Misguided Economic Policy Paving the Way for a Double-Dip Recession

By: Money_Morning

Jason Simpkins writes: With unemployment still hovering near 10%, policymakers should be doing all they can to combat joblessness and reinvigorate a recovery that is showing signs of weakness.

But they're not.

Instead, they're reeling in stimulus measures and enabling a double-dip recession, simply for the sake of fiscal austerity.

The Labor Department is expected to report today (Friday) that the unemployment rate held steady at 9.7% in June, or worse, edged up to 9.8%. That would follow yesterday's (Thursday's) disappointing report that showed new claims for jobless benefits jumped by 13,000 to a seasonally adjusted 472,000. The four-week moving average, which smoothes out volatility, rose by 3,250 to 466,500 - its highest level since March.

That's not good for an economy that is backsliding. The U.S. economy grew at a 2.7% annual rate in the first quarter, less than previously calculated. That's less than half the 5.6% growth in gross domestic product (GDP) the U.S. market experienced in the fourth quarter of 2009.

A big reason for that revision was consumer spending, which was revised down to 3% growth from the previous 3.5% estimate. And with the economy struggling to add jobs, American consumers are showing no sign of mounting a comeback. On the contrary, they are retreating.

Retail sales plunged 1.2% in May - the biggest decline in eight months, according to the U.S. Commerce Department. And the Conference Board said Tuesday that its consumer confidence index plunged to 52.9 in June. That's the lowest level since March, and steeply lower than the downwardly revised 62.7 it posted in May.

But rather than lending a hand to the American consumer, Congress is kicking the legs out from under the staggering economy by refusing to extend unemployment benefits and keeping billions from cash-strapped states - thereby enabling a double-dip recession.

With Democrats unable to secure the 60 votes needed to end a Republican filibuster, the Senate on Wednesday failed again to restore jobless benefits for people out of work more than six months. And with Congress scheduled for a weeklong vacation, those benefits have no chance of being appropriated until mid-July.

Unemployment insurance typically lasts 26 weeks, but since 2008, Congress has periodically extended benefits by a period of 73 weeks. But since no compromise has been reached, more than 1.3 million unemployed Americans will have to make due without that income.

A total of 2 million Americans will lose their unemployment checks by July 12. And that number will continue to snowball in July as more of the 4.9 million people who continue to receive the emergency aid see their unemployment payments expire.

"People whose benefits are going to run out will simply not have the spending power necessary to help drive growth," Dan Greenhaus, chief economic strategist at Miller Tabak, told The Associated Press.

Republicans who opposed the legislation did so citing concerns about the deficit. The Congressional Budget Office CBO report earlier this week said the government's official debt to the public is in the process of surging from about 40% of gross domestic product (GDP) when the recession began to 62% by the end of this year.

"No one's disputing the value of these very important programs," said Sen. Scott Brown, R-MA. "But we also have to have tough choices and we also need to live within our means."

Still, economists caution concerns about the deficit may be premature, considering the fragility of the recovery.

Nobel prize-winning economist Paul Krugman said on Sunday that we are in "the early stages of a third depression," and misguided policy is a big reason why.

"Around the world - most recently at last weekend's deeply discouraging G-20 meeting - governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending," Krugman said in the New York Times. "The Obama administration understands the dangers of premature fiscal austerity - but because Republicans and conservative Democrats in Congress won't authorize additional aid to state governments, that austerity is coming anyway, in the form of budget cuts at the state and local levels."

U.S. President Barack Obama last month urged lawmakers to spend about $50 million to help states pay for Medicaid programs and avoid teacher layoffs, but that effort, too, faltered in the face of a Republican filibuster.

Meanwhile, layoffs in the public sector continue to mount as state governments struggle to close persistent budget gaps. New York city, for example, approved a budget on Tuesday that cuts about $1 billion in spending at the expense of 5,300 jobs.

Democrats jettisoned numerous other provisions from the jobless bill - including $16 billion for cash-strapped state governments, $1 billion for summer jobs and $32 billion in special-interest tax breaks that expired earlier this year - in the hopes of winning Republican support. But now it appears those sacrifices were made in vain.

The lack of progress in Washington has not gone unnoticed by Wall Street. The Dow Jones Industrial Average has plunged more than 1,400 points - about 12% - since late April and the Standard & Poor's 500 Index is down some 15%.

"It's almost as if the financial markets understand what policy makers seemingly don't: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating," said Krugman.

According to Krugman, the decision to abandon the loose fiscal and monetary policies that pulled the world out of its nauseating plunge in 2008 and 2009 is nothing short of misguided at a time when the recovery has yet to prove itself sustainable.

"In the face of this grim picture, you might have expected policy makers to realize that they haven't yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy," he said. "And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again."

Source : http://moneymorning.com/2010/07/02/double-dip-recession/

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