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Unemployment in the Third Depression Era
Source of Title Blog
June 30 2010

The end of May, federal unemployment benefits began to expire leaving 1.2 million jobless Americans cut off.  The House passed a bill providing a six-month extension, but the Senate has not been able to pass such legislation... despite three attempts.  All of the Senate Republicans have blocked the effort. 

This will certainly worsen our already troubled economy as well as pile on to our crippled housing market.  One economist has noted that we may be setting the stage for a Third Depression.  While our Congressman are busy playing politics, Americans are suffering... and it is going to get worse.

Never before have our Congressmen let let federally extended unemployment benefits expire with unemployment above 7.2%.  Yet, we could see an unprecedented end to benefits with an unemployment rate at nearly 10%. 

The Republicans are taking a hard line position that we can't extend benefits because it would add too much to our expanding national debt.  I'm a fiscally conservative Republican, but even I see this for what it is... political gamesmanship.  Many of these same Republicans had no problem with nearly doubling our national debt under Bush's term in office.  When George W. Bush took office, the debt stood at $5.7 trillion - we added another $4.9 trillion before he left. 

Ken Rogoff, a Harvard Professor, recently told CNN's Christine Romans that he doesn't get it either.

I'm very concerned about it Christine. I'm a fiscal conservative, I think this is nuts. This is a once in every half century event. People are going to have to have a tough time finding jobs for a long time and it has a lot of physiological effects on people's health. Unemployment insurance is really one of the most important parts of the whole stimulus trying to help the people who really need it. I just don't understand this.

Later in the same interview, Romans made a very good point.

The reason why they can pay the mortgage right now is because one of the spouses is still getting that unemployment check. With out that unemployment check though they would be on the edge. I wonder Ken, if you take away that check then; do you pay for it somewhere else in society and the cost to the tax payer through the housing market or through other social safety nets?

And Chrystia Freeland, Reuters Global Editor at Large, boiled that down its essence.

People who are living on those benefits are people who have a very strong propensity to spend as the economist say. So that money is going to go directly into the economy.

Without the unemployment benefits, we will see a sharp rise in foreclosures.  Even modification cannot help those that cannot pay even a lesser payment.  That will take a toll on our housing market that we just cannot afford right now.

In addition, it will place a higher burden on the states to provide services - causing tax increases and even higher unemployment. As explained in a NY Times editorial

Meanwhile, the states face a collective budget hole of some $112 billion, but neither the House nor the Senate has a plan to help. The House stripped a provision for $24 billion in state fiscal aid from its earlier spending bill. The Senate included state aid in its ill-fated bill to extend unemployment benefits; when that bill failed, the promise of aid vanished as well.

As a result, 30 states that had counted on the money to help balance their budgets will be forced to raise taxes even higher and to cut spending even deeper in the budget year that begins on July 1. That will only worsen unemployment, both among government workers and the states’ private contractors. Worsening unemployment means slower growth, or worse, renewed recession.

Some Republicans seem to believe that we need to cut unemployment benefits to force the unemployed to go back to work.  The counter-point, of course, is "back to work where?"  There just aren't any jobs available.

Recently Senate Candidate Sharon Angle was widely criticized in the media for saying "we have put in so much entitlement, in to our government, that we have really spoiled our citizenry."  A poor choice of words, perhaps.  I don't really think she meant to say that the masses of unemployed have been so spoiled by their meager unemployment benefits that they just don't want to go back to work.  In fact, she has clarified her position by saying that what we need is a "supplement" that will pay people some lesser amount if they take an entry level position that may pay less than they were receiving on unemployment.

I don't really disagree with Angle's idea for supplemental under-employment benefits, but something needs to be done quickly.  Why?  Because we don't want to end up in a Third Depression.

Paul Krugman, A NY Times columnist and Economics Professor at Princeton University, recently wrote "We are now, I fear, in the early stages of a third depression."  Krugman has an impressive biography - B.A. from Yale, Ph.D. from MIT, and a Nobel Prize for Economics. 

[G]overnments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

In 2008 and 2009, it seemed as if we might have learned from history. Unlike their predecessors, who raised interest rates in the face of financial crisis, the current leaders of the Federal Reserve and the European Central Bank slashed rates and moved to support credit markets. Unlike governments of the past, which tried to balance budgets in the face of a plunging economy, today’s governments allowed deficits to rise. And better policies helped the world avoid complete collapse: the recession brought on by the financial crisis arguably ended last summer.

But future historians will tell us that this wasn’t the end of the third depression, just as the business upturn that began in 1933 wasn’t the end of the Great Depression. After all, unemployment — especially long-term unemployment — remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly. And both the United States and Europe are well on their way toward Japan-style deflationary traps.

In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.

He concluded his editorial with a gloomy prediction.  "And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again."

Ending federally extended unemployment is just ludicrous!  Both Democrats and Republicans had no problem casting our nation in to deeper and deeper debt to bailout AIG, GM, Chrysler, and countless banks... but when it comes to providing direct assistance to the people who need it, who will put that money directly in to our struggling economy, they want to draw some sort of line in the sand.  Really??  Does that make any sense?

The root of our problem started when the mortgage market went belly-up - we still haven't figured out a solution, despite throwing hundreds of billions of dollars at the banks who caused the mess.  Credit is still pretty tough to come by for most regular people.  Cutting unemployment benefits will mean that fewer people can afford to keep their homes, worsening our housing crisis. 

Maybe our Congressmen just don't understand the importance of unemployment benefits.  The salary for the rank-and-file members of the House and Senate is $147,000 per year.  And, most of them probably don't even need it.  How can they possibly relate to the average Joe who lost his $12 an hour job and needs an unemployment check to keep a roof over his head and provide food for his family? 

I get that Republicans want to see President Obama and the Democrats fail.  The problem is that the rest of America will likely get it too.  Come election time, they won't look favorably on political maneuvering that cut the only support many Americans had in the midst of a recession where jobs just aren't available.