Latest News

Here's a happy thought: Stimulus plan might not work

WASHINGTON — Economists say a stimulus package is desperately needed. Politicians from both parties insist it'll happen quickly. However, no one can say with certainty that $775 billion of government spending will return the economy to health.

Defining whether a stimulus package will work depends on how success is defined.

President-elect Barack Obama has said the stimulus plan is intended to create jobs. So he'll be measuring success in part, it appears, by the number of jobs created.

Some of the brightest minds who study the economy, however, think that even with a massive stimulus plan, there'd still be staggering job losses.

Mark Zandi, chief economist at forecaster Moody's, thinks the unemployment rate could top 10 percent in 2010 before the crisis ebbs. That's if an effective stimulus plan isn't passed. The highest unemployment rate in the postwar period was 10.8 percent in 1982.

Laurence Meyer, a former Federal Reserve governor who's a respected forecaster, told the National Economics Club on Thursday that he expected the unemployment rate to hit 8 percent later this year and then stay high for an uncomfortably long period of time.

"We are going to be in this very, very long period of uncomfortably low inflation and uncomfortably high unemployment," Meyer said at the close of a luncheon address, adding the caution, "That's the optimistic forecast."

Success or failure will also hinge on developments outside the control of Obama or the Congress, said Thomas Donohue, president of the U.S. Chamber of Commerce — and things don't look good.

In his annual State of American Business speech on Wednesday, Donohue said that at least 12 major economies are now deeply in trouble. That's a problem for U.S. exports, which last year were the economy's sole bright spot and are thought to be one of the important factors for getting it back on track.

U.S. exports last year offset almost dollar for dollar the economic growth that was lost in the housing meltdown. If the global economy sinks further, export industries could find themselves also contracting.

Oil prices are another factor, Donohue said. The price of petroleum, now hovering around $40 a barrel, has fluctuated violently since Hurricane Katrina in late 2005. If another war in the Middle East or a natural disaster somewhere were to push the price back above $100 a barrel, it only would aggravate the economic slowdown.

Perhaps the biggest factor in recovery is the degree to which credit markets return to life, and banks and other financial players resume lending to consumers, businesses and each other. Lending of almost any kind has simply stopped.

"This is the largest (credit) shock in the postwar period, dramatically so," Meyer said.

The Federal Reserve has moved aggressively in recent months to thaw the credit markets by making short-term loans, assuming responsibility for troubled debt and taking other actions that have brought its total liabilities to $3.8 trillion today from a mere $800 billion last summer.

These actions have driven down and stabilized bank-to-bank lending rates — something that should eventually drive business investment independently of any stimulus plan.

"This is the only area where we can point to where there has been substantial improvement," Meyer said.

The Obama stimulus proposal, which is sure to morph as it moves through Congress in January and into February, seeks to spark the economy with a mix of spending on infrastructure projects, direct aid to cash-strapped state governments and tax cuts and credits for consumers and business. The price tag is believed to be in the range, over two years, of $775 billion to $1.3 trillion.

Republicans and business groups are pressing for a number of tax breaks they say will spark the economy. Obama appears to be going along, but there's less to the tax cuts than meets the eye, Meyer warned.

Virtually all the proposals would allow the faster write-offs of previous expenses, a step that lowers tax bills but won't do much to stimulate new investment.

So for now, most economists believe the stimulus plan alone won't jolt the economy back to health. Economic growth will come from a combination of things — spending, low interest rates — some lucky breaks in the global economy.

Until then, the next year will seem like an eternity. The Labor Department is expected to report on Friday that employers shed roughly another 500,000 jobs in December, bringing the 12-month, year-over-year job losses to almost 2.5 million.

"If so, this will be the steepest rate of job losses in the first year of any postwar recession," wrote Lawrence Mishel and John Irons, in a report published on Thursday by the Economic Policy Institute, a liberal research organization. "Without swift intervention, similar or higher monthly losses are expected to mount well into next year, and continuing weaknesses in the labor market are likely to persist for another two to three years."


To ask a question about this story or any economic question, go to McClatchy's economy Q&A

Just as Obama begins, huge deficit could hamper plans

Economic woes expected to worsen early this year

Amid the economic wreckage, some sectors still hiring

Was 2008 the beginning of another Great Depression?

Related stories from Myrtle Beach Sun News