President Obama's claim that a second depression isn't possible doesn't square with the relevant numbers
It has been one year since U.S. President Barack Obama signed the $787-billion stimulus bill, the Recovery Act, to lift the U.S. out of recession, and threw an additional $50-billion lifeline to American homeowners facing foreclosure. The package was subsequently enriched and is now estimated at $862 billion, while the pledge to stem foreclosures has risen to $275 billion.
"One year later, thanks to the Recovery Act, we can stand here again and say that a second depression is no longer a possibility," Obama said in marking the anniversary last week.
Oh no? Take another look at the numbers.
After all that spending -- actual and committed (Congress passed an additional $155 billion in aid in December) -- claims of job creation and economic growth remain highly suspect. The U.S. economy has shed more than eight million jobs since the recession began, and losses continue with 20,000 fewer jobs in January alone. A White House advisory council forecast that the economy will create 95,000 jobs per month this year. For forecasters, the year is not off to a good start. Unless the job generator shifts into a higher gear, one analysis concluded, it will take more than seven years to replace the jobs lost since 2007.
The U.S. Labor Department recorded 473,000 new jobless claims last week, up from 442,000 a week earlier, while the number of people on extended benefits (those who have exhausted the regular 26 weeks of benefits) rose by 274,000 to six million. The official unemployment rate eased to 9.7 per cent in January from 10.1 per cent in October, but few believe the Obama administration's boast that the stimulus has generated nearly two million jobs. According to a recent CBS News/ New York Times poll, only six per cent of Americans think the stimulus has created any jobs at all, and public support for the plan has dropped from 55 per cent in June to 38 per cent.
If the stimulus package has created jobs, they are in the public sector, displacing jobs that could have been created more efficiently in the private sector, costing taxpayers far more for each job than the sum of salary and benefits. That's what happens when capital is diverted from productive endeavours that create wealth to government spending programs that dissipate it.
Beyond the jobs front, things are even worse. Loans in foreclosure now represent 4.6 per cent of all mortgages, and the number of mortgages more than 90 days overdue has climbed to 5.1 per cent.
A Congressional panel reported earlier this month that half of approximately $1.4 trillion in commercial loans coming due over the next four years are under water, and hundreds of small-and mid-sized banks face insolvency. It warned of an impending commercial real estate crisis with property values down 40 per cent since 2007 and 18 per cent of office space sitting vacant.
The move last week by the Federal Reserve to raise its emergency loan rate looked more like public relations than economic policy, an attempt to signal that GDP growth -- seen at three per cent this year and four per cent in 2011 -- is real and that inflation remains a threat. But strip out energy prices and consumer prices fell 0.1 per cent in January, the first month of deflation since 1982.
Underlying the economic gloom is a national debt of $12.4 trillion. Obama, apparently unfazed, signed a law this month that raised the limit on public debt to $14.3 trillion. Government debt now amounts to more than $40,000 for each American, $113,000 for each taxpayer. Given its ballooning budget deficit, which is seen at $1.6 trillion this year, or 10.6 per cent of GDP -- a post-Second World War record -- it's difficult to see how the administration can put its fiscal house in order without massive spending cuts. But with soaring health care costs, an aging population, the environmental agenda, military commitments and more Obama-inspired social initiatives, spending cuts are unlikely.
China has indicated its lack of confidence in the crumbling U.S. economy by unloading $34.2 billion in U.S. bonds in December, relinquishing its status as the largest holder of U.S. foreign debt to Japan. As U.S. debt grows, so too does pressure on the interest rate on bills and bonds used to finance it. Rising debt service costs, perhaps accompanied by a downgrade from global ratings agencies, would help expose the phantom recovery for the charade it is.
A second depression impossible? Don't bet on it.