CURRENT STIMULUS = THE WRONG MEDICINE
Focus Needed on Job Creation and Household Wealth
In February Congress rushed an unprecedented $787 billion “stimulus” package to the President’s desk with the promise that the package would stem the tide of rising unemployment and place the economy back on firm footing. The package has not delivered the promised relief, in part, because it was premised on faulty Keynesian economic assumptions. While supporters point out that little of the “stimulus” money has been delivered, critics correctly respond that the failure to deliver stimulus dollars supports their criticism that the package wasn’t stimulus in the first place because it did not meet the test of being “timely, targeted, or temporary.” Even though “stimulus” spending has not reached full swing, the nation’s debt-spending for this fiscal year is already over $1 trillion and there is still a whole quarter left in the year for spending to rise.
One distinguishing feature of the current recession is the massive loss of wealth by American households. Not since the Federal Reserve’s flow of funds data series began in 1952 have there been declines in household wealth that approach the losses experienced in the current recession, nor has there been a period of such prolonged decline.
Since the 4th quarter of 2007, net worth of households and nonprofit organizations has declined by more than $12 trillion or 19.5%, household equity in real estate has declined by $2.5 trillion or 25.4%, and financial assets have declined by $9.5 trillion or 19.1%. Even these massive declines, however, fail to describe adequately how recent economic turmoil has battered household balance sheets compared to prior recessions.
BOTH net worth and the value of financial assets have declined for six consecutive quarters. Prior to this, declines in both measures during the same single quarter have only occurred ten times out of 222 quarters since 1952 – only once have they declined together for two consecutive quarters (2nd and 3rd quarters 1974).
With household wealth battered in an unprecedented manner, it should come as no surprise that households and businesses have been reluctant to respond to Keynesian inspired stimulus. Consumer spending, which accounts for 70% of the economy, cannot directly “fix” household balance sheets. While prior recessions have ended with labor markets still in decline, in none of those cases was household net worth still declining or at a level below what existed before the recession’s beginning. Unfortunately, the present stimulus package does little to rebuild household wealth. Uncertainty surrounding health care reform, cap and trade environmental legislation, and anticipated higher taxes serve to discourage the kind of investments in labor and capital that are necessary to rebuild the economy.
One distinguishing feature of the current recession is the massive loss of wealth by American households. Not since the Federal Reserve’s flow of funds data series began in 1952 have there been declines in household wealth that approach the losses experienced in the current recession, nor has there been a period of such prolonged decline.
Since the 4th quarter of 2007, net worth of households and nonprofit organizations has declined by more than $12 trillion or 19.5%, household equity in real estate has declined by $2.5 trillion or 25.4%, and financial assets have declined by $9.5 trillion or 19.1%. Even these massive declines, however, fail to describe adequately how recent economic turmoil has battered household balance sheets compared to prior recessions.
BOTH net worth and the value of financial assets have declined for six consecutive quarters. Prior to this, declines in both measures during the same single quarter have only occurred ten times out of 222 quarters since 1952 – only once have they declined together for two consecutive quarters (2nd and 3rd quarters 1974).
With household wealth battered in an unprecedented manner, it should come as no surprise that households and businesses have been reluctant to respond to Keynesian inspired stimulus. Consumer spending, which accounts for 70% of the economy, cannot directly “fix” household balance sheets. While prior recessions have ended with labor markets still in decline, in none of those cases was household net worth still declining or at a level below what existed before the recession’s beginning. Unfortunately, the present stimulus package does little to rebuild household wealth. Uncertainty surrounding health care reform, cap and trade environmental legislation, and anticipated higher taxes serve to discourage the kind of investments in labor and capital that are necessary to rebuild the economy.
