This is Part 2 of a two-part series.
U.S. BackgroundLate 2008: the U.S. banking meltdown resulted in stock market losses to U.S. citizens of more than $10 trillion. Couple that with losses in real estate values of more than $7 trillion, and suddenly, households felt a lot poorer than they did a year earlier -- $17 trillion in capital losses against a 2008 GDP of only $14.2 trillion -- a tough year! The predictable result was a spending collapse triggering U.S. job losses of 8.4 million in 2008 and 2009. As
The Stimulus EffectsThe U.S. Congress has passed only one employment stimulus bill -- the $787 billion American Recovery and Reinvestment Act (ARRA). 1 Table 1 gives the Congressional Budget Office's (CBO) estimate of what effect this bill will have on employment.
In general, the wordy document contains much talk of restoring "fiscal discipline" and stopping "job-killing tax hikes". Critics have pointed out that these goals are largely contradictory. Extending tax cuts, after all, will add to America's fiscal woes.But assume "austerity" means no stimulus package. Without it, the unemployment rate would be 11%+ rather than 9.6%. So the Austerity argument is that $787 billion cutback in the government deficit would have made Americans confident enough to start spending again? This stretches credulity. And remember that with no stimulus, there would be another 2+ million out of work. They are most certainly not going to feel confident about the future, and further, with no pay check coming in, they will spend less.
Was ARRA Big Enough?Let us go in a different direction. As can be seen from Table 2, $551 billion or 70% of the ARRA stimulus money has been paid out. Is it an adequate stimulus? Remember, 218,000 jobs were lost in the last three months. Bernanke is talking about trying to help out. But all the Fed can do is buy financial paper: it cannot spend money to create jobs. And unfortunately, Congress is not prepared to enact another stimulus package.
Other Stimulus Policy ConsiderationsA growing number of countries want to keep the dollar strong so they will have an advantage in selling goods in the U.S. market. They prop up the dollar by purchasing U.S. dollars (non-interest bearing U.S. government debt) and Treasury securities (interest-bearing U.S. government debt). China and Japan are the largest purchasers. Indeed, the central banks of China and Japan have bought more U.S. debt than the Fed:
A Brief Technical Aside
When the Fed buys Treasury debt, it is effectively "printing money" in the sense that it provides the Treasury with dollars to spend. Ceteris paribus, this expansion in the "global" dollar supply will weaken the dollar. Purchases of US dollars or other US government debt by the central banks of other countries has just the opposite effect - it absorbs dollars/debt available on the global markets and strengthens the dollar.
What the US NeedsThe ARRA stimulus package was not enough to end the recession, and it is running out. The U.S. Congress should pass a new stimulus package. As
There will be three benefits from this package: