David Coates

Chapter 3: The Story in 2009

2009 was dominated by first the passing and then the impact of the Obama administration’s stimulus package. That package drew a principled rejection from fiscally conservative and free-market minded conservatives, using arguments of the kind discussed in the text. It also drew criticism – as too little and too late – from the progressive wing of the Democratic Party. Certainly 2009 saw an intensification of poverty in the United States, generalized job and income insecurity and the return to 1980’s levels of unemployment; and in the wider global economy actual contraction in total for 2009, and only modest growth predicted for 2010.

As Answering Back went to press in March 2009, the first Obama budget was projecting a $1.67 trillion (or 11.9% of GDP) federal deficit for fiscal year 2009. That deficit has two major components: overspending inherited as the consequence Bush tax cuts and increased Bush-era spending (including on the wars in Iraq and Afghanistan) and spending linked to the immediate financial crisis and associated recession (financial bailouts and the American Recovery and Reinvestment Act). The EPI estimated that nearly half of the deficit was inherited, 22% was the product of the financial bailout and 12% the product of ARRA (www.epi.org, August 20 2009). The ten year program proposed in Obama’s first budget included big new spending on climate change ($150 billion), health care reform ($634 billion), and defense (($75.5 billion) while, among other tax changes, making permanent the $800 dollar tax cut for 95% of working Americans. Trimmed slightly, the budget passed through both houses of Congress in April, with voting entirely on party lines; and was followed in May by an administration proposal to trim $17 billion off 121 government programs, each of which then attracted political support from key legislators on both sides of the aisle! Projecting spending is clearly politically easier than eradicating waste.

Alongside the budget, the $787 billion American Recovery and Reinvestment Act was signed into law in February. Its spending was broken down into five categories: help for those most in need, aid for states and localities, green investments, other investments (transport, utilities, health, education, broadband) and tax cuts. The plan was to spend at least 75% of that money by the end of fiscal year 2010, and 91% by September 2011. Passing that legislation was also not easy, and getting the money quickly to where it was needed most was more difficult still. Complaints abounded through the year of low levels of take-up and administrative holdups, though by November Vice-President Biden was putting a very precise figure on the number of jobs saved/created by stimulus money: 640,000. That figure was contested by the chairman of the Recovery Accountability and Transparency Board as too precise to be reliable, but defenders of ARRA were adamant that the $81 billion already distributed by late October had added at least 2.7 percentage points to the GDP’s growth rate in the third quarter and “created or saved between 1.1 million and 1.5 million jobs” (EPI Issue Brief #265, October 29 2009). One reason why the actual figure of jobs saved was hard to know with any certainty, however, was that in truth both the $700 billion bank bailout (TARP) and the $787 billion stimulus package were small beer compared to the expansion of money and credit orchestrated quietly by the Federal Reserve throughout 2009 – cumulatively trillions of dollars in loans, bailouts and asset purchases. To take just one example: the Fed put $1.2 trillion into the economy in March, buying government bonds and mortgage-backed securities in a sustained effort to hold interest rates low, stimulate credit and restore faith in the US housing market.

Throughout 2009 the Obama administration was perennially in search of policy initiatives to trigger growth (especially employment growth). Extra credit help for small businesses was announced in March and again in October, tax credits for job creation were publicly explored in October, and a jobs summit at the White House was called for December – and with good reason. For unemployment continued to climb through 2009.

  • The official jobless rate reached 10.2% in October – 16 million Americans unemployed, 7 million jobs lost since late 2007. Job loss was particularly high in certain industries and sectors. The US manufacturing sector as a whole lost one job in three – six million in total – between 1997 and 2009. Over 2 million of those jobs were lost between December 2007 and December 2009. Construction lost 1.6 million jobs in the same two year period; leisure and hospitality lost 455,000 jobs; professional and business services lost 1.3 million; trade, transport and utilities lost 1.76 million. ((Wall Street Journal, January 12, 2010)
  • The broader measure of unemployment – those unemployed or under-employed – reached 17.5% in October. It had never before been higher than 17.1% (December 1982).
  • Unemployment in September for 16-24 year olds was 18.1%. Only 46% of Americans in that age group were in paid work in the fall of 2009 – the lowest percentage since figures were first collected in 1948 – as 2.5 million jobs for young workers vanished between December 2007 and September 2009. By year’s end, unemployment among African-American 16-24 year old men was a staggering 34.5%.
  • The length of unemployment stretched out further too. Prior to the 2007 downturn, only 10% of unemployed US workers had been out of work for a year or more, compared to 25% in the UK, 40% in France and 57% in Germany. No longer. As 8.2 million Americans joined the ranks of the unemployed in 2008/9, the US length of unemployment moved towards European levels. “In October 5.5 million – almost 40 percent of the US jobless – had been so for more than six months, the highest on record. Twenty percent had been unemployed for a year or more, compared with a fairly static 25 percent in the UK…..The US is so unused to this phenomenon that unemployment insurance only lasts 26 weeks.” (The Financial Times, November 24 2009, p.5)
  • The poverty rate, at 13.2%, was the highest since 1997 – 2.6 million Americans joining the ranks of the poor – especially children, with child poverty back up to 19%, virtually one American child in five. (for more details, see Chapter 4 below)
  • US wages stagnated or fell in 2009. Median household income, adjusted for inflation, was down to $50,303, the steepest drop in four decades. Average household wealth was in freefall for most of 2008-9, and with credit card debt at record levels ($951 billion in 2008) and rates of personal savings at an all time low, financial insecurity and fear of job loss was everywhere rampant.

Those job losses were both private sector jobs and government ones – the latter particularly at state level as state revenues plummeted as the economy stalled. In consequence, public confidence in the effectiveness of the stimulus package also plummeted, and debate opened within the relevant policy-making and opinion-making circles on whether a further stimulus package was either necessary or essential. Certainly parts of the stimulus package set to expire in December – like additional insurance benefits for unemployment workers – were extended into 2010. They were much needed because, as Mark Zandi put it in November, “businesses may not be shedding jobs as aggressively as they were earlier this year, but they still aren’t hiring” (The New York Times, November 3 2009)

In the wake of the jobs summit called by the White House in December 2009, the President used a speech at the Brookings Institution (December 8) to call for a new burst of federal spending: new spending on highway and bridge construction; tax cuts for small businesses; aid to homeowners retrofitting their houses to make them more energy efficient; funds to extend unemployment benefit and health coverage to the unemployed; more money to the states to protect public sector jobs; and $250 grants to senior citizens and veterans. America, he said, “must continue to spend its way out of this recession.” John Boehner, for the GOP, immediately dismissed these proposals as yet more “job-killing policies” that were bound to fail. The Republicans presented their own blue-print for solving unemployment, focusing heavily on the job-creating capacities of small businesses free of heavy taxation and excessive government regulation. (See his “A better plan for jobs”, The Washington Post, December 11 2009) In January 2010 the President used his first State of the Union Address to call for a new jobs bill that would ignite “the true engine of job creation in this country…America’s businesses”. He proposed directing TARP money to community banks (and on to small businesses), a small business tax credit for companies hiring new workers or raising wages, and funds for high-speed rail links and a clean energy economy.

The Federal Reserve issued its long-term unemployment forecast in November. It made grim reading. As the country goes to its next presidential election (November 2012) the Fed expects unemployment to be still in the 6.8-7.5 percent range, calculating that it will take maybe “about five to six years” from 2009 for economic activity to return to normal!

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David Coates holds the Worrell Chair in Anglo-American Studies at Wake Forest University. He is the author of Answering Back: Liberal Responses to Conservative Arguments, New York: Continuum Books, 2010.

He writes here in a personal capacity.

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