers likely to do first? Well, naturally they will begin to boost the workweek and just getting back to pre-recession levels would be the same as hiring more than two million people. Then there are the record number of people who got furloughed into part-time work and again, they total over nine million, and these folks are not counted as unemployed even if they are working considerably fewer days than they were before the credit crunch began.
11. So the business sector has a vast pool of resources to draw from before they start tapping into the ranks of the unemployed or the typical 100,000-125,000 new entrants into the labour force when the economy turns the corner. Hence the unemployment rate is going to very likely be making new highs long after the recession is over — perhaps even years.
both of which would appear to confirm the studies of scholars whose work has found that fiscal stimulus via spending has a multiplier below 1, i.e. it actually reduces economic activity, I’d have a lot more confidence in the idea of more stimulus packages if their proponents would actually produce some evidence from the real world of a Keynesian multiplier greater than one rather than just telling us that their models say it is.
If the government had to produce evidence of the efficacy of their programs, would any of them survive?
I believe I made a similar argument months ago at OTB, that government borrowing has the potential to crowd out private borrowing, and that is one reason why the multiplier might not be as large as some argue or even less than 1.
I think the fact that bonds were issued is only part of the story. There’s a reason investors are willing to put their money into those bonds for essentially no return rather than somewhere in the private sector.
Sigh, don’t you guys ever look at unemployment charts? How long after a recession do you expect employment to begin to rise? Reagan cut taxes. How long did it take for unemployment to peak? Did he do something silly like increase taxes? Did it stop the recovery?
Steve
I’m somewhat skeptical of the first article for the same reason Andy is – these are US Treasury Bonds were talking about. Nobody is forcing investors to buy them, and if they weren’t available investors would just pick some other ultra-safe, ultra-low-return place to dump the money. It’s not like they’re saying, “Well, I was going to use this money for venture capital, but I think I’d rather buy some US Treasury Bonds,” to the best of my knowledge.
Yes, its called risk aversion. Right now investors and business owners don’t know what the future holds.
1. Obama is spending at amazing rates. Health care expansion, talk of another round of stimulus, and so on.
2. Global warming legislation could turn out to be expensive mandates similar to health care expansion legislation.
3. The wishy-washy nature of bailouts, talk of various regulatory reforms, etc.
The first one makes hiring more workers much more costly and uncertain. The second makes investing in plant and capitla much more expensive and uncertain. The third one leaves everyone wondering what is going to happen and will taxes go up.
Not only are there more people who are looking favorably on U.S. treasuries business are holding considerably more cash as well. Why? Cash is liquid and you can move it fast, and in case finacial regulation cuts you off from a line of credit you are at least partly covered.
Yes. At least 1 year would be my guess.
Well, there were two recessions in Reagan’s first term. The first actually started under Carter (January 1980) and ended in July 1980. The second started in July 1981 and ended in November 1982. The second had unemployment peaking in December 1982.
Now if you contrast it to the last two recessions you’ll see a different pattern. The recession that ended in March of 1991 didn’t see a peak in unemployment until June 1992. For the recession that ended in November 2001 we didn’t see unemployment peak until June 2003.
Of course the peaks in the last two recessions weren’t as high as they historically are (Just under 8% and just over 6% respectively). The peak in 1983 was 10.3%.
Now, the pessimistic scenario has the high unemployment like we say in 1983 and other earlier recessions and the long lag time till unemployment peaks like we’ve seen more recently. In which case I wouldn’t expect to see unemployment drop below 7.5% for at least 2 to 3 years, maybe longer.
Yes he did with the Tax Equity and Fiscal Responsibility Act in 1982. However, its effects went in mostly in 1983 when the economy was in a recovery phase. From a Keynesian/fiscal stimulus perspective this is exactly right. Increase taxes (and revenues) as the economy expands. Did it derail the recovery? No, but I don’t think we’ll see the robust type of recovery this time around that we did in 1982/1983 in the labor market.
There is nothing safer than U.S. treasuries. If you are worried about risk that is the place to put them, and given the rate at which the debt has grown there is nothing that provides the equivalent volume as well as safety.
It is like the Obama Administration is picking every bad strategy to promote a robust business environment. And like or not, that is a necessary condition for a robust recovery.
Bond buyers dont worry about inflation anymore? The ability to pay back debt?
Steve
Yes, they do, very much. And that is why if inflation starts to go up and it isn’t stamped out combined with the massive amounts of debt we’ve take on in the past year to year and half….well it would be damn ugly. This what prompted the somewhat famous comment from James Carville about wanting to come back as a bond market as they scare the pants of everyone, even the President of the United States.
This is why the debt run up has been problematic, it constrains the hands of the Fed. They have to be carefully in pursuing expansionary policy. Expand too much and we get inflation, uh-oh. But that is precisely what was needed in the early 1930’s and what is needed now. Back in the 1930’s I don’t think the debt to GDP ratio was like it is today, plus there wasn’t the long term imbalances in programs like Social Security and Medicare since they didn’t even exist.